Item 1. BUSINESS
General
Koger Equity, Inc. ("KE") is a self-administered and self-managed equity real estate investment trust (a "REIT") which develops, owns, operates and manages suburban office centers in the southeastern and southwestern United States. As of December 31, 1996, the KE portfolio consisted of 215 office buildings (each an "Office Building") in 17 office centers (each a "Koger Center") located in 13 metropolitan areas throughout the Southeast and Southwest. The Office Buildings contain approximately 7.7 million net rentable square feet and were on average 92 percent leased as of December 31, 1996. During 1996, KE began construction of two buildings which will contain approximately 106,000 net rentable square feet and will be ready for occupancy in late 1997. While KE has initiated and expects to continue a pattern of vertically integrated development of suburban office properties for its own account, it may from time to time acquire developed properties which are compatible with its properties in other markets in the Southeast and Southwest that the Company considers favorable.
KE owns approximately 139 acres of unencumbered land held for development and approximately 54 acres of unencumbered land held for sale. A majority of the land held for development adjoins Office Buildings in seven Koger Centers which have infrastructure, including roads and utilities, in place. KE intends over time to develop and construct office buildings using this land and currently has two buildings under construction on approximately 11 acres of land held for development. KE expects to acquire additional land for development. In addition, KE provides leasing, management and other customary tenant-related services for the Koger Centers and for 22 office buildings containing approximately 1.3 million net rentable square feet owned by unaffiliated parties.
As the result of restrictive covenants contained in certain of the KE debt instruments, it was effectively prevented from engaging in significant development and acquisition activities as it could not incur additional debt in excess of $5 million. Any development or acquisition activity had to be internally financed. With the refinancing of this debt in December of 1996, KE is no longer subject to such restrictive covenants and will be able to expand its development and acquisition activities.
KE was incorporated in Florida in 1988 for the purpose of investing in office buildings located in suburban office centers throughout the southeastern and southwestern Untied States. In selecting its investments, KE generally sought office buildings which had been substantially leased. In 1988, 1989 and 1990, KE purchased its initial Office Buildings from Koger Properties, Inc. ("KPI"), a real estate development company and the sponsor of KE. In September 1991, KPI filed a petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida. In April 1993, KE and KPI jointly proposed a plan of reorganization of KPI which provided for the merger of KPI with and into KE (the "Merger"). In December 1993, the Merger was consummated, and KE succeeded to substantially all of the assets of KPI, including 93 Office Buildings and approximately 295 acres of unimproved land. All of the Office Buildings acquired by KE from KPI were developed by KPI. In connection with the Merger, KE also acquired the management, development and administrative organizations of KPI and its subsidiaries. Prior to the Merger, KPI employees provided property management and leasing services for the Office Buildings owned by KE and certain buildings owned by third parties. KE has been self-administered since 1992 and self-managed since the Merger.
As part of the Merger, KPI transferred to Southeast Properties Holding Corporation, a Florida corporation and a wholly-owned subsidiary of KE ("Southeast"), all of KPI's debt and equity interests in The Koger Partnership, Ltd., a Florida limited partnership ("TKPL"), which had also been the subject of a Chapter 11 bankruptcy case. At the time of the Merger, TKPL owned 92 suburban office buildings located in five metropolitan areas. Following the Merger, such buildings were managed by KE, as delegee of Southeast, pursuant to a management agreement between TKPL and Southeast. On July 31, 1995, TKPL sold its 92 buildings and parcels of related land to Koala Miami Realty Holding, Inc., Koala Norfolk Realty Holding, Inc., Koala Raleigh Realty Holding, Inc., Koala Richmond Realty Holding, Inc., and Koala Tampa Realty Holding, Inc. (collectively, "Koala"), all of which are wholly owned by a co- mingled pension trust for which Morgan Guaranty Trust Company of New York is the trustee and J.P. Morgan Investment Management Inc. is the investment manager. Simultaneously with the sale by TKPL of its properties, KE sold to certain Koala entities three buildings and related parcels of land for an aggregate purchase price of $25.26 million. During 1996, Koala continued to hold an option to purchase from KE two additional parcels of land in Miami, Florida. During February 1997, this option was exercised and Koala purchased these two parcels of land for an aggregate purchase price of $2.97 million.
In addition to managing its own properties, KE, through certain related entities, provides property management services to third parties. In conjunction with Koger Real Estate Services, Inc., a Florida corporation and a wholly-owned subsidiary of KE ("KRES"), KE manages 21 office buildings owned by Centoff Realty Company, Inc. ("Centoff"), a subsidiary of Morgan Guaranty Trust Company of New York (KE, Southeast and KRES are hereafter referred to as the "Company").
During 1995 (prior to the sale by TKPL of its properties), KE acquired $32.3 million in aggregate principal amount (subject to provisions permitting prepayment at a discount) of promissory notes issued by TKPL to third parties (the "TKPL Notes") for an aggregate purchase price of approximately $18.2 million. During the quarter ended September 30, 1995, TKPL retired the TKPL Notes. KE recorded approximately $13.1 million of interest revenue on the TKPL Notes during 1995.
The Company operates in a manner to qualify as a REIT under the provisions of the Internal Revenue Code of 1986, as amended (the "Code" ). As a REIT, the Company will not, with certain limited exceptions, be taxed at the corporate level on taxable income distributed to its shareholders on a current basis. The Company distributes at least 95 percent of its annual REIT taxable income (which term is used herein as defined and modified in the Code) to its shareholders. To qualify as a REIT, a corporation must meet certain substantive tests: (a) at least 95 percent of its gross income must be derived from certain passive and real estate sources; (b) at least 75 percent of its gross income must be derived from certain real estate sources; (c) less than 30 percent of its gross income must be derived from the sale or other disposition of certain items, including certain real property held for less than four years; (d) at the close of each calendar quarter, it must meet certain tests designed to ensure that its assets consist principally (at least 75 percent by value) of real estate assets, cash and cash equivalents and that its holdings of securities are adequately diversified; (e) each year, it must distribute at least 95 percent of its REIT taxable income; and (f) at no time during the second half of any calendar year may the Company be "closely held" (i.e., have more than 50 percent in value of its outstanding stock owned, directly, indirectly or constructively, by not more than five individuals). The constructive ownership rules, among other things, treat the shareholders of a corporation as owning proportionately any stock in another corporation owned by the first corporation. Management fee revenue does not qualify as real estate or passive income for purposes of determining whether
the Company has met the REIT requirements that at least 95 percent of the Company's gross income be derived from certain real estate and passive sources and that at least 75 percent of its gross income be derived from certain real estate sources. Accordingly, in the event the Company derives income in excess of five percent from management and other "non-real estate" and "non-passive" activities, the Company would no longer qualify as a REIT for federal income tax purposes and would be required to pay federal income taxes as a business corporation.
Two major governmental tenants, when all of their respective departments and agencies which lease space in the Company's buildings are combined, each lease more than 10 percent of the net rentable area of the Company's buildings and contribute more than 10 percent of the Company's annualized rentals as of December 31, 1996. At that date, the State of Florida accounted for an aggregate of 11.7 percent of the Company's total net rentable square feet leased and 13.4 percent of the Company's total annualized rental revenues. In addition, the United States of America accounted for an aggregate of 10.1 percent of the Company's total net rentable square feet leased and 10.5 percent of the Company's total annualized rental revenues as of December 31, 1996. Some of the Company's principal tenants are the State of Florida, the United States of America, Blue Cross and Blue Shield of Florida, First Data Resources, Aetna Life Insurance Company, Lumbermens Mutual Casualty Company, Norwest Bank of Texas, the State of Texas, Travelers Insurance Company, and General Motors Acceptance Corporation. Governmental tenants (including the State of Florida and the United States of America), which account for 23.9 percent of the Company's leased space, may be subject to budget reductions in times of recession and governmental austerity. There can be no assurance that governmental appropriations for rents may not be reduced. Additionally, certain private-sector tenants which have contributed to the Company's rent stream may reduce their current demands, or curtail their future need, for additional office space.
Competition
The Company competes in the leasing of office space with a considerable number of other realty concerns, including local, regional and national, some of which have greater resources than the Company. Through its ownership and management of suburban office parks, the Company seeks to attract tenants by offering office space convenient to residential areas and away from the congestion and attendant traffic problems of the downtown business districts. In recent years local, regional and national concerns have built competing office parks and single buildings in suburban areas in which the Company's centers are located. In addition, the Company competes for tenants with large high-rise office buildings generally located in the downtown business districts of these metropolitan areas. Although competition from other lessors of office space varies from city to city, the Company has been able to attain and maintain what it considers satisfactory occupancy levels at satisfactory rental rates.
Investment Policies
Based on its improved financial structure and results as of the end of 1996, the Company is in a position to capitalize on some of its strengths, such as the value of its franchise in the suburban office park market and its operating systems, development expertise, acquisition expertise and unimproved land available for development. During 1996, the Company committed to a plan to enhance shareholder value by refinancing indebtedness and increasing growth. The Company has completed its plan to refinance its indebtedness which eliminated certain restrictive covenants which had limited the Company's ability to grow through development and acquisitions. In addition, the Company has signed a commitment for a $50 million revolving credit facility which will be available
to finance growth opportunities, subject to sufficient collateral being provided to fund this facility which collateral is available. The plan also contemplates the possible use by the Company of its existing inventory of 139 acres of land held for development, most of which is partially or wholly improved with streets and/or utilities and is located in various metropolitan areas where the Company currently operates suburban office parks. The Company may also acquire existing office buildings or land for development in other markets in the Southeast and Southwest that the Company considers favorable.
The investment policies of the Company may be changed by its directors at any time without notice to, or a vote of, security holders. Although, the Company has no current policy which limits the percentage 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. Although it has no current plans to do so, 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, 1996, all of the Company's rental revenues were derived from the buildings purchased from KPI or buildings acquired pursuant to the Merger. The Company's 1996 interest revenues were derived from temporary cash investments.
Employees
In connection with its current real estate operations and property management agreements, the Company has a combined financial, administrative, leasing, and center maintenance staff of 220 employees. A resident general manager is responsible for the leasing and operations of all buildings in a center or city. The Company has approximately 86 employees who perform maintenance activities.
Item 2.

Item 2. PROPERTIES
General
As of December 31, 1996, the Company owned 215 office buildings located in 17 Koger Centers in the 13 metropolitan areas of Jacksonville, Orlando, St. Petersburg, and Tallahassee, Florida; Atlanta, Georgia; Charlotte and Greensboro, North Carolina; Tulsa, Oklahoma; Greenville, South Carolina; Memphis, Tennessee; and Austin, El Paso, and San Antonio, Texas. In addition, the Company had two buildings which were under construction. The Koger Centers have been developed in campus-like settings with extensive landscaping and ample tenant parking. The buildings are generally one to five-story structures of contemporary design and constructed of masonry, concrete and steel, with facings of brick, concrete and glass. The Koger Centers are generally located with easy access, via expressways, to the central business district and to shopping and residential areas in the respective communities. The properties are well maintained and adequately covered by insurance.
Leases on the Office Buildings vary between net leases (under which the tenant pays some operating expenses, such as utilities, insurance and repairs) and gross leases (under which the Company pays all such items). Most leases are on a gross basis and are for terms generally ranging from three to five years. In some instances, such as when a tenant rents the entire building, leases are
for terms of up to 20 years. As of December 31, 1996, the Office Buildings were on average 92 percent leased and the average annual rent per net rentable square foot leased was $14.24. The buildings are occupied by numerous tenants, many of whom lease relatively small amounts of space, conducting a broad range of commercial activities.
New leases and renewals of existing leases are negotiated at the current market rate at the date of execution. The Company endeavors to include escalation provisions in all of its gross leases. As of December 31, 1996, approximately 42 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 52 percent of such revenues were derived from leases containing escalation provisions based upon real estate tax and operating expense increases; and approximately 6 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 200 acres of unimproved land (194 acres of which are suitable for development) located in the metropolitan areas of Jacksonville, Miami, Orlando and St. Petersburg, Florida; Atlanta, Georgia; Charlotte and Greensboro, North Carolina; Tulsa, Oklahoma; Columbia and Greenville, South Carolina; Memphis, Tennessee; Austin and San Antonio, Texas; and Richmond, Virginia. Each of these parcels of land has been partially or wholly developed with streets and/or utilities. The Company currently has two buildings under construction on approximately 11 acres of this unimproved land.
(1) The age of each building was weighted by the net rentable square feet for such building to determine the weighted average age of (a) the buildings in each Koger Center and (b) all buildings owned by the Company.
(2) The Company currently has a building under construction on approximately 7.4 acres of this parcel.
(3) The Company currently has a building under construction on approximately 3.9 acres of this parcel.
(4) This unimproved land parcel was sold to Koala for an aggregate sales price of $2.97 million during February 1997.
Lease Expirations on the Company's Properties
The following schedule sets forth with respect to all of the Company's office buildings (a) the number of leases which will expire in calendar years 1997 through 2005, (b) the total net rentable area in square feet covered by such leases, (c) the percentage of total net rentable square feet leased represented by such leases, (d) the average annual rent per square foot for such leases, (e) the current annual rental represented by such leases, and (f) the percentage of gross annual rental contributed by such leases. This information is based on the buildings owned by the Company on December 31, 1996 and on the terms of leases in effect as of December 31, 1996, 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 63 percent, 67 percent and 61 percent of the Company's net rentable square feet which were scheduled to expire during 1996, 1995 and 1994, respectively.
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, 1996. The information set forth below is not necessarily indicative of future expenditures for these items.
(1) Excludes the three buildings sold on July 31, 1995.
(2) Increase in deferred tenant costs due to $799,000 commission paid for 10 year lease on 142,800 net rentable square feet which takes effect in 1997.
Fixed Rate Indebtedness on the Company's Properties
The following table sets forth with respect to each Koger Center the principal amount (dollars in thousands) of, and the weighted average interest rate on, the indebtedness of the Company having a fixed interest rate and encumbering the Company's properties in such Koger Center as of December 31, 1996.
Weighted Mortgage Average Loan Interest Koger Center Balance Rate - ------------- ----------- --------- Atlanta Chamblee $ 14,809 8.75% Austin 17,000 8.33% Charlotte Carmel 0 -- Charlotte East 0 -- El Paso 9,000 8.33% Greensboro South 0 -- Greenville 11,000 8.33% Jacksonville Baymeadows 27,500 8.33% Jacksonville Central 401 9.75% Memphis Germantown 22,018 8.80% Orlando Central 25,000 8.33% Orlando University 0 -- San Antonio 20,203 8.25% St. Petersburg 17,194 8.25% Tallahassee Apalachee Pkwy 17,194 8.25% Tallahassee Capital Circle 20,582 8.36% Tulsa 1,512 9.95% ----
Total $203,413 8.41% ======== ====
For additional information on these loans see Note 4, "Mortgages and Loans Payable" of the Notes to Consolidated Financial Statements.
Indebtedness with Variable Interest Rates
As of December 31, 1996, the Company had no indebtedness having variable interest rates and encumbering the Company's properties. The following table sets forth historical information with respect to indebtedness having variable interest rates (dollars in thousands):
Item 3.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the American Stock Exchange. The high and low closing sales prices for the periods indicated in the table below were:
The Company intends that any dividend paid in respect of its common stock during the last quarter of each year will, if necessary, be adjusted to satisfy the REIT qualification requirement that at least 95 percent of the Company's REIT taxable income for such taxable year be distributed. The Company did not pay any dividends during the three years ended December 31, 1996. During December 1996, the Company's Board of Directors declared a quarterly dividend of $0.05 per share payable on February 10, 1997, to shareholders of record on January 6, 1997.
On February 28, 1997, there were approximately 945 shareholders of record and the closing price of the Company's common stock on the American Stock Exchange was $17.875.
Item 6.

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.
* On December 21, 1993, KPI was merged with and into the Company. (1) The Company believes that Funds from Operations is one measure of the performance of an equity REIT. Funds from Operations should not be considered as an alternative to net income as an indication of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. Funds from Operations is calculated as follows (in thousands):
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the selected financial data and the consolidated financial statements (the "Consolidated Financial Statements") appearing elsewhere in this report. Historical results and percentage relationships in the Consolidated Financial Statements, including trends which might appear, should not be taken as indicative of future operations or financial position. The Consolidated Financial Statements include the accounts of KE, Southeast and KRES (collectively, the "Company").
GENERAL
The Company has prepared, and is responsible for, the accompanying Consolidated Financial Statements and the related consolidated financial information included in this report. Such Consolidated Financial Statements were prepared in accordance with generally accepted accounting principles and include amounts determined using management's best judgments and estimates of the expected effects of events and transactions that are being accounted for currently.
The Company's independent auditors have audited the accompanying Consolidated Financial Statements. The objective of their audit, conducted in accordance with generally accepted auditing standards, was to express an opinion on the fairness of presentation, in all material respects, of the Company's consolidated financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. They evaluated the Company's internal control structure to the extent considered necessary by them to determine the audit procedures required to support their report on the Consolidated Financial Statements and not to provide assurance on such structure.
The Company maintains accounting and other control systems which management believes provide reasonable assurance that the Company's assets are safeguarded and that the Company's books and records reflect the authorized transactions of the Company, although there are inherent limitations in any internal control structure, as well as cost versus benefit considerations. The Audit Committee of the Company's Board of Directors, which is composed exclusively of directors who are not officers of the Company, directs matters relating to audit functions, annually appoints the auditors subject to ratification of the Company's Board of Directors, reviews the auditors' independence, reviews the scope and results of the annual audit, and periodically reviews the adequacy of the Company's internal control structure.
RECENT DEVELOPMENTS
On October 10, 1996, the Company completed a private placement of three million shares of its common stock to an affiliate of Apollo Real Estate Investment Fund II, L.P. for an aggregate sales price of $43.5 million. The Company applied the proceeds from this sale to the repayment of indebtedness with an average interest rate of approximately 8 percent.
On December 18, 1996, the Company closed on $175.9 million of a $190 million non-recourse loan with Northwestern Mutual Life Insurance Company ("Northwestern") which is secured by 10 office parks. This loan is divided into (i) a tranche in the amount of $100.5 million ($86.4 million which has been drawn) with a 10 year maturity and an interest rate of 8.25 percent and (ii) a tranche in the amount of $89.5 million with a maturity of 12 years and an interest rate of 8.33 percent.
RESULTS OF OPERATIONS
Rental Revenues. Rental revenues increased $3,477,000 from the year ended December 31, 1995 to the year ended December 31, 1996. This increase resulted primarily from (i) increases in the percent leased rate and the Company's average rental rate and (ii) increases in revenues from operating cost escalations and other items passed through to tenants. The effect of these increases was partially offset by the sale of three buildings during 1995, which is described below. For 1995, rental revenues increased $1,733,000 from the year ended December 31, 1994. This increase resulted primarily from increases in the percent leased rate and the average rental rate in the Company's buildings, which increases were partially offset by the sale of three buildings (containing 233,980 net rentable square feet) on July 31, 1995. During 1995, the Company earned $2,228,000 in rental revenues from these three buildings through the date of sale. As of December 31, 1996, the Company's buildings were on average 92 percent leased. As of December 31, 1995 and 1994, the buildings owned by the Company were on average 91 and 90 percent leased, respectively.
Management Fee Revenues. Management fee revenues decreased $942,000 for 1996 as compared to 1995. This decrease was due primarily to the termination of the management agreement with TKPL which resulted from the sale of all of TKPL's operating properties during 1995. The Company earned $1,685,000 in management fee revenue from this contract during 1995. This decrease was partially offset by (i) an increase in fees earned for construction management services and (ii) an increase in fees earned under the management contract with Centoff. Management fee revenues decreased by $1,302,000 for 1995 as compared to 1994. This decrease was primarily due to the termination of the management agreement with TKPL, as previously described. The effect of this decrease was partially offset by an increase in the fees earned under the management contract with Centoff. On May 5, 1994, third party management contracts on two buildings terminated due to a change of ownership of such buildings. Management fee revenue related to the management of such buildings totalled approximately $106,000 during 1994.
Interest Revenues. Interest revenues decreased $12,489,000 for 1996 as compared to 1995. This decrease was due to the interest revenue earned during 1995 from the TKPL Notes ($13,066,000). For 1995, interest revenues increased $13,378,000 from the year ended December 31, 1994. This increase was due to (i) the interest revenue associated with the TKPL Notes ($13,066,000), (ii) the higher interest rates earned on the Company's temporary cash investments and (iii) the higher average balance of temporary cash investments.
Gain on TKPL Note to Southeast. During 1995, Southeast received approximately $17.7 million as a partial repayment of an unsecured note, issued by TKPL to KPI (and subsequently transferred by KPI to Southeast in connection with the Merger) in an original principal amount of approximately $31 million. This TKPL unsecured note had been valued and carried on the books of the Company at $0. A gain of $11,288,000 was recorded on this repayment, which was net of a write-off of unamortized cost in excess of fair value of net assets acquired from KPI of $6,412,000.
Expenses. Property operating expenses include such charges as utilities, real estate taxes, janitorial, maintenance, property insurance, provision for uncollectible rents, and management costs. During 1996, property operating expenses increased by $767,000 or 1.9 percent, compared to 1995, primarily due to increases in maintenance costs. During 1995, property operating expenses increased by $1,119,000 or 2.8 percent, compared to 1994, primarily due to the
increase in management cost for the Company's buildings. This increase in management cost was primarily due to the accrued compensation expense ($876,000) related to stock appreciation rights granted in conjunction with stock options. For 1996, property operating expenses as a percentage of total rental revenues were 42.1 percent. For 1995 and 1994, property operating expenses as a percentage of total rental revenues were 42.8 percent and 42.1 percent, respectively.
Depreciation expense 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 1996, depreciation expense increased $2,208,000 or 12.5 percent compared to the prior year, due to improvements made to the properties owned by the Company during 1996 and 1995. For 1995, depreciation expense increased $2,222,000 or 14.4 percent compared to the prior year, due to improvements made to the properties owned by the Company during 1995 and 1994.
Amortization expense decreased by $183,000 during 1996 compared to 1995, due primarily to the $6,412,000 of unamortized cost in excess of fair value of net assets acquired which was written off and offset against proceeds received by Southeast from the TKPL unsecured note during 1995. For 1995, amortization expense increased $152,000 compared to the prior year, due to amounts incurred for deferred tenant costs.
Interest expense decreased by $5,007,000 during 1996 compared to 1995, primarily due to the reduction in the average balance of mortgages and loans payable. Interest expense decreased by $2,164,000 during 1995 compared to 1994, primarily due to (i) the reduction in the average balance of mortgages and loans payable and (ii) the forgiveness of accrued interest on certain debt due to early repayment ($1,362,000), which forgiveness was partially offset by yield maintenance payments required due to early repayment of certain mortgages ($882,000). During 1996, 1995, and 1994, the weighted average interest rate on the Company's variable rate loans was 9.3 percent, 8.4 percent, and 7.9 percent, respectively. The Company's average outstanding amount under such loans during 1996, 1995, and 1994 was $18,280,000, $47,945,000 and $58,718,000, respectively.
General and administrative expenses were 1.1 percent, 1.2 percent, and 1.0 percent of average invested assets for 1996, 1995 and 1994, respectively. For 1996, general and administrative expenses decreased $936,000 compared to 1995, primarily due to (i) decreases in the accrual for compensation expense related to stock appreciation rights granted in conjunction with stock options, (ii) decreases in professional and legal fees incurred, (iii) decreases in certain insurance costs, and (iv) decreases in the accrual for the Company's contribution to the 401(k) Plan. For 1995, general and administrative expenses increased $1,193,000 compared to the prior year, primarily due to (i) increases in the accrual for compensation expense related to stock appreciation rights granted in conjunction with stock options ($423,000), (ii) the accrual for expense related to the Supplemental Executive Retirement Plan adopted during 1995 ($184,000), and (iii) increases in compensation costs.
For 1996, direct costs of management contracts decreased $953,000, compared to 1995, due to the termination of the management agreement with TKPL which resulted from the sale of all of TKPL's operating properties during 1995. The Company incurred $1,601,000 in costs pursuant to this contract during 1995. This decrease was partially offset by (i) an increase in costs associated with providing construction management services and (ii) an increase in costs for providing services under the management agreement with Centoff. Direct costs of management contracts decreased by $812,000 for 1995, compared to 1994, due to the termination of the management agreement with TKPL, as previously described. The effect of this decrease was partially offset by the increase in costs for providing services under the management agreement with Centoff.
For 1996, undeveloped land costs remained basically unchanged from those incurred during 1995. Real estate taxes and other costs related to the Company's unimproved land decreased $155,000 during 1995, compared to 1994, due to (i) the sale of a parcel of unimproved land (approximately 23 acres) during October 1994 ($77,000) and (ii) the sale of two parcels of unimproved land (approximately 44 acres) on July 31, 1995 ($22,000).
During 1994, the Company settled a pending class action proceeding (the "Securities Action"). The Company recorded a provision of $1,685,000 relating to the settlement of the Securities Action and incurred additional costs related to such settlement which totalled $217,000.
During 1995, the Company recorded a provision for loss on land held for sale which totalled $970,000. This provision for loss was based upon a contract for the sale of a land parcel (approximately 8.1 acres) which is located in Miami, Florida adjacent to an office center sold to Koala. Contingent upon the assurances which can be received from the local government concerning the square footage of office buildings which can be constructed on this land parcel, the contract price ranges between $2,000,000 and $2,970,000. In 1994, the Company recorded a provision for loss on land held for sale which totalled $996,000. This provision for loss was based upon contracts for the sale of two land parcels (approximately 53 acres). The sale of one of these land parcels (approximately 23 acres) was consummated during 1994, while the contract for the sale of the other land parcel expired.
Management periodically reviews its investment in properties for evidence of other than temporary impairments in value. Factors considered consist of, but are not limited to, the following: current and projected occupancy rates, market conditions in different geographic regions, and management's plans with respect to its properties. Where management concludes that expected cash flows will not enable the Company to recover the carrying amount of its investments, losses are recorded and asset values are reduced. No such impairments in value existed during 1996, 1995 or 1994.
Operating Results. Net income totalled $10,501,000, $28,990,000 and $4,215,000 for 1996, 1995 and 1994, respectively. For 1996, net income decreased $18,489,000 over the prior year due primarily to (i) the interest revenue earned during 1995 on the TKPL mortgage notes which were retired by TKPL during 1995 and (ii) the gain associated with the partial repayment of a TKPL note to Southeast during 1995. For 1995, net income increased $24,775,000 over the prior year due to (i) the interest revenue associated with KE's investment in the TKPL Notes, (ii) the gain associated with the partial repayment of a note owing from TKPL to Southeast, (iii) the reduction in mortgage and loan interest, (iv) the increase in rental revenues, and (v) the gain on early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. During the year ended December 31, 1996, the Company generated approximately $35.9 million in net cash from operating activities. The Company's primary internal sources of cash are (i) the collection of rents from buildings owned by the Company and (ii) the receipt of management fees paid to the Company in respect of properties managed on behalf of others. As a REIT, the Company is required to pay out annually, as dividends, 95 percent of its REIT taxable income (which, due to non-cash charges, including provision for losses and depreciation, may be substantially less than cash flow). In the past, the Company has paid out dividends in amounts at least equal to its REIT taxable income. The Company believes that its cash provided by operating activities will be sufficient to cover debt service payments and to pay the dividends required to maintain REIT status through 1997.
The level of cash flow generated by rents depends primarily on the occupancy rates of the Company's buildings and changes in rental rates on new and renewed leases and under escalation provisions. As of December 31, 1996, approximately 94 percent of the Company's annualized gross rental revenues were derived from existing leases containing provisions for rent escalations. However, market conditions may prevent the Company from escalating rents under such provisions.
As of December 31, 1996, leases representing approximately 26.1 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 1997. This represents 1,156 leases for space in buildings located in all of the 17 Koger Centers in which the Company owns buildings. Certain of these tenants may not renew their leases or may reduce their demand for space. Leases were renewed on approximately 63 percent, 67 percent and 61 percent of the Company's net rentable square feet which were scheduled to expire during 1996, 1995 and 1994, respectively. For those leases which renewed during 1996, the average rental rate increased from $14.13 to $15.00. However, current market conditions in certain markets may require that rental rates at which leases are renewed or at which vacated space is leased be lower than rental rates under existing leases. Based upon the significant amount of leases which will expire during 1996 and the competition for tenants in the markets in which the Company operates, the Company has offered, and expects to continue to offer, incentives to certain new and renewal tenants. These incentives may include the payment of tenant improvement costs and, in certain markets, reduced rents during initial lease periods.
During 1994, 1995, and 1996, the Company has benefited from improving economic conditions and reduced vacancy levels for office buildings in many of the metropolitan areas in which the Company owns buildings. The Company believes that the southeastern and southwestern regions of the United States provide significant economic growth potential due to their diverse regional economies, expanding metropolitan areas, skilled work force and moderate labor costs. However, the Company cannot predict whether such economic growth will continue. Cash flow from operations could be reduced if economic growth were not to continue in the Company's markets and if this resulted in lower occupancy rates for the Company's buildings.
Governmental tenants (including the State of Florida and the United States of America) which accounted for 23.9 percent of the Company's leased space as of December 31, 1996, may be subject to budget reductions in times of recession and governmental austerity measures. Consequently, there can be no assurance that governmental appropriations for rents may not be reduced. Additionally, certain of the private-sector tenants which have contributed to the Company's rent stream may reduce their current demands, or curtail their future need, for additional office space.
At the end of 1996, the Company had management contracts for the management of 22 commercial office properties. On March 31, 1996, a management agreement to manage 21 commercial office buildings owned by Centoff was automatically extended to March 31, 1997. This management agreement provides that, so long as no default has occurred, the management agreement will be automatically extended from year to year until such time as the management agreement is terminated. The Company earned fees of $2,259,000 from this management agreement during 1996. Another agreement to manage one commercial office building has been extended on a month to month basis. During 1996, the Company earned management fees of $92,000 for the management of this building. With the sale of TKPL's 92 buildings to Koala during 1995, Southeast's management agreement with TKPL ended.
Investing Activities. At December 31, 1996, substantially all of the Company's invested assets were in real properties. Improvements to the Company's existing properties have been financed through internal operations. During 1996, the Company's expenditures for improvements to existing properties decreased by $1.8 million over the prior year, primarily due to reductions in expenditures for tenant improvements and energy management improvements. During 1996, the Company did not purchase any buildings.
The Company has started the construction of two buildings, on approximately 11.3 acres of undeveloped land, which will contain approximately 106,000 net rentable square feet. Expenditures for construction of these two buildings are expected to total approximately $7.6 million, excluding land and tenant improvement costs.
During 1995, KE acquired $32.3 million in aggregate principal amount of TKPL Notes for an aggregate purchase price of approximately $18.2 million. During the quarter ended September 30, 1995, TKPL retired the TKPL Notes. KE recorded approximately $13.1 million of interest revenue on the TKPL Notes during 1995.
During 1996 and 1995, Southeast received $292,000 and $17.7 million, respectively, as partial repayment of an unsecured note issued by TKPL to KPI (and subsequently transferred by KPI to Southeast in connection with the Merger) in an original principal amount of approximately $31 million.
During 1996, the Company sold a 30 acre land parcel located in Birmingham, Alabama for $1,263,000, net of selling costs. During 1995, the Company sold to Koala three office buildings (containing 233,980 net rentable square feet), two undeveloped land parcels (totalling approximately 44 acres), and certain other assets for approximately $25,267,000, net of selling costs.
Based on its improved financial structure and results, the Company is in a position to capitalize on some of its strengths, such as the value of its franchise in the suburban office park market and its operating systems, development expertise, acquisition expertise and unimproved land available for development. The Company has committed to a plan to enhance shareholder value by refinancing indebtedness and increasing growth. The Company has completed the refinancing of its indebtedness to eliminate certain restrictive covenants which had limited the Company's ability to grow through development and acquisitions. In addition, the Company has signed a commitment for a new bank revolving credit facility which will be available to finance growth opportunities. The plan also contemplates the possible use by the Company of its existing inventory of 139 acres of land held for development, most of which is partially or wholly improved with streets and/or utilities and is located in various metropolitan areas where the Company currently operates suburban office parks. The Company may also acquire existing office buildings or land for development in other markets in the Southeast and Southwest that the Company considers favorable.
Financing Activities. Historically, the Company's primary external sources of cash have been in the form of bank borrowings, mortgage financings, and public and private offerings of equity securities. The proceeds of these financings were used by the Company to acquire buildings or to refinance debt. The Company has no open lines of credit, but had cash and temporary cash investments which totalled $35,715,000 at December 31, 1996.
On October 10, 1996, the Company completed a private placement of three million shares of its common stock to an affiliate of Apollo Real Estate Investment Fund II, L.P. for an aggregate sales price of $43.5 million. The Company applied the proceeds from this sale to the repayment of indebtedness with an average interest rate of approximately 8 percent.
On December 18, 1996, the Company closed on $175.9 million of a $190 million non-recourse loan with Northwestern which is secured by 10 office parks. This loan is divided into (i) a tranche in the amount of $100.5 million ($86.4 million which has been drawn) with a 10 year maturity and an interest rate of 8.25 percent and (ii) a tranche in the amount of $89.5 million with a maturity of 12 years and an interest rate of 8.33 percent. The Company plans to draw the remaining loan proceeds when the existing indebtedness on two buildings matures. Amortization with respect to this indebtedness is based on equal monthly installments over a 25 year amortization period. This indebtedness requires the Company to maintain certain financial ratios.
With the proceeds of the private placement of common stock and the Northwestern loan, the Company repaid all of the restructured debt acquired pursuant to the Merger and repaid all of its bank debt. The repayment of this indebtedness eliminated the restrictive covenants which have limited the Company's ability to grow. At December 31, 1996, the Company had 82 buildings (containing approximately three million net rentable square feet) which were unencumbered.
Based upon interest rates in effect on December 31, 1996 and assuming only scheduled principal payments for 1997, management expects total interest expense for 1997 to decrease to approximately $16.3 million. The high degree of leverage of the Company, when compared to other REITs, may result in the impairment of its ability to obtain additional financing, to make acquisitions, and to take advantage of significant business opportunities that may arise, including activities which require significant funding. This high degree of leverage may also increase the vulnerability of the Company to adverse general economic and industry conditions and to increased competitive pressures, especially rental pressures from less highly leveraged competitors.
Loan maturities and normal amortization of mortgages and loans payable are expected to total approximately $11.3 million over the next twelve months. The Company plans to draw $8.3 million of the remaining Northwestern loan proceeds when existing indebtedness on a building matures in 1997 and believes that the remainder of these obligations will be paid from cash provided by operations or from current cash balances. Significant maturities of the Company's mortgages and loans payable do not begin to occur until 2006.
In order to generate funds sufficient to make principal payments in respect of indebtedness of the Company over the long term, as well as necessary capital and tenant acquisition expenditures, the Company will be required to successfully refinance its indebtedness or procure additional equity capital. However, there can be no assurance that any such refinancing or equity financing will be achieved or will generate adequate funds on a timely basis for these purposes. If additional funds are raised by issuing equity securities, further dilution to existing shareholders may result. Unfavorable conditions in the financial markets, the degree of leverage of the Company and various other factors may limit the ability of the Company to successfully undertake any such financings, and no assurance can be given as to the availability of alternative sources of funds. On August 22, 1994, the Company filed a shelf registration statement with respect to the possible issuance of up to $100,000,000 of its common stock and/or preferred stock. The Company has not yet issued any equity
under such registration statement. During 1995, the Company wrote off $745,000 of certain costs incurred for potential public and private offerings of equity securities which management determined had no future value.
In addition, in the event the Company is unable to generate sufficient funds both to meet principal payments in respect of its indebtedness and to satisfy distribution requirements of 95 percent of annual REIT taxable income to its shareholders, the Company may be unable to qualify as a REIT. In such an event, the Company (i) will incur federal income taxes and perhaps penalties, (ii) if the Company is then paying dividends, may be required to decrease any dividend payments to its shareholders, and (iii) the market price of the Company's common stock may decrease. The Company would also be prohibited from requalifying as a REIT for five years.
IMPACT OF INFLATION
The Company may experience increases in its expenses as a result of inflation; however, the amount of such increases cannot be accurately determined. The Company's exposure to inflationary cost increases in property level expenses is reduced by escalation clauses which are included in most leases. However, market conditions may prevent the Company from escalating rents. Inflationary pressure may increase operating expenses, including labor and energy costs (and, indirectly, property taxes) above expected levels, at a time when it may not be possible to increase lease rates to offset such higher operating expenses. In addition, inflation can have secondary effects upon occupancy rates by decreasing the demand for office space in many of the markets in which the Company operates. As of December 31, 1996, 94 percent of the Company's annualized rentals were subject to leases having annual escalation clauses as described under "Properties" above. As of December 31, 1995 and 1994, 93 percent and 94 percent, respectively, of the Company's annualized rentals were subject to leases having annual escalation clauses.
Historically, inflation has often caused increases in the value of income-producing real estate through higher rentals. The Company, however, can provide no assurance that inflation will increase the value of its properties in the future, and, in fact, the rate of inflation over recent years has been considerably below that which has been experienced previously.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR PURPOSE OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward- looking statements to encourage companies to provide prospective information about their businesses without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. The Company desires to take advantage of the "safe harbor" provisions of the Act.
This Annual Report on Form 10-K contains forward-looking statements, together with related data and projections, about the Company's projected financial results and its future plans and strategies. However, actual results and needs of the Company may vary materially from forward-looking statements and projections made from time to time by the Company on the basis of management's then-current expectations. The business in which the Company is engaged involves changing and competitive markets and a high degree of risk, and there can be no
assurance that forward-looking statements and projections will prove accurate. Accordingly, the Company hereby identifies the following important factors which could cause the Company's actual performance and financial results to differ materially from any results which might be projected, forecast, estimated or budgeted by the Company.
Real Estate Financing Risks
Existing Debt. The Company is subject to risks normally associated with debt financing, including (a) the risk that the Company's cash flow will be insufficient to meet required payments of principal and interest, (b) the risk that the existing debt in respect of the Company's properties (which in substantially all cases will not have been fully amortized at maturity) will not be able to be refinanced and (c) the risk that the terms of any refinancing of any existing debt will not be as favorable as the terms of such existing debt. The Company currently has outstanding debt of approximately $203 million, all of which is secured by certain of the Company's properties. Approximately $131 million of such debt will mature before 2007, with the remaining balance maturing in 2008. If principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, the Company expects that its cash flow will not be sufficient to repay all such maturing debt. Furthermore, if prevailing interest rates or other factors at the time of refinancing (such as the reluctance of lenders to make commercial real estate loans) result in higher interest rates upon refinancing than the interest rates on the existing debt, the interest expense relating to such refinanced debt would increase, which would adversely affect the Company's cash flow and the amount of distributions the Company would be able to make to its shareholders. If the Company has mortgaged a property to secure payment of debt and the Company is unable to meet the mortgage payments, then the mortgagee may foreclose upon, or otherwise take control 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 no variable rate debt. The Company may incur variable rate debt in the future. Increases in interest rates on such debt could increase the Company's interest expense, which would adversely affect the Company's cash flow and its ability to pay distributions to its shareholders.
Existing Leverage; No Limitation on Debt
As of December 31, 1996, the debt to total market capitalization ratio of the Company was approximately 33.5 percent. The Company's policy regarding this ratio (i.e., total consolidated debt as a percentage of the sum of the market value of issued and outstanding capital stock plus total consolidated debt) is not subject to any limitation in the organizational documents of the Company. Accordingly, the Board of Directors could establish a policy and decide to borrow on a case-by-case or other basis, which would increase the Company's debt to total market capitalization ratio. If this action were taken, the Company could become more highly leveraged, resulting in an increase in debt service that (a) could adversely affect the Company's cash flow and, consequently, the amount of cash available for distribution to shareholders and (b) could increase the risk of default on the Company's debt.
For purposes of establishing and evaluating its debt policy, the Company measures its leverage by reference to the total market capitalization of the Company rather than by reference to the book value of its assets. The Company has used total market capitalization because it believes that the book value of its assets (which to a large extent is comprised of the depreciated value of real property, the Company's primary tangible asset) does not accurately reflect
its ability to borrow and to meet debt service requirements. The market capitalization of the Company, however, is more variable than book value, and does not necessarily reflect the fair market value of the underlying assets of the Company at all times. The Company also considers factors other than its market capitalization in making decisions regarding the incurrence of indebtedness, such as the purchase price of properties to be acquired with debt financing, the estimated market value of its properties upon refinancing and the ability of particular properties, and the Company as a whole, to generate cash flow to cover expected debt service.
Geographic Concentration
The Company's revenues and the value of its properties may be affected by a number of factors, including the regional and local economic climates of the metropolitan areas in which the Company's buildings are located (which may be adversely impacted by business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and regional and local real estate conditions in such areas (such as oversupply of, or reduced demand for, office and other competing commercial properties). All of the Company's properties are located in the southeastern and southwestern United States. The Company's performance and its ability to make distributions to its shareholders are, therefore, dependent on economic conditions in these market areas. The Company's historical growth has occurred during periods when the economy in the southeastern United States has out-performed the national economy. There can be no assurance as to the continued growth of the economy in the southeastern United States or the future growth rate of the Company.
Renewal of Leases and Reletting of Space
The Company is subject to the risks that upon expiration of leases for space located in its buildings (a) such leases may 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 26.5 percent and 21.8 percent of the total net rentable square feet leased in the Company's buildings will expire in 1997 and 1998, respectively. The Company has established annual reserves for renovation and reletting expenses, which take into consideration its view of both the current and expected business conditions in the southeastern and southwestern United States, but no assurance can be given that these reserves will be sufficient to cover such expenses. If the Company is unable to promptly relet, or renew the leases for, all or a substantial portion of the space located in its buildings, or if the rental rates upon such renewal or reletting are significantly lower than expected rental rates, or if the Company's reserves for these purposes prove inadequate, then the Company's cash flow and its ability to make expected distributions to its shareholders may be adversely affected.
Real Estate Investment Risks
General Risks. Real property investments are subject to varying degrees of risk. The yields available from equity investments in real estate depend in large part on the amount of income generated and expenses incurred. If the Company's properties do not generate revenues sufficient to meet operating expenses, including current levels of debt service, tenant improvements, leasing commissions and other capital expenditures, the Company may have to borrow additional amounts to cover fixed costs and the Company's cash flow and its ability to make distributions to its shareholders will be adversely affected. The Company must obtain external financing to meet future debt maturities.
The Company's net revenues and the value of its properties may be adversely affected by a number of factors, including the national, regional and local economic climates; regional and local real estate conditions; the perceptions of prospective tenants as to the attractiveness of the property; the ability of the Company to provide adequate management, maintenance and insurance; and increased operating costs (including real estate taxes and utilities). In addition, real estate values and income from properties are also affected by such factors as applicable laws, including tax laws, interest rate levels and the availability of financing.
Illiquidity of Real Estate. Equity real estate investments are relatively illiquid. Such illiquidity will tend to limit the ability of the Company to vary its portfolio promptly in response to changes in economic or other conditions. In addition, the Internal Revenue Code limits the Company's ability to sell certain properties held for fewer than four years, which may affect the Company's ability to sell its properties.
Competition. Numerous office buildings compete with the Company's buildings in attracting tenants to lease space. Some of these competing buildings are newer, better located or better capitalized than some of the Company's buildings. Moreover, the Company believes that major national or regional commercial property developers will continue to seek development opportunities in the southeastern and southwestern United States. These developers may have greater financial resources than the Company. The number of competitive commercial properties in a particular area could have a material adverse effect on the Company's ability to lease space in its buildings or at newly developed or acquired properties and the rents charged.
Changes in Laws. Because increases in income, service or transfer taxes are generally not passed through to tenants under leases, such increases may adversely affect the Company's cash flow and its ability to make distributions to its shareholders. The Company's properties are also subject to various federal, state and local regulatory requirements, such as requirements of the Americans with Disabilities Act (the "ADA") and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. The Company believes that its properties are currently in compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by the Company and could have an adverse effect on the Company's cash flow and expected distributions.
Uninsured Loss. The Company presently carries comprehensive liability, fire, flood (where appropriate), extended coverage and rental loss insurance with respect to its properties, with policy specifications and insured limits customary for similar properties. There are, however, certain types of losses (such as from wars) that may be either uninsurable or not economically insurable. Should an uninsured loss or a loss exceeding policy limits occur, the Company could lose both its capital invested in, and anticipated profits from, one or more of its properties.
Bankruptcy and Financial Condition of Tenants. At any time, a tenant of the Company's buildings may seek the protection of the bankruptcy laws, which could result in the rejection and termination of such tenant's lease and thereby cause a reduction in the cash flow available for distribution by the Company. No assurance can be given that tenants will not file for bankruptcy protection in the future or, if any tenants file, that they will affirm their leases and continue to make rental payments in a timely manner. In addition, a tenant from
time to time may experience a downturn in its business which may weaken its financial condition and result in its failure to make rental payments when due. If a tenant's lease is not affirmed following bankruptcy or if a tenant's financial condition weakens, the Company's income may be adversely affected.
Americans with Disabilities Act Compliance. Under the ADA, all public accommodations and commercial facilities are required to meet certain federal requirements relating to access and use by disabled persons. These requirements became effective in 1992. Compliance with the requirements of the ADA could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. Government or an award of damages to private litigants. Although the Company believes that its properties are substantially in compliance with these requirements, the Company may incur additional costs to comply with the ADA. Although the Company believes that such costs will not have a material adverse effect on the Company, if required changes involve a greater expenditure than the Company currently anticipates, the Company's ability to make distributions to its shareholders could be adversely affected.
Risks Involved in Property Ownership Through Partnership and Joint Ventures. Although the Company owns fee simple interests in its properties, in the future the Company could, if then permitted by the covenants in its loan agreements and its financial position, participate with other entities in property ownership through partnerships or joint ventures. Partnership or joint venture investments may, under certain circumstances, involve risks not otherwise present in property ownership, including the possibility that (a) the Company's partners or co-venturers might become bankrupt, (b) such partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with the business interests or goals of the Company, and (c) such partners or co-venturers may be in a position to take action contrary to the instructions or the requests of the Company or contrary to the Company's policies or objectives, including the Company's policy to maintain its qualification as a REIT. The Company will, however, seek to maintain sufficient control of such participants or joint ventures to permit the Company's business objectives to be achieved. There is no limitation under the Company's organizational documents as to the amount of available funds that may be invested in partnerships or joint ventures.
Impact of Inflation. The Company may experience increases in its expenses, including debt service, as a result of inflation. The Company'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, property taxes) above expected levels at a time when it may not be possible for the Company to increase lease rates to offset such higher operating expenses. In addition, inflation can have secondary effects upon occupancy rates by decreasing the demand for office space in many of the markets in which the Company operates.
Although, inflation has historically often caused increases in the value of income-producing real estate through higher rentals, the Company can provide no assurance that inflation will increase the value of its properties in the future and, in fact, the rate of inflation over recent years has been considerably below that which has been experienced previously.
Risk of Development, Construction and Acquisition Activities
Within the constraints of its policy concerning leverage, the Company has and will continue to develop and construct office buildings, particularly on its undeveloped land. Risks associated with the Company's development and construction activities, including activities relating to its undeveloped land, may include: abandonment of development opportunities; construction costs of a property exceeding original estimates and possibly making the property uneconomical; insufficient occupancy rates and rents at a newly completed property to make the property profitable; unavailability of financing on favorable terms for development of a property; and the failure to complete construction and lease-up on schedule, resulting in increased debt service expense and construction costs. In addition, new development activities, regardless of whether or not they are ultimately successful, typically require a substantial portion of management's time and attention. Development activities are subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations.
The Company will in the future also acquire office buildings. Acquisitions of office buildings entail risks that investments will fail to perform in accordance with expectations. Estimates of the cost of improvements to bring an acquired building up to standards established for the market position intended for such building may prove inaccurate. In addition, there are general investment risks associated with any new real estate investment.
The Company anticipates that any future developments and acquisitions would be financed through a combination of internally generated cash, equity investments and secured or unsecured financing. If new developments are financed through construction loans, there is a risk that, upon completion of construction, permanent financing for newly developed properties may not be available or may be available only on disadvantageous terms.
Changes in Policies Without Stockholder Approval
The investment, financing, borrowing and distribution policies of the Company, as well as its policies with respect to all other activities, including growth, debt, capitalization and operations, are determined by the Board of Directors. Although the Board of Directors has no present intention to do so, these policies may be amended or revised at any time and from time to time at the discretion of the Board of Directors without a vote of the shareholders of the Company. A change in these policies could adversely affect the financial condition or results of operations of the Company or the market price of the Common Stock.
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.
The Company's environmental assessments of its properties have not revealed any environmental liability that the Company believes would have a material adverse effect on its business, assets or results of operations taken as a whole, nor is the Company aware of any such material environmental
liability. Nevertheless, it is possible that the Company's assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. Moreover, there can be no assurance that future laws, ordinances or regulations will not impose any material environmental liability or the current environmental condition of the Company's properties will not be affected by tenants, by the condition of land or operations in the vicinity of such properties (such as the presence of underground storage tanks), or by third parties unrelated to the Company.
Effect of Market Interest Rates on Price of Common Stock
One of the factors that will influence the market price of the Common Stock in public markets will be the annual dividend yield on the share price reflected by dividend distributions by the Company. An increase in market interest rates could reduce cash available for distribution by the Company to its shareholders and, accordingly, adversely affect the market price of the Common Stock.
Additional Information
For additional disclosure of risk factors to which the Company is subject, see the other sections of "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Item 8.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE NO.
Independent Auditors' Report................................ 28
Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1996 and 1995............................................ 29
Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 1996................................... 30
Consolidated Statements of Changes in Shareholders' Equity for Each of the Three Years in the Period Ended December 31, 1996......... 31
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1996................................... 32
Notes to Consolidated Financial Statements for Each of the Three Years in the Period Ended December 31, 1996................................... 33
Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts for the Three Years Ended December 31, 1996......... 45
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1996................ 46
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Koger Equity, Inc. Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Koger Equity, Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 8. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Koger Equity, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Jacksonville, Florida February 28, 1997
KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Organization. Koger Equity, Inc. ("KE") was incorporated in Florida on June 21, 1988. KE has two wholly-owned subsidiaries which are Southeast Properties Holding Corporation ("Southeast"), a Florida corporation, and Koger Real Estate Services, Inc. ("KRES"), a Florida corporation.
Principles of Consolidation. The consolidated financial statements include the accounts of KE and its wholly-owned subsidiaries (the "Company"). All material intercompany accounts have been eliminated in consolidation.
Investment in Koger Realty Services, Inc. Koger Realty Services, Inc., a Delaware corporation ("KRSI"), provides leasing and property management services to owners of commercial office buildings. During 1995, the Company purchased all of the preferred stock of KRSI, which preferred stock represents at least 95 percent of the economic value of KRSI. Initially, such preferred stock was non-voting but was convertible into voting common stock. Accordingly, KE consolidated KRSI in the 1995 financial statements. During 1996, the Company requested KRSI to change the convertibility feature of the preferred stock owned by the Company. Effective in 1996, the preferred stock is non-voting and is not convertible into the common stock of KRSI while held by the Company. The Company has accounted for its investment in the preferred stock of KRSI using the equity method.
Real Estate Investments. Operating properties, furniture and equipment, and undeveloped land held for investment are stated at cost less accumulated depreciation. Undeveloped land held for sale is carried at the lower of cost or fair value less selling costs.
Periodically, management reviews its portfolio of operating properties, undeveloped land held for investment and related goodwill and in those instances where properties have suffered an impairment in value that is deemed to be other than temporary, the properties and related goodwill will be reduced to their fair value. This review includes a quarterly analysis of occupancy levels and rental rates for the Company's properties in order to identify properties which may have suffered an impairment in value. Management prepares estimates of future cash flows for these properties to determine whether the Company will be able to recover its investment. In making such estimates, management considers the conditions in the commercial real estate markets in which the properties are located, current and expected occupancy rates, current and expected rental rates, and expected changes in operating costs. As of December 31, 1996, there were no such impairments in value. Maintenance and repairs are charged to operations. Acquisitions, additions, and improvements are capitalized.
Depreciation and Amortization. The Company uses the straight-line method for depreciation and amortization. Acquisition costs, building improvements and tenant improvements are depreciated over the periods benefited by the expenditures which range from 3 to 40 years. Deferred tenant costs (leasing commissions and tenant relocation costs) are amortized over the term of the related leases. Deferred financing costs are amortized over the terms of the related agreements. Cost in excess of fair value of net assets acquired is being amortized over 15 years.
Revenue Recognition. Rentals are generally recognized as revenue over the lives of leases according to provisions of the lease agreements. However, the straight-line basis, which averages annual minimum rents over the terms of leases, is used to recognize minimum rent revenues under leases which provide for material varying rents over their terms. For 1996, 1995 and 1994, the recognition of rental revenues on this basis for applicable leases increased rental revenues by $114,000, $80,000 and $512,000, respectively, over the amount which would have been recognized based upon the contractual provisions of these leases. Interest revenue is recognized on the accrual basis for interest-earning investments.
Federal Income Taxes. The Company is qualified and has elected tax treatment as a real estate investment trust under the Internal Revenue Code (a "REIT"). Accordingly, the Company distributes at least 95 percent of its REIT taxable income to its shareholders. Since the Company had no REIT taxable income in 1996, 1995 or 1994, no distributions to shareholders were made. To the extent that the Company pays dividends equal to 100 percent of REIT taxable income, the earnings of the Company are taxed at the shareholder level. However, the use of net operating loss carryforwards, which may reduce REIT taxable income to zero, are limited for alternative minimum tax purposes.
Earnings Per Common Share. Earnings per common share have been computed based on the weighted average number of shares of common stock and common stock equivalents outstanding as follows:
Year Primary Fully Diluted ---- ------- ------------- 1996 19,500,171 19,575,513 1995 18,011,076 18,091,029 1994 17,718,757 17,718,757
Fair Value of Financial Instruments. The Company believes that the carrying amount of its financial instruments (temporary investments, accounts receivable, accounts payable, and mortgages and loans payable) is a reasonable estimate of fair value of these instruments.
Statements of Cash Flows. Cash in excess of daily requirements is invested in short-term monetary securities. Such temporary cash investments have an original maturity of less than three months and are deemed to be cash equivalents for purposes of the statements of cash flows.
During 1994, cost in excess of fair value of net assets acquired was adjusted as follows: (1) assets acquired increased $2,250,000; (2) liabilities assumed increased $243,000; and (3) additional direct merger costs were incurred which totalled $344,000. During 1995, cost in excess of fair value of net assets acquired was adjusted as follows: (1) assets acquired increased $169,000; and (2) liabilities assumed increased $1,000. In addition, $6,412,000 of the unamortized cost in excess of fair value of net assets acquired was written off and offset against proceeds received by Southeast from the TKPL unsecured note. This write-off was based on management's analysis of the remaining value of the intangible assets based on the liquidation of TKPL and the partial repayment of the TKPL unsecured note.
During 1995, the Company contributed 122,441 shares of common stock to the Company's 401(k) Plan. These shares had a value of approximately $888,000 based on the closing price of the Company's common stock on the American Stock Exchange on December 30, 1994. In addition, TKPL assigned $595,000 of its net assets to Southeast as payment on the unsecured note to Southeast during 1995. During 1996, the Company contributed 43,804 shares of common stock to the
Company's 401(k) Plan. These shares had a value of approximately $465,000 based on the closing price of the Company's common stock on the American Stock Exchange on December 31, 1995.
For 1996, 1995, and 1994, total interest payments (net of amounts capitalized) were $18,599,000, $23,823,000 and $23,525,000, respectively, for the Company. For 1996, 1995 and 1994, payments for income taxes totalled $816,000, $133,000 and $227,000, respectively.
Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates.
New Accounting Standards. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. SFAS 121 is effective for the Company for the year ending December 31, 1996. The adoption of SFAS 121 did not have a material effect on the financial statements of the Company.
In October 1995, the Financial Accounting Standards Board also issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply Accounting Principles Board Opinion No. 25 ("APB 25"), which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB 25 to its stock based compensation awards to employees and has disclosed the required pro forma effect on net income and earnings per share.
Reclassification. Certain 1995 and 1994 amounts have been reclassified to conform with 1996 presentation.
2. TRANSACTIONS WITH RELATED PARTIES.
Three directors were elected to the Company's Board under the terms of an agreement dated October 10, 1996 between the Company and an affiliate of Apollo Real Estate Investment Fund II, L.P. ("Apollo") pursuant to which Apollo purchased three million shares of common stock from the Company for $43.5 million ($14.50 per share). Such agreement grants to Apollo registration rights and a conditional exemption from certain of the Company's takeover defenses and provides that for a period of three years (subject to earlier termination under certain circumstances): (i) Apollo may purchase up to 25 percent of the Company's outstanding stock; (ii) Apollo will be entitled to Board representation of up to three directors on a board of not more than 12 (depending upon Apollo's level of ownership of the common stock); and (iii) Apollo will not acquire more than 25 percent of the Company's outstanding stock and will vote its shares as to certain matters either in accordance with the recommendation of the Board or proportionately with other shareholders, unless
the Company breaches its agreements or, without Apollo's consent, the Company takes certain significant actions such as certain amendments of the Company's organizational documents, liquidation, termination of REIT status, sale of the Company, acquisitions or disposition over a certain size, issuance of more than 9.8 percent of the outstanding common stock to a person or group or failure by the Company to employ its takeover defenses against another person who holds (or tender for) 15 percent or more of the common stock.
The proceeds of the Apollo stock sale were used to retire debt with a weighted average interest rate of 8.04%. Pro forma earnings per share information assuming the debt was retired at the beginning of 1996 is as follows:
Pro forma net income $13,291,000 Pro forma earnings per share: Primary $ 0.61 Fully diluted $ 0.61
In connection with the above transaction, Rothschild Realty, Inc., which employs Mr. Aloian as a Managing Director, received $350,000 for providing a fairness opinion to the Company's Board of Directors. Also, Mr. Hiley received from the Company a fee of $204,000 for his role in negotiating the transaction. Both Mr. Aloian and Mr. Hiley are directors of the Company.
Pursuant to a Consulting Agreement with the Company, which is subject to periodic evaluation by the Board of Directors, Mr. Hiley provides advice with respect to the financial aspects of the Company's strategic plan and was paid a fee of $146,000 for 1996.
Mr. Davis retired as an employee of the Company on December 31, 1996, but continues to serve the Company as a consultant. Pursuant to the Consulting Agreement between Mr. Davis and the Company, he will receive a consulting fee of $50,000 per year through December 31, 1999.
3. INVESTMENTS IN THE KOGER PARTNERSHIP, LTD.
General. Southeast, a wholly-owned subsidiary of the Company, was the managing general partner of TKPL through December 26, 1995. Southeast's interests in TKPL included (1) 90,360 TKPL General and Limited Partnership Units (the "Units") and (2) a restructured unsecured note from TKPL with a principal amount of approximately $31 million. In light of the terms of TKPL's restructured debt, the Company had determined that these investments had no value. During 1995, TKPL sold all of its operating properties. The net proceeds from the sale were sufficient to repay in full all secured debt and accrued interest of TKPL with the remaining excess sales proceeds and available cash of TKPL used to pay Southeast for amounts owed on subordinate debt and accrued interest. During 1995, TKPL repaid $17.7 million of the subordinate debt to Southeast. On December 4, 1995, the Bankruptcy Court in the TKPL Chapter 11 Case entered an order authorizing and directing Southeast to take all necessary and advisable action to wind up TKPL's affairs and to terminate its existence as a partnership. On December 26, 1995, TKPL was dissolved. The Company recorded a gain on the recovery of the TKPL note to Southeast of $11,288,000, which was calculated as follows:
Proceeds from TKPL unsecured note to Southeast $17,700,000 Partial Write-off of Cost in Excess of Fair Value of Net Assets Acquired (6,412,000) ---------- Gain on TKPL Note to Southeast $11,288,000 ===========
Basis of Accounting for the Investment in TKPL. Southeast had significant influence over TKPL's activities because it owned approximately 32 percent of TKPL's outstanding Units. However, Southeast did not control TKPL for accounting purposes and, accordingly, accounted for its investment using the equity method. No losses of TKPL were allocated to Southeast because Southeast was not obligated to fund losses of TKPL as stated in the Third Amended and Restated Agreement of Limited Partnership dated August 3, 1993.
Duties to and Compensation from TKPL. Southeast, in its capacity as Managing General Partner, generally had responsibility for all aspects of TKPL's operations and received as compensation for its services a management fee equal to nine percent of the gross rental revenues derived from the properties it managed for TKPL. All third-party leasing commissions incurred on TKPL buildings were the responsibility of the Company. During 1995 and 1994, the management fees earned were approximately $1,685,000 and $3,288,000, respectively. During the fourth quarter of 1995, approximately $500,000 of management fees from TKPL previously recorded were written off because collection of these fees could have potentially affected the Company's REIT status.
Purchase of TKPL Mortgage Notes. During 1995, KE acquired $27.8 million principal amount of TKPL New Secured Notes and $4.5 million principal amount of TKPL Converted Loan Notes for approximately $18.2 million in the aggregate. During 1995, the TKPL New Secured Notes and the TKPL Converted Loan Notes were retired by TKPL. The Company recorded $13,066,000 of interest revenue related to these notes during 1995 which represented repayment proceeds on the notes in excess of the Company's cost basis. These excess proceeds were recorded as an interest yield adjustment on the notes.
4. MORTGAGES AND LOANS PAYABLE.
On December 18, 1996, the Company closed on $175.9 million of a $190 million non-recourse loan with Northwestern Mutual Life Insurance Company ("Northwestern") which is secured by 10 office parks. This loan is divided into (i) a tranche in the amount of $100.5 million ($86.4 million which has been drawn) with a 10 year maturity and an interest rate of 8.25 percent and (ii) a tranche in the amount of $89.5 million with a maturity of 12 years and an interest rate of 8.33 percent. The Company plans to draw the remaining loan proceeds when the existing indebtedness on two buildings matures. Monthly payments on this loan include principal amortization based on a 25 year amortization period. This indebtedness requires the Company to maintain certain financial ratios and is collateralized by properties with a carrying value of approximately $253.8 million at December 31, 1996.
At December 31, 1996, the Company had other mortgages payable with an outstanding balance of $27,142,000 which is net of a $369,000 discount. Such mortgages are generally amortizing, bear interest at rates ranging from 8.5 percent to 10.125 percent, and are collateralized by office buildings with a carrying value of approximately $50.2 million at December 31, 1996.
With the proceeds of a private placement of three million shares of the Company's common stock and the Northwestern loan, the Company repaid all of its debt which had been restructured during 1993.
The Company has signed a commitment for a $50 million revolving credit facility, subject to sufficient collateral being provided to fund this facility. Based on the Company's election, the interest rate on this revolving credit facility will be either (i) the lender's LIBOR rate plus 200 basis points or (ii) the lender's prime rate. Interest payments will be due monthly on this
credit facility which has a term of two years. At the election of the lender, the term of this credit facility may be extended for additional periods of one year each.
The annual maturities of loans and mortgages payable, which are gross of $369,000 of unamortized discounts, as of December 31, 1996, are summarized as follows:
Year Ending Amount December 31, (In thousands) ------------ --------------- 1997 $ 11,333 1998 3,909 1999 3,502 2000 17,971 2001 3,184 Subsequent Years 163,514 --------- Total $203,413 ========
5. LEASES.
The Company's operations consist principally of owning and leasing of office space. Most of the leases are for terms of three to five years. Generally, the Company pays all operating expenses, including real estate taxes and insurance. At December 31, 1996, approximately 94 percent of the Company's annualized rentals were subject to rent escalations based on changes in the Consumer Price Index or increases in real estate taxes and certain operating expenses. A substantial number of leases contain options that allow leases to renew for varying periods.
The Company's leases are operating leases and expire at various dates through 2014. Minimum future rental revenues from leases in effect at December 31, 1996, determined without regard to renewal options, are summarized as follows:
Year Ending Amount December 31, (In thousands) ------------ --------------- 1997 $ 88,825 1998 66,783 1999 46,759 2000 34,423 2001 21,693 Subsequent Years 61,470 ---------- Total $319,953 ========
The above minimum future rental revenue does not include contingent rentals that may be received under provisions of the lease agreements. Contingent rentals amounted to $2,886,000, $1,792,000 and $2,172,000 for the years 1996, 1995, and 1994, respectively.
At December 31, 1996, annualized rental revenues totalled approximately $13,500,000 for the State of Florida, when all of its departments and agencies which lease space in the Company's buildings were combined. Also, at that date, annualized rental revenues totalled approximately $10,498,000 for the United States of America, when all of its departments and agencies which lease space in the Company's buildings were combined.
6. STOCK OPTIONS AND RIGHTS.
1988 Stock Option Plan. The Company's Amended and Restated 1988 Stock Option Plan (the "1988 Plan") provides for the granting of options to purchase up to 500,000 shares of its common stock to key employees of the Company and its subsidiaries. To exercise the option, payment of the option price is required before the option shares are delivered. These options expire seven years from the date of grant and are generally exercisable beginning one year from the date of the grant at the rate of 20 percent per annum of the shares covered by each option on a cumulative basis being fully exercisable five years after the date of grant.
1993 Stock Option Plan. The Company's 1993 Stock Option Plan (the "1993 Plan") provides for the granting of options to purchase up to 1,000,000 shares of its common stock to key employees of the Company and its affiliates. To exercise the option, payment of the option price is required before the option shares are delivered. These options expire ten years from the date of grant and are generally exercisable beginning one year from the date of the grant at the rate of 20 percent per annum of the shares covered by each option on a cumulative basis being fully exercisable five years after the date of grant.
1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996 Plan") provides for the granting of options to purchase up to 650,000 shares of its common stock to key employees of the Company. To exercise the option, payment of the option price is required before the option shares are delivered. These options expire ten years from the date of grant and are exercisable beginning one year from the date of the grant at the rate of 20 percent per annum of the shares covered by each option on a cumulative basis being fully exercisable five years after the date of grant.
Information Concerning Options Granted. Substantially all of the options granted have been granted with an exercise price equal to the market value at the date of grant. If compensation cost for stock option grants had been determined based on the fair value at the grant dates for 1996 and 1995 consistent with the method prescribed by SFAS 123, the Company's net earnings and earnings per share would have been adjusted to the pro forma amounts indicated below:
1996 1995 ----------- ----------- Net Income - As reported $10,501,000 $28,990,000 - Pro forma $10,139,000 $28,960,000
Primary Earnings per share - As reported $ 0.54 $ 1.61 - Pro forma $ 0.52 $ 1.61
Under SFAS 123, the fair value of each option grant is estimated on the date of grant using the binomial option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995:
1996 1995 ----------- ----------- 1988 Plan Dividend Yield 5.00% 5.00% Expected Volatility 28.09% 43.70% Risk-free Interest Rates 6.52% 7.35% Expected Lives (Months) 61 69
1996 1995 ----------- ----------- 1993 Plan and 1996 Plan Dividend Yield 5.00% 5.00% Expected Volatility 24.17% 43.60% Risk-free Interest Rates 6.29% 7.37% Expected Lives (Months) 86 69
A summary of the status of fixed stock option grants as of December 31, 1996, 1995 and 1994, and changes during the years ending on those dates is presented below:
The weighted average fair values of options granted during 1996 and 1995 were $3.79 and $3.44 per option, respectively.
Remaining non-exercisable options as of December 31, 1996 become exercisable as follows:
Number Year of Options ---- ---------- 1997 387,243 1998 329,993 1999 329,993 2000 164,842 2001 123,010 ---------- 1,335,081 =========
Warrants. The Company had 1,110,887 and 1,114,217 Warrants outstanding on December 31, 1996 and 1995, respectively. Each Warrant gives the holder the right to purchase one share of common stock at a price of $8.00 per share, such rights to be exercisable until June 30, 1999. The Warrants are subject to redemption at the option of the Company at prices currently ranging from $3.48 to $5.24 per Warrant.
Shareholder Rights Plan. Pursuant to a Shareholder Rights Plan (the "Rights Plan"), on September 30, 1990, the Board of Directors of the Company declared a dividend of one Common Stock Purchase Right for each outstanding share of common stock of the Company. Under the terms of the Rights Plan, the rights which were distributed to the shareholders of record on October 11, 1990, trade together with the Company's common stock (the "Shares") and are not exercisable until the occurrence of certain events (none of which have occurred through December 31, 1996), including acquisition of, or commencement of a tender offer for, 15 percent or more of the Company's common stock. In such event, each right entitles its holder (other than the acquiring person or bidder) to acquire additional shares of the Company's common stock at a fifty percent discount from the market price. The rights are redeemable under circumstances as specified in the Rights Plan. The Rights Plan was amended effective October 10, 1996 for a certain shareholder and its affiliates. See Note 2 for further discussion of this amendment.
7. STOCK INVESTMENT PLAN.
During 1994, the Company adopted a Monthly Stock Investment Plan (the "SIP") which provides for regular purchases of the Company's common stock by all employees and directors. The SIP provides for monthly payroll and directors' fees deductions up to $1,700 per month with the Company making monthly contributions for the account of each participant as follows: (i) 25 percent of amounts up to $50; (ii) 20 percent of amounts between $50 and $100; and (iii) 15 percent of amounts between $100 and $1,700, which amounts are used by an unaffiliated Administrator to purchase shares from the Company.
The Company has reserved a total of 200,000 Shares for issuance under the SIP. The Company's contribution and the expenses incurred in administering the SIP totalled approximately $36,700, $34,800 and $7,900 for 1996, 1995 and 1994, respectively. Through December 31, 1996, 45,016 Shares have been issued under the SIP.
8. EMPLOYEE BENEFIT PLANS.
During 1994, the Company adopted a 401(k) plan (the "401(k) Plan") which permits contributions by employees. The Company's Board of Directors approved a Company contribution to the 401(k) Plan for 1994. This contribution was in the form of the Company's common stock and was made during February, 1995. The contribution totalled 122,441 Shares which had a value of approximately $888,000 on December 31, 1994. For 1995, the Company's Board of Directors approved a Company contribution to the 401(k) Plan in the form of the Company's Shares (43,804 Shares which had a value of approximately $465,000 on December 31, 1995) and cash ($443,000). The contribution for 1995 was made during February, 1996. For 1996, the Company's Board of Directors approved a Company contribution to the 401(k) Plan in the form of the Company's Shares (23,657 Shares which had a value of approximately $444,000 on December 31, 1996). The contribution for 1996 was made on January 6, 1997.
The Company's Board of Directors has adopted a supplemental executive retirement plan (the "SERP"), an unfunded defined benefit plan. The purpose of the SERP is to facilitate the retirement of select key executive employees by supplementing their benefits under the Company's 401(k) Plan. The document establishing the SERP, which became effective on June 28, 1995, was executed by the Company on August 18, 1995. The benefits are based on years of service and the employee's average base salary during the last three calendar years of employment.
Net periodic pension cost for the SERP for 1996 and 1995 was as follows (in thousands) :
1996 1995 ---- ---- Service Cost $ 28 $ 25 Interest Cost 242 94 Amortization of Unrecognized Prior Service Cost 219 109 ----- ---- Total $489 $228 ==== ====
Assumptions used in the computation of net periodic pension cost for the SERP were as follows:
Discount rate 7.5% Rate of increase in salary levels 5.0%
The following table sets forth the status of the unfunded SERP and the amounts included in accrued liabilities-other in the Consolidated Balance Sheet at December 31, 1996 and 1995 (in thousands):
1996 1995 ---- ---- Accumulated benefit obligation $ 2,370 $ 1,884 Effect of projected future salary increases 1,126 624 --------- --------- Projected benefit obligation $ 3,496 $ 2,508 -------- ------- Actuarial present value of projected benefit obligations in excess of plan assets $(3,496) $(2,508) Unrecognized prior service cost 2,779 2,280 Additional minimum liability (1,653) (1,656) -------- ------- Accrued pension cost $(2,370) $(1,884) ======= =======
9. DIVIDENDS.
The Company paid no dividends during the three years ended December 31, 1996. The Company intends that the quarterly dividend payout in the last quarter of each year will be adjusted to reflect the distribution of at least 95 percent of the Company's REIT taxable income as required by the Federal income tax laws. During December 1996, the Company's Board of Directors declared a quarterly dividend of $0.05 per share payable on February 10, 1997, to shareholders of record on January 6, 1997.
10. FEDERAL INCOME TAXES.
The Company is operated in a manner so as to qualify and has elected tax treatment as a REIT. The Company's taxable loss prior to the dividends paid
deduction for the years ended December 31, 1996, 1995, and 1994 was approximately $401,000, $23,265,000 and $15,954,000, respectively. The difference between net income for financial reporting purposes and taxable income/loss results primarily from different methods of accounting for bad debts, depreciable lives related to the properties owned, advance rents received and net operating loss carryforwards. At December 31, 1996, the net book basis of the Company's assets and liabilities exceeded the net tax basis of assets and liabilities in the amount of approximately $11.9 million.
The Company utilized approximately $323,000 and $593,000 of net operating loss carryforwards to eliminate REIT taxable income for 1994 and 1995, respectively. The Company's net operating loss carryforward available to offset REIT taxable income for 1996 is approximately $14,949,000. The use of net operating loss carryforwards and other tax attributes by the Company is subject to certain limitations imposed by Internal Revenue Code Sections 382 and 383. These limitations apply to both regular and alternative minimum taxes. These net operating loss carryforwards and other tax attributes can be used in varying degrees to offset REIT taxable income or tax through 2007. For 1995, the Company paid alternative minimum taxes of approximately $103,000 and recorded a provision for alternative minimum taxes of approximately $300,000 for 1996.
During 1996, the Internal Revenue Service ("IRS") completed its examination of the Company's 1992 and 1993 Federal income tax returns and the Koger Properties, Inc. ("KPI") final Federal income tax return. The IRS submitted their Report to the Company and proposed disallowing certain deductions on KPI's final Federal income tax return, the result of which reduced the net operating loss carryforwards acquired from KPI from approximately $98 million to $30 million and required the payment of approximately $169,000 of alternative minimum tax plus interest. Management believes this was a favorable settlement with respect to KPI's final Federal income tax return. There were no proposed adjustments to the Company's 1992 and 1993 tax returns.
11. LITIGATION.
A derivative action against the Company in the U. S. District Court, Middle District of Florida (the "District Court"), which commenced on October 29, 1990, has been resolved in favor of the Company. Various amended filings and counter-claims have been filed against the Company of which the Company does not believe that the outcome will materially affect its operations or financial position. The Company and the other parties to this derivative action have agreed on a settlement of all claims and have submitted documentation thereof to the District Court. On January 10, 1996, the District Court entered its order approving this settlement (the "Approval Order") after notice to stockholders of the Company. The Approval Order became final on or about February 12, 1996, and the parties are now required to exchange documentation and effect other steps to consummate this settlement. During 1995, the Company paid $50,000 for settlement of this litigation.
During 1994, the Company settled a pending class action proceeding (the "Securities Action"). The Company recorded a provision of $1,685,000 relating to the settlement of the Securities Action and incurred additional costs related to the settlement which totalled $217,000.
Under the terms of the merger agreement between the Company and KPI, the Company agreed to indemnify the former non-officer directors of KPI other than Ira M. Koger (the "Indemnified Persons") in respect of amounts to which such Indemnified Person would be otherwise entitled to indemnification under Florida
law, the articles of incorporation or the by-laws of KPI arising out of acts or omissions prior to September 25, 1991 (the "Indemnity"). The obligations, if any, of the Company under such indemnification do not exceed (i) $1,000,000 in the aggregate and (ii) $200,000 per Indemnified Person and are subject to certain other conditions precedent. Certain of the former non-officer directors of KPI were defendants in a Pension Plan class action suit (the "Roby Case"). The Company was not named in this suit. However, certain former non-officer directors of KPI may be Indemnified Persons. The Company signed an agreement to settle the Roby Case and placed in escrow $100,000 as its contribution to such settlement for the Indemnified Persons. On January 9, 1997, the District Court entered the Order and Final Judgment approving the agreement to settle the Roby Case. The time for appeal of the Order and Final Judgment has passed with no appeal having been taken. No provision has been made in the Consolidated Financial Statements for any additional liability that may result from the Indemnity.
12. COMMITMENTS AND CONTINGENCIES.
At December 31, 1996, the Company had commitments for the construction of buildings and improvements to existing buildings of approximately $6.7 million.
On February 27, 1997, the Company sold 8.1 acres of unimproved land, with a carrying value of $2 million, located in Miami, Florida for an aggregate sales price of $2.97 million.
(1) The results for the quarter ended September 30, 1995 were affected by (i) the interest revenue associated with the Company's investment in the TKPL mortgage notes, (ii) the gain associated with the partial repayment of a TKPL note to Southeast and (iii) the write-off of deferred offering costs.
(2) The results for the quarter ended December 31, 1995 were affected by additional gain associated with the partial repayment of a TKPL note to Southeast.
(3) The results for the quarter ended December 31, 1996 were affected by an extraordinary loss on early retirement of debt. Income before extraordinary item was $4,396 and earnings per common share before extraordinary item was $0.21.
(a) Receivable balance which was determined to be uncollectible and written-off in the applicable year.
(b) Land parcel was sold for which valuation allowance had been recorded.
KOGER EQUITY, INC. AND SUBSIDIARIES Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (in thousands)
(d) (a) ACCUM. MORT- DATE DEPRECIABLE CENTER DEPR. GAGES ACQUIRED LIFE - ------ ----- ----- -------- ---- - ------ PROPERTIES UNDER CONSTRUCTION: CHARLOTTE CARMEL $ 0 $ 0 MEMPHIS GERMANTOWN 0 0
TOTAL UNDER CONSTRUCTION 0 0
UNIMPROVED LAND: ATLANTA GWINNETT 0 0 1993 CHARLOTTE CARMEL 0 0 1993 CHARLOTTE EAST 0 0 1993 COLUMBIA SPRING VALLEY 0 0 1993 GREENSBORO WENDOVER 0 0 1993 GREENVILLE 0 0 1993 JACKSONVILLE BAYMEADOWS 0 0 1993 JACKSONVILLE CENTRAL 0 0 1989 MEMPHIS GERMANTOWN 0 0 1993 MIAMI 0 0 1993 ORLANDO UNIVERSITY 0 0 1993 RICHMOND SOUTH 0 0 1993 ST. PETERSBURG 0 0 1993 SAN ANTONIO 0 0 1993 TULSA 0 0 1993 -------- -------- TOTAL UNIMPROVED LAND 0 0 -------- -------- TOTAL $82,478 $203,413 ======= ========
Schedule III
KOGER EQUITY, INC. AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (in thousands)
(a) At December 31, 1996, the outstanding balance of mortgages payable was $203,413, which is gross of $369 of unamortized discounts.
(b) Aggregate cost basis for Federal income tax purposes was $647,605 at December 31, 1996.
(c) Reconciliation of total real estate carrying value for the years ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994 ---- ---- ---- Balance at beginning of year $601,594 $614,249 $606,806 Acquisitions and construction 1,058 330 384 Improvements 12,568 14,371 11,083 Transfer from/to other assets (257) 16 Sale of unimproved land (1,250) (4,761) (3,028) Sale or disposition operating real estate (620) (21,539) Investment in KRSI (102) Provision for loss - land parcels (970) (996) -------- ------- -------- Balance at close of year $613,093 $601,594 $614,249 ======== ======== ========
For 1995, the provision for loss was based upon a contract for the sale of the Miami land parcel held for sale for which the contract price ranges between $2,000 and $2,970 contingent upon the square footage of office buildings which can be constructed on this land parcel. For 1994, the provision for loss was based upon contracts for the sale of two land parcels. The sale of one of these land parcels was consummated during 1994, while the contract for the sale of the other land parcel expired.
(d) Reconciliation of accumulated depreciation for the years ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994 ---- ---- ---- Balance at beginning of year $ 62,845 $ 46,106 $ 30,706 Depreciation expense: Operating real estate 19,538 17,363 15,202 Furniture and equipment 292 258 198 Investment in KRSI (31) Sale or disposition of operating real estate (197) (851) -------- ------- -------- Balance at close of year $ 82,478 $62,845 $ 46,106 ======== ======= ========
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about directors of the Company who are not executive officers is contained in the Company's Proxy Statement (the "1997 Proxy Statement") and is incorporated herein by reference.
The following tabulation lists the executive officers of the Company, their ages and their occupations for the past five years:
Mr. Hughes, age 61, was elected Chairman and CEO on June 21, 1996. He has served as President of the Company since August 22, 1995, and as Chief Financial Officer of the Company since March 31, 1991. He held the positions of Senior Vice President of the Company from May 20, 1991 through August 21, 1995, and Vice President from April 1, 1990 through May 20, 1991. Mr. Hughes was also Assistant Secretary of the Company from March 11, 1991 through December 21, 1993. Mr. Hughes was elected to the Board of Directors of the Company on July 27, 1992.
Mr. Teagle, age 55, has been Executive Vice President and Chief Operating Officer since June 21, 1996. He had previously held the positions of Senior Vice President of the Company since May 10, 1994, and Vice President from December 21, 1993 to May 10, 1994. Mr. Teagle was a Vice President of KPI from July, 1973 to December 21, 1993. Mr. Teagle was elected to the Board of Directors of the Company on October 10, 1996.
Mr. Jenkins, age 53, has been the Corporate Secretary of the Company since December 21, 1993, and Vice President of the Company since May 10, 1994. Mr. Jenkins served as Corporate Secretary of KPI from June 7, 1973 through December 21, 1993, and as Vice President/Administration of KPI from August 7, 1990 through December 21, 1993.
Mr. Stephens, age 39, has been Vice President of the Company since May 7, 1996, and was the Treasurer of the Company from March 31, 1991 to May 7, 1996. He has served as Chief Accounting Officer of the Company since March 31, 1991. He held the position of Assistant Secretary of the Company from May 20, 1991 through December 21, 1993.
Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's directors and executive officers file with the Securities and Exchange Commission (the "SEC") and the American Stock Exchange initial reports of ownership and reports of changes in ownership of the Company's equity securities. Executive officers and directors are required by regulations of the SEC to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 1996, the Company's executive officers and directors complied with all Section 16(a) filing requirements.
Item 11.

Item 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference to the section headed "Executive Compensation" in the 1997 Proxy Statement (except for information contained under the headings "Compensation Committee Report on Executive Compensation" and "Shareholder Return Performance Presentation").
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The stock ownership of each person known to the Company to be the beneficial owner of more than five percent (5%) of its outstanding common stock is incorporated by reference to the section headed "Principal Holders of Voting Securities" of the 1997 Proxy Statement. The beneficial ownership of Common Stock of all directors of the Company is incorporated by reference to the section headed "Election of Directors" contained in the 1997 Proxy Statement.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to Item 1. "Business," 2. "Properties," 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 "Transactions With Related Parties" to the Notes to Consolidated Financial Statements contained in this Report and to the heading "Certain Relationships and Transactions" contained in the 1997 Proxy Statement for information regarding certain relationships and related transactions which information is incorporated herein by reference.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) See "Item 8 - Financial Statements and Supplementary Data - Index to Consolidated Financial Statements and Financial Statement Schedules" for a list of the financial statements included in this report.
(2) The consolidated supplemental financial statement schedules required by Regulation S-X are included on pages 45 through 48 in this Form.
(b) Reports on Form 8-K: On October 10, 1996, the Company filed a Form 8-K reporting under Item 5, Other Events, that the Company had issued a New Release and providing under Item 7, Financial Statements and Exhibits, a copy of the Koger Equity, Inc. News Release, dated October 10, 1996.
(c) The following exhibits are filed as part of this report:
Exhibit Number Description - -------------------------------------------------------------------------------- 2 Agreement and Plan of Merger, dated as of December 21, 1993 between the Company and Koger Properties, Inc. Incorporated by reference to Exhibit 2 of Form 10-K filed by the Registrant for the period ended December 31, 1993 (File No. 1-9997).
3(a) Amended and Restated Articles of Incorporation of Koger Equity, Inc. Incorporated by reference to Exhibit 3 of the Form 8-K, dated May 10, 1994, filed by the Registrant on June 17, 1994 (File No. 1-9997).
3(b) Koger Equity, Inc. By Laws, as Amended and Restated on August 21, 1996. Incorporated by reference to Exhibit 3(ii) of the Form 8-K/A, dated August 22, 1996 filed by the Registrant on August 22, 1996 (File No. 1-9997).
4(a) Common Stock Certificate of Koger Equity, Inc. Incorporated by reference to Exhibit 4(a) to Registration Statement on Form S-11 (Registration No. 33-22890).
4(b)(1)(A) Koger Equity, Inc. Rights Agreement (the "Rights Agreement") dated as of September 30, 1990 between the Company and Wachovia Bank and Trust Company, N.A. as Rights Agent ("Wachovia").Incorporated by reference to Exhibit 1 to a Registration Statement on Form 8-A, dated October 3, 1990 (File No. 1-9997).
4(b)(1)(B) First Amendment to the Rights Agreement, dated as of March 22, 1993, between the Company and First Union National Bank of North Carolina, as Rights Agent ("First Union"), entered into for the purpose of replacing Wachovia. Incorporated by reference to Exhibit 4(b)(4) of the Form 10-Q filed by the Registrant for the quarter ended March 31, 1993 (File No. 1-9997).
4(b)(1)(C) Second Amendment to the Rights Agreement, dated as of December 21, 1993, between the Company and First Union. Incorporated by reference to Exhibit 5 to an Amendment on Form 8-A/A, dated December 21, 1993, to a Registration Statement of the Registrant on Form 8-A, dated October 3, 1990 (File No. 1-9997).
4(b)(1)(D) Third Amendment to Rights Agreement, dated as of October 10, 1996, between Koger Equity, Inc. and First Union. Incorporated by reference to Exhibit 6 to an Amendment on Form 8-A/A, dated November 7, 1996, to a Registration Statement of the Registrant on Form 8-A, dated October 3, 1990 (File No. 1-9997).
4(b)(1)(E) Fourth Amendment to Rights Agreement, dated as of February 27, 1997, between Koger Equity, Inc. and First Union. Incorporated by reference to Exhibit 8 to an Amendment on Form 8-A/A, dated March 17, 1997, to a Registration Statement of the Registrant on Form 8-A, dated October 3, 1990 (File No. 1-9997).
4(b)(2) Form of Common Stock Purchase Rights Certificate (attached as Exhibit A to the Rights Agreement). Pursuant to the Rights Agreement, printed Common Stock Purchase Rights Certificates will not be mailed until the Distribution Date (as defined in the Rights Agreement).
4(b)(3) Summary of Common Stock Purchase Rights (attached as Exhibit B to the Rights Agreement, Exhibit 4(b)(1)(A)).
Exhibit Number Description - -------------------------------------------------------------------------------- 4(c)(1) Warrant Agreement, dated as of December 21, 1993, between the Company and First Union (the "Warrant Agreement"). Incorporated by reference to Exhibit 2 to an Amendment on Form 8-A/A, dated December 21, 1993, to a Registration Statement on Form 8-A, dated September 30, 1993 (File No. 1-9997).
4(c)(2) Form of a Common Share Purchase Warrant issued pursuant to the Warrant Agreement. Incorporated by reference to Exhibit 1 to an Amendment on Form 8-A/A, dated December 21, 1993, to a Registration Statement on Form 8-A, dated September 30, 1993 (File No. 1-9997).
10(a)(1)(A) Koger Equity, Inc. Amended and Restated 1988 Stock Option Plan. Incorporated by reference to Exhibit 10(e)(1)(A) of Form 10-Q filed by the Registrant for the quarter ended June 30, 1992 (File No. 1-9997).
10(a)(1)(B) Form of Stock Option Agreement pursuant to Koger Equity, Inc. Amended and Restated 1988 Stock Option Plan. Incorporated by reference to Exhibit 10(e)(2)(A) of Form 10-Q filed by the Registrant for the quarter ended June 30, 1992 (File No. 1-9997).
10(a)(1)(C) Form of Amendment to Stock Option Agreement pursuant to Koger Equity, Inc. Amended and Restated 1988 Stock Option Plan.*
10(a)(2)(A) Koger Equity, Inc. 1993 Stock Option Plan. Incorporated by reference to Exhibit II to Registrant's Proxy Statement dated June 30, 1993 (File No. 1-9997).
10(a)(2)(B) Form of Stock Option Agreement pursuant to Koger Equity, Inc. 1993 Stock Option Plan. Incorporated by reference to Exhibit 10(e)(3)(B) of Form 10-K filed by the Registrant for the period ended December 31, 1994 (File No. 1-9997).
10(a)(2)(C) Form of Amendment to Stock Option Agreement pursuant to Koger Equity, Inc. 1993 Stock Option Plan.*
10(a)(3)(A) Koger Equity, Inc. 1996 Stock Option Plan.*
10(a)(3)(B) Form of Stock Option Agreement pursuant to Koger Equity, Inc. 1996 Stock Option Plan.*
10(b)(1) Shareholders Agreement, dated August 9, 1993, between the Company and TCW Special Credits, a California general partnership. Incorporated by reference to Exhibit 10(o) of Form 10-K filed by the Registrant for the period ended December 31, 1993 (File No. 1-9997).
10(b)(2) Registration Rights Agreement, dated as of August 9, 1993, between the Company and TCW Special Credits, a California general partnership. Incorporated by reference to Exhibit 10(p) of Form 10-K filed by the Registrant for the period ended December 31, 1993 (File No. 1-9997).
10(c) License Agreement, dated as of July 28, 1995, between Koger Equity, Inc. and Koger Realty Services, Inc. Incorporated by reference to Exhibit 10(v) of Form 10-Q filed by the Registrant for the quarter ended June 30, 1995 (File No. 1-9997).
10(d) Supplemental Executive Retirement Plan, dated as of August 18, 1995 to be effective as of June 28, 1995. Incorporated by reference to Exhibit 10(w) of Form 10-Q filed by the Registrant for the quarter ended September 30, 1995 (File No. 1-9997).
10(e) Form of Indemnification Agreement between Koger Equity, Inc. and its Directors and certain of its officers. Incorporated by reference to Exhibit 10(x) of Form 10-K filed by the Registrant for the year ended December 31, 1995 (File No. 1-9997).
10(f)(1) Employment Agreement between Koger Equity, Inc. and Victor A. Hughes, Jr. effective as of June 21, 1996. Incorporated by reference to Exhibit 10(y)(1) of Form 10-Q filed by the Registrant for the quarter ended September 30, 1996 (File No. 1-9997).
10(f)(2) Employment Agreement between Koger Equity, Inc. and James C. Teagle, effective as of June 21, 1996. Incorporated by reference to Exhibit 10(y)(2) of Form 10-Q filed by the Registrant for the quarter ended September 30, 1996 (File No. 1-9997).
10(g)(1)(A) Stock Purchase Agreement, dated as of October 10, 1996, between Koger Equity, Inc. and AP- KEI Holdings, LLC, a Delaware limited liability company. Incorporated by reference to Exhibit 7 to an Amendment on Form 8-A/A, dated November 7, 1996, to a Registration Statement of the Registrant on Form 8-A, dated October 3, 1990 (File No. 1-9997).
Exhibit Number Description - -------------------------------------------------------------------------------- 10(g)(1)(B) Registration Rights Agreement, dated as of October 10, 1996, between Koger Equity, Inc. and AP-KEI Holdings, LLC, a Delaware limited liability company. Incorporated by reference to Exhibit A of the Stock Purchase Agreement, dated as of October 10, 1996, between Koger Equity, Inc. and AP-KEI Holdings, LLC, which is Exhibit 7 to an Amendment on Form 8-A/A, dated November 7, 1996, to a Registration Statement on Form 8-A, dated October 3, 1990 (File No. 1-9997).
10(g)(2)(A) Amendment No. 1 to Stock Purchase Agreement, dated as of February 27, 1997, between Koger Equity, Inc. and AP-KEI Holdings, LLC. Incorporated by reference to Exhibit 9 to an Amendment on Form 8-A/A, dated March 17, 1997, to a Registration Statement of the Registrant on Form 8-A, dated October 3, 1990 (File No. 1-9997).
10(g)(2)(B) Assignment and Assumption Agreement, dated as of February 27, 1997, among and between Koger Equity, Inc. and AP-KEI Holdings, LLC and AREIF II Realty Trust, Inc. Incorporated by reference to Exhibit 10 to an Amendment on Form 8-A/A, dated March 17, 1997, to a Registration Statement of the Registrant on Form 8-A, dated October 3, 1990 (File No. 1-9997).
10(h) Consulting Agreement, dated as of June 21, 1996, between Koger Equity, Inc. and Irvin H. Davis. Incorporated by reference to Exhibit 10(ab) of Form 10-Q filed by the Registrant for the quarter ended September 30, 1996 (File No. 1-9997).
10(i) Consulting Agreement, dated as of March 14, 1996, between Koger Equity, Inc. and David B. Hiley. Incorporated by reference to Exhibit 10(ac) of Form 10-Q filed by the Registrant for the quarter ended September 30, 1996 (File No. 1-9997).
10(j)(1) Loan Application, dated July 29, 1996, by Koger Equity, Inc. to The Northwestern Mutual Life Insurance Company. Incorporated by reference to Exhibit 10(j)(1) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997).
10(j)(2)(A) Koger Equity, Inc. Tranche A Promissory Note, dated December 16, 1996, in the principal amount of $100,500,000 payable to The Northwestern Mutual Life Insurance Company. Incorporated by reference to Exhibit 10(j)(2)(A) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997).
10(j)(2)(B) Koger Equity, Inc. Tranche B Promissory Note, dated December 16, 1996, in the principal amount of $89,500,000 payable to The Northwestern Mutual Life Insurance Company. Incorporated by reference to Exhibit 10(j)(2)(B) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997).
10(j)(3)(A) Master Lien Instrument from Koger Equity, Inc. to The Northwestern Mutual Life Insurance Company, dated December 16, 1996, (1) with Mortgage and Security Agreement for Duval, Leon, Orange and Pinellas Counties, Florida and (2) with Deed of Trust and Security Agreement for Greenville County, South Carolina, Shelby County, Tennessee and Bexar, El Paso and Travis Counties, Texas. Incorporated by reference to Exhibit 10(j)(3)(A) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997).
10(j)(3)(B) Absolute Assignment of Leases and Rents from Koger Equity, Inc. to The Northwestern Mutual Life Insurance Company, dated December 16, 1996, for Duval, Leon, Orange, and Pinellas, Counties, Florida, Greenville County, South Carolina, Shelby County, Tennessee and Bexar, El Paso and Travis Counties, Texas. Incorporated by reference to Exhibit 10(j)(3)(B) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997).
10(j)(4) Environmental Indemnity Agreement, dated December 16, 1996, between Koger Equity, Inc. and The Northwestern Mutual Life Insurance Company and others. Incorporated by reference to Exhibit 10(j)(4) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997).
Exhibit Number Description - -------------------------------------------------------------------------------- 10(j)(5) Certificate of Borrower contained in letter, dated December 16, 1996, from Koger Equity, Inc. to The Northwestern Mutual Life Insurance Company. Incorporated by reference to Exhibit 10(j)(5) on Form 8-K, dated December 16, 1996, filed by the Registrant on March 10, 1997 (File No. 1-9997).
11 Earnings Per Share Computations.*
21 Subsidiaries of the Registrant.*
23 Independent Auditors' Consent.*
27 Financial Data Schedule.*
*Filed with this Report.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Koger Equity, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KOGER EQUITY, INC. By: VICTOR A. HUGHES, JR. ---------------------- Victor A. Hughes, Jr. Chairman of the Board and Chief Executive Officer Date: March 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date VICTOR A. HUGHES, JR. Chairman of the Board, and March 19, 1997 - ---------------------------- (Victor A. Hughes, Jr.) Chief Executive Officer
JAMES C. TEAGLE Executive Vice President, Chief March 19, 1997 - ---------------------------- (James C. Teagle) Operating Officer and Director
JAMES L. STEPHENS Vice President and Chief March 19, 1997 - ---------------------------- (James L. Stephens) Accounting Officer
D. PIKE ALOIAN Director March 19, 1997 (D. Pike Aloian)
BENJAMIN C. BISHOP Director March 19, 1997 (Benjamin C. Bishop)
IRVIN H. DAVIS Director March 19, 1997 (Irvin H. Davis)
DAVID B. HILEY Director March 19, 1997 - ---------------------------- (David B. Hiley)
G. CHRISTIAN LANTZSCH Director March 19, 1997 (G. Christian Lantzsch)
WILLIAM L. MACK Director March 19, 1997 - ---------------------------- (William L. Mack)
LEE S. NEIBART Director March 19, 1997 (Lee S. Neibart)
W. EDWARD SCHEETZ Director March 19, 1997 (W. Edward Scheetz)
GEORGE F. STAUDTER Director March 19, 1997 - ---------------------------- (George F. Staudter)
S. D. STONEBURNER Director March 19, 1997 - ---------------------------- (S. D. Stoneburner)