SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 1-9997
KOGER EQUITY, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2898045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3986 BOULEVARD CENTER DRIVE, SUITE 101
JACKSONVILLE, FLORIDA 32207
(Address of principal executive off (Zip Code)
Registrant's telephone number, including area code: (904) 398-3403
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at November 6, 1995
Common Stock, $.01 par value 17,750,515 shares
<PAGE>
KOGER EQUITY, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Independent Accountants' Report............................... 2
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1995 and December 31, 1994................... 3
Condensed Consolidated Statements of Operations
for the Three and Nine Month Periods Ended
September 30, 1995 and 1994................................ 4
Condensed Consolidated Statement of Changes in
Shareholders' Equity for the Nine Month Period
Ended September 30, 1995................................... 5
Condensed Consolidated Statements of Cash Flows
for the Nine Month Periods Ended September 30, 1995
and 1994................................................... 6
Notes to Condensed Consolidated Financial
Statements for the Three and Nine Month Periods
Ended September 30, 1995 and 1994.......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 15
Item 5. Other Information............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................. 20
Signatures ........................................................ 21
1
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INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Koger Equity, Inc.
Jacksonville, Florida
We have reviewed the accompanying condensed consolidated balance sheet of Koger
Equity, Inc. and subsidiaries (the "Company") as of September 30, 1995, and the
related condensed consolidated statements of operations for the three and nine
month periods ended September 30, 1995 and 1994, the condensed consolidated
statement of changes in shareholders' equity for the nine month period ended
September 30, 1995 and the condensed consolidated statements of cash flows for
the nine month periods ended September 30, 1995 and 1994. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1994, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated March 10, 1995, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1994 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
November 3, 1995
2
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - See Independent Accountants' Report)
(In thousands)
September 30, December 31,
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Real Estate Investments:
Operating properties:
Land $ 98,727 $ 102,161
Buildings 466,435 474,879
Furniture and equipment 1,459 1,197
Accumulated depreciation (57,952) (46,106)
--------- ---------
Operating properties - net 508,669 532,131
Undeveloped land held for investment 26,931 33,054
Undeveloped land held for sale, at lower of
cost or market value 3,350 2,958
Cash and temporary investments 18,881 23,315
Accounts receivable, net of allowance for
uncollectible rents of $443 and $362 5,454 4,276
Management fees and other receivables from TKPL 2,188 1,851
Cost in excess of fair value of net assets acquired from
KPI, net of accumulated amortization of $315 and $688 2,241 9,295
Other assets 9,110 6,926
--------- ---------
TOTAL ASSETS $ 576,824 $ 613,806
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgages and loans payable $ 255,975 $ 323,765
Accounts payable 2,088 2,823
Accrued interest 190 1,047
Accrued real estate taxes payable 5,575 970
Accrued liabilities - other 4,153 1,268
Advance rents and security deposits 3,984 3,332
--------- ---------
Total Liabilities 271,965 333,205
--------- ---------
Contingency (Note 9) -- --
Shareholders' Equity
Common stock 205 205
Capital in excess of par value 318,594 318,589
Warrants 2,251 2,251
Retained earnings (Accumulated dividends in excess of net income) 7,426 (15,657)
Treasury stock, at cost (23,617) (24,787)
--------- ---------
Total Shareholders' Equity 304,859 280,601
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 576,824 $ 613,806
========= =========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
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KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - See Independent Accountants' Report)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES
Rental $23,762 $23,426 $71,499 $69,689
Other rental services 119 355 393 1,053
Management fees ($320, $836, $2,201 and
$2,431 from TKPL) 1,489 1,368 4,243 3,612
Interest 13,471 345 14,130 726
Gain on TKPL note to Southeast 5,988 5,988
Gain on early retirement of debt 739 886
------- ------- ------- -------
Total 45,568 25,494 97,139 75,080
------- ------- ------- -------
EXPENSES
Property operations 10,774 10,883 30,323 30,151
Mortgage and loan interest 5,610 6,548 18,693 19,348
Depreciation and amortization 4,906 4,201 13,788 11,979
General and administrative 2,142 850 5,762 4,058
Direct cost of management fees 1,040 1,087 2,888 2,549
Provision for loss on land held for sale 970 150 970 996
Undeveloped land costs 130 125 444 551
Loss on sale of assets 185 6 188 67
Settlement of litigation and related costs 83 24 83 2,144
Other 742 742
------- ------- ------- -------
Total 26,582 23,874 73,881 71,843
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 18,986 1,620 23,258 3,237
Income taxes 3 188 45 188
------- ------- ------- -------
NET INCOME $18,983 $ 1,432 $23,213 $ 3,049
======= ======= ======= =======
EARNINGS PER COMMON SHARE AND
COMMON EQUIVALENT SHARE:
Primary $ 1.05 $ 0.08 $ 1.30 $ 0.17
======= ======= ======= =======
Fully Diluted $ 1.04 $ 0.08 $ 1.29 $ 0.17
======= ======= ======= =======
WEIGHTED AVERAGE COMMON
SHARES AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Primary 18,157 17,978 17,916 17,726
======= ======= ======= =======
Fully Diluted 18,317 17,978 17,970 17,726
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements
</TABLE>
4
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KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited - See Independent Accountants' Report)
(In thousands)
<TABLE>
<CAPTION>
Retained
Earnings
(Accumulated Total
Common Stock Capital in Dividends in Share-
Par Excess of Excess of Net Treasury Stock holders'
Shares Value Par Value Warrants Income) Shares Cost Equity
------ ------ ---------- --------- ---------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 20,474 $ 205 $ 318,589 $2,251 $(15,657) 2,870 $(24,787) $280,601
Warrants Exercised 2 2
Stock Options Exercised 1 3 (3)
401(K) Plan Contribution (122) (122) 1,010 888
Treasury Stock Reissued (8) (20) 163 155
Net Income 23,213 23,213
------- ------- --------- ------ -------- ----- -------- --------
Balance, September 30, 1995 20,475 $ 205 $ 318,594 $2,251 $ 7,426 2,728 $(23,617) $304,859
======= ======== ========= ====== ======== ===== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
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KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - See Independent Accountants' Report)
(In thousands)
<TABLE>
<CAPTION>
Nine Month Period
Ended September 30,
1995 1994
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 23,213 $ 3,049
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,788 11,979
Provision for loss on land held for sale 970 996
Loss on sale of assets 188 67
Provision for litigation settlements 50 2,000
Gain on TKPL unsecured note to Southeast (5,988)
Gain on early debt repayment (886)
Accrued interest added to principal 457 1,005
Amortization of mortgage discounts 131 169
Provision for uncollectible rents 125 109
Increase in accounts payable, accrued
liabilities and other liabilities 7,387 3,192
Increase in receivables and other assets (3,766) (3,658)
Increase in receivable from TKPL (337) (830)
-------- --------
Net cash provided by operating activities 35,332 18,078
-------- --------
INVESTING ACTIVITIES
Purchase of TKPL mortgage notes (18,192)
Tenant improvements to existing properties (5,986) (4,861)
Building improvements to existing properties (3,467) (2,926)
Deferred tenant costs (660) (489)
Additions to furniture and equipment (262) (311)
Merger costs (338)
Proceeds from TKPL mortgage notes 18,192
Proceeds from TKPL unsecured note to Southeast 12,400
Proceeds from sale of assets 25,252 520
Cash acquired in purchase of assets from KPI 308 2,135
-------- --------
Net cash provided by (used in) investing activities 27,585 (6,270)
-------- --------
FINANCING ACTIVITIES
Proceeds from sale of stock under Stock Investment Plan 155
Proceeds from exercise of warrants and stock options 2 8
Principal payments on mortgages and loans (67,492) (7,104)
Financing costs (16) (104)
-------- --------
Net cash used in financing activities (67,351) (7,200)
-------- --------
Net increase (decrease) in cash and cash equivalents (4,434) 4,608
Cash and cash equivalents - beginning of period 23,315 18,566
-------- --------
Cash and cash equivalents - end of period $ 18,881 $ 23,174
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest $ 18,909 $ 17,295
======== ========
Cash paid during the period for income taxes $ 42 $ 188
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
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KOGER EQUITY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1995 AND 1994
(Unaudited - See Independent Accountants' Report)
1. BASIS OF PRESENTATION. The condensed consolidated financial statements
include the accounts of Koger Equity, Inc., its wholly-owned subsidiaries and
Koger Realty Services, Inc. (the "Company"). All significant intercompany
transactions have been eliminated. The financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission related to interim financial statements.
The financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1994,
included in the Company's Form 10-K Annual Report for the year ended December
31, 1994. The balance sheet at December 31, 1994, has been derived from the
audited financial statements at that date and is condensed.
All adjustments of a normal recurring nature which, in the opinion of
management, are necessary to present a fair statement of the results for the
interim periods have been made. Results of operations for the nine month period
ended September 30, 1995, are not necessarily indicative of the results to be
expected for the full year.
2. ORGANIZATION. The Company, a Florida corporation, was incorporated in
1988, for the purpose of investing in the ownership of income producing
properties, primarily commercial office buildings developed by Koger Properties,
Inc. ("KPI"). On December 21, 1993, KPI was merged with and into the Company
(the "Merger"). Pursuant to the Merger, Southeast Properties Holding
Corporation, Inc. ("Southeast"), a wholly owned subsidiary of the Company,
became the managing general partner of The Koger Partnership, Ltd. ("TKPL").
During the quarter ended September 30, 1995, Koger Realty Services, Inc.
("KRSI") was incorporated for the purpose of providing leasing and property
management services to owners of commercial office buildings. The Company has
purchased all of the preferred stock of KRSI which represents approximately 95
percent of the economic benefits of this entity. The common stock of KRSI is
owned by the officers and certain employees of KRSI, some of which are also
officers of Koger Equity, Inc. KRSI is not a qualified real estate investment
trust subsidiary under the Internal Revenue Code of 1986 (the "Code") and,
therefore, will be subject to Federal income tax. For financial reporting, but
not for tax, purposes, KRSI will be consolidated with the Company. Currently,
KRSI provides leasing and property management services for 93 office buildings
owned by Koala Realty Holding Company, Inc. ("Koala"), an investment entity for
which J.P. Morgan Investment Management, Inc. acts as the investment manager.
3. FEDERAL INCOME TAXES. The Company is operated in a manner so as to
qualify and has elected tax treatment as a real estate investment trust under
the Code (a "REIT"). As a REIT, the Company is required to distribute annually
at least 95 percent of its REIT taxable income to its shareholders. Since the
Company had no REIT taxable income
7
<PAGE>
during 1994 and does not expect to have REIT taxable income during 1995, no
provision has been made for Federal income taxes. However, the Company has
recorded a provision of $30,000 for alternative minimum tax for the nine month
period ended September 30, 1995. To the extent that the Company pays dividends
equal to 100 percent of REIT taxable income, the earnings of the Company are not
taxed at the corporate level; however, under existing loan covenants the Company
may be prohibited from paying dividends in excess of amounts necessary to
maintain its status as a REIT. See Note 10, Dividends.
4. STATEMENTS OF CASH FLOWS. Cash in excess of daily requirements is
invested in short-term monetary securities. Such temporary cash investments have
an original maturity date of less than three months and are deemed to be cash
equivalents for purposes of the statements of cash flows. During the nine month
period ended September 30, 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. There were no material
non-cash investing or financing transactions for the nine month period ended
September 30, 1994.
5. EARNINGS PER COMMON SHARE. Earnings per common share have been computed
based on the weighted average number of shares of common stock and common stock
equivalents outstanding during the applicable periods.
6. INVESTMENT IN TKPL MORTGAGE NOTES. During April, 1995, the Company
acquired $21.0 million principal amount of TKPL New Secured Notes and $4.5
million principal amount of TKPL Converted Loan Notes for approximately $10.7
million in the aggregate. During July, 1995, the Company acquired an additional
$6.8 million principal amount of TKPL New Secured Notes for $6.8 million. The
Company's accounting for these notes is on the cost-recovery method. During the
quarter ended September 30, 1995, substantially all of TKPL's operating
properties were sold and the Company's investments in the TKPL New Secured Notes
and the TKPL Converted Loan Notes were retired by TKPL. Cash received was
applied first against the recorded amount of these notes, including certain
costs incurred to acquire these notes, until it was reduced to zero. Further
receipts of cash, which totalled approximately $13,068,000, have been recognized
as interest income.
7. TKPL NOTE TO SOUTHEAST. Immediately prior to the Merger, KPI
transferred its interest in a restructured unsecured note from TKPL, with a
principal amount of approximately $31 million, to Southeast. At that time, the
Company determined that the TKPL unsecured note had no value. This note was
subordinated to substantially all other indebtedness of TKPL and has a
contractual interest rate of 10 percent. No interest or principal payments were
due on this note until all other debt of TKPL was repaid. With the sale of
substantially all of TKPL's operating properties during the quarter ended
September 30, 1995, all TKPL debt which was senior to this note was repaid and
the Company has received $12.4 million in partial repayment of this note. The
Company has recorded a gain on the TKPL note to Southeast of $5,988,000, which
was calculated as follows:
8
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Proceeds from TKPL unsecured note to Southeast $12,400,000
Partial write-off of Cost in Excess of Fair Value of
Net Assets Acquired from KPI (6,412,000)
-------------
Gain on TKPL Note to Southeast $ 5,988,000
============
8. MORTGAGES AND LOANS PAYABLE. At September 30, 1995, the Company had
$255,975,000 of loans outstanding, which are collateralized by mortgages on
certain operating properties. During the nine month period ended September 30,
1995, the Company fully repaid $3,958,000 of the outstanding balances of 22 tax
notes assumed from KPI pursuant to the Merger. With the proceeds from the sale
of three office buildings, the Company repaid approximately $21.4 million of
mortgage loans during the quarter ended September 30, 1995. In addition, the
Company repaid approximately $39.5 million of the outstanding balances of
mortgages and loans payable during the quarter ended September 30, 1995. These
early repayments resulted in the release of 37 buildings, containing 1,175,380
net rentable square feet, which had been collateral for these loans.
Annual maturities for mortgages and loans payable, which are gross of $941,000
of discounts, are as follows (in thousands):
Year Ending December 31,
1995 $ 990
1996 4,116
1997 12,926
1998 19,328
1999 5,774
Subsequent Years 213,782
---------
Total $256,916
=========
In addition to reporting and other requirements, the Company's debt agreements
contain provisions limiting the amount of annual dividends, limiting additional
borrowings, and limiting general and administrative expenses. The Company is
also required to maintain certain financial ratios.
9. LEGAL PROCEEDINGS. 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 counterclaims 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, which must determine whether to
approve the settlement after notice to stockholders of the Company. During the
quarter ended September 30, 1995, the Company recorded a provision for
settlement of this litigation which totalled $50,000.
10. DIVIDENDS. The Company intends that the quarterly dividend payout in
the last quarter of each year will be adjusted if necessary to reflect the
distribution of at least 95 percent of the Company's REIT taxable income as
required by the Federal income tax laws.
9
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The terms of the secured debt of the Company provide that the Company will be
subject to certain dividend limitations which, however, will not restrict the
Company from paying the dividends required to maintain its qualification as a
REIT. In the event that the Company no longer qualifies as a REIT, additional
dividend limitations would be imposed by the terms of such debt. In addition,
two of the Company's bank lenders have required that until the Company has
raised an aggregate of $50 million of equity the following limitations on
dividends will be applied: (a) in 1995, 1996 and 1997, $11 million unless
imposition of the limit would cause loss of REIT status and (b) in 1998 and
1999, $11 million regardless of impact on REIT status.
11. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Company's Board of
Directors has adopted a supplemental executive retirement plan (the "SERP"). 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 annual base salary during the last three
calendar years of employment. The Company does not plan to fund the SERP.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes appearing elsewhere in this
Form 10-Q, and the Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's December 31, 1994, Annual
Report on Form 10-K.
RESULTS OF OPERATIONS. On July 31, 1995, the Company sold three office buildings
and two land parcels for $25,260,000. Proceeds from the sale were used in part
to repay approximately $21.4 million of outstanding mortgage loans. The major
revenues and expenses related to the buildings and land sold for the three and
nine month periods ended September 30, 1995 are as follows:
Periods Ended
September 30, 1995
------------------
Three Nine
Months Months
------ ------
Rental revenues $311,000 $2,240,000
Property operations expense 87,000 885,000
Mortgage and loan interest expense 788,000 1,545,000
Depreciation expense 39,000 272,000
Rental revenues totalled $23,762,000 for the quarter ended September 30, 1995,
compared to $23,426,000 for the quarter ended September 30, 1994. The increase
in rental revenues resulted primarily from increases in the percentage leased
rate and the average rental rate in the Company's buildings. At September 30,
1995, the Company's buildings were on average 90 percent leased with an average
rental rate of $13.58. Rental revenues increased to $71,499,000 during the nine
month period ended September 30, 1995, compared to $69,689,000 during the same
period last year, primarily for the same reasons mentioned
10
<PAGE>
above. Other rental revenues declined $236,000 and $660,000, respectively, for
the three and nine month periods ended September 30, 1995, compared to the same
periods last year, due to the reduction in these type of services requested by
tenants in the Company's buildings.
Management fee revenues totalled $1,489,000 for the quarter ended September 30,
1995, compared to $1,368,000 for the quarter ended September 30, 1994. This
increase was due primarily to (i) an increase in fees earned from the management
of buildings sold by TKPL to Koala on August 1, 1995 and (ii) the management
fees earned from the three buildings sold by the Company to Koala on the same
date. Management fee revenues increased to $4,243,000 during the nine month
period ended September 30, 1995, compared to $3,612,000 during the same period
last year, primarily due to the same items detailed above. On May 5, 1994, third
party management contracts on two buildings terminated due to a change of
ownership for these buildings. Management fee revenue related to the management
of these two buildings was approximately $110,000 for the nine month period
ended September 30, 1994.
Interest revenues increased $13,126,000 for the quarter ended September 30,
1995, compared to the same period last year, due to (i) interest revenue
associated with the TKPL mortgage notes ($13,068,000), (ii) higher interest
rates earned on the Company's temporary cash investments and (iii) the higher
average balance of cash to invest. Interest revenues increased $13,404,000 for
the nine month period ended September 30, 1995, compared to the same period last
year, due to (i) interest revenue associated with the TKPL mortgage notes
($13,068,000), (ii) higher interest rates earned on the Company's temporary cash
investments and (iii) the higher average balance of cash to invest.
Property operating expenses include such charges as utilities, taxes,
janitorial, maintenance, provision for uncollectible rents and management costs.
The amounts of property operating expenses and their percentages of total rental
revenues for the applicable periods are as follows:
% of Rental
Period Amount Revenues
----------------------------------- -------------- ----------
September 30, 1995 - Quarter $10,774,000 45.1%
September 30, 1994 - Quarter $10,883,000 45.8%
September 30, 1995 - Nine Months $30,323,000 42.2%
September 30, 1994 - Nine Months $30,151,000 42.6%
For the nine month period ended September 30, 1995, property operating expenses
increased $172,000 due primarily to the increase in management cost for the
Company's buildings.
Interest expense decreased by $938,000 and $655,000, respectively, during the
three and nine month periods ended September 30, 1995, compared to the same
periods last year, 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 was partially offset by
yield maintenance payments required due to early repayment of certain mortgages
($882,000). At September 30, 1995, the weighted average interest on the
Company's outstanding debt was 7.7 percent.
11
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Depreciation expense has been calculated on the straight line method based upon
the useful lives of the Company's depreciable assets, generally 4 to 40 years.
Depreciation expense increased $518,000 and $1,517,000, respectively, for the
three and nine month periods ended September 30, 1995, compared to the same
periods last year, due to improvements made to the Company's existing properties
during 1994 and 1995. Amortization expense increased $187,000 and $292,000,
respectively, for the three and nine month periods ended September 30, 1995,
compared to the same periods last year, due primarily to amounts incurred for
deferred tenant costs after September 30, 1994.
General and administrative expenses for the three month periods ended September
30, 1995 and 1994, totalled $2,142,000 and $850,000, respectively, which is 1.4
percent and 0.6 percent (annualized) of average invested assets. General and
administrative expenses for the nine month periods ended September 30, 1995 and
1994, totalled $5,762,000 and $4,058,000, respectively, which is 1.3 percent and
0.9 percent of average invested assets. General and administrative expenses
increased for the nine month period ended September 30, 1995, compared to the
same period last year, primarily due to (i) increases in professional fees and
payroll costs incurred, (ii) increases in the accrual for the Company's
contribution to the 401(k) Plan ($343,000), (iii) the accrual for expense
related to the SERP ($101,000), and (iv) increases in the accrual for
compensation expense related to stock appreciation rights granted in conjunction
with stock options ($778,000).
Direct costs of management contracts decreased $47,000 for the three month
period ended September 30, 1995, compared to the same period last year, due to
decreased costs associated with providing property management services for all
management contracts. Direct costs of management contracts increased $339,000
for the nine month period ended September 30, 1995, compared to the same period
last year, due to increased costs associated with providing property management
services for the TKPL and Centoff Realty Company management contracts during the
six month period ended June 30, 1995.
During the quarter ended September 30,1995, the Company recorded a provision for
loss on land held for sale which totalled $970,000. This provision for loss is
based upon a contract for the sale of a land parcel (approximately 8.1 acres)
which is located adjacent to a center sold to Koala, which sale had not closed
as of September 30, 1995. 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.
During the quarter ended September 30, 1995, the Company recorded other expenses
related to costs incurred for potential public and private offerings of equity
securities which management has determined have no future value.
Net income totalled $18,983,000 for the quarter ended September 30, 1995,
compared to net income of $1,432,000 for the corresponding period of 1994. This
improvement is due to (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, (iii) the gain on early repayment of
certain debt, and (iv) the reduction in mortgage and loan interest. These items
were partially offset by the increase in depreciation and amortization expense,
general
12
<PAGE>
and administrative expense, and the provision for loss on land held for sale.
Net income increased $20,164,000 during the nine month period ended September
30, 1995, compared to the same period last year. This improvement is due to (i)
increases in rental revenues, (ii) the interest revenue associated with the
Company's investment in the TKPL mortgage notes, (iii) the gain associated with
the partial repayment of a TKPL note to Southeast, (iv) the gain on early
repayment of certain debt, and (v) the reduction in mortgage and loan interest.
These items were partially offset by the increase in depreciation and
amortization expense and general and administrative expense.
LIQUIDITY AND CAPITAL RESOURCES.
Operating Activities - The Company's primary internal sources of cash
are the collection of rents and income from management fees with respect to
properties managed for TKPL, Centoff Realty Company, Inc., and others. As a REIT
for Federal income tax purposes, the Company is required to pay out annually, as
dividends, 95 percent of its REIT taxable income (which, due to non-cash
charges, including depreciation and net operating loss carry forwards, 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. However, the
Company currently expects that it will not be required to pay any dividends
during 1995 to maintain its REIT status. The Company believes that its cash
provided by operating activities will be sufficient to cover debt service
payments through 1995.
The level of cash flow generated by rents depends primarily on the occupancy
rates of the Company's buildings and increases in rental rates on new and
renewed leases and under escalation provisions in existing leases. During the
nine months ended September 30, 1995, the Company generated approximately $35.3
million in net cash from operating activities.
At September 30, 1995, leases representing approximately 7.7 percent of the
gross annual rent from the Company's properties, without regard to the exercise
of options to renew, were due to expire during the remainder of 1995. This
represents 352 leases for space in buildings located in 16 of the 18 centers in
which the Company owns buildings. Certain of these tenants may not renew their
leases or may reduce their demand for space. During the nine months ended
September 30, 1995, leases were renewed on approximately 70 percent of the
Company's net rentable square feet which were scheduled to expire during the
nine month period. For those leases which renewed during the nine months ended
September 30, 1995, the average rental rate increased from $13.68 to $14.51.
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 number of
leases which will expire during 1995 and 1996 and the competition for tenants in
the markets in which the Company operates, the Company has and expects to
continue to offer incentives to certain new and renewal tenants. These
incentives may include the payment of tenant improvements costs and in certain
markets reduced rents during initial lease periods. During 1994 and 1995, the
Company has benefitted from improving economic conditions and reduced vacancy
levels for office buildings in many of the metropolitan areas in which the
Company owns buildings. The Company believes that the southeastern and
southwestern regions of the United States provide significant economic growth
potential due to their diverse regional economies, expanding metropolitan areas,
skilled work force and
13
<PAGE>
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
Government) which account for approximately 23.2 percent of the Company's leased
space at September 30, 1995, may be subject to budget reductions in times of
recession and governmental austerity; therefore, 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 need for additional
office space.
Investing Activities - At September 30, 1995, the Company's invested
assets were in properties. Improvements to the Company's existing properties
have been financed through internal operations. During the nine month period
ended September 30, 1995, the Company's expenditures for improvements to
existing properties increased by $1,666,000 over the corresponding period of the
prior year primarily due to increased leasing and renewal activity.
During April, 1995, the Company acquired $21.0 million principal amount of TKPL
New Secured Notes and $4.5 million principal amount of TKPL Converted Loan Notes
for approximately $10.7 million in the aggregate. During July, 1995, the Company
acquired an additional $6.8 million principal amount of TKPL New Secured Notes
for $6.8 million. The Company obtained necessary modifications to its debt
agreements which permitted the purchase of these debt instruments. During the
quarter ended September 30, 1995, the TKPL New Secured Notes and the TKPL
Converted Loan Notes acquired by the Company were retired by TKPL.
During the three months ended September 30, 1995, Southeast received $12.4
million as partial repayment of the TKPL unsecured note acquired from KPI
pursuant to the Merger.
During the nine month period ended September 30, 1995, the Company sold various
items of furnishings and equipment which it had acquired pursuant to the Merger
for approximately $78,000 net of selling costs. On July 31, 1995, the Company
sold three office buildings, containing 233,980 net rentable square feet, and
two undeveloped land parcels, totalling approximately 44 acres, for $25,260,000.
The terms of the Company's existing indebtedness require that a substantial
portion of any debt or equity financing achieved by the Company during the
foreseeable future be applied to the reduction of the current secured
indebtedness of the Company and contain limitations on incurrence of additional
debt and other restrictions.
Financing Activities - The Company has no open lines of credit, but has
a cash balance at September 30, 1995 of $18,881,000. During the nine month
period ended September 30, 1995, the Company fully repaid $3,958,000 of the
outstanding balances of 22 tax notes assumed from KPI pursuant to the Merger.
With the proceeds from the sale of three office buildings, the Company repaid
approximately $21.4 million of mortgage loans during the
14
<PAGE>
quarter ended September 30, 1995. In addition, the Company repaid approximately
$39.5 million of the outstanding balances of mortgages and loans payable during
the quarter ended September 30, 1995. These early repayments resulted in the
release of 37 buildings, containing 1,175,380 net rentable square feet, which
had been collateral for these loans. At September 30, 1995, the Company had 86
buildings, containing 2,516,230 net rentable square feet, which were
unencumbered.
Loan maturities and normal amortization of mortgages and loans payable are
expected to total approximately $4.1 million over the next 12 months. The
Company believes that these obligations will be paid from cash provided by
operations or from current cash balances. Significant maturities of the
Company's mortgages and loans payable do not begin to occur until 1998.
Depending on market conditions, the Company may seek to raise additional equity
capital, the proceeds of which would be used to reduce existing indebtedness. 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 and/or preferred
stock. However, due to existing market conditions, the Company has not been able
to go forward with an equity offering on terms which it would consider
satisfactory.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A derivative action in the District Court was commenced on October 29,
1990, by Howard Greenwald and Albert and Phyllis Schlesinger, shareholders of
the Company, against the Company, KPI, all of the then current directors of the
Company, including: Ira M. Koger, James B. Holderman, Allen R. Ransom, Wallace
F. E. Kienast, S. D. Stoneburner, Yank D. Coble, Jr., G. Christian Lantzsch, A.
Paul Funkhouser and Stephen D. Lobrano, alleging breach of fiduciary duty by
favoring KPI over the interest of the Company and failing to disclose or
intentionally misleading the public as to the Company's cash flow, dividend and
financing policies and status, and seeking damages therefor (the "Derivative
Action"). During the pendency of the litigation a Special Litigation Committee,
which was composed of outside independent members of the Company's Board of
Directors, was appointed to conduct an extensive investigation of the facts and
circumstances surrounding the Derivative Action. Upon completion of its
investigation, it was the conclusion of this committee that the ultimate best
interests of the Company and its shareholders would not be served in prosecuting
this litigation. Subsequently, the Company moved that the Derivative Action be
dismissed under the provisions of Florida law. Thereafter, the plaintiffs filed
a Second Amended and Supplemental Complaint which realleged the original cause
of action ("Count I"); alleged a new cause of action against Stephen D. Lobrano
for legal malpractice ("Count II"); and alleged a new cause of action against
the members of the Special Litigation Committee for violation of fiduciary
duties in conducting their investigation ("Count III"). During 1993, the Company
filed further motions seeking dismissal of the Second Amended and Supplemental
Complaint. On January 27, 1994, the United States Magistrate issued his Report
and Recommendation concerning the Second Amended and Supplemental Complaint and
Derivative Action, which recommended that (1) Count I should be dismissed
pursuant to the Special Litigation Committee Report, (2) Count III against the
Special Litigation Committee members should be dismissed, and (3) Count II
against Mr. Lobrano should not be dismissed. The District Court
15
<PAGE>
adopted the Report and Recommendations of the United States Magistrate by order
entered March 8, 1994. Subsequently, Mr. Lobrano filed his answer denying all of
the material allegations of the Second Amended and Supplemental Complaint, and
raised affirmative defenses, including, without limitation, the defense that Mr.
Lobrano was at all times acting under the direction of the officers and
directors of KPI. Mr. Lobrano and his law firm (the "Lobrano Defendants") also
filed a counter claim against the Company (the "Counter-Claim"), asserting that,
in connection with the matters complained of in the Second Amended and
Supplemental Complaint, Mr. Lobrano and his law firm acted under the direction
and control of the officers and directors of KPI, that they had suffered
out-of-pocket expenses and reputation damage to their business due to the
directions of the officers and directors of KPI, and that they are entitled to
contribution or indemnity from the Company, as the successor of KPI under the
Merger consummated pursuant to the KPI Plan of Reorganization in its Chapter 11
Bankruptcy Case, in respect of such damages. They have brought similar cross
claims against Ira M. Koger, Allen R. Ransom and Wallace F. E. Kienast, former
officers and directors of KPI. The Company moved to dismiss the Counter-Claim,
and moved in the United States Bankruptcy Court for the Middle District (the
"Bankruptcy Court") of Florida for an order holding Mr. Lobrano, the other
members of his firm and his lawyers in contempt on the grounds that any such
claims against KPI were discharged in its Chapter 11 Case and that the filing of
the Counter-Claim against the Company was a violation of the confirmation order
in the Chapter 11 Case (the "Confirmation Order"). On July 22, 1994, the
Bankruptcy Court entered its order finding that the filing of the Counter-Claim
was a violation of the Confirmation Order and in contempt of the Bankruptcy
Court. The Counter-Claim was then subsequently dismissed. The Lobrano Defendants
then filed an amended counter-claim (the "Amended Counter-Claim") against the
Company asserting, among other things, that the Company, through its officers
and directors, improperly shaped and influenced the Special Litigation Committee
Report so that it contains inaccurate and false statements about the Lobrano
Defendants which have, in turn, caused damage to the Lobrano Defendants. The
Company moved to dismiss the Amended Counter-Claim on various grounds and
renewed its motion that Mr. Lobrano, certain members of his firm and their
lawyers be held in contempt of the Confirmation Order by reason of the filing of
the Amended Counter-Claim. On January 26, 1995, the Bankruptcy Court held that
the filing of the Amended Counter-Claim violated the Confirmation Order, ordered
that the Amended Counter-Claim be dismissed with prejudice on or before February
10, 1995, and imposed a fine of $500 per day on the Lobrano Defendants and their
attorneys for each day thereafter that the Amended Counter-Claim remained
pending. On February 2, 1995, the Amended Counter-Claim was dismissed with
prejudice. The Company and the other parties to the Derivative Action and
related cross- claims and counter-claims have agreed on a settlement of all
claims and have submitted documentation thereof to the District Court, which
must determine whether to approve this settlement after notice to stockholders
of the Company, which notice has been sent to stockholders. Under the terms of
this settlement, a fund in the amount of $100,000 will be created, of which
$50,000 will be contributed by the Lobrano Defendants and $50,000 will be
contributed by the Company. The Company does not believe that the outcome of
this litigation will materially affect its operations or financial position.
16
<PAGE>
On March 23, 1993, the Securities and Exchange Commission ("the
Commission") entered an Order directing a private investigation with respect to
KPI's accounting practices, including the accuracy of financial information
included in certain reports filed with the Commission, possible insider trading
in KPI's stock, and possible misleading statements concerning the financial
condition of KPI and its ability to pay dividends to its shareholders. Prior to
March 23, 1993, the Commission had been engaged in a confidential investigation
without a formal order. As a result of the Merger of KPI with and into the
Company, the Company has assumed responsibility for responding to the requests
and subpoenas of the Commission staff in connection with this private
investigation. Although the staff of the Commission had subpoenaed KPI documents
and former employees of KPI, who are presently employees of the Company, for
testimony, on February 8, 1994, the Commission staff advised the Company,
through its counsel, that the scheduled depositions of former KPI employees and
the review of documents of KPI had been suspended. The Company has received no
communication from the Commission staff since the above notice of suspension.
Based on the information currently available to the Company, it is unable to
determine whether or not the private investigation will lead to formal legal
proceedings or administrative actions or whether or not such legal proceedings
or administrative actions will involve the Company.
17
<PAGE>
Item 5. Other Information
(a) The following table sets forth, with respect to the Company's centers at
September 30, 1995, number of buildings, net rentable square feet, percentage
leased, and the average annual rent per net rentable square foot leased.
<TABLE>
<CAPTION>
Average
Net Annual
Number Rentable Percentage Rent Per
of Square Leased Square
Center Buildings Feet (1) Foot (2)
------- --------- ---------- --------- --------
<S> <C> <C> <C> <C>
Atlanta Chamblee 22 947,920 95% $14.26
Austin 12 370,860 93% 14.97
Charlotte Carmel 1 109,600 100% 15.83
Charlotte East 11 468,820 75% 12.69
El Paso 14 251,930 97% 12.97
Greensboro South 13 610,470 88% 13.25
Greenville 8 290,560 88% 13.46
Jacksonville Baymeadows 4 468,000 99% 15.60
Jacksonville Central 32 677,540 93% 11.47
Memphis Germantown 3 258,400 97% 16.74
Orlando Central 22 565,220 90% 13.45
Orlando University 2 159,600 87% 16.37
San Antonio 26 788,670 78% 11.39
St. Petersburg 15 519,320 94% 12.58
Tallahassee Apal. Pkwy 14 408,500 93% 15.57
Tallahassee Cap. Circle 4 300,700 100% 17.66
Tulsa North 2 103,520 89% 10.56
Tulsa South 11 372,760 82% 9.41
----- ----------
TOTAL 216 7,672,390 90% $13.58
==== ========= ==== ======
</TABLE>
(1) The percent leased rates have been calculated by dividing total net
rentable square feet leased in an office building by net rentable
square feet in such building, which excludes public or common areas.
(2) Rental rates are computed by dividing annualized gross rental revenues
for a center by the net rentable square feet applicable to such gross
rental revenues.
18
<PAGE>
(b) The following schedule sets forth for all of the Company's office buildings
(i) the number of leases which will expire during the remainder of calender year
1995 and calendar years 1996 through 2003, (ii) the total net rentable area in
square feet covered by such leases, (iii) the percentage of total net rentable
square feet represented by such leases, (iv) the average annual rent per square
foot for such leases, (v) the current annual rental represented by such leases,
and (vi) the percentage of gross annual rental contributed by such leases. This
information is based on the buildings owned by the Company on September 30, 1995
and on the terms of leases in effect as of September 30, 1995, on the basis of
then existing base rentals, and without regard to the exercise of options to
renew. Furthermore, the information below does not reflect that some leases have
provisions for early termination for various reasons, including, in the case of
government entities, lack of budget appropriations. Leases were renewed on
approximately 70 percent of the Company's net rentable square feet which were
scheduled to expire during the nine month period ended September 30, 1995.
<TABLE>
<CAPTION>
Percentage of Average Percentage
Total Square Annual Rent of Total
Number of Number of Feet Leased per Square Total Annual Annual Rents
Leases Square Feet Represented by Foot Under Rents Under Represented by
Period Expiring Expiring Expiring Leases Expiring Leases Expiring Leases Expiring Leases
- ------ --------- -------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1995 352 567,581 8.2% $12.80 $ 7,265,471 7.7%
1996 967 1,663,975 24.0% 13.42 22,331,719 23.7%
1997 516 1,358,191 19.6% 13.63 18,517,698 19.7%
1998 394 1,615,429 23.3% 13.65 22,052,285 23.5%
1999 132 658,072 9.5% 12.80 8,423,875 9.0%
2000 85 517,513 7.5% 15.44 7,992,631 8.5%
2001 12 143,656 2.1% 13.63 1,958,278 2.1%
2002 6 121,728 1.8% 13.60 1,655,390 1.8%
2003 10 72,195 1.0% 13.79 995,463 1.0%
OTHER 9 204,680 3.0% 13.68 2,800,023 3.0%
-------- ----------- -------- ------------- --------
TOTAL 2,483 6,923,020 100.0% $13.58 $93,992,833 100.0%
====== ========== ====== ====== =========== ======
</TABLE>
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
10(w) Supplemental Executive
Retirement Plan, dated as of
August 18, 1995 to be
effective as of June 28, 1995.
15 Letter re: Unaudited interim financial
information.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On August 1, 1995, the Company filed a Form 8-K
reporting under Item 5, Other Events, that The Koger
Partnership, Ltd. (the "Partnership") of which
Southeast Properties Holding Corporation, Inc., a
subsidiary of the Company, is the managing general
partner, closed the sale of 90 of its 92 buildings and
related land and providing under Item 7, Financial
Statements and Exhibits, a copy of the press release
announcing the sale of these properties of the
Partnership.
On August 21, 1995, the Company filed a Form 8-K
reporting under Item 5, Other Events, that the Company
had amended its By-Laws and providing under Item 7,
Financial Statements and Exhibits, a copy of Koger
Equity, Inc. By-Laws, as Amended and Restated, dated
August 21, 1995.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KOGER EQUITY, INC.
Registrant
[VICTOR A. HUGHES]
VICTOR A. HUGHES
PRESIDENT AND
CHIEF FINANCIAL OFFICER
Dated: November 9, 1995
[JAMES L. STEPHENS]
JAMES L. STEPHENS
TREASURER AND
CHIEF ACCOUNTING OFFICER
21
<PAGE>
Exhibit 15
November 3, 1995
Koger Equity, Inc.
3986 Boulevard Center Drive
Jacksonville, Florida 32207
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Koger Equity, Inc. and subsidiaries for the periods ended
September 30, 1995 and 1994, as indicated in our report dated November 3, 1995;
because we did not perform an audit, we expressed no opinion on such financial
information.
We are aware that our report referred to above, which is included in your
Quarterly Reports on Form 10-Q for the quarter ended September 30, 1995, is
incorporated by reference in Registration Statement No. 33-55179 on Form S-3 and
Registration Statement No. 33-54617 on Form S-3.
We also are aware that the aforementioned report, pursuant to Rule 436 (c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
FOR EXECUTIVES OF
KOGER EQUITY, INC. AND PARTICIPATING
RELATED ENTITIES
-1-
<PAGE>
ARTICLE 1. INTRODUCTION
1.1 Purpose of Plan. The purpose of the Plan is to facilitate the
retirement of select key executive employees by supplementing their benefits
under the Koger 401(k) Plan.
1.2 Status. The Plan is intended to be a plan that is unfunded and is
maintained by the Company primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of the Employee
Retirement Income Security Act of 1974 (ERISA), and shall be interpreted and
administered accordingly.
ARTICLE 2. DEFINITIONS
Unless otherwise defined, any word, phrase or term used in this Plan
has the meaning given to it in the Basic Plan. However, the following terms have
the following meanings unless a different meaning is clearly required by the
context:
2.1 "Base Pay" means a Participant's average annual base salary during
his final three calendar years as an Employee.
2.2 "Basic Plan" means the Koger 401(k) Plan, as amended and in effect
from time to time. Reference to any provision of the Basic Plan includes
reference to any comparable or successor provisions of the Basic Plan, as
amended from time to time.
2.3 "Basic Plan Benefit" means the value of the Participant's account
in the Basic Plan attributable to all Company Profit-Sharing Contributions.
2.4 "Board" means the Board of Directors of the Company.
-1-
<PAGE>
2.5 "Cause" means conviction of a felony, gross neglect of duties,
wilful misconduct or wilful failure of the Participant to perform duties
pursuant to direction given by the Board. The Participant shall not be deemed to
have been terminated for Cause until the later to occur of (i) the 30th day
after notice of termination is given and (ii) the delivery to the Participant of
a copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the members of the Board at a meeting held for that purpose (after
reasonable notice to the Participant), and at which the Participant together
with his or her counsel was given an opportunity to be heard, finding that the
Participant was guilty of conduct described above in this definition and
specifying the particulars thereof in detail.
2.6 "Change of Control" is defined in Schedule A.
2.7 "Committee" means the Compensation Committee of the Board or such
other person or persons designated to administer the Plan in accordance with
Article 7.
2.8 "Company" means Koger Equity, Inc.
2.9 "Disability" has the meaning given it in the Company's long-term
disability plan. A Participant's employment shall be deemed terminated for
Disability when the Participant is entitled to receive long-term disability
compensation under such plan.
2.10 "Effective Date" means June 28, 1995.
2.11 "Employee" means an individual employed by the Company or a
Related Entity.
2.12 "Participant" means any executive Employee selected to
participate in the Plan in accordance with Section 3.1.
-2-
<PAGE>
2.13 "Plan" means this Supplemental Executive Retirement Plan for
Executives of Koger Equity, Inc. and Participating Related Entities as set forth
herein and in all subsequent amendments hereto.
2.14 "Related Entity" means Koger Realty Services, Inc. or any
subsidiary of the Company. "Participating Related Entity" means Koger Realty
Services, Inc. and any other Related Entity designated by the Board to become
a party to the Plan.
2.15 "Social Security Benefit" means the annual amount of Old Age
Insurance Benefit payable to the Participant commencing at retirement, as
calculated at the time of his or her retirement under the provisions of the
Social Security Act then in effect.
2.16 "Years of Service" means Years of Service as defined in the Basic
Plan for purposes of vesting and includes for purposes of this Plan service with
a Related Entity and service with Koger Properties, Inc., The Koger Company or
their respective subsidiaries.
ARTICLE 3. PARTICIPATION AND VESTING
3.1 Selection of Participants. The Committee will select from time to
time those executive Employees who will be Participants in the Plan. The
executives set forth in the attached Schedules B and C will become Participants
on the Effective Date. If and when additional Participants are named by the
Committee, they will be added to the appropriate Schedule and will become
Participants at that time.
-3-
<PAGE>
3.2 Vesting.
(a) Except as provided in paragraph (b) and in Section 6, a Participant
will be vested and entitled to receive benefits under this Plan only if he or
she satisfies the following requirements:
(i) If the Participant becomes a Participant prior to
attaining age 60, he or she must remain an Employee
for at least five full years from the date the
Employee becomes a Participant.
(ii) If the Participant becomes a Participant after
attaining age 60 but before age 63, he or she must
remain an Employee until age 65.
(iii) If the Participant becomes a Participant after
attaining age 63, he or she must remain an Employee
for at least two years from the date he or she became
Participant.
A Participant who does not satisfy the requirements of this Section 3.2 will
forfeit all rights under the Plan. Notwithstanding any other provision of the
Plan to the contrary, under no circumstance shall a Participant at any time be
more than 100% vested in his or her benefits under the Plan.
(b) A Participant who ceases to be an Employee because of death or
Disability before satisfying the requirements of paragraph (a) shall become
vested immediately and entitled to receive benefits subject to the other
provisions of the Plan.
-4-
<PAGE>
ARTICLE 4. SOURCE OF BENEFIT PAYMENTS
4.1 Obligations of Company and Participating Related Entities. The
Company and Participating Related Entities will establish on their books
liabilities for obligations to pay benefits under the Plan. With respect to all
benefits payable under the Plan, each Participant (or other person entitled to
receive benefits with respect to a Participant) will be an unsecured general
creditor of the Company and of any Participating Related Entity by which the
Participant has been employed. Payments with respect to a Participant who has
been an employee of a Participating Related Entity will be allocated between the
Company and such Participating Related Entity in accordance with Section 4.2.
However, all the initial Participants who are employed by the initial
Participating Related Entity, Koger Realty Services, Inc., have also provided
substantial past services as employees of the Company, and the Plan has been
established in recognition of such past services as well as future services.
Therefore, all obligations under the Plan to such initial Participants are joint
and several liabilities of the Company and Koger Realty Services, Inc.
4.2 Allocation of Payments. Payments under the Plan with respect to a
Participant who has been an employee of a Participating Related Entity will be
allocated as follows: Each Participating Related Entity will pay that percentage
share of the total payments to the Participant under the Plan that is equal to
the total base salary payments made by the Participating Related Entity to the
Participant during his or her final three calendar years as an Employee divided
by the combined total base salary payments made to the Participant by the
Company and all Participating Related Entities during such three years; the
remainder of the payments will be made by the Company.
-5-
<PAGE>
4.3 No Funding Required. Nothing in the Plan will be construed to
obligate the Company or a Related Entity to fund the Plan. However, the Company
may establish a trust of which it is treated as the owner under Subpart E of
Subchapter J, Chapter 1 of the Internal Revenue Code of 1986, as amended (a
"rabbi trust"). In the event of a Change of Control, the Company shall establish
such a rabbi trust, and the Company and, as appropriate, Participating Related
Entities shall deposit funds with the trustee of the trust sufficient to satisfy
the accrued benefits provided under the Plan.
4.4 No Claim to Specific Assets. Nothing in the Plan will be
construed to give any individual rights to any specific assets of the Company,
or any other person or entity.
ARTICLE 5. RETIREMENT BENEFITS
5.1 Schedule B Participants.
(a) Subject to Section 5.3, the annual benefit payable under the Plan
to a Participant listed on Schedule B (a "Schedule B Participant") will be (i)
minus (ii) minus (iii), where
(i) is 50% of the Participant's Base Pay;
(ii) is the annual benefit payable commencing at retirement in
the form of a 50% joint and survivor annuity (with the
Participant's spouse as contingent annuitant) that is the
actuarial equivalent of the Participant's Basic Plan Benefit
(using the actuarial assumptions set forth in Schedule D as
that Schedule may from time to time be amended by the Board or
the Committee); and (iii) is the Participant's Social Security
Benefit.
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<PAGE>
(b) Subject to Section 5.3, the Schedule B Participant's annual benefit
will commence at his or her Normal Retirement Date (or such later date on which
the Participant actually retires) and continue for his or her lifetime. If the
Participant dies leaving a surviving spouse, an annual benefit equal to 50% of
the Participant's annual benefit will thereafter be paid to the surviving spouse
for the lifetime of the surviving spouse.
(c) A Schedule B Participant and his or her spouse will be entitled for
the remainder of their respective lives to receive medical insurance coverage
equivalent to that provided to the then current senior executive officers of the
Company as such coverage may be changed from time to time, with any contribution
required of the recipient to be no greater than that contribution required for
coverage from the then current senior executive officers. If at any time the
Company ceases to provide its senior executive officers with medical insurance
coverage or if the Company is unable to continue to include the Schedule B
Participants on its medical insurance coverage, the Company shall provide to
each Schedule B Participant the same or substantially equivalent medical
insurance, or if less expensive to the Company than the cost of providing such
coverage, pay to the Participant $10,000 per year for the remainder of the
Participant's and his or her spouse's lives, such amount to be reduced to $5,000
upon the death of either the Schedule B Participant or his or her spouse.
5.2 Schedule C Participants.
(a) Subject to paragraph (c) and Section 5.3, the annual benefit
payable under the Plan to a Participant listed on Schedule C (a "Schedule C
Participant") will be (i) minus (ii) minus (iii), where
(i) is 40% of the Participant's Base Pay;
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<PAGE>
(ii) is the annual benefit payable commencing at retirement in
the form of a 15- year term certain that is the actuarial
equivalent of the Participant's Basic Plan Benefit (using the
actuarial assumptions set forth in Schedule D as that Schedule
may from time to time be amended by the Board or the
Committee); and (iii) is the Participant's Social Security
Benefit.
(b) Subject to Section 5.3, the Schedule C Participant's annual benefit
will commence at his or her Normal Retirement Date (or such later date on which
the Participant actually retires) and continue for 15 years. If the Participant
dies before all payments have been made, the remaining payments will be made to
the Participant's Beneficiary.
(c) The annual benefit payable to a Schedule C Participant (or his or
her Beneficiary) if the Participant has less than 20 Years of Service upon the
commencement of benefits shall be the annual benefit calculated in accordance
with paragraph (a) multiplied by a fraction the numerator of which is his or her
Years of Service and the denominator of which is 20.
5.3 Early Commencement of Benefits. A vested Participant who ceases to
be an Employee before Normal Retirement Age because of retirement with the
consent of the Company or because of Disability may thereafter elect to have his
or her annual benefit under the Plan commence any time after the attainment of
age 62 (but not later than the Participant's Normal Retirement Date). If a
Participant dies before commencement of benefits, the Participant's surviving
spouse in the case of a Schedule B Participant or the Participant's Beneficiary
in the case of a Schedule C Participant may elect to have the applicable annual
benefit under Section 5.1 or 5.2 commence at any time after the Participant's
62nd birthday (but not later than the Participant's Normal Retirement Date). If
an election is made under
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<PAGE>
this Section 5.3 to have an annual benefit commence prior to the Participant's
Normal Retirement Date, such benefit will be reduced actuarially in accordance
with Schedule D, as that Schedule may from time to time be amended by the Board
or the Committee. In the case of a Schedule C Participant or the Beneficiary of
a Schedule C Participant, this reduction is in addition to any reduction
required by Section 5.2(c). The annual benefit payable with respect to a vested
Participant who ceases to be an Employee for any reason other than retirement
with consent of the Company, Disability or death may not commence prior to his
or her Normal Retirement Date.
ARTICLE 6. SEVERANCE BENEFITS
6.1 Schedule B Participants. In the event of a "Qualified Termination,"
a Schedule B Participant shall, notwithstanding any other provision of the Plan,
immediately become fully vested in his or her retirement benefits as described
in Section 5.1, and payment of such benefits shall commence immediately without
reduction under Section 5.3.
6.2 Schedule C Participants. In the event of a "Qualified Termination,"
a Schedule C Participant shall, notwithstanding any other provision of the Plan,
continue to receive his or her base salary, as in effect on the date of the
Change of Control, for a period of 18 months, or at the Participant's option,
the Participant's vested benefits under this Plan, subject to the provisions of
the Plan, including the vesting requirements of Article 3 and the reduction
requirements of Sections 5.2 (c) and 5.3.
-9-
<PAGE>
6.3 "Qualified Termination." Qualified Termination means termination of
the Participant's status as an Employee within 24 months following a Change of
Control (a) by the Company other than for Cause, or (b) by the Participant for
any of the following reasons:
(i) assignment to the Participant of any duties
inconsistent with his or her positions, duties,
responsibilities, reporting requirements, or status
with the Company or a Related Entity immediately
prior to the Change of Control; a substantive
diminution in the Participant's titles or offices as
in effect immediately prior to the Change of Control;
or any removal of the Participant from or any failure
to reelect him or her to such positions; or
(ii) reduction in the Participant's total cash
compensation opportunities, including base salary,
cash incentive compensation opportunities and
contributions to retirement plans, for any fiscal
year to less than 100 percent of the total amounts
paid to or on behalf of the Participant in the
completed fiscal year of the Company last ended prior
to the Change of Control, except for any such
reduction of compensation or benefits that is made
as part of a reduction of compensation or benefits
implemented by the Board for all salaried employees;
and provided that a reduction in actual cash
incentive compensation paid to a Participant shall
not by itself constitute a Qualified Termination; or
(iii) material reduction in the health, disability or life
insurance benefits that the Company or a Related
Company is providing to the Participant at the
-10-
<PAGE>
time of the Change of Control, except for any such
reduction of benefits that is made as part of a
reduction of benefits implemented by the Board for
all salaried employees; or
(iv) relocation of the Participant's principal business
office more than 100 miles from the place where he or
she was located immediately prior to the Change of
Control.
ARTICLE 7. ADMINISTRATION
The Plan will be administered by the Committee. The Committee will have
full discretionary authority to interpret the provisions of the Plan and decide
all questions and settle all disputes that may arise in connection with the
Plan. The Committee may establish its own operative and administrative rules and
procedures in connection with the Plan, provided such procedures are consistent
with the requirements of Section 503 of ERISA and the regulations thereunder.
All interpretations, decisions and determinations made by the Committee will be
binding on all persons concerned.
The Committee in its sole discretion may delegate certain of its duties
and responsibilities to an appropriate Employee or Employees. For purposes of
the Plan, any action taken by the delegee Employee pursuant to such delegation
will be considered to have been taken by the Committee. The Company agrees to
indemnify and to defend to the fullest possible extent permitted by law any
member of the Committee and any delegee of the Committee (including any person
who formerly served as a member of the Committee or delegee) against all
liabilities, damages, costs and expenses (including attorneys' fees and
-11-
<PAGE>
amounts paid in settlement of any claims approved by the Company) occasioned by
any act or omission to act in connection with the Plan, if such act or omission
is in good faith.
ARTICLE 8. AMENDMENT OR TERMINATION OF PLAN
The Company hopes and expects to continue the Plan in effect, but the
Board necessarily reserves the right to amend the Plan at any time, and from
time to time, or to terminate the Plan, provided that such amendment or
termination shall not materially adversely affect any vested right or benefit of
a Participant. Any amendment or termination shall be stated in an instrument in
writing and signed by a duly authorized representative of the Board.
ARTICLE 9. MISCELLANEOUS
9.1 No Assignment or Alienation. None of the benefits, payments,
proceeds or claims of any person under this Plan shall be subject to any claim
of any creditor of the person or to attachment or garnishment or other legal
process by any such creditor; nor shall any person have any right to alienate,
anticipate, commute, pledge, encumber or assign any of the benefits, payments or
proceeds which he or she may expect to receive, contingently or otherwise, under
the Plan.
9.2 Limitation of Rights. Neither the establishment of the Plan, nor
any amendment thereof, nor the payment of any benefits will be construed as
giving any individual any legal or equitable right against the Company, a
Related Entity, or the Committee except for those rights explicitly provided for
-12-
<PAGE>
in the Plan.
9.3 Payment for the Benefit of an Incapacitated Individual. If the
payments due to a Participant under the Basic Plan must be paid to another
individual because of a Participant's incapacity, benefits that would otherwise
be payable to the Participant under the Plan will be paid to the Participant's
Beneficiary.
9.4 Governing Law. The Plan will be construed, administered, and
governed under the laws of the State of Florida, to the extent not preempted by
federal law.
9.5 Severability. If any provision of this Plan is held by a court of
competent jurisdiction to be invalid or unenforceable, the remaining provisions
shall continue to be fully effective.
IN WITNESS WHEREOF, the Company and Participating Related Entities have
caused this Plan to be executed by their duly authorized officers this 18th day
of August, 1995, to be effective as of June 28, 1995.
KOGER EQUITY, INC.
By: Irvin H. Davis
KOGER REALTY SERVICES, INC.
By: James L. Stephens
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<PAGE>
SCHEDULE A
"Change of Control" means the occurrence of either of the following
events:
(1) any Person becomes the owner of 35% or more of the
Company's Common Stock; or
(2) individuals who, as of the Effective Date, constitute the
Board of Directors of the Company (the "Continuing Directors") cease
for any reason to constitute at least a majority of such Board;
provided, however, that any individual becoming a director after the
Effective Date whose election or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority
of the Continuing Directors shall be considered as though such
individual were a Continuing Director, but excluding for this purpose
any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Securities and Exchange Act of 1934 (the "Exchange Act")) or other
actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board.
In addition, for purposes of this definition the following terms have
the meanings set forth below:
"Common Stock" means the then outstanding Common Stock of the Company
plus, for purposes of determining the stock ownership of any Person, the number
of unissued shares of Common Stock which such Person has the right to acquire
(whether such right is exercisable immediately or only after the passage of
time) upon the exercise of conversion rights, exchange rights, warrants or
options or otherwise. Notwithstanding the foregoing, the term Common Stock shall
not include shares of preferred stock or convertible debt or options or warrants
to acquire shares of Common Stock (including any shares of Common Stock issued
or issuable upon the conversion or exercise thereof) to the extent that the
Board of Directors of the Company shall expressly so determine in any future
transaction or transactions.
A Person shall be deemed to be the "owner" of any Common Stock of which
such Person would be the "beneficial owner," as such term is defined in Rule
13d-3 promulgated by the Securities and Exchange Commission under the Exchange
Act.
"Person" shall have the meaning used in Section 13(d) of the Exchange
Act, except that "Person" shall not include (i) the Participant, a Participant
Related Party, or any group of which the Participant or Participant Related
Party is a member, or (ii) the Company or a wholly owned subsidiary of the
Company or an employee benefit plan (or related trust) of the Company or of a
wholly owned subsidiary.
-1-
<PAGE>
A "Participant Related Party" shall mean any affiliate or associate of
the Participant other than the Company or a subsidiary of the Company. The terms
"affiliate" and "associate" shall have the meanings ascribed thereto in Rule
12b-2 under the Exchange Act; the term "registrant" in the definition of
"associate" means, in this case, the Company.
-2-
<PAGE>
SCHEDULE B
Participants
Irvin H. Davis
Victor A. Hughes, Jr.
-1-
<PAGE>
SCHEDULE C
Participants
Michael F. Beale
Robert N. Bridger
Philip J. Bruce
Bradford A. Chaffin
Wade L. Hampton
Bryan F. Howell
W. Lawrence Jenkins
J. Velma Keen
Luther W. Kiger
James L. Stephens
James C. Teagle
James W. Walker
-1-
<PAGE>
SCHEDULE D
Actuarial Assumptions:
Mortality: GA83 50/50 Blend
Interest: 7.50%
Early Retirement Reduction Factors:
Age at Retirement Reduction Factor
62 0.7361
63 0.8136
64 0.9010
65 1.0000
-1-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Company does not file a classified balance sheet, therefore these not
provided. 5-02(9), 5-02(21)
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 18,881
<SECURITIES> 0
<RECEIVABLES> 8,085
<ALLOWANCES> 443
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 596,902
<DEPRECIATION> 57,952
<TOTAL-ASSETS> 576,824
<CURRENT-LIABILITIES> 0
<BONDS> 255,975
<COMMON> 205
0
0
<OTHER-SE> 304,654
<TOTAL-LIABILITY-AND-EQUITY> 576,824
<SALES> 0
<TOTAL-REVENUES> 97,139
<CGS> 0
<TOTAL-COSTS> 33,086
<OTHER-EXPENSES> 21,977
<LOSS-PROVISION> 125
<INTEREST-EXPENSE> 18,693
<INCOME-PRETAX> 23,258
<INCOME-TAX> 45
<INCOME-CONTINUING> 23,213
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,213
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.29
</TABLE>
