<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, 1998 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-9997
KOGER EQUITY, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2898045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8880 FREEDOM CROSSING TRAIL
JACKSONVILLE, FLORIDA 32256
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 732-1000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at October 30, 1998
Common Stock, $.01 par value 26,580,137 shares
<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, 1998 and December 31, 1997................................................. 3
Condensed Consolidated Statements of Operations
for the Three and Nine Month Periods Ended
September 30, 1998 and 1997.............................................................. 4
Condensed Consolidated Statement of Changes in
Shareholders' Equity for the Nine Month Period
Ended September 30, 1998................................................................. 5
Condensed Consolidated Statements of Cash Flows
for the Nine Month Periods Ended September 30, 1998
and 1997................................................................................. 6
Notes to Condensed Consolidated Financial
Statements for the Three and Nine Month Periods
Ended September 30, 1998 and 1997........................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 12
Item 5. Other Information........................................................................... 13
Item 6. Exhibits and Reports on Form 8-K............................................................ 16
Signatures ....................................................................................... 17
</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, 1998, and the
related condensed consolidated statements of operations for the three and nine
month periods ended September 30, 1998 and 1997, the condensed consolidated
statement of changes in shareholders' equity for the nine month period ended
September 30, 1998 and the condensed consolidated statements of cash flows for
the nine month periods ended September 30, 1998 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1997, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 28, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1997 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
October 29, 1998
2
<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,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Real Estate Investments:
Operating properties:
Land $ 130,058 $ 111,697
Buildings 668,108 567,332
Furniture and equipment 3,316 2,220
Accumulated depreciation (122,515) (104,700)
------------ ------------
Operating properties - net 678,967 576,549
Properties under construction:
Land 13,171 8,978
Buildings 24,749 18,608
Undeveloped land held for investment 17,553 13,249
Undeveloped land held for sale 1,263 1,512
Cash and temporary investments 3,249 16,955
Accounts receivable, net of allowance for
uncollectible accounts of $288 and $250 6,111 5,646
Investment in Koger Realty Services, Inc. 1,103 472
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $813 and $685 1,743 1,870
Other assets 13,256 12,258
------------ ------------
TOTAL ASSETS $ 761,165 $ 656,097
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages and loans payable $ 260,481 $ 181,963
Accounts payable 6,596 8,802
Accrued real estate taxes payable 7,896 3,294
Accrued liabilities - other 7,859 6,623
Dividends payable 7,973 6,352
Advance rents and security deposits 4,715 4,801
------------ ------------
Total Liabilities 295,520 211,835
------------ ------------
Commitments and Contingencies
Shareholders' Equity:
Common stock 286 284
Capital in excess of par value 454,909 441,451
Retained earnings 30,752 30,947
Treasury stock, at cost (20,302) (28,420)
------------ ------------
Total Shareholders' Equity 465,645 444,262
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 761,165 $ 656,097
============ ============
</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,
-------------------- ----------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Rental and other rental services $34,476 $28,230 $ 97,195 $ 80,250
Management fees 547 639 1,738 2,209
Interest 85 178 392 1,084
Income from Koger Realty Services, Inc. 207 96 1,062 489
Adjustment to gain on TKPL note to Southeast (9)
------- ------- -------- --------
Total revenues 35,315 29,143 100,387 84,023
------- ------- -------- --------
EXPENSES
Property operations 14,370 12,037 39,197 32,824
Depreciation and amortization 6,766 6,124 20,416 17,238
Mortgage and loan interest 4,251 4,037 11,518 12,264
General and administrative 1,620 1,367 4,877 4,256
Direct cost of management fees 326 469 972 1,553
Undeveloped land costs 87 107 280 341
Loss on early retirement of debt 102 144
Recovery of loss on land held for sale (379)
------- ------- -------- --------
Total expenses 27,420 24,243 77,260 68,241
------- ------- -------- --------
INCOME BEFORE GAIN ON SALE OR
DISPOSITION OF ASSETS 7,895 4,900 23,127 15,782
Gain on sale or disposition of assets 3 2,057 6 2,057
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 7,898 6,957 23,133 17,839
Income taxes 160 8 770 189
------- ------- -------- --------
NET INCOME $ 7,738 $ 6,949 $ 22,363 $ 17,650
======= ======= ======== ========
EARNINGS PER SHARE:
Basic $ 0.29 $ 0.33 $ 0.85 $ 0.84
======= ======= ======== ========
Diluted $ 0.29 $ 0.31 $ 0.83 $ 0.79
======= ======= ======== ========
WEIGHTED AVERAGE SHARES:
Basic 26,566 21,259 26,199 21,018
======= ======= ======== ========
Diluted 27,114 22,341 26,869 22,251
======= ======= ======== ========
</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 EARNINGS SHARES COST EQUITY
------- -------- ---------- -------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 28,389 $ 284 $ 441,451 $30,947 2,982 $(28,420) $444,262
Common stock sold 12,049 (1,016) 8,378 20,427
Treasury stock purchased 18 (302) (302)
401(k) Plan contribution 126 (9) 76 202
Stock options exercised 166 2 1,283 2 (34) 1,251
Dividends declared (22,558) (22,558)
Net income 22,363 22,363
------- -------- --------- ------- ----- -------- --------
Balance, September 30, 1998 28,555 $ 286 $ 454,909 $30,752 1,977 $(20,302) $465,645
======= ======== ========= ======= ===== ======== ========
</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,
------------------------
1998 1997
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 22,363 $ 17,650
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,416 17,238
Income from Koger Realty Services, Inc. (1,062) (489)
Recovery of loss on land held for sale (379)
Provision for uncollectible accounts 94 156
Adjustment to gain on TKPL unsecured note to Southeast 9
Gain on sale or disposition of assets (6) (2,057)
Loss on early retirement of debt 144
Amortization of mortgage discounts 71
Increase in accounts payable, accrued
liabilities and other liabilities 3,895 3,828
Decrease (increase) in receivables and other assets (1,764) 200
--------- --------
Net cash provided by operating activities 43,936 36,371
--------- --------
INVESTING ACTIVITIES
Property acquisitions (73,845) (45,833)
Building construction expenditures (38,404) (11,731)
Tenant improvements to first generation space (2,829) (135)
Tenant improvements to existing properties (7,433) (5,622)
Building improvements (3,015) (2,181)
Energy management improvements (194) (531)
Deferred tenant costs (1,450) (1,220)
Additions to furniture and equipment (1,096) (473)
Proceeds from sale of assets 6 6,345
Dividends received from Koger Realty Services, Inc. 431 364
--------- --------
Net cash used in investing activities (127,829) (61,017)
--------- --------
FINANCING ACTIVITIES
Proceeds from sale of common stock 20,427 257
Proceeds from exercise of warrants and stock options 1,104 10,141
Proceeds from mortgage and loans 101,917 24,300
Dividends paid (20,937) (4,190)
Principal payments on mortgages and loans (31,900) (25,428)
Treasury stock purchase (302) (5,750)
Warrants redeemed (379)
Financing costs (122) (727)
--------- --------
Net cash provided by (used in) financing activities 70,187 (1,776)
--------- --------
Net decrease in cash and cash equivalents (13,706) (26,422)
Cash and cash equivalents - beginning of period 16,955 35,715
--------- --------
Cash and cash equivalents - end of period $ 3,249 $ 9,293
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest $ 10,162 $ 12,193
========= ========
Cash paid during the period for income taxes $ 1,047 $ 189
========= ========
</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, 1998 AND 1997
(UNAUDITED - SEE INDEPENDENT ACCOUNTANTS' REPORT)
1. BASIS OF PRESENTATION. The condensed consolidated financial
statements include the accounts of Koger Equity, Inc. and its wholly-owned
subsidiaries (the "Company"). All material intercompany transactions have been
eliminated. The financial statements have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission related to
interim financial statements.
The financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1997,
included in the Company's Form 10-K Annual Report for the year ended December
31, 1997. The balance sheet at December 31, 1997, has been derived from the
audited financial statements at that date and is condensed.
All adjustments of a normal recurring nature, which, in the opinion of
management, are necessary to present a fair statement of the results of
operations for the interim periods, have been made. Results of operations for
the nine month period ended September 30, 1998, are not necessarily indicative
of the results to be expected for the full year.
Certain 1997 amounts have been reclassified to conform with 1998 presentations.
2. ORGANIZATION. Koger Equity, Inc. ("KE"), a Florida corporation, was
incorporated in 1988 for the purpose of investing in the ownership of income
producing properties, primarily commercial office buildings. KE is totally
self-administered and self-managed.
In addition to managing its own properties, KE, through certain related
entities, provides property management services to third parties. In conjunction
with Koger Real Estate Services, Inc. ("KRES"), a Florida corporation and a
wholly-owned subsidiary of KE, KE manages 21 office buildings owned by Centoff
Realty Company, Inc. ("Centoff"), a subsidiary of Morgan Guaranty Trust Company
of New York.
3. FEDERAL INCOME TAXES. The Company is operated in a manner so as to
qualify, and has elected tax treatment, as a real estate investment trust under
the Internal Revenue Code (a "REIT"). As a REIT, the Company is required to
distribute annually at least 95 percent of its REIT taxable income to its
shareholders. Since the Company had no REIT taxable income during 1997 and does
not expect to have REIT taxable income during 1998, no provision has been made
for Federal income taxes. However, the Company has recorded a provision of
$380,000 for alternative minimum tax for the nine month period ended September
30, 1998. To the extent that the Company pays dividends equal to 100 percent of
REIT taxable income, the earnings of the Company are not taxed at the corporate
level. However, the use of net operating loss carryforwards, which may reduce
REIT taxable income to zero, are limited for alternative minimum tax purposes.
4. STATEMENTS OF CASH FLOWS. Cash in excess of daily requirements is
invested in short-term monetary securities. Such temporary cash investments have
an original maturity date of less than three months and are deemed to be cash
equivalents for purposes of the statements of cash flows. During the nine month
period ended September 30, 1998, the Company contributed 9,197 shares of common
stock to the Company's 401(k) Plan. These shares had a value of approximately
$202,000 based on the closing price of the Company's common stock on the
American Stock Exchange on December 31, 1997. During January 1998, the Company
assumed a mortgage loan with an outstanding balance of approximately $8,501,000
in conjunction with the acquisition of an office building. During the nine month
period ended September 30, 1997, the Company contributed 23,657 shares of common
stock to the Company's 401(k) Plan. These shares had a value of approximately
$444,000 based on the closing price of the Company's common stock on the
American Stock Exchange on December 31, 1996. In addition, the Company issued
15,455 shares of common stock as payment for certain
7
<PAGE> 9
1996 bonuses for senior management. These shares had a value of approximately
$278,000 based on the closing price of the Company's common stock on the
American Stock Exchange on January 6, 1997.
5. EARNINGS PER SHARE. Basic earnings per share has been computed based
on the weighted average number of common shares outstanding during the period.
The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator has been increased to
include the number of additional common shares that would have been outstanding
if the dilutive potential common shares for stock options had been issued.
6. MORTGAGES AND LOANS PAYABLE. At September 30, 1998, the Company had
$260,481,000 of loans outstanding, which are collateralized by mortgages on
certain operating properties. Annual maturities for mortgages and loans payable
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1998 $ 907
1999 68,957
2000 3,209
2001 3,485
2002 11,486
Subsequent Years 172,437
----------
Total $ 260,481
==========
</TABLE>
7. DIVIDENDS. The Company paid the following dividends during the nine
months ended September 30, 1998:
<TABLE>
<CAPTION>
PAYMENT DATE RECORD DATE DIVIDEND PER SHARE
----------------- ----------------- ------------------
<S> <C> <C>
February 14, 1998 December 31, 1997 $0.25
May 6, 1998 March 31, 1998 $0.25
August 6, 1998 June 30, 1998 $0.30
</TABLE>
During the quarter ended September 30, 1998, the Company's Board of Directors
declared a quarterly dividend of $0.30 per share payable on November 5, 1998, to
shareholders of record at the close of business on September 30, 1998. The
Company currently expects that all dividends paid during 1998 will be treated as
ordinary income to the recipient for income tax purposes.
8. STOCK OPTIONS. During the quarter ended September 30, 1998, the
Company granted options to purchase 461,500 shares of its common stock. All
options were granted with an exercise price in excess of the market value at the
date of grant.
9. SUBSEQUENT EVENT. On October 22, 1998, the Company completed the
acquisition of the Vanguard Office Center, a suburban office park located in
Charlotte, North Carolina, for a total purchase price of $52.3 million. This
transaction was structured as a contribution of the property to a down-REIT
partnership to be called Koger-Vanguard Partners, L.P., whose General Partner is
the Company. The purchase price was paid by the assumption of approximately
$22.2 million of debt, the issuance of 999,710 partnership operating units
(valued at approximately $22.95 million) and the balance in cash. The
partnership operating units carry with them the right to redeem the units for
common shares of the Company on a one-operating-unit-for-one-share basis or, at
the option of the Company, the units may be redeemed for cash.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes appearing elsewhere in this
Form 10-Q, and the Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's Annual Report on Form 10-K
for the period ended December 31, 1997.
8
<PAGE> 10
RESULTS OF OPERATIONS.
Rental and other rental services revenues totaled $34,476,000 for the quarter
ended September 30, 1998, compared to $28,230,000 for the quarter ended
September 30, 1997. This increase in rental revenues resulted primarily from (i)
increases in the Company's average rental rate and (ii) increases in rental
revenues from the properties acquired and construction completed during 1997 and
1998 ($5,163,000). At September 30, 1998, the Company's buildings were on
average 91 percent leased with an average rental rate of $15.63. Rental and
other rental services revenues increased to $97,195,000 during the nine month
period ended September 30, 1998, compared to $80,250,000 during the same period
last year. This increase resulted primarily from (i) increases in the Company's
average rental rate and (ii) increases in rental revenues from the properties
acquired and construction completed during 1997 and 1998 ($13,174,000).
Management fee revenues totaled $547,000 for the quarter ended September 30,
1998, compared to $639,000 for the quarter ended September 30, 1997. This
decrease was due primarily to a decrease in leasing fees earned. Management fee
revenues decreased to $1,738,000 during the nine month period ended September
30, 1998, compared to $2,209,000 during the same period last year, primarily due
to a decrease in the leasing fees earned under the management contract with
Centoff and from other sources.
Interest revenues decreased $93,000 and $692,000, respectively, for the three
and nine month periods ended September 30, 1998, compared to the same periods
last year, due to the lower average balance of cash to invest.
Property operations expense includes such charges as utilities, real estate
taxes, janitorial, maintenance, property insurance, provision for uncollectible
rents and management costs. The amounts of property operations expense and its
percentage of total rental revenues for the applicable periods are as follows:
<TABLE>
<CAPTION>
PERCENT OF
TOTAL RENTAL
PERIOD AMOUNT REVENUES
-------------------------------- ------------ ------------
<S> <C> <C>
September 30, 1998 - Quarter $ 14,370,000 41.7%
September 30, 1997 - Quarter 12,037,000 42.6%
September 30, 1998 - Nine Months 39,197,000 40.3%
September 30, 1997 - Nine Months 32,824,000 40.9%
</TABLE>
Property operations expense increased primarily due to (i) increased accruals
for real estate taxes, (ii) increased utility costs, (iii) increased property
management costs and (iv) increases in operations expense for the properties
acquired and construction completed during 1997 and 1998 ($2,037,000 and
$5,460,000, respectively, for the three and nine month periods ended September
30, 1998).
Depreciation expense has been calculated on the straight line method based upon
the useful lives of the Company's depreciable assets, generally 3 to 40 years.
Depreciation expense increased $453,000 and $2,579,000 respectively, for the
three and nine month periods ended September 30, 1998, compared to the same
periods last year, due to (i) improvements made to the Company's existing
properties during 1997 and 1998 and (ii) the properties acquired and
construction completed during 1997 and 1998 ($832,000 and $2,284,000,
respectively, for the three and nine month periods ended September 30, 1998).
Amortization expense increased $189,000 and $599,000, respectively, for the
three and nine month periods ended September 30, 1998, compared to the same
periods last year, due primarily to (i) financing costs incurred during 1997 for
the secured revolving credit facility and (ii) deferred tenant costs incurred
after September 30, 1997.
Interest expense increased by $214,000 during the three month period ended
September 30, 1998, compared to the same period last year, primarily due to the
increase in the outstanding balance of mortgages and loans payable. Compared to
the same period last year, interest expense decreased by $746,000 during the
nine month period ended September 30, 1998
9
<PAGE> 11
primarily due to the increase in interest capitalization due to the Company's
construction of office buildings. At September 30, 1998, the weighted average
annual interest rate on the Company's outstanding debt was approximately 8.0
percent.
General and administrative expenses for the three month periods ended September
30, 1998 and 1997, totaled $1,620,000 and $1,367,000, respectively, which is 0.8
percent and 0.8 percent (annualized) of average invested assets. General and
administrative expenses for the nine month periods ended September 30, 1998 and
1997, totaled $4,877,000 and $4,256,000, respectively, which is 0.8 percent and
0.9 percent (annualized) of average invested assets. These increases were
primarily due to (i) increases in group insurance costs, (ii) costs for
corporate office relocation and (iii) increased accruals related to a bonus
plan.
Direct costs of management contracts decreased $143,000 and $581,000,
respectively, for the three and nine month periods ended September 30, 1998,
compared to the same periods last year, due to decreased costs associated with
providing property management services for all management contracts.
Based on the proceeds received from the sale of the Miami land parcel and the
Company's analysis of the fair value of the remaining land parcels held for
sale, the Company reversed $379,000 of the provision for loss on land held for
sale, which had been previously recorded.
Net income totaled $7,738,000 for the quarter ended September 30, 1998, compared
to net income of $6,949,000 for the corresponding period of 1997. This
improvement is due primarily to the increase in rental revenues which was
partially offset by increases in (i) property operations expense and (ii)
depreciation and amortization expense and the decrease in gain on sale or
disposition of assets. Net income increased $4,713,000 during the nine month
period ended September 30, 1998, compared to the same period last year, due to
the same items detailed above.
LIQUIDITY AND CAPITAL RESOURCES.
OPERATING ACTIVITIES - During the nine months ended September 30, 1998, the
Company generated approximately $43.9 million in net cash from operating
activities. The Company's primary internal sources of cash are (i) the
collection of rents from buildings owned by the Company and (ii) the receipt of
management fees paid to the Company in respect of properties managed on behalf
of Centoff and others. As a REIT for Federal income tax purposes, the Company is
required to pay out annually, as dividends, 95 percent of its REIT taxable
income (which, due to non-cash charges, including depreciation and net operating
loss carryforwards, may be substantially less than cash flow). In the past, the
Company has paid out dividends in amounts at least equal to its REIT taxable
income. The Company believes that its cash provided by operating activities will
be sufficient to cover debt service payments and to pay the dividends required
to maintain REIT status through 1998.
The level of cash flow generated by rents depends primarily on the occupancy
rates of the Company's buildings and changes in rental rates on new and renewed
leases and under escalation provisions in existing leases.
At September 30, 1998, leases representing approximately 7.6 percent of the
gross annualized rent from the Company's properties, without regard to the
exercise of options to renew, were due to expire during the remainder of 1998.
This represents 326 leases for space in buildings located in 20 of the 23
centers or locations in which the Company owns buildings. Certain of these
tenants may not renew their leases or may reduce their demand for space. During
the nine months ended September 30, 1998, leases were renewed on approximately
61 percent of the Company's net rentable square feet, which were scheduled to
expire during the nine month period. For those leases which renewed during the
nine months ended September 30, 1998, the average rental rate increased from
$15.03 to $15.93. Based upon the significant number of leases which will expire
during 1998 and 1999 and the competition for tenants in the markets in which the
Company operates, the Company has and expects to continue to offer incentives to
certain new and renewal tenants. These incentives may include the payment of
tenant improvements costs and in certain markets reduced rents during initial
lease periods.
10
<PAGE> 12
The Company continues to benefit from improving economic conditions and reduced
vacancy levels for office buildings in many of the metropolitan areas in which
the Company owns buildings. The Company believes that the southeastern and
southwestern regions of the United States provide significant economic growth
potential due to their diverse regional economies, expanding metropolitan areas,
skilled work force and moderate labor costs. However, the Company cannot predict
whether such economic growth will continue. Cash flow from operations could be
reduced if economic growth were not to continue in the Company's markets and if
this resulted in lower occupancy rates for the Company's buildings.
Governmental tenants (including the State of Florida and the United States
Government) which account for approximately 21.2 percent of the Company's leased
space at September 30, 1998, may be subject to budget reductions in times of
recession and governmental austerity measures. Consequently, there can be no
assurance that governmental appropriations for rents may not be reduced.
Additionally, certain of the private sector tenants, which have contributed to
the Company's rent stream, may reduce their current demands, or curtail their
future need, for additional office space.
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information. All significant accounting applications used by the
Company are packaged software products licensed from various computer software
companies. During 1998, the Company began implementing its existing plan to
upgrade its significant accounting applications from DOS-based software to
Windows-based software. The Company has confirmed that its Windows-based
software applications are Year 2000 Compliant. The project to upgrade these
applications to Windows-based software will be completed by March 31, 1999.
The Company has also completed its initial assessment of its critical building
operating systems (HVAC, lighting, security and elevators) regarding Year 2000
Compliance. This assessment determined that the costs of dealing with timing
devices which are not Year 2000 Compliant would not be material to the Company's
financial position or results of operations. The Company is continuing to
inventory all building operating systems to confirm the Company's assessment of
these devices with the applicable manufacturers.
The total cost to the Company of these Year 2000 Compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. These costs and the date on which the Company
plans to complete its application conversions are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from these
plans.
INVESTING ACTIVITIES - At September 30, 1998, substantially all of the
Company's invested assets were in real properties. Improvements to the Company's
existing properties have been financed through internal operations. During the
nine month period ended September 30, 1998, the Company's expenditures for
improvements to existing properties increased by $2,308,000 over the
corresponding period of the prior year primarily due to increases in
expenditures for tenant improvements to the Company's buildings.
During the quarter ended March 31, 1997, the Company sold 8.1 acres of
unimproved land located in Miami, Florida for approximately $2,908,000, net of
selling costs. On August 8, 1997, the Company sold 17.2 acres of unimproved land
located in Richmond, Virginia for approximately $3,433,000, net of selling
costs.
On January 30, 1998, the Company acquired a building, containing 127,700 net
rentable square feet, located in Richmond, Virginia for a purchase price of
$16.5 million. On February 1, 1998, the Company acquired a building, containing
19,000 net rentable square feet, located in Jacksonville, Florida for a purchase
price of $2.0 million. On March 6, 1998, the Company acquired 14.41 acres of
land located in Jacksonville, Florida for a purchase price of $2.3 million. On
April 22, 1998, the
11
<PAGE> 13
Company acquired an office and retail complex consisting of (i) four office
buildings containing 279,300 net rentable square feet, (ii) a retail development
containing 112,600 net rentable square feet and (iii) approximately 22 acres of
developable land. These properties were acquired for a purchase price of
approximately $58.2 million and are located in Birmingham, Alabama. On May 18,
1998, the Company acquired 15.4 acres of land located in Jacksonville, Florida
for a purchase price of $2.68 million.
The Company has ten buildings under construction, which will contain
approximately 887,000 net rentable square feet. Expenditures for construction of
these ten buildings are expected to total approximately $75.6 million, excluding
land and tenant improvement costs.
FINANCING ACTIVITIES - The Company has a $100 million secured revolving
credit facility ($66 million of which was outstanding on September 30, 1998)
provided by First Union National Bank of Florida, Morgan Guaranty Trust Company
of New York, AmSouth Bank, N.A. and Guaranty Federal Bank. At September 30,
1998, the Company had 74 buildings, containing 2,992,900 net rentable square
feet, which were unencumbered.
On March 27, 1998, the Company issued 1,000,000 shares of its common stock to
Wheat First Securities, Inc. at a price per share of $20.246875.
Loan maturities and normal amortization of mortgages and loans payable are
expected to total approximately $69.1 million over the next 12 months. This
assumes that the secured revolving credit facility will be repaid at its
original maturity date of April 7, 1999. However, this credit facility may be
extended annually by the lender for one year periods. Significant maturities of
the Company's remaining mortgages and loans payable do not begin to occur until
2006. The Company has filed shelf registration statements with respect to the
possible issuance of up to $300 million of its common and/or preferred stock.
The Company has issued $91.6 million of its common stock under such registration
statements.
The foregoing discussion contains forward-looking statements concerning 1998.
The actual results of operations for 1998 could differ materially from those
projected because of factors affecting the financial markets, reactions of the
Company's existing and prospective investors, the ability of the Company to
identify and execute development projects and acquisition opportunities, the
ability of the Company to renew and enter into new leases on favorable terms,
and other risks factors. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Cautionary Statement Relevant
to Forward-Looking Information for Purpose of the 'Safe Harbor' Provisions of
the Private Securities Litigation Reform Act of 1995" in the Company's Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 1997.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
12
<PAGE> 14
ITEM 5. OTHER INFORMATION
(a) The following table sets forth, with respect to the Company's centers or
locations at September 30, 1998, gross square feet, net rentable square
feet, percentage leased, and the average annual rent per net rentable
square foot leased.
<TABLE>
<CAPTION>
AVERAGE
NET ANNUAL
GROSS RENTABLE RENT PER
SQUARE SQUARE PERCENT SQUARE
KOGER CENTER/LOCATION FEET FEET LEASED (1) FOOT (2)
- --------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Atlanta Chamblee 1,146,100 938,100 95% $16.22
Atlanta Gwinnett (3) 171,200 139,400 82% 17.61
Atlanta Perimeter 181,100 154,100 100% 17.50
Austin 458,400 370,900 100% 19.11
Birmingham Colonnade 326,300 279,300 97% 15.81
Birmingham Colonnade-Retail 112,600 112,600 93% 11.43
Charlotte Carmel (4) 339,200 283,300 75% 17.89
Charlotte East 574,800 468,900 83% 13.79
El Paso 364,100 298,300 94% 15.50
Greensboro South 749,200 610,700 95% 14.90
Greenville Park Central 161,700 134,000 91% 16.97
Greenville Roper Mt. (5) 431,000 350,900 88% 16.62
Jacksonville Baymeadows 793,400 664,200 98% 15.15
Jacksonville Central 828,200 666,000 84% 13.07
Jacksonville JTB 29,600 23,000 100% 16.48
Memphis Germantown 366,400 299,100 99% 18.18
Orlando Central 699,700 554,400 91% 15.20
Orlando University 194,600 159,600 98% 18.10
Richmond Paragon 154,300 127,700 86% 19.07
San Antonio Airport 258,800 200,100 95% 17.28
San Antonio West 960,700 788,900 86% 14.14
St. Petersburg 625,700 509,000 96% 14.37
Tallahassee 960,300 789,600 89% 17.70
Tulsa 581,100 476,400 85% 11.98
---------- ---------
TOTAL 11,468,500 9,398,500 91% $15.63
========== ========= === ======
</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 or location as of September 30, 1998 by (b) the net rentable
square feet applicable to such total annualized rents.
(3) Includes a building, containing 59,600 net rentable square feet, for
which construction has been completed. This building is currently in
the lease-up period.
(4) Includes a building, containing 112,500 net rentable square feet, for
which construction has been completed. This building is currently in
the lease-up period.
(5) Includes a building, containing 60,400 net rentable square feet, for
which construction has been completed. This building is currently in
the lease-up period.
13
<PAGE> 15
(b) The following schedule sets forth for all of the Company's office
buildings (i) the number of leases which will expire during the
remainder of calendar year 1998 and calendar years 1999 through 2006,
(ii) the total net rentable area in square feet covered by such leases,
(iii) the percentage of total net rentable square feet represented by
such leases, (iv) the average annual rent per square foot for such
leases, (v) the current annual rental represented by such leases, and
(vi) the percentage of gross annual rental contributed by such leases.
This information is based on the buildings owned by the Company on
September 30, 1998 and on the terms of leases in effect as of September
30, 1998, on the basis of then existing base rentals, and without
regard to the exercise of options to renew. Furthermore, the
information below does not reflect that some leases have provisions for
early termination for various reasons, including, in the case of
government entities, lack of budget appropriations. Leases were renewed
on approximately 61 percent of the Company's net rentable square feet,
which were scheduled to expire during the nine month period ended
September 30, 1998.
<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>
1998 326 684,684 8.0% $14.77 $ 10,109,861 7.6%
1999 930 1,562,914 18.3% 15.10 23,600,876 17.7%
2000 495 1,427,102 16.7% 15.95 22,767,344 17.0%
2001 429 1,649,414 19.3% 15.88 26,196,389 19.6%
2002 146 801,917 9.4% 15.95 12,788,278 9.6%
2003 165 1,082,749 12.6% 16.10 17,430,220 13.0%
2004 85 444,719 5.2% 11.78 5,239,424 3.9%
2005 17 108,385 1.3% 16.49 1,787,555 1.3%
2006 11 220,035 2.6% 18.68 4,110,259 3.1%
OTHER 21 569,720 6.6% 16.93 9,644,317 7.2%
----- --------- ----- ------ ------------ -----
TOTAL 2,625 8,551,639 100.0% $15.63 $133,674,523 100.0%
===== ========= ===== ====== ============ =====
</TABLE>
14
<PAGE> 16
(c) The Company believes that Funds from Operations is one measure of the
performance of an equity real estate investment trust. Funds from
Operations should not be considered as an alternative to net income as
an indication of the Company's financial performance or to cash flow
from operating activities (determined in accordance with generally
accepted accounting principles) as a measure of the Company's
liquidity, nor is it necessarily indicative of sufficient cash flow to
fund all of the Company's needs. Funds from Operations is calculated as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTH PERIOD NINE MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 7,738 $ 6,949 $ 22,363 $ 17,650
Depreciation - real estate 5,983 5,571 18,243 15,703
Amortization - deferred tenant costs 389 252 1,084 739
Amortization - goodwill 43 43 128 128
Gain on sale or disposition of assets (3) (2,057) (6) (2,057)
Adjustment to gain on TKPL note
to Southeast 9
Recovery of loss on land held for sale (379)
Loss on early retirement of debt 102 144
-------- -------- -------- --------
Funds from Operations $ 14,150 $ 10,860 $ 41,812 $ 31,937
======== ======== ======== ========
</TABLE>
(d) For information concerning how a shareholder may properly bring
business before a meeting of shareholders of the Company and nominate
persons for election as directors to the Company's Board, reference is
made to paragraph (d) of Item 5. (Other Information) of the Company's
quarterly report on Form 10-Q for the quarterly period ended June 30,
1998.
15
<PAGE> 17
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.
</TABLE>
(b) Reports on Form 8-K There were no reports on Form 8-K filed
during the quarter ended September 30, 1998.
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KOGER EQUITY, INC.
Registrant
(DAVID B. HILEY)
----------------------------
DAVID B. HILEY
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Dated: November 11, 1998
(JAMES L. STEPHENS)
------------------------
JAMES L. STEPHENS
VICE PRESIDENT AND
CHIEF ACCOUNTING OFFICER
17
<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,
------------------------ ----------------------
1998 1997 1998 1997
---------- --------- --------- --------
<S> <C> <C> <C> <C>
EARNINGS PER COMMON AND DILUTIVE
POTENTIAL COMMON SHARES:
Net Income $ 7,738 $ 6,949 $ 22,363 $ 17,650
========== ========= ========= ========
Shares:
Weighted average number of common
shares outstanding 26,566 21,259 26,199 21,018
Weighted average number of additional shares
issuable for dilutive potential shares (a) 548 1,082 670 1,233
---------- --------- ---------- --------
Adjusted common shares 27,114 22,341 26,869 22,251
========== ========= ========== ========
EARNINGS PER SHARE - DILUTED $ 0.29 $ 0.31 $ 0.83 $ 0.79
========== ========= ========== ========
</TABLE>
(a) Shares issuable were derived using the "Treasury Stock Method" for all
dilutive potential shares.
<PAGE> 1
EXHIBIT 15
November 11, 1998
Koger Equity, Inc.
8880 Freedom Crossing Trail
Jacksonville, Florida 32256
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited interim
financial information of Koger Equity, Inc. and subsidiaries for the periods
ended September 30, 1998 and 1997, as indicated in our report dated October
29, 1998; because we did not perform an audit, we expressed no opinion on
such financial information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, is
incorporated by reference in Registration Statement No. 33-55179 of Koger
Equity, Inc. on Form S-3, Registration Statement No. 33-54617 of Koger Equity,
Inc. on Form S-8, Registration Statement No. 333-20975 of Koger Equity, Inc. on
Form S-3, Registration Statement No. 333-23429 of Koger Equity, Inc. on Form S-8
and Registration Statement No. 333-37919 of Koger Equity, Inc. on Form S-3.
We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the
Registration Statement prepared or certified by an accountant or a report
prepared or certified by an accountant within the meaning of Sections 7 and
11 of that Act.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
<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> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 3,249
<SECURITIES> 0
<RECEIVABLES> 6,399
<ALLOWANCES> 288
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 858,218
<DEPRECIATION> 122,515
<TOTAL-ASSETS> 761,165
<CURRENT-LIABILITIES> 0
<BONDS> 260,244
0
0
<COMMON> 286
<OTHER-SE> 465,359
<TOTAL-LIABILITY-AND-EQUITY> 761,165
<SALES> 0
<TOTAL-REVENUES> 100,387
<CGS> 0
<TOTAL-COSTS> 40,075
<OTHER-EXPENSES> 25,573
<LOSS-PROVISION> 94
<INTEREST-EXPENSE> 11,518
<INCOME-PRETAX> 23,133
<INCOME-TAX> 770
<INCOME-CONTINUING> 22,363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,363
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.83
</TABLE>
