SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
__X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File Number 1-9997
KOGER EQUITY, INC.
(Exact name of Registrant as specified in its Charter)
FLORIDA 59-2898045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 NE Mizner Blvd., Suite 200
Boca Raton, Florida 33432
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (561) 395-9666
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
1. Common Stock, Par Value $.01 New York Stock Exchange
2. Common Stock Purchase Rights New York 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.
__X__
The aggregate market value of the voting stock held by non-affiliates of the
registrant on February 28, 2003 was approximately $329,687,761.
The number of shares of registrant's Common Stock outstanding on February 28,
2003 was 21,297,659.
Documents Incorporated by Reference
The Company's Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Act of 1934 for the 2003 Annual Meeting of Shareholders is
incorporated by reference in Part III of this report.
1
TABLE OF CONTENTS
ITEM NO. DESCRIPTION PAGE NO.
PART I
1. BUSINESS................................................................................... 3
2. PROPERTIES................................................................................. 5
3. LEGAL PROCEEDINGS.......................................................................... 10
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 10
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................... 10
6. SELECTED FINANCIAL DATA.................................................................... 11
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 12
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 24
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 25
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....... 48
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 49
11. EXECUTIVE COMPENSATION..................................................................... 50
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 50
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 50
14. CONTROLS AND PROCEDURES.................................................................... 50
PART IV
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................... 51
16. PRINCIPAL ACCOUNTANT FEES AND SERVICES..................................................... 62
17. SIGNATURES AND CERTIFICATIONS.............................................................. 63, 64
2
PART I
Item 1. BUSINESS
General
Koger Equity, Inc. ("KE") is a self-administered and self-managed equity
real estate investment trust (a "REIT") which develops, owns, operates, leases
and manages suburban office buildings in metropolitan areas in the southeastern
and southwestern United States. At December 31, 2002, KE's portfolio of assets
consisted of 124 office buildings totaling 8.93 million rentable square feet
located in 16 suburban office projects in 9 metropolitan areas in the
southeastern United States and Houston, Texas (the "Office Projects"). KE
directly owns 107 of the 124 office buildings in its current portfolio.
Koger-Vanguard Partners, L.P. ("KVP") is a consolidated wholly owned subsidiary
limited partnership and owns a suburban office project in Charlotte, North
Carolina consisting of 13 office buildings containing approximately 526,000
rentable square feet. Koger Ravinia, LLC ("KRLLC") is a consolidated wholly
owned subsidiary limited liability company and owns a single suburban office
building in Atlanta, Georgia containing 805,000 rentable square feet. Koger Post
Oak Limited Partnership ("KPOLP") is a consolidated wholly owned subsidiary
limited partnership and owns 3 suburban office buildings in Houston, Texas
totaling approximately 1.2 million rentable square feet. Koger Post Oak, Inc.
("KPO"), a wholly owned subsidiary of KE, is the general partner of KPOLP. The
Office Projects were on average 84% occupied at December 31, 2002. KE expects to
continue to acquire existing properties in markets compatible with its long-term
investment strategy and may also develop new properties in those markets when
economically desirable.
During December 2001, KE sold 75 suburban office buildings and one retail
center, containing more than 3.9 million rentable square feet, located in San
Antonio and Austin, Texas; Greensboro and Charlotte, North Carolina; Greenville,
South Carolina; and Birmingham, Alabama to AP-Knight, LP ("AP-Knight"), an
affiliate of Apollo Real Estate Investment Fund ("Apollo").
During January 2002, the Company acquired all of the remaining limited
partnership units in KVP. These partnership units were convertible into 999,710
shares of the Company's common stock. On January 31, 2002, KRLLC acquired Three
Ravinia Drive, an 805,000 square foot suburban office building located in
Atlanta, Georgia. On December 6, 2002, KPOLP acquired The Lakes on Post Oak, a
1.2 million square foot, three office building complex in Houston, Texas.
KE owns approximately 55.8 acres of unencumbered land held for development
and approximately 23.2 acres of unencumbered land held for sale. A majority of
the land held for development adjoins four of the Office Projects, which have
infrastructure, including roads and utilities, in place. The remaining land held
for development adjoins properties which were sold during 2001. KE intends over
time to develop and construct office buildings using this land and to acquire
additional land for development. In addition, KE provides leasing, management
and other customary tenant-related services for the Office Projects.
In addition to managing its own properties, KE provides property and asset
management services through its wholly-owned subsidiaries, Southeast Properties
Holding Corporation ("Southeast"), Koger Real Estate Services, Inc. ("KRES") and
Koger Realty Services, Inc. ("KRSI") for office buildings owned by third parties
(KE, KVP, Southeast , KRES, KRSI, KRLLC, KPO, and KPOLP are hereafter referred
to as the "Company"). Through August 2001, KRSI provided property management
services to Koala Realty Holding Company, Inc. ("Koala") for 55 office
properties. On December 12, 2001, KRSI began providing property management
services to the properties sold to AP-Knight. On December 31, 2002, the property
management agreement between AP-Knight and KRSI was terminated. The Company
currently provides asset management services to Crocker Realty Trust for office
properties containing approximately 4.6 million square feet.
KE operates in a manner so as to qualify as a REIT under the provisions of
the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the
Company will not, with certain limited exceptions, be taxed at the corporate
level on taxable income distributed to its shareholders on a current basis. The
Company distributes at least 90 percent of its annual REIT taxable income (which
term is used herein as defined and modified in the Code) to its shareholders.
3
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) 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; (d)
each year, it must distribute at least 90 percent of its REIT taxable income;
and (e) at no time during the second half of any calendar year may the Company
be "closely held" (i.e., have more than 50 percent in value of its outstanding
stock owned, directly, indirectly or constructively, by not more than five
individuals). The constructive ownership rules, among other things, treat the
shareholders of a corporation as owning proportionately any stock in another
corporation owned by the first corporation. Management fee revenue does not
qualify as real estate or passive income for purposes of determining whether the
Company has met the REIT requirements that at least 95 percent of the Company's
gross income be derived from certain real estate and passive sources and that at
least 75 percent of its gross income be derived from certain real estate
sources. Accordingly, in the event the Company derives income in excess of five
percent from management and other "non-real estate" and "non-passive"
activities, the Company would no longer qualify as a REIT for federal income tax
purposes and would be required to pay federal income taxes as a business
corporation. The income earned by KRSI is not included in determining KE's
qualification as a REIT.
Two major governmental tenants, when all of their respective departments
and agencies which lease space in the Company's buildings are combined, lease
more than ten percent of the rentable area of the Company's buildings and
contribute more than ten percent of the Company's annualized rentals as of
December 31, 2002. At that date, the United States of America leased 12.4
percent of the Company's rentable square feet and accounted for an aggregate of
12.3 percent of the Company's annualized rents. In addition, the State of
Florida leased 9.2 percent of the Company's rentable square feet and accounted
for 9.2 percent of the Company's annualized rents. In addition to the United
States of America and the State of Florida, some of the Company's principal
tenants are Blue Cross and Blue Shield of Florida, Six Continents Hotels,
Bechtel Corporation, CitiFinancial, Landstar System Holdings, Siemens
Westinghouse, Zurich Insurance, and Hanover Insurance. Governmental tenants
(including the State of Florida and the United States of America), which account
for 24.4 percent of the Company's leased space, may be subject to budget
reductions in times of recession and governmental austerity measures. There can
be no assurance that governmental appropriations for rents may not be reduced.
Additionally, certain private-sector tenants, which have contributed to the
Company's rent stream, may reduce their current demands, or curtail their future
need, for additional office space.
Competition
The Company competes in the leasing of office space with a considerable
number of other realty concerns, including local, regional and national, some of
which have greater resources than the Company. Through its ownership and
management of suburban office parks, the Company seeks to attract tenants by
offering office space that has, among other advantages, convenient access to
residential areas. In recent years local, regional and national concerns have
built competing office parks and single buildings in suburban areas in which the
Company's Office Projects 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
achieve and maintain what it considers satisfactory occupancy levels at
satisfactory rental rates, given current market and economic conditions.
Investment Policies
The Company seeks to capitalize on some of its competitive advantages, such
as the value of its franchise in the suburban office park market and its
operating systems, development expertise, acquisition expertise and unimproved
land available for development. The Company intends to continue to develop and
construct office buildings primarily using its existing inventory of 55.8 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 or manages suburban office buildings. The Company
also intends to acquire existing office buildings or additional land for
development in markets that the Company considers favorable. Although all of the
Company's properties are located in the Southeast and Houston, Texas, management
does not necessarily limit the Company's development and acquisitions activities
to any particular area. The Company may also sell Office Projects located in
certain markets.
4
In 2000, the Company has adopted a plan to repurchase up to 2.65 million
shares of its common stock of which 1.21 million shares have been repurchased.
See "Financing Activities" in Management's Discussion and Analysis of Financial
Condition and Results of Operations for further information.
The investment policies of the Company may be changed by its directors at
any time without notice to, or a vote of, shareholders. Although the Company has
no fixed policy which limits the percentage of its assets which may be invested
in any one type of investment or the geographic areas in which the Company may
acquire properties, the Company intends to continue to operate so as to qualify
for tax treatment as a REIT. The Company may in the future invest in other types
of office buildings, apartment buildings, shopping centers, and other
properties. The Company also may invest in the securities (including mortgages)
of companies primarily engaged in real estate activities; however, it does not
intend to become an investment company regulated under the Investment Company
Act of 1940.
For the year ended December 31, 2002, all of the Company's rental revenues
were derived from buildings purchased or developed by the Company. The Company's
2002 interest revenues were derived from temporary cash investments and notes
receivable from stock sales to current employees.
Employees
The Company currently has a combined financial, administrative, leasing,
and center maintenance staff of approximately 140 employees. An on-site general
manager is responsible for the leasing and operations of all buildings in a
Koger Center or metropolitan area.
Item 2. PROPERTIES
General
As of December 31, 2002, the Company owned 124 office buildings located in
the nine metropolitan areas of Jacksonville, Orlando, St. Petersburg, and
Tallahassee, Florida; Atlanta, Georgia; Charlotte, North Carolina; Memphis,
Tennessee; Houston, Texas; and Richmond, Virginia. The Office Projects acquired
and developed by the Company have campus-like settings with extensive
landscaping and ample tenant parking. The Office Projects are generally
low-rise, mid-rise, and high-rise structures of contemporary design and
constructed of masonry, concrete and steel, with facings of brick, concrete and
glass. The Office Projects are generally located with easy access, via
expressways, to the central business district and to shopping and residential
areas in the respective communities. The properties are well maintained and
adequately covered by insurance.
Leases on the Office Projects vary between net leases (under which the
tenant pays a proportionate share of operating expenses, such as utilities,
insurance, property taxes and repairs), base year leases (under which the tenant
pays a proportionate share of operating expenses in excess of a fixed amount),
and gross leases (under which the Company pays all such items). Most leases are
on a base year 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, 2002, the Office
Projects were on average 84 percent occupied and the average annual base rent
per rentable square foot occupied was $17.01. The Office Projects are occupied
by numerous tenants (approximately 940 leases), many of whom lease relatively
small amounts of space, conducting a broad range of commercial activities.
5
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 leases. As of December 31, 2002,
approximately two percent of the Company's annualized gross rental revenues were
derived from existing leases containing rental escalation provisions based upon
changes in the Consumer Price Index (some of which contain maximum rates of
increases); approximately 97 percent of such revenues were derived from leases
containing escalation provisions based upon fixed steps or real estate tax and
operating expense increases; and approximately one percent of such revenues were
derived from leases without escalation provisions. Some of the Company's leases
contain options which allow the lessee to renew for varying periods, generally
at the same rental rate and subject, in most instances, to Consumer Price Index
escalation provisions.
The Company owns approximately 85 acres of unimproved land (55.8 acres held
for development, 23.2 acres held for sale and six acres not suitable for
development) located in the metropolitan areas of Birmingham, Alabama; Orlando
and St. Petersburg, Florida; Atlanta, Georgia; Charlotte and Greensboro, North
Carolina; and Columbia and Greenville, South Carolina. Each of these parcels of
land has been partially or wholly developed with streets and/or utilities.
Property Location and Other Information
The following table sets forth information relating to the properties owned
by the Company as of December 31, 2002.
Weighted
Average Land
Number Age of Improved Unimproved
of Buildings Rentable with Bldgs. Land
Office Project/Location Buildings (In Years) (1) Sq. Ft. (In Acres) (In Acres)
- ----------------------- --------- -------------- ------- ---------- ----------
Atlanta Chamblee 21 20 1,117,569 76.2 2.5
Atlanta Gwinnett 3 6 262,789 15.9 19.6
Atlanta Perimeter 1 17 176,503 5.3
Atlanta Three Ravinia 1 11 804,528 3.8
Birmingham Colonnade 16.5
Charlotte Carmel 7.7
Charlotte University 2 4 182,852 18.7
Charlotte Vanguard 13 19 526,177 39.7 17.1
Columbia Spring Valley 1.0
Greensboro Wendover 9.1
Greenville Park Central 3.5
Houston Post Oak 3 22 1,205,728 11.4
Jacksonville Baymeadows 7 10 749,787 51.1
Jacksonville JTB 4 3 416,773 32.0
Memphis Germantown 6 9 531,506 34.6
Orlando Central 21 31 616,154 44.7 1.3
Orlando Lake Mary 2 4 303,481 20.2
Orlando University 5 8 384,193 27.1
Richmond Paragon 1 17 145,127 8.1
St. Petersburg 15 19 669,040 68.7 6.7
Tallahassee 19 20 833,786 62.7
-- -- ------- ----
Total 124 8,925,993 520.2 85.0
=== ========= ===== ====
Weighted Average 16
(1) The age of each office building was weighted by the rentable square feet
for such office building to determine the weighted average age of (a) the
buildings in each Office Project or location and (b) all Office Projects
owned by the Company.
6
Percent Occupied and Average Rental Rates
The following table sets forth, with respect to each Office Project, the
number of buildings, number of leases, rentable square feet, percent occupied,
and the average annual rent per rentable square foot occupied as of December 31,
2002.
Average
Number Number Rentable Annual
of of Square Percent Base Rent Per
Office Project/Location Buildings Leases Feet Occupied (1) Square Foot (2)
- ----------------------- --------- ------ ---- ------------ ---------------
Atlanta Chamblee 21 124 1,117,569 95% $18.08
Atlanta Gwinnett 3 51 262,789 91% 18.79
Atlanta Perimeter 1 12 176,503 63% 20.46
Atlanta Three Ravinia (3) 1 19 804,528 63% 17.49 (4)
Charlotte University 2 16 182,852 96% 18.28
Charlotte Vanguard 13 61 526,177 75% 16.88
Houston Post Oak (3) 3 103 1,205,728 78% 17.42
Jacksonville Baymeadows 7 43 749,787 99% 14.84 (4)
Jacksonville JTB 4 7 416,773 100% 12.60 (4)
Memphis Germantown 6 78 531,506 78% 18.64
Orlando Central 21 140 616,154 97% 16.13
Orlando Lake Mary 2 19 303,481 75% 19.63
Orlando University 5 60 384,193 87% 18.93
Richmond Paragon 1 26 145,127 91% 18.73
St. Petersburg 15 117 669,040 87% 16.27
Tallahassee 19 62 833,786 71% 17.16
-- -- ------- -- -----
Total 124 938 8,925,993
=== === =========
Weighted Average - Total Company 84% $17.01
== ======
Weighted Average - Operational Buildings 86% $16.90
== ======
Weighted Average - Buildings in Lease-up 71% $17.44
== ======
(1) The percent occupied rates have been calculated by dividing total rentable
square feet occupied in a building by rentable square feet in such
building.
(2) Rental rates are computed by dividing (a) total annualized base rents
(which excludes expense pass-throughs and reimbursements) for an Office
Project as of December 31, 2002 by (b) the rentable square feet applicable
to such total annualized base rents.
(3) Currently in the lease-up period. The Company considers an acquired
building to be in a lease-up period until the earlier of 85% occupancy or
18 months after acquisition or substantial completion.
(4) Leases are "triple net" where tenants pay substantially all operating costs
in addition to base rent.
7
Lease Expirations on the Company's Properties
The following schedule sets forth with respect to all of the Office
Projects (a) the number of leases which will expire in calendar years 2003
through 2011, (b) the total rentable area in square feet covered by such leases,
(c) the percentage of total rentable square feet leased represented by such
leases, (d) the average annual rent per square foot for such leases, (e) the
current annualized base rents represented by such leases, and (f) the percentage
of gross annualized base rents contributed by such leases. This information is
based on the buildings owned by the Company on December 31, 2002 and on the
terms of leases in effect as of December 31, 2002, 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 64 percent, 66 percent and 61 percent of the Company's square
feet, which were scheduled to expire during 2002, 2001 and 2000, respectively.
Percentage of Average Percentage
Total Square Annual Rent Total of Total
Number of Number of Feet Leased per Square Annualized Annual. Rents
Leases Square Feet Represented by Foot Under Rents Under Represented by
Period Expiring Expiring Expiring Leases Expiring Leases Expiring Leases Expiring Leases
- ------ -------- -------- --------------- --------------- --------------- ---------------
2003 352 1,827,632 24.4% $16.77 $ 30,654,269 24.1%
2004 193 901,227 12.1% 17.08 15,397,383 12.1%
2005 175 987,462 13.2% 16.68 16,468,491 12.9%
2006 85 624,266 8.3% 17.63 11,006,163 8.7%
2007 72 960,378 12.8% 16.89 16,216,885 12.8%
2008 24 446,148 6.0% 18.23 8,133,132 6.4%
2009 19 1,061,786 14.2% 18.15 19,271,218 15.2%
2010 6 162,913 2.2% 16.25 2,647,992 2.1%
2011 3 79,844 1.1% 16.28 1,299,956 1.0%
Other 9 422,721 5.7% 14.24 6,020,296 4.7%
--- ------- --- ----- --------- ---
Total 938 7,474,377 100.0% $17.01 $127,115,785 100.0%
=== ========= ===== ====== ============ =====
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, 2002. The information set forth below
is not necessarily indicative of future expenditures for these items.
Building Improvements Tenant Improvements Deferred Tenant Costs
--------------------- ------------------- ---------------------
Per Average Per Average Per Average
Usable Sq. Usable Sq. Usable Sq.
Year Total Ft. Owned(4) Total Ft. Owned (4) Total Ft. Owned (4)
---- ----- ------------ ----- ------------- ----- ---------
2000 (1) $4,005,000 $0.48 $8,362,000 $1.00 $1,711,000 $0.20
2001 (2) 4,829,000 0.58 6,666,000 0.80 1,381,000 0.17
2002 (3) 4,383,000 0.69 5,156,000 0.81 1,338,000 0.21
(1) Excludes the 18 buildings for which construction was completed during 1998,
1999 and 2000.
(2) Excludes the 13 buildings for which construction was completed during 1999,
2000 and 2001.
(3) Excludes the 8 buildings constructed and the 2 properties acquired during
2000, 2001 and 2002.
(4) Per average rentable square foot for 2002.
8
Fixed Rate Indebtedness on the Company's Properties
The following table sets forth with respect to each Office Project 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 Office Project as of December 31,
2002.
Weighted
Mortgage Average
Loan Interest
Office Project Balance Rate
- -------------- ------- ----
Atlanta Chamblee $ 0 --
Atlanta Gwinnett 10,476 8.26%
Atlanta Perimeter 7,055 8.26%
Atlanta Three Ravinia 85,000 5.26%
Charlotte University 0 --
Charlotte Vanguard 19,066 8.20%
Houston Post Oak 0 --
Jacksonville Baymeadows 33,073 7.86%
Jacksonville JTB 17,061 8.26%
Memphis Germantown 23,796 7.84%
Orlando Central 25,801 8.26%
Orlando Lake Mary 12,519 8.26%
Orlando University 20,276 7.25%
Richmond Paragon 7,718 8.00%
St. Petersburg 27,216 8.26%
Tallahassee 38,132 8.10%
------ ----
Total $327,189 7.32%
======== ====
A mortgage loan with Northwestern Mutual Life Insurance Company encumbers
several Office Projects and the outstanding principal amount on this mortgage
loan has been allocated based upon the square footage of the collateral in the
applicable Office Project. For additional information on these loans see Note 3,
"Mortgages and Loans Payable" of the Notes to Consolidated Financial Statements.
Indebtedness with Variable Interest Rates
As of December 31, 2002, the Company had an outstanding balance of $26
million on its $100 million secured revolving credit facility and $78.5 million
in term loans with variable interest rates encumbering certain of the Company's
properties. The following table sets forth historical information with respect
to indebtedness having variable interest rates (dollars in thousands):
Weighted Approximate Approximate
Balance Average Maximum Average Wtd. Avg. Int.
Year Ended at End Int. Rate at Amount Amount Rate During
December 31 of Period End of Period Outstanding Outstanding the Period
- ----------- --------- ------------- ----------- ----------- ----------
2002 104,509 4.2% $192,509 $75,498 4.1%
2001 1,544 7.9% 101,577 90,009 5.7%
2000 90,000 8.1% 123,500 96,262 7.9%
9
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange under
the ticker symbol KE. The high and low closing sales prices for the periods
indicated in the table below were:
Years
--------------------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
March 31 $17.95 $15.85 $15.97 $13.35 $17.9375 $15.5000
June 30 19.30 17.17 16.60 14.07 18.8750 16.5625
September 30 18.71 15.75 17.51 15.95 17.4375 16.6250
December 31 17.18 15.00 18.10 16.30 16.9375 15.0625
Any dividend paid in respect of the Company's common stock during the last
quarter of each year will, if necessary, be adjusted to satisfy the REIT
qualification requirement that at least 90 percent of the Company's REIT taxable
income for such taxable year be distributed. The Company's secured revolving
credit facility requires the Company to maintain certain financial ratios, which
includes a limitation on dividends. However, this covenant does not restrict the
Company from paying the dividends required to maintain its qualification as a
REIT.
Set forth below are the dividends per share paid during the three years
ended December 31, 2002.
Years
------------------------------
Quarter Ended 2002 2001 2000
------------- ---- ---- ----
March 31 $.35 $.35 $.35
June 30 .35 .35 .35
September 30 .35 .35 .35
December 31 .35 .35 .35
On January 15, 2002, the Company paid a capital gain distribution in the
form of a special dividend of $1.74 per share to shareholders of record on
December 28, 2001.
On February 6, 2003, the Company paid a quarterly dividend of $0.35 per
share to shareholders of record on December 31, 2002. In addition, the Company's
Board of Directors has declared a quarterly dividend of $0.35 per share payable
on May 1, 2003, to shareholders of record on March 31, 2003.
On February 28, 2003, there were approximately 1,200 shareholders of record
and the closing price of the Company's common stock on the New York Stock
Exchange was $15.48.
10
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 2002 2001 2000 1999 1998
- ------------------ ---- ---- ---- ---- ----
Rental revenues and other rental services $126,404 $165,623 $164,733 $156,153 $133,663
Interest revenues 405 776 703 457 446
Total operating revenues (1) 129,751 169,703 166,526 158,537 135,940
Property operations expense 46,235 61,608 61,868 60,582 53,719
Depreciation and amortization (1) 27,908 35,099 34,244 31,477 27,454
Mortgage and loan interest (1) 25,145 26,112 28,157 22,730 17,543
General and administrative expense 11,381 8,412 20,217 8,633 6,953
Net income 16,423 73,223 27,153 36,586 29,602
Earnings per share - diluted 0.77 2.75 1.01 1.35 1.10
Dividends declared per common share 1.40 3.14 1.40 1.35 1.15
Weighted average shares outstanding - diluted 21,378 26,610 26,962 27,019 26,901
Balance Sheet Information
Operating properties (before depreciation) $897,158 $663,286 $946,780 $927,523 $872,183
Undeveloped land 13,826 13,855 13,975 17,137 20,535
Total assets 805,085 690,585 851,022 885,739 834,995
Mortgages and loans payable 431,698 248,683 343,287 351,528 307,903
Total shareholders' equity 343,068 354,542 448,493 467,826 464,763
Other Information
Funds from operations (2) $ 43,834 $ 69,681 $ 56,107 $ 65,011 $ 56,486
Income before interest expense, income taxes,
total depreciation and amortization $69,063 $135,118 $ 89,533 $ 90,980 $ 75,555
Number of buildings (at end of period) 124 120 194 218 251
Percent occupied (at end of period) 84% 90% 90% 93% 90%
(1) Certain amounts have been reclassified for comparability with current year
presentation.
(2) 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):
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net income $16,423 $73,223 $27,153 $36,586 $29,602
Depreciation - real estate 25,889 32,261 31,720 28,800 25,146
Amortization - deferred tenant costs 1,523 2,172 1,923 2,132 1,464
Amortization - goodwill 170 170 170 170
Minority interest 20 1,044 1,156 1,174 139
Gain on sale or disposition of operating properties (39,189) (5,963) (3,846)
Gain on sale or disposition of non-operating assets (21) (52) (5) (35)
--- --- -- ---
Funds from Operations $43,834 $69,681 $56,107 $65,011 $56,486
======= ======= ======= ======= =======
11
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, KRSI, KVP, KRLLC, KPO, and KPOLP
(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 accounting principles generally accepted in the
United States of America ("GAAP") and include amounts determined using
management's best judgments and estimates of the expected effects of events and
transactions that are being accounted for currently.
The Company's independent auditors have audited the accompanying
Consolidated Financial Statements. The objective of their audit, conducted in
accordance with auditing standards generally accepted in the United States of
America, 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 GAAP. They evaluated the Company's
internal control structure to the extent considered necessary by them to
determine the audit procedures required to support their report on the
Consolidated Financial Statements and not to provide assurance on such
structure.
The Company maintains accounting and other control systems which management
believes provide reasonable assurance that the Company's assets are safeguarded
and that the Company's books and records reflect the authorized transactions of
the Company, although there are inherent limitations in any internal control
structure, as well as cost versus benefit considerations. The Audit Committee of
the Company's Board of Directors, which is composed exclusively of directors who
are not officers of the Company, directs matters relating to audit functions,
annually appoints the auditors subject to ratification of the Company's Board of
Directors, reviews the auditors' independence, reviews the scope and results of
the annual audit, and periodically reviews the adequacy of the Company's
internal control structure with its external auditors, its internal auditors and
its senior management.
In December 2001, the Company sold 75 suburban office buildings, one retail
center and 3.4 acres of unimproved land to AP-Knight LP, a related party, for
approximately $199,587,000, net of selling costs, and 5,733,772 shares of the
Company's common stock (which were valued at approximately $96,327,000). These
properties contained more than 3.9 million of rentable square feet and
contributed rental revenues of approximately $54.4 million during the year ended
December 31, 2001. Rental revenues for the sold properties comprised
approximately 33% of the Company's total rental revenues for the year ended
December 31, 2001. The results of these properties are included in the operating
results of the Company for the period ending December 31, 2001. As a result,
certain of the Company's current operating results, as compared to the prior
year, have been affected by the sale of these assets. On January 15, 2002, the
Company distributed a portion of the proceeds above in the form of a special
dividend of $1.74 per share to shareholders of record on December 28, 2001.
During January 2002, the Company acquired all of the remaining limited
partnership units in Koger-Vanguard Partners, L.P., a Delaware limited
partnership, for approximately $16.5 million. These partnership units were
convertible into 999,710 shares of the Company's common stock.
12
On January 31, 2002, the Company acquired Three Ravinia Drive, an 805,000
square foot suburban office building located in Atlanta, Georgia, for
approximately $125.0 million and other transaction costs. As of December 31,
2002, approximately 63% of the property's rentable space was leased. On December
6, 2002, the Company acquired The Lakes on Post Oak, an 1.2 million square foot,
suburban three office building complex located in Houston, Texas, for
approximately $101.5 million and other transaction costs. As of December 31,
2002, approximately 78% of the property's rentable space was leased. The Company
expects to lease the properties' vacant space over the next three years. The
results of the Koger-Vanguard Partners, L.P., Three Ravinia Drive, and The Lakes
on Post Oak acquisitions have been included in the Company's operating results
for the period ending December 31, 2002 from their respective acquisition dates.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are described in Note 1 to
the consolidated financial statements included in Item 8 of this Form 10-K. The
Company believes that its significant accounting policies and estimates include
investments in real estate, depreciation and amortization, impairment of
long-lived assets, revenue recognition, allowances for doubtful accounts,
minority interest, federal income taxes, stock options, fair value of financial
instruments, cash and cash equivalents, and restricted cash.
RESULTS OF OPERATIONS
Rental Revenues. Rental and other rental services revenues decreased
$39,272,000 or 23.7 percent from the year ended December 31, 2001 to the year
ended December 31, 2002. This decrease resulted primarily from (i) the reduction
of rental revenues due to the sale of 75 office buildings and one retail center
on December 12, 2001 (the "2001 Property Sale") and (ii) the decline in
occupancy in the "same store" universe of properties owned at December 31, 2001
and 2002. The effect of these decreases was partially offset by an increase in
rental revenues ($3,247,000) from two buildings constructed by the Company in
2001, 11 months of revenues ($12,692,000) from the Three Ravinia Drive property,
and approximately one month of revenue ($1,143,000) from The Lakes on Post Oak
property. For 2001, rental revenues increased $890,000 or 0.5 percent from the
year ended December 31, 2000 to the year ended December 31, 2001. This increase
resulted primarily from (i) the increase in the Company's average rental rate
and (ii) increases in rental revenues ($7,308,000) from seven buildings
constructed by the Company. The effect of these increases was partially offset
by (i) the reduction of rental revenues ($5,949,000) caused by the sale of two
office parks during 2000 and 75 office buildings and one retail center on
December 12, 2001 (the "2001 Property Sale") and (ii) the decline in occupancy
in the "same store" universe of properties owned at December 31, 2000 and 2001.
As of December 31, 2002, the Company's buildings were on average 84 percent
occupied. The buildings owned by the Company were on average 90 percent occupied
at both December 31, 2001 and 2000.
Management Fee Revenues. For 2002, management fee revenues decreased
$733,000, as compared to 2001. This decrease was due primarily to the loss of
fees from one management agreement that was terminated in 2001. This loss of
fees was partially offset by fees received from AP-Knight LP under a property
management agreement that began in December 2001. AP-Knight LP terminated this
property management agreement effective December 31, 2002. For the year ended
December 31, 2002, management fees and leasing commissions from AP-Knight LP
totaled approximately $2,680,000. The loss of such revenues will be partially
offset by a corresponding reduction in the direct cost of management fees. For
2001, management fee revenues increased $2,287,000, as compared to 2000. This
increase was due primarily to (i) the merger of Koger Realty Services, Inc. into
a wholly owned taxable subsidiary of the Company on February 1, 2001 (the
"Merger") and (ii) the increase in asset management fees ($156,000) earned from
Crocker Realty Trust. These increases were partially offset by reductions in (i)
fees earned under the management contract with Centoff Realty Company, Inc.
("Centoff"), a subsidiary of Morgan Guaranty Trust Company of New York and (ii)
construction management fees.
Equity in Earnings from Unconsolidated Subsidiary (Koger Realty Services,
Inc.) Income from Koger Realty Services, Inc. decreased $564,000 for 2001, as
compared to 2000, due to the Merger. The subsidiary was consolidated in 2002.
Interest Income. For 2002, interest revenues decreased $371,000, as
compared to 2001. This decrease was due primarily to reductions in interest
earned from loans to certain current and former employees and lower effective
interest rates on the Company's average invested cash balances. For 2001,
interest income increased $73,000, as compared to 2000, due to additional
earnings on larger cash balances resulting from the 2001 Property Sale.
13
Expenses. Property operations expense includes such charges as utilities,
real estate taxes, janitorial, maintenance, property insurance, provision for
uncollectible rents and management costs. During 2002, property operations
expense decreased $15,373,000, compared to 2001, primarily due to (i) the 2001
Property Sale, (ii) the Company's ongoing cost management programs, and (iii)
reductions in the Company's provision for uncollectible accounts. During 2001,
property operations expense decreased $260,000 or 0.4 percent, compared to 2000,
primarily due to the reduction of property operations expense ($3,365,000)
caused by the sale of two office parks during 2000 and the 2001 Property Sale.
Most of this decrease was offset by (i) the increases in property operations
expense ($1,870,000) from seven buildings constructed by the Company and (ii)
increases in the Company's provision for uncollectible accounts. For 2002, 2001
and 2000, property operations expense as a percentage of total rental and other
rental services revenues was 36.5 percent, 37.2 percent and 37.6 percent,
respectively.
Depreciation expense has been calculated on the straight-line method based
upon the useful lives of the Company's depreciable assets, generally 3 to 40
years. For 2002, depreciation expense decreased $6,372,000, compared to 2001,
due to the 2001 Property Sale. The effect of this decrease was partially offset
by the acquisition of the Three Ravinia Drive and The Lakes on Post Oak
properties during 2002. For 2001, depreciation expense increased $605,000 or 1.9
percent, compared to 2000, due to the construction completed during 2000 and
2001. The effect of this increase was partially offset by the sale of two office
parks during 2000 and the 2001 Property Sale.
In 2002, amortization expense decreased $819,000, compared to 2001. These
decreases were due primarily to a decline in the Company's expenditures for
deferred tenant costs and the Company's adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142 effective January 1, 2002. SFAS No. 142
discontinues the practice of amortizing goodwill. In 2001, amortization expense
increased $269,000, compared to 2000, due to deferred tenant costs incurred
during 2000 and 2001.
Interest expense decreased $967,000 during 2002, compared to 2001,
primarily due to (i) the decrease in the average balance of mortgages and loans
payable and (ii) the decrease in the average interest rate on the Company's
variable rate loans. For 2001, interest expense decreased $2,045,000 during
2001, compared to 2000, primarily due to the decrease in the average interest
rate on the Company's variable rate loans. During 2002, 2001, and 2000, the
weighted average interest rate on the Company's variable rate loans was 4.1
percent, 5.7 percent and 7.9 percent, respectively. The Company's average
outstanding amount under such loans during 2002, 2001, and 2000 was $75,498,000,
$90,009,000, and $96,262,000, respectively. During 2002, 2001, and 2000, the
weighted average interest rate on the Company's fixed rate loans was 7.3
percent, 8.0 percent and 8.0 percent, respectively. The Company's average
outstanding amount under its fixed rate loans during 2002, 2001, and 2000 was
$327,189,000, $250,373,000, and $255,439,000, respectively.
For 2002, general and administrative expenses increased $2,969,000,
compared to 2001. During 2002, the Company expensed $2,118,000 of compensation
expense (of which $1,942,000 was general and administrative expense) related to
special distributions that are probable of being paid under the terms of certain
stock options agreements. In March 2003, the Company paid special distributions
of $1,740,000 which had been accrued as of December 31, 2002. The Company also
incurred a one-time curtailment loss of $418,000 related to the resignation of a
participant in the Company's retirement plan. The Company also experienced
increases in professional fees for internal audit, legal, and personnel
recruiting services. For 2001, general and administrative expenses decreased
$11,805,000, compared to 2000, primarily due to certain non-recurring charges,
including restructuring charges and severance costs, incurred during 2000.
Direct costs of management fees decreased $43,000 during 2002, compared to
2001. Direct costs of management fees increased $2,480,000 during 2001, compared
to 2000, primarily due to the Merger. This increase was partially offset by
declines in costs due to (i) termination of the Centoff management contract and
(ii) reduction in construction management services provided to third parties.
14
Other expenses decreased $46,000 during 2002, compared to 2001, primarily
due to the reduction in real estate taxes on unimproved land. Other expenses
decreased $28,000 during 2001, compared to 2000, primarily due to the reduction
in real estate taxes on unimproved land resulting from the reduction in the
number of acres held for investment and held for sale.
Management periodically reviews its investment in properties for evidence
of impairments in value. Factors considered consist of, but are not limited to:
current and projected occupancy rates, market conditions in different geographic
regions, and management's plans with respect to its properties. If management
were to conclude that expected cash flows would not enable the Company to
recover the carrying amount of its investments, losses would be recorded and
asset values would be reduced. No such impairments in value were recognized
during 2002, 2001 or 2000.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. During the year ended December 31, 2002, the Company
generated approximately $46.7 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 AP-Knight LP and
Crocker Realty Trust. As a REIT for Federal income tax purposes, the Company is
required to pay out annually, as dividends, 90 percent of its REIT taxable
income (which, due to non-cash charges, including depreciation and net operating
loss carryforwards, may be substantially less than cash flow). In the past, the
Company has paid out dividends in amounts at least equal to its REIT taxable
income. The Company believes that its cash provided by operating activities and
its current cash balance will be sufficient to cover debt service payments and
to pay the dividends required to maintain REIT status through 2003.
The level of cash flow generated by rents depends primarily on the
occupancy rates of the Company's buildings and changes in rental rates on new
and renewed leases and under escalation provisions contained in most leases. As
of December 31, 2002, approximately 99 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, 2002, leases representing approximately 24.1 percent of
the gross annualized rent from the Company's properties, without regard to the
exercise of options to renew, were due to expire during 2003. This represents
approximately 350 leases for space in buildings located in 15 of the Company's
16 Office Projects. Certain of these tenants may not renew their leases or may
reduce their demand for space. Leases were renewed on approximately 64 percent,
66 percent and 61 percent of the Company's rentable square feet, which were
scheduled to expire during 2002, 2001 and 2000, respectively. For those leases
which renewed during 2002, the average base rental rate increased from $17.23 to
$17.44, an increase of 1.2 percent. 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
amount of leases which will expire during 2003 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 has historically benefited from generally positive economic
conditions and stable occupancy levels in many of the metropolitan areas in
which the Company owns office buildings. The Company believes that the
southeastern and southwestern United States provides significant economic growth
potential due to its diverse regional economies, expanding metropolitan areas,
skilled work force and moderate labor costs. However, the Company is currently
experiencing a slowdown in the demand for office space in the markets in which
it owns office buildings. Cash flow from operations could be reduced if a
weakened economy resulted in lower occupancy, declining market rental rates, and
lower rental income for the Company's office buildings, which may in turn affect
the amount of dividends paid by the Company. For the properties owned on
December 31, 2002, occupancy was 84 percent.
15
Governmental tenants (including the State of Florida and the United States
of America), which accounted for 24.4 percent of the Company's leased space as
of December 31, 2002, may be subject to budget reductions in times of recession
and governmental austerity measures. Consequently, there can be no assurance
that governmental appropriations for rents may not be reduced. Additionally,
certain of the private-sector tenants, which have contributed to the Company's
rent stream, may reduce their current demands, or curtail their future need, for
additional office space.
On December 12, 2001, the Company began providing property management and
leasing services to AP-Knight for 75 suburban office buildings and one retail
center. AP-Knight acquired these properties from the Company. The Company agreed
to continue to manage and lease these properties for what it considers to be
arm's length property management and leasing fees. This agreement was terminable
by either party upon 30 days written notice. AP-Knight LP terminated this
property management agreement effective December 31, 2002. For the year ended
December 31, 2002, management fees and leasing commissions from AP-Knight
totaled approximately $2,680,000. The loss of such revenues will be partially
offset by a corresponding reduction in the direct cost of management fees. From
February 1, 2001 through August 31, 2001, the Company provided property
management services for 55 commercial office properties owned by Koala. During
this period, the Company earned fees of $3,499,000 for the management of these
properties.
During 2000, the Company reached an agreement with Crocker Realty Trust
("CRT") to provide asset management services for the 6.1 million square foot
portfolio of CRT of which Mr. Thomas J. Crocker is the Chairman of the Board and
Chief Executive Officer owning 2.8 percent of the outstanding CRT shares, Mr.
Robert E. Onisko is the Treasurer and Chief Financial Officer owning 0.2 percent
of the outstanding shares and Apollo is a principal shareholder owning 49
percent of the outstanding CRT shares. The Company is paid a fee for these
services based upon the value of CRT's assets. The agreement is terminable by
either party upon 90 days written notice. The terms of this agreement were
approved by a committee of the Company's Board of Directors whose members were
not affiliated with CRT, and who determined that such terms were similar to
those that could be obtained from an unaffiliated third party. During 2002 and
2001, the Company earned fees of $603,000 and $452,000, respectively, under this
agreement. Currently, the Company provides asset management services for the
remaining 4.6 million square feet owned by CRT.
Investing Activities. At December 31, 2002, substantially all of the
Company's invested assets were in office buildings and land. Improvements to the
Company's existing properties have been financed principally through internal
operations. During 2002, the Company's expenditures for improvements to existing
properties decreased by approximately $1.4 million from the prior year,
primarily due to decreases in expenditures for tenant improvements. This
decrease in expenditures for tenant improvements was primarily due to (i) the
2001 Property Sale and (ii) the lower leasing activity of second generation
space during 2002 compared to 2001.
During January 2002, the Company acquired all of the remaining limited
partnership units in Koger-Vanguard Partners, L.P., a Delaware limited
partnership, for approximately $16.5 million. These partnership units were
convertible into 999,710 shares of the Company's common stock.
On January 31, 2002, the Company acquired Three Ravinia Drive, an 805,000
suburban square foot office building located in Atlanta, Georgia, for
approximately $125.0 million and other transaction costs. The Company allocated
approximately $7.0 million and $118.3 million of the net purchase price to the
value of the acquired land and building, respectively. As of December 31, 2002,
approximately 63% of the property's rentable space was leased. The Company
expects to lease most of the property's vacant space over the next three years.
On December 6, 2002, the Company acquired The Lakes on Post Oak, an 1.2
million square foot, suburban three office building complex located in Houston,
Texas, for approximately $101.5 million and other transaction costs. The Company
allocated approximately $12.4 million and $90.7 million of the net purchase
price to the value of the acquired land and building, respectively. As of
December 31, 2002, approximately 78% of the property's rentable space was
leased. The Company expects to lease most of the properties' vacant space over
the next three years.
16
The Company had no development activity in 2002. During 2001, the Company
completed the development of two buildings, which contain 180,900 gross square
feet. During 2000, the Company completed the development of six buildings, which
contain 579,200 gross square feet. During 1999, the Company completed the
development of six buildings, which contain 630,400 gross square feet. At
December 31, 2002, the Company owned 10 of these 14 buildings containing 983,900
gross square feet.
On December 12, 2001, the Company sold 75 suburban office buildings, one
retail center and 3.4 acres of unimproved land for approximately $199,587,000,
net of selling costs, and 5,733,772 shares of the Company's common stock (which
were valued at approximately $96,327,000). These properties contained more than
3.9 million rentable square feet and were located in Austin and San Antonio,
Texas; Charlotte and Greensboro, North Carolina; Greenville, South Carolina; and
Birmingham, Alabama. These properties were sold to AP-Knight, an affiliate of
Apollo. A former director of the Company is the partner responsible for
investments at Apollo. The transaction was negotiated by a Special Committee of
the Board of Directors composed of directors who had no affiliation with Apollo.
In order to insure that the terms of the transaction were equal to, or better
than, a similar transaction with an unrelated third party, the Company initiated
a marketing period through its financial advisor during which unrelated bidders
were asked to submit competing offers to purchase these properties. Prior to the
closing of the sale, the Company did not receive any sufficiently attractive
alternative offers for these properties. In connection with this transaction,
Morgan Stanley & Co. Incorporated acted as financial advisor and provided an
opinion to the Special Committee of the Board of Directors which opinion stated
that the consideration received by the Company from the transaction was fair
from a financial point of view.
On June 1, 2000, the Company sold the Tulsa Center (containing 476,400
multi-tenant usable square feet and 10 acres of undeveloped land) for
approximately $28,841,000, net of selling costs. The Company sold approximately
5.6 acres of unimproved land located in Richmond, Virginia, for approximately
$800,000, net of selling costs, on July 10, 2000. On August 11, 2000, the
Company sold the El Paso Center (containing 315,600 multi-tenant usable square
feet) for approximately $20,075,000, net of selling costs. On August 31, 1999,
the Company sold the Jacksonville Central Center (containing 666,000
multi-tenant usable square feet and 1.4 acres of undeveloped land) and the
Charlotte East Center (containing 468,900 multi-tenant usable square feet and
3.9 acres of undeveloped land) for approximately $68,761,000, net of selling
costs.
Financing Activities. The Company's primary external sources of cash are
bank borrowings, mortgage financings, and public and private offerings of equity
securities. The proceeds of these financings are used by the Company to acquire
buildings and land or to refinance debt. The Company has a $100 million secured
revolving credit facility provided by Fleet Bank, of which $26 million and $0
were outstanding at December 31, 2002 and 2001, respectively.
Prior to 1999, the Company's Board of Directors (the "Board") approved the
repurchase of up to one million shares of the Company's common stock (the
"Shares"). The Company repurchased 54,000 Shares for approximately $852,000
during 1999. During 2000, the Board approved the repurchase of up to 2.65
million Shares and the Company repurchased 1,209,980 Shares for approximately
$20.4 million for a remaining balance of approximately 1.44 million Shares
approved. The Company did not repurchase any Shares during 2001. During 2002,
the Company repurchased 32,800 Shares for approximately $503,000.
During December 2001, the Company repaid the $90 million outstanding
balance under the secured revolving credit facility provided by First Union
National Bank of Florida. This credit facility matured during December 2001. On
December 28, 2001, the Company closed on a new $125 million secured revolving
credit facility provided by Fleet Bank. The commitment on this facility was
subsequently reduced to $100 million in December 2002. This facility provides
for monthly interest payments, requires the Company to maintain certain
financial ratios and matures in December 2004.
17
During the fourth quarter 2002, Koger acquired The Lakes on Post Oak. The
funds required for this acquisition were drawn from a $77 million mortgage
secured by the property as well as draws on the Company's revolving credit
facility. The non-recourse debt expires on December 9, 2004 and bears interest
at LIBOR plus 287 basis points with a maximum interest rate of 8.32% for the
first two years. Three consecutive one-year extensions, with 0.25% in extension
fees in the second and third years, are available at the Company's option. These
extensions are contingent on the Company's compliance with certain covenants.
During the fourth quarter 2002, Koger secured an $85 million non-recourse
loan from Metropolitan Life Insurance Company collateralized by its Three
Ravinia Drive property in Atlanta, Georgia. This loan has a five-year term
expiring on January 1, 2008 with a fixed interest rate of 5.26%. Koger used the
proceeds from this loan to pay down a substantial portion of the existing
balance on its secured revolving credit facility.
Concurrently, Koger amended its secured revolving credit facility to lower
the commitment amount to $100 million from $125 million and modified certain
debt covenant definitions and other requirements.
Loan maturities and normal amortization of mortgages and loans payable
during 2003 are expected to total approximately $12.9 million. In order to
generate funds sufficient to make principal payments in respect of indebtedness
of the Company over the long term, as well as necessary capital and tenant
acquisition expenditures, the Company will be required to successfully refinance
its indebtedness or procure additional equity capital. However, there can be no
assurance that any such refinancing or equity financing will be achieved or will
generate adequate funds on a timely basis for these purposes. If additional
funds are raised by issuing equity securities, further dilution to existing
shareholders may result. Unfavorable conditions in the financial markets, the
degree of leverage of the Company and various other factors may limit the
ability of the Company to successfully undertake any such financings, and no
assurance can be given as to the availability of alternative sources of funds.
The Company has filed shelf registration statements with respect to the issuance
of up to $300 million of its common and/or preferred stock. The Company has
issued $91.6 million of its common stock under such registration statements.
In addition, in the event the Company is unable to generate sufficient
funds both to meet principal payments in respect of its indebtedness and to
satisfy distribution requirements of 90 percent of annual REIT taxable income to
its shareholders, the Company may be unable to qualify as a REIT. In such an
event, (i) the Company will incur federal income taxes and perhaps penalties,
(ii) if the Company is then paying dividends, it may be required to decrease any
dividend payments to its shareholders, and (iii) the market price of the
Company's common stock may decrease. The Company would also be prohibited from
requalifying as a REIT for five years.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR PURPOSE OF
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their businesses without fear of litigation so
long as those statements are identified as forward-looking and are accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected in such
statements. The Company desires to take advantage of the "safe harbor"
provisions of the Act.
This Annual Report on Form 10-K contains forward-looking statements,
together with related data and projections, about the Company's projected
financial results and its future plans and strategies. However, actual results
and needs of the Company may vary materially from forward-looking statements and
projections made from time to time by the Company on the basis of management's
then-current expectations. The business in which the Company is engaged involves
changing and competitive markets and a high degree of risk, and there can be no
assurance those 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.
18
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 $431.7 million, all
of which is secured by the Company's properties. Approximately $249.5 million of
such debt will mature by 2007. The $100 million secured revolving credit
facility ($26.0 million of which had been borrowed at December 31, 2002) matures
in December 2004. 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.
Risk of Rising Interest Rates and Variable Rate Debt. The Company currently
has a $100 million secured revolving credit facility and term loans with
variable interest rates. The Company may incur additional variable rate debt in
the future. Increases in interest rates on such debt could increase the
Company's interest expense, which would adversely affect the Company's cash flow
and its ability to pay dividends to its shareholders.
Existing Leverage; No Limitation on Debt. As of December 31, 2002, the debt
to total market capitalization ratio of the Company was approximately 57
percent. The Company's policy regarding this ratio (i.e., total consolidated
debt as a percentage of the sum of the market value of issued and outstanding
capital stock plus total consolidated debt) is not subject to any limitation in
the organizational documents of the Company. Accordingly, the Board of Directors
could establish policies which would increase the Company's debt to total market
capitalization ratio subject to any existing debt covenants. If this action were
taken, the Company could become more highly leveraged, resulting in an increase
in debt service that (a) could adversely affect the Company's cash flow and,
consequently, the amount of cash available for distribution to shareholders and
(b) could increase the risk of default on the Company's debt.
For purposes of establishing and evaluating its debt policy, the Company
measures its leverage by reference to the total market capitalization of the
Company rather than by reference to the book value of its assets. The Company
has used total market capitalization because it believes that the book value of
its assets (which to a large extent is comprised of the depreciated value of
real property, the Company's primary tangible asset) does not accurately reflect
its ability to borrow and to meet debt service requirements. The market
capitalization of the Company, however, is more variable than book value, and
does not necessarily reflect the fair market value of the underlying assets of
the Company at all times. The Company also considers factors other than its
market capitalization in making decisions regarding the incurrence of
indebtedness, such as the purchase price of properties to be acquired with debt
financing, the estimated market value of its properties upon refinancing and the
ability of particular properties, and the Company as a whole, to generate cash
flow to cover expected debt service.
19
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 Office Projects 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 (including oversupply of, or reduced demand for, office
and other competing commercial properties). All of the Company's Office Projects
are located in the southeastern United States and Houston, Texas. There is also
the risk of over building in certain sub-markets located in markets which the
Company currently serves. While the Company has generally avoided acquiring or
developing property in these sub-markets such over built conditions may occur in
sub-markets where the Company currently owns properties. The Company's
performance and its ability to pay dividends to its shareholders are, therefore,
dependent on economic conditions in these markets. The Company's historical
growth has occurred during periods when the economy in the 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 and
Houston, Texas 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 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 24.4 percent and 12.1 percent of the total
rentable square feet leased in the Company's buildings will expire in 2003 and
2004, respectively. If the Company is unable to promptly relet, or renew the
leases for, all or a substantial portion of the space located in its buildings,
or if the rental rates upon such renewal or reletting are significantly lower
than expected rental rates, or if the Company's reserves for these purposes
prove inadequate, the Company's cash flow and its ability to make expected
dividends to its shareholders may be adversely affected.
Leases with State of Florida
At December 31, 2002, the Company had 43 leases with various departments
and agencies of the State of Florida which totaled approximately 688,000
rentable square feet. The majority of these leases are for space in the
Company's Office Projects located in Tallahassee, Florida. These leases have
provisions for early termination for various reasons, including lack of budget
appropriations. During times of recession and government austerity measures, the
State of Florida may be subject to budget reductions and may decide to terminate
certain of its leases prior to the contractual lease expiration date. In
addition, these leases provide the State of Florida with the right to terminate,
without penalty, prior to the contractual lease expiration date in the event a
State owned building becomes available for occupancy upon giving six months
advance written notice to the Company. During 2002, the State of Florida
announced its intention to eliminate its Department of Labor, which had a direct
impact on the Company's property in Tallahassee. The Company is currently
evaluating the long-term impact of this reorganization and is in negotiations
with other state departments to reassign the vacated space.
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 pay dividends 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.
20
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.
Competition. Numerous office buildings compete with the Company's Office
Projects 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. The Company believes that major national or regional commercial
property developers will continue to seek development opportunities in the
southeastern and southwestern United States. These developers may have greater
financial resources than the Company. The number of competitive commercial
properties in a particular area could have a material adverse affect on the
Company's ability to lease space in its Office Projects or at newly developed or
acquired properties or on the amount of 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 pay dividends 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 substantial
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 affect on the Company's cash flow and
dividends paid.
Uninsured Loss. The Company presently carries comprehensive liability,
fire, and 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 or certain acts of terrorism, including nuclear, chemical,
and biological attacks) 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 affect on the Company, if required changes involve a greater
expenditure than the Company currently anticipates, the Company's ability to pay
dividends to its shareholders could be adversely affected.
21
Risks Involved in Property Ownership Through Partnership and Joint
Ventures. Although the Company owns fee simple interests in all of 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-ventures might become
bankrupt, (b) such partners or co-ventures 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-ventures 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's exposure to
inflationary cost increases in property level expenses is reduced by escalation
clauses, which are included in most of its leases. However, market conditions
may prevent the Company from escalating rents. Inflationary pressure may
increase operating expenses, including labor and energy costs (and, indirectly,
real estate taxes) above expected levels at a time when it may not be possible
for the Company to increase lease rates to offset such higher operating
expenses. In addition, inflation can have secondary effects upon occupancy rates
by decreasing the demand for office space in many of the markets in which the
Company operates.
Although inflation has historically often caused increases in the value of
income-producing real estate through higher rentals, the Company can provide no
assurance that inflation, when and if it occurs, will increase the value of its
properties in the future.
Risk of Development, Construction and Acquisition Activities
Within the constraints of its policy concerning leverage, the Company has
and will continue to develop and construct office buildings, particularly on its
undeveloped land. Risks associated with the Company's development and
construction activities, including activities relating to its undeveloped land,
may include: abandonment of development opportunities; construction costs of a
property exceeding original estimates and possibly making the property
uneconomical; occupancy rates and rents at a newly completed property
insufficient to make the property profitable; unavailability of financing on
favorable terms for development of a property; and the failure to complete
construction and lease-up on schedule, resulting in increased debt service
expense and construction costs. In addition, new development activities,
regardless of whether or not they are ultimately successful, typically require a
substantial portion of management's time and attention. Development activities
are subject to risks relating to the inability to obtain, or delays in
obtaining, all necessary zoning, land-use, building, occupancy and other
required governmental permits and authorizations.
The Company will continue to acquire office buildings. Acquisitions of
office buildings entail risks that investments will fail to perform in
accordance with expectations. Estimates of the cost of improvements to bring an
acquired building up to standards established for the market position intended
for such building may prove inaccurate. In addition, there are general
investment risks associated with any new real estate investment.
The Company anticipates that any future developments and acquisitions would
be financed through a combination of internally generated cash, equity
investments and secured or unsecured financing. If new developments are financed
through construction loans, there is a risk that, upon completion of
construction, permanent financing for newly developed properties may not be
available or may be available only on disadvantageous terms.
Changes in Policies Without Shareholder 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.
22
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 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.
23
The Company's environmental assessments of its properties have not revealed
any environmental liability that the Company believes would have a material
adverse affect 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 Company's
common stock in public markets will be the annual dividend yield on the share
price reflected by dividends paid 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."
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company currently has a $100 million secured revolving credit facility
and term loans with variable interest rates. The Company may incur additional
variable rate debt in the future to meet its financing needs. 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 dividends
to its shareholders. The Company has not entered into any interest rate hedge
contracts in order to mitigate the interest rate risk with respect to the
secured revolving credit facility. As of December 31, 2002, the Company had
$104.5 million outstanding under loans with variable interest rates. If the
weighted average interest rate on this variable rate debt were 100 basis points
higher or lower, annual interest expense would be increased or decreased by
approximately $1,045,000.
Additionally, the Company had $327.2 million outstanding under loans with
fixed interest rates as of December 31, 2002. The Company may incur additional
fixed rate debt in the future to meet its financing needs. Should market
interest rates decline, the Company's use of fixed rate debt financing may
result in the recognition of interest expense at rates higher than market rates.
If the market interest rate on this fixed rate debt were 100 basis points lower,
the Company would forfeit annual interest expense savings of approximately
$3,272,000 as compared to variable rate debt financing.
24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE NO.
Independent Auditors' Report........................................ 26
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2002
and 2001.................................................... 27
Consolidated Statements of Operations for Each
of the Three Years in the Period Ended
December 31, 2002........................................... 28
Consolidated Statements of Changes in Shareholders'
Equity for Each of the Three Years in the
Period Ended December 31, 2002............................ 29
Consolidated Statements of Cash Flows for Each
of the Three Years in the Period Ended
December 31, 2002........................................... 30
Notes to Consolidated Financial Statements for
Each of the Three Years in the Period Ended
December 31, 2002........................................... 31
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
for the Three Years Ended December 31, 2002................. 45
Schedule III - Real Estate and Accumulated
Depreciation as of December 31, 2002........................ 46
25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Koger Equity, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Koger Equity,
Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001, 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,
2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
West Palm Beach, Florida
February 21, 2003
26
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
(In Thousands Except Share Data)
2002 2001
---- ----
ASSETS
Real estate investments:
Operating properties:
Land $110,653 $ 91,919
Buildings 783,185 568,285
Furniture and equipment 3,320 3,082
Accumulated depreciation (149,830) (123,999)
-------- --------
Operating properties - net 747,328 539,287
Undeveloped land held for investment 9,995 13,779
Undeveloped land held for sale, net of allowance 3,831 76
Cash and cash equivalents 4,627 113,370
Restricted cash 13,340 --
Accounts receivable, net of allowance for uncollectible
accounts of $1,280 and $1,114 12,183 11,574
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $683 and $683 595 595
Other assets 13,186 11,904
------ ------
TOTAL ASSETS $805,085 $690,585
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages and loans payable $431,698 $248,683
Accounts payable 3,801 4,962
Accrued real estate taxes payable 147 1,007
Accrued liabilities - other 13,435 9,206
Dividends payable 7,453 44,159
Advance rents and security deposits 5,483 5,103
----- -----
Total Liabilities 462,017 313,120
======= =======
Minority interest -- 22,923
----- -----
Commitments and contingencies (Notes 2 and 10)
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: 29,826,632 and 29,663,362 shares;
outstanding: 21,294,894 and 21,128,905 shares 298 297
Capital in excess of par value 472,156 469,779
Notes receivable from stock sales to related parties (5,266) (5,066)
Accumulated other comprehensive loss (212) --
Retained earnings 7,813 21,180
Treasury stock, at cost; 8,531,738 and 8,534,457 shares (131,721) (131,648)
-------- --------
Total Shareholders' Equity 343,068 354,542
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $805,085 $690,585
======== ========
See Notes to Consolidated Financial Statements.
27
KOGER EQUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 2002
(In Thousands Except Per Share Data)
2002 2001 2000
---- ---- ----
Revenues
Rental and other rental services $126,404 $165,623 $164,733
Management fees 3,347 4,080 1,793
----- ----- -----
Total operating revenues 129,751 169,703 166,526
------- ------- -------
Expenses
Property operations 46,235 61,608 61,868
Depreciation and amortization 27,908 35,099 34,244
General and administrative 11,381 8,412 20,217
Direct cost of management fees 3,335 3,378 898
Other 143 189 217
--- --- ---
Total operating expenses 89,002 108,686 117,444
====== ======= =======
Operating Income 40,749 61,017 49,082
------ ------ ------
Other Incom