UNITED STATES
SECURITIES and EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 1-9997
KOGER EQUITY, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2898045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3986 BOULEVARD CENTER DRIVE, SUITE 101
JACKSONVILLE, FLORIDA 32207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 398-3403
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at August 1, 1996
Common Stock, $.01 par value 17,873,866 shares
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KOGER EQUITY, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Independent Accountants' Report........................ 2
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1996 and December 31, 1995................. 3
Condensed Consolidated Statements of Operations
for the Three and Six Month Periods Ended
June 30, 1996 and 1995.............................. 4
Condensed Consolidated Statement of Changes in
Shareholders' Equity for the Six Month Period
Ended June 30, 1996................................. 5
Condensed Consolidated Statements of Cash Flows
for the Six Month Periods Ended June 30, 1996
and 1995............................................ 6
Notes to Condensed Consolidated Financial
Statements for the Three and Six Month Periods
Ended June 30, 1996 and 1995........................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................... 14
Item 5. Other Information............................... 15
Item 6. Exhibits and Reports on Form 8-K................ 18
Signatures............................................... 19
1
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INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Koger Equity, Inc.
Jacksonville, Florida
We have reviewed the accompanying condensed consolidated balance sheet of Koger
Equity, Inc. and subsidiaries (the "Company") as of June 30, 1996, and the
related condensed consolidated statements of operations for the three and six
month periods ended June 30, 1996 and 1995, the condensed consolidated statement
of changes in shareholders' equity for the six month period ended June 30, 1996
and the condensed consolidated statements of cash flows for the six month
periods ended June 30, 1996 and 1995. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1995, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated March 4, 1996, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1995 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
August 2, 1996
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statement
KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - See Independent Accountants' Report)
(In thousands)
June 30, December 31,
1996 1995
--------------- ------------
ASSETS
Real Estate Investments:
Operating properties:
<S> <C> <C>
Land $ 98,727 $ 98,727
Buildings 476,074 471,145
Furniture and equipment 1,626 1,566
Accumulated depreciation (72,220) (62,885)
---------- ----------
Operating properties - net 504,207 508,553
Undeveloped land held for investment 21,150 21,150
Undeveloped land held for sale, at lower
of cost or market value 9,131 9,131
Cash and temporary investments 35,563 25,650
Accounts receivable, net of allowance for
uncollectible rents of $286 and $391 4,177 5,260
Cost in excess of fair value of net assets acquired from
KPI, net of accumulated amortization of $430 and $345 2,125 2,211
Other assets 8,700 7,427
----------- -----------
TOTAL ASSETS $585,053 $579,382
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgages and loans payable $253,053 $254,909
Accounts payable 1,768 2,641
Accrued interest 263 206
Accrued real estate taxes payable 4,404 2,222
Accrued liabilities - other 4,913 5,133
Advance rents and security deposits 3,709 3,574
----------- -----------
Total Liabilities 268,110 268,685
--------- ---------
Contingency (Note 3) - -
Shareholders' Equity
Common stock 205 205
Capital in excess of par value 319,240 318,609
Warrants 2,246 2,250
Retained earnings 18,440 13,210
Treasury stock, at cost (23,188) (23,577)
---------- ----------
Total Shareholders' Equity 316,943 310,697
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $585,053 $579,382
======== ========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
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KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - See Independent Accountants' Report)
(In thousands, except per share data)
Three Month Period Six Month Period
Ended June 30, Ended June 30,
1996 1995 1996 1995
---------- ------ -------- -----
REVENUES
<S> <C> <C> <C> <C>
Rental $24,160 $24,255 $48,145 $47,737
Other rental services 176 151 271 274
Management fees ($0, $875, $0, and $1,881 from TKPL) 1,971 1,406 3,693 2,754
Interest 429 294 802 659
Gain on early retirement of debt 19 147
Gain on TKPL Note to Southeast (76) (76)
-------- -------- -------- --------
Total revenues 26,660 26,125 52,835 51,571
-------- -------- -------- --------
EXPENSES
Property operations 10,345 9,840 20,264 19,549
Depreciation and amortization 5,095 4,406 10,150 8,882
Mortgage and loan interest 4,935 6,567 9,897 13,083
General and administrative 1,402 2,175 2,868 3,620
Direct cost of management fees 1,480 935 2,776 1,848
Undeveloped land costs 138 152 267 314
Litigation costs 298 553
Loss on sale or disposition of assets 423 1 423 3
-------- -------- -------- --------
Total expenses 24,116 24,076 47,198 47,299
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,544 2,049 5,637 4,272
Income taxes 330 23 407 42
--------- ---------- --------- -----------
NET INCOME $ 2,214 $ 2,026 $ 5,230 $ 4,230
======= ======= ======= ========
EARNINGS PER COMMON SHARE AND
COMMON EQUIVALENT SHARE:
Primary $ 0.12 $ 0.11 $ 0.28 $ 0.24
======== ========= ======== =========
Fully Diluted $ 0.12 $ 0.11 $ 0.28 $ 0.24
======== ========= ======== =========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Primary 18,682 17,841 18,629 17,794
======= ======= ======== ========
Fully Diluted 18,711 17,841 18,644 17,794
======= ======= ======= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited - See Independent Accountants' Report)
(In thousands)
Total
Common Stock Capital in Share-
Par Excess of Retained Treasury Stock holders'
Shares Value Par Value Warrants Earnings Shares Cost Equity
------ ------ ---------- -------- --------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 20,477 $205 $318,609 $2,250 $13,210 2,723 $(23,577) $310,697
Treasury Stock Reissued 130 (52) 425 555
Warrants Exercised 2 17 (4) 13
Stock Options Exercised 33 214 3 (36) 178
Stock Appreciation Rights
Exercised 23 270 270
Net Income 5,230 5,230
----------- ------------------------ --------------------- ---------- -------------- ------
Balance, June 30, 1996 20,535 $205 $319,240 $2,246 $18,440 2,674 $(23,188) $316,943
====== ==== ======== ======= ======= ===== ======== ========
See Notes to Condensed Consolidated Financial Statements.
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</TABLE>
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KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - See Independent Accountants' Report)
(In thousands)
Six Month Period
Ended June 30,
1996 1995
------------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,230 $ 4,230
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,150 8,882
Loss on sale or disposition of assets 423 3
Gain on early debt repayment (147)
Accrued interest added to principal 75 393
Amortization of mortgage discounts 88 88
Increase in accounts payable, accrued
liabilities and other liabilities 2,016 4,398
Decrease (increase) in receivables and other assets 271 (46)
Increase in receivable from TKPL (922)
-------- --------
Net cash provided by operating activities 18,253 16,879
-------- --------
INVESTING ACTIVITIES
Purchase of TKPL mortgage notes (10,689)
Tenant improvements to existing properties (2,821) (4,605)
Building improvements to existing properties (1,229) (1,494)
Energy management improvements (1,499) (113)
Deferred tenant costs (596) (644)
Additions to furniture and equipment (60) (192)
Proceeds from sale of assets 61
Cash acquired in purchase of assets from KPI 157
-------- --------
Net cash used in investing activities (6,205) (17,519)
-------- --------
FINANCING ACTIVITIES
Proceeds from sale of stock under Stock Investment Plan 90 106
Proceeds from exercise of warrants and stock options 191 1
Principal payments on mortgages and loans (2,019) (5,346)
Financing costs (397) (16)
-------- --------
Net cash used in financing activities (2,135) (5,255)
-------- --------
Net increase (decrease) in cash and cash equivalents 9,913 (5,895)
Cash and cash equivalents - beginning of period 25,650 23,315
-------- --------
Cash and cash equivalents - end of period $35,563 $17,420
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest $ 9,677 $12,004
======== =======
Cash paid during the period for income taxes $ 408 $ 39
======== =======
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
6
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KOGER EQUITY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 1996 AND 1995
(Unaudited - See Independent Accountants' Report)
1. BASIS OF PRESENTATION. The condensed consolidated financial statements
include the accounts of Koger Equity, Inc., its wholly-owned subsidiaries and
Koger Realty Services, Inc. (the "Company"). All significant intercompany
transactions have been eliminated. The financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission related to interim financial statements.
The financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1995,
included in the Company's Form 10-K Annual Report for the year ended December
31, 1995. The balance sheet at December 31, 1995, has been derived from the
audited financial statements at that date and is condensed.
All adjustments of a normal recurring nature which, in the opinion of
management, are necessary to present a fair statement of the results for the
interim periods have been made. Results of operations for the six month period
ended June 30, 1996, are not necessarily indicative of the results to be
expected for the full year.
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"). Adoption of SFAS 121 had no impact on the
financial statements for the six month period ended June 30, 1996. In October
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS
123") which will be effective for the Company beginning January 1, 1996. SFAS
123 requires expanded disclosures of stock-based compensation arrangements with
employees and encourages (but does not require) compensation cost to be measured
based on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply Accounting Principles Board Opinion No.
25 ("APB 25"), which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB 25 to
its stock based compensation awards to employees and will disclose the required
pro forma effect on net income and earnings per share.
2. ORGANIZATION. Koger Equity, Inc. ("KE"), a Florida corporation, was
incorporated in 1988 for the purpose of investing in the ownership of income
producing properties, primarily commercial office buildings. KE is totally
self-administered and self-managed.
In addition to managing its own properties, KE, through certain related
entities, provides property management services to third parties. In conjunction
with Koger Real Estate Services, Inc. ("KRES"), a Florida corporation and a
wholly-owned subsidiary of KE, KE manages 20 office buildings owned by Centoff
Realty Company, Inc. ("Centoff"), a subsidiary of Morgan Guaranty Trust Company
of New York. More significantly, Koger Realty Services, Inc., a Delaware
corporation and an entity in which KE has a significant economic interest
("KRSI"), manages 95 buildings owned by Koala Realty Holding Company, Inc.
("Koala"), an investment entity for which J.P. Morgan Investment Management,
Inc. acts as the investment manager. KRSI was
7
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incorporated during 1995 to, among other things, provide leasing and property
management services to owners of commercial office buildings. KE has purchased
all of the preferred stock of KRSI, which preferred stock represents at least 95
percent of the economic value of KRSI. Such preferred stock is non-voting but is
convertible into voting common stock. Accordingly, KE has consolidated KRSI in
the financial statements.
3. FEDERAL INCOME TAXES. The Company is operated in a manner so as to
qualify and has elected tax treatment as a real estate investment trust under
the Code (a "REIT"). As a REIT, the Company is required to distribute annually
at least 95 percent of its REIT taxable income to its shareholders. Since the
Company had no REIT taxable income during 1995 and does not expect to have REIT
taxable income during 1996, no provision has been made for Federal income taxes.
However, the Company has recorded a provision of $120,000 for alternative
minimum tax for the six month period ended June 30, 1996. To the extent that the
Company pays dividends equal to 100 percent of REIT taxable income, the earnings
of the Company are not taxed at the corporate level; however, under existing
loan covenants the Company may be prohibited from paying dividends in excess of
amounts necessary to maintain its status as a REIT. See Note 8, Dividends. KRSI
has recorded a provision of $227,500 for Federal income tax for the six month
period ended June 30, 1996.
The Internal Revenue Service has completed its examination of the Company's 1992
and 1993 Federal income tax returns and the Koger Properties, Inc. ("KPI") final
Federal income tax return. The Internal Revenue Service has submitted their
Report to the Company and has proposed disallowing certain deductions on KPI's
final Federal income tax return, the result of which if upheld, would reduce the
net operating loss carryforwards acquired from KPI from approximately $98
million to $30 million and require the payment of approximately $200,000 of
alternative minimum tax and interest. Management is in the process of reviewing
the Report. As no determination can be made as to the eventual outcome of this
uncertainty, the condensed consolidated financial statements have not been
adjusted to reflect the outcome of such uncertainty.
4. STATEMENTS OF CASH FLOWS. Cash in excess of daily requirements is
invested in short-term monetary securities. Such temporary cash investments have
an original maturity date of less than six months and are deemed to be cash
equivalents for purposes of the statements of cash flows. During the six month
period ended June 30, 1996, the Company contributed 43,804 shares of common
stock to the Company's 401(K) Plan. These shares had a value of approximately
$465,000 based on the closing price of the Company's common stock on the
American Stock Exchange on December 31, 1995. During the six month period ended
June 30, 1995, the Company contributed 122,441 shares of common stock to the
Company's 401(K) Plan. These shares had a value of approximately $888,000 based
on the closing price of the Company's stock on the American Stock Exchange on
December 30, 1994.
5. EARNINGS PER COMMON SHARE. Earnings per common share have been
computed based on the weighted average number of shares of common stock and
common stock equivalents outstanding during the applicable periods.
6. MORTGAGES AND LOANS PAYABLE. At June 30, 1996, the Company had
$253,053,000 of loans outstanding, which are collateralized by mortgages on
certain operating properties.
8
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Annual maturities for mortgages and loans payable, which are gross of $809,000
of discounts, are as follows (in thousands):
Year Ending December 31,
1996 $ 2,064
1997 12,937
1998 19,430
1999 5,751
2000 87,181
Subsequent Years 126,499
---------
Total $253,862
In addition to reporting and other requirements, the Company's debt agreements
contain provisions limiting the amount of annual dividends, limiting additional
borrowings, and limiting general and administrative expenses. The Company is
also required to maintain certain financial ratios.
7. LEGAL PROCEEDINGS. Pursuant to the merger of KPI with and into the
Company during 1993, the Company agreed to indemnify the former non-officer
directors of KPI (the "Indemnified Persons") in respect of amounts to which such
Indemnified Persons would be otherwise entitled to indemnification under Florida
law, the articles of incorporation or the by-laws of KPI arising out of acts or
omissions prior to September 25, 1991. Certain of the former non-officers
directors of KPI are defendants in a Pension Plan class action suit (the "Roby
Case"). The Company has signed an agreement to settle the Roby Case and has
recorded an expense of $100,000 during the quarter ended June 30, 1996 for its
contribution to such settlement for the Indemnified Persons.
8. DIVIDENDS. The terms of the secured debt of the Company provide that
the Company will be subject to certain dividend limitations which, however, will
not restrict the Company from paying the dividends required during 1996 to
maintain its qualification as a REIT. In the event that the Company no longer
qualifies as a REIT, additional dividend limitations would be imposed by the
terms of such debt. In addition, two of the Company's bank lenders have required
that until the Company has raised an aggregate of $50 million of equity the
following limitations on dividends will be applied: (a) in 1996 and 1997, $11
million unless imposition of the limit would cause loss of REIT status and (b)
in 1998 and 1999, $11 million regardless of impact on REIT status.
9. STOCK OPTIONS AND RIGHTS. Pursuant to the Company's Amended and
Restated 1988 Stock Option Plan, the Compensation Committee of the Company's
Board of Directors (the "Compensation Committee") granted options to purchase
47,864 shares on May 6, 1996 to certain key employees at an exercise price of
$11.50 per share, which was the closing market price on the American Stock
Exchange on the date of grant. These options expire seven years from the date of
grant with 26,608 shares fully exercisable six months from the date of the grant
and 21,256 shares exercisable beginning one year from the date of the grant at
the rate of 20 percent per annum of the shares covered by each option on a
cumulative basis being fully exercisable five years after the date of grant.
9
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Pursuant to the Company's 1993 Stock Option Plan, the Compensation Committee
granted options to purchase 143,170 shares on May 6, 1996 to certain key
employees at an exercise price of $11.50 per share, which was the closing market
price on the American Stock Exchange on the date of grant. These options expire
ten years from the date of grant with 110,876 shares fully exercisable six
months from date of grant and 32,294 shares exercisable beginning one year from
the date of the grant at the rate of 20 percent per annum of the shares covered
by each option on a cumulative basis being fully exercisable five years after
the date of grant.
During the quarter ended June 30, 1996, the stock option agreements between the
Company and all employees who had been granted stock options, under the Amended
and Restated 1988 Stock Option Plan and the 1993 Stock Option Plan, were amended
to eliminate the stock appreciation rights which had been granted in conjunction
with the stock options.
10. SUBSEQUENT EVENT. On July 29, 1996, the Company signed a loan
application with Northwestern Mutual Life Insurance Company ("Northwestern") for
a $190,000,000 non-recourse loan which will be secured by 10 office parks. This
loan will be divided into (i) a tranche in the amount of $100,500,000 with a 10
year maturity and an interest rate of 8.25 percent and (ii) a tranche in the
amount of $89,500,000 with a maturity of 12 years and an interest rate of 8.33
percent. In order to set the interest rates for this loan on the date the loan
application was signed, the Company transferred $5,700,000 to Northwestern as a
refundable earnest money deposit. This represents the Company's first step in
its plan to refinance the Company's existing debt in order to eliminate certain
restrictive covenants. Currently, management expects to close on this loan
during the quarter ended December 31, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes appearing elsewhere in this
Form 10-Q, and the Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's Annual Report on Form 10-K
for the period ended December 31, 1995.
RESULTS OF OPERATIONS.
Rental revenues totalled $24,160,000 for the quarter ended June 30, 1996,
compared to $24,255,000 for the quarter ended June 30, 1995. The decrease in
rental revenues resulted primarily from the decrease in the total net rentable
square feet owned by the Company during the quarter ended June 30, 1996, as
compared to the same period of the prior year. The Company sold three buildings
(containing 233,980 net rentable square feet) on July 31, 1995. The effect of
the decrease in the total net rentable square feet owned by the Company was
partially offset by the increase in the Company's average rental rate. At June
30, 1996, the Company's buildings were on average 91 percent leased with an
average rental rate of $13.91. Rental revenues increased to $48,145,000 during
the six month period ended June 30, 1996, compared to $47,737,000 during the
same period last year. This increase resulted primarily from increases in the
revenues from operating cost escalations and other items passed through to
tenants.
Management fee revenues totalled $1,971,000 for the quarter ended June 30, 1996,
compared to $1,406,000 for the quarter ended June 30, 1995. This increase was
due primarily to (i) an increase in fees earned for construction management
services, (ii) an increase in fees earned from
10
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the management of buildings sold by The Koger Partnership, Ltd. ("TKPL") to
Koala on August 1, 1995 and (iii) the management fees earned from the three
buildings sold by the Company to Koala. Management fee revenues increased to
$3,693,000 during the six month period ended June 30, 1996, compared to
$2,754,000 during the same period last year, primarily for the same reasons
mentioned above.
Interest revenues increased $135,000 and $143,000, respectively, for the three
and six month periods ended June 30, 1996, compared to the same periods last
year, due to the higher average balance of cash to invest.
Property operating expenses include such charges as utilities, taxes,
janitorial, maintenance, provision for uncollectible rents and management costs.
The amounts of property operating expenses and their percentages of total rental
revenues for the applicable periods are as follows:
Percent of
Total Rental
Period Amount Revenues
-------------------------- -------------- -----------
June 30, 1996 - Quarter $ 10,345,000 42.5%
June 30, 1995 - Quarter 9,840,000 40.3%
June 30, 1996 - Six Months 20,264,000 41.9%
June 30, 1995 - Six Months 19,549,000 40.7%
Property operating expenses increased primarily due to increases in maintenance
costs.
Depreciation expense has been calculated on the straight line method based upon
the useful lives of the Company's depreciable assets, generally 3 to 40 years.
Depreciation expense increased $721,000 and $1,368,000, respectively, for the
three and six month periods ended June 30, 1996, compared to the same periods
last year, due to improvements made to the Company's existing properties during
1995. Amortization expense decreased $32,000 and $100,000, respectively, for the
three and six month periods ended June 30, 1996, compared to the same periods
last year, due primarily to the reduction in goodwill recorded during the
quarter ended September 30, 1995.
Interest expense decreased by $1,632,000 and $3,186,000, respectively, during
the three and six month periods ended June 30, 1996, compared to the same
periods last year, primarily due to the reduction in the average balance of
mortgages and loans payable. At June 30, 1996, the weighted average interest
rate on the Company's outstanding debt was approximately 7.7 percent.
General and administrative expenses for the three month periods ended June 30,
1996 and 1995, totalled $1,402,000 and $2,175,000, respectively, which is 0.9
percent and 1.4 percent (annualized) of average invested assets. General and
administrative expenses for the six month periods ended June 30, 1996 and 1995,
totalled $2,868,000 and $3,620,000, respectively, which is 1.0 percent and 1.2
percent (annualized) of average invested assets. These decreases were primarily
due to (i) decreases in the accrual for compensation expense related to stock
appreciation rights granted in conjunction with stock options, (ii) decreases in
professional and legal fees incurred, (iii) decreases in certain insurance
expenses, and (iv) decreases in the accrual for the Company's contribution to
the 401(k) Plan.
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Direct costs of management contracts increased $545,000 and $928,000,
respectively, for the three and six month periods ended June 30, 1996, compared
to the same periods last year, due to increased costs associated with (i)
providing property management services for all management contracts and (ii)
providing construction management services.
During the quarter ended June 30, 1996, the Company decided to demolish a
building containing 11,040 net rentable square feet because the building no
longer met the Company's investment criteria. The Company has recorded a loss on
disposition of assets which totals $423,000 due to its plans to demolish this
building.
Net income totalled $2,214,000 for the quarter ended June 30, 1996, compared to
net income of $2,026,000 for the corresponding period of 1995. This improvement
is due primarily to the increase in management fee revenues and the reductions
in interest expense and general and administrative expenses. These items were
partially offset by the increases in (i) property operations expense, (ii)
depreciation and amortization expense, (iii) direct cost of management fees,
(iv) litigation costs and (v) loss on sale or disposition of assets. Net income
increased $1,000,000 during the six month period ended June 30, 1996, compared
to the same period last year, due to the same items detailed above.
LIQUIDITY AND CAPITAL RESOURCES.
Operating Activities - During the six months ended June 30, 1996, the
Company generated approximately $18.3 million in net cash from operating
activities. The Company's primary internal sources of cash are (i) the
collection of rents from buildings owned by the Company and (ii) the receipt of
management fees paid to the Company in respect of properties managed on behalf
of Koala, Centoff, and others. As a REIT for Federal income tax purposes, the
Company is required to pay out annually, as dividends, 95 percent of its REIT
taxable income (which, due to non-cash charges, including depreciation and net
operating loss carryforwards, may be substantially less than cash flow). In the
past, the Company has paid out dividends in amounts at least equal to its REIT
taxable income. However, the Company currently expects that it will not be
required to pay any dividends during 1996 to maintain its REIT status. The
Company believes that its cash provided by operating activities will be
sufficient to cover debt service payments through 1996.
The level of cash flow generated by rents depends primarily on the occupancy
rates of the Company's buildings and increases in rental rates on new and
renewed leases and under escalation provisions in existing leases.
At June 30, 1996, leases representing approximately 16.9 percent of the gross
annual rent from the Company's properties, without regard to the exercise of
options to renew, were due to expire during the remainder of 1996. This
represents 663 leases for space in buildings located in 16 of the 17 centers in
which the Company owns buildings. Certain of these tenants may not renew their
leases or may reduce their demand for space. During the six months ended June
30, 1996, leases were renewed on approximately 65 percent of the Company's net
rentable square feet which were scheduled to expire during the six month period.
For those leases which renewed during the six months ended June 30, 1996, the
average rental rate increased from $14.51 to $15.35. Based upon the significant
number of leases which will expire during 1996 and the competition for tenants
in the markets in which the Company operates, the Company has and expects to
continue to offer incentives to certain new and renewal tenants. These
incentives may
12
<PAGE>
include the payment of tenant improvements costs and in certain markets reduced
rents during initial lease periods. During 1994, 1995 and 1996, the Company has
benefitted from improving economic conditions and reduced vacancy levels for
office buildings in many of the metropolitan areas in which the Company owns
buildings. The Company believes that the southeastern and southwestern regions
of the United States provide significant economic growth potential due to their
diverse regional economies, expanding metropolitan areas, skilled work force and
moderate labor costs. However, the Company cannot predict whether such economic
growth will continue. Cash flow from operations could be reduced if economic
growth were not to continue in the Company's markets and if this resulted in
lower occupancy rates for the Company's buildings.
Governmental tenants (including the State of Florida and the United States
Government) which account for approximately 22.1 percent of the Company's leased
space at June 30, 1996, may be subject to budget reductions in times of
recession and governmental austerity measures. Consequently, there can be no
assurance that governmental appropriations for rents may not be reduced.
Additionally, certain of the private sector tenants which have contributed to
the Company's rent stream may reduce their current demands, or curtail their
future need, for additional office space.
Investing Activities - At June 30, 1996, substantially all of the
Company's invested assets were in real properties. Improvements to the Company's
existing properties have been financed through internal operations. During the
six month period ended June 30, 1996, the Company's expenditures for
improvements to existing properties decreased by $663,000 over the corresponding
period of the prior year primarily due to reductions in expenditures for tenant
improvements, which reductions were partially offset by expenditures for energy
management improvements to the Company's buildings.
The terms of the Company's existing indebtedness require that a substantial
portion of any debt or equity financing achieved by the Company during the
foreseeable future be applied to the reduction of the current secured
indebtedness of the Company and contain limitations on incurrence of additional
debt and other restrictions.
Financing Activities - The Company has no open lines of credit, but has a
cash balance at June 30, 1996 of $35,563,000. At June 30, 1996, the Company had
86 buildings, containing 2,516,230 net rentable square feet, which were
unencumbered.
Loan maturities and normal amortization of mortgages and loans payable are
expected to total approximately $4.4 million over the next 12 months. The
Company believes that these obligations will be paid from cash provided by
operations or from current cash balances. Significant maturities of the
Company's mortgages and loans payable do not begin to occur until 1998.
Depending on market conditions, the Company may seek to raise additional equity
capital, the proceeds of which would be used to reduce existing indebtedness. On
August 22, 1994, the Company filed a shelf registration statement with respect
to the possible issuance of up to $100,000,000 of its common and/or preferred
stock.
The Company is currently implementing its plan to refinance or restructure the
Company's existing debt in order to eliminate certain restrictive covenants. To
assist in implementing the debt refinancing, the Company has engaged J.P. Morgan
and Company as its financial adviser. Currently, management expects to complete
the refinancing during the quarter ended December
13
<PAGE>
31, 1996. On July 29, 1996, the Company signed a loan application with
Northwestern Mutual Life Insurance Company ("Northwestern") for a $190,000,000
non-recourse loan which will be secured by 10 office parks. This loan will be
divided into (i) a tranche in the amount of $100,500,000 with a 10 year maturity
and an interest rate of 8.25 percent and (ii) a tranche in the amount of
$89,500,000 with a maturity of 12 years and an interest rate of 8.33 percent. In
order to set the interest rates for this loan on the date the loan application
was signed, the Company transferred $5,700,000 to Northwestern as a refundable
earnest money deposit. This represents the Company's first step in its plan to
refinance the Company's existing debt in order to eliminate certain restrictive
covenants. Currently, management expects to close on this loan during the
quarter ended December 31, 1996.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
14
<PAGE>
Item 5. Other Information
(a) The following table sets forth, with respect to the Company's centers
at June 30, 1996, number of buildings, net rentable square feet,
percentage leased, and the average annual rent per net rentable square
foot leased.
<TABLE>
<CAPTION>
Average
Net Annual
Number Rentable Rent Per
of Square Percent Square
Koger Center Buildings Feet Leased(1) Foot (2)
- ------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Atlanta Chamblee 22 947,920 96% $14.59
Austin 12 370,860 95% 16.09
Charlotte Carmel 1 109,600 100% 14.97
Charlotte East 11 468,820 76% 13.07
El Paso 14 251,930 94% 14.08
Greensboro South 13 610,470 92% 13.57
Greenville 8 290,560 94% 14.08
Jacksonville Baymeadows 4 468,000 100% 15.57
Jacksonville Central (3) 31 666,500 91% 11.50
Memphis Germantown 3 258,400 99% 16.91
Orlando Central 22 565,220 87% 14.19
Orlando University 2 159,600 92% 16.15
San Antonio 26 788,670 88% 11.62
St. Petersburg 15 519,320 94% 13.05
Tallahassee Apal. Pkwy 14 408,500 85% 15.99
Tallahassee Cap. Circle 4 300,700 90% 17.97
Tulsa 13 476,280 81% 10.25
----- ----------
TOTAL 215 7,661,350 91% $13.91
==== ========= ==== ======
(1) The percent leased rates have been calculated by dividing total net
rentable square feet leased in an office building by net rentable
square feet in such building, which excludes public or common areas.
(2) Rental rates are computed by dividing (a) total annualized rents for a
center as of June 30, 1996 by (b) the net rentable square feet
applicable to such total annualized rents.
(3) The Company has decided to demolish a building containing 11,040 net
rentable square feet. This building has been removed from this table.
15
<PAGE>
(b) The following schedule sets forth for all of the Company's office
buildings (i) the number of leases which will expire during the
remainder of calender year 1996 and calendar years 1997 through 2004,
(ii) the total net rentable area in square feet covered by such leases,
(iii) the percentage of total net rentable square feet represented by
such leases, (iv) the average annual rent per square foot for such
leases, (v) the current annual rental represented by such leases, and
(vi) the percentage of gross annual rental contributed by such leases.
This information is based on the buildings owned by the Company on June
30, 1996 and on the terms of leases in effect as of June 30, 1996, on
the basis of then existing base rentals, and without regard to the
exercise of options to renew. Furthermore, the information below does
not reflect that some leases have provisions for early termination for
various reasons, including, in the case of government entities, lack of
budget appropriations. Leases were renewed on approximately 65 percent
of the Company's net rentable square feet which were scheduled to
expire during the six month period ended June 30, 1996.
</TABLE>
<TABLE>
<CAPTION>
Percentage of Average Percentage
Total Square Annual Rent of Total
Number of Number of Feet Leased per Square Total Annual Annual Rents
Leases Square Feet Represented by Foot Under Rents Under Represented by
Period Expiring Expiring Expiring Leases Expiring Leases Expiring Leases Expiring Leases
- ------ -------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1996 663 1,185,929 17.0% $13.90 $16,484,946 16.9%
1997 803 1,501,515 21.5% 14.08 21,136,176 21.7%
1998 525 1,800,222 25.7% 13.72 24,694,342 25.4%
1999 302 981,772 14.0% 13.44 13,194,154 13.6%
2000 116 609,170 8.7% 14.79 9,012,160 9.3%
2001 58 410,325 5.9% 14.64 6,006,261 6.2%
2002 11 148,271 2.1% 13.57 2,012,359 2.1%
2003 11 78,661 1.1% 13.86 1,090,254 1.1%
2004 3 74,069 1.1% 9.75 722,538 0.7%
OTHER 9 204,426 2.9% 14.31 2,924,375 3.0%
-------- --------- -------- ------------- --------
TOTAL 2,501 6,994,360 100.0% $13.91 $97,277,565 100.0%
===== ========= ====== ====== =========== ======
</TABLE>
16
<PAGE>
(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):
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June, Ended June 30,
----------- --------------
1996 1995 1996 1995
------------ --------- ---------- -------
<S> <C> <C> <C> <C>
Net Income $2,214 $2,026 $ 5,230 $ 4,230
Depreciation - real estate 4,718 4,014 9,378 8,046
Amortization - deferred tenant costs 209 118 434 279
Amortization - goodwill 42 158 85 325
Litigation costs 298 553
Loss on sale or disposition of assets 423 1 423 3
Gain on TKPL note to Southeast 76 76
Gain on early retirement of debt (19) (147)
---------- --------- ------------- ----------
Funds from Operations $7,980 $6,298 $16,179 $12,736
====== ====== ======= =======
</TABLE>
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
11 Earnings Per Share Computations.
15 Letter re: Unaudited interim financial information.
27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
June 30, 1996.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KOGER EQUITY, INC.
Registrant
(VICTOR A. HUGHES, JR.)
-----------------------
VICTOR A. HUGHES, JR.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Dated: August 7, 1996
(JAMES L. STEPHENS)
-------------------
JAMES L. STEPHENS
VICE PRESIDENT AND
CHIEF ACCOUNTING OFFICER
19
<PAGE>
EXHIBIT 11
EARNINGS PER SHARE COMPUTATIONS
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30, Ended June 30,
------- -------
1996 1995 1996 1995
------- ------- ------- -------
EARNINGS PER COMMON AND DILUTIVE
COMMON EQUIVALENT SHARE:
<S> <C> <C> <C> <C>
Net Income $ 2,214 $ 2,026 $ 5,230 $ 4,230
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 17,841 17,739 17,821 17,700
Weighted average number of additional
shares issuable for common stock
equivalents (a) 841 102 808 94
------- ------- ------- -------
Adjusted common shares 18,682 17,841 18,629 17,794
======= ======= ======= =======
EARNINGS PER SHARE $ 0.12 $ 0.11 $ 0.28 $ 0.24
======= ======= ======= =======
EARNINGS PER COMMON SHARE ASSUMING
FULL DILUTION:
Net Income $ 2,214 $ 2,026 $ 5,230 $ 4,230
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 17,841 17,739 17,821 17,700
Weighted average number of additional shares
issuable for all dilutive common stock
equivalents (a) 870 102 823 94
------- ------- ------- -------
Shares as adjusted for all dilutants 18,711 17,841 18,644 17,794
======= ======= ======= =======
EARNINGS PER SHARE $ 0.12 $ 0.11 $ 0.28 $ 0.24
======= ======= ======= =======
(a) Shares issuable were derived using the "Treasury Stock Method" for all
dilutive common stock equivalents.
</TABLE>
<PAGE>
EXHIBIT 15
August 2, 1996
Koger Equity, Inc.
3986 Boulevard Center Drive
Jacksonville, Florida 32207
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Koger Equity, Inc. and subsidiaries for the periods ended June
30, 1996 and 1995, as indicated in our report dated August 2, 1996; because we
did not perform an audit, we expressed no opinion on such financial information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is
incorporated by reference in Registration Statement No. 33-55179 on Form S-3 and
Registration Statement No. 33-54617 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
<PAGE>
<PAGE>
EXHIBIT 11
EARNINGS PER SHARE COMPUTATIONS
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30, Ended June 30,
------- -------
1996 1995 1996 1995
------- ------- ------- -------
EARNINGS PER COMMON AND DILUTIVE
COMMON EQUIVALENT SHARE:
<S> <C> <C> <C> <C>
Net Income $ 2,214 $ 2,026 $ 5,230 $ 4,230
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 17,841 17,739 17,821 17,700
Weighted average number of additional
shares issuable for common stock
equivalents (a) 841 102 808 94
------- ------- ------- -------
Adjusted common shares 18,682 17,841 18,629 17,794
======= ======= ======= =======
EARNINGS PER SHARE $ 0.12 $ 0.11 $ 0.28 $ 0.24
======= ======= ======= =======
EARNINGS PER COMMON SHARE ASSUMING
FULL DILUTION:
Net Income $ 2,214 $ 2,026 $ 5,230 $ 4,230
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 17,841 17,739 17,821 17,700
Weighted average number of additional shares
issuable for all dilutive common stock
equivalents (a) 870 102 823 94
------- ------- ------- -------
Shares as adjusted for all dilutants 18,711 17,841 18,644 17,794
======= ======= ======= =======
EARNINGS PER SHARE $ 0.12 $ 0.11 $ 0.28 $ 0.24
======= ======= ======= =======
(a) Shares issuable were derived using the "Treasury Stock Method" for all
dilutive common stock equivalents.
</TABLE>
<PAGE>
<PAGE>
EXHIBIT 15
August 2, 1996
Koger Equity, Inc.
3986 Boulevard Center Drive
Jacksonville, Florida 32207
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Koger Equity, Inc. and subsidiaries for the periods ended June
30, 1996 and 1995, as indicated in our report dated August 2, 1996; because we
did not perform an audit, we expressed no opinion on such financial information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is
incorporated by reference in Registration Statement No. 33-55179 on Form S-3 and
Registration Statement No. 33-54617 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Company does not file a classified balance sheet, therefore these not
provided.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 35,563
<SECURITIES> 0
<RECEIVABLES> 4,463
<ALLOWANCES> 286
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 606,708
<DEPRECIATION> 72,220
<TOTAL-ASSETS> 585,053
<CURRENT-LIABILITIES> 0
<BONDS> 253,053
0
0
<COMMON> 205
<OTHER-SE> 316,738
<TOTAL-LIABILITY-AND-EQUITY> 585,053
<SALES> 0
<TOTAL-REVENUES> 52,835
<CGS> 0
<TOTAL-COSTS> 23,040
<OTHER-EXPENSES> 14,261
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,897
<INCOME-PRETAX> 5,637
<INCOME-TAX> 407
<INCOME-CONTINUING> 5,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,230
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
