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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1996
REGISTRATION NO. 333-4455
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HOMESTEAD VILLAGE PROPERTIES INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
7011 74-2770966
MARYLAND (PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE
NUMBER)
INCORPORATION OR 125 LINCOLN AVENUE
ORGANIZATION) SANTA FE, NEW MEXICO 87501
(505) 982-9292
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JEFFREY A. KLOPF, SECRETARY
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
125 LINCOLN AVENUE
SANTA FE, NEW MEXICO 87501
(505) 982-9292
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
EDWARD J. SCHNEIDMAN
MAYER, BROWN & PLATT
190 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
(312) 782-0600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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EXPLANATORY NOTE
This Registration Statement contains a proxy statement to be used in
connection with a special meeting of shareholders of Security Capital Pacific
Trust (the "PTR Proxy Statement") and an information statement to be used in
connection with a special meeting of shareholders of Security Capital Atlantic
Incorporated (the "Atlantic Information Statement"). This Registration
Statement also includes a form of a prospectus of Homestead Village Properties
Incorporated ("Homestead") to be included as an appendix to each of the PTR
Proxy Statement and the Atlantic Information Statement, relating to the
securities of Homestead to be issued in connection with the transactions
described in this Registration Statement.
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[PTR LETTERHEAD]
To the Shareholders of Security Capital Pacific Trust ("PTR"):
You are invited to attend a special meeting of PTR shareholders to be held
in , on , September , 1996 at a.m. local
time.
At the meeting you will be asked to consider and vote upon a proposed Merger
and Distribution Agreement which contemplates (i) the contribution, through a
series of merger transactions, by PTR of its Homestead Village properties to a
newly formed company, Homestead Village Properties Incorporated ("Homestead"),
in exchange for shares of Homestead common stock, (ii) the receipt of warrants
to purchase shares of Homestead common stock in exchange for the agreement of
PTR to finance, through convertible mortgage loans to Homestead, the
acquisition and development of certain properties being contributed by PTR to
Homestead and (iii) the distribution, pro rata, of all of the Homestead common
stock and warrants PTR receives to PTR shareholders. You will also be asked to
consider and vote upon an amendment to PTR's Declaration of Trust necessary to
facilitate the transaction. If the foregoing proposals are approved, each
holder of PTR common shares will (1) retain his or her existing PTR common
shares and (2) receive shares of Homestead common stock and warrants to
purchase shares of Homestead common stock. The transaction and certain related
matters are described in detail in the accompanying Proxy Statement and
Prospectus. Please review it carefully.
After careful consideration, the PTR Board of Trustees, by unanimous vote of
trustees who are not officers of PTR or directors, officers or employees of
PTR's largest shareholder, Security Capital Group Incorporated, or its
affiliates, has approved the transaction and recommends that all shareholders
vote for its approval. The affirmative vote of holders of two-thirds of the
outstanding common shares of PTR will be necessary for approval of the
transaction and the amendment to PTR's Declaration of Trust. The approval of
the amendment to PTR's Declaration of Trust is a condition to the consummation
of the transaction.
Please complete, sign and date your enclosed proxy card and return it to us
in the accompanying envelope as soon as possible. Failure to return your proxy
card or to vote in person at the special meeting will have the effect of a
vote against the transaction. Returning your completed proxy card will not
limit your right to vote in person if you attend the special meeting.
If you have any questions regarding the proposed transaction, please call
Georgeson & Company, Inc., our proxy solicitation and information agent, at
(800) 223-2064.
Very truly yours,
C. Ronald Blankenship
Chairman
YOUR PROXY IS IMPORTANT--PLEASE RESPOND PROMPTLY
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[PTR LETTERHEAD]
Notice is Hereby Given that a special meeting of shareholders of Security
Capital Pacific Trust ("PTR") will be held on , September , 1996,
commencing at a.m., local time, at , for the following
purposes:
1. To consider and vote upon the approval of a Merger and Distribution
Agreement dated as of May 21, 1996 (the "Merger Agreement"), among PTR,
Homestead Village Properties Incorporated, a Maryland corporation
("Homestead"), Security Capital Atlantic Incorporated, a Maryland
corporation ("ATLANTIC"), and Security Capital Group Incorporated, a
Maryland corporation ("SCG"), pursuant to which, among other matters, (i)
PTR, ATLANTIC and SCG would contribute, through a series of merger
transactions, all of their respective assets related to the Homestead
Village properties in exchange for shares of Homestead common stock, (ii)
PTR and ATLANTIC would agree to finance, through convertible mortgage
loans, the acquisition and development of certain properties being
contributed by them in exchange for warrants to purchase shares of
Homestead common stock, (iii) SCG would agree to finance the acquisition
and development of certain Homestead Village properties in exchange for
warrants to purchase shares of Homestead common stock and (iv) PTR and
ATLANTIC would distribute such Homestead securities pro rata to their
respective shareholders, all as more fully described in the accompanying
Proxy Statement and Prospectus;
2. To consider and vote upon an amendment to PTR's Restated Declaration
of Trust necessary in order to consummate the transactions contemplated by
the Merger Agreement; and
3. To transact any other business that may properly come before the
special meeting or any adjournment or postponement thereof.
A copy of the Merger Agreement is set forth as Annex I to the Proxy
Statement and Prospectus attached hereto and is incorporated herein by
reference.
The Board of Trustees of PTR has fixed the close of business on August ,
1996 as the record date for the determination of shareholders entitled to
notice of and to vote at the special meeting. The affirmative vote of the
holders of two-thirds of the outstanding common shares of PTR entitled to vote
at the special meeting is necessary to approve and adopt the proposals set
forth above. Holders of common shares of PTR are not entitled to dissenters'
rights under Maryland law in connection with the transaction.
Whether or not you plan to attend the special meeting, please fill in, date
and sign the proxy card furnished herewith and mail it promptly in the
enclosed pre-addressed envelope, which requires no postage if mailed in the
United States.
By Order of the Board of Trustees,
Jeffrey A. Klopf
Secretary
El Paso, Texas
August , 1996
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SUBJECT TO COMPLETION DATED JULY 17, 1996
SECURITY CAPITAL PACIFIC TRUST
PROXY STATEMENT
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HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PROSPECTUS
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This Proxy Statement and Prospectus relates to (i) a proposed transaction
pursuant to which Security Capital Pacific Trust ("PTR"), Security Capital
Atlantic Incorporated ("ATLANTIC") and Security Capital Group Incorporated
("SCG") will each contribute, through a series of merger transactions (the
"Mergers"), their Homestead Village(R) extended-stay lodging assets to
Homestead Village Properties Incorporated ("Homestead") in exchange for
Homestead common stock, par value $0.01 per share ("Homestead Common Stock"),
all as contemplated by the terms of a Merger and Distribution Agreement dated
as of May 21, 1996 (the "Merger Agreement"); (ii) the receipt of warrants, each
to purchase one share of Homestead Common Stock, at an exercise price of $10.00
per share ("Homestead Warrants" and, together with the Homestead Common Stock,
the "Homestead Securities"), by PTR and ATLANTIC in exchange for the agreement
of PTR and ATLANTIC to finance the acquisition and development of certain
properties being contributed by them to Homestead through convertible mortgage
loans to Homestead; (iii) the receipt of Homestead Warrants by SCG in exchange
for the agreement of SCG to provide certain financing to Homestead; (iv) the
subsequent distribution by PTR and ATLANTIC of such Homestead Securities to
their respective shareholders (the "Distribution"); and (v) the approval of an
amendment to PTR's Restated Declaration of Trust, as amended (the "PTR
Declaration of Trust"), necessary to consummate the transactions contemplated
by the Merger Agreement (collectively, the "Transaction"). The Distribution
will result in a taxable dividend to shareholders of PTR. See "The
Transaction--Federal Income Tax Consequences."
PTR is soliciting proxies from its shareholders for use at a Special Meeting
of Shareholders of PTR scheduled to be held on September , 1996 and at any
adjournment or postponement thereof (the "PTR Special Meeting") to consider the
matters described above. A copy of the Merger Agreement is attached to this
Proxy Statement and Prospectus as Annex I and is incorporated herein by
reference. SCG owns approximately 37.8% of the outstanding PTR common shares of
beneficial interest, $1.00 par value per share ("PTR Common Shares"), and it
has agreed, subject to certain conditions, to vote all of its PTR Common Shares
in favor of the Merger Agreement.
This Proxy Statement and Prospectus constitutes both the proxy statement of
PTR relating to the solicitation of proxies by the PTR Board of Trustees (the
"PTR Board") for use at the PTR Special Meeting, and the Prospectus of
Homestead with respect to 9,485,727 shares of Homestead Common Stock and
Homestead Warrants to purchase 6,363,789 shares of Homestead Common Stock to be
distributed to the shareholders of PTR. The amount of Homestead Securities to
be received by each PTR shareholder in the Distribution will depend on the
number of PTR Common Shares outstanding on the record date to be established
for the Distribution (the "Distribution Record Date"). Based on the number of
PTR Common Shares outstanding on July 12, 1996, each PTR shareholder would
receive 0.131033 shares of Homestead Common Stock and 0.087907 Homestead
Warrants for each PTR Common Share held. Cash will be paid in lieu of any
fractional shares of Homestead Common Stock and fractional Homestead Warrants.
Thus, a PTR shareholder which owns 100 PTR Common Shares on the Distribution
Record Date would receive 13 shares of Homestead Common Stock, eight Homestead
Warrants plus cash for fractional shares and warrants. To the extent that any
Series A Preferred Shares (as defined herein) are converted into PTR Common
Shares or outstanding options to acquire PTR Common Shares are exercised prior
to the Distribution Record Date, there would be a proportionate reduction in
the amount of Homestead Securities to be received by each PTR shareholder.
Information concerning Homestead is set forth in Appendix A hereto and is
incorporated herein by reference. This Proxy Statement and Prospectus and the
enclosed form of proxy are first being sent to shareholders of PTR on or about
August , 1996. A shareholder who returns a signed proxy may revoke it at any
time prior to its exercise.
SEE "RISK FACTORS" AT PAGE 14 OF THIS PROXY STATEMENT AND PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE
TRANSACTION.
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THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT AND PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT AND PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
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The date of this Proxy Statement and Prospectus is August , 1996.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROXY STATEMENT AND PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
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AVAILABLE INFORMATION
PTR is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, such material can be obtained from the Commission's web site at
http://www.sec.gov. The PTR Common Shares, PTR's Cumulative Convertible Series
A Preferred Shares of Beneficial Interest, $1.00 par value per share ("Series
A Preferred Shares"), and PTR's Series B Cumulative Redeemable Preferred
Shares of Beneficial Interest, $1.00 par value per share (the "Series B
Preferred Shares" and, together with the Series A Preferred Shares, the "PTR
Preferred Shares") are listed and traded on the New York Stock Exchange (the
"NYSE") under the symbols "PTR," "PTR-PRA," and "PTR-PRB," respectively. All
such reports, proxy statements and other information filed by PTR with the
NYSE may be inspected at the NYSE's offices at 20 Broad Street, New York, New
York 10005.
Homestead has filed with the Commission a registration statement on Form S-4
(together with all amendments and exhibits, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Homestead Securities to be issued pursuant to the Transaction.
This Proxy Statement and Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
As a result of the Transaction, Homestead will become subject to the
informational requirements of the Exchange Act, and in accordance therewith
will file reports and other information with the Commission. Reports,
registration statements, proxy statements, and other information filed by
Homestead with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at the addresses specified
above. Copies of such materials can be obtained at prescribed rates from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. In addition, such material can be obtained from the
Commission's web site at http://www.sec.gov.
INCORPORATION BY REFERENCE
THIS PROXY STATEMENT AND PROSPECTUS INCORPORATES CERTAIN PTR DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE
DOCUMENTS (OTHER THAN THE EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE
WITHOUT CHARGE UPON ORAL OR WRITTEN REQUEST FROM JEFFREY A. KLOPF, SECRETARY,
AT PTR'S PRINCIPAL EXECUTIVE OFFICES AT 7777 MARKET CENTER AVENUE, EL PASO,
TEXAS 79912, TELEPHONE (915) 877-3900. IN ORDER TO ENSURE TIMELY DELIVERY OF
THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY , 1996.
The following documents, which have been filed with the Commission pursuant
to the Exchange Act, are hereby incorporated herein by reference (Commission
File No. 1-10272):
(a) PTR's Annual Report on Form 10-K for the year ended December 31,
1995;
(b) PTR's Quarterly Report on Form 10-Q for the period ended March 31,
1996;
(c) PTR's Current Reports on Form 8-K filed February 6, 1996, February
15, 1996 and May 22, 1996;
(d) PTR's Proxy Statement for the annual meeting of shareholders held on
May 21, 1996; and
(e) The description of PTR's preferred share purchase rights contained in
PTR's Registration Statement on Form 8-A filed with the Commission on July
12, 1994 (as amended by Form 8-A/A No. 1 dated July 20, 1994).
i
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All documents filed by PTR pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act after the date hereof and prior to the date of the PTR
Special Meeting shall be deemed to be incorporated herein by reference and to
be a part hereof from the date of filing of such documents. All information
appearing in this Proxy Statement and Prospectus or in any document
incorporated herein by reference is not necessarily complete and is qualified
in its entirety by the information and financial statements (including notes
thereto) appearing in this Proxy Statement and Prospectus or the documents
incorporated by reference herein and should be read together with such
information and documents.
Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Proxy Statement and Prospectus to the extent that a
statement contained herein or in any other subsequently filed document that is
deemed to be incorporated herein by reference modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement and Prospectus.
No person is authorized to give any information or to make any
representation other than those contained or incorporated by reference in this
Proxy Statement and Prospectus, and if given or made, such information or
representations should not be relied upon as having been authorized. This
Proxy Statement and Prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this Proxy
Statement and Prospectus, or the solicitation of a proxy, in any jurisdiction
to or from any person to whom or from whom it is unlawful to make such offer,
solicitation of an offer or proxy solicitation in such jurisdiction. Neither
the delivery of this Proxy Statement and Prospectus nor any distribution of
securities pursuant to this Proxy Statement and Prospectus shall, under any
circumstances, create any implication that there has been no change in the
information set forth or incorporated herein by reference or in the affairs of
PTR since the date of this Proxy Statement and Prospectus. However, if any
material change occurs during the period that this Proxy Statement and
Prospectus is required to be delivered, this Proxy Statement and Prospectus
will be amended and supplemented accordingly. All information regarding PTR in
this Proxy Statement and Prospectus has been supplied by PTR, and all
information regarding Homestead in this Proxy Statement and Prospectus has
been supplied by Homestead.
ii
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TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION..................................................... i
INCORPORATION BY REFERENCE................................................ i
SUMMARY................................................................... 2
RISK FACTORS.............................................................. 14
Significant Influence of Principal Shareholder.......................... 14
Determination of Relative Ownership Percentages......................... 14
Risks in Valuation and Allocation....................................... 15
Conflicts of Interest in the Transaction................................ 15
Absence of Prior Public Market.......................................... 16
Risks of Investments in Mortgages and Funding Commitment................ 16
Impact of Transaction on Future Distributions, Funds From Operations and
Price of PTR Common Shares............................................. 16
Competition............................................................. 16
Limited Operating History............................................... 17
THE TRANSACTION (Proposal 1).............................................. 17
General................................................................. 17
The Distribution........................................................ 17
Foreign Shareholders.................................................... 18
Background.............................................................. 18
Recommendations of the PTR Board and Reasons for the Transaction........ 25
Fairness Opinion........................................................ 31
Federal Income Tax Consequences......................................... 34
Interests of Certain Persons in the Transaction......................... 40
The Merger Agreement.................................................... 40
Protection of Business Agreement........................................ 46
SCG Investor Agreement.................................................. 46
Funding Commitment Agreements........................................... 47
ATLANTIC and PTR Investor Agreements.................................... 47
Administrative Services Agreement....................................... 48
Escrow Agreement........................................................ 48
Regulatory Filings and Approvals........................................ 48
Restrictions on Sales by Affiliates..................................... 49
Accounting Treatment.................................................... 49
Expenses................................................................ 49
Dissenters' Rights...................................................... 49
Board Recommendation.................................................... 49
AMENDMENT TO THE PTR DECLARATION OF TRUST (Proposal 2).................... 50
THE SPECIAL MEETING....................................................... 50
Purpose of the Meeting.................................................. 50
Date, Time and Place; Record Date....................................... 51
Voting Rights........................................................... 51
Other Matters........................................................... 51
INFORMATION CONCERNING PTR................................................ 52
PTR Historical and Pro Forma Selected Financial Information............. 52
PTR Share Prices........................................................ 53
PTR Policies with Respect to Certain Activities......................... 53
</TABLE>
iii
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<TABLE>
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COMPARISON OF RIGHTS OF HOLDERS OF PTR COMMON SHARES AND HOMESTEAD COMMON
STOCK.................................................................... 56
Preferred Shares........................................................ 57
Restrictions on Transfer and Redemption of Shares....................... 57
Dissenters' Rights...................................................... 57
Amendments to the PTR Declaration of Trust and the Homestead Charter.... 58
Amendments to the Bylaws................................................ 58
Termination............................................................. 58
Trustees and Directors.................................................. 58
Removal of Trustees and Directors....................................... 59
Vacancies Among Trustees and Directors.................................. 59
Limitation on Trustee and Director Liability............................ 59
Shareholder Liability................................................... 60
Indemnification of Trustees, Directors and Officers..................... 60
Shareholders' Meetings.................................................. 61
Advance Notice of Director Nominations and New Business................. 62
Asset Requirements...................................................... 62
LEGAL MATTERS............................................................. 62
INDEPENDENT PUBLIC ACCOUNTANTS AND EXPERTS................................ 62
EXPENSES OF SOLICITATION.................................................. 63
SHAREHOLDER PROPOSALS..................................................... 63
INDEX TO PTR PRO FORMA FINANCIAL STATEMENTS............................... F-1
APPENDIX A--Homestead Prospectus
ANNEX I--Merger and Distribution Agreement
ANNEX II--Opinion of Goldman, Sachs & Co.
</TABLE>
iv
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SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Proxy Statement and Prospectus
(including Appendix A and the Annexes hereto) or incorporated herein by
reference. Shareholders are urged to review the entire Proxy Statement and
Prospectus, Appendix A and the Annexes hereto. Unless otherwise indicated,
information contained herein regarding PTR assumes that none of the outstanding
Series A Preferred Shares are converted into PTR Common Shares and no
outstanding options to acquire PTR Common Shares are exercised prior to the
Distribution Record Date. Unless otherwise noted, share ownership information
is as of July 12, 1996 and does not take into account any shares which may be
issued by ATLANTIC as a result of an initial public offering of its common
stock (which is expected to occur prior to the Distribution Record Date). In
addition, unless the context otherwise requires, references to "Homestead"
refer to Homestead Village Properties Incorporated and its subsidiaries. All
references to Homestead Village Properties Incorporated's operations include
PTR, ATLANTIC and SCG operations with respect to the Homestead Village
properties. Homestead Village(R) is a registered trademark of SCG, which will
be assigned to Homestead as part of the Transaction. The term "Homestead
Village" as used herein shall include a reference to such registered trademark.
Except as otherwise specifically described, all property and other information
regarding PTR includes its Homestead Village properties.
SECURITY CAPITAL PACIFIC TRUST
The objective of PTR is to be the preeminent real estate operating company
focusing on multifamily property in its western United States target market.
PTR's REIT manager is Security Capital Pacific Incorporated (the "PTR REIT
Manager" or "PTR REIT Management"). Through the PTR REIT Manager, PTR is a
fully integrated operating company which focuses on development, acquisition,
operation and long term ownership of multifamily properties. At March 31, 1996,
PTR owned and operated or was developing 56,143 multifamily units with a total
expected cost of $2.4 billion, including budgeted costs of planned renovations
and development expenditures. PTR's recent investment activity is focused
primarily on the following metropolitan areas: Portland, Oregon; Salt Lake
City, Utah; San Diego, California; San Francisco (Bay Area), California; and
Seattle, Washington. PTR's properties are located in 23 metropolitan areas in
12 states.
PTR seeks to achieve long-term sustainable growth in cash flow by maximizing
the operating performance of its core portfolio through value-added operating
systems and concentrating its experienced team of professionals on developing
and acquiring industry-leading product in targeted submarkets exhibiting strong
job growth and favorable demographic trends.
PTR believes that development of multifamily properties that are built for
long-term ownership and that target an underserved market (moderate income
households, defined as those households earning 65% to 90% of a submarket's
median income; or, $25,870 to $35,821 based on a weighted average median income
using the number of households in each submarket) will provide a substantial
source of long-term cash flow growth. At March 31, 1996, PTR had completed
multifamily developments with total expected costs of $338.2 million, had
developments under construction with total expected costs of $332.9 million,
had developments in planning for which construction is anticipated to commence
within 12 months with total expected costs of $414.9 million and owned land
held for future development with total expected costs of $155.1 million.
PTR develops and acquires properties with a view to effective long-term
operation and ownership. The PTR REIT Manager utilizes its affiliate, Security
Capital Investment Research Incorporated, to conduct comprehensive evaluations
of PTR's target market to identify those submarkets and product types that
offer above average prospects for long-term cash flow growth. These detailed
market evaluations, combined with PTR's extensive development experience as one
of the largest multifamily property owners in its target market, assist PTR in
identifying the submarkets and product types that will offer above average
opportunities for long-term cash flow growth.
PTR has elected to be taxed as a real estate investment trust ("REIT") for
federal income tax purposes. PTR was formed in 1963 and is a real estate
investment trust organized under the laws of Maryland. Its principal executive
offices are located at 7777 Market Center Avenue, El Paso, Texas 79912, and its
telephone number is (915) 877-3900.
2
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
The first Homestead Village property was opened in 1992 by PTR. Since then
PTR has developed and placed into operation 27 additional Homestead Village
properties and ATLANTIC has developed and placed into operation one Homestead
Village property. Homestead was organized in January 1996 to continue the
operations of PTR, ATLANTIC and SCG with respect to their respective moderate
priced, extended-stay lodging facilities. Homestead will develop, own and
manage moderate priced, extended-stay lodging facilities designed to appeal to
value-conscious customers on temporary assignment, undergoing relocation or in
training.
The objective of Homestead is to be the preeminent developer, owner and
national operator focused on the moderate priced, extended-stay lodging
business. Homestead expects to achieve this objective by:
. participating in high growth markets;
. exercising investment discipline based on research; and
. employing a consistent high quality service standard to property
operations.
Homestead currently has a total of 80 facilities either in operation, under
construction or in pre-development planning. Homestead operates 29 facilities,
has begun construction of 12 additional facilities and has an additional 39
properties in pre-development planning. The term "in pre-development planning"
means developments owned or under control (land which is under control through
contingent contract) with construction anticipated to commence within 12
months. Homestead's facilities are designed and built to uniform plans
developed by Homestead. Homestead expects to have a total of 31 facilities
operational and 41 facilities under construction by the end of 1996 and plans
to continue an active development program thereafter. Homestead's plans call
for the average facility to have approximately 136 extended-stay rooms and to
take approximately eight to ten months to construct.
The average length of stay for a customer is in excess of four weeks. For the
quarter ended March 31, 1996, average physical occupancy and average weekly
rate for 17 stabilized properties was 87% and $217 per week, respectively, and,
for the same quarter, average physical occupancy and average weekly rate for
seven pre-stabilized properties was 59% and $217 per week, respectively.
Homestead categorizes its operating properties (which include all properties
not under construction or in pre-development planning) as either "stabilized"
or "pre-stabilized." The term "stabilized" means that construction has been
completed and management and marketing programs have been in place for a
sufficient period of time (but in no event longer than 12 months) to achieve an
80% occupancy level for five consecutive weeks at market rates. Prior to being
"stabilized," an operating property is considered to be "pre-stabilized." All
operating properties have been newly developed by Homestead.
Homestead believes that it is distinguished from its competitors in the
moderate priced, extended-stay lodging business in several respects.
. Homestead has been developing and operating moderate priced, extended-
stay facilities since 1992. It has in place a staff of 66 professionals
who have substantial experience in the real estate and lodging
industries and has 318 site-level employees. Most of these individuals
were previously employed by affiliates of SCG, which operated and
managed the Homestead Village properties on behalf of PTR and ATLANTIC,
in similar capacities to those they will have with Homestead.
. Homestead currently operates 29 facilities in eight cities and will
operate nationally. It expects to have 31 facilities in eight cities
operating by the end of 1996.
. Homestead has access to substantial financing through (i) the Funding
Commitment Agreements with PTR and ATLANTIC (described herein), under
which PTR and ATLANTIC have agreed to provide funding of $133 million
and $111 million, respectively, and to receive convertible mortgage
notes of $144 million and $98 million, respectively, in respect thereof,
and (ii) the Investor Agreement with SCG (described herein) under which
SCG has agreed to exercise upon notice from Homestead all of the
Homestead Warrants it will receive in the Transaction with an aggregate
exercise price of approximately $51 million. This access to capital
should provide Homestead with sufficient capital to fund its national
development program through mid-1997 without having to seek additional
external financing.
3
<PAGE>
. Homestead is affiliated with SCG, which will be the principal
shareholder of Homestead and will be entitled to representation on the
board of directors of Homestead (the "Homestead Board"). Homestead will
be self-managed but will have access to various services which SCG
offers to its real estate affiliates. These and other services will be
available to Homestead under an Administrative Services Agreement
(described herein). See "The Transaction--Administrative Services
Agreement." Homestead believes that it can purchase these services from
SCG at a price which would be less expensive than hiring the necessary
personnel to perform these services, and that the level of services SCG
can provide would be of a higher quality than Homestead could provide
internally due to SCG's large, experienced staff and economies of scale.
Homestead was formed in 1996 as a Maryland corporation and will operate as a
Subchapter C corporation. Its executive offices are located at 125 Lincoln
Avenue, Santa Fe, New Mexico 87501 and its telephone number is (505) 982-9292.
RISK FACTORS
In considering whether to approve the matters described herein, PTR
shareholders should consider the following matters in addition to the matters
described in greater detail herein under "Risk Factors." ADDITIONALLY, PTR
SHAREHOLDERS SHOULD CONSIDER THOSE MATTERS DESCRIBED UNDER THE CAPTION "RISK
FACTORS," BEGINNING ON PAGE A-8 IN APPENDIX A, WITH RESPECT TO THE OWNERSHIP OF
HOMESTEAD SECURITIES.
. There may be alternative methods of calculating the relative ownership
percentages of the various parties in Homestead which, if used, could
have resulted in different relative amounts of consideration being
received by PTR, ATLANTIC or SCG.
. The terms of the Transaction were not determined based on arm's length
negotiations.
. Since SCG controls all of the parties to the Transaction, conflicts of
interest exist.
. SCG will exercise significant influence over the business and policies
of PTR, ATLANTIC and Homestead after consummation of the Transaction due
to its (i) existing ownership of shares of PTR and ATLANTIC and of their
respective REIT Managers and expected ownership of shares of Homestead
Common Stock, (ii) right to nominate up to three members of the PTR
Board and the board of directors of ATLANTIC (the "ATLANTIC Board") and
two members of the Homestead Board, and (iii) right of prior
consultation regarding certain Homestead matters, including annual
operating budgets and substantial deviations therefrom.
. PTR will be subject to the risks inherent in making mortgage loans if
the Transaction is approved, including the risk that Homestead may not
be able to make debt service payments or pay principal when due and the
risk that the value of the mortgaged properties may be less than the
amounts owed.
. Homestead and the Homestead Village properties have limited operating
histories.
. Prior to the Distribution, there will not be an established trading
market for the Homestead Securities and there is no assurance of the
price at which the Homestead Securities will trade.
THE SPECIAL MEETING
THE MEETING
The PTR Special Meeting is scheduled to be held at a.m., local time, on
, September , 1996, at . The PTR Board has fixed the close
of business on August , 1996 as the record date for the determination of
holders of PTR Common Shares entitled to notice of and to vote at the PTR
Special Meeting. See "The Special Meeting."
4
<PAGE>
THE PROPOSALS
At the PTR Special Meeting, shareholders will be asked to consider and vote
upon the following matters:
. The approval of the Merger Agreement and the Transaction; and
. The approval of an amendment to the PTR Declaration of Trust necessary
to consummate the Transaction.
THE PTR BOARD, BY UNANIMOUS VOTE OF TRUSTEES WHO WERE PRESENT, APPROVED THE
MERGER AGREEMENT AND THE TRANSACTION AND RECOMMENDS THAT PTR SHAREHOLDERS VOTE
"FOR" THE APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTION, INCLUDING THE
AMENDMENT TO THE PTR DECLARATION OF TRUST. SEE "THE TRANSACTION--
RECOMMENDATIONS OF THE PTR BOARD AND REASONS FOR THE TRANSACTION."
REQUIRED VOTE
The affirmative vote of the holders of at least two-thirds of the outstanding
PTR Common Shares is required to approve the Merger Agreement and the
Transaction and to approve the amendment to the PTR Declaration of Trust. The
approval by shareholders of the amendment to the PTR Declaration of Trust is a
condition to the consummation of the Transaction and the approval by
shareholders of the Merger Agreement and the Transaction is a condition to the
approval of the amendment to the PTR Declaration of Trust. As of July 12, 1996,
SCG beneficially owned approximately 37.8% of the outstanding PTR Common
Shares. See "The Special Meeting--Voting Rights." SCG has agreed, subject to
certain conditions, to vote all PTR Common Shares owned by it in favor of the
proposals. Therefore, the affirmative vote of holders of approximately an
additional 29% of the outstanding PTR Common Shares will be required to approve
the proposals.
THE TRANSACTION
GENERAL
PTR has traditionally focused on multifamily assets in the western United
States and ATLANTIC has focused on multifamily assets in the southeastern
United States. Since 1992 PTR has developed and operated 28 Homestead Village
properties and ATLANTIC has developed and placed in operation one Homestead
Village property. In January 1996, the PTR Board began considering ways to
maximize shareholder value with respect to the Homestead Village properties. On
May 21, 1996, PTR, ATLANTIC, Homestead and SCG entered into the Merger
Agreement.
The Transaction is expected to result in:
. Enhanced market valuation placed on the Homestead Village operations by
allowing the financial markets the ability to focus on the distinct
characteristics of PTR's multifamily property operations and Homestead's
moderate priced, extended-stay lodging business.
. Homestead Village properties being more effectively and profitably
utilized and developed due to the elimination of certain restrictions
applicable to REITs.
. Enhanced ability of Homestead to access external capital markets
necessary to carry out its business plan.
FORMATION OF HOMESTEAD
Assuming that the requisite shareholder vote is received and that all other
conditions to the Merger Agreement have been satisfied or waived, each of PTR,
ATLANTIC and SCG will contribute, through a series of merger transactions, all
of their respective assets related to Homestead Village properties in return
for shares of Homestead Common Stock as follows:
5
<PAGE>
. PTR will contribute 54 properties (or the rights to acquire such
properties) to Homestead in exchange for 9,485,727 shares of Homestead
Common Stock.
. ATLANTIC will contribute 26 properties (or the rights to acquire such
properties) to Homestead in exchange for 4,201,220 shares of Homestead
Common Stock. Pursuant to the Merger Agreement, ATLANTIC will provide an
estimated cash payment of $18.6 million to Homestead at the date of the
closing of the Mergers (the "Closing Date"). This payment is required
because ATLANTIC's Homestead Village properties are in earlier stages of
development than PTR's Homestead Village properties, therefore ATLANTIC
has not funded the same percentage of total costs as PTR. This payment
also assures that ATLANTIC receives all of its shares of Homestead
Common Stock at the Closing Date rather than being received in smaller
increments over time as funds are expended for Homestead Village
properties contributed by ATLANTIC.
. SCG will contribute to Homestead its anticipated future cash flows from
the PTR REIT Management Agreement (defined herein) and a similar
agreement with ATLANTIC (the "ATLANTIC REIT Management Agreement") and
property management agreements relating to the Homestead Village
properties in exchange for 1,819,750 shares of Homestead Common Stock,
not including 2,243,038 shares which will be placed in escrow and
released as funds are advanced under the Funding Commitment Agreements.
In addition, SCG will contribute the Homestead Village trademark and the
operating system. No separate consideration was attributed to the
Homestead Village trademark or the operating system, as the trademark
and operating system would be necessary to achieve the anticipated fees.
There are additional Homestead Village facilities which are in early
stages of planning, but which are not owned or under control and are not
included in the 80 facilities which will be contributed in the
Transaction, and are being planned and developed outside the target
markets of PTR and ATLANTIC by SCG with its own funds. SCG will
contribute the rights to certain properties to Homestead for no
additional consideration.
. Simultaneous with the transactions described above, PTR and ATLANTIC
will receive 6,363,789 and 2,818,517 Homestead Warrants, respectively,
in exchange for their entering into the Funding Commitment Agreements.
Each Homestead Warrant is exercisable at $10.00 per share and expires
one year after the Closing Date.
. Pursuant to the applicable Funding Commitment Agreement, PTR and
ATLANTIC will agree to provide secured financing to Homestead and
receive up to $144,044,620 and $98,028,471, respectively, in convertible
mortgage notes. These notes will have a term of approximately ten years,
bear interest at 9% per year, will not be callable for five years and
will be convertible into shares of Homestead Common Stock after March
31, 1997 on the basis of one share of Homestead Common Stock for every
$11.50 of principal amount outstanding, subject to adjustment. The PTR
mortgage loans and ATLANTIC mortgage loans will be used to finance the
acquisition and development of properties contributed by PTR and
ATLANTIC, respectively. In addition, PTR subsidiaries currently have
$77,289,000 in convertible mortgage loans with PTR which will be assumed
by Homestead at the Closing Date. These loans have substantially the
same terms as the mortgage loans described above. If all such mortgage
loans were made and converted, an additional 19,246,402 and 8,524,215
shares of Homestead Common Stock would be issued to PTR and ATLANTIC,
respectively.
. SCG will receive 817,694 Homestead Warrants in exchange for providing
funding to Homestead during the time between the execution of the Merger
Agreement and the Closing Date and the use of office facilities for one
year.
. The relative percentage ownership interests of PTR, ATLANTIC and SCG in
Homestead, giving effect to the issuance of the Homestead Common Stock
at the Closing Date, the exercise of all Homestead Warrants and the
conversion of all mortgage loans outstanding and which could be made
under the Funding Commitment Agreements, would be 63.21%, 28.00% and
8.79%, respectively. These percentages are different than the relative
percentage ownership interests described elsewhere because the
convertible mortgage loans issuable to PTR and ATLANTIC have a
conversion price of $11.50 per share rather than the $10.00 per share
used in calculating the original issuance of the Homestead Common Stock.
6
<PAGE>
. After giving effect to the distribution of the Homestead Securities by
PTR and ATLANTIC, the exercise of all Homestead Warrants, the release of
all shares of Homestead Common Stock to SCG from escrow and the
conversion of all mortgage loans and the subsequent distribution of the
Homestead Common Stock issuable upon such conversion to the shareholders
of PTR and ATLANTIC, SCG would own approximately 50.6% of the
outstanding Homestead Common Stock.
THE DISTRIBUTION
The Homestead Securities received by PTR will be distributed, pro rata, to
PTR shareholders. The Distribution of the Homestead Securities will be declared
following approval of the proposals by PTR shareholders and ATLANTIC
shareholders, subject to the satisfaction of certain conditions to the Merger
Agreement. The Distribution will be made to holders of PTR Common Shares of
record at the close of business on the Distribution Record Date. The amount of
Homestead Securities to be received by each PTR shareholder in the Distribution
will depend on the number of PTR Common Shares outstanding on the Distribution
Record Date. Based on the number of PTR Common Shares outstanding as of July
12, 1996, each PTR shareholder would receive 0.131033 shares of Homestead
Common Stock and 0.087907 Homestead Warrants for each PTR Common Share held. To
the extent that any Series A Preferred Shares are converted into, or options
are exercised for, PTR Common Shares prior to the Distribution Record Date,
such conversions or exercises will result in a proportionate reduction in the
amount of Homestead Securities to be received by each PTR shareholder. See "The
Transaction--The Distribution."
No certificates or scrip representing fractional shares of Homestead Common
Stock or fractional Homestead Warrants will be issued directly to PTR
shareholders as a part of the Distribution. The Distribution Agent (defined
herein) will, as soon as practicable after the Distribution Record Date,
aggregate and sell all fractional shares of Homestead Common Stock and
Homestead Warrants on the Nasdaq Stock Market (National Market) or otherwise at
then prevailing market prices and remit the net proceeds (after deduction of
brokerage fees) to PTR shareholders who would otherwise be entitled to receive
fractional shares or warrants.
NO HOLDER OF PTR COMMON SHARES WILL BE REQUIRED TO PAY ANY CASH OR OTHER
CONSIDERATION FOR THE HOMESTEAD SECURITIES RECEIVED IN THE DISTRIBUTION OR TO
SURRENDER OR EXCHANGE PTR COMMON SHARES IN ORDER TO RECEIVE HOMESTEAD
SECURITIES. THE DISTRIBUTION WILL NOT AFFECT THE NUMBER OF, OR THE RIGHTS
ATTACHING TO, OUTSTANDING PTR COMMON SHARES.
7
<PAGE>
<TABLE>
<CAPTION>
The following diagram shows the contributions to be made by, and the
consideration to be distributed with respect to, each of PTR and its
shareholders, ATLANTIC and its shareholders, SCG and Homestead, respectively:
[CHART APPEARS HERE]
<C> <S> <C> <S> <C>
Homestead Properties Homestead Properties
-------------------- --------------------
28 In Operation 1 In Operation
8 Under Construction 4 Under Construction
- ----------- 18 In Pre-Development ----------- 21 In Pre-Development -----------
Planning Planning
$18.6 million in cash(1)
PTR --------------------- HOMESTEAD ---------------------- ATLANTIC
--------------------- ----------------------
- ----------- ----------- -----------
Homestead Securities Homestead Securities
-------------------- --------------------
9,485,727 Shares of 4,201,220 Shares of
Homestead Common Stcok Homestead Common Stock
$221 Million Convertible $98 Million Convertible
9,485,727 Mortgages Mortgages 4,201,220
Shares of 6,363,789 Homestead 2,818,517 Homestead Shares of
Homestead Warrants Warrants Homestead
Common (63.2% Ownership(2)) (28.0% Ownership(2)) Common
Stock Stock
6,363,789 Homestead Securities Development Properties 2,818,517
Homestead -------------------- Homestead Trademarks Homestead
Warrants 4,062,788 Shares of Operating Systems Warrants
Homestead Common Stock(3) Personnel
817,694 Homestead
Warrants
(8.8% Ownership(2)(4))
- -------------------- ----------- --------------------
PTR ATLANTIC
SHAREHOLDERS(4) SCG SHAREHOLDERS(4)
- -------------------- ----------- --------------------
</TABLE>
(1) Subject to adjustment pursuant to the terms of the Merger Agreement.
(2) Ownership percentages assume full conversion of mortgages and exercise of
all warrants.
(3) 2,243,038 of these shares will be placed in escrow and released as funds
are advanced under the Funding Commitment Agreements.
(4) SCG beneficially owns 37.8% and 64.1% of PTR and ATLANTIC, respectively, at
July 12, 1996.
RECOMMENDATIONS OF THE PTR BOARD AND REASONS FOR THE TRANSACTION
A special committee of the independent trustees of the PTR Board (the "PTR
Special Committee") approved the Merger Agreement and the Transaction as being
fair and reasonable to PTR and on terms and conditions not less favorable to
PTR than those available from unaffiliated third parties. The PTR Special
Committee recommended that the PTR Board approve the Merger Agreement and the
Transaction. The PTR Board, by unanimous approval of the trustees present at
the meeting, approved the Merger Agreement and the Transaction as being fair
and reasonable and on terms not less favorable to PTR than those available from
unaffiliated third parties. In reaching its conclusion, the PTR Board placed
particular emphasis on the recommendation of the PTR Special Committee. The PTR
Board considered a number of other factors including the reasons emphasized by
the PTR Special Committee, the goals and objectives of Homestead, SCG's stated
objective of maximizing shareholder value, the relative contributions of PTR,
ATLANTIC and SCG, the impact of the Transaction on PTR's estimated funds from
operations and balance sheet, the financial structure of Homestead giving
effect to the Transaction, the impact of the REIT rules on continued operation
of the Homestead Village properties by PTR, the terms of the Homestead
Securities, the affiliated nature of the Transaction, the tax impact of the
Distribution on PTR and its shareholders, and the nature and extent of
inquiries from third parties. Finally, the PTR Board considered the condition
to the Merger Agreement that the PTR
8
<PAGE>
Special Committee receive a written opinion from an investment banking firm
satisfactory to the PTR Special Committee that the aggregate consideration to
be received by PTR pursuant to the Merger Agreement in exchange for the
contribution by PTR to Homestead of PTR's Homestead Village properties and the
agreement by PTR to enter into the Funding Commitment Agreement was fair to
PTR. The PTR Board did not quantify or otherwise attempt to assign relative
weights to the specific factors considered in making its determination
although, as noted above, it did place special emphasis on the recommendation
of the PTR Special Committee. For a more detailed discussion of the reasons for
the Transaction and the factors considered by the PTR Board in making its
recommendation, see "The Transaction--Recommendations of the PTR Board and
Reasons for the Transaction."
INTERESTS OF CERTAIN PERSONS
PTR's trustees and executive officers who own PTR Common Shares or ATLANTIC
Common Stock (as hereafter defined) will, in the aggregate, receive a total of
44,646 shares of Homestead Common Stock and 29,950 Homestead Warrants as a
result of the Transaction. SCG and its directors and executive officers who own
PTR Common Shares or ATLANTIC Common Stock will, in the aggregate, receive a
total of 10,460,177 shares of Homestead Common Stock (including 2,243,038
shares being held in escrow) and 5,109,575 Homestead Warrants as a result of
the Transaction. Each of the foregoing persons will receive cash in lieu of
fractional shares of Homestead Common Stock and fractional Homestead Warrants.
Certain officers of PTR and the PTR REIT Manager will become officers and
employees of Homestead. See "The Transaction--Interests of Certain Persons in
the Transaction."
FAIRNESS OPINION
The PTR Special Committee has retained Goldman, Sachs & Co. ("Goldman,
Sachs") to assist the PTR Special Committee in evaluating the consideration to
be received by PTR in exchange for the PTR assets being transferred to
Homestead.
On May 20, 1996, Goldman, Sachs delivered its oral opinion to the PTR Special
Committee to the effect that, as of the date of such opinion, the aggregate
consideration to be received by PTR pursuant to the Merger Agreement in
exchange for the contribution by PTR to Homestead of PTR's Homestead Village
properties and the agreement by PTR to enter into the Funding Commitment
Agreement was fair to PTR. Goldman, Sachs subsequently confirmed its opinion by
delivery of a written opinion dated the date hereof. The full text of the
written opinion of Goldman, Sachs, which sets forth the assumptions made,
matters considered and limitations of the review undertaken, is attached hereto
as Annex II and is incorporated herein by reference. SHAREHOLDERS OF PTR ARE
URGED TO READ THE OPINION OF GOLDMAN, SACHS IN ITS ENTIRETY. For additional
information concerning the assumptions made, matters considered and limits of
the review by Goldman, Sachs in reaching its opinion and the fees received and
to be received by it, see "The Transaction--Fairness Opinion."
FEDERAL INCOME TAX CONSEQUENCES
The Mergers have been structured to constitute a transaction subject to
Section 351 or the reorganization provisions of the Internal Revenue Code of
1986, as amended to the date hereof (the "Code"), and related provisions. PTR
will recognize taxable gain on the Mergers if PTR is treated as having received
property or cash ("boot") in the Mergers and will recognize gain on the
Distribution in an amount equal to the excess of the sum of (i) the fair market
value of the Homestead Securities on the Distribution Record Date and (ii) cash
distributed in lieu of fractional shares of Homestead Common Stock and
fractional Homestead Warrants over PTR's basis immediately prior to the
Distribution in the Homestead Securities it receives in the Mergers (PTR's tax
basis in the Homestead Village properties immediately prior to the Transaction
is estimated to be approximately $146.8 million). The earnings and profits of
PTR will be increased by the amount of any such gain recognized in the Mergers
or the Distribution. PTR will also recognize income with respect to the value
of the Homestead Warrants received by it in exchange for entering into the
Funding Commitment Agreement, which will increase PTR's earnings and profits.
9
<PAGE>
The Distribution of the Homestead Securities and cash in lieu of fractional
shares of Homestead Common Stock and fractional Homestead Warrants will
constitute a taxable dividend to PTR shareholders, taxable as ordinary income,
to the extent of the earnings and profits of PTR allocable to such Homestead
Securities and cash. The amount of the Distribution which exceeds the allocated
earnings and profits of PTR will be treated as a nontaxable reduction (although
not below zero) of a shareholder's tax basis in its PTR Common Shares. To the
extent that the Distribution exceeds such shareholder's adjusted tax basis in
its PTR Common Shares, the excess will be taxed as gain to such shareholder.
See "The Transaction--Federal Income Tax Consequences."
CONDITIONS TO THE TRANSACTION
The obligations of PTR to consummate the Transaction are subject to the
satisfaction or waiver of certain conditions, including, among others, (i)
obtaining the requisite approvals of the PTR shareholders and the ATLANTIC
shareholders, (ii) the absence of any injunction prohibiting the consummation
of the Transaction, (iii) the receipt of all governmental consents, orders and
approvals legally required for consummation of the Transaction, (iv) the
receipt of certain legal opinions or Internal Revenue Service ("IRS") rulings
with respect to the tax consequences of the Transaction, effects of the
Transaction on REIT qualification and certain other legal matters, (v) the
continuing accuracy of the representations and warranties of each party and
(vi) the performance of certain other specified obligations by each party. See
"The Transaction--The Merger Agreement--Conditions to the Transaction."
TERMINATION
The Merger Agreement may be terminated at any time prior to the Closing Date
(i) by mutual consent of PTR, ATLANTIC, SCG and Homestead; (ii) by any of PTR,
ATLANTIC, SCG or Homestead after December 31, 1996, if the Transaction has not
been consummated on or before such date (so long as the party terminating has
not breached its obligations under the Merger Agreement except for such
breaches that are immaterial); (iii) unilaterally by any of PTR, ATLANTIC, SCG
or Homestead if (a) any other party fails to perform any covenant or agreement
in the Merger Agreement in any material respect and does not cure such failure
in all material respects within 15 business days after receipt of written
notice of the alleged failure from another party, (b) any other party fails to
fulfill or complete a condition to the obligations of that party (which
condition is not waived) by reason of a breach by that party of its obligations
in the Merger Agreement or (c) any condition to the obligations of any other
party is not satisfied (other than by reason of a breach by that party of its
obligations under the Merger Agreement), and it reasonably appears that the
condition cannot be satisfied prior to December 31, 1996; (iv) unilaterally by
any of PTR, SCG or Homestead if ATLANTIC, through the ATLANTIC Board or the
special committee of the ATLANTIC Board (the "ATLANTIC Special Committee"),
either fails to recommend to ATLANTIC's shareholders the approval of the Merger
Agreement and the Transaction or withdraws, modifies or amends such
recommendation; and (v) unilaterally by any of ATLANTIC, SCG or Homestead if
PTR, through the PTR Board or the PTR Special Committee, either fails to
recommend to PTR's shareholders the approval of the Merger Agreement and the
Transaction or withdraws, modifies or amends such recommendation.
AMENDMENT AND WAIVER
Subject to compliance with applicable law, the Merger Agreement may be
amended by the written agreement of PTR, ATLANTIC, SCG and Homestead. However,
the Merger Agreement may not be amended in any material respect subsequent to
obtaining the approval of the shareholders of PTR and ATLANTIC. See "The
Transaction--The Merger Agreement--Amendment and Waiver."
REGULATORY REQUIREMENTS
Consummation of the Transaction is subject to compliance with the provisions
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), for which early termination of the applicable waiting period was
granted on June 14, 1996.
10
<PAGE>
DISSENTERS' RIGHTS
Under Maryland law, holders of PTR Common Shares are not entitled to
dissenters' rights in connection with the Transaction. See "The Transaction--
Dissenters' Rights."
PTR SHARE PRICES
The Homestead Securities are not traded on any established public trading
market. The PTR Common Shares are listed and traded on the NYSE under the
symbol "PTR." On January 31, 1996 (the last trading day prior to the public
announcement that PTR was evaluating its options with respect to its Homestead
Village properties), the last sales price of the PTR Common Shares, as reported
on the NYSE Composite Tape, was $19 5/8 per share. On May 21, 1996 (the last
trading day preceding the announcement of the signing of the Merger Agreement),
the last sales price of the PTR Common Shares, as reported on the NYSE
Composite Tape, was $21 1/2 per share. See "Information Concerning PTR--PTR
Share Prices and Per Share Dividends." On July 16, 1996, the last sales price
of the PTR Common Shares, as reported on the NYSE Composite Tape, was $20 5/8
per share.
11
<PAGE>
PTR HISTORICAL AND PRO FORMA SUMMARY FINANCIAL DATA
The following table sets forth (1) historical summary financial data for the
periods indicated and as of the dates indicated for PTR and (2) unaudited pro
forma summary financial data for the periods indicated and as of the date
indicated, giving effect to the Transaction as if it had occurred as of January
1, 1995 for the operations summary information and on March 31, 1996 for
financial position information. Pro forma adjustments made to arrive at the pro
forma amounts set forth below are described in the PTR Pro Forma Financial
Information included elsewhere in this Proxy Statement and Prospectus. The
following information should be read in conjunction with and is qualified in
its entirety by the PTR Historical Financial Statements and related notes
thereto incorporated by reference into this Proxy Statement and Prospectus and
the PTR pro forma financial information and accompanying discussion and notes
set forth in the PTR Pro Forma Financial Information. The unaudited pro forma
summary information is intended for informational purposes and is not
necessarily indicative of the future financial position or future results of
operations of PTR or of the financial position or the results of operations of
PTR that would have actually occurred had the Transaction been completed as of
the date or for the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------
PRO HISTORICAL PRO HISTORICAL
FORMA --------------- FORMA -----------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
------- ------- ------- -------- --------- -------- -------- --------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Rental Income........... $69,056 $75,809 $53,517 $243,783 $ 262,473 $183,472 $ 76,129 $ 30,970 $ 14,721
Property Management Fees
Paid to Affiliates..... 2,354 2,754 1,895 7,894 8,912 7,148 3,862 1,424 148
General and
Administrative
Expenses............... 101 276 214 154 952 784 660 436 697
REIT Management Fee Paid
to Affiliate........... 4,811 5,555 3,957 18,018 20,354 13,182 7,073 2,711 793
Earnings from Operations
(1).................... 21,034 22,920 14,540 76,418 81,696 46,719 23,191 9,037 2,078
Gain (loss) on Sale of
Investments............ 2,923 2,923 -- 2,623 2,623 -- 2,302 (51) (611)
Preferred Share
Dividends Paid......... 6,388 6,388 4,025 21,823 21,823 16,100 1,341 -- --
Net Earnings
Attributable to Common
Shares................. 17,569 19,455 10,515 57,218 62,496 30,619 24,152 8,986 1,467
Common Share
Distributions Paid..... $22,437 $22,437 $14,506 $ 76,804 $ 76,804 $ 46,121 $ 29,162 $ 13,059 $ 4,179
PER SHARE DATA:
Net Earnings
Attributable to Common
Shares................. $ 0.24 $ 0.27 $ 0.20 $ 0.85 $ 0.93 $ 0.66 $ 0.66 $ 0.46 $ 0.21
Common Share
Distributions Paid..... 0.31 0.31 0.2875 1.15 1.15 1.00 0.82 0.70 0.64
Series A Preferred Share
Dividends Paid......... 0.4375 0.4375 0.4375 1.75 1.75 1.75 0.1458 -- --
Series B Preferred Share
Dividends Paid......... $0.5625 $0.5625 $ -- $ 1.363 $ 1.363 $ -- $ -- $ -- $ --
Weighted Average Common
Shares Outstanding..... 72,211 72,211 51,485 67,052 67,052 46,734 36,549 19,435 7,123
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------------------- ------------------------------------------------
HISTORICAL
PRO FORMA HISTORICAL ------------------------------------------------
1996 1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Real Estate Owned, at
cost................... $1,719,603 $1,930,632 $1,855,866 $1,296,288 $872,610 $337,274 $117,572
Total Assets............ 1,816,290 1,889,934 1,840,999 1,295,778 890,301 342,235 141,020
Line of Credit.......... 48,039 36,250 129,000 102,000 51,500 54,802 101
Long-Term Debt.......... 350,000 350,000 200,000 200,000 -- -- --
Mortgages Payable....... 157,570 157,570 158,054 93,624 48,872 30,824 35,772
Total Liabilities....... 601,042 594,812 565,331 455,136 135,284 94,186 38,707
Shareholders' Equity.... $1,215,248 $1,295,122 $1,275,668 $ 840,642 $755,017 $248,049 $102,313
Number of Common Shares
Outstanding............ 72,211 72,211 72,211 50,456 44,645 27,034 13,161
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------- --------------------------------------------------------------
PRO HISTORICAL PRO HISTORICAL
FORMA ------------------ FORMA ----------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
------- -------- -------- -------- --------- --------- --------- --------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net earnings
attributable to Common
Shares................. $17,569 $ 19,455 $ 10,515 $ 57,218 $ 62,496 $ 30,619 $ 24,152 $ 8,986 $ 1,467
Add (Deduct):
Depreciation........... 9,759 10,618 7,424 34,342 36,685 24,614 10,513 5,311 2,886
Provision for possible
loss on investments... -- -- 120 420 420 1,600 2,270 400 400
(Gain) loss on sale of
investments........... (2,923) (2,923) -- (2,623) (2,623) -- (2,302) 51 611
Other (primarily
provision for loss on
receivables).......... -- -- -- -- -- -- 83 174 40
------- -------- -------- -------- --------- --------- --------- --------- --------
Funds from Operations
Attributable to Common
Shares (2)............. $24,405 $ 27,150 $ 18,059 $ 89,357 $ 96,978 $ 56,833 $ 34,716 $ 14,922 $ 5,404
======= ======== ======== ======== ========= ========= ========= ========= ========
Net Cash Provided by
Operating Activities... $ 16,172 $ 12,016 $ 121,795 $ 94,625 $ 49,247 $ 20,252 $ 6,092
Net Cash Used by
Investing Activities... (61,095) (58,926) (294,488) (368,515) (529,065) (229,489) (33,553)
Net Cash Provided by
Financing Activities... 26,342 48,211 191,520 276,457 478,345 185,130 57,259
</TABLE>
12
<PAGE>
- --------
(1) Earnings from operations for the years ended December 31, 1995, 1994 and
1993 reflect a $420,000, a $1.6 million, and a $2.3 million provision,
respectively, for possible losses relating to investments in non-
multifamily properties.
(2) Funds from operations attributable to PTR Common Shares ("funds from
operations") means net earnings computed in accordance with generally
accepted accounting principles ("GAAP"), excluding gains (or losses) from
debt restructuring and sales of property, plus certain non-cash items,
principally property depreciation, and after adjustments for unconsolidated
partnerships and joint ventures. PTR believes that funds from operations is
helpful in understanding a property portfolio's ability to support interest
payments and general operating expenses. Funds from operations should not
be considered as an alternative to net earnings or any other GAAP
measurement of performance as an indicator of PTR's operating performance
or as an alternative to cash flows from operating, investing or financing
activities as a measure of liquidity. In July 1994, PTR changed to a more
conservative policy of expensing the amortization of loan costs in
determining funds from operations. For comparability, funds from operations
has been restated to give effect to this policy as if it had been in effect
since January 1, 1991. The funds from operations measure presented by PTR
may not be comparable to other similarly titled measures of other REITs.
COMPARATIVE PER SHARE DATA
The following sets forth for PTR Common Shares and Homestead Common Stock
certain historical and pro forma summary per share financial information for
the three months ended March 31, 1996 and for the year ended December 31, 1995.
The following information should be read in conjunction with and is qualified
in its entirety by (i) the consolidated financial statements and accompanying
notes of PTR included in the documents described under "Incorporation by
Reference," (ii) the balance sheet and accompanying notes of Homestead
contained in Appendix A to this Proxy Statement and Prospectus and (iii) the
pro forma financial information and notes set forth above under "--Pro Forma
Summary Financial Data."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
PTR COMMON SHARES:
Net Earnings Attributable to Common Shares
per Common Share:
Historical................................. $ .27 $ .93
Pro forma.................................. .24 .85
Distributions per Common Share:
Historical................................. .31 1.15
Pro forma.................................. .31 1.15
Book value per Common Share:
Historical................................. 13.30 13.03
Pro forma.................................. 12.19 N/A
HOMESTEAD COMMON STOCK:
Net Income (Loss) per share:
Historical................................. N/A N/A
Pro forma.................................. $ .003 $(.061)
Dividends per share:
Historical................................. N/A N/A
Pro forma.................................. N/A N/A
Book value per share:
Historical................................. N/A N/A
Pro forma.................................. $ 9.90 N/A
</TABLE>
13
<PAGE>
RISK FACTORS
Holders of PTR Common Shares should consider carefully the specific factors
set forth below as well as the other information contained in this Proxy
Statement and Prospectus in evaluating the Transaction. Additionally, holders
of PTR Common Shares should consider the factors set forth in Appendix A under
the caption "Risk Factors" with respect to an investment in Homestead
Securities.
SIGNIFICANT INFLUENCE OF PRINCIPAL SHAREHOLDER
As of July 12, 1996, SCG beneficially owned approximately 37.8% of the
issued and outstanding PTR Common Shares and 64.1% of the issued and
outstanding shares of ATLANTIC common stock, $0.01 par value per share
("ATLANTIC Common Stock"). As a result, SCG currently controls approximately
37.8% and 64.1% of the vote on matters submitted for PTR and ATLANTIC
shareholder action, respectively, including the Transaction. No other
shareholder may hold more than 9.8% of the shares of PTR or ATLANTIC. SCG has
the right to nominate up to three trustees to the PTR Board and three
directors to the ATLANTIC Board, depending upon its level of ownership of
shares. The trustees and directors so elected are in a position to exercise
significant influence over the affairs of PTR and ATLANTIC if they were to act
together.
Immediately after completion of the Mergers, SCG is expected to beneficially
own 1,819,750 shares of Homestead Common Stock, not including 2,243,038 shares
of Homestead Common Stock which will be held in escrow and released to SCG as
funding is made by PTR and ATLANTIC under their Funding Commitment Agreements.
See "The Transaction--Escrow Agreement." As a result of the distributions by
PTR and ATLANTIC to their respective shareholders, SCG expects to beneficially
own an additional 3,588,965 and 2,693,842 shares of Homestead Common Stock,
respectively, for a total of 8,102,557 shares of Homestead Common Stock, or
approximately 45.6% of the outstanding shares of Homestead Common Stock.
Through its beneficial ownership of Homestead Common Stock, it is expected
that SCG will control 45.6% of the vote on all matters submitted for Homestead
shareholder action. The foregoing share ownership information does not give
effect to the issuance of shares upon exercise of options or other awards
granted under Homestead's Long-Term Incentive Plan. See "Management--Stock
Option Plan" in Appendix A. SCG will also own Homestead Warrants to acquire an
additional 5,032,707 shares of Homestead Common Stock which, if fully
exercised, would increase SCG's beneficial ownership of Homestead Common Stock
to 57.7%. SCG may, over time, dispose of some of the shares of Homestead
Common Stock it acquires in the Transaction to reduce its beneficial ownership
in Homestead to below 50%. In addition, pursuant to an investor agreement
between SCG and Homestead, SCG will agree to exercise at the request of
Homestead all Homestead Warrants it receives in the Transaction. In exchange
for its agreement to exercise Homestead Warrants, Homestead will grant SCG the
right, among other things, to nominate up to two directors to the Homestead
Board, depending upon SCG's level of ownership of shares of Homestead Common
Stock, and to be consulted on certain business decisions made by Homestead. In
addition, pursuant to investor agreements with PTR and ATLANTIC, each of PTR
and ATLANTIC will have the right to nominate one director to the Homestead
Board. See "The Transaction--PTR and ATLANTIC Investor Agreements" and "--SCG
Investor Agreement."
The PTR REIT Manager is a wholly owned subsidiary of SCG and is responsible
for the day-to-day operations of PTR. PTR has no employees and all of PTR's
officers are also officers or employees of the PTR REIT Manager.
DETERMINATION OF RELATIVE OWNERSHIP PERCENTAGES
In structuring a combination of the Homestead Village properties and
operations which are separately owned and operated by PTR, ATLANTIC and SCG, a
method had to be used to determine the relative ownership percentages of each
of the parties in the new Homestead entity. The objectives of SCG in
structuring the Transaction were to compensate each party fairly for the
assets to be contributed, to determine the group of assets to be contributed
to the new entity and to use a discounted cash flow method of determining the
relative fair value of the assets to be contributed to the new entity. After
examining a variety of methods of determining relative fair values for the
Homestead Village assets of PTR, ATLANTIC and SCG, SCG determined to use as
the basis for the contributions of each party a total of 80 identified
Homestead properties in operation, under construction or in pre-development
planning as of July 1, 1996 (of which PTR would contribute 54 and
14
<PAGE>
ATLANTIC would contribute 26), the projected cash flows from those properties
for 1996, 1997 and 1998, and the projected REIT management fees and property
management fees from such properties, net of operating overhead for 1996, 1997
and 1998.
SCG determined the present values of the projected cash flows from these 80
properties and the projected REIT Management fees and property management fees
payable under existing agreements assuming the agreements were in effect
throughout the relevant periods using discount rates and capitalization rates
which SCG deemed reasonable. The present values of the respective cash flows
were totalled and the relative contributions to the new entity were determined
as follows: PTR--63.64%, ATLANTIC--28.18% and SCG--8.18%. SCG determined the
amount and type of securities to be issued to each party, with PTR and ATLANTIC
receiving Homestead Common Stock, Homestead Warrants and convertible mortgage
notes and SCG receiving Homestead Common Stock and Homestead Warrants. See "The
Transaction--Recommendations of the PTR Board and Reasons for the Transaction."
SCG determined the relative contributions of each party. The projected cash
flows to be received by PTR, ATLANTIC and SCG and the present values of those
projected cash flows were determined by SCG and reviewed by the PTR Special
Committee and its advisers. The inclusion or exclusion of certain Homestead
Village properties and the use of different discount rates or capitalization
rates would have resulted in different percentage ownership interests in
Homestead. The present values of the respective contributions of the parties do
not, and are not intended to, reflect what any party could obtain in an actual
sale of their contributed assets. The relative ownership percentages were not
based on actual or projected costs of any Homestead Village property or the
book value of any Homestead Village property. SCG did not obtain an appraisal
or any other third party valuation of any Homestead Village property or the
projected cash flow anticipated to be received by SCG under the PTR or ATLANTIC
REIT Management Agreement or property management agreements. See "The
Transaction--Recommendations of the PTR Board and Reasons for the Transaction."
RISKS IN VALUATION AND ALLOCATION
PTR is contributing 28 developed properties which have operating results and,
in general, its properties are in a more advanced state of development than the
properties to be contributed by ATLANTIC, which currently has one operating
property. There are risks associated with developing new Homestead Village
properties being contributed by PTR and by ATLANTIC. In addition, SCG is
contributing its REIT management and property management operations relating to
the Homestead Village properties. In determining SCG's relative ownership
interest in Homestead, SCG projected net operating cash flows through 1998 and
discounted these cash flows back to July 1, 1996. See "The Transaction--
Recommendations of the PTR Board and Reasons for the Transaction." Although SCG
believes these operations will be profitable once all 80 properties are
operational, to date these operations have not been profitable because SCG has
invested in operating systems to develop and manage over 200 Homestead Village
properties.
CONFLICTS OF INTEREST IN THE TRANSACTION
The Transaction has been initiated and structured by individuals who are
executive officers or directors of PTR and ATLANTIC, the PTR REIT Manager and
Security Capital (Atlantic) Incorporated (the "ATLANTIC REIT Manager") and are
affiliated with SCG. As a result, the terms of the Transaction have not been
negotiated at arms' length. No independent representatives have been retained
to negotiate the terms of the Transaction on behalf of PTR. If such
representatives had been retained, the terms of the Transaction might have been
more favorable to the shareholders of PTR. Although independent representatives
were not retained by PTR, the PTR Board created the PTR Special Committee
consisting of Messrs. John Schweitzer, Calvin Kessler and James Cardwell. The
PTR Special Committee engaged Munger, Tolles & Olson as its legal counsel, and
engaged Goldman, Sachs as its financial advisor to advise it in analyzing and
evaluating the fairness of the Transaction. No member of the PTR Special
Committee is an officer of PTR or a director or officer of the PTR REIT
Manager. Messrs. Schweitzer, Kessler and Cardwell beneficially own 32,602,
30,267 and 30,765 PTR Common
15
<PAGE>
Shares, respectively. Mr. Schweitzer or members of his family beneficially own
12,500 shares of ATLANTIC Common Stock. Neither Mr. Cardwell nor Mr. Kessler
beneficially owns any shares of ATLANTIC Common Stock. Mr. Schweitzer
beneficially owns 268 shares of SCG common stock, $0.01 par value per share
("SCG Common Stock"). Neither Mr. Cardwell nor Mr. Kessler beneficially owns
any SCG Common Stock. Trustees of PTR, other than members of the PTR Special
Committee, beneficially own in the aggregate 114,582 PTR Common Shares,
186,500 shares of ATLANTIC Common Stock and 11,738 shares of SCG Common Stock.
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Distribution, there will be no public market for the Homestead
Securities. The Homestead Common Stock and the Homestead Warrants have been
approved for quotation on the Nasdaq Stock Market (National Market) subject to
official notice of issuance. There can be no assurance that an active trading
market will develop. In addition, there can be no assurances of the price at
which holders of the Homestead Common Stock or Homestead Warrants will be able
to sell such Homestead Securities. From time to time, the stock market
experiences significant price and volume volatility, which may affect the
market price of the Homestead Common Stock or the Homestead Warrants for
reasons unrelated to Homestead's performance.
RISKS OF INVESTMENTS IN MORTGAGES AND FUNDING COMMITMENT
In connection with the Transaction, Homestead will assume approximately $77
million of existing mortgage indebtedness payable to PTR. Additionally,
pursuant to the Funding Commitment Agreement, PTR will agree to fund
additional mortgage loans to Homestead in the aggregate amount of up to
approximately $133 million, primarily to develop the properties contributed to
Homestead by PTR. PTR will receive convertible mortgage notes in respect
thereof in stated amounts of up to $144 million. See "The Transaction--Funding
Commitment Agreements." The obligation to provide this funding and the terms
thereof have been fixed as of the date of the Merger Agreement. There can be
no assurance that PTR could not obtain better terms for such mortgage loans
with an independent third party borrower or if the terms were to be determined
on the date a mortgage loan is made to Homestead. Mortgage investments are
subject to certain risks, including the risk that Homestead, as the borrower,
may not be able to make debt service payments or pay principal when due, the
risk that the value of the mortgaged properties may be less than the amounts
owed, and the risk that interest rates payable on the mortgages may be lower
than PTR's cost of funds. If any of the foregoing occur, PTR's ability to make
distributions to shareholders could be adversely affected.
IMPACT OF TRANSACTION ON FUTURE DISTRIBUTIONS, FUNDS FROM OPERATIONS AND PRICE
OF PTR COMMON SHARES
As of March 31, 1996, the Homestead Village properties owned by PTR
constituted 6.5% of PTR's total assets and for the quarter ended March 31,
1996, PTR's Homestead Village operations accounted for 9.0% of PTR's revenues
and 7.0% of funds from operations. Although there can be no assurances, PTR
does not expect that the Transaction will affect its future distributions to
PTR shareholders. The spin-off of the Homestead properties from PTR may have a
dilutive effect on PTR's funds from operations, however, this impact is
expected to be offset in part by new PTR multifamily properties under
development or which are expected to be acquired, and by income received from
the convertible mortgage notes to be issued to Homestead. As a result of an
amendment to the PTR REIT Management Agreement, income received from the
convertible mortgage loans is excluded from the definition of cash flow on
which the PTR REIT Management fee is based. The spin-off of the Homestead
Securities to PTR shareholders may cause the price of PTR Common Shares to
decline, which decline, however, may be offset in whole or in part by the
market value of the Homestead Securities to be distributed to PTR shareholders
in the Distribution. No assurance, however, can be given as to the price at
which the Homestead Securities may trade or whether any active market will
develop for the Homestead Securities.
COMPETITION
The moderate priced, extended-stay market is rapidly evolving, although
there is no single competitor or small number of competitors of Homestead that
is or are dominant in this industry. Competition in the moderate priced,
extended-stay market is generally based on price, convenience of location,
range of services and guest
16
<PAGE>
amenities offered, and quality of service. Demographic or other changes in one
or more of Homestead's markets could impact the convenience or desirability of
the sites of certain lodging facilities, which would adversely affect their
operations. Further, there can be no assurance that new or existing
competitors will not significantly lower rates or offer greater convenience,
services, or amenities or significantly expand or improve facilities in a
market in which Homestead's facilities compete, thereby adversely affecting
Homestead's operations.
LIMITED OPERATING HISTORY
Although the first Homestead Village property was opened in 1992, Homestead
has a limited operating history as a separate entity upon which investors may
evaluate Homestead's performance. Additionally, Homestead had no operating
history except during the recent economic expansion. There can be no assurance
that Homestead will be profitable in the future.
THE TRANSACTION
(PROPOSAL 1)
GENERAL
The following is a summary of the material aspects of the Transaction. This
summary does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement, which is attached to this Proxy Statement
and Prospectus as Annex I and is incorporated herein by reference.
THE DISTRIBUTION
The Homestead Securities received by PTR will be distributed, pro rata, to
PTR shareholders. The distribution of the Homestead Securities will be
declared following approval of the proposals by PTR shareholders, subject to
the satisfaction of certain conditions to the Merger Agreement. The
distribution will be made to holders of PTR Common Shares of record at the
close of business on the Distribution Record Date. The amount of Homestead
Securities to be received by each PTR shareholder in the Distribution will
depend on the number of PTR Common Shares outstanding on the Distribution
Record Date. Based on the number of PTR Common Shares outstanding on July 12,
1996, each shareholder would receive 0.131033 shares of Homestead Common Stock
and 0.087907 Homestead Warrants for each PTR Common Share held. There are
currently issued and outstanding 9,051,000 shares of Series A Preferred Shares
which are convertible into an aggregate of 11,007,826 PTR Common Shares, at a
conversion price of $20.56 per share, subject to adjustment. Additionally,
options to acquire 38,000 PTR Common Shares are outstanding and exercisable
under the Share Option Plan for Outside Trustees. To the extent that any
Series A Preferred Shares are converted into, or options are exercised for,
PTR Common Shares prior to the Distribution Record Date, such conversions or
exercises will result in a proportionate reduction in the amount of Homestead
Securities to be received by each PTR shareholder. In the event that all of
the outstanding Series A Preferred Shares were converted into, and all
outstanding options were exercised for, PTR Common Shares prior to the
Distribution Record Date, an additional 11,045,826 PTR Common Shares would be
issued, which would result in each PTR shareholder receiving 0.113700 shares
of Homestead Common Stock and 0.076279 Homestead Warrants per PTR Common Share
in the Distribution.
No certificates or scrip representing fractional shares of Homestead Common
Stock or fractional Homestead Warrants will be issued directly to PTR
shareholders as a part of the Distribution. The Distribution Agent will, as
soon as practicable after the Distribution Record Date, aggregate and sell all
fractional shares of Homestead Common Stock and Homestead Warrants on the
Nasdaq Stock Market (National Market) or otherwise at then prevailing market
prices and remit the net proceeds (after deduction of brokerage fees) to PTR
shareholders who would otherwise be entitled to receive fractional shares or
warrants.
17
<PAGE>
NO HOLDER OF PTR COMMON SHARES WILL BE REQUIRED TO PAY ANY CASH OR OTHER
CONSIDERATION FOR THE HOMESTEAD SECURITIES RECEIVED IN THE DISTRIBUTION OR TO
SURRENDER OR EXCHANGE PTR COMMON SHARES IN ORDER TO RECEIVE HOMESTEAD
SECURITIES. SEE HOWEVER "--FOREIGN SHAREHOLDERS" BELOW. THE DISTRIBUTION WILL
NOT AFFECT THE NUMBER OF, OR THE RIGHTS ATTACHING TO, OUTSTANDING PTR COMMON
SHARES.
FOREIGN SHAREHOLDERS
In the Distribution, Homestead Securities will not be mailed immediately to
PTR shareholders of record whose mailing addresses are outside the United
States ("Foreign Shareholders") but instead will be held by the Distribution
Agent for such shareholders' accounts. As described under the heading "--
Federal Income Tax Consequences--Tax Consequences to PTR Shareholders--Foreign
Withholding," PTR is subject to a United States Federal tax withholding
obligation with respect to the Homestead Securities to be distributed to
Foreign Shareholders. On the Distribution Record Date, the Distribution Agent
will mail a notice to each Foreign Shareholder announcing the Distribution as
well as seeking instructions from the Foreign Shareholder electing between the
following options: (i) providing a check to the Distribution Agent in the
amount to be withheld and receiving his or her full share of Homestead
Securities or (ii) having the Distribution Agent sell that amount of Homestead
Securities necessary to satisfy the withholding obligations and receiving his
or her remaining share of Homestead Securities. Within ten business days after
the Distribution Record Date, the Distribution Agent will mail an additional
notice to each Foreign Shareholder setting forth the amount of the withholding
obligation. A Foreign Shareholder must deliver to the Distribution Agent his
or her instructions and, if option (i) is elected, a check in the proper
amount of the withholding must be received by the Distribution Agent within 20
business days of the Distribution Record Date. If no instructions are received
from a Foreign Shareholder by the end of such period, the Distribution Agent
will take the actions specified in option (ii) in satisfying the withholding
obligations with respect to such shareholder.
BACKGROUND
In 1991, PTR was approached by a third party who was interested in entering
into a collaborative relationship with PTR for the development of moderate
priced, extended-stay lodging facilities. In order to evaluate this proposal,
PTR and SCG did extensive research on the industry and competitors in the
industry and retained consultants to advise them on this business. In 1991,
PTR entered into various agreements with this individual or his affiliates for
the site selection and development of several facilities. By 1992, PTR had
constructed its first moderate priced, extended-stay facility in Texas. This
development was undertaken as part of PTR's multifamily business and not
operated as a separate business.
During 1993, PTR constructed additional facilities in Texas and gained
additional experience in operating these facilities and knowledge of this
segment of the lodging business. By the end of 1994, PTR had gained enough
experience in the business and had done enough research on the overall market
to determine that the Homestead Village business constituted a significant
growth opportunity and that additional personnel and resources were needed to
support and expand such business. Additionally, by the end of 1994, PTR and
the original third party had entered into various agreements which altered
their relationship. See "Certain Relationships and Transactions--Finder's
Agreements" in Appendix A.
During 1995, a distinct and separate management team was created by the PTR
REIT Manager to manage and grow the Homestead Village business. Additional
personnel were hired and additional employees were assigned by SCG to increase
development efforts and obtain additional sites. Personnel experienced in the
lodging industry were also recruited and employed by SCG. Because of the
geographical focus of PTR's primary business, it was determined that Homestead
Village properties developed in the southeastern United States would be
developed by ATLANTIC.
Since 1991, the fees received by the REIT managers and property managers for
the Homestead Village operations have been less than the overhead necessary to
fund their Homestead Village operations. See "Financial Statements--SCG-
Homestead Village Group" in Appendix A. SCG has been willing to bear this
expense while the Homestead Village concept was being developed because SCG
believed Homestead Village would be accepted in the marketplace which would
result in additional funds from operations for the benefit of
18
<PAGE>
PTR shareholders. In addition, SCG believed that as more Homestead Village
properties became operational, the fees generated by the additional properties
would cover such overhead. SCG believes that under the current REIT management
agreements and property management agreements for the PTR and ATLANTIC
Homestead Village properties, it would generate substantial fees from the 80
properties which are to be contributed to Homestead.
In mid-1995, SCG was contacted by another operator of extended-stay
facilities to discuss a possible business relationship involving PTR's
Homestead Village facilities. Several telephone calls and a meeting were held
but no terms were discussed.
In September 1995, management of SCG made a presentation to the SCG board of
directors (the "SCG Board") regarding the Homestead Village business and its
future direction. The SCG Board instructed SCG management to create a plan for
a structure which would maximize shareholder values for PTR, ATLANTIC and SCG
and to present alternatives to achieve this goal. Management then began to
actively explore means of achieving this goal. At the December 1995 meeting of
the SCG Board, SCG management reported that it had various alternatives under
review but that it was not prepared to make any recommendations at that time.
After this meeting, SCG and the PTR REIT Manager began actively to consider
and analyze various alternatives for the Homestead Village operations.
In December 1995, PTR decided, in anticipation of the possibility of the
formation of Homestead and a potential business combination involving the
Homestead Village business, to place convertible mortgage loans on the
Homestead Village properties. The decision to place the convertible mortgage
loans on the Homestead Village properties was based on PTR's desire to retain
a substantial portion of the value of and a substantial portion of the upside
potential of the Homestead Village business in the event of such a business
combination. On January 24, 1996, approximately $77,289,000 of convertible
mortgage loans were placed on the Homestead Village properties by PTR.
In January 1996, the PTR REIT Manager discussed with the PTR Board various
alternatives for PTR's Homestead Village operations. By the end of January,
PTR trustees instructed the PTR REIT Manager to actively pursue examination of
various alternatives. On January 31, 1996, as part of its press release
discussing results of operations for 1995, PTR made the following statement
(the "January Press Release"):
". . . after a detailed review of Homestead Village's successful
performance, PTR's Board of Trustees has asked management to evaluate all
options relating to the operation of Homestead Village assets in order to
maximize PTR shareholder value. This would include an analysis of whether
Homestead assets should continue to be developed within PTR, be spun out as
a new stand-alone entity with a target market extending beyond PTR's
current market area, or be offered for sale, merger or disposition to a
national operator. The Board asked that this analysis be completed during
1996. Goldman, Sachs & Co. has been engaged to advise the Board on this
matter. It is possible that certain actions, if pursued, may require
approval of PTR's Board of Trustees and a possible shareholder vote."
Following the January Press Release, PTR held several discussions with
Goldman, Sachs regarding a possible spin-off of the Homestead Village
business. In February 1996, the PTR REIT Manager was contacted by a national
operator of extended-stay facilities to discuss a possible transaction. One
meeting was held in February 1996 in which the PTR REIT Manager discussed
valuation of the Homestead Village business and general terms of a possible
transaction. Management provided the other party with certain information
regarding the Homestead Village operations. Management had several telephone
calls with that party later in February 1996 but no written offer was
solicited or received.
In February 1996, the PTR REIT Manager also received four unsolicited
telephone calls from several other owners or operators of lodging businesses
to discuss PTR's interest in selling its Homestead Village operations. No
formal written offers were received. In addition, Goldman, Sachs received
several unsolicited telephone calls in February 1996 from other parties
inquiring about PTR's Homestead Village operations, but no formal written
offers were received.
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During February 1996, SCG management reviewed the options of continuing the
Homestead Village operations within PTR and ATLANTIC or disposing of the
Homestead Village assets. For the reasons discussed below under "--
Recommendations of the PTR Board and Reasons for the Transaction," SCG
management concluded that continuing the Homestead Village operations within
PTR would not maximize value for PTR and ATLANTIC shareholders. SCG management
and the PTR REIT Manager reviewed the various inquiries it had received
regarding the PTR Homestead Village assets and determined that the purchase
proposals it would likely receive would value the Homestead Village assets on
a private company basis and that the consideration that PTR would receive
would be equity securities in a public company which SCG would not control.
PTR REIT Management believed that such result would not maximize shareholder
values. PTR REIT Management also determined that its existing Homestead
Village operations and those under construction or in pre-development planning
were substantially larger than the operations of other entities which were
focused on the moderate priced, extended-stay segment of the lodging business.
SCG management also had to consider the impact of a possible sale of the
Homestead Village assets on the recently assembled management team which had
been put in place to develop the Homestead Village concept. SCG management was
concerned that the Homestead Village properties and operations would suffer
from defections by the Homestead Village management if a sale were to be
pursued and that the Homestead Village properties and operations could not be
sold at an attractive price unless management remained intact. For these
reasons, SCG management and the PTR REIT Manager did not actively pursue a
sale of the Homestead Village business.
By March 1996, SCG management had prepared and distributed materials to the
SCG Board, the ATLANTIC Board and the PTR Board describing in detail the
various alternatives for the Homestead Village operations and the advantages
and disadvantages of each alternative.
On March 12, 1996, members of SCG's management made a presentation to the
ATLANTIC Board as part of a regularly scheduled meeting. SCG's management
presented to the ATLANTIC Board information prepared by SCG regarding
alternatives available for the ATLANTIC Homestead Village operations,
including leaving the properties in ATLANTIC, a sale of the business or a
spin-off of the business, the advantages and disadvantages of each alternative
and SCG's recommendation that a spin-off be pursued. SCG presented detailed
information regarding the lodging industry, the advantages of a spin-off to
ATLANTIC's shareholders, competition in the lodging industry, a proposed
combination of ATLANTIC's and PTR's Homestead Village businesses and the means
of funding those businesses, a method by which the relative ownership
interests of PTR, ATLANTIC and SCG in the new entity would be determined, and
legal requirements to accomplish a combination and spin-off. Following the
discussion, the ATLANTIC Board authorized the ATLANTIC REIT Manager to pursue
a spin-off of ATLANTIC's Homestead Village business and a combination of
ATLANTIC's and PTR's Homestead Village businesses.
Because of SCG's significant ownership of ATLANTIC Common Stock and PTR
Common Shares and SCG's direct interest in the possible spin-off, the ATLANTIC
Board appointed the ATLANTIC Special Committee, consisting of ATLANTIC's
independent directors, Messrs. Ned Holmes and Manuel Garcia, to consider the
proposed transaction and recommend action with respect to any such proposed
transaction to the ATLANTIC Board.
On March 14, 1996, SCG management made a presentation to the PTR Board. SCG
management discussed the opportunity in the extended-stay market, competition
in the lodging industry, means by which the Homestead Village concept could
become national, and historical results for the Homestead Village operations.
SCG management discussed three options available to PTR for its Homestead
Village operations, including leaving its Homestead Village properties in PTR,
a sale of the business or a spin-off, the advantages and disadvantages of each
option and SCG's recommendation that the PTR Board pursue a spin-off of the
Homestead Village properties. SCG management presented information regarding a
proposed capital structure of a new Homestead Village entity, a method by
which the relative ownership interests of PTR, ATLANTIC and SCG in the new
entity would be determined and possible value creation for PTR shareholders.
Following the discussion, the PTR Board authorized the PTR REIT Manager to
pursue a spin-off of its Homestead Village operations to a new entity in
exchange for securities of the new entity. Because of SCG's significant
ownership of PTR Common
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Shares and ATLANTIC Common Stock and SCG's direct interest in the possible
spin-off, the PTR Board appointed the PTR Special Committee, consisting of
three of PTR's independent trustees, Messrs. John C. Schweitzer, James A.
Cardwell and Calvin Kessler, to consider the proposed transaction and
recommend action with respect to any such proposed transaction to the PTR
Board. The PTR Special Committee retained Goldman, Sachs as financial advisor
to the PTR Special Committee.
On March 20, 1996, the PTR Special Committee approved the retention of
Munger, Tolles & Olson as legal counsel to the PTR Special Committee.
On March 20, 1996, SCG management made a presentation to the SCG Board
regarding the alternatives available to PTR, ATLANTIC and SCG regarding the
Homestead Village operations, which presentation was similar to the
presentations made to the ATLANTIC Board and the PTR Board. After discussion,
the SCG Board authorized SCG management to proceed with a spin-off of its
Homestead Village business. No special committee of directors of SCG was
formed and no separate counsel or financial advisors were retained by SCG in
connection with the Transaction.
On March 22, 1996, the ATLANTIC Special Committee approved the retention of
King & Spalding as legal counsel to the ATLANTIC Special Committee. On March
29, 1996, the ATLANTIC Special Committee approved retaining J.P. Morgan
Securities Inc. ("J.P. Morgan") to deliver an opinion as to the fairness, from
a financial point of view, to the shareholders of ATLANTIC (other than SCG) of
the consideration to be paid in connection with the proposed Transaction.
Between March 20 and April 8, 1996, SCG management met and had numerous
telephone conversations with J.P. Morgan and Goldman, Sachs to discuss the
proposed spin-off, valuation issues, the terms of the proposed securities to
be issued by Homestead and related matters. During that same period, Mayer,
Brown & Platt, counsel for PTR, ATLANTIC, SCG and Homestead, had several
discussions with King & Spalding and Munger, Tolles & Olson regarding the
structure and the documentation of the proposed transaction.
On April 8, 1996, a special meeting of the PTR Board was held which was
devoted entirely to the proposed spin-off. SCG management made a detailed
presentation to the entire PTR Board regarding the proposed spin-off, pro
forma historical and projected financial information regarding Homestead,
comparisons of multiples for large multifamily REITs and extended-stay lodging
operators, competition in the extended-stay lodging market, reasons why
management believed PTR shareholders would benefit from the proposed spin-off,
terms of the proposed transaction, including terms of the proposed warrants
and convertible mortgages, tax treatment of the proposed transaction, expected
value creation resulting from the spin-off, relative ownership interests of
PTR, ATLANTIC and SCG in the new entity as calculated by SCG, estimated impact
of the spin-off on PTR's funds from operations and estimated impact of the
spin-off on the financial condition of PTR. There followed an extensive
discussion by the entire PTR Board of the proposed transaction, the relative
valuation of SCG's contribution, the terms of the convertible mortgage notes
and warrants, and the assumptions used by SCG in calculating the relative
valuation of the contributions of each party.
At the same meeting Goldman, Sachs made a presentation regarding the
methodologies it would use in reviewing the proposed spin-off and arriving at
its opinion, the issues it would examine in arriving at its opinion and the
form of its opinion.
Such special meeting was adjourned, at which time the PTR Special Committee
met separately with its counsel and, for portions of the meeting, Goldman,
Sachs and SCG management. The PTR Special Committee discussed with its counsel
its legal duties as a committee of "independent trustees." Additionally, it
discussed the presentations at the PTR Board meeting and additional
information it wanted to review in connection with the proposed transaction.
The PTR Special Committee then met with Goldman, Sachs and reviewed the scope
of Goldman, Sachs' opinion, the analysis to be performed by Goldman, Sachs,
and the timing of receiving Goldman, Sachs' opinion. Next, the PTR Special
Committee met with SCG management to discuss SCG's analysis and presentation.
Later that day, the PTR Board meeting reconvened at which time the PTR Special
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Committee members stated that they would have further meetings to discuss the
proposed spin-off and requested additional information from SCG regarding the
methodology used in calculating percentage ownership interests, assumptions
used in SCG's projections and Homestead Village properties expected to be in
operation or under development by the end of 1997.
On April 11, 1996, the PTR Special Committee met with its counsel and SCG
management to discuss SCG's analysis from which SCG structured the proposed
transaction. At the meeting, the parties extensively discussed the extended-
stay lodging market, the assumptions and methodology underlying SCG's
analysis, the rationale and reasonableness of such assumptions and
methodology, the sensitivity of the analysis to various changes, and the value
and terms of the Homestead Securities and convertible mortgage loans to be
received by PTR in the proposed transaction.
On April 16, 1996, a special meeting of the ATLANTIC Board was held at which
SCG management made a detailed presentation regarding the proposed spin-off
which focused on the following matters: the opportunity to expand Homestead on
a national scope; a description of the segments and competition within the
extended-stay lodging business; comparisons of multiples for large multifamily
REITs and extended-stay lodging operators; the reasons why management believed
ATLANTIC shareholders would benefit from the proposed spin-off; the terms of
the proposed transaction, including the contribution of properties and other
assets by each party for common stock, warrants and convertible mortgage
loans, and the terms of such securities; the expected value creation from the
spin-off; the resulting relative ownership interests of ATLANTIC, PTR and SCG
in the new Homestead entity; the impact of the spin-off on ATLANTIC's results
of operations and financial condition; and the schedule of the spin-off in
regards to a proposed initial public offering by ATLANTIC. Following the
presentation by SCG management, the ATLANTIC Board engaged in an extensive
discussion with SCG management regarding the proposed transaction and its
impact on ATLANTIC.
Following such discussion, at the same ATLANTIC Board meeting,
representatives of J.P. Morgan made a presentation regarding the methodologies
they were using in reviewing the proposed spin-off and their approach to
evaluating the fairness of the transaction, which included an extensive
discussion of valuation methodologies, the terms of the proposed Homestead
securities and the allocation of ownership.
In addition, on April 16, 1996, the ATLANTIC Special Committee met with its
counsel and J.P. Morgan to discuss the financial terms of the proposed
transaction. The ATLANTIC Special Committee discussed with its counsel its
legal duties under Maryland law as a committee of "independent directors."
Among other things, the parties discussed the reasonableness of the terms of
the Homestead Securities and the convertible mortgage loans, the allocation of
ownership in Homestead among ATLANTIC, PTR and SCG, and J.P. Morgan's fairness
analysis and opinion. Next, the ATLANTIC Special Committee discussed with its
counsel the proposed terms of the Merger Agreement and the related agreements,
proposed revisions to such agreements, and the status of the negotiations of
such agreements.
SCG originally had proposed to the PTR Board and ATLANTIC Board in March
1996 a transaction involving a total of 73 Homestead Village properties.
Because of ongoing development by PTR and ATLANTIC of Homestead Village
facilities, in April 1996 SCG revised the proposed transaction to include a
total of 80 Homestead Village facilities. The effect of this change was to
alter the ownership interests of PTR, ATLANTIC and SCG in Homestead and to
increase the aggregate amount of Homestead Securities to be issued.
SCG originally had proposed to the PTR Board and the ATLANTIC Board that the
convertible mortgage loans have a term of 25 years with no call provision and
that the conversion premium be 10% above the expected price of the Homestead
Common Stock, and that the Homestead Warrants have a term of 18 months. As a
result of negotiations between members of the PTR Special Committee, Goldman,
Sachs, the ATLANTIC Special Committee, J. P. Morgan and SCG, which occurred
throughout April and early May 1996, certain terms of the proposed Homestead
Securities were changed. The term of the convertible mortgage loans was
reduced from 25 years to ten years; a provision was added to permit Homestead
to call the convertible mortgages after five years; the conversion premium on
the convertible mortgage loans was increased from 10% to 15%; and the term of
the
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Homestead Warrants was reduced from 18 months to 12 months. In addition, SCG
agreed to have a portion of its Homestead Common Stock placed in escrow to be
released as funding is made by PTR or ATLANTIC under the Funding Commitment
Agreements.
On April 17, 1996, the PTR Special Committee met with its counsel, and
Goldman, Sachs and its counsel to discuss the financial terms of the proposed
transaction. Among other things, the parties discussed the reasonableness of
the terms of the Homestead Securities and the convertible mortgage loans, the
allocation of ownership in Homestead among PTR, ATLANTIC and SCG, and Goldman,
Sachs' fairness analysis and opinion. Next, the PTR Special Committee
discussed with its counsel the proposed terms of the Merger Agreement and the
related agreements, proposed revisions to such agreements, and how to proceed
in negotiations of such agreements.
During the course of the negotiation of the documents covering the
Transaction, the PTR Special Committee and its counsel requested numerous
changes to the documents because of the related-party nature of the
Transaction. The PTR Special Committee requested that SCG vote its PTR Common
Shares (which represented 37.9% of the outstanding PTR Common Shares as of May
20, 1996) in favor of the proposal only if a majority of the PTR shareholders
not affiliated with SCG voted in favor of the proposal. This voting proposal
is not required under Maryland law. Counsel for the PTR Special Committee also
requested that the Merger Agreement be subject to approval by the holders of
two-thirds of the outstanding PTR Common Shares. Under Maryland law, the
amendment to the PTR Declaration of Trust requires the approval of the holders
of two-thirds of the outstanding PTR Common Shares while the Merger Agreement
requires the approval of the holders of a majority of the outstanding PTR
Common Shares. After several discussions with the PTR Special Committee and
its counsel, SCG declined the request of the PTR Special Committee that it
vote its PTR Common Shares only upon the affirmative vote of the majority of
the non-SCG shareholders since a two-thirds vote requirement would mean that
approval of the Transaction would require a substantial number of shareholders
not affiliated with SCG voting in favor of the Transaction; SCG however did
agree to have the Merger Agreement subject to approval by the holders of two-
thirds of the outstanding PTR Common Shares. Counsel for the PTR Special
Committee also discussed with SCG the terms of the convertible mortgage loans,
the methodology from which the allocation of ownership in Homestead among PTR,
ATLANTIC and SCG was derived, and the discussions SCG had with unaffiliated
third parties with respect to potential transactions involving PTR's Homestead
Village assets. Counsel for the PTR Special Committee also requested that SCG
not receive indemnification under the Merger Agreement for misstatements made
in the Merger Agreement or in the Registration Statement which are
attributable to PTR, ATLANTIC or Homestead, because SCG controls and manages
all these entities. SCG agreed to this request.
On May 14, 1996, the PTR Special Committee met with its counsel, and for a
portion of the meeting, with a senior officer of SCG to discuss the status of
outstanding issues, changes in the terms of the Merger Agreement and the
related agreements, and the structure of the fairness opinion to be received
by the PTR Special Committee from Goldman, Sachs.
On May 15, 1996, the ATLANTIC Special Committee met with its counsel, J.P.
Morgan and SCG management. At such meeting, SCG management discussed with the
ATLANTIC Special Committee the following changes to the terms of the proposed
transaction: an increase in the number of Homestead Village facilities to 80;
the need for ATLANTIC to fund $18.6 million in cash at Closing in order to
assure that ATLANTIC receive all of its shares of Homestead Common Stock at
Closing; the changes to the terms of convertible mortgage notes regarding
maturity date, the conversion premium, and the ability of Homestead to call
the convertible mortgage loans; the terms of the Funding Commitment
Agreements; and the terms of the Homestead Warrants. J.P. Morgan then reviewed
the impact of these changes on their view of the fairness of the transaction.
The ATLANTIC Special Committee discussed with SCG management and J.P. Morgan
the terms of the proposed transaction, including the accounting treatment of
the transaction, the impact on ATLANTIC's REIT status and the ability of
ATLANTIC to meet its funding obligations under its Funding Commitment
Agreement.
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On May 17, 1996, the ATLANTIC Special Committee met with its counsel and
J.P. Morgan to consider the Transaction. At such meeting, counsel for the
ATLANTIC Special Committee and J.P. Morgan discussed the terms of the Merger
Agreement and the related agreements. After extended discussions, J.P. Morgan
delivered an oral fairness opinion to the ATLANTIC Special Committee that, as
of such date, the consideration to be paid to ATLANTIC in the Transaction was
fair, from a financial point of view, to ATLANTIC shareholders (other than
SCG). Following such discussion, the ATLANTIC Special Committee unanimously
resolved that the Merger Agreement in the form presented and the transactions
as contemplated thereby are approved as being fair and reasonable to ATLANTIC,
and the ATLANTIC Special Committee recommends that the ATLANTIC Board approve
the Merger Agreement and the transactions contemplated thereby as being fair
and reasonable to ATLANTIC.
On May 17, 1996, the ATLANTIC Board held a telephonic board meeting with all
directors in attendance. Also present at the meeting were representatives of
J.P. Morgan, counsel to the ATLANTIC Special Committee and senior officers of
SCG and the ATLANTIC REIT Manager. Mr. Holmes reported that the ATLANTIC
Special Committee had met earlier that day with representatives of J.P. Morgan
and King & Spalding to discuss the Transaction and the various documents
relating to the Transaction and that the ATLANTIC Special Committee had
received an oral fairness opinion from J.P. Morgan. Mr. Holmes further
reported that, based on its review of the Transaction, its discussions with
counsel and the oral fairness opinion of J.P. Morgan, the ATLANTIC Special
Committee recommended to the ATLANTIC Board that the Merger Agreement and the
Transaction be approved as fair and reasonable to the ATLANTIC shareholders
(other than SCG). The entire ATLANTIC Board then discussed the terms of the
Transaction, the changes in the terms of the Transaction since it had been
originally proposed to the ATLANTIC Board, the reasons for the cash payment to
be made by ATLANTIC for the Homestead Common Stock at the Closing Date, the
reasons for the premium which ATLANTIC would pay for the Homestead convertible
mortgage notes it would receive, the impact of that premium on ATLANTIC's
future financial results, the reasons for the projected difference in the
investments by PTR and ATLANTIC in their respective Homestead Village
properties, the ability of ATLANTIC to fund its obligations under the Funding
Commitment Agreement, the mechanics of the Distribution and the disposition of
the convertible mortgage loans ATLANTIC would receive. After these
discussions, the ATLANTIC Board approved the Merger Agreement and the
Transaction as fair and reasonable to the ATLANTIC shareholders and
recommended its approval by the ATLANTIC shareholders.
On May 20, 1996, the PTR Special Committee met with its counsel, and for a
portion of the meeting, with Goldman, Sachs and its counsel. At such meeting,
Goldman, Sachs discussed material changes in the terms and conditions of the
proposed transaction since it last met with the PTR Special Committee and how
such changes affect Goldman, Sachs' analysis underlying its opinion. After
extended discussions, Goldman, Sachs delivered an oral opinion to the PTR
Special Committee to the effect that, as of the date of such opinion, the PTR
Transaction was fair to PTR. See "--Fairness Opinion." The PTR Special
Committee requested that its counsel review further with SCG information
regarding discussions between SCG and third parties with respect to the
Homestead Village business.
On May 20, 1996, counsel for the PTR Special Committee reviewed with senior
officers of SCG and Goldman, Sachs inquiries that each had received regarding
PTR's Homestead Village facilities, the responses to those inquiries and the
reasons why SCG and the PTR REIT Manager, as described earlier, had decided
not to pursue a sale of the Homestead Village facilities. Later that day, the
PTR Special Committee, except for Mr. Cardwell, reconvened and met with their
counsel to discuss their respective conversations with SCG management and
Goldman, Sachs regarding potential transactions with unaffiliated third
parties. Following such discussion, the PTR Special Committee resolved that,
subject to final documentation, (a) the Merger Agreement and the Transaction
are fair and reasonable to PTR and on terms and conditions not less favorable
to PTR than those available from unaffiliated third parties, and (b) the PTR
Special Committee recommends that the PTR Board approve the Merger Agreement
and the Transaction as being fair and reasonable to PTR and on terms and
conditions not less favorable to PTR than those available from unaffiliated
third parties and that the PTR Board recommend to the shareholders of PTR
their approval of the same.
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On May 21, 1996, the PTR Board held a meeting at which all trustees were
present, except James Cardwell. The purpose of the meeting was to discuss the
Merger Agreement and the Transaction. Members of SCG management outlined the
terms of the Transaction, discussed the terms of the Homestead Warrants and
convertible mortgage notes, discussed Homestead and answered trustees'
questions. Mr. Schweitzer then discussed the activities of the PTR Special
Committee. He stated that the PTR Special Committee had met six times and that
he had held extensive discussions with the PTR REIT Manager regarding the
Transaction. He reviewed the changes in the Transaction from the terms
originally proposed to the PTR Board, including the change to the conversion
premium for the convertible mortgages. Mr. Schweitzer stated that the PTR
Special Committee had examined in detail the terms of the convertible mortgage
notes and had concluded that the terms were very favorable to PTR compared to
other convertible securities which were available in the market. He also
discussed the PTR Special Committee's review of the allocation of the
ownership interests in Homestead among PTR, ATLANTIC and SCG. He then reviewed
the oral fairness opinion which Goldman, Sachs had delivered to the PTR
Special Committee. Mr. Schweitzer concluded by stating that the PTR Special
Committee recommended to the PTR Board that the Merger Agreement and
Transaction be approved as fair to PTR.
The trustees next discussed the timing of the Transaction and the conditions
to completion of the Transaction. The trustees then reviewed and discussed the
tax consequences of the Merger Agreement and the Distribution to PTR and its
shareholders. The trustees next reviewed and discussed the terms of the
Homestead Warrants and the future overhang on the Homestead Common Stock
created by the Homestead Warrants and the convertible mortgage notes.
SCG management then reviewed with the trustees the terms of the Merger
Agreement and each of the related agreements. SCG management also reviewed
with the trustees the proposed changes to the PTR REIT Management Agreement
and the PTR Declaration of Trust. SCG management explained that the reason for
the change to the REIT Management Agreement and the PTR Declaration of Trust
was to permit the Transaction to occur but to preserve the restrictions on
interested party transactions in other situations and SCG's recommendations
that the REIT Management Agreement be changed to exclude income derived from
the convertible mortgage loans from the formula for computing the REIT
management fee. After discussing these documents and the recommendations of
the PTR Special Committee, the PTR Board unanimously approved the Merger
Agreement and Transaction as fair and reasonable and on terms not less
favorable to PTR than those available from unaffiliated third parties and
recommended to the shareholders that they vote in favor of the Merger
Agreement and the Transaction and the amendment to the PTR Declaration of
Trust and further approved the amendment to the PTR REIT Management Agreement.
The trustees also authorized the PTR REIT Manager to proceed with the
Transaction.
On May 23, 1996, the PTR Special Committee held a telephonic meeting with
all members in attendance. At such meeting, the PTR Special Committee by
unanimous vote ratified the resolutions adopted by the PTR Special Committee
at its May 20, 1996 meeting.
RECOMMENDATIONS OF THE PTR BOARD AND REASONS FOR THE TRANSACTION
SCG Recommendations and Reasons.
By early 1996, SCG had determined that the PTR Homestead Village operations
were yielding very favorable returns, which were higher than returns on PTR's
multifamily properties, and could be operated more effectively as a separate
business. Based on the reasons described below, SCG believed that it would be
in the best interests of PTR and its shareholders for the Homestead Village
operations to be separated from PTR and spun-off to its shareholders. SCG
believed that the same reasons also were applicable to ATLANTIC as it
increased its development of Homestead Village properties. Because of the
interests of PTR, ATLANTIC and SCG in the various parts of the Homestead
Village operations, management's goal was to combine the various parts of the
Homestead Village operations and spin off the resulting entity to the various
parties in a manner which would maximize shareholder values for each party
while being fair to each entity and its shareholders.
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The following reasons were emphasized by SCG in recommending to the PTR
Board that it approve a spin-off of the Homestead Village operations.
. PUBLIC MARKET VALUATION. SCG examined the public market valuations of PTR,
other large public multifamily REITs and public extended-stay lodging
facility operators and concluded that although the PTR Homestead Village
operations have been very successful, the public market valuation of PTR has
not reflected the value of the Homestead Village operations within PTR. SCG
reviewed the funds from operations multiple of PTR as of December 31, 1995,
prior to the January Press Release, and the funds from operations multiples
of several other larger multifamily REITs, which multiples were comparable.
This comparability of funds from operations multiples demonstrated to SCG
that the public market valuation of PTR gave no additional value to the
Homestead Village operations within PTR beyond their funds from operations
contribution. SCG also examined the earnings before interest, taxes,
depreciation and amortization ("EBITDA") multiple of PTR for 1995 with
EBITDA multiples, based on market prices of two publicly held operators of
extended-stay lodging facilities, which were greater than PTR's EBITDA
multiple. This difference in multiples lead SCG to conclude that shareholder
value for PTR shareholders would be maximized if the Homestead Village
operations could be separated from PTR's traditional core business of owning
and operating garden apartments and spun off.
. NATIONAL SCOPE. SCG has determined that in order for the Homestead Village
concept to be highly successful, the Homestead Village operations should be
national in scope. The Homestead Village trademark, operating system and
management are owned or provided by SCG. PTR has Homestead Village
facilities which are operating, under construction or in pre-development
planning in several of its target markets in the western United States.
ATLANTIC has Homestead Village facilities under construction or in pre-
development planning in several of its target markets in the southeastern
United States. By combining all of the Homestead Village facilities in
operation, under construction or in pre-development planning with
management, operating systems and the Homestead Village trademark in a
single entity, SCG believed that the resulting entity would be stronger,
have greater geographic diversification, be more focused, achieve greater
economies of scale and be national in scope.
. FOCUS OF PTR'S PRIMARY BUSINESS. SCG believes that the capital markets place
a premium on REITs which are focused on a single product. PTR's objective is
to be the preeminent real estate operating company focusing on multifamily
property in its western United States target market. The Homestead Village
concept was initially created as a byproduct of the multifamily development
activities of PTR. Because of PTR's success with the Homestead Village
concept, the Homestead Village properties as of March 31, 1996 constituted
6.5% of PTR's assets, and for the quarter ended March 31, 1996 constituted
9.0% of PTR's revenues and 7.0% of PTR's funds from operations. As the
Homestead Village properties continue to become an increasingly greater
percentage of PTR's operations, revenues and net income, PTR could be
perceived as no longer focused on its primary business of owning and
operating multifamily properties. Further, as discussed above, SCG does not
believe that the market appropriately values the Homestead Village concept
within PTR. By spinning off the Homestead Village assets, SCG believes PTR
can get the dual benefit of focusing on its primary business while obtaining
an enhanced valuation for its Homestead Village business.
. RATING AGENCY ISSUES. PTR currently has investment grade ratings for its
public debt. It is SCG's belief that the presence of the Homestead Village
operations within PTR has caused concern for the rating agencies, as a
different business than multifamily operations with a different risk
profile, and that the continued inclusion of the Homestead Village assets
within PTR might have an adverse impact on PTR's ratings. Because PTR's
present intention is to finance future development through the public debt
markets and not through the issuance of additional common equity, management
believes it would be prudent to eliminate rating agencies' issues regarding
the continued operation of the Homestead Village properties within PTR.
. REIT RULES IMPACT ON OPERATION OF HOMESTEAD VILLAGE PROPERTIES. The REIT
rules impose restrictions on the types of services that a REIT may offer.
Homestead Village operations generally involve the provision of maid
services to its guests. These services are considered "non-customary" under
the REIT rules. If a REIT provides "non-customary" services in connection
with the rental of real estate, then all or part of the
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associated rents will fail to qualify as rents from real property for REIT
purposes and, if nonqualified gross income (which includes nonqualified rents)
exceed 5% of the REIT's gross income, the REIT will lose its REIT status under
the Code. Through various methods, PTR has ensured that rents received from
Homestead Village operations qualify as rents from real property for REIT
purposes. However, these methods have resulted in inefficiencies in operation
of the Homestead Village properties or loss of certain revenues from the
properties. By spinning off the Homestead Village assets, these inefficiencies
will be eliminated and PTR's REIT status will remain unaffected.
Based primarily on these reasons, SCG recommended a spin-off to the PTR
Board. By consolidating the Homestead Village operations in the Transaction,
SCG has attempted to eliminate the issues of lack of market valuation for the
Homestead Village properties, impediments to a national scope of the Homestead
Village concept, diffusion of PTR's focus on multifamily properties, rating
agency concerns regarding the continued operation of the Homestead properties
with PTR and REIT compliance matters, while at the same time permitting PTR
shareholders to participate in the future growth of the Homestead Village
concept.
In structuring the Transaction, SCG sought to address the issue of the impact
on PTR's funds from operations caused by the spin-off of the Homestead Village
assets through the issuance of the convertible mortgage notes. These mortgages
will have a dual purpose. First, they will provide a source of funding for
Homestead's future development activities. Second, they will provide a means by
which PTR can retain capital and not return to the common equity markets. At
the closing of the Mergers, it is expected that PTR will have an aggregate of
approximately $77 million in mortgage notes outstanding on various Homestead
Village properties and at full funding in 1998, and assuming all planned
Homestead Village properties which PTR has committed to finance are developed
and there are no conversions of any mortgage notes, PTR will have an aggregate
of approximately $221 million in mortgage notes outstanding. These mortgage
loans will bear interest at 9% per annum, have a term of 10 years, cannot be
called for the first five years and will be convertible into shares of
Homestead Common Stock at $11.50 per share. In addition, a portion of the
shares of Homestead Common Stock to be received by SCG will be issued to and
placed with State Street Bank and Trust Company ("Escrow Agent") and will only
be released to SCG as mortgage loans are made by PTR or ATLANTIC under their
Funding Commitment Agreements. See "--Escrow Agreement."
The methodology used in determining the relative ownership percentages of
PTR, ATLANTIC and SCG in Homestead was established by SCG based upon the
present values of the cash flows of the contributions made by each such party.
With respect to each of PTR and ATLANTIC, SCG prepared those present values by
discounting the future net cash flows for the 80 identified Homestead Village
properties in operation, under construction or in pre-development planning at
July 1, 1996 which will be contributed by each of them to Homestead in
connection with the Mergers, as described in the succeeding paragraph; with
respect to SCG, SCG calculated the present value of the cash flows from the PTR
and ATLANTIC REIT Management fees and property management fees which SCG would
have received from such 80 Homestead Village properties, net of operating
overhead, as described below. For purposes of the foregoing calculations, SCG
assumed that at July 1, 1996, PTR would have 28 properties in operation, seven
properties under construction and 19 properties in pre-development planning,
and that ATLANTIC would have no properties in operation, five properties under
construction and 21 properties in pre-development planning. At July 12, 1996,
PTR actually had 28 properties in operation, eight properties under
construction and 18 properties in pre-development planning, and ATLANTIC
actually had one property in operation, four properties under construction and
21 properties in pre-development planning.
For purposes of determining the relative ownership interests of PTR and
ATLANTIC in Homestead, SCG projected the net operating income for each of these
properties for the 18 months ended December 31, 1997, capitalized 1998 (the
first year in which all 80 Homestead Village properties are assumed to be
stabilized) projected net operating income at 11%, and discounted both cash
flows back to July 1, 1996, using a discount rate of 11%. SCG projected a net
operating income for each of the 80 Homestead Village properties through the
end of 1998 based on the historical income and expense experience of the
Homestead Village properties currently in operation, its current development
plans for each such Homestead Village property, and its extensive
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experience in the market and submarket in which each such Homestead Village
property is or will be located. In addition, the material underlying economic
assumptions used by SCG in projecting net operating income for each of the
Homestead Village properties were as follows: a 5% increase in the average
weekly rental rate beginning 18 months after the opening of a property and
every 12 months thereafter; a 28% occupancy rate for the first three months of
operation, a 70% occupancy rate for the second three months of operation, and
an 83% stabilized occupancy rate thereafter; an annual 5% increase in expenses
every 12 months after the opening of a property; and a capital reserve for
each property at a rate of 5% of gross revenue for the property. The
capitalization rate of 11% applied to 1998 net operating income for each
Homestead Village property contributed by PTR and ATLANTIC reflects SCG's
estimate of current real estate market capitalization rates for non-branded
lodging facilities based on its review of publicly available industry
information. The discount rate of 11% applied to PTR and ATLANTIC cash flows
reflects SCG's estimate of the rate appropriate to the moderate priced,
extended-stay lodging industry.
For purposes of determining the relative ownership interest of SCG in
Homestead, SCG calculated the projected PTR and ATLANTIC REIT Management fees
and property management fees which SCG would have received under existing
agreements with PTR and ATLANTIC for the 80 Homestead Village properties
assuming that such agreements were in effect throughout the relevant periods,
net of operating overhead of SCG related to those properties, for the 18
months ended December 31, 1997, multiplied projected 1998 net operating income
derived from such fees by nine, and discounted all cash flows back to July 1,
1996 using a discount rate of 17.5%. The 9.0x multiple for 1998 net operating
income for SCG was based on a publicly available report prepared by an
independent third party of private and public companies in the financial
services sector after adjusting for growth expectations and business
objectives for each company. A discount rate of 17.5% was applied to SCG's
cash flow between 1996 and 1998 to reflect SCG's belief that a higher level of
uncertainty exists regarding the profitability of financial services
operations during a period of rapid growth. SCG anticipates that it would
rapidly increase its management operations relating to the Homestead Village
properties during the next three years as 51 additional properties are
developed and become stabilized. The REIT Management fees and property
management fees were calculated using the same projected net operating income
through the end of 1998 for the 80 Homestead Village properties used to
calculate the present values of the cash flows contributed by PTR and
ATLANTIC. No separate consideration was attributed to the Homestead Village
trademark, operating system or rights for planned facilities to be contributed
by SCG, as the trademark and operating systems would be necessary to achieve
the anticipated fees.
These present values of cash flows were prepared solely for the purpose of
determining the relative ownership interests of PTR, ATLANTIC and SCG in
Homestead. These contributions were totalled and the resulting percentages of
the contributions are as follows: PTR-63.64%; ATLANTIC-28.18%; and SCG-8.18%.
Pursuant to each Funding Commitment Agreement, PTR and ATLANTIC will provide
Homestead aggregate funding on such developments in the amounts of up to
approximately $133 million and approximately $111 million, respectively, which
amounts are anticipated to be sufficient to complete the development of the
respective Homestead Village facilities contributed by them. PTR and ATLANTIC
will receive convertible mortgage notes in respect of such fundings in stated
amounts of up to $144 million and $98 million, respectively. The effect of
these provisions of the PTR Funding Commitment Agreement is that PTR will fund
approximately $898,000 for each $1,000,000 principal amount of convertible
mortgage loans. The convertible mortgage loans will be recorded for financial
reporting purposes at a discount of approximately $11 million which will be
amortized and recorded as an adjustment to interest income over the ten-year
term of the mortgage loans using the effective interest method. The
differences between the funded amounts and the stated amounts of the
convertible mortgage loans arise because the rate of return on the existing
Homestead Village facilities contributed by PTR is projected to exceed the
rate of return on the Homestead Village facilities contributed by PTR and
ATLANTIC to Homestead which are under construction or in pre-development
planning. In calculating the relative ownership interests of PTR and ATLANTIC,
SCG assumed that as of July 1, 1996 PTR would have 28 Homestead Village
facilities in operation and generating income, while ATLANTIC would have none.
In addition, SCG expects that the average property development costs for the
existing PTR Homestead Village properties will, on balance, be less than those
for the PTR and ATLANTIC Homestead Village properties
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projected to be built in the future because a large portion of the existing
PTR Homestead Village properties were in planning or under development during
1992 and 1993 when land prices and construction costs were less than they are
now and are anticipated to be over the next 18 months. The stated amount of
the convertible mortgage loans was determined based on a 9% interest rate to
provide an effective yield to each of PTR (10.02% on a fully funded basis) and
ATLANTIC (7.94% on a fully funded basis) that is reflective of the relative
rates of return anticipated to be realized on all of the facilities
contributed by PTR and ATLANTIC, respectively.
The PTR REIT Management Agreement prohibits the PTR REIT Manager from
proposing transactions which, among other things, involve the sale or purchase
of properties by PTR to or from the PTR REIT Manager or its affiliates. In
connection with the Transaction, both PTR and ATLANTIC have waived such
provisions of their respective REIT Management agreements. Additionally, the
PTR REIT Management fees are based upon PTR's cash flow (as defined in the PTR
REIT Management Agreement). PTR's cash flow includes interest payable on loans
made by PTR. Because SCG's contribution is based upon discounted cash flows
expected to be generated from the Homestead Village properties contributed by
PTR (including Homestead Village properties to be funded by PTR pursuant to a
Funding Commitment Agreement), PTR and the PTR REIT Manager have amended the
PTR REIT Management Agreement to exclude from the calculation of the PTR REIT
Management fee the interest payable on the mortgage loans made by PTR.
PTR Board Recommendations and Reasons.
At a special meeting of the PTR Board on May 21, 1996, following a review of
the information considered by SCG and a review of terms of the Merger
Agreement and the Transaction, as well as consideration of the recommendation
of the PTR Special Committee, the PTR Board unanimously approved the Merger
Agreement and the Transaction and recommended that PTR shareholders vote for
approval of the Merger Agreement and the Transaction. As noted below, the PTR
Board placed special emphasis in the determination by the PTR Special
Committee that the Merger Agreement and the Transaction are fair and
reasonable to PTR and on terms not less favorable to PTR than those available
from unaffiliated third parties.
In making its determination with respect to the Transaction, the PTR Board
considered the following material factors in approving the Merger Agreement
and the Transaction:
(i) The reasons emphasized by SCG in making its recommendations. The PTR
Board considered the concern of SCG management that the public market
valuation of PTR would not reflect the value of the Homestead Village
assets within PTR, that the capital markets place a premium on REITs which
are focused on a particular product and that the presence of Homestead
Village properties has caused a concern for the rating agencies.
(ii) The goals and objectives of Homestead, the projected growth in the
number of Homestead Village properties in operation, the gross revenues and
net operating income of the combined Homestead Village operations, the
funds from operations multiple of PTR as compared to its competitors, and
the EBITDA multiple of PTR and competitors in the extended stay market.
(iii) SCG's stated objective of maximizing shareholder value for the
shareholders of each of PTR, ATLANTIC and SCG, both separately and
individually, related to the Homestead Village operations while pursuing a
course of action that is fair to each shareholder group, and the expected
benefit resulting from a spin-out of the Homestead Village operations based
upon the number of operating Homestead Village properties at the end of
1997, the projected EBITDA for Homestead in 1998, and an assumed EBITDA
multiple and the proportionate interest of each of PTR, ATLANTIC and SCG in
the net benefit.
(iv) The proposed contributions by PTR, ATLANTIC and SCG using discounted
cash flow analysis of projected net operating income for the 80 properties
in operation and under development, as well as the methodology for
calculating the amount of the contribution by SCG using discounted cash
flow analysis of REIT management and property management fees for the
Homestead Village operations. The PTR Board examined SCG's methodology in
determining those contributions, the projections employed by SCG, the
assumptions underlying the projections, the mathematical accuracy of the
projections, and the resulting percentages of the contributions of each of
PTR, ATLANTIC and SCG and found them to be reasonable.
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(v) The estimated impact of the proposed transaction on the shareholders
of PTR comparing the estimated value of a PTR Common Share based upon 1997
estimated funds from operations and the current funds from operations
multiple to the estimated value of the various Homestead securities which
shareholders would own directly or indirectly as a result of the
Transaction, with no weight attributed to the Homestead Warrants.
(vi) The estimated impact of the proposed Transaction on PTR and PTR's
balance sheet, having reviewed historical performance of PTR, internal
forecasts assuming no spin-off and internal forecasts assuming a spin-off
as of January 1996, and the impact of the proposed Transaction on PTR's
covenants under its loan agreements.
(vii) The balance sheets of Homestead giving effect to the proposed
Transaction and full funding of the convertible mortgage debt, the capital
structure of Homestead at cost and the Homestead Warrants. In particular,
the PTR Board considered whether the number of shares issuable upon
exercise of the Homestead Warrants and conversion of the convertible
mortgage loans might restrict appreciation in the per share price of
Homestead Common Stock for an extended period.
(viii) The impact of the Transaction on PTR's projected funds from
operations and PTR's ability to continue to make cash distributions to
shareholders at the current level. The PTR Board considered the fact that
projected funds from operations for 1996 and 1997 would be impacted by the
Transaction but noted that the amendment to the REIT Management Agreement
to exclude income from the convertible mortgage loans as a basis for PTR
REIT Manager compensation would in part offset the potential decrease in
funds from operations caused by the Transaction.
(ix) The impact of the REIT tax rules on the operation of Homestead
Village properties by PTR. The PTR Board was advised that the current
methods of operation under the REIT tax rules would impose certain
inefficiencies in operation of the Homestead Village properties by PTR or
loss of certain revenues from the properties.
(x) The terms of the convertible mortgage loans and the Homestead
Warrants. The PTR Board considered the value of the continued investment by
PTR in Homestead Village facilities through the convertible mortgage loans,
the obligations of PTR under the Funding Commitment Agreement and PTR's
source of funding.
(xi) The nature of the Transaction in light of PTR's policies against
principal transactions and the existing provisions of the PTR Declaration
of Trust and the PTR REIT Management Agreement. The PTR Board considered
that the approval by PTR shareholders was required and that certain
provisions of the PTR REIT Management Agreement must be waived to effect
the Transaction and that the proposed amendment to the PTR Declaration of
Trust is limited to the Transaction only.
(xii) The Distribution will result in a taxable dividend to shareholders.
The PTR Board considered the estimated amount of such tax in light of the
value to be created by the spin-off. For a description of the estimated
amount of the taxable dividend based on certain assumptions and on various
assumed values of the Homestead Securities, see "--Federal Income Tax
Consequences--Tax Consequences to PTR Shareholders--The Distribution."
(xiii) The impact of the Distribution on the holders of Series A
Preferred Shares and the potential conversion of Series A Preferred Shares
resulting from the Distribution and the tax impact of such conversion on
PTR and its common shareholders.
(xiv) The substantial ownership interest of SCG in PTR and ATLANTIC and
the impact that such ownership interest was likely to have on SCG in
structuring the Transaction.
(xv) The PTR Board informed itself of the nature and extent of inquiries
by other parties regarding a possible transaction involving PTR's Homestead
Village assets.
(xvi) The PTR Board considered the condition to the Merger Agreement that
the PTR Special Committee receive a written opinion from an investment
banking firm satisfactory to the PTR Special Committee that the aggregate
consideration to be received by PTR pursuant to the Merger Agreement in
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exchange for the contribution by PTR to Homestead of PTR's Homestead
Village properties and the agreement by PTR to enter into the Funding
Commitment Agreement was fair to PTR.
(xvii) As noted above, the PTR Board placed special emphasis on the
recommendation of the PTR Special Committee. In reaching this
determination, the PTR Special Committee considered the same factors
described herein which were considered by the PTR Board as a whole. The PTR
Special Committee consulted with SCG management as well as with its legal
counsel and with Goldman, Sachs. In addition, the PTR Special Committee
considered the opinion, analyses and presentations of Goldman, Sachs
described below under "--Fairness Opinion," including the opinion of
Goldman, Sachs to the effect that, as of the date of such opinion, and
based upon and subject to certain matters stated therein, the PTR
Transaction (as defined in such section below) was fair to PTR. In this
respect, while the PTR Special Committee did not explicitly adopt Goldman,
Sachs' financial analyses, the PTR Special Committee placed special
emphasis on such analyses in its overall evaluation of the Transaction and
viewed such analyses as favorable to its determination.
In view of the wide variety of factors considered by the PTR Board, the PTR
Board did not quantify or otherwise attempt to assign relative weights to the
specific factors considered in making its determination.
FAIRNESS OPINION
On May 20, 1996, Goldman, Sachs delivered its oral opinion to the PTR
Special Committee that, as of the date of such opinion, the PTR Transaction
(as defined below) was fair to PTR. Goldman, Sachs subsequently confirmed its
oral opinion by delivery of its written opinion dated as of the date hereof.
As used herein, "PTR Transaction" means the receipt by PTR of aggregate
consideration pursuant to the Merger Agreement, consisting of 9,485,727 shares
of Homestead Common Stock in exchange for the contribution by PTR to Homestead
of PTR's Homestead Village properties (the "PTR Properties") and 6,363,789
Homestead Warrants in exchange for the agreement by PTR to enter into the
Funding Commitment Agreement.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN, SACHS DATED AS OF THE DATE
HEREOF, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED AS ANNEX
II TO THIS PROXY STATEMENT AND PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. SHAREHOLDERS OF PTR ARE URGED TO, AND SHOULD, READ SUCH OPINION IN
ITS ENTIRETY. THE FOLLOWING SUMMARY, WHILE CONTAINING ALL MATERIAL ELEMENTS OF
SUCH OPINION, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THE OPINION.
In connection with its written opinion, Goldman, Sachs reviewed among other
things the Merger Agreement, the form of Funding Commitment Agreement, this
Proxy Statement and Prospectus, the Annual Reports to Stockholders and Annual
Reports on Form 10-K for the two years ended December 31, 1995; certain
interim reports to shareholders and Quarterly Reports on Form 10-Q of PTR;
certain financial analyses and forecasts for PTR and Homestead, including
financial analyses and forecasts relating to the PTR Properties and the assets
being contributed to Homestead by ATLANTIC and SCG (the "Performance
Results"), prepared by the management of PTR, ATLANTIC and SCG, respectively
(collectively, the "Analyses"), and provided to Goldman, Sachs by the
management of PTR. Goldman, Sachs also held discussions with members of the
senior management of PTR regarding its past and current business operations,
the financial condition of PTR and the future prospects of PTR with and
without the PTR Properties and of Homestead. In addition, Goldman, Sachs
reviewed the reported price and trading activity for PTR Common Shares,
compared certain financial and stock market information for PTR with similar
information for certain other companies the securities of which are publicly
traded, reviewed the pro forma financial information for Homestead provided by
the management of PTR and compared it with similar information for certain
other companies including those in the extended-stay lodging industry
specifically and in other industries generally, and performed such other
studies and analyses as Goldman, Sachs considered appropriate.
In preparing its opinion, Goldman, Sachs relied, without independent
verification, upon the accuracy and completeness of all the financial and
other information reviewed by Goldman, Sachs for purposes of its opinion.
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In that regard, Goldman, Sachs assumed, with the consent of the PTR Special
Committee, that the Analyses have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of PTR, ATLANTIC and SCG, as the case may be, and that such
Performance Results will be realized at the times contemplated therein. In
addition, Goldman, Sachs has not made an independent evaluation or appraisal
of the assets and liabilities of PTR (including the assets being contributed
by PTR to Homestead), ATLANTIC (including the assets being contributed by
ATLANTIC to Homestead), SCG (including the assets being contributed by SCG to
Homestead), Homestead or any of their subsidiaries and was not furnished with
any such evaluation or appraisal. PTR did not place any limitations upon
Goldman, Sachs with respect to the procedures followed or factors considered
by Goldman, Sachs in rendering its opinion.
The following is a summary of certain of the analyses used by Goldman, Sachs
in connection with providing its oral opinion to the PTR Special Committee on
May 20, 1996. Goldman, Sachs used substantially the same type of analyses in
connection with providing the written opinion attached hereto as Annex II.
Comparable Companies Comparison. Goldman, Sachs reviewed and compared
certain financial information relating to PTR to corresponding financial
information, ratios and public market multiples for six publicly traded
multifamily real estate investment trusts (the "Selected REITs"): Avalon
Properties, Inc., Equity Residential Properties Trust, Irvine Apartment
Communities, Inc., Merry Land & Investment Co., Inc., Post Properties, Inc.,
and United Dominion Realty Trust Inc., using stock prices as of May 13, 1996.
The Selected REITs were chosen because they are publicly traded companies with
operations that, for purposes of analysis, may be considered similar to PTR.
Goldman, Sachs' analysis of the Selected REITs indicated that, based on First
Call consensus estimates for 1996 and 1997 funds from operations ("FFO") as of
May 14, 1996, multiples of FFO estimates for the Selected REITs for 1996
ranged from 10.8x to 12.6x and averaged 11.6x, and for 1997 ranged from 10.1x
to 11.4x and averaged 10.6x. PTR's multiples of FFO estimates were 12.0x and
10.8x for 1996 and 1997, respectively, based on PTR's stock price of $19.63 on
January 31, 1996, immediately prior to the announcement that PTR was
considering, among other options, the spin-off of the PTR Properties (the
"Pre-Announcement Price"). PTR's multiples of FFO estimates were 13.0x and
11.7x for 1996 and 1997, respectively, based on PTR's stock price as of May
13, 1996. For the Selected REITs, estimated 1996 earnings before interest,
depreciation and amortization ("EBITDA") multiples ranged from 11.9x to 13.8x
and averaged 12.8x; common stock dividend yields as of May 13, 1996 ranged
from 6.4% to 7.2% and averaged 6.8%; and five-year estimated growth in FFO,
based on research analysts' estimates, ranged from 7.0% to 10.0% and averaged
8.2%. For PTR, the estimated 1996 EBITDA multiple was 13.4x, PTR Common Share
dividend yield as of May 13, 1996 was 6.3% and five-year estimated growth in
FFO, based on research analyst's estimates, was 12.0%.
Goldman, Sachs also reviewed and compared certain financial information
relating to Homestead to corresponding financial information, ratios and
public market multiples of publicly traded companies deemed to be appropriate
comparables to Homestead. This comparison consisted of an analysis, based on
stock prices as of May 13, 1996, of selected publicly traded companies in the
extended stay lodging industry and publicly traded companies experiencing high
growth (together, the "Selected Companies"), which are identified below.
Goldman, Sachs compared 1996-1997 estimated earnings per share ("EPS") as
reported by Institutional Brokers Estimate System ("I/B/E/S") and estimated
EBITDA per share as projected in equity analyst research reports or otherwise
calculated for the Selected Companies. Homestead was considered relative to
two publicly traded companies in the extended stay lodging business: Studio
Plus Hotels, Inc. and Extended Stay America, Inc.; two companies experiencing
high growth through consolidation: Stewart Enterprises, Inc. and HFS, Inc.;
and three companies experiencing high growth through development and
expansion: Starbucks Corp., Sunglass Hut International, Inc. and Boston
Chicken Inc. The Selected Companies were chosen because the industry in which
they operate and/or their projected growth dynamics was analogous to
Homestead's industry and/or potential growth dynamics. Multiples on EBITDA
averaged 17.0x for the extended stay lodging companies, 18.5x for the
companies experiencing high growth through consolidation, and 18.5x for the
companies experiencing high growth through development and expansion.
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EBITDA Contribution Analysis. Goldman, Sachs reviewed certain publicly
available operating and financial information and reviewed estimated future
operating and financial information for PTR provided by the management of PTR.
Information reviewed included FFO and EBITDA attributable to the multifamily
properties owned and operated by PTR and attributable to the PTR Properties
for the four years ending December 31, 1995. PTR's management also provided
projected FFO for the two years 1996-1997, assuming alternately that (i) the
PTR Transaction had occurred as of January 1, 1996, and (ii) the PTR
Transaction had not occurred. The information provided by PTR's management
accounted for the revenue contributed by the PTR Properties as well as the
associated expenses incurred in the asset and property management of those
same assets. Based on PTR's management's projections for stabilized operations
in 1998 of the PTR Properties, Goldman, Sachs compared (i) the 1998 EBITDA
attributable to the PTR Properties, assuming no PTR Transaction had occurred,
to (ii) PTR's proportionate share of Homestead's EBITDA, assuming the PTR
Transaction had occurred. Goldman, Sachs estimated that $1.00 of EBITDA
generated by the PTR Properties assuming no PTR Transaction had occurred and
the PTR Properties had remained with PTR would compare with $1.08 of EBITDA,
PTR's proportionate share of Homestead's EBITDA assuming the PTR Transaction
had occurred.
Pro Forma Implied Value Per Share Analysis. Goldman, Sachs prepared pro
forma analyses of the financial impact of the PTR Transaction on PTR's implied
value per share. Goldman, Sachs compared the value per share of PTR assuming
alternately that (i) the PTR Properties remained within PTR and (ii) the PTR
Properties were contributed to Homestead pursuant to the terms of the Merger
Agreement. This moment in time analysis assumed all stock prices analyzed were
unaffected by general market movements and any other factors unrelated to the
PTR Transaction, and was not a prediction of the prices at which the Homestead
Common Stock and Homestead Warrants may trade, if and when issued.
Based on the 1998 EBITDA multiples of one or more of the selected publicly
traded companies in the extended stay lodging industry assuming a 52-week high
and low stock price, the range of implied values of shares of Homestead Common
Stock, on a primary share basis, was $25.65 to $50.20, and $45.83 based on
such companies' stock price as of May 13, 1996, and, on a fully diluted share
basis, was $17.04 to $26.59, and $24.89 based on such companies' stock price
as of May 13, 1996. Based on the 1997 EPS multiples for the selected publicly
traded companies experiencing high growth, the range of implied values of
Homestead's shares was $9.93 to $17.75, with an average value of $13.17, on a
primary share basis, and was $10.89 to $13.94, with an average value of
$12.15, on a fully diluted basis. Using the multiples of the Selected
Companies, PTR management's assumption that PTR's share of Homestead is
63.64%, and 72,210,918 as the total number of PTR Common Shares outstanding,
Goldman, Sachs calculated that the implied value of Homestead allocable to
each PTR Common Share ranged from $2.06 to $7.17.
Goldman, Sachs calculated the implied value per PTR Common Share, pro forma
for the PTR Transaction, using projections for 1996 and 1997 FFO provided by
PTR's management. Based on the Pre-Announcement Price, the 1996 and 1997 FFO
multiples on 1996 and 1997 FFO assuming no PTR Transaction occurred were 12.0x
and 10.8x, respectively. Based on these multiples and projected 1996 and 1997
FFO, pro forma for the PTR Transaction, the implied value of each PTR Common
Share, pro forma for the PTR Transaction, was $18.36 and $17.71, respectively.
Together, these analyses indicated that, pro forma for the PTR Transaction,
the implied value of each PTR Common Share would range from $19.76 to $25.53,
assuming no conversion of the convertible mortgages, compared to a trading
price of $19.63, the Pre-Announcement Price. The implied value of each PTR
Common Share, pro forma for the Transaction, represents a premium to the Pre-
Announcement Price ranging from .7% to 30.1%.
Convertible Mortgages. Under the terms of the Merger Agreement and Funding
Commitment Agreements, PTR and ATLANTIC will receive consideration for their
respective contributions allocated in the same proportion, 30% Homestead
Common Stock and 70% convertible mortgages, while SCG will receive 100% of its
consideration in the form of Homestead Common Stock. Accordingly, Goldman,
Sachs analyzed the value of the convertible mortgages to be received by PTR
under the Funding Commitment Agreement. Goldman, Sachs reviewed the terms of
the securities to be received: 9.0% coupon, conversion premium of 15.0% over
the initial
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Homestead Common Stock price, no dividend on the underlying Homestead Common
Stock, and five-year call protection. Goldman, Sachs calculated that the
break-even point by which the coupon received by PTR on the convertible
mortgages would compensate for the conversion premium would be 1.7 years
following issuance of the convertible mortgages. Goldman, Sachs compared these
terms with the terms of 48 publicly offered convertible debenture issues
issued between February 1995 and March 1996 (the "Selected Issues"). The
Selected Issues had an average coupon of 6.15%, an average conversion premium
of 22.0% and an average dividend of 0.9% on the underlying common stock.
Goldman, Sachs calculated that the average break-even point of the Selected
Issues would be 4.1 years following their issuance.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying Goldman, Sachs' opinion. In arriving at its fairness
determination, Goldman, Sachs considered the results of all such analyses,
taken as a whole. The analyses were prepared solely for the purposes of
Goldman, Sachs' providing its opinion to the PTR Special Committee as to the
fairness of the PTR Transaction to PTR and do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may
be sold. Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. Because such analyses are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of the parties or their respective advisors, neither PTR,
Goldman, Sachs nor any other person assumes responsibility if future results
are materially different from those forecast.
As described above, Goldman, Sachs' opinion to the PTR Special Committee was
one of the many factors taken into consideration by the PTR Board in making
its determination to approve the Merger Agreement and the Transaction. The
foregoing summary does not purport to be a complete description of the
analyses performed by Goldman, Sachs and is qualified by reference to the
written opinion of Goldman, Sachs set forth in Annex II hereto.
Goldman, Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisition, negotiated underwriting, competitive bidding,
secondary distributions of listed and unlisted securities, private placement
and valuation for estate, corporate and other purposes.
Goldman, Sachs has acted as financial advisor and provided certain
investment banking services to PTR and certain affiliates of PTR from time to
time including participating in and receiving fees in connection with the
public offering of securities. Goldman, Sachs has also provided a fairness
opinion to SCG in connection with its merger with an affiliate. In addition,
it is anticipated that Goldman, Sachs will act as lead underwriter in
connection with the initial public offering of ATLANTIC. Goldman, Sachs may in
the future provide financial advisory and investment banking services to PTR,
ATLANTIC, SCG, Homestead or their affiliates.
Pursuant to a letter agreement dated April 1, 1996 (the "GS Engagement
Letter"), the PTR Special Committee engaged Goldman, Sachs to render an
opinion with respect to the consideration to be received by PTR in connection
with the contribution by PTR to Homestead of the PTR Properties. Pursuant to
the terms of the GS Engagement Letter, PTR has agreed to pay Goldman, Sachs a
fee of $250,000 one-half of which would be paid upon execution of the GS
Engagement Letter and the other half upon delivery of Goldman, Sachs' written
opinion, whether or not such opinion is favorable as to the fairness of the
PTR Transaction. PTR also has agreed to reimburse Goldman, Sachs for its
reasonable out-of-pocket expenses, including attorneys' fees and
disbursements, and to indemnify Goldman, Sachs against certain liabilities,
including certain liabilities under federal securities laws.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States Federal income tax
consequences of the Transaction to PTR and PTR shareholders. The summary is
based upon the Code, its legislative history,
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<PAGE>
administrative pronouncements, judicial decisions and Treasury regulations,
subsequent changes to any of which may affect the tax consequences described
herein, possibly on a retroactive basis. The summary only applies to persons
who hold PTR Common Shares as capital assets and does not address tax
considerations which may affect the treatment of certain special status
taxpayers such as financial institutions, broker-dealers, life insurance
companies, tax-exempt organizations, investment companies and foreign
taxpayers. The summary does not address the foreign, state, local or other tax
consequences of the Transaction. SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX
ADVISORS AS TO THE PARTICULAR UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO
THEM OF THE TRANSACTION AND AS TO THE FOREIGN, STATE, LOCAL AND OTHER TAX
CONSEQUENCES OF THE TRANSACTION.
Tax Consequences to PTR
The Mergers. PTR, ATLANTIC, SCG and Homestead have requested a ruling from
the IRS that, among other matters, the Mergers constitute a transaction
subject to Section 351 of the Code and related provisions. In the event that
PTR does not receive a favorable ruling from the IRS prior to the consummation
of the Transaction, it is expected that Mayer, Brown & Platt will give an
opinion that, among other matters, the Mergers constitute a transaction
subject to Section 351 or the reorganization provisions of the Code and
related provisions. The obligation of PTR, ATLANTIC, Homestead and SCG to
consummate the Transaction is conditioned on receipt of either a favorable
ruling from the IRS or an opinion of Mayer, Brown & Platt that the Mergers so
qualify. Assuming the Mergers constitute a transaction subject to Section 351
or the reorganization provisions of the Code and related provisions, (i) PTR
will not recognize gain, income or loss upon the receipt of the Homestead
Common Stock in the Mergers in exchange for the Homestead Village properties
transferred by PTR to Homestead in the Mergers except to the extent that PTR
is treated as having received "boot" in the Mergers, (ii) the tax basis of the
Homestead Common Stock received by PTR will be the same as PTR's and its
subsidiaries' tax basis in the Homestead Village properties transferred by PTR
to Homestead in the Mergers reduced by any liabilities of PTR's subsidiaries
assumed by Homestead in the Mergers, and (iii) the holding period of the
Homestead Common Stock received by PTR will be the same as PTR's and its
subsidiaries' holding period in the Homestead Village properties, allocated
among the shares of the Homestead Common Stock received according to the fair
market values of such properties. To the extent that PTR is treated as having
received "boot" in the Mergers, PTR will recognize taxable gain with respect
to each of the Homestead Village properties transferred by PTR to Homestead in
the Mergers in an amount equal to the lesser of (i) the fair market value on
the date of the Merger of the "boot" received by PTR allocated to such
Homestead Village property and (ii) the amount by which the fair market value
of such Homestead Village property exceeds PTR's or its subsidiaries' tax
basis therein. The tax basis of the Homestead Common Stock received by PTR
will be increased by the amount of any such taxable gain recognized and will
be decreased by the fair market value of the "boot" received. PTR's tax basis
in any "boot" received will equal the fair market value on the date of the
Merger of such "boot." Any taxable gain recognized by PTR as a result of the
receipt of "boot" will reduce the amount of gain recognized by PTR on the
Distribution.
The Distribution. PTR will recognize gain upon the Distribution of the
Homestead Securities to its shareholders in an amount equal to the excess of
the sum of (i) the fair market value of the Homestead Securities on the
Distribution Record Date and (ii) cash distributed in lieu of fractional
shares of Homestead Common Stock and fractional Homestead Warrants over PTR's
tax basis immediately prior to the Distribution in the Homestead Securities it
receives in the Mergers, and the earnings and profits of PTR will be increased
by the amount of any such gain recognized. PTR's gain on the Distribution will
be reduced to the extent that PTR recognized gain on the Mergers from the
receipt of "boot" and its tax basis in the Homestead Common Stock was
increased thereby. In computing its taxable income for the year in which the
Distribution occurs, PTR will be allowed a dividends paid deduction with
respect to the Distribution in an amount equal to the sum of the fair market
value on the Distribution Record Date of the Homestead Securities distributed
and any cash distributed in lieu of fractional shares of Homestead Common
Stock and fractional Homestead Warrants, but in no event in excess of the
earnings and profits of PTR.
The fair market value of the Homestead Securities on the Distribution Record
Date will be determined by the best available evidence as to their value on
that date. Assuming there are no aberrations in the trading of the
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<PAGE>
Homestead Securities, and absent special factors bearing on the value of a
particular holder's Homestead Securities, the best available evidence of the
fair market value of the Homestead Securities on the Distribution Record Date
should be their value as reflected by their trading prices on the Distribution
Record Date or within a reasonable period before or after such date. To the
extent the trading price of the Homestead Securities does not reflect their
fair market value because, for example, there are too few trades, the trading
is of a sporadic nature or such securities were not traded, then other
relevant data bearing on the value of the Homestead Securities will be
considered in determining the fair market value of the Homestead Securities.
Thus, as a result of the Transaction, PTR will recognize gain in an amount
equal to the excess of the value of the Homestead Village properties
transferred by PTR to Homestead in the Mergers over PTR's or its subsidiaries'
basis therein (the "net built-in gain"). PTR will recognize such gain in one
of the following ways: (i) as a result of the receipt of "boot" in the
Mergers, (ii) upon the Distribution, or (iii) in part as a result of the
receipt of "boot" in the Mergers and in part upon the Distribution. In
addition, if the fair market value of any Homestead Village property
transferred by PTR to Homestead in the Mergers were less than PTR's or its
subsidiaries' tax basis therein (a "built-in loss") and if the fair market
value of "boot" received by PTR in the Mergers were to exceed PTR's net built-
in gain in the Homestead Village properties, PTR would recognize additional
gain in the Transaction in an amount equal to the lesser of (i) PTR's
aggregate built-in losses in the Homestead Village properties and (ii) the
excess of the fair market value of the "boot" received by PTR in the Mergers
over PTR's net built-in gain in the Homestead Village properties. However, it
is not anticipated that any of the Homestead Village properties transferred by
PTR in the Mergers will have a built-in loss.
Mortgages. After consummation of the Transaction, PTR will hold mortgage
notes of Homestead convertible into shares of Homestead Common Stock. See "The
Transaction--Funding Commitment Agreements." The terms of the Funding
Commitment Agreement provide that PTR will fund approximately $898,000 for
each $1,000,000 principal amount of convertible mortgage loans. Pursuant to
Sections 1271 through 1275 of the Code and regulations thereunder, PTR will be
treated as having acquired the convertible mortgage loans with original issue
discount in an amount equal to the difference between the issue price (the
amount funded by PTR) and the principal amount at maturity of the convertible
mortgage loans. PTR will be required to accrue such original issue discount in
income on a yield to maturity basis over the terms of the convertible mortgage
loans before receipt of the cash attributable to such income. Because PTR is
generally required to distribute 95% of its income in order to retain its REIT
status and 100% of its income to avoid being taxed, PTR may be required to
borrow funds in order to distribute amounts attributable to any such original
issue discount. Interest paid by Homestead (and original issue discount
accrued) to PTR on the mortgage notes will constitute qualified income for
purposes of determining whether PTR meets the gross income requirements for
REIT qualification.
The terms of the mortgages provide for adjustment of the price for
conversion of the mortgages into the Homestead Common Stock if Homestead makes
certain distributions of stock, cash or other property to its shareholders.
While Homestead does not presently contemplate making such a distribution, if
Homestead makes a distribution of cash or property resulting in an adjustment
to the conversion price, PTR, as a holder of such convertible mortgages, may
be viewed as receiving a "deemed distribution" under Section 305 of the Code,
even if PTR does not hold any Homestead Common Stock at such time. The deemed
distribution would constitute a taxable dividend, taxable as ordinary income,
to the extent that the earnings and profits of Homestead were allocable to the
deemed distribution. The amount of the deemed distribution which exceeded the
allocated earnings and profits of Homestead would be considered return of
capital and would reduce PTR's tax basis in the convertible mortgages (but not
below zero) by the value of the deemed distribution. To the extent that the
value of the deemed distribution exceeds PTR's tax basis in the convertible
mortgages, the deemed distribution would result in gain to PTR. PTR's tax
basis in the convertible mortgages would then immediately be increased by the
value of the property deemed to have been distributed.
Except as discussed below with respect to cash received in lieu of
fractional shares, PTR will not recognize gain or loss upon the exercise of
the conversion right. PTR's tax basis in the Homestead Common Stock received
upon the conversion will be equal to PTR's tax basis in the mortgages
converted. Upon conversion of the
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<PAGE>
mortgages, PTR will receive cash in lieu of any fractional shares of Homestead
Common Stock and will recognize gain to the extent that the cash received
exceeds PTR's tax basis in the portion of the mortgages converted for cash in
lieu of fractional shares. In the event that PTR exercises its conversion
right, it is expected that PTR, consistent with its status as a REIT, will
shortly thereafter distribute to its shareholders or sell in the open market
the Homestead Common Stock received. PTR will recognize gain upon such
distribution or sale of the Homestead Common Stock received upon conversion in
an amount equal to the excess of the fair market value of the Homestead Common
Stock over PTR's tax basis therein and the earnings and profits of PTR will be
increased by the amount of any such gain recognized. In computing its taxable
income for the year in which any such Homestead Common Stock is distributed,
PTR will be allowed a dividends paid deduction in an amount equal to the fair
market value at the time of distribution of the Homestead Common Stock
distributed, but in no event in excess of the earnings and profits of PTR.
Commitment Fee Income. The receipt by PTR of the Homestead Warrants in
consideration for entering into the Funding Commitment Agreement will be
treated as a commitment fee to PTR for entering into the Funding Commitment
Agreement which will constitute taxable income to PTR. Such income will
constitute qualified income for purposes of determining whether PTR meets the
gross income requirements for REIT qualification. The earnings and profits of
PTR will be increased by the amount of the commitment fee income, consequently
increasing the amount of the Distribution which will be treated as a fully
taxable dividend to PTR shareholders.
Tax Consequences to Homestead
Assuming the Mergers constitute a transaction subject to Section 351 or the
reorganization provisions of the Code and related provisions, (i) Homestead
will not recognize gain, income or loss as a result of the Transaction, (ii)
the tax bases of the Homestead Village properties received by Homestead from
PTR and its subsidiaries will be the same as the tax bases of PTR and its
subsidiaries in such properties increased by the amount of any gain recognized
by PTR as a result of the receipt by PTR of "boot" in the Mergers, and (iii)
the holding period of the Homestead Village properties received by Homestead
from PTR and its subsidiaries will be the same as the holding period of PTR
and its subsidiaries in such properties.
Tax Consequences to PTR Shareholders
The Distribution. The amount received by PTR shareholders in the
Distribution will be equal to the fair market value of the Homestead
Securities received plus the amount of any cash received in lieu of fractional
shares of Homestead Common Stock and fractional Homestead Warrants. The
Distribution will constitute a taxable dividend to PTR shareholders, taxable
as ordinary income, to the extent of the earnings and profits of PTR allocable
to such Homestead Securities and cash. To the extent that holders of Series A
Preferred Shares convert their shares into PTR Common Shares prior to the
Distribution Record Date, a greater portion of the earnings and profits of PTR
will be allocable to the Homestead Securities and cash distributed, and a
greater portion of subsequent distributions by PTR to holders of PTR Common
Shares will be taxable to such holders. The amount of the distribution which
exceeds the allocated earnings and profits of PTR will be treated as a
nontaxable reduction (although not below zero) of a shareholder's adjusted tax
basis in its PTR Common Shares. To the extent that the Distribution exceeds
such shareholder's adjusted tax basis in its PTR Common Shares, the
Distribution will be treated as gain to such shareholder. Any such gain will
constitute capital gain to such shareholder if the shareholder holds its PTR
Common Shares as a capital asset, and will constitute long-term capital gain
if such shareholder has held such shares for at least one year. As discussed
above, gain recognized by PTR upon the distribution of the Homestead
Securities will increase PTR's earnings and profits, thus increasing the
portion of the distributions of PTR for the taxable year of the Distribution
which will be treated as taxable dividends as opposed to return of capital.
To the extent that PTR has a net capital gain for the taxable year, it may
designate all or a portion of any dividend distributed as a capital gain
dividend. In this event, shareholders will be provided written notice of such
designation within 30 days after the close of PTR's taxable year. Shareholders
will be taxed at the long-term capital gains rate on any such capital gain
dividends regardless of the shareholders' holding period of its PTR
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<PAGE>
Common Shares. The amount of capital gain dividends which may be designated by
PTR will be reduced by any capital loss carryovers of PTR. Gain recognized by
PTR as a result of the Distribution will constitute capital gain to the extent
attributable to Homestead Village properties held by PTR and its subsidiaries
in excess of one year prior to the Mergers and PTR anticipates that it will
designate dividends attributable to any net capital gain resulting from the
Distribution as capital gain dividends.
The following sets forth an estimate of the portion of the Distribution
taxable as a dividend to PTR shareholders, based upon various assumed values
for the Homestead Securities and the following additional assumptions. The
following information assumes that (i) (a) the total number of outstanding PTR
Common Shares on the Distribution Record Date is 72,210,000, (b) the total
number of outstanding Series A Preferred Shares on the Distribution Record
Date is 9,200,000, and (c) the total number of outstanding Series B Preferred
Shares on the Distribution Record Date is 4,200,000, (ii) PTR will make total
cash distributions to shareholders for calendar year 1996 in an amount equal
to $89,540,400, (iii) PTR's total earnings and profits other than from the
Transaction for calendar year 1996 is $95,400,000, (iv) PTR's and its
subsidiaries' tax basis in the Homestead Village properties immediately prior
to the Transactions is $146,835,880 and (v) no Series A Preferred Shares are
converted into PTR Common Shares or outstanding options to acquire PTR Common
Shares are exercised. The foregoing assumptions and the assumed values of
Homestead Securities below are intended for informational purposes only for
purposes of computing the portion of the Distribution taxable as a dividend
based upon such assumptions and are not intended as an indication of the
actual number of PTR Common Shares which will be or are expected to be
outstanding on the Distribution Record Date, actual or expected cash
distributions to be made by PTR for calendar year 1996, actual or expected
taxable income of PTR for calendar year 1996, actual or expected tax basis of
PTR and its subsidiaries in the Homestead Village properties immediately prior
to the Transactions, whether holders of Series A Preferred Shares will or are
expected to convert such shares into PTR Common Shares, or PTR's estimate of
the value of the Homestead Securities.
<TABLE>
<CAPTION>
ASSUMED ASSUMED VALUE
VALUE OF ASSUMED OF PORTION OF
ONE SHARE OF VALUE OF ONE DISTRIBUTION THE DISTRIBUTION
HOMESTEAD HOMESTEAD PER PTR TAXABLE AS A
COMMON STOCK WARRANT COMMON SHARE DIVIDEND
------------ ------------ ------------- ----------------
<S> <C> <C> <C>
$10.00 $ 0.00 $1.31 $0.60
12.50 2.50 1.86 1.00
15.00 5.00 2.40 1.43
17.50 7.50 2.95 1.88
20.00 10.00 3.50 2.34
</TABLE>
Foreign Withholding. For purposes of this discussion a "non-U.S. holder"
means any PTR shareholder who, for United States income tax purposes, is a
foreign corporation, a nonresident alien, a nonresident alien fiduciary of a
foreign estate or trust, or a foreign partnership which has at least one
member that is, for United States Federal income tax purposes, a foreign
corporation, a nonresident alien individual or a nonresident alien fiduciary
of a foreign estate or trust. Non-U.S. holders will be subject to U.S.
withholding tax at a rate of 30%, or if applicable, a lower treaty rate, on
the portion of the Distribution not attributable to capital gains unless the
Distribution is effectively connected with the conduct of a trade or business
in the United States by such non-U.S. holder. In addition, under the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"), any distribution made
by PTR to a non-U.S. holder, to the extent attributable to gains from
dispositions of United States Real Property Interests ("USRPIs") by PTR
("USRPI Capital Gains"), will be considered effectively connected with a U.S.
trade or business of the non-U.S. holder and subject to U.S. income tax at the
rates applicable to U.S. individuals or corporations. PTR will be required to
withhold tax equal to 35% of the amount of the Distribution to the extent it
constitutes USRPI Capital Gains, without regard to the portion of the
Distribution which PTR designates as a capital gain dividend. The portion of
the Distribution which constitutes USRPI Capital Gains may also be subject to
the 30% branch profits tax (unless reduced by treaty) in the case of a non-
U.S. holder that is a foreign corporation.
Any portion of the Distribution that exceeds both current and accumulated
earnings and profits of PTR will not be taxed as either an ordinary dividend
or a capital gain dividend. However, because PTR will not be able to
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determine at the time the Distribution is made whether or not the Distribution
will be in excess of PTR's current and accumulated earnings and profits, the
Distribution will be subject to full withholding. The non-U.S. holder may seek
a refund of over-withholding from the Internal Revenue Service if it is
subsequently determined that the Distribution was, in fact, in excess of PTR's
current and accumulated earnings and profits. Under current Treasury
Regulations, distributions paid to an address in a foreign country are
presumed to be paid to a resident of that country (unless the payor has
knowledge to the contrary) for foreign withholding purposes and, under the
current interpretation of the Treasury Regulations, for purposes of
determining the applicability of a tax treaty rate. In any case where a
distribution is payable in any medium other than money, the withholding agent
cannot release the property so distributed until the property has been
converted into funds sufficient to enable the withholding agent to pay over in
money the tax required to be withheld. For a discussion of the manner in which
this withholding obligation will be satisfied by PTR in connection with the
Distribution, see "Foreign Shareholders."
Backup Withholding. Under the backup withholding rules of the Code (which
generally impose a 31% withholding tax on certain persons who fail to furnish
the information required under the United States tax reporting requirements),
a PTR shareholder who receives Homestead Securities or cash in lieu of
fractional shares of Homestead Common Stock or fractional Homestead Warrants
in the Distribution may be subject to backup withholding with respect to such
Homestead Securities and cash received in the Distribution unless such
shareholder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (ii) provides a
correct taxpayer identification number and certifies under penalties of
perjury that the taxpayer identification number is correct and that the holder
is not currently subject to backup withholding because of a failure to report
all dividend and interest income. Any amount withheld under these rules will
be credited against the shareholder's Federal income tax liability.
Information Reporting. PTR is required to report the amount distributed to
shareholders pursuant to the Distribution (and the allocation of such amount
among ordinary dividends, capital gain dividends and return of capital) to the
IRS and each shareholder on Form 1099-DIV.
Homestead Common Stock. A shareholder's tax basis in the Homestead Common
Stock received in the Distribution will be the fair market value of the
Homestead Common Stock on the Distribution Record Date to be determined as
discussed above. A shareholder's holding period for the Homestead Common Stock
received in the Distribution will begin on the day after the Distribution
Record Date.
Upon the sale or exchange of Homestead Common Stock, a Homestead shareholder
will realize gain or loss measured by the difference between the amount
realized on the sale or other disposition and the shareholder's tax basis in
the Homestead Common Stock. Such gain or loss will be capital gain or loss to
such shareholder if the shareholder holds its Homestead Common Stock as a
capital asset, and will be a long term capital gain or loss if the Homestead
shareholder's holding period with respect to the Homestead Common Stock sold
is more than one year at the time of sale or exchange.
Homestead Warrants. A shareholder's tax basis in the Homestead Warrants
received in the Distribution will be the fair market value of the Homestead
Warrants on the Distribution Record Date to be determined as discussed above.
A shareholder's holding period for the Homestead Warrants received in the
Distribution will begin on the day after the Distribution Record Date.
The terms of the Homestead Warrants distributed to PTR shareholders pursuant
to the Merger Agreement provide for adjustment of the price for exercise if
Homestead makes certain distributions of stock, cash or other property to its
shareholders. While Homestead does not presently contemplate making such a
distribution, if Homestead makes a distribution of cash or property resulting
in an adjustment to the exercise price, the holders of the Homestead Warrants
(the "Warrant Holders") may be viewed as receiving a "deemed distribution"
under Section 305 of the Code, even if such Warrant Holder does not hold any
Homestead Common Stock at such time. The deemed distribution would constitute
a taxable dividend, taxable as ordinary income, to the extent that the
earnings and profits of Homestead were allocable to the deemed distribution.
The amount of the deemed
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<PAGE>
distribution which exceeded the allocated earnings and profits of Homestead
would be considered a return of capital, and would reduce the Warrant Holder's
tax basis in the Homestead Warrants (but not below zero) by the value of the
deemed distribution. To the extent that the value of the deemed distribution
exceeds the Warrant Holder's tax basis in its Homestead Warrants, the deemed
distribution would result in gain to such Warrant Holder. In any event, the
Warrant Holder's tax basis in its Homestead Warrants would then immediately be
increased by the value of the property deemed to have been distributed.
Except as discussed below with respect to cash received in lieu of
fractional shares, Warrant Holders will not recognize gain or loss upon the
exercise of the Homestead Warrants. The Warrant Holder's tax basis in the
Homestead Common Stock received upon the exercise of the Homestead Warrants
will be equal to the sum of (i) the Warrant Holder's tax basis in the warrants
exercised and (ii) the exercise price paid. Upon the exercise of the Homestead
Warrants, Warrant Holders will receive cash in lieu of any fractional shares
of Homestead Common Stock and will recognize gain to the extent that the cash
received exceeds the Warrant Holder's tax basis in the portion of the
Homestead Warrants exercised for cash in lieu of fractional shares.
Upon a sale or other disposition of a Homestead Warrant, a Warrant Holder
will recognize gain or loss measured by the difference between the amount
realized on the sale or other disposition and the Warrant Holder's tax basis
in the Homestead Warrant. Such gain or loss will be capital gain or loss if
the stock into which the Homestead Warrants are exercisable would be a capital
asset in the Warrant Holder's hands, and will be a short term capital gain or
loss because the Homestead Warrants expire within one year and therefore the
Warrant Holder's holding period will be one year or less.
If a Warrant Holder's Homestead Warrants expire without being exercised, the
Warrant Holder will recognize a loss at the time such Homestead Warrants
expire equal to its tax basis in the expired Homestead Warrants. In general,
such loss will be a capital loss if the stock into which the warrants were
exercisable would be a capital asset in the Warrant Holder's hands.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
Based on the ownership on July 12, 1996, PTR's trustees and executive
officers who own PTR Common Shares or ATLANTIC Common Stock would, in the
aggregate, receive a total of 44,646 shares of Homestead Common Stock and
29,950 Homestead Warrants as a result of the Transaction. They will also
receive cash in lieu of any fractional shares of Homestead Common Stock and
fractional Homestead Warrants. SCG and its directors and executive officers
who own PTR Common Shares or ATLANTIC Common Stock will, in the aggregate,
receive a total of 10,460,177 shares of Homestead Common Stock (including
2,243,038 shares held in escrow) and 5,109,575 Homestead Warrants as a result
of the Transaction. They will also receive cash in lieu of any fractional
shares of Homestead Common Stock and fractional Homestead Warrants. Certain
officers of PTR and the PTR REIT Manager, including David Dressler, W.
Geoffrey Jewett, John Patterson and Gregg Plouff, will become officers and
employees of Homestead.
THE MERGER AGREEMENT
Pursuant to the Merger Agreement, PTR and Homestead shall take all actions
necessary to cause PTR Homestead Village Incorporated, a wholly owned
subsidiary of PTR, to be merged with and into Homestead in exchange for
9,485,727 shares of Homestead Common Stock, ATLANTIC and Homestead shall take
all actions necessary to cause Alabama Homestead Incorporated and Atlantic
Homestead Village Incorporated, wholly owned subsidiaries of ATLANTIC, to be
merged with and into Homestead in exchange for an aggregate of 4,201,220
shares of Homestead Common Stock, and SCG and Homestead shall take all actions
necessary to cause Homestead Village Incorporated, Homestead Realty Services
Incorporated and SCG Homestead Village Incorporated, wholly owned subsidiaries
of SCG, to be merged with and into Homestead in exchange for an aggregate of
4,062,788 shares of Homestead Common Stock of which 2,243,038 shares will be
placed in escrow and released as funds are advanced under the Funding
Commitment Agreements. In addition, pursuant to a
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<PAGE>
warrant purchase agreement dated as of May 21, 1996 by and among PTR,
ATLANTIC, SCG and Homestead (the "Warrant Purchase Agreement"), PTR and
ATLANTIC will receive 6,363,789 and 2,818,517 Homestead Warrants,
respectively, in exchange for their entering into their respective Funding
Commitment Agreement described below. SCG will receive 817,694 Homestead
Warrants in exchange for providing funding to Homestead during the time
between the execution of the Merger Agreement and the Closing Date and the use
of office facilities for a period of one year without charge.
For a description of the amount of Homestead Securities to be received by
PTR shareholders in the Transaction, see "The Transaction--The Distribution."
The following is a summary of the Merger Agreement, which is attached as
Annex I to this Proxy Statement and Prospectus and is incorporated herein by
reference. Such summary is qualified in its entirety by reference to the
Merger Agreement.
Representations and Warranties. The Merger Agreement contains customary
representations and warranties of PTR, ATLANTIC, SCG and Homestead, including,
with respect to PTR, ATLANTIC and Homestead, documents filed with the
Commission and the accuracy of the information contained or incorporated
therein, and with respect to PTR, ATLANTIC, SCG and Homestead, the (i)
preparation of the financial statements in accordance with GAAP applied on a
consistent basis, (ii) absence of undisclosed liabilities, (iii) absence of
certain material adverse events and (iv) accuracy of the information provided
to Homestead with respect to the Registration Statement of which this Proxy
Statement and Prospectus is a part.
Certain Covenants and Agreements. Pursuant to the Merger Agreement, each of
PTR, ATLANTIC and SCG has agreed that, during the period from the date of the
Merger Agreement until the Closing Date or the earlier termination of the
Merger Agreement, it will, among other things (except as permitted by the
Merger Agreement or as consented to in writing by the other parties): (i)
conduct its extended-stay lodging business in the ordinary and usual course
and consistent with past practice; (ii) use its best efforts to take all
actions reasonably necessary to continue, in the ordinary and normal course of
its business and consistent with past practice, with the development or
construction of any extended-stay properties currently in development; (iii)
not issue, sell, pledge or dispose of, or agree to issue, sell, pledge or
dispose of, any shares of, or any options, warrants or rights of any kind to
acquire any shares of stock of certain subsidiaries; (iv) not (a) except as
described in clauses (b) through (e) below, incur or become contingently
liable with respect to any additional indebtedness for borrowed money in
respect of the assets to be contributed to Homestead, (b) take any action
which would jeopardize PTR's or ATLANTIC's status as a REIT under the Code,
(c) sell any of the properties to be contributed to Homestead, (d) prepay any
existing convertible mortgage loans (except that PTR may cause one of its
subsidiaries to prepay a portion of the existing convertible mortgage loans to
the extent that the costs to acquire and develop the properties being
contributed to Homestead is less than the amount outstanding under such loans)
or (e) purchase or acquire any properties for use as extended-stay facilities;
(v) use reasonable efforts to preserve its extended-stay lodging business
organization and goodwill, keep available the services of its present
officers, preserve the goodwill and business relationships with its lessees,
operators, suppliers, distributors, customers and others, and not engage in
any action, directly or indirectly, with the intent to affect adversely the
Transaction; (vi) confer with one or more representatives of the other parties
when requested to report on material operational matters and the general
status of ongoing operations of its business; and (vii) maintain, in full
force and effect, with all premiums due thereon paid, policies of insurance
covering all of its insurable tangible assets and businesses related to its
Homestead Village operations in amounts and as to foreseeable risks usually
insured against by persons operating similar businesses under valid and
enforceable policies of insurance issued by nationally recognized insurers.
Pursuant to the Merger Agreement, Homestead has agreed that, during the
period from the date of the Merger Agreement until the Closing Date or the
earlier termination of the Merger Agreement, it will, among other things
(except as permitted by the Merger Agreement or as consented to in writing by
the other parties): (i) except in certain limited circumstances, not issue,
sell, pledge or dispose of, or agree to issue, sell, pledge or
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dispose of, any additional shares of, or any options, warrants or rights of
any kind to acquire any shares of stock of Homestead, of any class or any debt
or equity securities convertible into or exchangeable for such stock, or amend
or modify the terms and conditions of any of the foregoing; (ii) not incur or
become contingently liable with respect to any indebtedness for borrowed money
or enter into any contract or arrangement with respect thereto; and (iii) not
enter into any contract, arrangement or understanding relating to the
disposition of any property to be received from PTR, ATLANTIC or SCG, however,
it may purchase or acquire properties for use as extended-stay lodging
facilities with the consent of each of the other parties provided that the
funds therefor are loaned from SCG to Homestead at a rate of interest no
greater than the prime rate of interest as announced by Wells Fargo Realty
Advisors, Incorporated from time to time plus one-half of one percent.
Pursuant to the Merger Agreement, (i) each of PTR, ATLANTIC, SCG and
Homestead shall afford to each other party and their respective accountants,
counsel, financial advisors and other representatives full access during
normal business hours throughout the period prior to the Closing to all
properties, books, contracts, commitments and records of such party, as
appropriate and, during such period, shall furnish promptly to the other, (a)
a copy of each report, schedule and other document filed or received pursuant
to the requirements of federal or state securities laws or filed with the
Commission in connection with the transactions contemplated by the Merger
Agreement, (b) such other information concerning their respective businesses,
properties and personnel which are the subject of the Merger Agreement as
shall be reasonably requested, and (c) a writing indicating any change or
occurrence which may have any material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of the properties which are the subject of the Merger
Agreement; (ii) PTR, ATLANTIC and Homestead shall file the Registration
Statement with the Commission as soon as is reasonably practicable after the
date of the Merger Agreement and shall use all reasonable efforts to have the
Registration Statement declared effective by the Commission as promptly as
practicable, and each of them shall also take any action required to be taken
under applicable state blue sky or securities laws in connection with the
Distribution; (iii) in the case of PTR and ATLANTIC, promptly take such action
as is necessary to obtain shareholder approval of the Merger Agreement and the
Transaction; (iv) in the case of PTR and ATLANTIC, use its best efforts to
obtain and deliver to the other certain letters from its principal executive
officers, directors, trustees and "affiliates" as defined under Rule 145 under
the Securities Act agreeing to certain restrictions on resale of Homestead
Securities received in the Transaction; (v) Homestead shall use its best
efforts to effect, at or before the Closing Date, authorization for quotation
or listing on a national securities exchange or interdealer quotation system
upon official notice of issuance, of the Homestead Securities to be issued in
connection with the Distribution; (vi) each of PTR, ATLANTIC, SCG and
Homestead shall cooperate and use its best efforts to take all actions, make
all filings, registrations and submissions, and do all things necessary and
advisable to consummate the Transaction, including, but not limited to,
obtaining all required consents, waivers and approvals from the Commission,
the Department of Justice and any other applicable government entity; (vii)
the parties shall consult with each other prior to issuing any press release
or any written public statement with respect to the Merger Agreement or the
Transaction and shall not issue any such press release or written public
statement prior to review by the other parties, except that prior review and
approval shall not be required if, in the reasonable judgment of the party
seeking to issue such release or public statement, prior review and approval
would prevent the timely dissemination of such release or public statement in
violation of any applicable law, rule, regulation or policy of a national
securities exchange or interdealer quotation system; (viii) SCG will vote all
PTR Common Shares and all shares of ATLANTIC Common Stock owned by it in favor
of approval and adoption of the Merger Agreement and the Transaction,
provided, however, that SCG will not be obligated to vote any such shares in
favor of such matters in the event the PTR Board or the ATLANTIC Board
withdraws, modifies or amends its recommendation; (ix) ATLANTIC shall file
with the Commission as soon as is reasonably practicable after the date of the
Merger Agreement a registration statement relating to an initial public
offering (the "ATLANTIC IPO") of shares of ATLANTIC Common Stock and shall use
all reasonable efforts to have such registration statement declared effective
by the Commission as promptly as practicable, and shall take any action
required to be taken under applicable state blue sky or securities laws in
connection with the ATLANTIC IPO and, in the event that the ATLANTIC Board
determines that it is not reasonably practicable to file a registration
statement relating to the ATLANTIC IPO, it shall give written notice as
promptly as practicable to each of PTR, SCG and Homestead; (x) each party
agrees to maintain as confidential
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certain information provided to the other parties during the negotiation of
the Merger Agreement and the Transaction; and (xi) SCG shall be responsible
for all amounts due to employees who will become employees of Homestead for
earned but unpaid salary, wages and benefits for periods prior to the Closing
Date.
Conditions to the Transaction. The respective obligations of each of the
parties to effect the Transaction are subject to a number of conditions,
including among others: (i) each other party shall have performed in all
material respects its agreements contained in the Merger Agreement required to
be performed on or prior to the Closing Date and all representations and
warranties of such party shall be true and correct in all material respects on
and as of the date made and the Closing Date; (ii) the Merger Agreement and
the Transaction shall have been approved and adopted by the shareholders of
each of PTR and ATLANTIC; (iii) the PTR Board and the ATLANTIC Board shall
have each declared the dividend contemplated by the Distribution; (iv) the
Registration Statement shall have become effective and no stop order
suspending such effectiveness shall have been issued and remain in effect and
no proceeding shall have been initiated or threatened by the Commission; (v)
each of ATLANTIC and PTR shall have received either an opinion of Mayer, Brown
& Platt or a ruling from the IRS to the effect that, for United States Federal
income tax purposes, the Mergers constitute a transaction subject to Section
351 or the reorganization provisions of the Code and related provisions; (vi)
no preliminary or permanent injunction or other order or decree by any federal
or state court which prevents the consummation of the Transaction shall have
been issued or taken and remain in effect (each party agreeing to use its best
efforts to have any such injunction, order or decree lifted); (vii) all
governmental consents, orders and approvals legally required for the
consummation of the Transaction shall have been obtained and be in effect at
the Closing Date, and such consents, orders and approvals shall have become
final; (viii) the waiting period applicable to the consummation of the
Transaction under the HSR Act shall have expired or been terminated; (ix) the
Homestead Warrants shall have been issued pursuant to the Warrant Purchase
Agreement; (x) ATLANTIC shall have contributed $18.6 million (subject to
adjustment as provided in the Merger Agreement) in cash to one of its
subsidiaries being merged into Homestead and such subsidiary shall not have
encumbered or otherwise disposed of such funds; (xi) the registration
statement in connection with the ATLANTIC IPO, if filed with the Commission,
shall have been declared effective by the Commission or withdrawn by ATLANTIC,
or if such registration statement has not been filed, ATLANTIC shall have
given notice that it does not intend to proceed with the ATLANTIC IPO; (xii)
each of PTR, ATLANTIC and SCG shall have forgiven all indebtedness of their
respective subsidiaries being merged into Homestead (other than the existing
convertible mortgage loans); and (xiii) all material consents from third
parties necessary to consummate the Transaction shall have been obtained.
In addition to the conditions set forth above, the obligations of ATLANTIC
to effect the Transaction are subject to the following conditions: (i) the
receipt of a written legal opinion from Munger, Tolles & Olson, special
counsel to the PTR Special Committee, as to certain legal matters; (ii) the
receipt of a written legal opinion from Mayer, Brown & Platt as to certain
legal matters; (iii) the receipt by the ATLANTIC Special Committee from an
investment banking firm of an opinion to the effect that, as of the date of
this Proxy Statement and Prospectus, the consideration to be paid to ATLANTIC
in connection with the transactions contemplated by the Merger Agreement and
by the Related Agreements (as defined in the Merger Agreement) was fair, from
a financial point of view, to ATLANTIC's shareholders (other than SCG), which
opinion shall not have been withdrawn, revoked or modified; (iv) the Homestead
Securities to be issued in connection with the Distribution shall have been
authorized for quotation or listing on a national securities exchange or an
interdealer quotation system upon official notice of issuance; (v) the receipt
from Homestead of the executed Funding Commitment Agreement described below;
(vi) the receipt from Homestead of the executed ATLANTIC Investor Agreement
described below; (vii) the receipt of the executed Protection of Business
Agreement described below from each of PTR, Homestead and SCG; (viii) the
receipt of "comfort letters" in form and substance reasonably satisfactory to
ATLANTIC from the independent certified public accountants of PTR, Homestead
and SCG; (ix) no governmental consent, order or approval legally required to
consummate the Transaction shall have any terms which, in the reasonable
judgment of ATLANTIC, when taken together with the terms of all such consents,
orders or approvals, would materially impair the value of the Transaction to
ATLANTIC; (x) no governmental authority shall have promulgated any statute,
rule or regulation which, when taken together with all such promulgations,
would materially impair the value of the Transaction to ATLANTIC;
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and (xi) the receipt of an opinion from Mayer, Brown & Platt to the effect
that the performance of the Merger Agreement shall not jeopardize the status
of ATLANTIC as a REIT.
In addition to the conditions set forth above, the obligations of PTR to
effect the Transaction are subject to the following conditions: (i) the
receipt of written legal opinions from King & Spalding, special counsel to the
ATLANTIC Special Committee, as to certain legal matters; (ii) the receipt of a
written legal opinion from Mayer,
Brown & Platt as to certain legal matters; (iii) the receipt by the PTR
Special Committee from an investment banking firm of an opinion to the effect
that, as of the date of this Proxy Statement and Prospectus, the aggregate
consideration to be received by PTR pursuant to the Merger Agreement in
exchange for the PTR properties and the agreement by PTR to enter into the
Funding Commitment Agreement was fair to PTR, which opinion shall not have
been withdrawn, revoked or modified; (iv) the Homestead Securities to be
issued in connection with the Distribution shall have been authorized for
quotation or listing on a national securities exchange or an interdealer
quotation system upon official notice of issuance; (v) the receipt from
Homestead of the executed Funding Commitment Agreement described below; (vi)
the receipt from Homestead of the executed PTR Investor Agreement described
below; (vii) the receipt of the executed Protection of Business Agreements
described below from each of ATLANTIC, SCG and Homestead; (vii) the receipt of
"comfort letters" in form and substance reasonably satisfactory to PTR from
the independent certified public accountants of ATLANTIC, Homestead and SCG;
(ix) no governmental consent, order or approval legally required to consummate
the Transaction shall have any terms which, in the reasonable judgment of PTR,
when taken together with the terms of all such consents, orders or approvals,
would materially impair the value of the Transaction to PTR; (x) no
governmental authority shall have promulgated any statute, rule or regulation
which, when taken together with all such promulgations, would materially
impair the value of the Transaction to PTR; and (xi) the receipt of an opinion
from Mayer, Brown & Platt to the effect that the performance of the Merger
Agreement shall not jeopardize the status of PTR as a REIT.
In addition to the conditions set forth above, the obligations of SCG to
effect the Transaction are subject to the following conditions: (i) the
receipt of a written legal opinion from Munger, Tolles & Olson as to certain
legal matters; (ii) the receipt of a written legal opinion from King &
Spalding as to certain legal matters; (iii) the receipt of "comfort letters"
in form and substance reasonably satisfactory to SCG from the independent
certified public accountants of ATLANTIC, PTR and Homestead; (iv) the receipt
from Homestead of the executed SCG Investor Agreement and the executed
Administrative Services Agreement described below; (v) the receipt of the
executed Protection of Business Agreement described below from each of PTR,
ATLANTIC and Homestead; (vi) no governmental consent, order or approval
legally required to consummate the Transaction shall have any terms which, in
the reasonable judgment of SCG, when taken together with the terms of all such
consents, orders or approvals, would materially impair the value of the
Transaction to SCG; and (vii) no governmental authority shall have promulgated
any statute, rule or regulation which, when taken together with all such
promulgations, would materially impair the value of the Transaction to SCG.
In addition to the conditions set forth above, the obligations of Homestead
to effect the Transaction are subject to the following conditions: (i) the
receipt of a written legal opinion from Munger, Tolles & Olson as to certain
legal matters; (ii) the receipt of a written legal opinion from King &
Spalding as to certain legal matters; (iii) the receipt of a written legal
opinion from Mayer, Brown & Platt as to certain legal matters; (iv) the
receipt of letters from affiliates of ATLANTIC and PTR relating to the
restrictions on transferability of the Homestead Securities to be received in
the Transaction pursuant to Rule 145 promulgated under the Securities Act; (v)
the receipt from PTR and ATLANTIC of the executed Funding Commitment
Agreements described below; (vi) the receipt from ATLANTIC and PTR of the
executed ATLANTIC and PTR Investor Agreements described below; (vii) the
receipt of "comfort letters" in form and substance reasonably satisfactory to
Homestead from the independent certified public accountants of ATLANTIC, PTR
and SCG; (viii) the receipt of the executed SCG Investor Agreement and the
executed Administrative Services Agreement described below; (ix) the receipt
of the executed Protection of Business Agreement described below from each of
ATLANTIC, PTR and SCG; (x) the receipt from SCG of the executed Escrow
Agreement described below; (xi) the delivery by SCG of an assignment of the
Homestead Village trademark; (xii) no governmental consent, order or approval
legally
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required to consummate the Transaction shall have any terms which, in the
reasonable judgment of Homestead, when taken together with the terms of all
such consents, orders or approvals, would materially impair the value of the
Transaction to Homestead; and (xiii) no governmental authority shall have
promulgated any statute, rule or regulation which, when taken together with
all such promulgations, would materially impair the value of the Transaction
to Homestead.
Termination. The Merger Agreement may be terminated at any time prior to the
Closing (i) by mutual consent of PTR, ATLANTIC, SCG and Homestead; (ii) by any
of PTR, ATLANTIC, SCG or Homestead after December 31, 1996, if the Transaction
has not been consummated on or before such date (so long as the party
terminating has not breached its obligations under the Merger Agreement except
for such breaches that are immaterial); (iii) unilaterally by any of PTR,
ATLANTIC, SCG or Homestead if (a) any other party fails to perform any
covenant or agreement in the Merger Agreement in any material respect and does
not cure such failure in all material respects within 15 business days after
receipt of written notice of the alleged failure from another party, (b) any
other party fails to fulfill or complete a condition to the obligations of
that party (which condition is not waived) by reason of a breach by that party
of its obligations in the Merger Agreement or (c) any condition to the
obligations of any other party is not satisfied (other than by reason of a
breach by that party of its obligations under the Merger Agreement), and it
reasonably appears that the condition cannot be satisfied prior to December
31, 1996; (iv) unilaterally by any of PTR, SCG or Homestead if ATLANTIC,
through the ATLANTIC Board or the ATLANTIC Special Committee, either fails to
recommend to ATLANTIC's shareholders the approval of the Merger Agreement and
the Transaction or withdraws, modifies or amends such recommendation; and (v)
unilaterally by any of ATLANTIC, SCG or Homestead if PTR, through the PTR
Board or the PTR Special Committee, either fails to recommend to PTR's
shareholders the approval of the Merger Agreement and the Transaction or
withdraws, modifies or amends such recommendation.
In the event of termination of the Merger Agreement by any party as provided
above, the Merger Agreement will become void and there will be no further
obligation on the part of any party or their respective officers and trustees
or directors (except as set forth in certain provisions of the Merger
Agreement, including the expense reimbursement and termination fees described
under "--Expenses"). However, in the event that termination is pursuant to
clauses (iv) or (v) in the previous paragraph, ATLANTIC or PTR, as the case
may be, shall pay to each of the other parties all of the documented, out-of-
pocket expenses incurred by such parties after execution of the Merger
Agreement in connection with the transactions contemplated thereby.
Amendment and Waiver. Subject to applicable law, the Merger Agreement may be
amended by the written agreement of PTR, ATLANTIC, SCG and Homestead. However,
the Merger Agreement may not be amended in any material respect subsequent to
obtaining the approval of the shareholders of PTR and ATLANTIC. Each of PTR,
ATLANTIC, SCG and Homestead may unanimously agree to (a) extend the time for
the performance of any of the obligations or other acts of the parties
thereto, (b) waive any inaccuracies in the representations and warranties
contained therein and or in any document delivered pursuant thereto, and (c)
waive compliance with any of the agreements or conditions contained therein.
Indemnification. Each party has agreed to indemnify and hold harmless the
other parties (other than SCG) from and against losses incurred by such party
as a result of any breach of, or inaccuracy in, any of its representations and
warranties or agreements contained in the Merger Agreement. The
indemnification obligations of PTR, ATLANTIC and SCG are subject to a maximum
amount equal to the aggregate fair market value (based on the first sale price
of the Homestead Securities if trading in such securities has occurred) of the
Homestead Securities received by such party. The indemnification obligations
of Homestead shall not exceed, in the aggregate, the fair market value (based
on the first sale price of the Homestead Securities if trading in such
securities has occurred) of all of the Homestead Securities issued in
connection with the Transaction. The obligations to indemnify terminate two
years after the Distribution and may be invoked only in the event of losses
that exceed $200,000, in which event the indemnification will cover all losses
(including the initial amount).
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PROTECTION OF BUSINESS AGREEMENT
Each of PTR, ATLANTIC and SCG will enter into a protection of business
agreement dated as of the Closing Date (the "Protection of Business
Agreement") with Homestead which will prohibit PTR, ATLANTIC, SCG and their
respective affiliates from engaging, directly or indirectly, in the extended-
stay lodging business in the continental United States except through
Homestead and its subsidiaries. The Protection of Business Agreement also
prohibits Homestead from, directly or indirectly, engaging in the ownership,
operation, development, management or leasing of multifamily properties. The
Protection of Business Agreement does not prohibit any of PTR, ATLANTIC or SCG
from: (i) owning securities of Homestead; (ii) owning up to 5% of the
outstanding securities of another person engaged in owning, operating,
developing, managing or leasing extended-stay lodging properties, so long as
they do not actively participate in the business of such person; (iii) owning
the outstanding securities of another person, a majority owned subsidiary,
division, group, franchise or segment of which is engaged in owning,
operating, developing, managing or leasing extended-stay lodging properties,
so long as not more than 5% of such person's consolidated revenues are derived
from such properties; and (iv) owning securities of another person primarily
engaged in business other than a business owning, operating, developing,
managing or leasing extended-stay lodging properties, including a person
primarily engaged in business as an owner, operator or developer of hotel
properties, whether or not such person owns, operates, develops, manages or
leases extended-stay lodging properties. The Protection of Business Agreement
does not prohibit Homestead from: (i) owning securities of ATLANTIC, PTR or
SCG; (ii) owning up to 5% of the outstanding securities of another person
engaged in owning, operating, developing, managing or leasing garden style
multifamily properties; and (iii) owning the outstanding securities of another
person, a majority owned subsidiary, division, group, franchise or segment of
which is engaged in owing, operating, developing, managing or leasing garden
style multifamily properties, so long as not more than 5% of such person's
consolidated revenues are derived from such properties. The Protection of
Business Agreement will terminate in the event of an acquisition, directly or
indirectly (other than by purchase from PTR, ATLANTIC and SCG or their
respective affiliates (as defined in the Protection of Business Agreement)),
by any person (or group of associated persons acting in concert), other than
PTR, ATLANTIC, SCG, or their respective affiliates, of 25% or more of the
outstanding shares of voting stock of Homestead, without the prior written
consent of the Homestead Board. Subject to earlier termination pursuant to the
preceding sentence, the Protection of Business Agreement will terminate on the
tenth anniversary of the Closing Date.
SCG INVESTOR AGREEMENT
Homestead and SCG will enter into an investor agreement (the "SCG Investor
Agreement"), which will require SCG, upon notice from Homestead, to exercise
all of the Homestead Warrants (at an exercise price of $10.00 per share)
received by SCG in connection with the Transaction. Homestead may call for the
exercise of Homestead Warrants by SCG upon 10 days' prior written notice. The
SCG Investor Agreement, among other things, provides that, without having
first consulted with the nominee of SCG designated in writing, Homestead may
not seek Homestead Board approval of (i) Homestead's annual budget, (ii)
incurring expenses in any year exceeding (A) any line item in the annual
budget by 20% and (B) the total expenses set forth in the annual budget by 5%,
(iii) acquisitions or dispositions in a single transaction or group of related
transactions where the aggregate purchase price paid or received exceeds $5
million, (iv) new contracts with a service provider for (A) investment
management, property management or leasing services, or (B) that reasonably
contemplates annual contract payments by Homestead in excess of $200,000, (v)
the declaration or payment of any dividend or other distribution, (vi) the
approval of stock option plans, (vii) the offer or sale of any shares of stock
of Homestead or any securities convertible into shares of stock of Homestead
(other than the sale or grant of any stock or grants of options or exercise of
options granted under any benefit plan approved by stockholders) and (viii)
the incurrence, restructuring, renegotiation or repayment of indebtedness for
borrowed money (including guarantees) in which the aggregate amount involved
exceeds $5 million. The SCG Investor Agreement also provides that, so long as
SCG owns at least 10% of the outstanding shares of Homestead Common Stock,
Homestead may not increase the number of persons serving on the Homestead
Board to more than seven. SCG also will be entitled to designate one or more
persons as directors of Homestead, as follows: (i) so long as SCG owns at
least 10%
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but less than 30% of the outstanding shares of Homestead Common Stock, it is
entitled to nominate one person; and (ii) so long as SCG owns at least 30% of
the outstanding shares of Homestead Common Stock, it is entitled to nominate
that number of persons as shall bear approximately the same ratio to the total
number of members of the Homestead Board as the number of shares of Homestead
Common Stock beneficially owned by SCG bears to the total number of
outstanding shares of Homestead Common Stock, provided, that SCG shall be
entitled to designate no more than two persons so long as the Homestead Board
consists of no more than seven members. Any person who is employed by SCG or
who is an employee, a 25% shareholder or a director of any corporation of
which SCG is a 25% shareholder (except for Homestead) shall be deemed to be a
designee of SCG. The nominee(s) of SCG may, but need not, include the same
person(s) nominated by either PTR pursuant to the PTR Investor Agreement or
ATLANTIC pursuant to the ATLANTIC Investor Agreement.
In addition, because SCG is an affiliate of Homestead, the SCG Investor
Agreement provides SCG with registration rights pursuant to which, in certain
specified circumstances, SCG may request, at any time after the first
anniversary of the date on which the Homestead Common Stock is registered with
the Commission under either Section 12(b) or 12(g) of the Exchange Act, and on
not more than three occasions, registration of all of SCG's Homestead Common
Stock pursuant to Rule 415 under the Securities Act.
FUNDING COMMITMENT AGREEMENTS
Pursuant to funding commitment agreements to be dated as of the Closing Date
(the "Funding Commitment Agreements") each of PTR and ATLANTIC will agree to
make mortgage loans to Homestead. PTR and ATLANTIC will provide Homestead
aggregate funding for developments in the amounts of up to $133 million and
$111 million, respectively, which amounts are anticipated to be sufficient to
complete the development of the respective Homestead Village facilities
contributed by them. PTR and ATLANTIC will receive convertible mortgage notes
in respect of such fundings in stated amounts of up to $144 million and $98
million, respectively. The obligations of PTR and ATLANTIC are limited to a
specific dollar amount for each property identified in the respective Funding
Commitment Agreements. Upon any determination by Homestead to commence
development of a property identified in the Funding Commitment Agreement,
Homestead is required to notify PTR or ATLANTIC, as the case may be, and PTR
or ATLANTIC, as the case may be, is required to fund up to the full amount of
its obligation with respect to such property. Homestead is required to
endeavor in good faith to complete the development of such property consistent
with the development plans for such property. Each mortgage loan issued by
Homestead pursuant to a Funding Commitment Agreement will be convertible into
shares of Homestead Common Stock on the basis of one share of Homestead Common
Stock for every $11.50 of principal outstanding on the mortgage loan. The
obligation of Homestead to call for funding of, and the obligations of PTR and
ATLANTIC to provide funding for, the mortgage loans expires on March 31, 1998,
except with respect to properties for which Homestead has given notice that it
intends to develop. Interest on the mortgage loans accrues at the rate of 9%
on the unpaid principal balance, payable every six months. The mortgages loans
are scheduled to mature on October 31, 2006, and are not callable until five
years after the Closing Date. Homestead has pledged the assets being
contributed by PTR as collateral for the mortgage loans being made by PTR, and
it has pledged the assets being contributed by ATLANTIC as collateral for the
mortgage loans being made by ATLANTIC.
ATLANTIC AND PTR INVESTOR AGREEMENTS
ATLANTIC and PTR will each enter into an investor and registration rights
agreement with Homestead (the "ATLANTIC and PTR Investor Agreements") pursuant
to which ATLANTIC and PTR each are entitled to designate one person for
nomination to the Homestead Board, and Homestead will use its best efforts to
cause the election of such nominee(s) until March 31, 1998 and for so long
thereafter as PTR or ATLANTIC has the right to convert in excess of $20
million in principal amount of loans made pursuant to the Funding Commitment
Agreement. Such nominee(s) may, but need not, include the same person(s)
nominated by SCG pursuant to the SCG Investor Agreement. In addition,
Homestead has granted to each of ATLANTIC and PTR registration rights with
respect to the distribution of all of the shares of Homestead Common Stock
issuable upon conversion of the
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convertible mortgage notes. Prior to the one-year anniversary of the date the
Homestead Common Stock is registered under the Exchange Act, each of ATLANTIC
and PTR may request one registration of those shares of Homestead Common Stock
which are issued upon conversion of any or all of the convertible mortgage
notes during such one year period and which it intends to distribute to its
stockholders. After such one-year anniversary, each of ATLANTIC and PTR may
request three additional registrations pursuant to Rule 415 promulgated under
the Securities Act of all shares of Homestead Common Stock issued or issuable
upon conversion of the convertible mortgage notes. Such registration, except
for the fees and disbursements of counsel to ATLANTIC or PTR, shall be at the
expense of Homestead.
ADMINISTRATIVE SERVICES AGREEMENT
Upon the consummation of the Transaction, Homestead and SCG will enter into
an administrative services agreement (the "Administrative Services
Agreement"), pursuant to which SCG will provide Homestead with administrative
services with respect to certain aspects of Homestead's business. These
services are expected to include, but are not limited to, insurance
administration, accounts payable administration, internal audit, cash
management, human resources, management information systems, tax and legal
administration, research, shareholder communications and investor relations.
The fees payable to SCG will be based on market rates as mutually agreed. The
agreement will be for an initial term expiring on December 31, 1996 and will
be automatically renewed for one-year terms, subject to approval by a majority
of the disinterested members of the Homestead Board and the approval by the
disinterested directors of the annual compensation payable to SCG for services
rendered to Homestead.
ESCROW AGREEMENT
Pursuant to an escrow agreement to be dated the Closing Date (the "Escrow
Agreement") among Homestead, SCG and the Escrow Agent, a portion of the shares
of Homestead Common Stock issuable to SCG in the Transaction will be placed in
an escrow account maintained with the Escrow Agent. In general, as PTR and
ATLANTIC advance funds to Homestead in accordance with the terms of their
respective Funding Commitment Agreements, a portion of the shares of Homestead
Common Stock in the escrow account will be released to SCG, together with a
proportionate amount of accrued dividends, if any. On January 1, 2000, the
Escrow Agent will release to Homestead all of the shares of Homestead Common
Stock remaining in the escrow account. All dividends or other distributions
paid by Homestead in respect of the shares of Homestead Common Stock held in
the escrow account shall be retained by the Escrow Agent for the benefit of
the party to whom the related shares of Homestead Common Stock are ultimately
issued. The Escrow Agent will vote all shares of Homestead Common Stock held
in the escrow account proportionately in accordance with the vote of all other
Homestead shareholders as instructed by Homestead. In the event that
instructions are not received, the Escrow Agent will not vote such shares.
Because the number of shares of Homestead Common Stock being received by SCG
is based on the anticipated future REIT management fees and property
management fees SCG would have received under existing agreements with PTR and
ATLANTIC for the 80 Homestead Village properties contributed to Homestead, net
of overhead of SCG related to those properties, and since many of the
contributed Homestead Village properties are either in the development or
planning stage, the purpose of the Escrow Agreement is to time SCG's receipt
of the shares of Homestead Common Stock pursuant to the Merger Agreement with
the time the properties are actually funded and supported by a completion
guaranty.
REGULATORY FILINGS AND APPROVALS
Consummation of the Transaction is subject to the provisions of the HSR Act,
for which early termination of the applicable waiting period was granted on
June 14, 1996. Pursuant to the Merger Agreement, each of PTR, ATLANTIC, SCG
and Homestead may terminate the Merger Agreement if (i) any governmental
consent, order or approval legally required for the consummation of the
Transaction has not been obtained and in effect on the Closing Date or (ii)
any governmental consent, order or approval legally required for the
consummation of the
48
<PAGE>
Transaction shall have any terms, which in the reasonable judgement of PTR,
ATLANTIC, SCG or Homestead, respectively, would materially impair the value of
the Homestead Securities to be received by PTR, ATLANTIC or SCG, respectively,
or the value to Homestead of the Transaction.
RESTRICTIONS ON SALES BY AFFILIATES
The Homestead Securities to be issued in the Transaction will have been
registered under the Securities Act. Such shares will be freely transferable
under the Securities Act, except for shares issued to any person who may be
deemed to be an affiliate (as such term is defined for purposes of Rule 145
under the Securities Act, an "Affiliate") of ATLANTIC or PTR. Affiliates,
including SCG, may not sell their Homestead Securities acquired in connection
with the Transaction except pursuant to (i) an effective registration
statement under the Securities Act covering such shares, (ii) paragraph (d) of
Rule 145 or (iii) any other applicable exemption under the Securities Act.
Each of PTR and ATLANTIC has agreed to use its best efforts to procure written
agreements ("Affiliate Agreements") from executive officers, directors,
trustees and other Affiliates containing appropriate representations and
commitments intended to ensure compliance with the Securities Act.
ACCOUNTING TREATMENT
Since PTR will own over 50% of Homestead immediately after the Mergers, the
Transaction will be recorded by PTR as: (i) the formation of Homestead as a
wholly-owned subsidiary into which the PTR-Homestead Village Group assets will
be transferred at historical cost; (ii) the acquisition of Homestead Village
net assets of ATLANTIC and SCG (at fair value) for Homestead Securities using
the purchase method of accounting; and (iii) a reduction of shareholders'
equity to reflect the distribution of Homestead Securities owned by PTR to
PTR's shareholders. The historical financial statements of PTR-Homestead
Village Group will become the predecessor of Homestead and the operations of
the SCG-Homestead Village Group and the Atlantic-Homestead Village Group will
be included from the date of acquisition. For a description of certain terms
used in this paragraph, refer to the combined historical financial statements
included in Appendix A.
EXPENSES
The Merger Agreement provides that, whether or not the Transaction is
consummated, all expenses incurred in connection with the Merger Agreement and
the Transaction will be paid by the party incurring such expenses, except that
(i) expenses incurred in connection with filing, printing and distributing
this Proxy Statement and Prospectus will be paid 63.64%, 28.18% and 8.18% by
PTR, ATLANTIC and SCG, respectively, (ii) all costs relating to the ATLANTIC
IPO will be paid by ATLANTIC, (iii) all taxes payable by reason of the
Transaction will be paid 63.64%, 28.18% and 8.18% by PTR, ATLANTIC and SCG,
respectively and (iv) the filing fees payable in connection with the filings
under the HSR Act will be paid by SCG. See "Expenses of Solicitation."
DISSENTERS' RIGHTS
Holders of PTR Common Shares are not entitled to dissenters' rights in
connection with the Transaction.
BOARD RECOMMENDATION
THE PTR BOARD, BY UNANIMOUS VOTE OF TRUSTEES WHO WERE PRESENT AT THE
MEETING, APPROVED THE MERGER AGREEMENT AND THE TRANSACTION AND RECOMMENDS THAT
PTR SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT AND THE
TRANSACTION. THE AFFIRMATIVE VOTE OF THE HOLDERS OF TWO-THIRDS OF THE
OUTSTANDING PTR COMMON SHARES IS REQUIRED TO APPROVE AND ADOPT THIS PROPOSAL.
49
<PAGE>
AMENDMENT TO THE PTR DECLARATION OF TRUST
(PROPOSAL 2)
The PTR Declaration of Trust contains certain provisions which would
prohibit the Transaction from being completed. Article 1, Section 5(g) of the
PTR Declaration of Trust currently limits the ability of PTR to make mortgage
loans to an affiliate unless an appraisal is obtained from a qualified
independent appraiser. Pursuant to the terms of the Merger Agreement and the
Funding Commitment Agreements, PTR will be obligated to make convertible
mortgage loans to Homestead, upon consummation of the Transaction, to finance
the development of certain properties being contributed by PTR to Homestead.
It is contemplated that these mortgage loans will be made without first
obtaining an appraisal from a qualified independent appraiser.
In addition, Article 1, Section 6(a) of the PTR Declaration of Trust
currently restricts PTR from selling properties to the PTR REIT Manager, a
sponsor of PTR, trustees or affiliates thereof. Other transactions with
affiliates are also restricted but allow PTR to enter into such transactions
with the approval of a majority of the PTR Board, including the approval of a
majority of the independent trustees. It is arguable that the Transaction
could be considered the sale of properties to an affiliate.
Since the PTR Board has approved the Transaction, the PTR Board has
determined to amend the PTR Declaration of Trust in order to be able to enter
into various obligations contemplated by the Merger Agreement. This amendment
will only apply to the Transaction. The provisions of the PTR Declaration of
Trust governing transactions with affiliates will not otherwise be affected.
See "Information Concerning PTR--PTR Policies with Respect to Certain
Activities." Therefore, in order to facilitate certain continuing obligations
of PTR after the consummation of the Transaction, such as the making of
convertible mortgage loans, shareholders are being asked to consider and vote
upon the following amendment to the PTR Declaration of Trust:
"ARTICLE 9. HOMESTEAD TRANSACTION
Notwithstanding anything to the contrary contained herein, including,
without limitation, the provisions of Article 1 and Article 4 of this
Declaration of Trust, the Trust shall be authorized to perform all of
its obligations and exercise all of its rights under the terms of that
certain Merger and Distribution Agreement, dated as of May 21, 1996 (as
such agreement may be amended or supplemented from time to time, the
"Merger Agreement"), among the Trust, Security Capital Atlantic
Incorporated, Security Capital Group Incorporated and Homestead Village
Properties Incorporated and each of the other agreements and
transactions contemplated thereby, including, without limitation, the
following agreements (as each of such agreements are defined in the
Merger Agreement) and the transactions contemplated by such agreements:
(i) Articles of Merger; (ii) Warrant Purchase Agreement; (iii) one or
more Funding Commitment Agreements (including, without limitation, any
notes and mortgages or deeds of trust in connection therewith); (iv)
Investor and Registration Rights Agreement; (v) Protection of Business
Agreement; and (vi) Distribution Agency Agreement."
THE PTR BOARD, BY UNANIMOUS VOTE OF TRUSTEES WHO WERE PRESENT AT THE
MEETING, APPROVED THE AMENDMENT TO THE PTR DECLARATION OF TRUST AND RECOMMENDS
A VOTE "FOR" THE PROPOSAL TO AMEND THE PTR DECLARATION OF TRUST. The
affirmative vote of the holders of two-thirds of the outstanding PTR Common
Shares is required to approve and adopt this proposal.
THE SPECIAL MEETING
PURPOSE OF THE MEETING
At the PTR Special Meeting, the holders of PTR Common Shares will be asked
to (i) consider and vote upon a proposal to approve and adopt the Merger
Agreement and the Transaction and (ii) consider and vote upon an amendment to
the PTR Declaration of Trust necessary to consummate the Transaction. A copy
of the Merger
50
<PAGE>
Agreement is attached as Annex I hereto and is incorporated herein by
reference and a copy of the prospectus of Homestead is attached hereto as
Appendix A and is incorporated herein by reference.
DATE, TIME AND PLACE; RECORD DATE
The PTR Special Meeting is scheduled to be held at a.m., local time, on
, September , 1996, at . The PTR Board has fixed the
close of business on August , 1996 as the record date (the "PTR Record
Date") for the determination of holders of PTR Common Shares entitled to
notice of and to vote at the PTR Special Meeting. On July 12, 1996, there were
72,392,081 PTR Common Shares outstanding and PTR had approximately 3,300
record holders. As of July 12, 1996, SCG and PTR's trustees and executive
officers beneficially owned an aggregate of 27,622,084 shares or approximately
38.2% of the outstanding PTR Common Shares. SCG has agreed, subject to certain
conditions, and each of such other persons has indicated his or her intent, to
vote his or her shares in favor of the Merger Agreement and the Transaction as
well as in favor of the amendment to the PTR Declaration of Trust. Therefore,
the affirmative vote of holders of approximately an additional 29% of the
outstanding PTR Common Shares will be required to approve the proposals.
VOTING RIGHTS
Assuming the existence of a quorum, the affirmative vote of the holders of
at least two-thirds of the outstanding PTR Common Shares is also required to
approve the Merger Agreement and the Transaction. The affirmative vote of the
holders of at least two-thirds of the outstanding PTR Common Shares is
required to approve and adopt the amendment to the PTR Declaration of Trust.
Holders of record of PTR Common Shares on the PTR Record Date are entitled to
one vote per share at the PTR Special Meeting. The presence, either in person
or by proxy, of the holders of a majority of the outstanding PTR Common Shares
is necessary to constitute a quorum at the PTR Special Meeting.
If a shareholder attends the PTR Special Meeting, he or she may vote by
ballot. However, since many shareholders may be unable to attend the PTR
Special Meeting, the PTR Board is soliciting proxies so that each holder of
PTR Common Shares on the PTR Record Date has the opportunity to vote on the
proposals to be considered at the PTR Special Meeting. When a proxy card is
returned properly signed and dated, the shares represented thereby will be
voted in accordance with the instructions on the proxy card. If a shareholder
does not return a signed proxy card, his or her shares will not be voted and
thus will have the effect of a vote against the amendment to the PTR
Declaration of Trust and the Merger Agreement and the Transaction. Similarly,
broker non-votes and abstentions will have the effect of a vote against the
amendment to the PTR Declaration of Trust and the Merger Agreement and the
Transaction. Shareholders are urged to mark the box on the proxy card to
indicate how their shares are to be voted. If a shareholder returns a signed
proxy card, but does not indicate how his or her shares are to be voted, the
shares represented by the proxy card will be voted "FOR" approval and adoption
of the amendment to the PTR Declaration of Trust and the Merger Agreement and
the Transaction. The proxy card also confers discretionary authority on the
individuals appointed by the PTR Board and named on the proxy card to vote the
shares represented thereby on any other matter that is properly presented for
action at the PTR Special Meeting.
Any PTR shareholder who executes and returns a proxy card may revoke such
proxy at any time before it is voted by (i) notifying in writing the Secretary
of PTR at 7777 Market Center Avenue, El Paso, Texas 79912, (ii) granting a
subsequent proxy or (iii) appearing in person and voting at the PTR Special
Meeting. Attendance at the PTR Special Meeting will not in and of itself
constitute revocation of a proxy.
OTHER MATTERS
PTR is not aware of any business or matter other than those indicated above
which may be properly presented at the PTR Special Meeting. If, however, any
other matter properly comes before the PTR Special Meeting, the proxy holders
will, in their discretion, vote thereon in accordance with their best
judgments.
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<PAGE>
INFORMATION CONCERNING PTR
PTR HISTORICAL AND PRO FORMA SELECTED FINANCIAL INFORMATION
The following table sets forth (1) historical selected financial information
for the periods indicated and as of the dates indicated for PTR and (2)
unaudited pro forma selected financial information for the periods indicated
and as of the date indicated, giving effect to the Transaction as if it had
occurred as of January 1, 1995 for the operations summary information and on
March 31, 1996 for financial position information. Pro forma adjustments made
to arrive at the pro forma amounts set forth below are described in the PTR Pro
Forma Financial Information included elsewhere in this Proxy Statement. The
following information should be read in conjunction with and is qualified in
its entirety by the PTR Historical Financial Statements and related notes
thereto incorporated by reference into this Proxy Statement and Prospectus and
the PTR Pro Forma Financial Information and accompanying discussion and notes
set forth in the PTR Pro Forma Financial Information. The unaudited pro forma
selected financial information is intended for informational purposes and is
not necessarily indicative of the future financial position or future results
of operations of PTR or of the financial position or the results of operations
of PTR that would have actually occurred had the Transaction been completed as
of the date or for the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------
PRO HISTORICAL PRO HISTORICAL
FORMA --------------- FORMA -----------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
------- ------- ------- -------- --------- -------- -------- --------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Rental Income........... $69,056 $75,809 $53,517 $243,783 $ 262,473 $183,472 $ 76,129 $ 30,970 $ 14,721
Property Management Fees
Paid to Affiliates..... 2,354 2,754 1,895 7,894 8,912 7,148 3,862 1,424 148
General and
Administrative
Expenses............... 101 276 214 154 952 784 660 436 697
REIT Management Fee Paid
to Affiliate........... 4,811 5,555 3,957 18,018 20,354 13,182 7,073 2,711 793
Earnings from Operations
(1).................... 21,034 22,920 14,540 76,418 81,696 46,719 23,191 9,037 2,078
Gain (loss) on Sale of
Investments............ 2,923 2,923 -- 2,623 2,623 -- 2,302 (51) (611)
Preferred Share
Dividends Paid......... 6,388 6,388 4,025 21,823 21,823 16,100 1,341 -- --
Net Earnings
Attributable to Common
Shares................. 17,569 19,455 10,515 57,218 62,496 30,619 24,152 8,986 1,467
Common Share
Distributions Paid..... $22,437 $22,437 $14,506 $ 76,804 $ 76,804 $ 46,121 $ 29,162 $ 13,059 $ 4,179
PER SHARE DATA:
Net Earnings
Attributable to Common
Shares................. $ 0.24 $ 0.27 $ 0.20 $ 0.85 $ 0.93 $ 0.66 $ 0.66 $ 0.46 $ 0.21
Common Share
Distributions Paid..... 0.31 0.31 0.2875 1.15 1.15 1.00 0.82 0.70 0.64
Series A Preferred Share
Dividends Paid......... 0.4375 0.4375 0.4375 1.75 1.75 1.75 0.1458 -- --
Series B Preferred Share
Dividends Paid......... $0.5625 $0.5625 $ -- $ 1.363 $ 1.363 $ -- $ -- $ -- $ --
Weighted Average Common
Shares Outstanding..... 72,211 72,211 51,485 67,052 67,052 46,734 36,549 19,435 7,123
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------------------- ------------------------------------------------
HISTORICAL
PRO FORMA HISTORICAL ------------------------------------------------
1996 1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Real Estate Owned, at
cost................... $1,719,603 $1,930,632 $1,855,866 $1,296,288 $872,610 $337,274 $117,572
Total Assets............ 1,816,290 1,889,934 1,840,999 1,295,778 890,301 342,235 141,020
Line of Credit.......... 48,039 36,250 129,000 102,000 51,500 54,802 101
Long-Term Debt.......... 350,000 350,000 200,000 200,000 -- -- --
Mortgages Payable....... 157,570 157,570 158,054 93,624 48,872 30,824 35,772
Total Liabilities....... 601,042 594,812 565,331 455,136 135,284 94,186 38,707
Shareholders' Equity.... $1,215,248 $1,295,122 $1,275,668 $ 840,642 $755,017 $248,049 $102,313
Number of Common Shares
Outstanding............ 72,211 72,211 72,211 50,456 44,645 27,034 13,161
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------- --------------------------------------------------------------
PRO HISTORICAL PRO HISTORICAL
FORMA ------------------ FORMA ----------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
------- -------- -------- -------- --------- --------- --------- --------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net earnings
attributable to Common
Shares................. $17,569 $ 19,455 $ 10,515 $ 57,218 $ 62,496 $ 30,619 $ 24,152 $ 8,986 $ 1,467
Add (Deduct):
Depreciation........... 9,759 10,618 7,424 34,342 36,685 24,614 10,513 5,311 2,886
Provision for possible
loss on investments... -- -- 120 420 420 1,600 2,270 400 400
(Gain) loss on sale of
investments........... (2,923) (2,923) -- (2,623) (2,623) -- (2,302) 51 611
Other (primarily
provision for loss on
receivables).......... -- -- -- -- -- -- 83 174 40
------- -------- -------- -------- --------- --------- --------- --------- --------
Funds from Operations
Attributable to Common
Shares (2)............. $24,405 $ 27,150 $ 18,059 $ 89,357 $ 96,978 $ 56,833 $ 34,716 $ 14,922 $ 5,404
======= ======== ======== ======== ========= ========= ========= ========= ========
Net Cash Provided by
Operating Activities... $ 16,172 $ 12,016 $ 121,795 $ 94,625 $ 49,247 $ 20,252 $ 6,092
Net Cash Used by
Investing Activities... (61,095) (58,926) (294,488) (368,515) (529,065) (229,489) (33,553)
Net Cash Provided by
Financing Activities... 26,342 48,211 191,520 276,457 478,345 185,130 57,259
</TABLE>
52
<PAGE>
- --------
(1) Earnings from operations for the years ended December 31, 1995, 1994 and
1993 reflect a $420,000, a $1.6 million and $2.3 million provision,
respectively, for possible losses relating to investments in non-
multifamily properties.
(2) Funds from operations means net earnings computed in accordance with GAAP,
excluding gains (or losses) from debt restructuring and sales of property,
plus certain non-cash items, principally property depreciation, and after
adjustments for unconsolidated partnerships and joint ventures. PTR
believes that funds from operations is helpful in understanding a property
portfolio's ability to support interest payments and general operating
expenses. Funds from operations should not be considered as an alternative
to net earnings or any other GAAP measurement of performance as an
indicator of PTR's operating performance or as an alternative to cash
flows from operating, investing or financing activities as a measure of
liquidity. In July 1994, PTR changed to a more conservative policy of
expensing the amortization of loan costs in determining funds from
operations. For comparability, funds from operations has been restated to
give effect to this policy as if it had been in effect since January 1,
1991. The funds from operations measure presented by PTR may not be
comparable to other similarly titled measures of other REITs.
PTR SHARE PRICES
The PTR Common Shares are traded on the NYSE. There is no established public
trading market for the Homestead Common Stock. The following table sets forth,
for the periods indicated, the high and the low sale prices of the PTR Common
Shares, as reported on the NYSE Composite Tape by Compuserve, and the
distributions declared, for the periods indicated. Homestead has not paid any
dividends on its Common Stock and does not intend to pay any in the near
future.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
------- ------- -------------
<S> <C> <C> <C>
1994:
First Quarter............................. $21 5/8 $18 1/4 $0.250(1)
Second Quarter............................ 20 1/8 17 3/4 0.250
Third Quarter............................. 18 7/8 17 5/8 0.250
Fourth Quarter............................ 18 3/8 15 1/2 0.250
1995:
First Quarter............................. $18 3/8 $16 3/8 $0.2875(2)
Second Quarter............................ 18 1/8 16 5/8 0.2875
Third Quarter............................. 19 1/4 17 0.2875
Fourth Quarter............................ 20 1/2 17 1/4 0.2875
1996:
First Quarter............................. $22 1/8 $19 1/2 $0.310(3)
Second Quarter............................ 22 1/2 19 1/4 0.310
Third Quarter through July 16, 1996....... 21 3/4 20 5/8 --
</TABLE>
- --------
(1) Declared in the fourth quarter of 1993 and paid in the first quarter of
1994.
(2) Declared in the fourth quarter of 1994 and paid in the first quarter of
1995.
(3) Declared in the fourth quarter of 1995 and paid in the first quarter of
1996.
As of July 12, 1996, PTR had approximately 3,300 record holders of PTR
Common Shares. As of July 12, 1996, there were 1,000 shares of Homestead
Common Stock issued and outstanding, all of which were held of record by SCG.
PTR POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
Policies With Respect to Certain Activities. Subject to restrictions in the
PTR Declaration of Trust, the PTR Board may amend or revise PTR's policies
from time to time without a vote of the shareholders of PTR. The PTR Board
also reserves the right to make exceptions for transactions when it believes
that the transaction is in the best long-term interests of PTR and its
shareholders.
53
<PAGE>
Investment Policies. PTR evaluates investments based on its estimate of the
contribution of an investment to increased cash flow on an unleveraged basis.
PTR seeks to achieve long-term sustainable growth in cash flow by maximizing
the operating performance of its core portfolio through value added operating
systems and concentrating its experienced team of professionals on developing
and acquiring industry-leading product in targeted submarkets exhibiting
strong job growth and favorable demographic trends.
Prospective property investments are analyzed pursuant to several
underwriting criteria, including purchase price, competition and other market
factors, and prospects for long-term growth in cash flow. PTR's development or
acquisition decision is based upon the expected contribution of the property
to long-term cash flow growth on an unleveraged basis. The expected cash flow
contribution is based on an estimate of all cash revenues from leases and
other revenue sources, minus expenses incurred in operating the property
(generally real estate taxes, insurance, maintenance, personnel costs and
utility charges, but excluding depreciation, debt service and amortization of
loan costs) and a reserve for capital expenditures.
The PTR Declaration of Trust contains limitations on PTR's ability to make
certain investments. It is PTR's policy to generally limit its investments
such that (i) no more than 10% of its assets are invested in land held for
development other than land under development or where development is in
planning, (ii) PTR will not be treated as an investment company under the
Investment Company Act of 1940, and (iii) PTR does not invest in mortgage
loans, other than (a) mortgage loans to third party owner-developers in
connection with the development of multifamily properties that are
contractually required to be sold to PTR upon completion; (b) mortgage loans
to entities in which PTR owns a substantial majority of the economic interest;
(c) convertible mortgage loans to Homestead; and (d) other than mortgage loans
(convertible, participating or otherwise) where the PTR Board believes that
such loans are in the best long-term interests of PTR and its shareholders.
Financing Policies. The PTR Declaration of Trust provides that aggregate
borrowing of PTR, secured and unsecured, shall not be unreasonable in relation
to the net assets of PTR and shall be reviewed by the Trustees at least
quarterly. The PTR Declaration of Trust provides that the maximum amount of
such borrowing in relation to the net assets shall, in the absence of a
satisfactory showing that a higher level of borrowing is appropriate, not
exceed 300%. Any excess in borrowing over such 300% level shall be approved by
a majority of the Independent Trustees and disclosed to shareholders in the
next quarterly report of PTR, along with justification for such excess. The
term "net assets" means the total assets (other than intangibles) at cost,
before deducting depreciation or other non-cash reserves, less total
liabilities, calculated at least quarterly on a basis consistently applied.
PTR has an unsecured revolving line of credit for the purpose of
facilitating investment in developments and acquisitions as well as for
working capital. PTR may also from time to time determine to issue securities
senior to the PTR Common Shares, including preferred shares and debt
securities. PTR's financing policies guide it to replace revolving credit
borrowings with the proceeds of equity offerings or long-term, fixed rate,
fully amortizing debt. PTR does not intend to incur long-term, floating rate
debt other than in connection with property acquisitions in which the debt
assumed is impracticable to prepay or is tax-exempt debt.
Policies With Respect to Operating Expenses. The PTR Declaration of Trust
provides that Total Operating Expenses of PTR shall (in the absence of a
satisfactory showing to the contrary) not exceed in any fiscal year the
greater of: (a) 2% of the average of the aggregate book value of the assets of
PTR invested, directly or indirectly, in equity interests in and loans secured
by real estate, before reserves for depreciation or bad debts or other similar
non-cash reserves, computed by taking the average of such values at the end of
each month during such period; or (b) 25% of the Net Income of PTR for such
year. "Net Income" means total revenues applicable to such year, less the
expenses applicable to such year other than additions to reserves for
depreciation or bad debts or other similar non-cash reserves. For the purposes
of the foregoing, Net Income excludes the gain from the sale of PTR's assets.
"Total Operating Expenses" means all operating, general and administrative
expenses of PTR as determined under GAAP except the expenses of raising
capital, interest payments, taxes, non-cash expenditures and costs related
directly to asset acquisition, operation and disposition. The Independent
Trustees have the fiduciary responsibility of limiting such expenses to
amounts that do not exceed such limitations unless
54
<PAGE>
the Independent Trustees shall have made a finding that, based on such unusual
and non-recurring factors which they deem sufficient, a higher level of
expenses is justified for such year. Any such findings and the reasons in
support thereof shall be reflected in the minutes of the meeting of the
trustees. "Independent Trustee" means a trustee who (i) is not affiliated,
directly or indirectly, with the PTR REIT Manager, whether by ownership of,
ownership interest in, employment by, any material business or professional
relationship with, or service as an officer or director of, the PTR REIT
Manager or a business entity which is an affiliate of the PTR REIT Manager,
(ii) is not serving as a trustee or director for more than three real estate
investment trusts organized by a sponsor of PTR and (iii) performs no other
services for PTR, except as trustee.
The PTR Declaration of Trust provides that, within 60 days after the end of
any fiscal quarter of PTR for which Total Operating Expenses (for the 12
months then ended) exceeded 2% of average invested assets (as calculated
above) or 25% of Net Income, whichever is greater, there shall be sent to the
shareholders of PTR a written disclosure of such fact. If the Independent
Trustees find that such higher operating expenses are justified, such
disclosure shall be accompanied by an explanation of the facts the Independent
Trustees considered in arriving at the conclusion that such higher operating
expenses were justified. In the event that the Independent Trustees do not
determine such excess expenses are justified, the PTR REIT Manager shall
reimburse PTR for the amount by which the aggregate annual expenses paid or
incurred by PTR exceeded the limitations herein provided.
Conflict of Interest Policies. PTR does not intend to engage in principal
transactions with officers and trustees or to engage Independent Trustees to
provide services to PTR. In addition, transactions with the PTR REIT Manager
and its affiliates are significantly restricted and must be approved by a
majority of the Independent Trustees. PTR's policy is not to borrow from or
make loans to affiliates, other than mortgage loans to entities in which PTR
owns a substantial majority of the economic interest, convertible mortgage
loans to Homestead or mortgage loans (convertible, participating or otherwise)
where the PTR Board believes that such loans are in the best long-term
interests of PTR and its shareholders.
With a view to resolving potential conflicts of interest and protecting the
interests of PTR's shareholders against such possible conflicts, the PTR
Declaration of Trust requires that a majority of the PTR Board consist of
Independent Trustees. PTR's Independent Trustees are required to monitor the
performance of the PTR REIT Manager.
Policies Applicable to the PTR REIT Manager and Officers and Trustees of
PTR. The PTR REIT Manager has agreed in writing not to engage in any principal
transaction with PTR, including but not limited to purchases, sales or leases
of property or borrowing or lending of funds, except for transactions approved
by a majority of the Independent Trustees not otherwise interested in such
transaction as being fair and reasonable to PTR and on terms and conditions
not less favorable to PTR than those available from unaffiliated third
parties. The Transaction is currently prohibited by the terms of the PTR REIT
Management agreement, although the PTR REIT Manager and PTR have agreed to
waive this prohibition as it relates to the Transaction. Additionally, the PTR
Declaration of Trust currently prohibits PTR from selling property to a
sponsor, the PTR REIT Manager, a trustee, or affiliates thereof, although if
Proposal 2 is approved, such sales, to the extent that they are part of the
Transaction, would not be prohibited. See "Proposal to Amend the PTR
Declaration of Trust." The PTR Declaration of Trust further provides that PTR
shall not enter into any other principal transaction (including without
limitation the making of loans, borrowing money, or investing in joint
ventures) with a sponsor, the PTR REIT Manager, a trustee or affiliates
thereof, except for transactions approved by a majority of the Independent
Trustees not otherwise interested in such transaction as being fair and
reasonable to PTR and on terms and conditions not less favorable to PTR than
those available from unaffiliated third parties. In addition to the
requirements described above, PTR will not engage in such transactions unless
the Independent Trustees believe that any such transaction is in the long-term
best interests of PTR and its shareholders. The sole activity of the PTR REIT
Manager is managing PTR.
The PTR REIT Management agreement permits affiliates of the PTR REIT Manager
to provide property management and other services to PTR for compensation. The
fees charged for such services must be comparable
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to fees that would be charged by unaffiliated, qualified third parties. Any
property management or other fees for services provided by affiliates are
reviewed annually by the PTR Board and must be approved by a majority of the
Independent Trustees.
With certain exceptions, officers and employees of the PTR REIT Manager
spend all of their time on PTR's affairs. In the future, certain officers or
employees may be transferred to or from other affiliates of the PTR REIT
Manager, consistent with the PTR REIT Manager's plan for management depth and
orderly succession.
Under the law of Maryland (where PTR is organized), each trustee is
obligated to offer to PTR any opportunity (with certain limited exceptions)
which comes to him and which PTR could reasonably be expected to have an
interest in developing. In addition, under Maryland law, any contract or
transaction between PTR and any trustee or any entity in which the trustee has
a material financial interest is voidable unless (i) it is approved, after
disclosure of the interest, by the affirmative vote of a majority of
disinterested trustees or by the affirmative vote of a majority of the votes
cast by disinterested shareholders or (ii) it is fair and reasonable to PTR.
Policies with Respect to Other Activities. PTR may, but does not presently
intend to, make investments other than as previously described. All
investments will be primarily related to multifamily properties and the
management and development thereof. PTR has authority to issue senior
securities, to offer PTR Common Shares or other securities and to repurchase
or otherwise reacquire PTR Common Shares or any other securities and may
engage in such activities in the future. PTR has not made, and does not intend
to make, loans to affiliates, other than mortgage loans to entities in which
it owns a substantial majority of the economic interest, convertible mortgage
loans to Homestead and convertible mortgage loans where the PTR Board believes
that such loans are in the best long-term interest of PTR and its
shareholders. PTR will not make loans to its officers and trustees or to the
PTR REIT Manager. PTR may in the future make loans to partnerships, joint
ventures or other entities in which it participates in order to meet working
capital needs. PTR has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers and does not intend to do
so. PTR does not intend to engage in the purchase or sale of properties (other
than acquisition or disposition of properties in accordance with the REIT
rules and PTR's investment policies) and may on a selected basis in the future
offer securities in exchange for properties. PTR makes annual and quarterly
reports to shareholders. The annual reports contain audited financial
statements.
At all times, PTR intends to make investments in such a manner as to be
consistent with the requirements of the Code for PTR to qualify as a REIT
unless, because of changing circumstances or changes in the Code (or in
regulations thereunder), the PTR Board determines that it is no longer in the
best interests of PTR to qualify as a REIT.
COMPARISON OF RIGHTS OF HOLDERS OF
PTR COMMON SHARES AND HOMESTEAD COMMON STOCK
PTR is a real estate investment trust formed under Title 8 of the
Corporations and Associations Article of the Annotated Code of Maryland (the
"Maryland REIT Law"). The rights of holders of PTR Common Shares are governed
by the Maryland REIT Law and the PTR Declaration of Trust and Bylaws.
Homestead is a corporation incorporated under the Maryland General Corporation
Law (the "MGCL"). The rights of holders of Homestead Common Stock are governed
by the MGCL and by the Homestead charter (the "Homestead Charter") and Bylaws.
The Maryland REIT Law does not address many issues that are addressed in the
MGCL, e.g., calling of special meetings of shareholders, shareholder quorum
and voting requirements, fixing of record dates, standards for dividends and
other distributions, trustee conflicts of interest and amendment of bylaws.
Many of these matters are addressed in the PTR Declaration of Trust and
Bylaws.
The rights of Homestead shareholders will differ in some respects from the
rights of PTR shareholders. A summary of these differences is set forth below.
The following summary does not purport to be a complete statement of the
rights of holders of PTR Common Shares under applicable Maryland law, the PTR
Declaration
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of Trust and Bylaws or a comprehensive comparison with the rights of the
holders of Homestead Common Stock under applicable Maryland law, the Homestead
Charter and Bylaws or a complete description of the provisions referred to
herein. The identification of specific differences is not meant to indicate
that other equally or more significant differences do not exist. This summary
is qualified in its entirety by reference to the Maryland REIT Law and the PTR
Declaration of Trust and Bylaws and to the MGCL and the Homestead Charter and
Bylaws, to which prospective holders of Homestead Common Stock are referred.
PREFERRED SHARES
Subject to limitations prescribed by Maryland law and the PTR Declaration of
Trust and the Homestead Charter, the PTR Board is authorized to reclassify and
issue from the authorized but unissued shares of beneficial interest of PTR,
and the Homestead Board is authorized to reclassify and issue from the
authorized but unissued shares of stock of Homestead, as applicable, preferred
shares in series and to establish from time to time the number of preferred
shares to be included in such series and to fix the designation and any
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications and terms
and conditions of redemption of the shares of each series, and such other
subjects or matters as may be fixed by resolution of the PTR Board or
Homestead Board or duly authorized committees thereof. On July 12, 1996, PTR
had 9,051,000 of its Series A Preferred Shares issued and outstanding and held
of record by approximately 100 shareholders and had 4,200,000 of its Series B
Preferred Shares issued and outstanding and held of record by approximately
300 shareholders. Homestead has no shares of preferred stock outstanding.
RESTRICTIONS ON TRANSFER AND REDEMPTION OF SHARES
The PTR Declaration of Trust contains provisions governing the number of
shares that its shareholders may beneficially own. The PTR Declaration of
Trust restricts beneficial ownership of PTR's outstanding shares by a single
person, or persons acting as a group, to 9.8% of the outstanding PTR Common
Shares, except that for SCG, the ownership limitation is 49%. Beneficial
ownership of PTR Common Shares includes PTR Common Shares which a person may
acquire upon conversion of the Series A Preferred Shares. The purposes of
these provisions are to assist in protecting and preserving PTR's REIT status
and to protect the interest of shareholders in takeover transactions by
preventing the acquisition of a substantial block of shares unless the
acquiror makes a cash tender offer for all outstanding shares. While these
provisions are included in order to allow PTR to more effectively preserve its
REIT status under the Code, they may also have the effect of making an
attempted takeover of PTR more difficult for an acquiror.
The Homestead Charter contains no similar provisions.
DISSENTERS' RIGHTS
Under the Maryland REIT Law, a shareholder of a Maryland trust REIT has the
same right to demand and receive the fair market value of his or her shares as
is available to a stockholder under the MGCL but only in connection with
certain mergers and certain acquisitions and upon compliance by the
shareholder with certain procedures.
Under the MGCL, a stockholder of a Maryland corporation has the right, in
connection with certain mergers, sales of all or substantially all the assets
or other transactions, to demand and receive the fair value (excluding any
appreciation or depreciation resulting from the transaction) of his or her
stock if the stockholder complies with certain procedures. Under the MGCL, the
amount to be received by dissenters for their stock may be determined by
agreement between the dissenters and the corporation or, if the corporation
and the dissenters are unable to agree, the corporation or the dissenters may
petition a court for an appraisal of the fair value of the stock. Dissenters'
rights are not generally available with respect to stock listed on a national
securities exchange or on the National Association of Securities Dealers
Automated Quotation System.
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AMENDMENTS TO THE PTR DECLARATION OF TRUST AND THE HOMESTEAD CHARTER
The PTR Board, by a two-thirds vote, may amend the provisions of the PTR
Declaration of Trust from time to time, without a vote of shareholders, to
qualify PTR as a REIT under the Code or the Maryland REIT Law. Except as set
forth in the preceding sentence, the PTR Declaration of Trust may be amended
only by the affirmative vote or written consent of the holders of not less
than two-thirds of the PTR Common Shares then outstanding.
The Homestead Charter may be amended only upon the approval of the
stockholders by the affirmative vote of a majority of the total number of
votes entitled to be cast on the matter.
AMENDMENTS TO THE BYLAWS
The PTR Declaration of Trust provides that the PTR Bylaws may be altered,
amended or repealed and new Bylaws may be adopted, at any meeting of the PTR
Board by a majority vote of the trustees, subject to repeal or change by
action of the shareholders of PTR entitled to vote thereon.
As permitted by the MGCL, the Homestead Charter and Bylaws vest exclusive
power to amend, alter or repeal the Bylaws in the Homestead Board.
TERMINATION
The PTR Declaration of Trust permits the termination of PTR by the
affirmative vote or written consent of the holders of a majority of the
outstanding shares of all classes of beneficial interest of PTR.
The MGCL provides that a Maryland corporation may be dissolved, after
approval by a majority of the entire board of directors, only upon the
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter.
TRUSTEES AND DIRECTORS
The Maryland REIT Law does not set forth the duties of trustees of a
Maryland real estate investment trust such as PTR. The MGCL provides that a
director of a Maryland corporation such as Homestead shall perform his duties
in good faith, in a manner he reasonably believes to be in the best interests
of the corporation and with the care of an ordinarily prudent person in a like
position under similar circumstances.
The PTR Declaration of Trust provides that the number of trustees cannot be
less than three nor more than fifteen with the actual number of trustees to be
determined from time to time by resolution of the trustees then in office. The
PTR Board has set the current number of trustees at seven. The term of office
of each trustee is one year and until the election and qualification of his or
her successor. Trustees may succeed themselves in office. Trustees must be
individuals who are at least 21 years old and not under legal disability. A
majority of the trustees may not be affiliated with PTR's REIT Manager or with
any of its affiliates. A trustee is required to have at least three years of
relevant experience demonstrating the knowledge and experience required to
successfully acquire and manage the type of assets being acquired by PTR.
The Homestead Charter provides that the initial number of directors shall be
three, which number may be increased or decreased from time to time by a vote
of a majority of the entire Homestead Board. See "Information Concerning
Homestead--Certain Relationships and Transactions--SCG Investor Agreement" in
Appendix A. The directors are divided into three classes. At the 1997 annual
meeting of shareholders, one class will be elected to hold office for a term
expiring at the annual meeting of shareholders in 1998, a second class will be
elected to hold office for a term expiring at the annual meeting of
shareholders in 1999 and a third class will be elected to hold office for a
term expiring at the annual meeting of shareholders in 2000. Each director
will hold office for the term to which he or she is elected and until his or
her successor is duly elected and qualifies. At each annual meeting of
Homestead shareholders, the successors to the class of directors whose terms
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expire at such meeting will be elected to hold office for a term of three
years. Immediately following the date on which Homestead has a class of
securities registered pursuant to Section 12 of the Exchange Act, the
Homestead Board shall include a majority of directors each of whom (i) is not
affiliated with SCG or any of its affiliates, directly or indirectly, whether
by ownership of, ownership interest in, employment by, any material business
or professional relationship with, or service as an officer or director of,
SCG or any of its affiliates, (ii) is not servicing as a trustee or director
for more than three entities organized or controlled by SCG and (iii) performs
no other services for Homestead, except as director.
REMOVAL OF TRUSTEES AND DIRECTORS
The PTR Declaration of Trust provides that a trustee may be removed, with or
without cause, by the vote of the holders of two-thirds of the outstanding PTR
Common Shares or by vote of two-thirds of the trustees then in office (which
action shall be taken only by vote at a meeting and not by authorization
without a meeting).
The MGCL provides that any director of a corporation may be removed, with or
without cause, by the stockholders by the affirmative vote of a majority of
all votes entitled to be cast for the election of directors.
VACANCIES AMONG TRUSTEES AND DIRECTORS
Vacancies on the PTR Board (including vacancies resulting from an increase
in the number of trustees) will be filled either at a special meeting of
shareholders called for that purpose or at the next annual meeting of
shareholders. Trustees elected at special meetings of shareholders to fill
vacancies shall hold office until the next annual meeting of shareholders.
Independent Trustees are required to nominate replacements for vacancies
amongst the Independent Trustees' positions.
The MGCL provides that unless the charter or bylaws of a corporation provide
otherwise, newly created directorships resulting from an increase in the
number of directors may be filled by a majority of the entire board of
directors, and vacancies on the board that result from any other cause may be
filled by a majority of the remaining directors. Vacancies on the board
resulting from the removal of a director by the shareholders may also be
filled by the shareholders. The Homestead Bylaws provide that any vacancy will
be filled, at any regular meeting or at any special meeting called for that
purpose, by a majority of the remaining directors, except that a vacancy
resulting from an increase in the number of directors will be filled by a
majority of the entire Homestead Board.
LIMITATION ON TRUSTEE AND DIRECTOR LIABILITY
The Maryland REIT Law permits a Maryland trust REIT's declaration of trust
to contain any provision limiting the liability of trustees and officers of
the REIT for money damages to the REIT and its shareholders except (i) to the
extent that it is proved that the person actually received an improper benefit
or profit in money, property or services, for the amount of the benefit or
profit or (ii) to the extent that a judgment or other final adjudication
adverse to the person is entered in a proceeding based on a finding in the
proceeding that the person's action or failure to act was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated
in the proceeding. The PTR Declaration of Trust contains such a provision
which eliminates the liability of trustees and officers of PTR for monetary
damages for any act or omission by such person unless (i) the trustee or
officer actually received an improper benefit in money, property or services
(in which case, such liability shall be for the amount of the benefit in
money, property or services actually received), (ii) the trustee's or
officer's action or failure to act was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated, (iii)
the trustee's or officer's action or failure to act constitutes willful
misconduct or deliberate recklessness or (iv) such liability to PTR is
specifically imposed upon trustees or officers by statute.
The MGCL allows a corporation's charter to contain a provision limiting a
director's or an officer's personal liability to the corporation and its
shareholders for money damages except to the extent that (i) it is proved that
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the individual actually received an improper benefit or profit, for the amount
of such benefit or profit; or (ii) a judgment or other final adjudication
adverse to the individual is entered in a proceeding based on a finding in the
proceeding that the individual's action or failure to act was the result of
active and deliberate dishonesty and was material to the cause of action. The
Homestead Charter contains such a provision which limits the liability of its
directors and officers for money damages to the fullest extent permitted by
the MGCL.
SHAREHOLDER LIABILITY
Both the Maryland REIT Law and the PTR Declaration of Trust provide that
shareholders shall not be personally liable for the obligations of PTR. The
PTR Declaration of Trust further provides that PTR shall indemnify and hold
each shareholder harmless from all claims and liabilities to which the
shareholder may become subject by reason of his or her being or having been a
shareholder and that PTR shall reimburse each shareholder for all legal and
other expenses reasonably incurred by the shareholder in connection with any
such claim or liability, except to the extent that such claim or liability
arises out of the shareholder's bad faith, willful misconduct or gross
negligence and provided that such shareholder gives PTR prompt notice of any
claim or liability and permits PTR to conduct the defense thereof. In
addition, PTR is required to, and as a matter of practice does, insert a
clause in its management and other contracts providing that shareholders
assume no personal liability for obligations entered into on behalf of PTR.
Nevertheless, with respect to tort claims, contractual claims where
shareholder liability is not so negated, claims for taxes and certain
statutory liability, the shareholders may, in some jurisdictions, be
personally liable to the extent that such claims are not satisfied by PTR.
Inasmuch as PTR carries public liability insurance which it considers
adequate, any risk of personal liability to shareholders is limited to
situations in which PTR's assets plus its insurance coverage would be
insufficient to satisfy the claims against PTR and its shareholders.
Stockholders of a Maryland corporation are not personally liable for
obligations of the corporation.
INDEMNIFICATION OF TRUSTEES, DIRECTORS AND OFFICERS
The Maryland REIT Law permits a REIT to indemnify or advance expenses to
trustees, officers, employees and agents of the REIT to the same extent as is
permitted for directors, officers, employees and agents of a Maryland
corporation under the MGCL. The PTR Declaration of Trust provides that PTR
shall indemnify and hold harmless each trustee from and against all claims and
liabilities, whether they proceed to judgment or are settled, to which such
trustee may become subject by reason of his being or having been a trustee, or
by reason of any action alleged to have been taken or omitted by him as
trustee, and shall reimburse him for all legal and other expenses reasonably
incurred by him in connection with any such claim or liability, including any
claim or liability arising under the provisions of federal or state securities
laws. However, the PTR Declaration of Trust provides that no trustee shall be
indemnified or reimbursed under the foregoing provisions in relation to any
matter unless it shall have been adjudicated that his action or omission did
not constitute willful misfeasance, bad faith or gross negligence in the
conduct of his duties, or, unless, in the absence of such an adjudication, PTR
shall have received a written opinion from independent counsel, approved by
the trustees, to the effect that if the matter of willful misfeasance, bad
faith or gross negligence in the conduct of duties had been adjudicated, it
would have been adjudicated in favor of such trustee. Additionally, PTR has
entered into indemnity agreements with each of its officers and trustees which
provide for reimbursement of all expenses and liabilities of such officer or
trustee, arising out of any lawsuit or claim against such officer or trustee
due to the fact that he was or is serving as an officer or trustee, except for
liabilities and expenses (i) the payment of which is judicially determined to
be unlawful, (ii) relating to claims under Section 16(b) of the Exchange Act
or (iii) relating to judicially determined criminal violations.
The Homestead Charter authorizes Homestead, to the maximum extent permitted
by Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer or (b) any individual who, while a
director of Homestead and at the request of Homestead, serves or has served
another corporation, partnership, joint venture,
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trust, employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, from and against any claim or
liability to which such person may become subject or which such person may
incur by reason of his or her status as a present or former director or
officer of the corporation. The Bylaws of Homestead obligate it, to the
maximum extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director of Homestead and at the request of Homestead, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan
or any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made a party to the proceeding by reason of his service
in that capacity. The Homestead Charter and Bylaws also permit Homestead to
indemnify and advance expenses to any person who served a predecessor of
Homestead in any of the capacities described above and to any employee or
agent of Homestead or a predecessor of Homestead.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Homestead Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (a) the act
or omission of the director or officer was material to the matter giving rise
to the proceeding and (i) was committed in bad faith or (ii) was the result of
active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. In addition, the MGCL requires Homestead, as a
condition to advancing expenses, to obtain (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by Homestead as authorized by the Bylaws
and (b) a written statement by or on his behalf to repay the amount paid or
reimbursed by Homestead if it shall ultimately be determined that the standard
of conduct was not met.
SHAREHOLDERS' MEETINGS
The PTR Declaration of Trust provides for an annual meeting of shareholders
to be held within six months after the end of each full fiscal year. The PTR
Declaration of Trust also provides that special meetings of shareholders may
be called by a majority of the trustees, a majority of the Independent
Trustees or an officer of PTR and shall be called upon the written request of
shareholders holding in the aggregate not less than 10% of the outstanding PTR
Common Shares entitled to vote.
The MGCL provides that special meetings of the shareholders may be called by
the president, the board of directors or any other person specified in the
charter or bylaws of a corporation. The Homestead Bylaws also give the
Chairman of the Board and the chief executive officer the power to call a
special meeting of the shareholders. Under the current MGCL, a special meeting
of stockholders must be called by the secretary of the corporation upon the
written request of stockholders entitled to cast 25% of the votes entitled to
be cast at the meeting setting forth the purpose for which the meeting is
being called. A bill passed by the Maryland legislature and signed by the
Governor of Maryland earlier this year permits a Maryland corporation to
increase the percentage of votes necessary to require the secretary of the
corporation to call a special meeting from 25% to as high as a majority. This
bill will become effective on October 1, 1996. Accordingly, the Homestead
Bylaws provide that on and after October 1, 1996, a special meeting must be
called by the secretary upon the written request of the holders entitled to
cast a majority of the votes entitled to be cast at the meeting.
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ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
For nominations or other business to be properly brought before an annual
meeting of stockholders by a stockholder, the Homestead Bylaws require such
stockholder to deliver a notice to the Secretary, absent specified
circumstances, not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting setting forth: (i) as to
each person whom the stockholder proposes to nominate for election or
reelection as a director all information relating to such person that is
required to be disclosed in solicitations of proxies for the election of
directors, pursuant to Regulation 14A of the Exchange Act; (ii) as to any
other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such stockholder and of the beneficial owner, if
any, on whose behalf the proposal is made; and (iii) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made, (x) the name and address of such stockholder
as they appear on Homestead's books, and of such beneficial owner and (y) the
number of shares of each class of Homestead common stock which are owned
beneficially and of record by such stockholder and such beneficial owner, if
any.
ASSET REQUIREMENTS
To maintain its qualification as a Maryland real estate investment trust,
the Maryland REIT Law requires that the company hold, either directly or
indirectly, at least 75% of the value of its assets in real estate assets,
mortgages or mortgage-related securities, government securities, cash and cash
equivalent items, including high-grade short-term securities and receivables.
The Maryland REIT Law also prohibits using or applying land for farming,
agricultural, horticultural or similar purposes. The MGCL has no such
requirement.
LEGAL MATTERS
The validity of the Homestead Common Stock and the Homestead Warrants
offered hereby will be passed upon for Homestead by Mayer, Brown & Platt,
Chicago, Illinois. Certain legal matters relating to the Transaction will be
passed upon for ATLANTIC, Homestead, PTR and SCG by King & Spalding, Atlanta,
Georgia (counsel to the ATLANTIC Special Committee), Mayer, Brown & Platt,
Chicago, Illinois and Munger, Tolles & Olson, Los Angeles, California (counsel
to the PTR Special Committee). King & Spalding, Mayer, Brown & Platt and
Munger, Tolles & Olson will rely upon the opinion of Ballard Spahr Andrews &
Ingersoll, Baltimore, Maryland, as to certain matters of Maryland law. Mayer,
Brown & Platt has represented and is currently representing PTR, ATLANTIC, SCG
and Homestead and certain of their respective affiliates. King & Spalding has
in the past represented PTR.
INDEPENDENT PUBLIC ACCOUNTANTS AND EXPERTS
The financial statements of PTR as of December 31, 1995 and 1994, and for
each of the years in the three-year period ended December 31, 1995, and the
related schedule have been incorporated by reference herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
With respect to the unaudited interim financial information for the three-
month periods ended March 31, 1996 and March 31, 1995 of PTR incorporated by
reference herein, the independent certified public accountants have reported
that they applied limited procedures in accordance with professional standards
for a review of such information. However, their separate report included in
PTR's quarterly report on Form 10-Q for the quarter ended March 31, 1996,
incorporated by reference herein, states that they did not audit, and they do
not express an opinion, on that interim financial information. Accordingly,
the degree of reliance on their report on such information should be
restricted in light of the limited nature of the review procedures applied.
The accountants
62
<PAGE>
are not subject to the liability provisions of section 11 of the Securities
Act for their report on the unaudited interim financial information because
that report is not a "report" or a "part" of the registration statement
prepared or certified by the accountants within the meaning of Sections 7 and
11 of the Securities Act.
EXPENSES OF SOLICITATION
Homestead will pay the expenses in connection with the filing, printing and
distribution of this Proxy Statement and Prospectus. The costs of solicitation
of proxies from PTR shareholders will be borne by PTR. PTR will reimburse
brokers, fiduciaries, custodians and other nominees for reasonable out-of-
pocket expenses incurred in sending this Proxy Statement and Prospectus and
other proxy materials to, and obtaining instructions relating to such
materials from, beneficial owners of stock. PTR shareholder proxies may be
solicited by trustees or officers of PTR in person, by letter or by telephone
or telegram. In addition, PTR has retained Georgeson & Company, New York, New
York, to assist in the solicitation of proxies. It is estimated that its fees
for services to PTR will not exceed $10,000 in the aggregate plus expenses.
PTR will also reimburse custodians, nominees and fiduciaries for forwarding
proxies and proxy materials to the beneficial owners of their stock in
accordance with regulations of the Commission and the NYSE.
SHAREHOLDER PROPOSALS
Any Proposal by a shareholder intended to be presented at the 1997 annual
meeting of shareholders must be received by PTR at its principal executive
offices located at 7777 Market Center Avenue, El Paso, Texas 79912 not later
than November 30, 1996 for inclusion in PTR's proxy statement and form of
proxy relating to PTR's 1997 annual meeting of shareholders.
63
<PAGE>
INDEX TO PTR PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996
(unaudited).............................................................. F-3
Pro Forma Condensed Consolidated Statement of Operations for the three
months ended March 31, 1996 (unaudited).................................. F-7
Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1995 (unaudited)...................................... F-9
</TABLE>
F-1
<PAGE>
PTR
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
The unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as
if the following transactions had occurred on March 31, 1996: (i) PTR-
Homestead Village Group acquires land parcels which were under contract to be
acquired as of March 31, 1996 and are expected to close prior to the
Transaction; (ii) Homestead Village Properties Incorporated ("Homestead") was
capitalized and the PTR-Homestead Village Group merged into Homestead, (iii)
the net assets of Atlantic-Homestead Village Group and SCG-Homestead Village
Group were acquired by Homestead through the issuance of additional Homestead
common shares and warrants, and (iv) PTR distributes all of the Homestead
shares and warrants it received from the merger with Homestead to the PTR
shareholders. This unaudited Pro Forma Condensed Consolidated Balance Sheet
should be read in conjunction with the PTR-Homestead Village Group, Atlantic-
Homestead Village Group and SCG-Homestead Village Group historical combined
financial statements presented in Appendix A to this Proxy Statement and
Prospectus. In management's opinion, all adjustments necessary to reflect the
effects of theses transactions have been made.
The unaudited Pro Forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what PTR's actual financial position would have been
assuming these transactions had been completed as of March 31, 1996, nor does
it purport to represent the future financial position of PTR.
F-2
<PAGE>
PTR
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FORMATION OF
HOMESTEAD
AND MERGER ACQUISITION ACQUISITION
WITH PTR- PTR/ OF ATLANTIC OF SCG PRO FORMA
LAND TO HOMESTEAD HOMESTEAD HOMESTEAD HOMESTEAD OTHER PRO BEFORE SPIN-OFF
PTR BE VILLAGE CONSOLIDATED VILLAGE VILLAGE FORMA AND
ASSETS HISTORICAL(A) ACQUIRED GROUP(D) PRO FORMA GROUP (E) GROUP (F) ADJUSTMENTS DECONSOLIDATION
------ ------------- -------- ------------ ------------ ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate........ $1,840,474 $11,789(b) $-- $1,852,263 $24,095 $ 233 $ -- $1,876,591
Mortgage notes
receivable......... 14,764 -- -- 14,764 -- -- -- 14,764
---------- ------- ---- ---------- ------- ------- -------- ----------
Total
investments..... 1,855,238 11,789 -- 1,867,027 24,095 233 -- 1,891,355
Cash and cash
equivalents........ 8,338 -- 1(c) 8,339 27,239 12 (1,500)(g) 34,090
Accounts
receivable......... 3,047 -- -- 3,047 -- 481 -- 3,528
Other assets....... 23,311 -- -- 23,311 1,817 19,481 1,500(g) 46,109
---------- ------- ---- ---------- ------- ------- -------- ----------
Total assets.... $1,889,934 $11,789 $ 1 $1,901,724 $53,151 $20,207 $ -- $1,975,082
========== ======= ==== ========== ======= ======= ======== ==========
LIABILITIES AND
HAREHOLDERS' EQUITYS
- --------------------
Liabilities:
Line of credit.. . $ 36,250 $11,789(b) $-- $ 48,039 $ -- $ -- $ -- $ 48,039
Long term
unsecured debt.. . 350,000 -- -- 350,000 -- -- -- 350,000
Mortgages
payable......... . 157,570 -- -- 157,570 -- -- -- 157,570
Accounts payable . 24,488 -- -- 24,488 142 6 -- 24,636
Accrued expenses
and other
liabilities..... . 26,504 -- -- 26,504 1,310 3 -- 27,817
---------- ------- ---- ---------- ------- ------- -------- ----------
Total
liabilities..... 594,812 11,789 -- 606,601 1,452 9 -- 608,062
---------- ------- ---- ---------- ------- ------- -------- ----------
Minority interest.. -- -- -- -- -- -- 71,897(h) 71,897
---------- ------- ---- ---------- ------- ------- -------- ----------
Shareholders'
equity:
Series A
Cumulative
Preferred shares . 230,000 -- -- 230,000 -- -- -- 230,000
Series B
Cumulative
Redeemable
Perpetual
Preferred shares . 105,000 -- -- 105,000 -- -- -- 105,000
Common shares... . 72,376 -- -- 72,376 42 16 (58)(h) 72,376
Additional paid-
in capital...... . 952,679 -- 1(c) 952,680 51,657 20,182 (71,839)(h) 952,680
Dividends in
excess of net
earnings........ . (62,996) -- -- (62,996) -- -- -- (62,996)
Treasury shares,
at cost......... . (1,937) -- -- (1,937) -- -- -- (1,937)
---------- ------- ---- ---------- ------- ------- -------- ----------
Total
shareholders'
equity.......... 1,295,122 -- 1 1,295,123 51,699 20,198 (71,897) 1,295,123
---------- ------- ---- ---------- ------- ------- -------- ----------
Total
liabilities and
shareholders'
equity.......... $1,889,934 $11,789 $ 1 $1,901,724 $53,151 $20,207 $ -- $1,975,082
========== ======= ==== ========== ======= ======= ======== ==========
<CAPTION>
SPIN-OFF OF
SHARES OF
HOMESTEAD
COMMON STOCK TO PTR PRO FORMA
SHAREHOLDERS RESULTING
AND FROM
DECONSOLIDATION HOMESTEAD
ASSETS OF HOMESTEAD(I) SPIN-OFF
------ --------------- -------------
<S> <C> <C>
Real estate........ $(156,988) $1,719,603
Mortgage notes
receivable......... 51,563 66,327
--------------- -------------
Total
investments..... (105,425) 1,785,930
Cash and cash
equivalents........ (28,683) 5,407
Accounts
receivable......... (97) 3,431
Other assets....... (24,587) 21,522
--------------- -------------
Total assets.... $(158,792) $1,816,290
=============== =============
LIABILITIES AND
HAREHOLDERS' EQUITYS
- --------------------
Liabilities:
Line of credit.. . $ -- $ 48,039
Long term
unsecured debt.. . -- 350,000
Mortgages
payable......... . -- 157,570
Accounts payable . (4,172) 20,464
Accrued expenses
and other
liabilities..... . (2,848) 24,969
--------------- -------------
Total
liabilities..... (7,020) 601,042
--------------- -------------
Minority interest.. (71,897) --
--------------- -------------
Shareholders'
equity:
Series A
Cumulative
Preferred shares . -- 230,000
Series B
Cumulative
Redeemable
Perpetual
Preferred shares . -- 105,000
Common shares... . -- 72,376
Additional paid-
in capital...... . (74,591) 878,089
Dividends in
excess of net
earnings........ . (5,284) (68,280)
Treasury shares,
at cost......... . -- (1,937)
--------------- -------------
Total
shareholders'
equity.......... (79,875) 1,215,248
--------------- -------------
Total
liabilities and
shareholders'
equity.......... $(158,792) $1,816,290
=============== =============
</TABLE>
F-3
<PAGE>
PTR
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(a) Represents the historical consolidated balance sheet of Security Capital
Pacific Trust ("PTR") as of March 31, 1996, as set forth on Form 10-Q
filed with the Securities and Exchange Commission which is incorporated
herein by reference.
(b) Reflects 10 land parcels under contract to be acquired for cash by the
PTR-Homestead Village Group subsequent to March 31, 1996, and prior to the
date of the Transaction, described in the Prospectus. Such acquisitions
will be funded through borrowings on PTR's line of credit.
(c) Reflects the capitalization of Homestead Village Properties Incorporated
("Homestead") through the issuance of 1,000 shares of common stock in
exchange for $1.
(d) Upon the consummation of the merger of Homestead with PTR-Homestead
Village Group, Homestead will issue to PTR 9,485,727 shares of $.01 par
value common stock in exchange for the net assets of the PTR-Homestead
Village Group. Additionally, PTR will receive 6,363,789 warrants to
purchase additional shares of Homestead common stock at the exercise price
of $10 per share for its commitment to provide funding under the Funding
Commitment Agreement. Management of PTR, Security Capital Atlantic
Incorporated ("ATLANTIC") and other affiliates of Security Capital Group
Incorporated ("SCG") ("Management") determined the exercise price of the
warrants and concluded that $10 per share represents adequate
consideration for a share of Homestead Common Stock. Specific valuations
of net assets were not reviewed in arriving at its determination.
As a result of the merger transaction, Homestead will be consolidated into
PTR. Accordingly, the issuance of the shares to PTR has not been reflected
in the accompanying pro forma balance sheet as such shares would be
eliminated in consolidation.
(e) Reflects the acquisition of the net assets of the Atlantic-Homestead
Village Group by Homestead at estimated fair market value through the
issuance to ATLANTIC of Homestead Common Stock. Listed below is a
reconciliation of the historical cost of the net assets acquired to the
pro forma estimated fair market value acquisition cost, followed by
explanations of the pro forma acquisition adjustments.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ACQUISITION ACQUISITION
BALANCE SHEET CAPTION COST ADJUSTMENTS COST
--------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Real estate.......................... $10,437 $13,658 (i) $24,095
Cash and cash equivalents............ 72 27,167 (ii) 27,239
Other assets......................... 1,817 -- 1,817
------- ------- -------
Total assets....................... 12,326 40,825 53,151
------- ------- -------
Accounts payable..................... 142 -- 142
Accrued expenses and other
liabilities......................... 1,310 -- 1,310
Intercompany debt.................... 9,295 (9,295)(iii) --
------- ------- -------
Total liabilities.................. 10,747 (9,295) 1,452
------- ------- -------
Total shareholders' equity......... 1,579 50,120 (iv) 51,699
------- ------- -------
Total liabilities and shareholders'
equity............................ $12,326 $40,825 $53,151
======= ======= =======
</TABLE>
--------
(i) Reflects estimated costs of $9,582 relating to the acquisition of eight
parcels of land under contract to be acquired for cash, subsequent to
March 31, 1996 and prior to the date of the Transaction. Also included
is $4,076 which represents the amount by which the estimated fair
market value of the net
F-4
<PAGE>
assets acquired exceeds the historical cost basis. This excess has been
attributed to real estate as management believes that the carrying
amount of the remaining assets and liabilities approximates fair value
because of the short maturity of these instruments. The acquisition cost
was determined by Management. The fair market value of the real estate
was estimated using a premium over cost, which Management believes is
reasonable considering value added during the development process. Also
see "The Transaction--Recommendations of the PTR Board and Reasons for
the Transaction" for further discussion of the determination of
estimated fair market value.
(ii) Reflects, for pro forma purposes, cash of $27,167 contributed by
ATLANTIC as partial consideration for shares of Homestead Common Stock
received. The cash payment is necessary to facilitate ATLANTIC's
receipt of its entire share of Homestead Common Stock on the Closing
Date in accordance with the Merger Agreement. (The actual cash dollar
amount paid is expected to be reduced to approximately $18,600 by the
Closing Date as a result of development costs expected to be incurred
between March 31, 1996 and the Closing Date).
(iii) Reflects the conversion of all intercompany debt into contributed
capital immediately prior to the Transaction.
(iv) Reflects the impact on shareholders' equity of adjustments (i), (ii)
and (iii) above. Based upon the Merger Agreement, Atlantic will
receive 4,201,220 shares of Homestead Common Stock having an estimated
fair market value of $51,699. Additionally, ATLANTIC will receive
2,818,517 warrants to purchase additional shares of Homestead Common
Stock at the exercise price of $10 per share in exchange for entering
into the Funding Commitment Agreement. Management determined the
exercise price of the warrants and concluded that $10 per share
represents adequate consideration for a share of Homestead Common
Stock. Specific valuations of net assets were not reviewed in arriving
at their determination.
(f) Reflects the acquisition of the net assets of the SCG-Homestead Village
Group by Homestead at estimated fair market value through the issuance to
SCG of Homestead Common Stock. Listed below is a reconciliation of the
historical cost of the net assets acquired to the pro forma estimated fair
market value acquisition cost, followed by explanations of the pro forma
acquisition adjustments.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ACQUISITION ACQUISITION
BALANCE SHEET CAPTION COST ADJUSTMENTS COST
--------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Real estate (furniture and equipment,
net)................................ $ 233 $ -- $ 233
Cash and cash equivalents............ 12 -- 12
Accounts receivable.................. 481 -- 481
Other assets......................... 76 19,405 (i) 19,481
------- ------- -------
Total assets....................... $ 802 $19,405 $20,207
======= ======= =======
Accounts payable..................... $ 6 $ -- $ 6
Accrued expenses and other
liabilities......................... 494 (491)(ii) 3
Intercompany debt.................... 2,043 (2,043)(iii) --
------- ------- -------
Total liabilities.................. 2,543 (2,534) 9
------- ------- -------
Total shareholders' equity......... (1,741) 21,939 (iv) 20,196
------- ------- -------
Total liabilities and shareholders'
equity............................ $ 802 $19,405 $20,207
======= ======= =======
</TABLE>
--------
(i) The net assets acquired primarily consist of trademarks, tradenames,
development and property management expertise, as well as operating
systems necessary to conduct the business of developing, owning and
operating the Homestead Village properties. The estimated fair market
value of the net assets acquired is approximately $49,995 for which
Homestead will issue 4,062,788 shares of Homestead Common Stock. At the
date of the Transaction, SCG will receive a pro rata portion
(1,640,786) of the total shares, based upon the ratio (40.4%) of actual
funding provided by PTR and ATLANTIC to Homestead as of March 31, 1996
to the total expected funding to be provided, as more fully described
in the Transaction (The 1,640,786 shares issued to SCG is expected to
increase to
F-5
<PAGE>
1,819,750 shares issued at the Closing Date as a result of development
costs expected to be incurred between March 31, 1996 and the Closing
Date). Correspondingly, the proportional amount of the estimated fair
market value recorded at the date of the Transaction is approximately
$20,196, of which approximately $19,405 has been attributed to the
trademarks and other intangible assets listed above which Homestead's
management intends to amortize on a straight-line basis over a 20 year
period. The $19,405 has been attributed to these intangibles as
management believes that the carrying amount of the remaining assets and
liabilities approximates fair value because of the short maturity of
these instruments. The $793 ($20,198-$19,405) difference represents the
historical cost of the net assets of SCG after adjustment for (ii) and
(iii) below. The identification of the trademark and other intangible
assets listed above and the determination of the acquisition cost of the
net assets was made by Management. A discounted cash flow method was
used by Management to estimate fair market value. Also see "The
Transaction--Recommendations of the PTR Board and Reasons for the
Transaction" for further discussion of the determination of estimated
fair market value.
(ii) Reflects an adjustment to reduce accrued expenses and other
liabilities for employee-related liabilities which will not be assumed
by Homestead. Such adjustment is reflected as an addition to
contributed capital.
(iii) Reflects the conversion of all intercompany debt into contributed
capital immediately prior to the Transaction.
(iv) Reflects the impact on shareholders' equity of adjustments (i), (ii)
and (iii) above. Additionally, SCG will receive 817,694 warrants to
purchase additional shares of Homestead Common Stock at the exercise
price of $10 per share in exchange for the commitment to provide
funding to Homestead during the time between the execution of the
Merger Agreement and the Closing Date and the use of office facilities
for one year. Management determined the exercise price of the warrants
and concluded that $10 per share represents adequate consideration for
a share of Homestead Common Stock. Specific valuations of net assets
were not reviewed in arriving at their determination.
(g) Reflects estimated costs incurred in connection with the Transaction.
(h) Represents the minority interest in Homestead's shareholders' equity
resulting from shares issued to ATLANTIC and SCG in connection with the
acquisitions described in (e) and (f) above.
(i) Reflects the distribution to PTR shareholders of shares of Homestead Common
Stock and warrants PTR received from the merger with Homestead. Also
reflects deconsolidation of Homestead from PTR as a result of the
distribution of all of its shares of Homestead Common Stock to PTR
shareholders. Amounts represent the sum of the acquisition balance sheets
of Atlantic-Homestead Village Group and SCG-Homestead Village Group
presented herein, plus the historical combined balance sheet of PTR-
Homestead Village Group included in this Proxy Statement and Prospectus.
Per the terms of the Transaction, as of March 31, 1996 PTR will retain
$51,563 in convertible mortgage notes due from Homestead. Such amount was
calculated in accordance with the terms of the Merger Agreement.
The following analysis is provided to reconcile the Homestead Pro Forma
Condensed Consolidated Balance Sheet as of March 31, 1996 reflected on page
F-4 of Appendix A to the amounts reflected in the Spin-off of shares of
Homestead Common Stock to PTR Shareholders column on page F-3.
<TABLE>
<CAPTION>
SPIN-OFF OF SHARES
HOMESTEAD PRO FORMA OF HOMESTEAD COMMON
CONDENSED CONSOLIDATED STOCK
COLUMN--APPENDIX A TO PTR SHAREHOLDERS
PAGE F-4 COLUMN--PAGE F-3 DIFFERENCE
---------------------- ------------------- ----------
<S> <C> <C> <C>
Assets.................. $211,538 $158,792 $52,746
======== ======== =======
Liabilities............. 59,766 7,020 52,746
Shareholders' equity and
minority interest...... 151,772 151,772 --
-------- -------- -------
Total liabilities and
shareholders' equity
and minority
interest............. $211,538 $158,792 $52,746
======== ======== =======
</TABLE>
The difference represents $51,563 in convertible mortgage notes due to PTR
from Homestead and $1,183 in related accrued interest receivable as of
March 31, 1996.
F-6
<PAGE>
PTR
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
The unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended December 31, 1995 and the three months ended March 31, 1996, of
Security Capital Pacific Trust ("PTR") are presented as if the following
transactions had occurred as of January 1, 1995: (i) PTR-Homestead Village
Group acquires land parcels which were under contract to be acquired as of
March 31, 1996 and are expected to close prior to the Transaction; (ii)
Homestead Village Properties Incorporated ("Homestead") was capitalized and the
PTR-Homestead Village Group merged into Homestead; (iii) The net assets of
Atlantic-Homestead Village Group and SCG-Homestead Village Group were acquired
by Homestead through the issuance of additional Homestead common shares and
warrants; and (iv) PTR distributes all of the Homestead Common Stock and
warrants it received from the merger with Homestead to the PTR shareholders.
These unaudited Pro Forma Condensed Consolidated Statements of Operations
should be read in conjunction with the historical consolidated financial
statements of PTR for 1995, as set forth on Form 10-K filed with the Securities
and Exchange Commission, which is incorporated herein by reference and, the
PTR-Homestead Village Group historical combined financial statements presented
in Appendix A to this Proxy Statement and Prospectus. In management's opinion,
all adjustments necessary to reflect the effects of these transactions have
been made.
These unaudited Pro Forma Condensed Consolidated Statements of Operations are
not necessarily indicative of what PTR's actual results of operations would
have been for the year ended December 31, 1995 or for the three month period
ended March 31, 1996 assuming such transactions had been completed as of
January 1, 1995, nor do they purport to present the results of operations for
future periods for PTR. Additionally, the Pro Forma Condensed Consolidated
Statement of Operations for the three months ended March 31, 1996 is not
necessarily indicative of the results of operations for the full year.
F-7
<PAGE>
PTR
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PTR PRO
PTR-HOMESTEAD FORMA
VILLAGE GROUP RESULTING
INCLUDED IN FROM
PTR HOMESTEAD PRO FORMA HOMESTEAD
HISTORICAL(A) SPIN-OFF(B) ADJUSTMENTS SPIN-OFF
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental income............. $75,809 $(6,753) $ -- $69,056
Interest & other income... 547 (115) 1,160 (c) 1,592
------- ------- ------ -------
76,356 (6,868) 1,160 70,648
------- ------- ------ -------
Expenses:
Rental expenses........... 27,443 (2,946) -- 24,497
Property management fee
paid to affiliates....... 2,854 (500) -- 2,354
Depreciation.............. 10,618 (859) -- 9,759
Interest.................. 6,520 (961) 243 (d) 7,948
2,146 (f)
REIT management fee paid
to affiliate............. 5,555 (362) (39)(e) 4,811
(343)(f)
General and --
administrative........... 276 (175) 101
Other..................... 170 (26) -- 144
------- ------- ------ -------
Total expenses.......... 53,436 (5,829) 2,007 49,614
------- ------- ------ -------
Earnings from operations.... 22,920 (1,039) (847) 21,034
Gain on sale of investments,
net........................ 2,923 -- -- 2,923
------- ------- ------ -------
Net earnings................ 25,843 (1,039) (847) 23,957
Less Preferred share
dividends.................. 6,388 -- -- 6,388
------- ------- ------ -------
Net earnings
attributable to common
shares................. $19,455 $(1,039) $ (847) $17,569
======= ======= ====== =======
Weighted average common
shares outstanding......... 72,211 72,211
------- -------
Per share net earnings
attributable to common
shares..................... $ 0.27 $ 0.24
======= =======
</TABLE>
F-8
<PAGE>
PTR
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) Represents the historical consolidated statement of operations of Security
Capital Pacific Trust ("PTR") for the three months ended March 31, 1996, as
set forth on Form 10-Q filed with the Securities and Exchange Commission,
which is incorporated herein by reference.
(b) Reflects the historical combined statement of operations of the PTR-
Homestead Village Group for the three months ended March 31, 1996, which is
presented in this Proxy Statement and Prospectus.
(c) The pro forma adjustment reflects interest income earned at 9% on $51,563
convertible mortgage notes assumed by Homestead in connection with the
merger with PTR.
(d) Represents interest expense at 8.25% incurred on line of credit borrowings
by PTR in connection with convertible mortgage note fundings to Homestead
for the acquisition of land by Homestead.
(e) Reflects the reduction of the 16% REIT management fee attributable to the
increased interest expense in (c) above. The REIT Management Agreement
between PTR and the REIT Manager will be amended to exclude income received
from the convertible mortgage notes from the definition of income subject
to REIT management fee.
(f) Assuming the merger and spin-off transactions had occurred as of January 1,
1995, the costs incurred to acquire the assets existing at March 31, 1996
are also all assumed to have been incurred as of January 1, 1995 prior to
the spin-off by PTR. Further, as the debt incurred by PTR to finance the
assets would not be retired as a result of the spin-off, such financing
would, for pro forma purposes, remain outstanding for the entire three
months ended March 31, 1996.
Additionally, it is assumed that properties under development would have
been debt financed 100% via PTR's line of credit and that operating
properties would have been debt financed 70% based on the leverage ratio
which is expected to exist within Homestead after the Funding Commitment
Agreements have been fulfilled. Based upon these assumptions, following is
the interest expense and REIT management fee adjustments, for the three
months ended March 31, 1996, related to the financing of the $125,187 of
gross historical cost of real estate assets (prior to accumulated
depreciation existing as of March 31, 1996).
<TABLE>
<CAPTION>
PTR-HOMESTEAD VILLAGE PROPERTIES
---------------------------------------
OPERATING UNDER DEVELOPMENT TOTAL
--------- ----------------- --------
<S> <C> <C> <C>
March 31, 1996 gross historical
cost of real estate assets (prior
to accumulated depreciation)...... $89,508 $35,679 $125,187
Assumed financing percentage....... 70% 100% 78.55%
------- ------- --------
Assumed amount financed............ 62,656 35,679 98,335
Assumed interest rate.............. 9.00%(1) 8.25%(2) 8.73%
One-quarter of year................ .25 .25 .25
------- ------- --------
Pro forma interest adjustment (3).. $ 1,410 $ 736 2,146
======= =======
Pro forma REIT management fee
adjustment (16%).................. (343)
--------
Net pro forma adjustment........... $ 1,803
========
</TABLE>
--------
(1) Represents interest rate on convertible mortgage notes payable.
(2) Represents weighted average interest rate on PTR's line of credit
borrowings for the year.
(3) The pro forma interest adjustment reflects the financing costs for the
entire period as the actual historical interest expense was eliminated
in adjustment (b) above.
F-9
<PAGE>
PTR
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PTR-HOMESTEAD PTR PRO FORMA
VILLAGE GROUP RESULTING
INCLUDED IN FROM
PTR HOMESTEAD PRO FORMA HOMESTEAD
HISTORICAL (A) SPIN-OFF (B) ADJUSTMENTS SPIN-OFF
-------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental income......... $262,473 $(18,690) $ -- $243,783
Interest.............. 2,400 (13) 4,641 (c) 7,028
-------- -------- ------- --------
264,873 (18,703) 4,641 250,811
-------- -------- ------- --------
Expenses:
Rental expenses....... 95,134 (7,600) -- 87,534
Property management
fee paid to
affiliates........... 8,912 (1,018) -- 7,894
Depreciation.......... 36,685 (2,343) -- 34,342
Interest.............. 19,584 (2,958) 943 (d) 25,041
7,472 (f)
REIT management fee
paid to affiliate.... 20,354 (989) (151)(e) 18,018
(1,196)(f)
General and
administrative....... 952 (798) -- 154
Provision for possible
loss on investments.. 420 -- -- 420
Other................. 1,136 (146) -- 990
-------- -------- ------- --------
Total expenses...... 183,177 (15,852) 7,068 174,393
-------- -------- ------- --------
Earnings from
operations............. 81,696 (2,851) (2,427) 76,418
Gain on sale of
investments, net....... 2,623 -- -- 2,623
-------- -------- ------- --------
Net earnings............ 84,319 (2,851) (2,427) 79,041
Less preferred share
dividends.............. 21,823 -- -- 21,823
-------- -------- ------- --------
Net earnings
attributable to
common shares...... $ 62,496 $ (2,851) $(2,427) 57,218
======== ======== ======= ========
Weighted average common
shares outstanding..... 67,062 67,062
======== ========
Per share net earnings
attributable to common
shares................. $ 0.93 $ 0.85
======== ========
</TABLE>
F-10
<PAGE>
PTR
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) Represents the historical consolidated statement of operations of Security
Capital Pacific Trust ("PTR") for the year ended December 31, 1995, as set
forth on Form 10-K filed with the Securities and Exchange Commission,
which is incorporated herein by reference.
(b) Reflects the historical combined statement of operations of the PTR-
Homestead Village Group for the year ended December 31, 1995, which is
presented in the Prospectus.
(c) The pro forma adjustment reflects interest income earned at 9% on $51,563
convertible mortgage notes assumed by Homestead in connection with the
merger with PTR.
(d) Represents interest expense at 8.0% incurred on line of credit borrowings
by PTR in connection with convertible mortgage note fundings to Homestead
for the acquisition of land by Homestead.
(e) Reflects the reduction of the 16% REIT management fee attributable to the
increased interest expense in (c) above. The REIT Management Agreement
between PTR and the REIT Manager will be amended to exclude income
received from the convertible mortgage notes from the definition of income
subject to the REIT management fee.
(f) Assuming the merger and spin-off transactions had occurred as of January
1, 1995, the costs incurred to acquire the assets existing at March 31,
1996 are also all assumed to have been incurred as of January 1, 1995
prior to the spin-off by PTR. Further, as the debt incurred by PTR to
finance the assets would not be retired as a result of the spin-off, such
financing would, for pro forma purposes, remain outstanding for the entire
year ended December 31, 1995.
Additionally, it is assumed that properties under development would have
been debt financed 100% via PTR's line of credit and that operating
properties would have been debt financed 70% based on the leverage ratio
which is expected to exist within Homestead after the Funding Commitment
Agreements have been fulfilled. Based upon these assumptions, following is
the interest expense and REIT management fee adjustments, for the year
ended December 31, 1995, related to the financing of the $125,187 of gross
historical cost of real estate assets (prior to accumulated depreciation
existing as of March 31, 1996).
<TABLE>
<CAPTION>
PTR-HOMESTEAD VILLAGE PROPERTIES
---------------------------------------
OPERATING UNDER DEVELOPMENT TOTAL
--------- ----------------- --------
<S> <C> <C> <C>
March 31, 1996 gross historical
cost of real estate assets (prior
to accumulated depreciation)...... $89,508 $35,679 $125,187
Assumed financing percentage....... 70% 100% 78.55%
------- ------- --------
Assumed amount financed............ 62,656 35,679 98,335
Assumed interest rate.............. 7.37%(1) 8.00%(2) 7.60%
------- ------- --------
Pro forma interest adjustment(3)... $ 4,618 $ 2,854 7,472
======= =======
Pro forma REIT management fee
adjustment (16%).................. (1,196)
--------
Net pro forma adjustment........... $ 6,276
========
</TABLE>
--------
(1) Represents the interest rate on PTR's long term unsecured debt.
(2) Represents weighted average interest rate on PTR's line of credit
borrowings for the year.
(3) The pro forma interest adjustment reflects the financing costs for the
entire period as the actual historical interest expense was eliminated
in adjustment (b) above.
F-11
<PAGE>
[ATLANTIC LETTERHEAD]
To the Shareholders of Security Capital Atlantic Incorporated ("ATLANTIC"):
You are invited to attend a special meeting of ATLANTIC shareholders to be
held in , on , September , 1996 at a.m.
local time.
At the meeting you will be asked to consider and vote upon a proposed Merger
and Distribution Agreement which contemplates (i) the contribution, through a
series of merger transactions, by ATLANTIC of its Homestead Village properties
to a newly formed company, Homestead Village Properties Incorporated
("Homestead"), in exchange for shares of Homestead common stock, (ii) the
receipt of warrants to purchase shares of Homestead common stock in exchange
for the agreement of ATLANTIC to finance, through convertible mortgage loans
to Homestead, the acquisition and development of certain properties being
contributed by ATLANTIC to Homestead and (iii) the distribution, pro rata, of
all of the Homestead common stock and warrants ATLANTIC receives to ATLANTIC
shareholders. If the foregoing proposal is approved, each holder of ATLANTIC
common stock will (1) retain his or her existing shares of ATLANTIC common
stock and (2) receive shares of Homestead common stock and warrants to
purchase shares of Homestead common stock. The transaction and certain related
matters are described in detail in the accompanying Information Statement and
Prospectus. Please review it carefully.
After careful consideration, the ATLANTIC Board of Directors, by unanimous
vote of directors who are not officers of ATLANTIC or directors, officers or
employees of ATLANTIC's largest shareholder, Security Capital Group
Incorporated ("SCG"), or its affiliates, has approved the transaction and
recommends that all shareholders vote for its approval. The affirmative vote
of holders of a majority of the outstanding shares of ATLANTIC common stock
will be necessary for approval of the transaction.
SCG, which owns approximately 64.1% of the outstanding shares of ATLANTIC
common stock, has agreed, subject to certain conditions, to vote its shares of
ATLANTIC common stock in favor of the Merger Agreement. Therefore, approval of
the proposal is assured.
YOU ARE NOT BEING ASKED TO SUBMIT A PROXY AND ONE IS NOT BEING SOLICITED.
Very truly yours,
Constance B. Moore
Co-Chairman
James C. Potts
Co-Chairman
<PAGE>
[ATLANTIC LETTERHEAD]
Notice Is Hereby Given that a special meeting of shareholders of Security
Capital Atlantic Incorporated ("ATLANTIC") will be held on ,
September , 1996, commencing at a.m., local time, at , for the
following purposes:
1. To consider and vote upon the approval of a Merger and Distribution
Agreement dated as of May 21, 1996 (the "Merger Agreement"), among
ATLANTIC, Homestead Village Properties Incorporated, a Maryland corporation
("Homestead"), Security Capital Pacific Trust, a Maryland real estate
investment trust ("PTR"), and Security Capital Group Incorporated, a
Maryland corporation ("SCG"), pursuant to which, among other matters, (i)
ATLANTIC, PTR and SCG would contribute, through a series of merger
transactions, all of their respective assets related to the Homestead
Village properties in exchange for shares of Homestead common stock, (ii)
ATLANTIC and PTR would agree to finance, through convertible mortgage loans
to Homestead, the acquisition and development of certain properties being
contributed by them in exchange for warrants to purchase shares of
Homestead common stock, (iii) SCG would agree to finance the acquisition
and development of certain Homestead Village properties in exchange for
warrants to purchase shares of Homestead common stock and (iv) ATLANTIC and
PTR would distribute such Homestead securities pro rata to their respective
shareholders, all as more fully described in the accompanying Information
Statement and Prospectus;
2. To transact any other business that may properly come before the
special meeting or any adjournment or postponement thereof.
A copy of the Merger Agreement is set forth as Annex I to the Information
Statement and Prospectus attached hereto and is incorporated herein by
reference.
The Board of Directors of ATLANTIC has fixed the close of business on August
, 1996 as the record date for the determination of stockholders entitled to
notice of and to vote at the special meeting. The affirmative vote of the
holders of a majority of the outstanding shares of common stock of ATLANTIC
entitled to vote at the special meeting is necessary to approve and adopt the
proposal set forth above. Holders of shares of ATLANTIC common stock are not
entitled to dissenters' rights under Maryland law in connection with the
transaction.
YOU ARE NOT BEING ASKED TO SUBMIT A PROXY AND ONE IS NOT BEING SOLICITED.
By Order of the Board of Directors,
Jeffrey A. Klopf
Secretary
Atlanta, Georgia
August , 1996
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS INFORMATION STATEMENT AND PROSPECTUS SHALL NOT +
+CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL +
+THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JULY 17, 1996
SECURITY CAPITAL ATLANTIC INCORPORATED
INFORMATION STATEMENT
-----------
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PROSPECTUS
-----------
This Information Statement and Prospectus relates to (i) a proposed
transaction pursuant to which Security Capital Atlantic Incorporated
("ATLANTIC"), Security Capital Pacific Trust ("PTR") and Security Capital Group
Incorporated ("SCG") will each contribute, through a series of merger
transactions (the "Mergers"), their Homestead Village(R) extended-stay lodging
assets to Homestead Village Properties Incorporated ("Homestead") in exchange
for Homestead common stock, $0.01 par value per share ("Homestead Common
Stock"), all as contemplated by the terms of a Merger and Distribution
Agreement dated as of May 21, 1996 (the "Merger Agreement"); (ii) the receipt
of warrants, each to purchase one share of Homestead Common Stock, at an
exercise price of $10.00 per share ("Homestead Warrants" and, together with the
Homestead Common Stock, the "Homestead Securities"), by ATLANTIC and PTR in
exchange for the agreement of ATLANTIC and PTR to finance the acquisition and
development of certain properties being contributed by them to Homestead
through convertible mortgage loans to Homestead; (iii) the receipt of Homestead
Warrants by SCG in exchange for the agreement of SCG to provide certain
financing to Homestead; and (iv) the subsequent distribution (the
"Distribution") by ATLANTIC and PTR of such Homestead Securities to their
respective shareholders (collectively, the "Transaction"). The Distribution
will result in a taxable dividend to shareholders of ATLANTIC. See "The
Transaction--Federal Income Tax Consequences."
A Special Meeting of Shareholders of ATLANTIC is scheduled to be held on
September , 1996 and at any adjournment or postponement thereof (the
"ATLANTIC Special Meeting") to consider the matters described above. A copy of
the Merger Agreement is attached to this Information Statement and Prospectus
as Annex I and is incorporated herein by reference. ATLANTIC is not soliciting
proxies to be used at the ATLANTIC Special Meeting. SCG owns approximately
64.1% of the outstanding shares of ATLANTIC common stock, $0.01 par value per
share ("ATLANTIC Common Stock"), and it has agreed, subject to certain
conditions, to vote all of its shares of ATLANTIC Common Stock in favor of the
Merger Agreement. Therefore, approval of the proposal is assured.
This Information Statement and Prospectus constitutes both the information
statement of ATLANTIC relating to the matters to be addressed at the ATLANTIC
Special Meeting, and the prospectus of Homestead with respect to 4,201,220
shares of Homestead Common Stock and Homestead Warrants to purchase 2,818,517
shares of Homestead Common Stock to be distributed to the ATLANTIC
shareholders. The amount of Homestead Securities to be received by each
ATLANTIC shareholder in the Distribution will depend on the number of shares of
ATLANTIC Common Stock outstanding on the record date to be established for the
Distribution (the "Distribution Record Date"). Based on the number of shares of
ATLANTIC Common Stock outstanding on July 12, 1996, each ATLANTIC shareholder
would receive 0.063748 shares of Homestead Common Stock and 0.042768 Homestead
Warrants for each share of ATLANTIC Common Stock held. Cash will be paid in
lieu of any fractional shares of Homestead Common Stock and fractional
Homestead Warrants. Thus, an ATLANTIC shareholder which owns 100 shares of
ATLANTIC Common Stock on the Distribution Record Date would receive six shares
of Homestead Common Stock and four Homestead Warrants plus cash for fractional
shares and warrants. ATLANTIC has filed with the Securities and Exchange
Commission (the "Commission") a registration statement with respect to an
initial public offering (the "ATLANTIC IPO") of shares of ATLANTIC Common
Stock. If the ATLANTIC IPO occurs prior to the Distribution Record Date, the
number of shares of ATLANTIC Common Stock outstanding on the Distribution
Record Date will increase, which will result in a proportionate reduction in
the amount of Homestead Securities to be received by each ATLANTIC shareholder.
Information concerning Homestead is set forth in Appendix A hereto and is
incorporated herein by reference. This Information Statement and Prospectus is
first being sent to shareholders of ATLANTIC on or about August , 1996.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
SEE "RISK FACTORS" AT PAGE 13 OF THIS INFORMATION STATEMENT AND PROSPECTUS
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE
TRANSACTION.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS INFORMATION STATEMENT AND
PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT AND PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
-----------
The date of this Information Statement and Prospectus is August , 1996.
<PAGE>
AVAILABLE INFORMATION
Homestead has filed with the Commission a registration statement on Form S-4
(together with all amendments and exhibits, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Homestead Securities to be issued pursuant to the Merger
Agreement and the Transaction. This Information Statement and Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby
made to the Registration Statement.
As a result of the Transaction, Homestead will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will file reports and other
information with the Commission. Reports, registration statements, proxy
statements, and other information filed by Homestead with the Commission can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the following regional offices of the Commission: 7 World Trade Center,
Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, such material can be
obtained from the Commission's web site at http://www.sec.gov.
No person is authorized to give any information or to make any
representation other than those contained or incorporated by reference in this
Information Statement and Prospectus, and if given or made, such information
or representations should not be relied upon as having been authorized. This
Information Statement and Prospectus does not constitute an offer to sell, or
a solicitation of an offer to purchase, the securities offered by this
Information Statement and Prospectus, or the solicitation of a proxy, in any
jurisdiction to or from any person to whom or from whom it is unlawful to make
such offer, solicitation of an offer or proxy solicitation in such
jurisdiction. Neither the delivery of this Information Statement and
Prospectus nor any distribution of securities pursuant to this Information
Statement and Prospectus shall, under any circumstances, create any
implication that there has been no change in the information set forth or
incorporated herein by reference or in the affairs of ATLANTIC since the date
of this Information Statement and Prospectus. However, if any material change
occurs during the period that this Information Statement and Prospectus is
required to be delivered, this Information Statement and Prospectus will be
amended and supplemented accordingly. All information regarding ATLANTIC in
this Information Statement and Prospectus has been supplied by ATLANTIC, and
all information regarding Homestead in this Information Statement and
Prospectus has been supplied by Homestead.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION...................................................... i
SUMMARY.................................................................... 2
RISK FACTORS............................................................... 13
Significant Influence of Principal Shareholder........................... 13
Determination of Relative Ownership Percentages.......................... 13
Risks in Valuation and Allocation........................................ 14
Conflicts of Interest in the Transaction................................. 14
Absence of Prior Public Market........................................... 15
Risks of Investments in Mortgages and Funding Commitment................. 15
Impact of Transaction on Funds From Operations........................... 15
Competition.............................................................. 15
Limited Operating History................................................ 15
THE TRANSACTION............................................................ 16
General.................................................................. 16
The Distribution......................................................... 16
Foreign Shareholders..................................................... 16
Background............................................................... 16
Recommendations of the ATLANTIC Board and Reasons for the Transaction.... 24
Fairness Opinion......................................................... 29
Federal Income Tax Consequences.......................................... 32
Interests of Certain Persons in the Transaction.......................... 38
The Merger Agreement..................................................... 38
Protection of Business Agreement......................................... 43
SCG Investor Agreement................................................... 44
Funding Commitment Agreements............................................ 45
ATLANTIC and PTR Investor Agreements..................................... 45
Administrative Services Agreement........................................ 46
Escrow Agreement......................................................... 46
Regulatory Filings and Approvals......................................... 46
Restrictions on Sales by Affiliates...................................... 46
Accounting Treatment..................................................... 47
Expenses................................................................. 47
Dissenters' Rights....................................................... 47
Board Recommendation..................................................... 47
THE SPECIAL MEETING........................................................ 47
Purpose of the Meeting................................................... 47
Date, Time and Place; Record Date........................................ 48
Voting Rights............................................................ 48
Other Matters............................................................ 48
INFORMATION CONCERNING ATLANTIC............................................ 48
General.................................................................. 48
Employees................................................................ 49
Legal Proceedings........................................................ 49
Competition.............................................................. 49
ATLANTIC REIT MANAGEMENT................................................... 49
ATLANTIC PROPERTIES........................................................ 50
Properties Owned......................................................... 50
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ATLANTIC SELECTED FINANCIAL INFORMATION................................... 52
ATLANTIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 53
Overview................................................................ 53
Results of Operations................................................... 54
Environmental Matters................................................... 55
Liquidity and Capital Resources......................................... 56
REIT Management Agreement............................................... 60
ATLANTIC PER SHARE DISTRIBUTIONS.......................................... 61
ATLANTIC POLICIES WITH RESPECT TO CERTAIN ACTIVITIES...................... 62
Investment Policies..................................................... 62
Financing Policies...................................................... 63
Conflict of Interest Policies........................................... 63
Policies Applicable to the ATLANTIC REIT Manager and Officers and
Directors of ATLANTIC.................................................. 63
Policies With Respect to Other Activities............................... 64
PRINCIPAL SHAREHOLDERS.................................................... 65
FEDERAL INCOME TAX CONSIDERATIONS......................................... 66
Taxation of ATLANTIC.................................................... 66
Taxation of the Shareholders of ATLANTIC................................ 67
Backup Withholding...................................................... 68
COMPARISON OF RIGHTS OF HOLDERS OF ATLANTIC COMMON STOCK AND HOMESTEAD
COMMON STOCK............................................................. 68
Preferred Shares........................................................ 68
Restrictions on Transfer and Redemption of Shares....................... 69
Directors............................................................... 70
Vacancies Among Directors............................................... 71
Limitation on Director Liability........................................ 71
Indemnification of Directors and Officers............................... 71
Special Shareholders' Meetings.......................................... 71
Advance Notice of Directors' Nominations and New Business............... 72
LEGAL MATTERS............................................................. 72
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND EXPERTS...................... 72
EXPENSES OF SOLICITATION.................................................. 72
INDEX TO ATLANTIC FINANCIAL STATEMENTS.................................... F-1
APPENDIX A--Homestead Prospectus
ANNEX I--Merger and Distribution Agreement
ANNEX II--Opinion of J.P. Morgan Securities Inc.
</TABLE>
iii
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Information Statement and Prospectus
(including Appendix A and the Annexes hereto). Shareholders are urged to review
the entire Information Statement and Prospectus, Appendix A and the Annexes
hereto. Unless otherwise noted, share ownership information is as of July 12,
1996 and does not take into account any shares of ATLANTIC Common Stock which
may be issued by ATLANTIC as a result of an initial public offering of its
common stock (which is expected to occur prior to the Distribution Record
Date). In addition, unless the context otherwise requires, references to
"Homestead" refer to Homestead Village Properties Incorporated and its
subsidiaries. All references to Homestead Village Properties Incorporated's
operations include ATLANTIC, PTR and SCG operations with respect to the
Homestead Village properties. Homestead Village(R) is a registered trademark of
SCG, which will be assigned to Homestead as part of the Transaction. The term
"Homestead Village" as used herein shall include a reference to such registered
trademark. Except as otherwise specifically described, all property and other
information regarding ATLANTIC includes its Homestead Village properties.
SECURITY CAPITAL ATLANTIC INCORPORATED
ATLANTIC engages in the development, acquisition, operation and long-term
ownership of multifamily properties in the southeastern United States.
ATLANTIC's objective is to be the preeminent real estate operating company
focusing on multifamily properties in its primary target market. ATLANTIC,
through its REIT manager, Security Capital (Atlantic) Incorporated (the
"ATLANTIC REIT Manager" or "ATLANTIC REIT Management"), is an Atlanta-based,
fully integrated operating company with 96 professionals dedicated to
implementing its highly focused operating strategy. At March 31, 1996,
ATLANTIC's portfolio consisted of 25,266 multifamily units, including 9,107
units under construction and in planning, in 16 metropolitan areas and 32
submarkets in the premier growth areas of the southeastern United States. The
aggregate investment cost of these 102 properties, including planned
renovations and total budgeted development expenditures, is $1.28 billion.
ATLANTIC has filed a registration statement relating to an initial public
offering of up to $115,000,000 of shares of ATLANTIC Common Stock (the
"ATLANTIC IPO").
ATLANTIC has elected to be taxed as a real estate investment trust ("REIT")
for federal income tax purposes. ATLANTIC executive offices are located at Six
Piedmont Center, Atlanta, Georgia 30305, and its telephone number is (404) 237-
9292. ATLANTIC is a Maryland corporation. Its predecessor was formed in October
1993 as a Delaware corporation, and ATLANTIC was re-formed in Maryland in April
1994.
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
The first Homestead Village property was opened in 1992 by PTR. Since then
PTR has developed and placed into operation 27 additional Homestead Village
properties and ATLANTIC has developed and placed into operation one Homestead
Village property. Homestead was organized in January 1996 to continue the
operations of ATLANTIC, PTR and SCG with respect to their respective moderate
priced, extended-stay lodging facilities. Homestead will develop, own and
manage moderate priced, extended-stay lodging facilities designed to appeal to
value-conscious customers on temporary assignment, undergoing relocation or in
training.
The objective of Homestead is to be the preeminent developer, owner and
national operator focused on the moderate priced, extended-stay lodging
business. Homestead expects to achieve this objective by:
. participating in high growth markets;
. exercising investment discipline based on research; and
. employing a consistent high quality service standard to property
operations.
2
<PAGE>
Homestead currently has a total of 80 facilities either in operation, under
construction or in pre-development planning. Homestead operates 29 facilities,
has begun construction of 12 additional facilities and has an additional 39
properties in pre-development planning. The term "in pre-development planning"
means developments owned or under control (land which is under control through
contingent contract) with construction anticipated to commence within 12
months. Homestead's facilities are designed and built to uniform plans
developed by Homestead. Homestead expects to have a total of 31 facilities
operational and 41 facilities under construction by the end of 1996 and plans
to continue an active development program thereafter. Homestead's plans call
for the average facility to have approximately 136 extended-stay rooms and to
take approximately eight to ten months to construct.
The average length of stay for a customer is in excess of four weeks. For the
quarter ended March 31, 1996, average physical occupancy and average weekly
rate for 17 stabilized properties was 87% and $217 per week, respectively, and,
for the same quarter, average physical occupancy and average weekly rate for
seven pre-stabilized properties was 59% and $217 per week, respectively.
Homestead categorizes its operating properties (which include all properties
not under construction or in pre-development planning) as either "stabilized"
or "pre-stabilized." The term "stabilized" means that construction has been
completed and management and marketing programs have been in place for a
sufficient period of time (but in no event longer than 12 months) to achieve an
80% occupancy level for five consecutive weeks at market rates. Prior to being
"stabilized," an operating property is considered to be "pre-stabilized." All
operating properties have been newly developed by Homestead.
Homestead believes that it is distinguished from its competitors in the
moderate priced, extended-stay lodging business in several respects.
. Homestead has been developing and operating moderate priced, extended-
stay facilities since 1992. It has in place a staff of 66 professionals
who have substantial experience in the real estate and lodging
industries and has 318 site-level employees. Most of these individuals
were previously employed by affiliates of SCG, which operated and
managed the Homestead Village properties on behalf of ATLANTIC and PTR,
in similar capacities to those they will have with Homestead.
. Homestead currently operates 29 facilities in eight cities and will
operate nationally. It expects to have 31 facilities in eight cities
operating by the end of 1996.
. Homestead has access to substantial financing through (i) the Funding
Commitment Agreements with ATLANTIC and PTR (described herein), under
which ATLANTIC and PTR have agreed to provide funding of $111 million
and $133 million, respectively, and to receive convertible mortgage
notes of $98 million and $144 million, respectively, in respect thereof,
and (ii) the Investor Agreement with SCG (described herein) under which
SCG has agreed to exercise upon notice from Homestead all of the
Homestead Warrants it will receive in the Transaction with an aggregate
exercise price of approximately $51 million. This access to capital
should provide Homestead with sufficient capital to fund its national
development program through mid-1997 without having to seek additional
external financing.
. Homestead is affiliated with SCG, which will be the principal
shareholder of Homestead and will be entitled to representation on the
board of directors of Homestead (the "Homestead Board"). Homestead will
be self-managed but will have access to various services which SCG
offers to its real estate affiliates. These and other services will be
available to Homestead under an Administrative Services Agreement
(described herein). See "The Transaction--Administrative Services
Agreement." Homestead believes that it can purchase these services from
SCG at a price which would be less expensive than hiring the necessary
personnel to perform these services, and that the level of services SCG
can provide would be of a higher quality than Homestead could provide
internally due to SCG's large, experienced staff and economies of scale.
Homestead was formed in 1996 as a Maryland corporation and will operate as a
Subchapter C corporation. Its executive offices are located at 125 Lincoln
Avenue, Santa Fe, New Mexico 87501 and its telephone number is (505) 982-9292.
3
<PAGE>
RISK FACTORS
In considering whether to approve the matters described herein, ATLANTIC
shareholders should consider the following matters in addition to the matters
described in greater detail herein under "Risk Factors." ADDITIONALLY, ATLANTIC
SHAREHOLDERS SHOULD CONSIDER THOSE MATTERS DESCRIBED UNDER THE CAPTION "RISK
FACTORS," BEGINNING ON PAGE A-8 IN APPENDIX A, WITH RESPECT TO THE OWNERSHIP OF
HOMESTEAD SECURITIES.
. There may be alternative methods of calculating the relative ownership
percentages of the various parties in Homestead which, if used, could
have resulted in different relative amounts of consideration being
received by ATLANTIC, PTR or SCG.
. The terms of the Transaction were not determined based on arm's length
negotiations.
. Since SCG controls all of the parties to the Transaction, conflicts of
interest exist.
. SCG will exercise significant influence over the business and policies
of ATLANTIC, PTR and Homestead after consummation of the Transaction due
to its (i) existing ownership of shares of ATLANTIC and PTR and of their
respective REIT Managers and expected ownership of shares of Homestead
Common Stock, (ii) right to nominate up to three members of the board of
directors of ATLANTIC (the "ATLANTIC Board"), the board of trustees of
PTR (the "PTR Board") and two members of the Homestead Board, and (iii)
right of prior consultation regarding certain Homestead matters,
including annual operating budgets and substantial deviations therefrom.
. ATLANTIC will be subject to the risks inherent in making mortgage loans
if the Transaction is approved, including the risk that Homestead may
not be able to make debt service payments or pay principal when due and
the risk that the value of the mortgaged properties may be less than the
amounts owed.
. Homestead and the Homestead Village properties have a limited operating
history.
. Prior to the Distribution, there will not be an established trading
market for the Homestead Securities and there is no assurance of the
price at which the Homestead Securities will trade.
. Because ATLANTIC's Homestead Village properties are in earlier stages of
development than PTR's Homestead Village properties, and in order to
assure that ATLANTIC receives all of its shares of Homestead Common
Stock at the closing of the Mergers (the "Closing Date") rather than
being received in smaller increments over time as funds are expended for
Homestead Village properties contributed by ATLANTIC, ATLANTIC will
provide an estimated cash payment of $18.6 million to Homestead at the
Closing.
THE SPECIAL MEETING
THE MEETING
The ATLANTIC Special Meeting is scheduled to be held at a.m., local
time, on , September , 1996, at . The ATLANTIC Board has
fixed the close of business on August , 1996 as the record date for the
determination of holders of shares of ATLANTIC Common Stock entitled to notice
of and to vote at the ATLANTIC Special Meeting. See "The Special Meeting."
THE PROPOSALS
At the ATLANTIC Special Meeting, shareholders will be asked to consider and
vote upon the approval of the Merger Agreement and the Transaction.
THE ATLANTIC BOARD, BY UNANIMOUS VOTE OF DIRECTORS, APPROVED THE MERGER
AGREEMENT AND THE TRANSACTION AND RECOMMENDS THAT ATLANTIC SHAREHOLDERS VOTE
"FOR" THE APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTION. SEE "THE
TRANSACTION--RECOMMENDATIONS OF THE ATLANTIC BOARD AND REASONS FOR THE
TRANSACTION."
4
<PAGE>
REQUIRED VOTE
The affirmative vote of the holders of at least a majority of the
outstanding shares of ATLANTIC Common Stock is required to approve and adopt
the Merger Agreement and the Transaction. As of July 12, 1996, SCG
beneficially owned approximately 64.1% of the outstanding shares of ATLANTIC
Common Stock. See "The Special Meeting--Voting Rights." SCG has agreed,
subject to certain conditions, to vote all shares of ATLANTIC Common Stock
owned by it in favor of the proposal. Therefore, assuming such conditions are
satisfied, approval of the proposal is assured.
THE TRANSACTION
GENERAL
ATLANTIC has traditionally focused on multifamily assets in the southeastern
United States and PTR has focused on multifamily assets in the western United
States. Since 1992, PTR has developed and operated 28 Homestead Village
properties and, since 1995 ATLANTIC has developed one Homestead Village
property. At its meeting on March 12, 1996, the ATLANTIC Board began
considering ways to maximize shareholder value with respect to the Homestead
Village properties. On May 21, 1996, ATLANTIC, PTR, Homestead and SCG entered
into the Merger Agreement.
The Transaction is expected to result in:
. Enhanced market valuation placed on the Homestead Village operations by
allowing the financial markets the ability to focus on the distinct
characteristics of ATLANTIC's multifamily property operations and
Homestead's moderate priced, extended-stay lodging business.
. Homestead Village properties being more effectively and profitably
utilized and developed due to the elimination of certain restrictions
applicable to real estate investment trusts ("REITs").
. Enhanced ability of Homestead to access external capital markets
necessary to carry out its business plan.
FORMATION OF HOMESTEAD
Assuming that the requisite shareholder vote is received and that all other
conditions to the Merger Agreement have been satisfied or waived, each of
ATLANTIC, PTR and SCG will contribute, through a series of merger
transactions, all of their respective assets related to Homestead Village
properties in return for shares of Homestead Common Stock as follows:
. ATLANTIC will contribute 26 properties (or the rights to acquire such
properties) to Homestead in exchange for 4,201,220 shares of Homestead
Common Stock. Pursuant to the Merger Agreement, ATLANTIC will provide an
estimated cash payment of $18.6 million to Homestead at the date of the
closing of the Merger (the "Closing Date"). This payment is required
because ATLANTIC's Homestead Village properties are in earlier stages of
development than PTR's Homestead Village properties, therefore ATLANTIC
has not funded the same percentage of total costs as PTR. This payment
also assures that ATLANTIC receives all of its shares of Homestead
Common Stock at the Closing Date rather than being received in smaller
increments over time as funds are expended for Homestead Village
properties contributed by ATLANTIC.
. PTR will contribute 54 properties (or the rights to acquire such
properties) to Homestead in exchange for 9,485,727 shares of Homestead
Common Stock.
. SCG will contribute to Homestead its anticipated future cash flows from
the ATLANTIC REIT Management Agreement (defined herein) and a similar
management agreement with PTR (the "PTR REIT Management Agreement") and
property management agreements relating to the Homestead Village
properties in exchange for 1,819,750 shares of Homestead Common Stock,
not including 2,243,038 shares which will be placed in escrow and
released as funds are advanced under the Funding
5
<PAGE>
Commitment Agreements. In addition, SCG will contribute the Homestead
Village trademark and the operating system. No separate consideration
was attributed to the Homestead Village trademark or the operating
system, as the trademark and operating system would be necessary to
achieve the anticipated fees. There are additional Homestead Village
facilities which are in early stages of planning, but which are not
owned or under control and are not included in the 80 facilities which
will be contributed in the Transaction, and are being planned and
developed outside the target markets of ATLANTIC and PTR by SCG with its
own funds. SCG will contribute the rights to certain properties to
Homestead for no additional consideration.
. Simultaneous with the transactions described above, ATLANTIC and PTR
will receive 2,818,517 and 6,363,789 Homestead Warrants, respectively,
in exchange for their entering into the Funding Commitment Agreements.
Each Homestead Warrant is exercisable at $10.00 per share and expires
one year after the Closing Date.
. Pursuant to the applicable Funding Commitment Agreement, ATLANTIC and
PTR will agree to provide secured financing to Homestead and receive up
to $98,028,471 and $144,044,620, respectively, in convertible mortgage
notes. These notes will have a term of approximately ten years, bear
interest at 9% per year, will not be callable for five years and will be
convertible into shares of Homestead Common Stock after March 31, 1997
on the basis of one share of Homestead Common Stock for every $11.50 of
principal amount outstanding, subject to adjustment. The ATLANTIC
mortgage loans and PTR mortgage loans will be used to finance the
acquisition and development of properties contributed by ATLANTIC and
PTR, respectively. In addition, PTR subsidiaries currently have
$77,289,000 in convertible mortgage loans with PTR which will be assumed
by Homestead at the Closing Date. These loans have substantially the
same terms as the mortgage loans described above. If all such mortgage
loans were made and converted, an additional 8,524,215 and 19,246,402
shares of Homestead Common Stock would be issued to ATLANTIC and PTR,
respectively.
. SCG will receive 817,694 Homestead Warrants in exchange for providing
funding to Homestead during the time between the execution of the Merger
Agreement and the Closing Date and the use of office facilities for one
year.
. The relative percentage ownership interests of ATLANTIC, PTR and SCG in
Homestead, giving effect to the issuance of the Homestead Common Stock
at the Closing Date, the exercise of all Homestead Warrants and the
conversion of all mortgage loans outstanding and which could be made
under the Funding Commitment Agreements, would be 28.00%, 63.21% and
8.79%, respectively. These percentages are different than the relative
percentage ownership interests described elsewhere because the
convertible mortgage loans issuable to ATLANTIC and PTR have a
conversion price of $11.50 per share rather than the $10.00 per share
used in calculating the original issuance of the Homestead Common Stock.
. After giving effect to the distribution of the Homestead Securities by
ATLANTIC and PTR, the exercise of all Homestead Warrants, the release of
all shares of Homestead Common Stock to SCG from escrow and the
conversion of all mortgage loans and the subsequent distribution of the
Homestead Common Stock issuable upon such conversion to the shareholders
of ATLANTIC and PTR, SCG would own approximately 50.6% of the
outstanding Homestead Common Stock.
THE DISTRIBUTION
The Homestead Securities received by ATLANTIC will be distributed, pro rata,
to ATLANTIC shareholders. The Distribution of the Homestead Securities will be
declared following approval of the proposals by ATLANTIC shareholders and PTR
shareholders, subject to the satisfaction of certain conditions to the Merger
Agreement. The Distribution will be made to holders of shares of ATLANTIC
Common Stock of record at the close of business on the Distribution Record
Date. The amount of Homestead Securities to be received by each ATLANTIC
shareholder in the Distribution will depend on the number of shares of ATLANTIC
Common Stock
6
<PAGE>
outstanding on the Distribution Record Date. Based on the number of shares of
ATLANTIC Common Stock outstanding on July 12, 1996, each ATLANTIC shareholder
would receive 0.063748 shares of Homestead Common Stock and 0.042768 Homestead
Warrants for each share of ATLANTIC Common Stock held. If the ATLANTIC IPO
occurs prior to the Distribution Record Date, it will result in a proportionate
reduction in the amount of Homestead Securities to be received by each ATLANTIC
shareholder.
No certificates or scrip representing fractional shares of Homestead Common
Stock or fractional Homestead Warrants will be issued directly to ATLANTIC
shareholders as a part of the Distribution. The Distribution Agent (defined
herein) will, as soon as practicable after the Distribution Record Date,
aggregate and sell all fractional shares of Homestead Common Stock and
Homestead Warrants on the Nasdaq Stock Market (National Market) or otherwise at
then prevailing market prices and remit the net proceeds (after deduction of
brokerage fees) to ATLANTIC shareholders who would otherwise be entitled to
receive fractional shares or warrants.
NO HOLDER OF SHARES OF ATLANTIC COMMON STOCK WILL BE REQUIRED TO PAY ANY CASH
OR OTHER CONSIDERATION FOR THE HOMESTEAD SECURITIES RECEIVED IN THE
DISTRIBUTION OR TO SURRENDER OR EXCHANGE SHARES OF ATLANTIC COMMON STOCK IN
ORDER TO RECEIVE HOMESTEAD SECURITIES. THE DISTRIBUTION WILL NOT AFFECT THE
NUMBER OF, OR THE RIGHTS ATTACHING TO, OUTSTANDING SHARES OF ATLANTIC COMMON
STOCK.
The following diagram shows the contributions to be made by, and the
consideration to be distributed with respect to, each of PTR and its
shareholders, ATLANTIC and its shareholders, SCG and Homestead, respectively:
[CHART APPEARS HERE]
Homestead Properties Homestead Properties
-------------------- --------------------
28 In Operation 1 In Operation
8 Under Construction 4 Under Construction
18 In Pre-Development 21 In Pre-Development
Planning Planning
$18.6 million in cash(1)
- ----------- ----------- -----------
--------------- ---------------
PTR HOMESTEAD ATLANTIC
--------------- ---------------
- ----------- ----------- -----------
Homestead Securities Homestead Securities
-------------------- --------------------
9,485,727 9,485,727 Shares of 4,201,220 Shares of 4,201,220
Shares of Homestead Common Homestead Common Shares of
Homestead Stock Stock Homestead
Common $221 Million $98 Million Common
Stock Convertible Mortgages Convertible Mortgages Stock
6,363,789 6,363,789 Homestead 2,818,517 Homestead 2,818,517
Homestead Warrants Warrants Homestead
Warrants (63.2% Ownership (2)) (28.0% Ownership (2)) Warrants
Homestead Securities
--------------------
4,062,788 Shares of
Homestead Common Stock(3)
817,694 Homestead Development Properties
Warrants Homestead Trademarks
(8.8% Ownership (2)(4)) Operating Systems
Personnel
- --------------- ----------- ---------------
--------------- ---------------
PTR SCG ATLANTIC
SHAREHOLDERS(4) --------------- --------------- SHAREHOLDERS(4)
- --------------- ----------- ---------------
(1) Subject to adjustment pursuant to the terms of the Merger Agreement.
(2) Ownership percentages assume full conversion of mortgages and exercise of
all warrants.
(3) 2,243,038 of these shares will be placed in escrow and released as funds
are advanced under the Funding Commitment Agreements.
(4) SCG beneficially owns 37.8% and 64.1% of PTR and ATLANTIC, respectively, at
July 12, 1996.
7
<PAGE>
RECOMMENDATIONS OF THE ATLANTIC BOARD AND REASONS FOR THE TRANSACTION
A special committee of the independent directors of the ATLANTIC Board (the
"ATLANTIC Special Committee") unanimously approved the Merger Agreement as
being fair and reasonable to ATLANTIC. The ATLANTIC Special Committee
recommended that the ATLANTIC Board approve the Merger Agreement and the
Transaction. The ATLANTIC Board approved the Merger Agreement and the
Transaction as being fair and reasonable. The ATLANTIC Board considered a
number of factors including the recommendation of the ATLANTIC Special
Committee and the reasons emphasized by the ATLANTIC Special Committee, the
goals and objectives of Homestead, SCG's stated objective of maximizing
shareholder value, the relative contributions of ATLANTIC, PTR and SCG, the
premium that ATLANTIC must pay for its convertible notes under the Financing
Commitment Agreement, the sources of funding for ATLANTIC's obligations under
the Financing Commitment Agreement, the impact of the Transaction on ATLANTIC's
estimated funds from operations and balance sheet, the financial structure of
Homestead giving effect to the Transaction, the impact of the REIT rules on
continued operation of the Homestead Village properties by ATLANTIC, the terms
of the Homestead Securities and the tax impact of the Distribution on ATLANTIC
and its shareholders. Finally, the ATLANTIC Board considered the condition to
the Merger that the ATLANTIC Special Committee receive a written opinion from
an investment banking firm satisfactory to the ATLANTIC Special Committee that
the consideration to be received by ATLANTIC in connection with the Merger
Agreement and the transactions contemplated thereby and by the Related
Agreements (as defined in the Merger Agreement) is fair, from a financial point
of view, to ATLANTIC's shareholders (other than SCG). The ATLANTIC Board did
not quantify or otherwise attempt to assign relative weights to the specific
factors considered in making its determination. For a discussion of ATLANTIC's
reasons for the Transaction and the factors considered by the ATLANTIC Board in
making its recommendation, see "The Transaction--Recommendations of the
ATLANTIC Board and Reasons for the Transaction."
INTERESTS OF CERTAIN PERSONS
ATLANTIC's directors and officers who own ATLANTIC Common Stock or PTR Common
Shares (as hereafter defined) will, in the aggregate, receive a total of 21,535
shares of Homestead Common Stock and 14,445 Homestead Warrants as a result of
the Transaction. SCG and its directors and executive officers who own ATLANTIC
Common Stock or PTR Common Shares will, in the aggregate, receive a total of
10,460,177 shares of Homestead Common Stock (including 2,243,038 shares being
held in escrow) and 5,109,575 Homestead Warrants as a result of the
Transaction. Each of the foregoing persons will receive cash in lieu of
fractional shares of Homestead Common Stock and fractional Homestead Warrants.
Certain officers of ATLANTIC and the ATLANTIC REIT Manager will become officers
and employees of Homestead. See "The Transaction--Interests of Certain Persons
in the Transaction."
FAIRNESS OPINION
On May 17, 1996 J.P. Morgan Securities Inc. ("J.P. Morgan") delivered its
oral opinion to the ATLANTIC Special Committee to the effect that, as of such
date and based upon and subject to the assumptions made, the consideration to
be received by ATLANTIC in connection with the Merger Agreement and the
transactions contemplated thereby and by the Related Agreements (as defined in
the Merger Agreement) is fair, from a financial point of view, to the
shareholders of ATLANTIC (other than SCG). J.P. Morgan subsequently confirmed
its opinion by delivery of a written opinion dated the date of this Information
Statement and Prospectus. A copy of such opinion is attached hereto as Annex II
and is incorporated herein by reference. SHAREHOLDERS OF ATLANTIC ARE URGED TO
READ THE OPINION OF J.P. MORGAN IN ITS ENTIRETY. For additional information
concerning the assumptions made, matters considered and limits of the review by
J.P. Morgan in reaching its opinion and the fees to be received by it, see "The
Transaction--Fairness Opinion."
FEDERAL INCOME TAX CONSEQUENCES
The Mergers have been structured to constitute a transaction subject to
Section 351 or the reorganization provisions of the Internal Revenue Code of
1986, as amended to the date hereof (the "Code"), and related
8
<PAGE>
provisions. ATLANTIC will recognize taxable gain on the Mergers if ATLANTIC is
treated as having received property or cash ("boot") in the Mergers and will
recognize gain on the Distribution in an amount equal to the excess of the sum
of (i) the fair market value of the Homestead Securities on the Distribution
Record Date and (ii) cash distributed in lieu of fractional shares of Homestead
Common Stock and fractional Homestead Warrants over ATLANTIC's basis
immediately prior to the Distribution in the Homestead Securities it receives
in the Mergers (ATLANTIC's and its subsidiaries' tax basis in the Homestead
Village properties immediately prior to the Transaction is estimated to be
approximately $47,622,293). The earnings and profits of ATLANTIC will be
increased by the amount of any such gain recognized in the Mergers or the
Distribution. ATLANTIC will also recognize income with respect to the value of
the Homestead Warrants received by it in exchange for entering into the Funding
Commitment Agreement, which will increase ATLANTIC's earnings and profits.
The Distribution of the Homestead Securities and cash in lieu of fractional
shares of Homestead Common Stock and fractional Homestead Warrants will
constitute a taxable dividend to ATLANTIC shareholders, taxable as ordinary
income, to the extent of the earnings and profits of ATLANTIC allocable to such
Homestead Securities and cash. The amount of the Distribution which exceeds the
allocated earnings and profits of ATLANTIC will be treated as a nontaxable
reduction (although not below zero) of a shareholder's tax basis in its
ATLANTIC Common Stock. To the extent that the Distribution exceeds such
shareholder's adjusted tax basis in its ATLANTIC Common Stock, the excess will
be taxed as gain to such shareholder. See "The Transaction--Federal Income Tax
Consequences."
CONDITIONS TO THE TRANSACTION
The obligations of ATLANTIC to consummate the Transaction are subject to the
satisfaction or waiver of certain conditions, including, among others, (i)
obtaining the requisite approvals of the ATLANTIC shareholders and PTR
shareholders, (ii) the absence of any injunction prohibiting the consummation
of the Transaction, (iii) the receipt of all governmental consents, orders and
approvals legally required for consummation of the Transaction, (iv) the
receipt of certain legal opinions or Internal Revenue Service ("IRS") rulings
with respect to the tax consequences of the Transaction, effects of the
Transaction on REIT qualification and certain other legal matters, (v) the
continuing accuracy of the representations and warranties of each party and
(vi) the performance of certain other specified obligations by each party. See
"The Transaction--The Merger Agreement--Conditions to the Transaction."
TERMINATION
The Merger Agreement may be terminated at any time prior to the Closing Date
(i) by mutual consent of ATLANTIC, PTR, SCG and Homestead; (ii) by any of
ATLANTIC, PTR, SCG or Homestead after December 31, 1996, if the Transaction has
not been consummated on or before such date (so long as the party terminating
has not breached its obligations under the Merger Agreement except for such
breaches that are immaterial); (iii) unilaterally by any of ATLANTIC, PTR, SCG
or Homestead if (a) any other party fails to perform any covenant or agreement
in the Merger Agreement in any material respect and does not cure such failure
in all material respects within 15 business days after receipt of written
notice of the alleged failure from another party, (b) any other party fails to
fulfill or complete a condition to the obligations of that party (which
condition is not waived) by reason of a breach by that party of its obligations
in the Merger Agreement or (c) any condition to the obligations of any other
party is not satisfied (other than by reason of a breach by that party of its
obligations under the Merger Agreement), and it reasonably appears that the
condition cannot be satisfied prior to December 31, 1996; (iv) unilaterally by
any of PTR, SCG or Homestead if ATLANTIC, through the ATLANTIC Board or the
ATLANTIC Special Committee, either fails to recommend to ATLANTIC's
shareholders the approval of the Merger Agreement and the Transaction or
withdraws, modifies or amends such recommendation; and (v) unilaterally by any
of ATLANTIC, SCG or Homestead if PTR, through the PTR Board or the special
committee of the PTR Board (the "PTR Special Committee"), either fails to
recommend to PTR's shareholders the approval of the Merger Agreement and the
Transaction or withdraws, modifies or amends such recommendation.
9
<PAGE>
AMENDMENT AND WAIVER
Subject to compliance with applicable law, the Merger Agreement may be
amended by the written agreement of ATLANTIC, PTR, SCG and Homestead. However,
the Merger Agreement may not be amended in any material respect subsequent to
obtaining the approval of the shareholders of ATLANTIC and PTR. See "The
Transaction--The Merger Agreement--Amendment and Waiver."
REGULATORY REQUIREMENTS
Consummation of the Transaction is subject to compliance with the provisions
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), for which early termination of the applicable waiting period was
granted on June 14, 1996.
DISSENTERS' RIGHTS
Under the Maryland General Corporation Law (the "MGCL"), holders of shares of
ATLANTIC Common Stock are not entitled to dissenters' rights in connection with
the Transaction. See "The Transaction--Dissenters' Rights."
10
<PAGE>
ATLANTIC HISTORICAL AND PRO FORMA SUMMARY FINANCIAL INFORMATION
The following table sets forth: (i) historical summary financial information
for the periods indicated and as of the dates indicated for ATLANTIC and (ii)
pro forma summary financial information for the periods indicated and as of the
dates indicated, giving effect to the Transaction and other events as if they
had occurred on January 1, 1995 for income statement information and on March
31, 1996 for balance sheet information. Pro forma adjustments made to arrive at
the pro forma amounts are based on the purchase method of accounting. The
following information should be read in conjunction with and is qualified in
its entirety by the financial statements and accompanying notes of ATLANTIC
included elsewhere in this Information Statement and Prospectus and the pro
forma financial statements and accompanying discussion and notes set forth in
the ATLANTIC Pro Forma Financial Statements. The pro forma summary information
is intended for informational purposes and is not necessarily indicative of the
future financial position or future results of operations of ATLANTIC or of the
financial position or the results of operations of ATLANTIC that would have
actually occurred had the Transaction been completed as of the dates or for the
periods presented.
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
------------------------- --------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED MARCH 31, YEAR ENDED DECEMBER 31,
MARCH 31, DECEMBER 31, ------------------ ------------------------------
1996 1995 1996 1995 1995 1994 1993(1)
------------ ------------ -------- -------- --------- --------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Rental Income.......... $ 31,737 $ 120,201 $ 30,809 $ 22,952 $ 103,634 $ 55,071 $ 156
Property Management
Fees Paid to
Affiliate............. 958 4,162 920 717 3,475 1,536 --
General and
Administrative
Expenses.............. 168 583 187 105 646 266 1
REIT Management Fee
Paid to Affiliate..... 2,039 7,659 2,123 1,515 6,923 3,671 12
Net Earnings........... 6,133 21,707 6,650 4,175 19,639 9,926 38
Net Earnings per Share. 0.11 0.41 0.12 0.11 0.45 0.41 0.07
Distributions Declared
and Paid.............. 11,667 35,119 11,667 7,426 35,119 14,648 --
Distributions Declared
and Paid per Share.... 0.21 0.80 0.21 0.20 0.80 0.60 --
Weighted Average Shares
Outstanding........... 56,838 52,547 55,555 37,133 43,889 24,454 572
<CAPTION>
PRO FORMA HISTORICAL
------------ --------------------------------------------------
MARCH 31, DECEMBER 31,
MARCH 31, ------------------ ------------------------------
1996 1996 1995 1995 1994 1993
------------ -------- -------- --------- --------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Real Estate Owned, at
cost.................. $ 944,363 $936,129 $678,564 $ 888,928 $ 631,260 $ 31,005
Total Assets........... 932,809 929,318 678,683 885,824 637,846 31,850
Line of Credit (3)..... 223,353 226,000 181,000 190,000 153,000 --
Mortgages Payable...... 129,291 123,291 115,317 118,524 107,347 --
Total Liabilities...... 378,986 376,967 310,334 328,886 271,216 178
Total Shareholders'
Equity................ 553,823 552,351 368,349 556,938 366,630 31,672
Number of Shares
Outstanding........... 59,781 55,570 37,588 55,526 37,133 3,163
<CAPTION>
PRO FORMA HISTORICAL
------------------------- --------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED MARCH 31, YEAR ENDED DECEMBER 31,
MARCH 31, DECEMBER 31, ------------------ ------------------------------
1996 1995 1996 1995 1995 1994 1993(1)
------------ ------------ -------- -------- --------- --------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net Earnings........... $ 6,133 $ 21,707 $ 6,650 $ 4,175 $ 19,639 $ 9,926 $ 38
Add: Depreciation...... 4,901 17,952 4,804 3,605 15,925 8,770 28
-------- --------- -------- -------- --------- --------- --------
Funds from
Operations(2)......... $ 11,034 $ 39,659 $ 11,454 $ 7,780 $ 35,564 $ 18,696 $ 66
Net Cash Provided
(Used) by Operating
Activities............ 17,590 49,330 18,011 12,954 45,235 26,205 (492)
Net Cash Used by
Investing Activities.. (47,201) (289,982) (47,201) (39,177) (240,652) (392,718) (31,005)
Net Cash Provided by
Financing Activities.. 28,743 241,932 29,249 24,579 195,649 372,638 31,634
</TABLE>
- -------
(1) For the period from October 26, 1993 (the date of ATLANTIC's inception) to
December 31, 1993.
(2) ATLANTIC believes that funds from operations is helpful in understanding a
property portfolio in that such calculation reflects cash flow from
operating activities and the properties' ability to support interest
payments and general operating expenses. For an explanation of funds from
operations, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Funds from operations should not be considered as an alternative to net
income or any other generally accepted accounting principles ("GAAP")
measurement of performance as an indicator of ATLANTIC's operating
performance or as an alternative to cash flows from operating, investing or
financing activities as a measure of liquidity. On January 1, 1996,
ATLANTIC adopted the National Association of Real Estate Investments
Trusts' ("NAREIT") new definition of funds from operations. Under this new
definition, loan cost amortization is not added back to net earnings in
determining funds from operations. For comparability, funds from operations
for the periods prior to January 1, 1996 give effect to this new
definition. The funds from operations measure presented by ATLANTIC may not
be comparable to other similarly titled measures of other REITs.
(3) At July 16, 1996, ATLANTIC had $202 million outstanding under its $350
million line of credit.
11
<PAGE>
COMPARATIVE PER SHARE DATA
The following sets forth for ATLANTIC Common Stock and Homestead Common Stock
certain historical and pro forma summary per share financial information for
the three months ended March 31, 1996 and the year ended December 31, 1995. The
pro forma summary amounts included in the table below are based on the purchase
method of accounting. The following information should be read in conjunction
with and is qualified in its entirety by (i) the financial statements and
accompanying notes of ATLANTIC included elsewhere in this Information Statement
and Prospectus, (ii) the consolidated financial statements and accompanying
notes of Homestead contained in Appendix A to this Information Statement and
Prospectus and (iii) the pro forma summary financial statements and
accompanying discussion and notes set forth above under "--ATLANTIC Historical
and Pro Forma Summary Financial Data."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
ATLANTIC COMMON STOCK:
Net earnings per share:
Historical.......................... $ 0.12 $ 0.45
Pro forma........................... 0.11 0.41
Distributions per share:
Historical.......................... 0.21 0.80
Pro forma........................... 0.21 0.80
Book value per share:
Historical.......................... 9.94 10.03
Pro forma........................... 9.26 9.34
HOMESTEAD COMMON STOCK:
Earnings from Operations per share:
Historical.......................... N/A N/A
Pro forma........................... $0.003 $(0.061)
Dividends per share:
Historical.......................... N/A N/A
Pro forma........................... N/A N/A
Book value per share:
Historical.......................... N/A N/A
Pro forma........................... $9.90 N/A
</TABLE>
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<PAGE>
RISK FACTORS
Holders of ATLANTIC Common Stock should consider carefully the specific
factors set forth below as well as the other information contained in this
Information Statement and Prospectus in evaluating the Transaction.
Additionally, holders of ATLANTIC Common Stock should consider the factors set
forth in Appendix A under the caption "Risk Factors" with respect to an
investment in Homestead Securities.
SIGNIFICANT INFLUENCE OF PRINCIPAL SHAREHOLDER
As of July 12, 1996, SCG beneficially owned approximately 64.1% of the
issued and outstanding shares of ATLANTIC Common Stock and 37.8% of the issued
and outstanding common shares of beneficial interest, $1.00 par value per
share (the "PTR Common Shares"), of PTR. As a result, SCG currently controls
approximately 64.1% and 37.8% of the vote on matters submitted for ATLANTIC
and PTR shareholder action, respectively, including the Transaction. No other
shareholder may hold more than 9.8% of the shares of ATLANTIC or PTR. SCG has
the right to nominate up to three directors to the ATLANTIC Board and three
trustees to the PTR Board, depending upon its level of ownership of shares.
The trustees and directors so elected are in a position to exercise
significant influence over the affairs of ATLANTIC and PTR if they were to act
together.
Immediately after completion of the Mergers, SCG is expected to beneficially
own 1,819,750 shares of Homestead Common Stock, not including 2,243,038 shares
of Homestead Common Stock which will be held in escrow and released to SCG as
funding is made by ATLANTIC and PTR under their Funding Commitment Agreements.
See "The Transaction--Escrow Agreement." As a result of the distributions by
ATLANTIC and PTR to their respective shareholders, SCG expects to beneficially
own an additional 2,693,842 and 3,588,965 shares of Homestead Common Stock,
respectively, for a total of 8,102,557 shares of Homestead Common Stock or
approximately 45.6% of the outstanding shares of Homestead Common Stock.
Through its beneficial ownership of Homestead Common Stock, it is expected
that SCG will control 45.6% of the vote on all matters submitted for Homestead
shareholder action. The foregoing share ownership information does not give
effect to the issuance of shares upon exercise of options or other awards
granted under Homestead's Long-Term Incentive Plan. See "Management--Stock
Option Plan" in Appendix A. SCG may, over time, dispose of some of the shares
of Homestead Common Stock it acquires in the Transaction to reduce its
beneficial ownership in Homestead to below 50%. SCG will also own Homestead
Warrants to purchase an additional 5,032,707 shares of Homestead Common Stock
which, if fully exercised, would increase SCG's beneficial ownership of
Homestead Common Stock to 57.7%. In addition, pursuant to an Investor
Agreement between SCG and Homestead, SCG will agree to exercise at the request
of Homestead all Homestead Warrants it receives in the Transaction. In
exchange for its agreement to exercise Homestead Warrants, Homestead will
grant SCG the right, among other things, to nominate up to two directors to
the Homestead Board, depending upon SCG's level of ownership of shares of
Homestead Common Stock, and to be consulted on certain business decisions made
by Homestead. In addition, pursuant to Investor Agreements with ATLANTIC and
PTR, each of ATLANTIC and PTR will have the right to nominate one director to
the Homestead Board. See "The Transaction--PTR and ATLANTIC Investor
Agreements" and "--SCG Investor Agreement."
The ATLANTIC REIT Manager is a wholly owned subsidiary of SCG and is
responsible for the day-to-day operations of ATLANTIC. ATLANTIC has no
employees and all of ATLANTIC's officers are also officers or employees of the
ATLANTIC REIT Manager.
DETERMINATION OF RELATIVE OWNERSHIP PERCENTAGES
In structuring a combination of the Homestead Village properties and
operations which are separately owned and operated by ATLANTIC, PTR and SCG, a
method had to be used to determine the relative ownership percentages of each
of the parties in the new Homestead entity. The objectives of SCG in
structuring the Transaction were to compensate each party fairly for the
assets to be contributed, to determine the group of assets to be contributed
to the new entity and to use a discounted cash flow method of determining the
relative fair value of the assets to be contributed to the new entity. After
examining a variety of methods of determining relative fair values for the
Homestead Village assets of ATLANTIC, PTR and SCG, SCG determined to use as
the basis for the contributions of each party a total of 80 identified
Homestead properties in operation, under
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<PAGE>
construction or in pre-development planning as of July 1, 1996 (of which
ATLANTIC would contribute 26 and PTR would contribute 54), the projected cash
flows from those properties for 1996, 1997 and 1998, and the projected REIT
management fees and property management fees from such properties net of
operating overhead for 1996, 1997 and 1998.
SCG determined the present values of the projected cash flows from these 80
properties and the projected REIT management fees and property management fees
payable under existing agreements assuming the agreements were in effect
throughout the relevant periods using discount rates and capitalization rates
which SCG deemed reasonable. The present values of the respective cash flows
were totalled and the relative contributions to the new entity were determined
as follows: ATLANTIC--28.18%, PTR--63.64%, and SCG--8.18%. SCG determined the
amount and type of securities to be issued to each party, with ATLANTIC and
PTR receiving Homestead Common Stock, Homestead Warrants and convertible
mortgages and SCG receiving Homestead Common Stock and Homestead Warrants.
SCG determined the relative contributions of each party. The projected cash
flows to be received by ATLANTIC, PTR and SCG and the present values of those
projected cash flows were determined by SCG and reviewed by the ATLANTIC
Special Committee and its advisers. The inclusion or exclusion of certain
Homestead Village properties and the use of different discount rates or
capitalization rates would have resulted in different percentage ownership
interests in Homestead. The present values of the respective contributions of
the parties do not, and are not intended to, reflect what any party could
obtain in an actual sale of their contributed assets. The relative ownership
percentages were not based on actual or projected costs of any Homestead
Village property or the book value of any Homestead Village property. SCG did
not obtain an appraisal or any other third party valuation of any Homestead
Village property or the projected cash flow anticipated to be received by SCG
under the ATLANTIC or PTR REIT Management Agreement or property management
agreements. See "The Transaction--Recommendations of the ATLANTIC Board and
Reasons for the Transaction."
RISKS IN VALUATION AND ALLOCATION
SCG is contributing its REIT management and property management operations
relating to the Homestead Village properties. In determining SCG's relative
ownership interest in Homestead, SCG projected net operating cash flows
through 1998 and discounted these cash flows back to July 1, 1996. See "The
Transaction--Recommendations of the PTR Board and Reasons for the
Transaction." Although SCG believes these operations will be profitable once
all 80 properties are operational, to date these operations have not been
profitable because SCG has invested in operating systems to develop and manage
over 200 Homestead Village properties.
CONFLICTS OF INTEREST IN THE TRANSACTION
The Transaction has been initiated and structured by individuals who are
executive officers or directors of ATLANTIC and PTR, the ATLANTIC REIT Manager
and Security Capital Pacific Incorporated (the "PTR REIT Manager") and are
affiliated with SCG. As a result, the terms of the Transaction have not been
negotiated at arms' length. No independent representatives have been retained
to negotiate the terms of the Transaction on behalf of ATLANTIC. If such
representatives had been retained, the terms of the Transaction might have
been more favorable to the shareholders of ATLANTIC. Although independent
representatives were not retained by ATLANTIC, the ATLANTIC Board created the
ATLANTIC Special Committee consisting of Messrs. Ned S. Holmes and Manuel A.
Garcia, III. The ATLANTIC Special Committee engaged King & Spalding as its
legal counsel and J.P. Morgan to advise it in analyzing and evaluating the
fairness of the Transaction. Neither of the members of the ATLANTIC Special
Committee is an officer of ATLANTIC or a director or officer of the ATLANTIC
REIT Manager. Mr. Holmes beneficially owns 120,000 shares of ATLANTIC Common
Stock, 1,055 PTR Common Shares and 67 shares of SCG Common Stock. Mr. Garcia
beneficially owns 20,000 shares of ATLANTIC Common Stock and does not own any
PTR Common Shares or shares of SCG Common Stock. Directors of ATLANTIC other
than members of the ATLANTIC Special Committee beneficially own, in the
aggregate, 48,839 shares of ATLANTIC Common Stock, 57,745 PTR Common Shares
and 6,449 shares of SCG Common Stock.
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<PAGE>
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Distribution, there will be no public market for the Homestead
Securities. The Homestead Common Stock and the Homestead Warrants have been
approved for quotation on the Nasdaq Stock Market (National Market) subject to
official notice of issuance. There can be no assurance that an active trading
market will develop. In addition, there can be no assurance of the price at
which holders of the Homestead Common Stock or Homestead Warrants will be able
to sell such Homestead Securities. From time to time, the stock market
experiences significant price and volume volatility, which may affect the
market price of the Homestead Common Stock or Homestead Warrants for reasons
unrelated to Homestead's performance.
RISKS OF INVESTMENTS IN MORTGAGES AND FUNDING COMMITMENT
Pursuant to its Funding Commitment Agreement, ATLANTIC will agree to provide
Homestead aggregate funding in an amount up to $111 million. ATLANTIC will
receive convertible mortgage notes in respect of such fundings in a stated
amount of $98 million. ATLANTIC will make these loans primarily to develop the
properties contributed to Homestead by ATLANTIC. See "The Transaction--Funding
Commitment Agreements." The obligation to provide this funding and the terms
thereof have been fixed as of the date of the Merger Agreement. There can be
no assurance that ATLANTIC could not obtain better terms for such mortgage
loans with an independent third party borrower or if the terms were to be
determined on the date a mortgage loan is made to Homestead. Mortgage
investments are subject to certain risks, including the risk that Homestead,
as the borrower, may not be able to make debt service payments or pay
principal when due, the risk that the value of the mortgaged properties may be
less than the amounts owed, and the risk that interest rates payable on the
mortgages may be lower than ATLANTIC's cost of funds. If any of the foregoing
occur, ATLANTIC's ability to make distributions to shareholders could be
adversely affected.
IMPACT OF TRANSACTION ON FUNDS FROM OPERATIONS
As of March 31, 1996, the Homestead Village properties owned by ATLANTIC
constituted 1.1% of ATLANTIC's total assets. ATLANTIC has one Homestead
Village property currently in operation. The spin-off of the Homestead
properties from ATLANTIC may have a dilutive effect on ATLANTIC's funds from
operations, however, this impact is expected to be offset in part by new
ATLANTIC multifamily properties under development or which are expected to be
acquired, and by income received from the convertible mortgages to be issued
to Homestead. As a result of an amendment to the ATLANTIC REIT Management
Agreement, income received from the convertible mortgage loans is excluded
from the definition of cash flow on which the ATLANTIC REIT Management fee is
based.
COMPETITION
The moderate priced, extended-stay market is rapidly evolving, although
there is no single competitor or small number of competitors of Homestead that
is or are dominant in this industry. Competition in the moderate priced,
extended-stay market is generally based on price, convenience of location,
range of services and guest amenities offered, and quality of service.
Demographic or other changes in one or more of Homestead's markets could
impact the convenience or desirability of the sites of certain lodging
facilities, which would adversely affect their operations. Further, there can
be no assurance that new or existing competitors will not significantly lower
rates or offer greater convenience, services, or amenities or significantly
expand or improve facilities in a market in which Homestead's facilities
compete, thereby adversely affecting Homestead's operations.
LIMITED OPERATING HISTORY
Although the first Homestead Village property was opened in 1992, Homestead
has a limited operating history as a separate entity upon which investors may
evaluate Homestead's performance. Additionally, Homestead has no operating
history except during the recent economic expansion. There can be no assurance
that Homestead will be profitable in the future.
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<PAGE>
THE TRANSACTION
GENERAL
The following is a summary of the material aspects of the Transaction. This
summary does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement, which is attached to this Information
Statement and Prospectus as Annex I and is incorporated herein by reference.
THE DISTRIBUTION
The Homestead Securities received by ATLANTIC will be authorized and
distributed, pro rata, to ATLANTIC shareholders. The distribution of the
Homestead Securities will be declared following approval of the proposals by
ATLANTIC shareholders, subject to the satisfaction of certain conditions to
the Merger Agreement. The distribution will be made to holders of shares of
ATLANTIC Common Stock of record at the close of business on the Distribution
Record Date. The amount of Homestead Securities to be received by each
ATLANTIC shareholder in the Distribution will depend on the number of shares
of ATLANTIC Common Stock outstanding on the Distribution Record Date. Based on
the number of shares of ATLANTIC Common Stock outstanding on July 12, 1996,
each ATLANTIC shareholder would receive 0.063748 shares of Homestead Common
Stock and 0.042768 Homestead Warrants for each share of ATLANTIC Common Stock
held. To the extent that the ATLANTIC IPO occurs prior to the Distribution
Record Date, it will result in a proportionate reduction in the amount of
Homestead Securities to be received by each ATLANTIC shareholder.
No certificates or scrip representing fractional shares of Homestead Common
Stock or fractional Homestead Warrants will be issued directly to ATLANTIC
shareholders as a part of the Distribution. The Distribution Agent will, as
soon as practicable after the Distribution Record Date, aggregate and sell all
fractional shares of Homestead Common Stock and Homestead Warrants on the
Nasdaq Stock Market (National Market) or otherwise at then prevailing market
prices and remit the net proceeds (after deduction of brokerage fees) to
ATLANTIC shareholders who would otherwise be entitled to receive fractional
shares or warrants.
NO HOLDER OF SHARES OF ATLANTIC COMMON STOCK WILL BE REQUIRED TO PAY ANY
CASH OR OTHER CONSIDERATION FOR THE HOMESTEAD SECURITIES RECEIVED IN THE
DISTRIBUTION OR TO SURRENDER OR EXCHANGE SHARES OF ATLANTIC COMMON STOCK IN
ORDER TO RECEIVE HOMESTEAD SECURITIES. SEE HOWEVER "--FOREIGN SHAREHOLDERS"
BELOW. THE DISTRIBUTION WILL NOT AFFECT THE NUMBER OF, OR THE RIGHTS ATTACHING
TO, OUTSTANDING SHARES OF ATLANTIC COMMON STOCK.
FOREIGN SHAREHOLDERS
In the Distribution, Homestead Securities will not be mailed immediately to
ATLANTIC shareholders of record whose mailing addresses are outside the United
States ("Foreign Shareholders") but instead will be held by the Distribution
Agent for such shareholders' accounts. As described under the heading "Federal
Income Tax Consequences--Tax Consequences to ATLANTIC Shareholders--Foreign
Withholding." ATLANTIC is subject to a withholding obligation with respect to
the Homestead Securities to be distributed to Foreign Shareholders. On the
Distribution Record Date, the Distribution Agent will mail a notice to each
Foreign Shareholder announcing the Distribution as well as seeking
instructions from the Foreign Shareholder electing between the following
options: (i) providing a check to the Distribution Agent in the amount to be
withheld and receiving his or her full share of Homestead Securities or (ii)
having the Distribution Agent sell that amount of Homestead Securities
necessary to satisfy the withholding obligations and receiving his or her
remaining share of Homestead Securities. Within ten business days after the
Distribution Record Date, the Distribution Agent will mail an additional
notice to each Foreign Shareholder setting forth the amount of the withholding
obligation. A Foreign Shareholder must deliver to the Distribution Agent his
or her instructions and, if option (i) is elected, a check in the proper
amount of the withholding must be received by the Distribution Agent within 20
business days of the date of the Distribution Record Date. If no instructions
are received from a Foreign Shareholder by the end of such period, the
Distribution Agent will take the actions specified in option (ii) in
satisfying the withholding obligations with respect to such shareholder.
BACKGROUND
In 1991, PTR was approached by a third party who was interested in entering
into a collaborative relationship with PTR for the development of moderate
priced, extended-stay lodging facilities. In order to
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<PAGE>
evaluate this proposal, PTR and SCG did extensive research on the industry and
competitors in the industry and retained consultants to advise them on this
business. In 1991, PTR entered into various agreements with this individual or
his affiliates for the site selection and development of several facilities.
By 1992, PTR had constructed its first moderate priced, extended-stay facility
in Texas. This development was undertaken as part of PTR's multifamily
business and not operated as a separate business.
During 1993, PTR constructed additional facilities in Texas and gained
additional experience in operating these facilities and knowledge of this
segment of the lodging business. By the end of 1994, PTR had gained enough
experience in the business and had done enough research on the overall market
to determine that the Homestead Village business constituted a significant
growth opportunity and that additional personnel and resources were needed to
support and expand such business. Additionally, by the end of 1994, PTR and
the original third party had entered into various agreements which altered
their relationship. See "Certain Relationships and Transactions--Finder's
Agreements" in Appendix A.
During 1995, a distinct and separate management team was created by the PTR
REIT Manager to manage and grow the Homestead Village business. Additional
personnel were hired and additional employees were assigned by SCG to increase
development efforts and obtain additional sites. Personnel experienced in the
lodging industry were also recruited and employed by SCG. Because of the
geographical focus of PTR's primary business, it was determined that Homestead
Village properties developed in the southeastern United States would be
developed by ATLANTIC.
Since 1991, the fees received by the REIT managers and property managers for
the Homestead Village operations have been less than the overhead necessary to
fund their Homestead Village operations. See "Financial Statements--SCG
Homestead Village Group" in Appendix A. SCG has been willing to bear this
expense while the Homestead Village concept was being developed because SCG
believed Homestead Village would be accepted in the marketplace which would
result in additional funds from operations for the benefit of PTR and ATLANTIC
shareholders. In addition, SCG believed that as more Homestead Village
properties became operational, the fees generated by the additional properties
would cover such overhead. SCG believes that under the current REIT management
agreements and property management agreements for the PTR and ATLANTIC
Homestead Village properties, it would generate substantial fees from the 80
properties which are to be contributed to Homestead.
In mid-1995, SCG was contacted by another operator of extended-stay
facilities to discuss a possible business relationship involving PTR's
Homestead Village facilities. Several telephone calls and a meeting were held
but no terms were discussed.
In September 1995, management of SCG made a presentation to the SCG board of
directors (the "SCG Board") regarding the Homestead Village business and its
future direction. The SCG Board instructed SCG management to create a plan for
a structure which would maximize shareholder values for ATLANTIC, PTR and SCG
and to present alternatives to achieve this goal. Management then began to
actively explore means of achieving this goal. At the December 1995 meeting of
the SCG Board, SCG management reported that it had various alternatives under
review but that it was not prepared to make any recommendations at that time.
After this meeting, SCG and the PTR REIT Manager began actively to consider
and analyze various alternatives for the Homestead Village operations.
In December 1995, PTR decided, in anticipation of the possibility of the
formation of Homestead and a potential business combination involving the
Homestead Village business, to place convertible mortgage loans on the
Homestead Village properties. The decision to place the convertible mortgage
loans on the Homestead Village properties was based on PTR's desire to retain
a substantial portion of the value of and a substantial portion of the upside
potential of the Homestead Village business in the event of such a business
combination. On January 24, 1996, approximately $77,289,000 of convertible
mortgage loans were placed on the Homestead Village properties by PTR.
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<PAGE>
In January 1996, the PTR REIT Manager discussed with the PTR Board various
alternatives for PTR's Homestead Village operations. By the end of January,
PTR trustees instructed the PTR REIT Manager to actively pursue examination of
various alternatives. On January 31, 1996, as part of its press release
discussing results of operations for 1995, PTR made the following statement
(the "January Press Release"):
". . . after a detailed review of Homestead Village's successful
performance, PTR's Board of Trustees has asked management to evaluate all
options relating to the operation of Homestead Village assets in order to
maximize PTR shareholder value. This would include an analysis of whether
Homestead assets should continue to be developed within PTR, be spun out as
a new stand-alone entity with a target market extending beyond PTR's
current market area, or be offered for sale, merger or disposition to a
national operator. The Board asked that this analysis be completed during
1996. Goldman, Sachs & Co. has been engaged to advise the Board on this
matter. It is possible that certain actions, if pursued, may require
approval of PTR's Board of Trustees and a possible shareholder vote."
Following the January Press Release, PTR held several discussions with
Goldman, Sachs regarding a possible spin-off of the Homestead Village
business. In February 1996, the PTR REIT Manager was contacted by a national
operator of extended-stay facilities to discuss a possible transaction. One
meeting was held in February 1996 in which the PTR REIT Manager discussed
valuation of the Homestead Village business and general terms of a possible
transaction. Management provided the other party with certain information
regarding the Homestead Village operations. Management had several telephone
calls with that party later in February 1996 but no written offer was
solicited or received.
In February 1996, the PTR REIT Manager also received four unsolicited
telephone calls from several other owners or operators of lodging businesses
to discuss PTR's interest in selling its Homestead Village operations. No
formal written offers were received. In addition, Goldman, Sachs received
several unsolicited telephone calls in February 1996 from other parties
inquiring about PTR's Homestead Village operations, but no formal written
offers were received.
During February 1996, SCG management reviewed the options of continuing the
Homestead Village operations within ATLANTIC and PTR or disposing of the
Homestead Village assets. For the reasons discussed below under "--
Recommendations of the ATLANTIC Board and Reasons for the Transaction," SCG
management concluded that continuing the Homestead Village operations within
ATLANTIC and PTR would not maximize value for ATLANTIC and PTR shareholders.
SCG management reviewed the various inquiries it had received regarding the
PTR Homestead Village assets and determined that the purchase proposals it
would likely receive would include securities of the purchaser which would
value the Homestead Village assets on a private company basis and that the
consideration that PTR would receive would be equity securities in a public
company which SCG would not control. The PTR REIT Manager believed that such
result would not maximize shareholder values. The PTR REIT Manager also
determined that its existing Homestead Village operations and those under
construction or in pre-development planning were substantially larger than the
operations of other entities which were focused on the moderate priced,
extended-stay segment of the lodging business. SCG management also had to
consider the impact of a possible sale of the Homestead Village assets on the
recently assembled management team which had been put in place to develop the
Homestead Village concept. SCG management was concerned that the Homestead
Village properties and operations would suffer from defections by the
Homestead Village management if a sale were to be pursued and that the
Homestead Village properties and operations could not be sold at an attractive
price unless management remained intact. For these reasons, SCG management and
the PTR REIT Manager did not actively pursue a sale of the Homestead Village
business.
By March 1996, SCG management had prepared and distributed materials to the
SCG Board, the ATLANTIC Board and the PTR Board describing in detail the
various alternatives for the Homestead Village operations and the advantages
and disadvantages of each alternative.
On March 12, 1996, members of SCG's management made a presentation to the
ATLANTIC Board as part of a regularly scheduled meeting. SCG's management
presented to the ATLANTIC Board information prepared by SCG regarding
alternatives available for the ATLANTIC Homestead Village operations,
including leaving
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the properties in ATLANTIC, a sale of the business or a spin-off of the
business, the advantages and disadvantages of each alternative and SCG's
recommendation that a spin-off be pursued. SCG presented detailed information
regarding the lodging industry, the advantages of a spin-off to ATLANTIC's
shareholders, competition in the lodging industry, a proposed combination of
ATLANTIC's and PTR's Homestead Village businesses and the means of funding
those businesses, a method by which the relative ownership interests of
ATLANTIC, PTR and SCG in the new entity would be determined, and legal
requirements to accomplish a combination and spin-off. Following the
discussion, the ATLANTIC Board authorized the ATLANTIC REIT Manager to pursue
a spin-off of ATLANTIC's Homestead Village business and a combination of
ATLANTIC's and PTR's Homestead Village businesses.
Because of SCG's significant ownership of ATLANTIC Common Stock and PTR
Common Shares and SCG's direct interest in the possible spin-off, the ATLANTIC
Board appointed the ATLANTIC Special Committee, consisting of ATLANTIC's
independent directors, Messrs. Holmes and Garcia, to consider the proposed
transaction and recommend action with respect to any such proposed transaction
to the ATLANTIC Board.
On March 14, 1996, SCG management made a presentation to the PTR Board. SCG
management discussed the opportunity in the extended-stay market, competition
in the lodging industry, means by which the Homestead Village concept could
become national, and historical results for the Homestead Village operations.
SCG management discussed three options available to PTR for its Homestead
Village operations, including leaving its Homestead Village properties in PTR,
a sale of the business or a spin-off, the advantages and disadvantages of each
option and SCG's recommendation that the PTR Board pursue a spin-off of the
Homestead Village properties. SCG management presented information regarding a
proposed capital structure of a new Homestead Village entity, a method by
which the relative ownership interests of PTR, ATLANTIC and SCG in the new
entity would be determined and possible value creation for PTR shareholders.
Following the discussion, the PTR Board authorized the PTR REIT Manager to
pursue a spin-off of its Homestead Village operations to a new entity in
exchange for securities of the new entity. Because of SCG's significant
ownership of PTR Common Shares and ATLANTIC Common Stock and SCG's direct
interest in the possible spin-off, the PTR Board appointed the PTR Special
Committee, consisting of three of PTR's independent trustees, Messrs. John C.
Schweitzer, James A. Cardwell and Calvin Kessler, to consider the proposed
transaction and recommend action with respect to any such proposed transaction
to the PTR Board. The PTR Special Committee retained Goldman, Sachs as
financial advisor to the PTR Special Committee.
On March 20, 1996, the PTR Special Committee approved the retention of
Munger, Tolles & Olson as legal counsel to the PTR Special Committee.
On March 20, 1996, SCG management made a presentation to the SCG Board
regarding the alternatives available to ATLANTIC, PTR and SCG regarding the
Homestead Village operations, which presentation was similar to the
presentations made to the ATLANTIC Board and the PTR Board. After discussion,
the SCG Board authorized SCG management to proceed with a spin-off of its
Homestead Village business. No special committee of directors of SCG was
formed and no separate counsel or financial advisors were retained by SCG in
connection with the Transaction.
On March 22, 1996, the ATLANTIC Special Committee approved the retention of
King & Spalding as legal counsel to the ATLANTIC Special Committee. On March
29, 1996, the ATLANTIC Special Committee approved retaining J.P. Morgan to
deliver an opinion as to the fairness, from a financial point of view, to the
shareholders of ATLANTIC (other than SCG) of the consideration to be paid to
ATLANTIC in connection with the proposed Transaction.
Between March 20 and April 8, 1996, SCG management met and had numerous
telephone conversations with J.P. Morgan and Goldman, Sachs to discuss the
proposed spin-off, valuation issues, the terms of the proposed securities to
be issued by Homestead and related matters. During that same period, Mayer,
Brown & Platt, counsel for PTR, ATLANTIC, SCG and Homestead, had several
discussions with King & Spalding and Munger, Tolles & Olson regarding the
structure and the documentation of the proposed transaction.
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On April 8, 1996, a special meeting of the PTR Board was held which was
devoted entirely to the proposed spin-off. SCG management made a detailed
presentation to the entire PTR Board regarding the proposed spin-off, pro
forma historical and projected financial information regarding Homestead,
comparisons of multiples for large multifamily REITs and extended-stay lodging
operators, competition in the extended-stay lodging market, reasons why
management believed PTR shareholders would benefit from the proposed spin-off,
terms of the proposed transaction, including terms of the proposed warrants
and convertible mortgages, tax treatment of the proposed transaction, expected
value creation resulting from the spin-off, relative ownership interests of
PTR, ATLANTIC and SCG in the new entity as calculated by SCG, estimated impact
of the spin-off on PTR's funds from operations and estimated impact of the
spin-off on the financial condition of PTR. There followed an extensive
discussion by the entire PTR Board of the proposed transaction, the relative
valuation of SCG's contribution, the terms of the convertible mortgage loans
and warrants, and the assumptions used by SCG in calculating the relative
valuation of the contributions of each party.
At the same meeting Goldman, Sachs made a presentation regarding the
methodologies it would use in reviewing the proposed spin-off and arriving at
its opinion, the issues it would examine in arriving at its opinion and the
form of its opinion.
Such special meeting was adjourned, at which time the PTR Special Committee
met separately with its counsel and, for portions of the meeting, Goldman,
Sachs and SCG management. The PTR Special Committee discussed with its counsel
its legal duties as a committee of "independent trustees." Additionally, it
discussed the presentations at the PTR Board meeting and additional
information it wanted to review in connection with the proposed transaction.
The PTR Special Committee then met with Goldman, Sachs and reviewed the scope
of Goldman, Sachs' opinion, the analysis to be performed by Goldman, Sachs,
and the timing of receiving Goldman, Sachs' opinion. Next, the PTR Special
Committee met with SCG management to discuss SCG's analysis and presentation.
Later that day, the PTR Board meeting reconvened at which time the PTR Special
Committee members stated that they would have further meetings to discuss the
proposed spin-off and requested additional information from SCG regarding the
methodology used in calculating valuations, assumptions used in SCG's
projections and Homestead Village properties expected to be in operation or
under development by the end of 1997.
On April 11, 1996, the PTR Special Committee met with its counsel and SCG
management to discuss SCG's analysis from which SCG structured the proposed
transaction. At the meeting, the parties extensively discussed the extended-
stay lodging market, the assumptions and methodology underlying SCG's
analysis, the rationale and reasonableness of such assumptions and
methodology, the sensitivity of the analysis to various changes, and the value
and terms of the Homestead Securities and convertible mortgage loans to be
received by PTR in the proposed transaction.
On April 16, 1996, a special meeting of the ATLANTIC Board was held at which
SCG management made a detailed presentation regarding the proposed spin-off
which focused on the following matters: the opportunity to expand Homestead on
a national scope; a description of the segments and competition within the
extended-stay lodging business; comparisons of multiples for large multifamily
REITs and extended-stay lodging operators; the reasons why management believed
ATLANTIC shareholders would benefit from the proposed spin-off; the terms of
the proposed transaction, including the contributions of properties and other
assets by each party for common stock, warrants and convertible mortgage
loans, and the terms of such securities; the expected value creation from the
spin-off; the resulting relative ownership interests of ATLANTIC, PTR and SCG
in the new Homestead entity; the impact of the spin-off on ATLANTIC's results
of operations and financial condition; and the schedule of the spin-off in
regards to a proposed initial public offering by ATLANTIC. Following the
presentation by SCG management, the ATLANTIC Board engaged in an extensive
discussion with SCG management regarding the proposed transaction and its
impact on ATLANTIC.
Following such discussion, at the same ATLANTIC Board meeting,
representatives of J.P. Morgan made a presentation regarding the methodologies
they were using in reviewing the proposed spin-off and their approach to
evaluating the fairness of the transaction, which included an extensive
discussion of valuation methodologies, the terms of the proposed Homestead
securities and the allocation of ownership.
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In addition, on April 16, 1996, the ATLANTIC Special Committee met with its
counsel and J.P. Morgan to discuss the financial terms of the proposed
transaction. The ATLANTIC Special Committee discussed with its counsel its
legal duties under Maryland law as a committee of "independent directors."
Among other things, the parties discussed the reasonableness of the terms of
the Homestead Securities and the convertible mortgage loans, the allocation of
ownership in Homestead among ATLANTIC, PTR and SCG, and J.P. Morgan's fairness
analysis and opinion. Next, the ATLANTIC Special Committee discussed with its
counsel the proposed terms of the Merger Agreement and the related agreements,
proposed revisions to such agreements, and the status of the negotiations of
such agreements.
SCG originally had proposed to the PTR Board and ATLANTIC Board in March
1996 a transaction involving a total of 73 Homestead Village properties.
Because of ongoing development by PTR and ATLANTIC of Homestead Village
facilities, in April 1996 SCG revised the proposed transaction to include a
total of 80 Homestead Village facilities. The effect of this change was to
alter the ownership interests of PTR, ATLANTIC and SCG in Homestead and to
increase the aggregate amount of Homestead Securities to be issued.
SCG originally had proposed to the PTR Board and the ATLANTIC Board that the
convertible mortgage loans have a term of 25 years with no call provision and
that the conversion premium be 10% above the expected price of the Homestead
Common Stock, and that the Homestead Warrants have a term of 18 months. As a
result of negotiations between members of the PTR Special Committee, Goldman,
Sachs, the ATLANTIC Special Committee, J.P. Morgan and SCG, which occurred
throughout April and early May 1996, certain terms of the proposed Homestead
Securities were changed. The term of the convertible mortgage loans was
reduced from 25 years to ten years; a provision was added to permit Homestead
to call the convertible mortgage loans after five years; the conversion
premium on the convertible mortgage loans was increased from 10% to 15%; and
the term of the Homestead Warrants was reduced from 18 months to 12 months. In
addition, SCG agreed to have a portion of its Homestead Common Stock placed in
escrow to be released as funding is made by PTR or ATLANTIC under the Funding
Commitment Agreements.
On April 17, 1996, the PTR Special Committee met with its counsel, and
Goldman, Sachs and its counsel to discuss the financial terms of the proposed
transaction. Among other things, the parties discussed the reasonableness of
the terms of the Homestead Securities and the convertible mortgage loans, the
allocation of ownership in Homestead among PTR, ATLANTIC and SCG, and Goldman,
Sachs' fairness analysis and opinion. Next, the PTR Special Committee
discussed with its counsel the proposed terms of the Merger Agreement and the
related agreements, proposed revisions to such agreements, and how to proceed
in negotiations of such agreements.
During the course of the negotiation of the documents covering the
Transaction, the PTR Special Committee and its counsel requested numerous
changes to the documents because of the related-party nature of the
Transaction. The PTR Special Committee requested that SCG vote its PTR Common
Shares (which represented 37.9% of the outstanding PTR Common Shares as of May
20, 1996) in favor of the proposal only if a majority of the PTR shareholders
not affiliated with SCG voted in favor of the proposal. This voting proposal
is not required under Maryland law. Counsel for the PTR Special Committee also
requested that the Merger Agreement be subject to approval by the holders of
two-thirds of the outstanding PTR Common Shares. Under Maryland law, the
amendment to the PTR Declaration of Trust requires the approval of the holders
of two-thirds of the outstanding shares while the Merger Agreement requires
the approval of the holders of a majority of the outstanding PTR Common
Shares. After several discussions with the PTR Special Committee and its
counsel, SCG declined the request of the PTR Special Committee that it vote
its PTR Common Shares only upon the affirmative vote of the majority of the
non-SCG shareholders since a two-thirds vote requirement would mean that
approval of the Transaction would require a substantial number of shareholders
not affiliated with SCG voting in favor of the Transaction; SCG however did
agree to have the Merger Agreement subject to approval by the holders of two-
thirds of the outstanding PTR Common Shares. Counsel for the PTR Special
Committee also discussed with SCG the terms of the convertible mortgage loans,
the methodology from which the allocation of ownership in Homestead among PTR,
ATLANTIC and SCG was derived, and the discussions SCG had with unaffiliated
third parties with respect to potential transactions involving PTR's Homestead
Village assets.
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Counsel for the PTR Special Committee also requested that SCG not receive
indemnification under the Merger Agreement for misstatements made in the
Merger Agreement or in the Registration Statement which are attributable to
PTR, ATLANTIC or Homestead, because SCG controls and manages all these
entitles. SCG agreed to this request.
On May 14, 1996, the PTR Special Committee met with its counsel, and for a
portion of the meeting, with a senior officer of SCG to discuss the status of
outstanding issues, changes in the terms of the Merger Agreement and the
related agreements, and the structure of the fairness opinion to be received
by the PTR Special Committee from Goldman, Sachs.
On May 15, 1996, the ATLANTIC Special Committee met with its counsel, J.P.
Morgan and SCG management. At such meeting, SCG management discussed with the
ATLANTIC Special Committee the following changes to the terms of the proposed
transaction: an increase in the number of Homestead Village facilities to 80;
the need for ATLANTIC to fund $18.6 million in cash at Closing in order to
assure that ATLANTIC receives all of its shares of Homestead Common Stock at
closing; the changes to the terms of convertible mortgage notes regarding
maturity date, the conversion premium, and the ability of Homestead to call
the convertible mortgage loans; the terms of the Funding Commitment
Agreements; and the terms of the Homestead Warrants. J.P. Morgan then reviewed
the impact of these changes on their view of the fairness of the transaction.
The ATLANTIC Special Committee discussed with SCG management and J.P. Morgan
the terms of the proposed transaction, including the accounting treatment of
the transaction, the impact on ATLANTIC's REIT status and the ability of
ATLANTIC to meet its funding obligations under its Funding Commitment
Agreement.
On May 17, 1996, the ATLANTIC Special Committee met with its counsel and
J.P. Morgan to consider the Transaction. At such meeting, counsel for the
ATLANTIC Special Committee and J.P. Morgan discussed the terms of the Merger
Agreement and the related agreements. After extended discussions, J.P. Morgan
delivered an oral fairness opinion to the ATLANTIC Special Committee that, as
of such date, the consideration to be paid to ATLANTIC in the Transaction was
fair, from a financial point of view, to ATLANTIC shareholders (other than
SCG). Following such discussion, the ATLANTIC Special Committee unanimously
resolved that the Merger Agreement in the form presented and the transactions
as contemplated thereby are approved as being fair and reasonable to ATLANTIC,
and the ATLANTIC Special Committee recommended that the ATLANTIC Board approve
the Merger Agreement and the transactions contemplated thereby as being fair
and reasonable to ATLANTIC.
On May 17, 1996, the ATLANTIC Board held a telephonic board meeting with all
directors in attendance. Also present at the meeting were representatives of
J.P. Morgan, counsel to the ATLANTIC Special Committee and senior officers of
SCG and the ATLANTIC REIT Manager. Mr. Holmes reported that the ATLANTIC
Special Committee had met earlier that day with representatives of J.P. Morgan
and King & Spalding to discuss the Transaction and the various documents
relating to the Transaction and that the ATLANTIC Special Committee had
received an oral fairness opinion from J.P. Morgan. Mr. Holmes further
reported that, based on its review of the Transaction, its discussions with
counsel and the oral fairness opinion of J.P. Morgan, the ATLANTIC Special
Committee recommended to the ATLANTIC Board that the Merger Agreement and the
Transaction be approved as fair and reasonable to the ATLANTIC shareholders
(other than SCG). The entire ATLANTIC Board then discussed the terms of the
Transaction, the changes in the terms of the Transaction since it had been
originally proposed to the ATLANTIC Board, the reasons for the cash payment to
be made by ATLANTIC for the Homestead Common Stock at the Closing Date, the
reasons for the premium which ATLANTIC would pay for the Homestead convertible
mortgage notes it would receive, the impact of that premium on ATLANTIC's
future financial results, the reasons for the projected difference in the
investments by PTR and ATLANTIC in their respective Homestead Village
properties, the ability of ATLANTIC to fund its obligations under the Funding
Commitment Agreement, the mechanics of the Distribution and the disposition of
the convertible mortgage loans ATLANTIC would receive. After these
discussions, the ATLANTIC Board approved the Merger Agreement and the
Transaction as fair and reasonable to the ATLANTIC shareholders and
recommended its approval by the ATLANTIC shareholders.
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On May 20, 1996, the PTR Special Committee met with its counsel, and for a
portion of the meeting, with Goldman, Sachs and its counsel. At such meeting,
Goldman, Sachs discussed material changes in the terms and conditions of the
proposed transaction since it last met with the PTR Special Committee and how
such changes affected Goldman, Sachs' analysis underlying its opinion. After
extended discussions, Goldman, Sachs delivered an oral fairness opinion to the
PTR Special Committee to the effect that, as of the date of such opinion, the
PTR Transaction was fair to PTR. See "--Fairness Opinion." The PTR Special
Committee requested that its counsel review further with SCG information
regarding discussions between SCG and third parties with respect to the
Homestead Village business.
On May 20, 1996, counsel for the PTR Special Committee reviewed with senior
officers of SCG and Goldman, Sachs the inquiries that each had received
regarding PTR's Homestead Village facilities, the responses to those inquiries
and the reasons why SCG and the PTR REIT Manager, as described earlier, had
decided not to pursue a sale of the Homestead Village facilities. Later that
day, the PTR Special Committee except Mr. Cardwell reconvened and met with
their counsel to discuss their respective conversations with SCG management
and Goldman, Sachs regarding potential transactions with unaffiliated third
parties. Following such discussions, the PTR Special Committee resolved that,
subject to final documentation, (a) the Merger Agreement and the Transaction
are fair and reasonable to PTR and on terms and conditions not less favorable
to PTR than those available from unaffiliated third parties, and (b) the PTR
Special Committee recommends that the PTR Board approve the Merger Agreement
and the Transaction as being fair and reasonable to PTR and on terms and
conditions not less favorable to PTR than those available from unaffiliated
third parties and that the PTR Board recommend to the shareholders of PTR
their approval of the same.
On May 21, 1996, the PTR Board held a meeting at which all trustees were
present, except James Cardwell. The purpose of the meeting was to discuss the
Merger Agreement and the Transaction. Members of SCG management outlined the
terms of the Transaction, discussed the terms of the Homestead Warrants and
convertible mortgage notes, discussed Homestead and answered trustees'
questions. Mr. Schweitzer then
discussed the activities of the PTR Special Committee. He stated that the PTR
Special Committee had met six times and that he had held extensive discussions
with the PTR REIT Manager regarding the Transaction. He reviewed the changes
in the Transaction from the terms originally proposed to the PTR Board,
including the change to the conversion premium for the convertible mortgages.
Mr. Schweitzer stated that the PTR Special Committee had examined in detail
the terms of the convertible mortgage notes and had concluded that the terms
were very favorable to PTR compared to other convertible securities which were
available in the market. He also discussed the PTR Special Committee's review
of the allocation of the ownership interests in Homestead among PTR, ATLANTIC
and SCG. He then reviewed the oral fairness opinion which Goldman, Sachs had
delivered to the PTR Special Committee. Mr. Schweitzer concluded by stating
that the PTR Special Committee recommended to the PTR Board that the Merger
Agreement and Transaction be approved as fair to PTR.
The trustees next discussed the timing of the Transaction and the conditions
to completion of the Transaction. The trustees then reviewed and discussed the
tax consequences of the Merger Agreement and the Distribution to PTR and its
shareholders. The trustees next reviewed and discussed the terms of the
Homestead Warrants and the future overhang on the Homestead Common Stock
created by the Homestead Warrants and the convertible mortgage notes.
SCG management then reviewed with the trustees the terms of the Merger
Agreement and each of the related agreements. SCG management also reviewed
with the trustees the proposed changes to the PTR REIT Management Agreement
and the PTR Declaration of Trust. SCG management explained that the reason for
the change to the PTR REIT Management Agreement and the PTR Declaration of
Trust was to permit the Transaction to occur but to preserve the restrictions
on interested party transactions in other situations and SCG's recommendations
that the PTR REIT Management Agreement be changed to exclude income derived
from the convertible mortgage loans from the formula for computing the REIT
management fee. After discussing these documents and the recommendations of
the PTR Special Committee, the PTR Board unanimously approved the Merger
Agreement and Transaction as being fair and reasonable and on terms not less
favorable to PTR than those available from unaffiliated third parties and
recommended to the shareholders that they vote in favor of the
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Merger Agreement and the Transaction and the amendment to the PTR Declaration
of Trust and further approved the amendment to the PTR REIT Management
Agreement. The trustees also authorized the PTR REIT Manager to proceed with
the Transaction.
On May 23, 1996, the PTR Special Committee held a telephone meeting with all
members in attendance. At such meeting, the PTR Special Committee by unanimous
vote ratified the resolutions adopted by the PTR Special Committee at its May
20, 1996 meeting.
RECOMMENDATIONS OF THE ATLANTIC BOARD AND REASONS FOR THE TRANSACTION
SCG Recommendations and Reasons.
By early 1996, SCG had determined that the Homestead Village operations were
yielding very favorable returns, which were higher than returns on ATLANTIC's
and PTR's multifamily properties, and could be operated more effectively as a
separate business. Based on the reasons described below, SCG believed that it
would be in the best interests of ATLANTIC and its shareholders for the
Homestead Village operations to be separated from ATLANTIC and spun-off to its
shareholders, as ATLANTIC increased its development of Homestead Village
properties. Because of the interests of ATLANTIC, PTR and SCG in the various
parts of the Homestead Village operations, management's goal was to combine
the various parts of the Homestead Village operations and spin off the
resulting entity to the various parties in a manner which would maximize
shareholder values for each party while being fair to each entity and its
shareholders.
The following reasons were emphasized by SCG in recommending to the ATLANTIC
Board that it approve a spin-off of the Homestead Village operations.
. PUBLIC MARKET VALUATION. SCG examined the public market valuations of
PTR, other large public multifamily REITs and public extended-stay
lodging facility operators and concluded that although the PTR Homestead
Village operations have been very successful, the public market
valuation of PTR would not reflect the value of the Homestead Village
operations within PTR. SCG reviewed the funds from operations multiple
of PTR as of December 31, 1995, prior to the January Press Release, and
the funds from operations multiples of several other larger multifamily
REITs, which multiples were comparable. This comparability of funds from
operations multiples demonstrated to SCG that a public market valuation
of PTR would give no additional value to the Homestead Village
operations within PTR beyond their funds from operations contribution.
SCG also examined the earnings before interest, taxes, depreciation and
amortization ("EBITDA") multiple of PTR for 1995 with EBITDA multiples,
based on market prices of two publicly held operators of extended-stay
lodging facilities, which were greater than PTR's EBITDA multiple. This
difference in multiples lead SCG to conclude that shareholder value for
PTR shareholders would be maximized if the Homestead Village operations
could be separated from PTR's traditional core business of owning and
operating garden apartments and spun off. SCG believes this analysis
would be true for ATLANTIC as it continues to increase its development
of Homestead Village properties.
. NATIONAL SCOPE. SCG has determined that in order for the Homestead
Village concept to be highly successful, the Homestead Village
operations should be national in scope. The Homestead Village trademark,
operating system and management are owned or provided by SCG. ATLANTIC
has Homestead Village facilities under construction or in pre-
development planning in several of its target markets in the
southeastern United States. PTR has Homestead Village facilities which
are operating, under construction or in pre-development planning in
several of its target markets in the western United States. By combining
all of the Homestead Village facilities in operation, under construction
or in pre-development planning with management, operating system and the
Homestead Village trademark in a single entity, SCG believed that the
resulting entity would be stronger, have greater geographic
diversification, be more focused, achieve greater economies of scale and
be national in scope.
. FOCUS OF ATLANTIC'S PRIMARY BUSINESS. SCG believes that the capital
markets place a premium on REITs which are focused on a single product.
ATLANTIC's objective is to be the preeminent real
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estate operating company focusing on multifamily property in its
southeastern United States target market. The Homestead Village concept
was initially created as a byproduct of the multifamily development
activities of PTR. Because of PTR's success with the Homestead Village
concept, ATLANTIC began development of its first Homestead Village
property in 1995 and as of March 31, 1996 Homestead Village properties
constituted 1.1% of ATLANTIC's assets. As the Homestead Village
properties continue to become an increasingly greater percentage of
ATLANTIC's operations, ATLANTIC could be perceived as no longer focused
on its primary business of owning and operating multifamily properties.
Further, as discussed above, SCG does not believe that the market would
appropriately value the Homestead Village concept within ATLANTIC. By
spinning off the Homestead Village assets, SCG believes ATLANTIC can get
the dual benefit of focusing on its primary business while obtaining an
enhanced valuation for its Homestead Village business.
. REIT RULES IMPACT ON OPERATION OF HOMESTEAD VILLAGE PROPERTIES. The REIT
rules impose restrictions on the types of services that a REIT may
offer. Homestead Village operations generally involve the provision of
maid services to its guests. These services are considered "non-
customary" under the REIT rules. If a REIT provides "non-customary"
services in connection with the rental of real estate, then all or part
of the associated rents will fail to qualify as rents from real property
for REIT purposes and, if nonqualified gross income (which includes
nonqualified rents) exceed 5% of the REIT's gross income, the REIT will
lose its REIT status under the Code. Through various methods, ATLANTIC
could ensure that rents received from Homestead Village operations
qualify as rents from real property for REIT purposes. However, these
methods would result in inefficiencies in operation of the Homestead
Village properties or loss of certain revenues from the properties. By
spinning off the Homestead Village assets, these inefficiencies would be
eliminated and ATLANTIC's REIT status would remain unaffected.
Based primarily on these reasons, SCG recommended a spin-off to the ATLANTIC
Board. By consolidating the Homestead Village operations in the Transaction,
SCG has attempted to eliminate the issues of lack of market valuation for the
Homestead Village properties, impediments to a national scope of the Homestead
Village concept, diffusion of ATLANTIC's focus on multifamily properties, and
REIT compliance matters, while at the same time permitting ATLANTIC
shareholders to participate in the future growth of the Homestead Village
concept.
In structuring the Transaction, SCG sought to address the issue of the
impact on ATLANTIC's funds from operations caused by the spin-off of the
Homestead Village assets through the issuance of the convertible mortgage
notes. These mortgages will have a dual purpose. First, they will provide a
source of funding for Homestead's future development activities. Second, they
will provide a means by which ATLANTIC can retain capital. It is expected that
at full funding in 1998, assuming all planned Homestead Village properties
which ATLANTIC has committed to finance are developed and there are no
conversions of any mortgage notes, ATLANTIC will have an aggregate of
approximately $98 million in mortgage notes outstanding. These mortgage loans
will bear interest at 9% per annum, have a term of 10 years, cannot be called
for the first five years and will be convertible into shares of Homestead
Common Stock at $11.50 per share. In addition, a portion of the shares of
Homestead Common Stock to be received by SCG will be issued to and placed with
State Street Bank and Trust Company ("Escrow Agent") and will only be released
to SCG as mortgage loans are made by ATLANTIC or PTR under their Funding
Commitment Agreements. See "--Escrow Agreement."
The methodology used in determining the relative ownership percentages of
PTR, ATLANTIC and SCG in Homestead was established by SCG based upon the
present values of the cash flows of the contributions made by each such party.
With respect to each of PTR and ATLANTIC, SCG prepared those present values by
discounting the future net cash flows for the 80 identified Homestead Village
properties in operation, under construction or in pre-development planning at
July 1, 1996 which will be contributed by each of them to Homestead in
connection with the Mergers, as described in the succeeding paragraph; with
respect to SCG, SCG calculated the present value of the cash flows from the
PTR and ATLANTIC REIT Management fees and property management fees which SCG
would have received from such 80 Homestead Village properties, net of
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operating overhead, as described below. For purposes of the foregoing
calculations, SCG assumed that at July 1, 1996, PTR would have 28 properties
in operation, seven properties under construction and 19 properties in pre-
development planning, and that ATLANTIC would have no properties in operation,
five properties under construction and 21 properties in pre-development
planning. At July 12, 1996, PTR actually had 28 properties in operation, eight
properties under construction and 18 properties in pre-development planning,
and ATLANTIC actually had one property in operation, four properties under
construction and 21 properties in pre-development planning.
For purposes of determining the relative ownership interests of PTR and
ATLANTIC in Homestead, SCG projected the net operating income for each of
these properties for the 18 months ended December 31, 1997, capitalized 1998
(the first year in which all 80 Homestead Village properties are assumed to be
stabilized) projected net operating income at 11%, and discounted both cash
flows back to July 1, 1996, using a discount rate of 11%. SCG projected a net
operating income for each of the 80 Homestead Village properties through the
end of 1998 based on the historical income and expense experience of the
Homestead Village properties currently in operation, its current development
plans for each such Homestead Village property, and its extensive experience
in the market and submarket in which each such Homestead Village property is
or will be located. In addition, the material underlying economic assumptions
used by SCG in projecting net operating income for each of the Homestead
Village properties were as follows: a 5% increase in the average weekly rental
rate beginning 18 months after the opening of a property and every 12 months
thereafter; a 28% occupancy rate for the first three months of operation, a
70% occupancy rate for the second three months of operation, and an 83%
stabilized occupancy rate thereafter; an annual 5% increase in expenses every
12 months after the opening of a property; and a capital reserve for each
property at a rate of 5% of gross revenue for the property. The capitalization
rate of 11% applied to 1998 net operating income for each Homestead Village
property contributed by PTR and ATLANTIC reflects SCG's estimate of current
real estate market capitalization rates for non-branded lodging facilities
based on its review of publicly available industry information. The discount
rate of 11% applied to PTR and ATLANTIC cash flows reflects SCG's estimate of
the rate appropriate to the moderate priced, extended-stay lodging industry.
For purposes of determining the relative ownership interest of SCG in
Homestead, SCG calculated the projected ATLANTIC and PTR REIT Management fees
and property management fees which SCG would have received under existing
agreements with ATLANTIC and PTR for the 80 Homestead Village properties
assuming that such agreements were in effect throughout the relevant periods,
net of operating overhead of SCG related to those properties, for the 18
months ended December 31, 1997, multiplied projected 1998 net operating net
income derived from such fees by nine, and discounted all cash flows back to
July 1, 1996 using a discount rate of 17.5%. The 9.0x multiple for 1998 net
operating income for SCG was based on a publicly available report prepared by
an independent third party of private and public companies in the financial
services sector after adjusting for growth expectations and business
objectives for each company. A discount rate of 17.5% was applied to SCG's
cash flow between 1996 and 1998 to reflect SCG's belief that a higher level of
uncertainty exists regarding the profitability of financial services
operations during a period of rapid growth. SCG anticipates that it would
rapidly increase its management operations relating to the Homestead Village
properties during the next three years as 51 additional properties are
developed and become stabilized. The REIT Management fees and property
management fees were calculated using the same projected net operating income
through the end of 1998 for the 80 Homestead Village properties used to
calculate the present values of the cash flows contributed by PTR and
ATLANTIC. No separate consideration was attributed to the Homestead Village
trademark, operating system or rights for planned facilities to be contributed
by SCG, as the trademark and operating system would be necessary to achieve
the anticipated fees.
These present values of cash flows were prepared solely for the purpose of
determining the relative ownership interests of ATLANTIC, PTR and SCG in
Homestead. These contributions were totalled and the resulting percentages of
the contributions are as follows: ATLANTIC-28.18%; PTR-63.64%; and SCG-8.18%.
Pursuant to each Funding Commitment Agreement, PTR and ATLANTIC will provide
Homestead aggregate funding on such developments in the amounts of up to
approximately $133 million and $111 million, respectively, which amounts are
anticipated to be sufficient to complete the development of the respective
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Homestead Village facilities contributed by them. PTR and ATLANTIC will
receive convertible mortgage notes in respect of such fundings in stated
amounts of up to approximately $144 million and $98 million, respectively. The
effect of these provisions of the ATLANTIC Funding Commitment Agreement is
that ATLANTIC will fund $1,133,535 for each $1,000,000 principal amount of
convertible mortgage loans. The convertible mortgage loans will be recorded
for financial reporting purposes at a premium of approximately $13 million
which will be amortized and recorded as an adjustment to interest income over
the ten-year term of the mortgage loans using the effective interest method.
The differences between the funded amounts and the stated amounts of the
convertible mortgage loans arise because the rate of return on the existing
Homestead Village facilities contributed by PTR is projected to exceed the
rate of return on the Homestead Village facilities contributed by PTR and
ATLANTIC to Homestead which are under construction or in pre-development
planning. In calculating the relative ownership interests of PTR and ATLANTIC,
SCG assumed that as of July 1, 1996 PTR would have 28 Homestead Village
facilities in operation and generating income, while ATLANTIC would have none.
In addition, SCG expects that the average property development costs for the
existing PTR Homestead Village properties will, on balance, be less than those
for the PTR and ATLANTIC Homestead Village properties projected to be built in
the future because a large portion of the existing PTR Homestead Village
properties were in planning or under development during 1992 and 1993 when
land prices and construction costs were less than they are now and are
anticipated to be over the next 18 months. The stated amount of the
convertible mortgage loans was determined based on a 9% interest rate to
provide an effective yield to each of PTR (10.02% on a fully funded basis) and
ATLANTIC (7.94% on a fully funded basis) that is reflective of the relative
rates of return anticipated to be realized on all of the facilities
contributed by PTR and ATLANTIC, respectively.
The ATLANTIC REIT Management Agreement prohibits the ATLANTIC REIT Manager
from proposing transactions which, among other things, involve the sale or
purchase of properties by ATLANTIC to or from the ATLANTIC REIT Manager or its
affiliates. In connection with the Transaction, both ATLANTIC and PTR have
waived such provisions of their respective REIT Management Agreements.
Additionally, the ATLANTIC REIT Management fees payable are based upon
ATLANTIC's cash flow (as defined in the ATLANTIC REIT Management Agreement).
ATLANTIC's cash flow includes interest payable on loans made by ATLANTIC.
Because SCG's contribution is based upon discounted cash flows expected to be
generated from the Homestead Village properties contributed by ATLANTIC
(including Homestead Village properties to be funded by ATLANTIC pursuant to
its Funding Commitment Agreement), ATLANTIC and the ATLANTIC REIT Manager have
amended the ATLANTIC REIT Management Agreement to exclude from the calculation
of the ATLANTIC REIT Management fee the interest income on the mortgage loans
made by ATLANTIC to Homestead.
ATLANTIC Board Recommendations and Reasons.
At a special meeting of the ATLANTIC Board on May 17, 1996, following a
review of the information considered by SCG and a review of terms of the
Merger Agreement and the Transaction, as well as consideration of the
recommendation of the ATLANTIC Special Committee, the ATLANTIC Board approved
the Merger Agreement and the Transaction and recommended that ATLANTIC
shareholders vote for approval of the Merger Agreement and the Transaction. As
noted below, the ATLANTIC Board considered the determination by the ATLANTIC
Special Committee that the Merger Agreement and the Transaction are fair and
reasonable to ATLANTIC and their recommendation that the ATLANTIC Board
approve the Merger Agreement and the Transaction.
In making its determination with respect to the Transaction, the ATLANTIC
Board considered the following material factors in approving the Merger
Agreement and the Transaction:
(i) The reasons emphasized by SCG in making its recommendations. The
ATLANTIC Board considered the concern of SCG management that the public
market valuation of ATLANTIC would not reflect the value of the Homestead
Village assets within ATLANTIC, that the capital markets place a premium on
REITs which are focused on a particular product and that the presence of
Homestead Village properties has caused a concern for the rating agencies.
(ii) The goals and objectives of Homestead, the projected growth in the
number of Homestead Village properties in operation, the current ownership
of Homestead Village properties by ATLANTIC and PTR,
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the services provided by SCG, the gross revenues and net operating income
of the combined Homestead Village operations, the funds from operations
multiple of PTR as compared to its competitors and the EBITDA multiple of
PTR and competitors in the extended-stay market and the expected comparable
result to ATLANTIC.
(iii) SCG's stated objective of maximizing shareholder value for the
shareholders of each of ATLANTIC, PTR and SCG, both separately and
individually, related to the Homestead Village operations while pursuing a
course of action that is fair to each shareholder group; and the expected
benefit resulting from a spin-off of the Homestead Village operations based
upon the number of operating Homestead Village properties at the end of
1997, the projected EBITDA for Homestead in 1998, and an assumed EBITDA
multiple and the proportionate interest of each of ATLANTIC, PTR and SCG in
the net benefit and in the 80 properties to be combined and the national
scope of the new Homestead entity.
(iv) The proposed contributions by ATLANTIC, PTR and SCG using discounted
cash flow analysis of projected net operating income for the 80 properties
in operation and under development, as well as the methodology for
calculating the amount of the contribution by SCG using discounted cash
flow analysis of REIT management and property management fees for the
Homestead Village operations that SCG would have received from ATLANTIC and
PTR, net of projected operating overhead of SCG related to the 80 Homestead
Village properties. In particular, the ATLANTIC Board considered the
requirement that ATLANTIC contribute to Homestead $18.6 million in cash in
order to assure that ATLANTIC receive all of its shares of Homestead Common
Stock at the Closing Date, rather than receiving shares in smaller
increments over time as funds are expended for Homestead Village properties
contributed by ATLANTIC. The ATLANTIC Board examined SCG's methodology in
determining those contributions, the projections employed by SCG, the
assumptions underlying the projections, the mathematical accuracy of the
projections, and the resulting percentages of the contributions of each of
ATLANTIC, PTR and SCG and found them to be reasonable.
(v) The estimated impact of the proposed transaction on the shareholders
of ATLANTIC comparing the estimated value of a share of common stock of
ATLANTIC based upon 1997 estimated funds from operations and the current
funds from operations multiple to the estimated value of the various
Homestead Securities which shareholders would own directly or indirectly as
a result of the Transaction, with no weight attributed to the Homestead
Warrants.
(vi) The estimated impact of the proposed Transaction on ATLANTIC and
ATLANTIC's balance sheet, having reviewed historical performance of
ATLANTIC, internal forecasts assuming no spin-off and internal forecasts
assuming a spin-off as of January 1996, and the impact of the proposed
Transaction on ATLANTIC's covenants under its loan agreements.
(vii) The balance sheets of Homestead giving effect to the proposed
Transaction and full funding of the convertible mortgage debt, the capital
structure of Homestead at cost and the Homestead Warrants. In particular,
the ATLANTIC Board considered whether the number of shares issuable upon
exercise of the Homestead Warrants and conversion of the convertible
mortgage loans might restrict appreciation in the per share price of
Homestead Common Stock for an extended period.
(viii) The impact of the Transaction on ATLANTIC's projected funds from
operations and ATLANTIC's ability to continue to make cash distributions to
shareholders at the current level. The ATLANTIC Board considered the fact
that projected funds from operations for 1996 and 1997 would be impacted by
the Transaction but noted that the amendment to the ATLANTIC REIT
Management Agreement to exclude income from the convertible mortgage loans
as a basis for ATLANTIC REIT Manager compensation would in part offset the
potential decrease in funds from operations caused by the Transaction.
(ix) The impact of the REIT tax rules on the operation of Homestead
Village properties by ATLANTIC. The ATLANTIC Board was advised that the
current methods of operation under the REIT tax rules would impose certain
inefficiencies in operation of the Homestead Village properties by ATLANTIC
or loss of certain revenues from the properties.
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(x) The terms of the convertible mortgage loans and the Homestead
Warrants. The ATLANTIC Board considered the value of the continued
investment by ATLANTIC in Homestead Village facilities through the
convertible mortgage loans, the obligations of ATLANTIC under the Funding
Commitment Agreement and ATLANTIC's source of funding. The ATLANTIC Board
considered the difference in the amount of its funding obligation to the
stated amount of the convertible mortgage notes it will receive under the
Funding Commitment Agreement.
(xi) The Distribution will result in a taxable dividend to shareholders.
The ATLANTIC Board considered the estimated amount of such tax in light of
the value to be created by the spin-off. For a description of the estimated
amount of the taxable dividend based on certain assumptions and on various
assumed values of the Homestead Securities, see "--Federal Income Tax
Consequences--Tax Consequences to ATLANTIC Shareholders--The Distribution."
(xii) The substantial ownership interest of SCG in ATLANTIC and PTR and
the impact that such ownership interest was likely to have on SCG in
structuring the Transaction.
(xiii) The ATLANTIC Board considered the condition to the Merger
Agreement that the ATLANTIC Special Committee receive a written opinion
from an investment banking firm satisfactory to the ATLANTIC Special
Committee that the consideration to be paid to ATLANTIC in the proposed
Transaction was fair from a financial point of view to ATLANTIC
shareholders (other than SCG).
(xiv) As noted above, the ATLANTIC Board considered the recommendation of
the ATLANTIC Special Committee. In reaching its determination, the ATLANTIC
Special Committee considered the same factors described herein which were
considered by the ATLANTIC Board as a whole. The ATLANTIC Special Committee
consulted with SCG management as well as with its legal counsel and with
J.P. Morgan. In addition, the ATLANTIC Special Committee considered the
opinion, analyses and presentations of J.P. Morgan described below under
"--Fairness Opinion" including the opinion of J.P. Morgan to the effect
that, as of the date of such opinion, and based upon and subject to certain
matters stated therein, the consideration to be paid to ATLANTIC in the
proposed Transaction was fair from a financial point of view to ATLANTIC
shareholders (other than SCG). In this respect, while the ATLANTIC Special
Committee did not explicitly adopt J.P. Morgan's financial analyses, the
ATLANTIC Special Committee placed special emphasis on such analyses in its
overall evaluation of the Transaction and viewed such analyses as favorable
to its determination.
In view of the wide variety of factors considered by the ATLANTIC Board, the
ATLANTIC Board did not quantify or otherwise attempt to assign relative
weights to the specific factors considered in making its determination.
FAIRNESS OPINION
Pursuant to an engagement letter dated April 1, 1996 (the "Engagement
Letter"), ATLANTIC retained J.P. Morgan to deliver a fairness opinion in
connection with the proposed Transaction.
At the meeting of the ATLANTIC Special Committee on May 17, 1996, J.P.
Morgan rendered its oral opinion to the ATLANTIC Special Committee that, as of
such date, the consideration to be paid to ATLANTIC in the proposed
Transaction was fair from a financial point of view to ATLANTIC shareholders
(other than SCG). J.P. Morgan has confirmed its May 17, 1996 oral opinion by
delivering its written opinion to the ATLANTIC Special Committee, dated as of
the date of this Information Statement and Prospectus, that, as of such date,
the consideration to be paid to ATLANTIC in the proposed Transaction was fair
from a financial point of view to ATLANTIC shareholders (other than SCG). No
limitations were imposed by the ATLANTIC Special Committee upon J.P. Morgan
with respect to the investigations made or procedures followed by it in
rendering its opinions.
THE FULL TEXT OF THE WRITTEN OPINION OF J.P. MORGAN DATED AS OF THE DATE OF
THIS INFORMATION STATEMENT AND PROSPECTUS, WHICH SETS FORTH THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS
ANNEX II TO THIS INFORMATION STATEMENT AND PROSPECTUS AND IS INCORPORATED
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HEREIN BY REFERENCE. ATLANTIC SHAREHOLDERS ARE URGED TO READ THE OPINION IN
ITS ENTIRETY. J.P. MORGAN'S WRITTEN OPINION IS ADDRESSED TO THE ATLANTIC
SPECIAL COMMITTEE, IS DIRECTED ONLY TO THE CONSIDERATION TO BE PAID IN THE
TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY ATLANTIC
SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE ATLANTIC SPECIAL
MEETING. THE SUMMARY OF THE OPINION OF J.P. MORGAN SET FORTH IN THIS
INFORMATION STATEMENT AND PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinions, J.P. Morgan reviewed, among other things; in
the case of its May 17, 1996 opinion, a draft of the Merger Agreement and the
Related Agreements (as defined in the Merger Agreement) and, in the case of
its written opinion dated as of the date of this Information Statement and
Prospectus, the Merger Agreement, the Related Agreements (as defined in the
Merger Agreement) and this Information Statement and Prospectus; certain
information concerning Alabama Homestead Incorporated and Atlantic Homestead
Village Incorporated (collectively, the "Portfolio") and Homestead and certain
publicly available information concerning certain other companies engaged in
businesses comparable to those of the Portfolio and Homestead; publicly
available terms of certain transactions involving companies comparable to the
Portfolio and Homestead and the consideration received in connection with such
transactions; the audited financial statements of ATLANTIC for the fiscal year
ended December 31, 1995; and certain internal financial analyses and forecasts
concerning the Portfolio and Homestead prepared by the management of ATLANTIC
and Homestead, respectively. J.P. Morgan also held discussions with certain
members of the management of ATLANTIC and Homestead with respect to certain
aspects of the Transaction, and the past and current business operations of
ATLANTIC and the Portfolio, the financial condition and future prospects and
operations of ATLANTIC, Homestead and the Portfolio, the effects of the
Transaction on the financial condition and future prospects of ATLANTIC and
Homestead and certain other matters believed necessary or appropriate to J.P.
Morgan's inquiry. In addition, J.P. Morgan reviewed such other financial
studies and analyses and considered such other information as it deemed
appropriate for the purposes of its opinions.
J.P. Morgan relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or
that was furnished to it by ATLANTIC and Homestead or otherwise reviewed by
J.P. Morgan, and J.P. Morgan has not assumed any responsibility or liability
therefor. J.P. Morgan has not conducted any valuation or appraisal of any
assets or liabilities, nor have any valuations or appraisals been provided to
J.P. Morgan. In relying on financial analyses and forecasts provided to J.P.
Morgan, J.P. Morgan has assumed that they have been reasonably prepared based
on assumptions reflecting the best currently available estimates and judgments
by management of ATLANTIC or Homestead, as applicable, as to the expected
future results of operations and financial condition of ATLANTIC and
Homestead, respectively. J.P. Morgan has also assumed that the Transaction
will have the tax consequences described in this Information Statement and
Prospectus, and in discussions with, and materials furnished to J.P. Morgan
by, representatives of ATLANTIC, and that the other transactions contemplated
by the Merger Agreement and the Related Agreements (as defined in the Merger
Agreement) will be consummated as described in the Merger Agreement, the
Related Agreements (as defined in the Merger Agreement) and this Information
Statement and Prospectus.
The projections furnished to J.P. Morgan for the Portfolio and Homestead
were prepared by the respective management of each company. Neither ATLANTIC
nor Homestead publicly discloses internal management projections of the type
provided to J.P. Morgan in connection with J.P. Morgan's analysis of the
Transaction, and such projections were not prepared with a view toward public
disclosure. These projections were based on numerous variables and assumptions
that are inherently uncertain and may be beyond the control of management,
including, without limitation, factors related to general economic and
competitive conditions and prevailing interest rates. Accordingly, actual
results could vary significantly from those set forth in such projections.
J.P. Morgan's opinions are based on economic, market and other conditions as
in effect on, and the information made available to J.P. Morgan as of, the
date of such opinions. Subsequent developments may affect the written opinion
dated as of the date of this Information Statement and Prospectus, and J.P.
Morgan does not have any obligation to update, revise, or reaffirm such
opinion. J.P. Morgan expressed no opinion as to the price at which the
Homestead Securities will trade at any future time.
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In accordance with customary investment banking practice, J.P. Morgan
employed generally accepted valuation methods in reaching its opinions. The
following is a summary of the material financial analyses utilized by J.P.
Morgan in connection with providing its written opinion dated as of the date
of this Information Statement and Prospectus.
Determination of Economic Benefits of Transaction: Using publicly available
information, J.P. Morgan compared selected financial data of Homestead with
similar data for selected publicly traded companies engaged in businesses
which J.P. Morgan judged to be analogous to Homestead. The companies selected
by J.P. Morgan were Studio Plus Hotels, Extended Stay America, Amerihost
Properties, John Q. Hammons, La Quinta Inns, Prime Hospitality, Servico, and
Supertel Hospitality. These companies were selected, among other reasons,
because of their focus on the extended-stay or limited-service hotel markets.
Additionally, using publicly available information, J.P. Morgan compared
selected financial data of ATLANTIC with similar data for selected publicly
traded companies engaged in businesses which J.P. Morgan judged to be
analogous to ATLANTIC. The companies selected by J.P. Morgan were Avalon
Properties, Camden Property Trust, Equity Residential, Evans Withycombe,
Irvine Apartment, Merry Land, Oasis Residential, Post Properties, Smith
Residential Trust, United Dominion, and Wellsford Residential, as well as PTR.
These companies were selected, among other reasons, because of their focus on
the multifamily real estate markets and the size of their public market
capitalization.
With respect to Homestead, for each comparable company, publicly available
financial performance through the twelve months ended December 31, 1995 was
measured. Based on December 31, 1995 stock prices, J.P. Morgan selected the
mean and the median value for EBITDA and earnings per share ("EPS") multiples
(excluding Extended Stay America, which has negative multiples), specifically:
projected 1996 EBITDA (14.6x for Studio Plus and 8.1x to 8.4x for the limited-
service hotels); and projected 1996 EPS (36.8x for Studio Plus and 14.4x to
15.0x for the limited-service hotels). Based on the extended-stay comparables,
multiple ranges of 14.0x to 17.0x on an EBITDA basis, and 30.0x to 40.0x on an
EPS basis, were then applied to Homestead's 1997 EBITDA and EPS, yielding
implied trading values for Homestead Common Stock, on a fully diluted basis,
of approximately $8.96 to $10.88 per share and $8.59 to $11.46 per share,
respectively, at year-end 1996. Based on ATLANTIC's proposed ownership stake
in Homestead, on a fully diluted basis, these implied trading values resulted
in a total Homestead value of $1.15 to $1.63 per ATLANTIC share.
With respect to ATLANTIC, for each comparable company, publicly available
financial performance through the twelve months ended December 31, 1995 was
measured. Based on December 31, 1995 stock prices, J.P. Morgan selected for
those comparable companies (excluding PTR) the mean and the median value for
the 1996 funds from operation multiples, 10.6x and 10.7x, respectively. J.P.
Morgan selected a 1996 funds from operations multiple of 12.1x for PTR. Funds
from operations multiple ranges of 10.7x to 12.1x were then applied to the
difference between ATLANTIC's estimated funds from operations per share at
year-end 1997 including and excluding the Portfolio ($0.06 per share). The
result was a range of value per share attributable to the Portfolio if
retained by ATLANTIC of $0.64 and $0.72 at year-end 1996, as compared to the
total value created for ATLANTIC shareholders of $1.15 to $1.63 per ATLANTIC
share through the Transaction.
Determination of Ownership of Homestead: J.P. Morgan analyzed management's
discounted cash flow ("DCF") analysis which was performed to determine each
party's contribution to Homestead and thus the percentage ownership each party
would receive in Homestead. Specifically, J.P. Morgan reviewed and sensitized
the underlying assumptions driving each party's allocation of value as well as
analyzed changes in capital market assumptions which could influence each
party's allocation of value relative to the other parties. The DCF analysis
management used to determine the allocation of ownership for ATLANTIC and PTR
used similar operating and cost assumptions and, as such, similar changes in
assumptions for both ATLANTIC and PTR did not significantly change the
proportion of value relative to each other. Accordingly, J.P. Morgan analyzed
SCG's allocation of ownership in Homestead and determined that such allocation
was reasonable and that changes in capital market assumptions for ATLANTIC's
and PTR's DCF analysis did not significantly affect ATLANTIC's ownership
relative to SCG.
Consideration: ATLANTIC and PTR receive the same compensation pro rata (30%
Homestead Common Stock and 70% convertible mortgages, while SCG is receiving
100% of its allocated ownership in Homestead Common Stock). Accordingly, J.P.
Morgan compared the convertible mortgages and the Homestead Common Stock.
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In reviewing the convertible mortgages, J.P. Morgan performed two analyses.
First, J.P. Morgan performed a valuation (based on the Black-Scholes model) to
determine the fair value of the convertible mortgages. Second, J.P. Morgan
calculated a five-year Internal Rate of Return ("IRR") for the Homestead
Common Stock and the convertible mortgages under various growth scenarios. The
determination of fair value concluded that the mortgages have a value in
excess of par and the return analysis concluded that the convertible mortgages
have an attractive return relative to the Homestead Common Stock.
In connection with the Homestead Warrants to be received by ATLANTIC in
connection with the Transaction, J.P. Morgan concluded that they provided
additional value to ATLANTIC.
The summary set forth above does not purport to be a complete description of
the analyses or data presented by J.P. Morgan. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. J.P. Morgan believes that the summary set
forth above and their analyses must be considered as a whole and that
selecting portions thereof, without considering all of its analyses, could
create an incomplete view of the processes underlying its analyses and
opinion. J.P. Morgan based its analyses on assumptions that it deemed
reasonable, including assumptions concerning general business and economic
conditions and industry-specific factors. The other principal assumptions upon
which J.P. Morgan based its analyses are set forth above under the description
of each such analysis. J.P. Morgan's analyses are not necessarily indicative
of actual values or actual future results that might be achieved, which values
may be higher or lower than those indicated. Moreover, J.P. Morgan's analyses
are not and do not purport to be appraisals or otherwise reflective of the
prices at which businesses actually could be bought or sold.
As a part of its investment banking business, J.P. Morgan and its affiliates
are continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, investments for passive and control
purposes, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes. J.P. Morgan was selected to deliver an opinion to the
ATLANTIC Special Committee with respect to the Transaction on the basis of
such experience and its familiarity with ATLANTIC.
Pursuant to the Engagement Letter, ATLANTIC has agreed to pay J.P. Morgan a
fee of $225,000 for the delivery of its opinion. In addition, ATLANTIC has
agreed to reimburse J.P. Morgan for its expenses incurred in connection with
its services, including the fees and disbursements of counsel, and will
indemnify J.P. Morgan against certain liabilities, including liabilities
arising under the securities laws.
J.P. Morgan and its affiliates maintain banking and other business
relationships with ATLANTIC, PTR and SCG and its affiliates, including Morgan
Guaranty Trust Company of New York acting as the agent bank under ATLANTIC's
existing commercial bank facility, for which it receives customary fees.
Specifically, in 1996 J.P. Morgan acted as financial advisor to SCG in the
private placement of approximately $75 million of equity securities, acted as
lead manager for Security Capital Industrial Trust ("SCI") in a $200 million
bond offering, acted as co-manager for SCI in a $135 million preferred stock
issuance, acted as lead manager for PTR in a $150 million bond offering, and
performed various exposure management transactions for SCI. In the ordinary
course of their businesses, J.P. Morgan's affiliates may actively trade the
debt and equity securities of ATLANTIC, PTR or SCG or its affiliates for their
own account or for the accounts of customers and, accordingly, they may at any
time hold long or short positions in such securities. Morgan Guaranty Trust
Company of New York has received fees of approximately $2,500,000 since 1994
in connection with ATLANTIC's commercial bank facility, and J.P. Morgan has
received fees in the aggregate of approximately $4,871,000 in connection with
its capital markets and other work for SCG and affiliates in 1996.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States Federal income tax
consequences of the Transaction to ATLANTIC and ATLANTIC shareholders. The
summary is based upon the Code, its legislative history, administrative
pronouncements, judicial decisions and Treasury regulations, subsequent
changes to any of which may affect the tax consequences described herein or
possibly on a retroactive basis. The summary only
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applies to persons who hold shares of ATLANTIC Common Stock as capital assets
and does not address tax considerations which may affect the treatment of
certain special status taxpayers such as financial institutions, broker-
dealers, life insurance companies, tax-exempt organizations, investment
companies and foreign taxpayers. The summary does not address the foreign,
state, local or other tax consequences of the Transaction. SHAREHOLDERS ARE
URGED TO CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES TO THEM OF THE TRANSACTION AND AS TO THE FOREIGN,
STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE TRANSACTION.
Tax Consequences to ATLANTIC
The Mergers. PTR, ATLANTIC, SCG and Homestead have requested a ruling from
the IRS that, among other matters, the Mergers constitute a transaction
subject to Section 351 of the Code and related provisions. In the event that
ATLANTIC does not receive a favorable ruling from the IRS prior to the
consummation of the Transaction, it is expected that Mayer, Brown & Platt will
give an opinion that, among other matters, the Mergers constitute a
transaction subject to Section 351 or the reorganization provisions of the
Code and related provisions. The obligation of PTR, ATLANTIC, Homestead and
SCG to consummate the Mergers is conditioned on receipt of either a favorable
ruling from the IRS or an opinion of Mayer, Brown & Platt that the Mergers so
qualify. Assuming the Mergers constitute a transaction subject to Section 351
or the reorganization provisions of the Code and related provisions, (i)
ATLANTIC will not recognize gain, income or loss upon the receipt of the
Homestead Common Stock in the Mergers in exchange for the Homestead Village
properties transferred by ATLANTIC to Homestead in the Mergers except to the
extent that ATLANTIC is treated as having received "boot" in the Mergers, (ii)
the tax basis of the Homestead Common Stock received by ATLANTIC will be the
same as ATLANTIC's and its subsidiaries' tax basis in the Homestead Village
properties transferred by ATLANTIC to Homestead in the Mergers reduced by any
liabilities of ATLANTIC's subsidiaries assumed by Homestead in the Mergers,
and (iii) the holding period of the Homestead Common Stock received by
ATLANTIC will be the same as ATLANTIC's and its subsidiaries' holding period
in the Homestead Village properties, allocated among the shares of the
Homestead Common Stock received according to the fair market values of such
properties. To the extent that ATLANTIC is treated as having received "boot"
in the Mergers, ATLANTIC will recognize taxable gain with respect to each of
the Homestead Village properties transferred by ATLANTIC to Homestead in the
Mergers in an amount equal to the lesser of (i) the fair market value on the
date of the Merger of the "boot" received by ATLANTIC allocated to such
Homestead Village property and (ii) the amount by which the fair market value
of such Homestead Village property exceeds ATLANTIC's or its subsidiaries' tax
basis therein. The tax basis of the Homestead Common Stock received by
ATLANTIC will be increased by the amount of any such taxable gain recognized
and will be decreased by the fair market value of the "boot" received.
ATLANTIC's tax basis in any "boot" received will equal the fair market value
on the date of the Merger of such "boot." Any taxable gain recognized by
ATLANTIC as a result of the receipt of "boot" will reduce the amount of gain
recognized by ATLANTIC on the Distribution.
The Distribution. ATLANTIC will recognize gain upon the Distribution of the
Homestead Securities to its shareholders in an amount equal to the excess of
the sum of (i) the fair market value of the Homestead Securities on the
Distribution Record Date and (ii) cash distributed in lieu of fractional
shares of Homestead Common Stock and fractional Homestead Warrants over
ATLANTIC's tax basis immediately prior to the Distribution in the Homestead
Securities it receives in the Mergers, and the earnings and profits of
ATLANTIC will be increased by the amount of any such gain recognized.
ATLANTIC's gain on the Distribution will be reduced to the extent that
ATLANTIC recognized gain on the Mergers from the receipt of "boot" and its tax
basis in the Homestead Common Stock was increased thereby. In computing its
taxable income for the year in which the Distribution occurs, ATLANTIC will be
allowed a dividends paid deduction with respect to the Distribution in an
amount equal to the sum of the fair market value on the Distribution Record
Date of the Homestead Securities distributed and any cash distributed in lieu
of fractional shares of Homestead Common Stock and fractional Homestead
Warrants, but in no event in excess of the earnings and profits of ATLANTIC.
The fair market value of the Homestead Securities on the Distribution Record
Date will be determined by the best available evidence as to their value on
that date. Assuming there are no aberrations in the trading of the
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Homestead Securities, and absent special factors bearing on the value of a
particular holder's Homestead Securities, the best available evidence of the
fair market value of the Homestead Securities on the Distribution Record Date
should be their value as reflected by their trading prices on the Distribution
Record Date or within a reasonable period before or after such date. To the
extent the trading price of the Homestead Securities does not reflect their
fair market value because, for example, there are too few trades, the trading
is of a sporadic nature or such securities are not traded, then other relevant
data bearing on the value of the Homestead Securities will be considered in
determining the fair market value of the Homestead Securities.
Thus, as a result of the Transaction, ATLANTIC will recognize gain in an
amount equal to the excess of the value of the Homestead Village properties
transferred by ATLANTIC to Homestead in the Mergers over ATLANTIC's or its
subsidiaries' basis therein (the "net built-in gain"). ATLANTIC will recognize
such gain in one of the following ways: (i) as a result of the receipt of
"boot" in the Mergers, (ii) upon the Distribution, or (iii) in part as a result
of the receipt of "boot" in the Mergers and in part upon the Distribution. In
addition, if the fair market value of any Homestead Village property
transferred by ATLANTIC to Homestead in the Mergers were less than ATLANTIC's
or its subsidiaries' tax basis therein (a "built-in loss") and if the fair
market value of "boot" received by ATLANTIC in the Mergers were to exceed
ATLANTIC's net built-in gain in the Homestead Village properties, ATLANTIC
would recognize additional gain in the Transaction in an amount equal to the
lesser of (i) ATLANTIC's aggregate built-in losses in the Homestead Village
properties and (ii) the excess of the fair market value of the "boot" received
by ATLANTIC in the Mergers over ATLANTIC's net built-in gain in the Homestead
Village properties. However, it is not anticipated that any of the Homestead
Village properties transferred by ATLANTIC in the Mergers will have a built-in
loss.
Mortgages. After consummation of the Transaction, ATLANTIC will hold
mortgage notes of Homestead convertible into shares of Homestead Common Stock.
See "The Transaction--Funding Commitment Agreements." The terms of the Funding
Commitment Agreement provide that ATLANTIC will fund $1,133,535 for each
$1,000,000 principal amount of convertible mortgage loans. Accordingly,
ATLANTIC will be treated as having acquired the convertible mortgage loans at a
premium which ATLANTIC will be entitled to amortize as an offset to interest
income (with a corresponding reduction in ATLANTIC's tax basis) under a
constant yield method over the terms of the convertible mortgage notes if (as
ATLANTIC intends) an election under Section 171 of the Code is made. Interest
paid by Homestead to ATLANTIC on the mortgage notes will constitute qualified
income for purposes of determining whether ATLANTIC meets the gross income
requirements for REIT qualification.
The terms of the mortgages provide for adjustment of the price for conversion
of the mortgages into the Homestead Common Stock if Homestead makes certain
distributions of stock, cash or other property to its shareholders. While
Homestead does not presently contemplate making such a distribution, if
Homestead makes a distribution of cash or property resulting in an adjustment
to the conversion price, ATLANTIC, as a holder of such convertible mortgages,
may be viewed as receiving a "deemed distribution" under Section 305 of the
Code, even if ATLANTIC does not hold any Homestead Common Stock at such time.
The deemed distribution would constitute a taxable dividend, taxable as
ordinary income, to the extent that the earnings and profits of Homestead were
allocable to the deemed distribution. The amount of the deemed distribution
which exceeded the allocated earnings and profits of Homestead would be
considered a return of capital and would reduce ATLANTIC's tax basis in the
convertible mortgages (but not below zero) by the value of the deemed
distribution. To the extent that the value of the deemed distribution exceeds
ATLANTIC's tax basis in the convertible mortgages, the deemed distribution
would result in gain to ATLANTIC. ATLANTIC's tax basis in the convertible
mortgages would then immediately be increased by the value of the property
deemed to have been distributed.
Except as discussed below with respect to cash received in lieu of fractional
shares, ATLANTIC will not recognize gain or loss upon the exercise of the
conversion right. ATLANTIC's tax basis in the Homestead Common Stock received
upon the conversion will be equal to ATLANTIC's tax basis in the mortgages
converted. Upon conversion of the mortgages, ATLANTIC will receive cash in lieu
of any fractional shares of Homestead Common Stock and will recognize gain to
the extent that the cash received exceeds ATLANTIC's tax basis in the portion
of the mortgages converted for cash in lieu of fractional shares. In the event
that ATLANTIC exercises its conversion right, it is expected that ATLANTIC,
consistent with its status as a REIT,
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<PAGE>
will shortly thereafter distribute to its shareholders or sell in the open
market the Homestead Common Stock received. ATLANTIC will recognize gain upon
such distribution or sale of the Homestead Common Stock received upon
conversion in an amount equal to the excess of the fair market value of the
Homestead Common Stock over ATLANTIC's tax basis therein, and the earnings and
profits of ATLANTIC will be increased by the amount of any such gain
recognized. In computing its taxable income for the year in which any such
Homestead Common Stock is distributed, ATLANTIC will be allowed a dividends
paid deduction in an amount equal to the fair market value at the time of
distribution of the Homestead Common Stock distributed, but in no event in
excess of the earnings and profits of ATLANTIC.
Commitment Fee Income. The receipt by ATLANTIC of the Homestead Warrants in
consideration for entering into the Funding Commitment Agreement will be
treated as a commitment fee to ATLANTIC for entering into the Funding
Commitment Agreement which will constitute taxable income to ATLANTIC. Such
income will constitute qualified income for purposes of determining whether
ATLANTIC meets the gross income requirements for REIT qualification. The
earnings and profits of ATLANTIC will be increased by the amount of the
commitment fee income, consequently increasing the amount of the Distribution
which will be treated as a fully taxable dividend to ATLANTIC shareholders.
Tax Consequences to Homestead
Assuming the Mergers constitute a transaction subject to Section 351 or the
reorganization provisions of the Code and related provisions, (i) Homestead
will not recognize gain, income or loss as a result of the Transaction, (ii)
the tax bases of the Homestead Village properties received by Homestead from
ATLANTIC and its subsidiaries will be the same as the tax bases of ATLANTIC
and its subsidiaries in such properties increased by the amount of any gain
recognized by ATLANTIC as a result of the receipt by ATLANTIC of "boot" in the
Mergers, and (iii) the holding period of the Homestead Village properties
received by Homestead from ATLANTIC and its subsidiaries will be the same as
the holding period of ATLANTIC and its subsidiaries in such properties.
Tax Consequences to ATLANTIC Shareholders
The Distribution. The amount received by ATLANTIC shareholders in the
Distribution will be equal to the fair market value of the Homestead
Securities received plus the amount of any cash received in lieu of fractional
shares of Homestead Common Stock and fractional Homestead Warrants. The
Distribution will constitute a taxable dividend to ATLANTIC shareholders,
taxable as ordinary income, to the extent of the earnings and profits of
ATLANTIC allocable to such Homestead Securities and cash. The amount of the
distribution which exceeds the allocated earnings and profits of ATLANTIC will
be treated as a nontaxable reduction (although not below zero) of a
shareholder's adjusted tax basis in its ATLANTIC Common Stock. To the extent
that the Distribution exceeds such shareholder's adjusted tax basis in its
ATLANTIC Common Stock, the Distribution will be treated as gain to such
shareholder. Any such gain will constitute capital gain to such shareholder if
the shareholder holds its shares of ATLANTIC Common Stock as a capital asset,
and will constitute long-term capital gain if such shareholder has held such
shares for at least one year. As discussed above, gain recognized by ATLANTIC
upon the distribution of the Homestead Securities will increase ATLANTIC's
earnings and profits, thus increasing the portion of the distributions of
ATLANTIC for the taxable year of the Distribution which will be treated as
taxable dividends as opposed to return of capital.
To the extent that ATLANTIC has a net capital gain for the taxable year, it
may designate all or a portion of any dividend distributed as a capital gain
dividend. In this event, shareholders will be provided written notice of such
designation within 30 days after the close of ATLANTIC's taxable year.
Shareholders will be taxed at the long-term capital gains rate on any such
capital gain dividends regardless of the shareholder's holding period of its
ATLANTIC Common Stock. The amount of capital gain dividends which may be
designated by ATLANTIC will be reduced by any capital loss carryovers of
ATLANTIC. Gain recognized by ATLANTIC as a result of the Distribution will
constitute capital gain to the extent attributable to Homestead Village
properties held by ATLANTIC and its subsidiaries in excess of one year prior
to the Mergers and ATLANTIC anticipates
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<PAGE>
that it will designate dividends attributable to any net capital gain
resulting from the Distribution as capital gain dividends. However, ATLANTIC
does not anticipate that it will derive significant net capital gain from the
Distribution.
The following sets forth an estimate of the portion of the Distribution
taxable as a dividend to ATLANTIC shareholders, based upon various assumed
values for the Homestead Securities and the following additional assumptions.
The following information assumes that (i) the total number of outstanding
shares of ATLANTIC Common Stock on the Distribution Record Date is 74,602,446
(since ATLANTIC has not established a price for shares to be issued in the
ATLANTIC IPO, the price at which prior shares have been issued was used for
purposes of computing the number of shares to be issued in the ATLANTIC IPO),
(ii) ATLANTIC will make total cash distributions to shareholders for calendar
year 1996 in an amount equal to $54,740,000, (iii) ATLANTIC's total earnings
and profits other than from the Transaction for calendar year 1996 is
$34,900,000, (iv) ATLANTIC's and its subsidiaries' tax basis in the Homestead
Village properties immediately prior to the Transactions is $47,622,293, (v)
the ATLANTIC IPO is consummated and (vi) no underwriter's overallotment is
exercised in the ATLANTIC IPO. The foregoing assumptions and the assumed
values of Homestead Securities below are intended for informational purposes
only for purposes of computing the Portion of the Distribution Taxable as a
Dividend based upon such assumptions and are not intended as an indication of
the actual number of shares of ATLANTIC Common Stock which will be or are
expected to be outstanding on the Distribution Record Date or which will or
are expected to be issued in the ATLANTIC IPO, actual or expected cash
distributions to be made by ATLANTIC for calendar year 1996, actual or
expected taxable income of ATLANTIC for calender year 1996, actual or expected
tax basis of ATLANTIC and its subsidiaries in the Homestead Village properties
immediately prior to the Transactions, whether the underwriter's overallotment
will or is expected to be exercised in the ATLANTIC IPO, or ATLANTIC's
estimate of the value of the Homestead Securities.
<TABLE>
<S> <C> <C> <C>
ASSUMED ASSUMED ASSUMED VALUE
VALUE OF VALUE OF DISTRIBUTION PORTION OF
ONE SHARE OF OF ONE PER SHARE OF THE DISTRIBUTION
HOMESTEAD HOMESTEAD ATLANTIC TAXABLE AS
COMMON WARRANT COMMON STOCK A DIVIDEND
STOCK --------- --------------- ----------------
- ------------
$10.00 $ 0.00 $0.56 $0.20
$12.50 $ 2.50 $0.79 $0.32
$15.00 $ 5.00 $1.03 $0.50
$17.50 $ 7.50 $1.27 $0.70
$20.00 $10.00 $1.51 $0.90
</TABLE>
Foreign Withholding. For purposes of this discussion, a "non-U.S. holder"
means any PTR shareholder who, for United States income tax purposes, is a
foreign corporation, a nonresident alien, a nonresident alien fiduciary of a
foreign estate or trust, or a foreign partnership which has at least one
member that is, for United States Federal income tax purposes, a foreign
corporation, a nonresident alien individual or a nonresident alien fiduciary
of a foreign estate or trust. Non-U.S. holders will be subject to U.S.
withholding tax at a rate of 30%, or if applicable, a lower treaty rate, on
the portion of the Distribution not attributable to capital gains unless the
Distribution is effectively connected with the conduct of a trade or business
in the United States by such non-U.S. holder. In addition, under the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"), any distribution made
by ATLANTIC to a non-U.S. holder, to the extent attributable to gains from
dispositions of United States Real Property Interests ("USRPIs") by ATLANTIC
("USRPI Capital Gains"), will be considered effectively connected with a U.S.
trade or business of the non-U.S. holder and subject to U.S. income tax at the
rates applicable to U.S. individuals or corporations. ATLANTIC will be
required to withhold tax equal to 35% of the amount of the Distribution to the
extent it constitutes USRPI Capital Gains, without regard to the portion of
the Distribution which ATLANTIC designates as a capital gain dividend. The
portion of the Distribution which constitutes USRPI Capital Gains may also be
subject to the 30% branch profits tax (unless reduced by treaty) in the case
of a non-U.S. holder that is a foreign corporation.
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<PAGE>
Any portion of the Distribution that exceeds both current and accumulated
earnings and profits of ATLANTIC will not be taxed as either an ordinary
dividend or a capital gain dividend. However, because ATLANTIC will not be able
to determine at the time the Distribution is made whether or not the
Distribution will be in excess of ATLANTIC's current and accumulated earnings
and profits, the Distribution will be subject to full withholding. The non-U.S.
holder may seek a refund of over-withholding from the Internal Revenue Service
if it is subsequently determined that the Distribution was, in fact, in excess
of ATLANTIC's current and accumulated earnings and profits. Under current
Treasury Regulations, distributions paid to an address in a foreign country are
presumed to be paid to a resident of that country (unless the payor has
knowledge to the contrary) for foreign withholding purposes and, under the
current interpretation of the Treasury Regulations, for purposes of determining
the applicability of a tax treaty rate. In any case where a distribution is
payable in any medium other than money, the withholding agent cannot release
the property so distributed until the property has been converted into funds
sufficient to enable the withholding agent to pay over in money the tax
required to be withheld. For a discussion of the manner in which this
withholding obligation will be satisfied by ATLANTIC in connection with the
Distribution, see "Foreign Shareholders."
Backup Withholding. Under the backup withholding rules of the Code (which
generally impose a 31% withholding tax on certain persons who fail to furnish
the information required under the United States tax reporting requirements), a
ATLANTIC shareholder who receives Homestead Securities or cash in lieu of
fractional shares of Homestead Common Stock or fractional Homestead Warrants in
the Distribution may be subject to backup withholding with respect to such
Homestead Securities and cash received in the Distribution unless such
shareholder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (ii) provides a
correct taxpayer identification number and certifies under penalties of perjury
that the taxpayer identification number is correct and that the holder is not
currently subject to backup withholding because of a failure to report all
dividend and interest income. Any amount withheld under these rules will be
credited against the shareholder's Federal income tax liability.
Information Reporting. ATLANTIC is required to report the amount distributed
to shareholders pursuant to the Distribution (and the allocation of such amount
among ordinary dividends, capital gain dividends and return of capital) to the
IRS and each shareholder on Form 1099-DIV.
Homestead Common Stock. A shareholder's tax basis in the Homestead Common
Stock received in the Distribution will be the fair market value of the
Homestead Common Stock on the Distribution Record Date to be determined as
discussed above. A shareholder's holding period for the Homestead Common Stock
received in the Distribution will begin on the day after the Distribution
Record Date.
Upon the sale or exchange of Homestead Common Stock, a Homestead shareholder
will realize gain or loss measured by the difference between the amount
realized on the sale or other disposition and the shareholder's tax basis in
the Homestead Common Stock. Such gain or loss will be a capital gain or loss to
such shareholder if the shareholder holds its Homestead Common Stock as a
capital asset, and will be a long-term capital gain or loss if the Homestead
shareholder's holding period with respect to the Homestead Common Stock sold is
more than one year at the time of sale or exchange.
Homestead Warrants. A shareholder's tax basis in the Homestead Warrants
received in the Distribution will be the fair market value of the Homestead
Warrants on the Distribution Record Date to be determined as discussed above. A
shareholder's holding period for the Homestead Warrants received in the
Distribution will begin on the day after the Distribution Record Date.
The terms of the Homestead Warrants distributed to ATLANTIC shareholders
pursuant to the Merger Agreement provide for adjustment of the price for
exercise if Homestead makes certain distributions of stock, cash or other
property to its shareholders. While Homestead does not presently contemplate
making such a distribution, if Homestead makes a distribution of cash or
property resulting in an adjustment to the exercise price, the holders of the
Homestead Warrants (the "Warrant Holders") may be viewed as receiving a "deemed
distribution" under Section 305 of the Code even if such Warrant Holder does
not hold any Homestead Common Stock at such time. The deemed distribution would
constitute a taxable dividend, taxable as ordinary income, to the extent that
the earnings and profits of Homestead were allocable to the deemed
distribution. The amount of
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<PAGE>
the deemed distribution which exceeded the allocated earnings and profits of
Homestead would be considered a return of capital, and would reduce the Warrant
Holder's tax basis in the Homestead Warrants (but not below zero) by the value
of the deemed distribution. To the extent that the value of the deemed
distribution exceeds the Warrant Holder's tax basis in its Homestead Warrants,
the deemed distribution would result in gain to such Warrant Holder. In any
event, the Warrant Holder's tax basis in its Homestead Warrants would then
immediately be increased by the amount of the property deemed to have been
distributed.
Except as discussed below with respect to cash received in lieu of fractional
shares, Warrant Holders will not recognize gain or loss upon the exercise of
the Homestead Warrants. The Warrant Holder's tax basis in the Homestead Common
Stock received upon the exercise of the Homestead Warrants will be equal to the
sum of (i) the Warrant Holder's tax basis in the warrants exercised and (ii)
the exercise price paid. Upon the exercise of the Homestead Warrants, Warrant
Holders will receive cash in lieu of any fractional shares of Homestead Common
Stock and will recognize gain to the extent that the cash received exceeds the
Warrant Holder's tax basis in the portion of the Homestead Warrants exercised
for cash in lieu of fractional shares.
Upon a sale or other disposition of a Homestead Warrant, a Warrant Holder
will recognize gain or loss measured by the difference between the amount
realized on the sale or other disposition and the Warrant Holder's tax basis in
the Homestead Warrant. Such gain or loss will be capital gain or loss if the
stock into which the Homestead Warrants are exercisable would be a capital
asset in the Warrant Holder's hands, and will be a short- term capital gain or
loss because the Homestead Warrants expire within one year and therefore the
Warrant Holder's holding period will be one year or less.
If a Warrant Holder's Homestead Warrants expire without being exercised, the
Warrant Holder will recognize a loss at the time such Homestead Warrants expire
equal to its tax basis in the expired Homestead Warrants. In general, such loss
will be a capital loss if the stock into which the warrants were exercisable
would be a capital asset in the Warrant Holder's hands.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
Based on the ownership on July 12, 1996, ATLANTIC's directors and executive
officers who own ATLANTIC Common Stock or PTR Common Shares will, in the
aggregate, receive a total of 21,535 shares of Homestead Common Stock and
14,445 Homestead Warrants as a result of the Transaction. SCG and its directors
and executive officers who own ATLANTIC Common Stock and PTR Common Shares
will, in the aggregate, receive a total of 10,460,177 shares of Homestead
Common Stock (including 2,243,038 shares held in escrow) and 5,109,575
Homestead Warrants as a result of the Transaction. They will also receive cash
in lieu of any fractional shares of Homestead Common Stock and fractional
Homestead Warrants. Certain officers of ATLANTIC and the ATLANTIC REIT Manager,
including David Dressler, John Patterson and Mark Riley, will become officers
and employees of Homestead.
THE MERGER AGREEMENT
Pursuant to the Merger Agreement, PTR and Homestead shall take all actions
necessary to cause PTR Homestead Village Incorporated, a wholly owned
subsidiary of PTR, to be merged with and into Homestead in exchange for
9,485,727 shares of Homestead Common Stock, ATLANTIC and Homestead shall take
all actions necessary to cause Alabama Homestead Incorporated and Atlantic
Homestead Village Incorporated, wholly owned subsidiaries of ATLANTIC, to be
merged with and into Homestead in exchange for an aggregate of 4,201,220 shares
of Homestead Common Stock, and SCG and Homestead shall take all actions
necessary to cause Homestead Village Incorporated, Homestead Realty Services
Incorporated and SCG Homestead Village Incorporated, wholly owned subsidiaries
of SCG, to be merged with and into Homestead in exchange for an aggregate of
4,062,788 shares of Homestead Common Stock of which 2,243,038 shares will be
placed in escrow and released as funds are advanced under the Funding
Commitment Agreements. In addition, pursuant to a warrant purchase agreement
dated as of May 21, 1996 by and among PTR, ATLANTIC, SCG and Homestead (the
"Warrant Purchase Agreement"), PTR and ATLANTIC will receive 6,363,789 and
2,818,517 Homestead
38
<PAGE>
Warrants, respectively, in exchange for entering into their respective Funding
Commitment Agreements described below. SCG will receive 817,694 Homestead
Warrants in exchange for providing funding to Homestead during the time
between the execution of the Merger Agreement and the Closing Date and the use
of office facilities for a period of one year without charge.
For a description of the amount of Homestead Securities to be received by
ATLANTIC shareholders in the Transaction, see "The Transaction--The
Distribution."
The following is a summary of the Merger Agreement, which is attached as
Annex I to this Information Statement and Prospectus and is incorporated
herein by reference. Such summary is qualified in its entirety by reference to
the Merger Agreement.
Representations and Warranties. The Merger Agreement contains customary
representations and warranties of PTR, ATLANTIC, SCG and Homestead, including,
with respect to PTR, ATLANTIC and Homestead, documents filed with the
Commission and the accuracy of the information contained or incorporated
therein, and with respect to PTR, ATLANTIC, SCG and Homestead, the (i)
preparation of the financial statements in accordance with GAAP applied on a
consistent basis, (ii) absence of undisclosed liabilities, (iii) absence of
certain material adverse events and (iv) accuracy of the information provided
to Homestead with respect to the Registration Statement of which this
Information Statement and Prospectus is a part.
Certain Covenants and Agreements. Pursuant to the Merger Agreement, each of
PTR, ATLANTIC and SCG has agreed that, during the period from the date of the
Merger Agreement until the Closing Date or the earlier termination of the
Merger Agreement, it will, among other things (except as permitted by the
Merger Agreement or as consented to in writing by the other parties): (i)
conduct its extended-stay lodging business in the ordinary and usual course
and consistent with past practice; (ii) use its best efforts to take all
actions reasonably necessary to continue in the ordinary and normal course of
its business and consistent with past practice, with the development or
construction of any extended-stay properties currently in development; (iii)
not issue, sell, pledge or dispose of, or agree to issue, sell, pledge or
dispose of, any shares of, or any options, warrants or rights of any kind to
acquire any shares of stock of certain subsidiaries; (iv) not (a) except as
described in clauses (b) through (e) below, incur or become contingently
liable with respect to any additional indebtedness for borrowed money secured
by the assets to be contributed to Homestead, (b) take any action which would
jeopardize PTR's or ATLANTIC's status as a REIT under the Code, (c) sell any
of the properties to be contributed to Homestead, (d) prepay any existing
convertible mortgage loans (except that PTR may cause one of its subsidiaries
to prepay a portion of the existing convertible mortgage loans to the extent
that the costs to acquire and develop the properties being contributed to
Homestead is less than the amounts outstanding under such loans), or (e)
purchase or acquire any properties for use as extended-stay facilities; (v)
use reasonable efforts to preserve its extended-stay lodging business
organization and goodwill, keep available the services of its present
officers, preserve the goodwill and business relationships with its lessees,
operators, suppliers, distributors, customers and others, and not engage in
any action, directly or indirectly, with the intent to affect adversely the
Transaction; (vi) confer with one or more representatives of the other parties
when requested to report on material operational matters and the general
status of ongoing operations of its business; and (vii) maintain, in full
force and effect, with all premiums due thereon paid, policies of insurance
covering all of its insurable tangible assets and businesses related to its
Homestead Village operations in amounts and as to foreseeable risks usually
insured against by persons operating similar businesses under valid and
enforceable policies of insurance issued by nationally recognized insurers.
Pursuant to the Merger Agreement, Homestead has agreed that, during the
period from the date of the Merger Agreement until the Closing or the earlier
termination of the Merger Agreement, it will, among other things (except as
permitted by the Merger Agreement or as consented to in writing by the other
parties): (i) except in certain limited circumstances, not issue, sell, pledge
or dispose of, or agree to issue, sell, pledge or dispose of, any additional
shares of, or any options, warrants or rights of any kind to acquire any
shares of stock of Homestead, of any class or any debt or equity securities
convertible into or exchangeable for such stock, or amend or modify the terms
and conditions of any of the foregoing; (ii) not incur or become contingently
liable
39
<PAGE>
with respect to any indebtedness for borrowed money or enter into any contract
or arrangement with respect thereto; and (iii) not enter into any contract,
arrangement or understanding relating to the disposition of any property to be
received from PTR, ATLANTIC or SCG, however, it may purchase or acquire
properties for use as extended-stay lodging facilities with the consent of
each of the other parties provided that the funds therefor are loaned from SCG
to Homestead at a rate of interest no greater than the prime rate of interest
as announced by Wells Fargo Realty Advisors, Incorporated from time to time
plus one-half of one percent.
Pursuant to the Merger Agreement, (i) each of PTR, ATLANTIC, SCG and
Homestead shall afford to each other party and their respective accountants,
counsel, financial advisors and other representatives full access during
normal business hours throughout the period prior to the Closing to all
properties, books, contracts, commitments and records of such party, as
appropriate and, during such period, shall furnish promptly to the other, (a)
a copy of each report, schedule and other document filed or received pursuant
to the requirements of federal or state securities laws or filed with the
Commission in connection with the transactions contemplated by the Merger
Agreement, (b) such other information concerning their respective businesses,
properties and personnel which are the subject of the Merger Agreement as
shall be reasonably requested, and (c) a writing indicating any change or
occurrence which may have any material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of the properties which are the subject of the Merger
Agreement; (ii) PTR, ATLANTIC and Homestead shall file the Registration
Statement with the Commission as soon as is reasonably practicable after the
date of the Merger Agreement and shall use all reasonable efforts to have the
Registration Statement declared effective by the Commission as promptly as
practicable, and each of them shall also take any action required to be taken
under applicable state blue sky or securities laws in connection with the
Distribution; (iii) in the case of PTR and ATLANTIC, promptly take such action
as is necessary to obtain shareholder approval of the Merger Agreement and the
Transaction; (iv) in the case of PTR and ATLANTIC, use its best efforts to
obtain and deliver to the other certain letters from its principal executive
officers, directors, trustees and "affiliates" as defined under Rule 145 under
the Securities Act agreeing to certain restrictions on resale of Homestead
Securities received in the Transaction; (v) Homestead shall use its best
efforts to effect, at or before the Closing Date, authorization for quotation
or listing on a national securities exchange or interdealer quotation system
upon official notice of issuance, of the Homestead Securities to be issued in
connection with the Distribution; (vi) each of PTR, ATLANTIC, SCG and
Homestead shall cooperate and use its best efforts to take all actions, make
all filings, registrations and submissions, and do all things necessary and
advisable to consummate the Transaction, including, but not limited to,
obtaining all required consents, waivers and approvals from the Commission,
the Department of Justice and any other applicable government entity; (vii)
the parties shall consult with each other prior to issuing any press release
or any written public statement with respect to the Merger Agreement or the
Transaction and shall not issue any such press release or written public
statement prior to review by the other parties, except that prior review and
approval shall not be required if, in the reasonable judgment of the party
seeking to issue such release or public statement, prior review and approval
would prevent the timely dissemination of such release or public statement in
violation of any applicable law, rule, regulation or policy of a national
securities exchange or interdealer quotation system; (viii) SCG will vote all
PTR Common Shares and all shares of ATLANTIC Common Stock owned by it in favor
of approval and adoption of the Merger Agreement and the Transaction,
provided, however, that SCG will not be obligated to vote any such shares in
favor of such matters in the event the PTR Board or the ATLANTIC Board
withdraws, modifies or amends its recommendation; (ix) ATLANTIC shall file
with the Commission as soon as is reasonably practicable after the date of the
Merger Agreement a registration statement relating to the ATLANTIC IPO of
shares of ATLANTIC Common Stock and shall use all reasonable efforts to have
such registration statement declared effective by the Commission as promptly
as practicable, and shall take any action required to be taken under
applicable state blue sky or securities laws in connection with the ATLANTIC
IPO and, in the event that the ATLANTIC Board determines that it is not
reasonably practicable to file a registration statement relating to the
ATLANTIC IPO, it shall give written notice as promptly as practicable to each
of PTR, SCG and Homestead (x) each party agrees to maintain as confidential
certain information provided to the other parties during the negotiation of
the Merger Agreement and the Transaction; and (xi) SCG shall be responsible
for amounts to employees who will become employees of Homestead for earned but
unpaid salary, wages and benefits for periods prior to the Closing Date.
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<PAGE>
Conditions to the Transaction. The respective obligations of each of the
parties to effect the Transaction are subject to a number of conditions,
including among others: (i) each other party shall have performed in all
material respects its agreements contained in the Merger Agreement required to
be performed on or prior to the Closing Date and all representations and
warranties of such party shall be true and correct in all material respects on
and as of the date made and the Closing Date; (ii) the Merger Agreement and
the Transaction shall have been approved and adopted by the shareholders of
each of PTR and ATLANTIC; (iii) the PTR Board and the ATLANTIC Board shall
have each declared the dividend contemplated by the Distribution; (iv) the
Registration Statement shall have become effective and no stop order
suspending such effectiveness shall have been issued and remain in effect and
no proceeding shall have been initiated or threatened by the Commission; (v)
each of ATLANTIC and PTR shall have received either an opinion of Mayer, Brown
& Platt or a ruling from the IRS to the effect that, for United States Federal
income tax purposes, the Mergers constitute a transaction subject to Section
351 or the reorganization provisions of the Code and related provisions; (vi)
no preliminary or permanent injunction or other order or decree by any federal
or state court which prevents the consummation of the Transaction shall have
been issued or taken and remain in effect (each party agreeing to use its best
efforts to have any such injunction, order or decree lifted); (vii) all
governmental consents, orders and approvals legally required for the
consummation of the Transaction, shall have been obtained and be in effect at
the Closing Date, and such consents, orders and approvals shall have become
final; (viii) the waiting period applicable to the consummation of the
Transaction under the HSR Act shall have expired or been terminated; (ix) the
Homestead Warrants shall have been issued pursuant to the Warrant Purchase
Agreement; (x) ATLANTIC shall have contributed $18.6 million (subject to
adjustment as provided in the Merger Agreement) in cash to one of its
subsidiaries being merged into Homestead and such subsidiary shall not have
encumbered or otherwise disposed of such funds; (xi) the registration
statement in connection with the ATLANTIC IPO shall have been declared
effective by the Commision or withdrawn by ATLANTIC, or if such registration
statement has not been filed, ATLANTIC shall have given notice that it does
not intend to proceed with the ATLANTIC IPO, (xii) each of PTR, ATLANTIC and
SCG shall have forgiven all indebtedness of their respective subsidiaries
being merged into Homestead (other than the existing convertible mortgage
loans); and (xiii) all material consents from third parties necessary to
consummate the Transaction shall have been obtained.
In addition to the conditions set forth above, the obligations of ATLANTIC
to effect the Transaction are subject to the following conditions: (i) the
receipt of a written legal opinion from Munger, Tolles & Olson, special
counsel to the PTR Special Committee, as to certain legal matters; (ii) the
receipt of a written legal opinion from Mayer, Brown & Platt as to certain
legal matters; (iii) the receipt by the ATLANTIC Special Committee from an
investment banking firm of an opinion to the effect that, as of the date of
this Information Statement and Prospectus, the consideration to be paid to
ATLANTIC in connection with the Merger Agreement and the transactions
contemplated by the Merger Agreement and by the Related Agreements (as defined
in the Merger Agreement) was fair, from a financial point of view, to
ATLANTIC's shareholders (other than SCG), which opinion shall not have been
withdrawn, revoked or modified; (iv) the Homestead Securities to be issued in
connection with the Distribution shall have been authorized for quotation or
listing on a national securities exchange or an interdealer quotation system
upon official notice of issuance; (v) the receipt from Homestead of the
executed Funding Commitment Agreement described below; (vi) the receipt from
Homestead of the executed ATLANTIC Investor Agreement described below; (vii)
the receipt of the executed Protection of Business Agreement described below
from each of PTR, Homestead and SCG; (viii) the receipt of "comfort letters"
in form and substance reasonably satisfactory to ATLANTIC from the independent
certified public accountants of PTR, Homestead and SCG; (ix) no governmental
consent, order or approval legally required to consummate the Transaction
shall have any terms which, in the reasonable judgment of ATLANTIC, when taken
together with the terms of all such consents, orders or approvals, would
materially impair the value of the Transaction to ATLANTIC; (x) no
governmental authority shall have promulgated any statute, rule or regulation
which, when taken together with all such promulgations, would materially
impair the value of the Transaction to ATLANTIC; and (xi) the receipt of an
opinion from Mayer, Brown & Platt to the effect that the performance of the
Merger Agreement shall not jeopardize the status of ATLANTIC as a REIT.
In addition to the conditions set forth above, the obligations of PTR to
effect the Transaction are subject to the following conditions: (i) the
receipt of written legal opinions from King & Spalding, special counsel to the
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ATLANTIC Special Committee, as to certain legal matters; (ii) the receipt of a
written legal opinion from Mayer, Brown & Platt as to certain legal matters;
(iii) the receipt by the PTR Special Committee from an investment banking firm
of an opinion to the effect that, as of the date of the PTR Proxy Statement
and Prospectus, the aggregate consideration to be received by PTR pursuant to
the Merger Agreement in exchange for the PTR properties and the agreement by
PTR to enter into the Funding Commitment Agreement was fair to PTR, which
opinion shall not have been withdrawn, revoked or modified; (iv) the Homestead
Securities to be issued in connection with the Distribution shall have been
authorized for quotation or listing on a national securities exchange or an
interdealer quotation system upon official notice of issuance; (v) the receipt
from Homestead of the executed Funding Commitment Agreement described below;
(vi) the receipt from Homestead of the executed PTR Investor Agreement
described below; (vii) the receipt of the executed Protection of Business
Agreements described below from each of ATLANTIC, SCG and Homestead; (vii) the
receipt of "comfort letters" in form and substance reasonably satisfactory to
PTR from the independent certified public accountants of ATLANTIC, Homestead
and SCG; (ix) no governmental consent, order or approval legally required to
consummate the Transaction shall have any terms which, in the reasonable
judgment of PTR, when taken together with the terms of all such consents,
orders or approvals, would materially impair the value of the Transaction to
PTR; (x) no governmental authority shall have promulgated any statute, rule or
regulation which, when taken together with all such promulgations, would
materially impair the value of the Transaction to PTR; and (xi) the receipt of
an opinion from Mayer, Brown & Platt to the effect that the performance of the
Merger Agreement shall not jeopardize the status of PTR as a REIT.
In addition to the conditions set forth above, the obligations of SCG to
effect the Transaction are subject to the following conditions: (i) the
receipt of a written legal opinion from Munger, Tolles & Olson as to certain
legal matters; (ii) the receipt of a written legal opinion from King &
Spalding as to certain legal matters; (iii) the receipt of "comfort letters"
in form and substance reasonably satisfactory to SCG from the independent
certified public accountants of ATLANTIC, PTR and Homestead; (iv) the receipt
from Homestead of the executed SCG Investor Agreement and the executed
Administrative Services Agreement described below; (v) the receipt of the
executed Protection of Business Agreement described below from each of PTR,
ATLANTIC and Homestead; (vi) no governmental consent, order or approval
legally required to consummate the Transaction shall have any terms which, in
the reasonable judgment of SCG, when taken together with the terms of all such
consents, orders or approvals, would materially impair the value of the
Transaction to SCG; and (vii) no governmental authority shall have promulgated
any statute, rule or regulation which, when taken together with all such
promulgations, would materially impair the value of the Transaction to SCG.
In addition to the conditions set forth above, the obligations of Homestead
to effect the Transaction are subject to the following conditions: (i) the
receipt of a written legal opinion from Munger, Tolles & Olson as to certain
legal matters; (ii) the receipt of a written legal opinion from King &
Spalding as to certain legal matters; (iii) the receipt of a written legal
opinion from Mayer, Brown & Platt as to certain legal matters; (iv) the
receipt of letters from affiliates of PTR and ATLANTIC relating to the
restrictions on transferability of the Homestead Securities to be received in
the Transaction pursuant to Rule 145 promulgated under the Securities Act; (v)
the receipt from PTR and ATLANTIC of the executed Funding Commitment
Agreements described below; (vi) the receipt from PTR and ATLANTIC of the
executed ATLANTIC and PTR Investor Agreements described below; (vii) the
receipt of "comfort letters" in form and substance reasonably satisfactory to
Homestead from the independent certified public accountants of PTR, ATLANTIC
and SCG; (viii) the receipt of the executed SCG Investor Agreement and the
executed Administrative Services Agreement described below; (ix) the receipt
of the executed Protection of Business Agreement described below from each of
PTR, ATLANTIC and SCG; (x) the receipt from SCG of the executed Escrow
Agreement described below; (xi) the delivery by SCG of an assignment of the
Homestead Village trademark; (xii) no governmental consent, order or approval
legally required to consummate the Transaction shall have any terms which, in
the reasonable judgment of Homestead, when taken together with the terms of
all such consents, orders or approvals, would materially impair the value of
the Transaction to Homestead; and (xiii) no governmental authority shall have
promulgated any statute, rule or regulation which, when taken together with
all such promulgations, would materially impair the value of the Transaction
to Homestead.
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Termination. The Merger Agreement may be terminated at any time prior to the
Closing (i) by mutual consent of PTR, ATLANTIC, SCG and Homestead; (ii) by any
of PTR, ATLANTIC, SCG or Homestead after December 31, 1996, if the Transaction
has not been consummated on or before such date (so long as the party
terminating has not breached its obligations under the Merger Agreement except
for such breaches that are immaterial); (iii) unilaterally by any of PTR,
ATLANTIC, SCG or Homestead if (a) any other party fails to perform any
covenant or agreement in the Merger Agreement in any material respect and does
not cure such failure in all material respects within 15 business days after
receipt of written notice of the alleged failure from another party, (b) any
other party fails to fulfill or complete a condition to the obligations of
that party (which condition is not waived) by reason of a breach by that party
of its obligations in the Merger Agreement or (c) any condition to the
obligations of any other party is not satisfied (other than by reason of a
breach by that party of its obligations under the Merger Agreement), and it
reasonably appears that the condition cannot be satisfied prior to December
31, 1996; (iv) unilaterally by any of PTR, SCG or Homestead if ATLANTIC,
through the ATLANTIC Board or the ATLANTIC Special Committee, either fails to
recommend to ATLANTIC's shareholders the approval of the Merger Agreement and
the Transaction or withdraws, modifies or amends such recommendation; and
(v) unilaterally by any of ATLANTIC, SCG or Homestead if PTR, through the PTR
Board or the PTR Special Committee, either fails to recommend to PTR's
shareholders the approval of the Merger Agreement and the Transaction or
withdraws, modifies or amends such recommendation.
In the event of termination of the Merger Agreement by any party as provided
above, the Merger Agreement will become void and there will be no further
obligation on the part of any party or their respective officers and trustees
or directors (except as set forth in certain provisions of the Merger
Agreement, including the expense reimbursement and termination fees described
under "--Expenses"). However, in the event that termination is pursuant to
clauses (iv) or (v) in the previous paragraph, ATLANTIC or PTR, as the case
may be, shall pay to each of the other parties all of the documented, out-of-
pocket expenses incurred by such parties after execution of the Merger
Agreement in connection with the transactions contemplated thereby.
Amendment and Waiver. Subject to applicable law, the Merger Agreement may be
amended by the written agreement of PTR, ATLANTIC, SCG and Homestead. However,
the Merger Agreement may not be amended in any material respect subsequent to
obtaining the approval of the shareholders of PTR and ATLANTIC. Each of PTR,
ATLANTIC, SCG and Homestead may unanimously agree to (a) extend the time for
the performance of any of the obligations or other acts of the parties
thereto, (b) waive any inaccuracies in the representations and warranties
contained therein and or in any document delivered pursuant thereto, and (c)
waive compliance with any of the agreements or conditions contained therein.
Indemnification. Each party has agreed to indemnify and hold harmless the
other parties (other than SCG) from and against losses incurred by such party
as a result of any breach of, or inaccuracy in, any of its representations and
warranties or other agreements contained in the Merger Agreement. The
indemnification obligations of PTR, ATLANTIC and SCG are subject to a maximum
amount equal to the aggregate fair market value (based on the first sale price
of the Homestead Securities if trading in such securities has occurred) of the
Homestead Securities received by such party. The indemnification obligations
of Homestead shall not exceed in the aggregate the fair market value (based on
the first sale price of the Homestead Securities if trading in such securities
has occurred) of all of the Homestead Securities issued in connection with the
Transaction. The obligations to indemnify terminate two years after the
Distribution and may be invoked only in the event of losses that exceed
$200,000, in which event the indemnification will cover all losses (including
the initial amount).
PROTECTION OF BUSINESS AGREEMENT
Each of PTR, ATLANTIC and SCG will enter into a protection of business
agreement dated as of the Closing Date (the "Protection of Business
Agreement") with Homestead which will prohibit PTR, ATLANTIC, SCG and their
respective affiliates from engaging, directly or indirectly, in the extended-
stay lodging business in the continental United States except through
Homestead and its subsidiaries. The Protection of Business Agreement also
prohibits Homestead from, directly or indirectly, engaging in the ownership,
operation,
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development, management or leasing of multifamily properties. The Protection
of Business Agreement does not prohibit any of PTR, ATLANTIC or SCG from: (i)
owning securities of Homestead; (ii) owning up to 5% of the outstanding
securities of another person engaged in owning, operating, developing,
managing or leasing extended-stay lodging properties, so long as they do not
actively participate in the business of such person; (iii) owning the
outstanding securities of another person, a majority owned subsidiary,
division, group, franchise or segment of which is engaged in owning,
operating, developing, managing or leasing extended-stay lodging properties,
so long as not more than 5% of such person's consolidated revenues are derived
from such properties; and (iv) owning securities of another person primarily
engaged in business other than a business owning, operating, developing,
managing or leasing extended-stay lodging properties, including a person
primarily engaged in business as an owner, operator or developer of hotel
properties, whether or not such person owns, operates, develops, manages or
leases extended-stay lodging properties. The Protection of Business Agreement
does not prohibit Homestead from: (i) owning securities of ATLANTIC, PTR or
SCG; (ii) owning up to 5% of the outstanding securities of another person
engaged in owning, operating, developing, managing or leasing garden style
multifamily properties; and (iii) owning the outstanding securities of another
person, a majority owned subsidiary, division, group, franchise or segment of
which is engaged in owing, operating, developing, managing or leasing garden
style multifamily properties, so long as not more than 5% of such person's
consolidated revenues are derived from such properties. The Protection of
Business Agreement will terminate in the event of an acquisition, directly or
indirectly (other than by purchase from PTR, ATLANTIC or SCG or their
respective affiliates (as defined in the Protection of Business Agreement)),
by any person (or group of associated persons acting in concert), other than
PTR, ATLANTIC, SCG, or their respective affiliates, of 25% or more of the
outstanding shares of voting stock of Homestead, without the prior written
consent of the Homestead Board. Subject to earlier termination pursuant to the
preceding sentence, the Protection of Business Agreement will terminate on the
tenth anniversary of the Closing Date.
SCG INVESTOR AGREEMENT
Homestead and SCG will enter into an investor agreement (the "SCG Investor
Agreement"), which will require SCG, upon notice from Homestead, to exercise
all of the Homestead Warrants (at an exercise price of $10.00 per share)
received by SCG in connection with the Transaction. Homestead may call for the
exercise of Homestead Warrants by SCG upon 10 days' prior written notice. The
SCG Investor Agreement, among other things, provides that, without having
first consulted with the nominee of SCG designated in writing, Homestead may
not seek Homestead Board approval of (i) Homestead's annual budget, (ii)
incurring expenses in any year exceeding (A) any line item in the annual
budget by 20% and (B) the total expenses set forth in the annual budget by 5%,
(iii) acquisitions or dispositions in a single transaction or group of related
transactions where the aggregate purchase price paid or received exceeds $5
million, (iv) new contracts with a service provider for (A) investment
management, property management or leasing services, or (B) that reasonably
contemplates annual contract payments by Homestead in excess of $200,000, (v)
the declaration or payment of any dividend or other distribution, (vi) the
approval of stock option plans, (vii) the offer or sale of any shares of stock
of Homestead or any securities convertible into shares of stock of Homestead
(other than the sale or grant of any stock or grants of options or exercise of
options granted under any stock option plan approved by stockholders), and
(viii) the incurrence, restructuring, renegotiation or repayment of
indebtedness for borrowed money (including guarantees) in which the aggregate
amount involved exceeds $5 million. The SCG Investor Agreement also provides
that, so long as SCG owns at least 10% of the outstanding shares of Homestead
Common Stock, Homestead may not increase the number of persons serving on the
Homestead Board to more than seven. SCG also will be entitled to designate one
or more persons as directors of Homestead, as follows: (i) so long as SCG owns
at least 10% but less than 30% of the outstanding shares of Homestead Common
Stock, it is entitled to nominate one person; and (ii) so long as SCG owns at
least 30% of the outstanding shares of Homestead Common Stock, it is entitled
to nominate that number of persons as shall bear approximately the same ratio
to the total number of members of the Homestead Board as the number of shares
of Homestead Common Stock beneficially owned by SCG bears to the total number
of outstanding shares of Homestead Common Stock, provided, that SCG shall be
entitled to designate no more than two persons so long as the Homestead Board
consists of no more than seven members. Any person who is employed by SCG or
who is an employee, a 25% shareholder or a director of any corporation
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of which SCG is a 25% shareholder (except for Homestead) shall be deemed to be
a designee of SCG. The nominee(s) of SCG may, but need not, include the same
person(s) nominated by either PTR pursuant to the PTR Investor Agreement or
ATLANTIC pursuant to the ATLANTIC Investor Agreement.
In addition, because SCG is an affiliate of Homestead, the SCG Investor
Agreement provides SCG with registration rights pursuant to which, in certain
specified circumstances, SCG may request, at any time after the first
anniversary of the date on which the Homestead Common Stock is registered with
the Commission under either Section 12(b) or 12(g) of the Exchange Act, and on
not more than three occasions, registration of all of SCG's Homestead Common
Stock pursuant to Rule 415 under the Securities Act.
FUNDING COMMITMENT AGREEMENTS
Pursuant to funding commitment agreements to be dated as of the Closing Date
(the "Funding Commitment Agreements") each of PTR and ATLANTIC will agree to
make mortgage loans to Homestead. PTR and ATLANTIC will provide Homestead
aggregate funding for developments in amounts of up to $133 million and $111
million, respectively, which amounts are anticipated to be sufficient to
complete the development of the respective Homestead Village facilities
contributed by them. PTR and ATLANTIC will receive convertible mortgage notes
in respect of such fundings in stated amounts of up to $144 million and $98
million, respectively. The obligations of PTR and ATLANTIC are limited to a
specific dollar amount for each property identified in the respective Funding
Commitment Agreements. Upon any determination by Homestead to commence
development of a property identified in the Funding Commitment Agreement,
Homestead is required to notify PTR or ATLANTIC, as the case may be, and PTR
or ATLANTIC, as the case may be, is required to fund up to the full amount of
its obligation with respect to such property. Homestead is required to
endeavor in good faith to complete the development of such property consistent
with the development plans for such property. Each mortgage loan issued by
Homestead pursuant to a Funding Commitment Agreement will be convertible into
shares of Homestead Common Stock on the basis of one share of Homestead Common
Stock for every $11.50 of principal outstanding on the mortgage loan. The
obligation of Homestead to call for funding of, and the obligations of PTR and
ATLANTIC to provide funding for, the mortgage loans expires on March 31, 1998,
except with respect to properties for which Homestead has given notice that it
intends to develop. Interest on the mortgage loans accrues at the rate of 9%
on the unpaid principal balance, payable every six months. The mortgages are
scheduled to mature on October 31, 2006, and, are not callable until five
years after the Closing Date. Homestead has pledged the assets being
contributed by ATLANTIC as collateral for the mortgage loans being made by
ATLANTIC, and it has pledged the assets being contributed by PTR as collateral
for the mortgage loans being made by PTR.
ATLANTIC AND PTR INVESTOR AGREEMENTS
ATLANTIC and PTR will each enter into an investor and registration rights
agreement with Homestead (the "ATLANTIC and PTR Investor Agreements") pursuant
to which ATLANTIC and PTR each are entitled to designate one person for
nomination to the Homestead Board, and Homestead will use its best efforts to
cause the election of such nominee(s), until March 31, 1998 and for so long
thereafter as ATLANTIC or PTR has the right to convert in excess of $20
million in principal amount of loans made pursuant to the Funding Commitment
Agreements. Such nominee(s) may, but need not, include the same person(s)
nominated by SCG pursuant to the SCG Investor Agreement. In addition,
Homestead has granted to each of ATLANTIC and PTR registration rights with
respect to the distribution of all of the shares of Homestead Common Stock
issuable upon conversion of the convertible mortgage notes. Prior to the one-
year anniversary of the date the Homestead Common Stock is registered under
the Exchange Act, each of ATLANTIC and PTR may request one registration of
those shares of Homestead Common Stock which are issued upon conversion of any
or all of the convertible mortgage notes during such one year period and which
it intends to distribute to its stockholders. After such one-year anniversary,
each of ATLANTIC and PTR may request three additional registrations pursuant
to Rule 415 promulgated under the Securities Act of all shares of Homestead
Common Stock issued or issuable upon conversion of the convertible mortgage
notes. Such registration, except for the fees and disbursements of counsel to
ATLANTIC or PTR, shall be at the expense of Homestead.
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ADMINISTRATIVE SERVICES AGREEMENT
Prior to the consummation of the Transaction, Homestead and SCG will enter
into an administrative services agreement (the "Administrative Services
Agreement"), pursuant to which SCG will provide Homestead with administrative
services with respect to certain aspects of Homestead's business. These
services are expected to include, but are not limited to, insurance
administration, accounts payable administration, internal audit, cash
management, human resources, management information systems, tax and legal
administration, research, shareholder communications and investor relations.
The fees payable to SCG will be based on market rates as mutually agreed. The
agreement will be for an initial term expiring on December 31, 1996 and will
be automatically renewed for one-year terms, subject to approval by a majority
of the disinterested members of the Homestead Board and the approval by the
disinterested directors of the annual compensation payable to SCG for services
rendered to Homestead.
ESCROW AGREEMENT
Pursuant to an escrow agreement to be dated the Closing Date (the "Escrow
Agreement") among Homestead, SCG and the Escrow Agent, a portion of the shares
of Homestead Common Stock issuable to SCG in the Transaction will be placed in
an escrow account with the Escrow Agent. In general, as PTR and ATLANTIC
advance funds to Homestead in accordance with the terms of their respective
Funding Commitment Agreements, a portion of the shares of Homestead Common
Stock in the escrow account will be released to SCG, together with a
proportionate amount of accrued dividends, if any. On January 1, 2000, the
Escrow Agent will release to Homestead all of the shares of Homestead Common
Stock remaining in the escrow account. All dividends or other distributions
paid by Homestead in respect of the shares of Homestead Common Stock held in
the escrow account shall be retained by the Escrow Agent for the benefit of
the party to whom the related shares of Homestead Common Stock are ultimately
issued. The Escrow Agent will vote all shares of Homestead Common Stock in the
escrow account proportionately in accordance with the vote of all other
Homestead shareholders as instructed by Homestead. In the event that
instructions are not received, the Escrow Agent will not vote such shares.
Because the number of shares of Homestead Common Stock being received by SCG
is based on the anticipated future REIT management fees and property
management fees SCG would have received under existing agreements with PTR and
ATLANTIC for the 80 Homestead Village properties contributed to Homestead, net
of overhead of SCG related to those properties, and since many of the
contributed Homestead Village properties are either in the development or pre-
development planning stage, the purpose of the Escrow Agreement is to time
SCG's receipt of the shares of Homestead Common Stock pursuant to the Merger
Agreement with the time the properties are actually funded and supported by a
completion guaranty.
REGULATORY FILINGS AND APPROVALS
Consummation of the Merger is subject to the provisions of the HSR Act, for
which early termination of the applicable waiting period was granted on June
14, 1996. Pursuant to the Merger Agreement, each of PTR, ATLANTIC, SCG and
Homestead may terminate the Merger Agreement if (i) any governmental consent,
order or approval legally required for the consummation of the Transaction has
not been obtained and in effect on the Closing Date or (ii) any governmental
consent, order or approval legally required for the consummation of the
Transaction shall have any terms, which in the reasonable judgement of PTR,
ATLANTIC, SCG or Homestead, respectively, would materially impair the value of
the Homestead Securities to be received by PTR, ATLANTIC or SCG, respectively,
or the value to Homestead of the Transaction.
RESTRICTIONS ON SALES BY AFFILIATES
The Homestead Securities to be issued in the Transaction will have been
registered under the Securities Act. Such shares will be freely transferable
under the Securities Act, except for shares issued to any person who may be
deemed to be an affiliate (as such term is defined for purposes of Rule 145
under the Securities Act, an
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"Affiliate") of ATLANTIC or PTR. Affiliates, including SCG, may not sell their
Homestead Securities acquired in connection with the Transaction except
pursuant to (i) an effective registration statement under the Securities Act
covering such shares, (ii) paragraph (d) of Rule 145 or (iii) any other
applicable exemption under the Securities Act. Each of PTR and ATLANTIC has
agreed to use its best efforts to procure written agreements ("Affiliate
Agreements") from executive officers, directors, trustees and other Affiliates
containing appropriate representations and commitments intended to ensure
compliance with the Securities Act.
ACCOUNTING TREATMENT
The Transaction will be recorded by ATLANTIC as a sale of its Homestead
Village Properties to PTR at fair market value. ATLANTIC will recognize the
Distribution as a reduction of shareholders' equity.
Since PTR will own over 50% of Homestead immediately after the Mergers, the
Transaction will be recorded by PTR as: (i) the formation of Homestead as a
wholly-owned subsidiary into which the PTR-Homestead Village Group assets will
be transferred at historical cost; (ii) the acquisition of Homestead Village
net assets of ATLANTIC and SCG (at fair value) for Homestead Securities using
the purchase method of accounting; and (iii) a reduction of shareholders'
equity to reflect the distribution of Homestead Securities owned by PTR to
PTR's shareholders. The historical financial statements of PTR-Homestead
Village Group will become the predecessor of Homestead and the operations of
the SCG-Homestead Village Group and the Atlantic-Homestead Village Group will
be included from the date of acquisition. For a description of certain terms
used in this paragraph, refer to the combined historical financial statements
included in Appendix A.
EXPENSES
The Merger Agreement provides that, whether or not the Transaction is
consummated, all expenses incurred in connection with the Merger Agreement and
the Transaction will be paid by the party incurring such expenses, except that
(i) expenses incurred in connection with filing, printing and distributing
this Information Statement and Prospectus will be paid 63.64%, 28.18% and
8.18% by PTR, ATLANTIC and SCG, respectively, (ii) all costs relating to the
ATLANTIC IPO will be paid by ATLANTIC, (iii) all taxes payable by reason of
the Transaction will be paid 63.64%, 28.18% and 8.18% by PTR, ATLANTIC and
SCG, respectively, and (iv) the filing fees payable in connection with the
filings under the HSR Act will be paid by SCG. See "Expenses of Solicitation."
DISSENTERS' RIGHTS
Holders of ATLANTIC Common Stock are not entitled to dissenters' rights in
connection with the Transaction.
BOARD RECOMMENDATION
THE ATLANTIC BOARD, BY UNANIMOUS VOTE OF THE DIRECTORS WHO ARE NOT OFFICERS
OF ATLANTIC OR DIRECTORS, OFFICERS OR EMPLOYEES OF SCG OR ITS AFFILIATES,
APPROVED THE MERGER AGREEMENT AND THE TRANSACTION AND RECOMMENDS THAT ATLANTIC
SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT AND THE
TRANSACTION.
THE SPECIAL MEETING
PURPOSE OF THE MEETING
At the ATLANTIC Special Meeting, the holders of ATLANTIC Common Stock will
be asked to consider and vote upon a proposal to approve the Merger Agreement
and the Transaction. A copy of the Merger Agreement is attached as Annex I
hereto and is incorporated herein by reference and a copy of the prospectus of
Homestead is attached hereto as Appendix A and is incorporated by reference.
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DATE, TIME AND PLACE; RECORD DATE
The ATLANTIC Special Meeting is scheduled to be held at a.m., local
time, on , September , 1996, at . The ATLANTIC Board has
fixed the close of business on August , 1996 as the record date (the
"ATLANTIC Record Date") for the determination of holders of ATLANTIC Common
Stock entitled to notice of and to vote at the ATLANTIC Special Meeting. On
July 12, 1996, there were 65,903,161 shares of ATLANTIC Common Stock
outstanding held of record by approximately 290 shareholders. As of July 12,
1996, SCG and ATLANTIC's directors and executive officers beneficially owned
an aggregate of 42,447,246 shares or approximately 64.4% of the outstanding
ATLANTIC Common Stock. SCG has agreed, and each of such other persons has
indicated his or her intent, to vote his or her shares in favor of the Merger
Agreement and the Transaction. Therefore, approval of the proposal is assured.
VOTING RIGHTS
Assuming the existence of a quorum, the affirmative vote of the holders of
at least a majority of the outstanding shares of ATLANTIC Common Stock is
required to approve the Merger Agreement and the Transaction. Holders of
record of ATLANTIC Common Stock on the ATLANTIC Record Date are entitled to
one vote per share at the ATLANTIC Special Meeting. The presence, either in
person or by proxy, of the holders of a majority of the outstanding ATLANTIC
Common Stock is necessary to constitute a quorum at the ATLANTIC Special
Meeting.
If a shareholder attends the ATLANTIC Special Meeting, he or she may vote by
ballot. If a shareholder does not attend the meeting and vote, his or her
shares will not be voted and thus will have the effect of a vote against the
Merger Agreement and the Transaction. Similarly, broker non-votes and
abstentions will have the effect of a vote against the Merger Agreement and
the Transaction.
YOU ARE NOT BEING ASKED TO SUBMIT A PROXY AND ONE IS NOT BEING SOLICITED.
OTHER MATTERS
ATLANTIC is not aware of any business or matters other than those indicated
above which may be properly presented at the ATLANTIC Special Meeting.
INFORMATION CONCERNING ATLANTIC
GENERAL
Since its inception in 1993, ATLANTIC has employed a research-driven
investment approach, deploying its capital in markets and submarkets which
exhibit strong market fundamentals. ATLANTIC REIT Management believes that
population and employment growth are the primary demand generators for
multifamily product.
At March 31, 1996, ATLANTIC owned assets in 32 of the 143 submarkets within
its 12 primary target market cities. ATLANTIC REIT Management is continuously
researching additional submarkets and cities and may expand ATLANTIC's primary
target market in the future; however, ATLANTIC intends to remain regionally
focused in the southeastern United States. ATLANTIC has filed a registration
statement relating to an initial public offering of up to $115,000,000 of
shares of ATLANTIC Common Stock.
In the future, ATLANTIC will focus primarily on the moderate income
category, which comprises the largest segment of the renter population. Few
other real estate companies currently focus on this segment within ATLANTIC's
primary target market. In addition, lack of available financing for moderate
income product often results in limited supply. Consequently, ATLANTIC REIT
Management believes that the moderate income segment is a significantly
underserved market with limited competition.
Moderate income residents are typically longer-term residents due, in part,
to the financial resources required to purchase single-family homes. As a
result, resident turnover is often significantly lower in moderate
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income properties than upper middle income or middle income properties. The
total cost of refurbishing and re-leasing a unit ranges from $700 to $1,500;
therefore, reducing resident turnover can have a material impact on an asset's
profitability. Due to market fundamentals and the operating characteristics of
moderate income properties, ATLANTIC REIT Management believes that this
product category offers greater sustainable cash flow growth.
ATLANTIC, through its REIT Manager, is a fully integrated operating company
with 96 professionals dedicated to implementing its highly focused business
strategy. ATLANTIC's operating system consists of six functional areas:
research, acquisitions, development, due diligence, property management and
capital markets/finance/legal. By focusing on a single discipline,
professionals within each of these areas develop unparalleled expertise.
Interaction and communication among these functional areas remain fluid; but
separation promotes certain checks and balances. All acquisition and
development investments must be approved by a four-member investment
committee, a four-member senior investment committee and ultimately by the
investment committee of the ATLANTIC Board.
EMPLOYEES
ATLANTIC has no employees. The ATLANTIC REIT Manager, whose sole activity is
advising ATLANTIC, manages the day-to-day operations of ATLANTIC. The ATLANTIC
REIT Manager has assembled a team of 96 professionals in the ATLANTIC REIT
Manager and its affiliates, collectively possessing extensive experience in
multifamily real estate. The majority of these persons are employed directly
by and focused entirely on the services provided by the ATLANTIC REIT Manager,
with the balance providing centralized research, senior investment committee,
capital markets, legal and accounting services.
LEGAL PROCEEDINGS
ATLANTIC is, from time to time, a party to a variety of legal proceedings
arising in the ordinary course of its business. Such matters generally are not
expected to have a material adverse impact on ATLANTIC.
COMPETITION
In general, there are numerous other multifamily properties located in close
proximity to each of ATLANTIC's properties. The number of multifamily units
available in any target market city could have a material effect on ATLANTIC's
capacity to rent units and on the rents charged. In addition, in many of
ATLANTIC's submarkets, institutional investors and owners and developers of
multifamily properties compete for the acquisition, development and leasing of
multifamily properties. Many of these persons have substantial resources and
experience.
ATLANTIC REIT MANAGEMENT
The ATLANTIC REIT Manager provides ATLANTIC with strategic and day-to-day
management, research, investment analysis, acquisition, development,
marketing, disposition of assets, asset management and due diligence, capital
markets, and legal and accounting services, all of which are included in the
ATLANTIC REIT Management fee. Hence, ATLANTIC depends upon the quality of the
management provided by the ATLANTIC REIT Manager. The ATLANTIC REIT Manager
and its specialized service affiliates employ 96 professionals. The ATLANTIC
REIT Manager also provides office and other facilities for ATLANTIC's needs.
ATLANTIC believes that a properly structured ATLANTIC REIT Management
relationship has several advantages over a self-administered REIT structure.
ATLANTIC believes that its relationship with the ATLANTIC REIT Manager
provides ATLANTIC with access to greater quality and depth of management
personnel and resources, savings from a dedicated capital markets group, and
access to centralized research,
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<PAGE>
accounting and legal support provided at substantial economies of scale.
ATLANTIC believes that these benefits, and the structure of the relationship,
will avoid the stock price discounting that has affected some externally
managed REITs.
The owner of the ATLANTIC REIT Manager has a substantial shareholder
interest in ATLANTIC, creating commonality of interest with ATLANTIC's
shareholders, and the ATLANTIC REIT Management Agreement prohibits self-
dealing principal transactions between ATLANTIC and the ATLANTIC REIT Manager
and its affiliates. The Transaction is currently prohibited by the terms of
the ATLANTIC REIT Management Agreement, although the ATLANTIC REIT Manager and
ATLANTIC have agreed to waive this prohibition as it relates to the completion
of the Transaction. Furthermore, the ATLANTIC REIT Manager provides all its
services for one fee, and an affiliate provides property management services
at market rates in a competitive environment. The ATLANTIC REIT Manager does
not receive additional fees for investment banking, financing, asset sales or
similar services. See "ATLANTIC Management's Discussion and Analysis of
Financial Condition and Results of Operations--REIT Management Agreement."
ATLANTIC PROPERTIES
PROPERTIES OWNED
No individual property, or group of properties operated as a single business
unit, amounts to 10% or more of ATLANTIC's pro forma total assets (based on
cost) nor does the gross revenue from any such properties amount to 10% or
more of ATLANTIC's pro forma gross revenues for the fiscal year ended December
31, 1995.
Geographic Distribution. ATLANTIC's multifamily properties are located in 16
metropolitan areas in seven states. The table below demonstrates the
geographic distribution of ATLANTIC's equity real estate investments at March
31, 1996.
<TABLE>
<CAPTION>
PERCENTAGE
OF ASSETS
NUMBER OF BASED ON
PROPERTIES COST(1)
---------- ----------
<S> <C> <C>
Atlanta, Georgia.................................... 29 31%
Birmingham, Alabama................................. 5 5%
Charlotte, North Carolina........................... 4 5%
Columbia, South Carolina............................ 1 1%
Ft. Lauderdale/West Palm Beach, Florida............. 8 7%
Ft. Myers, Florida.................................. 1 1%
Jacksonville, Florida............................... 6 6%
Memphis, Tennessee.................................. 2 1%
Miami, Florida...................................... 2 2%
Nashville, Tennessee................................ 4 5%
Orlando, Florida.................................... 5 3%
Raleigh, North Carolina............................. 7 6%
Richmond, Virginia.................................. 6 6%
Sarasota, Florida................................... 1 2%
Tampa, Florida...................................... 8 5%
Washington, D.C..................................... 13 14%
--- ---
Total........................................... 102 100%
=== ===
</TABLE>
- --------
(1) For operating properties at March 31, 1996, represents cost, including
planned renovations. For properties under construction or in planning at
March 31, 1996, represents budgeted development cost, which includes the
cost of land, fees, permits, payments to contractors, architectural and
engineering fees and interest and property taxes to be capitalized during
the construction period.
50
<PAGE>
Environmental Assessments. Under various federal, state and local laws,
ordinances and regulations, a current or previous owner, developer or operator
of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances at, on, under or in its property. The
costs of such removal or remediation of such substances could be substantial.
Such laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the release or presence of such
hazardous or toxic substances. The presence of such substances, may adversely
affect the owner's ability to sell or rent such real estate or to borrow using
such real estate as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances also may be liable for the costs of
removal or remediation of such substances at the disposal or treatment
facility, whether or not such facility is owned or operated by such person.
Certain environmental laws impose liability for the release of asbestos
containing materials into the air, pursuant to which third parties may seek
recovery from owners or operators of real properties for personal injuries
associated with such materials, and prescribe specific methods for the removal
and disposal of such materials, which may result in increased costs in
connection with renovations at ATLANTIC's properties.
ATLANTIC has not been notified by any governmental authority of any non-
compliance, liability, or other claim in connection with any of the properties
currently owned or being acquired, and ATLANTIC is not aware of any
environmental condition with respect to any of the properties, which is likely
to be material. ATLANTIC has subjected each of its properties to a Phase I
environmental assessment (which does not involve invasive procedures such as
soil sampling or ground water analysis) by independent consultants. While some
of these assessments have led to further investigation and sampling, none of
the environmental assessments has revealed, nor is ATLANTIC aware of, any
environmental liability (including asbestos related liability) that the REIT
Manager believes would have a material adverse effect on ATLANTIC's business,
financial condition or results of operations. No assurance can be given,
however, that these assessments and investigations reveal all potential
environmental liabilities, that no prior owner or operator created any
material environmental condition not known to ATLANTIC or the independent
consultants or that future uses and conditions (including, without limitation,
tenant actions or changes in applicable environmental laws and regulations)
will not result in the imposition of environmental liabilities.
Insurance Coverage. ATLANTIC REIT Management believes that all of ATLANTIC's
properties are adequately insured; however, an uninsured loss could result in
loss of capital investment and anticipated profits.
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<PAGE>
ATLANTIC SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information on a pro forma
basis for ATLANTIC (the "Pro Forma Financial Results") as of March 31, 1996
and the three-month period ended March 31, 1996 and the year ended December
31, 1995, and on a historical basis for ATLANTIC (the "Historical Financial
Results") as of and for the three-month periods ended March 31, 1996 and 1995
and the years ended December 31, 1995 and 1994 and the period ended December
31, 1993.
The following selected financial information should be read in conjunction
with "ATLANTIC Management's Discussion and Analysis of Financial Condition and
Results of Operations," and all of the financial statements included elsewhere
in this Information Statement and Prospectus. The ATLANTIC Pro Forma Financial
Results are not necessarily indicative of what the actual financial position
and results of operations of ATLANTIC would have been as of and for the
periods indicated, nor do they purport to represent the future financial
position and results of operations for future periods.
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
------------------------- --------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED MARCH 31, YEAR ENDED DECEMBER 31,
MARCH 31, DECEMBER 31, ------------------ ------------------------------
1996 1995 1996 1995 1995 1994 1993(1)
------------ ------------ -------- -------- --------- --------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Rental Income.......... $ 31,737 $ 120,201 $ 30,809 $ 22,952 $ 103,634 $ 55,071 $ 156
Property Management
Fees Paid to
Affiliate............. 958 4,162 920 717 3,475 1,536 --
General and
Administrative
Expenses.............. 168 583 187 105 646 266 1
REIT Management Fee
Paid to Affiliate..... 2,039 7,659 2,123 1,515 6,923 3,671 12
Net Earnings........... 6,133 21,707 6,650 4,175 19,639 9,926 38
Net Earnings per Share. 0.11 0.41 0.12 0.11 0.45 0.41 0.07
Distributions Declared
and Paid.............. 11,667 35,119 11,667 7,426 35,119 14,648 --
Distributions Declared
and Paid per Share.... 0.21 0.80 0.21 0.20 0.80 0.60 --
Weighted Average Shares
Outstanding........... 56,838 52,547 55,555 37,133 43,889 24,454 572
<CAPTION>
PRO FORMA HISTORICAL
------------ --------------------------------------------------
MARCH 31, DECEMBER 31,
MARCH 31, ------------------ ------------------------------
1996 1996 1995 1995 1994 1993
------------ -------- -------- --------- --------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Real Estate Owned, at
cost.................. $ 944,363 $936,129 $678,564 $ 888,928 $ 631,260 $ 31,005
Total Assets........... 932,809 929,318 678,683 885,824 637,846 31,850
Line of Credit (3)..... 223,353 226,000 181,000 190,000 153,000 --
Mortgages Payable...... 129,291 123,291 115,317 118,524 107,347 --
Total Liabilities...... 378,986 376,967 310,334 328,886 271,216 178
Total Shareholders'
Equity................ 553,823 552,351 368,349 556,938 366,630 31,672
Number of Shares
Outstanding........... 59,781 55,570 37,588 55,526 37,133 3,163
<CAPTION>
PRO FORMA HISTORICAL
------------------------- --------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED MARCH 31, YEAR ENDED DECEMBER 31,
MARCH 31, DECEMBER 31, ------------------ ------------------------------
1996 1995 1996 1995 1995 1994 1993(1)
------------ ------------ -------- -------- --------- --------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net Earnings........... $ 6,133 $ 21,707 $ 6,650 $ 4,175 $ 19,639 $ 9,926 $ 38
Add: Depreciation...... 4,901 17,952 4,804 3,605 15,925 8,770 28
-------- --------- -------- -------- --------- --------- --------
Funds from
Operations(2)......... $ 11,034 $ 39,659 $ 11,454 $ 7,780 $ 35,564 $ 18,696 $ 66
Net Cash Provided
(Used) by Operating
Activities............ 17,590 49,330 18,011 12,954 45,235 26,205 (492)
Net Cash Used by
Investing Activities.. (47,201) (289,982) (47,201) (39,177) (240,652) (392,718) (31,005)
Net Cash Provided by
Financing Activities.. 28,743 241,932 29,249 24,579 195,649 372,638 31,634
</TABLE>
- -------
(1) For the period from October 26, 1993 (the date of ATLANTIC's inception) to
December 31, 1993.
(2) ATLANTIC believes that funds from operations is helpful in understanding a
property portfolio in that such calculation reflects cash flow from
operating activities and the properties' ability to support interest
payments and general operating expenses. For an explanation of funds from
operations, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Funds from operations should not be considered as an alternative to net
income or any other GAAP measurement of performance as an indicator of
ATLANTIC's operating performance or as an alternative to cash flows from
operating, investing or financing activities as a measure of liquidity. On
January 1, 1996, ATLANTIC adopted NAREIT's new definition of funds from
operations. Under this new definition, loan cost amortization is not added
back to net earnings in determining funds from operations. For
comparability, funds from operations for the periods prior to January 1,
1996 give effect to this new definition. The funds from operations measure
presented by ATLANTIC may not be comparable to other similarly titled
measures of other REITs.
(3) At July 16, 1996, ATLANTIC had $202 million outstanding under its $350
million line of credit.
52
<PAGE>
ATLANTIC MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "ATLANTIC
Selected Financial Information" and all of the financial statements appearing
elsewhere in this Information Statement and Prospectus. Historical results and
percentage relationships set forth in "ATLANTIC Selected Financial
Information," the Financial Statements of ATLANTIC, and the Pro Forma Balance
Sheet and Statements of Earnings for ATLANTIC are not indicative of future
operations of ATLANTIC.
OVERVIEW
Since its inception on October 26, 1993, ATLANTIC has amassed a portfolio of
25,266 multifamily units located in the southeastern United States. ATLANTIC
acquired existing properties aggregating 15,355 units, has completed
developments aggregating 804 units and has developments under construction and
in planning aggregating 9,107 units. At March 31, 1996, ATLANTIC's investment
in real estate aggregated $936 million. This investment in real estate has
been financed through both debt and equity. Since inception ATLANTIC has
raised approximately $577 million in net equity, primarily through the private
placement of ATLANTIC Common Stock. Additionally, ATLANTIC assumed
approximately $123 million in long-term debt in connection with certain of its
property acquisitions. ATLANTIC's $350 million line of credit provided the
remaining investment capital.
ATLANTIC's operating results depend primarily upon income from multifamily
properties, which is substantially influenced by (i) the demand for and supply
of multifamily units in ATLANTIC's primary target market and submarkets, (ii)
operating expense levels, (iii) the effectiveness of property level
operations, and (iv) the pace and price at which ATLANTIC can acquire and
develop additional multifamily properties. Capital and credit market
conditions which affect ATLANTIC's cost of capital also influence operating
results.
ATLANTIC's target market cities and submarkets have benefitted substantially
in recent periods from demographic trends (including population and job
growth) which increase the demand for multifamily units. Consequently, rental
rates for multifamily units have increased more than the inflation rate for
the last two years and are expected to continue to experience such increases
throughout 1996. Expense levels also influence operating results, and rental
expenses (other than real estate taxes) as a percentage of rental revenues for
multifamily properties have generally increased at approximately the same rate
as rents for the past year and are expected to increase at a comparable rate
throughout 1996.
The ATLANTIC REIT Manager believes that development of multifamily
properties from the ground up, which are built for long term ownership and are
designed to meet broad renter preferences and demographic trends, will provide
a greater source of long term cash flow growth in the future. Therefore, while
land prices are favorable, ATLANTIC has acquired and will continue to acquire,
on an unleveraged basis, prudent amounts of land zoned for multifamily
development. The ATLANTIC REIT Manager believes ATLANTIC's ability to compete
is significantly enhanced relative to other companies because of the ATLANTIC
REIT Manager's depth of development and acquisition personnel and presence in
local markets combined with ATLANTIC's access to investment capital.
ATLANTIC's strategy is to build its asset base through the development and
acquisition of multifamily properties that will provide long-term growth in
cash flow. ATLANTIC's real estate investments have been made with a view to
effective long-term operation and ownership. Based upon ATLANTIC's market
research and in an effort to optimize its portfolio composition, ATLANTIC may
from time to time seek to dispose of assets that in management's view do not
meet ATLANTIC's long-term investment criteria and redeploy the proceeds
therefrom, preferably through tax-deferred exchanges, into assets that are
more consistent with ATLANTIC's investment objectives.
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<PAGE>
RESULTS OF OPERATIONS
Interim Period Results
Net earnings for the three-month period ended March 31, 1996 were $6.7
million ($0.12 per share) as compared to $4.2 million ($0.11 per share) for
the same period in 1995. In the first quarter of 1996, ATLANTIC had 59
operating properties (19 classified as pre-stabilized) as compared to 43
operating properties (40 classified as pre-stabilized) in the first quarter of
1995. The additional operating properties resulted in increases in rental
revenues ($7.8 million), rental expenses ($2.9 million), real estate taxes
($.7 million), depreciation ($1.2 million) and ATLANTIC REIT Management fee
($.6 million) in the three-month period ended March 31, 1996 as compared to
the same period in 1995. The increase in rental expenses is attributable to
the larger number of pre-stabilized properties in 1995 over 1996. After
stabilization, consistent with ATLANTIC's conservative accounting policies,
ATLANTIC expenses all make-ready costs, including carpet and appliance
replacements.
Interest expense in the three-month period ended March 31, 1996 was $4.3
million as compared to $4.7 million for the three-month period ended March 31,
1995. The decrease in interest expense of $.4 million is primarily a result of
lower short-term interest rates in 1996 which offset the effect of ATLANTIC's
higher outstanding debt balances. ATLANTIC's weighted average short-term
interest rate for the first quarter of 1996 was 7.61% as compared to 8.10% in
the first quarter of 1995.
Rental revenues were negatively impacted by the severe winter in the mid-
Atlantic region, resulting in reduced leasing activity. For ATLANTIC's 38
stabilized properties at March 31, 1996, that were fully operational
throughout both the first quarter of 1995 and the first quarter of 1996,
rental revenues grew 3.1%. All of these properties were pre-stabilized in 1995
and stabilized in 1996. Due to the more conservative accounting treatment for
stabilized properties, expense comparisons between periods are not meaningful.
These properties represent 68.1% of ATLANTIC's operating properties at March
31, 1996, based on cost.
ATLANTIC adopted Statement of Financial Accounting Standards No. 121,
Accounting For The Impairment Of Long-Lived Assets And For Long-Lived Assets
To Be Disposed Of on January 1, 1996. As a result of adopting this new
accounting standard, ATLANTIC did not recognize any provisions for possible
losses.
1995 Compared to 1994
Net earnings in 1995 were $19.6 million ($0.45 per share), an increase of
$9.7 million from net earnings in 1994 of $9.9 million ($0.41 per share).
Property Operations. Rental revenues for 1995 increased $48.6 million over
revenues for 1994. The increase in rental revenues from 1994 to 1995 is
attributable to (i) inclusion of a full year of operations for the 40
properties acquired in 1994; (ii) the acquisition of 15 existing properties in
1995; and (iii) the leasing of units in five of ATLANTIC's developments, two
of which were completed at December 31, 1995.
Because ATLANTIC will be completing construction on its current development
portfolio and acquiring additional existing properties in its target market,
ATLANTIC anticipates increases in rental revenues in subsequent periods.
Additionally, revenues in subsequent periods will reflect a full year of
operations for the 1995 acquisitions.
In 1995, rental expenses, property management fees paid to affiliate and
real estate taxes increased over the 1994 levels by $12.5 million, $1.9
million and $4.0 million, respectively. These increases are attributable to
the larger number of properties in operation in 1995. On a combined basis,
rental expenses, property management fees paid to affiliate and real estate
taxes as a percentage of rental revenues decreased to 40.0% in 1995 from 41.9%
in 1994.
Including the newly acquired and developed assets, income from property
operations (which is defined as rental income plus other real estate income,
less rental expenses, real estate taxes, property management fees
54
<PAGE>
paid to affiliate and depreciation) increased $23.0 million for 1995 over
1994. Depreciation expense increased $7.2 million for 1995 over 1994. These
increases are almost entirely related to the increased number of assets in
operation.
Cash provided by operating activities was $45.2 million in 1995, an increase
of $19.0 million from the 1994 level. This increase is primarily the result of
the increased number of properties in operation in 1995 as compared to 1994.
Properties Fully Operating Throughout Both Periods. In building its
portfolio, ATLANTIC made significant investments in multifamily properties in
each year since its inception. Accordingly, the size of its portfolio changed
significantly from 1993 to 1994 and from 1994 to 1995. ATLANTIC's portfolio
included only three properties aggregating 683 units that were fully operating
throughout both 1995 and 1994. Property level net operating income from these
three properties increased by 10.1% in 1995 over 1994. These three properties
represent 4.3% of ATLANTIC's operating properties at December 31, 1996, based
on cost.
Interest Expense. Interest expense for 1995 was $9.8 million higher than for
1994. ATLANTIC had no debt outstanding until the second quarter of 1994 which
resulted in higher average outstanding debt balances and higher interest
expense in 1995. Total interest capitalized amounted to $4.4 million and $0.8
million for 1995 and 1994, respectively. This increase is a function of the
higher interest expense incurred in 1995 and the increased development
activity in 1995 as compared to 1994.
ATLANTIC REIT Management Fee Paid to Affiliate. The ATLANTIC REIT Management
fee paid to affiliate by ATLANTIC increased by $3.3 million from 1994 to 1995.
Because the ATLANTIC REIT Management fee fluctuates with the level of
ATLANTIC's cash flow calculated before the ATLANTIC REIT Management fee, this
increase is expected and is proportionate to the increases in other revenue
and expense items experienced by ATLANTIC in 1995. As ATLANTIC arranges fully
amortizing, fixed rate, long-term debt, which it intends to arrange after
achieving a substantial equity base, the ATLANTIC REIT Management fee will
effectively decline in proportion to ATLANTIC's cash flow because regularly
scheduled principal payments or their assumed equivalent are deducted from the
cash flow amount on which the ATLANTIC REIT Management fee is based.
Currently, principal and principal reserve account payments on long-term
mortgage debt are deducted in arriving at cash flow for purposes of
calculating the ATLANTIC REIT Management fee, thus reducing ATLANTIC REIT
Management fee expense.
1994 Compared to 1993
In 1994, net earnings increased by $9.9 million over 1993; $9.9 million
($0.41 per share) in 1994 as compared to $38,000 ($0.07 per share) in 1993.
Rental revenues were $55.1 million in 1994 as compared to $0.2 million in
1993. This increase of $54.9 million is primarily the result of the
acquisition of 40 multifamily properties during 1994. Rental revenues for 1993
are not reflective of a full year of operations since ATLANTIC was formed in
October of that year. Additionally during 1993, ATLANTIC earned revenues from
only three income producing properties acquired in December 1993. These
factors also result in increases in rental expenses, real estate taxes,
property management fees paid to affiliate and depreciation in 1994 as
compared to 1993.
The increased number of operating properties in operation generated more
cash in 1994 as compared to 1993. Cash provided by operating activities was
$26.2 million in 1994. In 1993, operations used $0.5 million of cash. As
discussed above, the increase in cash flow affects the calculation of the
ATLANTIC REIT Management fee. The ATLANTIC REIT Management fee increased by
$3.7 million for 1994 as compared to 1993.
In 1994, ATLANTIC obtained its line of credit facility. Also in 1994,
ATLANTIC assumed mortgage obligations in connection with the acquisition of
certain properties. These debt obligations generated interest expense of $9.2
million in 1994. ATLANTIC had no outstanding debt and incurred no interest
expense in 1993.
ENVIRONMENTAL MATTERS
ATLANTIC is subject to environmental regulations related to the ownership,
operation, development and acquisition of real estate. As part of its due
diligence procedures, ATLANTIC has conducted Phase I
55
<PAGE>
environmental assessments on each property prior to acquisition. The cost of
complying with environmental regulations was not material to ATLANTIC's
results of operations. ATLANTIC is not aware of any environmental condition on
any of its properties which is likely to have a material adverse effect on
ATLANTIC's financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The ATLANTIC REIT Manager considers ATLANTIC's liquidity and ability to
generate cash from operations and financings to be adequate and expects it to
continue to be adequate to meet ATLANTIC's development, acquisition,
operating, debt service and shareholder distribution requirements.
Investing and Financing Activities
Overview. ATLANTIC's investment activities, which consisted primarily of
acquiring and developing multifamily properties, used approximately $47.2
million, $240.7 million, $392.7 million and $31.0 million of cash for the
three-month period ended March 31, 1996, the years ended December 31, 1995 and
1994 and the period ended December 31, 1993, respectively.
ATLANTIC's financing activities provided net cash flow of $29.2 million,
$195.6 million, $372.6 million and $31.6 million for the three-month period
ended March 31, 1996, the years ended December 31, 1995 and 1994 and the
period ended December 31, 1993, respectively. Combined proceeds from equity
offerings of $0.4 million in the three-month period ended March 31, 1996,
$205.8 million, net of share repurchases, in 1995, $239.7 million in 1994, and
$31.6 million in 1993 were the primary source of financing funds. Proceeds
from line of credit borrowings, net of repayments, were $36.0 million in the
three-month period ended March 31, 1996, $37.0 million in 1995 and $153.0
million in 1994.
ATLANTIC expects to finance construction, development and acquisitions
primarily with cash on hand, borrowings under its line of credit and cash from
future securities offerings. After building a substantial equity base,
ATLANTIC intends to arrange fully amortizing, fixed rate, 15 year to 25 year
debt to finance additional acquisitions and developments. ATLANTIC believes
that its current conservative ratio of long-term debt to total long-term
undepreciated book capitalization, the sum of long-term debt and shareholders'
equity after adding back accumulated depreciation (17.5% at March 31, 1996 on
an historical basis and 18.2% on a pro forma basis as adjusted to give effect
to the Transaction and the sale of additional common shares subsequent to
March 31, 1996, both of which are discussed below) provides considerable
flexibility to prudently increase its capital base by utilizing long-term debt
as a financing tool in the future.
1993 Investing and Financing Activities. ATLANTIC's initial portfolio
investment consisted of the acquisition of three operating properties (683
units) located in Atlanta, Georgia. Additionally, ATLANTIC purchased a land
parcel in Charlotte, North Carolina for the development of a 270-unit
property.
ATLANTIC's investment in real estate at December 31, 1993 aggregated $31
million, all of which was financed by the sale of ATLANTIC Common Stock.
1994 Investing and Financing Activities. ATLANTIC's investment strategy in
1994 focused on two components: the acquisition of a substantial base of
existing operating properties to provide operating cash flow and the creation
of an internal development process. During 1994, ATLANTIC acquired 40
operating properties, 31 of which were obtained in two large portfolio
acquisitions. These 40 properties, located in 14 metropolitan areas, added
11,307 units to the portfolio for a total of 11,990 operating units. At
December 31, 1994, ATLANTIC had a total of 15,060 units in its portfolio,
3,070 of which were in development (1,212 units in construction and 1,858
units in planning). The nine projects under development had an estimated
completion cost of $190.7 million.
ATLANTIC's investment in real estate at December 31, 1994 aggregated $631.3
million. The additional investment of approximately $600 million in 1994 was
financed through a combination of debt and equity. As
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partial payment for the largest of the portfolio acquisitions, ATLANTIC issued
$100 million in shares of ATLANTIC Common Stock to the seller of the
portfolio. Sales of ATLANTIC Common Stock through a private placement raised
an additional $240 million. Existing debt of $107.5 million associated with
certain of the properties acquired was assumed by ATLANTIC. Additionally,
ATLANTIC had net borrowings on its line of credit during 1994 of $153 million.
1995 Investing and Financing Activities. In 1995, ATLANTIC acquired existing
properties aggregating 3,961 units and disposed of two properties aggregating
596 units. The cost of the 15 operating properties acquired in 1995 was $177.6
million. Also in 1995, ATLANTIC began development on 5,051 units. In the
fourth quarter, ATLANTIC completed construction on its first two internally
developed multifamily communities, a 270-unit property in Charlotte, North
Carolina and a 198-unit property in Birmingham, Alabama. At December 31, 1995,
ATLANTIC's operating property portfolio aggregated 15,823 units. ATLANTIC's
development portfolio at the end of 1995 included 3,095 units under
construction and 4,558 units in planning with an estimated cost upon
completion of $401.3 million. Three properties under construction began
leasing completed units in the fourth quarter of 1995. At December 31, 1995,
Homestead Village properties, ATLANTIC's moderate priced, purpose-built,
extended-stay lodging properties, comprised 2,515 units of the development
portfolio with 137 units under construction and the remaining units in
planning.
During 1995, ATLANTIC's net additional investment in real estate was $257.7
million bringing its total real estate investment at December 31, 1995 to
$888.9 million. Sales of shares of ATLANTIC Common Stock generated the largest
source of capital in 1995. ATLANTIC sold $205.8 million of shares of ATLANTIC
Common Stock, net of share repurchases, through two private placements. In
connection with the acquisition of certain properties in 1995, ATLANTIC
assumed $24.7 million in existing debt. Additional borrowings on its line of
credit during 1995 aggregated $37 million. At December 31, 1995, ATLANTIC's
outstanding balance on its line of credit was $190 million.
First Quarter 1996 Investing and Financing Activities. During the first
quarter of 1996, ATLANTIC's additional investment in real estate aggregated
$47.2 million, primarily as a result of development activity. This investment
included the acquisitions of land parcels for the development of 1,790 units.
These additional units brought ATLANTIC's total portfolio to 25,266 units at
March 31, 1996 (16,159 operating units and 9,107 units of developments under
construction and in planning). The additional investment during the first
quarter of 1996 was financed primarily through borrowings on the line of
credit and additional mortgage debt. Also during this period, ATLANTIC
completed construction on a 336-unit multifamily community in Raleigh, North
Carolina, bringing its internally developed operating units to 804. ATLANTIC
began construction on 844 units during the first quarter of 1996.
At March 31, 1996, ATLANTIC had $209.7 million of budgeted development costs
for projects under construction, including $5.1 million associated with a
Homestead Village property. Of the total budgeted development cost, $97.3
million was unfunded at March 31, 1996. In addition, ATLANTIC had developments
in planning at March 31, 1996 aggregating 5,504 units in various target market
cities with an aggregate budgeted development cost of $264.9 million,
including $136.3 million associated with Homestead Village properties. The
foregoing developments are subject to a number of conditions, and ATLANTIC
cannot predict with certainty that any of them will be consummated.
On April 9, 1996, ATLANTIC disposed of a 358-unit, middle income property as
part of a tax-deferred exchange. This property accounted for $255,000 of net
operating income during the three-month period ended March 31, 1996. A gain of
approximately $670,000, which will be recognized in the second quarter of
1996, was realized on this disposition. The proceeds from this disposition
were held in escrow until April 22, 1996 when these funds were used to acquire
a 350-unit, moderate income property. Including this property, ATLANTIC
acquired a total of three operating properties aggregating 786 units at a cost
of $33.4 million in April 1996.
In connection with the Put Obligation, as discussed in Note 5 of the
Financial Statements, SCG purchased 2,500,000 shares of ATLANTIC Common Stock
subsequent to March 31, 1996. This Put Obligation was not assigned to ATLANTIC
and ATLANTIC will not repurchase these shares.
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Subsequent to March 31, 1996, ATLANTIC sold 4,210,870 shares of ATLANTIC
Common Stock at $11.50 per share. Total proceeds from these sales were
$48,425,000.
Homestead Transaction
ATLANTIC has traditionally focused on multifamily assets, which since the
first quarter of 1995 has included certain purpose-built, extended-stay
lodging properties known as Homestead Village. In March 1996 the ATLANTIC
Board began considering ways to maximize shareholder value with respect to the
Homestead Village properties. In May 1996, ATLANTIC entered into the Merger
Agreement, as more fully described under "The Transaction--Merger Agreement"
of this Information Statement and Prospectus, whereby ATLANTIC will contribute
its Homestead Village properties to Homestead in exchange for Homestead Common
Stock. The Transaction is expected to (i) result in the Homestead Village
properties being more effectively and profitably utilized and developed due to
the elimination of certain restrictions applicable to REITs and (ii) enhance
the ability of Homestead to access external capital markets necessary to carry
out its plans.
In exchange for ATLANTIC's contribution of the Homestead Village properties
and for ATLANTIC entering into the Funding Commitment Agreement as more fully
described under "The Transaction--Funding Commitment Agreements," ATLANTIC
will receive shares of Homestead Common Stock, convertible mortgages and
Homestead Warrants. Following the consummation of the Transaction, ATLANTIC
will distribute the Homestead Securities to its shareholders of record. Each
mortgage loan issued by Homestead pursuant to the Funding Commitment Agreement
bears interest at 9% per annum and will be convertible into Homestead Common
Stock on the basis of one share of Homestead Common Stock for every $11.50 of
principal outstanding on the mortgage loan.
ATLANTIC's contribution to Homestead will consist of cash, one operating
Homestead Village property and twenty-five Homestead Village land parcels,
which are either owned or under ATLANTIC's control. ATLANTIC's contribution,
including budgeted completion cost for the 26 properties, is approximately
$158.7 million. On the Closing Date, ATLANTIC will contribute assets with an
expected book value of approximately $29 million and cash of approximately
$18.6 million (subject to adjustment as provided in the Merger Agreement). The
remaining cost to complete the properties of $111.1 million will constitute
the funding commitment amount. ATLANTIC intends to fund this commitment
through cash on hand, borrowings on its line of credit and sales of ATLANTIC
Common Stock.
Line of Credit. ATLANTIC obtained a $225 million secured line of credit
agented by Morgan Guaranty Trust Company of New York in June 1994. In August
1995, the line of credit was increased to $300 million and in June 1996, the
line of credit was increased to $350 million. The line of credit is scheduled
to mature in June 1998 and may be extended for an additional year with the
approval of Morgan Guaranty Trust Company of New York and the other
participating lenders. The line of credit provides for interest at prime or,
at ATLANTIC's option, LIBOR plus 1.50% or the certificate of deposit rate plus
1.625%. ATLANTIC obtained a fixed rate of interest of 7.46% through February
5, 1997 on $100 million of its borrowings on the line of credit through a swap
agreement with Goldman Sachs Capital Markets, L.P. A commitment fee of .1875%
per annum on the average unfunded line of credit balance is payable quarterly.
All debt incurrences are subject to certain covenants. Primarily these
covenants address tangible net worth, interest payment coverage and
distributions. ATLANTIC must maintain a debt to tangible net worth ratio of
not greater than 2 to 1 and an adjusted net worth (as defined) of at least
$325 million. ATLANTIC's interest payment coverage (as defined) is required to
be not less than 2 to 1. Restricted payments or distributions (as defined) may
not exceed 95% of ATLANTIC's funds from operations (as defined) for the
preceding four quarters. ATLANTIC has been granted a waiver of the restricted
payments covenant. This waiver allows for restricted payments not to exceed
97% of funds from operations through the third quarter of 1997. ATLANTIC is
currently in compliance with all covenants.
At July 16, 1996, $202 million of borrowings are outstanding and multifamily
properties with an undepreciated cost of approximately $475.5 million are
pledged as collateral.
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Mortgage Debt. At March 31, 1996, ATLANTIC had approximately $123 million of
mortgages payable consisting of approximately $16 million of fixed rate
conventional mortgage debt and approximately $107 million of mortgages which
secure nine tax-exempt bond issues. As further discussed below, this long-term
mortgage debt, which is substantially fully amortizing, has a weighted average
interest rate of 6.73% and an average maturity of 25.8 years, thus providing
ATLANTIC with favorable and conservative financial leverage on the investment
in the properties associated with such debt.
Eight of ATLANTIC's nine tax-exempt bond issues have variable interest
rates. The tax-exempt bond issues are included in a credit enhancement
agreement with the Federal National Mortgage Association ("Fannie Mae"). Under
the agreement with Fannie Mae, ATLANTIC makes monthly principal payments,
based upon a thirty-year amortization, into a principal reserve account. To
mitigate the variable interest rate debt exposure associated with these bond
issues, ATLANTIC has entered into swap agreements. Under these swap
agreements, ATLANTIC pays and receives interest on the aggregate principal
amount of the underlying bonds outstanding, net of the amount held in the
principal reserve account. These agreements effectively mitigate ATLANTIC's
variable interest rate exposure by ensuring that ATLANTIC pays interest on a
fixed rate as provided in such agreements.
ATLANTIC has three interest rate swap agreements: i) an agreement expiring
in June 2002 on approximately $23 million of bonds that fixes the interest
rate at 5.18% (excluding the cost of the credit enhancement agreement); ii) an
agreement expiring in June 2005 on approximately $65 million of bonds that
fixes the interest rate at 5.42% (excluding the cost of the credit enhancement
agreement); and iii) an agreement expiring in March 2006 on $5 million of
bonds that fixes the interest rate at 4.82% (excluding the cost of the credit
enhancement agreement). To the extent the deposits in the principal reserve
account with Fannie Mae have not been used to redeem any of the outstanding
bonds, ATLANTIC pays interest on that portion of bonds outstanding which is
equivalent to the balance in the principal reserve fund at the variable rates
as provided by the mortgage agreements.
Distributions and Funds from Operations
ATLANTIC's current distribution policy is to pay quarterly distributions to
shareholders based upon what ATLANTIC REIT Management considers to be a
reasonable percentage of cash flow. Because depreciation is a non-cash
expense, cash flow typically will be greater than earnings from operations and
net earnings. Therefore, quarterly distributions will be higher than quarterly
earnings.
Distributions paid on shares in 1995 and 1994 aggregated $35.1 million
($0.80 per share) and $14.6 million ($0.60 per share), respectively. No
distributions were paid in 1993. The distributions paid were in excess of net
earnings in both 1995 and 1994 resulting in decreases in shareholders' equity
of $15.5 million in 1995 and $4.7 million in 1994.
ATLANTIC announces the following year's proposed distribution level after
the ATLANTIC Board's annual budget review and approval in December of each
year. At its December 19, 1995 meeting, the ATLANTIC Board announced a
proposed increase in the annual distribution level from $0.80 to $0.84 per
share. The payment of distributions is subject to the discretion of the
ATLANTIC Board and is dependent upon the financial condition and operating
results of ATLANTIC. On March 28, 1996, ATLANTIC paid a quarterly distribution
of $0.21 per share for shares outstanding throughout the first quarter, and on
June 27, 1996, ATLANTIC paid a quarterly distribution of $0.21 per share for
shares outstanding throughout the second quarter. The distributions paid
aggregated $11.7 million and $12.8 million for the first and second quarters,
respectively. In light of the Transaction (including the Distribution of
Homestead Securities), the ATLANTIC Board is evaluating the distribution
level.
Funds from operations represents ATLANTIC's net earnings computed in
accordance with GAAP, excluding gains (or losses) plus depreciation. ATLANTIC
believes that funds from operations is helpful in understanding a property
portfolio's ability to support interest payments and general operating
expenses. On January 1, 1996, ATLANTIC adopted NAREIT's new definition of
funds from operations. Under this new
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definition, loan cost amortization is not added back to net earnings in
determining funds from operations. For comparability, funds from operations
for the periods prior to January 1, 1996 give effect to this new definition.
The funds from operations measure presented by ATLANTIC may not be comparable
to other similarly titled measures of other REITs.
Funds from operations were $11.5 million and $7.8 million for the three-
month periods ended March 31, 1996 and 1995, respectively. Funds from
operations were $35.6 million, $18.7 million and $0.1 million for the years
ended December 31, 1995 and 1994 and the period ended December 31, 1993,
respectively. The aggregate increases corresponded with the increased number
of properties in operation in each year. For a reconciliation of net earnings
to funds from operations, see "ATLANTIC Selected Financial Information."
Funds from operations should not be considered as an alternative to net
income or any other GAAP measurement of performance as an indicator of
ATLANTIC's operating performance nor as an alternative to cash flows from
operating, investing or financing activities as a measure of liquidity. Cash
flow from financing activities is expected to be substantially equivalent to
cash used in investing activities, as ATLANTIC utilizes revolving credit
borrowings, to be refunded with sales of equity and long-term, fully
amortizing debt securities, to fund its investment activities. ATLANTIC's
policy is to expense, rather than capitalize, repairs and maintenance, in
determining net income and funds from operations. Only major renovations,
replacements or improvements with a substantial expected economic life (such
as roofs, parking lots and additions) are capitalized.
REIT MANAGEMENT AGREEMENT
Effective October 28, 1993, ATLANTIC entered into the ATLANTIC REIT
Management agreement, as amended and restated, pursuant to which the ATLANTIC
REIT Manager assumed the day-to-day management of ATLANTIC (the "ATLANTIC REIT
Management Agreement").
The ATLANTIC REIT Management Agreement requires ATLANTIC to pay an annual
fee of approximately 16% of cash flow as defined in the ATLANTIC REIT
Management Agreement, payable monthly. Cash flow is calculated by reference to
ATLANTIC's cash flow from operations, plus (i) fees paid to the ATLANTIC REIT
Manager, (ii) extraordinary expenses incurred at the request of the
independent directors of ATLANTIC (of which there were none in the periods
reported) and (iii) 33% of any interest paid by ATLANTIC on convertible
subordinated debentures (of which there were none in the periods reported);
and after deducting (i) regularly scheduled principal payments (excluding
prepayments or balloon payments) for debt with commercially reasonable
amortization schedules, (ii) assumed principal and interest payments on senior
unsecured debt treated as having regularly scheduled principal and interest
payments like a 20-year level-payment, fully amortizing mortgage (of which
there were none in the periods reported) and (iii) distributions actually paid
with respect to any non-convertible preferred stock of ATLANTIC (of which
there were none in the periods reported). Cash flow does not include dividend
and interest income from Atlantic Development Services, interest income from
the Homestead convertible mortgage notes, realized gains or losses from
dispositions of investments or income from cash equivalent investments. The
ATLANTIC REIT Manager also receives a fee of 0.20% per year on the average
daily balance of cash equivalent investments. The ATLANTIC REIT Management fee
aggregated $2,123,000 for the three-month period ended March 31, 1996 and
$6,923,000, $3,671,000 and $12,000 for the years ended December 31, 1995 and
1994 and the period ended December 31, 1993, respectively.
Total real estate operating, interest, general and administrative costs will
increase due to ATLANTIC's larger asset size, as well as unforeseen changes
which may occur. ATLANTIC'S REIT Management fees paid by ATLANTIC will
increase if cash flow of ATLANTIC, as defined in the ATLANTIC REIT Management
Agreement, increases, including such increases that may relate to increases in
ATLANTIC's assets. ATLANTIC does not expect its other operating costs and
expenses to increase except as a result of inflation, market conditions or
other factors over which the ATLANTIC REIT Manager has no control. Operating
costs for particular items, however, may be increased if they are expected to
result in greater decreases in other expenses or increases in revenues from
ATLANTIC assets.
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ATLANTIC is obligated to reimburse the ATLANTIC REIT Manager for all
expenses incurred by the ATLANTIC REIT Manager on behalf of ATLANTIC relating
to ATLANTIC's operations, primarily including third party legal, accounting,
property management and similar fees paid on behalf of ATLANTIC, and travel
expenses incurred in seeking financing, property acquisitions, property sales
and similar activities on behalf of ATLANTIC and in attending ATLANTIC Board,
committee and shareholder meetings. Under the ATLANTIC REIT Management
Agreement, the ATLANTIC REIT Manager or any of its affiliates are not
precluded from rendering services to other investors, including REITs, even if
such investors compete with ATLANTIC. Since the ATLANTIC REIT Manager is owned
by ATLANTIC's largest shareholder, the ATLANTIC REIT Manager has no intention
of rendering services to investors who compete with ATLANTIC.
The ATLANTIC REIT Management Agreement is renewable by ATLANTIC annually,
subject to a determination by the independent directors that the ATLANTIC REIT
Manager's performance has been satisfactory and that the compensation payable
to the ATLANTIC REIT Manager is fair. Each of ATLANTIC or the ATLANTIC REIT
Manager may terminate the ATLANTIC REIT Management Agreement on 60 days'
notice. Because of the year-to-year nature of the agreement, its maximum
effect on ATLANTIC's results of operations cannot be predicted, other than
that the ATLANTIC REIT Management fees will generally increase or decrease in
proportion to cash flow increases or decreases.
ATLANTIC PER SHARE DISTRIBUTIONS
There is no established public trading market for the ATLANTIC Common Stock
or the Homestead Common Stock. The following table sets forth the ATLANTIC
distributions for the periods indicated.
<TABLE>
<CAPTION>
DISTRIBUTIONS(1)
----------------
<S> <C>
1994
First Quarter......................................... $0.15(2)
Second Quarter........................................ $0.15(3)
Third Quarter......................................... $0.15
Fourth Quarter........................................ $0.15
-----
$0.60(4)
=====
1995
First Quarter......................................... $0.20
Second Quarter........................................ $0.20
Third Quarter......................................... $0.20
Fourth Quarter........................................ $0.20
-----
$0.80(5)
=====
1996
First Quarter......................................... $0.21
Second Quarter........................................ $0.21
</TABLE>
- --------
(1) While a private REIT, ATLANTIC's distribution policy is to calculate and
pay distributions based on the number of days of ownership during the
period, resulting in multiple record dates which correspond with the dates
additional shares are issued.
(2) Paid in the second quarter of 1994.
(3) One third was paid in the second quarter of 1994 and two-thirds were paid
in the third quarter of 1994.
(4) For tax purposes, the 1994 distribution consisted of $0.14 return of
capital and $0.46 ordinary income.
(5) For tax purposes, the 1995 distribution consisted of $0.34 return of
capital and $0.46 ordinary income.
ATLANTIC's tax return for the year ended December 31, 1995 has not been
filed. The taxability information for 1995 is based upon the best available
data. ATLANTIC's tax returns have not been examined by the Internal Revenue
Service and, therefore, the taxability of dividends is subject to change.
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The total distribution required to maintain ATLANTIC's REIT status for tax
purposes was $17.4 million for 1995 and $10.9 million for 1994. ATLANTIC
distributed $35.1 million and $14.6 million in 1995 and 1994, respectively. In
light of the Transaction (including the Distribution of Homestead Securities),
the ATLANTIC Board is evaluating the distribution level.
As of July 12, 1996, ATLANTIC had approximately 290 record holders of
ATLANTIC Common Stock.
ATLANTIC POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The ATLANTIC Board may amend or revise ATLANTIC's policies from time to time
without a vote of the shareholders of ATLANTIC. The ATLANTIC Board also
reserves the right to make exceptions for transactions when it believes that
the transaction is in the best long-term interests of ATLANTIC and its
shareholders.
INVESTMENT POLICIES
ATLANTIC evaluates investments based on its estimate of the contribution of
an investment to increased long-term cash flow on an unleveraged basis.
Prospective property investments are analyzed pursuant to several
underwriting criteria, including purchase price, competition and other market
factors, and prospects for long-term growth in cash flow. ATLANTIC's
investment decision is based upon the expected contribution of the property to
long-term cash flow growth on an unleveraged basis. The expected cash flow
contribution is based on an estimate of all cash revenues from leases and
other revenue sources, minus expenses incurred in operating the property
(generally, real estate taxes, insurance, maintenance, personnel costs and
utility charges, but excluding depreciation, debt service and amortization of
loan costs) and a reserve for capital expenditures.
It is ATLANTIC's policy to generally limit its investments such that (i) no
more than 10% of its assets are invested in land held for development other
than land under development or where development is in planning, (ii) ATLANTIC
will not be treated as an investment company under the Investment Company Act
of 1940, and (iii) ATLANTIC will not invest in mortgage loans, other than
mortgage loans to third party owner-developers in connection with the
development of multifamily properties that are contractually required to be
sold to ATLANTIC upon completion or, mortgage loans to Homestead or to
entities in which ATLANTIC owns a substantial majority of the economic
interest and other than mortgage loans (convertible, participating or other)
where the ATLANTIC Board believes that such loans are in the best long-term
interests of ATLANTIC and its shareholders.
ATLANTIC's strategy includes the development of industry-leading multifamily
products designed for the largest renter groups. Long term, ATLANTIC REIT
Management believes that development will contribute as much, or more, to
ATLANTIC's earnings growth than acquisitions.
While the current policy of ATLANTIC is to make equity investments in
multifamily properties exclusively, ATLANTIC may invest in other real estate
interests consistent with its qualification as a REIT. A change in this policy
could occur, for example, if ATLANTIC concludes that it may benefit from the
cash flow or any appreciation in the value of the property arising through
mortgage investment or as a means of ultimately achieving equity ownership of
a property.
Subject to the percentage of ownership limitations and gross income tests
necessary for REIT qualification, ATLANTIC may also invest in securities of
other entities engaged in real estate activities or securities of other
issuers. ATLANTIC does not currently intend to invest in the securities of
other issuers except in connection with acquisitions of indirect interests in
properties (normally, general or limited partnership interests in special
purpose partnerships controlled by ATLANTIC and owning multifamily properties
and except for preferred stock of entities in which ATLANTIC has a substantial
majority of the economic interest).
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FINANCING POLICIES
ATLANTIC has a secured line of credit for the purpose of facilitating
investment in developments and acquisitions as well as for working capital.
ATLANTIC may also determine to issue securities senior to the ATLANTIC Common
Stock, including preferred stock and debt securities (either of which may be
convertible into ATLANTIC Common Stock or be accompanied by warrants to
purchase ATLANTIC Common Stock). ATLANTIC's financing policies are to replace
revolving credit borrowings with the proceeds of equity offerings or long-
term, fixed rate, fully amortizing debt. ATLANTIC does not intend to incur
long-term, floating rate debt other than in connection with property
acquisitions in which the debt assumed is impracticable to prepay or is tax-
exempt debt. Because its assets are largely long-term, ATLANTIC's debt is
expected to be long-term, fixed rate, fully amortizing debt.
The proceeds of any borrowings by ATLANTIC may be used to pay distributions,
to provide working capital, to pay existing indebtedness or to finance
acquisitions, expansions or development of new properties.
CONFLICT OF INTEREST POLICIES
ATLANTIC does not intend to engage in principal transactions with officers
and directors or to engage independent directors to provide services to
ATLANTIC. In addition, transactions with the ATLANTIC REIT Manager and its
affiliates are significantly restricted and must be approved by a majority of
independent directors, as described below. ATLANTIC's policy is not to borrow
from or make loans to affiliates, other than mortgage loans to entities in
which ATLANTIC owns a substantial majority of the economic interest, mortgage
loans to Homestead or mortgage loans (convertible, participating or other)
where the ATLANTIC Board believes that such loans are in the best long-term
interests of ATLANTIC and its shareholders.
With a view to resolving potential conflicts of interest and protecting the
interests of ATLANTIC's shareholders against such possible conflicts, the
ATLANTIC Charter (the "ATLANTIC Charter") requires that a majority of the
ATLANTIC Board be Independent Directors. "Independent Director" means a
director who (i) is not affiliated, directly or indirectly, with the ATLANTIC
REIT Manager, whether by ownership of, ownership interest in, employment by,
any material business or professional relationship with, or service as an
officer or director of, the ATLANTIC REIT Manager or a business entity which
is an affiliate of the ATLANTIC REIT Manager, (ii) is not serving as a trustee
or director for more than three real estate investment trusts organized by a
sponsor of ATLANTIC and (iii) performs no other services for ATLANTIC, except
as director. ATLANTIC's Independent Directors are required to monitor the
performance of the ATLANTIC REIT Manager.
POLICIES APPLICABLE TO THE ATLANTIC REIT MANAGER AND OFFICERS AND DIRECTORS OF
ATLANTIC
The ATLANTIC REIT Manager has agreed in writing not to engage in any
principal transaction with ATLANTIC, including but not limited to purchases,
sales or leases of property or borrowing or lending of funds, except for
transactions approved by a majority of the Independent Directors not otherwise
interested in such transaction as being fair and reasonable to ATLANTIC and on
terms and conditions not less favorable to ATLANTIC than those available from
unaffiliated third parties. The Transaction is currently prohibited by the
terms of the ATLANTIC REIT Management Agreement, although the ATLANTIC REIT
Manager and ATLANTIC have agreed to waive this prohibition as it relates to
the completion of the Transaction. In addition to the requirements described
above, ATLANTIC will not engage in such transactions unless the Independent
Directors believe that any such transaction is in the long-term best interests
of ATLANTIC and its shareholders. The sole activity of the ATLANTIC REIT
Manager is advising ATLANTIC.
The ATLANTIC REIT Management Agreement permits affiliates of the ATLANTIC
REIT Manager to provide property management and other services to ATLANTIC for
compensation. The fees charged for such services must be comparable to fees
that would be charged by unaffiliated, qualified third parties. Any property
management fees are reviewed annually by the ATLANTIC Board and must be
approved by a majority of the Independent Directors.
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With certain exceptions, officers and employees of the ATLANTIC REIT Manager
spend all of their time on ATLANTIC's affairs. In the future, certain officers
or employees may be transferred to or from other affiliates of the ATLANTIC
REIT Manager, consistent with ATLANTIC REIT Manager's plan for management
depth and orderly succession.
ATLANTIC does not intend to issue options or warrants to the ATLANTIC REIT
Manager or its employees.
Under the law of Maryland (where ATLANTIC is organized), each director will
be obligated to offer to ATLANTIC any opportunity (with certain limited
exceptions) which comes to him or her and in which ATLANTIC has an interest or
a reasonable expectancy in developing. In addition, under Maryland law, any
contract or transaction between ATLANTIC and any director or any entity in
which a director has a material financial interest will not be void or
voidable if, in addition to being approved by at least a majority of a quorum
of the board of directors (i) it is approved, after disclosure of the
interest, by the affirmative vote of a majority of disinterested directors or
by the affirmative vote of a majority of the votes cast by disinterested
shareholders, or (ii) it is fair and reasonable to ATLANTIC.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
ATLANTIC may, but does not presently intend to, make investments other than
as previously described. All investments will be primarily related to
multifamily properties and the management and development thereof. ATLANTIC
has authority to issue senior securities, to offer ATLANTIC Common Stock or
other securities and to repurchase or otherwise reacquire its common stock or
any other securities and may engage in such activities in the future.
ATLANTIC's policy is not to make loans to its officers or directors or to the
ATLANTIC REIT Manager. ATLANTIC may in the future make loans to partnerships
and joint ventures in which it participates in order to meet working capital
needs. ATLANTIC has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers and does not intend to do
so. ATLANTIC does not intend to engage in the purchase or sale of investments
(other than acquisition or disposition of properties in accordance with the
REIT rules and ATLANTIC's investment policies) and may on a selected basis in
the future offer securities in exchange for properties. ATLANTIC intends to
make annual and quarterly reports to shareholders. The annual reports will
contain audited financial statements.
At all times, ATLANTIC intends to make investments in such a manner as to be
consistent with the requirements of the Code for ATLANTIC to qualify as a REIT
unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), the ATLANTIC Board determines that it is no longer in
the best interests of ATLANTIC to qualify as a REIT.
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PRINCIPAL SHAREHOLDERS
The following table sets forth, as of July 12, 1996, the beneficial
ownership of shares of ATLANTIC Common Stock for (i) each person known to
ATLANTIC to hold more than a 5% interest in ATLANTIC, (ii) each director of
ATLANTIC and (iii) the directors of ATLANTIC and directors and executive
officers of the ATLANTIC REIT Manager as a group. Unless otherwise indicated
in the footnotes, all of such interests are owned directly, and the indicated
person or entity has sole voting and investment power.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF ATLANTIC PERCENT OF
NAME AND ADDRESS COMMON STOCK ALL ATLANTIC
OF BENEFICIAL OWNER BENEFICIALLY OWNED COMMON STOCK
------------------- ---------------------------- ------------
<S> <C> <C>
Security Capital Group
Incorporated.................. 42,257,407(1) 64.1%
125 Lincoln Avenue
Santa Fe, New Mexico 87501
William D. Sanders (Corporate
Ownership).................. 42,257,407(2) 64.1
7777 Market Center Avenue
El Paso, Texas 79912
William D. Sanders (Personal
Ownership).................. 12,310 *
7777 Market Center Avenue
El Paso, Texas 79912
Ameritech Pension Trust........ 4,446,640 6.7
Ameritech Corporation
225 West Randolph Street
HQ-13A
Chicago, Illinois 60606
General Motors Investment
Management Corporation........ 4,347,826(3) 6.6
767 Fifth Avenue
New York, New York 10153
C. Ronald Blankenship.......... 1,000 *
125 Lincoln Avenue
Santa Fe, New Mexico 87501
Manuel A. Garcia, III.......... 20,000 *
P.O. Box 2066
Daugar Restaurants, Inc.
Winter Park, Florida 32790
Ned S. Holmes.................. 120,000(4) *
Parkway Investments/Texas,
Inc.
55 Waugh Drive
Houston, Texas 77007
Constance B. Moore............. 21,739 *
Six Piedmont Center
Atlanta, Georgia 30305
James C. Potts................. 26,100 *
Six Piedmont Center
Atlanta, Georgia 30305
All Directors and Executive
Officers of ATLANTIC as a
Group (11 persons)............ 189,839 *
</TABLE>
- --------
*Less than 1%
(1) These shares of ATLANTIC Common Stock are owned of record by SC Realty
Incorporated, a wholly owned subsidiary of SCG, and are pledged to secure
SCG's $300 million revolving line of credit facility
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with a syndicate of banks. As of July 12, 1996, there were $165 million of
borrowings outstanding under the line of credit. The line of credit is also
secured by securities owned by SCG of PTR, SCI, and Security Capital U.S.
Realty, an entity based in Luxembourg which invests in real estate operating
companies in the United States. SCG estimates that the aggregate market
value of the pledged securities exceeded $2.0 billion as of July 12, 1996.
SCG was in compliance with all covenants under the line of credit at March
31, 1996.
(2) Mr. Sanders may be deemed to beneficially own these shares of ATLANTIC
Common Stock, which are owned by SCG, because Mr. Sanders shares voting and
dispositive power with respect to all shares of ATLANTIC Common Stock owned
by SCG. SCG and Mr. Sanders intend to play a major role in the direction of
ATLANTIC for the purpose of maximizing the value of ATLANTIC.
(3) 3,913,043 of these shares are owned by the General Motors Hourly-Rate
Employees Pension Trust and 434,783 of these shares are owned by the
General Motors Salaried Employees Pension Trust.
(4) Mr. Holmes directly owns 5,000 of these shares of ATLANTIC Common Stock.
Mr. Holmes may be deemed to beneficially own 115,000 of these shares of
ATLANTIC Common Stock which are owned by Mr. Holmes' wife and children and
by Holmes Family Venture Ltd., a family entity with respect to which Mr.
Holmes shares voting and dispositive power.
FEDERAL INCOME TAX CONSIDERATIONS
This section is a summary of certain federal income tax matters of general
application pertaining to REITs under the Code. The discussion is based on
current law and does not purport to deal with all aspects of federal income
taxation that may be relevant to investors subject to special treatment under
federal income tax laws, such as investors subject to the Employee Retirement
Income Security Act of 1974, as amended, other tax exempt investors, dealers in
securities or foreign persons. The provisions of the Code pertaining to REITs
are highly technical and complex and sometimes involve mixed questions of fact
and law. In addition, this section does not discuss foreign, state or local
taxation. ATLANTIC has not requested and will not request a ruling from the IRS
with respect to any of the federal income tax issues discussed below.
Prospective investors should consult, and must depend on, their own tax
consequences of holding and disposing of shares of ATLANTIC Common Stock.
TAXATION OF ATLANTIC
ATLANTIC believes that is has been organized and operated, and it intends to
continue to operate, in a manner qualifying it as a REIT under Sections 856
through 860 of the Code, but no assurance can be given that it will at all
times so qualify. ATLANTIC's ability to qualify as a REIT under the
requirements of the Code and the regulations promulgated thereunder is
dependent upon actual operating results.
To qualify as a REIT under the Code for a taxable year, ATLANTIC must meet
certain organizational and operational requirements, which generally require it
to be a passive investor in operating real estate and to avoid excessive
concentration of ownership of its capital stock. First, its principal
activities must be real estate related. Generally, at least 75% of the value of
the total assets of ATLANTIC at the end of each calendar quarter must consist
of real estate assets, cash or governmental securities and for each taxable
year at least 75% of its gross income must be from real estate sources,
including rents from real property and interest on mortgage obligations.
ATLANTIC may not own more than 10% of the outstanding voting securities of any
corporation. Shares of qualified REITs, qualified temporary investments and
shares of certain wholly owned subsidiaries are exempt from this prohibition.
ATLANTIC holds assets through certain wholly owned subsidiary corporations that
it believes qualify for the exemption. Additionally, gross income from the sale
or other disposition of stock and securities held for less than one year and of
real property held for less than four years must constitute less than 30% of
the gross income for each taxable year of a REIT. For each taxable year, at
least 75% of a REIT's gross income must be derived from specified real estate
sources and 95% must be derived from such real estate sources plus certain
other permitted sources. Real estate income for purposes of these requirements
includes gains from the sale of real property not held primarily for sale to
customers in the ordinary course of business, dividends on REIT shares,
interest on loans secured by mortgages on real property, certain rents from
real property and income
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from foreclosure property. For rents to qualify, they may not be based on the
income or profits of any person, except that they may be based on a percentage
or percentages of gross income or receipts, and, subject to certain limited
exceptions, the REIT may not manage the property or furnish services to
tenants except through an independent contractor which is paid an arm's-length
fee and from which the REIT derives no income.
ATLANTIC must satisfy certain ownership restrictions that limit (i)
concentration of ownership of capital stock by a few individuals and (ii)
ownership by ATLANTIC of its tenants. The outstanding capital stock of
ATLANTIC must be held by at least 100 shareholders. No more than 50% in value
of the outstanding capital stock, including in some circumstances capital
stock into which outstanding securities might be converted, may be owned
actually or constructively by five or fewer individuals or certain other
entities at any time during the last half of ATLANTIC's taxable year.
Accordingly, the ATLANTIC Charter restrict the transfer of ATLANTIC Common
Stock and any other outstanding securities convertible into shares of ATLANTIC
Common Stock when necessary to maintain ATLANTIC's qualification as a REIT
under the Code. However, because the Code imposes broad attribution rules in
determining constructive ownership, no assurances can be given that the
restrictions of the ATLANTIC Charter will be effective in maintaining
ATLANTIC's REIT status. See "Comparison of Rights of Holders of ATLANTIC
Common Stock and Homestead Common Stock--Restriction on Size of Holdings of
Shares." Because SCG is a corporation, its ownership is attributed
proportionally to all of its shareholders for purposes of determining whether
more than 50% in value of the outstanding capital stock is owned by five or
fewer individuals at any time during the last half of ATLANTIC's taxable year.
So long as ATLANTIC qualifies for taxation as a REIT and distributes at
least 95% of its real estate investment trust taxable income (computed without
regard to net capital gains or the dividends-paid deduction) for its taxable
year to its shareholders annually, ATLANTIC itself will not be subject to
federal income tax on that portion of such income distributed to shareholders.
ATLANTIC will be taxed at regular corporate rates on all income not
distributed to shareholders. ATLANTIC's policy is to distribute at least 95%
of its taxable income. REITs may also incur taxes for certain other activities
or to the extent distributions do not satisfy certain other requirements.
Failure of ATLANTIC to qualify during any taxable year as a REIT could,
unless certain relief provisions were available, have a material adverse
effect upon its shareholders. If disqualified for taxation as a REIT for a
taxable year, ATLANTIC would also be disqualified for taxation as a REIT for
the next four taxable years, unless the failure was due to reasonable cause
and not willful neglect. ATLANTIC would be subject to federal income tax at
corporate rates on all of its taxable income and would not be able to deduct
the dividends paid, which could result in a discontinuation of or substantial
reduction in dividends to shareholders. Dividends would also be subject to the
regular tax rules applicable to dividends received by shareholders of
corporations. Should the failure to qualify be determined to have occurred
retroactively in an earlier tax year of ATLANTIC, the imposition of a
substantial federal income tax liability on ATLANTIC attributable to such
nonqualifying tax years may adversely affect ATLANTIC's ability to pay
dividends. In the event that ATLANTIC fails to meet certain income tests of
the tax law, it may, generally, nonetheless retain its qualification as a REIT
if it pays a 100% tax on the amount by which it failed to meet the income
tests so long as its failure was due to reasonable cause and not willful
neglect. Any such taxes would adversely affect ATLANTIC's ability to pay
dividends or to pay interest on any debt securities.
TAXATION OF THE SHAREHOLDERS OF ATLANTIC
As long as ATLANTIC qualifies as a REIT, distributions made to its
shareholders out of current or accumulated earnings and profits of ATLANTIC
(which are not designated as capital gain dividends) will generally be taxed
to shareholders as ordinary income either in the year of payment or, with
respect to distributions declared in the last quarter of any year and paid by
January 31 of the following year, in the year of declaration and will not be
eligible for the dividends received deduction for corporations. ATLANTIC's
earnings and profits will first be allocated to any outstanding preferred
shares. A distribution of net capital gains by ATLANTIC will generally be
treated as a long-term capital gain to shareholders to the extent properly
designated by ATLANTIC as a capital gain dividend and regardless of the length
of time a shareholder has held his shares
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of capital stock. Under Section 291 of the Code, however, corporate
shareholders may be required to treat up to 20% of any such capital gain as
ordinary income. Section 291 of the Code provides, in general, that if a
corporation sells or disposes of depreciable real property in a taxable
transaction, it must, to the extent of gain, include as ordinary income up to
20% of the depreciation previously taken on such property. Corporate
shareholders of a REIT are required to treat the portion of a capital gain
dividend attributable to the gain from the REIT's sale or exchange of
depreciable real property as subject to the 20% ordinary income rule. Capital
gains distributions are not eligible for the dividends-received deduction for
corporations. A distribution in excess of current or accumulated earnings and
profits will constitute a nontaxable return of capital, to the extent of the
shareholder's basis in his shares of capital stock, and is applied to reduce
the shareholder's basis in the shares of capital stock. To the extent such a
distribution is greater than such basis, it will be treated as capital gain to
those shareholders holding their shares of capital stock as capital assets.
ATLANTIC will notify shareholders as to the portions of each distribution
which, in its judgment, constitute ordinary income, capital gain dividends or
return of capital. Should ATLANTIC incur ordinary or capital losses,
shareholders will not be entitled to include such losses in their own income
tax returns.
BACKUP WITHHOLDING
ATLANTIC will report to its United States shareholders and the IRS the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at applicable rates with respect to
distributions paid unless such shareholder (a) is a corporation or falls
within certain other exempt categories and, when required, demonstrates this
fact, or (b) provides a taxpayer identification number, certifies as to no
loss or exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules. A shareholder that
does not provide ATLANTIC with his or her correct taxpayer identification
number may also be subject to penalties imposed by the IRS. Any amount paid as
backup withholding will be creditable against the shareholder's income tax
liability. In addition, ATLANTIC may be required to withhold a portion of
capital gain distributions to any shareholders who fail to certify their
nonforeign status to ATLANTIC.
COMPARISON OF RIGHTS OF HOLDERS OF
ATLANTIC COMMON STOCK AND HOMESTEAD COMMON STOCK
Both ATLANTIC and Homestead are corporations incorporated under the MGCL.
The rights of holders of Homestead Common Stock are governed by the MGCL and
by the Homestead charter (the "Homestead Charter") and Bylaws. The rights of
holders of ATLANTIC Common Stock are governed by the MGCL and by the ATLANTIC
Charter and Bylaws.
The rights of Homestead shareholders will differ in some respects from the
rights of ATLANTIC shareholders. A summary of these differences is set forth
below. The following summary does not purport to be a complete statement of
the rights of holders of ATLANTIC Common Stock under applicable Maryland law,
the ATLANTIC Charter and Bylaws or a comprehensive comparison with the rights
of the holders of Homestead Common Stock under applicable Maryland law, the
Homestead Charter and Bylaws or a complete description of the provisions
referred to herein. The identification of specific differences is not meant to
indicate that other equally or more significant differences do not exist. This
summary is qualified in its entirety by reference to the MGCL and the ATLANTIC
Charter and Bylaws and the Homestead Charter and Bylaws, to which prospective
holders of Homestead Common Stock are referred.
PREFERRED SHARES
Subject to limitations prescribed by Maryland law and the ATLANTIC Charter
and the Homestead Charter, each of the ATLANTIC Board and the Homestead Board
is authorized to reclassify and issue, from the authorized but unissued shares
of stock of ATLANTIC and Homestead, as applicable, preferred shares in series
and to establish from time to time the number of preferred shares to be
included in such series and to fix the
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designation and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends and other distributions,
qualifications and terms and conditions of redemption of the shares of each
series, and such other subjects or matters as may be fixed by resolution of
the ATLANTIC Board or Homestead Board or duly authorized committees thereof.
Neither ATLANTIC nor Homestead has any shares of preferred stock outstanding.
RESTRICTIONS ON TRANSFER AND REDEMPTION OF SHARES
The ATLANTIC Charter contains certain restrictions on the number of shares
of ATLANTIC Common Stock that individual shareholders may own. The Homestead
Charter contains no similar provisions.
For ATLANTIC to qualify as a REIT under the Code, no more than 50% in value
of its shares (after taking into account options to acquire shares) may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities and constructive ownership among specified
family members) during the last half of a taxable year (other than the first
taxable year) or during a proportionate part of a short taxable year. The
shares must also be beneficially owned (other than during the first taxable
year) by 100 or more persons during at least 335 days of a taxable year or
during a proportionate part of a shorter taxable year. Because ATLANTIC is a
REIT, the ATLANTIC Charter contains restrictions on the acquisition of shares
intended to ensure compliance with these requirements.
Subject to certain exceptions specified in the ATLANTIC Charter, no holder
may own, or be deemed to own by virtue of the attribution provisions of the
Code, more than 9.8% (the "Ownership Limit") of the number or value of the
issued and outstanding shares. The ATLANTIC Board, upon receipt of a ruling
from the IRS or an opinion of counsel or other evidence satisfactory to the
ATLANTIC Board and upon such other conditions as the ATLANTIC Board may
direct, may exempt a proposed transferee from the Ownership Limit. The
ATLANTIC Board may require such opinions of counsel, affidavits, undertakings
or agreements as it may deem necessary or advisable in order to determine or
ensure ATLANTIC's status as a REIT. Any transfer of shares that would (i)
create a direct or indirect ownership of shares in excess of the Ownership
Limit, (ii) result in the shares being beneficially owned by fewer than 100
persons (determined without reference to any rules of attribution) as provided
in Section 856(a) of the Code, or (iii) result in ATLANTIC being "closely
held" within the meaning of Section 856(h) of the Code, shall be null and void
ab initio, and the intended transferee will acquire no rights to the shares.
The foregoing restrictions on transferability and ownership will not apply if
the ATLANTIC Board determines, which determination must be approved by the
shareholders, that it is no longer in the best interests of ATLANTIC to
attempt to qualify, or to continue to qualify, as a REIT.
The ATLANTIC Charter excludes from the foregoing ownership restriction SCG
(and its transferees) who owned in excess of the Ownership Limit on the date
of its adoption. In no event will such persons (other than SCG) be entitled to
acquire additional shares such that the five largest beneficial owners of
shares hold more than 50% of the total outstanding shares.
Any shares, the purported transfer of which would result in a person owning
shares in excess of the Ownership Limit or cause ATLANTIC to become "closely
held" under Section 856(h) of the Code that is not otherwise permitted as
provided above, will constitute excess shares ("Excess Shares"), which will be
transferred pursuant to the ATLANTIC Articles to a party not affiliated with
ATLANTIC designated by ATLANTIC as the trustee of a trust for the exclusive
benefit of an organization or organizations described in Sections 170(b)(1)(A)
and 170(c) of the Code and identified by the ATLANTIC Board as the beneficiary
or beneficiaries of the trust (the "Charitable Beneficiary"), until such time
as the Excess Shares are transferred to a person whose ownership will not
violate the restrictions on ownership. While these Excess Shares are held in
trust, they will not be entitled to share in any distributions which will be
paid to the trust for the benefit of the Charitable Beneficiary and may only
be voted by the trustee for the benefit of the Charitable Beneficiary. Subject
to the Ownership Limit, the Excess Shares shall be transferred by the trustee
at the direction of ATLANTIC to any person (if the Excess Shares would not be
Excess Shares in the hands of such person). The purported transferee will
receive the lesser of (i) the price paid by the purported transferee for the
Excess Shares (or, if no
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consideration was paid, fair market value on the day of the event causing the
Excess Shares to be held in trust) and (ii) the price received from the sale
or other disposition of the Excess Shares held in trust. Any proceeds in
excess of the amount payable to the purported transferee will be paid to the
Charitable Beneficiary. In addition, such Excess Shares held in trust are
subject to purchase by ATLANTIC for a 90-day period at a purchase price equal
to the lesser of (i) the price paid for the Excess Shares by the purported
transferee (or, if no consideration was paid, fair market value at the time of
the event causing the shares to be held in trust) and (ii) the fair market
value of the Excess Shares on the date ATLANTIC elects to purchase. Fair
market value, for these purposes, means the last reported sales price reported
on the New York Stock Exchange ("NYSE") on the trading day immediately
preceding the relevant date, or if not then traded on the NYSE, the last
reported sales price on the trading day immediately preceding the relevant
date as reported on any exchange or quotation system over or through which the
relevant class of shares of stock may be traded, or if not then traded over or
through any exchange or quotation system, then the market price on the
relevant date as determined in good faith by the ATLANTIC Board.
From and after the purported transfer to the purported transferee of the
Excess Shares, the purported transferee shall cease to be entitled to
distributions, voting rights and other benefits with respect to the Excess
Shares except the right to payment on the transfer of the Excess Shares as
described above. Any distribution paid to a purported transferee on Excess
Shares prior to the discovery by ATLANTIC that such Excess Shares have been
transferred in violation of the provisions of the ATLANTIC Articles shall be
repaid to the trust for the benefit of the Charitable Beneficiary. If the
foregoing transfer restrictions are determined to be void, invalid or
unenforceable by any court of competent jurisdiction, then the purported
transferee of any Excess Shares may be deemed, at the option of ATLANTIC, to
have acted as an agent on behalf of ATLANTIC in acquiring such Excess Shares
and to hold such Excess Shares on behalf of ATLANTIC.
All certificates representing shares must bear a legend referring to the
restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% (or such other percentage between 1/2 of 1% and 5%, as
provided in the rules and regulations promulgated under the Code) of the
number or value of the outstanding shares of ATLANTIC Common Stock must give a
written notice containing certain information to ATLANTIC by January 31 of
each year. In addition, each shareholder shall upon demand be required to
disclose to ATLANTIC in writing such information with respect to the direct,
indirect and constructive ownership of shares of ATLANTIC Common Stock as the
ATLANTIC Board deems reasonably necessary to comply with the provisions of the
Code applicable to a REIT, to determine ATLANTIC's status as a REIT, to comply
with the requirements of any taxing authority or governmental agency or to
determine any such compliance.
These ownership limitations could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of the shares of
ATLANTIC Common Stock might receive a premium for their shares over the then
prevailing market price or which such holders might believe to be otherwise in
their best interest.
DIRECTORS
The Homestead Charter provides that the number of directors shall initially
be three, which number may be increased or decreased from time to time in
accordance with the Bylaws, but such number shall never be less than the
minimum number required by the MGCL. Homestead's Bylaws provide that the
number of directors may be established by the Homestead Board but may not be
fewer than three nor more than fifteen. Pursuant to the terms of the Homestead
Charter, the directors are divided into three classes. At the 1997 annual
meeting of stockholders, one class will be elected to hold office for a term
expiring at the annual meeting of shareholders in 1998, a second class will be
elected to hold office for a term expiring at the annual meeting of
shareholders in 1999 and a third class will be elected to hold office for a
term expiring at the annual meeting of shareholders in 2000. As the term of
each class expires, directors in that class will be elected for a term of
three years and until their successors are duly elected and qualify. Homestead
believes that the classification of the Homestead Board
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will help to assure the continuity and stability of Homestead's business
strategies and policies as determined by the Homestead Board. Immediately
following the date on which Homestead has a class of securities registered
pursuant to Section 12 of the Exchange Act, the Homestead Board shall include
a majority of directors each of whom (i) is not affiliated with SCG or any of
its affiliates, directly or indirectly, whether by ownership of, ownership
interest in, employment by, any material business or professional relationship
with, or service as, an officer or director of SCG or any or its affiliates,
(ii) is not serving as a trustee or director for more than three entities
organized or controlled by SCG and (iii) performs no other services for
Homestead, except as director. ATLANTIC's Charter contains substantially
similar provisions.
VACANCIES AMONG DIRECTORS
The MGCL provides that unless the charter or bylaws of a corporation provide
otherwise, newly created directorships resulting from an increase in the
number of directors may be filled by a majority of the entire board of
directors, and vacancies on the board that result from any other cause may be
filled by a majority of the remaining directors. Vacancies on the board
resulting from the removal of a director by the shareholders may also be
filled by the shareholders.
The Homestead Bylaws provide that any vacancy will be filled, at any regular
meeting or at any special meeting called for that purpose, by a majority of
the remaining directors, except that a vacancy resulting from an increase in
the number of directors will be filled by a majority of the entire Homestead
Board. The ATLANTIC Bylaws provide that any vacancy may be filled by a
majority of the directors then in office, though less than a quorum.
LIMITATION ON DIRECTOR LIABILITY
The MGCL allows a corporation's charter to contain a provision limiting a
director's or an officer's personal liability to the corporation and its
shareholders for money damages except to the extent that (i) it is proved that
the individual actually received an improper benefit or profit for the amount
of such benefit or profit; or (ii) a judgment or other final adjudication
adverse to the individual is entered in a proceeding based on a finding in the
proceeding that the individual's action or failure to act was the result of
active and deliberate dishonesty and was material to the cause of action. The
ATLANTIC Charter and the Homestead Charter contain provisions which limit the
liability of its directors and officers for money damages to the fullest
extent permitted by the MGCL.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The MGCL requires a corporation (unless its charter provides otherwise,
which neither the ATLANTIC Charter nor the Homestead Charter does) to
indemnify a director or officer who has been successful, on the merits or
otherwise, in the defense of any proceeding to which he is made a party by
reason of his service in that capacity. The MGCL permits indemnification of
directors, officers, employees and agents of a corporation unless (a) the act
or omission was material to the matter giving rise to the proceeding and (i)
was committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the party seeking indemnification to receive an improper
personal benefit in money, property or services or, (c) in the case of
criminal prosecutions, the party seeking indemnification had reasonable cause
to believe that the act or omission was unlawful. The ATLANTIC Charter and
Bylaws and the Homestead Charter and Bylaws provide for the indemnification of
directors and officers to the fullest extent permitted by the MGCL.
SPECIAL SHAREHOLDERS' MEETINGS
The MGCL provides that special meetings of the shareholders may be called by
the president, the board of directors or any other person specified in the
charter or bylaws of the corporation. The ATLANTIC Bylaws give the Chairman of
the Board and the Homestead Bylaws give the Chairman of the Board and chief
executive officer the power to call a special meeting of the shareholders.
Under the current MGCL, a special meeting of stockholders must be called by
the secretary of the corporation upon the written request of the stockholders
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entitled to cast 25% of the votes entitled to be cast at the meeting setting
forth the purpose for which the meeting is being called. A bill passed by the
Maryland legislature and signed by the Governor of Maryland earlier this year
permits a Maryland corporation to increase the percentage of votes necessary
to require the secretary of the corporation to call a special meeting from 25%
to as high as a majority. This bill will become effective on October 1, 1996.
Accordingly, the Homestead Bylaws provide that on and after October 1, 1996, a
special meeting must be called by the secretary upon the written request of
the holders entitled to cast a majority of the votes entitled to be cast at
the meeting.
ADVANCE NOTICE OF DIRECTORS' NOMINATIONS AND NEW BUSINESS
For nominations or other business to be properly brought before an annual
meeting of stockholders by a stockholder, the Homestead Bylaws require such
stockholder to deliver a notice to the Secretary, absent specified
circumstances, not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting setting forth: (i) as to
each person whom the stockholder proposes to nominate for election or
reelection as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies for the election of
directors, pursuant to Regulation 14A of the Exchange Act; (ii) as to any
other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such stockholder and of the beneficial owner, if
any, on whose behalf the proposal is made; and (iii) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made, (x) the name and address of such stockholder
as they appear on Homestead's books, and of such beneficial owner and (y) the
number of shares of each class of Homestead Common Stock which are owned
beneficially and of record by such stockholder and such beneficial owner, if
any. The ATLANTIC Bylaws contain a similar provision.
LEGAL MATTERS
The validity of the Homestead Common Stock and the Homestead Warrants
offered hereby will be passed upon for Homestead by Mayer, Brown & Platt,
Chicago, Illinois. Certain legal matters relating to the Transaction will be
passed upon for ATLANTIC, Homestead, PTR and SCG by King & Spalding, Atlanta,
Georgia (counsel to the ATLANTIC Special Committee), Mayer, Brown & Platt,
Chicago, Illinois and Munger, Tolles & Olson, Los Angeles, California (counsel
to the PTR Special Committee). King & Spalding, Mayer, Brown & Platt and
Munger, Tolles & Olson will rely upon the opinion of Ballard Spahr Andrews &
Ingersoll, Baltimore, Maryland, as to certain matters of Maryland law. Mayer,
Brown & Platt has represented and is currently representing ATLANTIC, PTR, SCG
and Homestead and certain of their respective affiliates. King & Spalding has
in the past represented PTR.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND EXPERTS
The financial statements of ATLANTIC as of December 31, 1995 and 1994, and
for each of the years ended December 31, 1995 and 1994, and the period October
26, 1993 (inception) through December 31, 1993, the related schedule as of
December 31, 1995 and the combined Historical Summaries of Gross Income and
Direct Operating Expenses of the Group A, Group B and Group C Properties of
ATLANTIC for the year ended December 31, 1994, the period from January 1, 1995
through September 30, 1995 and the year ended December 31, 1995, respectively,
all appearing in this Information Statement and Prospectus of ATLANTIC
included in the Homestead Registration Statement, have been audited by Ernst &
Young LLP, independent certified public accountants, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting
and auditing.
EXPENSES OF SOLICITATION
Homestead will pay the expenses in connection with the filing, printing and
distribution of this Information Statement and Prospectus.
72
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORICAL:
Condensed Balance Sheets as of March 31, 1996 and December 31, 1995..... F-2
Condensed Statements of Earnings for the three-month periods ended March
31, 1996 and 1995...................................................... F-3
Condensed Statements of Cash Flows for the three-month periods ended
March 31, 1996 and 1995................................................ F-4
Notes to Condensed Financial Statements................................. F-5
Report of Independent Certified Public Accountants...................... F-11
Balance Sheets as of December 31, 1995 and 1994......................... F-12
Statements of Earnings for the years ended December 31, 1995, 1994, and
1993................................................................... F-13
Statements of Shareholders' Equity for the years ended December 31,
1993, 1994, and 1995................................................... F-14
Statements of Cash Flows for the years ended December 31, 1995, 1994,
and 1993............................................................... F-15
Notes to Financial Statements........................................... F-16
Schedule III--Real Estate and Accumulated Depreciation.................. F-26
Note to Schedule III.................................................... F-30
PRO FORMA (UNAUDITED):
Summary of Pro Forma adjustments........................................ F-31
Pro Forma Balance Sheet as of March 31, 1996............................ F-32
Pro Forma Statement of Earnings for the three-month period ended March
31, 1996............................................................... F-33
Pro Forma Statement of Earnings for the year ended December 31, 1995.... F-34
Notes to Pro Forma Financial Statements................................. F-35
COMBINED HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT OPERATING EXPENSES
PURSUANT TO RULE 3-14:
Report of Independent Certified Public Accountants...................... F-39
Group A Properties Combined Historical Summary of Gross Income and
Direct Operating Expenses for the year ended December 31, 1994 and the
unaudited Combined Historical Summary of Gross Income and Direct
Operating Expenses for the period January 1, 1995 through the earlier
of June 30, 1995 or Date of Acquisition................................ F-40
Notes to Group A Properties Combined Historical Summary of Gross Income
and Direct Operating Expenses.......................................... F-41
Report of Independent Certified Public Accountants...................... F-43
Group B Properties Combined Historical Summary of Gross Income and
Direct Operating Expenses for the period from January 1, 1995 through
September 30, 1995..................................................... F-44
Notes to Group B Properties Combined Historical Summary of Gross Income
and Direct Operating Expenses.......................................... F-45
Report of Independent Certified Public Accountants...................... F-47
Group C Properties Combined Historical Summary of Gross Income and
Direct Operating Expenses for the Year ended December 31, 1995......... F-48
Notes to Group C Properties Combined Historical Summary of Gross Income
and Direct Operating Expenses.......................................... F-49
</TABLE>
F-1
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate........................................... $936,129 $888,928
Less accumulated depreciation......................... 28,364 23,561
-------- --------
Net investments in real estate.................... 907,765 865,367
Cash and cash equivalents............................. 6,553 6,494
Other assets.......................................... 15,000 13,963
-------- --------
Total assets...................................... $929,318 $885,824
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Line of credit...................................... $226,000 $190,000
Mortgages payable................................... 123,291 118,524
Accounts payable.................................... 16,267 11,030
Accrued expenses and other liabilities.............. 11,409 9,332
-------- --------
Total liabilities................................. 376,967 328,886
-------- --------
Shareholders' equity:
Common shares (250,000,000 authorized, 55,569,635
issued and
outstanding at March 31, 1996 and 55,525,635 issued
and outstanding at December 31, 1995).............. 556 555
Additional paid-in capital.......................... 576,976 576,547
Distributions in excess of net earnings............. (25,181) (20,164)
-------- --------
Total shareholders' equity........................ 552,351 556,938
-------- --------
Total liabilities and shareholders' equity........ $929,318 $885,824
======== ========
</TABLE>
See accompanying notes to the condensed financial statements.
F-2
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-
MONTH PERIODS
ENDED MARCH 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Revenues:
Rental income................................................ $30,809 $22,952
Interest income.............................................. 72 45
------- -------
30,881 22,997
------- -------
Expenses:
Rental expenses.............................................. 8,712 5,771
Real estate taxes............................................ 3,104 2,430
Property management fees paid to affiliate................... 920 717
Depreciation................................................. 4,804 3,605
Interest..................................................... 4,342 4,677
REIT management fee paid to affiliate........................ 2,123 1,515
General and administrative................................... 187 105
Other........................................................ 39 2
------- -------
24,231 18,822
------- -------
Net earnings................................................... $ 6,650 $ 4,175
======= =======
Weighted average shares outstanding.......................... 55,555 37,133
======= =======
Net earnings per share....................................... $ 0.12 $ 0.11
======= =======
</TABLE>
See accompanying notes to the condensed financial statements.
F-3
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE-MONTH PERIODS
ENDED MARCH 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings............................................ $ 6,650 $ 4,175
Adjustments to reconcile net earnings to net cash flow
provided by operating activities:
Depreciation and amortization......................... 5,236 3,948
Increase in accounts payable.......................... 5,237 1,157
Increase in accrued expenses and other liabilities.... 2,076 1,991
(Decrease) increase in other assets................... (1,188) 1,683
--------- ---------
Net cash flow provided by operating activities...... 18,011 12,954
--------- ---------
INVESTING ACTIVITIES:
Net cash flow used in real estate investing activities.. (47,201) (39,177)
--------- ---------
FINANCING ACTIVITIES:
Repurchase of shares.................................... -- (55,000)
Proceeds from sale of shares............................ 430 59,970
Proceeds from line of credit............................ 42,000 32,000
Proceeds from mortgage debt............................. 5,000 --
Payments on line of credit.............................. (6,000) (4,000)
Distributions paid...................................... (11,667) (7,426)
Debt issuance costs incurred............................ (281) (808)
Regularly scheduled principal payments on mortgages
payable................................................ (233) (157)
--------- ---------
Net cash flow provided by financing activities...... 29,249 24,579
--------- ---------
Net increase (decrease) in cash and cash equivalents...... 59 (1,644)
Cash and cash equivalents, beginning of period............ 6,494 6,262
--------- ---------
Cash and cash equivalents, end of period.................. $ 6,553 $ 4,618
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assumption of mortgages payable upon purchase of
multifamily properties................................. $ -- $ 8,127
</TABLE>
See accompanying notes to the condensed financial statements.
F-4
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 1--GENERAL
The financial statements of Security Capital Atlantic Incorporated
("ATLANTIC") as of March 31, 1996 and for the three-month periods ended March
31, 1996 and 1995 are unaudited and certain information and footnote
disclosures normally included in financial statements have been omitted. While
management of ATLANTIC believes that the disclosures presented are adequate,
these interim financial statements should be read in conjunction with the
financial statements and notes included in ATLANTIC'S financial statements for
the years ended December 31, 1995 and 1994 and the period October 26, 1993
(inception) through December 31, 1993.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments for a fair presentation of ATLANTIC's
financial statements for the interim periods presented. The results of
operations for the three-month periods ended March 31, 1996 and 1995 are not
necessarily indicative of the results to be expected for the entire year.
The preparation of these financial statements required the use of certain
estimates by management in determining ATLANTIC's assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
NOTE 2--REAL ESTATE
Investments in Real Estate
Investments in real estate, at cost, were as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
----------------- -----------------
INVESTMENT UNITS INVESTMENT UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Operating properties:
Acquired..................... $760,874 15,355 $757,986 15,355
Developed.................... 38,897 804 23,097 468
-------- ------ -------- ------
799,771 16,159 781,083 15,823
Developments under construc-
tion.......................... 112,429 3,603 95,293 3,095
Developments in planning:
Owned........................ 22,027 2,542(1) 11,258 1,504(1)
Under control (2)............ -- 2,962(1) -- 3,054(1)
-------- ------ -------- ------
22,027 5,504 11,258 4,558
Land held for future develop-
ment.......................... 1,902 -- 1,294 --
-------- ------ -------- ------
Total...................... $936,129 25,266 $888,928 23,476
======== ====== ======== ======
</TABLE>
- --------
(1) Unit information is based upon management's estimates.
(2) ATLANTIC's investment as of March 31, 1996 and December 31, 1995 for
developments under control was $1.7 million and $2.0 million,
respectively, and is reflected in the "Other assets" caption of ATLANTIC's
balance sheets.
At March 31, 1996, ATLANTIC had unfunded commitments for developments under
construction of $97.3 million, for a total completed construction cost of
$209.7 million. Costs for developments in planning shown above are primarily
for land acquisitions.
F-5
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
The change in investments in real estate, at cost, for the three-month
period ended March 31, 1996 consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1996...................................... $888,928
Renovation expenditures......................................... 2,229
Capital improvements............................................ 586
Development expenditures, including land acquisitions........... 44,386
--------
Balance at March 31, 1996....................................... $936,129
========
</TABLE>
Third Party Owner--Developments
To enhance its flexibility in developing and acquiring multifamily
properties, ATLANTIC has and will enter into presale agreements with third
party owner-developers to acquire properties developed by such owner-
developers where the developments meet ATLANTIC's investment criteria.
ATLANTIC has and will fund such developments through development loans to such
owner-developers. In addition, to provide greater flexibility for the use of
land acquired for development and to dispose of excess parcels, ATLANTIC plans
to make mortgage loans to Atlantic Development Services Incorporated
("Atlantic Development Services") to purchase land for development. ATLANTIC
owns all of the preferred stock of Atlantic Development Services, which
entitles ATLANTIC to substantially all of the net operating cash flow (95%) of
Atlantic Development Services. All of the common stock of Atlantic Development
Services is owned by an unaffiliated trust. The common stock is entitled to
receive the remaining 5% of net operating cash flow. As of March 31, 1996 the
outstanding balance of development and mortgage loans made by ATLANTIC to
third party owner-developers and Atlantic Development Services aggregated
$13,157,000 and none, respectively. The activities of Atlantic Development
Services and development loans are consolidated with ATLANTIC's activities and
all intercompany transactions have been eliminated in consolidation.
Gains and Losses from Sales or Impairments of Real Estate
ATLANTIC's real estate investments have been made with a view to effective
long-term operation and ownership. Based upon ATLANTIC's market research and
in an effort to optimize its portfolio composition, ATLANTIC may from time to
time seek to dispose of assets that in management's view do not meet
ATLANTIC's long-term investment criteria and redeploy the proceeds therefrom,
preferably through like-kind exchanges, into assets that are more consistent
with ATLANTIC's investment objectives.
On April 9, 1996, ATLANTIC sold a 358-unit middle-income property as part of
a tax-deferred exchange. This property accounted for $255,000 of net operating
income during the three-month period ended March 31, 1996. A gain of
approximately $670,000 on this disposition will be recognized in the second
quarter. The proceeds from this sale were held in escrow until April 22, 1996
when these funds were used to acquire a 350-unit moderate-income operating
property. Including this property, ATLANTIC acquired a total of three
operating properties aggregating 786 units at a cost of $33.4 million in April
1996.
ATLANTIC adopted Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting For The Impairment of Long-Lived Assets And For Long-Lived Assets
To Be Disposed Of, effective January 1, 1996. SFAS No. 121 requires that long-
lived assets, including real estate assets, be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. SFAS No. 121 also requires that long-lived
assets to be disposed of be reported at the lower of carrying amount or fair
value less cost to sell. No provisions for possible losses were required as a
result of adopting this new accounting standard and real estate is carried at
cost.
F-6
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--LINE OF CREDIT AND MORTGAGES PAYABLE
At March 31, 1996, ATLANTIC had $226 million outstanding on its $300 million
revolving line of credit with Morgan Guaranty Trust Company of New York, as
agent for a group of lenders ("MGT"). Borrowings bear interest at prime, or at
ATLANTIC's option, LIBOR plus 1.50% (reduced from 1.75% on March 13, 1996) or
the certificate of deposit rate (as defined) plus 1.625% (reduced from 1.875%
on March 13, 1996). Additionally, there is a commitment fee of .1875% per
annum on the average unfunded line of credit balance. The line is
collateralized by multifamily properties having an aggregate undepreciated
cost of $489,491,000 at March 31, 1996. Subsequent to March 31, 1996, the line
of credit was increased to $350 million. The line of credit matures June 1998
and may be extended for one year with the approval of MGT and other
participating lenders.
In August 1995, ATLANTIC entered into a swap agreement with Goldman Sachs
Capital Markets, L.P. covering $100 million of borrowings under the line of
credit. Under this one-year agreement which became effective on February 5,
1996, ATLANTIC pays a fixed rate of interest of 7.46% (reduced from 7.71% on
March 13, 1996). By entering into this swap agreement, ATLANTIC has
effectively mitigated a portion of the variable interest rate exposure
associated with the line of credit. For the three months ended March 31, 1996
the interest paid under the swap agreement was $110,000 greater than the
interest received.
All debt incurrences are subject to certain covenants. ATLANTIC must
maintain a debt to tangible net worth ratio of not greater than 2 to 1 and an
adjusted net worth (as defined) of at least $325 million. ATLANTIC's interest
payment coverage (as defined) is required to be not less than 2 to 1.
Restricted payments or distributions (as defined) may not exceed 95% of
ATLANTIC's funds from operations (as defined) for the preceding four quarters.
ATLANTIC has been granted a waiver of the restricted payment covenant. This
waiver allows for restricted payments not to exceed 97% of funds from
operations through the third quarter of 1997. ATLANTIC is in compliance with
all such convenants.
F-7
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Mortgages Payable
Mortgages payable consisted of the following at March 31, 1996 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
PROPERTY INTEREST RATE MATURITY DATE PERIODIC PAYMENT TERMS PRINCIPAL BALANCE
-------- ------------- ------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
Conventional fixed rate:
Cahaba Forest II...... 7.125% 03/01/29 fully amortizing $ 8,067
Country Place Village
I.................... 7.750% 11/01/00 (1) 2,030
Longwood Villas....... 8.750% 04/01/24 fully amortizing 6,388
--------
16,485
--------
Tax exempt fixed rate or
variable rate subject
to swap agreements(2):
Cameron Brook......... (3) 06/01/25 interest only 19,500
Cameron Station....... 6.0% 06/01/07 interest only 14,500
Clairmont Crest....... (3) 06/01/25 interest only 11,600
Forestwood............ (3) 06/01/25 interest only 11,485
Foxbridge............. (3) 06/01/25 interest only 10,400
The Greens............ (3) 06/01/25 interest only 10,400
Parrot's Landing...... (3) 06/01/25 interest only 15,835
Sun Pointe Cove....... (3) 06/01/25 interest only 8,500
WintersCreek.......... (3) 06/01/25 interest only 5,000
Less amounts held in
principal reserve
fund(4)................ (414)
--------
106,806
--------
$123,291
========
Total annual weighted
average interest rate.. 6.73%
========
</TABLE>
- --------
(1) Interest and principal payment due monthly; balloon payment of $1,845,000
due at maturity.
(2) These properties, in addition to others, are held by Security Capital
Atlantic Multifamily Incorporated, a wholly-owned subsidiary of ATLANTIC.
Security Capital Atlantic Multifamily Incorporated is a legal entity that
is separate and distinct from ATLANTIC with separate assets and
liabilities and business operations.
(3) Interest rate is fixed through swap agreements executed in conjunction
with the credit enhancement agreement with the Federal National Mortgage
Association discussed below.
(4) ATLANTIC has a thirty-year credit enhancement agreement with the Federal
National Mortgage Association related to the tax exempt bond issues. This
credit enhancement agreement requires ATLANTIC to make monthly payments on
each mortgage, based upon a thirty-year amortization, into a principal
reserve account.
F-8
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
ATLANTIC has effectively mitigated its variable rate debt exposure by
entering into swap agreements covering eight variable rate bond issues
included in ATLANTIC's credit enhancement agreement with the Federal National
Mortgage Association ("Fannie Mae"). Under these swap agreements, ATLANTIC
pays and receives interest on the aggregate principal amount of the underlying
bonds outstanding, net of the amount held in the principal reserve account.
These agreements are summarized as follows:
<TABLE>
<CAPTION>
AMOUNT OF BONDS TERM FIXED RATE ISSUER
--------------- -------- ---------- ------
<S> <C> <C> <C>
$23.1 million........... 7 years 5.18% General Re Financial Products Corporation
$64.6 million........... 10 years 5.42% Morgan Guaranty Trust Company of New York
$5.0 million............ 10 years 4.82% Morgan Guaranty Trust Company of New York
</TABLE>
For the three-month period ended March 31, 1996, the annual weighted average
interest rate received by ATLANTIC under the swap agreement was 3.25%. To the
extent the deposits in the principal reserve account have not been used to
redeem any of the outstanding bonds, ATLANTIC pays interest on that portion of
bonds outstanding which is equivalent to the balance in the principal reserve
fund at the variable rates as provided by the mortgage agreements. For the
three months ended March 31, 1996, the interest paid under the swap agreements
was $428,000 greater than interest received.
Real estate with an aggregate undepreciated cost at March 31, 1996 of
$23,429,000 and $180,080,000 serves as collateral for the conventional
mortgages payable and the tax exempt mortgages, respectively. Based on
prevailing market borrowing rates, the fair value of the mortgages payable was
not materially different from the book value at March 31, 1996.
The change in mortgages payable for the three-month period ended March 31,
1996 is as follows (in thousands):
<TABLE>
<S> <C>
Balances at January 1, 1996..................................... $118,524
Mortgage proceeds............................................... 5,000
Regularly scheduled principal payments.......................... (233)
--------
Balances at March 31, 1996...................................... $123,291
========
</TABLE>
In connection with an operating property acquisition on April 10, 1996,
ATLANTIC assumed a $6 million conventional mortgage loan which bears interest
at a fixed rate of 8%. The mortgage loan provides for monthly principal and
interest payments of $44,026 through maturity on July 10, 2003, at which time
a balloon payment of $5,556,000 will be due.
At March 31, 1996 ATLANTIC was in compliance with all debt covenants.
Interest paid in cash on all outstanding debt for the three months ended
March 31, 1996 was $6,381,000 including $2,036,000 of interest capitalized
during construction. Interest paid in cash on all outstanding debt for the
three months ended March 31, 1995 was $5,386,000, including $610,000 of
interest capitalized during construction.
Amortization of loan costs included in interest expense for the three months
ended March 31, 1996 and 1995 was $432,000 and $343,000, respectively.
NOTE 4--SHAREHOLDERS' EQUITY
Shares Authorized
At March 31, 1996, 250,000,000 shares of common stock, $0.01 par value per
share, were authorized. ATLANTIC's Board of Directors is authorized to issue,
from the authorized but unissued shares of ATLANTIC,
F-9
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
preferred shares in series and to establish from time to time the number of
preferred shares to be included in such series and to fix the designation and
any preferences, conversion and other rights, voting powers, restrictions,
limitations as to distributions, qualifications and terms and conditions of
redemption of the shares of each series. In connection with the Purchase
Rights discussed below, shares have been designated as Series A Junior
Participating Preferred Stock but such shares are not issued or outstanding.
Capital Offerings
ATLANTIC began a private offering in the fourth quarter of 1995. In
connection with this offering ATLANTIC sold 11,391,030 shares; 8,891,030
shares at $11.50 per share and 2,500,000 shares at $11.568 per share, for an
aggregate total of $130.7 million through December 31, 1995. In consideration
for Security Capital Group Incorporated's ("SCG") purchase of $50 million of
shares in this offering, and to permit greater participation by other
investors in this offering, ATLANTIC assumed SCG's Put Obligation and
purchased $28.9 million of ATLANTIC shares owned by the holder of the Put
Obligation; 2,500,000 shares at $11.568 per share.
During the three-month period ended March 31, 1996, ATLANTIC sold an
additional 44,000 shares in this private placement. Subsequent to March 31,
1996, ATLANTIC raised an additional $48.4 million through the sale of
4,210,870 shares.
Distributions
On December 19, 1995, the Board of Directors of ATLANTIC proposed an
annualized distribution level of $.84 per share in 1996. On March 28, 1996,
ATLANTIC made a quarterly distribution of $0.21 per share. In light of the
Homestead Transaction (including the distribution of the Homestead
Securities), ATLANTIC's Board of Directors is evaluating the distribution
level.
Purchase Rights
On March 12, 1996, the Board of Directors declared and paid a dividend of
one Purchase Right for each common share outstanding at the close of business
on March 12, 1996 to the holders of ATLANTIC's common shares on that date.
Holders of additional common shares after March 12, 1996 and prior to the
expiration of the rights on March 12, 2006 will be entitled to one Purchase
Right for each such additional common share.
Each Purchase Right entitles the holder, under certain circumstances, to
purchase from ATLANTIC one-hundredth of non-redeemable Series A Junior
Participating Preferred Stock of ATLANTIC at a price of $40. ATLANTIC has
designated one-hundredth of the total shares of common stock outstanding at
any point in time as Series A Junior Participating Preferred Stock. At this
time, ATLANTIC has no Series A Junior Participating Preferred Stock
outstanding.
NOTE 5--REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
Effective June 30, 1995, ATLANTIC entered into an amended and restated REIT
Management agreement with Security Capital (Atlantic) Incorporated (the "REIT
Manager"), to provide Management services to ATLANTIC. The REIT Manager is a
subsidiary of SCG, which owns 71.5% of ATLANTIC's common shares.
SCG Realty Services Atlantic Incorporated ("SCG Realty Services") began
managing properties for ATLANTIC on May 12, 1994 and currently manages
approximately 80% of ATLANTIC's multifamily properties. SCG owns 100% of SCG
Realty Services voting shares. Rates for services performed by SCG Realty
Services are subject to approval by ATLANTIC's independent Directors and are
at rates prevailing in the markets in which ATLANTIC operates.
F-10
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying balance sheets of Security Capital Atlantic
Incorporated as of December 31, 1995 and 1994, and the related statements of
earnings, shareholders' equity, and cash flows for the years ended December
31, 1995 and 1994 and the period October 26, 1993 (inception) through December
31, 1993. Our audits also included the schedule of real estate and accumulated
depreciation as of December 31, 1995. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Security Capital Atlantic
Incorporated at December 31, 1995 and 1994, and the results of its operations
and its cash flows for the years ended December 31, 1995 and 1994 and the
period October 26, 1993 (inception) through December 31, 1993, in conformity
with generally accepted accounting principles. Also, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Ernst & Young LLP
West Palm Beach, Florida
January 26, 1996 except for
Note 3, as to which the date
is February 5, 1996
F-11
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Real estate................................................ $888,928 $631,260
Less accumulated depreciation.............................. 23,561 8,798
-------- --------
Net investments in real estate......................... 865,367 622,462
Cash and cash equivalents.................................. 6,494 6,262
Other assets............................................... 13,963 9,122
-------- --------
Total assets........................................... $885,824 $637,846
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Line of credit........................................... $190,000 $153,000
Mortgages payable........................................ 118,524 107,347
Accounts payable......................................... 11,030 4,590
Accrued expenses and other liabilities................... 9,332 6,279
-------- --------
Total liabilities...................................... 328,886 271,216
-------- --------
Shareholders' equity:
Common shares (250,000,000 authorized, 55,525,635 issued
and outstanding at December 31, 1995 and 37,133,150
issued and outstanding at December 31, 1994)............ 555 371
Additional paid-in capital............................... 576,547 370,943
Distributions in excess of net earnings.................. (20,164) (4,684)
-------- --------
Total shareholders' equity............................. 556,938 366,630
-------- --------
Total liabilities and shareholders' equity............. $885,824 $637,846
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
(FROM
INCEPTION)
1995 1994 1993
-------- ------- ----------
<S> <C> <C> <C>
Revenues:
Rental income..................................... $103,634 $55,071 $ 156
Interest income................................... 245 149 3
-------- ------- -----
103,879 55,220 159
-------- ------- -----
Expenses:
Rental expenses................................... 28,405 15,921 75
Real estate taxes................................. 9,570 5,595 --
Property management fees paid to affiliate........ 3,475 1,536 --
Depreciation...................................... 15,925 8,770 28
Interest.......................................... 19,042 9,240 --
REIT management fee paid to affiliate............. 6,923 3,671 12
General and administrative........................ 646 266 1
Other............................................. 254 295 5
-------- ------- -----
84,240 45,294 121
-------- ------- -----
Net earnings........................................ $ 19,639 $ 9,926 $ 38
======== ======= =====
Weighted average shares outstanding................. 43,889 24,454 572
======== ======= =====
Net earnings per share.............................. $ 0.45 $ 0.41 $0.07
======== ======= =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON DISTRIBUTIONS
SHARES ADDITIONAL IN EXCESS
AT PAR PAID-IN OF NET
VALUE CAPITAL EARNINGS TOTAL
------ ---------- ------------- --------
<S> <C> <C> <C> <C>
Balances at inception (October 26,
1993)............................... $ -- $ -- $ -- $ --
Net earnings....................... -- -- 38 38
Shares issued...................... 32 31,602 -- 31,634
----- -------- -------- --------
Balances at December 31, 1993........ 32 31,602 38 31,672
Net earnings....................... -- -- 9,926 9,926
Distributions...................... -- -- (14,648) (14,648)
Shares issued...................... 339 339,341 -- 339,680
----- -------- -------- --------
Balances at December 31, 1994........ 371 370,943 (4,684) 366,630
Net earnings....................... -- -- 19,639 19,639
Distributions...................... -- -- (35,119) (35,119)
Shares repurchased................. (75) (83,845) -- (83,920)
Shares issued...................... 259 289,449 -- 289,708
----- -------- -------- --------
Balances at December 31, 1995........ $ 555 $576,547 $(20,164) $556,938
===== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
(FROM
INCEPTION)
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings................................. $ 19,639 $ 9,926 $ 38
Adjustments to reconcile net earnings to net
cash flow provided (used) by operating
activities:
Depreciation and amortization.............. 17,496 9,480 28
Increase in accounts payable............... 6,440 4,550 39
Increase in accrued expenses and other
liabilities............................... 3,053 6,141 139
Increase in other assets................... (1,393) (3,892) (736)
--------- --------- --------
Net cash flow provided (used) by
operating activities.................... 45,235 26,205 (492)
--------- --------- --------
INVESTING ACTIVITIES:
Real estate investments...................... (264,511) (392,718) (31,005)
Disposition of investment properties, net.... 23,859 -- --
--------- --------- --------
Net cash flow used in real estate
investing activities.................... (240,652) (392,718) (31,005)
--------- --------- --------
FINANCING ACTIVITIES:
Repurchase of shares......................... (83,920) -- --
Proceeds from sale of shares................. 289,708 239,680 31,634
Proceeds from line of credit................. 270,000 166,000 --
Payments on line of credit................... (233,000) (13,000) --
Distributions paid........................... (35,119) (14,648) --
Debt issuance costs incurred................. (5,019) (5,204) --
Principal payments at maturity............... (6,378) -- --
Regularly scheduled principal payments on
mortgages payable........................... (623) (190) --
--------- --------- --------
Net cash flow provided by financing
activities.............................. 195,649 372,638 31,634
--------- --------- --------
Net increase in cash and cash equivalents...... 232 6,125 137
Cash and cash equivalents, beginning of period. 6,262 137 --
--------- --------- --------
Cash and cash equivalents, end of period....... $ 6,494 $ 6,262 $ 137
========= ========= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of shares as partial consideration
for the purchase of multifamily properties.. $ -- $ 100,000 $ --
Assumption of mortgages payable upon purchase
of multifamily properties................... 24,678 107,537 --
Reduction to mortgages payable upon
disposition of multifamily property......... (6,500) -- --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Security Capital Atlantic Incorporated ("ATLANTIC") is an equity real estate
investment trust organized as a corporation under the laws of the state of
Maryland, which owns, acquires, develops and operates income-producing
multifamily properties in the southeastern United States.
ATLANTIC was formed on October 26, 1993 (inception) and, accordingly, the
1993 statements of earnings and cash flows reflect the results of operations
and cash flows for the period from inception through December 31, 1993.
Principles of Financial Presentation
The accounts of ATLANTIC and its wholly-owned subsidiaries are consolidated
in the accompanying financial statements. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
ATLANTIC considers all cash on hand, demand deposits with financial
institutions and short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
Real Estate and Depreciation
Real estate is carried at cost, which is not in excess of net realizable
value. Costs directly related to the acquisition, renovation or development of
real estate are capitalized. Costs incurred in connection with the pursuit of
unsuccessful land or property acquisitions are expensed at the time the
pursuit is abandoned.
Repairs and maintenance are expensed as incurred. Renovations and
improvements are capitalized and depreciated over their estimated useful
lives.
Depreciation is computed over the economic useful lives of depreciable
property on a straight-line basis. Properties are depreciated principally over
the following periods:
<TABLE>
<S> <C>
Buildings and improvements.................................... 20-40 years
Furnishings and other......................................... 2-10 years
</TABLE>
Interest
Periodically, ATLANTIC enters into swap agreements to manage its variable
interest rate exposure. Swap agreements are agreements to exchange interest
rate payment streams based on a notional principal amount. The net rate
differentials to be paid or received are recorded when earned as adjustments
to interest expense in calculating net earnings and funds from operations.
ATLANTIC is exposed to credit loss in the event of nonperformance by the
counterparties to the swap agreements. However, ATLANTIC does not anticipate
nonperformance by the counterparties.
F-16
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1995, 1994, and 1993, the total interest paid in cash on all
outstanding debt was $22,178,000, $9,120,000, and zero, respectively.
ATLANTIC capitalizes interest as part of the cost of real estate projects
under development. Interest capitalized during 1995, 1994, and 1993 aggregated
$4,404,000, $793,000, and zero, respectively.
Cost of Raising Capital
Costs incurred in connection with the issuance of common shares are deducted
from shareholders' equity. Costs incurred in connection with the incurrence or
renewal of debt are capitalized, included with other assets and amortized over
the term of the related loan or renewal term. Amortization of deferred
financing costs included in interest expense for the years ended December 31,
1995, 1994, and 1993 totaled $1,568,000, $707,000, and zero, respectively.
Revenue Recognition
Rental and interest income are recorded on the accrual method of accounting
for financial reporting and tax purposes. Gains on sales of real estate are
recorded when criteria required by Statement of Financial Accounting Standards
No. 66, Accounting for Sales of Real Estate, have been met. A provision for
possible loss is made when collection of receivables is considered doubtful.
Rental Expenses
Rental expenses includes utilities, repairs and maintenance, make-ready,
property insurance, marketing, landscaping, property management fees paid to
unaffiliated companies, on-site personnel and other administrative costs.
Federal Income Taxes
ATLANTIC has made an election to be taxed as a real estate investment trust
under the Internal Revenue Code of 1986, as amended. ATLANTIC believes it
qualifies as a real estate investment trust. Accordingly, no provisions have
been made for federal income taxes in the accompanying financial statements.
Per Share Data
Per share data is computed based upon the weighted average number of common
shares, par value $.01 per share, outstanding during the period.
Reclassifications
Certain of the 1994 financial statements and notes to financial statements
amounts have been reclassified to conform to the 1995 presentation.
F-17
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--REAL ESTATE
Investments in Real Estate
Investments in real estate, at cost, for the years ended December 31, 1995
and 1994, were as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
INVESTMENT UNITS INVESTMENT UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Operating properties:
Acquired......................... $757,986 15,355 $600,880 11,990
Developed........................ 23,097 468 -- --
-------- ------ -------- ------
781,083 15,823 600,880 11,990
Developments under construction.... 95,293 3,095 20,741 1,212
Developments in planning:
Owned............................ 11,258 1,504(1) 9,639 764(1)
Under control(2)................. -- 3,054(1) -- 1,094(1)
-------- ------ -------- ------
11,258 4,558 9,639 1,858
Land held for future development... 1,294 -- -- --
-------- ------ -------- ------
Total............................ $888,928 23,476 $631,260 15,060
======== ====== ======== ======
</TABLE>
- --------
(1) Unit information is based upon management's estimates and is unaudited.
(2) ATLANTIC's investment as of December 31, 1995 and 1994 for developments
under control was $2.0 million and $1.8 million, respectively, and is
reflected in the "Other assets" caption of ATLANTIC's balance sheets.
At December 31, 1995, ATLANTIC had unfunded commitments for developments
under construction of $86.6 million, for a total completed construction cost
of $181.9 million. Costs for developments in planning shown above are
primarily for land acquisitions.
During January 1996, ATLANTIC acquired two of the land parcels included in
"Developments in planning-Under control" as of December 31, 1995. These two
developments represent an estimated 469 units with an aggregate estimated
development cost of $23.8 million.
The change in investments in real estate, at cost, for the years ended
December 31, 1995, 1994, and 1993 consisted of the following (in thousands):
<TABLE>
<CAPTION>
(FROM
INCEPTION)
1995 1994 1993
-------- -------- ----------
<S> <C> <C> <C>
Beginning balances......................... $631,260 $ 31,005 $ --
Acquisitions and renovation expenditures... 187,267 571,288 29,591
Development expenditures, including land
acquisitions.............................. 101,335 28,967 1,414
Dispositions............................... (30,934) -- --
-------- -------- -------
Ending balances............................ $888,928 $631,260 $31,005
======== ======== =======
</TABLE>
Gains and Losses from Sales of Real Estate
ATLANTIC develops and acquires multifamily properties with a view to
effective long term operation and ownership. Based upon ATLANTIC's market
research and in an effort to optimize its portfolio allocation, ATLANTIC may
from time to time seek to dispose of assets that in management's view do not
meet
F-18
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ATLANTIC's long term investment criteria and redeploy the proceeds therefrom,
preferably through like kind exchanges, into assets that it believes provide
better long term growth opportunities. ATLANTIC disposed of two properties in
the fourth quarter of 1995. The proceeds from these dispositions were not
materially different from the book value of the assets on the date of
disposition.
Properties are periodically evaluated for impairment and provisions for
possible losses are made if required. Statement of Financial Accounting
Standards No.121, Accounting For The Impairment Of Long-Lived Assets And For
Long-Lived Assets To Be Disposed Of, will be adopted by ATLANTIC, as required,
effective January 1, 1996. In the opinion of ATLANTIC's management, the
adoption of this accounting standard will not have a material impact on the
financial statements as of the date of adoption.
NOTE 3--LINE OF CREDIT AND MORTGAGES PAYABLE
Line of Credit
ATLANTIC has a $300 million revolving line of credit with Morgan Guaranty
Trust Company of New York, as agent for a group of lenders ("MGT"). Borrowings
bear interest at prime, or at ATLANTIC's option, LIBOR plus 1.75% or the
certificate of deposit rate (as defined) plus 1.875%. Additionally, there is a
commitment fee of .1875% per annum on the average unfunded line of credit
balance. The line is collateralized by multifamily properties having an
aggregate undepreciated cost of $487,790,000 at December 31, 1995. Subsequent
to December 31, 1995, the line of credit agreement was amended to reduce the
interest on borrowings to LIBOR plus 1.50% or the certificate of deposit rate
(as defined) plus 1.625%.
The MGT line of credit matures June 1997 and may be extended for one year
with the approval of MGT and other participating lenders. All debt incurrences
are subject to certain covenants. ATLANTIC must maintain a debt to tangible
net worth ratio of not greater than 2 to 1 and an adjusted net worth (as
defined) of at least $325 million. ATLANTIC's interest payment coverage (as
defined) is required to be not less than 2 to 1. Restricted payments or
distributions (as defined) may not exceed 95% of ATLANTIC's funds from
operations (as defined) for the preceding four quarters. ATLANTIC is in
compliance with all such covenants.
A summary of ATLANTIC's line of credit borrowings for the years ended
December 31, 1995 and 1994 (none in 1993) is as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Total line of credit.................................. $300,000 $225,000
Borrowings outstanding at December 31................. 190,000 153,000
Weighted average daily borrowings..................... 178,318 127,957
Maximum borrowings outstanding at any month end....... 252,000 153,000
Weighted average daily interest rate.................. 7.92% 7.34%
Weighted average interest rate at December 31......... 7.73% 8.17%
</TABLE>
In August 1995, ATLANTIC entered into a swap agreement with Goldman Sachs
Capital Markets, L.P. covering $100 million of borrowings under the line of
credit. Under this one-year agreement which became effective on February 5,
1996, ATLANTIC pays a fixed rate of interest of 7.71%. By entering into this
swap agreement, ATLANTIC has effectively mitigated a significant portion of
the variable interest rate exposure associated with the line of credit.
F-19
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Mortgages Payable
Mortgages payable consisted of the following at December 31, 1995 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
PERIODIC
INTEREST MATURITY PAYMENT PRINCIPAL
PROPERTY RATE DATE TERMS BALANCE
-------- -------- -------- ---------------- ---------
<S> <C> <C> <C> <C>
Conventional fixed rate:
Cahaba Forest II............ 7.125% 03/01/29 fully amortizing $ 8,083
Country Place Village I..... 7.750% 11/01/00 (1) 2,038
Longwood Villas............. 8.750% 04/01/24 fully amortizing 6,402
--------
16,523
--------
Tax exempt fixed rate or
variable rate subject to swap
agreements(2)(3):
Cameron Brook............... (4) 06/01/25 interest only 19,500
Cameron Station............. 6.0% 06/01/07 interest only 14,500
Clairmont Crest............. (4) 06/01/25 interest only 11,600
Forestwood.................. (4) 06/01/25 interest only 11,485
Foxbridge................... (4) 06/01/25 interest only 10,400
The Greens.................. (4) 06/01/25 interest only 10,400
Parrot's Landing............ (4) 06/01/25 interest only 15,835
Sun Pointe Cove............. (4) 06/01/25 interest only 8,500
Less amounts held in
principal reserve fund(3).. (219)
--------
102,001
--------
$118,524
========
Total annual weighted aver-
age
interest rate.............. 6.67%
========
</TABLE>
- --------
(1) Interest and principal payment due monthly; balloon payment of $1,845,000
due at maturity.
(2) These properties, in addition to others, are held by Security Capital
Atlantic Multifamily Incorporated, a wholly-owned subsidiary of ATLANTIC.
Security Capital Atlantic Multifamily Incorporated is a legal entity that
is separate and distinct from ATLANTIC with separate assets and
liabilities and business operations.
(3) ATLANTIC has a thirty-year credit enhancement agreement with the Federal
National Mortgage Association related to eight tax exempt bond issues.
This credit enhancement agreement requires ATLANTIC to make monthly
payments on each mortgage, based upon a thirty-year amortization, into a
principal reserve account.
(4) Interest rate is fixed through swap agreements executed in conjunction
with the credit enhancement agreement with the Federal National Mortgage
Association discussed below.
ATLANTIC has effectively mitigated its variable rate debt exposure by
entering into swap agreements covering seven variable rate bond issues
included in ATLANTIC's credit enhancement agreement with the Federal National
Mortgage Association ("Fannie Mae"). Under these swap agreements, ATLANTIC
pays and receives interest on the aggregate principal amount of the underlying
bonds outstanding, net of the amount held in the principal reserve account.
These agreements effectively change ATLANTIC's variable interest rate exposure
on the $23.1 million of bonds included in the seven-year swap agreement with
General Re Financial
F-20
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Products Corporation to a fixed interest rate of 5.18% (excluding the cost of
the credit enhancement agreement) and to a fixed interest rate of 5.42%
(excluding the cost of the credit enhancement agreement) on the $64.6 million
of bonds included in the ten-year swap agreement with Morgan Guaranty Trust
Company of New York. The annual weighted average interest rate received by
ATLANTIC under the swap agreement was 3.89%. To the extent the deposits in the
principal reserve account have not been used to redeem any of the outstanding
bonds, ATLANTIC pays interest on that portion of bonds outstanding equivalent
to the balance in the principal reserve fund at the variable rates as provided
by the mortgage agreements. In 1995, the interest paid under the swap
agreements was $575,000 greater than the interest received.
The mortgages that secure the tax exempt bond issues contain certain
covenants which require that a minimum percentage of units (generally 20% to
30%) be rented to individuals whose income does not exceed levels specified by
U.S. Government programs. The Fannie Mae credit enhancement agreement contains
additional covenants. ATLANTIC is in compliance with all such covenants.
Real estate with an aggregate undepreciated cost at December 31, 1995 of
$23,342,000 and $172,079,000 serves as collateral for the conventional
mortgages payable and the tax exempt mortgages, respectively. Based on
prevailing market borrowing rates, the fair value of the mortgages payable was
not materially different from the book value at December 31, 1995.
The change in mortgages payable for the years ended December 31, 1995 and
1994 (none in 1993) is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Balances at January 1................................ $107,347 $ --
Mortgages assumed.................................... 24,678 107,537
Principal payments at maturity....................... (6,378) --
Regularly scheduled principal payments............... (623) (190)
Reduction to mortgages payable upon disposition of
multifamily property................................ (6,500) --
-------- --------
Balances at December 31.............................. $118,524 $107,347
======== ========
</TABLE>
Approximate principal payments due on mortgages payable during each of the
years in the five-year period ending December 31, 2000 and thereafter are as
follows (in thousands):
<TABLE>
<S> <C>
1996............................................................. $ 962
1997............................................................. 1,046
1998............................................................. 1,137
1999............................................................. 1,235
2000............................................................. 3,184
Thereafter....................................................... 110,960
--------
$118,524
========
</TABLE>
F-21
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--DISTRIBUTIONS
ATLANTIC made total distributions of $.80 per share in 1995 and $.60 per
share in 1994. No distributions were made in 1993. On December 19, 1995, the
Board of Directors of ATLANTIC proposed an annualized distribution level of
$.84 per share in 1996.
For federal income tax purposes, the following summarizes the taxability of
distributions paid for 1994, and the estimated taxability for 1995:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1995 1994
------ ------
<S> <C> <C>
Per share:
Ordinary income........................................... $ .46 $ .46
Return of capital......................................... .34 .14
------ ------
Total................................................... $ .80 $ .60
====== ======
</TABLE>
ATLANTIC's tax return for the year ended December 31, 1995 has not been
filed. The taxability information for 1995 is based upon the best available
data. ATLANTIC's tax returns have not been examined by the Internal Revenue
Service and, therefore, the taxability of dividends is subject to change.
NOTE 5--SHAREHOLDERS' EQUITY
Shares Authorized
At December 31, 1995, 250,000,000 shares of common stock, $0.01 par value
per share, were authorized. ATLANTIC's Board of Directors is authorized to
issue, from the authorized but unissued shares of ATLANTIC, preferred shares
in series and to establish from time to time the number of preferred shares to
be included in such series and to fix the designation and any preferences,
conversion and other rights, voting powers, restrictions, limitations as to
distributions, qualifications and terms and conditions of redemption of the
shares of each series.
Ownership Restrictions and Significant Shareholder
ATLANTIC's Articles of Incorporation restrict beneficial ownership (or
ownership generally attributed to a person under the REIT tax rules) of
ATLANTIC's outstanding common shares by a single person, or persons acting as
a group, to 9.8% of ATLANTIC's common shares.
The purpose of this provision is to assist in protecting and preserving
ATLANTIC's REIT status and to protect the interest of shareholders in takeover
transactions by preventing the acquisition of a substantial block of shares
unless the acquiror makes a cash tender offer for all outstanding shares. For
ATLANTIC to qualify as a REIT under the Internal Revenue Code of 1986, as
amended, not more than 50% in value of its outstanding capital shares may be
owned by five or fewer individuals at any time during the last half of
ATLANTIC's taxable year. The provision permits five persons to individually
acquire up to a maximum of 9.8% each of the common shares, or an aggregate of
49% of the outstanding common shares and, thus, assists the Directors in
protecting and preserving ATLANTIC's REIT status for tax purposes.
Common shares owned by a person or group of persons in excess of these
limits are subject to redemption by ATLANTIC. The provision does not apply
where a majority of the Board of Directors, in its sole and absolute
discretion, waives such limit after determining that the status of ATLANTIC as
a REIT for federal income tax purposes will not be jeopardized or the
disqualification of ATLANTIC as a REIT is advantageous to the shareholders.
F-22
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Board of Directors has permitted Security Capital Group Incorporated
("Security Capital Group"), an affiliate of the REIT Manager (see Note 6) to
acquire more than the stated maximum percentage of shares. Security Capital
Group owned 71.6% of the outstanding common shares at December 31, 1995. For
tax purposes, Security Capital Group's ownership is attributed to its
shareholders.
Capital Offerings
ATLANTIC completed a private offering in August 1994 in order to attain the
100 shareholders necessary to obtain REIT qualification. In the offering,
1,000,000 shares were offered at a price of $10.00 per share. All shares were
subscribed for by 125 persons and were purchased as of August 31, 1994.
ATLANTIC exchanged 10,000,000 shares of common stock at a price of $10 per
share as partial consideration for the acquisition of a pool of properties in
May 1994. The acquisition price was negotiated prior to the seller becoming a
related party. To facilitate ATLANTIC's transactions with the seller, Security
Capital Group granted the seller certain rights to require Security Capital
Group to purchase the 10,000,000 ATLANTIC shares owned by the seller at pre-
agreed prices (the "Put Obligation").
In the second quarter of 1995, ATLANTIC completed a private offering of
14,545,455 shares at $11.00 per share for an aggregate offering price of $160
million. In consideration for Security Capital Group purchasing $60 million of
shares in this offering, and to permit greater participation by other
investors in this offering, ATLANTIC assumed Security Capital Group's first
Put Obligation to purchase $55 million of ATLANTIC shares owned by the holder
of the Put Obligation. ATLANTIC purchased 5,000,000 shares on March 31, 1995
at $11.00 per share with a portion of the net proceeds from this offering.
ATLANTIC began a private offering in the fourth quarter of 1995. In
connection with this offering ATLANTIC sold 11,391,030 shares; 8,891,030
shares at $11.50 per share and 2,500,000 shares at $11.568 per share, for an
aggregate total of $131.2 million. In consideration for Security Capital
Group's purchase of $50 million of shares in this offering, ATLANTIC assumed
Security Capital Group's Put Obligation and purchased $28.9 million of
ATLANTIC shares owned by the holder of the Put Obligation; 2,500,000 shares at
$11.568 per share.
In December 1995, the holder of the Put Obligation provided notice of its
intent to require Security Capital Group to purchase the remaining Put
Obligation on June 30, 1996. The remaining Put Obligation consists of
2,500,000 shares at $12.265 per share.
Merger/Share Conversion
On April 22, 1994, ATLANTIC, which was previously a Delaware corporation,
was merged with and into a newly formed Maryland corporation so as to change
ATLANTIC's state of domicile to Maryland. Each issued and outstanding ATLANTIC
share was converted into one hundred (100) shares in such merger. All share
and per share information in the financial statements have been adjusted to
retroactively reflect the share conversion. An amount equal to the par value
of the shares issued was transferred from additional paid-in capital to the
common share account.
NOTE 6--REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
Effective June 30, 1995, ATLANTIC entered into an amended and restated REIT
management agreement (the "REIT Management Agreement") with Security Capital
(Atlantic) Incorporated (the "REIT Manager") to provide management services to
ATLANTIC. The REIT Manager is a subsidiary of Security Capital Group (see Note
5). All officers of ATLANTIC are employees of the REIT Manager and ATLANTIC
has no employees. The REIT Manager provides both strategic and day-to-day
management of ATLANTIC, including research, investment analysis, acquisition
and development, asset management, capital markets and legal and accounting
services.
F-23
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
The REIT Management Agreement requires ATLANTIC to pay an annual fee of 16%
of cash flow, as defined in the REIT Management Agreement ("Cash Flow"). Cash
Flow is calculated by reference to ATLANTIC's cash flow from operations before
deducting (i) fees paid to the REIT Manager, (ii) extraordinary expenses
incurred at the request of the independent Directors of ATLANTIC, and (iii)
33% of any interest paid by ATLANTIC on convertible subordinated debentures
(of which ATLANTIC has none); and, after deducting (i) regularly scheduled
principal payments (excluding prepayments or balloon payments) for debt with
commercially reasonable amortization schedules, (ii) assumed principal and
interest payments on senior unsecured debt treated as having regularly
scheduled principal and interest payments like a 20-year level-payment, fully
amortizing mortgage (of which ATLANTIC has none) and (iii) distributions
actually paid with respect to any non-convertible preferred stock of ATLANTIC
(of which ATLANTIC has none).
Cash Flow does not include realized gains or losses from dispositions of
investments or income from cash equivalent investments. The REIT Manager also
receives a fee of .20% per year on the average daily balance of cash
equivalent investments.
ATLANTIC will also reimburse the REIT Manager for third-party and out-of-
pocket expenses relating to travel, transaction costs, and similar costs
relating to the acquisition, development or disposition of assets or the
obtaining of financing for ATLANTIC and its operations. The REIT Manager will
pay all of its own salary and other overhead expenses. ATLANTIC will not have
any employee expense; however, it will pay all of the third-party costs
related to its normal operations, including legal, accounting, travel,
architectural, engineering, shareholder relations, unaffiliated directors fees
and similar expenses.
The REIT Management Agreement is renewable by ATLANTIC annually, subject to
a determination by the independent Directors that the REIT Manager's
performance has been satisfactory and that the compensation payable to the
REIT Manager is fair. ATLANTIC may terminate the REIT Management Agreement on
60-days notice. Because of the year-to-year nature of the agreement, its
maximum effect on ATLANTIC's results of operations cannot be predicted, other
than that REIT management fees will generally increase or decrease in
proportion to cash flow increases or decreases.
SCG Realty Services Incorporated ("Realty Services") began managing
properties for ATLANTIC on May 12, 1994 and currently manages approximately
82% of ATLANTIC's multifamily properties. Security Capital Group owns 100% of
Realty Services' voting shares.
The property management agreement, like the REIT Management Agreement, is
renewable annually and subject to the approval of ATLANTIC's independent
Directors. The property management agreement can be terminated by ATLANTIC on
30-days notice. Rates for services performed by Realty Services are subject to
approval by ATLANTIC's independent Directors and are at rates prevailing in
the markets in which ATLANTIC operates.
F-24
<PAGE>
NOTE 7--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data (in thousands except for per share
amounts) for 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
3-31 6-30 9-30 12-31 TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1995:
Rental income....................... $22,952 $24,330 $26,969 $29,383 $103,634
======= ======= ======= ======= ========
Net earnings........................ $ 4,175 $ 4,956 $ 5,333 $ 5,175 $ 19,639
======= ======= ======= ======= ========
Net earnings per share.............. $ 0.11 $ 0.11 $ 0.11 $ 0.11 $ 0.45
======= ======= ======= ======= ========
Funds from operations............... $ 8,123 $ 9,058 $ 9,776 $10,178 $ 37,135
======= ======= ======= ======= ========
Weighted average shares............. 37,133 43,284 46,679 48,306 43,889
======= ======= ======= ======= ========
1994:
Rental income....................... $ 1,400 $ 9,730 $21,721 $22,220 $ 55,071
======= ======= ======= ======= ========
Net earnings........................ $ 504 $ 2,305 $ 3,753 $ 3,364 $ 9,926
======= ======= ======= ======= ========
Net earnings per share.............. $ 0.13 $ 0.12 $ 0.10 $ 0.09 $ 0.41
======= ======= ======= ======= ========
Funds from operations............... $ 714 $ 3,995 $ 7,266 $ 7,431 $ 19,406
======= ======= ======= ======= ========
Weighted average shares............. 3,781 19,977 36,459 37,133 24,454
======= ======= ======= ======= ========
</TABLE>
NOTE 8--COMMITMENTS AND CONTINGENCIES
ATLANTIC is a party to various claims and routine litigation arising in the
ordinary course of business. ATLANTIC does not believe that the claims and
litigation, individually or in the aggregate, will have a material adverse
effect on its business, financial position, or results of operations.
ATLANTIC is subject to environmental regulations related to the ownership,
operation, development, and acquisition of real estate. As part of its due
diligence procedures, ATLANTIC has conducted Phase I environmental assessments
on each property prior to acquisition. The cost of complying with
environmental regulations was not material to ATLANTIC's results of
operations. ATLANTIC is not aware of any environmental condition on any of its
properties which is likely to have a material adverse effect on ATLANTIC's
financial position or results of operations.
F-25
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1995
-------------------- CAPITALIZED --------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY PROPERTIESL BRANCES LAND IMPROVEMENTS LANDACQUISIMPROVEMENTSITION (C) DEPRECIATION
- ---------------------- ------- ------ ------------- ------------- ---------- --------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING
PROPERTIES:
Properties
acquired:
Atlanta, Georgia:
Azalea Park..... $ -- $3,717 $21,076 $ 70 $ 3,717 $ 21,146 $ 24,863 $ 94
Camden at
Ashford......... (a) 3,672 20,841 277 3,672 21,118 24,790 960
Camden at
Briarcliff...... (b) 2,105 11,953 149 2,105 12,102 14,207 557
Camden at
Dunwoody........ (a) 2,486 14,114 197 2,486 14,311 16,797 650
Camden Creek.... (a) 3,627 20,589 215 3,627 20,804 24,431 913
Camden Crest.... (a) 3,525 20,009 215 3,525 20,224 23,749 884
Cameron Brook... 19,500 3,318 18,784 301 3,318 19,085 22,403 764
Cameron Forest.. -- 884 5,008 -- 884 5,008 5,892 11
Cameron Place... -- 1,124 6,372 -- 1,124 6,372 7,496 14
Cameron Station. 14,500 2,338 13,246 -- 2,338 13,246 15,584 --
Clairmont Crest. 11,600 1,603 9,102 223 1,603 9,325 10,928 371
Lake Ridge...... (a) 2,001 11,359 2,690 2,001 14,049 16,050 654
Lenox Villa..... (a) 1,740 9,878 199 1,740 10,077 11,817 441
Morgan's
Landing......... (a) 1,168 6,646 462 1,168 7,108 8,276 400
Oaks at Sandy
Springs......... (a) 1,270 7,212 972 1,270 8,184 9,454 454
Old Salem....... (a) 1,053 6,144 624 1,053 6,768 7,821 295
The Greens...... 10,400 2,004 11,354 363 2,004 11,717 13,721 471
Trolley Square.. -- 2,031 11,528 196 2,031 11,724 13,755 563
Vinings Landing. (a) 1,363 7,902 515 1,363 8,417 9,780 378
WintersCreek.... -- 1,133 6,434 75 1,133 6,509 7,642 68
Woodlands....... (a) 3,785 21,471 96 3,785 21,567 25,352 178
Birmingham,
Alabama:
Cahaba Forest I. (a) 1,020 5,784 173 1,020 5,957 6,977 116
Cahaba Forest
II.............. 8,083 1,688 9,580 272 1,688 9,852 11,540 192
Colony Woods I.. (a) 1,560 8,845 149 1,560 8,994 10,554 406
Morning Sun
Villas.......... (a) 1,260 7,309 548 1,260 7,857 9,117 335
Charlotte, North
Carolina:
Camden Oaks..... (a) 2,255 12,800 189 2,255 12,989 15,244 601
Columbia, South
Carolina:
Greenbrier...... (a) 2,165 12,293 170 2,165 12,463 14,628 606
<CAPTION>
CONSTRUCTION YEAR
MUTIFAMILY PROPERTIESL YEAR ACQUIRED
- ---------------------- ------------ --------
<S> <C> <C>
OPERATING
PROPERTIES:
Properties
acquired:
Atlanta, Georgia:
Azalea Park..... 1987 1995
Camden at
Ashford......... 1990 1994
Camden at
Briarcliff...... 1989 1994
Camden at
Dunwoody........ 1989 1994
Camden Creek.... 1988 1994
Camden Crest.... 1988 1994
Cameron Brook... 1988 1994
Cameron Forest.. 1981 1995
Cameron Place... 1979 1995
Cameron Station. (e) 1995
Clairmont Crest. 1987 1994
Lake Ridge...... 1979 1993
Lenox Villa..... 1988 1994
Morgan's
Landing......... 1983 1993
Oaks at Sandy
Springs......... 1965 1993
Old Salem....... 1968 1994
The Greens...... 1986 1994
Trolley Square.. 1989 1994
Vinings Landing. 1978 1994
WintersCreek.... 1984 1995
Woodlands....... (f) 1995
Birmingham,
Alabama:
Cahaba Forest I. 1987 1995
Cahaba Forest
II.............. 1990 1995
Colony Woods I.. 1991 1994
Morning Sun
Villas.......... 1985 1994
Charlotte, North
Carolina:
Camden Oaks..... 1989 1994
Columbia, South
Carolina:
Greenbrier...... 1989 1994
</TABLE>
(see notes following table)
F-26
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1995
-------------------- CAPITALIZED --------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MUTIFAMILY PROPERTIESL BRANCES LAND IMPROVEMENTS LANDACQUISIMPROVEMENTSITION (C) DEPRECIATION
- ---------------------- ------- ------ ------------- ------------- ---------- --------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cypress Lakes... $ (a) $1,225 $ 6,961 $147 $ 1,225 $ 7,108 $ 8,333 $ 78
Parrot's
Landing......... 15,835 2,691 15,276 399 2,691 15,675 18,366 635
Spencer Run..... (b) 2,852 16,194 392 2,852 16,586 19,438 670
Sun Pointe Cove. 8,500 1,367 7,773 190 1,367 7,963 9,330 326
Trails at Meadow
Lakes........... (a) 1,285 7,293 124 1,285 7,417 8,702 81
Ft. Myers,
Florida:
Forestwood...... 11,485 2,031 11,540 167 2,031 11,707 13,738 486
Jacksonville,
Florida:
Bay Club........ (a) 1,789 10,160 168 1,789 10,328 12,117 477
Memphis,
Tennessee:
Cameron at Kirby
Parkway......... (a) 1,386 7,959 674 1,386 8,633 10,019 429
Stonegate....... (a) 985 5,608 288 985 5,896 6,881 183
Miami, Florida:
Park Hill....... (a) 1,650 9,377 212 1,650 9,589 11,239 372
Nashville,
Tennessee:
Arbor Creek..... (a) -- 17,671 404 -- 18,075 18,075 784
Enclave at
Brentwood....... (a) 2,263 12,847 621 2,263 13,468 15,731 229
Orlando, Florida:
Camden Springs.. (a) 2,477 14,072 710 2,477 14,782 17,259 648
Cedar Bay
Village......... (b) 255 1,454 13 255 1,467 1,722 16
Kingston
Village......... (a) 876 4,973 48 876 5,021 5,897 56
Longwood Villas. 6,402 1,087 6,317 675 1,087 6,992 8,079 281
Wellington...... (b) 1,155 6,565 235 1,155 6,800 7,955 275
Raleigh, North
Carolina:
Camden Square... (a) 2,314 13,143 434 2,314 13,577 15,891 587
Richmond,
Virginia:
Camden at
Wellesley....... (a) 2,878 16,339 143 2,878 16,482 19,360 769
Potomac Hunt.... (b) 1,486 8,452 142 1,486 8,594 10,080 229
Sarasota,
Florida:
Camden at Palmer
Ranch........... (a) 3,534 20,057 381 3,534 20,438 23,972 908
Tampa/St.
Petersburg,
Florida:
Camden Downs.... (a) 1,840 10,447 206 1,840 10,653 12,493 483
Cameron Lakes... (a) 1,126 6,418 999 1,126 7,417 8,543 157
<CAPTION>
CONSTRUCTION YEAR
MUTIFAMILY PROPERTIESL YEAR ACQUIRED
- ---------------------- ------------ --------
<S> <C> <C>
Ft.
Lauderdale/West
Palm Beach,
Florida:
Cypress Lakes... 1987 1995
Parrot's
Landing......... 1986 1994
Spencer Run..... 1987 1994
Sun Pointe Cove. 1986 1994
Trails at Meadow
Lakes........... 1983 1995
Ft. Myers,
Florida:
Forestwood...... 1986 1994
Jacksonville,
Florida:
Bay Club........ 1990 1994
Memphis,
Tennessee:
Cameron at Kirby
Parkway......... 1985 1994
Stonegate....... 1986 1994
Miami, Florida:
Park Hill....... 1968 1994
Nashville,
Tennessee:
Arbor Creek..... 1986 1994
Enclave at
Brentwood....... 1988 1995
Orlando, Florida:
Camden Springs.. 1986 1994
Cedar Bay
Village......... 1981 1995
Kingston
Village......... 1982 1995
Longwood Villas. 1982 1994
Wellington...... 1988 1994
Raleigh, North
Carolina:
Camden Square... 1987 1994
Richmond,
Virginia:
Camden at
Wellesley....... 1989 1994
Potomac Hunt.... 1987 1994
Sarasota,
Florida:
Camden at Palmer
Ranch........... 1988 1994
Tampa/St.
Petersburg,
Florida:
Camden Downs.... 1988 1994
Cameron Lakes... 1986 1995
</TABLE>
(see notes following table)
F-27
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1995
---------------------- CAPITALIZED ------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MLTIFAMILY PROPERTIESU BRANCES LAND IMPROVEMENTS LAND ACQUIIMPROVEMENTSSITIO(C)N DEPRECIATION
- ---------------------- -------- -------- ------------- ------------- ---------- ------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tampa/St.
Petersburg,
Florida:
(continued)
Country Place
Village I....... $ 2,038 $ 567 $ 3,219 $ 68 $ 567 $ 3,287 $ 3,854 $ 36
Country Place
Village II...... (a) 644 3,658 56 644 3,714 4,358 41
Foxbridge....... 10,400 1,591 9,036 258 1,591 9,294 10,885 383
Summer Chase.... (b) 542 3,094 87 542 3,181 3,723 130
Washington, D.C.:
Arbors at
Landmark........ (a) 3,434 19,501 579 3,434 20,080 23,514 941
Camden at
Kendall Ridge... (a) 1,708 9,698 195 1,708 9,893 11,601 467
Camden at
Saybrooke....... (a) 2,802 15,906 127 2,802 16,033 18,835 740
Sheffield
Forest.......... -- 2,269 12,859 2,269 12,859 15,128 29
Less amounts held
in principal
reserve fund(d).. (219) -- -- -- -- -- -- --
-------- -------- -------- ------- ---------- ---------- ---------- -------
Total operating
properties
acquired........ $118,524 $108,004 $631,500 $18,482 $ 108,004 $ 649,982 $ 757,986 $23,302
======== ======== ======== ======= ========== ========== ========== =======
PROPERTIES
DEVELOPED:
Birmingham,
Alabama:
Colony Woods II. -- 1,254 -- 9,252 1,298 9,208 10,506 59
Charlotte, North
Carolina:
Waterford Hills. -- 1,508 -- 11,083 1,508 11,083 12,591 114
-------- -------- -------- ------- ---------- ---------- ---------- -------
Total operating
properties
developed....... $ -- $ 2,762 $ -- $20,335 $ 2,806 $ 20,291 $ 23,097 $ 173
-------- -------- -------- ------- ---------- ---------- ---------- -------
TOTAL OPERATING
PROPERTIES...... $118,524 $110,766 $631,500 $38,817 $ 110,810 $ 670,273 $ 781,083 $23,475
======== ======== ======== ======= ========== ========== ========== =======
DEVELOPMENTS
UNDER
CONSTRUCTION:
Atlanta, Georgia:
Camden Creek II. -- 2,730 -- 5,553 2,772 5,511 8,283 --
Peachtree
Corners......... -- 889 -- 310 889 310 1,199 --
Charlotte, North
Carolina:
Waterford
Square.......... -- 1,890 -- 16,020 2,041 15,869 17,910 26
Jacksonville,
Florida:
Cameron Lakes... -- 1,759 -- 10,350 1,897 10,212 12,109 --
Cameron
Timberlin Parc
I............... -- 2,167 -- 1,150 2,169 1,148 3,317 --
Raleigh, North
Carolina:
Waterford
Forest.......... -- 2,371 -- 6,120 2,371 6,120 8,491 --
Waterford Point. -- 985 -- 14,947 1,094 14,838 15,932 60
<CAPTION>
CONSTRUCTION YEAR
MLTIFAMILY PROPERTIESU YEAR ACQUIRED
- ---------------------- ------------ --------
<S> <C> <C>
Tampa/St.
Petersburg,
Florida:
(continued)
Country Place
Village I....... 1982 1995
Country Place
Village II...... 1983 1995
Foxbridge....... 1986 1994
Summer Chase.... 1988 1994
Washington, D.C.:
Arbors at
Landmark........ 1990 1994
Camden at
Kendall Ridge... 1990 1994
Camden at
Saybrooke....... 1990 1994
Sheffield
Forest.......... 1987 1995
Less amounts held
in principal
reserve fund(d)..
Total operating
properties
acquired........
PROPERTIES
DEVELOPED:
Birmingham,
Alabama:
Colony Woods II. 1995(g) 1994
Charlotte, North
Carolina:
Waterford Hills. 1995(g) 1993
Total operating
properties
developed.......
TOTAL OPERATING
PROPERTIES......
DEVELOPMENTS
UNDER
CONSTRUCTION:
Atlanta, Georgia:
Camden Creek II. -- 1994
Peachtree
Corners......... -- 1995
Charlotte, North
Carolina:
Waterford
Square.......... (g) 1994
Jacksonville,
Florida:
Cameron Lakes... (g) 1995
Cameron
Timberlin Parc
I............... -- 1995
Raleigh, North
Carolina:
Waterford
Forest.......... -- 1995
Waterford Point. (g) 1994
</TABLE>
(see notes following table)
F-28
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT AT WHICH CARRIED AT
TO ATLANTIC COSTS DECEMBER 31, 1995
---------------------- CAPITALIZED ------------------------------------
ENCUM- BUILDINGS AND SUBSEQUENT TO BUILDINGS AND TOTALS ACCUMULATED
MLTIFAMILY PROPERTIESU BRANCES LAND IMPROVEMENTS LAND ACQUIIMPROVEMENTSSITIO(C)N DEPRECIATION
- ---------------------- ------- -------- ------------- ------------- ---------- ------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Washington, D.C.:
Milestone....... $ -- $ 5,477 $ -- $ 7,333 $ 5,485 $ 7,325 $ 12,810 $ --
Woodway Trinity. -- 5,342 -- 9,900 5,492 9,750 15,242 --
------- -------- -------- -------- ---------- ---------- ---------- -------
TOTAL
DEVELOPMENTS
UNDER
CONSTRUCTION.... $ -- $ 23,610 $ -- $ 71,683 $ 24,210 $ 71,083 $ 95,293 $ 86
------- -------- -------- -------- ---------- ---------- ---------- -------
DEVELOPMENTS IN
PLANNING:
Charlotte, North
Carolina:
Waterford Square
II.............. -- 2,014 -- 253 2,039 228 2,267 --
Ft.
Lauderdale/West
Palm Beach,
Florida:
Parrot's Landing
II.............. -- 1,328 -- 300 1,342 286 1,628 --
Raleigh, North
Carolina:
Cameron Brooke.. -- 1,353 -- 305 1,378 280 1,658 --
Research
Triangle Park... -- 805 -- 38 805 38 843 --
Richmond,
Virginia:
Cameron at
Wyndham......... -- 2,038 -- 229 2,038 229 2,267 --
Cameron
Crossing........ -- 1,666 -- 343 1,670 339 2,009 --
Tampa/St.
Petersburg,
Florida:
North Airport... -- 511 -- 75 511 75 586 --
------- -------- -------- -------- ---------- ---------- ---------- -------
TOTAL
DEVELOPMENTS IN
PLANNING........ $ -- $ 9,715 $ -- $ 1,543 $ 9,783 $ 1,475 $ 11,258 $ --
------- -------- -------- -------- ---------- ---------- ---------- -------
LAND HELD FOR
FUTURE
DEVELOPMENT:
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. -- 1,294 -- -- 1,294 -- 1,294 --
------- -------- -------- -------- ---------- ---------- ---------- -------
TOTAL LAND HELD
FOR FUTURE
DEVELOPMENT..... $ -- $ 1,294 $ -- $ -- $ 1,294 $ -- $ 1,294 $ --
------- -------- -------- -------- ---------- ---------- ---------- -------
TOTAL
MULTIFAMILY
PROPERTIES...... $18,524 $145,385 $631,500 $112,043 $ 146,097 $ 742,831 $ 888,928 $23,561
======= ======== ======== ======== ========== ========== ========== =======
<CAPTION>
CONSTRUCTION YEAR
MLTIFAMILY PROPERTIESU YEAR ACQUIRED
- ---------------------- ------------ --------
<S> <C> <C>
Washington, D.C.:
Milestone....... -- 1995
Woodway Trinity. -- 1994
TOTAL
DEVELOPMENTS
UNDER
CONSTRUCTION....
DEVELOPMENTS IN
PLANNING:
Charlotte, North
Carolina:
Waterford Square
II.............. -- 1995
Ft.
Lauderdale/West
Palm Beach,
Florida:
Parrot's Landing
II.............. -- 1994
Raleigh, North
Carolina:
Cameron Brooke.. -- 1995
Research
Triangle Park... -- 1995
Richmond,
Virginia:
Cameron at
Wyndham......... -- 1995
Cameron
Crossing........ -- 1995
Tampa/St.
Petersburg,
Florida:
North Airport... -- 1995
TOTAL
DEVELOPMENTS IN
PLANNING........
LAND HELD FOR
FUTURE
DEVELOPMENT:
Jacksonville,
Florida:
Cameron
Timberlin Parc
II.............. -- 1995
TOTAL LAND HELD
FOR FUTURE
DEVELOPMENT.....
TOTAL
MULTIFAMILY
PROPERTIES......
</TABLE>
- ----
(a) Pledged to secure $300 million line of credit with Morgan Guaranty Trust
Company of New York.
(b) Pledged as collateral under credit enhancement agreement with the Federal
National Mortgage Association.
(c) For federal income tax purposes, ATLANTIC's aggregate cost of real estate
at December 31, 1995 was $887,671,000.
(d) The Federal National Mortgage Association credit enhancement agreement
requires payments to be made to a principal reserve fund.
(e) Phase I (108 units) was developed in 1981 and Phase II (240 units) was
developed in 1983.
(f) Phase I (332 units) was developed in 1983 and Phase II (312 units) was
developed in 1985.
(g) As of 12/31/95, property was in lease-up.
F-29
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTE TO SCHEDULE III
AS OF DECEMBER 31, 1995
The following is a reconciliation of the carrying amount and related
accumulated depreciation of ATLANTIC's investment in real estate, at cost (in
thousands):
<TABLE>
<CAPTION>
(FROM
INCEPTION)
CARRYING AMOUNT 1995 1994 1993
--------------- -------- -------- ----------
<S> <C> <C> <C>
Beginning balances......................... $631,260 $ 31,005 $ --
Acquisitions and renovation expenditures... 187,267 571,288 29,591
Development expenditures, including land
acquisitions.............................. 101,335 28,967 1,414
Dispositions............................... (30,934) -- --
-------- -------- -------
Ending balances............................ $888,928 $631,260 $31,005
======== ======== =======
<CAPTION>
(FROM
INCEPTION)
ACCUMULATED DEPRECIATION 1995 1994 1993
------------------------ -------- -------- ----------
<S> <C> <C> <C>
Beginning balances......................... $ 8,798 $ 28 $ --
Depreciation for the period................ 15,925 8,770 28
Accumulated depreciation of real estate
sold...................................... (1,162) -- --
-------- -------- -------
Ending balances............................ $ 23,561 $ 8,798 $ 28
======== ======== =======
</TABLE>
F-30
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
PRO FORMA FINANCIAL STATEMENTS
SUMMARY OF PRO FORMA ADJUSTMENTS
(UNAUDITED)
The accompanying unaudited pro forma balance sheet as of March 31, 1996 and
the unaudited pro forma statements of earnings for the three-month period
ended March 31, 1996 and the year ended December 31, 1995 of ATLANTIC reflect:
(i) the acquisition and disposition by ATLANTIC of all properties acquired or
disposed of since December 31, 1994 as if these properties had been acquired
or disposed of as of January 1, 1995; (ii) the assumption and retirement of
mortgage debt associated with the acquisition or disposition of the properties
acquired or disposed of since December 31, 1994 as if this mortgage debt had
been assumed or retired on January 1, 1995; (iii) the sale of ATLANTIC Common
Stock through private placement subsequent to December 31, 1994, necessary to
fund pro forma acquisitions, as if the shares had been issued on January 1,
1995; (iv) the spin-off of the Homestead Village properties as if the Merger
had been consummated on January 1, 1995; and, (v) certain pro forma
adjustments to the historical financial statements of ATLANTIC. For pro forma
purposes, the proceeds from the sale of ATLANTIC Common Stock subsequent to
March 31, 1996 have been used to repay pro forma borrowings on ATLANTIC's line
of credit.
The unaudited pro forma financial statements have been prepared by
management of ATLANTIC and do not purport to be indicative of the results
which would actually have been obtained had the transactions described above
been completed on the dates indicated or which may be obtained in the future.
The pro forma financial statements should be read in conjunction with the
financial statements of ATLANTIC included elsewhere herein.
F-31
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
PRO FORMA BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS (A)
--------------------------------------
ISSUANCE OF
ACQUISITIONS/ COMMON
HISTORICAL DISPOSITIONS SHARES SUBTOTAL HOMESTEAD(D) PRO FORMA
---------- ------------- ----------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Real Estate............. $936,129 $18,671 (a) $ $954,800 $(10,437) $944,363
Less accumulated
depreciation......... 28,364 (699)(a) 27,665 -- 27,665
-------- ------- -------- -------- -------- --------
Net real estate
investments.......... 907,765 19,370 927,135 (10,437) 916,698
Cash and cash
equivalents............ 6,553 (3,553)(b) 3,000 (72) 2,928
Other assets............ 15,000 15,000 (1,817) 13,183
-------- ------- -------- -------- -------- --------
Total assets........ $929,318 $15,817 $ $945,135 $(12,326) $932,809
======== ======= ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Line of credit........ $226,000 $ 9,029 (b) $(48,425)(c) $186,604 $ 36,749 $223,353
Mortgages payable..... 123,291 6,000 (b) 129,291 129,291
Accounts payable...... 16,267 16,267 16,267
Accrued expenses and
other liabilities.... 11,409 118 (a) 11,527 (1,452) 10,075
-------- ------- -------- -------- -------- --------
Total liabilities... 376,967 15,147 (48,425) 343,689 35,297 378,986
-------- ------- -------- -------- -------- --------
Shareholders' Equity:
Common shares
(250,000,000 shares
authorized;
55,569,635 issued in
historical period and
59,780,505 issued on
pro forma basis)..... 556 42 (c) 598 598
Additional paid-in
capital.............. 576,976 48,383 (c) 625,359 625,359
Distributions in
excess of net
earnings............. (25,181) 670 (a) (24,511) (47,623) (72,134)
-------- ------- -------- -------- -------- --------
Total shareholders'
equity............. 552,351 670 48,425 601,446 (47,623) 553,823
-------- ------- -------- -------- -------- --------
Total liabilities
and shareholders'
equity............. $929,318 $15,817 $ 0 $945,135 $(12,326) $932,809
======== ======= ======== ======== ======== ========
</TABLE>
See accompanying notes to pro forma financial statements.
F-32
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
PRO FORMA STATEMENT OF EARNINGS
THREE-MONTH PERIOD ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS(E)
---------------------- --------------------------------
ACQUISITIONS/
ATLANTIC DISPOSITIONS ACQUISITIONS OTHER SUBTOTAL HOMESTEAD(D) PRO FORMA
-------- ------------- --------------- ------------ -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income
Rental income......... $30,809 $934 (f) $ $ $31,743 $ (6) $31,737
Interest income....... 72 72 72
------- ---- ----------- ------------ ------- ----- -------
Total income........ 30,881 934 31,815 (6) 31,809
------- ---- ----------- ------------ ------- ----- -------
Expenses
Rental expenses....... 11,816 422 (f) 12,238 12,238
Property management
fees paid to
affiliate............ 920 38 (f) 958 958
Mortgage interest..... 2,041 120 (f)(g) 2,161 2,161
Depreciation.......... 4,804 (93)(h) 190 (i) 4,901 4,901
Interest on general
debt................. 2,301 2,301 871 3,172
General and
administrative....... 186 186 (18) 168
REIT management fees
paid to affiliate.... 2,124 53 (j) 2,177 (138) 2,039
Other................. 39 39 39
------- ---- ----------- ------------ ------- ----- -------
Total expenses...... 24,231 487 190 53 24,961 715 25,676
------- ---- ----------- ------------ ------- ----- -------
Net earnings (loss),
excludes gain on
disposition............ $ 6,650 $447 $ (190) $ (53) $ 6,854 $(721) $ 6,133
======= ==== =========== ============ ======= ===== =======
Weighted average shares
outstanding............ 55,555 1,283 (p) 56,838 56,838
======= ============ ======= =======
Net earnings per share,
excludes gain on
disposition............ $ 0.12 $ 0.12 $ 0.11
======= ======= =======
</TABLE>
See accompanying notes to pro forma financial statements.
F-33
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
PRO FORMA STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS(E)
---------------------- ----------------------
ACQUISITIONS/
ATLANTIC DISPOSITIONS ACQUISITIONS OTHER SUBTOTAL HOMESTEAD(D) PRO FORMA
-------- ------------- ------------ ------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income
Rental income......... $103,634 $16,571 (f) $ $ $120,205 $ (4) $120,201
Interest income....... 245 245 245
-------- ------- ------- ------- -------- ------- --------
Total income........ 103,879 16,571 120,450 (4) 120,446
-------- ------- ------- ------- -------- ------- --------
Expenses
Rental expenses....... 37,951 7,537 (f) (981)(k) 44,507 44,507
Property management
fees paid to
affiliate............ 3,499 749 (f) (86)(l) 4,162 4,162
Mortgage interest..... 7,662 1,104 (f)(m) 8,766 8,766
Depreciation.......... 15,925 (1,052)(h) 3,079 (n) 17,952 17,952
Interest on general
debt................. 11,380 11,380 3,476 14,856
General and
administrative....... 646 646 (63) 583
REIT management fees
paid to affiliate 6,923 1,283 (o) 8,206 (547) 7,659
Other................. 254 254 254
-------- ------- ------- ------- -------- ------- --------
Total expenses...... 84,240 8,338 2,012 1,283 95,873 2,866 98,739
-------- ------- ------- ------- -------- ------- --------
Net earnings (loss),
excludes gain on
disposition............ $ 19,639 $ 8,233 $(2,012) $(1,283) $ 24,577 $(2,870) $ 21,707
======== ======= ======= ======= ======== ======= ========
Weighted average shares
outstanding............ 43,889 8,658 (p) 52,547 52,547
======== ======= ======== ========
Net earnings per share,
excludes gain on
disposition............ $ 0.45 $ 0.47 $ 0.41
======== ======== ========
</TABLE>
See accompanying notes to pro forma financial statements.
F-34
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO PRO FORMA FINANCIAL STATEMENTS
MARCH 31, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
(a) Represents the acquisition of three properties and the disposition of
one property that occurred subsequent to March 31, 1996 as follows:
<TABLE>
<CAPTION>
AMOUNT
PROPERTY DATE (IN 000'S)
-------- ---- ----------
<S> <C> <C>
Acquisitions:
Cameron at Hickory Grove (formerly Es-
prit).................................... April 10, 1996 $ 8,000
Paces Court............................... April 22, 1996 11,007
Park Place at Turtle Run (formerly Park
Place)................................... April 22, 1996 14,355
--------
33,362
--------
Disposition:
Greenbrier................................ April 9, 1996 (14,691)(1)
--------
Net acquisitions........................ $ 18,671
========
</TABLE>
- --------
(1) Greenbrier was sold at a gain of $670,000.
(b) Reflects the application of cash on hand and additional borrowings under
ATLANTIC's line of credit, which were repaid with the proceeds from the
issuance of common stock as discussed in note (c), to fund the pro forma net
acquisitions above. Additionally, reflects ATLANTIC's assumption of a $6
million mortgage note payable upon the purchase of the Esprit property.
(c) Reflects the sale of 4,210,870 common shares ($.01 par value) at a price
of $11.50 subsequent to March 31, 1996. For pro forma purposes, the net
proceeds have been assumed to be used to repay the pro forma borrowings under
ATLANTIC's line of credit as discussed in note (b).
(d) The Transaction will be recorded by ATLANTIC as a sale of its Homestead
Village Properties to PTR at fair market value. ATLANTIC will recognize the
Distribution as a reduction of shareholders' equity.
Since PTR will own over 50% of Homestead immediately after the Merger, the
Transaction will be recorded by PTR as (i) the formation of Homestead as a
wholly-owned subsidiary into which the PTR-Homestead Village Group assets will
be transferred at historical cost; (ii) the acquisition of Homestead Village
net assets of ATLANTIC and SCG (at fair value) for Homestead Securities using
the purchase method of accounting; and (iii) a reduction of shareholders'
equity to reflect the distribution of Homestead Securities owned by PTR to
PTR's shareholders. The historical financial statements of PTR-Homestead
Village Group will become the predecessor of Homestead and the operations of
the SCG-Homestead Village Group and the Atlantic-Homestead Village Group will
be included from the date of acquisition. For a description of certain terms
used in this paragraph, refer to the combined historical financial statements
included in Appendix A. The adjustment reflects consummation of the Merger
Agreement and spin-off of ATLANTIC's Homestead Village net assets as if the
closing of the Transaction, contemplated in the accompanying Information
Statement, had occurred on January 1, 1995 as follows:
1) Elimination of the results of operations of ATLANTIC's Homestead Village
properties from the historical financial statements of ATLANTIC for the
three months ended March 31, 1996 and the year ended December 31, 1995.
2) Elimination of the Homestead Village net assets as of March 31, 1996.
3) ATLANTIC's receipt of 4,201,220 shares of Homestead Common Stock and
2,818,517 Homestead Warrants in exchange for ATLANTIC's contribution of
Homestead Village net assets as of March 31, 1996 of $10,874,000, the
Homestead Village assets expected to be acquired prior to the Closing Date
of $18,128,000 and cash of $18,621,000. ATLANTIC's contribution totals
$47,623,000. The $18,128,000 of Homestead assets that ATLANTIC will
contribute consists of land acquisitions subsequent to March 31,
F-35
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
1996 of $9,582,000 and development costs to be incurred from March 31, 1996
to the Closing Date of $8,546,000.
4) The additional borrowings under ATLANTIC's line of credit necessary to
finance ATLANTIC's contribution to Homestead as of January 1, 1995.
5) Additional interest expense and a corresponding reduction in the REIT
management fee resulting from (i) the additional pro forma borrowings of
$36,749,000 and (ii) the $10,874,000 of borrowings that financed the
Homestead Village net assets contributed by ATLANTIC. Interest related to
the $10,874,000 of borrowings was capitalized in ATLANTIC's historical
financial statements. ATLANTIC's current interest rate of 7.3% is used to
calculate the additional interest expense.
6) The special dividend to ATLANTIC shareholders of all of the Homestead
Securities to be received by ATLANTIC under the Merger Agreement. For pro
forma purposes, a value of $51,699,000 has been assumed for the Homestead
Securities and ATLANTIC's basis in the assets contributed to Homestead is
assumed to be $47,623,000. The resulting gain on the exchange of $4,076,000
is reflected in "Distributions in excess of net earnings" in the
accompanying pro forma balance sheet as of March 31, 1996.
(e) The pro forma financial statements do not reflect the funding of
ATLANTIC's obligation of approximately $111,000,000 under the Funding
Commitment Agreement or receipt of the related convertible mortgages of
approximately $98,000,000, as this funding is related to future development
costs of the properties contributed to Homestead. The convertible mortgages
will be recorded at a premium of approximately $13,000,000 which will be
amortized as an adjustment to interest income over the ten-year term of the
mortgages.
(f) All of ATLANTIC's acquisitions subsequent to December 31, 1994 were
acquired from unaffiliated third parties. These acquisitions are described
below:
<TABLE>
<CAPTION>
OCCUPANCY
ACQUISITION ACQUISITION AT DATE OF
PROPERTY DATE LOCATION COST (IN 000'S) UNITS PRODUCT TYPE ACQUISITION
-------- ----------- -------- --------------- ----- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Cameron Lakes........... 2/01/95 Tampa, FL $ 7,544 207 Middle 88.4%
Cahaba Forest I & II.... 3/24/95 Birmingham, AL 18,072 400 Moderate 96.0%
Enclave at Brentwood.... 4/28/95 Nashville, TN 15,110 380 Middle 97.1%
Cameron Villas II (for-
merly Cedar Bay Vil-
lage).................. 7/20/95 Orlando, FL 1,709 42 Moderate 97.6%
Country Place Village
I & II................. 7/20/95 Tampa, FL 8,088 188 Moderate 89.9%
Cypress Lakes........... 7/20/95 Fort Lauderdale, FL 8,186 176 Moderate 93.2%
Kingston Village........ 7/20/95 Orlando, FL 5,849 120 Middle 97.5%
Trails at Meadow Lakes.. 7/20/95 West Palm Beach, FL 8,578 189 Moderate 94.7%
WintersCreek............ 8/01/95 Atlanta, GA 7,567 200 Moderate 99.0%
Woodlands............... 9/01/95 Atlanta, GA 25,256 644 Moderate 96.0%
Azalea Park............. 11/09/95 Atlanta, GA 24,793 447 Moderate 80.1%
Cameron Forest.......... 12/12/95 Atlanta, GA 5,892 152 Moderate 92.8%
Cameron Place........... 12/12/95 Atlanta, GA 7,496 212 Moderate 93.9%
Sheffield Forest........ 12/15/95 Washington, DC 15,128 256 Middle 88.7%
Cameron Station......... 12/19/95 Atlanta, GA 15,584 348 Moderate 95.7%
Cameron at Hickory Grove
(formerly Esprit)...... 4/10/96 Charlotte, NC 8,000 202 Moderate 93.6%
Paces Court............. 4/22/96 Greenville, SC 11,007 234 Middle 91.0%
Park Place at Turtle Run
(formerly Park Place).. 4/22/96 Coral Springs, FL 14,355 350 Moderate 91.7%
</TABLE>
F-36
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
This adjustment reflects historical: 1) gross income, 2) rental expenses,
and 3) mortgage interest on mortgage debt assumed, if applicable, for all
properties acquired, subsequent to December 31, 1994 for the period January 1,
1995 to the earlier of the respective dates of acquisition, December 31, 1995
or March 31, 1996, as applicable (results of operations after the date of
acquisition are included in ATLANTIC's historical operating results). Reflects
removal from ATLANTIC's historical balances of: 1) gross income, 2) rental
expenses, and 3) mortgage interest on mortgage debt, if applicable, for all
properties disposed of subsequent to December 31, 1994 to the earlier of the
respective dates of disposition, December 31, 1995 or March 31, 1996, as
applicable. The historical gross income and rental expenses relating to the
period prior to ATLANTIC's acquisition, exclude amounts which would not be
comparable to the proposed future operations of the properties such as certain
interest income and income taxes.
The following tables summarizes the historical income and expense amounts
shown on the pro forma statements of earnings (in thousands):
<TABLE>
<CAPTION>
RENTAL
EXPENSES,
EXCLUDING
RENTAL MORTGAGE MORTGAGE
INCOME INTEREST(I) INTEREST
------- ----------- --------
<S> <C> <C> <C>
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
1996:
Group C Properties.......................... $ 1,446 $ 717 $ 120
Less: Post acquisition amounts already
included in ATLANTIC's historical
balances............................... -- -- --
Less: Disposition........................... (512) (257) --
------- ------ ------
Net adjustment to ATLANTIC's historical
balances................................. $ 934 $ 460 $ 120
======= ====== ======
FOR THE YEAR ENDED DECEMBER 31, 1995:
Group A properties.......................... $14,032 $6,398 $ 159
Group B properties.......................... 9,662 4,395 887
Group C properties.......................... 5,876 3,043 480
Other acquisitions in 1995.................. 4,005 1,578 620
------- ------ ------
Totals for the year....................... 33,575 15,414 2,146
Less: Post acquisition amounts already in-
cluded in ATLANTIC's historical bal-
ances.................................. (10,338) (4,142) (583)
Less: Dispositions.......................... (6,666) (2,986) (459)
------- ------ ------
Net adjustment to ATLANTIC's historical
balances................................. $16,571 $8,286 $1,104
======= ====== ======
</TABLE>
- --------
(i) Includes property management fees and real estate taxes.
The following analysis reconciles the audited information for the Group A
properties, the Group B properties and the Group C properties to the amounts
contained in the pro forma statements of earnings (in thousands):
<TABLE>
<CAPTION>
RENTAL
EXPENSES,
EXCLUDING
RENTAL MORTGAGE MORTGAGE
INCOME INTEREST(I) INTEREST
------- ----------- --------
<S> <C> <C> <C>
Group A Properties: Audited
results of operations for
the year ended December 31,
1994....................... $13,338 $6,330 $159
Adjustment to reflect the
results of operations of
Group A properties for
1995..................... 694(ii) 68(ii) 0(ii)
------- ------ ----
Total 1995 Group A...... $14,032 $6,398 $159
======= ====== ====
Group B Properties: Audited
results of operations for
the nine months ended
September 30, 1995......... $ 7,126 $3,298 $653
Adjustment to reflect
fourth quarter 1995
results of operations of
Group B properties....... 2,536(iii) 1,097(iii) 234(iii)
------- ------ ----
Total 1995 Group B...... $ 9,662 $4,395 $887
======= ====== ====
</TABLE>
F-37
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
RENTAL
EXPENSES,
EXCLUDING
RENTAL MORTGAGE MORTGAGE
INCOME INTEREST(I) INTEREST
------ ----------- --------
<S> <C> <C> <C>
Group C Properties: Audited results of
operations for the year ended December 31,
1995.......................................... $5,876 $3,043 $ --
Adjustment to reflect interest on mortgage
debt assumed................................ -- -- 480
------ ------ -----
Total 1995 Group C......................... $5,876 $3,043 $ 480
====== ====== =====
</TABLE>
- --------
(i) Includes property management fees and real estate taxes.
(ii) Represents incremental income and expense adjustments necessary to
reconcile the 1994 audited results with the 1995 actual results.
(iii) Represents fourth quarter 1995 actual results which are added to the
audited results for the nine months ended September 30, 1995. This
adjustment is necessary to present twelve months of information for
Group B properties.
(g) Reflects pro forma interest expense for the three-month period ended
March 31, 1996 on a $6 million mortgage note which bears interest at 8%. The
mortgage note was assumed in connection with a property acquisition in April
1996.
(h) Represents the removal of depreciation expense recognized on properties
disposed of subsequent to December 31, 1994 which is included in ATLANTIC's
historical balances.
(i) Reflects depreciation expense for the three-month period ended March 31,
1996 for the properties acquired in April 1996. This depreciation adjustment
is based on ATLANTIC's purchase cost assuming asset lives of 10 to 40 years.
Depreciation is computed using a straight-line method.
(j) Reflects the additional REIT management fee that would have been
incurred in the three-month period ended March 31, 1996 had the property
acquisitions in April 1996 occurred on January 1, 1995.
(k) Reflects the difference for the year ended December 31, 1995 between
historical make-ready expense and ATLANTIC's pro forma make-ready expense.
(l) Reflects the difference for the year ended December 31, 1995 between
historical property management fee expense and ATLANTIC's pro forma property
management fee expense.
(m) Reflects pro forma interest expense on mortgage notes payable assumed
subsequent to December 31, 1994 as if these mortgages were assumed by ATLANTIC
on January 1, 1995. The interest rates on the mortgage notes varies from 5.98%
to 7.75%.
(n) Reflects depreciation expense from January 1, 1995 through the
acquisition date for all properties acquired subsequent to December 31, 1994
(depreciation expense after the date of acquisition is included in ATLANTIC's
historical operating results). This depreciation adjustment is based on
ATLANTIC's purchase cost assuming asset lives of 10 to 40 years. Depreciation
is computed using a straight-line method.
(o) Reflects the additional REIT management fee that would have been
incurred in 1995 had the property acquisitions subsequent to December 31, 1994
all occurred on January 1, 1995.
(p) The number of shares used in the calculation of the pro forma per share
data was based on the weighted average number of common shares outstanding
during the period adjusted to give effect to common shares assumed to have
been issued on January 1, 1995 as necessary to complete the property
acquisitions which are all assumed to have been financed with equity proceeds
to the extent mortgage debt was not assumed.
F-38
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying combined Historical Summary of Gross Income
and Direct Operating Expenses (the Historical Summary) of the Group A
Properties described in Note 1 for the year ended December 31, 1994. This
combined Historical Summary is the responsibility of the Group A Properties
management. Our responsibility is to express an opinion on this combined
Historical Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined Historical Summary is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined Historical
Summary. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the
overall presentation of the combined Historical Summary. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Security Capital Atlantic Incorporated as described in the accompanying
Note 1 of the combined Group A Properties and is not intended to be a complete
presentation of the income and expenses of the combined Group A Properties.
In our opinion, the combined Historical Summary of Gross Income and Direct
Operating Expenses referred to above presents fairly, in all material
respects, the combined gross income and direct operating expenses as described
in Note 1 of the combined Group A Properties for the year ended December 31,
1994, in conformity with generally accepted accounting principles.
Ernst & Young LLP
West Palm Beach, Florida
March 5, 1996
F-39
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP A PROPERTIES
COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1994 AND THE PERIOD FROM JANUARY 1, 1995 THROUGH THE
EARLIER OF JUNE 30, 1995 OR DATE OF ACQUISITION
<TABLE>
<CAPTION>
1995
1994 (UNAUDITED)
----------- -----------
<S> <C> <C>
Gross income:
Rental................................................ $12,951,378 $6,432,457
Other................................................. 387,073 128,010
----------- ----------
Total gross income.................................. 13,338,451 6,560,467
----------- ----------
Direct operating expenses:
Utilities and other property operating expenses....... 3,051,955 1,629,333
Real estate taxes..................................... 1,255,172 589,640
Repairs and maintenance............................... 997,451 573,832
Management fees....................................... 601,533 334,262
Interest on certain obligations assumed............... 159,253 79,905
Advertising........................................... 217,925 93,086
Insurance............................................. 205,648 108,550
----------- ----------
Total direct operating expenses..................... 6,488,937 3,408,608
----------- ----------
Excess of gross income over direct operating expenses... $ 6,849,514 $3,151,859
=========== ==========
</TABLE>
See accompanying notes.
F-40
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP A PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1994 AND THE PERIOD FROM JANUARY 1, 1995 THROUGH THE
EARLIER OF JUNE 30, 1995 OR DATE OF ACQUISITION
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined Historical Summary of Gross Income and Direct Operating
Expenses (the Historical Summary) for the year ended December 31, 1994 and the
Period from January 1, 1995 through the earlier of June 30, 1995 or the date
Security Capital Atlantic Incorporated (the "Company") acquired the property
(the Date of Acquisition) relates to the operations of the following Group A
Properties which were acquired from unaffiliated parties by the Company
between April 1, 1995 and September 30, 1995:
<TABLE>
<CAPTION>
DATE OF ACQUISITION PROPERTY NAME LOCATION ACQUISITION COST
------------------- ------------------------ ------------------------ ----------------
(IN 000'S)
<S> <C> <C> <C>
April 28,
1995 Enclave at Brentwood Nashville, Tennessee $15,110
July 20,
1995 Trails at Meadowlakes West Palm Beach, Florida 8,578
July 20,
1995 Country Place Village I Tampa, Florida 3,786
July 20,
1995 Country Place Village II Tampa, Florida 4,302
July 20,
1995 Kingston Village Orlando, Florida 5,849
July 20,
1995 Cypress Lakes Fort Lauderdale, Florida 8,186
July 20, Cameron Villas II Orlando, Florida 1,709
1995 (formerly Cedar Bay
Village)
August 1,
1995 WintersCreek Atlanta, Georgia 7,567
September
1, 1995 Woodlands I & II Atlanta, Georgia 25,256
</TABLE>
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration Statement on Form S-11
of the Company. The combined Historical Summary is not intended to be a
complete presentation of combined income and expenses of the Group A
Properties for the year ended December 31, 1994 and the Period from January 1,
1995 through the earlier of June 30, 1995 or Date of Acquisition, as certain
costs such as depreciation, amortization, certain mortgage interest,
professional fees and other costs not directly related to the future
operations of the Group A Properties have been excluded. These costs are not
considered to be direct operating expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rental income from leasing activities consist of lease payments earned from
tenants under lease agreements with terms of one year or less.
Capitalization Policy
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
Advertising Expense
The cost of advertising is expensed as incurred.
F-41
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP A PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES--(CONTINUED)
Use of Estimates
The preparation of the combined Historical Summary in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined Historical
Summary and accompanying notes. Actual results could differ from those
estimates.
Unaudited Interim Historical Summary
The combined historical summary of gross income and direct operating
expenses for the period from January 1, 1995 through the earlier of June 30,
1995 or the Date of Acquisition is unaudited. In the opinion of management,
all adjustments necessary for a fair presentation of such combined historical
summary have been included. The results of operations for the period are not
necessarily indicative of the Group A Properties future results of operations.
3. RELATED PARTY TRANSACTIONS
Management fees of $601,533 and $334,262 (unaudited) were paid to affiliates
of the prior owners under property management contracts in 1994 and 1995,
respectively.
4. DEBT ASSUMPTION
The Company assumed outstanding debt in connection with the acquisition of
Country Place Village I and WintersCreek.
Country Place Village I
A 7.75% mortgage note with an outstanding balance of $2,051,078 at July 20,
1995 (the date of acquisition) was assumed by the Company. The note, which is
secured by the property, matures on November 1, 2000. The mortgage note
provides for monthly principal and interest payments of $15,862 through
maturity and for a balloon payment of $1,844,613 at maturity.
The mortgage note had an outstanding balance of $2,068,822 at December 31,
1994 and $2,051,078 (unaudited) at June 30, 1995. The Company's assumption of
this mortgage note did not provide for any modification to the original terms,
therefore, interest expense incurred prior to the Company's assumption is
representative of future interest expense. Accordingly, interest expense of
$159,253 for 1994 and $79,905 (unaudited) for 1995 is recognized in the
accompanying combined Historical Summary.
WintersCreek
A variable rate mortgage note securing a $5,000,000 tax-exempt bond issue
was assumed by the Company in connection with the acquisition of WintersCreek
on August 1, 1995. The mortgage note, which is secured by the property,
provides for monthly interest payments at the variable rate with the principal
amount of the bonds due at maturity on October 1, 2004.
Subsequent to the debt assumption, the Company obtained a swap agreement
which provides for interest payments on a fixed rate. On a continuing basis,
the interest expense incurred will differ from the amounts incurred prior to
the Company's assumption of the debt. Accordingly, no interest expense is
recognized in the accompanying combined Historical Summary.
F-42
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying combined Historical Summary of Gross Income
and Direct Operating Expenses (the Historical Summary) of the Group B
Properties described in Note 1 for the period from January 1, 1995 through
September 30, 1995. This combined Historical Summary is the responsibility of
the Group B Properties' management. Our responsibility is to express an
opinion on this combined Historical Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined Historical Summary is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined Historical
Summary. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the
overall presentation of the combined Historical Summary. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Security Capital Atlantic Incorporated as described in the accompanying
Note 1 of the combined Group B Properties and is not intended to be a complete
presentation of the income and expenses of the combined Group B Properties.
In our opinion, the combined Historical Summary of Gross Income and Direct
Operating Expenses referred to above presents fairly, in all material
respects, the combined gross income and direct operating expenses as described
in Note 1 of the combined Group B Properties for the period from January 1,
1995 through September 30, 1995, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
West Palm Beach, Florida
March 5, 1996
F-43
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP B PROPERTIES
COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
PERIOD FROM JANUARY 1, 1995
THROUGH SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Gross income:
Rental............................................................ $6,825,589
Other............................................................. 300,734
----------
Total gross income.............................................. 7,126,323
----------
Direct operating expenses:
Utilities and other property operating expenses................... 1,685,757
Real estate taxes................................................. 503,766
Repairs and maintenance........................................... 582,710
Management fees................................................... 283,974
Interest on certain obligations assumed........................... 652,500
Advertising....................................................... 157,178
Insurance......................................................... 84,802
----------
Total direct operating expenses................................. 3,950,687
----------
Excess of gross income over direct operating expenses............... $3,175,636
==========
</TABLE>
See accompanying notes.
F-44
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP B PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
PERIOD FROM JANUARY 1, 1995 THROUGH SEPTEMBER 30, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined Historical Summary of Gross Income and Direct Operating
Expenses (the Historical Summary) for the period from January 1, 1995 to
September 30, 1995, relates to the operations of the following Group B
Properties which were acquired from unaffiliated parties by Security Capital
Atlantic Incorporated (the Company) between October 1, 1995 and December 31,
1995:
<TABLE>
<CAPTION>
ACQUISITION DATE PROPERTY NAME LOCATION ACQUISITION COST
----------------- ---------------- ---------------- ----------------
(IN 000S)
<S> <C> <C> <C>
November 9, 1995 Azalea Park Atlanta, Georgia $24,793
December 12, 1995 Cameron Place Atlanta, Georgia 7,496
December 12, 1995 Cameron Forest Atlanta, Georgia 5,892
December 15, 1995 Sheffield Forest Washington,D.C. 15,128
December 19, 1995 Cameron Station Atlanta, Georgia 15,584
</TABLE>
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration Statement on Form S-11
of the Company. The combined Historical Summary is not intended to be a
complete presentation of combined income and expenses of the Group B
Properties for the period from January 1, 1995 through September 30, 1995, as
certain costs such as depreciation, amortization, certain mortgage interest,
professional fees and other costs not directly related to the future
operations of the Group B Properties have been excluded. These costs are not
considered to be direct operating expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rental income from leasing activities consist of lease payments earned from
tenants under lease agreements with terms of one year or less.
Capitalization Policy
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
Advertising Expense
The cost of advertising is expensed as incurred.
Use of Estimates
The preparation of the combined Historical Summary in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined Historical
Summary and accompanying notes. Actual results could differ from those
estimates.
F-45
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP B PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES--(CONTINUED)
3. RELATED PARTY TRANSACTIONS
Management fees of $283,974 were paid to affiliates of the prior owners
under property management contracts.
4. DEBT ASSUMPTION
The Company assumed outstanding debt in connection with the acquisition of
Cameron Station and Azalea Park.
Cameron Station
A 6% fixed rate mortgage note securing a $14,500,000 tax-exempt bond issue
was assumed by the Company in connection with the acquisition of Cameron
Station on December 19, 1995. The mortgage note, which is secured by the
property, provides for monthly interest payments with the amount of the bonds
due at maturity on June 1, 2007.
The Company's assumption of this mortgage note did not provide for any
modification to the original terms, therefore, interest expense incurred prior
to the Company's assumption is representative of future interest expense.
Accordingly, interest expense of $652,500 is recognized in the accompanying
combined Historical Summary.
Azalea Park
A 12.76% mortgage note securing a $15,500,000 tax-exempt bond issue was
assumed by the Company in connection with the acquisition of Azalea Park on
November 9, 1995. The mortgage note, which is secured by the property,
provides for monthly interest payments with the principal amount of the bonds
due at maturity on February 1, 2008.
The Company intends to include this bond issue in its existing credit
enhancement agreement which will result in a reduction to the 12.76% interest
rate. On a continuing basis, the interest expense incurred will differ from
the amounts incurred prior to the Company's assumption of the debt.
Accordingly, no interest expense is recognized in the accompanying combined
Historical Summary.
F-46
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying combined Historical Summary of Gross Income
and Direct Operating Expenses (the Historical Summary) of the Group C
Properties described in Note 1 for the year ended December 31, 1995. This
combined Historical Summary is the responsibility of the Group C Properties'
management. Our responsibility is to express an opinion on this combined
Historical Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined Historical Summary is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined Historical
Summary. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the
overall presentation of the combined Historical Summary. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Security Capital Atlantic Incorporated as described in the accompanying
Note 1 of the combined Group C Properties and is not intended to be a complete
presentation of the income and expenses of the combined Group C Properties.
In our opinion, the combined Historical Summary of Gross Income and Direct
Operating Expenses referred to above presents fairly, in all material
respects, the combined gross income and direct operating expenses as described
in Note 1 of the combined Group C Properties for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
West Palm Beach, Florida
April 26, 1996
F-47
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP C PROPERTIES
COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Gross income:
Rental...................................................... $5,760,923
Other....................................................... 114,949
----------
Total gross income........................................ 5,875,872
----------
Direct operating expenses:
Utilities and other property operating expenses............. 1,279,237
Real estate taxes........................................... 615,907
Repairs and maintenance..................................... 783,851
Management fees............................................. 228,903
Advertising................................................. 88,289
Insurance................................................... 47,163
----------
Total direct operating expenses........................... 3,043,350
----------
Excess of gross income over direct operating expenses......... $2,832,522
==========
</TABLE>
See accompanying notes.
F-48
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP C PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
DECEMBER 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined Historical Summary of Gross Income and Direct Operating
Expenses (the Historical Summary) for the year ended December 31, 1995,
relates to the operations of the following Group C Properties which were
acquired from unaffiliated parties by Security Capital Atlantic Incorporated
(the Company) between January 1, 1996 and April 29, 1996:
<TABLE>
<CAPTION>
ACQUISITION DATE PROPERTY NAME LOCATION ACQUISITION COST
---------------- ------------------------ -------------------------- ----------------
(IN 000S)
<S> <C> <C> <C>
April Charlotte, North Carolina $ 8,000
10, Cameron at Hickory Grove
1996 (formerly Esprit)
April Coral Springs, Florida 14,355
22, Park Place at Turtle Run
1996 (formerly Park Place)
April
22,
1996 Paces Court Greenville, South Carolina 11,007
</TABLE>
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Registration Statement on Form S-11
of the Company. The combined Historical Summary is not intended to be a
complete presentation of combined income and expenses of the Group C
Properties for the year ended December 31, 1995, as certain costs such as
depreciation, amortization, certain mortgage interest, professional fees and
other costs not directly related to the future operations of the Group C
Properties have been excluded. These costs are not considered to be direct
operating expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Rental income from leasing activities consist of lease payments earned from
tenants under lease agreements with terms of one year or less.
Capitalization Policy
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
Advertising Expense
The cost of advertising is expensed as incurred.
Use of Estimates
The preparation of the combined Historical Summary in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined Historical
Summary and accompanying notes. Actual results could differ from those
estimates.
F-49
<PAGE>
SECURITY CAPITAL ATLANTIC INCORPORATED
GROUP C PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES--(CONCLUDED)
3. RELATED PARTY TRANSACTIONS
Management fees of $228,903 were paid to affiliates of the prior owners
under property management contracts.
4. DEBT ASSUMPTION
During 1995, the Cameron at Hickory Grove Apartments secured an 8.75%,
interest-only mortgage note with a balance of $6,660,000. The Company assumed
this mortgage note on April 10, 1996 in connection with the acquisition of the
property. Substantial modifications in the terms of the note were made prior
to the assumption by the Company. Therefore, on a continuing basis, the
interest expense incurred will differ from the amounts incurred prior to the
Company's assumption of the debt. Accordingly, no interest expense is
recognized in the accompanying combined Historical Summary.
F-50
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THE PROSPECTUS (OF WHICH THIS APPENDIX A FORMS A PART) +
+SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY +
+NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH +
+OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR +
+QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
APPENDIX A
SUBJECT TO COMPLETION DATED JULY 17, 1996
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PROSPECTUS
-----------
This Appendix A is a part of the Proxy Statement and Prospectus of Security
Capital Pacific Trust ("PTR") and the Information Statement and Prospectus of
Security Capital Atlantic Incorporated ("ATLANTIC") to which this Appendix A is
attached. This Appendix A also constitutes part of the Prospectus of Homestead
Village Properties Incorporated ("Homestead") in connection with the
distribution (the "Distribution") by PTR and ATLANTIC of all of the shares of
Common Stock, $0.01 par value per share, of Homestead (the "Homestead Common
Stock"), and warrants to purchase shares of Homestead Common Stock (the
"Homestead Warrants" and, together with the Homestead Common Stock, the
"Homestead Securities") owned by them. The Distribution will result in all of
the Homestead Securities issuable to PTR and ATLANTIC in connection with the
Transaction (as hereafter defined) being distributed to holders of PTR common
shares of beneficial interest, $1.00 par value per share (the "PTR Common
Shares"), and holders of shares of ATLANTIC common stock, $0.01 par value per
share (the "ATLANTIC Common Stock"), as of the record date to be established
for the Distribution (the "Distribution Record Date").
There has been no public trading market for the shares of Homestead Common
Stock or the Homestead Warrants. The Homestead Common Stock and the Homestead
Warrants have been approved for quotation on the Nasdaq Stock Market (National
Market) subject to official notice of issuance.
SEE "RISK FACTORS" AT PAGE A-8 OF THIS APPENDIX A FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF HOMESTEAD SECURITIES.
-----------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROSPECTUS (OF WHICH THIS
APPENDIX A FORMS A PART) HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PTR PROXY
STATEMENT AND PROSPECTUS OR THE ATLANTIC INFORMATION STATEMENT AND
PROSPECTUS (OF WHICH THIS APPENDIX A FORMS A PART). ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
-----------
The date of this Appendix A is August , 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... A-2
RISK FACTORS.............................................................. A-8
Significant Influence of Principal Shareholder.......................... A-8
Limited Operating History............................................... A-8
Risks of Borrowing...................................................... A-8
General Real Estate Investment Risks.................................... A-9
Development Risks....................................................... A-9
Risks Associated with Rapid Growth...................................... A-9
Risks Associated with the Lodging Industry.............................. A-9
Competition in the Lodging Industry..................................... A-10
Need for Additional Capital............................................. A-10
Impact of Environmental Regulations..................................... A-10
Government Regulation and Compliance with Americans with Disabilities
Act.................................................................... A-11
Losses in Excess of Insurance Coverage.................................. A-11
Reliance on Key Personnel............................................... A-11
Limitations on Changes in Control....................................... A-12
Absence of Prior Public Market.......................................... A-13
Shares Eligible for Future Sale......................................... A-13
Absence of Dividends.................................................... A-13
DIVIDEND POLICY........................................................... A-13
CAPITALIZATION............................................................ A-14
HOMESTEAD PRO FORMA SELECTED FINANCIAL INFORMATION........................ A-15
PTR-HOMESTEAD VILLAGE GROUP SELECTED FINANCIAL INFORMATION................ A-17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PTR-HOMESTEAD VILLAGE GROUP................................ A-18
Overview................................................................ A-18
Environmental Matters................................................... A-18
Liquidity and Capital Resources......................................... A-18
Results of Operations................................................... A-18
ATLANTIC-HOMESTEAD VILLAGE GROUP SELECTED FINANCIAL INFORMATION........... A-20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ATLANTIC-HOMESTEAD VILLAGE GROUP........................... A-21
Overview................................................................ A-21
Environmental Matters................................................... A-21
Liquidity and Capital Resources......................................... A-21
Results of Operations................................................... A-21
SCG-HOMESTEAD VILLAGE GROUP SELECTED FINANCIAL INFORMATION................ A-22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SCG-HOMESTEAD VILLAGE GROUP................................ A-23
Overview................................................................ A-23
Liquidity and Capital Resources......................................... A-23
Results of Operations................................................... A-23
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BUSINESS................................................................... A-24
Objectives............................................................... A-24
History.................................................................. A-25
The Facilities........................................................... A-26
Growth and Development Strategy.......................................... A-27
Operating Strategy....................................................... A-27
Homestead Village Properties............................................. A-28
Administrative Services Agreement........................................ A-28
Industry Overview........................................................ A-29
Competition.............................................................. A-30
Environmental Matters.................................................... A-31
Governmental Regulation.................................................. A-31
Trademarks............................................................... A-32
Insurance................................................................ A-32
Employees................................................................ A-32
Legal Proceedings........................................................ A-32
MANAGEMENT................................................................. A-32
Directors and Executive Officers......................................... A-32
Other Officers of Homestead.............................................. A-33
Management Philosophy.................................................... A-35
Committee of the Board................................................... A-36
Management Compensation.................................................. A-36
Stock Option Plan........................................................ A-36
RELATIONSHIP WITH SECURITY CAPITAL GROUP INCORPORATED...................... A-37
CERTAIN RELATIONSHIPS AND TRANSACTIONS..................................... A-38
Protection of Business Agreement......................................... A-38
SCG Investor Agreement................................................... A-38
Funding Commitment Agreements............................................ A-39
ATLANTIC and PTR Investor Agreements..................................... A-40
Escrow Agreement......................................................... A-40
Finder's Agreements...................................................... A-41
PRINCIPAL SHAREHOLDERS..................................................... A-42
DESCRIPTION OF HOMESTEAD SECURITIES........................................ A-43
General.................................................................. A-43
Homestead Common Stock................................................... A-43
Preferred Stock.......................................................... A-44
Purchase Rights.......................................................... A-44
Homestead Warrants....................................................... A-46
Convertible Mortgage Notes............................................... A-48
CERTAIN PROVISIONS OF MARYLAND LAW AND OF HOMESTEAD'S CHARTER AND BYLAWS... A-48
Classification of the Homestead Board.................................... A-48
Business Combinations.................................................... A-49
Control Share Acquisitions............................................... A-49
Advance Notice Provisions................................................ A-50
SHARES AVAILABLE FOR FUTURE SALE........................................... A-50
INDEPENDENT PUBLIC ACCOUNTANTS AND EXPERTS................................. A-51
ADDITIONAL INFORMATION..................................................... A-51
LEGAL MATTERS.............................................................. A-52
INDEX TO HOMESTEAD FINANCIAL STATEMENTS.................................... F-1
</TABLE>
A-ii
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in either the PTR Proxy Statement and
Prospectus (or incorporated therein by reference), including this Appendix A or
the ATLANTIC Information Statement and Prospectus, including this Appendix A.
Shareholders are urged to review the entire PTR Proxy Statement and Prospectus
or the ATLANTIC Information Statement and Prospectus, as applicable, this
Appendix and the Annexes thereto, and the documents, if any, incorporated
therein by reference. All references to Homestead Village Properties
Incorporated's operations include PTR, ATLANTIC and Security Capital Group
Incorporated ("SCG") operations with respect to Homestead Village(R)
properties. Homestead Village(R) is a registered trademark of SCG, which will
be assigned to Homestead as a part of the Transaction. The term "Homestead
Village" as used herein shall include a reference to such registered trademark.
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
The first Homestead Village property was opened in 1992 by PTR. Since then
PTR has developed and placed into operation 27 additional Homestead Village
properties and ATLANTIC has developed and placed into operation one Homestead
Village property. Homestead was organized in January 1996 to continue the
operations of PTR, ATLANTIC and SCG with respect to their respective moderate
priced, extended-stay lodging facilities. Homestead will develop, own and
manage moderate priced, extended-stay lodging facilities designed to appeal to
value-conscious customers on temporary assignment, undergoing relocation or in
training. PTR's stabilized Homestead Village facilities have produced annual
returns (based on funds from operations over actual investment cost) in excess
of 14% for 1994 and 1995. No assurance can be given that Homestead will be able
to achieve or sustain such returns in the future.
The objective of Homestead is to be the preeminent developer, owner and
national operator focused on the moderate priced, extended-stay lodging
business. Homestead expects to achieve this objective by:
. participating in high growth markets;
. exercising investment discipline based on research; and
. employing a consistent high quality service standard to property
operations.
Homestead currently operates 29 facilities, has begun construction of 12
additional facilities and has an additional 39 properties in pre-development
planning. The term "in pre-development planning" means developments owned or
under control (land which is under control through contingent contract) with
construction anticipated to commence within 12 months. Homestead's facilities
are designed and built to uniform plans developed by Homestead. Homestead
expects to have a total of 31 facilities operational and 41 facilities under
construction by the end of 1996 and plans to continue an active development
program thereafter. Homestead's plans call for the average facility to have
approximately 136 extended-stay rooms and take approximately eight to ten
months to construct.
The average length of stay for a customer is in excess of four weeks. For the
quarter ended March 31, 1996, average physical occupancy and average weekly
rate for 17 stabilized properties was 87% and $217 per week, respectively, and,
for the same quarter, average physical occupancy and average weekly rate for
seven pre-stabilized properties was 59% and $217 per week, respectively.
Homestead categorizes its operating properties (which include all properties
not under construction or in pre-development planning) as either "stabilized"
or "pre-stabilized." The term "stabilized" means that construction has been
completed and management and marketing programs have been in place for a
sufficient period of time (but in no event longer than 12 months) to achieve an
80% occupancy level for five consecutive weeks at market rates. Prior to being
"stabilized," an operating property is considered to be "pre-stabilized." All
operating properties have been newly developed by Homestead.
A-2
<PAGE>
Homestead believes that it is distinguished from its competitors in the
moderate priced, extended-stay lodging business in several respects.
. Homestead has been developing and operating moderate priced, extended-
stay facilities since 1992. It has in place a staff of 66 professionals
who have substantial experience in the real estate and lodging industries
and has 318 site-level employees. Most of these individuals were
previously employed by affiliates of SCG which operated and managed the
Homestead Village properties on behalf of PTR and ATLANTIC in similar
capacities to those they will have with Homestead.
. Homestead currently operates 29 facilities in eight cities and will
operate nationally. It expects to have 31 facilities in eight cities
operating by the end of 1996.
. Homestead has access to substantial financing through (i) the Funding
Commitment Agreements with PTR and ATLANTIC (described herein), under
which PTR and ATLANTIC have agreed to provide funding of $133 million and
$111 million, respectively, and to receive convertible mortgage notes of
$144 million and $98 million, respectively, in respect thereof and (ii)
the Investor Agreement with SCG (described herein) under which SCG has
agreed to exercise upon notice from Homestead all of the Homestead
Warrants it will receive directly and indirectly as part of the
Transaction with an aggregate exercise price of approximately $51
million. This access to capital should provide Homestead with sufficient
capital to fund its national development program through mid-1997 without
having to seek additional external financing.
. Homestead is affiliated with SCG, which will be the principal shareholder
of Homestead and will be entitled to representation on the board of
directors of Homestead (the "Homestead Board"). Homestead will be self-
managed but will have access to various services which SCG offers to its
real estate affiliates. These and other services will be available to
Homestead under an Administrative Services Agreement (described herein).
See "Business--Administrative Services Agreement." Homestead believes
that it can purchase these services from SCG at a price which would be
less expensive than hiring the necessary personnel to perform these
services, and that the level of services SCG can provide would be higher
than Homestead could provide internally due to SCG's large, experienced
staff and economies of scale.
Homestead was formed in 1996 as a Maryland corporation and will operate as a
Subchapter C corporation. Its executive offices are located at 125 Lincoln
Avenue, Santa Fe, New Mexico 87501 and its telephone number is (505) 982-9292.
THE TRANSACTION
Assuming that the requisite PTR and ATLANTIC shareholder vote is received and
that all other conditions to the Merger and Distribution Agreement, dated as of
May 21, 1996 (the "Merger Agreement" and, collectively with all of the
transactions contemplated thereby and the Distribution, the "Transaction"),
among PTR, ATLANTIC, SCG and Homestead, have been satisfied or waived, each of
PTR, ATLANTIC and SCG will contribute, through a series of merger transactions
(the "Mergers"), all of their respective assets related to Homestead Village
properties in return for shares of Homestead Common Stock as follows:
. PTR will contribute 54 properties (or the rights to acquire such
properties) to Homestead in exchange for 9,485,727 shares of Homestead
Common Stock.
. ATLANTIC will contribute 26 properties (or the rights to acquire such
properties) to Homestead in exchange for 4,201,220 shares of Homestead
Common Stock. Pursuant to the Merger Agreement, ATLANTIC will provide an
estimated cash payment of $18.6 million to Homestead at the date of the
closing of the Mergers (the "Closing Date"). This payment is required
because ATLANTIC's Homestead Village properties are in earlier stages of
development than PTR's Homestead Village
A-3
<PAGE>
properties, therefore ATLANTIC has not funded the same percentage of total
costs as PTR. This payment also assures that ATLANTIC receives all of its
shares of Homestead Common Stock at the Closing Date rather than being
received in smaller increments over time as funds are expended for
Homestead Village properties contributed by ATLANTIC.
. SCG will contribute to Homestead its anticipated future cash flows from
the PTR and ATLANTIC real estate investment trust ("REIT") management
agreements and property management agreements relating to the Homestead
Village properties in exchange for 4,062,788 shares of Homestead Common
Stock of which 2,243,038 shares which will be placed in escrow and
released as funds are advanced under the Funding Commitment Agreements.
In addition, SCG will contribute the Homestead Village trademark and the
operating system. No separate consideration was attributed to the
Homestead Village trademark or the operating system, as the trademark and
the operating system would be necessary to achieve the anticipated fees.
There are additional Homestead Village facilities which are in early
stages of planning, but which are not owned or under control and are not
included in the 80 facilities which will be contributed in the
Transaction, and are being planned and developed outside the target
markets of PTR or ATLANTIC by SCG with its own funds. SCG will contribute
the rights to certain properties to Homestead for no additional
consideration.
. Simultaneous with the transactions described above, PTR and ATLANTIC will
receive 6,363,789 and 2,818,517 Homestead Warrants, respectively, in
exchange for their entering into the Funding Commitment Agreements. Each
Homestead Warrant is exercisable at $10.00 per share and expires one year
after the Closing Date.
. Pursuant to the applicable Funding Commitment Agreement, PTR and ATLANTIC
have agreed to provide funding of $133 million and $111 million,
respectively, and to receive convertible mortgage notes in respect
thereof. These notes will have a term of approximately ten years, bear
interest at 9% per year, will not be callable for five years and will be
convertible into shares of Homestead Common Stock after March 31, 1997 on
the basis of one share of Homestead Common Stock for every $11.50 of
principal amount outstanding, subject to adjustment. The PTR mortgage
loans and ATLANTIC mortgage loans will be used to finance the acquisition
and development properties contributed by PTR and ATLANTIC, respectively.
In addition, PTR subsidiaries currently have $77,289,000 in convertible
mortgage loans with PTR which will be assumed by Homestead at the Closing
Date. These loans have substantially the same terms as the mortgage loans
described above. If all such mortgage loans were made and converted, an
additional 19,246,402 and 8,524,215 shares of Homestead Common Stock
would be issued to PTR and ATLANTIC, respectively.
. SCG will receive 817,694 Homestead Warrants in exchange for providing
funding to Homestead during the time between the execution of the Merger
Agreement and the Closing Date and the use of office facilities for one
year.
. The relative percentage ownership interests of PTR, ATLANTIC and SCG in
Homestead, giving effect to the issuance of the Homestead Common Stock at
the Closing Date, the exercise of all Homestead Warrants and the
conversion of all mortgage loans outstanding and which could be made
under the Funding Commitment Agreements, would be 63.21%, 28.00% and
8.79%, respectively. These percentages are different than the relative
percentage ownership interests described elsewhere because the
convertible mortgage loans issuable to PTR and ATLANTIC have a conversion
price of $11.50 per share rather than the $10.00 per share used in
calculating the original issuance of the Homestead Common Stock.
. After giving effect to the distribution of the Homestead Securities by
PTR and ATLANTIC, the exercise of all Homestead Warrants, the release of
all shares of Homestead Common Stock to SCG from escrow and the
conversion of all mortgage loans and the subsequent distribution of the
Homestead Common Stock issuable upon such conversion to the shareholders
of PTR and ATLANTIC, SCG would own approximately 50.6% of the outstanding
Homestead Common Stock.
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<PAGE>
THE DISTRIBUTION
The shares of Homestead Common Stock and Homestead Warrants being distributed
hereby are being issued in connection with the Distribution by PTR and ATLANTIC
of all of the Homestead Securities owned by them to their respective
shareholders. Set forth below is a summary of the number of shares of Homestead
Common Stock and Homestead Warrants being issued in connection with the
Transaction.
<TABLE>
<S> <C>
Homestead Common Stock..................................... 17,749,735 shares(1)
Homestead Warrants......................................... 10,000,000 warrants
Fully Exercised and Converted(2)........................... 55,520,352 shares
</TABLE>
- --------
(1) Including the 2,243,038 shares held in escrow.
(2) Assumes the exercise of all 10,000,000 Homestead Warrants and conversion of
the outstanding $77,289,000 principal amount of convertible mortgage loans
and $242,073,091 principal amount of convertible mortgage loans issuable
pursuant to the Funding Commitment Agreements.
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<PAGE>
HOMESTEAD PRO FORMA SUMMARY FINANCIAL INFORMATION
The following table sets forth certain unaudited selected pro forma condensed
consolidated financial information for Homestead after giving effect to the
Transaction, as if it had been consummated, with respect to statements of
operations data, as of January 1, 1995, or, with respect to balance sheet data,
as of the date presented. The information presented is derived from, should be
read in conjunction with, and is qualified in its entirety by reference to, the
historical balance sheet and the notes thereto and unaudited pro forma
condensed consolidated financial data and the notes thereto appearing elsewhere
in this Appendix A. The unaudited selected pro forma condensed consolidated
financial data have been included for comparative purposes only and do not
purport to be indicative of the results of operations or financial position
which actually would have been obtained if the Transaction had been effected at
the dates indicated or of the financial position or results of operations which
may be obtained in the future. See "Homestead Pro Forma Selected Financial
Information" and "Homestead Pro Forma Financial Statements."
<TABLE>
<CAPTION>
PRO FORMA
--------------------------
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATIONS SUMMARY:
Room Revenue....................................... $ 6,753 $ 18,337
Total Revenue...................................... 6,874 18,721
Property Operating Expenses(1)..................... 2,946 7,600
Corporate Operating Expenses....................... 2,000 6,188
Depreciation....................................... 859 3,352
Net Income (Loss).................................. 48 (937)
<CAPTION>
PRO FORMA
MARCH 31,
1996
------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
FINANCIAL POSITION:
Property and Equipment, net........................ $ 156,988
Total Assets....................................... 211,538
Convertible Mortgage Notes Payable................. 51,563
Total Liabilities.................................. 59,766
Shareholders' Equity............................... 151,772
Common Stock Outstanding(2)........................ 15,327,733
<CAPTION>
PRO FORMA
--------------------------
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
PER SHARE DATA:
Net Income (Loss).................................. $ .003 $ (.061)
Net Book Value..................................... 9.90 N/A
Weighted Average Number of Shares of Homestead
Common Stock Outstanding(2)....................... 15,327,733 15,327,733
OTHER DATA:
EBITDA(3).......................................... $ 1,928 $ 4,933
Cash Provided by (used in):
Operating Activities............................. (415) 904
Investing Activities............................. (23,791) (52,468)
Financing Activities............................. 25,302 53,001
</TABLE>
A-6
<PAGE>
- --------
(1) Property operating expenses consist of all expenses directly related to the
operation of the properties and do not include an allocation of corporate
operating expenses. Property operating expenses include primarily salaries
and wages, telephone, utilities, property taxes, insurance, maintenance and
supply costs.
(2) On a pro forma basis, this excludes 2,422,002 shares held in escrow pending
the resolution of the funding contingency:
<TABLE>
<S> <C>
Total shares to be issued to SCG................................ 4,062,788
Pro forma shares to be issued at the Closing Date (see Note (h)
to the Homestead pro forma financial statements)............... (1,640,786)
----------
Pro forma shares to be held in escrow......................... 2,422,002
==========
</TABLE>
(3) EBITDA means operating income before mortgage and other interest, income
taxes, depreciation and amortization. EBITDA does not represent cash
generated from operating activities in accordance with GAAP, is not to be
considered as an alternative to net income or any other GAAP measurement as
a measure of operating performance and is not necessarily indicative of
cash available to fund cash needs. Homestead has included EBITDA herein
because Homestead believes that it is one measure used by certain investors
to determine operating cash flow. EBITDA, as calculated above, may not be
comparable to other similarly titled measures of other companies.
A-7
<PAGE>
RISK FACTORS
Holders of Homestead Securities should consider carefully the specific
factors set forth below as well as the other information contained in either
the PTR Proxy Statement and Prospectus or the ATLANTIC Information Statement
and Prospectus, as appropriate, including this Appendix A.
SIGNIFICANT INFLUENCE OF PRINCIPAL SHAREHOLDER
As of July 12, 1996, SCG beneficially owned approximately 37.8% of the
issued and outstanding PTR Common Shares and 64.1% of the issued and
outstanding shares of ATLANTIC Common Stock. Immediately after completion of
the Mergers, SCG is expected to beneficially own 1,819,750 shares of Homestead
Common Stock, not including 2,243,038 shares of Homestead Common Stock which
will be held in escrow and released to SCG as funding is made by ATLANTIC and
PTR under their Funding Commitment Agreements. See "Certain Relationships and
Transactions--Escrow Agreement." As a result of the distribution by PTR and
ATLANTIC to their respective shareholders, SCG expects to beneficially own an
additional 3,588,965 and 2,693,842 shares of Homestead Common Stock,
respectively, for a total of 8,102,557 shares of Homestead Common Stock or
approximately 45.6% of the outstanding shares of Homestead Common Stock.
Through its beneficial ownership of Homestead Common Stock, it is expected
that SCG will control 45.6% of the vote on all matters submitted for Homestead
shareholder action. The foregoing share ownership information does not give
effect to the issuance of shares upon exercise of options or other awards
granted under Homestead's Long-Term Incentive Plan. See "Management--Stock
Option Plan." SCG will also own Homestead Warrants to acquire an additional
5,032,707 shares of Homestead Common Stock, which, if fully exercised, would
increase SCG's beneficial ownership of Homestead Common Stock to 57.7%. SCG
may, over time, dispose of some of the shares of Homestead Common Stock it
acquires in the Transaction to reduce its beneficial ownership in Homestead to
below 50%. In addition, pursuant to an Investor Agreement between SCG and
Homestead, SCG will agree to exercise at the request of Homestead all
Homestead Warrants it receives in the Transaction. In exchange for its
agreement to exercise Homestead Warrants, Homestead will grant SCG the right,
among other things, to nominate up to two directors to the Homestead Board,
depending upon SCG's level of ownership of shares of Homestead Common Stock,
and to be consulted on certain business decisions made by Homestead. In
addition, pursuant to Investor Agreements with PTR and ATLANTIC, each of PTR
and ATLANTIC will have the right to nominate one director to the Homestead
Board. See "Certain Relationships and Transactions--PTR and ATLANTIC Investor
Agreements" and "--SCG Investor Agreement."
LIMITED OPERATING HISTORY
Although the first Homestead Village property was opened in 1992, Homestead
has a limited operating history as a separate entity upon which investors may
evaluate Homestead's performance. In addition, Homestead has no operating
history except during the recent economic expansion. There can be no assurance
that Homestead will be profitable in the future.
RISKS OF BORROWING
As of the Closing Date, Homestead will assume approximately $77 million of
indebtedness secured by convertible mortgages on Homestead's properties and
various accounts and other assets. Homestead will incur additional debt
(including up to approximately $242 million of additional convertible
mortgages from PTR and ATLANTIC) from time to time, including construction
loans to finance the construction of extended-stay lodging facilities and
future acquisitions of land for development. The obligations under the
mortgage loans with PTR and ATLANTIC and the terms thereof, including the
maturity date and interest rate, have been fixed as of the date of the Merger
Agreement. There can be no assurance that Homestead could not obtain better
terms for such mortgage loans, if the terms were to be determined on the date
a mortgage loan is made to Homestead. In addition, leverage increases the
risks to Homestead of any variations in its results of operations,
construction cost overruns, or any other factors affecting its cash flow or
liquidity. In addition, Homestead's interest costs could increase as the
result of general market increases in interest rates because Homestead expects
to enter into a revolving credit facility which will bear interest at floating
rates. See "Description of Other Indebtedness."
A-8
<PAGE>
GENERAL REAL ESTATE INVESTMENT RISKS
Real property investments are subject to varying degrees of risk. Real
estate cash flows and values are affected by a number of factors, including
changes in the general economic climate, local conditions (such as an
oversupply of extended-stay properties or a reduction in rental demand in an
area), the quality and philosophy of management, competition from other
available extended-stay properties, the ability of the owner to provide
adequate maintenance and insurance and to control operating costs. Although
Homestead seeks to minimize these risks through its market research and asset
management capabilities, these risks cannot be eliminated entirely. Real
estate cash flows and values are also affected by such factors as government
regulations, including zoning and tax laws, interest rate levels, the
availability of financing and potential liability under, and changes in,
environmental and other laws.
Equity real estate investments are relatively illiquid and therefore may
tend to limit the ability of Homestead to react promptly to changes in
economic or other conditions. In addition, certain significant expenditures
associated with equity investments (such as mortgage payments, real estate
taxes and maintenance costs) are generally not reduced when circumstances
cause a reduction in income from the investments. There can be no assurance
that Homestead will be able to dispose of an investment when it finds
disposition advantageous or necessary or that the sale price of any
disposition will recoup or exceed the amount of Homestead's investment.
DEVELOPMENT RISKS
Homestead intends to grow by developing additional company-owned moderate
priced, extended-stay lodging facilities. Development involves substantial
risks, including the risk that development costs will exceed budgeted or
contracted amounts, the risk of delays in completion of construction, the risk
of failing to obtain all necessary zoning and construction permits, the risk
that financing might not be available on favorable terms, the risk that
developed properties will not achieve desired revenue or profitability levels
once opened, the risk of competition for suitable development sites from
competitors which have greater financial resources than Homestead, the risks
of incurring substantial costs in the event a development project must be
abandoned prior to completion, changes in governmental rules, regulations, and
interpretations (including interpretations of the requirements of the
Americans with Disabilities Act of 1990 (the "ADA")), and general economic and
business conditions. Although Homestead intends to manage development to
reduce such risks, there can be no assurance that present or future
developments will perform in accordance with Homestead's expectations. At July
12, 1996, Homestead had twelve facilities under construction, expects to have
41 facilities under construction at the end of 1996 and plans to continue an
active development program thereafter. All construction will be performed by
third party general contractors overseen by Homestead's development group.
Under the Funding Commitment Agreements with PTR and ATLANTIC, if there are
cost overruns Homestead must complete the development of each property funded
by PTR or ATLANTIC consistent with the development plans for such project with
its own funds. There can be no assurance, however, that Homestead will
complete the development and construction of the facilities, or that any such
developments will be completed in a timely manner or within budget.
RISKS ASSOCIATED WITH RAPID GROWTH
Homestead's rapid development plans will require the implementation of
enhanced operational and financial systems and will require additional
management, operational, and financial resources. For example, Homestead will
be required to recruit and train property managers and other personnel for
each new lodging facility as well as additional accounting personnel. There
can be no assurance that Homestead will be able to manage its expanding
operations effectively. The failure to implement such systems and add such
resources on a cost-effective basis could have a material adverse effect on
Homestead's results of operations and financial condition.
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
The moderate priced, extended-stay segment of the lodging industry, in which
Homestead operates, may be adversely affected by changes in national or local
economic conditions and other local market conditions, such
A-9
<PAGE>
as an oversupply of hotel space or a reduction in demand for hotel space in a
geographic area, changes in travel patterns, extreme weather conditions,
changes in governmental regulations which influence or determine wages,
prices, or construction costs, changes in interest rates, the availability of
financing for operating or capital needs, and changes in real estate tax rates
and other operating expenses. Homestead's principal assets will consist of
real property, and real estate values are sensitive to changes in local market
and economic conditions and to fluctuations in the economy as a whole. In
addition, due in part to the strong correlation between the lodging industry's
performance and economic conditions, the lodging industry is subject to
cyclical changes in revenue and profits. These risks may be exacerbated by the
relatively illiquid nature of real estate holdings. In addition, Homestead has
no operating history except during the recent economic expansion. The ability
of Homestead to vary its portfolio in response to changes in economic and
other conditions will be limited. There can be no assurance that downturns or
prolonged adverse conditions in real estate or capital markets or in national
or local economies, and the inability of Homestead to dispose of an investment
when it finds disposition to be advantageous or necessary, will not have a
material adverse impact on Homestead.
COMPETITION IN THE LODGING INDUSTRY
There is no single competitor or small number of competitors of Homestead
that is or are dominant in the moderate priced, extended-stay lodging market.
Competition in the U.S. lodging industry is based generally on convenience of
location, price, range of services and guest amenities offered, and quality of
customer service. Homestead considers the reasonableness of its room rates,
the location of its lodging facilities, and the services and the guest
amenities provided by it to be among the most important factors in its
business. Demographic or other changes in one or more of Homestead's markets
could impact the convenience or desirability of the sites of certain lodging
facilities, which would adversely affect their operations. Further, there can
be no assurance that new or existing competitors will not significantly lower
rates or offer greater convenience, services, or amenities or significantly
expand or improve facilities in a market in which Homestead's facilities
compete, thereby adversely affecting Homestead's operations. There have been a
number of recent announcements indicating that a substantial number of
competitors intend to enter the moderate priced or economy extended-stay
lodging market, which could adversely affect Homestead's business. See
"Business--Competition."
NEED FOR ADDITIONAL CAPITAL
PTR and ATLANTIC have agreed to make convertible mortgage loans to Homestead
to develop the properties being contributed by them (see "Certain
Relationships and Transactions--Funding Commitment Agreements") and SCG has
agreed to exercise at the request of Homestead all of its Homestead Warrants
which it will receive in the Transaction. Homestead anticipates that the
proceeds from the loans and exercise of warrants will provide sufficient
capital for its operations through mid-1997. Thereafter, Homestead may need to
procure additional financing over time, the amount of which will depend on a
number of factors including the number of properties Homestead constructs and
the cash flow generated by its properties. If additional financing is needed,
there can be no assurance regarding the availability or terms of such
financing Homestead may be able to procure over time. Any future debt
financings or issuances of preferred stock by Homestead will be senior to the
rights of the holders of Homestead Common Stock, and any future issuances of
Homestead Common Stock will result in the dilution of the then existing
shareholders' proportionate equity interests in Homestead. Although Homestead
is unable to quantify its needs for additional financing, such needs will
depend upon a number of factors, including the pace of Homestead's development
activities and its ability to generate cash from operations.
IMPACT OF ENVIRONMENTAL REGULATIONS
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner, developer or operator of real estate may be liable
for the costs of removal or remediation of certain hazardous or toxic
substances at, on, under or in its property. The costs of such removal or
remediation of such substances could be substantial. Such laws often impose
such liability without regard to whether the owner or operator knew
A-10
<PAGE>
of, or was responsible for, the release or presence of such hazardous or toxic
substances. The presence of such substances may adversely affect the owner's
ability to sell or rent such real estate or to borrow using such real estate
as collateral. Persons who arrange for the disposal or treatment of hazardous
or toxic substances also may be liable for the costs of removal or remediation
of such substances at the disposal or treatment facility, whether or not such
facility is owned or operated by such person. Certain environmental laws
impose liability for the release of asbestos containing materials into the
air, pursuant to which third parties may seek recovery from owners or
operators of real properties for personal injuries associated with such
materials, and prescribe specific methods for the removal and disposal of such
materials. Homestead has not been notified by any governmental authority of
any non-compliance, liability, or other claim in connection with any of the
properties currently owned or being acquired, and Homestead is not aware of
any environmental condition with respect to any of the properties, which is
likely to be material. Homestead has subjected each of its properties to a
Phase I environmental site assessment ("Phase I Survey") (which does not
involve invasive procedures such as soil sampling or ground water analysis) by
independent consultants. While some of these assessments have led to further
investigation and sampling, none of the environmental assessments has
revealed, nor is Homestead aware of, any environmental liability (including
asbestos related liability) that management believes would have a material
adverse effect on Homestead's business, financial condition or results of
operations. No assurance can be given, however, that these assessments and
investigations reveal all potential environmental liabilities, that no prior
owner or operator created any material environmental condition not known to
Homestead or the independent consultants or that future uses and conditions
(including, without limitation, resident actions or changes in applicable
environmental laws and regulations) will not result in the imposition of
environmental liabilities.
GOVERNMENT REGULATION AND COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
The lodging industry is subject to numerous federal, state and local
government regulations including those relating to building and zoning
requirements. Also, Homestead is subject to laws governing its relationships
with employees, including minimum wage requirements, overtime, working
conditions and work permit requirements. An increase in the minimum wage rate,
employee benefit costs or other costs associated with employees could
adversely impact Homestead's results of operations or financial condition. In
addition, in accordance with the provisions of the ADA, all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While Homestead believes that its
facilities are in compliance with these requirements, a determination that
Homestead is not in compliance with the ADA could result in the imposition of
fines or an award of damages to private litigants. In addition, changes in
governmental rules and regulations or enforcement policies affecting the use
and operation of the facilities, including changes to building codes and fire
and life-safety codes, may occur. If Homestead were required to make
substantial modifications at its facilities to comply with interpretations of
the ADA or other changes in governmental rules and regulations, Homestead's
financial condition and ability to develop new facilities could be materially
adversely affected.
LOSSES IN EXCESS OF INSURANCE COVERAGE
Homestead intends to maintain comprehensive insurance on each of its
properties, including liability, fire, and extended coverage, in the types and
amounts customarily obtained by an owner and operator in Homestead's industry.
Nevertheless, there are certain types of losses, generally of a catastrophic
nature, such as hurricanes, earthquakes, and floods, that may be uninsurable
or not economically insurable. Homestead uses its discretion in determining
amounts, coverage limits, and deductibility provisions of insurance, with a
view to obtaining appropriate insurance on Homestead's properties at a
reasonable cost and on suitable terms. This may result in insurance coverage
that in the event of a loss would not be sufficient to pay the full current
market value or current replacement value of Homestead's lost investment and
the insurance proceeds received by Homestead might not be adequate to restore
its economic position with respect to such property.
RELIANCE ON KEY PERSONNEL
Homestead's success will depend to a significant extent upon the efforts and
abilities of its senior management and key employees, particularly David C.
Dressler, Jr., Chairman and President, John Patterson and Donald Schultz, each
a Senior Vice President, and, Gary DeLapp, a Vice President. The loss of the
services of
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<PAGE>
any of these individuals could have a material adverse effect upon Homestead.
See "Management--Directors and Officers." Homestead does not have employment
or consulting agreements with any of its officers nor does it carry key man
life insurance on any of its officers.
LIMITATIONS ON CHANGES IN CONTROL
Shareholder Purchase Rights. On May 16, 1996, the Homestead Board authorized
a dividend of one preferred share purchase right (a "Purchase Right") for each
share of Homestead Common Stock outstanding. Each Purchase Right entitles the
holder under certain circumstances to purchase from Homestead one one-
hundredth of a share of Series A Junior Participating Preferred Stock, par
value $0.01 per share (the "Participating Preferred Shares"), at a price of
$50.00 per one one-hundredth of a Participating Preferred Share, subject to
adjustment. Purchase Rights are exercisable when a person or group of persons
(other than SCG, PTR or ATLANTIC) acquires beneficial ownership of 20% or more
of the outstanding shares of Homestead Common Stock or announces a tender
offer for beneficial ownership of 25% or more of the outstanding shares of
Homestead Common Stock. Under certain circumstances, each Purchase Right
entitles the holder to purchase, at the Purchase Right's then current exercise
price, a number of shares of Homestead Common Stock having a market value of
twice the Purchase Right's exercise price. The acquisition of Homestead
pursuant to certain mergers or other business transactions would entitle each
holder to purchase, at the Purchase Right's then current exercise price, a
number of the acquiring company's common shares having a market value at that
time equal to twice the Purchase Right's exercise price. The Purchase Rights
held by certain 20% shareholders (other than SCG, PTR or ATLANTIC) would not
be exercisable. The Purchase Rights will expire in May 2006 and are subject to
redemption in whole, but not in part, at a price of $0.01 per Purchase Right
payable in cash, shares of Homestead Common Stock or any other form of
consideration determined by the Homestead Board.
The Purchase Rights may have certain anti-takeover effects, may have the
effect of delaying, deferring or preventing a change in control of Homestead
and may adversely affect the voting and other rights of shareholders. See
"Description of Homestead Securities--Purchase Rights."
Preferred Shares. The Homestead charter (the "Homestead Charter") authorizes
the Homestead Board to issue shares of preferred stock and to establish the
preferences and rights of any shares of preferred stock so issued. See
"Description of Homestead Securities--Preferred Stock." The issuance of
preferred stock could have the effect of delaying, deferring or preventing a
change in control of Homestead even if a change in control were in the
shareholders' interests.
Advance Notice Provisions. For nominations or other business to be properly
brought before an annual meeting of shareholders by a shareholder, the
Homestead Bylaws require such shareholder to deliver a notice to the
Secretary, absent specified circumstances, not less than 60 days nor more than
90 days prior to the first anniversary of the preceding year's annual meeting
setting forth: (i) as to each person whom the shareholder proposes to nominate
for election or reelection as a director all information relating to such
person that is required to be disclosed in solicitations of proxies for the
election of directors pursuant to Regulation 14A of the Securities Exchange
Act of 1934 (the "Exchange Act"); (ii) as to any other business that the
shareholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of
such shareholder and of the beneficial owner, if any, on whose behalf the
proposal is made; and (iii) as to the shareholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made,
(x) the name and address of such shareholder as it appears on Homestead's
books and of such beneficial owner and (y) the number of shares of each class
of Homestead Common Stock which are owned beneficially and of record by such
shareholder and such beneficial owner, if any.
Classified Board. The Homestead Board has been divided into three classes.
At the 1997 annual meeting of shareholders, one class will be elected to hold
office for a term expiring at the annual meeting of shareholders to be held in
1998, another class will be elected to hold office initially for a term
expiring at the annual meeting of shareholders to be held in 1999 and another
class will hold office initially for a term expiring at the annual meeting of
shareholders to be held in 2000. As the term of each class expires, directors
in that class will be
A-12
<PAGE>
elected for a term of three years and until their successors are duly elected
and qualified. Since at least two annual meetings will generally be required
to effect a change in a majority of the Homestead Board, this provision could
have the effect of delaying, deferring or preventing a change in control of
Homestead even if a change in control were in the shareholders' interests.
Certain Statutory Provisions. Homestead is subject to the Maryland General
Corporation Law (the "MGCL"), which imposes certain restrictions and requires
certain procedures with respect to the acquisition of certain levels of share
ownership and business combinations, including combinations with interested
shareholders. These provisions of the MGCL could have the effect of delaying,
deferring or preventing a change in control of Homestead even if a change in
control were in the shareholders' interest. Additionally, the Homestead
Charter exempts SCG, its affiliates and successors from these provisions,
allowing SCG, its affiliates and successors to take actions that other persons
are prohibited from taking, which actions may not be in the best interests of
the shareholders other than SCG. See "Certain Provisions of Maryland Law and
of Homestead's Charter and Bylaws."
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the consummation of the Transaction, there will be no public market
for the Homestead Securities. The Homestead Common Stock and the Homestead
Warrants have been approved for quotation on the Nasdaq Stock Market (National
Market) subject to official notice of issuance. There can be no assurance that
an active trading market will develop. In addition, there can be no assurance
of the price at which holders of the Homestead Common Stock or Homestead
Warrants will be able to sell such Homestead Securities. From time to time,
the stock market experiences significant price and volume volatility, which
may affect the market price of the Homestead Common Stock or Homestead
Warrants for reasons unrelated to Homestead's performance.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Homestead Common Stock, or the
perception that such sales could occur, could adversely affect the prevailing
market price for Homestead Common Stock. Upon completion of the Distribution,
Homestead will have 17,749,735 shares of Homestead Common Stock outstanding.
Except for shares issued to SCG, all such shares, as well as 10,000,000 shares
issuable upon exercise of Homestead Warrants (other than those issued to SCG),
may be sold in the public markets without limitation. Additionally, up to
6,720,783 shares of Homestead Common Stock may be issuable upon exercise of
outstanding convertible mortgage notes and up to 21,049,834 shares of
Homestead Common Stock may be issuable upon exercise of convertible mortgage
notes to be issued pursuant to the Funding Commitment Agreements (described
herein). All such shares of Homestead Common Stock may be sold in the public
markets pursuant to registration rights or available exemptions from
registration. See "Shares Available for Future Sale." No prediction can be
made regarding the effect of future sales of Homestead Common Stock on the
market price thereof.
ABSENCE OF DIVIDENDS
Homestead intends to retain its earnings to finance its growth and for
general corporate purposes and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. See "Dividend Policy."
DIVIDEND POLICY
Homestead is a newly organized company. For Federal income tax purposes,
Homestead is organized as a Subchapter C corporation rather than a real estate
investment trust. As a result, it is under no obligation to distribute
substantially all or any of its earnings to shareholders. The declaration and
payment of dividends by Homestead are subject to the discretion of the
Homestead Board. Any determination as to the payment of dividends will depend
upon the results of operations, capital requirements and financial condition
of Homestead and such other factors as the Homestead Board deems relevant. The
Homestead Board intends to follow a policy of retaining earnings to finance
Homestead's growth and for general corporate purposes and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
A-13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Homestead as of March
31, 1996 and as adjusted to give effect to the Transaction. This table should
be read in conjunction with the pro forma selected financial information, the
historical Balance Sheet and Pro Forma Condensed Consolidated Balance Sheet of
Homestead, and the related notes thereto contained elsewhere herein. See
"Homestead Pro Forma Selected Financial Information" and "Index to Homestead
Financial Statements."
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
------ ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Short-term notes payable......................... $-- $ --
Convertible mortgage notes payable............... -- 51,563
Shareholders' equity:
Common Stock, par value $.01 per share, 1,000
shares authorized (250,000,000 shares
authorized pro forma);
0 shares issued and outstanding (15,327,733
shares issued and outstanding pro forma)...... -- (1) 153(2)(3)
Additional paid-in capital/contributed capital. -- 146,335(3)
Retained earnings.............................. -- 5,284
---- --------
Total shareholders' equity................... $-- 151,772(2)
---- --------
Total capitalization......................... $-- $203,335(4)
==== ========
</TABLE>
- --------
(1) Homestead was initially capitalized on April 18, 1996 in the amount of
$1,000 in respect of the issuance of 1,000 shares.
(2) Does not include 10,000,000 shares of Homestead Common Stock issuable upon
exercise of outstanding Homestead Warrants or any shares of Homestead
Common Stock which may be issuable upon the conversion of any convertible
mortgage notes payable.
(3) Does not reflect the shares of Homestead Common Stock to be issued to and
held in escrow for SCG. As each property is funded under the Funding
Commitment Agreements, the shares of Homestead Common Stock would be
transferred to SCG.
(4) The total capitalization does not reflect the additional funding to be
provided by PTR and ATLANTIC in the form of convertible mortgage notes
pursuant to the Funding Commitment Agreements subsequent to the date of
the Transaction. Therefore, the total capitalization as reflected in the
pro forma above does not reflect the entire Transaction.
A-14
<PAGE>
HOMESTEAD PRO FORMA SELECTED FINANCIAL INFORMATION
The following table sets forth certain unaudited pro forma selected
condensed consolidated financial information for Homestead after giving effect
to the Transaction, as if it had been consummated, with respect to statements
of operations data, as of January 1, 1995, or, with respect to balance sheet
data, as of the date presented. The information presented is derived from,
should be read in conjunction with, and is qualified in its entirety by
reference to, the historical balance sheet and the notes thereto and unaudited
pro forma condensed consolidated financial information and the notes thereto
appearing elsewhere in this Appendix A. The unaudited selected pro forma
condensed consolidated financial information have been included for
comparative purposes only and do not purport to be indicative of the results
of operations or financial position which actually would have been obtained if
the Transaction had been effected at the dates indicated or of the financial
position or results of operations which may be obtained in the future. See
"Homestead Pro Forma Summary Financial Information" and "Homestead Pro Forma
Financial Statements."
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------
YEAR ENDED
THREE MONTHS DECEMBER 31,
ENDED MARCH 31, 1996 1995
---------------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATIONS SUMMARY
Room Revenue............................. $ 6,753 $ 18,337
Total Revenue............................ 6,874 18,721
Property Operating Expenses(1)........... 2,946 7,600
Corporate Operating Expenses............. 2,000 6,188
Depreciation............................. 859 3,352
Net Income (Loss)........................ $ 48 $ (937)
<CAPTION>
PRO FORMA MARCH 31,
1996
----------------------
FINANCIAL POSITION: (DOLLARS IN THOUSANDS)
<S> <C> <C>
Property and Equipment, net.............. $ 156,988
Total Assets............................. 211,538
Convertible Mortgage Notes Payable....... 51,563
Total Liabilities........................ 59,766
Shareholders' Equity..................... 151,772
Common Stock Outstanding(2).............. 15,327,733
<CAPTION>
PRO FORMA
-----------------------------------
YEAR ENDED
THREE MONTHS DECEMBER 31,
ENDED MARCH 31, 1996 1995
---------------------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
PER SHARE DATA:
Net Income (Loss)........................ $ .003 $ (.061)
Net Book Value........................... 9.90 N/A
Weighted Average Number of Shares of
Homestead Common Stock Outstanding(2)... 15,327,733 15,327,733
OTHER DATA:
EBITDA(3)................................ $ 1,928 $ 4,933
Cash Provided by (used in):
Operating Activities................... (415) 804
Investing Activities................... (23,791) (52,468)
Financing Activities................... 25,302 53,001
</TABLE>
A-15
<PAGE>
- --------
(1) Property operating expenses consist of all expenses directly related to
the operation of the properties and do not include an allocation of
corporate operating expenses. Property operating expenses include
primarily salaries and wages, telephone, utilities, property taxes,
insurance, maintenance and supply costs.
(2) On a pro forma basis, this excludes 2,422,002 shares held in escrow
pending the resolution of the funding contingency:
<TABLE>
<S> <C>
Total shares to be issued to SCG................................ 4,062,788
Pro forma shares to be issued at the Closing Date (see Note (h)
to the Homestead pro forma financial statements)............... (1,640,786)
----------
Pro forma shares to be held in escrow......................... 2,422,002
==========
</TABLE>
(3) EBITDA means operating income before mortgage and other interest, income
taxes, depreciation and amortization. EBITDA does not represent cash
generated from operating activities in accordance with GAAP, is not to be
considered as an alternative to net income or any other GAAP measurement
as a measure of operating performance and is not necessarily indicative of
cash available to fund cash needs. Homestead has included EBITDA herein
because Homestead believes that it is one measure used by certain
investors to determine operating cash flow. EBITDA, as calculated above,
may not be comparable to other similarly titled measures of other
companies.
A-16
<PAGE>
THE TRANSACTION DESCRIBED HEREIN INVOLVES THE SUBSIDIARIES OF PTR (THE "PTR-
HOMESTEAD VILLAGE GROUP"), ATLANTIC (THE "ATLANTIC-HOMESTEAD VILLAGE GROUP")
AND SCG (THE "SCG-HOMESTEAD VILLAGE GROUP") ENGAGED IN THE DEVELOPMENT,
OWNERSHIP AND MANAGEMENT OF HOMESTEAD VILLAGE FACILITIES. SET FORTH BELOW ARE
SELECTED FINANCIAL INFORMATION ON A COMBINED BASIS FOR SUCH HOMESTEAD RELATED
SUBSIDIARIES PRESENTED SEPARATELY FOR EACH OF THE ABOVE ENTITIES. HOMESTEAD
MANAGEMENT BELIEVES THAT PRESENTING SUCH INFORMATION ON A COMBINED BASIS
RESULTS IN A MORE MEANINGFUL PRESENTATION THAN PRESENTING THE SEPARATE
INFORMATION OF EACH SUBSIDIARY.
PTR-HOMESTEAD VILLAGE GROUP SELECTED FINANCIAL INFORMATION
The selected financial information set forth below has been derived from the
historical combined financial statements of the PTR-Homestead Village Group.
The financial information for the three-month periods is not necessarily
indicative of results for subsequent periods or the full year. This selected
financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
PTR-Homestead Village Group" and the historical combined financial statements
and related notes thereto of the PTR-Homestead Village Group contained
elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ----------------------------------
1996 1995 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Room Revenue............ $ 6,753 $ 3,359 $ 18,337 $ 7,827 $ 2,554 $ 377
Property Operating
Expenses(1)............ 2,946 1,261 7,600 3,146 1,157 232
Property management fees
paid to affiliates..... 500 197 1,018 460 145 22
Corporate Operating
Expenses............... 201 165 944 826 304 7
REIT management fees
paid to affiliate...... 362 206 989 332 109 9
Depreciation............ 859 397 2,343 845 234 36
Total Expenses.......... 5,829 2,766 15,852 7,018 2,204 367
Net Income.............. 1,039 683 2,851 974 409 10
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------------
1996 1995 1994 1993 1992
--------- -------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Property and Equipment,
net.................... $120,871 $105,002 $59,099 $23,898 $6,972
Total Assets............ 126,390 108,965 60,866 24,921 7,076
Current Liabilities..... 6,742 5,850 3,667 2,529 367
Intercompany Debt....... 11,185 80,144 45,131 19,290 5,123
Convertible Mortgage
Notes Payable.......... 77,289 -- -- -- --
Total Liabilities....... 95,216 85,994 48,798 21,818 5,490
Owners' Equity.......... 31,174 22,971 12,068 3,103 1,586
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------ -------------------------------------
1996 1995 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(2) $ 2,859 $ 1,620 $ 8,152 $ 3,228 $ 898 $ 107
Net cash provided by
(used in):
Operating
activities......... 2,264 200 6,019 2,381 599 374
Investing
activities......... (16,724) (10,480) (48,116) (35,474) (15,751) (7,007)
Financing
activities......... 15,495 9,985 43,065 33,832 15,275 6,699
</TABLE>
- -------
(1) Property operating expenses consist of all expenses directly related to
the operation of the properties and do not include an allocation of
corporate operating expenses. Property operating expenses include
primarily salaries and wages, telephone, utilities, property taxes,
insurance, maintenance and supply costs.
(2) EBITDA means operating income before mortgage and other interest, income
taxes, depreciation and amortization. EBITDA does not represent cash
generated from operating activities in accordance with GAAP, is not to be
considered as an alternative to net income or any other GAAP measurement
as a measure of operating performance and is not necessarily indicative of
cash available to fund all cash needs. The PTR-Homestead Village Group has
included EBITDA herein because the PTR-Homestead Village Group believes
that it is one measure used by certain investors to determine operating
cash flow. EBITDA, as calculated above, may not be comparable to other
similarly titled measures of other companies.
A-17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF PTR-HOMESTEAD VILLAGE GROUP
OVERVIEW
The PTR-Homestead Village Group historical operating results reflect the
growth and evolution of both the Homestead Village concept and the extended-
stay lodging business as a whole. Since the first Homestead Village facility
opened in 1992, the PTR-Homestead Village Group has developed an additional 27
properties in less than four years.
ENVIRONMENTAL MATTERS
The PTR-Homestead Village Group is not aware of, nor does it expect, any
environmental condition on its properties to have a material adverse affect
upon its business, financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1996, PTR-Homestead Village Group had
invested $125.2 million for the acquisition and development of 36 Homestead
Village properties, 23 of which were operating, seven of which were under
construction and six of which were in pre-development planning. These
investments have been financed through a combination of intercompany debt
borrowed from PTR and contributed capital.
At March 31, 1996, the PTR-Homestead Village Group expected to invest an
additional $158.8 million for the acquisition, development and construction of
18 properties over the next two years. The foregoing transactions are subject
to a number of conditions, and Homestead cannot predict with certainty that
any of them will be consummated.
PTR-Homestead Village Group expects to finance construction, development and
land acquisitions primarily with cash on hand, convertible mortgage loans to
be made under the Funding Commitment Agreements, exercise of Homestead
Warrants by SCG pursuant to the SCG Investor Agreement, possible exercise of
Homestead Warrants by other warrantholders and cash from future securities
offerings.
At April 23, 1996, the PTR-Homestead Village Group had unfunded development
commitments for developments under construction of approximately $21.1
million.
RESULTS OF OPERATIONS
1995 Compared to 1994
Total revenue for the year ended December 31, 1995 was $18.7 million,
representing an increase of $10.7 million over the previous year. This
increase was due primarily to (i) a 67% increase in the number of operating
properties from twelve to twenty and (ii) a 14% increase in the average weekly
rate for stabilized properties, from $186 to $212 per week.
Total costs and expenses for the year ended December 31, 1995 were $15.9
million, representing an increase of $8.8 million over the previous twelve
months. Property operating expense and property management fee increases of
approximately $5.0 million can be attributed to the (i) increase in the number
of operating properties noted above, (ii) an increase in property taxes as a
result of the additional operating properties and (iii) refinements in the
number and quality of property-level programs and services. REIT management
fees increased approximately $0.7 million as a result of increased property
cash flow.
Depreciation of the cost of properties and improvements is provided using
the straight-line method over the estimated useful lives. Depreciation expense
increased $1.5 million in 1995 primarily due to the eight new properties
opened in 1995 and the full year of depreciation being charged for the nine
properties opened in 1994.
A-18
<PAGE>
Interest expense increased $1.5 million over 1994 due primarily to eight
additional properties opening in 1995. Additionally, a full year of interest
was incurred on the nine properties which opened in 1994.
1994 Compared to 1993
PTR-Homestead Village Group ended 1994 with twelve operating properties
versus three operating properties at the end of 1993. These nine new
properties generated a $4.5 million revenue increase over the prior twelve
months. The remaining $0.9 million increase in revenue can be attributed to an
increase in average weekly rates for stabilized properties increasing from
$169 to $186 per week or approximately 10%.
Total costs and expenses increased by $4.8 million over the same period,
from $2.2 million to $7.0 million. Most of the $2.3 million increase in
property expenses is attributable to the nine new property openings. The major
component of the increase is due to property taxes that are expensed on
operating properties. Corporate operating expenses and REIT management fees
increased approximately $0.7 million during this period as a result of
additional new property openings and higher property cash flow.
Depreciation expense for December 31, 1994 increased $0.6 million over 1993
primarily due to the addition of nine new properties in 1994. Interest expense
for the period increased $1.2 million due primarily to the completion of the
nine new properties referred to above incurring interest plus a full year of
interest on the properties which opened in 1993.
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Total revenue for the three months ended March 31, 1996 was $6.9 million, an
increase of $3.4 million over the three months ended March 31, 1995. This
increase was due to both the addition of eleven properties over the period, as
well as a 6.9% increase in the average weekly rates for stabilized properties
from $203 to $217 per week.
Total costs and expenses increased from $2.8 million to $5.8 million over
the same period, an increase of $3.0 million. Property operating expenses and
property management fees contributed $2.0 million to this increase, due to a
greater number of operating properties and the addition of certain customer
amenities and property level programs and services. REIT management fees
increased approximately $0.2 million as a result of increased property cash
flow.
The increase in depreciation expense of $0.5 million is primarily due to the
additional eleven properties which were opened between April 1995 and March
1996. An increase of $0.4 million in interest expense resulted from additional
operating properties and from the issuance of 9.00% convertible mortgage notes
payable to PTR on January 24, 1996, replacing intercompany debt bearing
interest at 7.37%.
A-19
<PAGE>
ATLANTIC-HOMESTEAD VILLAGE GROUP SELECTED FINANCIAL INFORMATION
The selected financial information set forth below has been derived from the
historical combined financial statements of the Atlantic-Homestead Village
Group. The financial information for the three month period ended March 31,
1996 is not necessarily indicative of results for subsequent periods or the
full year. These selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations of Atlantic-Homestead Village Group" and the combined historical
financial statements and related notes thereto of the Atlantic-Homestead
Village Group contained elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS INCEPTION
ENDED (APRIL 3, 1995)
MARCH 31, TO
1996 DECEMBER 31, 1995
------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATIONS SUMMARY:
Corporate operating expenses................... $ 18 $ 63
Net Loss....................................... (12) (59)
OTHER DATA:
Net Cash Provided by (used in):
Operating activities......................... $ 158 $ 81
Investing activities......................... (6,994) (4,118)
Financing activities......................... 6,724 4,221
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FINANCIAL POSITION:
Properties under development........................... $10,437 $2,627
Total Assets........................................... 12,326 4,317
Development Costs Payable.............................. 1,142 15
Total Current Liabilities.............................. 1,452 155
Intercompany Debt...................................... 9,295 2,627
Total Liabilities...................................... 10,747 2,782
Owners' Equity......................................... 1,579 1,535
</TABLE>
A-20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF ATLANTIC-HOMESTEAD VILLAGE GROUP
OVERVIEW
The Atlantic-Homestead Village Group's historical combined financial
statements reflect the acquisition and development of Homestead Village
properties. As of March 31, 1996, there were no operating properties. As of
March 31, 1996, the Atlantic-Homestead Village Group had one property under
construction and 25 in pre-development planning (as defined).
ENVIRONMENTAL MATTERS
The Atlantic-Homestead Village Group is not aware of, nor does it expect,
any environmental condition on its properties to have a material adverse
affect upon its business, financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1996, Atlantic-Homestead Village Group
invested $10.4 million for the acquisition and development of Homestead
Village properties. These investments have been financed through intercompany
debt.
At March 31, 1996, Atlantic-Homestead Village Group planned to invest an
additional $148.3 million for the acquisition, development and construction of
26 Homestead Village properties over approximately the next eighteen months.
Atlantic-Homestead Village Group expects to finance construction,
development and acquisitions primarily from convertible mortgage loans to be
made under the Funding Commitment Agreements, exercise of Homestead Warrants
by SCG pursuant to the SCG Investor Agreement, possible exercise of Homestead
Warrants by other warrantholders and cash from future securities offerings.
At March 31, 1996, the Atlantic-Homestead Village Group had unfunded
development commitments for developments under construction of approximately
$2.4 million.
RESULTS OF OPERATIONS
Period from April 3, 1995 (date of formation) through December 31, 1995 and
the Three Months Ended March 31, 1996
The Atlantic-Homestead Village Group consists of several entities that are
subsidiaries of ATLANTIC. During 1995 and the three months ended March 31,
1996, the Atlantic-Homestead Village Group has been developing Atlantic-
Homestead Village properties. As described in the combined financial
statements of the Atlantic-Homestead Village Group, property acquisitions and
development costs are assumed to have been funded via intercompany debt
borrowed from ATLANTIC. All interest related to the intercompany debt during
1995 and the three months ended March 31, 1996 has been capitalized and
included in "Properties under development." Operating expenses during 1995 and
the three months ended March 31, 1996 pertain to pursuit costs relating to
abandoned projects and various administrative expenses.
A-21
<PAGE>
SCG-HOMESTEAD VILLAGE GROUP SELECTED FINANCIAL INFORMATION
The selected financial information set forth below has been derived from the
historical combined financial statements of the SCG-Homestead Village Group.
The financial information for the three month period ended March 31, 1996 is
not necessarily indicative of results for subsequent periods or the full year.
These selected financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of SCG-Homestead Village Group and the historical combined
financial statements and related notes thereto of the SCG-Homestead Village
Group contained elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ------------------------------
1996 1995 1995 1994 1993 1992
-------- ------- ------- ------- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
REIT and Property
Management Fees Earned
from Affiliates........... $ 861 $ 402 $ 2,007 $ 792 $ 254 $ 43
Payroll and Related
Expenses.................. 1,909 665 4,276 1,713 707 152
Total Expenses............. 3,097 920 7,176 2,454 922 233
Net Loss................... (2,236) (518) (5,155) (1,662) (668) (190)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1996 1995 1994 1993 1992
--------- ------- ----- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
REIT and Property Management Fees
Receivable............................. $ 481 $ 470 $ 55 $ 10 $16
Furniture and Equipment, net............ 233 228 47 -- --
Total Assets............................ 802 779 102 10 16
Intercompany Debt....................... 2,043 1,147 -- -- --
Current Liabilities..................... 2,543 2,046 251 96 --
Total Liabilities....................... 2,543 2,046 251 96 --
Owners' Equity (Deficit)................ (1,741) (1,267) (149) (86) 16
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ------------------------------
1996 1995 1995 1994 1993 1992
-------- ------- ------- ------- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(1).................. $ (2,177) $ (510) $(5,046) $(1,640) $(668) $(190)
Net Cash Provided by (used
in):
Operating activities..... (2,573) (737) (4,951) (1,545) (565) (206)
Investing activities..... (73) (55) (234) (55) -- --
Financing activities..... 2,658 792 5,185 1,600 565 206
</TABLE>
- --------
(1) EBITDA means operating income before mortgage and other interest, income
taxes, depreciation and amortization. EBITDA does not represent cash
generated from operating activities in accordance with GAAP, is not to be
considered as an alternative to net income or any other GAAP measurement
as a measure of operating performance and is not necessarily indicative of
cash available to fund all cash needs. The SCG-Homestead Village Group has
included EBITDA herein because the SCG-Homestead Village Group believes
that it is one measure used by certain investors to determine operating
cash flow. EBITDA, as calculated above, may not be comparable to other
similarly titled measures of other companies.
A-22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF SCG-HOMESTEAD VILLAGE GROUP
OVERVIEW
The SCG-Homestead Village Group's business consists of providing development
and property and REIT management services for the Homestead Village properties
developed, owned and operated by the PTR-Homestead Village Group and the
Atlantic-Homestead Village Group. SCG-Homestead Village Group earns REIT
management fees which in general are 16% of cash flow (as defined) and
property management fees which are computed as a percentage (5%-7%) of gross
revenues (as defined).
LIQUIDITY AND CAPITAL RESOURCES
The SCG-Homestead Village Group has incurred operating deficits since
inception as a result of performing development services for the PTR-Homestead
Village Group and the Atlantic-Homestead Village Group without compensation.
Under the respective REIT management agreements, fees are paid from the cash
flow of operating Homestead Village properties. Deficits are a result of
having a significant number of properties under development thus incurring
higher development overhead. The deficits have been and are expected to
continue to be funded through intercompany borrowings and contributed capital
from SCG.
From inception through March 31, 1996, SCG-Homestead Village Group invested
$0.3 million in furniture and equipment for the support of the operations and
development of the Homestead Village properties.
RESULTS OF OPERATIONS
1995 Compared to 1994
REIT and property management fees for the year ended December 31, 1995 were
$2.0 million, an increase of $1.2 million, or approximately 153%, over the
year ended December 31, 1994. These additional fees are primarily attributable
to the revenues and cash flow generated by the new Homestead Village
properties opened in 1995 (eight) as well as Homestead Village properties
experiencing their first full year of operations during 1995 (nine).
Costs and expenses increased by $4.7 million, or approximately 192%, to $7.2
million for the year ended December 31, 1995 from $2.5 million for the year
ended December 31, 1994. The additional expenses resulted primarily from
increased payroll, recruiting and relocation and other expenses associated
with increased staffing given (i) the additional Homestead Village properties
receiving property management services and (ii) the additional property
acquisition and development activities applicable to the current and future
growth of the Homestead Village properties.
1994 Compared to 1993
REIT and property management fees for the year ended December 31, 1994 were
$0.8 million, which is an increase of $0.5 million, or approximately 212%,
over the year ended December 31, 1993. These additional fees are primarily
attributable to the revenue and cash flow generated by Homestead Village
properties which opened in 1994 (eight) as well as the effect of one Homestead
Village property experiencing its first full year of operations during 1994.
Costs and expenses increased $1.5 million (166%), to $2.4 million for the
year ended December 31, 1994 from $0.9 million for the year ended December 31,
1993. The additional expenses resulted primarily from increased payroll and
other expenses associated with increased staffing resulting from the growth in
operating properties and property acquisitions and development activity.
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Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
REIT and property management fees for the three months ended March 31, 1996
were $0.9 million, an increase of $0.5 million, or approximately 114%, over
the three months ended March 31, 1995. These additional fees are primarily
attributable to (i) the increased revenue and cash flow generated by four
Homestead Village properties which opened during the three months ended March
31, 1996 as well as seven Homestead Village properties which opened during the
period April 1, 1995 to December 31, 1995 and (ii) the property management fee
percentage which increased to 7% of gross revenues commencing January 1, 1996.
Costs and expenses increased $2.2 million, or approximately 237%, to $3.1
million for the three months ended March 31, 1996 from $0.9 million for the
three months ended March 31, 1995. The additional expenses resulted primarily
from increased payroll, recruiting and relocation, overhead allocated by SCG
and other expenses associated with increased staffing as a result of the
continued growth in operating Homestead Village properties and property
acquisition and development activities.
BUSINESS
OBJECTIVES
The objective of Homestead is to be the preeminent developer, owner, and
national operator focused on the moderate priced, extended-stay lodging
business. Homestead intends to achieve this objective by:
. participating in high growth markets;
. exercising investment discipline based on research; and
. employing a consistent high quality service standard to property
operations.
Homestead currently owns and operates 29 facilities in eight cities, has
begun construction on 12 additional facilities and has an additional 39
properties in pre-development planning. (See "--Homestead Village
Properties.")
Homestead seeks to offer a purpose-built standardized product for the value-
conscious business customer on temporary assignment, undergoing relocation or
in training. Homestead will offer as its primary amenities price and value.
Secondary amenities include location and site livability--convenience to the
targeted business base and services--in an environment that is attractive,
well landscaped, and secure.
Customer research indicates that the primary Homestead Village customer stay
is work-related. The largest proportion of these relate to temporary business
assignments. Average income of Homestead customers exceeds $50,000. Homestead
believes the customer's foremost reason for selecting Homestead is the high
level of value delivered to the customer in relation to the price. Forty-four
percent (44%) of Homestead customers pay for their stay either out-of-pocket
(are not reimbursed) or on a per diem. Twenty-five percent (25%) of Homestead
Village customers are direct employer referrals, in many cases due to
training. The average length of stay for a customer is in excess of four
weeks. Management believes that Homestead will benefit from well-defined
trends in business including an increased focus on cost-efficiency, reduction
in travel expenses, out-sourcing, and geographic dispersion of customers and
operations.
Homestead is founded on research. The Homestead product was conceived and
has evolved to meet consumer needs through research, testing, and the
operating experience gained through the development and operation of twenty-
seven properties over the past four years. Homestead believes its operating
experience and its affiliation with Security Capital Investment Research
Incorporated ("Security Capital Investment Research") allow it to better
target markets where supply and demand factors permit high occupancies at
increasing rental rates. Homestead targets submarkets that exhibit strong
employment and demographic trends in selecting locations with barriers to
extensive competitive development. Homestead believes it brings a strategic
discipline
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to determining an investment focus which provides favorable initial returns
and long-term growth prospects. Through its Investment Committee, described
below, and due diligence process, Homestead employs uniform systems and
procedures to achieve its investment goals.
Homestead believes that the Homestead Village brand identity and the market
opportunity in extended-stay lodging is best served by a property specifically
designed and built to Homestead's standards and specifications. Accordingly,
while Homestead intends to be an active national developer, it has no plans or
intention to acquire existing extended-stay properties or to convert other
existing lodging properties to extended-stay use. To ensure maximum control
over the brand identity and quality of operations, Homestead has no plans or
intention to franchise the Homestead Village concept.
Homestead minimizes development risks by having zoning, site planning,
construction budgets and similar risks resolved or assumed by third parties
prior to Homestead's commitment to a transaction. Homestead incorporates into
its development process certain proprietary technologies, design and
purchasing aimed at enhancing occupancy and rental growth while reducing
ongoing maintenance costs. Homestead has had the opportunity to evaluate and
refine its product through its history of development. Homestead focuses on
the quality of construction, materials and design with a view towards
minimizing long term operation and maintenance costs. Homestead uses
independent general contractors for the construction of its properties and
intends to use a number of such contractors depending upon the geographic
area, costs of construction and physical capacities of the contractors.
Homestead personnel will oversee the progress of construction on a regular
basis during the development cycle.
HISTORY
Homestead was initially created as a byproduct of the multifamily
development activities of PTR. The PTR REIT Manager (defined herein)
identified a customer need not ideally addressed through its traditional
multifamily garden apartment product or through corporate apartments operated
within a garden apartment context. The PTR REIT Manager believed that a
product which offered greater flexibility of rental term, a fully furnished
studio apartment with cooking facilities, a focused array of services (such as
limited maid service, voice mail, cable or satellite television), at an
affordable price would meet the needs of a significant and growing segment of
demand for those business customers on temporary assignment, training, or
relocating.
In conjunction with its research affiliate, Security Capital Investment
Research, the PTR REIT Manager engaged in extensive study to determine an
optimum approach to what it originally termed "Corporate Affordable Housing."
Beginning in 1992, the PTR REIT Manager initiated development projects in
Dallas and Houston, Texas. It was the PTR REIT Manager's express intention to
gain operating experience and to fully understand market characteristics prior
to committing to full-scale Homestead Village development on a broad
geographical basis. SCG funded the early stages of development of the
Homestead Village concept.
Homestead properties which opened in 1992 and 1993 enjoyed substantial
occupancy and customer acceptance. During this period, management reviewed
Homestead Village properties and operations to refine and improve its approach
to serving the Homestead customer. Management believes its initial operating
experience allowed it to not only better understand the depth and scope of the
available market opportunity for Homestead Village but also to create a better
development process and operating system in response to that opportunity.
During 1995, a distinct and separate management team was created to support
and expand the opportunity for Homestead Village in PTR and ATLANTIC. PTR and
ATLANTIC are affiliates of SCG and are REITs which own, operate and develop
multifamily properties. PTR's target market is the western United States and
ATLANTIC's target market is the southeastern United States. Homestead projects
were developed by each entity in its own region. From January 1995 to July
1996 the number of professional employees focused exclusively on Homestead
Village increased from eight to 66 and the number of on-site personnel is
currently 318. Operations and development were organized within PTR and
ATLANTIC to meet the distinct needs of the moderate priced, extended-stay
lodging business. Homestead believes it has not only brought a focused
approach to the
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development and operations of moderate priced, extended-stay properties, but
that Homestead currently has superior management depth and experience in the
industry.
As a result of the Mergers, Homestead will become a separate entity. It has
been organized as a Subchapter C corporation and is internally managed.
However, Homestead has a relationship with SCG which it intends to continue
through the Administrative Services Agreement and will enjoy the benefits of
SCG's organization and service. See "--Administrative Services Agreement."
THE FACILITIES
Homestead has developed, owns and operates 29 Homestead Village properties
representing in the aggregate 4,025 units in eight cities. Homestead currently
has 12 Homestead Village properties under construction totaling 1,589 units
within four of these cities as well as five additional cities. In addition,
Homestead owns or controls through contracts 39 development sites for which it
plans to initiate construction within the next 12 months. Units operating,
under construction, or in pre-development planning aggregate 10,908 units in
23 cities. Homestead has 46 additional sites under review and is continually
searching for additional appropriate sites.
The average size and development cost of the initial 80 Homestead Village
properties is 136 units and $40,593 per unit, respectively. It is expected,
however, that the size and cost to develop a property will vary significantly
by geographic location. The 12 Homestead Village properties currently under
construction average 132 units at an average project cost of $5.8 million with
an average cost per unit of $43,486.
Homestead Village properties are designed and built to uniform plans
developed and periodically refined since 1991. Units generally contain 260 to
325 square feet of fully furnished living space, with kitchen facilities
including full-size refrigerator, microwave, sink and cook-top. Generally,
units include combination work station/eating area, chair and features such as
individual voice mail, cable/satellite television, weekly housekeeping,
dataport and free local telephone calls.
For the quarter ended March 31, 1996, the stabilized Homestead Village
properties had an average physical occupancy of 87% with an average weekly
rate of $217 per unit. Average physical occupancy and average weekly rate for
seven pre-stabilized properties were 59% and $217 per week, respectively.
Each Homestead Village property employs a General Manager who is responsible
for the operations of the particular property. The General Manager shares
duties with and oversees a staff typically consisting of a Guest Services
Manager, Operations Manager, a Maintenance Supervisor, front desk clerk and
housekeeping/laundry staff of five to seven individuals (some of whom are
part-time employees). The office at each property is generally open daily from
7:00 am to 7:00 pm.
Homestead expects that the majority of daily operational decisions will be
made by the General Manager under the supervision of a Regional Manager who
will be responsible for six to twelve properties, depending on geographic
location. The Regional Manager oversees the performance of the General
Managers in such areas as guest service, property maintenance, staffing and
cost control. Each Homestead Village property is measured against a detailed
revenue and expense budget, as well as against the performance of Homestead's
other properties. Homestead employs a series of incentive programs,
encompassing all employees, based on guest service, cleanliness, recruiting
and retaining people and property level performance.
Homestead has invested substantially in training for its regional and on-
site personnel. Twelve separate training modules with subjects ranging from
personal selling and guest service to guest safety are conducted on a regular
basis. Training design and organizational development are administered on a
corporate basis with field implementation personnel located within a
geographic region. Homestead views its investment in training and developing
its site-level personnel as essential to its goal of providing a high
customer-service standard consistent with the objective of becoming the
preeminent operator in the moderate priced, extended-stay lodging business.
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<PAGE>
GROWTH AND DEVELOPMENT STRATEGY
Homestead's goal is to become a national provider of moderate priced,
extended-stay lodging in its target markets. Homestead intends to achieve this
goal by developing properties in a disciplined manner in its target markets,
providing high value accommodations for its customers, actively managing its
existing properties to increase revenues and reduce operating costs, and
increasing awareness of the moderate priced, extended-stay concept and the
Homestead Village name. Homestead currently owns and operates 29 properties,
has begun construction of 12 additional properties and has an additional 39
properties in pre-development planning. Homestead expects to have a total of
31 properties operational by the end of 1996. Homestead plans to continue an
active development program thereafter. Homestead's plans call for the average
facility to have approximately 136 extended-stay rooms and to take
approximately eight to ten months to construct.
Homestead targets major metropolitan areas which, based on its own research,
it has determined have suitable submarkets with favorable employment and
demographic trends. To achieve and maintain certain management efficiencies,
Homestead has elected not to enter markets where its submarket research
indicates that Homestead is not likely to be successful in achieving multiple
desirable site locations. Homestead employs dedicated site acquisition
professionals who evaluate each site against a set of eighteen separate
criteria where optimum standards have been established.
As part of its development strategy, Homestead employs contingent contracts
which allow it to conduct thorough due diligence and obtain entitlements prior
to taking title to a site. Homestead employs a dedicated due diligence staff
of six experienced professionals which reviews each investment according to
uniform standards concerning environmental, legal, entitlement and
geotechnical risk.
Each investment transaction undergoes a detailed and comprehensive review by
operational and development senior management and a subsequent review by
Homestead's Investment Committee. Members of the Investment Committee include
David Dressler, Jr., Chairman and President, John Patterson and Donald
Schultz, each a Senior Vice President, and Gary DeLapp, a Vice President. The
Investment Committee process is designed to review both the specific
investment as well as to ensure its conformance to Homestead's investment
policies and goals.
Sites for development will be selected by Homestead's real estate
professionals, subject to review and approval of the Investment Committee.
Homestead currently maintains offices in Atlanta, Dallas and Santa Fe.
Homestead expects to open regional offices in other geographic areas in the
future as Homestead increases the number of regions in which it is focusing
its development. Homestead will utilize independent general contractors for
the construction of its lodging facilities and intends to use a number of such
contractors depending upon geographic area, costs of construction, and
financial and physical capacities of the contractors. Homestead's personnel
will oversee the progress of construction on a regular basis during the
development cycle.
OPERATING STRATEGY
Homestead's business strategy is to develop moderate priced, extended-stay
facilities providing an affordable and attractive lodging alternative for
value conscious business customers looking for extended-stay accommodations.
Homestead's goal is to provide its customers with a level of amenities needed
to optimize room and occupancy rates while maintaining high operating margins
at its facilities. Homestead attempts to achieve this goal through the
following:
Appeal to Value Conscious Guests. Homestead's facilities are designed to
offer quality accommodations for guests at substantially lower rates than
most other extended-stay lodging providers and hotels. Homestead's
properties currently offer extended-stay accommodations at a standard
weekly rate of between $189 and $239 per week. Room rates at Homestead's
facilities may vary significantly, however, depending upon specific market
factors and the size of the room. These rates contrast with average weekly
rates of approximately $500 for traditional extended-stay hotels.
Lodging Facility Features. Homestead's facilities are designed and built
to uniform plans. Units generally contain 260 to 325 square feet of fully
furnished living space, with kitchen facilities including
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full-size refrigerator, microwave, sink and cook-top. Generally, units
include combination work station/eating area, chair and features such as
individual voice mail, cable/satellite television, weekly housekeeping,
dataport and free local telephone calls.
Standardized Concept. Homestead has developed standardized plans and
specifications for its properties which lower construction and purchasing
costs and establish uniform quality and operational standards.
Operating Efficiencies. Homestead believes that the design and price
level of its properties attract guest stays of several weeks or more, which
result in a more stable revenue stream and, coupled with low-labor
amenities, will in turn lead to reduced administrative and operational
costs and higher operating margins.
HOMESTEAD VILLAGE PROPERTIES
Operating and development properties are located in 23 metropolitan areas in
14 states. The table below demonstrates the geographic distribution of
Homestead's initial 80 property investments at July 12, 1996:
<TABLE>
<CAPTION>
NUMBER OF PROPERTIES
-------------------------------
UNDER PERCENTAGE OF
OPERA- CONSTRUC- IN ASSETS BASED
CITY TING TION PLANNING TOTAL ON COST(1)
---- ------ --------- -------- ----- -------------
<S> <C> <C> <C> <C> <C>
Albuquerque, NM............. 1 1 2 2%
Atlanta, GA................. 1 1 4 6 8%
Austin, TX.................. 2 1 1 4 4%
Dallas, TX.................. 9 1 10 9%
Denver, CO.................. 2 2 4 5%
Houston, TX................. 8 8 7%
Jacksonville, FL............ 1 1 1%
Kansas City, MO............. 1 1 1%
Los Angeles, CA............. 1 1 1%
Miami/Ft. Lauderdale, FL.... 3 3 5%
Nashville, TN............... 2 2 3%
Orange County, CA........... 1 1 1%
Phoenix, AZ................. 3 1 4 5%
Portland, OR................ 1 1 2%
Raleigh, NC................. 2 1 3 4%
Richmond, VA................ 1 1 2%
Salt Lake City, UT.......... 1 1 2 3%
San Antonio, TX............. 3 3 3%
San Diego, CA............... 2 2 3%
San Francisco, CA........... 3 4 7 11%
Seattle, WA................. 4 4 6%
Tampa, FL................... 1 2 3 4%
Washington, DC.............. 7 7 10%
--- --- --- --- ----
Total................... 29 12 39 80 100%
=== === === === ====
</TABLE>
- --------
(1) Represents budgeted development costs, which includes the cost of land,
fees, permits, payments to contractors, architectural and engineering fees
and interest and property taxes to be capitalized during the construction
period, for properties under development.
ADMINISTRATIVE SERVICES AGREEMENT
SCG currently provides certain administrative services to Homestead through
Security Capital Pacific Incorporated (the "PTR REIT Manager") and Security
Capital (Atlantic) Incorporated (the "ATLANTIC REIT Manager") and the property
managers for the Homestead Village properties currently owned and developed by
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PTR and ATLANTIC. Certain employees of the PTR and ATLANTIC REIT Managers who
performed various services for the Homestead predecessor entities controlled
by PTR and ATLANTIC and who participated in various benefit plans maintained
by SCG will become employees of Homestead and perform similar services.
At or prior to the consummation of the Mergers, Homestead and SCG will enter
into an administrative services agreement (the "Administrative Services
Agreement"), pursuant to which SCG will provide Homestead with administrative
services with respect to certain aspects of Homestead's business. These
services will include, but are not limited to, insurance administration,
accounts payable administration, internal audit, cash management, human
resources, management information systems, tax and legal administration,
research, shareholder communications and investor relations. The fees payable
to SCG will be based on market rates as mutually agreed. The Administrative
Services Agreement will be for an initial term expiring on December 31, 1996
and will automatically be renewed for one-year terms, subject to approval by a
majority of the disinterested members of the Homestead Board and the approval
by the disinterested members of the Homestead Board of the annual compensation
payable to SCG for services rendered to Homestead.
Homestead believes its relationship with SCG under this agreement provides
certain advantages to Homestead. Homestead believes that a properly structured
Administrative Services Agreement provides Homestead with access to greater
quality and depth of management personnel and resources, highly focused
research, information systems, insurance, cash management and legal support
provided at substantial economies of scale, than it could provide internally.
INDUSTRY OVERVIEW
Traditional Lodging Industry
The United States lodging industry is estimated to have generated
approximately $52.7 billion in annual room revenues in 1995 and had
approximately 3.3 million rooms at the end of 1995. Over 62.7% of the
industry's rooms are owned, managed, or franchised by the 10 largest lodging
chains.
Industry statistics, which Homestead believes to be reliable, indicate that
the United States lodging industry's performance is strongly correlated to
economic activity. Room supply and demand historically have been sensitive to
shifts in economic growth, which has resulted in cyclical changes in average
daily room and occupancy rates. Overbuilding in the lodging industry in the
mid and late 1980s resulted in an oversupply of rooms. Homestead believes this
oversupply and the general downturn in the economy led to depressed industry
performance and a lack of capital available to the industry in the late 1980s
and early 1990s.
Homestead believes that the lodging industry has benefited from a gradually
improving supply and demand balance, evidenced by increased average daily room
and occupancy rates. Room supply growth in the lodging industry has slowed in
recent years as the industry absorbs the oversupply of rooms that resulted
from an annual room supply growth range of approximately 3% to 4% from 1987 to
1990. According to industry reports, which Homestead believes are reliable,
this growth slowed to 1.0% in 1993, 1.4% in 1994, and 1.6% in 1995. The 4.0%
and 2.7% increases in demand (measured by occupied rooms) from 1993 to 1994
and 1994 to 1995, respectively, as compared to increases in supply during the
same periods reflect an improved supply and demand balance in the industry.
Homestead believes these factors were primarily responsible for the increase
in industry occupancy rates from 63.8% in 1993 to 65.4% in 1994 and to 66.1%
in 1995 and the increase in average daily room rates from $60.35 in 1993 to
$62.62 in 1994 and to $65.62 in 1995.
The lodging industry generally can be segmented by the level of service
provided and the pricing of the rooms. Segmentation by level of service is
divided into the following categories: full service hotels, which offer food
and beverage services, meeting rooms, room service, and similar guest
services; limited service hotels, which generally offer only rooms with
amenities such as swimming pools, continental breakfast, or similar limited
services; and all-suites, which generally have limited public spaces but
provide guests with two rooms or
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distinct partitioned areas and which may or may not offer food and beverage
service to guests. Segmentation by price level may generally be divided into
the following categories with the respective average daily room rates for
1995: budget ($36), economy-priced ($47), mid-price ($61), upscale ($80), and
luxury ($118).
The all-suites segment of the lodging industry is a relatively new segment,
having developed largely over the past 10 years, and is principally oriented
toward business travelers in the mid-price to upscale price levels. All-suite
hotels were developed partially in response to the increasing number of
corporate relocations, transfers, and temporary assignments and the need of
business travelers for more than just a room. To address those needs, all-
suite hotels began to offer suites with additional space and, in some cases,
an efficiency kitchen, and guests staying for extended periods of time were
offered discounts to daily rates when they paid on a weekly or monthly basis.
Because of the perceived positive price/value relationship, all-suite hotels
have generally outperformed the lodging industry as a whole over the last five
years.
Extended-Stay Market
Homestead believes that the extended-stay market, in which Homestead
participates, is a continuation of the all-suites phenomenon, and that the
same price/value relationship which has enabled the all-suites segment to
achieve higher than industry average occupancy rates and operating margins
will also carry through to the extended-stay market. Demand for extended-stay
lodging has been stimulated by the economic and social changes resulting from
the increased volume of corporate reorganizations and trends toward down-
sizing and out-sourcing of various functions, the break-up and geographic
dispersion of the traditional family, and technological improvements which
have allowed businesses to relocate outside of large metropolitan areas. These
changes have created new accommodation needs for, among others, corporate
executives and trainees, consultants, sales representatives, construction
workers, and relocating individuals.
Moderate Priced, Extended-Stay Concept
Moderate priced, extended-stay lodging competes on the basis of price and
value compared to the extended-stay market generally, thereby providing an
economic inducement to guests who are already attracted to the extended-stay
concept. In addition, moderate priced, extended-stay lodging provides a new
and affordable lodging alternative for guests who are value conscious, have
lower incomes, or are on limited expense accounts. Based on published
occupancy rates for other participants in the extended-stay market, Homestead
believes that there is a strong demand for moderate priced, extended-stay
accommodations and that in certain areas of the country there is no organized
competition for that business. Of the approximately 3.3 million total
available rooms in the United States lodging industry at the end of 1995,
there were approximately 45,000, or 1.4%, dedicated extended-stay rooms at
approximately 390 separate properties. More than 260 of these extended-stay
properties were controlled by only three other competitors, both of which are
priced toward the upscale segment of the extended-stay market.
COMPETITION
The lodging industry is highly competitive. Competitive factors within the
lodging industry include room rates, quality of accommodations, service
levels, convenience of location, reputation, reservation systems, name
recognition and supply and availability of alternative lodging in local
markets, including short-term lease lodging facilities. Homestead's facilities
will compete with a number of competitors, including budget and economy
segment hotels and other companies focusing on the extended-stay market. Each
of Homestead's existing properties is located in a developed area that
includes competing lodging facilities. In addition, each of Homestead's
proposed properties is likely to be located in an area that includes competing
facilities. The number of competitive lodging facilities in a particular area
could have a material adverse effect on the levels of occupancy and average
weekly room rates of Homestead's existing and future properties.
Homestead anticipates that competition within the moderate priced, extended-
stay lodging market will substantially increase as participants in other
segments of the lodging industry and others focus on this relatively
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new market. A number of other extended-stay lodging facilities exist, many of
which are oriented toward the upscale segment; however, recent announcements
indicate a substantial number of competitors intend to enter the mid-priced or
economy extended-stay segment. Homestead may compete for development sites
with established entities which have greater financial resources than
Homestead and better relationships with lenders and sellers. These entities
may generally be able to accept more risk than Homestead can prudently manage.
Further, there can be no assurance that new or existing competitors will not
significantly reduce their rates or offer greater convenience, services, or
amenities or significantly expand, improve or develop facilities in a market
in which Homestead competes, thereby adversely affecting Homestead's
operations.
ENVIRONMENTAL MATTERS
Under various federal, state, and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person that arranges for the disposal or transports for disposal or treatment
a hazardous substance at a property owned by another may be liable for the
costs of removal or remediation of hazardous substances released into the
environment at that property. The costs of remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such substances, may adversely affect the
owner's ability to sell such real estate or to borrow using such real estate
as collateral. In connection with the ownership and operation of its
properties, Homestead may be potentially liable for any such costs.
Homestead has obtained recent Phase I Surveys on its existing properties and
intends to obtain Phase I Surveys prior to the purchase of any future
properties. The Phase I Surveys are intended to identify potential
environmental contamination and regulatory compliance concerns. Phase I
Surveys generally include historical reviews of the properties, reviews of
certain public records, preliminary investigations of the sites and
surrounding properties and the preparation and issuance of written reports.
Phase I Surveys generally do not include invasive procedures, such as soil
sampling or ground water analysis.
The Phase I Surveys have not revealed any environmental liability or
compliance concern that Homestead believes would have a material adverse
effect on Homestead's business, financial position or results of operations
nor is Homestead aware of any such liability or concern. Nevertheless, it is
possible that Phase I Surveys will not reveal all environmental liabilities or
compliance concerns or that there will be material environmental liabilities
or compliance concerns of which Homestead will not be aware. Moreover, no
assurances can be given that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of Homestead's existing and future properties will not
be affected by the condition of neighboring properties (such as the presence
of leaking underground storage tanks) or by third parties unrelated to
Homestead.
GOVERNMENTAL REGULATION
A number of states regulate the licensing of hotels by requiring
registration, disclosure statements and compliance with specific standards of
conduct. Homestead believes that each of its facilities has the necessary
permits and approvals to operate its respective business and Homestead intends
to continue to obtain such permits and approvals for its new facilities. In
addition, Homestead is subject to laws governing its relationship with
employees, including minimum wage requirements, overtime, working conditions
and work permit requirements. An increase in the minimum wage rate, employee
benefit costs or other costs associated with employees could adversely affect
Homestead. Both at the federal and state level from time to time, there are
proposals under consideration to increase the minimum wage.
Under the ADA, all public accommodations are required to meet certain
federal requirements related to access and use by disabled persons. Although
Homestead has attempted to satisfy ADA requirements in the designs for its
facilities, no assurance can be given that a material ADA claim will not be
asserted against
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Homestead, which could result in a judicial order requiring compliance, and
the expenditure of substantial sums to achieve compliance, an imposition of
fines, or an award of damages to private litigants. These and other
initiatives could adversely affect Homestead as well as the lodging industry
in general.
TRADEMARKS
The Homestead Village name has been registered with the United States Patent
and Trademark office.
INSURANCE
Homestead currently has the types and amounts of insurance coverage that it
considers appropriate for a company in its business. While management believes
that its insurance coverage is adequate, if Homestead were held liable for
amounts exceeding the limits of its insurance coverage or for claims outside
of the scope of its insurance coverage, Homestead's business, results of
operations or financial condition could be materially and adversely affected.
EMPLOYEES
Upon consummation of the Mergers, Homestead will employ approximately 66
professionals and 318 on site personnel. Homestead expects that it will
significantly increase the number of its employees as it expands its business.
Homestead's employees are not subject to any collective bargaining agreements
and management believes that its relationship with its employees is good.
LEGAL PROCEEDINGS
Homestead is not a party to any litigation or claims, other than routine
matters incidental to the operation of the business of Homestead. To date, no
claims have had a material adverse effect on Homestead nor does Homestead
expect that the outcome of any pending claims will have such an effect.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following are Homestead's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David C. Dressler, Jr. 42 Chairman, President and Director
C. Ronald Blankenship 46 Director
John P. Frazee, Jr. 51 Director
Jeffrey A. Klopf 48 Senior Vice President and Secretary
John R. Patterson 44 Senior Vice President
Donald J. Schultz 41 Senior Vice President
</TABLE>
DAVID C. DRESSLER, JR.--42--Director; Chairman of Homestead since May 1996
and President since January 1996; Director and Chairman of Homestead Village
Incorporated since June 1995; Managing Director of PTR since May 1993 and
Director and Managing Director of the PTR and ATLANTIC REIT Managers since
April 1992; from 1984 to May 1991, Regional Partner, Trammell Crow
Residential, Boston, Massachusetts (multifamily real estate development and
property management). While with Trammell Crow Residential, Mr. Dressler was
on the Management Board for Trammell Crow Residential Services (managing
90,000 multifamily units nationwide) and was co-founder and a board member of
Trammell Crow Residential Services-North, which managed 10,000 multifamily
units in the Midwest and Northeast. In his various positions prior to his
affiliation with PTR, Mr. Dressler supervised the development of approximately
6,500 multifamily units.
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C. RONALD BLANKENSHIP--46--Director; Chairman of PTR and the PTR REIT
Manager and Managing Director of SCG since March 1991; Director of ATLANTIC
and the ATLANTIC REIT Manager since April 1996; from June 1988 to March 1991,
Regional Partner, Trammell Crow Residential, Chicago, Illinois (multifamily
real estate development and property management); prior thereto Executive Vice
President and Chief Financial Officer, The Mischer Corporation, Houston, Texas
(multibusiness holding company with investments primarily in real estate).
While with Trammell Crow Residential, Mr. Blankenship was on the Management
Board for Trammell Crow Residential Services, a property management company
that managed approximately 90,000 multifamily units nationwide, and was chief
executive officer of Trammell Crow Residential Services-North, which managed
10,000 multifamily units in the Midwest and Northeast. In his various
positions prior to his affiliation with the PTR REIT Manager, Mr. Blankenship
supervised the development of approximately 9,300 multifamily units. Mr.
Blankenship supervises the overall operations of PTR and the PTR REIT Manager.
JOHN P. FRAZEE, JR.--51--Director; private investor; formerly President and
Chief Operating Officer of Sprint Corporation; prior to the March 1993 merger
with Sprint, Mr. Frazee was the Chairman and Chief Executive Officer of Centel
Corporation (a major telecommunications company he joined in 1972). He is a
member of the Board of Directors of Nalco Chemical Company, Dean Foods
Company, Paging Network Inc., C-Span and SCG. He is a life trustee of Rush-
Presbyterian-St. Luke's Medical Center, a national trustee of The Newberry
Library and a trustee of the Florida State University Foundation.
JEFFREY A. KLOPF--47--Senior Vice President of Homestead since May 1996 and
Secretary since January 1996 and Senior Vice President and Secretary of
Homestead Village Incorporated, PTR, ATLANTIC and SCG since January 1996,
where he provides securities offerings and corporate acquisition services and
oversees the provision of legal services for affiliates of the firm; from
January 1988 to December 1995, partner of Mayer, Brown & Platt where he
practiced corporate and securities law.
JOHN R. PATTERSON--44--Senior Vice President of Homestead since May 1996 and
Homestead Village Incorporated since June 1995 where he is a member of the
operations group; Vice President of PTR since January 1995; from July 1993 to
January 1995, a Senior Vice President in business development at NationsBank
in Atlanta; prior thereto, Division President and Partner of Trammell Crow
Residential Services.
DONALD J. SCHULTZ--41--Senior Vice President of Homestead since May 1996 and
Homestead Village Incorporated since June 1995 where he is a member of the
development group; from November 1993 to June 1995, Senior Vice President of
Construction with Avalon Properties, Inc.; and from March 1986 to November
1993, President of Construction for Trammell Crow Residential (Northwest
Region).
OTHER OFFICERS OF HOMESTEAD
LAURIE B. BURNS--33--Vice President of Homestead since May 1996, and
Homestead Village Incorporated since November 1995 where she is a member of
the development group; from March 1994 to November 1995, Director of the Real
Estate division of Apple South, Inc.; and from June 1986 to March 1994, with
the Real Estate Division of Taco Bell Corporation where her most recent
position was a Director of the Real Estate Division.
ROBERT E. CLARK--36--Vice President, Treasurer and Controller of Homestead
since May 1996 and Vice President of Homestead Village Incorporated since
September 1995 where he is responsible for accounting and financial reporting;
from September 1990 to August 1995, Director of accounting for the Residence
Inn, Courtyard and Fairfield Inn divisions of Marriott International; and from
February 1989 to September 1990, controller of business travel programs for
Marriott where he was responsible for all accounting and finance for
Marriott's marketing programs.
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<PAGE>
GARY A. DELAPP--36--Vice President of Homestead since May 1996 and of
Homestead Village Incorporated since February 1996 where he is a member of the
operations group; from July 1983 to February 1996 with Vista Host Inc. where
his most recent position was Senior Vice President of Operations.
ROBERT W. FROST JR.--49--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since November 1995 where he is a member of the
development group; from February 1982 to November 1995, Vice President of
Payless Shoesource, Inc. where he was responsible for the real estate and
construction in a 23-state region. Prior thereto, Mr. Frost was a Group
Development Manager of The Southland Corporation where he was responsible for
expanding Chief Auto Parts stores in California, Nevada and Texas.
FREDRIC A. GOERS--53--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since November 1995 where he is a member of the
development group; from September 1993 to October 1995 Vice President of
Discovery Zone, Inc. where he was responsible for design and construction; and
from May 1990 to August 1993, a partner of Garrison Goers Associates, Inc., a
construction and development firm providing service to institutional lenders,
developers and investors.
BRADLEY P. GRIGGS--39--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since September 1995 where he is a member of
the development group; from November 1990 to September 1995; Project Manager
with The Fieldstone Company where he directed all aspects of project
management; and from November 1987 to November 1990, Operations Manager with
M.J. Brock and Sons, Inc. for Riverside and San Diego Counties.
A. DAVID HALE--38--Vice President of Homestead since May 1996 and Homestead
Village Incorporated since June 1995 where he is a member of the development
group; from May 1992 to June 1995, Director of Human Resources of Ryland Homes
mid-Atlantic region; and from April 1989 to May 1992, Vice President of
Acquisition and Development at Questar Properties.
LAURA L. HAMILTON--33--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since January 1996 where she supervises
Homestead's due diligence group, and a member of the PTR due diligence group
since April 1992; prior thereto Ms. Hamilton was a real estate paralegal with
the law firm of Poole, Kelly & Ramo in Albuquerque, New Mexico.
W. GEOFFREY JEWETT--48--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since January 1996 where he is a member of the
operations group; Vice President of PTR since March 1995; from November 1994
to March 1995, Vice President of Security Capital Pacific Incorporated which
merged into PTR in March 1995 ("PACIFIC"), where he was involved with and had
overall responsibility for acquisitions; from May 1994 to November 1994, Vice
President of ATLANTIC, where he had overall responsibility for the
acquisitions group; from September 1993 to April 1994, member of the
acquisition group of PACIFIC; prior thereto, Vice President of LaSalle
Partners Limited in its acquisitions and property finance group, where he
provided investment property sale, financing and acquisition services on
behalf of corporate and institutional clients throughout the western United
States.
JEFFREY A. JONES--37--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since June 1995 where he is a member of the
development group and with PTR since February 1995; from June 1993 to January
1995, Vice President of SENTRE Partners where he was responsible for
investment acquisitions and development activities in Mexico; and from
November 1989 to April l993, a Development Manager with Stark Companies
International where he was responsible for site acquisitions and entitlement
processing for residential and hotel projects.
ARTHUR G. MAY--36--Vice President of Homestead since May 1996 and Homestead
Village Incorporated since June 1995 where he is a member of the development
group and with PTR since September 1994; from
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<PAGE>
August 1989 to September 1994, Vice President and Chief Financial Officer at
Western Development Group, Inc. where he was responsible for residential
development projects. Prior thereto, Mr. May was a Project Manager at J.R.
Abbott Construction Co., Inc.
GREGG A. PLOUFF--39--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since June 1995 where he is a member of the
development group; Vice President of PTR since March 1995; from July 1994 to
March 1995, Vice President of PACIFIC; from November 1993 to July 1994, a
member of the acquisitions group of PTR; prior to November 1993, Mr. Plouff
served in an acquisitions consulting capacity for PTR; prior thereto, Mr.
Plouff was with Trammell Crow Residential, most recently as a partner, where
he was involved with residential development in the Dallas, Chicago and
Southern California markets.
MARK E. RILEY--37--Vice President of Homestead since May 1996 and Homestead
Village Incorporated since June 1995 where he is a member of the development
group; from September 1993 to September 1994, co-founder of Southeast Lodges
Development Company where he developed and operated economy extended-stay
facilities across the Southeast; and from May 1990 to September 1993, Vice
President of Suburban Lodges of America Inc., where he was responsible for
franchising and financing activities of economy extended-stay facilities.
WILLIAM C. STEAD--53--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since September 1995 where he is a member of
the development group; from March 1991 to September 1995, Vice President of
Heritage Construction Company where he has managed all development and
construction activities; and from May 1988 to February 1991, Partner of
Morgan-Stead & Associates which complete projects abandoned by financial
institutions in Tennessee, Florida and Georgia.
S. SCOTT STEWART--32--Vice President of Homestead since May 1996 and
Homestead Village Incorporated since June 1995 where he is a member of the
development group; from May 1993 to January 1995, President of Potomac Land &
Development Company; and from November 1991 to May 1993 with Providence
Savings Bank as a Real Estate Owned Manager.
MANAGEMENT PHILOSOPHY
Homestead believes that the quality of management should be assessed in the
light of the following factors:
Management Depth/Succession. Management should have several senior
executives with the leadership, operational, investment and financial
skills and experience to oversee the entire operations of Homestead.
Homestead believes that several of its senior officers could serve as the
principal executive officer and continue Homestead's performance.
Strategic Vision. Management should have the strategic vision to
determine an investment focus that provides both favorable initial yields
and strong long-term growth prospects. Homestead will demonstrate its
strategic vision by focusing Homestead on the extended-stay lodging
business in target markets where demographic and supply factors will permit
high occupancies at increasing rates.
Research Capability. Management should have the means for researching
both markets and product to determine appropriate investment opportunities.
Homestead divides its target markets into multiple submarkets for analysis
purposes. Through its relationship with Security Capital Investment
Research, Homestead will have several professionals devoting substantial
time to research, on a submarket-by-submarket basis, who are closely
supervised by the directors and executive officers of Homestead.
Investment Committee Process. Investment committees should provide
discipline and guidance for the investment activities of Homestead in order
to achieve its long-term strategic objectives. The four members of
Homestead's Investment Committee have a combined 56 years of experience in
the real estate industry. The Investment Committee receives detailed
written analyses and research, in a standardized format, from
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Homestead's development and acquisition personnel and evaluates all
prospective investments pursuant to uniform underwriting criteria prior to
submission of investment recommendations to the Homestead Board. The
quality of the Investment Committee's process will be evident from the
ability of Homestead to achieve its investment goals, generally exceeding
its projected initial returns and growth from the extended-stay lodging
business.
Development Capability. Homestead has no plans or intentions of acquiring
existing hotel properties and converting them to the Homestead Village
concept. Homestead's personnel have substantial development experience.
Homestead has 39 full-time professionals committed to development
activities. Homestead has engaged in substantial development at attractive
yields that have generally exceeded projections.
Due Diligence Process. Management should have experienced personnel
dedicated to performing intelligent and thorough due diligence. Homestead
has six full-time due diligence professionals and has developed uniform
systems and procedures for due diligence.
Operating Capability. Management can substantially improve cash flow by
actively and effectively managing assets. Homestead has devoted substantial
personnel and financial resources to developing value-added operating
systems, which control and effectively administer the operation of
Homestead's extended-stay lodging business.
COMMITTEE OF THE BOARD
The Homestead Board will establish an Audit Committee consisting solely of
Independent Directors prior to the consummation of the Transaction. The Audit
Committee makes recommendations concerning the engagement of independent
public accountants, reviews the plans and results of the audit engagement with
the independent public accountants, approves professional services provided by
the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit
fees and reviews the adequacy of Homestead's internal accounting controls.
MANAGEMENT COMPENSATION
Directors' Compensation. Directors who are not employees of Homestead or SCG
will receive $14,000 per year for serving as a director and will be reimbursed
for their travel and other expenses incurred in connection with attending
meetings of the Homestead Board or committees thereof.
Executive Compensation. Homestead was incorporated in January 1996 and did
not conduct any operations prior to that time. Homestead anticipates that
during 1996 its most highly compensated officers, with estimated salary
amounts for each such individual on an annualized basis, will be David C.
Dressler, Jr., $195,000; Robert W. Frost, Jr., $160,000; John R. Patterson,
$160,000; and Donald J. Schultz, $160,000, (the "Named Executive Officers").
Each Named Executive Officer will also be eligible for discretionary bonuses.
STOCK OPTION PLAN
Long-Term Incentive Plan
Prior to consummation of the Mergers, Homestead anticipates adoption of the
Homestead Village Properties Incorporated Long-Term Incentive Plan (the
"Incentive Plan"), subject to approval of Homestead shareholders, which, it is
expected, will contain the following terms and conditions. The number of
shares of Homestead Common Stock which may be awarded under the Incentive Plan
shall not exceed 5,000,000 shares in the aggregate. Shares of Homestead Common
Stock issued under the Incentive Plan may be authorized and unissued shares or
treasury shares. In the event of certain transactions affecting the type or
number of outstanding shares, the number of shares subject to the Incentive
Plan, the number or type of shares subject to outstanding awards, and the
exercise price thereof, will be appropriately adjusted. The Incentive Plan
will authorize the award of stock options, stock appreciation rights ("SARs"),
stock grants (which may be subject to restrictions), performance stock and
performance units, and authorizes the establishment of one or more stock
purchase
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programs. A committee of the Homestead Board (the "Committee") will be
appointed to administer the Incentive Plan. Subject to the terms of the
Incentive Plan, the Committee will determine which employees or other
individuals providing services to Homestead shall be eligible to receive
awards under the Incentive Plan, and the amount, price, timing and other terms
and conditions applicable to such awards.
Options awarded under the Incentive Plan may be either incentive stock
options which are intended to satisfy the requirements of Section 422 of the
Code, or non-qualified stock options which are not intended to satisfy Section
422 of the Code. SARs may be granted in tandem or otherwise in connection with
options, or may be granted as free-standing awards. Exercise of an option will
result in the corresponding surrender of any tandem SAR. Options and SARs will
become exercisable in accordance with the terms established by the Committee,
which may include conditions relating to completion of a specified period of
service or achievement of performance standards. Options and SARs will expire
on the date determined by the Committee which shall not be later than the
earliest to occur of (i) the tenth anniversary of the grant date, (ii) the
first anniversary of the participant's termination of employment by reason of
death or disability, (iii) the third anniversary of the participant's
termination of employment by reason of retirement, or (iv) the three month
anniversary of the participant's termination of employment for any other
reason. Shares transferred to a participant pursuant to the exercise of an
option may be subject to such additional restrictions or limitations as the
Committee may determine.
Under the Incentive Plan, the Committee may grant awards of Homestead Common
Stock to participants, which shall be subject to such conditions and
restrictions, if any, as the Committee may determine. During the period a
stock award is subject to restrictions or limitations, the Committee may award
the participant dividend rights with respect to such shares. The Incentive
Plan may also provide that the Committee may establish one or more stock
programs which may permit purchases of Homestead Common Stock.
The Committee may award participants performance stock, the distribution of
which is subject to achievement of performance objectives, or performance
units which entitle the participant to receive value for the units at the end
of a performance period to the extent provided under the award. In either
case, the number of shares or units and the performance measures and periods
shall be established by the Committee at the time the award is made.
RELATIONSHIP WITH SECURITY CAPITAL GROUP INCORPORATED
Prior to consummation of the Mergers, portions of Homestead's properties,
assets and operations were owned by subsidiaries of each of PTR, ATLANTIC and
SCG. SCG is a private real estate company which owns controlling positions in
several real estate operating companies, including PTR and ATLANTIC, and owns
several REIT managers which direct these operating businesses.
Immediately after completion of the Mergers, SCG is expected to beneficially
own 8,102,557 shares of Homestead Common Stock or approximately 45.6% of the
outstanding shares of Homestead Common Stock, not including 2,243,038 shares
which will be issued to and held in escrow by an escrow agent pending funding
of convertible mortgages loans under the Funding Commitment Agreements. See
"Certain Relationships and Transactions--Escrow Agreement." Through its
beneficial ownership of Homestead Common Stock, SCG will control 45.6% of the
vote on all matters submitted for Homestead shareholder action. The foregoing
share ownership information does not give effect to the issuance of shares
upon exercise of options or other awards granted under the Incentive Plan. SCG
will also own Homestead Warrants to acquire an additional 5,032,707 shares of
Homestead Common Stock, which, if fully exercised, would increase SCG's
beneficial ownership of Homestead Common Stock to 57.7%. SCG may, over time,
dispose of some of the shares of Homestead Common Stock it acquires in the
Transaction to reduce its beneficial ownership in Homestead to below 50%. In
addition, pursuant to an Investor Agreement between SCG and Homestead, SCG
will agree to exercise at the request of Homestead all Homestead Warrants it
receives in the Transaction. In exchange for its agreement to exercise
Homestead Warrants, Homestead will grant SCG the right, among other things, to
nominate up to two directors to the Homestead Board, depending upon SCG's
level of ownership of shares of Homestead Common Stock, and to be consulted on
certain business decisions made by Homestead. In addition, pursuant to
investor
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agreements with ATLANTIC and PTR, each of ATLANTIC and PTR will have the right
to nominate one director to the Homestead Board. See "Certain Relationships and
Transactions--PTR and ATLANTIC Investor Agreements" and "--SCG Investor
Agreement."
SCG has funded the development of the Homestead Village concept since 1991.
As part of the Transaction, SCG will contribute, for no additional
consideration, the Homestead Village trademark, the Homestead Village operating
system and Homestead Village properties which it is developing in areas outside
the target markets of PTR and ATLANTIC. SCG will also provide financing to
Homestead for additional developments undertaken between the execution of the
Merger Agreement and the Closing Date.
Prior to the Mergers, Homestead obtained certain services from affiliates of
SCG and the SCG employees who performed services for Homestead under the PTR
and ATLANTIC REIT management agreements and the property management agreements
participated in a number of employee benefit plans maintained by SCG. Prior to
completion of the Transaction, SCG and Homestead will enter into certain
agreements relating to these matters. See "Business--Administrative Services
Agreement" and "Certain Relationships and Transactions."
CERTAIN RELATIONSHIPS AND TRANSACTIONS
PROTECTION OF BUSINESS AGREEMENT
Each of PTR, ATLANTIC and SCG will enter into a protection of business
agreement dated as of the Closing Date (the "Protection of Business Agreement")
with Homestead which will prohibit PTR, ATLANTIC, SCG and their respective
affiliates from engaging, directly or indirectly, in the extended-stay lodging
business in the continental United States except through Homestead and its
subsidiaries. The Protection of Business Agreement also prohibits Homestead
from, directly or indirectly, engaging in the ownership, operation,
development, management or leasing of multifamily properties. The Protection of
Business Agreement does not prohibit any of PTR, ATLANTIC or SCG from: (i)
owning securities of Homestead; (ii) owning up to 5% of the outstanding
securities of another person engaged in owning, operating, developing, managing
or leasing extended-stay lodging properties, so long as they do not actively
participate in the business of such person; (iii) owning the outstanding
securities of another person, a majority owned subsidiary, division, group,
franchise or segment of which is engaged in owning, operating, developing,
managing or leasing extended-stay lodging properties, so long as not more than
5% of such person's consolidated revenues are derived from such properties; and
(iv) owning securities of another person primarily engaged in business other
than a business owning, operating, developing, managing or leasing extended-
stay lodging properties, including a person primarily engaged in business as an
owner, operator or developer of hotel properties, whether or not such person
owns, operates, develops, manages or leases extended-stay lodging properties.
The Protection of Business Agreement does not prohibit Homestead from: (i)
owning securities of ATLANTIC, PTR or SCG; (ii) owning up to 5% of the
outstanding securities of another person engaged in owning, operating,
developing, managing or leasing garden style multifamily properties; and (iii)
owning the outstanding securities of another person, a majority owned
subsidiary, division, group, franchise or segment of which is engaged in
owning, operating, developing, managing or leasing garden style multifamily
properties, so long as not more than 5% of such person's consolidated revenues
are derived from such properties. The Protection of Business Agreement will
terminate in the event of an acquisition, directly or indirectly (other than by
purchase from PTR, ATLANTIC and SCG or their respective affiliates (as defined
in the Protection of Business Agreement)), by any person (or group of
associated persons acting in concert), other than PTR, ATLANTIC, SCG, or their
respective affiliates, of 25% or more of the outstanding shares of voting stock
of Homestead, without the prior written consent of the Homestead Board. Subject
to earlier termination pursuant to the preceding sentence, the Protection of
Business Agreement will terminate on the tenth anniversary of the Closing Date.
SCG INVESTOR AGREEMENT
Homestead and SCG will enter into an investor agreement (the "SCG Investor
Agreement"), which will require SCG, upon notice from Homestead, to exercise
all of the Homestead Warrants (at an exercise price of $10.00 per share)
received by SCG in connection with the Transaction. Homestead may call for the
exercise of Homestead Warrants by SCG upon 10 days' prior written notice. The
SCG Investor Agreement, among other things, provides that, without having first
consulted with the nominee of SCG designated in writing, Homestead may not seek
Homestead Board approval of (i) Homestead's annual budget, (ii) incurring
expenses in any year
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exceeding (A) any line item in the annual budget by 20% and (B) the total
expenses set forth in the annual budget by 5%, (iii) acquisitions or
dispositions in a single transaction or group of related transactions where
the aggregate purchase price paid or received exceeds $5 million, (iv) new
contracts with a service provider for (A) investment management, property
management or leasing services, or (B) that reasonably contemplates annual
contract payments by Homestead in excess of $200,000, (v) the declaration or
payment of any dividend or other distribution, (vi) the approval of stock
option plans, (vii) the offer or sale of any shares of stock of Homestead or
any securities convertible into shares of stock of Homestead (other than the
sale or grant of any stock or grants of options or exercise of options granted
under any benefit option plan approved by stockholders) and (viii) the
incurrence, restructuring, renegotiation or repayment of indebtedness for
borrowed money in which the aggregate amount involved exceeds $5 million. The
SCG Investor Agreement also provides that, so long as SCG owns at least 10% of
the outstanding shares of Homestead Common Stock, Homestead may not increase
the number of persons serving on the Homestead Board to more than seven. SCG
also will be entitled to designate one or more persons as directors of
Homestead, as follows: (i) so long as SCG owns at least 10% but less than 30%
of the outstanding shares of Homestead Common Stock, it is entitled to
nominate one person; and (ii) so long as SCG owns at least 30% of the
outstanding shares of Homestead Common Stock, it is entitled to nominate that
number of persons as shall bear approximately the same ratio to the total
number of members of the Homestead Board as the number of shares of Homestead
Common Stock beneficially owned by SCG bears to the total number of
outstanding shares of Homestead Common Stock, provided, that SCG shall be
entitled to designate no more than two persons so long as the Homestead Board
consists of no more than seven members. Any person who is employed by SCG or
who is an employee, a 25% shareholder or a director of any corporation of
which SCG is a 25% shareholder (except for Homestead) shall be deemed to be a
designee of SCG. The nominee(s) of SCG may, but need not, be the same
person(s) nominated by either PTR pursuant to the PTR Investor Agreement or
ATLANTIC pursuant to the ATLANTIC Investor Agreement.
In addition, because SCG is an affiliate of Homestead, the SCG Investor
Agreement provides SCG with registration rights pursuant to which, in certain
specified circumstances, SCG may request, at any time after the first
anniversary of the date on which the Homestead Common Stock is registered with
the Securities and Exchange Commission (the "Commission") under either Section
12(b) or 12(g) of the Exchange Act, and on not more than three occasions,
registration of all of SCG's Homestead Common Stock pursuant to Rule 415 under
the Securities Act of 1933 (the "Securities Act").
FUNDING COMMITMENT AGREEMENTS
Pursuant to funding commitment agreements to be dated as of the Closing Date
(the "Funding Commitment Agreements") each of PTR and ATLANTIC will agree to
make mortgage loans to Homestead of up to $144,044,620 and $98,028,471,
respectively. The obligations of PTR and ATLANTIC are limited to a specific
dollar amount for each property identified in the respective Funding
Commitment Agreements. Upon any determination by Homestead to commence
development of a property identified in the Funding Commitment Agreement,
Homestead is required to notify PTR or ATLANTIC, as the case may be, and PTR
or ATLANTIC, as the case may be, is required to endeavor in good faith to fund
up to the full amount of its obligation with respect to such property.
Homestead is required to complete the development of such property consistent
with the development plans for such property. Each mortgage loan issued by
Homestead pursuant to a Funding Commitment Agreement will be convertible into
shares of Homestead Common Stock on the basis of one share of Homestead Common
Stock for every $11.50 of principal outstanding on the mortgage loan. The
obligation of Homestead to call for funding of, and the obligations of PTR and
ATLANTIC to provide funding for, the mortgage loans expires on March 31, 1998,
except with respect to properties for which Homestead has given notice that it
intends to develop. Interest on the mortgage loans accrues at the rate of 9%
on the unpaid principal balance, payable every six months. The mortgages are
scheduled to mature on October 31, 2006, and are not callable until five years
after the Closing Date. Homestead has pledged substantially all of its assets
as collateral for the mortgage loans.
Pursuant to each Funding Commitment Agreement, PTR and ATLANTIC will provide
Homestead aggregate funding on such developments in the amounts of up to
approximately $133 million and $111 million,
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respectively, which amounts are anticipated to be sufficient to complete the
development of the respective Homestead Village facilities contributed by
them. PTR and ATLANTIC will receive convertible mortgage notes in respect of
such fundings in stated amounts of up to approximately $144 million and $98
million, respectively. The effect of these provisions is that PTR will fund
$898,000 for each $1,000,000 principal amount of convertible mortgage loans
and ATLANTIC will fund $1,133,535 for each $1,000,000 principal amount of
convertible mortgage loans. The differences between the funded amounts and the
stated amounts of the convertible mortgage loans arise because the rate of
return on the existing Homestead Village facilities contributed by PTR is
projected to exceed the rate of return on the Homestead Village facilities
contributed by PTR and ATLANTIC to Homestead which are under construction or
in pre-development planning. In calculating the relative ownership interests
of PTR and ATLANTIC, SCG assumed that as of July 1, 1996 PTR would have 28
Homestead Village facilities in operation and generating income, while
ATLANTIC would have none. In addition, SCG expects that the average property
development costs for the existing PTR Homestead Village properties will, on
balance, be less than those for the PTR and ATLANTIC Homestead Village
properties projected to be built in the future because a large portion of the
existing PTR Homestead Village properties were in planning or under
development during 1992 and 1993 when land prices and construction costs were
less than they are now and are anticipated to be over the next 18 months. The
stated amount of the convertible mortgage loans was determined based on a 9%
interest rate to provide an effective yield to each of PTR and ATLANTIC that
is reflective of the relative rates of return anticipated to be realized on
all of the facilities contributed by PTR and ATLANTIC, respectively.
ATLANTIC AND PTR INVESTOR AGREEMENTS
ATLANTIC and PTR will each enter into an investor and registration rights
agreement with Homestead (the "ATLANTIC and PTR Investor Agreements") pursuant
to which ATLANTIC and PTR each are entitled to designate one person for
nomination to the Homestead Board, and Homestead will use its best efforts to
cause the election of such nominee(s), until March 31, 1998 and for so long
thereafter as PTR or ATLANTIC has the right to convert in excess of $20
million in principal amount of loans made pursuant to the Funding Commitment
Agreement. Such nominee(s) may, but need not, be the same person(s) nominated
by SCG pursuant to the SCG Investor Agreement. In addition, Homestead has
granted to each of ATLANTIC and PTR registration rights with respect to the
issuance upon conversion and the distribution of all of the shares of
Homestead Common Stock issuable upon conversion of the convertible mortgage
notes. Prior to the one-year anniversary of the date the Homestead Common
Stock is registered under the Exchange Act, each of ATLANTIC and PTR may
request one registration of those shares of Homestead Common Stock which are
issued upon conversion of any or all the convertible mortgage notes converted
during such one-year period and which it intends to distribute to its
stockholders. After such one-year anniversary, each of ATLANTIC and PTR may
request three additional registrations pursuant to Rule 415 promulgated under
the Securities Act of all shares of Homestead Common Stock issued or issuable
upon conversion of the convertible mortgage notes. Such registration, except
for the fees and disbursements of counsel to ATLANTIC or PTR, shall be at the
expense of Homestead.
ESCROW AGREEMENT
Pursuant to an escrow agreement to be dated the Closing Date (the "Escrow
Agreement") among Homestead, SCG and State Street Bank and Trust Company
("Escrow Agent"), a portion of the shares of Homestead Common Stock issuable
to SCG in the Transaction will be placed in an escrow account maintained with
the Escrow Agent. In general, as PTR and ATLANTIC advance funds to Homestead
in accordance with the terms of their respective Funding Commitment
Agreements, a portion of the shares of Homestead Common Stock in the escrow
account will be released to SCG, together with a proportionate amount of
accrued dividends, if any. On January 1, 2000, unless all of the shares of
Homestead Common Stock placed in the escrow account have been released to SCG
sooner in accordance with the provisions of the Escrow Agreement, the Escrow
Agent will release to Homestead all of the shares of Homestead Common Stock
remaining in the escrow account. All dividends or other distributions paid by
Homestead in respect of the shares of Homestead Common Stock held in the
escrow account shall be retained by the Escrow Agent for the benefit of the
party to whom the related shares of Homestead Common Stock are ultimately
issued. The Escrow Agent will vote all shares of Homestead
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Common Stock held in the escrow account proportionately in accordance with the
vote of all other Homestead shareholders as instructed by Homestead. In the
event that instructions are not received, the Escrow Agent will not vote such
shares.
Because the number of shares of Homestead Common Stock being received by SCG
is based on the anticipated future REIT management fees and property
management fees SCG would have received under existing agreements with PTR and
ATLANTIC for the 80 Homestead Village properties contributed to Homestead, net
of overhead of SCG related to those properties, and since many of the
contributed Homestead Village properties are either in the development or
planning stage, the purpose of the Escrow Agreement is to time SCG's receipt
of the shares of Homestead Common Stock pursuant to the Merger Agreement with
the time the properties are actually funded and supported by a completion
guaranty.
FINDER'S AGREEMENTS
Pursuant to a series of agreements between PTR and the unaffiliated person
who brought the Homestead concept to PTR and certain of his affiliates
(collectively, "Finder"), Finder agreed to assist PTR in locating, developing
and operating temporary corporate affordable housing facilities. In accordance
with these agreements, Finder is entitled to receive: (i) with respect to four
Homestead properties currently in operation and located in the Dallas area
(collectively, the "Dallas Properties"), an annual amount of $535,000; (ii)
with respect to the first 35 Homestead facilities constructed by Homestead
(other than the Dallas Properties), an annual amount of $7,500 per property
(such amount subject to proportionate increase or decrease if the property has
less than 120 units or more than 150 units) for each fiscal year beginning on
the date the facility achieves 80% occupancy and provided that Homestead
expects to receive for such fiscal year an annual return from the facility
equal to 12% of its undepreciated cost in the facility; (iii) upon the sale of
any of the Dallas Properties to an unaffiliated third party, 20% of the net
proceeds received by Homestead from the sale of such property; and (iv) upon
the sale of any of the other 35 properties to an unaffiliated third party, 10%
of the net proceeds received by Homestead from the sale of such property. The
annual payments for each facility are payable until the earliest to occur of
the sale of the facility to an unaffiliated third party, a breach of the
agreements by Finder (subject to various cure provisions), and February 2043.
In addition, Finder has agreed, until December 31, 1996, not to compete,
directly or indirectly, with Homestead in certain states in which Homestead
operates. Finder is not affiliated with Homestead, PTR, ATLANTIC or SCG.
Homestead does not currently have an intention to sell any of its properties.
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PRINCIPAL SHAREHOLDERS
As of July 12, 1996, there were 1,000 shares of Homestead Common Stock
issued and outstanding, which were held of record by SCG. The following table
sets forth, as of July 12, 1996 and as adjusted to give effect to the
Transaction, certain information regarding the beneficial ownership of
Homestead Common Stock by each person who is expected to be the beneficial
owner of five percent or more of the outstanding Homestead Common Stock, by
each of Homestead's directors and Named Executive Officers, and by all
directors and executive officers of Homestead as a group. As of such date,
there are expected to be approximately 3,400 record holders of Homestead
Common Stock.
<TABLE>
<CAPTION>
AMOUNT OF PERCENT OF
NAME AND ADDRESS OR NUMBER OF PERSONS IN BENEFICIAL HOMESTEAD
GROUP OWNERSHIP(1) COMMON STOCK
---------------------------------------- ------------ ------------
<S> <C> <C>
Security Capital Group Incorporated.......... 13,135,264(2) 57.7%
125 Lincoln Avenue
Santa Fe, New Mexico 87501
William D. Sanders (Corporate Ownership)... 13,135,264(3) 57.7%
7777 Market Center Avenue
El Paso, Texas 79912
William D. Sanders (Personal Ownership).... 64,593(4) *
7777 Market Center Avenue
El Paso, Texas 79912
C . Ronald Blankenship....................... 7,962 *
125 Lincoln Avenue
Santa Fe, New Mexico 87501
David C. Dressler, Jr........................ 909 *
125 Lincoln Avenue
Santa Fe, New Mexico 87501
John P. Frazee, Jr........................... 3,143 *
9512 Bull Headley Road
Tallahassee, Florida 32312
Robert W. Frost, Jr.......................... 0 *
Six Piedmont Center
Atlanta, Georgia 30305
John R. Patterson............................ 0 *
125 Lincoln Avenue
Santa Fe, New Mexico 87501
Donald J. Schultz............................ 199 *
125 Lincoln Avenue
Santa Fe, New Mexico 87501
Directors and Executive Officers as a group
(6 persons)................................. 12,213 *
</TABLE>
- --------
* Less than 1%.
(1) Includes for SCG, Messrs. Sanders, Blankenship, Dressler, Frazee and
Schultz, and all directors and executive officers as a group, 5,032,707,
25,935, 3,197, 365, 1,262 and 80, and 5,105 shares of Homestead Common
Stock, respectively, that may be acquired upon exercise of Homestead
Warrants.
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(2) These shares of Homestead Common Stock will be owned of record by SC
Realty Incorporated, a wholly owned subsidiary of SCG, and will be pledged
to secure SCG's $300 million revolving line of credit facility with a
syndicate of banks. As of July 12, 1996, there were $165 million of
borrowings outstanding under the line of credit. The line of credit is
also secured by securities owned by SCG of PTR, ATLANTIC, Security Capital
Industrial Trust, a publicly-traded REIT affiliated with SCG, and Security
Capital U.S. Realty, an entity based in Luxembourg that is affiliated with
SCG and which invests in real estate operating companies in the United
States. SCG estimates that the aggregate market value of the pledged
securities exceeded $2.0 billion as of July 12, 1996. SCG was in
compliance with all covenants under the line of credit as of March 31,
1996. Does not include up to 2,243,038 shares of Homestead Common Stock
which may be issued to SCG pursuant to the Escrow Agreement. See "Certain
Relationships and Transactions--Escrow Agreement."
(3) Mr. Sanders may be deemed to beneficially own these shares of Homestead
Common Stock, which will be owned by SCG, because Mr. Sanders shares
voting and dispositive power with respect to all shares of Homestead
Common Stock owned by SCG. SCG and Mr. Sanders intend to play a major role
in the direction of Homestead for the purpose of maximizing the value of
Homestead.
(4) 3,455 of these shares of Homestead Common Stock will be owned by Mr.
Sanders directly. Mr. Sanders may be deemed to beneficially own 58,395 of
these shares of Homestead Common Stock which will be owned by Sanders
Partners Incorporated and CAMPR Partners Limited, family entities with
respect to which Mr. Sanders shares voting and dispositive power, and
2,743 of these shares of Homestead Common Stock will be owned by a
foundation of which Mr. Sanders is a director.
DESCRIPTION OF HOMESTEAD SECURITIES
The following summary of the terms of the securities of Homestead does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Homestead Charter and Bylaws, copies of which have been filed
as exhibits to the Registration Statement of which this Appendix A forms a
part.
GENERAL
The authorized stock of Homestead consists of 250,000,000 shares of common
stock, $0.01 par value per share. The Homestead Board may classify or
reclassify any unissued shares of stock from time to time by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends and other distributions,
qualifications or terms or conditions of redemption of such stock. No holder
of any class of stock of Homestead will have any preemptive right to subscribe
to any securities of Homestead except as may be granted by the Homestead Board
in authorizing the issuance of a class of preferred stock. Under Maryland law,
stockholders are generally not liable for Homestead's debts or obligations.
For a description of certain provisions that could have the effect of
delaying, deferring or preventing a change in control, see "Risk Factors--
Limitations on Changes in Control," "Certain Relationships and Transactions--
SCG Investor Agreement" and "Certain Provisions of Maryland Law and of
Homestead's Charter and Bylaws."
The transfer agent and registrar for the Homestead Common Stock is The First
National Bank of Boston, 150 Royall Street, Canton, Massachusetts 02021.
HOMESTEAD COMMON STOCK
The outstanding shares of Homestead Common Stock are fully paid and
nonassessable. Each share of Homestead Common Stock entitles the holder to one
vote on all matters requiring a vote of stockholders, including the election
of directors. Stockholders do not have the right to cumulate their votes in
the election of directors, which means that the holders of a majority of the
outstanding shares of Homestead Common Stock can elect all of the directors
then standing for election. Stockholders are entitled to such dividends as may
be authorized from time to time by the directors out of assets legally
available therefor.
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In the event of any liquidation, dissolution or winding-up of the affairs of
Homestead, holders of Homestead Common Stock will be entitled, subject to the
preferential rights of holders of preferred stock, if any, to share ratably in
the assets of Homestead remaining after provision for payment of liabilities
to creditors.
All shares of Homestead Common Stock have equal distribution, liquidation
and other rights, and shall have no preference, appraisal, conversion or
exchange rights. Upon completion of the Distribution, 17,749,735 shares of
Homestead Common Stock will be issued and outstanding (including the 2,243,038
shares held in escrow).
PREFERRED STOCK
The Homestead Board is empowered by the Homestead Charter, without the
approval of stockholders, to cause shares of preferred stock to be issued in
one or more series and to determine, among other things, the number of
preferred shares of each series and the rights, preferences, powers and
limitations of each series which may be senior to the rights of Homestead
Common Stock. The issuance of preferred stock could have the effect of
delaying, deferring or preventing a change in control of Homestead and may
adversely affect the voting and other rights of stockholders. Upon completion
of the Transaction, no shares of preferred stock will be outstanding and
Homestead has no present plans to issue any preferred stock following
completion of the Distribution other than as contemplated by the Rights
Agreement (as defined below).
PURCHASE RIGHTS
On May 16, 1996, the Board of Directors authorized a dividend of one
Purchase Right for each share of Homestead Common Stock outstanding at the
close of business on May 16, 1996 (the "Rights Record Date") to the holders of
Homestead Common Stock of record as of the Rights Record Date. The dividend
was paid on the Rights Record Date. The holders of any additional shares of
Homestead Common Stock issued after the Rights Record Date and before the
redemption or expiration of the Purchase Rights will also be entitled to one
Purchase Right for each such additional share. Each Purchase Right entitles
the registered holder under certain circumstances to purchase from Homestead
one-hundredth of a Participating Preferred Share of Homestead at a price of
$50.00 per one-hundredth of a Participating Preferred Share (the "Purchase
Price"), subject to adjustment. The description and terms of the Purchase
Rights are set forth in the Rights Agreement dated as of May 16, 1996 between
Homestead and The First National Bank of Boston, as rights agent (the "Rights
Agreement").
The Purchase Rights will be exercisable and will be evidenced by separate
certificates only after the earlier to occur of: (1) 10 days following a
public announcement that a person or group of affiliated or associated persons
(excluding certain affiliates of Homestead) has acquired beneficial ownership
of 20% or more of the outstanding shares of Homestead Common Stock (thereby
becoming an "Acquiring Person"), (2) 15 business days (or such later date as
may be determined by action of the Homestead Board prior to such time as any
person or group of affiliated persons becomes an Acquiring Person) following
the commencement of, or announcement of an intention to make, a tender offer
or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of persons (excluding certain affiliates of
Homestead) of 25% or more of the outstanding shares of Homestead Common Stock
or (3) 15 business days (or such later date as may be determined by action of
the Homestead Board prior to such time as any person becomes an Acquiring
Person) after the date of filing by any person of, or the first public
announcement of the intention of any person to file, any application, request,
submission or other document with any federal or state regulatory authority
seeking approval of, attempting to rebut any presumption of control upon, or
otherwise indicating an intention to enter into, any transaction or series of
transactions (other than a transaction in which newly issued Homestead Common
Stock is issued directly by Homestead) the consummation of which would result
in any person (excluding certain affiliates of Homestead) becoming the
beneficial owner of Homestead Common Stock aggregating 25% or more of the then
outstanding shares of Homestead Common Stock (the first to occur of such dates
being called the "Rights Distribution Date"). With respect to any of the stock
certificates outstanding as of the Rights Record Date, until the Rights
Distribution Date the Purchase Rights will be evidenced by such stock
certificate. Until the Rights Distribution Date (or earlier redemption or
expiration of the Purchase Rights), new stock certificates
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<PAGE>
issued after the Rights Record Date upon transfer or new issuance of shares of
Homestead Common Stock will contain a notation incorporating the Rights
Agreement by reference. Notwithstanding the foregoing, if the Homestead Board
in good faith determines that a person who would otherwise be an Acquiring
Person under the Rights Agreement has become such inadvertently, and such
person divests as promptly as practicable a sufficient number of shares of
Homestead Common Stock so that such person would no longer be an Acquiring
Person, then such person shall not be deemed to be an Acquiring Person for
purposes of the Rights Agreement.
The Purchase Rights will expire on May 16, 2006 (the "Final Expiration
Date"), unless the Final Expiration Date is extended or unless the Purchase
Rights are earlier redeemed or exchanged by Homestead, in each case as
described below.
The Purchase Price payable, and the number of Participating Preferred Shares
or other securities or property issuable, upon exercise of the Purchase Rights
are subject to adjustment under certain circumstances from time to time to
prevent dilution. With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment of at
least 1% in such Purchase Price.
Participating Preferred Shares purchasable upon exercise of the Purchase
Rights will not be redeemable. Each Participating Preferred Share will be
entitled to a minimum preferential quarterly distribution payment equal to the
greater of (i) $1 per share or (ii) 100 times the distribution declared per
share of Homestead Common Stock. Each Participating Preferred Share will have
100 votes, voting together with the shares of Homestead Common Stock. If
dividends payable on Participating Preferred Shares are in arrears in an
amount equal to at least six full quarterly dividends (whether or not declared
and whether or not consecutive), the holders of record of the outstanding
Participating Preferred Shares shall have the exclusive right, voting
separately as a single class, to elect two directors of Homestead until such
time as all arrears in dividends (whether or not declared) on the
Participating Preferred Shares shall have been paid or declared and set apart
for payment. In the event of liquidation, the holders of the Participating
Preferred Shares will be entitled to a minimum preferential liquidation
payment of $1 per share (plus any accrued and unpaid dividends) but will be
entitled to an aggregate payment of 100 times the payment made per share of
Homestead Common Stock. In the event of any merger, consolidation or other
transaction in which shares of Homestead Common Stock are exchanged, each
Participating Preferred Share will be entitled to receive 100 times the amount
received per share of Homestead Common Stock. In the event of issuance of
Participating Preferred Shares upon exercise of the Purchase Rights, in order
to facilitate trading, a depositary receipt may be issued for each one-
hundredth of a Participating Preferred Share. The Purchase Rights will be
protected by customary antidilution provisions.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision will be made so that each holder
of a Purchase Right, other than Purchase Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the
right to receive upon exercise a number of shares of Homestead Common Stock
having a market value (determined in accordance with the Rights Agreement) of
twice the Purchase Price. In lieu of the issuance of shares of Homestead
Common Stock upon exercise of Purchase Rights, the Homestead Board may under
certain circumstances, and if there is an insufficient number of shares of
Homestead Common Stock authorized but unissued or held by Homestead to permit
the exercise in full of the Purchase Rights, the Homestead Board is required
to, take such action as may be necessary to cause Homestead to issue or pay
upon the exercise of Purchase Rights, cash (including by way of a reduction of
purchase price), property, other securities or any combination of the
foregoing having an aggregate value equal to that of the shares of Homestead
Common Stock which otherwise would have been issuable upon exercise of
Purchase Rights.
In the event that, after any person or group becomes an Acquiring Person,
Homestead is acquired in a merger or other business combination transaction or
50% or more of its consolidated assets or earning power are sold, proper
provision will be made so that each holder of a Purchase Right will thereafter
have the right to receive, upon the exercise thereof at the then current
Purchase Price, a number of shares of common stock of the acquiring company
having a market value (determined in accordance with the Rights Agreement) of
twice the Purchase Price.
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<PAGE>
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by that person or group of 50% or more of the outstanding
shares of Homestead Common Stock, the Homestead Board may exchange the
Purchase Rights (other than Purchase Rights owned by that person or group
which will have become void), in whole or in part, at an exchange ratio of one
share of Homestead Common Stock (or one-hundredth of a Participating Preferred
Share) per Purchase Right (subject to adjustment).
As soon as practicable after a Rights Distribution Date, Homestead is
obligated to use its best efforts to file a registration statement under the
Securities Act relating to the securities issuable upon exercise of Purchase
Rights and to cause such registration statement to become effective as soon as
practicable.
At any time prior to the time a person or group of persons becomes an
Acquiring Person, the Homestead Board may redeem the Purchase Rights in whole,
but not in part, at a price of $0.01 per Purchase Right (the "Redemption
Price") payable in cash, shares of Homestead Common Stock or any other form of
consideration deemed appropriate by the Homestead Board. The redemption of the
Purchase Rights may be made effective at such time, on such basis and with
such conditions as the Homestead Board in its sole discretion may establish.
Immediately upon the effectiveness of any redemption of the Purchase Rights,
the right to exercise the Purchase Rights will terminate and the only right of
the holders of Purchase Rights will be to receive the Redemption Price.
The terms of the Purchase Rights may be amended by the Homestead Board
without the consent of the holders of the Purchase Rights, except that from
and after the time any person or group of affiliated or associated persons
becomes an Acquiring Person no such amendment may adversely affect the
interests of the holders of the Purchase Rights and in no event shall any such
amendment change the 20% threshold at which a person acquiring beneficial
ownership of shares of Homestead Common Stock becomes an Acquiring Person.
The Purchase Rights have certain anti-takeover effects. The Purchase Rights
will cause substantial dilution to a person or group that attempts to acquire
Homestead on terms not approved by the Homestead Board, except pursuant to an
offer conditioned on a substantial number of Purchase Rights being acquired.
The Purchase Rights should not interfere with any merger or other business
combination approved by the Homestead Board since the Purchase Rights may be
redeemed by Homestead at the Redemption Price prior to the time that a person
or group has acquired beneficial ownership of 20% or more of the shares of
Homestead Common Stock. The form of Rights Agreement specifying the terms of
the Purchase Rights has been incorporated by reference into the Registration
Statement (of which this Appendix A forms a part) and is incorporated herein
by reference. The foregoing description of the Purchase Rights does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Rights Agreement, including the definitions therein of
certain terms.
HOMESTEAD WARRANTS
The Homestead Warrants are to be issued under a Warrant Agreement (the
"Warrant Agreement") between Homestead and The First National Bank of Boston,
as Warrant Agent (the "Warrant Agent"), a copy of which has been filed as an
exhibit to the Registration Statement of which this Appendix A forms a part.
The following is a summary of the material terms of the Homestead Warrants and
the Warrant Agreement. The summary is subject to, and is qualified in its
entirety by reference to, all the provisions of the Homestead Warrants and the
Warrant Agreement, including the definitions therein of certain terms.
General
Each Homestead Warrant will entitle the registered holder thereof, subject
to and upon compliance with the provisions thereof and of the Warrant
Agreement, at such holder's option, to purchase at an exercise price of $10.00
per share from Homestead one share of Homestead Common Stock. The number of
shares of Homestead Common Stock for which a Homestead Warrant may be
exercised is subject to adjustment as set forth in the Warrant Agreement.
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Homestead Warrants may be exercised at any time by surrendering the
certificate evidencing such Homestead Warrants (the "Warrant Certificates")
with the form of election to purchase shares set forth on the reverse side
thereof duly completed and executed by the holder thereof and paying in full
the exercise price for such Homestead Warrant at the office or agency
designated for such purpose, which will initially be the corporate trust
office of the Warrant Agent in New York, New York. Each Homestead Warrant may
be exercised only in whole and the exercise price may be paid only in cash or
by certified or official bank check. The Homestead Warrants will expire at
5:00 p.m., New York time on the first anniversary of the date on which the
Transaction is consummated.
The Warrant Certificates evidencing the Homestead Warrants may be
surrendered for exercise or exchange, and the transfer of Warrant Certificates
will be registrable, at the office or agency of Homestead maintained for such
purpose, which initially will be the corporate trust office of the Warrant
Agent in New York, New York. The Warrant Certificates will be issued only in
fully registered form. No service charge will be made for any exercise,
exchange or registration of transfer of Warrant Certificates, but Homestead
may require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
Fractional shares of Homestead Common Stock will not be issued upon exercise
of Homestead Warrants. In lieu thereof Homestead will pay a cash adjustment
based on the difference between the Current Market Value (as defined in the
Warrant Agreement) of a share of Homestead Common Stock on the date the
Warrant Certificate is surrendered for conversion and the exercise price of
the Homestead Warrants.
Holders of Homestead Warrants will not be entitled, by virtue of being such
holders, to receive dividends, vote, receive notice of any meetings of
stockholders or otherwise have any right of stockholders of Homestead.
Adjustments
The number of shares of Homestead Common Stock issuable upon exercise of a
Homestead Warrant (the "Exercise Rate") is subject to adjustment upon the
occurrence of certain events, including (a) dividends or distributions on
Homestead Common Stock payable in Homestead Common Stock or certain other
stock of Homestead; (b) subdivisions, combinations or certain
reclassifications of Homestead Common Stock; (c) distributions to all holders
of Homestead Common Stock of rights, warrants or options entitling them to
subscribe for Homestead Common Stock at a price per share less than 94% of the
Current Market Value at the Time of Determination (each as defined in the
Warrant Agreement); (d) sales by Homestead of Homestead Common Stock or of
securities convertible into or exchangeable or exercisable for Homestead
Common Stock (other than pursuant to (1) the exercise of the Homestead
Warrants (2) any security convertible into, or exchangeable or exercisable
for, Homestead Common Stock as to which the issuance thereof has previously
been the subject of any required adjustment pursuant to the Warrant Agreement
and (3) the conversion of any convertible notes issued or issuable pursuant to
the Funding Commitment Agreements) at a price per share less than the Current
Market Value at the Time of Determination; and (e) distributions to
stockholders of assets or debt securities of Homestead or certain rights,
warrants or options to purchase assets or debt securities or other securities
of Homestead (excluding cash dividends or other cash distributions from
consolidated retained earnings other than any Extraordinary Cash Dividend (as
defined in the Warrant Agreement)). No adjustment in the Exercise Rate will be
required unless such adjustment would require an increase or decrease of at
least one percent (1%) in the Exercise Rate; provided that any adjustment that
is not made will be carried forward and taken into account in any subsequent
adjustment.
If Homestead is a party to a consolidation or merger, or certain transfers
of all or substantially all of its assets occur, a Homestead Warrant for
Homestead Common Stock shall automatically become exercisable for the kind and
amount of securities, cash or other assets which the holder of Homestead
Warrants would have received immediately after the consolidation, merger or
transfer if the holder exercised the Homestead Warrant immediately before the
effective date of the transaction.
In the event of a taxable distribution to holders of Homestead Common Stock
which results in an adjustment to the number of shares of Homestead Common
Stock or other consideration for which a Homestead Warrant
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may be exercised, the holders of the Homestead Warrants may, in certain
circumstances, be deemed to have received a distribution subject to United
States Federal income tax.
CONVERTIBLE MORTGAGE NOTES
As of the Closing Date, Homestead will assume the $77,289,000 principal
amount of promissory notes of its predecessors in connection with funding the
acquisition and construction costs and expenses incurred in connection with
acquiring and developing various real properties as Homestead Village
properties. Pursuant to the Funding Commitment Agreements, PTR and ATLANTIC
have agreed to provide Homestead aggregate funding on the respective Homestead
Village properties contributed by such party in the amounts of up to
approximately $133 million and $111 million, respectively. PTR and ATLANTIC
will receive convertible mortgage notes in respect of such fundings in stated
amounts of up to approximately $144 million and $98 million, respectively. The
convertible mortgage notes issued to PTR will be recorded for financial
reporting purposes by Homestead at a premium of approximately $11 million and
the convertible mortgage notes issued to ATLANTIC will be recorded by
Homestead at a discount of approximately $13 million, each of which will be
amortized as an adjustment to interest expense over the ten-year term of the
mortgage notes using the effective interest method. The differences between
the funded amounts and the stated amounts of the convertible mortgage loans
arise because the rate of return on the existing Homestead Village facilities
contributed by PTR is projected to exceed the rate of return on the Homestead
Village facilities contributed by PTR and ATLANTIC to Homestead which are
under construction or in pre-development planning. In calculating the relative
ownership interests of PTR and ATLANTIC, SCG assumed that as of July 1, 1996
PTR would have 28 Homestead Village facilities in operation and generating
income, while ATLANTIC would have none. In addition, SCG expects that the
average property development costs for the existing PTR Homestead Village
properties will, on balance, be less than those for the PTR and ATLANTIC
Homestead Village properties projected to be built in the future because a
large portion of the existing PTR Homestead Village properties were in
planning or under development during 1992 and 1993 when land prices and
construction costs were less than they are now and are anticipated to be over
the next 18 months. The stated amount of the convertible mortgage loans was
determined based on a 9% interest rate to provide an effective yield to each
of PTR (10.02% on a fully funded basis) and ATLANTIC (7.94% on a fully funded
basis) that is reflective of the relative rates of return anticipated to be
realized on all of the facilities contributed by PTR and ATLANTIC,
respectively.
Interest on the promissory notes accrues at the rate of 9% on the unpaid
principal balance payable every six months. The promissory notes are scheduled
to mature on October 31, 2006. Homestead has pledged substantially all of its
assets as collateral for the promissory notes. PTR and ATLANTIC have the
right, beginning on or after March 31, 1997, to convert all of the outstanding
principal amount of the promissory
notes into shares of Homestead Common Stock on the basis of one share of
Homestead Common Stock for each $11.50 aggregate principal amount outstanding
on the promissory notes being converted. This conversion rate is subject to
adjustment on substantially the same terms as the Homestead Warrants.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
HOMESTEAD'S CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and
the Homestead Charter and Bylaws. The summary does not purport to be complete
and is subject to and qualified in its entirety by reference to Maryland law
and the Homestead Charter and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Appendix A forms a part.
CLASSIFICATION OF THE HOMESTEAD BOARD
Homestead's Bylaws provide that the number of directors may be established
by the Homestead Board but may not be fewer than three nor more than fifteen.
Any vacancy will be filled, at any regular meeting or at any
A-48
<PAGE>
special meeting called for that purpose, by a majority of the remaining
directors, except that a vacancy resulting from an increase in the number of
directors will be filled by a majority of the entire Homestead Board. Pursuant
to the Homestead Charter, the directors are divided into three classes. At the
1997 annual meeting of shareholders, one class will be elected to hold office
initially for a term expiring at the annual meeting of shareholders to be held
in 1998, another class will be elected to hold office initially for a term
expiring at the annual meeting of shareholders to be held in 1999 and another
class will be elected to hold office initially for a term expiring at the
annual meeting of shareholders to be held in 2000. As the term of each class
expires, directors in that class will be elected for a term of three years and
until their successors are duly elected and qualify. Homestead believes that
classification of the Homestead Board will help to assure the continuity and
stability of Homestead's business strategies and policies as determined by the
Homestead Board.
The classified director provision could have the effect of making the
replacement of incumbent directors more time-consuming and difficult, which
could discourage a third party from making a tender offer or otherwise
attempting to obtain control of Homestead, even though such an attempt might
be beneficial to Homestead and its shareholders. At least two annual meetings
of shareholders, instead of one, will generally be required to effect a change
in a majority of the Homestead Board. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate of the corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate
of such an Interested Stockholder are prohibited for five years after the most
recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative
vote of at least (a) 80% of the votes entitled to be cast by holders of
outstanding voting shares of the corporation and (b) two-thirds of the votes
entitled to be cast by holders of outstanding voting shares of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. The Homestead Board has exempted from these provisions
of the MGCL any business combination with SCG and its affiliates and
successors. As a result, SCG and its affiliates and successors may be able to
enter into business combinations with Homestead that may not be in the best
interests of its stockholders without compliance by Homestead with the super-
majority vote requirements and other provisions of the statute.
CONTROL SHARE ACQUISITIONS
Maryland law provides that "Control Shares" of a Maryland corporation
acquired in a "Control Share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on
the matter, excluding shares of stock owned by the acquiror or by officers or
directors who are employees of the corporation. "Control Shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror, or in respect of which the acquiror is
able to exercise or direct the exercise of voting power, would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power (except solely by virtue of a revocable
proxy): (i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority, or (iii) a majority or more of all voting power.
Control Shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A
"Control Share acquisition" means the acquisition of Control Shares, subject
to certain exceptions.
A-49
<PAGE>
A person who has made or proposes to make a Control Share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares.
If no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the Control Shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the Control Shares, as of the date of the
last Control Share acquisition or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for Control Shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the Control Share acquisition.
The Control Share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction or to acquisitions approved or exempted by the charter or bylaws
of the corporation.
Homestead's Bylaws contain a provision exempting SCG and its affiliates and
successors from the provisions of the Control Share acquisition statute.
ADVANCE NOTICE PROVISIONS
For nominations or other business to be properly brought before an annual
meeting of stockholders by a stockholder, the Homestead Bylaws require such
stockholder deliver a notice to the Secretary, absent specified circumstances,
not less than 60 days nor more than 90 days prior to the first anniversary of
the preceding year's annual meeting setting forth: (i) as to each person whom
the stockholder proposes to nominate for election or reelection as a director,
all information relating to such person that is required to be disclosed in
solicitations of proxies for the election of directors, pursuant to Regulation
14A of the Exchange Act; (ii) as to any other business that the stockholder
proposed to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and of the beneficial owner, if any, on whose behalf the
nomination or proposal is made; and (iii) as to the stockholder giving the
notice and beneficial owner, if any, on whose behalf the nomination or
proposal is made, (x) the name and address of such stockholder as they appear
on Homestead's books, and of such beneficial owner and (y) the number of
shares of each class of stock of Homestead which are owned beneficially and of
record by such stockholder and such beneficial owner, if any.
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of the Mergers, Homestead will have 17,749,735 shares of
Homestead Common Stock (including the 2,243,038 shares held in escrow) and
Homestead Warrants to purchase 10,000,000 shares of Homestead Common Stock
issued and outstanding. All of the shares to be issued in the Distribution,
other than any shares purchased by affiliates, will be tradeable without
restriction under the Securities Act. The shares of Homestead Common Stock
currently issued and outstanding or reserved for issuance upon conversion of
the convertible mortgage notes or exercise of options will be eligible for
sale, subject to the volume resale, manner of sale and notice limitations of
Rule 144 of the Securities Act.
In general, under Rule 144, a person (or persons whose shares are aggregated
in accordance with the Rule) who has beneficially owned his or her shares of
Homestead Common Stock for at least two years, including any such persons who
may be deemed "affiliates" of Homestead (as defined in the Securities Act),
would be entitled to sell within any three-month period a number of shares of
Homestead Common Stock that does not exceed the
A-50
<PAGE>
greater of 1% of the then outstanding number of shares or the average weekly
trading volume of the shares during the four calendar weeks preceding each
such sale. After shares are held for three years, a person who is not deemed
an "affiliate" of Homestead is entitled to sell such shares under Rule 144
without regard to the volume limitations described above. Sales of shares of
Homestead Common Stock by affiliates will continue to be subject to the volume
limitations. As defined in Rule 144, an "affiliate" of an issuer is a person
that directly or indirectly, through the use of one or more intermediaries,
controls, is controlled by, or is under common control with, such issuer.
Homestead has granted SCG, which will beneficially own 8,102,557 shares of
Homestead Common Stock after the Transaction, and each of PTR and ATLANTIC,
certain registration rights. See "Certain Relationships and Transactions--SCG
Investor Agreement" and "--ATLANTIC and PTR Investor Agreements."
No prediction can be made as to the effect, if any, that future sales of
shares or the availability of shares for future sale will have on the market
price prevailing from time to time. Sales of substantial amounts of shares
(including shares issued upon the exercise of warrants and options), or the
perception that such sales could occur, could adversely affect the prevailing
market price of the shares.
INDEPENDENT PUBLIC ACCOUNTANTS AND EXPERTS
The following financial statements have been included herein and in the
registration statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing:
(i) the combined balance sheets of the PTR-Homestead Village Group as of
December 31, 1994 and 1995, the related combined statements of
operations, owners' equity and cash flows for each of the years in the
three-year period ended December 31, 1995 and the related combined
schedule as of December 31, 1995;
(ii) the combined balance sheet of the Atlantic-Homestead Village Group as
of December 31, 1995, the related combined statements of operations,
owners' equity and cash flows for the period from April 3, 1995 (date
of formation) through December 31, 1995 and the related combined
schedule as of December 31, 1995;
(iii) the combined balance sheets of the SCG-Homestead Village Group as of
December 31, 1994 and 1995 and the related combined statements of
operations, shareholder's equity and cash flows for each of the years
in the three-year period ended December 31, 1995.
The balance sheet of Homestead Village Properties Incorporated at April 30,
1996 appearing in the Prospectus of Homestead included in the Homestead
Registration Statement has been audited by Ernst & Young LLP, independent
certified public accountants, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
Homestead has filed with the Commission the Homestead Registration Statement
under the Securities Act with respect to the Homestead Securities being
distributed hereby. This Appendix A, the PTR Proxy Statement and Prospectus
and the ATLANTIC Information Statement and Prospectus omit certain information
contained in the Registration Statement as permitted by the rules and
regulations of the Commission. For further information with respect to
Homestead and the Homestead Securities being distributed hereby, reference is
made to the Registration Statement including the exhibits thereto. Statements
herein concerning the contents of any contract or other document are not
necessarily complete and in each instance reference is made to such contract
or other documents filed with the Commission as an exhibit to the Registration
Statement, or otherwise, each such statement being qualified by and subject to
such reference in all respects.
A-51
<PAGE>
As a result of the Mergers, Homestead will become subject to the
informational requirements of the Exchange Act, and in accordance therewith
will file reports and other information with the Commission. Reports,
registration statements, proxy statements and other information filed by
Homestead with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
In addition, such material can also be obtained from the Commission's web site
at http://www.sec.gov.
LEGAL MATTERS
The validity of the Homestead Common Stock and the Homestead Warrants
offered hereby has been passed upon for Homestead by Mayer, Brown & Platt,
Chicago, Illinois. Mayer, Brown & Platt has relied upon the opinion of Ballard
Spahr Andrews & Ingersoll, Baltimore, Maryland, as to certain matters of
Maryland law. Mayer, Brown & Platt has represented and is currently
representing ATLANTIC, PTR, SCG and Homestead and certain of their respective
affiliates.
A-52
<PAGE>
INDEX TO HOMESTEAD FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
PRO FORMA (UNAUDITED):
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996....... F-4
Pro Forma Condensed Consolidated Statement of Operations for the three
months ended March 31, 1996 ............................................. F-9
Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1995 ................................................. F-10
THE PTR--HOMESTEAD VILLAGE GROUP
HISTORICAL COMBINED FINANCIAL STATEMENTS:
Independent Auditors' Report.............................................. F-11
Combined Balance Sheets as of December 31, 1994 and 1995 and the unaudited
Combined Balance Sheet as of March 31, 1996.............................. F-12
Combined Statements of Operations for the years ended December 31, 1993,
1994 and 1995 and the unaudited Combined Statements of Operations for the
three months ended March 31, 1995 and 1996............................... F-13
Combined Statements of Owners' Equity for the years ended December 31,
1993, 1994 and 1995 and the unaudited Combined Statement of Owners'
Equity for the three months ended March 31, 1996......................... F-14
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and the unaudited Combined Statements of Cash Flows for the
three months ended March 31, 1995 and 1996............................... F-15
Notes to Combined Financial Statements.................................... F-16
Schedule III--Real Estate and Accumulated Depreciation as of December 31,
1995..................................................................... F-21
THE ATLANTIC--HOMESTEAD VILLAGE GROUP
HISTORICAL COMBINED FINANCIAL STATEMENTS:
Independent Auditors' Report.............................................. F-23
Combined Balance Sheet as of December 31, 1995 and the unaudited Combined
Balance Sheet as of March 31, 1996....................................... F-24
Combined Statement of Operations for the period from April 3, 1995 (date
of formation) through December 31, 1995 and the unaudited Combined
Statement of Operations for the three months ended March 31, 1996........ F-25
Combined Statement of Owners' Equity for the period from April 3, 1995
(date of formation) through December 31, 1995 and the unaudited Combined
Statement of Owners' Equity for the three months ended March 31, 1996.... F-26
Combined Statement of Cash Flows for the period from April 3, 1995 (date
of formation) through December 31, 1995 and the unaudited Combined
Statement of Cash Flows for the three months ended March 31, 1996........ F-27
Notes to Combined Financial Statements.................................... F-28
Schedule III--Real Estate and Accumulated Depreciation as of December 31,
1995..................................................................... F-31
THE SCG--HOMESTEAD VILLAGE GROUP
HISTORICAL COMBINED FINANCIAL STATEMENTS:
Independent Auditors' Report.............................................. F-32
Combined Balance Sheets as of December 31, 1994 and 1995 and the unaudited
Combined Balance Sheet as of March 31, 1996.............................. F-33
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Combined Statements of Operations for the years ended December 31, 1993,
1994 and 1995 and the unaudited Combined Statements of Operations for the
three months ended March 31, 1995 and 1996............................... F-34
Combined Statements of Shareholder's Equity (Deficit) for the years ended
December 31, 1993, 1994 and 1995 and the unaudited Combined Statement of
Shareholder's Equity (Deficit) for the three months ended March 31, 1996. F-35
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and the unaudited Combined Statements of Cash Flows for the
three months ended March 31, 1995 and 1996............................... F-36
Notes to Combined Financial Statements.................................... F-37
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
BALANCE SHEET:
Report of Independent Auditors............................................ F-40
Balance Sheet as of April 30, 1996........................................ F-41
Notes to Balance Sheet.................................................... F-42
</TABLE>
F-2
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
The unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as
if the following transactions had occurred on March 31, 1996; (I) the PTR-
Homestead Village Group including land parcels which were under contract as of
March 31, 1996 and expected to be acquired prior to the date of the
transaction, merged with and into Homestead; (II) the acquisition of net
assets of the Atlantic-Homestead Village Group including land parcels which
were under contract as of March 31, 1996 and expected to be acquired prior to
the transaction date had been completed; (III) the acquisition of the net
assets of SCG-Homestead Village Group had occurred. Such pro forma information
is based in part on the historical Combined Balance Sheets of the PTR-
Homestead Village Group, the Atlantic-Homestead Village Group and the SCG-
Homestead Village Group. It should be read in conjunction with the financial
statements listed in the index page F-1 of this Appendix A. In management's
opinion, all adjustments necessary to reflect the effects of these
transactions have been made.
In accordance with the merger and distribution agreement and the funding
commitment agreement the PTR-Homestead Village Group will contribute a total
of 54 facilities either in operation, under construction or in pre-development
planning. Similarly, the Atlantic-Homestead Village Group will contribute a
total of 26 facilities either in operation, under construction or in pre-
development planning. Subsequent to the date of the transaction, PTR and
Security Capital Atlantic Incorporated ("ATLANTIC") will be obligated to
provide the additional funding to complete the development of the facilities
contributed. The Pro Forma Condensed Consolidated Balance Sheet excludes
expected development costs related to the properties under development or
planned to be developed and the related convertible mortgage notes for the
period April 1, 1996 through ultimate completion of the facilities and
therefore is not reflective of the entire transaction.
The unaudited Pro Forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been
assuming these transactions had been completed as of March 31, 1996, nor does
it purport to represent the future financial position of Homestead.
F-3
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CAPITALIZATION ACQUISITION
OF HOMESTEAD HOMESTEAD OF THE ACQUISITION
THE PTR- AND MERGER VILLAGE ATLANTIC- OF THE SCG-
HOMESTEAD WITH THE PTR- PROPERTIES HOMESTEAD HOMESTEAD OTHER PRO PRO FORMA
VILLAGE GROUP PRO FORMA HOMESTEAD INCORPORATED VILLAGE VILLAGE FORMA CONDENSED
HISTORICAL(A) ADJUSTMENTS VILLAGE GROUP PRO FORMA GROUP (G) GROUP (H) ADJUSTMENTS CONSOLIDATED
------------- ----------- -------------- ------------ ----------- ----------- ----------- ------------
ASSETS
- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents....... $ 2,931 $ -- $ 1 (e) $ 2,932 $27,239 $ 12 $(1,500)(i) $ 28,683
Accounts
receivable........ 799 -- -- 799 -- 481 -- 1,280
Other current
assets............ 314 -- -- 314 -- 4 -- 318
-------- ------- ------- -------- ------- ------- ------- --------
Total current
assets.......... 4,044 -- 1 4,045 27,239 497 (1,500) 30,281
Property and
equipment, net..... 120,871 11,789 (c) -- 132,660 24,095 233 -- 156,988
Other assets....... 1,475 -- -- 1,475 1,817 72 1,500 (i) 4,864
Trademark and other
intangible assets.. -- -- -- -- -- 19,405 -- 19,405
-------- ------- ------- -------- ------- ------- ------- --------
Total assets.... $126,390 $11,789 $ 1 $138,180 $53,151 $20,207 $ -- $211,538
======== ======= ======= ======== ======= ======= ======= ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
EQUITY
- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current
liabilities:
Development costs
payable........... $ 3,590 $ -- $ -- $ 3,590 $ 1,142 $ -- $ -- $ 4,732
Accrued real
estate taxes...... 760 -- -- 760 5 -- -- 765
Accounts payable.. 342 -- -- 342 142 6 -- 490
Other accrued
expenses.......... 867 -- -- 867 163 3 -- 1,033
Accrued interest
payable........... 1,183 -- -- 1,183 -- -- -- 1,183
Advances from
shareholders...... -- -- -- -- -- -- -- --
-------- ------- ------- -------- ------- ------- ------- --------
Total current
liabilities..... 6,742 -- -- 6,742 1,452 9 -- 8,203
Intercompany
debt.............. 11,185 (11,185)(d) -- -- -- -- -- --
Convertible
mortgage notes
payable........... 77,289 (25,726)(b) -- 51,563 -- -- -- 51,563
-------- ------- ------- -------- ------- ------- ------- --------
Total
liabilities..... 95,216 (36,911) -- 58,305 1,452 9 -- 59,766
Shareholders'
Equity: --
Common stock...... -- -- 95 (f) 95 42 16 -- 153
Additional paid
in
capital/Contributed
capital........... 25,890 11,789 (c) 1 (e)
25,726 (b) 74,495 (f)
11,185 (d) (74,590)(f) 74,496 51,657 20,182 -- 146,335
Retained
earnings.......... 5,284 -- -- 5,284 -- -- -- 5,284
-------- ------- ------- -------- ------- ------- ------- --------
Total
shareholders'
equity.......... 31,174 48,700 1 79,875 51,699 20,198 -- 151,772
-------- ------- ------- -------- ------- ------- ------- --------
Total liabilities
and shareholders'
equity............. $126,390 $11,789 $ 1 $138,180 $53,151 $20,207 $ -- $211,538
======== ======= ======= ======== ======= ======= ======= ========
</TABLE>
F-4
<PAGE>
- --------
(a) Reflects the historical combined balance sheet of the PTR-Homestead
Village Group as of March 31, 1996, which is presented elsewhere in this
registration statement.
(b) Reflects the conversion of convertible mortgage notes of the PTR-Homestead
Village Group to capital contributed as a result of the transaction. In
accordance with the Merger Agreement, PTR will receive all of its shares
of Homestead Common Stock at the date of merger (representing 30% of the
fair market value of its assets contributed at full funding). Based on the
pro forma costs at the merger date, the face value of the convertible
mortgages would be limited to $51,563. Therefore, the balance of
convertible mortgage notes payable at March 31, 1996 ($77,289) less the
maximum convertible mortgage notes payable at merger date ($51,563) equals
the convertible mortgage notes converted to capital ($25,726).
(c) Reflects the land to be acquired by the PTR-Homestead Village Group
subsequent to March 31, 1996 and prior to the date of transaction. The
land consists of 10 separate parcels of developed land that will be
contributed to Homestead unencumbered by any mortgage or other financial
obligation at the date of merger. The PTR-Homestead Village Group intends
to acquire these parcels utilizing capital contributed by its parent
company, PTR.
(d) Reflects the conversion of intercompany debt of the PTR-Homestead Village
Group to contributed capital in accordance with the merger and
distribution agreement.
(e) Reflects the capitalization of Homestead through the issuance of 1,000
shares of common stock in exchange for $1.
(f) Reflects the issuance of 9,485,727 shares of Homestead Common Stock to PTR
in exchange for the net assets of the PTR-Homestead Village Group. This
transaction is accounted for as a reorganization of entities under common
control and accordingly, assets and liabilities are reflected at the PTR-
Homestead Village Group's historical cost. Additionally, PTR would receive
6,364,789 warrants to purchase additional shares of Homestead Common Stock
at the exercise price of $10 per share for its commitment to provide
funding under the Funding Commitment Agreement. Management of PTR,
ATLANTIC and other affiliates of SCG ("Management") determined the
exercise price of the warrants and believes that $10 per share represents
adequate consideration for a share of Homestead Common Stock. Management
did not review specific valuations of net assets in arriving at its
determination.
(g) Reflects the acquisition of the net assets of the Atlantic-Homestead
Village Group by Homestead at estimated fair market value through the
issuance to ATLANTIC of Homestead Common Stock. Listed below is a
reconciliation of the historical cost of the net assets acquired to the
pro forma estimated fair market value acquisition cost, followed by
explanations of the pro forma acquisition adjustments.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ACQUISITION ACQUISITION
BALANCE SHEET CAPTION COST ADJUSTMENTS COST
--------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Property and equipment, net.......... $10,437 $13,658(i) $24,095
Cash and cash equivalents............ 72 27,167(ii) 27,239
Other assets......................... 1,817 -- 1,817
------- ------- -------
Total assets....................... $12,326 $40,825 $53,151
======= ======= =======
Accounts payable..................... $ 142 $ -- $ 142
Accrued expenses and other
liabilities......................... 1,310 -- 1,310
Intercompany debt.................... 9,295 (9,295)(iii) --
------- ------- -------
Total liabilities.................. 10,747 (9,295) 1,452
------- ------- -------
Total shareholders' equity......... 1,579 50,120(iv) 51,699
------- ------- -------
Total liabilities and shareholders'
equity............................ $12,326 $40,825 $53,151
======= ======= =======
</TABLE>
(i) Reflects estimated costs of $9,582 relating to the acquisition of
eight parcels of land under contract to be acquired for cash,
subsequent to March 31, 1996 and prior to the date of the Transaction.
Also included is $4,076 which represents the amount by which the
estimated fair market value of the net assets acquired exceeds the
historical cost basis. This excess has been attributed to property and
equipment as management believes that the carrying amount of the
remaining assets and liabilities
F-5
<PAGE>
approximates fair value because of the short maturity of these
instruments. The acquisition cost was determined by Management. The
fair market value of the property and equipment was estimated using a
premium over cost, which Management believes is reasonable considering
value added during the development process. Also see "The Transaction--
Recommendations of the PTR Board and Reasons for the Transaction" for
further discussion of the determination of estimated fair market value.
(ii) Reflects, for pro forma purposes, cash of $27,167 contributed by
Atlantic as partial consideration for the Homestead stock received. The
cash payment is necessary to facilitate ATLANTIC's receipt of its
entire share of common stock on the Closing Date in accordance with the
Merger Agreement (The actual cash dollar amount paid is expected to be
reduced to approximately $18,600 by the Closing Date as a result of
development costs incurred between March 31, 1996 and the Closing
Date).
(iii) Reflects the conversion of all intercompany debt into contributed
capital immediately prior to the Transaction.
(iv) Reflects the impact on shareholders' equity of adjustments (i),
(ii) and (iii), above. Based upon the Merger Agreement, ATLANTIC will
receive 4,201,220 shares of Homestead Common Stock having an estimated
fair market value of $51,699. Additionally, ATLANTIC will receive
2,818,517 warrants to purchase additional shares of Homestead common
stock at the exercise price of $10 per share in exchange for entering
into the Funding Commitment Agreement. Management determined the
exercise price of the warrants and concluded that $10 per share
represents adequate consideration for a share of Homestead Common
Stock. Specific valuations of net assets were not reviewed in arriving
at their determination.
(h) Reflects the acquisition of the net assets of the SCG-Homestead Village
Group by Homestead at estimated fair market value through the issuance to
SCG of Homestead Common Stock. Listed below is a reconciliation of the
historical cost of the net assets acquired to the pro forma estimated fair
market value acquisition cost, followed by explanations of the pro forma
acquisition adjustments.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ACQUISITION ACQUISITION
BALANCE SHEET CAPTION COST ADJUSTMENTS COST
--------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Property and equipment, net.......... $ 233 $ -- $ 233
Cash and cash equivalents............ 12 -- 12
Accounts receivable.................. 481 -- 481
Other assets......................... 76 19,405 19,481
------ ------- -------
Total assets....................... $ 802 $19,405 $20,207
====== ======= =======
Accounts payable..................... $ 6 $ -- $ 6
Accrued expenses and other
liabilities......................... 494 (491)(ii) 3
Intercompany debt.................... 2,043 (2,043)(iii) --
------ ------- -------
Total liabilities.................. 2,543 (2,534) 9
------ ------- -------
Total shareholders' equity......... (1,741) 21,939(iv) 20,198
------ ------- -------
Total liabilities and shareholders'
equity............................ $ 802 $19,405 $20,207
====== ======= =======
</TABLE>
(i) The net assets acquired primarily consist of trademarks,
tradenames, development and property management expertise, as well as
operating systems necessary to conduct the business of developing,
owning and operating the Homestead Village properties. The estimated
fair market value of the net assets acquired is approximately $49,995
for which Homestead will issue 4,062,788 shares of $.01 par value
common stock. At the date of the Transaction, SCG will receive a pro
rata portion (1,640,786) of the total shares, based upon the ratio
(40.4%) of actual funding provided by PTR and ATLANTIC to Homestead as
of March 31, 1996 to the total expected funding to be provided, as more
fully described in the Transaction (the 1,640,786 shares issued to SCG
is expected to increase to 1,819,750 shares issued at the Closing Date
as a result of development costs incurred between March 31, 1996
F-6
<PAGE>
and the Closing Date). Correspondingly, the proportional amount of the
estimated fair market value recorded at the date of the Transaction is
approximately $20,198, of which approximately $19,405 has been
attributed to the trademarks and other intangible assets listed above.
Management intends to amortize the intangible assets on a straight-line
basis over a period of 20 years. The $19,405 has been attributed to
these intangibles as management believes that the carrying amount of
the remaining assets and liabilities approximates fair value because of
the short maturity of these instruments. The $793 ($20,198-$19,405)
difference represents the historical cost of the net assets of SCG
after adjustment for (ii) and (iii) below. The identification of the
trademark and other intangible assets listed above and the
determination of the acquisition cost of the net assets was made by
Management. A discounted cash flow method was used by management to
estimate fair market value. Also see "The Transaction--Recommendations
of the PTR Board and Reasons for the Transactions" for further
discussion of the determination of estimated fair market value.
(ii) Reflects an adjustment to reduce accrued expenses and other
liabilities for employee-related liabilities which will not be assumed
by Homestead. Such adjustment is reflected as an addition to
contributed capital.
(iii) Reflects the conversion of all intercompany debt into contributed
capital immediately prior to the Transaction.
(iv) Reflects the impact on shareholders' equity of adjustments (i),
(ii) and (iii) above. Additionally, SCG will receive 817,694 warrants
to purchase additional shares of Homestead common stock at the exercise
price of $10 per share in exchange for the commitment to provide
funding to Homestead during the time between the execution of the
Merger Agreement and the Closing Date and the use of office facilities
for one year. Management determined the exercise price of the warrants
and concluded that $10 per share represents adequate consideration for
a share of stock of Homestead. Specific valuations of net assets were
not reviewed in arriving at their determination.
(i) Reflects estimated expenses of consummating the merger transaction.
F-7
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended December 31, 1995 and for the three months ended March 31, 1996
of Homestead Village Properties Incorporated ("Homestead") are presented as
if: I) Homestead was capitalized and the PTR-Homestead Village Group merged
into Homestead; II) the PTR-Homestead Village Group acquired land parcels
which were under contract as of March 31, 1996 and expected to close prior to
the date of the transaction; and III) Homestead acquired the net assets of the
Atlantic-Homestead Village Group and the SCG-Homestead Village Group through
the issuance of shares of Homestead common stock and warrants as of January 1,
1995. The financial statements and related footnotes of the PTR-Homestead
Village Group, the Atlantic-Homestead Village Group and the SCG-Homestead
Village Group are presented elsewhere in this registration statement. The
statements also include estimated incremental expenses related to operating a
publicly held company as if it were publicly held as of January 1, 1995. Such
pro forma information is based in part upon the Historical Combined Statements
of Operations of the PTR-Homestead Village Group, the Atlantic-Homestead
Village Group and the SCG-Homestead Village Group. It should be read in
conjunction with the financial statements listed in the index on page F-1 of
this Appendix A. In management's opinion, all adjustments necessary to reflect
the effects of these transactions have been made.
The unaudited Pro Forma Condensed Consolidated Statements of Operations are
not necessarily indicative of what Homestead's actual results of operations
would have been assuming such transactions had been completed as of January 1,
1995, nor do they purport to present the results of operations for future
periods. Results of operations and the related earnings or loss per share will
be affected by a number of factors including, but not limited to, the total
number of extended-stay lodging facilities opened and operated and the related
operating results thereon, interest cost incurred on indebtedness, corporate
operating and management expenses, development and acquisition costs and the
number of shares issued. Additionally, the Pro Forma Condensed Consolidated
Statement of Operations for the three months ended March 31, 1996 is not
necessarily indicative of the results of operations for the full year.
F-8
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THE PTR- THE ATLANTIC- THE SCG-
HOMESTEAD HOMESTEAD HOMESTEAD PRO FORMA
VILLAGE GROUP VILLAGE GROUP VILLAGE GROUP ELIMINATION COMBINED PRO FORMA CONDENSED
HISTORICAL(A) HISTORICAL(A) HISTORICAL(A) ENTRIES HISTORICAL ADJUSTMENTS CONSOLIDATED
------------- ------------- ------------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Room revenue........... $6,753 $-- $ -- $ -- $ 6,753 $ -- $6,753
Other.................. 115 6 861 (861)(b) 121 -- 121
------ ---- ------- ----- ------- ------- ------
Total Revenue........ 6,868 6 861 (861) 6,874 -- 6,874
COSTS AND EXPENSES:
Property operating
expenses.............. 2,946 -- -- -- 2,946 -- 2,946
Property management
fees paid to
affiliates............ 500 -- -- (500)(b) -- -- --
Corporate operating
expenses.............. 202 18 3,038 -- 3,258 (1,339)(c) 2,000
81 (d)
REIT management fees
paid to affiliates.... 361 -- -- (361)(b) -- -- --
Depreciation and
amortization.......... 859 -- 10 -- 869 243 (e) 1,112
Interest expense....... 961 -- 49 -- 1,010 (425)(f) 585
------ ---- ------- ----- ------- ------- ------
Total costs and
expenses............ 5,829 18 3,097 (861) 8,083 (1,440) 6,643
------ ---- ------- ----- ------- ------- ------
Income (loss) before
income tax expense.... 1,039 (12) (2,236) -- (1,209) 1,440 231
Income tax expense..... -- -- -- -- -- (183)(g) (183)
------ ---- ------- ----- ------- ------- ------
NET INCOME (LOSS)....... $1,039 $(12) $(2,236) $ -- $(1,209) $ 1,257 $ 48
====== ==== ======= ===== ======= ======= ======
PRO FORMA NET INCOME PER COMMON SHARE................................................................ $ .003
======
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING NOTE (H)............................................... 15,328
======
</TABLE>
- -------
(a) Reflects the historical combined statements of operations of the PTR-
Homestead Village Group, the Atlantic-Homestead Village Group and the SCG-
Homestead Village Group, which are presented elsewhere in this
registration statement.
(b) Reflects the elimination of intercompany REIT and property management fee
income and expense which will no longer be paid since Homestead will be
self-managed.
(c) Reflects the adjustment for development overhead costs incurred by the
SCG-Homestead Village Group in conjunction with the acquisition of land
and the development of the extended-stay lodging facilities that will now
be incurred and capitalized by Homestead in accordance with generally
accepted accounting principles. Development overhead costs consisted
primarily of payroll and related benefits and are included in the
historical financial statements of the SCG-Homestead Village Group.
(d) Reflects the additional costs of operating as a public company for the
three months ended March 31, 1996 including additional salaries and
benefits, ($44) and legal, accounting and other professional fees ($37).
(e) Depreciation is computed utilizing the straight-line method over the
estimated useful lives of 20 to 40 years for buildings and improvements
and 2 to 7 years for equipment. This treatment is consistent with the
historical financial statements and, therefore, no pro forma adjustment is
necessary. Trademark and other intangible assets are being amortized over
a period of 20 years. Amortization totaled $243 for the three months ended
March 31, 1996. Upon release of the escrowed shares to SCG additional
trademark and other intangibles of $29,797 would be recorded and quarterly
amortization would increase by $372.
(f) Reflects the adjustment to reduce interest expense as a result of the
conversion of $25,726 of convertible mortgage notes, bearing interest at
9% and $11,185 of intercompany debt, bearing interest at rates between 8%
and 8.25% to contributed capital.
(g) Prior to the proposed transaction, the PTR-Homestead Village Group and the
Atlantic-Homestead Village Group were taxed as qualified real estate
investment trust subsidiaries under the Internal Revenue Code of 1986, as
amended. The SCG-Homestead Village Group was a subsidiary of a Subchapter
C corporation, which has experienced operating losses since its inception.
Therefore, as described further in the historical combined financial
statements of the PTR-Homestead Village Group, the Atlantic-Homestead
Village Group and the SCG-Homestead Village Group, which appear elsewhere
in this registration statement, no provision was required for federal or
state income taxes.
Homestead will be taxed as a Subchapter C corporation and, as such, will be
subject to federal and any applicable state income taxes. The components of
the pro forma adjustment for income taxes consist of the following:
<TABLE>
<S> <C>
Income before income tax expenses................................. $231
Amortization of trademark and other intangible assets acquired
from the SCG-Homestead Village Group not deductible for tax
purposes......................................................... 243
----
474
Assumed federal and state income tax rate......................... 38.6%
----
Pro forma adjustment.............................................. $183
====
</TABLE>
(h) Reflects the assumed number of weighted average common shares outstanding
during the three months ended March 31, 1996 based upon the assumed
issuance of 15,328 total shares of common stock, excluding the shares in
escrow, at the beginning of the period.
The conversion features associated with the convertible 9% mortgage notes
are assumed to be anti-dilutive to earnings per share since the conversion
price of $11.50 per share is greater than the assumed common stock price of
$10 per share. Similarly, the warrants, which are exercisable at $10 per
share were not considered since the strike price is equal to the assumed
price per common share of $10.
F-9
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THE PTR- THE ATLANTIC- THE SCG-
HOMESTEAD HOMESTEAD HOMESTEAD PRO FORMA
VILLAGE GROUP VILLAGE GROUP VILLAGE GROUP ELIMINATION COMBINED PRO FORMA CONDENSED
HISTORICAL(A) HISTORICAL(A) HISTORICAL(A) ENTRIES HISTORICAL ADJUSTMENTS CONSOLIDATED
------------- ------------- ------------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Room revenue........... $18,337 $ -- $ -- $ -- $18,337 $ -- $18,337
Other.................. 366 4 2,021 (2,007)(b) 384 -- 384
------- ----- ------- ------- ------- ------- -------
Total Revenue........ 18,703 4 2,021 (2,007) 18,721 -- 18,721
COSTS AND EXPENSES:
Property operating
expenses.............. 7,600 -- -- -- 7,600 -- 7,600
Property management
fees paid to
affiliates............ 1,018 -- -- (1,018)(b) -- -- --
Corporate operating
expenses.............. 944 63 7,067 -- 8,074 (2,211)(c) 6,188
325 (d) --
REIT management fees
paid to affiliates.... 989 -- -- (989)(b) -- -- --
Depreciation and
amortization.......... 2,343 -- 39 -- 2,382 970 (e) 3,352
Interest expense....... 2,958 -- 70 -- 3,028 (530)(f) 2,498
------- ----- ------- ------- ------- ------- -------
Total costs and
expenses............ 15,852 63 7,176 (2,007) 21,084 (1,446) 19,638
------- ----- ------- ------- ------- ------- -------
Income (loss) before
income tax expense.... 2,851 (59) (5,155) -- (2,363) 1,446 (917)
Income tax expense..... -- -- -- -- -- (20)(g) (20)
------- ----- ------- ------- ------- ------- -------
NET INCOME (LOSS)....... $ 2,851 $ (59) $(5,155) $ -- $(2,363) $ 1,426 $ (937)
======= ===== ======= ======= ======= ======= =======
PRO FORMA NET LOSS PER COMMON SHARE.................................................................. $ (.061)
=======
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING NOTE (H)............................................... 15,328
=======
</TABLE>
- -------
(a) Reflects the historical combined statements of operations of the PTR-
Homestead Village Group, the Atlantic-Homestead Village Group and the SCG-
Homestead Village Group, which are presented elsewhere in this
registration statement.
(b) Reflects the elimination of intercompany REIT and property management fee
income and expense which will no longer be paid since Homestead will be
self-managed.
(c) Reflects the adjustment for development overhead costs incurred by the
SCG-Homestead Village Group in conjunction with the acquisition of land
and the development of the extended-stay lodging facilities that will now
be incurred and capitalized by Homestead in accordance with generally
accepted accounting principles. Development overhead costs consisted
primarily of payroll and related benefits and are included in the
historical financial statements of the SCG-Homestead Village Group.
(d) Reflects the additional costs of operating as a public company for the
year ended December 31, 1995 including additional salaries and benefits,
($175) and legal, accounting and other professional fees ($150).
(e) Depreciation is computed utilizing the straight-line method over the
estimated useful lives of 20 to 40 years for buildings and improvements
and 2 to 7 years for equipment. This treatment is consistent with the
historical financial statements and, therefore, no pro forma adjustment is
necessary. Trademark and other intangible assets are being amortized over
a period of 20 years. Amortization totaled $970 for the year ended
December 31, 1995. Upon release of the escrowed shares to SCG additional
trademark and other intangibles of $29,797 would be recorded and annual
amortization would increase by $1,490.
(f) Reflects the adjustment to reduce interest expense as a result of the
conversion of $25,726 of convertible mortgage notes, bearing interest at
9% and $11,185 of intercompany debt bearing interest at rates between 8%
and 8.25% to contributed capital.
(g) Prior to the proposed transaction, the PTR-Homestead Village Group and the
Atlantic-Homestead Village Group were taxed as qualified real estate
investment trust subsidiaries under the Internal Revenue Code of 1986, as
amended. The SCG-Homestead Village Group was a subsidiary of a Subchapter
C corporation, which has experienced operating losses since its inception.
Therefore, as described further in the historical combined financial
statements of the PTR-Homestead Village Group, the Atlantic-Homestead
Village Group, and the SCG-Homestead Village Group which appear elsewhere
in this registration statement, no provision was required for federal or
state income taxes.
Homestead will be taxed as a Subchapter C corporation and, as such, will be
subject to federal and any applicable state income taxes. The components of
the pro forma adjustment for income taxes consist of the following:
<TABLE>
<S> <C>
Income (loss) before income tax expense......................... $(917)
Amortization of trademark and other intangible assets acquired
from the SCG-Homestead Village Group not deductible for tax
purposes....................................................... 970
-----
53
Assumed federal and state income tax rate....................... 38.6%
-----
Pro forma adjustment............................................ $ 20
=====
</TABLE>
(h) Reflects the assumed number of weighted average common shares outstanding
during the year ended December 31, 1995 based upon the assumed issuance of
15,328 total shares of common stock, excluding the shares in escrow, at
the beginning of the period.
The conversion features associated with the convertible 9% mortgage notes
are assumed to be anti-dilutive to earnings per share since the conversion
price of $11.50 per share is greater than the assumed common stock price of
$10 per share. Similarly, the warrants, which are exercisable at $10 per
share were not considered since the strike price is equal to the assumed
price per common share of $10.
F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Owners of
The PTR-Homestead Village Group:
We have audited the accompanying combined balance sheets of the PTR-
Homestead Village Group (as described in Note 1) as of December 31, 1994 and
1995 and the related combined statements of operations, owners' equity and
cash flows for each of the years in the three-year period ended December 31,
1995. In connection with our audits, we also have audited the accompanying
Schedule III, Real Estate and Accumulated Depreciation. These combined
financial statements and combined financial statement schedule are the
responsibility of the PTR-Homestead Village Group's management. Our
responsibility is to express an opinion on these combined financial statements
and combined financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the PTR-Homestead
Village Group as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, the related combined financial statement
schedule, when considered in relation to the basic combined financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Chicago, Illinois
May 1, 1996
F-11
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- -----------
1994 1995 1996
------- -------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 928 $ 1,896 $ 2,931
Accounts receivable.............................. 111 436 799
Other current assets............................. 145 353 314
------- -------- --------
Total current assets........................... 1,184 2,685 4,044
Property and equipment, net........................ 59,099 105,002 120,871
Other assets....................................... 583 1,278 1,475
------- -------- --------
Total assets....................................... $60,866 $108,965 $126,390
======= ======== ========
<CAPTION>
LIABILITIES AND OWNERS' EQUITY
------------------------------
<S> <C> <C> <C>
Current liabilities:
Development costs payable........................ $ 2,564 $ 3,389 $ 3,590
Accrued real estate taxes........................ 272 1,056 760
Accounts payable................................. 349 578 342
Other accrued expenses........................... 482 827 867
Accrued interest payable......................... -- -- 1,183
------- -------- --------
Total current liabilities...................... 3,667 5,850 6,742
Intercompany debt.................................. 45,131 80,144 11,185
Convertible mortgage notes payable................. -- -- 77,289
------- -------- --------
Total liabilities.............................. 48,798 85,994 95,216
------- -------- --------
Commitments and contingencies
Owners' equity:
Contributed capital.............................. 10,674 18,726 25,890
Retained earnings................................ 1,394 4,245 5,284
------- -------- --------
Total owners' equity........................... 12,068 22,971 31,174
------- -------- --------
Total liabilities and owners' equity............... $60,866 $108,965 $126,390
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-12
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER ENDED
31, MARCH 31,
--------------------- -------------
1993 1994 1995 1995 1996
------ ------ ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Room revenue............................. $2,554 $7,827 $18,337 $3,359 $6,753
Other revenue............................ 59 165 366 90 115
------ ------ ------- ------ ------
Total revenue.......................... 2,613 7,992 18,703 3,449 6,868
------ ------ ------- ------ ------
COSTS AND EXPENSES:
Property operating expenses.............. 1,157 3,146 7,600 1,261 2,946
Property management fees paid to
affiliates.............................. 145 460 1,018 197 500
Corporate operating expenses............. 304 826 944 165 201
REIT management fees paid to affiliates.. 109 332 989 206 362
Depreciation............................. 234 845 2,343 397 859
Interest expense......................... 255 1,409 2,958 540 961
------ ------ ------- ------ ------
Total costs and expenses............... 2,204 7,018 15,852 2,766 5,829
------ ------ ------- ------ ------
NET INCOME................................. $ 409 $ 974 $ 2,851 $ 683 $1,039
====== ====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-13
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED OWNERS'
CAPITAL EARNINGS EQUITY
----------- -------- -------
<S> <C> <C> <C>
Balance at December 31, 1992...................... $ 1,576 $ 11 $ 1,587
Contributed capital............................. 1,107 -- 1,107
Net income...................................... -- 409 409
------- ------ -------
Balance at December 31, 1993...................... 2,683 420 3,103
Contributed capital............................. 7,991 -- 7,991
Net income...................................... -- 974 974
------- ------ -------
Balance at December 31, 1994...................... 10,674 1,394 12,068
Contributed capital............................. 8,052 -- 8,052
Net income...................................... -- 2,851 2,851
------- ------ -------
Balance at December 31, 1995...................... 18,726 4,245 22,971
Contributed capital (unaudited)................. 7,164 -- 7,164
Net income (unaudited).......................... -- 1,039 1,039
------- ------ -------
Balance at March 31, 1996 (unaudited)............. $25,890 $5,284 $31,174
======= ====== =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-14
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income................. $ 409 $ 974 $ 2,851 $ 683 $ 1,039
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation............. 234 845 2,343 397 859
Change in:
Accounts receivable...... (31) (62) (325) (177) (363)
Accounts payable and
accrued expenses........ (17) 752 1,358 (712) 690
Other current assets..... 4 (128) (208) 9 39
-------- -------- -------- -------- --------
Net cash provided by
operating activities.. 599 2,381 6,019 200 2,264
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Other assets............... (769) (186) (695) (142) (197)
Investment in property and
equipment, net of
development costs payable. (14,982) (35,288) (47,421) (10,338) (16,527)
-------- -------- -------- -------- --------
Net cash used in investing
activities................ (15,751) (35,474) (48,116) (10,480) (16,724)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from intercompany
debt...................... 15,275 33,832 43,065 9,985 15,495
-------- -------- -------- -------- --------
Net cash provided by
financing activities...... 15,275 33,832 43,065 9,985 15,495
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS... 123 739 968 (295) 1,035
BEGINNING BALANCE OF CASH AND
CASH EQUIVALENTS............ 66 189 928 928 1,896
-------- -------- -------- -------- --------
ENDING BALANCE OF CASH AND
CASH EQUIVALENTS............ $ 189 $ 928 $ 1,896 $ 633 $ 2,931
======== ======== ======== ======== ========
NON-CASH TRANSACTIONS:
Conversion of intercompany
debt to owners' equity.... $ 1,107 $ 7,991 $ 8,052 $ 5,284 $ 7,164
======== ======== ======== ======== ========
Conversion of intercompany
debt to convertible
mortgage notes payable.... $ -- $ -- $ -- $ -- $ 77,289
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-15
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED AS TO INTERIM PERIODS)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS:
The accompanying combined financial statements have been prepared by
combining the accounts of PTR Homestead Village Incorporated and its
consolidated limited partnership, PTR Homestead Village Limited Partnership,
hereinafter collectively referred to as the PTR-Homestead Village Group. PTR
Homestead Village Incorporated directly owns a 99% limited partner interest in
PTR Homestead Village Limited Partnership and through a wholly-owned
subsidiary, also owns a 1% general partner interest. PTR Homestead Village
Incorporated is a wholly-owned subsidiary of Security Capital Pacific Trust, a
real estate investment trust, ("PTR"). Each of the entities comprising the
PTR-Homestead Village Group were formed in 1995. Prior to formation, the
activities of these entities were performed within PTR. Such activities have
been carved out of PTR for purposes of inclusion in the accompanying combined
financial statements.
The accompanying historical financial statements of the PTR-Homestead
Village Group are being presented on a combined basis as PTR Homestead Village
Incorporated is expected to be subject to a merger transaction with certain
affiliated groups of entities in which Homestead Village Properties
Incorporated will own and operate these properties subsequent to the merger
transaction. (See "The Transaction" included elsewhere in the Prospectus for a
description of the merger transaction.) Management of PTR believes that the
combined financial statements results in a more meaningful presentation than
presenting the separate historical financial statements of each entity.
The PTR-Homestead Village Group develops, owns and manages extended-stay
lodging facilities located primarily in the western part of the United States
designed to appeal to value-conscious guests. Rooms are generally rented on a
weekly basis to guests such as business travelers, professionals and others,
with most guests staying multiple weeks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in bank accounts and cash invested
in money market funds.
Property and Equipment
Property and equipment is carried at cost, which is not in excess of
estimated fair market value. Costs directly related to the acquisition,
renovation or development of real estate are capitalized. Repairs and
maintenance costs are expensed as incurred.
Depreciation is computed utilizing a straight-line method over the estimated
economic lives of depreciable property. Properties are depreciated principally
over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements............ 20-40 years
Furniture, fixtures and equipment and
other................................ 2-7 years
</TABLE>
Interest
The PTR-Homestead Village Group capitalizes interest incurred during the
land development or construction period for qualifying projects. Interest
capitalized is included in the cost of properties in the accompanying combined
financial statements. Total interest capitalized amounted to $426,529,
$1,038,815 and $2,142,628 for the years ended December 31, 1993, 1994 and
1995, respectively, and $381,830 and $575,332 for the three months ended March
31, 1995 and 1996, respectively. Interest paid amounted to approximately
$681,500, $2,447,800 and $5,100,600 for the years ended December 31, 1993,
1994 and 1995, respectively, and $921,800 and $353,300 for the three months
ended March 31, 1995 and 1996, respectively.
F-16
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Other Assets
Other assets consist primarily of costs incurred in connection with the
pursuit of land to be acquired for development including refundable earnest
money deposits of $175,000 and $795,000 at December 31, 1994 and 1995,
respectively and $840,000 at March 31, 1996. Costs incurred in connection with
the pursuit of unsuccessful acquisitions or developments are expensed at the
time the pursuit is abandoned.
Revenue Recognition
Room revenue and other income are recognized when earned, utilizing the
accrual method of accounting. A provision for possible bad debts is made when
collection of receivables is considered doubtful.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes
The companies comprising the PTR-Homestead Village Group are qualified
subsidiaries of PTR, which has elected to be taxed as a real estate investment
trust ("REIT").
REITs are not required to pay federal income taxes if minimum distribution
and income, asset and shareholder tests are met. PTR has met each of those
tests for each of the years and interim periods for which combined financial
statements are presented. Accordingly, no income tax provision or benefit has
been reflected in the combined financial statements of the PTR-Homestead
Village Group for the periods presented.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, other
assets, development costs payable, accounts payable and accrued expenses
approximates fair value as of December 31, 1994, 1995 and March 31, 1996
because of the short maturity of these instruments. Similarly, the carrying
value of the intercompany debt and convertible mortgage notes payable
approximates fair value as of those dates as the interest rates approximate
market rates for similar debt instruments.
Unaudited Interim Statements
The combined financial statements as of March 31, 1996 and for the three
months ended March 31, 1995 and 1996 are unaudited. In the opinion of
management all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of such combined financial statements have
been included. The results of operations for the three months ended March 31,
1996 are not necessarily indicative of the PTR-Homestead Village Group future
results of operations for the full year ending December 31, 1996.
F-17
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of land held for future development,
properties under construction and income producing Homestead Village extended-
stay lodging facilities, located in the following markets:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL COST AT
---------------------------
DECEMBER 31, MARCH 31,
--------------- ---------
1994 1995 1996
------ ------ ---------
<S> <C> <C> <C>
MARKET:
Dallas, TX.................................... 38% 29% 26%
Houston, TX................................... 41 29 25
San Antonio, TX............................... 13 12 10
Austin, TX.................................... 3 9 9
Phoenix, AZ................................... 2 8 10
Denver, CO.................................... 3 6 8
Albuquerque, NM............................... -- 4 4
Bay Area, CA.................................. -- 3 5
Kansas City, KA............................... -- -- 1
Seattle, WA................................... -- -- 2
------ ------ ---
100% 100% 100%
====== ====== ===
</TABLE>
The following summarizes property and equipment (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------- -----------
1994 1995 1996
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
PROPERTY AND EQUIPMENT:
Land.................................... $ 7,044 $ 14,812 $ 17,053
Buildings and improvements.............. 29,611 52,697 61,059
Furniture, fixtures and equipment....... 4,973 10,760 11,396
------- -------- --------
Operating properties.................. 41,628 78,269 89,508
Construction in progress, excluding
land................................... 9,296 26,577 20,558
Land held for and under development..... 9,289 3,613 15,121
------- -------- --------
60,213 108,459 125,187
Less: accumulated depreciation........ (1,114) (3,457) (4,316)
------- -------- --------
Property and equipment, net............... $59,099 $105,002 $120,871
======= ======== ========
</TABLE>
The PTR-Homestead Village Group's strategy is to focus on the ownership of
extended-stay lodging facilities. Properties are periodically evaluated for
impairment by comparing the sum of the expected undiscounted future cash flows
to the carrying value of the assets and in the event the carrying value
exceeds such cash flows, provisions for possible losses, measured as the
amount by which the carrying value exceeds the estimated fair value of the
assets, are made if required. No such impairment losses have been recognized
to date. Statement of Financial Accounting Standards No. 121 entitled
"Accounting For The Impairment Of Long-Lived Assets And For Long-Lived Assets
To Be Disposed Of" has been adopted by the PTR-Homestead Village Group, as
required by the statement effective January 1, 1996. The adoption of the
statement had no impact on the combined financial statements at the date of
adoption.
4. INTERCOMPANY DEBT AND CONTRIBUTED CAPITAL:
The combined financial statements of the PTR-Homestead Village Group reflect
intercompany debt assumed to have been borrowed from PTR to fund the
acquisition and development of the Homestead Village properties.
F-18
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Acquisition and development costs were assumed to have been financed through
borrowings from PTR up through the completion date of each respective
property. Upon completion of a property, 30% of the intercompany debt
associated with the property was assumed to have been converted to contributed
capital. This assumption was made to reflect the ultimate leverage ratio (70%
convertible mortgage debt and 30% common equity) expected to exist within
Homestead after the funding commitment is fulfilled. Borrowings were assumed
to bear interest at the weighted average interest rate of PTR's line of credit
and unsecured long term debt which rates ranged from 6.3% to 9.25% for the
period from January 1, 1993 through March 31, 1996. Interest costs were either
expensed or capitalized in accordance with the PTR-Homestead Village Group's
accounting policy for capitalization of interest cost discussed above.
Approximately $77,289,000 of intercompany debt was converted to convertible
mortgage notes payable in January 1996 (Note 5).
5. CONVERTIBLE MORTGAGE NOTES PAYABLE:
On January 24, 1996, the entities comprising the PTR-Homestead Village Group
(the "Borrower") executed convertible mortgage notes payable ($77,289,000) in
favor of PTR. These notes provide the PTR-Homestead Village Group with
borrowing capability in the aggregate amount of $148,164,832 and are secured
by currently owned Homestead Village properties. Additionally, these notes
will further be secured by land to be acquired and developed. The terms of the
notes provide for interest only payments of 9% per annum with payments
beginning six months from the date of the note. The notes are due and payable
on or before October 31, 2006.
The mortgage notes are convertible, at the option of PTR, into common shares
of the Borrower at any time beginning April 1, 1997. The conversion price is
equal to 115% of the value of the common shares at the date of the note, as
determined by the Board of Directors of the Borrower.
6. REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS:
PTR has a REIT management agreement with Security Capital Pacific
Incorporated (the "REIT Manager"), a subsidiary of Security Capital Group
Incorporated ("SCG"), which is a significant shareholder of PTR. The REIT
Manager provides both strategic and day-to-day management of PTR, including
research, investment analysis, acquisition and development, asset management,
capital markets, and legal and accounting services. All officers of PTR are
employees of the REIT Manager and PTR has no employees.
The REIT management agreement requires PTR to pay a stipulated base annual
fee plus 16% of cash flow, as defined in the agreement. The PTR-Homestead
Village Group's allocable share of the REIT management fee was based on 16% of
its properties defined cash flow. Such fees, which are included in corporate
operating expenses in the accompanying statements of operations, were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1993................. $109,032
1994................. 332,252
1995................. 989,471
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
- ------------------
<S> <C>
March 31, 1995....... $205,630
March 31, 1996....... 361,558
</TABLE>
Additionally, in 1995, the PTR-Homestead Village Group entered into property
management agreements with Homestead Realty Services Incorporated ("Homestead
Realty") to manage its operating properties. Prior to 1995, such agreements
were with SCG Realty Services Incorporated ("SCG Realty"). Both Homestead
Realty and SCG Realty are wholly-owned subsidiaries of SCG. Fees for such
services are computed as a percentage (5.0%-7.0%) of gross revenues, as
defined. Such fees, which are included in property operating expenses in the
accompanying statements of operations, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1993............... $ 144,942
1994............... 459,513
1995............... 1,018,223
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
- ------------------
<S> <C>
March 31, 1995....... $196,704
March 31, 1996....... 499,661
</TABLE>
F-19
<PAGE>
THE PTR-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
Accrued expenses include $55,000 and $470,000 at December 31, 1994 and 1995,
respectively and $481,000 at March 31, 1996 payable to these affiliates for
the REIT and property management services including amounts owed for
reimbursement of out-of-pocket expenses incurred by the REIT Manager.
7. COMMITMENTS AND CONTINGENCIES:
Finder's Agreements
Pursuant to a series of agreements between PTR and an unaffiliated person
("Finder") who developed the Homestead Village concept, Finder has performed
certain services. The agreements which expire February 5, 2043, provide for
the payment of fees to Finder as follows: (i) $535,000 annually with respect
to the four properties for which Finder assisted in the location, development
and initial operations; (ii) an annual amount of $7,500 per property (subject
to certain conditions as defined in the agreements) for assistance in site
location with respect to the first 35 properties constructed (other than the
four properties referred to in (i) above); (iii) 20% of the net proceeds as
defined per the agreements, upon the sale of the four properties to an
unaffiliated third party; and (iv) 10% of the net proceeds as defined per the
agreement, upon the sale of the additional 35 properties to an unaffiliated
third party. No such sales have occurred to date. Fees paid under this
agreement and reflected in the accompanying combined statements of operations
for the years ended December 31, 1993, 1994 and 1995 aggregated approximately
$120,000, $646,000 and $611,000, respectively, and $145,000 and $158,000 for
the three months ended March 31, 1995 and 1996, respectively. Effective
December 1994, the agreement to assist in the site location of any additional
properties beyond the 39 properties was terminated. Additionally, Finder has
agreed not to compete, directly or indirectly, with the Homestead Village
properties in certain states in which PTR does business through December 31,
1996.
Other
At April 23, 1996, the PTR-Homestead Village Group had unfunded development
commitments for developments under construction of approximately $21.1
million.
The PTR-Homestead Village Group is subject to environmental regulations
related to the ownership, operation, development and acquisition of real
estate. As part of its due diligence procedures, the PTR-Homestead Village
Group has conducted Phase I environmental assessments on each property prior
to acquisition. The cost of complying with environmental regulations was not
material to PTR-Homestead Village Group's results of operations for any of the
periods presented. The PTR-Homestead Village Group is not aware of any
environmental condition on any of its properties which is likely to have a
material adverse effect on its financial condition or results of operations.
F-20
<PAGE>
SCHEDULE III
THE PTR-HOMESTEAD VILLAGE GROUP
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL
COST TO GROSS AMOUNT AT WHICH
THE PTR- COSTS CARRIED AT DECEMBER 31, 1995
HOMESTEAD CAPITALIZED -----------------------------
VILLAGE SUBSE- BUILDINGS ACCUMU- CON-
GROUP: QUENT TO AND LATED DE- STRUCTION YEAR
PROPERTIES LAND ACQUISITION LAND IMPROVEMENTS TOTALS PRECIATION YEAR ACQUIRED
---------- --------- ----------- ---- ------------ -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Albuquerque, New Mexico:
Osuna.................. $ 832 $ 3,039 $ 840 $ 3,031 $ 3,871 (a) (a) 1995
Austin, Texas:
Burnet Road............ 525 3,543 723 3,345 4,068 66 1995 1994
Mid Town............... 600 3,135 645 3,090 3,735 (a) (a) 1995
Pavilion (c)........... 693 120 693 120 813 (a) (a) 1995
Dallas, Texas:
Skillman............... 400 2,683 400 2,683 3,083 278 1993 1992
Stemmons Freeway....... 356 4,136 424 4,068 4,492 296 (b) (b)
Tollway................ 275 2,443 353 2,365 2,718 340 1993 1993
North Richland Hills... 470 3,020 544 2,946 3,490 300 1994 1993
Coit Road.............. 425 2,961 496 2,890 3,386 300 1994 1993
West Arlington......... 585 3,400 652 3,333 3,985 118 1995 1993
South Arlington........ 550 3,274 642 3,182 3,824 120 1995 1994
Fort Worth............. 350 2,296 372 2,274 2,646 (a) (a) 1994
Las Colinas............ 800 3,562 805 3,557 4,362 (a) (a) 1994
Denver, Colorado:
Denver Tech Center..... 876 2,622 921 2,577 3,498 (a) (a) 1994
Iliff.................. 615 2,910 624 2,901 3,525 (a) (a) 1994
Houston, Texas:
West by Northwest...... 519 2,913 568 2,864 3,432 283 1994 1993
Fuqua.................. 416 2,929 491 2,854 3,345 250 1994 1993
Westheimer............. 796 3,205 897 3,104 4,001 208 1994 1993
Park Ten............... 791 3,102 860 3,033 3,893 172 1994 1993
Stafford............... 575 3,092 665 3,002 3,667 168 1994 1993
Bammel-Westfield....... 516 2,959 595 2,880 3,475 162 1994 1993
Medical Center......... 1,530 3,765 1,669 3,626 5,295 18 1995 1994
Willowbrook............ 575 3,350 669 3,256 3,925 51 1995 1994
Phoenix, Arizona
Baseline (c)........... 808 1,692 830 1,670 2,500 (a) (a) 1995
Dunlap (c)............. 915 1,153 933 1,135 2,068 (a) (a) 1995
Scottsdale............. 883 3,376 975 3,284 4,259 37 1995 1994
San Antonio:
Fredricksburg.......... 800 3,239 892 3,147 4,039 170 1994 1993
I-10/De Zavala......... 844 3,587 983 3,448 4,431 55 1995 1994
281/Bitters............ 1,000 3,729 1,198 3,531 4,729 65 1995 1994
San Francisco (Bay Area),
California:
San Mateo.............. 1,510 142 1,510 142 1,652 (a) (a) 1995
Sunnyvale.............. 1,274 87 1,277 84 1,361 (a) (a) 1995
Austin, Texas:
Round Rock (d)......... 808 83 828 63 891 -- -- 1995
------- ------- ------- ------- -------- ------
Total.................. $22,912 $85,547 $24,974 $83,485 $108,459 $3,457
======= ======= ======= ======= ======== ======
</TABLE>
- --------
(a) As of December 31, 1995, the property was undergoing development.
(b) Phase I (132 units) was developed in 1992 and Phase II (57 units) was
developed in 1995.
F-21
<PAGE>
(c) Represents properties owned by third party developers that are subject to
presale agreements with PTR to acquire such properties. The investment as
of December 31, 1995 represents development loans made by PTR to such
developers.
(d) 53.1 acres of undeveloped land.
The following is a reconciliation of the carrying amount and related
accumulated depreciation of the PTR-Homestead Village Group's investment in
property and equipment, at cost (in thousands):
<TABLE>
<CAPTION>
PROPERTY AND EQUIPMENT
----------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Balance at January 1,........................... $ 7,007 $24,168 $ 60,213
Development expenditures including land
acquisition.................................. 17,161 36,045 48,246
------- ------- --------
Balance at December 31,......................... $24,168 $60,213 $108,459
======= ======= ========
<CAPTION>
ACCUMULATED DEPRECIATION
------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Balance at January 1,........................... $ 35 $ 269 $ 1,114
Depreciation for the year..................... 234 845 2,343
------- ------- --------
Balance at December 31,......................... $ 269 $ 1,114 $ 3,457
======= ======= ========
</TABLE>
As of December 31, 1995 the aggregate cost and net investment cost for
federal income tax purposes of PTR-Homestead Village Group's investment in
property and equipment amounted to $107,623 and $104,972, respectively.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Owners of
The Atlantic-Homestead Village Group:
We have audited the accompanying combined balance sheet of the Atlantic-
Homestead Village Group (as described in Note 1) as of December 31, 1995 and
the related combined statements of operations, owners' equity and cash flows
for the period from April 3, 1995 (date of formation) through December 31,
1995. In connection with our audit, we also have audited the accompanying
Schedule III, Real Estate and Accumulated Depreciation. These combined
financial statements and combined financial statement schedule are the
responsibility of the Atlantic-Homestead Village Group's management. Our
responsibility is to express an opinion on these combined financial statements
and combined financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Atlantic-
Homestead Village Group as of December 31, 1995, and the results of their
operations and their cash flows for the period from April 3, 1995 (date of
formation) through December 31, 1995, in conformity with generally accepted
accounting principles. Also in our opinion, the related combined financial
statement schedule, when considered in relation to the basic combined
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Chicago, Illinois
May 1, 1996
F-23
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 184 $ 72
------ -------
Total current assets............................... 184 72
Properties under development........................... 2,627 10,437
Other assets........................................... 1,506 1,817
------ -------
Total assets....................................... $4,317 $12,326
====== =======
<CAPTION>
LIABILITIES AND OWNERS' EQUITY
------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable..................................... $ 93 $ 142
Development costs payable............................ 15 1,142
Accrued real estate taxes............................ 3 5
Accrued expenses..................................... 44 163
------ -------
Total current liabilities.......................... 155 1,452
Intercompany debt...................................... 2,627 9,295
------ -------
Total liabilities.................................. 2,782 10,747
------ -------
Commitments and Contingencies
Owners' Equity:
Contributed capital.................................. 1,594 1,650
Retained earnings (deficit).......................... (59) (71)
------ -------
Total owners' equity............................... 1,535 1,579
------ -------
Total liabilities and owners' equity................... $4,317 $12,326
====== =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-24
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3, 1995
(DATE OF FORMATION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, 1995 MARCH 31, 1996
------------------- --------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Miscellaneous.............................. $ 4 $ 6
---- ----
Total revenue............................ 4 6
---- ----
Costs and Expenses:
Corporate operating expenses............... 63 18
---- ----
Total costs and expenses................. 63 18
---- ----
Net loss..................................... $(59) $(12)
==== ====
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-25
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED TOTAL
CONTRIBUTED EARNINGS OWNERS'
CAPITAL (DEFICIT) EQUITY
----------- --------- -------
<S> <C> <C> <C>
Balance at April 3, 1995 (date of formation)..... $ -- $-- $ --
Contributed capital............................ 1,594 -- 1,594
Net loss....................................... -- (59) (59)
------ ---- ------
Balance at December 31, 1995..................... $1,594 $(59) $1,535
Contributed capital (unaudited)................ 56 -- 56
Net loss (unaudited)........................... -- (12) (12)
------ ---- ------
Balance at March 31, 1996 (unaudited)............ $1,650 $(71) $1,579
====== ==== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-26
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3, 1995 THREE MONTHS
(DATE OF FORMATION) ENDED
THROUGH MARCH 31,
DECEMBER 31, 1995 1996
------------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................... $ (59) $ (12)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Change in accounts payable and accrued
expenses................................. 140 170
------- -------
Net cash provided by operating
activities............................. 81 158
------- -------
Cash flows from investing activities:
Other assets................................ (1,506) (311)
Investment in properties, net of development
costs payable.............................. (2,612) (6,683)
------- -------
Net cash used in investing activities... (4,118) (6,994)
------- -------
Cash flows from financing activities:
Proceeds from intercompany debt............. 2,627 6,668
Capital contributions....................... 1,594 56
------- -------
Net cash provided by financing
activities............................. 4,221 6,724
------- -------
Net increase (decrease) in cash and cash
equivalents.................................. 184 (112)
Beginning balance of cash and cash
equivalents.................................. -- 184
------- -------
Ending balance of cash and cash equivalents... $ 184 $ 72
======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-27
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED AS TO INTERIM PERIOD)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS:
The accompanying combined financial statements have been prepared by
combining the accounts of Alabama Homestead Incorporated, Atlantic Homestead
Village Incorporated and its consolidated limited partnership, Atlantic
Homestead Village Limited Partnership, hereinafter collectively referred to as
the Atlantic-Homestead Village Group. Through various wholly-owned
subsidiaries, Atlantic Homestead Village Incorporated owns a 99% limited
partner and a 1% general partner interest in Atlantic Homestead Village
Limited Partnership. Alabama Homestead Incorporated and Atlantic Homestead
Village Incorporated are wholly-owned subsidiaries of Security Capital
Atlantic Incorporated, a real estate investment trust ("ATLANTIC"). The
entities comprising the Atlantic-Homestead Village Group were formed
commencing April 3, 1995.
The accompanying historical financial statements of the Atlantic-Homestead
Village Group are being presented on a combined basis as Alabama Homestead
Incorporated and Atlantic Homestead Village Incorporated are expected to be
subject to a merger transaction with certain affiliated groups of entities in
which Homestead Village Properties Incorporated will own and operate the
properties subsequent to the merger transaction (See the Prospectus for a
description of the merger transaction). Management of Atlantic believes that
the combined financial statements result in a more meaningful presentation
than presenting the separate historical financial statements of each entity.
The Atlantic-Homestead Village Group develops, owns and manages extended-
stay lodging facilities located in the Southeastern region of the United
States designed to appeal to value-conscious guests. Rooms are generally
rented on a weekly basis to guests such as business travelers, professionals
and others, with most guests staying multiple weeks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in bank accounts and cash invested
in money market funds.
Properties Under Development
As of December 31, 1995 and March 31, 1996, the Atlantic-Homestead Village
Group had three properties and seven properties under development,
respectively. Costs directly related to the acquisition, development or
improvement of real estate are capitalized. Property under development is
carried at cost, which is not in excess of estimated fair market value.
Interest
The Atlantic-Homestead Village Group capitalizes interest incurred during
the land development or construction period for qualifying projects. Interest
capitalized is included in the cost of properties in the accompanying combined
financial statements. All interest incurred was capitalized and amounted to
$35,528 for the period ended December 31, 1995 and $117,409 for the three
months ended March 31, 1996. No interest was paid through March 31, 1996. All
interest was added to the intercompany debt balance as incurred.
Other Assets
Other assets consist primarily of costs incurred in connection with the
pursuit of land to be acquired for development including refundable earnest
money deposits of $950,000 and $1,090,000 at December 31, 1995 and March 31,
1996, respectively. Costs incurred in connection with the pursuit of
unsuccessful acquisitions or developments are expensed at the time the pursuit
is abandoned.
F-28
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED AS TO INTERIM PERIOD)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes
The companies comprising the Atlantic-Homestead Village Group are qualified
subsidiaries of ATLANTIC, a corporation which has elected to be taxed as a
real estate investment trust ("REIT").
REITs are not required to pay federal income taxes if minimum distribution
and income, asset and shareholder tests are met. ATLANTIC has met each of
those tests for each of the periods for which combined financial statements
are presented. Accordingly, no income tax provision or benefit has been
reflected in the combined financial statements of the Atlantic-Homestead
Village Group for the periods presented.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, development costs payable and accrued expenses approximates
fair value as of December 31, 1995 and March 31, 1996 because of the short
maturity of these instruments. Similarly, the carrying value of the
intercompany debt approximates fair value as of those dates as the weighted
average interest rates approximate market rates for similar debt instruments.
Unaudited Interim Statements
The combined financial statements as of March 31, 1996 and for the three
months ended March 31, 1996 are unaudited. In the opinion of management all
adjustments (consisting solely of normal recurring adjustments) necessary for
a fair presentation of such combined financial statements have been included.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the Atlantic-Homestead Village Group future results
of operations for the full year ending December 31, 1996.
3. INTERCOMPANY DEBT AND CONTRIBUTED CAPITAL:
The combined financial statements of the Atlantic-Homestead Village Group
reflect intercompany debt assumed to have been borrowed from ATLANTIC to fund
the acquisition and development of the Homestead Village properties.
Borrowings were assumed to bear interest at the weighted average interest rate
of ATLANTIC's debt, which was approximately 8.00% and 7.6% at December 31,
1995 and March 31, 1996, respectively. Interest costs were capitalized in
accordance with the Atlantic-Homestead Village Group's accounting policy for
capitalization of interest cost discussed above. All net operating costs and
expenses incurred were assumed to have been financed through capital
contributed by ATLANTIC.
4. CONVERTIBLE MORTGAGE NOTES PAYABLE:
On January 24, 1996, the Atlantic-Homestead Village Group (the "Borrower")
executed convertible mortgage notes payable in favor of ATLANTIC. These notes
give the Atlantic-Homestead Village Group borrowing capability in the
aggregate amount of $81,244,906 and are secured by the currently owned
Homestead Village properties. Additionally, these notes will further be
secured by land to be acquired and developed. The terms of the notes provide
for interest only payments of 9% per annum with payments beginning six months
from the issue date of each note. The notes are due and payable on or before
October 31, 2006. There were no borrowings under these notes during the period
ended March 31, 1996.
F-29
<PAGE>
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED AS TO INTERIM PERIOD)
The mortgage notes are convertible, at the option of ATLANTIC, into common
shares of the Borrower at any time beginning April 1, 1997. The conversion
price is equal to 115% of the value of the common shares at the date of the
note, as determined by the Board of Directors of the Borrower.
5. REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
Atlantic has a REIT management agreement with Security Capital (Atlantic)
Incorporated (the "REIT Manager"), a subsidiary of Security Capital Group
Incorporated ("SCG"), which is a majority shareholder of ATLANTIC. The REIT
Manager provides both strategic and day-to-day management of Atlantic,
including research, investment analysis, acquisition and development, asset
management, capital markets, and legal and accounting services. All officers
of ATLANTIC are employees of the REIT Manager and ATLANTIC has no employees.
The REIT management agreement requires ATLANTIC to pay an annual fee of 16%
of cash flow, as defined in the agreement. The Atlantic-Homestead Village
Group's allocable share of the REIT management fee is based on 16% of its
properties defined cash flow. No fees were payable for the periods ended
December 31, 1995 or March 31, 1996 as no properties were operating during
such periods.
6. COMMITMENTS AND CONTINGENCIES:
At March 31, 1996, the Atlantic-Homestead Village Group had unfunded
development commitments for developments under construction of approximately
$2.4 million.
The Atlantic-Homestead Village Group is subject to environmental regulations
related to the ownership, operation, development and acquisition of real
estate. As part of its due diligence procedures, the Atlantic-Homestead
Village Group has conducted Phase I environmental assessments on each property
prior to acquisition. The cost of complying with environmental regulations was
not material to the Atlantic-Homestead Village Group's results of operations
for the periods presented. The Atlantic-Homestead Village Group is not aware
of any environmental condition on any of its properties which is likely to
have a material adverse effect on its financial condition or results of
operations.
F-30
<PAGE>
SCHEDULE III
THE ATLANTIC-HOMESTEAD VILLAGE GROUP
REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
INITIAL CARRIED AT DECEMBER 31,
COST TO 1995
ATLANTIC- COSTS
HOMESTEAD CAPITALIZED --------------------------
VILLAGE SUBSE- BUILDINGS ACCUMU- CON-
GROUP: QUENT TO AND LATED DE- STRUCTION YEAR
PROPERTIES LAND ACQUISITION LAND TOTALS IMPROVEMENTS PRECIATION YEAR ACQUIRED
---------- --------- ----------- ------ ------ ------------ ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Atlanta, Georgia:
Peachtree Corners...... 889 310 889 310 1,199 -- (a) 1995
Raleigh, North Carolina:
Research Triangle Park. 805 38 805 38 843 -- (b) 1995
Tampa/St. Petersburg,
Florida:
North Airport.......... 511 74 511 74 585 -- (b) 1995
------ ---- ------ ---- ------ ----
Total.................. $2,205 $422 $2,205 $422 $2,627 $ 0
====== ==== ====== ==== ====== ====
</TABLE>
(a) As of December 31, 1995, the property was undergoing development.
(b) As of December 31, 1995, the property was undergoing planning.
As of December 31, 1995 the aggregate cost and net investment cost for
federal income tax purposes of Atlantic-Homestead Village Group's investment
in property under development approximates its book value.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholder of
The SCG-Homestead Village Group:
We have audited the accompanying combined balance sheets of the SCG-
Homestead Village Group (as described in Note 1) as of December 31, 1994 and
1995 and the related combined statements of operations, shareholder's equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1995. These combined financial statements are the responsibility
of the SCG-Homestead Village Group's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the SCG-Homestead
Village Group as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
May 1, 1996
F-32
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- -----------
1994 1995 1996
------- ------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash........................................... $ -- $ -- $ 12
REIT and property management fees receivable... 55 470 481
Other current assets........................... -- 67 4
------- ------- -------
Total current assets......................... 55 537 497
Furniture and equipment, net................... 47 228 233
Other assets................................... -- 14 72
------- ------- -------
Total assets................................. $ 102 $ 779 $ 802
======= ======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable............................... $ 13 $ 92 $ 6
Accrued expenses............................... 238 807 494
Intercompany debt.............................. -- 1,147 2,043
------- ------- -------
Total current liabilities.................... 251 2,046 2,543
------- ------- -------
Commitments and contingencies
Shareholder's equity (deficit):
Contributed capital............................ 2,371 6,408 8,170
Retained earnings (deficit).................... (2,520) (7,675) (9,911)
------- ------- -------
Total shareholder's equity (deficit)......... (149) (1,267) (1,741)
------- ------- -------
Total liabilities and shareholder's equity
(deficit)....................................... $ 102 $ 779 $ 802
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-33
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
----------------------- ------------------
1993 1994 1995 1995 1996
----- ------- ------- ----- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
REIT and property management fees
earned from affiliates.......... $ 254 $ 792 $ 2,007 $ 402 $ 861
Other revenue.................... -- -- 14 -- --
----- ------- ------- ----- -------
Total revenue.................. 254 792 2,021 402 861
----- ------- ------- ----- -------
Costs and Expenses:
Payroll and related expenses..... 707 1,713 4,276 665 1,909
Office expenses.................. 22 67 273 31 147
Travel and entertainment......... 14 60 232 27 105
Recruiting and relocation........ 53 85 822 71 223
Other expenses................... 57 187 601 58 300
Allocation of SCG overhead....... 69 342 972 68 413
----- ------- ------- ----- -------
Total costs and expenses....... 922 2,454 7,176 920 3,097
----- ------- ------- ----- -------
Net loss........................... $(668) $(1,662) $(5,155) $(518) $(2,236)
===== ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-34
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
RETAINED SHAREHOLDER'S
CONTRIBUTED EARNINGS EQUITY
CAPITAL (DEFICIT) (DEFICIT)
----------- --------- -------------
<S> <C> <C> <C>
Balance at December 31, 1992................ $ 206 $ (190) $ 16
Contributed capital....................... 565 -- 565
Net loss.................................. -- (668) (668)
------ ------- -------
Balance at December 31, 1993................ 771 (858) (87)
Contributed capital....................... 1,600 -- 1,600
Net loss.................................. -- (1,662) (1,662)
------ ------- -------
Balance at December 31, 1994................ 2,371 (2,520) (149)
Contributed capital....................... 4,037 -- 4,037
Net loss.................................. -- (5,155) (5,155)
------ ------- -------
Balance at December 31, 1995................ 6,408 (7,675) (1,267)
Contributed capital (unaudited)........... 1,762 -- 1,762
Net loss (unaudited)...................... -- (2,236) (2,236)
------ ------- -------
Balance at March 31, 1996 (unaudited)....... $8,170 $(9,911) $(1,741)
====== ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-35
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS
31, ENDED MARCH 31,
----------------------- ------------------
1993 1994 1995 1995 1996
----- ------- ------- ----- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss......................... $(668) $(1,662) $(5,155) $(518) $(2,236)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization.. -- 8 39 3 10
Change in:
REIT and property management
fees receivable............... 6 (45) (416) (112) (11)
Accounts payable and accrued
expenses...................... 97 154 648 (106) (399)
Other current assets........... -- -- (67) (4) 63
----- ------- ------- ----- -------
Net cash used by operating
activities.................. (565) (1,545) (4,951) (737) (2,573)
----- ------- ------- ----- -------
Cash flows from investing
activities:
Other assets..................... -- -- (14) -- (58)
Investment in furniture and
equipment....................... -- (55) (220) (55) (15)
----- ------- ------- ----- -------
Net cash used in investing
activities.................. -- (55) (234) (55) (73)
----- ------- ------- ----- -------
Cash flows from financing
activities:
Intercompany debt................ -- -- 1,148 788 896
Capital contributions............ 565 1,600 4,037 4 1,762
----- ------- ------- ----- -------
Net cash provided by
financing activities........ 565 1,600 5,185 792 2,658
----- ------- ------- ----- -------
Net increase in cash............... -- -- -- -- 12
Cash at beginning of period........ -- -- -- -- --
----- ------- ------- ----- -------
Cash at end of period.............. $ -- $ -- $ -- $ -- $ 12
===== ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-36
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED AS TO INTERIM PERIODS)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS:
The accompanying combined financial statements have been prepared by
combining the accounts of Homestead Village Incorporated and Homestead Realty
Services Incorporated, each incorporated in June, 1995 and SCG-Homestead
Village Incorporated, incorporated in February, 1996. These entities are
wholly-owned subsidiaries of Security Capital Group Incorporated ("SCG") and
are hereinafter collectively referred to as the SCG-Homestead Village Group.
Prior to incorporation, the activities of these entities were performed within
other subsidiaries of SCG. Such activities have been carved out of those
subsidiaries for purposes of inclusion in the accompanying combined financial
statements.
The accompanying historical financial statements of the SCG-Homestead
Village Group are presented on a combined basis as these entities are expected
to be subject to a merger transaction with certain affiliated groups of
entities in which Homestead Village Properties Incorporated will operate and
manage properties subsequent to the merger transaction. (See the Prospectus
for a description of the merger transaction.) Management of SCG believes that
the combined financial statements result in a more meaningful presentation
than presenting the separate historical financial statements of each
subsidiary.
The SCG-Homestead Village Group provides fee-based strategic and day-to-day
advisory services to affiliated real estate investment trusts (REITs) which
develop, own and operate extended-stay lodging facilities (Homestead Village
Properties) designed to appeal to value-conscious guests. The services
provided include research, investment analysis, acquisition and development,
asset management, capital markets, property management and legal and
accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in bank accounts and cash invested
in money market funds.
Furniture and Equipment
Furniture and equipment is carried at cost, which is not in excess of
estimated fair market value. Depreciation is computed utilizing a straight-
line method over the estimated economic lives of depreciable property,
generally five to seven years.
The following summarizes furniture and equipment as of December 31, 1994,
1995 and March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------- -----------
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment............................. $ 54 $ 274 $289
Less: accumulated depreciation.................... (7) (46) (56)
----- ------ ----
Furniture and equipment, net........................ $ 47 $ 228 $233
===== ====== ====
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-37
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED AS TO INTERIM PERIODS)
Income Taxes
None of the entities within the SCG-Homestead Village Group have generated
taxable income since incorporation. The total net operating loss carryforward
of these entities is approximately $856,000 and $1,308,000 as of December 31,
1995 and March 31, 1996, respectively, and expire in varying amounts through
2016. The deferred tax asset resulting from these net operating loss
carryforwards has been fully reserved due to its uncertain realizability.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates their fair value as of
December 31, 1994, 1995 and March 31, 1996 because of the short maturity of
these instruments. Similarly, the carrying value of the intercompany debt
approximates fair value as of those dates as the interest rates approximate
market rates for similar debt instruments.
Unaudited Interim Statements
The combined financial statements as of March 31, 1996 and for the three
months ended March 31, 1995 and 1996 are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such combined
financial statements have been included. The results of operations for the
three months ended March 31, 1996 are not necessarily indicative of the SCG-
Homestead Village Group's future results of operations for the full year
ending December 31, 1996.
3. INTERCOMPANY DEBT AND CONTRIBUTED CAPITAL:
The operating expenses incurred by the SCG-Homestead Village Group were
assumed to have been financed through capital contributed by SCG through 1994.
Commencing in 1995, such costs were financed in part through unsecured
borrowings from SCG which are due on demand. The advances include interest at
prime plus 1/4%, (8.75% and 8.5% at December 31, 1995 and March 31, 1996,
respectively). No interest was paid, all interest was added to the
intercompany debt balance as incurred. Interest expense was $69,843 and
$49,043 for the year ended December 31, 1995 and the three months ended March
31, 1996, respectively, and is included in the "Other expense" caption in the
combined statements of operations.
4. REIT MANAGEMENT AND PROPERTY MANAGEMENT FEES EARNED FROM AFFILIATES
SCG, the parent of the entities comprising the SCG-Homestead Village Group
has entered into agreements with affiliated real estate investment trusts,
Security Capital Pacific Trust ("PTR") and Security Capital Atlantic,
Incorporated ("Atlantic") to provide REIT management services. The services
with respect to the Homestead Village Properties are provided by the employees
of the SCG-Homestead Village Group and, therefore, the fees earned from
providing such services have been included in the accompanying combined
financial statements.
The REIT management fees are generally based on 16% of cash flow, as defined
in the agreements. The fees earned by the SCG-Homestead Village Group which
were based on the cash flow (as defined) of the Homestead Village Properties
operated by PTR (no Atlantic properties were operational as of March 31, 1996)
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
<S> <C>
March 31, 1995...... $205,630
March 31, 1996...... $361,558
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1993................ $109,032
1994................ $332,252
1995................ $989,471
</TABLE>
F-38
<PAGE>
THE SCG-HOMESTEAD VILLAGE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED AS TO INTERIM PERIODS)
Additionally, in 1995 Homestead Realty Services Incorporated ("Homestead
Realty") entered into property management agreements with PTR's Homestead
Village subsidiaries to manage their operating properties. Prior to 1995 such
agreements were with SCG Realty Services Incorporated ("SCG Realty"), a
subsidiary of SCG and a predecessor of Homestead Realty. Fees for such
services are computed as a percentage (5.0%-7.0%) of gross revenues, as
defined. Property management fees earned for each period were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
<S> <C>
March 31, 1995...... $196,704
March 31, 1996...... $499,661
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1993.............. $ 144,942
1994.............. $ 459,513
1995.............. $1,018,223
</TABLE>
5. TRANSACTIONS WITH SCG
SCG serves as cash manager for the entities in the SCG-Homestead Village
Group. In this capacity SCG collects all cash attributable to the SCG-
Homestead Village Group business activities and makes all cash disbursements
on behalf of the SCG-Homestead Village Group. Additionally, the SCG-Homestead
Village Group is allocated overhead expenses and certain other costs from SCG
related to occupancy and other services provided to the SCG-Homestead Village
Group by SCG. In the opinion of management, the allocation of costs and
expenses have been made on a basis which is believed to be reasonable however,
the allocation is not necessarily indicative of the costs and expenses the
SCG-Homestead Village Group may have incurred on its own account.
F-39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Homestead Village Properties Incorporated
We have audited the accompanying balance sheet of Homestead Village
Properties Incorporated as of April 30, 1996. This balance sheet is the
responsibility of the company's management. Our responsibility is to express
an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Homestead Village Properties
Incorporated as of April 30, 1996, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Dallas, Texas
May 21, 1996
F-40
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
BALANCE SHEET
APRIL 30, 1996
<TABLE>
<S> <C>
ASSETS
Cash.................................................................... $1,000
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Commitments and contingencies
Shareholder's Equity:
Common Stock, $.01 par value, 250,000,000 shares authorized, 1,000
shares issued and outstanding........................................ $ 10
Additional paid in capital............................................ 990
------
Total shareholder's equity.......................................... 1,000
------
Total liabilities and shareholder's equity.............................. $1,000
======
</TABLE>
See accompanying notes.
F-41
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
NOTES TO BALANCE SHEET
APRIL 30, 1996
1. ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
Homestead Village Properties Incorporated, a Maryland corporation
("Homestead") was formed on January 26, 1996 to develop, own and manage
extended-stay lodging facilities under the Homestead Village tradename.
Homestead's extended-stay lodging rooms are designed to appeal to value-
conscious guests such as business travelers, professionals and others on a
weekly basis, with most guests staying multiple weeks. The issuance of the
initial shares was funded on April 18, 1996.
Homestead was formed to acquire, through a series of merger transactions,
all of the extended-stay lodging assets operating or to be operated under the
Homestead Village tradename. The net assets related to the Homestead Village
properties are to be acquired through the merger of various wholly-owned
subsidiaries of Security Capital Group Incorporated (SCG), Security Capital
Pacific Trust (PTR) and Security Capital Atlantic Incorporated ("ATLANTIC"),
all affiliates of Homestead, in exchange for common stock of Homestead. PTR
had 27 operating Homestead Village properties, 5 properties under construction
and 22 in pre-development planning (as defined) as of May 20, 1996. ATLANTIC
had 1 Homestead Village property under construction and 25 in pre-development
planning as of May 20, 1996. SCG will provide the trademark and development
and property management expertise as well as operating systems necessary to
develop, own and operate the properties.
Homestead was initially capitalized through the issuance of 1,000 shares of
$.01 par value common stock for $1,000 to SCG. As of April 30, 1996, Homestead
has 250,000,000 shares of common stock, $.01 par value authorized.
Income Taxes
Homestead was formed as a Subchapter C corporation and, as such, will be
subject to federal and any applicable state income taxes.
2. TRANSACTIONS WITH AFFILIATES
Homestead has entered into various agreements with affiliated companies in
order to complete the transaction discussed above and to conduct the business
of developing, owning and operating Homestead Village properties.
Merger and Distribution Agreement
On May 21, 1996, Homestead entered into a Merger and Distribution Agreement
with PTR, ATLANTIC and SCG (collectively, the "Affiliated Companies") which
provides for certain subsidiaries of the Affiliated Companies to be merged
with and into Homestead in exchange for common stock. The subsidiaries of the
Affiliated Companies develop, own and manage the Homestead Village properties.
Pursuant to the agreement, PTR will merge with and into Homestead the net
assets related to Homestead Village properties in exchange for 9,485,727
shares of Homestead common stock. ATLANTIC will contribute net assets in
exchange for 4,201,220 shares of Homestead common stock. Homestead will issue
4,062,788 shares of Homestead common stock in exchange for certain net assets
of SCG which consist primarily of the Homestead Village trademark, and
development and management expertise, as well as operating systems utilized in
the ongoing development and operations of the extended-stay lodging
facilities. Homestead will not assume any obligations related to the employees
of the SCG subsidiaries including unpaid salaries, wages, benefits and any
expense reimbursements.
F-42
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
NOTES TO BALANCE SHEET--(CONTINUED)
PTR and Atlantic will receive all of their shares of Homestead common stock
at the date of the transaction. SCG is to receive 1,819,750 shares of
Homestead common stock based on the ratio of actual funding provided by PTR
and Atlantic to the total expected funding to be provided at the date of the
transaction. The remaining 2,243,038 shares of Homestead common stock will be
issued to and held in escrow by an appointed escrow agent. The escrowed shares
will be transferred to SCG pro rata based on the completion of PTR's and
Atlantic's remaining funding commitments. In the event not all of the funding
commitments are provided to Homestead by PTR or Atlantic, the remaining shares
of common stock not transferred to SCG will be returned to Homestead along
with any dividends paid. The Escrow Agent will vote all shares of Homestead
Common Stock held in the escrow account proportionately in accordance with the
vote of all other Homestead shareholders as instructed by Homestead. In the
event that instructions are not received, the Escrow Agent will not vote such
shares.
In conjunction with the Merger and Distribution Agreement, described above,
Homestead, SCG, PTR and Atlantic entered into a Warrant Agreement dated May
21, 1996 whereby SCG, PTR and Atlantic are to receive warrants based on the
relative fair value of the assets each is to contribute in the transaction. A
total of 10,000,000 warrants are to be issued. The warrants may be used to
purchase common stock of Homestead for $10 per share, may be exercised at any
time and will expire twelve months from the date of the transaction. As
consideration for the warrants issued, PTR and Atlantic have agreed to provide
additional funding to Homestead for the development of properties and SCG will
provide financing for the purchase of properties to be used as extended-stay
facilities for the period from the date of the Merger and Distribution
Agreement through the date of the transaction.
All shares of Homestead common stock and warrants issued by Homestead to PTR
and Atlantic in connection with the transaction will be issued directly to a
distribution agent for the benefit of the holders of PTR and Atlantic common
stock on such date of record of distribution. The remaining shares of
Homestead common stock and warrants will be issued directly to SCG and the
escrow agent.
The costs associated with the transaction are to be paid by each party
incurring the expense, except for those costs related to filing, printing and
distributing proxy and prospectus materials will be paid 63.64%, 28.18%, and
8.18% by PTR, Atlantic and SCG, respectively.
In conjunction with the agreement, Homestead will assume contractual
obligations including development contracts. At April 23, 1996, the PTR
subsidiary had approximately $21.1 million and at March 31, 1996 the Atlantic
subsidiary had approximately $2.4 million of unfunded development commitments
for developments under construction.
3. COMMITMENTS AND CONTINGENCIES
Finder's Agreements
In conjunction with the Merger and Distribution Agreement, PTR will assign
its rights and obligations pursuant to a series of agreements with an
unaffiliated person ("Finder") who developed the Homestead Village concept,
and has performed certain services. The agreements which expire February 5,
2043, provide for the payment of fees to Finder as follows: (i) $535,000
annually with respect to the four properties for which Finder assisted in the
location, development and initial operations; (ii) an annual amount of $7,500
per property (subject to certain conditions as defined in the agreements) for
assistance in site location with respect to the first 35 properties
constructed (other than the four properties referred to in (i) above; (iii)
20% of the net proceeds as defined per the agreements, upon the sale of the
four properties noted in (i) above to an unaffiliated third party; and (iv)
10% of the net proceeds as defined per the agreement, upon the sale of the
additional 35 properties to an unaffiliated third party. No such sales have
occurred to date. Effective December 1994, the agreement to assist in the site
location of any additional properties beyond the 35 properties was terminated.
Additionally, Finder has agreed not to compete, directly or indirectly, with
the Homestead Village properties in certain states in which PTR and Atlantic
do business through December 31, 1996.
F-43
<PAGE>
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
NOTES TO BALANCE SHEET--(CONTINUED)
Rights Agreement
On May 16, 1996 the Homestead Board of Directors declared and paid a
dividend of one purchase right as defined per the Rights Agreement for each
share of Homestead Common Stock outstanding to the holders of Homestead common
stock of record on this date. The shares of Homestead common stock issued
after May 16, 1996 and before the expiration of the purchase rights (May 16,
2006), will also be entitled to one purchase right for each share issued. Each
purchase right entitles the holder to purchase one-hundredth of a
participating preferred share of Homestead at $50, subject to adjustment as
defined in the agreement. The Board of Directors of Homestead through its
Articles of Incorporation is authorized to issue one or more series and to
determine the number of preferred shares of each series and the rights of each
series. The purchase rights will be exercisable only after a person or group
of affiliated persons acquires 20% or more of the outstanding shares of common
stock or offers to acquire 25% or more.
F-44
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERGER AND DISTRIBUTION AGREEMENT
DATED AS OF MAY 21, 1996
BY AND AMONG
SECURITY CAPITAL PACIFIC TRUST,
SECURITY CAPITAL ATLANTIC INCORPORATED,
SECURITY CAPITAL GROUP INCORPORATED
AND
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE I DEFINITIONS.......... 1
SECTION 1.1 DEFINITIONS.... 1
ARTICLE II THE MERGERS AND
DISTRIBUTION.................. 4
SECTION 2.1 THE MERGERS.... 4
SECTION 2.2 THE
DISTRIBUTION... 5
ARTICLE III REPRESENTATIONS AND
WARRANTIES OF PTR............. 6
SECTION 3.1 ORGANIZATION
AND
QUALIFICATION.. 6
SECTION 3.2 CAPITALIZATION. 6
SECTION 3.3 AUTHORITY; NON-
CONTRAVENTION;
APPROVALS...... 6
SECTION 3.4 REPORTS AND
FINANCIAL
STATEMENTS..... 7
SECTION 3.5 ABSENCE OF
CERTAIN CHANGES
OR EVENTS...... 8
SECTION 3.6 REGISTRATION
STATEMENT AND
PROXY STATEMENT
AND PROSPECTUS. 8
SECTION 3.7 TAXES.......... 8
SECTION 3.8 ABSENCE OF
UNDISCLOSED
LIABILITIES.... 9
SECTION 3.9 LITIGATION..... 9
SECTION 3.10 NO VIOLATION OF
LAW............ 9
SECTION 3.11 PTR ACQUISITION
PROPERTY
CONTRACTS...... 9
SECTION 3.12 ZONING......... 10
SECTION 3.13 TITLE
INSURANCE...... 10
SECTION 3.14 ENVIRONMENTAL
MATTERS........ 10
SECTION 3.15 DEFECTS........ 11
SECTION 3.16 INSURANCE...... 11
SECTION 3.17 UTILITIES AND
ACCESS......... 11
SECTION 3.18 CONDEMNATION... 11
SECTION 3.19 TAXES AND
ASSESSMENTS ON
PTR PROPERTIES. 11
SECTION 3.20 MORTGAGES...... 12
SECTION 3.21 BROKERS AND
FINDERS........ 12
SECTION 3.22 INVESTMENT
COMPANY ACT.... 12
SECTION 3.23 ADEQUACY OF PTR
CONSIDERATION.. 12
ARTICLE IV REPRESENTATIONS AND
WARRANTIES OF ATLANTIC........ 12
SECTION 4.1 ORGANIZATION
AND
QUALIFICATION.. 12
SECTION 4.2 CAPITALIZATION. 13
SECTION 4.3 AUTHORITY; NON-
CONTRAVENTION;
APPROVALS...... 13
SECTION 4.4 FINANCIAL
STATEMENTS..... 14
SECTION 4.5 ABSENCE OF
CERTAIN CHANGES
OR EVENTS...... 15
SECTION 4.6 REGISTRATION
STATEMENT AND
PROXY STATEMENT
AND PROSPECTUS. 15
SECTION 4.7 TAXES.......... 15
SECTION 4.8 ABSENCE OF
UNDISCLOSED
LIABILITIES.... 15
SECTION 4.9 LITIGATION..... 16
SECTION 4.10 NO VIOLATION OF
LAW............ 16
SECTION 4.11 ATLANTIC
ACQUISITION
PROPERTY
CONTRACTS...... 16
SECTION 4.12 ZONING......... 16
SECTION 4.13 TITLE
INSURANCE...... 17
SECTION 4.14 ENVIRONMENTAL
MATTERS........ 17
SECTION 4.15 DEFECTS........ 17
SECTION 4.16 INSURANCE...... 18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
SECTION 4.17 UTILITIES AND
ACCESS......... 18
SECTION 4.18 CONDEMNATION... 18
SECTION 4.19 TAXES AND
ASSESSMENTS ON
ATLANTIC
PROPERTIES..... 18
SECTION 4.20 MORTGAGES...... 19
SECTION 4.21 BROKERS AND
FINDERS........ 19
SECTION 4.22 INVESTMENT
COMPANY ACT.... 19
SECTION 4.23 ADEQUACY OF
ATLANTIC
CONSIDERATION.. 19
ARTICLE V REPRESENTATIONS AND
WARRANTIES OF SCG............. 19
SECTION 5.1 ORGANIZATION
AND
QUALIFICATION.. 19
SECTION 5.2 CAPITALIZATION. 19
SECTION 5.3 AUTHORITY; NON-
CONTRAVENTION;
APPROVALS...... 20
SECTION 5.4 FINANCIAL
STATEMENTS..... 21
SECTION 5.5 ABSENCE OF
CERTAIN CHANGES
OR EVENTS...... 21
SECTION 5.6 REGISTRATION
STATEMENT AND
PROXY STATEMENT
AND PROSPECTUS. 21
SECTION 5.7 TAXES.......... 21
SECTION 5.8 ABSENCE OF
UNDISCLOSED
LIABILITIES.... 22
SECTION 5.9 LITIGATION..... 22
SECTION 5.10 NO VIOLATION OF
LAW............ 22
SECTION 5.11 SCG ACQUISITION
PROPERTY
CONTRACTS...... 22
SECTION 5.12 ZONING......... 23
SECTION 5.13 TITLE
INSURANCE...... 23
SECTION 5.14 ENVIRONMENTAL
MATTERS........ 23
SECTION 5.15 DEFECTS........ 24
SECTION 5.16 INSURANCE...... 24
SECTION 5.17 CONDEMNATION... 24
SECTION 5.18 TAXES AND
ASSESSMENTS ON
SCG PROPERTIES. 24
SECTION 5.19 EMPLOYEE
BENEFIT PLANS.. 24
SECTION 5.20 MORTGAGES...... 25
SECTION 5.21 INTELLECTUAL
PROPERTY....... 25
SECTION 5.22 BROKERS AND
FINDERS........ 25
SECTION 5.23 INVESTMENT
COMPANY ACT.... 25
SECTION 5.24 ADEQUACY OF SCG
CONSIDERATION.. 25
ARTICLE VI REPRESENTATIONS AND
WARRANTIES OF HOMESTEAD....... 25
SECTION 6.1 ORGANIZATION
AND
QUALIFICATION.. 25
SECTION 6.2 CAPITALIZATION. 25
SECTION 6.3 ISSUANCE OF
SECURITIES..... 26
SECTION 6.4 AUTHORITY; NON-
CONTRAVENTION;
APPROVALS...... 26
SECTION 6.5 REGISTRATION
STATEMENT AND
PROXY STATEMENT
AND PROSPECTUS. 27
SECTION 6.6 ABSENCE OF
UNDISCLOSED
LIABILITIES.... 27
SECTION 6.7 LITIGATION..... 27
SECTION 6.8 NO VIOLATION OF
LAW............ 27
SECTION 6.9 BROKERS AND
FINDERS........ 28
SECTION 6.10 INVESTMENT
COMPANY ACT.... 28
ARTICLE VII CONDUCT OF
BUSINESSES PENDING THE MERGER
CLOSING....................... 28
SECTION 7.1 CONDUCT OF
BUSINESS BY
ATLANTIC, PTR
AND SCG........ 28
SECTION 7.2 CONDUCT OF
BUSINESS BY
HOMESTEAD...... 29
ARTICLE VIII ADDITIONAL
AGREEMENTS.................... 29
SECTION 8.1 ACCESS TO
INFORMATION.... 29
</TABLE>
ii
<PAGE>
<TABLE>
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<S> <C>
SECTION 8.2 REGISTRATION STATEMENT AND PROXY STATEMENT AND PROSPECTUS. 30
SECTION 8.3 SHAREHOLDERS' APPROVAL.................................... 30
SECTION 8.4 AFFILIATE AGREEMENTS...................................... 30
SECTION 8.5 EXCHANGE.................................................. 30
SECTION 8.6 EXPENSES.................................................. 30
SECTION 8.7 AGREEMENT TO COOPERATE.................................... 31
SECTION 8.8 PUBLIC STATEMENTS......................................... 31
SECTION 8.9 CORRECTIONS TO THE PROXY STATEMENT AND PROSPECTUS AND
REGISTRATION STATEMENT.................................... 31
SECTION 8.10 VOTING OF SHARES.......................................... 31
SECTION 8.11 ATLANTIC IPO REGISTRATION STATEMENT....................... 31
SECTION 8.12 CONFIDENTIALITY........................................... 32
SECTION 8.13 PERSONNEL................................................. 33
SECTION 8.14 EXHIBITS AND SCHEDULES.................................... 33
SECTION 8.15 REIMBURSEMENT OF PURSUIT COSTS............................ 33
SECTION 8.16 PRORATIONS................................................ 33
ARTICLE IX CONDITIONS..................................................... 34
SECTION 9.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS.................... 34
SECTION 9.2 CONDITIONS TO OBLIGATIONS OF ATLANTIC..................... 35
SECTION 9.3 CONDITIONS TO OBLIGATIONS OF PTR.......................... 35
SECTION 9.4 CONDITIONS TO OBLIGATIONS OF SCG.......................... 36
SECTION 9.5 CONDITIONS TO OBLIGATIONS OF HOMESTEAD.................... 37
ARTICLE X TERMINATION, AMENDMENT AND WAIVER............................... 38
SECTION 10.1 TERMINATION............................................... 38
SECTION 10.2 EFFECT OF TERMINATION..................................... 38
SECTION 10.3 AMENDMENT................................................. 38
SECTION 10.4 WAIVER.................................................... 39
ARTICLE XI SURVIVAL AND REMEDY; INDEMNIFICATION........................... 39
SECTION 11.1 INDEMNIFICATION........................................... 39
SECTION 11.2 LIMITATION OF INDEMNIFICATION............................. 39
SECTION 11.3 NOTICE OF CLAIMS; ASSUMPTION OF DEFENSE................... 39
SECTION 11.4 SETTLEMENT OR COMPROMISE.................................. 40
SECTION 11.5 FAILURE OF INDEMNIFYING PARTY TO ACT...................... 40
SECTION 11.6 SURVIVAL.................................................. 40
ARTICLE XII GENERAL PROVISIONS............................................ 40
SECTION 12.1 NOTICES................................................... 40
SECTION 12.2 INTERPRETATION............................................ 41
SECTION 12.3 MISCELLANEOUS............................................. 41
SECTION 12.4 COUNTERPARTS.............................................. 41
SECTION 12.5 PARTIES IN INTEREST....................................... 41
SECTION 12.6 LIMITATION OF LIABILITY................................... 42
SECTION 12.7 NO PRESUMPTION AGAINST DRAFTER............................ 42
</TABLE>
iii
<PAGE>
EXHIBITS
<TABLE>
<S> <C>
EXHIBIT IARTICLES OF MERGER
EXHIBIT IIATLANTIC PROPERTIES
EXHIBIT IIIPTR PROPERTIES
EXHIBIT IVSCG PROPERTIES
EXHIBIT VOPINION OF MUNGER, TOLLES & OLSON
EXHIBIT VIOPINION OF MAYER, BROWN & PLATT
EXHIBIT VIIFUNDING COMMITMENT AGREEMENT
EXHIBIT VIIIINVESTOR AGREEMENT
EXHIBIT IXOPINION OF KING & SPALDING
EXHIBIT XSCG INVESTOR AGREEMENT
EXHIBIT XIPROTECTION OF BUSINESS AGREEMENT
EXHIBIT XIIESCROW AGREEMENT
EXHIBIT XIIIASSIGNMENT OF REGISTRATION
SCHEDULES
SCHEDULE 3.3(b)PTR REQUIRED CONSENTS
SCHEDULE 3.9PTR LITIGATION
SCHEDULE 4.3(b)ATLANTIC REQUIRED CONSENTS
SCHEDULE 4.9ATLANTIC LITIGATION
SCHEDULE 5.3(b)SCG REQUIRED CONSENTS
SCHEDULE 5.9SCG LITIGATION
SCHEDULE 5.21INTELLECTUAL PROPERTY
SCHEDULE 8.15PURSUIT COSTS
SCHEDULE 9.1(j)ADJUSTMENT OF CAPITAL CONTRIBUTION
</TABLE>
iv
<PAGE>
MERGER AND DISTRIBUTION AGREEMENT
THIS MERGER AND DISTRIBUTION AGREEMENT (this "Agreement"), is entered into
as of May 21, 1996 by and among Security Capital Pacific Trust, a Maryland
real estate investment trust ("PTR"), Security Capital Atlantic Incorporated,
a Maryland corporation ("Atlantic"), Security Capital Group Incorporated, a
Maryland corporation ("SCG"), and Homestead Village Properties Incorporated, a
Maryland corporation ("Homestead").
WHEREAS, the Board of Directors of Atlantic, SCG and Homestead and the Board
of Trustees of PTR have each approved this Agreement and the transactions
contemplated hereby upon the terms and subject to the conditions set forth
herein; and
WHEREAS, it is intended that pursuant to this Agreement each of PTR,
Atlantic and SCG will cause certain of their respective subsidiaries engaged
in the conduct of the extended-stay lodging businesses (the "Business") to be
merged with and into Homestead in exchange for certain securities of
Homestead.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Acquisition Properties" shall mean those PTR Properties, Atlantic
Properties or SCG Properties, as applicable, as to which PTR or a PTR
Subsidiary, Atlantic or an Atlantic Subsidiary or SCG or an SCG Subsidiary,
as applicable, has commenced due diligence, has executed a letter of intent
or acquisition agreement to acquire or has rights to acquire pursuant to an
option or right of first refusal. Such properties are identified as
"Acquisition Properties" on the applicable Exhibits II, III and IV.
Homestead may, with respect to any PTR Acquisition Property, Atlantic
Acquisition Property or SCG Acquisition Property, substitute any property
identified in Schedule 8.15 for any Acquisition Property identified in
Exhibits II, III or IV, respectively, upon prior notice to PTR, Atlantic or
SCG, as the case may be. In addition, Homestead may substitute another
property for an Acquisition Property identified in Exhibits II, III or IV
upon the written approval of PTR, Atlantic or SCG, as the case may be.
"Atlantic Board" shall mean the Board of Directors of Atlantic.
"Atlantic Common Stock" shall mean the shares of common stock, $0.01 par
value per share, of Atlantic.
"Atlantic Distribution Agent" shall mean the distribution agent for the
stockholders of Atlantic, as appointed by Atlantic to distribute shares of
Homestead Stock and Homestead Warrants pursuant to the Distribution.
"Atlantic Distribution Date" shall mean the close of business on the date
determined by the Atlantic Board (or a duly authorized committee thereof)
to be the date as of which the Distribution shall be effected by Atlantic.
"Atlantic Distribution Record Date" shall mean the close of business on
the date determined by the Atlantic Board (or a duly authorized committee
thereof) as the record date for the Distribution by Atlantic, but in no
event shall such date be prior to the later of (i) the date on which the
underwriters' over-allotment option in connection with the Atlantic IPO
shall have been fully exercised or expired or (ii) if a registration
statement relating to the Atlantic IPO has been filed and not withdrawn and
the Atlantic IPO is not
<PAGE>
consummated by November 30, 1996, such date or (iii) if the registration
statement relating to the Atlantic IPO has been filed and subsequently
withdrawn, the date of such withdrawal or (iv) if the registration relating
to the Atlantic IPO has not been filed pursuant to Section 8.11, the date
of the notice required by that Section or (v) the Atlantic Distribution
Date.
"Atlantic IPO" shall mean the initial public offering by Atlantic of
Atlantic Common Stock.
"Atlantic Mortgage" and "Atlantic Mortgages" shall have the meaning set
forth in Section 4.22.
"Atlantic Permitted Encumbrances" shall have the meaning set forth in
Section 4.13.
"Atlantic Properties" shall mean the real properties described in Exhibit
II hereto.
"Atlantic Required Statutory Approvals" shall have the meaning set forth
in Section 4.3(c).
"Atlantic Shareholders' Approval" shall have the meaning set forth in
Section 8.3.
"Atlantic Special Committee" shall have the meaning set forth in Section
9.2(c).
"Atlantic Subsidiaries" shall mean Alabama Homestead Incorporated, an
Alabama corporation, Atlantic Homestead Village Incorporated, a Maryland
corporation, Atlantic Homestead Village (1) Incorporated, a Maryland
corporation, Atlantic Homestead Village (2) Incorporated, a Maryland
corporation, and Atlantic Homestead Village Limited Partnership, a Delaware
limited partnership.
"Business" shall have the meaning set forth in the preamble to this
Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"Development Properties" shall mean those PTR Properties, Atlantic
Properties or SCG Properties, as applicable, which are owned by a PTR
Subsidiary, Atlantic Subsidiary or SCG Subsidiary, as applicable, and which
are in development or under construction or on which development or
construction is planned. Such properties are identified as "Development
Properties" on the applicable Exhibits II, III and IV.
"Distribution" shall mean the distribution by PTR to holders of PTR
Common Shares of the Homestead Stock and Homestead Warrants owned by PTR on
the PTR Distribution Date and the distribution by Atlantic to holders of
Atlantic Common Stock of Homestead Stock and Homestead Warrants owned by
Atlantic on the Atlantic Distribution Date.
"Distribution Agent" shall mean, as applicable, the Atlantic Distribution
Agent or the PTR Distribution Agent.
"Distribution Date" shall mean, as applicable, the Atlantic Distribution
Date or the PTR Distribution Date.
"Distribution Record Date" shall mean, as applicable, the Atlantic
Distribution Record Date or the PTR Distribution Record Date.
"Environmental Laws" means the Resource Conservation and Recovery Act and
the Comprehensive Environmental Response Compensation and Liability Act and
other federal laws governing the environment as in effect on the date of
this Agreement together with their implementing regulations as of the date
of this Agreement, and all state, regional, county, municipal and other
local laws, regulations and ordinances as in effect on the date hereof that
are equivalent or similar to the federal laws recited above or that purport
to regulate Hazardous Materials.
"Environmental Reports" shall mean the Phase I and Phase II environmental
assessments conducted on or with respect to the PTR Properties, Atlantic
Properties or SCG Properties, as applicable, previously delivered or made
available to each of the parties hereto.
"Escrow Agreement" shall mean the Escrow Agreement in substantially the
form set forth in Exhibit XII hereto.
"Exchange" shall mean either the New York Stock Exchange, Inc. or The
Nasdaq Stock Market, Inc.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
2
<PAGE>
"Hazardous Materials" shall mean (a) any petroleum or petroleum products,
radioactive materials, asbestos in any form that is or could become
friable, polychlorinated biphenyls and, only to the extent it exists at
levels which are considered hazardous to human health, radon gas and (b)
any chemicals, materials or substances defined as or included in the
definition of "hazardous substances," "toxic substances," "toxic
pollutants," "contaminants" or "pollutants" or words of similar import,
under any applicable Environmental Laws.
"Homestead Board" shall mean the Board of Directors of Homestead.
"Homestead Required Statutory Approvals" shall have the meaning set forth
in Section 6.4(c).
"Homestead Stock" shall mean the shares of common stock, $0.01 par value
per share, of Homestead.
"Homestead Warrants" shall mean the warrants to acquire shares of
Homestead Stock to be issued pursuant to the terms of the Warrant Purchase
Agreement.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Indemnified Parties" shall have the meaning set forth in Section 11.1.
"Indemnifying Parties" shall have the meaning set forth in Section 11.1.
"Intellectual Property" shall mean all United States and foreign patents,
patent applications, patent licenses, trade names, trademarks, trade name
and trademark registrations (and applications therefor), copyrights and
copyright registrations (and applications therefor), trade secrets,
inventions, processes, designs, know-how and formulae which are in any way
connected to the Business, other than names which include the name
"Security Capital."
"Losses" shall have the meaning set forth in Section 11.1.
"Merger Closing" shall have the meaning set forth in Section 2.1.
"Operating Properties" shall mean those PTR Properties or Atlantic
Properties, as applicable, as to which a PTR Subsidiary or an Atlantic
Subsidiary has commenced commercial operations. Such properties are
identified as "Operating Properties" on the applicable Exhibits II and III.
"Proxy Statement and Prospectus" shall mean the definitive
proxy/information statement and prospectus to be filed with the Commission
as a part of the Registration Statement.
"PTR Board" shall mean the Board of Trustees of PTR.
"PTR Common Shares" shall mean the common shares of beneficial interest,
$1.00 par value per share, of PTR.
"PTR Distribution Agent" shall mean the distribution agent for the
shareholders of PTR, as appointed by PTR to distribute shares of Homestead
Stock and Homestead Warrants pursuant to the Distribution.
"PTR Distribution Date" shall mean the close of business on the date
determined by the PTR Board (or a duly authorized committee thereof) to be
the date as of which the Distribution shall be effected by PTR.
"PTR Distribution Record Date" shall mean the close of business on the
date determined by the PTR Board (or a duly authorized committee thereof)
as the record date for the Distribution by PTR, but in no event shall such
date be prior to the later of (i) the date on which the underwriters' over-
allotment option in connection with the Atlantic IPO shall have been fully
exercised or expired or (ii) if a registration statement relating to the
Atlantic IPO has been filed and not withdrawn and the Atlantic IPO is not
consummated by November 30, 1996, such date or (iii) if the registration
statement relating to the Atlantic IPO has been filed and subsequently
withdrawn, the date of such withdrawal or (iv) if the registration
statement relating to the Atlantic IPO has not been filed pursuant to
Section 8.11, the date of the notice required by that Section or (v) the
PTR Distribution Date.
"PTR Mortgage" and "PTR Mortgages" shall have the meaning as set forth in
Section 3.21.
"PTR Permitted Encumbrances" shall have the meaning set forth in Section
3.13.
3
<PAGE>
"PTR Properties" shall mean the real properties described in Exhibit III
hereto.
"PTR Required Statutory Approvals" shall have the meaning set forth in
Section 3.3(c).
"PTR Shareholders' Approval" shall have the meaning set forth in Section
8.3.
"PTR Special Committee" shall have the meaning set forth in Section
9.3(c).
"PTR Subsidiaries" shall mean PTR Homestead Village Incorporated, a
Maryland corporation, PTR Homestead Village (1) Incorporated, a Maryland
corporation, and PTR Homestead Village Limited Partnership, a Delaware
limited partnership.
"Registration Statement" shall mean the registration statement on Form S-
4 of Homestead, of which the Proxy Statement and Prospectus will form a
part, to be filed with the Commission in connection with the transactions
contemplated hereby.
"Related Agreements" shall mean each of the agreements, instruments and
documents contemplated to be entered into in connection with this
Agreement, including, without limitation, the Articles of Merger, the
Warrant Purchase Agreement, the Funding Commitment Agreements, the PTR
Investor Agreement, the Atlantic Investor Agreement, the SCG Investor
Agreement, the Administrative Services Agreement, the Escrow Agreement and
the Protection of Business Agreement.
"Representatives" shall have the meaning set forth in Section 8.1.
"SCG Board" shall mean the Board of Directors of SCG.
"SCG Permitted Encumbrances" shall have the meaning set forth in Section
5.13.
"SCG Properties" shall mean the real properties and assets described in
Exhibit IV hereto.
"SCG Required Statutory Approvals" shall have the meaning set forth in
Section 5.3(c).
"SCG Subsidiaries" shall mean Homestead Village Incorporated, a Maryland
corporation, Homestead Realty Services Incorporated, a Maryland
corporation, and SCG Homestead Village Incorporated, a Maryland
corporation.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Taxes" shall mean all taxes, charges, fees, levies or other assessments,
including, without limitation, income, gross receipts, excise, property,
sales, withholding, social security, occupation, use, service, service use,
license, payroll, franchise, transfer and recording taxes, fees and
charges, imposed by the United States, or any state, local or foreign
government or subdivision or agency thereof whether computed on a separate,
consolidated, unitary, combined or any other basis; and such term shall
include any interest, fines, penalties or additional amounts attributable
or imposed on or with respect to any such taxes, charges, fees, levies or
other assessments.
"Tax Returns" shall mean any return, report or other document or
information required to be supplied to a taxing authority in connection
with Taxes.
"Termination Date" shall have the meaning set forth in Section 10.1(b).
"Warrant Purchase Agreement" shall mean that certain Warrant Purchase
Agreement of even date herewith among PTR, Atlantic, SCG and Homestead.
ARTICLE II
THE MERGERS AND DISTRIBUTION
SECTION 2.1 THE MERGERS. The events set forth in this Section 2.1 shall be
effected, upon the terms and subject to the conditions of this Agreement,
immediately prior to the Distribution (the "Merger Closing"). Except as
otherwise specifically set forth herein, it is the intention of the parties
that each of the events set forth in this Section 2.1 shall occur
simultaneously.
4
<PAGE>
(a) PTR and PTR Subsidiaries. PTR and Homestead shall each take all actions
necessary to cause PTR Homestead Village Incorporated to be merged with and
into Homestead on the terms and conditions described in the Articles of Merger
substantially in the form of Exhibit I hereto (the "Articles of Merger"). All
shares of Homestead Stock issuable in connection with such merger shall be
issued by Homestead directly to the PTR Distribution Agent for the benefit of
the holders of PTR Common Shares on the PTR Distribution Record Date.
(b) Atlantic and Atlantic Subsidiaries. Atlantic and Homestead shall each
take all actions necessary to cause Alabama Homestead Incorporated and
Atlantic Homestead Village Incorporated to be merged with and into Homestead
on the terms and conditions described in the Articles of Merger. All shares of
Homestead Stock issuable in connection with such mergers shall be issued by
Homestead directly to the Atlantic Distribution Agent for the benefit of the
holders of Atlantic Common Stock on the Atlantic Distribution Record Date.
(c) SCG and SCG Subsidiaries. SCG and Homestead shall each take all actions
necessary to cause the SCG Subsidiaries to be merged with and into Homestead
on the terms and conditions described in the Articles of Merger. A portion of
the shares of Homestead Stock issuable in connection with such mergers shall
be issued directly to SCG and a portion of such shares shall be issued to the
escrow agent as provided in the Escrow Agreement.
SECTION 2.2 THE DISTRIBUTION.
(a) The PTR Board (or a duly authorized committee thereof) shall, in its
discretion, establish the PTR Distribution Record Date and the PTR
Distribution Date and any appropriate procedures in connection with the
Distribution by PTR, and the Atlantic Board (or a duly authorized committee
thereof) shall, in its discretion, establish the Atlantic Distribution Record
Date and the Atlantic Distribution Date and any appropriate procedures in
connection with the Distribution by Atlantic, but in no event shall the
Distribution occur prior to such time as all of the conditions set forth in
this Agreement have been satisfied or waived. Each of PTR and Atlantic will
cooperate with one another to make their respective Distribution Record Dates
and Distribution Dates the same.
(b) On the PTR Distribution Date, subject to the conditions and rights of
termination set forth in this Agreement, PTR shall deliver to the PTR
Distribution Agent written instructions to distribute as soon as practicable
following the PTR Distribution Record Date a pro rata number of shares of
Homestead Stock issuable to PTR in connection with the merger contemplated by
Section 2.1(a) and a pro rata number of Homestead Warrants issuable to PTR
pursuant to the Warrant Purchase Agreement to each holder of record of PTR
Common Shares on the PTR Distribution Record Date or designated transferee or
transferees of such holder (and, if applicable, cash in lieu of fractional
shares and fractional warrants pursuant to Section 2.2(d)). PTR shall provide
all certificates and other instruments that the PTR Distribution Agent shall
reasonably require in order to effect the Distribution.
(c) On the Atlantic Distribution Date, subject to the conditions and rights
of termination set forth in this Agreement, Atlantic shall deliver to the
Atlantic Distribution Agent written instructions to distribute as soon as
practicable following the Atlantic Distribution Record Date a pro rata number
of shares of Homestead Stock issuable to Atlantic in connection with the
mergers contemplated by Section 2.1(b) and a pro rata number of Homestead
Warrants issuable to Atlantic in connection with the Warrant Purchase
Agreement to each holder of record of Atlantic Common Stock on the Atlantic
Distribution Record Date or designated transferee or transferees of such
holder (and, if applicable, cash in lieu of fractional shares and fractional
warrants pursuant to Section 2.2(d)). Atlantic shall provide all certificates
and other instruments that the Atlantic Distribution Agent shall reasonably
require in order to effect the Distribution.
(d) No certificates or scrip representing fractional shares of Homestead
Stock or Homestead Warrants shall be issued in connection with the
Distribution. With respect to each of the Homestead Stock and the Homestead
Warrants, the Distribution Agent shall be directed to determine the number of
whole shares and warrants allocable to each holder of record of PTR or
Atlantic, as applicable, to aggregate all remaining fractional shares and
warrants, to sell the whole shares and warrants obtained through such
aggregation on an Exchange or, if the
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Homestead Stock and Homestead Warrants are not listed or quoted on an
Exchange, in such method and for such price as the Distribution Agent shall
deem reasonable, and to cause to be distributed to each such holder to which a
fractional share or warrant shall be allocable, such holder's ratable share of
the net proceeds of such sale. Any fractional shares of Homestead Stock or any
fractional Homestead Warrants remaining after the application of the
provisions of this Section shall be returned to Homestead for cancellation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PTR
PTR represents and warrants to each of the other parties as follows:
SECTION 3.1 ORGANIZATION AND QUALIFICATION. PTR and each of the PTR
Subsidiaries is duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization and each has the requisite power,
corporate or otherwise, and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being conducted and as it
is proposed by it to be conducted. Each PTR Subsidiary is qualified to do
business and is in good standing in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so
qualified and in good standing would not reasonably be expected to have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of any such
PTR Subsidiaries. True, accurate and complete copies of each of the
Declaration of Trust and Bylaws of PTR and the charter and bylaws, partnership
agreement or other organizational documents of each PTR Subsidiary as in
effect on the date hereof, including all amendments thereto, have heretofore
been delivered to each of the other parties hereto.
SECTION 3.2 CAPITALIZATION.
(a) The authorized stock of PTR Homestead Village Incorporated consists of
1,000 shares of common stock, $1.00 par value per share, all of which is owned
by PTR, and is validly issued, fully paid and nonassessable. The authorized
stock of PTR Homestead Village (1) Incorporated consists of 1,000 shares of
common stock, $1.00 par value per share, all of which is owned by PTR
Homestead Village Incorporated, and is validly issued, fully paid and
nonassessable. The sole general partner of PTR Homestead Village Limited
Partnership is PTR Homestead Village (1) Incorporated and the sole limited
partner is PTR Homestead Village Incorporated, and all such partnership
interests are validly issued and fully paid.
(b) PTR owns good and marketable title to the stock of the PTR Subsidiaries
owned by it and each PTR Subsidiary owns good and marketable title to the
securities of each other PTR Subsidiary owned by it, in each case, free and
clear of all liens, encumbrances, claims, security interests and defects.
(c) There are no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement that is presently exercisable obligating PTR or
any PTR Subsidiary to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of any PTR Subsidiary or obligating PTR or any PTR
Subsidiary to grant, extend or enter into any such agreement or commitment.
There are no voting trusts, proxies or other agreements or understandings to
which PTR or a PTR Subsidiary is a party or is bound with respect to the
voting of any shares of any PTR Subsidiary.
SECTION 3.3 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) PTR and each of the PTR Subsidiaries have full power, corporate or
otherwise, and authority to enter into this Agreement and the Related
Agreements to which it is a party and, subject to PTR Shareholders' Approval
and PTR Required Statutory Approvals, to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Related Agreements, and the consummation by
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PTR and the PTR Subsidiaries of the transactions contemplated hereby and
thereby, have been duly authorized by the PTR Board or the board or other
governing body of each PTR Subsidiary and no other proceedings on the part of
PTR or a PTR Subsidiary are necessary to authorize the execution and delivery
of this Agreement or the Related Agreements and the consummation by PTR and
the PTR Subsidiaries of the transactions contemplated hereby and thereby,
except for PTR Shareholders' Approval and the obtaining of PTR Required
Statutory Approvals. This Agreement has been duly and validly executed and
delivered by PTR, and, assuming the due authorization, execution and delivery
hereof by each other party hereto, constitutes a valid and binding agreement
of PTR enforceable against PTR in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally, (ii) general equitable principles and (iii) to
the extent this Agreement or any of the Related Agreements contains
indemnification provisions for violations of federal or state securities laws,
as enforceability of such provisions may be limited under federal and state
securities laws.
(b) The execution and delivery of this Agreement and the Related Agreements
by PTR and each PTR Subsidiary to the extent it is a party thereto do not, and
the consummation by PTR and the PTR Subsidiaries of the transactions
contemplated hereby and thereby will not, violate, conflict with or result in
a breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result
in the termination of, or accelerate the performance required by, or result in
a right of termination or acceleration under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the PTR Properties
under any of the terms, conditions or provisions of (i) subject to obtaining
PTR Shareholders' Approval, PTR's Declaration of Trust or Bylaws, (ii) subject
to obtaining PTR Required Statutory Approvals and PTR Shareholders' Approval,
any statute, law, ordinance, rule, regulation, judgment, decree, order,
injunction, writ, permit or license of any court or governmental authority
applicable to PTR or any PTR Subsidiary or, to PTR's best knowledge, any of
the PTR Properties, (iii) subject to receiving the approvals of the
shareholders and board or other governing body of the PTR Subsidiaries, the
charter or bylaws or other organizational documents of a PTR Subsidiary or
(iv) except as set forth on Schedule 3.3(b) hereto, any note, bond, mortgage,
indenture, deed of trust, license, franchise, permit, concession, contract,
lease or other instrument, obligation or agreement of any kind to which PTR or
any PTR Subsidiary is now a party or by which PTR or any PTR Subsidiary or, to
PTR's best knowledge, any of the PTR Properties may be bound, excluding from
the foregoing clauses (ii) and (iv) such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security
interests, charges or encumbrances that would not, in the aggregate, be
reasonably expected to have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of PTR or, taken as a whole, the PTR Subsidiaries.
(c) Except for (i) any filings by the parties hereto that may be required by
the HSR Act, (ii) the filing of the Registration Statement, including the
Proxy Statement and Prospectus, with the Commission pursuant to the Securities
Act and the Exchange Act, and the declaration of the effectiveness thereof by
the Commission and filings with various state blue sky authorities, (iii) any
required filings by PTR or a PTR Subsidiary pursuant to Section 2.1(a), (iv)
any required filings with or approvals from applicable federal or state
environmental authorities and (v) any required filings with or approvals from
applicable federal or state housing authorities (the filings and approvals
referred to in clauses (i) through (v) are collectively referred to as the
"PTR Required Statutory Approvals"), to PTR's best knowledge, no declaration,
filing or registration with, or notice to, or authorization, consent or
approval of, any governmental or regulatory body or authority is necessary for
the execution and delivery of this Agreement and the Related Agreements by PTR
or a PTR Subsidiary or the consummation by PTR or a PTR Subsidiary of the
transactions contemplated hereby or thereby, other than such declarations,
filings, registrations, notices, authorizations, consents or approvals which,
if not made or obtained, as the case may be, would not, in the aggregate, be
reasonably expected to have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of PTR or, taken as a whole, the PTR Subsidiaries.
SECTION 3.4 REPORTS AND FINANCIAL STATEMENTS.
(a) PTR has previously delivered or made available to each of the other
parties hereto copies of its audited consolidated financial statements (the
"PTR Financial Statements") for the fiscal year ended December 31,
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1995. The PTR Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis and
fairly present the financial position of PTR and PTR Subsidiaries on a
consolidated basis as of the dates thereof and the results of their operations
and cash flows for the periods then ended.
(b) All of the accounts receivable of the PTR Subsidiaries included in the
PTR Financial Statements or otherwise, including any transactions with related
parties, reflect actual transactions and will not be subject to offset or
deduction and have arisen in the ordinary course of business.
(c) The combined financial statements prepared by PTR with respect to the
Business for the years ended December 31, 1993, 1994 and 1995 have been
prepared in accordance with generally accepted accounting principles applied
on a consistent basis and fairly present the financial position of the PTR
Subsidiaries as of the dates presented and the results of their operations and
cash flows for the periods presented.
SECTION 3.5 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1995,
there has not been any material adverse change or any event (other than
general economic or market conditions) which would reasonably be expected to
result in a material adverse change, individually or in the aggregate, in the
business, operations, properties, assets, liabilities, condition (financial or
other), results of operations or prospects of the PTR Subsidiaries, taken as a
whole.
SECTION 3.6 REGISTRATION STATEMENT AND PROXY STATEMENT AND PROSPECTUS. None
of the information to be supplied by PTR for inclusion or incorporation by
reference in (a) the Registration Statement or (b) the Proxy Statement and
Prospectus will, in the case of the Proxy Statement and Prospectus or any
amendments thereof or supplements thereto, at the time of the mailing of the
Proxy Statement and Prospectus and any amendments thereof or supplements
thereto, and at the time of the meetings of shareholders of Atlantic and PTR
to be held in connection with the transactions contemplated by this Agreement
or, in the case of the Registration Statement, as amended or supplemented, at
the time it becomes effective and at the time of such meeting of the
shareholders of Atlantic and PTR, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Proxy Statement
and Prospectus will comply as to form in all material respects with all
applicable laws, including the provisions of the Exchange Act and the rules
and regulations promulgated thereunder, except that no representation is made
by PTR with respect to information supplied by Atlantic, SCG or Homestead or
derived therefrom for inclusion therein.
SECTION 3.7 TAXES.
(a) Each PTR Subsidiary has duly filed with the appropriate governmental
authorities all Tax Returns required to be filed by it for all periods ending
on or prior to the Merger Closing, except to the extent of any Tax Returns for
which an extension of time for filing has been properly filed. Each such
return and filing is true and correct in all material respects. All Taxes
shown as due on all such returns and other filings have been paid. No material
issues have been raised in any examination by any taxing authority with
respect to the businesses and operations of PTR which, by application of
similar principles, reasonably could be expected to result in a proposed
adjustment to the liability for Taxes for any other period not so examined.
All Taxes which each PTR Subsidiary is required by law to withhold or collect,
including without limitation, sales and use taxes, have been duly withheld or
collected and, to the extent required, have been paid over to the proper
governmental authorities or are held in separate bank accounts for such
purpose. There are no liens for Taxes upon the PTR Properties which are
Operating Properties or Development Properties except for statutory liens for
current Taxes not yet due.
(b) PTR has not filed for an extension of a statute of limitations with
respect to any Tax and no governmental authorities have requested an extension
of the statute of limitations with respect to any Tax.
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SECTION 3.8 ABSENCE OF UNDISCLOSED LIABILITIES. Neither PTR nor any PTR
Subsidiary had, at December 31, 1995, and neither has incurred since that
date, any liabilities or obligations (whether absolute, accrued, contingent or
otherwise) of any nature (other than ordinary and recurring operating
expenses), with respect to the PTR Properties (a) except liabilities,
obligations or contingencies which are accrued or reserved against in the PTR
Business Financial Statements or reflected in the notes thereto and (b) except
for any liabilities, obligations or contingencies which (i) would not, in the
aggregate, be reasonably expected to have a material adverse effect on the
business, operations, properties, assets, condition (financial or other),
results of operations or prospects of the PTR Subsidiaries, taken as a whole
or (ii) have been discharged or paid in full prior to the date hereof.
SECTION 3.9 LITIGATION. Except as set forth on Schedule 3.9, there are no
claims, suits, actions or proceedings pending or, to the best of PTR's
knowledge without any independent investigation, threatened, against, relating
to or affecting any PTR Subsidiary or any of the PTR Properties which are
Operating Properties or Development Properties before or by any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator that could reasonably be expected, either alone or in the
aggregate with all such claims, actions or proceedings, to affect materially
and adversely the business, operations, properties, assets, condition
(financial or other), results of operations or prospects of the PTR
Subsidiaries, taken as a whole. No PTR Subsidiary is subject to any judgment,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or authority, or any arbitrator which
prohibits or restricts the consummation of the transactions contemplated
hereby or would have a material adverse effect on the business, operations,
properties, assets, condition (financial or other), results of operations or
prospects of the PTR Subsidiaries, taken as a whole.
SECTION 3.10 NO VIOLATION OF LAW. To the knowledge of PTR, none of the PTR
Subsidiaries is in violation of or has been given notice or been charged with
any violation of any law, statute, order, rule, regulation, ordinance or
judgment (including, without limitation, any applicable environmental law,
ordinance or regulation) of any governmental or regulatory body or authority,
except for violations which, in the aggregate, would not reasonably be
expected to have a material adverse effect on the business, operations,
properties, assets, condition (financial or other), results of operations or
prospects of the PTR Subsidiaries, taken as a whole. To the knowledge of PTR,
none of the PTR Subsidiaries is in violation or has been given notice or been
charged with any violation of any law, statute, order, rule, regulation,
ordinance or judgment (including, without limitation, any applicable
environmental law, ordinance or regulation) of any governmental or regulatory
body or authority with respect to the PTR Properties which are Operating
Properties or Development Properties, except for violations which, in the
aggregate, would not reasonably be expected to have a material adverse effect
on the business, operations, properties, assets, condition (financial or
other), results of operations or prospects of the PTR Subsidiaries, taken as a
whole. No investigation or review of the PTR Subsidiaries by any governmental
or regulatory body or authority is pending or, to the best knowledge of PTR
without any independent investigation, threatened, nor has any governmental or
regulatory body or authority indicated to PTR or any PTR Subsidiary an
intention to conduct the same, other than, in each case, those the outcome of
which, as far as reasonably can be foreseen, would not reasonably be expected
to have a material adverse effect on the business, operations, properties,
assets, condition (financial or other), results of operations or prospects of
the PTR Subsidiaries, taken as a whole. Each of the PTR Subsidiaries has all
permits, licenses, franchises, variances, exemptions, orders and other
governmental authorizations, consents and approvals necessary to conduct its
business as presently conducted and as proposed by such PTR Subsidiary to be
conducted, except for permits, licenses, franchises, variances, exemptions,
orders, authorizations, consents and approvals the absence of which, alone or
in the aggregate, would not reasonably be expected to have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other), results of operations or prospects of the PTR Subsidiaries, taken
as a whole.
SECTION 3.11 PTR ACQUISITION PROPERTY CONTRACTS. Copies of all contracts,
arrangements and understandings to which PTR or a PTR Subsidiary is a party
relating to the acquisition of each PTR Property which is an Acquisition
Property have previously been delivered or made available to each of the other
parties
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hereto. To PTR's knowledge, all such contracts, arrangements and
understandings are, to the extent provided therein, valid and binding
agreements of the parties thereto and enforceable against the parties thereto
in accordance with their respective terms, except that such enforcement may be
subject to (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting or relating to enforcement of creditors' rights
generally and (ii) general equitable principles. The execution and delivery of
this Agreement and the Related Agreements and the consummation of the
transactions contemplated hereby and thereby will not result in a breach of
any provision of, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, any of such contract, arrangement or understanding.
SECTION 3.12 ZONING. No application filed by PTR or any PTR Subsidiary for
variance or change in zoning or in use or occupancy with respect to any PTR
Property which is an Operating Property or a Development Property is pending
before any governmental agency or authority except for those consistent with
the intended use of such properties in the Business and except for those the
failure of which to obtain would not, individually or in the aggregate,
reasonably be expected to have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of the PTR Subsidiaries, taken as a whole. Neither PTR
nor any PTR Subsidiary has received written notice from any federal, state,
municipal, or other governmental instrumentality (a) requiring the correction
of any condition with respect to any PTR Property which is an Operating
Property or a Development Property, or any part thereof, by reason of a
violation of current applicable laws, regulations, ordinances, building codes
and rules of all applicable municipal, local, state and federal jurisdictions,
including, without limitation, the Americans with Disabilities Act, zoning
ordinances and building codes or (b) that any PTR Property which is an
Operating Property or a Development Property or its current use or operation
violates any restriction, condition or agreement contained in any easement,
restrictive covenant, or similar instrument or agreement affecting any PTR
Property which is an Operating Property or a Development Property. PTR or a
PTR Subsidiary (i) has obtained or holds all certificates of occupancy,
licenses, and permits which, to PTR's knowledge, are required for operating
the PTR Properties which are Operating Properties for their current or
intended use and (ii) has not received any written notice of violation from
any federal, state, municipal, or other governmental instrumentality, or
written notice of an intention by any of the foregoing to revoke any
certificate of occupancy, license, or permit issued by it in connection with
the current or intended use of any PTR Property which is an Operating Property
or a Development Property.
SECTION 3.13 TITLE INSURANCE. An owner's policy of title insurance, or a
commitment to issue such a policy, issued by a nationally recognized title
insurance company has been obtained for each PTR Property which is an
Operating Property or a Development Property. Each owner's policy of title
insurance or commitment (a) insures or will insure the fee simple ownership
interest of the appropriate PTR Subsidiary in each such PTR Property subject
only to those liens, encumbrances, claims, security interests and defects, (i)
disclosed in such title insurance policies and commitments, (ii) created by
the PTR Mortgages and (iii) those which would not, either individually or in
the aggregate, have a material adverse effect on the business, operations,
properties, assets, condition (financial or other), results of operations or
prospects of the PTR Subsidiaries, taken as a whole (collectively, the "PTR
Permitted Encumbrances") and (b) is in an amount at least equal to the sum of
(x) the cost of the acquisition of such PTR Property and (y) the estimated
costs of any subsequent construction and installation of the improvements made
by such PTR Subsidiary located on such PTR Property (measured at the time of
such construction).
SECTION 3.14 ENVIRONMENTAL MATTERS. Except as set forth in the Environmental
Reports (copies of which have previously been provided or made available to
each of the other parties hereto), PTR has no knowledge of (a) any violation
of Environmental Laws relating to any PTR Property which is an Operating
Property or a Development Property, (b) the release or potential release of
Hazardous Materials on or from any PTR Property which is an Operating Property
or a Development Property in violation of any Environmental Laws, (c)
underground storage tanks located on any PTR Property which is an Operating
Property or a Development Property, or (d) asbestos in or on any PTR Property
which is an Operating Property or a Development Property. Except as set forth
in the Environmental Reports, neither PTR nor any PTR Subsidiary
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has manufactured, introduced, released or discharged from or onto any PTR
Property which is an Operating Property or a Development Property any
Hazardous Materials or any toxic wastes, substances or materials (including,
without limitation, asbestos) in violation of any Environmental Laws, and
neither PTR nor any PTR Subsidiary has used any PTR Property which is an
Operating Property or a Development Property or any part thereof for the
generation, treatment, storage, handling or disposal of any Hazardous
Materials, in violation of any Environmental Laws.
SECTION 3.15 DEFECTS. To the best of PTR's knowledge without any independent
investigation, there are no material defects in the improvements located on a
PTR Property which is an Operating Property or a Development Property
including, without limitation, any defect in the foundation, structural
systems or roof or the electrical, plumbing, heating, ventilating or air
conditioning systems included within the improvements located on such PTR
Property and there are no material repairs or deferred maintenance required to
be made thereto.
SECTION 3.16 INSURANCE. PTR or the PTR Subsidiaries maintain insurance
coverage for the PTR Subsidiaries and the PTR Properties which are Operating
Properties or Development Properties of a type, and in amounts, typical of
similar companies engaged in the extended-stay lodging business. All such
insurance policies are in full force and effect, and with respect to all
policies none of PTR or any PTR Subsidiary is delinquent in the payment of any
premiums thereon, and no notice of cancellation or termination has been
received with respect to any such policy. All such policies are sufficient for
compliance with all requirements of law and of all agreements to which PTR or
the PTR Subsidiaries are a party or otherwise bound and are valid,
outstanding, collectable, and enforceable policies and will remain in full
force and effect through the Merger Closing. Neither PTR nor any PTR
Subsidiary has received written notice within the last 12 months from any
insurance company or board of fire underwriters of any defects or inadequacies
in, on or about any PTR Property which is an Operating Property or a
Development Property or any part or component thereof that would materially
adversely affect the insurability of such PTR Property or cause any material
increase in the premiums for such PTR Property that have not been cured or
repaired to the satisfaction of the party issuing the notice.
SECTION 3.17 UTILITIES AND ACCESS. The improvements located on each PTR
Property which is an Operating Property are connected and serviced by water,
solid waste, sewage disposal, storm drainage, telephone, gas (if applicable)
and electricity which, to PTR's knowledge, meet all requirements imposed by
applicable law. Neither PTR nor any PTR Subsidiary has received notice of any
fact or condition which would result or could result in the termination of the
current access from any PTR Property which is an Operating Property to
existing roads and highways, or to sewer or other utility services currently
serving any such PTR Property.
SECTION 3.18 CONDEMNATION. Neither PTR nor any PTR Subsidiary has been
served with a complaint in a public or private condemnation or similar
proceeding relating to the taking by eminent domain of a PTR Property which is
an Operating Property or a Development Property or any part thereof which
would reasonably be expected to have a material adverse effect upon the
present maintenance, operation, occupancy or use of such PTR Property nor, to
the best of PTR's knowledge without any independent investigation, has any
such proceeding been threatened in writing against PTR or any PTR Subsidiary.
SECTION 3.19 TAXES AND ASSESSMENTS ON PTR PROPERTIES. All real estate taxes
and assessments imposed by governmental authority and any assessments assessed
by governmental authority or by private covenant due and payable for the
current year or other applicable period and all prior years or periods for any
PTR Property which is an Operating Property or a Development Property have
been paid, except for installments due and not yet delinquent, and no such
taxes or assessments are delinquent. All impact fees or other assessments,
fees or charges, however denominated, which may constitute a lien or charge on
any PTR Property which is an Operating Property or a Development Property as a
result of existing improvements or developments or which have been assessed or
charged as a result of any permit, license or approval obtained for any such
PTR Property have been paid when due. To PTR's knowledge, there is not
presently pending any such assessments, fees or charges of any nature with
respect to any such PTR Property or any part thereof, nor has
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PTR received notice of any such assessments, fees or charges being
contemplated. Neither PTR nor any PTR Subsidiary has received notice of, nor
has other knowledge or information of, any proposed change in the valuation of
any PTR Property which is an Operating Property or a Development Property for
real estate taxes from that assessed for the current assessment period, nor
does PTR have any other knowledge or information of any action or proceeding
designed to levy any special assessment against any such PTR Property other
than such as would not, in the aggregate, be reasonably expected to have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of the PTR
Subsidiaries, taken as a whole. Neither PTR nor any PTR Subsidiary has
received written notice of any possible future improvements by a governmental
instrumentality, any part of the cost of which would or might be assessed
against any PTR Property which is an Operating Property or a Development
Property, or of any contemplated future assessments of any kind other than
such as would not, in the aggregate, be reasonably expected to have a material
adverse effect on the business, operations, properties, assets, condition
(financial or other), results of operations or prospects of the PTR
Subsidiaries, taken as a whole.
SECTION 3.20 MORTGAGES. Other than any mortgages that will secure the
payment of notes issuable by Homestead to PTR pursuant to the Funding
Commitment Agreement and other than any mortgages that secure payment of notes
issued by a PTR Subsidiary to PTR or another PTR Subsidiary (individually, a
"PTR Mortgage" and collectively, the "PTR Mortgages"), the PTR Properties
which are Operating Properties and Development Properties are not encumbered
by any mortgage, deed of trust, deed to secure debt or other similar security
interest. Each PTR Mortgage is valid and enforceable, is in full force and
effect, and has not been amended, modified or supplemented. All payments,
installments and charges due and payable under a PTR Mortgage have been paid
in full. To the best of PTR's knowledge, no condition or event exists which
with the giving of notice or the passage of time, or both, would constitute a
default by any PTR Subsidiary under a PTR Mortgage. The occurrence of any of
the transactions contemplated by this Agreement will not require the consent
or approval of the holder of a PTR Mortgage and will not violate, conflict
with or constitute a default by any PTR Subsidiary under a PTR Mortgage or
result in a condition or event which with the giving of notice or the passage
of time, or both, would constitute a default by any PTR Subsidiary under a PTR
Mortgage.
SECTION 3.21 BROKERS AND FINDERS. PTR has not employed any broker, finder or
other intermediary in connection with the transactions contemplated by this
Agreement which would be entitled to any brokerage, finder's or similar fee or
commission in connection with this Agreement or the transactions contemplated
hereby.
SECTION 3.22 INVESTMENT COMPANY ACT. PTR is not, and as of the Distribution
Date will not be, an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
SECTION 3.23 ADEQUACY OF PTR CONSIDERATION. No part of the Business as
conducted by PTR is conducted by PTR through any entity other than a PTR
Subsidiary.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ATLANTIC
Atlantic represents and warrants to each of the other parties as follows:
SECTION 4.1 ORGANIZATION AND QUALIFICATION. Atlantic and each of the
Atlantic Subsidiaries is duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization and each has the requisite
power, corporate or otherwise, and authority to own, lease and operate its
assets and properties and to carry on its business as it is now being
conducted and as it is proposed by it to be conducted. Each Atlantic
Subsidiary is qualified to do business and is in good standing in each
jurisdiction in which the properties owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary,
except where the failure to be so qualified and in good standing would not
reasonably be expected to
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have a material adverse effect on the business, operations, properties,
assets, condition (financial or other), results of operations or prospects of
any such Atlantic Subsidiaries. True, accurate and complete copies of each of
the charter and Bylaws of Atlantic and the charter and bylaws, partnership
agreement or other organizational documents of each Atlantic Subsidiary as in
effect on the date hereof, including all amendments thereto, have heretofore
been delivered to each of the other parties hereto.
SECTION 4.2 CAPITALIZATION.
(a) The authorized capital stock of Alabama Homestead Incorporated consists
of 1,000 common shares, $0.01 par value per share, all of which is owned by
Atlantic, and is validly issued, fully paid and nonassessable. The authorized
stock of Atlantic Homestead Village Incorporated consists of 1,000 shares of
common stock, $1.00 par value per share, all of which is owned by Atlantic,
and is validly issued, fully paid and nonassessable. The authorized stock of
Atlantic Homestead Village (1) Incorporated consists of 1,000 shares of common
stock, $1.00 par value per share, all of which is owned by Atlantic Homestead
Village Incorporated, and is validly issued, fully paid and nonassessable. The
authorized stock of Atlantic Homestead Village (2) Incorporated consists of
1,000 shares of common stock, $1.00 par value per share, all of which is owned
by Atlantic Homestead Village Incorporated, and is validly issued, fully paid
and nonassessable. The sole general partner of Atlantic Homestead Village
Limited Partnership is Atlantic Homestead Village (1) Incorporated and the
sole limited partner is Atlantic Homestead Village (2) Incorporated, and all
such partnership interests are validly issued and fully paid.
(b) Atlantic owns good and marketable title to the stock of the Atlantic
Subsidiaries owned by it and each Atlantic Subsidiary owns good and marketable
title to the securities of each other Atlantic Subsidiary owned by it, in each
case, free and clear of all liens, encumbrances, claims, security interests
and defects.
(c) There are no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement that is presently exercisable obligating
Atlantic or any Atlantic Subsidiary to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of Atlantic or any Atlantic
Subsidiary or obligating Atlantic or any Atlantic Subsidiary to grant, extend
or enter into any such agreement or commitment. There are no voting trusts,
proxies or other agreements or understandings to which Atlantic is a party or
is bound with respect to the voting of any shares of Atlantic or any Atlantic
Subsidiary.
SECTION 4.3 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) Atlantic and each of the Atlantic Subsidiaries have full power,
corporate or otherwise, and authority to enter into this Agreement and the
Related Agreements to which it is a party and, subject to Atlantic
Shareholders' Approval and Atlantic Required Statutory Approvals, to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and the Related Agreements, and the consummation by
Atlantic and the Atlantic Subsidiaries of the transactions contemplated hereby
and thereby, have been duly authorized by the Atlantic Board or the board or
other governing body of each Atlantic Subsidiary and no other proceedings on
the part of Atlantic or an Atlantic Subsidiary are necessary to authorize the
execution and delivery of this Agreement or the Related Agreements and the
consummation by Atlantic and the Atlantic Subsidiaries of the transactions
contemplated hereby and thereby, except for the obtaining of Atlantic Required
Statutory Approvals. This Agreement has been duly and validly executed and
delivered by Atlantic, and, assuming the due authorization, execution and
delivery hereof by each other party hereto, constitutes a valid and binding
agreement of Atlantic enforceable against Atlantic in accordance with its
terms, except that such enforcement may be subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting or
relating to enforcement of creditors' rights generally, (ii) general equitable
principles and (iii) to the extent this Agreement or any of the Related
Agreements contains indemnification provisions for violations of federal or
state securities laws, as enforceability of such provisions may be limited
under federal and state securities laws.
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(b) The execution and delivery of this Agreement and the Related Agreements
by Atlantic and each Atlantic Subsidiary to the extent it is a party thereto
do not, and the consummation by Atlantic and the Atlantic Subsidiaries of the
transactions contemplated hereby and thereby will not, violate, conflict with
or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination of, or accelerate the performance required
by, or result in a right of termination or acceleration under, or result in
the creation of any lien, security interest, charge or encumbrance upon any of
the Atlantic Properties under any of the terms, conditions or provisions of
(i) Atlantic's Articles of Incorporation or Bylaws, (ii) subject to obtaining
Atlantic Required Statutory Approvals, any statute, law, ordinance, rule,
regulation, judgment, decree, order, injunction, writ, permit or license of
any court or governmental authority applicable to Atlantic or any Atlantic
Subsidiary or, to Atlantic's best knowledge, any of the Atlantic Properties,
(iii) subject to receiving the approvals of the shareholders and board or
other governing body of the Atlantic Subsidiaries, the charter or bylaws or
other organizational documents of an Atlantic Subsidiary or (iv) except as set
forth on Schedule 4.3(b) hereto, any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which Atlantic or any
Atlantic Subsidiary is now a party or by which Atlantic or any Atlantic
Subsidiary or, to Atlantic's best knowledge, any of the Atlantic Properties
may be bound, excluding from the foregoing clauses (ii) and (iv) such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of liens, security interests, charges or encumbrances that would
not, in the aggregate, be reasonably expected to have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other), results of operations or prospects of Atlantic or, taken as a
whole, the Atlantic Subsidiaries.
(c) Except for (i) any filings by the parties hereto that may be required by
the HSR Act, (ii) the filing by Atlantic of a registration statement in
connection with the Atlantic IPO and the filing of the Registration Statement,
including the Proxy Statement and Prospectus, with the Commission pursuant to
the Securities Act and the Exchange Act, and the declaration of the
effectiveness thereof by the Commission and filings with various state blue
sky authorities, (iii) any required filings by Atlantic or an Atlantic
Subsidiary pursuant to Section 2.1(b), (iv) any required filings with or
approvals from applicable federal or state environmental authorities and (v)
any required filings with or approvals from applicable federal or state
housing authorities (the filings and approvals referred to in clauses (i)
through (v) are collectively referred to as the "Atlantic Required Statutory
Approvals"), to Atlantic's best knowledge, no declaration, filing or
registration with, or notice to, or authorization, consent or approval of, any
governmental or regulatory body or authority is necessary for the execution
and delivery of this Agreement and the Related Agreements by Atlantic or an
Atlantic Subsidiary or the consummation by Atlantic or an Atlantic Subsidiary
of the transactions contemplated hereby or thereby, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not, in
the aggregate, be reasonably expected to have a material adverse effect on the
business, operations, properties, assets, condition (financial or other),
results of operations or prospects of Atlantic or, taken as a whole, the
Atlantic Subsidiaries.
SECTION 4.4 FINANCIAL STATEMENTS.
(a) Atlantic has previously delivered or made available to each of the other
parties hereto copies of its audited consolidated financial statements (the
"Atlantic Financial Statements") for the fiscal year ended December 31, 1995.
The Atlantic Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis and
fairly present the financial position of Atlantic and the Atlantic
Subsidiaries on a consolidated basis as of the dates thereof and the results
of their operations and cash flows for the periods then ended.
(b) All of the accounts receivable of the Atlantic Subsidiaries included in
the Atlantic Financial Statements or otherwise, including any transactions
with related parties, reflect actual transactions, are collectible consistent
with Atlantic's past history and will not be subject to offset or deduction
and have arisen in the ordinary course of business.
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(c) The combined financial statements prepared by Atlantic with respect to
the Business for the years ended December 31, 1993, 1994 and 1995 (the
"Atlantic Business Financial Statements") have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
and fairly present the financial position of the Atlantic Subsidiaries as of
the dates presented and the results of their operations and cash flows for the
periods presented.
SECTION 4.5 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1995,
there has not been any material adverse change or any event (other than
general economic or market conditions) which would reasonably be expected to
result in a material adverse change, individually or in the aggregate, in the
business, operations, properties, assets, liabilities, condition (financial or
other), results of operations or prospects of the Atlantic Subsidiaries, taken
as a whole.
SECTION 4.6 REGISTRATION STATEMENT AND PROXY STATEMENT AND PROSPECTUS. None
of the information to be supplied by Atlantic for inclusion or incorporation
by reference in (a) the Registration Statement or (b) the Proxy Statement and
Prospectus will, in the case of the Proxy Statement and Prospectus or any
amendments thereof or supplements thereto, at the time of the mailing of the
Proxy Statement and Prospectus and any amendments thereof or supplements
thereto, and at the time of the meetings of shareholders of Atlantic and PTR
to be held in connection with the transactions contemplated by this Agreement
or, in the case of the Registration Statement, as amended or supplemented, at
the time it becomes effective and at the time of such meeting of the
shareholders of Atlantic and PTR, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that no
representation is made by Atlantic with respect to information supplied by
PTR, SCG or Homestead or derived therefrom for inclusion therein.
SECTION 4.7 TAXES.
(a) Each Atlantic Subsidiary has duly filed with the appropriate
governmental authorities all Tax Returns required to be filed by it for all
periods ending on or prior to the Merger Closing, except to the extent of any
Tax Returns for which an extension of time for filing has been properly filed.
Each such return and filing is true and correct in all material respects. All
Taxes shown as due on all such returns and other filings have been paid. No
material issues have been raised in any examination by any taxing authority
with respect to the businesses and operations of Atlantic which, by
application of similar principles, reasonably could be expected to result in a
proposed adjustment to the liability for Taxes for any other period not so
examined. All Taxes which each Atlantic Subsidiary is required by law to
withhold or collect, including without limitation, sales and use taxes, have
been duly withheld or collected and, to the extent required, have been paid
over to the proper governmental authorities or are held in separate bank
accounts for such purpose. There are no liens for Taxes upon the Atlantic
Properties which are Operating Properties or Development Properties except for
statutory liens for Taxes not yet due.
(b) Atlantic has not filed for an extension of a statute of limitations with
respect to any Tax and no governmental authorities have requested an extension
of the statute of limitations with respect to any Tax.
SECTION 4.8 ABSENCE OF UNDISCLOSED LIABILITIES. Neither Atlantic nor any
Atlantic Subsidiary had, at December 31, 1995, and neither has incurred since
that date, any liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of any nature (other than ordinary and recurring
operating expenses), with respect to the Atlantic Properties (a) except
liabilities, obligations or contingencies which are accrued or reserved
against in the Atlantic Business Financial Statements or reflected in the
notes thereto and (b) except for any liabilities, obligations or contingencies
which (i) would not, in the aggregate, be reasonably expected to have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of the
Atlantic Subsidiaries, taken as a whole or (ii) have been discharged or paid
in full prior to the date hereof.
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SECTION 4.9 LITIGATION. Except as set forth on Schedule 4.9, there are no
claims, suits, actions or proceedings pending or, to the best of Atlantic's
knowledge without any independent investigation, threatened, against, relating
to or affecting any Atlantic Subsidiary or any of the Atlantic Properties
which are Operating Properties or Development Properties before or by any
court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator that could reasonably be expected, either alone
or in the aggregate with all such claims, actions or proceedings, to affect
materially and adversely the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of the
Atlantic Subsidiaries, taken as a whole. No Atlantic Subsidiary is subject to
any judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or authority, or any
arbitrator which prohibits or restricts the consummation of the transactions
contemplated hereby or would have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of the Atlantic Subsidiaries, taken as a whole.
SECTION 4.10 NO VIOLATION OF LAW. To the knowledge of Atlantic, none of the
Atlantic Subsidiaries is in violation of or has been given notice or been
charged with any violation of any law, statute, order, rule, regulation,
ordinance or judgment (including, without limitation, any applicable
environmental law, ordinance or regulation) of any governmental or regulatory
body or authority, except for violations which, in the aggregate, would not
reasonably be expected to have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of the Atlantic Subsidiaries, taken as a whole. To the
knowledge of Atlantic, none of the Atlantic Subsidiaries is in violation or
has been given notice or been charged with any violation of any law, statute,
order, rule, regulation, ordinance or judgment (including, without limitation,
any applicable environmental law, ordinance or regulation) of any governmental
or regulatory body or authority with respect to the Atlantic Properties which
are Operating Properties or Development Properties, except for violations
which, in the aggregate, would not reasonably be expected to have a material
adverse effect on the business, operations, properties, assets, condition
(financial or other), results of operations or prospects of the Atlantic
Subsidiaries, taken as a whole. No investigation or review of the Atlantic
Subsidiaries by any governmental or regulatory body or authority is pending
or, to the best knowledge of Atlantic without any independent investigation,
threatened, nor has any governmental or regulatory body or authority indicated
to Atlantic or any Atlantic Subsidiary an intention to conduct the same, other
than, in each case, those the outcome of which, as far as reasonably can be
foreseen, would not reasonably be expected to have a material adverse effect
on the business, operations, properties, assets, condition (financial or
other), results of operations or prospects of the Atlantic Subsidiaries, taken
as a whole. Each of the Atlantic Subsidiaries has all permits, licenses,
franchises, variances, exemptions, orders and other governmental
authorizations, consents and approvals necessary to conduct its business as
presently conducted and as proposed by such Atlantic Subsidiary to be
conducted, except for permits, licenses, franchises, variances, exemptions,
orders, authorizations, consents and approvals the absence of which, alone or
in the aggregate, would not reasonably be expected to have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other), results of operations or prospects of the Atlantic Subsidiaries,
taken as a whole.
SECTION 4.11 ATLANTIC ACQUISITION PROPERTY CONTRACTS. Copies of all
contracts, arrangements and understandings to which Atlantic or an Atlantic
Subsidiary is a party relating to the acquisition of each Atlantic Property
which is an Acquisition Property have previously been delivered or made
available to each of the other parties hereto. To Atlantic's knowledge, all
such contracts, arrangements and understandings are, to the extent provided
therein, valid and binding agreements of the parties thereto and enforceable
against the parties thereto in accordance with their respective terms, except
that such enforcement may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally and (ii) general equitable
principles. The execution and delivery of this Agreement and the Related
Agreements and the consummation of the transactions contemplated hereby and
thereby will not result in a breach of any provision of, or result in the
termination of, or accelerate the performance required by, or result in a
right of termination or acceleration under, any of such contract, arrangement
or understanding.
SECTION 4.12 ZONING. No application filed by Atlantic or any Atlantic
Subsidiary for variance or change in zoning or in use or occupancy with
respect to any Atlantic Property which is an Operating Property or a
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Development Property is pending before any governmental agency or authority
except for those consistent with the intended use of such properties in the
Business and except for those the failure of which to obtain would not,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on the business, operations, properties, assets, condition
(financial or other), results of operations or prospects of the Atlantic
Subsidiaries, taken as a whole. Neither Atlantic nor any Atlantic Subsidiary
has received written notice from any federal, state, municipal, or other
governmental instrumentality (a) requiring the correction of any condition
with respect to any Atlantic Property which is an Operating Property or a
Development Property, or any part thereof, by reason of a violation of current
applicable laws, regulations, ordinances, building codes and rules of all
applicable municipal, local, state and federal jurisdictions, including,
without limitation, the Americans with Disabilities Act, zoning ordinances and
building codes or (b) that any Atlantic Property which is an Operating
Property or a Development Property or its current use or operation violates
any restriction, condition or agreement contained in any easement, restrictive
covenant, or similar instrument or agreement affecting any Atlantic Property
which is an Operating Property or a Development Property. Atlantic or an
Atlantic Subsidiary (i) has obtained or holds all certificates of occupancy,
licenses, and permits which, to Atlantic's knowledge, are required for
operating the Atlantic Properties which are Operating Properties for their
current or intended use and (ii) has not received any written notice of
violation from any federal, state, municipal, or other governmental
instrumentality, or written notice of an intention by any of the foregoing to
revoke any certificate of occupancy, license, or permit issued by it in
connection with the current or intended use of any Atlantic Property which is
an Operating Property or a Development Property.
SECTION 4.13 TITLE INSURANCE. An owner's policy of title insurance, or a
commitment to issue such a policy, issued by a nationally recognized title
insurance company has been obtained for each Atlantic Property which is an
Operating Property or a Development Property. Each owner's policy of title
insurance or commitment (a) insures or will insure the fee simple ownership
interest of the appropriate Atlantic Subsidiary in each such Atlantic Property
subject only to those liens, encumbrances, claims, security interests and
defects, (i) disclosed in the title insurance policies and commitments, (ii)
created by the Atlantic Mortgages and (iii) those which would not, either
individually or in the aggregate, have a material adverse effect on the
business, operations, properties, assets, condition (financial or other),
results of operations or prospects of the Atlantic Subsidiaries, taken as a
whole (collectively, the "Atlantic Permitted Encumbrances") and (b) is in an
amount at least equal to the sum of (x) the cost of the acquisition of such
Atlantic Property and (y) the estimated costs of any subsequent construction
and installation of the improvements made by such Atlantic Subsidiary located
on such Atlantic Property (measured at the time of such construction).
SECTION 4.14 ENVIRONMENTAL MATTERS. Except as set forth in the Environmental
Reports (copies of which have previously been provided or made available to
each of the other parties hereto), Atlantic has no knowledge of (a) any
violation of Environmental Laws relating to any Atlantic Property which is an
Operating Property or a Development Property, (b) the release or potential
release of Hazardous Materials on or from any Atlantic Property which is an
Operating Property or a Development Property in violation of any Environmental
Laws, (c) underground storage tanks located on any Atlantic Property which is
an Operating Property or a Development Property, or (d) asbestos in or on any
Atlantic Property which is an Operating Property or a Development Property.
Except as set forth in the Environmental Reports, neither Atlantic nor any
Atlantic Subsidiary has manufactured, introduced, released or discharged from
or onto any Atlantic Property which is an Operating Property or a Development
Property any Hazardous Materials or any toxic wastes, substances or materials
(including, without limitation, asbestos) in violation of any Environmental
Laws, and neither Atlantic nor any Atlantic Subsidiary has used any Atlantic
Property which is an Operating Property or a Development Property or any part
thereof for the generation, treatment, storage, handling or disposal of any
Hazardous Materials, in violation of any Environmental Laws.
SECTION 4.15 DEFECTS. To the best of Atlantic's knowledge without any
independent investigation, there are no material defects in the improvements
located on an Atlantic Property which is an Operating Property or a
Development Property including, without limitation, any defect in the
foundation, structural systems or roof or the electrical, plumbing, heating,
ventilating or air conditioning systems included within the improvements
located on such Atlantic Property and there are no material repairs or
deferred maintenance required to be made thereto.
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SECTION 4.16 INSURANCE. Atlantic or the Atlantic Subsidiaries maintain
insurance coverage for the Atlantic Subsidiaries and the Atlantic Properties
which are Operating Properties or Development Properties of a type, and in
amounts, typical of similar companies engaged in the extended-stay lodging
business. All such insurance policies are in full force and effect, and with
respect to all policies, none of Atlantic nor any Atlantic Subsidiary is
delinquent in the payment of any premiums thereon, and no notice of
cancellation or termination has been received with respect to any such policy.
All such policies are sufficient for compliance with all requirements of law
and of all agreements to which Atlantic or the Atlantic Subsidiaries are a
party or otherwise bound and are valid, outstanding, collectable, and
enforceable policies and will remain in full force and effect through the
Merger Closing. Neither Atlantic nor any Atlantic Subsidiary has received
written notice within the last 12 months from any insurance company or board
of fire underwriters of any defects or inadequacies in, on or about any
Atlantic Property which is an Operating Property or a Development Property or
any part or component thereof that would materially adversely affect the
insurability of such Atlantic Property or cause any material increase in the
premiums for such Atlantic Property that have not been cured or repaired to
the satisfaction of the party issuing the notice.
SECTION 4.17 UTILITIES AND ACCESS. The improvements located on each Atlantic
Property which is an Operating Property are connected and serviced by water,
solid waste, sewage disposal, storm drainage, telephone, gas (if applicable)
and electricity which, to Atlantic's knowledge, meet all requirements imposed
by applicable law. Neither Atlantic nor any Atlantic Subsidiary has received
notice of any fact or condition which would result or could result in the
termination of the current access from any Atlantic Property which is an
Operating Property to existing roads and highways, or to sewer or other
utility services currently serving any such Atlantic Property.
SECTION 4.18 CONDEMNATION. Neither Atlantic nor any Atlantic Subsidiary has
been served with a complaint in a public or private condemnation or similar
proceeding relating to the taking by eminent domain of an Atlantic Property
which is an Operating Property or a Development Property or any part thereof
which would reasonably be expected to have a material adverse effect upon the
present maintenance, operation, occupancy or use of such Atlantic Property
nor, to the best of Atlantic's knowledge without independent investigation,
has any such proceeding been threatened in writing against Atlantic or any
Atlantic Subsidiary.
SECTION 4.19 TAXES AND ASSESSMENTS ON ATLANTIC PROPERTIES. All real estate
taxes and assessments imposed by governmental authority and any assessments
assessed by governmental authority or by private covenant due and payable for
the current year or other applicable period and all prior years or periods for
any Atlantic Property which is an Operating Property or a Development Property
have been paid, except for installments due and not yet delinquent, and no
such taxes or assessments are delinquent. All impact fees or other
assessments, fees or charges, however denominated, which may constitute a lien
or charge on any Atlantic Property which is an Operating Property or a
Development Property as a result of existing improvements or developments or
which have been assessed or charged as a result of any permit, license or
approval obtained for any such Atlantic Property have been paid when due. To
Atlantic's knowledge, there is not presently pending any such assessments,
fees or charges of any nature with respect to any such Atlantic Property or
any part thereof, nor has Atlantic received notice of any such assessments,
fees or charges being contemplated. Neither Atlantic nor any Atlantic
Subsidiary has received notice of, nor has other knowledge or information of,
any proposed change in the valuation of any Atlantic Property which is an
Operating Property or a Development Property for real estate taxes from that
assessed for the current assessment period, nor does Atlantic have any other
knowledge or information of any action or proceeding designed to levy any
special assessment against any such Atlantic Property other than such as would
not, in the aggregate, be reasonably expected to have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other), results of operations or prospects of the Atlantic Subsidiaries,
taken as a whole. Neither Atlantic nor any Atlantic Subsidiary has received
written notice of any possible future improvements by a governmental
instrumentality, any part of the cost of which would or might be assessed
against any Atlantic Property, or of any contemplated future assessments of
any kind other than such as would not, in the aggregate, be reasonably
expected to have a material adverse effect on the business, operations,
properties, assets, condition (financial or other), results of operations or
prospects of the Atlantic Subsidiaries, taken as a whole.
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SECTION 4.20 MORTGAGES. Other than any mortgages that will secure the
payment of notes issuable by Homestead to Atlantic pursuant to the Funding
Commitment Agreement and other than any mortgages that secure payment of notes
issued by an Atlantic Subsidiary to Atlantic or another Atlantic Subsidiary
(individually, an "Atlantic Mortgage" and collectively, the "Atlantic
Mortgages"), the Atlantic Properties which are Operating Properties and
Development Properties are not encumbered by any mortgage, deed of trust, deed
to secure debt or other similar security interest. Each Atlantic Mortgage is
valid and enforceable, is in full force and effect, and has not been amended,
modified or supplemented. All payments, installments and charges due and
payable under an Atlantic Mortgage have been paid in full. To the best of
Atlantic's knowledge, no condition or event exists which with the giving of
notice or the passage of time, or both, would constitute a default by any
Atlantic Subsidiary under an Atlantic Mortgage. The occurrence of any of the
transactions contemplated by this Agreement will not require the consent or
approval of the holder of an Atlantic Mortgage and will not violate, conflict
with or constitute a default by any Atlantic Subsidiary under an Atlantic
Mortgage or result in a condition or event which with the giving of notice or
the passage of time, or both, would constitute a default by any Atlantic
Subsidiary under an Atlantic Mortgage.
SECTION 4.21 BROKERS AND FINDERS. Atlantic has not employed any broker,
finder or other intermediary in connection with the transactions contemplated
by this Agreement which would be entitled to any brokerage, finder's or
similar fee or commission in connection with this Agreement or the
transactions contemplated hereby.
SECTION 4.22 INVESTMENT COMPANY ACT. Atlantic is not, and as of the
Distribution Date will not be, an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
SECTION 4.23 ADEQUACY OF ATLANTIC CONSIDERATION. No part of the Business as
conducted by Atlantic is conducted by Atlantic through any entity other than
an Atlantic Subsidiary.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SCG
SCG represents and warrants to each of the other parties as follows:
SECTION 5.1 ORGANIZATION AND QUALIFICATION. SCG and each of the SCG
Subsidiaries is duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization and each has the requisite power,
corporate or otherwise, and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being conducted and as it
is proposed by it to be conducted. Each SCG Subsidiary is qualified to do
business and is in good standing in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so
qualified and in good standing would not reasonably be expected to have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of any such
SCG Subsidiaries. True, accurate and complete copies of each of the charter
and Bylaws of SCG and the charter and bylaws, partnership agreement or other
organizational documents of each SCG Subsidiary as in effect on the date
hereof, including all amendments thereto, have heretofore been delivered to
each of the other parties hereto.
SECTION 5.2 CAPITALIZATION.
(a) The authorized stock of each SCG Subsidiary (other than SCG Homestead
Village Incorporated) consists of 1,000 shares of common stock, $1.00 par
value per share, all of which is owned by SCG or a wholly owned subsidiary of
SCG. The authorized stock of SCG Homestead Village Incorporated consists of
1,000 shares of common stock, $0.01 par value per share, 100 shares of which
is outstanding and owned by SCG or a wholly owned subsidiary of SCG. All such
shares of stock are validly issued, fully paid and nonassessable. SCG or one
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of its wholly owned subsidiaries owns good and marketable title to the capital
stock of the SCG Subsidiaries, in each case, free and clear of all liens,
encumbrances, claims, security interests and defects, except such liens,
encumbrances, claims, security interests and defects disclosed on Schedule
5.3(b) hereto.
(b) There are no outstanding subscriptions, options, call, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement that is presently exercisable obligating SCG or
any subsidiary of SCG to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of any SCG Subsidiary or obligating SCG
or any subsidiary of SCG to grant, extend or enter into any such agreement or
commitment. There are no voting trusts, proxies or other agreements or
understandings to which SCG or any subsidiary of SCG is a party or is bound
with respect to the voting of any shares of any SCG Subsidiary.
SECTION 5.3 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) SCG and each of the SCG Subsidiaries have full power, corporate or
otherwise, and authority to enter into this Agreement and the Related
Agreements to which it is party and, subject to SCG Required Statutory
Approvals, to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the Related Agreements, and the
consummation by SCG and the SCG Subsidiaries of the transactions contemplated
hereby and thereby, have been duly authorized by the SCG Board and the board
of each SCG Subsidiary and no other corporate proceedings on the part of SCG
or any SCG Subsidiary are necessary to authorize the execution and delivery of
this Agreement or the Related Agreements and the consummation by SCG and the
SCG Subsidiaries of the transactions contemplated hereby and thereby, except
for the obtaining of SCG Required Statutory Approvals. This Agreement has been
duly and validly executed and delivered by SCG, and, assuming the due
authorization, execution and delivery hereof by each other party hereto,
constitutes a valid and binding agreement of SCG enforceable against SCG in
accordance with its terms, except that such enforcement may be subject to (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally, (ii)
general equitable principles and (iii) to the extent this Agreement or any of
the Related Agreements contains indemnification provisions for violations of
federal or state securities laws, as enforceability of such provisions may be
limited under federal and state securities laws.
(b) The execution and delivery of this Agreement and the Related Agreements
by SCG and each SCG Subsidiary to the extent it is a party thereto do not, and
the consummation by SCG and the SCG Subsidiaries of the transactions
contemplated hereby and thereby will not, violate, conflict with or result in
a breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result
in the termination of, or accelerate the performance required by, or result in
a right of termination or acceleration under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the SCG Properties
under any of the terms, conditions or provisions of (i) SCG's Articles of
Incorporation or Bylaws, (ii) subject to obtaining SCG Required Statutory
Approvals, any statute, law, ordinance, rule, regulation, judgment, decree,
order, injunction, writ, permit or license of any court or governmental
authority applicable to SCG or any SCG Subsidiary or, to SCG's best knowledge,
any of the SCG Properties, (iii) subject to receiving the approvals of the
shareholders and board of the SCG Subsidiaries, the charter or bylaws of an
SCG Subsidiary or (iv) except as set forth on Schedule 5.3(b) hereto, any
note, bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of
any kind to which SCG or any SCG Subsidiary is now a party or by which SCG or
any SCG Subsidiary or, to SCG's best knowledge, any of the SCG Properties may
be bound, excluding from the foregoing clauses (ii) and (iv) such violations,
conflicts, breaches, defaults, terminations, accelerations or creations of
liens, security interests, charges or encumbrances that would not, in the
aggregate, be reasonably expected to have a material adverse effect on the
business, operations, properties, assets, condition (financial or other),
results of operations or prospects of SCG or, taken as a whole, the SCG
Subsidiaries.
(c) Except for (i) any filings by the parties hereto that may be required by
the HSR Act, (ii) the filing of the Registration Statement, including the
Proxy Statement and Prospectus, with the Commission pursuant to the
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Securities Act and the Exchange Act, and the declaration of the effectiveness
thereof by the Commission and filings with various state blue sky authorities,
(iii) any required filings by SCG or an SCG Subsidiary pursuant to Section
2.1(c), (iv) any required filings with or approvals from applicable federal or
state environmental authorities and (v) any required filings with or approvals
from applicable federal or state housing authorities (the filings and
approvals referred to in clauses (i) through (v) are collectively referred to
as the "SCG Required Statutory Approvals"), to SCG's best knowledge, no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any governmental or regulatory body or authority is
necessary for the execution and delivery of this Agreement and the Related
Agreements by SCG or any SCG Subsidiary or the consummation by SCG or any SCG
Subsidiary of the transactions contemplated hereby or thereby, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not, in
the aggregate, be reasonably expected to have a material adverse effect on the
business, operations, properties, assets, condition (financial or other),
results of operations or prospects of SCG or, taken as a whole, the SCG
Subsidiaries.
SECTION 5.4 FINANCIAL STATEMENTS. The combined financial statements prepared
by SCG with respect to the Business for the years ended December 31, 1993,
1994 and 1995 (the "SCG Business Financial Statements") have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis and fairly present the financial position of the SCG
Subsidiaries as of the dates presented and the results of their operations and
cash flows for the periods presented.
SECTION 5.5 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1995,
there has not been any material adverse change or any event (other than
general economic or market conditions) which would reasonably be expected to
result in a material adverse change, individually or in the aggregate, in the
business, operations, properties, assets, liabilities, condition (financial or
other), results of operations or prospects of the SCG Subsidiaries, taken as a
whole.
SECTION 5.6 REGISTRATION STATEMENT AND PROXY STATEMENT AND PROSPECTUS. None
of the information to be supplied by SCG for inclusion or incorporation by
reference in (a) the Registration Statement or (b) the Proxy Statement and
Prospectus will, in the case of the Proxy Statement and Prospectus or any
amendments thereof or supplements thereto, at the time of the mailing of the
Proxy Statement and Prospectus and any amendments thereof or supplements
thereto, and at the time of the meetings of shareholders of Atlantic and PTR
to be held in connection with the transactions contemplated by this Agreement
or, in the case of the Registration Statement, as amended or supplemented, at
the time it becomes effective and at the time of such meeting of the
shareholders of Atlantic and PTR, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that no
representation is made by SCG with respect to information supplied by PTR,
Atlantic or Homestead or derived therefrom for inclusion therein.
SECTION 5.7 TAXES.
(a) Each SCG Subsidiary has duly filed with the appropriate governmental
authorities all Tax Returns required to be filed by it for all periods ending
on or prior to the Merger Closing, except to the extent of any Tax Returns for
which an extension of time for filing has been properly filed. Each such
return and filing is true and correct in all material respects. Each such
return and filing is true and correct in all material respects. All Taxes
shown as due on all such returns and other filings have been paid. No material
issues have been raised in any examination by any taxing authority with
respect to the businesses and operations of SCG which, by application of
similar principles, reasonably could be expected to result in a proposed
adjustment to the liability for Taxes for any other period not so examined.
All Taxes which each SCG Subsidiary is required by law to withhold or collect,
including without limitation, sales and use taxes, have been duly withheld or
collected and, to the extent required, have been paid over to the proper
governmental authorities or are held in separate bank accounts for such
purpose. There are no liens for Taxes upon the SCG Properties which are
Development Properties except for statutory liens for Taxes not yet due.
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(b) SCG has not filed for an extension of a statute of limitations with
respect to any Tax and no governmental authorities have requested an extension
of the statute of limitations with respect to any Tax.
SECTION 5.8 ABSENCE OF UNDISCLOSED LIABILITIES. Neither SCG nor any SCG
Subsidiary had, at December 31, 1995, and neither has incurred since that
date, any liabilities or obligations (whether absolute, accrued, contingent or
otherwise) of any nature (other than ordinary and recurring operating
expenses), with respect to the SCG Properties (a) except liabilities,
obligations or contingencies which are accrued or reserved against in the SCG
Business Financial Statements or reflected in the notes thereto and (b) except
for any liabilities, obligations or contingencies which (i) would not, in the
aggregate, be reasonably expected to have a material adverse effect on the
business, operations, properties, assets, condition (financial or other),
results of operations or prospects of the SCG Subsidiaries, taken as a whole
or (ii) have been discharged or paid in full prior to the date hereof.
SECTION 5.9 LITIGATION. Except as set forth on Schedule 5.9, there are no
claims, suits, actions or proceedings pending or, to the best of SCG's
knowledge without any independent investigation, threatened, against, relating
to or affecting any SCG Subsidiary or any of the SCG Properties which are
Development Properties before or by any court, governmental department,
commission, agency, instrumentality or authority, or any arbitrator that could
reasonably be expected, either alone or in the aggregate with all such claims,
actions or proceedings, to affect materially and adversely the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of the SCG Subsidiaries, taken as a whole. No SCG
Subsidiary is subject to any judgment, decree, injunction, rule or order of
any court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator which prohibits or restricts the consummation of
the transactions contemplated hereby or would have a material adverse effect
on the business, operations, properties, assets, condition (financial or
other), results of operations or prospects of the SCG Subsidiaries, taken as a
whole.
SECTION 5.10 NO VIOLATION OF LAW. To the knowledge of SCG, none of the SCG
Subsidiaries is in violation of or has been given notice or been charged with
any violation of any law, statute, order, rule, regulation, ordinance or
judgment (including, without limitation, any applicable environmental law,
ordinance or regulation) of any governmental or regulatory body or authority,
except for violations which, in the aggregate, would not reasonably be
expected to have a material adverse effect on the business, operations,
properties, assets, condition (financial or other), results of operations or
prospects of the SCG Subsidiaries, taken as a whole. To the knowledge of SCG,
none of the SCG Subsidiaries is in violation or has been given notice or been
charged with any violation of any law, statute, order, rule, regulation,
ordinance or judgment (including, without limitation, any applicable
environmental law, ordinance or regulation) of any governmental or regulatory
body or authority with respect to the SCG Properties which are Development
Properties, except for violations which, in the aggregate, would not
reasonably be expected to have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of the SCG Subsidiaries, taken as a whole. No
investigation or review of the SCG Subsidiaries by any governmental or
regulatory body or authority is pending or, to the best knowledge of SCG
without any independent investigation, threatened, nor has any governmental or
regulatory body or authority indicated to SCG or any SCG Subsidiary an
intention to conduct the same, other than, in each case, those the outcome of
which, as far as reasonably can be foreseen, would not reasonably be expected
to have a material adverse effect on the business, operations, properties,
assets, condition (financial or other), results of operations or prospects of
the SCG Subsidiaries, taken as a whole. Each of the SCG Subsidiaries has all
permits, licenses, franchises, variances, exemptions, orders and other
governmental authorizations, consents and approvals necessary to conduct its
business as presently conducted and as proposed by such SCG Subsidiary to be
conducted, except for permits, licenses, franchises, variances, exemptions,
orders, authorizations, consents and approvals the absence of which, alone or
in the aggregate, would not reasonably be expected to have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other), results of operations or prospects of the SCG Subsidiaries, taken
as a whole.
SECTION 5.11 SCG ACQUISITION PROPERTY CONTRACTS. Copies of all contracts,
arrangements and understandings to which SCG or an SCG Subsidiary is a party
relating to the acquisition of each SCG
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Property which is an Acquisition Property have previously been delivered or
made available to each of the other parties hereto. To SCG's knowledge, all
such contracts, arrangements and understandings are, to the extent provided
therein, valid and binding agreements of the parties thereto and enforceable
against the parties thereto in accordance with their respective terms, except
that such enforcement may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally and (ii) general equitable
principles. The execution and delivery of this Agreement and the Related
Agreements and the consummation of the transactions contemplated hereby and
thereby will not result in a breach of any provision of, or result in the
termination of, or accelerate the performance required by, or result in a
right of termination or acceleration under, any of such contract, arrangement
or understanding.
SECTION 5.12 ZONING. No application filed by SCG or any SCG Subsidiary for
variance or change in zoning or in use or occupancy with respect to any SCG
Property which is a Development Property is pending before any governmental
agency or authority except for those consistent with the intended use of such
properties in the Business and except for those the failure of which to obtain
would not, individually or in the aggregate, reasonably be expected to have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of the SCG
Subsidiaries, taken as a whole. Neither SCG nor any SCG Subsidiary has
received written notice from any federal, state, municipal, or other
governmental instrumentality requiring (a) the correction of any condition
with respect to any SCG Property which is a Development Property, or any part
thereof, by reason of a violation of current applicable laws, regulations,
ordinances, building codes and rules of all applicable municipal, local, state
and federal jurisdictions, including, without limitation, the Americans with
Disabilities Act, zoning ordinances and building codes or (b) that any SCG
Property which is a Development Property or its current use or operation
violates any restriction, condition or agreement contained in any easement,
restrictive covenant, or similar instrument or agreement affecting any SCG
Property which is a Development Property. SCG or an SCG Subsidiary has not
received any written notice of violation from any federal, state, municipal,
or other governmental instrumentality, or written notice of an intention by
any of the foregoing to revoke any certificate of occupancy, license, or
permit issued by it in connection with the current or intended use of any SCG
Property which is a Development Property.
SECTION 5.13 TITLE INSURANCE. An owner's policy of title insurance, or a
commitment to issue such a policy, issued by a nationally recognized title
insurance company has been obtained for each SCG Property which is a
Development Property. Each owner's policy of title insurance or commitment (a)
insures or will insure the fee simple ownership interest of the appropriate
SCG Subsidiary in each SCG Property subject only to those liens, encumbrances,
claims, security interests and defects, (i) disclosed in the title insurance
policies and commitments, and (ii) those which would not, either individually
or in the aggregate, have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of the SCG Subsidiaries, taken as a whole
(collectively, the "SCG Permitted Encumbrances") and (b) is in an amount at
least equal to the sum of (x) the cost of the acquisition of such SCG Property
and (y) the estimated costs of any subsequent construction and installation of
the improvements made by such SCG Subsidiary located on such SCG Property
(measured at the time of such construction).
SECTION 5.14 ENVIRONMENTAL MATTERS. Except as set forth in the Environmental
Reports (copies of which have previously been provided or made available to
each of the other parties hereto), SCG has no knowledge of (a) any violation
of Environmental Laws relating to any SCG Property which is a Development
Property, (b) the release or potential release of Hazardous Materials on or
from any SCG Property which is a Development Property in violation of any
Environmental Laws, (c) underground storage tanks located on any SCG Property
which is a Development Property, or (d) asbestos in or on any SCG Property
which is a Development Property. Except as set forth in the Environmental
Reports, neither SCG nor any SCG Subsidiary has manufactured, introduced,
released or discharged from or onto any SCG Property any Hazardous Materials
or any toxic wastes, substances or materials (including, without limitation,
asbestos) in violation of any Environmental Laws, and neither SCG nor any SCG
Subsidiary has used any SCG Property which is a Development Property or any
part thereof for the generation, treatment, storage, handling or disposal of
any Hazardous Materials, in violation of any Environmental Laws.
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SECTION 5.15 DEFECTS. To the best of SCG's knowledge without any independent
investigation, there are no material defects in the improvements located on an
SCG Property which is a Development Property including, without limitation,
any defect in the foundation, structural systems or roof or the electrical,
plumbing, heating, ventilating or air conditioning systems included within the
improvements located on such SCG Property and there are no material repairs or
deferred maintenance required to be made thereto.
SECTION 5.16 INSURANCE. SCG or the SCG Subsidiaries maintain insurance
coverage for the SCG Subsidiaries and the SCG Properties which are Development
Properties of a type, and in amounts, typical of similar companies engaged in
the extended-stay lodging business. All such insurance policies are in full
force and effect, and with respect to all policies, none of SCG nor any SCG
Subsidiary is delinquent in the payment of any premiums thereon, and no notice
of cancellation or termination has been received with respect to any such
policy. All such policies are sufficient for compliance with all requirements
of law and of all agreements to which SCG or the SCG Subsidiaries are a party
or otherwise bound and are valid, outstanding, collectable, and enforceable
policies and will remain in full force and effect through the Merger Closing.
Neither SCG nor any SCG Subsidiary has received written notice within the last
12 months from any insurance company or board of fire underwriters of any
defects or inadequacies in, on or about any SCG Property which is a
Development Property or any part or component thereof that would materially
adversely affect the insurability of such SCG Property or cause any material
increase in the premiums for such SCG Property that have not been cured or
repaired to the satisfaction of the party issuing the notice.
SECTION 5.17 CONDEMNATION. Neither SCG nor any SCG Subsidiary has been
served with a complaint in a public or private condemnation or similar
proceeding affecting an SCG Property which is an Operating Property or a
Development Property or any part thereof which would reasonably be expected to
have a material adverse effect upon the present maintenance, operation,
occupancy or use of such SCG Property nor, to the best of SCG's knowledge
without independent investigation, has any such proceeding been threatened in
writing against SCG or any SCG Subsidiary.
SECTION 5.18 TAXES AND ASSESSMENTS ON SCG PROPERTIES. All real estate taxes
and assessments imposed by governmental authority and any assessments assessed
by governmental authority or by private covenant due and payable for the
current year or other applicable period and all prior years or periods for any
SCG Property which is a Development Property have been paid, except for
installments due and not yet delinquent, and no such taxes or assessments are
delinquent. All impact fees or other assessments, fees or charges, however
denominated, which may constitute a lien or charge on any SCG Property which
is a Development Property as a result of existing improvements or developments
or which have been assessed or charged as a result of any permit, license or
approval obtained for any such SCG Property have been paid when due. To SCG's
knowledge, there is not presently pending any such assessments, fees or
charges of any nature with respect to any such SCG Property or any part
thereof, nor has SCG received notice of any such assessments, fees or charges
being contemplated. Neither SCG nor any SCG Subsidiary has received notice of,
nor has other knowledge or information of, any proposed change in the
valuation of any SCG Property which is an Operating Property or a Development
Property for real estate taxes from that assessed for the current assessment
period, nor does SCG have any other knowledge or information of any action or
proceeding designed to levy any special assessment against any such SCG
Property. Neither SCG nor any SCG Subsidiary has received written notice of
any possible future improvements by a governmental instrumentality, any part
of the cost of which would or might be assessed against any SCG Property, or
of any contemplated future assessments of any kind other than such as would
not, in the aggregate, be reasonably expected to have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other), results of operations or prospects of the SCG Subsidiaries, taken
as a whole.
SECTION 5.19 EMPLOYEE BENEFIT PLANS. SCG has previously provided or made
available to each of the other parties hereto a copy of each written employee
benefit plan maintained by SCG and/or their affiliates ("Employee Benefit
Plans") that provides retirement, pension, health care, long term disability
income, life insurance and any other post-retirement benefits that as of the
date hereof covers any employee of an SCG
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Subsidiary who will become an employee of Homestead or one of its subsidiaries
after the Merger Closing ("Employees"). Each Employee Benefit Plan complies
and has been administered in form and in operation in all material respects
with all applicable requirements of law and no notice has been issued by any
governmental authority questioning or challenging such compliance.
SECTION 5.20 MORTGAGES. The SCG Properties are not subject to any mortgages,
deeds of trust, deeds to secure debt and other similar security interests
encumbering the SCG Properties or any part thereof.
SECTION 5.21 INTELLECTUAL PROPERTY. Schedule 5.21 is a true and complete
list of all of the Intellectual Property used in the conduct of the Business.
SCG owns all right, title and interest in the Intellectual Property, free and
clear of all liens, encumbrances, claims, security interests and defects,
except for licenses granted by SCG to the PTR Subsidiaries, PTR, and the
Atlantic Subsidiaries. None of the Intellectual Property has been or is the
subject of any pending adverse claim, or to the best knowledge of SCG, any
threatened litigation or claim of infringement. SCG has not received any
notice contesting its right to use any Intellectual Property.
SECTION 5.22 BROKERS AND FINDERS. SCG has not employed any broker, finder or
other intermediary in connection with the transactions contemplated by this
Agreement which would be entitled to any brokerage, finder's or similar fee or
commission in connection with this Agreement or the transactions contemplated
hereby.
SECTION 5.23 INVESTMENT COMPANY ACT. SCG is not, and as of the Distribution
Date will not be, an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
SECTION 5.24 ADEQUACY OF SCG CONSIDERATION. Except for the Intellectual
Property described on Schedule 5.21, no part of the Business as conducted by
SCG is conducted by SCG through any entity other than an SCG Subsidiary.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF HOMESTEAD
SECTION 6.1 ORGANIZATION AND QUALIFICATION. Homestead is duly organized,
validly existing and in good standing under the laws of the State of Maryland
and has the requisite power, corporate or otherwise, and authority to own,
lease and operate its assets and properties and to carry on its business as it
is now being conducted and as it is proposed by it to be conducted. As of the
Merger Closing, Homestead will be qualified to do business and in good
standing in each jurisdiction in which the properties owned, leased or
operated by it or proposed to be owned, leased or operated or the nature of
the business conducted by it or proposed to be conducted by it makes such
qualification necessary, except where the failure to be so qualified and in
good standing would not reasonably be expected to have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other), results of operations or prospects of Homestead. True, accurate and
complete copies of each of the charter and Bylaws of Homestead, including all
amendments thereto, have heretofore been delivered to each of the other
parties.
SECTION 6.2 CAPITALIZATION.
(a) The authorized stock of Homestead consists of 250,000,000 shares of
Homestead Stock, of which 1,000 shares of Homestead Stock are issued and
outstanding as of the date hereof. All of the issued and outstanding shares of
Homestead Stock are validly issued, fully paid and nonassessable and free of
preemptive rights. As of the date hereof, Homestead has no subsidiaries.
(b) Except as contemplated by this Agreement and the Related Agreements, as
of the date hereof, there are no outstanding subscriptions, options, calls,
contracts, commitments, understandings, restrictions, arrangements,
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rights or warrants, including any right of conversion or exchange under any
outstanding security, instrument or other agreement that is presently
exercisable obligating Homestead to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of Homestead Stock or obligating
Homestead to grant, extend or enter into any such agreement or commitment;
provided, however, that the foregoing shall not apply to the adoption by
Homestead of any stock option plan providing for grants of options to
directors and employees nor to any grant of options thereunder nor shall the
foregoing apply to the adoption by Homestead of a shareholder rights plan and
any dividend of rights to acquire securities thereunder. There are no voting
trusts, proxies or other agreements or understandings to which Homestead is a
party or is bound with respect to the voting of any shares of Homestead Stock.
SECTION 6.3 ISSUANCE OF SECURITIES. The shares of Homestead Stock issuable
to PTR, Atlantic and SCG hereunder, when issued in accordance with the
provisions of this Agreement and the Related Agreements, will be duly and
validly authorized and issued and will be fully paid and nonassessable.
SECTION 6.4 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) Homestead has full power, corporate or otherwise, and authority to enter
into this Agreement and the Related Agreements and, subject to the Homestead
Required Statutory Approvals, to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the Related
Agreements, and the consummation by Homestead of the transactions contemplated
hereby and thereby, have been duly authorized by the Homestead Board and no
other corporate proceedings on the part of Homestead are necessary to
authorize the execution and delivery of this Agreement and the Related
Agreements and the consummation by Homestead of the transactions contemplated
hereby and thereby, except for the obtaining of Homestead Required Statutory
Approvals. This Agreement has been duly and validly executed and delivered by
Homestead, and, assuming the due authorization, execution and delivery hereof
by each other party hereto, constitutes a valid and binding agreement of
Homestead enforceable against Homestead in accordance with its terms, except
that such enforcement may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally, (ii) general equitable principles
and (iii) to the extent this Agreement or any of the Related Agreements
contains indemnification provisions for violations of federal or state
securities laws, as enforceability of such provisions may be limited under
federal and state securities laws.
(b) The execution and delivery of this Agreement and the Related Agreements
by Homestead to the extent it is a party thereto do not, and the consummation
by Homestead of the transactions contemplated hereby and thereby will not,
violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of its properties under any of the terms,
conditions or provisions of (i) Homestead's charter or Bylaws, (ii) subject to
obtaining Homestead Required Statutory Approvals, any statute, law, ordinance,
rule, regulation, judgment, decree, order, injunction, writ, permit or license
of any court or governmental authority applicable to Homestead or, to
Homestead's best knowledge, any of its properties, or (iii) any note, bond,
mortgage, indenture, deed of trust, license, franchise, permit, concession,
contract, lease or other instrument, obligation or agreement of any kind to
which Homestead is now a party or by which Homestead or any of its properties
may be bound, excluding from the foregoing clauses (ii) and (iii) such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of liens, security interests, charges or encumbrances that would
not, in the aggregate, be reasonably expected to have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other), results of operations or prospects of Homestead.
(c) Except for (i) any filings by the parties hereto that may be required by
the HSR Act, (ii) the filing of the Registration Statement, including the
Proxy Statement and Prospectus with the Commission pursuant to the Securities
Act and the Exchange Act, and the declaration of the effectiveness thereof by
the Commission and
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filings with various state blue sky authorities, (iii) any required filings by
Homestead pursuant to Section 2.1, (iv) any required filings with or approvals
from applicable federal or state environmental authorities and (v) any
required filings with or approvals from applicable federal or state housing
authorities (the filings and approvals referred to in clauses (i) through (v)
are collectively referred to as the "Homestead Required Statutory Approvals"),
to Homestead's best knowledge, no declaration, filing or registration with, or
notice to, or authorization, consent or approval of, any governmental or
regulatory body or authority is necessary for the execution and delivery of
this Agreement and the Related Agreements by Homestead or the consummation by
Homestead of the transactions contemplated hereby or thereby, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not, in
the aggregate, be reasonably expected to have a material adverse effect on the
business, operations, properties, assets, condition (financial or other),
results of operations or prospects of Homestead.
SECTION 6.5 REGISTRATION STATEMENT AND PROXY STATEMENT AND PROSPECTUS. None
of the information to be supplied by Homestead for inclusion or incorporation
by reference in (a) the Registration Statement or Atlantic's registration
statement in connection with the Atlantic IPO or (b) the Proxy Statement and
Prospectus will, in the case of the Proxy Statement and Prospectus or any
amendments thereof or supplements thereto, at the time of the mailing of the
Proxy Statement and Prospectus and any amendments thereof or supplements
thereto, and at the time of the meetings of shareholders of Atlantic and PTR
to be held in connection with the transactions contemplated by this Agreement
or, in the case of the Registration Statement or Atlantic's registration
statement in connection with the Atlantic IPO, as amended or supplemented, at
the time it becomes effective and in the case of the Registration Statement at
the time of such meeting of the shareholders of Atlantic and PTR, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Proxy Statement and Prospectus will comply as to form in all
material respects with all applicable laws, including the provisions of the
Securities Act and the Exchange Act (as applicable thereto) and the rules and
regulations promulgated thereunder, except that no representation is made by
Homestead with respect to information supplied by Atlantic or PTR or derived
therefrom for inclusion therein.
SECTION 6.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except in connection with
the negotiation, execution and delivery of this Agreement and the Related
Agreements, Homestead has not incurred any liabilities or obligations (whether
absolute, accrued, contingent or otherwise) of any nature (other than ordinary
and recurring operating expenses) except for any liabilities, obligations or
contingencies which (i) would not, in the aggregate, be reasonably expected to
have a material adverse effect on the business, operations, properties,
assets, condition (financial or other), results of operations or prospects of
Homestead or (ii) have been discharged or paid in full prior to the date
hereof.
SECTION 6.7 LITIGATION. Except as set forth on Schedule 6.7, there are no
claims, suits, actions or proceedings pending or, to the best of Homestead's
knowledge without any independent investigation, threatened, against, relating
to or affecting Homestead or any of its properties before or by any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator that could reasonably be expected, either alone or in the
aggregate with all such claims, actions or proceedings, to affect materially
and adversely the business, operations, properties, assets, condition
(financial or other), results of operations or prospects of Homestead.
Homestead is not subject to any judgment, decree, injunction, rule or order of
any court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator which prohibits or restricts the consummation of
the transactions contemplated hereby or would have a material adverse effect
on the business, operations, properties, assets, condition (financial or
other), results of operations or prospects of Homestead.
SECTION 6.8 NO VIOLATION OF LAW. To the knowledge of Homestead, Homestead is
not in violation of or has been given notice or been charged with any
violation of any law, statute, order, rule, regulation, ordinance or judgment
(including, without limitation, any applicable environmental law, ordinance or
regulation) of any governmental or regulatory body or authority, except for
violations which, in the aggregate, would not
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reasonably be expected to have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of Homestead. To the knowledge of Homestead, none of
Homestead's properties is in violation or has been given notice or been
charged with any violation of any law, statute, order, rule, regulation,
ordinance or judgment (including, without limitation, any applicable
environmental law, ordinance or regulation) of any governmental or regulatory
body or authority, except for violations which, in the aggregate, would not
reasonably be expected to have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of Homestead. No investigation or review of Homestead
by any governmental or regulatory body or authority is pending or, to the best
knowledge of Homestead without any independent investigation, threatened, nor
has any governmental or regulatory body or authority indicated to Homestead an
intention to conduct the same, other than, in each case, those the outcome of
which, as far as reasonably can be foreseen, would not reasonably be expected
to have a material adverse effect on the business, operations, properties,
assets, condition (financial or other), results of operations or prospects of
Homestead. Homestead has all permits, licenses, franchises, variances,
exemptions, orders and other governmental authorizations, consents and
approvals necessary to conduct its business as presently conducted and as
proposed by Homestead to be conducted, except for permits, licenses,
franchises, variances, exemptions, orders, authorizations, consents and
approvals the absence of which, alone or in the aggregate, would not
reasonably be expected to have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of Homestead.
SECTION 6.9 BROKERS AND FINDERS. Homestead has not employed any broker,
finder or other intermediary in connection with the transactions contemplated
by this Agreement which would be entitled to any brokerage, finder's or
similar fee or commission in connection with this Agreement or the
transactions contemplated hereby.
SECTION 6.10 INVESTMENT COMPANY ACT. Homestead is not, and as of the
Distribution Date will not be, an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
ARTICLE VII
CONDUCT OF BUSINESSES PENDING THE MERGER CLOSING
SECTION 7.1 CONDUCT OF BUSINESS BY ATLANTIC, PTR AND SCG. After the date
hereof and prior to the Merger Closing or earlier termination of this
Agreement, except as each other party shall otherwise agree in writing or as
may be otherwise specifically contemplated by this Agreement and the Related
Agreements, each of PTR, Atlantic and SCG shall, with respect to the Business
as conducted by it:
(a) conduct its Business in the ordinary and usual course of business and
consistent with past practice (subject to clause (c) below);
(b) use its respective best efforts to take, or cause to be taken, all
actions reasonably necessary to continue, in the ordinary and normal course
of business and consistent with past practice, with the development of, or
construction on, any of its properties which is a Development Property;
(c) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of, any additional shares of, or any options, warrants or
rights of any kind to acquire any shares of capital stock of a PTR
Subsidiary, Atlantic Subsidiary or SCG Subsidiary of any class or any debt
or equity securities convertible into or exchangeable for such stock or
amend or modify the terms and conditions of any of the foregoing;
(d) not (i) incur or become contingently liable with respect to any
additional indebtedness for borrowed money in respect of the PTR
Properties, Atlantic Properties or SCG Properties, (ii) take any action
which would jeopardize PTR's or Atlantic's status as a real estate
investment trust under the Code, (iii) sell any PTR Properties, Atlantic
Properties or SCG Properties, (iv) prepay or cause to be prepaid any
principal amount outstanding under any notes secured by any of the PTR
Mortgages or the Atlantic Mortgages (other than a prepayment by a PTR
Subsidiary to the extent that all costs to acquire or develop the PTR
Properties
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is less than the amount outstanding under any such notes immediately prior
to the Merger Closing), (v) purchase or acquire any properties for use as
extended-stay lodging facilities other than pursuant to any contract,
agreement with respect to an Acquisition Property or (vi) enter into any
contract, agreement, commitment or arrangement with respect to any of the
foregoing;
(e) use reasonable efforts to preserve intact its Business organization
and goodwill, keep available the services of its present officers, and
preserve the goodwill and business relationships with all lessees,
operators, suppliers, distributors, customers, and others having business
relationships with it and not engage in any action, directly or indirectly,
with the intent to adversely impact the transactions contemplated by this
Agreement;
(f) confer with one or more representatives of each other party when
requested to report on material operational matters and the general status
of ongoing operations of its respective business to be contributed to
Homestead pursuant to this Agreement; and
(g) maintain, in full force and effect, with all premiums due thereon
paid, policies of insurance covering all of the insurable tangible assets
and businesses of the Atlantic Subsidiaries and Atlantic Properties, the
PTR Subsidiaries and PTR Properties and the SCG Subsidiaries and SCG
Properties in amounts and as to foreseeable risks usually insured against
by persons operating similar businesses under valid and enforceable
policies of insurance issued by nationally recognized insurers.
SECTION 7.2 CONDUCT OF BUSINESS BY HOMESTEAD. After the date hereof and
prior to the Merger Closing or earlier termination of this Agreement, except
as each other party shall otherwise agree in writing or as may be otherwise
specifically contemplated by this Agreement or the Related Agreements,
Homestead shall:
(a) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of, any additional shares of, or any options, warrants or
rights of any kind to acquire any shares of stock of Homestead of any class
or any debt or equity securities convertible into or exchangeable for such
stock or amend or modify the terms and conditions of any of the foregoing
(provided that the foregoing shall not apply to the adoption by Homestead
of any stock option plan providing for grants of options to directors and
employees nor to any grant of options thereunder nor shall the foregoing
apply to the adoption by Homestead of a shareholders rights agreement and
any dividend of rights to acquire securities thereunder);
(b) except as described in clause (c) below, not incur or become
contingently liable with respect to any indebtedness for borrowed money or
enter into any contract or arrangement with respect thereto; and
(c) not enter into any contract, arrangement or understanding relating to
the purchase or acquisition of any property or any contract, arrangement or
understanding relating to the disposition of any PTR Property, Atlantic
Property or SCG Property; provided, however, that Homestead may purchase or
acquire properties for use as extended-stay lodging facilities with the
consent of each of the other parties hereto provided that the funds
therefor are loaned from SCG to Homestead at a rate of interest no greater
than the prime rate of interest as announced from time to time by Wells
Fargo Realty Advisors Funding, Incorporated at its Atlanta, Georgia office,
plus one-half of one percent.
ARTICLE VIII
ADDITIONAL AGREEMENTS
SECTION 8.1 ACCESS TO INFORMATION. Each of the parties shall afford to each
of the other parties hereto and their respective accountants, counsel,
financial advisors and other representatives (the "Representatives") full
access during normal business hours throughout the period prior to the Merger
Closing to all properties, books, contracts, commitments and records
(including, but not limited to, Tax Returns) of such party, as appropriate,
and, during such period, each shall furnish promptly to the other (a) a copy
of each report, schedule and other document filed or received pursuant to the
requirements of federal or state securities laws or filed with the Commission
in connection with the transactions contemplated by this Agreement, and (b)
such
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other information concerning their respective businesses, properties and
personnel which are the subject of this Agreement or the Related Agreements as
shall be reasonably requested; provided that no investigation pursuant to this
Section 8.1 shall affect any representation or warranty made herein or the
conditions to the obligations of the respective parties hereto to consummate
the transactions contemplated hereby or thereby. Each party shall promptly
advise each other party in writing of any change or the occurrence of any
event after the date of this Agreement or the Related Agreements having, or
which, insofar as can reasonably be foreseen, in the future may have, any
material adverse effect on the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of the
properties which are the subject of this Agreement or the Related Agreements.
SECTION 8.2 REGISTRATION STATEMENT AND PROXY STATEMENT AND PROSPECTUS. PTR,
Atlantic and Homestead shall file with the Commission as soon as is reasonably
practicable after the date hereof the Proxy Statement and Prospectus and shall
use all reasonable efforts to have the Registration Statement declared
effective by the Commission as promptly as practicable. PTR, Atlantic and
Homestead shall also take any action required to be taken under applicable
state blue sky or securities laws in connection with the Distribution. PTR,
Atlantic and Homestead shall promptly furnish to each other all information,
and take such other actions as may reasonably be requested in connection with
any action by any of them in connection with this Section and shall cooperate
with one another and use their respective best efforts to facilitate the
expeditious consummation of the transactions contemplated by this Agreement
and the Related Agreements.
SECTION 8.3 SHAREHOLDERS' APPROVAL. PTR shall promptly take such action as
may be required by its Declaration of Trust and applicable law, and Atlantic
shall promptly seek to obtain the requisite shareholder approval of this
Agreement and the transactions contemplated hereby, including, in the case of
PTR, amendments to PTR's Declaration of Trust necessary to consummate the
transactions contemplated hereby (the "PTR Shareholders' Approval" and
"Atlantic Shareholders' Approval," as appropriate), and PTR and Atlantic shall
each use their respective best efforts to obtain shareholder approval and
adoption of this Agreement and the transactions contemplated hereby as soon as
practicable following the date upon which the Registration Statement is
declared effective by the Commission. The PTR Board and the Atlantic Board
shall recommend to their respective shareholders the approval of this
Agreement and of the transactions contemplated by this Agreement; provided,
however, that prior to the meeting of shareholders of PTR or Atlantic, the PTR
Board or the Atlantic Board, as the case may be, may withdraw, modify or amend
such recommendation to the extent that the PTR Board or the Atlantic Board, as
the case may be, deems it necessary to do so in the exercise of its fiduciary
obligations to PTR or Atlantic, as the case may be, after being so advised by,
in the case of PTR, Munger, Tolles & Olson, and, in the case of Atlantic, King
& Spalding, or in either case, other nationally recognized counsel not having
an interest in the transactions contemplated by this Agreement or the Related
Agreements.
SECTION 8.4 AFFILIATE AGREEMENTS. PTR and Atlantic shall use their
respective best efforts to cause each principal executive officer, each
director, trustee and each other person who is an "affiliate," as that term is
used in paragraphs (c) and (d) of Rule 145 under the Securities Act, of PTR or
Atlantic to deliver to Homestead on or prior to the Distribution Date a
written agreement (an "Affiliate Agreement") to the effect that such person
will not offer to sell, sell or otherwise dispose of any Homestead Stock or
Homestead Warrants issued in the Distribution, except, in each case, pursuant
to an effective registration statement or in compliance with Rule 145, as
amended from time to time, or in a transaction which, in the opinion of legal
counsel satisfactory to Homestead, is exempt from the registration
requirements of the Securities Act.
SECTION 8.5 EXCHANGE. Homestead shall use its best efforts to effect, at or
before the Distribution Date, authorization for listing or quotation on an
Exchange upon official notice of issuance of the Homestead Stock and Homestead
Warrants to be issued in connection with the Distribution.
SECTION 8.6 EXPENSES. All costs and expenses incurred in connection with
this Agreement, the Related Agreements and the transactions contemplated
hereby and thereby shall be paid by the party incurring such expenses, except
that (a) those expenses incurred in connection with filing, printing and
distributing the Proxy
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Statement and Prospectus shall be paid 63.64%, 28.18% and 8.18% by PTR,
Atlantic and SCG, respectively, (b) and all costs relating to the Atlantic IPO
shall be paid by Atlantic, (c) all transfer, excise or other taxes payable by
reason of the transactions contemplated pursuant to Section 2.1 shall be borne
63.64%, 28.18% and 8.18% by PTR, Atlantic and SCG, respectively, and (d) the
filing fees payable in connection with any required filing under the HSR Act
shall be borne by SCG.
SECTION 8.7 AGREEMENT TO COOPERATE. Subject to the terms and conditions
herein provided, each of the parties hereto shall cooperate and use its
respective best efforts to take, or cause to be taken, all action and to do,
or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement and the Related Agreements,
including using its best efforts to identify and obtain all necessary or
appropriate waivers, consents and approvals to effect all necessary
registrations, filings and submissions (including, but not limited to,
Atlantic Required Statutory Approvals, PTR Required Statutory Approvals, SCG
Required Statutory Approvals, Homestead Required Statutory Approvals, any
filings under federal and state securities laws and the HSR Act and any
submissions requested by the Federal Trade Commission or Department of Justice
in connection therewith) and to lift any injunction or other legal bar to the
transactions contemplated hereby and thereby (and, in such case, to proceed
with such transactions as expeditiously as possible), subject, however, to
obtaining Atlantic Shareholders' Approval and PTR Shareholders' Approval.
SECTION 8.8 PUBLIC STATEMENTS. The parties shall consult with each other
prior to issuing any press release or any written public statement with
respect to this Agreement and the Related Agreements or the transactions
contemplated hereby and thereby and shall not issue any such press release or
written public statement prior to review and approval by the other parties,
except that prior review and approval shall not be required if, in the
reasonable judgment of the party seeking to issue such release or public
statement, prior review and approval would prevent the timely dissemination of
such release or announcement in violation of any applicable law, rule,
regulation or policy of an Exchange.
SECTION 8.9 CORRECTIONS TO THE PROXY STATEMENT AND PROSPECTUS AND
REGISTRATION STATEMENT. Prior to the date of Atlantic Shareholders' Approval
and PTR Shareholders' Approval, each of PTR, Atlantic, SCG and Homestead shall
correct promptly any information provided by it to be used specifically in the
Proxy Statement and Prospectus and Registration Statement or relating to it
and incorporated by reference into the Proxy Statement and Prospectus and
Registration Statement that shall have become false or misleading in any
material respect and shall take all steps necessary to file with the
Commission and have declared effective or cleared by the Commission any
amendment or supplement to the Proxy Statement and Prospectus or the
Registration Statement so as to correct the same and to cause the Proxy
Statement and Prospectus as so corrected to be disseminated to the
shareholders of Atlantic and PTR, in each case to the extent required by
applicable law.
SECTION 8.10 VOTING OF SHARES. SCG will vote all PTR Common Shares and all
shares of Atlantic Common Stock owned by it in favor of the approval and
adoption of this Agreement, the Related Agreements and the transactions
contemplated hereby and thereby; provided, however, that SCG shall not be
obligated to vote any PTR Common Shares or shares of Atlantic Common Stock in
favor of such matters in the event that the PTR Board or the Atlantic Board
withdraws, modifies or amends its recommendation pursuant to Section 8.3.
SECTION 8.11 ATLANTIC IPO REGISTRATION STATEMENT. Atlantic shall file with
the Commission as soon as is reasonably practicable after the date hereof a
registration statement relating to the Atlantic IPO and shall use all
reasonable efforts to have such registration statement declared effective by
the Commission as promptly as practicable. Atlantic shall also take any action
required to be taken under applicable state blue sky or securities laws in
connection with the Atlantic IPO. Atlantic shall promptly furnish to each
other party copies of all information filed by Atlantic with any governmental
authority in connection with the Atlantic IPO. In the event the Atlantic Board
determines that it is not reasonably practicable to file a registration
statement relating to the Atlantic IPO during the term of this Agreement, the
Atlantic Board will give written notice of such determination as promptly as
practicable to each of PTR, SCG and Homestead.
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SECTION 8.12 CONFIDENTIALITY
(a) As used herein, "Confidential Material" means, with respect to any party
hereto (the "Providing Party"), all information, whether oral, written or
otherwise, furnished to any other party hereto (the "Receiving Party") or such
Receiving Party's directors, trustees, officers, partners, Affiliates (as
defined in Rule 12b-2 under the Exchange Act), employees, agents or
representatives (collectively, "Representatives"), by the Providing Party and
all reports, analyses, compilations, studies and other material prepared by
the Receiving Party or its Representatives (in whatever form maintained,
whether documentary, computer storage or otherwise) containing, reflecting or
based upon, in whole or in part, any such information. The term "Confidential
Material" does not include information which (i) is or becomes generally
available, to the public other than as a result of a disclosure by the
Receiving Party, its Representatives or anyone to whom the Receiving Party or
any of its Representatives transmit any Confidential Material in violation of
this Agreement, (ii) is or becomes known or available to the Receiving Party
on a non-confidential basis from a source (other than the Providing Party or
one of its Representatives) who is not, to the knowledge of the Receiving
Party after reasonable inquiry, prohibited from transmitting the information
to the Receiving Party or its Representatives by a contractual, legal,
fiduciary or other obligation or (iii) is contained in the Registration
Statement.
(b) Subject to paragraph (c) below or except as required by applicable laws,
regulations or legal process, the Confidential Material will be kept
confidential and will not, without the prior written consent of the Providing
Party, be disclosed by the Receiving Party or its Representatives, in whole or
in part, and will not be used by the Receiving Party or its Representatives,
directly or indirectly, for any purpose other than in connection with this
Agreement, the Related Agreement and the transactions contemplated hereby or
thereby or evaluating, negotiating or advising with respect to such matters.
Moreover, each Receiving Party agrees to transmit Confidential Material to its
Representatives only if and to the extent that such Representatives need to
know the Confidential Material for purposes of such transactions and are
informed by such Receiving Party of the confidential nature of the
Confidential Material and of the terms of this Section. In any event, each
Receiving Party will be responsible for any actions by its Representatives
which are not in accordance with the provisions hereof.
(c) In the event that any Receiving Party, its Representatives or anyone to
whom such Receiving Party or its Representatives supply the Confidential
Material, are requested (by oral questions, interrogatories, requests for
information or documents, subpoena, civil or criminal investigative demand,
any informal or formal investigation by any government or governmental agency
or authority or otherwise in connection with legal process) to disclose any
Confidential Material, such Receiving Party agrees (i) to immediately notify
the Providing Party of the existence, terms and circumstances surrounding such
a request, (ii) to consult with the Providing Party on the advisability of
taking legal available steps to resist or narrow such request and (iii) if
disclosure of such information is required, to furnish only that portion of
the Confidential Material which, in the opinion of such Receiving Party's
counsel, such Receiving Party is legally compelled to disclose and to
cooperate with any action by the Providing Party to obtain an appropriate
protective order or other reliable assurance that confidential treatment will
be accorded the Confidential Material (it being agreed that the Providing
Party shall reimburse the Receiving Party for all reasonable out-of-pocket
expenses incurred by the Receiving Party in connection with such cooperation).
(d) In the event of the termination of this Agreement in accordance with its
terms, promptly upon request from a Providing Party, the Receiving Party
shall, except to the extent prohibited by applicable laws, regulations or
legal process, redeliver to the Providing Party or destroy all tangible
Confidential Material and will not retain any copies, extracts or other
reproductions thereof in whole or in part. Any such destruction shall be
certified in writing to the Providing Party by an authorized officer of the
Receiving Party supervising the same. Notwithstanding the foregoing, each
Receiving Party and one Representative designated by each Receiving Party
shall be permitted to retain one permanent file copy of each document
constituting Confidential Material to be used only in connection with
litigation arising from the transactions contemplated by this Agreement.
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SECTION 8.13 PERSONNEL.
(a) SCG Liability for Employee Obligations. SCG shall indemnify and hold
harmless Homestead for any and all obligations, debts or liabilities relating
to or arising from any Employee's employment with SCG or an SCG Subsidiary,
which obligation, debt or liability arises prior to the date of the Merger
Closing. SCG shall honor or cause its insurance carriers to honor all claims
for benefits by the Employees under each Employee Benefit Plan with respect to
claims incurred by the Employees or their covered dependents before the
Closing Date.
(b) Homestead Employee Benefit Plans. Homestead shall establish or cause to
be established employee benefit plans for the Employees that are substantially
similar to the SCG Employee Benefit Plans, which plans shall recognize service
of the Employees with Homestead and SCG and its affiliates to the same extent
such service has been recognized under the Employee Benefit Plans.
Notwithstanding the foregoing, (i) the medical plan established by Homestead
shall recognize any deductibles and co-payments Employees have made under the
SCG medical plan in the current plan year and (ii) the 401(k) plan established
by Homestead shall permit investment in Homestead common stock and, to the
extent permitted by applicable law, either accept rollovers of Employees'
accounts under the SCG 401(k) plan or merge the portion of the SCG 401(k) plan
that covers the Employees with and into the new plan.
(c) Homestead's Nonassumption of Liability. Except as provided in paragraph
(b) above, Homestead shall not incur any liability with respect to an Employee
Benefit Plan.
(d) WARN Act. SCG agrees to assume responsibility for giving all notices
required, if any, by the Worker Adjustment and Retraining Notification Act of
1988 (the "WARN Act") or any similar state law or regulation, to assume
liability for any alleged failure to give such notice, and to indemnify and
hold harmless Homestead and its affiliates for any and all claims asserted
under the WARN Act or any similar state law or regulation because of a "plant
closing" or a "mass layoff" occurring on or before the Merger Closing date.
For purposes of this Agreement, the Merger Closing date is the "effective
date" for purposes of the WARN Act.
SECTION 8.14 EXHIBITS AND SCHEDULES.
(a) Immediately prior to the Merger Closing, each of PTR, Atlantic and SCG
shall update Exhibits II, III and IV, as appropriate, to reflect changes in
the status of the properties identified by such parties as Acquisition
Properties, Development Properties and Operating Properties.
(b) Each party hereto shall deliver to each other party hereto at least two
days prior to the Merger Closing date updated schedules to this Agreement
reflecting any changes in such party's scheduled items occurring from the date
hereto to the Merger Closing date.
SECTION 8.15 REIMBURSEMENT OF PURSUIT COSTS. Set forth on Schedule 8.15
hereto is a complete list of all properties identified by PTR, Atlantic or SCG
as to which PTR, Atlantic or SCG, as the case may be, has expended funds in
furtherance of the potential acquisition thereof. Set forth opposite the name
of each such property is the aggregate amount expended by PTR, Atlantic or
SCG, as the case may be, for such purpose as of the date hereof. Upon the
acquisition by Homestead of any of such properties, Homestead shall reimburse
PTR, Atlantic or SCG, as the case may be, all such costs. Homestead further
agrees that any and all additional expenses in furtherance of the acquisition
of such properties shall be borne exclusively by Homestead.
SECTION 8.16 PRORATIONS. Homestead and SCG hereby agree that all of the
items referred to in clauses (i) through (iii) of this Section 8.16 relating
to the operation of the Business as conducted by SCG or an SCG Subsidiary will
be prorated as of the Merger Closing, with SCG liable or entitled to the
benefit of such items to the extent such items relate to any time period up to
and including the date of the Merger Closing, and Homestead liable or entitled
to the benefit of such items to the extent such items relate to periods
subsequent to the date of the Merger Closing: (i) REIT management and property
management fees and expenses relating to
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the operation of the Business; (ii) travel costs and expenses of attorneys,
accountants and other professional related to the operation of the Business;
and (iii) fees and expenses relating to any contract, arrangement or
understanding involving the purchase of goods or the provision of services
relating to the operation of the Business. At the Merger Closing, Homestead
will pay to SCG and SCG will pay to Homestead the amount in cash, if any, due
under this Section 8.16.
ARTICLE IX
CONDITIONS
SECTION 9.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
obligation of each party to effect the transactions contemplated hereby and by
the Related Agreements shall be subject to the fulfillment at or prior to the
Merger Closing of the following conditions:
(a) Each other party shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Merger Closing and the representations and warranties of each such
other party shall be true and correct in all material respects on and as of
(i) the date made and (ii) the Merger Closing with the same effect as if
made on that date; and each other party shall have received a certificate
of an executive officer of such party to that effect;
(b) This Agreement, the Related Agreements and the transactions
contemplated hereby and thereby shall have been approved by the requisite
vote of shareholders of PTR and Atlantic;
(c) The PTR Board and the Atlantic Board shall have each declared the
dividend contemplated by the Distribution;
(d) The Registration Statement shall have become effective in accordance
with the provisions of the Securities Act, and no stop order suspending
such effectiveness shall have been issued and remain in effect and no
proceeding for that purpose shall have been initiated or threatened by the
Commission;
(e) Each of PTR and Atlantic shall have received either a favorable
opinion of Mayer, Brown & Platt (in form and substance reasonably
satisfactory to PTR and Atlantic) or a favorable ruling from the Internal
Revenue Service to the effect that the mergers described in Section 2.1
will constitute a transaction subject to Section 351 or the reorganization
provisions of the Code and related provisions;
(f) No preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the
transactions contemplated by this Agreement and the Related Agreements
shall have been issued and remain in effect (each party agreeing to use its
best efforts to have any such injunction, order or decree lifted);
(g) The waiting period applicable to the consummation of the Merger
Closing and the Distribution under the HSR Act shall have expired or been
terminated;
(h) All governmental consents, orders and approvals legally required for
the consummation of the transactions contemplated by this Agreement and the
Related Agreements shall have been obtained and be in effect at the Merger
Closing (including Atlantic Required Statutory Approvals, PTR Required
Statutory Approvals, SCG Required Statutory Approvals and Homestead
Required Statutory Approvals), and all consents, orders and approvals
legally required for the consummation of the transactions contemplated by
this Agreement and the Related Agreements shall have become final orders;
(i) The Homestead Warrants shall have been issued pursuant to the Warrant
Purchase Agreement;
(j) Atlantic shall have contributed $18,620,245 (which amount shall be
adjusted in accordance with the formula set forth in Schedule 9.1(j)) in
cash to Atlantic Homestead Village and shall not have encumbered or
otherwise disposed of such funds;
(k) The registration statement relating to the Atlantic IPO, if filed
with the SEC, shall have been declared effective by the SEC or withdrawn by
Atlantic or, if such registration statement has not been filed, Atlantic
shall have given the notice required by Section 8.11;
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(l) Each of PTR, Atlantic and SCG shall have forgiven all indebtedness
owing to it from each PTR Subsidiary, Atlantic Subsidiary and SCG
Subsidiary, respectively, other than any indebtedness secured by a PTR
Mortgage or an Atlantic Mortgage, as the case may be; and
(m) Each of the parties shall have acquired all material consents
required from third parties necessary to consummate the transactions
contemplated by this Agreement.
SECTION 9.2 CONDITIONS TO OBLIGATIONS OF ATLANTIC. Unless waived by
Atlantic, the obligation of Atlantic to effect the transactions contemplated
hereby and by the Related Agreements shall be subject to the fulfillment at or
prior to the Merger Closing of the following additional conditions:
(a) Atlantic shall have received an opinion from Munger, Tolles & Olson,
counsel to the PTR Special Committee, dated as of the Merger Closing,
substantially in the form set forth in Exhibit V hereto;
(b) Atlantic shall have received an opinion from Mayer, Brown & Platt,
counsel to SCG and Homestead, dated as of the Merger Closing, substantially
in the form set forth in Exhibit VI hereto;
(c) The Special Committee of the Atlantic Board (the "Atlantic Special
Committee") shall have received from an investment banking firm
satisfactory to the Atlantic Special Committee, a written opinion to the
effect that, as of the date of the Proxy Statement and Prospectus, the
consideration to be paid to Atlantic in the transactions contemplated by
this Agreement and by the Related Agreements is fair, from a financial
point of view, to Atlantic shareholders (other than SCG), and such opinion
shall not have been withdrawn, revoked or modified;
(d) The Homestead Stock and Homestead Warrants to be issued in connection
with the Distribution shall have been authorized for listing or quotation
on an Exchange upon official notice of issuance;
(e) Homestead shall have executed and delivered to Atlantic the Funding
Commitment Agreement substantially in the form set forth in Exhibit VII
hereto;
(f) Homestead shall have executed and delivered to Atlantic the Atlantic
Investor Agreement substantially in the form set forth in Exhibit VIII
hereto;
(g) Homestead shall have executed and delivered to Atlantic the
Protection of Business Agreement substantially in the form of Exhibit XI
hereto;
(h) Atlantic shall have received "comfort letters" from the independent
public accountants of PTR, SCG and Homestead, dated as of the effective
date of the Registration Statement, with respect to financial information
of PTR, SCG and Homestead included or incorporated by reference in the
Registration Statement in form and substance reasonably satisfactory to
Atlantic and customary in scope and substance for "comfort letters"
delivered by independent public accountants in connection with registration
statements and proxy statements;
(i) No governmental consent, order or approval legally required for the
consummation of the transactions contemplated by this Agreement and by the
Related Agreements shall have any terms which in the reasonable judgment of
Atlantic, when taken together with the terms of all such consents, orders
or approvals, would materially impair the value of the Homestead Stock and
Homestead Warrants to be received by shareholders of Atlantic as a result
of the transactions contemplated hereby and thereby, and no governmental
authority shall have promulgated any statement, rule or regulation which,
when taken together with all such promulgations, would materially impair
the value of the Homestead Stock and Homestead Warrants to be received by
shareholders of Atlantic as a result of the transactions contemplated
hereby and thereby; and
(j) Atlantic shall have received an opinion from Mayer, Brown & Platt
that the performance of this Agreement will not jeopardize the status of
Atlantic as a "real estate investment trust" under the Code.
SECTION 9.3 CONDITIONS TO OBLIGATIONS OF PTR. Unless waived by PTR, the
obligation of PTR to effect the transactions contemplated hereby and by the
Related Agreements shall be subject to the fulfillment at or prior to the
Merger Closing of the additional following conditions:
(a) PTR shall have received an opinion from King & Spalding, counsel to
the Atlantic Special Committee, dated as of the Merger Closing,
substantially in the form set forth in Exhibit IX hereto;
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(b) PTR shall have received an opinion of Mayer, Brown & Platt, counsel
to SCG and Homestead, dated as of the Merger Closing, substantially in the
form set forth in Exhibit VI hereto;
(c) The Special Committee of the PTR Board (the "PTR Special Committee")
shall have received from an investment banking firm satisfactory to the PTR
Special Committee, an opinion to the effect that, as of the date of the
Proxy Statement and Prospectus, the aggregate consideration to be received
by PTR in exchange for the contribution by PTR to Homestead of the PTR
Properties and the agreement by PTR to enter into the Funding Commitment
Agreement was fair to PTR, and such opinion shall not have been withdrawn,
revoked or modified;
(d) The Homestead Stock and Homestead Warrants to be issued in connection
with the Distribution shall have been authorized for listing or quotation
on an Exchange upon official notice of issuance;
(e) Homestead shall have executed and delivered to PTR the Funding
Commitment Agreement substantially in the form set forth in Exhibit VII
hereto;
(f) Homestead shall have executed and delivered to PTR the PTR Investor
Agreement substantially in the form set forth in Exhibit VIII hereto;
(g) Homestead shall have executed and delivered to PTR the Protection of
Business Agreement substantially in the form of Exhibit XI hereto;
(h) PTR shall have received "comfort letters" from the independent public
accountants of Atlantic, SCG and Homestead, dated as of the effective date
of the Registration Statement, with respect to financial information of
Atlantic, SCG and Homestead included or incorporated by reference in the
Registration Statement in form and substance reasonably satisfactory to PTR
and customary in scope and substance for "comfort letters" delivered by
independent public accountants in connection with registration statements
and proxy statements;
(i) No governmental consent, order or approval legally required for the
consummation of the transactions contemplated by this Agreement and by the
Related Agreements shall have any terms which in the reasonable judgment of
PTR, when taken together with the terms of all such consents, orders or
approvals, would materially impair the value of the Homestead Stock and
Homestead Warrants to be received by shareholders of PTR as a result of the
transactions contemplated hereby and thereby, and no governmental authority
shall have promulgated any statute, rule or regulation which, when taken
together with all such promulgations, would materially impair the value of
the Homestead Stock and Homestead Warrants to be received by shareholders
of PTR as a result of the transactions contemplated hereby and thereby; and
(j) PTR shall have received an opinion from Mayer, Brown & Platt that the
performance of this Agreement will not jeopardize the status of PTR as a
"real estate investment trust" under the Code.
SECTION 9.4 CONDITIONS TO OBLIGATIONS OF SCG. Unless waived by SCG, the
obligation of SCG to effect the transactions contemplated hereby and by the
Related Agreements shall be subject to the fulfillment at or prior to the
Merger Closing of the additional following conditions:
(a) SCG shall have received an opinion from Munger, Tolles & Olson,
counsel to the PTR Special Committee, dated as of the Merger Closing,
substantially in the form set forth in Exhibit V hereto;
(b) SCG shall have received an opinion from King & Spalding, counsel to
the Atlantic Special Committee, dated as of the Merger Closing,
substantially in the form set forth in Exhibit IX hereto;
(c) SCG shall have received "comfort letters" from the independent public
accountants of Atlantic, PTR and Homestead, dated as of the effective date
of the Registration Statement, with respect to financial information of
Atlantic, PTR and Homestead included or incorporated by reference in the
Registration Statement in form and substance reasonably satisfactory to SCG
and customary in scope and substance for "comfort letters" delivered by
independent public accountants in connection with registration statements
and proxy statements;
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(d) Homestead shall have executed and delivered to SCG an Investor
Agreement substantially in the form set forth in Exhibit X hereto;
(e) Homestead shall have executed and delivered to SCG an Administrative
Services Agreement in a form to be agreed upon between SCG and Homestead
and not inconsistent with the description thereof as described in the Proxy
Statement and Prospectus;
(f) Homestead shall have executed and delivered to SCG the Protection of
Business Agreement substantially in the form of Exhibit XI hereto; and
(g) No governmental consent, order or approval legally required for the
consummation of the transactions contemplated by this Agreement shall have
any terms which in the reasonable judgment of SCG, when taken together with
the terms of all such consents, orders or approvals, would materially
impair the value of the Homestead Stock and Homestead Warrants to be
received by SCG in connection with the transactions contemplated hereby and
thereby, and no governmental authority shall have promulgated any statute,
rule or regulation which, when taken together with all such promulgations,
would materially impair the value of the Homestead Stock and Homestead
Warrants to be received by SCG in connection with the transactions
contemplated hereby and thereby.
SECTION 9.5 CONDITIONS TO OBLIGATIONS OF HOMESTEAD. Unless waived by
Homestead, the obligation of Homestead to effect the transactions contemplated
hereby and by the Related Agreements shall be subject to the fulfillment at or
prior to the Merger Closing of the additional following conditions:
(a) Homestead shall have received an opinion from Munger, Tolles & Olson,
counsel to the PTR Special Committee, dated as of the Merger Closing,
substantially in the form set forth in Exhibit V hereto;
(b) Homestead shall have received an opinion from King & Spalding,
counsel to the Atlantic Special Committee, dated as of the Merger Closing,
substantially in the form set forth in Exhibit IX hereto;
(c) Homestead shall have received an opinion from Mayer, Brown & Platt,
counsel to SCG, dated as of the Merger Closing, substantially in the form
set forth in Exhibit VI hereto;
(d) The Affiliate Agreements required to be delivered by affiliates of
PTR and Atlantic pursuant to Section 8.4 shall have been furnished as
required by Section 8.4;
(e) Each of PTR and Atlantic shall have executed and delivered to
Homestead a Funding Commitment Agreement substantially in the form set
forth in Exhibit VII hereto;
(f) Each of PTR and Atlantic shall have executed and delivered to
Homestead an Investor Agreement substantially in the form set forth in
Exhibit VIII hereto;
(g) Homestead shall have received "comfort letters" from the independent
public accountants of Atlantic, PTR and SCG, dated as of the effective date
of the Registration Statement, with respect to financial information of
Atlantic, PTR and SCG included or incorporated by reference in the
Registration Statement in form and substance reasonably satisfactory to
Homestead and customary in scope and substance for "comfort letters"
delivered by independent public accountants in connection with registration
statements and proxy statements;
(h) SCG shall have executed and delivered to Homestead an Investor
Agreement substantially in the form set forth in Exhibit X hereto;
(i) SCG shall have executed and delivered to Homestead an Administrative
Services Agreement substantially in a form to be agreed upon between SCG
and Homestead and not inconsistent with the description thereof as
described in the Proxy Statement and Prospectus;
(j) Each of Atlantic, PTR and SCG shall have executed and delivered to
Homestead the Protection of Business Agreement substantially in the form
set forth in Exhibit XI hereto;
(k) SCG shall have executed and delivered to Homestead the Escrow
Agreement substantially in the form set forth in Exhibit XII hereto;
(l) SCG shall have executed and delivered to SCG Homestead Village
Incorporated, the Assignment of Registration substantially in the form set
forth in Exhibit XIII hereto; and
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(m) No governmental consent, order or approval legally required for the
consummation of the transactions contemplated by this Agreement and by the
Related Agreements shall have any terms which in the reasonable judgment of
Homestead, when taken together with the terms of all such consents, orders
or approvals, would materially impair the value to Homestead of the
transactions contemplated hereby and thereby, and no governmental authority
shall have promulgated any statute, rule or regulation which, when taken
together with all such promulgations, would materially impair to Homestead
the value of the transactions contemplated hereby and thereby.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
SECTION 10.1 TERMINATION. This Agreement may be terminated at any time prior
to the Merger Closing, whether before or after approval by the shareholders of
PTR and Atlantic:
(a) by mutual consent of each of the parties hereto;
(b) by any of the parties hereto, so long as such party has not breached
any of its obligations hereunder (except for such breaches as are
immaterial), if the transactions contemplated hereby shall not have been
consummated on or before December 31, 1996 (the "Termination Date");
(c) unilaterally by any of the parties hereto (i) if any of the other
parties (A) fails to perform any covenant or agreement in this Agreement in
any material respect, and does not cure the failure, in all material
respects within 15 business days after the terminating party delivers
written notice of the alleged failure or (B) fails to fulfill or complete a
condition to the obligations of the terminating party (which condition is
not waived) by reason of a breach by the non-terminating party of its
obligations hereunder or (ii) if any condition to the obligations of the
terminating party is not satisfied (other than by reason of a breach by
that party of its obligations hereunder), and it reasonably appears that
the condition cannot be satisfied prior to the Termination Date;
(d) unilaterally by any of PTR, SCG or Homestead if Atlantic, through the
Atlantic Board or Atlantic Special Committee, either fails to recommend to
Atlantic's shareholders the approval of this Agreement and the transactions
contemplated hereby or withdraws, modifies or amends such recommendation;
and
(e) unilaterally by any of Atlantic, SCG or Homestead if PTR, through the
PTR Board or PTR Special Committee, either fails to recommend to PTR's
shareholders the approval of this Agreement and the transactions
contemplated hereby or withdraws, modifies or amends such recommendation.
SECTION 10.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement, as provided in Section 10.1, this Agreement shall forthwith become
void and there shall be no further obligation on the part of any party hereto
or their respective officers or directors or trustees (except as set forth in
this Section 10.2 and in Sections 8.6 and 8.12 and Article XI, which shall
survive such termination). Nothing in this Section 10.2 shall relieve any
party from liability for any breach of this Agreement. Upon any termination
pursuant to Section 10.1(d), Atlantic shall pay to each of the other parties
all of the documented, out-of-pocket expenses incurred by such parties after
the date hereof in connection with the transactions contemplated by this
Agreement. Upon any termination pursuant to Section 10.1(e), PTR shall pay to
each of the other parties all of the documented, out-of-pocket expenses
incurred by such parties after the date hereof in connection with the
transactions contemplated by this Agreement.
SECTION 10.3 AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto and in
compliance with applicable law; provided, however, this Agreement may not be
amended in any material respect following the PTR Shareholders' Approval or
the Atlantic Shareholders' Approval.
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SECTION 10.4 WAIVER. At any time prior to the Merger Closing, the parties
hereto may (a) extend the time for the performance of any of the obligations
or other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE XI
SURVIVAL AND REMEDY; INDEMNIFICATION
SECTION 11.1 INDEMNIFICATION. Each party hereto agrees to indemnify (each an
"Indemnifying Party") each other party hereto (other than SCG) and each of
their respective affiliates (other than SCG) (each an "Indemnified Party" and
collectively, the "Indemnified Parties") against, and agrees to hold it and
them harmless from, any and all liabilities, losses, costs, damages, penalties
or expenses (including, without limitation, reasonable attorneys' fees and
expenses and costs of investigation and litigation) (collectively, "Losses")
incurred or suffered by an Indemnified Party arising out of or in connection
with any breach of, or inaccuracy in, any of the representations and
warranties or agreements of the Indemnifying Party under this Agreement, as
such representations and warranties may be updated pursuant to Section 8.14.
SECTION 11.2 LIMITATION OF INDEMNIFICATION. An Indemnified Party shall not
be entitled to indemnification under this Article XI until the aggregate of
all Losses with respect to which such Indemnified Party would otherwise be
entitled to indemnification under this Article XI exceed $200,000, in which
event the Indemnified Party shall be entitled to all such Losses including
such $200,000; provided, however, that none of the indemnification obligations
of PTR, Atlantic and SCG hereunder (other than for Losses arising in
connection with a breach of the representations and warranties set forth in
Sections 3.7, 4.7, and 5.7, as applicable) shall exceed the fair market value
of the securities of Homestead received by them pursuant to Section 2.1 of
this Agreement; and provided, further, that the indemnification obligations of
Homestead hereunder shall not exceed in the aggregate the fair market value as
of all Homestead Stock and Homestead Warrants issued in connection herewith or
in connection with any of the Related Agreements. For purposes of this Section
11.2, the fair market value of a share of Homestead Stock and a Homestead
Warrant shall be based upon the first sale price of a share of Homestead Stock
and a Homestead Warrant, respectively, once public trading in such security
commences.
SECTION 11.3 NOTICE OF CLAIMS; ASSUMPTION OF DEFENSE. The Indemnified Party
shall give prompt notice to the Indemnifying Party, in accordance with the
terms of Section 12.1, of the assertion of any claim, or the commencement of
any suit, action or proceeding by any party in respect of which indemnity may
be sought hereunder, specifying with reasonable particularity the basis
therefor and giving the Indemnifying Party such information with respect
thereto as the Indemnifying Party may reasonably request. The Indemnifying
Party may, at its own expense, (a) participate in and, (b) upon notice to the
Indemnified Party and upon the Indemnifying Party's written agreement that the
Indemnified Party is entitled to indemnification pursuant to Section 11.1 for
Losses arising out of such claim, suit, action or proceeding, at any time
during the course of any such claim, suit, action or proceeding, assume the
defense thereof; provided that (x) the Indemnifying Party's counsel is
reasonably satisfactory to the Indemnified Party; and (y) the Indemnifying
Party shall thereafter consult with the Indemnified Party upon its reasonable
request from time to time with respect to such claim, suit, action or
proceeding; provided, however, that the Indemnified Party shall have the right
to retain its own counsel, with the reasonable fees and expenses to be paid by
the Indemnifying Party if the Indemnified Party reasonably believes that
representation of it by the counsel retained by the Indemnifying Party would
be inappropriate due to actual or potential differing interest between the
Indemnified Party and any other party represented by such counsel in such
proceeding. If the Indemnifying Party assumes such defense, the Indemnified
Party shall have the right (but not the duty) to participate in the defense
thereof and to employ counsel, at its own expense, separate from the counsel
employed by the Indemnifying Party. Whether or not the Indemnifying Party
chooses to defend or prosecute any such claim, suit, action or proceeding, all
of the parties hereto shall cooperate in the defense or prosecution thereof.
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SECTION 11.4 SETTLEMENT OR COMPROMISE. Any settlement or compromise made or
caused to be made by the Indemnified Party or the Indemnifying Party, as the
case may be, of any claim, suit, action or proceeding of the kind referred to
in Section 11.3 shall also be binding upon the Indemnifying Party or the
Indemnified Party, as the case may be, in the same manner as if a final
judgment or decree had been entered by a court of competent jurisdiction in
the amount of such settlement or compromise. No party shall settle or
compromise any such claim, suit, action or proceeding without the prior
written consent of the other party, which shall not be unreasonably withheld.
SECTION 11.5 FAILURE OF INDEMNIFYING PARTY TO ACT. In the event that the
Indemnifying Party does not elect to assume the defense of any claim, suit,
action or proceeding within a reasonable time of being notified by the
Indemnified Party, then any failure of the Indemnified Party to defend or to
participate in the defense of any such claim, suit, action or proceeding or to
cause the same to be done, shall not relieve the Indemnifying Party of its
obligations hereunder.
SECTION 11.6 SURVIVAL. The indemnification provided by this Article XI shall
be a continuing right to indemnification and shall survive the closing of the
transactions contemplated hereby and the expiration or termination of this
Agreement for a period of two years following the Merger Closing, and the
Indemnified Party shall be entitled to bring an action thereon only if the
Indemnified Party has given the Indemnifying Party written notice within such
two-year period.
ARTICLE XII
GENERAL PROVISIONS
SECTION 12.1 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, sent via a
recognized overnight courier with delivery confirmed in writing or sent via
facsimile to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a)If to PTR, to:
Security Capital Pacific Trust
7777 Market Center Avenue
El Paso, Texas 79912
Attention: C. Ronald Blankenship
Fax: (915) 877-3301
with a copy to:
Munger, Tolles & Olson
355 South Grand Avenue, 35th Floor
Los Angeles, California 90071
Attention: R. Gregory Morgan
Fax: (213) 687-3702
(b)If to Atlantic, to:
Security Capital Atlantic Incorporated
Six Piedmont Center, Sixth Floor
Atlanta, Georgia 30305
Attention: James C. Potts
Fax: (404) 233-2379
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with a copy to:
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
Attention: Alan J. Prince
Fax: (404) 572-5046
(c)If to SCG, to:
Security Capital Group Incorporated
125 Lincoln Avenue, Suite 300
Santa Fe, New Mexico 87501
Attention: Jeffrey A. Klopf
Fax: (505) 988-8920
with a copy to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Attention: Edward J. Schneidman
Fax: (312) 701-7711
(d)If to Homestead, to:
Homestead Village Properties Incorporated
125 Lincoln Avenue, Suite 300
Santa Fe, New Mexico 87501
Attention: David C. Dressler, Jr.
Fax: (505) 982-2925
with a copy to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Attention: Edward J. Schneidman
Fax: (312) 701-7711
SECTION 12.2 INTERPRETATION. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 12.3 MISCELLANEOUS. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof and thereof; (b) shall not be assigned by operation of law or
otherwise; and (c) shall be governed in all respects, including validity,
interpretation and effect, by the laws of the State of Maryland (without
giving effect to the provisions thereof relating to conflicts of law).
SECTION 12.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
SECTION 12.5 PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
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SECTION 12.6 LIMITATION OF LIABILITY. Any obligation or liability whatsoever
of PTR which may arise at any time under this Agreement or any obligation or
liability which may be incurred by it pursuant to any other instrument,
transaction or undertaking contemplated hereby shall be satisfied, if at all,
out of PTR's assets only. No such obligation or liability shall be personally
binding upon, nor shall resort for the enforcement thereof be had to, the
property of any of its shareholders, trustees, officers, employees or agents,
regardless of whether such obligation or liability is in the nature of
contract, tort or otherwise.
SECTION 12.7 NO PRESUMPTION AGAINST DRAFTER. Each of the parties hereto have
jointly participated in the negotiation and drafting of this Agreement. In the
event of an ambiguity or a question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by each of the parties
hereto and no presumptions or burdens of proof shall arise favoring any party
by virtue of the authorship of any of the provisions of this Agreement.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
SECURITY CAPITAL PACIFIC TRUST
/s/ C. Ronald Blankenship
By: ________________________________________
C. Ronald Blankenship
Chairman
SECURITY CAPITAL ATLANTIC INCORPORATED
/s/ James C. Potts
By: ________________________________________
James C. Potts
Co-Chairman
SECURITY CAPITAL GROUP INCORPORATED
/s/ Jeffrey A. Klopf
By: ________________________________________
Jeffrey A. Klopf
Senior Vice President
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
/s/ David C. Dressler, Jr.
By: ________________________________________
David C. Dressler, Jr.
Chairman
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ANNEX II
OPINION OF GOLDMAN, SACHS & CO.
TO BE FILED BY AMENDMENT
II-1
<PAGE>
ANNEX II
OPINION OF J.P. MORGAN SECURITIES INC.
TO BE FILED BY AMENDMENT
II-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Seventh of the Registrant's charter provides as follows with respect
to indemnification of its directors and officers:
"The Corporation shall have the power, to the maximum extent permitted by
Maryland law in effect from time to time, to obligate itself to indemnify
and to pay or reimburse reasonable expenses in advance of final disposition
of a proceeding to (a) any individual who is a present or former director
or officer of the Corporation or (b) any individual who, while a director
or officer of the Corporation and at the request of the Corporation, serves
or has served as a director, officer, partner or trustee of another
corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise from and against any claim or liability which such
person may incur by reason of his or her status as a present or former
director or officer of the Corporation. The Corporation shall have the
power, with the approval of its Board of Directors, to provide such
indemnification and advancement of expenses to a person who served a
predecessor of the Corporation in any of the capacities described in (a) or
(b) above and to any employee or agent of the Corporation or a predecessor
of the Corporation."
Article Eleventh of the Registrant's charter provides as follows with
respect to limitation of liability of its directors and officers:
"To the maximum extent that Maryland law in effect from time to time
permits limitation of the liability of directors and officers of a Maryland
corporation, no director or officer of the Corporation shall be liable to
the Corporation or its stockholders for money damages. Neither the
amendment nor repeal of this Article ELEVENTH, nor the adoption or
amendment of any other provision of the charter or Bylaws of the
Corporation inconsistent with this Article ELEVENTH, shall apply to or
affect in any respect the applicability of the preceding sentence with
respect to any act or failure to act which occurred prior to such
amendment, repeal or adoption."
Article XII of the Registrant's Bylaws provides as follows with respect to
indemnification of its directors and officers:
"To the maximum extent permitted by Maryland law in effect from time to
time, the Corporation, without requiring a preliminary determination of the
ultimate entitlement to indemnification, shall indemnify and shall pay or
reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any individual who is a present or former director or
officer of the Corporation and who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director of the Corporation and at the request of the Corporation, serves
or has served another corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Corporation may,
with the approval of its Board of Directors, provide such indemnification
and advance for expenses to a person who served a predecessor of the
Corporation in any of the capacities described in (a) or (b) above and to
any employee or agent of the Corporation or a predecessor of the
Corporation."
"Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the Bylaws or charter of the
Corporation inconsistent with this Article, shall apply to or affect in any
respect the applicability of the preceding paragraph with respect to any
act or failure to act which occurred prior to such amendment, repeal or
adoption."
II-1
<PAGE>
In addition, the Registrant has entered into indemnity agreements with each
of its officers and Directors which provide for reimbursement of all expenses
and liabilities of such officer or Director, arising out of any lawsuit or
claim against such officer or Director due to the fact that he was or is
serving as an officer or Director, except for such liabilities and expenses
(a) the payment of which is judicially determined to be unlawful, (b) relating
to claims under Section 16(b) of the Securities Exchange Act of 1934, or (c)
relating to judicially determined criminal violations.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS.
(a) Refer to Index to Exhibits.
(b) Refer to Index to Financial Statements included as part of the
Prospectus.
(c) Refer to Annex II and Annex III to the Prospectus.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes: (1) to file, during any period
in which offers or sales are being made, a post-effective amendment to this
registration statement: (i) to include any prospectus required by section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereto) which, individually or
in the aggregate, represent a fundamental change in the information set forth
in the registration statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement; (2) that, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof; and (3) to remove from registration
by means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of any
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities being offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
The registrant undertakes that every prospectus: (1) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-2
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF SANTA FE, STATE OF NEW MEXICO ON THE 16TH DAY OF JULY, 1996.
Homestead Village Properties
Incorporated
/s/ Jeffrey A. Klopf
By: _________________________________
Jeffrey A. Klopf
Senior Vice President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ David C. Dressler, Jr.* Chairman (Principal
____________________________________ Executive Officer) and
David C. Dressler, Jr. Director
/s/ Robert E. Clark* Vice President (Principal
____________________________________ Financial and Accounting
Robert E. Clark Officer)
/s/ C. Ronald Blankenship* Director
____________________________________
C. Ronald Blankenship
/s/ John P. Frazee, Jr.* Director
____________________________________
John P. Frazee, Jr.
</TABLE>
/s/ Jeffrey A. Klopf July 16,
1996
*By: _____________________
Jeffrey A. Klopf
Attorney-in-fact
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DOCUMENT DESCRIPTION NUMBER
------- -------------------- ----------
<C> <S> <C>
2 Merger and Distribution Agreement, dated as of May 21,
1996, by and among Security Capital Pacific Trust,
Security Capital Atlantic Incorporated, Security Capital
Group Incorporated and Homestead Village Properties
Incorporated (Included as Annex I to this Registration
Statement)
* 2.1 Form of Articles of Merger
* 3.1 Articles of Amendment and Restatement to the Homestead
Charter
* 3.2 Amended and Restated Bylaws
* 4.1 Form of Warrant Agreement by and between Homestead
Village Properties Incorporated and The First National
Bank of Boston, as warrant agent
* 4.2 Rights Agreement, dated as of May 16, 1996, between
Homestead Village Properties Incorporated and The First
National Bank of Boston, as rights agent
+ 4.3 Form of Amended and Restated Promissory Note
+ 4.4 Form of Amended and Restated Promissory Note by Homestead
Village Properties Incorporated in favor of Security
Capital Pacific Trust
+ 4.5 Form of Amended and Restated Promissory Note by Homestead
Village Limited Partnership in favor of Security Capital
Pacific Trust
+ 4.6 Form of Amended and Restated Promissory Note by Homestead
Village Properties Incorporated in favor of Security
Capital Atlantic Incorporated
+ 4.7 Form of Amended and Restated Promissory Note by Homestead
Village Limited Partnership in favor of Security Capital
Atlantic Incorporated
+ 4.8 Form of Promissory Note
+ 5.1 Opinion of Mayer, Brown & Platt
+ 8 Opinion of Mayer, Brown & Platt
*10.1 Form of Protection of Business Agreement by and among
Security Capital Atlantic Incorporated, Security Capital
Pacific Trust, Security Capital Group Incorporated and
Homestead Village Properties Incorporated
*10.2 Form of Investor Agreement by and between Homestead
Village Properties Incorporated and Security Capital
Group Incorporated
+10.3 Form of Funding Commitment Agreement between Homestead
Village Properties Incorporated and Security Capital
Pacific Trust
+10.4 Form of Funding Commitment Agreement between Homestead
Village Properties Incorporated and Security Capital
Atlantic Incorporated
+10.5 Form of Administrative Services Agreement by and between
Homestead Village Properties Incorporated and Security
Capital Group Incorporated
*10.6 Warrant Purchase Agreement, dated as of May 21, 1996,
among Homestead Village Properties Incorporated, Security
Capital Atlantic Incorporated, Security Capital Pacific
Trust and Security Capital Group Incorporated
*10.7 Form of Investor and Registration Rights Agreement
between Homestead Village Properties Incorporated and
Security Capital Atlantic Incorporated
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DOCUMENT DESCRIPTION NUMBER
------- -------------------- ----------
<C> <S> <C>
*10.8 Form of Investor and Registration Rights Agreement
between Homestead Village Properties Incorporated and
Security Capital Pacific Trust
10.9 Form of Escrow Agreement among Homestead Village
Properties Incorporated, Security Capital Group
Incorporated, and State Street Bank and Trust Company, as
escrow agent
15 Letter regarding unaudited interim financial information.
+21 Subsidiaries of Homestead Village Properties Incorporated
+23.1 Consent of Mayer, Brown & Platt (included in Exhibits 5.1
and 8)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Ernst & Young, LLP, Dallas, Texas
23.4 Consent of Ernst & Young, LLP West Palm Beach, Florida
*24 Power of Attorney
*27 Financial Data Schedule
*99.1 Security Capital Pacific Trust Form of Proxy
</TABLE>
- --------
*Previously filed.
+To be filed by amendment.
<PAGE>
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement"), is made in Boston, Massachusetts,
this _____ day of _________, 1996, among Homestead Village Properties
Incorporated, a Maryland corporation ("Homestead"), Security Capital Group
Incorporated, a Maryland corporation ("SCG"), and State Street Bank and Trust
Company, a national banking association, as Escrow Agent (in such capacity, the
"Escrow Agent").
WHEREAS, Homestead and SCG have entered into a Merger and Distribution
Agreement, dated as of May 21, 1996 (the "Merger Agreement"), pursuant to which,
among other things, SCG will be entitled to receive certain shares of common
stock, $0.01 par value per share (the "Common Stock"), of Homestead;
WHEREAS, a portion of the shares of Common Stock (the "Escrowed Shares")
issuable to SCG are payable based upon the projected value of certain expected
cash flows contributed in connection with the Merger Agreement by SCG (or one of
its subsidiaries) to Homestead with respect to certain properties of Homestead
which are not currently operational (individually, a "Property" and
collectively, the "Properties");
WHEREAS, pursuant to the Merger Agreement, the Escrowed Shares shall be
delivered into the escrow created hereby;
WHEREAS, the number of Escrowed Shares and the pro rata share (the "Pro
Rata Share") of such Escrowed Shares attributable to each Property are set forth
on Schedule I hereto;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
Section 1. Escrow.
Section 1.1 Creation of Escrow. Homestead has delivered, concurrently with
the execution of this Agreement, to the Escrow Agent, to be held in escrow
pursuant hereto, a stock certificate, registered in the name of the Escrow Agent
(as nominee for the beneficial owners of such shares), representing the Escrowed
Shares and the Escrow Agent has delivered a receipt therefor to SCG. The parties
hereto agree and acknowledge that the certificate relating to the Escrowed
Shares is registered in the name of the Escrow Agent merely as a matter of
administrative convenience pending the determination pursuant to this Agreement
of the number of Escrowed Shares to be delivered to SCG or returned to Homestead
by the Escrow Agent.
Section 1.2 Disbursement of Escrowed Shares. On January 1, 2000, or the
first business day thereafter, the Escrow Agent shall (i) deliver to The First
National Bank of Boston,
<PAGE>
the transfer agent for the Common Stock (the "Transfer Agent"), a certificate
representing the Escrowed Shares which have not been the subject of a prior SCG
Funding Certificate, with instructions for the Transfer Agent to cancel such
shares on the records of the Transfer Agent and (ii) deliver to Homestead the
Pro Rata Share of the Proceeds (as defined below) with respect to such Escrowed
Shares.
Section 1.3 Notice by SCG. In the event that SCG from time to time
delivers to the Escrow Agent a certificate (a copy of which shall also be
delivered concurrently to Homestead) on or before December 31, 1999 (the
"Termination Date") (each, an "SCG Funding Certificate"), which certificate
shall be substantially in the form of Exhibit A hereto, shall be signed by a
senior officer of SCG and shall (i) set forth that Security Capital Pacific
Trust ("PTR") or Security Capital Atlantic Incorporated ("Atlantic") has
advanced funds to Homestead (or one of its subsidiaries) with respect to a
Property or Properties pursuant to a funding commitment agreement between PTR
and Homestead (or one of its subsidiaries) or between Atlantic and Homestead (or
one of its subsidiaries) (each, a "Funding Commitment Agreement"), (ii) identify
the Property or Properties as to which such funding has been made and (iii) the
number of Escrowed Shares to which each such Property relates, then the Escrow
Agent shall distribute the Escrowed Shares in accordance with this Section 1.3
as follows:
(a) if, within 10 days after receiving an SCG Funding Certificate, the
Escrow Agent shall have received a certificate (the "Hold-Back
Certificate") signed by a senior officer of Homestead, which certificate
shall be substantially in the form of Exhibit B hereto, shall be delivered
concurrently to SCG and shall state (i) the Property or Properties, if any,
identified in the SCG Funding Certificate as to which Homestead believes
were improperly included therein and (ii) the number of Escrowed Shares, if
any, as to which a dispute exists (the "Disputed Shares"), then the Escrow
Agent shall, within 5 business days of receipt of the Hold-Back
Certificate, (A) deliver to the Transfer Agent the certificate representing
the Escrowed Shares with instructions for the Transfer Agent to issue new
certificates (x) to SCG representing, subject to Section 3.3 hereof, the
total number of Escrowed Shares set forth in the Hold-Back Certificate as
to which no dispute exists, and (y) to the Escrow Agent certificates
representing the Disputed Shares and the remaining Escrowed Shares (other
than the shares released to SCG in the previous provision (x)) subject to
this Agreement, (B) deliver to SCG the Pro Rata Share of the Proceeds
relating to the Escrowed Shares as to which no dispute exists and (C)
unless otherwise instructed in writing signed by each of SCG and Homestead,
surrender the Disputed Shares, together with a Pro Rata Share of the
Proceeds relating to such Disputed Shares, to a court for determination of
proper disposition in accordance with the procedures as set forth in
Section 1.4 hereof.
(b) if, within 10 days after receiving an SCG Funding Certificate, the
Escrow Agent shall not have received from Homestead a Hold-Back
Certificate, then the Escrow Agent shall not accept thereafter a Hold-Back
Certificate with respect to the Properties and Escrowed Shares subject to
such SCG Funding Certificate, and shall, within 5
-2-
<PAGE>
business days after the expiration of such 10-day period (i) deliver to the
Transfer Agent the certificate representing the Escrowed Shares with
instructions for the Transfer Agent to issue (A) to SCG a new certificate,
subject to Section 3.3 hereof, in the name of SCG representing the Escrowed
Shares which were the subject of the SCG Funding Certificate and (B)
deliver to the Escrow Agent a certificate representing the remaining
Escrowed Shares and (ii) deliver to SCG a Pro Rata Share of the Proceeds
relating to such Escrowed Shares.
Section 1.4 Interpleader. The Escrow Agent shall, within 60 calendar days
upon receipt of a certificate representing any Disputed Shares, interplead such
shares to any state or Federal court of competent jurisdiction located in
Suffolk County, State of Massachusetts, and such court shall determine whether
such shares are to be delivered to or withheld from SCG pursuant to the terms of
this Agreement. Upon interpleading such shares, SCG and Homestead agree to file
a joint motion permitting the Escrow Agent to be dismissed with prejudice and
all fees and costs of the Escrow Agent, including reasonable attorneys' fees,
shall be paid by Homestead on such date.
2. Substitution of Properties. Homestead may, from time to time prior to
the Termination Date, amend Schedule I to this Agreement to substitute
properties for existing Properties. To amend Schedule I to substitute
Properties, Homestead shall deliver written notice (the "Substitution Notice"),
which notice shall certify that such substitution was made in accordance with
the provisions of a Funding Commitment Agreement, to the Escrow Agent and shall
concurrently furnish a copy of such Substitution Notice to SCG. The Substitution
Notice shall set forth the name of the Property or Properties proposed to be
removed from Schedule I and the name of the Property or Properties proposed to
be substituted therefor. The Property or Properties so substituted shall succeed
to the respective number of Escrowed Shares attributable to the Property or
Properties for which they are substituted; under no circumstances shall any
party hereto be entitled to change or in any way modify the number of Escrowed
Shares to which a Property or Properties relate.
Section 3. Rights of Parties in Respect of Escrowed Shares.
Section 3.1 Distributions. All dividends or other distributions, if any,
and any proceeds thereon (such dividends, distributions and proceeds,
collectively referred to herein as "Proceeds") paid by Homestead in respect of
the Escrowed Shares and delivered to the Escrow Agent shall be retained by the
Escrow Agent for the benefit of SCG with respect to those Escrowed Shares
ultimately issued to SCG pursuant to Section 1.3 and for the benefit of
Homestead with respect to those Escrowed Shares to be returned to Homestead
pursuant to Section 1.2. The Escrow Agent shall invest Proceeds, in accordance
with the written instructions of Homestead, in short-term bank time or demand
deposits, short-term certificates of deposit, short-term United States
government securities or other short-term United States government guaranteed
money instruments and any other investment permitted under Rule 15c2-4 under the
Securities Exchange Act of 1934, as amended; provided, however, that such
-3-
<PAGE>
investments shall be made in a manner permitting necessary Proceeds to be
available for transfer in accordance with this Agreement.
Section 3.2 Voting. The Escrow Agent shall vote the Escrowed Shares
proportionately in accordance with the vote of all other shareholders of
Homestead as provided by Homestead to the Escrow Agent in writing. In the event
that the Escrow Agent shall not have received written instructions from
Homestead with respect to all or any portion of the Escrowed Shares, the Escrow
Agent shall not vote such Escrowed Shares.
Section 3.3 Fractional Shares. SCG shall have no right to receive, and
the Escrow Agent shall not distribute, fractional Escrowed Shares. In the event
that the distribution of any Escrowed Shares would, but for this Section 3.3,
result in SCG receiving fractional shares of Common Stock, (i) the Escrow Agent
shall instruct the Transfer Agent to issue a certificate in SCG's name for the
number of Escrowed Shares rounded down to the nearest whole share, (ii) the
Escrow Agent shall instruct the Transfer Agent to issue an additional
certificate representing all fractional share interests and the Escrow Agent
shall thereupon deliver such certificate to Homestead, (iii) Homestead shall
deliver to the Escrow Agent an amount of cash representing the aggregate value
of such fractional share interests (based on the last sale price of a share of
Common Stock on the date of the SCG Funding Certificate), and (iv) the Escrow
Agent shall deliver to SCG cash or a check representing SCG's fractional share
interest.
Section 4. General Terms.
Section 4.1 Definitions. All capitalized terms used but not otherwise
defined herein shall have the meanings ascribed thereto in the Merger Agreement.
Section 4.2 Concerning the Escrow Agent.
(a) If at any time the Escrow Agent shall receive conflicting
notices, claims, demands or instructions or if for any reason it shall be
unable in good faith to determine the party or parties entitled to receive
all or any portion of the Escrowed Shares, the Escrow Agent may refuse to
deliver the Escrowed Shares to the Transfer Agent and shall interplead the
Escrowed Shares as described in Section 1.4 hereof.
(b) Homestead and SCG, jointly and severally, shall indemnify and
hold harmless the Escrow Agent for losses and expenses it incurs, including
reasonable attorneys' fees, in connection with any dispute hereunder or
under the Merger Agreement. This indemnity shall include, but not be
limited to, all costs incurred in connection with any interpleader which
the Escrow Agent may enter into regarding this Agreement; provided,
however, that if it is ultimately determined that SCG is not entitled to
any Escrowed Shares that were interplead, SCG shall reimburse Homestead for
all such costs. In no instance shall the Escrow Agent be bound by the terms
of the Merger Agreement, the Funding Commitment Agreement or any other
agreement by or among the parties to this
-4-
<PAGE>
Agreement or charged with knowledge of the terms thereof or have any duty
to comply with or determine compliance with the terms thereof.
(c) Homestead and SCG, jointly and severally, agree to assume any and
all obligations imposed now or hereafter by any applicable tax law with
respect to the payment of Escrowed Shares under this Agreement, and to
indemnify and hold the Escrow Agent harmless from and against any taxes,
additions of late payment, interest, penalties and other expenses, that may
be assessed against the Escrow Agent on any such payment or other
activities under this Agreement. Homestead and SCG undertake to instruct
the Escrow Agent in writing with respect to the Escrow Agent's
responsibility for withholding and other taxes, assessments or other
governmental charges, certifications and governmental reporting in
connection with its acting as Escrow Agent under this Agreement. Homestead
and SCG, jointly and severally, agree to indemnify and hold the Escrow
Agent harmless from any liability on account of taxes, assessments or other
governmental charges, including without limitation the withholding or
deduction or the failure to withhold or deduct same, and any liability for
failure to obtain proper certifications or to properly report to
governmental authorities, to which the Escrow Agent may be or become
subject in connection with or which arises out of this Agreement, including
costs and expenses (including reasonable legal fees and expenses), interest
and penalties. Notwithstanding the foregoing, no distributions will be made
unless the Escrow Agent is supplied with an original, signed W-9 form or
its equivalent prior to distribution.
(d) In performing any of its duties under this Agreement, neither the
Escrow Agent nor any of its directors, officers or employees shall be
liable to the parties hereto for any losses which may be incurred by such
other parties as a result of the Escrow Agent or any of its directors,
officers or employees so acting (or failing to act as a result of a
dispute) and further, the Escrow Agent shall not incur any liability with
respect to any action taken or omitted to be taken in reliance upon advice
of legal counsel or in reliance upon any document delivered in connection
herewith which the Escrow Agent in good faith believes to be valid,
including any of the certificates described herein and included as Exhibits
hereto. In no event shall the Escrow Agent be liable for indirect,
punitive, special or consequential damages.
(e) It is understood and agreed that the duties of the Escrow Agent
are purely ministerial in nature and that it shall not be liable for any
error of judgment, fact or law or any act done or omitted to be done except
for its own willful misconduct or gross negligence. With respect to this
Agreement, the Escrow Agent shall not be required to determine whether an
event or condition hereunder has occurred, been met or satisfied, or as to
whether a provision of this Agreement has been complied with or as to
whether sufficient evidence of the event or condition or compliance with
the provision has been furnished to it. No action in compliance with the
terms of this Agreement, including interpleader, shall subject the Escrow
Agent to any claim, liability or obligation
-5-
<PAGE>
whatsoever, even if it shall be found that such action was improper or
incorrect provided only that the Escrow Agent shall not have been guilty of
willful misconduct or gross negligence in making such determination. The
recitals of this Agreement shall not be deemed to be made or represented to
by the Escrow Agent.
(f) Homestead and SCG acknowledge and agree that the Escrow Agent (i)
shall not be responsible for any of the agreements referred to herein but
shall be obligated only for the performance of such duties as are
specifically set forth in this Agreement, (ii) shall not be obligated to
take any legal or other action hereunder which might in its judgment
involve any expense or liability unless it shall have been furnished with
acceptable indemnification; (iii) may rely on and shall be protected in
acting or refraining from acting upon any written notice, instruction,
instrument, statement, request or document furnished to it hereunder and
believed by it to be genuine and to have been signed or presented by the
proper person, and shall have no responsibility for determining the
accuracy thereof, and (iv) may consult counsel satisfactory to it,
including house counsel, and the opinion of such counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in accordance with
the opinion of such counsel.
(g) The Escrow Agent shall have no more or less responsibility or
liability on account of any action or omission of any book-entry depository
or subescrow agent employed by the Escrow Agent than any such book-entry
depository or subescrow agent has to the Escrow Agent, except to the extent
that such action or omission of any book-entry depository or subescrow
agent was caused by the Escrow Agent's own gross negligence or bad faith.
(h) All representations and indemnifications contained in this
Agreement shall survive the termination of this Agreement.
(i) For purposes of this Agreement a "business day" is a day on which
the Escrow Agent is open for business and shall not include a Saturday,
Sunday, or legal holiday. Notwithstanding anything to the contrary in this
Agreement, no action shall be required of the Escrow Agent, Homestead, or
SCG except on a business day and in the event an action is required on a
day which is not a business day, such action shall be required to be
performed on the next succeeding day which is a business day.
(j) All action by the parties hereto shall be performed at the office
of the Escrow Agent.
Section 4.3 Reliance on Instructions. Notwithstanding anything to the
contrary contained in this Agreement, the Escrow Agent shall take any and all
actions as directed by both Homestead and SCG, provided such direction is set
forth in a writing signed by both parties.
-6-
<PAGE>
Section 4.4 Assumed Validity of Documents. The Escrow Agent shall not be
responsible for the sufficiency or accuracy of the form, execution, validity or
genuineness of documents deposited hereunder, or of any endorsement thereon, or
for any lack of endorsement thereon, or for any description therein, nor shall
the Escrow Agent be responsible or liable in any respect on the account of the
identity, authority or right of the persons executing or delivering or
purporting to execute or deliver any such document or endorsement.
Section 4.5 Fees. The Escrow Agent shall be entitled to receive a
reasonable fee for its services and to be reimbursed by Homestead for the
out-of-pocket costs and expenses, including legal fees, incurred by the Escrow
Agent in connection with the preparation of this Agreement and in connection
with the ordinary administration of the escrow, including charges for the
acceptance and disbursement of the Escrowed Shares, including legal fees and
expenses incurred in connection with the administration of the escrow created
hereby which are in excess of its compensation for normal services hereunder,
including without limitation, payment of any legal fees incurred by the Escrow
Agent in connection with resolution of any claim by any party hereunder. The
schedule of fees is set forth in Exhibit C. Homestead shall pay all fees and
expenses of the Escrow Agent under this Agreement.
Section 4.6 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, sent via a
recognized overnight courier with delivery confirmed in writing or sent via
facsimile to the parties at the following addresses (or such other address for a
party as shall be specified by like notice):
If to Homestead:
Homestead Village Properties Incorporated
125 Lincoln Avenue, Suite 300
Santa Fe, New Mexico 87501
Attention: David C. Dressler, Jr.
Facsimile: (505) 982-2925
If to SCG:
Security Capital Group Incorporated
125 Lincoln Avenue
Santa Fe, New Mexico 87501
Attention: Jeffrey A. Klopf
Facsimile: (505) 988-8920
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<PAGE>
If to the Escrow Agent:
State Street Bank and Trust Company
Corporate Trust Department
P.O. Box 778
Boston, Massachusetts 02102-0778
Attention: John F. Sugden
Facsimile: (617) 664-5724
4.7 Assignment. A party to this Agreement may not, without the prior
written consent of the other parties hereto, directly or indirectly, sell,
transfer, distribute, assign, pledge (other than a bona fide pledge to a lender
for borrowed money for which the lender has recourse to SCG; it being understood
that in no event shall the Escrowed Shares be delivered to any such pledgee
except in accordance with Section 1 hereof), hypothecate, encumber, grant a
security interest in, or grant, issue, sell or convey any option, warrant or
right to acquire or otherwise dispose of this Agreement or any interest herein,
including the Escrowed Shares other than by operation of law; provided, however,
that notwithstanding anything to the contrary contained herein, no consent of
any party shall be required under this Agreement in connection with any merger
to which Homestead is a party.
4.8 Resignation. The Escrow Agent may at any time resign as Escrow Agent
hereunder by giving thirty (30) days' prior written notice of resignation to
Homestead and SCG. Prior to the effective date of the resignation as specified
in such notice, Homestead will issue to the Escrow Agent a written instruction
authorizing redelivery of the Escrow Funds to a bank or trust company that it
selects subject to the reasonable consent of Homestead. Such bank or trust
company shall have a principal office in Boston, Massachusetts, and shall have
capital, surplus and undivided profits in excess of $50,000,000. If, however,
Homestead shall fail to name such a successor Escrow Agent within twenty (20)
days after the notice of resignation from the Escrow Agent, SCG shall be
entitled to name such successor Escrow Agent. If no successor Escrow Agent is
named by Homestead or SCG, the Escrow Agent may apply to a court of competent
jurisdiction for appointment of a successor Escrow Agent.
4.9 Termination. This Agreement shall terminate and be of no further
force and effect upon and after the date that final distribution of the Escrowed
Shares has been made hereunder and all amounts to be distributed have been
distributed or the Escrow Agent has interplead all Escrowed Shares and has been
dismissed as contemplated by Section 1.4 hereof. The provision of Section 4.2
shall survive the termination of this Agreement.
4.10 Applicable Law. This Agreement shall be governed by and interpreted,
construed and enforced in accordance with the internal laws of the Commonwealth
of Massachusetts without reference to its conflict of laws rules.
-8-
<PAGE>
4.11 CONSENT TO JURISDICTION. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT
LOCATED IN SUFFOLK COUNTY, STATE OF MASSACHUSETTS, AS LONG AS SUCH VENUE IS
PROPER, IN ANY SUIT, ACTION OR PROCEEDING BROUGHT BY ANY PARTY HERETO WITH
RESPECT TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND FURTHER
AGREES THAT NO MOTION RELATING TO FORUM NON CONVENIENS SHALL BE RAISED. IN ANY
SUCH ACTION OR PROCEEDING, HOMESTEAD AND SCG HEREBY ABSOLUTELY AND IRREVOCABLY
WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT, DECLARATION OR OTHER PROCESS
AND HEREBY ABSOLUTELY AND IRREVOCABLY AGREE THAT THE SERVICE THEREOF MAY BE MADE
BY CERTIFIED OR REGISTERED FIRST-CLASS MAIL DIRECTED TO HOMESTEAD AND SCG, AS
THE CASE MAY BE, AT THEIR RESPECTIVE ADDRESSES IN ACCORDANCE WITH SECTION 4.6
HEREOF.
4.12 Counterparts. One or more counterparts of this Agreement may be
signed by the parties, each of which shall be an original but all of which
together shall constitute one and the same instrument.
4.13 Invalidity of Provisions. If any provision of this Agreement is or
becomes invalid, illegal or unenforceable in any respect, the validity and
enforceability of the remaining provisions contained herein shall not be
affected thereby.
4.14 Headings. The headings in this Agreement are for convenience of
reference only and shall not be deemed to alter or affect the meaning or
interpretation of the provisions hereof.
4.15 Amendment. This Agreement may be amended, modified or supplemented
but only in writing signed by each of Homestead, the Escrow Agent and SCG. No
course of conduct shall constitute a waiver of any of the terms and conditions
of this Agreement, unless such waiver is specified in writing, and then only to
the extent so specified. A waiver of any of the terms and conditions of this
Agreement on one occasion shall not constitute a waiver of the other terms of
this Agreement, or of such terms and conditions on any other occasion. This
Agreement shall be binding upon the respective parties hereto and their heirs,
executors, successors and assigns.
4.16 Force Majeure. Neither Homestead nor SCG nor the Escrow Agent shall
be responsible for delays or failures in performance resulting from acts beyond
its control. Such acts shall include but not be limited to acts of God, strikes,
lockouts, riots, acts of war, epidemics, governmental regulations superimposed
after the fact, fire, communication line failures, power failures, earthquakes
or other disasters.
4.17 Reproduction of Documents. This Agreement and all documents relating
thereto, including, without limitation, (a) consents, waivers and modifications
which may hereafter be
-9-
<PAGE>
executed, and (b) certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm,
optical disk, micro-card, miniature photographic or other similar process. The
parties agree that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproductions of such reproduction shall likewise be admissible in
evidence.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers effective as of the day and year
first above written.
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
By: ____________________________
David C. Dressler, Jr.
Chairman
SECURITY CAPITAL GROUP INCORPORATED
By: ____________________________
Jeffrey A. Klopf
Senior Vice President
STATE STREET BANK AND TRUST COMPANY,
as Escrow Agent
By: ____________________________
Name:
Title:
-11-
<PAGE>
SCHEDULE I
Escrowed Shares
---------------
Property Shares Pro Rata Share
- -------- ------ --------------
<PAGE>
EXHIBIT A
Form of SCG Funding Certificate
-------------------------------
Pursuant to Section 1.3 of that certain Escrow Agreement (the "Escrow
Agreement"), dated as of ___________, 1996 among Homestead Village Properties
Incorporated, a Maryland corporation ("Homestead"), Security Capital Group
Incorporated, a Maryland corporation ("SCG"), and State Street Bank and Trust
Company, a national banking association, as Escrow Agent, the undersigned, being
a senior officer of SCG, hereby certifies that (capitalized terms used but not
expressly defined herein shall have the meanings attributed thereto in the
Escrow Agreement):
1. As of the date hereof, PTR and/or Atlantic has advanced funds to
Homestead with respect to each Property identified below and set forth opposite
such Property are the number of Escrowed Shares and Pro Rata Share to which such
Property relates:
Property Escrowed Shares Pro Rata Share
- -------- --------------- --------------
2. The undersigned is concurrently herewith delivering a copy of this
certificate to Homestead in accordance with the terms of the Escrow Agreement.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this ____ day
of ______________, 199_.
SECURITY CAPITAL GROUP INCORPORATED
By: _________________________
Its: _________________________
Received by:
STATE STREET BANK AND TRUST COMPANY
as Escrow Agent
this _______ day of _____________, 199__
By:________________________
Name:______________________
Title:_____________________
<PAGE>
EXHIBIT B
Form of Hold-back Certificate
-----------------------------
Pursuant to Section 1.3 of that certain Escrow Agreement (the "Escrow
Agreement), dated as of ____________, 1996 among Homestead Village Properties
Incorporated, a Maryland corporation ("Homestead"), Security Capital Group
Incorporated, a Maryland corporation ("SCG"), and State Street Bank and Trust
Company, a national banking association, as Escrow Agent, the undersigned, being
a senior officer of Homestead, hereby certifies that (capitalized terms used but
not expressly defined herein shall have the meanings attributed thereto in the
Escrow Agreement):
1. As of the date hereof, Homestead believes that the Properties set forth
below were improperly included on the SCG Funding Certificate dated ___________,
199_ and that the number of Escrowed Shares set forth opposite such Properties
constitute the "Disputed Shares":
Property Escrowed Shares Pro Rata Share
- -------- --------------- --------------
2. The number of Escrowed Shares (and the Properties to which they relate)
to be released to SCG by the Escrow Agent is as follows:
Property Escrowed Shares Pro Rata Share
- -------- --------------- --------------
3. The undersigned is concurrently herewith delivering a copy of this
certificate to SCG in accordance with the terms of the Escrow Agreement.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this ____ day
of ______________, 199_.
HOMESTEAD VILLAGE PROPERTIES INCORPORATED
By: _________________________
Its: _______________________
Received by:
STATE STREET BANK AND TRUST COMPANY
as Escrow Agent
this _______ day of _____________, 199__
By:__________________________
Name:______________________
Title:_______________________
<PAGE>
EXHIBIT C
Fee Schedule
------------
Acceptance Fee $500
- --------------
Includes review of documents and set up of account. Payable at closing.
Annual Administration Fee $3,000
- -------------------------
Includes administrative services performed according to documents. Payable
annually in advance for each year or part thereof in which State Street Bank and
Trust Company acts as Escrow Agent.
Out-of-Pocket Expenses Billed at cost
- ----------------------
Escrow Transaction Charges Included in Annual
- -------------------------- Administration Fee
Legal Counsel Fees Billed at cost
- ------------------
<PAGE>
EXHIBIT 15
Security Capital Pacific Trust
El Paso, Texas
Ladies and Gentlemen:
Re: Registration Statement No. 333-4455 on Form S-4
With respect to the subject registration statement, we acknowledge our
awareness of the incorporation therein of our AU 722 report dated April 23,
1996 related to our review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant within the meaning of sections 7 and 11 of the Act.
Very truly yours,
KPMG Peat Marwick LLP
Chicago, Illinois
July 16, 1996
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Trustees and Shareholders of Security Capital Pacific Trust
The Board of Directors and Shareholders of Security Capital Atlantic
Incorporated
The Board of Directors and Shareholders of Security Capital Group
Incorporated:
With respect to the accompanying Amendment No. 1 to the registration
statement on Form S-4 of Homestead Village Properties Incorporated which
includes a prospectus related to Homestead Village Properties Incorporated and
a proxy statement related to Security Capital Pacific Trust, we consent to:
(i) incorporation by reference of our report dated January 31, 1996,
except as to note 12, which is as of February 23, 1996, relating to the
balance sheets of Security Capital Pacific Trust as of December 31, 1995
and 1994, the related statements of earnings, shareholders' equity, and
cash flows for each of the years in the three-year period ended December
31, 1995, and the related schedule as of December 31, 1995, which report
appears in the December 31, 1995 annual report on Form 10-K of Security
Capital Pacific Trust;
(ii) the use of our report dated May 1, 1996 on the combined balance
sheets of the PTR-Homestead Village Group as of December 31, 1994 and 1995,
the related combined statements of operations, owners' equity and cash
flows for each of the years in the three-year period ended December 31,
1995 and the related combined schedule as of December 31, 1995, which
report is included herein;
(iii) the use of our report dated May 1, 1996 on the combined balance
sheet of the Atlantic-Homestead Village Group as of December 31, 1995, the
related combined statements of operations, owners' equity and cash flows
for the period from April 3, 1995 (date of formation) through December 31,
1995 and the related combined schedule as of December 31, 1995, which
report is included herein;
(iv) the use of our report dated May 1, 1996 on the combined balance
sheets of the SCG-Homestead Village Group as of December 31, 1994 and 1995
and the related combined statements of operations, shareholder's equity
(deficit) and cash flows for each of the years in the three-year period
ended December 31, 1995, which report is included herein, and;
(v) the reference to our firm under the heading "Independent Public
Accountants and Experts" in the registration statement.
KPMG Peat Marwick LLP
Chicago, Illinois
July 16, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 21, 1996, in the Prospectus of Homestead
Village Properties Incorporated that is made a part of the Amendment No. 1 to
the Registration Statement (Form S-4 No. 333-4455) of Homestead Village
Properties Incorporated.
Ernst & Young LLP
Dallas, Texas
July 16, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Independent
Certified Public Accountants and Experts" and to the use of (a) our report
dated January 26, 1996, except for Note 3, as to which the date is February 5,
1996, with respect to the financial statements at December 31, 1995 and 1994
and for each of the years ended December 31, 1995 and 1994 and the period
October 26, 1993 (inception) through December 31, 1993 and schedule of
Security Capital Atlantic Incorporated ("ATLANTIC"), (b) our reports dated
March 5, 1996 with respect to the Combined Historical Summaries of Gross
Income and Direct Operating Expenses of the Group A and Group B Properties of
ATLANTIC and (c) our report dated April 26, 1996 with respect to the Combined
Historical Summary of Gross Income and Direct Operating Expenses of the Group
C Properties of ATLANTIC, all of which are included in the Information
Statement of ATLANTIC that is made a part of the Amendment No. 1 to the
Registration Statement (Form S-4 No. 333-4455) and the Prospectus of Homestead
Village Properties Incorporated ("Homestead") for the registration of
Homestead common stock.
Ernst & Young LLP
West Palm Beach, Florida
July 16, 1996
