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UNITED STATES SECURITIES AND
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 March 31, 2000
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 May 12,
2000 was 120,031,477.
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<PAGE>
HOMESTEAD VILLAGE INCORPORATED
TABLE OF CONTENTS
<TABLE>
NUMBER
PAGE
-----------
PART I. Condensed Financial Information
<S> <C> <C>
Item 1. Financial Statements
Condensed Balance Sheets (unaudited) - March 31, 2000 and December 31, 1999............... 3
Condensed Statements of Operations (unaudited) - Three-month Periods Ended March 31, 2000
and 1999.................................................................................. 4
Condensed Statements of Cash Flows (unaudited) - Three-month Periods Ended March 31, 2000
and 1999.................................................................................. 5
Notes to Condensed Financial Statements (unaudited)....................................... 6
Report of Independent Public Accountants.................................................. 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 16
PART II. Other Information
Item 1. Legal Proceedings......................................................................... 17
Item 6. Exhibits and Reports on Form 8-K......................................................... 17
</TABLE>
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
ASSETS MARCH 31, DECEMBER 31,
2000 1999
------------ ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................................. $ 214 $ 20,747
Accounts receivable, net of allowance.................................................. 7,723 5,767
Other current assets................................................................... 1,837 1,821
------------ --------------
Total current assets.............................................................. 9,774 28,335
------------ --------------
Property and equipment...................................................................... 1,103,887 1,111,999
Less accumulated depreciation............................................................... (82,081) (72,008)
------------ --------------
Net investment in property and equipment.................................................... 1,021,806 1,039,991
------------ --------------
Deferred loan costs, net of accumulated amortization........................................ 2,638 1,588
Trademark and intangibles, net of accumulated amortization................................. 41,175 41,796
Other assets ............................................................................... 21,824 21,730
------------ --------------
Total assets............................................................................. $1,097,217 $ 1,133,440
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit, current................................................................ $ -- $ 125,449
Capital lease obligation, current...................................................... 3,932 3,837
Development costs payable, including retainage......................................... 839 1,101
Due to affiliate....................................................................... 946 882
Accrued interest payable to affiliate.................................................. 6,917 1,882
Accrued real estate taxes.............................................................. 7,509 7,628
Accounts payable and other accrued expenses............................................ 12,608 12,269
Accrued payroll and related accrued expenses........................................... 7,214 8,332
Accrued special charge expense......................................................... 2,130 5,372
------------ -------------
Total current liabilities......................................................... 42,095 166,752
Line of credit, non-current................................................................. 80,949 --
Capital lease obligation, noncurrent........................................................ 135,998 137,017
Convertible mortgage notes payable to affiliate............................................. 221,334 221,334
------------ -------------
Total liabilities................................................................. 480,376 525,103
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Shareholders' equity:
Common stock, $.01 par value, 249,822,502 shares authorized, 120,031,477 shares
issued and outstanding in 2000 and 1999............................................. 1,200 1,200
Preferred stock, 177,498 shares authorized, none issued................................ -- --
Additional paid-in capital............................................................. 694,913 694,930
Accumulated deficit.................................................................... (79,229) (87,724)
Less deferred compensation............................................................. (43) (69)
------------ -------------
Total shareholders' equity........................................................ 616,841 608,337
------------ -------------
Total liabilities and shareholders' equity........................................ $1,097,217 $ 1,133,440
============ =============
The accompanying notes are an integral part of these condensed
financial statements.
</TABLE>
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Revenues:
Room revenue........................................................................... $ 59,542 $ 48,119
Other revenue.......................................................................... 520 33
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Total revenues.................................................................... 60,062 48,152
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Operating expenses:
Property operating expenses............................................................ 25,489 22,030
Corporate operating expenses........................................................... 6,010 9,694
Special charge (credit) (Note 3)....................................................... (1,922) --
Depreciation and amortization.......................................................... 10,962 9,997
------------ -------------
Total operating expenses.......................................................... 40,539 41,721
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Operating income............................................................................ 19,523 6,431
Interest income............................................................................. 262 154
Interest expense, net of capitalized interest............................................... (11,290) (11,316)
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Earnings (loss) before income taxes and cumulative effect of accounting change.............. 8,495 (4,731)
Provision for income taxes.................................................................. -- --
------------ -------------
Earnings (loss) before cumulative effect of accounting change............................... 8,495 (4,731)
Cumulative effect of accounting change for organizational, pre-opening and
start-up activities...................................................................... -- (14,230)
------------ -------------
Net earnings (loss)......................................................................... $ 8,495 $ (18,961)
========== ===========
Basic weighted average shares outstanding................................................... 120,031 38,245
========== ===========
Diluted weighted average shares outstanding................................................. 120,031 38,245
========== ===========
Net earnings (loss) per share:
Basic earnings (loss) before cumulative effect of accounting change......................... $ 0.07 $ (0.12)
Cumulative effect of accounting change...................................................... -- (0.37)
========== ===========
Basic earnings (loss)....................................................................... $ 0.07 (0.49)
========== ===========
Diluted earnings (loss) before cumulative effect of accounting change....................... $ 0.07 $ (0.12)
Cumulative effect of accounting change...................................................... -- (0.37)
------------ -------------
Diluted earnings (loss)..................................................................... $ 0.07 (0.49)
========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
THREE MONTHS
ENDED MARCH 31,
-------------------------------
2000 1999
------------ -------------
<S> ` <C> <C>
Operating activities:
Net earnings(loss)........................................................... $ 8,495 $ (18,961)
Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities:
Gain on sales of land..................................................... (713) --
Cumulative effect of accounting change.................................... -- 14,230
Depreciation and amortization............................................. 10,962 9,997
Deferred compensation..................................................... 10 107
Amortization of deferred loan costs....................................... 368 994
Change in assets and liabilities:
Increase in accounts receivable, net of change in allowance............... (1,956) (807)
Decrease in funds held in escrow.......................................... -- 1,701
(Increase) in other current assets........................................ (16) (243)
Decrease in accrued real estate taxes..................................... (119) (350)
Increase in accrued interest on convertible mortgage notes................ 5,035 4,979
Decrease in accrued payroll and related accrued expenses.................. (1,118) (1,570)
Increase in accounts payable and other accrued expenses................... 338 2,139
Decrease in accrued special charge........................................ (3,117) (1,453)
Increase in due to affiliate.............................................. 64 379
-------------- --------------
Net cash provided by operating activities............................. 18,233 11,142
-------------- --------------
Investing activities:
Investment in properties, net of development costs payable................ (1,558) (48,782)
Proceeds from sales of land............................................... 9,996 --
Decrease in deposits and pursuit costs.................................... -- 688
Increase in other assets.................................................. (361) (1,190)
-------------- --------------
Net cash provided by (used in) investing activities................... 8,077 (49,284)
-------------- --------------
Financing activities:
Proceeds from lines of credit............................................. -- 41,920
Payments on line of credit................................................ (44,500) --
Deferred loan costs for line of credit.................................... (1,419) (2,377)
Payments on mortgage note payable......................................... -- (122,028)
Sale of property and equipment, net....................................... -- 127,262
Payments on capital lease................................................. (924) (1,740)
Payments on other long-term liabilities................................... -- (3)
Repurchase of stock....................................................... -- (107)
Proceeds from principal payments on notes from officers.................. -- 14
-------------- --------------
Net cash provided by (used in) financing activities................... (46,843) 42,941
-------------- --------------
Net (decrease) increase in cash and cash equivalents.............................. (20,533) 4,799
Cash and cash equivalents, beginning of period.................................... 20,747 12,144
-------------- --------------
Cash and cash equivalents, end of period.......................................... $ 214 $ 16,943
============== ==============
Non-cash investing and financing transaction:
Increase in property and equipment and lease obligation, from capital lease $ -- $ 145,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
NOTE 1--GENERAL
Principles of Financial Presentation
The financial statements of Homestead Village Incorporated ("Homestead") as
of March 31, 2000 and for the three-month periods ended March 31, 2000 and 1999
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 1999 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-month periods ended March 31, 2000 and 1999 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.
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-month periods
ended March 31, 2000 and 1999 exercise of options and conversion of debt is not
assumed as the effects are not dilutive in 2000 and are anti-dilutive in a
period of loss in 1999.
<PAGE>
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
MARCH 31,
------------------------------
2000 1999
---- ----
<S> <C> <C>
Net earnings (loss) attributable to common shares
before cumulative effect of accounting change.......................... $ 8,495 $ (4,731)
=========== ==========
Weighted average shares outstanding - basic.............................. 120,031 38,245
=========== ==========
Net earnings (loss) per share before cumulative effect of accounting
change:
Basic.................................................................... $ 0.07 $ (0.12)
=========== ==========
Diluted.................................................................. $ 0.07 $ (0.12)
=========== ==========
</TABLE>
Reclassifications
Certain 1999 financial statement amounts have been reclassified to conform
to the 2000 presentation.
New Accounting Rules
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.
NOTE 2--PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
MARCH 31, 2000 DECEMBER 31, 1999
--------------------------------------------------
NUMBER OF NUMBER OF
PROPERTIES/ CARRYING
CARRYING PROPERTIES/
PARCELS AMOUNT PARCELS AMOUNT
--------------------------------------------------
<S> <C> <C> <C> <C>
Operating properties:
Owned properties:
Land.................................... $ 197,232 $ 197,226
Buildings and improvements.............. 658,924 658,668
Furniture, fixtures and equipment....... 89,036 88,145
----------- -----------
Subtotal, owned properties................. 118 945,192 118 944,039
Properties under a capital lease............. 18 145,000 18 145,000
---- ----
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136 1,090,192 136 1,089,039
=== ===
Under construction.............................. -- -- -- --
=== ===
Land held for development....................... (a) 1,177 -- --
===== ===
Land held for sale, including excess parcels.... 9 12,518 13 22,960
===== ====
=========== ===========
Total................................. $1,103,887 $1,111,999
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<FN>
(a) Land held for development at March 31, 2000 consists of one excess parcel
upon which Homestead will expand an existing operating property. The excess
parcel had been held for sale as of December 31, 1999.
Land held for sale at March 31, 2000 consists of seven suburban sites and
two excess parcels located adjacent to operating properties. During the
first quarter of 2000 the sole remaining urban site was sold, as well as a
suburban site and an excess land parcel, for aggregate proceeds of
approximately $9.9 million.
</FN>
</TABLE>
<PAGE>
NOTE 3--SPECIAL CHARGE CREDIT
In 1999 Homestead recorded a special charge of $65.3 million primarily for
write-downs of land to be held for sale, write-offs of pursuit costs, closure of
offices and discontinuance of new initiatives, and severance of personnel costs.
In the quarter ended March 31, 2000 credit adjustments have been recorded
consisting of gains on sales of land and anticipated cost recoveries of
approximately $2.0 million and a decrease in the costs of closing administrative
offices (due to Homestead obtaining subleases for unused space) of approximately
$1.2 million. The credit adjustments were offset by additional severance costs
for the separation of 2 executive officers in first quarter 2000 estimated at
$1.3 million.
The remaining $2.1 million liability for special charge expenses at March
31, 2000 consists of approximately $2.2 million of unpaid severance costs,
approximately $1.3 million for ongoing costs of closed offices, and
approximately $1.4 million of estimated recoveries of costs.
NOTE 4--DEBT
The following table summarizes Homestead's outstanding debt.
<TABLE>
MARCH 31, DECEMBER 31,
2000 1999
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
Credit facility:
Revolving portion......................................... $ 5,949 $ 125,449
Term portion.............................................. 75,000 --
---------------- -----------------
Total credit facility................................... 80,949 125,449
Capital lease obligation..................................... 139,930 140,854
Convertible mortgage notes................................... 221,334 221,334
---------------- -----------------
Total debt.............................................. $ 442,213 $ 487,637
================ =================
</TABLE>
Credit Facility
On February 29, 2000 Homestead entered into an amended and restated bank
credit facility which allows for $110 million of total borrowings of which $35
million is available on a revolving basis and $75 million is a term loan. Any
repayment on the term loan before the maturity date cancels the term loan
commitment in the amount of the repayment. The amended and restated facility
matures February 28, 2003, bears interest at LIBOR plus 2.5%, is secured by 64
operating properties and permits payment of dividends based upon a definition of
free cash flow. The amended and restated credit facility requires maintenance of
financial ratio and coverage covenants effective with first quarter 2000.
Homestead was in compliance with all covenants under its credit facility as of
March 31, 2000.
As of March 31, 2000, Homestead has an outstanding balance of $80.9 million
under the credit facility, of which $75 million was outstanding on the term
portion and $5.9 million was outstanding on the revolving portion.
Convertible Mortgage Notes Payable
At March 31, 2000 Homestead owed convertible mortgage notes to Archstone
Communities Trust ("Archstone"), an affiliate, in the principal amount of $221.3
million. The notes are collateralized by mortgages on 54 Homestead properties
with a historical cost of $359.6 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).
<PAGE>
Capital Lease Obligation
Homestead operates eighteen properties under a long-term lease through
December 2015 and pays a minimum rent of approximately $16 million per year and
a minimum of $1.5 million per year payment to a furniture, fixtures and
equipment reserve. Homestead posted a security deposit equal to one year's rent.
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, being
amortized over the lease term, and an obligation, which is reduced over the term
of the lease by allocating rent payments between interest expense and reduction
of the lease obligation. Future minimum payments aggregate $17,460,000 per year,
or a total of $274,995,000 for the remainder of 2000 through 2015, of which
$135,065,000 represents interest. The balance of the obligation at March 31,
2000 was $139,930,000.
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 PERIODS ENDED
MARCH 31,
-------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Credit facilities.............................................................. $ 2,822 $ 7,622
Convertible mortgage notes.................................................... 5,035 4,980
Mortgage note payable.......................................................... -- 1,282
Capital lease obligation...................................................... 3,433 1,407
Other......................................................................... -- 193
-------------- --------------
Total interest cost....................................................... 11,290 15,484
Capitalized interest.......................................................... -- (4,168)
-------------- --------------
Net interest expense...................................................... $ 11,290 $ 11,316
============== ==============
Amortization of deferred financing costs included in interest cost............ $ 368 $ 994
============== ==============
</TABLE>
The total interest paid in cash for the three-month periods ended March 31,
2000 and 1999 was $6,434,000 and $9,571,000, respectively.
NOTE 5--INCOME TAXES
As Security Capital Group Incorporated's ("Security Capital's") ownership
in Homestead exceeded 80% as of May 1999, Homestead's results after May 1999 are
included in Security Capital's federal income tax return. 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 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 income tax returns, such loss carryforwards will not
be available to Homestead in the future. Homestead and Security Capital have
entered into a tax allocation agreement which provides for tax liability or
refund payments between the entities as determined by a defined calculation of
Homestead's proportionate share of taxable income versus the total taxable
income for all entities filing as part of Security Capital's federal tax return.
The agreement also provides that if a capital transaction were to occur where
Security Capital owned less than 50% of Homestead after the transaction, all net
operating loss carryforwards generated by Homestead through May 1999 would inure
to Security Capital.
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 lease obligation, 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 6--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 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 administration,
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. The Administrative Services
Agreement, which expires December 31, 2000, is renewable for a one-year term,
subject to approval by a majority of the independent members of the Homestead
Board of Directors. Additionally, Security Capital provides legal administration
services under a separate agreement which expires December 31, 2000. Total
administrative services fees for the three-month periods ended March 31, 2000
and 1999 were $1,215,000 and $1,457,000, respectively.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Other than described below 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. As a result of the announcement on March 23, 2000 of
Security Capital's proposal to Homestead to purchase all shares of Homestead
common stock not already owned by Security Capital, several lawsuits (the
"Actions") were filed against Homestead, Security Capital, and Homestead's
directors which purport to be stockholder class actions alleging the proposed
$3.40 cash per share offer was unfair and breaches of duties of Security Capital
and Homestead directors. On May 2, 2000, as the result of negotiations between
counsel for parties in the Actions, an agreement in principle was reached
providing for the settlement of the Actions, subject to court approval and the
completion of the merger, among other things. 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.
NOTE 8--PROPOSED TRANSACTION WITH SECURITY CAPITAL
On March 23, 2000, Security Capital submitted a letter to the Homestead
Board of Directors setting forth Security Capital's proposal to acquire all
outstanding shares of Homestead common stock not currently beneficially owned by
Security Capital for $3.40 per share in cash. On May 2, 2000, Homestead
announced that it has entered into a definitive merger agreement providing for
the acquisition by cash tender offer by Security Capital for all the shares of
Homestead's common stock and the associated preferred share purchase rights not
owned by Security Capital at $4.10 per share. Any shares of Homestead common
stock and associated preferred share purchase rights not purchased in the tender
offer will be acquired by Security Capital in a subsequent merger transaction at
the same $4.10 per share cash price. On May 9, 2000 Security Capital commenced a
cash tender offer for all shares of Homestead common stock and the associated
preferred share purchase rights not owned by Security Capital at $4.10 per
share.
<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
March 31, 2000 and the related condensed consolidated statements of operations
for the three-month periods ended March 31, 2000 and 1999 and the related
condensed consolidated statements of cash flows for the three-month periods
ended March 31, 2000 and 1999. 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 auditing standards generally accepted in the United States, 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 accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Homestead
Village Incorporated and subsidiaries as of December 31, 1999, and in our report
dated January 28, 2000, 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, 1999, 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
April 28, 2000
<PAGE>
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
1999 Annual Report on Form 10-K (the "1999 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 1999 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
First quarter 2000 results reflect the transition of Homestead to an
operating company composed of 136 stabilized properties with, management
believes, an appropriately scaled corporate overhead structure. The transition,
which largely took place during 1999, included focusing on Homestead's balance
sheet to dispose of land held for sale, reduce debt balances, and extend the
maturities of debt; focusing on property operations to maximize cash flow from
operations, and reducing corporate overhead costs to a level appropriate for a
136-property operating company. By first quarter 2000 the effects of the
transition are reflected in Homestead's improved operating results and, through
additional first quarter 2000 land sales and debt repayments, a further
strengthened balance sheet at the end of the quarter.
Balance Sheet Focus
Homestead has reduced its debt to $442.2 million at March 31, 2000 (from
$487.6 million at December 31, 1999), which primarily reflects repayment of
$44.5 million on the bank line of credit during first quarter 2000. Homestead
reduced the bank debt in first quarter 2000 by utilizing cash on hand, cash from
operations and proceeds from the sales of land. Land sales in the quarter
generated net proceeds of approximately $9.9 million from the sale of the sole
remaining urban site, one suburban site and an excess land parcel.
In addition to the debt reductions, on February 29, 2000 Homestead entered
into an amended and restated bank credit facility which allows for $110 million
of total borrowings of which $35 million is available on a revolving basis. The
amended and restated line matures February 28, 2003 (the former facility was due
December 2000), bears interest at LIBOR plus 2.5%, is secured by 64 operating
properties, and permits payment of dividends based upon a definition of free
cash flow.
Focus on Property Operations
Beginning in late second quarter 1999 Homestead lowered rates in selected
markets which were experiencing competitive pressures. Management believes the
improvements in occupancy levels and revenues for the three months ended March
31, 2000 were partially due to these actions. Occupancy of same-store properties
increased 560 basis points from 65.1% for the three months ended March 31, 1999
to 70.7% for the same period in 2000.
<PAGE>
Reduction of Overhead
In May 1999, Homestead's management established a goal of reducing overhead
to reflect a company with stabilized operations of 136 properties. In the first
quarter of 2000, on an annualized basis, total overhead costs was reduced to
$24.5 million from $48.6 million from the same period in 1999.
Proposed Transaction with Security Capital
On March 23, 2000, Security Capital submitted a letter to the Homestead
Board of Directors setting forth Security Capital's proposal to acquire all
outstanding shares of Homestead common stock not currently beneficially owned by
Security Capital for $3.40 per share in cash. On May 2, 2000, Homestead
announced that it has entered into a definitive merger agreement providing for
the acquisition by cash tender offer by Security Capital for all the shares of
Homestead's common stock and the associated preferred share purchase rights not
owned by Security Capital at $4.10 per share. Any shares of Homestead common
stock and associated preferred share purchase rights not purchased in the tender
offer will be acquired by Security Capital in a subsequent merger transaction at
the same $4.10 per share cash price. On May 9, 2000, Security Capital commenced
a cash tender for all the shares of Homestead common stock and the associated
preferred share purchase rights not owned by Security Capital at $4.10 per
share.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
Net earnings (loss), for the three months ended March 31, 2000 and 1999
were $8.49 million and $(18.96) million, respectively. Net earnings for the
three-month period ended March 31, 2000 includes a special charge credit of $1.9
million relating to an adjustment to the second quarter 1999 special charge and
additional severances in first quarter 2000. The net loss for the three
month-period ended March 31, 1999 includes a 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. Net earnings (loss) before the special charge credit and
cumulative effect was $6.6 million for the three month period ended March 31,
2000 and ($4.7) million for the three-month period ended March 31, 1999. The
$11.3 million increase is primarily attributable to an increase of $11.4 million
in room revenue. A discussion of the major components of net earnings (loss)
follows.
Property Operations
Homestead's first quarter 2000 revenue per available room performance shows
a 14.0% increase compared to the same period of 1999 which reflects higher
occupancy levels offset partially by lower average weekly rates. The following
table sets forth certain information for Homestead's total operating property
portfolio for the periods indicated:
<TABLE>
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2000 1999 CHANGE
-------------------------------------
<S> <C> <C> <C>
Weekly RevPAR(1)..................................... $252 $221 14.0%
Average Weekly Rate(2)............................... $349 $352 (0.8%)
Occupancy............................................ 72.2% 62.8% 9.4
Number of Operating Properties at Period End......... 136 125 8.8%
Property Operating Income Margin..................... 57.4% 54.2% 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 11 new openings since the end of the first quarter of 1999
account for approximately one-half of the room revenue increase of $11.4 million
(23.7%) for the three months ended March 31, 2000 as compared to the same period
in 1999. The remainder of the increase in room revenue is primarily due to
stabilized operations of properties which were in a pre-stabilized status in
first quarter 1999 and the effect of occupancy increases on RevPAR of properties
operating and stabilized in both periods. Total property operating expenses
increased $3.5 million (15.7%) for the three months ended March 31, 2000 over
1999. The increase is due primarily to the increase in the number of operating
properties as noted above.
Same-Store Properties
Homestead had 100 properties which were operating and stabilized
("stabilized" means those properties which obtained 80% occupancy for a one-week
period or have been opened for 24 weeks) throughout both three-month periods
ended March 31, 2000 and 1999 ("same-store" properties). RevPAR for the three
months ended March 31, 2000 for the same-store properties increased to $230 from
$219 for the same period in 1999. The RevPAR increase was due to an increase in
occupancy to 70.7% for the three month period ended March 31, 2000 from 65.1%
for the same period in 1999, offset in part by a decrease in the average weekly
rate of $11 (3.3%) for the three months ended March 31, 2000 as compared to the
same period in 1999. The increase in RevPAR and occupancy is a result of
management's efforts to improve occupancy in select markets by reducing room
rates.
Corporate Operating Expenses
Corporate operating expenses decreased $3.7 million for the three month
period ended March 31, 2000 as compared to the same period in 1999. The decrease
is due to the severance of personnel and the cost reductions initiated in May
1999.
Depreciation and Amortization
Depreciation and amortization increased $965,000 for the three months ended
March 31, 2000 as compared to the same period in 1999 primarily due to the
increased number of properties operating for the three-month period ended March
31, 2000 as compared to the same period in 1999.
Interest Income
Interest income of $262,000 and $154,000 for the three months ended March
31, 2000 and 1999, respectively, was a result of interest earned from investment
of excess cash on hand.
Interest Expense
The following summarizes Homestead's interest expense (in thousands):
<TABLE>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2000 1999
-----------------------------
<S> <C> <C>
Credit facilities.............................................$ 2,822 $ 7,622
Convertible mortgage notes.................................... 5,035 4,980
Mortgage note payable......................................... -- 1,282
Capital lease obligation...................................... 3,433 1,407
Other......................................................... -- 193
------------- --------------
Total interest cost....................................... 11,290 15,484
Capitalized interest.......................................... -- (4,168)
------------- --------------
Net interest expense......................................$ 11,290 $ 11,316
============= ==============
Amortization of deferred financing costs included in
interest cost $ 368 $ 994
============= ==============
</TABLE>
Interest expense on credit facilities borrowings decreased $4.8 million for
the three months ended March 31, 2000 as compared to the same period in 1999 due
primarily to a lower average outstanding balance ($111.0 million in 2000
compared to $376.5 million in 1999).
Homestead incurred $1.3 million in interest cost for the three months ended
March 31, 1999 relating to a mortgage note which was repaid on February 23, 1999
with proceeds from the sale-leaseback of properties. Homestead incurred $3.4
million and $1.4 million in interest cost in the three months ended March 31,
2000 and 1999, respectively, as a result of the leaseback of such properties
under a capital lease.
In 1999 interest cost on borrowings was 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 $4.2 million for the three months ended March
31, 2000 as compared to the same period in 1999 due to the completion of all
properties in construction during the second quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Investing and Financing Activities
During the three month periods ended March 31, 2000 and 1999, Homestead
invested $1.6 million and $48.8 million, respectively in Homestead properties.
The amounts invested in the three months ended March 31, 2000 were financed
primarily from cash flows from operations. The amounts invested in the three
months ended March 31, 1999 were financed primarily from borrowings under the
lines of credit.
During the first three months of 2000, Homestead reduced its debt from
$487.6 million at December 31, 1999 to $442.2 million at March 31, 2000 by
paying a total of $44.5 million on the line of credit reducing its line of
credit to $80.9 million.
Homestead believes it will have adequate cash resources from cash on hand
and cash flow from operations to fund its debt service needs and payment of
severances and other special charge liabilities. In addition Homestead may
generate additional cash by the sale of the remaining land held for sale, 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 operations of its properties, there can be no assurance of generation
of positive cash flow from future operations due to the risks of operations 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 increased by $7.1 million
for the three months ended March 31, 2000 as compared to 1999. The increase is
due primarily to an increase in cash from operations provided by the growth in
the number of operating properties as described under "Results of Operations."
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.
<PAGE>
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 credit facility. On February 29, 2000, the credit facility was
amended and restated to provide for, among other things, interest at LIBOR plus
2.5% and a due date of February 28, 2003. As the facility bears interest at a
rate which fluctuates with the market, fair value approximates carrying value at
the balance sheet date.
As of March 31, 2000 no other significant change had occurred in
Homestead's interest rate risk as discussed in Homestead's 1999 Annual Report on
Form 10-K.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a result of the announcement on March 23, 2000, of Security
Capital's proposal to Homestead to purchase all shares of Homestead common stock
not already owned by Security Capital for $3.40 per share, and before the
Homestead Board of Directors took any action with respect to the proposal,
several lawsuits were filed against Homestead, Security Capital and Homestead's
directors. Homestead, Security Capital and Homestead's directors have been named
as defendants in four purported stockholder class actions. Three of these
actions have been filed in the Circuit Court for Baltimore City, Maryland, and
are captioned Earl Joseph Maisonneuve v. Eugene B. Vesell, et al.; Robert
Merritt v. Security Capital Group Incorporated; and Harold McClintock v. C.
Ronald Blankenship, et al. One of these actions has been filed in the Circuit
Court for Montgomery County, Maryland, and is captioned Aron Rubin v. Homestead
Village, Inc., et al. The allegations in all four cases (the "Actions") are
substantially similar, and each complaint in the Actions alleges that (a) the
Security Capital proposal of $3.40 in cash per share was unfair, (b) Security
Capital and the Homestead directors were breaching their duties to the
stockholders of Homestead not affiliated with Security Capital in connection
with the Homestead proposal, and (c) appropriate steps were not being taken to
insure that the stockholders of Homestead not affiliated with Security Capital
would receive fair value for their Homestead shares in any transaction that
might occur. As relief, the complaints in the Actions sought, among other
things, damages in an unspecified amount and rescission of the transaction, if
effected. In addition, the action brought by Harold McClintock was also filed in
a Georgia court and is captioned Harold McClintock v. C. Ronald Blankenship. The
plaintiff has filed a motion to dismiss the Georgia action; however, the court
has not yet granted the motion.
On May 2, 2000, as the result of negotiations between counsel for parties
in the Actions, an agreement in principle was reached providing for the
settlement of the Actions, subject to Court approval and the completion of the
merger, among other things. Homestead does not believe that the results of the
settlement will have a material adverse effect on its business, financial
position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Change in Control Agreement between James C. Potts and Homestead
10.2 Agreement and Plan of Merger by and among Security Capital Group
Incorporated, HSD Acquisition Corporation and Homestead Village
Incorporated dated as of May 2, 2000 (previously filed as Exhibit
(d)(1) to Schedule TO of Security Capital Group Incorporated dated May
9, 2000, and incorporated by reference).
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 March 29, 2000 Item 5,7 No
8-K April 10, 2000 Item 5,7 No
<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/ A. RICHARD MOORE
Interim Chief Financial Officer
(Principal Financial Officer)
/S/ F. JOSEPH ROGERS
Vice President
(Principal Accounting Officer)
Date: May 12, 2000
CHANGE IN CONTROL AGREEMENT
This Agreement entered into as of the 24th_ day of May, 1999, by and
between Homestead Village Incorporated, a Maryland corporation (the "Company"),
and James C. Potts (the "Executive").
WHEREAS, the Company wishes to assure itself of the continuity of the
Executive's services in the event of any actual change in control of the
Company; and
WHEREAS, the Company and the Executive accordingly desire to enter into
this Agreement on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, it is hereby agreed by and between the parties as follows:
1. Term of Agreement. The "Term" of this Agreement shall commence on the date
hereof and shall continue through December 31, 2001; provided, however, that on
such date and on each December 31 thereafter, the Term of this Agreement shall
automatically be extended for one additional year unless, not later than the
preceding January 1 either party shall have given notice that such party does
not wish to extend the Term; and provided, further, that if a Change in Control
(as defined in paragraph 3 below) shall have occurred during the original or any
extended Term of this Agreement, the Term of this Agreement shall continue for a
period of twenty-four calendar months beyond the calendar month in which such
Change in Control occurs.
2. Employment After a Change in Control. If the Executive is in the employ of
the Company on the date of a Change in Control, the Company hereby agrees to
continue the Executive in its employ for the period commencing on the date of
the Change in Control and ending on the last day of the Term of this Agreement.
During the period of employment described in the foregoing provisions of this
paragraph 2 (the "Employment Period"), the Executive shall hold such position
with the Company and exercise such authority and perform such executive duties
as are commensurate with the Executive's position, authority and duties
immediately prior to the Change in Control. The Executive agrees that during the
Employment Period the Executive shall devote full business time exclusively to
the executive duties described herein and perform such duties faithfully and
efficiently; provided, however, that nothing in this Agreement shall prevent the
Executive from voluntarily resigning from employment upon 60 days' written
notice to the Company under circumstances which do not constitute a Termination
(as defined below in paragraph 5).
3. Change in Control. For purposes of the Plan, a "Change in Control" means the
happening of any of the following:
a. the stockholders of the Company approve a definitive agreement to merge the
Company into or consolidate the Company with another entity, sell or
otherwise dispose of all or substantially all of its assets or adopt a plan
of liquidation, provided, however, that a Change in Control shall not be
deemed to have occurred by reason of a transaction, or a substantially
concurrent or otherwise related series of transactions, upon the completion
of which 50% or more of the beneficial ownership of the voting power of the
Company, the surviving corporation or corporation directly or indirectly
controlling the Company or the surviving corporation, as the case may be,
is held by the same persons (as defined below) (although not necessarily in
the same proportion) as held the beneficial ownership of the voting power
of the Company immediately prior to the transaction or the substantially
concurrent or otherwise related series of transactions, except that upon
the completion thereof, employees or employee benefit plans of the Company
may be a new holder of such beneficial ownership; provided, further, that a
transaction with an "Affiliate" of the Company (as defined in the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall not
be treated as a Change in Control; or
b. the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange
Act) of securities representing 50% or more of the combined voting power of
the Company is acquired, other than from the Company, by any "person" as
defined in Sections 13(d) and 14(d) of the Exchange Act (other than by an
Affiliate or any trustee or other fiduciary holding securities under an
employee benefit or other similar stock plan of the Company); or
c. at any time during any period of two consecutive years, individuals who at
the beginning of such period were members of the Board of Directors of the
Company cease for any reason to constitute at least a majority thereof
(unless the election, or the nomination for election by the Company's
stockholders, of each new Director was approved by a vote of at least
two-thirds of the Directors still in office at the time of such election or
nomination who were Directors at the beginning of such period).
<PAGE>
4. Compensation During the Employment Period. During the Employment Period, the
Executive shall be compensated as follows:
a. the Executive shall receive an annual salary which is not less than his
annual salary immediately prior to the Employment Period and shall be
eligible to receive an increase in annual salary which is not materially
less favorable to the Executive than increases in salary granted by the
Company for executives with comparable duties;
b. the Executive shall be eligible to participate in short-term and long-term
cash-based incentive compensation plans which, in the aggregate, provide
bonus opportunities which are not materially less favorable to the
Executive than the greater of (i) the opportunities provided by the Company
for executives with comparable duties; and (ii) the opportunities provided
to the Executive under all such plans in which the Executive was
participating prior to the Employment Period;
c. the Executive shall be eligible to participate in stock option, performance
awards, restricted stock and other equity-based incentive compensation
plans on a basis not materially less favorable to the Executive than that
applicable (i) to the Executive immediately prior to the Employment Period
or (ii) to other executives of the Company with comparable duties; and
d. the Executive shall be eligible to receive employee benefits (including,
but not limited to, tax-qualified and nonqualified savings plan benefits,
medical insurance, disability income protection, life insurance coverage
and death benefits) and perquisites which are not materially less favorable
to the Executive than (i) the employee benefits and perquisites provided by
the Company to executives with comparable duties or (ii) the employee
benefits and perquisites to which the Executive would be entitled under the
Company's employee benefit plans and perquisites as in effect immediately
prior to the Employment Period.
5. Termination. For purposes of this Agreement, the term "Termination" shall
mean termination of the employment of the Executive during the Employment Period
(i) by the Company, for any reason other than death, Disability (as defined
below), or Cause (as described below), or (ii) by resignation of the Executive
upon the occurrence of one of the following events:
a. a significant change in the nature or scope of the Executive's authorities
or duties from those described in paragraph 2 above, a breach of any of the
subparagraphs of paragraph 4 above, or the breach by the Company of any
other provision of this Agreement;
b. the relocation of the Executive's office to a location more than fifty
miles from the location of the Executive's office immediately prior to the
Employment Period;
c. a reasonable determination by the Executive that, as a result of a Change
in Control and a change in circumstances thereafter significantly affecting
the nature and scope of Executive's authorities and duties from those
described in paragraph 2 above, the Executive is unable to exercise the
authorities, powers, functions or duties associated with the Executive's
position as contemplated by paragraph 2 above; or
d. the failure of the Company to obtain a satisfactory agreement from any
successor to assume and agree to perform this Agreement as contemplated in
paragraph 18 below.
The date of the Executive's Termination under this paragraph 5 shall be the date
specified by the Executive or the Company, as the case may be, in a written
notice to the other party complying with the requirements of paragraph 14 below.
For purposes of this Agreement, the Executive shall be considered to have a
"Disability" during the period in which the Executive is unable, by reason of a
medically determinable physical or mental impairment, to engage in the material
and substantial duties of his regular occupation, which condition is expected to
be permanent. For purposes of this Agreement, the term "Cause" means, in the
reasonable judgment of the Board of Directors of the Company, (i) the willful
and continued failure by the Executive to substantially perform the Executive's
duties with the Company after written notification by the Company, (ii) the
willful engaging by the Executive in conduct which is demonstrably injurious to
the Company, monetarily or otherwise, or (iii) the engaging by the Executive in
egregious misconduct involving serious moral turpitude. For purposes of this
Agreement, no act, or failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the Executive not in good faith
and without reasonable belief that such action was in the best interest of the
Company.
6. Severance Payments. Subject to the provisions of paragraph 10 below, in the
event of a Termination described in paragraph 5 above, in lieu of the amount
otherwise payable under paragraph 4 above, the Executive shall continue to
receive medical insurance, disability income protection, life insurance coverage
and death benefits and perquisites in accordance with subparagraph 4(d) above
for a period of twelve months after the date of Termination, and shall be
entitled to a lump sum payment in cash no later than ten business days after the
date of Termination equal to the sum of:
<PAGE>
a. the Executive's unpaid salary, accrued vacation pay and unreimbursed
business expenses through and including the date of Termination;
b. an amount equal to two times the Executive's annual salary rate in
effect immediately prior to the date of Termination;
c. an amount equal to two times the target bonus award for the Executive
for the year of Termination;
d. an amount equal to the assigned target bonus for the Executive for the
year of Termination prorated through the date of Termination.
7. Make-Whole Payments. Subject to the last three sentences of this paragraph 7,
if any payment or benefit to which the Executive is entitled, whether under this
Agreement or otherwise, in connection with a Change in Control or the
Executive's termination of employment (a "Payment") is subject to any tax under
section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or
any similar federal or state law (an "Excise Tax"), the Company shall pay to the
Executive an additional amount (the "Make-Whole Amount") which is equal to (i)
the amount of the Excise Tax, plus (ii) the aggregate amount of any interest,
penalties, fines or additions to any tax which are imposed in connection with
the imposition of such Excise Tax, plus (iii) all income, excise and other
applicable taxes imposed on the Executive under the laws of any Federal, state
or local government or taxing authority by reason of the payments required under
clause (i) and clause (ii) and this clause (iii). Such Make-Whole Amount will
not be paid to the Executive if the Payment is less than 10 percent above the
maximum amount that may be paid without incurring Excise Tax. In the event that
the Payment is greater than the maximum amount that may be paid without
incurring Excise Tax, but less than 10 percent greater than the maximum amount,
then the Payments shall be capped at the maximum amount that may be paid without
incurring Excise Tax. In such event, the cash severance payments provided in
paragraph 6 above and/or the outplacement services provided in paragraph 8
below, at the Executive's election, shall be reduced to a level that results in
the total Payment being equal to the maximum amount that may be paid without
incurring Excise Tax.
a. For purposes of determining the Make-Whole Amount, the Executive shall be
deemed to be taxed at the highest marginal rate under all applicable local,
state, federal and foreign income tax laws for the year in which the
Make-Whole Amount is paid. The Make-Whole Amount payable with respect to an
Excise Tax shall be paid by the Company coincident with the Payment with
respect to which such Excise Tax relates.
b. All calculations under this paragraph 7 shall be made initially by the
Company and the Company shall provide prompt written notice thereof to the
Executive to enable the Executive to timely file all applicable tax
returns. Upon request of the Executive, the Company shall provide the
Executive with sufficient tax and compensation data to enable the Executive
or his tax advisor to independently make the calculations described in
subparagraph (a) above and the Company shall reimburse the Executive for
reasonable fees and expenses incurred for any such verification.
c. If the Executive gives written notice to the Company of any objection to
the results of the Company's calculations within 60 days of the Executive's
receipt of written notice thereof, the dispute shall be referred for
determination to tax counsel selected by the independent auditors of the
Company ("Tax Counsel"). The Company shall pay all reasonable fees and
expenses of such Tax Counsel. Pending such determination by Tax Counsel,
the Company shall pay the Executive the Make-Whole Amount as determined by
it in good faith. The Company shall pay the Executive any additional amount
determined by Tax Counsel to be due under this paragraph 7 (together with
interest thereon at a rate equal to 120% of the Federal short-term rate
determined under section 1274(d) of the Code) promptly after such
determination.
<PAGE>
d. The determination by Tax Counsel shall be conclusive and binding upon all
parties unless the Internal Revenue Service, a court of competent
jurisdiction, or such other duly empowered governmental body or agency (a
"Tax Authority") determines that the Executive owes a greater or lesser
amount of Excise Tax with respect to any Payment than the amount determined
by Tax Counsel.
e. If a Taxing Authority makes a claim against the Executive which, if
successful, would require the Company to make a payment under this
paragraph 7, the Executive agrees to contest the claim, with counsel
reasonably satisfactory to the Company, on request of the Company subject
to the following conditions:
(i) The Executive shall notify the Company of any such claim within
10 days of becoming aware thereof. In the event that the Company
desires the claim to be contested, it shall promptly (but in no
event more than 30 days after the notice from the Executive or
such shorter time as the Taxing Authority may specify for
responding to such claim) request the Executive to contest the
claim. The Executive shall not make any payment of any tax which
is the subject of the claim before the Executive has given the
notice or during the 30-day period thereafter unless the
Executive receives written instructions from the Company to make
such payment together with an advance of funds sufficient to make
the requested payment plus any amounts payable under this
paragraph 7 determined as if such advance were an Excise Tax, in
which case the Executive will act promptly in accordance with
such instructions.
(ii) If the Company so requests, the Executive will contest the claim
by either paying the tax claimed and suing for a refund in the
appropriate court or contesting the claim in the United States
Tax Court or other appropriate court, as directed by the Company;
provided, however, that any request by the Company for the
Executive to pay the tax shall be accompanied by an advance from
the Company to the Executive of funds sufficient to make the
requested payment plus any amounts payable under this paragraph 7
determined as if such advance were an Excise Tax. If directed by
the Company in writing the Executive will take all action
necessary to compromise or settle the claim, but in no event will
the Executive compromise or settle the claim or cease to contest
the claim without the written consent of the Company; provided,
however, that the Executive may take any such action if the
Executive waives in writing his right to a payment under this
paragraph 7 for any amounts payable in connection with such
claim. The Executive agrees to cooperate in good faith with the
Company in contesting the claim and to comply with any reasonable
request from the Company concerning the contest of the claim,
including the pursuit of administrative remedies, the appropriate
forum for any judicial proceedings, and the legal basis for
contesting the claim. Upon request of the Company, the Executive
shall take appropriate appeals of any judgment or decision that
would require the Company to make a payment under this paragraph
7. Provided that the Executive is in compliance with the
provisions of this section, the Company shall be liable for and
indemnify the Executive against any loss in connection with, and
all costs and expenses, including attorneys' fees, which may be
incurred as a result of, contesting the claim, and shall provide
to the Executive within 30 days after each written request
therefor by the Executive cash advances or reimbursement for all
such costs and expenses actually incurred or reasonably expected
to be incurred by the Executive as a result of contesting the
claim.
f. Should a Tax Authority finally determine that an additional Excise Tax is
owed, then the Company shall pay an additional Make-Up Amount to the
Executive in a manner consistent with this paragraph 7 with respect to any
additional Excise Tax and any assessed interest, fines, or penalties. If
any Excise Tax as calculated by the Company or Tax Counsel, as the case may
be, is finally determined by a Tax Authority to exceed the amount required
to be paid under applicable law, then the Executive shall repay such excess
to the Company within 30 days of such determination; provided that such
repayment shall be reduced by the amount of any taxes paid by the Executive
on such excess which is not offset by the tax benefit attributable to the
repayment.
<PAGE>
8. Outplacement Services. If the Executive's Termination occurs during the
Employment Period, at the election of the Executive, the Company shall provide
the Executive with outplacement service of an experienced firm selected by the
Company and acceptable to the Executive located not more than fifty miles from
the location of Executive's office immediately prior to the Employment Period,
provided that the cost of such services shall not exceed $25,000 and such
services shall not extend beyond 24 months from Executive's Termination
9. Pooling of Interests Accounting Treatment. If the application of any
provision of this Agreement, or of the Agreement in its entirety, would preclude
the use of pooling of interests accounting treatment with respect to a
transaction for which such treatment otherwise is available and to be adopted by
the Company, this Agreement, upon the determination of the Board, shall be
modified as it applies to such transaction, to the minimum extent necessary to
prevent such impact.
10. Withholding. All payments to the Executive under this Agreement will be
subject to all applicable withholding of state and federal taxes.
11. Confidentiality, Non-Solicitation and Non-Competition. The Executive agrees
that:
a. Except as may be required by the lawful order of a court or agency of
competent jurisdiction, or except to the extent that the Executive has
express authorization from the Company, the Executive agrees to keep secret
and confidential indefinitely all non-public information concerning the
Company or any affiliate thereof which was acquired by or disclosed to the
Executive during the course of the Executive's employment with the Company
or any affiliate thereof, and not to disclose the same, either directly or
indirectly, to any other person, firm or business entity or to use it in
any way.
b. While the Executive is employed by the Company or any affiliate and for a
period of one year after the date of the Executive's Termination, the
Executive covenants and agrees that Executive will not, whether for
Executive or for any other person, business, partnership, association,
firm, company or corporation, initiate contact with, solicit, divert or
take away any of the customers (entities or individuals from which the
Company or any of its affiliates receives rents or payment for services) of
the Company or any affiliate thereof or employees of the Company or any
affiliate thereof in existence from time to time during Executive's
employment with the Company or any affiliate thereof and at the time of
such initiation, solicitation or diversion.
c. While the Executive is employed by the Company or any entity controlled by
the Company and for a period of one year after Executive's Termination, the
Executive covenants and agrees that Executive will not, directly or
indirectly, engage in, assist, perform services for, plan for, establish or
open, or have any financial interest (other than (i) ownership of 1% or
less of the outstanding stock of any corporation listed on the New York or
American Stock Exchange or included in the National Association of
Securities Dealers Automated Quotation System or (ii) ownership of
securities in any entity affiliated with the Company) in any person, firm,
corporation, or business entity (whether as an employee, officer, director
of consultant) that engages as its principal business in the operation,
development, management or financing of moderate priced, extended-stay
lodging facilities that compete directly with the Company or any entity
controlled by the Company.
<PAGE>
12. Arbitration of All Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in Chicago, Illinois, in accordance with the laws of the State of Illinois, by
three arbitrators appointed by the parties. If the parties cannot agree on the
appointment of the arbitrators, one shall be appointed by the Company and one by
the Executive and the third shall be appointed by the first two arbitrators. If
the first two arbitrators cannot agree on the appointment of a third arbitrator,
then the third arbitrator shall be appointed by the Chief Judge of the United
States Court of Appeals for the Seventh Circuit. The arbitration shall be
conducted in accordance with the rules of the American Arbitration Association,
except with respect to the selection of arbitrators which shall be as provided
in this paragraph 12. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof. In the event that it shall be
necessary or desirable for the Executive to retain legal counsel or incur other
costs and expenses in connection with enforcement of his rights under this
Agreement, the Company shall pay (or the Executive shall be entitled to recover
from the Company, as the case may be) his reasonable attorneys' fees and costs
and expenses in connection with enforcement of his rights (including the
enforcement of any arbitration award in court). Payments shall be made to the
Executive at the time such fees, costs and expenses are incurred. If, however,
the arbitrators shall determine that, under the circumstances, payment by the
Company of all or a part of any such fees and costs and expenses would be
unjust, the Executive shall repay such amounts to the Company in accordance with
the order of the arbitrators. Any award of the arbitrators shall include
interest at a rate or rates considered just under the circumstances by the
arbitrators.
13. Mitigation and Set-Off. The Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise. The Company shall not be entitled to set off against the amounts
payable to the Executive under this Agreement any amounts owed to the Company by
the Executive, any amounts earned by the Executive in other employment after
termination of his employment with the Company, or any amounts which might have
been earned by the Executive in other employment had he sought such other
employment.
14. Notices. Any notice of Termination of the Executive's employment by the
Company or the Executive for any reason shall be upon no less than 15 days' and
no greater than 45 days' advance written notice to the other party. Any notices,
requests, demand and other communications provided for by this Agreement shall
be sufficient if in writing and if sent by registered or certified mail to the
Executive at the last address he has filed in writing with the Company or, in
the case of the Company, to the attention of the Secretary of the Company, at
its principal executive offices.
15. Non-Alienation. The Executive shall not have any right to pledge,
hypothecate, anticipate or in any way create a lien upon any amounts provided
under this Agreement; and no benefits payable hereunder shall be assignable in
anticipation of payment either by voluntary or involuntary acts, or by operation
of law. Nothing in this paragraph shall limit the Executive's rights or powers
to dispose of his property by will or limit any rights or powers which his
executor or administrator would otherwise have. This Agreement shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees, and legatees. If the Executive should die while any amount is still
payable to the Executive hereunder had the Executive continued to live, all such
amounts shall be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee, or other designee, or if there is no such
designee, to the Executive's estate.
16. Governing Law. The provisions of this Agreement shall be construed in
accordance with the laws of the State of Illinois, without application of
conflict of laws provisions thereunder.
17. Amendment. This Agreement may be amended or canceled by mutual agreement of
the parties in writing without the consent of any other person and, so long as
the Executive lives, no person, other than the parties hereto, shall have any
rights under or interest in this Agreement or the subject matter hereof.
18. Successors to the Company. This Agreement shall be binding upon and inure to
the benefit of the Company and any successor of the Company. The Company shall
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no succession had taken place.
<PAGE>
19. Employment Status. Nothing herein contained shall be deemed to create an
employment agreement between the Company and the Executive, providing for the
employment of the Executive by the Company for any fixed period of time. The
Executive's employment with the Company is terminable at will by the Company or
the Executive and each shall have the right to terminate the Executive's
employment with the Company at any time, with or without Cause, subject to (i)
the notice provisions of paragraphs 2, 5 and 14, and (ii) the Company's
obligation to provide severance payments as required by paragraph 6. Upon a
termination of the Executive's employment prior to the date of a Change in
Control, there shall be no further rights under this Agreement.
20. Severability. In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, the remaining
provisions of this Agreement shall be unaffected thereby and shall remain in
full force and effect.
21. Counterparts. This Agreement may be executed in two or more counterparts,
any one of which shall be deemed the original without reference to the others.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name and on its behalf, all as of
the day and year first above written.
/s/ J.C. Potts
------------------------------------------
James C. Potts
HOMESTEAD VILLAGE INCORPORATED
/s/ John R. Patterson
------------------------------------------
By: John R. Patterson
Its: Senior Vice President
Exhibit 15
To Homestead Village Incorporated:
We are aware that Homestead Village Incorporated and subsidiaries has
incorporated by reference in its previously filed Registration Statements on
Form S-8 (Nos. 333-17243, 333-17245, 333-48163 and 333-92279 pertaining to the
Homestead Village Incorporated 1996 Long-Term Incentive Plan, the Homestead
Village Incorporated 1996 Outside Directors Plan, the Homestead Village
Incorporated 401(k) Savings Plan and the Homestead Village Incorporated 1999
Long-Term Incentive Plan, respectively) and the Registration Statement on Form
S-3 (Nos. 333-67039 and 333-37803 pertaining to the offering of common stock)
its Form 10-Q for the quarter ended March 31, 2000, which includes our report
dated April 28, 2000 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
April 28, 2000
<TABLE> <S> <C>
<ARTICLE>5
<MULTIPLIER>1
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 214,000 16,943,000
<SECURITIES> 0 0
<RECEIVABLES> 8,418,000 7,036,000
<ALLOWANCES> 695,000 319,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,774,000 25,035,000
<PP&E> 1,103,887,000 1,198,039,000
<DEPRECIATION> 82,081,000 42,444,000
<TOTAL-ASSETS> 1,097,217,000 1,257,332,000
<CURRENT-LIABILITIES> 42,095,000 250,080,000
<BONDS> 0 0
0 0
0 0
<COMMON> 1,200,000 382,000
<OTHER-SE> 694,913,000 438,697,000
<TOTAL-LIABILITY-AND-EQUITY> 1,097,217,000 1,257,332,000
<SALES> 0 0
<TOTAL-REVENUES> 60,062,000 48,152,000
<CGS> 0 0
<TOTAL-COSTS> 40,539,000 41,721,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11,290,000 11,316,000
<INCOME-PRETAX> 8,495,000 (4,731,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 8,495,000 (4,731,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 (14,230,000)
<NET-INCOME> 8,495,000 (18,961,000)
<EPS-BASIC> .07 (.49)
<EPS-DILUTED> .07 (.49)
<FN>
Certain amounts for the three-month period ended March 31, 1999 have been
reclassified to conform to the 2000 presentation.
</FN>
</TABLE>
