<PAGE> 1
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, 2000 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 Identification No.)
incorporation or organization)
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 latest practicable date.
Class Outstanding at July 31, 2000
Common Stock, $.01 par value 26,762,274 shares
<PAGE> 2
KOGER EQUITY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Independent Accountants' Report.............................................................................. 3
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999....................................................................... 4
Condensed Consolidated Statements of Operations
for the Three and Six Month Periods Ended
June 30, 2000 and 1999.................................................................................... 5
Condensed Consolidated Statement of Changes in
Shareholders' Equity for the Six Month Period
Ended June 30, 2000 ...................................................................................... 6
Condensed Consolidated Statements of Cash Flows
for the Six Month Periods Ended June 30, 2000 and 1999................................................... 7
Notes to Condensed Consolidated Financial Statements
for the Three and Six Month Periods Ended
June 30, 2000 and 1999.................................................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders................................................... 14
Item 5. Other Information..................................................................................... 15
Item 6. Exhibits and Reports on Form 8-K...................................................................... 17
Signatures..................................................................................................... 18
</TABLE>
2
<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, 2000 and the
related condensed consolidated statements of operations for the three and six
month periods ended June 30, 2000 and 1999, the condensed consolidated statement
of changes in shareholders' equity for the six month period ended June 30, 2000
and the condensed consolidated statements of cash flows for the six month
periods ended June 30, 2000 and 1999. 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 auditing standards generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 1999, 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 18, 2000, 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, 1999 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Jacksonville, Florida
July 25, 2000
3
<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,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Real Estate Investments:
Operating properties:
Land $ 142,093 $ 140,061
Buildings 815,220 784,769
Furniture and equipment 2,550 2,693
Accumulated depreciation (145,680) (137,452)
------------ ------------
Operating properties - net 814,183 790,071
Properties under construction:
Land 2,128 8,347
Buildings 6,195 41,912
Undeveloped land held for investment 13,899 16,034
Undeveloped land held for sale, net of allowance 557 1,103
Cash and temporary investments 4,974 --
Accounts receivable, net of allowance for uncollectible accounts of $351 and $440 10,796 10,512
Investment in Koger Realty Services, Inc. 2,328 2,319
Cost in excess of fair value of net assets acquired, net of accumulated
amortization of $1,111 and $1,025 1,445 1,530
Other assets 11,976 13,911
------------ ------------
TOTAL ASSETS $ 868,481 $ 885,739
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages and loans payable $ 348,952 $ 351,528
Accounts payable 4,062 12,716
Accrued real estate taxes payable 8,412 1,383
Accrued liabilities - other 16,542 13,162
Dividends payable 9,330 9,370
Advance rents and security deposits 7,319 6,570
------------ ------------
Total Liabilities 394,617 394,729
------------ ------------
Minority interest 23,216 23,184
------------ ------------
Shareholders' Equity:
Common stock 292 288
Capital in excess of par value 462,568 457,945
Notes receivable from stock sales (5,393) --
Retained earnings 23,068 30,546
Treasury stock, at cost (29,887) (20,953)
------------ ------------
Total Shareholders' Equity 450,648 467,826
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 868,481 $ 885,739
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<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,
2000 1999 2000 1999
------- -------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Rental and other rental services $42,131 $ 39,062 $83,537 $77,183
Management fees 241 504 651 1,094
Interest 193 47 249 95
Income (loss) from Koger Realty Services, Inc. 231 (167) 161 446
------- -------- ------- -------
Total revenues 42,796 39,446 84,598 78,818
------- -------- ------- -------
EXPENSES
Property operations 16,275 15,294 31,697 29,968
Depreciation and amortization 8,591 7,688 17,126 15,289
Mortgage and loan interest 6,998 5,448 13,677 11,012
General and administrative 8,979 2,333 14,087 4,054
Direct cost of management fees 162 223 298 663
Other 57 54 136 113
------- -------- ------- -------
Total expenses 41,062 31,040 77,021 61,099
------- -------- ------- -------
INCOME BEFORE GAIN ON SALE OR DISPOSITION OF
ASSETS, INCOME TAXES AND MINORITY INTEREST 1,734 8,406 7,577 17,719
Gain on sale or disposition of assets 4,404 4 4,404 4
------- -------- ------- -------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 6,138 8,410 11,981 17,723
Income taxes -- (39) 155 173
------- -------- ------- -------
INCOME BEFORE MINORITY INTEREST 6,138 8,449 11,826 17,550
Minority interest 298 325 631 676
------- -------- ------- -------
NET INCOME $ 5,840 $ 8,124 $11,195 $16,874
======= ======== ======= =======
EARNINGS PER SHARE:
Basic $ 0.22 $ 0.30 $ 0.42 $ 0.63
======= ======== ======= =======
Diluted $ 0.22 $ 0.30 $ 0.41 $ 0.63
======= ======== ======= =======
WEIGHTED AVERAGE SHARES:
Basic 26,615 26,683 26,705 26,632
======= ======== ======= =======
Diluted 26,959 27,020 27,027 26,953
======= ======== ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<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 NOTES
------------------ CAPITAL IN RECEIVABLE TOTAL
SHARES PAR EXCESS OF FROM STOCK RETAINED TREASURY SHAREHOLDERS'
ISSUED VALUE PAR VALUE SALES EARNINGS STOCK EQUITY
------ ----- ---------- ---------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 28,756 $ 288 $ 457,945 $ 30,546 $ (20,953) $ 467,826
Common stock sold 123 $ (4,003) 4,771 891
Treasury stock purchased (13,996) (13,996)
401(k) Plan contribution 134 128 262
Restricted stock issued (48) (48)
Options exercised 391 4 4,414 (1,390) 163 3,191
Dividends declared (18,673) (18,673)
Net income 11,195 11,195
------ ----- ---------- -------- -------- --------- ---------
Balance, June 30, 2000 29,147 $ 292 $ 462,568 $ (5,393) $ 23,068 $ (29,887) $ 450,648
====== ===== ========== ======== ======== ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<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,
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 11,195 $ 16,874
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 17,126 15,289
Income from Koger Realty Services, Inc. (161) (446)
Provision for uncollectible accounts 339 120
Minority interest 631 676
Gain on sale or disposition of assets (4,404) (4)
Changes in assets and liabilities:
Increase in accounts payable, accrued liabilities
and other liabilities 3,234 126
Decrease (increase) in receivables and other assets 747 (2,684)
--------- ---------
Net cash provided by operating activities 28,707 29,951
--------- ---------
INVESTING ACTIVITIES
Property acquisitions (10) --
Building construction expenditures (9,767) (28,169)
Tenant improvements to first generation space (2,341) (2,717)
Tenant improvements to existing properties (4,555) (5,778)
Building improvements (1,522) (1,560)
Energy management improvements (210) (6)
Deferred tenant costs (1,759) (1,288)
Additions to furniture and equipment (244) (572)
Dividends received from Koger Realty Services, Inc. 152 152
Proceeds from sales of assets 28,857 6
--------- ---------
Net cash provided by (used in) investing activities 8,601 (39,932)
--------- ---------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 2,675 1,424
Proceeds from sales of common stock 891 216
Proceeds from mortgages and loans 52,783 53,943
Dividends paid (18,713) (15,950)
Distributions paid to limited partners (599) (507)
Treasury stock purchased (13,996) (852)
Principal payments on mortgages and loans (55,359) (27,556)
Financing costs (16) (161)
--------- ---------
Net cash (used in) provided by financing activities (32,334) 10,557
--------- ---------
Net increase in cash and cash equivalents 4,974 576
Cash and cash equivalents - beginning of period -- 4,827
--------- ---------
Cash and cash equivalents - end of period $ 4,974 $ 5,403
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest, net of amount capitalized $ 13,520 $ 10,938
========= =========
Cash paid during the period for income taxes $ 155 $ 94
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 8
KOGER EQUITY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2000 AND 1999
(UNAUDITED - SEE INDEPENDENT ACCOUNTANTS' REPORT)
1. BASIS OF PRESENTATION. The condensed consolidated financial statements
include the accounts of Koger Equity, Inc., its wholly-owned subsidiaries and
Koger-Vanguard Partners, L.P. (the "Company"). All material intercompany
transactions have been eliminated. The financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission related to interim financial statements.
The financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1999,
included in the Company's Form 10-K Annual Report for the year ended December
31, 1999. The balance sheet at December 31, 1999, 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, 2000, are not necessarily indicative of the results to be
expected for the full year.
In December 1999, the Securities and Exchange Commission issued Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The
objective of this SAB is to provide further guidance on revenue recognition
issues in the absence of authoritative literature addressing a specific
arrangement or a specific industry. The Company is required to adopt the
guidance in the SAB no later than the fourth quarter of 2000. Adoption of this
guidance is not expected to have a material impact on the Company's financial
position or results of operations. The SEC has recently indicated it intends to
issue further guidance with respect to adoption of specific issues addressed by
SAB No. 101. Until such time as this additional guidance is issued, the Company
is unable to assess the impact, if any, it may have on its financial position or
results of operations.
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
self-administered and self-managed. Koger-Vanguard Partners, L.P. ("KVP") is a
Delaware limited partnership, for which KE is the general partner. Koger
Equity's common stock is listed on the New York Stock Exchange under the ticker
symbol KE.
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 eight 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. 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
be used to reduce REIT taxable income, are limited for alternative minimum tax
purposes. Since the Company had no REIT taxable income during 1999 and does not
expect to have REIT taxable income during 2000, no provision has been made for
Federal income taxes. However, the Company has recorded a provision of $130,000
for alternative minimum tax for the six month period ended June 30, 2000.
8
<PAGE> 9
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, 2000, the Company contributed 15,557 shares of common
stock to the Company's 401(k) Plan. These shares had a value of approximately
$262,000 based on the closing price of the Company's common stock on the
American Stock Exchange on December 31, 1999. During the six month period ended
June 30, 1999, the Company contributed 15,603 shares of common stock to the
Company's 401(k) Plan. These shares had a value of approximately $268,000 based
on the closing price of the Company's common stock on the American Stock
Exchange on December 31, 1998. In addition, the Company issued 19,695 shares of
common stock as payment for certain 1998 bonuses for senior management. These
shares had a value of approximately $285,000 based on the closing price of the
Company's common stock on the American Stock Exchange on February 18, 1999.
5. EARNINGS PER COMMON SHARE. Basic earnings per common share has been
computed based on the weighted average number of shares of common stock
outstanding for each period. Diluted earnings per common share is similar to
basic earnings per share except that the weighted average number of common
shares outstanding is increased to include the number of additional common
shares that would have been outstanding if the dilutive common shares (options)
had been issued. The treasury stock method is used to calculate dilutive shares
which reduces the gross number of dilutive shares by the number of shares
purchasable from the proceeds of the options assumed to be exercised.
6. MORTGAGES AND LOANS PAYABLE. At June 30, 2000, the Company had
$348,952,000 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>
2000 $ 2,165
2001 98,106
2002 12,704
2003 5,202
2004 5,632
Subsequent Years 225,143
---------
Total $ 348,952
=========
</TABLE>
7. DIVIDENDS. The Company paid a quarterly dividend of $0.35 per share on
February 3, 2000, to shareholders of record on December 31, 1999. The Company
paid a quarterly dividend of $0.35 per share on May 4, 2000, to shareholders of
record on March 31, 2000. During the quarter ended June 30, 2000, the Company's
Board of Directors declared a quarterly dividend of $0.35 per share payable on
August 3, 2000, to shareholders of record on June 30, 2000. A portion of the
dividends paid during 2000 may be treated as return of capital for income tax
purposes.
8. NOTES RECEIVABLE FROM STOCK SALES. During February 2000, the Company's
Board of Directors (the "Board") approved a program to lend up to $2.5 million
to executive officers and department heads for the purpose of exercising
options. The loans have a term of 60 months and bear interest at 150 basis
points over the applicable LIBOR rate. Through June 30, 2000, options have been
exercised to acquire 185,027 shares of common stock under this program.
In conjunction with the Company's plan to repurchase up to 2.65 million shares
of common stock (the "Shares"), the Board granted to Thomas Crocker, Chief
Executive Officer, the right to purchase up to 500,000 Shares and to Robert
Onisko, Chief Financial Officer, the right to purchase up to 150,000 Shares.
These officers are entitled to make purchases of one Share of every three Shares
purchased by the Company as part of this plan. The Shares may be purchased at
the same time and for the same prices as the Company purchases Shares. In
addition, the Company will loan up to 75 percent of the purchase price for these
Shares to Mr. Crocker and Mr. Onisko. These loans will be collateralized by the
Shares purchased, will be without recourse and will bear interest at 150 basis
points over the applicable LIBOR rate. Through June 30, 2000, Mr. Crocker
acquired 207,970 Shares and Mr. Onisko acquired 69,323 Shares under this plan.
9
<PAGE> 10
9. STOCK OPTIONS. During the quarter ended June 30, 2000, the Company
granted options to purchase 600,000 shares of its common stock. All options were
granted with an exercise price equal to the market value at the date of grant.
10. SUBSEQUENT EVENTS. On July 10, 2000, the Company sold approximately 5.6
acres of undeveloped land located in Richmond, Virginia (with a book value of
$481,000) for $850,000. During July 2000, the Company signed an agreement to
sell the El Paso Center. The sale of this office park is expected to close
during the quarter ending September 30, 2000. Selected information for the El
Paso Center, as of June 30, 2000, is provided below:
<TABLE>
<S> <C>
Number of buildings 17
Gross square feet 386,000
Usable square feet 315,583
Percent leased 84%
Net book value (in thousands) $ 18,213
</TABLE>
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, 1999.
RESULTS OF OPERATIONS.
Rental and other rental services revenues totaled $42,131,000 for the
quarter ended June 30, 2000, compared to $39,062,000 for the quarter ended June
30, 1999. This increase in rental revenues resulted primarily from (i) increases
in the Company's average rental rate and (ii) increases in rental revenues
($4,327,000) from the properties acquired and construction completed during 1999
and 2000. The effect of these increases was partially offset by the reduction of
rental revenues ($3,740,000) caused by the sale of two office parks during 1999
and another office park on June 1, 2000. At June 30, 2000, the Company's
buildings were on average 90 percent leased with an average rental rate of
$17.35. Excluding the five buildings which were in the lease-up period at June
30, 2000, the remainder of the Company's buildings were on average 92 percent
leased. At June 30, 1999, the Company's buildings were on average 90 percent
leased with an average rental rate of $16.31. Rental and other rental services
revenues increased to $83,537,000 during the six month period ended June 30,
2000, compared to $77,183,000 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 ($8,207,000) from the properties acquired and
construction completed during 1999 and 2000. The effect of these increases was
partially offset by the reduction of rental revenues ($6,966,000) caused by the
sale of office parks as described above.
Management fee revenues totaled $241,000 for the quarter ended June 30, 2000,
compared to $504,000 for the quarter ended June 30, 1999. This decrease was due
primarily to the reduction in fees earned under the management contract with
Centoff due to the management contract for one of the Centoff centers being
transferred from the Company to Koger Realty Services, Inc. ("KRSI") on January
1, 2000. The Company earned management fee revenues totaling $204,000 for the
management and leasing of this property during the quarter ended June 30, 1999.
Management fee revenues decreased to $651,000 during the six month period ended
June 30, 2000, compared to $1,094,000 during the same period last year, due to
the reduction in fees earned under the management contract with Centoff. The
Company earned management fee revenues totaling $404,000 for the management and
leasing of the transferred property during the six months ended June 30, 1999.
During March 1999, Centoff sold one of the centers for which the Company had
provided management services. The Company earned management fee revenues
totaling $194,000 for the management and leasing of this property during 1999.
Another agreement to manage one commercial office building was terminated by the
Company during February 1999. The Company earned fees of $82,000 for the
management of this building during 1999.
10
<PAGE> 11
Income (loss) from Koger Realty Services, Inc. totaled $231,000 for the quarter
ended June 30, 2000, compared to $(167,000) for the quarter ended June 30, 1999.
This increase was due primarily to the decrease in the accrual for compensation
expense related to a bonus plan which is based on KE's common stock price. For
the six months ended June 30, 2000, income from Koger Realty Services, Inc.
declined $285,000, compared to the same period last year, primarily due to an
increase in general and administrative expenses.
Property operations expense includes charges for utilities, real estate taxes,
janitorial, maintenance, property insurance, provision for uncollectible rents
and management costs. The amount of property operations expense and its
percentage of total rental revenues for the applicable periods are as follows:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
PERIOD AMOUNT RENTAL REVENUES
--------------------------- ----------- ----------------
<S> <C> <C>
June 30, 2000 - Quarter $16,275,000 38.6%
June 30, 1999 - Quarter 15,294,000 39.2%
June 30, 2000 - Six Months 31,697,000 37.9%
June 30, 1999 - Six Months 29,968,000 38.8%
</TABLE>
Property operations expense increased primarily due to (i) increased accruals
for real estate taxes, (ii) increased accruals to provision for uncollectible
accounts and (iii) increases in property operations expense ($1,816,000 and
$3,259,000, respectively, for the three and six month periods ended June 30,
2000) for the properties acquired and construction completed during 1999 and
2000. The effect of these increases was partially offset by the decline in
property operations expense ($1,523,000 and $2,935,000, respectively, for the
three and six month periods ended June 30, 2000) caused by the sale of two
office parks during 1999 and another office park on June 1, 2000.
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 $847,000 and $1,699,000, respectively, for the
three and six month periods ended June 30, 2000, compared to the same periods
last year, due to the properties acquired and construction completed during 1999
and 2000. Amortization expense increased $56,000 and $138,000, respectively, for
the three and six month periods ended June 30, 2000, compared to the same
periods last year, due primarily to deferred tenant costs which were incurred
after June 30, 1999.
Interest expense increased by $1,550,000 and $2,665,000, respectively, during
the three and six month periods ended June 30, 2000, compared to the same
periods last year, primarily due to the increase in the average balance of
mortgages and loans payable. At June 30, 2000, the weighted average interest
rate on the Company's outstanding debt was approximately 8.07 percent.
General and administrative expenses for the three month periods ended June 30,
2000 and 1999, totaled $8,979,000 and $2,333,000, respectively. This increase is
primarily due to certain non-recurring charges associated with a corporate
reorganization which totaled approximately $6,832,000. These non-recurring
charges include (i) charges for termination benefits and impact of curtailment
under the supplemental executive retirement plan ($2,490,000), (ii) charges for
severance payments ($3,265,000), (iii) reorganization expenses ($862,000) and
(iv) accrued compensation related to accelerated vesting of stock options
($215,000). General and administrative expenses for the six month periods ended
June 30, 2000 and 1999, totaled $14,087,000 and $4,054,000, respectively. This
increase is primarily due to certain non-recurring charges for (i) costs of a
corporate reorganization ($6,832,000), (ii) severance payments made to certain
former senior executives ($2,562,000), (iii) changes in termination benefits
under the supplemental executive retirement plan ($584,000), (iv) payments to
retiring directors ($138,000) and (v) initial fees for listing on the New York
Stock Exchange ($161,000).
Direct costs of management contracts decreased $61,000 for the three month
period ended June 30, 2000, compared to the same period last year, due to
decreased costs associated with providing property management services for the
Centoff management contract caused by the transfer of the management contract
for one of the Centoff centers to KRSI. The Company incurred costs totaling
$43,000 for the management and leasing of this property during the quarter ended
June 30, 1999. Compared to the prior
11
<PAGE> 12
year, direct costs of management contracts decreased $365,000 for the six months
ended June 30, 2000. The Company incurred costs totaling $164,000, during the
six months ended June 30, 1999, for the management and leasing of the property
for which the management contract was transferred to KRSI. During the six months
ended June 30, 1999, the Company incurred costs totaling $138,000 for the
management and leasing of the property which was sold by Centoff.
Net income totaled $5,840,000 for the quarter ended June 30, 2000, compared to
net income of $8,124,000 for the corresponding period of 1999. This decrease is
due primarily to (i) an increase in general and administrative expenses due to
corporate reorganization costs, (ii) an increase in property operations expense,
(iii) an increase in interest expense and (iv) an increase in depreciation and
amortization expense. These items were partially offset by increases in (i) gain
on sale or disposition of assets and (ii) rental revenues. Net income decreased
$5,679,000 during the six month period ended June 30, 2000, compared to the same
period last year. This decrease is due primarily to increases in (i) general and
administrative expenses as explained above, (ii) property operations expense,
(iii) interest expense and (iv) depreciation and amortization expense. These
items were partially offset by increases in (i) gain on sale or disposition of
assets and (ii) rental revenues.
LIQUIDITY AND CAPITAL RESOURCES.
OPERATING ACTIVITIES - During the six months ended June 30, 2000, the
Company generated approximately $28.7 million in net cash from operating
activities. The Company's primary internal sources of cash are (i) the
collection of rents from buildings owned by the Company and (ii) the receipt of
management fees paid to the Company in respect of properties managed on behalf
of Centoff. As a REIT for Federal income tax purposes, the Company is required
to pay out annually, as dividends, 95 percent of its REIT taxable income (which,
due to non-cash charges, including depreciation and net operating loss
carryforwards, may be 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 2000.
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, 2000,
leases representing approximately 10.8 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 2000. This represents 448 leases for
space in buildings located in 19 of the 24 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 six months ended June 30, 2000,
leases were renewed on approximately 52 percent of the Company's usable square
feet, which were scheduled to expire during the six month period. For those
leases which were renewed, the average rental rate increased from $16.49 to
$17.73, an increase of 7.5 percent. Based upon the number of leases which will
expire during 2000 and the competition for tenants in the markets in which the
Company operates, the Company has and expects to continue to offer incentives to
certain new and renewal tenants. These incentives may include the payment of
tenant improvement costs and in certain markets reduced rents during initial
lease periods.
The Company continues to benefit from existing economic conditions and stable
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 offer excellent 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 and rental rates for the Company's buildings.
Governmental tenants (including the State of Florida and the United States
Government) which account for approximately 19.9 percent of the Company's leased
space at June 30, 2000, 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 Company's private sector tenants may reduce their
need for office space in the future.
12
<PAGE> 13
INVESTING ACTIVITIES - At June 30, 2000, 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, 2000, the Company's expenditures for improvements to
existing properties decreased $1,057,000 from the corresponding period of the
prior year primarily due to a decrease in expenditures for tenant improvements.
This decrease in expenditures for tenant improvements was primarily due to (i)
the sale of two office parks during the third quarter of 1999 and (ii) fewer
leased square feet expiring during the first six months of 2000 compared to
1999.
On June 1, 2000, the Company sold the Tulsa Center (containing 476,400 usable
square feet and 10 acres of undeveloped land) for approximately $28,844,000, net
of selling costs. These properties were sold to KWIRP-Tulsa Associates, L.P. The
sale of the Tulsa Center when combined with certain property adjustments
resulted in a gain of $4,404,000 during the quarter ended June 30, 2000.
The Company has two buildings under construction, which will contain
approximately 148,000 usable square feet. Expenditures for construction of these
two buildings are expected to total approximately $14.9 million, excluding land
and tenant improvement costs.
FINANCING ACTIVITIES - The Company has a $150 million secured revolving
credit facility ($93.5 million of which was outstanding on June 30, 2000 at a
weighted average interest rate of 8.17 percent) provided by First Union National
Bank of Florida, AmSouth Bank, N.A., Citizens Bank of Rhode Island, Compass Bank
and Guaranty Federal Bank.
Loan maturities and normal amortization of mortgages and loans payable are
expected to total approximately $4.5 million over the next 12 months. However,
the Company's secured revolving credit facility will mature in December 2001.
The Company has filed shelf registration statements with respect to the possible
issuance of up to $300 million of its common and/or preferred stock and the
Company has issued $91.6 million of its common stock under such registration
statements. At June 30, 2000, the Company had 23 office buildings, containing
approximately 1.7 million usable square feet, which were unencumbered.
The foregoing discussion contains forward-looking statements concerning 2000.
The actual results of operations for 2000 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 risk 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, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. The Company currently has a $150 million secured
revolving credit facility with variable interest rates. The Company may incur
additional variable rate debt in the future to meet its financing needs.
Increases in interest rates on such debt could increase the Company's interest
expense, which would adversely affect the Company's cash flow and the amount of
distributions to its shareholders. The Company has not entered into any interest
rate hedge contracts to mitigate this interest rate risk. As of June 30, 2000,
the Company had $93.5 million outstanding under the secured revolving credit
facility. If the weighted average interest rate on this variable rate debt
changes 100 basis points higher or lower, annual interest expense would be
increased or decreased by approximately $935,000.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 2000 Annual Meeting of Shareholders on May 18,
2000.
(b) Not Applicable.
(c) At the Company's 2000 Annual Meeting of Shareholders in addition to
the election of directors, the following matters were considered,
voted upon and approved:
1. The amendment to the Koger Equity, Inc. Articles of Incorporation:
<TABLE>
<S> <C>
SHARES VOTED FOR: 23,082,080
SHARES VOTED AGAINST: 66,767
SHARES ABSTAINED: 58,667
BROKER NON-VOTE: 0
</TABLE>
2. The Koger Equity, Inc. 1998 Equity and Cash Incentive Plan, as
Amended and Restated:
<TABLE>
<S> <C>
SHARES VOTED FOR: 19,930,403
SHARES VOTED AGAINST: 3,191,591
SHARES ABSTAINED: 85,520
BROKER NON-VOTE: 0
</TABLE>
14
<PAGE> 15
ITEM 5. OTHER INFORMATION
(a) The following table sets forth, with respect to each Koger Center or
location at June 30, 2000, gross square feet, usable square feet,
percentage leased, and the average annual rent per usable square foot
leased.
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
RENT PER
GROSS USABLE PERCENT SQUARE
KOGER CENTER/ LOCATION SQUARE FEET SQUARE FEET LEASED (1) FOOT (2)
---------------------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Atlanta Chamblee 1,199,800 982,673 97% $ 18.11
Atlanta Gwinnett (3) 274,400 228,066 81% 20.10
Atlanta Perimeter 184,000 151,175 100% 21.96
Austin 458,400 370,948 99% 22.16
Birmingham Colonnade (3) 471,200 393,926 80% 18.15
Birmingham Colonnade-Retail 112,600 112,186 96% 11.19
Charlotte Carmel 339,200 285,526 91% 19.47
Charlotte University 190,600 161,805 98% 19.68
Charlotte Vanguard 548,200 484,601 91% 13.20
El Paso (3) 386,000 315,583 84% 16.04
Greensboro South 749,200 610,866 78% 16.03
Greensboro Wendover 98,300 80,978 54% 19.34
Greenville Park Central 161,700 138,478 84% 18.44
Greenville Roper Mt. 431,000 350,199 90% 17.74
Jacksonville Baymeadows 793,400 664,363 98% 13.19(4)
Jacksonville JTB 322,500 276,544 100% 13.25
Memphis Germantown (3) 562,600 459,528 88% 19.36
Orlando Central 699,700 552,549 97% 16.30
Orlando Lake Mary 318,000 268,472 96% 21.91
Orlando University 337,800 276,366 100% 19.57
Richmond Paragon 154,300 126,621 97% 19.80
San Antonio Airport 258,800 202,149 92% 19.32
San Antonio West 1,102,200 915,683 85% 16.49
St. Petersburg (3) 715,500 579,676 79% 16.23
Tallahassee 960,300 786,092 88% 19.04
----------- ------------
Total 11,829,700 9,775,053
=========== ============
Weighted Average - Total Company 90% $ 17.35
========= =======
Weighted Average - Operational Buildings 92% $ 17.30
========= =======
Weighted Average - Buildings in Lease-up 45% $ 21.14
========= =======
</TABLE>
(1) The percent leased rates have been calculated by dividing total
multi-tenant usable square feet leased in an office building by
multi-tenant usable square feet in such building.
(2) Rental rates are computed by dividing (a) total annualized base rents
(which excludes expense pass-throughs and reimbursements) for a Koger
Center or location as of June 30, 2000 by (b) the multi-tenant usable
square feet applicable to such total annualized rents.
(3) Includes a building which is currently in the lease-up period.
(4) Excludes corporate office space from calculation. Includes the effect of
three net leases where tenants lease the entire building and pay certain
operating costs in addition to base rent.
15
<PAGE> 16
(b) The following schedule sets forth for all of the Company's buildings (i)
the number of leases which will expire during the remainder of calendar
year 2000 and calendar years 2001 through 2008, (ii) the total multi-tenant
usable area in square feet covered by such leases, (iii) the percentage of
total multi-tenant usable square feet represented by such leases, (iv) the
average annual rent per square foot for such leases, (v) the current
annualized rents represented by such leases, and (vi) the percentage of
gross annualized rents contributed by such leases. This information is
based on the buildings owned by the Company on June 30, 2000 and on the
terms of leases in effect as of June 30, 2000, 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 52 percent of the Company's multi-tenant usable
square feet, which were scheduled to expire during the six month period
ended June 30, 2000.
<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 FOOT UNDER RENTS UNDER REPRESENTED BY
PERIOD EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES EXPIRING LEASES EXPIRING LEASES
------ --------- ----------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
2000 448 947,265 11.0% $ 17.17 $ 16,267,314 10.8%
2001 555 1,727,521 20.0% 16.43 28,385,794 18.9%
2002 402 1,301,873 15.0% 17.91 23,319,026 15.5%
2003 319 1,497,985 17.3% 17.53 26,259,037 17.5%
2004 265 1,341,070 15.5% 16.98 22,764,974 15.2%
2005 78 535,294 6.2% 18.83 10,080,936 6.7%
2006 15 246,516 2.8% 20.86 5,143,027 3.4%
2007 8 256,979 3.0% 16.31 4,191,598 2.8%
2008 12 181,755 2.1% 19.78 3,594,627 2.4%
OTHER 16 617,048 7.1% 16.46 10,153,830 6.8%
----- ---------- ----- ------- ------------- -----
TOTAL 2,118 8,653,306 100.0% $ 17.35 $ 150,160,163 100.0%
===== ========== ===== ======= ============= =====
</TABLE>
(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 30, Ended June 30,
--------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 5,840 $ 8,124 $ 11,195 $ 16,874
Depreciation - real estate 7,738 6,914 15,459 13,803
Amortization - deferred tenant costs 483 442 931 828
Amortization - goodwill 42 43 85 85
Minority interest 298 325 631 676
Gain on sale of operating properties (4,676) -- (4,676) --
Loss (gain) on sale or disposition of
non-operating assets 272 -- 272 (4)
-------- -------- -------- --------
Funds from Operations $ 9,997 $ 15,848 $ 23,897 $ 32,262
======== ======== ======== ========
</TABLE>
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
10(a)(1) Employment Agreement between Koger Equity, Inc. and Thomas J. Crocker, effective January
17, 2000.
10(a)(2) Promissory Note (No Recourse Note), dated as of February 17, 2000, executed by Thomas J.
Crocker as maker in favor of Koger Equity, Inc. as Lender.
10(a)(3) Promissory Note (25% Recourse Note), dated as of February 17, 2000, executed by Thomas J.
Crocker as maker in favor of Koger Equity, Inc. as Lender.
10(a)(4) Stock Pledge Security Agreement between Koger Equity, Inc. and Thomas J. Crocker, dated as of
February 17, 2000.
10(a)(5) Stock Purchase and Loan Agreement between Thomas J. Crocker and Koger Equity, Inc., dated as
of February 17, 2000.
10(a)(6) Stock Option Agreement between Koger Equity, Inc. and Thomas J. Crocker, dated as of February
17, 2000.
10(b)(1) Employment Agreement between Koger Equity, Inc. and Robert E. Onisko, effective January 17,
2000.
10(b)(2) Promissory Note (No Recourse Note), dated as of February 17, 2000, executed by Robert E.
Onisko as maker in favor of Koger Equity, Inc. as Lender.
10(b)(3) Promissory Note (25% Recourse Note), dated as of February 17, 2000, executed by Robert E.
Onisko as maker in favor of Koger Equity, Inc. as Lender.
10(b)(4) Stock Pledge Security Agreement between Koger Equity, Inc. and Robert E. Onisko, dated as of
February 17, 2000.
10(b)(5) Stock Purchase and Loan Agreement between Robert E. Onisko and Koger Equity, Inc., dated as of
February 17, 2000.
10(b)(6) Stock Option Agreement between Koger Equity, Inc. and Robert E. Onisko, dated as of
February 17, 2000.
11 Earnings Per Share Computations.
15 Letter re: Unaudited interim financial information.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
On June 16, 2000, the Company filed a Form 8-K reporting under Item 5,
Other Events, a major management reorganization involving staff
reduction and the costs associated with this restructuring and
providing under Item 7, Financial Statements and Exhibits, Koger
Equity, Inc. News Release dated June 16, 2000.
17
<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
/s/ ROBERT E. ONISKO
-------------------------
ROBERT E. ONISKO
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Dated: August 10, 2000
/s/ JAMES L. STEPHENS
-------------------------
JAMES L. STEPHENS
VICE PRESIDENT AND
CHIEF ACCOUNTING OFFICER
18
