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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12269
HOMESTEAD VILLAGE INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 74-2770966
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2030 POWERS FERRY ROAD
ATLANTA, GEORGIA 30339
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(770) 303-2200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Shares of Common Stock,
par value $.01 per
share American Stock Exchange
Warrants to Purchase
Shares of Common Stock American Stock Exchange
Preferred Share Purchase
Rights American Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Based on the closing price of the registrant's Common Stock on March 24,
1997, the aggregate market value of the Common Stock held by non-affiliates of
the registrant was $136,193,772.
At March 24, 1997, there were 21,194,583 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 1997 annual
meeting of its shareholders are incorporated by reference in Part III of this
report.
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TABLE OF COMMENTS
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ITEM DESCRIPTION PAGE
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PART I
1. Business........................................................... 1
Homestead Village Incorporated................................... 1
History.......................................................... 2
The Properties................................................... 3
Growth and Development Strategy.................................. 4
Operating System................................................. 5
Administrative Services Agreement................................ 6
Industry Overview................................................ 6
Competition...................................................... 7
Environmental Matters............................................ 8
Governmental Regulation.......................................... 8
Trademarks....................................................... 8
Insurance........................................................ 9
Employees........................................................ 9
Executive Officers of Homestead.................................. 9
Other Officers of Homestead...................................... 10
2. Properties......................................................... 12
Geographic Distribution.......................................... 12
Properties Portfolio............................................. 13
3. Legal Proceedings.................................................. 17
4. Submission of Matters to a Vote of Security Holders................ 17
PART II
Market for the Registrant's Common Equity and Related Stockholder
5. Matters............................................................ 17
6. Selected Financial Data............................................ 18
Management's Discussion and Analysis of Financial Condition and
7. Results of Operations.............................................. 19
Overview......................................................... 19
Homestead Investments............................................ 20
Current Development Activity..................................... 21
Results of Operations for the Years Ended December 31, 1996, 1995
and 1994........................................................... 22
Environmental Matters............................................ 24
Liquidity and Capital Resources.................................. 24
Seasonality and Inflation........................................ 26
Dividends........................................................ 26
8. Financial Statements and Supplementary Data........................ 26
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure Matters...................................... 26
PART III
10. Directors and Executive Officers of the Registrant................. 26
11. Executive Compensation............................................. 26
12. Security Ownership of Certain Beneficial Owners and Management..... 26
13. Certain Relationships and Related Transactions..................... 26
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 27
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PART I
ITEM 1. BUSINESS
HOMESTEAD VILLAGE INCORPORATED
Homestead Village Incorporated ("Homestead") is committed to creating
significant shareholder value by becoming the leading developer, owner and
operator of moderate priced, extended-stay lodging properties throughout the
United States. Homestead believes that the extended-stay segment of the
lodging industry offers excellent growth opportunity because of a limited
number of purpose-built properties and rising consumer awareness. Homestead
believes it is well positioned to achieve significant market share in the
extended-stay industry by targeting markets that demonstrate strong
demographics and providing extended-stay customers with a consistently high
standard of service and value-conscious pricing.
Homestead offers a carefully designed, purpose-built product targeted at the
business traveler on temporary assignment, undergoing relocation or in
training. Homestead Village properties are designed to offer excellent
location and site livability, convenient access to major employment centers
and retail support services, and a residential environment that is attractive,
well landscaped and secure.
The extended-stay segment of the lodging industry is a high-growth business,
and Homestead believes it is well positioned to become the leading provider of
moderate priced, extended-stay lodging. Homestead has the people and the
processes in place to achieve significant market share. Homestead's strategy
for future growth is focused on (i) developing new properties and efficiently
delivering them to the market place, (ii) increasing weekly rates at the
property level by matching its product to customers' expectations, and (iii)
improving operating margins through its proprietary operating systems.
Homestead believes that its product, locations, corporate commitment to
customer service and value-conscious pricing will help Homestead meet its
objectives.
As of December 31, 1996, Homestead owned and operated 31 properties in eight
cities, had begun construction on 41 additional properties and had an
additional eight properties in planning and owned and 44 in planning and under
control, for a total of 124 properties in 34 cities. Through mid March 1997,
Homestead has completed construction on and opened three additional
properties. Subsequent to December 31, 1996 Homestead closed on the purchase
of four sites for development. Homestead expects to have a total of 79
properties in operation at the end of 1997 and expects to start construction
on 40 to 50 new properties annually through the year 2000. In addition, its
development staff of 59 professionals is continually reviewing additional
development opportunities.
Homestead seeks to offer a purpose-built, standardized product for the
value-conscious business traveler on temporary assignment, undergoing
relocation or in training. Homestead properties offer excellent location and
site livability, convenient access to the targeted business base and retail
support services, and an environment that is attractive, well-landscaped and
secure. Homestead property-level employees participate in rigorous training
programs whose goal is to ensure continuous improvement in guest experience
and that each guest stay is consistently pleasant and enjoyable. Room layouts
and guest amenities have been designed specifically for the special needs of
the extended-stay customer and are offered at affordable prices.
Homestead is founded on research. The Homestead product was conceived and
has evolved to meet customer needs through research, testing and the operating
experience gained through the development and operation of 31 properties over
the past five years. Homestead believes its operating experience and its
affiliation with Security Capital Investment Research Incorporated ("Security
Capital Investment Research") allow it to more effectively target markets
where supply and demand factors permit high occupancies at increasing weekly
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
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.
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Research indicates that guests primarily stay at a Homestead Village for
work-related reasons, the largest proportion of which relate to temporary
business assignments. The typical Homestead Village guest is a professional or
mid-level manager with an annual income in excess of $50,000. Homestead Village
properties have been designed to address specific demographic and business
trends, including an increased focus on managing corporate overhead and
expenses, the outsourcing of services and a more mobile work force. These
factors, combined with growing consumer awareness of the extended-stay
alternative to traditional hotels, should substantially increase the demand for
extended-stay lodging. Homestead believes that it can meet a significant share
of that demand by offering its customers a consistent product and exceptional
service at an attractive price.
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 real estate transaction. Homestead
incorporates into its development process certain proprietary technologies,
design and purchasing aimed at enhancing occupancy and rate 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 oversee the progress of construction on a regular basis during the
development cycle.
Homestead Village(R) is a registered trademark of Homestead and all
references to the term "Homestead Village" herein shall include a reference to
such registered trademark. The term "in pre-development planning" means
developments in planning and owned (land has been acquired) and developments in
planning and under control (land which is under control through contingent
contract or letter of intent) with construction anticipated to commence within
12 months. Homestead categorizes its operating properties (which include all
properties not under construction or in pre-development planning) as either
"comparable" or "non-comparable." For purposes of this Form 10-K, the term
"comparable" means that all buildings in a property have been open for the
entire period from January 1, 1995 through December 31, 1996. An operating
property is considered to be "non-comparable" if all buildings have not been
open for this entire period.
HISTORY
Homestead was initially created as a byproduct of the multifamily development
activities of Security Capital Pacific Trust ("PTR"). Security Capital Pacific
Incorporated (the "PTR REIT Manager") 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 and 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 from those business customers on
temporary assignment, in 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
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understand market characteristics prior to committing to full-scale Homestead
Village development on a broad geographical basis. Security Capital Group
Incorporated ("Security Capital") 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 better serve the needs of the Homestead customer. Management believes that
this process, which is still in place today, combined with Homestead's initial
operating experience, has 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.
In January 1996, Security Capital began considering ways for Security Capital
Atlantic Incorporated ("ATLANTIC"), PTR and Security Capital to maximize
shareholder value with respect to their Homestead Village properties and
operations. On May 21, 1996, ATLANTIC, PTR, Security Capital and Homestead
entered into a merger agreement, pursuant to which each of ATLANTIC, PTR and
Security Capital agreed to contribute, through a series of merger transactions
(the "Mergers"), all of their respective assets relating to Homestead Village
properties to Homestead in exchange for shares of Homestead's Common Stock, par
value $.01 per share ("Shares"). ATLANTIC and PTR agreed to enter into the
funding commitment agreements, described below, and Security Capital provided
interim funding for Homestead acquisitions prior to the closing of the Mergers,
all in exchange for warrants to purchase Shares ("Warrants"). ATLANTIC's and
PTR's respective shareholders approved the Homestead transaction on September
13, 1996 and September 12, 1996, respectively, and the closing of the Homestead
transaction occurred on October 17, 1996.
Homestead is a Subchapter C corporation. Homestead has a relationship with
Security Capital which it intends to continue through the Administrative
Services Agreement and will enjoy the benefits of Security Capital's
organization and services. See "--Administrative Services Agreement" below.
THE PROPERTIES
As of December 31, 1996, Homestead had developed, owned and operated 31
Homestead Village properties representing in the aggregate 4,297 units in eight
cities and had 41 Homestead Village properties under construction totaling
5,509 units within three of these cities as well as 16 additional cities. In
addition, Homestead owns or controls through contracts 52 development sites for
which it plans to initiate construction within the next 12 months, for a total
of 124 properties in 34 cities. Units operating, under construction or in pre-
development planning aggregate 16,760 units. In addition, its development staff
of 59 professionals is continually reviewing additional developments
opportunities.
The 41 Homestead Village properties currently under construction average 134
units at an estimated average project cost of $6.46 million with an estimated
average cost per unit of $48,091.
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. Units also
generally contain a combination work station/eating area, an easy chair and
features such as individual voice mail, cable/satellite television, weekly
housekeeping, periodic towel service, dataport and free local telephone calls.
For the year ended December 31, 1996, the 12 comparable Homestead Village
properties had an average occupancy of 84.8% with an average weekly rate of
$218.65 per unit. Average occupancy and average weekly rate for the 19 non-
comparable properties, including the 11 properties which opened in 1996, were
74.1% and $224.98 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, a Rooms Manager, a Maintenance Supervisor, a 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.
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Homestead expects that the majority of daily operational decisions will be
made by the General Manager under the supervision of a Regional Director who
will be responsible for twelve to twenty properties, depending on geographic
location. The Regional Director oversees the performance of the General
Managers in such areas as guest service, property maintenance, staffing, rate
management and cost control. Each Homestead Village property is measured
against guest service standards and 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 the training of its regional and on-
site personnel. Homestead currently has twelve separate training modules with
subjects ranging from guest service and safety to personal selling techniques.
Training in these areas is conducted on a regular basis and, to ensure a
consistent guest experience at every property, Homestead is in the process of
standardizing all of its operating procedures. These procedures will
subsequently be incorporated into additional training modules for all
employees. In addition, dedicated pre-opening teams (consisting of experienced
Homestead Village managers) deliver on-site training to new employees to
ensure that the guest experience in all newly-opened Homestead properties is
consistent with the standards set by comparable properties. Training design
and organizational development are administered by corporate professionals in
conjunction with field implementation personnel located within a geographic
region. Homestead views its investment in training and developing site-level
personnel as being essential to delivering a high customer service standard,
and consistent with its objective of becoming the preeminent operator in the
moderate priced, extended-stay lodging industry.
GROWTH AND DEVELOPMENT STRATEGY
Homestead believes it is well positioned to become the leading provider of
moderate priced, extended-stay lodging. Homestead's strategy for future growth
is focused on (i) developing new properties and efficiently delivering them to
the market place, (ii) increasing weekly rates at the property level by
matching its product to customers' expectations, and (iii) improving operating
margins through its proprietary operating systems. Homestead expects to have a
total of 79 properties operational by the end of 1997. Homestead plans to
continue an active development program thereafter. Homestead's plans call for
the average property to have approximately 136 extended-stay rooms and to take
approximately eight to ten months to construct.
The table below (numbers in thousands) illustrates the growth in the
Homestead product resulting from this strategy since the Homestead product was
conceived and developed.
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TOTAL EXPECTED
INVESTMENT (1) HISTORICAL COST AT DECEMBER 31, (2)
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DECEMBER 31, 1996 1996 1995 1994 1993 1992
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Operating Properties.... $135,339 $135,339 $ 77,537 $41,629 $ 8,894 $6,108
Properties in
development:
Properties under
construction.......... 264,931 108,692 28,218 14,303 15,274 899
Properties in planning
and owned............. 51,561 12,256 4,440 4,281 -- --
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Total................ $451,831 $256,287 $110,195 $60,213 $24,168 $7,007
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(1) Total expected investment represents budgeted development cost for
properties under construction and properties in planning and owned.
Properties in planning and owned represent projects where land has been
acquired and pre-construction planning activities are in progress.
Budgeted development cost includes the cost of land, fees, permits,
payments to contractors, architectural and engineering fees and interest
and property taxes to be capitalized during the development period. Land
held for future development or for sale which is less than 3.0% of
property assets based on historical cost as of December 31, 1996, are not
included above.
(2) Such information aggregates the activity of both PTR and ATLANTIC prior to
the October 17, 1996 Mergers. The increase in cost of ATLANTIC properties,
which occurred due to the use of purchase accounting, is reflected on the
date of the Mergers.
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Homestead targets major metropolitan areas which, based on its 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 development 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., Co-Chairman, Chief Investment Officer and President,
Michael Cryan, Co-Chairman and Chief Operating Officer, Gary DeLapp, John
Patterson and Donald Schultz, each a Senior Vice President and Laura Hamilton,
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 are selected by Homestead's real estate professionals,
subject to review and approval of the Investment Committee. Homestead currently
maintains major offices in Atlanta, Georgia; Dallas, Texas; Hayward, California
and Santa Fe, New Mexico. 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 use independent general
contractors for the construction of its lodging properties 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 oversee the progress of construction on a regular basis
during the development cycle.
OPERATING SYSTEM
Homestead has developed and is continuously refining its operating system
that combines a conveniently located, well-designed guest room with friendly
and efficient guest service, and an amenity program designed to meet the
specific needs of the extended-stay guest. Management believes that by offering
this combination at an affordable price, it will create an excellent
price/value relationship that will appeal to the value-conscious business
traveler.
Appeal to Value-Conscious Business Travelers. Weekly room rates for
standard rooms at Homestead properties typically range between $199 and
$309 for a standard room. These rates contrast favorably with average
weekly rates of over $500 for the majority of traditional extended-stay
hotels. Weekly rates at Homestead properties may vary significantly
depending on specific market factors and the size of the room.
Room Designed Specifically for the Extended-Stay Guest. Homestead
properties are designed and built to uniform plans that are driven by the
needs of the extended-stay guest. Rooms generally contain 260 to 325 square
feet of fully furnished living space, with kitchen facilities that include
a full-size refrigerator, microwave, sink and cook-top. In general, these
rooms also offer a combination work station/dining area, an easy chair and
additional amenities such as individual phone lines and voice mail,
dataport, cable/satellite television, weekly housekeeping and free local
telephone calls.
Standardized Concept and Operating Efficiencies. Homestead has developed
standardized plans and specifications for its properties which help lower
construction and purchasing costs. In addition, Homestead's experience in
operating 31 properties has provided it with the opportunity to standardize
its operating procedures to meet the specific needs of extended-stay
guests. This standardization is aimed at both providing a consistent guest
experience and generating operating efficiencies that will be further
refined as Homestead seeks to adopt "best practices" in the lodging
industry. Homestead is also pursuing the standardization of its supply
purchases, which management believes will help to generate further
operating efficiencies and reduce costs through economies of scale and
volume discounts.
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ADMINISTRATIVE SERVICES AGREEMENT
As of October 17, 1996, Homestead entered into an administrative services
agreement with Security Capital (the "Administrative Services Agreement"),
pursuant to which Security Capital provides Homestead with administrative
services with respect to certain aspects of Homestead's business. These
services 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
Security Capital are based on Security Capital's cost of the services provided
plus an additional 20%. Any arrangements under the Administrative Services
Agreement for the provision of services are required to be commercially
reasonable and on terms not less favorable than those which could be obtained
from unaffiliated third parties. The Administrative Services Agreement expires
on December 31, 1997 and is automatically renewed for one-year terms, subject
to approval by a majority of the disinterested members of the board of
directors of Homestead (the "Board") and the approval by the disinterested
members of the Board of the annual compensation payable to Security Capital
for services rendered to Homestead. Homestead paid fees of $375,000 to
Security Capital for administrative services provided in 1996.
Homestead believes its relationship with Security Capital under this
agreement provides it with certain advantages, including 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 $58 billion in annual room revenues in 1996 and had
approximately 3.4 million rooms at the end of 1996. Over 63% 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 U.S. lodging industry has gradually recovered
from the negative effects of the supply/demand imbalance seen in the late
1980s and early 1990s. According to industry reports, which Homestead believes
are reliable, annual supply growth decreased to a low of 1.0% in 1993 after
reaching a peak range of between 3% and 4% annual growth during the 1987-1990
period. Since 1993, room supply has increased at more moderate levels, growing
by approximately 1%-2% annually through the end of 1996. In contrast, demand
(as measured by occupied rooms) has grown at an annual rate of approximately
3%-4% from 1993 to 1996, giving the industry an opportunity to improve its
underlying supply/demand fundamentals. This improvement is evidenced by a
national occupancy rate that increased from a recent low of 60.6% at the end
of 1991 to 65.6% at the end of 1996, and an average daily rate that grew from
$59.02 to $71.75 over the same period. However, since the lodging industry has
historically been characterized by cyclical trends, there can be no assurance
that the current state of improved supply/demand fundamentals will continue
into the future.
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 distinct partitioned areas and which may or may not offer food and
beverage service to guests. Segmentation by price-
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level may generally be divided into the following categories: budget, economy-
priced, mid-price, upscale and luxury. The average daily room rates for 1996
are: budget $38, economy-priced $50, mid-price $65, upscale $84 and luxury
$124.
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
several years.
Extended-Stay Market
Homestead believes that the extended-stay market, in which it 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 3.4 million total available rooms in the United
States lodging industry at the end of 1996, there were approximately 53,000, or
1.6%, dedicated extended-stay rooms at approximately 450 separate properties.
Over two-thirds of these extended-stay properties were controlled by
competitors that are priced toward the upscale segment of the extended-stay
market.
COMPETITION
Competition within the extended-stay segment of the lodging industry has
begun to increase because the growth prospects of the segment have attracted
numerous participants from both within and outside of the industry. While the
majority of currently operating extended-stay properties are oriented toward
the upscale and mid-price segments, there have been numerous recent
announcements of aggressive development plans for companies that operate within
all segments of the industry. Homestead may compete for development sites with
any or all of these entities, some of which may have greater financial
resources than Homestead and better relationships with lenders and sellers.
These entities also may 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 room rates or offer greater
convenience, services or amenities or significantly expand, or improve or
develop properties in a market in which Homestead competes, thereby adversely
affecting Homestead's operations.
7
<PAGE>
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 is
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.
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 that management believes would have a
material adverse effect on Homestead's business, financial position 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, guest actions or changes in applicable
environmental laws and regulations) will not result in the imposition of
environmental liabilities.
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 properties 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 properties. 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.
Under the American with Disabilities Act of 1990 (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 properties, no assurance can be given
that a material ADA claim will not be asserted against 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 and logo have been registered with the United
States Patent and Trademark office.
8
<PAGE>
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 position could be materially and adversely affected.
EMPLOYEES
Homestead employs approximately 90 professionals and 324 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.
EXECUTIVE OFFICERS OF HOMESTEAD
DAVID C. DRESSLER, JR.--43--Director; Co-Chairman and Chief Investment
Officer of Homestead since May 1996 and President since January 1996, where he
oversees all investment and capital allocation decisions; Co-Chairman of
Security Capital Investment Research from March 1995 to May 1996; Managing
Director of SCG Multifamily Development from January 1994 to August 1995;
Managing Director of PTR from May 1993 to May 1996 and Director of the PTR
REIT Manager from February 1995 to January 1997; Managing Director of Security
Capital (Atlantic) Incorporated (the "ATLANTIC REIT Manager") from April 1992
to May 1996; from 1984 to May 1991, Regional Partner, Trammell Crow
Residential based in 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.
MICHAEL D. CRYAN--45--Director, Co-Chairman and Chief Operating Officer of
Homestead since October 1996, where he has overall responsibility for
operations; formerly with ITT Sheraton Corporation from August 1986 to August
1996, where his most recent position held was Director, Executive Vice
President and Chief Financial Officer. Prior thereto, Mr. Cryan held positions
with ITT Sheraton Corporation as Director of Acquisitions and Asset
Management, Director of Strategic Projects and Director of Operations North
America East; from December 1976 to August 1986 Mr. Cryan was with Arthur
Andersen & Co. where he was a member of the Worldwide Hospitality Specialty
Team focusing on profit improvement and specialty analysis for the hotel
industry and providing financial consulting services to real estate and
hospitality clients.
GARY A. DELAPP--38--Senior Vice President of Homestead since December 1996
and Vice President from May 1996 to November 1996 where he is a member of the
operations group; Vice President of Homestead Village Managers Incorporated
from February 1996 to October 1996; 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--Senior Vice President of Homestead since December
1996 and Vice President from May 1996 to November 1996, where he is a member
of the development group; from November 1995 to October 1996, Vice President
of Homestead Village Managers Incorporated; from February 1982 to November
1995, Vice President of Payless Shoesource, Inc. where he was responsible for
real estate and construction in a 23-state region.
JOHN R. PATTERSON--45--Senior Vice President of Homestead since May 1996
where he is a member of the operations group; Senior Vice President of
Homestead Village Managers Incorporated from June 1995 to October 1996; from
July 1993 to January 1995, a Senior Vice President in business development of
NationsBank in Atlanta; prior thereto, Division President and Partner of
Trammell Crow Residential Services.
9
<PAGE>
KEN W. PIERCE--39--Senior Vice President of Homestead since March 1997 where
he oversees all marketing functions; from July 1982 to February 1997, Mr.
Pierce was with Holiday Inn Worldwide where his last position held was Vice
President of Relationship Marketing, responsible for developing and directing
marketing efforts targeting the business traveler and strategic corporate
alliances.
DONALD J. SCHULTZ--42--Senior Vice President of Homestead since May 1996
where he is a member of the development group; Senior Vice President of
Homestead Village Managers Incorporated from June 1995 to October 1996; 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).
JEFFREY A. KLOPF--48--Senior Vice President of Homestead since May 1996 and
Secretary since January 1996 and Senior Vice President and Secretary of
Homestead Village Managers Incorporated from January 1996 to October 1996;
Senior Vice President and Secretary of PTR, ATLANTIC and Security Capital since
January 1996, where he provides securities offerings and corporate acquisition
services and oversees the provision of legal services for affiliates of
Security Capital; from January 1988 to December 1995, partner of Mayer, Brown &
Platt where he practiced corporate and securities law.
OTHER OFFICERS OF HOMESTEAD
STEPHEN M. BENJAMIN--28--Vice President of Homestead since December 1996
where he has been a member of the development group since January 1996; prior
thereto, Mr. Benjamin was with PTR from May 1994 to December 1995, where he was
responsible for acquisitions in the Southwest region; from January 1990 to
April 1994, Associate with Cushman Wakefield in New York.
LAURIE B. BURNS--34--Vice President of Homestead since May 1996 where she is
a member of the development group; from November 1995 to October 1996 Vice
President of Homestead Village Managers Incorporated; from March 1994 to
November 1995, Director of the Real Estate division of Apple South, Inc.; and
from June 1986 to March 1994, Ms. Burns was with Taco Bell Corporation where
her most recent position held was Director of the Real Estate Division.
ROBERT E. CLARK--36--Vice President, Treasurer and Controller of Homestead
since May 1996 where he has accounting and financial reporting
responsibilities; from September 1995 to October 1996 Vice President of
Homestead Village Managers Incorporated; 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.
THOMAS A. COBB--39--Vice President of Homestead since December 1996 where he
has been a member of the development group since April 1996; from February 1993
to March 1996, President of Digital Telecom, Inc. where he was responsible for
management of all corporate office functions; from January 1989 to February
1993, Partner and Director of Construction for McDonald Development Company
where he was responsible for the development of industrial, office and
warehouse facilities.
BRIAN M. FRASER--33--Vice President of Homestead since December 1996 where he
oversees all aspects of human resources; from November 1993 to October 1996,
Human Resources Manager for Blockbuster Entertainment; from September 1992 to
September 1993, Director of Human Resources with First American Rental; and
from July 1985 to August 1992, Director of Human Resources Development for
Kinney Shoe Corporation.
BRADLEY P. GRIGGS--39--Vice President of Homestead since May 1996 where he is
a member of the development group; Vice President of Homestead Village Managers
Incorporated from September 1995 to October 1996; from November 1990 to
September 1995, Project Manager with The Fieldstone Company where he was
responsible for development of single family homes in the South California
region; and from November 1987 to November 1990, Operations Manager with M. J.
Brock and Sons, Inc. for Riverside and San Diego Counties.
10
<PAGE>
A. DAVID HALE--39--Vice President of Homestead since December 1996 where he
is a member of the development group; Vice President of Homestead Village
Managers Incorporated from June 1995 to October 1996; 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 with
Questar Properties.
LAURA L. HAMILTON--33--Vice President of Homestead since May 1996 where she
supervises Homestead's due diligence group; Vice President of Homestead Village
Managers Incorporated from January 1996 to October 1996; Vice President of PTR
from June 1995 to January 1996 where she had been a member of the 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 where he
is a member of the operations group; Vice President of Homestead Village
Managers Incorporated from January 1996 to October 1996; Vice President of PTR
from March 1995 to October 1996; from November 1994 to March 1995, Vice
President of Security Capital Pacific Incorporated ("PACIFIC"), which merged
into PTR in March 1995, where he 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 where he provided financing and acquisition services
on behalf of corporate and institutional clients throughout the Western United
States.
PETER A. JOBSON--35--Vice President of Homestead since December 1996, where
he has been a member of the development group since May 1995; prior thereto,
from February 1994 to May 1995 Mr. Jobson was Director of Development with
Paragon Group, where he was responsible for multifamily development in Florida;
from January 1991 to December 1994, partner in the acquisition of seven
commercial properties.
JEFFRY A. JONES--38--Vice President of Homestead since May 1996 where he is a
member of the development group; Vice President of Homestead Village Managers
Incorporated from June 1995 to October 1996; Vice President of PTR from
February 1995 to October 1996; 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 1993, a
Development Manager with Stark Companies International where he was responsible
for site acquisition and entitlement processing for residential and hotel
projects.
ARTHUR G. MAY--37--Vice President of Homestead since May 1996 where he is a
member of the development group; Vice President of Homestead Village Managers
Incorporated from June 1995 to October 1996; Vice President of PTR from
September 1994 to October 1996; from 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--40--Vice President of Homestead since May 1996 where he is a
member of the development group; Vice President of Homestead Village Managers
Incorporated from June 1995 to October 1996; Vice President of PTR from March
1995 to October 1996; 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.
KENT K. POULSEN--62--Vice President of Homestead since March 1997 where he is
a member of the development group; prior thereto, Vice President of ATLANTIC
and the ATLANTIC REIT manager from September 1995 to March 1997 where he was a
member of the development group; from April 1986 to May 1995, Divisional Vice
President for Construction of Trammell Crow Residential Illinois Division.
11
<PAGE>
JERRY D. QUINN--53--Vice President of Homestead since August 1996 where he
is a member of the development group; prior thereto, from June 1993 to July
1996, Mr. Quinn was Vice President of PTR, where he was responsible for
production of multifamily developments in the Central region; from May 1988 to
May 1993, Vice President with Lincoln Properties Company where he was
responsible for construction of multifamily projects.
MARK E. RILEY--38--Vice President of Homestead since May 1996 where he is a
member of the development group; Vice President of Homestead Village Managers
Incorporated from June 1995 to October 1996; 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 properties.
F. JOSEPH ROGERS--42--Vice President of Homestead since August 1996 where he
has accounting and financial reporting responsibilities; from October 1992 to
August 1996, Vice President of SCGroup Incorporated where he was responsible
for accounting and financial reporting for Security Capital; prior thereto,
Senior Manager with KPMG Peat Marwick.
SALLY J. ROWLING--43--Vice President of Homestead since December 1996 where
she is a member of the development group; prior thereto, Ms. Rowling was with
PTR from August 1993 to September 1996, where her last position held was Vice
President, responsible for special projects in the Northwest region; from
March 1988 to August 1993, Senior Analyst with WilsonSchanzer, Inc., where she
was responsible for the analysis of apartment acquisitions.
S. SCOTT STEWART--33--Vice President of Homestead since May 1996 where he is
a member of the development group; Vice President of Homestead Village
Managers Incorporated from June 1995 to October 1996; 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.
STEVEN M. TANGNEY--43--Vice President of Homestead since December 1996,
where he has been a member of the development group since May 1996; from June
1994 to May 1996 member of PTR's development group; prior thereto, from June
1993 to June 1994, Project Manager with the Mount Diablo California Unified
School District; from December 1992 to June 1993, Senior Civil Engineer with
the Federal Emergency Management Agency; from June 1979 to October 1992,
Development Manager for Public Storage, Inc. where he was responsible for
acquisitions and development of commercial real estate.
MATTHEW B. WHALEN--30--Vice President of Homestead since December 1996,
where he has been a member of the Development Group since June 1995; from
September 1993 to May 1995 with Crimson Partners where his last position held
was Vice President, responsible for management of construction projects,
market analysis, financial reporting and investor relations; Mr. Whalen
founded Crimson Homes in November 1993, a home-building entity within Crimson
Partners.
ITEM 2. PROPERTIES
GEOGRAPHIC DISTRIBUTION
Homestead operating properties, properties under construction and properties
in planning and owned are located in 24 metropolitan areas in 14 states. The
table below demonstrates the geographic distribution of
12
<PAGE>
Homestead's property investments (excluding land held for future development
and land held for sale) at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF PROPERTIES PERCENTAGE OF
---------------------------------------- ASSETS BASED ON
UNDER IN PLANNING TOTAL EXPECTED
CITY OPERATING CONSTRUCTION AND OWNED TOTAL INVESTMENT (1)
- ---- --------- ------------ ----------- ----- ---------------
<S> <C> <C> <C> <C> <C>
Albuquerque, NM......... 1 1 -- 2 2%
Atlanta, GA............. 1 5 -- 6 9%
Austin, TX.............. 3 -- 1 4 4%
Charlotte, NC........... -- 1 -- 1 1%
Dallas, TX.............. 9 -- -- 9 7%
Denver, CO.............. 2 2 -- 4 5%
Houston, TX............. 8 -- -- 8 7%
Jacksonville, FL........ -- 1 -- 1 1%
Kansas City, MO......... -- 1 1 2 3%
Los Angeles, CA......... -- 1 1 2 3%
Miami/Ft. Lauderdale,
FL..................... -- 3 1 4 6%
Nashville, TN........... -- 2 -- 2 3%
Orange County, CA....... -- 1 -- 1 2%
Phoenix, AZ............. 4 -- 1 5 6%
Portland, OR............ -- 1 1 2 3%
Raleigh, NC............. -- 3 -- 3 4%
Richmond, VA............ -- 1 -- 1 1%
Salt Lake City, UT...... -- 2 -- 2 3%
San Antonio, TX......... 3 -- -- 3 3%
San Diego, CA........... -- 1 -- 1 2%
San Francisco, CA....... -- 5 1 6 9%
Seattle, WA............. -- 4 -- 4 6%
Tampa, FL............... -- 3 -- 3 4%
Washington, DC.......... -- 3 1 4 6%
--- --- --- --- ----
Total................. 31 41 8 80 100%
=== === === === ====
</TABLE>
- --------
(1) Total expected investment represents budgeted development cost for
properties under construction and properties in planning and owned.
Properties in planning and owned represent projects where land has been
acquired and pre-construction planning activities are in progress. Budgeted
development cost includes the cost of land, fees, permits, payments to
contractors, architectural and engineering fees and interest and property
taxes to be capitalized during the development period. Land held for future
development or for sale, which is less than 3.0% of property assets based
on historical costs as of December 31, 1996, are not included above.
PROPERTIES PORTFOLIO
The information in the following table is as of December 31, 1996 for
Homestead's 31 operating properties. Additional information on Homestead's
properties is contained in Schedule III, Real Estate and Accumulated
Depreciation in "Item 14 Exhibits, Financial Statements, Schedules and Reports
on Form 8-K."
<TABLE>
<CAPTION>
YEAR
OPENED STATUS(1) UNITS
------ -------------- -----
<S> <C> <C> <C>
OPERATING PROPERTIES:
Albuquerque, New Mexico:
Osuna/North I-25 (3).............................. 1996 Non Comparable 141
Atlanta, Georgia:
Peachtree (4)..................................... 1996 Non Comparable 137
Austin, Texas:
Austin Midtown (3)................................ 1996 Non Comparable 145
Burnett (3)....................................... 1995 Non Comparable 133
Pavillion (3)..................................... 1996 Non Comparable 134
---
Subtotal........................................ 412
---
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C>
<CAPTION>
YEAR
OPENED STATUS(1) UNITS
------ -------------- -----
<S> <C> <C> <C>
Dallas, Texas:
Coit Road/North Central (3)....................... 1994 Comparable 133
Fort Worth/Downtown (3)........................... 1996 Non Comparable 97
Las Colinas/Irving (3)............................ 1996 Non Comparable 149
North Arlington/Six Flags (3)..................... 1995 Non Comparable 137
North Richland Hills (3).......................... 1994 Comparable 133
Skillman/Northeast (3)............................ 1992 Comparable 131
South Arlington (3)............................... 1995 Non Comparable 141
Stemmons/NW Highway (3)........................... (2) Comparable 189
Tollway/Addison (3)............................... 1993 Comparable 119
-----
Subtotal........................................ 1,229
-----
Denver, Colorado:
Belleview/Denver Tech Center (3).................. 1996 Non Comparable 161
Iliff/Aurora (3).................................. 1996 Non Comparable 137
-----
Subtotal........................................ 298
-----
Houston, Texas:
Astrodome/Med Center (3).......................... 1995 Non Comparable 163
Bammel/Cypress Station (3)........................ 1994 Comparable 134
Fuqua/Hobby Airport (3)........................... 1994 Comparable 133
Park Ten (3)...................................... 1994 Comparable 134
Stafford/Sugarland (3)............................ 1994 Comparable 133
West by Northwest/Hwy 290 (3)..................... 1994 Comparable 133
Westheimer/Beltway (3)............................ 1994 Comparable 133
Willowbrook/Northwest (3)......................... 1995 Non Comparable 137
-----
Subtotal........................................ 1,100
-----
Phoenix, Arizona:
Dunlap/North West Valley (3)...................... 1996 Non Comparable 141
Tempe (3)......................................... 1996 Non Comparable 149
Scottsdale (3).................................... 1995 Non Comparable 120
Union Hills (3)................................... 1996 Non Comparable 141
-----
Subtotal........................................ 551
-----
San Antonio, Texas:
Bitters (3)....................................... 1995 Non Comparable 153
DeZavala/Six Flags Fiesta (3)..................... 1995 Non Comparable 141
Fredricksburg/Medical Center (3).................. 1994 Comparable 135
-----
Subtotal........................................ 429
-----
Total Units--Operating Properties............. 4,297
=====
</TABLE>
- --------
(1) Operating properties are categorized as either "comparable" or "non-
comparable". The term "comparable" means that all buildings in a property
have been open for the entire period from January 1, 1995 through December
31, 1996. An operating property is considered "non-comparable" if all
buildings have not been open for this entire period.
(2) Phase I (132 units) was developed in 1992 and Phase II (57 units) was
developed in 1995.
(3) Subject to deeds of trust securing convertible mortgage notes due to PTR of
$112,639,000 (carried at $101,309,000, net of unamortized discount at
December 31, 1996).
14
<PAGE>
(4) Subject to deeds of trust securing convertible mortgage notes due to
ATLANTIC. No amounts were funded at December 31, 1996.
The following table is as of December 31, 1996 for Homestead's properties
under construction and properties in planning and owned(1). All properties
under construction are expected to be completed in 1997.
<TABLE>
<CAPTION>
UNITS
-----
<S> <C>
PROPERTIES UNDER CONSTRUCTION:
Albuquerque, New Mexico:
I-40 (3).......................................................... 138
Atlanta, Georgia:
Cumberland (4).................................................... 137
Gwinnett Place (4)................................................ 130
North Druid Hills (4)............................................. 137
Perimeter (4)..................................................... 133
Roswell (4)....................................................... 141
-----
Subtotal........................................................ 678
-----
Charlotte, North Carolina:
177-Billy Graham Pkwy............................................. 137
Denver, Colorado:
Cherry Creek (3).................................................. 108
Inverness (3)..................................................... 142
-----
Subtotal........................................................ 250
-----
Jacksonville, Florida:
JTB (4)........................................................... 137
Kansas City, Missouri:
Merriam (3)....................................................... 140
Los Angeles, California:
El Segundo (3).................................................... 150
Miami/Ft. Lauderdale, Florida:
Fort Lauderdale (4)............................................... 145
Miami Airport (4)................................................. 149
Plantation (4).................................................... 125
-----
Subtotal........................................................ 419
-----
Nashville, Tennessee:
Cool Springs (4).................................................. 137
Nashville Airport (4)............................................. 134
-----
Subtotal........................................................ 271
-----
Orange County, California:
Spectrum (3)...................................................... 149
Portland, Oregon:
Sunset East (3)................................................... 142
Raleigh/Durham, North Carolina:
Hwy 70 (4)........................................................ 138
North Raleigh (4)................................................. 121
RTP (4)........................................................... 125
-----
Subtotal........................................................ 384
-----
Richmond, Virginia:
Upper Broad (4)................................................... 141
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
UNITS
-----
<S> <C>
Salt Lake, Utah:
Ft. Union (3)..................................................... 132
Redwood (3)....................................................... 138
-----
Subtotal........................................................ 270
-----
San Diego, California:
Mission Valley (3)................................................ 140
San Francisco (Bay Area), California:
Milpitas (2) (3).................................................. 118
Mountain View (3)................................................. 133
San Jose (3)...................................................... 152
San Mateo (3)..................................................... 136
Sunnyvale (2) (3)................................................. 144
-----
Subtotal........................................................ 683
-----
Seattle, Washington:
Bellevue (3)...................................................... 149
Mountain Lake Terrace/N. Seattle (3).............................. 117
Redmond (3)....................................................... 162
Tukwila (3)....................................................... 92
-----
Subtotal........................................................ 520
-----
Tampa, Florida:
Brandon (4)....................................................... 141
North Airport (2) (4)............................................. 121
St. Petersburg (4)................................................ 113
-----
Subtotal........................................................ 375
-----
Washington, D.C.:
BWI (4)........................................................... 137
Dulles-South (4).................................................. 115
Fair Oaks (4)..................................................... 133
-----
Subtotal........................................................ 385
-----
Total Units--Properties Under Construction.................... 5,509
=====
PROPERTIES IN PLANNING AND OWNED:
Austin, Texas:
Round Rock (3).................................................... 106
Kansas City, Missouri:
Plaza............................................................. 99
Los Angeles, California:
Brea.............................................................. 133
Miami, Florida:
Coral Springs-Northpoint.......................................... 124
Phoenix, Arizona:
Mesa (3).......................................................... 122
Portland, Oregon:
Lake Oswego (3)................................................... 127
San Francisco, California:
San Ramon (3)..................................................... 147
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
UNITS
-----
<S> <C>
Washington, D.C.:
Merrifield (4).................................................... 128
---
Total Units--Properties in Planning and Owned................. 986
===
</TABLE>
- --------
(1) Does not include land held for future development or for sale which is less
than 3.0% of property assets based on historical costs as of December 31,
1996.
(2) First units were opened on February 26, 1997 for Milpitas, on March 9, 1997
for North Airport, and on March 10, 1997 for Sunnyvale.
(3) Subject to deeds of trust securing convertible mortgage notes due to PTR of
$112,639,000 (carried at $101,309,000, net of unamortized discount at
December 31, 1996).
(4) Subject to deeds of trust securing convertible mortgage notes due to
ATLANTIC. No amounts were funded at December 31, 1996.
ITEM 3. LEGAL PROCEEDINGS
Homestead is not a party to any litigation or claims, other than routine
matters arising out of the ordinary course of business that are incidental to
the operation of the business of Homestead. Homestead does not believe that the
results of all claims and litigation, individually or in the aggregate, will
have a material adverse effect on its business, financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Shares are listed on the American Stock Exchange (the "AMEX") under the
symbol "HSD" and the Warrants are listed on the AMEX under the symbol "HSD.W."
The table below indicates the range of the high and low sales prices of the
Shares and the Warrants since October 31, 1996 (the date the Shares and
Warrants were first traded on a when-issued basis).
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
SHARES:
1996
Fourth Quarter (trading commenced October 31, 1996 on a
when-issued basis).................................... $19 $15
1997
First Quarter (through March 24, 1997)................. $20 7/8 $16 7/8
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
WARRANTS:
1996
Fourth Quarter (trading commenced October 31, 1996 on a
when-issued basis).................................... $ 9 1/2 $ 5 1/2
1997
First Quarter (through March 24, 1997)................. $10 7/8 $ 7 1/4
</TABLE>
At March 24, 1997, there were approximately 2,300 holders of record of the
Shares and 2,100 holders of record of the Warrants.
Homestead is a recently organized company and has not paid any dividends. For
Federal income tax purposes, Homestead is a Subchapter C corporation. 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 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 Board deems
relevant. The 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.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data relating to the
historical financial condition and results of operations of Homestead for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992 as restated for the
acquisition of the subsidiaries of PTR relating to Homestead Village
properties (the "PTR Subsidiaries") in the Mergers accounted for as a
combination of entities under common control as described in Note 1 to the
financial statements. Prior to October 17, 1996, Homestead had no significant
activities, thus 1996 results of operations through the date of the Mergers
primarily represents the combined results of the PTR Subsidiaries. As of, and
prior to, December 31, 1995, all of the selected financial data represents
that of the PTR Subsidiaries. The following selected financial data is
qualified in its entirety by, and should be read in conjunction with, "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the financial statements and related notes thereto
included in Item 14 to this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATIONS SUMMARY:
Revenues:
Room Revenue................ $ 33,071 $ 18,337 $ 7,827 $ 2,554 $ 377
Other Revenue............... 492 366 165 59 --
--------- -------- -------- -------- -------
Total Operating Revenues.. $ 33,563 $ 18,703 $ 7,992 $ 2,613 $ 377
--------- -------- -------- -------- -------
Operating Expenses:
Property Operating Expenses
(1)........................ 13,767 7,600 3,146 1,157 232
Property Management Fees
Paid to Affiliate.......... 1,737 1,018 460 145 22
Corporate Operating
Expenses................... 3,362 944 826 304 7
Management Fees Paid to
Affiliate.................. 1,412 989 332 109 9
Depreciation and
Amortization............... 4,443 2,343 845 234 36
--------- -------- -------- -------- -------
Total Operating Expenses.. $ 24,721 $ 12,894 $ 5,609 $ 1,949 $ 306
--------- -------- -------- -------- -------
Operating Income............. $ 8,842 $ 5,809 $ 2,383 $ 664 $ 71
Interest Expense............. $ 5,971 $ 2,958 $ 1,409 $ 255 $ 61
Net Income................... $ 3,082 $ 2,851 $ 974 $ 409 $ 10
Pro Forma Earnings Per
Share(2).................... $ 0.23 N/A N/A N/A N/A
FINANCIAL POSITION:
Property and Equipment, net.. $ 255,608 $105,002 $ 59,099 $ 23,898 $ 6,972
Total Assets................. $ 324,625 $108,965 $ 60,866 $ 24,921 $ 7,076
Intercompany Debt............ $ -- $ 80,144 $ 45,131 $ 19,290 $ 5,123
Convertible Mortgage Notes
Payable..................... $ 101,309 $ -- $ -- $ -- $ --
Shareholders' Equity......... $ 204,003 $ 22,971 $ 12,068 $ 3,103 $ 1,586
OTHER DATA:
EBITDA (3)................... $ 13,285 $ 8,152 $ 3,228 $ 898 $ 107
Cash Provided by (used in):
Operating Activities........ $ 12,261 $ 6,019 $ 2,381 $ 599 $ 374
Investing Activities........ $(115,453) $(48,116) $(35,474) $(15,751) $(7,007)
Financing Activities........ $ 108,711 $ 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, utilities, insurance, maintenance and supply
costs and property taxes.
(2) Prior to the Mergers, the assets of Homestead were owned by subsidiaries
of PTR and ATLANTIC and were managed by subsidiaries of Security Capital.
The shares and equity interests of these entities differed substantially
from the Shares, Warrants and convertible mortgage notes outstanding after
the Mergers.
18
<PAGE>
Therefore, management does not believe that historical earnings per share
data is meaningful. Pro forma earnings per share assume issuance of the
Shares and Warrants for acquisition of the PTR Subsidiaries as of the
beginning of 1996. See "Item 1. Business--History."
(3) EBITDA means operating income before interest, income taxes, depreciation
and amortization. EBITDA does not represent cash generated from operating
activities in accordance with generally accepted accounting principles
("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. 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the "Item 6.
Selected Financial Data" and all of the financial statements and related notes
thereto appearing in Item 14 to this Form 10-K. Historical results and
percentage relationships set forth in "Item 6. Selected Financial Data" and the
Financial Statements of Homestead may not be indicative of future operations of
Homestead.
The statements contained in this discussion and elsewhere in this report that
are not historical facts are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are based on current expectations, estimates and projections about the industry
and markets in which Homestead operates, management's beliefs and assumptions
made by management. Words such as "expects", "anticipates", "intends", "plans",
"believes", "seeks", "estimates", variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. Homestead undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. Among the important factors that could
cause Homestead's actual results to differ materially from those expressed in
the forward-looking statement are (i) changes in general economic conditions in
its target markets that could adversely affect demand for Homestead's
properties and (ii) changes in financial markets and interest rates that could
adversely affect Homestead's cost of capital and its ability to meet its
financing needs and obligations.
OVERVIEW
The first Homestead Village property was opened in 1992. As of December 31,
1996, Homestead had developed, owned and operated 31 Homestead Village
properties representing in the aggregate 4,297 units in eight cities and had 41
Homestead Village properties under construction totaling 5,509 units within
three of these cities as well as 16 additional cities. In addition, Homestead
owns or controls through contracts 52 development sites for which it plans to
initiate construction within the next 12 months, for a total of 124 properties
in 34 cities. Units operating, under construction or in pre-development
planning aggregate 16,760 units.
In January 1996, Security Capital began considering ways for ATLANTIC, PTR
and Security Capital to maximize shareholder value with respect to their
Homestead Village properties and operations. On May 21, 1996, ATLANTIC, PTR,
Security Capital and Homestead entered into a merger agreement, pursuant to
which each of ATLANTIC, PTR and Security Capital agreed to contribute, through
a series of merger transactions, all of their respective assets relating to
Homestead Village properties to Homestead in exchange for Shares. ATLANTIC and
PTR agreed to enter into the funding commitment agreements and Security Capital
provided funding for Homestead acquisitions prior to the closing, all in
exchange for Warrants. ATLANTIC's and PTR's respective shareholders approved
the Homestead transaction on September 13, 1996 and September 12, 1996,
respectively, and the closing of the Homestead transaction occurred on October
17, 1996.
19
<PAGE>
Homestead's operating results reflect the growth and evolution of the
Homestead Village concept and the extended-stay lodging business as a whole,
which is substantially influenced by (i) the demand for and supply of
extended-stay lodging in Homestead's target markets and submarkets, (ii)
revenue and average weekly rate growth, (iii) the effectiveness of property
level operations and (iv) the pace and price at which Homestead can develop
additional extended-stay lodging properties. Capital and credit market
conditions which affect Homestead's cost of capital also influence operating
results.
HOMESTEAD INVESTMENTS
Homestead's active investment program has had a significant impact on its
financial performance during 1996, 1995 and 1994. The following table
summarizes Homestead's investment activity for 1996, 1995 and 1994 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
PROPERTIES UNDER CONSTRUCTION(1):
STARTS DURING PERIOD
Properties....................................... 42 11 6
Units............................................ 5,650 1,511 925
COMPLETIONS DURING PERIOD(1):
Properties....................................... 11 8 9
Units............................................ 1,532 1,182 1,201
UNDER CONSTRUCTION AT YEAR END(1):
Properties....................................... 41 10 7
Units............................................ 5,509 1,391 1,062
Total expected investment(2)..................... $264,931 $49,146 $31,729
OPERATING PROPERTIES(1):
Properties....................................... 31 20 12
Units............................................ 4,297 2,765 1,583
Total Investment, at historical cost............. $135,339 $77,537 $41,629
</TABLE>
- --------
(1) The table summarizes the investment activity for all Homestead Village
properties regardless of the form of ownership of such properties prior to
the Mergers.
(2) Total expected investment represents budgeted development cost for
properties under construction and properties in planning and owned;
properties in planning and owned represent projects where land has been
acquired and pre-construction planning activities are in progress.
Budgeted development cost includes the cost of land, fees, permits,
payments to contractors, architectural and engineering fees and interest
and property taxes to be capitalized during the development period. Land
held for future development or for sale, which is less than 3.0% of
property assets based on historical cost as of December 31, 1996, is not
included above.
20
<PAGE>
CURRENT DEVELOPMENT ACTIVITY
Homestead's overall results of operations and financial condition for the
three years ended December 31, 1996 have been significantly influenced by its
development activity. At the end of 1996, Homestead had 41 properties,
representing a total expected investment of $265 million, under construction.
The development properties which were under construction are summarized below
(all investment numbers are in thousands of dollars):
<TABLE>
<CAPTION>
EXPECTED
COST AT CONSTRUCTION COMPLETION
PROPERTY #UNITS YEAR-END START QUARTER QUARTER
- -------- ------ -------- ------------- ----------
<S> <C> <C> <C> <C>
Albuquerque, New Mexico:
I-40.................................. 138 $ 2,259 Q3 96 Q2 97
--- --------
Atlanta, Georgia:
Cumberland............................ 137 4,264 Q3 96 Q2 97
Gwinnett Place........................ 130 984 Q4 96 Q3 97
North Druid Hills..................... 137 3,022 Q4 96 Q3 97
Perimeter............................. 133 5,438 Q2 96 Q2 97
Roswell............................... 141 2,862 Q4 96 Q3 97
--- --------
Subtotal............................ 678 16,570
--- --------
Charlotte, North Carolina:
I-77 Billy Graham Pkwy................ 137 1,866 Q4 96 Q3 97
--- --------
Denver, Colorado:
Cherry Creek.......................... 108 2,747 Q3 96 Q2 97
Inverness............................. 142 3,151 Q3 96 Q2 97
--- --------
Subtotal............................ 250 5,898
--- --------
Jacksonville, Florida:
JTB................................... 137 2,492 Q3 96 Q2 97
--- --------
Kansas City, Missouri:
Merriam............................... 140 4,007 Q2 96 Q2 97
--- --------
Los Angeles, California:
El Segundo............................ 150 2,658 Q4 96 Q3 97
--- --------
Miami/Ft. Lauderdale, Florida:
Fort Lauderdale....................... 145 2,887 Q4 96 Q2 97
Miami Airport......................... 149 3,914 Q3 96 Q2 97
Plantation............................ 125 2,038 Q4 96 Q3 97
--- --------
Subtotal............................ 419 8,839
--- --------
Nashville, Tennessee:
Cool Springs.......................... 137 1,461 Q4 96 Q3 97
Nashville Airport..................... 134 2,584 Q3 96 Q2 97
--- --------
Subtotal............................ 271 4,045
--- --------
Orange County, California:
Spectrum.............................. 149 2,623 Q4 96 Q3 97
--- --------
Portland, Oregon:
Sunset East........................... 142 1,539 Q4 96 Q3 97
--- --------
Raleigh, North Carolina:
Hwy 70................................ 138 1,139 Q4 96 Q4 97
North Raleigh......................... 121 2,399 Q2 96 Q2 97
RTP................................... 125 2,812 Q2 96 Q2 97
--- --------
Subtotal............................ 384 6,350
--- --------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXPECTED
COST AT CONSTRUCTION COMPLETION
PROPERTY #UNITS YEAR-END START QUARTER QUARTER
- -------- ------ -------- ------------- ----------
<S> <C> <C> <C> <C>
Richmond, Virginia:
Upper Broad........................... 141 $ 1,840 Q4 96 Q2 97
----- --------
Salt Lake City, Utah:
Ft. Union............................. 132 1,725 Q4 96 Q3 97
Redwood............................... 138 2,846 Q3 96 Q2 97
----- --------
Subtotal............................ 270 4,571
----- --------
San Diego, California:
Mission Valley........................ 140 2,021 Q4 96 Q4 97
----- --------
San Francisco, California:
Milpitas.............................. 118 4,549 Q2 96 Q1 97
Mountain View......................... 133 2,480 Q4 96 Q3 97
San Jose.............................. 152 2,204 Q4 96 Q4 97
San Mateo............................. 136 5,743 Q1 96 Q1 97
Sunnyvale............................. 144 5,583 Q1 96 Q1 97
----- --------
Subtotal............................ 683 20,559
----- --------
Seattle, Washington:
Bellevue.............................. 149 3,169 Q4 96 Q4 97
Mountain Lake Terrace/N. Seattle...... 117 2,024 Q4 96 Q3 97
Redmond............................... 162 2,830 Q4 96 Q4 97
Tukwila............................... 92 1,365 Q4 96 Q3 97
----- --------
Subtotal............................ 520 9,388
----- --------
Tampa, Florida:
Brandon............................... 141 2,269 Q4 96 Q3 97
North Airport......................... 121 3,640 Q2 96 Q1 97
St. Petersburg........................ 113 1,185 Q4 96 Q3 97
----- --------
Subtotal............................ 375 7,094
----- --------
Washington, D.C.:
BWI................................... 137 1,426 Q4 96 Q3 97
Dulles-South.......................... 115 927 Q4 96 Q4 97
Fair Oaks............................. 133 1,720 Q4 96 Q4 97
----- --------
Subtotal............................ 385 4,073
----- --------
Total Under Construction............ 5,509 $108,692
===== ========
</TABLE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Prior to October 17, 1996 the operating assets of Homestead were held
primarily by subsidiaries of PTR. One property, opened in mid 1996, was held
by a subsidiary of ATLANTIC. Onsite property management was performed by a
subsidiary of Security Capital, which charged a fee based on a percentage (5%
to 7%) of gross operating property revenues. Other services such as investment
research, land acquisition, due diligence, development, marketing, asset
management, legal and accounting functions, was performed under PTR's and
ATLANTIC's overall REIT management agreements ("Management Agreements") with
subsidiaries of Security Capital. The fee charged for all services provided
under the Management Agreements was based on 16% of cash flow from operations
as defined in the Management Agreements. Neither PTR nor ATLANTIC had any
employees. All persons performing services related to Homestead Village
properties prior to the Mergers were employees of the above described property
management and REIT management subsidiaries of Security Capital.
22
<PAGE>
Upon the closing of the Mergers, all of the PTR and ATLANTIC Homestead
Village properties, including those under construction and in pre-development
planning, became assets of Homestead. Additionally, with the acquisition of
certain Security Capital subsidiaries, all onsite property management and
overall corporate management became an internal function of Homestead whereby
Homestead now directly incurs the costs of all property level, land
acquisition, due diligence, development and overall corporate management
personnel.
In addition to the change from fee-based property and corporate management
to internal management, the operating results of Homestead reported in the
accompanying financial statements are affected by certain matters of financial
presentation for the Mergers. The merger with the subsidiaries of PTR has been
accounted for as a combination of entities under common control in a manner
similar to a pooling of interests, thus the historical financial results of
the PTR Subsidiaries are presented for all periods prior to October 17, 1996
and, as the activities of Homestead prior to the Mergers were not significant,
the accompanying financial statements consist predominantly of the activities
of the PTR Subsidiaries prior to the merger closing date. The merger of the
subsidiaries of ATLANTIC was accounted for as a purchase, thus the operating
revenues and operating expenses of its one property opened in mid 1996 are not
included in the accompanying financial statements until the date of the
Mergers. Additionally, the development activities of the subsidiaries of
ATLANTIC are not reflected in the accompanying financial statements until the
merger closing date and thereafter. The merger of the subsidiaries of Security
Capital was also accounted for as a purchase, thus the incurrence of the costs
of personnel for property and corporate management are effective in the
accompanying financials after the merger closing date.
Unless otherwise noted, all references in the following discussion of
operating results are to the amounts as reported in the accompanying financial
statements.
Property Operations
The following table sets forth certain information for Homestead's operating
properties for the periods indicated (performance of the one operating
property acquired from ATLANTIC has been included from its opening date of
July 1, 1996 versus its acquisition date of October 17, 1996; inclusion of its
results in the table for such period has an insignificant effect on the
performance data presented):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Occupancy............................................... 78.8% 76.6% 75.9%
Average Weekly Rate(1).................................. $221.98 $211.86 $185.91
Weekly REVPAR(2)........................................ $174.92 $162.33 $141.05
Number of Operating Properties at Year End.............. 31 20 12
Property Operating Income Margin........................ 53.8% 53.9% 54.9%
</TABLE>
- --------
(1) Average weekly rate is determined by dividing room revenue by the number
of guest room days occupied for the period and multiplying by seven.
(2) Revenue per available room ("REVPAR") is determined by dividing room
revenue by the number of guest room days available for the period and
multiplying by seven.
Homestead opened 19 properties from the end of 1994 through the end of 1996.
These property openings were the primary reason for the reported operating
revenue increase of $14.9 million (79.5%) in 1996 over 1995 and $10.7 million
(134.0%) in 1995 over 1994. The increase in total operating revenues was also
due to increase in the average weekly rate of $10.12 in 1996 (4.8%) and $25.95
in 1995 over 1994 (14.0%).
Total property operating expenses, including property management fees,
increased $6.9 million (79.9%) in 1996 over 1995 and $5.0 million (139.0%) in
1995 over 1994, again primarily attributable to the increase in the number of
operating properties as noted above and also due to refinements in the number
and quality of property-level services and training programs.
Homestead Properties Fully Operating Throughout Consecutive Periods
Homestead had twelve properties, representing 1,640 units, that were fully
operational throughout both 1996 and 1995. Average occupancy for 1996 and 1995
was 84.8% and 80.4%, respectively. Average weekly rate for
23
<PAGE>
1996 and 1995 was $218.65 and $212.04, respectively, an increase of 3.1% in
1996 over 1995. Homestead had only three properties, representing 382 units
that were fully operational throughout both 1995 and 1994.
Corporate Operating Expenses
Corporate operating expense increased $2.4 million (256.1%) in 1996 over 1995
and $118,000 (14.3%) in 1995 over 1994. The significant increase in 1996
relates to the change in corporate structure from external management to
internal management. This change in structure involves costs associated with
operating as a public company, recruiting, relocation and personnel expenses
and other costs to create a corporate infrastructure, offset in part by
capitalizing costs related to the acquisition, development or improvement of
real estate. Under the new structure, Homestead no longer pays a management fee
to an external manager, but instead directly incurs the cost of corporate
employees.
Management Fees
The management fee paid by Homestead fluctuated with the level of Homestead's
pre-merger cash flow and therefore increased by $423,000 (42.8%) in 1996 over
1995 and $657,000 (197.9%) in 1995 over 1994 as operating cash flow increased.
The management agreement terminated at the merger closing date.
Depreciation and Amortization
Depreciation and amortization increased $2.1 million (89.6%) in 1996 over
1995 and $1.5 million (177.3%) in 1995 over 1994. The increase is attributable
primarily to depreciation as discussed below.
Depreciation of the cost of properties and improvements is provided using the
straight-line method over the estimated useful lives of the assets.
Depreciation expense increased $1.9 million (81.8%) in 1996 over 1995 due
primarily to the eleven new properties opened in 1996 and the full year of
depreciation being charged for the eight properties opened in 1995.
Depreciation expense increased $1.5 million (177.3%) in 1995 over 1994 due
primarily to the nine new properties opened in 1994.
Homestead also recorded $184,000 in amortization expense in 1996 as a result
of the amortization of the Homestead Village trademark and other intangibles
acquired in the Mergers.
Interest Income
Interest income of $211,000 recorded in 1996 relates to interest earned from
investment of excess cash on hand, nearly all of which was earned on cash
balances after the Mergers.
Interest Cost
Total interest cost increased $5.2 million in 1996 over 1995 and $2.7 million
in 1995 over 1994. The increases are due to the increase in investments in
operating and under construction properties and the corresponding increases in
intercompany debt and convertible mortgage notes payable. Total interest cost
incurred was offset by an increase in capitalized interest of $2.2 million in
1996 over 1995 and $1.1 million in 1995 over 1994. The increase in capitalized
interest is attributable to the increase levels of development activity.
ENVIRONMENTAL MATTERS
Homestead is not aware of, nor does it expect, any environmental condition on
its properties to have a material adverse effect upon its business, results of
operations or financial position.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996 Homestead had invested $256 million for the
acquisition and development of 80 Homestead Village properties, 31 of which
were operating, 41 of which were under construction and 8 of which
24
<PAGE>
were in planning and owned. Homestead had unfunded development commitments for
properties under construction of approximately $168 million. The total
expected future investment to develop properties in planning and owned as of
December 31, 1996 was approximately $39.6 million.
Of the properties in operation, properties under construction and properties
in planning and owned at December 31, 1996, 76 were acquired from PTR and
ATLANTIC in the Mergers. Homestead also acquired in the Mergers the rights
from PTR and ATLANTIC to develop four additional properties which are in
planning and under control. Homestead has financed and expects to finance the
remaining construction, development and land acquisitions for all of the
merger properties with the proceeds of convertible mortgage loans made under
the Funding Commitment Agreements from PTR and ATLANTIC. The total funding
commitment amounts at the merger date were determined based on the remaining
budgeted investment in the merger properties. At December 31, 1996
approximately $98 million and $111 million remaining funding commitments are
available from PTR and ATLANTIC, respectively. In January and February 1997,
Homestead received funding advances of approximately $10 million and $13
million from PTR and ATLANTIC, respectively, resulting in remaining unfunded
commitments of approximately $88 million and $98 million from PTR and
ATLANTIC, respectively. Management expects the funding commitments to be
adequate to complete development of the merger properties.
Homestead had 44 properties in planning and under control at December 31,
1996, including the four merger properties described above. Homestead expects
to finance future construction, development and land acquisitions by exercise
of Warrants by Security Capital pursuant to the Security Capital Investor
Agreement (approximately $31.9 million available as of December 31, 1996),
possible exercise of Warrants by other warrant holders ($50.6 million
outstanding at December 31, 1996), cash on hand and cash from future credit
facilities and/or securities offerings. Through February 1997, Security
Capital has exercised an additional $10 million of Warrants and, through
purchases of Warrants in the open market, holds Warrants with an aggregate
exercise price of $33.4 million.
Homestead expects future financings to come from a revolving line of credit
and from future securities offerings. Homestead is currently negotiating a
revolving line of credit which would be used to provide short-term financing.
The line of credit would facilitate an efficient response to market
opportunities while minimizing the amount of cash invested in short-term
investments at lower yields. There can be no assurance that Homestead will be
able to obtain funds from the revolving line of credit or from future
securities offerings on terms acceptable to Homestead.
The Board has established a policy of retaining earnings to finance
Homestead's growth and for general corporate purposes and, therefore, does not
anticipate paying a cash dividend in the foreseeable future.
Operating Activities
Net cash flow provided by operating activities increased by $6.2 million
(103.7%) for the year ended December 31, 1996 as compared to 1995 and $3.6
million (152.8%) for 1995 as compared to 1994. These increases are due
primarily to Homestead property openings as described under "--Results of
Operation for the Years ended December 31, 1996, 1995, 1994" as well as
improvements in occupancy and average weekly rates.
Investing and Financing Activities
During the years ended December 31, 1996, 1995, and 1994, Homestead invested
$113.5 million, $47.4 million and $35.3 million, respectively in Homestead
Village properties. The amounts invested in 1995 and 1994 were financed
primarily by intercompany borrowings by the PTR Subsidiaries from PTR and to a
lesser extent from contributed capital from PTR. Property investments in 1996
were financed primarily from intercompany borrowings by the subsidiaries of
PTR prior to the Mergers, the expenditure of $16.5 million received in cash
from ATLANTIC at the merger closing date for development of properties
acquired from ATLANTIC, $25.2 million in proceeds from the convertible
mortgage loans from PTR, and $17.5 million of proceeds from the exercise of
Warrants by Security Capital. Prior to the Mergers, Homestead, on a standalone
basis, borrowed $6.2 million under a note payable to Security Capital to fund
pursuit costs and land acquisitions. The note was repaid at the date of the
Mergers.
25
<PAGE>
SEASONALITY AND INFLATION
Based upon the operating history of Homestead properties, management
believes that the extended-stay lodging business is not as seasonal in nature
as the overall lodging industry. Management does expect, however, that
occupancy and revenues may be lower than normal during the months of December
and January due to the holiday season. Because many of Homestead's expenses do
not fluctuate with occupancy, such declines in occupancy may cause
fluctuations or decreases in Homestead's quarterly earnings.
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on the revenue or operating results of
Homestead in 1996. There can be no assurance, however, that inflation will not
affect future operating or construction costs.
DIVIDENDS
The 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Homestead's Balance Sheet as of December 31, 1996, its Statements of
Operations, Shareholders' Equity and Cash Flows for the year then ended and
Schedule III--Real Estate and Accumulated Depreciation as of December 31,
1996, together with the report of Ernst & Young LLP, independent auditors, are
included under Item 14 of this report and are incorporated herein by
reference. PTR-Homestead Village Group (the predecessor to Homestead) Balance
Sheet as of December 31, 1995, and its Statements of Operations, Shareholders'
Equity and Cash Flows for each of the years in the two year period ended
December 31, 1995 and the 1995 and 1994 information included in Schedule III--
Real Estate and Accumulated Depreciation, together with the report of KPMG
Peat Marwick LLP, independent auditors, are included under Item 14 of this
report and are incorporated herein by reference. Selected quarterly financial
data is presented in Note 8 of Notes to Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding the executive officers of Homestead, see "Item 1.
Business--Executive Officers of Homestead." The information regarding the
directors of Homestead is incorporated herein by reference to the description
under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in Homestead's definitive proxy statement for
its 1997 annual meeting of shareholders (the "1997 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the description under the captions
"Director Compensation" and "Executive Compensation" in the 1997 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the description under the caption
"Principal Shareholders" in the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the description under the caption
"Certain Relationships and Transactions" in the 1997 Proxy Statement.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a) Financial Statements and Schedules:
1. Financial Statements:
See Index to Financial Statements on page 28 of this report
2. Financial Statement Schedules:
Schedule III
All other schedules have been omitted since the required information is
presented in the financial statements and the related notes or is not
applicable.
3. Exhibits:
See Index to Exhibits, which is incorporated herein by reference.
(b) Reports on Form 8-K: The following reports on Form 8-K were filed during
the last quarter of the period covered by this report
None.
(c) Exhibits:
The Exhibits required by Item 601 of Regulation S-K are listed in the Index
to Exhibits, which is incorporated herein by reference.
27
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Auditors........................................... 29
Balance Sheets as December 31, 1996 and 1995.............................. 31
Statements of Operations for the Years Ended December 31, 1996, 1995 and
1994..................................................................... 32
Statements of Shareholders' Equity for the Years Ended December 31, 1996,
1995 and 1994............................................................ 33
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and
1994..................................................................... 34
Notes to Financial Statements............................................. 35
Schedule III--Real Estate and Accumulated Depreciation as of December 31,
1996..................................................................... 44
</TABLE>
28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Homestead Village Incorporated
We have audited the accompanying balance sheet of Homestead Village
Incorporated as of December 31, 1996, and the related statements of
operations, shareholders' equity and cash flows for the year ended December
31, 1996. Our audit also included the accompanying Schedule III, Real Estate
and Accumulated Depreciation. The financial statements and schedule are the
responsibility of Homestead Village Incorporated's management. Our
responsibility is to express an opinion on the financial statements and
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 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 audit provides 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 Homestead Village
Incorporated at December 31, 1996, and the results of its operations and its
cash flows for the year ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related 1996
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
February 24, 1997
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Homestead Village Incorporated
We have audited the accompanying combined balance sheet of PTR-Homestead
Village Group (the predecessor to Homestead Village Incorporated) as of
December 31, 1995 and the related combined statements of operations, owners'
equity, and cash flows for each of the years in the two-year period ended
December 31, 1995. Our audit also included the 1995 and 1994 information
included in the accompanying Schedule III, Real Estate and Accumulated
Depreciation. These combined financial statements and schedule are the
responsibility of PTR-Homestead Village Group's management. Our responsibility
is to express an opinion on these combined 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 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 PTR-Homestead
Village Group (the predecessor to Homestead Village Incorporated) as of
December 31, 1995, and the results of their operations and their cash flows
for each of the years in the two-year period ended December 31, 1995 in
conformity with generally accepted accounting principles. Also in our opinion,
the related 1995 and 1994 information included in the financial statement
schedule, when considered in relation to the basic 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
30
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
ASSETS 1996 1995
------ -------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 7,415 $ 1,896
Accounts receivable, net of allowance of $37 in 1996 and
$10 in 1995............................................. 809 436
Other current assets..................................... 736 353
-------- ---------
Total current assets................................... 8,960 2,685
Property and equipment..................................... 263,325 108,459
Less accumulated depreciation.............................. 7,717 3,457
-------- ---------
Net investment in property and equipment................... 255,608 105,002
-------- ---------
Deposits and pursuit costs, including $3,025 of funds with
title companies for property acquisitions in 1996 and $795
in 1995................................................... 5,536 1,278
Deferred loan costs, net of accumulated amortization of
$141...................................................... 29,075 --
Trademark and intangibles, net of accumulated amortization
of $184 .................................................. 21,807 --
Other assets............................................... 3,639 --
-------- ---------
Total Assets........................................... $324,625 $ 108,965
======== =========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Development costs payable................................ $ 11,328 $ 3,389
Accounts payable......................................... 412 578
Due to affiliate......................................... 216 --
Accrued interest payable to affiliate.................... 853 --
Accrued real estate taxes................................ 2,066 1,056
Other accrued expenses................................... 2,781 827
-------- ---------
Total current liabilities.............................. 17,656 5,850
Convertible mortgage notes payable to affiliate, net....... 101,309 --
Intercompany debt.......................................... -- 80,144
Deferred income taxes...................................... 1,657 --
-------- ---------
Total liabilities...................................... 120,622 85,994
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value, 250,000,000 shares
authorized, 19,689,130 shares issued and outstanding in
1996.................................................... 197 --
Additional paid-in capital and contributed capital....... 224,352 18,726
Retained earnings........................................ 7,327 4,245
Less shares in escrow.................................... (26,477) --
Less deferred compensation............................... (1,396) --
-------- ---------
Total shareholders' equity ............................ 204,003 22,971
-------- ---------
Total liabilities and shareholders' equity............. $324,625 $ 108,965
======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
---------- ------- -------
<S> <C> <C> <C>
Revenues:
Room revenue................................... $ 33,071 $18,337 $ 7,827
Other revenue.................................. 492 366 165
---------- ------- -------
Total operating revenues..................... 33,563 18,703 7,992
---------- ------- -------
Operating expenses:
Property operating expenses.................... 13,767 7,600 3,146
Property management fees paid to affiliate..... 1,737 1,018 460
Corporate operating expenses................... 3,362 944 826
Management fees paid to affiliate.............. 1,412 989 332
Depreciation and amortization.................. 4,443 2,343 845
---------- ------- -------
Total operating expenses..................... 24,721 12,894 5,609
---------- ------- -------
Operating income................................. 8,842 5,809 2,383
---------- ------- -------
Interest income.................................. 211 -- --
Interest expense, net of capitalized interest.... (5,971) (2,958) (1,409)
---------- ------- -------
Earnings before income taxes..................... 3,082 2,851 974
Provision for income taxes....................... -- -- --
---------- ------- -------
Net income....................................... $ 3,082 $ 2,851 $ 974
========== ======= =======
Pro forma earnings per share:
Weighted average shares and common equivalent
shares outstanding............................ 13,157,325
==========
Pro forma earnings per common and common
equivalent share.............................. $ 0.23
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID IN AND SHARES
NUMBER OF PAR CONTRIBUTED RETAINED IN DEFERRED TOTAL
SHARES VALUE CAPITAL EARNINGS ESCROW COMPENSATION EQUITY
---------- ----- ----------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1993................... -- $-- $ 2,683 $ 420 $ -- $ -- $ 3,103
Contributed capital.... -- -- 7,991 -- -- -- 7,991
Net income............. -- -- -- 974 -- -- 974
---------- ---- -------- ------ -------- ------- --------
Balances at December 31,
1994................... -- -- 10,674 1,394 -- -- 12,068
Contributed capital.... -- -- 8,052 -- -- -- 8,052
Net income............. -- -- -- 2,851 -- -- 2,851
---------- ---- -------- ------ -------- ------- --------
Balances at December 31,
1995................... -- -- 18,726 4,245 -- -- 22,971
Capital distribution,
net................... -- -- (1,201) -- -- -- (1,201)
Sale of common shares.. 1,000 -- 1 -- -- -- 1
Sale of restricted
common shares to
officers, less notes
receivable from
officers.............. 185,170 2 1,350 -- -- -- 1,352
Deferred compensation
for issuance of
options and sale of
restricted stock...... -- -- 1,511 -- -- (1,511) --
Amortization of
deferred compensation. -- -- -- -- -- 115 115
Common shares issued
for mergers, net of
expenses.............. 17,748,735 177 101,468 -- (26,477) -- 75,168
Conversion of mortgage
notes and interest
payable............... -- -- 16,917 -- -- -- 16,917
Conversion of
intercompany debt..... -- -- 35,660 -- -- -- 35,660
Issuance of warrants... -- -- 23,100 -- -- -- 23,100
Equity associated with
assumption and
issuance of
convertible mortgage
notes................. -- -- 7,934 -- -- -- 7,934
Issuance of common
stock for exercise of
warrants.............. 1,754,225 18 17,524 -- -- -- 17,542
Recognition of deferred
tax asset............. -- -- 1,362 -- -- -- 1,362
Net income............. -- -- -- 3,082 -- -- 3,082
---------- ---- -------- ------ -------- ------- --------
Balances at December 31,
1996................... 19,689,130 $197 $224,352 $7,327 $(26,477) $(1,396) $204,003
========== ==== ======== ====== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income...................................... $ 3,082 $ 2,851 $ 974
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 4,443 2,343 845
Deferred compensation......................... 115 -- --
Amortization of prepaid rent.................. 50 -- --
Amortization of deferred loan costs........... 1,720 -- --
Change in assets and liabilities, excluding the
effects of mergers accounted for by the
purchase method:
Increase in accounts receivable............... (394) (325) (62)
Increase in other current assets.............. (104) (208) (128)
Increase (decrease) in accounts payable....... (167) 229 265
Increase in accrued real estate taxes......... 1,010 784 188
Increase in accrued interest on convertible
mortgage notes............................... 853 -- --
Increase in other accrued expenses............ 1,379 345 299
Increase in due to affiliate.................. 216 -- --
Other......................................... 58 -- --
-------- -------- --------
Net cash provided by operating activities... 12,261 6,019 2,381
-------- -------- --------
Investing activities:
Investment in properties, excluding development
costs payable.................................. (113,461) (47,421) (35,288)
Increase in deposits and pursuit costs.......... (791) (832) (182)
Capital distribution, net....................... (1,201) 137 (4)
-------- -------- --------
Net cash used in investing activities....... (115,453) (48,116) (35,474)
-------- -------- --------
Financing activities:
Proceeds from note payable to affiliate......... 6,118 -- --
Payment of notes payable to affiliate........... (6,492) -- --
Proceeds from merger............................ 16,564 -- --
Sale of common stock............................ 1,353 -- --
Exercise of warrants for common stock........... 17,524 -- --
Proceeds from intercompany debt................. 48,402 43,065 33,832
Proceeds from convertible mortgage notes........ 25,242 -- --
-------- -------- --------
Net cash provided by financing activities... 108,711 43,065 33,832
-------- -------- --------
Net increase in cash and cash equivalents........ 5,519 968 739
Cash and cash equivalents, beginning of year..... 1,896 928 189
-------- -------- --------
Cash and cash equivalents, end of year........... $ 7,415 $ 1,896 $ 928
======== ======== ========
Noncash investing and financing transactions:
Increase in net assets acquired by issuance of
common stock in mergers........................ $ 58,920 $ -- $ --
======== ======== ========
Conversion of intercompany debt to equity....... $ 35,660 $ 8,052 $ 7,991
======== ======== ========
Conversion of intercompany debt to convertible
mortgage notes payable......................... $ 92,789 $ -- $ --
======== ======== ========
Conversion of convertible mortgage debt to
equity......................................... $ 16,917 $ -- $ --
======== ======== ========
Deferred loan costs resulting from issuance of
warrants and convertible mortgage debt......... $ 30,734 $ -- $ --
======== ======== ========
Increase in deferred tax asset and deferred tax
liability...................................... $ 1,657 $ -- $ --
======== ======== ========
Increase in property and equipment, and
development cost payable....................... $ 4,347 $ -- $ --
======== ======== ========
Deferred tax assets arising through equity...... $ 1,362 $ -- $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1--ORGANIZATION
Homestead Village Incorporated, a Maryland corporation ("Homestead"), was
formed on January 26, 1996 to develop, own, and manage extended-stay lodging
facilities under the Homestead Village(R) trademark. Homestead's extended-stay
lodging rooms are designed to appeal to guests such as business travelers,
professionals and others on a weekly basis, with most guests staying multiple
weeks.
On October 17, 1996 Homestead acquired, through a series of merger
transactions, extended-stay lodging assets operating or to be operated under
the Homestead Village trademark (the "Merger Transaction"). The net assets
related to the Homestead Village properties were acquired through the merger
of various wholly-owned subsidiaries of Security Capital Group Incorporated
("Security Capital"), Security Capital Pacific Trust ("PTR") and Security
Capital Atlantic Incorporated ("ATLANTIC"), all affiliates of Homestead, in
exchange for common stock of Homestead. At the closing date of the Merger
Transaction PTR had 28 operating Homestead Village properties, 11 under
construction and 15 in planning (or the rights to acquire such properties)
while ATLANTIC had one Homestead Village property in operation, 8 under
construction and 17 in planning (or the rights to acquire such properties).
Such properties are geographically distributed, and Homestead intends to
operate, on a national basis. Security Capital provided the trademark, and
development and property management expertise as well as operating systems
necessary to develop, own and operate the properties.
Homestead issued 9,485,727 shares of common stock to acquire the net assets
of PTR's Homestead Village Group subsidiaries (the "PTR Subsidiaries"). The
merging of the PTR Subsidiaries has been accounted for as a combination of
entities under common control in a manner similar to a "pooling of interests".
Accordingly, the financial statements assume the historical results of
operations for the PTR Subsidiaries were combined with Homestead for all of
1996 and prior years, with historical financial position and results of
operations prior to 1996 consisting solely of that of the PTR Subsidiaries.
Homestead's activities from its formation in January 1996 until the closing
date of the mergers were not significant.
The acquisition of the ATLANTIC subsidiaries has been accounted for as a
purchase and, accordingly, the results of the ATLANTIC subsidiaries have been
included in Homestead's results from October 17, 1996. Homestead issued
4,201,220 shares of common stock to ATLANTIC to acquire net assets with a fair
value of $35.2 million (including $4 million which represents the excess of
purchase price over recorded cost) and a cash payment of approximately $16.5
million.
The acquisition of the Security Capital subsidiaries has been accounted for
as a purchase and, accordingly, the results of the Security Capital
subsidiaries have been included in Homestead's results from October 17, 1996.
Homestead issued 4,062,788 shares of common stock (including 2,150,892 shares
of common stock held in escrow) for net assets of $50 million which consisted
of trademarks, tradenames, development and property management expertise and
operating systems necessary to conduct the business of developing, owning and
operating the Homestead Village properties valued at approximately $48.5
million and other net assets of approximately $1.5 million. The escrowed
shares will be transferred to Security Capital 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 Security
Capital will be returned to Homestead along with any dividends paid on those
shares. 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.
35
<PAGE>
On November 12, 1996, PTR and ATLANTIC distributed to their shareholders the
shares of Homestead common stock received in the Mergers. Security Capital
received 3,442,737 shares from PTR and 2,388,876 shares from ATLANTIC. Based
on shares received in the Merger (including shares held in escrow), shares
received in the distributions by PTR and ATLANTIC, and shares obtained by
exercise of Homestead warrants (see Note 5) Security Capital owned 59.14% of
Homestead's common stock at December 31, 1996.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Financial Presentation
The accompanying financial statements include the accounts of Homestead and
its wholly-owned subsidiaries. All material 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
Homestead 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.
Property and Equipment and Depreciation
Property and equipment is stated at cost.
Costs directly related to the acquisition, development or improvement of
real estate, including interest and salaries and related costs for site
acquisition and supervision of construction, are capitalized. Maintenance and
repairs are charged to operations as incurred; major renewals and improvements
are capitalized. Costs incurred in connection with the pursuit of successful
site acquisitions are capitalized, while costs associated with unsuccessful
site acquisitions are expensed at the time the pursuit is abandoned.
Depreciation is computed by the straight-line method principally over the
estimated following useful lives:
<TABLE>
<S> <C>
Buildings and improvements... 20-40 years
Furniture, fixtures and
equipment................... 2- 7 years
</TABLE>
Pre-opening costs incurred related to the opening of new properties are
capitalized and amortized over two years.
Trademarks and Intangibles
As a result of the Merger Transaction, Homestead acquired the Homestead
Village trademark and certain operating systems for the development, ownership
and operation of Homestead Village properties. These intangible assets have
been valued at $48.5 million. The amount initially recorded as an asset by
Homestead of $22 million represents the pro rata portion of the actual funding
provided by PTR and ATLANTIC to the total expected funding to be provided
under funding commitment agreements (see Note 4). The shares issued to
Security Capital were issued directly to Security Capital and to an escrow
agent in proportion to the actual funding commitments fulfilled by PTR and
ATLANTIC. As shares are released from escrow, additional intangible assets
will be recorded. Homestead is amortizing the intangible assets on the
straight line basis over a period of 20 years.
Deferred Costs
Homestead incurred certain costs in connection with the Merger Transaction
that have been recorded as deferred costs in the accompanying financial
statements. These costs are associated with the issuance of warrants to PTR
and ATLANTIC in exchange for execution of the Funding Commitment Agreements
(see Note 9). The deferred financing costs incurred related to the Funding
Commitment Agreements are being amortized by Homestead using the effective
interest method over the 10 year life of the convertible mortgages and is
included in interest expense. Additionally, Homestead incurred costs
associated with the issuance of warrants to Security Capital (see Note 5) in
exchange for interim financing (see Note 7) and the lease of office space for
one year.
36
<PAGE>
The costs related to the interim financing arrangement with Security Capital
have been charged to interest expense. The costs related to the office space
provided by Security Capital are being expensed over the period of one year.
Interest
During 1996, 1995 and 1994, the total interest paid in cash was $5,721,000,
$5,100,000 and $2,448,000, respectively.
Homestead capitalizes interest as part of the cost of its real estate
properties under development. Interest capitalized during 1996, 1995 and 1994
totaled $4,365,000, $2,143,000 and $1,039,000, respectively.
Income Taxes
Income taxes for Homestead are determined using the liability method in which
deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities used for financial reporting
purposes and income tax reporting purposes calculated using the income tax
rates, under existing legislation, expected to be in effect at the date such
temporary differences are expected to reverse.
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.
Per Share Data
Prior to the Merger Transaction on October 17, 1996 the operating assets of
Homestead were owned by subsidiaries of PTR and ATLANTIC and were managed under
contract by subsidiaries of Security Capital. The outstanding shares and equity
interests of these entities differed substantially from the common shares,
warrants and convertible debt outstanding after the mergers. Therefore,
historical earnings per share data is not meaningful.
The pro forma earnings per share for the year ended December 31, 1996 has
been calculated by dividing net income by pro forma weighted average shares
outstanding assuming shares and warrants issued to PTR were outstanding since
the beginning of the year and shares and warrants issued to Security Capital
and ATLANTIC were outstanding since the merger date. Warrants and options are
considered common stock equivalents and are included in pro forma weighted
average shares on the treasury stock method.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Operating properties:
Land................................................. $ 22,999 $ 14,812
Buildings and improvements........................... 92,964 52,697
Furniture, fixtures and equipment.................... 19,376 10,028
-------- --------
135,339 77,537
Properties under construction........................ 108,692 27,018
Properties in planning and owned..................... 12,256 3,013
Land held for future development..................... 1,448 891
Land held for sale................................... 5,590 --
-------- --------
Total.............................................. $263,325 $108,459
======== ========
</TABLE>
Statement of Financial Accounting Standards No. 121, Accounting For The
Impairment of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of
("SFAS No. 121"), adopted by Homestead effective January 1, 1996, establishes
accounting standards for the review of long-lived assets to be held and used
for impairment whenever the carrying amount of an asset may not be recoverable.
SFAS No. 121 also requires that certain long-lived assets to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell.
Homestead did not recognize any losses on the date it adopted SFAS No. 121 or
during the year ended December 31, 1996.
37
<PAGE>
NOTE 4--DEBT
Convertible Mortgage Notes Payable
In connection with the Merger Transaction Homestead obtained funding
commitment agreements from PTR and ATLANTIC which provide for aggregate
fundings of $198.8 million and $111.1 million, respectively. Under these
agreements, Homestead may call for funding from PTR and ATLANTIC for the
development of the projects acquired from PTR and ATLANTIC in the Merger
Transaction. Assuming full funding of the commitments, PTR and ATLANTIC will
receive convertible mortgage notes in stated principal amounts of $221.3
million and $98.0 million, respectively. The discount, in the case of the
notes payable to PTR, and the premium, in the case of the notes payable to
ATLANTIC, are amortized as an increase and a reduction, respectively, to
interest expense over the term of the notes using the effective interest
method. The notes are collateralized by the Homestead properties acquired in
the mergers ($190.9 million of properties at historical cost mortgaged to PTR
and $59.3 million of properties at historical cost mortgaged to ATLANTIC at
December 31, 1996), accrue interest at 9.0% on the principal amount, and
require interest only payments every six months on May 28 and November 28. The
notes are due October 31, 2006, and are callable on or after May 28, 2001.
The mortgage notes are convertible, at the option of PTR and ATLANTIC, into
shares of Homestead common stock on or after March 31, 1997. The conversion
price is equal to one share of common stock for every $11.50 of principal
amount outstanding. The value of the conversion feature, representing the
difference between the conversion price per share and the value per share of
Homestead stock established in the Merger Transaction, is recorded as a
deferred financing cost as the notes are funded. The deferred amounts are
amortized as an increase to interest expense over the term of the notes using
the effective interest method.
Homestead issued warrants to PTR and ATLANTIC in exchange for entering into
the funding commitment agreements. The costs associated with the issuance of
the warrants have been recorded as deferred financing costs and are amortized
to interest expense over the term of the notes using the effective interest
method. The effective interest rate on the PTR convertible mortgage notes
payable after giving effect to the related discount, conversion feature, and
warrants is estimated to be 13.56%.
At the closing date of the Merger Transaction, $15,004,000 of convertible
mortgage notes payable to PTR and related accrued interest of $1,912,000, were
converted to capital in accordance with the terms of the Mergers, resulting in
a carrying amount of the notes of $60,445,000, net of discount. At December
31, 1996 Homestead owed convertible mortgage notes to PTR of $112,639,000
(carrying amount of $101,309,000 net of unamortized discount). Homestead had
not requested fundings under the commitment agreement with ATLANTIC and,
accordingly, had no outstanding balance on the convertible mortgage notes with
ATLANTIC at December 31, 1996. In January and February 1997, Homestead
received funding advances of $10,250,000 and $13,000,000 from PTR and
ATLANTIC, respectively, under the funding commitment agreements.
Intercompany Debt
Prior to the Merger Transaction closing date, the balance sheets reflect
intercompany debt of the PTR Subsidiaries assumed to have been borrowed from
PTR to fund the acquisition and development of the Homestead Village
properties. Acquisition and development costs were assumed to have been
financed through borrowing 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 rate of PTR's line of credit
and unsecured long term debt which rates ranged from 7.4% to 9.25% for the
period from January 1, 1994 through October 17, 1996.
NOTE 5--SHAREHOLDERS' EQUITY
Stock Based Compensation Plans
In 1996 Homestead established two stock option plans, the 1996 Long-term
Incentive Plan (the "Incentive Plan") and the 1996 Outside Directors Plans
(the "Outside Directors Plan"). During 1996 Homestead made
38
<PAGE>
grants of stock options under both plans and sold stock under the Incentive
Plan. Homestead has elected to account for these plans under APB Opinion No.
25, under which certain compensation costs have been recognized equal to the
difference between the fair value of the Homestead stock at the date of the
grant or sale and the exercise or sale price. Total stock-based compensation
expense related to these plans for 1996 is $115,000, which is included in
corporate operating expenses in the accompanying statement of operations.
Had compensation cost for the grants of stock options been determined
consistent with Statement of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock-Based Compensation", Homestead's net income of
$3,082,000 for the year ended December 31, 1996 would have been reduced to
$3,014,000.
Homestead may grant options for up to 4,000,000 shares of stock to its full
time employees under the Incentive Plan and up to 100,000 shares of stock
under the Outside Directors Plan. In 1996, Homestead granted 465,000 shares at
an exercise price of $10 and 115,000 shares at an exercise price of $16. These
grants have a contractual life of 10 years and at December 31, 1996 none were
exercisable and none had been forfeited. Additionally in 1996 Homestead
granted options of 4,000 shares at an exercise price of $10 under the Outside
Directors Plan. These grants have a contractual life of 10 years and at
December 31, 1996 all were exercisable.
The weighted average fair value of all options granted in 1996 was $6.58.
The fair value of each option grant on the date of grant was estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions; 1996 risk-free interest rates of 6.23%; no expected dividend
yields; expected lives of 5.5 years and expected volatility of 37%.
Certain of Homestead's key officers purchased 185,170 shares of common stock
at a price of $10 per share, subject to a two-year vesting term.
Warrants
Homestead issued a total of 10,000,000 of warrants on the merger date which
entitles the holders to buy one share of Homestead common stock at the
exercise price of $10 per share. Warrants were issued to PTR and ATLANTIC in
exchange for entering into the funding commitment agreements in the amounts of
6,363,789 and 2,818,517 shares, respectively. Security Capital received
817,694 Homestead warrants in exchange for providing financing to Homestead
during the time between the execution of the merger agreement and the closing
date and for the use of office facilities for one year. The warrants expire
October 29, 1997.
The fair value of the warrants exceeded the exercise price at the date of
issuance. The difference between the fair value of the Homestead stock at the
date of issuance and the warrant exercise price of $10 for the warrants issued
to PTR and ATLANTIC has been recorded as deferred financing costs of
approximately $21.1 million (see Note 2). The value attributable to the
interim financing provided by Security Capital to Homestead of $1,589,000 has
been charged to interest expense. The value of the use of office facilities
for one year was determined by management to be $300,000 and is being charged
to corporate operating expense over a period of one year.
After the initial issuance of warrants to PTR, ATLANTIC and Security
Capital, both PTR and ATLANTIC distributed the warrants to their shareholders
which resulted in Security Capital holding a total of 4,730,022 warrants after
the distribution. Homestead has the right under an investor agreement entered
into with Security Capital at the merger closing to request Security Capital
to exercise its warrants in minimum increments of $5,000,000. Through December
31, 1996 Security Capital exercised 1,750,000 warrants or $17,500,000 in
proceeds. Third party holders of warrants had exercised 4,225 warrants
resulting in proceeds of $42,250 of warrants through year end. In January and
February, 1997 Security Capital exercised an additional $10,000,000 of
warrants and third parties exercised an additional $47,030. Additionally,
Security Capital has made market purchases of 1,360,100 warrants through
February, 1997 bringing its holdings of Homestead warrants to 3,340,122.
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
39
<PAGE>
Homestead common stock of record on that 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 (other than Security Capital, PTR or
ATLANTIC) acquires 20% or more of the outstanding shares of common stock or
offers to acquire 25% or more.
NOTE 6--INCOME TAXES
At December 31, 1996, Homestead had, for federal income tax reporting
purposes, net operating loss carryforwards of $3,300,000, which expire in the
year 2011.
Significant components of Homestead's deferred tax assets and liabilities as
of December 31, 1996 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Deferred financing costs................................... $ 3,546,500
Net Operating Loss......................................... 1,111,500
-----------
4,658,000
Valuation allowance........................................ (3,001,000)
-----------
$ 1,657,000
===========
Deferred tax liabilities:
Depreciable assets......................................... $ 1,657,000
===========
</TABLE>
Deferred tax assets related primarily to: (1) the difference in the carrying
amount of deferred financing costs recognized at formation and in connection
with subsequent fundings of convertible mortgage notes payable for financial
reporting purposes and the amount recognized for tax purposes; and (2) the
current year tax net operating loss. Deferred tax liabilities relate primarily
to the difference in the carrying amount and the methods of depreciation of
certain depreciable assets for financial reporting purposes and the amount
recognized for tax purposes. A valuation allowance has been recognized to
offset the net deferred tax assets, due to the uncertainty of the ultimate
realization of those deferred tax assets in future years. Additional paid-in
capital has been credited for deferred tax assets arising from equity
transactions.
Prior to the Merger Transaction on October 17, 1996, the PTR Subsidiaries
were qualified subsidiaries of PTR, a real estate investment trust and,
accordingly, were not subject to income tax. Additionally, prior to the Merger
Transaction, Homestead was a wholly-owned subsidiary of Security Capital. For
income tax reporting purposes, the net income or loss of the PTR Subsidiaries
and Homestead for the period January 1, 1996 through October 16, 1996 will be
included in a consolidated tax return for PTR and Security Capital,
respectively.
The difference between the provision for income taxes and the amounts
computed by applying the statutory federal income tax rate to net income
before income taxes are:
<TABLE>
<S> <C>
Statutory rate applied to income before income taxes......... $ 1,048,000
Effect of PTR income included in other tax returns........... (1,441,000)
Effect of Homestead losses included in other tax returns..... 36,000
Effect of permanent difference............................... 107,000
-----------
(250,000)
Provision for valuation allowance............................ 250,000
-----------
Income tax expense........................................... $ --
===========
</TABLE>
40
<PAGE>
If the merger of the PTR Subsidiaries and Homestead had occurred on January
1, 1996, income tax expense and net income for the year would have been
$1,154,000 and $1,928,000, respectively.
NOTE 7--RELATED PARTY TRANSACTIONS
REIT and Property Management Agreements
Prior to the Merger Transaction, the PTR Subsidiaries acquired, developed
and operated the Homestead Village properties through management contracts
with Security Capital Pacific Incorporated (the "PTR REIT Manager") and SCG
Realty Services Incorporated (the "PTR Property Manager").
The PTR REIT Manager, provided both strategic and day-to-day management
services to the PTR subsidiaries including research, asset management, capital
market services and legal and accounting services. In exchange, the REIT
management contract required the PTR subsidiaries to pay a stipulated REIT
management fee of 16% of its defined cash flow. Such fees were $1,412,000;
$989,000 and $332,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Additionally, the PTR Subsidiaries reimbursed the PTR REIT
Manager for travel and out-of-pocket costs incurred.
The PTR Property Manager provided services to the PTR subsidiaries which
were necessary for the operation of its Homestead Village extended-stay
lodging business. The property management agreement provided for fees of
between 5% and 7% of gross revenues. Such property management fees amounted to
$1,737,000; $1,018,000 and $460,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
Administrative Services Agreement
Prior to the Merger Transaction, Security Capital provided certain
administrative services to Homestead through the PTR REIT Manager and the PTR
Property Manager for the Homestead Village properties owned and developed by
the PTR Subsidiaries. Certain employees of the PTR REIT Manager who performed
various services for the PTR Subsidiaries and who participated in various
benefit plans maintained by Security Capital have become employees of
Homestead and perform similar services for Homestead.
At the consummation of the Merger Transaction, Homestead and Security
Capital entered into an administrative services agreement (the "Administrative
Services Agreement"), pursuant to which Security Capital has agreed to provide
Homestead with administrative services with respect to certain aspects of
Homestead's business. These services include, but are not limited to,
insurance administration, accounts payable, internal audit, cash management,
human resources, management information systems, tax and legal administration,
research, shareholder communications and investor relations. The fees payable
to Security Capital are based on Security Capital's cost of the services
provided plus an additional 20%. Any arrangements under the Administrative
Services Agreement for the provision of services are required to be
commercially reasonable and on terms not less favorable than those which could
be obtained from unaffiliated third parties. Expense for 1996 was $375,000.
The Administrative Services Agreement is for an initial term expiring on
December 31, 1997 and will automatically be renewed for one-year terms,
subject to approval by a majority of the disinterested members of the
Homestead Board.
Homestead believes its relationship with Security Capital under this
agreement provides it with certain advantages, including 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 economics of scale, than it could provide internally.
Interim Financing Agreement
During the period May 21, 1996 to October 17, 1996, Security Capital agreed
to lend Homestead up to $10 million for working capital and other purposes.
The note payable to Security Capital was an unsecured demand note with an
interest rate at prime plus .25% per annum. Homestead borrowed up to
approximately $6.2 million
41
<PAGE>
under this arrangement, including interest advanced under the note, which was
repaid from proceeds at the closing date of the Merger Transaction.
NOTE 8--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data (in thousands except per share amounts)
for 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
JUNE
MARCH 31 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------ ------------ ----------- -------
<S> <C> <C> <C> <C> <C>
1996:
Operating Revenue............ $6,868 $8,475 $8,954 $9,266 $33,563
====== ====== ====== ====== =======
Net Income (loss)............ $1,039 $1,436 $1,259 $ (652) $ 3,082
====== ====== ====== ====== =======
1995:
Operating Revenue............ $3,449 $4,422 $4,805 $6,027 $18,703
====== ====== ====== ====== =======
Net Income................... $ 683 $1,237 $ 777 $ 154 $ 2,851
====== ====== ====== ====== =======
</TABLE>
The above amounts reflect the merger with subsidiaries of PTR accounted for
as a combination of entities under common control. Amounts through June 30,
1996 solely reflect the operations of the PTR Subsidiaries. Homestead's
previously reported results for the quarter ended September 30, 1996 have been
restated to reflect $8,954,000 of operating revenue and $1,349,000 of net
income of the PTR Subsidiaries. The reduced net income in the fourth quarter
of 1996, as compared to the prior quarters, is primarily a result of the
change in corporate structure from external to internal management. This
change in structure involves costs associated with operating as a public
company, recruiting, relocation and personnel and other costs to create a
corporate infrastructure.
NOTE 9--PRO FORMA ADJUSTED RESULTS OF OPERATIONS (UNAUDITED)
The unaudited pro forma results of operations of Homestead have been
prepared, assuming the acquisitions of the ATLANTIC and Security Capital
subsidiaries had occurred as of the beginning of 1995, after giving effect to
certain adjustments, including development overhead costs, additional costs of
operating as a public company (such as additional salaries and benefits,
legal, accounting and other professional fees), trademark amortization,
interest expense and amortization of deferred financing costs and are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Total revenues.......................................... $33,987 $18,721
======= =======
Net income (loss)....................................... $ (472) $(3,064)
======= =======
</TABLE>
The unaudited pro forma results of operations are not necessarily indicative
of what the actual results of operations would have been had the 1996
acquisitions occurred on January 1, 1995, nor do they purport to present the
results of operations of future periods.
NOTE 10--COMMITMENTS AND CONTINGENCIES
Unfunded Development Commitments
At December 31, 1996, Homestead had approximately $168 million of unfunded
commitments for developments under construction.
Finder's Agreement
In conjunction with the Merger Transaction, PTR assigned 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
42
<PAGE>
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 39 properties was
terminated. Additionally, Finder has agreed not to compete, directly or
indirectly, with the Homestead Village(R) properties in certain states in which
PTR and ATLANTIC do business through December 31, 1996. Fee expense under this
agreement in 1996, 1995 and 1994 was $662,000, $611,000 and $646,000,
respectively, which is included in corporate operating expenses in the
accompanying statements of operations.
NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value of financial instruments
were determined by Homestead based on available market information and
valuation methodologies believed to be appropriate for these purposes.
Considerable judgment and a high degree of subjectivity are involved in
developing these estimates and accordingly they are not necessarily indicative
of amounts that Homestead could realize upon disposition.
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The carrying values of the
Homestead's financial instruments, which include cash and cash equivalents,
accounts receivable, other assets, development costs payable, accounts payable
and accrued expenses approximate fair value as of December 31, 1996 and 1995
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.
As described in Note 4, the convertible mortgage notes due PTR at December
31, 1996 are convertible into Homestead common stock on or after March 31, 1997
on the basis of one share of Homestead common stock for every $11.50 of
principal amount outstanding. The fair value of the convertible mortgage notes
(assuming conversion), based upon the $18 closing price of Homestead's common
stock on the American Stock Exchange at December 31, 1996, was $176,304,000.
43
<PAGE>
SCHEDULE III
HOMESTEAD VILLAGE INCORPORATED
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
INITIAL COST TO CARRIED AT DECEMBER 31,
HOMESTEAD COSTS 1996
------------------- CAPITALIZED ---------------------------
BUILDINGS SUBSE- BUILDINGS
AND IM- QUENT TO AND IM- ACCUMULATED CONSTRUCTION YEAR
PROPERTIES ENCUMBRANCE LAND PROVEMENTS ACQUISITION LAND PROVEMENTS TOTAL DEPRECIATION YEAR ACQUIRED
- ---------- ----------- -------- ---------- ----------- ------- ---------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Albuquerque, New
Mexico:
I-40............ (c) $ 770 -- $ 1,489 $ 776 $ 1,483 $ 2,259 (a) (a) 1996
Osuna/North I-
25............. (c) 832 -- 4,598 840 4,590 5,430 157 1996 1995
Atlanta, Georgia:
Cumberland...... (d) 1,321 524 2,419 1,321 2,943 4,264 (a) (a) 1996
Gwinnett Place.. (d) 743 -- 241 790 194 984 (a) (a) 1996
North Druid
Hills.......... (d) 1,814 144 1,064 1,814 1,208 3,022 (a) (a) 1996
Peachtree....... (d) 1,091 5,085 87 1,095 5,168 6,263 45 1996 1996
Perimeter....... (d) 2,356 982 2,100 2,381 3,057 5,438 (a) (a) 1996
Roswell......... (d) 1,923 110 829 1,923 939 2,862 (a) (a) 1996
Austin, Texas:
Burnet Road..... (c) 525 -- 3,616 723 3,418 4,141 243 1995 1994
Midtown......... (c) 600 -- 4,085 643 4,042 4,685 109 1996 1995
Pavillion....... (c) 633 -- 4,459 633 4,459 5,092 -- 1996 1995
Round Rock...... (c) 483 -- 351 506 328 834 (a) (a) 1995
Charlotte, North
Carolina:
1-77 Billy
Graham Pkwy.... -- 1,500 -- 366 1,524 342 1,866 (a) (a) 1996
Dallas, Texas:
Coit Road/North
Central........ (c) 425 -- 3,051 496 2,980 3,476 463 1994 1993
Ft.
Worth/Downtown
Freeway........ (c) 350 -- 2,653 384 2,619 3,003 82 1996 1994
Las
Colinas/Irving. (c) 800 -- 3,900 805 3,895 4,700 126 1996 1994
North
Arlington/Six
Flags Hills.... (c) 340 -- 3,487 407 3,420 3,827 296 1995 1993
North Richland
Hills Road..... (c) 470 -- 3,113 544 3,039 3,583 464 1994 1993
South Arlington. (c) 550 -- 3,371 642 3,279 3,921 302 1995 1994
Skillman/Northwest. (c) 400 -- 2,765 400 2,765 3,165 373 1993 1992
Stemmons/NW
Highway Worth.. (c) 356 -- 4,275 424 4,207 4,631 441 1995 1992
Tollway/Addison
Colinas........ (c) 275 -- 2,529 353 2,451 2,804 468 1993 1993
Denver, Colorado:
Cherry Creek.... (c) 1,070 -- 1,677 1,078 1,669 2,747 (a) (a) 1996
Bellview/Denver
Tech Center.... (c) 876 -- 5,318 942 5,252 6,194 120 1996 1994
Iliff/Aurora.... (c) 615 -- 4,543 624 4,534 5,158 125 1996 1994
Inverness....... (c) 1,041 -- 2,110 1,064 2,087 3,151 (a) (a) 1996
Houston, Texas:
Astrodome/Medical
Center......... (c) 1,530 -- 3,902 1,669 3,763 5,432 236 1995 1994
Bammel/Cypress
Station........ (c) 516 -- 3,112 595 3,033 3,628 303 1994 1993
Fuqua/Hobby
Airport........ (c) 416 -- 3,034 491 2,959 3,450 412 1994 1993
Park Ten........ (c) 791 -- 3,212 860 3,143 4,003 320 1994 1993
Stafford/Sugarland. (c) 575 -- 3,127 665 3,037 3,702 332 1994 1993
West by
Northwest/Hwy
290............ (c) 519 -- 2,997 568 2,948 3,516 434 1994 1993
Westheimer/Beltway. (c) 796 -- 3,296 897 3,195 4,092 383 1994 1993
Willowbrook/Northwest. (c) 575 -- 3,437 669 3,343 4,012 250 1995 1994
Jacksonville,
Florida:
JTB............. (d) 1,137 379 976 1,206 1,286 2,492 (a) (a) 1996
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
INITIAL COST TO CARRIED AT DECEMBER 31,
HOMESTEAD COSTS 1996
------------------ CAPITALIZED ---------------------------
BUILDINGS SUBSE- BUILDINGS
AND IM- QUENT TO AND IM- ACCUMULATED CONSTRUCTION YEAR
PROPERTIES ENCUMBRANCE LAND PROVEMENTS ACQUISITION LAND PROVEMENTS TOTAL DEPRECIATION YEAR ACQUIRED
- ---------- ----------- ------- ---------- ----------- ------- ---------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Kansas City,
Missouri:
Merriam......... (c) 871 -- 3,136 905 3,102 4,007 (a) (a) 1996
Plaza........... -- 1,090 -- 208 1,158 140 1,298 (a) (a) 1996
Los Angeles,
California:
Brea............ -- 1,518 -- 173 1,529 162 1,691 (a) (a) 1996
El Segundo...... (c) 2,233 -- 425 2,255 403 2,658 (a) (a) 1996
Miami/Ft.
Lauderdale,
Florida:
Coral Springs-
Northpoint..... -- 1,030 -- 139 1,059 110 1,169 (a) (a) 1996
Fort Lauderdale. (d) 1,328 633 926 1,384 1,503 2,887 (a) (a) 1996
Miami Airport... (d) 2,238 679 997 2,326 1,588 3,914 (a) (a) 1996
Plantation...... (d) 1,562 358 118 1,636 402 2,038 (a) (a) 1996
Nashville,
Tennessee:
Cool Springs.... (d) 1,106 -- 355 1,182 279 1,461 (a) (a) 1996
Nashville
Airport........ (d) 1,292 338 954 1,324 1,260 2,584 (a) (a) 1996
Orange County,
California:
Spectrum........ (c) 2,115 -- 508 2,128 495 2,623 (a) (a) 1996
Phoenix, Arizona:
Dunlap/North
West Valley.... (c) 915 -- 4,418 935 4,398 5,333 77 1996 1995
Mesa............ (c) 1,470 -- 161 1,529 102 1,631 (a) (a) 1996
Tempe........... (c) 808 -- 4,613 830 4,591 5,421 107 1996 1995
Scottsdale...... (c) 883 -- 3,454 971 3,366 4,337 218 1995 1994
Union Hills..... (c) 810 -- 3,963 821 3,952 4,773 -- 1996 1996
Portland, Oregon:
Lake Oswego..... (c) 1,960 -- 168 2,010 118 2,128 (a) (a) 1996
Sunset East..... (c) 1,289 -- 250 1,308 231 1,539 (a) (a) 1996
Raleigh/Durham,
North Carolina:
Hwy 70.......... (d) 901 -- 238 936 203 1,139 (a) (a) 1996
North Raleigh... (d) 1,163 301 935 1,197 1,202 2,399 (a) (a) 1996
RTP............. (d) 984 230 1,598 993 1,819 2,812 (a) (a) 1996
Richmond,
Virginia:
Upper Broad..... (d) 1,358 -- 482 1,444 396 1,840 (a) (a) 1996
Salt Lake City,
Utah:
Ft. Union....... (c) 1,285 -- 440 1,288 437 1,725 (a) (a) 1996
Redwood......... (c) 844 -- 2,002 912 1,934 2,846 (a) (a) 1996
San Antonio,
Texas:
Bitters......... (c) 1,000 -- 3,836 1,198 3,638 4,836 254 1995 1994
DeZavala/Six
Flags Fiesta... (c) 844 -- 3,731 983 3,592 4,575 258 1995 1994
Fredricksburg/Medical
Center......... (c) 800 -- 3,356 892 3,264 4,156 319 1994 1993
San Diego,
California:
Mission Valley.. (c) 1,603 -- 418 1,618 403 2,021 (a) (a) 1996
San Francisco
(Bay Area),
California:
Milpitas........ (c) 1,136 -- 3,413 1,143 3,406 4,549 (a) (a) 1996
Mountain View... (c) 1,805 -- 675 1,849 631 2,480 (a) (a) 1996
San Jose........ (c) 1,770 -- 434 1,776 428 2,204 (a) (a) 1996
San Mateo....... (c) 1,510 -- 4,233 1,517 4,226 5,743 (a) (a) 1995
San Ramon....... (c) 1,327 -- 402 1,341 388 1,729 (a) (a) 1996
Santa Clara..... -- 1,423 -- 25 1,428 20 1,448 -- (e) 1996
Sunnyvale....... (c) 1,274 -- 4,309 1,278 4,305 5,583 (a) (a) 1995
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
INITIAL COST TO CARRIED AT DECEMBER 31,
HOMESTEAD COSTS 1996
------------------ CAPITALIZED ---------------------------
BUILDINGS SUBSE- BUILDINGS
AND IM- QUENT TO AND IM- ACCUMULATED CONSTRUCTION YEAR
PROPERTIES ENCUMBRANCE LAND PROVEMENTS ACQUISITION LAND PROVEMENTS TOTAL DEPRECIATION YEAR ACQUIRED
- ---------- ----------- ------- ---------- ----------- ------- ---------- -------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Seattle,
Washington:
Bellevue........ (c) 2,050 -- 1,119 2,067 1,102 3,169 (a) (a) 1996
Mountain Lake
Terrace/N.
Seattle........ (c) 1,530 -- 494 1,589 435 2,024 (a) (a) 1996
Redmond......... (c) 2,265 -- 565 2,527 303 2,830 (a) (a) 1996
Tukwila......... (c) 900 -- 465 937 428 1,365 (a) (a) 1996
Tampa Area,
Florida:
Brandon......... (d) 923 762 584 971 1,298 2,269 (a) (a) 1996
North Airport... (d) 615 1,142 1,883 635 3,005 3,640 (a) (a) 1996
St. Petersburg.. (d) 766 155 264 766 419 1,185 (a) (a) 1996
Washington, D.C.:
BWI............. (d) 940 -- 486 1,062 364 1,426 (a) (a) 1996
Dulles-South.... (d) 690 -- 237 722 205 927 (a) (a) 1996
Fair Oaks....... (d) 1,152 196 372 1,157 563 1,720 (a) (a) 1996
Merrifield...... (d) 1,500 -- 276 1,511 265 1,776 (a) (a) 1996
Miscellaneous.... (b) 5,429 -- 161 5,589 1 5,590 -- -- 1995/1996
------- ------- -------- ------- -------- -------- ------
Total........... $93,319 $12,018 $157,988 $97,368 $165,957 $263,325 $7,717
======= ======= ======== ======= ======== ======== ======
</TABLE>
- -------
(a) As of December 31, 1996, these properties were under construction or in
planning and owned.
(b) Land held for sale.
(c) Certain properties owned by Homestead are subject to the terms and
conditions of the Funding Commitment Agreement between Homestead and PTR.
At December 31, 1996 convertible mortgage notes in the amount of $112,639
were payable to PTR (carried at $101,309, net of unamortized discount, in
the accompanying financial statements).
(d) Certain properties owned by Homestead are subject to the terms and
conditions of the Funding Commitment Agreement between Homestead and
ATLANTIC. At December 31, 1996 there were no amounts funded on the
convertible mortgage notes payable to ATLANTIC.
(e) Land held for future development.
46
<PAGE>
The following is a reconciliation of the carrying amount and related
accumulated depreciation of Homestead's investment in property and equipment,
at cost (in thousands):
<TABLE>
<CAPTION>
PROPERTY AND EQUIPMENT 1996 1995 1994
---------------------- -------- -------- -------
<S> <C> <C> <C>
Balance at January 1,........................... $108,459 $ 60,213 $24,168
Acquisition of ATLANTIC properties
in the merger transaction.................... 36,921 -- --
Development expenditures including land
acquisition.................................. 117,945 48,246 36,045
-------- -------- -------
Balance at December 31,......................... $263,325 $108,459 $60,213
======== ======== =======
<CAPTION>
ACCUMULATED DEPRECIATION 1996 1995 1994
------------------------ -------- -------- -------
<S> <C> <C> <C>
Balance at January 1,........................... $ 3,457 $ 1,114 $ 269
Depreciation for the year..................... 4,260 2,343 845
-------- -------- -------
Balance at December 31,......................... $ 7,717 $ 3,457 $ 1,114
======== ======== =======
</TABLE>
As of December 31, 1996, the aggregate cost and net investment cost for
federal income tax purposes of Homestead's investment in property and
equipment amounted to $256,912,000 and $250,845,000, respectively.
47
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of Homestead Village Incorporated,
a Maryland corporation, and the undersigned Directors and officers of
Homestead Village Incorporated, hereby constitutes and appoints David C.
Dressler, Jr., Michael D. Cryan, Robert E. Clark, Jeffrey A. Klopf and Ariel
Amir its or his true and lawful attorneys-in-fact and agents, for it or him
and in its or his name, place and stead, in any and all capacities, with full
power to act alone, to sign any and all amendments to this report, and to file
each such amendment to this report, with all exhibits thereto, and any and all
documents in connection therewith, with the Securities and Exchange
Commission, hereby granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform any and all acts and
things requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as it or he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them may lawfully do or cause to be done by virtue hereof.
48
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Homestead Village Incorporated
/s/ David C. Dressler,
Jr.
By: _________________________________
David C. Dressler, Jr.
Co-Chairman, President and Chief
Investment Officer
Date: March 28, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ David C. Dressler, Jr. Co-Chairman, President, March 28, 1997
____________________________________ Chief Investment Officer
David C. Dressler, Jr. and Director
/s/ Michael D. Cryan Co-Chairman, Chief Operating March 28, 1997
____________________________________ Officer and Director
Michael D. Cryan
/s/ Robert E. Clark Vice President and March 28, 1997
____________________________________ Controller (Principal
Robert E. Clark Accounting and Financial
Officer)
/s/ John P. Frazee, Jr. Director March 28, 1997
____________________________________
John P. Frazee, Jr.
/s/ Patricia G. Will Director March 28, 1997
____________________________________
Patricia G. Will
</TABLE>
49
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT DESCRIPTION
----------- --------------------
<C> <S> <C>
4.1 Restated Homestead Charter (incorporated by reference to Ex-
hibit 3.1 to Homestead's Form S-4 Registration Statement
(File No. 333-4455, the "Homestead S-4"))
4.2 Amended and Restated Bylaws of Homestead (incorporated by
reference to Exhibit 3.2 to the Homestead S-4)
4.3 Rights Agreement, dated as of May 16, 1996, between Home-
stead and The First National Bank of Boston, as Rights
Agent, including form of rights certificate (incorporated by
reference to Exhibit 4.2 to the Homestead S-4)
4.4 Warrant Agreement, dated as of October 17, 1996, between
Homestead and The First National Bank of Boston, as Warrant
Agent, including form of warrant certificate (incorporated
by reference to Exhibit 4.1 to Homestead's Form 10-Q for the
quarter ended September 30, 1996 (File No. 1-12269, the
"Homestead Form 10-Q"))
4.5 Amended and Restated Promissory Note by PTR Homestead Vil-
lage Incorporated in favor of Security Capital Pacific Trust
("PTR") (incorporated by reference to Exhibit 4.3 to the
Homestead Form 10-Q)
4.6 Amended and Restated Promissory Note by PTR Homestead Vil-
lage Limited Partnership in favor or PTR (incorporated by
reference to Exhibit 4.4 to the Homestead Form 10-Q)
4.7 Additional Corporate Promissory Note by Atlantic Homestead
Village Incorporated in favor of Security Capital Atlantic
Incorporated ("ATLANTIC") (incorporated by reference to Ex-
hibit 4.5 to the Homestead Form 10-Q)
4.8 Consolidated Amended and Restated Promissory Note by Atlan-
tic Homestead Village Limited Partnership in favor of ATLAN-
TIC (incorporated by reference to Exhibit 4.6 to the Home-
stead Form 10-Q)
4.9 Amended and Restated Promissory Note by Atlantic Homestead
Village Limited Partnership in favor of ATLANTIC (incorpo-
rated by reference to Exhibit 4.7 to the Homestead Form 10-Q)
4.10 Form of stock certificate for shares of common stock of
Homestead (incorporated by reference to Exhibit 4.8 to the
Homestead Form S-4)
10.1 Protection of Business Agreement, dated as of October 17,
1996, by and among ATLANTIC, PTR, Security Capital Group In-
corporated ("Security Capital") and Homestead (incorporated
by reference to Exhibit 10.1 to the Homestead Form 10-Q)
10.2 Investor Agreement, dated as of October 17, 1996, by and be-
tween Homestead and Security Capital (incorporated by refer-
ence to Exhibit 10.2 to the Homestead Form 10-Q)
10.3 Funding Commitment Agreement, dated as of October 17, 1996,
between Homestead and PTR (incorporated by reference to Ex-
hibit 10.3 to the Homestead Form 10-Q)
10.4 Funding Commitment Agreement, dated as of October 17, 1996,
between Homestead and ATLANTIC (incorporated by reference to
Exhibit 10.4 to the Homestead Form 10-Q)
10.5 Guaranty of Completion and Payment, dated as of October 17,
1996, from Homestead to PTR (incorporated by reference to
Exhibit 10.5 to the Homestead Form 10-Q)
10.6 Guaranty of Completion and Payment, dated as of October 17,
1996, from Homestead to ATLANTIC (incorporated by reference
to Exhibit 10.10 to the Homestead Form 10-Q)
10.7 Investor and Registration Rights Agreement, dated as of Oc-
tober 17, 1996, between Homestead and PTR (incorporated by
reference to Exhibit 10.8 to the Homestead Form 10-Q)
10.8 Investor and Registration Rights Agreement, dated as of Oc-
tober 17, 1996, between Homestead and ATLANTIC (incorporated
by reference to Exhibit 10.7 to the Homestead Form 10-Q)
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT DESCRIPTION
----------- --------------------
<C> <S> <C>
10.9 Escrow Agreement, dated as of October 17, 1996, among Home-
stead, Security Capital and State Street Bank and Trust Com-
pany, as escrow agent (incorporated by reference to Exhibit
10.9 to the Homestead Form 10-Q)
10.10 Administrative Services Agreement, dated as of October 17,
1996, by and between Homestead and SCGroup Incorporated (in-
corporated by reference to Exhibit 10.11 to the Homestead
Form 10-Q)
10.11 Homestead Village Incorporated 1996 Long-Term Incentive Plan
(incorporated by reference to Exhibit 4 to Homestead's Form
S-8 Registration Statement (File No. 333-17243))
10.12 Homestead Village Incorporated 1996 Outside Directors Plan
(incorporated by reference to Exhibit 4 to Homestead's Form
S-8 Registration Statement (File No. 333-17245))
10.13 Form of Indemnification Agreement entered into between Home-
stead and each of its directors
23.1 Consent of Ernst & Young, LLP, Dallas, Texas
23.2 Consent of KPMG Peat Marwick LLP, Chicago, Illinois
24 Power of Attorney (included on page 48)
27.1 Financial Data Schedules
</TABLE>
51
<PAGE>
EXHIBIT 10.13
FORM OF INDEMNIFICATION AGREEMENT
AGREEMENT, made and entered into as of [DATE], between Homestead Village
Incorporated, a Maryland corporation (the "Corporation"), and [EMPLOYEE]
("Indemnitee").
WHEREAS, the Corporation is a Maryland corporation; and
WHEREAS, at the request of the Corporation, Indemnitee currently serves as a
director or officer of the Corporation and may, therefore, be subjected to
claims, suits or proceedings arising as a result of his or her service; and
WHEREAS, as an inducement to Indemnitee to continue to serve as such
director or officer, the Corporation has agreed to indemnify Indemnitee
against expenses and costs incurred by Indemnitee in connection with any such
claims, suits or proceedings, to the fullest extent that is lawful; and
WHEREAS, the parties by this Agreement desire to set forth their agreement
regarding indemnification;
NOW, THEREFORE, parties agree as follows:
1. Acts or Omissions Covered by This Agreement. This Agreement shall cover
any act or omission by an Indemnitee after the date of his or her commencement
of service as an officer or director, regardless of whether said act or
omission occurred prior to the date of this Agreement, which (i) occurs or is
alleged to have occurred by reason of his or her being or having been a
director or officer, (ii) occurs or is alleged to have occurred, during or
after the time when the Indemnitee served as a director or officer and (iii)
gives rise to, or is the direct or indirect subject of a claim in any
threatened, pending or completed action, suit or proceeding at any time or
times whether during or after his or her service as director or officer.
2. Indemnity.
(a) The Corporation hereby agrees to indemnify, and keep indemnified in
accordance with, and to the fullest lawful extent permitted by the
Corporation's Articles of Incorporation and by-laws on the date of
execution hereof, and regardless of any subsequently enacted by-law or
amendment to the Articles of Incorporation to the contrary, Indemnitee,
from and against any and all expenses (including attorney's fees),
judgments, fines, taxes, penalties and amounts paid in settlement actually
and reasonably incurred by Indemnitee in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or
was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, trustee, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise and whether or not such action is by or in the right of the
Corporation or that other corporation, partnership, joint venture, trust or
other enterprise with respect to which the Indemnitee serves or has served.
(b) Despite anything to the contrary in subsection (a), the Corporation
agrees to indemnify Indemnitee in a suit or proceeding initiated by the
Indemnitee only if the Indemnitee acted with the authorization of the
Corporation in initiating that suit or proceeding. However, an arbitration
proceeding brought under Section 8 shall not be subject to this subsection
(b).
(c) An indemnification under this Agreement shall be made upon
Indemnitee's written request to the board of directors, setting forth the
grounds and lawfulness of such indemnification. If the board of directors
disagrees with the Indemnitee, such disagreement shall be resolved by a
decision of the arbitrators in an arbitration proceeding pursuant to
Section 8. For purposes of this Agreement, references to "other
enterprises" shall include, without limitation, employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person
with respect to an employee benefit plan; and references to "serving at the
request of the Corporation" shall include any service as a trustee,
director, officer, employee or agent
<PAGE>
of any other partnership, trust or corporation which imposes duties on, or
involves services by, the Indemnitee which are requested in writing by the
board of directors, or which involve services by, such trustee, director,
officer, employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries.
3. Burden of Proof. Indemnitee shall be presumed to be entitled to
indemnification for any act or omission covered in Section 1 or 2 of this
Agreement. The burden of proof of establishing that Indemnitee is not entitled
to indemnification because of the failure to fulfill some requirement of
Maryland law, the Corporation's Articles of Incorporation or by-laws as in
effect on the date of execution hereof, or this Agreement shall be on the
Corporation.
4. Notice by Indemnitee. Indemnitee shall notify the Corporation in writing
of any matter with respect to which Indemnitee intends to seek indemnification
hereunder as soon as reasonably practicable following the receipt by
Indemnitee of written threat thereof, provided that failure to so notify the
Corporation shall not constitute a waiver by Indemnitee of his or her rights
hereunder.
5. Advancement of Expenses. In the event of any action, suit or proceeding
against Indemnitee which may give rise to a right of indemnification from the
Corporation pursuant to this Agreement, following written request to the
Corporation by the Indemnitee, the Corporation shall advance to Indemnitee
amounts to cover expenses incurred by Indemnitee in defending the action, suit
or proceeding in advance of final disposition upon receipt of (i) an
undertaking by or on behalf of the Indemnitee to repay the amount advanced in
the event that it shall be ultimately determined in accordance with Section 3
of this Agreement that he or she is not entitled to indemnification by the
Corporation, and (ii) satisfactory evidence as to the amount of such expenses.
Indemnitee's written certification together with a copy of the statement paid
or to be paid by Indemnitee shall constitute satisfactory evidence unless
determined to the contrary in an arbitration proceeding conducted pursuant to
Section 8 of this Agreement.
6. Non-Exclusivity of Right of Indemnification. The indemnification rights
granted to Indemnitee under this Agreement shall not be deemed exclusive of,
or in limitation of, any rights to which Indemnitee may be entitled under
Maryland law, the Corporation's Articles of Incorporation or by-laws, any
other agreement, vote of stockholders or directors or otherwise.
7. Termination of Agreement and Survival of Right of Indemnification.
(a) Subject to subparagraph (b) of this section, this Agreement shall
terminate when the Indemnitee's term of office as a director or officer
ends.
(b) The rights granted to Indemnitee hereunder shall continue after
termination as provided in Section 1 and shall inure to the benefit of
Indemnitee, his or her personal representative, heirs, executors,
administrators and beneficiaries, and this Agreement shall be binding upon
the Corporation, its successors and assigns.
8. Arbitration of All Disputes Concerning Entitlement. Any controversy or
claim arising out of or relating to the Indemnitee's entitlement to
indemnification under this Agreement shall be settled by arbitration in the
State of Texas by three arbitrators, one of whom shall be appointed by the
Corporation, one by the Indemnitee and the third of whom shall be appointed by
the first two arbitrators. If the first two arbitrators cannot agree on the
appointment of a third arbitrator or if either party fails to appoint an
arbitrator, then that arbitrator shall be appointed by a Court. The
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association. Judgment upon the award rendered by the arbitrators
may be entered in any court having jurisdiction thereof. Interest on any
judgment shall be assessed at a rate or rates the arbitrators consider just
under the circumstances. If it is necessary or desirable for the Indemnitee to
retain legal counsel or incur other costs and expenses (including, without
limitation, travel costs and expenses) in connection with enforcement of his
or her rights under this Agreement, the Corporation shall pay his or her
reasonable attorneys' fees and reasonable costs and expenses in connection
with enforcement of his or her rights (including the enforcement of any
arbitration
2
<PAGE>
award in court), regardless of the final outcome, unless the arbitrators
determine that under the circumstances recovery by the Indemnitee of all or a
part of any such fees and costs and expenses would be unjust.
9. Governing Law.
(a) Except as provided for in subparagraph (b) of this section, this
Agreement shall be governed by the laws of the State of Maryland.
(b) Any arbitration under this Agreement shall be governed by the laws of
the State of Texas.
10. Severability. If any provision of this Agreement is determined to be
invalid or unenforceable, the invalidity or unenfoceability shall not affect
the validity or enforceability of any other provision of this Agreement, and
this Agreement shall be interpreted as though the invalid or unenforceable
provision was not a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above stated.
Homestead Village Incorporated
By __________________________________
Name:
Title:
INDEMNITEE
-------------------------------------
3
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8, No. 333-17243 and 333-17245) pertaining to the Homestead Village
Incorporated 1996 Long-Term Incentive Plan and Homestead Village Incorporated
1996 Outside Directors Plan of our report dated February 24, 1997, with
respect to the 1996 financial statements and schedule of Homestead Village
Incorporated included in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
Ernst & Young LLP
Dallas, Texas
March 28, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
Board of Directors and Shareholders of
Homestead Village Incorporated
We consent to incorporation by reference in the registration statements No.
333-17243 (Form S-8) and No. 333-17245 (Form S-8) of Homestead Village
Incorporated of our report dated May 1, 1996, relating to the combined balance
sheet of PTR-Homestead Village Group (the predecessor to Homestead Village
Incorporated) as of December 31, 1995 and the related combined statements of
operations, owners' equity, and cash flows for each of the years in the two-
year period ended December 31, 1995, and the related 1995 and 1994 information
included in Schedule III, Real Estate and Accumulated Depreciation, which
report appears in the December 31, 1996 annual report on Form 10-K of
Homestead Village Incorporated.
KPMG Peat Marwick LLP
Chicago, Illinois
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 1,510,000 5,285,874 7,415,000
<SECURITIES> 0 0 0
<RECEIVABLES> 871,000 859,037 846,000
<ALLOWANCES> 3,000 29,662 37,000
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 2,550,000 3,130,696 8,960,000
<PP&E> 141,234,000 165,665,720 263,325,000
<DEPRECIATION> 5,298,000 6,100,802 7,717,000
<TOTAL-ASSETS> 141,091,000 170,032,917 324,625,000
<CURRENT-LIABILITIES> 7,246,000 15,998,801 17,656,000
<BONDS> 0 0 0
<COMMON> 10 10 197,000
0 0 0
0 0 0
<OTHER-SE> 26,445,990 25,470,994 203,806,000
<TOTAL-LIABILITY-AND-EQUITY> 141,091,000 170,032,910 324,625,000
<SALES> 0 0 0
<TOTAL-REVENUES> 15,343,000 23,347,242 33,563,000
<CGS> 0 0 0
<TOTAL-COSTS> 10,528,000 15,029,711 24,721,000
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 2,340,000 4,070,086 5,971,000
<INCOME-PRETAX> 2,475,000 3,734,016 3,082,000
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 2,475,000 3,734,016 3,082,000
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,475,000 3,734,016 3,082,000
<EPS-PRIMARY> 0<F1> 0<F1> 0<F1>
<EPS-DILUTED> 0<F1> 0<F1> 0<F1>
<FN>
<F1> EPS IS NOT CONSIDERED MEANINGFUL, AND IS NOT PRESENTED, DUE TO CHANGES IN
CAPITAL STRUCTURE FROM MERGERS WHICH OCCURRED OCTOBER 17, 1996.
</FN>
</TABLE>
