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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
For the fiscal year ended DECEMBER 31, 1997 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 1-9997
KOGER EQUITY, INC.
(Exact name of Registrant as specified in its Charter)
FLORIDA 59-2898045
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer
3986 BOULEVARD CENTER DRIVE, SUITE 101 Identification No.)
JACKSONVILLE, FLORIDA 32207
(Address of principal executive offices) (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
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.
------
The aggregate market value of the voting stock held by non-affiliates of the
registrant on February 27, 1998 was approximately $566,873,000.
The number of shares of registrant's Common Stock outstanding on February 27,
1998 was 25,477,450.
Documents Incorporated by Reference
The Company's Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Act of 1934 for the 1998 Annual Meeting of Shareholders is
incorporated by reference in Part III of this report.
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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................................................................................. 58
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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 buildings primarily located in 19 office centers (each a
"Koger Center") located in 13 metropolitan areas throughout the southeastern and
southwestern United States. As of December 31, 1997, KE owns 228 office
buildings (each an "Office Building"), of which 224 are in Koger Centers and
four are outside Koger Centers but in metropolitan areas where Koger Centers are
located. The Office Buildings contain approximately 8.5 million net rentable
square feet and were on average 92 percent leased as of December 31, 1997.
During 1997, KE began construction of eight buildings which will contain
approximately 650,000 net rentable square feet and will be ready for occupancy
at various times throughout 1998. 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
compatible with its properties in other markets primarily in the Southeast and
Southwest if such acquisitions can be made on terms favorable to the Company.
KE owns approximately 137 acres of unencumbered land held for development
and approximately 21 acres of unencumbered land held for sale. A majority of the
land held for development adjoins Office Buildings in 11 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
eight buildings under construction on approximately 52 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.
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.
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,
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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. Koala continued to hold an option to purchase from KE two additional
parcels of land in Miami, Florida until February 1997 when 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
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
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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, 1997. At that
date, the State of Florida accounted for an aggregate of 11 percent of the
Company's total net rentable square feet leased and 12.2 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 percent of the Company's total annualized
rental revenues as of December 31, 1997. Some of the Company's principal tenants
are the State of Florida, the United States of America, Blue Cross and Blue
Shield of Florida, Aetna Life Insurance Company, Ford Motors, Wellspring
Resources, Lumbermens Mutual Casualty Company, Norwest Bank of Texas, First Data
Resources and Landstar. Governmental tenants (including the State of Florida and
the United States of America), which account for 22.6 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, 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. Also during 1996, the Company
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 1997, the Company closed on a $100 million
revolving credit facility which is available to finance growth opportunities.
The plan also contemplates the possible use by the Company of its existing
inventory of 137 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 primarily in the Southeast and Southwest that the Company
considers favorable. Although all of the Company's properties are located in the
Southeast and Southwest, management does not consider that the Company's
development and acquisitions activities are limited to any particular area.
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
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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. 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, 1997, all of the Company's rental revenues
were derived from the buildings purchased or constructed by the Company. The
Company's 1997 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 224 employees. A resident general
manager is responsible for the leasing and operations of all buildings in a
Koger Center or city. The Company has approximately 89 employees who perform
maintenance activities.
ITEM 2. PROPERTIES
GENERAL
As of December 31, 1997, the Company owned 228 office buildings located 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 eight
buildings which were under construction. The Koger Centers have been developed
in campus-like settings with extensive landscaping and ample tenant parking. The
Office 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
for terms of up to 20 years. As of December 31, 1997, the Office Buildings were
on average 92 percent leased and the average annual rent per net rentable square
foot leased was $15.02. 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, 1997,
approximately 36 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 57 percent of such revenues were derived from leases
containing escalation provisions based upon real estate tax and operating
expense increases; and approximately 7 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
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varying periods, generally at the same rental rate and subject, in most
instances, to Consumer Price Index escalation provisions.
The Company owns approximately 167 acres of unimproved land (158 acres of
which are suitable for development) located in the metropolitan areas of
Jacksonville, Orlando and St. Petersburg, Florida; Atlanta, Georgia; Charlotte
and Greensboro, North Carolina; Tulsa, Oklahoma; Columbia and Greenville, South
Carolina; Memphis, Tennessee; Austin, El Paso 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 eight
buildings under construction on approximately 52 acres of this unimproved land.
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PROPERTY LOCATION AND OTHER INFORMATION
The following table sets forth information relating to the properties
owned by the Company as of December 31, 1997.
AVERAGE LAND
NUMBER AGE OF NET IMPROVED UNIMPROVED
OF BUILDINGS RENTABLE WITH BLDGS. LAND
KOGER CENTER/LOCATION BUILDINGS (IN YEARS) (1) SQ. FT. (IN ACRES) (IN ACRES)
- --------------------- ---------- --------------- -------------- ------------- -------------
Atlanta Chamblee 22 17 947,920 76.2 2.5
Atlanta Gwinnett 1 6 79,800 4.5 31.0(2)
Atlanta Perimeter 1 12 154,100 5.3
Austin 12 17 370,860 29.6 1.8
Charlotte Carmel 2 4 170,800 15.0 19.6(3)
Charlotte East 11 17 468,820 39.9 3.9
Columbia Spring Valley 1.0
El Paso 16 23 298,330 22.7 2.4
Greensboro South 13 15 610,470 46.0
Greensboro Wendover 18.5(4)
Greenville Park Central 3 13 134,000 9.9 3.5
Greenville Roper Mt. 8 15 290,560 24.7 4.5(5)
Jacksonville Baymeadows 4 7 468,000 34.6 13.3(6)
Jacksonville Central 31 25 665,670 47.2 1.6
Jacksonville Deerwood 1 6 23,000 2.2
Memphis Germantown 4 8 299,100 23.6 11.0(7)
Orlando Central 22 26 565,220 46.0
Orlando University 2 9 159,600 11.6 15.5(8)
Richmond South 5.8
San Antonio Airport 2 13 200,100 7.9
San Antonio West 26 20 788,670 63.5 7.2
St. Petersburg 15 17 519,320 64.4 11.0
Tallahassee Apalachee Pkwy 14 21 408,500 33.7
Tallahassee Capital Circle 5 8 381,200 29.0
Tulsa 13 18 476,280 36.0 13.4
---- ---------- ------ ------
Total 228 8,480,320 673.5 167.5
==== ========== ====== ======
Average 17
==
(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
4.4 acres of this parcel.
(3) The Company currently has a building under construction on approximately
10.2 acres of this parcel.
(4) The Company currently has a building under construction on approximately
6.4 acres of this parcel.
(5) The Company currently has a building under construction on approximately
4.5 acres of this parcel.
(6) The Company currently has two buildings under construction on approximately
13.3 acres of this parcel.
(7) The Company currently has a building under construction on approximately
5.7 acres of this parcel.
(8) The Company currently has a building under construction on approximately
7 acres of this parcel.
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PERCENT LEASED AND AVERAGE RENTAL RATES
The following table sets forth, with respect to each Koger Center or
location, 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, 1997.
NET AVERAGE
NUMBER NUMBER RENTABLE ANNUAL
OF OF SQUARE PERCENT RENT PER
KOGER CENTER/LOCATION BUILDINGS LEASES FEET LEASED (1) SQUARE FOOT(2)
- ---------------------- ---------- ------------ ---------- ------------ --------------
Atlanta Chamblee 22 165 947,920 96% $15.41
Atlanta Gwinnett 1 13 79,800 88% 15.80
Atlanta Perimeter 1 9 154,100 100% 17.14
Austin 12 190 370,860 100% 17.94
Charlotte Carmel 2 24 170,800 75% 17.25
Charlotte East 11 219 468,820 83% 13.23
El Paso 16 195 298,330 93% 15.17
Greensboro South 13 199 610,470 97% 14.85
Greenville Park Central 3 55 134,000 94% 16.27
Greenville Roper Mt. 8 145 290,560 96% 15.31
Jacksonville Baymeadows 4 32 468,000 100% 17.15
Jacksonville Central 31 241 665,670 89% 12.04
Jacksonville Deerwood 1 1 23,000 100% 16.48
Memphis Germantown 4 65 299,100 99% 17.73
Orlando Central 22 173 565,220 92% 14.79
Orlando University 2 49 159,600 98% 17.09
San Antonio Airport 2 61 200,100 91% 15.70
San Antonio West 26 289 788,670 92% 13.18
St. Petersburg 15 160 519,320 91% 13.71
Tallahassee Apalachee Pkwy 14 89 408,500 93% 16.58
Tallahassee Capital Circle 5 9 381,200 76% 18.12
Tulsa 13 179 476,280 82% 11.39
--- -------- -------
Total 228 2,562 8,480,320
=== ======= =========
Weighted Average 92% $15.02
=== ======
(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-through and reimbursements) for a Koger Center
or location as of December 31, 1997 by (b) the net rentable square feet
applicable to such total annualized rents.
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LEASE EXPIRATIONS ON THE COMPANY'S PROPERTIES
The following schedule sets forth with respect to all of the Office Buildings
(a) the number of leases which will expire in calendar years 1998 through 2006,
(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
annualized rents represented by such leases, and (f) the percentage of gross
annualized rents contributed by such leases. This information is based on the
buildings owned by the Company on December 31, 1997 and on the terms of leases
in effect as of December 31, 1997, 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 65 percent,
63 percent and 67 percent of the Company's net rentable square feet which were
scheduled to expire during 1997, 1996 and 1995, 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
- ------ ---------- ----------- --------------- --------------- --------------- ---------------
1998 1,198 2,261,715 29.1% $14.69 $ 33,220,276 28.5%
1999 577 1,406,771 18.1% 14.10 19,839,779 17.0%
2000 447 1,241,990 16.0% 15.28 18,983,733 16.3%
2001 155 1,103,443 14.2% 15.48 17,080,525 14.6%
2002 110 681,042 8.8% 15.51 10,565,935 9.1%
2003 31 253,719 3.3% 14.51 3,681,917 3.1%
2004 13 179,014 2.3% 13.76 2,464,126 2.1%
2005 5 31,064 0.4% 12.16 377,714 0.3%
2006 10 161,835 2.1% 18.52 2,997,516 2.6%
Other 16 444,328 5.7% 16.70 7,422,460 6.4%
----- ---------- -------- ------------ -------
Total 2,562 7,764,921 100.0% $15.02 $116,633,981 100.0%
===== ========== ======== ====== ============ =======
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, 1997. The information set forth below
is not necessarily indicative of future expenditures for these items.
BUILDING IMPROVEMENTS TENANT IMPROVEMENTS DEFERRED TENANT COSTS
------------------------ ------------------------- ---------------------------
NUMBER PER AVERAGE PER AVERAGE PER AVERAGE
OF OFFICE NET SQUARE NET SQUARE NET SQUARE
YEAR BUILDINGS TOTAL FT. OWNED TOTAL FT. OWNED TOTAL FT. OWNED
- ------- --------- ---------- ------------ ---------- ----------- ------------ ------------
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
1997(3) 226 3,116,000 0.39 7,513,000 0.94 1,902,000 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 commenced in 1997.
(3) Excludes the two buildings for which construction was completed during 1997.
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FIXED RATE INDEBTEDNESS ON THE COMPANY'S PROPERTIES
The following table sets forth with respect to each Koger Center or
location 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 or
location as of December 31, 1997.
WEIGHTED
MORTGAGE AVERAGE
LOAN INTEREST
KOGER CENTER/LOCATION BALANCE RATE
- ---------------------- ----------- ---------
Atlanta Chamblee $ 0 -
Atlanta Gwinnett 0 -
Atlanta Perimeter 0 -
Austin 16,788 8.33%
Charlotte Carmel 0 -
Charlotte East 0 -
El Paso 8,888 8.33%
Greensboro South 0 -
Greenville Park Central 0 -
Greenville Roper Mt. 10,863 8.33%
Jacksonville Baymeadows 27,158 8.33%
Jacksonville Central 0 -
Jacksonville Deerwood 0 -
Memphis Germantown 14,898 8.25%
Orlando Central 24,689 8.33%
Orlando University 0 -
San Antonio Airport 0 -
San Antonio West 21,881 8.25%
St. Petersburg 18,622 8.25%
Tallahassee Apalachee Pkwy 18,622 8.25%
Tallahassee Capital Circle 19,553 8.25%
Tulsa 0 -
------------
Total $181,962 8.29%
============ =====
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, 1997, the Company had a $100 million secured revolving
credit facility with variable interest rates and encumbering certain of the
Company's properties. The following table sets forth historical information with
respect to indebtedness having variable interest rates (dollars in thousands):
WEIGHTED APPROXIMATE APPROXIMATE
BALANCE AVERAGE 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
- ----------- ------------ --------------- ----------- ----------- -------------
1997 $ 1 8.5% $40,000 $ 8,077 8.0%
1996 0 - 22,276 18,280 9.3%
1995 22,276 9.5% 58,352 47,945 8.4%
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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
------------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ---------------------- --------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------- ----------- ----------- -------- ------- ------- ------
March 31 $18 5/8 $17 1/4 $12 1/4 $10 3/4 $ 7 7/8 $6 3/4
June 30 18 1/4 15 3/8 13 3/8 11 9 6 3/4
September 30 20 13/16 17 11/16 16 13 10 1/8 8 5/8
December 31 23 3/8 20 1/8 18 3/4 15 1/8 10 5/8 9 1/8
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.
Set forth below are the dividends per share paid during the three years
ended December 31, 1997.
YEARS
--------------------------
QUARTER ENDED 1997 1996 1995
------------- ---- ---- ----
March 31 $.05 - -
June 30 .05 - -
September 30 .10 - -
December 31 .15 - -
On February 4, 1998, the Company paid a quarterly dividend of $0.25 per
share to shareholders of record on December 31, 1997. In addition, the Company's
Board of Directors has declared a quarterly dividend of $0.25 per share payable
on May 6, 1998, to shareholders of record on March 31, 1998.
On February 27, 1998, there were approximately 1,559 shareholders of
record and the closing price of the Company's common stock on the American Stock
Exchange was $22.25.
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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)
--------------------------------------------------------------------
1997 1996 1995 1994 1993*
----------- ---------- ----------- --------- --------
INCOME INFORMATION
Rental revenues and other rental services $109,501 $ 98,805 $ 95,443 $ 94,388 $ 46,108
Interest revenues 1,274 1,951 14,440 1,062 206
Total revenues 113,989 104,072 125,750 100,376 46,406
Property operations expenses 44,453 41,597 40,830 39,711 21,034
Depreciation and amortization 24,073 21,127 19,102 16,728 8,958
Mortgage and loan interest 16,517 18,701 23,708 25,872 11,471
Net income 21,204 10,501 28,990 4,215 2,452
Earnings per common share - diluted .94 .54 1.61 .24 .18
Dividends declared per common share .55 .05
Weighted average shares outstanding - diluted 22,495 19,500 18,011 17,719 13,352
BALANCE SHEET INFORMATION
Operating properties (before depreciation) $681,249 $582,972 $571,313 $578,237 $566,770
Undeveloped land 14,761 27,108 30,281 36,012 40,036
Total assets 656,097 584,666 578,756 613,806 615,089
Mortgages and loans payable 181,963 203,044 254,909 323,765 330,625
Total shareholders' equity 444,262 364,135 310,697 280,601 275,450
OTHER INFORMATION
Funds from operations (1) $ 42,324 $ 33,154 $ 36,707 $ 23,475 $ 11,075
Income before interest, income taxes,
depreciation and amortization $ 62,729 $ 51,144 $ 71,866 $ 47,042 $ 22,881
Number of buildings (at end of period) 228 215 216 219 219
Percent leased (at end of period) 92% 92% 91% 90% 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):
1997 1996 1995 1994 1993
------- ------- ------- -------- --------
Net income $21,204 $10,501 $28,990 $ 4,215 $ 2,452
Depreciation - real estate 21,795 19,538 17,363 15,202 8,403
Amortization - deferred tenant costs 1,031 929 656 452 197
Amortization - goodwill 170 171 504 665 23
Litigation costs 424 176 1,902
Loss (gain) on sale or disposition of assets (1,955) 497 255 43
Provision for loss on land held for sale (379) 970 996
Gain on TKPL note to Southeast (292) (11,288)
Loss (gain) on early retirement of debt 458 1,386 (919)
------- ------- ------- ------- -------
Funds from Operations $42,324 $33,154 $36,707 $23,475 $11,075
======= ======= ======= ======= =======
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.
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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 December 17, 1997, the Company completed a public offering of 3.5
million shares of its common stock, three million shares of which were sold in
an underwritten offering for an aggregate sales price of $60.75 million, and
500,000 of such shares were sold to AREIF II Realty Trust, Inc., an affiliate of
Apollo Real Estate Investment Fund II, L.P. (together referred to as "Apollo"),
for an aggregate sales price of $9.57 million. The Company applied approximately
$51.6 million of the proceeds from this sale to the repayment of indebtedness
with an average interest rate of approximately 8.6 percent.
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RESULTS OF OPERATIONS
RENTAL REVENUES. For 1997, rental revenues increased $10,582,000 from 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) rental revenues from the properties acquired and construction completed
during 1997 ($5,051,000). 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 (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, 1997, the Company's buildings were on average 92
percent leased. As of December 31, 1996 and 1995, the buildings owned by the
Company were on average 92 and 91 percent leased, respectively.
MANAGEMENT FEE REVENUES. For 1997, management fee revenues remained
basically unchanged from those earned in 1996. 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.
INTEREST REVENUES. For 1997, interest revenues decreased $677,000 from the
year ended December 31, 1996. This decrease was due to the lower average balance
of cash to invest. 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).
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 1997, property operating
expenses increased by $2,856,000 or 6.9 percent, compared to 1996, primarily due
to (i) increased real estate taxes and (ii) operating expenses for the
properties acquired and construction completed during 1997 ($1,994,000). During
1996, property operating expenses increased by $767,000 or 1.9 percent, compared
to 1995, primarily due to increases in maintenance costs. For 1997, property
operating expenses as a percentage of total rental revenues were 40.6 percent.
For 1996 and 1995, property operating expenses as a percentage of total rental
revenues were 42.1 percent and 42.8 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 1997, depreciation expense increased $2,405,000 or 12.1 percent,
compared to the prior year, due to (i) improvements made to the properties owned
by the Company during 1997 and 1996 and (ii) the properties acquired and
construction completed
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16
during 1997 ($841,000). 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 1997, amortization expense increased $541,000 compared to the prior
year, due primarily to financing costs which were incurred for (i) the mortgage
with the Northwestern Mutual Life Insurance Company ("Northwestern") and (ii)
the $100 million secured revolving credit facility which closed during 1997.
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.
Interest expense decreased by $2,184,000 during 1997, compared to 1996,
primarily due to (i) the reduction in the average balance of mortgages and loans
payable and (ii) the interest capitalized due to the Company's construction of
office buildings. 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. During 1997, 1996, and 1995, the weighted average interest rate
on the Company's variable rate loans was 8.0 percent, 9.3 percent, and 8.4
percent, respectively. The Company's average outstanding amount under such loans
during 1997, 1996, and 1995 was $8,077,000, $18,280,000 and $47,945,000,
respectively.
General and administrative expenses were 1.0 percent, 1.1 percent, and 1.2
percent of average invested assets for 1997, 1996 and 1995, respectively. For
1997, general and administrative expenses decreased $249,000, compared to 1996,
primarily due to decreases in the accrual for the Company's contribution to the
401(k) Plan. 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 previously granted in conjunction
with stock options, which rights the Company has discontinued granting, (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 1997, direct costs of management contracts remained basically unchanged
from those incurred during 1996. 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.
Real estate taxes and other costs related to the Company's unimproved land
decreased $104,000 during 1997, compared to 1996, due to (i) the sale of two
land parcels (25.3 acres) and (ii) the assignment of 52 acres to construction
projects. For 1996, undeveloped land costs remained basically unchanged from
those incurred during 1995.
Based on the proceeds received from the sale of the Miami land parcel and
the Company's analysis of the fair value of the remaining land parcels held for
sale during 1997, the Company reversed $379,000 of the provision for loss on
land held for sale, which had been previously recorded. During 1995, the Company
recorded a provision for loss on land held for sale which totaled $970,000. This
provision for loss was based upon a contract for the sale of a land parcel
(approximately 8.1 acres) which was located in Miami, Florida adjacent to an
office center sold to Koala.
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
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17
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 1997, 1996 or 1995.
OPERATING RESULTS. Net income totaled $21,204,000, $10,501,000 and
$28,990,000 for 1997, 1996 and 1995, respectively. For 1997, net income
increased $10,703,000 over the prior year due primarily to (i) the increase in
rental revenues, which was partially offset by the increases in property
operations expense and depreciation expense, (ii) the decrease in mortgage and
loan interest expense and (iii) the gain on sale or disposition of assets. 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.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the year ended December 31, 1997, the Company
generated approximately $50.2 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 for
Federal income tax purposes, the Company is required to pay out annually, as
dividends, 95 percent of its REIT taxable income (which, due to non-cash
charges, including depreciation and net operating loss carryforwards, 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 1998.
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, 1997,
approximately 93 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, 1997, leases representing approximately 28.5 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 1998. This represents
1,198 leases for space in buildings located in 21 of the 22 Koger Centers or
locations 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 65 percent, 63 percent and 67 percent of the Company's net
rentable square feet which were scheduled to expire during 1997, 1996 and 1995,
respectively. For those leases which renewed during 1997, the average rental
rate increased from $14.01 to $15.41. 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 1998 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.
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18
The Company continues to benefit 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 22.6 percent of the Company's leased space as of
December 31, 1997, 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 1997, the Company had management contracts for the management
of 22 commercial office properties. On March 31, 1997, a management agreement to
manage 21 commercial office buildings owned by Centoff was automatically
extended to March 31, 1998. 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 $2.3 million from this management agreement during 1997.
Another agreement to manage one commercial office building has been extended on
a month to month basis. During 1997, the Company earned management fees of
$50,000 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.
INVESTING ACTIVITIES. At December 31, 1997, 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 1997,
the Company's expenditures for improvements to existing properties decreased by
approximately $1.4 million from the prior year, primarily due to reduction in
expenditures for energy management improvements. The Company purchased 11
buildings during 1997.
During 1997, the Company completed the construction of (i) a building
located in Memphis, Tennessee which contains 40,700 net rentable square feet and
(ii) a building located in Charlotte, North Carolina which contains 61,200 net
rentable square feet. The Company has eight buildings under construction, on
approximately 52 acres of undeveloped land, which will contain approximately
650,000 net rentable square feet. Expenditures for construction of these eight
buildings are expected to total approximately $52.3 million, excluding land and
tenant improvement costs.
On May 15, 1997, the Company acquired three buildings, containing 134,000
net rentable square feet, and 3.5 usable acres of unimproved land located in
Greenville, South Carolina for a purchase price of $14 million. On June 4, 1997,
the Company acquired two buildings, containing 200,100 net rentable square feet,
located in San Antonio, Texas for a purchase price of $15.5 million. On June 18,
1997, the Company acquired a building, containing 23,000 net rentable square
feet, located in Jacksonville, Florida for a purchase price of $3.3 million. On
August 4, 1997, the Company acquired a building, containing 80,500 net rentable
square feet, located in Tallahassee, Florida for a purchase price of $9.575
million. On September 23, 1997, the Company acquired two buildings, containing
46,400 net rentable square feet, and 2.4 acres of unimproved land located in El
Paso, Texas for a purchase price of $3.3 million. On October 1, 1997, the
Company acquired a building, containing 154,100 net rentable square feet,
located in Atlanta,
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Georgia for a purchase price of $21.2 million. On December 1, 1997, the Company
acquired a building, containing 79,800 net rentable square feet, located in
Atlanta, Georgia for a purchase price of $8.5 million.
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 1997, the Company sold (i) 8.1 acres of unimproved land located in
Miami, Florida for approximately $2,907,000, net of selling costs, and (ii) 17.2
acres of unimproved land located in Richmond, Virginia for approximately
$3,434,000, net of selling costs. 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 (totaling
approximately 44 acres), and certain other assets for approximately $25,267,000,
net of selling costs.
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 a $100 million secured revolving credit facility provided by
First Union National Bank of Florida, Morgan Guaranty Trust Company of New York,
AmSouth Bank, N.A. and Guaranty Federal Bank.
During 1997, the Company's Board of Directors approved the repurchase of up
to one million shares of the Company's common stock (the "Shares") and the
Company repurchased 372,600 Shares for approximately $5.75 million.
During July 1997, the Company's Board of Directors approved the redemption
of warrants outstanding on August 29, 1997 (the "Redemption Date") for $3.81 per
warrant. Each warrant gave the holder the right to purchase one Share at a price
of $8.00 per share, until the Redemption Date. The Company redeemed 99,871
warrants following the Redemption Date. The remaining warrants were exercised by
the holders either on or prior to the Redemption Date.
On December 17, 1997, the Company completed a public offering of 3.5
million shares of its common stock, three million shares of which were sold in
an underwritten offering for an aggregate sales price of $60.75 million ($20.25
per share less an underwriting discount of $1.11 per share), and 500,000 of such
shares were sold to Apollo for an aggregate sales price of $9.57 million ($19.14
per share). The Company applied approximately $51.6 million of the proceeds from
this sale to the repayment of indebtedness with an average interest rate of
approximately 8.6 percent. During October 1996, the Company completed a private
placement of three million shares of its common stock to an affiliate of Apollo
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.
During December 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
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of $100.5 million ($94.7 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.
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.
During April 1997, the Company closed on a $50 million secured revolving
credit facility. This secured revolving credit facility was increased to $100
million during December 1997. This facility provides for monthly interest
payments and requires the Company to maintain certain financial ratios.
Loan maturities and normal amortization of mortgages and loans payable are
expected to total approximately $2.5 million over the next twelve months. The
Company believes that 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.
At December 31, 1997, the Company had 64 buildings (containing
approximately 2.26 million net rentable square feet) which were unencumbered.
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. The Company has filed shelf registration statements with
respect to the issuance of up to $300 million of its common and/or preferred
stock. The Company has issued $70.32 million of its common stock under such
registration statements. 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, real estate 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
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space in many of the markets in which the Company operates. As of December 31,
1997, 93 percent of the Company's annualized rentals were subject to leases
having annual escalation clauses as described under "Properties" above. As of
December 31, 1996 and 1995, 94 percent and 93 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
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 $182 million, all of
which is secured by certain of the Company's properties. Approximately $109
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
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22
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 a $100 million secured revolving credit facility with variable interest
rates. The Company may incur additional 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, 1997, the debt to total market capitalization ratio of
the Company was approximately 24.6 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
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 and southwestern United States has out-performed the national
economy. There can be no assurance as to the continued growth of the economy in
the southeastern and southwestern United States or the future growth rate of the
Company.
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23
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 29.1 percent and 18.1 percent of the total net
rentable square feet leased in the Company's buildings will expire in 1998 and
1999, respectively. 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.
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")
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24
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
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.
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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, real
estate 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.
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 continue to 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.
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26
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. The President's 1999 Budget
Plan proposes to prohibit REITs from holding more than ten percent of the voting
stock or value of all classes of stock of another company. This proposal would
be applicable to stock acquired on or after the date of first committee action.
If a REIT's stock ownership is grandfathered, the grandfathering is lost if the
subsidiary corporation engages in a new business or acquires substantially new
assets on or after the effective date. If passed, this proposal could restrict
the Company's ability to benefit from possible increases in third party
management services provided by KRSI.
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
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27
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 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.
INFORMATION SYSTEMS AND THE YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a two
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company has identified all significant applications that will require
modification to ensure Year 2000 Compliance. All significant applications used
by the Company are packaged software products licensed from various computer
software companies. The Year 2000 Compliance issue will be resolved through the
Company's existing plan to upgrade its significant applications from DOS-based
software to Windows-based software, which are Year 2000 compliant, with its
existing software vendors. The Company plans on completing this conversion
process during 1998.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete these application conversions are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availablity of certain resources, third
party modification plans and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ from those
plans.
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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."
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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, 1997
and 1996........................................................................................ 29
Consolidated Statements of Operations for Each
of the Three Years in the Period Ended
December 31, 1997............................................................................... 30
Consolidated Statements of Changes in Shareholders'
Equity for Each of the Three Years in the
Period Ended December 31, 1997................................................................. 31
Consolidated Statements of Cash Flows for Each
of the Three Years in the Period Ended
December 31, 1997............................................................................... 32
Notes to Consolidated Financial Statements for
Each of the Three Years in the Period Ended
December 31, 1997............................................................................... 33
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
for the Three Years Ended December 31, 1997..................................................... 45
Schedule III - Real Estate and Accumulated
Depreciation as of December 31, 1997............................................................ 46
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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, 1997 and 1996, 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,
1997. 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, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 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, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
February 23, 1998
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31
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(IN THOUSANDS EXCEPT SHARE DATA)
1997 1996
------ -----
ASSETS
Real Estate Investments:
Operating properties:
Land $ 111,697 $ 98,567
Buildings 567,332 482,836
Furniture and equipment 2,220 1,569
Accumulated depreciation (104,700) (82,478)
--------- ---------
Operating properties - net 576,549 500,494
Properties under construction:
Land 8,978 2,083
Buildings 18,608 930
Undeveloped land held for investment 13,249 20,558
Undeveloped land held for sale 1,512 6,550
Cash and temporary investments 16,955 35,715
Accounts receivable, net of allowance for uncollectible
accounts of $250 and $231 5,646 5,600
Investment in Koger Realty Services, Inc. 472 259
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $685 and $515 1,870 2,040
Other assets 12,258 10,437
--------- ---------
TOTAL ASSETS $ 656,097 $ 584,666
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages and loans payable $ 181,963 $ 203,044
Accounts payable 8,802 4,662
Accrued real estate taxes payable 3,294 2,144
Accrued liabilities - other 6,623 5,467
Dividends payable 6,352 1,045
Advance rents and security deposits 4,801 4,169
--------- ---------
Total Liabilities 211,835 220,531
--------- ---------
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: 28,389,195 and 23,560,427 shares;
outstanding: 25,406,792 and 20,892,574 shares 284 236
Capital in excess of par value 441,451 362,127
Warrants; outstanding 0 and 1,110,887 2,243
Retained earnings 30,947 22,666
Treasury stock, at cost; 2,982,403 and 2,667,853 shares (28,420) (23,137)
--------- ---------
Total Shareholders' Equity 444,262 364,135
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 656,097 $ 584,666
========= =========
See Notes to Consolidated Financial Statements.
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32
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
1997 1996 1995
---- ---- ----
REVENUES
Rental $ 108,924 $ 98,342 $ 94,865
Other rental services 577 463 578
Management fees ($1,685 from TKPL in 1995) 2,637 2,682 3,624
Interest ($13,066 from TKPL in 1995) 1,274 1,951 14,440
Income from Koger Realty Services, Inc. 577 342 36
Gain on TKPL note to Southeast 292 11,288
Gain on early retirement of debt 919
--------- --------- ---------
Total revenues 113,989 104,072 125,750
--------- --------- ---------
EXPENSES
Property operations 44,453 41,597 40,830
Depreciation and amortization 24,073 21,127 19,102
Mortgage and loan interest 16,517 18,701 23,708
General and administrative 6,374 6,623 7,559
Direct cost of management fees 1,896 1,884 2,837
Undeveloped land costs 413 517 512
Litigation costs 424 176
Provision for (recovery of) loss on land held for sale (379) 970
Other 745
--------- --------- ---------
Total expenses 93,347 90,873 96,439
--------- --------- ---------
INCOME BEFORE GAIN (LOSS) ON SALE OR
DISPOSITION OF ASSETS 20,642 13,199 29,311
Gain (Loss) on sale or disposition of assets 1,955 (497) (255)
--------- --------- ---------
INCOME BEFORE INCOME TAXES 22,597 12,702 29,056
Income taxes 935 815 66
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 21,662 11,887 28,990
Extraordinary loss on early retirement of debt 458 1,386
--------- --------- ---------
NET INCOME $ 21,204 $ 10,501 $ 28,990
========= ========= =========
EARNINGS PER COMMON SHARE AND COMMON
EQUIVALENT SHARE:
Basic-
Income before extraordinary item $ 1.01 $ 0.64 $ 1.64
Extraordinary loss (0.02) (0.07)
--------- --------- ---------
Net Income $ 0.99 $ 0.57 $ 1.64
========= ========= =========
Diluted -
Income before extraordinary item $ 0.96 $ 0.61 $ 1.61
Extraordinary loss (0.02) (0.07)
--------- --------- ---------
Net Income $ 0.94 $ 0.54 $ 1.61
========= ========= =========
See Notes to Consolidated Financial Statements.
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33
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1997
(IN THOUSANDS)
RETAINED EARNINGS
COMMON STOCK CAPITAL (ACCUMULATED TOTAL
------------------ IN EXCESS DIVIDENDS SHARE-
SHARES PAR OF PAR IN EXCESS OF TREASURY HOLDERS'
ISSUED VALUE VALUE WARRANTS NET INCOME) STOCK EQUITY
------ -------- --------- --------- ---------------- -------- ---------
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
Treasury stock reissued 605 489 1,094
Treasury stock purchased (5,750) (5,750)
Warrants redeemed (236) (143) (379)
Warrants exercised 994 10 9,945 (2,007) 7,948
Options exercised 335 3 2,542 (22) 2,523
Common stock issued 3,500 35 66,232 66,267
Dividends declared (12,780) (12,780)
Net income 21,204 21,204
------- -------- --------- -------- -------- -------- --------
BALANCE,
DECEMBER 31, 1997 28,389 $ 284 $ 441,451 $ 0 $ 30,947 $(28,420) $444,262
======= ======== ========= ======== ======== ======== ========
See Notes to Consolidated Financial Statements.
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KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1997
(IN THOUSANDS)
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES
Net income $ 21,204 $ 10,501 $ 28,990
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 24,073 21,127 19,102
Gain on TKPL unsecured note to Southeast (292) (11,288)
Provision for (recovery of) loss on land held for sale (379) 970
Loss (Gain) on sale or disposition of assets (1,955) 497 255
Loss (Gain) on early debt repayment 458 1,386 (919)
Income from Koger Realty Services, Inc. (577) (342) (36)
Provision for uncollectible accounts 224 50 172
Accrued interest added to principal 112 496
Amortization of mortgage discounts 86 196 175
Changes in assets and liabilities:
Increase in accounts payable, accrued
liabilities and other liabilities 7,906 3,542 4,500
Increase in receivables and other assets (842) (829) (349)
Decrease in receivable from TKPL 1,851
--------- --------- ---------
Net cash provided by operating activities 50,198 35,948 43,919
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from sale of assets 6,244 1,241 25,267
Proceeds from TKPL note to Southeast 887 17,105
Proceeds from TKPL mortgage notes 18,195
Purchase of TKPL mortgage notes (18,195)
Property acquisitions (75,774)
Building construction expenditures (26,099) (930)
Tenant improvements to first generation space (701)
Tenant improvements to existing properties (7,513) (7,873) (8,644)
Building improvements (3,116) (2,795) (3,064)
Energy management improvements (572) (1,900) (2,663)
Deferred tenant costs (1,997) (1,862) (1,085)
Additions to furniture and equipment (651) (128) (330)
Purchase of Koger Realty Services, Inc. preferred stock (300)
Dividends received from Koger Realty Services, Inc. 364 490
Cash acquired in purchase of assets 307
--------- --------- ---------
Net cash provided by (used in) investing activities (109,815) (12,870) 26,593
--------- --------- ---------
FINANCING ACTIVITIES
Principal payments on mortgages and loans (77,749) (228,090) (68,608)
Dividends paid (7,473)
Treasury stock purchased (5,750)
Warrants redeemed (379)
Proceeds from mortgages and loans 56,300 175,900
Proceeds from sales of common stock 66,640 42,748 206
Proceeds from exercise of warrants and stock options 10,252 376 6
Financing costs (984) (3,712) (16)
--------- --------- ---------
Net cash provided by (used in) financing activities 40,857 (12,778) (68,412)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (18,760) 10,300 2,100
Cash and cash equivalents - beginning of year 35,715 25,415 23,315
--------- --------- ---------
Cash and cash equivalents - end of year $ 16,955 $ 35,715 $ 25,415
========= ========= =========
See Notes to Consolidated Financial Statements.
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KOGER EQUITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1997
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, 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, 1997, 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.
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36
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 1997, 1996 and 1995, the
recognition of rental revenues on this basis for applicable leases increased
rental revenues by $454,000, $114,000 and $80,000, 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 or 1995, 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 BASIC DILUTED
---- ---------- ----------
1997 21,373,810 22,495,022
1996 18,523,122 19,500,171
1995 17,724,127 18,011,076
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 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
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. During 1997, the Company contributed 23,657
shares of common stock to the Company's 401(k) Plan. These shares had a value of
approximately $444,000 based on the closing price of the Company's common stock
on the American Stock Exchange on December 31, 1996.
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37
For 1997, 1996, and 1995, total interest payments (net of amounts
capitalized) were $16,426,000, $18,599,000 and $23,823,000, respectively, for
the Company. For 1997, 1996 and 1995, payments for income taxes totaled
$690,000, $816,000 and $133,000, 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 1997, the Financial Accounting Standards
Board (the"FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share." This Statement establishes standards for
computing and presenting earnings per share ("EPS") and applies to all entities
with publicly held common stock or potential common stock. This Statement
replaces the presentation of primary EPS and fully diluted EPS with a
presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes
dilution and is computed by dividing earnings available to common shareholders
by the weighted average number of common shares outstanding for the period.
Similar to fully diluted EPS, diluted EPS reflects the potential dilution of
securities that could share in the earnings. This Statement was adopted in the
fourth quarter of 1997 and did not have a material effect on the Company's
reported EPS amounts.
In June 1997, the FASB Issued SFAS No. 130, "Reporting Comprehensive Income"
effective for fiscal years beginning after December 15, 1997. This Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement does not require a specific format for that financial
statement but requires that an entity display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130
requires that an entity classify items of other comprehensive income by their
nature in a financial statement. For example, other comprehensive income may
include foreign currency and unrealized gains and losses on certain investments
in debt and equity securities. In addition, the accumulated balance of other
comprehensive income must be displayed separately from retained earnings and
additional paid in capital in the equity section of a statement of financial
position. Reclassification of financial statements for earlier periods, provided
for comparative purposes, is required. The Company has not determined the impact
that the adoption of this new accounting standard will have on its financial
statements. The Company will adopt this accounting standard on January 1, 1998,
as required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" effective for fiscal years beginning after
December 15, 1997. This Statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. SFAS No. 131 requires reporting segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segments profit or loss, total
segment assets, and other amounts disclosed for segments to corresponding
amounts reported in the financial statements. Restatement of comparative
information for earlier periods presented is required in the initial year of
application. Interim information is not required until the second year of
application, at which time comparative information is required. The Company has
not determined the impact that the adoption of this new accounting standard will
have on
35
38
its financial statement disclosures. The Company will adopt this accounting
standard on January 1, 1998, as required.
RECLASSIFICATION. Certain 1996 and 1995 amounts have been reclassified to
conform with 1997 presentation.
2. TRANSACTIONS WITH RELATED PARTIES.
Three directors were elected to the Company's Board of Directors 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
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
tenders for) 15 percent or more of the common stock.
In connection with a public offering of 3.5 million shares of the Company's
common stock (the "Shares") which closed in December 1997, the Company entered a
purchase agreement with AREIF II Realty Trust, Inc., an affiliate of Apollo,
whereby the latter acquired 500,000 of the publicly offered Shares at a price of
$19.14 per share or aggregate proceeds to the Company of $9.57 million. The
price to the public of the remaining 3,000,000 Shares was $20.25 or an aggregate
offering price of $60.75 million. The underwriting discount on these Shares was
$1.11 making the per share proceeds to the Company of $19.14 or aggregate
proceeds of $57.42 million.
In connection with the 1996 sale of common stock to an affiliate of Apollo,
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 a consulting
agreement between Mr. Davis and the Company, he will receive a consulting fee of
$50,000 per year through December 31, 1999.
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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
===========
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, the management fees earned
were approximately $1,685,000. 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.
During December 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 ($94.7 million of which has been
37
40
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. 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 $257.6 million at December 31,
1997.
The Company has a $100 million secured revolving credit facility ($1,000 of
which was outstanding on December 31, 1997) provided by First Union National
Bank of Florida, Morgan Guaranty Trust Company of New York, AmSouth Bank, N.A.
and Guaranty Federal Bank. Based on the Company's election, the interest rate on
this revolving credit facility will be either (i) the lender's LIBOR rate plus
either 125, 137.5 or 150 basis points (depending on the Company's leverage
ratio) or (ii) the lender's prime rate. Interest payments will be due monthly on
this 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. This credit facility requires the Company to maintain certain
financial ratios and is collateralized by properties with a carrying value of
approximately $157.8 million at December 31, 1997.
The annual maturities of loans and mortgages payable, as of December 31,
1997, are summarized as follows:
YEAR ENDING AMOUNT
DECEMBER 31, (IN THOUSANDS)
------------ --------------
1998 $ 2,506
1999 2,722
2000 2,954
2001 3,210
2002 3,486
Subsequent Years 167,085
--------
Total $181,963
========
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, 1997, approximately 93 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, 1997, determined without regard to renewal options, are summarized as
follows:
YEAR ENDING AMOUNT
DECEMBER 31, (IN THOUSANDS)
------------ --------------
1998 $101,453
1999 76,644
2000 59,229
2001 39,947
2002 27,233
Subsequent Years 73,080
--------
Total $377,586
========
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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 $2,850,000, $2,886,000 and $1,792,000 for the years 1997,
1996, and 1995, respectively.
At December 31, 1997, annualized rental revenues totaled approximately
$14,245,000 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 totaled approximately $11,609,000 for the United
States of America, when all of its departments and agencies which lease space in
the Company's buildings were combined.
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 1997, 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:
1997 1996 1995
----------- ----------- -----------
Net Income - As reported $21,204,000 $10,501,000 $28,990,000
- Pro forma $19,355,000 $10,139,000 $28,960,000
Diluted Earnings per share - As reported $ 0.94 $ 0.54 $ 1.61
- Pro forma $ 0.86 $ 0.52 $ 1.61
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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 1997, 1996 and 1995:
1997 1996 1995
----- ----- -----
1988 PLAN
Dividend Yield 5.00% 5.00% 5.00%
Expected Volatility 23.71% 28.09% 43.70%
Risk-free Interest Rates 5.94% 6.52% 7.35%
Expected Lives (Months) 38 61 69
1997 1996 1995
----- ----- -----
1993 PLAN, 1996 PLAN AND OTHER
Dividend Yield 5.00% 5.00% 5.00%
Expected Volatility 23.71% 24.17% 43.60%
Risk-free Interest Rates 6.11% 6.29% 7.37%
Expected Lives (Months) 65 86 69
A summary of the status of fixed stock option grants as of December 31,
1997, 1996 and 1995, and changes during the years ending on those dates is
presented below:
1997 1996 1995
---------------------- ----------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ------ --------- ------ --------- ------
Outstanding - beginning of year 1,928,959 $10.51 1,251,862 $ 7.04 1,557,412 $ 9.54
Granted 171,392 18.80 923,981 14.39 311,800 7.53
Exercised (335,261) 6.94 (146,268) 7.33 (5,470) 6.96
Expired 0 -- 0 -- (299,180) 20.00
Forfeited (8,317) 14.85 (100,616) 7.69 (312,700) 7.60
--------- --------- ---------
Outstanding - end of year 1,756,773 $11.98 1,928,959 $10.51 1,251,862 $ 7.04
========= ====== ========= ====== ========= ======
The weighted average fair values of options granted during 1997, 1996 and
1995 were $4.35, $3.79 and $3.44 per option, respectively.
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
EXERCISE OPTIONS OPTIONS WEIGHTED AVERAGE
PRICE OUTSTANDING EXERCISABLE REMAINING LIFE
--------- ----------- ----------- ----------------
(Months)
$ 5.1250 105,031 105,031 13
7.5000 162,300 40,404 84
7.6250 467,056 236,755 66
8.1250 3,600 0 88
11.5000 140,851 100,699 90
15.3750 745,000 168,500 107
19.1250 18,000 0 109
19.8125 114,935 44,760 115
--------- -------
1,756,773 696,149 88
========= ======= ===
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Remaining non-exercisable options as of December 31, 1997 become
exercisable as follows:
NUMBER
YEAR OF OPTIONS
---- ----------
1998 339,869
1999 339,871
2000 244,645
2001 132,639
2002 3,600
---------
1,060,624
=========
WARRANTS. The Company had 0 and 1,110,887 warrants outstanding on December
31, 1997 and 1996, respectively. Each warrant gave 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. During July 1997, the Company's Board of
Directors approved the redemption of warrants outstanding on August 29, 1997
(the "Redemption Date") for $3.81 per warrant. The Company redeemed 99,871
warrants following the Redemption Date.
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 Shares and are not exercisable until the occurrence of
certain events (none of which have occurred through December 31, 1997),
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.
The Company has 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 totaled approximately $59,300, $36,700 and $34,800 for 1997, 1996 and 1995,
respectively. Through December 31, 1997, 65,113 Shares have been issued under
the SIP.
8. EMPLOYEE BENEFIT PLANS.
The Company has a 401(k) plan (the "401(k) Plan") which permits
contributions by employees. 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
41
44
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
during January, 1997. For 1997, the Company's Board of Directors approved a
Company contribution to the 401(k) Plan in the form of the Company's Shares
(9,197 Shares which had a value of approximately $202,000 on December 31, 1997).
The contribution for 1997 was made on February 26, 1998.
The Company has 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 1997, 1996 and 1995 was as
follows (in thousands) :
1997 1996 1995
----- ----- -----
Service Cost $ 25 $ 28 $ 25
Interest Cost 287 242 94
Amortization of Unrecognized Prior Service Cost 244 219 109
----- ----- -----
Total $ 556 $ 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, 1997, 1996 and 1995 (in thousands):
1997 1996 1995
----- ----- -----
Accumulated benefit obligation $ 2,943 $ 2,370 $ 1,884
Effect of projected future salary increases 1,149 1,126 624
------- ------- -------
Projected benefit obligation $ 4,092 $ 3,496 $ 2,508
======= ======= =======
Actuarial present value of projected benefit
obligations in excess of plan assets $(4,092) $(3,496) $(2,508)
Unrecognized prior service cost 2,924 2,779 2,280
Additional minimum liability (1,670) (1,653) (1,656)
------- ------- -------
Accrued pension cost $(2,838) $(2,370) $(1,884)
======= ======= =======
9. DIVIDENDS.
During 1997, the Company paid a total of $0.35 per share of dividends. The
Company paid no dividends during the two 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
November 1997, the Company's Board of Directors declared a quarterly dividend of
$0.25 per share payable on February 4, 1998, to shareholders of record on
December 31, 1997.
42
45
10. FEDERAL INCOME TAXES.
The Company is operated in a manner so as to qualify and has elected tax
treatment as a REIT. For the year ended December 31, 1997, the Company's taxable
income prior to the dividends paid deduction was approximately $7,473,000 (which
equals the Company's 1997 dividends paid deduction). The Company's taxable loss
prior to the dividends paid deduction for the years ended December 31, 1996 and
1995 was approximately $18,416,000 and $23,265,000, 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, 1997, 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 $6.8 million.
The Company utilized approximately $14,932,000 and $593,000 of net
operating loss carryforwards to eliminate REIT taxable income for 1996 and 1995,
respectively. The Company's net operating loss carryforward available to offset
REIT taxable income for 1997 is approximately $22,239,000. 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 1996 and 1995,
the Company incurred alternative minimum taxes of approximately $324,000 and $0,
respectively, and recorded a provision for alternative minimum taxes of
approximately $834,000 for 1997.
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 disallowed 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 adjustments to the
Company's 1992 and 1993 Federal income tax returns.
11. LITIGATION.
A derivative action, which was filed in 1990, against the Company in the U.
S. District Court, Middle District of Florida (the "District Court"), was
resolved in favor of the Company in 1996. The Company and the other parties to
this action agreed on a settlement of all claims, and on January 10, 1996, the
District Court entered its order approving this settlement, which became final
on or about February 12, 1996. During 1995, the Company paid $50,000 for
settlement of this litigation.
Under the terms of the merger agreement between the Company and KPI, the
Company agreed to indemnify certain former non-officer directors of KPI (the
"Indemnified Persons") in respect of amounts to which such Indemnified Persons
would be otherwise entitled to indemnification under Florida 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 of the Company under such
indemnification did not exceed (i) $1,000,000 in the aggregate and (ii) $200,000
per Indemnified Person and were 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"). Although the Company was not named in
this suit, certain former non-officer directors of KPI were 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
43
46
settle the Roby Case. The time for appeal of the Order and Final Judgment 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, 1997, the Company had commitments for the construction of
buildings and improvements to existing buildings of approximately $20.5 million.
13. PRO FORMA INFORMATION - SALE OF COMMON STOCK.
The proceeds of the sale of 3.5 million shares of common stock, on December
17, 1997, were used to retire approximately $51.6 million of debt, with an
average interest rate of approximately 8.6%, and for general corporate purposes.
Pro forma earnings per share information assuming that the sale of common stock
had occurred on January 1, 1997 is as follows:
Pro forma net income $24,394,000
Pro forma earnings per share:
Basic $ 0.99
Diluted $ 0.94
14. SUBSEQUENT EVENTS.
On January 30, 1998, the Company acquired a building, containing 127,700
net rentable square feet, located in Richmond, Virginia for a purchase price of
$16.5 million. In connection with this acquisition, the Company assumed $8.5
million of mortgages with an interest rate of 8.0 percent. On February 1, 1998,
the Company acquired a building, containing 20,000 net rentable square feet,
located in Jacksonville, Florida for a purchase price of $2.0 million.
15. INTERIM FINANCIAL INFORMATION (UNAUDITED).
Selected quarterly information for the two years in the period ended
December 31, 1997 is presented below (in thousands except per share amounts):
RENTAL TOTAL NET EARNINGS PER
QUARTERS ENDED REVENUES REVENUES INCOME COMMON SHARE
- -------------- -------- -------- ------ ------------
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 (1) 25,682 27,760 3,010 .14
March 31, 1997 25,383 26,943 5,693 .25
June 30, 1997 26,387 27,937 5,008 .23
September 30, 1997 (2) 28,079 29,143 6,949 .31
December 31, 1997 29,075 29,966 3,554 .15
(1) 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.
(2) The results for the quarter ended September 30, 1997 were affected by a
gain from the sale of a land parcel which totaled $2,057.
44
47
SCHEDULE II
KOGER EQUITY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------ ------------ ---------- ---------- ---------- ----------
1997
Allowance for uncollectible accounts $ 231 $ 224 $0 $205(a) $ 250
====== ===== == ==== ======
Valuation allowance - land held
for sale $1,020 $(679) $0 $ 62(b) $ 279
====== ===== == ==== ======
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
====== ===== == ==== ======
(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
48
KOGER EQUITY, INC. AND SUBSIDIARIES SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
COSTS CAPITALIZED
SUBSEQUENT
INITIAL COST TO ACQUISITION TOTAL COST
----------------- ------------------ ----------------------------
BLDGS & IMPROVE CARRYING BLDGS & (b)(c)
CENTER/LOCATION LAND IMPROV. MENTS COSTS LAND IMPROV. TOTAL
- --------------- ---- ------- -------- -------- ---- ------- -------
OPERATING REAL ESTATE:
ATLANTA CHAMBLEE $13,145 $63,211 $ 8,443 $ 0 $13,145 $71,654 $84,799
ATLANTA GWINNETT 950 7,565 0 0 950 7,565 8,515
ATLANTA PERIMETER 2,785 18,406 5 0 2,785 18,411 21,196
AUSTIN 4,274 13,650 2,909 0 4,274 16,559 20,833
CHARLOTTE CARMEL 1,796 14,809 404 0 1,796 15,213 17,009
CHARLOTTE EAST 5,788 25,078 3,519 0 5,788 28,597 34,385
EL PASO 4,011 12,440 3,471 0 4,011 15,911 19,922
GREENSBORO SOUTH 6,384 38,700 4,583 0 6,384 43,283 49,667
GREENSBORO WENDOVER 0 11 0 0 0 11 11
GREENVILLE PARK CENTRAL 1,238 12,377 150 0 1,238 12,527 13,765
GREENVILLE ROPER MT. 3,833 16,104 2,916 0 3,833 19,020 22,853
JACKSONVILLE BAYMEADOWS 7,625 23,716 490 0 7,625 24,206 31,831
JACKSONVILLE CENTRAL 6,755 34,806 5,942 0 6,755 40,748 47,503
JACKSONVILLE DEERWOOD 479 2,837 0 0 479 2,837 3,316
MEMPHIS GERMANTOWN 5,164 24,977 2,398 0 5,164 27,375 32,539
ORLANDO CENTRAL 8,342 30,575 7,284 0 8,342 37,859 46,201
ORLANDO UNIVERSITY 2,900 12,218 798 0 2,900 13,016 15,916
ST. PETERSBURG 6,657 29,525 4,486 0 6,657 34,011 40,668
SAN ANTONIO AIRPORT 3,243 12,532 187 0 3,243 12,719 15,962
SAN ANTONIO WEST 9,638 29,649 8,493 0 9,638 38,142 47,780
TALLAHASSEE APALACHEE PKWY 6,063 28,043 4,781 0 6,063 32,824 38,887
TALLAHASSEE CAPITAL CIRCLE 4,561 31,493 2,364 0 4,561 33,857 38,418
TULSA 6,066 17,134 3,142 0 6,066 20,276 26,342
-------- -------- -------- ------ --------- -------- --------
SUBTOTALS 111,697 499,856 66,765 0 111,697 566,621 678,318
FURNITURE & EQUIPMENT 2,220 2,220 2,220
IMPROVEMENTS IN PROGRESS 711 711 711
TOTAL OPERATING
-------- -------- ------- ------ -------- -------- --------
REAL ESTATE $111,697 $502,076 $67,476 $ 0 $111,697 $569,552 $681,249
-------- -------- ------- ------ -------- -------- --------
(d) (a)
ACCUM. MORT- DATE DEPRECIABLE
CENTER/LOCATION DEPR. GAGES ACQUIRED LIFE
- --------------- ----- -------- ------- ------------
OPERATING REAL ESTATE:
ATLANTA CHAMBLEE $15,579 $ 1 1988 - 1993 3 - 40 YRS.
ATLANTA GWINNETT 18 0 1993 - 1997 7 - 39 YRS.
ATLANTA PERIMETER 118 0 1997 39 YRS.
AUSTIN 2,918 16,788 1990 - 1993 3 - 40 YRS.
CHARLOTTE CARMEL 1,131 0 1993 - 1997 3 - 40 YRS.
CHARLOTTE EAST 5,049 0 1989 - 1993 3 - 40 YRS.
EL PASO 3,714 8,888 1990 - 1993 3 - 40 YRS.
GREENSBORO SOUTH 7,925 0 1988 - 1993 3 - 40 YRS.
GREENSBORO WENDOVER 6 0 1993 7 YRS.
GREENVILLE PARK CENTRAL 220 0 1997 3 - 39 YRS.
GREENVILLE ROPER MT. 4,520 10,863 1988 - 1993 3 - 40 YRS.
JACKSONVILLE BAYMEADOWS 2,680 27,158 1993 3 - 40 YRS.
JACKSONVILLE CENTRAL 9,082 0 1989 - 1993 3 - 40 YRS.
JACKSONVILLE DEERWOOD 64 0 1997 39 YRS.
MEMPHIS GERMANTOWN 5,413 14,898 1988 - 1997 3 - 40 YRS.
ORLANDO CENTRAL 9,496 24,689 1988 - 1993 3 - 40 YRS.
ORLANDO UNIVERSITY 2,219 0 1990 - 1993 3 - 40 YRS.
ST. PETERSBURG 7,441 18,622 1988 - 1993 3 - 40 YRS.
SAN ANTONIO AIRPORT 198 0 1997 3 - 39 YRS.
SAN ANTONIO WEST 9,478 21,881 1990 - 1993 3 - 40 YRS.
TALLAHASSEE APALACHEE PKWY 7,554 18,622 1988 - 1993 3 - 40 YRS.
TALLAHASSEE CAPITAL CIRCLE 4,325 19,553 1988 - 1993 3 - 40 YRS.
TULSA 4,387 0 1990 - 1993 3 - 40 YRS.
-------- --------
SUBTOTALS 103,535 181,963
FURNITURE & EQUIPMENT 1,165 3 - 7 YRS.
IMPROVEMENTS IN PROGRESS
TOTAL OPERATING
-------- --------
REAL ESTATE $104,700 $181,963
-------- --------
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49
KOGER EQUITY, INC. AND SUBSIDIARIES SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
COSTS CAPITALIZED
SUBSEQUENT
INITIAL COST TO ACQUISITION TOTAL COST
------------------------ --------------------- ------------------------------
BLDGS & IMPROVE CARRYING BLDGS & (b)(c)
CENTER/LOCATION LAND IMPROV. MENTS COSTS LAND IMPROV. TOTAL
- --------------- ---------- ------- -------- -------- -------- ------- ------
PROPERTIES UNDER CONSTRUCTION:
ATLANTA GWINNETT $ 813 $ 1,625 $ 0 $ 0 $ 813 $ 1,625 $ 2,438
CHARLOTTE CARMEL 1,374 2,504 0 0 1,374 2,504 3,878
GREENSBORO WENDOVER 513 1,101 0 0 513 1,101 1,614
GREENVILLE ROPER MT. 949 2,413 0 0 949 2,413 3,362
JACKSONVILLE BAYMEADOWS 2,319 9,107 0 0 2,319 9,107 11,426
MEMPHIS GERMANTOWN 1,714 1,233 0 0 1,714 1,233 2,947
ORLANDO UNIVERSITY 1,296 333 0 0 1,296 333 1,629
SAN ANTONIO WEST 0 292 0 0 0 292 292
---------- ---------- ------- ------ -------- -------- ---------
TOTAL UNDER CONSTRUCTION 8,978 18,608 0 0 8,978 18,608 27,586
---------- ---------- ------- ------ -------- -------- ---------
UNIMPROVED LAND:
ATLANTA GWINNETT 4,967 0 0 0 4,967 0 4,967
CHARLOTTE CARMEL 990 0 0 0 990 0 990
CHARLOTTE EAST 468 0 0 0 468 0 468
COLUMBIA SPRING VALLEY 76 0 0 0 76 0 76
El PASO 100 0 0 0 100 0 100
GREENSBORO WENDOVER 978 0 0 0 978 0 978
GREENVILLE PARK CENTRAL 438 0 0 0 438 0 438
JACKSONVILLE CENTRAL 95 0 0 0 95 0 95
MEMPHIS GERMANTOWN 1,594 0 0 0 1,594 0 1,594
ORLANDO UNIVERSITY 1,584 0 0 0 1,584 0 1,584
RICHMOND SOUTH 481 0 0 0 481 0 481
ST. PETERSBURG 700 0 0 0 700 0 700
SAN ANTONIO WEST 1,430 0 0 0 1,430 0 1,430
TULSA 860 0 0 0 860 860
---------- ---------- ------- ------ -------- -------- ---------
TOTAL UNIMPROVED LAND 14,761 0 0 0 14,761 0 14,761
---------- ---------- ------- ------ -------- -------- ---------
TOTAL $ 135,436 $ 520,684 $ 67,476 $ 0 $135,436 $ 588,160 $ 723,596
========== ========== ======== ====== ======== ========= =========
(d) (a)
ACCUM. MORT- DATE DEPRECIABLE
CENTER/LOCATION DEPR. GAGES ACQUIRED LIFE
- --------------- ------ ------- -------- ------------
PROPERTIES UNDER CONSTRUCTION:
ATLANTA GWINNETT $ 0 $ 0
CHARLOTTE CARMEL 0 0
GREENSBORO WENDOVER 0 0
GREENVILLE ROPER MT. 0 0
JACKSONVILLE BAYMEADOWS 0 0
MEMPHIS GERMANTOWN 0 0
ORLANDO UNIVERSITY 0 0
SAN ANTONIO WEST 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
El PASO 0 0 1997
GREENSBORO WENDOVER 0 0 1993
GREENVILLE PARK CENTRAL 0 0 1997
JACKSONVILLE CENTRAL 0 0 1989
MEMPHIS GERMANTOWN 0 0 1993
ORLANDO UNIVERSITY 0 0 1993
RICHMOND SOUTH 0 0 1993
ST. PETERSBURG 0 0 1993
SAN ANTONIO WEST 0 0 1993
TULSA 0 0 1993
-------- --------
TOTAL UNIMPROVED LAND 0 0 1993
-------- ---------
TOTAL $104,700 $ 181,963
======== =========
47
50
KOGER EQUITY, INC. AND SUBSIDIARIES SCHEDULE III
REAL ESTATE AND ACCUMULATED
DEPRECIATION DECEMBER 31, 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------
(a) At December 31, 1997, the outstanding balance of mortgages payable was
$181,963.
(b) Aggregate cost basis for Federal income tax purposes was $758,520 at
December 31, 1997.
(c) Reconciliation of total real estate carrying value for the years ended
December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
--------- --------- ---------
Balance at beginning of year $ 613,093 $ 601,594 $ 614,249
Acquisitions and construction 102,524 1,058 330
Improvements 11,902 12,568 14,371
Transfer from/to other assets (257) 16
Sale of unimproved land (4,287) (1,250) (4,761)
Sale or disposition operating real estate (15) (620) (21,539)
Investment in KRSI (102)
Provision for loss - land parcels 379 (970)
--------- --------- ---------
Balance at close of year $ 723,596 $ 613,093 $ 601,594
========= ========= =========
For 1995, the provision for loss was based upon a contract for the
sale of the Miami land parcel.
(d) Reconciliation of accumulated depreciation for the years ended December 31,
1997, 1996 and 1995 is as follows:
1997 1996 1995
------- ---- ----
Balance at beginning of year $ 82,478 $ 62,845 $ 46,106
Depreciation expense:
Operating real estate 21,795 19,538 17,363
Furniture and equipment 440 292 258
Investment in KRSI (31)
Sale or disposition of operating real estate (13) (197) (851)
--------- --------- ---------
Balance at close of year $ 104,700 $ 82,478 $ 62,845
========= ========= =========
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51
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 "1998 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, Chief Executive Officer, Chief Financial
Officer and Director
James C. Teagle............................. President, Chief Operating Officer and Director
Robert N. Bridger........................... Senior Vice President of Engineering Services and Construction
W. Lawrence Jenkins ........................ Vice President of Administration and Corporate Secretary
James L. Stephens........................... Vice President and Chief Accounting Officer
Mr. Hughes, age 62, was elected Chairman and CEO on June 21, 1996. He has
served as Chief Financial Officer of the Company since March 31, 1991. He held
the position of President from August 22, 1995 to November 14, 1997. Mr. Hughes
also 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 to May 20,
1991. He was 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 56, was elected President on November 14, 1997, and has
been Chief Operating Officer of the Company since June 21, 1996. He previously
held the positions of Executive Vice President from June 21, 1996 to November
14, 1997, Senior Vice President from May 10, 1994 to June 21, 1996, and Vice
President from December 21, 1993 to May 10, 1994. Mr. Teagle was a Vice
President of KPI from June 7, 1973 to December 21, 1993. Mr. Teagle was elected
to the Board of Directors of the Company on October 10, 1996.
Mr. Bridger, age 61, was elected Senior Vice President of Engineering
Services and Construction on November 14, 1997. He had held the position of Vice
President since May 10, 1994. Mr. Bridger served as Senior Vice President of
Development of KPI from August 6, 1985 to February 8, 1991, and as Senior Vice
President of Koger Management, Inc. from February 8, 1991 to December 21, 1993.
From 1970 to 1985, Mr. Bridger served as Vice President of Construction of KPI.
Mr. Jenkins, age 54, 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 40, 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.
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52
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.
Except for the late reporting of the exercise of 1,450 options to purchase
Shares by James L. Stephens, and the late reporting of the sale of 25,000 Shares
by Irvin H. Davis, 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, 1997,
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 1998 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 1998 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 1998 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 1998 Proxy Statement for
information regarding certain relationships and related transactions which
information is incorporated herein by reference.
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53
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 November 18, 1997, the Company filed a Form
8-K (dated October 1, 1997) reporting under Item 5, Other Events, six
individual acquisition transactions completed during the period from
May 15, 1997 through October 1, 1997 and providing under Item 7,
Financial Statements and Exhibits, Statements of Revenues and Certain
Expenses for each of the six individual acquisition transactions. On
December 15, 1997, the Company filed a Form 8-K (dated December 12,
1997) reporting that the Company had signed (i) an Underwriting
Agreement relating to the sale by the Company in an underwritten
public offering of 3,000,000 shares of the Company's Common Stock plus
450,000 shares subject to a thirty-day underwriters' over-allotment
option and (ii) a Purchase Agreement between the Company and AREIF II
Realty Trust, Inc. ("AREIF") relating to the sale by the Company to
AREIF of 500,000 shares of the Company's Common Stock. The Company
also provided under Item 7, Financial Statements and Exhibits, copies
of the Underwriting Agreement and the Purchase Agreement.
(c) The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
- -------- -------------------------------------------------------------
1 Underwriting Agreement dated December 12, 1997, between Koger
Equity, Inc. and J.P. Morgan Securities, Inc., Bear Stearns
and Company, Inc. and BT Alex Brown Incorporated, as
Representatives of the several underwriters. Incorporated by
reference to Exhibit 1 of the Form 8-K, dated December 12,
1997, filed by the Registrant on December 15, 1997 (File No.
1-9997).
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).
51
54
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------
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)).
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.
Incorporated by reference to Exhibit 10(a)(1)(C) of Form 10-K
filed by the Registrant for the period ended December 31,
1996 (File No. 1-9997).
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).
52
55
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
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. Incorporated by
reference to Exhibit 10(a)(2)(C) of Form 10-K filed by the
Registrant for the period ended December 31, 1996 (File No.
1-9997).
10(a)(3)(A) Koger Equity, Inc. 1996 Stock Option Plan. Incorporated by
reference to Exhibit 10(a)(3)(A) of Form 10-K filed by the
Registrant for the period ended December 31, 1996 (File No.
1-9997).
10(a)(3)(B) Form of Stock Option Agreement pursuant to Koger
Equity, Inc. 1996 Stock Option Plan. Incorporated by
reference to Exhibit 10(a)(3)(B) of Form 10-K filed by the
Registrant for the period ended December 31, 1996 (File No.
1-9997).
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)(1) 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(d)(2) Amendment No. 1 to Supplemental Executive Retirement Plan,
effective June 21, 1996.*
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).
53
56
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(g)(3) Purchase Agreement, dated December 12, 1997, between Koger
Equity, Inc. and AREIF II Realty Trust, Inc. Incorporated by
reference to Exhibit 10 of the Form 8-K, dated December 12,
1997, filed by the Registrant on December 15, 1997 (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).
54
57
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
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).
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).
10(k)(1) Amended and Restated Revolving Credit Loan Agreement dated as
of December 29, 1997 between and among Koger Equity, Inc.,
and First Union National Bank of Florida, Morgan Guaranty
Bank of New York, AmSouth Bank and Guaranty Federal Bank
F.S.B. (the "Lenders"). Incorporated by reference to Exhibit
10(k)(1) on Form 8-K, dated December 29, 1997, filed by the
Registrant on February 2, 1998 (File No. 1-9997).
10(k)(2)(A) The Substitution Revolving Promissory Note dated December 29,
1997 issued by Koger Equity, Inc. to First Union National
Bank of Florida in the principal amount of up to $35,000,000.
Incorporated by reference to Exhibit 10(k)(2)(a) on Form 8-K,
dated December 29, 1997, filed by the Registrant on February
2, 1998 (File No. 1-9997).
10(k)(2)(B) The Substitution Revolving Promissory Note dated December 29,
1997 issued by Koger Equity, Inc. to Morgan Guaranty Trust
Company of New York in the principal amount of up to
$15,000,000. Incorporated by reference to Exhibit 10(k)(2)(b)
on Form 8-K, dated December 29, 1997, filed by the Registrant
on February 2, 1998 (File No. 1-9997).
10(k)(2)(C) The Revolving Promissory Note dated December 29, 1997 issued
by Koger Equity, Inc. to AmSouth Bank in the principal amount
of up to $25,000,000. Incorporated by reference to Exhibit
10(k)(2)(c) on Form 8-K, dated December 29, 1997, filed by
the Registrant on February 2, 1998 (File No. 1-9997).
10(k)(2)(D) The Revolving Promissory Note dated December 29, 1997 issued
by Koger Equity, Inc. to Guaranty Federal Bank F.S.B. in the
principal amount of up to $25,000,000. Incorporated by
reference to Exhibit 10(k)(2)(d) on Form 8-K, dated December
29, 1997, filed by the Registrant on February 2, 1998 (File
No. 1-9997).
55
58
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------
10(k)(3)(A) The Amended and Restated Deed to Secure Debt, Assignment of
Leases and Rents, and Security Agreement dated as of
December 29, 1997 relating to that portion of the Collateral
located in Dekalb County, the State of Georgia granted by
Koger Equity, Inc. to, and in favour of, the Lenders.
Incorporated by reference to Exhibit 10(k)(3)(a) on Form
8-K, dated December 29, 1997, filed by the Registrant on
February 2, 1998 (File No. 1-9997).
10(k)(3)(B) The Assignment of Leases and Rents dated as of December 29,
1997 relating to that portion of the Collateral located in
the State of Georgia granted by Koger Equity, Inc. to, and
in favour of, the Lenders. Incorporated by reference to
Exhibit 10(k)(3)(b) on Form 8-K, dated December 29, 1997,
filed by the Registrant on February 2, 1998 (File No.
1-9997).
10(k)(3)(C) The Assignment of Contracts, Licenses and Permits dated as
of December 29, 1997 relating to that portion of the
Collateral located in the State of Georgia from Koger
Equity, Inc. to, and in favour of, the Lenders. Incorporated
by reference to Exhibit 10(k)(3)(c) on Form 8-K, dated
December 29, 1997, filed by the Registrant on February 2,
1998 (File No. 1-9997).
10(k)(3)(D) The Environmental Indemnification Agreement dated as of
December 29, 1997 relating to that portion of the Collateral
located in the State of Georgia between and among Koger
Equity, Inc. and the Lenders. Incorporated by reference to
Exhibit 10(k)(3)(d) on Form 8-K, dated December 29, 1997,
filed by the Registrant on February 2, 1998 (File No.
1-9997).
10(k)(4)(A)(i) The Amended and Restated Deed of Trust and Security
Agreement dated as of December 29, 1997 relating to that
portion of the Collateral located in Guilford County, the
State of North Carolina granted by Koger Equity, Inc. to,
and in favour of, the Lenders. Incorporated by reference to
Exhibit 10(k)(4)(a)(i) on Form 8-K, dated December 29, 1997,
filed by the Registrant on February 2, 1998 (File No.
1-9997).
10(k)(4)(A)(ii) The Deed of Trust and Security Agreement dated as of
December 29, 1997 relating to that portion of the Collateral
located in Mecklenburg County, State of North Carolina
granted by Koger Equity, Inc. to, and in favour of, the
Lenders. Incorporated by reference to Exhibit
10(k)(4)(a)(ii) on Form 8-K, dated December 29, 1997, filed
by the Registrant on February 2, 1998 (File No 1-9997).
10(k)(4)(B) The Assignment of Leases and Rents dated as of December 29,
1997 relating to that portion of the Collateral located in
the State of North Carolina from Koger Equity, Inc. to, and
in favour of, the Lenders. Incorporated by reference to
Exhibit 10(k)(4)(b) on Form 8-K, dated December 29, 1997,
filed by the Registrant on February 2, 1998 (File No.
1-9997).
10(k)(4)(C) The Assignment of Contracts, Licenses and Permits dated as
of December 29, 1997 relating to that portion of the
Collateral located in the State of North Carolina from Koger
Equity, Inc. to, and in favour of, the Lenders. Incorporated
by reference to Exhibit 10(k)(4)(c) on Form 8-K, dated
December 29, 1997, filed by the Registrant on February 2,
1998 (File No. 1-9997).
56
59
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------
10(k)(4)(D) The Environmental Indemnification Agreement dated as of
December 29, 1997 relating to that portion of the Collateral
located in the State of North Carolina between and among
Koger Equity, Inc. and the Lenders. Incorporated by
reference to Exhibit 10(k)(4)(d) on Form 8-K, dated December
29, 1997, filed by the Registrant on February 2, 1998 (File
No. 1-9997).
10(k)(5)(A) The Mortgage, Assignment of Leases and Rents and Security
Agreement, dated as of December 29, 1997 relating to that
portion of the Collateral located in the State of South
Carolina granted by Koger Equity, Inc. to, and in favour of,
the Lenders. Incorporated by reference to Exhibit
10(k)(5)(a) on Form 8-K, dated December 29, 1997, filed by
the Registrant on February 2, 1998 (File No. 1-9997).
10(k)(5)(B) The Assignment of Leases and Rents dated as of December 29,
1997 relating to that portion of the Collateral located in
the State of South Carolina from Koger Equity, Inc. to, and
in favour of, the Lenders. Incorporated by reference to
Exhibit 10(k)(5)(b) on Form 8-K/A, dated December 29, 1997,
filed by the Registrant on February 4, 1998 (File No.
1-9997).
10(k)(5)(C) The Assignment of Contracts, Licenses and Permits dated as
of December 29, 1997 relating to that portion of the
Collateral located in the State of South Carolina among and
between Koger Equity, Inc. and the Lenders. Incorporated by
reference to Exhibit 10(k)(5)(c) on Form 8-K, dated December
29, 1997, filed by the Registrant on February 2, 1998 (File
No. 1-9997).
10(k)(5)D) The Environmental Indemnity Agreement dated as of December
29, 1997 relating to that portion of the Collateral located
in the State of South Carolina among and between Koger
Equity, Inc. and the Lenders. Incorporated by reference to
Exhibit 10(k)(5)(d) on Form 8-K, dated December 29, 1997,
filed by the Registrant on February 2, 1998 (File No.
1-9997).
11 Earnings Per Share Computations.*
21 Subsidiaries of the Registrant.*
23 Independent Auditors' Consent.*
27 Financial Data Schedule (for SEC use only).*
*Filed with this Report.
57
60
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 18, 1998
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 18, 1998
- ------------------------------- Chief Executive Officer
(VICTOR A. HUGHES, JR.)
James C. Teagle President, Chief March 18, 1998
- ------------------------------- Operating Officer and Director
(JAMES C. TEAGLE)
James L. Stephens Vice President and Chief March 18, 1998
- ------------------------------- Accounting Officer
(JAMES L. STEPHENS)
D. Pike Aloian Director March 18, 1998
- -------------------------------
(D. PIKE ALOIAN)
Benjamin C. Bishop Director March 18, 1998
- -------------------------------
(BENJAMIN C. BISHOP)
Irvin H. Davis Director March 18, 1998
- -------------------------------
(IRVIN H. DAVIS)
David B. Hiley Director March 18, 1998
- -------------------------------
(DAVID B. HILEY)
John R. S. Jacobsson Director March 18, 1998
- -------------------------------
(JOHN R. S. JACOBSSON)
G. Christian Lantzsch Director March 18, 1998
- -------------------------------
(G. CHRISTIAN LANTZSCH)
William L. Mack Director March 18, 1998
- -------------------------------
(WILLIAM L. MACK)
Lee S. Neibart Director March 18, 1998
- -------------------------------
(LEE S. NEIBART)
George F. Staudter Director March 18, 1998
(GEORGE F. STAUDTER)
- -------------------------------
S. D. Stoneburner Director March 18, 1998
- -------------------------------
(S. D. STONEBURNER)
58