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As filed with the Securities and Exchange Commission on July 17, 2000
Registration No. 333-36162
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VelocityHSI, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware 7370 94-3360232
(State or other jurisdiction
of (Primary standard industrial (IRS employer
incorporation or organization) classification code number) identification number)
</TABLE>
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44 Montgomery Street, 36th Floor
San Francisco, California 94104-4809
(415) 445-6536
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
----------------
Stephen E. Carlson
President and Chief Executive Officer
VelocityHSI, Inc.
44 Montgomery Street, 36th Floor
San Francisco, California 94104-4809
(415) 445-6536
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Jeffrey T. Pero, Esq.
Bradley S. Fenner, Esq.
Robert W. Phillips, Esq.
Latham & Watkins
505 Montgomery Street, Suite 1900
San Francisco, California 94111-2562
(415) 391-0600
Approximate date of commencement of distribution to shareholders: As soon as
practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be distributed until the registration +
+statement filed with the Securities and Exchange Commission becomes +
+effective. The preliminary prospectus is not an offer to sell these +
+securities nor does it seek offers to buy these securities in any +
+jurisdiction where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 17, 2000
8,986,276 Shares
[LOGO]
VelocityHSI, Inc.
Common Stock
This prospectus is being delivered by VelocityHSI to you because you were an
owner of common stock of BRE Properties, Inc. on July , 2000 and will be
receiving shares of VelocityHSI common stock in a distribution of those shares
by BRE Properties. We expect the distribution to be made on August , 2000.
The distribution will be made on the basis of one share of our common stock for
every five shares of common stock of BRE Properties held of record on July ,
2000. No fractional shares will be distributed and shareholders will receive
cash in lieu of fractional shares. You do not need to pay cash or take any
action to receive our shares in the distribution. The distribution will have
tax consequences to you and you should review the information in this
prospectus carefully.
Prior to the distribution, there has been no public market for our common
stock. It is anticipated that the shares of our common stock will initially
trade on the National Association of Securities Dealers Over-The- Counter
Bulletin Board System under the symbol .
Ownership of our common stock involves risks. See "Risk Factors" on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The date of this prospectus is August , 2000.
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TABLE OF CONTENTS
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Page
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Summary.................................................................. 1
Risk Factors............................................................. 6
Forward-Looking Information.............................................. 21
The Distribution......................................................... 22
Material Federal Income Tax Consequences of the Distribution............. 26
Trading of BRE Common Stock.............................................. 30
Trading of VelocityHSI Common stock...................................... 31
Transferability of Shares of VelocityHSI Common Stock.................... 31
Conditions; Termination.................................................. 31
Significant Financial Accounting Methods to be Used in Connection with
the Distribution........................................................ 32
Capitalization........................................................... 33
Selected Financial Data.................................................. 34
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 35
Business................................................................. 38
Relationship Between VelocityHSI and BRE after the Distribution.......... 51
Management............................................................... 54
Security Ownership of Certain Beneficial Owners and Management........... 57
Description of Capital Stock............................................. 58
Dividend Policy.......................................................... 59
Limitation of Liability and Indemnification of Directors and Officers.... 59
Transfer Agent and Registrar............................................. 61
Legal Matters............................................................ 61
Experts.................................................................. 61
Where You Can Find More Information...................................... 61
Index to Financial Statements............................................ F-1
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You should rely only on the information contained in this prospectus
regarding the distribution. VelocityHSI has not authorized any other person to
provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. BRE Properties will not
distribute these securities in any jurisdiction where the distribution is not
permitted. You should assume that the information appearing in this prospectus
is accurate as of the date on the front cover of this prospectus only.
VelocityHSI's business, financial condition, results of operations and
prospects may change subsequent to that date.
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Summary
This summary highlights material information contained elsewhere in this
prospectus. This summary may not contain all the information about the
distribution and VelocityHSI, Inc. which may be important to you. To better
understand the distribution and VelocityHSI, Inc., you should read the entire
prospectus carefully, including the risk factors and financial statements
contained elsewhere in this prospectus. References in this prospectus to "we,"
"us" or "our" mean VelocityHSI, Inc. References in this prospectus regarding
the aggregate number of shares of VelocityHSI common stock to be distributed to
BRE stockholders have been calculated based upon the number of shares of BRE
common stock outstanding as of June 30, 2000.
Why we are sending this prospectus to you
We are sending this prospectus to you because you were an owner of common
stock of BRE Properties, Inc. on July , 2000, sometimes referred to in this
prospectus as the distribution record date. If you were a common shareholder of
BRE on the distribution record date, you are entitled to receive a distribution
of one share of the common stock of a new company, VelocityHSI, Inc., a
Delaware corporation, for each five shares of BRE common stock you owned on
July , 2000. No action is required on your part to cause this distribution
to happen, you do not need to surrender shares of BRE common stock to receive
VelocityHSI common stock in the distribution, and you do not have to pay cash
or take any action to receive these shares. The distribution of these shares
will have tax consequences to you, so please read the information in this
prospectus carefully. The number of shares of BRE common stock you own will not
change as a result of the distribution. This prospectus describes the reasons
for the distribution and how this transaction benefits BRE and its
shareholders, the business of VelocityHSI and the relationship between BRE and
VelocityHSI, and provides other information to assist you in evaluating the
benefits and risks of holding or disposing of your shares of VelocityHSI common
stock.
Reasons for the distribution
BRE is a real estate investment trust, or a REIT, that owns and manages
multifamily apartment communities in the Western United States. BRE has
developed a package of Internet services designed to meet the needs of the
property owners and managers as well as the residents of its properties. These
services are known as "Project Velocity." The BRE board of directors believes
that the Project Velocity business has commercial potential beyond BRE's own
properties if it is developed as a separate company. Consequently, BRE has
contributed the Project Velocity assets to VelocityHSI and is distributing
8,986,276 shares of common stock of VelocityHSI to BRE shareholders. The number
of shares distributed to BRE shareholders will equal approximately 65.5% of the
number of shares of our common stock outstanding following the distribution,
assuming exercise in full of all options to acquire shares of our common stock
issued prior to the time of the distribution and the completion of other
related issuances of our shares described below in this prospectus. The
distribution will provide BRE shareholders with the opportunity to hold an
investment directly in the VelocityHSI business.
Description of VelocityHSI, Inc.
VelocityHSI provides high-speed Internet installation, access and content to
the multifamily apartment industry. The term "high-speed" as it relates to the
transmission of information to and from the Internet, generally refers to
connection and transmission speeds which are faster than those provided by
traditional dial-up modems. Our customers are multifamily apartment property
owners and managers and their apartment unit residents and we offer them
Internet-related products and services to meet their specific high-speed
Internet communication, information, and entertainment needs. We provide the
following products and services:
. We develop and install high-speed Internet connection systems for
multifamily apartment property owners and managers. Our systems deliver,
Internet-access over existing copper telephone wires at T-1
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speed, a signalling speed of 1.5 megabits per second, and allow property
owners and managers to offer their residents subscriptions to very fast
Internet access through existing telephone lines. Our systems are "always
on" which allow our subscribers continuous connection to the Internet
eliminating busy signals or the additional time required to periodically
reconnect to the Internet inherent with the use of traditional dial-up
modems.
. We provide portable email, Web site hosting and local-area networks, or
LANs, with our Internet service provider, or ISP, service, called
ZIPPITYKLIK(TM). ZIPPITYKLIK is offered on a monthly subscription basis
giving individual subscribers unlimited, always-on, high-speed Internet
service which may be accessed by personal computers or through a
VelocityHSI-provided television set-top box. Through ZIPPITYKLIK, we
offer portable email services, host subscribers' personal Web sites and
create local-area networks allowing file and printer sharing between
multiple personal computers within each apartment unit.
. Through our KLIKLANE(TM) service, we provide Internet launch pages, the
first computer screen which leads a computer user to the content of the
Internet, that are customized to each apartment community and can be
personalized by each subscriber for community messaging, connections to
local and national information and retail Web sites, and television-
quality satellite broadcast video and audio programming.
We offer standard system installations to property owners and managers at no
cost in exchange for the right to market our non-exclusive ISP services and
launch page to their residents. We currently generate revenues through monthly
subscriptions to our ISP service called ZIPPITYKLIK. As of June 30, 2000,
monthly subscriptions for our ISP service comprised 100% of our revenues.
As of June 30, 2000, VelocityHSI was installed in 35 apartment communities
with 10,573 apartment units. BRE owns each of these apartment communities and
is our sole property owner customer. As of June 30, 2000, VelocityHSI had 1,654
service activations, 1,600 of which are revenue-generating subscribers and the
balance of which are for leasing office and demonstration purposes.
The Distribution
Each owner of shares of BRE common stock on the distribution record date
will receive one share of VelocityHSI common stock for every five shares of BRE
common stock held on that date. The aggregate number of shares of VelocityHSI
common stock to be distributed to BRE stockholders will be 8,986,276 shares.
Distribution and Transfer Agent and Registrar. ChaseMellon Shareholder
Services will act as the distribution agent for the distribution to BRE
shareholders and as our transfer agent and registrar for transfers of our
shares of common stock following the distribution.
Distribution Record Date. The record date for the distribution of the shares
of VelocityHSI common stock will be the close of business on July , 2000.
Distribution Date. The distribution date will be August , 2000. On or
about the distribution date, the distribution agent will commence mailing share
certificates and checks for payments made by BRE in lieu of fractional shares
to holders on the distribution record date of shares of BRE common stock.
No Fractional Shares. BRE will not distribute fractional shares of our
common stock. Instead, BRE will pay any person entitled to a fractional share
cash in an amount equal to the fractional share multiplied by $1.00, the amount
determined by the board of directors of BRE to represent the fair value of a
share of VelocityHSI common stock at the time of distribution.
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Trading Market. Shares of our common stock will not be listed for trading on
any national securities exchange nor qualified for inclusion in the National
Market System of the National Association of Securities Dealers Automated
Quotation System. It is anticipated that shares of our common stock will
initially trade on the National Association of Securities Dealers Over-The-
Counter Bulletin Board System under the symbol .
Related issuance of securities
Prior to or at the time of the distribution, we intend to sell an aggregate
of 1,713,920 shares of our common stock, at a price of $0.50 per share, to
seven of our officers and employees, and to give an aggregate of 395,000 shares
of our common stock to six employees of BRE. These six employees of BRE include
the president and chief executive officer of BRE, and the executive vice
president and chief operating officer of BRE, who were instrumental in the
development of the business of VelocityHSI. All of these shares, an aggregate
of 2,108,920 shares, will be subject to vesting in installments over a period
of eighteen or thirty-six months and will be forfeited to us if the person to
whom the shares are issued ceases to be employed by us or BRE prior to the date
of vesting. Upon the forfeiture of shares issued to an officer or employee of
VelocityHSI at a price of $0.50 per share, we will pay the officer or employee,
in exchange for the forfeited shares, the lesser of $0.50 per share or the fair
market value of the shares at the time of forfeiture. We will make no payment
upon the forfeiture of any of the 395,000 shares given to the six employees of
BRE.
We will recognize compensation expense for the difference between the $1.00
fair market value of a share of our common stock and the $0.50 price per share
paid for the shares sold to seven of our officers and employees referred to
above. This amount will be recognized as compensation expense over the vesting
period for the shares. Assuming no shares are forfeited, the total amount of
compensation expense to be recognized over the 18 and 24 month vesting periods
for these shares will be $856,960. We will also recognize compensation expense
for the 395,000 shares of common stock issued to the six employees of BRE who
will not be required to pay for the shares. The amount of the expense will be
recognized ratably over the 36-month vesting period based on the aggregate fair
market value of the shares at the date of vesting.
In connection with the distribution, current BRE option holders will receive
options to purchase shares of our common stock as an anti-dilution mechanism.
The VelocityHSI options granted to BRE option holders will reflect the terms of
the BRE options, including the vesting provisions and exercise periods of the
BRE options. The number of shares underlying the VelocityHSI options will
reflect the distribution ratio of one share of our common stock for every
five shares of BRE common stock subject to the BRE options. For example, if a
BRE option holder holds an option to purchase 25 shares of BRE common stock,
this option holder will receive options to purchase five shares of our common
stock. The exercise price of each VelocityHSI option will be established using
the ratio of the holder's BRE option exercise price to the underlying BRE
market value per share immediately before the distribution. This ratio will
then be applied to the VelocityHSI value per share at the time of the
distribution to establish the exercise price of the VelocityHSI option. The
exercise price of the existing BRE option after the distribution will be
calculated by applying the same ratio to the BRE market value per share
immediately after the distribution. The market value of BRE common stock
immediately before the distribution will be based on the market capitalization
of BRE on the date which is three days prior to the distribution record date.
The VelocityHSI value will be based on $1.00 per share, the amount determined
by the board of directors of BRE to represent the fair value of a share of
VelocityHSI common stock at the time of the distribution.
The formula for determining the BRE and VelocityHSI option exercise prices
is designed to assure that the intrinsic value of both the BRE option and the
related VelocityHSI option for each option holder following the distribution
will not be greater than the intrinsic value of the BRE option prior to the
distribution under the guidelines included in Financial Accounting Standards
Board Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of Accounting Principles Board Opinion
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No. 25, "Accounting for Stock Issued to Employees." The relevant guidelines,
when applied in a spin-off transaction, provide that modifications to exercise
prices of existing options and the granting of new awards for each option
holder do not result in financial accounting consequences to the grantors. The
issuance of the options to purchase shares of VelocityHSI common stock to BRE
option holders and the modification of the price of BRE options in the manner
described above will not result in a new measurement date for BRE's accounting
purposes.
In connection with the distribution, we will offer to sell to the holders of
limited liability company units in BRE Property Investors LLC, other than BRE,
concurrently with the distribution, one share of our common stock, at a price
of $1.00 per share, for each five shares of BRE common stock issuable to the
unit holder upon exchange of the units held by the unit holder at the close of
business on the distribution record date.
Federal income tax consequences of the distribution to BRE shareholders
The distribution of VelocityHSI common stock by BRE to its shareholders will
be a taxable event to the BRE shareholders. The amount of the distribution will
be equal to the fair market value of the distributed VelocityHSI common stock
determined at the time of the distribution. BRE intends to take the position
that the fair market value of the VelocityHSI common stock at the time of the
distribution will be $1.00 per share, the value determined by BRE's board of
directors. However, no assurance can be given that the IRS will not take the
position that this stock had a higher fair market value, increasing the amount
of the distribution. To the extent that BRE's aggregate distributions for its
2000 taxable year (including the distribution of VelocityHSI common stock) are
made out of BRE's current and accumulated earnings and profits, which will be
increased by the amount of gain recognized by BRE as a result of the
distribution of VelocityHSI common stock, the distributions will be taxable to
a BRE shareholder as ordinary income, unless BRE designates a portion of the
distributions as a capital gain dividend. Any portion of BRE's aggregate
distributions for its 2000 taxable year in excess of its earnings and profits
will be treated as a tax-free return of capital to the BRE shareholder and will
reduce the BRE shareholder's adjusted tax basis in the shareholder's BRE common
stock by an equivalent amount, but not below zero. Distributions in excess of a
BRE shareholder's adjusted tax basis in the shareholder's BRE common stock will
be taxable as capital gains, provided that the shares have been held as a
capital asset, and will be taxable as long-term capital gains if the shares
have been held for more than one year. BRE shareholders will have a tax basis
in our shares equal to the fair market value of the shares at the time of the
distribution. A BRE shareholder's holding period in our shares will begin on
the day following the distribution.
BRE will report the amount of the distribution received by each shareholder
to the shareholder and to the Internal Revenue Service on IRS Form 1099-DIV.
There can be no assurance that the IRS or the courts will agree with the amount
of the distribution determined by BRE.
BRE is not expected to recognize taxable gain as a result of the
contribution of the VelocityHSI assets to us in exchange for our common stock.
BRE will recognize gain as a result of the distribution of shares of our common
stock to BRE shareholders to the extent that the fair market value of the
distributed stock exceeds BRE's adjusted tax basis in the stock, determined as
of the date of the distribution. This gain will not qualify under the 75% REIT
gross income test applicable to BRE as described below in this prospectus.
BRE shareholders are urged to consult their own tax advisors as to the
specific federal, state, local and foreign tax consequences to them of the
distribution.
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Relationship with BRE after the distribution
Following the distribution, BRE will own approximately 9.9% of our
outstanding shares, assuming exercise in full of all options to acquire our
shares issued prior to the distribution, the sale in connection with the
distribution of 599,285 shares of our common stock to holders of limited
liability company units in BRE Property Investors LLC and the vesting of all
VelocityHSI restricted shares. We have entered into an administrative services
and reimbursement agreement with BRE pursuant to which BRE has agreed to
provide us with administrative services and make advances to us to fund
operating costs and capital expenditures, including reimbursements for
administrative services provided under the agreement but excluding capital
expenditures for equipment to be installed at properties owned by BRE, up to a
maximum amount of $10 million. BRE has also agreed to make advances to us,
without limitation on amount, to fund the acquisition during the term of the
agreement of equipment to be installed at properties owned by BRE. The
agreement will terminate on September 30, 2001, at which time we will be
obligated to repay the advances made to us by BRE under the agreement
subsequent to the distribution, including advances we use to reimburse BRE for
administrative services, together with accrued interest on unpaid balances at
the rate of 9% per annum. We will be obligated to reimburse BRE for
administrative services provided under the agreement in an amount equal to the
direct and indirect costs incurred by BRE in providing the services.
Reimbursements for actual time spent on VelocityHSI matters by BRE employees
will be computed based upon hourly rates assigned to BRE employees which
reflect the employees' salary and benefit costs to BRE, plus 35% of the hourly
rate to cover indirect costs such as office space, equipment usage, supplies
and utilities. The 35% adjustment reflects BRE's analysis of the historical
relationship between its indirect costs and its labor costs. In addition, BRE
may act as a guarantor of our future obligations. Furthermore, we will continue
to provide Internet access and other Web-related services to properties owned
by BRE pursuant to a service agreement.
BRE and VelocityHSI will have separate management teams. LeRoy E. Carlson
and Frank C. McDowell, executive officers of BRE, will serve on the VelocityHSI
board of directors. Mr. Carlson and Mr. McDowell will also continue to serve as
directors of BRE. A number of officers and directors of BRE and VelocityHSI
will also own (or have options or other rights to acquire) a significant number
of shares of common stock in both companies. Based solely on their ownership of
BRE common stock and options to acquire BRE common stock as of July , 2000
and shares of our common stock to be sold or issued to them in connection with
the distribution as described below in this prospectus, the officers and
directors of VelocityHSI will beneficially own an aggregate of 2,127,542
shares, or 15.4% of the outstanding shares of VelocityHSI common stock
immediately following the distribution, assuming exercise in full of all
options to purchase shares of our common stock issued in connection with the
distribution.
Investor contact
VelocityHSI and BRE shareholders with questions about the distribution
should contact Lauren L. Barr, senior vice president, strategic planning and
communications of BRE, at BRE's principal executive offices at 44 Montgomery
Street, 36th Floor, San Francisco, California 94104-4809; telephone: (415) 445-
6530. This contact information will remain the same after the distribution.
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Risk Factors
Your ownership of our common stock will involve risks. You should carefully
consider the following risks, as well as the other information contained in
this prospectus. If any of the events described in the following risk factors
actually occur, our business, results of operations and financial condition
could be harmed. In that case, the trading price of our common stock could
decline, and you might lose part or all of your investment.
Risks Related to our Business
Because we have a limited operating history, it is difficult to evaluate our
business. We face various risks, expenses and difficulties associated with
early stage companies and may not be able to manage our business successfully
or achieve profitability.
The business referred to as VelocityHSI commenced operations in March 1999
with limited revenue generating activities conducted mainly on a part-time
basis by several BRE employees. On January 1, 2000, BRE formed a division with
accounting and reporting separate and discrete from all of BRE's other
activities and referred to as "Project Velocity." We were formed as a Delaware
corporation in April 2000. Our prospects for financial and operational success
must be considered in light of the risks and challenges frequently encountered
by early stage companies in the Internet services industry that provide
services to owners, managers and residents of multifamily apartment
communities.
The material risks and uncertainties related to our limited operating
history include risks that we may be unable to:
. expand our property owner and manager customer base beyond BRE, our sole
property owner customer, which would impair our ability to develop our
business in accordance with our current business plan;
. attract and retain new subscribers for our services and retain existing
subscribers, which is critical to our ability to achieve profitability
in the future, and if we cannot retain subscribers our results of
operations and business will be materially and adversely affected;
. create and maintain relationships with technology and content providers,
which would impair our ability to compete with the dominant companies in
the Internet services industry;
. compete in the highly competitive Internet services industry, which
would adversely affect our business and results of operations and impair
our ability to obtain additional capital;
. introduce new services, which would impair our ability to attract and
retain subscribers;
. upgrade our technologies, systems and infrastructure and enhance our
service features, which would impair our ability to satisfy the evolving
Internet service needs of our subscribers; and
. minimize potential Internet service interruptions, which interruptions
could cause our subscribers to switch to a competing Internet service
provider.
We will need additional capital. If we cannot obtain additional capital, we
will not be able to fund our operations and your shares of VelocityHSI common
stock may lose value or become worthless. In addition, we may only be able to
raise capital on terms that are not favorable to us economically or may dilute
existing shareholders.
BRE has agreed to provide us with up to $10 million in funds through
September 30, 2001 to finance our operating expenses and the costs of
installing equipment at properties that are not owned by BRE. BRE has also
agreed to provide us with funds through September 30, 2001, without limitation
on amount, to finance the installation of our equipment at properties owned by
BRE. We must repay, on or before September 30, 2001, all of the funds advanced
to us by BRE subsequent to the distribution, together with interest at the rate
of 9% per year. The operating expenses and capital expenditures we will incur
during the next twelve months in carrying out our business plan will vary
depending upon a number of factors, including:
. the number of new apartment property owner customers and subscribers
engaged during that period which will determine the amount required for
the acquisition and installation of capital equipment;
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. the extent of the changes and developments that may occur during that
period in available technology and user requirements and preferences
that will affect the amount we will be required to spend to develop and
maintain a competitive position in the industry; and
. the cost of attracting new apartment property owner customers and
subscribers.
Although we cannot predict with precision the amount required to fund future
operating expenses and capital expenditures, we expect the funding required to
carry out our current business plan during the next twelve months to exceed
substantially the funding available from BRE. Consequently, we will be required
to obtain financing from additional sources in order to fund our expected
operations both during the next 12 months and thereafter, including the
repayment on or before September 30, 2001 of advances made by BRE. If we cannot
obtain additional capital, we will be required to reduce our expenditures to a
level that could be financed with advances from BRE. A reduction in
expenditures would limit our ability to:
. hire and retain the technical personnel necessary to develop our
products and services;
. hire and retain the marketing personnel necessary to expand our property
owner customer base beyond BRE and attract new subscribers;
. acquire the equipment necessary to expand or maintain our business;
. respond effectively to competitive products and services; and
. hire necessary management personnel.
A reduction in expenditures as a result of our inability to obtain
additional capital may result in the reduction in value or loss of your
investment. Even if we raise additional capital it may be dilutive to existing
shareholders and if we incur additional debt the lender may subject us to
restrictions which will impair our ability to develop our business in
accordance with our current business plan.
Our quarterly performance may be difficult to forecast and our actual
performance may fluctuate.
Our quarterly revenues and operating results are difficult to forecast even
in the short term. Many of our expenses, such as depreciation, overhead,
payroll and T-1 Internet service costs, will be fixed in advance based in large
part on future revenue forecasts. If revenue is below expectations in any given
quarter, the adverse impact of the shortfall on our operating results may be
magnified by our inability to adjust spending to compensate for the shortfall.
In addition, our actual operating results may fluctuate significantly due to
a variety of factors, many of which are outside our control. The material
factors that may affect our operating results include:
. the speed with which third parties are able to deliver local and
national telecommunications circuits;
. the condition of the copper telephone wiring within an apartment
community and our ability to upgrade or maintain that wiring system;
. our effectiveness in marketing our services to apartment property owners
and subscribers;
. the rate at which customers subscribe to our Internet services and the
price the market will bear for these services;
. our ability to retain our current and future subscribers; and
. the overall market demand for e-commerce and broadband content and
applications in general.
Loss of BRE as a customer would have a material adverse effect on our financial
condition and results of operations.
BRE is currently our sole property owner customer. As of June 30, 2000, all
of our subscribers were residents of apartment communities owned by BRE and
monthly subscriber fees from these residents comprised
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100% of our revenues. Although we intend to enter into agreements with other
property owners, we anticipate that BRE will remain our largest customer at
least through the end of the year 2000. BRE may terminate its agreement with us
by providing us with a thirty-day termination notice at any time following the
earlier of completion of the 180-day period after the date of the distribution
or the thirty-day period subsequent to the date of our initial installation in
BRE's apartment complexes of the equipment necessary to deliver our services.
Our basic equipment installation costs per multifamily apartment community are
approximately $30,000 and this basic installed equipment can accommodate up to
50 subscribers. After our initial installation, we can add additional
subscriber capacity at a cost of approximately $25,000 for each additional
50 subscribers. The loss of BRE as a customer would have a material adverse
effect on our business, financial condition and results of operations.
Retention of our current and future subscribers is critical to our ability to
achieve profitability in the future. If we cannot retain our subscribers, our
revenues and therefore our business will be materially and adversely affected.
We believe that our long-term success largely depends on our ability to
retain our existing subscribers, while continuing to attract new subscribers.
Since commencement of the Project Velocity operations on January 1, 2000, we
have achieved customer retention rates of approximately 96%. However, as a
result of our limited operating history and the early stage nature of our
business, it is difficult, if not impossible, for us to predict our ability to
maintain these historical customer retention rates. We continue to invest
significant resources in our infrastructure, marketing and customer and
technical support capabilities and to incur substantial installation costs. Our
sales, marketing and other costs of obtaining and providing service for
subscribers, including depreciation on equipment at the apartment community,
overhead, payroll, the installation at the subscriber's apartment unit and the
T-1 line to access the Internet, are substantial relative to the basic $35
monthly fee derived from subscribers. There can be no assurance that these
expenditures will improve subscriber retention or improve our ability to
attract new subscribers. Because the high-speed Internet services market is new
and changing rapidly, and the variety of available services is not well
understood by new and potential customers, it is difficult, if not impossible
for us to predict our ability to attract and retain future subscribers.
Moreover, a number of new Internet users experience the Internet only as a
novelty and do not become consistent users of Internet services. These factors
may adversely effect our subscriber retention rates. Our subscribers pay for
our Internet services on a monthly basis. Either the subscriber or VelocityHSI
can terminate our service upon 30 days notice. Our subscribers are not required
to sign written agreements to pay for our services for any minimum length of
time. If we cannot retain our current subscribers or attract new subscribers,
our revenues and therefore our business and results of operations will be
materially and adversely affected.
Attracting and retaining property owners and managers as customers is important
for our revenues. If we can not retain property owners and managers, our
revenues and therefore our business will be materially and adversely affected.
The multifamily apartment property owners and managers that we expect to
have as customers will provide us access to their apartment properties so that
we may install the equipment necessary to deliver our services to the residents
in these apartment buildings. As more fully described above, our installation
costs for new properties are substantial relative to the monthly subscriber
service fee that can be derived from subscribers at those properties. For
example, our basic installation costs per multifamily apartment community are
approximately $30,000 and this installed equipment can accommodate up to 50
subscribers. After our initial installation, we can add additional subscriber
capacity at a cost of approximately $25,000 for each additional 50 subscribers.
We have not in the past and do not anticipate in the forseeable future charging
the property owner or the subscriber for these installation costs. In
comparison to these installation costs, we charge monthly subscriber fees for
the Internet services that we provide. The subscriber service fees that we
expect to receive per apartment unit will be approximately $35.00 per
subscriber per month and we recognize this revenue as we provide these monthly
services. Our agreements with these property owners and managers will be
generally short-term, non-exclusive contracts which can be terminated by the
property owner or manager on 30 days' notice. If the property owner or manager
cancels the contract after the initial 30 day period, we cannot
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recover the substantial capital cost of installing our systems at their
property. If we enter into an agreement with a property owner or manager and
install our equipment at the property, there is no assurance that property
residents will subscribe to our services. Our contracts do not guarantee a
percentage of subscribers at each property. Our long-term success is dependent
on our continuing relationship with the property owners and managers on whose
properties we have installed the equipment necessary to deliver our services.
If we cannot enter into and maintain agreements with property owners and
managers, our revenues and therefore our business will be materially and
adversely affected.
Our Internet service agreements with property owners or managers do not
require them to ensure specific subscriber levels, and their residents may
choose not to subscribe to our services. As a result we may be unable to
derive revenues from our agreements.
Property owners and managers do not provide a direct source of revenue to
us because our Internet service agreements with them do not require them to
ensure specific subscription levels for their residents. Therefore, even if we
enter into Internet service agreements with property owners or managers, we
cannot assure you that we will obtain revenues because the property residents
may choose not to subscribe to our Internet services. If we are unable to
attract and retain resident subscribers, currently our primary source of
revenue, our business and results of operations would suffer.
Our failure to manage the expected growth of our operations could harm our
business.
Our future performance depends, in part, on the ability of our senior
management to manage our growth effectively. We have rapidly and significantly
expanded our operations. We anticipate that further significant expansion of
installation, technical support, customer service and administrative personnel
will be required to increase our subscriber base to the extent necessary to
achieve profitability. We may not be able to implement management information
and control systems in an efficient and timely manner, and our current or
planned personnel, systems, procedures and controls may not be adequate to
support expanded operations. To manage the expected growth of our operations
and personnel, we will be required to:
. train, motivate and manage our sales and marketing, engineering,
technical and customer support employees to develop and sell new
services and provide acceptable levels of customer service to attract
and retain subscribers, which is critical to our ability to achieve
profitability and improve our results of operations;
. improve existing and implement new operational, financial and management
controls, reporting systems and procedures, which will be important to
enable us to comply with our reporting obligations as a public company;
and
. install new management information systems, which are necessary for our
senior management to monitor our existing business while attempting to
expand our operations and personnel.
If we are unable to manage growth effectively, our business and results of
operations will suffer.
The Internet service provider and consumer Web site markets are very
competitive. If we are unable to compete successfully, your shares will lose
value and may become worthless.
The Internet services market in which we operate is extremely competitive,
and we expect competition in this market to intensify in the future. Our
current and prospective competitors include many large companies with
substantially greater market presence and financial, technical, marketing and
other resources than we have.
We do and will compete directly and indirectly with these dominant
companies in the following categories:
. local exchange carriers, or LECs, such as Pacific Bell Telephone Company
and SBC Communications, Inc.;
. inter-exchange carriers such as AT&T Corp., Sprint Corporation and MCI
WorldCom, Inc.;
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. digital subscriber line infrastructure providers such as Covad
Communications Group Inc., Rhythms NetConnections Inc. and Northpoint
Communications Group, Inc.;
. local, regional and national Internet service providers which provide DSL
service, such as PSINet Inc., EarthLink, Inc. and Internet America, Inc.;
. cable television providers which offer high-speed connectivity such as
Excite@Home and Road Runner, and their respective cable partners;
. fixed wireless and satellite companies such as WinStar Communications,
Inc., Teligent, Inc., Spaceway, Loral Cyberstar, iSKY, Inc. and Teledesic
LLC;
. Internet access and networking service providers focused primarily on
multifamily apartment properties and office properties, such as CAIS
Intenet, Inc., Brix Communications Corp., Ntegrity Telecontent Services
Incorporated, BroadBandNOW, Inc., Reflex Communications, Inc., Allied
Riser Communications Corporation, Cypress Communications, Inc. and
BroadBand Office, Inc.; and
. content and portal service providers such as America Online, Inc.,
Yahoo!, Inc., Excite@Home, EdificeRex.com, Inc., ElectricStreets.com and
Ntegrity Telecontent Services Incorporated.
We compete with these companies primarily on the basis of:
. operating performance and reliability;
. speed of Internet service;
. broadband capacity;
. scalability of our services; and
. price.
These competitors pose a risk to VelocityHSI because they have resources
that may allow them advantages based on their ability to:
. build high-speed Internet infrastructure more rapidly than we can;
. market to existing and future customers more readily than we can; and
. gain acceptance by property owners and individual subscribers more
readily than we can through the provision of related services (e.g.
telephone, cable, Internet service provider or portal services).
Competitors with substantial financial resources, established brands and
substantial marketing resources may offer content and services that are more
popular than the content and services we offer. Also, recent advances in
technology have lowered the barriers to entry for emerging participants.
Specifically, the ability to deliver high-speed Internet access over existing
copper telephone wires has allowed more entrants to compete directly with
larger digital subscriber line and cable modem providers. In addition, because
our strategy is to offer content and services to targeted groups, the potential
demand for our content and services is limited. There can be no assurance that
we will have the financial resources, technical expertise or marketing and
support capabilities to compete successfully with these competitors. If we are
unable to do so, our business and results of operations will be materially and
adversely affected.
If we do not respond effectively and on a timely basis to rapid technological
change in our industry, we will not be able to sell our services and our sales
will materially decline.
The Internet service provider industry is characterized by rapid change. The
speed of both the technological change and user requirements and preferences
creates rapid change in industry standards. These changing standards could
render our existing services, proprietary technology and systems obsolete. We
must continually improve the performance, features and reliability of our
services, particularly in response to competitive offerings.
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Our success depends, in part, on our ability to enhance our existing email
and Internet services and to develop new services, functionality and technology
that address the increasingly sophisticated and varied needs of our prospective
subscribers. If we do not properly identify the future preferences of
prospective subscribers, or if we fail to deliver features or content which
meet the standards of these prospective customers, our ability to market our
services successfully and to increase our revenues could be impaired.
The development of proprietary technology and necessary service enhancements
entail significant technical and business risks and require substantial
expenditures and lead-time. During the twelve month period ended May 31, 2000,
we and BRE have invested approximately $545,000 in the development of
proprietary technology and service enhancements. We may not be able to keep
pace with the latest technological developments. We may also not be able to use
new technologies effectively or adapt our services to customer requirements or
emerging industry standards. If we cannot adapt or respond in a cost-effective
and timely manner to changing market conditions or customer requirements, our
business and results of operations will be materially and adversely affected.
The future success of our business depends largely on the continued growth in
use of the Internet and the development of demand for our email, Internet
portal and Web hosting services. If the Internet does not continue to grow or
demand for our email, Internet portal and Web hosting services does not
develop, our business would be materially and adversely affected.
Our future success is substantially dependent on continued growth in the use
of the Internet by residents of multifamily apartment communities. Rapid growth
in the use of, and interest in, the Internet, and in particular the World Wide
Web, is a recent phenomenon. There can be no assurance that Internet usage will
become more widespread by residents of multifamily apartment communities, that
extensive Internet content will continue to be developed or accessible at no or
nominal cost, or that there will be a demand for high-speed, always-on Internet
access. There can be no assurance that demand will develop for our services
including VelocityHSI, ZIPPITYKLIK and KLIKLANE.
The Internet may not prove to be viable for a number of reasons, including
potentially inadequate development of the necessary infrastructure or
performance improvements. If use of the Internet does not continue to grow, our
business and results of operations would be materially and adversely affected.
Conversely, to the extent that the Internet continues to experience significant
growth in the number of users and level of use, the Internet infrastructure may
not be able to support the demands placed on it by that growth and it may not
function properly or adequately thereby also materially and adversely affecting
the growth or use of the Internet.
If consumer oriented Web-based businesses are unable to raise adequate capital
or if these businesses implement cutbacks in expenditures, our business and
results of operations may be materially and adversely affected.
Our future success depends in part on the growth and success of consumer
oriented Web-based businesses that provide varying forms of content and
electronic commerce. Many of these businesses have recently experienced
difficulties in implementing their business plans. As a result, the private and
public capital markets have become less willing to finance these types of
businesses. Recently some of these businesses have experienced significant
layoffs and, in some cases, the termination of operations. The inability of
these companies to successfully implement and finance their business plans
could impact the commercial development of the Internet, and therefore
materially and adversely affect our business.
Although we currently do not derive revenue from these sources, we plan to
derive future revenue from advertising on our Internet launch pages customized
for each apartment community and from commissions that Web-based businesses
would pay us for completed electronic sales transactions with our subscribers.
Therefore, our future revenues may be limited by the amount of advertising
revenues that these Web-based businesses could pay us for access to our
subscribers through the customized launch pages we create for each apartment
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community and revenues from commissions that these Web-based businesses would
pay us for completed electronic sales transactions with our subscribers. The
loss of future revenue related to advertising and commissions from Web-based
businesses could have a material and adverse effect on our business and results
of operations.
We need to upgrade our systems and infrastructure continually to accommodate
increases in email and Internet traffic. If we fail to upgrade these services,
our business and results of operations could be materially and adversely
affected.
We must continue to expand and adapt our network infrastructure as the
number of users and the amount of information they wish to transmit over the
Internet increases and as their requirements change. Currently, our network
infrastructure can support 100,000 users. As of June 30, 2000, we had installed
our equipment in 35 multifamily apartment communities with 10,573 apartment
units, of which 1,654 units had been activated for service. Our service
includes 54 non-revenue leasing office and demonstration activations and 1,600
revenue generating subscriptions. The expansion and adaptation of our network
infrastructure will require substantial financial, operational and management
resources. Due to the limited deployment of our services to date, the ability
of our network to connect and manage a substantially larger number of customers
at high transmission speeds is unknown. We face risks related to the network's
ability to operate with higher customer levels while maintaining expected
performance.
As the frequency, size and complexity of email transmission and Web hosting
requirements increase, we will need to make additional investments in our
infrastructure, which may be expensive. In addition, we may not be able to
project accurately the rate or timing of email and Internet traffic increases
or upgrade our systems and infrastructure to accommodate future traffic levels.
We may also not be able to achieve or maintain a sufficient capacity of data
transmission as customer usage increases. Subscriber demand for our services
could be greatly reduced if we fail to maintain high capacity data
transmission. High capacity data transmission is generally regarded to include
Internet connection equipment which allows transmission through the Internet of
audio, video, graphic and text which are larger than those readily transmitted
through the Internet by traditional dial-up modems. In addition, as we upgrade
our network infrastructure to increase capacity available to our subscribers,
we are likely to encounter equipment or software incompatibility which may
cause delays in implementations. We may not be able to expand or adapt our
network infrastructure to meet additional demand or our subscribers' changing
requirements in a timely manner or at all. If we fail to do so, our business
and results of operations could be materially and adversely affected.
Security breaches and viruses could hurt our business.
Our network and services may be vulnerable to unauthorized access, computer
viruses and other disruptive problems. Internet service providers and online
service providers have in the past experienced, and may in the future
experience, interruptions in service as a result of the accidental or
intentional actions of Internet users, current or former employees or others.
Unauthorized access may also jeopardize the security of confidential
information stored in our computer systems or those of our subscribers, which
might result in liability to our subscribers, the loss of our current
subscribers and the possible deterrence of potential subscribers. Although we
have adopted industry-standard security measures and intend to continue to
implement industry standard security measures in the future, those measures
have been circumvented in the past at other companies, and there is no
assurance that measures we implement will not be circumvented in the future.
Eliminating computer viruses and alleviating other security problems may
require interruptions, expenses, delays or cessation of service to our
subscribers, which could have a material adverse effect on our business,
operating results and financial condition. Any imposition of liability that is
not covered by insurance or is in excess of our insurance coverage could have a
material adverse effect on our business, operating results and financial
condition.
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We depend on the development and acceptance of high-quality, high-speed
broadband internet content and applications. If the content and applications
are not available, our business could be adversely affected.
A key component of our strategy is to provide a more compelling interactive
experience to Internet users than the experience currently available from dial-
up Internet service providers and other online service providers. We believe
that, in addition to providing high-speed, high-performance Internet access, we
must also promote the development and aggregation of high-quality multimedia
Internet content and applications. Our ability to provide and aggregate the
content and applications, and our ability to charge a premium for our service,
is dependent on the capability of content and applications providers to create
and support high-quality, high-speed multimedia Internet content and
applications and our ability to aggregate content and applications offerings in
a manner that subscribers find useful. Our ability to accomplish this will
depend on our ability and that of our competitors to develop a subscriber base
sufficiently large to justify investments in the development of high-quality,
high-speed multimedia Internet content and applications by others. There is no
assurance that we will be successful in these endeavors. In addition, the
market for high-quality, high-speed multimedia Internet content and
applications is at an early stage of development and is rapidly evolving, and
there is significant competition among Internet service providers and online
service providers for aggregating content and applications. If the market fails
to develop as expected or competition increases, or our content and
applications offerings do not achieve or sustain market acceptance, our
business, operating results and financial condition will be materially and
adversely affected.
We may not be able to protect our trademarks which could hamper our ability to
market our products and services.
Our success is dependent in part on recognition of our name and trademarks
"ZIPPITYKLIK," "KLIKLANE" and "VelocityHSI." We intend to protect and defend
our name, servicemarks and trademarks in the United States and internationally.
We filed for federal trademark protection in the United States for a number of
our trademarks which we use or intend to use. However, we cannot assure you
that:
. our efforts to protect our proprietary rights in the United States or
abroad will be successful;
. our use of our trademarks and servicemarks will be free from legal
challenges; or
. we will have sufficient funds to withstand such challenges or claims,
regardless of their merit.
If we are unable to protect our proprietary rights, it could seriously
affect our ability to market our products and services. In addition, legal
challenges to our proprietary rights could lead to a substantial diversion of
our limited resources.
We cannot be certain that we will be able to protect our intellectual property
and we may face claims of intellectual property infringement by a third party.
Despite the precautions we take to protect our technology and other
proprietary information, the possibility exists that a third party may copy or
otherwise obtain and use our products, services or technology without
authorization, or develop similar technology independently. In addition,
effective copyright, trademark and trade secret protection may be unavailable
or limited in foreign countries. The global nature of the Internet makes it
virtually impossible to control the ultimate destination of our content
offerings. Policing unauthorized use of our content offerings is difficult. We
can provide no assurance that the steps we take will prevent misappropriation
or infringement of our technology. In addition, litigation may be necessary in
the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Litigation could result in substantial costs and diversion of resources
and could have a material adverse effect on our business, operating results and
financial condition.
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Uncertain federal and state tax and other surcharges on our services may
increase our payment obligations.
The tax treatment of the Internet and e-commerce is currently unsettled. A
number of proposals have been made at the federal, state and local level that
could impose taxes on the sale of goods and services ordered through the
Internet. A recently passed federal law places a temporary moratorium on types
of taxation on Internet commerce until October 21, 2001. We cannot predict the
effect of any current or future attempts to tax or regulate commerce over the
Internet. Any legislation that substantially impairs the growth of e-commerce
could harm our business.
Proposed federal and state legislation with respect to internet privacy-related
issues may adversely impact our business.
Federal and state legislators are currently studying online privacy-related
issues. In particular, they are examining Internet sites' use of identifiers
that enable sites, including advertisers, to track usage patterns by compiling
data and to deliver customized content to users. The Federal Trade Commission
and certain states' attorneys general are investigating these activities as
potentially unfair and deceptive practices. In addition, other Internet privacy
concerns, such as protecting the confidentiality of medical records, personal
finances and credit card numbers, are also being reviewed. We have industry-
standard security measures in place to maintain the confidentiality of certain
subscriber information; however, our security measures may not prevent security
breaches by people who intend to steal or misuse personal or confidential
information of or about our subscribers. In addition, our own internal use of
subscriber information, which we may use to personalize and customize product
and service offerings to individuals and customer groups, could be the subject
of government investigation or regulation in the future. We cannot predict the
effect of or our liability under any legislation designed to safeguard privacy
on the Internet. Any legislation that substantially impairs the growth of
e-commerce could cause our sales to decline and have a material adverse effect
on our business.
We may have liability for Internet content and we may not have adequate
liability insurance. If we are subject to any claim that is not covered
adequately by insurance, we may be liable for damages that could materially and
adversely affect our financial condition.
As a provider of email, Internet portal and Web hosting services, we face
potential liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
transmitted through email, posted on the Web and downloaded from the Web by our
subscribers. We do not and cannot screen all of the content generated by our
users, and we could be exposed to liability with respect to this content. In
addition, Congress has attempted to regulate the dissemination of obscene or
indecent materials over the Internet. The constitutionality of those provisions
has been debated in ongoing litigation and has been subject to further
litigation. We may be subject to liability for the content distributed by our
subscribers.
We are covered under BRE's general liability and umbrella liability
insurance until the date on which we distribute our shares of common stock to
BRE shareholders. After the distribution, we will have to obtain our own
general liability and umbrella liability insurance. We may not be able to
obtain adequate insurance at a reasonable cost, if at all. If we are able to
obtain general liability and umbrella liability insurance, this insurance may
not cover claims of these types or may not be adequate to indemnify us for all
liability that may be imposed. There is also a risk that a single claim or
multiple claims, if successfully asserted against us, could exceed the total of
our coverage limits. Should either of these risks occur, we may not have
sufficient capital to cover the claims. Any imposition of liability,
particularly liability that is not covered by insurance or is in excess of
insurance coverage, could have a material adverse effect on our reputation and
our business and results of operations, or could result in the imposition of
criminal penalties.
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We must retain our initial directors and senior management to expand our
business. If we are unable to retain these individuals, our business would
suffer and the value of your shares would be adversely affected.
The development of our business depends on the skills, experience and
performance of our initial directors and senior management. The loss of the
services of any of our initial directors, Frank C. McDowell and LeRoy E.
Carlson, or our senior management including Stephen E. Carlson, our president
and chief executive officer, Charles P. Wingard, our senior vice president,
chief financial officer, secretary and treasurer, and Douglas A. Campillo, II,
our senior vice president and chief technical officer, could materially and
adversely affect our business.
We must recruit, hire, train and retain sales, marketing and technical
personnel. If we are unable to recruit, hire and retain a sufficient number of
these personnel, our business and results of operations would be adversely
affected.
Our success depends on our ability to recruit, hire, train, retain and
motivate highly-skilled sales, marketing and technical personnel. Competition
for these people is intense, and these people are in limited supply. We may not
be able to successfully recruit, hire, train or retain qualified personnel, in
particular qualified software developers for the enhancement of our Internet
service offerings in order to grow our business and remain competitive. The
number of sales, marketing and technical personnel that we will need to hire
over the next 12 months will be substantially dependent on the extent and the
form of the growth of our business. For example, to increase significantly the
base of our apartment property owner and manager customers beyond BRE, we will
require additional sales and marketing personnel, and to increase significantly
the number of products and services that we offer to our customers we will
require additional technical personnel. In addition, as our sales and marketing
efforts result in increased subscriptions for our service, we will be required
to add installation, technical support and customer service personnel. If we
fail to recruit, hire, train and retain necessary software sales, marketing and
technical personnel, our business and our ability to develop new services and
to provide acceptable levels of customer service would suffer.
Governmental regulation and legal uncertainties could impair the growth of the
Internet and decrease demand for our services or increase our cost of doing
business. Future government regulation could make it easier for our competitors
to have access to our customers. If legislation is enacted that makes
competition easier, our business and results of operations could be materially
and adversely affected.
Although there are currently few U.S. laws and regulations that specifically
regulate communications or commerce over the Internet, we may become subject to
burdensome government regulation which could increase our costs of doing
business or subject us to liability. New and existing laws may be interpreted
to cover issues which include:
. content;
. distribution;
. antitrust matters;
. user privacy;
. pricing controls;
. consumer protection;
. libel and defamation;
. copyright and trademark protection;
. characteristics and quality of services;
. sales and other taxes; and
. other claims based on the nature and control of Internet materials.
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The applicability to the Internet of new or existing laws in various
jurisdictions governing these issues or issues such as property ownership,
sales and other taxes, libel and personal privacy is uncertain and may take
years to resolve. Further, the growth and development of the market for high-
speed home Internet service may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies
conducting business online. We face risks due to possible changes in the way
our competitors are regulated which could have an adverse effect on our
business. For example, the Federal Communications Commission is considering
measures that could stimulate the development of high-speed telecommunications
facilities and make it easier for operators of these facilities to obtain
access to customers. Favorable regulatory measures could enhance the viability
of our competitors in the Internet access marketplace. In addition, changes in
the regulatory environment may provide competing Internet service providers the
right of access to the cable systems of local franchised cable operators. If
legislation is enacted that reduces competition, our business and results of
operations could be materially and adversely affected.
Risks Related to the Distribution
Our stock has not been publicly traded before this distribution and our stock
price may be volatile.
Our common stock has not been publicly traded, and an active trading market
may not develop or be sustained after this distribution. If an active trading
market for our common stock does not develop, we may not be able to attract and
retain market makers for our common stock or obtain coverage by financial
analysts and other media attention. A when-issued trading market for
VelocityHSI common stock may develop on or shortly before the distribution
record date if the shares are qualified for quotation on the National
Association of Securities Dealers Over-The-Counter Bulletin Board System. The
term "when-issued" means that the shares of VelocityHSI common stock can be
traded prior to the time certificates are actually available or issued. A when-
issued trade is a trade that is conditional upon the issuing company, in this
case BRE, actually distributing the shares of our common stock to BRE
shareholders. No BRE shareholder will be able to initiate a when-issued
transaction unless the shareholder either continues to hold the BRE shares
until the trading day, known as the "Ex-Date," after the first trading day
sales of shares of VelocityHSI common stock are quoted on any quotation system
recognized by the New York Stock Exchange, or has rights to when-issued shares
of VelocityHSI common stock from a source other than ownership of shares of
BRE. The price at which our common stock will be quoted on the National
Association of Securities Dealers Over-The-Counter Bulletin Board System after
this distribution may be highly volatile and may fluctuate substantially due to
factors such as:
. actual or anticipated fluctuations in our results of operations;
. announcements of technological innovations;
. introduction of new services by us or our competitors;
. the trading price of equity securities of our competitors;
. developments with respect to intellectual property rights;
. conditions and trends in the Internet and other technology industries;
and
. general market conditions, including the depth and liquidity of the
market for VelocityHSI common stock.
In addition, the National Association of Securities Dealers Over-The-Counter
Bulletin Board System has from time to time experienced significant price
quotation fluctuations. These broad market price fluctuations may result in a
material decline in the market price of our common stock. If the market price
for our common stock declines for a prolonged period of time, we may not be
able to obtain sufficient capital to implement our current business plan and
attract and retain qualified employees. These results would have a material and
adverse effect on our business, liquidity and financial condition.
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Initially, our common stock will be deemed to be a "penny stock." Transactions
in penny stocks require broker-dealers to implement additional procedures
before selling a penny stock to a particular investor. These additional
procedures may materially and adversely affect the trading market of our common
stock.
Initially, our common stock will be deemed to be "penny stock" as that term
is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of
1934. Generally, penny stocks are stocks that trade at a price of less than
five dollars per share and:
. are not registered on a recognized national securities exchange; or
. are not issued by an issuer with net tangible assets in excess of
$2,000,000, if the issuer has been in continuous operation for at least
three years, or $5,000,000, if the issuer has been in continuous
operation for less than three years, or an issuer with average annual
revenues of at least $6,000,000 for the last three years.
Section 15(g) of the Securities Exchange Act of 1934 and Rule 15g-2
promulgated under the Securities Exchange Act of 1934 require broker-dealers
dealing in penny stocks to provide potential investors with a document
disclosing the risks of penny stocks and to obtain a manually signed and dated
written receipt of the document before effecting any transaction in a penny
stock for the investor's account.
In addition, Rule 15g-9 promulgated under the Securities Exchange Act of
1934 requires broker-dealers in penny stocks to approve the account of any
investor for transactions in penny stocks before selling any penny stock to
that investor. This procedure requires the broker-dealer to:
. obtain from the investor information concerning his or her financial
situation, investment experience and investment objectives;
. reasonably determine, based on that information, that transactions in
penny stocks are suitable for the investor and that the investor has
sufficient knowledge and experience as to be reasonably capable of
evaluating the risks of penny stock transactions;
. provide the investor with a written statement setting forth the basis on
which the broker-dealer made the determination that the investor has
sufficient knowledge and experience to be reasonably capable of
evaluating the risks of penny stock transactions; and
. receive a signed and dated copy of this statement from the investor,
confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives.
Compliance with these requirements may make it more difficult for investors
in our common stock to resell their shares to third parties or to otherwise
dispose of these shares which may materially and adversely affect the trading
market of our common stock.
Our directors, officers and principal stockholders will be able to exert
significant influence over us. These persons may make decisions that are not in
your interest as a stockholder and materially and adversely affect the value of
your shares.
Upon completion of this distribution, our directors and officers will
beneficially own approximately 15.4% and BRE will own approximately 9.9% of our
outstanding common stock, assuming exercise in full of all options to acquire
shares of our common stock issued prior to the time of the distribution, the
full vesting of all shares issued subject to vesting requirements and the sale
of all shares of our common stock offered for sale to BRE Property Investors
LLC unit holders. In addition, upon completion of or at the time of the
distribution two existing shareholders of BRE who hold an aggregate of
approximately 14% of BRE's common stock will own beneficially approximately
9.3% of our outstanding shares, assuming exercise in full of previously issued
options, the full vesting of shares issued subject to vesting requirements and
the sale of shares to the BRE Property Investors LLC unit holders. If the
stockholders above vote together, they will be able to exercise significant
influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership may also delay or prevent a change in control of
VelocityHSI.
17
<PAGE>
Our directors may face conflicts of interest in making decisions that affect
our relationship with BRE.
Frank C. McDowell, the president and chief executive officer and a director
of BRE, and Leroy E. Carlson, the executive vice president and chief operating
officer and a director of BRE, will serve on our board of directors. At the
time of the distribution, our board of directors will also include two
directors who are unaffiliated with BRE. We expect to recruit and retain other
independent, unaffiliated board members shortly after the distribution.
Although our directors intend to act in a manner consistent with their
fiduciary duties to our stockholders, there is a risk that common membership on
the boards of directors or in management of VelocityHSI and BRE will lead to
conflicts of interest in connection with transactions between the two
companies, including matters arising under our administrative services and
reimbursement agreement with BRE. It is anticipated that Messrs. McDowell and
Carlson will abstain from voting on any matter submitted to a vote of our board
of directors involving a conflict of interest with BRE.
Our certificate of incorporation and bylaws contain provisions which could
delay or prevent a change in control. This could have the effect of materially
and adversely affecting the value of your shares because it will discourage
take-overs.
Our certificate of incorporation and bylaws contain the following provisions
that could delay or prevent a change in control of VelocityHSI or could limit
the price that investors might be willing to pay in the future for shares of
our common stock:
. establishing a staggered board of directors, which prevents a third
party from being able to remove all or a majority of our directors at
once;
. authorizing the issuance of preferred stock which can be created and
issued by the board of directors without prior stockholder approval,
commonly referred to as "blank check" preferred stock, with rights
senior to those of our common stock, which could make it more difficult
or expensive for a third party to obtain voting control;
. prohibiting stockholder action by written consent, which requires a
third party to execute the proper procedures to convene a meeting of the
stockholders which could delay a third party from acquiring us;
. requiring the affirmative vote of at least 66 2/3% of the outstanding
voting stock to amend a number of provisions in our certificate of
incorporation and bylaws and to approve certain business combinations,
which could make it more difficult for a third party to remove the
provisions we have included to prevent or delay a change of control; and
. reserving to our board of directors the exclusive right to change the
number of directors and fill vacancies on our board of directors, which
could make it more difficult for a third party to obtain control of our
board of directors.
These provisions could delay or prevent a third party from acquiring us even if
this change of control would benefit our stockholders.
The number of shares eligible for future sale is substantial. Because so many
shares can be traded at the same time, the market may not be able to balance
efficiently all purchase and sale orders which could have a material adverse
effect on our stock price.
We are unable to estimate the number of shares that may be sold in the
future by our stockholders or the effect, if any, that sales will have on the
market price of our common stock prevailing from time to time. Sales of
substantial amounts of our common stock, or the prospect of sales, could
materially and adversely affect the market price of our common stock.
Shares of VelocityHSI common stock distributed to BRE shareholders in the
distribution will be freely transferable, except for the shares distributed to
persons who may be deemed to be "affiliates" of VelocityHSI under the
Securities Act. Affiliates generally include individuals or entities that
control, are controlled by, or
18
<PAGE>
are under common control with VelocityHSI. Persons who are affiliates of
VelocityHSI will be permitted to sell their shares of VelocityHSI common stock
received in the distribution pursuant to Rule 144 under the Securities Act
beginning 90 days after the distribution. In general, under Rule 144, an
"affiliate" of VelocityHSI is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of common stock of VelocityHSI or the average weekly trading volume of
the common stock of VelocityHSI during the four calendar weeks preceding such
sale. Sales under Rule 144 are subject to certain volume limitations, manner of
sale limitations, notice requirements and the requirement of availability of
current public information about VelocityHSI.
Beginning 90 days after the distribution, shares issued pursuant to the
exercise of options granted to BRE option holders which are not subject to
vesting restrictions will be freely transferable by non-affiliates of
VelocityHSI, subject to compliance with the manner of sale limitations of Rule
144 and will be freely transferable by affiliates of VelocityHSI subject to
compliance with the volume limitations, manner of sale limitations, notice
requirements and the requirement of availability of current public information
about VelocityHSI set forth in Rule 144. Based on the number of BRE shares and
options outstanding as of May 31, 2000, of the 13,773,755 shares of our common
stock which may be outstanding immediately following the distribution, assuming
exercise in full of the options to purchase shares of our common stock issued
in connection with the distribution to BRE shareholders and the sale of all of
the shares offered for sale to holders of limited liability company units of
BRE Property Investors LLC in connection with the distribution, we expect that:
. 8,962,086 shares will be freely transferable upon completion of the
distribution;
. an additional 300,941 shares will become freely transferrable 90 days
following the date of the distribution, subject to compliance by our
affiliates with the applicable provisions of Rule 144;
. an additional 35,482 shares, including shares assumed to have been
issued upon exercise of options to purchase shares of our common stock,
will become freely transferrable 180 days following the date of the
distribution, assuming that none of those shares have been forfeited to
us due to a failure of the shareholder to satisfy the applicable vesting
requirements;
. an additional 2,970,602 shares, including shares assumed to have been
issued upon exercise of options to purchase shares of our common stock,
will become freely transferrable on the first anniversary of the date of
the distribution, assuming that none of those shares have been forfeited
to us due to a failure of the shareholder to satisfy the applicable
vesting requirements;
. an additional 839,595 shares, including shares assumed to have been
issued upon exercise of options to purchase shares of our common stock,
will become freely transferrable on the second anniversary of the date
of the distribution, assuming that none of those shares have been
forfeited to us due to a failure of the shareholder to satisfy the
applicable vesting requirements; and
. an additional 665,049 shares become freely transferrable on the third
and fourth anniversaries of the distribution, assuming that none of
those shares have been forfeited to us due to a failure of the
shareholder to satisfy the applicable vesting requirements.
Following the distribution, we intend to file a registration statement on
Form S-8 covering the 2,157,457 shares that have been reserved for issuance
under the VelocityHSI, Inc. 2000 Equity Incentive Plan, including the shares
issued upon the exercise of options issued to BRE option holders, that will
permit resale of those shares in the public market without restriction under
the Securities Act.
The distribution of the VelocityHSI common stock will be taxable to you.
The distribution of the VelocityHSI common stock to you will be a taxable
event. The amount of your distribution will be equal to the fair market value,
determined at the time of the distribution, of the VelocityHSI common stock
distributed to you. To the extent that BRE's distributions for the year,
including the distribution of this stock, are made out of BRE's earnings and
profits, which will be increased by the amount of gain
19
<PAGE>
recognized by BRE as a result of the distribution of the VelocityHSI common
stock, the distribution will be taxable to you as a dividend. While the board
of directors of BRE will report to you and to the Internal Revenue Service the
amount of your dividend income based on its determination of the value of the
VelocityHSI common stock, there can be no assurance that the Internal Revenue
Service or the courts will agree with this determination.
The distribution may have an adverse effect on BRE common stock.
After the distribution, the BRE common stock will continue to be traded on
the New York Stock Exchange. As a result of the distribution, the trading price
of BRE common stock may be lower than the trading price of BRE common stock
prior to the distribution, reflecting the value of the assets transferred to
us. The combined trading prices of BRE common stock and our common stock after
the distribution may be less than the trading price of BRE common stock prior
to the distribution. In addition, until the market has fully analyzed the
operations of BRE without our assets, the price at which the BRE common stock
trades may fluctuate significantly which may have an adverse effect on the
price of the BRE common stock.
20
<PAGE>
Forward-Looking Information
This prospectus contains forward-looking statements that involve a number of
risks and uncertainties. Forward-looking statements can be identified by the
use of forward-looking words such as "believes," "expects," "may," "will,"
"plan," "intends," "estimates," "could," "should," "would," "continue,"
"seeks," "pro forma" or "anticipates," or other similar words (including their
use in the negative), or by discussions of strategies, plans or intentions.
These statements include but are not limited to statements under the captions
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" as well as other sections in this
prospectus. A number of factors could cause results to differ materially from
those anticipated by the forward-looking statements, including those discussed
under "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." You should be aware that the occurrence
of any of the events discussed under "Risk Factors" and elsewhere in this
prospectus could substantially harm our business, results of operations and
financial condition and that upon the occurrence of any of these events, the
trading price of our common stock could decline and you could lose all or a
part of the value of your shares of our common stock.
Our forward-looking statements are dependent upon assumptions and estimates
that may prove to be incorrect. Although we believe that the assumptions and
estimates reflected in the forward-looking statements are reasonable, our
plans, intentions or expectations may not be achieved.
The cautionary statements made in this prospectus are intended to be
applicable to all related forward-looking statements wherever they may appear
in this prospectus.
21
<PAGE>
The Distribution
Background and Reasons for the Distribution
BRE is a self-administered, self-managed real estate investment trust, or
REIT, that owns and manages multifamily apartment communities in the Western
United States. To a large extent, public REITs, including BRE, manage their
property portfolios with consideration to both public market perceptions and
compliance with tax laws. Because investors are seeking a consistent and
growing income stream from their REIT investments, REITs are encouraged to make
conservative investments that will ensure sound returns. As a result, REITs
have generally been hesitant to participate in long-term, higher-risk projects.
In addition, the tax laws governing REITs include limitations on the types of
assets that REITs may own, the type of income REITs may receive and the ability
of REITs to retain earnings.
BRE has developed a package of Internet services designed to meet the needs
of the property owners and managers as well as the residents of its properties.
The services known as "Project Velocity" are designed to enhance the experience
of apartment community residents and facilitate the leasing and operation of
the communities.
BRE's business is significantly larger and more mature than the business of
VelocityHSI. Consequently, the stock price of BRE reflects primarily the market
value of an investment in a REIT rather than an investment in the business of
VelocityHSI. So that investors may make an investment directly in the
VelocityHSI business that will be priced in the stock market based upon the
business of VelocityHSI rather than a combination of the VelocityHSI and BRE
businesses, the BRE board of directors decided to separate the Project Velocity
business from the BRE business and distribute shares of common stock of
VelocityHSI to the BRE shareholders. The board of directors of BRE also
determined that the distribution of shares of VelocityHSI common stock to the
BRE shareholders and the conduct of the business of VelocityHSI through a
separate company would:
. enhance the attractiveness of VelocityHSI and BRE to investors who have
investment criteria aligned with only one of these businesses;
. enable VelocityHSI to operate outside of the constraints imposed by the
rules and regulations applicable to REITs such as BRE and, among other
things, to enable VelocityHSI to offer services to residents of
properties not owned by BRE;
. attract personnel to VelocityHSI with the required technological and
marketing expertise to run an email, Internet and Web hosting service
business;
. focus the employees of each company on the management of their respective
businesses; and
. provide compensation incentives linked to the objective performance of
each company's shares in the public markets.
Distribution and Transfer Agent and Registrar. ChaseMellon Shareholder
Services will act as the distribution agent for the distribution to BRE
shareholders and as our transfer agent and registrar for transfers of our
shares of common stock following the distribution.
The Contribution and Distribution
BRE has contributed 100% of the assets of Project Velocity to VelocityHSI, a
newly formed subsidiary, in exchange for 10,343,701 shares of VelocityHSI's
common stock, representing all of the outstanding shares of VelocityHSI common
stock.
BRE will distribute by dividend to its shareholders, 8,986,276 of its shares
of VelocityHSI common stock on the basis of one share of VelocityHSI common
stock for every five shares of BRE common stock outstanding on the distribution
record date of July , 2000. No holder of BRE common stock will be required to
pay cash for the shares of VelocityHSI common stock to be received in the
distribution or to surrender or exchange shares of BRE common stock or to take
any action in order to receive VelocityHSI common stock
22
<PAGE>
pursuant to the distribution. The general terms and conditions relating to the
contribution of Project Velocity to VelocityHSI in exchange for all of the
shares of VelocityHSI common stock and the distribution are set forth in the
Contribution and Distribution Agreement between BRE and VelocityHSI.
Manner of Effecting the Distribution
BRE will effect the distribution to its shareholders by delivery of
certificates representing the shares of VelocityHSI common stock to be
distributed to ChaseMellon for distribution to the holders of record of BRE
common stock as of the close of business on July , 2000. The distribution
will be made on the basis of one share of VelocityHSI common stock for every
five shares of BRE common stock. Based on 44,931,381 shares of BRE common stock
outstanding as of July , 2000, 8,986,276 shares of VelocityHSI common stock
will be distributed to BRE shareholders. The number of shares distributed will
be subject to adjustment to avoid the issuance of fractional shares. The shares
of VelocityHSI common stock distributed to BRE shareholders will be fully paid
and non-assessable, and the holders of these shares will not be entitled to
preemptive rights. It is expected that certificates representing shares of the
VelocityHSI common stock will be mailed to stockholders on or about August ,
2000.
Holders of BRE common stock should not send certificates to VelocityHSI. BRE
stock certificates will continue to represent shares of BRE common stock after
the distribution in the same amount shown on the certificates.
No Issuance of Fractional Shares
No certificate or scrip representing fractional interests in shares of
VelocityHSI common stock will be issued to BRE shareholders as part of the
distribution. Instead of fractional shares, ChaseMellon, as distribution agent,
will pay to any person who would be entitled to a fractional share cash in an
amount equal to the fractional share multiplied by $1.00, the amount determined
by the board of directors of BRE to represent the fair value of a share of
VelocityHSI common stock at the time of the distribution.
Results of the Distribution
After the distribution of the VelocityHSI common stock to the BRE
shareholders, VelocityHSI will be a separate company. The number and identity
of stockholders of VelocityHSI immediately after the distribution will be
substantially the same as the number and identity of shareholders of BRE on
July , 2000. Immediately after the distribution to the BRE shareholders,
VelocityHSI expects to have approximately 6,300 holders of record of
VelocityHSI common stock and approximately 13,052,406 shares of VelocityHSI
common stock outstanding excluding shares issued upon the exercise of options
issued prior to the distribution to holders of BRE options.
The distribution will not affect the number of outstanding shares of BRE
common stock or the rights of BRE shareholders. BRE will bear the costs
associated with this distribution, including legal, accounting and other
professional fees through intracompany advances to VelocityHSI which will be
converted into a capital contribution to VelocityHSI.
Related Issuances of Securities not Covered by this Prospectus
Issuance of Shares Prior to the Distribution. Prior to or at the time of the
distribution, VelocityHSI intends to sell an aggregate of 1,713,920 shares of
VelocityHSI common stock at a price of $0.50 per share to four executive
officers and three other employees of VelocityHSI and to give an aggregate of
395,000 shares of VelocityHSI common stock to six employees of BRE who were
instrumental in the development of the business of VelocityHSI who will not be
required to pay for these shares. These 2,108,920 shares will represent
approximately 15% of the shares of VelocityHSI common stock outstanding or
issuable upon the exercise of all options outstanding following the
distribution by BRE to its shareholders, assuming that holders of units of
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<PAGE>
limited liability company interest in BRE Property Investors LLC purchase the
599,285 shares of VelocityHSI common stock offered for sale to them at the time
of the distribution, as described below. All of these 2,108,920 shares will
vest in installments over a period of either eighteen or thirty-six months and
will be forfeited to us if the person to whom the shares are issued ceases to
be employed by us or BRE prior to the date of vesting. Upon the forfeiture of
shares issued to an officer or employee of ours at a price of $0.50 per share,
we will pay that officer or employee, in exchange for the forfeited shares, the
lesser of $0.50 per share or the fair market value of the shares at the time of
forfeiture. We will make no payment upon the forfeiture of any of the 395,000
shares given to the six employees of BRE who will not be required to pay for
the shares. The 1,713,920 shares of VelocityHSI common stock will be sold to
the following executive officers and other employees of VelocityHSI in the
following amounts:
<TABLE>
<CAPTION>
Number
of
Name Title Shares
---- ----- -------
<C> <S> <C>
President, Chief Executive
Stephen E. Carlson............... Officer and Director 822,682
Senior Vice President and Chief
Douglas A. Campillo II........... Technical Officer 411,341
Senior Vice President of
Nancye Miller.................... Marketing 137,114
Charles P. Wingard............... Senior Vice President, Chief
Financial Officer,
Secretary and Treasurer 68,557
Other employees (three persons).. 274,226
</TABLE>
The 395,000 shares of VelocityHSI common stock will be given to the
following BRE employees who were instrumental in the development of the
business of VelocityHSI: Frank C. McDowell, the president and chief executive
officer and director of BRE and a director of VelocityHSI (150,000 shares);
LeRoy E. Carlson, the executive vice president and chief operating officer and
a director of BRE and a director of VelocityHSI (175,000 shares); and four
other employees of BRE (an aggregate of 70,000 shares). These six BRE employees
will not be required to pay for these 395,000 shares of VelocityHSI common
stock.
We will recognize compensation expense for the difference between the $1.00
fair market value of a share of our common stock and the $0.50 price per share
paid for the shares to be sold to seven of our officers and employees referred
to above. This amount will be recognized as compensation expense over the
vesting period for the shares. Assuming no shares are forfeited, the total
amount of compensation expense to be recognized over the 18 and 36 month
vesting period for these shares will be $856,960. We will also recognize
compensation expense for the 395,000 shares of common stock issued to six
employees of BRE who will not be required to pay for the shares. The amount of
the expense will be recognized ratably over the 36-month vesting period based
on the aggregate fair market value of the shares at the date of vesting.
BRE Option Holders. In connection with the distribution, current BRE option
holders will receive options to purchase shares of our common stock as an anti-
dilution mechanism. The VelocityHSI options granted to BRE option holders will
reflect the terms of the BRE options, including the vesting provisions and
exercise periods of the BRE options. The number of shares underlying the
VelocityHSI options will reflect the distribution ratio of one share of our
common stock for every five shares of BRE common stock subject to the BRE
options. For example, if a BRE option holder holds an option to purchase
25 shares of BRE common stock, this option holder will receive options to
purchase five shares of our common stock. The exercise price of each
VelocityHSI option will be established using the ratio of the holder's BRE
option exercise price to the underlying BRE market value per share immediately
before the distribution. This ratio will then be applied to the VelocityHSI
value per share at the time of the distribution to establish the exercise price
of the VelocityHSI option. The exercise price of the existing BRE option after
the distribution will be calculated by applying the same ratio to the BRE
market value per share immediately after the distribution. The market value of
BRE common stock immediately before the distribution will be based on the
market capitalization of BRE on the date which is three days prior to the
distribution record date. The VelocityHSI value will be based on $1.00 per
share, the amount determined by the board of directors of BRE to represent the
fair value of a share of VelocityHSI common stock at the time of the
distribution.
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<PAGE>
The formula for determining the BRE and VelocityHSI option exercise prices
is designed to assure that the aggregate intrinsic value of both the BRE option
and the related VelocityHSI option for each option holder following the
distribution will not be greater than the intrinsic value of the BRE option
prior to the distribution under the guidelines included in Financial Accounting
Standards Board Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." The relevant
guidelines, when applied in a spin-off transaction, provide that modifications
to exercise prices of existing options and the granting of new awards for each
option holder do not result in financial accounting consequences to the
grantors. The issuance of the options to purchase shares of VelocityHSI common
stock to BRE option holders and the modification of the price of the BRE
options in the manner described above will not result in a new measurement date
for BRE's accounting purposes.
BRE Property Investors LLC Unit Holders. Holders of units of limited
liability company interests ("LLC Unit Holders") in BRE Property Investors LLC
(the "LLC") will not receive shares of VelocityHSI common stock directly in
connection with the distribution of shares of VelocityHSI common stock to the
BRE shareholders. LLC Unit Holders currently have the right to exchange their
units for cash, or, at the sole discretion of BRE as managing member of the
LLC, shares of BRE common stock at the ratio of one share of common stock for
each unit exchanged. If the units are exchanged for cash, the LLC Unit Holder
would receive an amount of cash equal to the market value at the time of
exchange of the shares of BRE common stock that may otherwise have been
delivered as part of the exchange.
In connection with the distribution, VelocityHSI will offer to sell to the
LLC Unit Holders, other than BRE, concurrently with the distribution, one share
of VelocityHSI common stock, at a price of $1.00 per share, for each five
shares of BRE common stock issuable to the LLC Unit Holder upon exchange of the
units held by the LLC Unit Holder at the close of business on July , 2000.
LLC Unit Holders, other than BRE, who exchange their units for shares of BRE
common stock prior to the close of business on July , 2000, will receive one
share of VelocityHSI common stock for every five shares of BRE common stock for
which the units were exchanged and will not be entitled to purchase additional
VelocityHSI shares concurrently with the distribution. If the LLC Unit Holders,
other than BRE, holding the 2,996,424 units currently outstanding elect to
acquire shares of VelocityHSI common stock at the time of the distribution,
VelocityHSI will issue an aggregate of 599,285 shares of its common stock to
the LLC Unit Holders for an aggregate consideration of $599,285. BRE intends to
cause the LLC to make a special cash distribution to the LLC Unit Holders in an
amount sufficient to enable each LLC Unit Holder to purchase shares of
VelocityHSI common stock at the time of the distribution. BRE will not be
entitled to acquire shares of VelocityHSI common stock as a result of its
membership interest in the LLC.
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<PAGE>
The table below summarizes, as of August , 2000, the allocation of the
outstanding shares of VelocityHSI common stock upon completion of the
distribution covered by this prospectus and related issuances of securities,
assuming exercise of all of the options issued to BRE option holders, the
purchase of 599,285 shares of VelocityHSI common stock by LLC Unit Holders at
the time of the distribution and the vesting of all VelocityHSI restricted
shares.
<TABLE>
<CAPTION>
Beneficial
Ownership of
Outstanding
and Issuable
Shares Shares
---------- ------------
<S> <C> <C>
Shares to be issued to BRE common shareholders at the
distribution date..................................... 8,986,276 65.5%
---------- -----
Shares to be issued in related transactions to:
BRE option holders (assuming exercise of the related
VelocityHSI options)................................ 659,457 4.8%
LLC Unit Holders..................................... 599,285 4.4%
VelocityHSI and BRE employees (subject to vesting)... 2,108,920 15.4%
---------- -----
3,367,662 24.6%
---------- -----
Shares retained by BRE ................................ 1,357,425 9.9%
---------- -----
Total VelocityHSI shares outstanding................... 13,711,363 100.0%
========== =====
</TABLE>
Material Federal Income Tax Consequences of the Distribution
General
The following summary of the material federal income tax considerations
associated with the distribution is based on current law, is for general
information only and is not tax advice. The information set forth below was
prepared by Latham & Watkins, tax counsel to BRE and VelocityHSI. A BRE
shareholder's treatment will vary depending on his particular situation, and
this discussion does not purport to deal with all aspects of taxation that may
be relevant to a BRE shareholder in light of his personal investments or tax
circumstances, or to shareholders who receive special treatment under the
federal income tax laws except to the extent discussed under the headings "--
Taxation of Tax-Exempt Shareholders of BRE as a Result of the Distribution" and
"--Taxation of Foreign Shareholders of BRE as a Result of the Distribution."
Stockholders receiving special treatment include, without limitation:
. insurance companies;
. financial institutions or broker-dealers;
. tax-exempt organizations;
. shareholders holding securities as part of a conversion transaction, or
a hedge or hedging transaction or as a position in a straddle for tax
purposes;
. foreign corporations or partnerships; and
. persons who are not citizens or residents of the United States.
The information in this section is based on:
. the Internal Revenue Code;
. current, temporary and proposed treasury regulations promulgated under
the Internal Revenue Code;
. the legislative history of the Internal Revenue Code;
. current administrative interpretations and practices of the Internal
Revenue Service; and
. court decisions;
26
<PAGE>
in each case, as of the date of this prospectus. In addition, the
administrative interpretations and practices of the Internal Revenue Service
include its practices and policies as expressed in private letter rulings which
are not binding on the Internal Revenue Service except with respect to the
particular taxpayers who requested and received the rulings. Future
legislation, treasury regulations, administrative interpretations and practices
and/or court decisions may adversely affect the tax considerations described in
this prospectus. Any change could apply retroactively to transactions preceding
the date of the change. We have not requested, and do not plan to request, any
rulings from the Internal Revenue Service concerning our tax treatment and the
statements in this prospectus are not binding on the Internal Revenue Service
or a court. Thus, we can provide no assurance that the tax considerations
contained in this summary will not be challenged by the Internal Revenue
Service or sustained by a court if challenged by the Internal Revenue Service.
You are urged to consult your tax advisor regarding the specific tax
consequences to you of (1) the distribution, (2) the ownership and sale or
other disposition of our common stock, including the federal, state, local,
foreign and other tax consequences of ownership and sale or other disposition,
and (3) potential changes in applicable tax laws.
Based upon the transactions as described in this prospectus, upon
representations made by BRE and VelocityHSI as to factual matters and subject
to the qualifications and assumptions contained in its opinions and this
prospectus, Latham & Watkins is of the opinion that:
. BRE's contribution of the VelocityHSI assets to VelocityHSI in exchange
for common stock of VelocityHSI, which will occur for federal income tax
purposes at the time of the distribution, will qualify as an exchange
under Section 351 of the Code; and
. BRE's distribution of the VelocityHSI stock to BRE's shareholders will
constitute a distribution of property under Section 301 of the Code.
Based on the characterization of this transaction as set forth in the opinions
above, except to the extent described below, this contribution will be tax-free
to BRE. In addition, as a result of the distribution, BRE will recognize gain
and the BRE shareholders will recognize ordinary income, tax-free return of
capital and/or capital gain, depending on BRE's earnings and profits and the
shareholders' personal tax situations. The resulting tax consequences to BRE
and its shareholders are described in more detail below.
Taxation of BRE in General
BRE has elected to be taxed as a REIT under Sections 856 through 860 of the
Code. BRE believes that it was organized and has operated in such a manner so
as to qualify as a REIT under the Code. BRE intends to continue to operate in
that manner, but no assurance can be given that it has operated in a manner so
as to qualify, or will operate in a manner so as to continue to qualify, as a
REIT. The sections of the Code relating to qualification and operation as a
REIT are highly technical and complex. Qualification and taxation as a REIT
depend upon BRE's ability to meet, through actual annual operating results,
asset diversification, distribution levels, and diversity of stock ownership,
the various qualification tests imposed under the Code. Accordingly, no
assurance can be given that BRE has operated or will continue to operate in a
manner so as to qualify or remain qualified as a REIT.
Taxable Income Recognition by BRE as a Result of the Formation of VelocityHSI
and the Distribution
BRE has contributed the assets of Project Velocity to VelocityHSI in
exchange for 10,343,701 shares of common stock of VelocityHSI, which
represented 100% of the outstanding shares of VelocityHSI stock. During the
period of time BRE owns 100% of the stock of VelocityHSI, VelocityHSI will be
treated as a "qualified REIT subsidiary" which will be disregarded as an entity
separate from BRE for federal income tax purposes. BRE's distribution of the
VelocityHSI common stock to BRE's shareholders, and VelocityHSI's issuance of
its common stock to others, will cause VelocityHSI to cease to be a qualified
REIT subsidiary. Immediately before this occurs, BRE will be deemed for tax
purposes to have contributed the assets then owned by VelocityHSI to
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<PAGE>
VelocityHSI in exchange for common stock of VelocityHSI, and then distributed a
portion of the VelocityHSI common stock received by BRE to the BRE
shareholders. As set forth above, this deemed exchange transaction will qualify
as a contribution under Section 351 of the Code. As a result of this treatment,
and except with respect to the treatment of the compensatory issuance of
VelocityHSI common stock and options described below, the deemed exchange
transaction will be tax-free to BRE. BRE intends to take the position that it
will not recognize income upon the issuance by VelocityHSI of its common stock
or options to purchase its common stock to BRE employees or other service
providers as compensation. However, the law is not clear on this point and
there can be no assurance that the Internal Revenue Service will not
successfully take the position that BRE recognized income upon these issuances.
BRE will have a basis in its VelocityHSI common stock equal to the basis of the
VelocityHSI assets it contributed to VelocityHSI in the deemed exchange
transaction.
BRE's distribution of VelocityHSI common stock to BRE shareholders will
result in the recognition of gain by BRE to the extent that the fair market
value of the distributed stock at the time of distribution exceeds BRE's
adjusted tax basis in the stock. BRE believes that the income it recognizes
upon the distribution will be offset by the dividends paid deduction to which
it will be entitled as a result of the distribution, assuming BRE qualifies as
a REIT for the taxable year of the distribution. As a result, BRE does not
expect to pay federal income tax with respect to the distribution.
Characterization of Gain Recognized by BRE for Purposes of REIT Income Tests
In order to maintain qualification as a REIT, BRE annually must satisfy two
gross income requirements. First, at least 75% of BRE's gross income (excluding
gross income from prohibited transactions) for each taxable year must be
derived directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property," certain
interest, and gains from the sale or other disposition of real property) or
from certain types of temporary investments. Second, at least 95% of BRE's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from investments the income from which satisfies
the 75% gross income test or from dividends, interest and gain from the sale or
other disposition of stock or securities (or from any combination of the
foregoing).
Any income recognized by BRE as a result of the issuance by VelocityHSI of
its common stock or options to purchase its common stock to BRE employees or
other service providers as compensation may not qualify under the 75% or 95%
REIT gross income test. Also, gain recognized by BRE upon the distribution to
its shareholders of VelocityHSI common stock will be characterized as gain from
the disposition of securities, which will constitute qualifying income for
purposes of the 95% income test, but not for purposes of the 75% income test.
Because of the factual nature of the value of the VelocityHSI common stock on
the date of the distribution, no assurance can be given regarding the amount of
income or gain that will be recognized by BRE upon these issuances or upon the
distribution of the VelocityHSI common stock to the BRE shareholders. BRE's
board of directors has made a determination of the value of the VelocityHSI
common stock as of the date of the distribution. If the Internal Revenue
Service were to successfully assert that the value of the VelocityHSI common
stock for federal income tax purposes on the date of the distribution was much
greater than the value determined by BRE's board, BRE could recognize
substantial income or gain upon the stock or option issuances or the
distribution, possibly causing BRE to fail a REIT gross income test.
If BRE fails to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, BRE may nevertheless qualify as a REIT for the year if it is
entitled to relief under certain provisions of the Code. Generally, BRE may
avail itself of the relief provisions if:
. its failure to meet these tests was due to reasonable cause and not due
to willful neglect;
. it attaches a schedule of the sources of its income to any federal income
tax return; and
. any incorrect information on the schedule was not due to fraud with
intent to evade tax.
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<PAGE>
It is not possible, however, to state whether BRE would be entitled to the
benefit of these relief provisions. If BRE failed the 75% or 95% income tests
and these relief provisions did not apply, BRE would fail to qualify as a REIT.
If BRE fails to qualify for taxation as a REIT in any taxable year, and the
relief provisions of the Code do not apply, BRE will be required to pay tax,
including any applicable alternative minimum tax, on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which BRE
fails to qualify as a REIT will not be deductible by BRE, and BRE will not be
required to distribute any amounts to its shareholders. As a result, BRE
anticipates that any failure to qualify as a REIT would reduce the cash
available for distribution by BRE to its shareholders. In addition, if BRE
fails to qualify as a REIT, all distributions to its shareholders will be
taxable as ordinary income to the extent of BRE's current and accumulated
earnings and profits, and subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, BRE will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which BRE lost its qualification. It is not possible to state
whether in all circumstances BRE would be entitled to this statutory relief.
Taxation of Taxable Domestic Shareholders as a Result of the Distribution
As set forth above, the receipt of VelocityHSI common stock will be taxable
to domestic shareholders as a distribution from BRE under Section 301 of the
Code. The amount of the distribution for federal income tax purposes will be
equal to the fair market value of the VelocityHSI common stock at the time of
the distribution. As long as BRE qualifies as a REIT, distributions, including
the distribution of the VelocityHSI common stock, made to BRE's taxable U.S.
shareholders out of BRE's current or accumulated earnings and profits, and not
designated as capital gain dividends, will be taxable to U.S. shareholders as
ordinary income. For corporate shareholders, these distributions will not be
eligible for the dividends received deduction. In making this determination,
BRE's earnings and profits for the taxable year of the distribution of the
VelocityHSI common stock will be increased by the amount of gain recognized by
BRE as a result of the distribution. Distributions in excess of current and
accumulated earnings and profits will be treated as a tax-free return of
capital to the extent that they do not exceed the adjusted tax basis of the
shareholder's shares of BRE common stock. These distributions will reduce the
adjusted tax basis which each U.S. shareholder has in his BRE shares for tax
purposes, but not below zero. Distributions in excess of a U.S. shareholder's
adjusted tax basis in his shares will be taxable as capital gains, provided
that the shareholder's BRE shares have been held as a capital asset. For
certain non-corporate shareholders (including individuals), this capital gain
will be subject to a reduced rate if the shareholder has held the shares for
more than one year. A shareholder's initial tax basis for determining gain or
loss on a subsequent disposition of the VelocityHSI common stock received in
the distribution will be equal to the fair market value of that stock at the
time of the distribution. A shareholder's holding period for this stock will
begin on the day following the distribution.
Taxation of Tax-Exempt Shareholders of BRE as a Result of the Distribution
The Internal Revenue Service has ruled that amounts distributed as dividends
by a qualified REIT do not constitute unrelated business taxable income when
received by a tax-exempt entity. Based on that ruling, provided that a tax-
exempt stockholder, except some tax-exempt stockholders described below, has
not held its shares as "debt financed property" within the meaning of the Code
and the shares are not otherwise used in a trade or business, the distribution
will not be unrelated business taxable income to a tax-exempt BRE shareholder.
For tax-exempt BRE shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, income from
the distribution will constitute unrelated business taxable income unless the
organization is able to properly claim a deduction for amounts set aside or
placed in reserve for specified purposes so as to offset the income generated
by its investment in BRE shares. These BRE shareholders should consult their
tax advisors concerning these "set aside" and reserve requirements.
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<PAGE>
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall be treated as unrelated business taxable income as to
some types of trusts which hold more than 10%, by value, of the interests in
the REIT. A REIT will not be a "pension held REIT" if it is able to satisfy the
"not closely held" requirement without relying upon the "look-through"
exception with respect to specified trusts. BRE does not expect to be
classified as a "pension-held REIT," and as a result, the tax treatment
described above should be inapplicable to BRE shareholders.
Taxation of Foreign Shareholders of BRE as a Result of the Distribution
The rules governing United States federal income taxation of Non-U.S.
Persons are complex. When we use the term "Non-U.S. Persons" we mean a holder
of BRE common stock who, for United States federal income tax purposes:
. is neither a citizen nor resident of the United States;
. is a corporation, partnership, or other entity that is not created or
organized in or under the laws of the United States or of any state
thereof or in the District of Columbia, and, in the case of a
partnership, treasury regulations do not provide otherwise;
. is an estate the income of which is not subject to United States federal
income taxation regardless of its source; or
. is a trust whose administration is not subject to the primary supervision
of a United States court and which does not have one or more United
States persons who have the authority to control all substantial
decisions of the trust.
The preceding discussion does not address the United States federal income
tax consequences of the distribution to BRE shareholders that are Non-U.S.
Persons. In general, Non-U.S. Persons may be subject to special tax withholding
requirements on the distribution of VelocityHSI common stock to them, except to
the extent reduced or eliminated by an income tax treaty between the United
States and the Non-U.S. Person's country. A Non-U.S. Person who is a
shareholder of record and is eligible for reduction or elimination of
withholding must file an appropriate form with BRE in order to claim such
treatment. Non-U.S. Persons holding BRE common stock should consult with their
tax advisors to determine the impact of federal, state and local tax laws with
regard to the distribution, including any reporting requirements. Amounts
required to be withheld from payments to Non-U.S. Persons may be collected by
exchanging a portion of VelocityHSI common stock to be distributed for cash.
Reporting of the Distribution
As discussed above, the board of directors of BRE has made a determination
of the fair market value of VelocityHSI common stock as of the distribution
date. Based upon that determination, BRE will report the amount of the
distribution received by each shareholder to such shareholder and to the
Internal Revenue Service on Internal Revenue Service Form 1099-DIV. There can
be no assurance that the Internal Revenue Service or the courts will agree with
the amount determined by BRE.
A BRE shareholder may also be subject to backup withholding at a rate of 31%
of amounts paid to the shareholder, unless the shareholder provides proof of an
applicable exemption or a correct taxpayer identification number, and otherwise
complies with applicable requirements of the backup withholding rules.
Trading of BRE Common Stock
BRE common stock will continue to trade on a regular basis until the trading
day, known as the "Ex-Date," after the first trading day sales of shares of
VelocityHSI common stock are quoted on any quotation system recognized by the
New York Stock Exchange. On the Ex-Date, any sales of BRE stock will not
include
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<PAGE>
the rights to the VelocityHSI common stock. From the distribution record date
until the Ex-Date, all shares of BRE common stock will carry due-bills
representing the rights to the VelocityHSI common stock distributable with
respect to such shares of BRE common stock. Prior to the Ex-Date, the New York
Stock Exchange will not allow the sale of either the BRE common stock or the
due-bills separately. Any shares of BRE common stock sold through the New York
Stock Exchange prior to the Ex-Date will automatically result in the sale of
the due-bill and therefore the entitlement to the VelocityHSI shares.
Trading of VelocityHSI Common Stock
There is not currently a public market for the VelocityHSI common stock. A
when-issued trading market for VelocityHSI common stock may develop on or
shortly before the distribution record date if the shares are qualified for
quotation on the National Association of Securities Dealers Over-The-Counter
Bulletin Board System. The term "when-issued" means that shares of VelocityHSI
common stock can be traded prior to the time certificates are actually
available or issued. A when-issued trade is a trade that is conditional upon
the issuing company, in this case BRE, actually distributing the shares of our
common stock to BRE shareholders. No BRE shareholder will be able to initiate a
when-issued transaction unless they either continue to hold the BRE shares
until the Ex-Date or have rights to when-issued shares of VelocityHSI common
stock from a source other than ownership of their shares of BRE. Prices at
which the VelocityHSI common stock may trade on a when-issued basis or after
such time certificates are actually available or issued cannot be predicted.
Until the VelocityHSI common stock is fully distributed and an orderly
market develops, the prices at which trading in VelocityHSI common stock occurs
may fluctuate significantly. The prices at which the VelocityHSI common stock
trades will be determined by the marketplace and may be influenced by many
factors, including, among others, the depth and liquidity of the market for
VelocityHSI common stock, investor perception of VelocityHSI and its business,
changes in the Internet service provider and consumer Web site industries,
VelocityHSI's financial results, and general economic and market conditions.
Transferability of Shares of VelocityHSI Common Stock
Shares of VelocityHSI common stock distributed to BRE shareholders in the
distribution will be freely transferable, except for the shares distributed to
persons who may be deemed to be "affiliates" of VelocityHSI under the
Securities Act. Persons who may be deemed to be affiliates of VelocityHSI after
the distribution generally include individuals or entities that control, are
controlled by, or are under common control with VelocityHSI. Persons who are
affiliates of VelocityHSI will be permitted to sell their shares of VelocityHSI
common stock received in the distribution pursuant to Rule 144 under the
Securities Act beginning 90 days after the distribution, subject to certain
volume limitations, manner of sale limitations, notice requirements and the
requirement of availability of current public information about VelocityHSI.
Beginning 90 days after the distribution, shares issued pursuant to the
exercise of options granted to the BRE option holders which are not subject to
vesting restrictions will be freely transferable by non-affiliates subject to
compliance with the manner of sale limitations of Rule 144 and will be freely
transferable by affiliates subject to compliance with the volume limitations,
manner of sale limitations, notice requirements and the requirement of
availability of current public information about VelocityHSI set forth in Rule
144. See "Risk Factors--The number of shares eligible for future sale is
substantial. Because so many shares can be traded at the same time, the market
may not be able to balance efficiently all purchase and sale orders which could
have a material adverse effect on our stock price" for a summary of the manner
of sale limitations under Rule 144. Following the distribution, we intend to
file a registration statement on Form S-8 covering the 2,157,457 shares that
have been reserved for issuance under the VelocityHSI, Inc. 2000 Equity
Incentive Plan, including the shares issued upon the exercise of options issued
to BRE option holders, that will permit resale of those shares in the public
market without restriction under the Securities Act.
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<PAGE>
Conditions; Termination
The BRE board of directors has conditioned the distribution upon the
following material events:
. the transfers of assets and liabilities of Project Velocity to
VelocityHSI to occur prior to these distributions having occurred in all
material respects;
. the VelocityHSI board of directors having been appointed, and the
VelocityHSI certificate of incorporation and VelocityHSI bylaws having
been adopted and in effect;
. BRE and VelocityHSI having obtained all third party consents or
approvals necessary or desirable in connection with the distribution,
and if some are not yet attained, BRE's board of directors determining
that the absence of the consents or approvals would not have a material
adverse effect on BRE or VelocityHSI;
. the registration statement on Form S-1, of which this prospectus forms a
part, filed by VelocityHSI pursuant to the Securities Act in connection
with the distribution having been declared effective by the Securities
and Exchange Commission;
. the registration statement on Form 8-A filed by VelocityHSI pursuant to
the Securities Exchange Act of 1934 having been declared effective by
the Securities and Exchange Commission; and
. BRE and VelocityHSI having entered into all of the agreements,
instruments, understandings, assignments or other arrangements which are
necessary in connection with the transactions contemplated by the
distribution.
VelocityHSI believes that there are no third party consents to the
contribution of assets or the distribution of shares of VelocityHSI common
stock which, if not obtained, would have a material adverse effect on
VelocityHSI, BRE or the distributions. Any of the conditions to the
distribution may be waived in the discretion of the BRE board of directors.
Even if all of the above conditions are satisfied, the BRE board of directors
has reserved the right to abandon, defer or modify the distribution or the
other elements of the distribution at any time prior to the date the shares of
VelocityHSI common stock are distributed to BRE shareholders. The BRE board of
directors will not waive any of the conditions to or make any changes in the
terms of the distribution unless the BRE board of directors determines that the
waiver of conditions or the changes would not be materially adverse to the BRE
shareholders.
Significant Financial Accounting Methods to be Used in Connection with the
Distribution
The significant financial accounting methods to be used in connection with
the distribution are discussed in the "Overview" section of the "Unaudited
Proforma Financial Information" referenced under the Index to Financial
Statements.
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Capitalization
The following table sets forth the cash and capitalization of VelocityHSI,
Inc. as of June 30, 2000:
. on a historical basis; and
. on a pro forma basis giving effect to the issuance of 10,343,701 shares
of VelocityHSI common stock to BRE and the distribution of shares to the
BRE shareholders, the sale and issuance of 2,108,920 shares of
VelocityHSI common stock to officers of VelocityHSI and employees of
BRE, and the payment of signing bonuses totalling $1,250,000 to
executive officers and other employees of VelocityHSI, as if those
transactions had occurred on June 30, 2000.
The table does not reflect 659,457 shares issuable upon the exercise of
VelocityHSI stock options granted to BRE option holders as part of the
distribution transaction or the potential sale of 599,285 shares of VelocityHSI
common stock to holders of units of limited liability company interest in BRE
Property Investors LLC.
<TABLE>
<CAPTION>
As of June 30, 2000
------------------------
Historical Pro Forma
----------- -----------
<S> <C> <C>
Cash................................................. $ -- $ 856,960
=========== ===========
Equity:
Preferred Stock, 50,000,000 shares authorized, $.01
par value per share; no shares issued or
outstanding....................................... -- --
Common Stock, 100,000,000 shares authorized, $.01
par value per share; 12,452,621 pro forma shares
issued and outstanding............................ -- 124,526
Additional paid-in capital (1)..................... -- 8,901,059
Deferred compensation (2).......................... -- (2,501,960)
Intercompany account (3)........................... 6,782,177 --
Accumulated deficit................................ (1,817,962) (1,817,962)
----------- -----------
Total capitalization................................. $ 4,964,215 $ 4,705,663
=========== ===========
</TABLE>
--------
(1) In addition to the issuance of shares, additional paid-in capital includes
on a pro forma basis amounts advanced by BRE to pay $1,250,000 of signing
bonuses, as well as $6,782,177 of other advances converted into a capital
contribution in connection with the distribution. Also offset against
additional paid-in capital is a charge of $1,115,512 reflecting prepaid
transaction costs which were carried on the balance sheet of VelocityHSI
as an asset prior to the distribution.
(2) Deferred compensation includes a charge for the issuance of 395,000 shares
of VelocityHSI common stock subject to vesting requirements to employees
of BRE who were instrumental in the development of the business of
VelocityHSI, which will be amortized over the 18 and 36 month vesting
periods for the shares. Also included in deferred compensation is a charge
for the market value discount for shares sold to VelocityHSI employees
which vest and amortize over 18 or 36 months and a charge for the signing
bonuses which vest over 24 months.
(3) The intercompany account represents amounts advanced by BRE to VelocityHSI
which will be converted into a capital contribution in connection with the
distribution.
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<PAGE>
Selected Financial Data
The selected financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes contained eleswhere in this
prospectus.
The business referred to as VelocityHSI commenced operations in March 1999
with limited revenue generating activities conducted mainly on a part-time
basis by several BRE employees. On January 1, 2000, BRE formed a division with
accounting and reporting separate and discrete from all of BRE's other
activities and referred to as "Project Velocity."
<TABLE>
<CAPTION>
Period from Six Months
March 1, 1999 Ended
through June 30,
December 31, 1999 2000
----------------- -----------
(unaudited)
<S> <C> <C>
Operating Results
Revenues
Subscriber service fees........................ $ 138,125 $ 182,378
--------- -----------
Expenses
Cost of services............................... 182,710 511,324
Sales and marketing............................ 53,396 178,450
Depreciation................................... 105,069 388,211
General and administrative..................... 4,861 714,444
--------- -----------
346,036 1,792,429
--------- -----------
Net loss......................................... $(207,911) $(1,610,051)
========= ===========
Balance Sheet Data
Assets
Prepaid transaction costs...................... $ -- $ 1,115,512
Equipment and fixtures, net.................... 857,350 3,066,611
Software development costs..................... 29,650 725,662
Other assets................................... -- 56,430
--------- -----------
Total assets................................. $ 887,000 $ 4,964,215
========= ===========
Equity
Intracompany account and accumulated deficit... $ 887,000 $4,964,215
========= ===========
</TABLE>
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<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Nature of Business
The business referred to as VelocityHSI commenced operations in March 1999
with limited revenue generating activities conducted mainly on a part-time
basis by several BRE employees. On January 1, 2000, BRE formed a division with
accounting and reporting separate and discrete from all of BRE's other
activities and referred to as "Project Velocity."
In April 2000, BRE formed a corporation, VelocityHSI, Inc., which had no
assets or liabilities as of June 30, 2000.
Monthly subscriber fees comprised 100% of revenues for the periods ended
June 30, 2000 and December 31, 1999. As of June 30, 2000, all of our
subscribers were residents of apartment communities owned by BRE.
Results of Operations
Revenues totaled $182,378 for the six months ended June 30, 2000 and
$138,125 for the ten months ended December 31, 1999. This increase was due to
an increased number of subscribers over the period. Revenues consist solely of
subscription sales from subscribers to our monthly Internet access service.
Subscription fees vary in amount based on the level of service a subscriber
chooses. Subscribers pay our subscription fees for our Internet services on a
monthly basis. Either the subscriber or VelocityHSI can terminate our service
upon 30 days notice. Our subscribers are not required to sign written contracts
to pay for our subscription fees for any minimum length of time. These
subscription fees are recognized as income as earned. As part of our marketing
plan, we may reduce the charges to potential subscribers as part of special
promotions. As of June 30, 2000 and December 31, 1999, we had approximately
1,650 and 836 subscribers in 35 and 23 apartment communities, respectively.
Cost of services totaled $511,324 for the six months ended June 30, 2000, an
increase of $328,614 over the $182,710 for the ten months ended December 31,
1999. The increase in cost resulted from the addition of new apartment
communities as customers and the addition of subscribers during the six month
period ended June 30, 2000. The costs for the period ended June 30, 2000
consist of $280,000 in charges for wiring, setup and installation of Internet
services performed by an independent contractor, T-1 access charges of $205,000
and, to a lesser extent, commissions to on-site personnel for new
subscriptions. We anticipate that installation expenses will be associated with
each new subscriber. T-1 access charges reflect a per community charge, and are
not incurred in connection with the addition of new subscribers.
Sales and marketing costs totaled $178,450 for the six months ended June 30,
2000, an increase of $125,054 over the $53,396 for the ten months ended
December 31, 1999. The increase in sales and marketing costs consists largely
of promotional expenses to introduce Project Velocity to the multifamily
apartment industry in March 2000. These costs are nonrecurring; however, we
anticipate significant ongoing sales and marketing expenses as we market our
services to property owners, managers and potential subscribers.
Depreciation expense totaled $388,211 for the six months ended June 30, 2000
compared to $105,069 for the ten months ended December 31, 1999. The increase
of $283,142 is directly related to the increase in equipment placed in service
in 2000. Depreciation expense is based on the total cost to place the related
assets in service and is calculated on a straight-line basis over three years.
We anticipate this cost will increase as we continue to purchase additional
equipment.
General and administrative expenses totaled $714,444 for the six months
ended June 30, 2000, a significant increase over the $4,861 for the ten months
ended December 31, 1999. The increase resulted from
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<PAGE>
additional direct and indirect personnel costs of executive and administrative
officers and support personnel, additional facility costs and expenses for
travel, printing, and office supplies incurred in connection with the
development of the VelocityHSI business. General and administrative expenses
should continue to increase over the next twelve months as we hire additional
software developers, sales, marketing and technical personnel to support
VelocityHSI on a stand-alone basis.
Net loss of $1,610,051 and $207,911 for the six months ended June 30, 2000
and the ten months ended December 31, 1999, respectively, resulted from the
costs of services, sales and marketing costs, depreciation and general and
administrative costs exceeding revenues generated from subscriber service fees.
Equipment totalling $3,066,611 and $857,350 on our balance sheets as of June
30, 2000 and December 31, 1999, respectively, consists of hardware and other
equipment used for VelocityHSI services. These amounts are expected to continue
to increase as additional equipment is required to install VelocityHSI at new
communities.
Software development costs totalling $725,662 and $29,650 on our balance
sheets as of June 30, 2000 and December 31, 1999, respectively, consist
primarily of salary and consultant expenses incurred in connection with the
development of our Internet applications and content. There has been no
amortization of these costs, since these projects were under development during
the period ended June 30, 2000. Upon completion of the projects, these costs
will be amortized over a term of three years or less.
Prepaid transaction costs totalling $1,115,512 on our balance sheet at June
30, 2000 consist mainly of legal and accounting services incurred in connection
with the formation of VelocityHSI and the distribution of shares of our common
stock to shareholders of BRE. Such costs will be expensed upon the distribution
or if the plans for distribution are terminated.
Liquidity and Capital Resources
Cash used in operating activities, primarily for the payment of operating
expenses, was $2,393,782 and $102,842 for the six months ended June 30, 2000
and the ten months ended December 31, 1999, respectively. We expect to
experience substantial negative cash flow from operating activities through the
end of fiscal year 2000 due to the commencement of our business and the
implementation of our business plan. Our future cash requirements as well as
our revenues will depend on a number of factors including: the number of
multifamily apartment properties with which we contract to provide services;
the terms of contracts with the multifamily apartment property owners;
subscriber penetration within the multifamily apartment property; monthly
subscription rates; variable installation and setup costs at each multifamily
apartment property and marketing costs.
We incur both system installation costs to place equipment in service at
each property and incremental installation costs to set up new subscribers with
VelocityHSI. Since we do not charge the property owner or subscribers for these
installation costs, and the monthly subscriber fees generated from service are
earned over a period of time, we experience negative cash flows upon
installation.
Our major expenditures to date consist of hardware and software purchases
and development costs of our Internet services. Net cash used in investing
activities was $3,293,484 and $992,039 for the six months ended June 30, 2000
and the ten months ended December 31, 1999, respectively.
Our expenses to date have been financed primarily with advances from BRE.
BRE has agreed to provide us with up to $10,000,000 in additional funds through
September 30, 2001 to finance our operating expenses and the costs of
installing equipment at properties which are not owned by BRE. BRE has also
agreed to provide us with funds through September 30, 2001, without limitation
on amount, to finance the installation of our equipment at properties owned by
BRE. We must repay, on or before September 30, 2001, all of the funds advanced
to us by BRE subsequent to the distribution, together with interest at the rate
of 9% per year. We currently have no external debt facility or source of funds
other than BRE. The operating expenses and capital
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expenditures we will incur during the next twelve months in carrying out our
business plan will vary depending upon a number of factors, including:
. the number of new apartment property owner customers and subscribers
engaged during that period which will determine the amount required for
the acquisition and installation of capital equipment;
. the extent of the changes and developments that may occur during that
period in available technology and user requirements and preferences
that will affect the amount we will be required to spend to develop and
maintain a competitive position in the industry; and
. the cost of attracting new apartment property owner customers and
subscribers.
Although we cannot predict with precision the amount required to fund future
operating expenses and capital expenditures, we expect the funding required to
carry out our business plan during the next twelve months to exceed
substantially the funding available from BRE. Consequently, we will be required
to obtain financing from additional sources in order to fund our expected
operations both during the next 12 months and thereafter, including the
repayment of advances made by BRE. If we cannot obtain additional capital, we
will be required to reduce our expenditures to a level that could be financed
with advances from BRE. A reduction in expenditures would limit our ability to:
. hire and retain the technical personnel necessary to develop our
products and services;
. hire and retain the marketing personnel necessary to expand our property
owner and customer base beyond BRE and attract new subscribers;
. acquire the equipment necessary to expand or maintain our business;
. respond effectively to competitive products and services; and
. hire necessary management personnel.
We intend to pursue additional sources of financing, including debt and
equity financing and borrowings. If we are unable to obtain the additional
financing, our business will be materially and adversely affected.
We expect to experience negative cash flow from operating activities through
the periods ending December 31, 2000 and September 30, 2001 and for periods
thereafter depending on a variety of factors. Our future cash requirements as
well as our revenues will depend on a number of factors including: the rate at
which subscribers purchase our service; our effectiveness in developing income
sources other than subscription fees; the cost to install and maintain the
service to individual users or apartment communities; marketing costs,
including the costs of providing service to new customers during an
introductory period without charge; and changes in technology.
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Business
Company Overview
VelocityHSI provides high-speed Internet installation, access and content to
the apartment industry. The term "high-speed" as it relates to the transmission
of information to and from the Internet is generally regarded to refer to
connection and transmission speeds which are faster than those provided by
traditional dial-up modems. Our customers are multifamily apartment owners and
managers and their apartment unit residents and we offer them Internet-related
products and services to meet their specific high-speed Internet communication,
information and entertainment needs. VelocityHSI is comprised of three primary
elements:
. We develop and install high-speed Internet connection systems for
apartment-property owners and managers. Our systems deliver Internet-
access over existing copper telephone wires at T-1 speed, a signalling
speed of 1.5 megabits per second, and allow property owners and managers
to offer their residents subscriptions to very fast Internet access
through existing telephone lines. Our systems are "always on" which
allow our subscribers continuous connection to the Internet eliminating
busy signals or the additional time required to periodically reconnect
to the Internet inherent with the use of traditional dial-up modems.
This data-over-voice technology allows subscribers simultaneous use of
the telephone, Internet and fax machine over a single telephone line.
VelocityHSI delivers Internet access to all subscribers at 1,000K bytes
per second, which ranges from 17 to 69 times faster than standard dial-
up modem connection speeds of 14.4K, 28.8K and 56.6K. In addition to
providing an amenity for residents, the installation creates a high-
speed, wide-area network, or WAN, for property owners and managers,
allowing them to connect all their on-site properties to regional and
headquarters offices for email and data transmission needs.
. We provide portable email, Web-site hosting and local-area networks with
our Internet Service Provider service. Our Internet Service Provider
service, also known as ISP service, called ZIPPITYKLIK, is offered on a
monthly subscription basis giving individual subscribers unlimited,
always-on, high-speed Internet access over existing telephone lines
which may be accessed by computer or through a VelocityHSI-provided
television set-top box. Our ISP service includes portable email accounts
that can be accessed from the subscriber's home or from any remote
Internet access location. Our subscribers may store their personal Web-
sites on our ISP servers and can make payments to us, or other goods and
service providers, using our electronic billing and payment features.
Activation of our service in an apartment unit creates a local area
network, or LAN, for each customer, allowing file and printer sharing
between multiple computers within the apartment.
. We provide Internet launch pages which are customized to each apartment
community and can be personalized to each subscriber. Included in the
price of our ISP service is our launch page, called the "KLIKLANE." A
launch page is the first computer screen which leads a computer user to
the content of the Internet. KLIKLANE is an Internet portal site which
provides a community bulletin board and messaging system; a preset or
subscriber-defined information and service connection to national and
local retail Web sites; personal management tools, such as calendar,
contacts and task lists; and on-demand television-quality satellite-
broadcast video and audio content.
We offer standard system installations to property owners and managers at no
cost in exchange for the right to market our non-exclusive ISP services and
launch page to their residents. We currently generate revenues through monthly
subscriptions to our ISP service. Currently, our basic monthly subscription
fees are $34.95. Once we have installed a system on a property, we can activate
service for subscribers within two to five business days, any time of day,
within a 30-minute appointment window. Our service includes customer service
and technical support over the phone, 24 hours a day, 7 days per week.
As of May 31, 2000, VelocityHSI was installed in 29 apartment communities,
comprising 8,863 apartment units. BRE owns each of these apartment communities
and is our sole property owner customer. As of May 31, 2000, VelocityHSI had
1,425 service activations, 1,356 of which are revenue-generating subscribers
and the balance of which are for leasing office and demonstration purposes.
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While we have not generated revenues from other sources, we anticipate
future sources of revenue to include advertisers on our launch page and
commissions derived from retailers who complete sales with our subscribers who
accessed participating retail Web sites through KLIKLANE. In addition, we
intend to enter into arrangements with apartment owners and managers in which
we will pay to them a percentage of the gross revenues we receive from our
services provided at these apartment communities. We have entered into a
service agreement pursuant to which we will pay to BRE 10% of gross revenues
generated from our services provided at communities owned by BRE after the
distribution. See "Relationship Between VelocityHSI and BRE After the
Distribution--Agreement for Provision of our Services to BRE."
Market Opportunity
Our market opportunity can be characterized by the following factors:
. Internet usage continues to grow. Demand for connectivity to the Internet
continues to grow as households realize that the Internet can
significantly enhance communication, allow for the accessibility of
valuable information and provide opportunities to reach new markets and
compare products and services. Tremendous market potential remains as
Yankee Group research indicates that 72% of U.S. households are not yet
online. This number is expected to decrease rapidly, with Forrester
Research projecting that household Internet penetration will grow to 56%
by 2003.
. Increased broadband availability drives the adoption of the Internet and
the need for more broadband- enhanced applications and access. Consumers
are increasingly demanding faster connections. According to the Yankee
Group, 34% of consumers indicate that the number one reason they do not
access the Internet at home is because they can access it at work at
higher speeds through the use of T-1 or other high-speed lines. Based on
the emerging demand for streaming video, Internet long distance telephone
service and other content-rich products and services, we believe that
there will be a further increased demand for broadband access.
. Increasing access to non-PC based Internet devices further drives usage
of the Internet. According to Forrester Research, household PC
penetration is projected to grow only 8% over the next four years, from
52% in 1999 to 60% in 2003. Access to lower-cost, easy-to-use non-PC
Internet devices, including wireless handheld devices, television set-top
boxes and other Internet appliances, has the potential to reach non-PC
households and further increase Internet usage. We believe these other
Internet appliances such as wireless handheld devices have the potential
to increase Internet penetration because they allow users to access the
Web remotely, inside or outside their home or office, without the
physical constraints of sitting in front of a computer.
. Broadband infrastructure is used for more than just Internet
connectivity. Broadband capabilities are scalable for other services
beyond Internet access, including IP telephony and other communications
services, enhanced entertainment and content delivery, streaming video,
video on demand, interactive television, and home management services to
name a few. These services are particularly attractive when bundled into
one convenient package.
. The multifamily apartment market provides a unique value proposition. The
multifamily apartment unit market represents a significant opportunity
for an ISP given the unique aggregation attributes of multifamily
apartment properties to efficiently deploy broadband infrastructure and
enhance marketing opportunities. Properties of 50 units or more offer
efficient broadband deployment. According to the National Multihousing
Council and the Yankee Group in its November 1999 report, there are an
estimated 20.6 million apartment units in the United States of which 9.4
million units or 46% are clustered in properties containing 50 or more
units.
We believe the multifamily apartment unit market provides a unique value
proposition based on:
. Efficient deployment of technology: The clustering of individual
apartment units within buildings and the clustering of buildings within
individual apartment properties allows for rapid, cost-effective
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installation of broadband infrastructure within centralized telephone
closets and allows technicians to activate service in multiple apartment
units during a single property visit. This compares to the more labor-
intensive installation process faced by cable and telecommunications
companies to connect single-family homes on a one-by-one basis. Current
technology allows router equipment investment in 50-unit increments,
enabling us the flexibility to purchase and install equipment in
anticipation of, or concurrent with, demand for subscriptions.
. Consumer aggregation: The aggregation of demographically similar
consumers allows for unique marketing and e-commerce programs, such as
targeted marketing and aggregated purchasing of services including video,
Internet access and Internet long distance telephone service which
provide value to both vendors and consumers. We believe that the control
of access to this aggregation of consumers and of their access to the
Internet gives the ISP a preferential position in monetizing potential
future values.
. Multiple entry points for marketing of services: Traditional providers of
broadband service (such as cable and telephone companies) to the non-
multifamily apartment property market incur large advertising costs for
television, radio, direct-mail and call-center marketing targeting a
broad spectrum of prospective users. Multifamily apartment unit marketing
is property-specific and can reach 100% of its target market through
demonstration of the service by incentivized on-site leasing
professionals on initial leasing tours, at lobby, community events,
information kiosks and door hangers, and through referrals from other
property subscribers.
Broadband Market Characteristics
Numerous services have been developed to provide broadband Internet access
to consumers and businesses. These include digital subscriber line, or DSL,
service, supplied by many ISPs, telecommunications companies and DSL network
providers; cable modem service, supplied by many cable television providers;
wireless and satellite services, supplied by many existing and emerging
wireless communications providers; and T-1 service and other high-speed
circuits, employed by many telecommunications companies primarily to business
customers. Each solution employs a different set of technologies in providing
high-speed service to end users. However, leading providers of these services
have encountered limitations in expanding their customer bases. DSL, for
example, suffers from geographic limitations since service generally cannot
work beyond an 18,000 feet radius from the local exchange carrier's central
office. Cable service systems experience limited service coverage and bandwidth
shortages as user volume increases.
Similarly, the broadband industry's interaction with the multifamily
apartment property industry to date has been characterized by difficulties and
limitations. Broadband service providers typically secure a long-term right-of-
entry, or ROE agreement, from a property owner to access and deliver
infrastructure to individual properties or buildings. Such long-term ROEs
represent a recordable easement on the title to a property and can tie the
property to a single ISP for multiple years and, as a result, have caused
property owners, wary of giving up property rights, to resist these services.
While service providers typically provide a revenue sharing agreement to
consenting property owners in exchange for the ROE, the level of revenue
realized is largely dependent on the service provider's sales, marketing and
customer service abilities and thus may not fully compensate the owner for the
value of providing the ROE. In addition, many high-speed access providers do
not have an industry-specific understanding of the needs of the owners,
managers and residents of multifamily apartment property communities.
The VelocityHSI Advantage
We believe our services address many of the problems and limitations faced
by other providers of high-speed networking and Internet access services in the
multifamily apartment unit marketplace. By utilizing T-1 or higher-speed
circuits on a 24 hours a day, seven days a week, managed broadband network, we
are able to offer reliable high-speed access without the bandwidth degradation
problems faced by other broadband
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services. Currently, the two most common residential high-speed access delivery
technologies are DSL and cable modem. DSL services are delivered in three mile
range increments or radiuses from local exchange carrier central offices.
Subscribers located at the outer range of the three mile radius experience
slower signal speed and, therefore, bandwidth degradation. Cable modems deliver
service over a distributed network. For example, a single cable modem is split
equally among all users, degrading bandwidth speed with each additional
actively connected user. However, VelocityHSI creates the equivalent of a local
exchange carrier central office for each apartment community eliminating the
bandwidth degradation problem encountered by DSL service at the outer points of
the three mile range. In addition, each VelocityHSI user is allocated an
individual channel to the Internet which is not split between additional
subscribers within the apartment community and is not degraded as additional
subscribers become actively connected to the Internet. In addition, by delivery
of our services over existing copper telephone wires, Ethernet or wireless
systems as appropriate, we are able to offer multifamily apartment property
owners an immediate, cost-effective, efficient and scalable infrastructure. We
also serve both our property owner and subscriber customers by offering a
community-specific Internet portal that provides targeted content, e-commerce
and management tools and services. We believe management's extensive experience
in the multifamily apartment unit industry has given us intimate knowledge of
the products and services that address the needs of both property owners and
managers and resident subscribers. We are committed to offering customer-
focused services which:
. address the communications and infrastructure needs of property owners
without the ROE and contractual concerns of similar services;
. allow property owners and managers to enhance competitiveness and improve
the management of their properties; and
. deliver the broadband Internet access, relevant content and top quality
customer service that multifamily apartment residents demand.
The VelocityHSI Network. We deliver our high-speed networking, Internet
access and content services using multiple broadband access technologies over a
proprietary Internet Protocol network that is managed 24 hours a day/seven days
a week to ensure peak performance. Our leased network alleviates Internet
bottlenecks through the use of a direct connection between the infrastructure,
or backbone, of the Internet and the end-user that allows us to provide
reliable high-speed service without bandwidth degradation. We have developed
and are implementing our network using a backbone that operates at DS-3, or a
speed of 45Mbps, and can be upgraded as needed. We connect subscribers directly
to our network using existing protocols that integrate multiple broadband
access technologies, through network access points, typically located in space
leased from a local exchange carrier and consist of fully scalable switches,
routers and servers that we own. This architecture allows us to adapt to
improving broadband technologies and rapidly scale our network to accommodate a
growing subscriber base.
VelocityHSI for Property Owners and Managers. Our services offer an
efficient, cost-effective and convenient opportunity for property owners and
managers to provide their residents with high-speed Internet access and
broadband-enabled content and services while enhancing the value of their
properties and improving their own internal property management operations.
Specifically, we provide property owners and managers with:
. a ready-to-use broadband system which enables existing copper telephone
wires to carry multiple signals simultaneously which facilitates system
planning, hardware installation, subscriber marketing, content and
technology upgrades, technical support and customer service for low or no
initial investment;
. fee revenues from VelocityHSI based on the extent to which the residents
generate subscriber fees, or the extent to which businesses that appear
on an apartment community-specific launch page provide VelocityHSI with
advertising fees, commissions or promotional fees, in an amount to be
determined by future market conditions except for the fee from
VelocityHSI due to BRE, which will be based on 10% of subscriber fees
from residents in BRE-owned properties;
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. improved leasing effectiveness and resident retention by offering what we
believe is a desirable amenity to prospective and current residents; and
. reduced operating costs through subsidized installation of high-speed
Internet access for communication, rapid transmission of data and
Internet long distance telephone capabilities between all properties
owned or managed by a particular customer and its headquarters offices.
VelocityHSI for Subscribers. We provide subscribers with a suite of products
and services which enhance the residential living experience of apartment
residents. These advantages include:
. availability of high-speed, always-on Internet access, delivered over
existing copper telephone wires, replacing the need for slower dial-up
modem connections and eliminating the increased cost of additional
telephone lines which were necessary to enable a subscriber to access the
Internet while simultaneously utilizing the telephone;
. Internet access through television set-top boxes or other electronic
devices that allow Internet access to those who do not have a personal
computer;
. portable ISP service that allows email access from anywhere and can
follow a subscriber even after they no longer live at a multifamily
apartment community serviced by VelocityHSI;
. a customized, personalized launch page featuring local apartment
community communication tools, goods and service advertisements and the
ability to conduct transactions over the Internet; and
. a local area network within each apartment unit, allowing subscribers to
link multiple computers and printers.
By retaining ownership of the distribution method, and by providing a
customized "launch page" which is the first screen which leads a computer user
to the content of the Internet, we effectively create a mechanism by which
businesses can access our subscribers as potential customers. The aggregation
of customers who see this launch page each time they access the Internet has
potential value to providers of goods and services who wish to focus
advertising or products to targeted user groups, resulting in the potential for
group purchasing discounts, advertising fees or performance-based revenue
sharing for the owner of the launch page.
Our Services
VelocityHSI
VelocityHSI provides system planning, development, and installation of high-
speed Internet access for property owners and managers of apartment communities
using a revenue-sharing model. We survey sites to determine the adaptability
and installation wiring requirements of a given apartment community's telephone
wiring system to utilize our T-1 distribution system. Based on this analysis,
we are then able to plan the equipment and installation requirements for
additional trenching, wiring, switching and routing equipment. VelocityHSI
works with a multifamily apartment property's existing infrastructure, using a
hybrid of wired and wireless engineering, creating a fully upgradable and
expandable system. We offer standard system installations to property owners
and managers at no cost in exchange for the right to market our ISP services
and launch page to their residents. We generate revenues primarily through
subscriptions to our ISP service as well as a minimal amount from installation
fees. While we have not generated revenues from other sources, we anticipate
future sources of revenues to include advertisers on our launch page and
commissions derived from retailers who complete sales with our subscribers who
accessed participating retail Web sites through KLIKLANE.
ZIPPITYKLIK(TM)
ZIPPITYKLIK is our proprietary, fully-portable, Internet service provider
offering subscribers dedicated T-1 access for connecting to the Internet at a
rate anywhere from 17 to 69 times faster than a standard dial-up connection. It
also permits users to define a customized package of services, including
multiple Internet-based
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email accounts. Customers are able to access ZIPPITYKLIK from a television set-
top box which we intend to make available in the third quarter of 2000.
Initially, these television set-top boxes will be made available at no cost to
subscribers on a test basis. We also provide online and telephone technical
support to all subscribers. Currently, our basic monthly subscription fees are
$34.95.
KLIKLANE(TM)
KLIKLANE is our Internet portal site and subscriber launch page, which can
be customized for each apartment community on a regional and localized basis.
Standard KLIKLANE retail channels currently include Entertainment/Travel,
Fashion & Style, Grocery & Dining, Health & Fitness, Home & Bath,
Info/Referral, Klik Central Mall, Personal Finances and Kid Kliks. In addition,
each user can customize basic content settings, such as local and national
news, stocks, horoscopes and weather. Based on the package of options selected
by property owners and managers, KLIKLANE can be used for online rent payment,
maintenance service requests, direct messaging to and from community
management, and links to and affiliations with local resources.
KLIKLANE also features unique content and services such as Coolcast(TM). We
are the exclusive provider of Coolcast to the multifamily apartment market.
Coolcast is a video-enhanced portal, which aggregates and broadcasts live,
TV-quality video and CD-quality digital audio from branded media and
entertainment providers. As a media aggregator, Coolcast, and not VelocityHSI,
contracts directly with branded providers that include Bloomberg, Disney, the
Home Shopping Network and Fox Sports. Coolcast allows users to access live
television and audio broadcasts from around the globe. Coolcast bypasses Web
congestion by stripping apart audio and video content at its point of origin
and transporting this content via satellite to a delivery hub where the audio
and video is rejoined, effectively limiting the distance this content travels
over the Internet to the distance between the delivery hub and the end user.
This method allows Coolcast to provide a high-quality media experience without
service delays or interruptions typically associated with streaming media. In
addition, users can view broadcasts in full screen or, if desired, on a smaller
screen while performing other computer activities.
Customer Service and Technical Support
We believe that customer service and technical support are extremely
important in retaining subscribers. Service and technical support are available
to subscribers 24 hours a day/seven days a week. Our trained Help Desk team has
access to a data base of similar issues and resolutions, problem areas and
service histories and to the necessary in-house resources, training, and
inventory to resolve problems. Working with our experienced field personnel and
Web development groups, our Help Desk will publish the most common resolutions
for use by advanced subscribers and field support teams.
Business Strategy
Our goal is to be the leading developer and provider of high-speed Internet
access, networking services and community-specific content to the multifamily
apartment industry that will:
. enhance the residential living experience of apartment residents; and
. increase productivity and competitive advantages for apartment property
owners and managers.
VelocityHSI's strategy to achieve this objective includes six key elements:
Increase number of connected communities. Our services have been tested
within BRE's apartment portfolio for approximately 18 months for technical
quality, efficiency of delivery, and subscriber acceptance and satisfaction.
Having developed the business model within a property owner and subscriber
environment, our strategy is to rapidly expand the delivery of our services
beyond BRE's Western U.S. portfolio to the broader multifamily apartment
marketplace. We target large and mid-size multifamily apartment property owners
as customers for our services by tailoring launch page content specifically to
their needs and the needs of their residents. Furthermore, while we have the
capability to deploy our connected community technology in
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any size multifamily apartment unit property, we are initially targeting
properties with 50 or more units, a U.S. market totaling approximately nine
million units. Such criteria will allow us to take advantage of greater
efficiencies in deployment and community aggregation.
Build and strengthen subscriber relationships with demand-driven speed,
superior launch page content and high-quality service and support. Our strategy
is to develop a large and loyal subscriber base by offering superior services
through broadband technology and with customer-focused support at competitive
prices. Our delivery of high-speed Internet access combined with content,
information and local services through a community-specific portal will drive
subscribers to our services and increase subscribers' usage of our launch page
to access information and goods and services. In addition, we intend to build
customer loyalty by offering superior customer service, such as installation
within two to five days and 24-hour technical service and support.
Drive penetration levels through non-PC access devices. VelocityHSI's goal
is to drive basic Intranet usage levels to 100% within each connected community
and then achieve subscription levels in excess of current industry levels. To
achieve this, we plan to provide each resident in a connected community with a
television set-top box, allowing the resident access to our services through
the television. When used, this set-up box will enable residents to access our
community-specific launch page for intra-property communications, and to access
our e-commerce affiliates, regardless of whether the resident has a PC. We
intend for this convenient device to encourage residents to subscribe to our
services, thus taking advantage of the high-speed Internet access and
bandwidth-enabled services included in the monthly subscription.
Increase revenue per subscriber by growing additional revenue streams. We
recognize that speed and bandwidth may ultimately become a commodity, and that
revenues from subscriptions are not sufficient to sustain long-term growth. To
this end, we intend to increase revenues per subscriber by leveraging our
control of property connectivity into additional revenue streams. We intend to
seek to enter into relationships with content providers or e-commerce companies
to offer increasingly value-added products and services such as pay-per-view
entertainment, on-line education, broadband-enabled entertainment and
IP telephony services. We are currently evaluating these products and services.
In order to provide these products and services we will need to establish
connections to these services from our launch page, KLICKLANE, and establish
customer billing procedures and revenue sharing agreements with these providers
or partners. At the present time IP telephony is the only product which would
require a modification to our existing system. Hardware, in the form of a card
insert, is being developed by one of our technology providers to allow our
existing systems to provide IP telephony to our subscribers. We also expect to
provide content and e-commerce opportunities which will encourage subscribers
to increase their Internet usage. In providing these services, we hope to
capture a portion of subscribers' on-line spending as well as monetize their
on-line time through targeted marketing and advertising programs.
Build and strengthen relationships with e-commerce companies, consumer
marketers and strategic technology providers. In order to provide goods and
services to our subscribers and to increase revenues, we intend to aggressively
pursue strategic alliances. We will continue to seek providers or e-commerce
companies to deliver Internet-enabled technologies for IP telephony,
entertainment, distance learning, local-area networks, and home-based business
and total telecommuting solutions. We believe this combination of activities
will continually improve subscriber service and satisfaction.
Expand our branded multifamily apartment property-specific network. In
expanding the exposure of our full service Internet address, our subscriber
base will benefit from an improved set of services, such as commerce,
entertainment, communication, educational and other services from a single
network. Developers of broadband content will look to targeted user groups such
as subscribers to VelocityHSI's apartment-specific portal for distribution of
revenue generating content where accounting, authorization and authentication
systems are in place.
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Competition
Over the last few years, DSL technologies, cable modems, T-1-based solutions
and fixed-wireless connections have emerged as alternative technologies for
high-speed access. As a result, we operate in a highly competitive environment
for each of our Internet services, which may become increasingly competitive in
the future. There exist companies that offer or are capable of offering some or
all of the services we provide, and new companies are rapidly entering these
markets. Many of these competitors are larger and more established companies
with significantly greater financial, technical and marketing resources and
deeper customer relationships. As a result, there is no assurance that we will
be able to compete effectively in the target markets. The competitive
environment for our different lines of business is as follows:
High-speed Connectivity and Internet Access Services
We face several major groups of competitors in the business of providing
high-speed Internet connectivity and networking services. We face direct
competition from companies which are focused specifically on servicing multi-
tenant properties with high-speed Internet access and networking services.
These include companies focused on the multifamily apartment sector, such as
CAIS Internet, Inc., Brix Communications Corp., Ntegrity Telecontent Services
Incorporated, BroadbandNOW, Inc. and Reflex Communications, Inc., as well as
companies focused on office properties, such as Allied Riser Communications
Corporation, Cypress Communications and BroadBand Office, Inc., which could
extend their offerings to include apartment communities. While we believe we
will be competitive based upon our flexible 30-day contract terms, many of
these competitors have been in existence much longer and have already gained
significant market share and visibility, and they may be in a better position
to drive acceptance of their services.
In addition, we face competition from several other major groups in the
business of providing high-speed Internet connectivity and networking services.
One such group consists of providers of DSL services, including incumbent and
competitive local exchange carriers, or CLECs, such as Pacific Bell and SBC
Communications, Inc.; established inter-exchange carriers such as AT&T
Corporation, Sprint Corporation and MCI WorldCom; and DSL infrastructure
providers such as Covad Communications, Rhythms Net Connections, Inc. and
Northpoint Communications Group, Inc. In addition, we experience competition
from local, regional and national ISPs, such as PSINet, Inc., EarthLink, Inc.
and Internet America, Inc. which either offer DSL service on their own networks
or resell these services from the providers listed above. We also face
competition from established and emerging cable television providers which
offer high-speed connectivity through cable modem service, such as Excite@Home
and Road Runner and their respective cable partners. Recently, some companies
have also developed the technology to efficiently offer high-speed connectivity
through fixed wireless technology such as WinStar Communications, Inc. and
Teligent, Inc. Other companies intend to launch high-speed satellite services
within the next several years, such as Spaceway, Loral Cyberstar, iSKY and
Teledesic LLC. Although we believe our combination of T-1 lines and connecting
equipment offer a better and more dependable service than the above-mentioned
competitors, many of our competitors are in a better financial and market
position from which to drive acceptance of their product.
Many ISPs have partnered directly with high-speed network providers. These
include Excite@Home, which offers some of its service through the @HomeNetwork,
and America Online, which has gained a cable affiliate through its planned
merger with Time Warner. Many of the DSL network providers also partner
directly with ISPs, often offering their services through a variety of ISP
partners. The ISP market is highly competitive, and we believe simple Internet
access services will become commoditized over time. Therefore, our ability to
compete successfully in this market will depend on our ability to compete
against providers that offer value-added products and services along with high-
speed Internet access, including IP telephony and video delivery technologies.
Content and Portal Services
The Internet portal market is extremely competitive, with a small number of
successful entrants. Yahoo! and America Online are the dominant players, with a
significant hold over the market for general content. In
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addition, many ISPs, such as Excite@Home, brand their own portal offerings in
an attempt to control their users' entrance onto the Internet. In addition to
these general content providers, companies have emerged which are attempting to
provide community-specific content to the multifamily apartment industry. These
competitors include Insignia/Edifice Rex, ElectricStreets.com and Ntegrity
Telecontent Services Incorporated. Although these companies are early stage and
are just developing their services, some of them have significant financial and
strategic backing. While we believe our knowledge and expertise in the
multifamily apartment market will allow us to provide relevant and compelling
content to our subscribers, these services are critical to our business model
and our overall performance will depend significantly on our ability to deliver
them successfully.
Sales and Marketing
As part of our overall strategy, we market to multifamily apartment property
owners and managers, apartment community residents and content providers and e-
commerce companies.
Property owners and managers: We are marketing our services to large and
mid-sized multifamily apartments, leveraging our management's expertise in
multifamily apartment operations as well as our management's extensive contacts
in the multifamily apartment industry. Our sales strategy is to target owners
of large multifamily apartment portfolios through direct contact with the
senior management in order to gain access to significant portions of their
portfolios. We supplement our primary sales strategy of direct relationships
and referrals with appropriate industry trade shows and advertisements.
Apartment community residents: We will train, support and utilize management
and leasing professionals in our connected communities to market our products
to new and existing residents, using sales commissions and other incentive
programs to encourage active and productive marketing. We also intend to
advertise our services in kiosks and model apartments during the normal course
of the leasing presentation. Additionally, we provide flexible service options
offered to subscribers.
Content providers and e-commerce companies: Through in-person contacts by
our senior team members, we are actively pursuing content providers and e-
commerce companies with which we can establish relationships to improve the
attractiveness of our entertainment, information, educational and retail
service offerings for our subscribers. In addition to our relationship with
Coolcast, we currently have relationships with six e-commerce companies under
which we may receive payments based on purchases made by our subscribers who
were referred to the companies' web sites through our KLIKLANE Internet launch
pages. We may enter into additional arrangements in the future. To date, we
have not received any payments based on these arrangements.
VelocityHSI is a spin-off of BRE. As of June 30, 2000 BRE constituted
VelocityHSI's sole customer. Although VelocityHSI intends to enter into
agreements in the near term with other property owners, it anticipates that BRE
will remain a significant customer through the end of the fiscal year 2000.
Intellectual Property
We have filed applications for federal registration or own common law rights
in the following trademarks: VelocityHSI(TM), KLIKLANE(TM), ZIPPITYKLIK(TM) and
our logos. This prospectus also includes trade dress, trade names and the
trademarks of other companies. All other brand names or trademarks appearing in
this prospectus are the property of their respective holders.
The acquisition and maintenance of Web domain names generally is regulated
by governmental agencies and their designees. For example, in the United
States, the National Science Foundation has appointed Network Solutions, Inc.
as the current exclusive registrar for the ".com," ".net" and ".org" generic
top-level domains. The regulation of domain names in the United States and in
foreign countries is subject to change in the near future. Such changes in the
United States are expected to include a transition from the current system to a
system which is controlled by a non-profit corporation and the creation of
additional top-level domains. Governing bodies may establish additional top-
level domains, appoint additional domain name registrars or modify the
requirements for holding domain names.
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We regard the code we have written and continue to upgrade for our portal
site as proprietary and attempt to protect it with copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods. We also
generally enter into confidentiality or license agreements with our employees
and consultants, and generally control access to and distribution of our
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
products, services or technology without authorization, or to develop similar
technology independently. In addition, effective copyright, trademark and trade
secret protection may be unavailable or limited in foreign countries, and the
global nature of the Internet makes it virtually impossible to control the
ultimate destination of our content offerings. Policing unauthorized use of our
content offerings is difficult. There can be no assurance that the steps we
take will prevent misappropriation or infringement of our technology. In
addition, litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business, operating results, and financial condition.
From time to time, we may receive notice of claims of infringement of other
parties' proprietary rights, including claims for infringement resulting from
the downloading of materials by the online or Internet services we operate or
facilitate. There can be no assurance that infringement or invalidity claims
(or claims for indemnification resulting from infringement claims) will not be
asserted or prosecuted against us or that any assertions or prosecutions will
not materially affect our business, operating results and financial condition.
Irrespective of the validity or the successful assertion of such claims, we
would incur significant costs and diversion of resources with respect to the
defense thereof, which could have a material adverse effect on our business,
operating results and financial condition. If any claims or actions are
asserted against us, we may seek to obtain a license under a third party's
rights. There can be no assurance, however, that under such circumstances a
license would be available on commercially reasonable terms, or at all.
Government Regulation
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state and local
regulations and legislation affecting our industry. Other existing federal,
state and local legislation and regulations are currently subject to judicial
proceedings, legislative hearings and administrative proposals that could
change, in varying degrees, the manner in which this industry operates. We
cannot predict the outcome of these proceedings or their impact upon the
Internet industry or upon us.
We provide Internet access, in part through transmissions over public
telephone lines. The underlying telephonic transmissions are governed by
regulations and policies establishing charges, terms and conditions for
communications. As an Internet provider, we are not currently regulated
directly by the Federal Communications Commission or any other agency, other
than regulations applicable to businesses generally. We could, however, become
subject in the future to regulation by the Federal Communications Commission
and/or other regulatory agencies if we become classified as a provider of basic
telecommunications services or if such agencies seek to regulate Internet
providers. Regulations relating to providers of telecommunications services
could affect the charges that we pay to connect to the local telephone network
or for other purposes. For example, currently, Internet access providers,
unlike long distance telephone companies, are not required to pay carrier
access charges. Access charges are assessed by local telephone companies on
long-distance companies for the use of the local telephone network when the
local telephone company originates and terminates long-distance calls,
generally on a per-minute basis. The payment of access charges has been a
matter of continuing dispute, with long-distance companies complaining that the
charges are substantially in excess of actual costs and local telephone
companies arguing that access charges are justified to subsidize lower local
rates for end users and other purposes. In May 1997, the Federal Communications
Commission reaffirmed its decision that Internet access providers should not be
required to pay access charges. Subsequent statements issued by the Federal
Communications Commission have not altered this conclusion. A requirement by
the Federal Communications Commission that we pay access charges could have a
significant impact on our costs of providing service.
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The Federal Communications Commission also has concluded that Internet
access providers should not be required to contribute to a new universal
service fund established to replace current local rate subsidies and to meet
other public policy objectives, such as providing access to enhanced
communications systems for schools, libraries and health care providers. As a
result, unlike telecommunications providers, Internet access providers do not
have to contribute a percentage of their revenues to the federal universal
service fund and are not expected to be required to contribute to similar funds
being established at the state level. Both the access charge issue and the
universal service treatment of Internet access providers, however, are the
subjects of further Federal Communications Commission proceedings and could
change. Telephone companies are actively seeking reconsideration or reversal of
the relevant Federal Communications Commission decisions and their arguments
are gaining support as Internet-based telephony begins to compete with
conventional telecommunications services. We cannot predict how these matters
will be resolved but we could be adversely affected if, in the future, Internet
service providers are required to pay access charges or contribute to universal
service support.
In addition, to the extent that an end user's call to an Internet access
provider is considered local rather than long distance, the local telephone
company that serves the Internet service provider may be entitled to reciprocal
compensation from the calling party's local telephone company. Reciprocal
compensation is a reimbursement mechanism between telephone companies whereby
the carrier that terminates a call is eligible for payment from the carrier
serving the calling party. To the extent that a call to an Internet service
provider is considered local, the local telephone company serving an Internet
service provider would be entitled to reciprocal compensation. This payment of
reciprocal compensation reduces the local telephone company's costs and
ultimately reduces the internet service provider's costs. However, the Federal
Communications Commission has determined that most, but not all, traffic to an
Internet access provider is interstate rather than local in nature. This
determination could potentially eliminate or significantly reduce the payment
of reciprocal compensation to the local telephone companies that serve us,
which ultimately may affect our costs. The Federal Communications Commission's
ruling was challenged in federal court and remanded to the Federal
Communications Commission. There is a pending proceeding at the Federal
Communications Commission to determine appropriate compensation mechanisms for
such calls and the Federal Communications Commission has ruled that state
commissions, in the interim, may determine under what circumstances reciprocal
compensation should be paid. To date, most states considering the issue have
upheld reciprocal compensation for calls placed to Internet service providers.
If new compensation mechanisms increase the costs to carriers that terminate
calls to Internet service providers or if states eliminate or significantly
reduce reciprocal compensation payments for calls to Internet service
providers, the affected carriers could increase the price of service to
Internet service providers to compensate, which could have a material adverse
effect on our business, financial condition and results of operation. The
Federal Communications Commission is also considering measures that could
stimulate the development of high-speed telecommunications facilities and make
it easier for operators of these facilities to obtain access to customers by
requiring incumbent telephone companies to provide access to their rights-of-
way and wiring located within multiple tenant buildings. In addition, the
Federal Communications Commission is considering requiring owners of multiple
tenant buildings to provide competing service providers nondiscriminatory
access to their buildings. These regulatory measures could enhance the
competitive viability of Internet service providers that are affiliated with
the providers of these high-speed facilities.
The issue of internet service provider access to the infrastructure deployed
by cable television operators is being considered at the local and federal
levels. Several municipal franchising authorities have required franchised
cable companies to provide competing internet service providers open access to
their cable infrastructure. However, the Federal Communications Commission has
recently filed a brief in federal court addressing the open access issue in
which it voiced its opposition to the local regulation, preferring instead a
uniform national policy on the issue of open access. Further, in February 2000,
the Federal Communications Commission decided that an Internet service provider
is not entitled to obtain leased access to a cable system for the purpose of
providing Internet access or any service other than video programming.
Nonetheless, several large multiple system operators have recently entered into
open access commitments with Internet service providers. The outcome of efforts
to compel open access will affect our business, by either increasing or
foreclosing Internet service provider access rights to the cable television
infrastructure. If open access is
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mandated, we could face additional competition, although we could also benefit
by being able to obtain access to cable operators' networks.
The law relating to the liability of Internet service providers and online
service providers for information disseminated through their networks is not
completely settled. While the U.S. Supreme Court has held that content
transmitted over the Internet is entitled to the highest level of protection
under the U.S. Constitution, there are federal and state laws regarding the
distribution of obscene, indecent, defamatory or otherwise illegal material, as
well as materials that infringe on intellectual property rights, that may
subject us to liability. These risks are mitigated by two federal laws. In
1996, Congress immunized Internet service providers and online service
providers from liability for defamation and similar claims arising from
materials the Internet service providers and online service providers did not
create, but merely distributed without knowing or having had reason to know of
their nature.
U.S. laws protecting Internet Privacy include the Children's Online Privacy
Protection Act, which recently became effective. This Act mandates that sites
whose traffic includes children under the age of 13 post a privacy policy
spelling out what information they collect about their child visitors and have
a parental notification and approval system in place.
Federal and state legislators are currently studying additional Internet
privacy-related issues and have introduced numerous Internet and e-mail privacy
bills. which are currently pending. In particular, they are examining Internet
sites' use of identifiers that enable sites, including advertisers, to track
usage patterns by compiling data and then delivering customized content to
targeted users. The Federal Trade Commission and several attorneys general are
investigating these practices as potentially unfair and deceptive practices.
Other Internet concerns regarding user privacy or secure transmission of
personal or confidential information, as well as encryption and other Internet
security-related issues, are also being reviewed. VelocityHSI collects personal
subscriber information, provided by users, through the registration process and
by subscribers' voluntary participation in surveys and contests. Examples of
personal subscriber information includes name, email address, password, birth
date, profession, gender, postal address or ZIP code. This data is collected to
authenticate a service account for ZIPPITYKLIK and KLIKLANE users, to offer
interactive or personalized elements on the content site or to better prepare
future content, based on the interest demonstrated through user demographics or
patterns of usage. We have encryption security measures in place to maintain
the confidentiality of this personal subscriber information; however, our
security measures may not prevent security breaches by people who desire to
steal or misuse personal or confidential information of or about our
subscribers. In addition, our own use of personal subscriber information, which
we may use to personalize and customize product and service offerings to
individuals and customer groups, could be the subject of government
investigation or regulation in the future. We cannot predict the effect on us
or our industry of any legislation to safeguard privacy and provide security on
the Internet. Any legislation that substantially impairs the growth of
e-commerce could cause our sales to decline and have a material adverse effect
on our business.
The law in the United States relating to the liability of on-line service
providers and Internet service providers for information carried on,
disseminated through, or hosted on their systems remains largely unsettled. In
1998, Congress passed the Digital Millennium Copyright Act. The Act includes a
limitation on liability of on-line service providers for copyright infringement
for transmitting, routing, or providing connections, transient storage, caching
or storage at the direction of a user. This limitation on liability applies if
the service provider had no actual knowledge or awareness that the transmitted
or stored material was infringing and if certain other conditions are met.
Since this law is new, we are unsure of how it will be applied to limit any
liability we may face in the future for any possible copyright infringement or
copyright-related issues. This new law also requires Internet service providers
to follow certain "notice and take-down" procedures in order to be able to take
advantage of the limitation on liability. We have not yet implemented those
procedures or evaluated the cost of complying with them. Although our customers
are subject to an acceptable use policy which regulates their use of our
services, this policy and any enforcement of it may not be sufficient to shield
us from liability under the Digital Millennium Copyright Act or otherwise. In
addition, this new law addresses only copyright infringement.
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It may take years to determine whether and how existing laws such as those
governing other types of intellectual property (such as trademarks), privacy,
libel and taxation apply to the Internet. If liability for materials carried on
or disseminated through their systems is imposed on Internet service providers,
we would likely implement measures to reduce our exposure to such liability.
Those measures could require us to expend substantial resources or discontinue
certain product or service offerings. In addition, increased attention to
liability issues, as a result of lawsuits, legislation and legislative
proposals, could divert management attention, result in unanticipated expenses
and harm our business.
Due to the increasing popularity and use of the Internet, it is possible
that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as the sale of alcohol and firearms, content,
user privacy, pricing and trademark or copyright infringement. Laws and
regulations potentially affecting us have been adopted, and may be adopted in
the future, by federal and state governments, as well as by foreign
governments. We cannot predict the impact, if any, that recent and any future
legislative or regulatory changes or developments may have on our business,
financial condition and results of operations. Changes in the regulatory
environment relating to the Internet access industry, including regulatory
changes that directly affect telecommunications costs or increase the
likelihood or scope of competition from regional telephone companies or others,
such as open access to cable infrastructure, could have a material adverse
effect on our business.
Employees
As of June 5, 2000, we had 14 full-time employees and approximately 24
outside consultants and BRE employees providing services relating to the
marketing, installation and support of VelocityHSI. None of our employees is
covered by a collective bargaining agreement.
Facilities
We currently operate out of space located at 44 Montgomery Street, 36th
Floor, San Francisco, California 94104, pursuant to a temporary arrangement
with BRE. VelocityHSI intends to occupy space under a lease entered into by BRE
for VelocityHSI's executive offices to be located in Walnut Creek, California.
VelocityHSI will reimburse BRE for the cost of the occupied space.
Legal Proceedings
We are not involved in any pending legal proceedings.
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Relationship between VelocityHSI and BRE
after the Distribution
The agreements described below have been filed as exhibits to our
registration statement on Form S-1 which has been filed with the Securities and
Exchange Commission, and are available for public review. The following
description is only a summary; for the full text of the agreements, you should
review the exhibits filed with the Securities and Exchange Commission.
Contribution and Distribution Agreement
Prior to the distribution date, VelocityHSI and BRE will enter into a
Contribution and Distribution Agreement which provides for the contribution of
the Project Velocity assets to VelocityHSI and the distribution.
The Contribution and Distribution Agreement provides that BRE is responsible
for all liabilities with respect to the contributed assets and the VelocityHSI
business arising out of events happening prior to the contribution. We are
responsible for all liabilities with respect to the contributed assets and the
VelocityHSI business arising out of events happening on or after the
contribution. The Contribution and Distribution Agreement further provides that
we will be covered under BRE's insurance policies until the distribution
occurs. BRE and VelocityHSI have agreed to provide each other access to
documents relating to or affecting the other party after the distribution.
Administrative Services and Reimbursement Agreement
At the time of BRE's contribution of the Project Velocity assets to
VelocityHSI, we entered into an Administrative Services and Reimbursement
Agreement with BRE pursuant to which BRE will provide us with financial support
and administrative services, such as use of office space; management,
accounting and payroll services; administration of benefits programs; and any
other administrative services on which we and BRE may agree. The Agreement will
become effective upon the distribution of our shares to BRE shareholders and
will terminate on September 30, 2001. The agreement is terminable prior to
September 30, 2001 by us for any reason, upon 30 days notice, and by BRE in the
event of an acquisition or other change in control of VelocityHSI.
We will be obligated to reimburse BRE for administrative services provided
under the Agreement in an amount equal to the direct and indirect costs
incurred by BRE in providing the services. Reimbursements for actual time spent
on VelocityHSI matters by BRE employees will be computed based upon hourly
rates assigned to BRE employees which reflect the employees' salary and benefit
costs to BRE, plus 35% of the hourly rate to cover indirect costs such as
office space, equipment usage, supplies and utilities. The 35% adjustment
reflects BRE's analysis of the historical relationship between its indirect
costs and its labor costs.
BRE has also agreed to make advances to us of up to $10 million during the
term of the Agreement to fund operating costs and capital expenditures,
including reimbursements for administrative services provided under the
Agreement but excluding capital expenditures for equipment installed at
properties owned by BRE. BRE has further agreed to make advances to us during
the term of the Agreement, without limitation on amount, to cover capital
expenditures for equipment installed at properties owned by BRE. We will be
obligated to repay all advances made by BRE subsequent to the distribution,
including advances we use to reimburse BRE for administrative services,
together with accrued interest on unpaid balances at the rate of 9% per annum,
on or before September 30, 2001 or any earlier Agreement termination date.
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Agreement for Provision of our Services to BRE
At the time that BRE contributed the Project Velocity assets to us, we
entered into a Service Agreement pursuant to which we have agreed to provide
high-speed Internet installation, access and content to apartment properties
owned by BRE. Under the Service Agreement, we will pay to BRE 10% of gross
revenues generated after the distribution from services provided at communities
owned by BRE. This agreement will become effective upon the distribution and
will continue until terminated by either party. BRE may terminate the agreement
by providing us with 30 days notice at any time after the earlier of six months
from the time we entered into the agreement or 30 days after completion of our
initial installation in BRE's properties of the equipment necessary to deliver
our services. We may terminate the agreement at any time by providing BRE with
180 days notice.
Registration Rights
Pursuant to the terms of a registration rights agreement, we have granted
BRE the following registration rights with respect to the shares of our common
stock that BRE will continue to hold after the distribution.
Piggy-Back Registration. If we propose to register any of our common stock
under the Securities Act for sale solely for cash, other than this registration
statement, the registration of our first underwritten public offering of common
stock, a registration on Form S-4 or Form S-8, a registration in which the only
stock being registered is common stock issuable upon conversion of debt
securities which are also being registered, or any registration on any form
which does not include substantially the same information as would be required
to be included in a registration statement covering the sale of our shares of
common stock held by BRE, BRE is entitled to notice of the proposed
registration and the opportunity to include its shares in the registration. If
the registration involves an underwriting, the underwriters have the right to
limit shares proposed to be included in the registration and underwriting by
BRE.
Demand Registration. At any time following the expiration of the 180-day
period after the effective date of the first underwritten public offering of
our common stock, if BRE requests, we are required to use our best efforts to
cause BRE's shares to be registered under the Securities Act, subject to
certain conditions and limitations. BRE is entitled to two of these demand
registrations.
Registration on Form S-3. BRE has the right to require us to register all or
a portion of its shares on Form S-3 when we are entitled to use Form S-3,
provided that:
. the aggregate proceeds of the registration are expected to exceed
$500,000;
. we are not required to effect more than two Form S-3 registrations in any
twelve-month period;
. we are not required to qualify to do business or to execute a general
consent to service of process in effecting the registration; and
. the registration does not occur during the period ending 180 days after
the effective date of a registration statement subject to our obligations
described above under "Piggy-Back Registration."
In addition, if our president provides BRE with a certificate stating that,
in the good faith judgment of our board of directors, it would be seriously
detrimental to us and our stockholders for a Form S-3 registration to be
effected at that time, we have the right to defer the filing of the Form S-3
registration statement for a period of up to 120 days after receipt of the
request for registration. We cannot utilize this right more than one time in
any twelve-month period.
Procedure for Addressing Conflicts of Interest
Frank C. McDowell, the president and chief executive officer and a director
of BRE, and Leroy E. Carlson, the executive vice president and chief operating
officer and a director of BRE, will serve on our board
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of directors. At the time of the distribution, our board of directors will also
include two directors who are not affiliated with BRE. The number of shares of
common stock of BRE and options to acquire shares of common stock of BRE
beneficially owned or held by Messrs. McDowell and Carlson as of May 31, 2000,
together with the number of shares of VelocityHSI common stock and options to
acquire VelocityHSI common stock expected to be acquired by Messrs. McDowell
and Carlson prior to the distribution of our shares by BRE are set forth in the
following table:
<TABLE>
<CAPTION>
BRE Common Stock VelocityHSI Common Stock
------------------------ -------------------------------
Shares Subject
Shares Shares Shares to
Beneficially Subject to Expected Options Expected
Owned Options to be Acquired to be Acquired
------------ ---------- -------------- ----------------
<S> <C> <C> <C> <C>
Frank C. McDowell..... 292,099(1) 463,333(2) 174,573(3) 126,514(4)
Leroy E. Carlson...... 94,816(5) 166,375(6) 184,845(7) 42,393(8)
</TABLE>
--------
(1) Includes 27,521 shares owned directly by Mr. McDowell, 1,450 shares held by
his wife in which he disclaims any interest, 169,235 shares that may be
purchased upon exercise of stock options that are currently exercisable or
will become exercisable on or prior to July 30, 2000, 8,893 restricted
shares and 85,000 shares acquired upon the exercise of stock options that
are collateral for recourse loans from BRE.
(2) Does not include 169,235 shares included in the number of shares
beneficially owned by Mr. McDowell.
(3) Includes 150,000 shares which will vest in installments over a period of 36
months and will be forfeited to VelocityHSI if Mr. McDowell ceases to be
employed by BRE prior to the vesting date and 24,573 shares expected to be
acquired in the distribution as a result of the ownership of BRE shares.
(4) These options will be issued in connection with the distribution as an
antidilution mechanism with respect to options held by Mr. McDowell to
purchase 632,568 shares of BRE common stock.
(5) Includes 11,743 shares owned directly by Mr. Carlson, 45,591 shares that
may be purchased upon the exercise of stock options that are currently
exercisable or that will become exercisable on or prior to July 30, 2000,
1,482 restricted shares and 36,000 shares acquired upon the exercise of
stock options that are collateral for recourse loans from BRE.
(6) Does not include 45,591 shares included in the number of shares
beneficially owned by Mr. Carlson.
(7) Includes 175,000 shares which will vest in installments over a period of
36 months and will be forfeited to VelocityHSI if Mr. Carlson ceases to be
employed by BRE prior to the vesting date and 9,845 shares expected to be
acquired in the distribution as a result of the ownership of BRE shares.
(8) The options will be issued in connection with the distribution as an
antidilution mechanism with respect to options held by Mr. Carlson to
purchase 211,966 shares of BRE common stock.
VelocityHSI and BRE intend to pursue separate and distinct business
strategies to minimize potential conflicts of interest between the two
companies. Nonetheless, the ongoing relationship between VelocityHSI and BRE
may present conflict-of-interest situations for directors of VelocityHSI.
Although the directors of VelocityHSI intend to act in a manner consistent with
their fiduciary duties to VelocityHSI shareholders, there is a risk that common
membership on the boards of directors or in management of VelocityHSI and BRE
will lead to conflicts of interest in connection with transactions between the
two companies, including matters arising under the administrative services and
reimbursement agreement between VelocityHSI and BRE. It is anticipated that
Messrs. McDowell and Carlson will abstain from voting on any matter submitted
to a vote of the VelocityHSI board of directors involving a conflict of
interest with BRE.
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Management
Executive Officers and Directors
Our bylaws authorize a minimum of two directors or any greater number as
determined by resolution of our board of directors. As of the date of this
registration statement, Frank C. McDowell, Stephen E. Carlson, LeRoy E. Carlson
and Morgan P. Guenther serve as our directors. Upon consummation of the
distribution, we intend to appoint two additional non-employee "outside
directors" to the board of directors. All directors will hold office until our
next annual meeting of stockholders or until their successors have been elected
and qualified.
The following table sets forth our executive officers and directors. There
are no family relationships among our executive officers or directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Stephen E. Carlson...... 53 President, Chief Executive Officer and Director
Charles P. Wingard...... 42 Senior Vice President, Chief Financial Officer, Secretary and Treasurer
Douglas A. Campillo II.. 31 Senior Vice President and Chief Technical Officer
Nancye Miller........... 43 Senior Vice President of Marketing
LeRoy E. Carlson........ 54 Director
Morgan P. Guenther...... 46 Director
Frank C. McDowell....... 51 Director
</TABLE>
Stephen E. Carlson has served as the president, chief executive officer and
a director of VelocityHSI since April 2000. Prior to joining VelocityHSI, Mr.
Carlson was executive director of the California Housing Council for over 19
years. Mr. Carlson also served as executive director of the Cellular Carriers
Association of California from 1993 to 2000. Mr. Carlson has a J.D., magna cum
laude, from the University of San Diego School of Law and a bachelor's degree
in economics from Wesleyan University. Stephen E. Carlson is not related to
LeRoy E. Carlson.
Charles P. Wingard has served as senior vice president, chief financial
officer, secretary and treasurer of VelocityHSI since April 2000. Prior to that
date, Mr. Wingard was vice president of financial reporting from May 1999 and
director of financial reporting from August 1996 to May 1999 at BRE Properties,
Inc. Prior to joining BRE Properties, Mr. Wingard served as controller of De
Anza Properties from April 1996, and controller of Bay Apartment Communities
from July 1994 to April 1996. Mr. Wingard has a bachelor's degree from the
University of California at Berkeley and is a certified public accountant.
Douglas A. Campillo II has served as senior vice president and chief
technical officer of VelocityHSI since April 2000. Prior to joining
VelocityHSI, Mr. Campillo was vice president, chief technology officer of BRE
Properties, Inc. from May 1997. Prior to joining BRE, Mr. Campillo was network
manager for InPower, Inc., a human resources software development company from
May 1995 to May 1997. Mr. Campillo is an alumnus of the University of Hawaii.
Nancye Miller has served as senior vice president of marketing of
VelocityHSI since April 2000. Prior to joining VelocityHSI, from 1998 to 2000
Ms. Miller was vice president for sales and marketing at Coolcast, Inc. where
she was responsible for marketing that company's Coolcast service and for
coordinating technical trials of Coolcast with Internet Service Providers.
Prior to joining Coolcast, Ms. Miller was president of Miller & McCall
Enterprises, a media consulting firm, from 1984 to 1998. Ms. Miller holds a
bachelor's degree from Trinity College.
LeRoy E. Carlson has served as one of our directors since April 2000. Mr.
Carlson has been executive vice president and chief operating officer and a
director of BRE Properties, Inc. since July 2000. Prior to that date,
Mr. Carlson served as executive vice president and chief financial officer of
BRE since 1996. Prior to joining
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BRE in 1996, Mr. Carlson served as the chief financial officer of Real Estate
Investment Trust of California. Mr. Carlson is a California certified public
accountant and holds a bachelor's degree from the University of Southern
California.
Morgan P. Guenther has served as one of our directors since July 2000. Mr.
Guenther has been a vice president of business development of TiVo, Inc. since
June 1999. Prior to joining TiVo, Inc., Mr. Guenther was a partner in the law
firm of Paul, Hastings, Janofsky & Walker LLP from March 1998 to June 1999,
and a partner in the law firm of Farella Braun & Martel LLP from 1990 to March
1998. Mr. Guenther presently serves on the board of directors of Tier
Technology, Inc. Mr. Guenther holds a bachelor's degree and J.D. from the
University of Colorado, and an M.B.A. from the University of San Francisco.
Frank C. McDowell has served as one of our directors since April 2000. Mr.
McDowell has served as the president, chief executive officer and a director
of BRE Properties, Inc. since 1995. From 1992 to 1995, Mr. McDowell served as
the chairman and chief executive officer of Cardinal Realty Services, Inc. Mr.
McDowell has over twenty-five years of experience in the real estate
investment, management and financing fields, and has served in various
executive capacities for banks and management and investment companies. Mr.
McDowell holds a bachelor's degree and an M.B.A. from the University of Texas.
Executive officers are appointed by, and serve at the discretion of, our
board of directors.
Classified Board
Prior to the distribution, we intend to divide our board of directors into
three classes. The directors in each class will serve for three years. The
Class I directors' initial term will expire at the annual meeting of
stockholders to be held in 2001, the Class II directors' initial term will
expire at the annual meeting of stockholders to be held in 2002 and the Class
III directors' initial term will expire at the annual meeting of stockholders
to be held in 2003. After their initial terms, directors in each class will
serve for a term of three years. Mr. Stephen E. Carlson will be a Class I
director, Mr. LeRoy E. Carlson will be a Class II director and Mr. Frank C.
McDowell and Mr. Morgan P. Guenther will be Class III directors.
Committees of the Board of Directors
Upon the appointment of additional outside directors, our board of
directors will establish an Audit Committee and a Compensation Committee, each
consisting of outside members of the board of directors.
The Audit Committee will review the annual audits of our independent public
accountants, review and evaluate internal accounting controls, recommend the
selection of our independent public accountants, review and pass upon or
ratify related party transactions, and conduct those reviews and examinations
as it deems necessary with respect to the practices and policies of, and the
relationship between, VelocityHSI and its independent public accountants. Mr.
Guenther will serve as chairman of the Audit Committee.
The Compensation Committee will review salaries, bonuses and stock options
of our senior officers, and administer our executive compensation policies and
stock option plans. Mr. Guenther will serve as chairman of the Compensation
Committee.
Director Compensation
We will reimburse each member of our board for reasonable out-of-pocket
expenses incurred in connection with attending board meetings. No board member
currently receives any additional cash compensation. Board members will be
entitled to receive options to purchase VelocityHSI common stock under the
VelocityHSI, Inc. 2000 Equity Incentive Plan following the distribution. It is
currently expected that board members will receive 25,000 options for serving
as a board member, an additional 5,000 options for serving as a committee
chairman and an additional 3,000 options for serving on a committee, up to a
maximum of 33,000 options per year per
55
<PAGE>
board member. The chairman of the board will receive an additional 25,000
options. Options will be granted after the distribution or upon joining the
board and annually thereafter, vesting over one year, and will have an exercise
price equal to the market price of VelocityHSI common stock on the date of
grant.
Transactions with Executive Officers
VelocityHSI was formed in January 2000 as a division of BRE. We were
separately incorporated in April 2000 and employed no executive officers prior
to that time. We have paid signing bonuses in the amounts of $600,000 and
$300,000, respectively, to Stephen E. Carlson, our president and chief
executive officer, and Douglas A. Campillo II, our senior vice president and
chief technical officer. The recipient of the signing bonus must return 100% of
this payment if he ceases to be employed by us during the first year following
commencement of employment and 50% of this payment if he ceases to be employed
by us during the second year following commencement of employment.
Stock Options
VelocityHSI was incorporated in April 2000 and has not issued any options to
purchase shares of common stock. Under the VelocityHSI 2000 Equity Incentive
Plan, we may issue options to purchase 2,157,457 shares of common stock. Under
the Plan, we intend to issue options to purchase 659,457 shares to holders of
BRE stock options as an anti-dilution mechanism in the manner described
elsewhere in this prospectus.
Employment Agreements
In July 2000, we entered into an employment agreement with Stephen E.
Carlson to serve as our president and chief executive officer effective as of
April 1, 2000. Under the terms of the agreement, Mr. Carlson receives a base
salary of $200,000 per year, subject to adjustment, and an annual discretionary
bonus of between 50% to 100% of his then-current base salary, based upon
achieving specific operating and performance criteria established by the board
of directors. The employment agreement is for a term of three years from
April 1, 2000. The agreement provides that if we terminate Mr. Carlson's
employment without cause or Mr. Carlson voluntarily terminates his employment
for good reason during the first year of his employment, we will pay him his
then-current base salary for one year and a bonus equal to 50% of his then-
current base salary. If we terminate Mr. Carlson's employment without cause or
Mr. Carlson voluntarily terminates his employment for good reason after the
first year, we will pay him his then-current base salary for the shorter of one
year or the remainder of the term of his employment agreement and we will pay
him a bonus equal to the average of the bonuses paid to him in previous years.
We may enter into employment agreements with selected senior management. We
are currently paying Charles P. Wingard, our senior vice president, chief
financial officer, secretary and treasurer, an annual salary of $125,000,
Douglas A. Campillo, our senior vice president and chief technical officer, an
annual salary of $150,000 and Nancye Miller, our senior vice president of
marketing, an annual salary of $ .
56
<PAGE>
Security Ownership of Certain
Beneficial Owners and Management
Based on the number of outstanding shares of BRE common stock on May 31,
2000, the following table sets forth the number of shares and approximate
percentage of VelocityHSI common stock expected to be owned beneficially
immediately following the distribution by (i) all stockholders expected to own
beneficially more than 5% of the outstanding VelocityHSI common stock, (ii) the
executive officers and directors of VelocityHSI and (iii) all of VelocityHSI's
executive officers and directors as a group.
<TABLE>
<CAPTION>
Total Shares Percent of
Name (1) Beneficially Owned (2) Common Stock (3)
-------- ---------------------- ----------------
<S> <C> <C>
BRE Properties, Inc. ................. 1,363,602 10.5%
Stephen E. Carlson (4)................ 826,425 6.3%
Charles P. Wingard (5)................ 70,984 *
Douglas A. Campillo II (6)............ 414,253 3.2%
Nancye Miller (7)..................... 137,738 1.1%
Frank C. McDowell (8)................. 208,420 1.4%
LeRoy E. Carlson (9).................. 194,033 1.4%
Morgan P. Guenther ................... -- --
Executive Officers and Directors as a
group (10)........................... 1,851,853 13.9%
</TABLE>
--------
* Less than 1%
(1) The address of each stockholder is c/o VelocityHSI, Inc., 44 Montgomery
Street, 36th Floor, San Francisco, California, 94104.
(2) Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. Shares of
VelocityHSI common stock subject to options which are currently
exercisable, or will become exercisable within 60 days of June 30, 2000
(including options expected to be issued prior to the distribution), are
deemed outstanding for purposes of computing the percentage of the person
or entity holding the options but are not outstanding for purposes of
computing the percentage of any other person or entity. Except as
otherwise indicated by footnote, and subject to the community property
laws where applicable, each stockholder named in the table above has sole
investment and voting power with respect to the shares shown.
(3) Assumes the sale in connection with the distribution of 599,285 shares of
VelocityHSI common stock to holders of limited liability company units in
BRE Property Investors LLC and the vesting of all VelocityHSI restricted
shares.
(4) Includes 826,425 shares owned pursuant to a three-year vesting
arrangement.
(5) Includes 68,869 shares owned pursuant to an eighteen-month vesting
arrangement and 2,100 shares which are vested or will vest by July 30,
2000.
(6) Includes 413,213 shares owned pursuant to an eighteen-month vesting
arrangement and 1,040 shares which are vested or will vest by July 30,
2000.
(7) Includes 137,738 shares owned pursuant to a three-year vesting
arrangement.
(8) Includes 150,000 shares owned pursuant to a three-year vesting arrangement
and 33,847 shares which are vested or will vest within 60 days of July 30,
2000.
(9) Includes 175,000 shares owned pursuant to a three-year vesting arrangement
and 9,188 shares which are vested or will vest by July 30, 2000.
(10) Includes 482,082 shares owned pursuant to eighteen-month vesting
arrangements, 1,289,163 shares owned pursuant to three-year vesting
arrangements and 46,175 shares which have vested or will vest by July 30,
2000.
57
<PAGE>
Description of Capital Stock
The certificate of incorporation of VelocityHSI authorizes a total of
150,000,000 shares of capital stock, consisting of 100,000,000 shares of common
stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par
value $0.01 per share. The certificate of incorporation grants to the board of
directors the right to designate series of preferred stock, with such rights,
preferences, privileges and restrictions as the board may approve by resolution
within the confines of state law and the terms of the certificate and bylaws.
As of July , 2000, the total outstanding shares of VelocityHSI consist of
shares of common stock and no shares of preferred stock.
The Common Stock
Voting Rights. Each holder of common stock shall be entitled to one vote per
common stock share registered in his, her or its name on the books of
VelocityHSI as of the record date on all matters submitted to a vote of
stockholders. Except as may be provided in connection with any preferred stock
in a certificate of designation filed pursuant to the Delaware General
Corporation law ("DGCL"), or as may otherwise be required by law or our
Certificate of Incorporation, the common stock will be our only capital stock
entitled to vote in the election of directors and on all other matters
presented to our stockholders. Our common stock will not have cumulative voting
rights.
Dividend Rights. Each holder of common stock shall be entitled to that
dividend per share declared by the board of directors in its sole discretion
subject to the prior rights of any preferred stock then outstanding.
Liquidation Rights. Upon a liquidation, dissolution or winding up of
VelocityHSI, the holders of common stock will be entitled to share ratably in
the net assets legally available for distribution to shareholders after payment
of all debts and other liabilities of VelocityHSI, subject to the prior rights
of any preferred stock then outstanding.
Other Rights. The outstanding shares of our common stock, including the
shares being distributed hereby, are validly issued, fully paid and
nonassessable. The common stock does not have any preemptive, subscription or
conversion rights. Additional shares of authorized common stock may be issued,
as determined by our board of directors from time to time, without stockholder
approval, except as may be required by applicable law, stock exchange or Nasdaq
requirements.
Preferred Stock
Our board of directors may, without the consent or further action by the
shareholders, authorize and issue from time to time, a total of 50,000,000
shares of preferred stock in one or more series. Our board of directors may fix
the number of shares, designations, preferences, powers and relative
participating, optional or other special rights, and the qualifications or
restrictions thereof, associated with each series. The preferences, powers,
rights and restrictions of different series of preferred stock may differ from
each other with respect to dividend rates, amounts payable on liquidating,
voting rights, conversion rights, redemption provisions, sinking fund
provisions, or any other matter. The issuance of additional preferred stock
could decrease the amount of earnings and assets available for distribution to
holders of common stock or adversely affect the rights and powers of the
holders of common stock.
Anti-Takeover Effect of Authorized but Undesignated Preferred Stock
Our certificate of incorporation authorizes our board of directors to issue,
without further action by the stockholders, up to 50,000,000 shares of
preferred stock, in one or more series, with such rights, preferences,
privileges and restrictions as the board may designate. The issuance of
preferred stock with super voting or conversion rights could adversely affect
the voting power or other rights of the holders of common stock, and may have
the effect of delaying, deterring or preventing a change in control of
VelocityHSI. We have no current intention to issue any such series of preferred
stock.
58
<PAGE>
Dividend Policy
We presently intend to retain future earnings to finance the growth and
development of our business and do not currently anticipate paying any cash
dividends. Any future determination relating to dividend policy will be made at
the discretion of our board. Such determinations will depend on a number of
factors, including our future earnings, capital requirements, financial
condition and prospects, possible loan or financing covenant restrictions, and
such other factors as our board may deem relevant.
Limitation of Liability and Indemnification of Directors and Officers
Our certificate of incorporation eliminates the personal liability of our
directors to the company and its stockholders for breach of any director's
fiduciary duty to VelocityHSI to the fullest extent permitted by Section
102(b)(7) of the Delaware General Corporation Law, as that section may be
amended or supplemented from time to time. Section 102(b)(7) allows a
corporation to limit or eliminate the personal liability of directors to the
corporation and its shareholders, so long as the provision does not limit or
eliminate liability based on:
. a breach of the duty of loyalty;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. Section 174 of the Delaware General Corporation Code dealing with
unlawful payment of dividends;
. a transaction from which a director received an improper personal
benefit; or
. acts or omissions that occurred prior to the enactment of the provision.
In addition, except for derivative actions, our bylaws provide that
VelocityHSI shall indemnify officers and directors when they are made or
threatened to be made a party to any action relating to his or her affiliation
with the corporation as an officer or director, so long as the person acted:
. in good faith;
. in a manner he or she believed to be in the best interest or not adverse
to the best interest of VelocityHSI; and
. had no reason to believe that his or her actions were unlawful.
In actions by or in the right of VelocityHSI (i.e., derivative actions) no
officer or director will receive indemnification if found to be liable to
VelocityHSI, unless the appropriate Delaware court or similar court with
jurisdiction determines that, under the circumstances, we should indemnify the
director or officer. In any case, if the officer or director prevails on the
merits in any defense of the action, we will indemnify that person for expenses
actually and reasonably incurred in defending the action. Indemnification
expenses may include, without limitation, attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
the action. Our bylaws also allow us to advance to officers and directors
expenses related to the defense of the claims, and to purchase and maintain
insurance on behalf of any officer or director to protect the officer or
director against any liability asserted as a result of the officer or
director's service in that capacity with VelocityHSI.
The inclusion of the indemnification provision in our bylaws may have the
effect of reducing the likelihood of derivative litigation against directors
and may discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though the action, if
successful, might otherwise benefit us and our stockholders.
We intend to enter into indemnification agreements with our directors and
executive officers for the indemnification of those persons to the fullest
extent permitted by law.
59
<PAGE>
Under Delaware law, each director and officer is restricted in his or her
ability to take advantage, either directly or through affiliates, of corporate
opportunities of interest to VelocityHSI. Under Delaware law, a transaction
with VelocityHSI in which a director or officer of VelocityHSI has a direct or
indirect interest is not voidable by VelocityHSI solely because of the
director's or officer's interest in the transaction if:
. the material facts of the transaction and the director's or officer's
interest are disclosed to or known by the directors or a committee of
directors noted in the minutes, and the transaction is approved,
authorized, or ratified in good faith by the disinterested directors; or
. the material facts of the transaction and the director's or officer's
interest are disclosed to or known by the stockholders entitled to vote
and the transaction is approved or ratified in good faith by the
stockholders; or
. the transaction is established to have been fair to VelocityHSI at the
time it was authorized or approved.
60
<PAGE>
Transfer Agent and Registrar
The transfer agent and registrar for the shares of our common stock is
ChaseMellon Shareholder Services.
Legal Matters
The validity of the securities offered hereby will be passed upon for us by
Latham & Watkins, San Francisco, California. In addition, the description of
material federal income tax considerations contained in this prospectus under
the caption "The Distribution--Material Federal Income Tax Considerations of
the Distribution" is based upon the opinion of Latham & Watkins, special tax
counsel to VelocityHSI.
Experts
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1999, and for the period from March 1, 1999
(commencement of operations) through December 31, 1999, as set forth in their
report. We have included these financial statements in this prospectus and
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited BRE's consolidated
financial statements at December 31, 1999 and 1998, and for each of the three
years in the period ended December 31, 1999, as set forth in their report. We
have included these consolidated financial statements in this prospectus and
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
Where You Can Find More Information
As a result of the distribution, the Securities Exchange Act of 1934
requires us to file annual, quarterly and other reports with the Securities and
Exchange Commission. We intend to provide annual reports containing audited
financial statements to our stockholders in connection with our annual meetings
of stockholders.
We filed with the Securities and Exchange Commission a registration
statement, which includes exhibits, under the Securities Act, with respect to
the shares covered by this prospectus. This prospectus contains general
information about the contents of contracts and other documents filed as
exhibits to the registration statement. However, this prospectus does not
contain all of the information set forth in the registration statement and the
exhibits filed with the registration statement. You should read the
registration statement and the exhibits for further information about
VelocityHSI and the distribution.
You should rely only on the information contained in this prospectus or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. If you are in a jurisdiction where offers to
exchange or sell, or solicitations of offers to exchange or purchase, the
securities offered by this prospectus is unlawful, or if you are a person to
whom it is unlawful to direct these types of activities, then the offer
presented in this prospectus does not extend to you. The information contained
in this prospectus speaks only as of the date of this prospectus unless the
information specifically indicates that another date applies.
You may read and copy the registration statement and other materials that we
file with the Securities and Exchange Commission at the Public Reference Room
of the Securities and Exchange Commission, 450 Fifth Street, Washington, D.C.
20549 and at the Securities and Exchange Commission's regional offices at 7
World Trade Center, Suite 1300, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents, upon payment of a duplication fee, by writing to the
Securities and Exchange Commission's Public Reference Section. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of the Public Reference Rooms. The Securities and Exchange
Commission filings of VelocityHSI are also available to the public on the
Securities and Exchange Commission Internet site (http://www.sec.gov).
61
<PAGE>
Index to Financial Statements
<TABLE>
<S> <C>
VelocityHSI
Unaudited pro forma financial information.................................. F-2
Overview................................................................. F-2
Pro forma balance sheets................................................. F-5
Pro forma statements of operations....................................... F-6
June 30, 2000 and December 31, 1999
Report of independent auditors........................................... F-8
Balance sheets........................................................... F-9
Statements of operations................................................. F-10
Statements of changes in equity.......................................... F-11
Statements of cash flows................................................. F-12
Notes to financial statements............................................ F-13
BRE Properties, Inc.
Financial statements....................................................... F-18
March 31, 2000
Consolidated balance sheets.............................................. F-19
Consolidated statements of income........................................ F-20
Consolidated statements of cash flows.................................... F-21
Notes to consolidated financial statements............................... F-22
December 31, 1999, 1998 and 1997
Report of Independent Auditors........................................... F-23
Consolidated balance sheets.............................................. F-24
Consolidated statements of income........................................ F-25
Consolidated statements of cash flows.................................... F-26
Consolidated statements of shareholders' equity.......................... F-27
Notes to consolidated financial statements............................... F-28
</TABLE>
F-1
<PAGE>
VelocityHSI
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Overview
The following unaudited pro forma financial information has been prepared to
give effect to the transactions described below.
Unaudited Pro forma Balance Sheet and Statement of Operations
The unaudited pro forma balance sheet presents the historical balance sheet
of VelocityHSI as of June 30, 2000, adjusted to give effect to the pro rata
distribution of VelocityHSI common stock directly and indirectly to BRE
shareholders. The aggregate number of shares of VelocityHSI common stock to be
distributed to BRE and BRE shareholders is assumed to be 10,343,701 shares in
this presentation.
The unaudited pro forma balance sheet also gives effect to the following
related transactions as if those transactions had occurred on June 30, 2000:
. The transfer of assets and liabilities which comprise VelocityHSI (a
division of BRE) from BRE to a wholly owned subsidiary, VelocityHSI,
Inc., at carry-over basis, in exchange for VelocityHSI, Inc. common
stock. Both VelocityHSI, a division of BRE, and VelocityHSI, Inc. are
referred to in this pro forma financial information as VelocityHSI.
. VelocityHSI's sale of an aggregate of 1,713,920 restricted shares of its
common stock, at a price of $0.50 per share, to four executive officers
and three other employees and the issuance of an additional 395,000
restricted shares of common stock to six employees of BRE who will not be
required to pay for these shares. The amount of the discount related to
the sale of shares to VelocityHSI executive officers and employees (value
of $1.00 per share less the sales price of $0.50 per share) and the full
value of the shares granted to the employees of BRE (at $1.00 per share)
are reflected as deferred compensation which amortizes over the vesting
periods of the stock of 18 or 36 months.
. The payment by VelocityHSI of signing bonuses to key executives of
VelocityHSI. The signing bonuses vest over a period of 24 months and are
reflected as deferred compensation at origination to be amortized over
the vesting period.
The unaudited pro forma balance sheet does not give effect to the offer for
sale by VelocityHSI of 599,285 shares of VelocityHSI common stock, at a price
of $1.00 per share, to holders of units of limited liability company interests
in BRE Property Investors LLC.
The unaudited pro forma statements of operations present VelocityHSI's
historical statement of operations for the six months ended June 30, 2000 and
for the period from March 1, 1999 (commencement of operations) to December 31,
1999, adjusted as if the distribution and related transactions discussed above
had occurred on March 1, 1999. The pro forma adjustments to operations reflect
amortization of the aforementioned prepaid expense and deferred compensation
amounts and interest expense on the intracompany account. The pro forma
adjustments to operations also reflect the payment to BRE of 10% of VelocityHSI
revenues generated from services provided to residents in communities owned by
BRE under the Service Agreement between VelocityHSI and BRE, as if that
agreement was effective as of March 1, 1999.
Issuance of Options
In addition to the aforementioned pro rata distribution of VelocityHSI
common stock, BRE option holders holding options to purchase BRE common stock
will receive options to purchase shares of VelocityHSI common stock. The number
of shares underlying the VelocityHSI options reflect the same distribution
ratio of one share of VelocityHSI common stock for every five shares of BRE
common stock. The terms of
F-2
<PAGE>
VelocityHSI options received by the BRE option holders are identical to the BRE
options held by the BRE option holder. The exercise price of each VelocityHSI
option will be established using the ratio of the holder's BRE option exercise
price to the underlying BRE market value per share immediately before the
distribution. This ratio will then be applied to the VelocityHSI value per
share at the time of the distribution to establish the exercise price of the
VelocityHSI option. The exercise price of the existing BRE option after the
distribution will be calculated by applying the same ratio to the BRE market
value per share immediately after the distribution. The market value of BRE
stock immediately before the distribution will be based on the market
capitalization of BRE on the date which is three days prior to the distribution
record date. The VelocityHSI value will be based on $1.00 per share, the amount
determined by the board of directors of BRE to represent the fair value of a
share of VelocityHSI common stock at the time of the distribution.
The formula for determining the BRE and VelocityHSI option exercise prices
is designed to assure that the aggregate intrinsic value of both the BRE option
and the related VelocityHSI option for each option holder following the
distribution will not be greater than the intrinsic value of the BRE option
prior to the distribution under the guidelines included in Financial Accounting
Standards Board Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." The relevant
guidelines, when applied in a spin off transaction, provide that modifications
to exercise prices of existing options and the granting of new awards for each
option holder do not result in financial accounting consequences to the
grantors. The issuance of the options to purchase shares of VelocityHSI common
stock to BRE option holders and the modification of the price of the BRE
options in the manner described above will not result in a new measurement date
for BRE's accounting purposes.
Pro forma Per Share Information
Pro forma basic and diluted net loss per share is based on the net loss for
the periods ended June 30, 2000 and December 31, 1999, divided by the weighted
average number of shares of common stock outstanding during the respective
period, assuming that the distribution and related transactions had occurred on
March 1, 1999. The effect of shares of common stock resulting from the assumed
exercise of stock options (because their effect would be anti-dilutive) and the
grant of restricted shares that would not have vested through June 30, 2000 and
December 31, 1999 (because the shares would be subject to forfeiture) were not
included in the respective computation of diluted net loss per share. The
number of options and restricted shares omitted from the calculation was
3,367,662 for the periods ended June 30, 2000 and December 31, 1999.
Significant Financial Accounting Methods To Be Used For The Distribution
VelocityHSI will account for the net assets transferred to it from BRE in
the distribution as a non- reciprocal transfer to owners in accordance with
Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary
Transactions." Accordingly, the net assets will be carried over to the balance
sheet of VelocityHSI at the same basis as they appeared on the balance sheet of
BRE immediately prior to the transfer.
The VelocityHSI options granted to existing BRE option holders are intended
to qualify under the guidelines included in Financial Accounting Standards
Board Interpretation No. 44, "Accounting for Certain Transactions involving
Stock Compensation," an interpretation of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25). The relevant
guidelines, when applied in a spin off transaction, provide that modifications
to exercise prices of existing options and the granting of new awards do not
result in financial accounting consequences to the grantors.
Stock awards to VelocityHSI employees will be accounted for under APB 25. As
a result, the difference between the fair market value of each share issued to
employees at the time of the distribution of $1.00 and the $0.50 amount paid
for each share will be recorded by VelocityHSI as deferred compensation and
amortized to expense over the vesting period.
F-3
<PAGE>
Stock awards issued to non employees of VelocityHSI will be accounted for at
fair market value in accordance with the guidelines of EITF 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services." As a result, the fair
market value of $1.00 for each of the 395,000 shares given to the six employees
of BRE will be recorded by VelocityHSI as deferred compensation and amortized
to expense over the vesting period. These six employees will not be required to
pay for these shares. The amortization will be adjusted to the then fair market
value as shares vest. For the purposes of presentation herein, it is assumed
that the fair market value of the shares does not change during the periods
ended June 30, 2000 and December 31, 1999.
Shares restricted until the satisfaction of certain conditions are
considered to be outstanding common shares and are included in the computation
of basic earning per share after all necessary conditions have been satisfied.
Such shares shall be included in the computation of diluted earning per share
under the treasury stock method unless their impact is antidilutive.
Costs incurred in the formation and organization of VelocityHSI will be
expensed as incurred as start up costs.
Administrative Services and Reimbursement Agreement
VelocityHSI has entered into an Administrative Services and Reimbursement
Agreement with BRE pursuant to which BRE will provide VelocityHSI with funding
and office space and administrative services in connection with the business
operations of VelocityHSI. It is impractical for management to estimate whether
there would have been a material difference between the actual results of
operations compared to the pro forma results had the Administrative Services
and Reimbursement Agreement been in place for prior periods and, therefore, no
pro forma adjustment has been made to the presentation, except for interest
expense on an intercompany account.
The pro forma financial data is provided for informational purposes only and
does not purport to represent what VelocityHSI's financial position or results
of operations would actually have been had the distribution occurred on June
30, 2000 or March 1, 1999 or to project VelocityHSI's results of operations or
financial position for any future period.
F-4
<PAGE>
VelocityHSI
PRO FORMA BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
June 30, 2000
----------------------------------------
Pro Forma
Historical Adjustments Pro Forma
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash................................. $ -- $ 856,960 (1) $ 856,960
Prepaid transaction costs............ 1,115,512 (1,115,512)(2) --
Equipment and fixtures, net of
accumulated depreciation of $493,280
at June 30, 2000.................... 3,066,611 3,066,611
Software development costs........... 725,662 725,662
Other assets......................... 56,430 56,430
----------- ----------- -----------
Total assets....................... $ 4,964,215 $ (258,552) $ 4,705,663
=========== ===========
EQUITY
Convertible preferred stock, $.01 par
value; 50,000,000 pro forma shares
authorized; no pro forma shares
issued or outstanding............... $ -- $ -- $ --
Common stock, $.01 par value;
100,000,000 pro forma shares
authorized;......................... -- 17,139 (1) 124,526
103,437 (3)
3,950 (4)
Additional paid-in capital........... -- 1,696,781 (1) 8,901,059
6,678,740 (3)
391,050 (4)
1,250,000 (5)
(1,115,512)(2)
Deferred compensation................ -- (856,960)(1) (2,501,960)
(395,000)(4)
(1,250,000)(5)
Intracompany account................. 6,782,177 (6,782,177)(3) --
Accumulated deficit.................. (1,817,962) -- (1,817,962)
----------- ----------- -----------
Total equity....................... $ 4,964,215 $ (258,552) $ 4,705,663
=========== ===========
</TABLE>
--------
Pro Forma Adjustments:
(1) Reflects proceeds from the sale of 1,713,920 shares of common stock at
$0.50 per share to employees of VelocityHSI. The difference between the
share value of $1.00 and the sale price of $0.50 is reflected as deferred
compensation. Shares vest over 18 or 36 months.
(2) Reflects the expensing of prepaid transaction costs at the time of
distribution.
(3) Reflects the conversion of the amount due to BRE at the time of
distribution into common stock of VelocityHSI.
(4) Reflects the issuance of 395,000 shares of common stock given to select BRE
employees, who will not be required to pay for these shares, at an assumed
share value of $1.00 per share. The offsetting entry appears as deferred
compensation since the shares vest over 36 months.
(5) VelocityHSI paid signing bonuses in this amount to executives of
VelocityHSI with funds advanced by BRE. The advance has been converted to
additional paid-in capital of VelocityHSI. The offsetting entry is
reflected as a prepaid expense since the bonuses vest over 24 months.
See accompanying notes.
F-5
<PAGE>
VelocityHSI
PRO FORMA STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000
---------------------------------------
Pro Forma
Historical Adjustments Pro Forma
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Subscriber service fees............ $ 182,378 $ 182,378
----------- -----------
Expenses
Cost of services................... 511,324 $ 18,238 (1) 529,562
Sales and marketing................ 178,450 178,450
Depreciation....................... 388,211 388,211
Interest........................... -- 27,902 (2) 27,902
General and administrative......... 714,444 65,833 (3) 1,258,456
312,500 (4)
165,679 (5)
----------- -----------
Total expenses................... 1,792,429 2,382,581
----------- -----------
Net Loss........................... $(1,610,051) $(2,200,203)
=========== ===========
Pro forma basic and diluted net loss
per share........................... $ (0.21)
===========
Pro forma weighted average common
shares used in computing pro forma
basic and diluted net loss per
share............................... 10,343,701
===========
</TABLE>
--------
Pro Forma Adjustments:
(1) Represents the payment to BRE of 10% of revenues generated from services
installed at communities owned by BRE which are due to BRE under terms of a
service agreement between VelocityHSI and BRE.
(2) Represents interest expense on intracompany advances from BRE at an annual
rate of 9%. The amount of intracompany advances is assumed to represent
advances related to the net loss adjusted for non-cash items funded ratably
over the six months ended June 30, 2000.
(3) Represents the amortization during the six months ended June 30, 2000, of
deferred compensation expense of $395,000 related to the issuance of common
stock given to select employees of BRE who will not be required to pay for
these shares. Vesting period equals thirty-six months.
(4) Represents the amortization during the six months ended June 30, 2000, of
prepaid expense of $1,250,000 related to signing bonuses paid to executives
of VelocityHSI.
(5) Represents the amortization during the six months ended June 30, 2000, of a
deferred compensation expense of $856,960 related to the sale of stock to
executives of VelocityHSI at a price of $0.50 per share.
See accompanying notes.
F-6
<PAGE>
VelocityHSI
PRO FORMA STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Period from March 1, 1999 to
December 31, 1999
-------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- -----------
<S> <C> <C> <C>
Revenues
Subscriber service fees................. $ 138,125 $ 138,125
--------- -----------
Expenses
Cost of services........................ 182,710 $ 13,813(1) 196,523
Sales and marketing..................... 53,396 53,396
Depreciation............................ 105,069 105,069
Interest................................ -- 4,374(2) 4,374
General and administrative.............. 4,861 109,722(3) 911,548
520,833(4)
276,132(5)
--------- -----------
Total expenses........................ 346,036 1,270,910
--------- -----------
Net Loss................................ $(207,911) $(1,132,785)
========= ===========
Pro forma basic and diluted net loss per
share.................................... $ (0.11)
===========
Pro forma weighted average common shares
used in computing pro forma basic and
diluted net loss per share............... 10,343,701
===========
</TABLE>
--------
Pro Forma Adjustments:
(1) Represents the payment to BRE of 10% of revenues generated from services
installed at communities owned by BRE which are due to BRE under terms of a
service agreement between VelocityHSI and BRE.
(2) Represents interest expense on intracompany advances from BRE at an annual
rate of 9%. The amount of intracompany advances is assumed to represent
advances related to the net loss adjusted for non-cash items funded ratably
over the period from March 1, to December 31, 1999.
(3) Represents the amortization of deferred compensation expense of $395,000
during the period from March 1, 1999 to December 31, 1999, related to the
issuance of common stock given to select employees of BRE who will not be
required to pay for these shares.
(4) Represents the amortization during the period from March 1, 1999 to
December 31, 1999, of prepaid expense of $1,250,000 related to signing
bonuses paid to executives of VelocityHSI.
(5) Represents the amortization of a deferred compensation expense of $856,960
during the period from March 1, 1999 to December 31, 1999, related to the
sale of stock to executives of VelocityHSI at a price of $0.50 per share.
See accompanying notes.
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
BRE Properties, Inc.
We have audited the accompanying balance sheet of VelocityHSI as of December
31, 1999, and the related statements of operations, changes in equity and cash
flows for the period from March 1, 1999 (commencement of operations) through
December 31, 1999. These financial statements are the responsibility of BRE
Properties, Inc. management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VelocityHSI at December 31,
1999, and its results of operations and cash flows for the period from March 1,
1999 (commencement of operations) through December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Francisco, California
July 12, 2000
F-8
<PAGE>
VelocityHSI
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Cash................................................. $ -- $ --
Prepaid transaction costs............................ -- 1,115,512
Equipment, net of accumulated depreciation of
$105,069 at December 31, 1999, and $493,280 at
June 30, 2000....................................... 857,350 3,066,611
Software development costs........................... 29,650 725,662
Other assets......................................... -- 56,430
---------- -----------
Total assets....................................... $ 887,000 $ 4,964,215
========== ===========
EQUITY
Intracompany account................................. 1,094,911 6,782,177
Accumulated deficit.................................. (207,911) (1,817,962)
---------- -----------
Total equity....................................... $ 887,000 $ 4,964,215
========== ===========
</TABLE>
See accompanying notes.
F-9
<PAGE>
VelocityHSI
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
March
1, 1999
(commencement
of
operations) Six months
through ended
December 31, June 30,
1999 2000
------------- -----------
(unaudited)
<S> <C> <C>
Revenues:
Subscriber service fees........................... $ 138,125 $ 182,378
Expenses:
Cost of services.................................. 182,710 511,324
Sales and marketing............................... 53,396 178,450
Depreciation...................................... 105,069 388,211
General and administrative........................ 4,861 714,444
--------- -----------
346,036 1,792,429
--------- -----------
Net loss........................................ $(207,911) $(1,610,051)
========= ===========
</TABLE>
See accompanying notes.
F-10
<PAGE>
VelocityHSI
STATEMENT OF CHANGES IN EQUITY
June 30, 2000
<TABLE>
<S> <C>
Advances........................................................... $ 1,094,911
Net loss......................................................... (207,911)
-----------
Balance, December 31, 1999......................................... 887,000
Additional advances (unaudited).................................. 5,687,266
Net loss (unaudited)............................................. (1,610,051)
-----------
Balance, June 30, 2000 (unaudited)................................. $ 4,964,215
===========
</TABLE>
See accompanying notes.
F-11
<PAGE>
VelocityHSI
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
March 1, 1999
(commencement
of
operations) Six months
through ended
December 31, June 30,
1999 2000
------------- -----------
(unaudited)
<S> <C> <C>
Operating activities:
Net loss........................................... $ (207,911) $(1,610,051)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation..................................... 105,069 388,211
Increase in prepaid transaction costs............ -- (1,115,512)
Increase in other assets......................... -- (56,430)
---------- -----------
Net cash used in operating activities.............. (102,842) (2,393,782)
Investing activities:
Purchase of equipment and fixtures................. (962,419) (2,597,472)
Additions to software development costs............ (29,650) (696,012)
---------- -----------
Net cash used in investing activities.............. (992,069) (3,293,484)
Financing activities:
Proceeds from intracompany advances................ 1,094,911 5,687,266
---------- -----------
Net proceeds from financing activities............. 1,094,911 5,687,266
---------- -----------
Net increase in cash............................... -- --
Cash at beginning of period........................ -- --
---------- -----------
Cash at end of period.............................. $ -- $ --
========== ===========
</TABLE>
See accompanying notes.
F-12
<PAGE>
VelocityHSI
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and June 30, 2000
(Financial information for the six months ended June 30, 2000 is unaudited)
1. Description of Business and Form of Organization
VelocityHSI, Inc. (VelocityHSI), provides high-speed Internet installation,
access and content to the multifamily apartment industry.
The business referred to as VelocityHSI commenced operations in March 1999
with limited revenue generating activities conducted mainly on a part-time
basis by several BRE employees. On January 1, 2000, BRE formed a division with
accounting and reporting separate and discrete from all of BRE's other
activities and referred to as "Project Velocity."
In April 2000, BRE formed a corporation, VelocityHSI, Inc., which had no
assets or liabilities as of June 30, 2000. It is expected that the operations
and assets of Project Velocity will be transferred to VelocityHSI, Inc. after
June 30, 2000 but before the distribution in exchange for stock. It is also
expected that some employees of BRE will join VelocityHSI. BRE then plans to
distribute a portion of the shares received from VelocityHSI to BRE common
shareholders and retain the balance. In addition, the holders of BRE options
will receive options in VelocityHSI as an anti-dilution mechanism. In related
issuances of securities, VelocityHSI will sell shares of its common stock
subject to vesting requirements and forfeiture provisions to seven of its
officers, issue without consideration shares of its common stock subject to
vesting requirements and forfeiture provisions to six employees of BRE, and
offer to sell to the holders of units in BRE Property Investors LLC other than
BRE, one share of VelocityHSI common stock for each five shares of BRE common
stock issuable to the unit holder upon exchange of the units held by the unit
holder. Assuming exercise of all options, vesting of all shares subject to
forfeiture and purchase by all unit holders, BRE's interest will be reduced to
9.9% of the outstanding common stock of VelocityHSI. The transaction will be
taxable to the distribution recipients.
BRE will fund the costs associated with this distribution, including legal,
accounting and other professional fees in the form of intracompany advances
which will eventually be converted into an equity contribution.
For convenience in these financial statements, both the division known as
Project Velocity and its eventual legal successor, VelocityHSI, Inc., are
referred to herein as VelocityHSI.
Through June 30, 2000, all revenues of VelocityHSI were generated from
residents located in communities owned by BRE. VelocityHSI intends to provide
its services to other owners and managers of apartment communities and
residents of those communities.
2. Accounting Policies
Basis of Presentation
The financial statements of VelocityHSI reflect those of an activity or
division of BRE prepared on a stand-alone, carve-out basis. Included herein are
charges by BRE to the activity or division for direct and indirect costs which,
in the opinion of management, reflect all costs of VelocityHSI doing business
on such basis. Direct costs and allocated costs are more fully discussed in
Note 3.
BRE has agreed to provide VelocityHSI with up to $10 million in funds
through September 30, 2001 to finance operating expenses and the costs of
installing equipment at properties which are not owned by BRE. BRE has also
agreed to provide VelocityHSI with funds through September 30, 2001, without
limitation on amount, to finance the installation of equipment at properties
owned by BRE. VelocityHSI must repay, on or before September 30, 2001, all of
the funds advanced by BRE subsequent to the distribution, together with
F-13
<PAGE>
VelocityHSI
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and June 30, 2000
(Financial information for the six months ended June 30, 2000 is unaudited)
interest at the rate of 9% per year. Under VelocityHSI's current business plan,
operating expenses and capital expenditure requirements for the next 12 months
are expected to exceed substantially the funding available from BRE and thus
VelocityHSI will be required to obtain financing from additional sources in
order to fund expected operations both during the next 12 months and
thereafter, including the repayment on or before September 30, 2001 of advances
made by BRE. If VelocityHSI cannot obtain additional capital, it would be
required to reduce expenditures to a level that could be financed with advances
from BRE.
As of June 30, 2000, BRE constituted VelocityHSI's sole property owner
customer. Although VelocityHSI intends to enter into agreements with other
property owners, VelocityHSI anticipates that BRE will remain the largest
customer at least through the end of the fiscal year 2000. The loss of BRE as a
customer would have a material adverse effect on VelocityHSI's financial
condition and results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent 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.
Software Development Costs
Software development costs are capitalized or expensed in accordance with
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" and Emerging Issues Task Force Issue
No. 00-2, "Accounting for Website Development Costs". Amounts incurred during
the planning and operation stages are expensed as incurred, while amounts
incurred during the product development, Web application and infrastructure
development, and graphics development stages are capitalized. Capitalized
amounts are stated at cost less accumulated amortization. Amortization will be
calculated using the straight-line method over periods not to exceed three
years, beginning at the time assets are placed in service. No amortization has
been recorded by VelocityHSI as of June 30, 2000.
Equipment
VelocityHSI's equipment is stated at cost, less accumulated depreciation.
System installation costs incurred in order to place the equipment in service
at a property are capitalized as equipment. Costs to install the monthly
service for individual new subscribers are expensed as incurred and included as
cost of services. Depreciation is calculated using the straight-line method
over the estimated useful lives of the assets, which is three years.
Impairment of Long-Lived Assets
VelocityHSI records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. There have been no
events or circumstances to date that indicate that any assets might be
impaired.
Sales and Marketing Costs
Sales and marketing costs, which amounted to $53,396 during the ten months
ended December 31, 1999, and $178,450 (unaudited) during the six months ended
June 30, 2000, are expensed in the period incurred.
F-14
<PAGE>
VelocityHSI
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and June 30, 2000
(Financial information for the six months ended June 30, 2000 is unaudited)
Prepaid Transaction Costs
Costs, primarily legal and accounting to third parties, directly related to
services in connection with the distribution have been capitalized and will be
expensed at the time of the distribution (discussed in Note 1), or when such
distribution becomes less than probable.
Revenue Recognition
VelocityHSI records monthly subscriber service fees due from apartment
residents as revenue as the services are provided. Amounts owed to property
owners under the service agreements which provide access to the residents are
reported as a cost of services. As of June 30, 2000, VelocityHSI had not
commenced any service agreements.
Income Taxes
For the six months ended June 30, 2000, VelocityHSI's tax basis income or
loss will be included in the federal and state income or franchise tax returns
of BRE. For preparation of these financial statements, income taxes are
accounted for on a separate return basis using the liability method.
Accordingly, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates expected to be in effect when the
differences are expected to reverse.
At June 30, 2000, and for the six months then ended, there were no
differences between the financial and tax basis of assets and liabilities
except for organization costs which are deferred and amortized over five years
for income tax purposes. BRE has elected to be taxed as a Real Estate
Investment Trust under the Internal Revenue Code of 1986, as amended. As a
result, BRE is not subject to taxation at the corporate level. Accordingly, no
income tax benefit has been provided in connection with VelocityHSI's tax basis
loss for the period.
F-15
<PAGE>
VelocityHSI
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and June 30, 2000
(Financial information for the quarter ended June 30, 2000 is unaudited)
Stock-based Compensation and Consideration
VelocityHSI accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation," an interpretation of APB No. 25,
and complies with the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Under APB No. 25, compensation expense is based on
the difference, if any, on the date of the grant, between the estimated fair
value of VelocityHSI stock and the exercise price.
VelocityHSI accounts for stock issued to non-employees in accordance with
the provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus in
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
Segment Information
The Financial Accounting Standards Board issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS 131"), which is
effective for financial statements for periods beginning after December 15,
1997. SFAS 131 establishes standards for the way that public business
enterprises report financial and descriptive information about reportable
operating segments in annual financial statements and interim reporting to
shareholders. In adopting the provisions of SFAS 131, VelocityHSI has
determined that it has only one operating and reportable segment; therefore,
separate segment disclosure has not been made.
Recently Issued Accounting Pronouncements
The staff of the Securities and Exchange Commission and the members of the
Emerging Issues Task Force of the Financial Accounting Standards Board, among
other accounting standard setters, are addressing accounting issues related to
companies doing business commonly referred to as "electronic commerce." Areas
of discussion include advertising barter transactions, Web site development,
exchange of equity investment for services, revenue recognition in complex
multiple element arrangements, arrangements with up front payments and revenue
recognition for auction sites. The ultimate resolutions to these issues and
other similar issues could have a material effect on VelocityHSI's accounting
policies used in the future.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides specific
guidance, among other things, as to the recognition of revenue related to up-
front, non-refundable fees and service charges received in connection with a
contractual arrangement. VelocityHSI has applied the provisions of SAB 101 in
these financial statements.
3. Related Party Transactions
BRE has incurred direct and indirect costs and expenses on behalf of
VelocityHSI. These costs and expenses, including BRE payroll costs, have been
included in these financial statements. Where appropriate, costs and expenses
were allocated to VelocityHSI by BRE based on BRE's cost, which reflects
management's estimate of what the expenses would have been on a stand-alone,
carve-out basis under arms length transactions. In the opinion of management,
the allocation method is reasonable and appropriate.
F-16
<PAGE>
VelocityHSI
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and June 30, 2000
(Financial information for the six months ended June 30, 2000 is unaudited)
Under a revenue sharing agreement to become effective after the
distribution, VelocityHSI will pay to BRE 10% of revenues generated from
services provided to residents of communities owned by BRE.
The intracompany account is comprised of amounts earned and incurred by BRE
on behalf of VelocityHSI.
Administrative Services and Reimbursement Agreement
VelocityHSI has entered into an Administrative Services and Reimbursement
Agreement with BRE pursuant to which BRE will provide VelocityHSI with funding
and office space and administrative services in connection with the business
operations of VelocityHSI. BRE has also agreed to provide VelocityHSI with up
to $10 million in funds through September 30, 2001, to finance operating
expenses and the costs of installing equipment at properties which are not
owned by BRE. BRE has further agreed to provide VelocityHSI with funds through
September 30, 2001, without limitation on amount, to finance the installation
of equipment at properties owned or managed by BRE. Funds advanced by BRE to
VelocityHSI subsequent to the distribution must be repaid by VelocityHSI on or
before September 30, 2001 together with interest on periodic unpaid balances at
the rate of 9% per year.
Under a service agreement, VelocityHSI will pay to BRE 10% of revenues
generated from services provided to residents of communities owned by BRE after
the distribution.
4. Subsequent Events
Approval of Signing Bonuses
In April 2000, the compensation committee of the board of directors of BRE
approved signing bonuses aggregating $1,250,000 to be paid to key executives of
VelocityHSI. The signing bonuses vest over a period of 24 months.
S-1 Registration Statement
VelocityHSI, Inc. has filed a registration statement on Form S-1 in
connection with the distribution of its shares to BRE shareholders discussed in
Note 1.
VelocityHSI 2000 Equity Incentive Plan
Under the VelocityHSI 2000 Equity Incentive Plan, adopted in April 2000,
VelocityHSI is authorized to issue options to purchase up to 1,730,823 shares
of common stock.
F-17
<PAGE>
BRE Properties Inc.
FINANCIAL STATEMENTS
The financial statements of BRE are included in this filing because it is
VelocityHSI's sole property owner customer at this time and because of BRE's
commitment to fund portions of VelocityHSI's operations and capital
requirements through July 30, 2001.
F-18
<PAGE>
BRE PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(Dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
ASSETS
Real estate portfolio
Direct investments in rental properties
Multifamily......................................... $1,693,574 $1,691,762
Construction in progress............................ 86,146 46,575
Less: accumulated depreciation...................... (118,093) (109,623)
---------- ----------
1,661,627 1,628,714
---------- ----------
Equity interests in and advances to real estate joint
ventures
Investments in rental properties.................... 4,565 --
Construction in progress............................ 10,843 15,083
---------- ----------
15,408 15,083
---------- ----------
Land under development................................ 12,126 26,538
---------- ----------
Total real estate portfolio....................... 1,689,161 1,670,335
Cash.................................................. 1,173 13,812
Other assets.......................................... 29,076 25,306
---------- ----------
Total assets...................................... $1,719,410 $1,709,453
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage loans payable................................ $ 205,623 $ 211,403
Unsecured senior notes................................ 243,000 253,000
Unsecured line of credit.............................. 340,500 315,000
Accounts payable and other liabilities................ 18,693 17,212
---------- ----------
Total liabilities................................. 807,816 796,615
---------- ----------
Minority interest..................................... 86,190 87,640
---------- ----------
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized: 8 1/2% Series A cumulative redeemable,
liquidation preference $25 per share. Shares issued
and outstanding: 2,150,000 shares at March 31, 2000
and at December 31, 1999........................... 53,750 53,750
Common stock, $.01 par value; 100,000,000 shares
authorized. Shares issued and outstanding:
44,729,821 shares at March 31, 2000; 44,679,341
shares at December 31, 1999........................ 447 447
Additional paid-in capital............................ 688,986 671,760
Accumulated net income in excess of cumulative
dividends............................................ 82,221 99,241
---------- ----------
Total shareholders' equity........................ 825,404 825,198
---------- ----------
Total liabilities and shareholders' equity........ $1,719,410 $1,709,453
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-19
<PAGE>
BRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For the
Three Months
Ended March 31,
---------------
2000 1999
------- -------
<S> <C> <C>
Revenue
Rental income............................................... $57,642 $52,293
Other income................................................ 3,961 3,127
------- -------
Total revenue............................................. 61,603 55,420
------- -------
Expenses
Real estate................................................. 17,405 16,940
Provision for depreciation.................................. 8,980 8,184
Interest.................................................... 11,635 9,839
General and administrative.................................. 1,894 1,696
Provision for nonrecurring charge........................... -- 1,250
------- -------
Total expenses............................................ 39,914 37,909
------- -------
Income before gain on sales of investments in rental
properties, minority interest and dividends attributable to
preferred stock.............................................. 21,689 17,511
Net gain on sales of investments in rental properties......... -- --
------- -------
Income before minority interest............................... 21,689 17,511
Minority interest in income................................... 1,352 1,415
------- -------
Net income.................................................... 20,337 16,096
Dividends attributable to preferred stock................... 1,142 756
------- -------
Net income available to common shareholders................... $19,195 $15,340
======= =======
Net income per common share:
Income excluding net gain on sales of investments in rental
properties and minority interest............................. $ 0.43 $ 0.35
Net gain on sales of investments in rental properties......... -- --
------- -------
Net income per common share--basic............................ $ 0.43 $ 0.35
======= =======
Net income per common share assuming dilution:
Income excluding net gain on sales of investments in rental
properties and minority interest............................. $ 0.42 $ 0.35
Net gain on sales of investments in rental properties......... -- --
------- -------
Net income per common share--assuming dilution................ $ 0.42 $ 0.35
======= =======
Weighted average common shares outstanding--basic............. 44,710 44,280
======= =======
Weighted average common shares outstanding--assuming
dilution..................................................... 47,860 47,690
======= =======
Dividends declared and paid per common share.................. $ 0.425 $ 0.390
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-20
<PAGE>
BRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 20,337 $ 16,096
Adjustments to reconcile net income to net cash flows
generated by operating activities
Provision for depreciation.............................. 8,980 8,184
Provision for nonrecurring charge....................... -- 1,250
Minority interest in income............................. 1,352 1,415
(Increase) decrease in other assets..................... (4,280) 1,772
Increase (decrease) in accounts payable and other
liabilities............................................ 1,481 (635)
-------- --------
Net cash flows generated by operating activities.......... 27,870 28,082
-------- --------
Cash flows from investing activities
Additions to direct investment construction in progress... (14,359) (4,146)
Reimbursements of construction in progress from
unconsolidated joint ventures............................ 16,926 --
Advances to unconsolidated joint ventures for construction
in progress.............................................. (17,251) --
Purchase of land under development........................ (10,800) (8,155)
Capital expenditures--multifamily......................... (1,199) (1,191)
Rehabilitation expenditures............................... (613) (4,744)
Mortgage loans receivable repayments...................... -- 57
Other..................................................... -- (843)
-------- --------
Net cash flows (used in) investing activities............. (27,296) (19,022)
-------- --------
Cash flows from financing activities
New mortgage loans payable................................ -- 10,954
Principal payments on mortgage loans and unsecured senior
notes.................................................... (15,780) (730)
Line of credit
Advances................................................ 77,000 41,000
Repayments.............................................. (51,500) (82,000)
Proceeds from preferred equity offering, net.............. -- 51,933
Proceeds from exercises of stock options, net............. 1 1,854
Distributions to minority members and purchase of minority
interest................................................. (2,802) (1,437)
Dividends paid............................................ (20,132) (18,031)
-------- --------
Net cash flows (used in) generated by financing
activities............................................... (13,213) 3,543
-------- --------
(Decrease) increase in cash............................... (12,639) 12,603
Balance at beginning of period............................ 13,812 2,057
-------- --------
Balance at end of period.................................. $ 1,173 $ 14,660
======== ========
Transfers of direct investment construction in progress... -- $ 12,811
======== ========
Transfers of joint venture construction in progress, net.. $ 5,049 --
======== ========
Transfers of land under development....................... $ 25,212 --
======== ========
Interest capitalized...................................... $ 2,938 $ 3,034
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
March 31, 2000
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared
in accordance with the instructions to Form 10-Q and should be read in
conjunction with the Annual Report of BRE Properties, Inc. (the "Company" or
"BRE") on Form 10-K for the year ended December 31, 1999 (the "1999 10-K"). In
the opinion of management, all adjustments (consisting of normal recurring
adjustments only) that were necessary for a fair statement of the results for
the interim periods presented herein were made.
BRE adopted Financial Accounting Standards Board Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("Statement 131") in the fourth quarter of 1998. Statement 131 requires certain
descriptive information about an enterprise's reportable segments. BRE
determined that it has one operating and reportable segment, multifamily
communities, which comprised 98% of BRE's assets and 98% of its revenues as of,
and for, the quarter ended March 31, 2000. All multifamily communities owned by
the Company are located in the Western United States.
BRE's business focus is the ownership and operation of multifamily
communities. The Company evaluates performance and allocates resources
primarily based on the net operating income ("NOI") of an individual
multifamily community. NOI is defined by the Company (and generally by the real
estate industry) as the excess of all revenue generated by the community
(primarily rental revenue) less direct operating expenses (primarily, but not
limited to, payroll, property taxes, insurance and maintenance expense).
Accordingly, NOI excludes depreciation, capitalized expenditures and interest
expense. NOI from multifamily communities totaled $42,642,000 and $37,900,000
for the quarters ended March 31, 2000 and 1999, respectively. All other segment
measurements are disclosed presently in the accompanying consolidated balance
sheets and Notes to Consolidated Financial Statements.
All revenues are from external customers. There are no revenues from
transactions with other segments, because the only activity outside operating
apartments is the ownership of one parcel of commercial land. There are no
tenants who contributed 10% or more of BRE's total revenues in the quarters
ended March 31, 2000 or 1999. Interest income is not separately reported
because it is immaterial. Interest expense on debt is not allocated to
individual properties, even if such debt is secured. Further, minority interest
in consolidated subsidiaries is not allocated to the related properties. There
is no provision for income tax because the Company is organized as a real
estate investment trust under the Internal Revenue Code of 1986, as amended.
In the quarter ended March 31, 1999, the Company provided a nonrecurring
restructuring charge of $1,250,000, primarily in personnel severance benefits,
in connection with a restructuring to reduce corporate overhead costs.
Certain reclassifications have been made from the prior year's presentation
to conform to the current year's presentation.
NOTE B--LITIGATION
BRE is defending various claims and legal actions that arise from its normal
course of business. While it is not feasible to predict or determine the
ultimate outcome of these matters, in the opinion of management, none of these
actions will have a material adverse effect on BRE's results of operations or
financial position.
NOTE C--COMMITMENTS
As of March 31, 2000, the Company had commitments to acquire two multifamily
communities, with a total estimated acquisition cost of approximately
$65,000,000. The Company expects to fund the commitments in calendar year 2000.
There can be no assurance that these communities will be acquired or will be
acquired for the estimated cost indicated.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Directors of
BRE Properties, Inc.:
We have audited the accompanying consolidated balance sheets of BRE
Properties, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, cash flows and shareholders' equity
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of BRE Properties, Inc. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Francisco, California
January 18, 2000
F-23
<PAGE>
BRE PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
------
Real estate portfolio
Direct investments in rental properties:
Multifamily.......................................... $1,691,762 $1,618,461
Construction in progress............................. 46,575 43,830
Less: accumulated depreciation....................... (109,623) (75,838)
---------- ----------
1,628,714 1,586,453
---------- ----------
Equity interests in and advances to real estate joint
ventures
Investments in rental properties..................... -- --
Construction in progress............................. 15,083 --
---------- ----------
15,083 --
---------- ----------
Land under development................................. 26,538 15,328
---------- ----------
Total real estate portfolio........................ 1,670,335 1,601,781
Cash................................................... 13,812 2,057
Other assets........................................... 25,306 27,078
---------- ----------
Total assets....................................... $1,709,453 $1,630,916
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Mortgage loans payable................................. $ 211,403 $ 235,146
Unsecured senior notes................................. 253,000 253,000
Unsecured line of credit............................... 315,000 264,000
Accounts payable and other liabilities................. 17,212 26,333
---------- ----------
Total liabilities.................................. 796,615 778,479
---------- ----------
Minority interest...................................... 87,640 87,432
---------- ----------
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized: 8 1/2% Series A cumulative redeemable,
liquidation preference $25 per share. Shares issued
and outstanding: 2,150,000 shares at December 31,
1999; no shares outstanding at December 31, 1998.... 53,750 --
Common stock, $.01 par value; 100,000,000 shares
authorized. Shares issued and outstanding:
44,679,341 shares at December 31, 1999; 44,221,560
shares at December 31, 1998......................... 447 443
Additional paid-in capital............................. 671,760 664,811
Accumulated net income in excess of cumulative
dividends............................................. 99,241 99,751
---------- ----------
Total shareholders' equity......................... 825,198 765,005
---------- ----------
Total liabilities and shareholders' equity......... $1,709,453 $1,630,916
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-24
<PAGE>
BRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue
Rental income--multifamily...................... $217,812 $189,810 $122,936
Commercial and retail........................... 245 996 5,742
Other income.................................... 16,196 12,439 9,083
-------- -------- --------
Total revenue................................. 234,253 203,245 137,761
-------- -------- --------
Expenses
Real estate..................................... 70,469 64,624 44,571
Provision for depreciation...................... 35,524 27,763 17,938
Interest........................................ 41,695 35,598 21,606
General and administrative...................... 6,706 6,133 4,301
Provision for nonrecurring charge............... 1,250 2,400 --
-------- -------- --------
Total expenses................................ 155,644 136,518 88,416
-------- -------- --------
Income before gain (loss) on sales of investments
in rental properties and minority interest....... 78,609 66,727 49,345
Net gain (loss) on sales of investments in rental
properties....................................... 54 (1,859) 27,824
-------- -------- --------
Income before minority interest................... 78,663 64,868 77,169
Minority interest in income....................... 5,447 4,224 972
-------- -------- --------
Net income........................................ 73,216 60,644 76,197
Dividends attributable to preferred stock......... 4,182 -- --
-------- -------- --------
Net income available to common shareholders....... $ 69,034 $ 60,644 $ 76,197
======== ======== ========
Earnings per common share:
Income excluding net gain (loss) on sales of
investments in rental properties and minority
interest......................................... $ 1.55 $ 1.45 $ 1.35
Net gain (loss) on sales of investments in rental
properties....................................... -- $ (0.04) $ 0.78
-------- -------- --------
Net income per common share--basic................ $ 1.55 $ 1.41 $ 2.13
======== ======== ========
Earnings per common share assuming dilution:
Income excluding net gain (loss) on sales of
investments in rental properties and minority
interest......................................... $ 1.55 $ 1.45 $ 1.35
Net gain (loss) on sales of investments in rental
properties....................................... -- $ (0.04) $ 0.76
-------- -------- --------
Net income per common share--assuming dilution.... $ 1.55 $ 1.41 $ 2.11
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-25
<PAGE>
BRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................... $ 73,216 $ 60,644 $ 76,197
Adjustments to reconcile net income to net
cash flows generated by operating activities
Net (gain) loss on sales of investments in
rental properties......................... (54) 1,859 (27,824)
Provision for depreciation................. 35,524 27,763 17,938
Provision for nonrecurring charge.......... -- 2,400 --
Minority interest in income................ 5,447 4,224 972
Decrease (increase) in other assets........ 392 63 (9,074)
(Decrease) increase in accounts payable and
other liabilities......................... (1,501) 128 9,355
--------- --------- ---------
Net cash flows generated by operating
activities.................................. 113,024 97,081 67,564
--------- --------- ---------
Cash flows from investing activities
Additions to direct investment construction
in progress................................. (35,514) (179,568) (9,813)
Reimbursements of construction in progress
from unconsolidated joint ventures.......... 56,615 -- --
Advances to unconsolidated joint ventures for
construction in progress.................... (49,243) -- --
Purchase of land under development........... (11,210) -- --
Multifamily communities acquired, net........ (59,206) (149,638) (152,700)
Apartments and construction in progress
purchased from TCRW......................... -- -- (160,544)
Decrease (increase) in funds held in escrow.. -- 15,833 (15,833)
Capital expenditures--multifamily............ (4,715) (3,553) (1,542)
Capital expenditures--commercial and retail.. -- (141) (446)
Rehabilitation expenditures.................. (12,604) (6,665) (4,578)
Mortgage loans receivable advanced........... -- -- (5,950)
Mortgage loans receivable repayments......... -- 2,535 10,795
Proceeds from sales of property, net......... 11,589 30,900 105,318
--------- --------- ---------
Net cash flows (used in) investing
activities.................................. (104,288) (290,297) (235,293)
--------- --------- ---------
Cash flows from financing activities
Principal payments on mortgage loans......... (23,743) (5,833) (2,736)
Issuance of unsecured senior notes, net...... -- 130,000 50,000
Costs of issuance of senior unsecured notes.. -- (3,787) (3,746)
Line of credit
Advances................................... 231,000 386,000 240,500
Repayments................................. (180,000) (308,000) (178,500)
Proceeds from preferred equity offering,
net......................................... 51,637 -- --
Proceeds from common equity offerings, net... -- 56,013 109,903
Proceeds from exercises of stock options,
net......................................... 3,438 2,991 8,375
Distributions to minority members............ (5,587) (4,189) (972)
Dividends paid............................... (73,726) (62,138) (51,063)
--------- --------- ---------
Net cash flows generated by financing
activities.................................. 3,019 191,057 171,761
--------- --------- ---------
Increase (decrease) in cash.................. 11,755 (2,159) 4,032
Balance at beginning of period............... 2,057 4,216 184
--------- --------- ---------
Balance at end of period..................... $ 13,812 $ 2,057 $ 4,216
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-26
<PAGE>
BRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Common stock shares
Balance at beginning of year........... 44,221,560 41,738,704 32,879,741
Issuance of shares pursuant to purchase
transactions.......................... -- -- 3,713,331
Stock options exercised................ 269,852 350,415 364,752
Conversion of operating company units
to common shares...................... 185,000 -- --
Shares issued pursuant to dividend
reinvestment plan..................... -- 12,926 101,951
Issuance of shares pursuant to equity
offerings............................. -- 2,119,515 4,678,929
Other.................................. 2,929 -- --
----------- ----------- -----------
Balance at end of year............... 44,679,341 44,221,560 41,738,704
----------- ----------- -----------
Preferred stock shares
Balance at beginning of year........... -- -- --
Issuance of 8 1/2% Series A cumulative
redeemable............................ 2,150,000 -- --
----------- ----------- -----------
Balance at end of year............... 2,150,000 -- --
=========== =========== ===========
Common stock
Balance at beginning of year........... $ 443 $ 417 $ 329
Issuance of shares pursuant to purchase
transactions.......................... -- -- 37
Stock options exercised................ 2 5 4
Conversion of operating company units
to common shares...................... 2 -- --
Issuance of shares pursuant to dividend
reinvestment plan..................... -- -- 1
Issuance of shares pursuant to equity
offerings............................. -- 21 46
----------- ----------- -----------
Balance at end of year............... $ 447 $ 443 $ 417
----------- ----------- -----------
Preferred stock
Balance at beginning of year........... -- -- --
Issuance of 8 1/2% Series A cumulative
redeemable............................ $ 53,750 -- --
----------- ----------- -----------
Balance at end of year............... $ 53,750 -- --
----------- ----------- -----------
Additional paid-in capital
Balance at beginning of year........... $ 664,811 $ 605,833 $ 387,674
Issuance of shares pursuant to purchase
transactions.......................... -- -- 99,932
Conversion of operating company units
to common shares...................... 4,980 -- --
Stock options exercised................ 1,899 2,637 5,764
Issuance of shares pursuant to dividend
reinvestment plan..................... -- 349 2,606
Issuance of shares pursuant to equity
offerings............................. -- 55,992 109,857
Other.................................. 70 -- --
----------- ----------- -----------
Balance at end of year............... $ 671,760 $ 664,811 $ 605,833
----------- ----------- -----------
Accumulated net income in excess of
cumulative dividends
Balance at beginning of year........... $ 99,751 $ 101,245 $ 76,111
Net income for year................ 73,216 60,644 76,197
Cash dividends paid: $1.56, $1.44 and
$1.38 per common share for the years
ended December 31, 1999, 1998 and
1997, respectively, and $1.96 per
preferred share in 1999............... (73,726) (62,138) (51,063)
----------- ----------- -----------
Balance at end of year............... $ 99,241 $ 99,751 $ 101,245
----------- ----------- -----------
Total shareholders' equity......... $ 825,198 $ 765,005 $ 707,495
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-27
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Company
BRE Properties, Inc. ("BRE" or the "Company") is a self-administered real
estate investment trust that owns and operates multifamily communities and
other income-producing properties in the Western United States. At December 31,
1999, BRE's portfolio, owned directly or through subsidiaries, consisted of
89 properties, including 86 multifamily communities (aggregating 22,690 units),
one commercial and retail property, and two properties held in partnerships in
which BRE is a limited partner. Of these properties, 39 were located in
California, 22 in Arizona, nine in Washington, five in Nevada, five in Utah,
four in New Mexico, three in Oregon and two in Colorado. In addition, at
December 31, 1999, there were eight properties under development aggregating an
estimated 2,161 units, including 780 units held under joint venture agreements
in which BRE will be a minority owner when construction is completed.
Transaction with Trammell Crow Residential-West
On November 18, 1997, BRE acquired 16 completed properties and eight
development properties from certain entities of Trammell Crow Residential-West
(the "Transaction") pursuant to a definitive agreement (the "Contribution
Agreement"). BRE paid a total of approximately $160 million in cash and issued
$100 million in common stock based on a stock price of $26.93 per share, as
provided for in the Contribution Agreement. In addition, certain entities
received Operating Company Units ("OC Units ") valued at $76 million in BRE
Property Investors LLC (the "Operating Company"), a Delaware limited liability
company and majority-owned subsidiary of BRE. The Operating Company also
assumed approximately $120 million in debt. BRE is the sole managing member of
the Operating Company and owned an approximate 74% interest therein at December
31, 1999. Substantially all of the properties acquired in the Transaction were
held through the Operating Company, which was formed by the Company for the
purpose of acquiring the properties in the Transaction. The Operating Company
continues to hold substantially all of the properties acquired in the
Transaction.
The OC Units held by nonmanaging members are included in minority interest
in the Company's consolidated financial statements. Starting in November 1998,
nonmanaging members of the Operating Company can exchange their units for
common stock of BRE on a 1:1 basis or, at the option of the Company, cash in an
amount equal to the market value of such common stock at the time of the
exchange. As of December 31, 1999, 185,000 OC Units have been exchanged for
common stock. The nonmanaging members are entitled to priority distributions
regardless of the cash flow of the Operating Company. The Operating Company is
also required to maintain certain financial ratios to protect the nonmanaging
member's distributions. Further, the Company is restricted from selling assets
of the Operating Company in a taxable sale for a period ranging from eight to
ten years from the date of the Transaction. The Operating Company has also
guaranteed the repayment of the Company's $400 million line of credit.
The Contribution Agreement also provided for an additional issuance of OC
Units dependent on the extent to which the eight development properties
attained completion schedules and budget objectives. Accordingly, a total of
430,624 additional OC Units were issued. In 1998, the Company recorded a
liability of approximately $7 million for its estimate of additional OC Units
to be issued. The actual amount was reclassified to minority interest in 1999,
once the actual number of OC Units issued was determined.
Equity Offerings
In the first quarter of 1999, BRE issued 2,150,000 shares of 8 1/2% Series A
Cumulative Redeemable Preferred Stock for net proceeds of approximately $52
million. The Series A Preferred Stock is redeemable, at the Company's option,
starting January 29, 2004.
In July 1998, the Company issued 1,750,000 shares of common stock, for net
proceeds of approximately $47 million. In April 1998, the Company issued
369,515 shares of common stock for net proceeds of approximately $9 million.
F-28
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Debt Offering
In February 1998, the Company issued $130 million in unsecured notes due
2013, with a coupon rate of 7.125% resulting, after related costs, in an
effective rate of 7.3%.
2. Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of
the Company, the Operating Company and other subsidiaries that hold title to
individual properties. All significant intercompany balances and transactions
have been eliminated in consolidation. Due to the Company's ability to control
the Operating Company and other subsidiaries, such entities have been
consolidated with the Company for financial reporting purposes.
During 1999, the Company entered into joint venture agreements in which the
Company will be a noncontrolling minority owner. Accordingly, these interests
are recorded using the equity method. BRE receives certain fees for the
development and construction of the real estate property held by these joint
ventures and has recognized other income to the extent of the third-party
interest.
Rental property
Rental property is recorded at cost, less accumulated depreciation, less an
adjustment, if any, for impairment. Rental properties are evaluated for
impairment when conditions indicate that the sum of expected future cash flows
before interest from a rental property during the expected holding period may
be less than its carrying value. Upon determination that such impairment has
occurred, rental properties are reduced to estimated fair value. There were no
properties for which an adjustment for impairment in value was made in 1999 or
1998. Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets, which range from 35 to 45 years for buildings and
three to ten years for other property. Direct investment development projects
are considered placed in service as certificates of occupancy are issued and
the units become ready for occupancy. Land acquired for development is
capitalized and reported as "Land under development" until the development plan
for the land is formalized. Once the development plan is determined, the costs
are transferred to the balance sheet line items "Construction in progress."
Real estate held for sale
Real estate classified as held for sale is stated at the lower of its
carrying amount or estimated fair value less disposal costs. Depreciation is
not recorded on assets classified as held for sale.
In the normal course of business, BRE will receive offers for sale of its
properties, either solicited or unsolicited. For those offers that are
accepted, the prospective buyer will usually require a due diligence period
before consummation of the transaction. It is not unusual for matters to arise
that result in the withdrawal or rejection of the offer during this process. As
a result, real estate is not classified as "held for sale" until it is likely,
in the opinion of management, that a property will be disposed of in the near
term, even if sales negotiations for such property are currently under way. No
properties were considered "held for sale" for this purpose as of December 31,
1999 or 1998.
Rental expenses and capitalized costs
For multifamily properties, costs of replacements, such as appliances,
carpets and drapes, are expensed. For all properties, improvements and
betterments that increase the value of the property or extend its useful life
are capitalized.
F-29
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and short-term investments
Financial instruments that potentially subject BRE to concentrations of
credit risk include cash, short-term investments and funds held in escrow. BRE
places its cash deposits and temporary cash investments with creditworthy,
high-quality financial institutions. Cash and cash-equivalent balances are held
with various financial institutions and may at times exceed the applicable
Federal Deposit Insurance Corporation limit of $100,000.
Deferred costs
Included in Other assets are costs incurred in obtaining debt financing that
are deferred and amortized over the terms of the respective debt agreements as
interest expense. Related amortization expense is included in interest expense
in the accompanying consolidated statements of income. Net deferred financing
costs included in Other assets in the accompanying balance sheets are
$7,730,000 and $8,713,000 as of December 31, 1999 and 1998, respectively.
Income taxes
BRE has elected to be taxed as a Real Estate Investment Trust ("REIT") under
the Internal Revenue Code of 1986, as amended ("the Code"). As a result, BRE
will not be subject to federal taxation at the corporate level to the extent it
distributes, annually, at least 95% of its REIT taxable income, as defined by
the Code, to its shareholders and satisfies certain other requirements. In
addition, the states in which BRE owns and operates real estate properties have
provisions equivalent to the federal REIT provisions. Accordingly, no provision
has been made for federal or state income taxes in the accompanying
consolidated financial statements.
Net gain (loss) on sales of investments in rental properties
Sales are generally recorded after title has been transferred to the buyer
and after appropriate payments have been received and other criteria met.
Fair value of financial instruments
The fair values of BRE's financial instruments (including such items in the
financial statement captions as cash, other assets, accounts payable and other
liabilities and unsecured line of credit) approximate their carrying or
contract values based on their nature, terms and interest rates that
approximate current market rates. The fair value of mortgage loans payable and
unsecured senior notes is estimated using discounted cash flow analyses with an
interest rate similar to that of current market borrowing arrangements. The
fair value of the Company's mortgage loans payable and unsecured senior notes
approximates their carrying value at December 31, 1999.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the presentation of the current year's financial
statements.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-30
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Descriptive information about reportable segments
BRE adopted Financial Accounting Standards Board Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("Statement 131") in the fourth quarter of 1998. Statement 131 requires certain
descriptive information to be provided about an enterprise's reportable
segments. BRE has determined that it has one operating and reportable segment,
multifamily communities, which comprised 98% of BRE's assets at December 31,
1999 and 1998 and approximately 96% of its total revenues for the three years
ended December 31, 1999. All multifamily communities owned by the Company are
located in the Western United States, in three general markets that it defines
as Coastal, Desert and Mountain states.
BRE's business focus is the ownership and operation of multifamily
communities; it evaluates performance and allocates resources primarily based
on the net operating income ("NOI") of an individual multifamily community. NOI
is defined by the Company (and generally by the real estate industry) as the
excess of all revenue generated by the community (primarily rental revenue)
less direct operating expenses (primarily, but not limited to, payroll,
property taxes, insurance and maintenance expense). Accordingly, NOI excludes
depreciation, capitalized expenditures and interest expense. NOI from
multifamily communities totaled $158 million, $134 million and $83 million for
the years ended December 31, 1999, 1998, and 1997, respectively. All other
segment measurements are presently disclosed in the accompanying consolidated
balance sheets and Notes to Consolidated Financial Statements.
All revenues are from external customers and there are no revenues from
transactions with other segments, as the only activity outside operating
apartments is the ownership of one parcel of commercial land. There are no
tenants that contributed 10% or more of BRE's total revenues in 1999, 1998 or
1997. Interest income is not separately reported, as it is immaterial. Interest
expense on debt is not allocated to individual properties, even if such debt is
secured. Further, minority interest in consolidated subsidiaries is not
allocated to the related properties. There is no provision for income tax as
the Company is organized as a REIT under the Code.
3. Real Estate Portfolio
Direct investments in rental properties--multifamily:
<TABLE>
<CAPTION>
December 31,
1999
--------------
<S> <C>
Land........................................................ $ 327,928,000
Improvements................................................ 1,363,834,000
--------------
Subtotal.................................................. 1,691,762,000
Accumulated depreciation.................................... (109,623,000)
--------------
Total..................................................... $1,582,139,000
==============
<CAPTION>
December 31,
1998
--------------
<S> <C>
Land........................................................ $ 316,705,000
Improvements................................................ 1,301,756,000
--------------
Subtotal.................................................. 1,618,461,000
Accumulated depreciation.................................... (75,838,000)
--------------
Total..................................................... $1,542,623,000
==============
</TABLE>
F-31
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
An analysis of direct investment construction in progress follows.
<TABLE>
<S> <C>
Balance, December 31, 1998................................... $ 43,830,000
Additions to projects under construction at December 31,
1998........................................................ 9,426,000
Projects started in 1999..................................... 24,444,000
Communities sold............................................. (5,369,000)
Contributions to joint ventures.............................. (22,455,000)
Transfers of construction in progress to direct investments
in rental properties--multifamily........................... (3,301,000)
------------
Balance, December 31, 1999................................... $ 46,575,000
============
</TABLE>
As of December 31, 1999, the Company had commitments to acquire two
multifamily communities with a total estimated acquisition cost of
approximately $65,000,000. The Company expects the commitments will be funded
in calendar year 2000. There can be no assurance that these communities will be
acquired, or will be acquired for the estimated cost indicated.
During the year ended December 31, 1998, approximately $7,000,000 of taxable
gain (unaudited) was deferred under Section 1031 of the Code for certain
properties sold. BRE's carrying value of its assets exceeded the tax basis by
approximately $146,000,000 (unaudited) at December 31, 1999.
4. Equity Interests in and Advances to Real Estate Joint Ventures
As of December 31, 1999, BRE had no completed communities under joint
venture agreements. Such communities are accounted for under the equity method
and, accordingly, BRE's interest is presented net of debt or partners'
contributions. An analysis of equity interests in real estate joint ventures--
construction in progress follows.
<TABLE>
<S> <C>
Balance, December 31, 1998................................... $ --
Transfers from direct investments for contributions to joint
ventures.................................................... 22,455,000
Reimbursements from joint ventures........................... (56,615,000)
Advances to joint ventures................................... 49,243,000
------------
Balance, December 31, 1999................................... $ 15,083,000
============
</TABLE>
The joint ventures have total costs in construction in progress of
$71,698,000 at December 31, 1999. The joint ventures have construction loans
with total commitments of $72,700,000, with $54,668,000 outstanding at December
31, 1999. These construction loans are guaranteed by BRE, mature in 2000 and
2011, and have interest rates between 7.00%-7.25%, with interest only due until
maturity.
5. Line of Credit and Unsecured Senior Notes
As of December 31, 1999, BRE had an unsecured line of credit for up to
$400,000,000, expiring in August 2001. Borrowings totaled $315,000,000 at
December 31, 1999 and $264,000,000 at December 31, 1998. The interest rate is
variable and the average interest rate was approximately 6.1% and 6.3% for the
years ended December 31, 1999 and 1998, respectively.
As of December 31, 1999, there were $253,000,000 in unsecured senior notes
outstanding with an average fixed interest rate of 7.5% with interest only due
through 1999. Included in this effective interest rate is the amortization of
the costs related to the issuance of the $50 million unsecured notes due 2007
and the
F-32
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$130 million unsecured notes due 2013. These unsecured notes are to be repaid
through scheduled principal payments from 2000 through 2005, 2007 and 2013.
The line of credit and unsecured senior note agreements contain various
covenants that include, among other factors, tangible net worth and
requirements to maintain certain financial ratios. BRE was in compliance with
such financial covenants as of December 31, 1999.
6. Mortgage Loans Payable
The following data pertain to loans payable at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
Mortgage loans payable........................... $211,403,000 $235,146,000
Cost of investments in real estate securing
mortgage loans payable.......................... $400,247,000 $401,850,000
Annual principal and interest payments........... $ 19,500,000 $ 20,400,000
Remaining terms of mortgage loans payable........ 1-29 years 1-30 years
Interest rates on fixed rate mortgages........... 6.5%-9.3% 6.5%-9.3%
</TABLE>
Included in the $211,403,000 mortgage loans payable is $32,530,000 of tax-
exempt debt with a variable interest rate, which was 3.3% at December 31, 1999.
The effective interest rate on this debt is 5.3%, which includes amortization
of related fees and costs. Interest on all other mortgage loans is fixed.
Scheduled principal payments required on the unsecured line of credit,
unsecured senior notes payable and mortgage loans payable for the next five
years and thereafter are as follows. Included in the 2001 amount is
$315,000,000 for the unsecured line of credit.
<TABLE>
<S> <C>
2000.......................................................... $ 30,737,000
2001.......................................................... 327,893,000
2002.......................................................... 40,916,000
2003.......................................................... 28,840,000
2004.......................................................... 21,931,000
Thereafter.................................................... 329,086,000
------------
Total....................................................... $779,403,000
============
</TABLE>
Interest expense on mortgage loans and unsecured senior notes including
amortization of related costs aggregated $36,164,000, $35,654,000 and
$17,034,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Capitalized interest was $9,485,000, $12,606,000 and $1,178,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. Excluding capitalized
interest, interest expense exceeded cash paid for interest by approximately
$1,500,000 and $1,300,000 in 1999 and 1998, respectively; this difference was
immaterial in 1997.
7. Stock Option Plans
BRE has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations in accounting for its employee and non-employee director stock
options. As discussed below, the alternative fair value accounting provided for
under Financial Accounting Standards Board Statement No. 123, "Accounting and
Disclosure of Stock-Based Compensation" ("Statement 123"), requires the use of
option valuation models that were not developed for use in valuing
F-33
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
employee and non-employee director stock options. Under APB 25, because the
exercise price equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Employee Plan
The 1984 and 1992 Stock Option Plans and the 1999 BRE Stock Incentive Plan
("Plans") provide for the issuance of Incentive Stock Options, Non-Qualified
Stock Options, restricted shares and other grants. The maximum number of shares
that may be issued under the Plans is 4,350,000. The option price may not be
less than the fair market value of a share on the date that the option is
granted and the options generally vest over five years. The 1999 BRE Stock
Incentive Plan was adopted by shareholders in 1999. The 1999 BRE Stock
Incentive Plan incorporated the Broad Based Plan created in 1998, and allows
for grants of up to 2,000,000 shares. During 1999 and 1998, certain key
employees were allowed to exercise options with a reload provision and 18,567
and 186,374 reload grants were made, respectively, in those years. Changes in
options outstanding during the years ended December 31, 1999, 1998 and 1997
were as follows.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1999 1998 1997
------------------- ------------------- ------------------
Weighted Weighted Weighted
Shares average Shares average Shares average
under exercise under exercise under exercise
option price option price option price
--------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period................. 1,445,179 $24.29 864,200 $20.96 752,600 $16.90
Granted................. 825,410 $24.64 852,424 $26.72 397,500 $25.87
Exercised............... (218,510) $19.34 (208,095) $19.04 (236,700) $16.89
Cancelled............... (211,310) $25.76 (63,350) $24.29 (49,200) $21.14
--------- --------- --------
Balance at end of
period............... 1,840,769 $24.96 1,445,179 $24.29 864,200 $20.96
========= ========= ========
Exercisable............. 441,096 $24.33 266,005 $18.79 319,600 $16.59
Shares available for
granting future
options................ 1,385,764 2,601 755,936
Weighted average
estimated fair value of
options granted during
the year............... $ 3.26 $ 3.14 $ 3.23
</TABLE>
At December 31, 1999, the exercise price of shares under option ranged from
$12.97 to $28.06, with a weighted average exercise price of $24.96. The
exercise price of all options granted in the years ended December 31, 1999,
1998 and 1997 was equal to the market price on the date of grant. Expiration
dates range from 2000 through 2009; the weighted average remaining contractual
life of these options is 8.1 years. Stock options were exercised during 1999 on
options originally granted from $12.97 to $26.00. At December 31, 1999, there
were 20,175 restricted shares outstanding under the Plans, and 18,375 were
granted in 1999. There were no restricted shares granted in 1998 or 1997.
In addition to the options granted under the Plans, an option for 100,000
shares (at $15.32 per share) is held by the President and Chief Executive
Officer. During 1998, 33,334 and in 1999, 33,333 such options were exercised
for $15.32 per share; 33,333 options remain outstanding at December 31, 1999.
This option was registered with the Securities and Exchange Commission on a
Form S-8 and is not part of the Plans. This option had a fair value of $2.28
per share in 1995, the year of the grant. In conjunction with the 1996 merger
with Real Estate Investment Trust of California ("RCT"), options on 381,900 BRE
shares equivalent to options previously granted under the RCT plan were issued
to officers with exercise prices ranging from $11.41 to $14.70. During 1999,
81,919 of these options were exercised at $14.70 and none of these options
remain
F-34
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
outstanding at December 31, 1999. In addition, an outside consultant holds
options on 8,000 shares at a strike price of $26.88, which is not a part of the
Plans.
Direct Stock Purchase and Dividend Reinvestment Plan
In 1996, the Company instituted a direct stock purchase and dividend
reinvestment plan (the "DRIP") in which shareholders may purchase either newly
issued or previously issued shares. The total amount of shares authorized under
the DRIP is 1,500,000; from inception through December 31, 1999, 122,001 new
shares have been issued.
Non-Employee Director Stock Option Plan
The Amended and Restated Non-Employee Director Stock Option Plan provides
for the issuance of 25,000 Non-Qualified Stock Options per year to each non-
employee member of the Board of Directors and an additional 25,000 options to
the Chairman of the Board of Directors. In addition, up to 8,000 options may be
granted to each non-employee director for committee membership and/or
chairmanship, and up to 5,000 options may be granted based on operational
performance. This plan has a reload provision that granted an additional
140,681 options in 1999 and 100,305 options in 1998. The maximum number of
shares that may be issued under this plan is 1,550,000. As with the Plans, the
option price may not be less than the fair market value of a share on the date
the option is granted. Changes in options outstanding for the years ended
December 31, 1999, 1998 and 1997 were as follows.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1999 1998 1997
------------------- ------------------ -----------------
Weighted Weighted Weighted
Shares average Shares average Shares average
under exercise under exercise under exercise
option price option price option price
--------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period................. 796,204 $24.38 600,000 $21.92 420,000 $18.71
Granted................. 433,545 $24.30 381,305 $25.25 240,000 $26.82
Exercised............... (158,548) $21.25 (174,349) $17.61 (60,000) $18.97
Cancelled............... (667) $26.25 (10,752) $27.80 -- --
--------- -------- -------
Balance at end of
period............... 1,070,534 $24.81 796,204 $24.38 600,000 $21.92
========= ======== =======
Exercisable............. 704,413 $24.89 527,723 $24.10 445,828 $19.94
Shares available for
granting future
options................ 310,475 602,672 140,000
Weighted average
estimated fair value of
options granted during
the year............... $ 3.28 $ 2.84 $ 3.64
</TABLE>
At December 31, 1999, the exercise prices of shares under option ranged
between $15.25 and $27.88, with expiration dates from 2004 to 2009. The
exercise price of all options granted in the years ended December 31, 1999,
1998 and 1997 was equal to the market price on the date of grant. The options
vest ratably over one year, except for options granted pursuant to a reload,
which vest 100% after 18 months from the date of the grant, and options granted
by operational performance, which vest immediately. The weighted average
remaining contractual life of these options is 8.4 years.
Pro forma information regarding net income and earnings per share required
by Statement 123 was determined as if BRE had accounted for the employee and
non-employee director stock options granted only in the years ended December
31, 1999, 1998 and 1997 under the fair value method of that Statement. The
impact
F-35
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
on the years ended December 31, 1999, 1998 and 1997 of options granted prior to
1996 was excluded from this presentation. The fair value for these options was
estimated as of the date of grant using a Black-Scholes option pricing model,
with the following weighted average assumptions for the years ended December
31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................... 5.70% 5.50% 6.12%
Dividend yield.................................... 6.70% 5.70% 5.70%
Volatility........................................ .24 .18 .18
Weighted average option life...................... 7 years 7 years 7 years
</TABLE>
The Black-Scholes option pricing model was developed for use in estimating
the fair market value of traded options that have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions, including the expected stock price
volatility. Because the above stock option plans have characteristics
significantly different from those of traded options, and because, in
management's opinion, changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models do not
necessarily provide a reliable single measure of the fair value of the above
stock option plans.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. BRE's pro forma
information, as if the Company had adopted Statement 123 as discussed above,
follows.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net income................... $66,291,000 $58,474,000 $74,721,000
Pro forma earnings per share........... $ 1.49 $ 1.36 $ 2.09
Pro forma earnings per share assuming
dilution.............................. $ 1.49 $ 1.36 $ 2.07
</TABLE>
The effect of the application of Statement 123 is not necessarily
representative of the effect on net income for future years.
F-36
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Earnings per Share
The following table sets forth the computation of basic and diluted earnings
per share with respect to income from continuing operations:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Numerator
Net income available to common
shareholders...................... $69,034,000 $60,644,000 $ 76,197,000
Less adjustment for gain (loss) on
sales of investments in rental
properties available to common
shareholders...................... (54,000) 1,859,000 (27,824,000)
----------- ----------- ------------
Numerator for basic earnings per
share income from continuing
operations available to common
shareholders........................ 68,980,000 62,503,000 48,373,000
Effect of dilutive securities
Minority interest in income
convertible into common shares.... 4,847,000 4,126,000 972,000
----------- ----------- ------------
Numerator for diluted earnings per
share............................... $73,827,000 $66,629,000 $ 49,345,000
=========== =========== ============
Denominator
Denominator for basic earnings per
share--weighted average shares.... 44,540,000 42,940,000 35,750,000
Effect of dilutive securities
Stock options.................... 120,000 330,000 570,000
Weighted average convertible
operating company units......... 3,100,000 2,840,000 290,000
----------- ----------- ------------
Dilutive potential common shares... 3,220,000 3,170,000 860,000
----------- ----------- ------------
Denominator for diluted earnings
per share adjusted for weighted
average shares and assumed
conversion........................ 47,760,000 46,110,000 36,610,000
=========== =========== ============
Basic earnings per share excluding
gain (loss) on sale............... $ 1.55 $ 1.45 $ 1.35
=========== =========== ============
Diluted earnings per share
excluding gain (loss) on sale..... $ 1.55 $ 1.45 $ 1.35
=========== =========== ============
</TABLE>
9. Retirement Plan
BRE has a defined contribution retirement plan covering all employees with
more than six months of continuous full-time employment. In addition to
employee elective deferrals, in 1999 and 1998, BRE contributed up to 3% of the
employee's compensation up to $4,800 per employee in 1999, and $4,500 in 1998.
In 1997, BRE's contribution was limited to 1.5% of the participating employee's
salary. The aggregate amounts contributed by BRE were $359,000, $197,000 and
$63,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
10. Related Party Transactions
Certain executives of BRE have purchased stock, the consideration for which
was interest-bearing recourse loans. The loans may be forgiven in whole or in
part upon the achievement of certain performance goals for
F-37
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BRE related to growth in assets, funds from operations and stock price. A
portion of the loans expected to be forgiven are expensed currently as
compensation. At December 31, 1999, the carrying amount of the loans was
$2,291,000 and was included in other assets. The amounts of such loans expected
to be forgiven and treated as compensation expense were $166,000, $370,000 and
$151,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
11. Litigation
BRE defends against various claims and legal actions that happen in its
normal course of business, including certain environmental actions. BRE cannot
predict the ultimate outcome of these matters. In the opinion of management,
there are no current actions that would have a material adverse effect on BRE's
consolidated results of operations or financial position.
In the third quarter of 1998, the Company recorded a provision for
litigation loss of $2,400,000 in connection with a jury award and related legal
expenses. This judgment was settled in 1999 with no additional charges to
expenses.
12. Supplemental Financial Data
Quarterly financial information (unaudited) follows.
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues.......................... $55,420 $58,339 $59,829 $60,665
Income before gain (loss) on
sales............................ $17,511 $19,462 $20,434 $21,202
Net income available to common
shareholders..................... $15,340 $17,038 $17,939 $18,717
Net income per outstanding common
share--basic
Income before gain (loss) on
sales.......................... $ 0.40 $ 0.44 $ 0.46 $ 0.47
Net income...................... $ 0.35 $ 0.38 $ 0.40 $ 0.42
Net income per outstanding common
share--assuming dilution
Income before gain (loss) on
sales.......................... $ 0.45 $ 0.41 $ 0.43 $ 0.37
Net income...................... $ 0.35 $ 0.38 $ 0.40 $ 0.42
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues.......................... $47,413 $49,231 $52,750 $53,851
Income before gain (loss) on
sales............................ $14,967 $15,787 $14,318 $17,431
Net income........................ $14,142 $15,741 $14,116 $16,645
Net income per share
Income before gain (loss) on
sales.......................... $ 0.36 $ 0.37 $ 0.33 $ 0.39
Net income...................... $ 0.34 $ 0.37 $ 0.32 $ 0.38
Net income per share--assuming
dilution
Income before gain (loss) on
sales.......................... $ 0.36 $ 0.37 $ 0.33 $ 0.39
Net income...................... $ 0.34 $ 0.37 $ 0.32 $ 0.38
</TABLE>
F-38
<PAGE>
BRE PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1999, 1998 and 1997, the federal income tax
components of the Company's dividends on the common stock were as follows. In
1999, the dividends on the preferred stock were 100% allocable to ordinary
income (unaudited).
<TABLE>
<CAPTION>
28% 20% Unrecaptured Return
Ordinary Capital Capital Section 1250 of
Income Gain Gain Gain Capital
-------- ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C>
December 31, 1999.............. 95% -- 1% 4% 0%
December 31, 1998.............. 83% -- 4% 2% 11%
December 31, 1997.............. 83% 13% 2% 2% 0%
</TABLE>
F-39
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
8,986,276 Shares
VelocityHSI, Inc.
Common Stock
----------------
PROSPECTUS
----------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses payable by us in connection with
the offering as required by Item 511 of Regulation S-K. All of the following
amounts (except the SEC registration fee) are estimated:
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 2,640.00
Accounting Fees and Expenses.................................. 750,000.00
Legal Fees and Expenses....................................... 1,200,000.00
Printing Expenses............................................. 200,000.00
Blue Sky Qualification Fees and Expenses...................... 10,000.00
Transfer Agent's Fee.......................................... 25,000.00
Miscellaneous................................................. 12,360.00
-------------
Total....................................................... $2,200,000.00
=============
</TABLE>
--------
* To be completed by amendment.
Item 14. Indemnification of Directors and Officers.
VelocityHSI's certificate of incorporation eliminates the personal liability
of VelocityHSI directors to the company and its stockholders for breach of any
such director's fiduciary duty to VelocityHSI to the fullest
extent permitted by Section 102(b)(7) of the Delaware General Corporation Law,
as such section may be amended or supplemented from time to time. Section
102(b)(7) allows a corporation to limit or eliminate the personal liability of
directors to the corporation and its shareholders, so long as the provision
does not limit or eliminate liability based on:
. a breach of the duty of loyalty;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. Section 174 of the Delaware General Corporation Code dealing with
unlawful payment of dividends;
. a transaction from which a director received an improper personal
benefit; or
. acts or omissions that occurred prior to the enactment of such provision.
In addition, except for derivative actions, our bylaws provide that
VelocityHSI shall indemnify officers and directors when such persons are made
or threatened to be made a party to any action relating to such person's
affiliation with the corporation as an officer or director, so long as such
person acted:
. in good faith;
. in a manner such person believed to be in the best interest or not
adverse to the best interest of VelocityHSI; and
. had no reason to believe that his or her actions were unlawful.
Provided, however, that in actions by or in the right of VelocityHSI (i.e.,
derivative actions) such persons will receive no indemnification if found to be
liable to VelocityHSI, unless the appropriate Delaware court or similar court
with jurisdiction determines that, under the circumstances, VelocityHSI should
indemnify such person. In any case, if such officer or director prevails on the
merits in any defense of such action, VelocityHSI shall indemnify such person
for expenses actually and reasonably incurred in defending such action.
Indemnification expenses may include, without limitation, attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action. Our bylaws also allow VelocityHSI
II-1
<PAGE>
to advance to officers and directors expenses related to the defense of such
claims, and to purchase and maintain insurance on behalf of any officer or
director to protect such person against any liability asserted as a result of
such officer or director's capacity with VelocityHSI.
The inclusion of the permissive indemnification provision in the VelocityHSI
bylaws may have the effect of reducing the likelihood of derivative litigation
against directors and may discourage or deter stockholders or management from
bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise benefit VelocityHSI and
its stockholders.
Pursuant to Delaware law, each director and officer is subject to
restrictions relating to the misappropriation of corporate opportunities by
such director or officer or such director's or officer's affiliates. Under
Delaware law, a transaction with VelocityHSI in which a director or officer of
VelocityHSI has a direct or indirect interest is not voidable by VelocityHSI
solely because of the director's or officer's interest in the transaction if:
. the material facts of the transaction and the director's or officer's
interest therein are disclosed to or known by the directors or a
committee noted in the minutes, and the transaction is approved,
authorized, or ratified in good faith by the disinterested directors;
. the material facts of the transaction and the director's or officer's
interest therein are disclosed to or known by the stockholders entitled
to vote and the transaction is approved or ratified in good faith by the
stockholders; and
. the transaction is established to have been fair to VelocityHSI at the
time it was authorized or approved.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities.
1. Prior to the distribution, VelocityHSI intends to issue options to
purchase approximately 659,457 shares of VelocityHSI common stock to holders of
options to purchase BRE common stock. The offer and sale of such securities
will be made pursuant to the exemption from registration under Rule 701 as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended.
2. Prior to the distribution, VelocityHSI intends to offer and sell, at a
price of $0.50 per share, 1,713,920 shares of VelocityHSI common stock, to
officers and employees of VelocityHSI and to give an aggregate of 395,000
shares of VelocityHSI common stock to employees of BRE, subject to certain
vesting and repurchase rights. The offer, sale and gift of such securities will
be made pursuant to an exemption from registration under the Securities Act in
reliance on Section 4(2) of such Act as transactions by an issuer not involving
any public offering.
3. Prior to the distribution, VelocityHSI intends to offer and sell, at a
price of $1.00 per share, up to 599,285 shares of VelocityHSI common stock to
holders of units in BRE Property Investors LLC. The offer and sale of such
securities will be made pursuant to an exemption from registration under the
Securities Act in reliance on Section 4(2) of such Act as transactions by an
issuer not involving any public offering.
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<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits. The following exhibits are filed as part of this registration
statement:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation of
VelocityHSI, Inc.*
3.2 Amended and Restated Bylaws of VelocityHSI, Inc.*
4.1 Form of Common Stock Certificate of VelocityHSI, Inc.
5.1 Opinion of Latham & Watkins regarding the validity of the common
stock being registered
8.1 Opinion of Latham & Watkins regarding certain federal income tax
matters
10.1 Form of Contribution and Distribution Agreement between BRE
Properties, Inc. and VelocityHSI, Inc.+
10.2 Form of Administrative Services and Reimbursement Agreement
between BRE Properties, Inc. and VelocityHSI, Inc.
10.3 VelocityHSI, Inc. 2000 Equity Incentive Plan*
10.4 Form of Service Agreement between BRE Properties, Inc. and
VelocityHSI, Inc.+
10.5 Registration Rights Agreement*
10.6 Employment Agreement of Stephen E. Carlson*
23 Consent of Independent Auditors
24.1 Power of Attorney+
24.2 Power of Attorney (for Morgan P. Guenther)
27 Financial Data Schedule
99 Transmittal Letter to BRE Shareholders+
</TABLE>
--------
+ Previously filed.
* To be filed by amendment.
(b) Financial Statement Schedules. Financial statement schedules have been
omitted because they are inapplicable, are not required under applicable
provisions of Regulation S-X, or the information that would otherwise be
included in such schedules is contained in our financial statements or
accompanying notes.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement (this "Amendment")
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of San Francisco and the State of California on the 17th day of July,
2000.
VelocityHSI, Inc.
/s/ Charles P. Wingard
By: _________________________________
Charles P. Wingard
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed by the following persons in the capacities described below on
July 17, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Stephen E. Carlson* President and Chief Executive Officer and a
___________________________________________ Director (Principal Executive Officer)
Stephen E. Carlson
/s/ Charles P. Wingard Senior Vice President, Chief Financial
___________________________________________ Officer, Secretary and Treasurer (Principal
Charles P. Wingard Financial and Accounting Officer)
/s/ LeRoy E. Carlson* Director
___________________________________________
LeRoy E. Carlson
/s/ Frank C. McDowell* Director
___________________________________________
Frank C. McDowell
/s/ Morgan P. Guenther Director
___________________________________________
Morgan P. Guenther
/s/ Charles P. Wingard
*By: ______________________________________
Charles P. Wingard
Attorney-in-fact
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of VelocityHSI,
Inc. *
3.2 Amended and Restated Bylaws of VelocityHSI, Inc.*
4.1 Form of Common Stock Certificate of VelocityHSI, Inc.
5.1 Opinion of Latham & Watkins regarding the validity of the common stock
being registered
8.1 Opinion of Latham & Watkins regarding certain federal income tax
matters
10.1 Form of Contribution and Distribution Agreement between BRE
Properties, Inc. and VelocityHSI, Inc.+
10.2 Form of Administrative Services and Reimbursement Agreement between
BRE Properties, Inc. and VelocityHSI, Inc.
10.3 VelocityHSI, Inc. 2000 Equity Incentive Plan*
10.4 Form of Service Agreement between BRE Properties, Inc. and
VelocityHSI, Inc.+
10.5 Registration Rights Agreement*
10.6 Employment Agreement of Stephen E. Carlson*
23 Consent of Independent Auditors
24.1 Power of Attorney+
24.2 Power of Attorney (for Morgan P. Guenther)
27 Financial Data Schedule
99 Transmittal Letter to BRE Shareholders+
</TABLE>
--------
+ Previously filed.
* To be filed by amendment.
