-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QV6xkcEzA6J+ntR5J1b/TsOZF2PbBQoBikq55u7/Om9JFEslL5d/crjg46fOQii8 47WvRXTY5WMqsQ0GgmHivA== 0000950144-97-013361.txt : 19971216 0000950144-97-013361.hdr.sgml : 19971216 ACCESSION NUMBER: 0000950144-97-013361 CONFORMED SUBMISSION TYPE: 424B2 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19971215 SROS: AMEX SROS: CSX FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOGER EQUITY INC CENTRAL INDEX KEY: 0000835664 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 592898045 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B2 SEC ACT: SEC FILE NUMBER: 333-37919 FILM NUMBER: 97738320 BUSINESS ADDRESS: STREET 1: 3986 BLVD CTR DR STE 101 CITY: JACKSONVILLE STATE: FL ZIP: 32207 BUSINESS PHONE: 9043983403 MAIL ADDRESS: STREET 1: 3986 BLVD CTR DR STREET 2: SUITE 101 CITY: JACKSONVILLE STATE: FL ZIP: 32207 424B2 1 KOGER EQUITY INC 1 Filed Pursuant to Rule 424(b)(2) Registration No. 333-37919 PROSPECTUS SUPPLEMENT (To Prospectus dated November 18, 1997) 3,500,000 Shares [KOGER(R) LOGO] Common Stock (par value $.01 per share) Koger Equity, Inc. (the "Company") is a self-administered and self-managed equity real estate investment trust (a "REIT") which, as of September 30, 1997, owned, operated and managed 225 office buildings, most of which are in 18 office centers located in 13 metropolitan areas throughout the southeastern and southwestern United States. All of the shares of Common Stock, par value $.01 per share (the "Common Stock"), being offered hereby are being offered by the Company. Of the 3,500,000 shares offered hereby, 3,000,000 are being offered by the Company to the public in an underwritten offering ("the Underwritten Offering") and 500,000 shares are being offered by the Company to AREIF II Realty Trust, Inc. in a non-underwritten concurrent offering (the "Concurrent Offering," and together with the Underwritten Offering, the "Offering"). The shares of Common Stock trade on the American Stock Exchange (the "ASE") under the symbol "KE." The last reported per share sale price of the Common Stock on the ASE on December 11, 1997 was $20.50. For information concerning restrictions on the ownership of Common Stock, see "Description of Common Stock" in the accompanying Prospectus. FOR A DESCRIPTION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE PAGES 20 THROUGH 26 IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - -------------------------------------------------------------------------------------------------------- Per Share -- Public Offering $20.25 $1.11 $19.14 - -------------------------------------------------------------------------------------------------------- Per Share -- Concurrent Offering $19.14 -- $19.14 - -------------------------------------------------------------------------------------------------------- Total(3) $70,320,000 $3,330,000 $66,990,000 - --------------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $800,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to an additional 450,000 shares of Common Stock on the same terms as set forth above, solely to cover over-allotments, if any. If all such shares of Common Stock are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $79,432,500, $3,829,500 and $75,603,000, respectively. See "Underwriting." The shares of Common Stock are offered by the Underwriters, subject to prior sale, when, as and if received and accepted by the Underwriters and subject to approval of certain legal matters by Cahill Gordon & Reindel, counsel for the Underwriters. It is expected that delivery of the shares of Common Stock offered hereby will be made against payment therefor on or about December 17, 1997 at the offices of J.P. Morgan Securities Inc., 60 Wall Street, New York, New York. J.P. MORGAN & CO. BEAR, STEARNS & CO. INC. BT ALEX. BROWN December 12, 1997 2 UNDER DEVELOPMENT OR CONSTRUCTION As of September 30, 1997, the Company had ten office buildings under development or construction in Atlanta, Charlotte, Greensboro, Greenville, Jacksonville, Memphis, Orlando and San Antonio. These office buildings will add approximately 829,000 net rentable square feet to the Company's portfolio. Color rendering of the Piedmont Building, located in the Koger-Carmel Center, in Charlotte, NC. BY KOGER Color rendering of the Kimbrough Building, located in Memphis, TN. Color rendering of the Glenridge Office Building, located in Orlando, FL. Color rendering of the Chisholm Building, located in San Antonio, TX. Photograph of the Dillon Building, located in Greenville, SC. Photograph of a site map of the Koger-Baymeadows Office Center, located in Jacksonville, with an inset of a rendering of the Nassau Building. OFFICE BUILDINGS OWNED As of September 30, 1997, Koger owned and managed 225 office buildings in 13 metropolitan areas. It also managed 22 office buildings for third-party owners. Photograph of the Colgate Building, located in Atlanta, GA Photograph of the Dorchester Building, Greenville, SC Photograph of the Cross Building, located in Austin, TX Photograph of the Davie Building located in Charlotte, NC. Photograph of the Cragg Building, located in Orlando, FL Photograph of the Gunti Building, located in Jacksonville, FL Photograph of the Gainsborough Building located in Memphis, TN Photograph of the Brownwood Building, San Antonio, TX Photograph of the Ashville Building, located in Greensboro, NC Aerial Photograph of the St Petersburg Koger Center, located in St. Petersburg, FL. 3 No person is authorized to give any information or to make any representation not contained or incorporated by reference in this Prospectus Supplement or the accompanying Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or any Underwriter. Neither this Prospectus Supplement nor the accompanying Prospectus constitutes an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. TABLE OF CONTENTS PROSPECTUS SUPPLEMENT
PAGE Prospectus Supplement Summary.............. S-4 The Company................................ S-11 Use of Proceeds............................ S-13 Capitalization............................. S-14 Price Range of Common Stock................ S-14 Distribution Policy........................ S-15 Selected Financial Information............. S-17 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... S-19 Business and Properties.................... S-25 Management................................. S-43 Federal Income Tax Considerations.......... S-46 Principal Shareholders..................... S-53 Underwriting............................... S-55 Concurrent Offering........................ S-57 Index to Financial Statements.............. F-1
PROSPECTUS
PAGE Available Information...................... 3 Incorporation of Certain Documents By Reference................................ 3 The Company................................ 5 Use of Proceeds............................ 5 Description of Common Stock................ 5 Description of Preferred Stock............. 7 Provisions of Florida Law.................. 12 Ratios of Earnings to Fixed Charges........ 12 Plan of Distribution....................... 13 Experts.................................... 14 Legal Matters.............................. 14
FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the "Securities Litigation Reform 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 information 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 Securities Litigation Reform Act. This Prospectus Supplement and the accompanying Prospectus contain forward-looking statements within the meaning of the Securities Litigation Reform Act which are not historical facts and which involve risks and uncertainties that could cause actual results to differ materially from those expected, projected, estimated or budgeted. These forward-looking statements, together with related data and projections, about the Company's projected financial results and its future plans and strategies are based on 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 the forward-looking statements and projections will prove accurate. Accordingly, the Company has identified certain 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 and which are more particularly described in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, which is incorporated herein by reference. These risks include risks associated with (a) real estate financing, (b) leverage and debt policy, (c) geographic concentration, (d) renewal of leases and reletting of space, (e) illiquidity of real estate, (f) competition, (g) changes in laws, (h) uninsured losses, (i) bankruptcy and financial condition of tenants, (j) compliance with the Americans with Disabilities Act, (k) property ownership through partnerships and joint ventures, (l) impact of inflation, (m) development, construction and acquisition activities, (n) changes in policies of the Company without shareholder approval, (o) limitations of REIT status on business subsidiaries, (p) adverse consequences of failure to qualify as a REIT, (q) possible environmental liabilities and (r) the effect of market interest rates on the price of the Common Stock. Additional disclosure of risks to which the Company is subjected is contained herein and in certain of the documents incorporated herein and in the accompanying Prospectus under "Management's Discussion and Analysis of Financial Condition and Results of Operations." S-3 4 PROSPECTUS SUPPLEMENT SUMMARY The following summary information is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus Supplement and incorporated herein by reference. Except as otherwise indicated, (a) all information in this Prospectus Supplement regarding buildings and land is as of September 30, 1997 and (b) all information in this Prospectus Supplement assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Koger Equity, Inc. ("Koger" or the "Company") is a self-administered and self-managed REIT which owns, operates and manages a portfolio of suburban office buildings primarily located in 18 office centers (the "Koger Centers") located in 13 metropolitan areas throughout the southeastern and southwestern United States. The Company owns 225 office buildings (the "Office Buildings"), of which 222 are in Koger Centers and three are outside Koger Centers but in metropolitan areas where Koger Centers are located. The Office Buildings contain approximately 8.2 million net rentable square feet and were approximately 92% leased at an average annual rent per square foot of $14.24 as of December 31, 1996 and approximately 92% leased at an average annual rent per square foot of $14.84 as of September 30, 1997. Of the 222 Office Buildings located in Koger Centers, 217 were developed by the Company. The Company purchased the five other Office Buildings which are located in Koger Centers as well as the three Office Buildings which are not located in Koger Centers. All of the Office Buildings are wholly owned by the Company. A pioneer in the development of suburban office centers, the Koger organization has developed and constructed 17 of the Koger Centers, which were among the first suburban office centers to feature on-site property management and tenant services personnel. Generally located with easy access via expressways to central business districts and shopping and residential areas, the Koger Centers have been developed in campus-like settings and consist of office buildings surrounded by extensive landscaping and ample tenant parking. More than 20 years ago, the Koger organization implemented a national marketing program which focuses on developing strong relationships with Fortune 500 companies, federal government departments and agencies and other large prospective users of office space. The Company attributes much of its leasing success with national clients to this marketing program. The Company also owns approximately 145 acres of unencumbered land held for development (the "Development Land"). Most of the Development Land adjoins Office Buildings in ten Koger Centers and has infrastructure, including roads and utilities, in place. Management believes that the Company's ownership of the Development Land will permit the Company to increase its investment returns and compete more effectively for development and leasing opportunities. The Company intends to develop and construct office buildings on the Development Land and on other land which it may acquire. The Company estimates that the Development Land can support new development of approximately 2.2 million gross square feet, although greater density would be allowed under current zoning. As of September 30, 1997, the Company had under construction seven office buildings containing approximately 568,000 net rentable square feet on approximately 44.4 acres of the Development Land. One of these office buildings was completed in October 1997. The Company is committed to providing a high level of tenant service and provides leasing, management and other customary tenant-related services for each of the Koger Centers. In addition, the Company manages for others 22 office buildings containing approximately 1.3 million net rentable square feet. Including the Office Buildings, the Company manages a total of 247 office buildings containing approximately 9.5 million net rentable square feet through 16 management offices in eight states. The Company's property management personnel have substantial leasing and marketing experience and have leased, or renewed leases for, approximately 1.9 million net rentable square feet of suburban office space during the first nine months of 1997. The Company has 220 full-time employees, including 13 officers who have worked for the Koger organization for an average of more than 20 years. S-4 5 RECENT DEVELOPMENTS Recent Acquisitions During 1997, the Company has acquired eleven office buildings (the "1997 Acquisitions") containing an aggregate of 731,900 net rentable square feet for an aggregate purchase price of approximately $74.8 million. The following table sets forth summary information regarding these office buildings.
------------------------------------------------------------------ NET NUMBER RENTABLE PURCHASE PERCENTAGE DATE OF OFFICE SQUARE PRICE LEASED PROPERTY LOCATION PURCHASED BUILDINGS FEET (IN MILLIONS) (AS OF 9/30/97) - ----------------- --------- --------- -------- ------------- --------------- Greenville Park Central.............................. 5/15/97 3 134,000 $13.5 92 San Antonio Airport.................................. 6/4/97 2 214,100 15.5 83 Jacksonville Deerwood Park........................... 6/18/97 1 23,000 3.3 100 Tallahassee Capital Circle........................... 8/4/97 1 80,500 9.6 99 El Paso.............................................. 9/23/97 2 46,400 3.2 93 Atlanta Lincoln Parkway.............................. 10/1/97 1 154,100 21.2 100(1) Atlanta Gwinnett..................................... 12/1/97 1 79,800 8.5 78(2) -- ------- ----- Totals..................................... 11 731,900 $74.8 == ======= =====
- --------------- (1) As of October 1, 1997 (2) As of December 1, 1997 Recently Completed Development During 1997, the Company has completed the construction of two office buildings. The following table sets forth summary information regarding these office buildings.
----------------------------------------------------------- NET RENTABLE PERCENTAGE COMPLETION SQUARE COST(1) LEASED PROPERTY LOCATION DATE FEET (IN MILLIONS) (AS OF 10/31/97) - ----------------- ---------- -------- ------------- ------------------- Memphis Germantown........................................ 9/97 40,700 $ 4.5 86 Charlotte Carmel.......................................... 10/97 61,200 5.6 21 ------- ----- Totals.......................................... 101,900 $10.1 ======= =====
- --------------- (1) Does not include expected tenant improvement costs. Pending Acquisitions As of the date of this Prospectus Supplement, the Company has agreed to acquire one office building in Jacksonville, Florida containing approximately 24,000 gross square feet for an aggregate purchase price of approximately $2.0 million. The closing of this acquisition is subject to the Company's due diligence and certain other closing conditions, and there can be no assurance that this acquisition will be consummated. S-5 6 Development As of the date of this Prospectus Supplement, the Company has seven office buildings under construction which will contain approximately 587,400 net rentable square feet. The following table sets forth summary information regarding these office buildings.
------------------------------------- NET EXPECTED RENTABLE ESTIMATED COMPLETION SQUARE COST(1) PROPERTY LOCATION DATE FEET (IN MILLIONS) - ----------------- ---------- -------- ------------- Jacksonville Baymeadows..................................... 1/98 83,800 $ 7.1 Greenville Roper Mt......................................... 3/98 60,400 5.3 Atlanta Gwinnett............................................ 6/98 62,700 4.9 Charlotte Carmel............................................ 6/98 112,500 9.4 Jacksonville Baymeadows..................................... 7/98 93,400 8.1 Memphis Germantown.......................................... 9/98 93,600 9.6 Greensboro Wendover......................................... 10/98 81,000 7.6 ------- ----- Totals............................................ 587,400 $52.0 ======= =====
- --------------- (1) Does not include expected tenant improvement costs. S-6 7 BUSINESS AND GROWTH STRATEGIES The Company's goal is to maximize funds from operations so as to increase its cash available for distribution. The Company intends to achieve this goal by implementing the following strategies. Develop and acquire suburban office buildings in the Southeast and Southwest The Company intends to continue its focus on acquiring and developing suburban office buildings in the southeastern and southwestern United States. From time to time, the Company may consider developing and acquiring office buildings in other regions of the country. The Company believes that its focus on suburban office centers offers good opportunities for growth. Such office centers contain multiple office buildings in a single location, which allows for cost-effective management and property maintenance and enables the Company to create and control the design and aesthetic environment of its centers. The Koger Centers are generally located with easy access via expressways to central business districts and shopping and residential areas. Because of the Company's established presence in the Southeast and the Southwest, the Company believes it is well positioned to identify and acquire properties in these regions which complement its existing portfolio. The Company believes that the southeastern and southwestern regions of the United States provide significant growth potential due to diverse regional economies, expanding metropolitan areas, a skilled work force and moderate labor costs. Enhance existing portfolio The Company's internal growth results from (a) adding new leases, (b) renewing existing leases at higher rental rates and (c) implementing scheduled rent increases under existing leases. The Office Buildings were approximately 92% leased at an average annual rental rate of $14.24 per square foot on December 31, 1996 and were approximately 92% leased at an average annual rental rate of $14.84 per square foot on September 30, 1997. During the nine months ended September 30, 1997, the Company entered into over 300 new leases covering approximately 592,000 net rentable square feet at an average rental rate of $15.84 per square foot. In addition, the Company renewed leases covering approximately 68% of the square footage under expiring leases at an average increase in rental rates from $14.44 per square foot to $15.69 per square foot. The Company continues to emphasize cost controls in order to increase the efficiencies of its operations. The Company also closely monitors real estate tax assessments and has sought and obtained reductions in certain instances. Utilize existing land The Company owns approximately 145 acres of unencumbered Development Land, most of which has road and utility infrastructure in place. Such Development Land allows the Company the opportunity to construct additional office buildings for new and existing tenants. Management believes that the Company's ownership of the Development Land will permit the Company to increase its investment returns and compete more effectively. Consistent with its historical approach, the Company would expect to act as its own general contractor in the construction of new office buildings, using standard architectural designs which have in the past resulted in savings in design costs and more effective controls on construction costs. The Company may seek to finance the development of some or all of the Development Land by entering into joint ventures with individuals or institutions possessing sufficient capital resources. As of September 30, 1997, the Company had under construction seven office buildings containing approximately 568,000 net rentable square feet on approximately 44.4 acres of the Development Land. One of these office buildings was completed in October 1997. CAPITAL POSITION As of September 30, 1997, after giving effect to the Offering and assuming application of a portion of the proceeds thereof to repay debt as more fully described in "Use of Proceeds," the Company's debt-to-total market capitalization ratio based on the closing price of the Common Stock on the ASE on December 11, 1997, and the Company's debt-to-total book capitalization ratio would be 26.0% and 29.0%, respectively. Following the Offering, the Company would have $182.5 million of debt outstanding with a weighted average interest rate of 8.29% and a weighted average maturity of ten years. All such remaining debt has fixed interest rates. The Company's policy is to manage its leverage in a manner consistent with the Company's strategy to maintain and expand its operations. The Company's policy regarding these ratios is not subject to any limitation in the organizational documents of the Company, and the Company's Board of Directors has not adopted any policy with regard to the amount of debt the Company may incur. S-7 8 THE PROPERTIES The Company owns 225 Office Buildings, of which 222 are in 18 Koger Centers and three are outside Koger Centers. The Koger Centers are located in 13 metropolitan areas in the Southeast and the Southwest. In addition, the Company owns approximately 145 acres of Development Land. The following table sets forth certain information with respect to the Office Buildings and the Development Land as of September 30, 1997, all of which was wholly owned.
------------------------------------------------------------------------------------------ LAND ACREAGE NET AVERAGE IMPROVED NUMBER RENTABLE PERCENTAGE ANNUAL WITH DEVELOPMENT OF OFFICE SQUARE OF TOTAL PERCENTAGE RENT PER OFFICE LAND PROPERTY LOCATION BUILDINGS FEET PORTFOLIO LEASED SQUARE FOOT(1) BUILDINGS ACREAGE(2) - ----------------- --------- --------- ---------- ---------- -------------- --------- ----------- FLORIDA Jacksonville Baymeadows 4 468,000 5.7 99 $18.20 34.6 13.3 Jacksonville Central 31 666,500 8.1 89 11.92 47.2 -- Jacksonville Deerwood Park(3) 1 23,000 0.3 100 15.85 2.2 -- Orlando Central 22 565,220 6.9 91 14.51 46.0 -- Orlando University 2 159,600 1.9 95 16.83 11.6 15.5 St. Petersburg 15 519,320 6.3 97 13.64 64.4 7.0 Tallahassee Apalachee Parkway 14 408,500 5.0 92 16.30 33.7 -- Tallahassee Capital Circle 5 381,200 4.7 97 17.87 29.0 -- --- --------- ----- ----- ----- Total Florida 94 3,191,340 38.9 94 15.06 268.7 35.8 GEORGIA Atlanta Chamblee 22 947,920 11.6 96 15.29 76.2 -- Atlanta Gwinnett -- -- -- -- -- -- 31.0 --- --------- ----- ----- ----- Total Georgia 22 947,920 11.6 96 15.29 76.2 31.0 NORTH CAROLINA Charlotte Carmel 1 109,600 1.3 83 16.63 7.6 27.0 Charlotte East 11 468,820 5.7 83 13.01 39.9 3.9 Greensboro South 13 610,470 7.4 95 14.79 46.0 -- Greensboro Wendover -- -- -- -- -- -- 18.5 --- --------- ----- ----- ----- Total North Carolina 25 1,188,890 14.4 89 14.29 93.5 49.4 OKLAHOMA Tulsa 13 476,280 5.8 73 11.11 36.0 -- --- --------- ----- ----- ----- Total Oklahoma 13 476,280 5.8 73 11.11 36.0 -- SOUTH CAROLINA Greenville Park Central 3 134,000 1.6 92 15.89 9.9 3.5 Greenville Roper Mt. 8 290,560 3.6 95 15.18 24.7 4.5 --- --------- ----- ----- ----- Total South Carolina 11 424,560 5.2 94 15.40 34.6 8.0 TENNESSEE Memphis Germantown 4 299,100 3.7 95 17.81 22.4 11.0 --- --------- ----- ----- ----- Total Tennessee 4 299,100 3.7 95 17.81 22.4 11.0 TEXAS Austin 12 370,860 4.5 98 17.68 29.6 -- El Paso 16 298,330 3.7 93 14.91 22.7 2.4 San Antonio Airport(3) 2 214,100 2.6 83 15.34 7.9 -- San Antonio West 26 788,670 9.6 93 12.94 63.5 7.2 --- --------- ----- ----- ----- Total Texas 56 1,671,960 20.4 93 14.68 123.7 9.6 --- --------- ----- ----- ----- Total 225 8,200,050 100.0 92 $14.84 655.1 144.8 === ========= ===== ===== ===== ------------ ACREAGE UNDER PROPERTY LOCATION CONSTRUCTION - ----------------- ------------ FLORIDA Jacksonville Baymeadows 13.3 Jacksonville Central -- Jacksonville Deerwood Park(3) -- Orlando Central -- Orlando University -- St. Petersburg -- Tallahassee Apalachee Parkway -- Tallahassee Capital Circle -- --- Total Florida 13.3 GEORGIA Atlanta Chamblee -- Atlanta Gwinnett 4.3 --- Total Georgia 4.3 NORTH CAROLINA Charlotte Carmel 16.6 Charlotte East -- Greensboro South -- Greensboro Wendover -- --- Total North Carolina 16.6 OKLAHOMA Tulsa -- --- Total Oklahoma -- SOUTH CAROLINA Greenville Park Central -- Greenville Roper Mt. 4.5 --- Total South Carolina 4.5 TENNESSEE Memphis Germantown 5.7 --- Total Tennessee 5.7 TEXAS Austin -- El Paso -- San Antonio Airport(3) -- San Antonio West -- --- Total Texas -- --- Total 44.4 ===
- --------------- (1) Rental rates are computed by dividing annualized gross rental revenues for an office center by the net rentable square feet applicable to such gross rental revenues. This information is based on the Office Buildings owned by the Company on September 30, 1997 and the terms of the leases in effect as of such date. (2) Includes approximately 44.4 acres on which the Company is currently constructing seven office buildings containing approximately 568,000 net rentable square feet. Does not include approximately 21 acres of land which the Company intends to sell and nine acres of land which the Company cannot improve with buildings. (3) Not located in a Koger Center. S-8 9 THE OFFERING COMMON STOCK OFFERED TO THE PUBLIC..............................3,000,000 shares COMMON STOCK OFFERED TO AREIF II REALTY TRUST, INC...................500,000 shares TOTAL COMMON STOCK OFFERED..........3,500,000 shares COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING........................25,386,921 shares USE OF PROCEEDS.....................To finance the acquisition and development of office buildings and to repay debt. See "Use of Proceeds." AMERICAN STOCK EXCHANGE SYMBOL......"KE" S-9 10 SUMMARY SELECTED FINANCIAL INFORMATION The following table summarizes certain selected financial information of the Company and should be read in conjunction with the financial statements and notes thereto which appear elsewhere in this Prospectus Supplement. The Company's consolidated financial statements as of September 30, 1997 and for the nine months ended September 30, 1997 and 1996 include all adjustments (consisting only of normal recurring adjustments and accruals) that in the opinion of management are necessary for a fair presentation of the financial information set forth therein. Results of operations for the nine months ended September 30, 1997 are not necessarily indicative of the results to be expected for the full year.
------------------------------------------------- Nine Months Ended Year Ended September 30, December 31, ----------------------- ----------------------- 1997 1996 1996 1995(1) In thousands, except per share information ---------- ---------- ---------- ---------- STATEMENTS OF OPERATIONS INFORMATION Rental revenues $ 79,849 $ 72,660 $ 98,342 $ 94,865 Total revenues 84,023 76,322 104,072 125,750 Property operations expenses 32,824 31,194 41,597 40,830 Depreciation and amortization 17,238 15,679 21,127 19,102 Mortgage and loan interest 12,264 14,865 18,701 23,708 General and administrative expenses 4,256 4,103 6,623 7,559 Income before gain (loss) on sale or disposition of assets, income taxes and extraordinary item 15,782 8,394 13,199 29,311 Net income 17,650 7,491 10,501 28,990 Earnings per common share--primary $ 0.79 $ 0.40 $ 0.54 $ 1.61 Dividends declared per common share $ 0.30 -- $ 0.05 -- Weighted average common shares and common equivalent shares outstanding--primary 22,251 18,741 19,500 18,011 In thousands, except property information OTHER INFORMATION Funds from operations(2) $ 31,937 $ 23,676 $ 33,154 $ 36,707 Net cash provided by operating activities 36,371 21,898 35,948 43,919 Net cash provided by (used in) investing activities (61,017) (8,392) (12,870) 26,593 Net cash used in financing activities $ (1,776) $ (5,493) $ (12,778) $ (68,412) Number of office buildings (at end of period) 225 215 215 216 Net rentable square feet in office buildings (at end of period) 8,200,050 7,661,350 7,661,350 7,672,390 Percentage leased (at end of period) 92% 90% 92% 91%
----------------------- At September 30, 1997 ----------------------- As Adjusted for Offering Actual In thousands ------------ -------- BALANCE SHEET INFORMATION Operating properties (before depreciation) $641,637 $641,637 Total assets 651,749 605,319 Debt 182,525 202,091 Total shareholders' equity 446,520 380,524
- --------------- (1) For 1995, total revenues, net income and funds from operations include $13,066 of interest revenue associated with the mortgage notes of The Koger Partnership Ltd. ("TKPL") which were acquired by the Company and retired by TKPL during 1995. In addition, for 1995, total revenues and net income include $11,288 of gain associated with the partial repayment of an unsecured note of TKPL. See Note 3 to Consolidated Financial Statements on page F-17. (2) The Company believes that funds from operations is one measure of the performance of a REIT, and the Company has included such information to assist investors in analyzing the performance of the Company. Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles ("GAAP"). Funds from operations should not be considered 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. S-10 11 THE COMPANY GENERAL The Company is a self-administered and self-managed REIT which owns, operates and manages a portfolio of suburban Office Buildings primarily located in 18 office centers located in 13 metropolitan areas throughout the southeastern and southwestern United States. The Company owns 225 Office Buildings, of which 222 are in Koger Centers and three are outside Koger Centers but in metropolitan areas where Koger Centers are located. The Office Buildings contain approximately 8.2 million net rentable square feet, of which 73.8% is located in the Southeast in the states of Florida, Georgia, North Carolina, South Carolina and Tennessee with the remaining 26.2% located in the Southwest in the states of Oklahoma and Texas. The Office Buildings were approximately 92% leased at an average annual rent per square foot of $14.24 as of December 31, 1996 and approximately 92% leased at an average annual rent per square foot of $14.84 as of September 30, 1997. Of the 222 Office Buildings located in Koger Centers, 217 were developed by the Company. The Company purchased the five other Office Buildings which are located in Koger Centers as well as the three Office Buildings which are not located in Koger Centers. All of the Office Buildings are wholly owned by the Company. Koger Equity, Inc. has two wholly-owned subsidiaries, Southeast Properties Holding Corporation, Inc. ("Southeast") and Koger Real Estate Services, Inc. ("KRES"). A pioneer in the development of suburban office centers, the Koger organization has developed and constructed 17 of the Koger Centers, which were among the first suburban office centers to feature on-site property management and tenant services personnel. Generally located with easy access via expressways to central business districts and shopping and residential areas, the Koger Centers have been developed in campus-like settings and consist of office buildings surrounded by extensive landscaping and ample tenant parking. The Office Buildings generally are contemporary in design and constructed of masonry, concrete and steel, with facings of brick, concrete and glass. More than 20 years ago, the Koger organization implemented a national marketing program which focuses on developing strong relationships with Fortune 500 companies, federal government departments and agencies and other large prospective users of office space. The Company attributes much of its leasing success with national clients to this marketing program. The Company's 15 largest tenants at September 30, 1997 were the State of Florida, the United States Government, Blue Cross & Blue Shield of Florida, Inc., Aetna Life Insurance Company, Lumbermens Mutual Casualty Co., Ciba Geigy Corporation, Sara Lee Corporation, the State of Texas, PCA Family Health Plans, Inc., First Data Resources, Norwest Bank--Texas, General Motors Acceptance Corp., Landstar, Ahold Finance USA and BellSouth. These 15 tenants had 204 leases in 17 Koger Centers at September 30, 1997. See "Business and Properties--The Properties--Tenants." The Company also owns approximately 145 acres of unencumbered Development Land. Most of the Development Land adjoins Office Buildings in ten Koger Centers in the states of Florida, North Carolina, South Carolina, Tennessee and Texas, and has infrastructure, including roads and utilities, in place. Management believes that the Company's ownership of the Development Land will permit the Company to increase its investment returns and compete more effectively for development and leasing opportunities. The Company intends to develop and construct office buildings on the Development Land. The Company estimates that the Development Land can support new development of approximately 2.2 million gross square feet, although greater density would be allowed under current zoning. As of September 30, 1997, the Company had under construction seven office buildings containing approximately 568,000 net rentable square feet on approximately 44.4 acres of the Development Land. One of these office buildings was completed in October 1997. In addition to the Development Land, the Company owns approximately 21 acres of unimproved land which is not strategic to its business and which it intends to sell. The Company is committed to providing a high level of tenant service and provides leasing, management and other customary tenant-related services for each of the Koger Centers. In addition, the Company manages for others 22 office buildings containing approximately 1.3 million net rentable square feet. Including the Office Buildings, the Company manages a total of 247 office buildings containing approximately 9.5 million net rentable square feet through 16 management offices in eight states. The Company's property management personnel have substantial leasing and marketing experience and have leased, or renewed leases for, approximately 1.9 million net rentable square feet of suburban office space during the first nine months of 1997. The Company's 13 officers have an average of more than 20 years of experience with the Koger organization. Furthermore, the general managers of the Koger Centers have an average of more than 13 years of experience with the Koger organization. In connection with its current real estate operations and property management services, the Company has a combined financial, administrative, leasing and maintenance staff of 220 full-time employees, of whom 68 work in the Company's corporate offices in Jacksonville, Florida and 152 are located in 16 on-site management offices throughout the Southeast and the Southwest. S-11 12 HISTORY OF THE COMPANY The Company was incorporated in Florida in 1988 for the purpose of investing in office buildings located in suburban office centers throughout the southeastern and southwestern United States. In selecting its investments, the Company generally sought office buildings which had been substantially leased. In 1988 and 1989, the Company purchased its initial Office Buildings from Koger Properties, Inc. ("KPI"), a real estate development company organized in 1969 and the sponsor of the Company. In September 1991, KPI filed a petition in bankruptcy. In December 1993, KPI merged into the Company, and the Company succeeded to substantially all of the assets of KPI, including 93 Office Buildings and substantially all of the Development Land (the "Merger"). All of the Office Buildings acquired by the Company from KPI were developed by KPI. In connection with the Merger, the Company also acquired the management, leasing, development and administrative organizations of KPI and its subsidiaries, consisting of 227 employees. Prior to the Merger, 192 of such employees provided property management and leasing services for the Office Buildings owned by the Company and certain office buildings owned by others. The Company has been self-administered since 1992 and self-managed since the Merger. BUSINESS AND GROWTH STRATEGIES The Company's goal is to maximize funds from operations so as to increase its cash available for distribution. The Company intends to achieve this goal by implementing the following strategies: Develop and acquire suburban office buildings in the Southeast and Southwest The Company intends to continue its focus on acquiring and developing suburban office buildings in the southeastern and southwestern United States. From time to time, the Company may consider developing and acquiring office buildings in other regions of the country. The Company believes that its focus on suburban office centers offers good opportunities for growth. Such office centers contain multiple office buildings in a single location, which allows for cost-effective management and property maintenance and enables the Company to create and control the design and aesthetic environment of its centers. The Koger Centers are generally located with easy access via expressways to central business districts and shopping and residential areas. Because of the Company's established presence in the Southeast and the Southwest, the Company believes it is well positioned to identify and acquire properties in these regions which complement its existing portfolio. The Company believes that the southeastern and southwestern regions of the United States provide significant growth potential due to diverse regional economies, expanding metropolitan areas, a skilled work force and moderate labor costs. As an integrated commercial real estate firm, the Company believes that its in-house leasing, management, development, construction and marketing experience will allow the Company to realize economies of scale by developing and acquiring additional office buildings. Enhance existing portfolio The Company's internal growth results from (a) adding new leases, (b) renewing existing leases at higher rental rates and (c) implementing scheduled rent increases under existing leases. The Office Buildings were approximately 92% leased at an average annual rental rate of $14.24 per square foot on December 31, 1996 and were approximately 92% leased at an average annual rental rate of $14.84 per square foot on September 30, 1997. During the nine months ended September 30, 1997, the Company entered into over 300 new leases covering approximately 592,000 net rentable square feet at an average rental rate of $15.84 per square foot. In addition, the Company renewed leases covering approximately 68% of the square footage under expiring leases at an average increase in rental rates from $14.44 per square foot to $15.69 per square foot. The Company continues to emphasize cost controls in order to increase the efficiencies of its organization. Recent initiatives include the reduction of utilities expenditures through improved energy management techniques, the purchase of more efficient heating and air conditioning equipment and lighting fixtures, the renegotiation of national contracts with large vendors of such HVAC and lighting equipment and the renegotiation of local contracts with suppliers of building services to the Koger Centers. The Company also closely monitors real estate tax assessments and has sought and obtained reductions in certain instances. During the nine months ended September 30, 1997, the Company's property operations expenses as a percentage of total rental revenues decreased to 40.9% from 42.7% for the comparable period in 1996. Utilize existing land The Company owns approximately 145 acres of unencumbered Development Land, most of which already has road and utility infrastructure in place. Such Development Land allows the Company the opportunity to construct additional office buildings for new and existing tenants. Management believes that the Company's ownership of the Development Land will permit the S-12 13 Company to increase its investment returns and compete more effectively. Consistent with its historical approach, the Company would expect to act as its own general contractor in the construction of new office buildings, using standard architectural designs which have in the past resulted in savings in design costs and more effective controls on construction costs. The Company may seek to finance the development of some or all of the Development Land by entering into joint ventures with individuals or institutions possessing sufficient capital resources. As of September 30, 1997, the Company had under construction seven office buildings containing approximately 568,000 net rentable square feet on approximately 44.4 acres of the Development Land. One of these office buildings was completed in October 1997. CAPITAL POSITION As of September 30, 1997, after giving effect to the Offering and assuming application of a portion of the proceeds thereof to repay debt, the Company's debt-to-total market capitalization ratio (the total consolidated debt of the Company as a percentage of the market value of issued and outstanding capital stock of the Company plus total consolidated debt of the Company) based on the closing price of the Common Stock on the ASE on December 11, 1997 and the Company's debt-to-total book capitalization ratio (the total consolidated debt of the Company as a percentage of the shareholders' equity of the Company plus total consolidated debt of the Company) would be 26.0% and 29.0%, respectively. Following the Offering, the Company would have $182.5 million of secured debt outstanding with a weighted average interest rate of 8.29% and a weighted average maturity of ten years. All such remaining debt has fixed interest rates. The Company's policy is to manage its leverage in a manner consistent with the Company's strategy to maintain and expand its operations. The Company's policy regarding these ratios is not subject to any limitation in the organizational documents of the Company, and the Company's Board of Directors has not adopted a policy with regard to the amount of debt the Company may incur. THIRD-PARTY MANAGEMENT SERVICES The Company currently manages 22 office buildings containing 1.3 million net rentable square feet owned primarily by a subsidiary of Morgan Guaranty Trust Company of New York ("Morgan Guaranty") and located in Little Rock, Arkansas; Columbia, South Carolina; and Memphis and Nashville, Tennessee. The Company's management contracts with third-parties are cancellable by either party thereto under certain circumstances, including a breach by the Company of its duties under the contract if such breach is not cured within 30 days following notice thereof. Accordingly, the Company's revenues from its management contracts could be reduced if such contracts are terminated or not renewed. In the future, the Company may pursue selective opportunities to manage office properties consistent with the Company's portfolio and reputation. However, under the Internal Revenue Code of 1986, as amended (the "Code"), a REIT's income from management fees and other fees from services, together with other nonqualifying REIT income, may not exceed 5% of gross income. Thus, the amount of third-party management services that may be provided by a REIT is limited. However, up to 25% (reduced by the percentage of nonqualifying REIT income) of a REIT's income may be comprised of dividends and other investment income. Accordingly, the Company participates economically in the market for third-party property management services not only by providing such services directly, but also through its investment in Koger Realty Services, Inc. ("KRSI"). KRSI is a corporation that was formed in 1995 by the Company and certain employees of the Company to provide property management and leasing services for third parties that had purchased office buildings from the Company and TKPL, then an affiliate of the Company, and to develop and expand such property management business. The Company owns all of the nonvoting, participating preferred stock of KRSI, which represents more than 95% of the economic value of KRSI. The common stock of KRSI is held by individuals who are officers of the Company and KRSI and by certain other employees of KRSI. USE OF PROCEEDS The net proceeds to the Company from the Offering, after deducting the underwriting discount and estimated expenses of the Offering, are estimated to be approximately $66.2 million (approximately $74.8 million if the Underwriters' over-allotment option is exercised in full). The Company expects to use the net proceeds of the Offering to finance the acquisition and development of office buildings and to repay debt. The debt to be repaid consists of (a) approximately $11.6 million of mortgage loans having a weighted average interest rate of 8.82% per annum and a weighted average remaining term to maturity of three years and (b) outstanding borrowings under the Company's secured revolving credit facility ($40.0 million as of December 11, 1997), which borrowings bear interest at a weighted average rate of 8.5% per annum and mature in April 1999. The borrowings under the secured revolving credit facility were incurred to finance the Company's acquisition activities. S-13 14 CAPITALIZATION The following table sets forth the capitalization of the Company at September 30, 1997, and as adjusted to give effect to the Offering and the repayment of $19.76 million of indebtedness from the proceeds of the Offering. The table should be read in conjunction with the consolidated financial information of the Company which appears elsewhere in this Prospectus Supplement.
------------------------- September 30, 1997 Actual As Adjusted Dollars in thousands, except share information ---------- ----------- Mortgages and loans payable $ 202,091(1) $ 182,525 Shareholders' equity Preferred stock, $.01 par value; 50,000,000 shares authorized; none issued -- -- Common stock, $.01 par value; 100,000,000 shares authorized; 24,874,254 shares issued (28,374,254 shares as adjusted); 21,886,921 shares outstanding (25,386,921 shares as adjusted) 249 284 Capital in excess of par value 374,988 441,143 Retained earnings 33,745 33,551 Treasury stock, at cost; 2,987,333 shares of common stock (28,458) (28,458) ---------- ----------- Total shareholders' equity 380,524 446,520 ---------- ----------- Total capitalization $ 582,615 $ 629,045 ========== ===========
- --------------- (1) Includes $8.0 million of borrowings under the Company's secured revolving credit facility. PRICE RANGE OF COMMON STOCK The Company's Common Stock is listed on the ASE under the symbol "KE." The following table sets forth the high and low closing sale prices of the Common Stock, as reported by the ASE, for the periods indicated.
--------------- HIGH LOW ---- --- 1995 First Quarter $ 7 7/8 $ 6 3/4 Second Quarter 9 6 3/4 Third Quarter 10 1/8 8 5/8 Fourth Quarter 10 5/8 9 1/8 1996 First Quarter 12 1/4 10 3/4 Second Quarter 13 3/8 11 Third Quarter 16 13 Fourth Quarter 18 3/4 15 1/8 1997 First Quarter 18 5/8 17 1/4 Second Quarter 18 1/4 15 3/8 Third Quarter 20 13/16 17 11/16 Fourth Quarter (through December 11, 1997) 23 3/8 20 1/8
The last reported sale price of the Common Stock on the ASE on December 11, 1997 was $20 1/2 per share. As of September 30, 1997, there were approximately 1,433 registered holders of Common Stock. S-14 15 DISTRIBUTION POLICY The Company, in order to qualify as a REIT, is required to distribute dividends (other than capital gains dividends) to its shareholders each year in an amount at least equal to (a) the sum of (i) 95% of the Company's REIT taxable income for such year (computed without regard to the dividends-paid deduction and the REIT's net capital gain) and (ii) 95% of the net income (after tax), if any, from foreclosure property, minus (b) the sum of certain items of non-cash income. To the extent permitted, certain net operating loss carryforwards acquired by the Company upon the Merger may be taken into account in determining REIT taxable income and therefore the distribution requirement. Such distributions as are required to maintain the Company's REIT status must be paid in the taxable year to which they relate, or in the following taxable year if declared before the Company timely files its tax return for the earlier year and if paid on or before the first regular dividend payment after such declaration. To the extent that the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its REIT taxable income, as adjusted, it will be subject to tax on the undistributed amounts at regular corporate tax rates; provided, however, that as discussed below, effective for taxable years of the Company beginning on or after January 1, 1998, the Company's shareholders may claim a credit for taxes paid by the Company in respect of undistributed net capital gains if the Company so elects. Furthermore, if the Company should fail to distribute during each calendar year at least the sum of (A) 85% of its ordinary income for such year, (B) 95% of its capital gain net income for such year, and any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of the required distribution over the amounts actually distributed. Dividends declared by the Company in October, November or December of a calendar year payable to shareholders of record on a specified date in any such month will be deemed to have been paid by the Company and received by each shareholder on December 31 of such year as long as they are actually paid in January of the following year. The Company did not pay any dividends in respect of its taxable years 1992 through 1996, as its REIT taxable income for such years was reduced to zero by losses or net operating loss carryforwards. The Company recommenced paying dividends in 1997, and paid a dividend of $0.05 per share on February 10, 1997, a dividend of $0.05 per share on May 6, 1997 and a dividend of $0.10 per share on August 6, 1997. In addition, the Company paid a dividend of $0.15 per share on November 5, 1997 and declared a dividend of $0.25 per share payable on February 4, 1998. The Company has remaining net operating losses which, subject to certain limitations, are expected to be available to reduce the Company's REIT taxable income in 1997 and possibly also later years. For federal income tax purposes, distributions paid to holders of the Common Stock may consist of ordinary income, capital gains, a non-taxable return of capital or a combination thereof. Distributions that exceed the Company's current and accumulated earnings and profits (calculated for tax purposes) but do not exceed such shareholder's basis in his or her securities constitute a return of capital rather than a distribution and reduce the shareholder's basis in his or her securities. To the extent that a distribution exceeds both current and accumulated earnings and profits and the shareholder's basis in his or her securities, it will generally be treated as gain from the sale or exchange of that shareholder's securities. Provided that the securities constitute a capital asset in the hands of the shareholder, the gain will be capital gain and will generally be long-term capital gain if the securities have been held for more than 12 months and otherwise will be short-term capital gain; provided that capital gain recognized by individuals, trusts and estates will be characterized as "adjusted net capital gain," taxable at a 20% rate, if the securities have been held for more than 18 months, or as "mid-term capital gain," taxable at a 28% rate, if the securities have been held for more than 12 months but not more than 18 months. Any loss upon the sale or exchange of securities held for six months or less will be treated as long-term capital loss to the extent of any capital gains dividends received by the shareholder, subject to the possible modification of this rule as applied to shareholders who are individuals, trusts or estates, to reflect the new capital gains rate schedule introduced by the Taxpayer Relief Act (discussed below). If the Company designates certain distributions as capital gains dividends in accordance with Section 857(b)(3)(B) and (C) of the Code, such distributions will not be taxable as short-term capital gain to the shareholder, regardless of the length of time the shareholder has held his or her securities. In general and subject to the discussion below regarding changes to the capital gains rates, such distributions will be taxable as long-term capital gain. Under Section 291 of the Code, however, a corporate shareholder may be required to treat up to 20% of a capital gains dividend as ordinary income. The Company may elect to retain and pay income tax on its net capital gain received during the taxable year. For taxable years beginning after December 31, 1997, if the Company so elects for a taxable year, the Company's shareholders would include in income as long-term capital gains their proportionate share of such portion of the Company's undistributed net capital gain for the taxable year as the Company may designate. A shareholder would be deemed to have paid his or her share of the tax paid by the Company on such undistributed net capital gain, which would be credited or refunded to the shareholder. The shareholder's basis in his shares of Common Stock would be increased by the amount of undistributed net capital gain included in the shareholder's income, less the capital gains tax paid by the Company. S-15 16 The Taxpayer Relief Act of 1997 (the "Taxpayer Relief Act") alters the taxation of capital gain income. Under the Taxpayer Relief Act, individuals, estates and trusts who hold certain investments for more than 18 months may be taxed at a maximum long-term capital gain rate of 20% on the sale or exchange of those investments. Individuals, estates and trusts who hold certain assets for more than 12 months but no more than 18 months may be taxed at a maximum rate of 28% on the sale or exchange of those investments. The Taxpayer Relief Act also provides a maximum rate of 25% for "unrecaptured section 1250 gain" for individuals, special rules for "qualified 5-year gain," as well as other changes to prior law. The Taxpayer Relief Act allows the Internal Revenue Service (the "Service") to prescribe regulations on how the Taxpayer Relief Act's new capital gain rates will apply to sales of capital assets by "pass-thru entities," which include REITs such as the Company. To date, regulations have not yet been promulgated. However, in Notice 97-64, issued on November 10, 1997, the Service indicated that the regulations will provide that whether capital gains dividends are taxed at the 28%, 25% or 20% rate will be determined by reference to the Company's holding periods in the property that generates the gain and the amount of unrecaptured straight-line depreciation attributable to such property. Investors are urged to consult their own tax advisors with respect to the new rules contained in the Taxpayer Relief Act. The Company annually notifies shareholders as to the amount of distributions paid (or deemed paid) during the preceding year and the extent to which such distributions represent each of (a) distributions taxable at ordinary income tax rates, (b) capital gains dividends and (c) returns of capital. See "Federal Income Tax Considerations--Taxation of Taxable Domestic Shareholders." The Company's tax returns for years after 1993 have not been examined by the Service and, therefore, the taxability of distributions is subject to change. S-16 17 SELECTED FINANCIAL INFORMATION The following table summarizes certain selected financial information of the Company and should be read in conjunction with the financial statements and notes thereto which appear elsewhere in this Prospectus Supplement. Results of operations for the nine months ended September 30, 1997 are not necessarily indicative of the results to be expected for the full year.
----------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ---------------------- ------------------------------------------------------------- 1997 1996 1996 1995(1) 1994 1993 1992 --------- --------- --------- --------- --------- --------- --------- In thousands, except per share information STATEMENTS OF OPERATIONS INFORMATION Rental revenues $79,849 $72,660 $98,342 $94,865 $93,132 $45,927 $45,957 Management fees 2,209 1,893 2,682 3,624 4,926 92 -- Total revenues 84,023 76,322 104,072 125,750 100,376 46,406 46,188 Property operations expenses 32,824 31,194 41,597 40,830 39,711 21,034 19,579 Depreciation and amortization 17,238 15,679 21,127 19,102 16,728 8,958 8,089 Direct cost of management fees 1,553 1,300 1,884 2,837 3,649 56 -- Mortgage and loan interest 12,264 14,865 18,701 23,708 25,872 11,471 11,530 General and administrative expenses 4,256 4,103 6,623 7,559 6,366 2,411 4,075 Income before gain (loss) on sale or disposition of assets, income taxes and extraordinary item 15,782 8,394 13,199 29,311 4,485 2,452 933 Net income 17,650 7,491 10,501 28,990 4,215 2,452 933 Earnings per common share--primary $0.79 $0.40 $0.54 $1.61 $0.24 $0.18 $0.07 Dividends declared per common share $0.30 - $0.05 - - - - Weighted average common shares and common equivalent shares outstanding--primary 22,251 18,741 19,500 18,011 17,719 13,352 13,220 In thousands BALANCE SHEET INFORMATION Operating properties (before depreciation) $641,637 $578,796 $582,972 $571,313 $578,237 $566,770 $311,286 Total assets 605,319 586,277 584,666 578,756 613,806 615,089 396,841 Debt 202,091 249,925 203,044 254,909 323,765 330,625 155,362 Total shareholders' equity 380,524 319,477 364,135 310,697 280,601 275,450 235,514 In thousands, except property information OTHER INFORMATION Funds from operations(2) $31,937 $23,676 $33,154 $36,707 $23,475 $11,075 $10,674 Net cash provided by operating activities 36,371 21,898 35,948 43,919 20,276 11,925 10,453 Net cash provided by (used in) investing activities (61,017) (8,392) (12,870) 26,593 (7,107) 5,746 (2,109) Net cash used in financing activities $(1,776) $(5,493) $(12,778) $(68,412) $(8,420) $(8,388) $(2,227) Number of office buildings (at end of period) 225 215 215 216 219 219 126 Net rentable square feet in office buildings (at end of period) 8,200,050 7,661,350 7,661,350 7,672,390 7,906,370 7,906,370 4,058,380 Percentage leased (at end of period) 92% 90% 92% 91% 90% 88% 88%
- --------------- (1) For 1995, total revenues, net income and funds from operations include $13,066 of interest revenue associated with the mortgage notes of TKPL which were acquired by the Company and retired by TKPL during 1995. In addition, for 1995, total revenues and net income include $11,288 of gain associated with the partial repayment of an unsecured note of TKPL. See Note 3 to Consolidated Financial Statements on page F-17. (2) The Company believes that funds from operations is one measure of the performance of a REIT, and the Company has included such information to assist investors in analyzing the performance of the Company. Funds from operations does not S-17 18 represent cash generated from operating activities in accordance with GAAP. 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. CALCULATION OF FUNDS FROM OPERATIONS
---------------------------------------------------------------------------- Nine Months Ended September 30, Year Ended December 31, ------------------ ---------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 In thousands ------- ------- ------- -------- ------- ------- ------- Net income $17,650 $ 7,491 $10,501 $ 28,990 $ 4,215 $ 2,452 $ 933 Depreciation--real estate 15,703 14,534 19,538 17,363 15,202 8,403 7,673 Amortization--deferred tenant costs 739 661 929 656 452 197 86 Amortization--goodwill 128 128 171 504 665 23 -- Litigation costs -- 371 424 176 1,902 -- -- Loss (gain) on early retirement of debt 144 18 1,386 (919) -- -- -- Provision for loss on land held for sale (379) -- -- 970 996 -- -- Loss (gain) on sale or disposition of assets (2,057) 452 497 255 43 -- -- (Gain) reduction of gain on TKPL note to Southeast 9 21 (292) (11,288) -- -- -- Provision for losses on loans to KPI -- -- -- -- -- -- 1,982 ------- ------- ------- -------- ------- ------- ------- Funds from operations $31,937 $23,676 $33,154 $ 36,707 $23,475 $11,075 $10,674 ======= ======= ======= ======== ======= ======= =======
The 1995 calculated funds from operations includes $13,066 of interest revenue associated with the mortgage notes of TKPL which were acquired by the Company and retired by TKPL during 1995. See Note 3 to Consolidated Financial Statements on page F-17. S-18 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere herein. RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Rental Revenues Rental revenues increased to $79,849,000 during the nine month period ended September 30, 1997, compared to $72,660,000 during the same period last year. This increase in rental revenues resulted primarily from (i) increases in the percent leased rate and the Company's average rental rate and (ii) rental revenues from the properties acquired and construction completed during 1997 ($2,103,000). At September 30, 1997, the Company's buildings were on average 92 percent leased with an average rental rate of $14.84 per square foot. Management Fee Revenues Management fee revenues increased to $2,209,000 during the nine month period ended September 30, 1997, compared to $1,893,000 during the same period last year. This increase was due primarily to an increase in the leasing fees earned under the management contract with Centoff Realty Company, Inc. ("Centoff"), a subsidiary of Morgan Guaranty. Interest Revenues Compared to the same period last year, interest revenues decreased $223,000 during the nine month period ended September 30, 1997, due to the lower average balance of cash to invest. Expenses Property operating expenses include such charges as utilities, real estate taxes, janitorial, maintenance, provision for uncollectible rents and management costs. The amounts of property operating expenses and their percentages of total rental revenues for the applicable periods are as follows:
----------------------------------- PERCENT OF PERIOD AMOUNT TOTAL RENTAL REVENUES ------ ----------- --------------------- September 30, 1997--Nine Months $32,824,000 40.9% September 30, 1996--Nine Months $31,194,000 42.7%
Property operating expenses increased primarily due to (i) increased accruals for real estate taxes, (ii) increases in janitorial costs and (iii) operating expenses for the properties acquired and construction completed during 1997 ($733,000). Depreciation expense has been calculated on the straight line method based upon the useful lives of the Company's depreciable assets, generally three to 40 years. Depreciation expense increased $1,187,000 for the nine month period ended September 30, 1997, compared to the same period last year, due to (i) improvements made to the Company's existing properties during 1996 and 1997 and (ii) the properties acquired and construction completed during 1997. Amortization expense increased $372,000 for the nine month period ended September 30, 1997, compared to the same period last year, due primarily to financing costs which were incurred for (i) the mortgage loan from The Northwestern Mutual Life Insurance Company ("Northwestern") and (ii) the secured revolving credit facility which closed during April 1997. Interest expense decreased by $2,601,000 during the nine month period ended September 30, 1997, compared to the same period last year, primarily due to the reduction in the average balance of mortgages and loans payable. At September 30, 1997, the weighted average interest rate on the Company's outstanding debt was approximately 8.3 percent. General and administrative expenses for the nine month periods ended September 30, 1997 and 1996, totalled $4,256,000 and $4,103,000, respectively, which is 0.9 percent and 0.9 percent (annualized) of average invested assets. This increase was due primarily to (i) increases in director fees due primarily to the increase in the number of directors and (ii) costs for a Company-wide managers meeting held during August 1997. S-19 20 Direct costs of management fees increased $253,000 for the nine month period ended September 30, 1997, compared to the same period last year, due to increased costs associated with providing property management services for all management contracts. Based on the proceeds received from the sale of a Miami land parcel and the Company's analysis of the fair value of the remaining land parcels held for sale, the Company reversed $379,000 of the provision for loss on land held for sale, which had been previously recorded. Net income increased $10,159,000 during the nine month period ended September 30, 1997, compared to the same period last year. This improvement is due primarily to the increase in rental revenues, the gain on sale or disposition of assets and the reductions in (i) interest expense and (ii) income tax expense. These items were partially offset by the increases in (i) property operating expense and (ii) depreciation and amortization expense. RESULTS OF OPERATIONS--COMPARISON OF 1996 TO 1995 AND COMPARISON OF 1995 TO 1994 Rental Revenues Rental revenues increased $3,477,000 from the year ended December 31, 1995 to the year ended December 31, 1996. This increase resulted primarily from (i) increases in the percent leased rate and the Company's average rental rate and (ii) increases in revenues from operating cost escalations and other items passed through to tenants. The effect of these increases was partially offset by the sale of three buildings during 1995, which is described below. For 1995, rental revenues increased $1,733,000 from the year ended December 31, 1994. This increase resulted primarily from increases in the percent leased rate and the average rental rate in the Company's buildings, which increases were partially offset by the sale of three buildings (containing 233,980 net rentable square feet) on July 31, 1995. During 1995, the Company earned $2,228,000 in rental revenues from these three buildings through the date of sale. As of December 31, 1996, the Company's buildings were on average 92 percent leased. As of December 31, 1995 and 1994, the buildings owned by the Company were on average 91 and 90 percent leased, respectively. Management Fee Revenues Management fee revenues decreased $942,000 for 1996 as compared to 1995. This decrease was due primarily to the termination of the management agreement with TKPL which resulted from the sale of all of TKPL's operating properties on July 31, 1995. The Company earned $1,685,000 in management fee revenue from this contract during 1995. This decrease was partially offset by (i) an increase in fees earned for construction management services and (ii) an increase in fees earned under the management contract with Centoff. Management fee revenues decreased by $1,302,000 for 1995 as compared to 1994. This decrease was primarily due to the termination of the management agreement with TKPL, as previously described. The effect of this decrease was partially offset by an increase in the fees earned under the management contract with Centoff. On May 5, 1994, third party management contracts on two buildings terminated due to a change of ownership of such buildings. Management fee revenue related to the management of such buildings totalled approximately $106,000 during 1994. Interest Revenues Interest revenues decreased $12,489,000 for 1996 as compared to 1995. This decrease was due to the interest revenue earned during 1995 from the TKPL mortgage notes ($13,066,000). For 1995, interest revenues increased $13,378,000 from the year ended December 31, 1994. This increase was due to (i) the interest revenue associated with the TKPL mortgage notes ($13,066,000), (ii) the higher interest rates earned on the Company's temporary cash investments and (iii) the higher average balance of temporary cash investments. Gain on TKPL Unsecured Note to Southeast During 1995, Southeast, a wholly owned subsidiary of the Company, received approximately $17.7 million as a partial repayment of an unsecured note, issued by TKPL to KPI (and subsequently transferred by KPI to Southeast in connection with the Merger) in an original principal amount of approximately $31 million. This TKPL unsecured note had been valued and carried on the books of the Company at $0. A gain of $11,288,000 was recorded on this repayment, which was net of a write-off of unamortized cost in excess of fair value of net assets acquired from KPI of $6,412,000. Expenses During 1996, property operating expenses increased by $767,000 or 1.9 percent, compared to 1995, primarily due to increases in maintenance costs. During 1995, property operating expenses increased by $1,119,000 or 2.8 percent, compared to 1994, S-20 21 primarily due to the increase in management cost for the Company's buildings. This increase in management cost was primarily due to the accrued compensation expense ($876,000) related to stock appreciation rights granted in conjunction with stock options. For 1996, property operating expenses as a percentage of total rental revenues were 42.1 percent. For 1995 and 1994, property operating expenses as a percentage of total rental revenues were 42.8 percent and 42.1 percent, respectively. Depreciation expense increased $2,208,000 or 12.5 percent in 1996 compared to the prior year, due to improvements made to the properties owned by the Company during 1996 and 1995. For 1995, depreciation expense increased $2,222,000 or 14.4 percent compared to the prior year, due to improvements made to the properties owned by the Company during 1995 and 1994. Amortization expense decreased by $183,000 during 1996 compared to 1995, due primarily to the $6,412,000 of unamortized cost in excess of fair value of net assets acquired which was written off and offset against proceeds received by Southeast from the TKPL unsecured note during 1995. For 1995, amortization expense increased $152,000 compared to the prior year, due to amounts incurred for deferred tenant costs. Interest expense decreased by $5,007,000 during 1996 compared to 1995, primarily due to the reduction in the average balance of mortgages and loans payable. Interest expense decreased by $2,164,000 during 1995 compared to 1994, primarily due to (i) the reduction in the average balance of mortgages and loans payable and (ii) the forgiveness of accrued interest on certain debt due to early repayment ($1,362,000), which forgiveness was partially offset by yield maintenance payments required due to early repayment of certain mortgages ($882,000). During 1996, 1995 and 1994, the weighted average interest rate on the Company's variable rate loans was 9.3 percent, 8.4 percent and 7.9 percent, respectively. The Company's average outstanding amount under such loans during 1996, 1995 and 1994 was $18,280,000, $47,945,000 and $58,718,000, respectively. General and administrative expenses were 1.1 percent, 1.2 percent and 1.0 percent of average invested assets for 1996, 1995 and 1994, respectively. For 1996, general and administrative expenses decreased $936,000 compared to 1995, primarily due to (i) decreases in the accrual for compensation expense related to stock appreciation rights granted in conjunction with stock options, (ii) decreases in professional and legal fees incurred, (iii) decreases in certain insurance costs, and (iv) decreases in the accrual for the Company's contribution to its 401(k) Plan. For 1995, general and administrative expenses increased $1,193,000 compared to the prior year, primarily due to (i) increases in the accrual for compensation expense related to stock appreciation rights granted in conjunction with stock options ($423,000), (ii) the accrual for expense related to the Supplemental Executive Retirement Plan adopted during 1995 ($184,000) and (iii) increases in compensation costs. For 1996, direct costs of management fees decreased $953,000, compared to 1995, due to the termination of the management agreement with TKPL which resulted from the sale of all of TKPL's operating properties during 1995. The Company incurred $1,601,000 in costs pursuant to this contract during 1995. This decrease was partially offset by (i) an increase in costs associated with providing construction management services and (ii) an increase in costs for providing services under the management agreement with Centoff. Direct costs of management fees decreased by $812,000 for 1995, compared to 1994, due to the termination of the management agreement with TKPL, as previously described. The effect of this decrease was partially offset by the increase in costs for providing services under the management agreement with Centoff. For 1996, undeveloped land costs remained basically unchanged from those incurred during 1995. Real estate taxes and other costs related to the Company's unimproved land decreased $155,000 during 1995, compared to 1994, due to (i) the sale of a parcel of unimproved land (approximately 23 acres) during October 1994 ($77,000) and (ii) the sale of two parcels of unimproved land (approximately 44 acres) on July 31, 1995 ($22,000). During 1994, the Company settled a pending class action proceeding (the "Securities Action"). The Company recorded a provision of $1,685,000 relating to the settlement of the Securities Action and incurred additional costs related to such settlement which totalled $217,000. During 1995, the Company recorded a provision for loss on land held for sale which totalled $970,000. This provision for loss was based upon a contract for the sale of a land parcel which closed in 1997. In 1994, the Company recorded a provision for loss on land held for sale which totalled $996,000. This provision for loss was based upon contracts for the sale of two land parcels. The sale of one of these land parcels was consummated during 1994, while the contract for the sale of the other land parcel expired. Management periodically reviews its investment in properties for evidence of other than temporary impairments in value. Factors considered consist of, but are not limited to, the following: current and projected occupancy rates, market conditions in different geographic regions and management's plans with respect to its properties. Where management concludes that S-21 22 expected cash flows will not enable the Company to recover the carrying amount of its investments, losses are recorded and asset values are reduced. No such impairments in value existed during 1996, 1995 or 1994. Net Income Net income totalled $10,501,000, $28,990,000 and $4,215,000 for 1996, 1995 and 1994, respectively. For 1996, net income decreased $18,489,000 compared to the prior year due primarily to (i) the interest revenue earned during 1995 on the TKPL mortgage notes which were retired by TKPL during 1995 and (ii) the gain associated with the partial repayment of an unsecured TKPL note to Southeast during 1995. For 1995, net income increased $24,775,000 over the prior year due to (i) the interest revenue associated with KE's investment in the TKPL mortgage notes, (ii) the gain associated with the partial repayment of a note owing from TKPL to Southeast, (iii) the reduction in mortgage and loan interest, (iv) the increase in rental revenues, and (v) the gain on early retirement of debt. LIQUIDITY AND CAPITAL RESOURCES Operating Activities During the nine months ended September 30, 1997, the Company generated approximately $36.4 million in net cash from operating activities. During the year ended December 31, 1996, the Company generated approximately $35.9 million in net cash from operating activities. The Company's primary internal sources of cash are (i) the collection of rents from buildings owned by the Company and (ii) the receipt of management fees paid to the Company in respect of properties managed on behalf of others. As a REIT for federal income tax purposes, the Company is required to pay out annually, as dividends, 95 percent of its REIT taxable income computed without regard to its net capital gain or the dividends-paid deduction (which, due to non-cash charges, including depreciation and net operating loss carryforwards, may be substantially less than cash flow). In 1994, 1995 and 1996, the Company's REIT taxable income was reduced to zero by net operating losses of the Company and by operating losses of KPI to which the Company succeeded in the Merger. The Company did not pay any dividends in such years as it believed that the capital resources preserved by not paying dividends could be more effectively used to continue to repay relatively high-cost debt and/or to invest in selective development opportunities. In 1997, the Company resumed paying dividends. The Company believes that its cash provided by operating activities will be sufficient to cover debt service payments and to pay the dividends required to maintain REIT status through 1997. The level of cash flow generated by rents depends primarily on the occupancy rates of the Company's buildings and changes in rental rates on new and renewed leases and under escalation provisions. As of December 31, 1996, approximately 94 percent of the Company's annualized gross rental revenues were derived from existing leases containing provisions for rent escalations. However, the Company may determine, for a variety of reasons, including tenant relations, not to enforce such provisions. As of September 30, 1997, leases representing approximately 9.6 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 the remainder of 1997. This represents 387 leases for space in buildings located in 19 of the 20 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. During the nine months ended September 30, 1997, leases were renewed on approximately 68 percent of the Company's net rentable square feet which were scheduled to expire during the nine month period. Leases were renewed on approximately 63 percent, 67 percent and 61 percent of the Company's net rentable square feet which were scheduled to expire during 1996, 1995 and 1994, respectively. For those leases which renewed during the nine months ended September 30, 1997, the average rental rate increased from $14.44 to $15.69. 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. 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. However, the Company, along with other lessors of commercial office properties, offers incentives to tenants with respect to the payment of tenant improvement costs. In addition, in certain markets, the Company may offer reduced rents during initial lease periods. The Company believes that the southeastern and southwestern regions of the United States provide significant economic growth potential due to their diverse regional economies, expanding metropolitan areas, skilled work force and moderate labor costs. However, the Company cannot predict whether such economic growth will continue. Cash flow from operations could be reduced if economic growth were not to continue in the Company's markets and if this resulted in lower occupancy rates for the Company's buildings. Governmental tenants (including the State of Florida and the United States of America) which accounted for 24.5 percent of the Company's leased space as of September 30, 1997, may be subject to budget reductions in times of recession and governmental austerity measures. Consequently, there can be no assurance that governmental appropriations for rents may not S-22 23 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 September 30, 1997, the Company had management contracts for the management of 22 commercial office properties. On March 31, 1997, a management agreement to manage 21 commercial office buildings owned by Centoff was automatically extended to March 31, 1998. This management agreement provides that, so long as no default has occurred, the management agreement will be automatically extended from year to year until such time as the management agreement is terminated. The Company earned fees of $2,259,000 from this management agreement during 1996. Another agreement to manage one commercial office building has been extended on a month to month basis. During 1996, the Company earned management fees of $92,000 for the management of this building. With the sale of TKPL's 92 buildings during 1995, Southeast's management agreement with TKPL ended. Investing Activities At September 30, 1997, substantially all of the Company's invested assets were in real properties. Improvements to the Company's existing properties have been financed through internal operations. During the nine month period ended September 30, 1997, the Company's expenditures for improvements to existing properties increased by $187,000 over the corresponding period of the prior year primarily due to increases in expenditures for tenant improvements to the Company's buildings. During 1996, the Company's expenditures for improvements to existing properties decreased by $1.8 million over the prior year, primarily due to reductions in expenditures for tenant improvements and energy management improvements. During the quarter ended September 30, 1997, the Company completed the construction of a building located in Memphis, Tennessee which contains 40,700 net rentable square feet. The Company had seven buildings under construction which will contain approximately 567,600 net rentable square feet. Expenditures for construction of these seven buildings are expected to total approximately $42.2 million, excluding land and tenant improvement costs. On May 15, 1997, the Company acquired three buildings, containing 134,000 net rentable square feet and 5.26 acres of unimproved land located in Greenville, South Carolina for a purchase price of $14 million. On June 4, 1997, the Company acquired two buildings, containing 214,100 net rentable square feet, located in San Antonio, Texas for a purchase price of $15.5 million. On June 18, 1997, the Company acquired a building, containing 23,000 net rentable square feet, located in Jacksonville, Florida for a purchase price of $3.3 million. On August 4, 1997, the Company acquired a building, containing 80,500 net rentable square feet, located in Tallahassee, Florida for a purchase price of $9.575 million. On September 23, 1997, the Company acquired two buildings, containing 46,400 net rentable square feet, and 2.4 acres of unimproved land located in El Paso, Texas for a purchase price of $3.3 million. During 1995, KE acquired $32.3 million in aggregate principal amount of TKPL mortgage notes for an aggregate purchase price of approximately $18.2 million. During the quarter ended September 30, 1995, TKPL retired the TKPL mortgage notes. KE recorded approximately $13.1 million of interest revenue on the TKPL mortgage notes during 1995. During 1996 and 1995, Southeast received $292,000 and $17.7 million, respectively, as partial repayment of an unsecured note issued by TKPL to KPI (and subsequently transferred by KPI to Southeast in connection with the Merger) in an original principal amount of approximately $31 million. During the quarter ended March 31, 1997, the Company sold 8.1 acres of unimproved land located in Miami, Florida for approximately $2,908,000, net of selling costs. On August 8, 1997, the Company sold 17.2 acres of unimproved land located in Richmond, Virginia for approximately $3,433,000, net of selling costs. During 1996, the Company sold a 30 acre land parcel located in Birmingham, Alabama for $1,263,000, net of selling costs. During 1995, the Company sold three office buildings (containing 233,980 net rentable square feet), two undeveloped land parcels (totalling approximately 44 acres), and certain other assets for approximately $25,267,000, net of selling costs. Based on its improved financial structure and results, the Company is in a position to capitalize on some of its strengths, such as the value of its franchise in the suburban office park market and its operating systems, development expertise, acquisition expertise and unimproved land available for development. The Company has committed to a plan to enhance shareholder value by refinancing indebtedness and increasing growth. The Company has completed the refinancing of its indebtedness to eliminate certain restrictive covenants which had limited the Company's ability to grow through development and acquisitions. During April 1997, the Company closed on a $50 million secured revolving credit facility which is available to finance growth opportunities. The plan also contemplates the possible use by the Company of its existing inventory of 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 continues to acquire existing office buildings and may acquire land for development in other markets in the Southeast and Southwest that the Company considers favorable. S-23 24 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. During April 1997, the Company closed a $50 million secured revolving credit facility provided by First Union National Bank of Florida and Morgan Guaranty Trust Company of New York. As of September 30, 1997, the Company had $8 million outstanding under this revolving credit facility. On May 2, 1997, the Company's Board of Directors approved the repurchase of up to one million shares of the Company's Common Stock. On that date, the Company repurchased 372,600 shares of Common Stock for approximately $5.75 million. During July 1997, the Company's Board of Directors approved the redemption of warrants outstanding on August 29, 1997 (the "Redemption Date") for $3.81 per warrant. Each warrant gave the holder the right to purchase one share of Common Stock at a price of $8.00 per share, until the Redemption Date. The Company redeemed 99,871 warrants following the Redemption Date. The remaining warrants were exercised by the holders either on or prior to the Redemption Date. On October 10, 1996, the Company completed a private placement of three million shares of its Common Stock to an affiliate of Apollo Real Estate Investment Fund II, L.P. for an aggregate sales price of $43.5 million. The Company applied the proceeds from this sale to the repayment of indebtedness with an average interest rate of approximately eight percent. See "Principal Shareholders--Agreements with Shareholders." On December 18, 1996, the Company closed on $175.9 million of a $190 million non-recourse loan with Northwestern which is secured by 10 office parks. This loan is divided into (i) a tranche in the amount of $100.5 million ($86.4 million of which was initially drawn) with a 10 year maturity and an interest rate of 8.25 percent and (ii) a tranche in the amount of $89.5 million with a maturity of 12 years and an interest rate of 8.33 percent. During August 1997, the Company drew $8.3 million of the remaining Northwestern loan proceeds when the $8.2 million existing indebtedness on a building matured. The Company plans to draw the remaining loan proceeds when the existing indebtedness on a building matures. Amortization with respect to this indebtedness is based on equal monthly installments over a 25 year amortization period. This indebtedness requires the Company to maintain certain financial ratios. With the proceeds of the private placement of Common Stock and the Northwestern loan, the Company repaid all of the restructured debt acquired pursuant to the Merger and repaid all of its bank debt. The repayment of this indebtedness eliminated the restrictive covenants which had limited the Company's ability to grow. During the nine months ended September 30, 1997, the Company repaid approximately $6.9 million of the outstanding balances of mortgages and loans payable. These early repayments resulted in the release of four buildings containing 126,370 net rentable square feet, which had been collateral for these loans. At September 30, 1997, the Company had 69 buildings, containing 2,459,000 net rentable square feet, which were unencumbered. Loan maturities and normal amortization of mortgages and loans payable are expected to total approximately $3.6 million over the next twelve months. The Company believes that these obligations will be paid from cash provided by operations or from current cash balances. Significant maturities of the Company's mortgages and loans payable do not begin to occur until 2006. 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 possible issuance of up to $300,000,000 of its Common Stock and/or Preferred Stock, and the Offering is being made thereunder. During 1995, the Company wrote off $745,000 of certain costs incurred for potential public and private offerings of equity securities which management determined had no future value. In addition, in the event the Company is unable to generate sufficient funds both to meet principal payments in respect of its indebtedness and to satisfy distribution requirements of 95 percent of annual REIT taxable income (computed without regard to the Company's net capital gain or the deduction for dividends paid) 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 S-24 25 market price of the 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. Inflationary pressure may increase operating expenses, including labor and energy costs (and, indirectly, property taxes), above expected levels at a time when it may not be possible to increase lease rates to offset such higher operating expenses. In addition, inflation can have secondary effects upon occupancy rates by decreasing the demand for office space in many of the markets in which the Company operates. As of December 31, 1996, 94 percent of the Company's annualized rentals were subject to leases having annual escalation clauses. As of December 31, 1995 and 1994, 93 percent and 94 percent, respectively, of the Company's annualized rentals were subject to leases having annual escalation clauses. Historically, inflation has often caused increases in the value of income-producing real estate through higher rentals. The Company, however, can provide no assurance that inflation will increase the value of its properties in the future, and, in fact, the rate of inflation over recent years has been considerably below that which has been experienced previously. BUSINESS AND PROPERTIES GENERAL The Company is a self-administered and self-managed REIT which owns 225 Office Buildings, of which 222 are in 18 Koger Centers and three are outside Koger Centers. The Koger Centers are located in 13 metropolitan areas throughout the southeastern and southwestern United States. In addition, the Company owns approximately 145 acres of unencumbered Development Land. Most of the Development Land adjoins Office Buildings in ten Koger Centers and has infrastructure, including roads and utilities, in place. The Company provides leasing, management and other customary tenant-related services for the Office Buildings and for 22 additional office buildings containing approximately 1.3 million net rentable square feet owned by other parties. MARKETS Overview The Company has historically focused its activities in the southeastern and southwestern areas of the United States due to their favorable demographic and economic characteristics. The Company believes that these markets have certain advantages which will contribute to the Company's growth and profitability, including pro-business environments and developed transportation infrastructures. These advantages make these markets a leading choice for business and household locations. According to the 1997 MSA Profile--Metropolitan Area Projections to 2020 by Woods and Poole Economics, Inc. (the "MSA Profile Report"), as set forth in the tables below, the Company's markets have, on average, experienced population and employment growth in excess of the national average and are expected to continue to do so over the next several years. The following information summarizes certain demographic and economic trends in the 13 markets in which the Company owns Office Buildings and briefly describes the Koger Centers located in such markets. The population and employment growth information presented in S-25 26 this Prospectus Supplement was derived from the MSA Profile Report. All information with respect to square footage of properties is approximate. POPULATION GROWTH PROJECTIONS
------------------------------------------------------------------------------------------------ COMPOUND ANNUAL GROWTH MARKET 1990 1996 2000 2005 2010 1990-2010 - ------ ----------- ----------- ----------- ----------- ----------- --------- FLORIDA Jacksonville 912,710 990,080 1,053,120 1,130,140 1,208,440 1.4% Orlando 1,239,120 1,445,230 1,667,210 1,936,290 2,203,070 2.9% St. Petersburg/Tampa 2,075,610 2,227,950 2,412,410 2,638,640 2,867,510 1.6% Tallahassee 234,910 261,780 279,070 300,180 321,560 1.6% GEORGIA Atlanta 2,977,680 3,505,970 3,795,730 4,151,420 4,511,440 2.1% NORTH CAROLINA Charlotte 1,168,550 1,313,100 1,405,550 1,518,570 1,633,190 1.7% Greensboro 1,053,610 1,137,080 1,187,210 1,248,190 1,310,680 1.1% OKLAHOMA Tulsa 710,740 751,630 770,540 793,210 817,020 0.7% SOUTH CAROLINA Greenville 833,590 894,680 934,050 981,930 1,031,040 1.1% TENNESSEE Memphis 1,009,930 1,079,370 1,122,100 1,174,070 1,227,650 1.0% TEXAS Austin 850,570 1,020,250 1,098,790 1,194,910 1,292,090 2.1% El Paso 596,270 690,550 737,910 795,940 854,860 1.8% San Antonio 1,327,560 1,487,190 1,595,390 1,727,910 1,862,320 1.7% AVERAGE 1,153,142 1,292,682 1,389,160 1,507,031 1,626,220 1.7% UNITED STATES 249,402,970 265,225,490 274,581,020 285,913,030 297,640,710 0.9%
S-26 27 EMPLOYMENT GROWTH PROJECTIONS
------------------------------------------------------------------------------------------------ COMPOUND ANNUAL GROWTH MARKET 1990 1996 2000 2005 2010 1990-2010 - ------ ----------- ----------- ----------- ----------- ----------- --------- FLORIDA Jacksonville 545,700 586,280 610,530 655,240 700,710 1.3% Orlando 751,300 889,250 992,490 1,138,070 1,278,080 2.7% St. Petersburg/Tampa 1,091,560 1,239,550 1,346,580 1,477,240 1,602,700 1.9% Tallahassee 149,790 173,350 185,750 200,990 215,750 1.8% GEORGIA Atlanta 1,896,970 2,256,300 2,431,140 2,648,280 2,862,000 2.1% NORTH CAROLINA Charlotte 753,080 854,880 907,870 972,580 1,037,050 1.6% Greensboro 687,090 754,040 791,500 837,890 885,370 1.3% OKLAHOMA Tulsa 414,490 458,650 477,910 500,420 522,540 1.2% SOUTH CAROLINA Greenville 488,730 540,000 568,480 603,290 638,220 1.3% TENNESSEE Memphis 604,870 652,870 673,380 709,470 748,120 1.1% TEXAS Austin 515,710 660,600 715,710 779,620 837,540 2.5% El Paso 270,640 313,770 340,070 370,870 398,980 2.0% San Antonio 700,410 791,250 839,870 916,300 993,710 1.8% AVERAGE 682,334 782,368 837,022 908,481 978,521 2.1% UNITED STATES 138,981,300 149,285,620 155,511,510 163,584,780 171,909,790 1.1%
Market Descriptions Jacksonville, Florida Jacksonville's economy is a diversified mix of retail trade, services, shipping, financial services, manufacturing and government and military offices and installations. A planned port expansion, as well as a new National Football League franchise have contributed to an increase in the city's rate of economic growth, and will continue to do so over the next several years. Major private employers in the area include Winn-Dixie, AT&T American Transtech, Publix Super Markets and Blue Cross & Blue Shield of Florida, Inc. The Company's Jacksonville Baymeadows Center consists of four Office Buildings containing 468,000 net rentable square feet and two office buildings currently under construction containing 177,200 net rentable square feet on 13.3 acres of Development Land. As of September 30, 1997, the Jacksonville Baymeadows Center was 99% leased at an average annual rent per square foot of $18.20. Tenants in the center include Blue Cross & Blue Shield of Florida, Inc., Carolina Casualty, General Motors Acceptance Corporation, Pitney Bowes, Wellspring Resources and The Unisys Group. The Jacksonville Baymeadows Center is located on Interstate 95 at Baymeadows Road and is strategically situated among some of the fastest growing areas of Jacksonville. The Company's second Koger Center in Jacksonville is the Jacksonville Central Center, which consists of 31 Office Buildings containing 666,500 net rentable square feet. The center is located on Beach Boulevard west of the Hart Expressway, approximately 20 minutes from the airport and five minutes from downtown Jacksonville. As of September 30, 1997, the center was 89% leased with an average annual rent per square foot of $11.92. The Jacksonville Central Center houses tenants including Landstar and various departments and agencies of the United States Government and the State of Florida. The Company recently acquired an Office Building containing 23,000 net rentable square feet in Deerwood Park, a planned office community. This building is 100% leased on a triple-net basis through October 2002. Orlando, Florida Orlando has been the fastest growing market in the country. From 1990 to 2010, Orlando's compound annual employment growth is projected to be approximately 2.7%, which is greater than twice the national average. Orlando's two largest employment sectors are services and retail trade, with tourism being the major strength of Orlando's economy. Walt Disney S-27 28 World and Universal Studios-Florida are two of the largest employers in the area. Projected growth in the area's economy is expected to continue to create demand for office space in Orlando. The Company's Orlando Central Center has 22 Office Buildings containing 565,220 net rentable square feet. The center is located in northwest Orlando adjacent to the Fashion Square Mall. As of September 30, 1997, the Orlando Central Center was 91% leased with an average annual rent per square foot of $14.51. The Orlando University Center, located at the intersection of University Boulevard and Rouse Road, is close to the University of Central Florida and the Central Florida Research Park. The center consists of two Office Buildings containing 159,600 net rentable square feet and 15.5 acres of Development Land. As of September 30, 1997, percentage leased and average annual rent per square foot were 95% and $16.83, respectively. Tenants in this center include Lumbermens Mutual Casualty Company and General Motors Acceptance Corporation. St. Petersburg-Tampa, Florida From 1990 to 2010, compound annual employment growth in St. Petersburg-Tampa is projected to be 1.9%, compared to the national average of 1.1%. Much of this growth will be due to the expansion and creation of new businesses in the services and retail trade sectors, the largest sectors of the economy. Major private employers in the St. Petersburg-Tampa market include GTE, Publix Super Markets, Winn-Dixie and Sears, Roebuck & Co. The Company's St. Petersburg Center consists of 15 Office Buildings containing 519,320 net rentable square feet and approximately seven acres of Development Land. As of September 30, 1997, the center was 97% leased with an average annual rent per square foot of $13.64. Tenants in the center include the United States Government and Cox Broadcasting. The St. Petersburg Center is located between Fourth and Ninth Streets North, approximately one mile from Interstate 275. Tallahassee, Florida From 1990 to 2010, Tallahassee's compound annual employment growth is projected to be over 65% greater than the national average. As the state capital of Florida, Tallahassee has been partially shielded from the effects of the last recession, due to the large number of non-cyclical government jobs which are less susceptible to cyclical changes in the economy. In addition, because of its educational facilities, including Florida State University, Tallahassee has become a regional center for high technology and research. Major employers in Tallahassee include state and local government (which comprises more than 35% of non-agricultural employment), Tallahassee Memorial Regional Medical Center, Publix Super Markets and Sprint/Centel-Florida. The Company's Tallahassee Apalachee Parkway Center has 14 Office Buildings containing 408,500 net rentable square feet. The center is located three miles east of the Florida State Capitol, between Apalachee Parkway and Old St. Augustine Road. The center's major tenant is the State of Florida. As of September 30, 1997, the Tallahassee Apalachee Parkway Center was 92% leased and the average annual rent per square foot was $16.30. The Company's Tallahassee Capital Circle Center consists of five Office Buildings containing 381,200 net rentable square feet. The Tallahassee Capital Circle Center is located just south of the Tallahassee Apalachee Parkway Center at the intersection of Old St. Augustine Road and Capital Circle. The State of Florida is the major tenant in the center. As of September 30, 1997, percentage leased and average annual rent per square foot in the center were 97% and $17.87, respectively. Atlanta, Georgia Atlanta is widely regarded as the leading economic market in the Southeast. From 1990 to 2010, compound annual employment growth in Atlanta is projected to be almost twice the national average. Employment in Atlanta is focused primarily in the services, retail trade, manufacturing and state and local government sectors. Major private employers include Delta Airlines, AT&T and BellSouth, and major companies headquartered in Atlanta include Coca-Cola, CNN and Home Depot. The Atlanta suburban office market is characterized by increasing occupancy and strong net absorption. The Company's Atlanta Chamblee Center is located adjacent to I-85 North near the interchange of I-285 and consists of 22 Office Buildings containing 947,920 net rentable square feet. As of September 30, 1997, the center was 96% leased and the average annual rent per square foot was $15.29. Tenants in the Atlanta Chamblee Center include the Center for Disease Control, the Internal Revenue Service, Lumbermens Mutual Casualty Company, First Data Resources Inc. and BellSouth Communications Inc. The Company's second Koger Center in Atlanta will be the Atlanta Gwinnett Center. The center will consist of one office building which is currently under construction containing 62,700 net rentable square feet and 26.7 acres of remaining S-28 29 Development Land. The center will be located on Pleasant Hill Road at I-85 North in a well-developed area near the Gwinnett Place regional shopping mall. Charlotte, North Carolina As the leading economic market in North Carolina and the banking capital of the southeastern United States, Charlotte is expected to enjoy sustained economic and annual employment growth during the next several years. The primary sectors of Charlotte's economy include services, manufacturing, retail trade and state and local government. Some of Charlotte's major private employers are Duke Power Company, USAirways, First Union National Bank, NationsBank, Presbyterian Health Services Corp. and IBM. The suburban office market in the Charlotte area is characterized by increasing occupancy and strong net absorption. The Company's Charlotte Carmel Center currently has one Office Building containing 109,600 net rentable square feet, one office building nearing completion containing 61,200 net rentable square feet, of which approximately 12,800 net rentable square feet has been pre-leased, one office building under construction containing 112,500 net rentable square feet, of which approximately 70,000 net rentable square feet has been pre-leased, and 10.4 acres of remaining Development Land. The Charlotte Carmel Center is located on State Road 51 at Carmel Road. As of September 30, 1997, the center was 83% leased and the average annual rent per square foot was $16.63. The major tenant at the Charlotte Carmel Center is The Traveler's Insurance Company. The Company's Charlotte East Center consists of 11 Office Buildings containing 468,820 net rentable square feet and 3.9 acres of Development Land. The Charlotte East Center is located on Albemarle Road across from the Eastland Mall shopping center. As of September 30, 1997, the center was 83% leased with an average annual rent per square foot of $13.01. Tenants at the Charlotte East Center include First Data Resources, Michigan Mutual Insurance, Employer's Insurance of Wausau, Prudential Healthcare and United States Government Office of Hearing. Greensboro, North Carolina During the next several years, Greensboro is expected to experience above average annual employment growth as its local economy expands from its traditional textile and furniture manufacturing base into the services and retail trade sectors. The latter two sectors now account for more than half the non-agricultural employment in the region. Major private employers in the Greensboro area include RJR/Nabisco, Sara Lee Corporation and Bowman Gray/Baptist Hospital. Like many other southeastern cities, Greensboro's suburban job growth is outpacing job growth in the downtown market. The Company's Greensboro South Center is a 610,470 net rentable square foot center consisting of 13 Office Buildings located at Interstate 40 and High Point Road in Greensboro's prime commercial area. The center was constructed over the period from 1976 to 1988. As of September 30, 1997, percentage leased and average annual rent per square foot were 95% and $14.79, respectively. Tenants in the Greensboro South Center include Aetna Life Insurance Company, the United States Government and CIBA-Geigy Corporation. The Company's Greensboro Wendover location consists of 18.5 acres of Development Land. The Greensboro Wendover Center will be located on Interstate 40 on Wendover Avenue. The location provides interstate highway access to High Point, Winston-Salem and Burlington, North Carolina. Tulsa, Oklahoma From 1990 to 2010, Tulsa's compound annual employment growth is expected to be roughly equal to the national average. Manufacturing, transportation and services are expected to be the principal sources of economic growth in the future. The three largest private employers in the Tulsa area are American Airlines, Inc., Avis Rent-A-Car and the Bank of Oklahoma. The Company's Tulsa Center currently has 13 Office Buildings containing 476,280 net rentable square feet. The Tulsa Center is located at the intersection of the Broken Arrow and Mingo Valley Expressways, and is approximately 7 1/2 miles southeast of downtown Tulsa. As of September 30, 1997, the center was 73% leased with an average annual rent per square foot of $11.11. Tenants in the Tulsa Center include TCI Marketing Inc., AT&T Resource Management, West Telemarketing, and General Electric. Greenville, South Carolina From 1990 to 2010, Greenville's compound annual employment growth is expected to be slightly above the national average. Long known as a textile center, Greenville is also a center for the production of rubber and plastic products, paper, chemicals and industrial machinery. Greenville's major private employers include Michelin North America Corp., JPS Textile Group, Inc., DI-LD, Inc., W.R. Grace & Company and General Electric. S-29 30 The Company's Greenville Roper Mountain Center consists of eight Office Buildings containing 290,560 net rentable square feet and one office building under construction containing 60,400 net rentable square feet. The total center size upon completion of the building under construction will be 350,960 net rentable square feet. As of September 30, 1997, the Greenville Roper Mountain Center was 95% leased at an average annual rent per square foot of $15.18. Tenants in this center include Ahold Finance USA, Inc., Lumbermens Mutual Casualty Corp., McDonalds Corp., General Motors Acceptance Corp., and Simons-Eastern Services. The Greenville Roper Mountain Center is located at the intersection of I-85 and I-385 and is now linked by expressway to Columbia, South Carolina; Atlanta, Georgia; and Charlotte, North Carolina. The Company's Greenville Park Central Center, purchased in May 1997, consists of three Office Buildings containing 134,000 net rentable square feet and 3.5 acres of Development Land. As of September 30, 1997, the center was 92% leased with an average annual rent per square foot of $15.89. Tenants in this center include Cirrus Logic, Inc., JPS Textiles Group, Carlson Group, Inc., Industra, Inc. and AT&T Resource Management. The Greenville Park Central Center is located in the southwest quadrant of Interstate 385 and SC Highway 291 (North Pleasantburg Drive). Memphis, Tennessee From 1990 to 2010, compound annual population and employment growth rates in Memphis are expected to be 1.0% and 1.1%, respectively. Employment growth is expected to accelerate in distribution-related business (such as Federal Express), tourism and health care but will be offset by reductions in military employment. Memphis' transportation network has made the area a distribution hub, and Federal Express and Northwest Airlines are two of its largest employers. The Company's Memphis Germantown Center has four Office Buildings containing 299,100 net rentable square feet, one office building under construction containing 93,600 net rentable square feet, and 5.3 acres of remaining Development Land. The center is located at the intersection of Germantown Road and Walnut Grove Road in suburban Cordova, Tennessee. As of September 30, 1997, the Memphis Germantown Center was 95% leased and the average annual rent per square feet was $17.81. Austin, Texas Governmental services, as well as high technology and manufacturing, will drive the economic growth of Austin, the Texas state capital. From 1990 to 2010, compound annual employment growth in Austin is projected to be almost twice the national average. Major private employers in Austin include Motorola, IBM Corporation and Dell Computer Corporation. The office vacancy rate in Austin was one of the worst in the country, exceeding 40% in 1987. Since then, the rapid growth of the local economy and lack of new construction have combined to gradually improve both the downtown and suburban office markets. The Company's Austin Center is a 370,860 net rentable square foot center consisting of 12 Office Buildings and is located at the intersection of Spicewood Springs Road, just off of Anderson, with the MOPAC Expressway. As of September 30, 1997, the Austin Center was 98% leased with an average annual rent per square foot of $17.68. Tenants in the Austin Center include Lumbermens Mutual Casualty Company and the State of Texas. El Paso, Texas Above average annual rates of population and employment growth are projected in the El Paso area through the year 2010, as the region is expected to benefit from increased trade with Mexico promoted by NAFTA. Manufacturing, trade and services sectors are expected to generate most of this growth. Some of El Paso's major private employers are Levi Strauss & Co., Columbia Health Care System, Wrangler, The Lee Company and Wal-Mart Stores. El Paso's suburban office market exhibits more growth than its downtown office market and provides most of El Paso's newer office space. Despite the recent construction, however, most of the office buildings are small, containing less than 60,000 square feet. The Company's El Paso Center currently has 16 Office Buildings. It contains 298,330 net rentable square feet and 2.4 acres of Development Land. The El Paso Center is located on Interstate 10 at Executive Center Boulevard, approximately two miles north of downtown El Paso. As of September 30, 1997, the El Paso Center was 93% leased with an average annual rent per square foot of $14.91. Tenants at the El Paso Center include General Motors Acceptance Corporation and A.G. Edwards & Sons, Inc. San Antonio, Texas San Antonio's annual population and employment growth have been spurred by the city's low cost of living, low-wage environment and central location between the rest of Texas and Mexico. As evidenced by recent corporate relocations, S-30 31 including American Airlines' reservation center and Citicorp's national customer service center, San Antonio is a growing center for back office operations and is positioned to benefit from the trade growth projected as a result of NAFTA. Major private employers include USAA, QVC Network and H.E.B. Grocery Co. The Company's San Antonio West Center is a 788,670 net rentable square foot center consisting of 26 Office Buildings and 7.2 acres of Development Land. The center is located in northwestern San Antonio, one mile west of the intersection of Interstate 410 and Interstate 10. As of September 30, 1997, the center was 93% leased with an average annual rent per square foot of $12.94. Tenants in the San Antonio West Center include ITT Hartford Corporation, the United States Government, and Norwest Bank--Texas. The Company's San Antonio Airport properties contain 214,100 net rentable square feet in two Office Buildings. The Office Buildings were purchased in June 1997 to complement the existing San Antonio West Center. As of September 30, 1997, the center was 83% leased at an average annual rent per square foot of $15.34. S-31 32 THE PROPERTIES Office Buildings As of September 30, 1997, the Company's portfolio consisted of 222 Office Buildings in 18 Koger Centers and three Office Buildings outside such centers, but within markets currently served by the Company. Generally located with easy access via expressways to the central business district and shopping and residential areas, the Koger Centers have been developed in campus-like settings and consist of Office Buildings surrounded by extensive landscaping and ample tenant parking. The Koger Centers feature on-site property management and tenant-service personnel. The Office Buildings outside such Koger Centers have the same amenities as those within centers with comparable service by the Company's management and tenant-service personnel. The Office Buildings generally are contemporary in design, contain between one and eight stories and are constructed of masonry, concrete and steel, with facings of brick, concrete and glass. The Company believes that the Office Buildings are well maintained and adequately covered by insurance. All the Office Buildings are wholly-owned by the Company. Leases on the Office Buildings vary between net leases (pursuant to which the tenant pays some operating expenses, such as utilities, insurance and repairs) and gross leases (pursuant to which the Company pays all such expenses). Most of the Company's leases are on a gross basis and are typically for terms varying 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. However, some leases have provisions for early termination for various reasons, including, in the case of government entities, lack of budget appropriations. The Office Buildings were approximately 92% leased at an average annual rent per square foot of $14.24 on December 31, 1996 and were approximately 92% leased at an average annual rent per square foot of $14.84 on September 30, 1997. During the nine months ended September 30, 1997, the Company signed over 300 new leases covering approximately 592,000 net rentable square feet at an average annual rent per square foot of $15.84. In addition, the Company renewed leases covering approximately 68% of the square footage under expiring leases at an average increase in rental rates from $14.44 per square foot to $15.69 per square foot. Leases to new tenants, combined with the renewal leases and scheduled increases in rents under existing leases, resulted in the increase in percentage leased and average annual rent per square foot between December 31, 1996 and September 30, 1997. 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 its leases. Substantially all of the Company's leases contain some type of escalation feature based on changes in the Consumer Price Index, real estate taxes and operating expenses or other measures. 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 reviews all new and renewal leases with respect to a desired return on assets and net rent criteria developed for each Koger Center. Land The Company also owns approximately 145 acres of unencumbered Development Land. Most of the Development Land adjoins Office Buildings in ten Koger Centers and has infrastructure, including roads and utilities, in place. The Company estimates that the Development Land can support new development of approximately 2.2 million gross square feet, although greater density would be allowed under current zoning. The Company also owns approximately 21 acres of unimproved land which is not strategic to its business and which it intends to sell. Property Location and Other Information The Company markets space on a total center basis, with less emphasis on specific Office Buildings. As part of its strategy, the Company may from time to time consolidate vacant space in one or more Office Buildings within a Koger Center in order to create large blocks of contiguous space, thereby enabling the Company to accommodate tenants which require large amounts of S-32 33 space. The following table sets forth certain information as of September 30, 1997 with respect to each of the Office Buildings in each location:
---------------------------------------------------------------------------------------- NET RENTABLE NUMBER KOGER CENTER/ YEAR SQUARE PERCENTAGE OF LARGEST TENANT LEASING IN OFFICE BUILDING BUILT FEET LEASED(1) LEASES EXCESS OF 5,000 SQUARE FEET - --------------- ----- --------- ---------- ------ --------------------------- FLORIDA Jacksonville Baymeadows Jackson 1989 91,200 100 9 Blue Cross & Blue Shield of Florida, Inc. Hamilton 1990 91,200 97 19 Pitney Bowes Inc. Osborn 1990 142,800 100 1 Blue Cross & Blue Shield of Florida, Inc. Gunti 1990 142,800 100 1 Wellspring Resources --------- ----- Koger Center Total 468,000 99 30 Jacksonville Central Bay 1960 13,950 85 2 William H. Coleman, Inc. Bradford 1960 18,090 73 9 Boulevard Center 1961 20,150 74 17 Hudson 1961 4,130 80 1 Graphic Arts 1962 5,090 18 1 Koger 1962 33,900 100 4 Koger Equity, Inc. Baldwin 1963 8,650 100 1 American Cancer Society Kogerama 1963 11,130 95 44 Polk 1963 4,860 100 1 Woodcock 1965 38,660 84 30 City of Jacksonville Holmes 1966 19,750 14 4 Calhoun 1967 13,260 98 3 Tromberg, Shore, Harrison & Safer Clay 1967 19,420 81 4 U.S. Government--DEA Brownett 1968 30,490 93 13 State of Florida--Health Dew 1969 21,520 100 1 State of Florida--Labor The Arts 1969 15,000 69 10 Highland 1970 27,940 100 1 Unisource Worldwide Ribault 1970 26,360 91 10 U.S. Government--Army Martin 1971 34,330 87 17 Commonwealth Land Title Pratt 1972 39,900 100 1 Landstar Ranger, Inc. Pottsburg 1973 20,220 91 5 U.S. Government--Navy Flagler 1974 24,380 72 9 State of Florida--Vocational Rehab. St. Johns 1974 24,380 100 1 U.S. Government--IRS Destin 1975 2,350 100 2 Liberty 1976 19,770 100 1 Landstar System Holding Walton 1976 5,400 100 2 W.G. Taylor 1981 9,990 100 4 Memorial Healthcare Talbot 1983 35,630 100 1 PCA Family Health Plan Broward 1985 47,430 94 19 Parsons de Leuw, Inc. Brevard 1986 22,970 71 6 State of Florida--Labor Scott 1987 47,400 100 15 Professional Insurance --------- ----- Koger Center Total 666,500 89 239 Jacksonville Deerwood Park Deerwood Park 1991 23,000 100 1 CUC International --------- ----- Location Total 23,000 100 1 Orlando Central Independence 1966 36,810 99 11 State of Florida--Children and Families Kogerama 1966 11,000 67 29 Carr 1968 20,640 99 6 Claims Capabilities, Inc. Rockbridge 1968 14,660 100 1 State of Florida--Children and Families Saratoga 1968 37,010 96 11 State of Florida--Children and Families Essex 1969 24,760 89 15 Palmetto 1969 20,460 65 7 Hilb Rogel & Hamilton
S-33 34
---------------------------------------------------------------------------------------- NET RENTABLE NUMBER KOGER CENTER/ YEAR SQUARE PERCENTAGE OF LARGEST TENANT LEASING IN OFFICE BUILDING BUILT FEET LEASED(1) LEASES EXCESS OF 5,000 SQUARE FEET - --------------- ----- --------- ---------- ------ --------------------------- St. Paul 1969 30,770 64 12 Tedder 1969 22,580 91 6 PCA Family Health Plan Amherst 1970 20,160 97 14 Enterprise 1970 23,990 89 3 State of Florida--Labor Princeton 1970 7,840 100 1 State of Florida--Safety Bennington 1971 26,360 89 4 U.S. Government Porterfield 1971 50,780 100 4 Blue Cross & Blue Shield of Florida, Inc. Bainbridge 1972 8,190 100 1 Marcom Technologies Lexington 1972 50,780 92 10 State of Florida--DER Forrestal 1973 20,300 66 16 Chandler 1974 20,300 98 1 State of Florida--DIS Determination Commodore 1974 26,500 98 3 Hughes Supply, Inc. Hollister 1974 28,330 93 6 Wilbur Smith & Associates Yorktown 1979 28,620 98 8 Honeywell Inc. Langley 1980 34,380 92 11 Professional Administrators --------- ----- Koger Center Total 565,220 91 180 Orlando University Cragg 1988 79,800 91 28 Lumbermens Mutual Casualty Co. Laurel 1988 79,800 99 19 General Motors Acceptance Corporation --------- ----- Koger Center Total 159,600 95 47 St. Petersburg Pinellas 1971 20,460 92 23 Madison 1972 34,330 97 12 Crossland Mortgage Company Kogerama 1972 10,400 69 30 Duval 1973 26,790 97 3 U.S. Government--IRS Dade 1974 30,170 100 8 Application Profiles, Inc. Koger 1974 40,690 99 11 U.S. Government--Commerce Monroe 1974 23,990 100 7 Sunshine Behavioral Hendry 1978 27,530 89 10 Tampa Bay Regional Plan Gadsden 1980 32,140 97 4 U.S. Government--Defense Logistics Lake 1980 30,460 92 18 Franklin 1982 34,880 95 4 State of Florida--Children and Families Gilchrist 1984 42,170 100 1 SBF Services, Inc. St. Lucie 1985 47,430 95 17 Lincoln Financial Group Baker 1987 59,680 100 8 ABRA Software, Inc. Glades 1988 58,200 96 16 State of Florida--Health Care --------- ----- Koger Center Total 519,320 97 172 Tallahassee Apalachee Parkway Ashley 1972 40,300 100 1 State of Florida--Labor Kogerama 1972 10,410 80 30 Lafayette 1972 37,650 78 2 State of Florida--Transportation Montgomery 1972 30,100 99 3 State of Florida--Labor Ellis 1973 27,820 90 19 PCA Family Health Plan Howard 1973 32,280 100 7 State of Florida--Labor Marathon 1973 20,340 31 3 Turner 1973 19,970 100 3 State of Florida--PER Sutton 1977 28,310 96 2 State of Florida--Labor Berkeley 1979 24,230 100 1 ABB Environmental Services Atkins 1980 35,630 94 2 State of Florida--Labor Douglas 1980 30,200 100 6 State of Florida--Health Clifton 1981 35,630 99 5 State of Florida--Transportation Webster 1982 35,630 90 6 State of Florida--Labor --------- ----- Koger Center Total 408,500 92 90
S-34 35
---------------------------------------------------------------------------------------- NET RENTABLE NUMBER KOGER CENTER/ YEAR SQUARE PERCENTAGE OF LARGEST TENANT LEASING IN OFFICE BUILDING BUILT FEET LEASED(1) LEASES EXCESS OF 5,000 SQUARE FEET - --------------- ----- --------- ---------- ------ --------------------------- Tallahassee Capital Circle Rhyne 1987 81,000 86 4 State of Florida--Transportation Forrest 1988 58,200 100 1 State of Florida--Labor Knight 1989 81,000 100 1 State of Florida--Juvenile Justice Hartman 1990 80,500 100 1 State of Florida--Labor Alexander 1992 80,500 99 3 State of Florida--Legal Affairs --------- ----- Koger Center Total 381,200 97 10 GEORGIA Atlanta Chamblee Oxford 1971 39,960 81 27 Cambridge 1972 40,300 90 9 U.S. Government--IRS Oglethorpe 1972 35,770 98 47 Columbia 1974 9,990 97 10 Cornell 1974 27,930 72 9 BellSouth Telecom Inc. Vanderbilt 1974 28,200 100 1 U.S. Government--CDC Yale 1974 28,200 100 3 U.S. Government--CDC Dartmouth 1975 34,030 100 1 First Data Resources, Inc. Harvard 1975 37,650 100 2 First Data Resources, Inc. Stetson 1978 30,200 79 3 U.S. Government--IRS Tulane 1978 44,070 100 1 U.S. Government--IRS Davidson 1979 39,490 100 1 U.S. Government--CDC Duke 1979 44,070 95 11 Planning Technologies Fordham 1980 31,830 100 1 U.S. Government--IRS Hollins 1980 31,830 95 11 U.S. Government--IRS Drake 1981 39,490 90 9 State of Georgia--Bank & Finance Stanford 1981 33,120 100 1 U.S. Government--CDC Colgate 1982 61,260 99 6 Commercial Union Insurance McGill 1982 47,480 100 5 BellSouth Communications Inc Williams 1986 107,650 100 7 Lumbermens Mutual Casualty Co. Rhodes 1990 96,400 99 3 U.S. Government--CDC Rutgers 1990 59,000 100 2 U.S. Government--FEMA --------- ----- Koger Center Total 947,920 96 170 NORTH CAROLINA Charlotte Carmel Davie 1991 109,600 83 20 Travelers Insurance Company --------- ----- Koger Center Total 109,600 83 20 Charlotte East Kogerama 1972 10,440 96 40 Wilson 1972 39,910 86 38 Koger 1973 40,200 92 30 Squires Homes, Inc. Rowan 1976 38,960 96 31 Hatteras 1978 32,750 92 20 Mechanical Engineers Catawba 1979 32,750 93 11 Harleysville Mutual Insurance Company Rutherford 1980 46,990 94 11 U.S. Government--Office of Hearing Granville 1981 32,430 92 14 Prudential Health Care Scotland 1982 32,430 97 10 Employers Insurance of Wausau Brunswick 1985 82,360 58 6 First Data Resources Beaufort 1988 79,600 70 8 Hartford Fire Insurance Co. --------- ----- Koger Center Total 468,820 83 219 Greensboro South Boone 1976 21,340 93 17 Henderson 1976 30,270 96 15 Grain Dealers Mutual Insurance Co. Kinston 1977 49,800 99 2 Health Tex Inc. Wilmington 1978 24,500 97 22
S-35 36
---------------------------------------------------------------------------------------- NET RENTABLE NUMBER KOGER CENTER/ YEAR SQUARE PERCENTAGE OF LARGEST TENANT LEASING IN OFFICE BUILDING BUILT FEET LEASED(1) LEASES EXCESS OF 5,000 SQUARE FEET - --------------- ----- --------- ---------- ------ --------------------------- Koger 1979 43,380 98 7 U.S. Government--HUD Morehead 1979 32,750 89 25 Lenoir 1981 32,430 99 3 Aetna Life Insurance Company Pinehurst 1981 44,070 97 33 Ohio Casualty Insurance Wrightsville 1981 32,750 83 20 Hayes Seay Mattern Hickory 1982 44,070 100 1 Aetna Life Insurance Company Rockingham 1985 39,250 86 18 Finkbeiner Pettis Salem 1986 97,260 98 7 Aetna Life Insurance Company Asheville 1988 118,600 90 23 CIBA-Geigy Corporation --------- ----- Koger Center Total 610,470 95 193 OKLAHOMA Tulsa Osage 1974 25,700 87 51 Koger 1975 40,850 89 29 Visionael Corporation Seminole 1976 38,800 87 19 Hughes Lumber Co. Grant 1978 30,200 97 4 Trans. Info Services, Inc. Greer 1978 31,830 0 0 Comanche 1979 43,380 100 1 TCI Marketing, Inc. Miles 1979 29,210 50 1 Metris Direct Line Pawnee 1979 31,830 0 0 Blaine 1980 47,480 89 10 Foundation Health Cherokee 1980 47,480 71 33 Wyatt & Co. Inc. Logan 1981 51,760 66 22 AT&T Resource Management Woodward 1981 51,760 100 3 West Telemarketing Greenfield 1982 6,000 100 1 DialAmerica Marketing --------- ----- Koger Center Total 476,280 73 174 SOUTH CAROLINA Greenville Park Central Allendale 1982 62,900 83 21 Paging Network of South Carolina Edgefield 1984 32,800 100 6 Industra, Inc. Lancaster 1986 38,300 100 31 Carlson Group Inc. --------- ----- Koger Center Total 134,000 92 58 Greenville Roper Mt. Chesterfield 1974 27,930 90 26 Anderson 1975 36,680 83 61 Donald Gardner, Architect Laurens 1979 32,750 87 16 Lumbermens Mutual Casualty Barnwell 1980 28,840 100 1 Ahold Finance USA, Inc. Sumter 1981 27,530 100 17 AMICA Mutual Insurance Marion 1982 27,530 100 3 Ahold Finance USA, Inc. Darlington 1987 49,700 93 13 HOK Architects, Inc. Dorcester 1990 59,600 100 8 Simons--Eastern Services, Inc. --------- ----- Koger Center Total 290,560 95 145 TENNESSEE Memphis Germantown Parkway 1987 79,800 100 13 Cooperative Marketing Oak Ridge 1988 99,000 100 13 Sara Lee Corporation Gainsborough 1990 79,600 89 30 Shelby Systems, Inc. Grove 1997 40,700 86 7 Software Earnings --------- ----- Koger Center Total 299,100 95 63 TEXAS Austin Buchanan 1973 23,770 100 22 Hubbard 1973 23,990 100 15 Harbor Financial
S-36 37
---------------------------------------------------------------------------------------- NET RENTABLE NUMBER KOGER CENTER/ YEAR SQUARE PERCENTAGE OF LARGEST TENANT LEASING IN OFFICE BUILDING BUILT FEET LEASED(1) LEASES EXCESS OF 5,000 SQUARE FEET - --------------- ----- --------- ---------- ------ --------------------------- Medina 1974 24,490 100 25 Cross 1978 36,360 100 11 Rudd & Wisdom Inc. Whitney 1977 24,410 99 19 Colorado 1979 32,610 97 17 Tradewave Corporation Proctor 1980 32,610 98 6 Ryland Group, Inc. Benbrook 1981 27,530 100 15 Merchants & Professional Bridgeport 1982 27,530 94 21 Meredith 1982 34,820 82 10 Hutton Cathey & Associates Livingston 1985 41,370 100 14 Association Risk Management Travis 1985 41,370 100 11 State of Texas--Employment --------- ----- Koger Center Total 370,860 98 186 El Paso Chaparral 1967 19,420 74 14 Presidio 1968 10,550 61 3 El Paso Reprographics, Inc. Kogerama 1969 11,150 97 48 Los Arcos 1969 19,840 100 17 Koger 1970 34,440 98 36 A.G. Edwards & Sons, Inc. Mesa 1970 8,600 100 4 E. P. Nurses Unlimited Pershing West 1971 33,740 92 20 Madrid 1972 4,000 100 1 Lima 1973 3,840 100 1 Carlsbad 1974 9,970 77 2 Pershing East 1974 30,100 96 17 Brownsville 1975 7,940 100 2 Diversified Tech Los Picos 1976 28,560 93 7 Rio Grande HMO, Inc. Pioneer 1979 29,780 95 12 Sanders, Wingo, Galvin Coventry 1 1982 23,200 100 3 Hunt Building Corporation Coventry 2 1984 23,200 87 4 U.S. Government--GSA --------- ----- Koger Center Total 298,330 93 191 San Antonio Airport Atrium 1982 121,100 77 38 PCA Health Plans of Texas Plaza 1986 93,000 90 18 North American Intel --------- ----- Location Total 214,100 83 56 San Antonio West Kogerama 1969 10,290 100 42 Koger 1969 30,300 87 30 Incarnate Word Health Royal 1969 20,060 100 16 Finesilver 1970 24,000 93 20 San Jacinto 1970 26,650 100 4 ITT Corporation Midland 1971 9,970 100 1 Galloway Field Service Woodcock 1971 60,100 94 9 American Medicorp Austin 1972 26,500 90 16 Authentic Dental Lab Brazos 1972 40,890 99 11 U.S. Government--Social Security Lamar 1972 26,500 99 16 Lockheed Martin Corporation Bowie 1973 10,800 89 7 Garner 1973 10,800 100 2 Lumbermens Mutual Casualty Co. Goliad 1973 26,500 65 10 Sabine 1974 43,030 93 33 Home Health Concepts Fannin 1978 24,400 91 13 Concepts of Care Burnet 1978 12,520 100 1 RBC Music Company Carson 1978 12,520 99 4 Computers Made Simple Beaumont 1979 24,400 100 7 TRW Inc. Abilene 1979 30,270 100 2 Norwest Bank--Texas Borden 1980 38,770 75 14 Fiesta Home Health Houston 1980 30,270 100 1 Norwest Bank--Texas
S-37 38
---------------------------------------------------------------------------------------- NET RENTABLE NUMBER KOGER CENTER/ YEAR SQUARE PERCENTAGE OF LARGEST TENANT LEASING IN OFFICE BUILDING BUILT FEET LEASED(1) LEASES EXCESS OF 5,000 SQUARE FEET - --------------- ----- --------- ---------- ------ --------------------------- Trinity 1982 56,850 98 12 U.S. Government--Social Security Bonham 1983 32,140 75 13 State of Texas--Comptroller Plaza 1984 26,380 54 5 Frost National Bank Amistad 1985 51,760 100 6 Science Applications International Corporation Brownwood 1987 82,000 98 2 ITT Hartford --------- ----- Koger Center Total 788,670 93 297 --------- ----- Total 8,200,050 92 2,541 ========= =====
- --------------- (1) The total for each Koger Center/Office Building represents the weighted average percentage of leased net rentable square feet for the Office Buildings in such Koger Center. Percentage Leased The following table sets forth certain information with respect to the percentage leased of the Office Buildings as of December 31 in each of the five years beginning with 1992 and as of September 30, 1997. The information set forth below is not necessarily indicative of future percentage leased. This information is based on the Office Buildings owned by the Company on the relevant date and the terms of leases in effect as of such date.
------------------------------------------------------------------------- NUMBER NET AVERAGE OF NUMBER RENTABLE AVERAGE ANNUAL OFFICE OF SQUARE PERCENTAGE RENT PER DATE BUILDINGS LEASES FEET LEASED SQUARE FOOT(1) - ---- --------- ------ --------- ---------- --------------- December 31, 1992 126 1,392 4,058,380 88 $12.92 December 31, 1993 219 2,449 7,906,370 88 13.26 December 31, 1994 219 2,532 7,906,370 90 13.35 December 31, 1995 216 2,507 7,672,390 91 13.72 December 31, 1996 215 2,458 7,661,350 92 14.24 September 30, 1997 225 2,541 8,200,050 92 14.84
- --------------- (1) Rental rates are computed by dividing annualized gross rental revenues by the net rentable square feet applicable to such gross rental revenues. S-38 39 Tenants The following table sets forth certain information with respect to the 20 largest tenants which leased space in one or more of the Office Buildings as of September 30, 1997. This information is based on the terms of leases in effect as of September 30, 1997, on the basis of then existing base rentals.
---------------------------------------------------- TOTAL PERCENTAGE NET OF COMPANY'S RENTABLE TOTAL TOTAL NUMBER OF SQUARE ANNUALIZED ANNUALIZED TENANT LEASES FEET RENTS RENT(1) - ------ --------- -------- ----------- ------------ State of Florida(2)(3) 73 926,534 $15,413,324 13.9 United States Government(2)(4) 71 778,927 11,415,927 10.3 Blue Cross & Blue Shield of Florida 3 225,453 3,508,199 3.2 Aetna Life Insurance Company 4 116,213 1,342,810 1.2 Lumbermens Mutual Casualty 5 88,481 1,288,710 1.2 CIBA-Geigy Corporation 2 56,447 1,186,006 1.1 Sara Lee Corporation 1 55,410 1,039,176 0.9 State of Texas 14 71,371 1,016,501 0.9 PCA Family Health Plans, Inc. 5 74,570 1,001,022 0.9 First Data Resources 3 83,205 945,066 0.9 Norwest Bank-Texas 3 84,414 930,760 0.8 General Motors Acceptance Corp. 7 60,699 928,717 0.8 Landstar 6 71,525 916,467 0.8 Ahold Finance USA 2 55,981 854,680 0.8 BellSouth 5 59,959 837,030 0.8 ITT Hartford 1 51,275 810,783 0.7 Ford Motors 5 44,236 737,535 0.7 Cooperative Marketing 1 42,213 661,348 0.6 West Telemarketing Corp. 1 42,615 510,341 0.5 TCI Marketing Inc. 1 43,380 455,123 0.4
- --------------- (1) Calculation is based on total annualized rent of $110,503,194 as of September 30, 1997. (2) Some of the Company's leases with governmental departments and agencies have provisions for early termination for various reasons, including lack of budget appropriations. (3) Includes leases with 22 departments and/or agencies of the State of Florida. (4) Includes leases with 31 departments and/or agencies of the United States Government. Lease Expirations During the nine months ended September 30, 1997, the Company signed over 300 new leases covering approximately 592,000 net rentable square feet at an average rental rate of $15.84 per square foot. In addition, the Company renewed leases covering 68% of the square footage under expiring leases at an average increase in rental rates from $14.44 per square foot to $15.69 per square foot. However, if in the future the Company were unsuccessful in renewing or replacing existing leases, the Company's results of operations could be materially adversely affected. The following table sets forth certain information with respect to expirations for leases of space in the Office Buildings during the three months ended December 31, 1997 and during each of the four calendar years beginning 1998. This information is based on the Office Buildings owned by the Company on September 30, 1997 and the terms of leases in effect as of September 30, 1997, on the basis of then existing base rentals, and without regard to the exercise of options to renew. Furthermore, the information table 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. S-39 40
----------------------------------------------------------------------------------------------- PERCENTAGE OF AVERAGE PERCENTAGE TOTAL SQUARE ANNUAL RENT OF TOTAL NUMBER OF NUMBER OF FEET LEASED PER SQUARE TOTAL ANNUAL ANNUAL RENTS LEASES SQUARE FEET REPRESENTED BY FOOT UNDER RENTS UNDER REPRESENTED BY PERIOD EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES EXPIRING LEASES EXPIRING LEASES ------ --------- ----------- --------------- --------------- --------------- --------------- 1997(1) 387 734,525 9.9 $14.42 $ 10,594,945 9.6 1998 960 1,951,549 26.2 14.41 28,115,283 25.4 1999 554 1,376,874 18.5 13.94 19,195,412 17.4 2000 366 1,108,065 14.9 15.02 16,637,828 15.1 2001 138 977,797 13.1 15.67 15,320,589 13.9 Thereafter 136 1,297,874 17.4 15.90 20,639,137 18.6 ----- --------- ----- ------------ ----- Total 2,541 7,446,684 100.0 $14.84 $110,503,194 100.0 ===== ========= ===== ============ =====
- --------------- (1) Three months from October 1, 1997 through December 31, 1997. Capital Expenditures, Tenant Improvement Costs and Leasing Commissions The Company attempts to control capital expenditures and tenant improvement costs by acting, when possible, as general contractor. In marketing the space in the Office Buildings, the Company relies primarily on its general managers and in-house leasing personnel, rather than on outside brokers. The following table sets forth certain information with respect to the capital expenditures made, and tenant improvement costs and leasing commissions incurred, by the Company in the four years beginning 1993 and on an annualized basis for the nine months ended September 30, 1997. The information set forth below is not necessarily indicative of future capital expenditures, tenant improvement costs and leasing commissions.
------------------------------------------------------------------------------------------------- NUMBER CAPITAL TENANT LEASING OF TOTAL EXPENDITURES TOTAL IMPROVEMENTS TOTAL COMMISSIONS OFFICE CAPITAL PER SQUARE TENANT PER SQUARE LEASING PER SQUARE YEAR BUILDINGS EXPENDITURES FOOT OWNED IMPROVEMENTS FOOT OWNED COMMISSIONS FOOT OWNED ---- --------- ------------ ------------ ------------ ------------ ----------- ----------- 1993(1) 126 $1,680,000 $0.41 $4,534,000 $1.12 $ 598,000 $0.15 1994 219 3,749,000 0.47 7,334,000 0.93 1,112,000 0.14 1995(2) 216 2,991,000 0.39 8,592,000 1.12 1,060,000 0.14 1996 215 2,795,000 0.36 7,873,000 1.03 1,862,000 0.24 1997(3) 225 2,908,000 0.37 7,496,000 0.96 1,599,000 0.20
- --------------- (1) Excludes the 93 buildings acquired on December 21, 1993. (2) Excludes the three buildings sold on July 31, 1995. (3) Annualized as of September 30, 1997 based on amounts incurred through such date. Per square foot calculations are based on the average net rentable square feet owned during 1997, excluding 40,700 net rentable square feet contained in the Grove Building for which construction was completed on September 1, 1997. S-40 41 Development Land The Company owns 100% of the Development Land. Most of the Development Land has infrastructure in place and, except as noted below, is ready for construction. The following table sets forth certain information with respect to the Development Land as of September 30, 1997.
--------------------------------------------------- ESTIMATED GROSS ACREAGE SQUARE FEET GROSS UNDER OF OFFICE PROPERTY LOCATION ACREAGE(1) CONSTRUCTION BUILDING SPACE(2) - ----------------- ---------- ------------ ----------------- FLORIDA Jacksonville Baymeadows 13.3 13.3 211,000 Orlando University 15.5 -- 196,900 St. Petersburg(3) 7.0 -- 120,000 GEORGIA Atlanta Gwinnett 31.0 4.3 490,000 NORTH CAROLINA Charlotte Carmel 27.0 16.6 351,000 Charlotte East 3.9 -- 48,000 Greensboro Wendover 18.5 -- 247,200 SOUTH CAROLINA Greenville Park Central 3.5 -- 78,000 Greenville Roper Mt. 4.5 4.5 73,600 TENNESSEE Memphis Germantown 11.0 5.7 193,000 TEXAS El Paso 2.4 -- 50,000 San Antonio 7.2 -- 141,500 ----- ---- --------- Total 144.8 44.4 2,200,200 ===== ==== =========
- --------------- (1) The table above does not include information with respect to four parcels (approximately 21 acres) of unimproved land which the Company intends to sell. (2) The Company estimates that the Development Land can accommodate 2.2 million gross square feet of building space, although greater density would be allowed under current zoning. As of September 30, 1997, the Company had seven office buildings under construction, containing approximately 678,000 gross square feet, on approximately 44.4 acres of the Development Land. (3) The St. Petersburg Center may require additional permits prior to any future construction. Insurance The Company believes that the Office Buildings are covered by adequate fire, flood and property insurance provided by reputable insurers and with commercially reasonable deductibles and limits. The Company maintains a blanket policy that covers all of its properties. INDEBTEDNESS As of September 30, 1997, the Company had outstanding indebtedness in a principal amount of approximately $202.3 million, which is gross of $194,000 of unamortized discounts. The weighted average interest rate on such indebtedness was 8.29%. Assuming the application of $19.76 million of the net proceeds of the Offering to repay secured indebtedness, the principal amount of indebtedness as of September 30, 1997 would be $182.5 million, with a weighted average interest rate of 8.29%. The debt to be repaid with net proceeds of the Offering consists of (a) approximately $11.6 million of mortgage loans having a weighted average interest rate of 8.82% per annum and a weighted average remaining term to maturity of three years and (b) outstanding borrowings under the Company's secured revolving credit facility ($40.0 million as of December 11, 1997), which borrowings bear interest at a weighted average rate of 8.5% per annum and mature in April 1999. The borrowings under the secured revolving credit facility were incurred to finance the Company's acquisition activities. S-41 42 The following table sets forth certain information regarding indebtedness of the Company as of September 30, 1997, before and after giving effect to the Offering.
------------------------------------------------------------------------------------- WEIGHTED PROCEEDS POST-OFFERING AVERAGE OF OFFERING TOTAL WEIGHTED TYPE OF PRINCIPAL INTEREST APPLIED TO REDUCTION POST-OFFERING AVERAGE INDEBTEDNESS AMOUNT RATE OF INDEBTEDNESS INDEBTEDNESS INTEREST RATE - ------------ -------------- -------- -------------------- -------------- ------------- (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS) Mortgage Loans $194,285 8.32% $11,760 $182,525 8.29% Secured Revolving Credit Facility 8,000 7.66% 8,000 0 -- -------- ------- -------- $202,285 8.29% $19,760 $182,525 8.29% ======== ======= ========
Description of Debt On December 18, 1996, the Company closed a $190 million non-recourse loan with Northwestern which is secured by substantially all of the Office Buildings in ten Koger Centers. This loan is divided into (a) a tranche in the amount of $100.5 million ($94.7 million which has been drawn) with a 10 year maturity and an interest rate of 8.25 percent and (b) a tranche in the amount of $89.5 million with a maturity of 12 years and an interest rate of 8.33 percent. The Company may draw the remaining loan proceeds at any time up to March 31, 2000. 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 which include an interest coverage ratio, a debt limitation and net worth requirement. On April 7, 1997, the Company closed on a $50 million secured revolving credit facility provided by First Union National Bank of Florida and Morgan Guaranty Trust Company of New York. Based on the Company's election, the interest rate on this secured revolving credit facility is either (a) LIBOR rate plus 200 basis points or (b) the lender's prime rate. Interest payments are due monthly and the revolving credit facility has a term of two years. This secured revolving credit facility requires the Company to maintain certain financial ratios which include debt limitations, a dividend limitation and debt service ratios. Future Debt Maturities Assuming the application of $19.76 million of proceeds from the Offering to repay indebtedness, the annual maturities of indebtedness as of September 30, 1997 would be as follows (in thousands):
YEAR ENDING -------- DECEMBER 31 TOTAL - ----------- -------- 1997 $ 564 1998 2,505 1999 2,721 2000 3,043 2001 3,316 Thereafter 170,376 -------- Total $182,525 ========
S-42 43 MANAGEMENT OFFICERS AND NON-EXECUTIVE DIRECTORS OF THE COMPANY The Company has experienced management in all areas of its business. The 13 officers listed below have worked with the Koger organization an average of more than 21 years.
YEARS WITH THE NAME AGE(1) POSITION ORGANIZATION(1) ---- ------ -------- --------------- Officers Victor A. Hughes, Jr. 61 Chairman of the Board, Chief Executive Officer, 15 Chief Financial Officer and Director James C. Teagle 55 President, Chief Operating Officer and Director 25 Robert N. Bridger 61 Senior Vice President 35 James L. Stephens 40 Vice President and Chief Accounting Officer 10 W. Lawrence Jenkins 53 Vice President of Administration and Corporate 27 Secretary G. Danny Edwards 46 Treasurer 18 Michael F. Beale 44 Vice President and Assistant Secretary 12 Philip J. Bruce 54 Vice President 24 Wade L. Hampton 68 Vice President 32 James W. Walker 58 Vice President 20 Kenneth D. Lund 50 Vice President 18 Bryan P. Howell 50 Vice President 16 J. Velma Keen, II 52 Vice President 24 Non-Executive Directors D. Pike Aloian 43 Director 4 Benjamin C. Bishop, Jr. 65 Director 6 Irvin H. Davis 68 Vice Chairman and Director 30 David B. Hiley 59 Director 4 John R. S. Jacobsson 29 Director 2 months G. Christian Lantzsch 72 Director 8 William L. Mack 57 Director 1 Lee S. Neibart 47 Director 1 George F. Staudter 66 Director 4 S. D. Stoneburner 79 Director 33
- --------------- (1) As of September 30, 1997. VICTOR A. HUGHES, JR. was elected Chairman and Chief Executive Officer of the Company on June 21, 1996. Mr. Hughes has served as Chief Financial Officer of the Company since March 31, 1991. He also served as President from August 22, 1995 through November 14, 1997. He held the positions of Senior Vice President of the Company from May 20, 1991 through August 21, 1995, and Vice President from April 1, 1990 through May 20, 1991. Mr. Hughes was also Assistant Secretary of the Company from March 11, 1991 through December 21, 1993. He is a member of the Executive and Finance Committees of the Board of Directors of the Company. Mr. Hughes was elected to the Board of Directors of the Company on July 27, 1992. JAMES C. TEAGLE has been President and Chief Operating Officer of the Company since November 14, 1997. He has previously held the positions of Executive Vice President and Chief Operating Officer of the Company from June 21, 1996 to November 14, 1997, Senior Vice President of the Company since May 10, 1994, and Vice President of the Company from December 21, 1993 to May 10, 1994. Mr. Teagle was a Vice President of KPI from July, 1973 to December 21, 1993. Mr. Teagle was elected to the Board of Directors of the Company on October 10, 1996. S-43 44 ROBERT N. BRIDGER has served as Senior Vice President of the Company since November 14, 1997. He previously served as Vice President of the Company from May 10, 1994 to November 14, 1997. He is responsible for engineering, design, construction and technical support as well as energy management and maintenance programs for the Company. Mr. Bridger was Senior Vice President of Development of KPI from August 6, 1985 to December 21, 1993, Vice President of Construction/ Development of KPI from 1970 to 1985. JAMES L. STEPHENS has been Vice President of the Company since May 7, 1996, and was the Treasurer of the Company from March 31, 1991 to May 7, 1996. He has served as Chief Accounting Officer of the Company since March 31, 1991. He held the position of Assistant Secretary of the Company from May 20, 1991 through December 21, 1993. W. LAWRENCE JENKINS has been the Corporate Secretary of the Company since December 21, 1993, and Vice President of the Company since May 10, 1994. Mr. Jenkins served as Corporate Secretary of KPI from June 7, 1973 through December 21, 1993, and as Vice President/Administration of KPI from August 7, 1990 through December 21, 1993. MICHAEL F. BEALE has served as Vice President of the Company since May 10, 1994. He is responsible for the acquisition and disposition of real estate assets. Mr. Beale was Vice President of Real Estate of KPI from 1990 to December 21, 1993. PHILIP J. BRUCE has served as Vice President of the Company since May 10, 1994. He is responsible for the day-to-day implementation of the Company's development and construction programs including building design, building systems, site design, master planning of the office parks as well as ADA compliance and environmental hazard abatement. Mr. Bruce was Vice President of KPI from February 2, 1982 to December 21, 1993. DANNY G. EDWARDS has served as Treasurer of the Company since May 7, 1996. He previously served as Treasurer of KPI from January 31, 1989 to December 21, 1993. WADE L. HAMPTON has served as Vice President of the Company since December 21, 1993. He is responsible for developmental and motivational training programs for the Company and for providing promotional material for National Marketing and leasing and sales staffs. Mr. Hampton was Senior Vice President of Marketing of KPI from February 2, 1982 to December 21, 1993, and Vice President of KPI from 1970 to 1982. BRYAN F. HOWELL has served as Vice President of the Company since May 10, 1994. In this position, he serves as a Division Manager for Koger Centers, and is responsible for overseeing General Managers and their staffs, recommending new locations for expansion, new building starts, master plan changes and land sales, and reviewing and approving leases with respect to the desired return on assets and net rent criteria. Mr. Howell served as Vice President/Operations of KPI from January 29, 1985 to December 21, 1993. J. VELMA KEEN, III has served as Vice President of the Company since May 10, 1994. In this position, he serves as a Division Manager for Koger Centers, and is responsible for overseeing General Managers and their staffs, recommending new locations for expansion, new building starts, master plan changes and land sales, and reviewing and approving leases with respect to the desired return on assets and net rent criteria. Mr. Keen served as Vice President/Operations of KPI from January 29, 1985 to December 21, 1993. KENNETH D. LUND has served as Vice President of the Company since May 7, 1996. He is responsible for providing training programs for field personnel, developing field operational procedures, and assuring compliance with those procedures. Mr. Lund served as a General Manager of the Austin Koger Center from February 16, 1982 to February 16, 1995, at which time he became Manager of Field Training. JAMES W. WALKER has served as Vice President of the Company since May 10, 1994. Mr. Walker is responsible for directing marketing and sales material and campaigns for the Company. From January 29, 1985 to December 21, 1993, Mr. Walker served as Vice President of KPI. During that time, he was Vice President and Regional Manager over five Koger Centers. D. PIKE ALOIAN has been a Director of the Company since December 1993 and is a member of the Audit and Finance Committees of the Board of Directors of the Company. Mr. Aloian is a Managing Director of Rothschild Realty Inc., an affiliate of Rothschild Inc., an investment banking firm which served as financial advisor to the Creditors' Committee with respect to the bankruptcy cases of KPI and TKP. Mr. Aloian is also an adjunct Professor of Finance and Economics at the Columbia University Graduate School of Business; a Director of the Charter Oak Group, Ltd., a privately-held retail properties real estate management company; a Director of Angeles Corporation (a firm specializing in the liquidation of loans to and equity interests in various real estate investment partnerships); and a former Vice President of The Harlan Company, Inc., a real estate development and advisory service firm. BENJAMIN C. BISHOP, JR. has been a Director of the Company since 1991 and is a member of the Audit Committee and Chairman of the Litigation and Indemnification Committee of the Board of Directors of the Company. Mr. Bishop is Chairman S-44 45 of the Board of Allen C. Ewing & Company, an investment banking firm; a former Director of Grubb & Ellis Company, a national commercial real estate brokerage company; a former Trustee of GMR Properties, a real estate investment trust; and a former Director of Cousins Properties, Inc., a real estate investment trust. IRVIN H. DAVIS has served as a Director of the Company since 1991 and as Vice Chairman since August 1995 and has been a consultant to the Company since January 1997. He previously served the Company as President and Chief Executive Officer. Mr. Davis is a member of the Litigation and Indemnification Committee of the Board of Directors of the Company. DAVID B. HILEY has been a Director of the Company since May 1993 and is a member of the Compensation Committee and Chairman of the Finance Committee of the Board of Directors of the Company. Mr. Hiley is a financial consultant; a former Managing Director of Berkshire Capital Corporation, an investment banking services firm; a Director and former Senior Executive Vice President of Thomson McKinnon Securities Inc., a securities broker dealer; a consultant, Director and former Executive Vice President of Thomson McKinnon Inc., a financial services holding company; and a Director of Newcity Communications, Inc., a communications firm. JOHN R. S. JACOBSSON has been a Director of the Company since August 1997. Mr. Jacobsson is a Partner responsible for investments at Apollo Real Estate Advisors (manager of three real estate investment funds); and a Director of Metropolis Realty Trust, Inc. (owner of high rise office buildings). He is a member of the Compensation and Finance Committees of the Board of Directors of the Company. G. CHRISTIAN LANTZSCH has been a Director of the Company since 1989 and is Chairman of the Audit Committee and a member of the Compensation and Litigation and Indemnification Committees of the Board of Directors of the Company. Mr. Lantzsch is a retired Director of Duquesne Light Company; a retired Vice Chairman of the Board of Directors and Treasurer of Mellon Bank Corporation; and a retired Vice Chairman and Chief Financial Officer of Mellon Bank, N.A. WILLIAM L. MACK has been a Director of the Company since October 1996, and is a member of the Executive Committee of the Board of Directors of the Company. Mr. Mack is Senior Partner of Apollo Real Estate Advisors (manager of three real estate investment funds); President and a Senior Partner of the Mack Organization (national owner, developer and investor in office and industrial buildings and other real estate investments); a Director of The Bear Stearns Companies Inc.; Chairman of the Board of Metropolis Realty Trust, Inc. (owner of high rise office buildings); and a Director of Vail Resorts, Inc. (owner and operator of ski resorts). LEE S. NEIBART has been a Director of the Company since October 1996 and is a member of the Audit Committee and the Litigation and Indemnification Committee of the Board of Directors of the Company. He is Partner in charge of portfolio and asset management at Apollo Real Estate Advisors (manager of three real estate investment funds); former Executive Vice President and Chief Operating Officer of the Robert Martin Company (a real estate development and management firm); a Director of Allright Corporation (owner and operator of parking facilities); a Director of Atlantic Gulf Communities Corporation (a land development company); a Director of Meadowbrook Golf Group, Inc. (a golf management company); a Director and President of Metropolis Realty Trust, Inc. (owner of high rise office buildings); a Director of NextHealth, Inc. (operator of wellness and spa facilities); and a Director of Roland International, Inc. (a land development company). GEORGE F. STAUDTER has been a Director of the Company since May 1993, and is a member of the Executive Committee and Chairman of the Compensation Committee of the Board of Directors of the Company. Mr. Staudter is a managerial and financial consultant. He is a Director of Waterhouse Investors Cash Management Funds, Inc. (a family of mutual funds) and a former Director of Waterhouse Investor Services, Inc. (a securities broker-dealer); former President, Chief Executive Officer and Director of Family Steak Houses of Florida, Inc. (a restaurant chain), a former Principal of Douglas Capital Management (a registered investment advisor) and a former Vice President and Treasurer of Revlon, Inc. (a cosmetics manufacturer and marketer). S.D. STONEBURNER has been a Director of the Company since 1988. He previously served the Company as Chairman of the Board of Directors, President and Chief Financial Officer. Mr. Stoneburner is Chairman of the Executive Committee of the Board of Directors. S-45 46 FEDERAL INCOME TAX CONSIDERATIONS The following summary of certain federal income tax considerations relating to the Company is based on the Code, is for general information only and is not intended to constitute tax advice. The tax treatment of a holder of any of the Common Stock of the Company may vary depending on such holder's personal investment and tax circumstances and as between different types of shareholders subject to special treatment under the Code (including insurance companies, tax-exempt organizations, financial institutions, broker dealers, foreign corporations and other persons who are not domestic shareholders (defined below)). The summary does not address all possible federal tax issues, nor does the summary discuss any state, local, or foreign tax considerations. Further, the statements in this discussion and the opinion of Ropes & Gray (discussed below) are based on current provisions of the Code, current, temporary and proposed Treasury Regulations, the legislative history of the Code, existing administrative rulings and practices of the Service, and judicial decisions. No assurance can be given that future legislative, judicial, or administrative actions or decisions, which may be retroactive in effect, will not affect the accuracy of any statements in this Prospectus Supplement. EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND THE CONSEQUENCES OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. TAXATION OF THE COMPANY AS A REIT The Company was organized and elected to be taxed as a REIT in 1988. The Company believes that it was organized, has operated and that it will be able to continue to operate in such a manner as to meet the requirements for qualification and taxation as a REIT under the Code, and the Company intends to continue to operate in such a manner, although no assurance can be given that it will at all times so qualify. Ropes & Gray, special tax counsel to the Company, has reviewed with the officers of the Company the organizational and operational requirements for REIT qualification. Based upon information and data provided by the Company in connection with that review, Ropes & Gray is of the opinion that, for federal income tax purposes, (a) the Company has properly elected and otherwise qualified to be taxed as a REIT with respect to relevant taxable years ending prior to January 1, 1997, and (b) the Company is in a position to continue to qualify to be taxed as a REIT for the Company's current taxable year. Code provisions governing eligibility for taxation as a REIT are technical and complex. Qualification and taxation as a REIT depends in part upon an entity's having met, and its ability to meet, as a factual matter, certain operating tests, distribution requirements, diversity of stock ownership requirements and other qualification tests imposed by the Code. It must be emphasized that Ropes & Gray's opinion is based in part on certain assumptions and the accuracy of representations as to factual matters made by the Company. Opinions of Ropes & Gray have no binding effect or official status of any kind, and in the absence of a ruling from the Service, there can be no assurance that the Service will not challenge the conclusion or propriety of any of Ropes & Gray's opinions. As a REIT, provided certain detailed conditions imposed by the REIT provisions of the Code are met, the Company generally would not be subject to federal income tax on that portion of its ordinary income and net capital gain that is currently distributed to shareholders (subject to certain exceptions described below). This treatment substantially eliminates the "double taxation" (i.e., taxation at both the corporate and shareholder levels) that usually results from the use of corporate investment vehicles. However, the Company will be taxed at regular corporate rates on any of its income that is not distributed to its shareholders. See "--Taxation of the Company" for a further discussion of this matter. As the discussion set forth below indicates, continued qualification of the Company as a REIT depends on meeting Code requirements that may not be wholly within the Company's control. Accordingly, no assurance can be given that the Company will be able to operate in a manner so as to remain qualified as a REIT in any particular year. If the Company fails to qualify as a REIT in any year, it will be subject to federal income tax as if it were a domestic corporation, and its shareholders will be taxed in the same manner as shareholders of ordinary corporations. In this event, the Company could be subject to potentially significant tax liabilities, and the amount of cash available for distribution to its shareholders could be materially reduced. Moreover, a REIT that fails to qualify for REIT taxation in any year may not reelect REIT status for any taxable year prior to the fifth taxable year beginning after the taxable year of disqualification unless it can establish that its failure to qualify was due to reasonable cause and not due to willful neglect and it meets certain other requirements. S-46 47 REQUIREMENTS FOR QUALIFICATION AS A REIT The Code defines a real estate investment trust as a corporation, trust or unincorporated association (a) which is managed by one or more trustees or directors; (b) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (c) which would be taxable as a domestic corporation but for Sections 856 through 860 of the Code; (d) which is neither a financial institution nor an insurance company subject to certain provisions of the Code; (e) the beneficial ownership of which is held by 100 or more persons; (f) not more than 50% in value of the outstanding stock of which is owned, directly or indirectly, after applying certain constructive ownership rules, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of any taxable year (the "five or fewer test"); and (g) which meets certain other tests, described below, under the headings "Asset Tests," "Gross Income Tests," and "Annual Distribution Requirements." In an effort to ensure compliance with the ownership tests described in clauses (e) and (f) of the preceding paragraph, the Company's charter contains certain restrictions on the acquisition and transfer of its stock to prevent concentration of stock ownership that could adversely affect the Company's qualification as a REIT. Moreover, to evidence compliance with these ownership requirements, the Company must maintain records which are generally intended to disclose the actual ownership of its outstanding stock. In fulfilling its obligations to maintain records, the Company is required to and will demand written statements each year from the record holders of designated percentages of its stock disclosing the actual owners of such stock. A list of those persons failing or refusing to comply with such demand must be maintained as part of the Company's records. A shareholder failing or refusing to comply with the Company's written demand is required by the Treasury Regulations to submit with his tax returns a similar statement disclosing the actual ownership of stock and certain other information. Under the Taxpayer Relief Act of 1997, enacted on August 5, 1997 (the "Taxpayer Relief Act"), for the Company's taxable years commencing on or after January 1, 1998, if the Company complies with the demand letter requirement, but does not know, and exercising reasonable diligence would not have known, whether it satisfied the five or fewer test, the Company will be treated as having met such requirement. For 1998 and future years, if the Company were to fail to comply with the demand letter requirement for any year, it would be subject to certain prescribed penalties rather than loss of its status as a REIT. Asset Tests At the close of each quarter of the Company's taxable year, the Company must satisfy two tests relating to the nature and diversification of its assets. First, at least 75% of the value of the Company's total assets must be represented by interests in real property, interests in mortgages on real property, shares in other REITs, cash, cash items and government securities (as well as certain temporary investments in stock or debt instruments purchased with the proceeds of new capital raised by the Company). Second, although the remaining 25% of the Company's assets generally may be invested without restriction, except for stock of qualified REIT subsidiaries, securities in this class may not exceed either (a) 5% of the value of the Company's total assets as to any one non-government issuer or (b) 10% of the outstanding voting securities of any one issuer. Under the Code, all assets, liabilities, and items of income, deduction, and credit of any qualified REIT subsidiary will be treated as owned and realized directly by the Company. The Company has two qualified REIT subsidiaries, Southeast and KRES. The Company owns 100% of the nonvoting, participating preferred stock, but none of the voting common stock, of KRSI, a corporation providing management and leasing services with respect to certain office buildings not owned by the Company. The Company does not believe that the value of the KRSI nonvoting, participating preferred stock exceeds 5% of the total value of the Company's assets. No independent appraisals have been obtained to support this conclusion. Ropes & Gray, in rendering its opinion as to the qualification of the Company as a real estate investment trust, is relying on the representation of the Company as to the value of the KRSI preferred stock. There can be no assurance that the Service might not contend that the value of the KRSI preferred stock held by the Company exceeds 5% of the value of the Company's total assets. Gross Income Tests There are currently three separate percentage tests relating to the sources of the Company's gross income which must be satisfied for each taxable year of the Company, each of which is described below. The 75% Test At least 75% of the Company's gross income for the taxable year must be "qualifying income." Qualifying income generally includes (a) rents from real property (except as modified below); (b) interest on obligations collateralized by mortgages on, or interests in, real property; (c) gains from the sale or other disposition of interests in real property and real estate mortgages, other than gain from property held primarily for sale to customers in the ordinary course of the Company's trade or business ("dealer property"); (d) dividends or other distributions with respect to shares in other REITs, as well as gain from the sale of such shares; (e) abatements and refunds of real property taxes; (f) income from the operation, and gain from the sale, of S-47 48 property acquired at or in lieu of a foreclosure of the mortgage collateralized by such property ("foreclosure property"); and (g) commitment fees received for agreeing to make loans collateralized by mortgages on real property or to purchase or lease real property. The 95% Test In addition to deriving at least 75% of its gross income from the sources listed above, at least 95% of the Company's gross income for the taxable year must be comprised of qualifying income, as described in the preceding paragraph, or dividends, interest or gain from the sale or disposition of stock or other securities that are not dealer property. Dividends and interest on any obligation not collateralized by an interest in real property are included for purposes of the 95% test, but not for purposes of the 75% test. For purposes of determining whether the Company complies with the 75% and 95% gross income tests, gross income does not include income from prohibited transactions. A "prohibited transaction" is a sale of dealer property, excluding certain property held by the Company for at least four years and foreclosure property. See "--Taxation of the Company". For purposes of both the 75% test and the 95% test, rents received from a tenant will not qualify as rents from real property if the Company, or an owner of 10% or more of the Company, directly or constructively owns 10% or more of such tenant (a "related party tenant") or a subtenant of such tenant (in which case only rent attributable to the subtenant is disqualified). In addition, if rent attributable to personal property, which may only be leased in connection with a lease of real property, is greater than 15% of the total rent received under the applicable lease, the portion of rent attributable to such personal property will not qualify as rents from real property. Moreover, an amount received or accrued generally will not qualify as rents from real property (or as interest income) for purposes of the 75% and 95% gross income tests if it is based in whole or in part on the income or profits of any person. Rent or interest will not be disqualified, however, solely by reason of being based on a fixed percentage or percentages of gross receipts or sales. Finally, for rents received to qualify as rents from real property, the Company generally must not operate or manage the property or furnish or render services to tenants of such property, other than through an "independent contractor" who is adequately compensated and from whom the Company derives no revenue. The "independent contractor" requirement, however, does not apply to the extent that the services provided by the Company are "usually or customarily rendered" in connection with the rental of real property solely for occupancy in the geographic area in which the property is located (i.e., services that are not considered "rendered to the occupant"). Under current law, if the Company were to provide any impermissible tenant services in respect of a property, no rent from such property would qualify as rents from real property. Effective as of January 1, 1998, however, a de minimis rule will apply. Under such rule, as long as any income accrued during a taxable year by the Company for impermissible tenant services provided in respect of a property does not exceed 1% of all amounts accrued during such year directly or indirectly with respect to such property, only the income from the impermissible tenant services provided in respect of such property will fail to qualify as rents from real property. The Company is a self-managed REIT and provides certain services with respect to its properties and will provide such services with respect to any newly acquired properties. The Company believes and has represented that the services now provided by the Company are limited to services usually or customarily rendered in connection with the rental of space for occupancy only, and therefore that the provision of such services will not cause the rents received with respect to the properties to fail to qualify as rents from real property for purposes of the 75% and 95% gross income tests. The Company has not and does not intend to (i) charge rent for any property that is based in whole or in part on the income or profits of any person (other than being based on a percentage of receipts or sales), (ii) receive rents in excess of a de minimis amount from related party tenants, (iii) derive rents attributable to personal property which constitute greater than 15% of the total rents received under the lease, (iv) perform services that are not considered usual or customary or (v) perform services that are considered to be rendered to the occupant of property, other than through an independent contractor from whom the Company derives no income. The Company will endeavor to hold and manage the properties in a manner that will give rise to rental income qualifying under the 75% and 95% gross income tests. Gains on sales of the properties will generally qualify under the 75% and 95% gross income tests. However, the Company derives and expects to continue to derive management fees from the management of property owned by others. This fee income is not qualifying income, dividends, interest or gains and if the amount thereof, together with any other income that could not be counted towards satisfaction of the 95% test, should exceed 5% of gross income of the Company in any taxable year, the receipt of such fee income would adversely affect the Company's qualification as a REIT. The Company currently does not expect that its management fee income, together with other income that cannot be counted towards satisfaction of the 95% test, will exceed 5% of gross income in any taxable year. As described above, the Company owns all of the non-voting stock of KRSI, a corporation that is taxable as a regular corporation. KRSI provides management and leasing services for real properties owned by third parties. The income earned by KRSI would be nonqualifying income if earned directly by the Company; as a result of the ownership structure described S-48 49 above, the income will be earned by and taxed to KRSI. Dividends paid by KRSI to the Company will be counted towards satisfaction of the 95% gross income test. Even if the Company fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may still qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions will generally be available if: (a) the Company's failure to comply was due to reasonable cause and not to willful neglect; (b) the Company reports the nature and amount of each item of its income included in the 75% and 95% gross income tests on a schedule attached to its tax return; and (c) any incorrect information on this schedule is not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances the Company would be entitled to the benefit of these relief provisions. If these relief provisions apply, however, the Company will still be subject to a special tax upon the greater of the amount by which it fails either the 75% or 95% gross income test for that year. The 30% Test For its 1997 and all prior taxable years, the Company must derive less than 30% of its gross income for each taxable year from the sale or other disposition of (a) real property held for less than four years (other than foreclosure property and property exchanged in an involuntary conversion), (b) stock or securities held for less than one year, and (c) property disposed of in a prohibited transaction. The Company has complied with this test in the past and does not anticipate that it will have any difficulty in complying with this test for 1997. Effective as of January 1, 1998, the Company will no longer be required to satisfy the 30% test for federal income tax purposes. However, the Company may be required to comply, and, if so required, will comply, with the 30% test for state income tax purposes until such time as the laws of the relevant states are amended to reflect the recent repeal at the federal level of the 30% test. Annual Distribution Requirements The Company, in order to qualify as a REIT, is required to distribute dividends (other than capital gains dividends) to its shareholders each year in an amount at least equal to (a) the sum of (i) 95% of the Company's REIT taxable income for such year (computed without regard to the dividends-paid deduction and the REIT's net capital gain) and (ii) 95% of the net income (after tax), if any, from foreclosure property, minus (b) the sum of certain items of non-cash income. To the extent permitted, certain net operating loss carry forwards acquired by the Company upon the Merger may be taken into account in determining REIT taxable income and therefore the distribution requirement. Such distributions as are required to maintain the Company's REIT status must be paid in the taxable year to which they relate, or in the following taxable year if declared before the Company timely files its tax return for the earlier year and if paid on or before the first regular dividend payment after such declaration. To the extent that the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its REIT taxable income, as adjusted, it will be subject to tax on the undistributed amounts at regular corporate tax rates; provided, however, that as discussed below under "Taxation of Domestic Shareholders," effective for taxable years of the Company beginning on or after January 1, 1998, the Company's shareholders may claim a credit for taxes paid by the Company in respect of undistributed net capital gains if the Company so elects. Furthermore, if the Company should fail to distribute during each calendar year at least the sum of (A) 85% of its ordinary income for such year, (B) 95% of its capital gain net income for such year, and (C) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of the required distribution over the amounts actually distributed. Dividends declared by the Company in October, November or December of a calendar year payable to shareholders of record on a specified date in any such month will be deemed to have been paid by the Company and received by each shareholder on December 31 of such year as long as they are actually paid in January of the following year. The Company intends to make timely distributions sufficient to satisfy the annual distribution requirements. However, it is possible that the Company may not have sufficient cash or other liquid assets to meet the 95% distribution requirement, due to timing differences between the actual receipt of income and the actual payment of expenses on the one hand and the inclusion of such income and the deduction of such expenses in computing the Company's REIT taxable income on the other hand. Similarly, it is possible that, under some circumstances, a disposition of depreciated property by the Company may produce income or gain that exceeds the cash proceeds of such disposition available for distribution. To avoid any problem with the 95% distribution requirement, the Company will closely monitor the relationship between its REIT taxable income and cash flow and, if necessary, may seek to sell assets or borrow funds in order to satisfy the distribution requirement. The Company may be required to raise funds at a time when market conditions are not favorable and loan covenants restrict borrowing. If the Company fails to meet the 95% distribution requirement as a result of an adjustment to the Company's tax return by the Service, the Company may retroactively cure any failure by paying a "deficiency dividend" (plus applicable penalties and interest) within a specified period if certain requirements are satisfied. However, should such a situation arise, there is no assurance that the Company will be in a financial position to pay a deficiency dividend. S-49 50 Failure to Qualify If the Company fails to qualify for taxation as a REIT in any taxable year and the relief provisions do not apply, the Company will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to shareholders in any year in which the Company fails to qualify will not be deductible by the Company, nor will they be required to be made. In such event, to the extent of the Company's current and accumulated earnings and profits, all distributions to shareholders will be taxable as ordinary income, and, subject to certain limitations in the Code, corporate distributees may be eligible for the dividends-received deduction. Unless entitled to relief under specific statutory provisions, the Company also will be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether the Company would be entitled to such statutory relief. TAXATION OF THE COMPANY In any year in which the Company qualifies as a REIT, in general it will not be subject to federal income tax on that portion of its net income that it distributes to shareholders. This treatment substantially eliminates the "double taxation" on income at the corporate and shareholder levels that generally results from investment in a corporation. However, the REIT will be subject to federal income tax as follows: First, the REIT will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains (although, as discussed below under "Taxation of Taxable Domestic Shareholders," effective for taxable years of the Company beginning on or after January 1, 1998, if the Company so elects, its shareholders may claim a credit for taxes paid by the Company in respect of undistributed net capital gains). Second, under certain circumstances, a REIT may be subject to the "alternative minimum tax" on its items of tax preference, including alternative minimum taxable income attributable to its use of net operating loss carryforwards. Third, if the REIT has (a) net income from the sale or other disposition of "foreclosure property" which is held primarily for sale to customers in the ordinary course of business or (b) other non-qualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. Fourth, if the REIT has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than foreclosure property), such income will be subject to a 100% tax. Under existing law, whether property is held primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances with respect to the particular transaction. The Company has represented that it holds its real property for investment with a view to long-term appreciation, is engaged in the business of acquiring, developing, owning and operating the properties and makes such occasional sales of the properties as are consistent with the investment objectives of the Company. There can be no assurance, however, that the Service would not contend that one or more of sales of Company property is subject to the 100% penalty tax. Fifth, if the REIT should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed above) but has nonetheless maintained its qualification as a real estate investment trust because certain other requirements have been met, it will be subject to a 100% tax on the net income attributable to the greater of the amount by which the REIT fails the 75% or 95% test, multiplied by a fraction intended to reflect the Company's profitability. Sixth, if the REIT should fail to distribute during each calendar year at least the sum of (i) 85% of its ordinary income for such year, (ii) 95% of its capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, the REIT would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Seventh, if the REIT acquires any asset from a C corporation (i.e., generally a corporation subject to full corporate-level tax) in a transaction in which the basis of the asset in the REIT's hands is determined by reference to the basis of the asset (or any other property) in the hands of the C corporation, and the REIT subsequently recognizes gain on the disposition of such asset during the 10-year period beginning on the date on which such asset was acquired by the REIT, then, to the extent of any built-in gain at the time of acquisition, such gain will be subject to tax at the highest regular corporate rate pursuant to guidelines set forth by the Service in Notice 88-19, assuming the REIT makes an election pursuant to Notice 88-19. KPI was a C corporation, but the Company does not believe there was a net built-in gain with respect to the property acquired from KPI and has not made any election under Notice 88-19. TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS The following discussion of the taxation of persons owning Common Stock in the Company is intended for taxable domestic shareholders only. As used herein, the term "domestic shareholder" means a holder of Common Stock that for U.S. federal income tax purposes is (i) a citizen or resident of the United States, (ii) a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) an estate, the income of which is subject to United States federal income taxation regardless of its source, or (iv) a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust. This discussion assumes that the Common Stock constitutes a capital asset in the hands of the shareholder. S-50 51 Dividends and Other Distributions As long as the Company qualifies as a REIT, distributions made to the Company's taxable domestic shareholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by them as ordinary income and will not be eligible for the dividends-received deduction for corporations. Subject to the discussion below regarding changes to the capital gains tax rates, distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed the Company's actual net capital gain for the taxable year) without regard to the period for which the holder has held its Common Stock. However, corporate holders may be required to treat up to 20% of certain capital gain dividends as ordinary income. Distributions in excess of current and accumulated earnings and profits will not be taxable to a holder to the extent that they do not exceed the adjusted tax basis of the holder's shares, but rather will be treated as a return of capital and reduce the adjusted basis of such shares. To the extent that such distributions exceed the adjusted basis of a holder's shares, they will be included in income as long-term capital gain if the holder has held its shares for more than 12 months and otherwise as short-term capital gain, subject to the discussion below regarding changes to capital gains tax rates. In addition, any dividend declared by the Company in October, November or December of any year payable to a shareholder of record on a specified date in any such month shall be treated as both paid by the Company and received by the shareholder on December 31 of such year, provided that the dividend is actually paid by the Company during January of the following calendar year. Shareholders may not include in their individual income tax returns any net operating losses or capital losses of the Company. Instead, such losses would be carried over by the Company for potential offset against its future income (subject to certain limitations). Taxable distributions from the Company and gain from the disposition of Common Stock will not be treated as passive activity income and, therefore, shareholders generally will not be able to apply any "passive activity losses" (such as losses from certain types of limited partnerships in which the shareholder is a limited partner) against such income. In addition, taxable distributions from the Company generally will be treated as investment income for purposes of the investment interest limitations. Capital gains from the disposition of shares of Common Stock (or distributions treated as such) will be treated as investment income only if the shareholder so elects, in which case such capital gains will be taxed at ordinary income rates. The Company will notify shareholders after the close of the Company's taxable year as to the portions of the distributions attributable to that year that constitute each of (i) distributions taxable at ordinary income tax rates, (ii) capital gains dividends and (iii) returns of capital. The Company may elect to retain and pay income tax on its net capital gain received during the taxable year. For taxable years beginning after December 31, 1997, if the Company so elects for a taxable year, the Company's shareholders would include in income as long-term capital gains their proportionate share of such portion of the Company's undistributed net capital gain for the taxable year as the Company may designate. A shareholder would be deemed to have paid his share of the tax paid by the Company on such undistributed net capital gain, which would be credited or refunded to the shareholder. The shareholder's basis in his shares of Common Stock would be increased by the amount of undistributed net capital gain included in the shareholder's income, less the capital gains tax paid by the Company. The Taxpayer Relief Act alters the taxation of capital gain income. Under the Taxpayer Relief Act, individuals, estates and trusts who hold certain investments for more than 18 months may be taxed at a maximum long-term capital gain rate of 20% on the sale or exchange of those investments. Individuals, estates and trusts who hold certain assets for more than 12 months but no more than 18 months may be taxed at a maximum rate of 28% on the sale or exchange of those investments. The Taxpayer Relief Act also provides a maximum rate of 25% for "unrecaptured section 1250 gain" for individuals, estates and trusts, special rules for "qualified 5-year gain," as well as other changes to prior law. The Taxpayer Relief Act allows the Service to prescribe regulations on how the Act's new capital gain rates will apply to sales of capital assets by "pass-thru entities," which include REITs such as the Company. To date regulations have not yet been promulgated. However, in Notice 97-64, issued on November 10, 1997, the Service indicated that the regulations will provide that whether capital gain dividends are taxed at the 28%, 25% or 20% rate will be determined by reference to the Company's holding period in the property that generates the gain and the amount of unrecaptured straight-line depreciation attributable to such property. Investors are urged to consult their own tax advisors with respect to the new rules contained in the Taxpayer Relief Act. Sale of Common Stock On the sale of shares of Common Stock, gain or loss will be recognized by a holder in an amount equal to the difference between (a) the amount of cash and fair market value of any property received on such sale (less any portion thereof attributable to accumulated and declared but unpaid dividends, which will be taxable as a dividend to the extent of the Company's current or accumulated earnings and profits), and (b) the holder's adjusted basis in the Common Stock. Such gain or loss (unless recognized by a dealer in securities) will be long-term gain or loss if the shares of Common Stock have been held for more than one year and otherwise will be short-term capital gain or loss; provided, that gain recognized by individuals, trusts and estates in respect of shares held for more than 18 months will be taxed as "adjusted net capital gain," taxable at a 20% rate, and in respect of shares held for more than 12 months but not more than 18 months will be taxed as S-51 52 "mid-term capital gain," taxable at a 28% rate. In general, any loss upon a sale or exchange of shares by a holder who has held such shares for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss to the extent of distributions from the Company required to be treated by such holder as long-term capital gain, subject to the possible modification of this rule as applied to shareholders who are individuals, trusts or estates, to reflect the new capital gains rate schedule introduced by the Taxpayer Relief Act. All or a portion of any loss realized upon a taxable disposition of shares of Common Stock may be disallowed if other shares of Common Stock are purchased within 30 days before or after the disposition. Backup Withholding and Information Reporting The Company will report to its domestic shareholders and the Service the amount of distributions paid during each calendar year and the amount of tax withheld, if any. Under the backup withholding rules, a shareholder may be subject to backup withholding at the rate of 31% with respect to distributions paid unless such holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (b) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A shareholder that does not provide the Company with his correct taxpayer identification number may also be subject to penalties imposed by the Service. Any amount paid as backup withholding will be creditable against the shareholder's income tax liability. In addition, the Company may be required to withhold a portion of capital gain distributions to any shareholders who fail to certify their non-foreign status to the Company. On October 6, 1997, the Service released regulations that will revise certain procedures for backup withholding and information reporting, effective generally as of January 1, 1999. The regulations impose more stringent requirements to be followed by non-U.S. persons, and financial intermediaries acting on behalf of such non-U.S. persons, for establishing such non-U.S. persons' non-U.S. status for the purpose of the withholding rules. TREATMENT OF TAX-EXEMPT SHAREHOLDERS Dividends from the Company to a tax-exempt employee pension trust or other domestic tax-exempt shareholder generally will not constitute "unrelated business taxable income" ("UBTI") unless the shareholder has borrowed to acquire or carry its shares of Common Stock. Qualified trusts that hold more than 10% (by value) of the shares of certain REITs, however, may be required to treat a certain percentage of such a REIT's distributions as UBTI. This requirement will apply only if (i) the REIT would not qualify as such for Federal income tax purposes but for the application of a "look-through" exception to the "five or fewer test" applicable to shares held by qualified trusts and (ii) the REIT is "predominantly held" by qualified trusts. A REIT is predominantly held by qualified trusts if either (i) a single qualified trust holds more than 25% by value of the interests in the REIT or (ii) one or more qualified trusts, each owning more than 10% by value of the interests in the REIT, hold in the aggregate more than 50% of the interests in the REIT. The percentage of any REIT dividend treated as UBTI is equal to the ratio of (a) the UBTI earned by the REIT (treating the REIT as if it were a qualified trust and therefore subject to tax on UBTI) to (b) the total gross income of the REIT. A de minimis exception applies where the percentage is less than 5% for any year. For these purposes, a qualified trust is any trust described in section 401(a) of the Code and exempt from tax under section 501(a) of the Code. The provisions requiring qualified trusts to treat a portion of REIT distributions as UBTI will not apply if the REIT is able to satisfy the "five or fewer test" without relying upon the "look-through" exception. The Company has not in the past relied on the "look-through" exception to satisfy the "five or fewer" test and does not currently expect that it will rely on such exception for 1997 or future taxable years, although there can be no assurance that the Company will not so rely. STATE AND LOCAL TAXES The Company and its shareholders may be subject to state or local taxation in various jurisdictions, including those in which the Company or such shareholders transact businesses or reside. The state and local tax treatment of the Company and its shareholders may not conform to the federal income tax consequences discussed above. Consequently, prospective shareholders should consult their own tax advisers regarding the effect of state and local tax laws on an investment in Common Stock. S-52 53 PRINCIPAL SHAREHOLDERS OWNERSHIP OF COMMON STOCK A beneficial owner of a security includes any person who directly or indirectly has or shares voting power and/or investment power with respect to such security. Voting power is the power to vote or direct the voting of a security; investment power is the power to dispose of or direct the disposition of a security. The table below sets forth certain information with respect to the beneficial ownership of shares of Common Stock by each stockholder known to the Company to own 5% or more of the outstanding shares of Common Stock as of September 30, 1997.
-------------------------------------- NAME AND ADDRESS OF NUMBER OF SHARES BENEFICIAL OWNER PERCENT OF CLASS BENEFICIALLY OWNED ------------------- ---------------- ------------------ Apollo Real Estate Investment Fund II, L. P.(1) 23.0% 5,027,846 Two Manhattanville Road Purchase, New York 10577 Alliance Capital Management, Inc. 11.3% 2,477,000 787 Seventh Avenue New York, New York 10019
- --------------- (1) Includes shares beneficially owned by all of its affiliates, including its subsidiary AREIF II Realty Trust, Inc. AGREEMENTS WITH SHAREHOLDERS On October 10, 1996, the Company entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with AP-KEI Holdings, LLC, which subsequently merged with and into AREIF II Realty Trust, Inc. ("Apollo," and together with all of its affiliates, the "Apollo Shareholders"). On February 27, 1997, AP-KEI Holdings, LLC assigned all of its shares of Common Stock, together with all of its rights and obligations under the Stock Purchase Agreement, to Apollo. The Stock Purchase Agreement provides that as determined by the Board of Directors pursuant to Article V(D) of the Amended and Restated Articles of Incorporation of the Company (the "Articles of Incorporation"), the ownership by the Apollo Shareholders of up to 25% of the then outstanding shares of Common Stock (the "Maximum Shares") is exempt from certain of the operations of such Article V(D). Article V(D) of the Articles of Incorporation provides, subject to certain limitations, that no person, or persons acting as a group, may acquire beneficial ownership in the aggregate of more than 9.8% of the shares of Common Stock outstanding at any time. In applying this limit, a person is deemed to own shares of Common Stock constructively owned by such person after applying the relevant constructive ownership rules of the Code. All shares of Common Stock which any person has the right to acquire upon exercise of outstanding rights, options or warrants and upon conversion of securities convertible into shares of Common Stock shall be considered outstanding for purposes of applying the 9.8% limit. In the event that the Board of Directors believes that the tax status of the Company as a REIT is jeopardized or that any person has acquired ownership, whether direct, indirect or constructive, of in excess of 9.8% of the Company's outstanding Common Stock ("Excess Shares"), the Board of Directors may redeem a sufficient number of shares of Common Stock to protect and preserve the Company's status as a REIT, as well as all Excess Shares. The Board of Directors has agreed, subject to certain limitations, that so long as the Apollo Shareholders hold no more than the Maximum Shares, no such shares shall be deemed Excess Shares under the Articles of Incorporation. As of September 30, 1997, the Apollo Shareholders held an aggregate of approximately 23.0% of the Common Stock. See "Description of Common Stock--Restrictions on Ownership" in the accompanying Prospectus. Pursuant to the terms of the Stock Purchase Agreement, the Company amended its Common Stock Rights Agreement (the "Rights Agreement") to provide that, with certain exceptions, the Apollo Shareholders are Exempt Persons (as defined in the Rights Agreement) under the Rights Agreement so long as the Apollo Shareholders do not collectively Beneficially Own (as defined in the Rights Agreement) more than the Maximum Shares. Pursuant to the Rights Agreement, each holder of a share of Common Stock has the right (a "Right") to acquire shares of Common Stock with a market value of two times the exercise price of the Right, which Right becomes exercisable if any person (other than (a) the Company, (b) its subsidiaries, (c) employee benefit plans of the Company or its subsidiaries or any person or entity organized, appointed or established pursuant thereto, and (d) the Apollo Shareholders or any other Exempt Persons) acquires 15% or more of the outstanding shares of Common Stock (the "Acquiring Person"). If any Exempt Person acquires shares of Common Stock in excess of the number of shares for which such Exempt Person is exempt, such Exempt Person will then be an Acquiring Person and will not be able to exercise his, her or its Rights. The Company has also covenanted that it will not amend, alter or otherwise modify the Rights Agreement so as to terminate the status of the Apollo Shareholders as an Exempt Person. See "Description of Common Stock--Shareholder Rights Agreement" in the accompanying Prospectus. S-53 54 The Stock Purchase Agreement provides that for a period of three years from the date thereof (subject to earlier termination under certain circumstances): (a) the Apollo Shareholders may purchase up to 25% of the Company's outstanding stock including a subscription right with respect to any issuance of securities by the Company (including the Common Stock to be issued in the Offering); (b) the Apollo Shareholders are entitled to Board representation of up to three directors on a board of not more than 12, depending upon the Apollo Shareholders' level of ownership of the Common Stock (Messrs. Jacobson, Mack and Neibart are the Apollo Shareholders' nominees to the Company's Board of Directors pursuant to the Stock Purchase Agreement); and (c) the Apollo Shareholders will not acquire more than 25% of the Company's outstanding Common 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 the Apollo Shareholders' 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 dispositions over a certain size, issuance of more than 9.8% 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% or more of the Common Stock. In connection with the Offering, the Apollo Shareholders have agreed to waive their subscription right and, in lieu thereof, will purchase 500,000 shares of Common Stock in the Offering. Pursuant to a Registration Rights Agreement between an affiliate of Apollo and the Company, the Apollo Shareholders have the right, subject to certain limitations, to (a) demand that the Company register any shares of Common Stock owned by the Apollo Shareholders for a public offering in accordance with the registration requirements of the Securities Act and (b) have any shares of Common Stock owned by the Apollo Shareholders included in a public offering of the Company's securities which may be made on behalf of the Company or others. All expenses, except for underwriting discounts and commissions and expenses of professionals retained by the Apollo Shareholders, of any of the Apollo Shareholders' offerings of the Common Stock will be borne by the Company. The Apollo Shareholders have waived their right to include any of their shares of Common Stock in the Offering. S-54 55 UNDERWRITING The Underwriters named below (the "Underwriters"), for whom J.P. Morgan Securities Inc., Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the underwriting agreement between the Company and the Representatives (the "Underwriting Agreement"), to purchase from the Company, and the Company has agreed to sell to the Underwriters, the respective number of shares of Common Stock set forth opposite their names below:
--------- NUMBER OF UNDERWRITERS SHARES - ------------ --------- J.P. Morgan Securities Inc.................................. 734,000 Bear, Stearns & Co. Inc..................................... 734,000 BT Alex. Brown Incorporated................................. 734,000 Cowen & Company............................................. 84,000 Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 84,000 Prudential Securities Incorporated.......................... 84,000 Smith Barney Inc. .......................................... 84,000 Charles Schwab & Co., Inc. ................................. 84,000 Anderson & Strudwick, Inc. ................................. 42,000 J.C. Bradford & Co. ........................................ 42,000 Davenport & Co. of Virginia, Inc. ......................... 42,000 Allen C. Ewing & Co. ....................................... 42,000 Johnston, Lemon & Co. Incorporated ......................... 42,000 Legg Mason Wood Walker, Incorporated........................ 42,000 The Robinson-Humphrey Company, Inc. ........................ 42,000 Scott & Stringfellow, Inc. ................................. 42,000 Wheat, First Securities, Inc. .............................. 42,000 --------- Total............................................. 3,000,000 =========
The nature of the Underwriters' obligation under the Underwriting Agreement is such that all of the shares of Common Stock being offered, excluding shares covered by the over-allotment option granted to the Underwriters, must be purchased if any are purchased. The Representatives have advised the Company that the several Underwriters propose to offer the Common Stock to the public initially at the offering price set forth on the cover of this Prospectus Supplement and may offer the Common Stock to selected dealers at such price less a concession not to exceed $0.67 per share. The Underwriters may allow, and such dealers may reallow, a concession to other dealers not to exceed $0.10 per share. After the public offering of the Common Stock, the public offering price and other selling terms may be changed by the Representatives. The Company has granted the Underwriters an option, exercisable within 30 days after the date of this Prospectus Supplement, to purchase up to 450,000 additional shares of Common Stock from the Company at the same price per share to be paid by the Underwriters for the other shares offered hereby. If the Underwriters purchase any such additional shares pursuant to the option, each of the Underwriters will be committed to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may exercise the option only to cover over-allotments, if any, made in connection with the distribution of the Common Stock offered hereby. The Company, its directors and executive officers and the Apollo shareholders, on behalf of itself and certain other shareholders, have agreed not to offer, sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock or register for sale under the Securities Act of 1933, as amended (the "Securities Act") any Common Stock for a period of 90 days after the date of this Prospectus Supplement without the prior written consent of J.P. Morgan Securities Inc., with certain limited exceptions. The Common Stock is listed for trading on the American Stock Exchange under the symbol "KE." The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. In the ordinary course of their respective businesses, the Underwriters and their affiliates have engaged, and may in the future engage, in various commercial banking and investment banking transactions with the Company or its affiliates. In October 1996, J.P. Morgan Securities Inc. acted as a financial advisor to the Company in connection with the placement of approximately $190 million of the Company's secured debt, and received customary compensation in connection therewith. In addition, Morgan Guaranty, an affiliate of J.P. Morgan Securities Inc., expects to receive a portion of the proceeds of the Offering to repay outstanding indebtedness of the Company under the Company's revolving credit facility. In addition William S-55 56 L. Mack, a director of the Company and an affiliate of Apollo became a member of the Board of Directors of The Bear Stearns Companies Inc. on October 27, 1997. In March 1997, Bankers Trust Company, an affiliate of BT Alex. Brown Incorporated, extended a loan to an affiliate of Apollo, which loan is secured by a pledge of Common Stock of the Company owned by such affiliate. In connection with the Offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock offered hereby. Specifically, the Underwriters may over-allot in connection with the Offering, creating a syndicate short position. In addition, the Underwriters may bid for, and purchase, Common Stock in the open market to cover syndicate short positions created in connection with the Offering or to stabilize the price of the Common Stock. Finally, the underwriting syndicate may reclaim selling concessions allowed for distributing Common Stock in the Offering, if the syndicate repurchases previously distributed Common Stock in the market to cover over-allotments or to stabilize the price of the Common Stock. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in any of these activities, and may end any of them at any time. S-56 57 CONCURRENT OFFERING Subject to terms and conditions comparable to those in the Underwriting Agreement, the Company has offered to sell an aggregate of 500,000 of the shares of Common Stock offered hereby directly to Apollo. The agreement pursuant to which the shares to be sold to Apollo provides that the obligations of Apollo are subject to certain conditions precedent, including completion of the sale of 3,000,000 shares of Common Stock pursuant to the Underwriting Agreement, and that Apollo will purchase 500,000 of the shares of Common Stock offered hereby if any of such shares are purchased. Apollo will be purchasing such shares of Common Stock in the ordinary course of its business, and has no arrangement or understanding to participate in a distribution of the shares of Common Stock purchased pursuant to such agreement. Apollo has agreed not to offer, sell or otherwise dispose of such shares and any other shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock for a period of 90 days after the date of this Prospectus Supplement without the consent of J.P. Morgan Securities Inc. S-57 58 INDEX TO FINANCIAL STATEMENTS
PAGE Unaudited Consolidated Financial Statements: Independent Accountants' Report F-2 Condensed Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996 F-3 Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 1997 and 1996 F-4 Condensed Consolidated Statement of Changes in Shareholders' Equity for the Nine Month Period Ended September 30, 1997 F-5 Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 1997 and 1996 F-6 Notes to Condensed Consolidated Financial Statements for the Three and Nine Month Periods Ended September 30, 1997 and 1996 F-7 Audited Consolidated Financial Statements: Independent Auditors' Report F-10 Consolidated Balance Sheets as of December 31, 1996 and 1995 F-11 Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 1996 F-12 Consolidated Statements of Changes in Shareholders' Equity for Each of the Three Years in the Period Ended December 31, 1996 F-13 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1996 F-14 Notes to Consolidated Financial Statements for Each of the Three Years in the Period Ended December 31, 1996 F-15 Pro Forma Financial Statements F-25 Unaudited Pro Forma Balance Sheet as of September 30, 1997 F-26 Unaudited Pro Forma Statement of Operations for the Year Ended December 31, 1996 F-27 Unaudited Pro Forma Statement of Operations for the Nine Months Ended September 30, 1997 F-28 Notes to Unaudited Pro Forma Financial Statements F-29 Unaudited Statement of Estimated Taxable Operating Results and Estimated Cash to be Made Available by Operations for the Twelve Month Period Ended December 31, 1996 F-31
F-1 59 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Shareholders of Koger Equity, Inc. Jacksonville, Florida We have reviewed the accompanying condensed consolidated balance sheet of Koger Equity, Inc. and subsidiaries (the "Company") as of September 30, 1997, and the related condensed consolidated statements of operations for the three and nine month periods ended September 30, 1997 and 1996, the condensed consolidated statement of changes in shareholders' equity for the nine month period ended September 30, 1997 and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 1997 and 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of the Company as of December 31, 1996, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1996 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Jacksonville, Florida October 24, 1997 F-2 60 KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED--SEE INDEPENDENT ACCOUNTANTS' REPORT) (IN THOUSANDS)
----------------------------- SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ ASSETS Real Estate Investments: Operating properties: Land $106,627 $ 98,567 Buildings 532,968 482,836 Furniture and equipment 2,042 1,569 Accumulated depreciation (98,395) (82,478) -------- -------- Operating properties--net 543,242 500,494 Properties under construction: Land 7,785 2,083 Buildings 9,415 930 Undeveloped land held for investment 15,327 20,558 Undeveloped land held for sale 1,512 6,550 Cash and temporary investments 9,293 35,715 Accounts receivable, net of allowance for uncollectible accounts of $231 and $231 4,961 5,600 Investment in Koger Realty Services, Inc. 384 259 Cost in excess of fair value of net assets acquired, net of accumulated amortization of $643 and $515 1,912 2,040 Other assets 11,488 10,437 -------- -------- TOTAL ASSETS $605,319 $584,666 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgages and loans payable $202,091 $203,044 Accounts payable 3,011 4,662 Accrued real estate taxes payable 6,859 2,144 Accrued liabilities--other 5,025 5,467 Dividends payable 3,283 1,045 Advance rents and security deposits 4,526 4,169 -------- -------- Total Liabilities 224,795 220,531 -------- -------- Commitments and Contingencies Shareholders' Equity: Common stock 249 236 Capital in excess of par value 374,988 362,127 Warrants 2,243 Retained earnings 33,745 22,666 Treasury stock, at cost (28,458) (23,137) -------- -------- Total Shareholders' Equity 380,524 364,135 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $605,319 $584,666 ======== ========
See Notes to Condensed Consolidated Financial Statements. F-3 61 KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED--SEE INDEPENDENT ACCOUNTANTS' REPORT) (IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------- THREE MONTH PERIOD NINE MONTH PERIOD ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ------------------------ 1997 1996 1997 1996 ------- ------- --------- --------- REVENUES Rental $28,079 $24,515 $79,849 $72,660 Other rental services 151 95 401 366 Management fees 639 842 2,209 1,893 Interest 178 505 1,084 1,307 Income from Koger Realty Services, Inc. 96 (251) 489 117 Gain (reduction of gain) on TKPL note to Southeast 55 (9) (21) ------- ------- ------- ------- Total revenues 29,143 25,761 84,023 76,322 ------- ------- ------- ------- EXPENSES Property operations 12,037 10,930 32,824 31,194 Depreciation and amortization 6,124 5,543 17,238 15,679 Mortgage and loan interest 4,037 4,968 12,264 14,865 General and administrative 1,367 1,235 4,256 4,103 Direct cost of management fees 469 511 1,553 1,300 Undeveloped land costs 107 131 341 398 Loss on early retirement of debt 102 18 144 18 Provision for loss on land held for sale (379) Litigation costs (182) 371 ------- ------- ------- ------- Total expenses 24,243 23,154 68,241 67,928 ------- ------- ------- ------- INCOME BEFORE GAIN (LOSS) ON SALE OR DISPOSITION OF ASSETS 4,900 2,607 15,782 8,394 Gain (loss) on sale or disposition of assets 2,057 (29) 2,057 (452) ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 6,957 2,578 17,839 7,942 Income taxes 8 317 189 451 ------- ------- ------- ------- NET INCOME $ 6,949 $ 2,261 $17,650 $ 7,491 ======= ======= ======= ======= EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT SHARE: Primary $ 0.31 $ 0.12 $ 0.79 $ 0.40 ======= ======= ======= ======= Fully Diluted $ 0.31 $ 0.12 $ 0.79 $ 0.40 ======= ======= ======= ======= WEIGHTED AVERAGE COMMON SHARES AND COMMON EQUIVALENT SHARES OUTSTANDING: Primary 22,341 18,961 22,251 18,741 ======= ======= ======= ======= Fully Diluted 22,412 19,043 22,319 18,778 ======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements. F-4 62 KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED--SEE INDEPENDENT ACCOUNTANTS' REPORT) (IN THOUSANDS)
--------------------------------------------------------------------------------------- COMMON STOCK TOTAL --------------- CAPITAL IN TREASURY STOCK SHARE- PAR EXCESS OF RETAINED ------------------ HOLDERS' SHARES VALUE PAR VALUE WARRANTS EARNINGS SHARES COST EQUITY ------ ----- ---------- -------- -------- ------ -------- -------- Balance, January 1, 1997 23,560 $236 $362,127 $ 2,243 $22,666 2,668 $(23,137) $364,135 Treasury Stock Reissued 531 (54) 447 978 Treasury Stock Purchased 372 (5,750) (5,750) Warrants Redeemed (236) (143) (379) Warrants Exercised 994 10 9,945 (2,007) 7,948 Stock Options Exercised 320 3 2,385 1 (18) 2,370 Dividends Declared (6,428) (6,428) Net Income 17,650 17,650 ------ ---- -------- ------- ------- ----- -------- -------- Balance, September 30, 1997 24,874 $249 $374,988 $ 0 $33,745 2,987 $(28,458) $380,524 ====== ==== ======== ======= ======= ===== ======== ========
See Notes to Condensed Consolidated Financial Statements. F-5 63 KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED--SEE INDEPENDENT ACCOUNTANTS' REPORT) (IN THOUSANDS)
------------------- NINE MONTH PERIOD ENDED SEPTEMBER 30, ------------------- 1997 1996 -------- ------- OPERATING ACTIVITIES Net income $ 17,650 $ 7,491 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 17,238 15,679 Income from Koger Realty Services, Inc. (489) (117) Provision for loss on land held for sale (379) Provision for uncollectible accounts 156 Gain on TKPL unsecured note to Southeast 9 21 Loss (Gain) on sale or disposition of assets (2,057) 452 Loss on early debt repayment 144 18 Amortization of mortgage discounts 71 132 Accrued interest added to principal 112 Increase in accounts payable, accrued liabilities and other liabilities 3,828 4,495 Decrease (increase) in receivables and other assets 200 (6,385) -------- ------- Net cash provided by operating activities 36,371 21,898 -------- ------- INVESTING ACTIVITIES Property acquisitions (45,833) Building construction expenditures (11,731) (248) Tenant improvements to first generation space (135) Tenant improvements to existing properties (5,622) (4,353) Building improvements (2,181) (2,030) Energy management improvements (531) (1,764) Deferred tenant costs (1,220) (1,561) Additions to furniture and equipment (473) (116) Proceeds from sale of assets 6,345 1,266 Dividends received from Koger Realty Services, Inc. 364 414 -------- ------- Net cash used in investing activities (61,017) (8,392) -------- ------- FINANCING ACTIVITIES Proceeds from sale of stock under Stock Investment Plan 257 140 Proceeds from exercise of warrants and stock options 10,141 312 Proceeds from mortgage and loans 24,300 Dividends paid (4,190) Principal payments on mortgages and loans (25,428) (5,245) Treasury stock purchase (5,750) Warrants redeemed (379) Financing costs (727) (700) -------- ------- Net cash used in financing activities (1,776) (5,493) -------- ------- Net increase (decrease) in cash and cash equivalents (26,422) 8,013 Cash and cash equivalents--beginning of period 35,715 25,415 -------- ------- Cash and cash equivalents--end of period $ 9,293 $33,428 ======== ======= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for interest, net of capitalized interest $ 12,193 $14,542 ======== ======= Cash paid during the period for income taxes $ 189 $ 451 ======== =======
See Notes to Condensed Consolidated Financial Statements. F-6 64 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED--SEE INDEPENDENT ACCOUNTANTS' REPORT) 1. BASIS OF PRESENTATION. The condensed consolidated financial statements include the accounts of Koger Equity, Inc. and its wholly-owned subsidiaries (the "Company"). All material intercompany transactions have been eliminated. The financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission related to interim financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1996, included in the Company's Form 10-K Annual Report for the year ended December 31, 1996. The balance sheet at December 31, 1996, has been derived from the audited financial statements at that date and is condensed. All adjustments of a normal recurring nature which, in the opinion of management, are necessary to present a fair statement of the results for the interim periods have been made. Results of operations for the nine month period ended September 30, 1997, are not necessarily indicative of the results to be expected for the full year. Certain 1996 amounts have been reclassified to conform with 1997 presentations. In March 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This Statement establishes standards for computing and presenting earnings per share ("EPS") and applies to all entities with publicly held common stock or potential common stock. This Statement replaces the presentation of primary EPS and fully diluted EPS with a presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Similar to fully diluted EPS, diluted EPS reflects the potential dilution of securities that could share in the earnings. This Statement is not expected to have a material effect on the Company's reported EPS amounts. This Statement is effective for the Company's financial statements for the year ending December 31, 1997. In June 1997, the FASB Issued SFAS No. 130, "Reporting Comprehensive Income" effective for fiscal years beginning after December 15, 1997. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This Statement does not require a specific format for that financial statement but requires that an entity display an amount representing total comprehensive income for the period in that financial statement. This Statement requires that an entity classify items of other comprehensive income by their nature in a financial statement. For example, other comprehensive income may include foreign currency and unrealized gains and losses on certain investments in debt and equity securities. In addition, the accumulated balance of other comprehensive income must be displayed separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Reclassification of financial statements for earlier periods, provided for comparative purposes, is required. The Company has not determined the impact that the adoption of this new accounting standard will have on its financial statements. The Company will adopt this accounting standard on January 1, 1998, as required. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" effective for fiscal years beginning after December 15, 1997. This Statement establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. This Statement requires reporting segment profit or loss, certain specific revenue and expense items and segment assets. It also requires reconciliations of total segment revenues, total segments profit or loss, total segment assets, and other amounts disclosed for segments to corresponding amounts reported in the financial statements. Restatement of comparative information for earlier periods presented is required in the initial year of application. Interim information is not required until the second year of application, at which time comparative information is required. The Company has not determined the impact that the adoption of this new accounting standard will have on its financial statement disclosures. The Company will adopt this accounting standard on January 1, 1998, as required. F-7 65 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. ORGANIZATION. Koger Equity, Inc. ("KE"), a Florida corporation, was incorporated in 1988 for the purpose of investing in the ownership of income producing properties, primarily commercial office buildings. KE is totally self-administered and self-managed. In addition to managing its own properties, KE, through certain related entities, provides property management services to third parties. In conjunction with Koger Real Estate Services, Inc. ("KRES"), a Florida corporation and a wholly-owned subsidiary of KE, KE manages 21 office buildings owned by Centoff Realty Company, Inc. ("Centoff"), a subsidiary of Morgan Guaranty Trust Company of New York. 3. FEDERAL INCOME TAXES. The Company is operated in a manner so as to qualify and has elected tax treatment as a real estate investment trust under the Internal Revenue Code of 1986, as amended (a "REIT"). As a REIT, the Company is required to distribute annually at least 95 percent of its REIT taxable income to its shareholders. Since the Company had no REIT taxable income during 1996 and does not expect to have REIT taxable income during 1997, no provision has been made for federal income taxes. However, the Company has recorded a provision of $127,000 for alternative minimum tax for the nine month period ended September 30, 1997. To the extent that the Company pays dividends equal to 100 percent of its REIT taxable income, the earnings of the Company are not taxed at the corporate level. However, the use of net operating loss carryforwards, which may reduce REIT taxable income to zero, are limited for alternative minimum tax purposes. 4. 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 date of less than three months and are deemed to be cash equivalents for purposes of the statements of cash flows. During the nine month period ended September 30, 1997, the Company contributed 23,657 shares of common stock to the Company's 401(K) Plan. These shares had a value of approximately $444,000 based on the closing price of the Company's common stock on the American Stock Exchange on December 31, 1996. In addition, the Company issued 15,455 shares of common stock as payment for certain 1996 bonuses for senior management. These shares had a value of approximately $278,000 based on the closing price of the Company's common stock on the American Stock Exchange on January 6, 1997. During the nine month period ended September 30, 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. 5. EARNINGS PER COMMON SHARE. Earnings per common share have been computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during the applicable periods. 6. MORTGAGES AND LOANS PAYABLE. At September 30, 1997, the Company had $202,091,000 of loans outstanding, which are collateralized by mortgages on certain operating properties. Annual maturities for mortgages and loans payable, which are gross of $194,000 of discounts, are as follows (in thousands):
YEAR ENDING DECEMBER 31, - ------------------------ 1997 $ 848 1998 3,708 1999 12,035 2000 12,002 2001 3,316 Subsequent Years 170,376 ----------- Total $202,285 ===========
On April 7, 1997, the Company closed on a $50 million secured revolving credit facility provided by First Union National Bank of Florida and Morgan Guaranty Trust Company of New York. Based on the Company's election, the interest rate on this revolving credit facility will be either (i) the lender's LIBOR rate plus 200 basis points or (ii) the lender's prime rate. Interest payments will be due monthly on this revolving credit facility which has a term of two years. At the election of the lender, the F-8 66 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) term of this credit facility may be extended for additional periods of one year each. This credit facility requires the Company to maintain certain financial ratios. 7. DIVIDENDS. The Company paid the following dividends during the nine months ended September 30, 1997:
PAYMENT DATE RECORD DATE DIVIDEND PER SHARE ------------ ----------- ------------------ February 10, 1997 January 6, 1997 $0.05 May 6, 1997 April 4, 1997 $0.05 August 6, 1997 July 3, 1997 $0.10
During the quarter ended September 30, 1997, the Company's Board of Directors declared a quarterly dividend of $0.15 per share payable on November 5, 1997, to shareholders of record on September 30, 1997. The Company currently expects that all dividends paid during 1997 will be treated as ordinary income to the recipient for income tax purposes. 8. WARRANTS. 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 of common stock at a price of $8.00 per share, until the Redemption Date. The Company redeemed 99,871 warrants following the Redemption Date. The remaining warrants were exercised by the holders either on or prior to the Redemption Date. 9. STOCK OPTIONS. During the quarter ended September 30, 1997, the Company granted 171,392 options to purchase its common stock. The majority of the options granted have been granted with an exercise price equal to the market value at the date of grant. 10. SUBSEQUENT EVENT. On October 1, 1997, the Company acquired a building, containing 154,100 net rentable square feet, located in Atlanta, Georgia for a purchase price of $21.2 million. This purchase was partially funded with an $18 million draw on the Company's secured revolving line of credit. F-9 67 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Koger Equity, Inc. Jacksonville, Florida We have audited the accompanying consolidated balance sheets of Koger Equity, Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Koger Equity, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Jacksonville, Florida February 28, 1997 F-10 68 KOGER EQUITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995 (IN THOUSANDS EXCEPT SHARE DATA)
-------------------- DECEMBER 31, 1996 1995 -------- -------- ASSETS Real Estate Investments: Operating properties: Land $ 98,567 $ 98,727 Buildings 482,836 471,145 Furniture and equipment 1,569 1,441 Accumulated depreciation (82,478) (62,845) -------- -------- Operating properties--net 500,494 508,468 Properties under construction: Land 2,083 Buildings 930 Undeveloped land held for investment 20,558 21,150 Undeveloped land held for sale 6,550 9,131 Cash and temporary investments 35,715 25,415 Accounts receivable, net of allowance for uncollectible accounts of $231 and $391 5,600 4,724 Investment in Koger Realty Services, Inc. 259 407 Cost in excess of fair value of net assets acquired, net of accumulated amortization of $515 and $345 2,040 2,211 Other assets 10,437 7,250 -------- -------- TOTAL ASSETS $584,666 $578,756 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgages and loans payable $203,044 $254,909 Accounts payable 4,662 2,631 Accrued real estate taxes payable 2,144 2,222 Accrued liabilities--other 5,467 4,723 Dividends payable 1,045 Advance rents and security deposits 4,169 3,574 -------- -------- Total Liabilities 220,531 268,059 -------- -------- Commitments and Contingencies (Notes 2, 11 and 12) -- -- Shareholders' Equity: Preferred stock, $.01 par value; 50,000,000 shares authorized; issued: none -- -- Common stock, $.01 par value; 100,000,000 shares authorized; issued: 23,560,427 and 20,476,705 shares; outstanding: 20,892,574 and 17,753,677 shares 236 205 Capital in excess of par value 362,127 318,609 Warrants; outstanding 1,110,887 and 1,114,217 2,243 2,250 Retained earnings 22,666 13,210 Treasury stock, at cost; 2,667,853 and 2,723,028 shares (23,137) (23,577) -------- -------- Total Shareholders' Equity 364,135 310,697 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $584,666 $578,756 ======== ========
See Notes to Consolidated Financial Statements. F-11 69 KOGER EQUITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (IN THOUSANDS EXCEPT PER SHARE DATA)
-------------------------------- 1996 1995 1994 -------- -------- -------- REVENUES Rental $ 98,342 $ 94,865 $ 93,132 Other rental services 463 578 1,256 Management fees ($0, $1,685 and $3,288 from TKPL) 2,682 3,624 4,926 Interest ($13,066 from TKPL in 1995) 1,951 14,440 1,062 Income from Koger Realty Services, Inc. 342 36 Gain on TKPL note to Southeast 292 11,288 Gain on early retirement of debt 919 -------- -------- -------- Total revenues 104,072 125,750 100,376 -------- -------- -------- EXPENSES Property operations 41,597 40,830 39,711 Depreciation and amortization 21,127 19,102 16,728 Mortgage and loan interest 18,701 23,708 25,872 General and administrative 6,623 7,559 6,366 Direct cost of management fees 1,884 2,837 3,649 Undeveloped land costs 517 512 667 Litigation costs 424 176 1,902 Loss on sale or disposition of assets 497 255 43 Provision for loss on land held for sale 970 996 Other 745 -------- -------- -------- Total expenses 91,370 96,694 95,934 -------- -------- -------- INCOME BEFORE INCOME TAXES 12,702 29,056 4,442 Income taxes 815 66 227 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 11,887 28,990 4,215 Extraordinary loss on early retirement of debt 1,386 -------- -------- -------- NET INCOME $ 10,501 $ 28,990 $ 4,215 ======== ======== ======== EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT SHARE: Primary-- Income before extraordinary item $ 0.61 $ 1.61 $ 0.24 Extraordinary loss (0.07) -------- -------- -------- Net Income $ 0.54 $ 1.61 $ 0.24 ======== ======== ======== Fully Diluted-- Income before extraordinary item $ 0.61 $ 1.60 $ 0.24 Extraordinary loss (0.07) -------- -------- -------- Net Income $ 0.54 $ 1.60 $ 0.24 ======== ======== ========
See Notes to Consolidated Financial Statements. F-12 70 KOGER EQUITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (IN THOUSANDS)
------------------------------------------------------------------------------------ RETAINED EARNINGS COMMON STOCK CAPITAL (ACCUMULATED TOTAL --------------- IN EXCESS DIVIDENDS SHARE- SHARES PAR OF PAR IN EXCESS OF TREASURY HOLDERS' ISSUED VALUE VALUE WARRANTS NET INCOME) STOCK EQUITY ------ ----- --------- -------- ----------------- -------- -------- Balance December 31, 1993..................... 20,472 $205 $318,574 $1,368 $ (19,872) $(24,825) $275,450 Treasury stock reissued.... (3) 38 35 Warrants issued............ 885 885 Warrants exercised......... 1 12 (2) 10 Options exercised.......... 1 6 6 Net income................. 4,215 4,215 ------ ---- -------- ------ ----------------- -------- -------- Balance, December 31, 1994..................... 20,474 205 318,589 2,251 (15,657) (24,787) 280,601 Treasury stock reissued.... (123) 1,217 1,094 Warrants exercised......... 1 7 (1) 6 Options exercised.......... 1 7 (7) Stock appreciation rights exercised................ 1 6 6 Net income................. 28,990 28,990 ------ ---- -------- ------ ----------------- -------- -------- Balance, December 31, 1995..................... 20,477 205 318,609 2,250 13,210 (23,577) 310,697 Treasury stock reissued.... 182 487 669 Warrants exercised......... 3 33 (7) 26 Options exercised.......... 57 1 519 (47) 473 Stock appreciation rights exercised................ 23 270 270 Common stock issued........ 3,000 30 42,514 42,544 Dividends declared......... (1,045) (1,045) Net income................. 10,501 10,501 ------ ---- -------- ------ ----------------- -------- -------- Balance, December 31, 1996..................... 23,560 $236 $362,127 $2,243 $ 22,666 $(23,137) $364,135 ====== ==== ======== ====== ================= ======== ========
See Notes to Consolidated Financial Statements. F-13 71 KOGER EQUITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (IN THOUSANDS)
-------------------------------- 1996 1995 1994 --------- -------- ------- OPERATING ACTIVITIES Net income $ 10,501 $ 28,990 $ 4,215 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,127 19,102 16,728 Gain on TKPL note to Southeast (292) (11,288) Warrants issued--litigation settlement 885 Provision for loss on land held for sale 970 996 Loss on sale or disposition of assets 497 255 43 Loss/(gain) on early debt repayment 1,386 (919) Income from Koger Realty Services, Inc. (342) (36) Provision for uncollectible rents 50 172 212 Accrued interest added to principal 112 496 1,336 Amortization of mortgage discounts 196 175 219 Changes in assets and liabilities: Increase in accounts payable, accrued liabilities and other liabilities 3,542 4,500 35 Increase in receivables and other assets (829) (349) (3,176) Decrease (increase) in receivable from TKPL 1,851 (1,217) --------- -------- ------- Net cash provided by operating activities 35,948 43,919 20,276 --------- -------- ------- INVESTING ACTIVITIES Proceeds from sale of assets 1,241 25,267 3,499 Proceeds from TKPL note to Southeast 887 17,105 Proceeds from TKPL mortgage notes 18,195 Purchase of TKPL mortgage notes (18,195) Tenant improvements to existing properties (7,873) (8,644) (7,334) Building improvements to existing properties (2,795) (3,064) (3,749) Energy management improvements (1,900) (2,663) Building construction expenditures (930) Deferred tenant costs (1,862) (1,085) (1,112) Additions to furniture and equipment (128) (330) (383) Purchase of Koger Realty Services, Inc. preferred stock (300) Dividends received from Koger Realty Services, Inc. 490 Merger costs (344) Cash acquired in purchase of assets 307 2,316 --------- -------- ------- Net cash provided by (used in) investing activities (12,870) 26,593 (7,107) --------- -------- ------- FINANCING ACTIVITIES Principal payments on mortgages and loans (228,090) (68,608) (8,267) Proceeds from mortgages 175,900 Proceeds from sale of common stock 42,748 206 35 Proceeds from exercise of warrants and stock options 376 6 16 Financing costs (3,712) (16) (204) --------- -------- ------- Net cash used in financing activities (12,778) (68,412) (8,420) --------- -------- ------- Net increase in cash and cash equivalents 10,300 2,100 4,749 Cash and cash equivalents--beginning of year 25,415 23,315 18,566 --------- -------- ------- Cash and cash equivalents--end of year $ 35,715 $ 25,415 $23,315 ========= ======== =======
See Notes to Consolidated Financial Statements. F-14 72 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Organization. Koger Equity, Inc. ("KE") was incorporated in Florida on June 21, 1988. KE has two wholly-owned subsidiaries which are Southeast Properties Holding Corporation ("Southeast"), a Florida corporation, and Koger Real Estate Services, Inc. ("KRES"), a Florida corporation. Principles of Consolidation. The consolidated financial statements include the accounts of KE and its wholly-owned subsidiaries (the "Company"). All material intercompany accounts have been eliminated in consolidation. Investment in Koger Realty Services, Inc. Koger Realty Services, Inc., a Delaware corporation ("KRSI"), provides leasing and property management services to owners of commercial office buildings. During 1995, the Company purchased all of the preferred stock of KRSI, which preferred stock represents at least 95 percent of the economic value of KRSI. Initially, such preferred stock was non-voting but was convertible into voting common stock. Accordingly, KE consolidated KRSI in the 1995 financial statements. During 1996, the Company requested KRSI to change the convertibility feature of the preferred stock owned by the Company. Effective in 1996, the preferred stock is non-voting and is not convertible into the common stock of KRSI while held by the Company. The Company has accounted for its investment in the preferred stock of KRSI using the equity method. Real Estate Investments. Operating properties, furniture and equipment, and undeveloped land held for investment are stated at cost less accumulated depreciation. Undeveloped land held for sale is carried at the lower of cost or fair value less selling costs. Periodically, management reviews its portfolio of operating properties, undeveloped land held for investment and related goodwill and in those instances where properties have suffered an impairment in value that is deemed to be other than temporary, the properties and related goodwill will be reduced to their fair value. This review includes a quarterly analysis of occupancy levels and rental rates for the Company's properties in order to identify properties which may have suffered an impairment in value. Management prepares estimates of future cash flows for these properties to determine whether the Company will be able to recover its investment. In making such estimates, management considers the conditions in the commercial real estate markets in which the properties are located, current and expected occupancy rates, current and expected rental rates, and expected changes in operating costs. As of December 31, 1996, there were no such impairments in value. Maintenance and repairs are charged to operations. Acquisitions, additions, and improvements are capitalized. Depreciation and Amortization. The Company uses the straight-line method for depreciation and amortization. Acquisition costs, building improvements and tenant improvements are depreciated over the periods benefited by the expenditures which range from 3 to 40 years. Deferred tenant costs (leasing commissions and tenant relocation costs) are amortized over the term of the related leases. Deferred financing costs are amortized over the terms of the related agreements. Cost in excess of fair value of net assets acquired is being amortized over 15 years. Revenue Recognition. Rentals are generally recognized as revenue over the lives of leases according to provisions of the lease agreements. However, the straight-line basis, which averages annual minimum rents over the terms of leases, is used to recognize minimum rent revenues under leases which provide for material varying rents over their terms. For 1996, 1995 and 1994, the recognition of rental revenues on this basis for applicable leases increased rental revenues by $114,000, $80,000 and $512,000, respectively, over the amount which would have been recognized based upon the contractual provisions of these leases. Interest revenue is recognized on the accrual basis for interest-earning investments. Federal Income Taxes. The Company is qualified and has elected tax treatment as a real estate investment trust under the Internal Revenue Code (a "REIT"). Accordingly, the Company distributes at least 95 percent of its REIT taxable income to its shareholders. Since the Company had no REIT taxable income in 1996, 1995 or 1994, no distributions to shareholders were made. To the extent that the Company pays dividends equal to 100 percent of REIT taxable income, the earnings of the Company are taxed at the shareholder level. However, the use of net operating loss carryforwards, which may reduce REIT taxable income to zero, are limited for alternative minimum tax purposes. F-15 73 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Earnings Per Common Share. Earnings per common share have been computed based on the weighted average number of shares of common stock and common stock equivalents outstanding as follows:
--------------------------- YEAR PRIMARY FULLY DILUTED - ---- ---------- ------------- 1996 19,500,171 19,575,513 1995 18,011,076 18,091,029 1994 17,718,757 17,718,757
Fair Value of Financial Instruments. The Company believes that the carrying amount of its financial instruments (temporary investments, accounts receivable, accounts payable, and mortgages and loans payable) is a reasonable estimate of fair value of these instruments. Statements of Cash Flows. Cash in excess of daily requirements is invested in short-term monetary securities. Such temporary cash investments have an original maturity of less than three months and are deemed to be cash equivalents for purposes of the statements of cash flows. During 1994, cost in excess of fair value of net assets acquired was adjusted as follows: (1) assets acquired increased $2,250,000; (2) liabilities assumed increased $243,000; and (3) additional direct merger costs were incurred which totalled $344,000. During 1995, cost in excess of fair value of net assets acquired was adjusted as follows: (1) assets acquired increased $169,000; and (2) liabilities assumed increased $1,000. In addition, $6,412,000 of the unamortized cost in excess of fair value of net assets acquired was written off and offset against proceeds received by Southeast from the TKPL unsecured note. This write-off was based on management's analysis of the remaining value of the intangible assets based on the liquidation of TKPL and the partial repayment of the TKPL unsecured note. During 1995, the Company contributed 122,441 shares of common stock to the Company's 401(k) Plan. These shares had a value of approximately $888,000 based on the closing price of the Company's common stock on the American Stock Exchange on December 30, 1994. In addition, TKPL assigned $595,000 of its net assets to Southeast as payment on the unsecured note to Southeast during 1995. During 1996, the Company contributed 43,804 shares of common stock to the Company's 401(k) Plan. These shares had a value of approximately $465,000 based on the closing price of the Company's common stock on the American Stock Exchange on December 31, 1995. For 1996, 1995, and 1994, total interest payments (net of amounts capitalized) were $18,599,000, $23,823,000 and $23,525,000, respectively, for the Company. For 1996, 1995 and 1994, payments for income taxes totalled $816,000, $133,000 and $227,000, respectively. Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates. New Accounting Standards. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. SFAS 121 is effective for the Company for the year ending December 31, 1996. The adoption of SFAS 121 did not have a material effect on the financial statements of the Company. In October 1995, the Financial Accounting Standards Board also issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply Accounting Principles Board Opinion No. 25 ("APB 25"), which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB 25 to its stock based compensation awards to employees and has disclosed the required pro forma effect on net income and earnings per share. Reclassification. Certain 1995 and 1994 amounts have been reclassified to conform with 1996 presentation. F-16 74 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. TRANSACTIONS WITH RELATED PARTIES. Three directors were elected to the Company's Board under the terms of an agreement dated October 10, 1996 between the Company and an affiliate of Apollo Real Estate Investment Fund II, L.P. ("Apollo") pursuant to which Apollo purchased three million shares of common stock from the Company for $43.5 million ($14.50 per share). Such agreement grants to Apollo registration rights and a conditional exemption from certain of the Company's takeover defenses and provides that for a period of three years (subject to earlier termination under certain circumstances): (i) Apollo may purchase up to 25 percent of the Company's outstanding stock; (ii) Apollo will be entitled to Board representation of up to three directors on a board of not more than 12 (depending upon Apollo's level of ownership of the common stock); and (iii) Apollo will not acquire more than 25 percent of the Company's outstanding stock and will vote its shares as to certain matters either in accordance with the recommendation of the Board or proportionately with other shareholders, unless the Company breaches its agreements or, without Apollo's consent, the Company takes certain significant actions such as certain amendments of the Company's organizational documents, liquidation, termination of REIT status, sale of the Company, acquisitions or disposition over a certain size, issuance of more than 9.8 percent of the outstanding common stock to a person or group or failure by the Company to employ its takeover defenses against another person who holds (or tender for) 15 percent or more of the common stock. The proceeds of the Apollo stock sale were used to retire debt with a weighted average interest rate of 8.04%. Pro forma earnings per share information assuming the debt was retired at the beginning of 1996 is as follows: Pro forma net income $13,291,000 Pro forma earnings per share: Primary $ 0.61 Fully diluted $ 0.61
In connection with the above transaction, Rothschild Realty, Inc., which employs Mr. Aloian as a Managing Director, received $350,000 for providing a fairness opinion to the Company's Board of Directors. Also, Mr. Hiley received from the Company a fee of $204,000 for his role in negotiating the transaction. Both Mr. Aloian and Mr. Hiley are directors of the Company. Pursuant to a Consulting Agreement with the Company, which is subject to periodic evaluation by the Board of Directors, Mr. Hiley provides advice with respect to the financial aspects of the Company's strategic plan and was paid a fee of $146,000 for 1996. Mr. Davis retired as an employee of the Company on December 31, 1996, but continues to serve the Company as a consultant. Pursuant to the Consulting Agreement between Mr. Davis and the Company, he will receive a consulting fee of $50,000 per year through December 31, 1999. 3. INVESTMENTS IN THE KOGER PARTNERSHIP, LTD. General. Southeast, a wholly-owned subsidiary of the Company, was the managing general partner of TKPL through December 26, 1995. Southeast's interests in TKPL included (1) 90,360 TKPL General and Limited Partnership Units (the "Units") and (2) a restructured unsecured note from TKPL with a principal amount of approximately $31 million. In light of the terms of TKPL's restructured debt, the Company had determined that these investments had no value. During 1995, TKPL sold all of its operating properties. The net proceeds from the sale were sufficient to repay in full all secured debt and accrued interest of TKPL with the remaining excess sales proceeds and available cash of TKPL used to pay Southeast for amounts owed on subordinate debt and accrued interest. During 1995, TKPL repaid $17.7 million of the subordinate debt to Southeast. On December 4, 1995, the Bankruptcy Court in the TKPL Chapter 11 Case entered an order authorizing and directing Southeast to take all necessary and advisable action to wind up TKPL's affairs and to terminate its existence as a partnership. On December 26, 1995, TKPL was dissolved. The Company recorded a gain on the recovery of the TKPL note to Southeast of $11,288,000, which was calculated as follows: Proceeds from TKPL unsecured note to Southeast $17,700,000 Partial Write-off of Cost in Excess of Fair Value of Net Assets Acquired (6,412,000) ----------- Gain on TKPL Note to Southeast $11,288,000 ===========
F-17 75 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Basis of Accounting for the Investment in TKPL. Southeast had significant influence over TKPL's activities because it owned approximately 32 percent of TKPL's outstanding Units. However, Southeast did not control TKPL for accounting purposes and, accordingly, accounted for its investment using the equity method. No losses of TKPL were allocated to Southeast because Southeast was not obligated to fund losses of TKPL as stated in the Third Amended and Restated Agreement of Limited Partnership dated August 3, 1993. Duties to and Compensation from TKPL. Southeast, in its capacity as Managing General Partner, generally had responsibility for all aspects of TKPL's operations and received as compensation for its services a management fee equal to nine percent of the gross rental revenues derived from the properties it managed for TKPL. All third-party leasing commissions incurred on TKPL buildings were the responsibility of the Company. During 1995 and 1994, the management fees earned were approximately $1,685,000 and $3,288,000, respectively. During the fourth quarter of 1995, approximately $500,000 of management fees from TKPL previously recorded were written off because collection of these fees could have potentially affected the Company's REIT status. Purchase of TKPL Mortgage Notes. During 1995, KE acquired $27.8 million principal amount of TKPL New Secured Notes and $4.5 million principal amount of TKPL Converted Loan Notes for approximately $18.2 million in the aggregate. During 1995, the TKPL New Secured Notes and the TKPL Converted Loan Notes were retired by TKPL. The Company recorded $13,066,000 of interest revenue related to these notes during 1995 which represented repayment proceeds on the notes in excess of the Company's cost basis. These excess proceeds were recorded as an interest yield adjustment on the notes. 4. MORTGAGES AND LOANS PAYABLE. On December 18, 1996, the Company closed on $175.9 million of a $190 million non-recourse loan with Northwestern Mutual Life Insurance Company ("Northwestern") which is secured by 10 office parks. This loan is divided into (i) a tranche in the amount of $100.5 million ($86.4 million which has been drawn) with a 10 year maturity and an interest rate of 8.25 percent and (ii) a tranche in the amount of $89.5 million with a maturity of 12 years and an interest rate of 8.33 percent. The Company plans to draw the remaining loan proceeds when the existing indebtedness on two buildings matures. Monthly payments on this loan include principal amortization based on a 25 year amortization period. This indebtedness requires the Company to maintain certain financial ratios and is collateralized by properties with a carrying value of approximately $253.8 million at December 31, 1996. At December 31, 1996, the Company had other mortgages payable with an outstanding balance of $27,142,000 which is net of a $369,000 discount. Such mortgages are generally amortizing, bear interest at rates ranging from 8.5 percent to 10.125 percent, and are collateralized by office buildings with a carrying value of approximately $50.2 million at December 31, 1996. With the proceeds of a private placement of three million shares of the Company's common stock and the Northwestern loan, the Company repaid all of its debt which had been restructured during 1993. The Company has signed a commitment for a $50 million revolving credit facility, subject to sufficient collateral being provided to fund this facility. Based on the Company's election, the interest rate on this revolving credit facility will be either (i) the lender's LIBOR rate plus 200 basis points or (ii) the lender's prime rate. Interest payments will be due monthly on this credit facility which has a term of two years. At the election of the lender, the term of this credit facility may be extended for additional periods of one year each. F-18 76 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The annual maturities of loans and mortgages payable, which are gross of $369,000 of unamortized discounts, as of December 31, 1996, are summarized as follows:
-------------- YEAR ENDING AMOUNT DECEMBER 31, (IN THOUSANDS) ------------ -------------- 1997 $ 11,333 1998 3,909 1999 3,502 2000 17,971 2001 3,184 Subsequent Years 163,514 -------- Total $203,413 ========
5. LEASES. The Company's operations consist principally of owning and leasing of office space. Most of the leases are for terms of three to five years. Generally, the Company pays all operating expenses, including real estate taxes and insurance. At December 31, 1996, approximately 94 percent of the Company's annualized rentals were subject to rent escalations based on changes in the Consumer Price Index or increases in real estate taxes and certain operating expenses. A substantial number of leases contain options that allow leases to renew for varying periods. The Company's leases are operating leases and expire at various dates through 2014. Minimum future rental revenues from leases in effect at December 31, 1996, determined without regard to renewal options, are summarized as follows:
-------------- YEAR ENDING AMOUNT DECEMBER 31, (IN THOUSANDS) ------------ -------------- 1997 $ 88,825 1998 66,783 1999 46,759 2000 34,423 2001 21,693 Subsequent Years 61,470 -------- Total $319,953 ========
The above minimum future rental revenue does not include contingent rentals that may be received under provisions of the lease agreements. Contingent rentals amounted to $2,886,000, $1,792,000 and $2,172,000 for the years 1996, 1995, and 1994, respectively. At December 31, 1996, annualized rental revenues totalled approximately $13,500,000 for the State of Florida, when all of its departments and agencies which lease space in the Company's buildings were combined. Also, at that date, annualized rental revenues totalled approximately $10,498,000 for the United States of America, when all of its departments and agencies which lease space in the Company's buildings were combined. 6. STOCK OPTIONS AND RIGHTS. 1988 Stock Option Plan. The Company's Amended and Restated 1988 Stock Option Plan (the "1988 Plan") provides for the granting of options to purchase up to 500,000 shares of its common stock to key employees of the Company and its subsidiaries. To exercise the option, payment of the option price is required before the option shares are delivered. These options expire seven years from the date of grant and are generally exercisable beginning one year from the date of the grant at the rate of 20 percent per annum of the shares covered by each option on a cumulative basis being fully exercisable five years after the date of grant. F-19 77 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1993 Stock Option Plan. The Company's 1993 Stock Option Plan (the "1993 Plan") provides for the granting of options to purchase up to 1,000,000 shares of its common stock to key employees of the Company and its affiliates. To exercise the option, payment of the option price is required before the option shares are delivered. These options expire ten years from the date of grant and are generally exercisable beginning one year from the date of the grant at the rate of 20 percent per annum of the shares covered by each option on a cumulative basis being fully exercisable five years after the date of grant. 1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996 Plan") provides for the granting of options to purchase up to 650,000 shares of its common stock to key employees of the Company. To exercise the option, payment of the option price is required before the option shares are delivered. These options expire ten years from the date of grant and are exercisable beginning one year from the date of the grant at the rate of 20 percent per annum of the shares covered by each option on a cumulative basis being fully exercisable five years after the date of grant. Information Concerning Options Granted. Substantially all of the options granted have been granted with an exercise price equal to the market value at the date of grant. If compensation cost for stock option grants had been determined based on the fair value at the grant dates for 1996 and 1995 consistent with the method prescribed by SFAS 123, the Company's net earnings and earnings per share would have been adjusted to the pro forma amounts indicated below:
1996 1995 ----------- ----------- Net Income --As reported.......................................... $10,501,000 $28,990,000 --Pro forma............................................ $10,139,000 $28,960,000 Primary Earnings per share --As reported.......................................... $ 0.54 $ 1.61 --Pro forma............................................ $ 0.52 $ 1.61
Under SFAS 123, the fair value of each option grant is estimated on the date of grant using the binomial option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995:
1996 1995 ----- ----- 1988 PLAN Dividend Yield............................................ 5.00% 5.00% Expected Volatility....................................... 28.09% 43.70% Risk-free Interest Rates.................................. 6.52% 7.35% Expected Lives (Months)................................... 61 69
1996 1995 ----- ----- 1993 PLAN AND 1996 PLAN Dividend Yield............................................ 5.00% 5.00% Expected Volatility....................................... 24.17% 43.60% Risk-free Interest Rates.................................. 6.29% 7.37% Expected Lives (Months)................................... 86 69
F-20 78 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A summary of the status of fixed stock option grants as of December 31, 1996, 1995 and 1994, and changes during the years ending on those dates is presented below:
1996 1995 1994 --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- -------- --------- -------- --------- -------- Outstanding--beginning of year........ 1,251,862 $ 7.04 1,557,412 $ 9.54 758,576 $14.39 Granted............................. 923,981 14.39 311,800 7.53 973,282 7.63 Exercised........................... (146,268) 7.33 (5,470) 6.96 (1,200) 5.13 Expired............................. 0 -- (299,180) 20.00 0 -- Forfeited........................... (100,616) 7.69 (312,700) 7.60 (173,246) 20.00 --------- --------- --------- Outstanding--end of year.............. 1,928,959 $10.51 1,251,862 $ 7.04 1,557,412 $ 9.54 ========= ====== ========= ====== ========= ======
The weighted average fair values of options granted during 1996 and 1995 were $3.79 and $3.44 per option, respectively. The following table summaries information about fixed stock options outstanding at December 31, 1996:
EXERCISE OPTIONS OPTIONS WEIGHTED AVERAGE PRICE OUTSTANDING EXERCISABLE REMAINING LIFE - -------- ----------- ----------- ---------------- (MONTHS) $ 5.125 266,786 209,536 25 7.500 182,500 19,972 96 7.625 572,879 227,426 78 8.125 6,000 1,200 100 11.500 189,294 135,744 103 15.375 711,500 0 119 --------- ------- 1,928,959 593,878 90 ========= ======= ===
Remaining non-exercisable options as of December 31, 1996 become exercisable as follows:
NUMBER YEAR OF OPTIONS ---- ---------- 1997 387,243 1998 329,993 1999 329,993 2000 164,842 2001 123,010 --------- 1,335,081 =========
Warrants. The Company had 1,110,887 and 1,114,217 Warrants outstanding on December 31, 1996 and 1995, respectively. Each Warrant gives the holder the right to purchase one share of common stock at a price of $8.00 per share, such rights to be exercisable until June 30, 1999. The Warrants are subject to redemption at the option of the Company at prices currently ranging from $3.48 to $5.24 per Warrant. Shareholder Rights Plan. Pursuant to a Shareholder Rights Plan (the "Rights Plan"), on September 30, 1990, the Board of Directors of the Company declared a dividend of one Common Stock Purchase Right for each outstanding share of common stock of the Company. Under the terms of the Rights Plan, the rights which were distributed to the shareholders of record on October 11, 1990, trade together with the Company's common stock (the "Shares") and are not exercisable until the occurrence of certain events (none of which have occurred through December 31, 1996), including acquisition of, or commencement of a tender offer for, 15 percent or more of the Company's common stock. In such event, each right entitles its holder (other than the acquiring person or bidder) to acquire additional shares of the Company's common stock at a fifty percent discount from the market price. The rights are redeemable under circumstances as specified in the Rights Plan. The Rights Plan was F-21 79 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) amended effective October 10, 1996 for a certain shareholder and its affiliates. See Note 2 for further discussion of this amendment. 7. STOCK INVESTMENT PLAN. During 1994, the Company adopted a Monthly Stock Investment Plan (the "SIP") which provides for regular purchases of the Company's common stock by all employees and directors. The SIP provides for monthly payroll and directors' fees deductions up to $1,700 per month with the Company making monthly contributions for the account of each participant as follows: (i) 25 percent of amounts up to $50; (ii) 20 percent of amounts between $50 and $100; and (iii) 15 percent of amounts between $100 and $1,700, which amounts are used by an unaffiliated Administrator to purchase shares from the Company. The Company has reserved a total of 200,000 Shares for issuance under the SIP. The Company's contribution and the expenses incurred in administering the SIP totalled approximately $36,700, $34,800 and $7,900 for 1996, 1995 and 1994, respectively. Through December 31, 1996, 45,016 Shares have been issued under the SIP. 8. EMPLOYEE BENEFIT PLANS. During 1994, the Company adopted a 401(k) plan (the "401(k) Plan") which permits contributions by employees. The Company's Board of Directors approved a Company contribution to the 401(k) Plan for 1994. This contribution was in the form of the Company's common stock and was made during February, 1995. The contribution totalled 122,441 Shares which had a value of approximately $888,000 on December 31, 1994. For 1995, the Company's Board of Directors approved a Company contribution to the 401(k) Plan in the form of the Company's Shares (43,804 Shares which had a value of approximately $465,000 on December 31, 1995) and cash ($443,000). The contribution for 1995 was made during February, 1996. For 1996, the Company's Board of Directors approved a Company contribution to the 401(k) Plan in the form of the Company's Shares (23,657 Shares which had a value of approximately $444,000 on December 31, 1996). The contribution for 1996 was made on January 6, 1997. The Company's Board of Directors has adopted a supplemental executive retirement plan (the "SERP"), an unfunded defined benefit plan. The purpose of the SERP is to facilitate the retirement of select key executive employees by supplementing their benefits under the Company's 401(k) Plan. The document establishing the SERP, which became effective on June 28, 1995, was executed by the Company on August 18, 1995. The benefits are based on years of service and the employee's average base salary during the last three calendar years of employment. Net periodic pension cost for the SERP for 1996 and 1995 was as follows (in thousands):
1996 1995 ---- ---- Service Cost................................................ $ 28 $ 25 Interest Cost............................................... 242 94 Amortization of Unrecognized Prior Service Cost............. 219 109 ---- ---- Total.................................................. $489 $228 ==== ====
Assumptions used in the computation of net periodic pension cost for the SERP were as follows: Discount rate............................................... 7.5% Rate of increase in salary levels........................... 5.0%
F-22 80 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table sets forth the status of the unfunded SERP and the amounts included in accrued liabilities-other in the Consolidated Balance Sheet at December 31, 1996 and 1995 (in thousands):
1996 1995 ------- ------- Accumulated benefit obligation.............................. $ 2,370 $ 1,884 Effect of projected future salary increases................. 1,126 624 ------- ------- Projected benefit obligation................................ $ 3,496 $ 2,508 ======= ======= Actuarial present value of projected benefit obligations in excess of plan assets..................................... $(3,496) $(2,508) Unrecognized prior service cost............................. 2,779 2,280 Additional minimum liability................................ (1,653) (1,656) ------- ------- Accrued pension cost........................................ $(2,370) $(1,884) ======= =======
9. DIVIDENDS. The Company paid no dividends during the three years ended December 31, 1996. The Company intends that the quarterly dividend payout in the last quarter of each year will be adjusted to reflect the distribution of at least 95 percent of the Company's REIT taxable income as required by the Federal income tax laws. During December 1996, the Company's Board of Directors declared a quarterly dividend of $0.05 per share payable on February 10, 1997, to shareholders of record on January 6, 1997. 10. FEDERAL INCOME TAXES. The Company is operated in a manner so as to qualify and has elected tax treatment as a REIT. The Company's taxable loss prior to the dividends paid deduction for the years ended December 31, 1996, 1995, and 1994 was approximately $401,000, $23,265,000 and $15,954,000, respectively. The difference between net income for financial reporting purposes and taxable income/loss results primarily from different methods of accounting for bad debts, depreciable lives related to the properties owned, advance rents received and net operating loss carryforwards. At December 31, 1996, the net book basis of the Company's assets and liabilities exceeded the net tax basis of assets and liabilities in the amount of approximately $11.9 million. The Company utilized approximately $323,000 and $593,000 of net operating loss carryforwards to eliminate REIT taxable income for 1994 and 1995, respectively. The Company's net operating loss carryforward available to offset REIT taxable income for 1996 is approximately $14,949,000. The use of net operating loss carryforwards and other tax attributes by the Company is subject to certain limitations imposed by Internal Revenue Code Sections 382 and 383. These limitations apply to both regular and alternative minimum taxes. These net operating loss carryforwards and other tax attributes can be used in varying degrees to offset REIT taxable income or tax through 2007. For 1995, the Company paid alternative minimum taxes of approximately $103,000 and recorded a provision for alternative minimum taxes of approximately $300,000 for 1996. During 1996, the Internal Revenue Service ("IRS") completed its examination of the Company's 1992 and 1993 Federal income tax returns and the Koger Properties, Inc. ("KPI") final Federal income tax return. The IRS submitted their Report to the Company and proposed disallowing certain deductions on KPI's final Federal income tax return, the result of which reduced the net operating loss carryforwards acquired from KPI from approximately $98 million to $30 million and required the payment of approximately $169,000 of alternative minimum tax plus interest. Management believes this was a favorable settlement with respect to KPI's final Federal income tax return. There were no proposed adjustments to the Company's 1992 and 1993 tax returns. 11. LITIGATION. A derivative action against the Company in the U. S. District Court, Middle District of Florida (the "District Court"), which commenced on October 29, 1990, has been resolved in favor of the Company. Various amended filings and counter-claims have been filed against the Company of which the Company does not believe that the outcome will materially affect its operations or financial position. The Company and the other parties to this derivative action have agreed on a settlement of all claims and have submitted documentation thereof to the District Court. On January 10, 1996, the District Court entered its order F-23 81 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) approving this settlement (the "Approval Order") after notice to stockholders of the Company. The Approval Order became final on or about February 12, 1996, and the parties are now required to exchange documentation and effect other steps to consummate this settlement. During 1995, the Company paid $50,000 for settlement of this litigation. During 1994, the Company settled a pending class action proceeding (the "Securities Action"). The Company recorded a provision of $1,685,000 relating to the settlement of the Securities Action and incurred additional costs related to the settlement which totalled $217,000. Under the terms of the merger agreement between the Company and KPI, the Company agreed to indemnify the former non-officer directors of KPI other than Ira M. Koger (the "Indemnified Persons") in respect of amounts to which such Indemnified Person would be otherwise entitled to indemnification under Florida law, the articles of incorporation or the by-laws of KPI arising out of acts or omissions prior to September 25, 1991 (the "Indemnity"). The obligations, if any, of the Company under such indemnification do not exceed (i) $1,000,000 in the aggregate and (ii) $200,000 per Indemnified Person and are subject to certain other conditions precedent. Certain of the former non-officer directors of KPI were defendants in a Pension Plan class action suit (the "Roby Case"). The Company was not named in this suit. However, certain former non-officer directors of KPI may be Indemnified Persons. The Company signed an agreement to settle the Roby Case and placed in escrow $100,000 as its contribution to such settlement for the Indemnified Persons. On January 9, 1997, the District Court entered the Order and Final Judgment approving the agreement to settle the Roby Case. The time for appeal of the Order and Final Judgment has passed with no appeal having been taken. No provision has been made in the Consolidated Financial Statements for any additional liability that may result from the Indemnity. 12. COMMITMENTS AND CONTINGENCIES. At December 31, 1996, the Company had commitments for the construction of buildings and improvements to existing buildings of approximately $6.7 million. On February 27, 1997, the Company sold 8.1 acres of unimproved land, with a carrying value of $2 million, located in Miami, Florida for an aggregate sales price of $2.97 million. 13. INTERIM FINANCIAL INFORMATION (UNAUDITED). Selected quarterly information for the two years in the period ended December 31, 1996, is presented below (in thousands except per share amounts):
RENTAL TOTAL NET EARNINGS PER QUARTERS ENDED REVENUES REVENUES INCOME COMMON SHARE -------------- -------- -------- ------- ------------ March 31, 1995 $23,482 $25,446 $ 2,204 $ .12 June 30, 1995 24,255 26,125 2,026 .11 September 30, 1995(1) 23,762 44,934 18,983 1.05 December 31, 1995(2) 23,366 29,245 5,777 .32 March 31, 1996 23,985 25,177 3,016 .16 June 30, 1996 24,160 25,384 2,214 .12 September 30, 1996 24,515 25,751 2,261 .12 December 31, 1996(3) 25,682 27,760 3,010 .14
- --------------- (1) The results for the quarter ended September 30, 1995 were affected by (i) the interest revenue associated with the Company's investment in the TKPL mortgage notes, (ii) the gain associated with the partial repayment of a TKPL note to Southeast and (iii) the write-off of deferred offering costs. (2) The results for the quarter ended December 31, 1995 were affected by additional gain associated with the partial repayment of a TKPL note to Southeast. (3) The results for the quarter ended December 31, 1996 were affected by an extraordinary loss on early retirement of debt. Income before extraordinary item was $4,396 and earnings per common share before extraordinary item was $0.21. F-24 82 PRO FORMA FINANCIAL STATEMENTS The following unaudited pro forma financial statements set forth (i) the pro forma balance sheet as of September 30, 1997, as if the acquisition of an office building occurred on September 30, 1997, and (ii) the pro forma statements of operations for the year ended December 31, 1996 and the nine months ended September 30, 1997, as if the 1997 Acquisitions occurred on January 1, 1996. The pro forma financial statements are based upon assumptions contained in the notes thereto and should be read in conjunction with such notes. The following unaudited pro forma financial statements may not necessarily reflect the results of operations or financial position of the Company which would have actually resulted had the 1997 Acquisitions occurred as of the date and for the periods indicated, nor should they be taken as indicative of the future results of operations or the future financial position of the Company. Differences would result from various factors, including changes in the amounts of rents received and rental expenses paid in connection with operating the office buildings acquired and changes in the interest rates assumed on the Company's secured revolving credit facility. F-25 83 KOGER EQUITY, INC. UNAUDITED PRO FORMA BALANCE SHEET SEPTEMBER 30, 1997 (IN THOUSANDS)
--------------------------------------------- HISTORICAL PRO FORMA SEPTEMBER 30, PRO FORMA SEPTEMBER 30, 1997 ADJUSTMENTS 1997 ------------- ----------- -------------- ASSETS Operating properties: Real estate $639,595 $21,172(a) $660,767 Furniture and equipment 2,042 99(a) 2,141 Accumulated depreciation (98,395) (98,395) -------- ------- -------- Operating properties -- net 543,242 21,271 564,513 Properties under construction 17,200 17,200 Undeveloped land held for investment 15,327 15,327 Undeveloped land held for sale 1,512 1,512 Cash and temporary investments 9,293 (2,915)(a) 6,378 Accounts receivable, net 4,961 4,961 Investment in Koger Realty Services, Inc. 384 384 Cost in excess of fair value of net assets acquired -- net 1,912 1,912 Other assets 11,488 (286)(a) 11,202 -------- ------- -------- TOTAL ASSETS $605,319 $18,070 $623,389 ======== ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgages and loans payable $202,091 $18,000(a) $220,091 Accounts payable 3,011 3,011 Accrued real estate taxes payable 6,859 56(a) 6,915 Accrued liabilities -- other 5,025 5,025 Dividends payable 3,283 3,283 Advance rents and security deposits 4,526 14(a) 4,540 -------- ------- -------- Total Liabilities 224,795 18,070 242,865 -------- ------- -------- Shareholders' Equity: Common stock 249 249 Capital in excess of par value 374,988 374,988 Retained earnings 33,745 33,745 Treasury stock, at cost (28,458) (28,458) -------- ------- -------- Total Shareholders' Equity 380,524 380,524 -------- ------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $605,319 $18,070 $623,389 ======== ======= ========
See Accompanying Notes to Unaudited Pro Forma Financial Statements. F-26 84 KOGER EQUITY, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
------------------------------------------ HISTORICAL PRO FORMA PRO FORMA 1996 ADJUSTMENTS 1996 ---------- ----------- --------- REVENUES Rental and other rental services $98,805 $ 9,856(a) $108,661 Management fees 2,682 2,682 Interest 1,951 (1,225)(b) 726 Income from Koger Realty Services, Inc. 342 342 Gain on TKPL note to Southeast 292 292 ------- ------- -------- Total revenues 104,072 8,631 112,703 ------- ------- -------- EXPENSES Property operations 41,597 3,632(a) 45,229 Depreciation and amortization 21,127 1,827(c) 22,954 Mortgage and loan interest 18,701 3,138(d) 21,839 General and administrative 6,623 6,623 Direct cost of management fees 1,884 1,884 Undeveloped land costs 517 12(e) 529 Litigation costs 424 424 Loss on sale or disposition of assets 497 497 ------- ------- -------- Total expenses 91,370 8,609 99,979 ------- ------- -------- INCOME BEFORE INCOME TAXES 12,702 22 12,724 Income taxes 815 815 ------- ------- -------- INCOME BEFORE EXTRAORDINARY ITEM $11,887 $ 22 $ 11,909 ======= ======= ======== EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT SHARE BEFORE EXTRAORDINARY ITEM: Primary $ 0.61 $ 0.61 ======= ======== Fully Diluted $ 0.61 $ 0.61 ======= ======== WEIGHTED AVERAGE COMMON SHARES AND COMMON EQUIVALENT SHARES OUTSTANDING: Primary 19,500 19,500 ======= ======== Fully Diluted 19,576 19,576 ======= ========
See Accompanying Notes to Unaudited Pro Forma Financial Statements. F-27 85 KOGER EQUITY, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS)
--------------------------------------------- HISTORICAL PRO FORMA SEPTEMBER 30, PRO FORMA SEPTEMBER 30, 1997 ADJUSTMENTS 1997 ------------- ----------- ------------- REVENUES Rental and other rental services $80,250 $5,446(a) $85,696 Management fees 2,209 2,209 Interest 1,084 (727)(b) 357 Income from Koger Realty Services, Inc. 489 489 Reduction of gain on TKPL note to Southeast (9) (9) ------- ------ ------- Total revenues 84,023 4,719 88,742 ------- ------ ------- EXPENSES Property operations 32,824 2,147(a) 34,971 Depreciation and amortization 17,238 897(c) 18,135 Mortgage and loan interest 12,264 1,729(d) 13,993 General and administrative 4,256 4,256 Direct cost of management fees 1,553 1,553 Undeveloped land costs 341 6(e) 347 Loss on early retirement of debt 144 144 Provision for loss on land held for sale (379) (379) ------- ------ ------- Total expenses 68,241 4,779 73,020 ------- ------ ------- INCOME BEFORE GAIN ON SALE OR DISPOSITION OF ASSETS 15,782 (60) 15,722 Gain on sale or disposition of assets 2,057 2,057 ------- ------ ------- INCOME BEFORE INCOME TAXES 17,839 (60) 17,779 Income taxes 189 189 ------- ------ ------- NET INCOME $17,650 $ (60) $17,590 ======= ====== ======= EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT SHARE: Primary $ 0.79 $ 0.79 ======= ======= Fully Diluted $ 0.79 $ 0.79 ======= ======= WEIGHTED AVERAGE COMMON SHARES AND COMMON EQUIVALENT SHARES OUTSTANDING: Primary 22,251 22,251 ======= ======= Fully Diluted 22,319 22,319 ======= =======
See Accompanying Notes to Unaudited Pro Forma Financial Statements. F-28 86 KOGER EQUITY, INC. NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION. During the period from May 15, 1997 through October 1, 1997, the Company consummated the 1997 Acquisitions. These acquisitions were funded from working capital and by drawing $26 million under the Company's secured revolving credit facility. It is the intent of the Company's management to operate the ten office buildings acquired in a manner similar to the Company's existing office building portfolio. It is currently management's intent that the undeveloped land acquired, pursuant to these acquisitions, will be held as an investment for future development. 2. UNAUDITED PRO FORMA BALANCE SHEET. The unaudited pro forma balance sheet as of September 30, 1997 is based on the historical balance sheet for the Company presented herein and in its Quarterly Report on Form 10-Q for the period ended September 30, 1997. The unaudited pro forma balance sheet includes adjustments assuming the acquisition of an office building occurred as of September 30, 1997. Significant pro forma adjustments in the unaudited pro forma balance sheet include the following: (a) The Company acquired an office building in Atlanta, Georgia for $21,172,000 and related furniture and equipment which totaled $99,000. This purchase was partially funded with an $18,000,000 draw on the Company's secured revolving credit facility. 3. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996. The unaudited pro forma statement of operations for the year ended December 31, 1996 is based on the historical statement of operations for the Company presented herein and in its Annual Report on Form 10-K for the year ended December 31, 1996. The unaudited pro forma statement of operations includes adjustments assuming that the 1997 Acquisitions occurred as of January 1, 1996. Significant pro forma adjustments in the unaudited pro forma statement of operations include the following: (a) Adjustment required for the historical rental revenues and operating expenses for the ten office buildings acquired. Operating expenses do not include historical management costs and fees for those office buildings which the Company plans to manage with existing staff. (b) Adjustment required to reduce interest revenues based upon assumption that $25,000,000 of cash would have been used to purchase the 1997 Acquisitions on January 1, 1996. The average interest rate on temporary cash investments was estimated to be 4.9 percent. (c) Adjustment required to reflect depreciation ($1,472,000) on the office buildings and furniture and equipment acquired, based on the total cost of the 1997 Acquisitions. The Company uses the straight-line method for depreciation and amortization using an estimated life of 39 years for buildings and five to seven years for furniture and equipment. Also, an adjustment required to reflect amortization expense ($355,000) related to deferred financing costs for the secured revolving credit facility. (d) Adjustment required to reflect interest expense related to the assumed amount drawn on the secured revolving credit facility ($42,111,000) to fund the 1997 Acquisitions. The estimated average interest rate on the secured revolving credit facility was 7.45 percent. (e) Adjustment required to reflect real estate taxes on the two parcels of unimproved land purchased as part of the 1997 Acquisitions. 4. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997. The unaudited pro forma statement of operations for the nine months ended September 30, 1997 is based on the historical statement of operations for the Company presented herein and in its Quarterly Report on Form 10-Q for the period ended September 30, 1997. The unaudited pro forma statement of operations includes adjustments assuming that the 1997 Acquisitions occurred as of January 1, 1996. Significant pro forma adjustments in the unaudited pro forma statement of operations for the nine months ended September 30, 1997 include the following: (a) Adjustment required for the rental revenues and operating expenses for the ten office buildings for the period prior to their acquisition. These amounts were estimated based on historical information available for portions of these F-29 87 KOGER EQUITY, INC. NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED) periods. Operating expenses do not include management costs and fees for those office buildings which the Company plans to manage with existing staff. (b) Adjustment required to reduce interest revenues based upon assumption that $35,000,000 of cash would have been used to purchase the 1997 Acquisitions on January 1, 1996. The average interest rate on temporary cash investments was estimated to be 5.0 percent. (c) Adjustment required to reflect depreciation ($799,000) on the office buildings and furniture and equipment acquired, based on the total cost of the assets acquired. The Company uses the straight-line method for depreciation and amortization using an estimated life of 39 years for buildings and five to seven years for furniture and equipment. Also, an adjustment required to reflect additional amortization expense ($98,000) related to deferred financing costs for the secured revolving credit facility. (d) Adjustment required to reflect additional interest expense related to the assumed amount drawn on the secured revolving credit facility ($32,111,000) to fund the 1997 Acquisitions. The estimated average interest rate on the secured revolving credit facility was 7.60 percent. (e) Adjustment required to reflect real estate taxes on the two parcels of unimproved land acquired as part of the 1997 Acquisitions for the period prior to acquisition. F-30 88 KOGER EQUITY, INC. UNAUDITED STATEMENT OF ESTIMATED TAXABLE OPERATING RESULTS AND ESTIMATED CASH TO BE MADE AVAILABLE BY OPERATIONS OF KOGER EQUITY, INC. FOR THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 1996 (IN THOUSANDS) REVENUES Rental and other rental services $108,960 Management fees 2,682 Interest 726 Dividends received from Koger Realty Services, Inc. 490 Gain on TKPL note to Southeast 292 -------- Total revenues 113,150 -------- EXPENSES Property operations 44,938 Depreciation and amortization 19,027 Mortgage and loan interest 21,839 General and administrative 6,190 Direct cost of management fees 1,813 Other 953 Compensation -- exercise of stock options 742 -------- Total expenses 95,502 -------- Estimated Taxable Operating Income 17,648 Add Back: Depreciation and Amortization 19,027 -------- Estimated Cash to Be Made Available by Operations $ 36,675 ========
Note 1: This statement of estimated taxable operating results and estimated cash to be made available by operations is an estimate of operating results of the Company for the twelve month period ended December 31, 1996 assuming that the 1997 Acquisitions occurred on the first day of the twelve month period. However, this statement does not purport to reflect actual results for any period. Note 2: Tax depreciation was determined based upon the actual tax depreciation for the Company's existing portfolio and based upon the assumption that the 1997 Acquisitions occurred on the first day of the twelve month period. F-31 89 ACQUISITIONS As of September 30, 1997 the Company had acquired ten office buildings in Atlanta, El Paso, Greenville, Jacksonville, San Antonio and Tallahassee, containing approximately 652,100 net rentable square feet. Description of seven color photographs: Photograph of the 1455 Parkway Building office building, located in Atlanta, GA. Photograph of the Pacific Plaza Building, located in San Antonio, TX. Photograph of the Deerwood Park Building, located in Jacksonville, FL. Photograph of two office buildings, the Coventry I and the Coventry II, located in El Paso, TX. Photograph of the Koger Atrium Building, located in San Antonio, TX. Photograph of the Alexander Building, located in Tallahassee, FL. Photograph of the three office buildings located in the Park Central Office Park, in Greenville, S.C. 90 PROSPECTUS $300,000,000 PREFERRED STOCK AND COMMON STOCK KOGER EQUITY, INC. --------------------- Koger Equity, Inc. (the "Company") may offer from time to time, in one or more classes or series, (a) shares of its Preferred Stock, par value $.01 per share (the "Preferred Stock"), and (b) shares of its Common Stock, par value $.01 per share (the "Common Stock"), with an aggregate public offering price of up to $300,000,000 on terms to be determined at the time or times of offering. The Preferred Stock and the Common Stock (collectively, the "Securities") may be offered, separately or together, in separate classes or series in amounts, at prices and on terms to be set forth in a supplement to this Prospectus (a "Prospectus Supplement"). The specific terms of the Securities in respect of which this Prospectus is being delivered will be set forth in the applicable Prospectus Supplement and will include, where applicable: (a) in the case of Preferred Stock, the number of shares, the specific title, any dividend, liquidation, redemption, conversion or exchange, voting and other rights, and any initial public offering price, and (b) in the case of Common Stock, the number of shares and any initial public offering price. In addition, such specific terms may include limitations on direct or beneficial ownership and restrictions on transfer of the Securities, in each case as may be appropriate to preserve the status of the Company as a real estate investment trust (a "REIT") for federal income tax purposes. The applicable Prospectus Supplement will also contain information, where applicable, about certain federal income tax considerations relating to, and any listing on a securities exchange of, the Securities covered by such Prospectus Supplement. The Securities may be offered directly, through agents designated from time to time by the Company or to or through underwriters or dealers. If any agents or underwriters are involved in the sale of any of the Securities, their names, and any applicable purchase price, fee, commission or discount arrangement between or among them, will be set forth, or will be calculable from the information set forth, in the applicable Prospectus Supplement. See "Plan of Distribution." No Securities may be sold without delivery of the applicable Prospectus Supplement describing the method and terms of the offering of such series of Securities. --------------------- THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF OFFERED SECURITIES UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- November 18, 1997 91 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR AN APPLICABLE PROSPECTUS SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER, DEALER OR AGENT. THIS PROSPECTUS AND ANY APPLICABLE PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF. --------------------- TABLE OF CONTENTS Available Information....................................... 3 Incorporation of Certain Documents by Reference............. 3 The Company................................................. 5 Use of Proceeds............................................. 5 Description of Common Stock................................. 5 Description of Preferred Stock.............................. 7 Provisions of Florida Law................................... 12 Ratios of Earnings to Fixed Charges......................... 12 Plan of Distribution........................................ 13 Experts..................................................... 14 Legal Matters............................................... 14
2 92 AVAILABLE INFORMATION The Company is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). The Registration Statement, the exhibits and schedules forming a part thereof and the reports, proxy statements and other information filed by the Company with the Commission in accordance with the Exchange Act can be inspected and copied at the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Company is required to file electronic versions of these documents with the Commission through the Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system, and such electronic versions are available to the public at the Commission's World-Wide Web Site, http://www.sec.gov. Furthermore, the Common Stock is listed on the American Stock Exchange and similar information concerning the Company can be inspected and copied at the offices of the American Stock Exchange Inc., 86 Trinity Place, New York, New York 10006-1881. The Company has filed with the Commission a registration statement (the "Registration Statement") (of which this Prospectus is a part) under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Securities. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference and the exhibits and schedules thereto. For further information regarding the Company and the Securities, reference is hereby made to the Registration Statement and such exhibits and schedules, which may be obtained from the Commission at its principal office in Washington, D.C., upon payment of the fees prescribed by the Commission. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The documents listed below have been filed by the Company under the Exchange Act with the Commission (File No. 1-9997) and are incorporated herein by reference: (a) Annual Report on Form 10-K for the year ended December 31, 1996; (b) Definitive proxy statement dated April 18, 1997 relating to the Annual Meeting of Shareholders held on May 20, 1997; (c) Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997; (d) Current Reports on Form 8-K dated December 16, 1996, April 7, 1997, May 27, 1997 and October 1, 1997; and (e) Description of Common Stock contained in Registration Statement on Form 8-A dated August 18, 1988, including any amendments thereto or reports filed for the purpose of updating such description. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Securities shall be deemed to be incorporated by reference in this Prospectus and to be part hereof from the date of filing such documents. 3 93 Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein (or in the applicable Prospectus Supplement) or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Copies of all documents which are incorporated herein by reference (not including the exhibits to such information, unless such exhibits are specifically incorporated by reference in such information) will be provided without charge to each person, including any beneficial owner, to whom this Prospectus is delivered upon written or oral request. Requests should be directed to Koger Equity, Inc., 3986 Boulevard Center Drive, Jacksonville, Florida 32207, Attn: W. Lawrence Jenkins, Vice President and Secretary, telephone number (904) 398-3403. 4 94 THE COMPANY The Company is a self-administered and self-managed equity real estate investment trust (a "REIT") which, as of September 30, 1997, owned, operated and managed 225 office buildings (the "Office Buildings") of which 222 are in office centers (the "Koger Centers") located in 13 metropolitan areas throughout the southeastern and southwestern United States and three of which are outside Koger Centers but in metropolitan areas where Koger Centers are located. The Office Buildings contain approximately 8.2 million net rentable square feet and were on average 92% leased as of September 30, 1997. The Company also owned, as of September 30, 1997, approximately 145 acres of unencumbered land held for development (the "Development Land"). A majority of the Development Land adjoins Office Buildings in ten Koger Centers and has infrastructure, including roads and utilities, in place. The Company is committed to providing a high level of tenant services, and provides leasing, management and other customary tenant-related services for each of the Koger Centers. In addition, the Company manages for third parties 22 office buildings containing approximately 1.3 million net rentable square feet. Including the Office Buildings, the Company manages a total of 247 office buildings containing approximately 9.5 million net rentable square feet through 16 management offices in eight states. The Company's property management personnel have substantial leasing and marketing experience and have leased, or renewed leases for, approximately 1.9 million square feet of suburban office space during the first nine months of 1997. The Company was incorporated in Florida in 1988 for the purpose of investing in office buildings located in suburban office centers throughout the southeastern and southwestern United States. The Company has been self-administered since 1992 and self-managed since December 21, 1993. The principal executive offices of the Company are located at 3986 Boulevard Center Drive, Jacksonville, Florida 32207, and its telephone number is (904) 398-3403. Unless the context indicates otherwise, references in this Prospectus to the Company include all of the Company's subsidiaries. USE OF PROCEEDS Unless otherwise described in the applicable Prospectus Supplement, the Company intends to use the net proceeds from the sale of the Securities to repay certain indebtedness, for working capital and for general corporate purposes, which may include the acquisition of properties and the development, expansion and improvement of certain properties in the Company's portfolio. DESCRIPTION OF COMMON STOCK GENERAL The Amended and Restated Articles of Incorporation of the Company (the "Restated Articles of Incorporation") authorize the issuance of up to 100,000,000 shares of Common Stock. As of September 30, 1997, there were 21,886,921 shares of Common Stock issued and outstanding, and the Company had reserved 1,913,589 shares of Common Stock for issuance upon the exercise of stock options. In addition, as of September 30, 1997, the Company held 2,987,333 shares of Common Stock in treasury. The description of the Common Stock set forth below is in all respects subject to and qualified in its entirety by reference to the applicable provisions of the Restated Articles of Incorporation and the By-laws of the Company (the "By-laws") and is also subject to any terms specified in the applicable Prospectus Supplement. Holders of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors of the Company (the "Board of Directors"), out of funds legally available therefor. Payment and declaration of dividends on the Common Stock and purchases of shares thereof by the Company will be subject to certain restrictions if the Company fails to pay dividends on the Preferred Stock. See "Description 5 95 of Preferred Stock." Upon any liquidation, dissolution or winding up of the Company, holders of Common Stock will be entitled to share equally and ratably in any assets available for distribution to them, after payment or provision for payment of the debts and other liabilities of the Company and the preferential amounts owing with respect to any outstanding Preferred Stock. Although the Company is authorized to issue up to 50,000,000 of Preferred Stock, par value $.01 per share, as of the date hereof, the Company has not issued any such shares. The Common Stock possesses ordinary voting rights for the election of directors and in respect of other corporate matters, each share entitling the holder thereof to one vote. Holders of Common Stock do not have cumulative voting rights in the election of directors, which means that holders of more than 50% of all of the shares of Common Stock voting for the election of directors can elect all of the directors if they choose to do so and the holders of the remaining shares cannot elect any directors. Holders of Common Stock generally do not have preemptive rights, which means they have no right to acquire any additional shares of Common Stock that may be issued by the Company at a subsequent date. However, pursuant to a Stock Purchase Agreement dated as of October 10, 1996, between the Company and AP-KEI Holdings, LLC ("Apollo"), Apollo and its affiliates were granted such a right. The outstanding Common Stock is, and, when issued, the Common Stock to be issued in connection with this Prospectus will be, fully paid and nonassessable. RESTRICTIONS ON OWNERSHIP For the Company to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), not more than 50% in value of its outstanding capital stock may be owned, directly or indirectly, after applying certain constructive ownership rules, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of any taxable year, and its capital stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. Therefore, the Restated Articles of Incorporation contain certain provisions set forth below restricting the ownership and transfer of the Common Stock. Upon demand of the Company, each shareholder will be required to disclose to the Board of Directors in writing such information with respect to direct and indirect beneficial ownership of shares of the Company's capital stock as the Board of Directors may deem necessary to comply with provisions of the Code applicable to the Company or to comply with the requirements of any other taxing authority or governmental entity or agency. The limitations on ownership of the Company's capital stock may have the effect of discouraging tender offers or other takeover proposals. Such limitations do not apply to cash tender offers made for all of the outstanding shares of Common Stock in which two-thirds of the outstanding shares of Common Stock not held by the tender offeror or any affiliate or associate thereof are tendered and accepted for cash. In view of the importance to the Company of its tax treatment as a REIT, the Board of Directors believes that such limitations on ownership are necessary. The Restated Articles of Incorporation provide, subject to certain exceptions, that no person, or persons acting as a group, may acquire ownership in the aggregate of more than 9.8% of the shares of Common Stock outstanding at any time. In applying this limit, a person is deemed to own shares of Common Stock constructively owned by such person after applying the relevant constructive ownership rules of the Code. All shares of Common Stock which any person has the right to acquire upon exercise of outstanding rights, options and warrants, and upon conversion of any securities convertible into shares of Common Stock, if any, shall be considered outstanding for purposes of applying the 9.8% limit if such inclusion would cause such person to own shares in excess of such limit. In the event that the Board of Directors believes that the tax status of the Company as a REIT under the Code is jeopardized, or that any person has acquired ownership, whether direct, indirect or constructive, of in excess of 9.8% of the Company's outstanding Common Stock ("Excess Shares"), the Board of Directors may, at its option, redeem a sufficient number of shares of Common Stock to protect and preserve the Company's status as a REIT, as well as all Excess Shares. In the case of such a redemption, the subject shares of Common Stock will be redeemed by the Company at a price per share equal to the average closing prices over a 20-day period prior to the redemption date (or, if no such prices are available, as determined by the Board of Directors). From and after the redemption date, the holder 6 96 of any shares of Common Stock called for redemption shall cease to be entitled to any distributions, voting rights and other benefits with respect to such shares of Common Stock, except the right to receive payment of the redemption price. Any transfer of shares of Common Stock that would prevent continued REIT qualification of the Company shall be void ab initio and any purported acquisition of shares of Common Stock resulting in disqualification of the Company as a REIT will be null and void. The Board of Directors has agreed subject to certain limitations, that so long as Apollo and its affiliates collectively hold no more than 25% of the then outstanding shares of Common Stock, no shares shall be deemed Excess Shares under the Restated Articles of Incorporation. As of September 30, 1997, Apollo held an aggregate of approximately 23% of the Common Stock. There are currently three representatives of Apollo on the Board of Directors of the Company. SHAREHOLDER RIGHTS AGREEMENT On September 30, 1990, the Board of Directors adopted and entered into a Common Stock Rights Agreement (the "Rights Agreement"), pursuant to which the Company issued Common Stock purchase rights (the "Rights"). Under the Rights Agreement, one Right was issued for each outstanding share of Common Stock held as of October 1, 1990, and one Right attached to each share of Common Stock issued thereafter and will attach to each share of Common Stock issued in the future. Each Right entitles the holder thereof, upon the occurrence of certain events, to acquire shares of Common Stock with a market value of two times the exercise price of the Right, which Right becomes exercisable if any person (other than (a) the Company, (b) its subsidiaries, (c) employee benefit plans of the Company or its subsidiaries or any person or entity organized appointed or established pursuant thereto and (d) any Exempt Person (as defined in the Rights Agreement)), acquires 15% or more of the outstanding shares of Common Stock (the "Acquiring Person"). If any Exempt Person acquires shares of Common Stock in excess of the number of shares for which such Exempt Person is exempt, such Exempt Person will then be an Acquiring Person and will not be able to exercise his, her or its Rights. One of the events which will trigger the Rights is the acquisition or commencement of a tender offer, of 15% or more of the outstanding shares of Common Stock. The Rights are redeemable by the Company for $.01 and expire September 30, 2000. As of September 30, 1997, Apollo is an Exempt Person under the Rights Plan. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is First Union National Bank. DESCRIPTION OF PREFERRED STOCK GENERAL The Company is authorized to issue 50,000,000 shares of Preferred Stock, par value $.01 per share, of which no shares were outstanding at September 30, 1997. Under the Restated Articles of Incorporation, the Board of Directors is authorized to issue the Preferred Stock from time to time in one or more classes or series and to establish from time to time the number of shares of Preferred Stock to be included in each such class and series and to fix the voting powers, conversion rights, designations, preferences and relative, participating, optional or other special rights, and such qualifications, limitations or restrictions of each such class and series, without any further vote or action by stockholders. Unless otherwise designated in the Restated Articles of Incorporation (including any applicable amendments thereto), all series of Preferred Stock shall constitute a single class of Preferred Stock. The following description of the Preferred Stock sets forth certain general terms and provisions of the Preferred Stock to which any Prospectus Supplement may relate. The statements below describing the Preferred Stock are in all respects subject to and qualified in their entirety by reference to the applicable provisions of the Restated Articles of Incorporation (including any applicable amendments thereto) and the By-laws. 7 97 Subject to limitations prescribed by Florida law and the Restated Articles of Incorporation, the Board of Directors is authorized to fix the number of shares constituting each class or series of Preferred Stock and the designations and powers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including such provisions as may be desired concerning voting, redemption, dividends, dissolution or the distribution of assets, conversion or exchange, and such other subjects or matters as may be fixed by resolution of the Board of Directors or a duly authorized committee thereof. The Preferred Stock will, when issued, be fully paid and nonassessable and will have no preemptive rights. Reference is made to the applicable Prospectus Supplement relating to the Preferred Stock offered thereby for specific terms, including: (a) The title of such Preferred Stock; (b) The number of shares of such Preferred Stock offered, the liquidation preference per share and the offering price of such Preferred Stock; (c) The dividend rate(s), period(s) and/or payment date(s) or method(s) of calculation thereof applicable to such Preferred Stock; (d) The date from which dividends on such Preferred Stock shall accumulate, if applicable; (e) The procedures for any auction and remarketing, if any, for such Preferred Stock; (f) The provision for a sinking fund, if any, for such Preferred Stock; (g) The provision for redemption, if applicable, of such Preferred Stock; (h) Any listing of such Preferred Stock on any securities exchange; (i) The terms and conditions, if applicable, upon which such Preferred Stock will be convertible into Common Stock, including the conversion price (or manner of calculation thereof); (j) Any other specific terms, preferences, rights (including voting rights), limitations or restrictions of such Preferred Stock; (k) A discussion of federal income tax considerations applicable to such Preferred Stock; (l) The relative ranking and preferences of such Preferred Stock as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company; (m) Any limitations on issuance of any Preferred Stock ranking senior to or on a parity with such series of Preferred Stock as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company; and (n) Any limitations on direct or beneficial ownership and restrictions on transfer, in each case as may be appropriate to preserve the status of the Company as a REIT. RANK Unless otherwise specified in the applicable Prospectus Supplement, the Preferred Stock will, with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company, rank (a) senior to all Common Stock, and to all equity securities ranking junior to such Preferred Stock with respect to dividend rights or rights upon liquidation, dissolution or winding up of the Company; (b) on a parity with all equity securities issued by the Company, the terms of which specifically provide that such equity securities rank on a parity with the Preferred Stock with respect to dividend rights or rights upon liquidation, dissolution or winding up of the Company; and (c) junior to all equity securities issued by the Company the terms of which specifically provide that such equity securities rank senior to the Preferred Stock with respect to dividend rights or rights upon liquidation, dissolution or winding up of the Company. As used in the Restated Articles of Incorporation for these purposes, the term "equity securities" does not include convertible debt securities. 8 98 DIVIDENDS Holders of Preferred Stock of any series shall be entitled to receive, when, as and if declared by the Board of Directors, out of assets of the Company legally available for payment, cash dividends at such rates and on such dates as will be set forth in the applicable Prospectus Supplement. Each such dividend shall be payable to holders of record as they appear on the stock transfer books of the Company on such record dates as shall be fixed by the Board of Directors. Dividends on any series of Preferred Stock will be cumulative from and after the date set forth in the applicable Prospectus Supplement. If any shares of the Preferred Stock of any series are outstanding, no full dividends shall be declared or paid or set apart for payment on the Preferred Stock of any other series ranking, as to dividends, on a parity with or junior to the Preferred Stock of such series for any period unless full cumulative dividends have been or contemporaneously are declared and paid for all past dividend periods and a sum sufficient has been set apart for the payment of full dividends on the Preferred Stock of such series for the then current dividend period. When dividends are not paid in full (or a sum sufficient for such payment is not so set apart) upon the shares of Preferred Stock of any series and the shares of any other series of Preferred Stock ranking on a parity as to dividends with the Preferred Stock of such series, all dividends declared upon shares of Preferred Stock of such series and any other series of Preferred Stock ranking on a parity as to dividends with such Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on the Preferred Stock of such series and such other series of Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of Preferred Stock of such series and such other series of Preferred Stock bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on Preferred Stock of such series which may be in arrears. Except as provided in the immediately preceding paragraph, unless full cumulative dividends on the Preferred Stock of such series have been or contemporaneously are declared and paid for all past dividend periods and a sum sufficient has been set apart for the payment of full dividends for the then current dividend period, no dividends (other than in Common Stock or other capital stock ranking junior to the Preferred Stock of such series as to dividends and upon liquidation) shall be declared or paid or set apart for payment or other distribution shall be declared or made upon the Common Stock or any other capital stock of the Company ranking junior to or on a parity with the Preferred Stock of such series as to dividends or upon liquidation, nor shall any Common Stock or any other capital stock of the Company ranking junior to or on a parity with the Preferred Stock of such series as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company, except (a) by conversion into or exchange for other capital stock of the Company ranking junior to the Preferred Stock of such series as to dividends and upon liquidation or (b) by a redemption or purchase or other acquisition of Common Stock made for purposes of any employee incentive or benefit plan of the Company or any of its subsidiaries. Any dividend payment made on shares of a series of Preferred Stock shall first be credited against the earliest accrued but unpaid dividend due with respect to shares of such series which remains payable. REDEMPTION If so provided in the applicable Prospectus Supplement, the shares of Preferred Stock will be subject to mandatory redemption or redemption at the option of the Company, as a whole or in part, in each case upon the terms, at the times and at the redemption prices set forth in such Prospectus Supplement. The Prospectus Supplement relating to a series of Preferred Stock that is subject to mandatory redemption will specify the number of shares of such Preferred Stock that shall be redeemed by the Company in each year commencing after a date to be specified, at a redemption price per share to be specified, together with an amount equal to all accrued and unpaid dividends thereon to the date of redemption. The redemption price may be payable in cash or other property, as specified in the applicable Prospectus Supplement. If the redemption price for Preferred Stock of any series is payable only from the net proceeds of the issuance of capital stock of the Company, the terms of such Preferred Stock may provide that, if no such capital stock shall have been issued or to the extent the net proceeds from any issuance are insufficient to pay in full the 9 99 aggregate redemption price then due, such Preferred Stock shall automatically and mandatorily be converted into shares of the applicable capital stock of the Company pursuant to conversion provisions specified in the applicable Prospectus Supplement. Notwithstanding the foregoing, unless full cumulative dividends on all shares of such series and any other series of Preferred Stock on a parity with such series as to dividends shall have been or contemporaneously are declared and paid for all past dividend periods and a sum sufficient has been set apart for the payment of full dividends for the then current dividend period, no shares of any series of Preferred Stock shall be redeemed unless all outstanding shares of Preferred Stock of such series are simultaneously redeemed; provided, however, that the foregoing shall not prevent the purchase or acquisition of Preferred Stock of any series pursuant to any restrictions on ownership set forth herein or in any applicable Prospectus Supplement or pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Preferred Stock of such series. If fewer than all of the outstanding shares of Preferred Stock of any series are to be redeemed, the number of shares to be redeemed will be determined by the Company and such shares may be redeemed pro rata from the holders of record of such shares in proportion to the number of such shares held by such holders (with adjustments to avoid redemption of fractional shares) or any other equitable method determined by the Company. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of record of a share of Preferred Stock of any series to be redeemed at the address shown on the stock transfer books of the Company. Each notice shall state: (a) the redemption date; (b) the number of shares and series of Preferred Stock to be redeemed; (c) the redemption price; (d) the place or places where certificates for such Preferred Stock are to be surrendered for payment of the redemption price; (e) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (f) the date upon which the holder's conversion rights, if any, as to such shares shall terminate. If fewer than all the shares of Preferred Stock of any series are to be redeemed, the notice mailed to each such holder thereof shall also specify the number of shares of Preferred Stock to be redeemed from each such holder. If notice of redemption of any shares of Preferred Stock has been given and if the funds necessary for such redemption have been set apart by the Company in trust for the benefit of the holders of any shares of Preferred Stock so called for redemption, then from and after the redemption date dividends will cease to accrue on such shares of Preferred Stock, such shares of Preferred Stock shall no longer be deemed outstanding and all rights of the holders of such shares of Preferred Stock will terminate, except the right to receive the redemption price. LIQUIDATION PREFERENCE Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, then, before any distribution or payment shall be made to the holders of any Common Stock, Excess Common Stock or any other class or series of capital stock of the Company ranking junior to any series of Preferred Stock in the distribution of assets upon any liquidation, dissolution or winding up of the Company, the holders of such series of Preferred Stock shall be entitled to receive out of assets of the Company legally available for distribution to stockholders liquidating distributions in the amount of the liquidation preference per share (set forth in the applicable Prospectus Supplement), plus an amount equal to all dividends accrued and unpaid thereon. After payment of the full amount of the liquidating distributions to which they are entitled, the holders of any series of Preferred Stock will have no right or claim to any of the remaining assets of the Company. In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the legally available assets of the Company are insufficient to pay the amount of the liquidating distributions on all outstanding shares of any series of Preferred Stock and the corresponding amounts payable on all shares of other classes or series of capital stock of the Company ranking on a parity with such series of Preferred Stock in the distribution of assets upon liquidation, dissolution or winding up, then the holders of such series of Preferred Stock and all other such classes or series of capital stock shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled. If liquidating distributions shall have been made in full to all holders of shares of any series of Preferred Stock and the holders of any class or series of capital stock ranking on a parity with such series of Preferred 10 100 Stock in the distribution of assets upon any liquidation, dissolution or winding up of the Company, the remaining assets of the Company shall be distributed among the holders of any other classes or series of capital stock ranking junior to such series of Preferred Stock upon liquidation, dissolution or winding up, according to their respective rights and preferences and in each case according to their respective number of shares. For such purposes, the consolidation or merger of the Company with or into any other corporation, or the sale, lease, transfer or conveyance of all or substantially all of the property or business of the Company, shall not be deemed to constitute a liquidation, dissolution or winding up of the Company. VOTING RIGHTS Holders of the Preferred Stock will not have any voting rights, except as set forth below or as otherwise from time to time required by law or as indicated in the applicable Prospectus Supplement. Whenever dividends on any shares of Preferred Stock shall be in arrears for six or more quarterly periods, the holders of such shares of Preferred Stock upon which such voting rights have been conferred (voting separately as a class with all other series of Preferred Stock upon which like voting rights have been conferred and are exercisable) will be entitled to vote for the election of two additional directors of the Company at a special meeting called by the holders of record of at least 10% of any series of Preferred Stock so in arrears (unless such request is received less than 90 days before the date fixed for the next annual or special meeting of the stockholders) or at the next annual meeting of stockholders, and at each subsequent annual meeting until all dividends accumulated on such shares of Preferred Stock for the past dividend periods shall have been fully paid or declared and a sum sufficient for the payment thereof set apart for payment. In such case, the entire Board of Directors will be increased by two directors. Under Florida law, notwithstanding anything to the contrary set forth above, holders of each series of Preferred Stock will be entitled to vote as a class upon any proposed amendment to the Restated Articles of Incorporation, whether or not entitled to vote thereon by the Restated Articles of Incorporation, if the amendment would increase or decrease the aggregate number of authorized shares of such series, increase or decrease the par value of the shares of such series or change the designations, rights, preferences or limitations of the shares of such series. In addition, unless provided otherwise for any series of Preferred Stock, so long as such series of Preferred Stock remains outstanding, the Company will not, without the affirmative vote or consent of the holders of at least two-thirds of the shares of such series of Preferred Stock then outstanding, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (a) authorize or create, or increase the authorized or issued amount of, any class or series of capital stock ranking prior to such series of Preferred Stock with respect to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up or reclassify any authorized capital stock of the Company into any such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such shares, or (b) amend, alter or repeal the provisions of the Restated Articles of Incorporation (or any applicable amendments thereto), whether by merger, consolidation or otherwise (each an "Event"), so as to materially and adversely affect any right, preference, privilege or voting power of such series of Preferred Stock or the holders thereof; provided, however, that with respect to the occurrence of any Event, so long as the Preferred Stock remains outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event the Company may not be the surviving entity, the occurrence of such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting power of the holders of Preferred Stock; and provided, further, that (i) any increase in the amount of the authorized Preferred Stock or the creation or issuance of any other series of Preferred Stock, or (ii) any increase in the amount of authorized shares of such series or any other series of Preferred Stock, in each case ranking on a parity with or junior to the Preferred Stock of such series with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of such series of Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 11 101 CONVERSION RIGHTS The terms and conditions, if any, upon which shares of any series of Preferred Stock are convertible into Common Stock will be set forth in the applicable Prospectus Supplement relating thereto. Such terms will include the number of shares of Common Stock into which the Preferred Stock is convertible, the conversion price (or manner of calculation thereof), the conversion period, provisions as to whether conversion will be at the option of the holders of the Preferred Stock or the Company and the events requiring an adjustment of the conversion price. RESTRICTIONS ON OWNERSHIP The applicable Prospectus Supplement will set forth any restrictions on ownership applicable to any series of Preferred Stock. TRANSFER AGENT AND REGISTRAR The transfer agent, dividend and redemption price disbursement agent and registrar for shares of each series of the Preferred Stock will be set forth in the applicable Prospectus Supplement. PROVISIONS OF FLORIDA LAW The Company is subject to several anti-takeover provisions under Florida law. These provisions permit a corporation to elect to opt out of such provisions in its Articles of Incorporation or (depending on the provision in question) its by-laws. The Company has not elected to opt out of these provisions. The Florida Business Corporation Act (the "Florida Act") contains a provision that prohibits the voting of shares in a publicly-held Florida corporation which are acquired in a "control share acquisition" unless the holders of a majority of the corporation's voting shares (exclusive of shares held by officers of the corporation, inside directors or the acquiring party) approve the granting of voting rights as to the shares acquired in the control share acquisition. A control share acquisition is defined as an acquisition that immediately thereafter entitles the acquiring party to vote in the election of directors within each of the following ranges of voting power: (a) one-fifth or more but less than one-third of such voting power, (b) one-third or more but less than a majority of such voting power and (c) a majority or more of such voting power. The Florida Act also contains an "affiliated transaction" provision that prohibits a publicly-held Florida corporation from engaging in a broad range of business combinations or other extraordinary corporate transactions with an "interested shareholder" unless (a) the transaction is approved by a majority of disinterested directors before the person becomes an interested shareholder, (b) the interested shareholder has owned at least 80% of the corporation's outstanding voting shares for at least five years, or (c) the transaction is approved by the holders of two-thirds of the corporation's voting shares other than those owned by the interested shareholder. An interested shareholder is defined as a person who together with affiliates and associates beneficially owns more than 10% of the corporation's outstanding voting shares. A transaction with Apollo would be an "affiliated transaction" under the Florida Act thereby requiring the approval of the holders of two-thirds of the shares of outstanding Common Stock other than the shares held by Apollo. RATIOS OF EARNINGS TO FIXED CHARGES The following table sets forth the Company's consolidated ratios of earnings to fixed charges for the periods shown:
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------- -------------------------------- 1997 1996 1996 1995 1994 1993 1992 -------- -------- ---- ---- ---- ---- ---- 2.30x 1.53x 1.67x 2.21x 1.17x 1.21x 1.08x
The ratios of earnings to fixed charges were computed by dividing earnings by fixed charges. For purposes of computing these ratios, earnings have been calculated by adding fixed charges (excluding capitalized 12 102 interest) to income (loss) before income taxes and extraordinary items. Fixed charges consist of interest costs, whether expensed or capitalized, the interest component of rental expense and the amortization of debt discounts and issue costs, whether expensed or capitalized. As of the date of this Prospectus, the Company has not issued any Preferred Stock; therefore, the ratios of earnings to combined fixed charges and Preferred Stock dividends are unchanged from the ratios presented in this section. PLAN OF DISTRIBUTION The Company may sell the Securities to one or more underwriters for public offering and sale by them or may sell the Securities to investors directly or through agents. Any such underwriter or agent involved in the offer and sale of the Securities will be named in the applicable Prospectus Supplement. Underwriters may offer and sell the Securities at a fixed price or prices, which may be changed, at prices related to the prevailing market prices at the time of sale or at negotiated prices. The Company also may offer and sell the Securities in exchange for one or more of its then outstanding issues of debt or convertible debt securities. The Company also may, from time to time, authorize underwriters acting as the Company's agents to offer and sell the Securities upon the terms and conditions as are set forth in the applicable Prospectus Supplement. In connection with the sale of Securities, underwriters may be deemed to have received compensation from the Company in the form of underwriting discounts or commissions and may also receive commissions from purchasers of Securities for whom they may act as agent. Underwriters may sell Securities to or through dealers, and such dealers may receive compensation in the form of discounts, concessions from the underwriters and/or commissions from the purchasers for whom they may act as agent. Any underwriting compensation paid by the Company to underwriters or agents in connection with the offering of Securities and any discounts, concessions or commissions allowed by underwriters to participating dealers will be set forth in the applicable Prospectus Supplement. Underwriters, dealers and agents participating in the distribution of the Securities may be deemed to be underwriters, and any discounts and commissions received by them and any profit realized by them on resale of the Securities may be deemed to be underwriting discounts and commissions under the Securities Act. Underwriters, dealers and agents may be entitled, under agreements entered into with the Company, to indemnification against and contribution toward certain civil liabilities, including liabilities under the Securities Act. If so indicated in the applicable Prospectus Supplement, the Company will authorize dealers or other persons acting as the Company's agents to solicit offers by certain institutions to purchase Securities from the Company at the public offering price set forth in such Prospectus Supplement pursuant to delayed delivery contracts (the "Contracts") providing for payment and delivery on the date or dates stated in such Prospectus Supplement. Each Contract will be for an amount not less than, and the aggregate number of Securities sold pursuant to the Contracts shall not be less nor more than, the amount or number, as the case may be, stated in the applicable Prospectus Supplement. Institutions with whom the Contracts, when authorized, may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and other institutions, but will in all cases be subject to the approval of the Company. The Contracts will not be subject to any conditions except (a) the purchase by an institution of the Securities covered by its Contracts shall not at the time of delivery be prohibited under the laws of any jurisdiction in the United States to which such institution is subject and (b) if the Securities not covered by Contracts are being sold to underwriters, the Company shall have sold to such underwriters the number of the Securities less the number thereof covered by the Contracts. The underwriters and such other agents will not have any responsibility in respect of the validity or performance of such Contracts. Certain of the underwriters and their affiliates may be customers of, engage in transactions with and perform services for the Company and its subsidiaries in the ordinary course of business. 13 103 EXPERTS The consolidated financial statements and the related financial statement schedules which are incorporated in this Prospectus by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report which is incorporated herein by reference, and have been so incorporated in reliance upon their authority as experts in accounting and auditing. With respect to the unaudited interim financial information for the periods ended March 31, 1997 and 1996, June 30, 1997 and 1996, and September 30, 1997 and 1996, which is incorporated herein by reference, Deloitte & Touche LLP have applied limited procedures in accordance with professional standards for a review of such information. However, as stated in their reports included in the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997 and incorporated by reference herein, they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their reports on such information should be restricted in light of the limited nature of the review procedures applied. Deloitte & Touche LLP are not subject to the liability provisions of Section 11 of the Securities Act for their reports on the unaudited interim financial information because those reports are not "reports" or a "part" of the registration statement prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Securities Act. LEGAL MATTERS The validity of the Securities will be passed upon for the Company by Boling & McCart, a professional association, 76 South Laura Street, Suite 700, Jacksonville, Florida 32202. Certain legal matters with respect to the Securities will be passed upon for any underwriters, dealers or agents by Cahill Gordon & Reindel (a partnership including a professional corporation), 80 Pine Street, New York, New York 10005. 14 104 [KOGER(R) Logo] -----END PRIVACY-ENHANCED MESSAGE-----