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UNITED STATES SECURITIES AND
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EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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
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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)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of the Registrant's common stock as of November
10, 1999 was 120,031,477.
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<PAGE>
HOMESTEAD VILLAGE INCORPORATED
TABLE OF CONTENTS
<TABLE>
NUMBER
PAGE
-----------
<S> <C>
PART I. Condensed Financial Information
Item 1. Financial Statements
Condensed Balance Sheets (unaudited) - September 30, 1999 and December 31, 1998........... 3
Condensed Statements of Operations (unaudited) - Three and Nine-month Periods Ended 4
September 30, 1999 and 1998...............................................................
Condensed Statements of Cash Flows (unaudited) - Nine-month Periods Ended September 30, 5
1999 and 1998.............................................................................
Notes to Condensed Financial Statements (unaudited)....................................... 6
Report of Independent Public Accountants.................................................. 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 20
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K......................................................... 22
</TABLE>
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
ASSETS SEPTEMBER 30, DECEMBER
1999 31, 1998
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................................. $ 23,412 $ 12,144
Accounts receivable, net of allowance of $604 in 1999 and $269 in 1998................. 7,010 5,910
Funds held in escrow................................................................... -- 1,701
Other current assets................................................................... 929 1,132
-------------- -------------
Total current assets.............................................................. 31,351 20,887
-------------- -------------
Property and equipment...................................................................... 1,176,841 1,186,652
Less accumulated depreciation............................................................... (61,776) (48,783)
-------------- -------------
Net investment in property and equipment.................................................... 1,115,065 1,137,869
-------------- -------------
Deposits and pursuit costs, including $3,399 of funds with title companies for property
acquisitions in 1998..................................................................... -- 7,830
Deferred loan costs, net of accumulated amortization of $36,529 in 1999 and $34,002 in
1998 2,278 1,063
Trademark and intangibles, net of accumulated amortization of $6,052 in 1999 and $4,190
in 1998 42,416 44,279
Other assets ............................................................................... 23,031 6,463
-------------- -------------
Total assets............................................................................. $ 1,214,141 $ 1,218,391
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit........................................................................ $ -- $ 357,080
Capital lease obligation, current...................................................... 3,744 --
Mortgage note payable.................................................................. -- 122,028
Development costs payable, of which retainage is $4,315 in 1999 and $16,558 in
1998 4,315 24,330
Due to affiliate....................................................................... 588 335
Accrued interest payable to affiliate.................................................. 6,972 1,882
Accrued real estate taxes.............................................................. 9,539 5,681
Accrued payroll and related accrued expenses........................................... 7,293 7,969
Accrued special charge expenses........................................................ 8,687 1,528
Accounts payable and other accrued expenses............................................ 13,769 10,135
-------------- -------------
Total current liabilities......................................................... 54,907 530,968
Lines of credit............................................................................. 193,050 --
Capital lease obligation, noncurrent........................................................ 138,012 --
Convertible mortgage notes payable to affiliate............................................. 221,334 221,334
Other long-term liabilities................................................................. 7,903 8,064
-------------- -------------
Total liabilities................................................................. 615,206 760,366
-------------- -------------
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock, $.01 par value, 249,823 shares authorized, 120,031 shares
issued and outstanding in 1999 and 38,255 shares issued and outstanding
in
1998 1,200 383
Preferred stock, 177 shares authorized, none issued.................................... -- --
Additional paid-in capital............................................................. 694,822 474,337
Accumulated deficit.................................................................... (97,004) (16,135)
Less deferred compensation............................................................. (83) (560)
-------------- -------------
Total shareholders' equity........................................................ 598,935 458,025
-------------- -------------
Total liabilities and shareholders' equity........................................ $ 1,214,141 $ 1,218,391
============== =============
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
3
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Room revenue............................................................ $ 60,440 $ 38,345 $ 163,712 $ 97,781
Other revenue........................................................... 968 638 1,644 1,566
----------- ---------- ---------- ----------
Total revenues..................................................... 61,408 38,983 165,356 99,347
----------- ---------- ---------- ---------
Operating expenses:
Property operating expenses............................................. 24,267 15,326 71,758 39,667
Corporate operating expenses............................................ 7,580 6,959 26,247 17,446
Special charge (Note 3)................................................. -- -- 65,296 --
Depreciation and amortization........................................... 10,805 8,368 31,120 22,227
----------- ---------- ---------- ----------
Total operating expenses........................................... 42,652 30,653 194,421 79,340
----------- ---------- ---------- ---------
Operating (loss) income...................................................... 18,756 8,330 (29,065) 20,007
Interest income.............................................................. 247 203 603 707
Interest expense, net of capitalized interest................................ (12,903) (6,679) (38,178) (13,798)
----------- ---------- ---------- ----------
(Loss) earnings before income taxes, extraordinary item and cumulative effect of
accounting change............................................................ 6,100 1,854 (66,640) 6,916
Provision for income taxes................................................... -- -- -- --
----------- ---------- ---------- ----------
(Loss) earnings before extraordinary item and cumulative effect of accounting change 6,100 1,854 (66,640) 6,916
Extraordinary item - loss on early extinguishment of debt.................... -- (25,344) -- (25,344)
----------- ---------- ---------- ----------
(Loss) earnings before cumulative effect of accounting change................ 6,100 (23,490) (66,640) (18,428)
Cumulative effect of accounting change for organizational, pre-opening and
start-up activities....................................................... -- -- (14,230) --
----------- ---------- ---------- ----------
Net (loss) earnings.......................................................... $ 6,100 $ (23,490) $ (80,870) $(18,428)
=========== ========== ========== ==========
(Loss) earnings per share:
Basic earnings (loss) before extraordinary item and cumulative effect of accounting
change....................................................................... $ 0.05 $ 0.05 $ (0.87) $ 0.19
Extraordinary item - loss on early extinguishment of debt.................... -- (0.66) -- (0.68)
Cumulative effect of accounting change....................................... -- -- (0.19) --
----------- ---------- ---------- ----------
Basic (loss) earnings........................................................ $ 0.05 $ (0.61) $ (1.06) $( 0.49)
=========== ========== ========== ==========
Diluted (loss) earnings before extraordinary item and cumulative effect of
accounting change............................................................ $ 0.05 $ 0.05 $ (0.87) $ 0.19
Extraordinary item - loss on early extinguishment of debt.................... -- (0.66) -- (0.68)
Cumulative effect of accounting change....................................... -- -- (0.19) --
----------- ---------- ---------- ----------
Diluted (loss) earnings...................................................... $ 0.05 $ (0.61) $ (1.06) $( 0.49)
=========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements.
4
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Operating activities:
Net (loss) earnings........................................................... $ (80,870) $ (18,428)
Adjustments to reconcile net (loss) earnings to net cash provided by operating
activities:
Special charge write-offs and asset write-downs........................... 51,587 --
Extraordinary item - loss on early extinguishment of debt................. -- 25,344
Cumulative effect of accounting change.................................... 14,230 --
Depreciation and amortization............................................. 31,120 22,227
Deferred compensation..................................................... (62) 510
Amortization of deferred loan costs....................................... 2,527 2,665
Change in assets and liabilities:
Increase in accounts receivable, net of change in allowance............... (1,100) (3,294)
Decrease in funds held in escrow.......................................... 1,701 --
Decrease (increase) in other current assets.............................. 203 (4,421)
Increase in accrued real estate taxes..................................... 3,858 3,246
Increase in accrued interest on convertible mortgage notes................ 5,090 4,432
(Decrease) increase in accrued payroll and related accrued expenses....... (676) 2,484
Increase in accrued special charge expenses....................... 7,159 --
Increase in accounts payable and other accrued expenses................... 3,634 5,139
Increase in due to affiliate.............................................. 253 206
-------------- --------------
Net cash provided by operating activities............................. 38,654 40,110
-------------- --------------
Investing activities:
Investment in properties.................................................. (88,715) (393,185)
Proceeds from sale of land................................................ 6,346 --
Decrease in deposits and pursuit costs.................................... 695 1,670
Increase in other assets.................................................. (1,527) (1,207)
-------------- --------------
Net cash used in investing activities................................. (83,201) (392,722)
-------------- --------------
Financing activities:
Proceeds from lines of credit............................................. 41,920 325,772
Payments on lines of credit............................................... (205,950) (130,000)
Deferred loan costs for line of credit.................................... (3,742) (3,281)
Payments on mortgage notes payable........................................ (122,028) --
Sale of property and equipment, net....................................... 127,261 --
Proceeds from sale of shares, net of expenses............................. 221,644 154,241
Payments on capital lease obligation...................................... (3,244) --
Proceeds from convertible mortgage notes payable.......................... -- 17,013
Payment of convertible mortgage note payable.............................. -- (98,028)
Proceeds from mortgage note payable....................................... -- 122,028
Payment to extinguish debt................................................ -- (25,344)
Payments on other long-term liabilities................................... (9) (3)
Repurchase of stock....................................................... (107) --
Proceeds from principal payments on notes from officers.................. 70 --
-------------- --------------
Net cash provided by financing activities............................. 55,815 362,398
-------------- --------------
Net increase in cash and cash equivalents......................................... 11,268 9,786
Cash and cash equivalents, beginning of period.................................... 12,144 2,974
-------------- --------------
Cash and cash equivalents, end of period.......................................... $ 23,412 $ 12,760
============== ==============
Non-cash investing and financing transactions:
Increase in property and equipment, and development cost payable.......... $ -- $ 5,231
============== ==============
Increase in property and equipment, from capital lease.................... $ 145,000 $ --
============== ==============
Increase in property and equipment from capitalization of loan costs...... $ -- $ 1,249
============== ==============
Increase in trademark and intangibles arising from release of shares
in escrow................................................................ $ -- $ 2,253
============== ==============
Loan costs resulting from issuance of convertible mortgage debt........... $ -- $ 1,251
============== ==============
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
5
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1--GENERAL
Principles of Financial Presentation
The financial statements of Homestead Village Incorporated ("Homestead") as
of September 30, 1999 and for the three and nine month periods ended September
30, 1999 and 1998 are unaudited, and pursuant to the rules of the Securities and
Exchange Commission, certain information and footnote disclosures normally
included in financial statements have been omitted. While management of
Homestead believes that the disclosures presented are adequate, these interim
financial statements should be read in conjunction with the financial statements
and notes included in Homestead's 1998 Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of Homestead's financial
statements for the interim periods presented. The results of operations for the
three and nine-month periods ended September 30, 1999 and 1998 are not
necessarily indicative of the results to be expected for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
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
wrote off unamortized organizational, pre-opening and start-up activity costs of
$14.2 million as a cumulative effect of adoption of an accounting standard in
the first quarter 1999. No financial statement amounts were restated upon
adoption of the new standard. Pre-opening and start-up activity costs which
would have been expensed in the nine month period ended September 30, 1998 if
SOP 98-5 were applied on a pro forma basis total $8,625,000. Amortization
expense for organizational, pre-opening and start-up costs recorded in the nine
month period ended September 30, 1998 was approximately $3,855,000.
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 for Homestead on January 1,
2001, are not expected to have a material impact on Homestead's financial
position or results of operations.
6
<PAGE>
NOTE 2--PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Operating properties:
Owned properties:
Land $ 197,179 $ 191,694
Buildings and improvements........................... 652,355 645,235
Furniture, fixtures and equipment.................... 92,523 108,446
Properties under a capital lease.......................... 145,000 --
---------------- -----------------
1,087,057 945,375
Properties under construction................................ -- 110,891
Properties in planning (land owned for development).......... -- 126,054
Land held for sale........................................... 89,784 4,332
---------------- -----------------
Total.............................................. $ 1,176,841 $ 1,186,652
================ =================
</TABLE>
Land held for sale consists of 23 parcels at September 30, 1999. One parcel
held for sale had been sold in third quarter 1999 and five parcels were sold
subsequent to the end of the quarter. The six land sales resulted in net
proceeds of $50.5 million of which $32.8 million has been used to repay
outstanding balances on the lines of credit (see "Note 4 - Debt").
NOTE 3 - SPECIAL CHARGE
In the second quarter of 1999, Homestead determined, based on its inability
to obtain financing for development of sites beyond those already in
construction, to further curtail its development program. As of the beginning of
the second quarter, Homestead had substantial investments in ownership of land
for development and in costs of pursuit of additional development sites. All
land previously held for development is presently held for sale, all pursuits
for acquisition of additional sites for development have been abandoned, and
Homestead has reduced overhead costs and personnel to reflect a company with
stabilized operations of 136 properties. Homestead recorded a special charge of
$65.3 million in the second quarter of 1999 consisting of approximately $43.5
million for write-downs of the carrying cost of land held for sale to its
estimated fair value less estimated costs to dispose, approximately $7.1 million
of write-offs of costs of pursuits and loss of non-refundable earnest money
deposits, approximately $5.5 million for closing of administrative offices and
discontinuing new initiatives, and approximately $9.2 million for the costs of
severance of personnel. Revisions to these estimates may be required based upon
the ultimate sale of the properties.
The $8.7 million of accrued special charge expenses at September 30, 1999
consist primarily of $4.8 million of unpaid severance costs, $0.8 million of
unpaid pursuit and development costs, and $3.1 million for ongoing costs of
closed offices and discontinuing new initiatives. No changes in estimates of the
special charge liability have been made.
Carrying costs on the land sites, such as interest and property taxes, will
be expensed until the sites are disposed of and will materially adversely affect
earnings until disposal. The majority of the land sites are subject to the
security interests of the lenders under the Working Capital Facilities (see
"Note 4 - Debt") and any sale of the encumbered sites requires the consent of
the lenders. Upon sale of encumbered sites the proceeds will be used to repay
the Working Capital Facilities. Of the 24 land sites, one was sold in third
quarter and five sold subsequent to the end of third quarter.
Payment of the final costs accrued for the special charge recorded in
fourth quarter 1998 were made in second quarter 1999 and no additional liability
remains.
NOTE 4--DEBT
Credit Facilities
On March 18, 1999 Homestead entered into amended and restated credit
agreements to, among other things, extend the $150 million revolving line of
credit facility secured by suburban properties and the $50 million line of
credit facility secured by urban properties (together the "Working Capital
Facilities") to December 31, 2000, or in the case of the line secured by urban
sites, to the dates of repayment of amounts borrowed under the line. The $150
million line was increased to $170 million total borrowing capacity, subject to
collateral requirements, and the interest terms adjusted to be a margin of 2.0%
to 3.0% over LIBOR or alternatively 1.0% to 2.0% over prime or 1.5% to 2.5% over
the federal funds rate, with the margin dependent on the percentage of
borrowings outstanding versus qualifying collateral. Future additional
collateral under the $170 million line is limited to suburban properties that
are stabilized. The $50 million facility was adjusted to $30 million total
borrowing capacity, subject to collateral, and the interest terms adjusted to
3.0% over LIBOR or alternatively 2.0% over prime or 2.5% over the federal funds
rate.
The amended and restated 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 a ratio of earnings before interest, taxes, depreciation and
amortization, as defined, to interest expense ranging from 1.25 to 1.0 for
first quarter 1999 up to 1.90 to 1.0 by fourth quarter 2000;
- -maintaining a ratio of earnings before interest, taxes, depreciation and
amortization, as defined, to debt service and preferred stock dividends
ranging from 1.0 to 1.0 for first quarter 1999 to 1.25 to 1.0 by fourth
quarter 2000;
- -maintaining a ratio of net property operating income to implied debt service,
as defined, ranging from 1.4 to 1.0 for first quarter 1999 to 2.25 to 1.0
by fourth quarter 2000;
- -maintaining 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 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; and Homestead's business activities will be limited to development,
ownership and operation of extended stay hotels.
As of September 30, 1999, Homestead has an outstanding balance of $193.1
million under the Working Capital Facilities, the full amount available under
collateral requirements, consisting of $170 million secured by suburban
properties and suburban land held for sale and $23.1 million secured by urban
land held for sale. Subsequent to quarter end, the Working Capital Facilities
balance secured by suburban properties and land was reduced to $166.2 million
and the facility secured by urban land was paid in full with the net proceeds
from sales of land.
Subsequent to the end of third quarter, Homestead entered into an interest
rate cap agreement on $70,000,000 of the line of credit which capped this
portion of the debt at an interest rate of 9.25% from November 15, 1999 through
February 15, 2000.
Presently, the actual interest rate on the $70,000,000 is 8.4375%.
Homestead had an additional $200 million bank line of credit facility (the
"Bridge Facility") which bore interest at the Eurodollar rate plus 1.25% or at a
base rate of prime plus 0.25%. Proceeds from the consummation of the rights
offering (see "Note 5 - Shareholders Equity") were used to repay the $200
million Bridge Facility on May 28, 1999. The bank's commitment under the Bridge
Facility and the obligation of Security Capital Group Incorporated ("Security
Capital") under its subscription agreement for $200 million of subordinated
debentures of Homestead expired upon repayment of the facility.
8
<PAGE>
Homestead was in compliance with all covenants under its credit facilities
as of September 30, 1999.
Convertible Mortgage Notes Payable
At September 30, 1999 Homestead owed convertible mortgage notes to
Archstone Communities Trust ("Archstone"), an affiliate, in the principal amount
of $221,333,620. The notes are collateralized by mortgages on 54 Homestead
properties with a historical cost of $358.8 million. 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 of each year. 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 21,191,262 shares of Homestead common stock (a
conversion ratio equal to one share of common stock for every approximate $10.44
of principal amount outstanding). The conversion ratio was adjusted in
accordance with the terms of the notes upon the issuance of shares in the May
1999 rights offering. Previously, the conversion ratio was $11.50 (19,246,402
shares). Deferred financing costs and the discount on the respective fundings
have been fully amortized. No further funding commitment is available under the
mortgage notes.
Capital Lease Obligation
On February 23, 1999, Homestead completed a sale and leaseback of 18 of the
26 Homestead properties collaterizing the $122 million mortgage note which was
due June 1999. Hospitality Properties Trust purchased the properties for $145
million. Homestead will continue to operate the properties under a long-term
lease through December 2015 and pay a minimum rent of approximately $16 million
per year. Homestead posted a security deposit equal to one year's rent. The
majority of the proceeds from the sale were used to repay the $122 million
mortgage note and post the approximate $16 million security deposit.
The lease is considered a capital lease for financial reporting purposes
and thus the present value of the minimum lease payments discounted at
approximately 9.8% has been recorded as an asset of $145,000,000, 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 balance of the obligation at September
30, 1999 was $141,756,000.
The lease also provides for two extension periods of 15 years each at the
option of Homestead, requires payment of percentage rents beginning July 2000
based on increases in revenues over a base period, and requires a percentage of
revenues be paid to a furniture, fixtures and equipment reserve to be used for
capital expenditures.
Interest
The following summarizes Homestead's interest expense (in thousands):
<TABLE>
THREE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -----------------------------
1999 1998 1999 1998
------------ ----------- -------------- --------------
<S> <C> <C> <C> <C>
Lines of credit facilities.................................$ 4,594 $ 5,742 $ 19,276 $ 10,174
Convertible mortgage notes................................. 5,091 5,213 15,106 21,202
Mortgage note payable...................................... -- 2,021 1,282 2,021
Capital lease obligation................................... 3,477 -- 8,383 --
Other...................................................... 193 355 574 749
------------ ----------- -------------- --------------
Total interest cost.................................... 13,355 13,331 44,621 34,146
Capitalized interest....................................... (451) (6,652) (6,443) (20,348)
------------ ----------- -------------- --------------
Net interest expense................................... 12,904 $ 6,679 $ 38,178 $ 13,798
============ =========== ============== ==============
Amortization of deferred financing costs included in
interest cost..................................................$ 449 $ 954 $ 2,527 $ 2,665
============ =========== ============== ==============
</TABLE>
The total interest paid in cash for the nine month periods ended September
30, 1999 and 1998 was $36,976,000 and $24,100,000, respectively.
9
<PAGE>
NOTE 5--SHAREHOLDERS' EQUITY
Common Stock Rights Offering
On May 28, 1999, Homestead completed a common stock rights offering with
the sale of 81,818,181 shares for $225 million in gross proceeds ($2.75 per
share). The securities issued in the rights offering had been registered under
Homestead's existing $356,402,600 shelf registration. Security Capital purchased
77,749,220 shares in the rights offering at the same price paid by the public.
Following the completion of the rights offering, Security Capital owns 87.0% of
Homestead's outstanding common shares. Net proceeds of $221.6 million were used
to repay the $200 million Bridge Facility and accrued interest; payment of
interest on the convertible mortgages, Working Capital Facilities, and other
long-term liabilities; payment of construction in process costs; and to provide
working capital for general corporate purposes. Security Capital's obligations
under a subscription agreement which secured the Bridge Facility was terminated
as a result of Security Capital's participation in the rights offering and the
repayment of the Facility.
Per Share Data
Basic earnings (loss) per share is calculated by dividing net earnings
(loss) available to common shareholders by weighted average common shares
outstanding. Diluted earnings per share is equivalent to basic earnings per
share unless dilution results from a calculation which divides adjusted earnings
available to common shareholders 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 any dilutive effect of options using the treasury stock
method and the dilutive effect of convertible debt. For the three and nine month
periods ended September 30, 1999 and 1998 convertible debt is not assumed to be
converted and exercise of options is not assumed as the effects are
anti-dilutive in the nine month period of loss in 1999 and the effects were not
dilutive in the three month period in 1999 and the three and nine month periods
in 1998.
A reconciliation of the numerators and denominators used to calculate basic
and diluted earnings (loss) per share for the periods indicated follows (in
thousands, except per share amounts):
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) earnings attributable to common shares
before extraordinary item and cumulative effect
of accounting change............................. $ 6,100 $ 1,854 $ (66,640) $ 6,916
============ =========== ============ ============
Weighted average shares outstanding - basic........ 120,031 38,263 75,995 37,430
============ =========== ============ ============
Net (loss) earnings per share before extraordinary
item and cumulative effect of accounting change:
Basic.............................................. $ 0.05 $ 0.05 $ (0.87) $ 0.19
============ =========== ============ ============
Diluted............................................ $ 0.05 $ 0.05 $ (0.87) $ 0.19
============ =========== ============ ============
</TABLE>
NOTE 6--INCOME TAXES
As a result of Security Capital's ownership in Homestead exceeding 80%
after the closing of the May 1999 rights offering, Homestead's results, post
rights offering, will be included in the federal income tax return of Security
Capital. Security Capital may utilize tax operating losses generated by
Homestead subsequent to May 1999. In order for Security Capital to utilize the
net operating loss carryforwards generated by Homestead through May 1999,
Homestead must generate future taxable income. To the extent Homestead's net
operating loss carryforwards are so utilized on Security Capital's federal tax
return, such loss carryforwards will not be available to Homestead in the
future.
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<PAGE>
Homestead presents in its financial statements its provision for taxes as
though Homestead filed a separate return. Deferred tax assets relate 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 uncertainty of realization of those deferred tax assets in future years.
NOTE 7--ADMINISTRATIVE SERVICES AGREEMENT
Homestead and Security Capital have an administrative services agreement
(the "Administrative Services Agreement"), under which Security Capital provides
Homestead with administrative services for 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, facilities management, and payroll administration. 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 December 31, 1999, is
renewable for a one-year term, subject to approval by a majority of the
independent members of the Homestead Board. Total administrative services fees
for the nine month periods ended September 30, 1999 and 1998 were $4,092,000 and
$3,084,000, respectively.
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 such areas as information systems, insurance,
cash management and legal support provided at substantial economies of scale.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In second quarter 1999 Homestead recorded an expense and accrual of
approximately $1.2 million for construction related claims which were settled in
third quarter 1999 for approximately $756,000, including legal costs. The
expense difference of approximately $435,000 was reversed in third quarter 1999
as a reduction to corporate operating expenses.
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 operation.
Unfunded Development Commitments
At September 30, 1999, Homestead had approximately $4.3 million of unfunded
commitments resulting from retainage payable on recently completed developments.
Homestead anticipates that the retainage will be paid by utilizing cash on hand
and cash flow from operations.
Finder's Agreement
Homestead had a series of agreements with an unaffiliated person ("Finder")
who developed the Homestead Village concept and performed certain services. The
agreements extended through February 5, 2043 and provided for payments to Finder
as follows: (i) $535,000 annually with respect to the four properties for which
Finder assisted in the location, development and initial operations; (ii) an
annual amount of $7,500 per property (subject to certain conditions as defined
in the agreements) for assistance in site location with respect to the first 35
properties constructed (exclusive of the four properties referred to in (i)
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<PAGE>
above and reduced by the 2 properties sold in February 1999 as described below);
(iii) 20% of the net proceeds as defined per the agreements, upon the sale of
the four properties noted in (i) above to an unaffiliated third party; and (iv)
10% of the net proceeds as defined per the agreements, upon the sale of the
additional 35 properties to an unaffiliated third party. The sale and leaseback
of properties described in Note 4 included 2 properties subject to the terms
described in (iv) above, resulting in a payment of approximately $68,000 to the
Finder. Total payments under these agreements for amounts due under (i) and (ii)
described above for the nine month periods ended September 30, 1999 and 1998
were $551,000 and $553,000, respectively.
On October 25, 1999, Homestead paid the Finder $2.3 million in full
settlement of all amounts due under the agreements, including amounts owed for
third quarter 1999, and the agreements and Homestead's obligation to pay any
future amounts to Finder were terminated.
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Homestead Village Incorporated:
We have reviewed the accompanying condensed consolidated balance sheet of
Homestead Village Incorporated (a Maryland corporation) and subsidiaries as of
September 30, 1999 and the related condensed consolidated statements of
operations for the three and nine-month periods ended September 30, 1999 and
1998 and the related condensed consolidated statement of cash flows for the nine
month period ended September 30, 1999 and 1998. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Homestead Village Incorporated and
subsidiaries as of December 31, 1998 (not presented herein), and, in our report
dated February 4, 1999, we expressed an unqualified opinion on that statement.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1998, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 28, 1999
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Homestead's
1998 Annual Report on Form 10-K (the "1998 Form 10-K") as well as the financial
statements and the notes thereto in Item 1 of this report. In addition to
historical information, this discussion contains forward-looking statements
under the federal securities laws. These 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) availability to Homestead of debt or equity financing, (iv) the matters
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Risk Factors" in Item 7 of the 1998 Form 10-K, (v) 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,
(vi) weather, and (vii) the ability of potential buyers of land held for sale to
obtain financing for such purchases.
OVERVIEW
Homestead's overall results of operations and financial position have been
significantly influenced by its development program and the financing activities
required to support it. The tightening of capital markets for real estate
operating companies and lodging companies which began in 1998 and continues in
1999 has had an adverse effect on Homestead's ability to continue its high
growth program of acquisition of land sites and construction of properties. In
October 1998, Homestead reorganized its development effort and recorded $7.24
million of special charges. Such charges primarily related to the severance of
certain development personnel and abandonment of certain pursuits of development
sites due to the limited availability of additional funds for development.
In the second quarter of 1999, Homestead determined, based on its inability
to obtain financing for development beyond those properties already in
construction, to further curtail its development program. As of the beginning of
the second quarter of 1999, Homestead had substantial investments in ownership
of land for development as well as in pursuit costs for additional development
sites. All land previously held for development is presently held for sale, all
pursuits for acquisition of additional sites for development have been
abandoned, and Homestead has reduced overhead costs and personnel to reflect a
company with stabilized operations of 136 properties. A special charge was
recorded in the second quarter of 1999 of $65.3 million for write-downs of land
to be held for sale, write-offs of costs of pursuits, and the costs of severance
of personnel.
The majority of the special charge relates to the write-downs on land held
for sale approximating $43.5 million. Substantial effort and costs were incurred
in the planning stage for design, engineering, and architectural work and
capitalization of carrying costs, all of which the company expects to be lost
upon sale of the sites.
Carrying costs on the land sites, such as interest and property taxes, will
be expensed until the sites are disposed of and will materially adversely affect
earnings until disposal. The majority of the land sites are encumbered by the
Working Capital Facilities and upon sale will require use of the proceeds to
repay the Working Capital Facilities.
Write-offs of pursuit costs and non-refundable earnest money deposits
approximate $7.1 million, severance costs approximate $9.2 million and other
costs such as closings of offices, overhead reductions and discontinuance of new
investment initiatives approximate $5.5 million.
As of September 30, 1999, Homestead had 136 Homestead Village properties in
operation representing in the aggregate 18,176 rooms in 28 states. Homestead
completed its last property under construction on August 30, 1999.
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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 timing and amounts of proceeds Homestead
can generate from sales of land to repay indebtedness. Capital and credit market
conditions which affect Homestead's access to credit markets and cost of capital
will influence future operating results.
As of September 30, 1999, Homestead had approximately $564.1 million of
indebtedness outstanding, consisting of $193.1 million due on its long-term bank
lines of credit, $221.3 million due on a convertible mortgage note, $141.8
million due under a capital lease agreement and $7.9 million due on other
long-term obligations. During the nine months ended September 30, 1999,
Homestead reduced its short-term debt from $479.1 million at December 31, 1998
to $3.7 at September 30, 1999. Homestead refinanced, extended, and repaid its
short-term debt as follows:
- -On February 23, 1999, Homestead completed a sale and lease-back of 18 of the
26 Homestead properties collaterizing a $122 million mortgage note.
Hospitality Properties Trust purchased the properties for $145 million.
Proceeds of the sale were used to repay the $122 million debt which was due
June 1999. Additionally, 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 to draw approximately $21 million in additional
borrowings under the line.
- -On March 18, 1999, Homestead renewed its Working Capital Facilities with an
extension of the maturity date to December 31, 2000.
- -On May 28, 1999, Homestead completed a $225 million common stock rights
offering of which $200 million was used to pay off the Bridge Facility.
With the accomplishment of these reductions of short-term debt and the
decision to cease additional development efforts, Homestead is focusing on
generation of cash from sales of land to be used to retire debt and on operation
of a company with stabilized operations of 136 properties.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 and 1998
Net loss for the nine months ended September 30, 1999 and 1998 were $80.9
million and $18.4 million, respectively. The net loss for the nine month period
ended September 30, 1999 includes a (i) cumulative effect of an accounting
change of $14.2 million relating to Homestead's adoption of Statement of
Position 98-5 "Reporting on the Costs of Start-Up Activities" beginning with its
1999 fiscal year and (ii) incurrence of a special charge of $65.3 million,
primarily relating to the write-downs on land held for sale. The net loss for
the nine month period ended September 30, 1998 includes an extraordinary item of
$25.3 million relating to Homestead's loss on early extinguishment of debt.
Net loss before the cumulative effect of an accounting change increased
$73.6 million in 1999 from the $6.9 million net earnings before extraordinary
item for the nine months ended September 30, 1998. The change is primarily due
to the special charge expense of $65.3 million in 1999. The remaining change of
$8.3 million is due primarily to an increase of property operating income and
other revenues of $33.9 million offset by increases in corporate expenses of
$8.8 million, an increase in depreciation of $8.9 million and an increase in
interest expense of $24.4 million. These components of operating income are
further discussed in the following.
Property Operations
For analysis purposes Homestead 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.
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<PAGE>
Whether considering the entire operating property portfolio or its
categories, Homestead's nine months ended September 30, 1999 property-level
revenue performance compared to the same period of 1998 is characterized by
higher weekly rates offset by lower occupancy levels. The occupancy decreases
are attributable to (i) competition in markets characterized by an oversupply of
extended stay hotels (predominantly in the Southwest), (ii) the effect on
occupancy due to rate increases at Homestead versus competitor rate levels
(experienced in the portfolio generally), and (iii) the first quarter effect of
the seasonal downturn as Homestead has increased its number of properties
located in the northeast and midwest as compared to prior years.
The following table sets forth certain information for Homestead's total
operating property portfolio for the periods indicated:
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- -------------------------------------
1999 1998 CHANGE 1999 1998 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Weekly RevPAR(1)..................................... $261 $222 17.2% $244 $215 13.9%
Average Weekly Rate(2)............................... $347 $301 15.2% $350 $296 18.2%
Occupancy......... 75.2% 73.9% 1.3 69.8% 72.5% (2.7)
Number of Operating Properties at Period End......... 136 111 22.5% 136 111 22.5%
Property Operating Income Margin..................... 60.1% 60.2% (0.1) 56.4% 59.6% (3.2)
- ----------
<FN>
(1) 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.
(2) Average weekly rate is determined by dividing room revenue by the number of
guest room days occupied for the period and multiplying by seven.
</FN>
</TABLE>
Homestead's 25 new openings from the end of the third quarter of 1998
through the end of the third quarter of 1999 were the predominant reason for the
room revenue increase of $65.9 million (67.4%) for the nine months ended
September 30, 1999 as compared to the same period in 1998. Total property
operating expenses increased $32.1 million (80.9%) for the nine months ended
September 30, 1999 over 1998. The increase is due primarily to the increase in
the number of operating properties as noted above and secondarily due to
increased expenses for additional services such as longer operating hours and
travel agent commissions.
Beginning in the latter part of second quarter 1999, management of
Homestead reduced room rates in selected markets to improve occupancy. Occupancy
for the total portfolio for third quarter 1999 was 75.2%, which compares
favorably to both third quarter 1998 total portfolio occupancy of 73.9% and to
second quarter occupancy of 70.9% Management is also reviewing property level
expenses in areas such as the number of new operating programs, extended
operating hours, job definitions and scheduling of personnel in order to improve
the property operating income margin.
Same-Store Properties
Homestead had 79 properties which were stabilized and operating throughout
both nine month periods ended September 30, 1999 and 1998 ("same-store"
properties). Thirty-seven such properties are located in the Southeast and in
Texas markets. RevPAR for the nine months ended September 30, 1999 for these 79
same store properties was $232 versus $222 for the same period in 1998. The
increase in RevPAR was due to an increase in the average weekly rate of $29
(9.9%) for the nine months ended September 30, 1999 as compared to the same
period in 1998 offset in part by a decrease in occupancy to 72.1% for the nine
month period ended September 30, 1999 from 75.6% for the same period in 1998.
The decrease in occupancy is a result of competition in the same-store markets
which are characterized by over supply and to some extent Homestead rates versus
the rate levels of competitors. The increase of 4.5% in RevPAR, offset by
increases in property expenses primarily for payroll, housekeeping, security,
and property administrative costs (primarily related to increasing services such
as longer office hours), resulted in the same-store property operating income
margin decreasing to 56.8% in 1999 from 60.2% in 1998.
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<PAGE>
Stabilized Properties Operations
RevPAR for the 125 stabilized properties for the nine months ended
September 30, 1999 increased to $243 from $222 for the 79 stabilized properties
in 1998. Average weekly rates for stabilized properties increased to $348 in
1999 from $293 in 1998 (an increase of 18.8%) but was offset by the decline of
occupancy to 69.9% for 1999 from 75.6% for 1998. Property operating income
margin for stabilized properties decreased to 57.5% in 1999 from 60.2% in 1998
due to increased property expenses as described above for the same-store
properties.
Corporate Operating Expenses
Corporate operating expenses, after capitalization of costs directly
associated with Homestead's development activity, increased $8.8 million for the
nine month period ended September 30, 1999 as compared to the same period in
1998. The increase is attributed to increases of approximately $1.3 million in
sales and marketing expenses, approximately $1.0 million in administrative
services related to the increases in operating sites, and the loss for
construction related claims of approximately $0.75 million, with the remainder
of the increase related primarily to incremental development overhead expenses
which were not capitalizable due to declining development activity in the nine
months ended September 30, 1999 and expenses of efforts to dispose of the land
held for sale and land holding costs.
Corporate operating expenses, after capitalization of costs directly
associated with Homestead's development activity, increased approximately
$600,000 for the three months ended September 30, 1999 as compared to the same
period in 1998 but decreased approximately $1.4 million versus the second
quarter of 1999 and decreased approximately $2.1 million as compared to the
first quarter of 1999. The three month comparisons reflect the changes in the
organization of the company and the reductions of personnel and other costs
occurring in fourth quarter 1998 and second quarter 1999.
Depreciation and Amortization
Depreciation and amortization increased $8.9 million for the nine months
ended September 30, 1999 as compared to the same period in 1998 due to the
increased number of properties operating for the nine month period ended
September 30, 1999 as compared to the same period in 1998. Depreciation of the
cost of properties and improvements is provided using the straight-line method
over the estimated useful lives of the assets. Amortization of the trademark and
other intangibles is calculated on a straight-line basis over a period of 20
years.
Interest Income
Interest income of $603,000 and $707,000 for the nine months ended
September 30, 1999 and 1998 was a result of interest earned from investment of
excess cash on hand.
Interest Expense
The following summarizes Homestead's interest expense (in thousands):
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -----------------------------
1999 1998 1999 1998
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Lines of credit facilities....................................$ 4,594 $ 5,742 $ 19,276 $ 10,174
Convertible mortgage notes.................................... 5,091 5,213 15,106 21,202
Mortgage note payable......................................... -- 2,021 1,282 2,021
Capital lease obligation...................................... 3,477 -- 8,383 --
Other......................................................... 193 355 574 749
------------ ----------- ------------- -------------
Total interest cost....................................... 13,355 13,331 44,621 34,146
Capitalized interest.......................................... (451) (6,652) (6,443) (20,348)
------------ ----------- ------------- -------------
Net interest expense...................................... 12,904 $ 6,679 38,178 $ 13,798
============ =========== ============= =============
Amortization of deferred financing costs included in interest 449 $ 954 2,527 $ 2,665
cost
============ =========== ============= =============
</TABLE>
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Interest cost on lines of credit borrowings increased $9.1 million for the
nine months ended September 30, 1999 as compared to the same period in 1998 due
primarily to a higher average outstanding balance ($297.7 million in 1999
compared to $132.8 million in 1998).
Interest cost on the convertible mortgages decreased $6.1 million for the
nine months ended September 30, 1999 as compared to the same period in 1998 as a
result of the early extinguishment of $98 million of Homestead convertible
mortgage notes in the third quarter 1998. Homestead incurred $1.3 million in
interest cost for the nine months ended September 30, 1999 relating to the
mortgage note which funded the extinguishment. On February 23, 1999, this
mortgage note was repaid with proceeds from the sale of properties discussed in
Note 4 to the financial statements. Homestead incurred $8.4 million in interest
cost in the nine months ended September 30, 1999 as a result of the leaseback of
such properties under a capital lease.
Interest cost on borrowings is offset by interest capitalized with respect
to Homestead's development activities. Capitalized interest levels are
reflective of Homestead's cost of funds and the level of development activity.
Capitalized interest decreased by $13.9 million for the nine months ended
September 30, 1999 as compared to the same period in 1998 due to less
development activity during the first nine months of 1999 as compared to 1998.
By the end of third quarter 1999 all development has been completed and
Homestead does not anticipate any additional capitalization of interest for the
remainder of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Investing and Financing Activities
On May 28, 1999, Homestead completed a common stock rights offering with
the sale of 81,818,181 shares for $225 million in gross proceeds ($2.75 per
share). The securities issued in the rights offering had been registered under
Homestead's existing $356,402,600 shelf registration. Security Capital purchased
77,749,220 shares in the rights offering at the same price paid by the public.
Following the completion of the rights offering, Security Capital owns 87.0% of
Homestead's outstanding common shares. Net proceeds of $221.6 million were used
to repay the $200 million Bridge Facility and accrued interest; payment of
interest on the convertible mortgages, Working Capital Facilities, and other
long-term liabilities; payment of construction in process costs; and to provide
working capital for general corporate purposes. Security Capital's obligations
under a subscription agreement which secured the Bridge Facility was terminated
as a result of Security capital's participation in the rights offering and the
repayment of the Facility.
During the nine month periods ended September 30, 1999 and 1998, Homestead
invested $88.7 million and $393.2 million, respectively in properties. The
amounts invested in the nine months ended September 30, 1999 were financed
primarily from proceeds from borrowings under the Working Capital Facilities.
The amounts invested in the nine months ended September 30, 1998 were financed
primarily from borrowings under the lines of credit and proceeds from the
January 1998 rights offering.
During the first nine months of 1999, Homestead reduced its short-term debt
from $479.1 million at December 31, 1998 to $3.7 million at September 30, 1999
by refinancing, repayment, and extensions of its debt as follows: (i) paying off
the $122.0 million mortgage note due June 1999 with proceeds received from the
sale and leaseback of properties under a long-term capital lease, (ii) paying
off the $200 million Bridge Facility with proceeds received from the rights
offering, and (iii) amending its Working Capital Facilities to, among other
things, extend the maturity date to December 31, 2000.
In third quarter 1999 Homestead sold one urban parcel held for sale and
used the net proceeds of $5.95 million to pay down
its line of credit.
Subsequent to the end of third quarter 1999, Homestead generated additional
net proceeds of $44.5 million from the sale of two suburban parcels and three
urban parcels. Homestead used $26.9 million of these net proceeds to further pay
down its lines of credit. Thus, subsequent to the end of the quarter the balance
on the $170 million revolving line of credit secured by suburban properties and
land has been reduced to an outstanding balance of $166.2 million and the $23.1
million balance of the line secured by urban properties has been paid in full.
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<PAGE>
Homestead may re-borrow on the line secured by suburban properties, subject to
collateral and covenant requirements. Repayment of all borrowings on the line
secured by urban land terminated the facility.
Homestead had at September 30, 1999 unfunded commitments resulting from
retainage payable on recently completed developments of approximately $4.3
million.
With the completion of development of all sites which were in construction,
termination of plans to develop all other land owned, and with no further
pursuit of acquisition of sites for development, Homestead's needs for financing
are substantially reduced. Homestead believes it will have adequate cash
resources from cash on hand and cash flow from operations to fund its needs for
debt service, payment of severances, and payment of the remaining construction
retainage. In addition Homestead may generate cash flow by the sale of
unencumbered land sites, but no assurance can be given that such sales will
occur or provide significant net proceeds. While Homestead believes it will
continue to generate positive cash flow from operation of its properties, there
can be no assurance of generation of cash from future operations due to the
risks of operation of lodging properties including competitive pressures, rates,
occupancies, and costs of operation. Additionally, Homestead's ability to meet
its obligations could be adversely affected by increases in interest rates.
Operating Activities
Net cash flow provided by operating activities decreased by $1.5 million
for the nine months ended September 30, 1999 as compared to 1998. The decrease
is due primarily to an increase in corporate expenses, special charge expenses
and interest during the nine months ended September 30, 1999 as compared to the
same period in 1998 offset in part by additional cash from operations provided
by the growth in the number of operating properties as described under "Results
of Operations."
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 has tested these
information technology systems, and based on this testing, management does not
anticipate any Year 2000 issues that will materially impact operations or
operating results.
Homestead's critical non-information technology systems have been
inventoried and have been assessed for Year 2000 compliance by contacting the
vendors of the systems. All non-information technology systems are in
compliance.
Homestead has surveyed its financial institutions and major vendors to
determine the extent to which Homestead is vulnerable to failure by those
institutions and vendors to make their systems Year 2000 compliant. Homestead
has received responses indicating these institutions and vendors are either Year
2000 compliant or have plans in place to be compliant by year end. Homestead's
most reasonably likely worst case scenario is the failure on the part of these
entities to be or become Year 2000 compliant which could result in disruption in
Homestead's cash receipt and disbursement functions, utilities and the failure
of reservation systems. Homestead management does not believe that the company
faces a material adverse financial impact from Year 2000 problems in the most
likely worst case scenario.
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<PAGE>
Homestead expects to complete by the end of November 1999 a contingency
plan to deal with unforeseen problems caused directly or indirectly by Year 2000
issues. The plan will address temporary procedures required due to failures in
internal systems or by service providers due to 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
$50,000. 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 Year 2000
issues 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 issue, which
depends on numerous uncertainties, many of which are outside its control, 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. 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.
Homestead will continue to monitor these issues through its Year 2000 compliance
program.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Homestead's exposure to market risk for changes in interest rates relates
primarily to its lines of credit facilities. 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 September
30, 1999. As the table incorporates only those exposures that exist as of
September 30, 1999, 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 September 30, 1999, 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.
20
<PAGE>
<TABLE>
EXPECTED MATURITY/PRINCIPAL REPAYMENT DECEMBER 31,
Nominal
Interest Total Fair
Rate 1999 (2) 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 - 8.54% $ $193,050 $ $ -- $ -- $ $193,050 $
variable rate (1) -- -- -- 193,050
Convertible Mortgage Notes - fixed
rate................................. 9.00% -- $ -- $ -- $ -- $ -- $ 221,334 $221,334 $ 218,363
Capital Lease Obligation - fixed
rate ................................ 9.8% $ 902 $ 3,837 $4,230 $4,663 $5,141 $ 122,983 $141,756 $ 141,756
Other Long-Term Obligation - fixed
rate (4)............................. 9.74% $ 3 $ 13 $ 14 $ 16 $ 17 $ 7,850 $ 7,913 $ 7,904
<FN>
(1) On March 18, 1999, Homestead obtained an extension and amendment of
its Working Capital Facilities 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.
(2) Amounts represent expected maturities and principal repayment for the
three months remaining for 1999.
(3) The estimated fair value of obligations extending beyond a one-year
maturity as of September 30, 1999 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 September 30, 1999 on a similar instrument.
(4) On October 25, 1999, this obligation was discharged with the payment
of $2.3 million. See "Note 8 - Commitments and Contingencies -
Finder's Agreement."
</FN>
</TABLE>
21
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amendment to Secured Promissory Note
15 Letter regarding unaudited interim financial information
27 Financial Data Schedules
(b) Reports on Form 8-K.
Form Date Items Reported Financial Statements
8-K October 7, 1999 Item 5, Item 7 No
8-K/A October 7, 1999 Item 5, Item 7 No
22
<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/ BRYAN J. FLANAGAN
Bryan J. Flanagan, Senior Vice President
And Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date: November 12, 1999
23
Exhibit 10.1
AMENDMENT TO SECURED PROMISSORY NOTE
Amendment, dated as of July 31, 1999, between Homestead Village
Incorporated, a Maryland corporation ("Homestead"), and David C. Dressler, Jr.
("Dressler").
WHEREAS, Dressler executed a Secured Promissory Note, dated October 15,
1996 (the "Note") under which Dressler borrowed $250,000 from Homestead to
purchase 25,000 shares of Homestead Common Stock at $10.00 per share (the
"Shares"), which Shares are pledged to Homestead as collateral for the Note; and
WHEREAS, the principal and interest on the Note is $260,077.05 as of
July 8, 1999; and
WHEREAS, the fair market value of the Shares as of July 8, 1999 is
$2.1875 per Share, or a total of $54,687.50; and
WHEREAS, Homestead and Dressler wish to adjust the Note:
NOW THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties agree as follows:
1. The principal and interest on the Note as of July 8, 1999, shall be
reduced to $54,687.50. It is intended that this loan adjustment qualify under
Section 108(e)(5) of the Internal Revenue Code.
2. Except as amended hereby, the Secured Promissory Note shall remain
in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of July
31, 1999.
HOMESTEAD VILLAGE INCORPORATED
By: /S/C. RONALD BLANKENSHIP
________________________
Title: Interim Chairman and
Chief Executive Officer
________________________
/S/ DAVID C. DRESSLER, JR.
________________________
David C. Dressler, Jr.
Exhibit 15
To Homestead Village Incorporated:
We are aware that Homestead Village Incorporated and subsidiaries has
incorporated by reference in its previously filed Registration Statement File
No. 333-37803, Registration Statement File No. 333-67039, Registration Statement
File No. 333-17243, Registration Statement File No. 333-17245, and Registration
Statement File No. 333-48163, its Form 10-Q for the quarter ended September 30,
1999, which includes our report dated October 28, 1999 covering the unaudited
interim financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933 (the "Act"), that report is not considered a part of the
Registration Statement prepared or certified by our firm or a report prepared or
certified by our firm within the meaning of Sections 7 and 11 of the Act.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 28, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27
<ARTICLE>5
<MULTIPLIER>1
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 23,412,000 12,760,000
<SECURITIES> 0 0
<RECEIVABLES> 7,614,000 5,369,000
<ALLOWANCES> 604,000 105,000
<INVENTORY> 0 00
<CURRENT-ASSETS> 31,351,000 23,177,000
<PP&E> 1,176,841,000 1,122,522,000
<DEPRECIATION> 61,776,000 37,665,000
<TOTAL-ASSETS> 1,214,141,000 1,171,577,000
<CURRENT-LIABILITIES> 54,907,000 473,418,000
<BONDS> 0 0
0 0
0 0
<COMMON> 1,200,000 383,000
<OTHER-SE> 597,735,000 468,375,000
<TOTAL-LIABILITY-AND-EQUITY> 1,214,141,000 1,171,577,000
<SALES> 0 0
<TOTAL-REVENUES> 165,356,000 99,347,000
<CGS> 0 0
<TOTAL-COSTS> 194,421,000 79,340,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 38,178,000 13,798,000
<INCOME-PRETAX> (66,640,000) 6,916,000
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (66,640,000) 6,916,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (25,344,000)
<CHANGES> (14,230,000) 0
<NET-INCOME> (80,870,000) (18,428,000)
<EPS-BASIC> (1.06) (.49)
<EPS-DILUTED> (1.06) (.49)
<FN>
Certain amounts for the nine month period ended September 30, 1998 have been
reclassified to conform to the 1999 presentation.
</FN>
</TABLE>
