-----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, J81v5cXylx4bE8jzCmIprusPVMDec2sumfoWltB0B7jb+HPrndGqb1c3VJd8pmkN o2tHNowLmtbgSnl5/7qKrg== 0000950144-98-012561.txt : 19981116 0000950144-98-012561.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950144-98-012561 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: SEC FILE NUMBER: 333-20975 FILM NUMBER: 98746948 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 EQUITY, INC. 1 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 SEPTEMBER 30, 1998 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.) 8880 FREEDOM CROSSING TRAIL JACKSONVILLE, FLORIDA 32256 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (904) 732-1000 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 October 30, 1998 Common Stock, $.01 par value 26,580,137 shares 2 KOGER EQUITY, INC. AND SUBSIDIARIES INDEX
PAGE NO. PART I. FINANCIAL INFORMATION Independent Accountants' Report............................................................. 2 Item 1. Financial Statements: Condensed Consolidated Balance Sheets September 30, 1998 and December 31, 1997................................................. 3 Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 1998 and 1997.............................................................. 4 Condensed Consolidated Statement of Changes in Shareholders' Equity for the Nine Month Period Ended September 30, 1998................................................................. 5 Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 1998 and 1997................................................................................. 6 Notes to Condensed Consolidated Financial Statements for the Three and Nine Month Periods Ended September 30, 1998 and 1997........................................................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................................... 12 Item 5. Other Information........................................................................... 13 Item 6. Exhibits and Reports on Form 8-K............................................................ 16 Signatures ....................................................................................... 17
1 3 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Shareholders of Koger Equity, Inc. Jacksonville, Florida We have reviewed the accompanying condensed consolidated balance sheet of Koger Equity, Inc. and subsidiaries (the "Company") as of September 30, 1998, and the related condensed consolidated statements of operations for the three and nine month periods ended September 30, 1998 and 1997, the condensed consolidated statement of changes in shareholders' equity for the nine month period ended September 30, 1998 and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 1998 and 1997. 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, 1997, 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 February 28, 1998, 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, 1997 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 October 29, 1998 2 4 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED - SEE INDEPENDENT ACCOUNTANTS' REPORT) (IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------ ------------ ASSETS Real Estate Investments: Operating properties: Land $ 130,058 $ 111,697 Buildings 668,108 567,332 Furniture and equipment 3,316 2,220 Accumulated depreciation (122,515) (104,700) ------------ ------------ Operating properties - net 678,967 576,549 Properties under construction: Land 13,171 8,978 Buildings 24,749 18,608 Undeveloped land held for investment 17,553 13,249 Undeveloped land held for sale 1,263 1,512 Cash and temporary investments 3,249 16,955 Accounts receivable, net of allowance for uncollectible accounts of $288 and $250 6,111 5,646 Investment in Koger Realty Services, Inc. 1,103 472 Cost in excess of fair value of net assets acquired, net of accumulated amortization of $813 and $685 1,743 1,870 Other assets 13,256 12,258 ------------ ------------ TOTAL ASSETS $ 761,165 $ 656,097 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgages and loans payable $ 260,481 $ 181,963 Accounts payable 6,596 8,802 Accrued real estate taxes payable 7,896 3,294 Accrued liabilities - other 7,859 6,623 Dividends payable 7,973 6,352 Advance rents and security deposits 4,715 4,801 ------------ ------------ Total Liabilities 295,520 211,835 ------------ ------------ Commitments and Contingencies Shareholders' Equity: Common stock 286 284 Capital in excess of par value 454,909 441,451 Retained earnings 30,752 30,947 Treasury stock, at cost (20,302) (28,420) ------------ ------------ Total Shareholders' Equity 465,645 444,262 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 761,165 $ 656,097 ============ ============
See Notes to Condensed Consolidated Financial Statements. 3 5 KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - SEE INDEPENDENT ACCOUNTANTS' REPORT) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTH PERIOD NINE MONTH PERIOD ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------- ---------------------- 1998 1997 1998 1997 ------- ------- -------- -------- REVENUES Rental and other rental services $34,476 $28,230 $ 97,195 $ 80,250 Management fees 547 639 1,738 2,209 Interest 85 178 392 1,084 Income from Koger Realty Services, Inc. 207 96 1,062 489 Adjustment to gain on TKPL note to Southeast (9) ------- ------- -------- -------- Total revenues 35,315 29,143 100,387 84,023 ------- ------- -------- -------- EXPENSES Property operations 14,370 12,037 39,197 32,824 Depreciation and amortization 6,766 6,124 20,416 17,238 Mortgage and loan interest 4,251 4,037 11,518 12,264 General and administrative 1,620 1,367 4,877 4,256 Direct cost of management fees 326 469 972 1,553 Undeveloped land costs 87 107 280 341 Loss on early retirement of debt 102 144 Recovery of loss on land held for sale (379) ------- ------- -------- -------- Total expenses 27,420 24,243 77,260 68,241 ------- ------- -------- -------- INCOME BEFORE GAIN ON SALE OR DISPOSITION OF ASSETS 7,895 4,900 23,127 15,782 Gain on sale or disposition of assets 3 2,057 6 2,057 ------- ------- -------- -------- INCOME BEFORE INCOME TAXES 7,898 6,957 23,133 17,839 Income taxes 160 8 770 189 ------- ------- -------- -------- NET INCOME $ 7,738 $ 6,949 $ 22,363 $ 17,650 ======= ======= ======== ======== EARNINGS PER SHARE: Basic $ 0.29 $ 0.33 $ 0.85 $ 0.84 ======= ======= ======== ======== Diluted $ 0.29 $ 0.31 $ 0.83 $ 0.79 ======= ======= ======== ======== WEIGHTED AVERAGE SHARES: Basic 26,566 21,259 26,199 21,018 ======= ======= ======== ======== Diluted 27,114 22,341 26,869 22,251 ======= ======= ======== ========
See Notes to Condensed Consolidated Financial Statements. 4 6 KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED - SEE INDEPENDENT ACCOUNTANTS' REPORT) (IN THOUSANDS)
COMMON STOCK TOTAL --------------------- CAPITAL IN TREASURY STOCK SHARE- PAR EXCESS OF RETAINED --------------------- HOLDERS' SHARES VALUE PAR VALUE EARNINGS SHARES COST EQUITY ------- -------- ---------- -------- ------ --------- -------- Balance, December 31, 1997 28,389 $ 284 $ 441,451 $30,947 2,982 $(28,420) $444,262 Common stock sold 12,049 (1,016) 8,378 20,427 Treasury stock purchased 18 (302) (302) 401(k) Plan contribution 126 (9) 76 202 Stock options exercised 166 2 1,283 2 (34) 1,251 Dividends declared (22,558) (22,558) Net income 22,363 22,363 ------- -------- --------- ------- ----- -------- -------- Balance, September 30, 1998 28,555 $ 286 $ 454,909 $30,752 1,977 $(20,302) $465,645 ======= ======== ========= ======= ===== ======== ========
See Notes to Condensed Consolidated Financial Statements. 5 7 KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - SEE INDEPENDENT ACCOUNTANTS' REPORT) (IN THOUSANDS)
NINE MONTH PERIOD ENDED SEPTEMBER 30, ------------------------ 1998 1997 --------- -------- OPERATING ACTIVITIES Net income $ 22,363 $ 17,650 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,416 17,238 Income from Koger Realty Services, Inc. (1,062) (489) Recovery of loss on land held for sale (379) Provision for uncollectible accounts 94 156 Adjustment to gain on TKPL unsecured note to Southeast 9 Gain on sale or disposition of assets (6) (2,057) Loss on early retirement of debt 144 Amortization of mortgage discounts 71 Increase in accounts payable, accrued liabilities and other liabilities 3,895 3,828 Decrease (increase) in receivables and other assets (1,764) 200 --------- -------- Net cash provided by operating activities 43,936 36,371 --------- -------- INVESTING ACTIVITIES Property acquisitions (73,845) (45,833) Building construction expenditures (38,404) (11,731) Tenant improvements to first generation space (2,829) (135) Tenant improvements to existing properties (7,433) (5,622) Building improvements (3,015) (2,181) Energy management improvements (194) (531) Deferred tenant costs (1,450) (1,220) Additions to furniture and equipment (1,096) (473) Proceeds from sale of assets 6 6,345 Dividends received from Koger Realty Services, Inc. 431 364 --------- -------- Net cash used in investing activities (127,829) (61,017) --------- -------- FINANCING ACTIVITIES Proceeds from sale of common stock 20,427 257 Proceeds from exercise of warrants and stock options 1,104 10,141 Proceeds from mortgage and loans 101,917 24,300 Dividends paid (20,937) (4,190) Principal payments on mortgages and loans (31,900) (25,428) Treasury stock purchase (302) (5,750) Warrants redeemed (379) Financing costs (122) (727) --------- -------- Net cash provided by (used in) financing activities 70,187 (1,776) --------- -------- Net decrease in cash and cash equivalents (13,706) (26,422) Cash and cash equivalents - beginning of period 16,955 35,715 --------- -------- Cash and cash equivalents - end of period $ 3,249 $ 9,293 ========= ======== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for interest, net of capitalized interest $ 10,162 $ 12,193 ========= ======== Cash paid during the period for income taxes $ 1,047 $ 189 ========= ========
See Notes to Condensed Consolidated Financial Statements. 6 8 KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 (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 material 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, 1997, included in the Company's Form 10-K Annual Report for the year ended December 31, 1997. The balance sheet at December 31, 1997, 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 of operations for the interim periods, have been made. Results of operations for the nine month period ended September 30, 1998, are not necessarily indicative of the results to be expected for the full year. Certain 1997 amounts have been reclassified to conform with 1998 presentations. 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 21 office buildings owned by Centoff Realty Company, Inc. ("Centoff"), a subsidiary of Morgan Guaranty Trust Company of New York. 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"). 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 1997 and does not expect to have REIT taxable income during 1998, no provision has been made for Federal income taxes. However, the Company has recorded a provision of $380,000 for alternative minimum tax for the nine month period ended September 30, 1998. 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, the use of net operating loss carryforwards, which may reduce REIT taxable income to zero, are limited for alternative minimum tax purposes. 4. STATEMENTS OF CASH FLOWS. Cash in excess of daily requirements is invested in short-term monetary securities. Such temporary cash investments have an original maturity date of less than three months and are deemed to be cash equivalents for purposes of the statements of cash flows. During the nine month period ended September 30, 1998, the Company contributed 9,197 shares of common stock to the Company's 401(k) Plan. These shares had a value of approximately $202,000 based on the closing price of the Company's common stock on the American Stock Exchange on December 31, 1997. During January 1998, the Company assumed a mortgage loan with an outstanding balance of approximately $8,501,000 in conjunction with the acquisition of an office building. During the nine month period ended September 30, 1997, the Company contributed 23,657 shares of common stock to the Company's 401(k) Plan. These shares had a value of approximately $444,000 based on the closing price of the Company's common stock on the American Stock Exchange on December 31, 1996. In addition, the Company issued 15,455 shares of common stock as payment for certain 7 9 1996 bonuses for senior management. These shares had a value of approximately $278,000 based on the closing price of the Company's common stock on the American Stock Exchange on January 6, 1997. 5. EARNINGS PER SHARE. Basic earnings per share has been computed based on the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the denominator has been increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares for stock options had been issued. 6. MORTGAGES AND LOANS PAYABLE. At September 30, 1998, the Company had $260,481,000 of loans outstanding, which are collateralized by mortgages on certain operating properties. Annual maturities for mortgages and loans payable are as follows (in thousands):
YEAR ENDING DECEMBER 31, 1998 $ 907 1999 68,957 2000 3,209 2001 3,485 2002 11,486 Subsequent Years 172,437 ---------- Total $ 260,481 ==========
7. DIVIDENDS. The Company paid the following dividends during the nine months ended September 30, 1998:
PAYMENT DATE RECORD DATE DIVIDEND PER SHARE ----------------- ----------------- ------------------ February 14, 1998 December 31, 1997 $0.25 May 6, 1998 March 31, 1998 $0.25 August 6, 1998 June 30, 1998 $0.30
During the quarter ended September 30, 1998, the Company's Board of Directors declared a quarterly dividend of $0.30 per share payable on November 5, 1998, to shareholders of record at the close of business on September 30, 1998. The Company currently expects that all dividends paid during 1998 will be treated as ordinary income to the recipient for income tax purposes. 8. STOCK OPTIONS. During the quarter ended September 30, 1998, the Company granted options to purchase 461,500 shares of its common stock. All options were granted with an exercise price in excess of the market value at the date of grant. 9. SUBSEQUENT EVENT. On October 22, 1998, the Company completed the acquisition of the Vanguard Office Center, a suburban office park located in Charlotte, North Carolina, for a total purchase price of $52.3 million. This transaction was structured as a contribution of the property to a down-REIT partnership to be called Koger-Vanguard Partners, L.P., whose General Partner is the Company. The purchase price was paid by the assumption of approximately $22.2 million of debt, the issuance of 999,710 partnership operating units (valued at approximately $22.95 million) and the balance in cash. The partnership operating units carry with them the right to redeem the units for common shares of the Company on a one-operating-unit-for-one-share basis or, at the option of the Company, the units may be redeemed for cash. 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, 1997. 8 10 RESULTS OF OPERATIONS. Rental and other rental services revenues totaled $34,476,000 for the quarter ended September 30, 1998, compared to $28,230,000 for the quarter ended September 30, 1997. This increase in rental revenues resulted primarily from (i) increases in the Company's average rental rate and (ii) increases in rental revenues from the properties acquired and construction completed during 1997 and 1998 ($5,163,000). At September 30, 1998, the Company's buildings were on average 91 percent leased with an average rental rate of $15.63. Rental and other rental services revenues increased to $97,195,000 during the nine month period ended September 30, 1998, compared to $80,250,000 during the same period last year. This increase resulted primarily from (i) increases in the Company's average rental rate and (ii) increases in rental revenues from the properties acquired and construction completed during 1997 and 1998 ($13,174,000). Management fee revenues totaled $547,000 for the quarter ended September 30, 1998, compared to $639,000 for the quarter ended September 30, 1997. This decrease was due primarily to a decrease in leasing fees earned. Management fee revenues decreased to $1,738,000 during the nine month period ended September 30, 1998, compared to $2,209,000 during the same period last year, primarily due to a decrease in the leasing fees earned under the management contract with Centoff and from other sources. Interest revenues decreased $93,000 and $692,000, respectively, for the three and nine month periods ended September 30, 1998, compared to the same periods last year, due to the lower average balance of cash to invest. Property operations expense includes such charges as utilities, real estate taxes, janitorial, maintenance, property insurance, provision for uncollectible rents and management costs. The amounts of property operations expense and its percentage of total rental revenues for the applicable periods are as follows:
PERCENT OF TOTAL RENTAL PERIOD AMOUNT REVENUES -------------------------------- ------------ ------------ September 30, 1998 - Quarter $ 14,370,000 41.7% September 30, 1997 - Quarter 12,037,000 42.6% September 30, 1998 - Nine Months 39,197,000 40.3% September 30, 1997 - Nine Months 32,824,000 40.9%
Property operations expense increased primarily due to (i) increased accruals for real estate taxes, (ii) increased utility costs, (iii) increased property management costs and (iv) increases in operations expense for the properties acquired and construction completed during 1997 and 1998 ($2,037,000 and $5,460,000, respectively, for the three and nine month periods ended September 30, 1998). 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 $453,000 and $2,579,000 respectively, for the three and nine month periods ended September 30, 1998, compared to the same periods last year, due to (i) improvements made to the Company's existing properties during 1997 and 1998 and (ii) the properties acquired and construction completed during 1997 and 1998 ($832,000 and $2,284,000, respectively, for the three and nine month periods ended September 30, 1998). Amortization expense increased $189,000 and $599,000, respectively, for the three and nine month periods ended September 30, 1998, compared to the same periods last year, due primarily to (i) financing costs incurred during 1997 for the secured revolving credit facility and (ii) deferred tenant costs incurred after September 30, 1997. Interest expense increased by $214,000 during the three month period ended September 30, 1998, compared to the same period last year, primarily due to the increase in the outstanding balance of mortgages and loans payable. Compared to the same period last year, interest expense decreased by $746,000 during the nine month period ended September 30, 1998 9 11 primarily due to the increase in interest capitalization due to the Company's construction of office buildings. At September 30, 1998, the weighted average annual interest rate on the Company's outstanding debt was approximately 8.0 percent. General and administrative expenses for the three month periods ended September 30, 1998 and 1997, totaled $1,620,000 and $1,367,000, respectively, which is 0.8 percent and 0.8 percent (annualized) of average invested assets. General and administrative expenses for the nine month periods ended September 30, 1998 and 1997, totaled $4,877,000 and $4,256,000, respectively, which is 0.8 percent and 0.9 percent (annualized) of average invested assets. These increases were primarily due to (i) increases in group insurance costs, (ii) costs for corporate office relocation and (iii) increased accruals related to a bonus plan. Direct costs of management contracts decreased $143,000 and $581,000, respectively, for the three and nine month periods ended September 30, 1998, compared to the same periods last year, due to decreased costs associated with providing property management services for all management contracts. Based on the proceeds received from the sale of the Miami land parcel and the Company's analysis of the fair value of the remaining land parcels held for sale, the Company reversed $379,000 of the provision for loss on land held for sale, which had been previously recorded. Net income totaled $7,738,000 for the quarter ended September 30, 1998, compared to net income of $6,949,000 for the corresponding period of 1997. This improvement is due primarily to the increase in rental revenues which was partially offset by increases in (i) property operations expense and (ii) depreciation and amortization expense and the decrease in gain on sale or disposition of assets. Net income increased $4,713,000 during the nine month period ended September 30, 1998, compared to the same period last year, due to the same items detailed above. LIQUIDITY AND CAPITAL RESOURCES. OPERATING ACTIVITIES - During the nine months ended September 30, 1998, the Company generated approximately $43.9 million in net cash from operating activities. The Company's primary internal sources of cash are (i) the collection of rents from buildings owned by the Company and (ii) the receipt of management fees paid to the Company in respect of properties managed on behalf of 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. The Company believes that its cash provided by operating activities will be sufficient to cover debt service payments and to pay the dividends required to maintain REIT status through 1998. The level of cash flow generated by rents depends primarily on the occupancy rates of the Company's buildings and changes in rental rates on new and renewed leases and under escalation provisions in existing leases. At September 30, 1998, leases representing approximately 7.6 percent of the gross annualized rent from the Company's properties, without regard to the exercise of options to renew, were due to expire during the remainder of 1998. This represents 326 leases for space in buildings located in 20 of the 23 centers or locations in which the Company owns buildings. Certain of these tenants may not renew their leases or may reduce their demand for space. During the nine months ended September 30, 1998, leases were renewed on approximately 61 percent of the Company's net rentable square feet, which were scheduled to expire during the nine month period. For those leases which renewed during the nine months ended September 30, 1998, the average rental rate increased from $15.03 to $15.93. Based upon the significant number of leases which will expire during 1998 and 1999 and the competition for tenants in the markets in which the Company operates, the Company has and expects to continue to offer incentives to certain new and renewal tenants. These incentives may include the payment of tenant improvements costs and in certain markets reduced rents during initial lease periods. 10 12 The Company continues to benefit 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 21.2 percent of the Company's leased space at September 30, 1998, 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. The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a two-digit year is commonly referred to as the Year 2000 Compliance issue. As the year 2000 approaches, such systems may be unable to accurately process certain date-based information. All significant accounting applications used by the Company are packaged software products licensed from various computer software companies. During 1998, the Company began implementing its existing plan to upgrade its significant accounting applications from DOS-based software to Windows-based software. The Company has confirmed that its Windows-based software applications are Year 2000 Compliant. The project to upgrade these applications to Windows-based software will be completed by March 31, 1999. The Company has also completed its initial assessment of its critical building operating systems (HVAC, lighting, security and elevators) regarding Year 2000 Compliance. This assessment determined that the costs of dealing with timing devices which are not Year 2000 Compliant would not be material to the Company's financial position or results of operations. The Company is continuing to inventory all building operating systems to confirm the Company's assessment of these devices with the applicable manufacturers. The total cost to the Company of these Year 2000 Compliance activities has not been and is not anticipated to be material to its financial position or results of operations in any given year. These costs and the date on which the Company plans to complete its application conversions are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from these plans. INVESTING ACTIVITIES - At September 30, 1998, 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 nine month period ended September 30, 1998, the Company's expenditures for improvements to existing properties increased by $2,308,000 over the corresponding period of the prior year primarily due to increases in expenditures for tenant improvements to the Company's buildings. During the quarter ended March 31, 1997, the Company sold 8.1 acres of unimproved land located in Miami, Florida for approximately $2,908,000, net of selling costs. On August 8, 1997, the Company sold 17.2 acres of unimproved land located in Richmond, Virginia for approximately $3,433,000, net of selling costs. On January 30, 1998, the Company acquired a building, containing 127,700 net rentable square feet, located in Richmond, Virginia for a purchase price of $16.5 million. On February 1, 1998, the Company acquired a building, containing 19,000 net rentable square feet, located in Jacksonville, Florida for a purchase price of $2.0 million. On March 6, 1998, the Company acquired 14.41 acres of land located in Jacksonville, Florida for a purchase price of $2.3 million. On April 22, 1998, the 11 13 Company acquired an office and retail complex consisting of (i) four office buildings containing 279,300 net rentable square feet, (ii) a retail development containing 112,600 net rentable square feet and (iii) approximately 22 acres of developable land. These properties were acquired for a purchase price of approximately $58.2 million and are located in Birmingham, Alabama. On May 18, 1998, the Company acquired 15.4 acres of land located in Jacksonville, Florida for a purchase price of $2.68 million. The Company has ten buildings under construction, which will contain approximately 887,000 net rentable square feet. Expenditures for construction of these ten buildings are expected to total approximately $75.6 million, excluding land and tenant improvement costs. FINANCING ACTIVITIES - The Company has a $100 million secured revolving credit facility ($66 million of which was outstanding on September 30, 1998) provided by First Union National Bank of Florida, Morgan Guaranty Trust Company of New York, AmSouth Bank, N.A. and Guaranty Federal Bank. At September 30, 1998, the Company had 74 buildings, containing 2,992,900 net rentable square feet, which were unencumbered. On March 27, 1998, the Company issued 1,000,000 shares of its common stock to Wheat First Securities, Inc. at a price per share of $20.246875. Loan maturities and normal amortization of mortgages and loans payable are expected to total approximately $69.1 million over the next 12 months. This assumes that the secured revolving credit facility will be repaid at its original maturity date of April 7, 1999. However, this credit facility may be extended annually by the lender for one year periods. Significant maturities of the Company's remaining mortgages and loans payable do not begin to occur until 2006. The Company has filed shelf registration statements with respect to the possible issuance of up to $300 million of its common and/or preferred stock. The Company has issued $91.6 million of its common stock under such registration statements. The foregoing discussion contains forward-looking statements concerning 1998. The actual results of operations for 1998 could differ materially from those projected because of factors affecting the financial markets, reactions of the Company's existing and prospective investors, the ability of the Company to identify and execute development projects and acquisition opportunities, the ability of the Company to renew and enter into new leases on favorable terms, and other risks factors. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Cautionary Statement Relevant to Forward-Looking Information for Purpose of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995" in the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. 12 14 ITEM 5. OTHER INFORMATION (a) The following table sets forth, with respect to the Company's centers or locations at September 30, 1998, gross square feet, net rentable square feet, percentage leased, and the average annual rent per net rentable square foot leased.
AVERAGE NET ANNUAL GROSS RENTABLE RENT PER SQUARE SQUARE PERCENT SQUARE KOGER CENTER/LOCATION FEET FEET LEASED (1) FOOT (2) - --------------------- ---------- ---------- ---------- --------- Atlanta Chamblee 1,146,100 938,100 95% $16.22 Atlanta Gwinnett (3) 171,200 139,400 82% 17.61 Atlanta Perimeter 181,100 154,100 100% 17.50 Austin 458,400 370,900 100% 19.11 Birmingham Colonnade 326,300 279,300 97% 15.81 Birmingham Colonnade-Retail 112,600 112,600 93% 11.43 Charlotte Carmel (4) 339,200 283,300 75% 17.89 Charlotte East 574,800 468,900 83% 13.79 El Paso 364,100 298,300 94% 15.50 Greensboro South 749,200 610,700 95% 14.90 Greenville Park Central 161,700 134,000 91% 16.97 Greenville Roper Mt. (5) 431,000 350,900 88% 16.62 Jacksonville Baymeadows 793,400 664,200 98% 15.15 Jacksonville Central 828,200 666,000 84% 13.07 Jacksonville JTB 29,600 23,000 100% 16.48 Memphis Germantown 366,400 299,100 99% 18.18 Orlando Central 699,700 554,400 91% 15.20 Orlando University 194,600 159,600 98% 18.10 Richmond Paragon 154,300 127,700 86% 19.07 San Antonio Airport 258,800 200,100 95% 17.28 San Antonio West 960,700 788,900 86% 14.14 St. Petersburg 625,700 509,000 96% 14.37 Tallahassee 960,300 789,600 89% 17.70 Tulsa 581,100 476,400 85% 11.98 ---------- --------- TOTAL 11,468,500 9,398,500 91% $15.63 ========== ========= === ======
(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 or location as of September 30, 1998 by (b) the net rentable square feet applicable to such total annualized rents. (3) Includes a building, containing 59,600 net rentable square feet, for which construction has been completed. This building is currently in the lease-up period. (4) Includes a building, containing 112,500 net rentable square feet, for which construction has been completed. This building is currently in the lease-up period. (5) Includes a building, containing 60,400 net rentable square feet, for which construction has been completed. This building is currently in the lease-up period. 13 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 calendar year 1998 and calendar years 1999 through 2006, (ii) the total net rentable area in square feet covered by such leases, (iii) the percentage of total net rentable square feet represented by such leases, (iv) the average annual rent per square foot for such leases, (v) the current annual rental represented by such leases, and (vi) the percentage of gross annual rental contributed by such leases. This information is based on the buildings owned by the Company on September 30, 1998 and on the terms of leases in effect as of September 30, 1998, 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 61 percent of the Company's net rentable square feet, which were scheduled to expire during the nine month period ended September 30, 1998.
PERCENTAGE OF AVERAGE PERCENTAGE TOTAL SQUARE ANNUAL RENT TOTAL OF TOTAL NUMBER OF NUMBER OF FEET LEASED PER SQUARE ANNUALIZED ANNUAL RENTS LEASES SQUARE FEET REPRESENTED BY FOOT UNDER RENTS UNDER REPRESENTED BY PERIOD EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES EXPIRING LEASES EXPIRING LEASES ------ --------- ----------- --------------- --------------- --------------- --------------- 1998 326 684,684 8.0% $14.77 $ 10,109,861 7.6% 1999 930 1,562,914 18.3% 15.10 23,600,876 17.7% 2000 495 1,427,102 16.7% 15.95 22,767,344 17.0% 2001 429 1,649,414 19.3% 15.88 26,196,389 19.6% 2002 146 801,917 9.4% 15.95 12,788,278 9.6% 2003 165 1,082,749 12.6% 16.10 17,430,220 13.0% 2004 85 444,719 5.2% 11.78 5,239,424 3.9% 2005 17 108,385 1.3% 16.49 1,787,555 1.3% 2006 11 220,035 2.6% 18.68 4,110,259 3.1% OTHER 21 569,720 6.6% 16.93 9,644,317 7.2% ----- --------- ----- ------ ------------ ----- TOTAL 2,625 8,551,639 100.0% $15.63 $133,674,523 100.0% ===== ========= ===== ====== ============ =====
14 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 NINE MONTH PERIOD ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ----------------------- ---------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Net Income $ 7,738 $ 6,949 $ 22,363 $ 17,650 Depreciation - real estate 5,983 5,571 18,243 15,703 Amortization - deferred tenant costs 389 252 1,084 739 Amortization - goodwill 43 43 128 128 Gain on sale or disposition of assets (3) (2,057) (6) (2,057) Adjustment to gain on TKPL note to Southeast 9 Recovery of loss on land held for sale (379) Loss on early retirement of debt 102 144 -------- -------- -------- -------- Funds from Operations $ 14,150 $ 10,860 $ 41,812 $ 31,937 ======== ======== ======== ========
(d) For information concerning how a shareholder may properly bring business before a meeting of shareholders of the Company and nominate persons for election as directors to the Company's Board, reference is made to paragraph (d) of Item 5. (Other Information) of the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 1998. 15 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 September 30, 1998. 16 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 (DAVID B. HILEY) ---------------------------- DAVID B. HILEY EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Dated: November 11, 1998 (JAMES L. STEPHENS) ------------------------ JAMES L. STEPHENS VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER 17 EX-11 2 EARNINGS PER SHARE COMPUTATION 1 EXHIBIT 11 EARNINGS PER SHARE COMPUTATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTH PERIOD NINE MONTH PERIOD ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------ ---------------------- 1998 1997 1998 1997 ---------- --------- --------- -------- EARNINGS PER COMMON AND DILUTIVE POTENTIAL COMMON SHARES: Net Income $ 7,738 $ 6,949 $ 22,363 $ 17,650 ========== ========= ========= ======== Shares: Weighted average number of common shares outstanding 26,566 21,259 26,199 21,018 Weighted average number of additional shares issuable for dilutive potential shares (a) 548 1,082 670 1,233 ---------- --------- ---------- -------- Adjusted common shares 27,114 22,341 26,869 22,251 ========== ========= ========== ======== EARNINGS PER SHARE - DILUTED $ 0.29 $ 0.31 $ 0.83 $ 0.79 ========== ========= ========== ========
(a) Shares issuable were derived using the "Treasury Stock Method" for all dilutive potential shares. EX-15 3 LETTER RE: UNAUDITED INTERIM FINANCIAL INFO 1 EXHIBIT 15 November 11, 1998 Koger Equity, Inc. 8880 Freedom Crossing Trail Jacksonville, Florida 32256 We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Koger Equity, Inc. and subsidiaries for the periods ended September 30, 1998 and 1997, as indicated in our report dated October 29, 1998; 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 September 30, 1998, is incorporated by reference in Registration Statement No. 33-55179 of Koger Equity, Inc. on Form S-3, Registration Statement No. 33-54617 of Koger Equity, Inc. on Form S-8, Registration Statement No. 333-20975 of Koger Equity, Inc. on Form S-3, Registration Statement No. 333-23429 of Koger Equity, Inc. on Form S-8 and Registration Statement No. 333-37919 of Koger Equity, Inc. on Form S-3. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP Jacksonville, Florida EX-27 4 FINANCIAL DATA SCHEDULE
5 THE COMPANY DOES NOT FILE A CLASSIFIED BALANCE SHEET, THEREFORE THESE NOT PROVIDED. 5-02(9), 5-02(21) 1,000 US DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 3,249 0 6,399 288 0 0 858,218 122,515 761,165 0 260,244 0 0 286 465,359 761,165 0 100,387 0 40,075 25,573 94 11,518 23,133 770 22,363 0 0 0 22,363 0.85 0.83
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