<PAGE> 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, 1997 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 October 23, 1997
Common Stock, $.01 par value 21,892,137 shares
<PAGE> 2
KOGER EQUITY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Independent Accountants' Report.................................. 2
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996...................... 3
Condensed Consolidated Statements of Operations
for the Three and Nine Month Periods Ended
September 30, 1997 and 1996................................... 4
Condensed Consolidated Statement of Changes in
Shareholders' Equity for the Nine Month Period
Ended September 30, 1997...................................... 5
Condensed Consolidated Statements of Cash Flows
for the Nine Month Periods Ended September 30, 1997
and 1996...................................................... 6
Notes to Condensed Consolidated Financial
Statements for the Three and Nine Month Periods
Ended September 30, 1997 and 1996............................. 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............................................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 17
Signatures ........................................................... 18
</TABLE>
1
<PAGE> 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, 1997, and the
related condensed consolidated statements of operations for the three and nine
month periods ended September 30, 1997 and 1996, the condensed consolidated
statement of changes in shareholders' equity for the nine month period ended
September 30, 1997 and the condensed consolidated statements of cash flows for
the nine month periods ended September 30, 1997 and 1996. 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,
1996, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 28, 1997, 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, 1996 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
October 24, 1997
2
<PAGE> 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)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Real Estate Investments:
Operating properties:
Land $106,627 $ 98,567
Buildings 532,968 482,836
Furniture and equipment 2,042 1,569
Accumulated depreciation (98,395) (82,478)
-------- --------
Operating properties - net 543,242 500,494
Properties under construction:
Land 7,785 2,083
Buildings 9,415 930
Undeveloped land held for investment 15,327 20,558
Undeveloped land held for sale 1,512 6,550
Cash and temporary investments 9,293 35,715
Accounts receivable, net of allowance for
uncollectible accounts of $231 and $231 4,961 5,600
Investment in Koger Realty Services, Inc. 384 259
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $643 and $515 1,912 2,040
Other assets 11,488 10,437
-------- --------
TOTAL ASSETS $605,319 $584,666
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgages and loans payable $202,091 $203,044
Accounts payable 3,011 4,662
Accrued real estate taxes payable 6,859 2,144
Accrued liabilities - other 5,025 5,467
Dividends payable 3,283 1,045
Advance rents and security deposits 4,526 4,169
-------- --------
Total Liabilities 224,795 220,531
-------- --------
Commitments and Contingencies
Shareholders' Equity
Common stock 249 236
Capital in excess of par value 374,988 362,127
Warrants 2,243
Retained earnings 33,745 22,666
Treasury stock, at cost (28,458) (23,137)
-------- --------
Total Shareholders' Equity 380,524 364,135
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $605,319 $584,666
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 5
KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - SEE INDEPENDENT ACCOUNTANTS' REPORT)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTH PERIOD NINE MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Rental $28,079 $24,515 $79,849 $72,660
Other rental services 151 95 401 366
Management fees 639 842 2,209 1,893
Interest 178 505 1,084 1,307
Income from Koger Realty Services, Inc. 96 (251) 489 117
Gain on TKPL note to Southeast 55 (9) (21)
------- ------- -------- --------
Total revenues 29,143 25,761 84,023 76,322
------- ------- ------- -------
EXPENSES
Property operations 12,037 10,930 32,824 31,194
Depreciation and amortization 6,124 5,543 17,238 15,679
Mortgage and loan interest 4,037 4,968 12,264 14,865
General and administrative 1,367 1,235 4,256 4,103
Direct cost of management fees 469 511 1,553 1,300
Undeveloped land costs 107 131 341 398
Loss on early retirement of debt 102 18 144 18
Provision for loss on land held for sale (379)
Litigation costs (182) 371
------- ------- --------- -------
Total expenses 24,243 23,154 68,241 67,928
------- ------- ------- -------
INCOME BEFORE GAIN (LOSS) ON SALE OR
DISPOSITION OF ASSETS 4,900 2,607 15,782 8,394
Gain (loss) on sale or disposition of assets 2,057 (29) 2,057 (452)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 6,957 2,578 17,839 7,942
Income taxes 8 317 189 451
------- ------- ------- -------
NET INCOME $ 6,949 $ 2,261 $17,650 $ 7,491
======= ======= ======= =======
EARNINGS PER COMMON SHARE AND
COMMON EQUIVALENT SHARE:
Primary $ 0.31 $ 0.12 $ 0.79 $ 0.40
======= ======= ======= =======
Fully Diluted $ 0.31 $ 0.12 $ 0.79 $ 0.40
======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Primary 22,341 18,961 22,251 18,741
======= ======= ======= =======
Fully Diluted 22,412 19,043 22,319 18,778
======== ======= ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 6
KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(UNAUDITED - SEE INDEPENDENT ACCOUNTANTS' REPORT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- CAPITAL IN TREASURY STOCK SHARE-
PAR EXCESS OF RETAINED ----------------- HOLDERS'
SHARES VALUE PAR VALUE WARRANTS EARNINGS SHARES COST EQUITY
------ ----- --------- -------- -------- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 23,560 $236 $362,127 $ 2,243 $22,666 2,668 $(23,137) $364,135
Treasury Stock Reissued 531 (54) 447 978
Treasury Stock Purchased 372 (5,750) (5,750)
Warrants Redeemed (236) (143) (379)
Warrants Exercised 994 10 9,945 (2,007) 7,948
Stock Options Exercised 320 3 2,385 1 (18) 2,370
Dividends Declared (6,428) (6,428)
Net Income 17,650 17,650
------ ---- -------- ------- ------- ----- -------- --------
Balance, September 30, 1997 24,874 $249 $374,988 $ 0 $33,745 2,987 $(28,458) $380,524
====== ==== ======== ======= ======= ===== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 7
KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - SEE INDEPENDENT ACCOUNTANTS' REPORT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED SEPTEMBER 30,
--------------------------
1997 1996
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 17,650 $ 7,491
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 17,238 15,679
Income from Koger Realty Services, Inc. (489) (117)
Provision for loss on land held for sale (379)
Provision for uncollectible accounts 156
Gain on TKPL unsecured note to Southeast 9 21
Loss (Gain) on sale or disposition of assets (2,057) 452
Loss on early debt repayment 144 18
Amortization of mortgage discounts 71 132
Accrued interest added to principal 112
Increase in accounts payable, accrued
liabilities and other liabilities 3,828 4,495
Decrease (increase) in receivables and other assets 200 (6,385)
--------- --------
Net cash provided by operating activities 36,371 21,898
--------- --------
INVESTING ACTIVITIES
Property acquisitions (45,833)
Building construction expenditures (11,731) (248)
Tenant improvements to first generation space (135)
Tenant improvements to existing properties (5,622) (4,353)
Building improvements (2,181) (2,030)
Energy management improvements (531) (1,764)
Deferred tenant costs (1,220) (1,561)
Additions to furniture and equipment (473) (116)
Proceeds from sale of assets 6,345 1,266
Dividends received from Koger Realty Services, Inc. 364 414
--------- --------
Net cash used in investing activities (61,017) (8,392)
--------- --------
FINANCING ACTIVITIES
Proceeds from sale of stock under Stock Investment Plan 257 140
Proceeds from exercise of warrants and stock options 10,141 312
Proceeds from mortgage and loans 24,300
Dividends paid (4,190)
Principal payments on mortgages and loans (25,428) (5,245)
Treasury stock purchase (5,750)
Warrants redeemed (379)
Financing costs (727) (700)
--------- --------
Net cash used in financing activities (1,776) (5,493)
--------- --------
Net increase (decrease) in cash and cash equivalents (26,422) 8,013
Cash and cash equivalents - beginning of period 35,715 25,415
--------- --------
Cash and cash equivalents - end of period $ 9,293 $ 33,428
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest,
net of capitalized interest $ 12,193 $ 14,542
========= ========
Cash paid during the period for income taxes $ 189 $ 451
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 8
KOGER EQUITY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED - SEE INDEPENDENT ACCOUNTANTS' REPORT)
1. BASIS OF PRESENTATION. The condensed consolidated financial statements
include the accounts of Koger Equity, Inc. and its wholly-owned subsidiaries
(the "Company"). All material intercompany transactions have been eliminated.
The financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission related to interim
financial statements.
The financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1996,
included in the Company's Form 10-K Annual Report for the year ended December
31, 1996. The balance sheet at December 31, 1996, 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, 1997, are not necessarily indicative of the results to be
expected for the full year.
Certain 1996 amounts have been reclassified to conform with 1997 presentations.
In March 1997, the Financial Accounting Standards Board (the"FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This Statement establishes standards for computing and presenting
earnings per share ("EPS") and applies to all entities with publicly held common
stock or potential common stock. This Statement replaces the presentation of
primary EPS and fully diluted EPS with a presentation of basic EPS and diluted
EPS, respectively. Basic EPS excludes dilution and is computed by dividing
earnings available to common stockholders by the weighted-average number of
common shares outstanding for the period. Similar to fully diluted EPS, diluted
EPS reflects the potential dilution of securities that could share in the
earnings. This Statement is not expected to have a material effect on the
Company's reported EPS amounts. This Statement is effective for the Company's
financial statements for the year ending December 31, 1997.
In June 1997, the FASB Issued SFAS No. 130, "Reporting Comprehensive Income"
effective for fiscal years beginning after December 15, 1997. This Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement does not require a specific format for that financial
statement but requires that an entity display an amount representing total
comprehensive income for the period in that financial statement. This Statement
requires that an entity classify items of other comprehensive income by their
nature in a financial statement. For example, other comprehensive income may
include foreign currency and unrealized gains and losses on certain investments
in debt and equity securities. In addition, the accumulated balance of other
comprehensive income must be displayed separately from retained earnings and
additional paid in capital in the equity section of a statement of financial
position. Reclassification of financial statements for earlier periods, provided
for comparative purposes, is required. The Company has not determined the impact
that the adoption of this new accounting standard will have on its financial
statements. The Company will adopt this accounting standard on January 1, 1998,
as required.
7
<PAGE> 9
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" effective for fiscal years beginning after
December 15, 1997. This Statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. This Statement requires reporting segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segments profit or loss, total
segment assets, and other amounts disclosed for segments to corresponding
amounts reported in the financial statements. Restatement of comparative
information for earlier periods presented is required in the initial year of
application. Interim information is not required until the second year of
application, at which time comparative information is required. The Company has
not determined the impact that the adoption of this new accounting standard will
have on its financial statement disclosures. The Company will adopt this
accounting standard on January 1, 1998, as required.
2. ORGANIZATION. Koger Equity, Inc. ("KE"), a Florida corporation, was
incorporated in 1988 for the purpose of investing in the ownership of income
producing properties, primarily commercial office buildings. KE is totally
self-administered and self-managed.
In addition to managing its own properties, KE, through certain related
entities, provides property management services to third parties. In conjunction
with Koger Real Estate Services, Inc. ("KRES"), a Florida corporation and a
wholly-owned subsidiary of KE, KE manages 21 office buildings owned by Centoff
Realty Company, Inc. ("Centoff"), a subsidiary of Morgan Guaranty Trust Company
of New York.
3. FEDERAL INCOME TAXES. The Company is operated in a manner so as to
qualify and has elected tax treatment as a real estate investment trust under
the Internal Revenue Code (a "REIT"). As a REIT, the Company is required to
distribute annually at least 95 percent of its REIT taxable income to its
shareholders. Since, the Company had no REIT taxable income during 1996 and does
not expect to have REIT taxable income during 1997, no provision has been made
for Federal income taxes. However, the Company has recorded a provision of
$127,000 for alternative minimum tax for the nine month period ended September
30, 1997. 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, 1997, the Company contributed 23,657 shares of common
stock to the Company's 401(K) Plan. These shares had a value of approximately
$444,000 based on the closing price of the Company's common stock on the
American Stock Exchange on December 31, 1996. In addition, the Company issued
15,455 shares of common stock as payment for certain 1996 bonuses for senior
management. These shares had a value of approximately $278,000 based on the
closing price of the Company's common stock on the American Stock Exchange on
January 6, 1997. During the nine month period ended September 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.
8
<PAGE> 10
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 September 30, 1997, the Company had
$202,091,000 of loans outstanding, which are collateralized by mortgages on
certain operating properties.
Annual maturities for mortgages and loans payable, which are gross of $194,000
of discounts, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1997 $ 848
1998 3,708
1999 12,035
2000 12,002
2001 3,316
Subsequent Years 170,376
--------
Total $202,285
========
</TABLE>
On April 7, 1997, the Company closed on a $50 million secured revolving credit
facility provided by First Union National Bank of Florida and Morgan Guaranty
Trust Company of New York. Based on the Company's election, the interest rate on
this revolving credit facility will be either (i) the lender's LIBOR rate plus
200 basis points or (ii) the lender's prime rate. Interest payments will be due
monthly on this revolving credit facility which has a term of two years. At the
election of the lender, the term of this credit facility may be extended for
additional periods of one year each. This credit facility requires the Company
to maintain certain financial ratios.
7. DIVIDENDS. The Company paid the following dividends during the nine
months ended September 30, 1997:
<TABLE>
<CAPTION>
PAYMENT DATE RECORD DATE DIVIDEND PER SHARE
------------ ----------- ------------------
<S> <C> <C>
February 10, 1997 January 6, 1997 $0.05
May 6, 1997 April 4, 1997 $0.05
August 6, 1997 July 3, 1997 $0.10
</TABLE>
During the quarter ended September 30, 1997, the Company's Board of Directors
declared a quarterly dividend of $0.15 per share payable on November 5, 1997, to
shareholders of record on September 30, 1997. The Company currently expects that
all dividends paid during 1997 will be treated as ordinary income to the
recipient for income tax purposes.
8. WARRANTS. During July 1997, the Company's Board of Directors approved
the redemption of warrants outstanding on August 29, 1997 (the "Redemption
Date") for $3.81 per warrant. Each warrant gave the holder the right to purchase
one share of common stock at a price of $8.00 per share, until the Redemption
Date. The Company redeemed 99,871 warrants following the Redemption Date. The
remaining warrants were exercised by the holders either on or prior to the
Redemption Date.
9. STOCK OPTIONS. During the quarter ended September 30, 1997, the Company
granted 171,392 options to purchase its common stock. The majority of the
options granted have been granted with an exercise price equal to the market
value at the date of grant.
9
<PAGE> 11
10. SUBSEQUENT EVENT. On October 1, 1997, the Company acquired a building,
containing 154,100 net rentable square feet, located in Atlanta, Georgia for a
purchase price of $21.2 million. This purchase was partially funded with an $18
million draw on the Company's secured revolving line of credit.
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, 1996.
RESULTS OF OPERATIONS.
Rental revenues totalled $28,079,000 for the quarter ended September 30, 1997,
compared to $24,515,000 for the quarter ended September 30, 1996. This increase
in rental revenues resulted primarily from (i) increases in the percent leased
rate and the Company's average rental rate and (ii) rental revenues from the
properties acquired and construction completed during the quarter ($1,562,000).
At September 30, 1997, the Company's buildings were on average 92 percent leased
with an average rental rate of $14.84. Rental revenues increased to $79,849,000
during the nine month period ended September 30, 1997, compared to $72,660,000
during the same period last year. This increase resulted primarily from the same
items detailed above.
Management fee revenues totalled $639,000 for the quarter ended September 30,
1997, compared to $842,000 for the quarter ended September 30, 1996. This
decrease was due primarily to a decrease in the leasing fees earned under the
management contract with Centoff. Management fee revenues increased to
$2,209,000 during the nine month period ended September 30, 1997, compared to
$1,893,000 during the same period last year, primarily due to an increase in the
leasing fees earned under the management contract with Centoff.
Interest revenues decreased $327,000 and $223,000, respectively, for the three
and nine month periods ended September 30, 1997, compared to the same periods
last year, due to the lower average balance of cash to invest.
Property operating expenses include such charges as utilities, real estate
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:
<TABLE>
<CAPTION>
PERCENT OF
TOTAL RENTAL
PERIOD AMOUNT REVENUES
---------------------------------- ----------- ------------
<S> <C> <C>
September 30, 1997 - Quarter $12,037,000 42.6%
September 30, 1996 - Quarter $10,930,000 44.4%
September 30, 1997 - Nine Months $32,824,000 40.9%
September 30, 1996 - Nine Months $31,194,000 42.7%
</TABLE>
Property operating expenses increased primarily due to (i) increased accruals
for real estate taxes, (ii) increases in janitorial costs and (iii) operating
expenses for the properties acquired and construction completed during 1997
($733,000).
10
<PAGE> 12
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 $421,000 and $1,187,000, respectively, for the
three and nine month periods ended September 30, 1997, compared to the same
periods last year, due to (i) improvements made to the Company's existing
properties during 1996 and 1997 and (ii) the properties acquired and
construction completed during 1997. Amortization expense increased $160,000 and
$372,000, respectively, for the three and nine month periods ended September 30,
1997, compared to the same periods last year, due primarily to financing costs
which were incurred for (i) the mortgage with the Northwestern Mutual Life
Insurance Company ("Northwestern") and (ii) the secured revolving credit
facility which closed during April, 1997.
Interest expense decreased by $931,000 and $2,601,000, respectively, during the
three and nine month periods ended September 30, 1997, compared to the same
periods last year, primarily due to the reduction in the average balance of
mortgages and loans payable. At September 30, 1997, the weighted average annual
interest rate on the Company's outstanding debt was approximately 8.3 percent.
General and administrative expenses for the three month periods ended September
30, 1997 and 1996, totalled $1,367,000 and $1,235,000, respectively, which is
0.8 percent and 0.8 percent (annualized) of average invested assets. General and
administrative expenses for the nine month periods ended September 30, 1997 and
1996, totalled $4,256,000 and $4,103,000, respectively, which is 0.9 percent and
0.9 percent (annualized) of average invested assets. These increases were
primarily due to (i) increases in director fees due primarily to the increase in
the number of directors and (ii) costs for a company-wide managers meeting held
during August, 1997.
Direct costs of management contracts totalled $469,000 for the quarter ended
September 30, 1997, compared to $511,000 for the quarter ended September 30,
1996. This decrease was due primarily to a decrease in costs related to
construction management projects for third party owners. Direct costs of
management contracts increased $253,000 for the nine month period ended
September 30, 1997, compared to the same period last year, due to increased
costs associated with providing property management services for all management
contracts.
Based on the proceeds received from the sale of the Miami land parcel and the
Company's analysis of the fair value of the remaining land parcels held for
sale, the Company reversed $379,000 of the provision for loss on land held for
sale, which had been previously recorded.
Net income totalled $6,949,000 for the quarter ended September 30, 1997,
compared to net income of $2,261,000 for the corresponding period of 1996. This
improvement is due primarily to the increase in rental revenues, the gain on
sale or disposition of assets and the reductions in (i) interest expense and
(ii) income tax expense. These items were partially offset by increases in (i)
property operations expense and (ii) depreciation and amortization expense. Net
income increased $10,159,000 during the nine month period ended September 30,
1997, 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, 1997, the
Company generated approximately $36.4 million in net cash from operating
activities. The Company's primary internal sources of cash are (i) the
collection of rents from buildings owned by the Company and (ii) the receipt of
management fees paid to the Company in respect of properties managed on behalf
of Centoff and others. As a REIT for Federal income tax purposes, the Company is
required to pay out annually, as dividends, 95 percent of its REIT taxable
income (which, due to non-cash charges, including depreciation
11
<PAGE> 13
and net operating loss carryforwards, may be substantially less than cash flow).
In the past, the Company has paid out dividends in amounts at least equal to its
REIT taxable income. The Company believes that its cash provided by operating
activities will be sufficient to cover debt service payments and to pay the
dividends required to maintain REIT status through 1997.
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, 1997, leases representing approximately 9.6 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 1997. This
represents 387 leases for space in buildings located in 19 of the 20 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, 1997, leases were renewed on approximately 68 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, 1997, the average rental rate increased from $14.44 to $15.69.
Based upon the significant number of leases which will expire during 1997 and
1998 and the competition for tenants in the markets in which the Company
operates, the Company has and expects to continue to offer incentives to certain
new and renewal tenants. These incentives may include the payment of tenant
improvements costs and in certain markets reduced rents during initial lease
periods.
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 24.5 percent of the Company's leased
space at September 30, 1997, 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 September 30, 1997, 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, 1997, the Company's expenditures for
improvements to existing properties increased by $187,000 over the corresponding
period of the prior year primarily due to increases in expenditures for tenant
improvements to the Company's buildings.
During the quarter ended March 31, 1997, the Company sold 8.1 acres of
unimproved land located in Miami, Florida for approximately $2,908,000, net of
selling costs. On August 8, 1997, the Company sold 17.2 acres of unimproved land
located in Richmond, Virginia for approximately $3,433,000 , net of selling
costs.
12
<PAGE> 14
On May 15, 1997, the Company acquired three buildings, containing 134,000 net
rentable square feet, and 5.26 acres of unimproved land located in Greenville,
South Carolina for a purchase price of $14 million. On June 4, 1997, the Company
acquired two buildings, containing 214,100 net rentable square feet, located in
San Antonio, Texas for a purchase price of $15.5 million. On June 18, 1997, the
Company acquired a building, containing 23,000 net rentable square feet, located
in Jacksonville, Florida for a purchase price of $3.3 million. On August 4,
1997, the Company acquired a building, containing 80,500 net rentable square
feet, located in Tallahassee, Florida for a purchase price of $9.575 million. On
September 23, 1997, the Company acquired two buildings, containing 46,400 net
rentable square feet, and 2.4 acres of unimproved land located in El Paso, Texas
for a purchase price of $3.3 million.
During the quarter ended September 30, 1997, the Company completed the
construction of a building located in Memphis, Tennessee which contains 40,700
net rentable square feet. The Company has seven buildings under construction
which will contain approximately 567,600 net rentable square feet. Expenditures
for construction of these seven buildings are expected to total approximately
$42.2 million, excluding land and tenant improvement costs.
FINANCING ACTIVITIES - During April 1997, the Company closed on a $50
million secured revolving credit facility provided by First Union National Bank
of Florida and Morgan Guaranty Trust Company of New York. As of September 30,
1997, the Company had $8 million outstanding under this revolving credit
facility. During August, 1997, the Company drew $8.3 million of the remaining
Northwestern loan proceeds when the $8.2 million existing indebtedness on a
building matured. The Company repaid approximately $6.9 million of the
outstanding balances of mortgages and loans payable during the nine months ended
September 30, 1997. These early repayments resulted in the release of four
buildings, containing 126,370 net rentable square feet, which had been
collateral for these loans. At September 30, 1997, the Company had 69 buildings,
containing 2,459,000 net rentable square feet, which were unencumbered.
On May 2, 1997, the Company's Board of Directors approved the repurchase of up
to one million shares of the Company's common stock (the "Shares"). On that
date, the Company repurchased 372,600 Shares for approximately $5.75 million.
During July 1997, the Company's Board of Directors approved the redemption of
warrants outstanding on August 29, 1997 (the "Redemption Date") for $3.81 per
warrant. Each warrant gave the holder the right to purchase one Share at a price
of $8.00 per Share, until the Redemption Date. The Company redeemed 99,871
warrants following the Redemption Date. The remaining warrants were exercised by
the holders either on or prior to the Redemption Date.
Loan maturities and normal amortization of mortgages and loans payable are
expected to total approximately $3.6 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 2006.
Depending on market conditions, the Company may seek to raise additional equity
capital, the proceeds of which would be used to reduce existing indebtedness,
for working capital and for general corporate purposes, which may include the
acquisition of properties and the development, expansion and improvement of
certain properties in the Company's portfolio. The Company 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 not yet issued any
equity under such registration statements.
13
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 5. OTHER INFORMATION
(a) The following table sets forth, with respect to the Company's centers at
September 30, 1997, 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% $15.29
Austin 12 370,860 98% 17.68
Charlotte Carmel 1 109,600 83% 16.63
Charlotte East 11 468,820 83% 13.01
El Paso 16 298,330 93% 14.91
Greensboro South 13 610,470 95% 14.79
Greenville Park Central 3 134,000 92% 15.89
Greenville Roper Mt. 8 290,560 95% 15.18
Jacksonville Baymeadows 4 468,000 99% 18.20
Jacksonville Central 31 666,500 89% 11.92
Jacksonville Deerwood Park 1 23,000 100% 15.85
Memphis Germantown 4 299,100 95% 17.81
Orlando Central 22 565,220 91% 14.51
Orlando University 2 159,600 95% 16.83
San Antonio Airport 2 214,100 83% 15.34
San Antonio West 26 788,670 93% 12.94
St. Petersburg 15 519,320 97% 13.64
Tallahassee Apalachee Pkwy 14 408,500 92% 16.30
Tallahassee Capital Circle 5 381,200 97% 17.87
Tulsa 13 476,280 73% 11.11
--- ---------
TOTAL 225 8,200,050 92% $14.84
=== ========= === ======
</TABLE>
(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 September 30, 1997 by (b) the net rentable square feet
applicable to such total annualized rents.
14
<PAGE> 16
(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 1997 and calendar years 1998 through 2005, (ii) the total
net rentable area in square feet covered by such leases, (iii) the
percentage of total net rentable square feet represented by such leases,
(iv) the average annual rent per square foot for such leases, (v) the
current annual rental represented by such leases, and (vi) the percentage
of gross annual rental contributed by such leases. This information is
based on the buildings owned by the Company on September 30, 1997 and on
the terms of leases in effect as of September 30, 1997, 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 68 percent of the
Company's net rentable square feet which were scheduled to expire during
the nine month period ended September 30, 1997.
<TABLE>
<CAPTION>
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
- ------ --------- ----------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1997 387 734,525 9.9% $14.42 $ 10,594,945 9.6%
1998 960 1,951,549 26.2% 14.41 28,115,283 25.4%
1999 554 1,376,874 18.5% 13.94 19,195,412 17.4%
2000 366 1,108,065 14.9% 15.02 16,637,828 15.1%
2001 138 977,797 13.1% 15.67 15,320,589 13.9%
2002 75 411,918 5.5% 15.58 6,416,201 5.8%
2003 18 153,109 2.1% 14.80 2,266,418 2.0%
2004 13 179,014 2.4% 13.46 2,409,675 2.2%
2005 5 31,273 0.4% 12.07 377,414 0.3%
OTHER 25 522,560 7.0% 17.55 9,169,429 8.3%
----- --------- ----- ------------ -----
TOTAL 2,541 7,446,684 100.0% $14.84 $110,503,194 100.0%
===== ========= ===== ====== ============ =====
</TABLE>
15
<PAGE> 17
(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 NINE MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $ 6,949 $2,261 $17,650 $ 7,491
Depreciation - real estate 5,571 5,156 15,703 14,534
Amortization - deferred tenant costs 252 227 739 661
Amortization - goodwill 43 43 128 128
Litigation costs (182) 371
Provision for loss on land held for sale (379)
Loss (Gain) on sale or disposition of assets (2,057) 29 (2,057) 452
Gain on TKPL note to Southeast (55) 9 21
Loss on early retirement of debt 102 18 144 18
------- ------ ------- -------
Funds from Operations $10,860 $7,497 $31,937 $23,676
======= ====== ======= =======
</TABLE>
16
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
11 Earnings Per Share Computations.
15 Letter re: Unaudited interim financial information.
27 Financial Data Schedule. (For SEC use only)
</TABLE>
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 30, 1997.
17
<PAGE> 19
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: October 27, 1997
(JAMES L. STEPHENS)
---------------------------
JAMES L. STEPHENS
VICE PRESIDENT AND
CHIEF ACCOUNTING OFFICER
Dated: October 27, 1997
18
<PAGE> 1
EXHIBIT 11
EARNINGS PER SHARE COMPUTATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTH PERIOD NINE MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
EARNINGS PER COMMON AND DILUTIVE
COMMON EQUIVALENT SHARE:
Net Income $ 6,949 $ 2,261 $17,650 $ 7,491
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 21,259 17,873 21,018 17,839
Weighted average number of additional shares
issuable for common stock equivalents (a) 1,082 1,088 1,233 902
------- ------- ------- -------
Adjusted common shares 22,341 18,961 22,251 18,741
======= ======= ======= =======
EARNINGS PER SHARE - PRIMARY $ 0.31 $ 0.12 $ 0.79 $ 0.40
======= ======= ======= =======
EARNINGS PER COMMON SHARE ASSUMING
FULL DILUTION:
Net Income $ 6,949 $ 2,261 $17,650 $ 7,491
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 21,259 17,873 21,018 17,839
Weighted average number of additional shares
issuable for all dilutive common stock
equivalents (a) 1,153 1,170 1,301 939
------- ------- ------- -------
Shares as adjusted for all dilutants 22,412 19,043 22,319 18,778
======= ======= ======= =======
EARNINGS PER SHARE - FULLY DILUTED $ 0.31 $ 0.12 $ 0.79 $ 0.40
======= ======= ======= =======
</TABLE>
(a) Shares issuable were derived using the "Treasury Stock Method" for all
dilutive common stock equivalents.
<PAGE> 1
EXHIBIT 15
October 28, 1997
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
September 30, 1997 and 1996, as indicated in our report dated October 24, 1997;
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, 1997, is
incorporated by reference in Registration Statement No. 33-55179 on Form S-3,
Registration Statement No. 33-54617 on Form S-8, Registration Statement No.
333-20975 on Form S-3, Registration Statement No. 333- 23429 on Form S-8, and
Registration Statement No. 333-37919 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Company does not file a classified balance sheet, therefore these are not
provided. 5-02 (9), 5-02 (21)
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,293
<SECURITIES> 0
<RECEIVABLES> 5,192
<ALLOWANCES> 231
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 675,676
<DEPRECIATION> 98,395
<TOTAL-ASSETS> 605,319
<CURRENT-LIABILITIES> 0
<BONDS> 202,091
0
0
<COMMON> 249
<OTHER-SE> 380,275
<TOTAL-LIABILITY-AND-EQUITY> 605,319
<SALES> 0
<TOTAL-REVENUES> 84,023
<CGS> 0
<TOTAL-COSTS> 34,221
<OTHER-EXPENSES> 21,600
<LOSS-PROVISION> 156
<INTEREST-EXPENSE> 12,264
<INCOME-PRETAX> 17,839
<INCOME-TAX> 189
<INCOME-CONTINUING> 17,650
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,650
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.79
</TABLE>
