-----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, VeXJru9MEW3ELbQ6Yegdse6XgRAkft4zsifocRmK+jQkbGye+mrRvk4XoZD6FFIU TZVYtVTIw4f80P9b6zXUGA== 0000950144-99-012862.txt : 19991115 0000950144-99-012862.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950144-99-012862 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99748309 BUSINESS ADDRESS: STREET 1: 8880 FREEDOM CROSSING TRAIL CITY: JACKSONVILLE STATE: FL ZIP: 32256 BUSINESS PHONE: 9047321000 MAIL ADDRESS: STREET 1: 8880 FREEDOM CROSSING TRAIL CITY: JACKSONVILLE STATE: FL ZIP: 32256 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, 1999 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 31, 1999 Common Stock, $.01 par value 26,758,408 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, 1999 and December 31, 1998................................................. 3 Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 1999 and 1998.............................................................. 4 Condensed Consolidated Statement of Changes in Shareholders' Equity for the Nine Month Period Ended September 30, 1999................................................................. 5 Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 1999 and 1998............................. 6 Notes to Condensed Consolidated Financial Statements for the Three and Nine Month Periods Ended September 30, 1999 and 1998........................................................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................. 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................................................... 13 Item 5. Other Information.......................................................................... 14 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, 1999, and the related condensed consolidated statements of operations for the three and nine month periods ended September 30, 1999 and 1998, the condensed consolidated statement of changes in shareholders' equity for the nine month period ended September 30, 1999 and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 1999 and 1998. 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, 1998, 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 12, 1999, 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, 1998 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Jacksonville, Florida November 1, 1999 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, 1999 1998 ------------- ------------ ASSETS Real Estate Investments: Operating properties: Land $ 129,079 $ 137,047 Buildings 706,867 731,558 Furniture and equipment 2,886 3,578 Accumulated depreciation (129,569) (129,682) --------- --------- Operating properties - net 709,263 742,501 Properties under construction: Land 10,692 11,318 Buildings 42,516 31,562 Undeveloped land held for investment 16,034 19,272 Undeveloped land held for sale 1,103 1,263 Cash and temporary investments 34,511 4,827 Accounts receivable, net of allowance for uncollectible accounts of $390 and $436 9,238 6,158 Investment in Koger Realty Services, Inc. 2,213 1,661 Cost in excess of fair value of net assets acquired, net of accumulated amortization of $983 and $855 1,573 1,700 Other assets 13,476 14,733 --------- --------- TOTAL ASSETS $ 840,619 $ 834,995 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgages and loans payable $ 305,992 $ 307,903 Accounts payable 8,595 12,139 Accrued real estate taxes payable 9,850 4,407 Accrued liabilities - other 9,397 9,288 Dividends payable 9,360 7,971 Advance rents and security deposits 5,892 5,432 --------- --------- Total Liabilities 349,086 347,140 --------- --------- Minority interest 24,018 23,092 --------- --------- Commitments and Contingencies Shareholders' Equity: Common stock 287 286 Capital in excess of par value 457,236 454,988 Retained earnings 30,948 30,020 Treasury stock, at cost (20,956) (20,531) --------- --------- Total Shareholders' Equity 467,515 464,763 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 840,619 $ 834,995 ========= =========
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, ---------------------- ---------------------- 1999 1998 1999 1998 -------- ------- -------- -------- REVENUES Rental and other rental services $ 39,157 $34,476 $116,340 $ 97,195 Management fees 641 547 1,735 1,738 Interest 189 85 284 392 Income from Koger Realty Services, Inc. 471 207 917 1,062 -------- ------- -------- -------- Total revenues 40,458 35,315 119,276 100,387 -------- ------- -------- -------- EXPENSES Property operations 16,272 14,370 46,240 39,197 Depreciation and amortization 8,445 6,766 23,734 20,416 Mortgage and loan interest 5,301 4,251 16,313 11,518 General and administrative 2,192 1,620 6,246 4,877 Direct cost of management fees 374 326 1,037 972 Other 54 87 167 280 -------- ------- -------- -------- Total expenses 32,638 27,420 93,737 77,260 -------- ------- -------- -------- INCOME BEFORE GAIN ON SALE OR DISPOSITION OF ASSETS, INCOME TAXES AND MINORITY INTEREST 7,820 7,895 25,539 23,127 Gain on sale or disposition of assets 3,861 3 3,865 6 -------- ------- -------- -------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 11,681 7,898 29,404 23,133 Income taxes (107) 160 66 770 -------- ------- -------- -------- INCOME BEFORE MINORITY INTEREST 11,788 7,738 29,338 22,363 Minority interest 250 -- 926 -- -------- ------- -------- -------- NET INCOME $ 11,538 $ 7,738 $ 28,412 $ 22,363 ======== ======= ======== ======== EARNINGS PER SHARE: Basic $ 0.43 $ 0.29 $ 1.07 $ 0.85 ======== ======= ======== ======== Diluted $ 0.43 $ 0.29 $ 1.05 $ 0.83 ======== ======= ======== ======== WEIGHTED AVERAGE SHARES: Basic 26,725 26,566 26,664 26,199 ======== ======= ======== ======== Diluted 27,101 27,114 27,003 26,869 ======== ======= ======== ========
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, 1998 28,560 $286 $454,988 $ 30,020 1,989 $(20,531) $464,763 Common stock sold 154 (21) 176 330 Treasury stock reissued 123 (20) 162 285 Treasury stock purchased 54 (852) (852) 401(k) Plan contribution 139 (16) 129 268 Restricted stock issued 22 Options exercised 150 1 1,832 3 (40) 1,793 Dividends declared (26,690) (26,690) Distributions to limited partners (794) (794) Net income 28,412 28,412 ------ ---- -------- --------- ----- -------- -------- Balance, September 30, 1999 28,732 $287 $457,236 $ 30,948 1,989 $(20,956) $467,515 ====== ==== ======== ========= ===== ======== ========
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, ------------------------- 1999 1998 --------- --------- OPERATING ACTIVITIES Net income $ 28,412 $ 22,363 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,734 20,416 Income from Koger Realty Services, Inc. (917) (1,062) Provision for uncollectible accounts 230 94 Minority interest 926 -- Gain on sale or disposition of assets (3,865) (6) Increase in accounts payable, accrued liabilities and other liabilities 3,201 3,895 Increase in receivables and other assets (1,912) (1,764) --------- --------- Net cash provided by operating activities 49,809 43,936 --------- --------- INVESTING ACTIVITIES Property acquisitions -- (73,845) Building construction expenditures (42,671) (38,404) Tenant improvements to first generation space (4,622) (2,829) Tenant improvements to existing properties (9,382) (7,433) Building improvements (2,582) (3,015) Energy management improvements (20) (194) Deferred tenant costs (1,958) (1,450) Additions to furniture and equipment (612) (1,096) Proceeds from sale of assets 68,775 6 Dividends received from Koger Realty Services, Inc. 365 431 --------- --------- Net cash provided by (used in) investing activities 7,293 (127,829) --------- --------- FINANCING ACTIVITIES Proceeds from sales of common stock 330 20,427 Proceeds from exercise of stock options 1,613 1,104 Proceeds from mortgage and loans 118,292 101,917 Dividends paid (25,301) (20,937) Distributions paid to limited partners (794) -- Principal payments on mortgages and loans (120,203) (31,900) Treasury stock purchased (852) (302) Financing costs (503) (122) --------- --------- Net cash provided by (used in) financing activities (27,418) 70,187 --------- --------- Net increase (decrease) in cash and cash equivalents 29,684 (13,706) Cash and cash equivalents - beginning of period 4,827 16,955 --------- --------- Cash and cash equivalents - end of period $ 34,511 $ 3,249 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for interest, net of amount capitalized $ 16,174 $ 10,162 ========= ========= Cash paid during the period for income taxes $ 105 $ 1,047 ========= =========
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, 1999 AND 1998 (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 - Vanguard Partners, L.P. (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, 1998, included in the Company's Form 10-K Annual Report for the year ended December 31, 1998. The balance sheet at December 31, 1998, has been derived from the audited financial statements at that date and is condensed. All adjustments of a normal recurring nature, which, in the opinion of management, are necessary to present a fair statement of the results for the interim periods, have been made. Results of operations for the nine month period ended September 30, 1999, are not necessarily indicative of the results to be expected for the full year. Certain 1998 amounts have been reclassified to conform with 1999 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. Koger - Vanguard Partners, L.P. ("KVP") is a Delaware limited partnership, for which KE is the general partner. 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 16 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 1998 and does not expect to have REIT taxable income during 1999, no provision has been made for Federal income taxes. However, the Company has recorded a provision of $60,000 for alternative minimum tax for the nine month period ended September 30, 1999. 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, 1999, the Company contributed 15,603 shares of common stock to the Company's 401(k) Plan. These shares had a value of approximately $268,000 based on the closing price of the Company's common stock on the American Stock Exchange on December 31, 1998. In addition, the Company issued 19,695 shares of common stock as payment for certain 1998 bonuses for senior management. These shares had a value of approximately $285,000 based on the closing price of the Company's common stock on the American Stock Exchange on February 18, 1999. 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 7 9 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. 5. EARNINGS PER COMMON SHARE. Basic earnings per common share has been computed based on the weighted average number of shares of common stock outstanding for each period. Diluted earnings per common share is similar to basic earnings per share except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares (options) had been issued. The treasury stock method is used to calculate dilutive shares which reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the options assumed to be exercised. 6. MORTGAGES AND LOANS PAYABLE. At September 30, 1999, the Company had $305,992,000 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, 1999 $ 1,276 2000 4,274 2001 52,133 2002 12,722 2003 5,238 Subsequent Years 230,349 ---------- Total $ 305,992 ==========
7. DIVIDENDS. The Company paid the following dividends during the nine months ended September 30, 1999:
PAYMENT DATE RECORD DATE DIVIDEND PER SHARE ---------------- ----------------- ------------------ February 4, 1999 December 31, 1998 $0.30 May 6, 1999 March 31, 1999 0.30 August 5, 1999 June 30, 1999 0.35
During the quarter ended September 30, 1999, the Company's Board of Directors declared a quarterly dividend of $ 0.35 per share payable on November 4, 1999, to shareholders of record at the close of business on September 30, 1999. The Company currently expects that all dividends paid during 1999 will be treated as ordinary income to the recipient for income tax purposes. 8. SUBSEQUENT EVENT. On November 1, 1999, the Company acquired (i) two buildings, containing approximately 301,600 square feet, located in Orlando, Florida for a purchase price of $41 million and (ii) two buildings, containing approximately 189,600 square feet, located in Charlotte, North Carolina for a purchase price of $23.1 million. These properties were acquired from Crescent Resources, Inc. 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, 1998. 8 10 RESULTS OF OPERATIONS. Rental and other rental services revenues totaled $39,157,000 for the quarter ended September 30, 1999, compared to $34,476,000 for the quarter ended September 30, 1998. This increase in rental revenues resulted primarily from (i) increases in the Company's average rental rate and (ii) increases in rental revenues ($4,182,000) from the properties acquired and construction completed during 1998 and 1999. These items were partially offset by the sale of the Jacksonville Central Center and the Charlotte East Center on August 31, 1999. At September 30, 1999, the Company's buildings were on average 92 percent leased with an average rental rate of $16.81. Rental and other rental services revenues increased to $116,340,000 during the nine month period ended September 30, 1999, compared to $97,195,000 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 ($14,809,000) from the properties acquired and construction completed during 1998 and 1999. These items were partially offset by the sale of the Jacksonville Central Center and the Charlotte East Center on August 31, 1999. Management fee revenues totaled $641,000 for the quarter ended September 30, 1999, compared to $547,000 for the quarter ended September 30, 1998. This increase was due primarily to an increase in construction management fees earned. Compared to the prior year, management fee revenues remained basically unchanged for the nine months ended September 30, 1999. During March 1999, Centoff sold one of the centers for which the Company had provided property management services. The Company earned management fee revenues totaling $194,000 for the management and leasing of this property during 1999. Another agreement to manage one commercial office building was terminated by the Company during February 1999. The Company earned fees of $82,000 for the management of this building during 1999. Income from Koger Realty Services, Inc. totaled $471,000 for the quarter ended September 30, 1999, compared to $207,000 for the quarter ended September 30, 1998. This increase was due primarily to (i) the decreased accrual for compensation expense related to a bonus plan which is based on KE's common stock price and (ii) a decrease in general and administrative expenses. For the nine months ended September 30, 1999, income from Koger Realty Services, Inc. declined $145,000, compared to the same period last year, primarily due to the increased accrual for compensation expense related to a bonus plan. Property operations expense includes such charges as utilities, real estate taxes, janitorial, maintenance, property insurance, provision for uncollectible rents and management costs. The amount 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, 1999 - Quarter $16,272,000 41.6% September 30, 1998 - Quarter 14,370,000 41.7% September 30, 1999 - Nine Months 46,240,000 39.7% September 30, 1998 - Nine Months 39,197,000 40.3%
Property operations expense increased primarily due to (i) increased accruals for real estate taxes and (ii) increases in property operations expense ($1,874,000 and $6,161,000, respectively, for the three and nine month periods ended September 30, 1999) for the properties acquired and construction completed during 1999 and 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 $1,217,000 and $2,777,000, respectively, for the three and nine month periods ended September 30, 1999, compared to the same periods last year, due to the properties acquired and construction completed during 1998 and 1999. Amortization expense increased $462,000 and $541,000, respectively, for the three and nine month periods ended September 30, 1999, compared to the same periods last year, due 9 11 primarily to (i) deferred tenant costs incurred after September 30, 1998 and (ii) amortization of the balance of deferred tenant costs related to properties which were sold during the third quarter. Interest expense increased by $1,050,000 and $4,795,000, respectively, during the three and nine month periods ended September 30, 1999, compared to the same periods last year, primarily due to the increase in the outstanding balance of mortgages and loans payable. At September 30, 1999, the weighted average interest rate on the Company's outstanding debt was approximately 7.9 percent. General and administrative expenses for the three month periods ended September 30, 1999 and 1998, totaled $2,192,000 and $1,620,000, respectively, which is 0.9 percent and 0.8 percent (annualized) of average invested assets. General and administrative expenses for the nine month periods ended September 30, 1999 and 1998, totaled $6,246,000 and $4,877,000, respectively, which is 0.9 percent and 0.8 percent (annualized) of average invested assets. These increases were primarily due to increases in (i) legal fees, (ii) compensation expense and certain employee benefit accruals and (iii) franchise taxes. Direct costs of management contracts increased $48,000 and $65,000, respectively, for the three and nine month periods ended September 30, 1999, compared to the same periods last year, due to increased costs associated with providing property management services for the Centoff management contract. During the nine months ended September 30, 1999, the Company incurred costs totaling $138,000 for the management and leasing of the property which was sold by Centoff. Net income totaled $11,538,000 for the quarter ended September 30, 1999, compared to net income of $7,738,000 for the corresponding period of 1998. This improvement is due primarily to the increases in (i) rental revenues and (ii) gain on sale or disposition of assets and the reduction in income tax expense. These items were partially offset by increases in (i) property operations expense, (ii) depreciation and amortization expense, (iii) interest expense and (iv) general and administrative expense. Net income increased $6,049,000 during the nine month period ended September 30, 1999, 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, 1999, the Company generated approximately $49.8 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. 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 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 1999. 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, 1999, leases representing approximately 5.2 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 1999. This represents 234 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, 1999, leases were renewed on approximately 63 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, 1999, the average rental rate increased from $15.26 to $17.62. Based upon the number of leases which will expire during 1999 and 2000 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 improvement 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 20.6 percent of the Company's leased space at September 30, 1999, 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. As of July 1999, all of the Company's significant accounting applications have been upgraded to either Windows-based software or versions of DOS-based software, which are Year 2000 compliant. The Company has also completed the 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 has completed its inventory of all building operating systems and continues to test these systems to confirm the Company's assessment of these devices. 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 these 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 those plans. Due to the general uncertainty inherent in the Year 2000 Compliance issue, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and tenants, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Company is exposed to the potential risk that its vendors and service providers may not be Year 2000 compliant. However, this risk is reduced by the availability of multiple vendors in the 15 cities in which the Company owns properties. Failures by utility vendors to provide regulated services would have the greatest impact on the Company's normal business operations. For this reason, the Company has requested information from each of its utility vendors concerning their Year 2000 readiness. Currently, the Company has received responses from substantially all of its utility vendors. All respondents have acknowledged that they are currently working on the problem and many have outlined their respective plans of implementation. The Company is exposed to the risk that its tenants could be impacted by the Year 2000 Compliance issue such that they would be unable to pay their rent on time. However, the Company has a diverse tenant base and its success is not closely tied to the success of any particular tenant. Also, the Company's leases with its tenants protect the Company in the event of tenant default and requires the payment of delinquent fees on late rental payments. The Company does not expect any adverse effects caused by its accounting and property management systems that would affect the Company's ability to meet its financial and reporting requirements. 11 13 The Company has developed contingency plans for dealing with timing devices in building operating systems, which are not Year 2000 compliant, in case these devices are not replaced by the end of 1999. Testing of these contingency plans has been completed and these plans will be implemented, as required, during the remainder of the year. The Company has sufficient internal resources and personnel to implement any required contingency plans related to its building operating systems. INVESTING ACTIVITIES - At September 30, 1999, 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, 1999, the Company's expenditures for improvements to existing properties increased by $1,342,000 over the corresponding period of the prior year primarily due to increases in expenditures for tenant improvements to the Company's buildings. On August 31, 1999, the Company sold the Jacksonville Central Center (containing 666,000 net rentable square feet and 1.4 acres of undeveloped land) and the Charlotte East Center (containing 468,900 net rentable square feet and 3.9 acres of undeveloped land) for approximately $68,770,000, net of selling costs. These properties were sold to Lennar Partners, Inc. of Miami, Florida. The Company has seven buildings under construction, which will contain approximately 638,000 net rentable square feet. Expenditures for construction of these seven buildings are expected to total approximately $59.3 million, excluding land and tenant improvement costs. FINANCING ACTIVITIES - The Company has a $150 million secured revolving credit facility ($47.5 million of which was outstanding on September 30, 1999) provided by First Union National Bank of Florida, AmSouth Bank, N.A., Citizens Bank of Rhode Island, Compass Bank and Guaranty Federal Bank. At September 30, 1999, the Company had 26 buildings, containing 1,388,900 net rentable square feet, which were unencumbered. During September 1999, the Company closed on a $45 million non-recourse loan with Northwestern Mutual Life Insurance Company, which is secured by nine office buildings. This loan is divided into (i) a tranche in the amount of $14.7 million which matures on January 2, 2007 and (ii) a tranche in the amount of $30.3 million which matures on January 2, 2009. This loan has an interest rate of 7.1 percent. Amortization with respect to this indebtedness is based on equal monthly installments over a 25-year amortization period. This indebtedness requires the Company to maintain certain financial ratios. Loan maturities and normal amortization of mortgages and loans payable are expected to total approximately $4.5 million over the next 12 months. Significant maturities of the Company's remaining mortgages and loans payable do not begin to occur until 2001. 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 1999. The actual results of operations for 1999 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 Habor' 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, 1998. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK. The Company currently has a $150 million secured revolving credit facility with variable interest rates. The Company may incur additional variable rate debt in the future to meet its financing needs. Increases in interest rates on 12 14 such debt could increase the Company's interest expense, which would adversely affect the Company's cash flow and its ability to pay distributions to its shareholders. The Company has not entered into any interest rate hedge contracts in order to mitigate the interest rate risk with respect to the secured revolving credit facility. As of September 30, 1999, the Company had $47.5 million outstanding under the secured revolving credit facility. If the weighted average interest rate on this variable rate debt is 100 basis points higher or lower, annual interest expense would be increased or decreased by approximately $475,000. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. 13 15 ITEM 5. OTHER INFORMATION (a) The following table sets forth, with respect to the Company's centers or locations at September 30, 1999, gross square feet, net rentable square feet, percentage leased, and the average annual rent per net rentable square foot leased.
AVERAGE ANNUAL NET RENT PER GROSS RENTABLE PERCENT SQUARE KOGER CENTER/LOCATION SQUARE FEET SQUARE FEET LEASED (1) FOOT (2) - ---------------------- ---------- ----------- ---------- -------- Atlanta Chamblee 1,109,600 907,900 99% $18.00 Atlanta Gwinnett (3) 171,200 139,400 92% 19.42 Atlanta Perimeter 184,000 151,600 97% 21.70 Austin 458,400 370,900 99% 20.93 Birmingham Colonnade 326,300 279,300 98% 15.94 Birmingham Colonnade-Retail 112,600 112,600 92% 11.67 Charlotte Carmel 339,200 283,300 90% 18.96 Charlotte Vanguard 548,200 481,700 89% 11.86 El Paso (3) 385,900 317,100 87% 16.13 Greensboro South 749,200 610,700 80% 16.22 Greensboro Wendover (3) 98,300 80,300 49% 19.09 Greenville Park Central 161,700 136,000 93% 18.02 Greenville Roper Mt. 431,000 350,900 96% 17.16 Jacksonville Baymeadows 793,400 664,200 98% 14.40 Jacksonville JTB (3) 139,600 113,400 91% 18.79 Memphis Germantown (3) 478,900 392,700 92% 19.19 Orlando Central 699,700 554,400 94% 15.95 Orlando University 270,400 222,300 93% 19.87 Richmond Paragon 154,300 127,700 91% 19.64 San Antonio Airport 258,800 200,100 89% 18.68 San Antonio West (3) 1,102,200 906,800 86% 15.94 St. Petersburg 625,700 509,000 95% 15.74 Tallahassee 960,300 789,600 96% 18.31 Tulsa 581,100 476,400 87% 13.24 ---------- --------- Total 11,140,000 9,178,300 ========== ========= Weighted Average - Total Company 92% $16.81 === ====== Weighted Average - Operational Buildings 93% $16.67 === ====== Weighted Average - Buildings in Lease-up 73% $20.11 === ======
(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 base rents (which excludes expense pass-throughs and reimbursements) for a Koger Center or location as of September 30, 1999 by (b) the net rentable square feet applicable to such total annualized rents. (3) Includes a building which is currently in the lease-up period. 14 16 (b) The following schedule sets forth for all of the Company's buildings (i) the number of leases which will expire during the remainder of calendar year 1999 and calendar years 2000 through 2007, (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 annualized rents represented by such leases, and (vi) the percentage of gross annualized rents contributed by such leases. This information is based on the buildings owned by the Company on September 30, 1999 and on the terms of leases in effect as of September 30, 1999, on the basis of then existing base rentals, and without regard to the exercise of options to renew. Furthermore, the information below does not reflect that some leases have provisions for early termination for various reasons, including, in the case of government entities, lack of budget appropriations. Leases were renewed on approximately 63 percent of the Company's net rentable square feet which were scheduled to expire during the nine month period ended September 30, 1999.
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 ------ -------- ----------- --------------- --------------- --------------- --------------- 1999 234 453,927 5.4% $16.14 $ 7,324,690 5.2% 2000 731 1,490,314 17.7% 16.81 25,046,272 17.7% 2001 480 1,750,461 20.8% 16.40 28,707,155 20.3% 2002 329 1,105,455 13.1% 17.20 19,011,922 13.4% 2003 200 1,252,310 14.9% 16.80 21,035,177 14.9% 2004 207 1,151,768 13.7% 15.97 18,398,435 13.0% 2005 20 183,400 2.2% 18.73 3,435,990 2.4% 2006 12 228,583 2.7% 19.64 4,488,850 3.2% 2007 8 277,968 3.3% 15.04 4,181,286 3.0% Other 23 521,348 6.2% 18.79 9,793,710 6.9% ----- --------- ----- ------ ------------ ----- Total 2,244 8,415,534 100.0% $16.81 $141,423,487 100.0% ===== ========= ===== ====== ============ =====
(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, ------------------------- ----------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Net Income $11,538 $ 7,738 $28,412 $22,363 Depreciation - real estate 7,204 5,983 21,007 18,243 Amortization - deferred tenant costs 874 389 1,702 1,084 Amortization - goodwill 42 43 127 128 Minority interest 250 -- 926 -- Gain on sale or disposition of assets (3,861) (3) (3,865) (6) ------- ------- ------- ------- Funds from Operations $16,047 $14,150 $48,309 $41,812 ======= ======= ======= =======
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. (for SEC use only).
(b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended September 30, 1999. 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 9, 1999 (JAMES L. STEPHENS) ---------------------------- JAMES L. STEPHENS VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER 17 EX-11 2 EARNINGS PER SHARE COMPUTATIONS 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, ---------------------- ---------------------- 1999 1998 1999 1998 -------- -------- --------- -------- EARNINGS PER COMMON AND DILUTIVE POTENTIAL SHARE: Net Income $ 11,538 $ 7,738 $ 28,412 $ 22,363 ======== ======== ========= ======== Shares: Weighted average number of common shares outstanding - Basic 26,725 26,566 26,664 26,199 Effect of dilutive securities (a): Stock options 376 548 339 670 -------- -------- --------- -------- Adjusted common shares - Diluted 27,101 27,114 27,003 26,869 ======== ======== ========= ======== EARNINGS PER SHARE - DILUTED $ 0.43 $ 0.29 $ 1.05 $ 0.83 ======== ======== ========= ========
(a) Shares issuable were derived using the "Treasury Stock Method" for all dilutive potential shares. EX-15 3 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION 1 EXHIBIT 15 November 10, 1999 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, 1999 and 1998, as indicated in our report dated November 1, 1999, 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, 1999, 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 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 34,511 0 9,628 390 0 0 909,177 129,569 840,619 0 305,992 0 0 287 467,228 840,619 0 119,276 0 47,047 30,147 230 16,313 29,404 66 28,412 0 0 0 28,412 1.07 1.05
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