-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, RBPnAFTDNiB+UOTw/RDNi9yLIG3/toEI/jYvR3fjX3byLAjYV12V4qTOZDbyCVth ZMbK3H1mi4iJvg9SK8RbLQ== 0000919607-94-000015.txt : 19940615 0000919607-94-000015.hdr.sgml : 19940615 ACCESSION NUMBER: 0000919607-94-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOGER EQUITIES INC CENTRAL INDEX KEY: 0000835664 STANDARD INDUSTRIAL CLASSIFICATION: 6798 IRS NUMBER: 592898045 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09997 FILM NUMBER: 94527624 BUSINESS ADDRESS: STREET 1: 3986 BLVD CTR DR STE 101 CITY: JACKSONVILLE STATE: FL ZIP: 32207 BUSINESS PHONE: 9043983403 MAIL ADDRESS: STREET 1: 3986 BLVD CTR DR STREET 2: SUITE 101 CITY: JACKSONVILLE STATE: FL ZIP: 32207 10-Q 1 KOGER 10-Q 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 March 31, 1994 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 offices) (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 May 6, 1994 Common Stock, $.01 par value 17,597,275 shares KOGER EQUITY, INC. AND SUBSIDIARIES INDEX Page Number PART I. FINANCIAL INFORMATION Independent Accountants' Report . . . . . . . . . . . . 2 Item 1. Financial Statements: Condensed Consolidated Balance Sheets March 31, 1994 and December 31, 1993 . . . . . . . . . 3 Condensed Consolidated Statements of Operations for the Three Month Periods Ended March 31, 1994 and 1993. . . . . . . . . . . . . . . . 4 Condensed Consolidated Statement of Changes in Shareholders' Equity for the Three Month Period Ended March 31, 1994 . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements for the Three Month Periods Ended March 31, 1994 and 1993. . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . 12 Item 5. Other Information. . . . . . . . . . . . . . . . 14 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 18 Signatures. . . . . . . . . . . . . . . . . . . . . . . . 19 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 March 31, 1994, and the related condensed consolidated statements of operations and cash flows for the three month periods ended March 31, 1994 and 1993, and the condensed consolidated statement of changes in shareholders' equity for the three month period ended March 31, 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. As discussed in Note 7 to the condensed consolidated financial statements and Note 9 to the annual financial statements for the year ended December 31, 1993 (not presented herein), the Company is a defendant in a class action proceeding and a derivative action and has an indemnity agreement with certain former directors of KPI. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of the Company as of December 31, 1993, 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 4, 1994, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph as to uncertainties regarding the outcome of litigation proceedings in which the Company is a defendant and an indemnity agreement with certain former directors of KPI. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1993 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE Jacksonville, Florida May 6, 1994 PART I. FINANCIAL INFORMATION Item 1. Financial Statements KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited - See Independent Accountants' Report) (In thousands) MARCH 31, DECEMBER 31, 1994 1993 ASSETS Real Estate Investments: Operating properties $567,788 $565,957 Furniture and equipment 844 813 Accumulated depreciation (34,289) (30,706) Operating properties - net 534,343 536,064 Undeveloped land held for investment 33,054 33,054 Undeveloped land held for sale, at lower of cost or market value 6,982 6,982 Cash and temporary investments 22,146 18,566 Accounts receivable, net 4,343 3,030 Receivable from The Koger Partnership, Ltd. 774 634 Cost in excess of fair value of net assets acquired from KPI, net of accumulated amortization of $196 and $23 10,226 11,623 Other assets 4,734 5,136 TOTAL ASSETS $616,602 $615,089 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Mortgages and loans payable $330,038 $330,625 Accounts payable 1,574 3,945 Accrued interest 507 294 Accrued real estate taxes payable 2,335 1,201 Other liabilities 4,006 3,574 Total Liabilities 338,460 339,639 Contingencies (Note 7) - - Shareholders' Equity Common stock 205 205 Capital in excess of par value 318,574 318,574 Warrants 1,368 1,368 Accumulated dividends in excess of net income (17,180) (19,872) Treasury stock (2,874,400 shares, at cost) (24,825) (24,825) Total Shareholders' Equity 278,142 275,450 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $616,602 $615,089 See Notes to Condensed Consolidated Financial Statements. KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited - See Independent Accountants' Report) (In thousands, except per share data) Three Month Period Ended March 31, 1994 1993 REVENUES Rental $23,554 $10,970 Management fees ($785 from TKPL) 1,206 Interest 148 60 Total 24,908 11,030 EXPENSES Property operations 9,378 4,145 Koger Management, Inc. management fees 554 Mortgage and loan interest 6,298 2,762 Depreciation and amortization 3,881 2,152 General and administrative 1,716 416 Provision for uncollectible rents 50 Direct cost of management fees 734 Undeveloped land costs 201 Loss on sale of assets 8 Total 22,216 10,079 NET INCOME $ 2,692 $ 951 EARNINGS PER COMMON SHARE $ 0.15 $ 0.07 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,597 13,220 KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited - See Independent Accountants' Report) (In thousands)
Accumulated Capital in Dividends in Total Common Stock Treasury Stock Excess of Excess Of Net Shareholders' Shares Par Value Shares Cost Par Value Warrants Income Equity Balance, January 1, 1994 20,472 $ 205 2,874 $(24,825) $ 318,574 $ 1,368 $ (19,872) $ 275,450 Net Income 2,692 2,692 Balance, March 31, 1994 20,472 $ 205 2,874 $(24,825) $ 318,574 $ 1,368 $ (17,180) $ 278,142
See Notes to Condensed Consolidated Financial Statements. KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited - See Independent Accountants' Report) (In thousands) Three Month Period Ended March 31, 1994 1993 OPERATING ACTIVITIES Net income $ 2,692 $ 951 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,881 2,152 Accrued interest added to principal 342 Provision for uncollectible rents 50 Amortization of mortgage discounts 52 54 Loss on sale of artwork 8 Decrease in accounts payable, accrued liabilities and other liabilities (732) (759) Decrease in receivables and other assets 73 194 Increase in receivable from TKPL (140) Net cash provided by operating activities 6,176 2,642 INVESTING ACTIVITIES Improvements to existing properties (1,831) (1,241) Deferred tenant costs (51) (190) Merger costs (109) (870) Additions to furniture and equipment (30) Proceeds from sale of artwork 403 Cash acquired in purchase of assets from KPI 9 Payments received on loans to Koger Properties, Inc. - Cash Collateral Order 339 Net cash used in investing activities (1,609) (1,962) FINANCING ACTIVITIES Proceeds from exercise of stock options 1 Principal payments on mortgages and loans (981) (1,833) Financing costs (6) (44) Net cash used in financing activities (987) (1,876) Net increase (decrease) in cash and cash equivalents 3,580 (1,196) Cash and cash equivalents - beginning of period 18,566 9,283 Cash and cash equivalents - end of period $22,146 $8,087 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for interest $ 5,692 $3,480 See Notes to Condensed Consolidated Financial Statements. KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1994 AND 1993 (Unaudited - See Independent Accountants' Report) 1. BASIS OF PRESENTATION. The condensed consolidated financial statements include the accounts of Koger Equity, Inc. and its wholly-owned subsidiaries (the "Company"). All 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, and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1993, included in the Company's Form 10-K Annual Report for the year ended December 31, 1993. The balance sheet at December 31, 1993, 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 three month period ended March 31, 1994, 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"). 3. FEDERAL INCOME TAXES. The Company is operated in a manner so as to qualify and has elected tax treatment as a real estate investment trust under the Internal Revenue Code (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 during 1993 and does not expect to have REIT taxable income during 1994, no provision has been made for Federal income taxes. 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, under existing loan covenants the Company is prohibited from paying more than 95 percent of its REIT taxable income as dividends. See Note 8, Dividend. 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. There were no material non-cash investing or financing transactions for the three month periods ended March 31, 1994 and 1993. 5. EARNINGS PER COMMON SHARE. Earnings per common share have been computed based on the weighted average number of shares of common stock outstanding. There were no dilutive common equivalent shares outstanding during any of the interim periods presented. 6. LOANS AND MORTGAGES PAYABLE. At March 31, 1994, the Company had $329,566,000 of loans outstanding, which are collateralized by mortgages on certain operating properties, and $472,000 of unsecured notes outstanding. Annual maturities for loans and mortgages payable, which are gross of $1,239,000 of discounts, are as follows (in thousands): Year Ending December 31, 1994 $ 2,271 1995 5,736 1996 8,901 1997 14,564 1998 19,262 Thereafter 280,543 $331,277 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. 7. LEGAL PROCEEDINGS. The Company, certain of its present and former officers and directors, and KPI and certain of its subsidiaries are parties to a class action filed in October, 1990 (the "Securities Action"). It is alleged in the Securities Action that various press releases, shareholder reports, and/or securities filings failed to disclose and/or misrepresented the Company's business policies in violation of certain provisions of the Federal securities law and seeks unspecified damages therefor. The Company believes that claims made in the Securities Action are without merit and intends to vigorously contest the proceeding. 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 course of the Derivative Action, the plaintiffs therein further alleged that Mr. Lobrano was liable to the Company for certain alleged acts of legal malpractice. The Company's Board of Directors' Independent Litigation Committee, which was composed of outside independent members of the Company's Board of Directors, completed an extensive investigation of the facts and circumstances surrounding the Derivative Action, including the allegations against Mr. Lobrano. It was the conclusion of this committee that the ultimate best interest 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"); and realleged the cause of action against Stephen D. Lobrano ("Count II"); and a new cause of action against the members of the Special Litigation Committee for alleged violation of fiduciary duties in conducting its 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 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 should not be dismissed. The District Court adopted the Report and Recommendations of the United States Magistrate by order entered March 8, 1994. Subsequently, Mr. Lobrano has filed his answer denying all of the material allegations of the Second Complaint, and raising 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 have also filed a cross claim against the Company, asserting that, in connection with the matters complained of in the Second Complaint, Mr. Lobrano and his law firm acted under the direction and control of the officers and directors of KPI, that they have 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 has moved to dismiss these claims, and has moved in the United States Bankruptcy Court for the Middle District 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 this cross-claim against the Company is a violation of the confirmation order in the Chapter 11 Case. At this time the Company's legal counsel is unable to determine whether the outcome of the above litigation will have a material impact on the Company. Accordingly, no provision has been made in the consolidated financial statements for any liability that may result from this litigation. Under the terms of the merger agreement between the Company and KPI, the Company has agreed to indemnify each former non-officer director of KPI (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"). Certain of the former non-officer directors of KPI are defendants in a Pension Plan class action suit. The Company is not named in this suit. However, certain former non-officer directors of KPI may be Indemnified Persons. 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. Based upon its investigation to date, the Company does not believe that this suit will give rise to any material liability to Indemnified Persons or to the Company. Accordingly, no provision has been made in the Consolidated Financial Statements for any liability that may result from the Indemnity. 8. DIVIDEND. 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. The terms of the secured debt of the Company provides that, so long as the Company is qualified as a REIT 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. 9. KPI MERGER. Upon a motion made by the Company during March, 1994, the United States Bankruptcy Court for the Middle District of Florida, Tampa Division, entered an order permitting the release of excess funds from the KPI Administrative Claims Reserve which was established to provide funds for the payment of various administrative claims in the KPI Chapter 11 Case. Pursuant to this order, approximately $1,463,000 was released to the Company from the KPI Administrative Claims Reserve and was received on April 6, 1994. This amount was recorded in accounts receivable at March 31, 1994 with a corresponding reduction to cost in excess of fair value of net assets acquired from KPI. 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, 1993, Annual Report on Form 10-K. RESULTS OF OPERATIONS. Rental revenues totalled $23,554,000 for the quarter ended March 31, 1994, compared to $10,970,000 for the quarter ended March 31, 1993. The increase in rental revenues resulted primarily from (i) the rental revenues from the 93 buildings acquired pursuant to the Merger on December 21, 1993 (totalling approximately $11,339,000) and (ii) increased contingent rental revenues. At March 31, 1994, the Company's buildings were on average 89 percent leased. At March 31, 1993, the Company's buildings were on average 87 percent leased. During the quarter ended March 31, 1994, the Company earned $1,206,000 of management fees from TKPL and third party management contracts which it assumed from KPI on the date of the Merger. On May 5, 1994, third party management contracts on two buildings terminated. Management fee revenue related to the management of these two buildings was approximately $61,000 for the quarter ended March 31, 1994. Property operating expenses include such charges as utilities, taxes, janitorial, and maintenance. The amounts of property operating expenses and management fees and their percentages of rental revenues for the applicable periods are as follows: % of Rental Period Amount Revenues March 31, 1994 - Quarter $9,378,000 39.8% March 31, 1993 - Quarter $4,699,000 42.8% Property operating expenses in 1994 were larger than 1993 primarily due to the operating expenses on the 93 buildings acquired pursuant to the Merger on December 21, 1993 (totalling approximately $4,223,000). General and administrative expenses for the quarters ended March 31, 1994 and 1993, totalled $1,716,000 and $416,000, respectively, which is 1.1 percent and 0.4 percent (annualized) of average invested assets. General and administrative expenses increased primarily due to the increased general and administrative functions performed by the Company following the Merger. Depreciation expense has been calculated on the straight line method based upon the useful lives of the Company's depreciable assets, generally 5 to 40 years. Depreciation expense increased $1,598,000 for the quarter ended March 31, 1994, compared to the same period last year, due to (i) improvements made to the Company's existing properties during 1993 and (ii) the acquisition of 93 buildings during 1993 pursuant to the Merger. Amortization expense increased $131,000 for the quarter ended March 31, 1994, compared to the same period last year, due to amounts incurred for goodwill related to the Merger during 1993. Interest expense increased by $3,536,000 during the quarter ended March 31, 1994, compared to the same period last year, primarily due to the interest expense on the KPI restructured debt assumed pursuant to the Merger. Net income increased $1,741,000 during the three month period ended March 31, 1994 compared to the same period last year primarily because of the acquisition of 93 buildings during 1993 pursuant to the Merger. 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 real estate investment trust (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 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 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, if any, to maintain REIT status through 1994. The level of cash flow generated by rents depends primarily on the occupancy rates of the Company's buildings and increases in effective rental rates on new and renewed leases and under escalation provisions. However, market conditions may prevent the Company from escalating rents under said provisions. At March 31, 1994, leases representing approximately 17.4 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 1994. With the current economic conditions, certain of these tenants may not renew their leases or may reduce their demand for space. Based upon the significant amount of leases which will expire during 1994 and the intense 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, such as reduced rent during initial lease periods and payment of tenant improvements costs, which the Company expects will require greater capital expenditures in 1994 than in 1993. Although most of the Company's leases permit it to increase rents annually to reflect increases in the Consumer Price Index or increases in real estate taxes and certain operating expenses, the Company has chosen, for competitive reasons, in certain cases not to demand the full increase permitted. In addition, current market conditions 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. These factors may result in reduced occupancy rates for the Company's buildings which could result in reduced levels of cash flow generated by operations. The Company cannot predict with any certainty the degree to which the current economic conditions will affect its operations, however, slower economic growth in the markets in which the Company owns buildings may result in lower occupancy rates for, and reduced cash flow from, the Company's properties. Governmental tenants (including the State of Florida and the United States Government) which account for approximately 23 percent of the Company's leased space at March 31, 1994, may be subject to budget reductions in times of recession and governmental austerity. There can be no assurance that, with the current economic climate, governmental appropriations for rents may not be reduced. Additionally, with the current economic conditions, 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 March 31, 1994, all of the Company's invested assets were in properties. Improvements to the Company's existing properties have been financed through internal operations. During the quarter ended March 31, 1994, the Company's expenditures for improvements to existing properties increased by $590,000 over the corresponding period of the prior year primarily due to the acquisition of 93 buildings pursuant to the Merger on December 21, 1993. During the quarter ended March 31, 1994, the Company sold various items of artwork and furnishings, which it had acquired pursuant to the Merger, through several auction houses for approximately $403,000, net of selling costs. 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. Under such circumstances, it is unlikely that the Company will have financial resources available to complete any significant additional purchases of income-producing properties, even if the Company determined that such purchases were otherwise available. Financing Activities - Historically, the Company's primary external sources of cash have been bank borrowings, mortgage financings and public offerings of equity securities. The proceeds of these financings have been used by the Company to acquire additional buildings from KPI and, in anticipation of such acquisitions, had been loaned to KPI under two credit agreements. At March 31, 1994, the Company had no uncollateralized loans outstanding from banks under short-term open lines of credit. During the quarter ended March 31, 1994, the Company fully repaid a mortgage which was collateralized by a building which contains 21,560 net rentable square feet. PART II. OTHER INFORMATION Item 1. Legal Proceedings An action in the U. S. District Court, Middle District of Florida (the "District Court") was filed on October 11, 1990, by Gerald and Althea Best and Jerome Wilem, shareholders of the Company, against KPI, the Company, two subsidiaries of KPI (Koger Advisors, Inc. and KMI), Messrs. Allen R. Ransom (a former director of the Company), Ira M. Koger (a former director of the Company), S. D. Stoneburner, and W.F.E. Kienast (a former director of the Company), alleging that various press releases, shareholder reports, and/or securities filings failed to disclose and/or misrepresented the Company's business policies and seeking damages therefore (the "Securities Action"). William L. Coalson, a shareholder of the Company, was subsequently added as an additional plaintiff. The Company believes that the claims asserted in the Securities Action are without merit and intends to vigorously contest the Securities Action. 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 course of the Derivative Action, the plaintiffs therein further alleged Mr. Lobrano was liable to the Company for certain alleged acts of legal malpractice. The Company's Board of Directors' Independent Litigation Committee, which was composed of outside independent members of the Company's Board of Directors, completed an extensive investigation of the facts and circumstances surrounding the Derivative Action, including the allegations against Mr. Lobrano. It was the conclusion of this committee that the ultimate best interest 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"); and realleged the cause of action against Stephen D. Lobrano ("Count II"); and a new cause of action against the members of the Special Litigation Committee for alleged violation of fiduciary duties in conducting its 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 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 should not be dismissed. The District Court adopted the Report and Recommendations of the United States Magistrate by order entered March 8, 1994. Subsequently, Mr. Lobrano has filed his answer denying all of the material allegations of the Second Complaint, and raising 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 have also filed a cross claim against the Company, asserting that, in connection with the matters complained of in the Second Complaint, Mr. Lobrano and his law firm acted under the direction and control of the officers and directors of KPI, that they have 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 has moved to dismiss these claims, and has moved in the United States Bankruptcy Court for the Middle District 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 this cross-claim against the Company is a violation of the confirmation order in the Chapter 11 Case. 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. Item 5. Other Information (a) The following table sets forth, with respect to the Company's centers at March 31, 1994, number of buildings, net rentable square feet, net square feet leased (based upon signed leases), weighted average percent leased, and current average effective rent per net rentable square foot leased. Avg Eff. Net Net Wtg Avg Rent Per Number Rentable Square Percent Net of Square Feet Leased Rentable Center Buildings Feet Leased (1) Sq Ft (2) Atlanta Chamblee 22 947,920 856,353 90% $14.40 Austin 12 370,860 335,396 90% 12.75 Charlotte Carmel 1 109,600 108,405 99% 15.50 Charlotte East 11 468,820 361,802 77% 12.65 El Paso 14 251,930 231,434 92% 12.50 Greensboro South 13 610,470 570,749 93% 13.25 Greenville 8 290,560 225,032 77% 12.20 Jacksonville Baymeadows 4 468,000 463,431 99% 14.55 Jacksonville Central 32 677,540 561,812 83% 12.00 Memphis Germantown 3 258,400 253,125 98% 16.95 Miami 1 96,800 91,159 94% 18.70 Norfolk West 1 59,680 47,865 80% 16.20 Orlando Central 22 565,220 491,540 87% 13.45 Orlando University 2 159,600 141,320 89% 16.00 Raleigh Crossroads 1 77,500 76,815 99% 15.40 San Antonio 26 788,670 708,792 90% 10.50 St. Petersburg 15 519,320 420,004 81% 13.10 Tall. Apal. Pkwy 14 408,500 376,280 92% 15.00 Tall. Cap. Circle 4 300,700 300,700 100% 16.70 Tulsa North 2 103,520 86,352 83% 9.75 Tulsa South 11 372,760 296,841 80% 9.05 TOTAL 219 7,906,370 7,005,207 89% $13.69 (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 annual gross rental revenues for a center by the net rentable square feet applicable to such gross rental revenues. Average effective rental rate is rounded to the nearest $.05. (b) The following schedule sets forth for each of the Company's centers (i) the number of tenants whose leases will expire in calendar years 1994 through 2002, (ii) the total net rentable area in square feet covered by such leases, (iii) the current annual rental represented by such leases, and (iv) the percentage of gross annual rental for such center contributed by such leases. This information is based on the buildings owned by the Company on March 31, 1994 and on the terms of leases in effect as of March 31, 1994, on the basis of then existing base rentals, and without regard to the exercise of options to renew. This table does not include tenants in possession where leases were in the process of execution but were not delivered to the Company at March 31, 1994.
Leases in Effect March 31, 1994, Expiring During the Calendar Years 1994 1995 1996 1997 1998 1999 2000 2001 2002 OTHER ATLANTA CHAMBLEE Number of Tenants 71 36 36 18 10 12 2 1 5 Number of Sq. Ft. 102,569 100,276 134,536 70,936 120,574 79,163 32,964 39,490 175,845 Annual Rental $ 1,404,718 1,364,619 2,069,414 908,563 1,701,331 1,121,842 647,733 518,790 2,475,646 % Gross Annual Rent 11.5% 11.2% 16.9% 7.4% 13.9% 9.2% 5.3% 0.0% 4.2% 20.3% AUSTIN Number of Tenants 52 50 55 12 5 3 Number of Sq. Ft. 62,726 113,990 111,759 25,385 8,031 13,505 Annual Rental $ 719,623 1,359,130 1,505,869 325,097 104,774 223,636 % Gross Annual Rent 17.0% 32.1% 35.5% 7.7% 2.5% 5.3% 0.0% 0.0% 0.0% 0.0% CHARLOTTE EAST Number of Tenants 76 34 23 10 4 Number of Sq. Ft. 129,807 89,341 54,816 15,901 24,130 Annual Rental $ 1,665,789 1,277,254 679,557 191,073 261,779 % Gross Annual Rent 36.7% 27.8% 14.8% 4.2% 5.7% 0.0% 0.0% 0.0% 0.0% 0.0% CHARLOTTE CARMEL Number of Tenants 2 1 3 6 1 Number of Sq. Ft. 6,530 1,042 60,930 38,849 1,054 Annual Rental $ 99,643 18,738 828,419 711,642 21,065 % Gross Annual Rent 0.0% 6.0% 1.1% 49.3% 42.4% 0.0% 1.3% 0.0% 0.0% 0.0% EL PASO Number of Tenants 62 38 61 21 8 1 1 Number of Sq. Ft. 50,527 49,793 73,585 35,058 16,190 1,475 4,806 Annual Rental $ 592,571 593,092 868,513 466,570 210,192 18,408 101,400 % Gross Annual Rent 20.8% 20.8% 30.5% 16.4% 7.4% 0.6% 3.6% 0.0% 0.0% 0.0% GREENSBORO SOUTH Number of Tenants 49 61 41 16 10 1 2 1 1 Number of Sq. Ft. 51,937 97,429 97,716 120,041 139,765 720 15,254 17,366 30,521 Annual Rental $ 715,196 1,421,263 1,301,631 1,695,586 1,655,463 9,000 181,628 201,183 378,328 % Gross Annual Rent 9.5% 18.8% 17.2% 22.4% 21.9% 0.1% 2.4% 2.7% 5.0% 0.0% GREENVILLE Number of Tenants 66 36 23 10 7 2 Number of Sq. Ft. 87,310 51,679 26,262 34,750 13,093 11,938 Annual Rental $ 1,117,162 492,740 325,513 452,632 163,464 190,797 % Gross Annual Rent 40.7% 18.0% 11.9% 16.5% 6.0% 0.0% 0.0% 0.0% 0.0% 7.0% JACKSONVILLE BAYMEADOWS Number of Tenants 2 14 4 5 6 1 Number of Sq. Ft. 4,924 381,641 23,435 5,825 23,706 23,900 Annual Rental $ 88,288 5,416,229 380,780 91,146 370,568 378,160 % Gross Annual Rent 1.3% 80.8% 13.7% 3.3% 5.4% 0.0% 5.6% 0.0% 0.0% 0.0%
Leases in Effect March 31, 1994, Expiring During the Calendar Years 1994 1995 1996 1997 1998 1999 2000 2001 2002 OTHER JACKSONVILLE CENTRAL Number of Tenants 76 61 53 30 30 8 1 4 Number of Sq. Ft. 49,210 129,499 137,032 69,629 97,047 54,727 1,262 23,406 Annual Rental $ 625,163 1,594,144 1,210,742 805,870 1,107,384 591,239 11,661 286,589 % Gross Annual Rent 10.0% 25.6% 19.4% 12.9% 17.8% 9.5% 0.2% 0.0% 0.0% 4.6% MEMPHIS GERMANTOWN Number of Tenants 15 11 18 10 5 Number of Sq. Ft. 94,570 15,521 76,955 49,482 16,597 Annual Rental $ 1,637,890 256,918 1,260,148 837,967 265,037 % Gross Annual Rent 38.5% 6.0% 29.6% 19.7% 6.2% 0.0% 0.0% 0.0% 0.0% 0.0% MIAMI Number of Tenants 3 9 5 1 1 Number of Sq. Ft. 24,399 46,803 11,391 820 7,746 Annual Rental $ 414,073 913,942 218,164 15,375 145,380 % Gross Annual Rent 24.3% 53.5% 12.8% 0.9% 0.0% 8.7% 0.0% 0.0% 0.0% 0.0% NORFOLK WEST Number of Tenants 4 4 3 2 1 1 1 Number of Sq. Ft. 16,554 11,492 5,183 4,822 1,770 3,014 5,030 Annual Rental $ 280,004 214,592 75,224 70,868 25,223 39,182 69,414 % Gross Annual Rent 36.2% 27.7% 9.7% 0.0% 9.2% 3.3% 0.0% 5.1% 0.0% 9.0% ORLANDO CENTRAL Number of Tenants 60 45 37 21 9 3 1 1 Number of Sq. Ft. 146,594 84,774 84,815 106,989 40,395 8,314 12,606 7,053 Annual Rental $ 1,975,341 1,170,798 1,102,573 1,379,250 505,724 102,242 170,522 92,535 % Gross Annual Rent 30.4% 18.0% 17.0% 21.2% 7.8% 1.6% 2.6% 0.0% 0.0% 1.4% ORLANDO UNIVERSITY Number of Tenants 9 6 12 7 2 3 1 Number of Sq. Ft. 13,343 34,040 24,096 26,144 7,834 32,692 3,171 Annual Rental $ 236,765 579,566 367,037 368,631 140,596 508,794 60,439 % Gross Annual Rent 10.5% 25.6% 16.2% 16.3% 6.2% 22.5% 0.0% 0.0% 0.0% 2.7% RALEIGH CROSSROADS Number of Tenants 3 1 2 1 Number of Sq. Ft. 3,244 1,525 43,794 28,252 Annual Rental $ 50,872 23,646 670,073 437,681 % Gross Annual Rent 4.3% 2.0% 56.7% 0.0% 0.0% 0.0% 37.0% 0.0% 0.0% 0.0% SAN ANTONIO Number of Tenants 111 79 58 22 22 9 1 2 Number of Sq. Ft. 139,759 220,654 103,823 50,877 137,546 37,703 512 17,918 Annual Rental $ 1,472,759 2,287,974 1,047,447 532,166 1,401,576 401,196 8,316 203,893 % Gross Annual Rent 20.0% 31.1% 14.2% 7.2% 19.1% 5.5% 0.1% 0.0% 0.0% 2.8% ST. PETERSBURG Number of Tenants 48 39 36 19 16 7 1 1 Number of Sq. Ft. 89,932 77,331 52,950 100,562 54,944 34,621 2,504 7,160 Annual Rental $ 1,239,851 1,119,680 701,826 941,166 727,186 436,994 32,026 130,619 % Gross Annual Rent 23.3% 21.0% 13.2% 17.7% 13.6% 8.2% 0.6% 0.0% 0.0% 2.5% TALLAHASSEE APALACHEE PKWY Number of Tenants 33 26 12 8 8 1 1 Number of Sq. Ft. 80,373 130,904 27,943 67,778 57,484 9,452 2,346 Annual Rental $ 1,161,451 1,967,920 369,980 1,067,050 825,296 140,042 31,392 % Gross Annual Rent 20.9% 35.4% 6.7% 19.2% 14.8% 2.5% 0.0% 0.0% 0.5% 0.0%
Leases in Effect March 31, 1994, Expiring During the Calendar Years 1994 1995 1996 1997 1998 1999 2000 2001 2002 OTHER TALLAHASSEE CAPITAL CIRCLE Number of Tenants 7 2 Number of Sq. Ft. 219,700 81,000 Annual Rental $ 3,626,019 1,401,150 % Gross Annual Rent 0.0% 72.1% 0.0% 27.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% TULSA NORTH Number of Tenants 11 6 8 3 Number of Sq. Ft. 20,207 7,713 45,885 12,547 Annual Rental $ 179,447 70,955 451,375 141,647 % Gross Annual Rent 21.3% 8.4% 53.5% 0.0% 16.8% 0.0% 0.0% 0.0% 0.0% 0.0% TULSA SOUTH Number of Tenants 75 42 32 6 1 1 Number of Sq. Ft. 53,605 88,519 117,181 8,842 6,051 22,643 Annual Rental $ 497,425 762,155 1,046,477 87,256 51,536 229,165 % Gross Annual Rent 18.6% 28.5% 39.1% 3.3% 1.9% 8.6% 0.0% 0.0% 0.0% 0.0% TOTAL OFFICE BUILDINGS Number of Tenants 826 611 524 225 158 52 12 2 3 17 Number of Sq. Ft. 1,221,590 1,961,805 1,262,374 940,819 832,483 318,764 123,114 20,380 72,357 251,521 Annual Rental $ 16,074,388 26,641,886 15,711,691 12,498,969 10,536,493 4,123,196 1,990,192 240,365 928,510 3,509,932 % Gross Annual Rent 17.4% 28.9% 17.0% 13.5% 11.4% 4.5% 2.2% 0.3% 1.0% 3.8%
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description 10 Material Contracts None. (b) Reports on Form 8-K On January 3, 1994, the Company filed a Form 8-K which provided information required under Item 2, Acquisition or Disposition of Assets, and Item 7, Financial Statements and Exhibits, for the merger of Koger Properties, Inc. with and into the Company. On March 4, 1994, the Company filed a Form 8-K/A which provided the remaining information required under Item 7, Financial Statements and Exhibits, for the merger of Koger Properties, Inc. with and into the Company. 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 SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Dated: May 6, 1994 [JAMES L. STEPHENS] JAMES L. STEPHENS TREASURER AND CHIEF ACCOUNTING OFFICER -----END PRIVACY-ENHANCED MESSAGE-----