##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the quarterly period ended MARCH 31, 2004oro
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from ___to ___
 Commission File Number 1-9997 KOGER EQUITY, INC.  FLORIDA
(State or other jurisdiction of
incorporation or organization)
    
    59-2898045
(I.R.S. Employer
Identification No.)225 NE MIZNER BOULEVARD, SUITE 200
BOCA RATON, FLORIDA
(Address of principal executive offices)
    
    33432
(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   
o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes   x   No   
o Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Class
Common Stock, $.01 par value
    
    Outstanding at April 30, 2004
26,838,743 shares




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##### 



KOGER EQUITY, INC. AND SUBSIDIARIES INDEX PAGE NO.PART I.      FINANCIAL INFORMATIONIndependent Accountants Report
    
    
    3Item 1.
    
    Financial Statements (Unaudited):Condensed Consolidated Balance
Sheets
    March 31, 2004 and December 31, 2003
    
    
    4Condensed Consolidated Statements
of Operations
    for the Three Months Ended
    March 31, 2004 and 2003
    
    
    5Condensed Consolidated Statement of
Changes in
    Shareholders Equity for the Three
Months
    Ended March 31, 2004
    
    
    6Condensed Consolidated Statements
of Cash Flows
    for the Three Months Ended March 31, 2004 and 2003
    
    
    7Notes to Condensed Consolidated
Financial
    Statements for the Three Months
    Ended March 31, 2004 and 2003
    
    
    8Item 2.
    
    Managements Discussion and
Analysis of Financial Condition
    and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20PART II.    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    21Item 5.
    
    Other Information
    
    
    21Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    24Signatures and Exhibits
    
    
    26
 2




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##### 



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 March 31, 2004, and the
related condensed consolidated statements of operations for the three-month
periods ended March 31, 2004 and 2003, the condensed consolidated statement of
changes in shareholders equity for the three-month period ended March 31, 2004
and the condensed consolidated statements of cash flows for the three-month
periods ended March 31, 2004 and 2003. 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, 2003, 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 March 5, 2004, 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, 2003 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
May 4, 2004 3




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##### 



KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited  See
Independent Accountants Report)
(In thousands, except share data)
 March 31,
    
    December 31,2004
    
    2003ASSETSReal Estate Investments:Operating properties:Land
    
    $
    129,973
    
    
    $
    119,973Buildings
    
    
    951,162
    
    
    
    838,430Furniture and equipment
    
    
    3,672
    
    
    
    3,599Accumulated depreciation
    
    
    (187,874
    )
    
    
    (179,569
    )Operating properties, net
    
    
    896,933
    
    
    
    782,433Undeveloped land held for investment
    
    
    10,975
    
    
    
    10,975Undeveloped land held for sale
    
    
    3,041
    
    
    
    3,041Cash and cash equivalents
    
    
    50,588
    
    
    
    9,163Restricted cash
    
    
    12,681
    
    
    
    11,114Accounts receivable, net of allowance for
uncollectible accounts of $1,188 and $939
    
    
    17,703
    
    
    
    16,236Investment in unconsolidated affiliate
    
    
    3,369
    
    
    
    Other assets
    
    
    14,193
    
    
    
    15,239TOTAL ASSETS
    
    $
    1,009,483
    
    
    $
    848,201LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Mortgages and loans payable
    
    $
    468,241
    
    
    $
    408,716Accounts payable
    
    
    4,884
    
    
    
    4,299Accrued real estate taxes payable
    
    
    4,864
    
    
    
    1,853Accrued liabilities  other
    
    
    10,255
    
    
    
    11,016Dividends payable
    
    
    9,693
    
    
    
    7,824Advance rents and security deposits
    
    
    7,147
    
    
    
    6,846Total Liabilities
    
    
    505,084
    
    
    
    440,554Minority interest
    
    
    4,672
    
    
    
    4,672Shareholders Equity:Preferred stock, $.01 par value; 50,000,000 shares
authorized; liquidation preference of $25 per share;
2,990,000 shares issued and outstanding
    
    
    30
    
    
    
    30Common stock, $.01 par value; 100,000,000 shares
authorized; 35,349,691 and 30,011,225 shares
issued; 26,837,657 and 21,495,956 shares outstanding
    
    
    354
    
    
    
    300Capital in excess of par value
    
    
    649,787
    
    
    
    546,968Notes receivable from stock sales to related parties
    
    
    (5,092
    )
    
    
    (5,092
    )Accumulated other comprehensive loss
    
    
    (241
    )
    
    
    (241
    )Dividends in excess of net income
    
    
    (13,553
    )
    
    
    (7,405
    )Treasury stock, at cost; 8,512,034 and 8,515,269 shares
    
    
    (131,558
    )
    
    
    (131,585
    )Total Shareholders Equity
    
    
    499,727
    
    
    
    402,975TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,009,483
    
    
    $
    848,201
 See notes to unaudited condensed consolidated financial statements. 4




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##### 



KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited  See
Independent Accountants Report)
(In thousands, except per share data)
 Three MonthsEnded March 31,2004
    
    2003RevenuesRental and other rental services
    
    $
    39,468
    
    
    $
    36,280Management fees
    
    
    66
    
    
    
    205Other
    
    
    
    
    
    
    5Total operating revenues
    
    
    39,534
    
    
    
    36,490ExpensesProperty operations
    
    
    15,536
    
    
    
    13,349Depreciation and amortization
    
    
    9,220
    
    
    
    8,456General and administrative
    
    
    2,844
    
    
    
    2,943Direct cost of management fees
    
    
    
    
    
    
    86Other
    
    
    52
    
    
    
    36Total operating expenses
    
    
    27,652
    
    
    
    24,870Operating Income
    
    
    11,882
    
    
    
    11,620Other Income and ExpenseEquity in earnings of unconsolidated affiliate
    
    
    131
    
    
    
    Interest Income
    
    
    127
    
    
    
    54Mortgage and loan interest, including amortization
of deferred loan costs of $374 and $357
    
    
    (7,306
    )
    
    
    (7,403
    )Total other income and expense
    
    
    (7,048
    )
    
    
    (7,349
    )Income Before Income Taxes
    
    
    4,834
    
    
    
    4,271Income tax provision
    
    
    
    
    
    
    Net Income
    
    
    4,834
    
    
    
    4,271Dividends on preferred stock
    
    
    (1,588
    )
    
    
    Net Income Available to Common Shareholders
    
    $
    3,246
    
    
    $
    4,271Earnings Per Share Available to Common Shareholders:Basic
    
    $
    0.12
    
    
    $
    0.20Diluted
    
    $
    0.12
    
    
    $
    0.20Weighted Average Shares:Basic
    
    
    26,071
    
    
    
    21,299Diluted
    
    
    26,524
    
    
    
    21,327
 See notes to unaudited condensed consolidated financial statements. 5




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##### 



KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS EQUITY
 (Unaudited  See
Independent Accountants Report)
(In thousands)
 Preferred Stock
    
    Common Stock
    
    Capital
    
    Notes
    
    Accumulated
    
    RetainedEarnings(Dividends
    
    
    
    
    
    Totalin Excess
    
    Receivable
    
    Other
    
    In Excess
    
    
    
    
    
    Share-Shares
    
    Par
    
    Shares
    
    Par
    
    of Par
    
    from Stock
    
    Comprehensive
    
    Of Net
    
    Treasury
    
    holdersIssued
    
    Value
    
    Issued
    
    Value
    
    Value
    
    Sales
    
    Loss
    
    Income)
    
    Stock
    
    EquityBALANCE AT
DECEMBER 31, 2003
    
    
    2,990
    
    
    $
    30
    
    
    
    30,011
    
    
    $
    300
    
    
    $
    546,968
    
    
    $
    (5,092
    )
    
    $
    (241
    )
    
    $
    (7,405
    )
    
    $
    (131,585
    )
    
    $
    402,975Common stock sold
    
    
    
    
    
    
    
    
    
    
    5,175
    
    
    
    52
    
    
    
    100,178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    100,257Options exercised
    
    
    
    
    
    
    
    
    
    
    163
    
    
    
    2
    
    
    
    2,641
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,643Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,982
    )
    
    
    
    
    
    
    (10,982
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,834
    
    
    
    
    
    
    
    4,834BALANCE AT
MARCH 31, 2004
    
    
    2,990
    
    
    $
    30
    
    
    
    35,349
    
    
    $
    354
    
    
    $
    649,787
    
    
    $
    (5,092
    )
    
    $
    (241
    )
    
    $
    (13,553
    )
    
    $
    (131,558
    )
    
    $
    499,727
 See notes to unaudited condensed consolidated financial statements. 6




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##### 



KOGER EQUITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited  See
Independent Accountants Report)
(In thousands)
 Three MonthsEnded March 31,2004
    
    2003OPERATING ACTIVITIESNet income
    
    $
    4,834
    
    
    $
    4,271Adjustments to reconcile net income to net cash
provided by operating activities:Equity in earnings of unconsolidated affiliate
    
    
    (131
    )
    
    
    Depreciation and amortization
    
    
    9,220
    
    
    
    8,456Amortization of deferred loan costs
    
    
    374
    
    
    
    357Provision for uncollectible accounts
    
    
    282
    
    
    
    51Changes in assets and liabilities:Increase in receivables and other assets
    
    
    (1,332
    )
    
    
    (146
    )Increase (decrease) in accounts payable, accrued liabilities
and other liabilities
    
    
    3,135
    
    
    
    (711
    )Net cash provided by operating activities
    
    
    16,382
    
    
    
    12,278INVESTING ACTIVITIESProperty acquisitions
    
    
    (118,107
    )
    
    
    Tenant improvements to first generation space
    
    
    (1,273
    )
    
    
    (1,146
    )Tenant improvements to second generation space
    
    
    (973
    )
    
    
    (1,253
    )Building improvements
    
    
    (2,392
    )
    
    
    (661
    )Deferred tenant costs
    
    
    (647
    )
    
    
    (573
    )Additions to furniture and equipment
    
    
    (73
    )
    
    
    (168
    )(Increase) decrease in restricted cash
    
    
    (1,567
    )
    
    
    149Investment in unconsolidated affiliate
    
    
    (3,238
    )
    
    
    Net cash used in investing activities
    
    
    (128,270
    )
    
    
    (3,652
    )FINANCING ACTIVITIESProceeds from exercise of stock options
    
    
    2,643
    
    
    
    67Proceeds from sales of common stock
    
    
    100,257
    
    
    
    64Proceeds from mortgages and loans
    
    
    75,874
    
    
    
    20,000Principal payments on mortgages and loans payable
    
    
    (16,349
    )
    
    
    (20,038
    )Dividends paid
    
    
    (9,112
    )
    
    
    (7,453
    )Net cash provided by (used in) financing activities
    
    
    153,313
    
    
    
    (7,360
    )Net increase (decrease) in cash and cash equivalents
    
    
    41,425
    
    
    
    1,266Cash and cash equivalents  beginning of period
    
    
    9,163
    
    
    
    4,627Cash and cash equivalents  end of period
    
    $
    50,588
    
    
    $
    5,893SUPPLEMENTAL CASH FLOW INFORMATIONCash paid during the period for interest
    
    $
    6,776
    
    
    $
    6,679Cash paid during the period for income taxes
    
    $
    5
    
    
    $
    Non cash item-issuance of limited partner units for real estate acquisitions
    
    $
    2,041
    
    
    $
    
 See notes to unaudited condensed consolidated financial statements. 7




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##### 



KOGER EQUITY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE
MONTHS
ENDED MARCH 31, 2004 AND 2003
(Unaudited  See Independent Accountants Report)
 1. BASIS OF PRESENTATION. The condensed consolidated financial
statements have been prepared by Koger Equity, Inc. (the Company or KE).
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. 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, 2003, included in the Companys Form 10-K Annual
Report for the year ended December 31, 2003. The accompanying balance sheet at
December 31, 2003 has been derived from the audited financial statements at
that date and is condensed. All adjustments which, in the opinion of management, are necessary to fairly
present the results for the interim periods have been made. Certain prior
year amounts have been reclassified in order to conform to the current year
presentation. Results of operations for the three months ended March 31, 2004
are not necessarily indicative of the results to be expected for future
periods or for the full year. New
Accounting Standards. In April 2002, the Financial Accounting
Standards Board (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s adoption of SFAS No. 145 has not
had a material impact on its condensed consolidated financial statements. 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 adopted SFAS No. 146 effective January 1,
2003. The Companys adoption of SFAS No. 146 has not had a material impact on
its condensed consolidated financial statements. In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees of
Indebtedness of Others. FIN No. 45 requires certain guarantees to be
recorded at fair value and also requires significant new disclosures related
to guarantees, even when the likelihood of making any payments under the
guarantee is remote. FIN No. 45 generally applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying variable
that is related to an asset, liability, or an equity security of the
guaranteed party. FIN No. 45 is effective for guarantees issued or modified
after December 31, 2002. The Company adopted FIN No. 45 effective January 1,
2003. The Companys adoption of FIN No. 45 has not had a material impact on
its condensed consolidated financial statements. 8




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In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure provisions of
SFAS No. 123 to require prominent disclosure about the effects of an entitys
accounting policy with respect to stock-based employee compensation on
reported net income and earnings per share in annual and interim financial
statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to
account for their employee stock-based awards using the fair value method.
However, the disclosure provisions are required for all companies with
stock-based employee compensation, regardless of whether they utilize the fair
value method of accounting described in SFAS No. 123 or the intrinsic value
method described in APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 148s transition provisions are effective for fiscal
years ending after December 15, 2002. The Company adopted the interim
disclosure provisions of SFAS No. 148 effective January 1, 2003. The
Companys adoption of SFAS No. 148 has not had a material impact on its
condensed consolidated financial statements. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, which is intended to clarify the application of ARB No.
51, Consolidated Financial Statements to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. FIN No. 46
requires the consolidation of variable interest entities (VIEs) in which the
variable interest will absorb a majority of the entitys expected losses if
they occur, receive a majority of the entitys expected residual returns if
they occur, or both. FIN No. 46 is effective for VIEs created after January
31, 2003. It applies in the first fiscal year or interim period beginning
after December 15, 2003 to variable interest entities in which an enterprise
that is a public company holds a variable interest that it acquired before
February 1, 2003. The Companys adoption of FIN No. 46 has not had a material
impact on its condensed consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133. This statement was effective for contracts entered into or modified
after June 30, 2003. The Companys adoption of SFAS No. 149 has not had a
material impact on its consolidated financial statements. In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS No. 150). This statement establishes standards for classifying and
measuring as liabilities certain financial instruments that embody obligations
of the issuer and have characteristics of both liabilities and equity. SFAS
No. 150 is effective for all financial instruments created or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003 (July 1, 2003 for calendar quarter
companies). The Company adopted FASB No. 150 effective July 1, 2003. The
Companys adoption of FASB No. 150 has not had a material impact on its
condensed consolidated financial statements. 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 March 31, 2004, KE
owned or had interests in 130 office buildings containing 10.2 million
rentable square feet, primarily located within 19 suburban office projects and
two urban centers in 11 metropolitan areas in the Southeastern United States
and Texas. In addition to managing its own properties, the Company formerly provided
asset management services to Crocker Realty Trust, a related party. The
Company and Crocker Realty Trust terminated the asset management agreement on
May 1, 2003. 9




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##### 



3. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES.The preparation of
condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America 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 significant accounting policies affect the
significant estimates and assumptions used in the preparation of its condensed
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. The Company recognizes gains on the sale of property in accordance with SFAS
No. 66. Revenues from sales of property are recognized when a significant down
payment is received, the earnings process is complete and the collection of any
remaining receivables is reasonably assured. Depreciation and Amortization. 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. Deferred tenant costs (leasing commissions
and tenant relocation costs) are amortized over the term of the related leases. Impairment of Long-Lived Assets. The Companys long-lived assets include
investments in real estate. 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
quarter ended March 31, 2004, 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. Revenue Recognition. Rental income is generally recognized over the lives
of leases according to provisions of the underlying lease agreements. 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. For these
leases, the Company records rental income for the full term of each lease on a
straight-line basis. For the quarters ended March 31, 2004 and 2003, the
recognition of rental revenues on a straight-line basis for applicable leases
increased rental revenues by $1,249,000 and $1,295,000, respectively, over the
amount which would have been recognized based upon the contractual provisions
of these leases. The Company historically generated management fees and leasing commissions by
providing on-site property management and leasing services to a limited number
of third party owners. Management fees were generally earned monthly and were
based on a percentage of the managed properties monthly rental and other
operating revenues. Leasing commissions were earned when the Company, on
behalf of the third party owner, negotiated or assisted in the negotiation of
new leases, 10




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renewals and expansions of existing leases, and were generally based on a
percentage of rents to be received under the initial term of the respective
leases. Allowances for Doubtful Accounts. The Company maintains allowances for
doubtful accounts for estimated losses that could result 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. Federal Income Taxes. The Company is qualified and has elected tax
treatment as a real estate investment trust under the Internal Revenue Code (a
REIT). A corporate REIT is a legal entity that owns income-producing real
property, and through distributions of income to its shareholders, is permitted
to reduce or avoid the payment of federal income taxes at the corporate level.
To maintain qualification as a REIT, the Company must, among other
requirements, distribute to shareholders at least 90 percent of REIT taxable
income. To the extent that the Company pays dividends equal to 100 percent of
REIT taxable income, the earnings of the Company are taxed at the shareholder
level. However, the use of net operating loss carryforwards, which may reduce
REIT taxable income to zero, are limited for alternative minimum tax purposes.
Distributed capital gains on sales of real estate are not subject to tax;
however, undistributed capital gains are taxed as capital gain. If the Company
fails to qualify as a REIT in any taxable year, it will be subject to federal
income taxes and will not be able to qualify as a REIT for four subsequent
taxable years. Although Koger Realty Services, Inc. (KRSI), a taxable REIT
subsidiary, is consolidated with the Company for financial reporting purposes,
this entity is subject to federal income tax and files separate federal and
state income tax returns. Stock Options. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply Accounting Principles Board Opinion No. 25 (APB 25), which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. As a result, there were no stock options charged to income during the
three months ended March 31, 2004 and 2003. The Company has continued to apply
APB 25 to its stock based compensation awards to employees and has disclosed
the required pro forma effect on net income and earnings per share. Three MonthsEnded March 31,2004
    
    2003Net income available to common shareholders  As reported
    
    $
    3,246,000
    
    
    $
    4,271,000 Pro forma
    
    
    3,278,000
    
    
    
    4,058,000Diluted earnings per share  As reported
    
    $
    0.12
    
    
    $
    0.20 Pro forma
    
    
    0.12
    
    
    
    0.19
 Investment in Unconsolidated Affiliate. The Company accounts for an
investment in an unconsolidated affiliate using the equity method of accounting
as it does not have a controlling interest over the operating and financial
policies of the joint venture. As a result, the assets and liabilities of the
joint venture are not included in the Companys balance sheet.
This
investment was recorded initially at cost and subsequently adjusted for equity
in earnings and cash contributions and distributions. 11




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##### 



Fair Value of Financial Instruments. The Company believes the carrying
amount of its financial instruments (temporary investments, accounts
receivable, and accounts payable) is a reasonable estimate of fair value of
these instruments. Based on a market interest rate of 7.0 percent, the fair
value of the Companys mortgages and loans payable would be approximately
$471.2 million at March 31, 2004. Fair Value of In-Place Leases. The Company adopted SFAS No. 142 Goodwill
and Other Intangible Assets, which 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 were encountered. Intangible assets with a determinable useful life
will continue to be amortized over that period. SFAS No. 142 also requires the
separate recognition of intangible assets acquired as part of an asset
acquisition, including the value attributable to leases in place and certain
customer relationships. The Company recorded $274,000, $1,500,000, $272,000,
and $228,000 of the estimated value of leases in place as part of its
acquisitions of Three Ravinia, The Lakes on Post Oak, Tollway Crossing, and
CIGNA Plaza, respectively. The Company intends to amortize these intangible
assets on a straight-line basis over the remaining term of the existing
leases, which usually averages 4 to 5 years. The Company is currently
evaluating any other intangible assets that may have arisen resulting from its
acquisition of Atlantic Center Plaza and McGinnis Park. Cash and Cash Equivalents. Cash in excess of daily requirements is
invested in short-term monetary securities. Such temporary cash investments
have an original maturity of less than three months and are deemed to be cash
equivalents for purposes of the condensed consolidated financial statements. Restricted Cash. Restricted cash represents amounts contractually placed
in escrow for purposes of making payments for certain future building
improvements, tenant allowances, leasing commissions, real estate taxes, and
debt service. 4. STATEMENTS OF CASH FLOWS. On January 13, 2004, the Company issued
5,175,000 shares of its common stock (including 675,000 shares issued in
connection with the exercise of an over-allotment option granted to the
Companys underwriter) at a price to the public of $20.45 per share. The net
proceeds of the offering ($100.2 million) were used to pay down the Companys
revolving credit facility ($15 million), fund a portion of the Atlantic Center
Plaza acquisition, with the remainder intended for general corporate purposes,
including future acquisitions. On January 27, 2004, the Company acquired Atlantic Center Plaza, a 502,000
square foot building located in Atlanta, Georgia, for a purchase price of
$116.5 million plus closing and other costs. Under the terms of the
acquisition agreement, the Company assumed a 3-year variable interest rate
secured loan of approximately $75.9 million with an interest rate of LIBOR
(1.10% at March 31, 2004) plus 160 basis points. Simultaneously, at closing,
the Company assumed a second 3-year variable interest rate secured loan of
$10.0 million with an interest rate of LIBOR plus 600 basis points and
immediately prepaid the loan in full. The Company funded the remainder of the
purchase price with a portion of the net proceeds ($40.5 million) from its
January 2004 common stock offering. 5. EARNINGS PER 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 underlying the 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. 12




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##### 



For the three months ended March 31, 2004 and 2003, earnings per common share
is calculated as follows (in thousands except per share data): Three MonthsEnded March 31,2004
    
    2003EARNINGS PER COMMON AND DILUTIVEPOTENTIAL COMMON SHARE:Net Income available to common shareholders
    
    $
    3,246
    
    
    $
    4,271Shares:Weighted average number of common
shares outstanding  Basic
    
    
    26,071
    
    
    
    21,299EARNINGS PER SHARE  BASIC
    
    $
    0.12
    
    
    $
    0.20Shares:Weighted average number of common
shares outstanding  Basic
    
    
    26,071
    
    
    
    21,299Effect of dilutive securities (a):Stock options
    
    
    453
    
    
    
    28Adjusted weighted average common shares  Diluted
    
    
    26,524
    
    
    
    21,327EARNINGS PER SHARE  DILUTED
    
    $
    0.12
    
    
    $
    0.20
  (a)
    
    Shares issuable were derived using the Treasury Stock Method for all
dilutive potential shares. As of March 31, 2004, the Company excluded
approximately 400,000 antidilutive stock options from the above calculation. 6. MORTGAGES AND LOANS PAYABLE. At March 31, 2004, the Company had
$468,241,000 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 31,2004
    
    $
    81,2822005
    
    
    6,1122006
    
    
    99,5802007
    
    
    98,0982008
    
    
    89,606Subsequent Years
    
    
    93,563Total
    
    $
    468,241
 In January 2004, the Company assumed a 3-year variable interest rate secured
loan of approximately $75.9 million (all of which was outstanding on March 31,
2004) with Metropolitan Life, Inc. (MetLife), which is secured by the
Companys Atlantic Center Plaza property. The loan bears interest at the LIBOR
rate (the LIBOR contract rate was 1.10% as of March 31, 2004) + 160 basis
points and matures on December 1, 2006. This indebtedness is collateralized by
property with a carrying value of approximately $117.6 million at March 31,
2004. 7. DIVIDENDS. The Company paid quarterly dividends on its common
stock of $0.35 per share on February 5, 2004, to shareholders of record on
December 31, 2003. During the quarter ended March 31, 2004, the Companys
Board of Directors declared a quarterly dividend on its common stock of $0.35
per share payable on May 6, 2004, to shareholders of record on March 31, 2004.
On February 26, 2004, the Companys Board of Directors declared a dividend on
its preferred stock of $0.53125 per share paid on March 15, 2004, to
shareholders of record on March 1, 2004. This preferred dividend
covered the period December 15, 2003 through March 14, 2004. 13




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##### 



8. SEGMENT REPORTING. The Company operates in one business segment, the
ownership and management of commercial 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. As of
March 31, 2004, all of the Companys operations were located in the
Southeastern United States and Texas. 9. NOTES RECEIVABLE FROM STOCK SALES. On February 17, 2000, and in
conjunction with the Companys plan (the Repurchase Plan) to repurchase up to
2.65 million shares of common stock (the Shares), the Company entered into an
agreement to, from time to time, loan to Mr. Thomas J. Crocker, Chief
Executive Officer, and Mr. Robert E. Onisko, former Chief Financial Officer
(collectively, the Officers), certain amounts in connection with their
purchase of up to 500,000 shares and 150,000 shares, respectively, of the
Companys common stock (collectively the Loan Stock). For Loan Stock
purchases consummated pursuant to the Companys 1998 Equity and Cash Incentive
Plan, the Company has agreed to advance up to 100% of the purchase price of the
shares. For Loan Stock purchases consummated in the open market or pursuant to
the Repurchase Plan, the Company has agreed to advance up to 50% of the
purchase price of the shares. Each Officers loans are collateralized by any
Loan Stock purchased by such Officer. Aside from an Officers equity interest
in Loan Shares, the Company has limited or no personal recourse against an
Officer for the principal amount of any loan. The Officers are personally
obligated to make any and all interest payments. Each loan bears interest at
150 basis points over the applicable LIBOR rate, which interest is payable
quarterly. The outstanding principal amount of each loan and all accrued but
unpaid interest is due on the earlier of (i) February 17, 2010 or (ii) the
second anniversary of the Officers termination by the Company for cause. As
of March 31, 2004, Mr. Crocker had purchased 320,370 shares of Loan Stock and
the aggregate outstanding principal balance of his loans was approximately
$3,800,000. As of March 31, 2004, Mr. Onisko has purchased 102,490 shares of
Loan Stock and the aggregate outstanding principal balance of his loans was
approximately $1,292,000. The Company has no discretion or termination right
under these agreements since the Companys loans to Mr. Crocker and Mr. Onisko
were made under the terms of a contract which precedes the Sarbanes-Oxley Act. 10. COMMON STOCK. On January 13, 2004, the Company issued 5,175,000
shares of its common stock (including 675,000 shares issued in connection with
the exercise of an over-allotment option granted to the Companys underwriter)
at a price to the public of $20.45 per share. The net proceeds of the
offering were used to pay down the Companys revolving credit facility ($15
million) and fund a portion of the acquisition of Atlantic Center Plaza ($40.5
million), with the remainder intended for general corporate purposes,
including future acquisitions. 11. SUBSEQUENT EVENTS. On April 2, 2004, the Company acquired four
properties, including two Class A office buildings, a ground lease and an
undeveloped parcel of land located in the Decoverly Office Park in Rockville,
Maryland for a purchase price of $42.0 million plus closing and other costs.
The two office buildings aggregate approximately 155,000 square feet of
rentable space and were 92% occupied at the date of acquisition. The
undeveloped land parcel contains 3.2 acres with an approved site plan for a
four-story 105,000 square foot office building. The funds required for this
acquisition were provided by the proceeds from the Companys January 2004
common stock offering. On April 21, 2004, the Company amended and extended the loan agreement
governing its $75.9 million loan with MetLife assumed in connection with the
acquisition of Atlantic Center Plaza. As part of the amendment, the existing
variable interest rate (LIBOR plus 160 basis points) will remain in place until
December 31, 2004 and the Company will draw an additional $4.1 million prior to
December 31, 2004. Effective January 1, 2005, the rate will be fixed at 5.49%
until December 31, 2014. 14




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##### 



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Estimates and certain other matters discussed in this press release may be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although Koger Equity, Inc. believes the
expectations reflected in such forward-looking statements are based on
reasonable assumptions; there can be no assurance that its expectations will be
attained. Certain factors that could cause actual results to differ materially
from the Companys expectations are set forth as risk factors in the Companys
SEC reports and filings, including its annual report on Form 10-K. Included
among these factors are changes in general economic conditions, including
changes in the economic conditions affecting industries in which its principal
tenants compete; its ability to timely lease or re-lease space at current or
anticipated rents to creditworthy tenants; its ability to achieve economies of
scale over time; the demand for tenant services beyond those traditionally
provided by landlords; changes in interest rates; changes in operating costs;
its ability to attract and retain high-quality personnel at a reasonable cost
in a highly competitive labor environment; future demand for its debt and
equity securities; its ability to refinance its debt on reasonable terms at
maturity; and its ability to complete current and future development projects
on schedule and on budget. Many of these factors are beyond the Companys
ability to control or predict. Forward-looking statements are not guarantees of
performance. For forward-looking statements contained or incorporated by
reference herein, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995. The Company assumes no obligation to update or supplement
forward-looking statements that become untrue because of subsequent events. 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 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 year ended December 31, 2003. On September 11, 2003, the Company acquired Tollway Crossing and CIGNA Plaza
in Dallas, Texas for approximately $33.1 million. The properties are
comprised of two office buildings which contain approximately 280,000 square
feet of rentable space. The funds required for this acquisition were provided
by the proceeds from the Companys September 10, 2003 preferred stock
issuance. As of March 31, 2004, Tollway Crossing and CIGNA Plaza were 100%
and 92% occupied, respectively. On December 30, 2003, the Company completed acquired a 75% interest in a joint
venture agreement with Triangle W/Development to acquire two mid-rise office
buildings encompassing 202,279 square feet and 8.5 acres of undeveloped land
suitable for development located in the McGinnis Park office complex in
Atlanta, Georgia. The Company contributed approximately $13.9 million to pay
off an existing mortgage plus an additional amount for closing costs and
working capital, funded from its secured line of credit. The joint venture
assumed an existing mortgage on the undeveloped land of approximately $978,000.
As of March 31, 2004, the two McGinnis Park office buildings were 52% leased. On January 27, 2004, the Company acquired Atlantic Center Plaza, a 502,000
square foot building located in Atlanta, Georgia, for a purchase price of
$116.5 million plus closing and other costs. As of March 31, 2004,
approximately 88% of the propertys rentable space was leased. Under the terms
of the acquisition agreement, the Company assumed a 3-year variable interest
rate secured loan of approximately $75.9 million with an interest rate of LIBOR
(1.10% at March 31, 2004) plus 160 basis points. Simultaneously, at closing,
the Company assumed a second 3-year variable interest rate secured loan of
$10.0 million with an interest rate of LIBOR plus 600 basis points and
immediately prepaid the loan in full. The Company funded the
remainder of the purchase price with a portion of the net proceeds from its
January 2004 common stock offering. 15




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##### 



OFF-BALANCE SHEET ARRANGEMENTS On January 12, 2004, the Company, through a newly formed subsidiary DownREIT
limited partnership called Koger BFC, Ltd., acquired all of the partnership
interests in Broward Financial Center (BFC) in downtown Fort Lauderdale,
Florida, in a joint venture with an affiliate of Investcorp Properties Limited
of New York (Investcorp), for approximately $60.1 million. BFC is a single
building comprised of approximately 326,000 rentable square feet. KE has a 30%
interest in the joint venture. Approximately 14% of the existing partnership
interests in BFC were owned by entities in which the Companys Chief Executive
Officer, Thomas J. Crocker had a 50% ownership interest (Crocker Affiliate).
The decision to acquire BFC and the terms thereof were approved by the members
of the Companys board of directors and finance committee without the
participation of Mr. Crocker. Investcorp, as the joint venture partner
acquiring 70% of the economic interests, played a substantial role in
negotiating the purchase. The Company acquired the partnership interests held
by Crocker Affiliate by issuing 97,948 limited partnership units (Units) in
exchange for the contribution of its partnership interests. The Units will be
entitled to receive quarterly distributions equivalent to the quarterly
dividend declared on the Companys common stock. Commencing on the first
anniversary of the transaction, Crocker Affiliate can cause the Units to be
redeemed in exchange for cash (at a price per Unit equal to the lesser of the
per share price for a share of the Companys common stock at the time of
redemption and the average per share closing price of the Companys common
stock for the thirty trading days preceding the redemption) or, at the
Companys option, shares of the Companys common stock (one share of the
Companys common stock per Unit). The Companys total investment in this joint
venture is $5.3 million including closing costs and fees. The Company accounts
for this investment using the equity method of accounting as it does not have a
controlling interest over the operating and financial policies of the joint
venture. As a result, the assets and liabilities of this joint venture are not
included in the Companys balance sheet. RECENT DEVELOPMENTS On April 2, 2004, the Company acquired four properties, including two Class A
office buildings, a ground lease and an undeveloped parcel of land located in
the Decoverly Office Park in Rockville, Maryland for a purchase price of $42.0
million plus closing and other costs. The two office buildings aggregate
approximately 155,000 square feet of rentable space and were 92% occupied at
the date of acquisition.The undeveloped land parcel contains 3.2 acres with an
approved site plan for a four-story 105,000 square foot office building. The
funds required for this acquisition were drawn from proceeds from the Companys
January 2004 common stock offering. On April 21, 2004, the Company amended and extended the loan agreement
governing its $75.9 million loan with MetLife assumed in connection with the
acquisition of Atlantic Center Plaza. As part of the amendment, the existing
variable interest rate (LIBOR plus 160 basis points) will remain in place until
December 31, 2004 and the Company will draw an additional $4.1 million prior to
December 31, 2004. Effective January 1, 2005, the rate will be fixed at 5.49%
until December 31, 2014. RESULTS OF OPERATIONS Rental and other rental services revenues totaled $39,468,000 for the quarter
ended March 31, 2004, compared to $36,280,000 for the quarter ended March 31,
2003. This increase resulted primarily from revenues resulting from the
acquisition of Atlantic Center Plaza in January 2004 ($2,520,000 for the
quarter ended March 31, 2004), and CIGNA Plaza and Tollway Crossing in
September 2003 ($909,000 and $1,003,000 for the quarter ended March 31, 2004,
respectively). The effect of this increase was partially offset by a decrease
in rental revenues from the Companys existing portfolio of $1,231,000 for the
quarter ended March 31, 2004 as compared to the same period in 2003. At March
31, 2004, the Companys buildings were on average 80 percent occupied with an
average rental rate of $17.81 per rentable square foot. At March 31, 2003,
the Companys buildings were on average 81 percent occupied with an average
rental rate of $17.15 per rentable square foot. 16




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##### 



Property operations expense includes such charges as utilities, real estate
taxes, janitorial, maintenance, property insurance, provision for
uncollectible rents and management costs. Property operations expense
increased $2,187,000 for the three months ended March 31, 2004, compared to
the same period in 2003. This increase was due primarily to operations expense
resulting from the acquisition of Atlantic Center Plaza in January 2004
($1,040,000 for the quarter ended March 31, 2004), McGinnis Park in December
2003 ($180,000 for the quarter ended March 31, 2004) and CIGNA Plaza and
Tollway Crossing in September 2003 ($253,000 and $374,000 for the quarter
ended March 31, 2004, respectively). The amount of property operations expense and its percentage of total rental
revenues for the applicable periods are as follows: Percent ofRental and OtherPeriod
    
    Amount
    
    Rental ServicesMarch 31, 2004
    
    $
    15,536,000
    
    
    
    39.4
    %March 31, 2003
    
    $
    13,349,000
    
    
    
    36.8
    %
 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 $1,063,000 for the three months ended
March 31, 2004, compared to the same period in 2003. This increase was due
primarily to depreciation resulting from the Companys acquisition of Atlantic
Center Plaza in January 2004 ($458,000 for the quarter ended March 31, 2004),
McGinnis Park in December 2003 ($100,146 for the quarter ended March 31,
2004), and CIGNA Plaza and Tollway Crossing in September 2003 ($77,640 and
$93,000 for the quarter ended March 31, 2004, respectively). Amortization expense decreased $299,000 for the three months ended March 31,
2004, compared to the same period in 2003. This decrease was due primarily to
an adjustment to the value of the Companys acquired leases subsequent to a
review by an independent valuation specialist within one year of the
acquisition date, resulting in a decrease in the amortization of the recorded
fair value of leases acquired in the purchases of Three Ravinia Drive, The
Lakes on Post Oak, CIGNA Plaza and Tollway Crossing. General and administrative expenses for the three months ended March 31, 2004
and 2003, totaled $2,844,000 and $2,943,000, respectively. General and
administrative expenses as a percentage of total rental revenues were 7.2% and
8.1% for the periods ended March 31, 2004 and March 31, 2003, respectively. Net income for the period ended March 31, 2004 increased $563,000 as compared
to the same period in 2003. For the period ended March 31, 2004, the Company paid $1,588,000 in dividends to
preferred shareholders. No such dividends were paid during the period ended
March 31, 2003. As a result, net income available to common shareholders
declined by $1,025,000 for the period ended March 31, 2004 as compared to the
same period in 2003. LIQUIDITY AND CAPITAL RESOURCES Operating ActivitiesDuring the three months ended March 31, 2004, the
Company generated approximately $16.4 million in net cash from operating
activities, approximately $4.1 million more than the comparable period of
2003. The Companys increased generation of cash from operations is primarily
attributable to a growth in the rate of increases in accounts payable, accrued
liabilities and other liabilities (approximately $3.8 million), an increase in
the aggregate rate of depreciation and amortization (approximately $764,000)
and an increase in net income (approximately $563,000). The increase in cash
generated by operations was partly offset by an increase in accounts
receivable and other assets (approximately $1.2 million). 17




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##### 



The Companys primary internal sources of cash are the collection of rents
from buildings owned by the Company. As a REIT for federal income tax
purposes, the Company must, among other requirements, 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 from operating activities). 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 flow from operating
activities will be sufficient to cover debt service payments and to pay the
dividends required to maintain REIT status through 2004. Dividends are
determined quarterly by the Companys board of directors. 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 March
31, 2004, leases representing approximately 14.1 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 2004. These
scheduled expirations represent leases for space in buildings located in 18 of
the 20 centers or locations in which the Company owns buildings. Certain of
these tenants may not renew their leases or may reduce their demand for space.
During the three months ended March 31, 2004, leases were renewed on
approximately 35.8 percent of the Companys rentable square feet that were
scheduled to expire during the three month period. 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 2004 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 20.0 percent of the Companys
occupied space at March 31, 2004 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. The Company believes that the Southeastern United States and Texas provide
significant economic growth potential due to diverse regional economies,
expanding metropolitan areas, skilled work force and moderate labor costs.
However, the Company is currently experiencing reduced demand in the markets in which it
owns buildings. Cash flow from operations could be reduced if a weakened
economy continues to result 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At March 31, 2004, substantially all of the
Companys invested assets were in real properties and the Companys primary
use of cash for investing activities was property acquisitions. Of the $128.3
million utilized in investing activities in the three months ended March 31,
2004, $118.1 million was for property acquisitions. On January 27, 2004, the Company acquired Atlantic Center Plaza, a 502,000
square foot building located in Atlanta, Georgia, for a purchase price of
$116.5 million plus closing and other costs. The Company allocated
approximately $108.1 million and $10.0 million of the net purchase price to
value of the acquired land and building, respectively. As of March 31, 2004,
approximately 88% of the propertys rentable space was leased. During the first quarter of 2004, the Company acquired a 30% interest in a
joint venture that owns the Broward Financial Center, resulting in a net
investment of $3.2 million. At March 31, 2004, substantially all of the Companys invested assets were in
real properties or joint ventures invested in real properties. Improvements
to the Companys existing properties have been financed through internal
operations and lender required escrow accounts for The Lakes on Post Oak. 18




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##### 



Financing ActivitiesThe Company generated $153.3 million and $7.4
million of cash from financing activities in the three months ended March
31, 2004 and March 31, 2003, respectively. For the three months ended March
31, 2004, the Companys largest sources of cash from financing activities were
proceeds from the sales of common stock ($100.3 million) and proceeds from
mortgages and loans ($75.9 million). In the same time period, the Companys
largest uses of cash for financing activities were principal payments on
mortgages and loans payable ($16.3 million) and dividends paid ($9.1 million).
For the three months ended March 31, 2003, the Companys largest sources of
cash for financing activities were proceeds from mortgages and loans ($20.0
million). In the same period, the Companys primary uses of cash for
financing activities were principal payments on mortgages and loans payable
($20.0 million) and dividends paid ($7.5 million). On January 13, 2004, the Company issued 5,175,000 shares of its common stock
(including 675,000 shares issued in connection with the exercise of an
over-allotment option granted to the Companys underwriter) at a price to the
public of $20.45 per share. The net proceeds of the offering ($100.2 million)
were used to pay down the Companys revolving credit facility ($15 million),
fund a portion of the Atlantic Center Plaza acquisition, with the remainder
intended for general corporate purposes, including future acquisitions. The Company has a $100 million secured revolving credit facility (none of
which had been borrowed on March 31, 2004) provided by Fleet Bank. At March
31, 2004, the Company had two buildings in Dallas, Texas and two buildings in
Atlanta, Georgia that were unencumbered. Loan maturities and normal
amortization of mortgages and loans payable are expected to total
approximately $81.2 million during the remainder of calendar year 2004,
including a $77.0 million mortgage note payable to Column Financial maturing
in December 2004, with three one-year extension options. CONTRACTUAL OBLIGATIONS
(In thousands) Less than
    
    
    
    
    
    
    
    
    
    More thanOne
    
    
    
    
    
    
    
    
    
    FiveTotal
    
    year
    
    1-3 years
    
    3-5 years
    
    yearsLong-Term Debt Obligations
    
    $
    468,241
    
    
    $
    81,282
    
    
    $
    105,692
    
    
    $
    187,704
    
    
    $
    93,563Purchase Obligations (a)
    
    
    3,200
    
    
    
    3,200
  (a)
    
    This purchase obligation consists of a contractual commitment related to
the renovation of The Lakes on Post Oak in Houston, Texas. Estimates and certain other matters discussed in this press release may be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although Koger Equity, Inc. believes the
expectations reflected in such forward-looking statements are based on
reasonable assumptions; there can be no assurance that its expectations will be
attained. Certain factors that could cause actual results to differ materially
from the Companys expectations are set forth as risk factors in the Companys
SEC reports and filings, including its annual report on Form 10-K. Included
among these factors are changes in general economic conditions, including
changes in the economic conditions affecting industries in which its principal
tenants compete; its ability to timely lease or re-lease space at current or
anticipated rents to creditworthy tenants; its ability to achieve economies of
scale over time; the demand for tenant services beyond those traditionally
provided by landlords; changes in interest rates; changes in operating costs;
its ability to attract and retain high-quality personnel at a reasonable cost
in a highly competitive labor environment; future demand for its debt and
equity securities; its ability to refinance its debt on reasonable terms at
maturity; and its ability to complete current and future development projects
on schedule and on budget. Many of these factors are beyond the Companys
ability to control or predict. Forward-looking statements are not guarantees of
performance. For forward-looking statements contained or incorporated by
reference herein, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995. The Company assumes no obligation to update or supplement
forward-looking statements that become untrue because of subsequent events. 19




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk.The Company currently has a $100 million secured
revolving credit facility and term loans 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 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 March 31, 2004, the Company had $154.3 million outstanding under loans with
variable interest rates. 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 $1,543,000. On April
21, 2004, the Company amended its $75.9 million loan, effective January 1,
2005, assumed in connection with its acquisition of Atlantic Center Plaza, to
convert to a fixed interest rate of 5.49% and extend the loan maturity date to
January 1, 2015. Additionally, the Company had $313.9 million outstanding under loans with fixed
interest rates as of March 31, 2004. The Company may incur additional fixed
rate debt in the future to meet its financing needs. Should market interest
rates decline, the Companys use of fixed rate debt financing may result in the
recognition of interest expense at rates higher than market
rates. If the market interest rate on this fixed rate debt were 100 basis
points lower, the Company would forfeit annual interest expense savings of
approximately $3,139,000 as compared to variable rate debt financing. Item 4. Controls and Procedures. 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. As of the end of the period covered by this report, 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. There have been no significant changes in the Companys internal controls over
financial statements 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. 20




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##### 



PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 5. Other Information  (a)
    
    The following table sets forth, with respect to each office project or
location at March 31, 2004, gross square feet, rentable square feet,
percentage occupied, and the average annual rent per rentable square foot
occupied. AverageAnnualGross
    
    Rentable
    
    
    
    
    
    Rent PerSquare
    
    Square
    
    Percent
    
    SquareOffice Project/Location
    
    Feet
    
    Feet (5)
    
    Occupied (1)
    
    Foot (2)Atlanta Atlantic Center Plaza (3)
    
    
    507,700
    
    
    
    502,579
    
    
    
    88
    %
    
    $
    26.10Atlanta Chamblee
    
    
    1,199,800
    
    
    
    1,124,311
    
    
    
    94
    %
    
    
    18.22Atlanta Gwinnett
    
    
    274,400
    
    
    
    262,806
    
    
    
    88
    %
    
    
    19.42Atlanta McGinnis Park (3)
    
    
    212,400
    
    
    
    202,279
    
    
    
    52
    %
    
    
    18.49Atlanta Perimeter
    
    
    184,000
    
    
    
    179,714
    
    
    
    55
    %
    
    
    20.58Atlanta Three Ravinia (3)
    
    
    845,000
    
    
    
    804,833
    
    
    
    66
    %
    
    
    17.50
    (4)Charlotte University
    
    
    190,600
    
    
    
    182,891
    
    
    
    85
    %
    
    
    18.35Charlotte Vanguard
    
    
    548,200
    
    
    
    526,374
    
    
    
    55
    %
    
    
    15.46Dallas Cigna Plaza (3)
    
    
    133,600
    
    
    
    127,226
    
    
    
    92
    %
    
    
    22.84Dallas Tollway Crossing (3)
    
    
    159,800
    
    
    
    152,163
    
    
    
    100
    %
    
    
    22.87Houston Post Oak (3)
    
    
    1,265,000
    
    
    
    1,204,852
    
    
    
    73
    %
    
    
    17.86Jacksonville Baymeadows
    
    
    793,400
    
    
    
    751,388
    
    
    
    91
    %
    
    
    13.66
    (4)Jacksonville JTB
    
    
    436,000
    
    
    
    416,773
    
    
    
    100
    %
    
    
    12.62
    (4)Memphis Germantown
    
    
    562,600
    
    
    
    533,085
    
    
    
    81
    %
    
    
    18.31Orlando Central
    
    
    699,700
    
    
    
    616,657
    
    
    
    88
    %
    
    
    16.50Orlando Lake Mary
    
    
    318,000
    
    
    
    303,546
    
    
    
    68
    %
    
    
    18.98Orlando University
    
    
    405,200
    
    
    
    383,883
    
    
    
    69
    %
    
    
    20.00Richmond Paragon
    
    
    154,300
    
    
    
    145,127
    
    
    
    93
    %
    
    
    19.32St. Petersburg
    
    
    715,500
    
    
    
    668,335
    
    
    
    88
    %
    
    
    16.35Tallahassee
    
    
    960,300
    
    
    
    834,025
    
    
    
    71
    %
    
    
    17.56Total
    
    
    10,565,500
    
    
    
    9,922,847Weighted Average  Total Company
    
    
    
    
    
    
    
    
    
    
    80
    %
    
    $
    17.81Weighted Average  Same Store
    
    
    
    
    
    
    
    
    
    
    82
    %
    
    $
    16.93Weighted Average  Acquisition
    
    
    
    
    
    
    
    
    
    
    74
    %
    
    $
    20.05
  (1)
    
    The percent occupied rates have been calculated by dividing total
rentable square feet occupied in an office building by total 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 an office
project or location as of March 31, 2004 by (b) the rentable square feet
applicable to such total annualized rents.  (3)
    
    Properties acquired subsequent to January 1, 2002.  (4)
    
    Includes the effect of triple net leases where tenants pay
substantially all operating costs in addition to base rent.  (5)
    
    Does not include investment in unconsolidated affiliate that
contains 325,583 of rentable square feet and
was 88% occupied at March 31, 2004. 21




---



##### 



(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 2004 (without regard to any renewals), calendar years 2005 through
2012, and years subsequent to 2012, (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 March 31, 2004 and on the terms of leases in
effect as of March 31, 2004, 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 35.8 percent of the Companys rentable square feet which
were scheduled to expire during the three months ended March 31, 2004. Percentage of
    
    Average
    
    
    
    
    
    PercentageTotal Square
    
    Annual Rent
    
    Total
    
    of TotalNumber of
    
    Number of
    
    Feet Leased
    
    per Square
    
    Annualized
    
    Annual RentsLeases
    
    Square Feet
    
    Represented by
    
    Foot Under
    
    Rents Under
    
    Represented byPeriod
    
    Expiring
    
    Expiring
    
    Expiring Leases
    
    Expiring Leases
    
    Expiring Leases
    
    Expiring Leases2004
    
    
    264
    
    
    
    1,128,903
    
    
    
    14.3
    %
    
    $
    17.48
    
    
    $
    19,732,677
    
    
    
    14.0
    %2005
    
    
    189
    
    
    
    990,266
    
    
    
    12.5
    %
    
    
    17.57
    
    
    
    17,400,556
    
    
    
    12.3
    %2006
    
    
    171
    
    
    
    1,036,642
    
    
    
    13.1
    %
    
    
    17.44
    
    
    
    18,080,647
    
    
    
    12.8
    %2007
    
    
    106
    
    
    
    1,168,462
    
    
    
    14.8
    %
    
    
    17.87
    
    
    
    20,885,551
    
    
    
    14.8
    %2008
    
    
    87
    
    
    
    974,460
    
    
    
    12.3
    %
    
    
    17.97
    
    
    
    17,515,100
    
    
    
    12.4
    %2009
    
    
    50
    
    
    
    1,316,013
    
    
    
    16.6
    %
    
    
    18.11
    
    
    
    23,838,414
    
    
    
    16.9
    %2010
    
    
    12
    
    
    
    199,024
    
    
    
    2.5
    %
    
    
    17.15
    
    
    
    3,413,505
    
    
    
    2.4
    %2011
    
    
    9
    
    
    
    181,175
    
    
    
    2.3
    %
    
    
    13.87
    
    
    
    2,513,357
    
    
    
    1.8
    %2012
    
    
    9
    
    
    
    164,968
    
    
    
    2.1
    %
    
    
    23.86
    
    
    
    3,936,539
    
    
    
    2.8
    %Other
    
    
    12
    
    
    
    753,848
    
    
    
    9.5
    %
    
    
    18.03
    
    
    
    13,593,803
    
    
    
    9.8
    %Total
    
    
    909
    
    
    
    7,913,761
    
    
    
    100.0
    %
    
    $
    17.81
    
    
    $
    140,910,149
    
    
    
    100.0
    %
 22




---



##### 



(c)
    
    The National Association of Real Estate Investment Trusts (NAREIT)
adopted the definition of funds from operations (FFO) in order to
promote an industry standard measure of REIT financial and operating
performance. The Company believes that the presentation of FFO (defined
below) provides useful information to investors regarding the Companys
financial condition and results of operations, particularly in reference
to the Companys ability to service debt, fund capital expenditures and
pay cash dividends. FFO adds back historical cost depreciation, which
assumes the value of real estate assets diminishes predictably in the
future. Real estate asset values increase or decrease with market
conditions. Consequently, FFO may be a useful measure in evaluating the
Companys operating performance by disregarding historical cost
depreciation.  NAREIT defines FFO as net income (loss) (computed in accordance with
generally accepted accounting principles (GAAP), excluding gains (losses)
from sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and
joint ventures. FFO is presented to assist investors in analyzing the
performance of the Company. While we believe our calculation of FFO
generally conforms to the NAREIT definition, our method of calculating FFO
may be different from methods used by other REITs and the method preferred
by NAREIT. The Companys method of calculating FFO may not be comparable
to other REITs. Moreover, FFO (i) does not represent cash flows from
operating activities as defined by generally accepted accounting
principles, (ii) is not indicative of cash available to fund all cash flow
and liquidity needs, including the ability to make distributions, and
(iii) should not be considered as an alternative to net income (as
determined in accordance with generally accepted accounting principles) for
purposes of evaluating the Companys operating performance.  The following presents the Companys reconciliation of net income available
to common shareholders to FFO for the three months ended March 31, 2004 and
2003 (in thousands): Three MonthsEnded March 31,2004
    
    2003(in thousands)Net income available to common shareholders
    
    $
    3,246
    
    
    $
    4,271Real estate related depreciation
    
    
    8,347
    
    
    
    7,191Real estate related depreciation
 unconsolidated affiliate
    
    
    101
    
    
    
    Real estate related amortization
 deferred tenant costs
    
    
    609
    
    
    
    396Real estate related amortization
 fair value of acquired leases
    
    
    137
    
    
    
    492Funds from operations
    
    $
    12,440
    
    
    $
    12,350
 23




---



##### 



Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number
    
    Description10.1
    
    Stock Option Agreement  Becker10.2
    
    Stock Option Agreement 
Brockwell15
    
    Letter re: Unaudited interim financial information.31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act32
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
 (b) Reports on Form 8-K On January 5, 2004, the Company filed a Form 8-K (dated March 27, 2003)
providing under Item 7, Exhibits, Employment Agreements between the Company and
Thomas J. Crocker (executed on March 27, 2003) and Thomas C. Brockwell
(executed on March 28, 2003). On January 6, 2004, the Company filed a Form 8-K (dated January 6, 2004),
reporting under Item 2, Acquisition or Disposition of Assets, the acquisition
of the Atlantic Center Plaza in Atlanta, Georgia, and providing under Item 7,
Financial Statements and Exhibits, (a) Financial Statements of real estate
acquired, (b) pro forma financial information, and (c) the Koger Equity, Inc.
News Release, dated January 6, 2004. On January 7, 2004, the Company filed a Form 8-K (dated January 5, 2004),
reporting under Item 9, Regulation FD Disclosure, announced (a) that it had
completed a joint venture and contributed $13.9 million to acquire two office
buildings in the McGinnis Park office complex in Alpharetta, Georgia, (b) its
intention to offer 3.5 million shares of common stock under a shelf
registration, and (c) it had signed a definitive agreement to acquire the
Atlantic Center Plaza building in Atlanta, Georgia for a purchase price of
$116.5 million, providing under Item 7, Financial Statements and Exhibits, the
Koger Equity, Inc. News Release, dated January 5, 2004 and the Koger Equity,
Inc. News Release, dated January 6, 2004. On January 8, 2004, the Company filed a Form 8-K (dated January 7, 2004)
reporting under Item 5, Other Events, the issuance of 4,500,000 shares of its
common stock, and providing under Item 7, Financial Statements and Exhibits,
(a) the Underwriting Agreement between Koger Equity, Inc. and Morgan Stanley &
Co. Incorporated, dated January 7, 2004, (b) the opinion of Hunton & Williams
LLP with respect to the legality of the common stock, (c) the opinion of Hunton
& Williams LLP with respect to certain tax matters, and (d) the Koger Equity, Inc. News
Release, dated January 8, 2004. On January 13, 2004, the Company filed a Form 8-K (dated January 9, 2004)
reporting under Item 9, Regulation FD Disclosure, the announcement of the
proper tax treatment of its 2003 dividends paid to shareholders, and providing
under Item 7, Financial Statements and Exhibits, the Koger Equity, Inc. News
Release, dated January 9, 2004. On January 15, 2004, the Company filed a Form 8-K (dated January 15, 2004),
reporting under Item 9, Regulations FD Disclosure, the closing of the
previously announced acquisition of the Broward Financial Centre in Fort
Lauderdale, Florida, and providing under Item 7, Financial Statements and
Exhibits, the Koger Equity, Inc. News Release, dated January 15, 2004. On January 23, 2004, the Company filed a Form 8-K (dated January 21, 2004)
reporting under Item 9, Regulation FD Disclosure, the announcement of the
Companys quarterly conference call to discuss fourth quarter 2003 financial
results and providing under Item 7, Financial Statements and Exhibits, the
Koger Equity, Inc. News Release dated January 21, 2004. 24




---



##### 



On January 27, 2004, the Company filed a Form 8-K (dated January 26, 2004),
reporting under Item 9, Regulations FD Disclosure, the announcement that
Brachs Confections, Inc. will occupy over 24,500 square feet at its Tollway
Crossing building in Dallas, Texas, and providing under Item 7, Exhibits, the
Koger Equity, Inc. News Release, dated January 26, 2004. On February 17, 2004, the Company filed a Form 8-K (dated February 17, 2004)
reporting under Item 9, Regulation FD Disclosure, the announcement of a
quarterly dividend on preferred stock, and providing under Item 7, Financial
Statements and Exhibits, the Koger Equity, Inc. News Release, dated February17,
2004. On February 25, 2004, the Company filed a Form 8-K (dated February 23, 2004)
reporting under Item 9, Regulation FD Disclosure, the announcement of its
quarterly results for the period ended December 31, 2003, and related
supplemental information, dated December 31, 2003, and providing under Item 7,
Financial Statements and Exhibits, the Koger Equity, Inc. News Release, dated
February 23, 2004 and related supplemental information. On February 26, 2004, the Company filed a Form 8-K (dated February 26, 2004)
reporting under Item 9, Regulation FD Disclosure, the announcement of a
quarterly dividend on common stock, and providing under Item 7, Financial
Statements and Exhibits, the Koger Equity, Inc. News Release, dated February
26, 2004. 25




---



##### 



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.
RegistrantDated: May 4, 2004
    /s/ Steven A. AbneySteven A. AbneyVice President, Finance and
Chief Accounting Officer
(Principal Financial Officer)
Koger Equity, Inc. 26