-----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, PHpq44EmVs41qL6cDGvU3YxfJTr4AmWK3wxtt1EyapzILHnFiACtqsN+zVx4p3wb ZBhUUG7eSQq1k7I7eXG9wQ== 0000950144-98-003106.txt : 19980324 0000950144-98-003106.hdr.sgml : 19980324 ACCESSION NUMBER: 0000950144-98-003106 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 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: 10-K SEC ACT: SEC FILE NUMBER: 333-20975 FILM NUMBER: 98571263 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 10-K 1 KOGER EQUITY INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission File Number 1-9997 KOGER EQUITY, INC. (Exact name of Registrant as specified in its Charter) FLORIDA 59-2898045 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer 3986 BOULEVARD CENTER DRIVE, SUITE 101 Identification No.) JACKSONVILLE, FLORIDA 32207 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (904) 398-3403 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED Common Stock, Par Value $.01 American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: TITLE OF CLASS NONE ============================= Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ------ The aggregate market value of the voting stock held by non-affiliates of the registrant on February 27, 1998 was approximately $566,873,000. The number of shares of registrant's Common Stock outstanding on February 27, 1998 was 25,477,450. Documents Incorporated by Reference The Company's Proxy Statement to be filed pursuant to Regulation 14A under the Securities Act of 1934 for the 1998 Annual Meeting of Shareholders is incorporated by reference in Part III of this report. 2 TABLE OF CONTENTS
ITEM NO. DESCRIPTION PAGE NO. PART I 1. BUSINESS.................................................................................... 1 2. PROPERTIES.................................................................................. 4 3. LEGAL PROCEEDINGS........................................................................... 10 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 10 PART II 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................................................................... 10 6. SELECTED FINANCIAL DATA.................................................................... 11 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................... 12 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 27 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................................................... 49 PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 49 11. EXECUTIVE COMPENSATION..................................................................... 50 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................................... 50 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 50 PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................................................. 51 SIGNATURES................................................................................. 58
3 PART I ITEM 1. BUSINESS GENERAL Koger Equity, Inc. ("KE") is a self-administered and self-managed equity real estate investment trust (a "REIT") which develops, owns, operates and manages suburban office buildings primarily located in 19 office centers (each a "Koger Center") located in 13 metropolitan areas throughout the southeastern and southwestern United States. As of December 31, 1997, KE owns 228 office buildings (each an "Office Building"), of which 224 are in Koger Centers and four are outside Koger Centers but in metropolitan areas where Koger Centers are located. The Office Buildings contain approximately 8.5 million net rentable square feet and were on average 92 percent leased as of December 31, 1997. During 1997, KE began construction of eight buildings which will contain approximately 650,000 net rentable square feet and will be ready for occupancy at various times throughout 1998. While KE has initiated and expects to continue a pattern of vertically integrated development of suburban office properties for its own account, it may from time to time acquire developed properties compatible with its properties in other markets primarily in the Southeast and Southwest if such acquisitions can be made on terms favorable to the Company. KE owns approximately 137 acres of unencumbered land held for development and approximately 21 acres of unencumbered land held for sale. A majority of the land held for development adjoins Office Buildings in 11 Koger Centers which have infrastructure, including roads and utilities, in place. KE intends over time to develop and construct office buildings using this land and currently has eight buildings under construction on approximately 52 acres of land held for development. KE expects to acquire additional land for development. In addition, KE provides leasing, management and other customary tenant-related services for the Koger Centers and for 22 office buildings containing approximately 1.3 million net rentable square feet owned by unaffiliated parties. KE was incorporated in Florida in 1988 for the purpose of investing in office buildings located in suburban office centers throughout the southeastern and southwestern Untied States. In selecting its investments, KE generally sought office buildings which had been substantially leased. In 1988, 1989 and 1990, KE purchased its initial Office Buildings from Koger Properties, Inc. ("KPI"), a real estate development company and the sponsor of KE. In September 1991, KPI filed a petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida. In April 1993, KE and KPI jointly proposed a plan of reorganization of KPI which provided for the merger of KPI with and into KE (the "Merger"). In December 1993, the Merger was consummated, and KE succeeded to substantially all of the assets of KPI, including 93 Office Buildings and approximately 295 acres of unimproved land. All of the Office Buildings acquired by KE from KPI were developed by KPI. In connection with the Merger, KE also acquired the management, development and administrative organizations of KPI and its subsidiaries. Prior to the Merger, KPI employees provided property management and leasing services for the Office Buildings owned by KE and certain buildings owned by third parties. KE has been self-administered since 1992 and self-managed since the Merger. As part of the Merger, KPI transferred to Southeast Properties Holding Corporation, a Florida corporation and a wholly-owned subsidiary of KE ("Southeast"), all of KPI's debt and equity interests in The Koger Partnership, Ltd., a Florida limited partnership ("TKPL"), which had also been the subject of a Chapter 11 bankruptcy case. At the time of the Merger, TKPL owned 92 suburban office buildings located in five metropolitan areas. Following the Merger, such buildings were managed by KE, as delegee of Southeast, 1 4 pursuant to a management agreement between TKPL and Southeast. On July 31, 1995, TKPL sold its 92 buildings and parcels of related land to Koala Miami Realty Holding, Inc., Koala Norfolk Realty Holding, Inc., Koala Raleigh Realty Holding, Inc., Koala Richmond Realty Holding, Inc., and Koala Tampa Realty Holding, Inc. (collectively, "Koala"), all of which are wholly owned by a co-mingled pension trust for which Morgan Guaranty Trust Company of New York is the trustee and J.P. Morgan Investment Management Inc. is the investment manager. Simultaneously with the sale by TKPL of its properties, KE sold to certain Koala entities three buildings and related parcels of land for an aggregate purchase price of $25.26 million. Koala continued to hold an option to purchase from KE two additional parcels of land in Miami, Florida until February 1997 when this option was exercised and Koala purchased these two parcels of land for an aggregate purchase price of $2.97 million. In addition to managing its own properties, KE, through certain related entities, provides property management services to third parties. In conjunction with Koger Real Estate Services, Inc., a Florida corporation and a wholly-owned subsidiary of KE ("KRES"), KE manages 21 office buildings owned by Centoff Realty Company, Inc. ("Centoff"), a subsidiary of Morgan Guaranty Trust Company of New York (KE, Southeast and KRES are hereafter referred to as the "Company"). During 1995 (prior to the sale by TKPL of its properties), KE acquired $32.3 million in aggregate principal amount (subject to provisions permitting prepayment at a discount) of promissory notes issued by TKPL to third parties (the "TKPL Notes") for an aggregate purchase price of approximately $18.2 million. During the quarter ended September 30, 1995, TKPL retired the TKPL Notes. KE recorded approximately $13.1 million of interest revenue on the TKPL Notes during 1995. The Company operates in a manner to qualify as a REIT under the provisions of the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company will not, with certain limited exceptions, be taxed at the corporate level on taxable income distributed to its shareholders on a current basis. The Company distributes at least 95 percent of its annual REIT taxable income (which term is used herein as defined and modified in the Code) to its shareholders. To qualify as a REIT, a corporation must meet certain substantive tests: (a) at least 95 percent of its gross income must be derived from certain passive and real estate sources; (b) at least 75 percent of its gross income must be derived from certain real estate sources; (c) less than 30 percent of its gross income must be derived from the sale or other disposition of certain items, including certain real property held for less than four years; (d) at the close of each calendar quarter, it must meet certain tests designed to ensure that its assets consist principally (at least 75 percent by value) of real estate assets, cash and cash equivalents and that its holdings of securities are adequately diversified; (e) each year, it must distribute at least 95 percent of its REIT taxable income; and (f) at no time during the second half of any calendar year may the Company be "closely held" (i.e., have more than 50 percent in value of its outstanding stock owned, directly, indirectly or constructively, by not more than five individuals). The constructive ownership rules, among other things, treat the shareholders of a corporation as owning proportionately any stock in another corporation owned by the first corporation. Management fee revenue does not qualify as real estate or passive income for purposes of determining whether the Company has met the REIT requirements that at least 95 percent of the Company's gross income be derived from certain real estate and passive sources and that at least 75 percent of its gross income be derived from certain real estate sources. Accordingly, in the event the Company derives income in excess of five percent from management and other "non-real estate" and "non-passive" activities, the Company would no longer qualify as a REIT for federal income tax purposes and would be required to pay federal income taxes as a business corporation. Two major governmental tenants, when all of their respective departments and agencies which lease 2 5 space in the Company's buildings are combined, each lease more than 10 percent of the net rentable area of the Company's buildings and contribute more than 10 percent of the Company's annualized rentals as of December 31, 1997. At that date, the State of Florida accounted for an aggregate of 11 percent of the Company's total net rentable square feet leased and 12.2 percent of the Company's total annualized rental revenues. In addition, the United States of America accounted for an aggregate of 10.1 percent of the Company's total net rentable square feet leased and 10 percent of the Company's total annualized rental revenues as of December 31, 1997. Some of the Company's principal tenants are the State of Florida, the United States of America, Blue Cross and Blue Shield of Florida, Aetna Life Insurance Company, Ford Motors, Wellspring Resources, Lumbermens Mutual Casualty Company, Norwest Bank of Texas, First Data Resources and Landstar. Governmental tenants (including the State of Florida and the United States of America), which account for 22.6 percent of the Company's leased space, may be subject to budget reductions in times of recession and governmental austerity. There can be no assurance that governmental appropriations for rents may not be reduced. Additionally, certain private-sector tenants which have contributed to the Company's rent stream may reduce their current demands, or curtail their future need, for additional office space. COMPETITION The Company competes in the leasing of office space with a considerable number of other realty concerns, including local, regional and national, some of which have greater resources than the Company. Through its ownership and management of suburban office parks, the Company seeks to attract tenants by offering office space convenient to residential areas and away from the congestion and attendant traffic problems of the downtown business districts. In recent years local, regional and national concerns have built competing office parks and single buildings in suburban areas in which the Company's centers are located. In addition, the Company competes for tenants with large high-rise office buildings generally located in the downtown business districts of these metropolitan areas. Although competition from other lessors of office space varies from city to city, the Company has been able to attain and maintain what it considers satisfactory occupancy levels at satisfactory rental rates. INVESTMENT POLICIES Based on its improved financial structure, the Company is in a position to capitalize on some of its strengths, such as the value of its franchise in the suburban office park market and its operating systems, development expertise, acquisition expertise and unimproved land available for development. During 1996, the Company committed to a plan to enhance shareholder value by refinancing indebtedness and increasing growth. Also during 1996, the Company completed its plan to refinance its indebtedness which eliminated certain restrictive covenants which had limited the Company's ability to grow through development and acquisitions. In 1997, the Company closed on a $100 million revolving credit facility which is available to finance growth opportunities. The plan also contemplates the possible use by the Company of its existing inventory of 137 acres of land held for development, most of which is partially or wholly improved with streets and/or utilities and is located in various metropolitan areas where the Company currently operates suburban office parks. The Company may also acquire existing office buildings or land for development in other markets primarily in the Southeast and Southwest that the Company considers favorable. Although all of the Company's properties are located in the Southeast and Southwest, management does not consider that the Company's development and acquisitions activities are limited to any particular area. The investment policies of the Company may be changed by its directors at any time without notice to, or a vote of, security holders. Although, the Company has no current policy which limits the percentage 3 6 of its assets which may be invested in any one type of investment or the geographic areas in which the Company may acquire properties, the Company intends to continue to operate so as to qualify for tax treatment as a REIT. The Company may in the future invest in other types of office buildings, apartment buildings, shopping centers, and other properties. The Company also may invest in the securities (including mortgages) of companies primarily engaged in real estate activities; however, it does not intend to become an investment company regulated under the Investment Company Act of 1940. For the year ended December 31, 1997, all of the Company's rental revenues were derived from the buildings purchased or constructed by the Company. The Company's 1997 interest revenues were derived from temporary cash investments. EMPLOYEES In connection with its current real estate operations and property management agreements, the Company has a combined financial, administrative, leasing, and center maintenance staff of 224 employees. A resident general manager is responsible for the leasing and operations of all buildings in a Koger Center or city. The Company has approximately 89 employees who perform maintenance activities. ITEM 2. PROPERTIES GENERAL As of December 31, 1997, the Company owned 228 office buildings located in the 13 metropolitan areas of Jacksonville, Orlando, St. Petersburg, and Tallahassee, Florida; Atlanta, Georgia; Charlotte and Greensboro, North Carolina; Tulsa, Oklahoma; Greenville, South Carolina; Memphis, Tennessee; and Austin, El Paso, and San Antonio, Texas. In addition, the Company had eight buildings which were under construction. The Koger Centers have been developed in campus-like settings with extensive landscaping and ample tenant parking. The Office Buildings are generally one to five-story structures of contemporary design and constructed of masonry, concrete and steel, with facings of brick, concrete and glass. The Koger Centers are generally located with easy access, via expressways, to the central business district and to shopping and residential areas in the respective communities. The properties are well maintained and adequately covered by insurance. Leases on the Office Buildings vary between net leases (under which the tenant pays some operating expenses, such as utilities, insurance and repairs) and gross leases (under which the Company pays all such items). Most leases are on a gross basis and are for terms generally ranging from three to five years. In some instances, such as when a tenant rents the entire building, leases are for terms of up to 20 years. As of December 31, 1997, the Office Buildings were on average 92 percent leased and the average annual rent per net rentable square foot leased was $15.02. The buildings are occupied by numerous tenants, many of whom lease relatively small amounts of space, conducting a broad range of commercial activities. New leases and renewals of existing leases are negotiated at the current market rate at the date of execution. The Company endeavors to include escalation provisions in all of its gross leases. As of December 31, 1997, approximately 36 percent of the Company's annualized gross rental revenues were derived from existing leases containing rental escalation provisions based upon changes in the Consumer Price Index (some of which contain maximum rates of increases); approximately 57 percent of such revenues were derived from leases containing escalation provisions based upon real estate tax and operating expense increases; and approximately 7 percent of such revenues were derived from leases without escalation provisions. Some of the Company's leases contain options which allow the lessee to renew for 4 7 varying periods, generally at the same rental rate and subject, in most instances, to Consumer Price Index escalation provisions. The Company owns approximately 167 acres of unimproved land (158 acres of which are suitable for development) located in the metropolitan areas of Jacksonville, Orlando and St. Petersburg, Florida; Atlanta, Georgia; Charlotte and Greensboro, North Carolina; Tulsa, Oklahoma; Columbia and Greenville, South Carolina; Memphis, Tennessee; Austin, El Paso and San Antonio, Texas; and Richmond, Virginia. Each of these parcels of land has been partially or wholly developed with streets and/or utilities. The Company currently has eight buildings under construction on approximately 52 acres of this unimproved land. 5 8 PROPERTY LOCATION AND OTHER INFORMATION The following table sets forth information relating to the properties owned by the Company as of December 31, 1997.
AVERAGE LAND NUMBER AGE OF NET IMPROVED UNIMPROVED OF BUILDINGS RENTABLE WITH BLDGS. LAND KOGER CENTER/LOCATION BUILDINGS (IN YEARS) (1) SQ. FT. (IN ACRES) (IN ACRES) - --------------------- ---------- --------------- -------------- ------------- ------------- Atlanta Chamblee 22 17 947,920 76.2 2.5 Atlanta Gwinnett 1 6 79,800 4.5 31.0(2) Atlanta Perimeter 1 12 154,100 5.3 Austin 12 17 370,860 29.6 1.8 Charlotte Carmel 2 4 170,800 15.0 19.6(3) Charlotte East 11 17 468,820 39.9 3.9 Columbia Spring Valley 1.0 El Paso 16 23 298,330 22.7 2.4 Greensboro South 13 15 610,470 46.0 Greensboro Wendover 18.5(4) Greenville Park Central 3 13 134,000 9.9 3.5 Greenville Roper Mt. 8 15 290,560 24.7 4.5(5) Jacksonville Baymeadows 4 7 468,000 34.6 13.3(6) Jacksonville Central 31 25 665,670 47.2 1.6 Jacksonville Deerwood 1 6 23,000 2.2 Memphis Germantown 4 8 299,100 23.6 11.0(7) Orlando Central 22 26 565,220 46.0 Orlando University 2 9 159,600 11.6 15.5(8) Richmond South 5.8 San Antonio Airport 2 13 200,100 7.9 San Antonio West 26 20 788,670 63.5 7.2 St. Petersburg 15 17 519,320 64.4 11.0 Tallahassee Apalachee Pkwy 14 21 408,500 33.7 Tallahassee Capital Circle 5 8 381,200 29.0 Tulsa 13 18 476,280 36.0 13.4 ---- ---------- ------ ------ Total 228 8,480,320 673.5 167.5 ==== ========== ====== ====== Average 17 ==
(1) The age of each building was weighted by the net rentable square feet for such building to determine the weighted average age of (a) the buildings in each Koger Center and (b) all buildings owned by the Company. (2) The Company currently has a building under construction on approximately 4.4 acres of this parcel. (3) The Company currently has a building under construction on approximately 10.2 acres of this parcel. (4) The Company currently has a building under construction on approximately 6.4 acres of this parcel. (5) The Company currently has a building under construction on approximately 4.5 acres of this parcel. (6) The Company currently has two buildings under construction on approximately 13.3 acres of this parcel. (7) The Company currently has a building under construction on approximately 5.7 acres of this parcel. (8) The Company currently has a building under construction on approximately 7 acres of this parcel. 6 9 PERCENT LEASED AND AVERAGE RENTAL RATES The following table sets forth, with respect to each Koger Center or location, the number of buildings, number of leases, net rentable square feet, percent leased, and the average annual rent per net rentable square foot leased, in each case as of December 31, 1997.
NET AVERAGE NUMBER NUMBER RENTABLE ANNUAL OF OF SQUARE PERCENT RENT PER KOGER CENTER/LOCATION BUILDINGS LEASES FEET LEASED (1) SQUARE FOOT(2) - ---------------------- ---------- ------------ ---------- ------------ -------------- Atlanta Chamblee 22 165 947,920 96% $15.41 Atlanta Gwinnett 1 13 79,800 88% 15.80 Atlanta Perimeter 1 9 154,100 100% 17.14 Austin 12 190 370,860 100% 17.94 Charlotte Carmel 2 24 170,800 75% 17.25 Charlotte East 11 219 468,820 83% 13.23 El Paso 16 195 298,330 93% 15.17 Greensboro South 13 199 610,470 97% 14.85 Greenville Park Central 3 55 134,000 94% 16.27 Greenville Roper Mt. 8 145 290,560 96% 15.31 Jacksonville Baymeadows 4 32 468,000 100% 17.15 Jacksonville Central 31 241 665,670 89% 12.04 Jacksonville Deerwood 1 1 23,000 100% 16.48 Memphis Germantown 4 65 299,100 99% 17.73 Orlando Central 22 173 565,220 92% 14.79 Orlando University 2 49 159,600 98% 17.09 San Antonio Airport 2 61 200,100 91% 15.70 San Antonio West 26 289 788,670 92% 13.18 St. Petersburg 15 160 519,320 91% 13.71 Tallahassee Apalachee Pkwy 14 89 408,500 93% 16.58 Tallahassee Capital Circle 5 9 381,200 76% 18.12 Tulsa 13 179 476,280 82% 11.39 --- -------- ------- Total 228 2,562 8,480,320 === ======= ========= Weighted Average 92% $15.02 === ======
(1) The percent leased rates have been calculated by dividing total net rentable square feet leased in a building by net rentable square feet in such building, which excludes public or common areas. (2) Rental rates are computed by dividing (a) total annualized base rents (which excludes expense pass-through and reimbursements) for a Koger Center or location as of December 31, 1997 by (b) the net rentable square feet applicable to such total annualized rents. 7 10 LEASE EXPIRATIONS ON THE COMPANY'S PROPERTIES The following schedule sets forth with respect to all of the Office Buildings (a) the number of leases which will expire in calendar years 1998 through 2006, (b) the total net rentable area in square feet covered by such leases, (c) the percentage of total net rentable square feet leased represented by such leases, (d) the average annual rent per square foot for such leases, (e) the current annualized rents represented by such leases, and (f) the percentage of gross annualized rents contributed by such leases. This information is based on the buildings owned by the Company on December 31, 1997 and on the terms of leases in effect as of December 31, 1997, on the basis of then existing base rentals, and without regard to the exercise of options to renew. Furthermore, the information below does not reflect that some leases have provisions for early termination for various reasons, including, in the case of government entities, lack of budget appropriations. Leases were renewed on approximately 65 percent, 63 percent and 67 percent of the Company's net rentable square feet which were scheduled to expire during 1997, 1996 and 1995, respectively.
PERCENTAGE OF AVERAGE PERCENTAGE TOTAL SQUARE ANNUAL RENT TOTAL OF TOTAL NUMBER OF NUMBER OF FEET LEASED PER SQUARE ANNUALIZED ANNUAL. RENTS LEASES SQUARE FEET REPRESENTED BY FOOT UNDER RENTS UNDER REPRESENTED BY PERIOD EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES EXPIRING LEASES EXPIRING LEASES - ------ ---------- ----------- --------------- --------------- --------------- --------------- 1998 1,198 2,261,715 29.1% $14.69 $ 33,220,276 28.5% 1999 577 1,406,771 18.1% 14.10 19,839,779 17.0% 2000 447 1,241,990 16.0% 15.28 18,983,733 16.3% 2001 155 1,103,443 14.2% 15.48 17,080,525 14.6% 2002 110 681,042 8.8% 15.51 10,565,935 9.1% 2003 31 253,719 3.3% 14.51 3,681,917 3.1% 2004 13 179,014 2.3% 13.76 2,464,126 2.1% 2005 5 31,064 0.4% 12.16 377,714 0.3% 2006 10 161,835 2.1% 18.52 2,997,516 2.6% Other 16 444,328 5.7% 16.70 7,422,460 6.4% ----- ---------- -------- ------------ ------- Total 2,562 7,764,921 100.0% $15.02 $116,633,981 100.0% ===== ========== ======== ====== ============ =======
BUILDING IMPROVEMENTS, TENANT IMPROVEMENTS AND DEFERRED TENANT COSTS ON THE COMPANY'S PROPERTIES The following table sets forth certain information with respect to the building improvements made, and tenant improvement costs and deferred tenant costs (leasing commissions and tenant relocation costs) incurred, by the Company during the three years ended December 31, 1997. The information set forth below is not necessarily indicative of future expenditures for these items.
BUILDING IMPROVEMENTS TENANT IMPROVEMENTS DEFERRED TENANT COSTS ------------------------ ------------------------- --------------------------- NUMBER PER AVERAGE PER AVERAGE PER AVERAGE OF OFFICE NET SQUARE NET SQUARE NET SQUARE YEAR BUILDINGS TOTAL FT. OWNED TOTAL FT. OWNED TOTAL FT. OWNED - ------- --------- ---------- ------------ ---------- ----------- ------------ ------------ 1995(1) 216 $2,991,000 $0.39 $8,592,000 $1.12 $1,060,000 $0.14 1996(2) 215 2,795,000 0.36 7,873,000 1.03 1,862,000 0.24 1997(3) 226 3,116,000 0.39 7,513,000 0.94 1,902,000 0.24
(1) Excludes the three buildings sold on July 31, 1995. (2) Increase in deferred tenant costs due to $799,000 commission paid for 10 year lease on 142,800 net rentable square feet which commenced in 1997. (3) Excludes the two buildings for which construction was completed during 1997. 8 11 FIXED RATE INDEBTEDNESS ON THE COMPANY'S PROPERTIES The following table sets forth with respect to each Koger Center or location the principal amount (dollars in thousands) of, and the weighted average interest rate on, the indebtedness of the Company having a fixed interest rate and encumbering the Company's properties in such Koger Center or location as of December 31, 1997.
WEIGHTED MORTGAGE AVERAGE LOAN INTEREST KOGER CENTER/LOCATION BALANCE RATE - ---------------------- ----------- --------- Atlanta Chamblee $ 0 - Atlanta Gwinnett 0 - Atlanta Perimeter 0 - Austin 16,788 8.33% Charlotte Carmel 0 - Charlotte East 0 - El Paso 8,888 8.33% Greensboro South 0 - Greenville Park Central 0 - Greenville Roper Mt. 10,863 8.33% Jacksonville Baymeadows 27,158 8.33% Jacksonville Central 0 - Jacksonville Deerwood 0 - Memphis Germantown 14,898 8.25% Orlando Central 24,689 8.33% Orlando University 0 - San Antonio Airport 0 - San Antonio West 21,881 8.25% St. Petersburg 18,622 8.25% Tallahassee Apalachee Pkwy 18,622 8.25% Tallahassee Capital Circle 19,553 8.25% Tulsa 0 - ------------ Total $181,962 8.29% ============ =====
For additional information on these loans see Note 4, "Mortgages and Loans Payable" of the Notes to Consolidated Financial Statements. INDEBTEDNESS WITH VARIABLE INTEREST RATES As of December 31, 1997, the Company had a $100 million secured revolving credit facility with variable interest rates and encumbering certain of the Company's properties. The following table sets forth historical information with respect to indebtedness having variable interest rates (dollars in thousands):
WEIGHTED APPROXIMATE APPROXIMATE BALANCE AVERAGE MAXIMUM AVERAGE WTG AVG INT YEAR ENDED AT END INT RATE AT AMOUNT AMOUNT RATE DURING DECEMBER 31 OF PERIOD END OF PERIOD OUTSTANDING OUTSTANDING THE PERIOD - ----------- ------------ --------------- ----------- ----------- ------------- 1997 $ 1 8.5% $40,000 $ 8,077 8.0% 1996 0 - 22,276 18,280 9.3% 1995 22,276 9.5% 58,352 47,945 8.4%
9 12 ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the American Stock Exchange. The high and low closing sales prices for the periods indicated in the table below were:
YEARS ------------------------------------------------------------------------------------------ 1997 1996 1995 ------------------------- ---------------------- -------------------- QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW - ------------- ----------- ----------- -------- ------- ------- ------ March 31 $18 5/8 $17 1/4 $12 1/4 $10 3/4 $ 7 7/8 $6 3/4 June 30 18 1/4 15 3/8 13 3/8 11 9 6 3/4 September 30 20 13/16 17 11/16 16 13 10 1/8 8 5/8 December 31 23 3/8 20 1/8 18 3/4 15 1/8 10 5/8 9 1/8
The Company intends that any dividend paid in respect of its common stock during the last quarter of each year will, if necessary, be adjusted to satisfy the REIT qualification requirement that at least 95 percent of the Company's REIT taxable income for such taxable year be distributed. Set forth below are the dividends per share paid during the three years ended December 31, 1997.
YEARS -------------------------- QUARTER ENDED 1997 1996 1995 ------------- ---- ---- ---- March 31 $.05 - - June 30 .05 - - September 30 .10 - - December 31 .15 - -
On February 4, 1998, the Company paid a quarterly dividend of $0.25 per share to shareholders of record on December 31, 1997. In addition, the Company's Board of Directors has declared a quarterly dividend of $0.25 per share payable on May 6, 1998, to shareholders of record on March 31, 1998. On February 27, 1998, there were approximately 1,559 shareholders of record and the closing price of the Company's common stock on the American Stock Exchange was $22.25. 10 13 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements (as defined below) and the notes thereto.
(IN THOUSANDS EXCEPT PER SHARE AND PROPERTY DATA) -------------------------------------------------------------------- 1997 1996 1995 1994 1993* ----------- ---------- ----------- --------- -------- INCOME INFORMATION Rental revenues and other rental services $109,501 $ 98,805 $ 95,443 $ 94,388 $ 46,108 Interest revenues 1,274 1,951 14,440 1,062 206 Total revenues 113,989 104,072 125,750 100,376 46,406 Property operations expenses 44,453 41,597 40,830 39,711 21,034 Depreciation and amortization 24,073 21,127 19,102 16,728 8,958 Mortgage and loan interest 16,517 18,701 23,708 25,872 11,471 Net income 21,204 10,501 28,990 4,215 2,452 Earnings per common share - diluted .94 .54 1.61 .24 .18 Dividends declared per common share .55 .05 Weighted average shares outstanding - diluted 22,495 19,500 18,011 17,719 13,352 BALANCE SHEET INFORMATION Operating properties (before depreciation) $681,249 $582,972 $571,313 $578,237 $566,770 Undeveloped land 14,761 27,108 30,281 36,012 40,036 Total assets 656,097 584,666 578,756 613,806 615,089 Mortgages and loans payable 181,963 203,044 254,909 323,765 330,625 Total shareholders' equity 444,262 364,135 310,697 280,601 275,450 OTHER INFORMATION Funds from operations (1) $ 42,324 $ 33,154 $ 36,707 $ 23,475 $ 11,075 Income before interest, income taxes, depreciation and amortization $ 62,729 $ 51,144 $ 71,866 $ 47,042 $ 22,881 Number of buildings (at end of period) 228 215 216 219 219 Percent leased (at end of period) 92% 92% 91% 90% 88%
* On December 21, 1993, KPI was merged with and into the Company. (1) The Company believes that Funds from Operations is one measure of the performance of an equity REIT. Funds from Operations should not be considered as an alternative to net income as an indication of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. Funds from Operations is calculated as follows (in thousands):
1997 1996 1995 1994 1993 ------- ------- ------- -------- -------- Net income $21,204 $10,501 $28,990 $ 4,215 $ 2,452 Depreciation - real estate 21,795 19,538 17,363 15,202 8,403 Amortization - deferred tenant costs 1,031 929 656 452 197 Amortization - goodwill 170 171 504 665 23 Litigation costs 424 176 1,902 Loss (gain) on sale or disposition of assets (1,955) 497 255 43 Provision for loss on land held for sale (379) 970 996 Gain on TKPL note to Southeast (292) (11,288) Loss (gain) on early retirement of debt 458 1,386 (919) ------- ------- ------- ------- ------- Funds from Operations $42,324 $33,154 $36,707 $23,475 $11,075 ======= ======= ======= ======= =======
The 1995 calculated Funds from Operations includes $13,066 of interest revenue associated with the TKPL mortgage notes which KE acquired during 1995. These mortgage notes were retired by TKPL during 1995. 11 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the selected financial data and the consolidated financial statements (the "Consolidated Financial Statements") appearing elsewhere in this report. Historical results and percentage relationships in the Consolidated Financial Statements, including trends which might appear, should not be taken as indicative of future operations or financial position. The Consolidated Financial Statements include the accounts of KE, Southeast and KRES (collectively, the "Company"). GENERAL The Company has prepared, and is responsible for, the accompanying Consolidated Financial Statements and the related consolidated financial information included in this report. Such Consolidated Financial Statements were prepared in accordance with generally accepted accounting principles and include amounts determined using management's best judgments and estimates of the expected effects of events and transactions that are being accounted for currently. The Company's independent auditors have audited the accompanying Consolidated Financial Statements. The objective of their audit, conducted in accordance with generally accepted auditing standards, was to express an opinion on the fairness of presentation, in all material respects, of the Company's consolidated financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. They evaluated the Company's internal control structure to the extent considered necessary by them to determine the audit procedures required to support their report on the Consolidated Financial Statements and not to provide assurance on such structure. The Company maintains accounting and other control systems which management believes provide reasonable assurance that the Company's assets are safeguarded and that the Company's books and records reflect the authorized transactions of the Company, although there are inherent limitations in any internal control structure, as well as cost versus benefit considerations. The Audit Committee of the Company's Board of Directors, which is composed exclusively of directors who are not officers of the Company, directs matters relating to audit functions, annually appoints the auditors subject to ratification of the Company's Board of Directors, reviews the auditors' independence, reviews the scope and results of the annual audit, and periodically reviews the adequacy of the Company's internal control structure. RECENT DEVELOPMENTS On December 17, 1997, the Company completed a public offering of 3.5 million shares of its common stock, three million shares of which were sold in an underwritten offering for an aggregate sales price of $60.75 million, and 500,000 of such shares were sold to AREIF II Realty Trust, Inc., an affiliate of Apollo Real Estate Investment Fund II, L.P. (together referred to as "Apollo"), for an aggregate sales price of $9.57 million. The Company applied approximately $51.6 million of the proceeds from this sale to the repayment of indebtedness with an average interest rate of approximately 8.6 percent. 12 15 RESULTS OF OPERATIONS RENTAL REVENUES. For 1997, rental revenues increased $10,582,000 from the year ended December 31, 1996. This increase resulted primarily from (i) increases in the percent leased rate and the Company's average rental rate and (ii) rental revenues from the properties acquired and construction completed during 1997 ($5,051,000). Rental revenues increased $3,477,000 from the year ended December 31, 1995 to the year ended December 31, 1996. This increase resulted primarily from (i) increases in the percent leased rate and the Company's average rental rate and (ii) increases in revenues from operating cost escalations and other items passed through to tenants. The effect of these increases was partially offset by the sale of three buildings (containing 233,980 net rentable square feet) on July 31, 1995. During 1995, the Company earned $2,228,000 in rental revenues from these three buildings through the date of sale. As of December 31, 1997, the Company's buildings were on average 92 percent leased. As of December 31, 1996 and 1995, the buildings owned by the Company were on average 92 and 91 percent leased, respectively. MANAGEMENT FEE REVENUES. For 1997, management fee revenues remained basically unchanged from those earned in 1996. Management fee revenues decreased $942,000 for 1996 as compared to 1995. This decrease was due primarily to the termination of the management agreement with TKPL which resulted from the sale of all of TKPL's operating properties during 1995. The Company earned $1,685,000 in management fee revenue from this contract during 1995. This decrease was partially offset by (i) an increase in fees earned for construction management services and (ii) an increase in fees earned under the management contract with Centoff. INTEREST REVENUES. For 1997, interest revenues decreased $677,000 from the year ended December 31, 1996. This decrease was due to the lower average balance of cash to invest. Interest revenues decreased $12,489,000 for 1996 as compared to 1995. This decrease was due to the interest revenue earned during 1995 from the TKPL Notes ($13,066,000). GAIN ON TKPL NOTE TO SOUTHEAST. During 1995, Southeast received approximately $17.7 million as a partial repayment of an unsecured note, issued by TKPL to KPI (and subsequently transferred by KPI to Southeast in connection with the Merger) in an original principal amount of approximately $31 million. This TKPL unsecured note had been valued and carried on the books of the Company at $0. A gain of $11,288,000 was recorded on this repayment, which was net of a write-off of unamortized cost in excess of fair value of net assets acquired from KPI of $6,412,000. EXPENSES. Property operating expenses include such charges as utilities, real estate taxes, janitorial, maintenance, property insurance, provision for uncollectible rents, and management costs. During 1997, property operating expenses increased by $2,856,000 or 6.9 percent, compared to 1996, primarily due to (i) increased real estate taxes and (ii) operating expenses for the properties acquired and construction completed during 1997 ($1,994,000). During 1996, property operating expenses increased by $767,000 or 1.9 percent, compared to 1995, primarily due to increases in maintenance costs. For 1997, property operating expenses as a percentage of total rental revenues were 40.6 percent. For 1996 and 1995, property operating expenses as a percentage of total rental revenues were 42.1 percent and 42.8 percent, respectively. Depreciation expense has been calculated on the straight-line method based upon the useful lives of the Company's depreciable assets, generally 3 to 40 years. For 1997, depreciation expense increased $2,405,000 or 12.1 percent, compared to the prior year, due to (i) improvements made to the properties owned by the Company during 1997 and 1996 and (ii) the properties acquired and construction completed 13 16 during 1997 ($841,000). For 1996, depreciation expense increased $2,208,000 or 12.5 percent, compared to the prior year, due to improvements made to the properties owned by the Company during 1996 and 1995. For 1997, amortization expense increased $541,000 compared to the prior year, due primarily to financing costs which were incurred for (i) the mortgage with the Northwestern Mutual Life Insurance Company ("Northwestern") and (ii) the $100 million secured revolving credit facility which closed during 1997. Amortization expense decreased by $183,000 during 1996, compared to 1995, due primarily to the $6,412,000 of unamortized cost in excess of fair value of net assets acquired which was written off and offset against proceeds received by Southeast from the TKPL unsecured note during 1995. Interest expense decreased by $2,184,000 during 1997, compared to 1996, primarily due to (i) the reduction in the average balance of mortgages and loans payable and (ii) the interest capitalized due to the Company's construction of office buildings. Interest expense decreased by $5,007,000 during 1996, compared to 1995, primarily due to the reduction in the average balance of mortgages and loans payable. During 1997, 1996, and 1995, the weighted average interest rate on the Company's variable rate loans was 8.0 percent, 9.3 percent, and 8.4 percent, respectively. The Company's average outstanding amount under such loans during 1997, 1996, and 1995 was $8,077,000, $18,280,000 and $47,945,000, respectively. General and administrative expenses were 1.0 percent, 1.1 percent, and 1.2 percent of average invested assets for 1997, 1996 and 1995, respectively. For 1997, general and administrative expenses decreased $249,000, compared to 1996, primarily due to decreases in the accrual for the Company's contribution to the 401(k) Plan. For 1996, general and administrative expenses decreased $936,000, compared to 1995, primarily due to (i) decreases in the accrual for compensation expense related to stock appreciation rights previously granted in conjunction with stock options, which rights the Company has discontinued granting, (ii) decreases in professional and legal fees incurred, (iii) decreases in certain insurance costs, and (iv) decreases in the accrual for the Company's contribution to the 401(k) Plan. For 1997, direct costs of management contracts remained basically unchanged from those incurred during 1996. For 1996, direct costs of management contracts decreased $953,000, compared to 1995, due to the termination of the management agreement with TKPL which resulted from the sale of all of TKPL's operating properties during 1995. The Company incurred $1,601,000 in costs pursuant to this contract during 1995. This decrease was partially offset by (i) an increase in costs associated with providing construction management services and (ii) an increase in costs for providing services under the management agreement with Centoff. Real estate taxes and other costs related to the Company's unimproved land decreased $104,000 during 1997, compared to 1996, due to (i) the sale of two land parcels (25.3 acres) and (ii) the assignment of 52 acres to construction projects. For 1996, undeveloped land costs remained basically unchanged from those incurred during 1995. Based on the proceeds received from the sale of the Miami land parcel and the Company's analysis of the fair value of the remaining land parcels held for sale during 1997, the Company reversed $379,000 of the provision for loss on land held for sale, which had been previously recorded. During 1995, the Company recorded a provision for loss on land held for sale which totaled $970,000. This provision for loss was based upon a contract for the sale of a land parcel (approximately 8.1 acres) which was located in Miami, Florida adjacent to an office center sold to Koala. Management periodically reviews its investment in properties for evidence of other than temporary impairments in value. Factors considered consist of, but are not limited to, the following: current and 14 17 projected occupancy rates, market conditions in different geographic regions, and management's plans with respect to its properties. Where management concludes that expected cash flows will not enable the Company to recover the carrying amount of its investments, losses are recorded and asset values are reduced. No such impairments in value existed during 1997, 1996 or 1995. OPERATING RESULTS. Net income totaled $21,204,000, $10,501,000 and $28,990,000 for 1997, 1996 and 1995, respectively. For 1997, net income increased $10,703,000 over the prior year due primarily to (i) the increase in rental revenues, which was partially offset by the increases in property operations expense and depreciation expense, (ii) the decrease in mortgage and loan interest expense and (iii) the gain on sale or disposition of assets. For 1996, net income decreased $18,489,000 over the prior year due primarily to (i) the interest revenue earned during 1995 on the TKPL mortgage notes which were retired by TKPL during 1995 and (ii) the gain associated with the partial repayment of a TKPL note to Southeast during 1995. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES. During the year ended December 31, 1997, the Company generated approximately $50.2 million in net cash from operating activities. The Company's primary internal sources of cash are (i) the collection of rents from buildings owned by the Company and (ii) the receipt of management fees paid to the Company in respect of properties managed on behalf of others. As a REIT for Federal income tax purposes, the Company is required to pay out annually, as dividends, 95 percent of its REIT taxable income (which, due to non-cash charges, including depreciation and net operating loss carryforwards, may be substantially less than cash flow). In the past, the Company has paid out dividends in amounts at least equal to its REIT taxable income. The Company believes that its cash provided by operating activities will be sufficient to cover debt service payments and to pay the dividends required to maintain REIT status through 1998. The level of cash flow generated by rents depends primarily on the occupancy rates of the Company's buildings and changes in rental rates on new and renewed leases and under escalation provisions. As of December 31, 1997, approximately 93 percent of the Company's annualized gross rental revenues were derived from existing leases containing provisions for rent escalations. However, market conditions may prevent the Company from escalating rents under such provisions. As of December 31, 1997, leases representing approximately 28.5 percent of the gross annualized rent from the Company's properties, without regard to the exercise of options to renew, were due to expire during 1998. This represents 1,198 leases for space in buildings located in 21 of the 22 Koger Centers or locations in which the Company owns buildings. Certain of these tenants may not renew their leases or may reduce their demand for space. Leases were renewed on approximately 65 percent, 63 percent and 67 percent of the Company's net rentable square feet which were scheduled to expire during 1997, 1996 and 1995, respectively. For those leases which renewed during 1997, the average rental rate increased from $14.01 to $15.41. However, current market conditions in certain markets may require that rental rates at which leases are renewed or at which vacated space is leased be lower than rental rates under existing leases. Based upon the significant amount of leases which will expire during 1998 and the competition for tenants in the markets in which the Company operates, the Company has offered, and expects to continue to offer, incentives to certain new and renewal tenants. These incentives may include the payment of tenant improvement costs and, in certain markets, reduced rents during initial lease periods. 15 18 The Company continues to benefit from improving economic conditions and reduced vacancy levels for office buildings in many of the metropolitan areas in which the Company owns buildings. The Company believes that the southeastern and southwestern regions of the United States provide significant economic growth potential due to their diverse regional economies, expanding metropolitan areas, skilled work force and moderate labor costs. However, the Company cannot predict whether such economic growth will continue. Cash flow from operations could be reduced if economic growth were not to continue in the Company's markets and if this resulted in lower occupancy rates for the Company's buildings. Governmental tenants (including the State of Florida and the United States of America) which accounted for 22.6 percent of the Company's leased space as of December 31, 1997, may be subject to budget reductions in times of recession and governmental austerity measures. Consequently, there can be no assurance that governmental appropriations for rents may not be reduced. Additionally, certain of the private-sector tenants which have contributed to the Company's rent stream may reduce their current demands, or curtail their future need, for additional office space. At the end of 1997, the Company had management contracts for the management of 22 commercial office properties. On March 31, 1997, a management agreement to manage 21 commercial office buildings owned by Centoff was automatically extended to March 31, 1998. This management agreement provides that, so long as no default has occurred, the management agreement will be automatically extended from year to year until such time as the management agreement is terminated. The Company earned fees of $2.3 million from this management agreement during 1997. Another agreement to manage one commercial office building has been extended on a month to month basis. During 1997, the Company earned management fees of $50,000 for the management of this building. With the sale of TKPL's 92 buildings to Koala during 1995, Southeast's management agreement with TKPL ended. INVESTING ACTIVITIES. At December 31, 1997, substantially all of the Company's invested assets were in real properties. Improvements to the Company's existing properties have been financed through internal operations. During 1997, the Company's expenditures for improvements to existing properties decreased by approximately $1.4 million from the prior year, primarily due to reduction in expenditures for energy management improvements. The Company purchased 11 buildings during 1997. During 1997, the Company completed the construction of (i) a building located in Memphis, Tennessee which contains 40,700 net rentable square feet and (ii) a building located in Charlotte, North Carolina which contains 61,200 net rentable square feet. The Company has eight buildings under construction, on approximately 52 acres of undeveloped land, which will contain approximately 650,000 net rentable square feet. Expenditures for construction of these eight buildings are expected to total approximately $52.3 million, excluding land and tenant improvement costs. On May 15, 1997, the Company acquired three buildings, containing 134,000 net rentable square feet, and 3.5 usable acres of unimproved land located in Greenville, South Carolina for a purchase price of $14 million. On June 4, 1997, the Company acquired two buildings, containing 200,100 net rentable square feet, located in San Antonio, Texas for a purchase price of $15.5 million. On June 18, 1997, the Company acquired a building, containing 23,000 net rentable square feet, located in Jacksonville, Florida for a purchase price of $3.3 million. On August 4, 1997, the Company acquired a building, containing 80,500 net rentable square feet, located in Tallahassee, Florida for a purchase price of $9.575 million. On September 23, 1997, the Company acquired two buildings, containing 46,400 net rentable square feet, and 2.4 acres of unimproved land located in El Paso, Texas for a purchase price of $3.3 million. On October 1, 1997, the Company acquired a building, containing 154,100 net rentable square feet, located in Atlanta, 16 19 Georgia for a purchase price of $21.2 million. On December 1, 1997, the Company acquired a building, containing 79,800 net rentable square feet, located in Atlanta, Georgia for a purchase price of $8.5 million. During 1995, KE acquired $32.3 million in aggregate principal amount of TKPL Notes for an aggregate purchase price of approximately $18.2 million. During the quarter ended September 30, 1995, TKPL retired the TKPL Notes. KE recorded approximately $13.1 million of interest revenue on the TKPL Notes during 1995. During 1996 and 1995, Southeast received $292,000 and $17.7 million, respectively, as partial repayment of an unsecured note issued by TKPL to KPI (and subsequently transferred by KPI to Southeast in connection with the Merger) in an original principal amount of approximately $31 million. During 1997, the Company sold (i) 8.1 acres of unimproved land located in Miami, Florida for approximately $2,907,000, net of selling costs, and (ii) 17.2 acres of unimproved land located in Richmond, Virginia for approximately $3,434,000, net of selling costs. During 1996, the Company sold a 30 acre land parcel located in Birmingham, Alabama for $1,263,000, net of selling costs. During 1995, the Company sold to Koala three office buildings (containing 233,980 net rentable square feet), two undeveloped land parcels (totaling approximately 44 acres), and certain other assets for approximately $25,267,000, net of selling costs. FINANCING ACTIVITIES. Historically, the Company's primary external sources of cash have been in the form of bank borrowings, mortgage financings, and public and private offerings of equity securities. The proceeds of these financings were used by the Company to acquire buildings or to refinance debt. The Company has a $100 million secured revolving credit facility provided by First Union National Bank of Florida, Morgan Guaranty Trust Company of New York, AmSouth Bank, N.A. and Guaranty Federal Bank. During 1997, the Company's Board of Directors approved the repurchase of up to one million shares of the Company's common stock (the "Shares") and the Company repurchased 372,600 Shares for approximately $5.75 million. During July 1997, the Company's Board of Directors approved the redemption of warrants outstanding on August 29, 1997 (the "Redemption Date") for $3.81 per warrant. Each warrant gave the holder the right to purchase one Share at a price of $8.00 per share, until the Redemption Date. The Company redeemed 99,871 warrants following the Redemption Date. The remaining warrants were exercised by the holders either on or prior to the Redemption Date. On December 17, 1997, the Company completed a public offering of 3.5 million shares of its common stock, three million shares of which were sold in an underwritten offering for an aggregate sales price of $60.75 million ($20.25 per share less an underwriting discount of $1.11 per share), and 500,000 of such shares were sold to Apollo for an aggregate sales price of $9.57 million ($19.14 per share). The Company applied approximately $51.6 million of the proceeds from this sale to the repayment of indebtedness with an average interest rate of approximately 8.6 percent. During October 1996, the Company completed a private placement of three million shares of its common stock to an affiliate of Apollo for an aggregate sales price of $43.5 million. The Company applied the proceeds from this sale to the repayment of indebtedness with an average interest rate of approximately 8 percent. During December 1996, the Company closed on $175.9 million of a $190 million non-recourse loan with Northwestern which is secured by 10 office parks. This loan is divided into (i) a tranche in the amount 17 20 of $100.5 million ($94.7 million which has been drawn) with a 10 year maturity and an interest rate of 8.25 percent and (ii) a tranche in the amount of $89.5 million with a maturity of 12 years and an interest rate of 8.33 percent. Amortization with respect to this indebtedness is based on equal monthly installments over a 25 year amortization period. This indebtedness requires the Company to maintain certain financial ratios. During April 1997, the Company closed on a $50 million secured revolving credit facility. This secured revolving credit facility was increased to $100 million during December 1997. This facility provides for monthly interest payments and requires the Company to maintain certain financial ratios. Loan maturities and normal amortization of mortgages and loans payable are expected to total approximately $2.5 million over the next twelve months. The Company believes that these obligations will be paid from cash provided by operations or from current cash balances. Significant maturities of the Company's mortgages and loans payable do not begin to occur until 2006. At December 31, 1997, the Company had 64 buildings (containing approximately 2.26 million net rentable square feet) which were unencumbered. In order to generate funds sufficient to make principal payments in respect of indebtedness of the Company over the long term, as well as necessary capital and tenant acquisition expenditures, the Company will be required to successfully refinance its indebtedness or procure additional equity capital. However, there can be no assurance that any such refinancing or equity financing will be achieved or will generate adequate funds on a timely basis for these purposes. If additional funds are raised by issuing equity securities, further dilution to existing shareholders may result. Unfavorable conditions in the financial markets, the degree of leverage of the Company and various other factors may limit the ability of the Company to successfully undertake any such financings, and no assurance can be given as to the availability of alternative sources of funds. The Company has filed shelf registration statements with respect to the issuance of up to $300 million of its common and/or preferred stock. The Company has issued $70.32 million of its common stock under such registration statements. During 1995, the Company wrote off $745,000 of certain costs incurred for potential public and private offerings of equity securities which management determined had no future value. In addition, in the event the Company is unable to generate sufficient funds both to meet principal payments in respect of its indebtedness and to satisfy distribution requirements of 95 percent of annual REIT taxable income to its shareholders, the Company may be unable to qualify as a REIT. In such an event, the Company (i) will incur federal income taxes and perhaps penalties, (ii) if the Company is then paying dividends, may be required to decrease any dividend payments to its shareholders, and (iii) the market price of the Company's common stock may decrease. The Company would also be prohibited from requalifying as a REIT for five years. IMPACT OF INFLATION The Company may experience increases in its expenses as a result of inflation; however, the amount of such increases cannot be accurately determined. The Company's exposure to inflationary cost increases in property level expenses is reduced by escalation clauses which are included in most leases. However, market conditions may prevent the Company from escalating rents. Inflationary pressure may increase operating expenses, including labor and energy costs (and, indirectly, real estate taxes) above expected levels, at a time when it may not be possible to increase lease rates to offset such higher operating expenses. In addition, inflation can have secondary effects upon occupancy rates by decreasing the demand for office 18 21 space in many of the markets in which the Company operates. As of December 31, 1997, 93 percent of the Company's annualized rentals were subject to leases having annual escalation clauses as described under "Properties" above. As of December 31, 1996 and 1995, 94 percent and 93 percent, respectively, of the Company's annualized rentals were subject to leases having annual escalation clauses. Historically, inflation has often caused increases in the value of income-producing real estate through higher rentals. The Company, however, can provide no assurance that inflation will increase the value of its properties in the future, and, in fact, the rate of inflation over recent years has been considerably below that which has been experienced previously. CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR PURPOSE OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their businesses without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. The Company desires to take advantage of the "safe harbor" provisions of the Act. This Annual Report on Form 10-K contains forward-looking statements, together with related data and projections, about the Company's projected financial results and its future plans and strategies. However, actual results and needs of the Company may vary materially from forward-looking statements and projections made from time to time by the Company on the basis of management's then-current expectations. The business in which the Company is engaged involves changing and competitive markets and a high degree of risk, and there can be no assurance that forward-looking statements and projections will prove accurate. Accordingly, the Company hereby identifies the following important factors which could cause the Company's actual performance and financial results to differ materially from any results which might be projected, forecast, estimated or budgeted by the Company. REAL ESTATE FINANCING RISKS EXISTING DEBT. The Company is subject to risks normally associated with debt financing, including (a) the risk that the Company's cash flow will be insufficient to meet required payments of principal and interest, (b) the risk that the existing debt in respect of the Company's properties (which in substantially all cases will not have been fully amortized at maturity) will not be able to be refinanced and (c) the risk that the terms of any refinancing of any existing debt will not be as favorable as the terms of such existing debt. The Company currently has outstanding debt of approximately $182 million, all of which is secured by certain of the Company's properties. Approximately $109 million of such debt will mature before 2007, with the remaining balance maturing in 2008. If principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, the Company expects that its cash flow will not be sufficient to repay all such maturing debt. Furthermore, if prevailing interest rates or other factors at the time of refinancing (such as the reluctance of lenders to make commercial real estate loans) result in higher interest rates upon refinancing than the interest rates on the existing debt, the interest expense relating to such refinanced debt would increase, which would adversely affect the Company's cash flow and the amount of distributions the Company would be able to make to its shareholders. If the Company has mortgaged a property to secure payment of debt and the Company is unable to meet the mortgage payments, then the mortgagee may foreclose upon, or otherwise take control 19 22 of, such property, with a consequent loss of income and asset value to the Company. RISK OF RISING INTEREST RATES AND VARIABLE RATE DEBT. The Company currently has a $100 million secured revolving credit facility with variable interest rates. The Company may incur additional variable rate debt in the future. Increases in interest rates on such debt could increase the Company's interest expense, which would adversely affect the Company's cash flow and its ability to pay distributions to its shareholders. EXISTING LEVERAGE; NO LIMITATION ON DEBT As of December 31, 1997, the debt to total market capitalization ratio of the Company was approximately 24.6 percent. The Company's policy regarding this ratio (i.e., total consolidated debt as a percentage of the sum of the market value of issued and outstanding capital stock plus total consolidated debt) is not subject to any limitation in the organizational documents of the Company. Accordingly, the Board of Directors could establish a policy and decide to borrow on a case-by-case or other basis, which would increase the Company's debt to total market capitalization ratio. If this action were taken, the Company could become more highly leveraged, resulting in an increase in debt service that (a) could adversely affect the Company's cash flow and, consequently, the amount of cash available for distribution to shareholders and (b) could increase the risk of default on the Company's debt. For purposes of establishing and evaluating its debt policy, the Company measures its leverage by reference to the total market capitalization of the Company rather than by reference to the book value of its assets. The Company has used total market capitalization because it believes that the book value of its assets (which to a large extent is comprised of the depreciated value of real property, the Company's primary tangible asset) does not accurately reflect its ability to borrow and to meet debt service requirements. The market capitalization of the Company, however, is more variable than book value, and does not necessarily reflect the fair market value of the underlying assets of the Company at all times. The Company also considers factors other than its market capitalization in making decisions regarding the incurrence of indebtedness, such as the purchase price of properties to be acquired with debt financing, the estimated market value of its properties upon refinancing and the ability of particular properties, and the Company as a whole, to generate cash flow to cover expected debt service. GEOGRAPHIC CONCENTRATION The Company's revenues and the value of its properties may be affected by a number of factors, including the regional and local economic climates of the metropolitan areas in which the Company's buildings are located (which may be adversely impacted by business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and regional and local real estate conditions in such areas (such as oversupply of, or reduced demand for, office and other competing commercial properties). All of the Company's properties are located in the southeastern and southwestern United States. The Company's performance and its ability to make distributions to its shareholders are, therefore, dependent on economic conditions in these market areas. The Company's historical growth has occurred during periods when the economy in the southeastern and southwestern United States has out-performed the national economy. There can be no assurance as to the continued growth of the economy in the southeastern and southwestern United States or the future growth rate of the Company. 20 23 RENEWAL OF LEASES AND RELETTING OF SPACE The Company is subject to the risks that upon expiration of leases for space located in its buildings (a) such leases may not be renewed, (b) such space may not be relet or (c) the terms of renewal or reletting (taking into account the cost of required renovations) may be less favorable than current lease terms. Leases on a total of 29.1 percent and 18.1 percent of the total net rentable square feet leased in the Company's buildings will expire in 1998 and 1999, respectively. If the Company is unable to promptly relet, or renew the leases for, all or a substantial portion of the space located in its buildings, or if the rental rates upon such renewal or reletting are significantly lower than expected rental rates, or if the Company's reserves for these purposes prove inadequate, then the Company's cash flow and its ability to make expected distributions to its shareholders may be adversely affected. REAL ESTATE INVESTMENT RISKS GENERAL RISKS. Real property investments are subject to varying degrees of risk. The yields available from equity investments in real estate depend in large part on the amount of income generated and expenses incurred. If the Company's properties do not generate revenues sufficient to meet operating expenses, including current levels of debt service, tenant improvements, leasing commissions and other capital expenditures, the Company may have to borrow additional amounts to cover fixed costs and the Company's cash flow and its ability to make distributions to its shareholders will be adversely affected. The Company must obtain external financing to meet future debt maturities. The Company's net revenues and the value of its properties may be adversely affected by a number of factors, including the national, regional and local economic climates; regional and local real estate conditions; the perceptions of prospective tenants as to the attractiveness of the property; the ability of the Company to provide adequate management, maintenance and insurance; and increased operating costs (including real estate taxes and utilities). In addition, real estate values and income from properties are also affected by such factors as applicable laws, including tax laws, interest rate levels and the availability of financing. ILLIQUIDITY OF REAL ESTATE. Equity real estate investments are relatively illiquid. Such illiquidity will tend to limit the ability of the Company to vary its portfolio promptly in response to changes in economic or other conditions. In addition, the Internal Revenue Code limits the Company's ability to sell certain properties held for fewer than four years, which may affect the Company's ability to sell its properties. COMPETITION. Numerous office buildings compete with the Company's buildings in attracting tenants to lease space. Some of these competing buildings are newer, better located or better capitalized than some of the Company's buildings. Moreover, the Company believes that major national or regional commercial property developers will continue to seek development opportunities in the southeastern and southwestern United States. These developers may have greater financial resources than the Company. The number of competitive commercial properties in a particular area could have a material adverse effect on the Company's ability to lease space in its buildings or at newly developed or acquired properties and the rents charged. CHANGES IN LAWS. Because increases in income, service or transfer taxes are generally not passed through to tenants under leases, such increases may adversely affect the Company's cash flow and its ability to make distributions to its shareholders. The Company's properties are also subject to various federal, state and local regulatory requirements, such as requirements of the Americans with Disabilities Act (the "ADA") 21 24 and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. The Company believes that its properties are currently in compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by the Company and could have an adverse effect on the Company's cash flow and expected distributions. UNINSURED LOSS. The Company presently carries comprehensive liability, fire, flood (where appropriate), extended coverage and rental loss insurance with respect to its properties, with policy specifications and insured limits customary for similar properties. There are, however, certain types of losses (such as from wars) that may be either uninsurable or not economically insurable. Should an uninsured loss or a loss exceeding policy limits occur, the Company could lose both its capital invested in, and anticipated profits from, one or more of its properties. BANKRUPTCY AND FINANCIAL CONDITION OF TENANTS. At any time, a tenant of the Company's buildings may seek the protection of the bankruptcy laws, which could result in the rejection and termination of such tenant's lease and thereby cause a reduction in the cash flow available for distribution by the Company. No assurance can be given that tenants will not file for bankruptcy protection in the future or, if any tenants file, that they will affirm their leases and continue to make rental payments in a timely manner. In addition, a tenant from time to time may experience a downturn in its business which may weaken its financial condition and result in its failure to make rental payments when due. If a tenant's lease is not affirmed following bankruptcy or if a tenant's financial condition weakens, the Company's income may be adversely affected. AMERICANS WITH DISABILITIES ACT COMPLIANCE. Under the ADA, all public accommodations and commercial facilities are required to meet certain federal requirements relating to access and use by disabled persons. These requirements became effective in 1992. Compliance with the requirements of the ADA could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. Government or an award of damages to private litigants. Although the Company believes that its properties are substantially in compliance with these requirements, the Company may incur additional costs to comply with the ADA. Although the Company believes that such costs will not have a material adverse effect on the Company, if required changes involve a greater expenditure than the Company currently anticipates, the Company's ability to make distributions to its shareholders could be adversely affected. RISKS INVOLVED IN PROPERTY OWNERSHIP THROUGH PARTNERSHIP AND JOINT VENTURES. Although the Company owns fee simple interests in its properties, in the future the Company could, if then permitted by the covenants in its loan agreements and its financial position, participate with other entities in property ownership through partnerships or joint ventures. Partnership or joint venture investments may, under certain circumstances, involve risks not otherwise present in property ownership, including the possibility that (a) the Company's partners or co-venturers might become bankrupt, (b) such partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with the business interests or goals of the Company, and (c) such partners or co-venturers may be in a position to take action contrary to the instructions or the requests of the Company or contrary to the Company's policies or objectives, including the Company's policy to maintain its qualification as a REIT. The Company will, however, seek to maintain sufficient control of such participants or joint ventures to permit the Company's business objectives to be achieved. There is no limitation under the Company's organizational documents as to the amount of available funds that may be invested in partnerships or joint ventures. 22 25 IMPACT OF INFLATION. The Company may experience increases in its expenses, including debt service, as a result of inflation. The Company's exposure to inflationary cost increases in property level expenses is reduced by escalation clauses which are included in most of its leases. However, market conditions may prevent the Company from escalating rents. Inflationary pressure may increase operating expenses, including labor and energy costs (and, indirectly, real estate taxes) above expected levels at a time when it may not be possible for the Company to increase lease rates to offset such higher operating expenses. In addition, inflation can have secondary effects upon occupancy rates by decreasing the demand for office space in many of the markets in which the Company operates. Although, inflation has historically often caused increases in the value of income-producing real estate through higher rentals, the Company can provide no assurance that inflation will increase the value of its properties in the future and, in fact, the rate of inflation over recent years has been considerably below that which has been experienced previously. RISK OF DEVELOPMENT, CONSTRUCTION AND ACQUISITION ACTIVITIES Within the constraints of its policy concerning leverage, the Company has and will continue to develop and construct office buildings, particularly on its undeveloped land. Risks associated with the Company's development and construction activities, including activities relating to its undeveloped land, may include: abandonment of development opportunities; construction costs of a property exceeding original estimates and possibly making the property uneconomical; insufficient occupancy rates and rents at a newly completed property to make the property profitable; unavailability of financing on favorable terms for development of a property; and the failure to complete construction and lease-up on schedule, resulting in increased debt service expense and construction costs. In addition, new development activities, regardless of whether or not they are ultimately successful, typically require a substantial portion of management's time and attention. Development activities are subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations. The Company will continue to acquire office buildings. Acquisitions of office buildings entail risks that investments will fail to perform in accordance with expectations. Estimates of the cost of improvements to bring an acquired building up to standards established for the market position intended for such building may prove inaccurate. In addition, there are general investment risks associated with any new real estate investment. The Company anticipates that any future developments and acquisitions would be financed through a combination of internally generated cash, equity investments and secured or unsecured financing. If new developments are financed through construction loans, there is a risk that, upon completion of construction, permanent financing for newly developed properties may not be available or may be available only on disadvantageous terms. CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL The investment, financing, borrowing and distribution policies of the Company, as well as its policies with respect to all other activities, including growth, debt, capitalization and operations, are determined by the Board of Directors. Although the Board of Directors has no present intention to do so, these policies may be amended or revised at any time and from time to time at the discretion of the Board of Directors without a vote of the shareholders of the Company. A change in these policies could adversely affect the financial condition or results of operations of the Company or the market price of the Common Stock. 23 26 LIMITATIONS OF REIT STATUS ON BUSINESS OF SUBSIDIARIES Certain requirements for REIT qualification may in the future limit the Company's ability to increase fee development, management and leasing operations conducted, and related services offered, by the Company's subsidiaries without jeopardizing the Company's qualification as a REIT. The President's 1999 Budget Plan proposes to prohibit REITs from holding more than ten percent of the voting stock or value of all classes of stock of another company. This proposal would be applicable to stock acquired on or after the date of first committee action. If a REIT's stock ownership is grandfathered, the grandfathering is lost if the subsidiary corporation engages in a new business or acquires substantially new assets on or after the effective date. If passed, this proposal could restrict the Company's ability to benefit from possible increases in third party management services provided by KRSI. ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT The Company believes it has operated so as to qualify as a REIT under the Internal Revenue Code since its inception in 1988. Although management of the Company intends that the Company continue to operate so as to qualify as a REIT, no assurance can be given that the Company will remain qualified as a REIT. Qualification as a REIT involves the application and satisfaction of highly technical and complex Code requirements for which there are only limited judicial and administrative interpretations. Uncertainty in the application of such requirements, as well as circumstances not entirely within the Company's control, may affect the Company's ability to qualify as a REIT. In addition, no assurance can be given that legislation, new regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. The Company, however, is not aware of any pending tax legislation that would adversely affect the Company's ability to operate as a REIT. POSSIBLE ENVIRONMENTAL LIABILITIES Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with the contamination. Such laws typically impose clean-up responsibility and liability without regard to whether the owner knew, or caused the presence, of the contaminants, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate the contamination on such property, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. Any person who arranges for the disposal or treatment of hazardous or toxic substances at a disposal or treatment facility also may be liable for the costs of removal or remediation of a release of hazardous or toxic substances at such disposal or treatment facility, whether or not such facility is owned or operated by such person. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs that it incurs in connection with the contamination. Finally, the owner of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos-containing materials ("ACM") when such materials are in poor condition or in the 24 27 event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability for release of ACM and may provide for third parties to seek recovery from owners or operators of real properties for personal injury associated with ACM. In connection with its ownership and operation of its properties, the Company may be potentially liable for such costs. All ACM in the Company's buildings has been found to be in good condition and non-friable, and should not present a risk as long as it continues to be properly managed. The Company's environmental assessments of its properties have not revealed any environmental liability that the Company believes would have a material adverse effect on its business, assets or results of operations taken as a whole, nor is the Company aware of any such material environmental liability. Nevertheless, it is possible that the Company's assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. Moreover, there can be no assurance that future laws, ordinances or regulations will not impose any material environmental liability or the current environmental condition of the Company's properties will not be affected by tenants, by the condition of land or operations in the vicinity of such properties (such as the presence of underground storage tanks), or by third parties unrelated to the Company. EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK One of the factors that will influence the market price of the Common Stock in public markets will be the annual dividend yield on the share price reflected by dividend distributions by the Company. An increase in market interest rates could reduce cash available for distribution by the Company to its shareholders and, accordingly, adversely affect the market price of the Common Stock. INFORMATION SYSTEMS AND THE YEAR 2000 The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a two digit year is commonly referred to as the Year 2000 Compliance issue. As the year 2000 approaches, such systems may be unable to accurately process certain date-based information. The Company has identified all significant applications that will require modification to ensure Year 2000 Compliance. All significant applications used by the Company are packaged software products licensed from various computer software companies. The Year 2000 Compliance issue will be resolved through the Company's existing plan to upgrade its significant applications from DOS-based software to Windows-based software, which are Year 2000 compliant, with its existing software vendors. The Company plans on completing this conversion process during 1998. The total cost to the Company of these Year 2000 Compliance activities has not been and is not anticipated to be material to its financial position or results of operations in any given year. These costs and the date on which the Company plans to complete these application conversions are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availablity of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those plans. 25 28 ADDITIONAL INFORMATION For additional disclosure of risk factors to which the Company is subject, see the other sections of "Management's Discussion and Analysis of Financial Condition and Results of Operations." 26 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES PAGE NO. Independent Auditors' Report............................................................................ 28 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1997 and 1996........................................................................................ 29 Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 1997............................................................................... 30 Consolidated Statements of Changes in Shareholders' Equity for Each of the Three Years in the Period Ended December 31, 1997................................................................. 31 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1997............................................................................... 32 Notes to Consolidated Financial Statements for Each of the Three Years in the Period Ended December 31, 1997............................................................................... 33 Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts for the Three Years Ended December 31, 1997..................................................... 45 Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1997............................................................ 46
27 30 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Koger Equity, Inc. Jacksonville, Florida We have audited the accompanying consolidated balance sheets of Koger Equity, Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the Index at Item 8. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Koger Equity, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Jacksonville, Florida February 23, 1998 28 31 KOGER EQUITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996 (IN THOUSANDS EXCEPT SHARE DATA)
1997 1996 ------ ----- ASSETS Real Estate Investments: Operating properties: Land $ 111,697 $ 98,567 Buildings 567,332 482,836 Furniture and equipment 2,220 1,569 Accumulated depreciation (104,700) (82,478) --------- --------- Operating properties - net 576,549 500,494 Properties under construction: Land 8,978 2,083 Buildings 18,608 930 Undeveloped land held for investment 13,249 20,558 Undeveloped land held for sale 1,512 6,550 Cash and temporary investments 16,955 35,715 Accounts receivable, net of allowance for uncollectible accounts of $250 and $231 5,646 5,600 Investment in Koger Realty Services, Inc. 472 259 Cost in excess of fair value of net assets acquired, net of accumulated amortization of $685 and $515 1,870 2,040 Other assets 12,258 10,437 --------- --------- TOTAL ASSETS $ 656,097 $ 584,666 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgages and loans payable $ 181,963 $ 203,044 Accounts payable 8,802 4,662 Accrued real estate taxes payable 3,294 2,144 Accrued liabilities - other 6,623 5,467 Dividends payable 6,352 1,045 Advance rents and security deposits 4,801 4,169 --------- --------- Total Liabilities 211,835 220,531 --------- --------- Commitments and Contingencies (Notes 2, 11 and 12) Shareholders' Equity: Preferred stock, $.01 par value; 50,000,000 shares authorized; issued: none Common stock, $.01 par value; 100,000,000 shares authorized; issued: 28,389,195 and 23,560,427 shares; outstanding: 25,406,792 and 20,892,574 shares 284 236 Capital in excess of par value 441,451 362,127 Warrants; outstanding 0 and 1,110,887 2,243 Retained earnings 30,947 22,666 Treasury stock, at cost; 2,982,403 and 2,667,853 shares (28,420) (23,137) --------- --------- Total Shareholders' Equity 444,262 364,135 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 656,097 $ 584,666 ========= =========
See Notes to Consolidated Financial Statements. 29 32 KOGER EQUITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 (IN THOUSANDS EXCEPT PER SHARE DATA)
1997 1996 1995 ---- ---- ---- REVENUES Rental $ 108,924 $ 98,342 $ 94,865 Other rental services 577 463 578 Management fees ($1,685 from TKPL in 1995) 2,637 2,682 3,624 Interest ($13,066 from TKPL in 1995) 1,274 1,951 14,440 Income from Koger Realty Services, Inc. 577 342 36 Gain on TKPL note to Southeast 292 11,288 Gain on early retirement of debt 919 --------- --------- --------- Total revenues 113,989 104,072 125,750 --------- --------- --------- EXPENSES Property operations 44,453 41,597 40,830 Depreciation and amortization 24,073 21,127 19,102 Mortgage and loan interest 16,517 18,701 23,708 General and administrative 6,374 6,623 7,559 Direct cost of management fees 1,896 1,884 2,837 Undeveloped land costs 413 517 512 Litigation costs 424 176 Provision for (recovery of) loss on land held for sale (379) 970 Other 745 --------- --------- --------- Total expenses 93,347 90,873 96,439 --------- --------- --------- INCOME BEFORE GAIN (LOSS) ON SALE OR DISPOSITION OF ASSETS 20,642 13,199 29,311 Gain (Loss) on sale or disposition of assets 1,955 (497) (255) --------- --------- --------- INCOME BEFORE INCOME TAXES 22,597 12,702 29,056 Income taxes 935 815 66 --------- --------- --------- INCOME BEFORE EXTRAORDINARY ITEM 21,662 11,887 28,990 Extraordinary loss on early retirement of debt 458 1,386 --------- --------- --------- NET INCOME $ 21,204 $ 10,501 $ 28,990 ========= ========= ========= EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT SHARE: Basic- Income before extraordinary item $ 1.01 $ 0.64 $ 1.64 Extraordinary loss (0.02) (0.07) --------- --------- --------- Net Income $ 0.99 $ 0.57 $ 1.64 ========= ========= ========= Diluted - Income before extraordinary item $ 0.96 $ 0.61 $ 1.61 Extraordinary loss (0.02) (0.07) --------- --------- --------- Net Income $ 0.94 $ 0.54 $ 1.61 ========= ========= =========
See Notes to Consolidated Financial Statements. 30 33 KOGER EQUITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 (IN THOUSANDS)
RETAINED EARNINGS COMMON STOCK CAPITAL (ACCUMULATED TOTAL ------------------ IN EXCESS DIVIDENDS SHARE- SHARES PAR OF PAR IN EXCESS OF TREASURY HOLDERS' ISSUED VALUE VALUE WARRANTS NET INCOME) STOCK EQUITY ------ -------- --------- --------- ---------------- -------- --------- BALANCE, DECEMBER 31, 1994 20,474 $ 205 $ 318,589 $ 2,251 $(15,657) $(24,787) $280,601 Treasury stock reissued (123) 1,217 1,094 Warrants exercised 1 7 (1) 6 Options exercised 1 7 (7) Stock appreciation rights exercised 1 6 6 Net income 28,990 28,990 ------ -------- --------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 1995 20,477 205 318,609 2,250 13,210 (23,577) 310,697 Treasury stock reissued 182 487 669 Warrants exercised 3 33 (7) 26 Options exercised 57 1 519 (47) 473 Stock appreciation rights exercised 23 270 270 Common stock issued 3,000 30 42,514 42,544 Dividends declared (1,045) (1,045) Net income 10,501 10,501 ------ -------- --------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 1996 23,560 236 362,127 2,243 22,666 (23,137) 364,135 Treasury stock reissued 605 489 1,094 Treasury stock purchased (5,750) (5,750) Warrants redeemed (236) (143) (379) Warrants exercised 994 10 9,945 (2,007) 7,948 Options exercised 335 3 2,542 (22) 2,523 Common stock issued 3,500 35 66,232 66,267 Dividends declared (12,780) (12,780) Net income 21,204 21,204 ------- -------- --------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 1997 28,389 $ 284 $ 441,451 $ 0 $ 30,947 $(28,420) $444,262 ======= ======== ========= ======== ======== ======== ========
See Notes to Consolidated Financial Statements. 31 34 KOGER EQUITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 (IN THOUSANDS)
1997 1996 1995 ---- ---- ---- OPERATING ACTIVITIES Net income $ 21,204 $ 10,501 $ 28,990 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,073 21,127 19,102 Gain on TKPL unsecured note to Southeast (292) (11,288) Provision for (recovery of) loss on land held for sale (379) 970 Loss (Gain) on sale or disposition of assets (1,955) 497 255 Loss (Gain) on early debt repayment 458 1,386 (919) Income from Koger Realty Services, Inc. (577) (342) (36) Provision for uncollectible accounts 224 50 172 Accrued interest added to principal 112 496 Amortization of mortgage discounts 86 196 175 Changes in assets and liabilities: Increase in accounts payable, accrued liabilities and other liabilities 7,906 3,542 4,500 Increase in receivables and other assets (842) (829) (349) Decrease in receivable from TKPL 1,851 --------- --------- --------- Net cash provided by operating activities 50,198 35,948 43,919 --------- --------- --------- INVESTING ACTIVITIES Proceeds from sale of assets 6,244 1,241 25,267 Proceeds from TKPL note to Southeast 887 17,105 Proceeds from TKPL mortgage notes 18,195 Purchase of TKPL mortgage notes (18,195) Property acquisitions (75,774) Building construction expenditures (26,099) (930) Tenant improvements to first generation space (701) Tenant improvements to existing properties (7,513) (7,873) (8,644) Building improvements (3,116) (2,795) (3,064) Energy management improvements (572) (1,900) (2,663) Deferred tenant costs (1,997) (1,862) (1,085) Additions to furniture and equipment (651) (128) (330) Purchase of Koger Realty Services, Inc. preferred stock (300) Dividends received from Koger Realty Services, Inc. 364 490 Cash acquired in purchase of assets 307 --------- --------- --------- Net cash provided by (used in) investing activities (109,815) (12,870) 26,593 --------- --------- --------- FINANCING ACTIVITIES Principal payments on mortgages and loans (77,749) (228,090) (68,608) Dividends paid (7,473) Treasury stock purchased (5,750) Warrants redeemed (379) Proceeds from mortgages and loans 56,300 175,900 Proceeds from sales of common stock 66,640 42,748 206 Proceeds from exercise of warrants and stock options 10,252 376 6 Financing costs (984) (3,712) (16) --------- --------- --------- Net cash provided by (used in) financing activities 40,857 (12,778) (68,412) --------- --------- --------- Net increase (decrease) in cash and cash equivalents (18,760) 10,300 2,100 Cash and cash equivalents - beginning of year 35,715 25,415 23,315 --------- --------- --------- Cash and cash equivalents - end of year $ 16,955 $ 35,715 $ 25,415 ========= ========= =========
See Notes to Consolidated Financial Statements. 32 35 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. ORGANIZATION. Koger Equity, Inc. ("KE") was incorporated in Florida on June 21, 1988. KE has two wholly-owned subsidiaries which are Southeast Properties Holding Corporation ("Southeast"), a Florida corporation, and Koger Real Estate Services, Inc. ("KRES"), a Florida corporation. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of KE and its wholly-owned subsidiaries (the "Company"). All material intercompany accounts have been eliminated in consolidation. INVESTMENT IN KOGER REALTY SERVICES, INC. Koger Realty Services, Inc., a Delaware corporation ("KRSI"), provides leasing and property management services to owners of commercial office buildings. During 1995, the Company purchased all of the preferred stock of KRSI, which preferred stock represents at least 95 percent of the economic value of KRSI. Initially, such preferred stock was non-voting but was convertible into voting common stock. Accordingly, KE consolidated KRSI in the 1995 financial statements. During 1996, the Company requested KRSI to change the convertibility feature of the preferred stock owned by the Company. Effective in 1996, the preferred stock is non-voting and is not convertible into the common stock of KRSI while held by the Company. The Company has accounted for its investment in the preferred stock of KRSI using the equity method. REAL ESTATE INVESTMENTS. Operating properties, furniture and equipment, and undeveloped land held for investment are stated at cost less accumulated depreciation. Undeveloped land held for sale is carried at the lower of cost or fair value less selling costs. Periodically, management reviews its portfolio of operating properties, undeveloped land held for investment and related goodwill and in those instances where properties have suffered an impairment in value, the properties and related goodwill will be reduced to their fair value. This review includes a quarterly analysis of occupancy levels and rental rates for the Company's properties in order to identify properties which may have suffered an impairment in value. Management prepares estimates of future cash flows for these properties to determine whether the Company will be able to recover its investment. In making such estimates, management considers the conditions in the commercial real estate markets in which the properties are located, current and expected occupancy rates, current and expected rental rates, and expected changes in operating costs. As of December 31, 1997, there were no such impairments in value. Maintenance and repairs are charged to operations. Acquisitions, additions, and improvements are capitalized. DEPRECIATION AND AMORTIZATION. The Company uses the straight-line method for depreciation and amortization. Acquisition costs, building improvements and tenant improvements are depreciated over the periods benefited by the expenditures which range from 3 to 40 years. Deferred tenant costs (leasing commissions and tenant relocation costs) are amortized over the term of the related leases. Deferred financing costs are amortized over the terms of the related agreements. Cost in excess of fair value of net assets acquired is being amortized over 15 years. 33 36 REVENUE RECOGNITION. Rentals are generally recognized as revenue over the lives of leases according to provisions of the lease agreements. However, the straight-line basis, which averages annual minimum rents over the terms of leases, is used to recognize minimum rent revenues under leases which provide for material varying rents over their terms. For 1997, 1996 and 1995, the recognition of rental revenues on this basis for applicable leases increased rental revenues by $454,000, $114,000 and $80,000, respectively, over the amount which would have been recognized based upon the contractual provisions of these leases. Interest revenue is recognized on the accrual basis for interest-earning investments. FEDERAL INCOME TAXES. The Company is qualified and has elected tax treatment as a real estate investment trust under the Internal Revenue Code (a "REIT"). Accordingly, the Company distributes at least 95 percent of its REIT taxable income to its shareholders. Since the Company had no REIT taxable income in 1996 or 1995, no distributions to shareholders were made. To the extent that the Company pays dividends equal to 100 percent of REIT taxable income, the earnings of the Company are taxed at the shareholder level. However, the use of net operating loss carryforwards, which may reduce REIT taxable income to zero, are limited for alternative minimum tax purposes. EARNINGS PER COMMON SHARE. Earnings per common share have been computed based on the weighted average number of shares of common stock and common stock equivalents outstanding as follows:
YEAR BASIC DILUTED ---- ---------- ---------- 1997 21,373,810 22,495,022 1996 18,523,122 19,500,171 1995 17,724,127 18,011,076
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company believes that the carrying amount of its financial instruments (temporary investments, accounts receivable, accounts payable, and mortgages and loans payable) is a reasonable estimate of fair value of these instruments. STATEMENTS OF CASH FLOWS. Cash in excess of daily requirements is invested in short-term monetary securities. Such temporary cash investments have an original maturity of less than three months and are deemed to be cash equivalents for purposes of the statements of cash flows. During 1995, cost in excess of fair value of net assets acquired was adjusted as follows: (1) assets acquired increased $169,000; and (2) liabilities assumed increased $1,000. In addition, $6,412,000 of the unamortized cost in excess of fair value of net assets acquired was written off and offset against proceeds received by Southeast from the TKPL unsecured note. This write-off was based on management's analysis of the remaining value of the intangible assets based on the liquidation of TKPL and the partial repayment of the TKPL unsecured note. During 1995, the Company contributed 122,441 shares of common stock to the Company's 401(k) Plan. These shares had a value of approximately $888,000 based on the closing price of the Company's common stock on the American Stock Exchange on December 30, 1994. In addition, TKPL assigned $595,000 of its net assets to Southeast as payment on the unsecured note to Southeast during 1995. During 1996, the Company contributed 43,804 shares of common stock to the Company's 401(k) Plan. These shares had a value of approximately $465,000 based on the closing price of the Company's common stock on the American Stock Exchange on December 31, 1995. During 1997, the Company contributed 23,657 shares of common stock to the Company's 401(k) Plan. These shares had a value of approximately $444,000 based on the closing price of the Company's common stock on the American Stock Exchange on December 31, 1996. 34 37 For 1997, 1996, and 1995, total interest payments (net of amounts capitalized) were $16,426,000, $18,599,000 and $23,823,000, respectively, for the Company. For 1997, 1996 and 1995, payments for income taxes totaled $690,000, $816,000 and $133,000, respectively. ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates. NEW ACCOUNTING STANDARDS. In March 1997, the Financial Accounting Standards Board (the"FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This Statement establishes standards for computing and presenting earnings per share ("EPS") and applies to all entities with publicly held common stock or potential common stock. This Statement replaces the presentation of primary EPS and fully diluted EPS with a presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes dilution and is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Similar to fully diluted EPS, diluted EPS reflects the potential dilution of securities that could share in the earnings. This Statement was adopted in the fourth quarter of 1997 and did not have a material effect on the Company's reported EPS amounts. In June 1997, the FASB Issued SFAS No. 130, "Reporting Comprehensive Income" effective for fiscal years beginning after December 15, 1997. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This Statement does not require a specific format for that financial statement but requires that an entity display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an entity classify items of other comprehensive income by their nature in a financial statement. For example, other comprehensive income may include foreign currency and unrealized gains and losses on certain investments in debt and equity securities. In addition, the accumulated balance of other comprehensive income must be displayed separately from retained earnings and additional paid in capital in the equity section of a statement of financial position. Reclassification of financial statements for earlier periods, provided for comparative purposes, is required. The Company has not determined the impact that the adoption of this new accounting standard will have on its financial statements. The Company will adopt this accounting standard on January 1, 1998, as required. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" effective for fiscal years beginning after December 15, 1997. This Statement establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS No. 131 requires reporting segment profit or loss, certain specific revenue and expense items and segment assets. It also requires reconciliations of total segment revenues, total segments profit or loss, total segment assets, and other amounts disclosed for segments to corresponding amounts reported in the financial statements. Restatement of comparative information for earlier periods presented is required in the initial year of application. Interim information is not required until the second year of application, at which time comparative information is required. The Company has not determined the impact that the adoption of this new accounting standard will have on 35 38 its financial statement disclosures. The Company will adopt this accounting standard on January 1, 1998, as required. RECLASSIFICATION. Certain 1996 and 1995 amounts have been reclassified to conform with 1997 presentation. 2. TRANSACTIONS WITH RELATED PARTIES. Three directors were elected to the Company's Board of Directors under the terms of an agreement dated October 10, 1996 between the Company and an affiliate of Apollo Real Estate Investment Fund II, L.P. ("Apollo") pursuant to which Apollo purchased three million shares of common stock from the Company for $43.5 million ($14.50 per share). Such agreement grants to Apollo registration rights and a conditional exemption from certain of the Company's takeover defenses and provides that for a period of three years (subject to earlier termination under certain circumstances): (i) Apollo may purchase up to 25 percent of the Company's outstanding stock; (ii) Apollo will be entitled to Board representation of up to three directors on a board of not more than 12 (depending upon Apollo's level of ownership of the common stock); and (iii) Apollo will not acquire more than 25 percent of the Company's outstanding stock and will vote its shares as to certain matters either in accordance with the recommendation of the Board or proportionately with other shareholders, unless the Company breaches its agreements or, without Apollo's consent, the Company takes certain significant actions such as certain amendments of the Company's organizational documents, liquidation, termination of REIT status, sale of the Company, acquisitions or disposition over a certain size, issuance of more than 9.8 percent of the outstanding common stock to a person or group or failure by the Company to employ its takeover defenses against another person who holds (or tenders for) 15 percent or more of the common stock. In connection with a public offering of 3.5 million shares of the Company's common stock (the "Shares") which closed in December 1997, the Company entered a purchase agreement with AREIF II Realty Trust, Inc., an affiliate of Apollo, whereby the latter acquired 500,000 of the publicly offered Shares at a price of $19.14 per share or aggregate proceeds to the Company of $9.57 million. The price to the public of the remaining 3,000,000 Shares was $20.25 or an aggregate offering price of $60.75 million. The underwriting discount on these Shares was $1.11 making the per share proceeds to the Company of $19.14 or aggregate proceeds of $57.42 million. In connection with the 1996 sale of common stock to an affiliate of Apollo, Rothschild Realty, Inc., which employs Mr. Aloian as a Managing Director, received $350,000 for providing a fairness opinion to the Company's Board of Directors. Also, Mr. Hiley received from the Company a fee of $204,000 for his role in negotiating the transaction. Both Mr. Aloian and Mr. Hiley are directors of the Company. Pursuant to a consulting agreement with the Company, which is subject to periodic evaluation by the Board of Directors, Mr. Hiley provides advice with respect to the financial aspects of the Company's strategic plan and was paid a fee of $146,000 for 1996. Mr. Davis retired as an employee of the Company on December 31, 1996, but continues to serve the Company as a consultant. Pursuant to a consulting agreement between Mr. Davis and the Company, he will receive a consulting fee of $50,000 per year through December 31, 1999. 36 39 3. INVESTMENTS IN THE KOGER PARTNERSHIP, LTD. GENERAL. Southeast, a wholly-owned subsidiary of the Company, was the managing general partner of TKPL through December 26, 1995. Southeast's interests in TKPL included (1) 90,360 TKPL General and Limited Partnership Units (the "Units") and (2) a restructured unsecured note from TKPL with a principal amount of approximately $31 million. In light of the terms of TKPL's restructured debt, the Company had determined that these investments had no value. During 1995, TKPL sold all of its operating properties. The net proceeds from the sale were sufficient to repay in full all secured debt and accrued interest of TKPL with the remaining excess sales proceeds and available cash of TKPL used to pay Southeast for amounts owed on subordinate debt and accrued interest. During 1995, TKPL repaid $17.7 million of the subordinate debt to Southeast. On December 4, 1995, the Bankruptcy Court in the TKPL Chapter 11 Case entered an order authorizing and directing Southeast to take all necessary and advisable action to wind up TKPL's affairs and to terminate its existence as a partnership. On December 26, 1995, TKPL was dissolved. The Company recorded a gain on the recovery of the TKPL note to Southeast of $11,288,000, which was calculated as follows: Proceeds from TKPL unsecured note to Southeast $17,700,000 Partial Write-off of Cost in Excess of Fair Value of Net Assets Acquired (6,412,000) ----------- Gain on TKPL Note to Southeast $11,288,000 ===========
BASIS OF ACCOUNTING FOR THE INVESTMENT IN TKPL. Southeast had significant influence over TKPL's activities because it owned approximately 32 percent of TKPL's outstanding Units. However, Southeast did not control TKPL for accounting purposes and, accordingly, accounted for its investment using the equity method. No losses of TKPL were allocated to Southeast because Southeast was not obligated to fund losses of TKPL as stated in the Third Amended and Restated Agreement of Limited Partnership dated August 3, 1993. DUTIES TO AND COMPENSATION FROM TKPL. Southeast, in its capacity as Managing General Partner, generally had responsibility for all aspects of TKPL's operations and received as compensation for its services a management fee equal to nine percent of the gross rental revenues derived from the properties it managed for TKPL. All third-party leasing commissions incurred on TKPL buildings were the responsibility of the Company. During 1995, the management fees earned were approximately $1,685,000. During the fourth quarter of 1995, approximately $500,000 of management fees from TKPL previously recorded were written off because collection of these fees could have potentially affected the Company's REIT status. PURCHASE OF TKPL MORTGAGE NOTES. During 1995, KE acquired $27.8 million principal amount of TKPL New Secured Notes and $4.5 million principal amount of TKPL Converted Loan Notes for approximately $18.2 million in the aggregate. During 1995, the TKPL New Secured Notes and the TKPL Converted Loan Notes were retired by TKPL. The Company recorded $13,066,000 of interest revenue related to these notes during 1995 which represented repayment proceeds on the notes in excess of the Company's cost basis. These excess proceeds were recorded as an interest yield adjustment on the notes. 4. MORTGAGES AND LOANS PAYABLE. During December 1996, the Company closed on $175.9 million of a $190 million non-recourse loan with Northwestern Mutual Life Insurance Company ("Northwestern") which is secured by 10 office parks. This loan is divided into (i) a tranche in the amount of $100.5 million ($94.7 million of which has been 37 40 drawn) with a 10 year maturity and an interest rate of 8.25 percent and (ii) a tranche in the amount of $89.5 million with a maturity of 12 years and an interest rate of 8.33 percent. Monthly payments on this loan include principal amortization based on a 25 year amortization period. This indebtedness requires the Company to maintain certain financial ratios and is collateralized by properties with a carrying value of approximately $257.6 million at December 31, 1997. The Company has a $100 million secured revolving credit facility ($1,000 of which was outstanding on December 31, 1997) provided by First Union National Bank of Florida, Morgan Guaranty Trust Company of New York, AmSouth Bank, N.A. and Guaranty Federal Bank. Based on the Company's election, the interest rate on this revolving credit facility will be either (i) the lender's LIBOR rate plus either 125, 137.5 or 150 basis points (depending on the Company's leverage ratio) or (ii) the lender's prime rate. Interest payments will be due monthly on this credit facility which has a term of two years. At the election of the lender, the term of this credit facility may be extended for additional periods of one year each. This credit facility requires the Company to maintain certain financial ratios and is collateralized by properties with a carrying value of approximately $157.8 million at December 31, 1997. The annual maturities of loans and mortgages payable, as of December 31, 1997, are summarized as follows:
YEAR ENDING AMOUNT DECEMBER 31, (IN THOUSANDS) ------------ -------------- 1998 $ 2,506 1999 2,722 2000 2,954 2001 3,210 2002 3,486 Subsequent Years 167,085 -------- Total $181,963 ========
5. LEASES. The Company's operations consist principally of owning and leasing of office space. Most of the leases are for terms of three to five years. Generally, the Company pays all operating expenses, including real estate taxes and insurance. At December 31, 1997, approximately 93 percent of the Company's annualized rentals were subject to rent escalations based on changes in the Consumer Price Index or increases in real estate taxes and certain operating expenses. A substantial number of leases contain options that allow leases to renew for varying periods. The Company's leases are operating leases and expire at various dates through 2014. Minimum future rental revenues from leases in effect at December 31, 1997, determined without regard to renewal options, are summarized as follows:
YEAR ENDING AMOUNT DECEMBER 31, (IN THOUSANDS) ------------ -------------- 1998 $101,453 1999 76,644 2000 59,229 2001 39,947 2002 27,233 Subsequent Years 73,080 -------- Total $377,586 ========
38 41 The above minimum future rental revenue does not include contingent rentals that may be received under provisions of the lease agreements. Contingent rentals amounted to $2,850,000, $2,886,000 and $1,792,000 for the years 1997, 1996, and 1995, respectively. At December 31, 1997, annualized rental revenues totaled approximately $14,245,000 for the State of Florida, when all of its departments and agencies which lease space in the Company's buildings were combined. Also, at that date, annualized rental revenues totaled approximately $11,609,000 for the United States of America, when all of its departments and agencies which lease space in the Company's buildings were combined. 6. STOCK OPTIONS AND RIGHTS. 1988 STOCK OPTION PLAN. The Company's Amended and Restated 1988 Stock Option Plan (the "1988 Plan") provides for the granting of options to purchase up to 500,000 shares of its common stock to key employees of the Company and its subsidiaries. To exercise the option, payment of the option price is required before the option shares are delivered. These options expire seven years from the date of grant and are generally exercisable beginning one year from the date of the grant at the rate of 20 percent per annum of the shares covered by each option on a cumulative basis being fully exercisable five years after the date of grant. 1993 STOCK OPTION PLAN. The Company's 1993 Stock Option Plan (the "1993 Plan") provides for the granting of options to purchase up to 1,000,000 shares of its common stock to key employees of the Company and its affiliates. To exercise the option, payment of the option price is required before the option shares are delivered. These options expire ten years from the date of grant and are generally exercisable beginning one year from the date of the grant at the rate of 20 percent per annum of the shares covered by each option on a cumulative basis being fully exercisable five years after the date of grant. 1996 STOCK OPTION PLAN. The Company's 1996 Stock Option Plan (the "1996 Plan") provides for the granting of options to purchase up to 650,000 shares of its common stock to key employees of the Company. To exercise the option, payment of the option price is required before the option shares are delivered. These options expire ten years from the date of grant and are exercisable beginning one year from the date of the grant at the rate of 20 percent per annum of the shares covered by each option on a cumulative basis being fully exercisable five years after the date of grant. INFORMATION CONCERNING OPTIONS GRANTED. Substantially all of the options granted have been granted with an exercise price equal to the market value at the date of grant. If compensation cost for stock option grants had been determined based on the fair value at the grant dates for 1997, 1996 and 1995 consistent with the method prescribed by SFAS 123, the Company's net earnings and earnings per share would have been adjusted to the pro forma amounts indicated below:
1997 1996 1995 ----------- ----------- ----------- Net Income - As reported $21,204,000 $10,501,000 $28,990,000 - Pro forma $19,355,000 $10,139,000 $28,960,000 Diluted Earnings per share - As reported $ 0.94 $ 0.54 $ 1.61 - Pro forma $ 0.86 $ 0.52 $ 1.61
39 42 Under SFAS 123, the fair value of each option grant is estimated on the date of grant using the binomial option-pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995:
1997 1996 1995 ----- ----- ----- 1988 PLAN Dividend Yield 5.00% 5.00% 5.00% Expected Volatility 23.71% 28.09% 43.70% Risk-free Interest Rates 5.94% 6.52% 7.35% Expected Lives (Months) 38 61 69 1997 1996 1995 ----- ----- ----- 1993 PLAN, 1996 PLAN AND OTHER Dividend Yield 5.00% 5.00% 5.00% Expected Volatility 23.71% 24.17% 43.60% Risk-free Interest Rates 6.11% 6.29% 7.37% Expected Lives (Months) 65 86 69
A summary of the status of fixed stock option grants as of December 31, 1997, 1996 and 1995, and changes during the years ending on those dates is presented below:
1997 1996 1995 ---------------------- ----------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- ------ --------- ------ --------- ------ Outstanding - beginning of year 1,928,959 $10.51 1,251,862 $ 7.04 1,557,412 $ 9.54 Granted 171,392 18.80 923,981 14.39 311,800 7.53 Exercised (335,261) 6.94 (146,268) 7.33 (5,470) 6.96 Expired 0 -- 0 -- (299,180) 20.00 Forfeited (8,317) 14.85 (100,616) 7.69 (312,700) 7.60 --------- --------- --------- Outstanding - end of year 1,756,773 $11.98 1,928,959 $10.51 1,251,862 $ 7.04 ========= ====== ========= ====== ========= ======
The weighted average fair values of options granted during 1997, 1996 and 1995 were $4.35, $3.79 and $3.44 per option, respectively. The following table summarizes information about fixed stock options outstanding at December 31, 1997:
EXERCISE OPTIONS OPTIONS WEIGHTED AVERAGE PRICE OUTSTANDING EXERCISABLE REMAINING LIFE --------- ----------- ----------- ---------------- (Months) $ 5.1250 105,031 105,031 13 7.5000 162,300 40,404 84 7.6250 467,056 236,755 66 8.1250 3,600 0 88 11.5000 140,851 100,699 90 15.3750 745,000 168,500 107 19.1250 18,000 0 109 19.8125 114,935 44,760 115 --------- ------- 1,756,773 696,149 88 ========= ======= ===
40 43 Remaining non-exercisable options as of December 31, 1997 become exercisable as follows:
NUMBER YEAR OF OPTIONS ---- ---------- 1998 339,869 1999 339,871 2000 244,645 2001 132,639 2002 3,600 --------- 1,060,624 =========
WARRANTS. The Company had 0 and 1,110,887 warrants outstanding on December 31, 1997 and 1996, respectively. Each warrant gave the holder the right to purchase one share of common stock at a price of $8.00 per share, such rights to be exercisable until June 30, 1999. During July 1997, the Company's Board of Directors approved the redemption of warrants outstanding on August 29, 1997 (the "Redemption Date") for $3.81 per warrant. The Company redeemed 99,871 warrants following the Redemption Date. SHAREHOLDER RIGHTS PLAN. Pursuant to a Shareholder Rights Plan (the "Rights Plan"), on September 30, 1990, the Board of Directors of the Company declared a dividend of one Common Stock Purchase Right for each outstanding share of common stock of the Company. Under the terms of the Rights Plan, the rights which were distributed to the shareholders of record on October 11, 1990, trade together with the Company's Shares and are not exercisable until the occurrence of certain events (none of which have occurred through December 31, 1997), including acquisition of, or commencement of a tender offer for, 15 percent or more of the Company's common stock. In such event, each right entitles its holder (other than the acquiring person or bidder) to acquire additional shares of the Company's common stock at a fifty percent discount from the market price. The rights are redeemable under circumstances as specified in the Rights Plan. The Rights Plan was amended effective October 10, 1996 for a certain shareholder and its affiliates. See Note 2 for further discussion of this amendment. 7. STOCK INVESTMENT PLAN. The Company has a Monthly Stock Investment Plan (the "SIP") which provides for regular purchases of the Company's common stock by all employees and directors. The SIP provides for monthly payroll and directors' fees deductions up to $1,700 per month with the Company making monthly contributions for the account of each participant as follows: (i) 25 percent of amounts up to $50; (ii) 20 percent of amounts between $50 and $100; and (iii) 15 percent of amounts between $100 and $1,700, which amounts are used by an unaffiliated Administrator to purchase Shares from the Company. The Company has reserved a total of 200,000 Shares for issuance under the SIP. The Company's contribution and the expenses incurred in administering the SIP totaled approximately $59,300, $36,700 and $34,800 for 1997, 1996 and 1995, respectively. Through December 31, 1997, 65,113 Shares have been issued under the SIP. 8. EMPLOYEE BENEFIT PLANS. The Company has a 401(k) plan (the "401(k) Plan") which permits contributions by employees. For 1995, the Company's Board of Directors approved a Company contribution to the 401(k) Plan in the form of the Company's Shares (43,804 Shares which had a value of approximately $465,000 on December 31, 1995) and cash ($443,000). The contribution for 1995 was made during February, 1996. For 1996, the 41 44 Company's Board of Directors approved a Company contribution to the 401(k) Plan in the form of the Company's Shares (23,657 Shares which had a value of approximately $444,000 on December 31, 1996). The contribution for 1996 was made during January, 1997. For 1997, the Company's Board of Directors approved a Company contribution to the 401(k) Plan in the form of the Company's Shares (9,197 Shares which had a value of approximately $202,000 on December 31, 1997). The contribution for 1997 was made on February 26, 1998. The Company has a supplemental executive retirement plan (the "SERP"), an unfunded defined benefit plan. The purpose of the SERP is to facilitate the retirement of select key executive employees by supplementing their benefits under the Company's 401(k) Plan. The document establishing the SERP, which became effective on June 28, 1995, was executed by the Company on August 18, 1995. The benefits are based on years of service and the employee's average base salary during the last three calendar years of employment. Net periodic pension cost for the SERP for 1997, 1996 and 1995 was as follows (in thousands) :
1997 1996 1995 ----- ----- ----- Service Cost $ 25 $ 28 $ 25 Interest Cost 287 242 94 Amortization of Unrecognized Prior Service Cost 244 219 109 ----- ----- ----- Total $ 556 $ 489 $ 228 ===== ===== =====
Assumptions used in the computation of net periodic pension cost for the SERP were as follows: Discount rate 7.5% Rate of increase in salary levels 5.0%
The following table sets forth the status of the unfunded SERP and the amounts included in accrued liabilities-other in the Consolidated Balance Sheet at December 31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995 ----- ----- ----- Accumulated benefit obligation $ 2,943 $ 2,370 $ 1,884 Effect of projected future salary increases 1,149 1,126 624 ------- ------- ------- Projected benefit obligation $ 4,092 $ 3,496 $ 2,508 ======= ======= ======= Actuarial present value of projected benefit obligations in excess of plan assets $(4,092) $(3,496) $(2,508) Unrecognized prior service cost 2,924 2,779 2,280 Additional minimum liability (1,670) (1,653) (1,656) ------- ------- ------- Accrued pension cost $(2,838) $(2,370) $(1,884) ======= ======= =======
9. DIVIDENDS. During 1997, the Company paid a total of $0.35 per share of dividends. The Company paid no dividends during the two years ended December 31, 1996. The Company intends that the quarterly dividend payout in the last quarter of each year will be adjusted to reflect the distribution of at least 95 percent of the Company's REIT taxable income as required by the Federal income tax laws. During November 1997, the Company's Board of Directors declared a quarterly dividend of $0.25 per share payable on February 4, 1998, to shareholders of record on December 31, 1997. 42 45 10. FEDERAL INCOME TAXES. The Company is operated in a manner so as to qualify and has elected tax treatment as a REIT. For the year ended December 31, 1997, the Company's taxable income prior to the dividends paid deduction was approximately $7,473,000 (which equals the Company's 1997 dividends paid deduction). The Company's taxable loss prior to the dividends paid deduction for the years ended December 31, 1996 and 1995 was approximately $18,416,000 and $23,265,000, respectively. The difference between net income for financial reporting purposes and taxable income/loss results primarily from different methods of accounting for bad debts, depreciable lives related to the properties owned, advance rents received and net operating loss carryforwards. At December 31, 1997, the net book basis of the Company's assets and liabilities exceeded the net tax basis of assets and liabilities in the amount of approximately $6.8 million. The Company utilized approximately $14,932,000 and $593,000 of net operating loss carryforwards to eliminate REIT taxable income for 1996 and 1995, respectively. The Company's net operating loss carryforward available to offset REIT taxable income for 1997 is approximately $22,239,000. The use of net operating loss carryforwards and other tax attributes by the Company is subject to certain limitations imposed by Internal Revenue Code Sections 382 and 383. These limitations apply to both regular and alternative minimum taxes. These net operating loss carryforwards and other tax attributes can be used in varying degrees to offset REIT taxable income or tax through 2007. For 1996 and 1995, the Company incurred alternative minimum taxes of approximately $324,000 and $0, respectively, and recorded a provision for alternative minimum taxes of approximately $834,000 for 1997. During 1996, the Internal Revenue Service ("IRS") completed its examination of the Company's 1992 and 1993 Federal income tax returns and the Koger Properties, Inc. ("KPI") final Federal income tax return. The IRS submitted their Report to the Company and disallowed certain deductions on KPI's final Federal income tax return, the result of which reduced the net operating loss carryforwards acquired from KPI from approximately $98 million to $30 million and required the payment of approximately $169,000 of alternative minimum tax plus interest. Management believes this was a favorable settlement with respect to KPI's final Federal income tax return. There were no adjustments to the Company's 1992 and 1993 Federal income tax returns. 11. LITIGATION. A derivative action, which was filed in 1990, against the Company in the U. S. District Court, Middle District of Florida (the "District Court"), was resolved in favor of the Company in 1996. The Company and the other parties to this action agreed on a settlement of all claims, and on January 10, 1996, the District Court entered its order approving this settlement, which became final on or about February 12, 1996. During 1995, the Company paid $50,000 for settlement of this litigation. Under the terms of the merger agreement between the Company and KPI, the Company agreed to indemnify certain former non-officer directors of KPI (the "Indemnified Persons") in respect of amounts to which such Indemnified Persons would be otherwise entitled to indemnification under Florida law, the articles of incorporation or the by-laws of KPI arising out of acts or omissions prior to September 25, 1991 (the "Indemnity"). The obligations of the Company under such indemnification did not exceed (i) $1,000,000 in the aggregate and (ii) $200,000 per Indemnified Person and were subject to certain other conditions precedent. Certain of the former non-officer directors of KPI were defendants in a Pension Plan class action suit (the "Roby Case"). Although the Company was not named in this suit, certain former non-officer directors of KPI were Indemnified Persons. The Company signed an agreement to settle the Roby Case and placed in escrow $100,000 as its contribution to such settlement for the Indemnified Persons. On January 9, 1997, the District Court entered the Order and Final Judgment approving the agreement to 43 46 settle the Roby Case. The time for appeal of the Order and Final Judgment passed with no appeal having been taken. No provision has been made in the Consolidated Financial Statements for any additional liability that may result from the Indemnity. 12. COMMITMENTS AND CONTINGENCIES. At December 31, 1997, the Company had commitments for the construction of buildings and improvements to existing buildings of approximately $20.5 million. 13. PRO FORMA INFORMATION - SALE OF COMMON STOCK. The proceeds of the sale of 3.5 million shares of common stock, on December 17, 1997, were used to retire approximately $51.6 million of debt, with an average interest rate of approximately 8.6%, and for general corporate purposes. Pro forma earnings per share information assuming that the sale of common stock had occurred on January 1, 1997 is as follows: Pro forma net income $24,394,000 Pro forma earnings per share: Basic $ 0.99 Diluted $ 0.94
14. SUBSEQUENT EVENTS. On January 30, 1998, the Company acquired a building, containing 127,700 net rentable square feet, located in Richmond, Virginia for a purchase price of $16.5 million. In connection with this acquisition, the Company assumed $8.5 million of mortgages with an interest rate of 8.0 percent. On February 1, 1998, the Company acquired a building, containing 20,000 net rentable square feet, located in Jacksonville, Florida for a purchase price of $2.0 million. 15. INTERIM FINANCIAL INFORMATION (UNAUDITED). Selected quarterly information for the two years in the period ended December 31, 1997 is presented below (in thousands except per share amounts):
RENTAL TOTAL NET EARNINGS PER QUARTERS ENDED REVENUES REVENUES INCOME COMMON SHARE - -------------- -------- -------- ------ ------------ March 31, 1996 $23,985 $25,177 $3,016 $.16 June 30, 1996 24,160 25,384 2,214 .12 September 30, 1996 24,515 25,751 2,261 .12 December 31, 1996 (1) 25,682 27,760 3,010 .14 March 31, 1997 25,383 26,943 5,693 .25 June 30, 1997 26,387 27,937 5,008 .23 September 30, 1997 (2) 28,079 29,143 6,949 .31 December 31, 1997 29,075 29,966 3,554 .15
(1) The results for the quarter ended December 31, 1996 were affected by an extraordinary loss on early retirement of debt. Income before extraordinary item was $4,396 and earnings per common share before extraordinary item was $0.21. (2) The results for the quarter ended September 30, 1997 were affected by a gain from the sale of a land parcel which totaled $2,057. 44 47 SCHEDULE II KOGER EQUITY, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (IN THOUSANDS)
ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ------------------------------------ ------------ ---------- ---------- ---------- ---------- 1997 Allowance for uncollectible accounts $ 231 $ 224 $0 $205(a) $ 250 ====== ===== == ==== ====== Valuation allowance - land held for sale $1,020 $(679) $0 $ 62(b) $ 279 ====== ===== == ==== ====== 1996 Allowance for uncollectible accounts $ 391 $ 50 $0 $210(a) $ 231 ====== ===== == ==== ====== Valuation allowance - land held for sale $1,520 $ 0 $0 $500(b) $1,020 ====== ===== == ==== ====== 1995 Allowance for uncollectible accounts $ 362 $ 172 $0 $143(a) $ 391 ====== ===== == ==== ====== Valuation allowance - land held for sale $ 550 $ 970 $0 $ 0 $1,520 ====== ===== == ==== ======
(a) Receivable balance which was determined to be uncollectible and written-off in the applicable year. (b) Land parcel was sold for which valuation allowance had been recorded. 45 48 KOGER EQUITY, INC. AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (IN THOUSANDS)
COSTS CAPITALIZED SUBSEQUENT INITIAL COST TO ACQUISITION TOTAL COST ----------------- ------------------ ---------------------------- BLDGS & IMPROVE CARRYING BLDGS & (b)(c) CENTER/LOCATION LAND IMPROV. MENTS COSTS LAND IMPROV. TOTAL - --------------- ---- ------- -------- -------- ---- ------- ------- OPERATING REAL ESTATE: ATLANTA CHAMBLEE $13,145 $63,211 $ 8,443 $ 0 $13,145 $71,654 $84,799 ATLANTA GWINNETT 950 7,565 0 0 950 7,565 8,515 ATLANTA PERIMETER 2,785 18,406 5 0 2,785 18,411 21,196 AUSTIN 4,274 13,650 2,909 0 4,274 16,559 20,833 CHARLOTTE CARMEL 1,796 14,809 404 0 1,796 15,213 17,009 CHARLOTTE EAST 5,788 25,078 3,519 0 5,788 28,597 34,385 EL PASO 4,011 12,440 3,471 0 4,011 15,911 19,922 GREENSBORO SOUTH 6,384 38,700 4,583 0 6,384 43,283 49,667 GREENSBORO WENDOVER 0 11 0 0 0 11 11 GREENVILLE PARK CENTRAL 1,238 12,377 150 0 1,238 12,527 13,765 GREENVILLE ROPER MT. 3,833 16,104 2,916 0 3,833 19,020 22,853 JACKSONVILLE BAYMEADOWS 7,625 23,716 490 0 7,625 24,206 31,831 JACKSONVILLE CENTRAL 6,755 34,806 5,942 0 6,755 40,748 47,503 JACKSONVILLE DEERWOOD 479 2,837 0 0 479 2,837 3,316 MEMPHIS GERMANTOWN 5,164 24,977 2,398 0 5,164 27,375 32,539 ORLANDO CENTRAL 8,342 30,575 7,284 0 8,342 37,859 46,201 ORLANDO UNIVERSITY 2,900 12,218 798 0 2,900 13,016 15,916 ST. PETERSBURG 6,657 29,525 4,486 0 6,657 34,011 40,668 SAN ANTONIO AIRPORT 3,243 12,532 187 0 3,243 12,719 15,962 SAN ANTONIO WEST 9,638 29,649 8,493 0 9,638 38,142 47,780 TALLAHASSEE APALACHEE PKWY 6,063 28,043 4,781 0 6,063 32,824 38,887 TALLAHASSEE CAPITAL CIRCLE 4,561 31,493 2,364 0 4,561 33,857 38,418 TULSA 6,066 17,134 3,142 0 6,066 20,276 26,342 -------- -------- -------- ------ --------- -------- -------- SUBTOTALS 111,697 499,856 66,765 0 111,697 566,621 678,318 FURNITURE & EQUIPMENT 2,220 2,220 2,220 IMPROVEMENTS IN PROGRESS 711 711 711 TOTAL OPERATING -------- -------- ------- ------ -------- -------- -------- REAL ESTATE $111,697 $502,076 $67,476 $ 0 $111,697 $569,552 $681,249 -------- -------- ------- ------ -------- -------- -------- (d) (a) ACCUM. MORT- DATE DEPRECIABLE CENTER/LOCATION DEPR. GAGES ACQUIRED LIFE - --------------- ----- -------- ------- ------------ OPERATING REAL ESTATE: ATLANTA CHAMBLEE $15,579 $ 1 1988 - 1993 3 - 40 YRS. ATLANTA GWINNETT 18 0 1993 - 1997 7 - 39 YRS. ATLANTA PERIMETER 118 0 1997 39 YRS. AUSTIN 2,918 16,788 1990 - 1993 3 - 40 YRS. CHARLOTTE CARMEL 1,131 0 1993 - 1997 3 - 40 YRS. CHARLOTTE EAST 5,049 0 1989 - 1993 3 - 40 YRS. EL PASO 3,714 8,888 1990 - 1993 3 - 40 YRS. GREENSBORO SOUTH 7,925 0 1988 - 1993 3 - 40 YRS. GREENSBORO WENDOVER 6 0 1993 7 YRS. GREENVILLE PARK CENTRAL 220 0 1997 3 - 39 YRS. GREENVILLE ROPER MT. 4,520 10,863 1988 - 1993 3 - 40 YRS. JACKSONVILLE BAYMEADOWS 2,680 27,158 1993 3 - 40 YRS. JACKSONVILLE CENTRAL 9,082 0 1989 - 1993 3 - 40 YRS. JACKSONVILLE DEERWOOD 64 0 1997 39 YRS. MEMPHIS GERMANTOWN 5,413 14,898 1988 - 1997 3 - 40 YRS. ORLANDO CENTRAL 9,496 24,689 1988 - 1993 3 - 40 YRS. ORLANDO UNIVERSITY 2,219 0 1990 - 1993 3 - 40 YRS. ST. PETERSBURG 7,441 18,622 1988 - 1993 3 - 40 YRS. SAN ANTONIO AIRPORT 198 0 1997 3 - 39 YRS. SAN ANTONIO WEST 9,478 21,881 1990 - 1993 3 - 40 YRS. TALLAHASSEE APALACHEE PKWY 7,554 18,622 1988 - 1993 3 - 40 YRS. TALLAHASSEE CAPITAL CIRCLE 4,325 19,553 1988 - 1993 3 - 40 YRS. TULSA 4,387 0 1990 - 1993 3 - 40 YRS. -------- -------- SUBTOTALS 103,535 181,963 FURNITURE & EQUIPMENT 1,165 3 - 7 YRS. IMPROVEMENTS IN PROGRESS TOTAL OPERATING -------- -------- REAL ESTATE $104,700 $181,963 -------- --------
46 49 KOGER EQUITY, INC. AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (IN THOUSANDS)
COSTS CAPITALIZED SUBSEQUENT INITIAL COST TO ACQUISITION TOTAL COST ------------------------ --------------------- ------------------------------ BLDGS & IMPROVE CARRYING BLDGS & (b)(c) CENTER/LOCATION LAND IMPROV. MENTS COSTS LAND IMPROV. TOTAL - --------------- ---------- ------- -------- -------- -------- ------- ------ PROPERTIES UNDER CONSTRUCTION: ATLANTA GWINNETT $ 813 $ 1,625 $ 0 $ 0 $ 813 $ 1,625 $ 2,438 CHARLOTTE CARMEL 1,374 2,504 0 0 1,374 2,504 3,878 GREENSBORO WENDOVER 513 1,101 0 0 513 1,101 1,614 GREENVILLE ROPER MT. 949 2,413 0 0 949 2,413 3,362 JACKSONVILLE BAYMEADOWS 2,319 9,107 0 0 2,319 9,107 11,426 MEMPHIS GERMANTOWN 1,714 1,233 0 0 1,714 1,233 2,947 ORLANDO UNIVERSITY 1,296 333 0 0 1,296 333 1,629 SAN ANTONIO WEST 0 292 0 0 0 292 292 ---------- ---------- ------- ------ -------- -------- --------- TOTAL UNDER CONSTRUCTION 8,978 18,608 0 0 8,978 18,608 27,586 ---------- ---------- ------- ------ -------- -------- --------- UNIMPROVED LAND: ATLANTA GWINNETT 4,967 0 0 0 4,967 0 4,967 CHARLOTTE CARMEL 990 0 0 0 990 0 990 CHARLOTTE EAST 468 0 0 0 468 0 468 COLUMBIA SPRING VALLEY 76 0 0 0 76 0 76 El PASO 100 0 0 0 100 0 100 GREENSBORO WENDOVER 978 0 0 0 978 0 978 GREENVILLE PARK CENTRAL 438 0 0 0 438 0 438 JACKSONVILLE CENTRAL 95 0 0 0 95 0 95 MEMPHIS GERMANTOWN 1,594 0 0 0 1,594 0 1,594 ORLANDO UNIVERSITY 1,584 0 0 0 1,584 0 1,584 RICHMOND SOUTH 481 0 0 0 481 0 481 ST. PETERSBURG 700 0 0 0 700 0 700 SAN ANTONIO WEST 1,430 0 0 0 1,430 0 1,430 TULSA 860 0 0 0 860 860 ---------- ---------- ------- ------ -------- -------- --------- TOTAL UNIMPROVED LAND 14,761 0 0 0 14,761 0 14,761 ---------- ---------- ------- ------ -------- -------- --------- TOTAL $ 135,436 $ 520,684 $ 67,476 $ 0 $135,436 $ 588,160 $ 723,596 ========== ========== ======== ====== ======== ========= ========= (d) (a) ACCUM. MORT- DATE DEPRECIABLE CENTER/LOCATION DEPR. GAGES ACQUIRED LIFE - --------------- ------ ------- -------- ------------ PROPERTIES UNDER CONSTRUCTION: ATLANTA GWINNETT $ 0 $ 0 CHARLOTTE CARMEL 0 0 GREENSBORO WENDOVER 0 0 GREENVILLE ROPER MT. 0 0 JACKSONVILLE BAYMEADOWS 0 0 MEMPHIS GERMANTOWN 0 0 ORLANDO UNIVERSITY 0 0 SAN ANTONIO WEST 0 0 -------- -------- TOTAL UNDER CONSTRUCTION 0 0 -------- -------- UNIMPROVED LAND: ATLANTA GWINNETT 0 0 1993 CHARLOTTE CARMEL 0 0 1993 CHARLOTTE EAST 0 0 1993 COLUMBIA SPRING VALLEY 0 0 1993 El PASO 0 0 1997 GREENSBORO WENDOVER 0 0 1993 GREENVILLE PARK CENTRAL 0 0 1997 JACKSONVILLE CENTRAL 0 0 1989 MEMPHIS GERMANTOWN 0 0 1993 ORLANDO UNIVERSITY 0 0 1993 RICHMOND SOUTH 0 0 1993 ST. PETERSBURG 0 0 1993 SAN ANTONIO WEST 0 0 1993 TULSA 0 0 1993 -------- -------- TOTAL UNIMPROVED LAND 0 0 1993 -------- --------- TOTAL $104,700 $ 181,963 ======== =========
47 50 KOGER EQUITY, INC. AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (IN THOUSANDS) - -------------------------------------------------------------------------------- (a) At December 31, 1997, the outstanding balance of mortgages payable was $181,963. (b) Aggregate cost basis for Federal income tax purposes was $758,520 at December 31, 1997. (c) Reconciliation of total real estate carrying value for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 --------- --------- --------- Balance at beginning of year $ 613,093 $ 601,594 $ 614,249 Acquisitions and construction 102,524 1,058 330 Improvements 11,902 12,568 14,371 Transfer from/to other assets (257) 16 Sale of unimproved land (4,287) (1,250) (4,761) Sale or disposition operating real estate (15) (620) (21,539) Investment in KRSI (102) Provision for loss - land parcels 379 (970) --------- --------- --------- Balance at close of year $ 723,596 $ 613,093 $ 601,594 ========= ========= =========
For 1995, the provision for loss was based upon a contract for the sale of the Miami land parcel. (d) Reconciliation of accumulated depreciation for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 ------- ---- ---- Balance at beginning of year $ 82,478 $ 62,845 $ 46,106 Depreciation expense: Operating real estate 21,795 19,538 17,363 Furniture and equipment 440 292 258 Investment in KRSI (31) Sale or disposition of operating real estate (13) (197) (851) --------- --------- --------- Balance at close of year $ 104,700 $ 82,478 $ 62,845 ========= ========= =========
48 51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information about directors of the Company who are not executive officers is contained in the Company's Proxy Statement (the "1998 Proxy Statement") and is incorporated herein by reference. The following tabulation lists the executive officers of the Company, their ages and their occupations for the past five years: Victor A. Hughes, Jr. ...................... Chairman of the Board, Chief Executive Officer, Chief Financial Officer and Director James C. Teagle............................. President, Chief Operating Officer and Director Robert N. Bridger........................... Senior Vice President of Engineering Services and Construction W. Lawrence Jenkins ........................ Vice President of Administration and Corporate Secretary James L. Stephens........................... Vice President and Chief Accounting Officer
Mr. Hughes, age 62, was elected Chairman and CEO on June 21, 1996. He has served as Chief Financial Officer of the Company since March 31, 1991. He held the position of President from August 22, 1995 to November 14, 1997. Mr. Hughes also held the positions of Senior Vice President of the Company from May 20, 1991 through August 21, 1995, and Vice President from April 1, 1990 to May 20, 1991. He was Assistant Secretary of the Company from March 11, 1991 through December 21, 1993. Mr. Hughes was elected to the Board of Directors of the Company on July 27, 1992. Mr. Teagle, age 56, was elected President on November 14, 1997, and has been Chief Operating Officer of the Company since June 21, 1996. He previously held the positions of Executive Vice President from June 21, 1996 to November 14, 1997, Senior Vice President from May 10, 1994 to June 21, 1996, and Vice President from December 21, 1993 to May 10, 1994. Mr. Teagle was a Vice President of KPI from June 7, 1973 to December 21, 1993. Mr. Teagle was elected to the Board of Directors of the Company on October 10, 1996. Mr. Bridger, age 61, was elected Senior Vice President of Engineering Services and Construction on November 14, 1997. He had held the position of Vice President since May 10, 1994. Mr. Bridger served as Senior Vice President of Development of KPI from August 6, 1985 to February 8, 1991, and as Senior Vice President of Koger Management, Inc. from February 8, 1991 to December 21, 1993. From 1970 to 1985, Mr. Bridger served as Vice President of Construction of KPI. Mr. Jenkins, age 54, has been the Corporate Secretary of the Company since December 21, 1993, and Vice President of the Company since May 10, 1994. Mr. Jenkins served as Corporate Secretary of KPI from June 7, 1973 through December 21, 1993, and as Vice President/Administration of KPI from August 7, 1990 through December 21, 1993. Mr. Stephens, age 40, has been Vice President of the Company since May 7, 1996, and was the Treasurer of the Company from March 31, 1991 to May 7, 1996. He has served as Chief Accounting Officer of the Company since March 31, 1991. He held the position of Assistant Secretary of the Company from May 20, 1991 through December 21, 1993. 49 52 Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's directors and executive officers file with the Securities and Exchange Commission (the "SEC") and the American Stock Exchange initial reports of ownership and reports of changes in ownership of the Company's equity securities. Executive officers and directors are required by regulations of the SEC to furnish the Company with copies of all Section 16(a) forms they file. Except for the late reporting of the exercise of 1,450 options to purchase Shares by James L. Stephens, and the late reporting of the sale of 25,000 Shares by Irvin H. Davis, to the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 1997, the Company's executive officers and directors complied with all Section 16(a) filing requirements. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated by reference to the section headed "Executive Compensation" in the 1998 Proxy Statement (except for information contained under the headings "Compensation Committee Report on Executive Compensation" and "Shareholder Return Performance Presentation"). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The stock ownership of each person known to the Company to be the beneficial owner of more than five percent (5%) of its outstanding common stock is incorporated by reference to the section headed "Principal Holders of Voting Securities" of the 1998 Proxy Statement. The beneficial ownership of Common Stock of all directors of the Company is incorporated by reference to the section headed "Election of Directors" contained in the 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to Item 1. "Business," 2. "Properties," 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 "Transactions With Related Parties" to the Notes to Consolidated Financial Statements contained in this Report and to the heading "Certain Relationships and Transactions" contained in the 1998 Proxy Statement for information regarding certain relationships and related transactions which information is incorporated herein by reference. 50 53 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) See "Item 8 - Financial Statements and Supplementary Data - Index to Consolidated Financial Statements and Financial Statement Schedules" for a list of the financial statements included in this report. (2) The consolidated supplemental financial statement schedules required by Regulation S-X are included on pages 45 through 48 in this Form. (b) Reports on Form 8-K: On November 18, 1997, the Company filed a Form 8-K (dated October 1, 1997) reporting under Item 5, Other Events, six individual acquisition transactions completed during the period from May 15, 1997 through October 1, 1997 and providing under Item 7, Financial Statements and Exhibits, Statements of Revenues and Certain Expenses for each of the six individual acquisition transactions. On December 15, 1997, the Company filed a Form 8-K (dated December 12, 1997) reporting that the Company had signed (i) an Underwriting Agreement relating to the sale by the Company in an underwritten public offering of 3,000,000 shares of the Company's Common Stock plus 450,000 shares subject to a thirty-day underwriters' over-allotment option and (ii) a Purchase Agreement between the Company and AREIF II Realty Trust, Inc. ("AREIF") relating to the sale by the Company to AREIF of 500,000 shares of the Company's Common Stock. The Company also provided under Item 7, Financial Statements and Exhibits, copies of the Underwriting Agreement and the Purchase Agreement. (c) The following exhibits are filed as part of this report:
EXHIBIT NUMBER DESCRIPTION - -------- ------------------------------------------------------------- 1 Underwriting Agreement dated December 12, 1997, between Koger Equity, Inc. and J.P. Morgan Securities, Inc., Bear Stearns and Company, Inc. and BT Alex Brown Incorporated, as Representatives of the several underwriters. Incorporated by reference to Exhibit 1 of the Form 8-K, dated December 12, 1997, filed by the Registrant on December 15, 1997 (File No. 1-9997). 2 Agreement and Plan of Merger, dated as of December 21, 1993 between the Company and Koger Properties, Inc. Incorporated by reference to Exhibit 2 of Form 10-K filed by the Registrant for the period ended December 31, 1993 (File No. 1-9997). 3(a) Amended and Restated Articles of Incorporation of Koger Equity, Inc. Incorporated by reference to Exhibit 3 of the Form 8-K, dated May 10, 1994, filed by the Registrant on June 17, 1994 (File No. 1-9997). 3(b) Koger Equity, Inc. By Laws, as Amended and Restated on August 21, 1996. Incorporated by reference to Exhibit 3(ii) of the Form 8-K/A, dated August 22, 1996 filed by the Registrant on August 22, 1996 (File No. 1-9997). 4(a) Common Stock Certificate of Koger Equity, Inc. Incorporated by reference to Exhibit 4(a) to Registration Statement on Form S-11 (Registration No. 33-22890). 4(b)(1)(A) Koger Equity, Inc. Rights Agreement (the "Rights Agreement") dated as of September 30, 1990 between the Company and Wachovia Bank and Trust Company, N.A. as Rights Agent ("Wachovia"). Incorporated by reference to Exhibit 1 to a Registration Statement on Form 8-A, dated October 3, 1990 (File No. 1-9997).
51 54
EXHIBIT NUMBER DESCRIPTION - ------- ------------------------------------------------------------- 4(b)(1)(B) First Amendment to the Rights Agreement, dated as of March 22, 1993, between the Company and First Union National Bank of North Carolina, as Rights Agent ("First Union"), entered into for the purpose of replacing Wachovia. Incorporated by reference to Exhibit 4(b)(4) of the Form 10-Q filed by the Registrant for the quarter ended March 31, 1993 (File No. 1-9997). 4(b)(1)(C) Second Amendment to the Rights Agreement, dated as of December 21, 1993, between the Company and First Union. Incorporated by reference to Exhibit 5 to an Amendment on Form 8-A/A, dated December 21, 1993, to a Registration Statement of the Registrant on Form 8-A, dated October 3, 1990 (File No. 1-9997). 4(b)(1)(D) Third Amendment to Rights Agreement, dated as of October 10, 1996, between Koger Equity, Inc. and First Union. Incorporated by reference to Exhibit 6 to an Amendment on Form 8-A/A, dated November 7, 1996, to a Registration Statement of the Registrant on Form 8-A, dated October 3, 1990 (File No. 1-9997). 4(b)(1)(E) Fourth Amendment to Rights Agreement, dated as of February 27, 1997, between Koger Equity, Inc. and First Union. Incorporated by reference to Exhibit 8 to an Amendment on Form 8-A/A, dated March 17, 1997, to a Registration Statement of the Registrant on Form 8-A, dated October 3, 1990 (File No. 1-9997). 4(b)(2) Form of Common Stock Purchase Rights Certificate (attached as Exhibit A to the Rights Agreement). Pursuant to the Rights Agreement, printed Common Stock Purchase Rights Certificates will not be mailed until the Distribution Date (as defined in the Rights Agreement). 4(b)(3) Summary of Common Stock Purchase Rights (attached as Exhibit B to the Rights Agreement, Exhibit 4(b)(1)(A)). 4(c)(1) Warrant Agreement, dated as of December 21, 1993, between the Company and First Union (the "Warrant Agreement"). Incorporated by reference to Exhibit 2 to an Amendment on Form 8-A/A, dated December 21, 1993, to a Registration Statement on Form 8-A, dated September 30, 1993 (File No. 1-9997). 4(c)(2) Form of a Common Share Purchase Warrant issued pursuant to the Warrant Agreement. Incorporated by reference to Exhibit 1 to an Amendment on Form 8-A/A, dated December 21, 1993, to a Registration Statement on Form 8-A, dated September 30, 1993 (File No. 1-9997). 10(a)(1)(A) Koger Equity, Inc. Amended and Restated 1988 Stock Option Plan. Incorporated by reference to Exhibit 10(e)(1)(A) of Form 10-Q filed by the Registrant for the quarter ended June 30, 1992 (File No. 1-9997). 10(a)(1)(B) Form of Stock Option Agreement pursuant to Koger Equity, Inc. Amended and Restated 1988 Stock Option Plan. Incorporated by reference to Exhibit 10(e)(2)(A) of Form 10-Q filed by the Registrant for the quarter ended June 30, 1992 (File No. 1-9997). 10(a)(1)(C) Form of Amendment to Stock Option Agreement pursuant to Koger Equity, Inc. Amended and Restated 1988 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(1)(C) of Form 10-K filed by the Registrant for the period ended December 31, 1996 (File No. 1-9997). 10(a)(2)(A) Koger Equity, Inc. 1993 Stock Option Plan. Incorporated by reference to Exhibit II to Registrant's Proxy Statement dated June 30, 1993 (File No. 1-9997).
52 55
EXHIBIT NUMBER DESCRIPTION - ------------------------------------------------------------------------------- 10(a)(2)(B) Form of Stock Option Agreement pursuant to Koger Equity, Inc. 1993 Stock Option Plan. Incorporated by reference to Exhibit 10(e)(3)(B) of Form 10-K filed by the Registrant for the period ended December 31, 1994 (File No. 1-9997). 10(a)(2)(C) Form of Amendment to Stock Option Agreement pursuant to Koger Equity, Inc. 1993 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(2)(C) of Form 10-K filed by the Registrant for the period ended December 31, 1996 (File No. 1-9997). 10(a)(3)(A) Koger Equity, Inc. 1996 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(3)(A) of Form 10-K filed by the Registrant for the period ended December 31, 1996 (File No. 1-9997). 10(a)(3)(B) Form of Stock Option Agreement pursuant to Koger Equity, Inc. 1996 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(3)(B) of Form 10-K filed by the Registrant for the period ended December 31, 1996 (File No. 1-9997). 10(b)(1) Shareholders Agreement, dated August 9, 1993, between the Company and TCW Special Credits, a California general partnership. Incorporated by reference to Exhibit 10(o) of Form 10-K filed by the Registrant for the period ended December 31, 1993 (File No. 1-9997). 10(b)(2) Registration Rights Agreement, dated as of August 9, 1993, between the Company and TCW Special Credits, a California general partnership. Incorporated by reference to Exhibit 10(p) of Form 10-K filed by the Registrant for the period ended December 31, 1993 (File No. 1-9997). 10(c) License Agreement, dated as of July 28, 1995, between Koger Equity, Inc. and Koger Realty Services, Inc. Incorporated by reference to Exhibit 10(v) of Form 10-Q filed by the Registrant for the quarter ended June 30, 1995 (File No. 1-9997). 10(d)(1) Supplemental Executive Retirement Plan, dated as of August 18, 1995 to be effective as of June 28, 1995. Incorporated by reference to Exhibit 10(w) of Form 10-Q filed by the Registrant for the quarter ended September 30, 1995 (File No. 1-9997). 10(d)(2) Amendment No. 1 to Supplemental Executive Retirement Plan, effective June 21, 1996.* 10(e) Form of Indemnification Agreement between Koger Equity, Inc. and its Directors and certain of its officers. Incorporated by reference to Exhibit 10(x) of Form 10-K filed by the Registrant for the year ended December 31, 1995 (File No. 1-9997). 10(f)(1) Employment Agreement between Koger Equity, Inc. and Victor A. Hughes, Jr. effective as of June 21, 1996. Incorporated by reference to Exhibit 10(y)(1) of Form 10-Q filed by the Registrant for the quarter ended September 30, 1996 (File No. 1-9997). 10(f)(2) Employment Agreement between Koger Equity, Inc. and James C. Teagle, effective as of June 21, 1996. Incorporated by reference to Exhibit 10(y)(2) of Form 10-Q filed by the Registrant for the quarter ended September 30, 1996 (File No. 1-9997). 10(g)(1)(A) Stock Purchase Agreement, dated as of October 10, 1996, between Koger Equity, Inc. and AP-KEI Holdings, LLC, a Delaware limited liability company. Incorporated by reference to Exhibit 7 to an Amendment on Form 8-A/A, dated November 7, 1996, to a Registration Statement of the Registrant on Form 8-A, dated October 3, 1990 (File No. 1-9997).
53 56
EXHIBIT NUMBER DESCRIPTION - ------- ------------------------------------------------------------ 10(g)(1)(B) Registration Rights Agreement, dated as of October 10, 1996, between Koger Equity, Inc. and AP-KEI Holdings, LLC, a Delaware limited liability company. Incorporated by reference to Exhibit A of the Stock Purchase Agreement, dated as of October 10, 1996, between Koger Equity, Inc. and AP-KEI Holdings, LLC, which is Exhibit 7 to an Amendment on Form 8-A/A, dated November 7, 1996, to a Registration Statement on Form 8-A, dated October 3, 1990 (File No. 1-9997). 10(g)(2)(A) Amendment No. 1 to Stock Purchase Agreement, dated as of February 27, 1997, between Koger Equity, Inc. and AP-KEI Holdings, LLC. Incorporated by reference to Exhibit 9 to an Amendment on Form 8-A/A, dated March 17, 1997, to a Registration Statement of the Registrant on Form 8-A, dated October 3, 1990 (File No. 1-9997). 10(g)(2)(B) Assignment and Assumption Agreement, dated as of February 27, 1997, among and between Koger Equity, Inc. and AP-KEI Holdings, LLC and AREIF II Realty Trust, Inc. Incorporated by reference to Exhibit 10 to an Amendment on Form 8-A/A, dated March 17, 1997, to a Registration Statement of the Registrant on Form 8-A, dated October 3, 1990 (File No. 1-9997). 10(g)(3) Purchase Agreement, dated December 12, 1997, between Koger Equity, Inc. and AREIF II Realty Trust, Inc. Incorporated by reference to Exhibit 10 of the Form 8-K, dated December 12, 1997, filed by the Registrant on December 15, 1997 (File No. 1-9997). 10(h) Consulting Agreement, dated as of June 21, 1996, between Koger Equity, Inc. and Irvin H. Davis. Incorporated by reference to Exhibit 10(ab) of Form 10-Q filed by the Registrant for the quarter ended September 30, 1996 (File No. 1-9997). 10(i) Consulting Agreement, dated as of March 14, 1996, between Koger Equity, Inc. and David B. Hiley. Incorporated by reference to Exhibit 10(ac) of Form 10-Q filed by the Registrant for the quarter ended September 30, 1996 (File No. 1-9997). 10(j)(1) Loan Application, dated July 29, 1996, by Koger Equity, Inc. to The Northwestern Mutual Life Insurance Company. Incorporated by reference to Exhibit 10(j)(1) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997). 10(j)(2)(A) Koger Equity, Inc. Tranche A Promissory Note, dated December 16, 1996, in the principal amount of $100,500,000 payable to The Northwestern Mutual Life Insurance Company. Incorporated by reference to Exhibit 10(j)(2)(A) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997). 10(j)(2)(B) Koger Equity, Inc. Tranche B Promissory Note, dated December 16, 1996, in the principal amount of $89,500,000 payable to The Northwestern Mutual Life Insurance Company. Incorporated by reference to Exhibit 10(j)(2)(B) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997).
54 57
EXHIBIT NUMBER DESCRIPTION - -------- ------------------------------------------------------------ 10(j)(3)(A) Master Lien Instrument from Koger Equity, Inc. to The Northwestern Mutual Life Insurance Company, dated December 16, 1996, (1) with Mortgage and Security Agreement for Duval, Leon, Orange and Pinellas Counties, Florida and (2) with Deed of Trust and Security Agreement for Greenville County, South Carolina, Shelby County, Tennessee and Bexar, El Paso and Travis Counties, Texas. Incorporated by reference to Exhibit 10(j)(3)(A) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997). 10(j)(3)(B) Absolute Assignment of Leases and Rents from Koger Equity, Inc. to The Northwestern Mutual Life Insurance Company, dated December 16, 1996, for Duval, Leon, Orange, and Pinellas Counties, Florida, Greenville County, South Carolina, Shelby County, Tennessee and Bexar, El Paso and Travis Counties, Texas. Incorporated by reference to Exhibit 10(j)(3)(B) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997). 10(j)(4) Environmental Indemnity Agreement, dated December 16, 1996, between Koger Equity, Inc. and The Northwestern Mutual Life Insurance Company and others. Incorporated by reference to Exhibit 10(j)(4) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997). 10(j)(5) Certificate of Borrower contained in letter, dated December 16, 1996, from Koger Equity, Inc. to The Northwestern Mutual Life Insurance Company. Incorporated by reference to Exhibit 10(j)(5) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997). 10(k)(1) Amended and Restated Revolving Credit Loan Agreement dated as of December 29, 1997 between and among Koger Equity, Inc., and First Union National Bank of Florida, Morgan Guaranty Bank of New York, AmSouth Bank and Guaranty Federal Bank F.S.B. (the "Lenders"). Incorporated by reference to Exhibit 10(k)(1) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 10(k)(2)(A) The Substitution Revolving Promissory Note dated December 29, 1997 issued by Koger Equity, Inc. to First Union National Bank of Florida in the principal amount of up to $35,000,000. Incorporated by reference to Exhibit 10(k)(2)(a) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 10(k)(2)(B) The Substitution Revolving Promissory Note dated December 29, 1997 issued by Koger Equity, Inc. to Morgan Guaranty Trust Company of New York in the principal amount of up to $15,000,000. Incorporated by reference to Exhibit 10(k)(2)(b) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 10(k)(2)(C) The Revolving Promissory Note dated December 29, 1997 issued by Koger Equity, Inc. to AmSouth Bank in the principal amount of up to $25,000,000. Incorporated by reference to Exhibit 10(k)(2)(c) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 10(k)(2)(D) The Revolving Promissory Note dated December 29, 1997 issued by Koger Equity, Inc. to Guaranty Federal Bank F.S.B. in the principal amount of up to $25,000,000. Incorporated by reference to Exhibit 10(k)(2)(d) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997).
55 58
EXHIBIT NUMBER DESCRIPTION - ------------------------------------------------------------------------------- 10(k)(3)(A) The Amended and Restated Deed to Secure Debt, Assignment of Leases and Rents, and Security Agreement dated as of December 29, 1997 relating to that portion of the Collateral located in Dekalb County, the State of Georgia granted by Koger Equity, Inc. to, and in favour of, the Lenders. Incorporated by reference to Exhibit 10(k)(3)(a) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 10(k)(3)(B) The Assignment of Leases and Rents dated as of December 29, 1997 relating to that portion of the Collateral located in the State of Georgia granted by Koger Equity, Inc. to, and in favour of, the Lenders. Incorporated by reference to Exhibit 10(k)(3)(b) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 10(k)(3)(C) The Assignment of Contracts, Licenses and Permits dated as of December 29, 1997 relating to that portion of the Collateral located in the State of Georgia from Koger Equity, Inc. to, and in favour of, the Lenders. Incorporated by reference to Exhibit 10(k)(3)(c) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 10(k)(3)(D) The Environmental Indemnification Agreement dated as of December 29, 1997 relating to that portion of the Collateral located in the State of Georgia between and among Koger Equity, Inc. and the Lenders. Incorporated by reference to Exhibit 10(k)(3)(d) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 10(k)(4)(A)(i) The Amended and Restated Deed of Trust and Security Agreement dated as of December 29, 1997 relating to that portion of the Collateral located in Guilford County, the State of North Carolina granted by Koger Equity, Inc. to, and in favour of, the Lenders. Incorporated by reference to Exhibit 10(k)(4)(a)(i) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 10(k)(4)(A)(ii) The Deed of Trust and Security Agreement dated as of December 29, 1997 relating to that portion of the Collateral located in Mecklenburg County, State of North Carolina granted by Koger Equity, Inc. to, and in favour of, the Lenders. Incorporated by reference to Exhibit 10(k)(4)(a)(ii) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No 1-9997). 10(k)(4)(B) The Assignment of Leases and Rents dated as of December 29, 1997 relating to that portion of the Collateral located in the State of North Carolina from Koger Equity, Inc. to, and in favour of, the Lenders. Incorporated by reference to Exhibit 10(k)(4)(b) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 10(k)(4)(C) The Assignment of Contracts, Licenses and Permits dated as of December 29, 1997 relating to that portion of the Collateral located in the State of North Carolina from Koger Equity, Inc. to, and in favour of, the Lenders. Incorporated by reference to Exhibit 10(k)(4)(c) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997).
56 59
EXHIBIT NUMBER DESCRIPTION - ------- ----------------------------------------------------------- 10(k)(4)(D) The Environmental Indemnification Agreement dated as of December 29, 1997 relating to that portion of the Collateral located in the State of North Carolina between and among Koger Equity, Inc. and the Lenders. Incorporated by reference to Exhibit 10(k)(4)(d) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 10(k)(5)(A) The Mortgage, Assignment of Leases and Rents and Security Agreement, dated as of December 29, 1997 relating to that portion of the Collateral located in the State of South Carolina granted by Koger Equity, Inc. to, and in favour of, the Lenders. Incorporated by reference to Exhibit 10(k)(5)(a) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 10(k)(5)(B) The Assignment of Leases and Rents dated as of December 29, 1997 relating to that portion of the Collateral located in the State of South Carolina from Koger Equity, Inc. to, and in favour of, the Lenders. Incorporated by reference to Exhibit 10(k)(5)(b) on Form 8-K/A, dated December 29, 1997, filed by the Registrant on February 4, 1998 (File No. 1-9997). 10(k)(5)(C) The Assignment of Contracts, Licenses and Permits dated as of December 29, 1997 relating to that portion of the Collateral located in the State of South Carolina among and between Koger Equity, Inc. and the Lenders. Incorporated by reference to Exhibit 10(k)(5)(c) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 10(k)(5)D) The Environmental Indemnity Agreement dated as of December 29, 1997 relating to that portion of the Collateral located in the State of South Carolina among and between Koger Equity, Inc. and the Lenders. Incorporated by reference to Exhibit 10(k)(5)(d) on Form 8-K, dated December 29, 1997, filed by the Registrant on February 2, 1998 (File No. 1-9997). 11 Earnings Per Share Computations.* 21 Subsidiaries of the Registrant.* 23 Independent Auditors' Consent.* 27 Financial Data Schedule (for SEC use only).*
*Filed with this Report. 57 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Koger Equity, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KOGER EQUITY, INC. By: Victor A. Hughes, Jr. --------------------------- Victor A. Hughes, Jr. Chairman of the Board and Chief Executive Officer Date: March 18, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE Victor A. Hughes, Jr. Chairman of the Board, and March 18, 1998 - ------------------------------- Chief Executive Officer (VICTOR A. HUGHES, JR.) James C. Teagle President, Chief March 18, 1998 - ------------------------------- Operating Officer and Director (JAMES C. TEAGLE) James L. Stephens Vice President and Chief March 18, 1998 - ------------------------------- Accounting Officer (JAMES L. STEPHENS) D. Pike Aloian Director March 18, 1998 - ------------------------------- (D. PIKE ALOIAN) Benjamin C. Bishop Director March 18, 1998 - ------------------------------- (BENJAMIN C. BISHOP) Irvin H. Davis Director March 18, 1998 - ------------------------------- (IRVIN H. DAVIS) David B. Hiley Director March 18, 1998 - ------------------------------- (DAVID B. HILEY) John R. S. Jacobsson Director March 18, 1998 - ------------------------------- (JOHN R. S. JACOBSSON) G. Christian Lantzsch Director March 18, 1998 - ------------------------------- (G. CHRISTIAN LANTZSCH) William L. Mack Director March 18, 1998 - ------------------------------- (WILLIAM L. MACK) Lee S. Neibart Director March 18, 1998 - ------------------------------- (LEE S. NEIBART) George F. Staudter Director March 18, 1998 (GEORGE F. STAUDTER) - ------------------------------- S. D. Stoneburner Director March 18, 1998 - ------------------------------- (S. D. STONEBURNER)
58 EX-10.(D)(2) 2 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 1 EXHIBIT 10(d)(2) AMENDMENT NO. 1 TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOR EXECUTIVES OF KOGER EQUITY, INC. AND PARTICIPATING RELATED ENTITIES In accordance with Article 8 of the Supplemental Executive Retirement Plan for Executives of Koger Equity, Inc. and Participating Related Entities (the "SERP"), the following amendments are hereby adopted by the Board of Directors of Koger Equity, Inc. and Participating Related Entities, effective June 21, 1996: a. Section 2.15 of the SERP is hereby amended to read as follows: "`Social Security Benefit' means the annual amount of Old Age Insurance Benefit payable to the Participant commencing at retirement, as calculated at the time of his or her retirement under the provisions of the Social Security Act then in effect and determined without regard to any reduction of such Benefit on account of `excess earnings.'" b. Schedule B of the SERP is hereby amended to add James C. Teagle to that Schedule. c. Schedule C of the SERP is hereby amended to delete James C. Teagle from that Schedule. d. Schedule C of the SERP is hereby amended to add Kenneth D. Lund to that Schedule. KOGER EQUITY, INC. By: [W. Lawrence Jenkins] ------------------------- Corporate Secretary June 21, 1996 EX-11 3 EARNINGS PER SHARE COMPUTATIONS 1 EXHIBIT 11 EARNINGS PER SHARE COMPUTATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
1997 1996 1995 ---- ---- ---- EARNING PER COMMON AND DILUTIVE COMMON EQUIVALENT SHARE: Income Before Extraordinary Item $21,662 $11,887 $28,990 ======= ======= ======= Net Income $21,204 $10,501 $28,990 ======= ======= ======= Shares: Weighted average number of common shares outstanding 21,374 18,523 17,724 Weighted average number of additional shares issuable for common stock equivalents (a) 1,121 977 287 ------- ------- ------- Adjusted common shares 22,495 19,500 18,011 ======= ======= ======= EARNINGS PER SHARE: Income Before Extraordinary Item $ 0.96 $ 0.61 $ 1.61 ======= ======= ======= Net Income $ 0.94 $ 0.54 $ 1.61 ======= ======= =======
(a) Shares issuable were derived using the "Treasury Stock Method" for all dilutive common stock equivalents. EX-21 4 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
STATE OF NAME OF SUBSIDIARIES* INCORPORATION - --------------------- ------------- Koger Real Estate Services, Inc. Florida Southeast Properties Holding Corporation, Inc. Florida
* These subsidiaries are wholly owned by Koger Equity, Inc. EX-23 5 CONSENT OF DELOITTE & TOUCHE 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-55179 of Koger Equity, Inc. on Form S-3, Registration Statement No. 33-54617 of Koger Equity, Inc. on Form S-8, Registration Statement No. 333-20975 of Koger Equity, Inc. on Form S-3 and Registration Statement No. 333-23429 of Koger Equity, Inc. on Form S-8 of our report dated February 23, 1998, appearing in this Annual Report on Form 10-K of Koger Equity, Inc. for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Jacksonville, Florida March 18, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 KOGER EQUITY, INC. DOES NOT FILE A CLASSIFIED BALANCE SHEET, THEREFORE THESE NOT PROVIDED. 5-02 (9), 5-02(21) 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 16,955 0 5,896 250 0 0 723,596 104,700 656,097 0 181,963 0 0 284 443,978 656,097 0 113,989 0 46,125 30,481 224 16,517 22,597 935 21,662 0 458 0 21,204 0.99 0.94
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