UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December
31, 1995 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ____________
Commission File Number 1-9997 KOGER
EQUITY, INC.
(Exact name of Registrant as specified in its Charter)
FLORIDA
(State or other jurisdiction of incorporation or organization)
59-2898045
(I.R.S. Employer Identification No.)
3986 Boulevard Center Drive, Suite 101
Jacksonville, Florida 32207
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (904) 398-3403
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
Common Stock, Par Value $.01 American Stock Exchange
Warrants to Purchase Shares of Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant on February 28, 1996 was approximately $205,066,000.
The number of shares of registrant's Common Stock outstanding on February 28,
1996 was 17,831,834.
Documents Incorporated by Reference
The Company's Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Act of 1934 for the 1996 Annual Meeting of Shareholders is
incorporated by reference in Part III of this report.
<PAGE>
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........... 11
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 11
6. SELECTED FINANCIAL DATA....................................... 12
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 13
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 29
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 54
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 54
11. EXECUTIVE COMPENSATION........................................ 55
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................................ 55
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 55
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K...................................... 56
SIGNATURES.................................................... 61
<PAGE>
PART I
Item 1. BUSINESS
General
Koger Equity, Inc., a Florida corporation ("KE"), is currently engaged
in the ownership, operation and management of commercial suburban office
buildings for the production of income. As of December 31, 1995, KE owned 216
buildings located in 13 metropolitan areas throughout the southeastern and
southwestern United States. KE acquired a total of 126 buildings from Koger
Properties, Inc., a Florida corporation ("KPI"), or its subsidiaries through
1990. In connection with a Chapter 11 bankruptcy case filed on behalf of KPI,
KPI merged with and into KE on December 21, 1993 (the "Merger"). As a result of
the Merger, KE acquired an additional 93 buildings, three of which were sold
during 1995 (as described below). Since the Merger, KE has been totally self-
administered and self-managed.
As part of the Merger, KPI transferred to Southeast Properties Holding
Corporation, a Florida corporation and a wholly-owned subsidiary of KE
("Southeast"), all of KPI's debt and equity interests in The Koger Partnership,
Ltd., a Florida limited partnership ("TKPL"), which had also been the subject of
a Chapter 11 bankruptcy case. At the time of the Merger, TKPL owned 92 suburban
office buildings located in five metropolitan areas. Following the Merger, such
buildings were managed by KE, as delegee of Southeast, pursuant to a management
agreement between TKPL and Southeast. On July 31, 1995, TKPL sold its 92
buildings and parcels of related land to Koala Miami Realty Holding, Inc., Koala
Norfolk Realty Holding, Inc., Koala Raleigh Realty Holding, Inc., Koala Richmond
Realty Holding, Inc., and Koala Tampa Realty Holding, Inc. (collectively,
"Koala"), all of which are wholly owned by a co-mingled pension trust for which
Morgan Guaranty Trust Company of New York is the trustee and J.P. Morgan
Investment Management Inc. is the investment manager. Simultaneously with the
sale by TKPL of its properties, KE sold to certain Koala entities three
buildings and related parcels of land for an aggregate purchase price of $25.26
million. Koala continues to hold an option to purchase from KE two additional
parcels of land in Miami, Florida.
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 20 office buildings owned by Centoff
Realty Company, Inc. ("Centoff"), a subsidiary of Morgan Guaranty Trust Company
of New York. More significantly, Koger Realty Services, Inc., a Delaware
corporation and an entity in which KE has a significant economic interest
("KRSI"), manages 95 buildings owned by Koala. KRSI was incorporated during 1995
to, among other things, provide leasing and property management services to
owners of commercial office buildings. KE has purchased all of the preferred
stock of KRSI, which preferred stock represents at least 95% of the economic
value of KRSI. Such preferred stock is non-voting but is convertible into voting
common stock. Accordingly, KE has consolidated KRSI in the 1995 financial
statements (KE, Southeast, KRES and KRSI 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. To permit the acquisition of the TKPL Notes, KE obtained
1
<PAGE>
certain modifications to the loan agreements governing KE's indebtedness. 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 in 1995.
KE operates in a manner so as to qualify as a real estate investment
trust (a "REIT") under the provisions of the Internal Revenue Code of 1986, as
amended (the "Code" ). As a REIT, KE will not, with certain limited exceptions,
be taxed at the corporate level on taxable income distributed to its
shareholders on a current basis. KE 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 KE 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 KE has met the REIT
requirements that at least 95 percent of KE'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 KE derives income in excess of five percent from management and other
"non-real estate" and "non-passive" activities, KE 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. KRSI is not a qualified REIT subsidiary under
the Code and, therefore, is taxed as a regular corporation and will be subject
to federal income tax on its taxable income. Amounts distributed by KRSI to KE
in respect of the preferred stock of KRSI owned by KE will generally be treated
as dividends and, accordingly, will be included in KE's passive income.
No single tenant occupies 10 percent or more of the net rentable area
of the Company's buildings or contributes 10 percent or more of the Company's
rental revenues, except for a major governmental tenant (the State of Florida,
when all of its departments and agencies which lease space in the Company's
buildings are combined) which accounted for an aggregate of 11.9 percent of the
Company's total net rentable square feet leased and 14.1 percent of the
Company's total annualized rental revenues as of December 31, 1995. 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,
Lumbermen Mutual Casualty Company, the State of Texas, Travelers Insurance
Company, General Motors Acceptance Corporation, USAA Federal Savings Bank, and
BellSouth Communications, Inc. Governmental tenants (including the State of
Florida and the United States of America), which account for 22.7 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.
2
<PAGE>
Competition
The Company competes in the leasing of office space with a considerable
number of other realty concerns, both local 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 both local
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. However, higher vacancy levels in
metropolitan areas in which the Company's properties are located have had an
adverse affect on the Company's ability to increase its rental rates while
maintaining satisfactory occupancy levels.
Investment Policies
Based on its improved financial structure and results as of the end of
1995, the Company believes that it 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 and unimproved land available
for development. Therefore, the Company has committed to a plan to enhance
shareholder value by refinancing indebtedness and increasing growth. The Company
intends to refinance or restructure its existing indebtedness to eliminate
certain restrictive covenants which limit the Company's ability to grow through
development and acquisitions. In addition, the Company intends to establish a
new bank revolving credit facility which would be available to finance growth
opportunities. The plan also contemplates the possible use by the Company of its
existing inventory of 228 acres of land held for development, most of which is
partially or wholly improved with streets and/or utilities and is located in
various metropolitan areas where the Company currently operates suburban office
parks. The Company may also acquire existing office buildings or land for
development in other markets in the Southeast and Southwest that the Company
considers favorable.
The investment policies of KE may be changed by KE's directors at any
time without notice to, or a vote of, security holders. Although, KE has no
current policy which limits the percentage of its assets which may be invested
in any one type of investment or the geographic areas in which KE may acquire
properties, KE intends to continue to operate so as to qualify for tax treatment
as a REIT. Although it has no current plans to do so, KE may in the future
invest in other types of office buildings, apartment buildings, shopping
centers, and other properties. KE 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, 1995, all of the Company's rental
revenues were derived from the buildings purchased from KPI or buildings
acquired pursuant to the Merger. The Company's 1995 interest revenues were
derived from temporary cash investments and KE's investment in the TKPL Notes.
3
<PAGE>
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 270 employees. A resident general
manager is responsible for the leasing and operations of all buildings in a
center or city. The Company has approximately 114 employees who perform
maintenance activities.
Item 2. PROPERTIES
General
As of December 31, 1995, the Company owned 216 office buildings located
in 18 office centers (each a "Koger Center") 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.
The Koger Centers have been developed in campus-like settings with extensive
landscaping and ample tenant parking. The buildings are generally one to
five-story structures of contemporary design and constructed of masonry,
concrete and steel, with facings of brick, concrete and glass. The Koger Centers
are generally located with easy access, via expressways, to the central business
district and to shopping and residential areas in the respective communities.
The properties are well maintained and adequately covered by insurance.
Leases on the Company's 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, 1995, the Company's
buildings were on average 91 percent leased and the average annual rent per net
rentable square foot leased was $13.72. 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, 1995,
approximately 34 percent of the Company's annualized gross rental revenues was
derived from existing leases containing rental escalation provisions based upon
changes in the Consumer Price Index (some of which contain maximum rates of
increase); approximately 59 percent of such revenues was derived from leases
containing escalation provisions based upon real estate tax and operating
expense increases; and approximately 7 percent of such revenues was derived from
leases without escalation provisions. Some of the Company's leases contain
options which allow the lessee to renew for varying periods, generally at the
same rental rate and subject, in most instances, to Consumer Price Index
escalation provisions.
4
<PAGE>
The Company owns approximately 228 acres of unimproved land (224 acres
of which are suitable for development) located in the metropolitan areas of
Birmingham, Alabama; Jacksonville, Miami, Orlando and St. Petersburg, Florida;
Atlanta, Georgia; Charlotte and Greensboro, North Carolina; Tulsa, Oklahoma;
Columbia and Greenville, South Carolina; Memphis, Tennessee; Austin and San
Antonio, Texas; and Richmond, Virginia. Each of these parcels of land has been
partially or wholly developed with streets and/or utilities.
Title to Property
No examinations of title to real properties have been made for the
purpose of this report. However, the Company obtained title insurance on each
property acquired by it prior to the Merger at the time of such acquisition.
Although no additional title insurance was obtained in respect of the properties
acquired from KPI pursuant to the Merger, the Company succeeded to KPI's
existing title policies on such properties. The Company believes that all of the
real estate described herein as owned by the Company is owned in fee simple
without encumbrances, except for the leases and mortgages described in this
report and other encumbrances which do not substantially interfere with the use
of the properties or have a material adverse effect upon their values.
5
<PAGE>
Property Location and Other Information
The following table sets forth information relating to the properties
owned by the Company as of December 31, 1995.
<TABLE>
Average Land
Number Age of Net Improved Unimproved
of Buildings Rentable with Bldgs. Land
Koger Center Buildings (in Years)(1) Sq. Ft. (In Acres) (In Acres)
- ------------ --------- ------------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Atlanta Chamblee 22 15 947,920 76.2 2.5
Atlanta Gwinnett 31.0
Austin 12 15 370,860 29.6 1.8
Birmingham 30.0
Charlotte Carmel 1 4 109,600 7.6 27.0
Charlotte East 11 15 468,820 39.9 3.9
Columbia Spring Valley 1.0
El Paso 14 23 251,930 19.6
Greensboro South 13 13 610,470 46.0
Greensboro Wendover 18.5
Greenville 8 13 290,560 24.7 4.5
Jacksonville Baymeadows 4 5 467,860 34.6 13.3
Jacksonville Central 32 23 677,680 48.4 0.4
Memphis Germantown 3 7 258,400 18.4 16.2
Miami 8.1
Orlando Central 22 24 565,220 46.0
Orlando University 2 7 159,600 11.6 15.5
Richmond South 23.0
San Antonio 26 18 788,670 63.5 7.2
St. Petersburg 15 15 519,320 64.4 11.0
Tallahassee Apalachee Pkwy 14 19 408,500 33.7
Tallahassee Capital Circle 4 6 300,700 23.3
Tulsa North 2 14 103,520 9.1 13.4
Tulsa South 11 17 372,760 26.9
--- --------- ----- -----
Total 216 7,672,390 623.5 228.3
=== ========= ===== =====
Average 15
==
</TABLE>
(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.
6
<PAGE>
Percent Leased and Average Rental Rates
The following table sets forth, with respect to each Koger Center, the
number of buildings, number of leases, net rentable square feet, percent leased,
and the average annual rent per net rentable square foot leased, in each case as
of December 31, 1995.
<TABLE>
Net Average
Number Number Rentable Annual
of of Square Percent Rent Per
Koger Center Buildings Leases Feet Leased (1) Square Foot(2)
- ------------ --------- ------ -------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Atlanta Chamblee 22 182 947,920 96% $14.42
Austin 12 187 370,860 88% 15.43
Charlotte Carmel 1 19 109,600 100% 15.78
Charlotte East 11 194 468,820 71% 12.88
El Paso 14 197 251,930 98% 13.21
Greensboro South 13 182 610,470 90% 13.34
Greenville 8 157 290,560 94% 13.79
Jacksonville Baymeadows 4 32 467,860 99% 15.62
Jacksonville Central 32 264 677,680 93% 11.60
Memphis Germantown 3 55 258,400 99% 16.82
Orlando Central 22 186 565,220 86% 13.95
Orlando University 2 47 159,600 90% 15.99
San Antonio 26 314 788,670 84% 11.49
St. Petersburg 15 184 519,320 93% 12.58
Tallahassee Apalachee Pkwy 14 99 408,500 94% 15.69
Tallahassee Capital Circle 4 10 300,700 100% 17.66
Tulsa North 2 33 103,520 79% 10.75
Tulsa South 11 165 372,760 85% 9.75
--- ----- ---------
Total 216 2,507 7,672,390
=== ===== =========
91% $13.72
=== ======
</TABLE>
(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 rents for a
Koger Center as of December 31, 1995 by (b) the net rentable square
feet applicable to such total annualized rents.
7
<PAGE>
Lease Expirations on the Company's Properties
The following schedule sets forth with respect to all of the Company's
office buildings (a) the number of leases which will expire in calendar years
1996 through 2004, (b) the total net rentable area in square feet covered by
such leases, (c) the percentage of total net rentable square feet leased
represented by such leases, (d) the average annual rent per square foot for such
leases, (e) the current annual rental represented by such leases, and (f) the
percentage of gross annual rental contributed by such leases. This information
is based on the buildings owned by the Company on December 31, 1995 and on the
terms of leases in effect as of December 31, 1995, 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 67 percent and 61 percent of the Company's net rentable square
feet which were scheduled to expire during 1995 and 1994, respectively.
<TABLE>
Percentage of Average Percentage
Total Square Annual Rent of Total
Number of Number of Feet Leased per Square Total Annual Annual Rents
Leases Square Feet Represented by Foot Under Rents Under Represented by
Period Expiring Expiring Expiring Leases Expiring Leases Expiring Leases Expiring Leases
- ------ --------- ----------- --------------- --------------- --------------- ---------------
<C> <C> <C> <C> <C> <C> <C>
1996 1,214 1,955,695 28.0% $13.61 $26,616,124 27.8%
1997 531 1,359,859 19.5% 13.84 18,824,227 19.6%
1998 467 1,719,488 24.6% 13.49 23,189,091 24.2%
1999 141 685,496 9.8% 12.99 8,905,517 9.3%
2000 103 608,067 8.7% 14.98 9,109,422 9.5%
2001 24 232,027 3.3% 14.73 3,418,096 3.6%
2002 6 121,161 1.8% 13.63 1,651,822 1.7%
2003 10 74,023 1.1% 13.76 1,018,762 1.1%
2004 2 22,794 0.3% 10.71 244,168 0.3%
Other 9 203,306 2.9% 13.88 2,822,674 2.9%
----- --------- ------ ----------- ------
Total 2,507 6,981,916 100.0% $13.72 $95,799,903 100.0%
===== ========= ====== ====== =========== ======
</TABLE>
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, 1995. The information set forth below
is not necessarily indicative of future expenditures for these items.
<TABLE>
Number Building Improvements Tenant Improvements Deferred Tenant Costs
of Office Per Net Sq. Per Net Sq. Per Net Sq.
Year Buildings Total Ft. Owned Total Ft. Owned Total Ft. Owned
<C> <C> <C> <C> <C> <C> <C> <C>
1993(1) 126 $1,680,000 $0.41 $4,534,000 $1.12 $ 598,000 $0.15
1994 219 3,749,000 0.47 7,334,000 0.93 1,112,000 0.14
1995(2) 216 2,991,000 0.39 8,592,000 1.12 1,060,000 0.14
</TABLE>
(1) Excludes the 93 buildings acquired on December 21, 1993 pursuant to the
Merger.
(2) Excludes the three buildings sold on July 31, 1995.
8
<PAGE>
Fixed Rate Indebtedness on the Company's Properties
The following table sets forth with respect to each Koger Center the
principal amount (dollars in thousands) of, and the weighted average interest
rate on, the indebtedness of the Company having a fixed interest rate and
encumbering the Company's properties in such Koger Center as of December 31,
1995.
Weighted
Mortgage Average
Loan Interest
Koger Center Balance Rate
- ------------ -------- --------
Atlanta Chamblee $ 27,542 7.79%
Austin 1,642 9.46%
Charlotte Carmel 8,912 6.62%
Charlotte East 13,972 8.15%
El Paso 1,072 9.00%
Greensboro South 21,953 8.73%
Greenville 7,029 6.40%
Jacksonville Baymeadows 34,293 6.62%
Jacksonville Central 12,699 6.71%
Memphis Germantown 13,244 8.57%
Orlando Central 17,001 8.06%
Orlando University 9,426 6.53%
San Antonio 5,571 7.78%
St. Petersburg 19,723 7.82%
Tallahassee Apalachee Pkwy 14,325 6.54%
Tallahassee Capital Circle 20,710 8.04%
Tulsa South 4,416 9.98%
-------- -----
Total $233,530 7.81%
For additional information concerning certain interest rate reset
provisions and reset dates for these loans see Note 5, "Mortgages and Loans
Payable" of the Notes to Consolidated Financial Statements.
9
<PAGE>
Indebtedness with Variable Interest Rates
In addition to the fixed rate indebtedness described above, as of
December 31, 1995, the Company had outstanding an aggregate principal amount of
$22,276,000 of indebtedness having variable interest rates and encumbering the
Company's properties. This indebtedness bears interest at rates based upon the
applicable lender's prime rate. The following table sets forth information with
respect to this indebtedness (dollars in thousands):
<TABLE>
Approximate Approximate
Balance Weighted Avg. Maximum Average Wtg Avg Int
Year Ended at End Int Rate at Amount Amount Rate During
December 31 of Period End of Period Outstanding Outstanding the Period(1)
----------- --------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
1995 $22,276 9.5% $ 58,352 $47,945 8.4%
1994 58,352 9.1% 59,028 58,718 7.9%
1993 58,861 6.6% 98,262 95,110 6.2%
</TABLE>
(1) The approximate weighted average interest rates during the periods were
computed by dividing the interest costs for the year by the average
balance outstanding during the year.
As of December 31, 1995, $1,152,000 of this indebtedness matures in
December, 2000 and accrues interest at the prime rate of the applicable lender.
Accrued interest on this indebtedness must be paid no later than December, 1998
and monthly interest payments are required beginning in January, 1999. The
accrued interest on this indebtedness is forgiven if this indebtedness is paid
in full prior to December, 1996. This indebtedness is secured by properties that
also serve as collateral for certain fixed rate indebtedness assumed by the
Company from KPI pursuant to the Merger.
As of December 31, 1995, $21,124,000 of this indebtedness matures in
2001 and accrues interest at a rate equal to the sum of (a) the prime rate of
NationsBank of Florida, N.A. plus (b) one percent, with a minimum rate of 6.62
percent and a maximum rate of 10 percent. Interest only payments are due on a
monthly basis. This indebtedness is collateralized by properties with a carrying
value of approximately $24,772,000 as of December 31, 1995.
Management Agreement
Prior to the Merger, Koger Management, Inc., a Florida corporation and
a subsidiary of KPI ("KMI"), was responsible for the leasing, operation,
maintenance and management of each of the Company's properties. The Company paid
KMI a management fee equal to five percent of the gross rental receipts
collected on the property managed for the Company by KMI. For the year ended
December 31, 1993, the Company incurred management fee expense to KMI of
$2,184,000. With the Merger, the Company assumed all of the leasing and other
management responsibilities for its properties, including the properties
acquired in the Merger.
Item 3. LEGAL PROCEEDINGS
None.
10
<PAGE>
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
KE'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:
<TABLE>
Years
- -----------------------------------------------------------------------------------------------------------------------
1995 1994 1993
------------------ ------------------- ------------------
Quarter Ended High Low High Low High Low
- ------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
March 31 $ 7 7/8 $6 3/4 $ 8 1/2 $6 1/2 $9 3/8 $4 3/8
June 30 9 6 3/4 9 5/8 6 3/8 8 1/2 7 1/8
September 30 10 1/8 8 5/8 10 1/2 8 1/4 9 7 1/8
December 31 10 5/8 9 1/8 8 7/8 6 7/8 9 1/4 7 3/4
</TABLE>
KE 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 KE's REIT taxable
income for such taxable year be distributed. KE did not declare or pay any
dividends during the three years ended December 31, 1995.
The terms of KE's secured debt subject KE to certain dividend
limitations. However, such limitations will not restrict KE from paying the
dividends required during 1996 to maintain its qualification as a REIT. In the
event that KE ceases to qualify as a REIT, additional dividend limitations would
be imposed by the terms of such debt. In addition, two of KE's bank lenders have
required that, until KE has raised an additional $50 million of equity, the
following limitations on dividends will be applied: (a) in 1996 and 1997, a
maximum of $11 million, unless imposition of the limit would cause loss of REIT
status and (b) in 1998 and 1999, a maximum of $11 million, regardless of the
impact on REIT status.
On February 28, 1996, there were approximately 1,107 shareholders of
record and the closing price of KE's common stock on the American Stock Exchange
was $11.50.
11
<PAGE>
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.
<TABLE>
(In thousands except per share and property data)
-------------------------------------------------
Income Information 1995 1994 1993* 1992 1991
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Rental revenues and other rental services $ 95,443 $ 94,388 $ 46,108 $ 45,957 $ 45,393
Interest revenues 14,440 1,062 206 231 7,099
Total revenues 127,698 100,376 46,406 46,188 52,492
Property operating expenses 40,830 39,711 21,034 19,579 18,541
Mortgage and loan interest 23,708 25,872 11,471 11,530 13,065
Depreciation and amortization 19,110 16,728 8,958 8,089 7,484
Net income (loss) 28,990 4,215 2,452 933 (5,949)
Earnings (loss) per common share-primary 1.61 .24 .18 .07 (.43)
Dividends per share - - - - .77
Weighted average shares outstanding 18,011 17,719 13,352 13,220 13,750
Balance Sheet Information
Operating properties (before depreciation) $571,438 $578,237 $566,770 $311,286 $308,293
Undeveloped land 30,281 36,012 40,036 0 0
Loans to Koger Properties, Inc.
foreclosed in-substance 0 0 0 94,889 99,484
Total assets 579,382 613,806 615,089 396,841 399,241
Mortgages and loans payable 254,909 323,765 330,625 155,362 158,805
Shareholders' equity 310,697 280,601 275,450 235,514 234,581
Other Information
Funds from operations (1) $37,294 $ 23,884 $ 11,410 $ 11,004 $ 18,235
Income before interest, taxes,
depreciation and amortization $72,128 $ 47,042 $ 22,881 $ 20,552 $ 14,600
Number of buildings (at end of period) 216 219 219 126 126
Percent leased (at end of period) 91% 90% 88% 88% 91%
</TABLE>
* 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):
<TABLE>
1995 1994 1993 1992 1991
------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net income (loss) $28,990 $ 4,215 $ 2,452 $ 933 $ (5,949)
Depreciation and amortization 19,110 16,728 8,958 8,089 7,484
Litigation settlement 176 1,902
Provision for loss on land held for sale 970 996
Loss on sale of assets 255 43
Gain on TKPL note to Southeast (11,288)
Gain on early retirement of debt (919)
Provision for losses on loans to KPI 1,982 16,700
------- ------- ------- ------- -------
Funds from Operations $37,294 $23,884 $11,410 $11,004 $18,235
======= ======= ======= ======= =======
</TABLE>
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.
12
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
selected financial data and the consolidated financial statements (the
"Consolidated Financial Statements") appearing elsewhere in this report.
Historical results and percentage relationships in the Consolidated Financial
Statements, including trends which might appear, should not be taken as
indicative of future operations or financial position. The Consolidated
Financial Statements include the accounts of KE, Southeast, KRES and KRSI
(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, Deloitte & Touche LLP, 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 KE's Board of Directors, which is composed exclusively of
directors who are not officers of KE, directs matters relating to audit
functions, annually appoints the auditors subject to ratification of KE'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
During 1995, KE acquired $32.3 million in aggregate principal amount
(subject to provisions permitting prepayment at a discount) of TKPL Notes for an
aggregate purchase price of approximately $18.2 million. To permit the
acquisition of the TKPL Notes, KE obtained certain modifications to the loan
agreements governing KE's indebtedness. During the quarter ended September 30,
1995, TKPL retired the TKPL Notes. KE recorded $13,066,000 of interest revenue
on the TKPL Notes in 1995.
13
<PAGE>
In addition, 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.
RESULTS OF OPERATIONS
Rental Revenues. For 1995, rental revenues increased $1,733,000 from
the year ended December 31, 1994. This increase resulted primarily from
increases in the percent leased rate and the average rental rate in the
Company's buildings, which increases were partially offset by the sale of three
buildings (containing 233,980 net rentable square feet) on July 31, 1995. During
1995, the Company earned $2,228,000 in rental revenues from these three
buildings through the date of sale. Rental revenues increased $47,205,000 from
the year ended December 31, 1993 to the year ended December 31, 1994. This
increase resulted primarily from the rental revenues of the 93 buildings
acquired by the Company pursuant to the Merger (approximately $46,560,000). As
of December 31, 1995, the Company's buildings were on average 91 percent leased.
As of December 31, 1994 and 1993, the buildings owned by the Company were on
average 90 and 88 percent leased, respectively.
Management Fee Revenues. Management fee revenues increased by $682,000
for 1995 as compared to 1994. This increase was due primarily to (a) an increase
in the fees earned under the management contract with Centoff, (b) an increase
in the fees earned under the management contract with Koala for the period
following Koala's purchase of TKPL's office buildings and (c) the management
fees earned for the management of the three buildings sold by the Company to
certain Koala entities on July 31, 1995. On May 5, 1994, third party management
contracts on two buildings terminated due to a change of ownership of such
buildings. Management fee revenue related to the management of such buildings
totalled approximately $106,000 during 1994. The Company earned $4,926,000 and
$92,000 of management fees from TKPL and third party management contracts, which
it assumed from KPI, during 1994 and 1993, respectively.
Interest Revenues. For 1995, interest revenues increased $13,378,000
from the year ended December 31, 1994. This increase was due to (i) the interest
revenue associated with the TKPL Notes ($13,066,000), (ii) the higher interest
rates earned on the Company's temporary cash investments and (iii) the higher
average balance of temporary cash investments. Interest revenues increased
$856,000 for 1994 as compared to 1993. This increase was due to (i) higher
interest rates earned on the Company's temporary cash investments and (ii) the
higher average balance of temporary cash investments.
Expenses. Property operating expenses include such charges as
utilities, real estate taxes, janitorial, maintenance, property insurance,
provision for uncollectible rents, and management cost. During 1995, property
operating expenses increased by $1,119,000 or 2.8 percent, compared to 1994,
primarily due to the increase in management cost for the Company's buildings.
This increase in management cost was primarily due to the accrued compensation
expense ($876,000) related to stock appreciation rights granted in conjunction
with stock options. During 1994, property operating expenses increased by
$18,677,000 or 89 percent, compared to 1993, primarily due to the operating
expenses of the 93 buildings acquired by the Company pursuant
14
<PAGE>
to the Merger (approximately $18,722,000). For 1995, property operating expenses
as a percentage of total rental revenues were 42.8 percent. For 1994 and 1993,
property operating expenses as a percentage of total rental revenues were 42.1
percent and 45.6 percent, respectively. In 1994, the decrease in operating
expenses as a percentage of total rental revenues was primarily due to the fact
that the 93 buildings acquired by the Company pursuant to the Merger were
generally newer and, therefore, had lower operating expenses as a percentage of
total rental revenues than the 126 buildings which the Company owned prior to
the Merger.
Interest expense decreased by $2,164,000 during 1995 compared to 1994,
primarily due to (i) the reduction in the average balance of mortgages and loans
payable and (ii) the forgiveness of accrued interest on certain debt due to
early repayment ($1,362,000), which forgiveness was partially offset by yield
maintenance payments required due to early repayment of certain mortgages
($882,000). Interest expense increased by $14,401,000 during 1994 compared to
1993 primarily due to the interest expense on the restructured debt of KPI
assumed pursuant to the Merger. During 1995, 1994, and 1993, the weighted
average interest rate on the Company's variable rate loans was 8.4 percent, 7.9
percent, and 6.2 percent, respectively. The Company's average outstanding amount
under such loans during 1995, 1994, and 1993 was $47,945,000, $58,718,000, and
$95,110,000 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 1995, depreciation expense increased $2,230,000 or 14.5 percent
compared to the prior year, due to improvements made to the properties owned by
the Company during 1995 and 1994. For 1994, depreciation expense increased
$6,993,000 or 83 percent compared to the prior year, due to (i) the acquisition
by the Company of 93 buildings pursuant to the Merger and (ii) improvements made
to the properties owned by the Company during 1994 and 1993.
Amortization expense increased by $152,000 during 1995 compared to
1994, due to amounts incurred during 1995 for deferred tenant costs. For 1994,
amortization expense increased $777,000 compared to the prior year, due to
amounts incurred for deferred tenant costs and due to having a full year of
amortization of cost in excess of the fair value of assets acquired by the
Company in the Merger.
General and administrative expenses were 1.2 percent, 1.0 percent, and
0.6 percent of average invested assets for 1995, 1994 and 1993, respectively.
For 1995, general and administrative expenses increased $1,193,000 compared to
the prior year, primarily due to (i) increases in the accrual for compensation
expense related to stock appreciation rights granted in conjunction with stock
options ($423,000), (ii) the accrual for expense related to the Supplemental
Executive Retirement Plan adopted during 1995 ($184,000), and (iii) increases in
compensation costs. For 1994, general and administrative expenses increased
$3,955,000 compared to the prior year, primarily due to the increased general
and administrative functions performed by the Company following the Merger.
During 1994, the Company settled a pending class action proceeding (the
"Securities Action"). The Company recorded a provision of $1,685,000 relating to
the settlement of the Securities Action and incurred additional costs related to
such settlement which totalled $217,000.
15
<PAGE>
During 1995, the Company recorded a provision for loss on land held for
sale which totalled $970,000. This provision for loss was based upon a contract
for the sale of a land parcel (approximately 8.1 acres) which is located
adjacent to an office center sold to Koala. Contingent upon the assurances which
can be received from the local government concerning the square footage of
office buildings which can be constructed on this land parcel, the contract
price ranges between $2,000,000 and $2,970,000. In 1994, the Company recorded a
provision for loss on land held for sale which totalled $996,000. This provision
for loss was based upon contracts for the sale of two land parcels
(approximately 53 acres). The sale of one of these land parcels (approximately
23 acres) was consummated during 1994, while the contract for the sale of the
other land parcel expired.
Management periodically reviews its investment in properties for
evidence of other than temporary impairments in value. Factors considered
consist of, but are not limited to, the following: current and projected
occupancy rates, market conditions in different geographic regions, and
management's plans with respect to its properties. Where management concludes
that expected cash flows will not enable the Company to recover the carrying
amount of its investments, losses are recorded and asset values are reduced. No
such impairments in value existed during 1995, 1994 or 1993.
Direct costs of management contracts increased by $874,000 for 1995,
compared to 1994, due to increased costs to provide services required under the
management contracts with Centoff and Koala. The primary cause of the increased
cost was the increase in the accrual for compensation expense related to stock
appreciation rights which have been granted to certain employees who provide
these management services. During 1994 and 1993, the Company incurred $3,649,000
and $56,000, respectively, in direct costs to generate management fees from TKPL
and third party management contracts which the Company assumed from KPI pursuant
to the Merger.
Real estate taxes and other costs related to the Company's unimproved
land decreased $155,000 during 1995, compared to 1994, due to (i) the sale of a
parcel of unimproved land (approximately 23 acres) during October, 1994
($77,000) and (ii) the sale of two parcels of unimproved land (approximately 44
acres) on July 31, 1995 ($22,000). During 1994 and 1993, real estate taxes and
other costs related to the unimproved land acquired pursuant to the Merger
totalled $667,000 and $24,000, respectively.
Operating Results. Net income totalled $28,990,000, $4,215,000 and
$2,452,000 for 1995, 1994 and 1993, respectively. For 1995, net income increased
$24,775,000 over the prior year due to (i) the interest revenue associated with
KE's investment in the TKPL Notes, (ii) the gain associated with the partial
repayment of a note owing from TKPL to Southeast, (iii) the reduction in
mortgage and loan interest, (iv) the increase in rental revenues, and (v) the
gain on early retirement of debt. For 1994, net income increased over the prior
year primarily due to the positive effect on the period of the acquisition by
the Company of the 93 buildings pursuant to the Merger, which was partially
offset by the costs related to the litigation settlement and the provision
recorded for the loss on two land parcels held for sale.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. During the year ended December 31, 1995, the
Company generated approximately $43.9 million in net cash from operating
activities. The Company's primary internal sources of cash are (i) the
collection of rents from buildings owned by the Company and (ii) the receipt of
management fees paid to the Company in respect of properties managed on behalf
of Koala, TKPL, Centoff, and others. As a REIT, KE is required to pay out
annually, as dividends, 95 percent of its REIT taxable income (which, due to
non-cash charges, including provision for losses and depreciation, may be
substantially less than cash flow). In the past, KE has paid out dividends in
amounts at least equal to its REIT taxable income. KE believes that its cash
provided by operating activities will be sufficient to cover debt service
payments and to pay the dividends required, if any, to maintain REIT status
through 1996.
The level of cash flow generated by rents depends primarily on the
occupancy rates of the Company's buildings and increases in rental rates on new
and renewed leases and under escalation provisions. As of December 31, 1995,
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, 1995, leases representing approximately 27.8 percent
of the gross annual rent from the Company's properties, without regard to the
exercise of options to renew, were due to expire during 1996. This represents
1,214 leases for space in buildings located in all of the 18 Koger Centers in
which the Company owns buildings. Certain of these tenants may not renew their
leases or may reduce their demand for space. Leases were renewed on
approximately 67 percent, 61 percent and 74 percent of the Company's net
rentable square feet which were scheduled to expire during 1995, 1994 and 1993,
respectively. For those leases which renewed during 1995, the average rental
rate increased from $13.60 to $14.48. However, current market conditions in
certain markets may require that rental rates at which leases are renewed or at
which vacated space is leased be lower than rental rates under existing leases.
Based upon the significant amount of leases which will expire during 1996 and
the competition for tenants in the markets in which the Company operates, the
Company has offered, and expects to continue to offer, incentives to certain new
and renewal tenants. These incentives may include the payment of tenant
improvement costs and, in certain markets, reduced rents during initial lease
periods. The Company's percent leased rate has increased from 88 percent on
December 31, 1993 to 91 percent on December 31, 1995. During 1994 and 1995, the
Company has benefitted 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 22.7 percent of the Company's leased
space as of December 31, 1995, may be subject to budget reductions in times of
recession and governmental austerity measures.
17
<PAGE>
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 beginning of 1995, the Company had management contracts for the
management of 113 commercial office properties. On March 31, 1995, a management
agreement to manage 20 commercial office buildings owned by Centoff was
automatically extended to March 31, 1996. 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 $1,791,000 from this
management agreement during 1995. Another agreement to manage one commercial
office building has been extended to June 30, 1996. During 1995, the Company
earned management fees of $121,000 for the management of this building. With the
sale of TKPL's 92 buildings to Koala, Southeast's management agreement with TKPL
ended. However, KRSI has entered into a management agreement with Koala to
manage for five years the 95 buildings which Koala purchased from TKPL and the
Company.
Investing Activities. At December 31, 1995, 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 1995,
the Company's expenditures for improvements to existing properties increased by
$3,288,000 over the prior year, primarily due to the $2,663,000 which the
Company expended for energy management improvements to its buildings. During
1995, the Company did not purchase any buildings.
During 1995, KE acquired $32.3 million in aggregate principal amount of
TKPL Notes for an aggregate purchase price of approximately $18.2 million. To
permit the acquisition of the TKPL Notes, KE obtained certain modifications to
the loan agreements governing KE's indebtedness. 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 in 1995.
During 1995, Southeast received $17.7 million 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 1995, the Company sold to Koala three office buildings
(containing 233,980 net rentable square feet), two undeveloped land parcels
(totalling approximately 44 acres), and certain other assets for approximately
$25,268,000, net of selling costs.
The terms of the restructured indebtedness of KPI assumed by the
Company pursuant to the Merger and the terms of the Company's other indebtedness
require that a substantial portion of any debt or equity offering effected by
the Company during the foreseeable future be applied to the reduction of the
current secured indebtedness of the Company. The loan agreements governing the
Company's indebtedness contain provisions requiring the Company to use the first
$50 million of proceeds from any equity offering to pay down certain portions of
such indebtedness. To the extent that the equity offering proceeds exceed $50
million, one half of the excess proceeds must be used to pay down certain
portions of such indebtedness, with the remainder being available for use at the
Company's discretion. In addition, the Company's bank
18
<PAGE>
loans contain certain principal prepayment obligations in addition to normal
principal repayment. Two of these bank loans require that the Company make
additional principal payments totalling $10 million by December, 1998. So long
as these provisions remain in effect, it is unlikely that the Company will have
financial resources available to complete any significant additional development
or purchases of income-producing properties, even if the Company determined that
such purchases were otherwise available.
Based on its improved financial structure and results as of the end of
1995, the Company believes that it 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 and unimproved land available
for development. Therefore, the Company has committed to a plan to enhance
shareholder value by refinancing indebtedness and increasing growth. The Company
intends to refinance or restructure its existing indebtedness to eliminate
certain restrictive covenants which limit the Company's ability to grow through
development and acquisitions. In addition, the Company intends to establish a
new bank revolving credit facility which would be available to finance growth
opportunities. The plan also contemplates the possible use by the Company of its
existing inventory of 228 acres of land held for development, most of which is
partially or wholly improved with streets and/or utilities and is located in
various metropolitan areas where the Company currently operates suburban office
parks. The Company may also acquire existing office buildings or land for
development in other markets in the Southeast and Southwest that the Company
considers favorable. The Company also intends to spend an additional $1.6
million for energy management improvements to existing properties during 1996.
Financing Activities. Historically, the Company's primary external
sources of cash have been bank borrowings, mortgage financings, and public
offerings of equity securities. The proceeds of these financings were used by
the Company to acquire buildings from KPI. The Company has no open lines of
credit, but had cash and temporary cash investments which totalled $25,650,000
at December 31, 1995.
In December, 1993, in connection with the Merger and the resolution of
KPI's Chapter 11 bankruptcy case, the Company entered into agreements with its
major bank lenders which provided for revised terms and conditions, including
extended maturity dates and modified interest rates and amortization schedules.
With respect to approximately $70 million of secured bank indebtedness, the
maturity of such indebtedness was extended to December 21, 2000. Through
December 1996, the interest rate is fixed at 6.43 percent per annum for
approximately $45.9 million and at 6.386 percent per annum for approximately
$24.1 million. During the remaining four years of the term, the interest rate
will be set at a rate equal to the sum of (a) the effective interest rate
prevailing on December 21, 1996 for U.S. Treasury obligations having a term to
maturity of four years, plus (b) 210 basis points, subject to a maximum of 11
percent per annum. Amortization with respect to this indebtedness is based on
equal monthly installments over a 25 year amortization period. The Company will
be required to make additional principal payments totalling approximately $10
million on December 21, 1998, although the Company's obligation to do so would
be reduced to the extent that it had made prepayments in respect of secured
indebtedness to such lenders out of equity proceeds during the first three years
after the Merger. These lenders have required that, until the Company has raised
an aggregate of $50 million of equity, the following limitations on dividends
will be applied: (i) in 1996 and 1997, a maximum of $11,000,000, unless
imposition of the limit would cause loss of REIT status and (ii) in 1998 and
1999, a maximum of $11,000,000, regardless of impact on REIT status.
19
<PAGE>
In addition, each of these lenders required affirmative and negative
covenants and other agreements which may become burdensome to the Company. In
particular, each bank lender has required that, commencing on December 21, 1998,
the Company maintain a total liabilities to net worth ratio of 1.0 to 1.0, that
the Company maintain loan-to-value ratios determined on the basis of periodic
appraisals of bank collateral and that, under certain circumstances, additional
collateral be provided for indebtedness to such bank. At December 31, 1995, the
total liabilities to net worth ratio of the Company was 0.9 to 1.0. In addition,
each such bank lender has required other covenants generally similar to the
provisions set forth in the loan agreements governing the restructured debt of
KPI. These other covenants include reporting requirements, provisions limiting
the amount of annual dividends, limitations regarding additional debt, and
limitations on general and administrative expenses. In addition, the Company is
also required to maintain certain financial ratios.
With the consummation of the Merger, the Company assumed approximately
$182.6 million of restructured debt of KPI. At December 31, 1995, the
outstanding balance of such debt was approximately $139.2 million. For
additional information concerning terms, interest rates, and maturity dates of
the restructured debt of KPI, see the "Mortgages and Loans Payable" footnote in
the notes to the Consolidated Financial Statements.
Based upon interest rates in effect on December 31, 1995 and assuming
only scheduled principal payments for 1995, management expects total interest
expense for 1996 to decrease to approximately $19.5 million. However, the high
degree of leverage of the Company, when compared to other REITs, may result in
the impairment of its ability to obtain additional financing, to make
acquisitions, and to take advantage of significant business opportunities that
may arise, including activities which require significant funding. This high
degree of leverage may also increase the vulnerability of the Company to adverse
general economic and industry conditions and to increased competitive pressures,
especially rental pressures from less highly leveraged competitors. During 1995,
the Company fully repaid $3,958,000 of the outstanding balances of 22 tax notes
assumed by the Company from KPI pursuant to the Merger. With the proceeds from
the sale of three office buildings, the Company repaid approximately $21.4
million of mortgage loans during 1995. In addition, the Company repaid
approximately $39.5 million of the outstanding balances of mortgages and loans
payable during 1995. These early repayments resulted in the release from
mortgages of 37 buildings (containing 1,175,380 net rentable square feet) which
had been collateral for such loans. At December 31, 1995, the Company had 86
buildings (containing 2,516,230 net rentable square feet) which were
unencumbered.
Loan maturities and normal amortization of mortgages and loans payable
are expected to total approximately $4.1 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 1998.
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. Moreover, under the terms of the
Company's existing secured debt, the Company
20
<PAGE>
will be required to utilize the first $50 million of any proceeds from the sale
of equity securities, as well as half of such proceeds in excess of $50 million,
to reduce secured indebtedness. The prepayments generally will be made pro rata
among the holders of secured indebtedness and will not generally relieve the
Company of the obligation to meet maturities on the remaining secured
indebtedness. Unfavorable conditions in the financial markets, the high degree
of leverage of the Company, restrictive covenants contained in its debt
instruments and various other factors may limit the ability of the Company to
successfully undertake any such financings, and no assurance can be given as to
the availability of alternative sources of funds. On August 22, 1994, KE filed a
shelf registration statement with respect to the possible issuance of up to
$100,000,000 of its common stock and/or preferred stock. However, due to market
conditions, KE has not yet issued any equity under such registration statement.
During 1995, the Company wrote off $745,000 of certain costs incurred for
potential public and private offerings of equity securities which management
determined had no future value.
In addition, in the event KE 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, KE may be unable to qualify as a REIT. In such an event, KE (i)
will incur federal income taxes and perhaps penalties, (ii) if KE is then paying
dividends, may be required to decrease any dividend payments to its
shareholders, and (iii) the market price of KE's common stock may decrease. KE
would also be prohibited from requalifing 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 attempts to pass on inflationary cost increases through
escalation clauses which are included in most leases. However, market conditions
may prevent the Company from escalating rents. Inflationary pressure may
increase operating expenses, including labor and energy costs (and, indirectly,
property taxes) above expected levels, at a time when it may not be possible to
increase lease rates to offset such higher operating expenses. In addition,
inflation can have secondary effects upon occupancy rates by decreasing the
demand for office space in many of the markets in which the Company operates. As
of December 31, 1995, 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, 1994 and 1993, 94 percent of the
Company's annualized rentals were subject to leases having annual escalation
clauses.
The interest rate on approximately $22.3 million of the Company's debt
is floating. Interest rates on the Company's remaining debt are subject to reset
at various dates through December 21, 2003, based upon then-current interest
rates for U.S. Treasury obligations. Therefore, the interest rates payable from
time to time on this debt will reflect changes in underlying market rates of
interest, and thus be subject to the effects of inflation.
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 obtained previously.
21
<PAGE>
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 new "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 new
"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 $254.9 million, all
of which is secured by certain of the Company's properties. Approximately $129.3
million of such debt will mature before 2001, with most of the balance maturing
through 2003. If principal payments due at maturity cannot be refinanced,
extended or paid with proceeds of other capital transactions, such as new equity
capital, the Company expects that its cash flow will not be sufficient to repay
all such maturing debt. Furthermore, if prevailing interest rates or other
factors at the time of refinancing (such as the reluctance of lenders to make
commercial real estate loans) result in higher interest rates upon refinancing
than the interest rates on the existing debt, the interest expense relating to
such refinanced debt would increase, which would adversely affect the Company's
cash flow and the amount of distributions the Company would be able to make to
its shareholders. If the Company has mortgaged a property to secure payment of
debt and the Company is unable to meet the mortgage payments, then the mortgagee
may foreclose upon, or otherwise take control of, such property, with a
consequent loss of income and asset value to the Company.
Restrictions on Incurrence of Additional Debt. The existing debt of the
Company contains provisions restricting the Company's ability to incur any
significant new debt and requiring major portions of new financings, including
equity proceeds, to be applied to the reduction of existing
22
<PAGE>
debt. While the Company's policy is to continue to reduce its existing debt,
these restrictions could limit the Company's ability to develop its existing
land and otherwise take advantage of favorable real estate opportunities.
Risk of Rising Interest Rates and Variable Rate Debt. The Company
currently has $22.3 million in variable rate debt. The Company may incur other
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, 1995, the debt to total market capitalization ratio
of the Company was approximately 57%. The Company's policy is to seek to reduce
this ratio over time to approximately 35%. 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 alter or eliminate this policy or
decide to borrow on a case-by-case or other basis, thereby increasing the
Company's debt to total market capitalization ratio. If this policy were
changed, 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
23
<PAGE>
southeastern United States has out-performed the national economy. There can be
no assurance as to the continued growth of the economy in the southeastern
United States or the future growth rate of the Company.
Renewal of Leases and Reletting of Space
The Company is subject to the risks that upon expiration of leases for
space located in its buildings (a) such leases may be 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 28.0% and 19.5% of the total net rentable
square feet leased in the Company's buildings will expire in 1996 and 1997,
respectively. The Company has established annual reserves for renovation and
reletting expenses, which take into consideration its view of both the current
and expected business conditions in the southeastern and southwestern United
States, but no assurance can be given that these reserves will be sufficient to
cover such expenses. If the Company is unable to promptly relet, or renew the
leases for, all or a substantial portion of the space located in its buildings,
or if the rental rates upon such renewal or reletting are significantly lower
than expected rental rates, or if the Company's reserves for these purposes
prove inadequate, then the Company's cash flow and its ability to make expected
distributions to its shareholders may be adversely affected.
Real Estate Investment Risks
General Risks. Real property investments are subject to varying degrees
of risk. The yields available from equity investments in real estate depend in
large part on the amount of income generated and expenses incurred. If the
Company's properties do not generate revenues sufficient to meet operating
expenses, including current levels of debt service, tenant improvements, leasing
commissions and other capital expenditures, the Company may have to borrow
additional amounts to cover fixed costs and the Company's cash flow and its
ability to make distributions to its shareholders will be adversely affected.
The Company must obtain external financing to meet future debt maturities.
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
24
<PAGE>
major national or regional commercial property developers will continue to seek
development opportunities in the southeastern and southwestern United States.
These developers may have greater financial resources than the Company. The
number of competitive commercial properties in a particular area could have a
material adverse effect on the Company's ability to lease space in its buildings
or at newly developed or acquired properties and the rents charged.
Changes in Laws. Because increases in income, service or transfer taxes
are generally not passed through to tenants under leases, such increases may
adversely affect the Company's cash flow and its ability to make distributions
to its shareholders. The Company's properties are also subject to various
federal, state and local regulatory requirements, such as requirements of the
Americans with Disabilities Act (the "ADA") and state and local fire and life
safety requirements. Failure to comply with these requirements could result in
the imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that its properties are currently in
compliance with all such regulatory requirements. However, there can be no
assurance that these requirements will not be changed or that new requirements
will not be imposed which would require significant unanticipated expenditures
by the Company and could have an adverse effect on the Company's cash flow and
expected distributions.
Uninsured Loss. The Company presently carries comprehensive liability,
fire, flood (where appropriate), extended coverage and rental loss insurance
with respect to its properties, with policy specifications and insured limits
customary for similar properties. There are, however, certain types of losses
(such as from wars) that may be either uninsurable or not economically
insurable. Should an uninsured loss or a loss exceeding policy limits occur, the
Company could lose both its capital invested in, and anticipated profits from,
one or more of its properties.
Bankruptcy and Financial Condition of Tenants. At any time, a tenant of
the Company's buildings may seek the protection of the bankruptcy laws, which
could result in the rejection and termination of such tenant's lease and thereby
cause a reduction in the cash flow available for distribution by the Company. No
assurance can be given that tenants will not file for bankruptcy protection in
the future or, if any tenants file, that they will affirm their leases and
continue to make rental payments in a timely manner. In addition, a tenant from
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.
25
<PAGE>
Risks Involved in Property Ownership Through Partnership and Joint
Ventures. Although the Company owns fee simple interests in its properties, in
the future the Company could, if then permitted by the covenants in its loan
agreements and its financial position, participate with other entities in
property ownership through partnerships or joint ventures. Partnership or joint
venture investments may, under certain circumstances, involve risks not
otherwise present in property ownership, including the possibility that (a) the
Company's partners or co-venturers might become bankrupt, (b) such partners or
co-venturers might at any time have economic or other business interests or
goals which are inconsistent with the business interests or goals of the
Company, and (c) such partners or co-venturers may be in a position to take
action contrary to the instructions or the requests of the Company or contrary
to the Company's policies or objectives, including the Company's policy to
maintain its qualification as a REIT. The Company will, however, seek to
maintain sufficient control of such participants or joint ventures to permit the
Company's business objectives to be achieved. There is no limitation under the
Company's organizational documents as to the amount of available funds that may
be invested in partnerships or joint ventures.
Impact of Inflation. The Company may experience increases in its
expenses, including debt service, as a result of inflation. The Company attempts
to pass on inflationary cost increases through escalation clauses which are
included in most of its leases. However, market conditions may prevent the
Company from escalating rents. Inflationary pressure may increase operating
expenses, including labor and energy costs (and, indirectly, property taxes)
above expected levels at a time when it may not be possible for the Company to
increase lease rates to offset such higher operating expenses. In addition,
inflation can have secondary effects upon occupancy rates by decreasing the
demand for office space in many of the markets in which the Company operates.
Although inflation has historically often caused increases in the value
of income-producing real estate through higher rentals, the Company can provide
no assurance that inflation will increase the value of its properties in the
future and, in fact, the rate of inflation over recent years has been
considerably below that which obtained previously.
Risk of Development, Construction and Acquisition Activities
Within the constraints of the terms of its current loan agreements and
its policy to reduce its leverage over time, the Company may in the future
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 might in the future also acquire office buildings.
Acquisitions of office buildings entail risks that investments will fail to
perform in accordance with expectations. Estimates of the cost of improvements
to bring an acquired building up to standards established
26
<PAGE>
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 equity investments and secured or
unsecured financing. If new developments are financed through construction
loans, there is a risk that, upon completion of construction, permanent
financing for newly developed properties may not be available or may be
available only on disadvantageous terms.
Changes in Policies Without Stockholder Approval
The investment, financing, borrowing and distribution policies of the
Company, as well as its policies with respect to all other activities, including
growth, debt, capitalization and operations, are determined by the Board of
Directors. Although the Board of Directors has no present intention to do so,
these policies may be amended or revised at any time and from time to time at
the discretion of the Board of Directors without a vote of the shareholders of
the Company. A change in these policies could adversely affect the financial
condition or results of operations of the Company or the market price of the
Common Stock.
Limitations of REIT Status on Business of Subsidiaries
Certain requirements for REIT qualification may in the future limit the
Company's ability to increase fee development, management and leasing operations
conducted, and related services offered, by the Company's subsidiaries without
jeopardizing the Company's qualification as a REIT.
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
27
<PAGE>
impose clean-up responsibility and liability without regard to whether the owner
knew, or caused the presence, of the contaminants, and the liability under such
laws has been interpreted to be joint and several unless the harm is divisible
and there is a reasonable basis for allocation of responsibility. The costs of
investigation, remediation or removal of such substances may be substantial, and
the presence of such substances, or the failure to properly remediate the
contamination on such property, may adversely affect the owner's ability to sell
or rent such property or to borrow using such property as collateral. Any person
who arranges for the disposal or treatment of hazardous or toxic substances at a
disposal or treatment facility also may be liable for the costs of removal or
remediation of a release of hazardous or toxic substances at such disposal or
treatment facility, whether or not such facility is owned or operated by such
person. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs that it incurs in
connection with the contamination. Finally, the owner of a site may be subject
to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site.
Certain federal, state and local laws, regulations and ordinances
govern the removal, encapsulation or disturbance of asbestos-containing
materials ("ACM") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACM and may provide for third parties to seek
recovery from owners or operators of real properties for personal injury
associated with ACM. In connection with its ownership and operation of its
properties, the Company may be potentially liable for such costs. All ACM in the
Company's buildings has been found to be in good condition and non-friable, and
should not present a risk as long as it continues to be properly managed.
The Company's environmental assessments of its properties have not
revealed any environmental liability that the Company believes would have a
material adverse effect on its business, assets or results of operations taken
as a whole, nor is the Company aware of any such material environmental
liability. Nevertheless, it is possible that the Company's assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no assurance
that future laws, ordinances or regulations will not impose any material
environmental liability or the current environmental condition of the Company's
properties will not be affected by tenants, by the condition of land or
operations in the vicinity of such properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company.
Effect of Market Interest Rates on Price of Common Stock
One of the factors that will influence the market price of the Common
Stock in public markets will be the annual dividend yield on the share price
reflected by dividend distributions by the Company. An increase in market
interest rates could reduce cash available for distribution by the Company to
its shareholders and, accordingly, adversely affect the market price of the
Common Stock.
Additional Information
For additional disclosure of risk factors to which the Company is
subject, see the other sections of "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE NO.
Independent Auditors' Report........................................ 30
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995
and 1994.................................................... 31
Consolidated Statements of Operations for Each
of the Three Years in the Period Ended
December 31, 1995........................................... 32
Consolidated Statements of Changes in
Shareholders' Equity for Each of the Three
Years in the Period Ended December 31, 1995................. 33
Consolidated Statements of Cash Flows for Each
of the Three Years in the Period Ended
December 31, 1995........................................... 34
Notes to Consolidated Financial Statements for
Each of the Three Years in the Period Ended
December 31, 1995........................................... 35
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
for the Three Years Ended December 31, 1995................. 50
Schedule III - Real Estate and Accumulated
Depreciation as of December 31, 1995........................ 51
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<PAGE>
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, 1995 and 1994, 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,
1995. 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, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
March 4, 1996
30
<PAGE>
<TABLE>
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994 (In
Thousands Except Share Data)
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Real Estate Investments:
Operating properties:
Land $ 98,727 $102,161
Buildings 471,145 474,879
Furniture and equipment 1,566 1,197
Accumulated depreciation (62,885) (46,106)
-------- --------
Operating properties - net 508,553 532,131
Undeveloped land held for investment 21,150 33,054
Undeveloped land held for sale, at lower
of cost or market value 9,131 2,958
Cash and temporary investments 25,650 23,315
Accounts receivable, net of allowance for uncollectible
rents of $391 and $362 5,260 4,276
Management fees and other receivables from TKPL 1,851
Cost in excess of fair value of net assets acquired from KPI,
net of accumulated amortization of $345 and $688 2,211 9,295
Other assets 7,427 6,926
-------- --------
TOTAL ASSETS $579,382 $613,806
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgages and loans payable $254,909 $323,765
Accounts payable 2,641 2,823
Accrued interest 206 1,047
Accrued real estate taxes payable 2,222 970
Accrued liabilities - other 5,133 1,268
Advance rents and security deposits 3,574 3,332
-------- --------
Total Liabilities 268,685 333,205
-------- --------
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: 20,476,705 and 20,474,019 shares;
outstanding: 17,753,677 and 17,604,295 shares 205 205
Capital in excess of par value 318,609 318,589
Warrants; outstanding 1,114,217 and 1,114,889 2,250 2,251
Retained earnings (Accumulated dividends in excess
of net income) 13,210 (15,657)
Treasury stock, at cost; 2,723,028 and 2,869,724 shares (23,577) (24,787)
-------- --------
Total Shareholders' Equity 310,697 280,601
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $579,382 $613,806
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1995
(In Thousands Except Per Share Data)
<TABLE>
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Revenues
Rental $ 94,865 $ 93,132 $45,927
Other rental services 578 1,256 181
Management fees ($1,685, $3,288 and $89 from TKPL) 5,608 4,926 92
Interest ($13,066 from TKPL in 1995) 14,440 1,062 206
Gain on TKPL note to Southeast 11,288
Gain on early retirement of debt 919
-------- -------- -------
Total revenues 127,698 100,376 46,406
-------- -------- -------
Expenses
Property operations 40,830 39,711 18,850
Management fee to Koger Management, Inc. 2,184
Mortgage and loan interest 23,708 25,872 11,471
Depreciation and amortization 19,110 16,728 8,958
General and administrative 7,559 6,366 2,411
Direct cost of management fees 4,523 3,649 56
Settlement of litigation and related costs 176 1,902
Provision for loss on land held for sale 970 996
Undeveloped land costs 512 667 24
Loss on sale of assets 255 43
Write-off of deferred offering costs 745
-------- -------- -------
Total expenses 98,388 95,934 43,954
-------- -------- -------
Income Before Income Taxes 29,310 4,442 2,452
Income taxes 320 227
-------- -------- -------
Net Income $ 28,990 $ 4,215 $ 2,452
======== ======== =======
Earnings Per Common Share and Common
Equivalent Share:
Primary $ 1.61 $ 0.24 $ 0.18
======== ======== =======
Fully Diluted $ 1.60 $ 0.24 $ 0.18
======== ======== =======
See Notes to Consolidated Financial Statements.
</TABLE>
32
<PAGE>
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1995
(In Thousands)
<TABLE>
Retained Earnings
Capital (Accumulated Total
Common Stock in Excess Dividends Share-
Shares Par of Par in Excess of Treasury holders'
Issued Value Value Warrants Net Income) Stock Equity
------ ---- -------- -------- --------- --------- --------
BALANCE,
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1992 14,313 $143 $267,824 $(22,324) $(10,129) $235,514
Common stock issued 6,159 62 50,750 50,812
Treasury stock acquired (14,696) (14,696)
Warrants issued $1,368 1,368
Net income 2,452 2,452
------ ---- -------- -------- --------- --------- --------
BALANCE,
DECEMBER 31, 1993 20,472 205 318,574 1,368 (19,872) (24,825) 275,450
Treasury stock reissued (3) 38 35
Warrants issued 885 885
Warrants exercised 1 12 (2) 10
Options exercised 1 6 6
Net income 4,215 4,215
------ ---- -------- -------- --------- --------- --------
BALANCE,
DECEMBER 31, 1994 20,474 205 318,589 2,251 (15,657) (24,787) 280,601
Treasury stock reissued (123) 1,217 1,094
Warrants exercised 1 7 (1) 6
Options exercised 1 7 (7)
Stock appreciation
rights exercised 1 6 6
Net income 28,990 28,990
------ ---- -------- -------- --------- --------- --------
BALANCE,
DECEMBER 31, 1995 20,477 $205 $318,609 $2,250 $ 13,210 $(23,577) $310,697
====== ==== ======== ====== ========= ========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
33
<PAGE>
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1995
(In Thousands)
<TABLE>
1995 1994 1993
-------- -------- --------
Operating Activities
<S> <C> <C> <C>
Net income $ 28,990 $ 4,215 $ 2,452
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,110 16,728 8,958
Gain on TKPL note to Southeast (11,288)
Warrants issued - litigation settlement 885
Provision for loss on land held for sale 970 996
Loss on sale of assets 255 43
Gain on early debt repayment (919)
Provision for uncollectible rents 172 212 343
Accrued interest added to principal 496 1,336 38
Amortization of mortgage discounts 175 219 267
Changes in assets and liabilities, net of
effects from purchase of assets from KPI:
Increase (decrease) in accounts payable,
accrued liabilities and other liabilities 5,126 35 (104)
Increase in payable to KPI 1,287
Increase in receivables and other assets (1,062) (3,176) (1,316)
Decrease (increase) in receivable from TKPL 1,851 (1,217)
-------- -------- --------
Net cash provided by operating activities 43,876 20,276 11,925
-------- -------- --------
Investing Activities
Purchase of TKPL mortgage notes (18,195)
Proceeds from TKPL mortgage notes 18,195
Proceeds from sale of assets 25,268 3,499
Proceeds from TKPL note to Southeast 17,105
Tenant improvements to existing properties (8,644) (7,334) (4,662)
Building improvements to existing properties (3,064) (3,749) (1,761)
Energy management improvements (2,663)
Deferred tenant costs (1,085) (1,112) (598)
Additions to furniture and equipment (353) (383)
Merger costs (344) (4,221)
Cash acquired in purchase of assets from KPI 307 2,316 15,596
Payments received on loans to KPI - Cash
Collateral Order 1,392
-------- -------- --------
Net cash provided by (used in) investing activities 26,871 (7,107) 5,746
-------- -------- --------
Financing Activities
Principal payments on mortgages and loans (68,608) (8,267) (7,670)
Proceeds from exercise of warrants and stock options 6 16 1
Proceeds from sale of stock under Stock Investment Plan 206 35
Financing costs (16) (204) (719)
-------- -------- --------
Net cash used in financing activities (68,412) (8,420) (8,388)
-------- -------- --------
Net increase in cash and cash equivalents 2,335 4,749 9,283
Cash and cash equivalents - beginning of year 23,315 18,566 9,283
-------- -------- --------
Cash and cash equivalents - end of year $25,650 $23,315 $18,566
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE>
KOGER EQUITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Organization. Koger Equity, Inc. ("KE") was incorporated in Florida on
June 21, 1988. Koger Properties, Inc. ("KPI") had maintained a 20 percent
interest in KE through June 28, 1991. On June 29, 1991, KE repurchased 1,081,081
shares of its common stock from KPI, which reduced KPI's percentage ownership to
13.5 percent of KE's issued and outstanding shares. On December 21, 1993, KPI
was merged with and into KE (the "Merger"). The Merger was part of a plan of
reorganization (the "KPI Plan") in a Chapter 11 bankruptcy case (the "KPI
Chapter 11 Case") filed on behalf of KPI.
Principles of Consolidation. The consolidated financial statements
include the accounts of KE, its wholly owned subsidiaries and Koger Realty
Services, Inc. (the "Company"). KE owns all of the preferred stock of Koger
Realty Services, Inc. which represents approximately 95 percent of the economic
benefits of this entity. All material intercompany accounts have been eliminated
in consolidation.
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
market value.
Periodically, management reviews its portfolio of operating properties,
undeveloped land held for investment and related goodwill and in those instances
where properties have suffered an impairment in value that is deemed to be other
than temporary, the properties and related goodwill will be reduced to their net
realizable 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, 1995, 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 and building and
tenant improvements are depreciated over the periods benefitted 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 charges are amortized over the terms of the
related agreements. Cost in excess of fair value of net assets acquired pursuant
to the Merger is being amortized over 15 years.
35
<PAGE>
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 1995 and 1994, the recognition
of rental revenues on this basis for applicable leases increased rental revenues
by $80,000 and $512,000, respectively, over the amount which would have been
recognized based upon the contractual provisions of these leases. Interest
income is recognized on the accrual basis on interest-earning investments.
Interest for which payment was due, based upon the contractual provisions of
loans to KPI under a Restated Credit Agreement and a Land Credit Agreement
between the Company and KPI, after KPI filed a petition under Chapter 11 of the
United States Bankruptcy Code in September 1991 and through December 21, 1993,
was not accrued.
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 1995, 1994 or 1993, 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. Koger Realty Services, Inc.
("KRSI") is not a qualified REIT subsidiary under the Internal Revenue Code of
1986 (the "Code"). Although, KRSI is consolidated with the Company for financial
reporting purposes, this entity is subject to Federal income tax and will file
separate Federal and state income tax returns.
Earnings Per Common Share. Earnings per common share have been computed
based on the weighted average number of shares of common stock and common stock
equivalents outstanding as follows:
Year Primary Fully Diluted
---- ---------- -------------
1995 18,011,076 18,091,029
1994 17,718,757 17,718,757
1993 13,351,525 13,351,525
Fair Value of Financial Instruments. The Company believes that the
carrying amount of its financial instruments (cash and short-term investments,
accounts receivable, management fees and other receivables from The Koger
Partnership, Ltd. ("TKPL"), 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 1993, KPI was merged with and into the Company. Pursuant to the
Merger, the Company received the collateral for loans to KPI, which were
accounted for as foreclosed in-substance, in full satisfaction of those loans.
As of December 21, 1993, the loans to KPI foreclosed in-substance had a carrying
value of approximately $93,498,000 which was management's best estimate of the
fair value of the collateral received ($121,743,000) less the mortgage debt
related to such collateral ($28,245,000) which was assumed by the Company.
36
<PAGE>
In addition, the Company acquired the remaining assets and liabilities
of KPI by issuing 6,158,977 shares of the Company's common stock (the "Shares")
and warrants to purchase 644,000 Shares (the "Warrants"). The following
represents the fair value of the KPI assets acquired and liabilities assumed by
the Company pursuant to the Merger in exchange for the Company's Shares and
Warrants (in thousands).
Fair value of assets and treasury stock
acquired, including cash of $15,596 $215,855
Fair value of common stock and warrants
issued and direct merger costs (56,461)
---------
Fair value of liabilities assumed $159,394
========
During 1994, the fair value of the KPI assets acquired and liabilities
assumed pursuant to the Merger was adjusted as follows: (1) assets acquired
increased $2,250,000; (2) liabilities assumed increased $243,000; and (3)
additional direct merger costs were incurred which totalled $344,000. During
1995, the fair value of KPI assets acquired and liabilities assumed pursuant to
the Merger 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 from KPI 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.
For 1995, 1994, and 1993, total interest payments were $23,823,000,
$23,525,000 and $12,421,000, respectively, for the Company. For 1995 and 1994,
payments for income taxes totalled $387,000 and $227,000 respectively. There
were no payments for income taxes during 1993.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during each
reporting period. Actual results could differ from those estimates.
New Accounting Standards. In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). SFAS 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. SFAS 121 is effective for
the Company for the year ending December 31, 1996. The Company does not believe
adoption of SFAS 121 will have a material effect on the financial statements of
the Company.
37
<PAGE>
In October 1995, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 establishes a fair value based method of
accounting for stock-based employee compensation plans; however, it also allows
companies to continue to measure cost for such plans using the method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"). Companies that elect to continue with
the accounting under APB 25 must provide certain pro forma disclosures of net
income, as if SFAS 123 had been applied. The accounting and disclosure
requirements of SFAS 123 are effective for the Company for transactions entered
into in 1996. The Company is currently evaluating its alternatives under SFAS
123, however, its impact on operating results when initially adopted is not
expected to be material.
Reclassification. Certain 1994 and 1993 amounts have been reclassified to
conform with 1995 presentation.
2. TRANSACTIONS WITH RELATED PARTIES.
General. The Company was incorporated for the purpose of investing in
the ownership of income producing properties, primarily commercial office
buildings developed by KPI. On September 25, 1991, KPI and TKPL, a Florida
limited partnership of which KPI was the managing general partner, filed
petitions under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code"). On August 10, 1993, TKPL completed the establishment of a $4.5 million
reorganization financing facility which represented the fulfillment and the
final condition to TKPL's emergence from bankruptcy and, as a result, the plan
of reorganization for the TKPL Chapter 11 Case became effective as of June 1,
1993. On December 21, 1993, KPI was merged with and into the Company.
Management Agreement. Prior to the Merger, Koger Management, Inc.
("KMI") was responsible for the leasing, operation, maintenance, and management
of each of the Company's properties. The management fee was five percent of the
gross rental receipts collected on the property managed for the Company by KMI.
For the year ended December 31, 1993, the Company incurred management fee
expenses to KMI of $2,184,000 for property management services. The Management
Agreement expired on December 31, 1991, but was extended on a month-to-month
basis through the date of the Merger. With the Merger, the Company assumed all
of the leasing and other management responsibilities for its properties
including those acquired in the Merger.
Other. A director of the Company is a Senior Vice President of an
affiliate of a shareholder who along with certain of its affiliates owned
approximately 18.8 percent of the outstanding Shares of the Company at December
31, 1995. The Company has entered into an agreement with this shareholder to
register shares owned by the shareholder and its affiliates pursuant to the
registration requirements of the Securities Act of 1933 in up to five public
offerings and include these Shares in an unlimited number of public offerings
which may be made on behalf of the Company or others for a period of eight years
following December 21, 1993. All expenses, except for brokerage discount, of any
of these offerings will be borne by the Company.
38
<PAGE>
In addition, one of the agreements contains provisions which permit the
shareholder and certain of its affiliates to own the greater of (i) 23 percent
of the outstanding Shares or (ii) 4,047,350 of the outstanding Shares, as
adjusted for recapitalization without triggering the Company's common stock
rights agreement or the right of the Company pursuant to its By Laws to
repurchase all Shares held by the shareholder and its affiliates in excess of
9.8 percent of outstanding Shares. The Company has also covenanted that
following December 21, 1993, for a period of eight years the Company would not
amend, alter or otherwise modify the common stock rights agreement or take any
action, which would limit or eliminate certain rights of the shareholder and its
affiliates without prior consent of the shareholder.
3. KPI MERGER.
The Merger became effective on December 21, 1993. The accounting
treatment for the Merger was separated into two components: (i) the receipt by
the Company of the collateral for loans to KPI made pursuant to a Restated
Credit Agreement and a Land Credit Agreement (loans to KPI foreclosed
in-substance), in full satisfaction of these loans; and (ii) the acquisition by
the Company of the remaining assets and restructured liabilities of KPI under
the purchase method of accounting.
Unpaid interest (amounting to $30.3 million from the date of KPI's
Chapter 11 Case to December 20, 1993) on loans to KPI foreclosed in-substance
made prior to KPI's Chapter 11 Case, has not been recognized in the accompanying
consolidated financial statements of the Company. Therefore, interest earned in
1993 of approximately $12 million was not recognized as interest revenue in
1993.
For 1993, revenues and expenses of the assets and liabilities acquired
from KPI are reflected in the Consolidated Statements of Operations for the 11
days from the date of the Merger, December 21, 1993, through December 31, 1993.
4. INVESTMENTS IN THE KOGER PARTNERSHIP, LTD.
General. Pursuant to the Merger, Southeast Properties Holding
Corporation, Inc. ("Southeast"), a wholly owned subsidiary of the Company,
became the managing general partner of TKPL. Immediately prior to the Merger,
KPI transferred all of its debt and equity interest in TKPL to Southeast. These
interests 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 the TKPL plan of
reorganization (the "TKPL Plan") and its restructured debt, the Company
determined that at the time of the Merger 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:
39
<PAGE>
Proceeds from TKPL unsecured note to Southeast $17,700,000
Partial Write-off of Cost in Excess of Fair Value of
Net Assets Acquired from KPI (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 and 1994, the management
fees earned were approximately $1,685,000 and $3,288,000, respectively. From the
date of the Merger, December 21, 1993, through December 31, 1993, the management
fees earned were approximately $89,000. 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, the Company 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 the quarter ended September 30, 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.
5. MORTGAGES AND LOANS PAYABLE.
During 1993, the Company's existing bank loans were modified and
extended in connection with the Merger. These bank loans had an outstanding
balance of $70,040,000 at December 31, 1995. Prior to the modification of the
loans, the loans bore interest at rates equal to such banks' prime rates. These
loans are collateralized by mortgages on certain operating properties. At
December 31, 1995, one of these loans in the amount of $45,945,000 bore interest
at 6.43 percent and has a final maturity date of December 21, 2000. This loan is
collateralized by properties with a carrying value of approximately $67,146,000.
At December 31, 1995, the other bank loan in the amount of $24,095,000 bore
interest at 6.386 percent and has a final maturity date of December 21, 2000.
This loan is collateralized by properties with a carrying value of approximately
$42,117,000. The interest rate on both of these bank loans will be adjusted in
December, 1996 to a rate equal to the sum of (i) the effective interest rate
prevailing on four year U.S. Treasury obligations, plus (ii) 210 basis points,
subject to a maximum of 11 percent per annum. Monthly payments on these loans
include principal amortization based on a 25 year amortization period. In
addition, the Company will be required to make additional
40
<PAGE>
principal payments totalling $10 million by December, 1998. Each of these
lenders required affirmative and negative covenants and other agreements which
may become burdensome to the Company. In particular, both bank lenders have
required that, commencing on December 21, 1998, the Company maintain a total
liabilities to net worth ratio of 1.0 to 1.0, that the Company maintain
loan-to-value ratios determined on the basis of periodic appraisals of bank
collateral and that, under certain circumstances, additional collateral be
provided for indebtedness to such bank. At December 31, 1995, the total
liabilities to net worth ratio of the Company was 0.9 to 1.0. In addition, both
of these bank lenders have required other covenants generally similar to the
provisions set forth in the KPI Plan with respect to the KPI restructured debt.
At December 31, 1995, the Company had mortgages payable with an
outstanding balance of $45,666,000 which is net of a $897,000 discount. Such
mortgages are generally amortizing, bear interest at rates ranging from 8.5
percent to 10.125 percent, and are collateralized by office buildings with a
carrying value of approximately $84,589,000 at December 31, 1995.
Senior Bank Mortgage Debt with outstanding balances of approximately
$74,898,000 will mature in December, 2003. Interest payments are due monthly
based on a 6.62 percent interest rate with monthly amortization which began in
December, 1994. The interest rate will adjust in April, 1998 to a rate equal to
the sum of (i) the then prevailing interest rate on five year U.S. Treasury
obligations plus (ii) 210 basis points with a maximum rate of 10 percent. These
loans are collateralized by properties with a carrying value of approximately
$76,619,000 at December 31, 1995.
Junior Bank Mortgage Debt totalling approximately $1,152,000 is secured
by properties that also serve as collateral for Senior Bank Mortgage Debt. The
Junior Bank Mortgage Debt matures in December, 2000 and accrues interest at the
prime rate of the lender (8.75 percent at December 31, 1995). Accrued interest
on Junior Bank Mortgage Debt must be paid no later than December, 1998. Monthly
interest payments are required beginning in January, 1999. Accrued interest on
this debt will be forgiven if the outstanding balance is paid in full prior to
December, 1996. Interest accrued and forgiven will be reflected as an adjustment
to interest expense in the year forgiven.
Insurance Company Mortgage Debt with outstanding balances at December
31, 1995 of approximately $41,838,000 are non-recourse to the Company, but are
secured by all properties on which each lender holds mortgages. The contractual
interest rates on these loans currently range from 8 percent to 10 percent.
These mortgages include provisions during the period ending December 21, 1996,
that a portion of the interest earned, equal to 25 percent, 20 percent and 15
percent in, respectively, the first, second and third years, may be deferred at
the option of the Company and added to principal, subject to a minimum interest
payment rate of seven and one-half percent per annum. During 1995, the Company
elected to discontinue the deferral of interest on these loans with certain
lenders. The interest rates will be reset on various dates, as defined. No reset
interest rate may be less than eight percent per annum. However, if any interest
reset rate would exceed ten percent per annum, the Company may elect to
establish the interest reset rate at ten percent per annum, in which case the
maturity of the indebtedness in question shall be the date on which a U.S.
Treasury obligation purchased on the interest reset date in question with an
effective interest rate of 210 basis points below ten percent per annum would
mature. In the absence of an election to fix any interest reset rate at ten
percent per annum, all of such indebtedness matures on December 21, 2003. The
loans begin principal amortization in 1997
41
<PAGE>
and are collateralized by properties with a carrying value of approximately
$60,173,000 at December 31, 1995. Additional Insurance Company Mortgage Debt
totalling $191,000 which retained their existing balances and terms were also
acquired from KPI in connection with the Merger. The interest rate on these
loans is 8.5 percent. These loans are collateralized by properties with a
carrying value of approximately $970,000 at December 31, 1995.
Other Mortgage Debt totals approximately $21,124,000 and matures in
June, 2001. Interest payments are due monthly based on the prime rate plus one
percent with a minimum rate of 6.62 percent and a maximum rate of 10 percent.
These loans are collateralized by properties with a carrying value of
approximately $24,772,000 at December 31, 1995.
The Company's restructured debt contains provisions requiring the
Company to use the first $50 million of proceeds from any equity offering to pay
down certain debt. To the extent that equity offering proceeds exceed $50
million, one half of the excess must be used to pay down debt with the remainder
being available for use at the Company's discretion. In addition to reporting
and other requirements, the restructured debt agreements contain provisions
limiting the amount of annual dividends, limiting additional borrowings to $5
million, and limiting general and administrative expense. The Company is also
required to maintain certain financial ratios.
The annual maturities of loans and mortgages payable, which are gross
of $897,000 of unamortized discounts, as of December 31, 1995, are summarized as
follows:
Year Ending Amount
December 31, (In thousands)
------------- --------------
1996 $4,082
1997 12,937
1998 19,355
1999 5,751
2000 87,181
Subsequent Years 126,500
--------
Total $255,806
========
6. 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, 1995, 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 2005. Minimum future rental revenues from leases in effect at December
31, 1995, determined without regard to renewal options, are summarized as
follows:
42
<PAGE>
Year Ending Amount
December 31, (In thousands)
------------ ---------------
1996 $ 81,196
1997 60,755
1998 40,224
1999 22,380
2000 14,207
Subsequent Years 37,847
--------
Total $256.609
========
The above minimum future rental income does not include contingent
rentals that may be received under provisions of the lease agreements.
Contingent rentals amounted to $1,792,000, $2,172,000 and $1,407,000 for the
years 1995, 1994, and 1993, respectively.
At December 31, 1995, annualized rental revenues totalled approximately
$13,503,000 for the State of Florida, when all of its departments and agencies
which lease space in the Company's buildings were combined.
7. 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. The 1988 Plan provides that the options granted contain stock
appreciation rights which may be exercised in lieu of the option. To exercise
the option, payment of the option price is required before the option shares are
delivered. Alternatively, the optionee may elect to receive shares equal in
value to the difference between the aggregate fair market value of the shares
exercised on the exercise date and the aggregate exercise price of those shares.
With the consent of the Company's Compensation Committee, the optionee may also
elect to exercise the option in part by having withheld cash equal to the
minimum amount required to be withheld for payroll tax purposes and the balance
by receiving shares equal to the difference between the aggregate fair market
value and the aggregate exercise price, less any cash received. All options
originally granted under the 1988 Plan on August 25, 1988, at an exercise price
of $20.00 per share have either been surrendered or forfeited.
Pursuant to the 1988 Plan, the Compensation Committee of the Company's
Board of Directors (the "Compensation Committee") granted options to purchase
213,750 shares on January 27, 1994 to certain employees at an exercise price of
$7.625 per share, which was the closing market price on the American Stock
Exchange on the date of the grant. These options expire seven 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. The
grant of certain of these options was conditioned upon the surrender of
previously granted and outstanding options to purchase 173,246 shares at an
exercise price of $20.00 per share. On February 21, 1995, the Compensation
Committee granted options to purchase 18,000 shares to certain key employees at
an exercise price of $7.50 per share, which was the closing market price on the
American Stock Exchange on the date of the grant. These options expire seven
years from the
43
<PAGE>
date of the grant and are exercisable beginning one year from the date of grant
at a cumulative annual rate of 20 percent of the shares covered by each option
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. The 1993
Plan provides that the options granted contain stock appreciation rights which
may be exercised in lieu of the option. To exercise the option, payment of the
option price is required before the option shares are delivered. Alternatively,
the optionee may elect to receive shares equal in value to the difference
between the aggregate fair market value of the shares exercised on the exercise
date and the aggregate exercise price of those shares. With the consent of the
Compensation Committee, the optionee may also elect to exercise the option in
part by having withheld cash equal to the minimum amount required to be withheld
for payroll tax purposes and the balance by receiving shares equal to the
difference between the aggregate fair market value and the aggregate exercise
price, less any cash received.
Pursuant to the 1993 Plan, the Compensation Committee granted options
to purchase 552,200 shares on January 27, 1994 to certain key employees at an
exercise price of $7.625 per share, which was the closing market price on the
American Stock Exchange on the date of the grant. 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. In addition, the Compensation Committee granted options to purchase
207,332 shares on May 9, 1994 to certain key employees at an exercise price of
$7.625 per share, which was the closing market price on the American Stock
Exchange on the date of the grant. These options expire ten years from the date
of grant with 115,000 shares fully exercisable six months from the date of the
grant and 92,332 shares 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 from the date of grant.
On February 21, 1995, the Compensation Committee granted options to purchase
279,800 shares to certain key employees at an exercise price of $7.50 per share,
which was the closing market price on the American Stock Exchange on the date of
grant. These options expire ten years from the date of grant and are exercisable
beginning one year from the date of 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. On May 15, 1995, the Compensation Committee
granted options to purchase 14,000 shares to certain key employees at an
exercise price of $8.125 per share, which was the closing market price on the
American Stock Exchange on the date of grant. These options expire ten years
from the date of grant and are exercisable beginning one year from the date of
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.
44
<PAGE>
Summary of Options Granted. Information as of December 31, 1995
concerning the options granted is summarized below.
<TABLE>
Remaining Options
Date of Shares Under Exercisable Exercise Price
Plan Grant Option at 12/31/95 Per Share Total
------- ------- ------- ------ ----------
<C> <C> <C> <C> <C> <C>
1988 Stock Option Plan 2/05/92 283,496 168,996 $5.125 $1,452,917
1/27/94 162,900 31,927 7.625 1,242,113
2/21/95 10,000 0 7.500 75,000
1993 Stock Option Plan 1/27/94 388,000 75,040 $7.625 $2,958,500
5/09/94 177,666 127,533 7.625 1,354,703
2/21/95 215,800 0 7.500 1,618,500
5/15/95 14,000 0 8.125 113,750
</TABLE>
At December 31, 1995, there were 40,034 shares available for granting
of options under the 1988 Plan and 201,334 shares available for the granting of
options under the 1993 Plan. Through December 31, 1995, options to purchase
2,754 shares had been exercised under the 1988 Plan and 4,016 stock appreciation
rights had been exercised to acquire 560 shares under the 1988 Plan and the 1993
Plan.
Warrants. The Company had 1,114,217 and 1,114,889 Warrants outstanding
on December 31, 1995 and 1994, respectively. Each Warrant gives the holder the
right to purchase one Share at a price of $8.00 per share, such rights to be
exercisable until June 30, 1999. The Warrants are subject to redemption at the
option of the Company at prices currently ranging from $2.90 to $5.24 per
Warrant.
Shareholder Rights Plan. Pursuant to a Shareholder Rights Plan (the
"Rights Plan"), on September 30, 1990, the Board of Directors of the Company
declared a dividend of one Common Stock Purchase Right for each outstanding
share of common stock of the Company. Under the terms of the Rights Plan, the
rights which were distributed to the shareholders of record on October 11, 1990,
trade together with the Company's common stock and are not exercisable until the
occurrence of certain events (none of which have occurred through December 31,
1995), 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 December 21, 1993 for a
certain shareholder and its affiliates. See Note 2 for further discussion of
this amendment.
8. STOCK INVESTMENT PLAN.
During 1994, the Company adopted a Monthly Stock Investment Plan (the
"SIP") which provides for regular purchases of the Company's common stock by all
employees and directors. The SIP provides for monthly payroll and directors'
fees deductions up to $1,700 per month with the Company making monthly
contributions for the account of each participant as follows: (i) 25 percent of
amounts up to $50; (ii) 20 percent of amounts between $50 and $100; and (iii) 15
percent of amounts between $100 and $1,700, which amounts are used by an
unaffiliated Administrator to purchase shares from the Company. The Company has
reserved a total of
45
<PAGE>
200,000 shares for issuance under the SIP. The Company's contribution and the
expenses incurred in administering the SIP totalled approximately $34,800 and
$7,900 for 1995 and 1994, respectively. Through December 31, 1995, 29,731 shares
have been issued under the SIP.
9. EMPLOYEE BENEFIT PLANS.
During 1994, the Company adopted a 401(k) plan (the "401(k) Plan")
which permits contributions by employees. The Company's Board of Directors
approved a Company contribution to the 401(k) Plan for 1994. This contribution
was in the form of the Company's common stock and was made during February,
1995. The contribution totalled 122,441 Shares which had a value of
approximately $888,000 on December 31, 1994. For 1995, the Company's Board of
Directors approved a Company contribution to the 401(k) Plan in the form of the
Company's Shares (43,804 Shares which had a value of approximately $465,000 on
December 31, 1995) and cash ($443,000). The contribution for 1995 was made on
February 12, 1996.
The Company's Board of Directors has adopted a supplemental executive
retirement plan (the "SERP"), an unfunded defined benefit plan. The purpose of
the SERP is to facilitate the retirement of select key executive employees by
supplementing their benefits under the Company's 401(k) Plan. The document
establishing the SERP, which became effective on June 28, 1995, was executed by
the Company on August 18, 1995. The benefits are based on years of service and
the employee's average base salary during the last three calendar years of
employment.
Net periodic pension cost for the SERP for 1995 was as follows:
Amount
(In thousands)
Service Cost $ 28
Interest Cost 102
Amortization of Unrecognized Prior Service Cost 119
--------
Total $ 249
========
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%
46
<PAGE>
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, 1995:
Amount
(In thousands)
--------------
Accumulated benefit obligation $ 2,074
Effect of projected future salary increases 657
--------
Projected benefit obligation $ 2,731
--------
Actuarial present value of projected benefit
obligations in excess of plan assets $ (2,731)
Unrecognized prior service cost 2,612
Additional minimum liability (1,955)
---------
Accrued pension cost $ (2,074)
=========
10. DIVIDENDS.
The Company paid no dividends during the three years ended December 31,
1995. 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 taxable income as required by the Federal income tax laws.
The terms of the secured debt of the Company provide that the Company
will be subject to certain dividend limitations which, however, will not
restrict the Company from paying the dividends required to maintain its
qualifications as a REIT. In the event that the Company no longer qualifies as a
REIT, additional dividend limitations would be imposed by the terms of such
debt. In addition, two of the Company's bank lenders have required that until
the Company has raised an aggregate of $50 million of equity the following
limitations on dividends will be applied: (a) 1996 and 1997, $11 million unless
imposition of the limit would cause loss of REIT status and (b) in 1998 and
1999, $11 million regardless of impact on REIT status.
11. FEDERAL INCOME TAXES.
The Company is operated in a manner so as to qualify and has elected
tax treatment as a REIT. The Company's taxable loss prior to the dividends paid
deduction for the years ended December 31, 1995, 1994, and 1993 was
approximately $(23,233,000), ($15,954,000), and $(8,375,000), respectively. The
difference between net income for financial reporting purposes and taxable
income 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, 1995, 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 $15.6 million.
On the Company's 1994 Federal income tax return, the Company utilized
approximately $323,000 of its 1993 net operating loss carryforward to eliminate
any REIT taxable income for 1994. Pursuant to the Merger, the Company succeeded
to KPI's net operating loss carryforward which, based upon KPI's final Federal
income tax return, totalled approximately $98,000,000. However, the portion of
KPI's net operating loss carryforward which is usable each year by the Company
is limited to approximately $7,900,000. The Company's net operating loss
carryforward
47
<PAGE>
available to offset REIT taxable income for 1995 totals approximately
$24,070,000, which can be used to offset REIT taxable income through 2007. The
use of net operating loss carryforwards are limited for alternative minimum tax
purposes. The Company paid approximately $104,000 of alternative minimum tax
when its 1993 Federal income tax return was filed. The Company requested a
refund of $70,000 when its 1994 Federal income tax return was filed. For 1995,
the Company recorded a provision for alternative minimum taxes of approximately
$100,000 and a non-REIT subsidiary recorded a provision for federal income tax
of approximately $215,000.
The Company's 1992 and 1993 Federal income tax returns are currently
being examined by the Internal Revenue Service. The Company does not believe
that the results of this examination will materially affect its operations or
its REIT status.
12. LITIGATION.
A derivative action against the Company in the U. S. District Court,
Middle District of Florida (the "District Court"), which commenced on October
29, 1990, has been resolved in favor of the Company. Various amended filings and
counter-claims have been filed against the Company of which the Company does not
believe that the outcome will materially affect its operations or financial
position. The Company and the other parties to this derivative action have
agreed on a settlement of all claims and have submitted documentation thereof to
the District Court. On January 10, 1996, the District Court entered its order
approving this settlement (the "Approval Order") after notice to stockholders of
the Company. The Approval Order became final on or about February 12, 1996, and
the parties are now required to exchange documentation and effect other steps to
consummate this settlement. During 1995, the Company paid $50,000 for settlement
of this litigation.
During 1994, the Company settled a pending class action proceeding (the
"Securities Action"). The Company recorded a provision of $1,685,000 relating to
the settlement of the Securities Action and incurred additional costs related to
the settlement which totalled $217,000.
Under the terms of the merger agreement between the Company and KPI,
the Company has agreed to indemnify the former non-officer directors of KPI
other than Ira M. Koger (the "Indemnified Persons") in respect of amounts to
which such Indemnified Person would be otherwise entitled to indemnification
under Florida law, the articles of incorporation or the by-laws of KPI arising
out of acts or omissions prior to September 25, 1991 (the "Indemnity"). Certain
of the former non-officer directors of KPI are defendants in a Pension Plan
class action suit. The Company is not named in this suit. However, certain
former non-officer directors of KPI may be Indemnified Persons. The obligations,
if any, of the Company under such indemnification do not exceed (i) $1,000,000
in the aggregate and (ii) $200,000 per Indemnified Person and are subject to
certain other conditions precedent. Based upon its investigation to date, the
Company does not believe that this suit will give rise to any material liability
to Indemnified Persons or to the Company. Accordingly, no provision has been
made in the Consolidated Financial Statements for any liability that may result
from the Indemnity.
48
<PAGE>
13. INTERIM FINANCIAL INFORMATION (UNAUDITED).
Selected quarterly information for the two years in the period ended
December 31, 1995, is presented below (in thousands except per share amounts):
<TABLE>
Net Earnings
Rental Total Income (Loss) Per
Quarters Ended Revenues Revenues (Loss) Common Share
- -------------- ------- ------- ------- ------------
<S> <C> <C> <C> <C>
March 31, 1994 $23,073 $24,908 $ 2,692 $.15
June 30, 1994 (1) 23,190 24,678 (1,075) (.06)
September 30, 1994 23,426 25,494 1,432 .08
December 31, 1994 23,443 25,296 1,166 .07
March 31, 1995 23,482 25,446 2,204 .12
June 30, 1995 24,255 26,125 2,026 .11
September 30, 1995 (2) 23,762 45,568 18,983 1.05
December 31, 1995 (3) 23,366 30,559 5,777 .32
</TABLE>
(1) The results for the quarter ended June 30, 1994 were affected by the
accrual for the settlement of the Securities Action and the provision for
loss on two land parcels held for sale.
(2) The results for the quarter ended September 30, 1995 were affected by (i)
the interest revenue associated with the Company's investment in the TKPL
mortgage notes, (ii) the gain associated with the partial repayment of a
TKPL note to Southeast and (iii) the write-off of deferred offering costs.
(3) The results for the quarter ended December 31, 1995 were affected by
additional gain associated with the partial repayment of a TKPL note to
Southeast.
49
<PAGE>
SCHEDULE II
KOGER EQUITY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(In Thousands)
<TABLE>
Additions
Balance at Charged to Charged to Balance at
beginning of costs and other end of
Description period expenses accounts Deductions period
- --------------------------------- --------- ------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
1995
- ----
Allowance for uncollectible rents $ 362 $ 172 $ 0 $ 143(a) $ 391
Valuation allowance - land held ========= ======= ========== ========== =========
for sale $ 550 $ 970 $ 0 $ 0 $ 1,520
========= ======= ========== ========== =========
1994
- ----
Allowance for uncollectible rents $ 651 $ 212 $ 0 $ 501(a) $ 362
Valuation allowance - land held ========= ======= ========== ======= =========
for sale $ 0 $ 996 $ 0 $ 446(b) $ 550
========= ======= ========== ======= =========
1993
- ----
Allowance for uncollectible rents $ 130 $ 343 $ 493(c) $ 315(a) $ 651
========= ======= ========== ========== =========
</TABLE>
(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.
(c) Balance acquired pursuant to Merger on December 21, 1993.
50
<PAGE>
KOGER EQUITY, INC. AND SUBSIDIARIES Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(in thousands)
<TABLE>
COSTS CAPITALIZED
SUBSEQUENT
INITIAL COST TO ACQUISITION TOTAL COST
---------------- ------------------- -------------------------- (d)
BLDGS & IMPROVE CARRYING BLDGS & (b)(c) ACCUM.
CENTER LAND IMPROV. MENTS COSTS LAND IMPROV. TOTAL DEPR .
- ------ -------- -------- -------- ---------- ---------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING REAL ESTATE:
ATLANTA CHAMBLEE $ 13,145 $ 63,211 $ 6,382 $ 0 $ 13,145 $ 69,593 $ 82,738 $10,207
ATLANTA GWINNETT 0 3 0 0 0 3 3 1
AUSTIN 4,274 13,650 1,585 0 4,274 15,235 19,509 1,218
CHARLOTTE CARMEL 910 9,993 98 0 910 10,091 11,001 512
CHARLOTTE EAST 5,788 25,078 1,533 0 5,788 26,611 32,399 2,708
EL PASO 3,108 10,107 2,433 0 3,108 12,540 15,648 2,053
GREENSBORO SOUTH 6,384 38,700 2,915 0 6,384 41,615 47,999 4,938
GREENSBORO WENDOVER 0 11 0 0 0 11 11 3
GREENVILLE 3,833 16,104 1,972 0 3,833 18,076 21,909 2,703
JACKSONVILLE BAYMEADOWS 7,625 23,716 316 0 7,625 24,032 31,657 1,282
JACKSONVILLE CENTRAL 6,915 35,321 5,253 0 6,915 40,574 47,489 5,479
MEMPHIS GERMANTOWN 3,518 21,821 1,621 0 3,518 23,442 26,960 3,425
ORLANDO CENTRAL 8,342 30,575 4,408 0 8,342 34,983 43,325 6,199
ORLANDO UNIVERSITY 2,900 12,218 543 0 2,900 12,761 15,661 1,301
RICHMOND SOUTH 0 16 0 0 0 16 16 8
ST. PETERSBURG 6,657 29,525 3,116 0 6,657 32,641 39,298 4,520
SAN ANTONIO 9,638 29,649 5,594 0 9,638 35,243 44,881 5,534
TALLAHASSEE APALACHEE PKWY 6,063 28,043 3,116 0 6,063 31,159 37,222 4,900
TALLAHASSEE CAPITAL CIRCLE 3,561 22,903 234 0 3,561 23,137 26,698 2,717
TULSA NORTH 1,600 4,300 552 0 1,600 4,852 6,452 771
TULSA SOUTH 4,466 12,834 1,297 0 4,466 14,131 18,597 1,934
-------- -------- -------- ---------- ---------- --------- -------- -------
SUBTOTALS 98,727 427,778 42,968 0 98,727 470,746 569,473 62,413
FURNITURE & EQUIPMENT 1,566 1,566 1,566 472
IMPROVEMENTS IN PROGRESS 399 399 399
-------- -------- -------- ---------- ---------- --------- -------- -------
TOTAL OPERATING
REAL ESTATE $ 98,727 $429,344 $43,367 $ 0 $98,727 $472,711 $571,438 $62,885
-------- -------- -------- ---------- ---------- --------- -------- -------
</TABLE>
(a)
MORT- DATE DEPRECIABLE
CENTER GAGES ACQUIRED LIFE
- ------ --------- ----------- ------------
OPERATING REAL ESTATE:
ATLANTA CHAMBLEE $ 27,542 1988 - 1993 3 - 40 YRS.
ATLANTA GWINNETT 0 1993 7 YRS.
AUSTIN 1642 1990 - 1993 3 - 40 YRS.
CHARLOTTE CARMEL 8,912 1993 3 - 40 YRS.
CHARLOTTE EAST 13,972 1989 - 1993 3 - 40 YRS.
EL PASO 1,072 1990 - 1993 3 - 40 YRS.
GREENSBORO SOUTH 21,953 1988 - 1993 3 - 40 YRS.
GREENSBORO WENDOVER 0 1993 7 YRS.
GREENVILLE 7,029 1988 - 1993 3 - 40 YRS.
JACKSONVILLE BAYMEADOWS 34,293 1993 3 - 40 YRS.
JACKSONVILLE CENTRAL 12,699 1989 - 1993 3 - 40 YRS.
MEMPHIS GERMANTOWN 13,244 1988 - 1993 3 - 40 YRS.
ORLANDO CENTRAL 17,001 1988 - 1993 3 - 40 YRS.
ORLANDO UNIVERSITY 9,426 1990 - 1993 3 - 40 YRS.
RICHMOND SOUTH 0 1993 4 YRS.
ST. PETERSBURG 19,723 1988 - 1993 3 - 40 YRS.
SAN ANTONIO 5,571 1990 - 1993 3 - 40 YRS.
TALLAHASSEE APALACHEE PKWY 14,325 1988 - 1993 3 - 40 YRS.
TALLAHASSEE CAPITAL CIRCLE 20,710 1988 - 1993 3 - 40 YRS.
TULSA NORTH 0 1990 3 - 40 YRS.
TULSA SOUTH 4,416 1990 - 1993 3 - 40 YRS.
-------
SUBTOTALS 233,530
FURNITURE & EQUIPMENT 3 - 7 YRS.
IMPROVEMENTS IN PROGRESS -------
TOTAL OPERATING
REAL ESTATE $233,530
--------
51
<PAGE>
KOGER EQUITY, INC. AND SUBSIDIARIES Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(in thousands)
<TABLE>
COSTS CAPITALIZED
SUBSEQUENT
INITIAL COST TO ACQUISITION TOTAL COST
------------------ ---------------- ---------------------------- (d) (a)
BLDGS & IMPROVE CARRYING BLDGS & (b)(c) ACCUM. MORT- DATE DEPRECIABLE
CENTER LAND IMPROV. MENTS COSTS LAND IMPROV. TOTAL DEPR . GAGES ACQUIRED LIFE
- ------ ---- ------- ------- -------- ----- ------- ------ ------ ----- -------- ----------
UNIMPROVED LAND:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ATLANTA GWINNETT $ 5,780 $ 0 $ 0 $ 0 $ 5,780 $ 0 $ 5,780 $ 0 $ 0 1993
BIRMINGHAM 1,200 0 0 0 1,200 0 1,200 0 0 1993
CHARLOTTE CARMEL 3,250 0 0 0 3,250 0 3,250 0 0 1993
CHARLOTTE EAST 468 0 0 0 468 0 468 0 0 1993
COLUMBIA SPRING VALLEY 150 0 0 0 150 0 150 0 0 1993
GREENSBORO WENDOVER 1,491 0 0 0 1,491 0 1,491 0 0 1993
GREENVILLE 949 0 0 0 949 0 949 0 0 1993
JACKSONVILLE BAYMEADOWS 2,318 0 0 0 2,318 0 2,318 0 0 1993
MEMPHIS GERMANTOWN 4,505 0 0 0 4,505 0 4,505 0 0 1993
MIAMI 2,000 0 0 0 2,000 0 2,000 0 0 1993
ORLANDO UNIVERSITY 2,880 0 0 0 2,880 0 2,880 0 0 1993
RICHMOND SOUTH 1,860 0 0 0 1,860 0 1,860 0 0 1993
ST. PETERSBURG 1,000 0 0 0 1,000 0 1,000 0 0 1993
SAN ANTONIO 1,430 0 0 0 1,430 0 1,430 0 0 1993
TULSA NORTH 1,000 0 0 0 1,000 0 1,000 0 0 1993
-------- -------- ------- ------ -------- -------- -------- ------- --------
TOTAL UNIMPROVED LAND 30,281 0 0 0 30,281 0 30,281 0 0
-------- -------- ------- ------ -------- -------- -------- ------- --------
$129,008 $429,344 $43,367 $ 0 $129,008 $472,711 $601,719 $62,885 $233,530
======== ======== ======= ====== ======== ======== ======== ======= ========
TOTAL
</TABLE>
52
<PAGE>
KOGER EQUITY, INC. AND SUBSIDIARIES Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(in thousands)
- ----------------------------------
(a) At December 31, 1995, the outstanding balance of mortgages payable was
$233,530. In addition, the Company has loans outstanding with variable
interest rates which are collateralized by mortgages on pools of
buildings. At December 31, 1995, the outstanding balance of these
loans was $22,276.
(b) Aggregate cost basis for Federal income tax purposes was $636,106 at
December 31, 1995.
(c) Reconciliation of total real estate carrying value for the years ended
December 31, 1995, 1994 and 1993 is as follows:
1995 1994 1993
---- ---- ----
Balance at beginning of year $614,249 $606,806 $311,286
Acquisitions 353 384 289,097
Improvements 14,371 11,083 6,423
Transfer from other assets 16
Provision for loss - land parcels (970) (996)
Sale of unimproved land (4,761) (3,028)
Sale of operating real estate (21,539)
------- -------- --------
Balance at close of year $601,719 $614,249 $606,806
Acquisitions of land and buildings during 1993 were made pursuant to
the Merger. For 1995, the provision for loss was based upon a contract
for the sale of the Miami land parcel held for sale for which the
contract price ranges between $2,000 and $2,970 contingent upon the
square footage of office buildings which can be constructed on this
land parcel. For 1994, the provision for loss was based upon contracts
for the sale of two land parcels. The sale of one of these land
parcels was consummated during 1994, while the contract for the sale
of the other land parcel expired.
(d) Reconciliation of accumulated depreciation for the years ended
December 31, 1995, 1994 and 1993 is as follows:
1995 1994 1993
---- ---- ----
Balance at beginning of year $46,106 $30,706 $22,300
Depreciation expense:
Operating real estate 17,363 15,202 8,403
Furniture and equipment 267 198 3
Sale of operating real estate (851)
------- -------- --------
Balance at close of year $62,885 $46,106 $30,706
======= ======= =======
53
<PAGE>
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 "1996 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:
S. D. Stoneburner..... Chairman of the Board
Irvin H. Davis........ Vice Chairman of the Board and Chief Executive Officer
Victor A. Hughes, Jr.. President, Chief Financial Officer and Director
James L. Stephens .... Treasurer and Chief Accounting Officer
James C. Teagle....... Senior Vice President of Operations
W. Lawrence Jenkins... Vice President of Administration and Corporate Secretary
Mr. Stoneburner, age 77, was elected as Chairman of the Board of Directors
of the Company on December 20, 1991, and has been a Director of the Company
since June, 1988.
Mr. Davis, age 66, was elected Vice Chairman of the Board of Directors
of the Company on August 22, 1995. He has been the Chief Executive Officer of
the Company since December 11, 1991. He held the position of President of the
Company from December 11, 1991 to August 22, 1995. He has served as a Director
of the Company since August 15, 1991. He previously held the positions of
Executive Vice President and Chief Executive Officer pro tempore of the Company
from August 15, 1991 to December 10, 1991. Mr. Davis held the positions of
Execuitve Vice President and Chief Executive Officer pro tempore of Koger
Advisors, Inc. ("KA") from August 15, 1991 to December 31, 1991. Prior to that
Mr. Davis served the Company as Senior Vice President/Asset Manager from August
1, 1991 to August 14, 1991 and as Senior Vice President from June, 1988 to
January 31, 1991. He held the position of Senior Vice President of KA from June,
1988 to Janaury 31, 1991. Mr. Davis was a Senior Vice President of Koger
Management, Inc. from February 1, 1991 to August 1, 1991.
Mr. Hughes, age 60, was elected President of the Company on August 22,
1995. He has been the Chief Financial Officer of the Company since March 31,
1991. He held the position of Senior Vice President of the Company from May 20,
1991 through August 21, 1995, and 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 29, 1993. Mr. Hughes was the Senior Vice
President and Chief Financial Officer of KA from May 20, 1991 to December 31,
1991. He was the Assistant Secretary of KA from March 11, 1991 to December 31,
1991. Mr. Hughes held the position of Vice President of the Company from April
1, 1990 to May 19, 1991. He held the position of Vice President of KA from April
1, 1990 to May 19, 1991.
54
<PAGE>
Mr. Stephens, age 38, has been the Treasurer and 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. Mr. Stephens was the
Treasurer, Chief Accouting Officer, and Assistant Secretary of KA from May 20,
1991 to December 31, 1991. Mr. Stephens was the Accounting Manager of KA from
December, 1990 to May 19, 1991.
Mr. Teagle, age 54, has been a Senior Vice President of the Company since
May 10, 1994. He had previously held the position of Vice President of the
Company from December 21, 1993 to May 10, 1994. Mr. Teagle was a Vice President
of KPI from July, 1973 to December 21, 1993.
Mr. Jenkins, age 52, has been the Corporate Secretary of the Company since
December 21, 1993, and Vice President of the Company since May 10, 1994. Mr.
Jenkins was a Vice President and Corporate Secretary of KPI from August, 1990 to
December 21, 1993.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers to 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 common stock of the
Company. Executive officers and directors are required by the SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file.
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, 1995, the
Company's executive officers and directors complied with all Section 16(a)
filing requirements, except for a Form 4 report for the month of December 1995
reflecting a stock purchase for the account of Mr. Hiley pursuant to an
automatic deduction from his director's retainer.
Item 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by
reference to the section headed "Executive Compensation" in the 1996 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 1996 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 1996 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 Conditions 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 1996 Proxy Statement
for information regarding certain relationships and related transactions which
information is incorporated herein by reference.
55
<PAGE>
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 50 through 53 in this Form.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the
quarter ended December 31, 1995.
(c) The following exhibits are filed as part of this
report:
Exhibit
Number Description
- ------- ------------------------------------------------------------
2 Agreement and Plan of Merger, dated as of December 21, 1993
between the Company and Koger Properties, Inc. Incorporated
by reference to Exhibit 2 of Form 10-K filed by the
Registrant for the period ended December 31, 1993 (File No.
1-9997). 3(a) Amended and Restated Articles of Incorporation
of Koger Equity, Inc. Incorporated by reference to Exhibit
IV of the 1993 Proxy Statement filed by the Registrant on
June 30, 1993 (File No.1-9997).
3(b) Koger Equity, Inc. By Laws, as Amended and Restated on
August 21, 1995. Incorporated by reference to Exhibit 3 of
the Form 8-K, dated August 21, 1995 filed by the Registrant
on August 31, 1995 (File No. 1-9997).
4(a) Common Stock Certificate of Koger Equity, Inc. See Exhibit
4(a) to Registration Statement on Form S-11 (Registration
No. 33-22890) which Exhibit is herein incorporated by
reference.
4(b)(1)(A) KogerEquity, 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"). See Exhibit 1 to a Registration Statement on
Form 8-A, dated October 3, 1990, (File No. 1-9997) which
Exhibit is herein incorporated by reference.
4(b)(1)(B) FirstAmendment 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. See
Exhibit 5 to an Amendment on Form 8-A/A to a Registration
Statement on Form 8-A, dated December 21, 1993, (File No.
1-9997) which Exhibit is herein incorporated by reference.
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).
56
<PAGE>
Exhibit
Number Description
- ----------- ------------------------------------------------------------
4(c)(1) Warrant Agreement, dated as of December 21, 1993, between
the Company and First Union (the "Warrant Agreement"). See
Exhibit 2 to an Amendment on Form 8-A/A to a Registration
Statement on Form 8-A, dated December 21, 1993, (File No.
1-9997) which Exhibit is herein incorporated by reference.
4(c)(2) Form of a Common Share Purchase Warrant issued pursuant to
the Warrant Agreement. See Exhibit 1 to an Amendment on Form
8-A/A to a Registration Statement on Form 8-A (File No.
1-9997) dated December 21, 1993, which Exhibit is herein
incorporated by reference.
10(a)(1) Purchase Agreement among Koger Equity, Inc., Koger
Properties, Inc., and The Koger Company. Incorporated by
reference to Exhibit 10(a) of Form 10- K filed by the
Registrant for the period ended December 31, 1988 (File No.
1-9997).
10(a)(2) First Amendment to Purchase Agreement. Incorporated by
reference to Exhibit 10(a)(2) of Form 10-Q filed by the
Registrant for the quarter ended June 30, 1989 (File No.
1-9997).
10(b)(1) Credit Agreement among Koger Equity, Inc., Koger Properties,
Inc. and The Koger Company. Incorporated by reference to
Exhibit 10(b) of Form 10-K filed by the Registrant for the
period ended December 31, 1988 (File No. 1- 9997).
10(b)(2) First Amendment to Credit Agreement. Incorporated by
reference to Exhibit 10(b)(2) of Form 10-Q filed by the
Registrant for the quarter ended June 30, 1989 (File No.
1-9997).
10(c) Advisory Agreement between Koger Equity, Inc. and Koger
Advisors, Inc. Incorporated by reference to Exhibit 10(c) of
Form 10-K filed by the Registrant for the period ended
December 31, 1988 (File No. 1-9997).
10(d)(1) Management Agreement between Koger Equity, Inc. and Koger
Management, Inc. Incorporated by reference to Exhibit 10(d)
of Form 10-K filed by the Registrant for the period ended
December 31, 1988 (File No. 1-9997).
10(d)(2) Amended Schedule "A" to Management Agreement between Koger
Management, Inc. and Koger Equity, Inc. Incorporated by
reference to Exhibit 10(d)(2) of Form 10-Q filed by the
Registrant for the quarter ended September 30, 1989 (File
No. 1-9997).
10(e)(1)(A) Koger Equity, Inc. 1988 Stock Option Plan. Incorporated by
reference to Exhibit 10(e)(2) of Form 10-Q filed by the
Registrant for the quarter ended September 30, 1989 (File
No. 1-9997).
10(e)(1)(B) 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(e)(2)(A) Koger Equity, Inc.
1988 Stock Option Agreement. Incorporated by reference to
Exhibit 10(e)(2) of Form 10-Q filed by the Registrant for
the quarter ended March 31, 1989 (File No. 1-9997).
10(e)(2)(B) Form of Stock Option Agreement pursuant to Koger Equity,
Inc. 1988 Stock Option Plan, as amended and restated.
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(e)(3)(A) Koger Equity, Inc. 1993 Stock Option Plan. See Exhibit II to
Registrant's Proxy Statement dated June 30, 1993 (File No.
1-9997) which is incorporated herein by reference.
10(e)(3)(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).
57
<PAGE>
Exhibit
Number Description
- ---------- -------------------------------------------
10(g) Addendum Agreement between Koger Equity, Inc. and Koger
Properties, Inc. Incorporated by reference to Exhibit 10(g)
of Form 10-K filed by the Registrant for the period ended
December 31, 1988 (File No. 1-9997).
10(h) Agreement between KPI and the Company, dated September 30,
1990. Incorporated by reference to Exhibit 10(h) of Form
10-Q filed by the Registrant for the quarter ended September
30, 1990 (File No. 1-9997).
10(i) Land Credit Agreement dated December 31, 1990 between Koger
Properties, Inc. and the Company. Incorporated by reference
to Exhibit 10(i) of Form 10-K filed by the Registrant for
the year ended December 31, 1990 (File No. 1-9997).
10(j) Second Amendment To Credit Agreement dated as of March 30,
1990. Incorporated by reference to Exhibit 10(j) of Form
10-K filed by the Registrant for the year ended December 31,
1990 (File No. 1-9997).
10(k) Amended and Restated Credit Agreement dated December 31,
1990. Incorporated by reference to Exhibit 10(k) of Form
10-K filed by the Registrant for the year ended December 31,
1990 (File No. 1-9997).
10(m) Loan Agreement with Barnett Bank of Jacksonville, N.A. dated
April 5, 1991. Incorporated by reference to Exhibit 10(m) of
Form 10-Q filed by the Registrant for the quarter ended June
30, 1991 (File No. 1-9997).
10(m)(1) Commitment letter to Koger Equity, Inc., from Barnett Bank
of Jacksonville, N.A., to modify and extend term loans,
dated September 22, 1993. Incorporated by reference to
Exhibit 10(m)(1) of Form 10-Q filed by the Registrant for
the quarter ended September 30, 1993 (File No. 1-9997).
10(m)(2) Consolidated Renewal Promissory Note between Barnett Bank of
Jacksonville, N.A., and Koger Equity, Inc., dated December
21, 1993. Incorporated by reference to Exhibit 10(m)(2) of
Form 10-K filed by the Registrant for the period ended
December 31, 1993 (File No. 1-9997).
10(n)(1) Commitment Letter to Koger Equity, Inc. with First Union
National Bank of Florida dated April 19, 1991. Incorporated
by reference to Exhibit 10(n)(1) of Form 10-Q filed by the
Registrant for the quarter ended June 30, 1991 (File No.
1-9997).
10(n)(2) Amendment to commitment Letter to Koger Equity, Inc. with
First Union National Bank of Florida dated June 5, 1991.
Incorporated by reference to Exhibit 10(n)(2) of Form 10-Q
filed by the Registrant for the quarter ended June 30, 1991
(File No. 1-9997).
10(n)(3) Commitment Letter to Koger Equity of South Carolina, Inc.
with First Union National Bank of Florida dated May 31,
1991. Incorporated by reference to Exhibit 10(n)(3) of Form
10-Q filed by the Registrant for the quarter ended June 30,
1991 (File No. 1-9997).
10(n)(4) Commitment Letter to Koger Equity of South Carolina, Inc.
with First Union National Bank of Florida dated May 31,
1991. Incorporated by reference to Exhibit 10(n)(4) of Form
10-Q filed by the Registrant for the quarter ended June 30,
1991 (File No. 1-9997).
10(n)(5) Commitment Letter to Koger Equity of North Carolina, Inc.
with First Union National Bank of Florida dated May 31,
1991. Incorporated by reference to Exhibit 10(n)(5) of Form
10-Q filed by the Registrant for the quarter ended June 30,
1991 (File No. 1-9997).
10(n)(6) Amendment to Commitment Letter to Koger Equity of North
Carolina, Inc. with First Union National Bank of Florida
dated June 5, 1991. Incorporated by reference to Exhibit
10(n)(6) of Form 10-Q filed by the Registrant for the
quarter ended June 30, 1991 (File No. 1-9997). 58
<PAGE>
Exhibit
Number Description
- ------------- ------------------------------------------------------------
10(n)(7) Loan Extension Agreement and Modification of Mortgage
between Koger Equity, Inc., and First Union National Bank of
Florida. Incorporated by reference to Exhibit 10(n)(7) of
Form 10-Q filed by the Registrant for the quarter ended
September 30, 1993 (File No. 1-9997).
10(n)(8) Loan Extension Agreement and Modification of Mortgage and
Assignment of Leases (and Consent of Guarantor) between
Koger Equity of South Carolina, Inc., Koger Equity, Inc.,
and First Union National Bank of Florida. Incorporated by
reference to Exhibit 10(n)(8) of Form 10-Q filed by the
Registrant for the quarter ended September 30, 1993 (File
No. 1-9997).
10(n)(9) Loan Extension Agreement and Modification of Deed of Trust
(and Consent of Guarantor) between Koger Equity of North
Carolina, Inc., Koger Equity, Inc., and First Union National
Bank of Florida. Incorporated by reference to Exhibit
10(n)(9) of Form 10-Q filed by the Registrant for the
quarter ended September 30, 1993 (File No. 1-9997).
10(n)(10) Commitment letter to Koger Equity, Inc., with First Union
National Bank of Florida to restructure loan, dated October
19, 1993. Incorporated by reference to Exhibit 10(n)(10) of
Form 10-Q filed by the Registrant for the quarter ended
September 30, 1993 (File No. 1-9997). 10(n)(11) Consolidated
Note between First Union National Bank of Florida and Koger
Equity, Inc., dated December 21, 1993. Incorporated by
reference to Exhibit 10(n)(11) of Form 10-K filed by the
Registrant for the period ended December 31, 1993 (File No.
1-9997).
10(o) 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(p) 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(q)(1) Amended and Restated Management Agreement, dated August 3,
1993, between The Koger Partnership, Ltd. and Koger
Properties, Inc. Incorporated by reference to Exhibit
10(q)(1) of Form 10-K filed by the Registrant for the period
ended December 31, 1993 (File No. 1-9997).
10(q)(2) First Amendment to Amended and Restated Management
Agreement, dated December 21, 1993, between The Koger
Partnership, Ltd. and Koger Properties, Inc. Incorporated by
reference to Exhibit 10(q)(2) of Form 10-K filed by the
Registrant for the period ended December 31, 1993 (File No.
1- 9997).
10(q)(3) TKP Co-Management Agreement, dated as of December 21, 1993,
between The Koger Partnership, Ltd. and the Company and
Southeast Properties Holding Corporation, Inc. Incorporated
by reference to Exhibit 10(q)(3) of Form 10-K filed by the
Registrant for the period ended December 31, 1993 (File No.
1-9997).
10(q)(4) Delegation of Duties Under TKP Co-Management Agreement,
dated as of December 21, 1993, between the Company and its
wholly owned subsidiary, Koger Real Estate Services, Inc.
Incorporated by reference to Exhibit 10(q)(4) of Form 10-K
filed by the Registrant for the period ended December 31,
1993 (File No. 1-9997).
10(r)(1) Incentive Fee Agreement, dated August 3, 1993, between The
Koger Partnership, Ltd. and Koger Properties, Inc.
Incorporated by reference to Exhibit 10(r)(1) of Form 10-K
filed by the Registrant for the period ended December 31,
1993 (File No. 1-9997).
59
<PAGE>
Exhibit
Number Description
- ------------- ------------------------------------------------------------
10(r)(2) First Amendment to Incentive Fee Agreement, dated December
21, 1993, between The Koger Partnership, Ltd, and Koger
Properties, Inc. Incorporated by reference to Exhibit
10(r)(2) of Form 10-K filed by the Registrant for the period
ended December 31, 1993 (File No. 1-9997).
10(s) Limited Recourse Guaranty and Security Agreement, dated
August 3, 1993, by The Koger Partnership, Ltd. and Koger
Properties, Inc. in favor of the holders of the Basic
Restructured Mortgage Notes of The Koger Partnership, Ltd.
Incorporated by reference to Exhibit 10(s) of Form 10-K
filed by the Registrant for the period ended December 31,
1993 (File No. 1-9997).
10(t) Option and Purchase and Sale Agreement, dated August 3,
1993, between The Koger Partnership, Ltd. and Koger
Properties, Inc. Incorporated by reference to Exhibit 10(t)
of Form 10-K filed by the Registrant for the period ended
December 31, 1993 (File No. 1-9997).
10(u) Subordination Agreement, dated as of August 3, 1993,
executed and delivered by Koger Properties, Inc.
Incorporated by reference to Exhibit 10(u) of Form 10-K
filed by the Registrant for the period ended December 31,
1993 (File No. 1-9997).
10(v) 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(w) 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(x) Form of Indemnification Agreement between Koger Equity, Inc.
and its Directors and certain of its officers.*
11 Earnings Per Share Computations.*
21 Subsidiaries of the Registrant.*
23 Independent Auditors' Consent.*
27 Financial Data Schedule.*
28(a) Order Granting Debtor's Motion to Use Cash Collateral
entered in RE Chapter 11 of Koger Properties, Inc. (Case No.
91-12294-8P1) by United States Bankruptcy Court, Middle
District of Florida, Tampa Division. Incorporated by
reference to Exhibit 28 of Form 10-K filed by the Registrant
for the year ended December 31, 1991 (File No. 1-9997).
28(b) First Amended and Restated Disclosure Statement, dated as of
March 1, 1993, pursuant to Section 1125 of the Bankruptcy
Code to accompany First Amended and Restated Plan of
Reorganization dated as of March 1, 1993, for Koger
Properties, Inc., proposed jointly by Koger Properties, Inc.
and Koger Equity, Inc., including all exhibits thereto.
Incorporated by reference to Exhibit 29 of Form 10-K filed
by the Registrant for the year ended December 31, 1992 (File
No. 1-9997).
*Filed with this Report.
60
<PAGE>
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. President and
Chief Financial Officer
Date: March 12, 1996
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
IRVIN H. DAVIS Vice Chairman, Chief Executive March 12, 1996
(Irvin H. Davis) Officer and Director
VICTOR A. HUGHES, JR. President, Chief Financial March 12, 1996
(Victor A. Hughes, Jr.) Officer and Director
JAMES L. STEPHENS Treasurer and Chief Accounting March 12, 1996
(James L. Stephens) Officer
S. D. STONEBURNER Chairman of the Board of March 12, 1996
(S. D. Stoneburner) Directors and Director
D. PIKE ALOIAN Director March 12, 1996
(D. Pike Aloian)
BENJAMIN C. BISHOP Director March 12, 1996
(Benjamin C. Bishop)
DAVID B. HILEY Director March 12, 1996
(David B. Hiley)
G. CHRISTIAN LANTZSCH Director March 12, 1996
(G. Christian Lantzsch)
GEORGE F. STAUDTER Director March 12, 1996
(George F. Staudter)
61
EXHIBIT 11
EARNINGS PER SHARE COMPUTATIONS
(In Thousands Except Per Share Data)
1995 1994 1993
EARNING PER COMMON AND DILUTIVE
COMMON EQUIVALENT SHARE:
Net Income $28,990 $ 4,215 $ 2,452
Shares:
Weighted average number of common
shares outstanding 17,751 17,599 13,352
Weighted average number of additional
shares issuable for common stock
equivalents (a) 260 120
Adjusted common shares 18,011 17,719 13,352
EARNINGS PER SHARE $ 1.61 $ .24 $ .18
EARNINGS PER COMMON SHARE ASSUMING
FULL DILUTION:
Net Income $28,990 4,215 $ 2,452
Shares:
Weighted average number of common
shares outstanding 17,751 17,599 13,352
Additional shares issuable for all
dilutive common stock equivalents (a) 340 120
Shares as adjusted for all dilutants 18,091 17,719 13,352
EARNINGS PER SHARE $ 1.60 $ .24 $ .18
(a) Shares issuable were derived using the "Treasury Stock Method" for all
dilutive common stock equivalents.
62
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Name of State of
Subsidiaries* Incorporation
- ----------------------------------------------------------- -------------
Koger Real Estate Services, Inc. Florida
Southeast Properties Holding Corporation, Inc. Florida
* These subsidiaries are wholly owned by Koger Equity, Inc.
63
<PAGE>
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 and Registration Statement No.
33-54617 of Koger Equity, Inc. on Form S-3 of our report dated March 4, 1996,
appearing in this Annual Report on Form 10-K of Koger Equity, Inc. for the year
ended December 31, 1995.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
March 13, 1996
64
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Company does not file a classified balance sheet, therefore these not
provided. 5-02(9), 5-02(21)
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> $25,650
<SECURITIES> 0
<RECEIVABLES> 5,651
<ALLOWANCES> 391
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 601,719
<DEPRECIATION> 62,885
<TOTAL-ASSETS> 579,382
<CURRENT-LIABILITIES> 0
<BONDS> 254,909
0
0
<COMMON> 205
<OTHER-SE> 310,492
<TOTAL-LIABILITY-AND-EQUITY> 579,382
<SALES> 0
<TOTAL-REVENUES> 127,698
<CGS> 0
<TOTAL-COSTS> 45,181
<OTHER-EXPENSES> 29,327
<LOSS-PROVISION> 172
<INTEREST-EXPENSE> 23,708
<INCOME-PRETAX> 29,310
<INCOME-TAX> 320
<INCOME-CONTINUING> 28,990
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $28,990
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.60
</TABLE>
FORM OF
INDEMNIFICATION AGREEMENT EXHIBIT 10(x)
THIS INDEMNIFICATION AGREEMENT is made this 14th day of
November, 1995, by and between KOGER EQUITY, INC., a Florida
corporation (the "Company"), and _____________ (the "Indemnitee").
Preliminary Statements
A. The Company desires to retain the services of the Indemnitee as a
director and/or officer of the Company.
B. Section 607.0850 of the Florida Business Corporation Act (the "Florida
Statutes") provides a nonexclusive statutory basis for the indemnification of
directors and officers of a Florida corporation and authorizes agreements
between the Company and its officers and directors with respect to
indemnification of such individuals.
C. Highly competent persons are becoming more reluctant to serve or to
continue to serve publicly-held corporations as directors or in other capacities
unless they are provided with adequate protection through insurance and/or
adequate indemnification against claims and actions against them arising out of
their service to and activities on behalf of such corporations.
D. It is reasonable, prudent, necessary and in the best interest of the
Company's shareholders for the Company contractually to obligate itself to
indemnify its directors and executive officers so that they will serve or
continue to serve the Company free from undue concern that they will not be so
indemnified, and the Indemnitee is willing to serve, continue to serve and to
take on additional service for or on behalf of the Company on the condition that
he be so indemnified.
Agreement
In order to induce the Indemnitee to serve or to continue to serve as a
director and/or officer of the Company and/or a subsidiary of the Company, the
Company has determined and agreed to enter into this agreement with the
Indemnitee, and the Company and the Indemnitee agree as follows:
1. Indemnification of Indemnitee. The Company hereby agrees to hold
harmless and indemnify the Indemnitee to the fullest extent authorized or
permitted by the provisions of the Florida Statutes or by any amendment thereof,
or other statutory provision authorizing or permitting such indemnification
adopted after the date hereof which has the effect of broadening (but not
narrowing) the scope of indemnification provided under the Florida Statutes as
it exists as of the date hereof.
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2. Additional Indemnification. In addition to any other indemnification to
which the Indemnitee may be entitled pursuant to the Florida Statutes, the
Company's Articles of Incorporation (the "Articles") or Bylaws (the "Bylaws"),
or otherwise, and subject only to the limitations set forth in Section 3 hereof,
the Company hereby further agrees to hold harmless and indemnify the Indemnitee
against any and all costs and expenses (including trial, appellate and other
attorneys' fees), judgments, fines, penalties and amounts paid in settlement,
actually and reasonably incurred by the Indemnitee in connection with any
threatened, pending or completed claim, action, suit or proceeding, whether
civil, criminal, administrative or investigative (including an action by or in
the right of the Company or any corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise or by or in the right of any other
person) to which the Indemnitee is, was or at any time becomes a party, or is
threatened to be made a party, by reason of the fact that the Indemnitee is, was
or at any time becomes a director, officer, employee or agent of the Company, or
is or was serving or at any time serves at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise. Notwithstanding any
other provision of this Agreement, the Company shall pay and reimburse all
expenses incurred by Indemnitee in connection with his appearance as a witness
or other participation in a proceeding at a time when he is not a named
defendant or respondent in the proceeding.
3. Limitations on Additional Indemnification. No indemnification pursuant
to Section 2 hereof shall be paid by the Company if a judgment (after exhaustion
of all appeals) or other final adjudication determines that the Indemnitee's
actions, or omissions to act, were material to the cause of action so adjudi-
cated and constitute:
(a) a violation of criminal law, unless the Indemnitee had reasonable
cause to believe his conduct was lawful or had no reasonable cause to
believe his conduct was unlawful;
(b) a transaction from which the Indemnitee received an improper
personal benefit within the meaning of Section 607.0831(l)(b)(2) and
607.0831(3) of the Florida Business Corporation Act;
(c) a circumstance under which the liability provisions of Section
607.0834 of the Florida Business Corporation Act are applicable; or
(d) willful misconduct or conscious disregard for the best interests
of the Company in a proceeding by or in the right of
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the Company to procure a judgment in its favor or in a proceeding
by or in the right of a shareholder of the Company.
4. Disbursement/Repayment of Expenses. In addition to the prompt payment of
any indemnification to which the Indemnitee may be entitled, upon the demand of
the Indemnitee, the Company shall promptly (and in any event within 5 business
days after written demand therefor) advance to or reimburse the Indemnitee for
all reasonable expenses (including, without limitation, trial, appellate and
other attorney's fees, court costs, judgments, fines, penalties, amounts paid in
settlement and other payments) that the Indemnitee may incur in responding to,
investigating, defending, settling or appealing any threatened, pending or
completed claim, action, suit or proceeding for which it reasonably appears that
the Indemnitee may be entitled to indemnification from the Company, either
pursuant to this Agreement, the Florida Statutes, the Articles, the Bylaws or
otherwise. The Indemnitee agrees to reimburse the Company for all such expenses
in the event, and only to the extent, that it shall be ultimately determined
that the Indemnitee is not entitled to be indemnified by the Company for such
expenses under the provisions of Section 3 of this Agreement. Such undertaking
to reimburse the Company for amounts advanced if it is ultimately determined
that the Indemnitee is not entitled to be indemnified by the Company is an
unlimited general, unsecured and interest-free obligation of the Indemnitee.
5. Indemnification Procedures.
(a) Payment/Determination of Indemnification. Upon any request from
the Indemnitee for indemnification from the Company, whether pursuant to
this Agreement, the Florida Statutes, the Articles, the Bylaws or
otherwise, the Company shall promptly pay the full amount of such requested
indemnification. If the Company's Board of Directors (the "Board")
reasonably believes that all or any portion of such indemnification
pursuant to this Agreement is prohibited by Section 3 hereof, the Company
shall in any event promptly pay the amount of such indemnification, if any,
that may reasonably then be paid and shall promptly make or cause to be
made a determination (the "Determination") of whether the payment of the
balance is limited by Section 3 hereof. Such Determination shall be made in
the following order of preference.
(i) by the Board by majority vote or consent of a quorum
consisting of directors who are not, at the time of the Determination,
named parties to such action, suit or proceeding ("Disinterested
Directors"); or
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(ii) if such a quorum of Disinterested Directors cannot be
obtained, by majority vote or consent of a committee duly designated
by the Board (in which designation all directors, whether or not
Disinterested Directors, may participate) consisting solely of two or
more Disinterested Directors; or
(iii) if such a committee cannot be established, by the opinion
of the outside legal counsel regularly employed by the Company (with
respect to which such counsel shall exercise due care in preparing
such opinion and shall have no further duty or liability with respect
thereto); or
(iv) if such legal opinion cannot be obtained, by vote or consent
of the holders of a majority of the Company's capital stock present
and entitled to vote at a meeting called for such purpose (a
"Shareholder Determination").
(b) Presumptions and Effect of Certain Proceedings. In making a
Determination with respect to entitlement to indemnification hereunder, the
person or persons or entity making the Determination shall presume that
Indemnitee is entitled to indemnification under this Agreement and the
Company shall have the burden of proof to overcome that presumption in
connection with the making by any person, persons or entity of any
Determination contrary to that presumption. The termination of any claim,
action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, be
determinative of or create a presumption that the Indemnitee is not
entitled to indemnification or reimbursement of expenses hereunder or
otherwise.
(c) Reliance as Safe Harbor. For purposes of any Determination
hereunder, the Indemnitee shall be deemed to have acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was
unlawful, if his action is based on (i) the records or books of account of
the Company or another enterprise, including financial statements, (ii)
information supplied to him by the officers of the Company or another
enterprise in the course of their duties, (iii) the advice of legal counsel
for the Company or another enterprise, or (iv) information or records given
or reports made to the Company or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected
with reasonable care by the Company or another enterprise. The term
"another enterprise" as used in this Section 5(c) shall mean any other
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corporation or any partnership, joint venture, trust, employee benefit plan
or other enterprise of which the Indemnitee is or was serving at the
request of the Company as a director, officer, partner, trustee, employee
or agent. The provisions of this Section 5(c) shall not be deemed to be
exclusive or to limit in any way the other circumstances in which the
Indemnitee may be deemed to have met the applicable standard of conduct set
forth herein.
(d) Success on Merits or Otherwise. Notwithstanding any other
provision of this Agreement, to the extent that the Indemnitee has been
successful on the merits or otherwise in defense of any action, suit or
proceeding described herein, or in defense of any claim, issue or matter
therein, he shall be indemnified against all costs and expenses (including
trial, appellate and other attorneys' fees) actually and reasonably
incurred by him in connection with the investigation, defense, settlement
or appeal thereof. For purposes of this Section 5(d), the term "successful
on the merits or otherwise" shall include, but not be limited to, (i) any
termination, withdrawal, or dismissal (with or without prejudice) of any
claim, action, suit or proceeding against the Indemnitee without any
express finding of liability or guilt against him, (ii) the expiration of
90 days after the making of any claim or threat of an action, suit or
proceeding without the institution of the same and without any promise or
payment made to induce a settlement, or (iii) the settlement of any
action, suit or proceeding pursuant to which the Indemnitee pays less than
$50,000.
(e) Partial Indemnification or Reimbursement. If the Indemnitee is
entitled under any provision of this Agreement to indemnification and/or
reimbursement by the Company for some or a portion of the costs and
expenses (including trial, appellate and other attorneys' fees), judgments,
fines, penalties or amounts paid in settlement by the Indemnitee in
connection with the investigation, defense, settlement or appeal of any
action specified herein, but not, however, for the total amount thereof,
the Company shall nevertheless indemnify and/or reimburse the Indemnitee
for the portion thereof to which the Indemnitee is entitled. The party or
parties making the Determination shall determine the portion (if less than
all) of such claims, damages, expenses (including trial, appellate and
other attorneys' fees), judgments, fines or amount paid in settlement for
which the Indemnitee is entitled to indemnification and/or reimbursement
under this Agreement.
(f) Costs. All costs of making any Determination required by this
Section 5 shall be borne solely by the Company, including, but not limited
to, the costs of legal counsel, proxy solicitations and judicial
determinations. The Company shall also be
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solely responsible for paying (i) all reasonable expenses incurred by the
Indemnitee to enforce this Agreement including trial, appellate and other
attorneys' fees and costs; and (ii) all costs of defending any suits or
proceedings challenging payments to the Indemnitee under this Agreement
including trial, appellate and other attorneys' fees and costs.
(g) Timing of the Determination. The Company shall use its best
efforts to make the Determination contemplated by this Section 5 promptly,
but in all events within the following time periods:
(i) if the Determination is to be made by the Board or a
committee thereof, such Determination shall be made not later than 30
days after a written request for a Determination (a "Request") is
delivered to the Company by the Indemnitee;
(ii) if the Determination is to be made by the Company's outside
legal counsel, such Determination shall be made not later than 30 days
after a Request is delivered to the Company by the Indemnitee; and
(iii) if the Determination is to be made by the Company's
shareholders, such Determination shall be made not later than 90 days
after a Request is delivered to the Company by the Indemnitee.
The failure to make a Determination within the above-specified
time period shall constitute a Determination that full indemnification
is not limited or prohibited by Section 3 hereof.
(h) Shareholder Vote on Determination. In connection with each meeting
at which a Shareholder Determination will be made, the Company shall
solicit proxies that expressly include a proposal to indemnify or reimburse
the Indemnitee. Subject to the fiduciary duties of its members under
applicable law, the Board will not recommend against indemnification or
reimbursement in any proxy statement relating to the proposal to indemnify
or reimburse the Indemnitee.
(i) Right of Indemnitee to Appeal on Adverse Determination by Board or
Committee. If a Determination is made by the Board or a committee thereof
that all or any portion of a request for indemnification pursuant to this
Agreement is prohibited by Section 3 hereof, then upon the written request
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<PAGE>
of the Indemnitee, the Company shall cause a new Determination to be made
by the Company's shareholders at the next regular or special meeting of
shareholders. Such Determination by the Company's shareholders shall be
binding and conclusive for all purposes of this Agreement, but shall not
preclude the Indemnitee from seeking court-ordered indemnification or
reimbursement pursuant to any provision of the Florida Statutes or
otherwise.
(j) Right of Indemnitee to Select Forum for Determination. If at any
time subsequent to the date of this Agreement, "Continuing Directors" (as
defined below) do not constitute a majority of the members of the Board, or
there is otherwise a change in control of the Company (as contemplated by
Item 403(c) of Securities and Exchange Commission Regulation S-K), then
upon the request of the Indemnitee, the Company shall cause the
Determination required by this Section 5 to be made by special legal
counsel designated by the Indemnitee and approved by the Board (which
approval shall not be unreasonably withheld), which counsel shall be deemed
to satisfy the requirements of Section 5(a) (iii) hereof. If none of the
legal counsel selected by the Indemnitee are willing and/or able to make
the Determination, then the Company shall cause the Determination to be
made by a majority vote or consent of a Board committee consisting solely
of Continuing Directors. For purposes of this Agreement, a "Continuing
Director" means either a member of the Board at the date of this Agreement
or a person nominated to serve as a member of the Board by a majority of
the then Continuing Directors.
(k) Access by the Indemnitee to Determination.The Company shall afford
to the Indemnitee and his representatives ample opportunity to present
evidence of the facts upon which the Indemnitee relies for indemnification
or reimbursement together with other information relating to any requested
Determination. The Company shall also afford the Indemnitee the reasonable
opportunity to include such evidence and information in any Company proxy
statement relating to a Shareholder Determination.
6. Contribution.
(a) If the indemnification provided in Sections 1 and 2 hereof is
unavailable and may not be paid to the Indemnitee for any reason other than
those set forth in Section 3 hereof, then in respect of any threatened,
pending or completed action, suit or proceeding in which the Company is
jointly liable with the Indemnitee (or would be if joined in such action,
suit or proceeding), the Company shall contribute to the amount of
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<PAGE>
expenses, judgments, fines and settlements paid or payable by the
Indemnitee in such proportion as is appropriate to reflect (i) the relative
benefits received by the Company on the one hand and the Indemnitee on the
other hand from the transaction from which such action, suit or proceeding
arose, and (ii) the relative fault of the Company on the one hand and the
Indemnitee on the other in connection with the events that resulted in such
expenses, judgments, fines or settlement amounts, as well as any other
relevant equitable considerations. The relative fault of the Company on the
one hand and of the Indemnitee on the other shall be determined by
reference to, among other things, the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent the
circumstances resulting in such expenses, judgments, fines or settlement
amounts. The Company agrees that it would not be just and equitable if
contribution pursuant to this Section 6 were determined by pro rata
allocation or any other method of allocation that does not take into
account the foregoing equitable considerations.
(b) The determination as to the amount of the contribution, if any,
shall be made by:
(i) a court of competent jurisdiction upon the application of
both the Indemnitee and the Company (if an action or suit had been
brought in, and final determination had been rendered by, such court);
(ii) the Board by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding; or
(iii) regular outside counsel of the Company, if a quorum is not
obtainable for purpose of (ii) above, or, even if obtainable, a quorum
of Disinterested Directors so directs.
7. Notification and Defense of Claim. Promptly after receipt of notice of
the commencement of any action, suit or proceeding, the Indemnitee will, if a
claim in respect thereof is to be made against the Company under this Agreement,
notify the Company of the commencement thereof, but the omission to so notify
the Company will not relieve the Company from any liability that it may have to
the Indemnitee otherwise than under this Agreement, with respect to any such
action, suit or proceeding as to which the Indemnitee so notifies the Company;
(a) The Company will be entitled to participate therein at its own
expense;
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(b) Except as otherwise provided below, the Company may assume the
defense thereof, with counsel satisfactory to the Indemnitee. After notice
from the Company to the Indemnitee of its election to assume the defense,
the Company will not be liable to the Indemnitee under this Agreement for
any legal or other expenses subsequently incurred by the Indemnitee in
connection with the defense thereof, other than reasonable costs of
investigation or as otherwise provided below. The Indemnitee shall have the
right to employ his counsel in such action, suit or proceeding, but the
fees and expense of such counsel incurred after notice from the Company of
its assumption of the defense thereof shall be at the expense of the
Indemnitee unless: (i) the employment of counsel by the Indemnitee has been
authorized by the Company; (ii) the Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
the Indemnitee in the conduct of the defense of such action; or (iii) the
Company shall not in fact have employed counsel to assume the defense of
such action, in each of which cases the fees and expenses of the
Indemnitee's counsel shall be at the expense of the Company. The Company
shall not be entitled to assume the defense of any action, suit or
proceeding brought by or on behalf of the Company or as to which the
Indemnitee shall have come to the conclusion provided for in (ii) above;
and
(c) The Company shall not be liable to indemnify the Indemnitee under
this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall not settle any
action or claim in any manner that would impose any penalty or limitation
on the Indemnitee without the Indemnitee's written consent. Neither the
Company nor the Indemnitee will unreasonably withhold its or his consent to
any proposed settlement.
8. Liability Insurance. So long as the Indemnitee shall continue to serve
as an officer or director of the Company (or shall continue at the request of
the Company to serve as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise), the Company
will use its best efforts to purchase and maintain in effect for the benefit of
the Indemnitee one or more valid, binding and enforceable policy or policies of
directors and officers liability insurance providing coverage within limits
determined by the Board in its sole discretion. Notwithstanding the foregoing,
the Company shall not be required to purchase or maintain such insurance policy
if, in the sole discretion of the Board (i) such insurance is not reasonably
available; (ii) the premium cost for such insurance is disproportionate to the
amount of the coverage; or (iii) the coverage provided by such insurance is so
limited by exclusions that there is insufficient benefit from such insurance.
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9. Disclosure of Payments. Except as expressly required by federal
securities laws or federal law, neither party shall disclose any payments under
this Agreement unless prior approval of the other party is obtained. Any
payments to the Indemnitee that must be disclosed shall, unless otherwise
required by law, be described only in Company proxy or information statements
relating to special and/or annual meetings of the Company's shareholders, and
the Company shall afford the Indemnitee the reasonable opportunity to review all
such disclosures and, if requested, to explain in such statement any mitigating
circumstances regarding the events reported.
10. Covenant Not to Sue; Limitation of Actions; Release of Claims. No legal
action shall be brought and no cause of action shall be asserted by or on behalf
of the Company (or any of its subsidiaries) against the Indemnitee, his spouse,
heirs, executors, personal representatives or administrators after the
expiration of 2 years from the date the Indemnitee ceases (for any reason) to
serve as either an officer or director of the Company, and any claim or cause of
action of the Company (or any of its subsidiaries) shall be extinguished and
deemed released unless asserted by the filing of a legal action within such
2-year period.
11. Continuation of Obligations. All agreements and obligations of the
Company contained herein shall continue during the period the Indemnitee is a
director, officer, employee or agent of the Company (or is serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise), and shall
continue thereafter for so long as the Indemnitee shall be subject to any
possible claim or threatened, pending or completed action, suit or proceeding,
whether civil, criminal or investigative, by reason of the fact that the
Indemnitee was an officer or director of the Company or serving in any other
capacity referred to herein, whether or not the Indemnitee has ceased to serve
in any such capacity due to his resignation, removal by vote of directors or
shareholders, termination, death, disability or otherwise.
12. Enforcement.
(a) The Company expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on it hereby
in order to induce the Indemnitee to serve or to continue to serve as
a director and/or officer of the Company and/or a subsidiary of the
Company, and acknowledges that the Indemnitee is relying upon this
Agreement in agreeing to serve or to continue to serve in such
capacity.
(b) In the event the Indemnitee is required to bring any action
to enforce his rights or to collect monies due under this Agreement
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and is successful in such action, the Company shall reimburse the
Indemnitee for all of the Indemnitee's reasonable fees and expenses in
bringing and pursuing such action, including reasonable attorneys'
fees (including trial, appellate and other attorneys' fees), court
costs and other related expenses.
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13. Miscellaneous.
(a) Cooperation and Intent. The Company shall cooperate in good
faith with the Indemnitee and use its best efforts to ensure that the
Indemnitee is indemnified and/or reimbursed for expenses as described
herein to the fullest extent permitted by law.
(b) Nonexclusivity; Subrogation; Entire Agreement. The rights of
indemnification and reimbursement provided in this Agreement shall be
in addition to any rights to which the Indemnitee may otherwise be
entitled by the Florida Statutes, the Articles, the Bylaws, a vote of
the Company's shareholders, or otherwise. In the event of any payment
under this Agreement, the Company shall be subrogated to the extent of
such payment to all of the rights of recovery of the Indemnitee, who
shall execute all papers required and take all action necessary to
secure such rights, including the execution of such documents as are
necessary to enable the Company to bring suit to enforce such rights.
The Company shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable hereunder if and to the
extent that the Indemnitee has otherwise actually received such
payment under any insurance policy, contract, agreement or otherwise.
This Agreement constitutes the entire agreement between the Company
and the Indemnitee with respect to the subject matter hereof and
supersedes all prior agreements, understandings, negotiations and
discussions, both written and oral, between the parties hereto with
respect to such subject matter (the "Prior Agreements"); provided,
however, that if this Agreement shall ever be held void or
unenforceable for any reasons whatsoever, and is not reformed pursuant
to Section 13(d) hereof, then (i) this Agreement shall not be deemed
to have superseded any Prior Agreements; (ii) all of such Prior
Agreements shall be deemed to be in full force and effect
notwithstanding the execution of this Agreement; and (iii) the
Indemnitee shall be entitled to maximum indemnification benefits
provided under the Florida Statutes, the Articles, the Bylaws, a vote
of Company's shareholders, or any Prior Agreements.
(c) Effective Date. The provisions of this Agreement shall cover
claims, actions, suits, and proceedings whether now pending or
hereafter commenced and shall be retroactive to cover acts or
omissions or alleged omissions that heretofore have taken place.
(d) Severability; Reformation. Each of the provisions of this
Agreement is a separate and distinct agreement and independent of the
others, so that if any provision hereof shall be held to be invalid or
unenforceable in whole or in part for any reason, such invalidity or
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unenforceability shall not affect the validity or enforceability of
the other provisions hereof. In the event that any or all portion(s)
of this Agreement is ever held void or unenforceable by a court of
competent jurisdiction, then the parties hereto hereby expressly
authorize such court to modify any and all provision(s) held void or
unenforceable to the extent, and only to the extent, necessary to
render it or them valid and enforceable.
(e) Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to
have been duly given if (i) delivered by hand and receipted for by the
party to whom said notice or other communication is directed, or (ii)
mailed by certified or registered mail, postage prepaid, on the third
business day after the date on which it is so mailed:
If to the Indemnitee:
________________________
________________________
________________________
If to the Company:
Koger Equity, Inc.
3986 Boulevard Center, Suite 101
Jacksonville, FL 32207
or to such other address as may have been furnished by either party
to the other.
(f) Amendments or Modifications. This Agreement may not be
amended or modified in any way except by a written instrument executed
by all of the parties.
(g) Governing Law. This Agreement shall be governed by,
interpreted and enforced in accordance with the laws of the State of
Florida, without giving effect to the principles of conflicts of law
thereof.
(h) Successors and Assigns. This Agreement shall be binding upon
the Indemnitee and the Company, its successors and assigns, and shall
inure to the benefit of the Indemnitee, his heirs, personal
representatives and assigns and to the benefit of the Company, its
successors and assigns.
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(i) Identical Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall for all purposes be deemed
to be an original but all of which together shall constitute one and
the same agreement. Only one such counterpart signed by the party
against whom enforceability is sought needs to be produced to evidence
the existence of this Agreement.
(j) Headings. The headings of the sections of this Agreement are
inserted for convenience only and shall not be deemed to constitute
part of this Agreement or to affect the construction thereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
THE COMPANY:
KOGER EQUITY, INC.
By:_______________________________
Its President
THE INDEMNITEE:
__________________________________
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