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, 2002
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.)
433 PLAZA REAL, SUITE 335
BOCA RATON, FLORIDA 33432
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 395-9666
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 October 31, 2002
Common Stock, $.01 par value 21,295,290 shares
1
KOGER EQUITY, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Independent Accountants' Report............................................................... 3
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets--
September 30, 2002 and December 31, 2001................................................... 4
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended
September 30, 2002 and 2001................................................................ 5
Condensed Consolidated Statement of Changes in
Shareholders' Equity for the Nine Months
Ended September 30, 2002 .................................................................. 6
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2002 and 2001...................................... 7
Notes to Condensed Consolidated Financial
Statements for the Three and Nine Months
Ended September 30, 2002 and 2001.......................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................... 17
Item 4. Controls and Procedures....................................................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 18
Item 5. Other Information............................................................................ 18
Item 6. Exhibits and Reports on Form 8-K............................................................. 21
Signatures and Certification.......................................................................... 22, 23
2
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Koger Equity, Inc.
Boca Raton, Florida:
We have reviewed the accompanying condensed consolidated balance sheet of Koger
Equity, Inc. and subsidiaries (the "Company") as of September 30, 2002, and the
related condensed consolidated statements of operations for the three-month and
nine-month periods ended September 30, 2002 and 2001, the condensed consolidated
statement of changes in shareholders' equity for the nine-month period ended
September 30, 2002 and the condensed consolidated statements of cash flows for
the nine-month periods ended September 30, 2002 and 2001. 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, 2001, 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 22, 2002, 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, 2001 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
West Palm Beach, Florida
October 25, 2002
3
KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - See Independent Accountants' Report)
(In thousands, except share data)
September 30, December 31,
2002 2001
----------- ----------
ASSETS
Real Estate Investments:
Operating properties:
Land $ 98,253 $ 91,919
Buildings 688,363 568,285
Furniture and equipment 3,120 3,082
Accumulated depreciation (142,295) (123,999)
------------ -----------
Operating properties, net 647,441 539,287
Undeveloped land held for investment 11,015 13,779
Undeveloped land held for sale, net of allowance 2,840 76
Cash and cash equivalents 10,930 113,370
Accounts receivable, net of allowance for
uncollectible accounts of $1,271 and $1,114 10,744 11,574
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $683 and $683 595 595
Other assets 11,939 11,904
----------- -----------
TOTAL ASSETS $ 695,504 $ 690,585
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages and loans payable $ 314,994 $ 248,683
Accounts payable 3,236 4,962
Accrued real estate taxes payable 6,336 1,007
Other accrued liabilities 9,929 9,206
Dividends payable 7,453 44,159
Advance rents and security deposits 5,137 5,103
----------- -----------
Total Liabilities 347,085 313,120
----------- -----------
Minority interest -- 22,923
Commitments and contingencies -- --
----------- -----------
Shareholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares
authorized; no shares issued -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; 29,816,632 and 29,663,362 shares
issued; 21,294,032 and 21,128,905 shares outstanding 298 297
Capital in excess of par value 472,012 469,779
Notes receivable from stock sales (5,066) (5,066)
Retained earnings 12,726 21,180
Treasury stock, at cost; 8,522,600 and 8,534,457 shares (131,551) (131,648)
------------ -----------
Total Shareholders' Equity 348,419 354,542
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 695,504 $ 690,585
=========== ===========
See notes to unaudited condensed consolidated financial statements.
4
KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - See Independent Accountants' Report)
(In thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
--------- -------- --------- --------
REVENUES
Rental and other rental services $ 31,836 $ 42,243 $ 94,286 $125,462
Management fees 839 1,074 2,590 3,530
Interest 98 154 329 596
Other -- -- 2 81
--------- -------- --------- ---------
Total revenues 32,773 43,471 97,207 129,669
--------- --------- --------- ---------
EXPENSES
Property operations 11,846 15,591 34,233 46,749
Depreciation and amortization 6,663 9,617 19,915 27,154
Mortgage and loan interest, including amortization
of deferred loan costs of $303 and $227 for the three
months and $891 and $680 for the nine months 6,041 6,543 17,864 20,059
General and administrative 2,971 2,276 8,428 6,148
Direct costs of management fees 797 798 2,630 2,658
Other 43 60 125 171
--------- -------- --------- ---------
Total expenses 28,361 34,885 83,195 102,939
--------- -------- --------- ---------
INCOME BEFORE GAIN ON SALE OR DISPOSITION OF
ASSETS, INCOME TAXES AND MINORITY INTEREST 4,412 8,586 14,012 26,730
Gain on sale or disposition of assets 1 -- 2 --
--------- -------- --------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 4,413 8,586 14,014 26,730
Income taxes 19 257 112 449
--------- -------- --------- ---------
INCOME BEFORE MINORITY INTEREST 4,394 8,329 13,902 26,281
Minority interest -- 323 20 937
--------- -------- --------- ---------
NET INCOME $ 4,394 $ 8,006 $ 13,882 $ 25,344
========= ======== ========= =========
EARNINGS PER SHARE:
Basic $ 0.21 $ 0.30 $ 0.65 $ 0.94
========= ======== ========= =========
Diluted $ 0.21 $ 0.30 $ 0.65 $ 0.94
========= ======== ========= =========
WEIGHTED AVERAGE SHARES:
Basic 21,293 26,865 21,258 26,872
========= ======== ========= =========
Diluted 21,410 26,912 21,407 26,888
========= ======== ========= =========
See Notes to unaudited condensed consolidated financial statements.
5
KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited - See Independent Accountants' Report)
(In thousands)
Notes
Common Stock Capital in Receivable Total
Shares Par Excess of from Stock Retained Treasury Shareholders'
Issued Value Par Value Sales Earnings Stock Equity
------ ----- --------- ---------- -------- --------- -------------
Balance, December 31, 2001 29,663 $297 $469,779 $(5,066) $21,180 $(131,648) $354,542
Common stock sold 113 97 210
Options exercised 154 1 2,120 2,121
Dividends declared (22,336) (22,336)
Net Income 13,882 13,882
------ ---- -------- -------- ------- --------- ---------
Balance, September 30, 2002 29,817 $298 $472,012 $(5,066) $12,726 $(131,551) $348,419
====== ==== ======== ======== ======= ========= =========
See notes to unaudited condensed consolidated financial statements.
6
KOGER EQUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - See Independent Accountants' Report)
(In thousands)
Nine Months
Ended September 30,
2002 2001
----------- ----------
OPERATING ACTIVITIES
Net income $ 13,882 $ 25,344
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,915 27,154
Amortization of deferred loan costs 588 680
Income from Koger Realty Services, Inc. -- (81)
Provision for uncollectible accounts 430 1,108
Minority interest 20 937
Gain on sale or disposition of assets (2) --
Changes in assets and liabilities:
Decrease (increase) in receivables and other assets 301 (1,305)
Increase in accounts payable, accrued liabilities
and other liabilities 4,361 395
--------- ---------
Net cash provided by operating activities 39,495 54,232
--------- ---------
INVESTING ACTIVITIES
Property acquisitions (125,478) --
Building construction expenditures -- (2,025)
Tenant improvements to first generation space (1,224) (3,734)
Tenant improvements to existing properties (3,743) (4,979)
Building improvements (2,582) (3,283)
Deferred tenant costs (1,382) (1,568)
Additions to furniture and equipment (38) (147)
Cash acquired in purchase of assets from KRSI -- 2,535
Purchase of limited partner interests in Koger-Vanguard Partnership, L.P. (16,465) --
Proceeds from sale of assets 2 15
--------- ---------
Net cash used in investing activities (150,910) (13,186)
---------- ----------
FINANCING ACTIVITIES
Collection of notes receivable from stock sales -- 174
Proceeds from exercise of stock options 2,121 634
Proceeds from sales of common stock 210 199
Proceeds from mortgages and loans 88,000 32,500
Dividends paid (59,043) (28,156)
Distributions paid to limited partners (398) (943)
Principal payments on mortgages and loans payable (21,689) (37,908)
Financing costs (226) (21)
---------- ----------
Net cash provided by (used in) financing activities 8,975 (33,521)
--------- ----------
Net (decrease) increase in cash and cash equivalents (102,440) 7,525
Cash and cash equivalents - beginning of period 113,370 1,615
--------- ---------
Cash and cash equivalents - end of period $ 10,930 $ 9,140
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest, net of amount capitalized $ 17,669 $ 19,543
========= =========
Cash paid during the period for income taxes $ 485 $ 252
========= =========
See notes to unaudited condensed consolidated financial statements.
7
KOGER EQUITY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2002 AND 2001
(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 and accounts have been
eliminated in consolidation. The financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission related to interim financial statements.
During January 2002, the Company acquired all of the remaining limited
partnership units in Koger-Vanguard Partners, L.P., a Delaware limited
partnership (the "Partnership"), for approximately $16.5 million. These
partnership units were convertible into 999,710 shares of the Company's common
stock. The Company previously consolidated the Partnership with an associated
minority interest. The acquisition of this minority interest was recorded using
the purchase method of accounting. As a result, the excess of the fair value of
the acquired net assets over the purchase price (approximately $6.2 million) was
recorded as a reduction in the bases of the acquired fixed assets.
During January 2001, Koger Equity, Inc. organized KRSI Merger, Inc., a Florida
corporation, as a wholly owned taxable subsidiary. Effective February 1, 2001,
Koger Realty Services, Inc. ("KRSI"), a Delaware corporation, was merged into
this new subsidiary (the "Merger"). Pursuant to the Merger, the common stock of
KRSI was repurchased at the formula price set forth in KRSI's Articles of
Incorporation. Subsequent to the Merger, the name of the new Florida subsidiary
was changed to Koger Realty Services, Inc. This merger was accounted for using
the purchase method of accounting resulting in a reduction in the cost basis of
assets of approximately $143,000. Prior to the Merger, the Company accounted for
its investment in the preferred stock of KRSI using the equity method.
The accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 2001, included in the Company's Form 10-K Annual Report
for the year ended December 31, 2001. The accompanying balance sheet at December
31, 2001 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. Certain prior year amounts have been
reclassified in order to conform to current year presentation. Results of
operations for the three and nine months ended September 30, 2002 are not
necessarily indicative of the results to be expected for the full year.
On July 20, 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." These
Statements make significant changes to the accounting for business combinations,
goodwill, and intangible assets. SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations with limited
exceptions for combinations initiated prior to July 1, 2001. In addition, it
further clarifies the criteria for recognition of intangible assets separately
from goodwill. This Statement is effective for business combinations completed
after June 30, 2001. The Company's adoption of SFAS No. 141 has not had a
material impact on its condensed consolidated financial statements.
8
SFAS No. 142 discontinues the practice of amortizing goodwill and indefinite
lived intangible assets and initiates an annual review for impairment.
Impairment would be examined more frequently if certain indicators are
encountered. Intangible assets with a determinable useful life will continue to
be amortized over that period. The amortization provisions apply to goodwill and
intangible assets acquired after September 30, 2001. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001. The Company adopted the
Statement effective January 1, 2002. The Company's adoption of SFAS No. 142 has
not had a material impact on its condensed consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and requires that the amount recorded as a liability be capitalized by
increasing the carrying amount of the related long-lived asset. Subsequent to
initial measurement, the liability is accreted to the ultimate amount
anticipated to be paid, and is also adjusted for revision to the timing or
amount of estimated cash flows. The capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS No. 143 is required to be adopted for fiscal years
beginning after June 15, 2002, with earlier application encouraged. The Company
is currently assessing but has not yet determined the impact of SFAS No. 143 on
its financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS No. 144 retains the fundamental provisions of SFAS No. 121
for (a) recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of by
sale. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The Company adopted the Statement effective January 1, 2002. The Company's
adoption of SFAS No. 144 has not had a material impact on its condensed
consolidated financial statements, but will require future sales of commercial
real estate properties to be presented as discontinued operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt." Under SFAS No. 4, all gains and losses from
extinguishment of debt were required to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. Under
SFAS No. 145, gains and losses from extinguishment of debt should be classified
as extraordinary items only if they meet the criteria in Accounting Principles
Board Opinion No. 30. SFAS No. 145 is effective for fiscal years beginning after
May 15, 2002. The Company is currently assessing but has not yet determined the
impact of SFAS No. 145 on its financial position and results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement applies to costs associated
with an exit activity that does not involve an entity newly acquired in a
business combination, an asset retirement obligation covered by SFAS No. 143 or
with a disposal activity covered by SFAS No. 144. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity shall be
recognized and measured initially at its fair value in the period in which the
liability is incurred provided that such fair value can be reasonably estimated.
An exception applies for certain one-time termination benefits that are incurred
over time. The Company will adopt SFAS No. 146 effective January 1, 2003. This
adoption is not expected to have a significant impact on the Company's financial
position or results of operations.
9
2. ORGANIZATION. Koger Equity, Inc. ("KE"), a Florida corporation, was
incorporated in 1988 to own and manage commercial office buildings and other
income-producing properties. KE is a self-administered and self-managed real
estate investment trust (a "REIT") and its common stock is listed on the New
York Stock Exchange under the ticker symbol "KE." As of September 30, 2002, KE
owned and managed 121 office buildings located primarily in 15 suburban office
projects in eight cities in the Southeastern United States of America.
In addition to managing its own properties, the Company provides property
management services to AP-Knight LP, an affiliate of Apollo Real Estate
Advisors, LP, and asset management services to Crocker Realty Trust, both
related parties. As of September 30, 2002, the Company managed 70 office
buildings for AP-Knight LP. The Company has been informed that AP-Knight LP
intends to terminate this property management agreement effective January 1,
2003.
3. CRITICAL ACCOUNTING POLICIES AND ESTIMATES. The preparation of
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires the Company to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, and expenses and the disclosure of contingent assets and liabilities.
These estimates are based on historical experience and various other factors
that are believed to be reasonable under the circumstances. However, actual
results could differ from the Company's estimates under different assumptions or
conditions. On an ongoing basis, the Company evaluates the reasonableness of its
estimates.
The Company believes the following critical accounting policies affect the
significant estimates and assumptions used in the preparation of its
consolidated financial statements:
Investments in Real Estate. Rental property and improvements, including interest
and other costs capitalized during construction, are included in real estate
investments and are stated at cost. Expenditures for ordinary maintenance and
repairs are expensed to operations as they are incurred. Significant renovations
and improvements, which improve or extend the useful life of the assets, are
capitalized. Except for amounts attributed to land, rental property and
improvements are depreciated as described below.
In September 2002, the Company entered an agreement to sell approximately 14.5
acres of undeveloped land at its Atlanta Gwinnett property for approximately
$3.6 million. This sale is contingent on the approval of the Company's board of
directors and on certain zoning revisions and is expected to close in the fourth
quarter of 2003.
Depreciation. The Company computes depreciation on its operating properties
using the straight-line method based on estimated useful lives of three to 40
years. A significant portion of the acquisition cost of each operating property
is allocated to the acquired buildings (usually 85% to 90%). The allocation of
the acquisition cost to buildings and the determination of the useful lives are
based on the Company's estimates. If the Company were to allocate acquisition
costs inappropriately to buildings or to incorrectly estimate the useful lives
of its operating properties, it may be required to adjust future depreciation
expense.
10
Impairment of Long-Lived Assets. The Company's long-lived assets include
investments in real estate and goodwill. The Company assesses impairment of
long-lived assets whenever changes or events indicate that the carrying value
may not be recoverable. The Company assesses impairment of operating properties
based on the operating cash flows of the properties. In performing its
assessment, the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets.
During the three and nine months ended September 30, 2002, no impairment charges
were recorded. If these estimates or their related assumptions change in the
future, the Company may be required to record impairment charges. Impairment of
goodwill has historically been evaluated based on projected cash flows of
underlying assets.
Rental Income. Certain leases provide for tenant occupancy during periods for
which no rent is due or where minimum rent payments increase during the term of
the lease. The Company records rental income for the full term of each lease on
a straight-line basis. Accordingly, each month, a receivable is recorded from
tenants for the average monthly amount that is expected to be collected over the
remaining lease term. When a property is acquired, the term of existing leases
is considered to commence as of the acquisition date for purposes of this
calculation.
Allowances for Doubtful Accounts. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its tenants to
make required payments for rents and other rental services. In assessing the
recoverability of these receivables, the Company makes assumptions regarding the
financial condition of the tenants based primarily on past payment trends and
certain financial information that tenants submit to the Company. If the
financial condition of the Company's tenants were to deteriorate and result in
an impairment of their ability to make payments, the Company may be required to
increase its allowances by recording additional bad debt expense. Likewise,
should the financial condition of its tenants improve and result in payments or
settlements of previously reserved amounts, the Company may be required to
record a reduction in bad debt expense to reverse its allowances.
4. FEDERAL INCOME TAXES. KE is qualified and has elected tax treatment as
a REIT under the Internal Revenue Code. A REIT is a taxable corporation that
holds real estate, and through distributions to shareholders, is permitted to
reduce or avoid the payment of federal income taxes at the corporate level. To
maintain qualification as a REIT, in addition to certain other requirements, KE
must distribute to shareholders at least 90 percent of REIT taxable income. To
the extent that KE pays dividends equal to 100 percent of REIT taxable income,
the taxable earnings of KE are taxed at the shareholder level. KE has a net
operating loss carryforward of approximately $95,000, which may be used to
reduce REIT taxable income. However, the use of net operating loss carryforwards
is limited for alternative minimum tax purposes. During the first quarter of
2002, the Company made payments of approximately $385,000 for the Company's 2001
estimated alternative minimum tax liability.
Although KRSI is consolidated with KE for financial reporting purposes, this
entity is subject to federal income tax and files separate federal and state
income tax returns. KRSI has recorded provisions of $19,000 and $112,000,
respectively, for federal income taxes for the three and nine months ended
September 30, 2002.
5. 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 January 2002, the Company acquired all of the remaining limited
partnership units in Koger-Vanguard Partners, L.P., a Delaware limited
partnership, for approximately $16.5 million. These partnership units were
convertible into 999,710 shares of the Company's common stock.
11
On January 31, 2002, the Company acquired a 31-story office building containing
approximately 803,000 rentable square feet for $125.0 million and other
transaction costs. This property is located in Atlanta, Georgia. The purchase of
the property was funded with cash and by an $80 million draw from the Company's
secured revolving credit facility. As of September 30, 2002, approximately 63%
of the property's rentable space was leased. The Company expects to lease the
property's vacant space over the next three years.
During the nine months ended September 30, 2001, the Company received 86,779
shares of its common stock as settlement of $1,364,000 of notes receivable from
former employees. Pursuant to the Merger (Note 1), the Company acquired the net
assets of KRSI in exchange for its preferred stock in KRSI. The net assets of
KRSI acquired consisted of (i) cash in the amount of $2,535,000, (ii) other
assets with a fair value of $1,016,000 and (iii) liabilities assumed with a fair
value of $937,000.
6. 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. See
Exhibit 11 for weighted average number of shares of common stock outstanding,
dilutive shares, and computations of basic and diluted earnings per share.
7. MORTGAGES AND LOANS PAYABLE. At September 30, 2002, the Company had
$314,994,000 of loans outstanding, which are collateralized by mortgages on the
Company's operating properties. Annual maturities for mortgages and loans
payable are summarized as follows (in thousands):
Year Ending December 31,
2002 $ 9,013
2003 5,200
2004 75,629
2005 6,110
2006 23,704
Subsequent Years 195,338
----------
Total $ 314,994
==========
8. DIVIDENDS. On January 15, 2002, the Company paid a special dividend of
$1.74 per share to shareholders of record on December 28, 2001 totaling
$36,764,000. The Company paid quarterly dividends of $0.35 per share on February
7, 2002 totaling $7,395,000, May 2, 2002 totaling $7,433,000, and August 1, 2002
totaling $7,452,000 to shareholders of record on December 31, 2001, March 31,
2002, and June 30, 2002, respectively. During the quarter ended September 30,
2002, the Company's Board of Directors declared a quarterly dividend of $0.35
per share payable on November 7, 2002 to shareholders of record on September 30,
2002. The Company currently expects that all dividends paid for 2002 will be
treated as ordinary income to the recipient for income tax purposes.
9. SEGMENT REPORTING. The Company operates in one business segment, real
estate. The Company's primary business is the ownership, development, and
operation of income-producing office properties. Management operates each
property as an individual operating segment and has aggregated these operating
segments into a single segment for financial reporting purposes due to the fact
that all of the individual operating segments have similar economic
characteristics. All of the Company's operations are located in the Southeastern
United States.
12
10. NOTES RECEIVABLE FROM STOCK SALES. On February 17, 2000, and in
conjunction with the Company's plan to repurchase up to 2.65 million shares of
common stock (the "Shares"), the Board of Directors granted to Thomas J.
Crocker, the Company's Chief Executive Officer, the right to purchase up to
500,000 Shares and to Robert E. Onisko, the Company's 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 from the Company at the same time and for
the same price as the Company purchases Shares. In addition, the Company will
loan up to 75% of the purchase price for these Shares to Mr. Crocker and to Mr.
Onisko. These loans will be collateralized by the Shares purchased. These loans
will bear interest at 150 basis points over the applicable LIBOR rate.
Approximately $836,000 of these loans are subject to recourse and the remaining
loans will be without recourse. Accrued interest on these loans is a recourse
obligation and any paid interest is not refundable if the stock is returned in
settlement of the loans. Through September 30, 2002, Mr. Crocker acquired
302,495 Shares and Mr. Onisko acquired 100,831 Shares under this plan. All of
these Shares were acquired during 2000.
11. SUBSEQUENT EVENTS. In addition to the prospective sale described in
Note 3, the Company has entered an agreement to sell approximately 7.0 acres of
undeveloped land at its Charlotte Carmel property for approximately $1.6
million. This sale is contingent on the approval of the Company's board of
directors and is expected to close in the first quarter of 2003.
In October 2002, the Company entered into purchase agreements to acquire The
Lakes on Post Oak in Houston, Texas for approximately $102 million. The Lakes
are three office buildings adjacent to the Galleria Mall which contain
approximately 1.2 million square feet of rentable space. The Company is
currently performing due diligence procedures and the transactions are expected
to close in December 2002.
In October 2002, the Company purchased 19,900 shares of its common stock on the
open market. Under the plan described in Note 10, the Company's Chief Executive
Officer and Chief Financial Officer acquired 4,975 and 1,659 shares,
respectively, of the Company's common stock.
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, 2001.
In December 2001, the Company sold 75 suburban office buildings, one retail
center and 3.4 acres of unimproved land to AP-Knight LP, a related party, for
approximately $199,587,000, net of selling costs, and 5,733,772 shares of the
Company's common stock (which were valued at approximately $96,327,000). These
properties contained more than 3.9 million of rentable square feet and
contributed rental revenues of approximately $42.4 million during the nine
months ended September 30, 2001. Rental revenues for the sold properties
comprised approximately 34% of the Company's total rental revenues for the nine
months ended September 30, 2001. The results of these properties are included in
the operating results of the Company for the periods ending September 30, 2001.
As a result, certain of the Company's current operating results, as compared to
the prior year, have been affected by the sale of these assets. On January 15,
2002, the Company distributed a portion of the proceeds above in the form of a
special dividend of $1.74 per share to shareholders of record on December 28,
2001.
During January 2002, the Company acquired all of the remaining limited
partnership units in Koger-Vanguard Partners, L.P., a Delaware limited
partnership, for approximately $16.5 million. These partnership units were
convertible into 999,710 shares of the Company's common stock.
13
On January 31, 2002, the Company acquired Three Ravinia Drive, an 803,160 square
foot office building located in Atlanta, Georgia, for approximately $125.0
million and other transaction costs. As of September 30, 2002, approximately 63%
of the property's rentable space was leased. The Company expects to lease the
property's vacant space over the next three years. The results of the
Koger-Vanguard Partners, L.P. and Three Ravinia Drive acquisitions have been
included in the Company's operating results for the periods ending September 30,
2002 from their respective acquisition dates.
RESULTS OF OPERATIONS
Rental and other rental services revenues totaled $31,836,000 for the quarter
ended September 30, 2002, compared to $42,243,000 for the quarter ended
September 30, 2001. Rental and other rental services revenues totaled
$94,286,000 for the nine months ended September 30, 2002, compared to
$125,462,000 for the nine months ended September 30, 2001. These decreases
resulted primarily from the sale of assets described above. The effect of these
decreases was partially offset by an increase in rental revenues ($2.4 million)
from two buildings constructed by the Company in 2001 and eight months of
revenues ($9.1 million) from the Three Ravinia Drive property. At September 30,
2002, the Company's buildings were on average 86 percent leased with an average
rental rate of $16.91 per rentable square foot. Excluding Three Ravinia Drive,
which was in its lease-up period at September 30, 2002, the remainder of the
Company's buildings were on average 89 percent leased. At September 30, 2001,
the Company's buildings were on average 88 percent leased with an average rental
rate of $16.58 per rentable square foot.
Management fee revenues totaled $839,000 for the quarter ended September 30,
2002, compared to $1,074,000 for the quarter ended September 30, 2001.
Management fee revenues totaled $2,590,000 for the nine months ended September
30, 2002, compared to $3,530,000 for the nine months ended September 30, 2001.
These decreases were due primarily to the loss of fees from one management
agreement that was terminated in 2001. This loss of fees was partially offset by
fees received from AP-Knight LP under a property management agreement that began
in December 2001. The Company has been informed that AP-Knight LP intends to
terminate this property management agreement effective January 1, 2003. For the
nine months ended September 30, 2002, management fees and leasing commissions
from AP-Knight LP totaled approximately $2.1 million. The loss of such revenues
would be partially offset by a corresponding reduction in the direct cost of
management fees. In conjunction with the termination of the management
agreement, John R.S. Jacobsson resigned as a director of the Company in August
2002. Mr. Jacobsson is also a director of Apollo Real Estate Advisors, LP.
Interest revenues decreased $56,000 and $267,000 for the three and nine months
ended September 30, 2002, respectively, compared to the same periods last year.
These decreases were due primarily to reductions in interest earned from loans
to certain current and former employees and lower effective interest rates on
the Company's average invested cash balances.
Property operations expense includes such charges as 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:
14
Percent of
Rental and Other
Period Amount Rental Services
------------------------------------ -------------- ------------------
September 30, 2002 - Quarter $ 11,846,000 37.2%
September 30, 2001 - Quarter $ 15,591,000 36.9%
September 30, 2002 - Nine Months $ 34,233,000 36.3%
September 30, 2001 - Nine Months $ 46,749,000 37.3%
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 decreased $2,693,000 and $6,533,000, respectively, for the
three and nine months ended September 30, 2002, compared to the same periods
last year. These decreases were due to the Company's disposition of 75 office
buildings and one retail property in December 2001. Amortization expense
decreased $261,000 and $706,000, respectively, for the three and nine months
ended September 30, 2002, compared to the same period last year. These decreases
were due primarily to a decline in the Company's expenditures for deferred
tenant costs and the Company's adoption of SFAS No. 142 effective January 1,
2002. SFAS No. 142 discontinues the practice of amortizing goodwill.
For the three months ended September 30, 2002, interest expense decreased to
$6,041,000 from $6,543,000 for the three months ended September 30, 2001. For
the nine months ended September 30, 2002, interest expense decreased to
$17,864,000 from $20,059,000 for the nine months ended September 30, 2001. At
September 30, 2002 and 2001, the weighted average interest rate on the Company's
outstanding debt was approximately 7.13 percent and 7.19 percent, respectively.
From January 1, 2002 until January 31, 2002, the Company had no outstanding
balances on its secured revolving credit facility. On January 31, 2002, the
Company borrowed $80 million on its credit facility to purchase Three Ravinia
Drive as described above. As of September 30, 2002, the outstanding balance on
the Company's credit facility was $70 million.
General and administrative expenses for the three months ended September 30,
2002 and 2001, totaled $2,971,000 and $2,276,000, respectively. General and
administrative expenses for the nine months ended September 30, 2002 and 2001,
totaled $8,428,000 and $6,148,000, respectively. During the first nine months of
2002, the Company expensed $1,479,000 of compensation expense related to special
distributions that are probable of being paid under the terms of certain stock
option agreements. The Company has also experienced increases in professional
fees for internal audit, legal, and personnel recruiting services. General and
administrative expenses as a percentage of rental revenues increased during the
three and nine months ended September 30, 2002 as compared to the same periods
in 2001. The Company expects these ratios to decline as capital from the sale of
assets is redeployed.
Direct costs of management fees decreased $1,000 and $28,000, respectively, for
the three and nine months ended September 30, 2002, compared to the same period
last year.
Net income totaled $4,394,000 for the quarter ended September 30, 2002, compared
to net income of $8,006,000 for the corresponding period in 2001. Net income
totaled $13,882,000 for the nine months ended September 30, 2002, compared to
net income of $25,344,000 for the corresponding period in 2001. This decrease
resulted primarily from the sale of assets described above.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities-- During the nine months ended September 30, 2002,
the Company generated approximately $39.5 million in net cash from operating
activities. The Company's primary internal sources of cash are
15
(i) the collection of rents from buildings owned by the Company and (ii)
the receipt of fees paid to the Company in respect of properties managed on
behalf of AP-Knight LP and Crocker Realty Trust. As a REIT for Federal income
tax purposes, the Company is required to pay out annually, as dividends, at
least 90 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 2002.
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,
2002, leases representing approximately 9.3 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 2002. These scheduled
expirations represent 87 leases for space in buildings located in 14 of the 15
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, 2002, leases were renewed on approximately
68 percent of the Company's rentable square feet that were scheduled to expire
during the nine-month period. For those leases which renewed during the nine
months ended September 30, 2002, the average rental rate per rentable square
foot increased from $16.95 to $17.68. However, current market conditions in
certain markets may require that rental rates at which leases are renewed or at
which vacated space is leased be lower than rental rates under existing leases.
Based upon the amount of leases that will expire during 2002 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.
Governmental tenants (including the State of Florida and the United States
Government) which account for approximately 25.0 percent of the Company's leased
space at September 30, 2002 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 that have contributed to the
Company's rent stream may reduce their current demands, or curtail their future
need, for additional office space. During 2002, the State of Florida announced
its intention to eliminate its Department of Labor, which will have a direct
impact on the Company's property in Tallahassee. The Company is currently
evaluating the long-term impact of this reorganization and is in negotiations
with other state departments to reassign the vacated space.
The Company has benefited from historic 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 United States provides significant economic growth potential due to
its diverse regional economies, expanding metropolitan areas, skilled work force
and moderate labor costs. However, the Company is currently experiencing slower
growth in the markets in which it owns buildings. Cash flow from operations
could be reduced if a weakened economy resulted in lower occupancy rates and
lower rental income for the Company's buildings, which may in turn affect the
amount of dividends paid by the Company.
Investing Activities-- During January 2002, the Company acquired all of
the remaining limited partnership units in Koger-Vanguard Partners, L.P., a
Delaware limited partnership, for approximately $16.5 million. These partnership
units were convertible into 999,710 shares of the Company's common stock.
On January 31, 2002, the Company acquired Three Ravinia Drive, an 803,160 square
foot office building located in Atlanta, Georgia, for approximately $125.0
million and other transaction costs. The Company allocated approximately $7.0
million and $118.3 million of the net purchase price to value of the acquired
land and building, respectively. As of September 30, 2002, approximately 63% of
the property's rentable space was leased. The Company expects to lease
16
the property's vacant space over the next three years.
At September 30, 2002, 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 months ended September 30,
2002, the Company's expenditures for improvements to existing properties
decreased $4,447,000 from the corresponding period of the prior year. This
decrease was due to the reduction in expenditures for tenant improvements
primarily caused by the sale of 75 office buildings and one retail property in
2001.
Financing Activities-- The Company has a $125 million secured revolving
credit facility ($70 million of which had been borrowed on September 30, 2002)
provided by Fleet National Bank and other lenders. At September 30, 2002, the
Company had no unencumbered properties. Loan maturities and normal amortization
of mortgages and loans payable are expected to total approximately $9.0 million
during the remainder of calendar year 2002.
The foregoing discussion contains forward-looking statements concerning 2002.
The actual results of operations for 2002 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
with creditworthy tenants, 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, 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. The Company currently has a $125 million secured
revolving credit facility with a variable interest rate. 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 its ability to
pay dividends to its shareholders. The Company has not entered into any interest
rate hedge contracts in order to mitigate the interest rate risk with respect to
the secured revolving credit facility. As of September 30, 2002, the Company had
borrowed $70 million under the secured revolving credit facility. If the
weighted average interest rate on this variable rate debt were 100 basis points
higher or lower, annual interest expense would be increased or decreased by
approximately $700,000.
Item 4. Controls and Procedures
(a) The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the periods specified in the rules and forms of
the Securities and Exchange Commission. Such information is accumulated and
communicated to the Company's management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company's management, including the
principal executive officer and the principal financial officer, recognizes that
any set of controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives.
Within 90 days prior to the filing date of this quarterly report on Form 10-Q,
the Company has carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's principal
executive officer and the Company's principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on such evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of their evaluation in connection with the
preparation of this quarterly report on Form 10-Q.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 5. Other Information
(a) The following table sets forth, with respect to each Koger Center or
location at September 30, 2002, gross square feet, rentable square feet,
percentage leased, and the average annual rent per rentable square foot
leased.
Average
Annual
Gross Rentable Rent Per
Square Square Percent Square
Koger Center/Location Feet Feet Leased(1) Foot (2)
--------------------- ---------- ----------- --------- --------
Atlanta Chamblee 1,199,800 1,117,565 89% $18.19
Atlanta Gwinnett 274,400 262,789 91% 18.70
Atlanta Perimeter 184,000 176,503 99% 20.90
Atlanta Three Ravinia (3) 845,000(4) 803,160(4) 63% 15.90
Charlotte University 190,600 182,852 99% 18.26
Charlotte Vanguard 548,200 525,679 75% 16.83
Jacksonville Baymeadows 793,400 749,848 99% 14.93
Jacksonville JTB 436,000 416,773 100% 12.70 (5)
Memphis Germantown 562,600 531,346 82% 18.63
Orlando Central 699,700 616,154 97% 16.15
Orlando Lake Mary 318,000 303,481 96% 20.32
Orlando University 405,200 384,193 86% 20.38
Richmond Paragon 154,300 153,374 98% 18.60
St. Petersburg 715,500 668,360 87% 16.12
Tallahassee 960,300 833,916 72% 17.61
------------ ------------
Total 8,287,000 7,725,993
=========== ============
Weighted Average - Total Company 86% $16.91
====== ======
Weighted Average - Operational Buildings 89% $17.00
====== ======
Weighted Average - Building in Lease-up 63% $15.90
====== ======
(1) The percent leased rates have been calculated by dividing total rentable
square feet leased in an office building by rentable square feet in such
building.
(2) Rental rates are computed by dividing (a) total annualized base rents
(which excludes expense pass-through and reimbursements) for a Koger Center
or location as of September 30, 2002 by (b) the rentable square feet
applicable to such total annualized rents.
(3) Currently in a lease-up period. The Company considers an acquired building
to be in a lease-up period until the earlier of 85% occupancy or 18 months.
18
(4) An engineering survey of the newly acquired property is ongoing. Square
footage amounts represent the Company's best current estimates.
(5) Includes the effect of "triple net" leases where tenants pay substantially
all operating costs in addition to base rent.
(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 2002, calendar years 2003 through 2010, and years subsequent to 2010,
(ii) the total rentable area in square feet covered by such leases, (iii)
the percentage of total rentable square feet represented by such leases,
(iv) the average annual rent per square foot for such leases, (v) the
current annualized base rents represented by such leases, and (vi) the
percentage of gross annualized base rents contributed by such leases. This
information is based on the buildings owned by the Company on September 30,
2002 and on the terms of leases in effect as of September 30, 2002, on the
basis of then existing base rentals, and without regard to the exercise of
options to renew. Furthermore, the information below does not reflect that
some leases have provisions for early termination for various reasons,
including, in the case of government entities, lack of budget
appropriations. Leases were renewed on approximately 68 percent of the
Company's rentable square feet which were scheduled to expire during the
nine months ended September 30, 2002.
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
------ --------------- ------------ -------------- --------------- --------------- ---------------
2002 87 584,475 8.8% $17.73 $ 10,360,263 9.3%
2003 250 1,143,513 17.3% 17.14 19,597,712 17.5%
2004 198 822,090 12.4% 16.97 13,952,792 12.5%
2005 149 879,992 13.3% 16.55 14,562,009 13.0%
2006 75 677,509 10.2% 16.81 11,388,192 10.2%
2007 54 785,978 11.9% 16.91 13,291,715 11.9%
2008 18 427,328 6.5% 18.48 7,896,510 7.0%
2009 17 682,738 10.3% 17.13 11,691,991 10.4%
2010 3 116,495 1.8% 17.21 2,005,239 1.8%
Other 11 495,266 7.5% 14.41 7,138,356 6.4%
------- ----------- -------- --------------- --------
Total 862 6,615,384 100.0% $16.91 $111,884,779 100.0%
====== ========== ====== ====== ============ ======
19
(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 accounting
principles generally accepted in the United States of America) 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):
Three Months
Ended September 30,
2002 2001
------------------------
Net Income $ 4,394 $ 8,006
Depreciation - real estate 6,174 8,849
Amortization - deferred tenant costs 378 597
Amortization - goodwill -- 43
Minority interest -- 323
Gain on sale of furniture and equipment (1) --
---------- ----------
Funds from Operations $10,945 $17,818
========== ===========
Nine Months
Ended September 30,
2002 2001
------------------------
Net Income $ 13,882 $ 25,344
Depreciation - real estate 18,493 24,991
Amortization - deferred tenant costs 1,080 1,658
Amortization - goodwill -- 128
Minority interest 20 937
Gain on sale of furniture and equipment (2) --
---------- ----------
Funds from Operations $33,473 $53,058
=========== ==========
20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
11 Earnings Per Share Computations.
15 Letter re: Unaudited interim financial information.
(b) Reports on Form 8-K
On August 15, 2002, the Company filed a Form 8-K (dated August 13, 2002)
reporting under Item 9, Regulation FD Disclosure, the announcement of its
quarterly results for the period ended June 30, 2002, and related supplemental
information, dated June 30, 2002, and including under Item 7, Financial
Statements and Exhibits, the Koger Equity, Inc. News Release, dated August 13,
2002, and related supplemental information.
On August 16, 2002, the Company filed a Form 8-K (dated August 15, 2002)
reporting under Item 9, Regulation FD Disclosure, the announcement of a
quarterly dividend, and including under Item 7, Financial Statements and
Exhibits, the Koger Equity, Inc. News Release, dated August 15, 2002.
21
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
Dated: November 14, 2002 /s/ Robert E. Onisko
--------------------------------
Robert E. Onisko
Chief Financial Officer
22
CERTIFICATE OF
CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
Each of the undersigned hereby certifies in his capacity as an officer of Koger
Equity, Inc. (the "Company") that he has reviewed this quarterly report and, to
the best of his knowledge and belief, the quarterly report of the Company on
Form 10-Q for the quarterly period ended September 30, 2002 fully complies with
the requirements of Section 13(a) of the Securities Exchange Act of 1934, that
the quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the report not
misleading, and that the information contained in such report fairly presents,
in all material respects, the financial condition of the Company at the end of
such period and the results of operations of the Company for such period.
Additionally, each of the undersigned are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the Company and has:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to each of the undersigned by others within those entities; and
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) disclosed, based on his most recent evaluation, to the Company's auditors and
the audit committee of the Company's board of directors:
1) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's ability
to record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls;
2) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
3) any significant changes in internal controls or in other factors
that could significantly affect internal controls, subsequent to the
date of his most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ Thomas J. Crocker
------------------------------
Thomas J. Crocker
Chief Executive Officer
Koger Equity, Inc.
Dated: November 14, 2002 /s/ Robert E. Onisko
------------------------------
Robert E. Onisko
Chief Financial Officer
Koger Equity, Inc.
23
EXHIBIT 11
EARNINGS PER SHARE COMPUTATIONS
(In Thousands Except Per Share Data)
Three Months
Ended September 30,
2002 2001
---------- ---------
EARNINGS PER COMMON AND DILUTIVE
POTENTIAL COMMON SHARE:
Net Income $ 4,394 $ 8,006
========= =========
Shares:
Weighted average number of common
shares outstanding - Basic 21,293 26,865
========= =========
EARNINGS PER SHARE - BASIC $ 0.21 $ 0.30
========== =========
Shares:
Weighted average number of common
shares outstanding - Basic 21,293 26,865
Effect of dilutive securities (a):
Stock options 117 47
--------- ---------
Adjusted weighted average common shares - Diluted 21,410 26,912
========= =========
EARNINGS PER SHARE - DILUTED $ 0.21 $ 0.30
========= =========
Nine Months
Ended September 30,
2002 2001
---------- ---------
EARNINGS PER COMMON AND DILUTIVE
POTENTIAL COMMON SHARE:
Net Income $ 13,882 $ 25,344
========= =========
Shares:
Weighted average number of common
shares outstanding - Basic 21,258 26,872
========= =========
EARNINGS PER SHARE - BASIC $ 0.65 $ 0.94
========= =========
Shares:
Weighted average number of common
shares outstanding - Basic 21,258 26,872
Effect of dilutive securities (a):
Stock options 149 16
--------- ---------
Adjusted weighted average common shares - Diluted 21,407 26,888
========= =========
EARNINGS PER SHARE - DILUTED $ 0.65 $ 0.94
========= =========
(a) Shares issuable were derived using the "Treasury Stock Method" for all
dilutive potential shares.
24
EXHIBIT 15
November 13, 2002
Koger Equity, Inc.
433 Plaza Real, Suite 335
Boca Raton, Florida 33432
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 nine
month periods ended September 30, 2002 and 2001, as indicated in our report
dated October 25, 2002; 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, 2002, 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, Registration Statement No. 333-37919 of Koger Equity, Inc. on Form S-3,
Registration Statement No. 333-33388 of Koger Equity, Inc. on Form S-8 and
Registration Statement No. 333-38712 of Koger Equity, Inc. on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the
Registration Statement prepared or certified by an accountant or a report
prepared or certified by an accountant within the meaning of Sections 7 and
11 of that Act.
DELOITTE & TOUCHE LLP
West Palm Beach, Florida
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