-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HJninnXGdXVJuWjGfampZEhHq6zPH8ZDnTLBRwuhwUJ5zimABAsj3vRCUgVoTuQe SVx8x35XSgRPOHGIWva1Kw== 0000919607-96-000055.txt : 19960812 0000919607-96-000055.hdr.sgml : 19960812 ACCESSION NUMBER: 0000919607-96-000055 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960809 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOGER EQUITY INC CENTRAL INDEX KEY: 0000835664 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [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: 96606757 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 QUARTERLY REPORT UNITED STATES SECURITIES and EXCHANGE COMMISSION Washington, D.C. 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 June 30, 1996 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 August 1, 1996 Common Stock, $.01 par value 17,873,866 shares KOGER EQUITY, INC. AND SUBSIDIARIES INDEX PAGE NO. PART I. FINANCIAL INFORMATION Independent Accountants' Report........................ 2 Item 1. Financial Statements: Condensed Consolidated Balance Sheets June 30, 1996 and December 31, 1995................. 3 Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 1996 and 1995.............................. 4 Condensed Consolidated Statement of Changes in Shareholders' Equity for the Six Month Period Ended June 30, 1996................................. 5 Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 1996 and 1995............................................ 6 Notes to Condensed Consolidated Financial Statements for the Three and Six Month Periods Ended June 30, 1996 and 1995........................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................... 14 Item 5. Other Information............................... 15 Item 6. Exhibits and Reports on Form 8-K................ 18 Signatures............................................... 19 1 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 June 30, 1996, and the related condensed consolidated statements of operations for the three and six month periods ended June 30, 1996 and 1995, the condensed consolidated statement of changes in shareholders' equity for the six month period ended June 30, 1996 and the condensed consolidated statements of cash flows for the six month periods ended June 30, 1996 and 1995. 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, 1995, 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, 1996, 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, 1995 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 August 2, 1996 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statement KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited - See Independent Accountants' Report) (In thousands) June 30, December 31, 1996 1995 --------------- ------------ ASSETS Real Estate Investments: Operating properties: Land $ 98,727 $ 98,727 Buildings 476,074 471,145 Furniture and equipment 1,626 1,566 Accumulated depreciation (72,220) (62,885) ---------- ---------- Operating properties - net 504,207 508,553 Undeveloped land held for investment 21,150 21,150 Undeveloped land held for sale, at lower of cost or market value 9,131 9,131 Cash and temporary investments 35,563 25,650 Accounts receivable, net of allowance for uncollectible rents of $286 and $391 4,177 5,260 Cost in excess of fair value of net assets acquired from KPI, net of accumulated amortization of $430 and $345 2,125 2,211 Other assets 8,700 7,427 ----------- ----------- TOTAL ASSETS $585,053 $579,382 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Mortgages and loans payable $253,053 $254,909 Accounts payable 1,768 2,641 Accrued interest 263 206 Accrued real estate taxes payable 4,404 2,222 Accrued liabilities - other 4,913 5,133 Advance rents and security deposits 3,709 3,574 ----------- ----------- Total Liabilities 268,110 268,685 --------- --------- Contingency (Note 3) - - Shareholders' Equity Common stock 205 205 Capital in excess of par value 319,240 318,609 Warrants 2,246 2,250 Retained earnings 18,440 13,210 Treasury stock, at cost (23,188) (23,577) ---------- ---------- Total Shareholders' Equity 316,943 310,697 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $585,053 $579,382 ======== ======== See Notes to Condensed Consolidated Financial Statements.
3
KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited - See Independent Accountants' Report) (In thousands, except per share data) Three Month Period Six Month Period Ended June 30, Ended June 30, 1996 1995 1996 1995 ---------- ------ -------- ----- REVENUES Rental $24,160 $24,255 $48,145 $47,737 Other rental services 176 151 271 274 Management fees ($0, $875, $0, and $1,881 from TKPL) 1,971 1,406 3,693 2,754 Interest 429 294 802 659 Gain on early retirement of debt 19 147 Gain on TKPL Note to Southeast (76) (76) -------- -------- -------- -------- Total revenues 26,660 26,125 52,835 51,571 -------- -------- -------- -------- EXPENSES Property operations 10,345 9,840 20,264 19,549 Depreciation and amortization 5,095 4,406 10,150 8,882 Mortgage and loan interest 4,935 6,567 9,897 13,083 General and administrative 1,402 2,175 2,868 3,620 Direct cost of management fees 1,480 935 2,776 1,848 Undeveloped land costs 138 152 267 314 Litigation costs 298 553 Loss on sale or disposition of assets 423 1 423 3 -------- -------- -------- -------- Total expenses 24,116 24,076 47,198 47,299 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 2,544 2,049 5,637 4,272 Income taxes 330 23 407 42 --------- ---------- --------- ----------- NET INCOME $ 2,214 $ 2,026 $ 5,230 $ 4,230 ======= ======= ======= ======== EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT SHARE: Primary $ 0.12 $ 0.11 $ 0.28 $ 0.24 ======== ========= ======== ========= Fully Diluted $ 0.12 $ 0.11 $ 0.28 $ 0.24 ======== ========= ======== ========= WEIGHTED AVERAGE COMMON SHARES AND COMMON EQUIVALENT SHARES OUTSTANDING: Primary 18,682 17,841 18,629 17,794 ======= ======= ======== ======== Fully Diluted 18,711 17,841 18,644 17,794 ======= ======= ======= ========
See Notes to Condensed Consolidated Financial Statements. 4
KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited - See Independent Accountants' Report) (In thousands) Total Common Stock Capital in Share- Par Excess of Retained Treasury Stock holders' Shares Value Par Value Warrants Earnings Shares Cost Equity ------ ------ ---------- -------- --------- ------- ------------ --------- Balance, January 1, 1996 20,477 $205 $318,609 $2,250 $13,210 2,723 $(23,577) $310,697 Treasury Stock Reissued 130 (52) 425 555 Warrants Exercised 2 17 (4) 13 Stock Options Exercised 33 214 3 (36) 178 Stock Appreciation Rights Exercised 23 270 270 Net Income 5,230 5,230 ----------- ------------------------ --------------------- ---------- -------------- ------ Balance, June 30, 1996 20,535 $205 $319,240 $2,246 $18,440 2,674 $(23,188) $316,943 ====== ==== ======== ======= ======= ===== ======== ======== See Notes to Condensed Consolidated Financial Statements. 5
KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited - See Independent Accountants' Report) (In thousands) Six Month Period Ended June 30, 1996 1995 ------------- ------- OPERATING ACTIVITIES Net income $ 5,230 $ 4,230 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,150 8,882 Loss on sale or disposition of assets 423 3 Gain on early debt repayment (147) Accrued interest added to principal 75 393 Amortization of mortgage discounts 88 88 Increase in accounts payable, accrued liabilities and other liabilities 2,016 4,398 Decrease (increase) in receivables and other assets 271 (46) Increase in receivable from TKPL (922) -------- -------- Net cash provided by operating activities 18,253 16,879 -------- -------- INVESTING ACTIVITIES Purchase of TKPL mortgage notes (10,689) Tenant improvements to existing properties (2,821) (4,605) Building improvements to existing properties (1,229) (1,494) Energy management improvements (1,499) (113) Deferred tenant costs (596) (644) Additions to furniture and equipment (60) (192) Proceeds from sale of assets 61 Cash acquired in purchase of assets from KPI 157 -------- -------- Net cash used in investing activities (6,205) (17,519) -------- -------- FINANCING ACTIVITIES Proceeds from sale of stock under Stock Investment Plan 90 106 Proceeds from exercise of warrants and stock options 191 1 Principal payments on mortgages and loans (2,019) (5,346) Financing costs (397) (16) -------- -------- Net cash used in financing activities (2,135) (5,255) -------- -------- Net increase (decrease) in cash and cash equivalents 9,913 (5,895) Cash and cash equivalents - beginning of period 25,650 23,315 -------- -------- Cash and cash equivalents - end of period $35,563 $17,420 ======= ======= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for interest $ 9,677 $12,004 ======== ======= Cash paid during the period for income taxes $ 408 $ 39 ======== ======= See Notes to Condensed Consolidated Financial Statements.
6 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995 (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, 1995, included in the Company's Form 10-K Annual Report for the year ended December 31, 1995. The balance sheet at December 31, 1995, 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 six month period ended June 30, 1996, are not necessarily indicative of the results to be expected for the full year. The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). Adoption of SFAS 121 had no impact on the financial statements for the six month period ended June 30, 1996. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") which will be effective for the Company beginning January 1, 1996. SFAS 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply Accounting Principles Board Opinion No. 25 ("APB 25"), which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB 25 to its stock based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share. 2. ORGANIZATION. Koger Equity, Inc. ("KE"), a Florida corporation, was incorporated in 1988 for the purpose of investing in the ownership of income producing properties, primarily commercial office buildings. KE is totally self-administered and self-managed. In addition to managing its own properties, KE, through certain related entities, provides property management services to third parties. In conjunction with Koger Real Estate Services, Inc. ("KRES"), a Florida corporation and a wholly-owned subsidiary of KE, KE manages 20 office buildings owned by Centoff Realty Company, Inc. ("Centoff"), a subsidiary of Morgan Guaranty Trust Company of New York. More significantly, Koger Realty Services, Inc., a Delaware corporation and an entity in which KE has a significant economic interest ("KRSI"), manages 95 buildings owned by Koala Realty Holding Company, Inc. ("Koala"), an investment entity for which J.P. Morgan Investment Management, Inc. acts as the investment manager. KRSI was 7 incorporated during 1995 to, among other things, provide leasing and property management services to owners of commercial office buildings. KE has purchased all of the preferred stock of KRSI, which preferred stock represents at least 95 percent of the economic value of KRSI. Such preferred stock is non-voting but is convertible into voting common stock. Accordingly, KE has consolidated KRSI in the financial statements. 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 during 1995 and does not expect to have REIT taxable income during 1996, no provision has been made for Federal income taxes. However, the Company has recorded a provision of $120,000 for alternative minimum tax for the six month period ended June 30, 1996. 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 8, Dividends. KRSI has recorded a provision of $227,500 for Federal income tax for the six month period ended June 30, 1996. The Internal Revenue Service has completed its examination of the Company's 1992 and 1993 Federal income tax returns and the Koger Properties, Inc. ("KPI") final Federal income tax return. The Internal Revenue Service has submitted their Report to the Company and has proposed disallowing certain deductions on KPI's final Federal income tax return, the result of which if upheld, would reduce the net operating loss carryforwards acquired from KPI from approximately $98 million to $30 million and require the payment of approximately $200,000 of alternative minimum tax and interest. Management is in the process of reviewing the Report. As no determination can be made as to the eventual outcome of this uncertainty, the condensed consolidated financial statements have not been adjusted to reflect the outcome of such uncertainty. 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 six months and are deemed to be cash equivalents for purposes of the statements of cash flows. During the six month period ended June 30, 1996, the Company contributed 43,804 shares of common stock to the Company's 401(K) Plan. These shares had a value of approximately $465,000 based on the closing price of the Company's common stock on the American Stock Exchange on December 31, 1995. During the six month period ended June 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 stock on the American Stock Exchange on December 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. MORTGAGES AND LOANS PAYABLE. At June 30, 1996, the Company had $253,053,000 of loans outstanding, which are collateralized by mortgages on certain operating properties. 8 Annual maturities for mortgages and loans payable, which are gross of $809,000 of discounts, are as follows (in thousands): Year Ending December 31, 1996 $ 2,064 1997 12,937 1998 19,430 1999 5,751 2000 87,181 Subsequent Years 126,499 --------- Total $253,862 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. Pursuant to the merger of KPI with and into the Company during 1993, the Company agreed to indemnify the former non-officer directors of KPI (the "Indemnified Persons") in respect of amounts to which such Indemnified Persons 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. Certain of the former non-officers directors of KPI are defendants in a Pension Plan class action suit (the "Roby Case"). The Company has signed an agreement to settle the Roby Case and has recorded an expense of $100,000 during the quarter ended June 30, 1996 for its contribution to such settlement for the Indemnified Persons. 8. DIVIDENDS. 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 during 1996 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 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. 9. STOCK OPTIONS AND RIGHTS. Pursuant to the Company's Amended and Restated 1988 Stock Option Plan, the Compensation Committee of the Company's Board of Directors (the "Compensation Committee") granted options to purchase 47,864 shares on May 6, 1996 to certain key employees at an exercise price of $11.50 per share, which was the closing market price on the American Stock Exchange on the date of grant. These options expire seven years from the date of grant with 26,608 shares fully exercisable six months from the date of the grant and 21,256 shares exercisable beginning one year from the date of the grant at the rate of 20 percent per annum of the shares covered by each option on a cumulative basis being fully exercisable five years after the date of grant. 9 Pursuant to the Company's 1993 Stock Option Plan, the Compensation Committee granted options to purchase 143,170 shares on May 6, 1996 to certain key employees at an exercise price of $11.50 per share, which was the closing market price on the American Stock Exchange on the date of grant. These options expire ten years from the date of grant with 110,876 shares fully exercisable six months from date of grant and 32,294 shares exercisable beginning one year from the date of the grant at the rate of 20 percent per annum of the shares covered by each option on a cumulative basis being fully exercisable five years after the date of grant. During the quarter ended June 30, 1996, the stock option agreements between the Company and all employees who had been granted stock options, under the Amended and Restated 1988 Stock Option Plan and the 1993 Stock Option Plan, were amended to eliminate the stock appreciation rights which had been granted in conjunction with the stock options. 10. SUBSEQUENT EVENT. On July 29, 1996, the Company signed a loan application with Northwestern Mutual Life Insurance Company ("Northwestern") for a $190,000,000 non-recourse loan which will be secured by 10 office parks. This loan will be divided into (i) a tranche in the amount of $100,500,000 with a 10 year maturity and an interest rate of 8.25 percent and (ii) a tranche in the amount of $89,500,000 with a maturity of 12 years and an interest rate of 8.33 percent. In order to set the interest rates for this loan on the date the loan application was signed, the Company transferred $5,700,000 to Northwestern as a refundable earnest money deposit. This represents the Company's first step in its plan to refinance the Company's existing debt in order to eliminate certain restrictive covenants. Currently, management expects to close on this loan during the quarter ended December 31, 1996. 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 Annual Report on Form 10-K for the period ended December 31, 1995. RESULTS OF OPERATIONS. Rental revenues totalled $24,160,000 for the quarter ended June 30, 1996, compared to $24,255,000 for the quarter ended June 30, 1995. The decrease in rental revenues resulted primarily from the decrease in the total net rentable square feet owned by the Company during the quarter ended June 30, 1996, as compared to the same period of the prior year. The Company sold three buildings (containing 233,980 net rentable square feet) on July 31, 1995. The effect of the decrease in the total net rentable square feet owned by the Company was partially offset by the increase in the Company's average rental rate. At June 30, 1996, the Company's buildings were on average 91 percent leased with an average rental rate of $13.91. Rental revenues increased to $48,145,000 during the six month period ended June 30, 1996, compared to $47,737,000 during the same period last year. This increase resulted primarily from increases in the revenues from operating cost escalations and other items passed through to tenants. Management fee revenues totalled $1,971,000 for the quarter ended June 30, 1996, compared to $1,406,000 for the quarter ended June 30, 1995. This increase was due primarily to (i) an increase in fees earned for construction management services, (ii) an increase in fees earned from 10 the management of buildings sold by The Koger Partnership, Ltd. ("TKPL") to Koala on August 1, 1995 and (iii) the management fees earned from the three buildings sold by the Company to Koala. Management fee revenues increased to $3,693,000 during the six month period ended June 30, 1996, compared to $2,754,000 during the same period last year, primarily for the same reasons mentioned above. Interest revenues increased $135,000 and $143,000, respectively, for the three and six month periods ended June 30, 1996, compared to the same periods last year, due to 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: Percent of Total Rental Period Amount Revenues -------------------------- -------------- ----------- June 30, 1996 - Quarter $ 10,345,000 42.5% June 30, 1995 - Quarter 9,840,000 40.3% June 30, 1996 - Six Months 20,264,000 41.9% June 30, 1995 - Six Months 19,549,000 40.7% Property operating expenses increased primarily due to increases in maintenance costs. Depreciation expense has been calculated on the straight line method based upon the useful lives of the Company's depreciable assets, generally 3 to 40 years. Depreciation expense increased $721,000 and $1,368,000, respectively, for the three and six month periods ended June 30, 1996, compared to the same periods last year, due to improvements made to the Company's existing properties during 1995. Amortization expense decreased $32,000 and $100,000, respectively, for the three and six month periods ended June 30, 1996, compared to the same periods last year, due primarily to the reduction in goodwill recorded during the quarter ended September 30, 1995. Interest expense decreased by $1,632,000 and $3,186,000, respectively, during the three and six month periods ended June 30, 1996, compared to the same periods last year, primarily due to the reduction in the average balance of mortgages and loans payable. At June 30, 1996, the weighted average interest rate on the Company's outstanding debt was approximately 7.7 percent. General and administrative expenses for the three month periods ended June 30, 1996 and 1995, totalled $1,402,000 and $2,175,000, respectively, which is 0.9 percent and 1.4 percent (annualized) of average invested assets. General and administrative expenses for the six month periods ended June 30, 1996 and 1995, totalled $2,868,000 and $3,620,000, respectively, which is 1.0 percent and 1.2 percent (annualized) of average invested assets. These decreases were primarily due to (i) decreases in the accrual for compensation expense related to stock appreciation rights granted in conjunction with stock options, (ii) decreases in professional and legal fees incurred, (iii) decreases in certain insurance expenses, and (iv) decreases in the accrual for the Company's contribution to the 401(k) Plan. 11 Direct costs of management contracts increased $545,000 and $928,000, respectively, for the three and six month periods ended June 30, 1996, compared to the same periods last year, due to increased costs associated with (i) providing property management services for all management contracts and (ii) providing construction management services. During the quarter ended June 30, 1996, the Company decided to demolish a building containing 11,040 net rentable square feet because the building no longer met the Company's investment criteria. The Company has recorded a loss on disposition of assets which totals $423,000 due to its plans to demolish this building. Net income totalled $2,214,000 for the quarter ended June 30, 1996, compared to net income of $2,026,000 for the corresponding period of 1995. This improvement is due primarily to the increase in management fee revenues and the reductions in interest expense and general and administrative expenses. These items were partially offset by the increases in (i) property operations expense, (ii) depreciation and amortization expense, (iii) direct cost of management fees, (iv) litigation costs and (v) loss on sale or disposition of assets. Net income increased $1,000,000 during the six month period ended June 30, 1996, compared to the same period last year, due to the same items detailed above. LIQUIDITY AND CAPITAL RESOURCES. Operating Activities - During the six months ended June 30, 1996, the Company generated approximately $18.3 million in net cash from operating activities. The Company's primary internal sources of cash are (i) the collection of rents from buildings owned by the Company and (ii) the receipt of management fees paid to the Company in respect of properties managed on behalf of Koala, Centoff, 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 carryforwards, may be substantially less than cash flow). In the past, the Company has paid out dividends in amounts at least equal to its REIT taxable income. However, the Company currently expects that it will not be required to pay any dividends during 1996 to maintain its REIT status. The Company believes that its cash provided by operating activities will be sufficient to cover debt service payments through 1996. The level of cash flow generated by rents depends primarily on the occupancy rates of the Company's buildings and increases in rental rates on new and renewed leases and under escalation provisions in existing leases. At June 30, 1996, leases representing approximately 16.9 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 1996. This represents 663 leases for space in buildings located in 16 of the 17 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 six months ended June 30, 1996, leases were renewed on approximately 65 percent of the Company's net rentable square feet which were scheduled to expire during the six month period. For those leases which renewed during the six months ended June 30, 1996, the average rental rate increased from $14.51 to $15.35. Based upon the significant number of leases which will expire during 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 12 include the payment of tenant improvements costs and in certain markets reduced rents during initial lease periods. During 1994, 1995 and 1996, the Company has benefitted from improving economic conditions and reduced vacancy levels for office buildings in many of the metropolitan areas in which the Company owns buildings. The Company believes that the southeastern and southwestern regions of the United States provide significant economic growth potential due to their diverse regional economies, expanding metropolitan areas, skilled work force and moderate labor costs. However, the Company cannot predict whether such economic growth will continue. Cash flow from operations could be reduced if economic growth were not to continue in the Company's markets and if this resulted in lower occupancy rates for the Company's buildings. Governmental tenants (including the State of Florida and the United States Government) which account for approximately 22.1 percent of the Company's leased space at June 30, 1996, may be subject to budget reductions in times of recession and governmental austerity measures. Consequently, there can be no assurance that governmental appropriations for rents may not be reduced. Additionally, certain of the private sector tenants which have contributed to the Company's rent stream may reduce their current demands, or curtail their future need, for additional office space. Investing Activities - At June 30, 1996, substantially all of the Company's invested assets were in real properties. Improvements to the Company's existing properties have been financed through internal operations. During the six month period ended June 30, 1996, the Company's expenditures for improvements to existing properties decreased by $663,000 over the corresponding period of the prior year primarily due to reductions in expenditures for tenant improvements, which reductions were partially offset by expenditures for energy management improvements to the Company's buildings. 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 June 30, 1996 of $35,563,000. At June 30, 1996, 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 $4.4 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. The Company is currently implementing its plan to refinance or restructure the Company's existing debt in order to eliminate certain restrictive covenants. To assist in implementing the debt refinancing, the Company has engaged J.P. Morgan and Company as its financial adviser. Currently, management expects to complete the refinancing during the quarter ended December 13 31, 1996. On July 29, 1996, the Company signed a loan application with Northwestern Mutual Life Insurance Company ("Northwestern") for a $190,000,000 non-recourse loan which will be secured by 10 office parks. This loan will be divided into (i) a tranche in the amount of $100,500,000 with a 10 year maturity and an interest rate of 8.25 percent and (ii) a tranche in the amount of $89,500,000 with a maturity of 12 years and an interest rate of 8.33 percent. In order to set the interest rates for this loan on the date the loan application was signed, the Company transferred $5,700,000 to Northwestern as a refundable earnest money deposit. This represents the Company's first step in its plan to refinance the Company's existing debt in order to eliminate certain restrictive covenants. Currently, management expects to close on this loan during the quarter ended December 31, 1996. PART II. OTHER INFORMATION Item 1. Legal Proceedings None. 14 Item 5. Other Information (a) The following table sets forth, with respect to the Company's centers at June 30, 1996, number of buildings, net rentable square feet, percentage leased, and the average annual rent per net rentable square foot leased.
Average Net Annual Number Rentable Rent Per of Square Percent Square Koger Center Buildings Feet Leased(1) Foot (2) - ------------- --------- ---------- --------- ----------- Atlanta Chamblee 22 947,920 96% $14.59 Austin 12 370,860 95% 16.09 Charlotte Carmel 1 109,600 100% 14.97 Charlotte East 11 468,820 76% 13.07 El Paso 14 251,930 94% 14.08 Greensboro South 13 610,470 92% 13.57 Greenville 8 290,560 94% 14.08 Jacksonville Baymeadows 4 468,000 100% 15.57 Jacksonville Central (3) 31 666,500 91% 11.50 Memphis Germantown 3 258,400 99% 16.91 Orlando Central 22 565,220 87% 14.19 Orlando University 2 159,600 92% 16.15 San Antonio 26 788,670 88% 11.62 St. Petersburg 15 519,320 94% 13.05 Tallahassee Apal. Pkwy 14 408,500 85% 15.99 Tallahassee Cap. Circle 4 300,700 90% 17.97 Tulsa 13 476,280 81% 10.25 ----- ---------- TOTAL 215 7,661,350 91% $13.91 ==== ========= ==== ====== (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 (a) total annualized rents for a center as of June 30, 1996 by (b) the net rentable square feet applicable to such total annualized rents. (3) The Company has decided to demolish a building containing 11,040 net rentable square feet. This building has been removed from this table. 15 (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 1996 and calendar years 1997 through 2004, (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 June 30, 1996 and on the terms of leases in effect as of June 30, 1996, on the basis of then existing base rentals, and without regard to the exercise of options to renew. Furthermore, the information below does not reflect that some leases have provisions for early termination for various reasons, including, in the case of government entities, lack of budget appropriations. Leases were renewed on approximately 65 percent of the Company's net rentable square feet which were scheduled to expire during the six month period ended June 30, 1996.
Percentage of Average Percentage Total Square Annual Rent of Total Number of Number of Feet Leased per Square Total Annual Annual Rents Leases Square Feet Represented by Foot Under Rents Under Represented by Period Expiring Expiring Expiring Leases Expiring Leases Expiring Leases Expiring Leases - ------ -------------- --------------- --------------- --------------- --------------- --------------- 1996 663 1,185,929 17.0% $13.90 $16,484,946 16.9% 1997 803 1,501,515 21.5% 14.08 21,136,176 21.7% 1998 525 1,800,222 25.7% 13.72 24,694,342 25.4% 1999 302 981,772 14.0% 13.44 13,194,154 13.6% 2000 116 609,170 8.7% 14.79 9,012,160 9.3% 2001 58 410,325 5.9% 14.64 6,006,261 6.2% 2002 11 148,271 2.1% 13.57 2,012,359 2.1% 2003 11 78,661 1.1% 13.86 1,090,254 1.1% 2004 3 74,069 1.1% 9.75 722,538 0.7% OTHER 9 204,426 2.9% 14.31 2,924,375 3.0% -------- --------- -------- ------------- -------- TOTAL 2,501 6,994,360 100.0% $13.91 $97,277,565 100.0% ===== ========= ====== ====== =========== ======
16 (c) The Company believes that Funds from Operations is one measure of the performance of an equity real estate investment trust. Funds from Operations should not be considered as an alternative to net income as an indication of the Company's financial performance or to cash flow from operating activities (determined in accordance with generally accepted accounting principles) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. Funds from Operations is calculated as follows (in thousands):
Three Month Period Six Month Period Ended June, Ended June 30, ----------- -------------- 1996 1995 1996 1995 ------------ --------- ---------- ------- Net Income $2,214 $2,026 $ 5,230 $ 4,230 Depreciation - real estate 4,718 4,014 9,378 8,046 Amortization - deferred tenant costs 209 118 434 279 Amortization - goodwill 42 158 85 325 Litigation costs 298 553 Loss on sale or disposition of assets 423 1 423 3 Gain on TKPL note to Southeast 76 76 Gain on early retirement of debt (19) (147) ---------- --------- ------------- ---------- Funds from Operations $7,980 $6,298 $16,179 $12,736 ====== ====== ======= =======
17 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description ------ ----------- 11 Earnings Per Share Computations. 15 Letter re: Unaudited interim financial information. 27 Financial Data Schedule. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended June 30, 1996. 18 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, JR.) ----------------------- VICTOR A. HUGHES, JR. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Dated: August 7, 1996 (JAMES L. STEPHENS) ------------------- JAMES L. STEPHENS VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER 19 EXHIBIT 11 EARNINGS PER SHARE COMPUTATIONS (In Thousands Except Per Share Data)
Three Month Period Six Month Period Ended June 30, Ended June 30, ------- ------- 1996 1995 1996 1995 ------- ------- ------- ------- EARNINGS PER COMMON AND DILUTIVE COMMON EQUIVALENT SHARE: Net Income $ 2,214 $ 2,026 $ 5,230 $ 4,230 ======= ======= ======= ======= Shares: Weighted average number of common shares outstanding 17,841 17,739 17,821 17,700 Weighted average number of additional shares issuable for common stock equivalents (a) 841 102 808 94 ------- ------- ------- ------- Adjusted common shares 18,682 17,841 18,629 17,794 ======= ======= ======= ======= EARNINGS PER SHARE $ 0.12 $ 0.11 $ 0.28 $ 0.24 ======= ======= ======= ======= EARNINGS PER COMMON SHARE ASSUMING FULL DILUTION: Net Income $ 2,214 $ 2,026 $ 5,230 $ 4,230 ======= ======= ======= ======= Shares: Weighted average number of common shares outstanding 17,841 17,739 17,821 17,700 Weighted average number of additional shares issuable for all dilutive common stock equivalents (a) 870 102 823 94 ------- ------- ------- ------- Shares as adjusted for all dilutants 18,711 17,841 18,644 17,794 ======= ======= ======= ======= EARNINGS PER SHARE $ 0.12 $ 0.11 $ 0.28 $ 0.24 ======= ======= ======= ======= (a) Shares issuable were derived using the "Treasury Stock Method" for all dilutive common stock equivalents.
EXHIBIT 15 August 2, 1996 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 June 30, 1996 and 1995, as indicated in our report dated August 2, 1996; 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 Report on Form 10-Q for the quarter ended June 30, 1996, is incorporated by reference in Registration Statement No. 33-55179 on Form S-3 and Registration Statement No. 33-54617 on Form S-8. 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 EX-11 2 EXHIBIT 11 EXHIBIT 11 EARNINGS PER SHARE COMPUTATIONS (In Thousands Except Per Share Data)
Three Month Period Six Month Period Ended June 30, Ended June 30, ------- ------- 1996 1995 1996 1995 ------- ------- ------- ------- EARNINGS PER COMMON AND DILUTIVE COMMON EQUIVALENT SHARE: Net Income $ 2,214 $ 2,026 $ 5,230 $ 4,230 ======= ======= ======= ======= Shares: Weighted average number of common shares outstanding 17,841 17,739 17,821 17,700 Weighted average number of additional shares issuable for common stock equivalents (a) 841 102 808 94 ------- ------- ------- ------- Adjusted common shares 18,682 17,841 18,629 17,794 ======= ======= ======= ======= EARNINGS PER SHARE $ 0.12 $ 0.11 $ 0.28 $ 0.24 ======= ======= ======= ======= EARNINGS PER COMMON SHARE ASSUMING FULL DILUTION: Net Income $ 2,214 $ 2,026 $ 5,230 $ 4,230 ======= ======= ======= ======= Shares: Weighted average number of common shares outstanding 17,841 17,739 17,821 17,700 Weighted average number of additional shares issuable for all dilutive common stock equivalents (a) 870 102 823 94 ------- ------- ------- ------- Shares as adjusted for all dilutants 18,711 17,841 18,644 17,794 ======= ======= ======= ======= EARNINGS PER SHARE $ 0.12 $ 0.11 $ 0.28 $ 0.24 ======= ======= ======= ======= (a) Shares issuable were derived using the "Treasury Stock Method" for all dilutive common stock equivalents.
EX-15 3 EXHIBIT 15 EXHIBIT 15 August 2, 1996 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 June 30, 1996 and 1995, as indicated in our report dated August 2, 1996; 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 Report on Form 10-Q for the quarter ended June 30, 1996, is incorporated by reference in Registration Statement No. 33-55179 on Form S-3 and Registration Statement No. 33-54617 on Form S-8. 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 EX-27 4 FINANCIAL DATA SCHEDULE
5 The Company does not file a classified balance sheet, therefore these not provided. 1000 DOLLARS 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 35,563 0 4,463 286 0 0 606,708 72,220 585,053 0 253,053 0 0 205 316,738 585,053 0 52,835 0 23,040 14,261 0 9,897 5,637 407 5,230 0 0 0 5,230 .28 .28
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