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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December
31, 1995 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ____________
Commission File Number 1-9997 KOGER
EQUITY, INC.
(Exact name of Registrant as specified in its Charter)
FLORIDA
(State or other jurisdiction of incorporation or organization)
59-2898045
(I.R.S. Employer Identification No.)
3986 Boulevard Center Drive, Suite 101
Jacksonville, Florida 32207
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (904) 398-3403
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
Common Stock, Par Value $.01 American Stock Exchange
Warrants to Purchase Shares of Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant on February 28, 1996 was approximately $205,066,000.
The number of shares of registrant's Common Stock outstanding on February 28,
1996 was 17,831,834.
Documents Incorporated by Reference
The Company's Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Act of 1934 for the 1996 Annual Meeting of Shareholders is
incorporated by reference in Part III of this report.
TABLE OF CONTENTS
ITEM NO. DESCRIPTION PAGE NO.
PART I
1. BUSINESS...................................................... 1
2. PROPERTIES.................................................... 4
3. LEGAL PROCEEDINGS............................................. 10
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 11
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 11
6. SELECTED FINANCIAL DATA....................................... 12
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 13
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 29
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 54
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 54
11. EXECUTIVE COMPENSATION........................................ 55
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................................ 55
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 55
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K...................................... 56
SIGNATURES.................................................... 61
PART I
Item 1. BUSINESS
General
Koger Equity, Inc., a Florida corporation ("KE"), is currently engaged
in the ownership, operation and management of commercial suburban office
buildings for the production of income. As of December 31, 1995, KE owned 216
buildings located in 13 metropolitan areas throughout the southeastern and
southwestern United States. KE acquired a total of 126 buildings from Koger
Properties, Inc., a Florida corporation ("KPI"), or its subsidiaries through
1990. In connection with a Chapter 11 bankruptcy case filed on behalf of KPI,
KPI merged with and into KE on December 21, 1993 (the "Merger"). As a result of
the Merger, KE acquired an additional 93 buildings, three of which were sold
during 1995 (as described below). Since the Merger, KE has been totally self-
administered and self-managed.
As part of the Merger, KPI transferred to Southeast Properties Holding
Corporation, a Florida corporation and a wholly-owned subsidiary of KE
("Southeast"), all of KPI's debt and equity interests in The Koger Partnership,
Ltd., a Florida limited partnership ("TKPL"), which had also been the subject of
a Chapter 11 bankruptcy case. At the time of the Merger, TKPL owned 92 suburban
office buildings located in five metropolitan areas. Following the Merger, such
buildings were managed by KE, as delegee of Southeast, pursuant to a management
agreement between TKPL and Southeast. On July 31, 1995, TKPL sold its 92
buildings and parcels of related land to Koala Miami Realty Holding, Inc., Koala
Norfolk Realty Holding, Inc., Koala Raleigh Realty Holding, Inc., Koala Richmond
Realty Holding, Inc., and Koala Tampa Realty Holding, Inc. (collectively,
"Koala"), all of which are wholly owned by a co-mingled pension trust for which
Morgan Guaranty Trust Company of New York is the trustee and J.P. Morgan
Investment Management Inc. is the investment manager. Simultaneously with the
sale by TKPL of its properties, KE sold to certain Koala entities three
buildings and related parcels of land for an aggregate purchase price of $25.26
million. Koala continues to hold an option to purchase from KE two additional
parcels of land in Miami, Florida.
In addition to managing its own properties, KE, through certain related
entities, provides property management services to third parties. In conjunction
with Koger Real Estate Services, Inc., a Florida corporation and a wholly-owned
subsidiary of KE ("KRES"), KE manages 20 office buildings owned by Centoff
Realty Company, Inc. ("Centoff"), a subsidiary of Morgan Guaranty Trust Company
of New York. More significantly, Koger Realty Services, Inc., a Delaware
corporation and an entity in which KE has a significant economic interest
("KRSI"), manages 95 buildings owned by Koala. KRSI was incorporated during 1995
to, among other things, provide leasing and property management services to
owners of commercial office buildings. KE has purchased all of the preferred
stock of KRSI, which preferred stock represents at least 95% of the economic
value of KRSI. Such preferred stock is non-voting but is convertible into voting
common stock. Accordingly, KE has consolidated KRSI in the 1995 financial
statements (KE, Southeast, KRES and KRSI are hereafter referred to as the
"Company").
During 1995 (prior to the sale by TKPL of its properties), KE acquired
$32.3 million in aggregate principal amount (subject to provisions permitting
prepayment at a discount) of promissory notes issued by TKPL to third parties
(the "TKPL Notes") for an aggregate purchase price of approximately $18.2
million. To permit the acquisition of the TKPL Notes, KE obtained
1
certain modifications to the loan agreements governing KE's indebtedness. During
the quarter ended September 30, 1995, TKPL retired the TKPL Notes. KE recorded
approximately $13.1 million of interest revenue on the TKPL Notes in 1995.
KE operates in a manner so as to qualify as a real estate investment
trust (a "REIT") under the provisions of the Internal Revenue Code of 1986, as
amended (the "Code" ). As a REIT, KE will not, with certain limited exceptions,
be taxed at the corporate level on taxable income distributed to its
shareholders on a current basis. KE distributes at least 95 percent of its
annual REIT taxable income (which term is used herein as defined and modified in
the Code) to its shareholders. To qualify as a REIT, a corporation must meet
certain substantive tests: (a) at least 95 percent of its gross income must be
derived from certain passive and real estate sources; (b) at least 75 percent of
its gross income must be derived from certain real estate sources; (c) less than
30 percent of its gross income must be derived from the sale or other
disposition of certain items, including certain real property held for less than
four years; (d) at the close of each calendar quarter, it must meet certain
tests designed to ensure that its assets consist principally (at least 75
percent by value) of real estate assets, cash and cash equivalents and that its
holdings of securities are adequately diversified; (e) each year, it must
distribute at least 95 percent of its REIT taxable income; and (f) at no time
during the second half of any calendar year may KE be "closely held" (i.e. have
more than 50 percent in value of its outstanding stock owned, directly,
indirectly or constructively, by not more than five individuals). The
constructive ownership rules, among other things, treat the shareholders of a
corporation as owning proportionately any stock in another corporation owned by
the first corporation. Management fee revenue does not qualify as real estate or
passive income for purposes of determining whether KE has met the REIT
requirements that at least 95 percent of KE's gross income be derived from
certain real estate and passive sources and that at least 75 percent of its
gross income be derived from certain real estate sources. Accordingly, in the
event KE derives income in excess of five percent from management and other
"non-real estate" and "non-passive" activities, KE would no longer qualify as a
REIT for federal income tax purposes and would be required to pay federal income
taxes as a business corporation. KRSI is not a qualified REIT subsidiary under
the Code and, therefore, is taxed as a regular corporation and will be subject
to federal income tax on its taxable income. Amounts distributed by KRSI to KE
in respect of the preferred stock of KRSI owned by KE will generally be treated
as dividends and, accordingly, will be included in KE's passive income.
No single tenant occupies 10 percent or more of the net rentable area
of the Company's buildings or contributes 10 percent or more of the Company's
rental revenues, except for a major governmental tenant (the State of Florida,
when all of its departments and agencies which lease space in the Company's
buildings are combined) which accounted for an aggregate of 11.9 percent of the
Company's total net rentable square feet leased and 14.1 percent of the
Company's total annualized rental revenues as of December 31, 1995. Some of the
Company's principal tenants are the State of Florida, the United States of
America, Blue Cross and Blue Shield of Florida, Aetna Life Insurance Company,
Lumbermen Mutual Casualty Company, the State of Texas, Travelers Insurance
Company, General Motors Acceptance Corporation, USAA Federal Savings Bank, and
BellSouth Communications, Inc. Governmental tenants (including the State of
Florida and the United States of America), which account for 22.7 percent of the
Company's leased space, may be subject to budget reductions in times of
recession and governmental austerity. There can be no assurance that
governmental appropriations for rents may not be reduced. Additionally, certain
private-sector tenants which have contributed to the Company's rent stream may
reduce their current demands, or curtail their future need, for additional
office space.
2
Competition
The Company competes in the leasing of office space with a considerable
number of other realty concerns, both local and national, some of which have
greater resources than the Company. Through its ownership and management of
suburban office parks, the Company seeks to attract tenants by offering office
space convenient to residential areas and away from the congestion and attendant
traffic problems of the downtown business districts. In recent years both local
and national concerns have built competing office parks and single buildings in
suburban areas in which the Company's centers are located. In addition, the
Company competes for tenants with large high-rise office buildings generally
located in the downtown business districts of these metropolitan areas. Although
competition from other lessors of office space varies from city to city, the
Company has been able to attain and maintain what it considers satisfactory
occupancy levels at satisfactory rental rates. However, higher vacancy levels in
metropolitan areas in which the Company's properties are located have had an
adverse affect on the Company's ability to increase its rental rates while
maintaining satisfactory occupancy levels.
Investment Policies
Based on its improved financial structure and results as of the end of
1995, the Company believes that it is in a position to capitalize on some of its
strengths, such as the value of its franchise in the suburban office park market
and its operating systems, development expertise and unimproved land available
for development. Therefore, the Company has committed to a plan to enhance
shareholder value by refinancing indebtedness and increasing growth. The Company
intends to refinance or restructure its existing indebtedness to eliminate
certain restrictive covenants which limit the Company's ability to grow through
development and acquisitions. In addition, the Company intends to establish a
new bank revolving credit facility which would be available to finance growth
opportunities. The plan also contemplates the possible use by the Company of its
existing inventory of 228 acres of land held for development, most of which is
partially or wholly improved with streets and/or utilities and is located in
various metropolitan areas where the Company currently operates suburban office
parks. The Company may also acquire existing office buildings or land for
development in other markets in the Southeast and Southwest that the Company
considers favorable.
The investment policies of KE may be changed by KE's directors at any
time without notice to, or a vote of, security holders. Although, KE has no
current policy which limits the percentage of its assets which may be invested
in any one type of investment or the geographic areas in which KE may acquire
properties, KE intends to continue to operate so as to qualify for tax treatment
as a REIT. Although it has no current plans to do so, KE may in the future
invest in other types of office buildings, apartment buildings, shopping
centers, and other properties. KE also may invest in the securities (including
mortgages) of companies primarily engaged in real estate activities; however, it
does not intend to become an investment company regulated under the Investment
Company Act of 1940.
For the year ended December 31, 1995, all of the Company's rental
revenues were derived from the buildings purchased from KPI or buildings
acquired pursuant to the Merger. The Company's 1995 interest revenues were
derived from temporary cash investments and KE's investment in the TKPL Notes.
3
Employees
In connection with its current real estate operations and property
management agreements, the Company has a combined financial, administrative,
leasing, and center maintenance staff of 270 employees. A resident general
manager is responsible for the leasing and operations of all buildings in a
center or city. The Company has approximately 114 employees who perform
maintenance activities.
Item 2. PROPERTIES
General
As of December 31, 1995, the Company owned 216 office buildings located
in 18 office centers (each a "Koger Center") in the 13 metropolitan areas of
Jacksonville, Orlando, St. Petersburg, and Tallahassee, Florida; Atlanta,
Georgia; Charlotte and Greensboro, North Carolina; Tulsa, Oklahoma; Greenville,
South Carolina; Memphis, Tennessee; and Austin, El Paso, and San Antonio, Texas.
The Koger Centers have been developed in campus-like settings with extensive
landscaping and ample tenant parking. The buildings are generally one to
five-story structures of contemporary design and constructed of masonry,
concrete and steel, with facings of brick, concrete and glass. The Koger Centers
are generally located with easy access, via expressways, to the central business
district and to shopping and residential areas in the respective communities.
The properties are well maintained and adequately covered by insurance.
Leases on the Company's buildings vary between net leases (under which
the tenant pays some operating expenses, such as utilities, insurance and
repairs) and gross leases (under which the Company pays all such items). Most
leases are on a gross basis and are for terms generally ranging from three to
five years. In some instances, such as when a tenant rents the entire building,
leases are for terms of up to 20 years. As of December 31, 1995, the Company's
buildings were on average 91 percent leased and the average annual rent per net
rentable square foot leased was $13.72. The buildings are occupied by numerous
tenants, many of whom lease relatively small amounts of space, conducting a
broad range of commercial activities.
New leases and renewals of existing leases are negotiated at the
current market rate at the date of execution. The Company endeavors to include
escalation provisions in all of its gross leases. As of December 31, 1995,
approximately 34 percent of the Company's annualized gross rental revenues was
derived from existing leases containing rental escalation provisions based upon
changes in the Consumer Price Index (some of which contain maximum rates of
increase); approximately 59 percent of such revenues was derived from leases
containing escalation provisions based upon real estate tax and operating
expense increases; and approximately 7 percent of such revenues was derived from
leases without escalation provisions. Some of the Company's leases contain
options which allow the lessee to renew for varying periods, generally at the
same rental rate and subject, in most instances, to Consumer Price Index
escalation provisions.
4
The Company owns approximately 228 acres of unimproved land (224 acres
of which are suitable for development) located in the metropolitan areas of
Birmingham, Alabama; Jacksonville, Miami, Orlando and St. Petersburg, Florida;
Atlanta, Georgia; Charlotte and Greensboro, North Carolina; Tulsa, Oklahoma;
Columbia and Greenville, South Carolina; Memphis, Tennessee; Austin and San
Antonio, Texas; and Richmond, Virginia. Each of these parcels of land has been
partially or wholly developed with streets and/or utilities.
Title to Property
No examinations of title to real properties have been made for the
purpose of this report. However, the Company obtained title insurance on each
property acquired by it prior to the Merger at the time of such acquisition.
Although no additional title insurance was obtained in respect of the properties
acquired from KPI pursuant to the Merger, the Company succeeded to KPI's
existing title policies on such properties. The Company believes that all of the
real estate described herein as owned by the Company is owned in fee simple
without encumbrances, except for the leases and mortgages described in this
report and other encumbrances which do not substantially interfere with the use
of the properties or have a material adverse effect upon their values.
5
Property Location and Other Information
The following table sets forth information relating to the properties
owned by the Company as of December 31, 1995.
Average Land
Number Age of Net Improved Unimproved
of Buildings Rentable with Bldgs. Land
Koger Center Buildings (in Years)(1) Sq. Ft. (In Acres) (In Acres)
- ------------ --------- ------------- -------- ----------- ----------
Atlanta Chamblee 22 15 947,920 76.2 2.5
Atlanta Gwinnett 31.0
Austin 12 15 370,860 29.6 1.8
Birmingham 30.0
Charlotte Carmel 1 4 109,600 7.6 27.0
Charlotte East 11 15 468,820 39.9 3.9
Columbia Spring Valley 1.0
El Paso 14 23 251,930 19.6
Greensboro South 13 13 610,470 46.0
Greensboro Wendover 18.5
Greenville 8 13 290,560 24.7 4.5
Jacksonville Baymeadows 4 5 467,860 34.6 13.3
Jacksonville Central 32 23 677,680 48.4 0.4
Memphis Germantown 3 7 258,400 18.4 16.2
Miami 8.1
Orlando Central 22 24 565,220 46.0
Orlando University 2 7 159,600 11.6 15.5
Richmond South 23.0
San Antonio 26 18 788,670 63.5 7.2
St. Petersburg 15 15 519,320 64.4 11.0
Tallahassee Apalachee Pkwy 14 19 408,500 33.7
Tallahassee Capital Circle 4 6 300,700 23.3
Tulsa North 2 14 103,520 9.1 13.4
Tulsa South 11 17 372,760 26.9
--- --------- ----- -----
Total 216 7,672,390 623.5 228.3
=== ========= ===== =====
Average 15
==
(1) The age of each building was weighted by the net rentable square feet for
such building to determine the weighted average age of (a) the buildings in
each Koger Center and (b) all buildings owned by the Company.
6
Percent Leased and Average Rental Rates
The following table sets forth, with respect to each Koger Center, the
number of buildings, number of leases, net rentable square feet, percent leased,
and the average annual rent per net rentable square foot leased, in each case as
of December 31, 1995.
Net Average
Number Number Rentable Annual
of of Square Percent Rent Per
Koger Center Buildings Leases Feet Leased (1) Square Foot(2)
- ------------ --------- ------ -------- ---------- --------------
Atlanta Chamblee 22 182 947,920 96% $14.42
Austin 12 187 370,860 88% 15.43
Charlotte Carmel 1 19 109,600 100% 15.78
Charlotte East 11 194 468,820 71% 12.88
El Paso 14 197 251,930 98% 13.21
Greensboro South 13 182 610,470 90% 13.34
Greenville 8 157 290,560 94% 13.79
Jacksonville Baymeadows 4 32 467,860 99% 15.62
Jacksonville Central 32 264 677,680 93% 11.60
Memphis Germantown 3 55 258,400 99% 16.82
Orlando Central 22 186 565,220 86% 13.95
Orlando University 2 47 159,600 90% 15.99
San Antonio 26 314 788,670 84% 11.49
St. Petersburg 15 184 519,320 93% 12.58
Tallahassee Apalachee Pkwy 14 99 408,500 94% 15.69
Tallahassee Capital Circle 4 10 300,700 100% 17.66
Tulsa North 2 33 103,520 79% 10.75
Tulsa South 11 165 372,760 85% 9.75
--- ----- ---------
Total 216 2,507 7,672,390
=== ===== =========
91% $13.72
=== ======
(1) The percent leased rates have been calculated by dividing total net
rentable square feet leased in a building by net rentable square feet
in such building, which excludes public or common areas.
(2) Rental rates are computed by dividing (a) total annualized rents for a
Koger Center as of December 31, 1995 by (b) the net rentable square
feet applicable to such total annualized rents.
7
Lease Expirations on the Company's Properties
The following schedule sets forth with respect to all of the Company's
office buildings (a) the number of leases which will expire in calendar years
1996 through 2004, (b) the total net rentable area in square feet covered by
such leases, (c) the percentage of total net rentable square feet leased
represented by such leases, (d) the average annual rent per square foot for such
leases, (e) the current annual rental represented by such leases, and (f) the
percentage of gross annual rental contributed by such leases. This information
is based on the buildings owned by the Company on December 31, 1995 and on the
terms of leases in effect as of December 31, 1995, on the basis of then existing
base rentals, and without regard to the exercise of options to renew.
Furthermore, the information below does not reflect that some leases have
provisions for early termination for various reasons, including, in the case of
government entities, lack of budget appropriations. Leases were renewed on
approximately 67 percent and 61 percent of the Company's net rentable square
feet which were scheduled to expire during 1995 and 1994, respectively.
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
- ------ --------- ----------- --------------- --------------- --------------- ---------------
1996 1,214 1,955,695 28.0% $13.61 $26,616,124 27.8%
1997 531 1,359,859 19.5% 13.84 18,824,227 19.6%
1998 467 1,719,488 24.6% 13.49 23,189,091 24.2%
1999 141 685,496 9.8% 12.99 8,905,517 9.3%
2000 103 608,067 8.7% 14.98 9,109,422 9.5%
2001 24 232,027 3.3% 14.73 3,418,096 3.6%
2002 6 121,161 1.8% 13.63 1,651,822 1.7%
2003 10 74,023 1.1% 13.76 1,018,762 1.1%
2004 2 22,794 0.3% 10.71 244,168 0.3%
Other 9 203,306 2.9% 13.88 2,822,674 2.9%
----- --------- ------ ----------- ------
Total 2,507 6,981,916 100.0% $13.72 $95,799,903 100.0%
===== ========= ====== ====== =========== ======
Building Improvements, Tenant Improvements and Deferred Tenant Costs on the
Company's Properties
The following table sets forth certain information with respect to the
building improvements made, and tenant improvement costs and deferred tenant
costs (leasing commissions and tenant relocation costs) incurred, by the Company
during the three years ended December 31, 1995. The information set forth below
is not necessarily indicative of future expenditures for these items.
Number Building Improvements Tenant Improvements Deferred Tenant Costs
of Office Per Net Sq. Per Net Sq. Per Net Sq.
Year Buildings Total Ft. Owned Total Ft. Owned Total Ft. Owned
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
(1) Excludes the 93 buildings acquired on December 21, 1993 pursuant to the
Merger.
(2) Excludes the three buildings sold on July 31, 1995.
8
Fixed Rate Indebtedness on the Company's Properties
The following table sets forth with respect to each Koger Center the
principal amount (dollars in thousands) of, and the weighted average interest
rate on, the indebtedness of the Company having a fixed interest rate and
encumbering the Company's properties in such Koger Center as of December 31,
1995.
Weighted
Mortgage Average
Loan Interest
Koger Center Balance Rate
- ------------ -------- --------
Atlanta Chamblee $ 27,542 7.79%
Austin 1,642 9.46%
Charlotte Carmel 8,912 6.62%
Charlotte East 13,972 8.15%
El Paso 1,072 9.00%
Greensboro South 21,953 8.73%
Greenville 7,029 6.40%
Jacksonville Baymeadows 34,293 6.62%
Jacksonville Central 12,699 6.71%
Memphis Germantown 13,244 8.57%
Orlando Central 17,001 8.06%
Orlando University 9,426 6.53%
San Antonio 5,571 7.78%
St. Petersburg 19,723 7.82%
Tallahassee Apalachee Pkwy 14,325 6.54%
Tallahassee Capital Circle 20,710 8.04%
Tulsa South 4,416 9.98%
-------- -----
Total $233,530 7.81%
For additional information concerning certain interest rate reset
provisions and reset dates for these loans see Note 5, "Mortgages and Loans
Payable" of the Notes to Consolidated Financial Statements.
9
Indebtedness with Variable Interest Rates
In addition to the fixed rate indebtedness described above, as of
December 31, 1995, the Company had outstanding an aggregate principal amount of
$22,276,000 of indebtedness having variable interest rates and encumbering the
Company's properties. This indebtedness bears interest at rates based upon the
applicable lender's prime rate. The following table sets forth information with
respect to this indebtedness (dollars in thousands):
Approximate Approximate
Balance Weighted Avg. Maximum Average Wtg Avg Int
Year Ended at End Int Rate at Amount Amount Rate During
December 31 of Period End of Period Outstanding Outstanding the Period(1)
----------- --------- ------------- ----------- ----------- -------------
1995 $22,276 9.5% $ 58,352 $47,945 8.4%
1994 58,352 9.1% 59,028 58,718 7.9%
1993 58,861 6.6% 98,262 95,110 6.2%
(1) The approximate weighted average interest rates during the periods were
computed by dividing the interest costs for the year by the average
balance outstanding during the year.
As of December 31, 1995, $1,152,000 of this indebtedness matures in
December, 2000 and accrues interest at the prime rate of the applicable lender.
Accrued interest on this indebtedness must be paid no later than December, 1998
and monthly interest payments are required beginning in January, 1999. The
accrued interest on this indebtedness is forgiven if this indebtedness is paid
in full prior to December, 1996. This indebtedness is secured by properties that
also serve as collateral for certain fixed rate indebtedness assumed by the
Company from KPI pursuant to the Merger.
As of December 31, 1995, $21,124,000 of this indebtedness matures in
2001 and accrues interest at a rate equal to the sum of (a) the prime rate of
NationsBank of Florida, N.A. plus (b) one percent, with a minimum rate of 6.62
percent and a maximum rate of 10 percent. Interest only payments are due on a
monthly basis. This indebtedness is collateralized by properties with a carrying
value of approximately $24,772,000 as of December 31, 1995.
Management Agreement
Prior to the Merger, Koger Management, Inc., a Florida corporation and
a subsidiary of KPI ("KMI"), was responsible for the leasing, operation,
maintenance and management of each of the Company's properties. The Company paid
KMI a management fee equal to five percent of the gross rental receipts
collected on the property managed for the Company by KMI. For the year ended
December 31, 1993, the Company incurred management fee expense to KMI of
$2,184,000. With the Merger, the Company assumed all of the leasing and other
management responsibilities for its properties, including the properties
acquired in the Merger.
Item 3. LEGAL PROCEEDINGS
None.
10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
KE's common stock is listed on the American Stock Exchange. The high
and low closing sales prices for the periods indicated in the table below were:
Years
- -----------------------------------------------------------------------------------------------------------------------
1995 1994 1993
------------------ ------------------- ------------------
Quarter Ended High Low High Low High Low
- ------------- ------ ----- ------ ----- ------ -----
March 31 $ 7 7/8 $6 3/4 $ 8 1/2 $6 1/2 $9 3/8 $4 3/8
June 30 9 6 3/4 9 5/8 6 3/8 8 1/2 7 1/8
September 30 10 1/8 8 5/8 10 1/2 8 1/4 9 7 1/8
December 31 10 5/8 9 1/8 8 7/8 6 7/8 9 1/4 7 3/4
KE intends that any dividend paid in respect of its common stock during
the last quarter of each year will, if necessary, be adjusted to satisfy the
REIT qualification requirement that at least 95 percent of KE's REIT taxable
income for such taxable year be distributed. KE did not declare or pay any
dividends during the three years ended December 31, 1995.
The terms of KE's secured debt subject KE to certain dividend
limitations. However, such limitations will not restrict KE from paying the
dividends required during 1996 to maintain its qualification as a REIT. In the
event that KE ceases to qualify as a REIT, additional dividend limitations would
be imposed by the terms of such debt. In addition, two of KE's bank lenders have
required that, until KE has raised an additional $50 million of equity, the
following limitations on dividends will be applied: (a) in 1996 and 1997, a
maximum of $11 million, unless imposition of the limit would cause loss of REIT
status and (b) in 1998 and 1999, a maximum of $11 million, regardless of the
impact on REIT status.
On February 28, 1996, there were approximately 1,107 shareholders of
record and the closing price of KE's common stock on the American Stock Exchange
was $11.50.
11
Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements (as defined below) and the
notes thereto.
(In thousands except per share and property data)
-------------------------------------------------
Income Information 1995 1994 1993* 1992 1991
-------- --------- -------- -------- --------
Rental revenues and other rental services $ 95,443 $ 94,388 $ 46,108 $ 45,957 $ 45,393
Interest revenues 14,440 1,062 206 231 7,099
Total revenues 127,698 100,376 46,406 46,188 52,492
Property operating expenses 40,830 39,711 21,034 19,579 18,541
Mortgage and loan interest 23,708 25,872 11,471 11,530 13,065
Depreciation and amortization 19,110 16,728 8,958 8,089 7,484
Net income (loss) 28,990 4,215 2,452 933 (5,949)
Earnings (loss) per common share-primary 1.61 .24 .18 .07 (.43)
Dividends per share - - - - .77
Weighted average shares outstanding 18,011 17,719 13,352 13,220 13,750
Balance Sheet Information
Operating properties (before depreciation) $571,438 $578,237 $566,770 $311,286 $308,293
Undeveloped land 30,281 36,012 40,036 0 0
Loans to Koger Properties, Inc.
foreclosed in-substance 0 0 0 94,889 99,484
Total assets 579,382 613,806 615,089 396,841 399,241
Mortgages and loans payable 254,909 323,765 330,625 155,362 158,805
Shareholders' equity 310,697 280,601 275,450 235,514 234,581
Other Information
Funds from operations (1) $37,294 $ 23,884 $ 11,410 $ 11,004 $ 18,235
Income before interest, taxes,
depreciation and amortization $72,128 $ 47,042 $ 22,881 $ 20,552 $ 14,600
Number of buildings (at end of period) 216 219 219 126 126
Percent leased (at end of period) 91% 90% 88% 88% 91%
* On December 21, 1993, KPI was merged with and into the Company.
(1) The Company believes that Funds from Operations is one measure of the
performance of an equity REIT. Funds from Operations should not be
considered as an alternative to net income as an indication of the
Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is it necessarily indicative of sufficient cash flow to fund
all of the Company's needs. Funds from Operations is calculated as follows
(in thousands):
1995 1994 1993 1992 1991
------- -------- -------- --------- ---------
Net income (loss) $28,990 $ 4,215 $ 2,452 $ 933 $ (5,949)
Depreciation and amortization 19,110 16,728 8,958 8,089 7,484
Litigation settlement 176 1,902
Provision for loss on land held for sale 970 996
Loss on sale of assets 255 43
Gain on TKPL note to Southeast (11,288)
Gain on early retirement of debt (919)
Provision for losses on loans to KPI 1,982 16,700
------- ------- ------- ------- -------
Funds from Operations $37,294 $23,884 $11,410 $11,004 $18,235
======= ======= ======= ======= =======
The 1995 calculated Funds from Operations includes $13,066 of interest
revenue associated with the TKPL mortgage notes which KE acquired during
1995. These mortgage notes were retired by TKPL during 1995.
12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
selected financial data and the consolidated financial statements (the
"Consolidated Financial Statements") appearing elsewhere in this report.
Historical results and percentage relationships in the Consolidated Financial
Statements, including trends which might appear, should not be taken as
indicative of future operations or financial position. The Consolidated
Financial Statements include the accounts of KE, Southeast, KRES and KRSI
(collectively, the "Company").
GENERAL
The Company has prepared, and is responsible for, the accompanying
Consolidated Financial Statements and the related consolidated financial
information included in this report. Such Consolidated Financial Statements were
prepared in accordance with generally accepted accounting principles and include
amounts determined using management's best judgments and estimates of the
expected effects of events and transactions that are being accounted for
currently.
The Company's independent auditors, Deloitte & Touche LLP, have audited
the accompanying Consolidated Financial Statements. The objective of their
audit, conducted in accordance with generally accepted auditing standards, was
to express an opinion on the fairness of presentation, in all material respects,
of the Company's consolidated financial position, results of operations, and
cash flows in conformity with generally accepted accounting principles. They
evaluated the Company's internal control structure to the extent considered
necessary by them to determine the audit procedures required to support their
report on the consolidated financial statements and not to provide assurance on
such structure.
The Company maintains accounting and other control systems which
management believes provide reasonable assurance that the Company's assets are
safeguarded and that the Company's books and records reflect the authorized
transactions of the Company, although there are inherent limitations in any
internal control structure, as well as cost versus benefit considerations. The
Audit Committee of KE's Board of Directors, which is composed exclusively of
directors who are not officers of KE, directs matters relating to audit
functions, annually appoints the auditors subject to ratification of KE's Board
of Directors, reviews the auditors' independence, reviews the scope and results
of the annual audit, and periodically reviews the adequacy of the Company's
internal control structure.
RECENT DEVELOPMENTS
During 1995, KE acquired $32.3 million in aggregate principal amount
(subject to provisions permitting prepayment at a discount) of TKPL Notes for an
aggregate purchase price of approximately $18.2 million. To permit the
acquisition of the TKPL Notes, KE obtained certain modifications to the loan
agreements governing KE's indebtedness. During the quarter ended September 30,
1995, TKPL retired the TKPL Notes. KE recorded $13,066,000 of interest revenue
on the TKPL Notes in 1995.
13
In addition, during 1995, Southeast received approximately $17.7
million as a partial repayment of an unsecured note, issued by TKPL to KPI (and
subsequently transferred by KPI to Southeast in connection with the Merger) in
an original principal amount of approximately $31 million. This TKPL unsecured
note had been valued and carried on the books of the Company at $0. A gain of
$11,288,000 was recorded on this repayment, which was net of a write-off of
unamortized cost in excess of fair value of net assets acquired from KPI of
$6,412,000.
RESULTS OF OPERATIONS
Rental Revenues. For 1995, rental revenues increased $1,733,000 from
the year ended December 31, 1994. This increase resulted primarily from
increases in the percent leased rate and the average rental rate in the
Company's buildings, which increases were partially offset by the sale of three
buildings (containing 233,980 net rentable square feet) on July 31, 1995. During
1995, the Company earned $2,228,000 in rental revenues from these three
buildings through the date of sale. Rental revenues increased $47,205,000 from
the year ended December 31, 1993 to the year ended December 31, 1994. This
increase resulted primarily from the rental revenues of the 93 buildings
acquired by the Company pursuant to the Merger (approximately $46,560,000). As
of December 31, 1995, the Company's buildings were on average 91 percent leased.
As of December 31, 1994 and 1993, the buildings owned by the Company were on
average 90 and 88 percent leased, respectively.
Management Fee Revenues. Management fee revenues increased by $682,000
for 1995 as compared to 1994. This increase was due primarily to (a) an increase
in the fees earned under the management contract with Centoff, (b) an increase
in the fees earned under the management contract with Koala for the period
following Koala's purchase of TKPL's office buildings and (c) the management
fees earned for the management of the three buildings sold by the Company to
certain Koala entities on July 31, 1995. On May 5, 1994, third party management
contracts on two buildings terminated due to a change of ownership of such
buildings. Management fee revenue related to the management of such buildings
totalled approximately $106,000 during 1994. The Company earned $4,926,000 and
$92,000 of management fees from TKPL and third party management contracts, which
it assumed from KPI, during 1994 and 1993, respectively.
Interest Revenues. For 1995, interest revenues increased $13,378,000
from the year ended December 31, 1994. This increase was due to (i) the interest
revenue associated with the TKPL Notes ($13,066,000), (ii) the higher interest
rates earned on the Company's temporary cash investments and (iii) the higher
average balance of temporary cash investments. Interest revenues increased
$856,000 for 1994 as compared to 1993. This increase was due to (i) higher
interest rates earned on the Company's temporary cash investments and (ii) the
higher average balance of temporary cash investments.
Expenses. Property operating expenses include such charges as
utilities, real estate taxes, janitorial, maintenance, property insurance,
provision for uncollectible rents, and management cost. During 1995, property
operating expenses increased by $1,119,000 or 2.8 percent, compared to 1994,
primarily due to the increase in management cost for the Company's buildings.
This increase in management cost was primarily due to the accrued compensation
expense ($876,000) related to stock appreciation rights granted in conjunction
with stock options. During 1994, property operating expenses increased by
$18,677,000 or 89 percent, compared to 1993, primarily due to the operating
expenses of the 93 buildings acquired by the Company pursuant
14
to the Merger (approximately $18,722,000). For 1995, property operating expenses
as a percentage of total rental revenues were 42.8 percent. For 1994 and 1993,
property operating expenses as a percentage of total rental revenues were 42.1
percent and 45.6 percent, respectively. In 1994, the decrease in operating
expenses as a percentage of total rental revenues was primarily due to the fact
that the 93 buildings acquired by the Company pursuant to the Merger were
generally newer and, therefore, had lower operating expenses as a percentage of
total rental revenues than the 126 buildings which the Company owned prior to
the Merger.
Interest expense decreased by $2,164,000 during 1995 compared to 1994,
primarily due to (i) the reduction in the average balance of mortgages and loans
payable and (ii) the forgiveness of accrued interest on certain debt due to
early repayment ($1,362,000), which forgiveness was partially offset by yield
maintenance payments required due to early repayment of certain mortgages
($882,000). Interest expense increased by $14,401,000 during 1994 compared to
1993 primarily due to the interest expense on the restructured debt of KPI
assumed pursuant to the Merger. During 1995, 1994, and 1993, the weighted
average interest rate on the Company's variable rate loans was 8.4 percent, 7.9
percent, and 6.2 percent, respectively. The Company's average outstanding amount
under such loans during 1995, 1994, and 1993 was $47,945,000, $58,718,000, and
$95,110,000 respectively.
Depreciation expense has been calculated on the straight-line method
based upon the useful lives of the Company's depreciable assets, generally 3 to
40 years. For 1995, depreciation expense increased $2,230,000 or 14.5 percent
compared to the prior year, due to improvements made to the properties owned by
the Company during 1995 and 1994. For 1994, depreciation expense increased
$6,993,000 or 83 percent compared to the prior year, due to (i) the acquisition
by the Company of 93 buildings pursuant to the Merger and (ii) improvements made
to the properties owned by the Company during 1994 and 1993.
Amortization expense increased by $152,000 during 1995 compared to
1994, due to amounts incurred during 1995 for deferred tenant costs. For 1994,
amortization expense increased $777,000 compared to the prior year, due to
amounts incurred for deferred tenant costs and due to having a full year of
amortization of cost in excess of the fair value of assets acquired by the
Company in the Merger.
General and administrative expenses were 1.2 percent, 1.0 percent, and
0.6 percent of average invested assets for 1995, 1994 and 1993, respectively.
For 1995, general and administrative expenses increased $1,193,000 compared to
the prior year, primarily due to (i) increases in the accrual for compensation
expense related to stock appreciation rights granted in conjunction with stock
options ($423,000), (ii) the accrual for expense related to the Supplemental
Executive Retirement Plan adopted during 1995 ($184,000), and (iii) increases in
compensation costs. For 1994, general and administrative expenses increased
$3,955,000 compared to the prior year, primarily due to the increased general
and administrative functions performed by the Company following the Merger.
During 1994, the Company settled a pending class action proceeding (the
"Securities Action"). The Company recorded a provision of $1,685,000 relating to
the settlement of the Securities Action and incurred additional costs related to
such settlement which totalled $217,000.
15
During 1995, the Company recorded a provision for loss on land held for
sale which totalled $970,000. This provision for loss was based upon a contract
for the sale of a land parcel (approximately 8.1 acres) which is located
adjacent to an office center sold to Koala. Contingent upon the assurances which
can be received from the local government concerning the square footage of
office buildings which can be constructed on this land parcel, the contract
price ranges between $2,000,000 and $2,970,000. In 1994, the Company recorded a
provision for loss on land held for sale which totalled $996,000. This provision
for loss was based upon contracts for the sale of two land parcels
(approximately 53 acres). The sale of one of these land parcels (approximately
23 acres) was consummated during 1994, while the contract for the sale of the
other land parcel expired.
Management periodically reviews its investment in properties for
evidence of other than temporary impairments in value. Factors considered
consist of, but are not limited to, the following: current and projected
occupancy rates, market conditions in different geographic regions, and
management's plans with respect to its properties. Where management concludes
that expected cash flows will not enable the Company to recover the carrying
amount of its investments, losses are recorded and asset values are reduced. No
such impairments in value existed during 1995, 1994 or 1993.
Direct costs of management contracts increased by $874,000 for 1995,
compared to 1994, due to increased costs to provide services required under the
management contracts with Centoff and Koala. The primary cause of the increased
cost was the increase in the accrual for compensation expense related to stock
appreciation rights which have been granted to certain employees who provide
these management services. During 1994 and 1993, the Company incurred $3,649,000
and $56,000, respectively, in direct costs to generate management fees from TKPL
and third party management contracts which the Company assumed from KPI pursuant
to the Merger.
Real estate taxes and other costs related to the Company's unimproved
land decreased $155,000 during 1995, compared to 1994, due to (i) the sale of a
parcel of unimproved land (approximately 23 acres) during October, 1994
($77,000) and (ii) the sale of two parcels of unimproved land (approximately 44
acres) on July 31, 1995 ($22,000). During 1994 and 1993, real estate taxes and
other costs related to the unimproved land acquired pursuant to the Merger
totalled $667,000 and $24,000, respectively.
Operating Results. Net income totalled $28,990,000, $4,215,000 and
$2,452,000 for 1995, 1994 and 1993, respectively. For 1995, net income increased
$24,775,000 over the prior year due to (i) the interest revenue associated with
KE's investment in the TKPL Notes, (ii) the gain associated with the partial
repayment of a note owing from TKPL to Southeast, (iii) the reduction in
mortgage and loan interest, (iv) the increase in rental revenues, and (v) the
gain on early retirement of debt. For 1994, net income increased over the prior
year primarily due to the positive effect on the period of the acquisition by
the Company of the 93 buildings pursuant to the Merger, which was partially
offset by the costs related to the litigation settlement and the provision
recorded for the loss on two land parcels held for sale.
16
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. During the year ended December 31, 1995, the
Company generated approximately $43.9 million in net cash from operating
activities. The Company's primary internal sources of cash are (i) the
collection of rents from buildings owned by the Company and (ii) the receipt of
management fees paid to the Company in respect of properties managed on behalf
of Koala, TKPL, Centoff, and others. As a REIT, KE is required to pay out
annually, as dividends, 95 percent of its REIT taxable income (which, due to
non-cash charges, including provision for losses and depreciation, may be
substantially less than cash flow). In the past, KE has paid out dividends in
amounts at least equal to its REIT taxable income. KE believes that its cash
provided by operating activities will be sufficient to cover debt service
payments and to pay the dividends required, if any, to maintain REIT status
through 1996.
The level of cash flow generated by rents depends primarily on the
occupancy rates of the Company's buildings and increases in rental rates on new
and renewed leases and under escalation provisions. As of December 31, 1995,
approximately 93 percent of the Company's annualized gross rental revenues were
derived from existing leases containing provisions for rent escalations.
However, market conditions may prevent the Company from escalating rents under
such provisions.
As of December 31, 1995, leases representing approximately 27.8 percent
of the gross annual rent from the Company's properties, without regard to the
exercise of options to renew, were due to expire during 1996. This represents
1,214 leases for space in buildings located in all of the 18 Koger Centers in
which the Company owns buildings. Certain of these tenants may not renew their
leases or may reduce their demand for space. Leases were renewed on
approximately 67 percent, 61 percent and 74 percent of the Company's net
rentable square feet which were scheduled to expire during 1995, 1994 and 1993,
respectively. For those leases which renewed during 1995, the average rental
rate increased from $13.60 to $14.48. However, current market conditions in
certain markets may require that rental rates at which leases are renewed or at
which vacated space is leased be lower than rental rates under existing leases.
Based upon the significant amount of leases which will expire during 1996 and
the competition for tenants in the markets in which the Company operates, the
Company has offered, and expects to continue to offer, incentives to certain new
and renewal tenants. These incentives may include the payment of tenant
improvement costs and, in certain markets, reduced rents during initial lease
periods. The Company's percent leased rate has increased from 88 percent on
December 31, 1993 to 91 percent on December 31, 1995. During 1994 and 1995, the
Company has benefitted from improving economic conditions and reduced vacancy
levels for office buildings in many of the metropolitan areas in which the
Company owns buildings. The Company believes that the southeastern and
southwestern regions of the United States provide significant economic growth
potential due to their diverse regional economies, expanding metropolitan areas,
skilled work force and moderate labor costs. However, the Company cannot predict
whether such economic growth will continue. Cash flow from operations could be
reduced if economic growth were not to continue in the Company's markets and if
this resulted in lower occupancy rates for the Company's buildings.
Governmental tenants (including the State of Florida and the United
States of America) which accounted for 22.7 percent of the Company's leased
space as of December 31, 1995, may be subject to budget reductions in times of
recession and governmental austerity measures.
17
Consequently, there can be no assurance that governmental appropriations for
rents may not be reduced. Additionally, certain of the private-sector tenants
which have contributed to the Company's rent stream may reduce their current
demands, or curtail their future need, for additional office space.
At the beginning of 1995, the Company had management contracts for the
management of 113 commercial office properties. On March 31, 1995, a management
agreement to manage 20 commercial office buildings owned by Centoff was
automatically extended to March 31, 1996. This management agreement provides
that, so long as no default has occurred, the management agreement will be
automatically extended from year to year until such time as the management
agreement is terminated. The Company earned fees of $1,791,000 from this
management agreement during 1995. Another agreement to manage one commercial
office building has been extended to June 30, 1996. During 1995, the Company
earned management fees of $121,000 for the management of this building. With the
sale of TKPL's 92 buildings to Koala, Southeast's management agreement with TKPL
ended. However, KRSI has entered into a management agreement with Koala to
manage for five years the 95 buildings which Koala purchased from TKPL and the
Company.
Investing Activities. At December 31, 1995, substantially all of the
Company's invested assets were in real properties. Improvements to the Company's
existing properties have been financed through internal operations. During 1995,
the Company's expenditures for improvements to existing properties increased by
$3,288,000 over the prior year, primarily due to the $2,663,000 which the
Company expended for energy management improvements to its buildings. During
1995, the Company did not purchase any buildings.
During 1995, KE acquired $32.3 million in aggregate principal amount of
TKPL Notes for an aggregate purchase price of approximately $18.2 million. To
permit the acquisition of the TKPL Notes, KE obtained certain modifications to
the loan agreements governing KE's indebtedness. During the quarter ended
September 30, 1995, TKPL retired the TKPL Notes. KE recorded approximately $13.1
million of interest revenue on the TKPL Notes in 1995.
During 1995, Southeast received $17.7 million as partial repayment of
an unsecured note issued by TKPL to KPI (and subsequently transferred by KPI to
Southeast in connection with the Merger) in an original principal amount of
approximately $31 million.
During 1995, the Company sold to Koala three office buildings
(containing 233,980 net rentable square feet), two undeveloped land parcels
(totalling approximately 44 acres), and certain other assets for approximately
$25,268,000, net of selling costs.
The terms of the restructured indebtedness of KPI assumed by the
Company pursuant to the Merger and the terms of the Company's other indebtedness
require that a substantial portion of any debt or equity offering effected by
the Company during the foreseeable future be applied to the reduction of the
current secured indebtedness of the Company. The loan agreements governing the
Company's indebtedness contain provisions requiring the Company to use the first
$50 million of proceeds from any equity offering to pay down certain portions of
such indebtedness. To the extent that the equity offering proceeds exceed $50
million, one half of the excess proceeds must be used to pay down certain
portions of such indebtedness, with the remainder being available for use at the
Company's discretion. In addition, the Company's bank
18
loans contain certain principal prepayment obligations in addition to normal
principal repayment. Two of these bank loans require that the Company make
additional principal payments totalling $10 million by December, 1998. So long
as these provisions remain in effect, it is unlikely that the Company will have
financial resources available to complete any significant additional development
or purchases of income-producing properties, even if the Company determined that
such purchases were otherwise available.
Based on its improved financial structure and results as of the end of
1995, the Company believes that it is in a position to capitalize on some of its
strengths, such as the value of its franchise in the suburban office park market
and its operating systems, development expertise and unimproved land available
for development. Therefore, the Company has committed to a plan to enhance
shareholder value by refinancing indebtedness and increasing growth. The Company
intends to refinance or restructure its existing indebtedness to eliminate
certain restrictive covenants which limit the Company's ability to grow through
development and acquisitions. In addition, the Company intends to establish a
new bank revolving credit facility which would be available to finance growth
opportunities. The plan also contemplates the possible use by the Company of its
existing inventory of 228 acres of land held for development, most of which is
partially or wholly improved with streets and/or utilities and is located in
various metropolitan areas where the Company currently operates suburban office
parks. The Company may also acquire existing office buildings or land for
development in other markets in the Southeast and Southwest that the Company
considers favorable. The Company also intends to spend an additional $1.6
million for energy management improvements to existing properties during 1996.
Financing Activities. Historically, the Company's primary external
sources of cash have been bank borrowings, mortgage financings, and public
offerings of equity securities. The proceeds of these financings were used by
the Company to acquire buildings from KPI. The Company has no open lines of
credit, but had cash and temporary cash investments which totalled $25,650,000
at December 31, 1995.
In December, 1993, in connection with the Merger and the resolution of
KPI's Chapter 11 bankruptcy case, the Company entered into agreements with its
major bank lenders which provided for revised terms and conditions, including
extended maturity dates and modified interest rates and amortization schedules.
With respect to approximately $70 million of secured bank indebtedness, the
maturity of such indebtedness was extended to December 21, 2000. Through
December 1996, the interest rate is fixed at 6.43 percent per annum for
approximately $45.9 million and at 6.386 percent per annum for approximately
$24.1 million. During the remaining four years of the term, the interest rate
will be set at a rate equal to the sum of (a) the effective interest rate
prevailing on December 21, 1996 for U.S. Treasury obligations having a term to
maturity of four years, plus (b) 210 basis points, subject to a maximum of 11
percent per annum. Amortization with respect to this indebtedness is based on
equal monthly installments over a 25 year amortization period. The Company will
be required to make additional principal payments totalling approximately $10
million on December 21, 1998, although the Company's obligation to do so would
be reduced to the extent that it had made prepayments in respect of secured
indebtedness to such lenders out of equity proceeds during the first three years
after the Merger. These lenders have required that, until the Company has raised
an aggregate of $50 million of equity, the following limitations on dividends
will be applied: (i) in 1996 and 1997, a maximum of $11,000,000, unless
imposition of the limit would cause loss of REIT status and (ii) in 1998 and
1999, a maximum of $11,000,000, regardless of impact on REIT status.
19
In addition, each of these lenders required affirmative and negative
covenants and other agreements which may become burdensome to the Company. In
particular, each bank lender has required that, commencing on December 21, 1998,
the Company maintain a total liabilities to net worth ratio of 1.0 to 1.0, that
the Company maintain loan-to-value ratios determined on the basis of periodic
appraisals of bank collateral and that, under certain circumstances, additional
collateral be provided for indebtedness to such bank. At December 31, 1995, the
total liabilities to net worth ratio of the Company was 0.9 to 1.0. In addition,
each such bank lender has required other covenants generally similar to the
provisions set forth in the loan agreements governing the restructured debt of
KPI. These other covenants include reporting requirements, provisions limiting
the amount of annual dividends, limitations regarding additional debt, and
limitations on general and administrative expenses. In addition, the Company is
also required to maintain certain financial ratios.
With the consummation of the Merger, the Company assumed approximately
$182.6 million of restructured debt of KPI. At December 31, 1995, the
outstanding balance of such debt was approximately $139.2 million. For
additional information concerning terms, interest rates, and maturity dates of
the restructured debt of KPI, see the "Mortgages and Loans Payable" footnote in
the notes to the Consolidated Financial Statements.
Based upon interest rates in effect on December 31, 1995 and assuming
only scheduled principal payments for 1995, management expects total interest
expense for 1996 to decrease to approximately $19.5 million. However, the high
degree of leverage of the Company, when compared to other REITs, may result in
the impairment of its ability to obtain additional financing, to make
acquisitions, and to take advantage of significant business opportunities that
may arise, including activities which require significant funding. This high
degree of leverage may also increase the vulnerability of the Company to adverse
general economic and industry conditions and to increased competitive pressures,
especially rental pressures from less highly leveraged competitors. During 1995,
the Company fully repaid $3,958,000 of the outstanding balances of 22 tax notes
assumed by the Company from KPI pursuant to the Merger. With the proceeds from
the sale of three office buildings, the Company repaid approximately $21.4
million of mortgage loans during 1995. In addition, the Company repaid
approximately $39.5 million of the outstanding balances of mortgages and loans
payable during 1995. These early repayments resulted in the release from
mortgages of 37 buildings (containing 1,175,380 net rentable square feet) which
had been collateral for such loans. At December 31, 1995, the Company had 86
buildings (containing 2,516,230 net rentable square feet) which were
unencumbered.
Loan maturities and normal amortization of mortgages and loans payable
are expected to total approximately $4.1 million over the next twelve months.
The Company believes that these obligations will be paid from cash provided by
operations or from current cash balances. Significant maturities of the
Company's mortgages and loans payable do not begin to occur until 1998.
In order to generate funds sufficient to make principal payments in
respect of indebtedness of the Company over the long term, as well as necessary
capital and tenant acquisition expenditures, the Company will be required to
successfully refinance its indebtedness or procure additional equity capital.
However, there can be no assurance that any such refinancing or equity financing
will be achieved or will generate adequate funds on a timely basis for these
purposes. If additional funds are raised by issuing equity securities, further
dilution to existing shareholders may result. Moreover, under the terms of the
Company's existing secured debt, the Company
20
will be required to utilize the first $50 million of any proceeds from the sale
of equity securities, as well as half of such proceeds in excess of $50 million,
to reduce secured indebtedness. The prepayments generally will be made pro rata
among the holders of secured indebtedness and will not generally relieve the
Company of the obligation to meet maturities on the remaining secured
indebtedness. Unfavorable conditions in the financial markets, the high degree
of leverage of the Company, restrictive covenants contained in its debt
instruments and various other factors may limit the ability of the Company to
successfully undertake any such financings, and no assurance can be given as to
the availability of alternative sources of funds. On August 22, 1994, KE filed a
shelf registration statement with respect to the possible issuance of up to
$100,000,000 of its common stock and/or preferred stock. However, due to market
conditions, KE has not yet issued any equity under such registration statement.
During 1995, the Company wrote off $745,000 of certain costs incurred for
potential public and private offerings of equity securities which management
determined had no future value.
In addition, in the event KE is unable to generate sufficient funds
both to meet principal payments in respect of its indebtedness and to satisfy
distribution requirements of 95 percent of annual REIT taxable income to its
shareholders, KE may be unable to qualify as a REIT. In such an event, KE (i)
will incur federal income taxes and perhaps penalties, (ii) if KE is then paying
dividends, may be required to decrease any dividend payments to its
shareholders, and (iii) the market price of KE's common stock may decrease. KE
would also be prohibited from requalifing as a REIT for five years.
IMPACT OF INFLATION
The Company may experience increases in its expenses as a result of
inflation; however, the amount of such increases cannot be accurately
determined. The Company attempts to pass on inflationary cost increases through
escalation clauses which are included in most leases. However, market conditions
may prevent the Company from escalating rents. Inflationary pressure may
increase operating expenses, including labor and energy costs (and, indirectly,
property taxes) above expected levels, at a time when it may not be possible to
increase lease rates to offset such higher operating expenses. In addition,
inflation can have secondary effects upon occupancy rates by decreasing the
demand for office space in many of the markets in which the Company operates. As
of December 31, 1995, 93 percent of the Company's annualized rentals were
subject to leases having annual escalation clauses as described under
"Properties" above. As of December 31, 1994 and 1993, 94 percent of the
Company's annualized rentals were subject to leases having annual escalation
clauses.
The interest rate on approximately $22.3 million of the Company's debt
is floating. Interest rates on the Company's remaining debt are subject to reset
at various dates through December 21, 2003, based upon then-current interest
rates for U.S. Treasury obligations. Therefore, the interest rates payable from
time to time on this debt will reflect changes in underlying market rates of
interest, and thus be subject to the effects of inflation.
Historically, inflation has often caused increases in the value of
income-producing real estate through higher rentals. The Company, however, can
provide no assurance that inflation will increase the value of its properties in
the future, and, in fact, the rate of inflation over recent years has been
considerably below that which obtained previously.
21
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR PURPOSE OF
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a new "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about their businesses without fear
of litigation so long as those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
projected in such statements. The Company desires to take advantage of the new
"safe harbor" provisions of the Act.
This Annual Report on Form 10-K contains forward-looking statements,
together with related data and projections, about the Company's projected
financial results and its future plans and strategies. However, actual results
and needs of the Company may vary materially from forward-looking statements and
projections made from time to time by the Company on the basis of management's
then-current expectations. The business in which the Company is engaged involves
changing and competitive markets and a high degree of risk, and there can be no
assurance that forward-looking statements and projections will prove accurate.
Accordingly, the Company hereby identifies the following important factors which
could cause the Company's actual performance and financial results to differ
materially from any results which might be projected, forecast, estimated or
budgeted by the Company.
Real Estate Financing Risks
Existing Debt. The Company is subject to risks normally associated with
debt financing, including (a) the risk that the Company's cash flow will be
insufficient to meet required payments of principal and interest, (b) the risk
that the existing debt in respect of the Company's properties (which in
substantially all cases will not have been fully amortized at maturity) will not
be able to be refinanced and (c) the risk that the terms of any refinancing of
any existing debt will not be as favorable as the terms of such existing debt.
The Company currently has outstanding debt of approximately $254.9 million, all
of which is secured by certain of the Company's properties. Approximately $129.3
million of such debt will mature before 2001, with most of the balance maturing
through 2003. If principal payments due at maturity cannot be refinanced,
extended or paid with proceeds of other capital transactions, such as new equity
capital, the Company expects that its cash flow will not be sufficient to repay
all such maturing debt. Furthermore, if prevailing interest rates or other
factors at the time of refinancing (such as the reluctance of lenders to make
commercial real estate loans) result in higher interest rates upon refinancing
than the interest rates on the existing debt, the interest expense relating to
such refinanced debt would increase, which would adversely affect the Company's
cash flow and the amount of distributions the Company would be able to make to
its shareholders. If the Company has mortgaged a property to secure payment of
debt and the Company is unable to meet the mortgage payments, then the mortgagee
may foreclose upon, or otherwise take control of, such property, with a
consequent loss of income and asset value to the Company.
Restrictions on Incurrence of Additional Debt. The existing debt of the
Company contains provisions restricting the Company's ability to incur any
significant new debt and requiring major portions of new financings, including
equity proceeds, to be applied to the reduction of existing
22
debt. While the Company's policy is to continue to reduce its existing debt,
these restrictions could limit the Company's ability to develop its existing
land and otherwise take advantage of favorable real estate opportunities.
Risk of Rising Interest Rates and Variable Rate Debt. The Company
currently has $22.3 million in variable rate debt. The Company may incur other
variable rate debt in the future. Increases in interest rates on such debt could
increase the Company's interest expense, which would adversely affect the
Company's cash flow and its ability to pay distributions to its shareholders.
Existing Leverage; No Limitation on Debt
As of December 31, 1995, the debt to total market capitalization ratio
of the Company was approximately 57%. The Company's policy is to seek to reduce
this ratio over time to approximately 35%. The Company's policy regarding this
ratio (i.e., total consolidated debt as a percentage of the sum of the market
value of issued and outstanding capital stock plus total consolidated debt) is
not subject to any limitation in the organizational documents of the Company.
Accordingly, the Board of Directors could alter or eliminate this policy or
decide to borrow on a case-by-case or other basis, thereby increasing the
Company's debt to total market capitalization ratio. If this policy were
changed, the Company could become more highly leveraged, resulting in an
increase in debt service that (a) could adversely affect the Company's cash flow
and, consequently, the amount of cash available for distribution to shareholders
and (b) could increase the risk of default on the Company's debt.
For purposes of establishing and evaluating its debt policy, the
Company measures its leverage by reference to the total market capitalization of
the Company rather than by reference to the book value of its assets. The
Company has used total market capitalization because it believes that the book
value of its assets (which to a large extent is comprised of the depreciated
value of real property, the Company's primary tangible asset) does not
accurately reflect its ability to borrow and to meet debt service requirements.
The market capitalization of the Company, however, is more variable than book
value, and does not necessarily reflect the fair market value of the underlying
assets of the Company at all times. The Company also considers factors other
than its market capitalization in making decisions regarding the incurrence of
indebtedness, such as the purchase price of properties to be acquired with debt
financing, the estimated market value of its properties upon refinancing and the
ability of particular properties, and the Company as a whole, to generate cash
flow to cover expected debt service.
Geographic Concentration
The Company's revenues and the value of its properties may be affected
by a number of factors, including the regional and local economic climates of
the metropolitan areas in which the Company's buildings are located (which may
be adversely impacted by business layoffs or downsizing, industry slowdowns,
changing demographics and other factors) and regional and local real estate
conditions in such areas (such as oversupply of, or reduced demand for, office
and other competing commercial properties). All of the Company's properties are
located in the southeastern and southwestern United States. The Company's
performance and its ability to make distributions to its shareholders are,
therefore, dependent on economic conditions in these market areas. The Company's
historical growth has occurred during periods when the economy in the
23
southeastern United States has out-performed the national economy. There can be
no assurance as to the continued growth of the economy in the southeastern
United States or the future growth rate of the Company.
Renewal of Leases and Reletting of Space
The Company is subject to the risks that upon expiration of leases for
space located in its buildings (a) such leases may be not be renewed, (b) such
space may not be relet or (c) the terms of renewal or reletting (taking into
account the cost of required renovations) may be less favorable than current
lease terms. Leases on a total of 28.0% and 19.5% of the total net rentable
square feet leased in the Company's buildings will expire in 1996 and 1997,
respectively. The Company has established annual reserves for renovation and
reletting expenses, which take into consideration its view of both the current
and expected business conditions in the southeastern and southwestern United
States, but no assurance can be given that these reserves will be sufficient to
cover such expenses. If the Company is unable to promptly relet, or renew the
leases for, all or a substantial portion of the space located in its buildings,
or if the rental rates upon such renewal or reletting are significantly lower
than expected rental rates, or if the Company's reserves for these purposes
prove inadequate, then the Company's cash flow and its ability to make expected
distributions to its shareholders may be adversely affected.
Real Estate Investment Risks
General Risks. Real property investments are subject to varying degrees
of risk. The yields available from equity investments in real estate depend in
large part on the amount of income generated and expenses incurred. If the
Company's properties do not generate revenues sufficient to meet operating
expenses, including current levels of debt service, tenant improvements, leasing
commissions and other capital expenditures, the Company may have to borrow
additional amounts to cover fixed costs and the Company's cash flow and its
ability to make distributions to its shareholders will be adversely affected.
The Company must obtain external financing to meet future debt maturities.
The Company's net revenues and the value of its properties may be
adversely affected by a number of factors, including the national, regional and
local economic climates; regional and local real estate conditions; the
perceptions of prospective tenants as to the attractiveness of the property; the
ability of the Company to provide adequate management, maintenance and
insurance; and increased operating costs (including real estate taxes and
utilities). In addition, real estate values and income from properties are also
affected by such factors as applicable laws, including tax laws, interest rate
levels and the availability of financing.
Illiquidity of Real Estate. Equity real estate investments are
relatively illiquid. Such illiquidity will tend to limit the ability of the
Company to vary its portfolio promptly in response to changes in economic or
other conditions. In addition, the Internal Revenue Code limits the Company's
ability to sell certain properties held for fewer than four years, which may
affect the Company's ability to sell its properties.
Competition. Numerous office buildings compete with the Company's buildings
in attracting tenants to lease space. Some of these competing buildings are
newer, better located or better capitalized than some of the Company's
buildings. Moreover, the Company believes that
24
major national or regional commercial property developers will continue to seek
development opportunities in the southeastern and southwestern United States.
These developers may have greater financial resources than the Company. The
number of competitive commercial properties in a particular area could have a
material adverse effect on the Company's ability to lease space in its buildings
or at newly developed or acquired properties and the rents charged.
Changes in Laws. Because increases in income, service or transfer taxes
are generally not passed through to tenants under leases, such increases may
adversely affect the Company's cash flow and its ability to make distributions
to its shareholders. The Company's properties are also subject to various
federal, state and local regulatory requirements, such as requirements of the
Americans with Disabilities Act (the "ADA") and state and local fire and life
safety requirements. Failure to comply with these requirements could result in
the imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that its properties are currently in
compliance with all such regulatory requirements. However, there can be no
assurance that these requirements will not be changed or that new requirements
will not be imposed which would require significant unanticipated expenditures
by the Company and could have an adverse effect on the Company's cash flow and
expected distributions.
Uninsured Loss. The Company presently carries comprehensive liability,
fire, flood (where appropriate), extended coverage and rental loss insurance
with respect to its properties, with policy specifications and insured limits
customary for similar properties. There are, however, certain types of losses
(such as from wars) that may be either uninsurable or not economically
insurable. Should an uninsured loss or a loss exceeding policy limits occur, the
Company could lose both its capital invested in, and anticipated profits from,
one or more of its properties.
Bankruptcy and Financial Condition of Tenants. At any time, a tenant of
the Company's buildings may seek the protection of the bankruptcy laws, which
could result in the rejection and termination of such tenant's lease and thereby
cause a reduction in the cash flow available for distribution by the Company. No
assurance can be given that tenants will not file for bankruptcy protection in
the future or, if any tenants file, that they will affirm their leases and
continue to make rental payments in a timely manner. In addition, a tenant from
time to time may experience a downturn in its business which may weaken its
financial condition and result in its failure to make rental payments when due.
If a tenant's lease is not affirmed following bankruptcy or if a tenant's
financial condition weakens, the Company's income may be adversely affected.
Americans with Disabilities Act Compliance. Under the ADA, all public
accommodations and commercial facilities are required to meet certain federal
requirements relating to access and use by disabled persons. These requirements
became effective in 1992. Compliance with the requirements of the ADA could
require removal of access barriers and non-compliance could result in imposition
of fines by the U.S. government or an award of damages to private litigants.
Although the Company believes that its properties are substantially in
compliance with these requirements, the Company may incur additional costs to
comply with the ADA. Although the Company believes that such costs will not have
a material adverse effect on the Company, if required changes involve a greater
expenditure than the Company currently anticipates, the Company's ability to
make distributions to its shareholders could be adversely affected.
25
Risks Involved in Property Ownership Through Partnership and Joint
Ventures. Although the Company owns fee simple interests in its properties, in
the future the Company could, if then permitted by the covenants in its loan
agreements and its financial position, participate with other entities in
property ownership through partnerships or joint ventures. Partnership or joint
venture investments may, under certain circumstances, involve risks not
otherwise present in property ownership, including the possibility that (a) the
Company's partners or co-venturers might become bankrupt, (b) such partners or
co-venturers might at any time have economic or other business interests or
goals which are inconsistent with the business interests or goals of the
Company, and (c) such partners or co-venturers may be in a position to take
action contrary to the instructions or the requests of the Company or contrary
to the Company's policies or objectives, including the Company's policy to
maintain its qualification as a REIT. The Company will, however, seek to
maintain sufficient control of such participants or joint ventures to permit the
Company's business objectives to be achieved. There is no limitation under the
Company's organizational documents as to the amount of available funds that may
be invested in partnerships or joint ventures.
Impact of Inflation. The Company may experience increases in its
expenses, including debt service, as a result of inflation. The Company attempts
to pass on inflationary cost increases through escalation clauses which are
included in most of its leases. However, market conditions may prevent the
Company from escalating rents. Inflationary pressure may increase operating
expenses, including labor and energy costs (and, indirectly, property taxes)
above expected levels at a time when it may not be possible for the Company to
increase lease rates to offset such higher operating expenses. In addition,
inflation can have secondary effects upon occupancy rates by decreasing the
demand for office space in many of the markets in which the Company operates.
Although inflation has historically often caused increases in the value
of income-producing real estate through higher rentals, the Company can provide
no assurance that inflation will increase the value of its properties in the
future and, in fact, the rate of inflation over recent years has been
considerably below that which obtained previously.
Risk of Development, Construction and Acquisition Activities
Within the constraints of the terms of its current loan agreements and
its policy to reduce its leverage over time, the Company may in the future
develop and construct office buildings, particularly on its undeveloped land.
Risks associated with the Company's development and construction activities,
including activities relating to its undeveloped land, may include: abandonment
of development opportunities; construction costs of a property exceeding
original estimates and possibly making the property uneconomical; insufficient
occupancy rates and rents at a newly completed property to make the property
profitable; unavailability of financing on favorable terms for development of a
property; and the failure to complete construction and lease-up on schedule,
resulting in increased debt service expense and construction costs. In addition,
new development activities, regardless of whether or not they are ultimately
successful, typically require a substantial portion of management's time and
attention. Development activities are subject to risks relating to the inability
to obtain, or delays in obtaining, all necessary zoning, land- use, building,
occupancy and other required governmental permits and authorizations.
The Company might in the future also acquire office buildings.
Acquisitions of office buildings entail risks that investments will fail to
perform in accordance with expectations. Estimates of the cost of improvements
to bring an acquired building up to standards established
26
for the market position intended for such building may prove inaccurate. In
addition, there are general investment risks associated with any new real estate
investment.
The Company anticipates that any future developments and acquisitions
would be financed through a combination of equity investments and secured or
unsecured financing. If new developments are financed through construction
loans, there is a risk that, upon completion of construction, permanent
financing for newly developed properties may not be available or may be
available only on disadvantageous terms.
Changes in Policies Without Stockholder Approval
The investment, financing, borrowing and distribution policies of the
Company, as well as its policies with respect to all other activities, including
growth, debt, capitalization and operations, are determined by the Board of
Directors. Although the Board of Directors has no present intention to do so,
these policies may be amended or revised at any time and from time to time at
the discretion of the Board of Directors without a vote of the shareholders of
the Company. A change in these policies could adversely affect the financial
condition or results of operations of the Company or the market price of the
Common Stock.
Limitations of REIT Status on Business of Subsidiaries
Certain requirements for REIT qualification may in the future limit the
Company's ability to increase fee development, management and leasing operations
conducted, and related services offered, by the Company's subsidiaries without
jeopardizing the Company's qualification as a REIT.
Adverse Consequences of Failure to Qualify as a REIT
The Company believes it has operated so as to qualify as a REIT under
the Internal Revenue Code since its inception in 1988. Although management of
the Company intends that the Company continue to operate so as to qualify as a
REIT, no assurance can be given that the Company will remain qualified as a
REIT. Qualification as a REIT involves the application and satisfaction of
highly technical and complex Code requirements for which there are only limited
judicial and administrative interpretations. Uncertainty in the application of
such requirements, as well as circumstances not entirely within the Company's
control, may affect the Company's ability to qualify as a REIT. In addition, no
assurance can be given that legislation, new regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to qualification as a REIT or the federal income tax consequences
of such qualification. The Company, however, is not aware of any pending tax
legislation that would adversely affect the Company's ability to operate as a
REIT.
Possible Environmental Liabilities
Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property and may be held liable to a governmental
entity or to third parties for property damage and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws typically
27
impose clean-up responsibility and liability without regard to whether the owner
knew, or caused the presence, of the contaminants, and the liability under such
laws has been interpreted to be joint and several unless the harm is divisible
and there is a reasonable basis for allocation of responsibility. The costs of
investigation, remediation or removal of such substances may be substantial, and
the presence of such substances, or the failure to properly remediate the
contamination on such property, may adversely affect the owner's ability to sell
or rent such property or to borrow using such property as collateral. Any person
who arranges for the disposal or treatment of hazardous or toxic substances at a
disposal or treatment facility also may be liable for the costs of removal or
remediation of a release of hazardous or toxic substances at such disposal or
treatment facility, whether or not such facility is owned or operated by such
person. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs that it incurs in
connection with the contamination. Finally, the owner of a site may be subject
to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site.
Certain federal, state and local laws, regulations and ordinances
govern the removal, encapsulation or disturbance of asbestos-containing
materials ("ACM") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACM and may provide for third parties to seek
recovery from owners or operators of real properties for personal injury
associated with ACM. In connection with its ownership and operation of its
properties, the Company may be potentially liable for such costs. All ACM in the
Company's buildings has been found to be in good condition and non-friable, and
should not present a risk as long as it continues to be properly managed.
The Company's environmental assessments of its properties have not
revealed any environmental liability that the Company believes would have a
material adverse effect on its business, assets or results of operations taken
as a whole, nor is the Company aware of any such material environmental
liability. Nevertheless, it is possible that the Company's assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no assurance
that future laws, ordinances or regulations will not impose any material
environmental liability or the current environmental condition of the Company's
properties will not be affected by tenants, by the condition of land or
operations in the vicinity of such properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company.
Effect of Market Interest Rates on Price of Common Stock
One of the factors that will influence the market price of the Common
Stock in public markets will be the annual dividend yield on the share price
reflected by dividend distributions by the Company. An increase in market
interest rates could reduce cash available for distribution by the Company to
its shareholders and, accordingly, adversely affect the market price of the
Common Stock.
Additional Information
For additional disclosure of risk factors to which the Company is
subject, see the other sections of "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
28
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE NO.
Independent Auditors' Report........................................ 30
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995
and 1994.................................................... 31
Consolidated Statements of Operations for Each
of the Three Years in the Period Ended
December 31, 1995........................................... 32
Consolidated Statements of Changes in
Shareholders' Equity for Each of the Three
Years in the Period Ended December 31, 1995................. 33
Consolidated Statements of Cash Flows for Each
of the Three Years in the Period Ended
December 31, 1995........................................... 34
Notes to Consolidated Financial Statements for
Each of the Three Years in the Period Ended
December 31, 1995........................................... 35
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
for the Three Years Ended December 31, 1995................. 50
Schedule III - Real Estate and Accumulated
Depreciation as of December 31, 1995........................ 51
29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Koger Equity, Inc.
Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Koger Equity,
Inc. and subsidiaries (the "Company") as of December 31, 1995 and 1994, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1995. Our audits also included the financial statement schedules listed in the
Index at Item 8. These financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Koger Equity, Inc. and subsidiaries
as of December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
March 4, 1996
30
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994 (In
Thousands Except Share Data)
1995 1994
-------- --------
ASSETS
Real Estate Investments:
Operating properties:
Land $ 98,727 $102,161
Buildings 471,145 474,879
Furniture and equipment 1,566 1,197
Accumulated depreciation (62,885) (46,106)
-------- --------
Operating properties - net 508,553 532,131
Undeveloped land held for investment 21,150 33,054
Undeveloped land held for sale, at lower
of cost or market value 9,131 2,958
Cash and temporary investments 25,650 23,315
Accounts receivable, net of allowance for uncollectible
rents of $391 and $362 5,260 4,276
Management fees and other receivables from TKPL 1,851
Cost in excess of fair value of net assets acquired from KPI,
net of accumulated amortization of $345 and $688 2,211 9,295
Other assets 7,427 6,926
-------- --------
TOTAL ASSETS $579,382 $613,806
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgages and loans payable $254,909 $323,765
Accounts payable 2,641 2,823
Accrued interest 206 1,047
Accrued real estate taxes payable 2,222 970
Accrued liabilities - other 5,133 1,268
Advance rents and security deposits 3,574 3,332
-------- --------
Total Liabilities 268,685 333,205
-------- --------
Commitments and Contingencies (Notes 2, 11 and 12) - -
Shareholders' Equity
Preferred stock, $.01 par value; 50,000,000 shares
authorized; issued: none
Common stock, $.01 par value; 100,000,000 shares
authorized; issued: 20,476,705 and 20,474,019 shares;
outstanding: 17,753,677 and 17,604,295 shares 205 205
Capital in excess of par value 318,609 318,589
Warrants; outstanding 1,114,217 and 1,114,889 2,250 2,251
Retained earnings (Accumulated dividends in excess
of net income) 13,210 (15,657)
Treasury stock, at cost; 2,723,028 and 2,869,724 shares (23,577) (24,787)
-------- --------
Total Shareholders' Equity 310,697 280,601
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $579,382 $613,806
======== ========
See Notes to Consolidated Financial Statements.
31
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1995
(In Thousands Except Per Share Data)
1995 1994 1993
--------