-----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, ABF7gv/sp9GF8l4tNghnOkQcB2L+tCedehwtY2VK8uLRMdmofJvfrx+Ao9wRHNu1 YJcW+2aiwCauhMy8n/NVig== 0000729237-98-000023.txt : 19981123 0000729237-98-000023.hdr.sgml : 19981123 ACCESSION NUMBER: 0000729237-98-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARKWAY PROPERTIES INC CENTRAL INDEX KEY: 0000729237 STANDARD INDUSTRIAL CLASSIFICATION: 6512 IRS NUMBER: 742123597 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11533 FILM NUMBER: 98752912 BUSINESS ADDRESS: STREET 1: ONE JACKSON PL STREET 2: 188 E CAPITOL ST STE 1000 CITY: JACKSON STATE: MS ZIP: 39225-4647 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 Page 24 of 24 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------------------------- FORM 10-Q [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarterly Period Ended September 30, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from ________ to ________ Commission File Number 1-11533 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) Registrant's telephone number, including area code (601) 948-4091 -------------- - - ------------------------------------------------------------------ (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 ------- ------- 10,109,266 shares of Common Stock, $.001 par value, were outstanding as of November 11, 1998. PARKWAY PROPERTIES, INC. FORM 10-Q TABLE OF CONTENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 ----------------------------------------------------- Pages ----- Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets, September 30, 1998 and December 31, 1997 3 Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 1998 and 1997 4 Consolidated Statements of Cash Flow for the Nine Months Ended September 30, 1998 and 1997 6 Consolidated Statements of Stockholders' Equity for the Nine Months Ended September 30, 1998 and 1997 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 23 Signatures Authorized signatures 24 PARKWAY PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands except share and per share data) September 30 December 31 1998 1997 ------------ ----------- (Unaudited) Assets Real estate related investments: Office buildings.......................$565,383 $362,074 Land held for development.............. 1,721 1,721 Accumulated depreciation............... (23,499) (14,143) -------- -------- 543,605 349,652 Land held for sale..................... 3,903 4,309 Mortgage loans......................... 896 1,117 Real estate partnership................ 333 323 -------- -------- 548,737 355,401 Interest, rents receivable and other assets................................. 14,459 12,232 Cash and cash equivalents................ 809 959 -------- -------- $564,005 $368,592 ======== ======== Liabilities Notes payable to banks...................$ 14,025 $ 6,473 Mortgage notes payable without recourse.. 203,986 105,220 Accounts payable and other liabilities... 18,451 12,158 -------- -------- 236,462 123,851 -------- -------- Stockholders' Equity 8.75% Series A Preferred stock, $.001 par value, 2,750,000 shares authorized and 2,650,000 shares issued and outstanding in 1998.................... 66,250 - Common stock, $.001 par value, 70,000,000 shares authorized, 10,106,710 and 9,765,176 shares issued and outstanding in 1998 and 1997, respectively......... 10 10 Additional paid-in capital............... 223,885 213,461 Retained earnings........................ 37,398 31,270 -------- -------- 327,543 244,741 -------- -------- $564,005 $368,592 ======== ======== See notes to consolidated financial statements. PARKWAY PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Three Months Ended September 30 --------------------- 1998 1997 -------- -------- (Unaudited) Revenues Income from office properties $24,839 $11,874 Income from other real estate properties - 124 Interest on mortgage loans 34 15 Management company income 158 147 Interest on investments 98 33 Dividend income - 195 Deferred gains and other income 53 36 ------- ------- 25,182 12,424 ------- ------- Expenses Office properties: Operating expense 10,594 5,219 Interest expense: Contractual 3,687 1,357 Amortization of loan costs. 38 25 Depreciation and amortization 4,290 1,540 Other real estate properties: Operating expense 10 68 Interest expense on bank notes: Contractual 47 527 Amortization of loan costs 216 49 Management company expenses 122 88 General and administrative 847 863 ------- ------- 19,851 9,736 ------- ------- Income before gains and minority interest 5,331 2,688 Gain (loss) on sales and minority interest Gain (loss) on real estate held for sale and mortgage loans 3,547 (483) Minority interest - unit holders (1) - ------- ------- Net income 8,877 2,205 Dividends on preferred stock 1,450 - ------- ------- Net income available to common stockholders $ 7,427 $ 2,205 ======= ======= Net income per common share: Basic $ .70 $ .34 ======= ======= Diluted $ .69 $ .33 ======= ======= Weighted average shares outstanding: Basic 10,611 6,532 ======= ======= Diluted 10,734 6,675 ======= ======= See notes to consolidated financial statements. PARKWAY PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Nine Months Ended September 30 --------------------- 1998 1997 -------- -------- (Unaudited) Revenues Income from office properties $69,464 $29,939 Income from other real estate properties - 564 Interest on mortgage loans 97 47 Management company income 391 398 Interest on investments 113 363 Dividend income 44 323 Deferred gains and other income 183 100 ------- -------- 70,292 31,734 ------- -------- Expenses Office properties: Operating expense 29,249 12,678 Interest expense: Contractual 7,767 3,856 Amortization of loan costs 89 68 Depreciation and amortization 10,205 3,795 Minority interest - 59 Other real estate properties: Operating expense 84 361 Interest expense on bank notes: Contractual 3,153 657 Amortization of loan costs 785 126 Management company expense 299 260 General and administrative 2,579 2,540 ------- -------- 54,210 24,400 ------- -------- Income before gains and minority interest 16,082 7,334 Gain on sales and minority interest Gain on real estate held for sale and mortgage loans 4,886 1,091 Minority interest - unit holders (1) - ------- ------- Net income 20,967 8,425 Dividends on preferred stock 2,464 - ------- ------- Net income available to common stockholders $18,503 $ 8,425 ======= ======= Net income per common share: Basic $ 1.74 $ 1.36 ======= ======= Diluted $ 1.72 $ 1.33 ======= ======= Weighted average shares outstanding: Basic 10,619 6,182 ======= ======= Diluted 10,758 6,312 ======= ======= See notes to consolidated financial statements. PARKWAY PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands) Nine Months Ended September 30 ---------------------- 1998 1997 --------- --------- (Unaudited) Operating activities Net income............................. $20,967 $ 8,425 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........ 10,205 3,795 Gain on real estate held for sale and mortgage loans............ (4,886) (1,091) Equity in earnings and other......... (16) (4) Changes in operating assets and liabilities: Decrease in receivables.......... (1,606) (537) Increase in accounts payable and accrued expenses............... 3,440 4,392 ------- ------- Cash provided by operating activities.. 28,104 14,980 ------- ------- Investing activities Payments received on mortgage loans.... 394 80 Purchase of real estate related investments.......................... (240,181) (172,686) Proceeds from sale of real estate held for sale and mortgage loans..... 55,853 5,665 Improvements to real estate related investments.......................... (7,654) (3,290) ------- ------- Cash used in investing activities...... (191,588) (170,231) ------- ------- Financing activities Principal payments on mortgage notes payable.............................. (4,196) (1,777) Proceeds from long term financing...... 97,000 - Proceeds from bank borrowings.......... 167,530 98,149 Principal payments on bank borrowings.. (159,978) (89,949) Stock options exercised................ 307 315 Dividends paid on common stock......... (12,375) (5,352) Dividends paid on preferred stock...... (1,256) - Proceeds from sale of stock............ 104,810 146,298 Purchase of company stock.............. (28,508) - ------- ------- Cash provided by financing activities.. 163,334 147,684 ------- ------- Decrease in cash and cash equivalents.. (150) (7,567) Cash and cash equivalents at beginning of period............................ 959 8,053 ------- ------- Cash and cash equivalents at end of period............................... $ 809 $ 486 ======= ======= See notes to consolidated financial statements. PARKWAY PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Nine Months Ended September 30 -------------------- 1998 1997 -------- -------- (Unaudited) 8.75% Series A Preferred stock, $.001 par value Balance at beginning of period...... $ - $ - Shares issued....................... 66,250 - -------- -------- Balance at end of period............ 66,250 - -------- -------- Common stock, $.001 par value Balance at beginning of period...... 10 4 Shares issued - stock offerings..... 1 5 Purchase of company stock........... (1) - -------- -------- Balance at end of period............ 10 9 -------- -------- Additional paid-in capital Balance at beginning of period...... 213,461 52,356 Stock options exercised............. 307 368 Shares issued - stock offerings..... 38,559 146,294 Purchase of company stock........... (28,507) - Shares issued in lieu of fees....... 65 - -------- -------- Balance at end of period............ 223,885 199,018 -------- -------- Retained earnings Balance at beginning of period...... 31,270 25,548 Net income.......................... 20,967 8,425 Preferred stock dividends declared.. (2,464) - Common stock dividends declared and paid........................ (12,375) (5,352) -------- -------- Balance at end of period............ 37,398 28,621 -------- -------- Total stockholders' equity............ $327,543 $227,648 ======== ======== See notes to consolidated financial statements. Parkway Properties, Inc. Notes to Consolidated Financial Statements (Unaudited) September 30, 1998 (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. The Company completed its reorganization into the UPREIT (Umbrella Partnership REIT) structure effective January 1, 1998. The Company anticipates that the UPREIT structure will enable it to pursue additional investment opportunities by having the ability to offer tax-advantaged operating partnership units to property owners in exchange for properties. (2) Reclassifications Certain reclassifications have been made in the 1997 financial statements to conform to the 1998 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. Nine Months Ended September 30 ------------------------ 1998 1997 ----------- ----------- Cash paid for interest........ $10,920,000 $ 4,307,000 Mortgage assumed in purchase.. $ 5,647,000 $ 6,910,000 (4) Acquisitions and Dispositions On January 21, 1998, the Company purchased the Schlumberger Building (formerly known as the Veritas Technology Center) in Houston, Texas for $12,200,000. The Schlumberger Building is a five-story office building comprising approximately 155,000 square feet located in the Energy Corridor submarket of West Houston. The building is situated on approximately 9.4 acres of land and offers 450 surface parking spaces. On February 25, 1998, the Company purchased a 13-building portfolio totaling approximately 1,470,000 net rentable square feet that included properties located in five of its primary markets and three new markets. The breakdown of the 13-building office portfolio by market is listed below: Number of Net Rentable Percentage of Location Properties Square Feet Portfolio ------------------ ---------- ------------ ------------- Houston, TX 2 536,000 36.4% Dallas, TX 2 251,000 17.0% Ft. Lauderdale, FL 2 215,000 14.6% Richmond, VA 3 179,000 12.2% Knoxville, TN 1 89,000 6.2% Chesapeake, VA 1 82,000 5.6% Northern VA 1 72,000 4.9% Greenville, SC 1 46,000 3.1% -- --------- ------ Total 13 1,470,000 100.0% == ========= ====== The purchase price of this portfolio totaled $163,014,000 and was funded by advances on existing lines of credit, a $75,000,000 unsecured loan from NationsBank, NA and the proceeds of two Common Stock offerings discussed below in Capital Transactions. On March 31, 1998, the Company purchased the SouthTrust Bank Building in St. Petersburg, Florida for $17,440,000. The SouthTrust Bank Building is a seventeen-story 196,000 rentable square foot office building overlooking Tampa Bay in downtown St. Petersburg. The building has an attached parking garage accommodating 192 spaces. On April 28, 1998, the Company purchased the 109,000 square foot Atrium at Stoneridge building in Columbia, South Carolina for $8,330,000. The six-story office building was constructed in 1986. Atrium at Stoneridge is located two miles northwest of the Columbia CBD in the St. Andrews sub-market. On May 1, 1998, the Company purchased the 73,000 square foot River Oaks Office Plaza in Jackson, Mississippi for $4,400,000. The project consists of two garden-style, two-story buildings constructed in 1981 and includes 326 surface parking spaces. River Oaks Office Plaza is located in the Lakeland Drive sub- market of Jackson. On June 30, 1998, the Company purchased the 44,000 square foot Pavilion Center in Atlanta, Georgia for $4,500,000. The three-story office building was constructed in 1984. Pavilion is located immediately off of Georgia Highway 400 in the North Fulton sub-market. On July 1, 1998, the Company purchased a partnership owning the 172,000 square foot 111 East Capitol Building in Jackson, Mississippi for $11,350,000 including 1,318 operating partnership units of Parkway Properties LP and the assumption of a $5,647,000 mortgage note payable. This acquisition has been accounted for using the purchase method of accounting. The total purchase price has been allocated on the basis of fair values of the assets acquired and liabilities assumed. The mortgage note payable, which has a stated rate of 8% has been recorded at $5,962,000 to reflect it at fair value based on the Company's current incremental borrowing rate of 7%. The building was constructed in 1983 and includes an attached 200-space two-level parking garage. The 111 East Capitol Building is located in the Central Business District of Jackson. On July 1, 1998, the Company closed the sale of its investment portfolio of four office properties located in Dallas, Texas for net proceeds of $52,536,000 in cash to Triad Properties Corporation, a Huntsville, Alabama-based private real estate investment and operating company. The Company recorded a gain for financial reporting purposes of $3,292,000 on the sale in the third quarter. The Company anticipates that the taxable gain from this transaction will be deferred through a Section 1031 like-kind exchange and, accordingly, no special dividend of the capital gain will be required. At September 30, approximately $1,600,000 of the sale proceeds remain in trust under the like- kind exchange rules, pending the purchase of replacement properties. On July 20, 1998, the Company purchased the 144,000 square foot Westvaco building in Richmond, Virginia for $13,030,000. The five-story office building was constructed in 1986 and is located in southwest Richmond in The Boulders office park. The purchase was funded with proceeds from the sale of the Dallas properties. On July 20, 1998, the Company purchased the 130,000 square foot Town Point Center building in Norfolk, Virginia for $10,700,000. The eleven-story office building was constructed in 1987 and is located in the central business district of Norfolk. The purchase was funded with proceeds from the sale of the Dallas properties. (5) Subsequent Events On October 7, 1998, the Company closed a three year $150 million unsecured credit facility with a consortium of 14 banks arranged by Chase Securities, Inc. The interest rate on the new line of credit is equal to LIBOR plus 112.5 to 137.5 basis points, depending upon overall company leverage, with the current rate set at LIBOR plus 125 basis points, or 6.625%. The new credit facility reflects a 15 basis point interest rate reduction (based on current leverage) and a $50 million increase over the previous lines of credit, which were secured lines of credit. The lead agent for the credit facility is Chase Bank of Texas, which is joined by a syndicate of banks including PNC Bank, serving as documentation agent, Wells Fargo Bank, First Union National Bank, SouthTrust Bank, AmSouth Bank, First National Bank of Commerce, Compass Bank, First Tennessee Bank, Hibernia National Bank, First American National Bank operating as Deposit Guaranty National Bank, Comerica Bank, Trustmark National Bank, and Bancorp South Bank. (6) Impact of Recently Issued Accounting Standards In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share". SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the SFAS No. 128 requirements. As of January 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components. The adoption of SFAS No. 130 did not affect consolidated results of operations or financial position. As of January 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 superseded Statement 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect consolidated results of operations or financial position. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. The Company has no derivative or hedging instruments outstanding, therefore, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. (7) Capital Transactions On February 23, 1998, the Company completed the sale of 451,528 shares of Common Stock to a unit investment trust under its existing shelf registration with net proceeds to the Company of $14,231,000. On March 11, 1998, the Company completed the sale of Common Stock through the direct placement of 855,900 shares of Common Stock in a public offering with net proceeds to the Company of $26,948,000. On April 28, 1998, the Company completed the sale of 2,400,000 shares of 8.75% Series A Cumulative Redeemable Preferred Stock with net proceeds to the Company of approximately $57,600,000. The underwriters in this transaction subsequently purchased an additional 250,000 shares of preferred stock under the over-allotment option. The exercise of the over-allotment option closed on May 6, 1998 with net proceeds to the Company of approximately $6,030,000. On June 5, 1998, the Company's Board of Directors approved the repurchase of 500,000 shares of the Company's Common Stock. On August 5, 1998, the Company's Board of Directors approved the repurchase of an additional 500,000 shares of the Company's Common Stock. As of October 7, 1998, the Company completed the purchase of 1,000,000 shares at an average price of $28.72. The purchase represents approximately 9% of the shares outstanding before the repurchase program was initiated. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Comments are for the balance sheet dated September 30, 1998 compared to the balance sheet dated December 31, 1997. During the first nine months of 1998, the Company purchased twenty-one office properties and sold four office properties and miscellaneous non-core and other assets. Total assets increased $195,413,000 and office properties (before depreciation) increased $203,309,000 or 56%. Parkway's direct investment in office buildings increased $193,953,000 net of depreciation to a carrying amount of $543,605,000 at September 30, 1998 and consisted of 48 properties. During the nine months ending September 30, 1998, Parkway purchased 21 office properties as detailed below. On January 21, 1998, the Company purchased the Schlumberger Building (previously known as the Veritas Technology Center) for $12,200,000. The Schlumberger Building is a 155,000 square foot building with 450 surface parking spaces. On February 25, 1998, the Company purchased a 13-building portfolio for $163,014,000 totaling approximately 1,470,000 net rentable square feet that included properties located in five of its primary markets and three new markets. The breakdown of the 13 building office portfolio by market is listed below: Number of Net Rentable Percentage of Location Properties Square Feet Portfolio ------------------ ---------- ------------ ------------- Houston, TX 2 536,000 36.4% Dallas, TX 2 251,000 17.0% Ft. Lauderdale, FL 2 215,000 14.6% Richmond, VA 3 179,000 12.2% Knoxville, TN 1 89,000 6.2% Chesapeake, VA 1 82,000 5.6% Northern VA 1 72,000 4.9% Greenville, SC 1 46,000 3.1% -- --------- ------ Total 13 1,470,000 100.0% == ========= ====== In connection with the portfolio purchase above, the Company purchased approximately eight acres of land for $1,575,000 that has been classified as land held for sale. The Company intends to sell this land, as well as the remaining non-core assets. On March 31, 1998, the Company purchased the SouthTrust Bank Building in St. Petersburg, Florida for $17,440,000. The SouthTrust Bank Building is a seventeen-story 196,000 rentable square foot office building. On April 28, 1998, the Company purchased the Atrium at Stoneridge building in Columbia, South Carolina for $8,330,000. The Atrium at Stoneridge is a six-story 109,000 square foot office building. On May 1, 1998, the Company purchased the 73,000 square foot River Oaks Office Plaza in Jackson, Mississippi for $4,400,000. The project consists of two garden-style, two-story buildings and includes 326 surface parking spaces. On June 30, 1998, the Company purchased the Pavilion Center in Atlanta, Georgia for $4,500,000. The Pavilion Center is a three-story 44,000 square foot office building. On July 1, 1998, the Company purchased a partnership owning the 172,000 square foot 111 East Capitol Building in Jackson, Mississippi for $11,350,000 including 1,318 operating partnership units of Parkway Properties LP and the assumption of a $5,647,000 mortgage note payable. This acquisition has been accounted for using the purchase method of accounting. The total purchase price has been allocated on the basis of fair values of the assets acquired and liabilities assumed. The mortgage note payable, which has a stated rate of 8% has been recorded at $5,962,000 to reflect it at fair value based on the Company's current incremental borrowing rate of 7%. The building was constructed in 1983 and includes an attached 200-space two-level parking garage. The 111 East Capitol Building is located in the Central Business District of Jackson. On July 20, 1998, the Company purchased the 144,000 square foot Westvaco building in Richmond, Virginia for $13,030,000. The five-story office building was constructed in 1986 and is located in southwest Richmond in The Boulders office park. On July 20, 1998, the Company purchased the 130,000 square foot Town Point Center building in Norfolk, Virginia for $10,700,000. The eleven-story office building was constructed in 1987 and is located in the central business district of Norfolk. During the nine months ending September 30, 1998, the Company also capitalized building improvements and additional purchase expenses of $7,833,000 and recorded depreciation expense of $9,690,000. On July 1, 1998 the Company closed the sale of its investment portfolio of four office properties located in Dallas, Texas for net proceeds of $52,536,000. The Company recorded a gain for financial reporting purposes of $3,292,000 on the sale in the third quarter. The Company anticipates that the taxable gain from this transaction will be deferred through a Section 1031 like-kind exchange and, accordingly, no special dividend of the capital gain will be required. At September 30, 1998, approximately $1,600,000 of the sale proceeds remain in trust under the like-kind exchange rules, pending the purchase of replacement properties. The decision to sell the Company's four office buildings in Dallas was based on management's belief that the significant amount of development and proposed development of office properties in the Dallas market may have the effect of depressing the recent growth in rental rates. The Company routinely evaluates changes in market conditions that indicate an opportunity or need to sell properties within those markets in order to maximize shareholder value. Parkway sold various non-core and other assets during the nine months that resulted in gains for financial reporting purposes of $1,424,000 and net proceeds of $3,317,000. At September 30, 1998, non-core assets other than mortgage loans totaled $3,903,000. The Company expects to continue its efforts to liquidate these assets. Mortgage loans decreased $394,000 due to principal payments received and increased $173,000 due to the amortization of interest rate valuations on mortgage loans. Of the total principal payments received, $336,000 is attributable to a payoff of a mortgage loan. Due to the early pay off of the mortgage loan, $170,000 was recognized as a gain on mortgage loan. The gain represented the remaining interest rate valuation upon payoff. Notes payable to banks totaled $14,025,000 at September 30, 1998 and are the result of advances under bank lines of credit to purchase additional office properties and company stock. Mortgage notes payable without recourse increased a net $98,766,000 due to the funding of a $97,000,000 fixed rate loan, the assumption of existing debt on the 111 East Capitol Building recorded at a rate of 7% in the amount of $5,962,000, net of a valuation allowance of $315,000, and scheduled principal payments of $4,196,000 during the nine months ended September 30, 1998 on existing notes payable without recourse. The Company expects to continue seeking fixed rate, non-recourse mortgage financing at terms ranging from ten 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% although such ratio may from time to time temporarily exceed 40%, especially when the Company has incurred significant amounts of short term debt in connection with property acquisitions. Stockholders' equity increased $82,802,000 during the nine months ended September 30, 1998 as a result of the following factors (in thousands): Increase (Decrease) ------------------- Net income $20,967 Shares issued-preferred stock 66,250 Shares purchased-company stock (28,508) Preferred stock dividends declared (2,464) Common stock dividends declared and paid (12,375) Exercise of stock options 307 Shares issued-stock offerings 38,560 Shares issued in lieu of directors fees 65 -------- $82,802 ======== On February 23, 1998, the Company completed the sale of 451,528 shares of Common Stock to a unit investment trust with net proceeds to the Company of $14,231,000. On March 11, 1998, the Company completed the sale of Common Stock through the direct placement of 855,900 shares of Common Stock in a public offering with net proceeds to the Company of $26,948,000. On April 28, 1998, the Company completed the sale of 2,400,000 shares of 8.75% Series A Cumulative Redeemable Preferred Stock with net proceeds to the Company of approximately $57,600,000. The underwriters in this transaction subsequently purchased an additional 250,000 shares of preferred stock under the over-allotment option. The exercise of the over-allotment option closed on May 6, 1998 with net proceeds to the Company of approximately $6,030,000. On June 5, 1998, the Company's Board of Directors approved the repurchase of 500,000 shares of the Company's common stock. On August 5, 1998, the Company's Board of Directors approved the repurchase of an additional 500,000 shares of the Company's common stock. As of September 30, 1998, the Company completed the purchase of 992,681 shares at an average price of $28.72. The purchase represents approximately 9% of the shares outstanding before the repurchase program was initiated. RESULTS OF OPERATIONS Comments are for the three months and nine months ended September 30, 1998 compared to the three months and nine months ended September 30, 1997. Net income available for common stockholders for the three months ended September 30, 1998 was $7,427,000 ($.70 per basic common share) as compared to $2,205,000 ($.34 per basic common share) for the three months ended September 30, 1997. Net income available for common stockholders for the nine months ended September 30, 1998 was $18,503,000 ($1.74 per basic common share) as compared to $8,425,000 ($1.36 per basic common share) for the nine months ended September 30, 1997. The primary reason for the increase in the Company's income before gains for 1998 as compared to 1997 is the reflection of the operations of the following office buildings subsequent to the date of purchase: Building Purchase Date Sq. Feet ------------------------------- ------------- --------- Forum II & III 01/07/97 177,000 Ashford II 01/28/97 59,000 Courtyard at Arapaho 03/06/97 201,000 Charlotte Park Executive Center 03/18/97 187,000 Meridian Building 03/31/97 101,000 Vestavia Centre 04/04/97 76,000 Sugar Grove 05/01/97 123,000 Lakewood 07/10/97 119,000 NationsBank 07/31/97 297,000 Fairway Plaza 08/12/97 82,000 First Tennessee Plaza 09/18/97 430,000 Morgan Keegan Tower 09/30/97 335,000 Hightower Centre 10/01/97 78,000 First Little Rock Plaza 11/07/97 116,000 Raytheon 11/17/97 148,000 Greenbrier Towers 11/25/97 174,000 Schlumberger 01/21/98 155,000 Brookdale Portfolio 02/25/98 1,470,000 SouthTrust 03/31/98 196,000 Atrium at Stoneridge 04/28/98 109,000 River Oaks Office Plaza 05/01/98 73,000 Pavilion Center 06/30/98 44,000 111 East Capitol Building 07/01/98 172,000 Town Point Center 07/20/98 130,000 Westvaco Building 07/20/98 144,000 On July 1, 1998, the Company sold its investment portfolio of four office properties in Dallas, Texas for net proceeds of $52,536,000. The portfolio included Courtyard at Arapaho, Fairway Plaza and two properties acquired in the Brookdale Portfolio. Operations of office building properties are summarized below (in thousands): Three Months Ended Nine Months Ended September 30 September 30 ------------------- ------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Income............ $24,839 $ 11,874 $69,464 $ 29,939 Operating expense. (10,594) (5,219) (29,249) (12,678) ------------------ --------- --------- 14,245 6,655 40,215 17,261 Interest expense.. (3,725) (1,382) (7,856) (3,924) Depreciation and amortization.... (4,290) (1,540) (10,205) (3,795) Minority interest. - - - (59) --------- --------- --------- --------- Net Income........ $6,230 $ 3,733 $22,154 $ 9,483 ================== ========= ========= In addition to 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 $35,000 was recorded on the equity method of accounting during the nine months ended September 30, 1998 and $30,000 during the nine months ended September 30, 1997. At September 30, 1998, the carrying value of this investment totaled $333,000. Operations of other real estate properties held for sale are summarized below (in thousands): Three Months Ended Nine Months Ended September 30 September 30 ------------------- ------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Income from real estate properties $ - $ 124 $ - $ 564 Real estate operating expenses (10) (68) (84) (361) --------- --------- --------- --------- Net income (loss) $ (10) $ 56 $ (84) $ 203 ========= ========= ========= ========= The increase in interest expense on office properties is primarily due to the mortgage loans assumed and/or new loans placed in 1997 and 1998. The average interest rate on Mortgage Notes Payable as of September 30, 1998 was 7.2%. The $2,496,000 increase in interest expense on banks notes for the nine months ending September 30, 1998 compared to the nine months ending September 30, 1997 is primarily due to advances made on existing bank lines of credit for purchases of office properties and company stock in the first nine months of 1998 and an advance of $75,000,000 on an unsecured loan from NationsBank, NA. The NationsBank, NA facility required the negative pledge of the 13 office properties purchased February 25, 1998 and matured August 25, 1998. This loan was repaid in full on June 30, 1998 with proceeds from the 97,000,000 mortgage notes payable. LIQUIDITY AND CAPITAL RESOURCES Statement of Cash Flows Cash and cash equivalents were $809,000 and $959,000 at September 30, 1998 and December 31, 1997, respectively. The Company generated $28,104,000 in cash flows from operating activities during the nine months ending September 30, 1998 compared to $14,980,000 for the same period of 1997, 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 nine months ending September 30, 1998 with a net of $191,588,000 being invested. In implementing its investment strategy, the Company used $240,577,000 not including closing costs and certain capitalized expenses, to purchase office properties and land held for sale while receiving net cash proceeds from the sale of non- core and other assets of $3,317,000 and net cash proceeds of $52,536,000 from the sale of four office properties located in Dallas, Texas. The Company also spent $7,654,000 to make capital improvements at its office properties. The Company received net proceeds of $41,180,000 from the sale of 1,307,428 shares of Common Stock and $63,630,000 from the sale of 2,650,000 shares of 8.75% Series A Preferred Stock during the nine months of 1998. Cash dividends of $12,375,000 ($1.15 per common share) were paid to shareholders, 992,681 shares of Common Stock were repurchased for a total of $28,508,000 and principal payments of $4,196,000 were made on mortgage notes payable during the nine months ending September 30, 1998. Liquidity The Company plans to continue actively pursuing the purchase of office building investments that meet the Company's investment criteria and intends to use bank lines of credit, proceeds from the sale of non-core assets and cash balances to fund those acquisitions. At September 30, 1998, the Company had $14,025,000 outstanding under two bank lines of credit. These lines of credit matured on September 30, 1998 and were replaced with a $10,000,000 line of credit with First American Bank, operating as Deposit Guaranty National Bank (the "$10 million line"), and a $150,000,000 line of credit with a consortium of 14 banks with Chase Bank of Texas, National Association serving as the lead agent (the "$150 million line"). The $10 million line is unsecured and is expected to fund the daily cash requirements of the Company's treasury management system. This line of credit matures September 30, 2001 and has an interest rate equal to the 30 day LIBOR rate plus 112.5 to 137.5 basis points, depending upon overall Company leverage, with the current rate set at LIBOR plus 125 basis points. The Company paid a facility fee of 40 basis points ($40,000) upon closing of the loan and will pay an annual administration fee of $3,000. The Company will also pay unused fees based upon overall Company leverage, with the current rate set at the maximum of 25 basis points. The $150 million line is also unsecured and is expected to fund acquisitions of additional office building investments. This line of credit matures October 7, 2001 and has an interest rate equal to the LIBOR rate plus 112.5 to 137.5 basis points, depending upon overall Company leverage, with the current rate set at LIBOR plus 125 basis points. The Company paid a facility fee of $150,000 and upfront fees of $432,500 (28.8 basis points) upon closing of the loan and will pay an annual administration fee of $37,500. The Company will also pay unused fees based upon overall Company leverage, with the current rate set at the maximum of 25 basis points. On June 30, 1998, the Company closed a $97,000,000 fixed rate mortgage loan at 6.945% that amortizes over a 15-year term and matures July 1, 2008. The loan was funded in two parts with $78,866,000 funded June 30, 1998 and $18,134,000 funded July 31, 1998. This loan is secured by 13 of the Company's office properties and was used to repay the NationsBank, NA loan of $75,000,000 and repay advances outstanding on bank lines of credit. The loan also contains a conversion feature that gives the Company an option to unsecure all or part of the loan upon receipt of an investment grade rating from two of the major rating agencies during the first 24 months of the loan. At September 30, 1998, the Company had $203,986,000 of non- recourse fixed rate mortgage notes payable with an average interest rate of 7.175% secured by office properties and $14,025,000 drawn under bank lines of credit. Based on the Company's total market capitalization of approximately $592,556,000 at September 30, 1998 (using the September 30, 1998 closing price of $30.50 per share) the Company's debt represented approximately 36.8% of its total market capitalization. The Company plans to maintain a ratio of debt to total market capitalization from 25% to 40% although such ratio may from time to time temporarily exceed 40%, especially when the Company has incurred significant amounts of short term debt in connection with property acquisitions. The Company presently has plans to make capital improvements at its office properties in 1998 of approximately $15,000,000. These expenses include tenant improvements, capitalized acquisition costs and capitalized building improvements. Approximately $8,000,000 of these improvements relate to upgrades on properties acquired in 1996, 1997 and 1998 that were anticipated at the time of purchase. 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, proceeds from the sale of office properties held for sale 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") are an appropriate measure of performance for equity REITs. Funds from operations are 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 and nine months ended September 30, 1998 and 1997 (in thousands): Three Months Ended Nine Months Ended September 30 September 30 ------------------- ------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Net income $8,877 $2,205 $20,967 $8,425 Adjustments to derive funds from operations: Preferred Dividends (1,450) - (2,464) - Depreciation and amortization 4,290 1,540 10,205 3,795 Minority interest depreciation - 1 - (56) Equity in earnings (12) (11) (35) (30) Distributions from unconsolidated subsidiaries 5 - 24 27 (Gain) loss on real estate (3,547) 483 (4,886) (1,091) Amortization of discounts, deferred gains and other (1) - (5) (1) -------- -------- -------- -------- Funds from Operations $8,162 $4,218 $23,806 $11,069 ======== ======== ======== ======== NAREIT has recommended supplemental disclosure concerning capital expenditures, leasing costs and straight-line rents which are given below (in thousands): Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------- 1998 1997 1998 1997 ------- ------- ------- ------- Straight-line rents $ 223 $ 95 $ 462 $ 217 Building improvements 474 68 1,202 171 Tenant improvements: New leases 54 42 348 135 Lease renewals 399 17 861 641 Leasing commissions: New leases 111 228 316 402 Lease renewals 320 614 724 1,070 Non-core asset improvements - 5 - 27 Leasing commissions amortized 181 120 473 228 Upgrades on recent acquisitions 1,944 204 4,202 844 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. Impact of Year 2000 At the end of 1997, the Company formed a Y2K Committee of employees to identify, assess and prepare for the upcoming Year 2000 Issue. The Year 2000 Issue refers to the inability of many existing computer programs to properly recognize a year that begins with "20" instead of "19" which, in programs that are time- sensitive, may result in a variety of problems ranging from miscalculations to the failure of entire systems. The Company's plan to address this issue includes making an inventory of the Company's systems, contacting our suppliers and vendors, prioritizing the problem areas and appropriate contingency planning. The Company operates in a PC-based environment and maintains its accounting, property and internal control systems utilizing non-proprietary software systems. The Company has contacted vendors of its significant software systems and received representations that all such software systems are Year 2000 compliant, or will be changed prior to June 30, 1999 to be Year 2000 compliant. All major computer hardware that supports the Company's local area network and wide-area network has been purchased within the past 18 months and is believed, based upon representations by the vendors, to be Year 2000 compliant. The Company is in the process of evaluating it's building systems, such as heating, air conditioning, elevators, and security systems to determine Year 2000 compliance. The Company has issued each property a compliance plan which outlines the basic steps in identifying, assessing, correcting and testing building systems or "embedded items" that may be potentially non- compliant. Each building system should be assessed by the fourth quarter of 1998 and implementation and testing should be complete by the end of the first quarter of 1999. In addition, the Company has sent correspondence to all tenants in order to keep them advised of the Year 2000 Issue and of our commitment to minimize to the greatest extent possible business interruptions related to the Year 2000 Issue. The cost associated with the Year 2000 analysis and the remediation of known Year 2000 issues is estimated to be immaterial. Such costs have been and will continue to be expensed as incurred. To date, the Company has incurred and expensed immaterial amounts for assessment of the Year 2000 Issue. As noted above, however, the Company's evaluation of Year 2000 issues is continuing and there can be no assurance that said evaluation will not uncover Year 2000 issues that will cause the Company to incur material costs. Based on the completion and the results of the above stages of analysis on the Year 2000 Issue, contingency plans are expected to be developed to take the necessary and feasible precautions against problems which could be caused by third parties not within our control. In addition, the Company will continue its review of internal systems and others that are under its direct control. This process will be ongoing for the remainder of 1998 and is expected to extend into 1999. 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, increases in real property tax rates and the ability of the Company and the parties on which the Company relies to successfully comply with the Year 2000 issues. 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. PARKWAY PROPERTIES, INC. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) (27) - Financial Data Schedule attached hereto. (99)(a) Credit Agreement among Parkway Properties LP, Chase Bank of Texas, National Association, and PNC Bank, National Association and the Lenders. (Incorporated by reference to the Registrant's Form 8-K filed November 12, 1998.) (99)(b) Form of Note by Parkway Properties LP as maker and Chase Bank of Texas, National Association as agent. (Incorporated by reference to the Registrant's Form 8-K filed November 12, 1998.) (b) Reports on Form 8-K (1) 8-K Filed July 1, 1998 Reporting the Sale of the Dallas Portfolio, and the purchase of the 111 East Capitol Building. (2) 8-K/A Filed July 20, 1998 Reporting Financial Statements and Exhibits and the opinion of Jaeckle Fleischmann & Mugel, LLP regarding tax matters. 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. DATED: November 16, 1998 PARKWAY PROPERTIES, INC. /s/ Regina P. Shows Regina P. Shows, CPA Controller /s/ Sarah P. Clark Sarah P. Clark, CPA Sr. Vice-President, Chief Financial Officer, Treasurer and Secretary EX-27 2
5 9-MOS DEC-31-1998 SEP-30-1998 809 0 14,459 0 0 0 0 23,499 564,005 236,462 0 0 66,250 10 261,283 564,005 0 70,292 0 0 42,416 0 11,794 20,967 0 20,967 0 0 0 20,967 1.74 1.72
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