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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December
31, 1996 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to _____________
Commission File Number 1-9997
KOGER EQUITY, INC.
(Exact name of Registrant as specified in its Charter)
FLORIDA 59-2898045
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3986 Boulevard Center Drive, Suite 101
Jacksonville, Florida 32207
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (904) 398-3403
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
Common Stock, Par Value $.01 American Stock Exchange
Warrants to Purchase Shares of Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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. X
The aggregate market value of the voting stock held by non-affiliates of the
registrant on February 28, 1997 was approximately $375,018,000.
The number of shares of registrant's Common Stock outstanding on February 28,
1997 was 20,980,000.
Documents Incorporated by Reference
The Company's Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Act of 1934 for the 1997 Annual Meeting of Shareholders is
incorporated by reference in Part III of this report.
TABLE OF CONTENTS
ITEM NO. DESCRIPTION PAGE NO.
PART I
1. BUSINESS................................ 1
2. PROPERTIES.............................. 4
3. LEGAL PROCEEDINGS....................... 10
4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS................... 10
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................... 10
6. SELECTED FINANCIAL DATA................. 11
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS... 12
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.................... 27
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE... 49
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT...................... 49
11. EXECUTIVE COMPENSATION................... 50
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................. 50
13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS............... 50
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K................ 51
SIGNATURES............................... 55
PART I
Item 1. BUSINESS
General
Koger Equity, Inc. ("KE") is a self-administered and self-managed equity
real estate investment trust (a "REIT") which develops, owns, operates and
manages suburban office centers in the southeastern and southwestern United
States. As of December 31, 1996, the KE portfolio consisted of 215 office
buildings (each an "Office Building") in 17 office centers (each a "Koger
Center") located in 13 metropolitan areas throughout the Southeast and
Southwest. The Office Buildings contain approximately 7.7 million net rentable
square feet and were on average 92 percent leased as of December 31, 1996.
During 1996, KE began construction of two buildings which will contain
approximately 106,000 net rentable square feet and will be ready for occupancy
in late 1997. While KE has initiated and expects to continue a pattern of
vertically integrated development of suburban office properties for its own
account, it may from time to time acquire developed properties which are
compatible with its properties in other markets in the Southeast and Southwest
that the Company considers favorable.
KE owns approximately 139 acres of unencumbered land held for development
and approximately 54 acres of unencumbered land held for sale. A majority of the
land held for development adjoins Office Buildings in seven Koger Centers which
have infrastructure, including roads and utilities, in place. KE intends over
time to develop and construct office buildings using this land and currently has
two buildings under construction on approximately 11 acres of land held for
development. KE expects to acquire additional land for development. In addition,
KE provides leasing, management and other customary tenant-related services for
the Koger Centers and for 22 office buildings containing approximately 1.3
million net rentable square feet owned by unaffiliated parties.
As the result of restrictive covenants contained in certain of the KE debt
instruments, it was effectively prevented from engaging in significant
development and acquisition activities as it could not incur additional debt in
excess of $5 million. Any development or acquisition activity had to be
internally financed. With the refinancing of this debt in December of 1996, KE
is no longer subject to such restrictive covenants and will be able to expand
its development and acquisition activities.
KE was incorporated in Florida in 1988 for the purpose of investing in
office buildings located in suburban office centers throughout the southeastern
and southwestern Untied States. In selecting its investments, KE generally
sought office buildings which had been substantially leased. In 1988, 1989 and
1990, KE purchased its initial Office Buildings from Koger Properties, Inc.
("KPI"), a real estate development company and the sponsor of KE. In September
1991, KPI filed a petition under Chapter 11 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the Middle District of Florida. In
April 1993, KE and KPI jointly proposed a plan of reorganization of KPI which
provided for the merger of KPI with and into KE (the "Merger"). In December
1993, the Merger was consummated, and KE succeeded to substantially all of the
assets of KPI, including 93 Office Buildings and approximately 295 acres of
unimproved land. All of the Office Buildings acquired by KE from KPI were
developed by KPI. In connection with the Merger, KE also acquired the
management, development and administrative organizations of KPI and its
subsidiaries. Prior to the Merger, KPI employees provided property management
and leasing services for the Office Buildings owned by KE and certain buildings
owned by third parties. KE has been self-administered since 1992 and
self-managed since the Merger.
1
As part of the Merger, KPI transferred to Southeast Properties Holding
Corporation, a Florida corporation and a wholly-owned subsidiary of KE
("Southeast"), all of KPI's debt and equity interests in The Koger Partnership,
Ltd., a Florida limited partnership ("TKPL"), which had also been the subject of
a Chapter 11 bankruptcy case. At the time of the Merger, TKPL owned 92 suburban
office buildings located in five metropolitan areas. Following the Merger, such
buildings were managed by KE, as delegee of Southeast, pursuant to a management
agreement between TKPL and Southeast. On July 31, 1995, TKPL sold its 92
buildings and parcels of related land to Koala Miami Realty Holding, Inc., Koala
Norfolk Realty Holding, Inc., Koala Raleigh Realty Holding, Inc., Koala Richmond
Realty Holding, Inc., and Koala Tampa Realty Holding, Inc. (collectively,
"Koala"), all of which are wholly owned by a co- mingled pension trust for which
Morgan Guaranty Trust Company of New York is the trustee and J.P. Morgan
Investment Management Inc. is the investment manager. Simultaneously with the
sale by TKPL of its properties, KE sold to certain Koala entities three
buildings and related parcels of land for an aggregate purchase price of $25.26
million. During 1996, Koala continued to hold an option to purchase from KE two
additional parcels of land in Miami, Florida. During February 1997, this option
was exercised and Koala purchased these two parcels of land for an aggregate
purchase price of $2.97 million.
In addition to managing its own properties, KE, through certain related
entities, provides property management services to third parties. In conjunction
with Koger Real Estate Services, Inc., a Florida corporation and a wholly-owned
subsidiary of KE ("KRES"), KE manages 21 office buildings owned by Centoff
Realty Company, Inc. ("Centoff"), a subsidiary of Morgan Guaranty Trust Company
of New York (KE, Southeast and KRES are hereafter referred to as the "Company").
During 1995 (prior to the sale by TKPL of its properties), KE acquired
$32.3 million in aggregate principal amount (subject to provisions permitting
prepayment at a discount) of promissory notes issued by TKPL to third parties
(the "TKPL Notes") for an aggregate purchase price of approximately $18.2
million. During the quarter ended September 30, 1995, TKPL retired the TKPL
Notes. KE recorded approximately $13.1 million of interest revenue on the TKPL
Notes during 1995.
The Company operates in a manner to qualify as a REIT under the provisions
of the Internal Revenue Code of 1986, as amended (the "Code" ). As a REIT, the
Company will not, with certain limited exceptions, be taxed at the corporate
level on taxable income distributed to its shareholders on a current basis. The
Company distributes at least 95 percent of its annual REIT taxable income (which
term is used herein as defined and modified in the Code) to its shareholders. To
qualify as a REIT, a corporation must meet certain substantive tests: (a) at
least 95 percent of its gross income must be derived from certain passive and
real estate sources; (b) at least 75 percent of its gross income must be derived
from certain real estate sources; (c) less than 30 percent of its gross income
must be derived from the sale or other disposition of certain items, including
certain real property held for less than four years; (d) at the close of each
calendar quarter, it must meet certain tests designed to ensure that its assets
consist principally (at least 75 percent by value) of real estate assets, cash
and cash equivalents and that its holdings of securities are adequately
diversified; (e) each year, it must distribute at least 95 percent of its REIT
taxable income; and (f) at no time during the second half of any calendar year
may the Company be "closely held" (i.e., have more than 50 percent in value of
its outstanding stock owned, directly, indirectly or constructively, by not more
than five individuals). The constructive ownership rules, among other things,
treat the shareholders of a corporation as owning proportionately any stock in
another corporation owned by the first corporation. Management fee revenue does
not qualify as real estate or passive income for purposes of determining whether
2
the Company has met the REIT requirements that at least 95 percent of the
Company's gross income be derived from certain real estate and passive sources
and that at least 75 percent of its gross income be derived from certain real
estate sources. Accordingly, in the event the Company derives income in excess
of five percent from management and other "non-real estate" and "non-passive"
activities, the Company would no longer qualify as a REIT for federal income tax
purposes and would be required to pay federal income taxes as a business
corporation.
Two major governmental tenants, when all of their respective departments
and agencies which lease space in the Company's buildings are combined, each
lease more than 10 percent of the net rentable area of the Company's buildings
and contribute more than 10 percent of the Company's annualized rentals as of
December 31, 1996. At that date, the State of Florida accounted for an aggregate
of 11.7 percent of the Company's total net rentable square feet leased and 13.4
percent of the Company's total annualized rental revenues. In addition, the
United States of America accounted for an aggregate of 10.1 percent of the
Company's total net rentable square feet leased and 10.5 percent of the
Company's total annualized rental revenues as of December 31, 1996. Some of the
Company's principal tenants are the State of Florida, the United States of
America, Blue Cross and Blue Shield of Florida, First Data Resources, Aetna Life
Insurance Company, Lumbermens Mutual Casualty Company, Norwest Bank of Texas,
the State of Texas, Travelers Insurance Company, and General Motors Acceptance
Corporation. Governmental tenants (including the State of Florida and the United
States of America), which account for 23.9 percent of the Company's leased
space, may be subject to budget reductions in times of recession and
governmental austerity. There can be no assurance that governmental
appropriations for rents may not be reduced. Additionally, certain
private-sector tenants which have contributed to the Company's rent stream may
reduce their current demands, or curtail their future need, for additional
office space.
Competition
The Company competes in the leasing of office space with a considerable
number of other realty concerns, including local, regional and national, some of
which have greater resources than the Company. Through its ownership and
management of suburban office parks, the Company seeks to attract tenants by
offering office space convenient to residential areas and away from the
congestion and attendant traffic problems of the downtown business districts. In
recent years local, regional and national concerns have built competing office
parks and single buildings in suburban areas in which the Company's centers are
located. In addition, the Company competes for tenants with large high-rise
office buildings generally located in the downtown business districts of these
metropolitan areas. Although competition from other lessors of office space
varies from city to city, the Company has been able to attain and maintain what
it considers satisfactory occupancy levels at satisfactory rental rates.
Investment Policies
Based on its improved financial structure and results as of the end of
1996, the Company is in a position to capitalize on some of its strengths, such
as the value of its franchise in the suburban office park market and its
operating systems, development expertise, acquisition expertise and unimproved
land available for development. During 1996, the Company committed to a plan to
enhance shareholder value by refinancing indebtedness and increasing growth. The
Company has completed its plan to refinance its indebtedness which eliminated
certain restrictive covenants which had limited the Company's ability to grow
through development and acquisitions. In addition, the Company has signed a
commitment for a $50 million revolving credit facility which will be available
3
to finance growth opportunities, subject to sufficient collateral being provided
to fund this facility which collateral is available. The plan also contemplates
the possible use by the Company of its existing inventory of 139 acres of land
held for development, most of which is partially or wholly improved with streets
and/or utilities and is located in various metropolitan areas where the Company
currently operates suburban office parks. The Company may also acquire existing
office buildings or land for development in other markets in the Southeast and
Southwest that the Company considers favorable.
The investment policies of the Company may be changed by its directors at
any time without notice to, or a vote of, security holders. Although, the
Company has no current policy which limits the percentage of its assets which
may be invested in any one type of investment or the geographic areas in which
the Company may acquire properties, the Company intends to continue to operate
so as to qualify for tax treatment as a REIT. Although it has no current plans
to do so, the Company may in the future invest in other types of office
buildings, apartment buildings, shopping centers, and other properties. The
Company also may invest in the securities (including mortgages) of companies
primarily engaged in real estate activities; however, it does not intend to
become an investment company regulated under the Investment Company Act of 1940.
For the year ended December 31, 1996, all of the Company's rental revenues
were derived from the buildings purchased from KPI or buildings acquired
pursuant to the Merger. The Company's 1996 interest revenues were derived from
temporary cash investments.
Employees
In connection with its current real estate operations and property
management agreements, the Company has a combined financial, administrative,
leasing, and center maintenance staff of 220 employees. A resident general
manager is responsible for the leasing and operations of all buildings in a
center or city. The Company has approximately 86 employees who perform
maintenance activities.
Item 2. PROPERTIES
General
As of December 31, 1996, the Company owned 215 office buildings located in
17 Koger Centers in the 13 metropolitan areas of Jacksonville, Orlando, St.
Petersburg, and Tallahassee, Florida; Atlanta, Georgia; Charlotte and
Greensboro, North Carolina; Tulsa, Oklahoma; Greenville, South Carolina;
Memphis, Tennessee; and Austin, El Paso, and San Antonio, Texas. In addition,
the Company had two buildings which were under construction. The Koger Centers
have been developed in campus-like settings with extensive landscaping and ample
tenant parking. The buildings are generally one to five-story structures of
contemporary design and constructed of masonry, concrete and steel, with facings
of brick, concrete and glass. The Koger Centers are generally located with easy
access, via expressways, to the central business district and to shopping and
residential areas in the respective communities. The properties are well
maintained and adequately covered by insurance.
Leases on the Office Buildings vary between net leases (under which the
tenant pays some operating expenses, such as utilities, insurance and repairs)
and gross leases (under which the Company pays all such items). Most leases are
on a gross basis and are for terms generally ranging from three to five years.
In some instances, such as when a tenant rents the entire building, leases are
4
for terms of up to 20 years. As of December 31, 1996, the Office Buildings were
on average 92 percent leased and the average annual rent per net rentable square
foot leased was $14.24. The buildings are occupied by numerous tenants, many of
whom lease relatively small amounts of space, conducting a broad range of
commercial activities.
New leases and renewals of existing leases are negotiated at the current
market rate at the date of execution. The Company endeavors to include
escalation provisions in all of its gross leases. As of December 31, 1996,
approximately 42 percent of the Company's annualized gross rental revenues were
derived from existing leases containing rental escalation provisions based upon
changes in the Consumer Price Index (some of which contain maximum rates of
increases); approximately 52 percent of such revenues were derived from leases
containing escalation provisions based upon real estate tax and operating
expense increases; and approximately 6 percent of such revenues were derived
from leases without escalation provisions. Some of the Company's leases contain
options which allow the lessee to renew for varying periods, generally at the
same rental rate and subject, in most instances, to Consumer Price Index
escalation provisions.
The Company owns approximately 200 acres of unimproved land (194 acres of
which are suitable for development) located in the metropolitan areas of
Jacksonville, Miami, Orlando and St. Petersburg, Florida; Atlanta, Georgia;
Charlotte and Greensboro, North Carolina; Tulsa, Oklahoma; Columbia and
Greenville, South Carolina; Memphis, Tennessee; Austin and San Antonio, Texas;
and Richmond, Virginia. Each of these parcels of land has been partially or
wholly developed with streets and/or utilities. The Company currently has two
buildings under construction on approximately 11 acres of this unimproved land.
5
Property Location and Other Information
The following table sets forth information relating to the properties
owned by the Company as of December 31, 1996.
Average Land
Number Age of Net Improved Unimproved
of Buildings Rentable with Bldgs. Land
Location Buildings (in Years) (1) Sq. Ft. (In Acres) (In Acres)
- -------- --------- -------------- ------------ ------------- -------------
Atlanta Chamblee 22 16 947,920 76.2 2.5
Atlanta Gwinnett 31.0
Austin 12 16 370,860 29.6 1.8
Charlotte Carmel 1 5 109,600 7.6 27.0(2)
Charlotte East 11 16 468,820 39.9 3.9
Columbia Spring Valley 1.0
El Paso 14 24 251,930 19.6
Greensboro South 13 14 610,470 46.0
Greensboro Wendover 18.5
Greenville 8 14 290,560 24.7 4.5
Jacksonville Baymeadows 4 6 468,000 34.6 13.3
Jacksonville Central 31 24 666,500 47.2 1.6
Memphis Germantown 3 8 258,400 18.4 16.2(3)
Miami 8.1(4)
Orlando Central 22 25 565,220 46.0
Orlando University 2 8 159,600 11.6 15.5
Richmond South 23.0
San Antonio 26 19 788,670 63.5 7.2
St. Petersburg 15 16 519,320 64.4 11.0
Tallahassee Apalachee Pkwy 14 20 408,500 33.7
Tallahassee Capital Circle 4 7 300,700 23.3
Tulsa 13 17 476,280 36.0 13.4
---- ---------- ------ ------
Total 215 7,661,350 622.3 199.5
=== ========= ===== =====
Average 16
==
(1) The age of each building was weighted by the net rentable square feet for
such building to determine the weighted average age of (a) the buildings in
each Koger Center and (b) all buildings owned by the Company.
(2) The Company currently has a building under construction on approximately
7.4 acres of this parcel.
(3) The Company currently has a building under construction on approximately
3.9 acres of this parcel.
(4) This unimproved land parcel was sold to Koala for an aggregate sales price
of $2.97 million during February 1997.
6
Percent Leased and Average Rental Rates
The following table sets forth, with respect to each Koger Center, the
number of buildings, number of leases, net rentable square feet, percent leased,
and the average annual rent per net rentable square foot leased, in each case as
of December 31, 1996.
Net Average
Number Number Rentable Annual
of of Square Percent Rent Per
Koger Center Buildings Leases Feet Leased (1) Square Foot(2)
- ------------ --------- ---------- ------------ ---------- --------------
Atlanta Chamblee 22 179 947,920 97% $15.11
Austin 12 186 370,860 97% 17.06
Charlotte Carmel 1 21 109,600 100% 15.28
Charlotte East 11 212 468,820 72% 13.15
El Paso 14 192 251,930 96% 14.24
Greensboro South 13 180 610,470 93% 13.70
Greenville 8 145 290,560 87% 14.58
Jacksonville Baymeadows 4 30 468,000 100% 15.63
Jacksonville Central 31 242 666,500 89% 11.68
Memphis Germantown 3 56 258,400 99% 17.38
Orlando Central 22 186 565,220 90% 14.49
Orlando University 2 47 159,600 98% 16.62
San Antonio 26 320 788,670 95% 12.40
St. Petersburg 15 187 519,320 95% 13.05
Tallahassee Apalachee Pkwy 14 88 408,500 90% 16.34
Tallahassee Capital Circle 4 11 300,700 96% 17.12
Tulsa 13 176 476,280 77% 10.39
---- ------- ----------
Total 215 2,458 7,661,350
=== ====== =========
Weighted Average 92% $14.24
==== ======
(1) The percent leased rates have been calculated by dividing total net
rentable square feet leased in a building by net rentable square feet in
such building, which excludes public or common areas.
(2) Rental rates are computed by dividing (a) total annualized base rents
(which excludes expense pass-throughs and reimbursements) for a Koger
Center as of December 31, 1996 by (b) the net rentable square feet
applicable to such total annualized rents.
7
Lease Expirations on the Company's Properties
The following schedule sets forth with respect to all of the Company's
office buildings (a) the number of leases which will expire in calendar years
1997 through 2005, (b) the total net rentable area in square feet covered by
such leases, (c) the percentage of total net rentable square feet leased
represented by such leases, (d) the average annual rent per square foot for such
leases, (e) the current annual rental represented by such leases, and (f) the
percentage of gross annual rental contributed by such leases. This information
is based on the buildings owned by the Company on December 31, 1996 and on the
terms of leases in effect as of December 31, 1996, on the basis of then existing
base rentals, and without regard to the exercise of options to renew.
Furthermore, the information below does not reflect that some leases have
provisions for early termination for various reasons, including, in the case of
government entities, lack of budget appropriations. Leases were renewed on
approximately 63 percent, 67 percent and 61 percent of the Company's net
rentable square feet which were scheduled to expire during 1996, 1995 and 1994,
respectively.
Percentage of Average Percentage
Total Square Annual Rent Total of Total
Number of Number of Feet Leased per Square Annualized Annual. Rents
Leases Square Feet Represented by Foot Under Rents Under Represented by
Period Expiring Expiring Expiring Leases Expiring Leases Expiring Leases Expiring Leases
- ------ ------------- --------------- --------------- --------------- --------------- ---------------
1997 1,156 1,866,554 26.5% $14.05 $ 26,225,375 26.1%
1998 551 1,534,716 21.8% 13.64 20,930,653 20.8%
1999 458 1,226,360 17.4% 13.29 16,303,197 16.2%
2000 139 697,596 9.9% 14.92 10,406,515 10.4%
2001 104 930,887 13.2% 15.28 14,223,490 14.2%
2002 14 169,296 2.4% 13.63 2,306,712 2.3%
2003 13 112,406 1.6% 13.51 1,518,905 1.5%
2004 4 77,361 1.1% 14.02 1,084,439 1.1%
2005 4 29,673 0.4% 12.33 366,001 0.4%
Other 15 404,142 5.7% 17.36 7,015,240 7.0%
-------- ---------- -------- --------------- --------
Total 2,458 7,048,991 100.0% $14.24 $100,380,527 100.0%
====== ========== ====== ====== ============ ======
Building Improvements, Tenant Improvements and Deferred Tenant Costs on the
Company's Properties
The following table sets forth certain information with respect to the
building improvements made, and tenant improvement costs and deferred tenant
costs (leasing commissions and tenant relocation costs) incurred, by the Company
during the three years ended December 31, 1996. The information set forth below
is not necessarily indicative of future expenditures for these items.
Number Building Improvements Tenant Improvements Deferred Tenant Costs
of Office Per Net Sq. Per Net Sq. Per Net Sq.
Year Buildings Total Ft. Owned Total Ft. Owned Total Ft. Owned
- ------ -------------------------- --------- ------------------ --------------------------- ---------
1994 219 $3,749,000 $0.47 $7,334,000 $0.93 $1,112,000 $0.14
1995(1) 216 2,991,000 0.39 8,592,000 1.12 1,060,000 0.14
1996(2) 215 2,795,000 0.36 7,873,000 1.03 1,862,000 0.24
(1) Excludes the three buildings sold on July 31, 1995.
(2) Increase in deferred tenant costs due to $799,000 commission paid for 10
year lease on 142,800 net rentable square feet which takes effect in 1997.
8
Fixed Rate Indebtedness on the Company's Properties
The following table sets forth with respect to each Koger Center the
principal amount (dollars in thousands) of, and the weighted average interest
rate on, the indebtedness of the Company having a fixed interest rate and
encumbering the Company's properties in such Koger Center as of December 31,
1996.
Weighted
Mortgage Average
Loan Interest
Koger Center Balance Rate
- ------------- ----------- ---------
Atlanta Chamblee $ 14,809 8.75%
Austin 17,000 8.33%
Charlotte Carmel 0 --
Charlotte East 0 --
El Paso 9,000 8.33%
Greensboro South 0 --
Greenville 11,000 8.33%
Jacksonville Baymeadows 27,500 8.33%
Jacksonville Central 401 9.75%
Memphis Germantown 22,018 8.80%
Orlando Central 25,000 8.33%
Orlando University 0 --
San Antonio 20,203 8.25%
St. Petersburg 17,194 8.25%
Tallahassee Apalachee Pkwy 17,194 8.25%
Tallahassee Capital Circle 20,582 8.36%
Tulsa 1,512 9.95%
----
Total $203,413 8.41%
======== ====
For additional information on these loans see Note 4, "Mortgages and Loans
Payable" of the Notes to Consolidated Financial Statements.
Indebtedness with Variable Interest Rates
As of December 31, 1996, the Company had no indebtedness having variable
interest rates and encumbering the Company's properties. The following table
sets forth historical information with respect to indebtedness having variable
interest rates (dollars in thousands):
Approximate Approximate
Balance Weighted Avg. Maximum Average Wtg. Avg Int
Year Ended at End Int Rate at Amount Amount Rate During
December 31 of Period End of Period Outstanding Outstanding the Period
- ----------- --------- --------------- ----------- ----------- -------------
1996 $ 0 - $22,276 $18,280 9.3%
1995 22,276 9.5% 58,352 47,945 8.4%
1994 58,352 9.1% 59,028 58,718 7.9%
9
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is listed on the American Stock Exchange. The
high and low closing sales prices for the periods indicated in the table below
were:
Years
1996 1995 1994
--------------------------- -------------------------- --------------------------
Quarter Ended High Low High Low High Low
- ------------- ---------- ------- --------- ------- --------- -----
March 31 $12 1/4 $10 3/4 $ 7 7/8 $6 3/4 $ 8 1/2 $6 1/2
June 30 13 3/8 11 9 6 3/4 9 5/8 6 3/8
September 30 16 13 10 1/8 8 5/8 10 1/2 8 1/4
December 31 18 3/4 15 1/8 10 5/8 9 1/8 8 7/8 6 7/8
The Company intends that any dividend paid in respect of its common stock
during the last quarter of each year will, if necessary, be adjusted to satisfy
the REIT qualification requirement that at least 95 percent of the Company's
REIT taxable income for such taxable year be distributed. The Company did not
pay any dividends during the three years ended December 31, 1996. During
December 1996, the Company's Board of Directors declared a quarterly dividend of
$0.05 per share payable on February 10, 1997, to shareholders of record on
January 6, 1997.
On February 28, 1997, there were approximately 945 shareholders of record
and the closing price of the Company's common stock on the American Stock
Exchange was $17.875.
10
Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements (as defined below) and the
notes thereto.
(In thousands except per share and property data)
Income Information 1996 1995 1994 1993* 1992
----------- ---------- ----------- --------- -------
Rental revenues and other rental services $ 98,805 $ 95,443 $ 94,388 $ 46,108 $ 45,957
Interest revenues 1,951 14,440 1,062 206 231
Total revenues 104,072 125,750 100,376 46,406 46,188
Property operating expenses 41,597 40,830 39,711 21,034 19,579
Depreciation and amortization 21,127 19,102 16,728 8,958 8,089
Mortgage and loan interest 18,701 23,708 25,872 11,471 11,530
Net income 10,501 28,990 4,215 2,452 933
Earnings per common share - primary .54 1.61 .24 .18 .07
Weighted average shares outstanding - primary 19,500 18,011 17,719 13,352 13,220
Balance Sheet Information
Operating properties (before depreciation) $ 582,972 $ 571,313 $ 578,237 $ 566,770 $ 311,286
Undeveloped land 27,108 30,281 36,012 40,036 0
Total assets 584,666 578,756 613,806 615,089 396,841
Mortgages and loans payable 203,044 254,909 323,765 330,625 155,362
Shareholders' equity 364,135 310,697 280,601 275,450 235,514
Other Information
Funds from operations (1) $ 33,154 $ 36,707 $ 23,475 $ 11,075 $ 10,674
Income before interest, income taxes,
depreciation and amortization $ 51,144 $ 71,866 $ 47,042 $ 22,881 $ 20,552
Number of buildings (at end of period) 215 216 219 219 126
Percent leased (at end of period) 92% 91% 90% 88% 88%
* On December 21, 1993, KPI was merged with and into the Company.
(1) The Company believes that Funds from Operations is one measure of the
performance of an equity REIT. Funds from Operations should not be
considered as an alternative to net income as an indication of the
Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is it necessarily indicative of sufficient cash flow to fund
all of the Company's needs. Funds from Operations is calculated as follows
(in thousands):
1996 1995 1994 1993 1992
-------- --------- --------- --------- -------
Net income $ 10,501 $28,990 $ 4,215 $ 2,452 $ 933
Depreciation - real estate 19,538 17,363 15,202 8,403 7,673
Amortization - deferred tenant costs 929 656 452 197 86
Amortization - goodwill 171 504 665 23
Litigation costs 424 176 1,902
Loss on sale or disposition of assets 497 255 43
Provision for loss on land held for sale 970 996
Gain on TKPL note to Southeast (292) (11,288)
Loss/(gain) on early retirement of debt 1,386 (919)
Provision for losses on loans to KPI 1,982
------------- ------------- ----------------------------------
Funds from Operations $ 33,154 $36,707 $ 23,475 $ 11,075 $10,674
======= ======= ======= ======= =======
The 1995 calculated Funds from Operations includes $13,066 of interest
revenue associated with the TKPL mortgage notes which KE acquired during
1995. These mortgage notes were retired by TKPL during 1995.
11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the selected
financial data and the consolidated financial statements (the "Consolidated
Financial Statements") appearing elsewhere in this report. Historical results
and percentage relationships in the Consolidated Financial Statements, including
trends which might appear, should not be taken as indicative of future
operations or financial position. The Consolidated Financial Statements include
the accounts of KE, Southeast and KRES (collectively, the "Company").
GENERAL
The Company has prepared, and is responsible for, the accompanying
Consolidated Financial Statements and the related consolidated financial
information included in this report. Such Consolidated Financial Statements were
prepared in accordance with generally accepted accounting principles and include
amounts determined using management's best judgments and estimates of the
expected effects of events and transactions that are being accounted for
currently.
The Company's independent auditors have audited the accompanying
Consolidated Financial Statements. The objective of their audit, conducted in
accordance with generally accepted auditing standards, was to express an opinion
on the fairness of presentation, in all material respects, of the Company's
consolidated financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. They evaluated the
Company's internal control structure to the extent considered necessary by them
to determine the audit procedures required to support their report on the
Consolidated Financial Statements and not to provide assurance on such
structure.
The Company maintains accounting and other control systems which
management believes provide reasonable assurance that the Company's assets are
safeguarded and that the Company's books and records reflect the authorized
transactions of the Company, although there are inherent limitations in any
internal control structure, as well as cost versus benefit considerations. The
Audit Committee of the Company's Board of Directors, which is composed
exclusively of directors who are not officers of the Company, directs matters
relating to audit functions, annually appoints the auditors subject to
ratification of the Company's Board of Directors, reviews the auditors'
independence, reviews the scope and results of the annual audit, and
periodically reviews the adequacy of the Company's internal control structure.
RECENT DEVELOPMENTS
On October 10, 1996, the Company completed a private placement of three
million shares of its common stock to an affiliate of Apollo Real Estate
Investment Fund II, L.P. for an aggregate sales price of $43.5 million. The
Company applied the proceeds from this sale to the repayment of indebtedness
with an average interest rate of approximately 8 percent.
On December 18, 1996, the Company closed on $175.9 million of a $190
million non-recourse loan with Northwestern Mutual Life Insurance Company
("Northwestern") which is secured by 10 office parks. This loan is divided into
(i) a tranche in the amount of $100.5 million ($86.4 million which has been
drawn) with a 10 year maturity and an interest rate of 8.25 percent and (ii) a
tranche in the amount of $89.5 million with a maturity of 12 years and an
interest rate of 8.33 percent.
12
RESULTS OF OPERATIONS
Rental Revenues. Rental revenues increased $3,477,000 from the year ended
December 31, 1995 to the year ended December 31, 1996. This increase resulted
primarily from (i) increases in the percent leased rate and the Company's
average rental rate and (ii) increases in revenues from operating cost
escalations and other items passed through to tenants. The effect of these
increases was partially offset by the sale of three buildings during 1995, which
is described below. For 1995, rental revenues increased $1,733,000 from the year
ended December 31, 1994. This increase resulted primarily from increases in the
percent leased rate and the average rental rate in the Company's buildings,
which increases were partially offset by the sale of three buildings (containing
233,980 net rentable square feet) on July 31, 1995. During 1995, the Company
earned $2,228,000 in rental revenues from these three buildings through the date
of sale. As of December 31, 1996, the Company's buildings were on average 92
percent leased. As of December 31, 1995 and 1994, the buildings owned by the
Company were on average 91 and 90 percent leased, respectively.
Management Fee Revenues. Management fee revenues decreased $942,000 for
1996 as compared to 1995. This decrease was due primarily to the termination of
the management agreement with TKPL which resulted from the sale of all of TKPL's
operating properties during 1995. The Company earned $1,685,000 in management
fee revenue from this contract during 1995. This decrease was partially offset
by (i) an increase in fees earned for construction management services and (ii)
an increase in fees earned under the management contract with Centoff.
Management fee revenues decreased by $1,302,000 for 1995 as compared to 1994.
This decrease was primarily due to the termination of the management agreement
with TKPL, as previously described. The effect of this decrease was partially
offset by an increase in the fees earned under the management contract with
Centoff. On May 5, 1994, third party management contracts on two buildings
terminated due to a change of ownership of such buildings. Management fee
revenue related to the management of such buildings totalled approximately
$106,000 during 1994.
Interest Revenues. Interest revenues decreased $12,489,000 for 1996 as
compared to 1995. This decrease was due to the interest revenue earned during
1995 from the TKPL Notes ($13,066,000). For 1995, interest revenues increased
$13,378,000 from the year ended December 31, 1994. This increase was due to (i)
the interest revenue associated with the TKPL Notes ($13,066,000), (ii) the
higher interest rates earned on the Company's temporary cash investments and
(iii) the higher average balance of temporary cash investments.
Gain on TKPL Note to Southeast. During 1995, Southeast received
approximately $17.7 million as a partial repayment of an unsecured note, issued
by TKPL to KPI (and subsequently transferred by KPI to Southeast in connection
with the Merger) in an original principal amount of approximately $31 million.
This TKPL unsecured note had been valued and carried on the books of the Company
at $0. A gain of $11,288,000 was recorded on this repayment, which was net of a
write-off of unamortized cost in excess of fair value of net assets acquired
from KPI of $6,412,000.
Expenses. Property operating expenses include such charges as utilities,
real estate taxes, janitorial, maintenance, property insurance, provision for
uncollectible rents, and management costs. During 1996, property operating
expenses increased by $767,000 or 1.9 percent, compared to 1995, primarily due
to increases in maintenance costs. During 1995, property operating expenses
increased by $1,119,000 or 2.8 percent, compared to 1994, primarily due to the
13
increase in management cost for the Company's buildings. This increase in
management cost was primarily due to the accrued compensation expense ($876,000)
related to stock appreciation rights granted in conjunction with stock options.
For 1996, property operating expenses as a percentage of total rental revenues
were 42.1 percent. For 1995 and 1994, property operating expenses as a
percentage of total rental revenues were 42.8 percent and 42.1 percent,
respectively.
Depreciation expense has been calculated on the straight-line method based
upon the useful lives of the Company's depreciable assets, generally 3 to 40
years. For 1996, depreciation expense increased $2,208,000 or 12.5 percent
compared to the prior year, due to improvements made to the properties owned by
the Company during 1996 and 1995. For 1995, depreciation expense increased
$2,222,000 or 14.4 percent compared to the prior year, due to improvements made
to the properties owned by the Company during 1995 and 1994.
Amortization expense decreased by $183,000 during 1996 compared to 1995,
due primarily to the $6,412,000 of unamortized cost in excess of fair value of
net assets acquired which was written off and offset against proceeds received
by Southeast from the TKPL unsecured note during 1995. For 1995, amortization
expense increased $152,000 compared to the prior year, due to amounts incurred
for deferred tenant costs.
Interest expense decreased by $5,007,000 during 1996 compared to 1995,
primarily due to the reduction in the average balance of mortgages and loans
payable. Interest expense decreased by $2,164,000 during 1995 compared to 1994,
primarily due to (i) the reduction in the average balance of mortgages and loans
payable and (ii) the forgiveness of accrued interest on certain debt due to
early repayment ($1,362,000), which forgiveness was partially offset by yield
maintenance payments required due to early repayment of certain mortgages
($882,000). During 1996, 1995, and 1994, the weighted average interest rate on
the Company's variable rate loans was 9.3 percent, 8.4 percent, and 7.9 percent,
respectively. The Company's average outstanding amount under such loans during
1996, 1995, and 1994 was $18,280,000, $47,945,000 and $58,718,000, respectively.
General and administrative expenses were 1.1 percent, 1.2 percent, and 1.0
percent of average invested assets for 1996, 1995 and 1994, respectively. For
1996, general and administrative expenses decreased $936,000 compared to 1995,
primarily due to (i) decreases in the accrual for compensation expense related
to stock appreciation rights granted in conjunction with stock options, (ii)
decreases in professional and legal fees incurred, (iii) decreases in certain
insurance costs, and (iv) decreases in the accrual for the Company's
contribution to the 401(k) Plan. For 1995, general and administrative expenses
increased $1,193,000 compared to the prior year, primarily due to (i) increases
in the accrual for compensation expense related to stock appreciation rights
granted in conjunction with stock options ($423,000), (ii) the accrual for
expense related to the Supplemental Executive Retirement Plan adopted during
1995 ($184,000), and (iii) increases in compensation costs.
For 1996, direct costs of management contracts decreased $953,000,
compared to 1995, due to the termination of the management agreement with TKPL
which resulted from the sale of all of TKPL's operating properties during 1995.
The Company incurred $1,601,000 in costs pursuant to this contract during 1995.
This decrease was partially offset by (i) an increase in costs associated with
providing construction management services and (ii) an increase in costs for
providing services under the management agreement with Centoff. Direct costs of
management contracts decreased by $812,000 for 1995, compared to 1994, due to
the termination of the management agreement with TKPL, as previously described.
The effect of this decrease was partially offset by the increase in costs for
providing services under the management agreement with Centoff.
14
For 1996, undeveloped land costs remained basically unchanged from those
incurred during 1995. Real estate taxes and other costs related to the Company's
unimproved land decreased $155,000 during 1995, compared to 1994, due to (i) the
sale of a parcel of unimproved land (approximately 23 acres) during October 1994
($77,000) and (ii) the sale of two parcels of unimproved land (approximately 44
acres) on July 31, 1995 ($22,000).
During 1994, the Company settled a pending class action proceeding (the
"Securities Action"). The Company recorded a provision of $1,685,000 relating to
the settlement of the Securities Action and incurred additional costs related to
such settlement which totalled $217,000.
During 1995, the Company recorded a provision for loss on land held for
sale which totalled $970,000. This provision for loss was based upon a contract
for the sale of a land parcel (approximately 8.1 acres) which is located in
Miami, Florida adjacent to an office center sold to Koala. Contingent upon the
assurances which can be received from the local government concerning the square
footage of office buildings which can be constructed on this land parcel, the
contract price ranges between $2,000,000 and $2,970,000. In 1994, the Company
recorded a provision for loss on land held for sale which totalled $996,000.
This provision for loss was based upon contracts for the sale of two land
parcels (approximately 53 acres). The sale of one of these land parcels
(approximately 23 acres) was consummated during 1994, while the contract for the
sale of the other land parcel expired.
Management periodically reviews its investment in properties for evidence
of other than temporary impairments in value. Factors considered consist of, but
are not limited to, the following: current and projected occupancy rates, market
conditions in different geographic regions, and management's plans with respect
to its properties. Where management concludes that expected cash flows will not
enable the Company to recover the carrying amount of its investments, losses are
recorded and asset values are reduced. No such impairments in value existed
during 1996, 1995 or 1994.
Operating Results. Net income totalled $10,501,000, $28,990,000 and
$4,215,000 for 1996, 1995 and 1994, respectively. For 1996, net income decreased
$18,489,000 over the prior year due primarily to (i) the interest revenue earned
during 1995 on the TKPL mortgage notes which were retired by TKPL during 1995
and (ii) the gain associated with the partial repayment of a TKPL note to
Southeast during 1995. For 1995, net income increased $24,775,000 over the prior
year due to (i) the interest revenue associated with KE's investment in the TKPL
Notes, (ii) the gain associated with the partial repayment of a note owing from
TKPL to Southeast, (iii) the reduction in mortgage and loan interest, (iv) the
increase in rental revenues, and (v) the gain on early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. During the year ended December 31, 1996, the Company
generated approximately $35.9 million in net cash from operating activities. The
Company's primary internal sources of cash are (i) the collection of rents from
buildings owned by the Company and (ii) the receipt of management fees paid to
the Company in respect of properties managed on behalf of others. As a REIT, the
Company is required to pay out annually, as dividends, 95 percent of its REIT
taxable income (which, due to non-cash charges, including provision for losses
and depreciation, may be substantially less than cash flow). In the past, the
Company has paid out dividends in amounts at least equal to its REIT taxable
income. The Company believes that its cash provided by operating activities will
be sufficient to cover debt service payments and to pay the dividends required
to maintain REIT status through 1997.
15
The level of cash flow generated by rents depends primarily on the
occupancy rates of the Company's buildings and changes in rental rates on new
and renewed leases and under escalation provisions. As of December 31, 1996,
approximately 94 percent of the Company's annualized gross rental revenues were
derived from existing leases containing provisions for rent escalations.
However, market conditions may prevent the Company from escalating rents under
such provisions.
As of December 31, 1996, leases representing approximately 26.1 percent of
the gross annualized rent from the Company's properties, without regard to the
exercise of options to renew, were due to expire during 1997. This represents
1,156 leases for space in buildings located in all of the 17 Koger Centers in
which the Company owns buildings. Certain of these tenants may not renew their
leases or may reduce their demand for space. Leases were renewed on
approximately 63 percent, 67 percent and 61 percent of the Company's net
rentable square feet which were scheduled to expire during 1996, 1995 and 1994,
respectively. For those leases which renewed during 1996, the average rental
rate increased from $14.13 to $15.00. However, current market conditions in
certain markets may require that rental rates at which leases are renewed or at
which vacated space is leased be lower than rental rates under existing leases.
Based upon the significant amount of leases which will expire during 1996 and
the competition for tenants in the markets in which the Company operates, the
Company has offered, and expects to continue to offer, incentives to certain new
and renewal tenants. These incentives may include the payment of tenant
improvement costs and, in certain markets, reduced rents during initial lease
periods.
During 1994, 1995, and 1996, the Company has benefited from improving
economic conditions and reduced vacancy levels for office buildings in many of
the metropolitan areas in which the Company owns buildings. The Company believes
that the southeastern and southwestern regions of the United States provide
significant economic growth potential due to their diverse regional economies,
expanding metropolitan areas, skilled work force and moderate labor costs.
However, the Company cannot predict whether such economic growth will continue.
Cash flow from operations could be reduced if economic growth were not to
continue in the Company's markets and if this resulted in lower occupancy rates
for the Company's buildings.
Governmental tenants (including the State of Florida and the United States
of America) which accounted for 23.9 percent of the Company's leased space as of
December 31, 1996, may be subject to budget reductions in times of recession and
governmental austerity measures. Consequently, there can be no assurance that
governmental appropriations for rents may not be reduced. Additionally, certain
of the private-sector tenants which have contributed to the Company's rent
stream may reduce their current demands, or curtail their future need, for
additional office space.
At the end of 1996, the Company had management contracts for the
management of 22 commercial office properties. On March 31, 1996, a management
agreement to manage 21 commercial office buildings owned by Centoff was
automatically extended to March 31, 1997. This management agreement provides
that, so long as no default has occurred, the management agreement will be
automatically extended from year to year until such time as the management
agreement is terminated. The Company earned fees of $2,259,000 from this
management agreement during 1996. Another agreement to manage one commercial
office building has been extended on a month to month basis. During 1996, the
Company earned management fees of $92,000 for the management of this building.
With the sale of TKPL's 92 buildings to Koala during 1995, Southeast's
management agreement with TKPL ended.
16
Investing Activities. At December 31, 1996, substantially all of the
Company's invested assets were in real properties. Improvements to the Company's
existing properties have been financed through internal operations. During 1996,
the Company's expenditures for improvements to existing properties decreased by
$1.8 million over the prior year, primarily due to reductions in expenditures
for tenant improvements and energy management improvements. During 1996, the
Company did not purchase any buildings.
The Company has started the construction of two buildings, on
approximately 11.3 acres of undeveloped land, which will contain approximately
106,000 net rentable square feet. Expenditures for construction of these two
buildings are expected to total approximately $7.6 million, excluding land and
tenant improvement costs.
During 1995, KE acquired $32.3 million in aggregate principal amount of
TKPL Notes for an aggregate purchase price of approximately $18.2 million.
During the quarter ended September 30, 1995, TKPL retired the TKPL Notes. KE
recorded approximately $13.1 million of interest revenue on the TKPL Notes
during 1995.
During 1996 and 1995, Southeast received $292,000 and $17.7 million,
respectively, as partial repayment of an unsecured note issued by TKPL to KPI
(and subsequently transferred by KPI to Southeast in connection with the Merger)
in an original principal amount of approximately $31 million.
During 1996, the Company sold a 30 acre land parcel located in Birmingham,
Alabama for $1,263,000, net of selling costs. During 1995, the Company sold to
Koala three office buildings (containing 233,980 net rentable square feet), two
undeveloped land parcels (totalling approximately 44 acres), and certain other
assets for approximately $25,267,000, net of selling costs.
Based on its improved financial structure and results, the Company is in a
position to capitalize on some of its strengths, such as the value of its
franchise in the suburban office park market and its operating systems,
development expertise, acquisition expertise and unimproved land available for
development. The Company has committed to a plan to enhance shareholder value by
refinancing indebtedness and increasing growth. The Company has completed the
refinancing of its indebtedness to eliminate certain restrictive covenants which
had limited the Company's ability to grow through development and acquisitions.
In addition, the Company has signed a commitment for a new bank revolving credit
facility which will be available to finance growth opportunities. The plan also
contemplates the possible use by the Company of its existing inventory of 139
acres of land held for development, most of which is partially or wholly
improved with streets and/or utilities and is located in various metropolitan
areas where the Company currently operates suburban office parks. The Company
may also acquire existing office buildings or land for development in other
markets in the Southeast and Southwest that the Company considers favorable.
Financing Activities. Historically, the Company's primary external sources
of cash have been in the form of bank borrowings, mortgage financings, and
public and private offerings of equity securities. The proceeds of these
financings were used by the Company to acquire buildings or to refinance debt.
The Company has no open lines of credit, but had cash and temporary cash
investments which totalled $35,715,000 at December 31, 1996.
17
On October 10, 1996, the Company completed a private placement of three
million shares of its common stock to an affiliate of Apollo Real Estate
Investment Fund II, L.P. for an aggregate sales price of $43.5 million. The
Company applied the proceeds from this sale to the repayment of indebtedness
with an average interest rate of approximately 8 percent.
On December 18, 1996, the Company closed on $175.9 million of a $190
million non-recourse loan with Northwestern which is secured by 10 office parks.
This loan is divided into (i) a tranche in the amount of $100.5 million ($86.4
million which has been drawn) with a 10 year maturity and an interest rate of
8.25 percent and (ii) a tranche in the amount of $89.5 million with a maturity
of 12 years and an interest rate of 8.33 percent. The Company plans to draw the
remaining loan proceeds when the existing indebtedness on two buildings matures.
Amortization with respect to this indebtedness is based on equal monthly
installments over a 25 year amortization period. This indebtedness requires the
Company to maintain certain financial ratios.
With the proceeds of the private placement of common stock and the
Northwestern loan, the Company repaid all of the restructured debt acquired
pursuant to the Merger and repaid all of its bank debt. The repayment of this
indebtedness eliminated the restrictive covenants which have limited the
Company's ability to grow. At December 31, 1996, the Company had 82 buildings
(containing approximately three million net rentable square feet) which were
unencumbered.
Based upon interest rates in effect on December 31, 1996 and assuming only
scheduled principal payments for 1997, management expects total interest expense
for 1997 to decrease to approximately $16.3 million. The high degree of leverage
of the Company, when compared to other REITs, may result in the impairment of
its ability to obtain additional financing, to make acquisitions, and to take
advantage of significant business opportunities that may arise, including
activities which require significant funding. This high degree of leverage may
also increase the vulnerability of the Company to adverse general economic and
industry conditions and to increased competitive pressures, especially rental
pressures from less highly leveraged competitors.
Loan maturities and normal amortization of mortgages and loans payable are
expected to total approximately $11.3 million over the next twelve months. The
Company plans to draw $8.3 million of the remaining Northwestern loan proceeds
when existing indebtedness on a building matures in 1997 and believes that the
remainder of these obligations will be paid from cash provided by operations or
from current cash balances. Significant maturities of the Company's mortgages
and loans payable do not begin to occur until 2006.
In order to generate funds sufficient to make principal payments in
respect of indebtedness of the Company over the long term, as well as necessary
capital and tenant acquisition expenditures, the Company will be required to
successfully refinance its indebtedness or procure additional equity capital.
However, there can be no assurance that any such refinancing or equity financing
will be achieved or will generate adequate funds on a timely basis for these
purposes. If additional funds are raised by issuing equity securities, further
dilution to existing shareholders may result. Unfavorable conditions in the
financial markets, the degree of leverage of the Company and various other
factors may limit the ability of the Company to successfully undertake any such
financings, and no assurance can be given as to the availability of alternative
sources of funds. On August 22, 1994, the Company filed a shelf registration
statement with respect to the possible issuance of up to $100,000,000 of its
common stock and/or preferred stock. The Company has not yet issued any equity
18
under such registration statement. During 1995, the Company wrote off $745,000
of certain costs incurred for potential public and private offerings of equity
securities which management determined had no future value.
In addition, in the event the Company is unable to generate sufficient
funds both to meet principal payments in respect of its indebtedness and to
satisfy distribution requirements of 95 percent of annual REIT taxable income to
its shareholders, the Company may be unable to qualify as a REIT. In such an
event, the Company (i) will incur federal income taxes and perhaps penalties,
(ii) if the Company is then paying dividends, may be required to decrease any
dividend payments to its shareholders, and (iii) the market price of the
Company's common stock may decrease. The Company would also be prohibited from
requalifying as a REIT for five years.
IMPACT OF INFLATION
The Company may experience increases in its expenses as a result of
inflation; however, the amount of such increases cannot be accurately
determined. The Company's exposure to inflationary cost increases in property
level expenses is reduced by escalation clauses which are included in most
leases. However, market conditions may prevent the Company from escalating
rents. Inflationary pressure may increase operating expenses, including labor
and energy costs (and, indirectly, property taxes) above expected levels, at a
time when it may not be possible to increase lease rates to offset such higher
operating expenses. In addition, inflation can have secondary effects upon
occupancy rates by decreasing the demand for office space in many of the markets
in which the Company operates. As of December 31, 1996, 94 percent of the
Company's annualized rentals were subject to leases having annual escalation
clauses as described under "Properties" above. As of December 31, 1995 and 1994,
93 percent and 94 percent, respectively, of the Company's annualized rentals
were subject to leases having annual escalation clauses.
Historically, inflation has often caused increases in the value of
income-producing real estate through higher rentals. The Company, however, can
provide no assurance that inflation will increase the value of its properties in
the future, and, in fact, the rate of inflation over recent years has been
considerably below that which has been experienced previously.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR PURPOSE OF
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a "safe harbor" for forward- looking statements to encourage companies to
provide prospective information about their businesses without fear of
litigation so long as those statements are identified as forward-looking and are
accompanied by meaningful cautionary statements identifying important factors
that could cause actual results to differ materially from those projected in
such statements. The Company desires to take advantage of the "safe harbor"
provisions of the Act.
This Annual Report on Form 10-K contains forward-looking statements,
together with related data and projections, about the Company's projected
financial results and its future plans and strategies. However, actual results
and needs of the Company may vary materially from forward-looking statements and
projections made from time to time by the Company on the basis of management's
then-current expectations. The business in which the Company is engaged involves
changing and competitive markets and a high degree of risk, and there can be no
19
assurance that forward-looking statements and projections will prove accurate.
Accordingly, the Company hereby identifies the following important factors which
could cause the Company's actual performance and financial results to differ
materially from any results which might be projected, forecast, estimated or
budgeted by the Company.
Real Estate Financing Risks
Existing Debt. The Company is subject to risks normally associated with
debt financing, including (a) the risk that the Company's cash flow will be
insufficient to meet required payments of principal and interest, (b) the risk
that the existing debt in respect of the Company's properties (which in
substantially all cases will not have been fully amortized at maturity) will not
be able to be refinanced and (c) the risk that the terms of any refinancing of
any existing debt will not be as favorable as the terms of such existing debt.
The Company currently has outstanding debt of approximately $203 million, all of
which is secured by certain of the Company's properties. Approximately $131
million of such debt will mature before 2007, with the remaining balance
maturing in 2008. If principal payments due at maturity cannot be refinanced,
extended or paid with proceeds of other capital transactions, such as new equity
capital, the Company expects that its cash flow will not be sufficient to repay
all such maturing debt. Furthermore, if prevailing interest rates or other
factors at the time of refinancing (such as the reluctance of lenders to make
commercial real estate loans) result in higher interest rates upon refinancing
than the interest rates on the existing debt, the interest expense relating to
such refinanced debt would increase, which would adversely affect the Company's
cash flow and the amount of distributions the Company would be able to make to
its shareholders. If the Company has mortgaged a property to secure payment of
debt and the Company is unable to meet the mortgage payments, then the mortgagee
may foreclose upon, or otherwise take control of, such property, with a
consequent loss of income and asset value to the Company.
Risk of Rising Interest Rates and Variable Rate Debt. The Company
currently has no variable rate debt. The Company may incur variable rate debt in
the future. Increases in interest rates on such debt could increase the
Company's interest expense, which would adversely affect the Company's cash flow
and its ability to pay distributions to its shareholders.
Existing Leverage; No Limitation on Debt
As of December 31, 1996, the debt to total market capitalization ratio of
the Company was approximately 33.5 percent. The Company's policy regarding this
ratio (i.e., total consolidated debt as a percentage of the sum of the market
value of issued and outstanding capital stock plus total consolidated debt) is
not subject to any limitation in the organizational documents of the Company.
Accordingly, the Board of Directors could establish a policy and decide to
borrow on a case-by-case or other basis, which would increase the Company's debt
to total market capitalization ratio. If this action were taken, the Company
could become more highly leveraged, resulting in an increase in debt service
that (a) could adversely affect the Company's cash flow and, consequently, the
amount of cash available for distribution to shareholders and (b) could increase
the risk of default on the Company's debt.
For purposes of establishing and evaluating its debt policy, the Company
measures its leverage by reference to the total market capitalization of the
Company rather than by reference to the book value of its assets. The Company
has used total market capitalization because it believes that the book value of
its assets (which to a large extent is comprised of the depreciated value of
real property, the Company's primary tangible asset) does not accurately reflect
20
its ability to borrow and to meet debt service requirements. The market
capitalization of the Company, however, is more variable than book value, and
does not necessarily reflect the fair market value of the underlying assets of
the Company at all times. The Company also considers factors other than its
market capitalization in making decisions regarding the incurrence of
indebtedness, such as the purchase price of properties to be acquired with debt
financing, the estimated market value of its properties upon refinancing and the
ability of particular properties, and the Company as a whole, to generate cash
flow to cover expected debt service.
Geographic Concentration
The Company's revenues and the value of its properties may be affected by
a number of factors, including the regional and local economic climates of the
metropolitan areas in which the Company's buildings are located (which may be
adversely impacted by business layoffs or downsizing, industry slowdowns,
changing demographics and other factors) and regional and local real estate
conditions in such areas (such as oversupply of, or reduced demand for, office
and other competing commercial properties). All of the Company's properties are
located in the southeastern and southwestern United States. The Company's
performance and its ability to make distributions to its shareholders are,
therefore, dependent on economic conditions in these market areas. The Company's
historical growth has occurred during periods when the economy in the
southeastern United States has out-performed the national economy. There can be
no assurance as to the continued growth of the economy in the southeastern
United States or the future growth rate of the Company.
Renewal of Leases and Reletting of Space
The Company is subject to the risks that upon expiration of leases for
space located in its buildings (a) such leases may not be renewed, (b) such
space may not be relet or (c) the terms of renewal or reletting (taking into
account the cost of required renovations) may be less favorable than current
lease terms. Leases on a total of 26.5 percent and 21.8 percent of the total net
rentable square feet leased in the Company's buildings will expire in 1997 and
1998, respectively. The Company has established annual reserves for renovation
and reletting expenses, which take into consideration its view of both the
current and expected business conditions in the southeastern and southwestern
United States, but no assurance can be given that these reserves will be
sufficient to cover such expenses. If the Company is unable to promptly relet,
or renew the leases for, all or a substantial portion of the space located in
its buildings, or if the rental rates upon such renewal or reletting are
significantly lower than expected rental rates, or if the Company's reserves for
these purposes prove inadequate, then the Company's cash flow and its ability to
make expected distributions to its shareholders may be adversely affected.
Real Estate Investment Risks
General Risks. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate depend in
large part on the amount of income generated and expenses incurred. If the
Company's properties do not generate revenues sufficient to meet operating
expenses, including current levels of debt service, tenant improvements, leasing
commissions and other capital expenditures, the Company may have to borrow
additional amounts to cover fixed costs and the Company's cash flow and its
ability to make distributions to its shareholders will be adversely affected.
The Company must obtain external financing to meet future debt maturities.
21
The Company's net revenues and the value of its properties may be
adversely affected by a number of factors, including the national, regional and
local economic climates; regional and local real estate conditions; the
perceptions of prospective tenants as to the attractiveness of the property; the
ability of the Company to provide adequate management, maintenance and
insurance; and increased operating costs (including real estate taxes and
utilities). In addition, real estate values and income from properties are also
affected by such factors as applicable laws, including tax laws, interest rate
levels and the availability of financing.
Illiquidity of Real Estate. Equity real estate investments are relatively
illiquid. Such illiquidity will tend to limit the ability of the Company to vary
its portfolio promptly in response to changes in economic or other conditions.
In addition, the Internal Revenue Code limits the Company's ability to sell
certain properties held for fewer than four years, which may affect the
Company's ability to sell its properties.
Competition. Numerous office buildings compete with the Company's
buildings in attracting tenants to lease space. Some of these competing
buildings are newer, better located or better capitalized than some of the
Company's buildings. Moreover, the Company believes that major national or
regional commercial property developers will continue to seek development
opportunities in the southeastern and southwestern United States. These
developers may have greater financial resources than the Company. The number of
competitive commercial properties in a particular area could have a material
adverse effect on the Company's ability to lease space in its buildings or at
newly developed or acquired properties and the rents charged.
Changes in Laws. Because increases in income, service or transfer taxes
are generally not passed through to tenants under leases, such increases may
adversely affect the Company's cash flow and its ability to make distributions
to its shareholders. The Company's properties are also subject to various
federal, state and local regulatory requirements, such as requirements of the
Americans with Disabilities Act (the "ADA") and state and local fire and life
safety requirements. Failure to comply with these requirements could result in
the imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that its properties are currently in
compliance with all such regulatory requirements. However, there can be no
assurance that these requirements will not be changed or that new requirements
will not be imposed which would require significant unanticipated expenditures
by the Company and could have an adverse effect on the Company's cash flow and
expected distributions.
Uninsured Loss. The Company presently carries comprehensive liability,
fire, flood (where appropriate), extended coverage and rental loss insurance
with respect to its properties, with policy specifications and insured limits
customary for similar properties. There are, however, certain types of losses
(such as from wars) that may be either uninsurable or not economically
insurable. Should an uninsured loss or a loss exceeding policy limits occur, the
Company could lose both its capital invested in, and anticipated profits from,
one or more of its properties.
Bankruptcy and Financial Condition of Tenants. At any time, a tenant of
the Company's buildings may seek the protection of the bankruptcy laws, which
could result in the rejection and termination of such tenant's lease and thereby
cause a reduction in the cash flow available for distribution by the Company. No
assurance can be given that tenants will not file for bankruptcy protection in
the future or, if any tenants file, that they will affirm their leases and
continue to make rental payments in a timely manner. In addition, a tenant from
22
time to time may experience a downturn in its business which may weaken its
financial condition and result in its failure to make rental payments when due.
If a tenant's lease is not affirmed following bankruptcy or if a tenant's
financial condition weakens, the Company's income may be adversely affected.
Americans with Disabilities Act Compliance. Under the ADA, all public
accommodations and commercial facilities are required to meet certain federal
requirements relating to access and use by disabled persons. These requirements
became effective in 1992. Compliance with the requirements of the ADA could
require removal of access barriers and non-compliance could result in imposition
of fines by the U.S. Government or an award of damages to private litigants.
Although the Company believes that its properties are substantially in
compliance with these requirements, the Company may incur additional costs to
comply with the ADA. Although the Company believes that such costs will not have
a material adverse effect on the Company, if required changes involve a greater
expenditure than the Company currently anticipates, the Company's ability to
make distributions to its shareholders could be adversely affected.
Risks Involved in Property Ownership Through Partnership and Joint
Ventures. Although the Company owns fee simple interests in its properties, in
the future the Company could, if then permitted by the covenants in its loan
agreements and its financial position, participate with other entities in
property ownership through partnerships or joint ventures. Partnership or joint
venture investments may, under certain circumstances, involve risks not
otherwise present in property ownership, including the possibility that (a) the
Company's partners or co-venturers might become bankrupt, (b) such partners or
co-venturers might at any time have economic or other business interests or
goals which are inconsistent with the business interests or goals of the
Company, and (c) such partners or co-venturers may be in a position to take
action contrary to the instructions or the requests of the Company or contrary
to the Company's policies or objectives, including the Company's policy to
maintain its qualification as a REIT. The Company will, however, seek to
maintain sufficient control of such participants or joint ventures to permit the
Company's business objectives to be achieved. There is no limitation under the
Company's organizational documents as to the amount of available funds that may
be invested in partnerships or joint ventures.
Impact of Inflation. The Company may experience increases in its expenses,
including debt service, as a result of inflation. The Company's exposure to
inflationary cost increases in property level expenses is reduced by escalation
clauses which are included in most of its leases. However, market conditions may
prevent the Company from escalating rents. Inflationary pressure may increase
operating expenses, including labor and energy costs (and, indirectly, property
taxes) above expected levels at a time when it may not be possible for the
Company to increase lease rates to offset such higher operating expenses. In
addition, inflation can have secondary effects upon occupancy rates by
decreasing the demand for office space in many of the markets in which the
Company operates.
Although, inflation has historically often caused increases in the value
of income-producing real estate through higher rentals, the Company can provide
no assurance that inflation will increase the value of its properties in the
future and, in fact, the rate of inflation over recent years has been
considerably below that which has been experienced previously.
23
Risk of Development, Construction and Acquisition Activities
Within the constraints of its policy concerning leverage, the Company has
and will continue to develop and construct office buildings, particularly on its
undeveloped land. Risks associated with the Company's development and
construction activities, including activities relating to its undeveloped land,
may include: abandonment of development opportunities; construction costs of a
property exceeding original estimates and possibly making the property
uneconomical; insufficient occupancy rates and rents at a newly completed
property to make the property profitable; unavailability of financing on
favorable terms for development of a property; and the failure to complete
construction and lease-up on schedule, resulting in increased debt service
expense and construction costs. In addition, new development activities,
regardless of whether or not they are ultimately successful, typically require a
substantial portion of management's time and attention. Development activities
are subject to risks relating to the inability to obtain, or delays in
obtaining, all necessary zoning, land-use, building, occupancy and other
required governmental permits and authorizations.
The Company will in the future also acquire office buildings. Acquisitions
of office buildings entail risks that investments will fail to perform in
accordance with expectations. Estimates of the cost of improvements to bring an
acquired building up to standards established for the market position intended
for such building may prove inaccurate. In addition, there are general
investment risks associated with any new real estate investment.
The Company anticipates that any future developments and acquisitions
would be financed through a combination of internally generated cash, equity
investments and secured or unsecured financing. If new developments are financed
through construction loans, there is a risk that, upon completion of
construction, permanent financing for newly developed properties may not be
available or may be available only on disadvantageous terms.
Changes in Policies Without Stockholder Approval
The investment, financing, borrowing and distribution policies of the
Company, as well as its policies with respect to all other activities, including
growth, debt, capitalization and operations, are determined by the Board of
Directors. Although the Board of Directors has no present intention to do so,
these policies may be amended or revised at any time and from time to time at
the discretion of the Board of Directors without a vote of the shareholders of
the Company. A change in these policies could adversely affect the financial
condition or results of operations of the Company or the market price of the
Common Stock.
Limitations of REIT Status on Business of Subsidiaries
Certain requirements for REIT qualification may in the future limit the
Company's ability to increase fee development, management and leasing operations
conducted, and related services offered, by the Company's subsidiaries without
jeopardizing the Company's qualification as a REIT.
24
Adverse Consequences of Failure to Qualify as a REIT
The Company believes it has operated so as to qualify as a REIT under the
Internal Revenue Code since its inception in 1988. Although management of the
Company intends that the Company continue to operate so as to qualify as a REIT,
no assurance can be given that the Company will remain qualified as a REIT.
Qualification as a REIT involves the application and satisfaction of highly
technical and complex Code requirements for which there are only limited
judicial and administrative interpretations. Uncertainty in the application of
such requirements, as well as circumstances not entirely within the Company's
control, may affect the Company's ability to qualify as a REIT. In addition, no
assurance can be given that legislation, new regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to qualification as a REIT or the federal income tax consequences
of such qualification. The Company, however, is not aware of any pending tax
legislation that would adversely affect the Company's ability to operate as a
REIT.
Possible Environmental Liabilities
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property and may be held liable to a governmental
entity or to third parties for property damage and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws typically impose clean-up responsibility and liability without regard
to whether the owner knew, or caused the presence, of the contaminants, and the
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate the contamination on such property, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Any person who arranges for the disposal or treatment of
hazardous or toxic substances at a disposal or treatment facility also may be
liable for the costs of removal or remediation of a release of hazardous or
toxic substances at such disposal or treatment facility, whether or not such
facility is owned or operated by such person. In addition, some environmental
laws create a lien on the contaminated site in favor of the government for
damages and costs that it incurs in connection with the contamination. Finally,
the owner of a site may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from a
site.
Certain federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials
("ACM") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACM and may provide for third parties to seek
recovery from owners or operators of real properties for personal injury
associated with ACM. In connection with its ownership and operation of its
properties, the Company may be potentially liable for such costs. All ACM in the
Company's buildings has been found to be in good condition and non-friable, and
should not present a risk as long as it continues to be properly managed.
The Company's environmental assessments of its properties have not
revealed any environmental liability that the Company believes would have a
material adverse effect on its business, assets or results of operations taken
as a whole, nor is the Company aware of any such material environmental
25
liability. Nevertheless, it is possible that the Company's assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no assurance
that future laws, ordinances or regulations will not impose any material
environmental liability or the current environmental condition of the Company's
properties will not be affected by tenants, by the condition of land or
operations in the vicinity of such properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company.
Effect of Market Interest Rates on Price of Common Stock
One of the factors that will influence the market price of the Common
Stock in public markets will be the annual dividend yield on the share price
reflected by dividend distributions by the Company. An increase in market
interest rates could reduce cash available for distribution by the Company to
its shareholders and, accordingly, adversely affect the market price of the
Common Stock.
Additional Information
For additional disclosure of risk factors to which the Company is subject,
see the other sections of "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
26
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE NO.
Independent Auditors' Report................................ 28
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996
and 1995............................................ 29
Consolidated Statements of Operations for Each
of the Three Years in the Period Ended
December 31, 1996................................... 30
Consolidated Statements of Changes in
Shareholders' Equity for Each of the Three
Years in the Period Ended December 31, 1996......... 31
Consolidated Statements of Cash Flows for Each
of the Three Years in the Period Ended
December 31, 1996................................... 32
Notes to Consolidated Financial Statements for
Each of the Three Years in the Period Ended
December 31, 1996................................... 33
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
for the Three Years Ended December 31, 1996......... 45
Schedule III - Real Estate and Accumulated
Depreciation as of December 31, 1996................ 46
27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Koger Equity, Inc.
Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Koger Equity,
Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. Our audits also included the financial statement schedules listed in the
Index at Item 8. These financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Koger Equity, Inc. and subsidiaries
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
February 28, 1997
28
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(In Thousands Except Share Data)
1996 1995
------ -----
ASSETS
Real Estate Investments:
Operating properties:
Land $ 98,567 $ 98,727
Buildings 482,836 471,145
Furniture and equipment 1,569 1,441
Accumulated depreciation (82,478) (62,845)
---------- ---------
Operating properties - net 500,494 508,468
Properties under construction:
Land 2,083
Buildings 930
Undeveloped land held for investment 20,558 21,150
Undeveloped land held for sale 6,550 9,131
Cash and temporary investments 35,715 25,415
Accounts receivable, net of allowance for uncollectible
accounts of $231 and $391 5,600 4,724
Investment in Koger Realty Services, Inc. 259 407
Cost in excess of fair value of net assets acquired
net of accumulated amortization of $515 and $345 2,040 2,211
Other assets 10,437 7,250
---------- -----------
TOTAL ASSETS $584,666 $578,756
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages and loans payable $203,044 $254,909
Accounts payable 4,662 2,631
Accrued real estate taxes payable 2,144 2,222
Accrued liabilities - other 5,467 4,723
Dividends payable 1,045
Advance rents and security deposits 4,169 3,574
------------ -----------
Total Liabilities 220,531 268,059
------------ -----------
Commitments and Contingencies (Notes 2, 11 and 12) - -
Shareholders' Equity:
Preferred stock, $.01 par value; 50,000,000 shares
authorized; issued: none
Common stock, $.01 par value; 100,000,000 shares
authorized; issued: 23,560,427 and 20,476,705 shares;
outstanding: 20,892,574 and 17,753,677 shares 236 205
Capital in excess of par value 362,127 318,609
Warrants; outstanding 1,110,887 and 1,114,217 2,243 2,250
Retained earnings 22,666 13,210
Treasury stock, at cost; 2,667,853 and 2,723,028 shares (23,137) (23,577)
---------- ----------
Total Shareholders' Equity 364,135 310,697
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $584,666 $578,756
======== ========
See Notes to Consolidated Financial Statements.
29
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1996
(In Thousands Except Per Share Data)
1996 1995 1994
---- ---- ----
Revenues
Rental $ 98,342 $ 94,865 $ 93,132
Other rental services 463 578 1,256
Management fees ($0, $1,685 and $3,288 from TKPL) 2,682 3,624 4,926
Interest ($13,066 from TKPL in 1995) 1,951 14,440 1,062
Income from Koger Realty Services, Inc. 342 36
Gain on TKPL note to Southeast 292 11,288
Gain on early retirement of debt 919
-------- -------- --------
Total revenues 104,072 125,750 100,376
-------- -------- --------
Expenses
Property operations 41,597 40,830 39,711
Depreciation and amortization 21,127 19,102 16,728
Mortgage and loan interest 18,701 23,708 25,872
General and administrative 6,623 7,559 6,366
Direct cost of management fees 1,884 2,837 3,649
Undeveloped land costs 517 512 667
Litigation costs 424 176 1,902
Loss on sale or disposition of assets 497 255 43
Provision for loss on land held for sale 970 996
Other 745
-------- -------- --------
Total expenses 91,370 96,694 95,934
-------- -------- --------
Income Before Income Taxes 12,702 29,056 4,442
Income taxes 815 66 227
-------- -------- --------
Income Before Extraordinary Item 11,887 28,990 4,215
Extraordinary loss on early retirement of debt 1,386
-------- -------- --------
Net Income $ 10,501 $ 28,990 $ 4,215
======== ========= ==========
Earnings Per Common Share and Common
Equivalent Share:
Primary -
Income before extraordinary item $ 0.61 $ 1.61 $ 0.24
Extraordinary loss (0.07)
-------- -------- --------
Net Income $ 0.54 $ 1.61 $ 0.24
=========== =========== ===========
Fully Diluted -
Income before extraordinary item $ 0.61 $ 1.60 $ 0.24
Extraordinary loss (0.07)
------------
Net Income $ 0.54 $ 1.60 $ 0.24
=========== ========== ===========
See Notes to Consolidated Financial Statements.
30
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1996
(In Thousands)
Retained Earnings
Capital (Accumulated Total
Common Stock in Excess Dividends Share-
Shares Par of Par in Excess of Treasury holders'
Issued Value Value Warrants Net Income) Stock Equity
---------- ----- ------------ -------- -------------------------------- -----------
BALANCE
DECEMBER 31, 1993 20,472 $205 $318,574 $1,368 $(19,872) $(24,825) $275,450
Treasury stock reissued (3) 38 35
Warrants issued 885 885
Warrants exercised 1 12 (2) 10
Options exercised 1 6 6
Net income 4,215 4,215
------ ---- -------- ------ -------- -------- --------
BALANCE,
DECEMBER 31, 1994 20,474 205 318,589 2,251 (15,657) (24,787) 280,601
Treasury stock reissued (123) 1,217 1,094
Warrants exercised 1 7 (1) 6
Options exercised 1 7 (7)
Stock appreciation
rights exercised 1 6 6
Net income 28,990 28,990
------ ---- -------- ------ -------- -------- --------
BALANCE,
DECEMBER 31, 1995 20,477 205 318,609 2,250 13,210 (23,577) 310,697
Treasury stock reissued 182 487 669
Warrants exercised 3 33 (7) 26
Options exercised 57 1 519 (47) 473
Stock appreciation
rights exercised 23 270 270
Common stock issued 3,000 30 42,514 42,544
Dividends declared (1,045) (1,045)
Net income 10,501 10,501
------ ---- -------- ------ -------- -------- --------
BALANCE,
DECEMBER 31, 1996 23,560 $236 $362,127 $2,243 $22,666 $(23,137) $364,135
======= ==== ======== ====== ======== ======== =========
See Notes to Consolidated Financial Statements.
31
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1996
(In Thousands)
1996 1995 1994
---- ---- ----
Operating Activities
Net income $ 10,501 $ 28,990 $ 4,215
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 21,127 19,102 16,728
Gain on TKPL note to Southeast (292) (11,288)
Warrants issued - litigation settlement 885
Provision for loss on land held for sale 970 996
Loss on sale or disposition of assets 497 255 43
Loss/(gain) on early debt repayment 1,386 (919)
Income from Koger Realty Services, Inc. (342) (36)
Provision for uncollectible rents 50 172 212
Accrued interest added to principal 112 496 1,336
Amortization of mortgage discounts 196 175 219
Changes in assets and liabilities:
Increase in accounts payable, accrued
liabilities and other liabilities 3,542 4,500 35
Increase in receivables and other assets (829) (349) (3,176)
Decrease (increase) in receivable from TKPL 1,851 (1,217)
------------- --------- ----------
Net cash provided by operating activities 35,948 43,919 20,276
-------- -------- ---------
Investing Activities
Proceeds from sale of assets 1,241 25,267 3,499
Proceeds from TKPL note to Southeast 887 17,105
Proceeds from TKPL mortgage notes 18,195
Purchase of TKPL mortgage notes (18,195)
Tenant improvements to existing properties (7,873) (8,644) (7,334)
Building improvements to existing properties (2,795) (3,064) (3,749)
Energy management improvements (1,900) (2,663)
Building construction expenditures (930)
Deferred tenant costs (1,862) (1,085) (1,112)
Additions to furniture and equipment (128) (330) (383)
Purchase of Koger Realty Services, Inc. preferred stock (300)
Dividends received from Koger Realty Services, Inc. 490
Merger costs (344)
Cash acquired in purchase of assets 307 2,316
-------------- ------------ -----------
Net cash provided by (used in) investing activities (12,870) 26,593 (7,107)
--------- ---------- -----------
Financing Activities
Principal payments on mortgages and loans (228,090) (68,608) (8,267)
Proceeds from mortgages 175,900
Proceeds from sale of common stock 42,748 206 35
Proceeds from exercise of warrants and stock options 376 6 16
Financing costs (3,712) (16) (204)
----------- ------------- -----------
Net cash used in financing activities (12,778) (68,412) (8,420)
---------- ---------- ----------
Net increase in cash and cash equivalents 10,300 2,100 4,749
Cash and cash equivalents - beginning of year 25,415 23,315 18,566
---------- --------- ---------
Cash and cash equivalents - end of year $ 35,715 $ 25,415 $ 23,315
========= ======== ========
See Notes to Consolidated Financial Statements.
32
KOGER EQUITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Organization. Koger Equity, Inc. ("KE") was incorporated in Florida on
June 21, 1988. KE has two wholly-owned subsidiaries which are Southeast
Properties Holding Corporation ("Southeast"), a Florida corporation, and Koger
Real Estate Services, Inc. ("KRES"), a Florida corporation.
Principles of Consolidation. The consolidated financial statements include
the accounts of KE and its wholly-owned subsidiaries (the "Company"). All
material intercompany accounts have been eliminated in consolidation.
Investment in Koger Realty Services, Inc. Koger Realty Services, Inc., a
Delaware corporation ("KRSI"), provides leasing and property management services
to owners of commercial office buildings. During 1995, the Company purchased all
of the preferred stock of KRSI, which preferred stock represents at least 95
percent of the economic value of KRSI. Initially, such preferred stock was
non-voting but was convertible into voting common stock. Accordingly, KE
consolidated KRSI in the 1995 financial statements. During 1996, the Company
requested KRSI to change the convertibility feature of the preferred stock owned
by the Company. Effective in 1996, the preferred stock is non-voting and is not
convertible into the common stock of KRSI while held by the Company. The Company
has accounted for its investment in the preferred stock of KRSI using the equity
method.
Real Estate Investments. Operating properties, furniture and equipment,
and undeveloped land held for investment are stated at cost less accumulated
depreciation. Undeveloped land held for sale is carried at the lower of cost or
fair value less selling costs.
Periodically, management reviews its portfolio of operating properties,
undeveloped land held for investment and related goodwill and in those instances
where properties have suffered an impairment in value that is deemed to be other
than temporary, the properties and related goodwill will be reduced to their
fair value. This review includes a quarterly analysis of occupancy levels and
rental rates for the Company's properties in order to identify properties which
may have suffered an impairment in value. Management prepares estimates of
future cash flows for these properties to determine whether the Company will be
able to recover its investment. In making such estimates, management considers
the conditions in the commercial real estate markets in which the properties are
located, current and expected occupancy rates, current and expected rental
rates, and expected changes in operating costs. As of December 31, 1996, there
were no such impairments in value. Maintenance and repairs are charged to
operations. Acquisitions, additions, and improvements are capitalized.
Depreciation and Amortization. The Company uses the straight-line method
for depreciation and amortization. Acquisition costs, building improvements and
tenant improvements are depreciated over the periods benefited by the
expenditures which range from 3 to 40 years. Deferred tenant costs (leasing
commissions and tenant relocation costs) are amortized over the term of the
related leases. Deferred financing costs are amortized over the terms of the
related agreements. Cost in excess of fair value of net assets acquired is being
amortized over 15 years.
33
Revenue Recognition. Rentals are generally recognized as revenue over the
lives of leases according to provisions of the lease agreements. However, the
straight-line basis, which averages annual minimum rents over the terms of
leases, is used to recognize minimum rent revenues under leases which provide
for material varying rents over their terms. For 1996, 1995 and 1994, the
recognition of rental revenues on this basis for applicable leases increased
rental revenues by $114,000, $80,000 and $512,000, respectively, over the amount
which would have been recognized based upon the contractual provisions of these
leases. Interest revenue is recognized on the accrual basis for interest-earning
investments.
Federal Income Taxes. The Company is qualified and has elected tax
treatment as a real estate investment trust under the Internal Revenue Code (a
"REIT"). Accordingly, the Company distributes at least 95 percent of its REIT
taxable income to its shareholders. Since the Company had no REIT taxable income
in 1996, 1995 or 1994, no distributions to shareholders were made. To the extent
that the Company pays dividends equal to 100 percent of REIT taxable income, the
earnings of the Company are taxed at the shareholder level. However, the use of
net operating loss carryforwards, which may reduce REIT taxable income to zero,
are limited for alternative minimum tax purposes.
Earnings Per Common Share. Earnings per common share have been computed
based on the weighted average number of shares of common stock and common stock
equivalents outstanding as follows:
Year Primary Fully Diluted
---- ------- -------------
1996 19,500,171 19,575,513
1995 18,011,076 18,091,029
1994 17,718,757 17,718,757
Fair Value of Financial Instruments. The Company believes that the
carrying amount of its financial instruments (temporary investments, accounts
receivable, accounts payable, and mortgages and loans payable) is a reasonable
estimate of fair value of these instruments.
Statements of Cash Flows. Cash in excess of daily requirements is invested
in short-term monetary securities. Such temporary cash investments have an
original maturity of less than three months and are deemed to be cash
equivalents for purposes of the statements of cash flows.
During 1994, cost in excess of fair value of net assets acquired was
adjusted as follows: (1) assets acquired increased $2,250,000; (2) liabilities
assumed increased $243,000; and (3) additional direct merger costs were incurred
which totalled $344,000. During 1995, cost in excess of fair value of net assets
acquired was adjusted as follows: (1) assets acquired increased $169,000; and
(2) liabilities assumed increased $1,000. In addition, $6,412,000 of the
unamortized cost in excess of fair value of net assets acquired was written off
and offset against proceeds received by Southeast from the TKPL unsecured note.
This write-off was based on management's analysis of the remaining value of the
intangible assets based on the liquidation of TKPL and the partial repayment of
the TKPL unsecured note.
During 1995, the Company contributed 122,441 shares of common stock to the
Company's 401(k) Plan. These shares had a value of approximately $888,000 based
on the closing price of the Company's common stock on the American Stock
Exchange on December 30, 1994. In addition, TKPL assigned $595,000 of its net
assets to Southeast as payment on the unsecured note to Southeast during 1995.
During 1996, the Company contributed 43,804 shares of common stock to the
34
Company's 401(k) Plan. These shares had a value of approximately $465,000 based
on the closing price of the Company's common stock on the American Stock
Exchange on December 31, 1995.
For 1996, 1995, and 1994, total interest payments (net of amounts
capitalized) were $18,599,000, $23,823,000 and $23,525,000, respectively, for
the Company. For 1996, 1995 and 1994, payments for income taxes totalled
$816,000, $133,000 and $227,000, respectively.
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 each
reporting period. Actual results could differ from those estimates.
New Accounting Standards. In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). SFAS 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. SFAS 121 is effective for
the Company for the year ending December 31, 1996. The adoption of SFAS 121 did
not have a material effect on the financial statements of the Company.
In October 1995, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply Accounting Principles Board Opinion No. 25 ("APB 25"), which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB 25 to its stock based compensation awards
to employees and has disclosed the required pro forma effect on net income and
earnings per share.
Reclassification. Certain 1995 and 1994 amounts have been reclassified to
conform with 1996 presentation.
2. TRANSACTIONS WITH RELATED PARTIES.
Three directors were elected to the Company's Board under the terms of an
agreement dated October 10, 1996 between the Company and an affiliate of Apollo
Real Estate Investment Fund II, L.P. ("Apollo") pursuant to which Apollo
purchased three million shares of common stock from the Company for $43.5
million ($14.50 per share). Such agreement grants to Apollo registration rights
and a conditional exemption from certain of the Company's takeover defenses and
provides that for a period of three years (subject to earlier termination under
certain circumstances): (i) Apollo may purchase up to 25 percent of the
Company's outstanding stock; (ii) Apollo will be entitled to Board
representation of up to three directors on a board of not more than 12
(depending upon Apollo's level of ownership of the common stock); and (iii)
Apollo will not acquire more than 25 percent of the Company's outstanding stock
and will vote its shares as to certain matters either in accordance with the
recommendation of the Board or proportionately with other shareholders, unless
35
the Company breaches its agreements or, without Apollo's consent, the Company
takes certain significant actions such as certain amendments of the Company's
organizational documents, liquidation, termination of REIT status, sale of the
Company, acquisitions or disposition over a certain size, issuance of more than
9.8 percent of the outstanding common stock to a person or group or failure by
the Company to employ its takeover defenses against another person who holds (or
tender for) 15 percent or more of the common stock.
The proceeds of the Apollo stock sale were used to retire debt with a
weighted average interest rate of 8.04%. Pro forma earnings per share
information assuming the debt was retired at the beginning of 1996 is as
follows:
Pro forma net income $13,291,000
Pro forma earnings per share:
Primary $ 0.61
Fully diluted $ 0.61
In connection with the above transaction, Rothschild Realty, Inc., which
employs Mr. Aloian as a Managing Director, received $350,000 for providing a
fairness opinion to the Company's Board of Directors. Also, Mr. Hiley received
from the Company a fee of $204,000 for his role in negotiating the transaction.
Both Mr. Aloian and Mr. Hiley are directors of the Company.
Pursuant to a Consulting Agreement with the Company, which is subject to
periodic evaluation by the Board of Directors, Mr. Hiley provides advice with
respect to the financial aspects of the Company's strategic plan and was paid a
fee of $146,000 for 1996.
Mr. Davis retired as an employee of the Company on December 31, 1996, but
continues to serve the Company as a consultant. Pursuant to the Consulting
Agreement between Mr. Davis and the Company, he will receive a consulting fee of
$50,000 per year through December 31, 1999.
3. INVESTMENTS IN THE KOGER PARTNERSHIP, LTD.
General. Southeast, a wholly-owned subsidiary of the Company, was the
managing general partner of TKPL through December 26, 1995. Southeast's
interests in TKPL included (1) 90,360 TKPL General and Limited Partnership Units
(the "Units") and (2) a restructured unsecured note from TKPL with a principal
amount of approximately $31 million. In light of the terms of TKPL's
restructured debt, the Company had determined that these investments had no
value. During 1995, TKPL sold all of its operating properties. The net proceeds
from the sale were sufficient to repay in full all secured debt and accrued
interest of TKPL with the remaining excess sales proceeds and available cash of
TKPL used to pay Southeast for amounts owed on subordinate debt and accrued
interest. During 1995, TKPL repaid $17.7 million of the subordinate debt to
Southeast. On December 4, 1995, the Bankruptcy Court in the TKPL Chapter 11 Case
entered an order authorizing and directing Southeast to take all necessary and
advisable action to wind up TKPL's affairs and to terminate its existence as a
partnership. On December 26, 1995, TKPL was dissolved. The Company recorded a
gain on the recovery of the TKPL note to Southeast of $11,288,000, which was
calculated as follows:
Proceeds from TKPL unsecured note to Southeast $17,700,000
Partial Write-off of Cost in Excess of Fair Value of
Net Assets Acquired (6,412,000)
----------
Gain on TKPL Note to Southeast $11,288,000
===========
36
Basis of Accounting for the Investment in TKPL. Southeast had significant
influence over TKPL's activities because it owned approximately 32 percent of
TKPL's outstanding Units. However, Southeast did not control TKPL for accounting
purposes and, accordingly, accounted for its investment using the equity method.
No losses of TKPL were allocated to Southeast because Southeast was not
obligated to fund losses of TKPL as stated in the Third Amended and Restated
Agreement of Limited Partnership dated August 3, 1993.
Duties to and Compensation from TKPL. Southeast, in its capacity as
Managing General Partner, generally had responsibility for all aspects of TKPL's
operations and received as compensation for its services a management fee equal
to nine percent of the gross rental revenues derived from the properties it
managed for TKPL. All third-party leasing commissions incurred on TKPL buildings
were the responsibility of the Company. During 1995 and 1994, the management
fees earned were approximately $1,685,000 and $3,288,000, respectively. During
the fourth quarter of 1995, approximately $500,000 of management fees from TKPL
previously recorded were written off because collection of these fees could have
potentially affected the Company's REIT status.
Purchase of TKPL Mortgage Notes. During 1995, KE acquired $27.8 million
principal amount of TKPL New Secured Notes and $4.5 million principal amount of
TKPL Converted Loan Notes for approximately $18.2 million in the aggregate.
During 1995, the TKPL New Secured Notes and the TKPL Converted Loan Notes were
retired by TKPL. The Company recorded $13,066,000 of interest revenue related to
these notes during 1995 which represented repayment proceeds on the notes in
excess of the Company's cost basis. These excess proceeds were recorded as an
interest yield adjustment on the notes.
4. MORTGAGES AND LOANS PAYABLE.
On December 18, 1996, the Company closed on $175.9 million of a $190
million non-recourse loan with Northwestern Mutual Life Insurance Company
("Northwestern") which is secured by 10 office parks. This loan is divided into
(i) a tranche in the amount of $100.5 million ($86.4 million which has been
drawn) with a 10 year maturity and an interest rate of 8.25 percent and (ii) a
tranche in the amount of $89.5 million with a maturity of 12 years and an
interest rate of 8.33 percent. The Company plans to draw the remaining loan
proceeds when the existing indebtedness on two buildings matures. Monthly
payments on this loan include principal amortization based on a 25 year
amortization period. This indebtedness requires the Company to maintain certain
financial ratios and is collateralized by properties with a carrying value of
approximately $253.8 million at December 31, 1996.
At December 31, 1996, the Company had other mortgages payable with an
outstanding balance of $27,142,000 which is net of a $369,000 discount. Such
mortgages are generally amortizing, bear interest at rates ranging from 8.5
percent to 10.125 percent, and are collateralized by office buildings with a
carrying value of approximately $50.2 million at December 31, 1996.
With the proceeds of a private placement of three million shares of the
Company's common stock and the Northwestern loan, the Company repaid all of its
debt which had been restructured during 1993.
The Company has signed a commitment for a $50 million revolving credit
facility, subject to sufficient collateral being provided to fund this facility.
Based on the Company's election, the interest rate on this revolving credit
facility will be either (i) the lender's LIBOR rate plus 200 basis points or
(ii) the lender's prime rate. Interest payments will be due monthly on this
37
credit facility which has a term of two years. At the election of the lender,
the term of this credit facility may be extended for additional periods of one
year each.
The annual maturities of loans and mortgages payable, which are gross of
$369,000 of unamortized discounts, as of December 31, 1996, are summarized as
follows:
Year Ending Amount
December 31, (In thousands)
------------ ---------------
1997 $ 11,333
1998 3,909
1999 3,502
2000 17,971
2001 3,184
Subsequent Years 163,514
---------
Total $203,413
========
5. LEASES.
The Company's operations consist principally of owning and leasing of
office space. Most of the leases are for terms of three to five years.
Generally, the Company pays all operating expenses, including real estate taxes
and insurance. At December 31, 1996, approximately 94 percent of the Company's
annualized rentals were subject to rent escalations based on changes in the
Consumer Price Index or increases in real estate taxes and certain operating
expenses. A substantial number of leases contain options that allow leases to
renew for varying periods.
The Company's leases are operating leases and expire at various dates
through 2014. Minimum future rental revenues from leases in effect at December
31, 1996, determined without regard to renewal options, are summarized as
follows:
Year Ending Amount
December 31, (In thousands)
------------ ---------------
1997 $ 88,825
1998 66,783
1999 46,759
2000 34,423
2001 21,693
Subsequent Years 61,470
----------
Total $319,953
========
The above minimum future rental revenue does not include contingent
rentals that may be received under provisions of the lease agreements.
Contingent rentals amounted to $2,886,000, $1,792,000 and $2,172,000 for the
years 1996, 1995, and 1994, respectively.
At December 31, 1996, annualized rental revenues totalled approximately
$13,500,000 for the State of Florida, when all of its departments and agencies
which lease space in the Company's buildings were combined. Also, at that date,
annualized rental revenues totalled approximately $10,498,000 for the United
States of America, when all of its departments and agencies which lease space in
the Company's buildings were combined.
38
6. STOCK OPTIONS AND RIGHTS.
1988 Stock Option Plan. The Company's Amended and Restated 1988 Stock
Option Plan (the "1988 Plan") provides for the granting of options to purchase
up to 500,000 shares of its common stock to key employees of the Company and its
subsidiaries. To exercise the option, payment of the option price is required
before the option shares are delivered. These options expire seven years from
the date of grant and are generally exercisable beginning one year from the date
of the grant at the rate of 20 percent per annum of the shares covered by each
option on a cumulative basis being fully exercisable five years after the date
of grant.
1993 Stock Option Plan. The Company's 1993 Stock Option Plan (the "1993
Plan") provides for the granting of options to purchase up to 1,000,000 shares
of its common stock to key employees of the Company and its affiliates. To
exercise the option, payment of the option price is required before the option
shares are delivered. These options expire ten years from the date of grant and
are generally exercisable beginning one year from the date of the grant at the
rate of 20 percent per annum of the shares covered by each option on a
cumulative basis being fully exercisable five years after the date of grant.
1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Plan") provides for the granting of options to purchase up to 650,000 shares of
its common stock to key employees of the Company. To exercise the option,
payment of the option price is required before the option shares are delivered.
These options expire ten years from the date of grant and are exercisable
beginning one year from the date of the grant at the rate of 20 percent per
annum of the shares covered by each option on a cumulative basis being fully
exercisable five years after the date of grant.
Information Concerning Options Granted. Substantially all of the options
granted have been granted with an exercise price equal to the market value at
the date of grant. If compensation cost for stock option grants had been
determined based on the fair value at the grant dates for 1996 and 1995
consistent with the method prescribed by SFAS 123, the Company's net earnings
and earnings per share would have been adjusted to the pro forma amounts
indicated below:
1996 1995
----------- -----------
Net Income - As reported $10,501,000 $28,990,000
- Pro forma $10,139,000 $28,960,000
Primary Earnings per share - As reported $ 0.54 $ 1.61
- Pro forma $ 0.52 $ 1.61
Under SFAS 123, the fair value of each option grant is estimated on the
date of grant using the binomial option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995:
1996 1995
----------- -----------
1988 Plan
Dividend Yield 5.00% 5.00%
Expected Volatility 28.09% 43.70%
Risk-free Interest Rates 6.52% 7.35%
Expected Lives (Months) 61 69
39
1996 1995
----------- -----------
1993 Plan and 1996 Plan
Dividend Yield 5.00% 5.00%
Expected Volatility 24.17% 43.60%
Risk-free Interest Rates 6.29% 7.37%
Expected Lives (Months) 86 69
A summary of the status of fixed stock option grants as of December 31,
1996, 1995 and 1994, and changes during the years ending on those dates is
presented below:
1996 1995 1994
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding - beginning of year 1,251,862 $ 7.04 1,557,412 $ 9.54 758,576 $14.39
Granted 923,981 14.39 311,800 7.53 973,282 7.63
Exercised (146,268) 7.33 (5,470) 6.96 (1,200) 5.13
Expired 0 - (299,180) 20.00 0 -
Forfeited (100,616) 7.69 (312,700) 7.60 (173,246) 20.00
---------- ---------- ----------
Outstanding - end of year 1,928,959 $10.51 1,251,862 $ 7.04 1,557,412 $ 9.54
========= ====== ========= ======= ========= =======
The weighted average fair values of options granted during 1996 and 1995
were $3.79 and $3.44 per option, respectively.
The following table summaries information about fixed stock options
outstanding at December 31, 1996:
Exercise Options Options Weighted Average
Price Outstanding Exercisable Remaining Life
----- ----------- ----------- --------------
(Months)
$ 5.125 266,786 209,536 25
7.500 182,500 19,972 96
7.625 572,879 227,426 78
8.125 6,000 1,200 100
11.500 189,294 135,744 103
15.375 711,500 0 119
---------- --------
1,928,959 593,878 90
========= ======= =====
Remaining non-exercisable options as of December 31, 1996 become
exercisable as follows:
Number
Year of Options
---- ----------
1997 387,243
1998 329,993
1999 329,993
2000 164,842
2001 123,010
----------
1,335,081
=========
40
Warrants. The Company had 1,110,887 and 1,114,217 Warrants outstanding on
December 31, 1996 and 1995, respectively. Each Warrant gives the holder the
right to purchase one share of common stock at a price of $8.00 per share, such
rights to be exercisable until June 30, 1999. The Warrants are subject to
redemption at the option of the Company at prices currently ranging from $3.48
to $5.24 per Warrant.
Shareholder Rights Plan. Pursuant to a Shareholder Rights Plan (the
"Rights Plan"), on September 30, 1990, the Board of Directors of the Company
declared a dividend of one Common Stock Purchase Right for each outstanding
share of common stock of the Company. Under the terms of the Rights Plan, the
rights which were distributed to the shareholders of record on October 11, 1990,
trade together with the Company's common stock (the "Shares") and are not
exercisable until the occurrence of certain events (none of which have occurred
through December 31, 1996), including acquisition of, or commencement of a
tender offer for, 15 percent or more of the Company's common stock. In such
event, each right entitles its holder (other than the acquiring person or
bidder) to acquire additional shares of the Company's common stock at a fifty
percent discount from the market price. The rights are redeemable under
circumstances as specified in the Rights Plan. The Rights Plan was amended
effective October 10, 1996 for a certain shareholder and its affiliates. See
Note 2 for further discussion of this amendment.
7. STOCK INVESTMENT PLAN.
During 1994, the Company adopted a Monthly Stock Investment Plan (the
"SIP") which provides for regular purchases of the Company's common stock by all
employees and directors. The SIP provides for monthly payroll and directors'
fees deductions up to $1,700 per month with the Company making monthly
contributions for the account of each participant as follows: (i) 25 percent of
amounts up to $50; (ii) 20 percent of amounts between $50 and $100; and (iii) 15
percent of amounts between $100 and $1,700, which amounts are used by an
unaffiliated Administrator to purchase shares from the Company.
The Company has reserved a total of 200,000 Shares for issuance under the
SIP. The Company's contribution and the expenses incurred in administering the
SIP totalled approximately $36,700, $34,800 and $7,900 for 1996, 1995 and 1994,
respectively. Through December 31, 1996, 45,016 Shares have been issued under
the SIP.
8. EMPLOYEE BENEFIT PLANS.
During 1994, the Company adopted a 401(k) plan (the "401(k) Plan") which
permits contributions by employees. The Company's Board of Directors approved a
Company contribution to the 401(k) Plan for 1994. This contribution was in the
form of the Company's common stock and was made during February, 1995. The
contribution totalled 122,441 Shares which had a value of approximately $888,000
on December 31, 1994. For 1995, the Company's Board of Directors approved a
Company contribution to the 401(k) Plan in the form of the Company's Shares
(43,804 Shares which had a value of approximately $465,000 on December 31, 1995)
and cash ($443,000). The contribution for 1995 was made during February, 1996.
For 1996, the Company's Board of Directors approved a Company contribution to
the 401(k) Plan in the form of the Company's Shares (23,657 Shares which had a
value of approximately $444,000 on December 31, 1996). The contribution for 1996
was made on January 6, 1997.
41
The Company's Board of Directors has adopted a supplemental executive
retirement plan (the "SERP"), an unfunded defined benefit plan. The purpose of
the SERP is to facilitate the retirement of select key executive employees by
supplementing their benefits under the Company's 401(k) Plan. The document
establishing the SERP, which became effective on June 28, 1995, was executed by
the Company on August 18, 1995. The benefits are based on years of service and
the employee's average base salary during the last three calendar years of
employment.
Net periodic pension cost for the SERP for 1996 and 1995 was as follows
(in thousands) :
1996 1995
---- ----
Service Cost $ 28 $ 25
Interest Cost 242 94
Amortization of Unrecognized
Prior Service Cost 219 109
----- ----
Total $489 $228
==== ====
Assumptions used in the computation of net periodic pension cost for the
SERP were as follows:
Discount rate 7.5%
Rate of increase in salary levels 5.0%
The following table sets forth the status of the unfunded SERP and the
amounts included in accrued liabilities-other in the Consolidated Balance Sheet
at December 31, 1996 and 1995 (in thousands):
1996 1995
---- ----
Accumulated benefit obligation $ 2,370 $ 1,884
Effect of projected future salary increases 1,126 624
--------- ---------
Projected benefit obligation $ 3,496 $ 2,508
-------- -------
Actuarial present value of projected benefit
obligations in excess of plan assets $(3,496) $(2,508)
Unrecognized prior service cost 2,779 2,280
Additional minimum liability (1,653) (1,656)
-------- -------
Accrued pension cost $(2,370) $(1,884)
======= =======
9. DIVIDENDS.
The Company paid no dividends during the three years ended December 31,
1996. The Company intends that the quarterly dividend payout in the last quarter
of each year will be adjusted to reflect the distribution of at least 95 percent
of the Company's REIT taxable income as required by the Federal income tax laws.
During December 1996, the Company's Board of Directors declared a quarterly
dividend of $0.05 per share payable on February 10, 1997, to shareholders of
record on January 6, 1997.
10. FEDERAL INCOME TAXES.
The Company is operated in a manner so as to qualify and has elected tax
treatment as a REIT. The Company's taxable loss prior to the dividends paid
42
deduction for the years ended December 31, 1996, 1995, and 1994 was
approximately $401,000, $23,265,000 and $15,954,000, respectively. The
difference between net income for financial reporting purposes and taxable
income/loss results primarily from different methods of accounting for bad
debts, depreciable lives related to the properties owned, advance rents received
and net operating loss carryforwards. At December 31, 1996, the net book basis
of the Company's assets and liabilities exceeded the net tax basis of assets and
liabilities in the amount of approximately $11.9 million.
The Company utilized approximately $323,000 and $593,000 of net operating
loss carryforwards to eliminate REIT taxable income for 1994 and 1995,
respectively. The Company's net operating loss carryforward available to offset
REIT taxable income for 1996 is approximately $14,949,000. The use of net
operating loss carryforwards and other tax attributes by the Company is subject
to certain limitations imposed by Internal Revenue Code Sections 382 and 383.
These limitations apply to both regular and alternative minimum taxes. These net
operating loss carryforwards and other tax attributes can be used in varying
degrees to offset REIT taxable income or tax through 2007. For 1995, the Company
paid alternative minimum taxes of approximately $103,000 and recorded a
provision for alternative minimum taxes of approximately $300,000 for 1996.
During 1996, the Internal Revenue Service ("IRS") completed its
examination of the Company's 1992 and 1993 Federal income tax returns and the
Koger Properties, Inc. ("KPI") final Federal income tax return. The IRS
submitted their Report to the Company and proposed disallowing certain
deductions on KPI's final Federal income tax return, the result of which reduced
the net operating loss carryforwards acquired from KPI from approximately $98
million to $30 million and required the payment of approximately $169,000 of
alternative minimum tax plus interest. Management believes this was a favorable
settlement with respect to KPI's final Federal income tax return. There were no
proposed adjustments to the Company's 1992 and 1993 tax returns.
11. LITIGATION.
A derivative action against the Company in the U. S. District Court,
Middle District of Florida (the "District Court"), which commenced on October
29, 1990, has been resolved in favor of the Company. Various amended filings and
counter-claims have been filed against the Company of which the Company does not
believe that the outcome will materially affect its operations or financial
position. The Company and the other parties to this derivative action have
agreed on a settlement of all claims and have submitted documentation thereof to
the District Court. On January 10, 1996, the District Court entered its order
approving this settlement (the "Approval Order") after notice to stockholders of
the Company. The Approval Order became final on or about February 12, 1996, and
the parties are now required to exchange documentation and effect other steps to
consummate this settlement. During 1995, the Company paid $50,000 for settlement
of this litigation.
During 1994, the Company settled a pending class action proceeding (the
"Securities Action"). The Company recorded a provision of $1,685,000 relating to
the settlement of the Securities Action and incurred additional costs related to
the settlement which totalled $217,000.
Under the terms of the merger agreement between the Company and KPI, the
Company agreed to indemnify the former non-officer directors of KPI other than
Ira M. Koger (the "Indemnified Persons") in respect of amounts to which such
Indemnified Person would be otherwise entitled to indemnification under Florida
43
law, the articles of incorporation or the by-laws of KPI arising out of acts or
omissions prior to September 25, 1991 (the "Indemnity"). The obligations, if
any, of the Company under such indemnification do not exceed (i) $1,000,000 in
the aggregate and (ii) $200,000 per Indemnified Person and are subject to
certain other conditions precedent. Certain of the former non-officer directors
of KPI were defendants in a Pension Plan class action suit (the "Roby Case").
The Company was not named in this suit. However, certain former non-officer
directors of KPI may be Indemnified Persons. The Company signed an agreement to
settle the Roby Case and placed in escrow $100,000 as its contribution to such
settlement for the Indemnified Persons. On January 9, 1997, the District Court
entered the Order and Final Judgment approving the agreement to settle the Roby
Case. The time for appeal of the Order and Final Judgment has passed with no
appeal having been taken. No provision has been made in the Consolidated
Financial Statements for any additional liability that may result from the
Indemnity.
12. COMMITMENTS AND CONTINGENCIES.
At December 31, 1996, the Company had commitments for the construction of
buildings and improvements to existing buildings of approximately $6.7 million.
On February 27, 1997, the Company sold 8.1 acres of unimproved land, with
a carrying value of $2 million, located in Miami, Florida for an aggregate sales
price of $2.97 million.
13. INTERIM FINANCIAL INFORMATION (UNAUDITED).
Selected quarterly information for the two years in the period ended
December 31, 1996, is presented below (in thousands except per share amounts):
Rental Total Net Earnings Per
Quarters Ended Revenues Revenues Income Common Share
- -------------- -------- -------- --------- ------------
March 31, 1995 $23,482 $25,446 $ 2,204 $ .12
June 30, 1995 24,255 26,125 2,026 .11
September 30, 1995 (1) 23,762 44,934 18,983 1.05
December 31, 1995 (2) 23,366 29,245 5,777 .32
March 31, 1996 23,985 25,177 3,016 .16
June 30, 1996 24,160 25,384 2,214 .12
September 30, 1996 24,515 25,751 2,261 .12
December 31, 1996(3) 25,682 27,760 3,010 .14
(1) The results for the quarter ended September 30, 1995 were affected by (i)
the interest revenue associated with the Company's investment in the TKPL
mortgage notes, (ii) the gain associated with the partial repayment of a
TKPL note to Southeast and (iii) the write-off of deferred offering costs.
(2) The results for the quarter ended December 31, 1995 were affected by
additional gain associated with the partial repayment of a TKPL note to
Southeast.
(3) The results for the quarter ended December 31, 1996 were affected by an
extraordinary loss on early retirement of debt. Income before
extraordinary item was $4,396 and earnings per common share before
extraordinary item was $0.21.
44
SCHEDULE II
KOGER EQUITY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(In Thousands)
Additions
Balance at Charged to Charged to Balance at
beginning of costs and other end of
Description period expenses accounts Deductions period
- ----------------------------------------------------------------------------------------------------------------------------
1996
- ----
Allowance for uncollectible accounts $ 391 $ 50 $ 0 $ 210(a) $ 231
======= -------- ------- ------ =======
Valuation allowance - land held
for sale $ 1,520 $ 0 $ 0 $ 500(b) $ 1,020
====== ========= ======= ====== ======
1995
Allowance for uncollectible accounts $ 362 $ 172 $ 0 $ 143(a) $ 391
------- ------- -------- ------ -------
Valuation allowance - land held
for sale $ 550 $ 970 $ 0 $ 0 $ 1,520
------- ------- -------- ------ ------
1994
Allowance for uncollectible accounts $ 651 $ 212 $ 0 $ 501(a) $ 362
------- ------- -------- ------ -------
Valuation allowance - land held
for sale $ 0 $ 996 $ 0 $ 446(b) $ 550
------- ------- -------- ------ -------
(a) Receivable balance which was determined to be uncollectible and
written-off in the applicable year.
(b) Land parcel was sold for which valuation allowance had been recorded.
45
KOGER EQUITY, INC. AND SUBSIDIARIES Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(in thousands)
COSTS CAPITALIZED
SUBSEQUENT
INITIAL COST TO ACQUISITION TOTAL COST
BLDGS & IMPROVE CARRYING BLDGS & (b)(c)
CENTER LAND IMPROV. MENTS COSTS LAND IMPROV. TOTAL
- ------ ---- ------- ---------- ------------ ---- ------- -----
OPERATING REAL ESTATE:
ATLANTA CHAMBLEE $ 13,145 $ 63,211 $ 7,507$ 0 $13,145 $70,718 $ 83,863
ATLANTA GWINNETT 0 3 0 0 0 3 3
AUSTIN 4,274 13,650 2,255 0 4,274 15,905 20,179
CHARLOTTE CARMEL 910 9,993 75 0 910 10,068 10,978
CHARLOTTE EAST 5,788 25,078 2,175 0 5,788 27,253 33,041
EL PASO 3,108 10,107 3,021 0 3,108 13,128 16,236
GREENSBORO SOUTH 6,384 38,700 3,501 0 6,384 42,201 48,585
GREENSBORO WENDOVER 0 11 0 0 0 11 11
GREENVILLE 3,833 16,104 2,635 0 3,833 18,739 22,572
JACKSONVILLE BAYMEADOWS 7,625 23,716 422 0 7,625 24,138 31,763
JACKSONVILLE CENTRAL 6,755 34,806 5,585 0 6,755 40,391 47,146
MEMPHIS GERMANTOWN 3,518 21,821 1,753 0 3,518 23,574 27,092
ORLANDO CENTRAL 8,342 30,575 5,912 0 8,342 36,487 44,829
ORLANDO UNIVERSITY 2,900 12,218 634 0 2,900 12,852 15,752
RICHMOND SOUTH 0 16 0 0 0 16 16
ST. PETERSBURG 6,657 29,525 3,969 0 6,657 33,494 40,151
SAN ANTONIO 9,638 29,649 7,719 0 9,638 37,368 47,006
TALLAHASSEE APALACHEE PKWY 6,063 28,043 4,502 0 6,063 32,545 38,608
TALLAHASSEE CAPITAL CIRCLE 3,561 22,903 1,168 0 3,561 24,071 27,632
TULSA 6,066 17,134 2,294 0 6,066 19,428 25,494
----- ------ ----- --- ----- ------ ------
SUBTOTALS 98,567 427,263 55,127 0 98,567 482,390 580,957
FURNITURE & EQUIPMENT 1,569 1,569 1,569
IMPROVEMENTS IN PROGRESS 446 446
----- ------ ----- --- ----- ------ ------
TOTAL OPERATING
REAL ESTATE $ 98,567 $428,832 $55,573$ 0 $98,567 $484,405 $582,972
----- ------ ----- - ----- ------ ------
46
KOGER EQUITY, INC. AND SUBSIDIARIES Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(in thousands)
(d) (a)
ACCUM. MORT- DATE DEPRECIABLE
CENTER DEPR. GAGES ACQUIRED LIFE
- ------ ----- ----- -------- ----
OPERATING REAL ESTATE:
ATLANTA CHAMBLEE $12,858 $ 14,809 1988 - 1993 3 - 40 YRS.
ATLANTA GWINNETT 1 0 1993 7 YRS.
AUSTIN 1,982 17,000 1990 - 1993 3 - 40 YRS.
CHARLOTTE CARMEL 784 0 1993 3 - 40 YRS.
CHARLOTTE EAST 3,766 0 1989 - 1993 3 - 40 YRS.
EL PASO 2,844 9,000 1990 - 1993 3 - 40 YRS.
GREENSBORO SOUTH 6,375 0 1988 - 1993 3 - 40 YRS.
GREENSBORO WENDOVER 4 0 1993 7 YRS.
GREENVILLE 3,567 11,000 1988 - 1993 3 - 40 YRS.
JACKSONVILLE BAYMEADOWS 1,974 27,500 1993 3 - 40 YRS.
JACKSONVILLE CENTRAL 7,216 401 1989 - 1993 3 - 40 YRS.
MEMPHIS GERMANTOWN 4,384 22,018 1988 - 1993 3 - 40 YRS.
ORLANDO CENTRAL 7,734 25,000 1988 - 1993 3 - 40 YRS.
ORLANDO UNIVERSITY 1,750 0 1990 - 1993 3 - 40 YRS.
RICHMOND SOUTH 12 0 1993 4 YRS.
ST. PETERSBURG 5,944 17,194 1988 - 1993 3 - 40 YRS.
SAN ANTONIO 7,437 20,203 1990 - 1993 3 - 40 YRS.
TALLAHASSEE APALACHEE PKWY 6,201 17,194 1988 - 1993 3 - 40 YRS.
TALLAHASSEE CAPITAL CIRCLE 3,406 20,582 1988 - 1993 3 - 40 YRS.
TULSA 3,515 1,512 1990 - 1993 3 - 40 YRS.
----- -----
SUBTOTALS 81,754 203,413
FURNITURE & EQUIPMENT 724 3 - 7 YRS.
IMPROVEMENTS IN PROGRESS
----- -----
TOTAL OPERATING
REAL ESTATE $ 82,478 $203,413
======== ========
46
KOGER EQUITY, INC. AND SUBSIDIARIES Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(in thousands)
COSTS CAPITALIZED
SUBSEQUENT
INITIAL COST TO ACQUISITION TOTAL COST
BLDGS & IMPROVE CARRYING BLDGS & (b)(c)
CENTER LAND IMPROV. MENTS COSTS LAND IMPROV. TOTAL
- ------ ---- ------- ----- ----- ---- ------- -----
PROPERTIES UNDER CONSTRUCTION:
CHARLOTTE CARMEL $ 886 $ 502 $ 0 $ 0 $ 886 $ 502 $ 1,388
MEMPHIS GERMANTOWN 1,197 428 0 0 1,197 428 1,625
-------- -------- ------- ----- -------- -------- --------
TOTAL UNDER CONSTRUCTION 2,083 930 0 0 2,083 930 3,013
-------- -------- ------- ----- -------- -------- --------
UNIMPROVED LAND:
ATLANTA GWINNETT 5,780 0 0 0 5,780 0 5,780
CHARLOTTE CARMEL 2,364 0 0 0 2,364 0 2,364
CHARLOTTE EAST 468 0 0 0 468 0 468
COLUMBIA SPRING VALLEY 100 0 0 0 100 0 100
GREENSBORO WENDOVER 1,491 0 0 0 1,491 0 1,491
GREENVILLE 949 0 0 0 949 0 949
JACKSONVILLE BAYMEADOWS 2,318 0 0 0 2,318 0 2,318
JACKSONVILLE CENTRAL 160 0 0 0 160 0 160
MEMPHIS GERMANTOWN 3,308 0 0 0 3,308 0 3,308
MIAMI 2,000 0 0 0 2,000 0 2,000
ORLANDO UNIVERSITY 2,880 0 0 0 2,880 0 2,880
RICHMOND SOUTH 1,860 0 0 0 1,860 0 1,860
ST. PETERSBURG 1,000 0 0 0 1,000 0 1,000
SAN ANTONIO 1,430 0 0 0 1,430 0 1,430
TULSA 1,000 0 0 0 1,000 0 1,000
-------- -------- ------- ----- -------- -------- --------
TOTAL UNIMPROVED LAND 27,108 0 0 0 27,108 0 27,108
-------- -------- ------- ----- -------- -------- --------
TOTAL $127,758 $429,762 $55,573 $ 0 $127,758 $485,335 $613,093
======== ======== ======= ===== ======== ======== ========
47
KOGER EQUITY, INC. AND SUBSIDIARIES Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(in thousands)
(d) (a)
ACCUM. MORT- DATE DEPRECIABLE
CENTER DEPR. GAGES ACQUIRED LIFE
- ------ ----- ----- -------- ----
- ------
PROPERTIES UNDER CONSTRUCTION:
CHARLOTTE CARMEL $ 0 $ 0
MEMPHIS GERMANTOWN 0 0
TOTAL UNDER CONSTRUCTION 0 0
UNIMPROVED LAND:
ATLANTA GWINNETT 0 0 1993
CHARLOTTE CARMEL 0 0 1993
CHARLOTTE EAST 0 0 1993
COLUMBIA SPRING VALLEY 0 0 1993
GREENSBORO WENDOVER 0 0 1993
GREENVILLE 0 0 1993
JACKSONVILLE BAYMEADOWS 0 0 1993
JACKSONVILLE CENTRAL 0 0 1989
MEMPHIS GERMANTOWN 0 0 1993
MIAMI 0 0 1993
ORLANDO UNIVERSITY 0 0 1993
RICHMOND SOUTH 0 0 1993
ST. PETERSBURG 0 0 1993
SAN ANTONIO 0 0 1993
TULSA 0 0 1993
-------- --------
TOTAL UNIMPROVED LAND 0 0
-------- --------
TOTAL $82,478 $203,413
======= ========
47
Schedule III
KOGER EQUITY, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(in thousands)
(a) At December 31, 1996, the outstanding balance of mortgages payable was
$203,413, which is gross of $369 of unamortized discounts.
(b) Aggregate cost basis for Federal income tax purposes was $647,605 at
December 31, 1996.
(c) Reconciliation of total real estate carrying value for the years ended
December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
---- ---- ----
Balance at beginning of year $601,594 $614,249 $606,806
Acquisitions and construction 1,058 330 384
Improvements 12,568 14,371 11,083
Transfer from/to other assets (257) 16
Sale of unimproved land (1,250) (4,761) (3,028)
Sale or disposition
operating real estate (620) (21,539)
Investment in KRSI (102)
Provision for loss - land parcels (970) (996)
-------- ------- --------
Balance at close of year $613,093 $601,594 $614,249
======== ======== ========
For 1995, the provision for loss was based upon a contract for the
sale of the Miami land parcel held for sale for which the contract
price ranges between $2,000 and $2,970 contingent upon the square
footage of office buildings which can be constructed on this land
parcel. For 1994, the provision for loss was based upon contracts for
the sale of two land parcels. The sale of one of these land parcels
was consummated during 1994, while the contract for the sale of the
other land parcel expired.
(d) Reconciliation of accumulated depreciation for the years ended
December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 62,845 $ 46,106 $ 30,706
Depreciation expense:
Operating real estate 19,538 17,363 15,202
Furniture and equipment 292 258 198
Investment in KRSI (31)
Sale or disposition of
operating real estate (197) (851)
-------- ------- --------
Balance at close of year $ 82,478 $62,845 $ 46,106
======== ======= ========
48
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about directors of the Company who are not executive officers
is contained in the Company's Proxy Statement (the "1997 Proxy Statement") and
is incorporated herein by reference.
The following tabulation lists the executive officers of the Company,
their ages and their occupations for the past five years:
Victor A. Hughes, Jr. ...................... Chairman of the Board, President, Chief Executive Officer,
Chief Financial Officer and Director
James C. Teagle............................. Executive Vice President, Chief Operating Officer and Director
W. Lawrence Jenkins ........................ Vice President of Administration and Corporate Secretary
James L. Stephens........................... Vice President and Chief Accounting Officer
Mr. Hughes, age 61, was elected Chairman and CEO on June 21, 1996. He has
served as President of the Company since August 22, 1995, and as Chief Financial
Officer of the Company since March 31, 1991. He held the positions of Senior
Vice President of the Company from May 20, 1991 through August 21, 1995, and
Vice President from April 1, 1990 through May 20, 1991. Mr. Hughes was also
Assistant Secretary of the Company from March 11, 1991 through December 21,
1993. Mr. Hughes was elected to the Board of Directors of the Company on July
27, 1992.
Mr. Teagle, age 55, has been Executive Vice President and Chief Operating
Officer since June 21, 1996. He had previously held the positions of Senior Vice
President of the Company since May 10, 1994, and Vice President from December
21, 1993 to May 10, 1994. Mr. Teagle was a Vice President of KPI from July, 1973
to December 21, 1993. Mr. Teagle was elected to the Board of Directors of the
Company on October 10, 1996.
Mr. Jenkins, age 53, has been the Corporate Secretary of the Company since
December 21, 1993, and Vice President of the Company since May 10, 1994. Mr.
Jenkins served as Corporate Secretary of KPI from June 7, 1973 through December
21, 1993, and as Vice President/Administration of KPI from August 7, 1990
through December 21, 1993.
Mr. Stephens, age 39, has been Vice President of the Company since May 7,
1996, and was the Treasurer of the Company from March 31, 1991 to May 7, 1996.
He has served as Chief Accounting Officer of the Company since March 31, 1991.
He held the position of Assistant Secretary of the Company from May 20, 1991
through December 21, 1993.
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's directors and executive officers file with the Securities and Exchange
Commission (the "SEC") and the American Stock Exchange initial reports of
ownership and reports of changes in ownership of the Company's equity
securities. Executive officers and directors are required by regulations of the
SEC to furnish the Company with copies of all Section 16(a) forms they file.
49
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1996, the
Company's executive officers and directors complied with all Section 16(a)
filing requirements.
Item 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
to the section headed "Executive Compensation" in the 1997 Proxy Statement
(except for information contained under the headings "Compensation Committee
Report on Executive Compensation" and "Shareholder Return
Performance Presentation").
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The stock ownership of each person known to the Company to be the
beneficial owner of more than five percent (5%) of its outstanding common stock
is incorporated by reference to the section headed "Principal Holders of Voting
Securities" of the 1997 Proxy Statement. The beneficial ownership of Common
Stock of all directors of the Company is incorporated by reference to the
section headed "Election of Directors" contained in the 1997 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to Item 1. "Business," 2. "Properties," 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 2 "Transactions With Related Parties" to the Notes to Consolidated
Financial Statements contained in this Report and to the heading "Certain
Relationships and Transactions" contained in the 1997 Proxy Statement for
information regarding certain relationships and related transactions which
information is incorporated herein by reference.
50
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) See "Item 8 - Financial Statements and Supplementary Data -
Index to Consolidated Financial Statements and Financial
Statement Schedules" for a list of the financial statements
included in this report.
(2) The consolidated supplemental financial statement schedules
required by Regulation S-X are included on pages 45 through
48 in this Form.
(b) Reports on Form 8-K:
On October 10, 1996, the Company filed a Form 8-K reporting
under Item 5, Other Events, that the Company had issued a New
Release and providing under Item 7, Financial Statements and
Exhibits, a copy of the Koger Equity, Inc. News Release,
dated October 10, 1996.
(c) The following exhibits are filed as part of this report:
Exhibit
Number Description
- --------------------------------------------------------------------------------
2 Agreement and Plan of Merger, dated as of December
21, 1993 between the Company and Koger Properties,
Inc. Incorporated by reference to Exhibit 2 of Form
10-K filed by the Registrant for the period ended
December 31, 1993 (File No. 1-9997).
3(a) Amended and Restated Articles of Incorporation of
Koger Equity, Inc. Incorporated by reference to
Exhibit 3 of the Form 8-K, dated May 10, 1994, filed
by the Registrant on June 17, 1994 (File No.
1-9997).
3(b) Koger Equity, Inc. By Laws, as Amended and Restated
on August 21, 1996. Incorporated by reference to
Exhibit 3(ii) of the Form 8-K/A, dated August 22,
1996 filed by the Registrant on August 22, 1996
(File No. 1-9997).
4(a) Common Stock Certificate of Koger Equity, Inc.
Incorporated by reference to Exhibit 4(a) to
Registration Statement on Form S-11 (Registration
No. 33-22890).
4(b)(1)(A) Koger Equity, Inc. Rights Agreement (the "Rights
Agreement") dated as of September 30, 1990 between
the Company and Wachovia Bank and Trust Company,
N.A. as Rights Agent ("Wachovia").Incorporated by
reference to Exhibit 1 to a Registration Statement
on Form 8-A, dated October 3, 1990 (File No.
1-9997).
4(b)(1)(B) First Amendment to the Rights Agreement, dated as of
March 22, 1993, between the Company and First Union
National Bank of North Carolina, as Rights Agent
("First Union"), entered into for the purpose of
replacing Wachovia. Incorporated by reference to
Exhibit 4(b)(4) of the Form 10-Q filed by the
Registrant for the quarter ended March 31, 1993
(File No. 1-9997).
4(b)(1)(C) Second Amendment to the Rights Agreement, dated as
of December 21, 1993, between the Company and First
Union. Incorporated by reference to Exhibit 5 to an
Amendment on Form 8-A/A, dated December 21, 1993, to
a Registration Statement of the Registrant on Form
8-A, dated October 3, 1990 (File No. 1-9997).
4(b)(1)(D) Third Amendment to Rights Agreement, dated as of
October 10, 1996, between Koger Equity, Inc. and
First Union. Incorporated by reference to Exhibit 6
to an Amendment on Form 8-A/A, dated November 7,
1996, to a Registration Statement of the Registrant
on Form 8-A, dated October 3, 1990 (File No.
1-9997).
4(b)(1)(E) Fourth Amendment to Rights Agreement, dated as of
February 27, 1997, between Koger Equity, Inc. and
First Union. Incorporated by reference to Exhibit 8
to an Amendment on Form 8-A/A, dated March 17, 1997,
to a Registration Statement of the Registrant on
Form 8-A, dated October 3, 1990 (File No. 1-9997).
4(b)(2) Form of Common Stock Purchase Rights Certificate
(attached as Exhibit A to the Rights Agreement).
Pursuant to the Rights Agreement, printed Common
Stock Purchase Rights Certificates will not be
mailed until the Distribution Date (as defined in
the Rights Agreement).
4(b)(3) Summary of Common Stock Purchase Rights (attached as
Exhibit B to the Rights Agreement, Exhibit
4(b)(1)(A)).
51
Exhibit
Number Description
- --------------------------------------------------------------------------------
4(c)(1) Warrant Agreement, dated as of December 21, 1993,
between the Company and First Union (the "Warrant
Agreement"). Incorporated by reference to Exhibit 2
to an Amendment on Form 8-A/A, dated December 21,
1993, to a Registration Statement on Form 8-A, dated
September 30, 1993 (File No. 1-9997).
4(c)(2) Form of a Common Share Purchase Warrant issued
pursuant to the Warrant Agreement. Incorporated by
reference to Exhibit 1 to an Amendment on Form
8-A/A, dated December 21, 1993, to a Registration
Statement on Form 8-A, dated September 30, 1993
(File No. 1-9997).
10(a)(1)(A) Koger Equity, Inc. Amended and Restated 1988 Stock
Option Plan. Incorporated by reference to Exhibit
10(e)(1)(A) of Form 10-Q filed by the Registrant for
the quarter ended June 30, 1992 (File No. 1-9997).
10(a)(1)(B) Form of Stock Option Agreement pursuant to Koger
Equity, Inc. Amended and Restated 1988 Stock Option
Plan. Incorporated by reference to Exhibit
10(e)(2)(A) of Form 10-Q filed by the Registrant for
the quarter ended June 30, 1992 (File No. 1-9997).
10(a)(1)(C) Form of Amendment to Stock Option Agreement pursuant
to Koger Equity, Inc. Amended and Restated 1988
Stock Option Plan.*
10(a)(2)(A) Koger Equity, Inc. 1993 Stock Option Plan.
Incorporated by reference to Exhibit II to
Registrant's Proxy Statement dated June 30, 1993
(File No. 1-9997).
10(a)(2)(B) Form of Stock Option Agreement pursuant to Koger
Equity, Inc. 1993 Stock Option Plan. Incorporated by
reference to Exhibit 10(e)(3)(B) of Form 10-K filed
by the Registrant for the period ended December 31,
1994 (File No. 1-9997).
10(a)(2)(C) Form of Amendment to Stock Option Agreement pursuant
to Koger Equity, Inc. 1993 Stock Option Plan.*
10(a)(3)(A) Koger Equity, Inc. 1996 Stock Option Plan.*
10(a)(3)(B) Form of Stock Option Agreement pursuant to Koger
Equity, Inc. 1996 Stock Option Plan.*
10(b)(1) Shareholders Agreement, dated August 9, 1993,
between the Company and TCW Special Credits, a
California general partnership. Incorporated by
reference to Exhibit 10(o) of Form 10-K filed by the
Registrant for the period ended December 31, 1993
(File No. 1-9997).
10(b)(2) Registration Rights Agreement, dated as of August 9,
1993, between the Company and TCW Special Credits, a
California general partnership. Incorporated by
reference to Exhibit 10(p) of Form 10-K filed by the
Registrant for the period ended December 31, 1993
(File No. 1-9997).
10(c) License Agreement, dated as of July 28, 1995,
between Koger Equity, Inc. and Koger Realty
Services, Inc. Incorporated by reference to Exhibit
10(v) of Form 10-Q filed by the Registrant for the
quarter ended June 30, 1995 (File No. 1-9997).
10(d) Supplemental Executive Retirement Plan, dated as of
August 18, 1995 to be effective as of June 28, 1995.
Incorporated by reference to Exhibit 10(w) of Form
10-Q filed by the Registrant for the quarter ended
September 30, 1995 (File No. 1-9997).
10(e) Form of Indemnification Agreement between Koger
Equity, Inc. and its Directors and certain of its
officers. Incorporated by reference to Exhibit 10(x)
of Form 10-K filed by the Registrant for the year
ended December 31, 1995 (File No. 1-9997).
10(f)(1) Employment Agreement between Koger Equity, Inc. and
Victor A. Hughes, Jr. effective as of June 21, 1996.
Incorporated by reference to Exhibit 10(y)(1) of
Form 10-Q filed by the Registrant for the quarter
ended September 30, 1996 (File No. 1-9997).
10(f)(2) Employment Agreement between Koger Equity, Inc. and
James C. Teagle, effective as of June 21, 1996.
Incorporated by reference to Exhibit 10(y)(2) of
Form 10-Q filed by the Registrant for the quarter
ended September 30, 1996 (File No. 1-9997).
10(g)(1)(A) Stock Purchase Agreement, dated as of October 10,
1996, between Koger Equity, Inc. and AP- KEI
Holdings, LLC, a Delaware limited liability company.
Incorporated by reference to Exhibit 7 to an
Amendment on Form 8-A/A, dated November 7, 1996, to
a Registration Statement of the Registrant on Form
8-A, dated October 3, 1990 (File No. 1-9997).
52
Exhibit
Number Description
- --------------------------------------------------------------------------------
10(g)(1)(B) Registration Rights Agreement, dated as of October
10, 1996, between Koger Equity, Inc. and AP-KEI
Holdings, LLC, a Delaware limited liability company.
Incorporated by reference to Exhibit A of the Stock
Purchase Agreement, dated as of October 10, 1996,
between Koger Equity, Inc. and AP-KEI Holdings, LLC,
which is Exhibit 7 to an Amendment on Form 8-A/A,
dated November 7, 1996, to a Registration Statement
on Form 8-A, dated October 3, 1990 (File No.
1-9997).
10(g)(2)(A) Amendment No. 1 to Stock Purchase Agreement, dated
as of February 27, 1997, between Koger Equity, Inc.
and AP-KEI Holdings, LLC. Incorporated by reference
to Exhibit 9 to an Amendment on Form 8-A/A, dated
March 17, 1997, to a Registration Statement of the
Registrant on Form 8-A, dated October 3, 1990 (File
No. 1-9997).
10(g)(2)(B) Assignment and Assumption Agreement, dated as of
February 27, 1997, among and between Koger Equity,
Inc. and AP-KEI Holdings, LLC and AREIF II Realty
Trust, Inc. Incorporated by reference to Exhibit 10
to an Amendment on Form 8-A/A, dated March 17, 1997,
to a Registration Statement of the Registrant on
Form 8-A, dated October 3, 1990 (File No. 1-9997).
10(h) Consulting Agreement, dated as of June 21, 1996,
between Koger Equity, Inc. and Irvin H. Davis.
Incorporated by reference to Exhibit 10(ab) of Form
10-Q filed by the Registrant for the quarter ended
September 30, 1996 (File No. 1-9997).
10(i) Consulting Agreement, dated as of March 14, 1996,
between Koger Equity, Inc. and David B. Hiley.
Incorporated by reference to Exhibit 10(ac) of Form
10-Q filed by the Registrant for the quarter ended
September 30, 1996 (File No. 1-9997).
10(j)(1) Loan Application, dated July 29, 1996, by Koger
Equity, Inc. to The Northwestern Mutual Life
Insurance Company. Incorporated by reference to
Exhibit 10(j)(1) on Form 8-K, dated December 16,
1996, filed by the Registrant on March 10, 1997
(File No. 1-9997).
10(j)(2)(A) Koger Equity, Inc. Tranche A Promissory Note, dated
December 16, 1996, in the principal amount of
$100,500,000 payable to The Northwestern Mutual Life
Insurance Company. Incorporated by reference to
Exhibit 10(j)(2)(A) on Form 8-K, dated December 16,
1996, filed by the Registrant on March 10, 1997
(File No. 1-9997).
10(j)(2)(B) Koger Equity, Inc. Tranche B Promissory Note, dated
December 16, 1996, in the principal amount of
$89,500,000 payable to The Northwestern Mutual Life
Insurance Company. Incorporated by reference to
Exhibit 10(j)(2)(B) on Form 8-K, dated December 16,
1996, filed by the Registrant on March 10, 1997
(File No. 1-9997).
10(j)(3)(A) Master Lien Instrument from Koger Equity, Inc. to
The Northwestern Mutual Life Insurance Company,
dated December 16, 1996, (1) with Mortgage and
Security Agreement for Duval, Leon, Orange and
Pinellas Counties, Florida and (2) with Deed of
Trust and Security Agreement for Greenville County,
South Carolina, Shelby County, Tennessee and Bexar,
El Paso and Travis Counties, Texas. Incorporated by
reference to Exhibit 10(j)(3)(A) on Form 8-K, dated
December 16, 1996, filed by the Registrant on March
10, 1997 (File No. 1-9997).
10(j)(3)(B) Absolute Assignment of Leases and Rents from Koger
Equity, Inc. to The Northwestern Mutual Life
Insurance Company, dated December 16, 1996, for
Duval, Leon, Orange, and Pinellas, Counties,
Florida, Greenville County, South Carolina, Shelby
County, Tennessee and Bexar, El Paso and Travis
Counties, Texas. Incorporated by reference to
Exhibit 10(j)(3)(B) on Form 8-K, dated December 16,
1996, filed by the Registrant on March 10, 1997
(File No. 1-9997).
10(j)(4) Environmental Indemnity Agreement, dated December
16, 1996, between Koger Equity, Inc. and The
Northwestern Mutual Life Insurance Company and
others. Incorporated by reference to Exhibit
10(j)(4) on Form 8-K, dated December 16, 1996, filed
by the Registrant on March 10, 1997 (File No.
1-9997).
53
Exhibit
Number Description
- --------------------------------------------------------------------------------
10(j)(5) Certificate of Borrower contained in letter, dated
December 16, 1996, from Koger Equity, Inc. to The
Northwestern Mutual Life Insurance Company.
Incorporated by reference to Exhibit 10(j)(5) on
Form 8-K, dated December 16, 1996, filed by the
Registrant on March 10, 1997 (File No. 1-9997).
11 Earnings Per Share Computations.*
21 Subsidiaries of the Registrant.*
23 Independent Auditors' Consent.*
27 Financial Data Schedule.*
*Filed with this Report.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Koger Equity, Inc., has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
KOGER EQUITY, INC.
By: VICTOR A. HUGHES, JR.
----------------------
Victor A. Hughes, Jr.
Chairman of the Board and Chief Executive Officer
Date: March 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
VICTOR A. HUGHES, JR. Chairman of the Board, and March 19, 1997
- ----------------------------
(Victor A. Hughes, Jr.) Chief Executive Officer
JAMES C. TEAGLE Executive Vice President, Chief March 19, 1997
- ----------------------------
(James C. Teagle) Operating Officer and Director
JAMES L. STEPHENS Vice President and Chief March 19, 1997
- ----------------------------
(James L. Stephens) Accounting Officer
D. PIKE ALOIAN Director March 19, 1997
(D. Pike Aloian)
BENJAMIN C. BISHOP Director March 19, 1997
(Benjamin C. Bishop)
IRVIN H. DAVIS Director March 19, 1997
(Irvin H. Davis)
DAVID B. HILEY Director March 19, 1997
- ----------------------------
(David B. Hiley)
G. CHRISTIAN LANTZSCH Director March 19, 1997
(G. Christian Lantzsch)
WILLIAM L. MACK Director March 19, 1997
- ----------------------------
(William L. Mack)
LEE S. NEIBART Director March 19, 1997
(Lee S. Neibart)
W. EDWARD SCHEETZ Director March 19, 1997
(W. Edward Scheetz)
GEORGE F. STAUDTER Director March 19, 1997
- ----------------------------
(George F. Staudter)
S. D. STONEBURNER Director March 19, 1997
- ----------------------------
(S. D. Stoneburner)
55