<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 JUNE 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 July 30, 1997
Common Stock, $.01 par value 20,937,937 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
June 30, 1997 and December 31, 1996.......................... 3
Condensed Consolidated Statements of Operations
for the Three and Six Month Periods Ended
June 30, 1997 and 1996....................................... 4
Condensed Consolidated Statement of Changes in
Shareholders' Equity for the Six Month Period
Ended June 30, 1997.......................................... 5
Condensed Consolidated Statements of Cash Flows
for the Six Month Periods Ended June 30, 1997
and 1996..................................................... 6
Notes to Condensed Consolidated Financial
Statements for the Three and Six Month Periods
Ended June 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........................................ 13
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 June 30, 1997, and the
related condensed consolidated statements of operations for the three and six
month periods ended June 30, 1997 and 1996, the condensed consolidated statement
of changes in shareholders' equity for the six month period ended June 30, 1997
and the condensed consolidated statements of cash flows for the six month
periods ended June 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
August 6, 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>
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Real Estate Investments:
Operating properties:
Land $ 103,527 $ 98,567
Buildings 516,478 482,836
Furniture and equipment 1,793 1,569
Accumulated depreciation (92,762) (82,478)
--------- ---------
Operating properties - net 529,036 500,494
Properties under construction:
Land 4,113 2,083
Buildings 6,496 930
Undeveloped land held for investment 20,096 20,558
Undeveloped land held for sale 2,891 6,550
Cash and temporary investments 5,826 35,715
Accounts receivable, net of allowance for
uncollectible accounts of $280 and $231 4,686 5,600
Investment in Koger Realty Services, Inc. 501 259
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $600 and $515 1,955 2,040
Other assets 10,449 10,437
--------- ---------
TOTAL ASSETS $ 586,049 $ 584,666
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgages and loans payable $ 199,598 $ 203,044
Accounts payable 2,885 4,662
Accrued real estate taxes payable 4,986 2,144
Accrued liabilities - other 4,223 5,467
Dividends payable 2,075 1,045
Advance rents and security deposits 4,289 4,169
--------- ---------
Total Liabilities 218,056 220,531
--------- ---------
Commitments and Contingencies
Shareholders' Equity
Common stock 237 236
Capital in excess of par value 363,772 362,127
Warrants 2,235 2,243
Retained earnings 30,241 22,666
Treasury stock, at cost (28,492) (23,137)
--------- ---------
Total Shareholders' Equity 367,993 364,135
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 586,049 $ 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 SIX MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Rental $ 26,387 $ 24,160 $ 51,770 $ 48,145
Other rental services 121 176 250 271
Management fees 929 523 1,570 1,051
Interest 372 429 906 802
Income from Koger Realty Services, Inc. 183 172 393 368
Gain on TKPL Note to Southeast (55) (76) (9) (76)
-------- -------- -------- --------
Total revenues 27,937 25,384 54,880 50,561
-------- -------- -------- --------
EXPENSES
Property operations 10,819 10,345 20,787 20,264
Depreciation and amortization 5,621 5,089 11,114 10,136
Mortgage and loan interest 4,068 4,935 8,227 9,897
General and administrative 1,526 1,402 2,889 2,868
Direct cost of management fees 567 417 1,084 789
Undeveloped land costs 120 138 234 267
Provision for loss on land held for sale 2 (379)
Loss on early retirement of debt 42 42
Litigation costs 298 553
Loss on sale or disposition of assets 423 423
-------- -------- -------- --------
Total expenses 22,765 23,047 43,998 45,197
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 5,172 2,337 10,882 5,364
Income taxes 164 123 181 134
-------- -------- -------- --------
NET INCOME $ 5,008 $ 2,214 $ 10,701 $ 5,230
======== ======== -------- ========
EARNINGS PER COMMON SHARE AND
COMMON EQUIVALENT SHARE:
Primary $ 0.23 $ 0.12 $ 0.48 $ 0.28
======== ======== ======== ========
Fully Diluted $ 0.23 $ 0.12 $ 0.48 $ 0.28
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Primary 22,053 18,682 22,205 18,629
======== ======== ======== ========
Fully Diluted 22,184 18,711 22,271 18,644
======== ======== ======== ========
</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 478 (49) 406 884
Treasury Stock Purchased 372 (5,750) (5,750)
Warrants Exercised 4 42 (8) 34
Stock Options Exercised 175 1 1,125 1 (11) 1,115
Dividends Declared (3,126) (3,126)
Net Income 10,701 10,701
------ ---- -------- ------ ------- ----- -------- --------
Balance, June 30, 1997 23,739 $237 $363,772 $2,235 $30,241 2,992 $(28,492) $367,993
====== ==== ======== ====== ======= ===== ======== ========
</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>
SIX MONTH PERIOD
ENDED JUNE 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,701 $ 5,230
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,114 10,136
Provision for loss on land held for sale (379)
Income from Koger Realty Services, Inc. (393) (368)
Provision for uncollectible accounts 119
Loss on sale or disposition of assets 423
Loss on early debt repayment 42
Amortization of mortgage discounts 48 88
Accrued interest added to principal 75
Increase in accounts payable, accrued
liabilities and other liabilities 732 1,614
Decrease in receivables and other assets 1,133 317
-------- --------
Net cash provided by operating activities 23,117 17,515
-------- --------
INVESTING ACTIVITIES
Property acquisitions (32,896)
Building construction expenditures (5,566)
Tenant improvements to existing properties (4,206) (2,821)
Building improvements to existing properties (1,400) (1,229)
Energy management improvements (538) (1,499)
Deferred tenant costs (395) (596)
Additions to furniture and equipment (224) (46)
Proceeds from sale of assets 2,908
Dividends received from Koger Realty Services, Inc. 151
-------- --------
Net cash used in investing activities (42,166) (6,191)
-------- --------
FINANCING ACTIVITIES
Proceeds from sale of stock under Stock Investment Plan 163 90
Proceeds from exercise of warrants and stock options 1,039 191
Dividends paid (2,096)
Principal payments on mortgages and loans (3,496) (2,019)
Treasury stock purchase (5,750)
Financing costs (700) (397)
-------- --------
Net cash used in financing activities (10,840) (2,135)
-------- --------
Net increase (decrease) in cash and cash equivalents (29,889) 9,189
Cash and cash equivalents - beginning of period 35,715 25,415
-------- --------
Cash and cash equivalents - end of period $ 5,826 $ 34,604
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest $ 8,179 $ 9,677
======== ========
Cash paid during the period for income taxes $ 181 $ 135
======== ========
</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 SIX MONTH PERIODS
ENDED JUNE 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 six month period
ended June 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 ended 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
7
<PAGE> 9
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.
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 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 six month period ended June 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 six month
period ended June 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
8
<PAGE> 10
$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 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 stock on the American Stock Exchange on December 31, 1995.
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, 1997, the Company had
$199,598,000 of loans outstanding, which are collateralized by mortgages on
certain operating properties.
Annual maturities for mortgages and loans payable, which are gross of $320,000
of discounts, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
<S> <C>
1997 $ 9,678
1998 3,245
1999 3,530
2000 18,088
2001 3,319
Subsequent Years 162,058
--------
Total $199,918
========
</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
will require the Company to maintain certain financial ratios.
7. DIVIDENDS. The Company paid a quarterly dividend of $0.05 per share
on February 10, 1997, to shareholders of record on January 6, 1997. The Company
paid a quarterly dividend of $0.05 per share on May 6, 1997, to shareholders of
record on April 4, 1997. During the quarter ended June 30, 1997, the Company's
Board of Directors declared a quarterly dividend of $0.10 per share payable on
August 6, 1997, to shareholders of record on July 3, 1997. The Company currently
expects that all dividends paid during 1997 will be treated as ordinary income
for income tax purposes.
9
<PAGE> 11
8. SUBSEQUENT EVENTS. 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 gives the holder the
right to purchase one share of common stock at a price of $8.00 per share, until
the Redemption Date.
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.
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 $26,387,000 for the quarter ended June 30, 1997,
compared to $24,160,000 for the quarter ended June 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 during the quarter ($541,000). At June 30, 1997, the
Company's buildings were on average 92 percent leased with an average rental
rate of $14.41. Rental revenues increased to $51,770,000 during the six month
period ended June 30, 1997, compared to $48,145,000 during the same period last
year. This increase resulted primarily from the same items detailed above.
Management fee revenues totalled $929,000 for the quarter ended June 30, 1997,
compared to $523,000 for the quarter ended June 30, 1996. This increase was due
primarily to an increase in the leasing fees earned under the management
contract with Centoff. Management fee revenues increased to $1,570,000 during
the six month period ended June 30, 1997, compared to $1,051,000 during the same
period last year, primarily for the same reason mentioned above.
Interest revenues decreased $57,000 for the three month period ended June 30,
1997, compared to the same period last year, due to the lower average balance of
cash to invest. Compared to the same period last year, interest revenues
increased $104,000 during the six month period ended June 30, 1997, due to the
higher 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>
June 30, 1997 - Quarter $10,819,000 40.8%
June 30, 1996 - Quarter 10,345,000 42.5%
June 30, 1997 - Six Months 20,787,000 40.0%
June 30, 1996 - Six Months 20,264,000 41.9%
</TABLE>
10
<PAGE> 12
Property operating expenses increased primarily due to (iI) increased accruals
for real estate taxes and (ii) operating expenses for the properties acquired
during the quarter ($194,000).
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 $369,000 and $766,000, respectively, for the
three and six month periods ended June 30, 1997, compared to the same periods
last year, due to (i) improvements made to the Company's existing properties
during 1996 and (ii) the properties acquired during the quarter ended June 30,
1997. Amortization expense increased $163,000 and $212,000, respectively, for
the three and six month periods ended June 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 $867,000 and $1,670,000, respectively, during the
three and six month periods ended June 30, 1997, compared to the same periods
last year, primarily due to the reduction in the average balance of mortgages
and loans payable. At June 30, 1997, the weighted average interest rate on the
Company's outstanding debt was approximately 8.4 percent.
General and administrative expenses for the three month periods ended June 30,
1997 and 1996, totalled $1,526,000 and $1,402,000, respectively, which is 1.0
percent and 0.9 percent (annualized) of average invested assets. General and
administrative expenses for the six month periods ended June 30, 1997 and 1996,
totalled $2,889,000 and $2,868,000, respectively, which is 0.9 percent and 1.0
percent (annualized) of average invested assets.
Direct costs of management contracts increased $150,000 and $295,000,
respectively, for the three and six month periods ended June 30, 1997, compared
to the same periods 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 $5,008,000 for the quarter ended June 30, 1997, compared to
net income of $2,214,000 for the corresponding period of 1996. This improvement
is due primarily to the increase in rental revenues and the reductions in (i)
interest expense, (ii) litigation costs, and (iii) loss on sale or disposition
of assets. These items were partially offset by the increases in (i) property
operations expense, (ii) depreciation and amortization expense, and (iii) direct
cost of management fees. Net income increased $5,471,000 during the six month
period ended June 30, 1997, 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, 1997, the
Company generated approximately $23.1 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
11
<PAGE> 13
Centoff and others. As a REIT for Federal income tax purposes, the Company is
required to pay out annually, as dividends, 95 percent of its REIT taxable
income (which, due to non-cash charges, including depreciation and net operating
loss carryforwards, may be substantially less than cash flow). In the past, the
Company has paid out dividends in amounts at least equal to its REIT taxable
income. The Company believes that its cash provided by operating activities will
be sufficient to cover debt service payments and to pay the dividends required
to maintain REIT status through 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 June 30, 1997, leases representing approximately 15.6 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 688 leases for space in buildings located in 19 of the 20 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, 1997, leases were renewed on approximately 69 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, 1997, the
average rental rate increased from $14.38 to $15.28. Based upon the significant
number of leases which will expire during 1997 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 22.7 percent of the Company's leased
space at June 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 June 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
six month period ended June 30, 1997, the Company's expenditures for
improvements to existing properties increased by $595,000 over the corresponding
period of the prior year primarily due to increases in expenditures for tenant
improvements to the Company's buildings.
12
<PAGE> 14
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 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 214,000 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.
The Company has four buildings under construction which will contain
approximately 246,000 net rentable square feet. Expenditures for construction of
these four buildings are expected to total approximately $18.4 million,
excluding land and tenant improvement costs.
FINANCING ACTIVITIES - 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. The Company repaid
approximately $1.9 million of the outstanding balances of mortgages and loans
payable during the quarter ended June 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 June 30, 1997, the Company had 65
buildings, containing 2,237,180 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.
Loan maturities and normal amortization of mortgages and loans payable are
expected to total approximately $11.3 million over the next 12 months. The
Company plans to draw $8.3 million of the remaining Northwestern loan proceeds
when existing indebtedness on a building matures during August 1997 and believes
that the remainder of 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. On
August 22, 1994, the Company filed a shelf registration statement with respect
to the possible issuance of up to $100 million of its common and/or preferred
stock. The Company has not yet issued any equity under such registration
statement.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
13
<PAGE> 15
ITEM 5. OTHER INFORMATION
(a) The following table sets forth, with respect to the Company's centers
at June 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% $15.16
Austin 12 370,860 98% 17.48
Charlotte Carmel 1 109,600 100% 15.36
Charlotte East 11 468,820 83% 12.95
El Paso 14 251,930 92% 14.57
Greensboro South 13 610,470 94% 14.64
Greenville Park Central(3) 3 134,000 97% 15.47
Greenville Roper Mt. 8 290,560 97% 14.93
Jacksonville Baymeadows 4 468,000 100% 14.90
Jacksonville Central 31 666,500 89% 11.60
Jacksonville Deerwood Park(3) 1 23,000 100% 15.85
Memphis Germantown 3 258,400 99% 17.44
Orlando Central 22 565,220 93% 14.36
Orlando University 2 159,600 99% 16.94
San Antonio Airport(3) 2 214,000 77% 14.96
San Antonio West 26 788,670 93% 12.82
St. Petersburg 15 519,320 95% 13.28
Tallahassee Apalachee Pkwy 14 408,500 86% 16.58
Tallahassee Capital Circle 4 300,700 89% 16.48
Tulsa 13 476,280 74% 10.95
--- ---------
TOTAL 221 8,032,350 92% $14.41
=== ========= === ======
</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 June 30, 1997 by (b) the net rentable square feet
applicable to such total annualized rents.
(3) These properties were acquired during the quarter ended June 30, 1997.
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 June
30, 1997 and on the terms of leases in effect as of June 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 69 percent
of the Company's net rentable square feet which were scheduled to
expire during the six month period ended June 30, 1997.
<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>
1997 688 1,172,537 15.8% $14.19 $ 16,636,510 15.6%
1998 832 1,817,092 24.5% 14.14 25,692,603 24.0%
1999 532 1,382,383 18.7% 13.65 18,872,698 17.7%
2000 285 939,653 12.7% 14.95 14,045,087 13.1%
2001 132 1,036,020 14.0% 14.94 15,480,653 14.5%
2002 47 327,987 4.4% 14.96 4,905,506 4.6%
2003 16 125,550 1.7% 14.02 1,759,897 1.6%
2004 10 132,126 1.8% 12.97 1,713,999 1.6%
2005 5 31,273 0.4% 12.07 377,414 0.4%
OTHER 22 448,165 6.0% 16.39 7,346,426 6.9%
----- --------- ----- ------------ -----
TOTAL 2,569 7,412,786 100.0% $14.41 $106,830,793 100.0%
===== ========= ===== ====== ============ =====
</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 SIX MONTH PERIOD
ENDED JUNE, ENDED JUNE 30,
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 5,008 $ 2,214 $10,701 $ 5,230
Depreciation - real estate 5,081 4,718 10,132 9,378
Amortization - deferred tenant costs 252 209 487 434
Amortization - goodwill 43 42 85 85
Litigation costs 298 553
Loss on early retirement of debt 42 42
Provision for loss on land held for sale 2 (379)
Loss on sale or disposition of assets 423 423
Gain on TKPL note to Southeast 55 76 9 76
------- ------- ------- -------
Funds from Operations $10,483 $ 7,980 $21,077 $16,179
======= ======= ======= =======
</TABLE>
16
<PAGE> 18
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
On April 25, 1997, the Company filed a Form 8-K (dated April
7, 1997) reporting under Item 5, Other Events, that the
Company had closed a revolving credit facility with First
Union National Bank of Florida and Morgan Guaranty Trust
Company of New York and providing under Item 7, Financial
Statements and Exhibits, copies of the loan documents dated
April 7, 1997 evidencing the $50 million revolving credit
facility.
On May 27, 1997, the Company filed a Form 8-K reporting under
Item 5, Other Events, that the Company had issued a News
Release and a Letter to Shareholders and providing under Item
7, Financial Statements and Exhibits, a copy of the Koger
Equity, Inc. News Release, dated May 27, 1997, and a copy of
the Koger Equity, Inc. Letter to Shareholders, dated May 27,
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
CHIEF EXECUTIVE OFFICER
Dated: August 8, 1997
(JAMES L. STEPHENS)
--------------------
JAMES L. STEPHENS
VICE PRESIDENT AND
CHIEF ACCOUNTING OFFICER
18
<PAGE> 1
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,
------------------ -----------------
1997 1996 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
EARNINGS PER COMMON AND DILUTIVE
COMMON EQUIVALENT SHARE:
Net Income $ 5,008 $ 2,214 $10,701 $ 5,230
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 20,831 17,841 20,896 17,821
Weighted average number of additional shares
issuable for common stock equivalents(a) 1,222 841 1,309 808
------- ------- ------- -------
Adjusted common shares 22,053 18,682 22,205 18,629
======= ======= ======= =======
EARNINGS PER SHARE - PRIMARY $ 0.23 $ 0.12 $ 0.48 $ 0.28
======= ======= ======= =======
EARNINGS PER COMMON SHARE ASSUMING
FULL DILUTION:
Net Income $ 5,008 $ 2,214 $10,701 $ 5,230
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 20,831 17,841 20,896 17,821
Weighted average number of additional shares
issuable for all dilutive common stock
equivalents(a) 1,353 870 1,375 823
------- ------- ------- -------
Shares as adjusted for all dilutants 22,184 18,711 22,271 18,644
======= ======= ======= =======
EARNINGS PER SHARE - FULLY DILUTED $ 0.23 $ 0.12 $ 0.48 $ 0.28
======= ======= ======= =======
</TABLE>
(a) Shares issuable were derived using the "Treasury Stock Method" for all
dilutive common stock equivalents.
<PAGE> 1
EXHIBIT 15
August 6, 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 June
30, 1997 and 1996, as indicated in our report dated August 6, 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 June 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 and Registration Statement No. 333-23429 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE COMPANY DOES NOT FILE A CLASSIFIED BALANCE SHEET, THEREFORE THESE NOT
PROVIDED. 5-02 (9), 5-02 (21)
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 5,826
<SECURITIES> 0
<RECEIVABLES> 4,966
<ALLOWANCES> 280
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 655,394
<DEPRECIATION> 92,762
<TOTAL-ASSETS> 586,049
<CURRENT-LIABILITIES> 0
<BONDS> 199,598
0
0
<COMMON> 237
<OTHER-SE> 367,756
<TOTAL-LIABILITY-AND-EQUITY> 586,049
<SALES> 0
<TOTAL-REVENUES> 54,880
<CGS> 0
<TOTAL-COSTS> 21,752
<OTHER-EXPENSES> 13,900
<LOSS-PROVISION> 119
<INTEREST-EXPENSE> 8,227
<INCOME-PRETAX> 10,882
<INCOME-TAX> 181
<INCOME-CONTINUING> 10,701
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,701
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
