-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PWs51+cFjg4jNYte+tq2y/W9wpzPd3DNwK1LKkcX+UNQ0KTTvTvxwJNacSqUYpJV tC2YNgRaB8rHbS7jmyhZNA== 0000729237-97-000024.txt : 19970520 0000729237-97-000024.hdr.sgml : 19970520 ACCESSION NUMBER: 0000729237-97-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARKWAY PROPERTIES INC CENTRAL INDEX KEY: 0000729237 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 742123597 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11533 FILM NUMBER: 97609457 BUSINESS ADDRESS: STREET 1: 300 ONE JACKSON PL STREET 2: 188 E CAPITOL ST STE 300 CITY: JACKSON STATE: MS ZIP: 39225-2728 BUSINESS PHONE: 6019484091 MAIL ADDRESS: STREET 1: P O BOX 22728 STREET 2: P O BOX 22728 CITY: JACKSON STATE: MS ZIP: 39201 FORMER COMPANY: FORMER CONFORMED NAME: PARKWAY CO DATE OF NAME CHANGE: 19951018 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------------------------- FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ----------------------------------- For Quarterly Period Ended March 31, 1997 Commission File Number 1-11533 Parkway Properties, Inc. - ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 74-2123597 - ------------------------------ --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) One Jackson Place Suite 1000 188 East Capitol Street P. O. Box 24647 Jackson, Mississippi 39225-4647 - -------------------------------------- ------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code (601) 948-4091 ------------------ Parkway Properties, Inc. 300 One Jackson Place 188 East Capitol Street P. O. Box 24647 Jackson, Mississippi 39225-24647 - ----------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report 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 ------- ------- 6,287,130 shares of common stock, $.001 par value, were outstanding at May 14, 1997. PARKWAY PROPERTIES, INC. FORM 10-Q TABLE OF CONTENTS FOR THE QUARTER ENDED MARCH 31, 1997 ----------------------------------------------------- Pages ----- Part I. Financial Information Item 1. Financial Statements Consolidated balance sheets, March 31, 1997 and December 31, 1996 3 Consolidated statements of income for the three months ended March 31, 1997 and 1996 4 Consolidated statements of cash flows for the three months ended March 31, 1997 and 1996 5 Consolidated statements of stockholders' equity for the three months ended March 31, 1997 and 1996 7 Notes to consolidated financial statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 18 Signatures Authorized signatures 19 PARKWAY PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands except share and per share data) March 31 December 31 1997 1996 --------- ----------- (Unaudited) Assets Real estate related investments: Office buildings....................... $191,220 $132,309 Land held for development.............. 1,721 - Accumulated depreciation............... (10,441) (9,507) -------- -------- 182,500 122,802 Real estate held for sale: Land................................. 5,187 5,664 Operating properties................. 1,492 3,675 Other non-core real estate assets.... 295 381 Mortgage loans......................... 348 350 Real estate partnership................ 313 319 -------- -------- 190,135 133,191 Interest, rents receivable and other assets................................. 5,182 5,791 Cash and cash equivalents................ 4,686 8,053 -------- -------- $200,003 $147,035 ======== ======== Liabilities Mortgage notes payable without recourse.. $ 62,260 $ 62,828 Accounts payable and other liabilities... 6,552 6,299 -------- -------- 68,812 69,127 -------- -------- Stockholders' Equity Common stock, $.001 par value, 69,424,000 shares authorized and 6,287,130 and 4,257,534 shares issued and outstanding in 1997 and 1996, respectively......... 6 4 Additional paid-in capital............... 103,665 52,356 Retained earnings........................ 27,520 25,548 -------- -------- 131,191 77,908 -------- -------- $200,003 $147,035 ======== ======== PARKWAY PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Three Months Ended March 31 --------------------- 1997 1996 --------- -------- (Unaudited) Revenues Income from office properties...... $ 8,030 $ 3,037 Income from other real estate properties....................... 306 438 Interest on mortgage loans......... 16 564 Management company income.......... 134 279 Interest on investments............ 301 99 Dividend income.................... 86 66 Deferred gains and other income.... 33 51 -------- -------- 8,906 4,534 -------- -------- Expenses Office properties: Operating expense................ 3,420 1,308 Interest expense: Contractual.................... 1,255 644 Amortization of loan costs..... 17 11 Depreciation and amortization.... 925 418 Minority interest................ 27 (28) Other real estate properties: Operating expense................ 217 369 Interest expense on bank notes: Contractual...................... 24 - Amortization of loan costs....... 36 - Interest expense on wrap mortgages. - 120 Management company expense......... 87 239 General and administrative......... 860 669 -------- -------- 6,868 3,750 -------- -------- Income before gains (losses)....... 2,038 784 -------- -------- Gain (loss) on sales Gains on real estate held for sale and mortgage loans...... 1,506 193 Loss on securities................. - (190) -------- -------- 1,506 3 -------- -------- Net income......................... $ 3,544 $ 787 ======== ======== Net income per share............... $ .62 $ .26 ======== ======== Weighted average shares outstanding...................... 5,718 3,012 ======== ======== Dividends paid per share........... $ .25 $ .11 ======== ======== PARKWAY PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended March 31 --------------------- 1997 1996 -------- -------- (Unaudited) Operating Activities Net income............................ $ 3,544 $ 787 Adjustments to reconcile net income to net cash provided by operating activities: Equity in earnings.................. (12) (4) Distributions from operations of unconsolidate subsidiaries........ 18 17 Depreciation an amortization........ 925 418 Amortization of discounts, deferred gains and other.......... (1) (19) Gains on real estate held for sale and mortgage loans........... (1,506) (193) Loss on securities.................. - 190 Changes in operating assets and liabilities: Decrease (increase) in receivables 836 (38) Increase in accounts payable and accrued expenses............ 253 607 -------- -------- Cash provided by operating activities. 4,057 1,765 -------- -------- Investing Activities Payments received on mortgage loans... 2 218 Purchase of real estate related investments......................... (60,420) (7,393) Purchase of mortgage loans............ - (600) Proceeds from sale of real estate held for sale and mortgage loans.... 4,334 148 Proceeds from sale of real estate securities.......................... - 799 Improvements to real estate related investments......................... (512) (344) -------- -------- Cash used in investing activities..... (56,596) (7,172) -------- -------- Financing Activities Principal payments on mortgage notes payable....................... (568) (898) Proceeds from borrowings on mortgage notes payable.............. - 4,800 Proceeds from bank borrowings......... 7,939 - Principal payments on bank borrowings. (7,939) - Stock options exercised............... 91 47 Dividends paid........................ (1,572) (341) Proceeds from sale of stock........... 51,221 - -------- -------- Cash provided by financing activities. 49,172 3,608 -------- -------- Decrease in cash and cash equivalents. (3,367) (1,799) Cash and cash equivalents at beginning of period................ 8,053 6,044 -------- -------- Cash and cash equivalents at end of period..................... $ 4,686 $ 4,245 ======== ======== PARKWAY PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Three Months Ended March 31 -------------------- 1997 1996 -------- -------- (Unaudited) Common stock, $.001 par value Balance at beginning of period...... $ 4 $ 2,008 Stock options exercised............. - 3 Shares issued - stock dividend...... - 1,006 Shares issued - stock offering...... 2 - -------- -------- Balance at end of period............ 6 3,017 -------- -------- Additional paid-in capital Balance at beginning of period...... 52,356 32,882 Stock options exercised............. 90 44 Shares issued - stock dividend...... - (1,006) Shares issued - stock offering...... 51,219 - -------- -------- Balance at end of period............ 103,665 31,920 -------- -------- Retained Earnings Balance at beginning of period...... 25,548 13,729 Net income.......................... 3,544 787 Cash dividends declared and paid.... (1,572) (341) -------- -------- Balance at end of period............ 27,520 14,175 -------- -------- Unrealized gain on securities Balance at beginning of period...... - 592 Unrealized gain on securities....... - 118 -------- -------- Balance at end of period............ - 710 -------- -------- Total stockholders' equity............ $131,191 $ 49,822 ======== ======== Notes to Consolidated Financial Statements (Unaudited) March 31, 1997 (1) Basis of Presentation The accompanying financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The financial statements should be read in conjunction with the annual report and the notes thereto. Effective January 1, 1997, the Company elected to be taxed as a real estate investment trust (REIT) under the Internal Revenue Code of 1986, as amended. (2) Reclassifications Certain reclassifications have been made in the 1996 financial statements to conform to the 1997 classifications. (3) Supplemental Cash Flow Information The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Three Months Ended March 31 ----------------------- 1997 1996 ---------- ---------- Cash paid for interest.......... $1,278,000 $501,000 (4) Acquisitions and Dispositions On January 7, 1997, the Company purchased the Forum II and III office buildings in Memphis, Tennessee. The two buildings contain an aggregate of approximately 177,250 square feet of leasable space. The purchase price for the buildings of $16,425,000 was funded with existing cash reserves and advances under bank lines of credit. On January 28, 1997, the Company purchased the Ashford II office building in Houston, Texas. The building has approximately 58,511 net rentable square feet and was purchased for $2,207,000 with existing cash reserves. On March 6, 1997, the Company purchased the Courtyard at Arapaho office buildings in Dallas, Texas. Courtyard at Arapaho has approximately 200,726 net rentable square feet consisting of a two-story atrium office building with approximately 155,974 square feet and two single-story service center buildings totaling 44,752 square feet. The development is situated on 10.58 acres in the Telecom Corridor submarket in suburban North Dallas. The purchase price of $15,125,000 was funded by existing cash reserves. On March 18, 1997, the Company purchased the Charlotte Park Executive Center in Charlotte, North Carolina for $14,350,000. This three-building office park is a 30 acre master-planned office park with approximately 187,207 net rentable square feet. It is located in the Southwest/I-77 corridor, Charlotte's largest office submarket. The Company also purchased 17.64 acres of development land in the office park for $1,721,000. The Company has no immediate plans to begin developing the property. The total purchase price of $16,071,000 was funded with existing cash reserves. On March 31, 1997, the Company purchased the Meridian Building in Atlanta, Georgia. The Meridian Building is a five- story office building consisting of approximately 100,932 net rentable square feet with an attached 330 space three-level parking deck. It is located in the Northwest submarket of Atlanta near the intersection of I-75 and I-285. The purchase price of $10,500,000 was funded with existing cash reserves. (5) Subsequent Events On April 4, 1997, the Company purchased the Vestavia Centre' in Birmingham, Alabama. The Vestavia Centre' office building is approximately 75,880 net rentable square feet. The purchase price of $4,650,000 was funded with existing cash reserves. On May 1, 1997, the Company purchased the Sugar Grove office building in the Sugar Land/Southwest Houston, Texas submarket. The Sugar Grove office building is a six-story building with approximately 122,682 net rentable square feet. The purchase price of $7,730,000 was funded with existing cash reserves. (6) Impact of Recently Issued Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact of Statement No. 128 on the calculation of primary and fully diluted earnings per share for these quarters is not expected to be material. (7) Capital Transactions On January 22, 1997, the Company completed the sale of 2,012,500 shares of common stock at $27.00 per share under its existing shelf registration to a combination of retail and institutional investors with net proceeds to the Company of $51,221,000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Comments are for the balance sheet dated March 31, 1997 compared to the balance sheet dated December 31, 1996. In 1997, Parkway is continuing the application of the Company's strategy of aggressively acquiring office properties and liquidating non-core assets. During the first quarter of 1997, the Company purchased five office properties and sold two non-core assets with total assets increasing $52,968,000, and office properties (before depreciation) increasing $58,911,000 or 45%. Parkway's direct investment in office buildings and land held for development increased $59,698,000 net of depreciation to a carrying amount of $182,500,000 at March 31, 1997 and consisted of 20 properties. During the three months ending March 31, 1997, Parkway purchased five office buildings as follows (in thousands): Purchase Purchase Office Building Location Price Date - --------------- ---------------- -------- -------- Forum II & III Memphis, TN $ 16,425 01/07/97 Ashford II Houston, TX 2,207 01/28/97 Courtyard at Arapaho Dallas, TX 15,125 03/06/97 Charlotte Park Executive Center Charlotte, NC 14,350 03/18/97 Meridian Atlanta, GA 10,500 03/31/97 -------- $ 58,607 ======== In connection with the Charlotte Park Executive Center purchase, the Company also purchased 17.64 acres of development land in the same office park for $1,721,000. The Company currently has no plans to begin development on the site. During the quarter, the Company also capitalized building improvements and additional purchase expenses of $379,000 and recorded depreciation expense of $925,000. Parkway sold two non-core assets during the quarter that resulted in gains for financial reporting purposes of $1,506,000 and net proceeds of $4,334,000. The non-core assets sold during the quarter were 162 acres of land in Katy, Texas and an 180 unit apartment complex in Winter Park, Florida. At March 31, 1997, non-core assets other than mortgage loans totaled $6,974,000. The Company expects to continue its efforts to liquidate these assets. Scheduled principal payments of $568,000 were made during the quarter on existing notes payable without recourse. The Company expects to continue seeking fixed rate, non-recourse mortgage financing at fully-amortizing terms ranging from twelve to fifteen years on select office building investments as additional capital is needed. The Company plans to maintain a ratio of debt to total market capitalization from 25% to 40%. Shareholders' equity increased $53,283,000 during the quarter ended March 31, 1997 as a result of the following factors (in thousands): Increase (Decrease) ------------------- Net income $ 3,544 Dividend declared and paid (1,572) Exercise of stock options 90 Shares issued-stock offering 51,221 ------- $53,283 ======= On January 22, 1997, the Company completed the sale of 2,012,500 shares of common stock at $27.00 per share under its existing shelf registration to a combination of retail and institutional investors with net proceeds to the Company of $51,221,000. RESULTS OF OPERATIONS Comments are for the three months ended March 31, 1997 compared to the three months ended March 31, 1996. Net income for the three months ended March 31, 1997 was $3,544,000 ($.62 per share) as compared to $787,000 ($.26 per share) for the three months ended March 31, 1996. The primary reason for the increase in the Company's net income for 1997 and 1996 is the reflection of the operations of the following office buildings subsequent to the date of purchase: Building Purchase Date Sq. Feet ---------------------- ------------- -------- One Park 10 Plaza 03/07/96 161,243 400 North Belt 04/15/96 220,934 Woodbranch 04/15/96 109,481 Cherokee Business Center 07/09/96 53,838 8381 and 8391 Courthouse Road 07/09/96 94,929 Falls Pointe 08/09/96 105,655 Roswell North 08/09/96 57,715 BB&T Financial Center 09/30/96 238,919 Tensor 10/31/96 92,017 Forum II & III 01/07/97 177,250 Ashford II 01/28/97 58,511 Courtyard at Arapaho 03/06/97 200,726 Charlotte Park Executive Center 03/18/97 187,207 Meridian Building 03/31/97 100,932 Operations of office building properties are summarized below (in thousands): Three Months Ended March 31 ------------------- 1997 1996 -------- -------- Income.......................... $ 8,030 $ 3,037 Operating expense............... (3,420) (1,308) ------- ------- 4,610 1,729 Interest expense................ (1,272) (655) Depreciation and amortization... (925) (418) Minority interest............... (27) 28 ------- ------- $ 2,386 $ 684 ======= ======= In addition to the direct investments in office properties, the Company owns the Wink Office Building in New Orleans, Louisiana through a 50% ownership in the Wink-Parkway Partnership. Income from the partnership of $12,000 and $10,000 was recorded on the equity method of accounting during the three months ended March 31, 1997 and 1996, respectively. The effect on the Company's operations related to One Jackson Place included in the operations of office buildings is as follows (in thousands): Three Months Ended March 31 -------------------- 1997 1996 -------- -------- Revenue......................... $ 963 $ 937 Operating expenses.............. (312) (368) Interest expense................ (358) (394) Depreciation.................... (165) (213) Minority interest income........ (27) 28 ----- ----- Net income (loss)............... $ 101 $ (10) ===== ===== The results of operations for the following properties included in the operations of office buildings are for the three months ending March 31, 1997 only due to the acquisition of these properties during the first quarter of 1997 (in thousands). Three Months Ended March 31, 1997 ----------------------------------------- Forum Courtyard Charlotte BB&T II & III at Arapaho Park -------- -------- ---------- --------- Revenue ...........$1,094 $ 682 $ 157 $ 104 Operating expenses. (356) (254) (57) (42) Depreciation....... (138) (86) (24) (12) ------ ------ ------ ------ Net income.........$ 600 $ 342 $ 76 $ 50 ====== ====== ====== ====== Operations of other real estate properties held for sale are summarized below (in thousands): Three Months Ended March 31 ------------------ 1997 1996 -------- -------- Income from real estate properties..... $ 306 $ 438 Real estate operating expense.......... (217) (369) -------- -------- $ 89 $ 69 ======== ======== At March 31, 1997, the Company had one non-office operating property held for sale known as Plantation Village, a 57,000 square foot shopping center located in Lake Jackson, Texas with a carrying value of $1,492,000. The Company also has the following parcels of undeveloped land held for sale at March 31, 1997 (dollars in thousands). Description Location Size Book Value - ------------------- --------------- --------- ----------- Bullard Road New Orleans, LA 80 acres $3,799 Sugar Land Triangle Sugar Land, TX 7 acres 868 Sugar Creek Center Sugar Land, TX 4 acres 520 ------ $5,187 ====== The decrease in interest income on mortgage loans is due primarily to sales of mortgage loans during 1996. In May 1996, the Company sold 157 mortgage loans. In December 1996, the Company sold its only wrap mortgage loan with a principal balance of $16,529,000 and 8.58% interest rate and subsequently repaid the associated wrap debt on that mortgage loan, accounting for the decrease in interest expense on wrap notes. At March 31, 1997, the Company has three mortgage loans totaling $348,000 with an average interest rate of 10%. The increase in interest on investments reflects higher cash balances invested in interest bearing accounts for the three months ended March 31, 1997 compared to the three months ended March 31, 1996. The increase in general and administrative expenses is primarily due to the increased costs related to the asset growth of the Company over the past year. LIQUIDITY AND CAPITAL RESOURCES Statement of Cash Flows Cash and cash equivalents were $4,686,000 and $8,053,000 at March 31, 1997 and December 31, 1996, respectively. The Company generated $4,057,000 in cash flows from operating activities during the three months ending March 31, 1997 compared to $1,765,000 for the same period of 1996, an increase primarily attributable to the significant increase in the number of office properties owned by the Company. The Company experienced significant investing activity during the three months ending March 31, 1997 with a net of $56,596,000 being invested. In implementing its investment strategy, the Company used $60,328,000, not including closing costs and certain capitalized expenses, to purchase office properties and development land while receiving net cash proceeds from the sale of non-core assets of $4,334,000. The Company also spent $512,000 to make capital improvements at its office properties and non-core operating real estate properties. The Company also received net proceeds of $51,221,000 from the sale of 2,012,500 shares of common stock. Cash dividends of $1,572,000 ($.25 per share) were paid to shareholders and principal payments of $568,000 were made on mortgage notes payable during the three months ending March 31, 1997. Capitalization At March 31, 1997, the Company had available $45,000,000 on its acquisition line of credit and $10,000,000 on its working capital line of credit with Deposit Guaranty National Bank in Jackson, Mississippi. The Company plans to continue actively pursuing the purchase of office building investments that meet the Company's investment criteria and intends to use these lines of credit, proceeds from the sale of non-core assets and cash balances to fund those acquisitions. At March 31, 1997, the lines of credit had an interest rate equal to the 90-day LIBOR rate plus 1.75% (adjusted quarterly), interest due monthly and annual commitment fees of .125%. In addition, both lines of credit have fees of .125% on the unused balances due quarterly. Prior to March 27, 1997, the interest rates on both lines of credit equaled the 90-day LIBOR rate plus 2.35% adjusted quarterly. The interest rate on the notes was 7.5625% as of May 14, 1997. The acquisition line of credit matures June 30, 1998 and the working capital line of credit matures June 30, 1997. At March 31, 1997, the Company had $62,260,000 of non- recourse fixed rate mortgage notes payable with an average interest rate of 8.01% secured by office properties. Based on the Company's total market capitalization of approximately $213,151,000 at March 31, 1997 (using the March 31, 1997 closing price of $24.00 per share) the Company's debt represented approximately 29.2% of its total market capitalization. The Company plans to maintain a ratio of debt to total market capitalization from 25% to 40%. Purchases of office buildings subsequent to March 31, 1997 include the following (in thousands): Purchase Purchase Office Building Location Price Date ------------------ ------------- -------- -------- Vestavia Centre' Birmingham, AL $ 4,650 04/04/97 Sugar Grove Houston, TX $ 7,730 05/01/97 The Company presently has plans to make capital improvements at its office properties in 1997 of approximately $5,500,000. These expenses included tenant improvements, capitalized acquisition costs and capitalized building improvements. Approximately $2,500,000 of these improvements relate to upgrades on properties acquired in 1996 and 1997. All such improvements are expected to be financed by cash flow from the properties and advances on bank lines of credit. The Company anticipates that its current cash balance, operating cash flows and borrowings (including borrowings under the working capital line of credit) will be adequate to pay the Company's (i) operating and administrative expenses, (ii) debt service obligations, (iii) distributions to shareholders, (iv) capital improvements, and (v) normal repair and maintenance expenses at its properties both in the short and long term. Funds From Operations Management believes that funds from operations ("FFO") is an appropriate measure of performance for equity REITs. Funds from operations is defined by the National Association of Real Estate Investment Trusts (NAREIT) as net income or loss, excluding gains or losses from debt restructuring and sales of properties, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. In March 1995, NAREIT issued a clarification of the definition of FFO. The clarification provides that amortization of deferred financing costs and depreciation of non-real estate assets are not to be added back to net income to arrive at FFO. Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not an indication of cash available to fund cash needs. Funds from operations should not be considered an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. The following table presents the Company's FFO for the three months ended March 31, 1997 and 1996 (in thousands): Three Months Ended March 31 ------------------- 1997 1996 -------- -------- Net income........................ $ 3,544 $ 787 Adjustments to derive funds from operations: Depreciation & amortization..... 925 418 Minority interest depreciation.. (35) (50) Equity in earnings.............. (12) (4) Distributions from unconsolidated subsidiaries... 18 17 Gain on real estate & mortgages. (1,506) (193) Loss on securities.............. - 190 Amortization of discounts, deferred gains and other...... (1) (19) ------- ------- Funds from operations........... $ 2,933 $ 1,146 ======= ======= NAREIT has recommended supplemental disclosure concerning capital expenditures, leasing costs and straight-line rents which are given below (in thousands): Three Months Ended March 31 ------------------- 1997 1996 -------- -------- Straight-line rents............... $ 62 $ (39) Building improvements............. 165 108 Tenant improvements: New leases...................... 85 36 Lease renewals.................. 37 101 Leasing commissions: New leases...................... 89 31 Lease renewals.................. 114 - Non-core asset improvements....... 22 68 Inflation In the last five years, inflation has not had a significant impact on the Company because of the relatively low inflation rate in the Company's geographic areas of operation. Most of the leases require the tenants to pay their pro rata share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in operating expenses resulting from inflation. In addition, the Company's leases typically have three to five year terms, which may enable the Company to replace existing leases with new leases at a higher base if rents on the existing leases are below the then-existing market rate. Forward-Looking Statements In addition to historical information, certain sections of this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those pertaining to the Company's capital resources, profitability and portfolio performance. Forward-looking statements involve numerous risks and uncertainties. The following factors, among others discussed herein, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: defaults or non-renewal of leases, increased interest rates and operating costs, failure to obtain necessary outside financing, difficulties in identifying properties to acquire and in effecting acquisitions, failure to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"), environmental uncertainties, risks related to natural disasters, financial market fluctuations, changes in real estate and zoning laws and increases in real property tax rates. The success of the Company also depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as the date hereof. The Company assumes no obligation to update forward-looking statements. See also the Company's reports to be filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. PARKWAY PROPERTIES, INC. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Reports on Form 8-K (1) Filed January 7, 1997 Reporting the sale of the Virginia Beach mortgage loan including Pro Forma Consolidated Financial Statements of Parkway Properties, Inc. (2) Filed January 9, 1997 Reporting the purchase of the Tensor Building. (3) Filed January 7, 1997 Reporting the purchase of Forum II and III and One Park 10 Plaza and the proposed acquisitions of Charlotte Park Executive Center and Ashford II and IV including Audited Statements of Rental Revenue and Direct Operating Expenses on Forum II and III, One Park 10 Plaza and Charlotte Park Executive Center and Pro Forma Consolidated Financial Statements of Parkway Properties, Inc. (4) Filed January 22, 1997 Reporting the sale of shares of Common Stock under its existing shelf registration. (5) Filed March 6, 1997 Reporting the purchase of Courtyard at Arapaho. (6) Filed March 18, 1997 Reporting the purchase of Charlotte Park Executive Center including Pro Forma Consolidated Financial Statements of Parkway Properties, Inc. SIGNATURE --------- 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. DATED: May 15, 1997 PARKWAY PROPERTIES, INC. /s/ Regina P. Shows Regina P. Shows, CPA Controller /s/ Sarah P. Clark Sarah P. Clark, CPA Vice-President, Chief Financial Officer, Treasurer and Secretary -----END PRIVACY-ENHANCED MESSAGE-----