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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, 1998 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from to
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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 Identification No.)
8880 FREEDOM CROSSING TRAIL
JACKSONVILLE, FLORIDA 32256
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (904) 732-1000
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
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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
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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.
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The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 1, 1999 was approximately $370,453,000.
The number of shares of registrant's Common Stock outstanding on March 1, 1999
was 26,579,609.
Documents Incorporated by Reference
The Company's Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Act of 1934 for the 1999 Annual Meeting of Shareholders is
incorporated by reference in Part III of this report.
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TABLE OF CONTENTS
ITEM NO. DESCRIPTION
PART I PAGE NO.
1. BUSINESS.................................................................................... 3
2. PROPERTIES.................................................................................. 5
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................................................ 25
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................................................... 46
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 46
11. EXECUTIVE COMPENSATION..................................................................... 47
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................................................... 47
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 47
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K...................................................................... 48
15. SIGNATURES................................................................................. 56
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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 (the "Office Buildings") primarily located
in 20 office centers (each a "Koger Center") located in 15 metropolitan areas
throughout the southeastern and southwestern United States. As of December 31,
1998, KE owns 238 Office Buildings, of which 233 are in Koger Centers and five
are outside Koger Centers but in metropolitan areas where Koger Centers are
located. Koger-Vanguard Partners, L.P. ("KVP") is a limited partnership, for
which KE is the general partner, which owns suburban office buildings located in
a Koger Center. As of December 31, 1998, KVP owns 13 Office Buildings. The
Office Buildings contain approximately 10 million net rentable square feet and
were on average 90 percent leased as of December 31, 1998. During 1998, KE began
construction of seven buildings, which will contain approximately 653,000 net
rentable square feet and will be ready for occupancy at various times throughout
1999. 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 170 acres of unencumbered land held for
development and approximately 18 acres of unencumbered land held for sale. A
majority of the land held for development adjoins Office Buildings in 13 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 nine buildings under construction on approximately 59 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.
In addition to managing its own properties, KE provides property
management services through its wholly owned subsidiaries, Southeast Properties
Holding Corporation ("Southeast") and Koger Real Estate Services, Inc. ("KRES"),
for 23 office buildings containing approximately 1.3 million net rentable square
feet owned by unaffiliated parties. In conjunction with KRES, KE manages 22
office buildings owned by Centoff Realty Company, Inc. ("Centoff"), a subsidiary
of Morgan Guaranty Trust Company of New York (KE, KVP, Southeast and KRES are
hereafter referred to as the "Company").
KE 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) 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; (d) each year,
it must distribute at least 95 percent of its REIT taxable income; and (e) 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.
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4
A major governmental tenant, when all of its respective departments and
agencies which lease space in the Company's buildings are combined, leases more
than 10 percent of the net rentable area of the Company's buildings and
contributes more than 10 percent of the Company's annualized rentals as of
December 31, 1998. At that date, the State of Florida accounted for an aggregate
of 10 percent of the Company's total net rentable square feet leased and 11.1
percent of the Company's total annualized rental revenues. Some of the Company's
principal tenants are the State of Florida, the United States of America, Blue
Cross and Blue Shield of Florida, United Healthcare, Wellspring Resources, Ford
Motors, Hanover Insurance, Hoechst Celanese Corp., Travelers Insurance and
Landstar. Governmental tenants (including the State of Florida and the United
States of America), which account for 20.6 percent of the Company's leased
space, may be subject to budget reductions in times of recession and
governmental austerity measures. 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 Office
Buildings 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
During 1998, the Company expanded its revolving credit facility from
$100 million to $150 million. 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. The Company intends over time to develop and
construct office buildings primarily using its existing inventory of 170 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 additional 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 fixed policy which limits the percentage of its assets which may
be invested in any one type of investment or the geographic areas in which the
Company may acquire properties, the Company intends to continue to operate so as
to qualify for tax treatment as a REIT. 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, 1998, all of the Company's rental
revenues were derived from the buildings purchased or constructed by the
Company. The Company's 1998 interest revenues were derived from temporary cash
investments.
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5
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 239 employees. A resident general
manager is responsible for the leasing and operations of all buildings in a
Koger Center or metropolitan area. The Company has approximately 93 employees
who perform maintenance activities.
ITEM 2. PROPERTIES
GENERAL
As of December 31, 1998, the Company owns 251 Office Buildings located
in the 15 metropolitan areas of Birmingham, Alabama; Jacksonville, Orlando, St.
Petersburg, and Tallahassee, Florida; Atlanta, Georgia; Charlotte and
Greensboro, North Carolina; Tulsa, Oklahoma; Greenville, South Carolina;
Memphis, Tennessee; Austin, El Paso, and San Antonio, Texas; and Richmond,
Virginia. In addition, the Company has nine buildings 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, 1998, the Office Buildings were
on average 90 percent leased and the average annual rent per net rentable square
foot leased was $15.82. 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, 1998,
approximately 27 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 69 percent of such revenues were derived from leases
containing escalation provisions based upon fixed steps or real estate tax and
operating expense increases; and approximately four percent of such revenues
were derived from leases without escalation provisions. Some of the Company's
leases contain options which allow the lessee to renew for varying periods,
generally at the same rental rate and subject, in most instances, to Consumer
Price Index escalation provisions.
The Company owns approximately 198 acres of unimproved land (188 acres
of which are suitable for development) located in the metropolitan areas of
Birmingham, Alabama; 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
nine buildings under construction on approximately 59 acres of this unimproved
land.
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6
PROPERTY LOCATION AND OTHER INFORMATION
The following table sets forth information relating to the properties
owned by the Company as of December 31, 1998.
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 21 18 938,100 74.9 3.8(2)
Atlanta Gwinnett 2 4 139,400 8.9 26.6
Atlanta Perimeter 1 13 154,100 5.3
Austin 12 18 370,900 29.6 1.8
Birmingham Colonnade 4 9 279,300 24.1 23.4(3)
Birmingham Colonnade - Retail 1 9 112,600 15.7
Charlotte Carmel 3 3 283,300 25.3 7.7
Charlotte East 11 18 468,900 39.9 3.9
Charlotte Vanguard 13 16 481,700 39.7 17.1
Columbia Spring Valley 1.0
El Paso 16 24 298,300 22.7 2.4(4)
Greensboro South 13 16 610,700 46.0
Greensboro Wendover 18.5(5)
Greenville Park Central 3 14 134,000 9.9 3.5
Greenville Roper Mt. 9 13 350,900 29.2
Jacksonville Baymeadows 7 6 664,200 51.1
Jacksonville Central 31 26 666,000 47.2 1.6
Jacksonville JTB 1 7 23,000 2.2 29.8(6)
Memphis Germantown 5 6 392,700 29.8 4.8(7)
Orlando Central 21 27 554,400 44.7 1.3
Orlando University 2 10 159,600 11.6 15.5(8)
Richmond Paragon 1 13 127,700 8.1
Richmond South 5.8
San Antonio Airport 2 14 200,100 7.9
San Antonio West 26 21 788,900 63.5 7.2(9)
St. Petersburg 14 18 509,000 62.9 12.5
Tallahassee 19 16 789,600 62.7
Tulsa 13 19 476,400 39.4 10.0
---- --------- ----- -----
Total 251 9,973,800 802.3 198.2
==== ========= ===== =====
Average 16
==
(1) The age of each building was weighted by the net rentable square feet for
such building to determine the weighted average age of (a) the buildings in
each Koger Center or location and (b) all buildings owned by the Company.
(2) The Company currently has a building under construction on approximately
1.3 acres of this parcel.
(3) The Company currently has a building under construction on approximately
6.9 acres of this parcel.
(4) The Company currently has a building under construction on approximately
2.4 acres of this parcel.
(5) The Company currently has a building under construction on approximately
7.8 acres of this parcel.
(6) The Company currently has two buildings under construction on
approximately 22.1 acres of this land.
(7) The Company currently has a building under construction on approximately
4.8 acres of this parcel.
(8) The Company currently has a building under construction on approximately
6.8 acres of this parcel.
(9) The Company currently has a building under construction on approximately
7.2 acres of this parcel.
6
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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, 1998.
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 21 158 938,100 96% $ 16.53
Atlanta Gwinnett 2 27 139,400 88% 19.23
Atlanta Perimeter 1 10 154,100 100% 18.83
Austin 12 185 370,900 99% 19.62
Birmingham Colonnade 4 29 279,300 96% 15.66
Birmingham Colonnade - Retail 1 33 112,600 91% 11.40
Charlotte Carmel 3 35 283,300 80% 17.94
Charlotte East 11 215 468,900 84% 14.22
Charlotte Vanguard 13 82 481,700 90% 11.73
El Paso 16 185 298,300 88% 15.63
Greensboro South 13 201 610,700 78% 15.92
Greenville Park Central 3 57 134,000 93% 17.20
Greenville Roper Mt. 9 142 350,900 94% 16.81
Jacksonville Baymeadows 7 44 664,200 99% 15.12
Jacksonville Central 31 232 666,000 86% 13.34
Jacksonville JTB 1 1 23,000 100% 16.97
Memphis Germantown 5 72 392,700 89% 18.61
Orlando Central 21 160 554,400 93% 15.43
Orlando University 2 49 159,600 98% 18.27
Richmond Paragon 1 25 127,700 82% 19.15
San Antonio Airport 2 66 200,100 86% 17.62
San Antonio West 26 265 788,900 85% 14.47
St. Petersburg 14 140 509,000 87% 14.95
Tallahassee 19 104 789,600 91% 18.20
Tulsa 13 165 476,400 88% 12.31
---- ------ ---------
Total 251 2,682 9,973,800
==== ====== =========
Weighted Average 90% $ 15.82
===== =======
(1) The percent leased rates have been calculated by dividing total net
rentable square feet leased in a building by net rentable square feet in
such building, which excludes public or common areas.
(2) Rental rates are computed by dividing (a) total annualized base rents
(which excludes expense pass-throughs and reimbursements) for a Koger
Center or location as of December 31, 1998 by (b) the net rentable square
feet applicable to such total annualized base rents.
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8
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 1999
through 2007, (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, 1998 and on the terms of
leases in effect as of December 31, 1998, 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 60
percent, 65 percent and 63 percent of the Company's net rentable square feet,
which were scheduled to expire during 1998, 1997 and 1996, 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
------ ---------- ------------ --------------- --------------- --------------- ---------------
1999 1,105 1,858,296 20.7% $ 15.27 $ 28,370,619 20.0%
2000 543 1,523,956 17.0% 15.92 24,268,509 17.1%
2001 510 1,824,968 20.4% 15.96 29,126,963 20.5%
2002 160 853,183 9.5% 16.23 13,846,511 9.8%
2003 206 1,361,946 15.2% 16.17 22,017,268 15.5%
2004 101 521,519 5.8% 12.46 6,497,076 4.6%
2005 20 120,679 1.4% 16.52 1,993,046 1.4%
2006 12 223,113 2.5% 19.60 4,373,393 3.1%
2007 10 276,393 3.1% 16.77 4,634,020 3.3%
Other 15 396,181 4.4% 16.70 6,614,386 4.7%
------ ----------- ------- ------------- ------
Total 2,682 8,960,234 100.0% $ 15.82 $ 141,741,791 100.0%
====== =========== ======= ======= ============= ======
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, 1998. 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
- ------ --------- ---------- ------------ ----------- ----------- ------------- -------------
1996 215 $2,795,000 $0.36 $ 7,873,000 $ 1.03 $1,862,000 $ 0.24
1997 (1) 226 3,116,000 0.39 7,513,000 0.94 1,902,000 0.24
1998 (2) 243 4,255,000 0.48 11,655,000 1.31 1,755,000 0.20
(1) Excludes the two buildings for which construction was completed during 1997.
(2) Excludes the eight buildings for which construction was completed during
1997 and 1998.
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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, 1998.
WEIGHTED
MORTGAGE AVERAGE
LOAN INTEREST
KOGER CENTER/LOCATION BALANCE RATE
- ---------------------- -------- --------
Atlanta Chamblee $ 0 --
Atlanta Gwinnett 0 --
Atlanta Perimeter 0 --
Austin 16,576 8.33%
Birmingham Colonnade 0 --
Birmingham Colonnade - Retail 0 --
Charlotte Carmel 0 --
Charlotte East 0 --
Charlotte Vanguard 22,129 8.13%
El Paso 8,776 8.33%
Greensboro South 0 --
Greenville Park Central 0 --
Greenville Roper Mt 10,726 8.33%
Jacksonville Baymeadows 26,815 8.33%
Jacksonville Central 0 --
Jacksonville JTB 0 --
Memphis Germantown 15,624 8.25%
Orlando Central 24,377 8.33%
Orlando University 0 --
Richmond Paragon 8,365 8.00%
San Antonio Airport 0 --
San Antonio West 22,948 8.25%
St. Petersburg 19,530 8.25%
Tallahassee 40,037 8.10%
Tulsa 0 --
--------
Total $215,903 8.26%
======== =====
For additional information on these loans see Note 3, "Mortgages and
Loans Payable" of the Notes to Consolidated Financial Statements.
INDEBTEDNESS WITH VARIABLE INTEREST RATES
As of December 31, 1998, the Company had a $150 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):
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10
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
- ----------- --------- --------------- ----------- ----------- ---------------
1998 $ 92,000 7.1% $ 92,000 $ 45,181 7.0%
1997 1 8.5% 40,000 8,077 8.0%
1996 0 -- 22,276 18,280 9.3%
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
under the ticker symbol KE. The high and low closing sales prices for the
periods indicated in the table below were:
YEARS
---------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ------------------------- -------------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------- ------------ ----------- ----------- ----------- --------- ----------
March 31 $23 3/4 $ 20 5/8 $18 5/8 $17 1/4 $12 1/4 $10 3/4
June 30 22 1/2 18 5/8 18 1/4 15 3/8 13 3/8 11
September 30 21 13/16 16 3/8 20 13/16 17 11/16 16 13
December 31 18 1/4 15 5/8 23 3/8 20 1/8 18 3/4 15 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. The
Company's secured revolving credit facility requires the Company to maintain
certain financial ratios, which includes a limitation on dividends. However,
this covenant will not restrict the Company from paying the dividends required
to maintain its qualification as a REIT.
Set forth below are the dividends per share paid during the three years
ended December 31, 1998.
YEARS
---------------------------
QUARTER ENDED 1998 1997 1996
------------- ----- ---- ----
March 31 $.25 $.05 -
June 30 .25 .05 -
September 30 .30 .10 -
December 31 .30 .15 -
On February 4, 1999, the Company paid a quarterly dividend of $0.30 per
share to shareholders of record on December 31, 1998. In addition, the Company's
Board of Directors has declared a quarterly dividend of $0.30 per share payable
on May 6, 1999, to shareholders of record on March 31, 1999.
On March 1, 1999, there were approximately 1,363 shareholders of record
and the closing price of the Company's common stock on the American Stock
Exchange was $13.9375.
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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)
--------------------------------------------------------------------
INCOME INFORMATION 1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
Rental revenues and other rental services $133,663 $109,501 $ 98,805 $ 95,443 $ 94,388
Interest revenues 446 1,274 1,951 14,440 1,062
Total revenues 138,082 113,989 104,072 125,750 100,376
Property operations expenses 53,719 44,453 41,597 40,830 39,711
Depreciation and amortization 28,381 24,073 21,127 19,102 16,728
Mortgage and loan interest 16,616 16,517 18,701 23,708 25,872
Net income 29,602 21,204 10,501 28,990 4,215
Earnings per common share - diluted 1.10 .94 .54 1.61 .24
Dividends declared per common share 1.15 .55 .05
Weighted average shares outstanding - diluted 26,901 22,495 19,500 18,011 17,719
BALANCE SHEET INFORMATION
Operating properties (before depreciation) $872,183 $681,249 $582,972 $571,313 $578,237
Undeveloped land 20,535 14,761 27,108 30,281 36,012
Total assets 834,995 656,097 584,666 578,756 613,806
Mortgages and loans payable 307,903 181,963 203,044 254,909 323,765
Total shareholders' equity 464,763 444,262 364,135 310,697 280,601
OTHER INFORMATION
Funds from operations (1) $ 56,486 $ 42,324 $ 33,154 $ 36,707 $ 23,475
Income before interest, income taxes,
depreciation and amortization $ 75,555 $ 62,729 $ 51,144 $ 71,866 $ 47,042
Number of buildings (at end of period) 251 228 215 216 219
Percent leased (at end of period) 90% 92% 92% 91% 90%
(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):
1998 1997 1996 1995 1994
--------- --------- --------- --------- ----------
Net income $ 29,602 $21,204 $10,501 $28,990 $ 4,215
Depreciation - real estate 25,146 21,795 19,538 17,363 15,202
Amortization - deferred tenant costs 1,464 1,031 929 656 452
Amortization - goodwill 170 170 171 504 665
Minority interest 139
Litigation costs 424 176 1,902
Loss (gain) on sale or disposition of assets (35) (1,955) 497 255 43
Provision for loss on land held for sale (379) 970 996
Gain on note to Southeast (292) (11,288)
Loss (gain) on early retirement of debt 458 1,386 (919)
-------- ------- ------- ------- -------
Funds from Operations $ 56,486 $42,324 $33,154 $36,707 $23,475
======== ======= ======= ======= =======
The 1995 calculated Funds from Operations includes $13,066 of interest revenue
associated with mortgage notes, which KE acquired during 1995. These mortgage
notes were retired 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, KRES and KVP
(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
with its external auditors, its internal auditors and its senior management.
RESULTS OF OPERATIONS
RENTAL REVENUES. Rental revenues increased $24,152,000 from the year
ended December 31, 1997 to the year ended December 31, 1998. This increase
resulted primarily from (i) the increase in the Company's average rental rate
and (ii) increases in the rental revenues ($18,915,000) from properties acquired
and construction completed during 1997 and 1998. 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 ($5,051,000) from the
properties acquired and construction completed during 1997. As of December 31,
1998, the Company's buildings were on average 90 percent leased. As of December
31,1997 and 1996, the buildings owned by the Company were on average 92 percent
leased.
MANAGEMENT FEE REVENUES. Management fee revenues decreased $360,000 for
1998, as compared to 1997, due primarily to a decrease in leasing fees earned.
For 1997, management fee revenues remained basically unchanged from those earned
in 1996.
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INTEREST REVENUES. Interest revenues decreased $828,000 for 1998, as
compared to 1997, due to the lower average balance of cash to invest. For 1997,
interest revenues decreased $677,000 from the year ended December 31, 1996. This
decrease was also due to the lower average balance of cash to invest.
EXPENSES. Property operations expense includes such charges as
utilities, real estate taxes, janitorial, maintenance, property insurance,
provision for uncollectible rents, and management costs. During 1998, property
operations expense increased by $9,266,000 or 20.8 percent, compared to 1997,
primarily due to (i) increases in property operations expense ($7,512,000) for
the properties acquired and construction completed during 1997 and 1998, (ii)
increased real estate taxes, (iii) increased utility costs and (iv) increased
property management costs. During 1997, property operations expense increased by
$2,856,000 or 6.9 percent, compared to 1996, primarily due to (i) increased real
estate taxes and (ii) property operations expense ($1,994,000) for the
properties acquired and construction completed during 1997. For 1998, 1997 and
1996, property operations expense as a percentage of total rental revenues was
40.2 percent, 40.6 percent and 42.1 percent, respectively.
Depreciation expense has been calculated on the straight-line method
based upon the useful lives of the Company's depreciable assets, generally 3 to
40 years. For 1998, depreciation expense increased $3,442,000 or 15.5 percent,
compared to the prior year, due to the properties acquired and construction
completed during 1997 and 1998. 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 during 1997 ($841,000).
Amortization expense increased $866,000 during 1998, compared to 1997,
due primarily to (i) financing costs incurred for increasing the secured
revolving credit facility from $50 million to $100 million and (ii) deferred
tenant costs incurred during 1998. 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 secured revolving credit facility which
closed during 1997.
Compared to 1997, interest expense remained basically unchanged during
1998. 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. During 1998, 1997, and 1996, the weighted average interest
rate on the Company's variable rate loans was 7.0 percent, 8.0 percent and 9.3
percent, respectively. The Company's average outstanding amount under such loans
during 1998, 1997, and 1996 was $45,181,000, $8,077,000 and $18,280,000,
respectively.
General and administrative expenses were 0.8 percent, 1.0 percent, and
1.1 percent of average invested assets for 1998, 1997 and 1996, respectively.
For 1998, general and administrative expenses increased $579,000, compared to
1997, primarily due to (i) increases in group insurance costs, (ii) costs for
corporate office relocation and (iii) legal fees incurred for organization of
KVP. 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.
Direct costs of management contracts decreased $528,000 during 1998,
compared to 1997, due to decreased costs associated with providing property
management services for all management contracts. For 1997, direct costs of
management contracts remained basically unchanged from those incurred during
1996.
Other expenses decreased $528,000 during 1997, compared to 1996, due to
the reduction in litigation costs ($424,000) and the reduction in real estate
taxes on the Company's unimproved land caused by (i) the sale of two land
parcels (25.3 acres) and (ii) the assignment of 52 acres to construction
projects.
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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.
Management periodically reviews its investment in properties for
evidence of other than temporary impairments in value. Factors considered
consist of, but are not limited to, the following: current and projected
occupancy rates, market conditions in different geographic regions, and
management's plans with respect to its properties. Where management concludes
that expected cash flows will not enable the Company to recover the carrying
amount of its investments, losses are recorded and asset values are reduced. No
such impairments in value existed during 1998, 1997 or 1996.
OPERATING RESULTS. Net income totaled $29,602,000, $21,204,000 and
$10,501,000 for 1998, 1997 and 1996, respectively. For 1998, net income
increased $8,398,000 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 and amortization expense and (ii) the
increase in income from Koger Realty Services, Inc. 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.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the year ended December 31, 1998, the
Company generated approximately $63.1 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 1999.
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, 1998,
approximately 96 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, 1998, leases representing approximately 20 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 1999. This
represents 1,105 leases for space in buildings located in 23 of the 24 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 60 percent, 65 percent and 63 percent of the
Company's net rentable square feet, which were scheduled to expire during 1998,
1997 and 1996, respectively. For those leases which renewed during 1998, the
average rental rate increased from $15.04 to $16.22. 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 amount of leases which will expire during 1999
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.
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
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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 20.6 percent of the Company's leased
space as of December 31, 1998, 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 1998, the Company had management contracts for the
management of 23 commercial office properties. On March 31, 1998, a management
agreement to manage 22 commercial office buildings owned by Centoff was
automatically extended to March 31, 1999. 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 million from this
management agreement during 1998. Another agreement to manage one commercial
office building was terminated by the Company during February, 1999. During
1998, the Company earned fees of $91,000 for the management of this building.
INVESTING ACTIVITIES. At December 31, 1998, 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 1998,
the Company's expenditures for improvements to existing properties increased by
approximately $5 million from the prior year, primarily due to increases in
expenditures for tenant improvements and building improvements. The Company
purchased 20 buildings during 1998.
During 1998, the Company completed the construction of six buildings,
which contain 503,300 net rentable square feet. During 1997, the Company
completed the construction of two buildings, which contain 101,900 net rentable
square feet. The Company has nine buildings under construction, on approximately
59 acres of undeveloped land, which will contain approximately 797,000 net
rentable square feet. Expenditures for construction of these nine buildings are
expected to total approximately $68.4 million, excluding land and tenant
improvement costs.
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. On February 1, 1998, the Company acquired a building,
containing 19,000 net rentable square feet, located in Jacksonville, Florida for
a purchase price of $2.0 million. On March 6, 1998, the Company acquired 14.4
acres of land located in Jacksonville, Florida for a purchase price of $2.3
million. On April 22, 1998, the Company acquired an office and retail complex
consisting of (i) four office buildings containing 279,300 net rentable square
feet, (ii) a retail development containing 112,600 net rentable square feet and
(iii) approximately 23 acres of developable land. These properties were acquired
for a purchase price of $58.2 million and are located in Birmingham, Alabama. On
May 18, 1998, the Company acquired 15.4 acres of land located in Jacksonville,
Florida for a purchase price of $2.68 million. On October 22, 1998, the Company
acquired a suburban office park located in Charlotte, North Carolina, for a
purchase price of $52.3 million. This transaction was structured as a
contribution of the property to a down-REIT partnership (Koger-Vanguard
Partners, L.P.), whose general partner is KE. In addition, KE acquired 17.1
acres of land adjacent to this suburban office park for a purchase price of $1.5
million.
During 1997, the Company acquired 11 buildings, containing 717,900 net
rentable square feet, for a total purchase price of $74.8 million in seven
separate transactions. In addition, the Company acquired 5.9 acres of land for a
purchase price of $0.5 million.
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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.
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 $150 million secured revolving credit facility provided by
First Union National Bank of Florida, AmSouth Bank, N.A., Citizens Bank of Rhode
Island, Compass Bank 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. The Company
repurchased 35,600 Shares for approximately $583,000 during 1998.
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 for $379,000 following the Redemption Date. The
remaining warrants were exercised by the holders either on or prior to the
Redemption Date.
On March 27, 1998, the Company issued one million shares of its common
stock to Wheat First Securities, Inc. for an aggregate sales price of $20.2
million. The Company applied approximately $15 million of the proceeds from this
sale to the repayment of indebtedness with an average interest rate of
approximately 7.94 percent. During December 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 AREIF II Realty Trust, Inc., an
affiliate of Apollo Real Estate Fund II, L.P. (together referred to as
"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 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 with a 10 year maturity and an average interest rate of
8.19 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.
In conjunction with the acquisition of certain office buildings during
1998, the Company assumed mortgage loans with outstanding balances of $30.7
million and a weighted average interest rate of 8.09 percent. Amortization with
respect to this indebtedness is based on an equal monthly installment over 25
year amortization periods.
During December 1998, the Company increased its secured revolving
credit facility from $100 million to $150 million. This facility provides for
monthly interest payments, requires the Company to maintain certain financial
ratios and matures in December 2001.
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Loan maturities and normal amortization of mortgages and loans payable
are expected to total approximately $3.3 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 2001.
At December 31, 1998, the Company had 61 buildings (containing
approximately 2.15 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 $91.6 million of its common stock under such
registration statements.
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 space in many of the markets
in which the Company operates. As of December 31, 1998, 96 percent of the
Company's annualized rentals were subject to leases having annual escalation
clauses as described under "Properties" above. As of December 31, 1997 and 1996,
93 percent and 94 percent, respectively, of the Company's annualized rentals
were subject to leases having annual escalation clauses.
Historically, inflation has often caused increases in the value of
income-producing real estate through higher rentals. The Company, however, can
provide no assurance that inflation will increase the value of its properties in
the future, and, in fact, the rate of inflation over recent years has been
considerably below that which has been experienced previously.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR PURPOSE OF
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their businesses without fear of
litigation so long as those statements are identified as forward-looking and are
accompanied by meaningful cautionary statements identifying important factors
that could cause actual results to differ materially from those projected in
such statements. The Company desires to take advantage of the "safe harbor"
provisions of the Act.
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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 $307.9 million, all
of which is secured by certain of the Company's properties. Approximately $236
million of such debt will mature before 2008, with the majority of the remaining
balance maturing in 2009. If principal payments due at maturity cannot be
refinanced, extended or paid with proceeds of other capital transactions, such
as new equity capital, the Company expects that its cash flow will not be
sufficient to repay all such maturing debt. Furthermore, if prevailing interest
rates or other factors at the time of refinancing (such as the reluctance of
lenders to make commercial real estate loans) result in higher interest rates
upon refinancing than the interest rates on the existing debt, the interest
expense relating to such refinanced debt would increase, which would adversely
affect the Company's cash flow and the amount of distributions the Company would
be able to make to its shareholders. If the Company has mortgaged a property to
secure payment of debt and the Company is unable to meet the mortgage payments,
then the mortgagee may foreclose upon, or otherwise take control of, such
property, with a consequent loss of income and asset value to the Company.
RISK OF RISING INTEREST RATES AND VARIABLE RATE DEBT. The Company
currently has a $150 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, 1998, the debt to total market capitalization ratio
of the Company was approximately 39 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
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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.
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 20.7 percent and 17.0 percent of the total net
rentable square feet leased in the Company's buildings will expire in 1999 and
2000, 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.
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
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20
development opportunities in the southeastern and southwestern United States.
These developers may have greater financial resources than the Company. The
number of competitive commercial properties in a particular area could have a
material adverse effect on the Company's ability to lease space in its buildings
or at newly developed or acquired properties and the rents charged.
CHANGES IN LAWS. Because increases in income, service or transfer taxes
are generally not passed through to tenants under leases, such increases may
adversely affect the Company's cash flow and its ability to make distributions
to its shareholders. The Company's properties are also subject to various
federal, state and local regulatory requirements, such as requirements of the
Americans with Disabilities Act (the "ADA") and state and local fire and life
safety requirements. Failure to comply with these requirements could result in
the imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that its properties are currently in
compliance with all such regulatory requirements. However, there can be no
assurance that these requirements will not be changed or that new requirements
will not be imposed which would require significant unanticipated expenditures
by the Company and could have an adverse effect on the Company's cash flow and
expected distributions.
UNINSURED LOSS. The Company presently carries comprehensive liability,
fire, flood (where appropriate), extended coverage and rental loss insurance
with respect to its properties, with policy specifications and insured limits
customary for similar properties. There are, however, certain types of losses
(such as from wars) that may be either uninsurable or not economically
insurable. Should an uninsured loss or a loss exceeding policy limits occur, the
Company could lose both its capital invested in, and anticipated profits from,
one or more of its properties.
BANKRUPTCY AND FINANCIAL CONDITION OF TENANTS. At any time, a tenant of
the Company's buildings may seek the protection of the bankruptcy laws, which
could result in the rejection and termination of such tenant's lease and thereby
cause a reduction in the cash flow available for distribution by the Company. No
assurance can be given that tenants will not file for bankruptcy protection in
the future or, if any tenants file, that they will affirm their leases and
continue to make rental payments in a timely manner. In addition, a tenant from
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 all but 13 of 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. KE is
currently the general partner of Koger-Vanguard Partners, L.P., which owns 13
office buildings. 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.
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.
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ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company believes it has operated so as to qualify as a REIT under
the Internal Revenue Code since its inception in 1988. Although management of
the Company intends that the Company continue to operate so as to qualify as a
REIT, no assurance can be given that the Company will remain qualified as a
REIT. Qualification as a REIT involves the application and satisfaction of
highly technical and complex Code requirements for which there are only limited
judicial and administrative interpretations. Uncertainty in the application of
such requirements, as well as circumstances not entirely within the Company's
control, may affect the Company's ability to qualify as a REIT. In addition, no
assurance can be given that legislation, new regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to qualification as a REIT or the federal income tax consequences
of such qualification. The Company, however, is not aware of any pending tax
legislation that would adversely affect the Company's ability to operate as a
REIT.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property and may be held liable to a governmental
entity or to third parties for property damage and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws typically impose clean-up responsibility and liability without regard
to whether the owner knew, or caused the presence, of the contaminants, and the
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate the contamination on such property, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Any person who arranges for the disposal or treatment of
hazardous or toxic substances at a disposal or treatment facility also may be
liable for the costs of removal or remediation of a release of hazardous or
toxic substances at such disposal or treatment facility, whether or not such
facility is owned or operated by such person. In addition, some environmental
laws create a lien on the contaminated site in favor of the government for
damages and costs that it incurs in connection with the contamination. Finally,
the owner of a site may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from a
site.
Certain federal, state and local laws, regulations and ordinances
govern the removal, encapsulation or disturbance of asbestos-containing
materials ("ACM") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACM and may provide for third parties to seek
recovery from owners or operators of real properties for personal injury
associated with ACM. In connection with its ownership and operation of its
properties, the Company may be potentially liable for such costs. All ACM in the
Company's buildings has been found to be in good condition and non-friable, and
should not present a risk as long as it continues to be properly managed.
The Company's environmental assessments of its properties have not
revealed any environmental liability that the Company believes would have a
material adverse effect on its business, assets or results of operations taken
as a whole, nor is the Company aware of any such material environmental
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.
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EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK
One of the factors that will influence the market price of the
Company's 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. All significant accounting applications used by the
Company are packaged software products licensed from various computer software
companies. During 1998, the Company began implementing its existing plan to
upgrade its significant accounting applications from DOS-based software to
Windows-based software. The Company has confirmed that its Windows-based
software applications are Year 2000 Compliant. The project to upgrade these
applications to Windows-based software will be completed by September 30, 1999.
The Company has also completed its initial assessment of its critical
building operating systems (HVAC, lighting, security and elevators) regarding
Year 2000 Compliance. This assessment determined that the costs of dealing with
timing devices which are not Year 2000 Compliant would not be material to the
Company's financial position or results of operations. The Company is continuing
to inventory all building operating systems to confirm the Company's assessment
of these devices with the applicable manufacturers.
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 availability 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.
Due to the general uncertainty inherent in the Year 2000 Compliance
issue, resulting in part from the uncertainty of the Year 2000 readiness of
third-party suppliers and tenants, the Company is unable to determine at this
time whether the consequences of Year 2000 failures will have a material impact
on the Company's results of operations, liquidity or financial condition. The
Company is exposed to the potential risk that its vendors and service providers
may not be Year 2000 compliant. However, this risk is reduced by the
availability of multiple vendors in the 15 cities in which the Company owns
properties. Failures by utility vendors to provide regulated services would have
the greatest impact on the Company's normal business operations. For this
reason, the Company has requested information from each of its utility vendors
concerning their Year 2000 readiness. Currently the Company has received
responses from approximately 95% of its utility vendors. All respondents have
acknowledged that they are currently working on the problem and many have
outlined their respective plans of implementation. The Company is exposed to the
risk that its tenants could be impacted by the Year 2000 Compliance issue such
that they would be unable to pay their rent on time. However, the Company has a
diverse tenant base and its success is not closely tied to the success of any
particular tenant. Also, the Company's leases with its tenants protect the
Company in the event of tenant default and requires the payment of delinquent
fees on late rental payments. The Company does not expect any adverse effects
caused by its accounting and property management systems that would affect the
Company's ability to meet its financial and reporting requirements.
The Company has developed contingency plans for dealing with timing
devices in building operating systems, which are not Year 2000 compliant, in
case these devices are not replaced by the end of 1999. Testing of these
contingency plans
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and decisions whether implementation of a contingency plan is required will be
completed by September 30, 1999. The Company has sufficient internal resources
and personnel to implement any required contingency plans related to its
building operating systems.
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............................................................................ 26
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998
and 1997........................................................................................ 27
Consolidated Statements of Operations for Each
of the Three Years in the Period Ended
December 31, 1998............................................................................... 28
Consolidated Statements of Changes in Shareholders'
Equity for Each of the Three Years in the
Period Ended December 31, 1998.................................................................. 29
Consolidated Statements of Cash Flows for Each
of the Three Years in the Period Ended
December 31, 1998............................................................................... 30
Notes to Consolidated Financial Statements for
Each of the Three Years in the Period Ended
December 31, 1998............................................................................... 31
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
for the Three Years Ended December 31, 1998..................................................... 42
Schedule III - Real Estate and Accumulated
Depreciation as of December 31, 1998............................................................ 43
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26
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, 1998 and 1997, 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,
1998. 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 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 12 , 1999
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27
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(IN THOUSANDS EXCEPT SHARE DATA)
1998 1997
--------- ------
ASSETS
Real estate investments:
Operating properties:
Land $ 137,047 $ 111,697
Buildings 731,558 567,332
Furniture and equipment 3,578 2,220
Accumulated depreciation (129,682) (104,700)
--------- ---------
Operating properties - net 742,501 576,549
Properties under construction:
Land 11,318 8,978
Buildings 31,562 18,608
Undeveloped land held for investment 19,272 13,249
Undeveloped land held for sale, net of allowance 1,263 1,512
Cash and temporary investments 4,827 16,955
Accounts receivable, net of allowance for uncollectible
accounts of $436 and $250 6,158 5,646
Investment in Koger Realty Services, Inc. 1,661 472
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $855 and $685 1,700 1,870
Other assets 14,733 12,258
--------- ---------
TOTAL ASSETS $ 834,995 $ 656,097
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages and loans payable $ 307,903 $ 181,963
Accounts payable 12,139 8,802
Accrued real estate taxes payable 4,407 3,294
Accrued liabilities - other 9,288 6,623
Dividends payable 7,971 6,352
Advance rents and security deposits 5,432 4,801
--------- ---------
Total Liabilities 347,140 211,835
--------- ---------
Minority interest 23,092
--------- ---------
Commitments and contingencies (Notes 2 and 10)
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: 28,559,751 and 28,389,195 shares;
outstanding: 26,571,068 and 25,406,792 shares 286 284
Capital in excess of par value 454,988 441,451
Retained earnings 30,020 30,947
Treasury stock, at cost; 1,988,683 and 2,982,403 shares (20,531) (28,420)
--------- ---------
Total Shareholders' Equity 464,763 444,262
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 834,995 $ 656,097
========= =========
See Notes to Consolidated Financial Statements.
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28
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1998
(IN THOUSANDS EXCEPT PER SHARE DATA)
1998 1997 1996
---- ---- ----
REVENUES
Rental $ 133,076 $ 108,924 $ 98,342
Other rental services 587 577 463
Management fees 2,277 2,637 2,682
Interest 446 1,274 1,951
Income from Koger Realty Services, Inc. 1,696 577 342
Gain on note to Southeast 292
--------- --------- ---------
Total revenues 138,082 113,989 104,072
--------- --------- ---------
EXPENSES
Property operations 53,719 44,453 41,597
Depreciation and amortization 28,381 24,073 21,127
Mortgage and loan interest 16,616 16,517 18,701
General and administrative 6,953 6,374 6,623
Direct cost of management fees 1,368 1,896 1,884
Other 383 413 941
Recovery of loss on land held for sale (379)
--------- --------- ---------
Total expenses 107,420 93,347 90,873
--------- --------- ---------
INCOME BEFORE GAIN (LOSS) ON SALE OR
DISPOSITION OF ASSETS, INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY ITEM 30,662 20,642 13,199
Gain (loss) on sale or disposition of assets 35 1,955 (497)
--------- --------- ---------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND
EXTRAORDINARY ITEM 30,697 22,597 12,702
Income taxes 956 935 815
--------- --------- ---------
INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM 29,741 21,662 11,887
Minority interest 139
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 29,602 21,662 11,887
Extraordinary loss on early retirement of debt 458 1,386
--------- --------- ---------
NET INCOME $ 29,602 $ 21,204 $ 10,501
========= ========= =========
EARNINGS PER SHARE:
Basic-
Income before extraordinary item $ 1.13 $ 1.01 $ 0.64
Extraordinary loss (0.02) (0.07)
--------- --------- ---------
Net Income $ 1.13 $ 0.99 $ 0.57
========= ========= =========
Diluted -
Income before extraordinary item $ 1.10 $ 0.96 $ 0.61
Extraordinary loss (0.02) (0.07)
--------- --------- ---------
Net Income $ 1.10 $ 0.94 $ 0.54
========= ========= =========
WEIGHTED AVERAGE SHARES:
Basic 26,294 21,374 18,523
========= ========= =========
Diluted 26,901 22,495 19,500
========= ========= =========
See Notes to Consolidated Financial Statements.
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29
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1998
(IN THOUSANDS)
COMMON STOCK CAPITAL TOTAL
----------------------- IN EXCESS SHARE-
SHARES PAR OF PAR RETAINED TREASURY HOLDERS'
ISSUED VALUE VALUE WARRANTS EARNINGS STOCK EQUITY
-------- ------- ---------- -------- -------- --------- --------
BALANCE,
DECEMBER 31, 1995 20,477 $ 205 $ 318,609 $ 2,250 $13,210 $(23,577) $310,697
Common stock sold 3,000 30 42,592 126 42,748
Warrants exercised 3 33 (7) 26
Options exercised 57 1 519 (47) 473
Stock appreciation
rights exercised 23 270 270
401(k) Plan contribution 104 361 465
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
Common stock sold 3,500 35 66,439 166 66,640
Treasury stock reissued 150 128 278
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
401(k) Plan contribution 248 195 443
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
Common stock sold 12,104 8,430 20,534
Treasury stock purchased (583) (583)
Options exercised 171 2 1,307 (34) 1,275
401(k) Plan contribution 126 76 202
Dividends declared (30,529) (30,529)
Net income 29,602 29,602
------- -------- --------- ------- -------- -------- --------
BALANCE,
DECEMBER 31, 1998 28,560 $ 286 $ 454,988 $ 0 $ 30,020 $(20,531) $464,763
======= ======== ========= ======= ======== ======== ========
See Notes to Consolidated Financial Statements.
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30
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1998
(IN THOUSANDS)
1998 1997 1996
---------- ---------- ----------
OPERATING ACTIVITIES
Net income $ 29,602 $ 21,204 $ 10,501
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 28,381 24,073 21,127
Income from Koger Realty Services, Inc. (1,696) (577) (342)
Provision for uncollectible accounts 300 224 50
Minority interest 139
(Gain) Loss on sale or disposition of assets (35) (1,955) 497
Loss on early retirement of debt 458 1,386
Recovery of loss on land held for sale (379)
Gain on unsecured note to Southeast (292)
Accrued interest added to principal 112
Amortization of mortgage discounts 86 196
Changes in assets and liabilities:
Increase in accounts payable, accrued
liabilities and other liabilities 8,095 7,906 3,542
Increase in accounts receivable and other assets (1,735) (842) (829)
--------- --------- ---------
Net cash provided by operating activities 63,051 50,198 35,948
--------- --------- ---------
INVESTING ACTIVITIES
Property acquisitions (83,337) (75,774)
Building construction expenditures (53,137) (26,099) (930)
Tenant improvements to first generation space (5,020) (701)
Tenant improvements to existing properties (11,655) (7,513) (7,873)
Building improvements (4,267) (3,116) (2,795)
Energy management improvements (283) (572) (1,900)
Deferred tenant costs (2,702) (1,997) (1,862)
Additions to furniture and equipment (1,358) (651) (128)
Dividends received from Koger Realty Services, Inc. 507 364 490
Proceeds from sale of assets 35 6,244 1,241
Proceeds from note to Southeast 887
--------- --------- ---------
Net cash used in investing activities (161,217) (109,815) (12,870)
--------- --------- ---------
FINANCING ACTIVITIES
Principal payments on mortgages and loans (40,749) (77,749) (228,090)
Dividends paid (28,910) (7,473)
Treasury stock purchased (583) (5,750)
Warrants redeemed (379)
Proceeds from mortgages and loans 136,002 56,300 175,900
Proceeds from sales of common stock 20,534 66,640 42,748
Proceeds from exercise of warrants and stock options 1,128 10,252 376
Financing costs (1,384) (984) (3,712)
--------- --------- ---------
Net cash provided by (used in) financing activities 86,038 40,857 (12,778)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (12,128) (18,760) 10,300
Cash and cash equivalents - beginning of year 16,955 35,715 25,415
--------- --------- ---------
Cash and cash equivalents - end of year $ 4,827 $ 16,955 $ 35,715
========= ========= =========
See Notes to Consolidated Financial Statements.
30
31
KOGER EQUITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1998
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. Koger-Vanguard
Partners, L.P. ("KVP") is a Delaware limited partnership, for which KE is the
general partner.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of KE, its wholly-owned subsidiaries and KVP (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. The Company owns all of the
preferred stock of KRSI, which preferred stock represents at least 95 percent of
the economic value of KRSI. Such 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, properties under
construction, 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, 1998, there were no such
impairments in value. Maintenance and repairs are charged to operations.
Acquisitions, additions, and improvements are capitalized.
MINORITY INTEREST. On October 22, 1998, KE acquired a suburban office
park for a purchase price of $52.3 million. The transaction was structured as a
contribution of the property to KVP in exchange for limited partner units valued
at $22.95 million. In connection with this transaction, KVP assumed $22.2
million of debt and received a contribution of $7.2 million from KE in exchange
for general partner interests. The limited partner units are entitled to a
cumulative preferred return, which approximates the average dividend rate on
KE's shares. In addition, the limited partner units carry with them the right to
redeem the units for common shares of KE on a one-unit-for-one-share basis or,
at the option of KE, the units may be redeemed for cash. KE has reported KVP's
assets, liabilities and operations in its financial statements on the
consolidated basis. The limited partnership units and earnings thereon are
reported as minority interests.
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.
31
32
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 rental revenues under leases which provide
for material varying rents over their terms. For 1998, 1997 and 1996, the
recognition of rental revenues on this basis for applicable leases increased
rental revenues by $1,335,000, $454,000 and $114,000, 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, 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. Basic earnings per common share has been
computed based on the weighted average number of shares of common stock
outstanding for each period. Diluted earnings per common share is similar to
basic earnings per share except that the weighted average number of common
shares outstanding is increased to include the number of additional common
shares that would have been outstanding if the dilutive common shares (options
and warrants) had been issued. The treasury stock method is used to calculate
dilutive shares which reduces the gross number of dilutive shares by the number
of shares purchasable from the proceeds of the options and warrants assumed to
be exercised. Following is a reconciliation of number of shares (in thousands)
used in the computation of basic and diluted earnings per share.
1998 1997 1996
---- ---- ----
Weighted average number of common
shares outstanding - Basic 26,294 21,374 18,523
Effect of dilutive securities:
Stock Options 607 736 536
Warrants 385 441
------- -------- -------
Adjusted common shares - Diluted 26,901 22,495 19,500
======= ======= =======
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 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 $443,000 based on the closing price of the Company's common stock
on the American Stock Exchange on December 31, 1996. During 1998, the Company
contributed 9,197 shares of common stock to the Company's 401(k) Plan. These
shares had a value of approximately $202,000 based on the closing price of the
Company's common stock on the American Stock Exchange on December 31, 1997. The
Company assumed certain mortgage loans with outstanding balances of $30.7
million in conjunction with certain property acquisitions during 1998. In
addition, KVP issued $22,953,000 of limited partner units in conjunction with a
property acquisition during 1998.
32
33
For 1998, 1997 and 1996, total interest payments (net of amounts
capitalized) were $15,015,000, $16,426,000 and $18,599,000, respectively, for
the Company. For 1998, 1997 and 1996, payments for income taxes totaled
$1,233,000, $690,000 and $816,000, 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 June 1997, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standards
("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 adopted this accounting standard on January 1, 1998, as
required. This standard had no impact on the financial statements as the Company
has no other comprehensive income.
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
adopted this accounting standard on January 1, 1998, as required. This standard
had no impact on the financial statements as the Company does not have multiple
operating segments.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post-Retirement Benefits" effective for fiscal years
beginning after December 15, 1997. This Statement revises employers' disclosures
about pension and other post-retirement benefit plans. It does not change the
measurement or recognition of those plans. This Statement standardizes the
disclosure requirements for pensions and other post-retirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer considered
useful. The Company adopted this accounting standard on January 1, 1998, as
required.
RECLASSIFICATION. Certain 1997 and 1996 amounts have been reclassified
to conform with 1998 presentation.
33
34
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.
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 in connection with the 1996 sale of common stock to an
affiliate of Apollo. 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, and Mr. Hiley became Executive Vice President and
Chief Financial Officer of the Company in April, 1998.
Pursuant to a consulting agreement with the Company which ended during
1998, Mr. Hiley provided advice with respect to the financial aspects of the
Company's strategic plan and was paid a fee of $146,000 during 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.
3. MORTGAGES AND LOANS PAYABLE.
The Company has 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
with a 10 year maturity and an average interest rate of 8.19 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 $259 million at December 31,
1998.
The Company has a $150 million secured revolving credit facility ($92
million of which was outstanding on December 31, 1998) provided by First Union
National Bank of Florida, AmSouth Bank, N.A., Citizens Bank of Rhode Island,
Compass Bank 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 130, 145 or 160 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 three years. This credit
34
35
facility requires the Company to maintain certain financial ratios, which
includes a limitation on dividends, and is collateralized by properties with a
carrying value of approximately $256.7 million at December 31, 1998.
During 1998, the Company assumed other non-recourse loans with
outstanding balances of $30.7 million in conjunction with certain property
acquisitions. The contractual interest rates on these loans range from 7.25
percent to 8.2 percent. Amortization with respect to this indebtedness is based
on equal monthly installments based on 25 year amortization periods. These three
loans mature in 2002, 2006 and 2021.
The annual maturities of mortgages and loans payable, as of December
31, 1998, are summarized as follows:
YEAR ENDING AMOUNT
DECEMBER 31, (IN THOUSANDS)
------------ --------------
1999 $ 3,269
2000 3,556
2001 95,869
2002 11,914
2003 4,355
Subsequent Years 188,940
--------
Total $307,903
========
4. 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, 1998, approximately 96 percent of the Company's
annualized rentals were subject to rent escalations based on changes in the
Consumer Price Index, fixed rental increases 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, 1998, determined without regard to renewal options, are summarized as
follows:
YEAR ENDING AMOUNT
DECEMBER 31, (IN THOUSANDS)
------------ --------------
1999 $128,247
2000 107,770
2001 81,663
2002 61,446
2003 40,620
Subsequent Years 87,856
--------
Total $507,602
========
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 $4,724,000, $2,850,000 and $2,886,000 for the
years 1998, 1997, and 1996, respectively.
At December 31, 1998, annualized rental revenues totaled approximately
$15,751,000 for the State of Florida, when all of its departments and agencies
which lease space in the Company's buildings were combined.
35
36
5. 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.
1998 EQUITY AND CASH INCENTIVE PLAN. The Company's 1998 Equity and Cash
Incentive Plan (the "1998 Plan") provides for the issuance of up to 1,000,000
shares of its common stock pursuant to the grant of awards under this plan which
may include stock options, stock appreciation rights, restricted stock,
unrestricted stock, deferred stock and performance awards (in cash or stock or
combinations thereof). Options granted pursuant to the 1998 Plan would expire
ten years from 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 1998, 1997 and
1996 consistent with the method prescribed by SFAS No. 123, the Company's net
earnings and earnings per share would have been adjusted to the pro forma
amounts indicated below:
1998 1997 1996
-------------- -------------- --------------
Net income - As reported $ 29,602,000 $ 21,204,000 $ 10,501,000
- Pro forma $ 27,688,000 $ 19,355,000 $ 10,139,000
Diluted earnings per share - As reported $ 1.10 $ 0.94 $ 0.54
- Pro forma $ 1.03 $ 0.86 $ 0.52
Under SFAS No. 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 1998, 1997 and 1996:
1998 1997 1996
-------------- -------------- --------------
1988 PLAN
Dividend yield - 5.00% 5.00%
Expected volatility - 23.71% 28.09%
Risk-free interest rates - 5.94% 6.52%
Expected lives (months) - 38 61
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37
1998 1997 1996
--------- -------- --------
1993 PLAN, 1996 PLAN, 1998 PLAN AND OTHER
Dividend yield 6.50% 5.00% 5.00%
Expected volatility 20.29% 23.71% 24.17%
Risk-free interest rates 5.47% 6.11% 6.29%
Expected lives (months) 67 65 86
A summary of the status of fixed stock option grants as of December 31,
1998, 1997 and 1996, and changes during the years ending on those dates is
presented below:
1998 1997 1996
------------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------- ------- --------
Outstanding - beginning of year 1,756,773 $11.98 1,928,959 $10.51 1,251,862 $ 7.04
Granted 934,000 21.05 171,392 18.80 923,981 14.39
Exercised (170,556) 6.80 (335,261) 6.94 (146,268) 7.33
Expired 0 -- 0 -- 0 --
Forfeited (5,496) 19.81 (8,317) 14.85 (100,616) 7.69
---------- ---------- ---------- ------
Outstanding - end of year 2,514,721 $15.68 1,756,773 $11.98 1,928,959 $10.51
========== ====== ========== ====== ========== ======
The weighted average fair values of options granted during 1998, 1997
and 1996 were $2.71, $4.35 and $3.79 per option, respectively.
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
EXERCISE OPTIONS OPTIONS WEIGHTED AVERAGE
PRICE OUTSTANDING EXERCISABLE REMAINING LIFE
-------- ----------- ----------- ----------------
(Months)
$ 5.1250 19,380 19,380 1
7.5000 148,900 67,636 72
7.6250 407,195 286,683 54
8.1250 3,600 1,200 76
11.5000 137,127 107,013 78
15.3750 737,080 330,580 95
19.1250 18,000 3,600 97
19.8125 109,439 45,423 103
20.0000 461,500 0 116
21.2500 25,000 25,000 113
21.5625 36,500 0 109
21.8750 286,000 0 110
22.8125 125,000 0 110
--------- --------
2,514,721 886,515 92
========= ======== =====
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Remaining non-exercisable options as of December 31, 1998 become
exercisable as follows:
NUMBER
YEAR OF OPTIONS
---- ----------
1999 574,918
2000 479,648
2001 368,440
2002 104,400
2003 100,800
---------
1,628,206
=========
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,
1998), 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.
6. STOCK INVESTMENT PLAN.
The Company has a Monthly Stock Investment Plan (the "SIP") which
provides for regular purchases of the Company's Shares 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 $58,500, $59,300 and $36,700 for 1998, 1997 and
1996, respectively. Through December 31, 1998, 86,922 Shares have been issued
under the SIP.
7. EMPLOYEE BENEFIT PLANS.
The Company has a 401(k) plan (the "401(k) Plan") which permits
contributions by employees. For 1996, the Company's Board of Directors approved
a Company contribution to the 401(k) Plan in the form of the Company's Shares
(23,657 Shares which had a value of approximately $443,000 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
during February 1998. For 1998, the Company's Board of Directors approved a
Company contribution to the 401(k) Plan in the form of the Company's Shares
(15,603 Shares which had a value of approximately $268,000 on December 31,
1998). The contribution for 1998 was made on February 18, 1999.
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 benefits are based on years of service and
the employee's average base salary during the last three calendar years of
employment.
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Net periodic pension cost for the SERP for 1998, 1997 and 1996 was as
follows (in thousands) :
1998 1997 1996
---- ---- ----
Service cost $ 28 $ 25 $ 28
Interest cost 328 287 242
Amortization of unrecognized prior service cost 203 203 203
Amortization of unrecognized net loss 67 41 16
----- ------ -----
Total $ 626 $ 556 $ 489
===== ====== =====
Assumptions used in the computation of net periodic pension cost for
the SERP were as follows:
1998 1997 1996
---- ----- -------
Discount rate 7.5% 7.5% 7.5%
Rate of increase in salary levels 5.0% 5.0% 5.0%
The following table provides a reconciliation of benefit obligations,
the status of the unfunded SERP and the amounts included in accrued
liabilities-other in the Consolidated Balance Sheet at December 31, 1998 and
1997 (in thousands):
1998 1997
------- -------
Change in benefit obligation
Benefit obligation at beginning of year $ 4,092 $ 3,496
Service cost 28 25
Interest cost 328 287
Actuarial (gain)/loss 339 390
Benefits paid (106) (106)
------- -------
Benefit obligation at end of year 4,681 4,092
======= =======
Change in plan assets
Fair value of plan assets at beginning of year 0 0
Expected return on plan assets 0 0
Employer contribution 106 106
Benefits paid (106) (106)
------- -------
Fair value of plan assets at end of year 0 0
======= =======
Funded status (4,681) (4,092)
Unrecognized prior service cost 1,888 2,090
Unrecognized actuarial loss 1,106 834
------- -------
Net amount recognized (1,687) (1,168)
======= =======
Amounts recognized in the statement of financial
position consist of:
Accrued benefit liability (1,687) (1,168)
Additional minimum liability (1,724) (1,670)
Intangible asset 1,724 1,670
------- -------
Net amount recognized $(1,687) $(1,168)
======= =======
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8. DIVIDENDS.
During 1998 and 1997, the Company paid a total of $1.10 and $0.35 per
share of dividends, respectively. The Company paid no dividends during the year
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. The Company's secured revolving credit facility
requires the Company to maintain certain financial ratios, which includes a
limitation on dividends. During November 1998, the Company's Board of Directors
declared a quarterly dividend of $0.30 per share payable on February 4, 1999, to
shareholders of record on December 31, 1998.
9. 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, 1998, the Company's
taxable income prior to the dividends paid deduction was approximately
$28,910,000 (which equals the Company's 1998 dividends paid deduction). The
Company's taxable income/(loss) prior to the dividends paid deduction for the
years ended December 31, 1997 and 1996 was approximately $7,473,000 and
$(18,416,000), 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, 1998, 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 $34
million.
The Company utilized approximately $15,610,000 and $14,932,000 of net
operating loss carryforwards to eliminate REIT taxable income for 1997 and 1996,
respectively. The Company's net operating loss carryforward available to offset
REIT taxable income for 1998 is approximately $6,921,000. 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 1997 and 1996,
the Company incurred alternative minimum taxes of approximately $603,000 and
$324,000, respectively, and recorded a provision for alternative minimum taxes
of approximately $560,000 for 1998.
10. COMMITMENTS AND CONTINGENCIES.
At December 31, 1998, the Company had commitments for the construction
of buildings and improvements to existing buildings of approximately $18.8
million.
11. PRO FORMA INFORMATION - SALE OF COMMON STOCK.
The proceeds of the sale of one million Shares, on March 27, 1998, were
used to retire approximately $15 million of debt, with an average interest rate
of approximately 7.94%, and for general corporate purposes. Pro forma earnings
per share information assuming that the sale of common stock had occurred on
January 1, 1998 is as follows:
Pro forma net income $ 29,794,000
Pro forma earnings per share:
Basic $ 1.12
Diluted $ 1.10
12. SUBSEQUENT EVENTS.
During January 1999, the Company repurchased 54,000 Shares for
approximately $852,000.
40
41
13. INTERIM FINANCIAL INFORMATION (UNAUDITED).
Selected quarterly information for the two years in the period ended
December 31, 1998 is presented below (in thousands except per share amounts):
TOTAL DILUTED
RENTAL TOTAL NET EARNINGS PER
QUARTERS ENDED REVENUES REVENUES INCOME COMMON SHARE
- -------------- -------- -------- ------ --------------
March 31, 1997 $25,512 $26,943 $5,693 $.25
June 30, 1997 26,508 27,937 5,008 .23
September 30, 1997 (1) 28,230 29,143 6,949 .31
December 31, 1997 29,251 29,966 3,554 .15
March 31, 1998 30,335 31,417 7,664 .29
June 30, 1998 32,384 33,658 6,961 .26
September 30, 1998 34,476 35,315 7,738 .29
December 31, 1998 36,468 37,692 7,239 .26
(1) 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.
41
42
SCHEDULE II
KOGER EQUITY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS)
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------------ ---------- ---------- ---------- ----------
1998
- ----
Allowance for uncollectible accounts $ 250 $ 300 $ 0 $114(a) $ 436
====== ======== ==== ==== ======
Valuation allowance - land held for sale $ 279 $ 0 $ 0 $ 0 $ 279
====== ======== ==== ==== ======
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
====== ======== ==== ==== ======
(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.
42
43
SCHEDULE III
KOGER EQUITY, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(IN THOUSANDS)
COSTS CAPITALIZED
SUBSEQUENT
INITIAL COST TO ACQUISITION TOTAL COST
------------------- --------------------- ---------------------------- (d)
BLDGS & IMPROVE CARRYING BLDGS & (b)(c) ACCUM.
CENTER/LOCATION LAND IMPROV. MENTS COSTS LAND IMPROV. TOTAL DEPR.
- --------------- -------- ------- ------- -------- ------- ------- ------- -------
OPERATING REAL ESTATE:
ATLANTA CHAMBLEE $ 13,075 $62,764 $10,029 $ 0 $13,075 $72,793 $ 85,868 $ 17,923
ATLANTA GWINNETT 1,763 12,456 758 0 1,763 13,214 14,977 278
ATLANTA PERIMETER 2,785 18,407 360 0 2,785 18,767 21,552 624
AUSTIN 4,274 13,650 3,378 0 4,274 17,028 21,302 3,853
BIRMINGHAM COLONNADE 6,054 33,689 140 0 6,054 33,829 39,883 585
BIRMINGHAM RETAIL 5,055 6,479 30 0 5,055 6,509 11,564 114
CHARLOTTE CARMEL 3,170 22,904 2,288 0 3,170 25,192 28,362 1,945
CHARLOTTE EAST 5,788 25,078 3,958 0 5,788 29,036 34,824 6,476
CHARLOTTE VANGUARD 5,136 48,019 24 0 5,136 48,043 53,179 203
EL PASO 4,011 12,440 4,897 0 4,011 17,337 21,348 4,685
GREENSBORO SOUTH 6,384 38,700 5,276 0 6,384 43,976 50,360 9,505
GREENSBORO WENDOVER 0 11 0 0 0 11 11 7
GREENVILLE PARK CENTRAL 1,237 12,377 311 0 1,237 12,688 13,925 587
GREENVILLE ROPER MT. 4,782 20,916 4,003 0 4,782 24,919 29,701 5,428
JACKSONVILLE BAYMEADOWS 10,514 40,105 1,755 0 10,514 41,860 52,374 3,808
JACKSONVILLE CENTRAL 6,755 34,806 6,683 0 6,755 41,489 48,244 10,816
JACKSONVILLE JTB 479 2,837 (9) 0 479 2,828 3,307 192
MEMPHIS GERMANTOWN 7,017 32,211 3,339 0 7,017 35,550 42,567 6,544
ORLANDO CENTRAL 8,092 29,825 8,836 0 8,092 38,661 46,753 10,902
ORLANDO UNIVERSITY 2,900 12,218 1,118 0 2,900 13,336 16,236 2,669
RICHMOND PARAGON 1,422 15,144 316 0 1,422 15,460 16,882 386
ST. PETERSBURG 6,534 28,963 5,191 0 6,534 34,154 40,688 8,641
SAN ANTONIO AIRPORT 3,243 12,791 752 0 3,243 13,543 16,786 626
SAN ANTONIO WEST 9,638 29,649 10,055 0 9,638 39,704 49,342 11,399
TALLAHASSEE 10,624 59,536 9,282 0 10,624 68,818 79,442 14,451
TULSA 6,315 17,134 4,715 0 6,315 21,849 28,164 5,340
-------- -------- -------- ------- -------- -------- -------- --------
SUBTOTALS 137,047 643,109 87,485 0 137,047 730,594 867,641 127,987
FURNITURE & EQUIPMENT 3,578 3,578 3,578 1,695
IMPROVEMENTS IN PROGRESS 964 964 964
-------- -------- -------- ------- -------- -------- -------- --------
TOTAL OPERATING REAL ESTATE $137,047 $646,687 $88,449 $ 0 $137,047 $735,136 $872,183 $129,682
-------- -------- ------- ------- -------- -------- -------- --------
(a)
MORT- DATE DEPRECIABLE
CENTER/LOCATION GAGES ACQUIRED LIFE
- --------------- --------- ----------- -----------
OPERATING REAL ESTATE:
ATLANTA CHAMBLEE $ 0 1988 - 1993 3 - 40 YRS.
ATLANTA GWINNETT 0 1993 - 1998 3 - 39 YRS.
ATLANTA PERIMETER 0 1997 3 - 39 YRS.
AUSTIN 16,576 1990 - 1993 3 - 40 YRS.
BIRMINGHAM COLONNADE 0 1998 3 - 39 YRS.
BIRMINGHAM RETAIL 0 1998 3 - 39 YRS.
CHARLOTTE CARMEL 0 1993 - 1998 3 - 40 YRS.
CHARLOTTE EAST 0 1989 - 1993 3 - 40 YRS.
CHARLOTTE VANGUARD 22,129 1998 3 - 40 YRS.
EL PASO 8,776 1990 - 1993 3 - 40 YRS.
GREENSBORO SOUTH 0 1988 - 1993 3 - 40 YRS.
GREENSBORO WENDOVER 0 1993 7 YRS.
GREENVILLE PARK CENTRAL 0 1997 3 - 39 YRS.
GREENVILLE ROPER MT. 10,726 1988 - 1998 3 - 40 YRS.
JACKSONVILLE BAYMEADOWS 26,815 1993 - 1998 3 - 40 YRS.
JACKSONVILLE CENTRAL 0 1989 - 1993 3 - 40 YRS.
JACKSONVILLE JTB 0 1997 39 YRS.
MEMPHIS GERMANTOWN 15,624 1988 - 1998 3 - 40 YRS.
ORLANDO CENTRAL 24,377 1988 - 1993 3 - 40 YRS.
ORLANDO UNIVERSITY 0 1990 - 1993 3 - 40 YRS.
RICHMOND PARAGON 8,365 1998 3 - 39 YRS.
ST. PETERSBURG 19,530 1988 - 1993 3 - 40 YRS.
SAN ANTONIO AIRPORT 0 1997 3 - 39 YRS.
SAN ANTONIO WEST 22,948 1990 - 1993 3 - 40 YRS.
TALLAHASSEE 40,037 1988 - 1997 3 - 40 YRS.
TULSA 0 1990 - 1993 3 - 40 YRS.
---------
SUBTOTALS 215,903
FURNITURE & EQUIPMENT 3 - 15 YRS.
IMPROVEMENTS IN PROGRESS
---------
TOTAL OPERATING REAL ESTATE $ 215,903
---------
43
44
SCHEDULE III
KOGER EQUITY, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(IN THOUSANDS)
COSTS CAPITALIZED
SUBSEQUENT
INITIAL COST TO ACQUISITION TOTAL COST
------------------ --------------- --------------------------- (d) (a)
BLDGS & IMPROVE CARRYING BLDGS & (b)(c) ACCUM. MORT- DATE DEPRECIABLE
CENTER/LOCATION LAND IMPROV. MENTS COSTS LAND IMPROV. TOTAL DEPR. GAGES ACQUIRED LIFE
- ---------------- -------- -------- ------- -------- ------- ------- ------- ------- -------- -------- -----------
PROPERTIES UNDER
CONSTRUCTION:
ATLANTA CHAMBLEE $ 438 $ 247 $ 0 $ 0 $ 438 $ 247 $ 685 $ 0 $ 0
ATLANTA GWINNETT 0 247 0 0 0 247 247 0 0
BIRMINGHAM COLONNADE 2,232 2,268 0 0 2,232 2,268 4,500 0 0
EL PASO 100 392 0 0 100 392 492 0 0
GREENSBORO WENDOVER 691 6,281 0 0 691 6,281 6,972 0 0
JACKSONVILLE JTB 3,709 8,665 0 0 3,709 8,665 12,374 0 0
MEMPHIS GERMANTOWN 1,455 608 0 0 1,455 608 2,063 0 0
ORLANDO UNIVERSITY 1,263 5,061 0 0 1,263 5,061 6,324 0 0
SAN ANTONIO WEST 1,430 7,538 0 0 1,430 7,538 8,968 0 0
ST. PETERSBURG 0 255 0 0 0 255 255 0 0
-------- -------- ------- ----- -------- -------- -------- -------- --------
TOTAL UNDER
CONSTRUCTION 11,318 31,562 0 0 11,318 31,562 42,880 0 0
-------- -------- ------- ----- -------- -------- -------- -------- --------
UNIMPROVED LAND:
ATLANTA GWINNETT 5,081 0 0 0 5,081 0 5,081 0 0 1993
BIRMINGHAM COLONNADE 4,886 0 0 0 4,886 0 4,886 0 0 1998
CHARLOTTE CARMEL 991 0 0 0 991 0 991 0 0 1993
CHARLOTTE EAST 468 0 0 0 468 0 468 0 0 1993
CHARLOTTE VANGUARD 1,516 0 0 0 1,516 0 1,516 0 0 1998
COLUMBIA SPRING VALLEY 76 0 0 0 76 0 76 0 0 1993
GREENSBORO WENDOVER 800 0 0 0 800 0 800 0 0 1993
GREENVILLE PARK CENTRAL 438 0 0 0 438 0 438 0 0 1997
JACKSONVILLE CENTRAL 95 0 0 0 95 0 95 0 0 1989
JACKSONVILLE JTB 1,366 0 0 0 1,366 0 1,366 0 0 1998
ORLANDO CENTRAL 808 0 0 0 808 0 808 0 0 1989
ORLANDO UNIVERSITY 1,617 0 0 0 1,617 0 1,617 0 0 1993
RICHMOND SOUTH 481 0 0 0 481 0 481 0 0 1993
ST. PETERSBURG 1,301 0 0 0 1,301 0 1,301 0 0 1993
TULSA 611 0 0 0 611 0 611 0 0 1993
-------- -------- ------- ----- -------- -------- -------- -------- --------
TOTAL UNIMPROVED
LAND 20,535 0 0 0 20,535 0 20,535 0 0
-------- -------- ------- ----- -------- -------- -------- -------- --------
TOTAL $168,900 $678,249 $88,449 $ 0 $168,900 $766,698 $935,598 $129,682 $215,903
======== ======== ======= ===== ======== ======== ======== ======== ========
44
45
SCHEDULE III
KOGER EQUITY, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(IN THOUSANDS)
(a) At December 31, 1998, the outstanding balance of mortgages payable was
$215,903. In addition, the Company has a secured revolving credit
facility with variable interest rates which is collaterialized by
mortgages on a pool of buildings. At December 31, 1998, the outstanding
balance of the secured revolving credit facility was $92,000.
(b) Aggregate cost basis for Federal income tax purposes was $965,009 at
December 31, 1998.
(c) Reconciliation of total real estate carrying value for the years ended
December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996
-------- -------- --------
Balance at beginning of year $723,596 $613,093 $601,594
Acquisitions and construction 191,472 102,524 1,058
Improvements 21,225 11,902 12,568
Transfer from/to other assets (257)
Sale of unimproved land (4,287) (1,250)
Sale or disposition operating real estate (695) (15) (620)
Recovery of loss - land parcels 379
-------- -------- --------
Balance at close of year $935,598 $723,596 $613,093
======== ======== ========
(d) Reconciliation of accumulated depreciation for the years ended
December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996
-------- --------- --------
Balance at beginning of year $104,700 $ 82,478 $ 62,845
Depreciation expense:
Operating real estate 25,146 21,795 19,538
Furniture and equipment 531 440 292
Sale or disposition of operating real estate (695) (13) (197)
-------- -------- --------
Balance at close of year $129,682 $104,700 $ 82,478
======== ======== ========
45
46
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 "1999 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 and Director
James C. Teagle....................... President, Chief Operating Officer and Director
David B. Hiley........................ Executive Vice President, Chief Financial Officer and Director
Robert N. Bridger..................... Senior Vice President of Development
W. Lawrence Jenkins .................. Vice President of Administration and Corporate Secretary
James L. Stephens..................... Vice President and Chief Accounting Officer
Mr. Hughes, age 63, was elected Chairman and Chief Executive Officer on
June 21, 1996. He held the position of Chief Financial Officer of the Company
from March 31, 1991 to April 1, 1998, and the position of President from August
22, 1995 to November 14, 1997. Mr. Hughes also held the position of Senior Vice
President of the Company from May 20, 1991 to August 21, 1995. Mr. Hughes was
elected to the Board of Directors of the Company on July 27, 1992.
Mr. Teagle, age 57, 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 elected to the
Board of Directors of the Company on October 10, 1996.
Mr. Hiley, age 60, was elected Executive Vice President and Chief
Financial Officer of the Company on April 1, 1998. He was previously the
Managing Director of Berkshire Capital Corporation (an investment banking
services firm), and is a Director and former Senior Executive Vice President in
charge of the Investment Banking Department of Thomson McKinnon Securities, Inc.
(a securities broker-dealer), and a Director and former Executive Vice President
of Thomson McKinnon, Inc. (a financial services holding company). Mr. Hiley was
elected to the Board of Directors of the Company on April 28, 1993.
Mr. Bridger, age 62, was elected Senior Vice President of Development
on November 14, 1997. He had held the position of Vice President since May 10,
1994.
Mr. Jenkins, age 55, has been the Corporate Secretary of the Company
since December 21, 1993, and Vice President of the Company since May 10, 1994.
Mr. Stephens, age 41, 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.
46
47
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 Stock Options to
purchase shares by James L. Stephans and 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, 1998, 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 1999 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 1999 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 1999 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 1999 Proxy Statement
for information regarding certain relationships and related transactions which
information is incorporated herein by reference.
47
48
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 42 through
45 in this Form.
(b) Reports on Form 8-K:
On December 31, 1998, the Company filed a Form 8-K (dated
October 22, 1998) reporting under Item 5, Other Events, an
acquisition transaction completed on October 22, 1998 and
providing under Item 7, Financial Statements and Exhibits,
Statements of Revenues and Certain Expenses for the
acquisition transaction.
(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).
1(a) Underwriting Agreement dated March 24, 1998, between
Koger Equity, Inc. and Wheat, First Securities, Inc.
Incorporated by reference to Exhibit 1 of the Form
8-K, dated March 24, 1998, filed by the Registrant on
March 30, 1998 (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).
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).
48
49
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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).
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).
49
50
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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.
Incorporated by reference to Exhibit 10(d)(2) of
Form 10-K filed by the Registrant for the period
ended December 31, 1997 (File No. 1-9997).
10(d)(3) Amendment No. 2 to Supplemental Executive
Retirement Plan, effective May 19, 1998.*
10(d)(4) Amendment No. 3 to Supplemental Executive
Retirement Plan, effective May 19, 1998.*
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) Amended and Restated Employment Agreement between
Koger Equity, Inc. and Victor A. Hughes, Jr.
effective as of April 1, 1998.*
10(f)(2) Amended and Restated Employment Agreement between
Koger Equity, Inc. and James C. Teagle, effective
as of April 1, 1998*.
10(f)(3) Employment Agreement between Koger Equity, Inc.
and David B. Hiley, effective as of April 1,
1998.*
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).
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).
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10(h) Consulting Agreement, dated as of June 21, 1996,
between Koger Equity, Inc. and Irvin H. Davis.
Incorporated by reference to Exhibit 10(ab) of
Form 10-Q filed by the Registrant for the quarter
ended September 30, 1996 (File No. 1-9997).
10(i) Consulting Agreement, dated as of March 14, 1996,
between Koger Equity, Inc. and David B. Hiley.
Incorporated by reference to Exhibit 10(ac) of
Form 10-Q filed by the Registrant for the quarter
ended September 30, 1996 (File No. 1-9997).
10(j)(1) Loan Application, dated July 29, 1996, by Koger
Equity, Inc. to The Northwestern Mutual Life
Insurance Company. Incorporated by reference to
Exhibit 10(j)(1) on Form 8-K, dated December 16,
1996, filed by the Registrant on March 10, 1997
(File No. 1-9997).
10(j)(2)(A) Koger Equity, Inc. Tranche A Promissory Note,
dated December 16, 1996, in the principal amount
of $100,500,000 payable to The Northwestern Mutual
Life Insurance Company. Incorporated by reference
to Exhibit 10(j)(2)(A) on Form 8-K, dated December
16, 1996, filed by the Registrant on March 10,
1997 (File No. 1-9997).
10(j)(2)(B) Koger Equity, Inc. Tranche B Promissory Note,
dated December 16, 1996, in the principal amount
of $89,500,000 payable to The Northwestern Mutual
Life Insurance Company. Incorporated by reference
to Exhibit 10(j)(2)(B) on Form 8-K, dated December
16, 1996, filed by the Registrant on March 10,
1997 (File No. 1-9997).
10(j)(3)(A) Master Lien Instrument from Koger Equity, Inc. to
The Northwestern Mutual Life Insurance Company,
dated December 16, 1996, (1) with Mortgage and
Security Agreement for Duval, Leon, Orange and
Pinellas Counties, Florida and (2) with Deed of
Trust and Security Agreement for Greenville
County, South Carolina, Shelby County, Tennessee
and Bexar, El Paso and Travis Counties, Texas.
Incorporated by reference to Exhibit 10(j)(3)(A)
on Form 8-K, dated December 16, 1996, filed by the
Registrant on March 10, 1997 (File No. 1-9997).
10(j)(3)(B) Absolute Assignment of Leases and Rents from Koger
Equity, Inc. to The Northwestern Mutual Life
Insurance Company, dated December 16, 1996, for
Duval, Leon, Orange, and Pinellas Counties,
Florida, Greenville County, South Carolina, Shelby
County, Tennessee and Bexar, El Paso and Travis
Counties, Texas. Incorporated by reference to
Exhibit 10(j)(3)(B) on Form 8-K, dated December
16, 1996, filed by the Registrant on March 10,
1997 (File No. 1-9997).
10(j)(4) Environmental Indemnity Agreement, dated December
16, 1996, between Koger Equity, Inc. and The
Northwestern Mutual Life Insurance Company and
others. Incorporated by reference to Exhibit
10(j)(4) on Form 8-K, dated December 16, 1996,
filed by the Registrant on March 10, 1997 (File
No. 1-9997).
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) The Second Amended and Restated Revolving Credit
Loan Agreement dated as of December 30, 1998
between and among Koger Equity, Inc., and First
Union National Bank of Florida, AmSouth Bank,
Guaranty Federal Bank F.S.B., Citizens Bank of
Rhode Island and Compass Bank (the "Lenders").
Incorporated by reference to Exhibit 10(k)(1) on
Form 8-K, dated December 30, 1998, filed by the
Registrant on February 16, 1999 (File No. 1-9997).
10(k)(2)(A) The Substitution Revolving Promissory Note dated
December 30, 1998 issued by Koger Equity, Inc. to
First Union National Bank of Florida in the
principal amount of up to $45,000,000.
Incorporated by reference to Exhibit 10(k)(2)(a)
on Form 8-K, dated December 30, 1998, filed by the
Registrant on February 16, 1999 (File No. 1-9997).
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EXHIBIT
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10(k)(2)(B) The Substitution Revolving Promissory Note dated
December 30, 1998 issued by Koger Equity, Inc. to
AmSouth Bank in the principal amount of up to
$35,000,000. Incorporated by reference to Exhibit
10(k)(2)(b) on Form 8-K, dated December 30, 1998,
filed by the Registrant on February 16, 1999 (File
No. 1-9997).
10(k)(2)(C) The Substitution Revolving Promissory Note dated
December 30, 1998 issued by Koger Equity, Inc. to
Guaranty Federal Bank F.S.B. in the principal
amount of up to $35,000,000. Incorporated by
reference to Exhibit 10(k)(2)(c) on Form 8-K,
dated December 30, 1998, filed by the Registrant
on February 16, 1999 (File No. 1-9997).
10(k)(2)(D) The Revolving Promissory Note, dated December 30,
1998, issued by Koger Equity, Inc. to Citizens
Bank of Rhode Island in the principal amount of
up to $20,000,000. Incorporated by reference to
Exhibit 10(k)(2)(d) on Form 8-K, dated December
30, 1998, filed by the Registrant on February 16,
1999 (File No. 1-9997).
10(k)(2)(E) The Revolving Promissory Note, dated December 30,
1998, issued by Koger Equity, Inc. to Compass Bank
in the principal amount of up to $15,000,000.
Incorporated by reference to Exhibit 10(k)(2)(e)
on Form 8-k, dated December 30, 1998, filed by the
Registrant on February 16, 1999 (File No. 1-9997).
10(k)(3)(A) The Mortgage, Assignment of Leases and Rents, and
Security Agreement, dated as of December 30, 1998,
relating to that portion of the Collateral located
in the State of Alabama. Incorporated by reference
to Exhibit 10(k)(3)(a) on Form 8-K, dated December
30, 1998, filed by the Registrant on February 16,
1999 (File No. 1-9997).
10(k)(3)(B) The Assignment of Leases and Rents, dated as of
December 30, 1998, relating to that portion of the
Collateral located in the State of Alabama.
Incorporated by reference to Exhibit 10(k)(3)(b)
on Form 8-k, dated December 30, 1998, filed by the
Registrant on February 16, 1999 (File No. 1-9997).
10(k)(3)(C) The Assignment of Contracts, Licenses and Permits,
dated as of December 30, 1998, relating to that
portion of the Collateral located in the State of
Alabama. Incorporated by reference to Exhibit
10(k)(3)(c) on Form 8-K, dated December 30, 1998,
filed by the Registrant on February 16, 1999 (File
No. 1-9997).
10(k)(3)(D) The Environmental Indemnification Agreement,
dated as of December 30, 1998, relating to that
portion of the Collateral located in the State of
Alabama. Incorporated by reference to Exhibit
10(k)(3)(d) on Form 8-K, dated December 30, 1998,
filed by the Registrant on February 16, 1999 (File
No. 1-9997).
10(k)(4)(A)(i) The Second Amended and Restated Deed to Secure
Debt, Assignment of Leases and Rents, and Security
Agreement dated as of December 30, 1998 relating
to that portion of the Collateral located in
Dekalb County, State of Georgia 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 30,
1998, filed by the Registrant on February 16, 1999
(File No. 1-9997).
10(k)(4)(A)(ii) The Amendment to Assignment of Leases and Rents
dated as of December 30, 1998 relating to that
portion of the Collateral located in Dekalb
County, State of Georgia 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 30,
1998, filed by the Registrant on February 16, 1999
(File No. 1-9997).
10(k)(4)(A)(iii) The Amendment to Environmental Indemnification
Agreement dated as of December 30, 1998 relating
to that portion of the Collateral located in
Dekalb County, State of Georgia between and among
Koger Equity, Inc. and the Lenders. Incorporated
by reference to Exhibit 10(k)(4)(a)(iii) on Form
8-K, dated December 30, 1998, filed by the
Registrant on February 16, 1999 (File No. 1-9997).
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EXHIBIT
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10(k)(4)(A)(iv) The Amendment to Assignment of Contracts, Licenses
and Permits dated as of December 30, 1998 relating
to that portion of the Collateral located in
Dekalb County, State of Georgia from Koger Equity,
Inc. to, and in favour of, the Lenders.
Incorporated by reference to Exhibit
10(k)(4)(a)(iv) on Form 8-K, dated December 30,
1998, filed by the Registrant on February 16, 1999
(File No. 1-9997).
10(k)(4)(B)(i) The Deed to Secure Debt, Assignment of Leases and
Rents, and Security Agreement, dated as of
December 30, 1998, relating to that portion of the
Collateral located in Gwinnett County, State of
Georgia. Incorporated by reference to Exhibit
10(k)(3)(b)(i) on Form 8-K, dated December 30,
1998, filed by the Registrant on February 16, 1999
(File No. 1-9997).
10(k)(4)(B)(ii) The Assignment of Leases and Rents, dated as of
December 30, 1998, relating to that portion of the
Collateral located in Gwinnett County, State of
Georgia. Incorporated by reference to Exhibit
10(k)(4)(b)(ii) on Form 8-K, dated December 30,
1998, filed by the Registrant on February 16, 1999
(File No. 1-9997).
10(k)(4)(B)(iii) The Environmental Indemnification Agreement, dated
as of December 30, 1998, relating to that portion
of the Collateral located in Gwinnett County,
State of Georgia. Incorporated by reference to
Exhibit 10(k)(4)(b)(iii) on Form 8-K, dated
December 30, 1998, filed by the Registrant on
February 16, 1999 (File No. 1-9997).
10(k)(4)(B)(iv) The Amendment to Assignment of Contracts, Licenses
and Permits, dated as of December 30, 1998,
relating to that portion of the Collateral located
in Gwinnett County, State of Georgia. Incorporated
by reference to Exhibit 10(k)(4)(b)(iv) on Form
8-K, dated December 30, 1998, filed by the
Registrant on February 16, 1999 (File No. 1-9997).
10(k)(5)(A)(i) The Second Amended and Restated Deed of Trust,
Assignment of Leases and Rents and Security
Agreement, dated as of December 30, 1998, relating
to that portion of the Collateral located in
Guilford County, State of North Carolina granted
by Koger Equity, Inc. to, and in favour of, the
Lenders. Incorporated by reference to Exhibit
10(k)(5)(a)(i) on Form 8-K, dated December 30,
1998, filed by the Registrant on February 16, 1999
(File No. 1-9997).
10(k)(5)(A)(ii) The Amended and Restated Assignment of Leases and
Rents, dated as of December 30, 1998, relating to
that portion of the Collateral located in Guilford
County, State of North Carolina from Koger Equity,
Inc. to, and in favour of, the Lenders.
Incorporated by reference to Exhibit
10(k)(5)(a)(ii) on Form 8-K, dated December 30,
1998, filed by the Registrant on February 16, 1999
(File No. 1-9997).
10(k)(5)(A)(iii) The Amendment to Environmental Indemnification
Agreement, dated as of December 30, 1998, relating
to that portion of the Collateral located in both
Guilford and Mecklenburg Counties, State of North
Carolina between and among Koger Equity, Inc. and
the Lenders. Incorporated by reference to Exhibit
10(k)(5)(a)(iii) on Form 8-K, dated December 30,
1998, filed by the Registrant on February 16, 1999
(File No. 1-9997).
10(k)(5)(A)(iv) The Amendment to Assignment of Contracts, Licenses
and Permits, dated as of December 30, 1998,
relating to that portion of the Collateral located
in both Guilford and Mecklenburg Counties, State
of North Carolina from Koger Equity, Inc. to, and
in favour of, the Lenders. Incorporated by
reference to Exhibit 10(k)(5)(a)(iv) on Form 8-K,
dated December 30, 1998, filed by the Registrant
on February 16, 1999 (File No. 1-9997).
10(k)(5)(B)(i) The Amended and Restated Deed of Trust, Assignment
of Leases and Rents and Security Agreement, dated
as of December 30, 1998, 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)(5)(b)(i) on Form 8-K, dated December 30,
1998, filed by the Registrant on February 16, 1999
(File No 1-9997).
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EXHIBIT
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10(k)(5)(B)(ii) The Amended and Restated Assignment of Leases and
Rents, dated as of December 30, 1998, relating to
that portion of the collateral located in
Mecklenburg County, State of North Carolina.
Incorporated by reference to Exhibit
10(k)(5)(b)(ii) on Form 8-K, dated December 30,
1998, filed by the Registrant on February 16, 1999
(File No. 1-9997).
10(k)(5)(B)(iii) The Amended and Restated Mortgage, Assignment of
Leases and Rents and Security Agreement, dated as
of December 30, 1998, 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)(b)(iii) on Form 8-K, dated
December 30, 1998, filed by the Registrant on
February 16, 1999 (File No. 1-9997).
10(k)(6)(A) The Amendment to Assignment of Leases and Rents,
dated as of December 30, 1998, 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)(6)(a) on Form 8-K, dated December
30, 1998, filed by the Registrant on February 16,
1999 (File No. 1-9997).
10(k)(6)(B) The Amendment to Environmental Indemnification
Agreement, dated as of December 30, 1998, 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)(6)(b) on Form 8-K,
dated December 30, 1998, filed by the Registrant
on February 16, 1999 (File No. 1-9997).
10(k)(6)(C) The Amendment to Assignment of Contracts,
Licenses and Permits, dated as of December 30,
1998, 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)(6)(c)
on Form 8-K, dated December 30, 1998, filed by the
Registrant on February 16, 1999 (File No. 1-9997).
10(k)(7)(A) The Deed of Trust, Assignment of Leases and
Rents, and Security Agreement, dated as of
December 30, 1998, relating to that portion of
the Collateral located in the State of Texas.
Incorporated by reference to Exhibit 10(k)(7)(a)
on Form 8-K, dated December 30, 1998, filed by the
Registrant on February 16, 1999 (File No. 1-9997).
10(k)(7)(B) The Assignment of Leases and Rents, dated as of
December 30, 1998, relating to that portion of the
Collateral located in the State of Texas.
Incorporated by reference to Exhibit 10(k)(7)(b)
on Form 8-K, dated December 30, 1998, filed by the
Registrant on February 16, 1999 (File No. 1-9997).
10(k)(7)(C) The Environmental Indemnification Agreement,
dated as of December 30, 1998, relating to that
portion of the Collateral in the State of Texas.
Incorporated by reference to Exhibit 10(k)(7)(c)
on Form 8-K, dated December 30, 1998, filed by the
Registrant on February 16, 1999 (File No. 1-9997).
10(k)(7)(D) The Assignment of Contracts, Licenses and Permits,
dated as of December 30, 1998, relating to that
portion of the Collateral in the State of Texas.
Incorporated by reference to Exhibit 10(k)(7)(d)
on Form 8-K, dated December 30, 1998, filed by the
Registrant on February 16, 1999 (File No. 1-9997).
10(k)(8) Unconditional Guaranty, dated December 30, 1998,
of Koger Real Estate Services, Inc. and Southeast
Properties Holding Corporation, Inc. both wholly
owned of Koger Equity, Inc. to perform and make
payments pursuant to the Second Amended and
Restated Revolving Credit Loan Agreement.
Incorporated by reference to Exhibit 10(k)(8) on
Form 8-K, dated December 30, 1998, filed by the
Registrant on February 16, 1999 (File No. 1-9997).
11 Earnings Per Share Computations.*
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EXHIBIT
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12 Amended and Restated Agreement of Limited
Partnership of Koger-Vanguard Partners, L.P.,
dated as of October 22, 1998, between Koger
Equity, Inc. as General Partner and certain
persons as Limited Partners of Koger-Vanguard
Partners, L.P. Incorporated by reference to
Exhibit 12 on Form 8-K, dated October 22, 1998,
filed by the Registrant on December 31, 1998 (File
No. 1-9997).
21 Subsidiaries of the Registrant.*
23 Independent Auditors' Consent.*
27 Financial Data Schedule (for SEC use only).*
*Filed with this Report.
55
56
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 23, 1999
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 23, 1999
- ------------------------------------------------------- Chief Executive Officer
(VICTOR A. HUGHES, JR.)
James C. Teagle President, Chief March 23, 1999
- ------------------------------------------------------ Operating Officer and Director
(JAMES C. TEAGLE)
David B. Hiley Executive Vice President, Chief March 23, 1999
- ------------------------------------------------------ Financial Officer and Director
(DAVID B. HILEY)
James L. Stephens Vice President and Chief March 23, 1999
- ------------------------------------------------------ Accounting Officer
(JAMES L. STEPHENS)
D. Pike Aloian Director March 23, 1999
- ------------------------------------------------------
(D. PIKE ALOIAN)
Benjamin C. Bishop Director March 23, 1999
- ------------------------------------------------------
(BENJAMIN C. BISHOP)
Irvin H. Davis Director March 23, 1999
- ------------------------------------------------------
(IRVIN H. DAVIS)
John R. S. Jacobsson Director March 23, 1999
- ------------------------------------------------------
(JOHN R. S. JACOBSSON)
G. Christian Lantzsch Director March 23, 1999
- ------------------------------------------------------
(G. CHRISTIAN LANTZSCH)
William L. Mack Director March 23, 1999
- ------------------------------------------------------
(WILLIAM L. MACK)
Lee S. Neibart Director March 23, 1999
- ------------------------------------------------------
(LEE S. NEIBART)
George F. Staudter Director March 23, 1999
- ------------------------------------------------------
(GEORGE F. STAUDTER)
S. D. Stoneburner Director March 23, 1999
- ------------------------------------------------------
(S. D. STONEBURNER)
56