<PAGE>
Filed Pursuant to Rule No. 424(b)(5)
Registration No. 333-67039
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED NOVEMBER 23, 1998
[LOGO OF HOMESTEAD VILLAGE]
76,489,092 Rights to Purchase Shares
76,489,092 Shares of Common Stock
----------------
Homestead is committed to creating significant shareholder value by becoming a
leading operator of moderately priced, extended stay lodging properties in
selected target markets in the United States.
This Prospectus Supplement relates to (a) 76,489,092 rights to subscribe for
and purchase 76,489,092 shares of common stock and (b) the 76,489,092 shares
that are issuable by Homestead upon the exercise of the rights. Homestead is
issuing to you as a dividend, at no cost, two rights for each share you hold.
Each right entitles you to purchase one share at a subscription price equal to
$2.75 per share. The rights will be traded on the New York Stock Exchange until
April 22, 1999, although there is no assurance that you can sell your rights or
that they will have any value. The rights will expire on April 23, 1999 at 5:00
p.m., Eastern Standard time, unless Homestead decides to extend the expiration
date. The last reported sale price of shares on the New York Stock Exchange on
April 5, 1999, was $2 11/16.
If you validly exercise all of your rights, you may also oversubscribe for
additional shares covered by this Prospectus Supplement that have not been
purchased by others through their exercise of rights.
Homestead's majority shareholder, Security Capital Group Incorporated, will
participate in the rights offering. To the extent shares are not purchased by
other parties in the rights offering, Security Capital has agreed to purchase
enough shares to ensure that the gross proceeds of the rights offering are no
less than $205 million.
If you do not exercise all of your rights, you will own a significantly smaller
relative equity ownership and voting interest in Homestead after completion of
this offering than if you were to exercise all of your rights.
At the same time as the rights offering, Homestead will sell unsubscribed
shares to third parties at a subscription price of $2.75 per share.
Homestead may withdraw the rights offering at any time prior to its expiration.
You should carefully review "Risk Factors" beginning on page S-11 of this
prospectus supplement before making an investment in the shares.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public Price....................................... $2.75 $210,345,003
Proceeds to Homestead.............................. $2.75 $210,345,003
</TABLE>
Homestead has authorized an additional 5,329,089 shares of common stock for
issuance in the event that Homestead determines to accept subscriptions in
excess of 76,489,092 shares pursuant to the oversubscription privilege or sales
to third parties. If additional shares are sold, the total public price and
proceeds to Homestead would be approximately $225,000,000.
The date of this prospectus supplement is April 5, 1999
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[Front Cover Graphics]
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You should read this prospectus supplement along with the prospectus and the
Annual Report on Form 10-K that follow. These documents contain information you
should consider when making your investment decision. You should rely only on
the information provided or incorporated by reference in this prospectus
supplement, the prospectus and the Form 10-K in making your decision. We have
not authorized anyone else to provide you with different information. We are
not making an offer of the rights in any state where the offer is unlawful. You
should not assume that the information in this prospectus supplement or the
prospectus is accurate as of any date other than the date on the front of these
documents.
FORWARD LOOKING STATEMENTS
The statements contained in this prospectus supplement 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 and management's beliefs and assumptions. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
"should," 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 risks, uncertainties and assumptions which
are difficult for management to predict. Therefore, you should be aware that
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements.
Among the important factors that could cause Homestead's actual results to
differ materially from those expressed in the forward-looking statements are:
. changes in general economic conditions in its target markets that could
adversely affect demand for Homestead's properties,
. the effects of increased or unexpected competition with respect to one or
more properties,
. Homestead's ability to open new properties on schedule, which may be
affected by factors outside the control of Homestead,
. the availability to Homestead of debt or equity financing or other
arrangements to allow development of land owned and acquisition and
development of sites under pursuit, and
. 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.
For a further discussion of such factors, you should carefully review "Risk
Factors" on page S-11 of this prospectus supplement. You should not place undue
reliance on these forward-looking statements, which speak only as of the date
of this prospectus supplement.
ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement provides you with specific information concerning
the terms of the shares as well as the rights offering. You should read this
prospectus supplement, the attached prospectus and the attached Annual Report
on Form 10-K, together with the additional information described under the
heading "Where You Can Find More Information" in the attached prospectus, in
determining whether to exercise your rights.
S-3
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
Prospectus Supplement
<S> <C>
Forward Looking Statements............................................... S-3
About This Prospectus Supplement......................................... S-3
Homestead Village Incorporated........................................... S-5
Rights Offering Information.............................................. S-9
Risk Factors............................................................. S-11
Use of Proceeds.......................................................... S-17
Price Range of Shares.................................................... S-17
Capitalization........................................................... S-18
Selected Financial Data.................................................. S-19
Certain Relationships and Transactions................................... S-21
The Offering............................................................. S-23
Validity of the Shares................................................... S-31
Prospectus
About This Prospectus.................................................... 2
Where You Can Find More Information...................................... 2
Homestead Village Incorporated........................................... 4
Use of Proceeds.......................................................... 4
Ratio Information........................................................ 5
Adjusted Ratio Information............................................... 5
Description of Common Shares............................................. 6
Description of Preferred Shares.......................................... 10
Description of Securities Warrants....................................... 16
Description of Rights.................................................... 19
Description of Debt Securities........................................... 19
Description of Convertible Mortgage Notes................................ 38
Certain Provisions of Maryland Law and of Homestead's Charter and
Bylaws.................................................................. 39
Plan of Distribution..................................................... 42
Experts.................................................................. 44
Validity of Offered Securities........................................... 44
Annual Report on Form 10-K
Item 1.Business......................................................... 3
Item 2.Properties....................................................... 16
Item 3.Legal Proceedings................................................ 24
Item 4.Submission of Matters to a Vote of Security Holders.............. 24
Item 5.Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................. 24
Item 6.Selected Financial Data.......................................... 26
Item 7.Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 28
Item 7AQuantitative and Qualitative Disclosures About Market Risk....... 41
Item 8.Financial Statements and Supplementary Data...................... 41
Item 9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 42
Item 10.Directors and Executive Officers of the Registrant............... 42
Item 11.Executive Compensation........................................... 42
Item 12.Security Ownership of Certain Beneficial Owners and Management... 42
Item 13.Certain Relationships and Related Transactions................... 42
Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 43
</TABLE>
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HOMESTEAD VILLAGE INCORPORATED
Homestead Village is committed to creating shareholder value by becoming a
leading operator of moderately priced, extended stay lodging properties in
selected target markets in the United States. Homestead believes that the
extended stay segment of the lodging industry offers excellent growth
opportunity because of:
. growing customer demand for extended stay accommodations,
. the limited number of properties that have been purposely built for
extended stay lodging, and
. rising consumer awareness of the extended stay product.
Homestead's strategy is 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, custom-built product targeted at the
business traveler on temporary assignment, undergoing relocation or in
training. Homestead Village properties, which have all been developed by
Homestead, are designed to offer locations with convenient access to major
employment centers and retail support services, and a residential environment
that is attractive, well landscaped and secure.
To become a leading provider of moderately priced, extended stay lodging,
Homestead's strategy is focused on:
. becoming the preferred brand for extended stay corporate travelers,
. increasing revenue per available room at the property level by matching
its product to customers' expectations, and
. improving operating property cash flow through its proprietary operating
systems.
Homestead believes that its product, locations, corporate commitment to
customer service and value-conscious pricing will help it meet its objectives.
Recent highlights
. During 1998, Homestead opened 49 properties consisting of 6,507 rooms and
as of December 31, 1998, had 120 Homestead Village properties in
operation representing in the aggregate 16,180 rooms in 37 cities. Also
as of December 31, 1998, Homestead had 16 Homestead Village properties
under construction totaling 2,040 rooms within eight of these cities as
well as one additional city.
. Homestead's financial results showed an increase in earnings before
depreciation, amortization, and deferred taxes ("EBDADT") to $40,945,000
for the year ended December 31, 1998 from $19,385,000 for the year ended
December 31, 1997, as a result of increased property operating income due
to new property openings in 1998 and a full year of results for the 40
openings in 1997. Homestead presents EBDADT as a measure of operating
performance which also takes into account the capital structure of the
company.
. During 1999, Homestead opened 5 properties consisting of 670 rooms and as
of March 31, 1999, had 125 Homestead Village properties in operation
representing in the aggregate 16,852 rooms in 37 cities. Also as of March
31, 1999, Homestead had 11 Homestead Village
S-5
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properties under construction totaling 1,375 rooms within six of these
cities as well as one additional city.
. Homestead listed its stock on the New York Stock Exchange (the "NYSE")
effective
April 1, 1998.
The tightening of capital markets for real estate operating companies and
lodging companies in 1998 has had an adverse effect on Homestead's ability to
continue its high growth program of acquisition of land sites and construction
of Homestead Village properties. In October 1998, Homestead reorganized its
development effort and recorded $7.24 million of special charges primarily
related to the severance of development personnel and abandonment of pursuits
of development sites due to the limited availability of additional funds for
development. Unless Homestead receives additional financing, Homestead will
have a slower growth rate in 1999 and therefore will have substantially fewer
development starts and openings than in prior years which will result in lower
growth in earnings for Homestead going forward.
Homestead expects that its results for the first quarter of 1999 will be below
management's 1999 plan. Lower than expected occupancy rates in several of its
markets has led to lower than expected revenues for properties in those
markets. Lower than expected increases in occupancy rates for newly opened
properties in the Northeast and Midwest, caused in part by adverse weather
conditions, also are expected to impact revenues. These lower than expected
results would adversely affect Homestead's results of operations for 1999.
While Homestead completed a common stock rights offering in January 1998, it
primarily utilized short-term debt and cash flow from operations during the
remainder of the year to finance its land acquisition and development program
as, due to falling stock market prices for Homestead and its sector, common
equity was not seen as a viable capital raising alternative. Homestead's
maximization of borrowings under its bank line of credit facilities secured by
properties (the "Working Capital Facilities") resulted in $157 million
outstanding due April 23, 1999 (subsequently extended to December 31, 2000) and
$200 million outstanding on its line of credit facility (the "Bridge Facility")
due February 23, 1999 (subsequently extended to May 4, 1999) at year end 1998.
The Bridge Facility is secured by a subscription receivable from Security
Capital and will be repaid with proceeds of this rights offering.
In addition, in third quarter 1998 Homestead extinguished $98 million of
convertible mortgage debt due October 2006. This mortgage debt was convertible
into approximately 8.5 million shares of common stock ("Shares"). As part of
this extinguishment, Homestead incurred an additional $24 million of
indebtedness with a resulting mortgage note payable totaling $122 million with
a due date of June 1999. Therefore, Homestead's balance sheet at December 31,
1998 was comprised of substantial short-term obligations.
At year end 1998, Homestead had outstanding $479 million of short-term debt,
consisting of $357 million due on its bank lines of credit ($157 million due on
the Working Capital Facilities and $200 million due on the Bridge Facility) and
$122 million due on a mortgage note. Homestead also had 16 properties in
construction at December 31, 1998 with unfunded development commitments of
approximately $68 million. Homestead intends to finance the completion of the
properties under construction with cash on hand, $21 million borrowed under the
Working Capital Facilities in January 1999, $21 million in additional capacity
available under its Working Capital Facilities upon renewal discussed above,
any additional borrowing capacity available after payments made from the net
proceeds of the rights offering in excess of $200 million and cash flow from
operations.
S-6
<PAGE>
Subsequent to year end, Homestead has refinanced its short-term debt as
follows:
. On February 23, 1999, Homestead completed a sale and leaseback of 18
properties for $145 million. The proceeds of the sale were used to repay
the $122 million mortgage note debt which was due June 1999. As a result
of this repayment, eight additional properties which were used as
collateral for the $122 million mortgage note were subsequently pledged
as collateral for the Working Capital Facilities, and
. On March 18, 1999, Homestead renewed its Working Capital Facilities ($200
million total capacity for the two lines) with an extension of the
maturity date to December 31, 2000.
Giving effect to the foregoing transactions and assuming that approximately
$225 million of Shares are sold in this rights offering, Homestead's aggregate
short-term debt would decrease from $479 million to approximately $3 million
and total indebtedness would decrease from approximately $709 million to
approximately $512 million.
At year end 1998, Homestead's development program, in addition to the 16
properties under construction, consisted of 18 land sites owned and 16 sites
under pursuit. Development of the 18 land sites owned (which includes six sites
in urban metropolitan areas) is estimated to cost $354 million. Acquisition and
development of the 16 sites under pursuit is estimated to cost $200 million.
Homestead's ability to continue development on the land sites owned and its
ability to acquire and develop the 16 sites under pursuit is dependent upon
Homestead obtaining additional financing. The Working Capital Facilities
effectively preclude further development beyond the properties currently under
construction without additional financing. Homestead is seeking financing from
a variety of sources to continue development of these sites and to acquire and
develop the additional sites under pursuit. Homestead may seek additional lines
of credit, issue debt or equity securities, or enter into joint venture or
other arrangements to provide for development of these properties. In addition,
Homestead may consider other strategic alternatives, including a business
combination or other extraordinary transaction, presented to it as a means of
continuing its growth and operations or otherwise enhancing shareholder value.
However, there is no assurance that Homestead will be able to obtain such
financing when required, that any other strategic alternative will be
available, or that any such financing or other alternative presented to
Homestead will be acceptable. Finally, the incurrence of additional
indebtedness, or the entering into of an alternative transaction by Homestead,
would require the consent of its lenders.
To the extent that Homestead cannot secure adequate financing or complete other
development arrangements then it will have to discontinue the development
process on some or all of the land sites owned, resulting in expensing of
carrying costs, such as interest and property taxes, and expensing of all costs
of its internal development group, which could materially and adversely affect
reported earnings. Similarly, if pursuits of some or all of the land sites are
abandoned, Homestead will incur write-offs of pursuit costs and loss of non-
refundable earnest money deposits. If discontinuance of development of land
sites is required or pursuits of land sites for acquisition are abandoned due
to financing constraints, Homestead intends to mitigate incurrence of expenses
and cash outflows by seeking to sell land sites, sell and assign rights to
acquire sites under pursuit, terminate personnel, or take other appropriate
actions all of which may result in additional losses for financial statement
purposes. In the event that Homestead is required to liquidate some of its real
estate holdings expeditiously, its ability to achieve a desirable sales price
could be adversely affected.
S-7
<PAGE>
Homestead intends to change the brand name under which it operates its
properties to "Homestead Guest Studios(TM)." A new marketing campaign
supporting the updated brand name will be launched in April 1999. The updated
brand name will be implemented in new collateral materials, such as property
directories and stationery, as inventories are depleted. In addition, new
signage will appear on all new opening properties and as existing property
signage is refurbished.
Homestead is affiliated with Security Capital Group Incorporated, which is
Homestead's majority shareholder. Homestead's affiliation with Security Capital
provides it with access to Security Capital's proprietary real estate research
and various other services which Security Capital offers to its affiliates.
Homestead is a Maryland corporation. Its executive offices are located at 2100
RiverEdge Parkway, 9th Floor, Atlanta, Georgia 30328 and its telephone number
is (770) 303-2200.
Homestead Village(R) is a registered trademark of Homestead and all references
to the term "Homestead Village" include a reference to such registered
trademark.
If you would like more information concerning Homestead, including a detailed
description of its business and operations, please read the attached Annual
Report on Form 10-K for the year ended December 31, 1998.
S-8
<PAGE>
RIGHTS OFFERING INFORMATION
Securities Offered......... 76,489,092 rights exercisable for an aggregate of
76,489,092 Shares with 5,329,089 additional
Shares authorized for issuance to cover excess
subscriptions ("Additional Shares"), if any, or
for sales to third parties.
Subscription Right......... You will receive as a dividend two rights for
each Share you own on April 5, 1999 (the "Record
Date"). Each right entitles you to purchase one
Share at $2.75 per Share (the "Subscription
Price").
Subscription Options.......
As a holder of rights you may:
(1) subscribe for Shares pro rata through the
exercise of all your rights, thereby
preserving approximately your relative
equity ownership and voting interest in
Homestead,
(2) subscribe for Shares not purchased by
other shareholders, thereby increasing your
relative equity ownership and voting
interest in Homestead,
(3) subscribe for Shares through the exercise
of part of your rights and transfer or sell
the remainder of your rights,
(4) transfer or sell all of your rights, or
(5) allow part or all of your rights to
expire unexercised.
In any of the last three cases, you would own
a smaller relative equity ownership and a
smaller voting interest in Homestead after
the rights offering.
Oversubscription If you validly exercise all of your rights, you
Privilege.................. may also subscribe for Shares that have not been
purchased by other shareholders through the
exercise of their rights (the "Unsubscribed
Shares") or for Additional Shares at the
Subscription Price (the "Oversubscription
Privilege"). To the extent Shares are not
purchased by other parties in the rights
offering, Security Capital has agreed to purchase
enough Shares to ensure that the gross proceeds
of the rights offering are no less than $205
million. Only holders of Shares on the Record
Date will be entitled to the Oversubscription
Privilege. See "The Offering--Oversubscription
Privilege" for more information concerning the
ability to purchase additional Shares.
Third Party Sales..........
At the same time as the rights offering,
Homestead will attempt to sell Unsubscribed
Shares or Additional Shares to third parties
S-9
<PAGE>
at the Subscription Price. See "The Offering--
Unsubscribed Shares and Third Party Sales" for
more information concerning the potential sale of
Unsubscribed Shares and Additional Shares to
third parties.
Expiration Date............ April 23, 1999 at 5:00 p.m. Eastern Standard time
(the "Expiration Date"). In its discretion,
Homestead may extend the Expiration Date or may
withdraw the rights offering. After the
Expiration Date, the rights will expire and have
no value.
Withdrawal................. Homestead may withdraw the rights offering at any
time prior to or on the Expiration Date for any
reason. See "The Offering--Withdrawal" for more
information concerning the ability of Homestead
to withdraw the rights offering.
Subscription Price......... $2.75 per Share.
Transferability of
Rights..................... The rights are transferable until their
expiration, subject to certain limitations, and
may be traded on the NYSE only up to the close of
the NYSE on April 22, 1999, the business day
preceding the Expiration Date.
Subscription Agent......... Boston EquiServe, 150 Royall Street, Canton,
Massachusetts 02021.
Shares Outstanding Before
Offering...................
38,244,546
Shares Outstanding After
Offering...................
114,733,638 (120,062,727 if all Additional Shares
are sold).
Use of Proceeds............ Homestead will use the net proceeds of this
offering to, first, repay borrowings under
Homestead's Bridge Facility ($200 million) and,
second, for purposes allowed under the Working
Capital Facilities. See "Use of Proceeds" for
more information on how Homestead intends to use
the proceeds raised in this offering.
S-10
<PAGE>
RISK FACTORS
Homestead will require substantial additional capital
Homestead will continue to require a substantial amount of additional capital
to finance its short-term obligations and future growth. Costs to fund
commitments on properties under construction at December 31, 1998 were
approximately $68 million. Additional expected funding required for properties
in planning and owned at December 31, 1998 was approximately $354 million, and
the expected funding required to acquire and develop properties under pursuit
at December 31, 1998 was approximately $200 million. As a result, Homestead
anticipates seeking to raise substantial additional amounts of capital
throughout 1999. Homestead may seek additional credit facilities and may seek
to issue long-term debt and additional equity securities or enter into joint
venture or other arrangements. In addition, Homestead may consider other
strategic alternatives, including a business combination or other extraordinary
transaction, presented to it as a means of continuing its growth and operations
or otherwise enhancing shareholder value. Homestead is currently restricted by
the terms and covenants of its bank lines of credit in the type and amount of
additional indebtedness it may incur or in the transactions it may enter into.
No assurance can be given regarding the availability or terms of such financing
or of any such alternative transaction. Any future debt financings or issuances
of preferred shares by Homestead will be senior to the rights of the holders of
Shares, and any future issuances of common or preferred shares may result in
the dilution of the then existing shareholders' proportionate equity interest
in Homestead.
If Homestead cannot secure adequate funding or complete other development
arrangements then it may have to discontinue the development process on some or
all of the land sites owned resulting in expensing of carrying costs, such as
interest and property taxes, and expensing of costs of its internal development
group, which could materially adversely affect reported earnings. Similarly, if
pursuits of some or all of the land sites are abandoned, Homestead may incur
write-offs of pursuit costs and loss of non-refundable earnest money deposits.
If discontinuance of development of land sites is required or pursuits of land
sites for acquisition are abandoned due to financing constraints, then
Homestead intends to mitigate incurrence of expenses and cash outflows by
seeking to sell land sites, sell and assign rights to acquire sites under
pursuit, terminate personnel, or take other appropriate actions all of which
may result in additional losses for financial statement purposes. In the event
that Homestead is required to liquidate some of its real estate holdings
expeditiously, its ability to achieve a desirable sales price could be
adversely affected.
Homestead is subject to a substantial amount of indebtedness
At December 31, 1998, Homestead's total indebtedness was approximately $709
million, which will be reduced to approximately $512 million assuming that $225
million of Shares are sold upon the completion of the rights offering and
giving effect to the February 23, 1999 sale and leaseback transaction.
Homestead will be required to seek refinancing for all or a portion of that
debt or to obtain additional financing, if it is at any time unable to generate
sufficient cash flow from operations to service its debt or satisfy other
covenants under its loan agreements, which include limitations on the amount of
additional indebtedness that Homestead can incur. There can be no assurance
that any such refinancing would be possible or that any additional financing
could be obtained on terms that are favorable or acceptable to Homestead. The
amount of Homestead's indebtedness may also make
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Homestead more vulnerable to economic downturns and may limit its ability to
withstand adverse changes or to capitalize on business opportunities.
Additionally, substantially all of Homestead's properties have been pledged as
collateral to secure the payment of Homestead's indebtedness. If Homestead were
to default in the payment of any of the secured indebtedness, Homestead could
lose the properties securing such debt. The loss of such properties could have
a material adverse effect on Homestead's financial condition and results of
operations.
Significant influence of principal shareholder may impact Homestead management
and operations
As of December 31, 1998, Security Capital owned approximately 69.8% of the
issued and outstanding Shares of Homestead, and therefore controls
approximately 69.8% of the vote on matters submitted for shareholder action,
including the election of directors. Based on Security Capital's agreement to
purchase enough Shares to ensure that the gross proceeds of the rights offering
are no less than $205 million and assuming other shareholders do not exercise
their rights and Additional Shares are not sold to third parties, Security
Capital's ownership interest in Homestead would increase to approximately 89.8%
of the outstanding Shares. Pursuant to an investor agreement with Homestead, as
amended (the "Security Capital Investor Agreement"), Security Capital currently
has the right to approve a variety of actions.
Under the Security Capital Investor Agreement for so long as Security Capital
beneficially owns at least 50.1% of Homestead's outstanding Shares, Security
Capital has the right to approve, among other things:
(1) Homestead's annual budget;
(2) incurring expenses in any year exceeding (A) any line item in the
annual budget by $500,000 or 10% and (B) the total expenses set forth
in the annual budget by 5%;
(3) the offer or sale of any Shares or any securities convertible into or
exchangeable for Shares, other than pursuant to (A) an employee benefit
plan approved by Homestead's shareholders, (B) previously issued
warrants, options or rights, (C) a dividend reinvestment plan or share
purchase plan approved by the board of directors of Homestead (the
"Board") or (D) an issuance of rights, options, or warrants for Shares
issued to all shareholders;
(4) the issuance or sale of securities that are subject to mandatory
redemption or redemption at the option of the holder;
(5) the adoption of any employee benefit plan pursuant to which Shares may
be issued and any action with respect to senior officers' compensation;
(6) the incurrence, restructuring, renegotiation or repayment of
indebtedness in which the aggregate amount involved exceeds $1,000,000;
(7) the declaration or payment of any dividend or other distribution;
(8) acquisitions or dispositions in a single transaction or group of
related transactions where the purchase price exceeds $1 million;
(9) service contracts (A) for property management, investment management or
leasing services, or (B) that contemplate annual payments in excess of
$500,000;
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<PAGE>
(10) the entering into of any new contract, including for construction,
development, or other capital expenditure, for which the total cost is
reasonably expected to exceed $1,000,000 for any contract or
$5,000,000 in the aggregate;
(11) the entering into of any joint venture for the development of any
properties owned by Homestead in which the book value of any property
to be contributed by Homestead exceeds $1,000,000 individually or
$5,000,000 in the aggregate;
(12) the entering into of any franchising or licensing agreements;
(13) amendment of the articles of incorporation or bylaws of Homestead; and
(14) waiver of antitakeover provisions of Maryland law or Homestead's
articles of incorporation;
In addition, so long as Security Capital owns at least 50% of the outstanding
Shares, Homestead will maintain an operating committee consisting of the two
Homestead Co-Chairmen and two nominees of Security Capital that will meet
weekly to review all operations of Homestead.
The Security Capital Investor Agreement also provides that, so long as Security
Capital owns at least 10% of the outstanding Shares, Homestead may not increase
the number of persons serving on the Board to more than seven without the
approval of Security Capital. Security Capital also is entitled to designate
one or more persons as directors of Homestead, as follows:
(1) so long as Security Capital owns at least 10% but less than 25% of the
outstanding Shares, it is entitled to nominate one person; and
(2) so long as Security Capital owns at least 25% of the outstanding
Shares, it is entitled to nominate that number of persons as shall bear
approximately the same ratio to the total number of members of the
Board as the number of Shares beneficially owned by Security Capital
bears to the total number of outstanding Shares, provided that Security
Capital shall be entitled to designate no more than two persons so long
as the Homestead Board consists of no more than seven members.
Currently, Security Capital does not have any nominees on the Board. However,
John P. Frazee, a Homestead director, is also a Security Capital director.
In addition, the Security Capital Investor Agreement provides Security Capital
with registration rights pursuant to which, in certain specified circumstances,
Security Capital may request, on not more than three occasions, registration of
all of the Shares owned by Security Capital pursuant to Rule 415 under the
Securities Act.
Accordingly, due to the foregoing, for so long as it continues to beneficially
own at least 10% of Homestead's outstanding Shares, Security Capital will
retain significant influence over the affairs of Homestead which may result in
decisions that do not fully represent the interests of all shareholders of
Homestead. However, Security Capital has agreed that no action taken by
Security Capital under the Security Capital Investor Agreement should advantage
Security Capital to the disadvantage of other shareholders.
In addition, if Security Capital purchases in the rights offering sufficient
Shares to increase its ownership in Homestead to 80% or greater, Security
Capital would be required to consolidate Homestead for federal income tax
purposes. Security Capital would include Homestead's activity in Security
Capital's federal income tax return including any available net operating loss
carryforwards of Homestead. Homestead had as of December 31, 1998,
approximately $86,000,000
S-13
<PAGE>
in net operating loss carryforwards. To the extent Security Capital is able to
utilize Homestead's net operating loss carryforwards, such loss carryforwards
will not be available to Homestead in the future.
Homestead has entered into a subscription agreement with Security Capital
whereby Security Capital has agreed to purchase $200 million of subordinated
debentures from Homestead. This subscription was pledged as security for the
$200 million Bridge Facility. If the subscription is called by Homestead or
Homestead receives proceeds from any offering of securities, the proceeds must
be used to first repay the Bridge Facility with any excess amounts to be used
for purposes allowed under the Working Capital Facilities. The debentures would
bear interest at a rate of 0.25% over the rate Homestead incurs under its $50
million credit facility (which became a $30 million facility on March 18,
1999). Homestead may repurchase the debentures with the proceeds of an equity
offering within 90 days of the issuance of the debentures. The subscription
agreement expires the earlier of June 30, 1999 or two weeks after the
termination of the Bridge Facility. The subscription obligation is reduced or
terminated to the extent Homestead issues equity securities to any third party,
or to Security Capital pursuant to a separate offering, including the rights
offering, and the proceeds are used to repay the Bridge Facility. If the
subscription is called by Homestead and if the debentures are converted to
Shares, Security Capital would own approximately 85% of the outstanding Shares
of Homestead. On the 90th day following the issuance of the debentures, the
debentures convert to Shares, on a per share basis at the lowest of (i)
$13.931, (ii) the fair market value, based upon a trailing 20-day average on
the date any debentures are issued, and (iii) the fair market value, based upon
a 20-day trailing average, on the date the debentures are converted
automatically into Shares. To the extent that Shares are not purchased by other
parties in the rights offering, Security Capital has agreed to purchase enough
shares to ensure that the gross proceeds of the rights offering are no less
than $205 million. No assurance can be given that Security Capital will provide
further financial accommodations for Homestead. In conjunction with Security
Capital's entering into the subscription agreement, Homestead paid an
arrangement fee to Security Capital of $600,000.
Seasonal fluctuations in the lodging industry may affect Homestead's operating
results
The lodging industry is seasonal in nature, with the second and third quarters
generally accounting for a greater proportion of annual revenues than the first
and fourth quarters. Quarterly earnings may be adversely affected by events
beyond Homestead's control such as poor weather conditions, economic factors
and other considerations affecting travel.
Competition and overdevelopment could adversely affect Homestead's operations
Each Homestead Village property is, or will be, located in a developed area
that includes competing properties. The number of competitors in a particular
area could have a material adverse effect on occupancy, average weekly rates
and weekly revenue per available room. Competition within the extended stay
lodging market has increased substantially. In several markets where Homestead
has properties, there is intense competition for the extended stay customer
which has already affected occupancy and weekly revenue per available room for
these properties. In addition, since the lodging industry has historically been
characterized by cyclical trends, there can be no assurance that the current
state of supply/demand fundamentals will continue into the future. Competition
within the lodging industry is based generally on convenience of location,
price, range of services and guest
S-14
<PAGE>
amenities offered and quality of customer service. Homestead considers the
reasonableness of room rates, the location of properties and the services and
the guest amenities provided to be among the most important competitive factors
in the business. A number of other lodging chains and developers have developed
or are developing extended stay properties. In particular, some of these
entities have targeted the moderately priced segment of the extended stay
market in which Homestead competes. Homestead competes for guests and for new
development sites with certain of these established entities which may have
greater financial resources than Homestead and better relationships with
lenders and real estate sellers. These entities 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 rates or offer
greater convenience, services or amenities or significantly expand or improve
properties in markets in which Homestead competes, thereby materially adversely
affecting Homestead's business and results of operations.
The value of Homestead's real estate is dependent on numerous factors
Real property investments are subject to varying degrees of risk. Real estate
values are affected by a number of factors, including:
(1) changes in the general economic climate;
(2) local conditions, such as an oversupply of space or a reduction in
demand for real estate in an area;
(3) the quality and philosophy of management;
(4) competition from other available space;
(5) the ability of the owner to provide adequate maintenance and insurance;
(6) the ability of the owner to control variable operating costs;
(7) government regulations;
(8) interest rate levels;
(9) the availability of financing; and
(10) potential liability under, and changes in, environmental, zoning, tax
and other laws.
Homestead's development activities may be unsuccessful
Subject to the availability of financing, Homestead intends to continue to
complete its properties under development and to pursue development activities
as opportunities arise and, as a result, will be subject to risks associated
with any such development activities. These risks include:
(1) the risk that development opportunities explored by Homestead may be
abandoned;
(2) the risk that construction costs of a project may exceed original
estimates, possibly making the project less profitable than originally
estimated;
(3) limited cash flow during the construction period;
(4) the risk that occupancy percentages and rates at a completed project
will not achieve expectations (which has occurred frequently with
recent developments) or not be sufficient to make the project
profitable; and
(5) the risk that government and other approvals may not be obtained.
S-15
<PAGE>
In case of an unsuccessful development project, Homestead's loss could exceed
its investment in the project.
Illiquidity of real estate investments
Equity real estate investments are relatively illiquid and therefore may tend
to limit the ability of Homestead to react promptly to changes in economic or
other conditions. In addition, significant expenditures associated with equity
real estate investments, such as mortgage payments, real estate taxes and
maintenance costs, are generally not reduced when circumstances cause a
reduction in income from the investments. Further, various agreements to which
Homestead is a party, including the terms of Homestead's outstanding
indebtedness, place limitations on the ability of Homestead to sell its
properties. Thus, Homestead's ability to sell assets at any time to change its
asset base may be restricted. Further, if additional financing is not obtained
to continue development of land sites owned, Homestead may seek to sell certain
properties in planning and owned. No assurance can be given that any sales will
occur or, if such sales occur, that the proceeds of such sale will be
sufficient to cover Homestead's costs. Homestead may seek joint venture
partners for certain properties in planning and owned. No assurance can be
given that any joint venture will be consummated or that the terms thereof will
be favorable to Homestead.
Uninsured losses may adversely affect Homestead
Some types of losses, such as from hurricanes, may be uninsurable, or the cost
of insuring against such losses may not be economically justifiable. If an
uninsured loss occurs, Homestead could lose both the invested capital in and
anticipated revenues from the facility, but would still be obligated to repay
any recourse mortgage indebtedness on the facility.
Homestead could be subject to potential environmental liability
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner, developer or operator of real estate may be liable
for the costs of removal or remediation of hazardous or toxic substances at,
on, under or in its property. The costs of removal or remediation of such
substances could be substantial. Such laws often impose liability without
regard to whether the owner or operator knew of, or was responsible for, the
release or presence of such hazardous substances. The presence of such
substances on Homestead's properties may adversely affect its ability to sell
such properties or to borrow using such properties as collateral and may also
have an adverse affect on Homestead's ability to pay distributions to its
shareholders.
Costs of compliance with laws may affect Homestead's financial condition
Homestead's facilities are subject to various federal, state and local
regulatory requirements, such as state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to private
litigants. There can be no assurance that these requirements will not be
changed or that new requirements will not be imposed, a result that could
require significant unanticipated expenditures by Homestead and could have an
adverse effect on Homestead's financial condition and results of operations.
S-16
<PAGE>
USE OF PROCEEDS
The net proceeds to Homestead from the sale of the Shares offered through this
rights offering, net of payment of all expenses, are expected to be
approximately $204 million ($218 million if all of the Additional Shares are
sold). The net proceeds will be used to repay outstanding indebtedness under
Homestead's $200 million Bridge Facility with any excess amounts to be used for
purposes allowed under the Working Capital Facilities. Outstanding borrowings
under the Bridge Facility bear interest at the LIBOR rate plus 1.25% per annum
and at March 31, 1999, the interest rate was 6.1875%. The Bridge Facility
matures May 4, 1999.
PRICE RANGE OF SHARES
Market information
The Shares are listed on the NYSE under the symbol "HSD". Before April 1, 1998,
Shares were listed on the American Stock Exchange under the same ticker symbol.
The following table sets forth the high and low sales prices of the Shares as
reported in the NYSE and AMEX Composite Tape, respectively, for the periods
indicated.
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
1997
First Quarter....................................... $20 7/8 $16 5/8
Second Quarter...................................... 18 1/2 15 7/8
Third Quarter....................................... 20 1/8 16
Fourth Quarter...................................... 18 1/4 13 11/16
1998
First Quarter....................................... $15 3/4 $13 9/16
Second Quarter...................................... 16 11
Third Quarter....................................... 13 13/16 6 1/4
Fourth Quarter...................................... 8 3/16 3 3/8
1999
First Quarter....................................... 4 3/4 2 1/4
Second Quarter (through April 5, 1999).............. 2 7/8 2 9/16
</TABLE>
As of March 31, 1999, Homestead had 38,244,546 Shares outstanding, which were
held of record by approximately 1,800 shareholders.
Dividend policy
The authorization and payment of dividends on Shares by Homestead are subject
to the discretion of the Homestead Board. Any determination as to the payment
of dividends will depend upon the results of operations, capital requirements
and financial condition of Homestead and such other factors as the Homestead
Board deems relevant. Currently, the Homestead Board intends to follow a policy
of retaining earnings to finance Homestead's growth and for general corporate
purposes and, therefore, does not anticipate paying any cash dividends in the
foreseeable future. In addition, Homestead's line of credit arrangements
restrict payment of dividends on the Shares without lender approval.
S-17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Homestead at December 31,
1998, and as adjusted to give effect to the (i) sale and leaseback of 18
properties for $145 million, (ii) the amendments to the Working Capital
Facilities, and (iii) the rights offering (assuming the sale of 76,489,092
Shares) and the application of the net proceeds therefrom. The table should be
read in conjunction with the financial statements of Homestead included in the
attached Annual Report on Form 10-K for the year ended December 31, 1998.
<TABLE>
<CAPTION>
December 31, 1998
-------------------------
Historical As Adjusted(1)
---------- --------------
(amounts in thousands,
except share data)
<S> <C> <C>
Lines of credit................................ $357,080 $ 153,374
======== ==========
Mortgage notes payable......................... 122,028 --
Capital lease obligation....................... -- 143,260
Convertible mortgage notes payable to
affiliates.................................... 221,334 221,334
Shareholders' equity:
Common Stock, $0.01 par value; 249,822,502
Shares authorized; 38,244,546 Shares issued
and outstanding 114,733,638 Shares issued as
adjusted (2)................................ 383 1,148
Preferred Stock, $0.01 par value; 177,498
shares authorized; none outstanding......... -- --
Additional paid-in capital................... 474,337 677,278
Accumulated deficit.......................... (16,135) (16,135)
Less deferred compensation................... (560) (560)
-------- ----------
Total shareholders' equity (3)............. 458,025 661,731
-------- ----------
Total Capitalization (3)................... $801,387 $1,026,325
======== ==========
</TABLE>
- --------
(1) The proceeds of the rights offering will be used to repay the Bridge
Facility and for purposes allowed under the Working Capital Facilities.
(2) As of December 31, 1998, does not include 19,246,402 Shares issuable upon
conversion of outstanding convertible mortgage notes and 3,701,373 Shares
issuable upon exercise of outstanding options.
(3) If Shares are sold pursuant to the exercise of rights and all Additional
Shares are sold to third parties, Total Shareholders' Equity and Total
Capitalization, as adjusted, will be $675,946 and $1,040,540, respectively.
S-18
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth summary selected financial information relating
to the historical financial condition and results of operations of Homestead
for the years ended December 31, 1998, 1997, 1996, 1995 and 1994. On October
17, 1996, Homestead acquired the subsidiaries of Security Capital Pacific Trust
("PTR") relating to Homestead Village properties (the "PTR Subsidiaries") in
the merger transactions relating to the formation of Homestead (the "Mergers").
Prior to October 17, 1996, Homestead had no significant activities, thus
substantially all 1996 results of operations through the date of the Mergers
and all of the summary selected financial information in 1995 and prior years
represents that of the PTR Subsidiaries. The following selected financial data
(amounts in thousands, except per share data and statistical data) is qualified
in its entirety by, and should be read in conjunction with, the historical
financial statements of Homestead included in the Annual Report on Form 10-K
for the year ended December 31, 1998 attached to the prospectus and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated by reference in the accompanying prospectus and
included in the Annual Report on Form 10-K for the year ended December 31, 1998
attached to the prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Operations Summary:
Revenues:
Room revenue........... $ 139,681 $ 58,397 $ 33,071 $ 18,337 $ 7,827
Other revenue.......... 5,771 1,469 492 366 165
---------- --------- --------- -------- --------
Total revenues....... $ 145,452 $ 59,866 $ 33,563 $ 18,703 $ 7,992
---------- --------- --------- -------- --------
Operating expenses:
Property operating
expenses (1).......... 63,339 25,089 16,166 9,229 4,252
Corporate operating
expenses.............. 22,280 15,238 4,112 1,322 512
Special charges (2).... 7,240 -- -- -- --
Depreciation and
amortization.......... 34,244 12,130 4,443 2,343 845
---------- --------- --------- -------- --------
Total operating
expenses............ $ 127,103 $ 52,457 $ 24,721 $ 12,894 $ 5,609
---------- --------- --------- -------- --------
Operating income........ $ 18,349 $ 7,409 $ 8,842 $ 5,809 $ 2,383
Interest income......... 952 552 211 -- --
Interest expense net of
capitalized interest... $ (23,190) $ (2,190) $ ( 5,971) $ (2,958) $(1 ,409)
---------- --------- --------- -------- --------
Earnings (loss) before
extraordinary item..... $ (3,889) $ 5,771 $ 3,082 $ 2,851 $ 974
Extraordinary item--loss
on early extinguishment
of debt................ $ (25,344) -- -- -- --
---------- --------- --------- -------- --------
Net earnings (loss)..... $ (29,233) $ 5,771 $ 3,082 $ 2,851 $ 974
========== ========= ========= ======== ========
Share Data: (3)
Weighted average shares
outstanding............ 37,639 23,578 N/A N/A N/A
Diluted weighted average
shares outstanding .... 37,639 43,502 N/A N/A N/A
Pro forma weighted
average shares
outstanding ........... N/A N/A 11,392 N/A N/A
Base earnings (loss) per
share.................. $ (0.78) $ 0.24 N/A N/A N/A
Diluted earnings (loss)
per share.............. $ (0.78) $ 0.18 N/A N/A N/A
Pro forma earnings per
share.................. N/A N/A $ 0.27 N/A N/A
Financial Position:
Property and equipment,
net.................... $1,137,869 $ 715,497 $ 255,608 $105,022 $ 59,099
Total assets............ $1,218,391 $ 783,949 $ 324,625 $108,965 $ 60,866
Other debt to
affiliate.............. -- -- -- $ 80,144 $ 45,131
Lines of credit......... $ 357,080 $ 96,808 -- -- --
Mortgage note payable... $ 122,028 -- -- -- --
Convertible mortgage
notes payable.......... $ 221,334 $ 301,606 $ 101,309 -- --
Shareholders' equity.... $ 458,025 $ 328,931 $ 204,003 $ 22,971 $ 12,068
Other Data:
EBDADT (4).............. $ 40,945 $ 19,385 $ 10,787 $ 5,194 $ 1,819
EBITDA (5).............. $ 52,593 $ 19,539 $ 13,285 $ 8,152 $ 3,228
Cash provided by (used
in):
Operating activities... $ 41,741 $ 25,976 $ 12,261 $ 6,019 $ 2,381
Investing activities... $ (459,292) $(398,721) $(115,453) $(48,116) $(35,474)
Financing activities... $ 426,721 $ 368,304 $ 108,711 $ 43,065 $ 33,832
Statistical Data (for
all operating
properties):
Occupancy............... 70.4% 74.7% 78.8% 76.6% 75.9%
Average weekly rate
(6).................... $ 301 $ 253 $ 222 $ 212 $ 186
Weekly RevPAR (7)....... $ 212 $ 189 $ 175 $ 162 $ 141
Property operating
income margin (8)...... 56.1% 57.8% 51.9% 50.7% 46.7%
</TABLE>
S-19
<PAGE>
- --------
(1) Property operating expenses consist of all expenses directly related to the
operation of the properties and do not include an allocation of corporate
operating expenses. Property operating expenses include primarily salaries
and wages, utilities, insurance, maintenance and supply costs and property
taxes. Prior to the Mergers on October 17, 1996, Homestead had an agreement
with a subsidiary of Security Capital for management of its properties and
paid a fee based on a percentage of revenues.
(2) Consists primarily of expense for Homestead's reorganization of its
internal development department and abandonment of pursuits to acquire
development sites.
(3) 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. Therefore, management does not believe that historical earnings
per share data for 1996 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 and Shares and warrants issued to Security
Capital and Atlantic were outstanding since the Mergers closing date. See
"Item 1. Business--The Company" in the attached Form 10-K. Pro forma
earnings per share for 1996 have also been restated using the methodology
of Statement of Financial Accounting Standards No. 128 which resulted in a
$0.04 increase from prior pro forma earnings per share. For the year ended
December 31, 1998 diluted weighted average shares outstanding are the same
as basic weighted average shares outstanding as convertible debt is not
assumed to be converted and exercise of options is not assumed as the
effects are anti-dilutive in a period of loss.
(4) EBDADT means earnings before depreciation, amortization and deferred taxes.
EBDADT for Homestead is total revenues, plus interest income, less property
operating expenses, corporate overhead, non-real property depreciation,
interest expense (other than convertible debt interest expenses) and
current tax expense. EBDADT is presented on a diluted basis which assumes
conversion of the convertible mortgage notes, thus interest expense
associated with the convertible notes is not deducted in arriving at
diluted EBDADT. EBDADT does not represent cash generated from operating
activities in accordance with GAAP, is not to be considered as an
alternative to net earnings or any other GAAP measurement of operating
performance and is not necessarily indicative of cash available to fund all
cash needs. Homestead has included EBDADT herein because Homestead believes
that it is one measure used by certain investors to determine operating
cash flow. EBDADT, as calculated above, may not be comparable to other
similarly titled measures of other companies.
(5) EBITDA does not represent cash generated from operating activities in
accordance with GAAP, is not to be considered as an alternative to net
income or any other GAAP measurement 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.
(6) Average weekly rate is determined by dividing room revenue by the number of
guest room days occupied for the period and multiplying by seven.
(7) Weekly 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.
(8) Property Operating Margin Income is property operating income (property
revenues less property operating expenses) divided by property revenues.
S-20
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Security Capital Investor Agreement
Please read "Risk Factors--Significant influence of principal shareholder may
impact Homestead management and operations" for information on the Security
Capital Investor Agreement.
Subscription Agreement
Homestead has entered into a subscription agreement with Security Capital
whereby Security Capital has agreed to purchase $200 million of subordinated
debentures from Homestead. This subscription was pledged as security for the
$200 million Bridge Facility. If the subscription is called by Homestead or
Homestead receives proceeds from any offering of securities, the proceeds must
be used to first repay the Bridge Facility with any excess amounts to be used
for purposes allowed under the Working Capital Facilities. The debentures would
bear interest at a rate of 0.25% over the rate Homestead incurs under its $50
million credit facility (which became a $30 million facility on March 18,
1999). Homestead may repurchase the debentures with the proceeds of an equity
offering within 90 days of issuance of the debentures. The subscription
agreement expires the earlier of June 30, 1999 or two weeks after termination
of the Bridge Facility. The subscription obligation is reduced or terminated to
the extent Homestead issues equity securities to any third party, or to
Security Capital pursuant to a separate offering, including the rights
offering, and the proceeds are used to repay the Bridge Facility. If the
subscription is called by Homestead and if the debentures are converted to
Shares, Security Capital would own between approximately 85%-90% of the
outstanding Shares of Homestead (based on the current price of the Shares). On
the 90th day following the issuance of the debentures, the debentures convert
to Shares, on a per share basis at the lowest of (i) $13.931, (ii) the fair
market value, based upon a trailing 20-day average on the date any debentures
are issued, and (iii) the fair market value, based upon a 20-day trailing
average, on the date the debentures are converted automatically into Shares. To
the extent that Shares remain available, Security Capital has agreed to
purchase enough shares to ensure that the gross proceeds of the rights offering
are no less than $205 million. No assurance can be given that Security Capital
will provide further financial accommodation for Homestead. In conjunction with
Security Capital's entering into the subscription agreement, Homestead paid an
arrangement fee to Security Capital of $600,000.
Financial advisor
Homestead has retained Morgan Stanley & Co. Incorporated ("Morgan Stanley") to
act as its financial advisor whereby Morgan Stanley has agreed, among other
things, to provide financial advice to Homestead in connection with the
execution or refinancing of the subscription agreement. Pursuant to the terms
of the engagement letter, Homestead will pay a fee to Morgan Stanley equal to
1.0% of the gross proceeds from the Shares issued in the rights offering and
will reimburse Morgan Stanley for its expenses incurred in connection with
performing its duties pursuant to the engagement letter. In addition, pursuant
to a separate agreement, Homestead has agreed to indemnify Morgan Stanley for
specified liabilities it may incur in connection with performing its duties
pursuant to the engagement letter.
Archstone Investor Agreement
Archstone entered into an investor and registration rights agreement with
Homestead (the "Archstone Investor Agreement") pursuant to which Archstone is
entitled to designate one person for nomination to the Homestead Board.
Homestead will use its best efforts to cause the election of such
S-21
<PAGE>
nominee for so long as Archstone has the right to convert in excess of $20
million in principal amount of Homestead convertible mortgage notes. Such
nominee may, but need not, be the same person(s) nominated by Security Capital
pursuant to the Security Capital Investor Agreement. In addition, Homestead has
granted to Archstone registration rights with respect to the issuance upon
conversion and the distribution of all of the Shares issuable upon conversion
of the convertible mortgage notes. Archstone may request three registrations
pursuant to Rule 415 promulgated under the Securities Act of all Shares issued
or issuable upon conversion of the convertible mortgage notes. Such
registrations, except for the fees and disbursements of counsel to Archstone,
shall be at the expense of Homestead.
Archstone convertible mortgages
At December 31, 1998, Homestead owed convertible mortgage notes to Archstone in
the amount of $221,333,620. The mortgage notes were funded pursuant to an
agreement entered into in conjunction with the formation of Homestead. The
mortgage funding commitment under the agreement was to finance the development
of properties acquired by Homestead from Archstone in the Merger. The notes are
collateralized by Homestead properties (54 Homestead properties at $366.1
million of historical cost mortgaged to Archstone at December 31, 1998). The
notes 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 notes are
convertible, at the option of the holder, into Shares at a conversion ratio
equal to one Share for every $11.50 of principal amount outstanding. Deferred
financing costs and discount on the respective funding have been fully
amortized. Archstone has no further funding commitment.
Administrative Services Agreement
Homestead entered into the 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, facilities management and payroll. 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, which expires on December 31, 1999, and is
automatically renewed each year for a one-year term, is subject to approval by
a majority of the independent members of the Homestead Board. Homestead
incurred fees for administrative services provided by Security Capital of
$4,213,000, $2,320,000 and $375,000 for services provided under the
Administrative Services Agreement in 1998, 1997 and for the period from October
17, 1996 to December 31, 1996, respectively.
Homestead believes its relationship with Security Capital under this agreement
provides it with certain advantages, including access to a greater quality and
depth of resources, in such areas as information systems, insurance, cash
management and legal support provided at substantial economies of scale, than
it could currently provide internally.
S-22
<PAGE>
THE OFFERING
Rights
Homestead is issuing to you as a dividend, at no cost, two rights for each
Share you hold. You must be a holder of Shares on April 5, 1999, the Record
Date, in order to receive the dividend. Each right entitles you to purchase one
Share at the Subscription Price. As a holder of rights you may:
(1) subscribe for Shares pro rata through the exercise of all your rights,
thereby preserving approximately your relative equity ownership and
voting interest in Homestead;
(2) subscribe for Shares not purchased by other Shareholders, thereby
increasing your relative equity ownership and voting interest in
Homestead;
(3) subscribe for Shares through the exercise of part of your rights and
transfer or sell the remainder of your rights;
(4) transfer or sell all of your rights; or
(5) allow part or all of your rights to expire unexercised.
In any of the last three cases, you would own a smaller relative equity
ownership and voting interest in Homestead.
Subscription price
The Subscription Price for one Share is $2.75. You may purchase one Share for
each right you exercise.
Expiration date
The rights will expire and become void at 5:00 p.m. Eastern Standard time on
April 23, 1999, or such later date as Homestead may determine in its sole
discretion. The rights will have no value after that date. Homestead will give
notice to shareholders of record on the Record Date of any new Expiration Date,
by mail or by publication in a newspaper of national circulation, if it extends
the period for the exercise of the rights.
Oversubscription privilege
If you validly exercise all of the rights initially issued to you to the extent
possible, you will have the further right to exercise the Oversubscription
Privilege for Unsubscribed Shares or Additional Shares at the Subscription
Price. Only holders of Shares on the Record Date will be entitled to the
Oversubscription Privilege. If you are entitled to exercise the
Oversubscription Privilege you may subscribe for as many Shares as you desire
(subject to the maximum number of Shares offered in the rights offering and
certain other restrictions). See "--Limitation on Purchases."
If the demand for Shares pursuant to the Oversubscription Privilege exceeds the
number of Shares available, holders of Shares on the Record Date will
participate in the Oversubscription Privilege (up to, but not exceeding, the
number of Shares oversubscribed for by each such holder) pro rata based upon
the number of rights exercised by each such person (without regard to the
number of Shares
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<PAGE>
oversubscribed for by each such person pursuant to the Oversubscription
Privilege), with fractional Shares adjusted in any manner Homestead deems
appropriate. If the rights offering is oversubscribed, Security Capital, in its
discretion, may reduce the number of rights it exercises in any manner it deems
appropriate so that other shareholders may acquire Shares pursuant to the
Oversubscription Privilege as long as Security Capital's overall ownership
percentage in Homestead does not go below 51%. Promptly after the Expiration
Date, Homestead will send each subscriber exercising the Oversubscription
Privilege a written confirmation of the number of Shares allocated to such
subscriber under the Oversubscription Privilege. Any amounts overpaid by
subscribers will be refunded promptly after the Expiration Date without
interest.
Unsubscribed shares and third party sales
Homestead will, at the same time as the offering of Shares to rights holders,
seek third-party investors to acquire Unsubscribed Shares and Additional
Shares. Homestead will offer the Unsubscribed Shares and Additional Shares at
the Subscription Price, on a best-efforts basis in jurisdictions where it is
authorized to do so. No person has committed to underwrite the sale of
Unsubscribed Shares or the Additional Shares to third parties.
Third-party investors who desire to purchase Unsubscribed Shares or Additional
Shares should mail or deliver the subscription form (the "Subscription Form")
to the Subscription Agent (as defined below) at the appropriate address set
forth under "--Subscription Agent." The Subscription Form must be properly
completed and duly executed. Subscription Forms may be obtained by contacting
Kelly Lee at (770) 303-8299. Subscriptions for less than 1,000 Shares from
third-party investors will not be accepted. If subscriptions exceed available
Shares, Homestead may allocate available Unsubscribed Shares or Additional
Shares in Homestead's sole discretion. Subscription Forms must be received by
the Subscription Agent prior to 5:00 p.m. Eastern Standard time on the
Expiration Date. Subscription Forms received after such time will not be
honored. On or promptly after April 27, 1999, the second business day after the
Expiration Date, Homestead will send each third-party investor a written
confirmation of the number of Shares allocated to such investor. On or prior to
April 30, 1999, the fifth business day after the Expiration Date, third-party
investors must deliver payment for the Shares subscribed for to the
Subscription Agent by wire transfer of immediately available funds, based upon
such investor's prorated allocation of Shares as notified by Homestead.
Limitation on purchases
Homestead has not taken any steps that
.would cause a purchaser to avoid becoming an "Acquiring Person" (an
Acquiring Person is someone who has acquired beneficial ownership of 20%
or more of outstanding Common Shares) pursuant to the terms of the Rights
Agreement, dated as of May 16, 1996, between Homestead and Boston
EquiServe, Inc., as rights agent;
.would cause a purchaser to avoid becoming an "Interested Stockholder" (an
Interested Stockholder is any person who beneficially owns ten percent
(10%) or more of the voting power of the corporation's Shares or an
affiliate of the corporation who, at any time within the two (2)-year
period prior to the date in question, was the beneficial owner of ten
percent
S-24
<PAGE>
(10%) or more of the voting power of the then-outstanding voting stock of
the corporation) pursuant to the business combination provisions of Title
3, Subtitle 6 of the Maryland General Corporation Law; or
.would cause a purchase to not be considered a "Control Share" acquisition
(a Control Share is a voting Share of stock which, if aggregated with all
other such Shares of stock previously acquired by the acquiror, or in
respect of which the acquiror is able to exercise or direct the exercise
of voting power, would entitle the acquiror to exercise voting power in
electing directors within one of the following ranges of voting power
(except solely by virtue of a revocable proxy); (i) one-fifth (1/5) or
more but less than one-third ( 1/3), (ii) one-third ( 1/3) or more but
less than a majority, or (iii) a majority or more of all voting power)
pursuant to the Control Share provisions of Title 3, Subtitle 7 of the
Maryland General Corporation Law.
For more information on whether the purchase of Shares would cause you to
become an Acquiring Person and the effects of being an Acquiring Person, we
encourage you to read the discussion under the caption "Description of Common
Shares" beginning on page 6 in the attached prospectus. For more information on
whether the purchase of Shares would cause you to become an Interested
Stockholder and the effects of being an Interested Stockholder, we encourage
you to read the discussion under the caption "Certain Provisions of Maryland
Law and of Homestead's Charter and Bylaws--Business Combinations" on page 41 in
the attached prospectus. For more information on whether the purchase of Shares
would constitute a Control Share acquisition and the effects of the purchase
being a Control Share acquisition, we encourage you to read the discussion
under the caption "Certain Provisions of Maryland Law and of Homestead's
Charter and Bylaws--Control Share Acquisitions" beginning on page 41 in the
attached prospectus.
Withdrawal
Homestead reserves the right to withdraw the rights offering (and the offering
of Unsubscribed Shares and Additional Shares to third parties) at any time
prior to or on the Expiration Date and for any reason (including, without
limitation, the market price of the Shares), in which event all funds received
from subscribers will be refunded promptly without interest.
Majority shareholder
Homestead's majority shareholder, Security Capital, will participate in the
rights offering. To the extent Shares are not purchased by other parties in the
rights offering, Security Capital has agreed to purchase enough Shares to
ensure that the gross proceeds of the rights offering are no less than $205
million.
S-25
<PAGE>
Subscription agent
The subscription agent is Boston EquiServe, Inc. (the "Subscription Agent").
You should mail or deliver Rights Certificates, Subscription Forms, Notices of
Guaranteed Delivery and payments to one of the following addresses:
By Regular Mail: By Facsimile Transmission:
Boston EquiServe (781) 575-4827
Corporate Reorganization (for Eligible Institutions Only)
P.O. Box 9573 Confirm by Telephone
Boston, Massachusetts 02205-9573 (781) 575-4816
By Hand: By Overnight Courier, Registered,
Securities Transfer & Reporting Certified or
Services, Inc. Express Mail Delivery:
c/o Boston EquiServe, Inc. Boston EquiServe, Inc.
100 William Street, Galleria Corporate Reorganization
New York, New York 10038 40 Campanelli Drive
Braintree, Massachusetts 02184
Delivery of Rights Certificates, Subscription Forms, Notices of Guaranteed
Delivery and payments (other than wire transfers) other than as above will not
constitute a valid delivery.
You may address questions, request assistance concerning the method of
subscribing for Shares, or ask for additional copies of this prospectus
supplement, by calling the Subscription Agent at (781) 575-3120 or Homestead's
Information Agent, Georgeson & Company, Inc., at 1-800-223-2064.
Fractional shares
Homestead will not issue fractional Shares. In addition, Homestead may adjust
for fractional Shares resulting from the exercise of the Oversubscription
Privilege in any manner it deems appropriate. Homestead will not divide Rights
Certificates in such a manner as to create fractional rights or permit holders
to subscribe for a greater number of Shares. Banks, trust companies, securities
dealers and brokers that hold Shares as nominees for more than one beneficial
owner may have a Rights Certificate divided by the Subscription Agent (see "--
Method of Exercising Rights and Oversubscription Privilege"), or may, upon
proper showing to the Subscription Agent, exercise their Rights Certificates on
the same basis as if the beneficial owners were record holders on the Record
Date. Homestead reserves the right to deny any division of Rights Certificates
if in its opinion the result would be inconsistent with the intent of this
privilege.
Method of exercising rights and oversubscription privilege
You may subscribe for rights and the Oversubscription Privilege by properly
completing and duly executing the Rights Certificate accompanying this
prospectus supplement, and mailing or delivering the Rights Certificate,
together with payment of the full Subscription Price for each Share subscribed
for pursuant to the exercise of rights and the Oversubscription Privilege, to
the Subscription Agent at the appropriate address above. Banks, trust
companies, securities dealers and brokers that hold Shares
S-26
<PAGE>
as nominee for more than one beneficial owner may, upon proper showing to the
Subscription Agent, exercise their rights and Oversubscription Privilege on the
same basis as if the beneficial owners were record holders on the Record Date.
Payment must be made in United States currency by personal check, cashier's
check, bank draft or money order drawn on a bank located in the United States
payable to the order of "Homestead Rights Offering." If your rights are held
through The Depository Trust Company ("DTC"), your rights may be exercised by
instructing DTC to transfer rights from your DTC account to the Subscription
Agent's DTC account, along with payment of the full Subscription Price. Except
as described under "--Late Delivery of Payments and Rights Certificates," to be
accepted, the properly completed and duly executed Rights Certificate and the
payment must be received by the Subscription Agent prior to 5:00 p.m. Eastern
Standard time on the Expiration Date. Rights Certificates received after such
time will not be honored.
If you exercise fewer than all of your rights, you will receive from the
Subscription Agent a new Rights Certificate representing the unexercised
rights. No new Rights Certificates will be issued after April 16, 1999. Neither
Homestead nor the Subscription Agent shall incur any liability if a Rights
Certificate, furnished by the Subscription Agent or otherwise, is not received
in time to be exercised, transferred or sold.
Read the instruction letter accompanying the Rights Certificate carefully and
follow it strictly. DO NOT SEND RIGHTS CERTIFICATES OR PAYMENTS TO HOMESTEAD.
Except as described under the captions "--Unsubscribed Shares and Third Party
Sales" and "--Late Delivery of Payments and Rights Certificates," no
subscription will be deemed to have been received until the Subscription Agent
has received delivery of a properly completed and duly executed Rights
Certificate and payment of the full Subscription Price. You, not Homestead or
the Subscription Agent, bear the risk of delivery of all documents and
payments. If the mail is used, we recommend that you use insured, registered
mail, return receipt requested. Please allow a sufficient number of days to
ensure delivery to the Subscription Agent on or before the Expiration Date.
Late delivery of payments and rights certificates
If, prior to 5:00 p.m. Eastern Standard time on the Expiration Date, the
Subscription Agent has received a properly completed and duly executed Notice
of Guaranteed Delivery substantially in the form accompanying this prospectus
supplement (by hand, mail, telegram or facsimile transmission) specifying the
name of the holder of rights and the number of Shares subscribed for (stating
separately the number of Shares subscribed for pursuant to the exercise of
rights and the Oversubscription Privilege) and guaranteeing that the properly
completed and duly executed Rights Certificate and payment of the full
Subscription Price for all Shares subscribed for will be delivered to the
Subscription Agent within five business days after the Expiration Date, such
subscription may be accepted, subject to the Subscription Agent's withholding
the certificates for the Shares until receipt of the properly completed and
duly executed Rights Certificate and payment of such amount within such time
period. If your rights are held through DTC, your rights may be exercised by
instructing DTC to transfer rights from such holder's DTC account to the
Subscription Agent's DTC account, together with payment of the full
Subscription Price. The Notice of Guaranteed Delivery must be guaranteed by a
commercial bank, trust company or credit union having an office, branch or
agency in the United States or by a member of the Stock Transfer Association
approved medallion
S-27
<PAGE>
program such as STAMP, SEMP or MSP. Notices of Guaranteed Delivery and payments
should be mailed or delivered to the appropriate addresses set forth under "--
Subscription Agent."
Method of transferring rights
Rights may be transferred in whole or in part to persons who are residents of
the United States. Rights may be transferred in whole by endorsing the Rights
Certificate for transfer. Rights may be transferred in part by delivering to
the Subscription Agent, at the appropriate addresses set forth under "--
Subscription Agent", a Rights Certificate that has been properly endorsed for
transfer, with instructions to reissue the rights in part in the name of the
transferee and reissue the balance to the rights holder. The Rights Certificate
must be received by the Subscription Agent by 5:00 p.m. Eastern Standard time
on April 16, 1999, for new Rights Certificates to be issued. Unless
arrangements are made for return overnight delivery, new Rights Certificates to
be issued on or about April 16, 1999 may not be received prior to the
Expiration Date. Any arrangements for, and the related expenses of, overnight
delivery of new Rights Certificates must be made by the individual holder. Any
questions regarding the transfer of rights should be directed to Homestead's
information agent, Georgeson & Company, Inc., at 1-800-223-2064.
All commissions, fees and other expenses (including any transfer taxes)
incurred in connection with the purchase, sale or exercise of rights are for
the account of the transferor or the transferee of the rights, and none of such
commissions, fees or expenses will be paid by Homestead.
Pursuant to a listing application for the underlying Shares, the rights will be
traded on the NYSE under the symbol "HSD RT". Pursuant to the rules of the
NYSE, the rights will be traded only up to the close of the NYSE on April 22,
1999, the business day preceding the Expiration Date. No assurance can be given
that a public market will develop or be sustained for the rights.
Validity of subscriptions
Homestead alone will determine all questions with respect to the validity and
form of the exercise of any rights or the Oversubscription Privilege or third-
party subscriptions for Unsubscribed Shares and Additional Shares (including
time of receipt and eligibility to participate in the offering). Homestead's
determination shall be final and binding. Once made, subscriptions and
directions are irrevocable, and no alternative, conditional or contingent
subscriptions or directions will be accepted. Homestead reserves the absolute
right to reject any subscriptions or directions not properly submitted or the
acceptance of which, in the opinion of Homestead's counsel, would be unlawful.
Any irregularities in connection with subscriptions must be cured on or before
the Expiration Date unless waived by Homestead in its sole discretion. Neither
Homestead nor the Subscription Agent shall be under any duty to give
notification of defects in subscriptions or incur any liability for failure to
give such notification. A subscription will be deemed to have been accepted
(subject to Homestead's right to withdraw or terminate the offering) only when
a properly completed and duly executed Subscription Form or Rights Certificate,
any other required documents and payment of the full Subscription Price with
respect to such subscription have been received by the Subscription Agent.
Homestead's interpretations of the terms and conditions of the offering shall
be final and binding.
S-28
<PAGE>
Rights of subscribers
You will have no rights as a shareholder of Homestead with respect to Shares
for which you subscribed until Homestead has issued certificates representing
such Shares to you. You have no right to revoke your subscription after
delivery to the Subscription Agent of a completed Rights Certificate or
Subscription Form and any other required documents.
Subscription proceeds
All proceeds received by the Subscription Agent with respect to the exercise of
rights and the Oversubscription Privilege and with respect to subscriptions for
Unsubscribed Shares and Additional Shares will be held by the Subscription
Agent. If the offering is withdrawn or terminated for any reason, the
Subscription Agent will return promptly to each subscriber all funds received
from such subscriber. No interest will be paid on funds returned due to
withdrawal or termination of the offering or the proration of oversubscriptions
(either pursuant to the Oversubscription Privilege or the sale of Unsubscribed
Shares or Additional Shares) or otherwise.
Foreign shareholders
If your mailing address is outside the United States or the Province of
Ontario, Canada, your Rights Certificates will be held by the Subscription
Agent until you give the Subscription Agent exercise instructions. If no
instructions are received prior to 10:00 a.m. Eastern Standard time on the
fifth business day preceding the Expiration Date, the Subscription Agent will
endeavor to sell the rights of such shareholders for their respective accounts.
The net proceeds, if any, from such sales (based on the average price received
during such day) will be distributed to such foreign holders. No assurances can
be given that the Subscription Agent will be able to sell such rights.
The rights issued pursuant to this rights offering to residents of Ontario are
not transferable in Ontario and the Shares issued to residents of Ontario upon
exercise of rights may not be sold or otherwise disposed of for value in
Ontario, except pursuant to either a prospectus or a statutory exemption
available only in specific and limited circumstances.
Delivery of shares
Certificates for Shares will be mailed as soon as practicable after the
Expiration Date and the receipt of all required documents and payment in full
of the Subscription Price due for such Shares. In the case of shareholders
whose Shares are held through DTC and third-party investors who arrange for
delivery and payment through DTC, the appropriate participant account will be
credited. Any refunds in connection with subscriptions will be mailed as soon
as practicable after the Expiration Date without interest.
Certain federal income tax considerations regarding the offering
The following discussion summarizes the material U.S. federal income tax
consequences of the offering to Homestead and its shareholders. To the extent
such summary discusses matters of law, such summary represents the opinion of
Mayer, Brown & Platt. The following discussion is based upon the current
provisions of the Internal Revenue Code of 1986, as amended, its legislative
history,
S-29
<PAGE>
administrative pronouncements, judicial decisions and Treasury Regulations, all
of which are subject to change, possibly with retroactive effect. The following
discussion does not purport to be a complete discussion of all U.S. federal
income tax considerations relating to the offering. The following discussion
does not address the tax consequences of the offering under state, local or
non-U.S. tax laws. In addition, the following discussion may not apply, in
whole or in part, to particular categories of Homestead shareholders, such as
dealers in securities, insurance companies, foreign persons, tax-exempt
organizations and financial institutions. A tax ruling from the Internal
Revenue Service has not been requested. The following discussion assumes that
the Shares owned by a shareholder constitute capital assets in the hands of
such shareholder. THE FOLLOWING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION
ONLY. ALL HOMESTEAD SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS TO
DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE OFFERING, INCLUDING ANY STATE,
LOCAL AND NON-U.S. TAX CONSEQUENCES.
Taxation of Homestead's shareholders
Receipt of right. A shareholder (including a foreign shareholder) will not
recognize any gain or loss upon his or her receipt of a right.
Tax basis of right. If a shareholder exercises or sells a right, the tax basis
of such right in the hands of the shareholder will be determined by allocating
the shareholder's existing tax basis of his or her Shares with respect to which
the right was distributed ("Old Shares") between his or her Old Shares and the
right, in proportion to their relative fair market values on the date of
distribution of the rights. If, however, the fair market value of the rights
distributed to the shareholder (on the date of distribution) is less than 15%
of the fair market value of his or her Old Shares, the tax basis of each right
will be deemed to be zero unless the shareholder affirmatively elects, by
attaching an election statement to his or her federal income tax return for the
year in which he or she receives his or her rights, to compute the tax basis of
his or her rights in accordance with the preceding sentence. Once made, such an
election is irrevocable. Homestead expects that the fair market value of the
rights distributed to each shareholder will be less than 15% of the fair market
value of his or her Old Shares.
Exercise of right. A shareholder will generally not recognize any gain or loss
upon the purchase of a Share pursuant to the exercise of a right. The tax basis
of the Shares purchased pursuant to the exercise of the rights will be equal to
the sum of:
(1)the shareholder's tax basis in the rights exercised and
(2)the Subscription Price paid for such Shares.
The holding period of the Shares purchased pursuant to the exercise of rights
will commence on the date of exercise.
Sale of right. A shareholder will generally recognize capital gain or loss
pursuant to the sale of a right in an amount equal to the difference between
the proceeds of the sale and the shareholder's tax basis in such right. Such
gain or loss will be long-term capital gain or loss if the shareholder's
holding period for such right (which will include the shareholder's holding
period for his or her Old
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<PAGE>
Shares) is more than twelve months from the date of sale. A shareholder's
ability to deduct capital losses may be subject to limitation.
Lapse of right. A shareholder will not recognize any gain or loss upon the
expiration of his or her rights since a right will not be treated as having any
tax basis if it lapses.
Foreign persons. Gains from the sale of the rights by a foreign person should
not be subject to U.S. taxation, unless either (i) such gain is effectively
connected with such person's U.S. business or, in the case of an individual
foreign person, such person is present within the U.S. for more than 182 days
in such taxable year or (ii) such person held more than five percent of the
Shares at some time during the five-year period ending on the date of the sale
of the rights.
Taxation of Homestead
Homestead will generally not recognize any gain or loss upon the issuance of
rights, the receipt of cash for Shares pursuant to the exercise of rights or
the lapse of rights.
VALIDITY OF THE SHARES
The validity of the Shares offered hereby will be passed upon for Homestead by
Mayer, Brown & Platt, Chicago, Illinois. Mayer, Brown & Platt has in the past
represented and is currently representing Homestead and certain of its
affiliates, including Security Capital.
S-31
<PAGE>
PROSPECTUS
Homestead Village Incorporated
$356,402,600*
Common Stock*
Preferred Stock
Debt Securities
Securities Warrants
Rights
----------------
Homestead will provide specific terms of these securities in supplements to
this prospectus. You should carefully read this prospectus and any supplement
before you invest.
*Pursuant to Rule 429 under the Securities Act of 1933, as amended (the
"Securities Act"), this Prospectus also relates to an additional $143,597,400
of the Common Shares which were registered under a previous registration
statement.
----------------
These securities have not been approved by the Securities and Exchange
Commission or any state securities commission nor have these organizations
determined that this prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
----------------
The date of this Prospectus is November 23, 1998.
<PAGE>
ABOUT THIS PROSPECTUS
This prospectus (the "Prospectus") is part of a registration statement that
Homestead Village Incorporated ("Homestead") filed with the Securities and
Exchange Commission (the "Commission") utilizing a "shelf" registration
process. Under this shelf process, Homestead may sell any combination of the
securities described in this Prospectus (the "Offered Securities") in one or
more offerings of preferred stock, debt securities and securities warrants up
to a total dollar amount of $356,402,600 and one or more offerings of common
stock up to a total dollar amount of $500,000,000. This Prospectus provides you
with a general description of the securities Homestead may offer. Each time
Homestead sells securities, Homestead will provide a prospectus supplement
(each supplement, a "Prospectus Supplement") that will contain specific
information about the terms of that offering. The Prospectus Supplement may
also add, update or change information contained in this Prospectus. You should
read both this Prospectus and any Prospectus Supplement together with the
additional information described under the heading "Where You Can Find More
Information".
WHERE YOU CAN FIND MORE INFORMATION
Homestead is subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and files reports, proxy
statements and other information with the Commission. You may read and copy any
materials Homestead files with the Commission at the Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. In addition, the Commission maintains an Internet
site that contains reports, proxies, information statements, and other
information regarding issuers that file electronically and the address of that
site is http://www.sec.gov. Homestead's outstanding Common Shares are listed on
the New York Stock Exchange (the "NYSE") under the symbol "HSD" and all
reports, proxy statements and other information filed by Homestead with the
NYSE may be inspected at the NYSE's offices at 20 Broad Street, New York, New
York 10005.
Homestead has filed with the Commission a registration statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement") under
the Securities Act, with respect to the Offered Securities. This Prospectus,
which constitutes part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement. Certain parts of the
Registration Statement are omitted from the Prospectus in accordance with the
rules and regulations of the Commission. For further information, your
attention is directed to the Registration Statement. Statements made in this
Prospectus concerning the contents of any documents referred to herein are not
necessarily complete, and in each case are qualified in all respects by
reference to the copy of such document filed with the Commission.
The Commission allows Homestead to "incorporate by reference" the information
Homestead files with the Commission, which means that Homestead can disclose
important information to you by referring you to those documents. The
information incorporated by reference is an important part of this Prospectus,
and information that Homestead files later with the Commission will
automatically
2
<PAGE>
update and supersede this information. Homestead incorporates by reference the
documents listed below:
. Homestead's Annual Report on Form 10-K for the year ended December 31,
1997;
. Homestead's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1998 and June 30, 1998;
. Homestead's Current Report on Form 8-K, dated January 1, 1998; and
. Homestead's Registration Statement on Form 8-A, dated March 25, 1998.
The Commission has assigned file number 1-12269 to the reports and other
information that Homestead files with the Commission.
Homestead also incorporates by reference any future filings made with the
Commission under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until
Homestead sells all of the Offered Securities. You should be aware that any
statement contained in this Prospectus or in a document incorporated by
reference may be modified or superseded by a document filed with the Commission
at a later date. Any statement which has been modified or superseded shall not
be considered to constitute a part of this Prospectus.
You may request a copy of each of these filing at no cost, by writing or
telephoning Homestead at the following address or telephone number:
Chief Financial Officer
Homestead Village Incorporated
2100 RiverEdge Parkway, 9th Floor
Atlanta, Georgia 30328
(770) 303-2200.
You should rely only on the information included in this Prospectus or the
Prospectus Supplement or incorporated by reference in this Prospectus.
Homestead has not authorized anyone else to provide you with different
information. Homestead is not making an offer of the Offered Securities in any
state where the offer is not permitted. You should not assume that the
information in this Prospectus or any Prospectus Supplement is accurate as of
any date other than the date on the front of those documents.
3
<PAGE>
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:
. growing customer demand for extended-stay accommodations,
. the limited number of properties that have been purposely built for
extended-stay lodging, and
. rising consumer awareness of the extended-stay product.
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, custom-built product targeted at the
business traveler on temporary assignment, undergoing relocation or in
training. Homestead Village(R) properties are designed to offer excellent
locations with 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 is
focused on
. becoming the brand of choice for extended-stay corporate travelers,
. increasing revenue per available room at the property level by matching
its product to customers' expectations, and
. 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 it meet its objectives.
The first Homestead Village(R) property was opened in 1992. As of September 30,
1998, Homestead operated 111 properties, had begun construction on 25
additional properties, and owned 18 development sites. Homestead's properties
are designed and built to uniform standards developed by Homestead.
Homestead is a Maryland corporation. Its executive offices are located at 2100
RiverEdge Parkway, Atlanta, Georgia 30328, and its telephone number is (770)
303-2200.
USE OF PROCEEDS
In general, the net proceeds from the sale of the Offered Securities will be
used for (1) the repayment of indebtedness, (2) the acquisition of sites and
the development of additional extended-stay lodging properties as suitable
opportunities arise, (3) for capital improvements to properties and (4) for
working capital purposes. The use of proceeds from each offering will be
described in the Prospectus Supplement relating to that offering.
4
<PAGE>
RATIO INFORMATION
The ratio of earnings to fixed charges for each of the periods indicated is as
follows:
<TABLE>
<CAPTION>
Six Months
Period Ended December 31, Ended June 30,
------------------------------------- ---------------
1993(1) 1994(1) 1995 1996(1) 1997(1) 1997(1) 1998(1)
------- ------- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges.......... .97x .97x 1.14x .88x .11x .07x .59x
Ratio of earnings to
fixed charges and
preferred stock
dividends.............. .97x .97x 1.14x .88x .11x .07x .59x
</TABLE>
- --------
(1) Earnings for these periods (years ended December 31, 1993, 1994, 1996 and
1997 and the six-month periods ended June 30, 1997 and 1998) were
inadequate to cover fixed charges by $18,000, $65,000, $1,283,000,
$63,976,000, $48,832,000 and $8,635,000, respectively.
For the purpose of computing these ratios, (a) "earnings" consist of earnings
plus fixed charges other than capitalized interest, and (b) "fixed charges"
consist of interest on borrowed funds (including capitalized interest) and
amortization of debt discount, premium and expense.
ADJUSTED RATIO INFORMATION
In the fourth quarter of 1996, in 1997 and in the first six months of 1998,
Homestead amortized financing costs and premium and discount related to certain
convertible mortgage notes over periods less than the stated term of the
mortgage notes. Such costs related to the mortgage note balances outstanding
under the mortgages before March 31, 1997 were amortized to interest on an
accelerated basis by March 31, 1997, the date of initial convertibility of the
mortgages. Costs related to subsequent fundings of the mortgages were amortized
to interest on the funding dates. All amounts available under the mortgage
notes were funded by June 30, 1998. The financing costs related to the
convertible mortgages did not require an expenditure of funds, but rather
originated from the difference in value between the exercise price of warrants
issued to obtain the mortgage funding commitments versus the fair value of
Homestead common stock and from the difference in value between the conversion
price of the mortgage notes versus the fair value of Homestead common stock.
The following adjusted ratios reflect adjustment for these amortization costs
on a pro forma basis by excluding such costs from interest.
<TABLE>
<CAPTION>
Six Months
Period Ended December 31, Ended June 30,
----------------------------------- ---------------
1993(2) 1994(2) 1995 1996 1997(2) 1997(2) 1998(2)
------- ------- ----- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges.................. .97x .97x 1.14x 1.07x .38x .51x .65x
Ratio of earnings to fixed
charges and Preferred
Share dividends.......... .97x .97x 1.14x 1.07x .38x .51x .65x
</TABLE>
- --------
(2) Earnings for these periods (years ended December 31, 1993, 1994 and 1997
and the six-month periods ended June 30, 1997 and 1998) were inadequate to
cover fixed charges by $18,000, $65,000, $13,053,000, $3,428,000 and
$6,641,000, respectively.
5
<PAGE>
DESCRIPTION OF COMMON SHARES
General
The following description sets forth certain general terms and provisions of
the shares of Homestead's common stock, par value $.01 per share (the "Common
Shares"). This Registration Statement relates to Common Shares that Homestead
may issue to the public as well as Common Shares issuable pursuant to
subscription offerings or rights offerings, upon conversion or exchange of
preferred stock or debt securities, or upon the exercise of Common Share
warrants. The following description of the terms of the Common Shares is not
complete and is subject to and qualified in its entirety by reference to
Maryland law and to Homestead's Restated Charter (the "Charter") and its bylaws
("Bylaws"). We encourage you to read copies of the Charter and Bylaws which are
exhibits to our registration statement No. 333-4455. Directions on how you can
get copies are provided on page 3.
The authorized stock of Homestead consists of 249,822,502 Common Shares and
177,498 shares of preferred stock, $.01 par value per share. The Board of
Directors of Homestead (the "Board") may classify or reclassify any unissued
shares of stock from time to time by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends and other distributions, qualifications or terms or conditions of
redemption of such stock. No holder of any class of stock of Homestead has any
preemptive right to subscribe to any securities of Homestead, except as may be
granted by the Board in authorizing the issuance of a class of preferred stock.
Under Maryland law, stockholders are generally not liable for a company's debts
or obligations. You should read "Certain Provisions of Maryland Law and of
Homestead's Charter and Bylaws" for a description of certain provisions that
could have the effect of delaying, deferring or preventing a change in control
of Homestead.
The outstanding Common Shares are fully paid and nonassessable. Each Common
Share entitles the holder to one (1) vote on all matters requiring a vote of
shareholders, including the election of directors. Shareholders do not have the
right to cumulate their votes in the election of directors, which means that
the holders of a majority of the outstanding Common Shares can elect all of the
directors then standing for election. Shareholders are entitled to such
dividends as may be authorized from time to time by the directors out of assets
legally available therefor.
In the event of any liquidation, dissolution or winding-up of the affairs of
Homestead, holders of Common Shares are entitled, subject to the preferential
rights of holders of preferred stock, if any, to share ratably in the assets of
Homestead remaining after provision for payment of liabilities to creditors.
All Common Shares have equal distribution, liquidation and other rights, and
have no preference, appraisal, conversion or exchange rights. As of November 1,
1998, 38,262,996 Common Shares were issued and outstanding.
The transfer agent and registrar for the Common Shares is BankBoston, N.A., 150
Royall Street, Canton, Massachusetts 02021.
6
<PAGE>
Purchase Rights
On May 16, 1996, the Board authorized a dividend of one (1) purchase right
("Purchase Right") for each Common Share outstanding at the close of business
on May 16, 1996 (the "Rights Record Date"). The dividend was paid on the Rights
Record Date. The holders of any Common Shares issued after the Rights Record
Date and before the redemption or expiration of the Purchase Rights are also be
entitled to one (1) Purchase Right for each such additional Common Share. Each
Purchase Right entitles the registered holder, under certain circumstances, to
purchase from Homestead one-hundredth (1/100) of a Participating Preferred
Share of Homestead at a price of $50.00 per one-hundredth (1/100) of a
Participating Preferred Share (the "Purchase Price"), subject to adjustment.
The description and terms of the Purchase Rights are set forth in the Rights
Agreement dated as of May 16, 1996 between Homestead and BankBoston, N.A., as
rights agent (the "Rights Agreement"). We encourage you to read a copy of the
Rights Agreement which is an exhibit to our registration statement No. 333-
4455. Directions on how you can get copies are provided on page 3.
The Purchase Rights will be exercisable and will be evidenced by separate
certificates only after the earliest to occur of:
(1) ten (10) business days following a public announcement that a person or
group of affiliated or associated persons (excluding certain affiliates of
Homestead) has acquired beneficial ownership of twenty percent (20%) or
more of the outstanding Common Shares (thereby becoming an "Acquiring
Person");
(2) fifteen (15) business days (or such later date as may be determined by
action of the Board prior to such time as any person or group of affiliated
persons becomes an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person
or group of persons (excluding certain affiliates of Homestead) of twenty-
five percent (25%) or more of the outstanding Common Shares; or
(3) ten (10) business days (or such later date as may be determined by
action of the Board prior to such time as any person becomes an Acquiring
Person) after the date of filing by any person of, or the first public
announcement of the intention of any person to file, any application,
request, submission or other document with any federal or state regulatory
authority seeking approval of, attempting to rebut any presumption of
control upon, or otherwise indicating an intention to enter into, any
transaction or series of transactions (other than a transaction in which
newly issued Common Shares are issued directly by Homestead) the
consummation of which would result in any person (excluding certain
affiliates of Homestead) becoming the beneficial owner of Common Shares
aggregating twenty-five percent (25%) or more of the then outstanding
Common Shares (the first to occur of such dates being called the "Rights
Distribution Date").
With respect to any of the stock certificates outstanding as of the Rights
Record Date, until the Rights Distribution Date the Purchase Rights will be
evidenced by such stock certificate. Until the Rights Distribution Date (or
earlier redemption or expiration of the Purchase Rights), new stock
certificates issued after the Rights Record Date upon transfer or new issuance
of Common Shares
7
<PAGE>
will contain a notation incorporating the Rights Agreement by reference.
However, if the Board in good faith determines that a person has become an
Acquiring Person under the Rights Agreement inadvertently, and such person
divests as promptly as practicable a sufficient number of Common Shares so that
such person would no longer be an Acquiring Person, then such person shall not
be deemed to be an Acquiring Person for purposes of the Rights Agreement.
The Purchase Rights expire on May 16, 2006 (the "Final Expiration Date"),
unless the Final Expiration Date is extended or unless the Purchase Rights are
earlier redeemed or exchanged by Homestead, in each case as described below.
The Purchase Price payable, and the number of Participating Preferred Shares or
other securities or property issuable, upon exercise of the Purchase Rights are
subject to adjustment under certain circumstances from time to time to prevent
dilution. With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent (1%) in such Purchase Price.
Participating Preferred Shares purchasable upon exercise of the Purchase Rights
will not be redeemable. Each Participating Preferred Share will be entitled to
a minimum preferential quarterly distribution payment equal to the greater of
(1) $1 per share or (2) one hundred (100) times the distribution declared per
Common Share. Each Participating Preferred Share will have one hundred (100)
votes, voting together with the Common Shares. If dividends payable on
Participating Preferred Shares are in arrears in an amount equal to at least
six (6) full quarterly dividends (whether or not declared and whether or not
consecutive), the holders of record of the outstanding Participating Preferred
Shares shall have the exclusive right, voting separately as a single class, to
elect two (2) directors of Homestead until such time as all arrears in
dividends (whether or not declared) on the Participating Preferred Shares shall
have been paid or declared and set apart for payment. In the event of
liquidation, the holders of the Participating Preferred Shares will be entitled
to a minimum preferential liquidation payment of $1 per share (plus any accrued
and unpaid dividends), but will be entitled to an aggregate payment of one
hundred (100) times the payment made per Common Share. In the event of any
merger, consolidation or other transaction in which Common Shares are
exchanged, each Participating Preferred Share will be entitled to receive one
hundred (100) times the amount received per Common Share. In the event of
issuance of Participating Preferred Shares upon exercise of the Purchase
Rights, in order to facilitate trading, a depositary receipt may be issued for
each one-hundredth ( 1/100) of a Participating Preferred Share. The Purchase
Rights will be protected by customary antidilution provisions.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision will be made so that each holder
of a Purchase Right, other than Purchase Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the
right to receive upon exercise a number of Common Shares having a market value
(determined in accordance with the Rights Agreement) of twice the Purchase
Price. In lieu of the issuance of Common Shares upon the exercise of Purchase
Rights, the Board may, under certain circumstances, and if there is an
insufficient number of Common Shares authorized but unissued or held by
Homestead to permit the exercise in full of the Purchase Rights, the Board is
required to, take such action as may be necessary to cause Homestead to issue
or pay upon the exercise of
8
<PAGE>
Purchase Rights, cash (including by way of a reduction of purchase price),
property, other securities or any combination of the foregoing having an
aggregate value equal to that of the Common Shares which otherwise would have
been issuable upon exercise of Purchase Rights.
In the event that, after any person or group becomes an Acquiring Person,
Homestead is acquired in a merger or other business combination transaction or
fifty percent (50%) or more of its consolidated assets or earning power are
sold, proper provision will be made so that each holder of a Purchase Right
will thereafter have the right to receive, upon the exercise thereof at the
then current Purchase Price, a number of shares of common stock of the
acquiring company having a market value (determined in accordance with the
Rights Agreement) of twice the Purchase Price.
At any time after any person or group becomes an Acquiring Person and prior to
the acquisition by that person or group of fifty percent (50%) or more of the
outstanding Common Shares, the Board may exchange the Purchase Rights (other
than Purchase Rights owned by that person or group which will have become
void), in whole or in part, at an exchange ratio of one (1) Common Share (or
one-hundredth ( 1/100) of a Participating Preferred Share) per Purchase Right
(subject to adjustment).
As soon as practicable after a Rights Distribution Date, Homestead is obligated
to use its best efforts to file a registration statement under the Securities
Act relating to the securities issuable upon exercise of Purchase Rights and to
cause such registration statement to become effective as soon as practicable.
At any time prior to the time a person or group of persons becomes an Acquiring
Person, the Board may redeem the Purchase Rights in whole, but not in part, at
a price of $0.01 per Purchase Right (the "Redemption Price"), payable in cash,
Common Shares or any other form of consideration deemed appropriate by the
Board. The redemption of the Purchase Rights may be made effective at such
time, on such basis and with such conditions as the Board in its sole
discretion may establish. Immediately upon the effectiveness of any redemption
of the Purchase Rights, the right to exercise the Purchase Rights will
terminate and the only right of the holders of Purchase Rights will be to
receive the Redemption Price.
The terms of the Purchase Rights may be amended by the Board without the
consent of the holders of the Purchase Rights, except that from and after the
time any person or group of affiliated or associated persons becomes an
Acquiring Person no such amendment may adversely affect the interests of the
holders of the Purchase Rights and in no event shall any such amendment change
the twenty percent (20%) threshold at which a person acquiring beneficial
ownership of Common Shares becomes an Acquiring Person.
The Purchase Rights have certain anti-takeover effects. The Purchase Rights
will cause substantial dilution to a person or group that attempts to acquire
Homestead on terms not approved by the Board, except pursuant to an offer
conditioned on a substantial number of Purchase Rights being acquired. The
Purchase Rights should not interfere with any merger or other business
combination approved by the Board since the Purchase Rights may be redeemed by
Homestead at the Redemption Price prior to the time that a person or group has
acquired beneficial ownership of twenty percent (20%) or more of the Common
Shares. The Rights Agreement specifying the terms of the Purchase Rights has
been incorporated by reference into the Registration Statement (of which this
Prospectus forms a part) and is incorporated herein by reference. The foregoing
description of the Purchase
9
<PAGE>
Rights is not complete and is subject to, and is qualified in its entirety by
reference to, the Rights Agreement, including the definitions therein of
certain terms.
DESCRIPTION OF PREFERRED SHARES
Preferred Stock
The Board is empowered by the Charter, without the approval of shareholders, to
cause shares of preferred stock to be issued in one or more series ("Preferred
Shares") and to determine, among other things, the number of Preferred Shares
of each series and the rights, preferences, powers and limitations of each
series which may be senior to the rights of Common Shares. The issuance of
Preferred Shares could have the effect of delaying, deferring or preventing a
change in control of Homestead and may adversely affect the voting and other
rights of shareholders. Homestead has not issued any Preferred Shares.
The following description sets forth certain general terms and provisions of
the Preferred Shares which Homestead may issue. The following description of
the general terms of the Preferred Shares is not complete and is subject to and
qualified in its entirety by reference to the Charter and Bylaws. In addition,
you should carefully review a Prospectus Supplement relating to an offering of
Preferred Shares for the specific terms of such Preferred Shares, including,
but not limited to, the following:
(1) The designation of such Preferred Shares;
(2) The number of Preferred Shares offered, the liquidation preference per
share and the initial public offering price per share;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such Preferred Shares;
(4) The date from which dividends on such Preferred Shares will cumulate,
if applicable;
(5) The procedures for the auction and remarketing, if any, for such
Preferred Shares;
(6) The provisions for a sinking fund, if any, for such Preferred Shares;
(7) The terms and conditions of redemption, if applicable, of such
Preferred Shares;
(8) Any listing of such Preferred Shares on any securities exchange;
(9) The terms and conditions on which such Preferred Shares will be
convertible into Common Shares, if applicable, including the conversion
price (or manner of calculation thereof);
(10) Whether interests in such Preferred Shares will be represented by
global securities;
(11) A discussion of Federal income tax considerations applicable to such
Preferred Shares;
(12) The relative ranking and preferences of such Preferred Shares as to
dividends and in the distribution of assets;
(13) Any limitations on issuance of any series of Preferred Shares ranking
senior to or on a parity with such Preferred Shares as to dividends and in
the distribution of assets;
(14) Any limitations on direct or beneficial ownership and restrictions on
transfer of such Preferred Shares, in each case in accordance with the
terms of the Charter; and
(15) Any other specific preferences, rights, voting powers, restrictions,
limitations as to dividends or qualifications of such Preferred Shares.
10
<PAGE>
Ranking
As to dividends and in the distribution of assets, each series of Preferred
Shares will rank:
(1) senior to all classes or series of Common Shares and to all other
equity securities ranking junior to such series of Preferred Shares;
(2) on a parity with all equity securities issued by Homestead the terms of
which specifically provide that such equity securities rank on a parity
with such series of Preferred Shares; and
(3) junior to all equity securities issued by Homestead the terms of which
specifically provide that such equity securities rank senior to such series
of Preferred Shares.
The Prospectus Supplement relating to an offering of Preferred Shares will
describe any differences from these terms. The term "equity securities" in the
preceding sentence does not include convertible debt securities. The rights of
the holders of each series of Preferred Shares will be subordinate to those of
Homestead's general creditors.
Dividends
The holders of each series of Preferred Shares will be entitled to receive,
when, as and if declared by the Board, out of funds legally available for that
purpose, cash dividends at such rates and on such dates as will be set forth in
the applicable Prospectus Supplement relating to an offering of Preferred
Shares. Such rates may be fixed or variable or both. Dividends will be payable
to holders of record as they appear in the stock records of Homestead on the
record dates.
Dividends on any series of Preferred Shares may be cumulative or non-
cumulative. Dividends, if cumulative, will begin to accrue and will be fully
cumulative from the date set forth in the applicable Prospectus Supplement. If
the Board fails to declare a dividend payable on a dividend payment date on any
series of Preferred Shares for which dividends are non-cumulative, then the
holders of such Preferred Shares will have no right to receive a dividend in
respect of the dividend period ending on such dividend payment date, and
Homestead will have no obligation to pay the dividend accrued for such period,
whether or not dividends on such Preferred Shares are declared payable on any
future dividend payment date. No interest, or sum of money in lieu of interest,
will be payable in respect of any dividend payment or payments on any series of
Preferred Shares which may be in arrears.
So long as any Preferred Shares of a series are outstanding, no full dividends
may be declared or paid or set apart for payment on any shares of any other
stock of Homestead ranking on a parity with such series of Preferred Shares as
to dividends ("Dividend Parity Shares") for any period unless
(1) if such series of Preferred Shares has a cumulative dividend, full
cumulative dividends have been or contemporaneously are paid or declared
and a sum sufficient for the payment thereof set apart for such payments
for all past dividend periods and the then current dividend period with
respect to such series of Preferred Shares, or
(2) if such series of Preferred Shares does not have a cumulative dividend,
full dividends have been or contemporaneously are paid or declared and a
sum sufficient for the payment thereof set apart for such payments for the
then current dividend period with respect to such series of Preferred
Shares.
11
<PAGE>
When dividends are not paid in full, or a sum sufficient for the payment
thereof is not set apart for payment, on any series of Preferred Shares and any
Dividend Parity Shares, all dividends declared on such series of Preferred
Shares and such Dividend Parity Shares will be declared ratably in proportion
to the amount of dividends accrued and unpaid on such series of Preferred
Shares (which will not include any cumulation in respect of unpaid dividends
for past dividend periods if such series of Preferred Shares does not have a
cumulative dividend) and on such Dividend Parity Shares.
So long as any Preferred Shares of a series are outstanding, except as provided
in the immediately preceding paragraph, no dividends (other than in Common
Shares or other shares of stock of Homestead ranking junior to such series of
Preferred Shares as to dividends and in the distribution of assets ("Fully
Junior Shares")) may be declared or paid or set apart for payment or other
distribution may be declared or made on the Common Shares or any other shares
of stock of Homestead ranking junior to such series of Preferred Shares as to
dividends or in the distribution of assets ("Junior Shares"), nor may any
Junior Shares be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund
for the redemption of any Junior Shares) by Homestead (except by conversion
into or exchange for Fully Junior Shares) unless
(1) if such series of Preferred Shares has a cumulative dividend, full
cumulative dividends have been or contemporaneously are paid or declared
and a sum sufficient for the payment thereof set apart for such payments
for all past dividend periods and the then current dividend period with
respect to such series of Preferred Shares, or
(2) if such series of Preferred Shares does not have a cumulative dividend,
full dividends have been or contemporaneously are paid or declared and a
sum sufficient for the payment thereof set apart for such payments for the
then current dividend period with respect to such series of Preferred
Shares.
Any dividend payment made on a series of Preferred Shares will first be
credited against the earliest accrued but unpaid dividend due with respect to
such series of Preferred Shares which remains payable.
Redemption
If so provided in the applicable Prospectus Supplement, a series of Preferred
Shares will be subject to mandatory redemption or redemption at the option of
Homestead, in whole or in part, in each case on the terms, at the times and at
the redemption prices set forth in such Prospectus Supplement relating to an
offering of Preferred Shares.
The Prospectus Supplement relating to an offering of a series of Preferred
Shares which is subject to mandatory redemption will specify the number of
Preferred Shares of such series which will be redeemed by Homestead in each
year commencing after a specified date, and the redemption price per share
which will include all dividends thereon accrued and unpaid, if any, to the
date fixed for redemption, without interest (which will not include any
cumulation in respect of unpaid dividends for past dividend periods if such
series of Preferred Shares does not have a cumulative dividend). The redemption
price may be payable in cash or other property. If the redemption price for any
series of Preferred Shares is payable solely out of the sale proceeds of stock
of Homestead, the terms of
12
<PAGE>
such series of Preferred Shares may provide that, if no such stock has been
issued or to the extent the sale proceeds from such stock are insufficient to
pay in full the aggregate redemption price then due, Preferred Shares of such
series will automatically and mandatorily be converted into shares of the
applicable stock of Homestead pursuant to conversion provisions specified in
the applicable Prospectus Supplement. If fewer than all the outstanding
Preferred Shares of any series are to be redeemed, the shares to be redeemed
will be selected by Homestead by lot or pro rata or by any other method
determined by Homestead.
However, unless
(1) if such series of Preferred Shares has a cumulative dividend, full
cumulative dividends have been or contemporaneously are paid or declared
and a sum sufficient for the payment thereof set apart for such payments
for all past dividend periods and the then current dividend period with
respect to such series of Preferred Shares and any shares of any other
stock of Homestead ranking on a parity with such series of Preferred Shares
as to distributions and in the distribution of assets ("Parity Shares"), or
(2) if such series of Preferred Shares does not have a cumulative dividend,
full dividends have been or contemporaneously are paid or declared and a
sum sufficient for the payment thereof set apart for such payments for the
then current dividend period with respect to such series of Preferred
Shares and any Parity Shares,
the Preferred Shares of such series may not be redeemed and Homestead may not
purchase or otherwise acquire any Preferred Shares of such series, except
pursuant to a purchase or exchange offer made on the same terms to all holders
of outstanding Preferred Shares of such series or by conversion into or
exchange for Fully Junior Shares.
Notice of the redemption of any Preferred Shares of any series will be mailed
not less than thirty (30) days nor more than ninety (90) days prior to the
redemption date to each holder of record of such series of Preferred Shares at
the address of such holder as shown on Homestead's stock records. Each notice
will state:
(1) the redemption date;
(2) the number of Preferred Shares of such series to be redeemed;
(3) the redemption price;
(4) the place or places at which certificates representing such Preferred
Shares are to be surrendered;
(5) that dividends on such Preferred Shares will cease to accrue on such
redemption date; and
(6) the date on which the holder's conversion rights, if any, as to such
Preferred Shares will terminate.
If fewer than all the Preferred Shares of any series are to be redeemed, the
notice mailed to each such holder will also specify the number of Preferred
Shares of such series to be redeemed from such holder. If notice of redemption
of any Preferred Shares has been mailed and if Homestead has deposited the
funds necessary for such redemption in trust, for the benefit of the holders of
the Preferred Shares so called for redemption, then from and after the
redemption date, dividends will cease to accrue on such Preferred Shares, such
Preferred Shares will no longer be deemed
13
<PAGE>
outstanding, and all rights of the holders of such Preferred Shares will
terminate, except the right to receive the redemption price.
Liquidation Preference
Upon any liquidation, dissolution or winding up of Homestead, whether voluntary
or involuntary, before any payment or distribution is made to or set apart for
the holders of any Common Shares or any shares of any other stock of Homestead
ranking junior to such series of Preferred Shares in the distribution of assets
("Liquidation Junior Shares"), the holders of each series of Preferred Shares
will be entitled to receive out of the assets of Homestead legally available
for that purpose, liquidating distributions in the amount of the liquidation
preference per share, plus an amount equal to all dividends (whether or not
earned or declared) thereon accrued and unpaid, if any (which will not include
any cumulation in respect of unpaid dividends for past dividend periods if such
series of Preferred Shares does not have a cumulative dividend); but the
holders of such series of Preferred Shares will not be entitled to any further
payment. If, upon any liquidation, dissolution or winding up of Homestead, the
assets of Homestead are insufficient to pay in full such preferential amount
with respect to such series of Preferred Shares and the corresponding amounts
with respect to all other stock of Homestead ranking on a parity with such
series of Preferred Shares in the distribution of assets ("Liquidation Parity
Shares"), then such assets will be distributed among the holders of such series
of Preferred Shares and such Liquidation Parity Shares in proportion to the
full liquidating distributions to which they would otherwise be respectively
entitled.
Subject to the rights of the holders of any class or series of stock of
Homestead ranking on a parity with or senior to such series of Preferred Shares
in the distribution of assets, upon any liquidation, dissolution or winding up
of Homestead, whether voluntary or involuntary, after payment has been made in
full to all holders of a series of Preferred Shares, the remaining assets of
Homestead will be distributed among the holders of any Liquidation Junior
Shares, according to their respective rights and preferences and in each case
according to their respective number of shares.
For the above purposes, a consolidation or merger of Homestead with or into any
other entity, a sale, transfer, lease or conveyance of all or substantially all
of Homestead's assets, property or business or a statutory share exchange will
not be deemed to be a liquidation, dissolution or winding up of Homestead.
Voting Rights
Holders of each series of Preferred Shares will not have any voting rights,
except as set forth below or in the applicable Prospectus Supplement or as
otherwise required by applicable law. The following is a summary of the voting
rights that, unless provided otherwise in the applicable Prospectus Supplement,
will apply to each series of Preferred Shares.
If and whenever six (6) quarterly dividends (whether or not consecutive)
payable on any series of Preferred Shares or any Parity Shares are in arrears,
whether or not earned or declared, the number of directors then constituting
the Board will be increased by two (2), and the holders of such series of
Preferred Shares, together with the holders of any such Parity Shares, voting
as a single class, will have the right to elect two (2) additional directors to
serve on the Board at the next annual meeting
14
<PAGE>
of shareholders or a special meeting of the holders of such series of Preferred
Shares and such Parity Shares and at each subsequent annual meeting of
shareholders until all such dividends in arrears have been paid and a sum
sufficient for the payment thereof has been set apart for payment of the
distribution for the current distribution period with respect to such series of
Preferred Shares and such Parity Shares. The term of office of all directors so
elected will terminate with the termination of such voting rights. For so long
as Homestead and certain of its affiliates beneficially own in excess of ten
percent (10%) of the outstanding Common Shares, in any such vote by holders of
such series of Preferred Shares and such Parity Shares, any Preferred Shares of
such series and Parity Shares beneficially owned by Homestead and such
affiliates will be voted in the same percentages as Preferred Shares of such
series and Parity Shares which are not beneficially owned by Homestead and such
affiliates.
The approval of two-thirds ( 2/3) of the outstanding Preferred Shares of any
series and all series of Parity Shares similarly affected, voting as a single
class, will be necessary in order to
(1) amend the Charter to materially and adversely affect the voting powers,
rights or preferences of the holders of such series of Preferred Shares,
(2) enter into a share exchange which affects such series of Preferred
Shares, consolidate with or merge into another entity, or permit another
entity to consolidate with or merge into Homestead, unless in each such
case, each Preferred Share of such series remains outstanding without a
material and adverse change to its terms and rights or is converted into or
exchanged for preferred stock of the surviving entity having preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms or conditions of redemption identical
to those of a Preferred Share of such series (except for changes which do
not materially and adversely affect the holders of such series of Preferred
Shares), or
(3) authorize, reclassify, create or increase the authorized amount of any
class of stock ranking senior to such series of Preferred Shares in the
payment of dividends or in the distribution of assets.
However, Homestead may create additional classes and series of Parity Shares,
Junior Shares and Fully Junior Shares, increase the authorized number of shares
of such stock and issue additional series of such stock without the consent of
any holder of such series of Preferred Shares.
Except as provided above and as required by law, the holders of each series of
Preferred Shares will not be entitled to vote on any merger or consolidation
involving Homestead or a sale of all or substantially all of the assets of
Homestead.
Conversion Rights
The terms and conditions, if any, on which any series of Preferred Shares will
be convertible into Common Shares will be set forth in the applicable
Prospectus Supplement relating to an offering of Preferred Shares. Such terms
will include the number of shares of Common Shares into which each share of
such series of Preferred Shares is convertible, the conversion price (or manner
of calculation thereof), the conversion period, provisions as to whether
conversion will be at the option of the holders of such series of Preferred
Shares or Homestead, the events requiring an adjustment of the conversion price
and provisions affecting conversion upon the redemption of such series of
Preferred Shares.
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DESCRIPTION OF SECURITIES WARRANTS
Homestead may issue warrants for the purchase of debt securities ("Debt
Securities Warrants"), Preferred Shares ("Preferred Share Warrants") or Common
Shares ("Common Share Warrants" and collectively with the Debt Securities
Warrants and Preferred Share Warrants, the "Securities Warrants"). Securities
Warrants may be issued independently or together with any other Offered
Securities and may be attached to or separate from such Offered Securities.
Each series of Securities Warrants will be issued under a separate warrant
agreement (each, a "Warrant Agreement") to be entered into between Homestead
and a warrant agent specified in the applicable Prospectus Supplement (the
"Warrant Agent") relating to an offering of Securities Warrants. The Warrant
Agent will act solely as an agent of Homestead in connection with the
Securities Warrants of such series and will not assume any obligation or
relationship of agency or trust for or with any holders or beneficial owners of
Securities Warrants. The following summaries of certain provisions of a
Securities Warrant Agreement and the Securities Warrants are not complete and
are subject to, and are qualified in their entirety by reference to, all the
provisions of a Warrant Agreement and the Securities Warrant certificates
relating to each series of Securities Warrants which will be filed with the
Commission at or prior to the time of the issuance of such series of Securities
Warrants. The Prospectus Supplement relating to an offering of Securities
Warrants will advise you where you can obtain copies of the Warrant Agreement
and Securities Warrant.
If Debt Securities Warrants are offered, the applicable Prospectus Supplement
will describe the terms of such Debt Securities Warrants, including (but not
limited to), the following where applicable:
(1) the offering price;
(2) the denominations and terms of the series of debt securities
purchasable upon exercise of such Debt Securities Warrants;
(3) the designation and terms of any series of debt securities with which
such Debt Securities Warrants are being offered and the number of such Debt
Securities Warrants being offered with such debt securities;
(4) the date, if any, on and after which such Debt Securities Warrants and
the related series of debt securities will be transferable separately;
(5) the principal amount of the series of debt securities purchasable upon
exercise of each such Debt Securities Warrant and the price at which such
principal amount of debt securities of such series may be purchased upon
such exercise;
(6) the date on which the right to exercise such Debt Securities Warrants
shall commence and the date on which such right shall expire (the
"Expiration Date");
(7) the terms, if any, on which Homestead may accelerate the date by which
the Debt Securities Warrants must be exercised; and
(8) any other material terms of such Debt Securities Warrants.
In the case of Preferred Share Warrants or Common Share Warrants, the
applicable Prospectus Supplement will describe the terms of such Securities
Warrants, including (but not limited to) the following where applicable:
(1) the offering price;
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(2) the aggregate number of shares purchasable upon exercise of such
Securities Warrants, the exercise price, and in the case of Preferred Share
Warrants, the designation, aggregate number and terms of the series of
Preferred Shares purchasable upon exercise of such Preferred Share
Warrants;
(3) the designation and terms of any series of Preferred Shares with which
such Preferred Share Warrants are being offered and the number of such
Preferred Share Warrants being offered with such Preferred Shares;
(4) the date, if any, on and after which such Securities Warrants and the
related series of Preferred Shares or Common Shares will be transferable
separately;
(5) the date on which the right to exercise such Securities Warrants shall
commence and the Expiration Date; and
(6) any other material terms of such Securities Warrants.
Securities Warrant certificates may be exchanged for new Securities Warrant
certificates of different denominations, may (if in registered form) be
presented for registration of transfer, and may be exercised at the corporate
trust office of the Securities Warrant Agent or any other office indicated in
the applicable Prospectus Supplement. Prior to the exercise of any Debt
Securities Warrant, holders of such Debt Securities Warrant will not have any
of the rights of holders of the debt securities purchasable upon such exercise,
including the right to receive payments of principal, premium, if any, or
interest, if any, on such debt securities or to enforce covenants in the
applicable indenture. Prior to the exercise of any Securities Warrants to
purchase Preferred Shares or Common Shares, holders of such Securities Warrants
will not have any rights of holders of such Preferred Shares or Common Shares,
including the right to receive payments of dividends, if any, on such Preferred
Shares or Common Shares, or to exercise any applicable right to vote.
Exercise of Securities Warrants
Each Securities Warrant will entitle the holder thereof to purchase such
principal amount of debt securities or number of Preferred Shares or Common
Shares, as the case may be, at such exercise price as shall be set forth in, or
calculable from, the Prospectus Supplement relating to the offered Securities
Warrants. After the close of business on the Expiration Date (or such later
date to which such Expiration Date may be extended by Homestead), unexercised
Securities Warrants will become void.
Securities Warrants may be exercised by delivering to the Securities Warrant
Agent payment as provided in the applicable Prospectus Supplement of the amount
required to purchase the debt securities, Preferred Shares or Common Shares, as
the case may be, purchasable upon such exercise together with certain
information set forth on the reverse side of the Securities Warrant
certificate. Securities Warrants will be deemed to have been exercised upon
receipt of payment of the exercise price, subject to the receipt within five
(5) business days, of the Securities Warrant certificate evidencing such
Securities Warrants. Upon receipt of such payment and the Securities Warrant
certificate properly completed and duly executed at the corporate trust office
of the Securities Warrant Agent or any other office indicated in the applicable
Prospectus Supplement, Homestead will, as soon as practicable, issue and
deliver the debt securities, Preferred Shares or Common
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Shares, as the case may be, purchasable upon such exercise. If fewer than all
of the Securities Warrants represented by such Securities Warrant certificate
are exercised, a new Securities Warrant certificate will be issued for the
remaining amount of Securities Warrants.
Amendments and Supplements to Warrant Agreement
The Warrant Agreements may be amended or supplemented without the consent of
the holders of the Securities Warrants issued thereunder to effect changes that
are not inconsistent with the provisions of the Securities Warrants and that do
not adversely affect the interests of the holders of the Securities Warrants.
Adjustments
Unless otherwise indicated in the applicable Prospectus Supplement, the
exercise price of, and the number of Common Shares covered by, a Common Shares
Warrant is subject to adjustment in certain events, including
(1) payment of a dividend on the Common Shares payable in Common Shares and
share splits, combinations or reclassification of the Common Shares;
(2) issuance to all holders of Common Shares of rights or warrants to
subscribe for or purchase Common Shares at less than their current market
price (as defined in the Warrant Agreement for such series of Common Shares
Warrants); and
(3) certain distributions of evidences of indebtedness or assets (including
securities but excluding cash dividends or distributions paid out of
consolidated earnings or retained earnings or dividends payable in Common
Shares) or of subscription rights and warrants (excluding those referred to
above).
No adjustment in the exercise price of, and the number of Common Shares covered
by, a Common Shares Warrant will be made for regular quarterly or other
periodic or recurring cash dividends or distributions or for cash dividends or
distributions to the extent paid from consolidated earnings or retained
earnings. No adjustment will be required unless such adjustment would require a
change of at least one percent (1%) in the exercise price then in effect.
Except as stated above, the exercise price of, and the number of Common Shares
covered by, a Common Shares Warrant will not be adjusted for the issuance of
Common Shares or any securities convertible into or exchangeable for Common
Shares, or carrying the right or option to purchase or otherwise acquire the
foregoing, in exchange for cash, other property or services.
In the event of any
(1) consolidation or merger of Homestead with or into any entity (other
than a consolidation or a merger that does not result in any
reclassification, conversion, exchange or cancellation of outstanding
Common Shares);
(2) sale, transfer, lease or conveyance of all or substantially all of the
assets of Homestead; or
(3) reclassification, capital reorganization or change of the Common Shares
(other than solely a change in par value or from par value to no par
value),
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then any holder of a Common Shares Warrant will be entitled, on or after the
occurrence of any such event, to receive on exercise of such Common Shares
Warrant the kind and amount of shares of beneficial interest or other
securities, cash or other property (or any combination thereof) that the holder
would have received had such holder exercised such holder's Common Shares
Warrant immediately prior to the occurrence of such event. If the consideration
to be received upon exercise of the Common Shares Warrant following any such
event consists of common shares of the surviving entity, then from and after
the occurrence of such event, the exercise price of such Common Shares Warrant
will be subject to the same anti-dilution and other adjustments described in
the second preceding paragraph, applied as if such common shares were Common
Shares.
DESCRIPTION OF RIGHTS
Homestead may sell the Offered Securities to investors directly through
shareholder purchase rights entitling owners of Common Shares to subscribe for
and purchase Common Shares, Preferred Shares or debt securities ("Rights"). If
Offered Securities are to be sold through Rights, such Rights will be
distributed as a dividend to Homestead's shareholders for which such
shareholders will pay no separate consideration. The Prospectus Supplement with
respect to the Rights offering will set forth the relevant terms of the Rights,
including
(1) the kind and number of Offered Securities which will be offered
pursuant to the Rights,
(2) the period during which and the price at which the Rights will be
exercisable,
(3) the number of Rights to be issued,
(4) any provisions for changes to or adjustments in the exercise price of
the Rights, and
(5) any other material terms of the Rights.
DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions of
the debt securities (the "Debt Securities") to which this Prospectus and any
applicable Prospectus Supplement may relate. The senior Debt Securities
("Senior Debt Securities ") will be issued under an Indenture, as amended or
supplemented from time to time (the "Senior Indenture"), between Homestead and
State Street Bank and Trust Company, as trustee (the "Trustee"). The
subordinated Debt Securities ("Subordinated Debt Securities") will be issued
under an Indenture, as amended or supplemented from time to time (the
"Subordinated Indenture") between Homestead and the Trustee. The Senior
Indenture and the Subordinated Indenture are sometimes referred to herein
collectively as the "Indentures" and each individually as an Indenture. We
encourage you to read copies of the Indentures which are exhibits to the
Registration Statement. Directions on how you can get copies are provided on
page 3. In addition, you can get copies of the Indenture from the corporate
trust office of the Trustee at Two International Place, Boston, Massachusetts
02110. The Indentures are subject to, and governed by, the Trust Indenture Act
of 1939, as amended (the "Trust Indenture Act"). The statements made hereunder
relating to the Indentures and the Debt Securities to be issued thereunder are
summaries of certain provisions thereof, are not complete and are subject to,
and are qualified in their entirety by reference to, all provisions of the
Indentures and such Debt Securities. All section references appearing herein
are to sections of the applicable Indenture, and capitalized terms used but not
defined herein have the respective meanings set forth in the applicable
Indenture.
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General
The Debt Securities will be direct obligations of Homestead and will constitute
Senior Debt Securities and/or Subordinated Debt Securities. The Debt Securities
effectively will be subordinated to any secured indebtedness of Homestead and
the indebtedness and other liabilities of Homestead's subsidiaries and
companies in which Homestead has a direct or indirect investment to the extent
of the assets of those subsidiaries and companies. Homestead and its
subsidiaries may incur additional indebtedness, subject to provisions limiting
the incurrence of additional indebtedness contained in specific Debt
Securities, as described in any applicable Prospectus Supplement.
The Indentures provide that the Debt Securities may be issued without limit as
to aggregate principal amount, in one or more series, in each case as
established from time to time in or pursuant to authority granted by a
resolution of the Board or as established in one or more indentures
supplemental to the Indentures.
Reference is made to the Prospectus Supplement relating to the Debt Securities
offered thereby for the specific terms of such Debt Securities, including, but
not limited to, the following:
(1) the title of such Debt Securities;
(2) any limit on the aggregate principal amount of such Debt Securities;
(3) the date or dates, or the method for determining such date or dates, on
which the principal of such Debt Securities will be payable and the amount
of principal payable thereon;
(4) the rate or rates, or the method by which such rate or rates will be
determined, at which such Debt Securities will bear interest, if any, and
the date or dates, or the method for determining such date or dates, from
which any such interest will accrue, the Interest Payment Dates (as
defined) on which any such interest will be payable, the Regular Record
Dates (as defined), if any, for such Interest Payment Dates, or the method
by which such dates will be determined, and the basis on which interest
will be calculated if other than a 360-day year comprised of twelve (12)
30-day months;
(5) the place or places where the principal of (and premium or Make-Whole
Amount (as defined), if any, on) and interest and Additional Amounts (as
defined), if any, on such Debt Securities will be payable, where such Debt
Securities may be surrendered for registration of transfer or exchange and
where notices or demands to or on Homestead in respect of such Debt
Securities and the Indentures may be served;
(6) the period or periods within which, the price or prices (including the
premium or Make-Whole Amount, if any) at which, the currency or currencies,
currency unit or units or composite currency or currencies in which, and
the other terms and conditions on which, such Debt Securities may be
redeemed, in whole or in part, at the option of Homestead, if Homestead is
to have such an option;
(7) the obligation, if any, of Homestead to redeem, repay or purchase such
Debt Securities pursuant to any sinking fund or analogous provision or at
the option of a Holder thereof, and the period or periods within which, the
date or dates on which, the price or prices at which, the currency or
currencies, currency unit or units or composite currency or currencies in
which, and the other terms and conditions on which, such Debt Securities
will be redeemed, repaid or purchased, in whole or in part, pursuant to
such obligation;
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(8) if other than denominations of $1,000 and any integral multiple
thereof, the denomination in which such Debt Securities will be issuable;
(9) if other than the Trustee, the identity of the Security Registrar (as
defined) and Paying Agent (as defined);
(10) the percentage of the principal amount at which such Debt Securities
will be issued and, if other than the full principal amount thereof, the
portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof, or the method for determining such
portion;
(11) if other than U.S. dollars, the currency or currencies in which the
principal of (and premium or Make-Whole Amount, if any, on) or interest or
Additional Amounts, if any, on such Debt Securities are denominated and
payable;
(12) whether the amount of payments of the principal of (and premium or
Make-Whole Amount, if any, on) or interest or Additional Amounts, if any,
on such Debt Securities may be determined with reference to an index,
formula or other method (which index, formula or method may be based,
without limitation, on one or more currencies, currency units, composite
currency or currencies, commodities, equity indices or other indices) and
the manner in or which such amounts will be determined;
(13) if such Debt Securities are to be issued upon the exercise of Debt
Securities Warrants, the time, manner and place for such Debt Securities to
be authenticated and delivered;
(14) the terms, if any, upon which Debt Securities may be convertible into
Common Shares, Preferred Shares or Debt Securities of another series of
Homestead and the terms and conditions upon which such conversion will be
effected, including, without limitation, the initial conversion price or
rate and the conversion period;
(15) whether the principal of (and premium or Make-Whole Amount, if any,
on) or interest or Additional Amounts, if any, on such Debt Securities are
to be payable, at the election of Homestead or a Holder, in a currency or
currencies, currency unit or units or composite currency or currencies,
other than that in which such Debt Securities are denominated or stated to
be payable, the period or periods within which, and the terms and
conditions on which, such election may be made, and the time and manner of,
and identity of the exchange rate agent with responsibility for,
determining the exchange rate between the currency or currencies in which
such Debt Securities are denominated or stated to be payable and the
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are to be so payable;
(16) provisions, if any, granting special rights to the Holders of such
Debt Securities upon the occurrence of such events as may be specified;
(17) any deletions from, modifications of or additions to the terms of such
Debt Securities with respect to the Events of Default or covenants set
forth in the Indentures;
(18) whether such Debt Securities are to be issuable in permanent global
form, and, if so, whether beneficial owners of interests in any such
permanent Global Security (as defined) may exchange such interests for Debt
Securities of such series and of like tenor of any authorized form and
denomination and the circumstances under which any such exchanges may
occur, and the identity of the Depository (as defined) for such series;
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(19) the Person to whom any interest on any Debt Security is payable, if
other than the Person in whose name such Debt Security is registered at the
close of business on the Regular Record Date for such interest;
(20) the applicability, if any, of the defeasance and covenant defeasance
provisions of Article Fourteen of the Indentures to such Debt Securities
and any provisions in modification thereof, in addition thereto or in lieu
thereof;
(21) if such Debt Securities are to be issuable in definitive form only
upon receipt of certificates, documents or conditions, the form and terms
of such certificates, documents or conditions;
(22) whether and under what circumstances Homestead will pay Additional
Amounts as contemplated in the Indentures on such Debt Securities to any
Holder who is not a U.S. person in respect of any tax, assessment or
governmental charge and, if so, whether Homestead will have the option to
redeem such Debt Securities rather than pay such Additional Amounts (and
the terms of any such option);
(23) the ranking of such Debt Securities;
(24) whether the Debt Securities will be secured by collateral and, if so,
the terms thereof;
(25) any other terms of such Debt Securities not inconsistent with the
provisions of the Indentures (Section 301), including financial covenants,
if any.
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
or bear no interest or bear interest at a rate which at the time of issuance is
below market rates ("Original Issue Discount Securities"). Special U.S. Federal
income tax, accounting and other considerations applicable to Original Issue
Discount Securities will be described in the applicable Prospectus Supplement.
Under the Indentures, Homestead will have the ability, in addition to the
ability to issue Debt Securities with terms different from those of Debt
Securities previously issued, without the consent of the Holders, to reopen a
previous issue of a series of Debt Securities and issue additional Debt
Securities of such series (Section 301).
Except as described in any applicable Prospectus Supplement, the Indentures do
not contain any other provisions which would limit the ability of Homestead to
incur indebtedness or which would afford Holders of Debt Securities protection
in the event of
(1) a highly leveraged or similar transaction involving Homestead, the
management of Homestead, or any affiliate of any such party,
(2) a change of control, or
(3) a reorganization, restructuring, merger or similar transaction
involving Homestead which may adversely affect the Holders of the Debt
Securities.
You should carefully read the applicable Prospectus Supplement relating to an
offering of Debt Securities for information with respect to any deletions from,
modifications of or additions to the Events of Default or covenants of
Homestead which are described below, including any addition of a covenant or
other provision providing event risk or similar protection.
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Denominations
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series issued in registered form, other than Debt Securities
issued in global form (which may be in any denomination), will be issued only
in denominations of $1,000 and integral multiples thereof (Section 302).
Principal and Interest
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and premium or Make-Whole Amount, if any, on) and interest on any
series of Debt Securities will be payable at the corporate trust office of the
Trustee, initially located at Two International Place, Boston, Massachusetts
02110; provided that, at the option of Homestead, payment of interest may be
made by check mailed to the address of the Person entitled thereto as it
appears in the Security Register or by wire transfer of funds to such Person at
an account maintained within the U.S. (Sections 301, 305, 306, 307 and 1002).
If any Interest Payment Date, Principal Payment Date or the Maturity Date (as
such terms are defined) falls on a day which is not a Business Day, the
required payment will be made on the next Business Day and no interest will
accrue on the amount so payable for the period from and after such Interest
Payment Date, Principal Payment Date or Maturity Date, as the case may be,
through and including such next Business Day (Section 113). "Business Day"
means any day, other than a Saturday or Sunday, on which banks in Boston,
Massachusetts are not required or authorized by law or executive order to
close. Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the Holder on the applicable Regular Record
Date and either may be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
Trustee, notice of which will be given to the Holder of such Debt Security not
less than ten (10) days prior to such Special Record Date, or may be paid at
any time in any other lawful manner, all as more completely described in the
Indentures (Section 307).
Merger, Consolidation or Sale of Assets
The Indentures provide that Homestead will not consolidate or merge with or
into (whether or not Homestead is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of the
properties or assets of Homestead in one or more related transactions, to
another Person unless
(1) the surviving Person or the Person formed by or surviving that
consolidation or merger (if other than Homestead) or to which that sale,
assignment, transfer, lease, conveyance or other disposition was made (the
"Surviving Entity") is a corporation organized or existing under the laws
of the United States, any state thereof or the District of Columbia;
(2) the Surviving Entity assumes all the obligations of Homestead under the
Debt Securities and the Indenture pursuant to supplemental indentures in
form reasonably satisfactory to the Trustee; and
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(3) immediately before and after giving effect to that transaction and
treating any indebtedness which becomes an obligation of Homestead as a
result of that transaction as having been incurred by Homestead at the time
of the transaction, no Event of Default and no event which, after notice or
the lapse of time, or both, would become an Event of Default has occurred
and is continuing; and
(4) an officer's certificate and legal opinion covering such conditions are
delivered to the Trustee (Sections 801 and 803).
Certain Covenants
Existence. Except as described under "Merger, Consolidation or Sale," Homestead
will do or cause to be done all things necessary to preserve and keep in full
force and effect its existence, rights (Charter and statutory) and franchises;
provided, however, that Homestead will not be required to preserve any right or
franchise if it determines that the preservation thereof is no longer desirable
in the conduct of its business and that the loss thereof is not disadvantageous
in any material respect to the Holders of the Debt Securities (Section 1004).
Maintenance of Properties. Homestead will cause all of its properties used or
useful in the conduct of its business or the business of any Subsidiary to be
maintained and kept in good condition, repair and working order and supplied
with all necessary equipment and will cause to be made all necessary repairs,
renewals, replacements, betterments and improvements thereof, all as in the
judgment of Homestead may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times;
provided, however, that Homestead and its Subsidiaries are not prevented from
selling or otherwise disposing of their properties for value in the ordinary
course of business (Section 1005).
Insurance. Homestead will, and will cause each of its Subsidiaries to, keep all
of its insurable properties insured against loss or damage at least equal to
their full insurable value with financially sound and reputable insurance
companies (Section 1006).
Payment of Taxes and Other Claims. Homestead will pay or discharge or cause to
be paid or discharged, before the same becomes delinquent, (i) all taxes,
assessments and governmental charges levied or imposed on it or any Subsidiary
or on the income, profits or property of Homestead or any Subsidiary and (ii)
all lawful claims for labor, materials and supplies which, if unpaid, might by
law become a lien on the property of Homestead or any Subsidiary; provided,
however, that Homestead will not be required to pay or discharge or cause to be
paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings (Section 1007).
Reports. The Indentures provide that, whether or not required by the rules and
regulations of the Commission, so long as any of the Debt Securities are
outstanding, Homestead will furnish to Holders of such Debt Securities
(1) all quarterly and financial information which would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if
Homestead were required to file those Forms, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report thereon by
Homestead's independent public accountants, and
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(2) all current reports which would be required to be filed with the
Commission on Form 8-K if Homestead were required to file those reports.
In addition, whether or not required by the rules and regulations of the
Commission, Homestead will file a copy of all such information and reports with
the Commission for public availability and make such information available to
securities analysts and prospective investors upon request. Homestead's
obligations to provide financial information and reports will be deemed
satisfied to the extent Homestead provides the Trustee with a sufficient number
of reports for the Trustee to provide or make available such reports to the
Holders. The Trustee, at Homestead's expense and written direction, shall
promptly mail copies or otherwise make available to the Holders all such
reports (Section 1008).
Additional Covenants and/or Modifications to the Covenants Described Above
Any additional covenants of Homestead and/or modifications to the covenants
described above with respect to any Debt Securities or series thereof will be
set forth in a supplement to the applicable Indenture and described in the
Prospectus Supplement relating thereto.
Events of Default, Notice and Waiver
The Indentures provide that the following events are "Events of Default" with
respect to any series of Debt Securities issued thereunder:
(1) default which continues for thirty (30) days in the payment of any
installment of interest or Additional Amounts payable on any Debt Security
of such series;
(2) default in the payment of the principal of (or premium or Make-Whole
Amount, if any, on) any Debt Security of such series at its Maturity;
(3) default in making any sinking fund payment as required for any Debt
Security of such series;
(4) default in the performance, or breach, of any other covenant or
warranty of Homestead contained in the Indenture (other than a covenant
added to the Indenture solely for the benefit of a series of Debt
Securities issued thereunder other than such series), continued for sixty
(60) days after written notice as provided in such Indenture;
(5) any default occurs under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
indebtedness for money borrowed by Homestead or any Significant Subsidiary
of Homestead (or the payment of which is guaranteed by Homestead or any
Significant Subsidiary of Homestead), whether that indebtedness or
guarantee exists on the date of the Indenture or is thereafter created,
which default after the termination of any applicable grace or cure period,
(a) constitutes a Payment Default or
(b) results in the acceleration of that indebtedness prior to its
express maturity and, in each case, the principal amount of any
indebtedness, together with the principal amount of any other such
indebtedness under which there has been a Payment Default or which has
been so accelerated, aggregates $25 million or more; provided that, in
calculating the aggregate principal amount of any such Indebtedness,
the Hedging Obligations of any Person under which there has been a
Payment Default or which has been so accelerated shall not be netted
against any other Hedging Obligation of that Person;
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(6) failure by Homestead or any Significant Subsidiary of Homestead to pay
final judgments aggregating in excess of $25 million, which judgments are
not paid, discharged or stayed for a period of sixty (60) days;
(7) certain events of bankruptcy or insolvency with respect to Homestead or
any Significant Subsidiary of Homestead; and
(8) any other Event of Default provided with respect to a particular series
of Debt Securities (Section 501).
The term "Significant Subsidiary" means a Subsidiary which otherwise meets the
tests ascribed to the term in Regulation S-X promulgated by the Commission
under the Securities Act, except that the tests therein shall be based on
twenty percent (20%) of total assets or income instead of ten percent (10%)
unless Homestead owns or controls, directly or indirectly, at least seventy-
five percent (75%) of the voting power of the Subsidiary's shares of Capital
Stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof (with that percentage
to be calculated on a fully diluted basis), in which case the tests shall be
based on ten percent (10%) of total assets or income.
If an Event of Default under either of the Indentures with respect to Debt
Securities of any series at the time Outstanding occurs and is continuing, then
in every such case, unless the principal of all of the Outstanding Debt
Securities of such series has already become due and payable, the Trustee or
the Holders of not less than twenty-five percent (25%) in principal amount of
the Outstanding Debt Securities of such series may declare the principal (or,
if the Debt Securities of such series are Original Issue Discount Securities or
Indexed Securities, such portion of the principal as may be specified in the
terms thereof) of, and the Make-Whole Amount, if any, on, all of the Debt
Securities of such series to be due and payable immediately by written notice
thereof to Homestead and to the Trustee (if given by the Holders). However, in
the case of an Event of Default described in clause (7) of the preceding
paragraph, acceleration is automatic.
At any time after such a declaration of acceleration with respect to Debt
Securities of such series has been made, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the Holders of a
majority in principal amount of the Outstanding Debt Securities of such series
may rescind and annul such declaration and its consequences if
(1) Homestead has paid or deposited with the Trustee all required payments
of the principal of (and premium or Make-Whole Amount, if any, on) and
interest and Additional Amounts, if any, on the Debt Securities of such
series, plus reasonable compensation, expenses, disbursements and advances
of the Trustee and
(2) all Events of Default, other than the nonpayment of accelerated
principal (or premium or Make-Whole Amount, if any) or interest or
Additional Amounts, if any, with respect to Debt Securities of such series
have been cured or waived as provided in the applicable Indenture (Section
502).
Each of the Indentures also provides that the Holders of not less than a
majority in principal amount of the Outstanding Debt Securities of any series
may waive any past default with respect to such series and its consequences,
except a default (i) in the payment of the principal of (or premium or
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Make-Whole Amount, if any, on) or interest or Additional Amounts, if any, on
any Debt Security of such series, or (ii) in respect of a covenant or provision
contained in the applicable Indenture which cannot be modified or amended
without the consent of the Holder of each Outstanding Debt Security affected
thereby (Section 513).
The Trustee is required to give notice to the Holders of Debt Securities within
ninety (90) days of a default under the applicable Indenture; provided,
however, that the Trustee may withhold notice to the Holders of any series of
Debt Securities of any default with respect to such series (except a default in
the payment of the principal of (or premium or Make-Whole Amount, if any, on)
or interest or Additional Amounts, if any, on any Debt Security of such series
or in the payment of any sinking fund installment in respect of any Debt
Security of such series) if a Responsible Officer of the Trustee considers such
withholding to be in the interest of such Holders (Section 601).
The Indentures provide that no Holders of Debt Securities of any series may
institute any proceedings, judicial or otherwise, with respect to the
Indentures or for any remedy thereunder, except in the case of failure of the
Trustee, for sixty (60) days, to act after it has received a written request to
institute proceedings in respect of an Event of Default from the Holders of not
less than twenty-five percent (25%) in principal amount of the Outstanding Debt
Securities of such series, as well as an offer of reasonable indemnity (Section
507). This provision will not prevent, however, any Holder of Debt Securities
from instituting suit for the enforcement of payment of the principal of (and
premium or Make-Whole Amount, if any, on) and interest and Additional Amounts,
if any, on such Debt Securities on or after the respective due dates thereof
(Section 508).
Subject to provisions in the Indentures relating to its duties in case of
default, the Trustee is under no obligation to exercise any of its rights or
powers under the Indentures at the request or direction of any Holders of any
series of Debt Securities then Outstanding under the Indentures, unless such
Holders have offered to the Trustee reasonable security or indemnity (Section
602). The Holders of not less than a majority in principal amount of the
Outstanding Debt Securities of any series will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or of exercising any trust or power conferred on the Trustee.
However, the Trustee may refuse to follow any direction which is in conflict
with any law or the Indentures, which may involve the Trustee in personal
liability or which may be unduly prejudicial to the Holders of Debt Securities
of such series not joining therein (Section 512).
Within one hundred thirty-five (135) days after the end of each fiscal year,
Homestead must deliver to the Trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under the Indentures and, if so, specifying each such default and the
nature and status thereof (Section 1009).
Modification of the Indentures
Modifications of and amendments to the Indentures may be made with the consent
of the Holders of not less than a majority in principal amount of all
Outstanding Debt Securities which are affected by such modification or
amendment; provided, however, that no such modification or amendment may,
without the consent of the Holder of each such Debt Security affected thereby,
(1) change the Stated Maturity of the principal of (or premium or Make-
Whole Amount, if any, on), or any installment of principal of or interest
or Additional Amounts, if any, on, any such Debt Security;
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(2) reduce the principal amount of, or the rate or amount of interest on,
or any premium or Make-Whole Amount payable upon redemption of, or any
Additional Amounts payable with respect to, any such Debt Security, or
reduce the amount of principal of an Original Issue Discount Security or
Make-Whole Amount, if any, which would be due and payable upon declaration
of acceleration of the maturity thereof or would be provable in bankruptcy,
or adversely affect any right of repayment of the Holder of any such Debt
Security;
(3) change the Place of Payment, or the currency, for payment of the
principal of (or premium or Make-Whole Amount, if any, on) or interest or
Additional Amounts, if any, on any such Debt Security;
(4) impair the right to institute suit for the enforcement of any payment
on or with respect to any such Debt Security;
(5) reduce the above-stated percentage of Outstanding Debt Securities of
any series necessary to modify or amend the applicable Indenture, to waive
compliance with certain provisions thereof or certain defaults and
consequences thereunder or to reduce the quorum or voting requirements set
forth in the applicable Indenture; or
(6) modify any of the foregoing provisions or any of the provisions
relating to the waiver of certain past defaults or certain covenants,
except to increase the required percentage to effect such action or to
provide that certain other provisions may not be modified or waived without
the consent of the Holder of such Debt Security (Section 902).
The Holders of at least a majority in principal amount of each series of
Outstanding Debt Securities have the right to waive compliance by Homestead
with certain covenants in the Indentures (Section 1011).
Modifications of and amendments to the Indentures may be made by Homestead and
the Trustee without the consent of any Holder of Debt Securities for any of the
following purposes:
(1) to evidence the succession of another Person to Homestead as obligor
under the applicable Indenture;
(2) to add to the covenants of Homestead for the benefit of the Holders of
all or any series of Debt Securities or to surrender any right or power
conferred on Homestead in the applicable Indenture;
(3) to add Events of Default for the benefit of the Holders of all or any
series of Debt Securities;
(4) to add or change any provisions of the applicable Indenture to
facilitate the issuance of, or to liberalize certain terms of, Debt
Securities in bearer form, or to permit or facilitate the issuance of Debt
Securities in uncertificated form, provided that such action may not
adversely affect the interests of the Holders of the Debt Securities of any
series in any material respect;
(5) to change or eliminate any provisions of the applicable Indenture,
provided that any such change or elimination will become effective only
when there are no Debt Securities Outstanding of any series created prior
thereto which are entitled to the benefit of such provision;
(6) to secure the Debt Securities;
(7) to establish the form or terms of Debt Securities of any series;
(8) to provide for the acceptance of appointment by a successor Trustee or
facilitate the administration of the trusts under the applicable Indenture
by more than one Trustee;
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(9) to cure any ambiguity in the applicable Indenture, correct or
supplement any provision in the applicable Indenture which may be defective
or inconsistent or make any other changes with respect to matters or
questions arising under the Indenture, provided that such action may not
adversely affect the interests of Holders of Debt Securities of any series
in any material respect;
(10) to close the applicable Indenture with respect to the authentication
and delivery of additional series of Debt Securities or to qualify, or
maintain qualification of, the applicable Indenture under the Trust
Indenture Act; or
(11) to supplement any of the provisions of the applicable Indenture to the
extent necessary to permit or facilitate defeasance and discharge of any
series of such Debt Securities, provided that such action may not adversely
affect the interests of the Holders of the Debt Securities of any series in
any material respect (Section 901).
The Indentures provide that, in determining whether the Holders of the
requisite principal amount of Outstanding Debt Securities of a series have
concurred in any request, demand, authorization, direction, notice, consent or
waiver thereunder or whether a quorum is present at a meeting of Holders of
Debt Securities,
(1) the principal amount of an Original Issue Discount Security which is
deemed Outstanding is the amount of the principal thereof which would be
due and payable as of the date of such determination upon declaration of
acceleration of the maturity thereof;
(2) the principal amount of a Debt Security denominated in a foreign
currency which is deemed Outstanding is the U.S. dollar equivalent,
determined on the issue date for such Debt Security, of the principal
amount (or, in the case of an Original Issue Discount Security, the U.S.
dollar equivalent on the issue date of such Debt Security of the amount
determined as provided in clause (1) above);
(3) the principal amount of an Indexed Security which is deemed Outstanding
is the principal face amount of such Indexed Security at original issuance,
unless otherwise provided with respect to such Indexed Security pursuant to
Section 301 of the applicable Indenture; and
(4) Debt Securities owned by Homestead or any other obligor on the Debt
Securities or any Affiliate of Homestead or of such other obligor are
disregarded (Section 101).
The Indentures contain provisions for convening meetings of the Holders of Debt
Securities of a series (Section 1501). A meeting may be called at any time by
the Trustee, and also, upon request, by Homestead or the Holders of at least
ten percent (10%) in principal amount of the Outstanding Debt Securities of
such series, in any such case upon notice given as provided in the Indenture
(Section 1502). Except for any consent which must be given by the Holder of
each Debt Security affected by certain modifications of and amendments to the
Indenture, any resolution presented at a meeting or adjourned meeting duly
reconvened at which a quorum is present may be adopted by the affirmative vote
of the Holders of a majority in principal amount of the Outstanding Debt
Securities of such series. However, except as referred to above, any resolution
with respect to any request, demand, authorization, direction, notice, consent,
waiver or other action which may be made, given or taken by the Holders of a
specified percentage, which is less than a majority, in principal amount of the
Outstanding Debt Securities of a series may be adopted at a meeting duly called
or adjourned meeting duly reconvened at which a quorum is present by the
affirmative vote of the Holders of such
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specified percentage in principal amount of the Outstanding Debt Securities of
such series. Any resolution passed or decision taken at any meeting of Holders
of Debt Securities of any series duly held in accordance with the applicable
Indenture will be binding on all Holders of Debt Securities of such series. The
quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be Persons holding or representing a majority in principal amount
of the Outstanding Debt Securities of a series. However, if any action is to be
taken at such meeting with respect to a consent or waiver which may be given by
the Holders of not less than a specified percentage in principal amount of the
Outstanding Debt Securities of a series, the Persons holding or representing
such specified percentage in principal amount of the Outstanding Debt
Securities of such series will constitute a quorum (Section 1504).
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of Holders of Debt Securities of any series with respect to any
request, demand, authorization, direction, notice, consent, waiver or other
action which the applicable Indenture expressly provides may be made, given or
taken by the Holders of a specified percentage in principal amount of all
Outstanding Debt Securities affected thereby, or of the Holders of such series
and one or more additional series:
(1) there will be no minimum quorum requirement for such meeting; and
(2) the principal amount of the Outstanding Debt Securities of such series
which vote in favor of such request, demand, authorization, direction,
notice, consent, waiver or other action will be taken into account in
determining whether such request, demand, authorization, direction, notice,
consent, waiver or other action has been made, given or taken under the
applicable Indenture (Section 1504).
Any request, demand, authorization, direction, notice, consent, waiver or other
action provided by the applicable Indenture to be given or taken by a specified
percentage in principal amount of the Holders of any or all series of Debt
Securities may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such specified percentage of Holders in
person or by agent duly appointed in writing; and, except as otherwise
expressly provided in the applicable Indenture, such action will become
effective when such instrument or instruments are delivered to the Trustee.
Proof of execution of any instrument or of a writing appointing any such agent
will be sufficient for any purpose of the applicable Indenture and (subject to
Article Six of the Indentures) conclusive in favor of the Trustee and
Homestead, if made in the manner specified above (Section 1507).
Discharge, Defeasance and Covenant Defeasance
Homestead may discharge certain obligations to Holders of any series of Debt
Securities which have not already been delivered to the Trustee for
cancellation by irrevocably depositing with the Trustee, in trust, funds in
such currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities in respect of principal
(and premium or Make-Whole Amount, if any) and interest and Additional Amounts,
if any, payable to the date of such deposit (if such Debt Securities have
become due and payable) or to the Stated Maturity or Redemption Date, as the
case may be (Sections 1401, 1402, 1403 and 1404).
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The Indentures provide that, if the provisions of Article Fourteen are made
applicable to the Debt Securities of or within any series pursuant to Section
301 of the Indentures, Homestead may elect either
(1) to defease and discharge itself from any and all obligations with
respect to such Debt Securities (except for the obligation to pay
Additional Amounts, if any, upon the occurrence of certain events of tax,
assessment or governmental charge with respect to payments on such Debt
Securities and the obligations to register the transfer or exchange of such
Debt Securities, to replace temporary or mutilated, destroyed, lost or
stolen Debt Securities, to maintain an office or agency in respect of such
Debt Securities and to hold moneys for payment in trust) ("defeasance")
(Section 1402) or
(2) to release itself from its obligations with respect to such Debt
Securities under Sections 1004 to 1009, inclusive, of the applicable
Indenture (being the restrictions described under "--Certain Covenants")
and, if provided pursuant to Section 301 of the applicable Indenture, their
obligations with respect to any other covenant, and any omission to comply
with such obligations will not constitute a default or an Event of Default
with respect to such Debt Securities ("covenant defeasance") (Section
1403),
in either case upon the irrevocable deposit by Homestead with the Trustee, in
trust, of an amount, in such currency or currencies, currency unit or units or
composite currency or currencies in which such Debt Securities are payable at
Stated Maturity, or Governmental Obligations (as defined below), or both,
applicable to such Debt Securities which through the scheduled payment of
principal and interest in accordance with their terms will provide money in an
amount sufficient to pay the principal of (and premium or Make-Whole Amount, if
any, on) and interest and Additional Amounts, if any, on such Debt Securities,
and any mandatory sinking fund or analogous payments thereon, on the scheduled
due dates therefor (Section 1404).
Such a trust may only be established if, among other things, Homestead has
delivered to the Trustee an Opinion of Counsel (as specified in the applicable
Indenture) to the effect that the Holders of such Debt Securities will not
recognize income, gain or loss for U.S. Federal income tax purposes as a result
of such defeasance or covenant defeasance and will be subject to U.S. Federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance or covenant defeasance had not
occurred, and such Opinion of Counsel, in the case of defeasance, must refer to
and be based on a ruling of the Internal Revenue Service (the "IRS") or a
change in applicable U.S. Federal income tax law occurring after the date of
the Indenture (Section 1404).
Unless otherwise provided in the applicable Prospectus Supplement, if after
Homestead has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any
series,
(1) the Holder of a Debt Security of such series is entitled to, and does,
elect pursuant to Section 301 of the applicable Indenture or the terms of
such Debt Security to receive payment in a currency, currency unit or
composite currency other than that in which such deposit has been made in
respect of such Debt Security or
(2) a Conversion Event (as defined below) occurs in respect of the
currency, currency unit or composite currency in which such deposit has
been made,
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the indebtedness represented by such Debt Security will be deemed to have been,
and will be, fully discharged and satisfied through the payment of the
principal of (and premium or Make-Whole Amount, if any, on) and interest and
Additional Amounts, if any, on such Debt Security as they become due out of the
proceeds yielded by converting the amount so deposited in respect of such Debt
Security into the currency, currency unit or composite currency in which such
Debt Security becomes payable as a result of such election or Conversion Event
based on the applicable market exchange rate (Section 1405). "Conversion Event"
means the cessation of use of (i) a currency (other than the ECU or other
currency unit) both by the government of the country which issued such currency
and for the settlement of transactions by a central bank or other public
institutions of or within the international banking community, (ii) the ECU
both within the European Monetary System and for the settlement of transactions
by public institutions of or within the European Communities or (iii) any
currency unit or composite currency other than the ECU for the purposes for
which it was established.
If Homestead effects covenant defeasance with respect to any Debt Securities
and such Debt Securities are declared due and payable because of the occurrence
of any Event of Default other than the Event of Default described in clause (4)
under "--Events of Default, Notice and Waiver" with respect to Sections 1004
through 1008, inclusive, of the applicable Indenture (which Sections would no
longer be applicable to such Debt Securities) as to which there has been
covenant defeasance, the amount in such currency, currency unit or composite
currency in which such Debt Securities are payable, plus Government Obligations
on deposit with the Trustee, will be sufficient to pay amounts due on such Debt
Securities at the time of their Stated Maturity but may not be sufficient to
pay amounts due on such Debt Securities at the time of the acceleration
resulting from such Event of Default. However, Homestead would remain liable to
make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
Registration and Transfer
Subject to certain limitations imposed on Debt Securities issued in book-entry
form, the Debt Securities of any series will be exchangeable for other Debt
Securities of the same series and of a like aggregate principal amount and
tenor of different authorized denominations upon surrender of such Debt
Securities at the corporate trust office of the Trustee. In addition, subject
to certain limitations imposed on Debt Securities issued in book-entry form,
the Debt Securities of any series may be surrendered for conversion or
registration of transfer thereof at the corporate trust office of the Trustee.
Every Debt Security surrendered for registration of transfer or exchange must
be duly endorsed or accompanied by a written instrument of transfer. No service
charge will be made for any registration of transfer or exchange of any Debt
Securities, but Homestead may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith (Section 305).
Homestead may at any time designate one or more offices or agencies where Debt
Securities of any series may be presented or surrendered for payment or
surrendered for registration of transfer or exchange. If Homestead has
designated such an office or agency, Homestead may at
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any time rescind the designation or approve a change in the location of such
office or agency, except that Homestead will be required to maintain such an
office or agency in each Place of Payment for such Debt Securities (Section
1002).
Neither Homestead nor the Trustee will be required to
(1) issue, register the transfer of or exchange Debt Securities of any
series during a period beginning at the opening of business fifteen (15)
days before any selection of Debt Securities of such series to be redeemed
and ending at the close of business on the day of mailing of the relevant
notice of redemption;
(2) register the transfer of or exchange any Debt Security, or portion
thereof, called for redemption, except the unredeemed portion of any Debt
Security being redeemed in part; or
(3) issue, register the transfer of or exchange any Debt Security which has
been surrendered for repayment at the option of the Holder, except the
portion, if any, of such Debt Security not to be so repaid (Section 305).
Subordination of Debt Securities
The Senior Debt Securities will constitute part of the Senior Indebtedness (as
defined below) of Homestead and will rank pari passu with all outstanding
senior debt. Except as set forth in the Prospectus Supplement, the Debt
Securities will be subordinated, in right of payment, to the prior payment in
full of the Senior Indebtedness, including the Senior Debt Securities, whether
outstanding at the date of the Subordinated Indenture or thereafter incurred,
assumed or guaranteed. The term "Senior Indebtedness" means
(1) the principal of and premium, if any, and unpaid interest on
indebtedness for money borrowed,
(2) purchase money and similar obligations,
(3) obligations under capital leases,
(4) guarantees, assumptions or purchase commitments relating to, or other
transactions as a result of which Homestead is responsible for the payment
of, such indebtedness of others,
(5) renewals, extensions and refunding of any such indebtedness,
(6) interest or obligations in respect of any such indebtedness accruing
after the commencement of any insolvency or bankruptcy proceedings and
(7) obligations associated with derivative products such as interest rate
and currency exchange contracts, foreign exchange contracts, commodity
contracts, and similar arrangements,
unless, in each case, the instrument by which Homestead incurred, assumed or
guaranteed the indebtedness or obligations described in clauses (1) through (7)
hereof expressly provides that such indebtedness or obligation is not senior in
right of payment to the Subordinated Debt Securities.
Under any distribution of assets of Homestead in connection with any
dissolution, winding up, liquidation or reorganization of Homestead, whether in
a bankruptcy, insolvency, reorganization or receivership proceeding or upon an
assignment for the benefit of creditors or any other marshalling of the assets
and liabilities of Homestead or otherwise, except a distribution in connection
with a
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merger or consolidation or a conveyance or transfer of all or substantially all
of the properties of Homestead in accordance with the Subordinated Indenture,
the holders of all Senior Indebtedness shall first be entitled to receive
payment of the full amount due thereon, or provision shall be made for such
payment in money or money's worth, before the holders of any of the
Subordinated Debt Securities are entitled to receive any payment in respect of
the Subordinated Debt Securities.
In the event that a payment default shall have occurred and be continuing with
respect to the Senior Indebtedness, the holders of all Senior Indebtedness
shall first be entitled to receive payment of the full amount due thereon, or
provision shall be made for such payment in money or money's worth, before the
holders of any of the Subordinated Debt Securities are entitled to receive any
payment in respect of the Subordinated Debt Securities. In the event that the
principal of the Subordinated Debt Securities of any series shall have been
declared due and payable pursuant to the Subordinated Indenture and such
declaration shall not have been rescinded and annulled, the holders of all
Senior Indebtedness outstanding at the time of such declaration shall first be
entitled to receive payment of the full amount due thereon, or provision shall
be made for such payment in money or money's worth, before the holders of any
of the Subordinated Debt Securities are entitled to receive any payment in
respect of the Subordinated Debt Securities.
This subordination will not prevent the occurrence of any event of default with
respect to the Subordinated Debt Securities. There is no limitation on the
issuance of additional Senior Indebtedness in the Subordinated Indenture.
Payment
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium or Make-Whole Amount, if any) and interest
on any series of Debt Securities will be payable at the corporate trust office
of the Trustee, the address of which will be stated in the applicable
Prospectus Supplement; provided that, at the option of Homestead, payment of
interest may be made by check mailed to the address of the person entitled
thereto as it appears in the applicable register for such Debt Securities or by
wire transfer of funds to such person at an account maintained within the
United States.
All moneys paid by Homestead to a paying agent or a Trustee for the payment of
the principal of or any premium or interest on any Debt Security which remain
unclaimed at the end of two (2) years after such principal, premium or interest
has become due and payable will be repaid to Homestead, and the Holder of such
Debt Security thereafter may look only to Homestead for payment thereof.
Book-Entry Securities
Unless otherwise provided in the applicable Prospectus Supplement, the Debt
Securities of each series will be represented by one or more certificates (the
"Global Securities"). The Global Security representing Debt Securities will be
deposited with, or on behalf of, The Depository Trust Company ("DTC"), or
another successor depository appointed by Homestead (DTC or such other
depository being the "Depository") and registered in the name of the Depository
or its nominee. Unless otherwise provided in the applicable Prospectus
Supplement, Debt Securities will not be issued in definitive form. If the
aggregate principal amount of any issue exceeds $200 million, one certificate
will be issued with respect to each $200 million of principal amount and an
additional certificate will be issued with respect to any remaining principal
amount of such issue.
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DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities which its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the NYSE, the American
Stock Exchange, Inc. and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as securities brokers
and dealers, banks and trust companies which clear through or maintain a
custodial relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to DTC and its Participants are
on file with the Commission.
Upon issuance by Homestead of Debt Securities represented by a Global Security,
purchases of Debt Securities under the DTC system must be made by or through
Direct Participants, which will receive a credit for the Debt Securities on
DTC's records. The ownership interest of each actual purchaser of each Debt
Security ("Beneficial Owner") will in turn be recorded on the Direct and
Indirect Participants' records. Beneficial Owners will not receive written
confirmation from DTC of their purchase, but Beneficial Owners are expected to
receive written confirmations providing details of the transaction, as well as
periodic statements of their holdings, from the Direct or Indirect Participant
through which the Beneficial Owner entered into the transaction. Transfers of
ownership interests in the Debt Securities will be accomplished by entries made
on the books of Participants acting on behalf of Beneficial Owners. Beneficial
Owners will not receive certificates representing their ownership interests in
Debt Securities, except if use of the book-entry system for the Debt Securities
is discontinued. The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to own, pledge or transfer
beneficial interests in a Global Security.
So long as the Depository for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depository or such nominee, as
the case may be, will be considered the sole owner or holder of the Debt
Securities represented by such Global Security for all purposes under the
Indentures. Except as provided below, owners of beneficial interests in Debt
Securities represented by a Global Security will not be entitled to have Debt
Securities represented by such Global Security registered in their names, will
not receive or be entitled to receive physical delivery of Debt Securities in
definitive form and will not be considered the owners or holders thereof under
the Indentures.
To facilitate subsequent transfers, all Debt Securities deposited by
Participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of Debt Securities with DTC and their registration in
the name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the Debt Securities; DTC's records
reflect only the identity of the Direct Participants to whose accounts such
Debt Securities are credited,
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<PAGE>
which may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants,
by Direct Participants to Indirect Participants, and by Direct Participants and
Indirect Participants to Beneficial Owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to Debt
Securities. Under its usual procedures, DTC will mail an omnibus proxy to
Homestead as soon as possible after the record date. The omnibus proxy will
assign Cede & Co.'s consenting or voting rights to those Direct Participants to
whose accounts the Debt Securities are credited on the record date (identified
in a listing attached to the omnibus proxy).
Payments of principal of (and premium and Make-Whole Amount, if any, on) and
interest and Additional Amounts, if any, on the Debt Securities represented by
a Global Security registered in the name of DTC or its nominee will be made by
Homestead through the Trustee under the Indentures or a paying agent (the
"Paying Agent"), which may also be the Trustee under the Indentures, to DTC or
its nominee, as the case may be, as the registered owner of such Global
Security. None of Homestead, the Trustee, the Paying Agent or the Security
Registrar for such Global Security will have any responsibility or liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in such Global Security or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Homestead has been advised that DTC, upon receipt of any payment of principal,
premium, Make-Whole Amount or interest in respect of a Global Security, will
credit Direct Participants' accounts on the payable date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payment on the payable date. Payments by
Participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of DTC, the Paying Agent or
Homestead, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of principal, premium and interest to DTC is
the responsibility of the Paying Agent or Homestead, as the case may be,
disbursement of such payments to Direct Participants is the responsibility of
DTC, and disbursement of such payments to the Beneficial Owners is the
responsibility of Direct and Indirect Participants.
If the Depository with respect to a Global Security is at any time unwilling or
unable to continue as Depository and a successor Depository is not appointed by
Homestead within ninety (90) days, Homestead will issue certificated notes in
exchange for the Debt Securities represented by such Global Security.
The information in this section concerning the Depository and the Depository's
book-entry system has been obtained from sources which Homestead believes to be
reliable.
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No Personal Liability of Shareholders, Officer or Directors
The Indentures provide that no recourse may be had against any past, present or
future stockholder, officer or director of Homestead, or any successor entity
under or upon any obligation, covenant or agreement contained in the Indentures
or in any Offered Security, or because of any indebtedness evidenced thereby
(Section 111).
Trustee
The Indentures provide that there may be more than one Trustee thereunder, each
with respect to one or more series of Debt Securities. Any Trustee under the
Indentures may resign or be removed with respect to one or more series of Debt
Securities, and a successor Trustee may be appointed to act with respect to
such series (Section 608). If two (2) or more Persons are acting as Trustee
with respect to different series of Debt Securities, each such Trustee will be
a Trustee of a trust under the applicable Indenture separate and apart from the
trust administered by any other Trustee, and, except as otherwise indicated
herein, any action described herein to be taken by the Trustee may be taken by
each such Trustee with respect to, and only with respect to, the one or more
series of Debt Securities for which it is Trustee under the applicable
Indenture (Section 609).
Certain Definitions
"Capital Stock" means (i) in the case of a corporation, corporate stock; (ii)
in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock; (iii) in the case of a partnership, partnership interests
(whether general or limited); and (iv) any other interest or participation
which confers on a Person the right to receive a share of the profits and
losses of, or distributions of assets of, the issuing Person.
"Government Obligations" means securities which are (i) direct obligations of
the United States of America, for the payment of which its full faith and
credit is pledged, or (ii) obligations of a person controlled or supervised by
and acting as an agency or instrumentality of the United States of America, the
payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America which, in either case, are not
callable or redeemable at the option of the issuer thereof, and also includes a
depository receipt issued by a bank or trust company as custodian with respect
to any such Government Obligation or a specific payment of interest on or
principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt, provided that (except as
required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the Government Obligation or the
specific payment of interest on or principal of the Government Obligation
evidenced by such depository receipt (Section 101).
"Hedging Obligations" means, with respect to any Person, the greater of (a) the
net obligations of that Person under (i) interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements, (ii) foreign
exchange contracts or currency swap agreements, and (iii) other agreements or
arrangements designed to protect that Person against fluctuations in interest
rates or currency values, or (b) zero.
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<PAGE>
"Payment Default" means any failure to pay any scheduled installment of
principal of, premium, if any, or interest on any indebtedness within the grace
period provided for that payment in the documentation governing that
indebtedness.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than fifty percent (50%) of
the total equity capital and more than fifty percent (50%) of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by that
Person or one or more of the other Subsidiaries of that Person (or a
combination thereof), and (ii) any partnership (a) the sole general partner or
the managing general partner of which is that Person or a Subsidiary of that
Person, or (b) the only general partners of which are that Person or one or
more Subsidiaries of that Person (or any combination thereof).
DESCRIPTION OF CONVERTIBLE MORTGAGE NOTES
At September 30, 1998, Homestead owed convertible mortgage notes to Archstone
Communities Trust ("Archstone"), an affiliate, in the amount of $221,333,620.
The notes are collateralized by 54 Homestead properties. The notes 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 notes are convertible, at the
option of Archstone, into Common Shares at a conversion ratio equal to one
Common Share for every $11.50 of principal amount outstanding.
On July 6, 1998, Homestead entered into a mortgage loan purchase agreement with
Security Capital Atlantic Incorporated ("Atlantic") and Merrill Lynch Mortgage
Capital Inc. ("MLMC") whereby $98 million of convertible mortgage notes held by
Atlantic were modified to, among other things, eliminate their convertibility
feature. The notes were then sold by Atlantic to MLMC. On August 7, 1998,
Homestead converted the $98 million of mortgage notes and $24 million of
convertible subordinated debentures into a $122 million mortgage of a newly
formed, wholly-owned, subsidiary of Homestead. The $122 million mortgage note
matures June 30, 1999 and provides for interest only monthly payments of LIBOR
plus 1.70% through September 30, 1998, LIBOR plus 2% from October 1, 1998
through November 30, 1998 and LIBOR plus 2.25% thereafter. MLMC has the
exclusive right to give notice by December 15, 1998 to extend the maturity of
the mortgage note to June 30, 2001 (the "2 Year Extension Notice") or give
notice by June 10, 1999 to extend the maturity of the mortgage note to at least
June 30, 2006 or as late as June 30, 2009. If extended, the mortgage note will
bear interest at LIBOR plus 2.5% (3.5% if the collateral properties do not
generate net operating income of $18 million for the twelve month period ended
June 30, 1999). Homestead may prepay the mortgage note, in whole or in part,
prior to June 30, 1999 or, if the 2 Year Extension Notice is given, Homestead
may prepay the mortgage note, in whole or in part, prior to June 30, 2001.
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<PAGE>
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
HOMESTEAD'S CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and the
Charter and Bylaws. The summary is not complete and is subject to and qualified
in its entirety by reference to Maryland law, the Charter and Bylaws, copies of
which have been incorporated by reference as exhibits to the Registration
Statement.
Classification of the Board
Homestead's Bylaws provide that the number of directors may be established by
the Board, but may not be fewer than three (3) nor more than fifteen (15). Any
vacancy will be filled, at any regular meeting or at any special meeting called
for that purpose, by a majority of the remaining directors, except that a
vacancy resulting from an increase in the number of directors will be filled by
a majority of the entire Board. Pursuant to the Charter, the directors are
divided into three (3) classes. At the 1997 annual meeting of shareholders, one
class was elected to hold office initially for a term expiring at the annual
meeting of shareholders held in 1998, another class was elected to hold office
initially for a term expiring at the annual meeting of shareholders to be held
in 1999, and another class was elected to hold office initially for a term
expiring at the annual meeting of shareholders to be held in 2000. As the term
of each class expires, directors in that class will be elected for a term of
three (3) years and until their successors are duly elected and qualify.
Homestead believes that the above-described classification of the Board will
help to assure the continuity and stability of Homestead's business strategies
and policies as determined by the Board.
The classified director provision could have the effect of making the
replacement of incumbent directors more time-consuming and difficult, which
could discourage a third party from making a tender offer or otherwise
attempting to obtain control of Homestead, even though such an attempt might be
beneficial to Homestead and its shareholders. At least two (2) annual meetings
of shareholders, instead of one (1), will generally be required to effect a
change in a majority of the Board. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
Director Liability Limitation and Indemnification
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except to liability
resulting from (i) actual receipt of an improper benefit or profit in money,
property or services, or (ii) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which eliminates such liability to the maximum extent
permitted by Maryland law.
Homestead's officers and directors are, and will be, indemnified under the
Charter against certain liabilities. The Charter provides that Homestead will,
to the maximum extent permitted by Maryland law in effect from time to time,
indemnify and pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (i) any individual who is a present or former
director or officer of Homestead, or (ii) any individual who, while a director
of Homestead and at the request of
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Homestead, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise. Homestead has the power, with
the approval of the Board, to provide such indemnification and advancement of
expenses to a person who served a predecessor of Homestead in any of the
capacities described in (i) or (ii) above and to any employee or agent of
Homestead or its predecessors.
Maryland law requires a corporation (unless its charter provides otherwise,
which the Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he or she is made a party by reason of his or her service in that
capacity. Maryland law permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities, unless it is established that
(1) the act or omission of the director or officer was material to the
matter giving rise to the proceeding and
(a) was committed in bad faith or
(b) was the result of active and deliberate dishonesty,
(2) the director or officer actually received an improper personal benefit
in money, property or services, or
(3) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful.
However, a Maryland corporation may not indemnify for an adverse judgment in a
suit by or in the right of the corporation. Maryland law permits a corporation
to advance reasonable expenses to a director or officer upon such corporation's
receipt of (i) a written affirmation by the director or officer of his or her
good faith belief that he or she has met the standard of conduct necessary for
indemnification by such corporation as authorized by its bylaws and (ii) a
written statement by or on his or her behalf to repay the amount paid or
reimbursed by such corporation if it shall ultimately be determined that the
standard of conduct was not met.
Additionally, Homestead has entered into indemnity agreements with each of its
officers and directors which provide for reimbursement of all expenses and
liabilities of such officer or director, arising out of any lawsuit or claim
against such officer or director due to the fact that he or she was or is
serving as an officer or director, except for such liabilities and expenses (i)
the payment of which is judicially determined to be unlawful, (ii) relating to
claims under Section 16(b) of the Exchange Act, or (c) relating to judicially
determined criminal violations.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling Homestead pursuant
to the foregoing provisions, Homestead has been informed that, in the opinion
of the Commission, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
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Business Combinations
Under the Maryland General Corporation Law ("MGCL"), certain "business
combinations" (including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and any person who beneficially owns
ten percent (10%) or more of the voting power of the corporation's shares or an
affiliate of the corporation who, at any time within the two (2)-year period
prior to the date in question, was the beneficial owner of ten percent (10%) or
more of the voting power of the then-outstanding voting stock of the
corporation (an "Interested Stockholder") or an affiliate of such an Interested
Stockholder are prohibited for five (5) years after the most recent date on
which the Interested Stockholder becomes an Interested Stockholder. Thereafter,
any such business combination must be recommended by the board of directors of
such corporation and approved by the affirmative vote of at least (a) eighty
percent (80%) of the votes entitled to be cast by holders of outstanding voting
shares of the corporation and (b) two-thirds ( 2/3) of the votes entitled to be
cast by holders of outstanding voting shares of the corporation other than
shares held by the Interested Stockholder with whom (or with whose affiliate)
the business combination is to be effected, unless, among other conditions, the
corporation's common stockholders receive a minimum price (as defined in the
MGCL) for their shares and the consideration is received in cash or in the same
form as previously paid by the Interested Stockholder for its shares. These
provisions of the MGCL do not apply, however, to business combinations that are
approved or exempted by the board of directors of the corporation prior to the
time that the Interested Stockholder becomes an Interested Stockholder. The
Board has exempted from these provisions of the MGCL any business combination
with Security Capital Group Incorporated ("Security Capital") and its
affiliates and successors. As a result, Security Capital and its affiliates and
successors may be able to enter into business combinations with Homestead that
may not be in the best interests of its shareholders without compliance by
Homestead with the super-majority vote requirements and other provisions of the
statute.
Control Share Acquisitions
Maryland law provides that "Control Shares" of a Maryland corporation acquired
in a "Control Share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds ( 2/3) of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror or by officers or
directors who are employees of the corporation. "Control Shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror, or in respect of which the acquiror is
able to exercise or direct the exercise of voting power, would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power (except solely by virtue of a revocable
proxy): (i) one-fifth ( 1/5) or more but less than one-third ( 1/3), (ii) one-
third ( 1/3) or more but less than a majority, or (iii) a majority or more of
all voting power. Control Shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained stockholder
approval. A "Control Share acquisition" means the acquisition of Control
Shares, subject to certain exceptions.
A person who has made or proposes to make a Control Share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of stockholders to
be held within fifty (50) days of demand to consider the voting rights of the
shares. If no request for a meeting is made, the corporation may itself present
the question at any stockholders meeting.
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If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the Control Shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for the Control Shares, as of the date of the last
Control Share acquisition or of any meeting of stockholders at which the voting
rights of such shares are considered and not approved. If voting rights for
Control Shares are approved at a stockholders meeting and the acquiror becomes
entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the Control Share acquisition.
The Control Share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction or to acquisitions approved or exempted by the charter or bylaws of
the corporation.
Homestead's Bylaws contain a provision exempting Security Capital and its
affiliates and successors from the provisions of the Control Share acquisition
statute.
Advance Notice Provisions
For nominations or other business to be properly brought before an annual
meeting of shareholders by a shareholder, the Bylaws require such shareholder
to deliver a notice to the Secretary, absent specified circumstances, not less
than sixty (60) days nor more than ninety (90) days prior to the first
anniversary of the preceding year's annual meeting setting forth:
(1) as to each person whom the stockholder proposes to nominate for
election or reelection as a director, all information relating to such
person that is required to be disclosed in solicitations of proxies for the
election of directors, pursuant to Regulation 14A of the Exchange Act;
(2) as to any other business that the shareholder proposed to bring before
the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting
and any material interest in such business of such shareholder and of the
beneficial owner, if any, on whose behalf the nomination or proposal is
made; and
(3) as to the shareholder giving the notice and beneficial owner, if any,
on whose behalf the nomination or proposal is made,
(a) the name and address of such shareholder as they appear on the
books, and of such beneficial owner and
(b) the number of shares of each class of stock of Homestead which are
owned beneficially and of record by such shareholder and such
beneficial owner, if any.
PLAN OF DISTRIBUTION
Homestead may sell the Offered Securities to one or more underwriters or
dealers for public offering and sale by them or may sell the Offered Securities
to investors directly or through agents, which agents may be affiliated with
Homestead. Direct sales to investors may be accomplished through subscription
offerings or through subscription rights distributed to Homestead shareholders
and direct
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placements to third parties. In connection with subscription offerings or the
distribution of subscription rights to shareholders, if all the underlying
Offered Securities are not subscribed for, Homestead may sell such unsubscribed
Offered Securities to third parties directly or through agents and, in
addition, whether or not all of the underlying Offered Securities are
subscribed for, Homestead may concurrently offer additional Offered Securities
to third parties directly or through agents, which agents may be affiliated
with Homestead. Any underwriter, dealer or agent involved in the offer and sale
of the Offered Securities will be named in the applicable Prospectus
Supplement.
The distribution of the Offered Securities may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, at
prices related to the prevailing market prices at the time of sale or at
negotiated prices (any of which may represent a discount from the prevailing
market price). Homestead also may, from time to time, authorize underwriters
acting as Homestead's agents to offer and sell the Offered Securities upon the
terms and conditions set forth in the applicable Prospectus Supplement. In
connection with the sale of Offered Securities, underwriters may be deemed to
have received compensation from Homestead in the form of underwriting discounts
or commissions and may also receive commissions from purchasers of Offered
Securities for whom they may act as agent. Underwriters may sell Offered
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by Homestead to underwriters or agents in
connection with the offering of Offered Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters,
dealers and agents participating in the distribution of the Offered Securities
may be deemed to be underwriters, and any discounts and commissions received by
them and any profit realized by them on resale of the Offered Securities may be
deemed to be underwriting discounts and commissions, under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with Homestead, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act. Any such
indemnification agreements will be described in the applicable Prospectus
Supplement.
If so indicated in the applicable Prospectus Supplement, Homestead will
authorize dealers acting as Homestead's agents to solicit offers by certain
institutions to purchase Offered Securities from Homestead at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts ("Contracts") providing for payment and delivery on the date
or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the aggregate principal amount of Offered Securities
sold pursuant to Contracts shall be not less nor more than, the respective
amounts stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but will in all cases be
subject to the approval of Homestead. Contracts will not be subject to any
conditions except (i) the purchase by an institution of the Offered Securities
covered by its Contracts shall not at the time of delivery be prohibited under
the laws of any jurisdiction in the United States to which such institution is
subject, and (ii) if the Offered Securities are being sold to underwriters,
Homestead
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shall have sold to such underwriters the total principal amount of the Offered
Securities less the principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of, engage in
transactions with and perform services for Homestead and its subsidiaries and
affiliates in the ordinary course of business.
EXPERTS
The consolidated balance sheets as of December 31, 1997, and the consolidated
statements of operations, shareholders' equity, and cash flows for the year
then ended, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
With respect to the unaudited interim financial information for the quarters
ended March 31, 1998 and June 30, 1998, Arthur Andersen, LLP has applied
limited procedures in accordance with professional standards for review of that
information. However, their separate reports thereon state that they did not
audit and they do not express an opinion on that interim financial information.
Accordingly, the degree of reliance on their reports on that information should
be restricted in light of the limited nature of the review procedures applied.
In addition, the accountants are not subject to the liability provisions of
Section 11 of the Securities Act for their reports on the unaudited interim
financial information because those reports are not "reports" or a "part" of
the Registration Statement prepared or certified by the accountants within the
meaning of Sections 7 and 11 of the Securities Act.
The financial statements of Homestead as of and for the year ended December 31,
1996 appearing in Homestead's Annual Report on Form 10-K for the year ended
December 31, 1997, have been audited by Ernst & Young, LLP, independent
auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
The combined statements of operations, owners' equity and cash flows of PTR-
Homestead Village Group (the predecessor to Homestead) for the year ended
December 31, 1995 appearing in Homestead's Annual Report on Form 10-K for the
year ended December 31, 1997 have been incorporated by reference herein and in
the Registration Statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
VALIDITY OF OFFERED SECURITIES
The validity of the Offered Securities will be passed upon for Homestead by
Mayer, Brown & Platt, Chicago, Illinois. Mayer, Brown & Platt has in the past
represented and is currently representing Homestead, certain of its affiliates,
including Security Capital.
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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, 1998
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
(State or other jurisdiction
of incorporation or organization)
74-2770966
(I.R.S. employer
identification no.)
2100 RiverEdge Parkway, 9th Floor
Atlanta, Georgia 30328
(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:
<TABLE>
<CAPTION>
Name of each exchange
Title of Each Class On which registered
------------------- -----------------------
<S> <C>
Shares of Common Stock, par value $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
</TABLE>
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,
1999, the aggregate market value of the Common Stock held by non-affiliates of
the registrant was $33,197,890.
At March 24, 1999, there were 38,244,546 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 1999 annual
meeting of its shareholders are incorporated by reference in Part III of this
report.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Description Page
---- ----------- ----
PART I
<C> <S> <C>
Glossary........................................................... 1
1. Business........................................................... 3
Business Strategy................................................. 3
The Company....................................................... 8
Extended Stay Market.............................................. 8
Competition....................................................... 9
Seasonality....................................................... 9
Environmental Matters............................................. 9
Governmental Regulation........................................... 10
Trademarks........................................................ 10
Insurance......................................................... 10
Agreements with Security Capital and Affiliates................... 10
Employees......................................................... 12
Directors and Officers of Homestead............................... 12
2. Properties......................................................... 16
Geographic Distribution........................................... 16
Properties Portfolio.............................................. 17
3. Legal Proceedings.................................................. 24
4. Submission of Matters to a Vote of Security Holders................ 24
PART II
Market for the Registrant's Common Equity and Related Stockholder
5. Matters............................................................ 24
6. Selected Financial Data............................................ 26
Management's Discussion and Analysis of Financial Condition and
7. Results of Operations.............................................. 28
Risk Factors...................................................... 28
Overview.......................................................... 32
Results of Operations for the Years Ended December 31, 1998, 1997
and 1996........................................................... 34
Liquidity and Capital Resources................................... 37
Impact of Year 2000............................................... 39
Seasonality and Inflation......................................... 40
Environmental Matters............................................. 40
Dividends......................................................... 40
7A. Quantitative and Qualitative Disclosures About Market Risk......... 41
8. Financial Statements and Supplementary Data........................ 41
Changes in and Disagreements with Accountants on Accounting and
9. Financial Disclosure............................................... 42
PART III
10. Directors and Executive Officers of the Registrant................. 42
11. Executive Compensation............................................. 42
12. Security Ownership of Certain Beneficial Owners and Management..... 42
13. Certain Relationships and Related Transactions..................... 42
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 43
</TABLE>
<PAGE>
GLOSSARY
The following abbreviations, acronyms or defined terms used in this Form 10-
K are defined below:
<TABLE>
<CAPTION>
Abbreviation, Acronym, or Defined Term Definition/Description
-------------------------------------- ----------------------
<S> <C>
AMEX....................................... American Stock Exchange
Archstone.................................. Archstone Communities Trust (formerly
Security Capital Pacific Trust), an investee
of Security Capital Group Incorporated
ATLANTIC................................... Security Capital Atlantic Incorporated, a
former investee of Security Capital, which
merged with Security Capital Pacific Trust
in July 1998
Average Weekly Rate........................ Average Weekly Rate is determined by dividing
room revenue by the number of guest room
days occupied for the period and multiplying
by seven.
Bridge Facility............................ The bank line of credit secured by a pledge
of a subscription receivable from Security
Capital
Comparables................................ Properties that have been fully operational
throughout both periods of comparison
EBDADT..................................... Earnings before depreciation, amortization
and deferred taxes
EBITDA..................................... Earnings before interest, income taxes,
depreciation and amortization
GAAP....................................... Generally Accepted Accounting Principles
Homestead.................................. Homestead Village Incorporated ("HSD" is The
New York Stock Exchange ticker symbol)
Homestead Village(R)....................... Registered trademark of Homestead Village
Incorporated and all references to Homestead
Village include references to such trademark
In planning and owned...................... Land sites owned and held for development
New Openings............................... Properties opened in the most recent period
of comparison
Noncomparables............................. Properties open for only a portion of the
prior period of comparison
NYSE....................................... New York Stock Exchange
Prestabilized.............................. All operating properties that do not meet the
criteria of Stabilized
PTR........................................ Security Capital Pacific Trust, which changed
its name to Archstone Communities Trust in
July 1998
PTR Subsidiaries........................... The subsidiaries of PTR acquired by Homestead
in the October 1996 mergers
RevPAR..................................... Weekly 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
Security Capital........................... Security Capital Group Incorporated,
Homestead's majority shareholder
Shares..................................... Homestead's shares of common stock
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Abbreviation, Acronym, or Defined Term Definition/Description
-------------------------------------- ----------------------
<S> <C>
Stabilized................................. Properties that have obtained 80% occupancy
for at least a one-week period or have been
open for 24 weeks
the Board.................................. Homestead Board of Directors
the Mergers................................ The October 17, 1996 series of merger
transactions pursuant to which each of
ATLANTIC, PTR and Security Capital
contributed all of their respective assets
relating to Homestead Village properties,
trademark and operating systems to Homestead
in exchange for shares of Homestead
Total Expected Investment.................. 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 or is under long-term lease 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, property taxes and
development overhead costs to be capitalized
during the development period
Working Capital Facilities................. Collectively, the two bank lines of credit
secured by suburban and urban location
properties, respectively
</TABLE>
2
<PAGE>
PART I
Item 1. Business
Business Strategy
Homestead Village Incorporated (NYSE: HSD) is committed to creating
shareholder value by becoming a leading operator of moderately priced,
extended stay lodging properties in selected target markets in the United
States. Homestead believes that the extended stay segment of the lodging
industry offers excellent growth opportunity because of:
. growing customer demand for extended stay accommodations,
. the limited number of properties that have been purposely built for
extended stay lodging, and
. rising consumer awareness of the extended stay product.
Homestead's strategy is 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, custom-built product targeted at the
business traveler on temporary assignment, undergoing relocation or in
training. Homestead Village properties, which have all been developed by
Homestead, are designed to offer locations with convenient access to major
employment centers and retail support services, and a residential environment
that is attractive, well landscaped and secure.
To become a leading provider of moderately priced, extended stay lodging,
Homestead's strategy is focused on:
. becoming the preferred brand of choice for extended stay corporate
travelers,
. increasing revenue per available room at the property level by matching
its product to customers' expectations, and
. improving operating property cash flow through its proprietary operating
systems.
Homestead believes that its product, locations, corporate commitment to
customer service and value-conscious pricing will help it meet its objectives.
Homestead is affiliated with Security Capital, which is the majority
shareholder of Homestead. Homestead's affiliation with Security Capital
provides it with access to proprietary real estate research and various other
services which Security Capital offers to its affiliates.
Recent Highlights
. During 1998, Homestead opened 49 properties consisting of 6,507 rooms
and as of December 31, 1998, had 120 Homestead Village properties in
operation representing in the aggregate 16,180 rooms in 37 cities. Also
as of December 31, 1998, Homestead had 16 Homestead Village properties
under construction totaling 2,040 rooms within eight of these cities as
well as one additional city and through the end of January 1999 had
opened five of these properties.
. Homestead's financial results showed an increase in earnings before
depreciation, amortization, and deferred taxes (EBDADT) to $40,945,000
for the year ended December 31, 1998 from $19,385,000 for the year ended
December 31, 1997, as a result of increased property operating income
due to new property openings in 1998 and a full year of results for the
40 openings in 1997. Homestead presents EBDADT as a measure of operating
performance which also takes into account the capital structure of the
company.
3
<PAGE>
. Homestead listed its stock on the New York Stock Exchange effective
April 1, 1998.
The tightening of capital markets for real estate operating companies and
lodging companies in 1998 has had an adverse effect on Homestead's ability to
continue its high growth program of acquisition of land sites and construction
of Homestead Village properties. In October 1998, Homestead reorganized its
development effort and recorded $7.24 million of special charges primarily
related to the severance of development personnel and abandonment of pursuits
of development sites due to the limited availability of additional funds for
development. Unless Homestead receives additional financing, Homestead will
have a slower growth rate in 1999 and therefore will have substantially fewer
development starts and openings than in prior years.
While Homestead did complete a common stock rights offering in January
1998, it primarily utilized short-term debt and cash flow from operations
during the remainder of the year to finance its land acquisition and
development program as, due to falling stock market prices for Homestead and
its sector, common equity was not seen as a viable capital raising
alternative. Homestead's maximization of borrowings under its bank line of
credit facilities secured by properties (the "Working Capital Facilities")
resulted in $157 million outstanding due April 23, 1999 (subsequently extended
to December 31, 2000) and $200 million outstanding on its line of credit
facility (the "Bridge Facility") due February 23, 1999 (subsequently extended
to April 23, 1999) at year end 1998. The Bridge Facility is secured by a
subscription receivable from Security Capital.
In addition, in third quarter 1998 Homestead extinguished $98 million of
convertible mortgage debt due October 2006. This mortgage debt was convertible
into approximately 8.5 million Shares. As part of this extinguishment,
Homestead incurred an additional $24 million of indebtedness with a resulting
mortgage note payable totaling $122 million with a due date of June 1999.
Therefore, Homestead's balance sheet at December 31, 1998 was comprised of
substantial short-term obligations.
At year end 1998, Homestead owed $479 million of short-term debt,
consisting of $357 million due on its bank lines of credit ($157 million due
on the Working Capital Facilities and $200 million due on the Bridge Facility)
and $122 million due on a mortgage note. Homestead also had 16 properties in
construction at December 31, 1998 with unfunded development commitments of
approximately $68 million. Homestead intends to finance the completion of the
properties under construction with cash on hand, $21 million borrowed under
the Working Capital Facilities in January 1999, $21 million in additional
capacity available under its Working Capital Facilities upon renewal, any
additional capacity available after payments made from the net proceeds of the
rights offering in excess of $200 million and cash flow from operations.
Subsequent to year end, Homestead has refinanced its short-term debt as
follows:
. On February 23, 1999, Homestead completed a sale and leaseback of 18
properties for $145 million. The proceeds of the sale were used to repay
the $122 million mortgage note debt which was due June 1999. As a result
of this repayment, eight properties which were used as collateral for
the $122 million mortgage note were subsequently pledged as collateral
for the Working Capital Facilities,
. On March 18, 1999, Homestead renewed its Working Capital Facilities
($200 million total capacity for the two lines) with an extension of the
maturity date to December 31, 2000, and
. On March 25, 1999, Homestead announced a rights offering for $225
million of common stock, the proceeds of which will be used to first
repay the $200 million Bridge Facility and then for purposes allowed
under the Working Capital Facilities. Security Capital will participate
in the rights offering. To the extent rights remain available Security
Capital has agreed to purchase enough Shares in the rights offering to
ensure that the proceeds of the offering are no less than $205 million,
based on current market prices and subject to final documentation. To
the extent Homestead raises proceeds of up to $200 million in the rights
offering from third parties or Security Capital which are used to repay
the Bridge Facility, Security Capital's obligation under its
subscription agreement for Homestead convertible subordinated debentures
will be reduced or terminated.
4
<PAGE>
Giving effect to the completion of the foregoing transactions, Homestead's
aggregate short-term debt would decrease from $479 million to approximately $3
million.
At year end 1998, Homestead's development program, in addition to the
properties under construction, consisted of 18 land sites owned and 16 sites
under pursuit. Development of the 18 land sites owned (which includes six sites
in urban metropolitan areas) is estimated to cost $354 million. Acquisition and
development of the 16 sites under pursuit is estimated to cost $200 million.
Homestead's ability to continue development on the land sites owned and its
ability to acquire and develop the 16 pursuit sites is dependent upon Homestead
obtaining additional financing. The Working Capital Facilities effectively
preclude further development beyond the properties currently under construction
without additional financing. Homestead is seeking financing from a variety of
sources to continue development of these sites and to acquire and develop the
additional sites under pursuit. Homestead may seek additional lines of credit,
issue debt or equity securities, or enter into joint venture or other
arrangements to provide for development of these properties. However, there is
no assurance that Homestead will be able to obtain such financing when required
or on acceptable terms and the incurrence of additional indebtedness by
Homestead would require the consent of its lenders.
To the extent that Homestead cannot secure adequate financing or complete
other development arrangements then it will have to discontinue the development
process on some or all of the land sites owned resulting in expensing of
carrying costs, such as interest and property taxes, and expensing of costs of
its internal development group, which could materially adversely affect
reported earnings. Similarly, if pursuits of some or all of the land sites are
abandoned, Homestead will incur write-offs of pursuit costs and loss of non-
refundable earnest money deposits. If discontinuance of development of land
sites is required or pursuits of land sites for acquisition are abandoned due
to financing constraints, Homestead intends to mitigate incurrence of expenses
and cash outflows by seeking to sell land sites, sell and assign rights to
acquire sites under pursuit, terminate personnel, or take other appropriate
actions all of which may result in additional losses for financial statement
purposes. In the event that Homestead is required to liquidate some of its real
estate holdings expeditiously, its ability to achieve a desirable sales price
could be adversely affected.
Commitment to Building a National Brand
Homestead's goal is to build a leading position within the extended stay
sector with a national brand noted for high-quality experience with facilities
located in markets convenient for corporate business travelers. The benefit of
brand recognition is the ability to attract and retain customers which will
result in increased shareholder value due to higher property-level performance.
Homestead believes that it can establish a dominant and long-term
recognizable national brand name and brand presence in the moderately priced,
extended stay lodging market place through a focus on:
. The corporate business traveler through a concentrated national and
local sales and marketing effort.
. Superior property locations and customer service.
. The Homestead proprietary operating system which provides a high-
quality, consistent experience for its customers through uniform
operating standards, a recruiting and training system that targets and
trains quality individuals, and a property reinvestment program that
ensures that Homestead properties remain up-to-date.
Focus on the Corporate Business Traveler
In an effort to capture the corporate business travelers' extended stay
demand, Homestead has established a sales and marketing team that targets
national and local businesses. The thirty-two sales and marketing professionals
supplement the marketing effort conducted at the local level by the general
managers of each
5
<PAGE>
property by establishing relationships with major corporate clients which are
national users of the extended stay product. Homestead's focus is on the
corporate business traveler and on establishing a relationship with major
corporate accounts which can be expanded to multiple properties and increased
room nights. Homestead believes that an emphasis on major national corporate
accounts is critical to maintaining occupancy levels that exceed market
averages.
In addition, in 1998 Homestead increased its access to its customers by
introducing a toll-free reservations number, 888-STAY-HSD, and connection to
the Global Distribution Systems used by travel professionals for making
reservations.
Homestead's six-year operating history and customer-level research provide
it with a competitive advantage of understanding the needs of the extended stay
corporate business traveler. In developing its extended stay lodging product,
Homestead relies on customer surveys, interviews and focus groups to identify
the specific needs and requirements of its customers. Understanding its
customers has allowed Homestead to design its properties and establish
operating procedures to meet and exceed the customers' needs and requirements.
Weekly room rates at Homestead Village properties appeal to value-conscious
corporate business travelers. Rates at Homestead properties typically range
between $249 and $449 for a standard room and compare favorably with average
weekly rates of over $500 for the majority of traditional extended stay hotels.
Weekly rates at Homestead properties will vary significantly depending on
specific market factors and the size of the room.
Proprietary Operating System
Homestead's proprietary operating system is focused on providing a uniform,
consistently high-quality experience to the corporate business traveler.
Homestead has developed and is continuously refining its operating system which
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 corporate business traveler all at an affordable
price. Homestead believes that the operating system will result in a positive
lodging experience for guests and generate a willingness to use the product
again and in multiple locations.
Homestead's operating experience has provided it with the opportunity to
standardize its operating procedures to meet the specific needs of extended
stay corporate business travelers. This standardization is aimed at both
providing a consistent guest experience and generating operating efficiencies
that are further refined as Homestead adopts "best practices" in the lodging
industry. Homestead is continuing the process of standardizing its supply
purchases, which management believes will help to generate further operating
efficiencies and reduce costs through economies of scale and volume discounts.
Homestead has invested substantially in the recruiting and training of its
personnel. Homestead currently provides training modules, which have been
purchased or developed, with topics ranging from guest services and safety to
personal selling techniques and leadership skills. Training in these areas is
conducted on a regular basis and ensures a consistent guest experience at every
property. Training design and organizational development are administered by
corporate professionals in conjunction with field trainers located within a
geographic region.
Homestead properties are designed and built to uniform plans that are driven
by the needs of the extended stay corporate business traveler. Rooms generally
contain 260 to 420 square feet of fully furnished living space, with a work
station/dining area and kitchen facilities that include a full-size
refrigerator, microwave, sink and cook-top. Timely capital expenditures as well
as its preventive maintenance program allow Homestead to maintain high-quality
and attractive rooms and properties for its customers.
Investment Strategy
Homestead believes it will be most successful by focusing specifically on
markets with a concentration of its target customers and which have high
barriers to entry such as a limited availability of quality sites and
6
<PAGE>
difficult entitlement processes. Homestead believes that over the long-term
high barriers to entry limit competition and result in sustainable cash flow
growth at the property level. Homestead's development program has targeted
markets with a high concentration of corporate customers and strong
demographic and employment growth prospects. In 1998, Homestead expanded its
development program beyond suburban sites and acquired its first development
sites located in the central business districts of New York City (three
sites), Chicago and San Francisco with the intent of developing a higher unit
count urban property. Homestead's continuance of development of these urban
sites is dependent on Homestead obtaining adequate additional financing.
Homestead's site acquisition professionals evaluate each site against a set
of 18 separate criteria where optimum standards have been established.
Homestead's properties are designed to offer excellent locations with
convenient access to major employment centers, retail and restaurant support
services and a residential environment that is attractive, well landscaped and
secure. In addition, Homestead seeks to minimize risk by entering into
contingent contracts with landowners which allow it to conduct thorough due
diligence and obtain entitlements prior to taking title to a development site.
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, Robert Morse and James
Potts, each a Managing Director, Gary DeLapp and Laura Hamilton, each a Senior
Vice President. The Investment Committee process is designed to review both
the specific investment as well as to ensure its conformity with Homestead's
investment policies and goals as set by the Board. In addition, the Board
specifically approves all investments over $15 million.
The table below illustrates the growth in investment in Homestead Village
properties over the last five years of operation and the total expected
investment in Homestead properties at December 31, 1998 (amounts in
thousands). Similar rates of growth in the future cannot be assured.
<TABLE>
<CAPTION>
Total Expected Historical Cost at December 31,
Investment ---------------------------------------------
December 31, 1994
1998 1998 1997 1996 (1) 1995 (1) (1)
-------------- ---------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Completed properties.... $ 945,375 $ 945,375 $478,936 $135,339 $ 77,537 $41,629
Properties in
development:
Properties under
construction......... 164,723 110,891 213,283 108,692 28,218 14,303
Properties in planning
and owned (2)........ 479,742 126,054 32,984 12,256 4,440 4,281
---------- ---------- -------- -------- -------- -------
Total............... $1,589,840 $1,182,320 $725,203 $256,287 $110,195 $60,213
========== ========== ======== ======== ======== =======
</TABLE>
- --------
(1) Such information aggregates the Homestead Village properties development
activity prior to the Mergers described below. The increase in cost of
properties, which occurred due to the use of purchase accounting, is
reflected on the date of the Mergers.
(2) Continuance of the development process for development sites owned is
dependent on Homestead obtaining adequate additional financing.
Homestead's 49 property completions in 1998 included its first properties
in twelve markets. Homestead made its first entry into the Southwest market of
Las Vegas (one property); into the West Coast market of Sacramento (one
property); into the Southeast markets of Birmingham, Charlotte, Memphis and
Orlando (five properties); into the Northeast markets of Boston, New York
Metro and Philadelphia (eight properties); and into the Central region markets
of Cleveland, Milwaukee and St. Louis (three properties). Homestead's rooms at
7
<PAGE>
December 31, 1998, and its key operating statistics by region for the year
ended December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Occupancy Average Weekly
Geographic Region Rooms (1) Weekly Rate RevPAR (1, 2)
----------------- ------ --------- ----------- -------------
<S> <C> <C> <C> <C>
Southwest...................... 5,418 74.3% $255 $189
West Coast..................... 2,869 75.3% $375 $283
Southeast...................... 4,165 64.1% $295 $189
Northeast...................... 2,310 65.8% $364 $240
Central........................ 1,418 65.5% $309 $202
------
Total/Averages............... 16,180 70.4% $301 $212
====== ===== ==== ====
</TABLE>
- --------
(1) Occupancy rates and weekly RevPAR are affected by the 49 new openings in
1998 and reflect in part a pre-stabilized stage of operations.
(2) Weekly revenue per available room ("RevPAR") is computed by dividing room
revenue by the number of guest room days available for the period and
multiplying by seven.
The Company
Background
The first Homestead Village(R) property was opened in 1992 as a byproduct
of the multifamily development activities of Security Capital Pacific Trust
("PTR"), now known as Archstone Communities Trust, an investee of Security
Capital. PTR identified a customer need not ideally addressed through its
traditional multifamily apartment product or through corporate apartments
operated within an apartment context. PTR 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 travelers on temporary assignment, in training or relocating.
In January 1996, Security Capital began considering ways for Security
Capital Atlantic Incorporated ("ATLANTIC"), an investee of Security Capital,
which had begun in 1995 to develop Homestead Village properties in its target
market of the Southeastern United States, 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 funding commitment agreements to provide convertible mortgage
financing towards completion of properties in construction or in planning at
the date of the Mergers and Security Capital provided interim funding for
Homestead acquisitions prior to the closing of the Mergers, all in exchange
for warrants to purchase Shares. The closing of the Mergers occurred in
October 1996.
Extended Stay Market
Homestead believes that the extended stay market represents a unique
business opportunity and that the price/value relationship has enabled the
extended stay market to achieve higher than industry average occupancy rates
and operating margins. 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 downsizing and outsourcing 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
8
<PAGE>
changes have created new accommodation needs for, among others, corporate
executives and trainees, consultants, sales representatives and relocating
individuals.
Moderately 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, moderately priced, extended stay lodging provides an
affordable, convenient and efficient lodging alternative for long-term stay
guests who would otherwise use a traditional lodging facility. Based on
published occupancy rates for other participants in the extended stay market,
Homestead believes that there is a strong demand for moderately priced,
extended stay accommodations that results in higher occupancy rates for
extended stay hotels than for comparable hotels competing in the same market.
Competition
Each Homestead Village property is, or will be, located in a developed area
that includes competing properties, including traditional hotels and corporate
apartments. The number of competitors in a particular area could have a
material adverse effect on occupancy, average weekly rates and revenue for a
Homestead Village property in that market. Competition within the extended
stay lodging market has increased substantially. In several markets where
Homestead has properties, there is intense competition for the extended stay
customer, which has already affected occupancy and RevPAR for these
properties. In addition, since the lodging industry has historically been
characterized by cyclical trends, there can be no assurance that the current
state of supply/demand fundamentals will continue into the future. Competition
within the lodging industry is based generally on convenience of location,
price, range of services and guest amenities offered and quality of customer
service. Homestead considers the reasonableness of its room rates, the
location of its properties and the services and the guest amenities provided
by it to be among the most important competitive factors in the business. A
number of other lodging chains and developers have developed or are developing
competitive extended stay properties. Homestead competes for guests and for
new development sites with certain of these established entities, which may
have greater financial resources than Homestead and better relationships with
lenders and real estate sellers. These entities 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 rates or
offer greater convenience, services or amenities, or significantly expand or
improve properties in markets in which Homestead competes, thereby materially
adversely affecting Homestead's business and results of operations.
Seasonality
The lodging industry is seasonal in nature, with the second and third
quarters generally accounting for a greater proportion of annual revenues than
the first and fourth quarters. Quarterly earnings may be adversely affected by
events beyond Homestead's control such as poor weather conditions, economic
factors and other considerations affecting travel.
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.
9
<PAGE>
Homestead has obtained 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 Americans with Disabilities Act (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.
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.
Agreements with Security Capital and Affiliates
Administrative Services Agreement
Homestead entered into the Administrative Services Agreement with Security
Capital, pursuant to which Security Capital provides Homestead with
administrative services with respect to certain aspects of Homestead's
10
<PAGE>
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.
Any arrangements under the 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 agreement,
which expires on December 31, 1999, is automatically renewed each year for a
one-year term, subject to approval by a majority of the independent members of
the Board. Homestead incurred fees of $4,213,000 for services provided under
the agreement during 1998.
Homestead believes its relationship with Security Capital under this
agreement provides it with certain advantages, including access to greater
quality and depth of resources in areas such as information systems,
insurance, cash management and legal support provided at substantial economies
of scale, than it could currently provide internally.
Security Capital Investor Agreement
Homestead and Security Capital have entered into an investor agreement
which, among other things, provides that, without having first consulted with
the nominee of Security Capital designated in writing, Homestead may not seek
Board approval of (i) Homestead's annual budget, (ii) incurring expenses in
any year exceeding (A) any line item in the annual budget by 20% and (B) the
total expenses set forth in the annual budget by 5%, (iii) acquisitions or
dispositions in a single transaction or group of related transactions where
the aggregate purchase price paid or received exceeds $5 million, (iv) new
contracts with a service provider (A) for investment management, property
management or leasing services, or (B) that reasonably contemplates annual
contract payments by Homestead in excess of $200,000, (v) the declaration or
payment of any dividend or other distribution, (vi) the approval of any
employee benefit plan pursuant to which shares of Homestead common stock or
securities convertible in such securities may be issued, (vii) the offer or
sale of any shares of stock of Homestead or any securities convertible into
shares of stock of Homestead (other than the sale or grant of any stock or
grants of options or exercise of options granted under any benefit option plan
approved by stockholders) and (viii) the incurrence, restructuring,
renegotiation or repayment of indebtedness for borrowed money in which the
aggregate amount involved exceeds $5 million. The Security Capital investor
agreement also provides that, so long as Security Capital owns at least 10% of
the outstanding Shares, Homestead may not increase the number of persons
serving on the Board to more than seven without the approval of Security
Capital. Security Capital also will be entitled to designate one or more
persons as nominees for directors of Homestead, as follows: (i) so long as
Security Capital owns at least 10% but less than 30% of the outstanding
Shares, it is entitled to nominate one person; and (ii) so long as Security
Capital owns at least 30% of the outstanding Shares, it is entitled to
nominate that number of persons as shall bear approximately the same ratio to
the total number of members of the Board as the number of Shares beneficially
owned by Security Capital bears to the total number of outstanding Shares,
provided that Security Capital shall be entitled to designate no more than two
persons so long as the Board consists of no more than seven members. Any
person who is employed by Security Capital or who is an employee, a 25%
shareholder or a director of any corporation of which Security Capital is a
25% shareholder (except for Homestead) shall be deemed to be a designee of
Security Capital. The nominee(s) of Security Capital may, but need not, be the
same person nominated by Archstone pursuant to the Archstone investor
agreement described below. Security Capital currently has reserved the right
to cause the nomination of two nominees to the Board.
The Security Capital investor agreement provides Security Capital with
registration rights pursuant to which, in specified circumstances, Security
Capital may request, and on not more than three occasions, registration of all
of Security Capital's Shares pursuant to Rule 415 under the Securities Act.
Security Capital presently owns 69.8% of Homestead's outstanding Shares.
Archstone Convertible Mortgages
At December 31, 1998, Homestead owed convertible mortgage notes to
Archstone in the amount of $221,333,620. The mortgage notes were funded
pursuant to an agreement entered into in conjunction with the Mergers. The
mortgage funding commitment under the agreement was to finance the development
of properties
11
<PAGE>
acquired by Homestead from Archstone in the Merger. The notes are
collateralized by Homestead properties (54 Homestead properties at $366.1
million of historical cost mortgaged to Archstone at December 31, 1998). The
notes 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 notes are
convertible, at the option of the holder, into Shares at a conversion ratio
equal to one Share for every $11.50 of principal amount outstanding. Deferred
financing costs and discount on the respective fundings have been fully
amortized. Archstone has no further funding commitment.
Archstone Investor Agreement
Archstone has entered into an investor and registration rights agreement
with Homestead pursuant to which Archstone is entitled to designate one person
for nomination to the Board, and Homestead will use its best efforts to cause
the election of such nominee, for so long as Archstone has the right to
convert in excess of $20 million in principal amount of convertible mortgage
notes. Such nominee may, but need not, be a person nominated by Security
Capital pursuant to the Security Capital Investor Agreement. In addition,
Homestead has granted to Archstone registration rights with respect to the
issuance upon conversion and the distribution of all of the Shares issuable
upon conversion of the convertible mortgage notes. Archstone may request three
registrations pursuant to Rule 415 promulgated under the Securities Act of all
Shares issued or issuable upon conversion of the convertible mortgage notes.
Such registrations, except for the fees and disbursements of counsel to
Archstone, shall be at the expense of Homestead.
Subscription Agreement
In June 1998, Homestead entered into a subscription agreement with Security
Capital whereby Security Capital agreed to purchase $200 million of
subordinated debentures from Homestead. This subscription agreement was
pledged as security for a $200 million bank line of credit facility referred
to as the Bridge Facility. If the subscription is called by Homestead or if
Homestead receives proceeds from any offering of securities, the proceeds must
be used first to repay the Bridge Facility and second to fund projects under
development which secure the other bank credit facilities. The debentures
would bear interest at a rate of 0.25% over the rate Homestead incurs under
its $50 million credit facility. Homestead may repurchase the debentures with
the proceeds of an equity offering within 90 days of issuance of the
debentures. On the 90th day following the issuance of the debentures the
debentures convert to Shares, on a per share basis, at the lowest of (i)
$13.931, (ii) the fair market value, based upon a trailing 20-day average, on
the date any debentures are issued, and (iii) the fair market value, based
upon a trailing 20-day average, on the date the debentures are converted
automatically into Shares. The subscription agreement expires the earlier of
June 30, 1999 or two weeks after termination of the $200 million credit
agreement. The subscription obligation will be reduced or terminated to the
extent Homestead issues equity securities to any third party, or to Security
Capital pursuant to a separate offering, including in connection with the
rights offering announced March 25, 1999, the proceeds of which are used to
repay the $200 million Bridge Facility. In conjunction with Security Capital's
entering into the subscription agreement, Homestead paid an arrangement fee to
Security Capital of $600,000.
Employees
As of December 31, 1998, Homestead employed approximately 1,700 employees
including 194 corporate professionals and administrative employees and 1,506
on-site personnel. Homestead's employees are not subject to any collective
bargaining agreements and management believes that its relationship with its
employees is good.
Directors and Officers of Homestead
Directors
Michael D. Cryan--47--Director, Co-Chairman and Chief Operating Officer of
Homestead since October 1996, where he has overall responsibility for
operations. From August 1986 to August 1996, Mr. Cryan was
12
<PAGE>
with ITT Sheraton Corporation, where his most recent position held was
Director, Executive Vice President and Chief Financial Officer.
David C. Dressler, Jr.--45--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. Mr. Dressler was Co-
Chairman of Security Capital Investment Research Incorporated from March 1995
to May 1996; Managing Director of SCG Multifamily Development from January
1994 to August 1995; Managing Director of Archstone Communities Trust from May
1992 to May 1996. From April 1993 to May 1996, he served as Managing Director
of the management company responsible for the management of Security Capital
Atlantic Incorporated.
John P. Frazee, Jr.--54--Director of Homestead since May 1996. Since August
1997, Mr. Frazee has served as Director, Chairman, President and Chief
Executive Officer of the Paging Network, Inc. (a provider of wireless
messaging and wireless information services). Mr. Frazee formerly was
President and Chief Operating Officer of Sprint Corporation; prior to the
March 1993 merger of Sprint and Centel Corporation, Mr. Frazee had been the
Chairman and Chief Executive Officer of Centel since 1972. He is a Director of
Security Capital Group Incorporated, C-Span, Dean Foods Company, and Nalco
Chemical Company. He is also a Director of the Foundation for Independent
Higher Education, a Life Trustee of Rush-Presbyterian St. Luke's Medical
Center in Chicago, and an Executive Board Member of the Edwin L. Cox School of
Business at Southern Methodist University.
Manuel A. Garcia--55--Director of Homestead since April 1997. Since May
1969, Mr. Garcia has been Chief Executive Officer of Davgar Restaurants, Inc.,
the owner/operator of ten Burger King Restaurants in central Florida, five
Pebbles Restaurants, Harvey's Bistro, and Manuel's on the 18th Restaurant in
Orlando, Florida. Mr. Garcia also is a Director of The Foundation for Orange
County Public Schools and is National Director of Cities in Schools. He is a
member of the Board of the National Conference of Christians and Jews, and
Honorary Director of the Boys' Clubs and Boy Scouts of Central Florida. Mr.
Garcia is a former Director of Security Capital Atlantic Incorporated.
John C. Schweitzer--54--Director of Homestead since April 1997, and a
Trustee of Archstone Communities Trust since 1976. Since 1974, Mr. Schweitzer
has been President of Westgate Corp., and general partner of Campbell Capital,
Ltd., a real estate and investments company in Austin, Texas. Mr. Schweitzer
serves as a Director of Regency Realty Corporation, Chase Bank of Texas, and
KLRU Public Television; he is also a Trustee of Texas Christian University.
C. Ronald Blankenship--49--Advisory Director since October 1996. Mr.
Blankenship has been the Vice Chairman and Chief Operating Officer of Security
Capital since May 1998. Mr. Blankenship was Managing Director of Security
Capital from March 1991 to May 1998. Mr. Blankenship was Managing Director of
Archstone Communities Trust from March 1991 to May 1998, and Non-Executive
Chairman from June 1997 to July 1998. From June 1991 to July 1997, Mr.
Blankenship was Chairman of Archstone Communities Trust. He is an Advisory
Trustee for Archstone Communities Trust, Director of Strategic Hotel Capital
Incorporated, CarrAmerica Realty Corp. and Storage USA, Inc., and a former
Advisory Director of Security Capital Atlantic Incorporated.
Executive Officers
Michael D. Cryan--See "Directors" above.
David C. Dressler, Jr.--See "Directors" above.
Robert J. Morse--43--Managing Director of Homestead since December 1997.
Prior thereto, from February 1997 to December 1997, Mr. Morse was President,
Franchise Division, ITT Sheraton Corporation; and from September 1995 to
February 1997, Senior Vice President and Director of Operations, ITT Sheraton
North
13
<PAGE>
American Division. From May 1992 to September 1995, he was Area Manager for
the Sheraton Boston Hotel and Towers.
James C. Potts--52--Managing Director of Homestead since July 1998, where
he is responsible for development. Prior thereto, Mr. Potts was Co-Chairman
and Chief Investment Officer for Security Capital Atlantic Incorporated from
January 1996 to July 1998 and a Director of Security Capital Atlantic
Incorporated and the management company responsible for the management of
Security Capital Atlantic Incorporated from October 1993 to July 1998. Mr.
Potts was Chairman of Security Capital Atlantic Incorporated and the
management company responsible for its management from May 1994 to December
1995; from December 1992 to April 1994, he was Managing Director of the
management company responsible for the management of Archstone Communities
Trust. Mr. Potts is a former Trustee for Archstone Communities Trust.
Paul J. Burke--45--Senior Vice President of Homestead since March 1998,
where he is responsible for urban hotel operations. Prior thereto, from July
1994 to March 1998, Mr. Burke was General Manager of the Sheraton Washington
Hotel; from January 1991 to July 1994, he was General Manager of the Sheraton
New York-Sheraton Manhattan Hotel Complex.
Gary A. DeLapp--39--Senior Vice President of Homestead since December 1996,
where he is a member of the operations group. Mr. DeLapp was Vice President of
Homestead from May 1996 to November 1996, and Vice President, Homestead
Village Managers Incorporated, from February 1996 to October 1996. Prior
thereto, from July 1983 to February 1996, Mr. DeLapp was with Vista Host,
Inc., where his most recent position was partner and Senior Vice President of
Operations.
Bryan J. Flanagan--46--Senior Vice President and Chief Accounting Officer
of Homestead since January 1999, where he is responsible for financial
operations. Mr. Flanagan was Senior Vice President and Controller of Homestead
from June 1998 to December 1998. Prior thereto, from November 1996 to June
1998, he was Senior Vice President of Archstone Communities Trust; from June
1995 to November 1996, Mr. Flanagan was responsible for the financial
operations of Security Capital Group Incorporated. From September 1987 to June
1995, Mr. Flanagan was Vice President-Financial Analysis for Marriott Hotels,
Resorts and Suites.
Brian M. Fraser--35--Senior Vice President of Homestead since March 1998,
where he oversees all aspects of human resources. Mr. Fraser was Vice
President of Homestead from December 1996 to March 1998. Prior thereto, from
November 1993 to October 1996, Mr. Fraser was Human Resources Manager for
Blockbuster Entertainment.
Bradley P. Griggs--41--Senior Vice President of Homestead since December
1998, where he is responsible for overseeing all real estate development
activities in the western region. Mr. Griggs was Vice President of Homestead
from May 1996 to December 1998. Prior to joining Homestead Village Managers
Incorporated in September 1995, from 1990 to August 1995, Mr. Griggs was a
senior executive with The Fieldstone Company. Mr. Griggs is a registered
California Architect.
Laura L. Hamilton--35--Senior Vice President of Homestead since March 1998,
where she supervises Homestead's due diligence group; from May 1996 to March
1998, Vice President of Homestead; from January 1996 to October 1996, Vice
President of Homestead Village Managers Incorporated. Prior thereto, from June
1995 to January 1996, Ms. Hamilton was Vice President of Archstone Communities
Trust, where she had been a member of the due diligence group since April
1992.
Jeffry A. Jones--40--Senior Vice President of Homestead since October 1998,
where he is responsible for development of Homestead's properties located in
urban markets. Mr. Jones was a Vice President of Homestead from May 1996 to
October 1998; he was a Land Manager with Homestead Village Managers
Incorporated from February 1995 to May 1996.
Jeffrey A. Klopf--50--Senior Vice President of Homestead since May 1996 and
Secretary since January 1996; Senior Vice President and Secretary of Archstone
Communities Trust, ProLogis Trust and Security Capital
14
<PAGE>
Group Incorporated 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, Mr. Klopf was a partner of Mayer, Brown & Platt, where he practiced
corporate and securities law.
John R. Patterson--47--Senior Vice President of Homestead since May 1996
where he is a member of the operations group. From June 1995 to October 1996,
Mr. Patterson was Senior Vice President of Homestead Village Managers
Incorporated. Prior thereto, from July 1993 to January 1995, Mr. Patterson was
a Senior Vice President in business development for NationsBank in Atlanta; he
was formerly Division President and partner of Trammell Crow Residential
Services Southeast.
Ken W. Pierce--41--Senior Vice President of Homestead since March 1997,
where he oversees all marketing functions. Prior thereto, from July 1982 to
February 1997, Mr. Pierce was with Holiday Inn Worldwide, where his last
position held was Vice President of Relationship Marketing.
Gregg A. Plouff--42--Senior Vice President of Homestead since March 1998,
where he is a member of the development group. From May 1996 to March 1998,
Mr. Plouff was Vice President of Homestead; from June 1995 to October 1996, he
was Vice President of Homestead Village Managers Incorporated. Prior thereto,
from March 1995 to May 1996, Mr. Plouff was Vice President of Archstone
Communities Trust; from July 1994 to March 1995, he was Vice President of the
management company responsible for management of Archstone Communities Trust;
from November 1993 to July 1994, he was a member of the acquisitions group of
Archstone Communities Trust.
Jerry D. Quinn--55--Senior Vice President of Homestead since December 1998,
where he is responsible for all new construction. Mr. Quinn was Vice President
of Homestead from December 1996 to December 1998. Prior thereto, from July
1994 to December 1996, Mr. Quinn was Vice President with Security Capital
Group Incorporated.
Mark E. Riley--40--Senior Vice President of Homestead since December 1998,
where he is responsible for national design. Mr. Riley was Vice President of
Homestead from May 1996 to December 1998; he was a Senior Development Manager
working on Homestead projects for Security Capital Group Incorporated from
September 1994 to May 1996. Prior thereto, from August 1993 to September 1994,
Mr. Riley was a Vice President with Southeast Lodges Development Company.
S. Scott Stewart--35--Senior Vice President, Regional Development Manager,
of Homestead since December 1998, where he is responsible for the suburban
development program for the eastern half of the United States. Mr. Stewart was
Vice President, Senior Development Manager of Homestead from May 1996 to
December 1998. Prior thereto, from December 1995 to May 1996, Mr. Stewart was
Vice President of Security Capital Atlantic Incorporated; from January 1995 to
December 1995, he was a Land Acquisitions Manager of Security Capital Atlantic
Incorporated; from 1993 to January 1995, Mr. Stewart was President of Potomac
Land and Development Company, a regional real estate enterprise based in the
Washington, D.C., area.
On January 12, 1999, Homestead announced the resignation of its chief
financial officer and is currently operating without a chief financial
officer.
15
<PAGE>
Item 2. Properties
Geographic Distribution
Homestead's operating properties and properties under construction are
located in 38 metropolitan areas in 25 states and the District of Columbia.
The table below describes the geographic distribution of Homestead's operating
and under construction property investments at December 31, 1998:
<TABLE>
<CAPTION>
Number of Properties Percentage of
---------------------------- Assets Based on
Under Total Expected
City Completed Construction Total Investment
---- --------- ------------ ----- ---------------
<S> <C> <C> <C> <C>
Southwest:
Albuquerque, NM.................. 2 -- 2 1%
Austin, TX....................... 4 -- 4 2%
Dallas, TX....................... 9 -- 9 4%
Denver, CO....................... 4 -- 4 3%
Houston, TX...................... 9 -- 9 4%
Las Vegas, NV.................... 1 -- 1 1%
Phoenix, AZ...................... 5 -- 5 3%
Salt Lake City, UT............... 3 -- 3 2%
San Antonio, TX.................. 3 -- 3 1%
--- --- --- ---
Subtotal....................... 40 -- 40 21%
=== === === ===
West Coast:
Los Angeles, CA.................. 2 2 4 3%
Orange County, CA................ 3 -- 3 2%
Portland, OR..................... 2 -- 2 2%
Sacramento, CA................... 1 -- 1 1%
San Diego, CA.................... 2 -- 2 2%
San Francisco (Bay Area), CA..... 7 1 8 7%
Seattle, WA...................... 4 -- 4 3%
--- --- --- ---
Subtotal........................ 21 3 24 20%
=== === === ===
Southeast:
Atlanta, GA...................... 8 -- 8 6%
Birmingham, AL................... 1 -- 1 1%
Charlotte, NC.................... 1 -- 1 1%
Jacksonville, FL................. 2 -- 2 1%
Memphis, TN...................... 1 1 2 1%
Miami/Ft. Lauderdale, FL......... 7 -- 7 6%
Nashville, TN.................... 2 -- 2 2%
Orlando, FL...................... 2 -- 2 2%
Raleigh, NC...................... 4 -- 4 3%
Tampa, FL........................ 3 -- 3 2%
--- --- --- ---
Subtotal........................ 31 1 32 25%
=== === === ===
Northeast:
Boston, MA....................... 3 -- 3 3%
New York Metro, NY............... 2 3 5 6%
Philadelphia, PA................. 3 -- 3 2%
Richmond, VA..................... 2 -- 2 2%
Washington, DC................... 7 3 10 8%
--- --- --- ---
Subtotal....................... 17 6 23 21%
=== === === ===
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Number of Properties Percentage of
---------------------------- Assets Based on
Under Total Expected
City Completed Construction Total Investment
---- --------- ------------ ----- ---------------
<S> <C> <C> <C> <C>
Central:
Chicago, IL..................... 3 2 5 4%
Cleveland, OH................... 1 1 2 2%
Detroit, MI..................... -- 2 2 2%
Kansas City, MO/KS.............. 3 -- 3 2%
Milwaukee, WI................... 1 -- 1 1%
Minneapolis, MN................. 2 -- 2 1%
St. Louis, MO................... 1 1 2 1%
--- --- --- ---
Subtotal...................... 11 6 17 13%
=== === === ===
Total......................... 120 16 136 100%
=== === === ===
</TABLE>
Properties Portfolio
The following table is as of December 31, 1998 for Homestead's 120
operating properties, 16 properties under construction and 18 properties in
planning and owned.
OPERATING PROPERTIES:
<TABLE>
<CAPTION>
Date Completed Rooms
-------------- -----
<S> <C> <C>
Southwest:
Albuquerque, New Mexico
Albuquerque/North (2).................................. March, 1996 141
Albuquerque/Midtown (2)................................ June, 1997 138
-----
Subtotal............................................. 279
-----
Austin, Texas
Austin/Arboretum (2)................................... July, 1995 133
Austin/Downtown/Townlake (5)........................... December, 1998 130
Austin/Midtown (2)..................................... February, 1996 145
Austin/Northwest (2)................................... October, 1996 132
-----
Subtotal............................................. 540
-----
Dallas, Texas
Dallas/Las Colinas (2)................................. January, 1996 149
Dallas/North (Tollway) Addison (2)..................... May, 1993 119
Dallas/North Arlington (2)............................. March, 1995 137
Dallas/North Central (2)............................... January, 1994 133
Dallas/North Richland Hills (2)........................ January, 1994 133
Dallas/Northeast (2)................................... August, 1992 131
Dallas/Northwest (2)................................... (1) 189
Dallas/South Arlington (2)............................. April, 1995 141
Fort Worth (2)......................................... January, 1996 97
-----
Subtotal............................................. 1,229
-----
Denver, Colorado
Denver/Aurora (2)...................................... April, 1996 137
Denver/Cherry Creek (2)................................ May, 1997 108
Denver/Inverness (2)................................... August, 1997 142
Denver/Tech Center (2)................................. April, 1996 159
-----
Subtotal............................................. 546
-----
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Date Completed Rooms
--------------- -----
<S> <C> <C>
Houston, Texas
Houston/Cypress Station (2)...... August, 1994 134
Houston/Galleria Area (5)........ September, 1998 136
Houston/Hobby South (2).......... April, 1994 133
Houston/Northwest (2)............ February, 1994 133
Houston/Park Ten (2)............. September, 1994 134
Houston/Sugarland (2)............ October, 1994 133
Houston/Westchase (2)............ July, 1994 133
Houston/Willowbrook (2).......... July, 1995 137
Houston/Medical Center (2)....... September, 1995 163
-----
Subtotal....................... 1,236
-----
Las Vegas, Nevada
Las Vegas Midtown................ August, 1998 123
-----
Phoenix, Arizona
Mesa (2)......................... December, 1997 122
Phoenix/Deer Valley (2).......... November, 1996 141
Phoenix/Metro (2)................ June, 1996 142
Scottsdale (2)................... August, 1995 120
Tempe (2)........................ April, 1996 149
-----
Subtotal....................... 674
-----
Salt Lake City, Utah
Salt Lake City/Ft. Union (2)..... October, 1997 132
Salt Lake City/South Valley (2).. June, 1997 138
Salt Lake City/Sugarhouse (5).... August, 1998 103
-----
Subtotal....................... 373
-----
San Antonio, Texas
San Antonio/Airport (2).......... July, 1995 153
San Antonio/Medical Center (2)... August, 1994 135
San Antonio/Six Flags Fiesta (2). August, 1995 130
-----
Subtotal....................... 418
-----
Total Southwest Region......... 5,418
=====
West Coast:
Los Angeles, California
Los Angeles International
Airport/El Segundo (2).......... December, 1997 150
Monrovia (2)..................... May, 1998 122
-----
272
-----
Orange County, California
Brea (5)........................... January, 1998 133
Cypress (5)...................... September, 1998 137
Irvine/Spectrum (2).............. October, 1997 149
-----
419
-----
Portland, Oregon
Beaverton (2).................... September, 1997 142
Lake Oswego (2).................. March, 1998 146
-----
288
-----
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Date Completed Rooms
--------------- -----
<S> <C> <C>
Sacramento, California
Sacramento/South Natomas (5)........................... November, 1998 143
-----
San Diego, California
San Diego/Mira Mesa (2)................................ August, 1998 140
San Diego/Mission Valley (2)........................... October, 1997 140
-----
280
-----
San Francisco (Bay Area), California
Milpitas (2)........................................... February, 1997 118
Mountain View (2)...................................... December, 1997 132
San Carlos (5)......................................... October, 1998 116
San Jose (2)........................................... May, 1998 152
San Mateo (2).......................................... March, 1997 136
San Ramon (2).......................................... May, 1998 147
Sunnyvale (2).......................................... March, 1997 144
-----
Subtotal............................................. 945
-----
Seattle, Washington
Bellevue (2)........................................... November, 1997 149
Seattle/Redmond (2).................................... November, 1997 162
Seattle/Southcenter (2)................................ January, 1998 93
North Seattle/Mountlake Terrace (2).................... January, 1998 118
-----
Subtotal............................................. 522
-----
Total West Coast Region.............................. 2,869
=====
Southeast:
Atlanta, Georgia
Atlanta/Cumberland (3)................................. May, 1997 137
Atlanta/Gwinnett Place (3)............................. October, 1997 130
Atlanta/Norcross (3)................................... July, 1996 137
Atlanta/North Druid Hills (3).......................... August, 1997 137
Atlanta/Northlake (5).................................. May, 1998 133
Atlanta/Perimeter (3).................................. May, 1997 133
Atlanta/Roswell (3).................................... December, 1997 141
Atlanta/Wildwood/Powers Ferry (5)...................... September, 1998 134
-----
Subtotal............................................. 1,082
-----
Birmingham, Alabama
Birmingham/Perimeter Park South (5).................... June, 1998 137
-----
Charlotte, North Carolina
Charlotte/Billy Graham Parkway/Coliseum (5)............ March, 1998 137
-----
Jacksonville, Florida
Jacksonville/Baymeadows (5)............................ March, 1998 134
Jacksonville/Southside (3)............................. July, 1997 137
-----
271
-----
Memphis, Tennessee
Memphis/Airport (5).................................... June, 1998 134
-----
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Date Completed Rooms
--------------- -----
<S> <C> <C>
Miami/Ft. Lauderdale, Florida
Boca Raton/Commerce (5)................................ December, 1998 141
Coral Springs (5)...................................... October, 1998 124
Ft. Lauderdale/Tamarac (3)............................. August, 1997 145
Miami Airport/Doral (3)................................ October, 1997 149
Miami/Blue Lagoon (5).................................. September, 1998 149
Plantation/Davie (3)................................... December, 1997 125
West Palm Beach (5).................................... December, 1998 137
-----
Subtotal............................................. 970
-----
Nashville, Tennessee
Nashville/Airport (3).................................. December, 1997 133
Nashville/Cool Springs (3)............................. April, 1998 137
-----
270
-----
Orlando, Florida
Orlando/Altamonte Springs (5).......................... September, 1998 134
Orlando/South (5)...................................... October, 1998 134
-----
268
-----
Raleigh, North Carolina
Raleigh/Crabtree Valley (3)............................ June, 1998 138
Durham (5)............................................. May, 1998 137
Raleigh/North (3)...................................... November, 1997 121
Research Triangle Park (3)............................. May, 1997 125
-----
Subtotal............................................. 521
-----
Tampa, Florida
Tampa/Brandon (3)...................................... July, 1997 141
Tampa/North Airport (3)................................ March, 1997 121
Clearwater (3)......................................... October, 1997 113
-----
Subtotal............................................. 375
-----
Total Southeast Region............................... 4,165
=====
Northeast:
Boston, Massachusetts
Boston/Burlington (5).................................. August, 1998 140
Boston/Marlborough (5)................................. August, 1998 135
Boston/Waltham (5)..................................... September, 1998 139
-----
414
-----
New York Metro, New York
Hanover/Parsipanny (5)................................. November, 1998 139
Shelton (5)............................................ December, 1998 139
-----
278
-----
Philadelphia, Pennsylvania
Horsham/Willow Grove (5)............................... July, 1998 136
King of Prussia (5).................................... August, 1998 141
Newark/Christiana (5).................................. February, 1998 140
-----
417
-----
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Date Completed Rooms
--------------- ------
<S> <C> <C>
Richmond, Virginia
Richmond/Innsbrook (3)................................ July, 1997 141
Richmond/Midlothian (5)............................... September, 1998 134
------
275
------
Washington, DC
Baltimore Washington International Airport (3)........ August, 1997 137
Dulles/Chantilly (3).................................. December, 1997 115
Dulles/Sterling (3)................................... August, 1998 133
Fair Oaks (3)......................................... December, 1997 133
Germantown (3)........................................ December, 1997 132
Merrifield (3)........................................ September, 1998 128
Reston-Sunset (3)..................................... August, 1998 148
------
Subtotal............................................ 926
------
Total Northeast Region.............................. 2,310
======
Central:
Chicago, Illinois
Chicago/Naperville (5)................................ December, 1997 136
Chicago/Schaumburg (5)................................ December, 1997 136
Chicago/Westmont (5).................................. February, 1998 140
------
Subtotal............................................ 412
------
Cleveland, Ohio
Cleveland/North Olmstead (5).......................... March, 1998 136
------
Kansas City, Missouri/Kansas
Kansas City/Country Club Plaza........................ March, 1998 99
Kansas City/Overland Park (5)......................... April, 1998 131
Kansas City/Shawnee Mission (2)....................... April, 1997 140
------
370
------
Milwaukee, Wisconsin
Milwaukee/Brookfield (5).............................. July, 1998 137
------
Minneapolis, Minnesota
Minneapolis/Eagan (5)................................. December, 1997 130
Minneapolis/Eden Prarie (5)........................... January, 1998 97
------
227
------
St. Louis, Missouri...................................
St. Louis Airport (5)................................. June, 1998 136
------
Total Central Region................................ 1,418
======
Total Rooms--Operating Properties................. 16,180
======
</TABLE>
PROPERTIES UNDER CONSTRUCTION:
<TABLE>
<CAPTION>
Rooms
-----
<S> <C>
West Coast:
Los Angeles, California:
Glendale (5)........................................................... 86
Torrance (5) (opened January 1999)..................................... 139
---
225
---
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Rooms
-----
<S> <C>
San Francisco (Bay Area), California:
Fremont (5) (opened January 1999)...................................... 121
-----
Total West Coast Region.............................................. 346
=====
Southeast:
Memphis, Tennessee:
Memphis/Poplar (5) (opened January 1999)............................... 134
-----
Total Southeast Region............................................... 134
=====
Northeast:
New York Metro, New York:
Meadowlands (5)........................................................ 140
Norwalk, CT (5)........................................................ 140
Woodbridge (5) (opened January 1999)................................... 140
-----
Subtotal............................................................. 420
-----
Washington, DC:
Alexandria (5) (opened January 1999)................................... 130
Gaithersburg (5)....................................................... 134
Tysons Corner (5)...................................................... 106
-----
Subtotal............................................................. 370
-----
Total Northeast Region............................................... 790
=====
Central:
Chicago, Illinois:
Vernon Hills (5)....................................................... 125
Oakbrook (5)........................................................... 136
-----
261
-----
Cleveland, Ohio:
Beachwood (5).......................................................... 142
-----
Detroit, Michigan:
Auburn Hills (5)....................................................... 134
Southfeld (5).......................................................... 134
-----
268
-----
St. Louis, Missouri:
Westport (5)........................................................... 99
-----
Total Central Region................................................. 770
=====
Total Rooms--Properties Under Construction........................... 2,040
=====
Properties in Planning and Owned:
Southwest:
Denver, Colorado
Colorado Springs (5)................................................... 88
-----
Total Southwest Region............................................... 88
=====
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Rooms
-----
<S> <C>
West Coast:
Los Angeles, California
Burbank (5)............................................................ 118
Calabasas (5).......................................................... 139
Ontario (5)............................................................ 127
Pasadena (5)........................................................... 97
Warner Center (5)...................................................... 142
-----
623
-----
San Diego, California
Rancho Bernardo (5).................................................... 132
-----
San Francisco (Bay Area), California
S. San Francisco (5)................................................... 110
San Francisco Fin. Dist. - Embarcadero Center.......................... 191
Walnut Creek (5)....................................................... 131
-----
432
-----
Total West Coast Region.............................................. 1,187
=====
Southeast:
Nashville, Tennessee
West End (5)........................................................... 126
-----
Total Southeast Region............................................... 126
=====
Northeast:
Boston, Massachusetts
Boston Tremont (4)..................................................... 198
-----
New York, New York
New York Bryant Park (40th St) (4)..................................... 305
New York Grand Central (45th St) (4)................................... 229
New York Madison Avenue (55th St) (4).................................. 199
-----
733
-----
Total Northeast Region............................................... 931
=====
Central:
Chicago, Illinois
East Ontario-Downtown Chicago (4)...................................... 242
Riverwoods (5)......................................................... 130
-----
372
-----
Minneapolis, Minnesota
Plymouth............................................................... 118
-----
Total Central Region................................................. 490
=====
Total Properties In Planning and Owned............................... 2,822
=====
</TABLE>
- --------
(1) Phase I (132 rooms) was developed in 1992 and Phase II (57 rooms) was
developed in 1995.
(2) Subject to deeds of trust securing convertible mortgage notes due to
Archstone of $221,333,620 at December 31, 1998.
(3) Pledged as collateral under a mortgage loan of $122,028,471 at December
31, 1998. On February 23, 1999, 18 of these properties were sold and
leased back and the other 8 properties were released from the lien under
the $122 million mortgage loan.
23
<PAGE>
(4) Pledged as collateral under a revolving bank line of credit agreement with
total borrowings of $29,000,000 at December 31, 1998.
(5) Pledged as collateral under a revolving bank line of credit agreement with
total borrowings of $128,080,000 at December 31, 1998.
Additionally, at December 31, 1998, Homestead had properties in planning
and under control for the development of 2,136 rooms at 16 sites for a total
estimated expected investment of approximately $200 million. Homestead has an
exclusive right (through contingent contract or letter of intent) during a
contractually agreed-upon time period to acquire land for development, subject
to removal of contingencies during the due diligence process, but does not
presently own the land. There can be no assurance that such land will be
acquired and such acquisition will be dependent on Homestead obtaining
adequate financing. The room and total expected investment information is
based on management's best estimates.
If additional financing is not obtained to continue development of land
sites, Homestead may seek to sell certain properties in planning and owned. No
assurance can be given that any sales will occur or, if such sales occur, that
the proceeds of such sale will be sufficient to cover Homestead's costs.
Homestead may seek joint venture partners for certain properties in planning
and owned. No assurance can be given that any joint venture will be
consummated or that the terms thereof will be favorable to Homestead.
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 development process and 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
Market Information
Homestead's Shares have been listed on the NYSE under the symbol "HSD"
since April 1, 1998. Prior to that time the Shares were listed on the AMEX
under the same symbol. The table below indicates the range of the high and low
sales prices of the Shares as reported in the NYSE and AMEX Composite Tape for
the periods indicated.
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
1997
First Quarter............................................. $20 7/8 $16 5/8
Second Quarter............................................ $18 1/2 $15 7/8
Third Quarter............................................. $20 1/8 $16
Fourth Quarter............................................ $18 1/4 $13 11/16
1998
First Quarter............................................. $15 3/4 $13 9/16
Second Quarter............................................ $16 $11
Third Quarter............................................. $13 13/16 $ 6 1/4
Fourth Quarter............................................ $ 8 3/16 $ 3 3/8
1999
First Quarter (through March 24, 1999).................... $ 4 3/4 $ 2 3/4
</TABLE>
At March 24, 1999, there were approximately 1,800 holders of record of the
Shares.
24
<PAGE>
Dividend Policy
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. In addition, Homestead's
line of credit arrangements restrict payment of dividends without lender
approval.
25
<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, 1998, 1997, 1996, 1995 and 1994. On October 17, 1996,
Homestead acquired the PTR Subsidiaries relating to Homestead Village
properties in the Mergers. Prior to October 17, 1996, Homestead had no
significant activities, thus substantially all 1996 results of operations
through the date of the Mergers and all of the summary selected financial
information in 1995 and prior years 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
report. Amounts provided in the table are in thousands, except share data and
statistical data.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Operations Summary:
Revenues:
Room revenue.............. $ 139,681 $ 58,397 $ 33,071 $ 18,337 $ 7,827
Other revenue............. 5,771 1,469 492 366 165
---------- -------- -------- -------- -------
Total revenues.......... 145,452 59,866 33,563 18,703 7,992
---------- -------- -------- -------- -------
Operating expenses:
Property operating
expenses (1)............. 63,339 25,089 16,166 9,229 4,252
Corporate operating
expenses................. 22,280 15,238 4,112 1,322 512
Special charges (2)....... 7,240 -- -- -- --
Depreciation and
amortization............. 34,244 12,130 4,443 2,343 845
---------- -------- -------- -------- -------
Total operating
expenses............... 127,103 52,457 24,721 12,894 5,609
---------- -------- -------- -------- -------
Operating income............ 18,349 7,409 8,842 5,809 2,383
Interest income............. 952 552 211 -- --
Interest expense, net of
capitalized interest....... (23,190) (2,190) (5,971) (2,958) (1,409)
---------- -------- -------- -------- -------
Earnings (loss) before
extraordinary item......... (3,889) 5,771 3,082 2,851 974
Extraordinary item - loss on
early extinguishment of
debt....................... (25,344) -- -- -- --
---------- -------- -------- -------- -------
Net earnings (loss)......... $ (29,233) $ 5,771 $ 3,082 $ 2,851 $ 974
========== ======== ======== ======== =======
Share Data:(3)
Weighted average shares
outstanding................ 37,639 23,578 N/A N/A N/A
Diluted weighted average
shares outstanding......... 37,639 43,502 N/A N/A N/A
Pro forma weighted average
shares outstanding......... N/A N/A 11,392 N/A N/A
Basic earnings (loss) per
share...................... $ (0.78) $ 0.24 N/A N/A N/A
Diluted earnings (loss) per
share...................... $ (0.78) $ 0.18 N/A N/A N/A
Pro forma earnings per
share...................... N/A N/A $ 0.27 N/A N/A
Financial Position:
Property and equipment, net. $1,137,869 $715,497 $255,608 $105,002 $59,099
Total assets................ $1,218,391 $783,949 $322,968 $108,965 $60,866
Lines of credit............. $ 357,080 $ 96,808 $ -- $ -- $ --
Mortgage note payable....... $ 122,028 $ -- $ -- $ -- $ --
Convertible mortgage notes
payable.................... $ 221,334 $301,606 $101,309 $ -- $ --
Other debt to affiliate..... $ -- $ -- $ -- $ 80,144 $45,131
Shareholders' equity........ $ 458,025 $328,931 $204,003 $ 22,971 $12,068
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Other Data:
EBDADT(4)................ $ 40,945 $ 19,385 $ 10,787 $ 5,194 $ 1,819
EBITDA(5)................ $ 52,593 $ 19,539 $ 13,285 $ 8,152 $ 3,228
Cash provided by (used
in):
Operating activities... $ 41,741 $ 25,976 $ 12,261 $ 6,019 $ 2,381
Investing activities... $(459,292) $(398,721) $(115,453) $(48,116) $(35,474)
Financing activities... $ 426,721 $ 368,304 $ 108,711 $ 43,065 $ 33,832
Statistical Data (for all
operating properties):
Occupancy................ 70.4% 74.7% 78.8% 76.6% 75.9%
Average weekly rate(6)... $ 301 $ 253 $ 222 $ 212 $ 186
Weekly RevPAR(7)......... $ 212 $ 189 $ 175 $ 162 $ 141
Property operating income
margin(8)............... 56.1% 57.8% 51.9% 50.7% 46.7%
</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. Prior to the Mergers on October 17, 1996,
Homestead had an agreement with a subsidiary of Security Capital for
management of its properties and paid a fee based on a percentage of
revenues.
(2) Consists primarily of expense for Homestead's reorganization of its
internal development department and abandonment of pursuits to acquire
development sites.
(3) Prior to the Mergers, the assets of Homestead were owned by subsidiaries
of PTR 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. Therefore, management does not believe that historical earnings
per share data for 1996 is meaningful. Pro forma earnings per share assume
issuance of shares for acquisition of the PTR Subsidiaries as of the
beginning of 1996 and shares issued to Security Capital and ATLANTIC were
outstanding since the Mergers closing date. See "Item 1. Business--The
Company." Pro forma earnings per share for 1996 have also been restated
using the methodology of Statement No. 128 which resulted in a $0.04
increase from prior pro forma earnings per share.
For the year ended December 31, 1999 diluted weighted average shares
outstanding are the same as basic weighted average shares outstanding as
convertible debt is not assumed to be converted and exercise of options is
not assumed as the effects are anti-dilutive in a period of loss.
(4) EBDADT means earnings before depreciation, amortization and deferred
taxes. EBDADT for Homestead is total revenues, plus interest income, less
property operating expenses, corporate overhead, non-real property
depreciation, interest expense (other than convertible debt interest
expenses) and current tax expense. EBDADT is presented on a diluted basis
which assumes conversion of the convertible mortgage notes, thus interest
expense associated with the convertible notes is not deducted in arriving
at diluted EBDADT. EBDADT does not represent cash generated from operating
activities in accordance with GAAP, is not to be considered as an
alternative to net earnings or any other GAAP measurement of operating
performance and is not necessarily indicative of cash available to fund
all cash needs. Homestead has included EBDADT herein because Homestead
believes that it is one measure used by certain investors to determine
operating cash flow. EBDADT, as calculated above, may not be comparable to
other similarly titled measures of other companies.
(5) EBITDA means earnings before interest, income taxes, depreciation and
amortization. EBITDA does not represent cash generated from operating
activities in accordance with GAAP, is not to be considered as an
alternative to net earnings or any other GAAP measurement 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.
27
<PAGE>
(6) Average weekly rate is determined by dividing room revenue by the number
of guest room days occupied for the period and multiplying by seven.
(7) Weekly 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.
(8) Property Operating Income Margin is property operating income (property
revenues less property operating expenses) divided by property revenues.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with "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.
For analysis purposes Homestead categorizes its operating properties as
"comparable," "noncomparable," or "new opening." "Comparable" means a property
open throughout both periods of comparison, "noncomparable" means a property
open for only a portion of the prior period of comparison, and "new opening"
means a property opened in the most recent period. For additional analysis
purposes Homestead also categorizes its operating properties as either
"stabilized" or "pre-stabilized." For purposes of this report, the term
"stabilized" means those properties which obtained 80% occupancy for a one-
week period or have been opened for 24 weeks and "pre-stabilized" means all
other operating properties.
The statements contained 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 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. Among the important factors
that could cause Homestead's actual results to differ materially from those
expressed in the forward-looking statements are (i) changes in general
economic conditions in its target markets that could adversely affect demand
for Homestead's properties, (ii) the effects of increased or unexpected
competition with respect to one or more properties, (iii) Homestead's ability
to open new properties on schedule which may be affected by factors outside
the control of Homestead, (iv) availability to Homestead of debt or equity
financing or other arrangements to allow development of land owned and
acquisition and development of sites under pursuit, (v) the matters described
under "--Risks Factors" and (vi) 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.
Risk Factors
Homestead will require substantial additional capital
Homestead will continue to require a substantial amount of additional
capital to finance its short-term obligations and future growth. Costs to fund
commitments on properties under construction at December 31, 1998 is
approximately $68 million. Additional expected funding required for properties
in planning and owned is approximately $354 million, and the expected funding
required to acquire and develop properties under pursuit is approximately $200
million. As a result, Homestead anticipates seeking to raise substantial
additional amounts of capital throughout 1999. Homestead may seek additional
credit facilities and may seek to issue long-term debt and additional equity
securities or enter into joint venture or other arrangements. Homestead is
currently restricted by the terms and covenants of its bank lines of credit in
the type and amount of additional indebtedness
28
<PAGE>
it may incur. No assurance can be given regarding the availability or terms of
such financing. Any future debt financings or issuances of preferred shares by
Homestead will be senior to the rights of the holders of common shares, and
any future issuances of common or preferred shares may result in the dilution
of the then existing shareholders' proportionate equity interest in Homestead.
If Homestead cannot secure adequate funding or complete other development
arrangements then it may have to discontinue the development process on some
or all of the land sites owned resulting in expensing of carrying costs, such
as interest and property taxes, and expensing of costs of its internal
development group, which could materially adversely affect reported earnings.
Similarly, if pursuits of some or all of the land sites are abandoned
Homestead may incur write-offs of pursuit costs and loss of non-refundable
earnest money deposits. If discontinuance of development of land sites is
required or pursuits of land sites for acquisition are abandoned due to
financing constraints, then Homestead intends to mitigate incurrence of
expenses and cash outflows by seeking to sell land sites, sell and assign
rights to acquire sites under pursuit, terminate personnel, or take other
appropriate actions all of which may result in additional losses for financial
statement purposes. In the event that Homestead is required to liquidate some
of its real estate holdings expeditiously, its ability to achieve a desirable
sales price could be adversely affected.
Homestead is subject to a substantial amount of indebtedness
At December 31, 1998, Homestead's total indebtedness was approximately $709
million. Homestead will be required to seek refinancing for all or a portion
of that debt or to obtain additional financing, if it is at any time unable to
generate sufficient cash flow from operations to service its debt or satisfy
other covenants under its loan agreements, which include limitations on the
amount of additional indebtedness that Homestead can incur. There can be no
assurance that any such refinancing would be possible or that any additional
financing could be obtained on terms that are favorable or acceptable to
Homestead. The amount of Homestead's indebtedness may also make Homestead more
vulnerable to economic downturns and may limit its ability to withstand
adverse changes or to capitalize on business opportunities.
Additionally, substantially all of Homestead's properties have been pledged
as collateral to secure the payment of Homestead's indebtedness. If Homestead
were to default in the payment of any of the secured indebtedness, Homestead
could lose the properties securing such debt. The loss of such properties
could have a material adverse effect on Homestead's financial condition and
results of operations.
Significant influence of principal shareholder may impact Homestead
management and operations
As of December 31, 1998, Security Capital owned approximately 69.8% of the
issued and outstanding common shares of Homestead and, therefore controls
approximately 69.8% of the vote on matters submitted for shareholder action,
including the election of directors. Pursuant to an investor agreement with
Homestead, Security Capital currently has the right to nominate up to two
directors of Homestead. Additionally, so long as Archstone owns $20 million
principal amount of convertible mortgage notes, it is entitled to nominate one
person as a director of Homestead. The directors so elected are in a position
to exercise significant influence over the affairs of Homestead if they were
to act together in the future. John C. Schweitzer, a director of Homestead, is
deemed to be a nominee of Archstone and Security Capital under the investor
agreement. Further, John P. Frazee, a director of Homestead, is a member of
the Security Capital board of directors.
For so long as Security Capital beneficially owns at least 10% of
Homestead's outstanding common shares, Security Capital has the right to
approve, among other significant matters:
(1) Homestead's annual operating budget and substantial deviations
therefrom;
(2) acquisitions or dispositions in a single transaction or group of
related transactions where the purchase price exceeds $5 million;
(3) property management arrangements;
(4) the declaration or payment of any dividend or other distribution;
29
<PAGE>
(5) the offer or sale of any shares of stock of Homestead or any
securities convertible into shares of stock of Homestead;
(6) the incurrence, restructuring, renegotiation or repayment of
indebtedness which exceeds $5 million; and
(7) the increase of the number of directors to more than seven.
Accordingly, due to the foregoing, for so long as it continues to
beneficially own at least 10% of Homestead's outstanding common shares,
Security Capital will retain significant influence over the affairs of
Homestead which may result in decisions that do not fully represent the
interests of all shareholders of Homestead.
Homestead has entered into a subscription agreement with Security Capital
whereby Security Capital has agreed to purchase $200 million of subordinated
debentures from Homestead. This subscription was pledged as security for a
$200 million bank line of credit facility referred to as the Bridge Facility.
If the subscription is called by Homestead or Homestead receives proceeds from
any offering of securities, the proceeds must be used to first repay the
Bridge Facility and second to fund projects under development which secure the
Working Capital Facilities. The debentures would bear interest at a rate of
0.25% over the rate Homestead incurs under its $50 million credit facility
(which became a $30 million facility on March 18, 1999). Homestead may
repurchase the debentures with the proceeds of an equity offering within 90
days of issuance of the debentures. On the 90th day following the issuance of
the debentures the debentures convert to common shares, on a per share basis,
at the lowest of (i) $13.931, (ii) the fair market value, based upon a trading
20-day average, on the date any debentures are issued, and (iii) the fair
market value, based upon a 20-day trading average, on the date the debentures
are converted automatically in Shares. The subscription agreement expires the
earlier of June 30, 1999 or two weeks after termination of the $200 million
credit agreement. The subscription obligation is reduced or terminated to the
extent Homestead issues equity securities to any third party, or to Security
Capital pursuant to a separate offering, including in connection with the
rights offering announced March 25, 1999, and the proceeds are used to repay
this credit facility. If the subscription is called by Homestead and if the
debentures are converted to common stock Security Capital would own
approximate 85% of the outstanding common shares of Homestead. No assurance
can be given that Security Capital will provide further financial
accommodation for Homestead. In conjunction with Security Capital's entering
into the subscription agreement, Homestead paid an arrangement fee to Security
Capital of $600,000.
Seasonal fluctuations in the lodging industry may affect Homestead's
operating results
The lodging industry is seasonal in nature, with the second and third
quarters generally accounting for a greater proportion of annual revenues than
the first and fourth quarters. Quarterly earnings may be adversely affected by
events beyond Homestead's control such as poor weather conditions, economic
factors and other considerations affecting travel.
Competition and overdevelopment could adversely affect Homestead's operations
Each Homestead Village property is, or will be, located in a developed area
that includes competing properties. The number of competitors in a particular
area could have a material adverse effect on occupancy, average weekly rates
and weekly revenue per available room. Competition within the extended stay
lodging market has increased substantially. In several markets where Homestead
has properties, there is intense competition for the extended stay customer
which has already affected occupancy and weekly revenue per available room for
these properties. In addition, since the lodging industry has historically
been characterized by cyclical trends, there can be no assurance that the
current state of supply/demand fundamentals will continue into the future.
Competition within the lodging industry is based generally on convenience of
location, price, range of services and guest amenities offered and quality of
customer service. Homestead considers the reasonableness of room rates, the
location of properties and the services and the guest amenities provided to be
among the most important competitive factors in the business. A number of
other lodging chains and developers have developed or are developing extended
stay properties. In particular, some of these entities have targeted the
moderately priced segment of the extended stay market in which Homestead
competes. Homestead competes for guests and for new development sites with
certain of these established entities which may have greater financial
resources than Homestead and better relationships with lenders and real estate
sellers. These entities may be able
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to accept more risk than Homestead can prudently manage. Further, there can be
no assurance that new or existing competitors will not significantly reduce
their rates or offer greater convenience, services or amenities or
significantly expand or improve properties in markets in which Homestead
competes, thereby materially adversely affecting Homestead's business and
results of operations.
Homestead's historical growth rate may strain its resources
Homestead has experienced rapid growth in its revenues, number of
properties and employees, and the scope of its operations. This growth has
resulted in new and increased responsibilities for management personnel, as
well as added demands on Homestead's operating and financial systems.
Homestead's growth depends on the efforts of key management personnel and
Homestead's ability to attract or develop new management personnel and to
integrate these new employees into its overall operations. If Homestead is
unable to manage growth effectively, Homestead's business and results of
operations could be materially and adversely affected.
The value of Homestead's real estate is dependent on numerous factors
Real property investments are subject to varying degrees of risk. Real
estate values are affected by a number of factors, including:
(1)changes in the general economic climate;
(2)local conditions, such as an oversupply of space or a reduction in
demand for real estate in an area;
(3)the quality and philosophy of management;
(4)competition from other available space;
(5)the ability of the owner to provide adequate maintenance and insurance;
(6)the ability of the owner to control variable operating costs;
(7)government regulations;
(8)interest rate levels;
(9)the availability of financing; and
(10)potential liability under, and changes in, environmental, zoning, tax
and other laws.
Homestead's development activities may be unsuccessful
Subject to the availability of financing, Homestead intends to continue to
pursue development activities as opportunities arise and, as a result, will be
subject to risks associated with any such development activities. These risks
include:
(1) the risk that development opportunities explored by Homestead may be
abandoned;
(2) the risk that construction costs of a project may exceed original
estimates, possibly making the project less profitable than originally
estimated;
(3) limited cash flow during the construction period;
(4) the risk that occupancy percentages and rates at a completed project
will not be sufficient to make the project profitable; and
(5) the risk that government and other approvals may not be obtained.
In case of an unsuccessful development project, Homestead's loss could exceed
its investment in the project.
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Illiquidity of real estate investments
Equity real estate investments are relatively illiquid and therefore may
tend to limit the ability of Homestead to react promptly to changes in
economic or other conditions. In addition, significant expenditures associated
with equity real estate investments, such as mortgage payments, real estate
taxes and maintenance costs, are generally not reduced when circumstances
cause a reduction in income from the investments. Further, various agreements
to which Homestead is a party, including the terms of Homestead's outstanding
indebtedness, place limitations on the ability of Homestead to sell its
properties. Thus, Homestead's ability to sell assets at any time to change its
asset base may be restricted. Further, if additional financing is not obtained
to continue development of land sites owned Homestead may seek to sell certain
properties in planning and owned. No assurance can be given that any sales
will occur or, if such sales occur, that the proceeds of such sale will be
sufficient to cover Homestead's costs. Homestead may seek joint venture
partners for certain properties in planning and owned. No assurance can be
given that any joint venture will be consummated or that the terms thereof
will be favorable to Homestead.
Uninsured losses may adversely affect Homestead
Some types of losses, such as from hurricanes may be uninsurable, or the
cost of insuring against such losses may not be economically justifiable. If
an uninsured loss occurs, Homestead could lose both the invested capital in
and anticipated revenues from the facility, but would still be obligated to
repay any recourse mortgage indebtedness on the facility.
Homestead could be subject to potential environmental liability
Under various federal, state and local laws, ordinances and regulations,
a current or previous owner, developer or operator of real estate may be
liable for the costs of removal or remediation of hazardous or toxic
substances at, on, under or in its property. The costs of removal or
remediation of such substances could be substantial. Such laws often impose
liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such hazardous substances. The
presence of such substances on Homestead's properties may adversely affect its
ability to sell such properties or to borrow using such properties as
collateral and may also have an adverse affect on Homestead's ability to pay
distributions to its shareholders.
Costs of compliance with laws may affect Homestead's financial condition
Homestead's facilities are subject to various federal, state and local
regulatory requirements, such as state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. There can be no assurance that these requirements will not
be changed or that new requirements will not be imposed, a result that could
require significant unanticipated expenditures by Homestead and could have an
adverse effect on Homestead's financial condition and results of operations.
Overview
General
Since the first Homestead Village property was opened in 1992 and through
December 31, 1998 Homestead has completed development of 120 Homestead Village
properties consisting of 16,180 rooms in 37 cities. As of December 31, 1998,
Homestead had 16 properties under construction totaling 2,040 rooms within
eight of these cities as well as one additional city. In addition, as of
December 31, 1998, Homestead owned 18 development sites and controlled through
contracts 16 development sites.
Homestead's development program resulted in opening 49 properties in 1998,
40 in 1997 and 11 in 1996. This development program and the financing
activities required to support it have had a significant impact on Homestead's
operations for the years ended 1998, 1997 and 1996 and on Homestead's
financial position as of December 31, 1998 and 1997.
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The tightening of capital markets for real estate operating companies and
lodging companies in 1998 has had an adverse effect on Homestead's ability to
continue its development program. Additionally, due to the limited
availability of other financing, Homestead primarily utilized short-term bank
line of credit borrowings in 1998 to finance development costs. The year end
1998 outstanding bank line borrowings combined with other short-term debt
gives Homestead total short-term obligations of $479 million at December 31,
1998. Subsequent to year end, Homestead has repaid $122 million of such debt
with proceeds of a sale-leaseback and obtained an extension of the bank lines
under which $157 million was outstanding at year end 1998. While the actions
taken subsequent to year end are expected to strengthen Homestead's balance
sheet, Homestead will need substantial additional financing to repay
indebtedness as it matures, develop land sites owned and acquire and develop
sites under pursuit.
Homestead's property investments from the date of the Mergers (see
"Background--1996 Mergers" below) through December 31, 1998 have been funded
primarily by $234 million from borrowings from Archstone, $98.8 million in
exercises of warrants; $357.1 million net borrowings under its bank lines of
credit; and $154.2 million from a January 1998 common stock rights offering.
Homestead's operating results are substantially influenced by (i) the
demand for and supply of extended stay lodging in Homestead's markets and
submarkets, (ii) occupancy and average weekly rate, (iii) the effectiveness of
property level operations and (iv) the pace and cost at which Homestead can
develop additional extended stay lodging properties. Capital and credit market
conditions which affect Homestead's access to and cost of capital may
influence future operating results.
Background--1996 Mergers
Prior to October 17, 1996 the operating assets of Homestead were held
primarily by the PTR Subsidiaries and one operating property, opened in mid-
1996, was held by a subsidiary of ATLANTIC. Onsite property management was
performed by a subsidiary of Security Capital and other entity management
services were performed under management agreements with subsidiaries of
Security Capital. Neither PTR nor ATLANTIC had any employees. All persons
performing services related to Homestead Village properties prior to the
Mergers were employees of the management subsidiaries of Security Capital.
Upon the closing of the Mergers, all of the PTR and ATLANTIC Homestead
Village properties 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 directly incurs the costs of all property level,
land acquisition, due diligence, development and corporate personnel.
In comparing 1998 and 1997 operating results to 1996, in addition to the
change in 1996 to internal management, the 1996 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 PTR
Subsidiaries was 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 financial
statements after the merger closing date.
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<PAGE>
Development Activity
Homestead's property development program has had a significant impact on
its financial performance during 1998, 1997 and 1996. The following table
summarizes Homestead's development activity for 1998, 1997 and 1996 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
1998 1997 1996(1)
-------- -------- --------
<S> <C> <C> <C>
Properties Under Construction:
Starts During Period
Properties................................... 15 49 42
Rooms........................................ 1,928 6,504 5,650
Completions During Period:
Properties................................... 49 40 11
Rooms........................................ 6,507 5,391 1,532
Under Construction At Year End:
Properties................................... 16 50 41
Rooms (2).................................... 2,040 6,622 5,509
Total expected investment.................... $164,723 $417,274 $264,931
Completed Properties:
Properties................................... 120 71 31
Rooms (2).................................... 16,180 9,675 4,297
Total investment, at historical cost......... $945,375 $478,936 $135,339
</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) Rooms data for 1998 reflects the most recent adjustments to configurations
as of December 31, 1998.
Recent Operating Results
Homestead expects that its results for the first quarter of 1999 will be
below management's 1999 plan. Lower than expected occupancy rates in several
of its markets has led to lower than expected revenues for properties in those
markets. Lower than expected increases in occupancy rates for newly opened
properties in the Northeast and Midwest, caused in part by adverse weather
conditions, also are expected to impact revenues. These lower than expected
results could affect Homestead's results of operations for the first quarter
of 1999.
Results of Operations for the Years Ended December 31, 1998, 1997 and 1996
Net earnings (loss) for the years ended December 31, 1998, 1997 and 1996
were ($29.2) million, $5.8 million, and $3.1 million, respectively. The net
loss in 1998 includes (i) a third quarter loss on extinguishment of debt of
$25.3 million recorded as an extraordinary item and (ii) incurrence of special
charges of $7.24 million, primarily relating to Homestead's reorganization of
its internal development department and abandonment of certain pursuits,
recorded in fourth quarter (see "--Investing and Financing Activities under
Liquidity and Capital Resources" below). A discussion of other major
components of net earnings or loss follows.
Property Operations
The following table sets forth operating performance information for the
years ended December 31, 1998, 1997 and 1996. The information is for
Homestead's total operating property portfolio. (Performance of the one
operating property acquired from ATLANTIC has been included from its opening
date of July 1, 1996 versus its
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date of acquisition in the Mergers. Inclusion of such property has an
insignificant effect on the performance data presented.)
<TABLE>
<CAPTION>
% %
Change Change
(1998 (1997
1998 over 1997) 1997 over 1996) 1996
---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C>
Weekly RevPAR........... $212 12.2% $189 8.0% $175
Average Weekly Rate..... $301 19.0% $253 13.9% $222
Occupancy............... 70.4% (5.8%) 74.7% (5.2%) 78.8%
Property Operating
Income Margin.......... 56.1% (2.9%) 57.8% 11.4% 51.9%
</TABLE>
Homestead's new property openings were the primary reason for room revenue
increases of $81.3 million (139.2%) in 1998 over 1997 and $25.3 million
(76.6%) in 1997 over 1996. Properties open for their first full year in 1998
and 1997 were the next most significant reason for room revenue increases. The
increase in room revenue was also due to increases in the average weekly rate
of $47.86 in 1998 and $30.84 in 1997. The average weekly rate increase in 1998
was partially offset by lower overall occupancy in 1998 versus 1997. The
occupancy decrease in 1998 versus 1997 is attributable to the effect of
competition in markets described below for "same store" properties for 1998.
Total property operating expenses increased $38.3 million (152.5%) in 1998
over 1997 and $8.9 million (55.2%) in 1997 over 1996, primarily due to the
increase in the number of operating properties as noted above.
Homestead Properties Fully Operating Throughout Consecutive Periods
Homestead had 31 properties which were operating throughout both 1998 and
1997 ("same store properties"). RevPAR for 1998 decreased to $192 from $193 in
1997. The RevPAR decrease was due primarily to an occupancy decrease from
79.7% to 76.4%. Average weekly rate increases of $9.54 offset most of the
occupancy effect to result in the approximate $1 RevPAR decrease. The decrease
in occupancy is attributed to competition in markets primarily in the
Southwest and an increase in Homestead's average weekly rates.
Homestead had 20 properties that were fully operational throughout both
1997 and 1996. All but one of such properties are located in Texas. RevPAR
increased 6.1% in 1997 to $188 due to an average weekly rate growth of 8.2%,
offset somewhat by a 2.0% decrease in occupancy to 78.7%. The 1997 decline in
occupancy was considered the direct result of implementing strategic pricing.
Stabilized Properties Operations
RevPAR for the 89 stabilized properties in 1998 increased to $218 from $200
for the 39 stabilized properties in 1997 an increase of 9.0%. These
improvements are primarily attributable to a 17.9% increase in average weekly
rate offset in part by a decrease in occupancy to 73.6% from 79.5%. The
decrease in occupancy is attributable to competition in markets primarily
located in the Southwest and an increase in Homestead's average weekly rates.
RevPAR for the 39 stabilized properties in 1997 increased to $200 from $176
for the 29 stabilized properties in 1996, an increase of 13.9%. These
improvements are primarily attributable to a 13.4% increase in average weekly
rate (occupancy was essentially unchanged), and operating efficiencies for
Homestead's total portfolio.
Corporate Operating Expenses
Corporate operating expense increased $7.0 million in 1998 over 1997 and
$11.1 million in 1997 over 1996. The increase in 1998 over 1997 is attributed
to the continued growth of the company since the first half of 1997 when
Homestead was still in the process of developing a corporate infrastructure in
support of a rapidly growing entity and includes costs for additional
personnel in operations, marketing and finance. The comparisons for 1997
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<PAGE>
over 1996 are affected by the fact that 1997 corporate expenses reflect a post
merger operating basis while 1996 operations consist only of the corporate
costs and management fee allocations from PTR to the PTR Subsidiaries through
the date of the Mergers. The increase in 1997 relates to the change in
corporate structure from external management to internal management and
additional corporate costs associated with the continued growth of the
company. 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 information technology, and the acquisition, development or
improvement of real estate.
Depreciation and Amortization
Depreciation and amortization increased $22.1 million (182.3%) in 1998 over
1997 and $7.7 million (173.0%) in 1997 over 1996. 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 (exclusive of
amortization) increased approximately $21.3 million (202.0%) in 1998 over 1997
and $6.3 million (147.6%) in 1997 over 1996 due to the increased number of
properties operating for each year.
Amortization expense increased $843,000 (52.8%) in 1998 over 1997 and $1.4
million (760.8%) in 1997 over 1996. Amortization of the trademarks and other
intangibles is calculated on a straight-line basis over a period of 20 years.
The increase in amortization is due to amortization of increases in the total
recorded cost of the Homestead Village trademark and other intangible assets.
Interest Income
Interest income of $952,000, $552,000 and $211,000 for 1998, 1997 and 1996,
respectively, resulted from investment of excess cash on hand. Nearly all of
the 1996 amount was earned after the Mergers.
Interest Cost
Homestead's gross interest cost includes amortization of non-cash financing
costs arising from the issuance of the warrants to obtain the commitment for
convertible mortgage notes financing and the differential between the
conversion price of the mortgage notes and the merger date value of Shares.
Exclusive of such amortized amounts Homestead's interest cost (comprised of
interest on the mortgages, amortization of premiums and discounts on the
mortgages, interest on its lines of credit borrowings, amortization of
deferred financing costs paid to obtain the lines of credit and interest on
the other debt to an affiliate) increased $15.9 million in 1998 over 1997 and
$10.9 million in 1997 over 1996. The increases are due to the increase in
investments in operating and under construction properties and the
corresponding increases in the notes payable and the lines of credit increases
used to finance the increases in investments.
Homestead's total interest cost, including the amortization of non-cash
mortgage financing costs described above, decreased $23.4 million in 1998 over
1997 and increased $61.6 million in 1997 over 1996. The 1998 decrease was due
to the greater amortization of the non-cash financing costs associated with
the mortgages in 1997 versus 1998. The 1997 increase was predominantly due to
amortization of the non-cash financing costs associated with the mortgages.
Total interest incurred was offset by capitalization of interest resulting
in a net interest expense of $23.2 million, $2.2 million and $6.0 million for
1998, 1997 and 1996, respectively. The net interest expense increase of $21.0
million in 1998 over 1997 is the result of increases in total debt and related
interest expense, relative to the amount of construction in progress during
the year, which results in a proportionate decrease in the amounts of interest
capitalized. Homestead's increased development activity in 1997 was the reason
for capitalization of nearly all interest cost incurred, resulting in a
decrease in net interest expense in 1997 of $3.8 million over 1996. Homestead
expects that a decrease in its 1999 development activity will result in a
decrease in the amount of capitalizable interest costs which will have a
negative impact on Homestead's earnings.
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<PAGE>
Liquidity and Capital Resources
Investing and Financing Activities
During the years ended December 31, 1998, 1997, and 1996, Homestead
invested $461.8 million, $388.1 million, and $113.5 million, respectively, in
Homestead Village properties and completed development of 49, 40 and 11
properties in each of these years, respectively. Financing of the investments
in 1998 was accomplished primarily by a January 1998 rights offering of common
stock, proceeds from bank lines of credit, cash flow from operations and the
final funding of the convertible mortgage notes commitments. The investments
were financed in 1997 and 1996 primarily by exercise of warrants to purchase
common stock issued in the Mergers, proceeds of the convertible mortgage note
funding commitments, proceeds from the lines of credit (beginning in 1997),
and intercompany debt prior to the Mergers in 1996.
The tightening of capital markets for real estate operating companies and
lodging companies in 1998 has had an adverse effect on Homestead's ability to
continue its high growth program of acquisition of land sites and construction
of Homestead Village properties. In October 1998, Homestead reorganized its
development effort and recorded $7.24 million of special charges primarily
related to the severance of development personnel and abandonment of certain
pursuits of development sites due the limited availability of additional funds
for development. Unless Homestead receives additional financing, Homestead
anticipates a slower growth rate in 1999 and therefore will have substantially
fewer development starts and openings than in prior years.
While Homestead completed a common stock rights offering in January 1998,
it primarily utilized short-term debt and cash flow from operations during the
remainder of the year to finance its land acquisition and development program
as, due to falling stock market prices for Homestead and its sector, common
equity was not seen as a viable capital raising alternative. Homestead's
maximization of borrowings under its Working Capital Facilities resulted in
$157 million outstanding due April 23, 1999 (subsequently extended to December
31, 2000) and $200 million outstanding on its Bridge Facility due February 23,
1999 (subsequently extended to April 23, 1999) at year end 1998.
In addition, in third quarter 1998 Homestead extinguished $98 million of
convertible mortgage debt due October 2006. This mortgage debt was convertible
into approximately 8.5 million Shares. As part of this extinguishment,
Homestead incurred an additional $24 million of indebtedness with a resulting
mortgage note payable totaling $122 million with a due date of June 1999.
Therefore, Homestead's balance sheet at December 31, 1998 was comprised of
substantial short-term obligations.
At year end 1998, Homestead owed $479 million of short-term debt,
consisting of $357 million due on its bank lines of credit ($157 million due
on the Working Capital Facilities and $200 million due on the Bridge Facility)
and $122 million due on a mortgage note. Homestead also had 16 properties in
construction at December 31, 1998 with unfunded development commitments of
approximately $68 million. Homestead intends to finance the completion of the
properties under construction with cash on hand, $21 million borrowed under
the Working Capital Facilities in January 1999, $21 million additional
capacity available under its Working Capital Facilities upon renewal, any
additional capacity available after payments made from the proceeds of the
rights offering in excess of $200 million and cash flow from operations.
Subsequent to year end, Homestead refinanced its short-term debt as
follows:
. On February 23, 1999, Homestead completed a sale and lease-back of 18 of
the 26 properties collaterizing the $122 million mortgage note.
Hospitality Properties Trust (NYSE: HPT) purchased the properties for
$145 million. Proceeds of the sale were used to repay the $122 million
debt which was due June 1999. Homestead will continue to operate the
properties under a long-term lease through 2015 with options to renew
through 2045 and pay minimum rent of approximately $16 million per year
which rent may increase based on payment of percentage rents beginning
July 2000 based on increases in revenues over a base period. Homestead
also posted a security deposit equal to one year's rent. As a result of
payment of the $122 million mortgage note, eight properties which were
used as collateral for the mortgage note were subsequently pledged as
collateral for its Working Capital Facilities, described below, to draw
approximately $21 million in additional borrowings under the line.
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<PAGE>
. On March 18, 1999, Homestead renewed its Working Capital Facilities with
an extension of the maturity date to December 31, 2000.
. On March 25, 1999, Homestead announced a rights offering for $225
million of common stock, the proceeds of which will be used to first
repay the $200 million Bridge Facility and then for purposes allowed
under the Working Capital Facilitites. Security Capital will participate
in the rights offering. To the extent rights remain available Security
Capital has agreed to purchase enough Shares in the rights offering to
ensure that the proceeds of the offering are no less than $205 million,
based on current market prices and subject to final documentation. To
the extent Homestead raises proceeds of up to $200 million in the rights
offering from third parties or Security Capital which are used to repay
the Bridge Facility, Security Capital's obligation under its
subscription agreement for Homestead convertible subordinated debentures
will be reduced or terminated.
In addition to the extension noted above, Homestead's Working Capital
Facilities were amended. The line secured by suburban properties has been
increased to $170 million total borrowing capacity from $150 million and the
sliding interest terms amended to be 2.0% to 3.0% over LIBOR and 1% to 2% over
prime or 1.5% to 2.5% over the federal funds rate. Future additional
collateral will be limited to suburban properties which are construction
complete and stabilized. The line secured by urban properties has been
decreased to $30 million total borrowing capacity from $50 million and the
interest terms amended to 3.0% over LIBOR and 2.0% over prime or 2.5% over the
federal funds rate.
The renewed and amended Working Capital Facilities require maintenance of
the following financial covenants effective with first quarter 1999:
. limiting total liabilities of no more than 55% of gross asset value, as
defined;
. limiting total indebtedness of no more than 50% of gross asset value, as
defined;
. maintaining various ratios of earnings before interest, taxes,
depreciation and amortization, as defined, to interest expense ranging
from 1.25 to 1.0 to 1.90 to 1.0;
. maintaining various ratios of earnings before interest, taxes,
depreciation and amortization, as defined, to debt service and preferred
stock dividends ranging from 1.0 to 1.0 to 1.25 to 1.0;
. maintaining various ratios of net property operating income to implied
debt service, as defined, ranging from 1.4 to 1.0 to 2.25 to 1.0;
. maintaining a minimum tangible net worth, as defined, of no less than 85%
of the year end 1998 amount, as defined, adjusted for net proceeds of
equity offerings; and
. maintaining positive net sources and uses of funds.
In addition, under the renewed and amended Working Capital Facilities
distributions or dividends on equity are prohibited; total cost, as defined,
of projects in development cannot exceed 25% of gross asset value, as defined,
in 1999 or 15% in 2000; Homestead's business activities will be limited to
development, ownership and operation of extended stay hotels; and no other
additional indebtedness other than non-recourse indebtedness may be incurred.
In addition to properties under construction at December 31, 1998,
Homestead also owned 18 development sites and had an additional 16 sites under
contractual control. Costs to develop the sites owned are estimated at $354
million. Costs to acquire and develop the sites under contractual control are
estimated at $200 million.
Capital resources in addition to those described above will be needed to
fund future developments, land acquisitions, and to repay or refinance
existing debt upon its maturity. Homestead may, subject to lender consent,
seek additional credit facilities and may seek to issue additional debt or
equity securities under its existing shelf registration statement, or
otherwise. However, there is no assurance that Homestead will be able to
obtain such financing when required or on acceptable terms. If Homestead
cannot secure adequate funding or complete other development arrangements then
it may have to discontinue the development process on some or all of the land
sites owned resulting in expensing of carrying costs, such as interest and
property taxes, and expensing of costs
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<PAGE>
of its internal development group, which could materially adversely affect
reported earnings. Similarly, if pursuits of some or all of the land sites are
abandoned Homestead may incur write-offs of pursuit costs and loss of non-
refundable earnest money deposits. If discontinuance of development of land
sites is required or pursuits of land sites for acquisition are abandoned due
to financing constraints, then Homestead intends to mitigate incurrence of
expenses and cash outflows by seeking to sell land sites, sell and assign
rights to acquire sites under pursuit, terminate personnel, or take other
appropriate actions, all of which may result in additional losses for financial
statement purposes.
Operating Activities
Net cash flow provided by operating activities increased by $15.0 million
(57.9%) for the year ended December 31, 1998 as compared to 1997 and $13.7
million (111.9%) for 1997 as compared to 1996. These increases are due
primarily to the growing number of Homestead operating properties as described
under "--Results of Operations for the Years ended December 31, 1998, 1997,
1996" as well as improvements in operations.
Impact of Year 2000
The Year 2000 issue has arisen as many existing computer programs and chip-
based embedded technology systems use only the last two digits to refer to a
year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications
could fail or create erroneous results. Homestead has adopted a Year 2000
compliance program in an attempt to minimize or prevent the number and
seriousness of any disruptions that may occur as a result of the Year 2000
issue. Homestead's compliance program includes an assessment of its hardware
and software computer systems ("information technology" systems) and embedded
systems ("non-information technology" systems such as lighting, security, fire,
card keys, phones, irrigation, elevators, and heating, ventilation, and air
conditioning systems), as well as an assessment of the Year 2000 issues
relating to third parties with which Homestead has a material relationship or
whose systems are material to the operations of Homestead's properties.
Homestead's computer hardware, operating systems, general accounting,
property management systems and principal desktop software applications are
Year 2000 compliant as certified by the various vendors. Homestead is currently
testing these information technology systems, and expects to complete the
testing phase by April 1, 1999. Based on initial testing, management does not
anticipate any Year 2000 issues that will materially impact operations or
operating results.
Homestead's property management system database software is non-compliant.
However, the property management system software vendor has stated that the
property management system does not use the date routines associated with the
underlying database software. Validation will be completed by April 1, 1999. If
the property management system does not pass the validation tests, an upgrade
will be necessary. The cost to complete the upgrade, if it is necessary to
upgrade, would approximate $250,000 and it is expected the upgrade would be
completed by end of the third quarter 1999.
Homestead's critical non-information technology systems have been
inventoried and are being assessed for Year 2000 compliance by contacting the
vendors of the systems. All non-information technology systems are expected to
be in compliance by the end of the second quarter 1999.
Homestead has surveyed its financial institutions and major vendors to
determine the extent to which Homestead is vulnerable to third parties' failure
to resolve their Year 2000 issues. Homestead will be able to more adequately
assess its third party risk when responses are received from the majority of
the entities contacted.
Management believes its planning efforts are adequate to address the Year
2000 issue and that its risks are primarily those that it cannot directly
control, including the readiness of its major vendors and financial
institutions. Homestead's most reasonably likely worst case scenario is the
failure on the part of these entities to become Year 2000 compliant which could
result in disruption in the Homestead's cash receipt and disbursement
functions, utilities and the failure of reservation systems. There can be no
guarantee, however, that the systems
39
<PAGE>
of unrelated entities upon which the Homestead's operations rely will be
corrected on a timely basis and will not have a material adverse effect on the
company.
Homestead does not have a formal contingency plan or a timetable for
implementing one. Contingency plans will be established, if they are deemed
necessary, after Homestead has adequately assessed the impact on operations
should third parties fail to properly respond to their Year 2000 issues.
Homestead's historical costs for addressing the Year 2000 issue are not
material and management does not anticipate that its future costs associated
with the Year 2000 issue will be material. Third-party costs and software
upgrades or replacements for Year 2000 issues are not expected to exceed
$500,000. Homestead does not separately track the internal costs incurred for
Year 2000 compliance issues. Such costs are principally the related payroll
costs of its information technology group. Although the cost of recently
replacing Homestead's key information technology systems was substantial, the
replacements were made to improve operational efficiency and were not
accelerated due to the Year 2000 issue. Homestead has not delayed any material
projects as a result of the Year 2000 issue. Funds expended to address the
Year 2000 issue have been made from operating cash flow.
There can be no assurances that Year 2000 remediation by Homestead or third
parties will be properly and timely completed, and failure to do so could have
a material adverse effect on Homestead, its business and its financial
condition. Homestead cannot predict the actual effects to it of the Year 2000
problem, which depends on numerous uncertainties such as: (i) whether
significant third parties properly and timely address the Year 2000 issue and
(ii) whether broad-based or systemic economic failures may occur. Failures
could include disruptions in passenger transportation or transportation
systems generally, loss of utility and/or telecommunications services, the
loss or disruption of hotel reservations made on centralized reservation
systems and errors or failures in financial transactions or payment processing
systems such as credit cards. Due to the general uncertainty inherent in the
Year 2000 problem and the company's dependence on third parties, Homestead is
unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on the company. Homestead's Year 2000
compliance program is expected to significantly reduce the level of
uncertainty about the Year 2000 issue and management believes that the
possibility of significant interruptions of normal operations should be
reduced.
Seasonality and Inflation
Based upon the operating history of Homestead properties, management
believes 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 and revenues may cause fluctuations or decreases in Homestead's
earnings during these periods.
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 1998. There can be no assurance, however, that inflation will not
affect future operating or construction costs.
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.
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. In addition,
Homestead's line of credit arrangements restrict payment of dividends without
lender approval.
40
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Homestead's exposure to market risk for changes in interest rates relates
primarily to its lines of credit facilities and variable rate mortgage note
debt. Homestead has no involvement with derivative financial instruments.
The table below provides information about Homestead's financial
instruments that are sensitive to changes in interest rates, including
estimated fair values for Homestead's interest rate sensitive liabilities as
of December 31, 1998. As the table incorporates only those exposures that
exist as of December 31, 1998, it does not consider exposures which could
arise after that date. Moreover, because there were no firm commitments to
actually sell the obligations at fair value as of December 31, 1998, the
information presented has limited predictive value. As a result, Homestead's
ultimate realized gain or loss with respect to interest rate fluctuations will
depend on the exposures that arise during a future period and prevailing
interest rates. Dollar amounts in the following table are in thousands.
<TABLE>
<CAPTION>
Expected Maturity/Principal Repayment
Nominal December 31,
Interest --------------------------------------- Total Fair
Rate 1999 2000 2001 2002 2003 Thereafter Balance Value(3)
-------- -------- ---- ---- ---- ---- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive
Liabilities:
Lines of Credit
Facilities--variable
rates (1)............. 7.30% $357,080 $-- $-- $-- $-- $ -- $357,080 $357,080
Convertible Mortgage
Notes--fixed rate..... 9.00% $ -- $-- $-- $-- $-- $221,334 $221,334 $218,363
Mortgage Note Payable--
variable rate (2)..... 7.875% $122,028 $-- $-- $-- $-- $ -- $122,028 $122,028
Other Long-Term
Obligation--fixed
rate.................. 9.74% $ 12 $ 13 $ 14 $ 16 $ 17 $ 8,003 $ 8,075 $ 8,064
</TABLE>
- --------
(1) On March 18, 1999, Homestead obtained an extension and amendment of its
Working Capital Facilities ($157,080 outstanding in the above amounts) to
a December 31, 2000 due date. The Working Capital Facilities interest
terms were amended resulting in the borrowings under the lines, based on
the present borrowings to collateral leverage ratio, bearing interest at
3% over LIBOR.
The $200 million of borrowings outstanding under the Bridge Facility
presently bear interest at 1.25% over LIBOR. On March 25, 1999 Homestead
announced a rights offering of common stock, the proceeds of which will be
used to repay the Bridge Facility and reduce the amounts outstanding under
the Working Capital Facilities.
(2) The $122 million mortgage note scheduled to mature June 1999 was repaid
with the proceeds of a sale lease-back transaction on February 23, 1999.
The note bore interest at LIBOR plus 2.25% at December 31, 1998.
(3) The estimated fair value of obligations extending beyond a one-year
maturity as of December 31, 1998 were calculated by discounting the stream
of cash payments of each obligation using a rate which, in management's
judgement, represents an interest rate obtainable by Homestead as of
December 31, 1998 on a similar instrument.
Item 8. Financial Statements and Supplementary Data
Homestead's Balance Sheet as of December 31, 1998 and 1997, and its
Statements of Operations, Shareholders' Equity and Cash Flows for the years
then ended, together with the report of Arthur Andersen LLP, independent
auditors, are included under Item 14 of this report and are incorporated
herein by reference. Homestead's Statements of Operations, Shareholders'
Equity and Cash Flows for the year ended 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. Selected quarterly
financial data is presented in Note 9 of Notes to Financial Statements.
41
<PAGE>
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--Directors and 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 1999 annual meeting of shareholders (the "1999 Proxy Statement").
Item 11. Executive Compensation
Incorporated herein by reference to the description under the captions
"Director Compensation" and "Executive Compensation" in the 1999 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 1999 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 1999 Proxy Statement.
42
<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 44 of this report
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 filed in last quarter of period covered by this report.
(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.
43
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Reports of Independent Public Accountants.................................. 45
Balance Sheets as of December 31, 1998 and 1997............................ 47
Statements of Operations for the Years Ended December 31, 1998, 1997 and
1996...................................................................... 48
Statements of Shareholders' Equity for the Years Ended December 31, 1998,
1997 and 1996............................................................. 49
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996...................................................................... 50
Notes to Financial Statements.............................................. 51
</TABLE>
44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Homestead Village Incorporated
We have audited the accompanying consolidated balance sheets of Homestead
Village Incorporated and subsidiaries, a Maryland corporation, as of December
31, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 1998. These financial statements are the responsibility of
Homestead Village Incorporated's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Homestead Village
Incorporated and subsidiaries as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
February 4, 1999
45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Homestead Village Incorporated
We have audited the accompanying statements of operations, shareholders'
equity and cash flows of Homestead Village Incorporated for the year ended
December 31, 1996. The financial statements are the responsibility of
Homestead Village Incorporated's management. Our responsibility is to express
an opinion on the financial statements 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 results of operations and cash flows of
Homestead Village Incorporated for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
February 24, 1997
46
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
BALANCE SHEETS
(In thousands, except per share amount)
<TABLE>
<CAPTION>
December 31,
--------------------
ASSETS 1998 1997
------ ---------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents (including restricted cash of
$167 in 1998 and $657 in 1997)........................ $ 12,144 $ 2,974
Accounts receivable, net of allowance of $269 in 1998
and $81 in 1997....................................... 5,910 1,970
Funds held in escrow................................... 1,701 --
Other current assets................................... 1,132 732
---------- --------
Total current assets................................. 20,887 5,676
---------- --------
Property and equipment................................... 1,186,652 733,321
Less accumulated depreciation........................... (48,783) (17,824)
---------- --------
Net investment in property and equipment................. 1,137,869 715,497
---------- --------
Deposits and pursuit costs, including $3,399 of funds
with title companies for property acquisitions in 1998
and $7,697 in 1997...................................... 7,830 12,901
Deferred loan costs, net of accumulated amortization of
$34,002 in 1998 and $43,297 in 1997..................... 1,063 632
Trademark and intangibles, net of accumulated
amortization of $4,190 in 1998 and $1,768 in 1997....... 44,279 44,447
Other assets............................................. 6,463 4,796
---------- --------
Total assets......................................... $1,218,391 $783,949
========== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Lines of credit........................................ $ 357,080 $ 96,808
Mortgage note payable.................................. 122,028 --
Development costs payable, including retainage of
$16,558 in 1998 and $21,966 in 1997................... 24,330 34,079
Accounts payable and other accrued expenses............ 19,632 8,882
Due to affiliate....................................... 335 133
Accrued interest payable to affiliates................. 1,882 2,540
Accrued real estate taxes.............................. 5,681 2,900
---------- --------
Total current liabilities............................ 530,968 145,342
Convertible mortgage notes payable to affiliates......... 221,334 301,606
Other long term liabilities.............................. 8,064 8,070
---------- --------
Total liabilities.................................... 760,366 455,018
---------- --------
Commitments and contingencies (Note 12)
Shareholders' equity:
Common stock, $.01 par value, 249,823 shares
authorized, 38,255 shares issued and outstanding in
1998 and 27,805 shares issued and outstanding in 1997. 383 278
Preferred stock, 177 shares authorized, none issued.... -- --
Additional paid-in capital............................. 474,337 318,667
(Accumulated deficit) retained earnings................ (16,135) 13,098
Less shares in escrow.................................. -- (2,253)
Less deferred compensation............................. (560) (859)
---------- --------
Total shareholders' equity........................... 458,025 328,931
---------- --------
Total liabilities and shareholders' equity........... $1,218,391 $783,949
========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Room revenue..................................... $139,681 $58,397 $33,071
Other revenue.................................... 5,771 1,469 492
-------- ------- -------
Total.......................................... 145,452 59,866 33,563
-------- ------- -------
Operating expenses:
Property operating expenses...................... 63,339 25,089 16,166
Corporate operating expenses..................... 22,280 15,238 4,112
Special charges (Note 3)......................... 7,240 -- --
Depreciation and amortization.................... 34,244 12,130 4,443
-------- ------- -------
Total operating expenses....................... 127,103 52,457 24,721
-------- ------- -------
Operating income................................... 18,349 7,409 8,842
Interest income.................................... 952 552 211
Interest expense, net of capitalized interest...... (23,190) (2,190) (5,971)
-------- ------- -------
Earnings (loss) before income taxes and
extraordinary item................................ (3,889) 5,771 3,082
Provision for income taxes......................... -- -- --
-------- ------- -------
Earnings (loss) before extraordinary item.......... (3,889) 5,771 3,082
Extraordinary item--loss on early extinguishment of
debt.............................................. (25,344) -- --
-------- ------- -------
Net earnings (loss)................................ $(29,233) $ 5,771 $ 3,082
======== ======= =======
Basic weighted average shares outstanding.......... 37,639 23,578
======== =======
Diluted weighted average shares outstanding........ 37,639 43,502
======== =======
Net earnings (loss) per share:
Basic earnings (loss) before extraordinary item.. $ (0.11) $ 0.24
Extraordinary item-loss on early extinguishment
of debt......................................... (0.67) --
-------- -------
Basic earnings (loss) per share.................. $ (0.78) $ 0.24
======== =======
Diluted earnings (loss) before extraordinary
item............................................ $ (0.11) $ 0.18
Extraordinary item-loss on early extinguishment
of debt......................................... (0.67) --
-------- -------
Diluted earnings (loss) per share................ $ (0.78) $ 0.18
======== =======
Pro forma net earnings per share (Note 1):
Pro forma weighted average shares outstanding.... 11,392
=======
Pro forma earnings per common share.............. $ 0.27
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
(In thousands, except shares data)
<TABLE>
<CAPTION>
Common Stock Retained
----------------- Additional Earnings Shares
Number Par Paid-in (Accumulated in Deferred Total
of Shares Value Capital Deficit) Escrow Compensation Equity
---------- ----- ---------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995................... -- $-- $ 18,726 $ 4,245 $ -- $ -- $ 22,971
Capital distributions,
net................... -- -- (1,201) -- -- -- (1,201)
Sale of common stock... 1,000 -- 1 -- -- 1
Sale of restricted
common stock 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 other
debt to affiliate..... -- -- 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 earnings........... -- -- -- 3,082 -- -- 3,082
---------- ---- -------- -------- ------- ------ --------
Balances at December 31,
1996................... 19,689,130 197 224,352 7,327 (26,477) (1,396) 204,003
Repurchase of
restricted common
stock................. (12,600) -- (126) -- -- -- (126)
Amortization of
deferred compensation. -- -- -- -- -- 459 459
Deferred compensation
adjustment for
forfeitures........... -- -- (78) -- -- 78 --
Release of shares from
escrow................ -- -- -- -- 24,224 -- 24,224
Other issuance of
common stock.......... 750 -- 14 -- -- -- 14
Issuance of common
stock for exercise of
warrants.............. 8,127,626 81 81,195 -- -- -- 81,276
Financing costs for
issuance of
convertible mortgage
notes................. -- -- 13,310 -- -- -- 13,310
Net earnings........... -- -- -- 5,771 -- -- 5,771
---------- ---- -------- -------- ------- ------ --------
Balances at December 31,
1997................... 27,804,906 278 318,667 13,098 (2,253) (859) 328,931
Sale of common stock--
rights offering....... 10,426,840 104 154,137 -- -- -- 154,241
Sale of restricted
stock to officer...... 31,250 1 499 -- -- (500) --
Repurchase of
restricted common
stock................. (8,450) -- (85) -- -- -- (85)
Amortization of
deferred compensation. -- -- -- -- -- 667 667
Deferred compensation
adjustment for
forfeitures........... -- -- (132) -- -- 132 --
Release of shares from
escrow................ -- -- -- -- 2,253 -- 2,253
Financing costs for
issuance of
convertible mortgage
notes................. -- -- 1,251 -- -- -- 1,251
Net loss............... -- -- -- (29,233) -- -- (29,233)
---------- ---- -------- -------- ------- ------ --------
Balances at December 31,
1998................... 38,254,546 $383 $474,337 $(16,135) $ -- $ (560) $458,025
========== ==== ======== ======== ======= ====== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net earnings (loss)........................... $(29,233) $ 5,771 $ 3,082
Adjustments to reconcile net earnings (loss)
to net cash provided by operating
activities:
Extraordinary item - loss on early
extinguishment of debt..................... 25,344 -- --
Depreciation and amortization............... 34,244 12,130 4,443
Deferred compensation....................... 667 459 115
Amortization of prepaid rent................ -- 250 50
Amortization of deferred loan costs......... 3,685 632 1,720
Change in assets and liabilities, excluding
the effects of mergers accounted for by the
purchase method in 1996:
Increase in accounts receivable, net of
change in allowance........................ (3,940) (1,160) (357)
Increase in funds held in escrow............ (1,701) -- --
Increase in other current assets............ (400) (246) (104)
Increase in accounts payable and other
accrued expenses........................... 10,750 5,701 1,212
Increase in accrued real estate taxes....... 2,781 835 1,010
Increase (decrease) in accrued interest on
convertible mortgage notes................. (658) 1,687 853
Increase (decrease) in due to affiliate..... 202 (83) 216
Other....................................... -- -- 21
-------- --------- ---------
Net cash provided by operating activities. 41,741 25,976 12,261
-------- --------- ---------
Investing activities:
Investment in properties, excluding
development costs payable.................... (461,831) (388,103) (113,461)
Decrease (increase) in deposits and pursuit
costs........................................ 5,071 (7,366) (791)
Capital distribution, net..................... -- -- (1,201)
Increase in other assets...................... (2,532) (3,252) --
-------- --------- ---------
Net cash used in investing activities..... (459,292) (398,721) (115,453)
-------- --------- ---------
Financing activities:
Proceeds from lines of credit................. 390,272 96,808 --
Payments on lines of credit................... (130,000) -- --
Deferred loan costs for lines of credit....... (3,370) (1,404) --
Proceeds from convertible mortgage notes
payable...................................... 17,013 191,750 25,242
Payment of convertible mortgage notes
payable...................................... (98,028) -- --
Payment to extinguish debt.................... (25,344) -- --
Proceeds from mortgage note payable........... 122,028 -- --
Proceeds from sale of shares, net of
expenses..................................... 154,241 -- 1,353
Repurchase of restricted common stock......... (85) (126) --
Exercise of warrants for common stock......... -- 81,276 17,524
Payments on other long-term liabilities....... (6) -- --
Proceeds from note payable to affiliate....... -- -- 6,118
Payment of notes payable to affiliate......... -- -- (6,492)
Proceeds from merger.......................... -- -- 16,564
Proceeds from other debt to affiliate......... -- -- 48,402
-------- --------- ---------
Net cash provided by financing activities. 426,721 368,304 108,711
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................... 9,170 (4,441) 5,519
Cash and cash equivalents, beginning of year... 2,974 7,415 1,896
-------- --------- ---------
Cash and cash equivalents, end of year......... $ 12,144 $ 2,974 $ 7,415
======== ========= =========
Noncash investing and financing transactions:
Loan costs resulting from issuance of
warrants and convertible mortgage debt....... $ 1,251 $ 13,310 $ 30,734
======== ========= =========
Increase in property and equipment, and
increase (decrease) in development cost
payable...................................... $ (9,750) $ 22,752 $ 4,347
======== ========= =========
Increase in property and equipment, and other
long term liabilities........................ $ -- $ 8,070 $ --
======== ========= =========
Increase in trademark and intangibles arising
from release of shares in escrow............. $ 2,253 $ 24,224 $ --
======== ========= =========
Increase in property and equipment from
capitalization of loan costs................. $ 1,249 $ 51,703 $ 1,850
======== ========= =========
Increase in net assets acquired by issuance
of common stock in merger.................... $ -- $ -- $ 58,920
======== ========= =========
Conversion of other debt to affiliate to
equity....................................... $ -- $ -- $ 35,660
======== ========= =========
Conversion of other debt to affiliate to
convertible mortgage notes payable........... $ -- $ -- $ 92,789
======== ========= =========
Conversion of convertible mortgage debt to
equity....................................... $ -- $ -- $ 16,917
======== ========= =========
Deferred tax assets arising through equity.... $ -- $ -- $ 1,362
======== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
Note 1--Description of Business and Summary of Significant Accounting Policies
Business and Organization
Homestead Village Incorporated, a Maryland corporation formed January 26,
1996 ("Homestead"), operates moderately priced, extended stay lodging
properties under the Homestead Village trademark in selected target markets in
the United States. Homestead's extended stay lodging rooms are designed to
appeal primarily to the corporate business traveler. Homestead and its
predecessor entities, which have purpose-built all Homestead Village
properties, have targeted infill locations proximate to major business centers
and convenient to services desired by its customers. As of December 31, 1998,
Homestead had developed 120 properties in 37 cities representing a total of
16,180 rooms and had an additional 16 properties under construction totaling
2,040 rooms within eight of these cities as well as one additional city.
Security Capital Group Incorporated ("Security Capital") owns 69.8% of
Homestead's outstanding common stock as of December 31, 1998. Homestead has
received significant financing from Security Capital through Security
Capital's exercise of Homestead warrants from the date of the Mergers
(described below) through October 1997 (the expiration date of the warrants),
Security Capital's participation in the January 1998 common stock rights
offering, and the use of a subscription receivable from Security Capital as
collateral for a $200 million line of credit facility. Additionally, two
investees of Security Capital have provided significant financing to Homestead
through funding of convertible mortgage notes payable since the date of the
Mergers through second quarter 1998. Security Capital also provides certain
services to Homestead under an agreement for administrative services as
described in Note 7.
1996 Mergers
On October 17, 1996 Homestead acquired, through a series of merger
transactions (the "Mergers"), the Homestead Village trademark and operating
systems necessary to develop and operate the properties from Security Capital
and extended stay lodging assets operating or to be operated under the
Homestead Village trademark from two investees of Security Capital, Security
Capital Pacific Trust ("PTR") and Security Capital Atlantic Incorporated
("ATLANTIC"). The acquisition of the trademark, operating system and
properties was through the merger of various wholly-owned subsidiaries of
Security Capital, PTR and ATLANTIC in exchange for common stock of Homestead.
The acquisition of the Security Capital subsidiaries was accounted for as a
purchase and, accordingly, the results of the Security Capital subsidiaries
have been included in Homestead's results only for periods subsequent to
October 17, 1996.
The merger of the net assets of PTR's Homestead Village Group subsidiaries
(the "PTR Subsidiaries") consisting of 54 properties (or the rights to acquire
such properties), was accounted for as a combination of entities under common
control in a manner similar to a "pooling of interests." Accordingly, 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, consisting of 26 properties
(or the rights to acquire such properties), was accounted for as a purchase
and, accordingly, the results of the ATLANTIC subsidiaries have been included
in Homestead's results only for periods subsequent to October 17, 1996.
51
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
PTR and ATLANTIC agreed to provide convertible mortgage funding commitments
(see Note 4) and Security Capital provided interim financing to Homestead
prior to the Mergers and the lease of office space for one year subsequent to
the Mergers, all in exchange for warrants to purchase Homestead common stock
(see Note 5).
Unaudited pro forma results of operations of Homestead, assuming the
purchase acquisitions of the ATLANTIC and Security Capital subsidiaries had
occurred as of the beginning of 1996, would have resulted in total revenues
for 1996 of $33,987,000 and a net loss of $472,000. Such unaudited pro forma
results give 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.
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, 1996, nor do they purport to present
the results of operations of future periods.
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 require 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 periods. 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.
New Accounting Rules
In April 1998 Statement of Position 98-5 "Reporting on the Costs of Start-
Up Activities" ("SOP 98-5") was issued which requires that costs associated
with organizational, pre-opening, and start-up activities be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998. Through the end of 1998, Homestead capitalized costs associated with
pre-opening and start-up activities and amortized such costs over a two-year
period. Homestead has adopted SOP 98-5 beginning with its 1999 fiscal year and
will write off unamortized organizational, pre-opening and startup costs
approximating $14 million as a cumulative effect of adoption of an accounting
standard in first quarter 1999. No financial statement amounts will be
restated on adoption of the new standard.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" was issued, establishing standards for the
reporting of comprehensive income and its components. The new rules, which are
effective for fiscal years beginning after December 31, 1997, do not change
the reporting of items included within net earnings such as income from
continuing operations, extraordinary items and cumulative effects of changes
in accounting principle. Other comprehensive income items are required to be
reported in the statement of shareholders' equity and include foreign currency
items, minimum pension liability adjustments,
52
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
and unrealized gains and losses on certain investments in debt and equity
securities. Homestead had no other comprehensive income items to be reported
in the accompanying statements of shareholders' equity.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued,
establishing standards for the accounting and reporting for derivative
instruments. The new rules, which become effective January 1, 2000, are not
expected to have a material impact on Homestead's financial position or
results of operations. Homestead has not entered into any derivative financial
instrument transactions.
Property and Equipment and Depreciation
Property and equipment are stated at cost. Incremental 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
following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................... 20-40 years
Furniture, fixtures and equipment............................. 3-10 years
</TABLE>
Pre-opening and start-up costs incurred related to the opening of new
properties through December 31, 1998 were capitalized and have been amortized
by the straight-line method over two years.
Long-Lived Assets and Long-Lived Assets To Be Disposed Of
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 121"), requires that long-lived assets to be held and used by an entity
be reviewed for impairment whenever the carrying amount of an asset may not be
recoverable. SFAS 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 reviews its long-lived assets for impairment on a
quarterly basis. Based on the provisions of SFAS 121, Homestead determined
that no impairment provision of the carrying cost of its properties or other
long-lived assets is necessary at December 31, 1998.
Trademarks and Intangibles
In the Mergers, Homestead acquired the Homestead Village trademark and
certain operating systems for the development and operation of Homestead
Village properties from Security Capital. These intangible assets were valued
at $48.5 million. Homestead's issuance of shares for the acquisition of the
Security Capital subsidiaries in the Mergers were issued in part directly to
Security Capital and in part to an escrow agent in proportion to the actual
funding commitments fulfilled by PTR and ATLANTIC. The amount initially
recorded as an asset by Homestead of $22 million represented the pro rata
portion of the actual funding provided by PTR and ATLANTIC as of the date of
the Mergers to the total expected funding to be provided under their funding
commitment agreements. As shares were released from escrow in proportion to
additional fundings received, additional intangible assets have been recorded.
All remaining escrowed shares were released in 1998. Homestead is amortizing
the intangible assets on the straight-line basis over a period of 20 years.
53
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred Costs
Homestead has incurred certain costs in obtaining its lines of credit. The
deferred financing costs related to the lines of credit have been deferred and
are being amortized over the terms of the respective lines of credit. Deferred
financing costs recorded in conjunction with the issuance of the warrants in
the Mergers and fundings under the convertible mortgage funding commitments
have been fully amortized.
Interest
The following summarizes Homestead's interest expense (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Lines of credit facilities................... $16,929 $ 2,137 $ --
Convertible mortgage notes................... 26,293 69,791 8,747
Mortgage note payable........................ 4,394 -- --
Convertible debentures....................... 157 -- --
Due to affiliate............................. -- -- 1,589
Other........................................ 732 9 --
------- -------- -------
Total interest cost........................ 48,505 71,937 10,336
Capitalized interest......................... (25,315) (69,747) (4,365)
------- -------- -------
Net interest expense....................... $23,190 $ 2,190 $ 5,971
======= ======== =======
Amortization of deferred financing costs
included in interest cost................... $ 2,994 $ 50,923 $ 261
======= ======== =======
</TABLE>
During 1998, 1997 and 1996, the total interest paid in cash was
$41,873,000, $18,134,000 and $5,721,000, 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
Basic earnings per share is calculated by dividing net earnings available
to common shareholders by weighted average common shares outstanding. Diluted
earnings per share is calculated by dividing adjusted earnings available to
common shareholders, assuming dilution, by adjusted weighted average common
shares outstanding. Adjusted earnings available for common shareholders adds
back all net interest expense from convertible debt. Adjusted weighted average
shares outstanding includes the dilutive effect of options and warrants using
the treasury stock method and the dilutive effect of convertible debt.
54
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
A reconciliation of the numerators and denominators used to calculate basic
and diluted earnings (loss) per share follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net earnings (loss) attributable to common shares
before extraordinary item............................. $(3,889) $ 5,771
Net convertible mortgage interest...................... -- 1,922
------- -------
Adjusted earnings (loss) before extraordinary item..... $(3,889) $ 7,693
======= =======
Weighted average shares outstanding--basic............. 37,639 23,578
Incremental options and warrants....................... -- 2,000
Conversion of convertible mortgage notes............... -- 17,924
------- -------
Adjusted weighted average shares outstanding--diluted.. 37,639 43,502
======= =======
Net earnings (loss) per share before extraordinary
item:
Basic................................................ $ (0.11) $ 0.24
======= =======
Diluted.............................................. $ (0.11) $ 0.18
======= =======
</TABLE>
For the year ended December 31, 1998 convertible debt is not assumed to be
converted and exercise of options is not assumed as the effects are anti-
dilutive in a period of loss.
Historical earnings per share data is not presented for the year ended
December 31, 1996. Prior to the Mergers 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 mortgages outstanding after the
mergers. Therefore, management does not believe historical earnings per share
is meaningful. Pro forma earnings per share for 1996, restated for the
adoption of SFAS 128, has been calculated by dividing net earnings by pro
forma weighted average shares outstanding assuming shares issued to PTR were
outstanding since the beginning of the year and shares issued to Security
Capital and ATLANTIC were outstanding since the merger date.
Note 2--Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
Completed properties: ---------- --------
<S> <C> <C>
Land.............................................. $ 191,694 $100,118
Buildings and improvements........................ 645,235 329,045
Furniture, fixtures and equipment................. 108,446 49,773
---------- --------
945,375 478,936
Properties under construction....................... 110,891 213,283
Properties in planning and owned.................... 126,054 32,984
Land held for future development.................... -- 1,463
Land held for sale.................................. 4,332 6,655
---------- --------
Total............................................. $1,186,652 $733,321
========== ========
</TABLE>
55
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 3--Special Charges
In fourth quarter 1998, in light of the difficult environment in capital
markets for real estate operating companies and lodging companies and the
resulting limited availability of new financing for additional commitments for
developments, Homestead reorganized its internal development department and
terminated approximately 40 full-time persons. In conjunction with the
severance of development personnel and changed expectations to pursue
development of certain sites under contract for acquisition, Homestead
recorded a special charge primarily for severance of personnel and abandonment
of pursuits totaling $7.24 million. As a result of these expenses, Homestead
sought, and received, an amendment of its bank lines of credit covenants for
fourth quarter 1998.
Through December 31, 1998 approximately $1.6 million of severance costs
have been paid and charged against the liability and $5.4 million of abandoned
pursuit costs have been expensed. The remaining liability is for payment of
remaining severance obligations. No other adjustments have been made to the
accrued liability.
Note 4--Debt
Lines of Credit
At December 31, 1998 Homestead had a bank revolving line of credit facility
which provided for total borrowing capacity of $150 million, subject to
collateral requirements. Borrowings outstanding at December 31, 1998 totaled
$128.1 million secured by 65 properties located in suburban metropolitan areas
with historical cost of $475.2 million. Borrowings bear interest at the
Eurodollar rate (5.63% at December 31, 1998) plus 1.5% to 2.5% per annum,
depending upon the percentage leverage of borrowings outstanding to the amount
of qualifying collateral. Alternatively, borrowings bear interest at a base
rate defined as the higher of prime rate (7.75% at December 31, 1998) plus a
margin of 0.5% to 1.5% or the federal funds rate plus a margin of 1% to 2%,
with the margin dependent on the percentage leverage of borrowings outstanding
to the amount of qualifying collateral. Average unfunded balances bear a
commitment fee of 0.375% per annum.
At December 31, 1998 Homestead also had a separate $50 million bank
revolving line of credit facility of which $29 million was outstanding based
upon collateral limitations. The line is secured by 5 land sites with
historical cost of $82.0 intended for development of Homestead Villages in
urban central business districts of major cities. Borrowings bear interest at
the Eurodollar rate plus 2.75% per annum or, alternatively, at a base rate
defined as the higher of prime rate plus 1.75% or the federal funds rate plus
2.25%. Average unfunded balances bear a commitment fee of 0.5% per annum.
The two lines above (together the "Working Capital Facilities") had due
dates of April 23, 1999, but subsequent to year end were extended, see Note
13.
On June 15, 1998 Homestead established an additional $200 million bank line
of credit facility (the "Bridge Facility") which bears interest at the
Eurodollar rate plus 1.25% or at a base rate of prime plus 0.25%. The average
unfunded balance bears a commitment fee of 0.25% per annum. Borrowings
outstanding at December 31, 1998 totaled $200 million. Homestead obtained a
subscription agreement from Security Capital for $200 million of Homestead
subordinated debentures to secure this obligation. The line, as amended, is
due April 23, 1999. If the subscription is called by Homestead or Homestead
receives proceeds from any offering of securities, the proceeds must be used
to first repay the Bridge Facility and Working Capital Facilities and second
to fund projects under development which secure the Working Capital
Facilities. The debentures would bear interest at a rate of 0.25% over the
rate Homestead incurs under the $50 million Working Capital Facility.
Homestead may repurchase the debentures with the proceeds of an equity
offering within 90 days of issuance of the debentures. On the 90th day
following the issuance of the debentures the debentures convert to Homestead
common stock, on a per share basis, at the lowest of (i) $13.931, (ii) the
fair market value, based upon a trailing 20-day average, on the date any
debentures are issued, and (iii) the fair market value, based upon a trailing
20-day average, on
56
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
the date the debentures are automatically converted into shares of common
stock. The subscription agreement expires the earlier of June 30, 1999 or two
weeks after termination of the $200 million credit agreement. The subscription
obligation will be reduced or terminated to the extent Homestead issues equity
securities to any third party, or to Security Capital pursuant to a separate
offering and the proceeds are used to repay the $200 million Bridge Facility
and any remaining proceeds are used to fund projects under development which
secure the Working Capital Facilities. In conjunction with Security Capital's
entering into the subscription agreement, Homestead paid an arrangement fee to
Security Capital of $600,000.
Homestead's weighted average stated interest rate was 7.30% and 7.87% on
borrowings outstanding as of December 31, 1998 and 1997, respectively.
The Working Capital Facilities and the Bridge Facility, as amended
effective December 31, 1998 (see Note 3--Special Charges), require maintenance
of certain financial covenants, specifically, aggregate indebtedness of no
more than 60% of gross asset value, as defined, or indebtedness secured by a
lien of no more than 60% of gross asset value, as defined. Homestead must also
maintain a minimum debt service coverage ratio of earnings before interest,
income taxes, depreciation, amortization and gains or losses on sales of
assets to cash debt service, as defined, of no less than 0.70 to 1 for the
fourth quarter of 1998, and, excluding the $200 million facility, no less than
1.0 to 1.0, and not allow stockholders equity to be less than $325 million.
Additionally, Homestead will not enter into any commitment for purchases of
land or construction of projects if such obligations exceed the available
borrowing capacity under all of the lines and internally generated excess
funds. The covenants also restrict payment of dividends without lender
approval. Homestead was in compliance with all such covenants, as amended, as
of December 31, 1998.
Convertible Mortgage Notes Payable
At December 31, 1998 Homestead owed convertible mortgage notes to Archstone
Communities Trust ("Archstone"), formerly PTR, of $221.3 million. The notes
are collateralized by Homestead properties (54 Homestead properties at $366.1
million of historical cost). The notes 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 notes are convertible, at the option of the holder,
into shares of Homestead common stock at a conversion ratio equal to one share
of common stock for every $11.50 of principal amount outstanding. In the
Mergers, Homestead obtained funding commitments from PTR and ATLANTIC which
provided for aggregate fundings of $198.8 million and $111.1 million,
respectively. Homestead called for fundings under the agreements to pay
development costs of the Homestead Village properties acquired from PTR and
ATLANTIC in the Mergers. The final amounts under both funding commitments were
received by Homestead in second quarter 1998. Face amounts of the final total
obligations were $221.3 million due to PTR and $98.0 million due to ATLANTIC.
Deferred financing costs and the discount, in the case of PTR, and the
premium, in the case of ATLANTIC, on the respective fundings have been fully
amortized. The convertible mortgage notes payable to ATLANTIC were
extinguished in third quarter 1998 as described below.
Mortgage Note
On July 6, 1998, Homestead entered into a mortgage loan purchase agreement
with ATLANTIC and Merrill Lynch Mortgage Capital Inc. ("MLMC") whereby the $98
million of Homestead convertible mortgage notes held by ATLANTIC were modified
to, among other things, eliminate their convertibility feature in exchange for
a payment of $21.4 million from Homestead to ATLANTIC. The amount paid to
ATLANTIC was based on trailing market prices of Homestead common stock at the
time the agreement was entered into, which exceeded the conversion price of
the convertible mortgage notes at that date. Homestead funded the payment with
the
57
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
proceeds received from the sale of $24 million of 7.5% convertible
subordinated debentures. Also pursuant to the mortgage loan purchase agreement
ATLANTIC sold the amended notes to MLMC for $98 million. On August 7, 1998,
Homestead converted the $98 million of mortgage notes and the $24 million of
7.5% convertible subordinated debentures into a $122 million mortgage of a
newly formed special purpose subsidiary of Homestead. The note is
collateralized by 26 Homestead properties (totaling $227.4 million of
historical cost at December 31, 1998) which were formerly collateral for the
ATLANTIC mortgage notes. The $122 million mortgage note matures June 30, 1999
and provides for interest only monthly payments of LIBOR plus 1.70% through
September 30, 1998, LIBOR plus 2.0% through November 30, 1998, and LIBOR plus
2.25% thereafter.
The transaction resulted in an early extinguishment of debt measured as the
difference between the $98 million carrying amount of the original mortgage
notes to ATLANTIC and the amount paid to extinguish the debt, including
transaction costs. Such loss on extinguishment of debt and transaction costs
amounted to $25.3 million and was recorded as an extraordinary item in the
third quarter 1998. The elimination of the conversion option attached to the
mortgage notes reduced Homestead's contingently issuable shares of common
stock by approximately 8.5 million shares.
See Note 13 regarding a sale of properties securing the mortgage note
subsequent to year end and repayment the $122 million note and all accrued
interest.
Note 5--Shareholders' Equity
Shelf Registration
In November 1998, Homestead filed a shelf registration statement with the
Securities and Exchange Commission for up to $356,402,600 of any combination
of preferred stock, debt securities and securities warrants, and up to a total
of $500,000,000 including common stock from Homestead's previous shelf
registration. The securities issuable under the registration, which was
declared effective November 23, 1998, may be offered from time to time, at
amounts, at prices and on terms to be set forth at the time of the offerings.
Common Stock Rights Offering
On January 15, 1998, Homestead completed a rights offering consisting of
10,426,840 common shares at $15 per share resulting in gross proceeds of
$156,402,600. The rights offering was part of Homestead's November 1997
$300,000,000 common stock shelf registration. After costs of the offering,
which include a fee of 1% of gross proceeds to Security Capital Markets Group
Incorporated, a wholly-owned subsidiary of Security Capital, net proceeds to
Homestead were approximately $154.2 million. Security Capital purchased
8,429,225 shares in the rights offering (80.8% of the offered shares) at the
same price paid by the public.
Stock Based Compensation Plans
In 1996, Homestead established two stock compensation plans, the 1996 Long-
Term Incentive Plan (the "Incentive Plan") and the 1996 Outside Directors
Plans (the "Outside Directors Plan"). Homestead elected to account for these
plans under Accounting Principle Board Opinion No. 25 Accounting for Stock
Issued to Employees, under which compensation costs are recognized as equal to
the difference between the fair value of the Homestead stock at the date of
grant or sale and the exercise or sale price. Total stock-based compensation
expense related to these plans for 1998, 1997 and 1996 is $346,000, $158,000
and $115,000, respectively, which is included in corporate operating expenses
in the accompanying statements of operations.
Had compensation cost for the grants of stock options been determined
consistent with Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), Homestead's net
earnings of $3,082,000 for the year ended December 31, 1996 would have been
reduced to
58
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
$3,014,000 and pro forma earnings per share to $0.26. The pro forma effect of
SFAS 123 for 1998 and 1997 is summarized as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Net earnings (loss) before extraordinary item:
As reported............................................ $(3,889) $5,771
======= ======
Pro forma.............................................. $(5,445) $5,392
======= ======
Basic earnings (loss) per share:
As reported............................................ $ (0.11) $ 0.24
======= ======
Pro forma.............................................. $ (0.14) $ 0.23
======= ======
Diluted earnings (loss) per share:
As reported............................................ $ (0.11) $ 0.18
======= ======
Pro forma.............................................. $ (0.14) $ 0.17
======= ======
</TABLE>
Homestead may grant 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. At December 31, 1998, 107,307 and 84,000 shares,
respectively, were available for future grant under the Incentive Plan and
Outside Directors Plan. The Incentive Plan options granted vest over four to
five years and the Outside Directors Plan options vest upon grant. A summary
of the status of Homestead's two fixed stock compensation plans as of December
31, 1998, 1997 and 1996 and changes during those years is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- -----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Incentive Plan & Outside Directors Plan Shares Price Shares Price Shares Price
--------------------------------------- --------- --------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year.................. 2,721,561 $15.39 584,000 $11.18 -- $ --
Granted................. 1,791,482 $ 6.88 2,180,061 $16.42 584,000 $11.18
Exercised............... -- $ -- -- $ -- -- $ --
Forfeited............... (811,670) $15.13 (42,500) $10.71 -- $ --
--------- --------- -------
Outstanding at end of
year..................... 3,701,373 $11.33 2,721,561 $15.39 584,000 $11.18
========= ========= =======
Exercisable at end of
year..................... 54,250 $12.19 10,000 $14.35 4,000 $10.00
========= ========= =======
</TABLE>
The weighted average fair value of options granted in the years ended
December 31, 1998, 1997 and 1996 were $3.42, $6.12, and $6.58, respectively.
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Option Remaining Average Option Average
Shares Contractual Exercise Shares Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$4.28................... 1,274,837 10.0 $ 4.28 --
$ 5.16 to $10.97........ 382,500 8.1 $ 9.86 34,250 $10.00
$13.03 to $16.00........ 390,452 9.0 $14.17 14,000 $15.37
$16.19 to $18.19........ 1,653,584 8.8 $16.44 6,000 $17.25
--------- ------
Totals.................. 3,701,373 9.1 $11.33 54,250 $12.19
========= ======
</TABLE>
59
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 used for grants in 1998, 1997 and 1996, respectively;
risk-free interest rates of 4.66%, 5.76% and 6.23%; no expected dividend
yields; expected lives of 4.5, 5.0 and 5.5 years; expected volatility of 53%,
30% and 37%.
Warrants
Homestead issued a total of 10,000,000 warrants on the date of the Mergers
which entitled 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 (See Note 4).
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 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 interest cost. The value attributable
to the interim financing provided by Security Capital to Homestead of
$1,589,000 has been charged to interest expense in 1996. The value of the use
of office facilities for one year was determined by management to be $300,000
and was charged to corporate operating expense over a period of one year ended
October 1997.
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 had the right under the 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. Security Capital
also acquired additional warrants in open market purchases. Upon expiration of
the warrants on October 29, 1997 Security Capital had exercised 8,121,628
warrants resulting in total proceeds of $81,216,000. Third party holders
exercised 1,760,273 warrants resulting in total proceeds of $17,603,000
through October 29, 1997. A total of 118,099 warrants expired unexercised.
Rights Agreement
On May 16, 1996, the Homestead Board of Directors declared and paid a
dividend of one purchase right as defined per the Rights Agreement for each
share of Homestead common stock outstanding to the holders of Homestead common
stock of record on 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
Homestead's Restated Charter 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 or Archstone) 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, 1998, Homestead had, for federal income tax reporting
purposes, net operating loss carryforwards of approximately $86,000,000, which
expire $4,200,000 in the year 2011, $24,800,000 in the year 2017 and
$57,000,000 in the year 2018.
60
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Significant components of Homestead's deferred tax assets and liabilities
as of December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Deferred tax assets:
Deferred financing costs............................. $ 17,322 $12,708
Mortgages and other liabilities...................... 6,274 2,886
Net operating loss................................... 29,144 6,819
-------- -------
$ 52,740 $22,413
Deferred tax liabilities:
Depreciable assets................................... (23,078) (6,877)
-------- -------
Valuation allowance.................................... (29,662) (15,536)
-------- -------
Net noncurrent deferred tax asset...................... $ -- $ --
======== =======
</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; (2)
the difference in the carrying amount of the convertible mortgage notes and
other liabilities for financial reporting purposes and the amount recognized
for tax purposes; and (3) 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 Mergers 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 the Mergers,
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 was included
in consolidated tax returns 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
(loss) before income taxes and extraordinary item are (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Statutory rate applied to income (loss) before
income taxes.................................. $(1,322) $1,962 $1,048
Effect of PTR income included in other tax
returns....................................... -- -- (1,441)
Effect of Homestead losses included in other
tax returns................................... -- -- 36
Effect of permanent differences................ 1,065 616 107
------- ------ ------
(257) 2,578 (250)
Provision of valuation allowance............... 257 (2,578) 250
------- ------ ------
Income tax expense............................. $ -- $ -- $ --
======= ====== ======
</TABLE>
Note 7--Related Party Transactions
Administrative Services Agreement
Homestead and Security Capital have an administrative services agreement
(the "Administrative Services Agreement"), pursuant to which Security Capital
provides Homestead with administrative services with respect
61
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. 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. Total administrative services fees for 1998,
1997 and 1996 were $4,213,000, $2,320,000 and $375,000, respectively. The
Administrative Services Agreement, which expires December 31, 1999, is
renewable for a one-year term, subject to approval by a majority of the
independent 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 resources, in areas such as research, information
systems, insurance, cash management and legal support provided at substantial
economies of scale.
REIT and Property Management Agreements
Prior to the Mergers in 1996 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"), both subsidiaries of
Security Capital.
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 cash flow as defined. Such fees included in corporate
operating expenses were $1,412,000 for the year ended December 31, 1996.
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 included in
property operating expenses amounted to $1,737,000 for the year ended December
31, 1996.
Interim Financing Agreement
During the period from May 21, 1996 (the date of the Mergers agreement) to
October 17, 1996 (the closing date of the Mergers), 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 0.25% per annum. Homestead borrowed approximately $6.2
million under this arrangement, including interest advanced under the note,
which was repaid at the closing date of the Mergers.
Note 8--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 judgement 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
Homestead's financial instruments, which include cash and cash equivalents,
accounts receivable, other assets, development costs
62
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
payable, accounts payable and accrued expenses approximate fair value as of
December 31, 1998 and 1997 because of the short maturity of these instruments.
Similarly, the carrying value of lines of credit balances and the carrying
value of the mortgage note payable approximate fair value at the balance sheet
dates due to their short-term maturities and since the interest rates
fluctuate based on published market rates.
At December 31, 1998, the estimated fair value and the actual carrying
value of the Homestead convertible mortgage notes payables were $218.4 million
and $221.3 million, respectively. Also at December 31, 1998 the estimated fair
value and the actual carrying value of the other long-term liabilities were
$8,064,000 and $8,075,000, respectively.
Note 9--Savings Plans
Homestead has a savings plan which qualifies under Section 401(k) of the
Internal Revenue Code. The plan allows eligible employees to contribute up to
20% of their pretax salary, subject to the Internal Revenue Services annual
deferral limit ($10,000 in 1998). Beginning in 1997, Homestead matched half of
the first 6% of the employee's contribution. The matching contribution is
invested in shares of Homestead common stock and vests over an employee's
initial five-year period of service. In 1998 and 1997 Homestead's matching
contribution totaled $397,000 and $223,000, respectively.
The Board also established and approved the adoption of the Nonqualified
Savings Plan ("NSP") to provide benefits for a select group of management or
highly compensated employees, effective January 1, 1998. The purpose of the
NSP is to allow the employee the opportunity to defer the receipt and income
taxation of a portion of compensation in excess of the amount permitted under
the 401(k) Plan. Under the NSP, these employees may defer up to 35% of their
annual salary and 100% of their annual target bonus. Under the NSP and in
coordination with the 401(k) Plan, Homestead will match half of the first 6%
of the employee's annual compensation since highly compensated employees were
limited to a 3% contribution in the 401(k) Plan in 1998. The matching
contribution vests in the same manner as the 401(k) Plan.
Note 10--Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data (in thousands, except per share amounts)
for 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
March 31 June 30 September 30 December 31 Total
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1998:
Revenues.............. $27,788 $34,067 $ 40,203 $ 43,394 $145,452
======= ======= ======== ======== ========
Earnings (loss) before
extraordinary item... $ 1,688 $ 3,375 $ 1,854 $(10,806) $ (3,889)
Extraordinary item.... $ -- $ -- $(25,344) $ -- $(25,344)
------- ------- -------- -------- --------
Net earnings (loss)... $ 1,688 $ 3,375 $(23,490) $(10,806) $(29,233)
======= ======= ======== ======== ========
Basic earnings (loss)
per share............ $ 0.05 $ 0.09 $ (0.61) $ (0.28) $ (0.78)
======= ======= ======== ======== ========
Diluted earnings
(loss) per share..... $ 0.05 $ 0.09 $ (0.61) $ (0.28) $ (0.78)
======= ======= ======== ======== ========
<CAPTION>
Three Months Ended
-----------------------------------------
March 31 June 30 September 30 December 31 Total
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1997:
Revenues.............. $11,087 $13,956 $ 16,206 $ 18,617 $ 59,866
======= ======= ======== ======== ========
Net earnings.......... $ 1,523 $ 2,095 $ 1,865 $ 288 $ 5,771
======= ======= ======== ======== ========
Basic earnings per
share................ $ 0.07 $ 0.10 $ 0.07 $ 0.01 $ 0.24
======= ======= ======== ======== ========
Diluted earnings per
share................ $ 0.04 $ 0.05 $ 0.04 $ 0.04 $ 0.18
======= ======= ======== ======== ========
</TABLE>
63
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 11--Segment Reporting
During 1998, Homestead adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which established standards for the way
that public business enterprises report information about operating segments
in audited financial statements, as well as related disclosures about product
and services, geographic areas and major customers.
Homestead defines each of its properties as individual operating segments
that have similar economic characteristics and, therefore, have been
aggregated into one reportable segment, that being the development and
operation of extended stay properties in its target markets in the United
States. Homestead's chief operating decision maker relies on the net property
operating income generated from its properties for purposes of making
decisions about allocating resources and assessing segment performance.
Reportable segment information is as follows: (i) revenues derived from
external customers, (ii) a reconciliation of net property operating income
derived from external customers to Homestead's earnings (loss) before
extraordinary items, and (iii) a reconciliation of assets to Homestead's total
assets, for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
-------- ---------- --------
<S> <C> <C> <C>
Extended stay segment revenues........... $145,452 $ 59,866 $ 33,563
======== ========== ========
Extended stay segment net property
operating income........................ $ 82,113 $ 34,777 $ 17,397
Reconciling items:
Interest income........................ 952 552 211
Depreciation and amortization.......... (34,244) (12,130) (4,443)
Interest expense, net of capitalized
interest.............................. (23,190) (2,190) (5,971)
Corporate operating expenses........... (22,280) (15,238) (4,112)
Special charges........................ (7,240) -- --
-------- ---------- --------
Earnings (loss) before extraordinary
item.................................... $ (3,889) $ 5,771 $ 3,082
======== ========== ========
<CAPTION>
December 31,
--------------------
1998 1997
---------- --------
<S> <C> <C> <C>
Extended stay segment assets...................... $1,145,311 $718,693
Reconciling items:
Cash and cash equivalents....................... 11,942 2,896
Deferred loan costs, net of accumulated
amortization................................... 1,063 632
Trademark and intangibles, net of accumulated
amortization................................... 44,279 44,447
Deposits and pursuit costs...................... 7,830 12,901
Other assets.................................... 7,966 4,380
---------- --------
Total assets...................................... $1,218,391 $783,949
========== ========
</TABLE>
Note 12--Commitments and Contingencies
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 development process and operation of the business of Homestead.
64
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 operation.
Unfunded Development Commitments
At December 31, 1998, Homestead had approximately $68 million of unfunded
commitments for developments under construction. Homestead anticipates
completing development of properties under construction utilizing the Working
Capital Facilities, cash on hand, and cash flow from operations.
Finder's Agreement
Homestead has 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 payments
to Finder as follows: (i) $535,000 annually with respect to 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 notes 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. Total payments under this agreement for 1998,
1997 and 1996 were $787,000, $734,000, and $662,000, respectively.
Note 13--Subsequent Events (Unaudited)
Sale and Leaseback of Properties
On February 23, 1999, Homestead completed the sale and leaseback of 18
Homestead Village properties with Hospitality Properties Trust (NYSE: HPT) for
a sales price of $145 million. Homestead will continue to operate the
properties under a long-term lease through December 2015 and pay minimum rent
of approximately $16 million per year. Homestead posted a security deposit
equal to one year's rent. The properties sold were among the 26 properties
pledged as collateral for the $122 million of mortgage note maturing in June
1999.
The lease is considered a capital lease for financial reporting purposes
and thus the present value of the minimum lease payments will be recorded as
an asset, to be amortized over the lease term, and an obligation, which will
be reduced over the term of the lease by allocating rent payments between
interest expense and reduction of the lease obligation. The lease also
provides for two extension periods of 15 years each at the option of
Homestead, requires payment of percentage rents beginning July 2000 based on
increases in revenues over a base period, and requires a percentage of
revenues be paid to a reserve to be used for capital expenditures.
Extension of Working Capital Facilities
On March 18, 1999 Homestead executed an agreement with its bank lenders to
renew and amend the Working Capital Facilities to December 31, 2000. The line
secured by suburban properties has been increased to $170 million total
borrowing capacity from $150 million and the sliding interest terms amended to
be 2.0% to 3.0% over LIBOR and 1% to 2% over prime or 1.5% to 2.5% over the
federal funds rate. Future additional collateral will be limited to suburban
properties which are construction complete and stabilized. The line secured by
urban properties has been decreased to $30 million total borrowing capacity
from $50 million and the interest terms amended to 3.0% over LIBOR and 2.0%
over prime or 2.5% over the federal funds rate.
65
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
The renewed and amended Working Capital Facilities require maintenance of
the following financial covenants effective with first quarter 1999:
. limiting total liabilities of no more than 55% of gross asset value, as
defined;
. limiting total indebtedness of no more than 50% of gross asset value, as
defined;
. maintaining various ratios of earnings before interest, taxes,
depreciation and amortization, as defined, to interest expense ranging
from 1.25 to 1.0 to 1.90 to 1.0;
. maintaining various ratios of earnings before interest, taxes,
depreciation and amortization, as defined, to debt service and preferred
stock dividends ranging from 1.0 to 1.0 to 1.25 to 1.0;
. maintaining various ratios of net property operating income to implied
debt service, as defined, ranging from 1.4 to 1.0 to 2.25 to 1.0;
. maintaining a minimum tangible net worth, as defined, of no less than 85%
of the year end 1998 amount, as defined, adjusted for net proceeds of
equity offerings; and
. maintaining positive net sources and uses of funds.
In addition, under the renewed and amended Working Capital Facilities
distributions or dividends on equity are prohibited; total cost, as defined,
of projects in development cannot exceed 25% of gross asset value, as defined,
in 1999 or 15% in 2000; Homestead's business activities will be limited to
development, ownership and operation of extended stay hotels; and no other
additional indebtedness other than non-recourse indebtedness may be incurred.
Common Stock Rights Offering
On March 25, 1999, Homestead announced a rights offering for $225 million
of common shares, the proceeds of which will be used to first repay the $200
million Bridge Facility and then for purposes allowed under the Working
Capital Facilities. Security Capital will participate in the rights offering.
To the extent rights remain available Security Capital has agreed to purchase
enough shares of common stock to ensure that the proceeds of the offering are
no less than $205 million, based on current market prices and subject to final
documentation. To the extent Homestead raises proceeds of up to $200 million
in the rights offering from third parties or Security Capital which are used
to repay the Bridge Facility, Security Capital's obligation under its
subscription agreement for Homestead convertible subordinated debentures will
be reduced or terminated.
66
<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, Bryan J. Flanagan, Jeffrey A. Klopf,
and Mark W. Pearson its or his true and lawful attorney-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.
67
<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 26, 1999
Pursuant to the requirements of the Securities and 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 26, 1999
____________________________________ Chief Investment Officer
David C. Dressler, Jr. and Director
/s/ Michael D. Cryan Co-Chairman, Chief Operating March 26, 1999
____________________________________ Officer and Director
Michael D. Cryan
/s/ Bryan J. Flanagan Senior Vice President and March 26, 1999
____________________________________ Chief Accounting Officer
Bryan J. Flanagan (Principal Financial
Officer and Principal
Accounting Officer)
/s/ John P. Frazee, Jr. Director March 26, 1999
____________________________________
John P. Frazee, Jr.
/s/ Manual A. Garcia Director March 26, 1999
____________________________________
Manual A. Garcia
/s/ John C. Schweitzer Director March 26, 1999
____________________________________
John C. Schweitzer
</TABLE>
68
