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