<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K/A
(Amendment No.1)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ____________to____________
Commission File Number 1-12269
__________________
HOMESTEAD VILLAGE INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction
of incorporation or organization)
74-2770966
(I.R.S. employer identification no.)
2100 RiverEdge Parkway, 9th Floor
Atlanta, Georgia 30328
(Address of principal executive offices and zip code)
(770)303-2200
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange On
------------------- which registered
----------------
Shares of Common Stock, par value $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the closing price of the registrant's Common Stock on March 24,
1999, the aggregate market value of the Common Stock held by non-affiliates of
the registrant was $33,197,890.
At March 24, 1999, there were 38,244,546 shares of the registrant's Common
Stock outstanding.
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TABLE OF CONTENTS
Item Description Page
- ---- ----------- ----
PART III*
Item 10. Directors and Executive Officers of the Registrant............ 1
Item 11. Executive Compensation........................................ 1
Item 12. Security Ownership of Certain Beneficial Owners and Management 7
Item 13. Certain Relationships and Related Transactions................ 9
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* Note: the purpose of this Amendment No.l is to include the information
required by Items 10, 11, 12 and 13 of the Homestead Village Incorporated Annual
Report on Form 10-K for the year ended December 31, 1998.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding Homestead's executive officers and Directors, see
"Item 1. Business Directors and Officers of Homestead."
Security Capital Group Incorporated ("Security Capital") has the right to
nominate up to two Directors. Security Capital currently has no nominees. In
addition, Archstone has the right to nominate one Director. See Item 13 "Certain
Relationships and Transactions--Archstone Investor Agreement". Mr. John
Schweitzer is Archstone's nominee. Homestead's Restated Charter requires that a
majority of the Directors be independent Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires Homestead's
Directors, officers and beneficial owners of more than 10% of the outstanding
Shares to file reports of ownership and changes in ownership of the Shares with
the Securities and Exchange Commission and to send copies of such reports to
Homestead. Based solely on a review of those reports and amendments thereto
furnished to and upon written representations of certain of such persons that
they were not required to file certain of those reports, Homestead believes that
no such person failed to file any such report on a timely basis during 1998,
except that Paul Burke, Ken W. Pierce, Brian M. Fraser, Robert J. Morse, James
C. Potts, Gary A. DeLapp, David C. Dressler, Jr., and John P. Frazee, Jr., each
filed one late report with respect to one transaction.
ITEM 11. EXECUTIVE COMPENSATION
The following table presents the compensation for 1998, 1997 and 1996 paid to
the chief investment officer, the chief operating officer, and the three other
most highly compensated officers during 1998 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Annual Compensation
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Other Annual
Name and Position Year Salary($) Bonus ($) Compensation (1)
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<S> <C> <C> <C> <C>
David C. Dressler, Jr. 1998 261,218 427,000 --
Co-Chairman, 1997 250,000 300,000 --
President 1996 195,000 285,000 --
& Chief Investment
Officer
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Michael D. Cryan (5) 1998 268,974 419,200 --
Co-Chairman & Chief 1997 260,000 290,000 157,098
Operating Officer 1996 85,635 65,000 --
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Robert J. Morse(6) 1998 278,526 277,000 --
Managing Director 1997 10,577 100,000 --
1996 -- -- --
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Robert C. Aldworth(7) 1998 261,346 92,000 --
Senior Vice President 1997 157,500 60,000 --
& Chief Financial 1996 -- -- --
Officer
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Gary A. DeLapp (8) 1998 200,000 90,000 --
Senior Vice President 1997 200,000 75,000 --
1996 127,452 70,000 --
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</TABLE>
<TABLE>
<CAPTION>
Long-Term Compensation
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Shares of
Security
Shares Capital Class
Underlying A Common Stock
Stock Underlying Restricted All Other
Name and Position Options (#) Options (#)(2) Stock Awards(3) Compensation ($)(4)
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<S> <C> <C> <C> <C>
David C. Dressler, Jr. 90,900 -- -- 270
Co-Chairman, 258,058 -- -- 270
President 60,000 439 25,000 270
& Chief Investment
Officer
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Michael D. Cryan (5) 90,900 -- -- 4,124
Co-Chairman & Chief 258,058 -- -- 4,820
Operating Officer 50,000 455 25,000 23
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Robert J. Morse(6) 37,950 -- 31,250 5,248
Managing Director 123,552 -- -- --
-- -- -- --
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Robert C. Aldworth(7) -- -- -- 3,150
Senior Vice President 100,019 -- -- 113
& Chief Financial -- -- -- --
Officer
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Gary A. DeLapp (8) 22,750 -- -- 3,576
Senior Vice President 74,710 -- -- 3,716
25,000 132 10,000 112
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</TABLE>
1
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(1) Includes relocation costs paid or reimbursed to each Named Executive
Officer if such amounts exceed the lesser of either $50,000 or 10% of the
executive's total combined annual salary and bonus.
(2) In connection with their employment with Security Capital, prior to
Homestead becoming an independent company on in 1996, Security Capital
granted Messrs. Dressler, Cryan and DeLapp options to acquire $500,000 (at
$1,139 per Security Capital Class A Common Share ("Class A Share"),
$500,000 ($290,000 at $1,057 per Class A Share and $210,000 at $1,163 per
Class A Share), and $150,000 (at $1,139 per Class A share), respectively,
of Class A Shares.
(3) Under the stock purchase program portion of Homestead's 1996 Long-Term
Incentive Plan, Homestead permitted the following individuals to purchase
Shares, subject to restrictions on transfer and encumbrance. Mr. Cryan,
Mr. Dressler, and Mr. DeLapp acquired their Shares at a price of $10.00 per
Share (the fair market value per Share on the purchase date) on October 15,
1996. On October 15, 1998, the second anniversary of the purchases, the
restrictions on transfer and encumbrance expired. Mr. Morse acquired his
Shares at a price of $16.00 per Share in March 1998 with the proceeds of a
promissory note made to Homestead. See "-1996 Long-Term Incentive Plan".
(4) Includes contributions made by Homestead in 1998 under its 401(k) Savings
Plan and non-qualified savings plan, and the dollar value of insurance
premiums paid by Homestead with respect to term life insurance for the
benefit of the Named Executive Officer. Beginning in 1997, Homestead
matches up to 50% of the first 6% of compensation contributed by the
employee under the 401(k) plan with common stock.
(5) Mr. Cryan joined Homestead on September 1, 1996 and the 1996 compensation
figures reflect the portion of the year he was employed by Homestead.
(6) Mr. Morse joined Homestead on December 1, 1997 and the 1997 compensation
figures reflect the portion of the year he was employed by Homestead.
(7) Mr. Aldworth resigned his position with Homestead on January 8, 1999.
(8) Mr. DeLapp joined Homestead on February 26, 1996 and the 1996 compensation
figures reflect the portion of the year he was employed by Homestead.
Option Grants
During 1998, options for 1,791,482 Shares were granted to 329 employees and
officers of Homestead. The Options vest twenty-five percent in each of the
first, second, third and fourth anniversaries of the date of grant. All options
expire ten years after the date of grant. The following table sets forth certain
information with respect to individual grants of options to each of the Named
Executive Officers.
Individual Grants
-----------------
<TABLE>
<CAPTION>
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Percent of
Shares Total Options
Underlying Granted to Exercise or Grant
Options Employees in Base Price Expiration Date Present
Name Granted (#) 1998 (%) ($/share) Date Value ($) (1)
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<S> <C> <C> <C> <C> <C>
David C. Dressler, Jr. 90,900 5.07 4.28125 12/18/08 189,608
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Michael D. Cryan 90,900 5.07 4.28125 12/18/08 189,608
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Robert J. Morse 37,950 2.12 4.28125 12/18/08 79,160
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Robert C. Aldworth -- -- -- -- --
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Gary A. DeLapp 22,750 1.27 4.28125 12/18/08 47,454
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</TABLE>
(1) The amounts shown are based on the Black-Scholes option pricing model. The
material assumptions incorporated in the Black-Scholes model in estimating
the value of the options include the following: an expected option life of
4.5 years; a risk-free interest rate of 4.66%; no expected dividend
yield; and expected volatility of 53%. The actual value, if any, an
optionee will realize upon exercise of an option will depend on the excess
of the market value of the Shares over the exercise price on the date the
option is exercised. There can be no assurance that the value realized by
an optionee will be at or near the value estimated by using the Black-
Scholes model.
2
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Option Exercises in 1998 and Year-End Option Values
None of the Named Executive Officers exercised options during 1998. The
following table sets forth certain information concerning the year-end value of
unexercised options owned by the Named Executive Officers.
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised in-the-money
Underlying Options Options at
at Year-End (#) December 31, 1998 ($) (1)
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Shares
Acquired
on Exercise Value Shares Shares
Namw (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David C. Dressler, Jr. -- -- 6,000 402,958 -- 19,884
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Michael D. Cryan -- -- 5,000 393,958 -- 19,884
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Robert J. Morse -- -- -- 161,502 -- 8,302
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Robert C. Aldworth -- -- -- 100,019 -- --
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Gary A. DeLapp -- -- 2,500 119,960 -- 4,977
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</TABLE>
(1) Based on the December 31, 1998 closing price on the New York Stock Exchange
("NYSE").
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
Under the Homestead 1996 Long-Term Incentive Plan, if a change in control
(as defined in the 1996 Long-Term Incentive Plan) of Homestead occurs and an
employee's employment terminates without cause, all of such employee's unexpired
options will become immediately exercisable.
Homestead has entered into change in control agreements with each of its
current officers. The agreements provide that if the officer is terminated or
constructively terminated other than for cause within two years after a change
in control of Homestead, the officer will be entitled to receive a lump-sum
severance payment (which amount depends upon the individual's responsibility
level within Homestead), together with certain payments and benefits, including
continuation of certain employee benefits. An additional payment will be
required to compensate certain officers for excise taxes imposed upon severance
payments under these agreements. The severance amounts for the four most senior
officers would equal two times the sum of base salary and target bonus for the
year in which termination occurs, plus target bonus through the date of
termination, plus forgiveness of any outstanding loans from Homestead. The
severance amounts for other officers would be one times salary, plus pro-rated
target bonus through the date of termination.
Loans to Executive Officers
See "Certain Relationships and Related Transactions" for a description of
loans made to executive officers of Homestead.
1996 Long-Term Incentive
The 1996 Long-Term Incentive Plan authorizes the establishment of one or more
qualified and non-qualified option programs and authorizes the award of share
grants, any of which may be subject to restriction. Shares issued under the
1996 Long-Term Incentive Plan may be authorized and unissued Shares or treasury
Shares. In the event of certain transactions affecting the type or number of
outstanding Shares, the number of Shares subject to the 1996 Long-Term Incentive
Plan, the number or type of Shares subject to outstanding awards and the
exercise price thereof will be appropriately adjusted. The 1996 Long-Term
Incentive Plan authorizes the award of stock grants (which may be subject to
restrictions), and performance stock and authorizes the establishment of one or
more stock purchase programs. The Management Development and Compensation
Committee (the "MDCC") of the Board of Directors (the "Board") administers the
Plan. Subject to the terms of the 1996 Long-Term Incentive Plan, the MDCC
determines which employees or other individuals providing services to Homestead
shall be eligible to receive awards under the 1996 Long-Term Incentive Plan, and
the amount, price, timing and other terms and conditions applicable to such
awards. A total of 4,000,000 Shares are reserved for issuance under the plan,
and 3,315,436 Shares are subject to outstanding awards, leaving 684,564
available for future awards.
3
<PAGE>
Options awarded under the 1996 Long-Term Incentive Plan may be either
incentive stock options which are intended to satisfy the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified stock options which are not intended to satisfy Section 422 of the
Code. Options become exercisable in accordance with the terms established by
the MDCC, which may include conditions relating to completion of a specified
period of service or achievement of performance standards. Options expire on
the date determined by the MDCC which shall not be later than the earliest to
occur of (i) the tenth anniversary of the grant date, (ii) the first
anniversary of the participant's termination of employment by reason of death,
disability or retirement or (iii) the date three months after the date of the
participant's termination of employment for any other reason. Shares
transferred to a participant pursuant to the exercise of an option may be
subject to such additional restrictions or limitations as the MDCC may
determine.
Under the 1996 Long-Term Incentive Plan, the MDCC may grant awards of Shares
to participants, which are subject to such conditions and restrictions, if any,
as the MDCC determines. During the period a stock award is subject to
restrictions or limitations, the MDCC may award the participant dividend rights
with respect to such Shares. The 1996 Long-Term Incentive Plan also provides
that the MDCC may establish one or more stock programs which may permit
purchases of Shares.
The MDCC may award participants performance stock, the distribution of which
is subject to achievement of performance objectives. The number of Shares and
the performance measures and periods shall be established by the MDCC at the
time the award is made.
The 1996 Long-Term Incentive Plan provides for, and Homestead has granted,
nonqualified options to acquire Shares. Beginning in 1998, such options become
exercisable twenty-five percent in each of the first, second, third and fourth
years after the date of grant, and expire ten years after the date of grant.
The participants have no rights as shareholders with respect to the Shares
subject to his or her options until the option is exercised. No income will be
recognized by a participant at the time of the options are granted. The
exercise of a nonqualified stock option is generally a taxable event that
requires the participant to recognize, as ordinary income, the difference
between the fair market value of the Shares at the time of exercise and the
option price. Homestead ordinarily will be entitled to claim a federal income
tax deduction on account of the exercise of a nonqualified option. The amount
of the deduction is equal to the ordinary income recognized by a participant.
Homestead has adopted Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related interpretations in
accounting for its stock options. Therefore, any excess of fair value of the
Shares at the date of grant over the option price has been treated as
compensation expense, recorded over the vesting period.
Director Compensation
During 1998, Directors who were not employees of Homestead or Security Capital
("Outside Directors") received $14,000 per year for serving as a Director and
are reimbursed for their travel and other expenses incurred in connection with
attending meetings of the Board or committees thereof. Outside Directors also
received grants of options to acquire Shares. For 1998, Messrs. Frazee, Garcia
and Schweitzer, each an independent Director, each received $14,000, as well as
options to purchase 2,000 Shares each, for their services as Directors. During
1999, Outside Directors will receive an annual retainer of $22,000; meeting
fees of $1,000 for each Board meeting attended in person and $500 for each Board
meeting attended by telephone. For each committee meeting attended in person
each Outside Director receives $500 and for each committee meeting attended by
telephone each Outside Director receives $250. Each Outside Director receives a
fee of $3,000 annually if the director is a chairman of any committee of the
board. Both the retainer and meeting fees will be paid quarterly. Directors who
are employees of Homestead or Security Capital are not separately compensated
for serving as Directors.
Outside Directors Plan
Homestead has adopted the Homestead Village Incorporated 1996 Outside
Directors Plan, under which up to 100,000 Shares may be subject to options (the
"Outside Directors Plan"). Options granted under the Outside Directors Plan
have a five year term and are immediately exercisable in whole or in part.
Options are granted to each outside director as of the date of each annual
meeting of shareholders of Homestead at an exercise price equal to the fair
market value of the Shares as of those dates. In 1998, options to purchase
2,000 Shares each, at an exercise price of $14.53125 per Share, were granted to
Messrs. Frazee, Garcia and Schweitzer. Options granted under the Outside
Directors Plan provide that the option holder may, in the event of the
acquisition of 50% or more of the outstanding Shares as a result of any cash
tender offer or exchange offer (other than one made by Homestead), exercise the
options immediately or surrender the options, or any unexercised option thereof,
to Homestead and receive cash from Homestead equal to the difference between the
exercise price of each option and the per Share price of the tender offer or
exchange offer, multiplied by the number of Shares for which options are held.
4
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 1, 1999, information concerning
the beneficial ownership of Shares for (i) each person known to Homestead to be
the beneficial owner of more than 5% of Shares outstanding (ii) each Director of
Homestead, (iii) each Named Executive Officer, who include the chief investment
officer, the chief operating officer and the three other most highly compensated
officers during 1998 and (iv) the directors and executive officers as a group.
Unless otherwise indicated, all of such Shares are owned directly, and the
indicated person or entity has sole voting and investment power and the address
for each such person is Homestead Village Incorporated, 2100 RiverEdge Parkway,
9th Floor, Atlanta, Georgia 30328.
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percent of
Beneficial Owner Beneficially Owned Shares(1)
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<S> <C> <C>
Security Capital Group Incorporated 45,943,856(2) 79.9%
125 Lincoln Avenue
Santa Fe, New Mexico 87501
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Archstone Communities Trust 19,246,402(3) 33.5%
7670 South Chester Street
Englewood, Colorado 80112
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David C. Dressler, Jr. 89,709(4) *
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Michael D. Cryan 84,870(5) *
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John P. Frazee, Jr. 29,358(6) *
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Manuel A. Garcia, III 9,000(7) *
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John C. Schweitzer 17,122(8) *
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Robert J. Morse 31,563(9) *
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Robert C. Aldworth -0- *
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Gary A. DeLapp 12,500(10) *
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All directors and executive officers
as a group (22 persons) 323,037 *
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</TABLE>
__________
* Less than 1%
(1) Assumes (i) in the case of Archstone Communities Trust ("Archstone"), that
Archstone has converted the principal amount of the convertible mortgage
notes held by it and that no other person has converted or exercised any
outstanding convertible or exercisable securities, (ii) in the case of
Security Capital, that Archstone has converted the principal amount of the
convertible mortgage notes held by Archstone, and that no other person has
converted or exercised any outstanding convertible or exercisable securities
and (iii) in the case of each other person, that such person has exercised
all options owned by him or her and that no other person has converted or
exercised any outstanding convertible or exercisable securities.
(2) Includes Shares beneficially owned by Archstone under the convertible
mortgage notes. As a result of its ownership of approximately 38.1% of
Archstone's outstanding common shares and Security Capital's contractual
arrangements with Archstone, Security Capital may be deemed to beneficially
own all Shares beneficially owned by Archstone. 26,697,454 Shares are owned
of record by SC Realty Incorporated, a wholly owned subsidiary of Security
Capital.
(3) All such Shares are issuable upon conversion of the principal amount of the
convertible mortgage notes outstanding (described below under "Certain
Relationships and Related Transactions--Archstone Funding Commitment). As of
February 1, 1999, the principal amount of the Archstone mortgages was
approximately $221 million, which is convertible into Shares at a conversion
price of one Share for each $11.50 principal amount of convertible mortgage
notes.
(4) Includes 5,010 Shares held in trusts for Mr. Dressler's children of which
Mr. Dressler is a co-trustee and options to acquire 55,070 Shares.
(5) Includes options to acquire 54,070 Shares.
(6) Includes 22,758 Shares held in an IRA, 600 Shares held by children and
options to acquire 6,000 Shares.
(7) Includes options to acquire 4,000 Shares.
(8) Includes 5,000 Shares held by a partnership of which Mr. Schweitzer is a
managing partner, 2,020 Shares held by a corporation that Mr. Schweitzer
owns, options to acquire 4,000 Shares, and 1,102 Shares held by Mr.
Schweitzer's wife.
(9) Includes 31,250 Shares acquired under the Homestead 1996 Long-Term Incentive
Plan at a price of $16.00 per Share. Mr. Morse acquired the Shares with the
proceeds of a promissory note made to Homestead.
(10) Includes options to acquire 2,500 Shares.
5
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Mergers
In October 1996, Security Capital Pacific Trust ("PTR") and Security Capital
Atlantic Incorporated ("Atlantic"), the predecessors to Archstone, and Security
Capital, sold through a series of merger transactions, all of their respective
assets relating to Homestead Village(R) properties to Homestead, and PTR and
Atlantic entered into funding commitment agreements with Homestead. The
transactions resulted in PTR and Atlantic owning Shares and warrants to purchase
Shares at a $10.00 per Share exercise price. PTR and Atlantic distributed the
Shares and warrants they received to their shareholders in November 1996.
Homestead also issued approximately four million Shares to Security Capital.
Approximately 2.15 million of these Shares were placed in escrow and have been
released over time as PTR and Atlantic fulfilled their funding commitments.
All of the Shares remaining in escrow were released to Security Capital during
1998.
Protection of Business Agreement
Each of Archstone and Security Capital have entered into a protection of
business agreement, dated as of October 17, 1996 (the "Protection of Business
Agreement"), with Homestead which prohibits Archstone, as successor to PTR and
Atlantic, Security Capital and their respective affiliates from engaging,
directly or indirectly, in the extended stay lodging business in the continental
United States except through Homestead and its subsidiaries. The Protection of
Business Agreement also prohibits Homestead from, directly or indirectly,
engaging in the ownership, operation, development, management or leasing of
multifamily properties. The Protection of Business Agreement does not prohibit
Archstone from: (i) owning securities of Homestead; (ii) owning up to 5% of the
outstanding securities of another person engaged in owning, operating,
developing, managing or leasing extended stay lodging properties, so long as
they do not actively participate in the business of such person; (iii) owning
the outstanding securities of another person, a majority owned subsidiary,
division, group, franchise or segment of which is engaged in owning, operating,
developing, managing or leasing extended stay lodging properties, so long as not
more than 5% of such person's consolidated revenues are derived from such
properties; and (iv) owning securities of another person primarily engaged in
business other than a business owning, operating, developing, managing or
leasing extended stay lodging properties, including a person primarily engaged
in business as an owner, operator or developer of hotel properties, whether or
not such person owns, operates, develops, manages or leases extended stay
lodging properties. The Protection of Business Agreement does not prohibit
Homestead from: (i) owning securities of Archstone or Security Capital; (ii)
owning up to 5% of the outstanding securities of another person engaged in
owning, operating, developing, managing or leasing garden style multifamily
properties; and (iii) owning the outstanding securities of another person, a
majority owned subsidiary, division, group, franchise or segment of which is
engaged in owning, operating, developing, managing or leasing garden style
multifamily properties, so long as not more than 5% of such person's
consolidated revenues are derived from such properties. The Protection of
Business Agreement terminates in the event of an acquisition, directly or
indirectly (other than by purchase from Archstone and Security Capital or their
respective affiliates), by any person (or group of associated persons acting in
concert), other than Archstone, Security Capital or their respective affiliates,
of 25% or more of the outstanding shares of voting stock of Homestead, without
the prior written consent of the Board. Subject to earlier termination pursuant
to the preceding sentence, the Protection of Business Agreement will terminate
on October 17, 2006.
Security Capital Investor Agreement
Homestead and Security Capital are parties to an Investor Agreement, dated
October 17, 1996, and amended as of April 5, 1999, (the "Security Capital
Investor Agreement"), which provides Security Capital with a variety of rights
regarding the management of Homestead. Under the Security Capital Investor
Agreement, for so long as Security Capital beneficially owns at least 50.1% of
Homestead's outstanding Shares, Security Capital has the right to approve, among
other things: (i) Homestead's annual budget; (ii) the incurrence of expenses in
any year exceeding (A) any line item in the annual budget by $500,000 or 10% and
(B) the total expenses set forth in the annual budget by 5%; (iii) the offer or
sale of any Shares or any securities convertible into or exchangeable for Shares
other than pursuant to (A) an employee benefit plan approved by Homestead's
shareholders, (B) previously issued warrants, options or rights, (C) a dividend
reinvestment plan or share purchase plan approved by the Board or (D) an
issuance of rights, options, or warrants for Shares issued to all shareholders;
(iv) the issuance or sale of securities that are subject to mandatory redemption
or redemption at the option of the holder; (v) the adoption of any employee
benefit plan pursuant to which Shares may be issued and any action with respect
to senior officers'
6
<PAGE>
compensation; (vi) the incurrence, restructuring, renegotiation or repayment of
indebtedness in which the aggregate amount involved exceeds $1,000,000; (vii)
the declaration or payment of any dividend or other distribution; (viii) the
acquisition or disposition in a single transaction or group of related
transactions where the purchase price exceeds $1 million; (ix) the entering into
of service contracts (A) for property management, investment management or
leasing services, or (B) that contemplate annual payments in excess of $500,000;
(x) the entering into of any new contract, including for construction,
development, or other capital expenditure, for which the total cost is
reasonably expected to exceed $1,000,000 for any contract or $5,000,000 in the
aggregate; (xi) the entering into of any joint venture for the development of
any properties owned by Homestead in which the book value of any property to be
contributed by Homestead exceeds $1,000,000 individually or $5,000,000 in the
aggregate; (xii) the entering into of any franchising or licensing agreements;
(xiii) the amendment of the articles of incorporation or bylaws of Homestead;
and (xiv) the waiver of antitakeover provisions of Maryland law or Homestead's
Charter.
In addition, so long as Security Capital owns at least 50% of the outstanding
Shares, Homestead will maintain an operating committee consisting of the two
Homestead Co-Chairmen and two nominees of Security Capital that will meet weekly
to review all operations of Homestead.
The Security Capital Investor Agreement also provides that, so long as
Security Capital owns at least 10% of the outstanding Shares, Homestead may not
increase the number of directors on the Board to more than seven without the
approval of Security Capital. Security Capital also is entitled to designate one
or more persons as directors of Homestead, as follows: so long as Security
Capital owns at least 10% but less than 25% of the outstanding Shares, it is
entitled to nominate one person; and (ii) so long as Security Capital owns at
least 25% of the outstanding Shares, it is entitled to nominate that number of
persons as shall bear approximately the same ratio to the total number of
members of the Board as the number of Shares beneficially owned by Security
Capital bears to the total number of outstanding Shares, provided that Security
Capital shall be entitled to designate no more than two persons so long as the
Homestead Board consists of no more than seven members. Security Capital
currently has no designees on the Board.
The Security Capital Investor Agreement also provides Security Capital with
registration rights pursuant to which, in certain specified circumstances,
Security Capital may request, on not more than three occasions, registration of
all of Security Capital's Shares pursuant to Rule 415 under the Securities Act
of 1933 (the "Securities Act").
Archstone Funding Commitment
Pursuant to a funding commitment agreement entered into at the closing of the
merger transactions, PTR agreed to make loans to Homestead, secured by mortgages
on certain properties of Homestead, of up to $198.8 million. The proceeds of the
loans were used to finance the development of properties acquired by Homestead
from PTR in the merger transactions. Archstone, as successor to PTR, has fully
funded its $198.8 million commitment and has received convertible notes in
respect of such fundings in stated amounts of $221.3 million. The notes are
collateralized by Homestead properties. Each note issued by Homestead is
convertible into Shares on the basis of one Share for every $11.50 of principal
outstanding on the mortgage loan. Interest on the notes accrues at the rate of
9% per annum on the unpaid principal amount, payable every six months. The notes
are scheduled to mature on October 31, 2006, and are callable after May 28,
2001.
Atlantic Mortgages
In July, 1998, Homestead entered into a mortgage loan purchase agreement with
Atlantic and Merrill Lynch Mortgage Capital Inc. ("MLMC"), under which the $98
million of Homestead convertible notes held by Atlantic were modified to, among
other things, eliminate their convertibility feature in exchange for a payment
of $21.4 million from Homestead to Atlantic. The amount paid to Atlantic was
based on trailing market prices of Shares at the time the agreement was entered
into, which exceeded the conversion price of the convertible mortgage notes at
that date. The elimination of the conversion option attached to the mortgage
notes reduced Homestead's contingently issuable shares of common stock by
approximately 8.5 million shares. Homestead funded the payment with the proceeds
received from the sale of $24 million of 7.5% convertible subordinated
debentures. Also pursuant to the mortgage loan purchase agreement Atlantic sold
the amended notes to MLMC for $98 million. In August 1998, Homestead converted
the $98 million of mortgage notes and the $24 million of 7.5% convertible
subordinated debentures into $122 million mortgage of a newly formed special
purpose subsidiary of Homestead. The note was collateralized by 26 Homestead
properties which were formerly collateral for the Atlantic notes. The $122
million mortgage note had a maturity date of June 30, 1999 and provided for
interest only monthly payments of LIBOR plus
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1.70% through September 30, 1998, LIBOR plus 2.0% through November 30, 1998, and
LIBOR plus 2.25% thereafter. MLMC had the right to extend the maturity of the
mortgage note. Homestead has repaid and discharged the mortgage note with the
proceeds of a sale leaseback transaction consummated in February 1999, under the
terms of which Homestead sold 18 of the properties that were the collateral for
the note payable to MLMC, and leased the properties from the purchaser.
The transaction with MLMC resulted in an early extinguishment of debt measured
as the difference between the $98 million carrying amount of the original
mortgage notes to Atlantic and the amount paid to extinguish the debt, including
transaction costs. Such loss on extinguishment of debt was $25.3 million and
was recorded as an extraordinary item in third quarter 1998.
Archstone Investor Agreement
PTR, predecessor to Archstone, entered into an investor and registration
rights agreement with Homestead (the "Archstone Investor Agreement") pursuant
to which Archstone is entitled to designate one person for nomination to the
Board, and Homestead will use its best efforts to cause the election of such
nominee(s), for so long as Archstone has the right to convert in excess of $20
million in principal amount of loans made pursuant to Archstone's funding
commitment agreement. Such nominee may, but need not, be the same person(s)
nominated by Security Capital pursuant to the Security Capital Investor
Agreement. In addition, Homestead has granted to Archstone registration rights
with respect to the issuance upon conversion and the distribution of all of the
Shares issuable upon conversion of the convertible mortgage notes. Archstone may
request three registrations pursuant to Rule 415 promulgated under the
Securities Act of all Shares issued or issuable upon conversion of the
convertible mortgage notes. Such registrations, except for the fees and
disbursements of counsel to Archstone, shall be at the expense of Homestead.
Commerzbank Loan Agreements, Security Capital
Subscription Agreement and Rights Offering
Homestead has entered into three credit facilities with Commerzbank AG, New
York Branch ("CAG"), as the arranger or agent, and other lenders. CAG holds all
of the outstanding shares of Security Capital Series B Preferred Stock, which is
convertible into Security Capital common stock. On March 18, 1999, two of the
credit facilities, one in the maximum principal amount of $170 million and
secured by mortgages on Homestead's suburban properties (the "Suburban Line")
and the other in the maximum principal amount of $30 million and secured by
mortgages on Homestead's urban properties (the "Urban Line") were extended to
December 31, 2000, from April 23, 1999. Borrowings under the Suburban Line bear
interest at rates equal to 2.0% to 3.0% over LIBOR, 1% to 2% over the prime rate
or 1.5% to 2.5% over the federal funds rate, with the margin depending upon the
ratio of outstanding indebtedness to the amount of qualifying collateral.
Borrowings under the Urban Line bear interest at the rate of 3.0% over LIBOR,
2.0% over the prime rate or 2.5% over the federal funds rate. Additionally, the
Suburban Line calls for a commitment fee of .375% per annum of the average
undrawn amount under the Suburban Line.
On June 15, 1998, Homestead entered into a third credit facility, which has a
maximum principal amount of $200 million (the "Bridge Facility"). Borrowings
under the Bridge Facility bear interest at the Eurodollar rate plus 1.25% or at
a base rate of prime plus 0.25%. The average unfunded balance bears a
commitment fee of 0.25% per annum. The line expires on October 31, 1999, and is
secured by a subscription agreement with Security Capital for $200 million of
convertible subordinated debentures. If the subscription is called, the
proceeds must be used to first repay the Bridge Facility and, second, for
purposes allowed under the credit facilities. The subscription agreement
expires October 31, 1999, or 2 weeks after termination of the $200 million
credit agreement. The subscription obligation is to be reduced or terminated to
the extent Homestead issues equity securities to any third party, or to Security
Capital pursuant to a separate offering, before October 31, 1999, and uses the
proceeds to repay the Bridge Facility. In conjunction with Security Capital's
entering into the subscription agreement, Homestead paid an arrangement fee to
Security Capital of $600,000.
On March 25, 1999, Homestead announced a rights offering for $225 million of
Shares. Security Capital has agreed to purchase, to the extent Shares have not
been purchased by other parties, $205 million of Shares in the rights offering,
provided that to the extent other parties acquire in the aggregate more than
$20,000,000 of Shares from Homestead in connection with the rights offering, the
Security Capital commitment will be reduced by the amount such purchases exceed
$20,000,000. Security Capital's participation in the rights offering will
satisfy Security Capital's obligations under the subscription agreement. The
rights offering was originally scheduled to close by the end of April, but has
been rescheduled to expire on May 21, 1999, and close on May 28, 1999. In
connection with the rescheduling, Security Capital agreed to provide Homestead
with a $25 million line of credit. Homestead agreed to pay Security Capital a
$31,944 arrangement fee for the line of credit.
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Administrative Services Agreement
Homestead has entered into an administrative services agreement with Security
Capital (the "Administrative Services Agreement"), pursuant to which Security
Capital provides Homestead with administrative services with respect to certain
aspects of Homestead's business. These services include, but are not limited to,
insurance administration, accounts payable administration, internal audit, cash
management, human resources, management information systems, tax and legal
administration, research, shareholder communications and investor relations. The
fees payable to Security Capital are fixed fees for particular services
provided. Any arrangements under the Administrative Services Agreement for the
provision of services are required to be commercially reasonable and on terms
not less favorable than those which could be obtained from unaffiliated third
parties. The Administrative Services Agreement, which expires on December 31,
1999, is renewable each year for a one-year term, subject to approval by a
majority of the disinterested members of the Board. Homestead incurred fees of
$4,213,000 for administrative services provided by Security Capital in the year
ended December 31, 1998.
Homestead believes its relationship with Security Capital under this agreement
provides it with certain advantages, including access to greater quality and
depth of resources, in such areas as research, information systems, insurance,
cash management and legal support provided at substantial economies of scale.
Other Transactions with Affiliates
On January 15, 1998, Security Capital purchased 8,429,225 Shares at a price of
$15 per Share. Such purchase was made in connection with a subscription rights
offering by Homestead and on the same terms and at the same time as made
available to other shareholders and investors. In connection with this offering,
Homestead paid a fee of $1,564,026 to Security Capital Markets Group
Incorporated, a wholly-owned subsidiary of Security Capital, for its services as
placement agent for the Shares being sold, and also reimbursed Security Capital
Markets Group Incorporated for approximately $45,000 of out-of-pocket expenses
that it incurred in connection therewith.
Separation Agreement
In January 1999, upon Robert Aldworth's resignation from Homestead, Homestead
and Mr. Aldworth entered into a separation agreement. Under the agreement
Homestead agreed to pay Mr. Aldworth $400,000 in consideration for a general
release by Mr. Aldworth of Homestead and its affiliates from all claims of Mr.
Aldworth arising prior to and through the date of the agreement. Mr. Aldworth
also agreed to cooperate with Homestead with regard to his departure from
Homestead.
Loans to Executive Officers
Homestead loaned each of Mr. Cryan and Mr. Dressler $250,000 on October 15,
1996. Each person used the proceeds of such loans to purchase 25,000 restricted
Shares under the 1996 Long-Term Incentive Plan. The Shares vested on October 15,
1998. The loans are due on January 5, 2006, are secured by the Shares purchased
with the loan proceeds and interest accrues at the lowest rate charged by Morgan
Guaranty Trust Company on maturities of 90 days or less, plus 0.25%. If Mr.
Cryan leaves the employ of Homestead prior to payment in full of the loan,
Homestead will buy back his Shares at a price of $10 per Share and will refund
all payments of interest made under the loan. At April 20, 1999, the outstanding
principal amounts of the loans and accrued interest due from Mr. Cryan and Mr.
Dressler were $240,598 and $255,735, respectively.
In addition, Homestead loaned Robert J. Morse $500,000 on March 31, 1998. Mr.
Morse used the proceeds of the loan to purchase 31,250 restricted Shares under
the 1996 Long-Term Incentive Plan. The loan is due on the earlier of January 1,
2000 or 120 days after Mr. Morse voluntarily leaves the employ of Homestead.
The loan is secured by the Shares acquired with the loan proceeds, and interest
accrues on the loan at LIBOR. If Mr. Morse is employed by Homestead on January
1, 2000, or if prior to January 1, 2000, Homestead terminates Mr. Morse's
employment for reasons other than gross negligence or misconduct, the unpaid
principal and interest on the loan will be forgiven.
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Security Capital has also entered into an amended and restated secured
promissory note and related pledge agreement with Mr. Dressler. Under the terms
of the note, Security Capital has agreed to loan Mr. Dressler up to $962,113,
which amount is due on the earlier of December 31, 2000 or 120 days after Mr.
Dressler is no longer an officer of an affiliate of Security Capital. Interest
on the unpaid balance accrues at 7.50% per year and is payable annually on
January 15 each year the note is outstanding. The proceeds of the note were used
to pay personal obligations of Mr. Dressler. The note is secured by Class A
Shares of Security Capital and options to purchase Class A Shares of Security
Capital owned by Mr. Dressler. The note is also secured by a life insurance
policy on Mr. Dressler in the amount of $1,300,000. Mr. Dressler has also
agreed that if he exercises any options for Security Capital securities prior to
repayment of the note, any securities obtained upon exercise of such options
shall become subject to the pledge agreement. The net proceeds (after payment of
minimum withholding taxes) of any securities obtained upon exercise of such
options and disposed of by Mr. Dressler shall be immediately applied to the
outstanding and unpaid interest and principal on the note.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934 and pursuant to the authorization granted by that certain Power of
Attorney filed by the registrant with its Annual Report on Form 10-K for the
year ended December 31, 1998, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
HOMESTEAD VILLAGE INCORPORATED
By:
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Its: Senior Vice President and Secretary
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