-----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, KrvbHmdzknEFVpLoGcqJzv7a9vNwwYrAjdFykL4HkrCAk+QONdgD97iwWBat46Xo ijysxY8rooj2KH1KP5CHHw== 0000729237-99-000003.txt : 19990402 0000729237-99-000003.hdr.sgml : 19990402 ACCESSION NUMBER: 0000729237-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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-K SEC ACT: SEC FILE NUMBER: 001-11533 FILM NUMBER: 99579455 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-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 (I.R.S. Employer of incorporation or organization) Identification No.) One Jackson Place Suite 1000 188 East Capitol Street Jackson, Mississippi 39201-2195 (Address of principal executive offices) (Zip Code) (601) 948-4091 Registrant's telephone number: Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.001 Par Value 8.75% Series A Cumulative Redeemable Stock $.001 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 22, 1999 was $255,675,000. The number of shares outstanding in the registrant's class of common stock as of March 22, 1999 was 10,086,132. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders are incorporated by reference into Part III. PART I Item 1. Business. General development of business. Parkway Properties, Inc. ("Parkway" or the "Company") is a self-administered, self-managed real estate investment trust ("REIT") specializing in the operation, leasing, management, acquisition and financing of office properties in the Southeastern United States and Texas. Parkway and its predecessors have been public companies engaged in the real estate business since 1971, and have successfully operated and grown through several major real estate cycles. At March 22, 1999, Parkway owned or had an interest in 52 office properties located in twelve states with an aggregate of approximately 6.9 million square feet of leasable space. The purchase of the SkyTel Centre (formerly Mtel Centre) in Jackson, Mississippi in July 1995 marked the implementation of the Company's business strategy of focused investment in office properties. As part of this strategy, the Company has (i) completed the acquisition of 52 office properties, encompassing approximately 7 million net rentable square feet, for a total investment of more than $610.2 million; (ii) sold or is in the process of selling all of its non-office assets and (iii) implemented self-management and self-leasing at its properties to promote a focus on tenant retention and superior service in meeting the needs of its tenants. Total investment is defined as purchase price plus estimated closing costs and anticipated capital expenditures during the first 12 months of ownership for tenant improvements, commissions, upgrades and capital improvements to bring the building up to the Company's standards. In addition to direct real estate acquisitions, Parkway's investment strategy has also historically included the consummation of business combination transactions with other public real estate and financial companies which Parkway deemed to be undervalued. Since 1979, Parkway has completed eight such business combinations. Management may pursue similar business combination transactions on a selected basis in order to enhance stockholder value. During 1998 and early 1999, the capital structure of Parkway has changed as a result of the following: a. 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. b. On February 23, 1998, the Company completed the sale of 451,128 shares of common stock to a unit investment trust with net proceeds to the Company of $14,231,000. c. On March 11, 1998, the Company completed the sale of common stock through the direct placement of 855,900 shares of common stock to institutional investors with net proceeds to the Company of $26,948,000. d 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. e. 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. f. On July 1, 1998, the Company closed its first UPREIT unit transaction issuing 1,318 units in the purchase of the 111 Capitol Building. g. On March 2, 1999, the Board of Directors approved the repurchase of an additional 500,000 shares of the Company's common stock. As of March 22, 1999, 26,034 additional shares have been purchased at an average price of $28.39. Parkway has managed its properties in Jackson since 1990 and expanded its self-management beginning January 1, 1998 to office properties that it owned in Houston, Atlanta, St. Petersburg, Deerfield Beach, Richmond, Hampton Roads, Charlotte, Winston- Salem, Columbia, Knoxville and Memphis. In December 1998, the Company expanded its self-management to include Richmond and Chesapeake, Virginia and currently self-manages approximately 92% of its current portfolio on a net rentable square footage basis. In addition, the Company implemented self-leasing for renewals in late 1998 and currently self-leases approximately 83% of its current portfolio on a net rentable square footage basis. For new tenant leasing, which is a small portion of our business, we rely on and cooperate with the third party brokerage community. The Company benefits from a fully integrated management infrastructure, provided by its wholly-owned management subsidiary, Parkway Realty Services LLC ("Parkway Realty"). The Company plans to expand the self-management of its properties to all markets as its presence in those markets reaches the minimum net rentable square footage necessary to make it cost efficient to self-manage. The Company believes self-management will result in better customer service, higher tenant retention and will allow the Company to enhance stockholder value through the application of its hands-on management style. The Company will consider selling buildings that cannot be self-managed. In addition to its owned properties, Parkway Realty currently manages and/or leases approximately one million net rentable square feet for third parties. Until December 31, 1996, Parkway operated as a real estate operating company. For the taxable years 1995 and 1996, Parkway paid virtually no federal income taxes ($64,000 in 1995 and none in 1996) primarily because Parkway had certain net operating losses ("NOLs") to shelter most of Parkway's income from such taxes. However, the increase in the number of outstanding common shares, which resulted from the completion of a private placement of common shares in June 1996 and Parkway's mergers during 1994 and 1995, caused the use of Parkway's NOLs to be significantly limited in any one year. The taxable income of the Company has increased significantly following the implementation of its strategy of focused investment in office properties. Accordingly, Parkway's Board of Directors determined that it was in the best interests of Parkway and its stockholders to elect to qualify Parkway as a REIT under the Code for the taxable year beginning January 1, 1997, which allows Parkway to be generally exempt from federal income taxes even if its NOLs are limited or exhausted, provided it meets various REIT requirements. Business Objectives and Strategy of the Company Parkway's business objective is to maximize total return to stockholders over time primarily through increases in distributions and share price appreciation. During 1998, Parkway distributed $1.60 per share in dividends to shareholders which represents a 33.3% increase over the 1997 dividends distributed of $1.20 per share. Distributions in 1998 of $1.60 per share represent a payout of 53.2% of the Company's funds from operations ("FFO") for the year. The Company's dividend increase in 1998 was determined by the minimum distribution requirements of the REIT rules. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation" for discussion of FFO. Parkway's operating philosophy is based on the premise that Parkway is in the tenant retention business and further based on superior service to our customers, commitment to our employees, openness in all communication and simplicity. The Company believes that its focus on tenant retention will result in higher returns to its stockholders by maintaining a stabilized revenue stream and avoiding higher capital expenditures associated with new leases. For several years, Parkway has been engaged in a process of strategic planning and goal setting. The material goals and objectives of Parkway's earlier strategic plans have been achieved, and have benefitted Parkway's stockholders through increased FFO and dividend payments per share. With the changing capital and real estate markets, Parkway has recently adopted a strategic plan that sets as its goal to increase Parkway's FFO per share in an environment in which capital is not readily available. The goal of the new strategic plan is to increase Parkway's FFO per basic share to $5.00 in 50 months (i.e., the end of 2002); hence the plan is referred to as the "5 in 50 Plan." The Plan sets goals, assigns responsibility for the attainment of such goals to a specific Parkway officer, and provides for follow up evaluations to determine whether the officer responsible for the attainment of each goal is moving toward success. The major goals include realizing the embedded rental rate growth in Parkway's existing portfolio of office properties, making net new investments of $50 million per year (for a total of $200 million) in office properties, selling Parkway's non-earning assets and redeploying the proceeds in office properties, increasing the overall occupancy of Parkway's office portfolio by one percentage point, and taking numerous other actions to generate additional cash flow from Parkway's properties. The 5 in 50 Plan is aggressive, but Parkway believes that its goals are attainable. Parkway believes that the assumptions on which the anticipated increases in FFO per basic share are based (e.g. anticipated rental rates, interest rates and capitalization rates on newly acquired office properties) are reasonable, but they are obviously subject to risks and uncertainties, many of which are beyond Parkway's control. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Forward Looking Statements." Parkway generally seeks to acquire well-located Class A, A- or B+ (as classified within their respective markets) multi-story office buildings which are located in primary or secondary markets in the Southeastern United States and Texas, ranging in size from 50,000 to 500,000 net rentable square feet and which have current and projected occupancy levels in excess of 70% and adequate parking to accommodate full occupancy. The Company targets buildings which are occupied by a major tenant (or tenants) (e.g., a tenant that accounts for at least 30% of the building's total rental revenue and has at least five years remaining on its lease). Parkway strives to purchase office buildings at initial unleveraged yields on its total investment in the range of 9% to 11% per annum. The Company defines initial unleveraged yield as net operating income divided by total investment (as previously defined), where net operating income represents budgeted cash operating income for the current year at current occupancy rates and at rental rates currently in place with no adjustments for anticipated expense savings, increases in rental rates, additional leasing or straight line rent. Leases that expire during the year are assumed to renew at market rates unless interviews with tenants during pre-purchase due diligence indicate a likelihood that a tenant will not renew. In markets where the Company self-manages its properties, NOI also includes the net management fee expected to be earned during the year. The Company also generally seeks to acquire properties whose total investment per net rentable square foot is at least 25% below estimated replacement cost and whose current rental rates are at or below market rental rates. While the Company seeks to acquire properties which meet all of the acquisition criteria, specific property acquisitions are evaluated individually and may fail to meet one or more of the acquisition criteria at the date of purchase. Since January 1, 1998, the Company has acquired 24 office properties aggregating approximately 2.8 million net rentable square feet for a total investment of approximately $268.1 million, or approximately $95 per net rentable square foot. Parkway believes that its focus on its existing and targeted high growth markets in the Southeastern United States and Texas should provide further opportunities to enhance stockholder value. Parkway is presently focusing its resources on acquisitions in both its existing markets and several additional markets in the Southeastern United States, including central business districts and suburban markets. Parkway has targeted these markets based on positive economic indicators such as higher than average job growth and strong real estate market fundamentals such as increasing occupancy levels, strong net absorption and rising rental rates. Parkway's management team consists of experienced office property specialists with proven capabilities in office property (i) ownership; (ii) leasing; (iii) management; (iv) acquisition; (v) financing; and (vi) re-positioning. The Company believes these capabilities will allow Parkway to continue to create office property value in all phases of the real estate cycle. Parkway's nine senior officers have an average of over 18 years of real estate industry experience, and have worked together at Parkway for an average of over 12 years. Management has developed a highly service-oriented management culture and believes that its proactive leasing, property management and asset management activities will result in higher tenant retention and rental rates and will continue to translate into enhanced stockholder value. Dispositions Since January 1, 1995, Parkway has also pursued a strategy of liquidating its non-office assets and office building investments that no longer meet the Company's investment criteria and/or the Company has determined value will be maximized by selling and using the proceeds from such sales to acquire office properties in the Southeastern United States and Texas. In accordance with this strategy, since January 1, 1995, Parkway has sold non-core assets with a book value of approximately $44 million for approximately $67 million, resulting in an aggregate gain for financial reporting purposes of approximately $23 million. The book value of all remaining non-office building real estate assets and mortgage loans, all of which are for sale, was approximately $5.5 million as of December 31, 1998. 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 $52,471,000. The Company recorded a gain for financial reporting purposes of $3,226,000 on the sale. 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 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. Currently, the Company is considering selling its single asset in Birmingham, Alabama. Administration The Company is self-administered and self-managed and maintains its principal executive offices in Jackson, Mississippi. As of March 22, 1999, the Company had 153 employees. The operations of the Company are conducted from approximately 11,000 square feet of office space located at 188 East Capitol Street, One Jackson Place Suite 1000, Jackson, Mississippi. The building is owned by Parkway and is leased by Parkway at market rental rates. The Company maintains a website at www.parkwayco.com. Item 2. Properties. General The Company invests principally in office buildings in the Southeastern United States and Texas, but is not limited to any specific geographical region or property type. Including office building acquisitions made through March 22, 1999, the Company has 52 office buildings comprising approximately 6.9 million square feet of office space located in twelve states. In addition, the Company has made an initial investment in the historic renovation of the Moore Building which is adjacent to a new Triple-A baseball stadium complex under development in downtown Memphis. The Moore Building was originally constructed in 1903 and will consist of approximately 175,000 rentable square feet. The Company will also construct a multi-level, 803-space parking garage to accommodate the building and stadium parking needs. This building is 100% pre-leased to three tenants under 15-year non-cancelable leases. Property acquisitions in 1998, 1997 and 1996 were funded through a variety of sources, including: a. Cash reserves and cash generated from operating activities, b. Sales of non-core assets, including real estate and mortgage loans, c. Sales of office properties, d. Fixed rate, non-recourse mortgage financing at terms ranging from 10 to 15 years, e. Assumption of existing fixed rate, non-recourse mortgages on properties purchased, f. Sales of Parkway common stock and preferred stock, and g. Advances on bank lines of credit. Office Buildings The Company intends to hold its portfolio of office buildings for investment purposes. Other than the Moore Building discussed previously, the Company does not propose any program for the renovation, improvement or development of any of the office buildings, except as called for under the renewal of existing leases or the signing of new leases or improvements necessary to upgrade recent acquisitions to the Company's operating standards. All such improvements are expected to be financed by cash flow from the portfolio of office properties and advances on bank lines of credit. In the opinion of management, all properties are adequately covered by insurance. All office building investments compete for tenants with similar properties located within the same market primarily on the basis of location, rent charged, services provided and the design and condition of the improvements. The Company also competes with other REITs, financial institutions, pension funds, partnerships, individual investors and others when attempting to acquire office properties. The following table sets forth certain information about office properties owned by the Company as of March 22, 1999:
Estimated Average % of Average Market % of Total Net Total Rent Rent Leases % Rentable Net Per Per Expiring Leased Number of Square Rentable Square Square in as of Location Properties Feet Feet Foot(1) Foot(2) 1999(3) 1/31/99 - ------------------------------------------------------------------------------------------ Houston, TX 11 1,625,000 23.4% $15.33 $17.61 9.6% 95.2% Jackson, MS 5 827,000 11.9% 16.20 17.75 12.5% 98.6% Atlanta, GA 7 598,000 8.6% 17.13 18.25 18.0% 95.7% Knoxville, TN 2 519,000 7.5% 14.19 15.09 16.4% 90.0% Winston-Salem, NC 1 239,000 3.4% 19.21 19.00 7.3% 100.0% Memphis, TN 3 662,000 9.6% 15.78 16.30 8.8% 91.0% Columbia, SC 2 405,000 2.7% 13.66 15.50 9.8% 96.4% Northern VA 3 220,000 3.2% 17.83 21.74 8.8% 100.0% Chesapeake, VA 3 384,000 5.5% 15.53 16.33 11.2% 85.2% Richmond, VA 6 499,000 7.2% 14.33 15.64 32.7% 95.9% Ft. Lauderdale, FL 2 215,000 3.1% 16.82 19.36 15.3% 99.1% All Others 7 749,000 13.9% 14.24 15.34 24.0% 93.1% -- --------- ------ ----- ----- ----- ----- 52 6,942,000 100.0% $15.55 $17.06 14.5% 94.6% == ========= ====== ====== ====== ===== ===== (1) Average rent per square foot is defined as the weighted average current gross rental rate including escalations for occupied office space in the building as of January 31, 1999. (2) Estimated average market rent per square foot is based upon information obtained from (i) the Company's own experience in leasing space at the properties; (ii) leasing agents in the relevant markets with respect to quoted rental rates and completed leasing transactions for comparable properties in the relevant markets; and (iii) publicly available data with respect thereto. Estimated average market rent is weighted by the net rentable square feet expiring in each property. (3) The percentage of leases expiring in 1999 represents the ratio of square feet under leases expiring in 1999 divided by total net rentable square feet.
The following table sets forth scheduled lease expirations for properties owned as of March 22, 1999 for leases executed as of January 31, 1999, assuming no tenant exercises renewal options:
Weighted Average Weighted Expiring Estimated Gross Average Net Rental Market Rent Rentable Percent Annualized Rate Per Per Net Year of Number Square of Total Rental Net Rentable Rentable Lease of Feet Net Rentable Amount Square Square Expiration Leases Expiring Square Feet Expiring(1) Foot(2) Foot (3) ---------- ------ --------- ------------ ------------ ------------ ----------- 1999 278 1,005,000 14.5% $ 14,677,000 $14.60 $16.56 2000 190 863,000 12.4% 13,360,000 15.47 17.53 2001 183 822,000 11.8% 13,019,000 15.85 17.11 2002 106 893,000 12.9% 13,994,000 15.67 16.96 2003 110 942,000 13.6% 15,112,000 16.04 17.13 Thereafter 78 2,045,000 29.4% 32,018,000 15.66 17.09 --- --------- ----- ------------ ----- ------ 945 6,570,000 94.6% $102,180,000 $15.55 $17.06 === ========= ===== ============ ====== ====== (1) Annualized rental amount expiring is defined as net rentable square feet expiring multiplied by the weighted average expiring annual rental rate per net rentable square foot. (2) Weighted average expiring gross rental rate is the weighted average rental rate including escalations for office space. (3) Estimated average market rent is based upon information obtained from (i) the Company's own experience in leasing space at the properties: (ii) leasing agents in the relevant markets with respect to quoted rental rates and completed leasing transactions for comparable properties in the relevant markets; and (iii) publicly available data with respect thereto. Estimated average market rent is weighted by the net rentable square feet expiring in each property.
Tenants The office properties are leased to approximately 945 tenants, which engage in a wide variety of industries including banking, professional services (including legal, accounting, and consulting), energy, financial services and telecommunications. The following table sets forth information concerning the 20 largest tenants of the properties owned as of January 31, 1999 (in thousands, except square foot data):
Annualized Lease Square Rental Expiration Tenant Feet Revenue (1) Office Building Date - ---------------------------- --------- ----------- ----------------------- ---------- SkyTel 198,509 $3,014 (2) (2) Morgan Keegan 159,910 3,075 Morgan Keegan Tower 09/07 Schlumberger (GECO-PRAKLA) 152,917 2,429 Schlumberger 04/02 Raytheon Engineers and Constructors, Inc. 147,075 2,972 Raytheon Building 12/05 Burlington Resources 108,759 1,517 400 North Belt (3) First Tennessee Bank 101,536 1,422 First Tennessee Plaza 09/04 Westvaco Corporation 100,457 1,528 Westvaco 01/06 DHL Airways 98,649 1,552 One Commerce Green 10/04 Nabors Industries 98,020 1,608 One commerce Green 07/00 Womble Carlyle Sandridge and Rice PLLC 94,431 1,812 BB&T Financial Center 06/05 NationsBank 93,786 1,154 NationsBank Tower 06/06 Premier Health Systems, Inc. 92,523 1,449 Charlotte Park Executive Center 11/99 PGS Tensor Geophysical, Inc. 91,960 1,236 Tensor Building 03/05 Branch Banking & Trust (BB&T) 90,426 1,708 BB&T Financial Center, Town Point Center (4) Technology Service Solution (an IBM/Kodak joint venture) 87,324 1,510 Meridian Building 06/01 Paracelsus Healthcare 61,086 985 One Commerce Green 02/03 Talus/Aeronomics 60,352 1,208 Waterstone 08/03 Tritel, Inc. 59,221 937 111 Capitol, River Oaks (5) McNair Law Firm, P.A. 56,409 799 NationsBank Tower 09/02 Wilbur Smith Associates 56,287 672 NationsBank Tower 11/04 --------- ------- 2,009,637 $32,587 ========= ======= (1) Annualized Rental Revenue represents the gross rental rate (including escalations) per square foot as of February 28, 1999, multiplied by the number of square feet leased by the tenant. (2) SkyTel, a service provider in the telecommunications industry, occupies 155,927 net rentable square feet in SkyTel Centre which represents 59.7% of the total net rentable square feet of the building. This lease is non- cancelable, expires in July 2005 and includes a contractual rental increase in the 61st month of the lease term based on the corresponding increase in the Consumer Price Index since the inception of the lease. In addition, SkyTel occupies 34,825 net rentable square feet in One Jackson Place, which represents 16.5% of the total net rentable square feet of the building, under a lease that expires in June 2002 and 7,757 net rentable square feet in 111 Capitol Building, which represents 4.3% of the total net rentable square feet of the building, under a lease that expires in January 2002. (3) Burlington Resources occupies a total of 108,759 square feet under separate leases that expire as follows: 86,096 square feet in December 2006, 8,180 square feet in September 2004, 5,454 square feet in April 2001, 3,866 square feet in March 2002, 2,831 square feet in September 2002 and 2,332 square feet in August 2000. (4) BB&T occupies a total of 90,426 square feet in two properties under separate leases that expire as follows: 84,168 square feet in December 2007 in Winston-Salem, North Carolina and 6,258 square feet in November 2001 in Chesapeake, Virginia. (5) Tritel, Inc. occupies 59,221 square feet in two properties under separate leases that expire as follows: 36,265 square feet in November 2003, 15,898 square feet in March 2004 and 7,058 square feet that expire in November 2008.
Non-Core Assets Since January 1, 1995, Parkway has pursued a strategy of liquidating its non-core assets and using the proceeds from such sales to acquire office properties. The Company defines non-core assets as all assets other than office properties which at December 31, 1998 consisted of land and mortgage loans. In accordance with this strategy, Parkway sold non-core assets with a book value of $9,235,000 for cash proceeds of $13,704,000 during 1998 and 1997. Aggregate gains for financial reporting purposes from sales, write-downs and deferred gains recognized on non-core assets during 1998 and 1997 were $4,469,000. The book value of all remaining non-office building real estate assets and mortgage loans, all of which are for sale, was $5,494,000 as of December 31, 1998. Of this amount, $4,599,000 represents undeveloped land with a carrying cost of approximately $67,000 annually. At December 31, 1998, the Company reclassed 17 acres of undeveloped land acquired with the purchase of Charlotte Park in 1997 with a carrying value of $1,721,000 from land held for development to land held for sale. Item 3. Legal Proceedings. The Company and its subsidiaries are, from time to time, parties to litigation arising from the ordinary course of their business. Management of Parkway does not believe that any such litigation will materially affect the financial position or operations of Parkway. Item 4. Submission of Matters to a Vote of Security Holders. None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Effective August 22, 1996, the Company's common stock ($.001 par value) was listed and began trading on the New York Stock Exchange under the symbol "PKY". Prior to that date, the stock was traded in the over-the-counter market and was listed on the NASDAQ National Market System under the symbol "PKWY". The number of record holders of the Company's common stock at March 22, 1999, was 3,168. The following table sets forth, for the periods indicated, the high and low last reported sales prices per share of the Company's common stock and the per share cash distributions paid by Parkway during each quarter. Year Ended Year Ended December 31, 1998 December 31, 1997 ------------------------ ------------------------ Distri- Distri- Qtr. Ended High Low butions High Low butions - ---------- -------- ------- ------- -------- ------- ------- March 31 $34.875 $30.125 $ .35 $28.625 $23.875 $ .25 June 30 33.500 28.875 .35 26.875 21.625 .25 Sept. 30 30.938 25.813 .45 34.188 26.375 .35 Dec. 31 33.000 27.000 .45 34.938 31.750 .35 ----- ----- $1.60 $1.20 ===== ===== Common Stock distributions during 1998 and 1997 ($1.60 and $1.20 per share, respectively) were taxable as follows for federal income tax purposes: Year Ended December 31 --------------- 1998 1997 ----- ----- Ordinary income................... $1.52 $1.20 Capital Gain...................... .04 - Unrecaptured Section 1250 Gain.... .04 - ----- ----- $1.60 $1.20 ===== ===== The Company's shares of Series A 8.75% Cumulative Redeemable Preferred Stock are also listed for trading on the New York Stock Exchange and trade under the symbol "PKY PrA". The following table shows the high and low preferred share prices and per share distributions paid for each quarter of 1998 (no Preferred Shares were issued in 1997 or in the first quarter 1998) reported by the New York Stock Exchange. Year Ended Year Ended December 31, 1998 December 31, 1997 ------------------------ ------------------------ Distri- Distri- Qtr. Ended High Low butions High Low butions - ---------- -------- ------- ------- -------- ------- ------- March 31 N/A N/A N/A N/A N/A N/A June 30 $25.250 $23.9375 N/A N/A N/A N/A Sept. 30 24.875 21.6250 .47 N/A N/A N/A Dec. 31 24.500 21.4375 .55 N/A N/A N/A ----- --- $1.02 N/A ===== === As of March 22, 1999, there were 68 holders of record of the Company's 2,650,000 outstanding shares of Series A preferred stock. Preferred stock distributions during 1998 ($1.02 per share) were taxable as $.97 ordinary income, $.03 capital gain and $.02 unrecaptured Section 1250 gain. Item 6. Selected Financial Data.
Twelve Twelve Twelve Twelve Six Twelve Months Months Months Months Months Months 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 06/30/94 -------- -------- -------- -------- -------- -------- (In thousands, except per share data) OPERATING DATA: Revenues Rental income from office properties $95,438 $45,799 $18,840 $6,918 $2,483 $4,768 Other income 1,045 2,288 5,239 5,849 2,423 3,442 Expenses Operating expenses: Office properties 40,844 19,697 8,466 2,960 972 2,087 Non-core assets 153 462 1,379 1,916 979 1,673 Interest expense 11,660 5,581 3,526 2,230 1,078 2,392 Depreciation & amortization 13,256 6,033 2,444 1,331 565 1,022 Minority interest - 59 (28) (100) (209) (542) Interest expense 4,349 997 621 291 140 - General & admini- strative & other 3,583 3,674 3,758 3,185 932 1,072 Income before gains & discontinued operations 22,638 11,584 3,913 954 449 506 Gain on real estate, mortgage loans, securities and real estate partnership 4,788 2,907 10,458 10,866 556 746 Minority interest - unit holders (1) - - - - - Income before discontinued operations 27,425 14,491 14,371 11,820 1,005 1,252 Discontinued operations - - - - - 51 Net income 27,425 14,491 14,371 11,820 1,005 1,303 Dividends on preferred stock 3,913 - - - - - Net income available to common stockholders $23,512 $14,491 $14,371 $11,820 $1,005 $1,303 PER COMMON SHARE DATA: Net income per: Basic $2.24 $2.05 $3.92 $4.24 $.43 $.67 Diluted $2.21 $2.01 $3.81 $4.16 $.42 $.65 Book value (at end of period) $25.89 $25.06 $18.30 $24.51 $13.75 $13.71 Cash distributions: Declared $1.60 $1.20 $.62 $.44 $.11 $.40 Paid $1.60 $1.20 $.62 $.44 $.21 $.43 Weighted average shares outstanding: Basic 10,490 7,078 3,662 2,787 2,316 1,950 Diluted 10,621 7,214 3,776 2,844 2,372 2,003 BALANCE SHEET DATA: Office investments net of deprecia- tion $568,244 $347,931 $122,802 $52,284 $24,801 $24,218 Total assets 592,252 368,592 147,035 88,043 61,062 59,735 Notes payable to banks 40,896 6,473 - - 4,154 3,631 Mortgage notes payable 201,841 105,220 62,828 34,704 22,827 22,902 Total liabilities 264,301 123,851 69,127 38,832 28,824 28,006 Stockholders' equity 327,951 244,741 77,908 49,211 32,238 31,729 Note: All amounts reflect the April 1996 stock split. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. Financial Condition Comments are for the balance sheet dated December 31, 1998 compared to the balance sheet dated December 31, 1997. In 1998, Parkway continued the application of its strategy of operating and acquiring office properties as well as liquidating non-core assets or office assets that no longer meet the Company's investment criteria and/or the Company has determined value will be maximized by selling. During the year ended December 31, 1998, the Company purchased 23 office properties, sold four office properties (based on management's evaluation of changes in market conditions) and sold various non- core assets. The Company also made an initial investment of $5,317,000 in the historic renovation of an office building and the construction of a multi-level parking garage to accommodate the building. Total assets increased $223,660,000 and office properties (before depreciation) increased $227,197,000 or 63%. Parkway's direct investment in office buildings and office redevelopment increased $220,313,000 net of depreciation to a carrying amount of $568,244,000 at December 31, 1998 and consisted of 50 properties. During the year ending December 31, 1998, Parkway purchased 23 office properties as follows (in thousands): Purchase Purchase Office Building Location Price Date - ---------------------- ------------------ -------- -------- Schlumberger Houston, TX $12,200 01/21/98 One Commerce Green Houston, TX 37,500 02/25/98 Comerica Bank Building Houston, TX 23,084 02/25/98 Cedar Ridge Knoxville, TN 9,330 02/25/98 Hillsboro I - IV Ft. Lauderdale, FL 8,800 02/25/98 Hillsboro V Ft. Lauderdale, FL 13,500 02/25/98 Healthsource Greenville, SC 5,700 02/25/98 Loudoun Plaza Northern VA 9,000 02/25/98 Glen Forest Richmond, VA 9,000 02/25/98 Moorefield II Richmond, VA 5,200 02/25/98 Moorefield III Richmond, VA 5,600 02/25/98 Lynnwood Plaza Virginia Beach, VA 9,250 02/25/98 Atrium at Bent Tree Dallas, TX 11,775 02/25/98 The Belvedere Dallas, TX 15,275 02/25/98 Southtrust Bank Bldg. St. Petersburg, FL 17,440 03/31/98 Atrium at Stoneridge Columbia, SC 8,330 04/28/98 River Oaks Plaza Jackson, MS 4,400 05/01/98 Pavilion Center Atlanta, GA 4,500 06/30/98 111 Capitol Bldg.* Jackson, MS 11,350 07/01/98 Town Point Center Norfolk, VA 10,700 07/20/98 Westvaco Richmond, VA 13,030 07/20/98 Winchester Richmond, VA 11,680 12/18/98 Falls Building Memphis, TN 7,600 12/31/98 -------- $264,244 ======== *The Company assumed a $5,647,000 first mortgage with an 8% interest rate as part of the purchase. The mortgage note payable has been recorded at $5,962,000 to reflect its fair value based on the Company's current incremental borrowing rate of 7% as of the date of purchase. During the year ending December 31, 1998, Parkway sold four office properties for net proceeds of $52,471,000. The Company recorded a gain for financial reporting purposes of $3,226,000. The office properties sold are as follows: Office Building Location Date Sold -------------------- ---------- --------- Courtyard at Arapaho Dallas, TX 07/01/98 Fairway Plaza Dallas, TX 07/01/98 Atrium at Bent Tree Dallas, TX 07/01/98 The Belvedere Dallas, TX 07/01/98 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. During the year ending December 31, 1998, the Company capitalized building improvements and additional purchase expenses of $12,441,000 and recorded depreciation expense of $12,538,000 related to its office property portfolio. Parkway sold various non-core and other assets during the year that resulted in gains for financial reporting purposes of $1,562,000 and net proceeds of $4,374,000. At December 31, 1998, non-core assets other than mortgage loans totaled $4,599,000. The Company expects to continue its efforts to liquidate these assets. Mortgage loans decreased $395,000 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 the payoff of one 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 increased $34,423,000 as a result of borrowings of $226,913,000 and payments of $192,490,000 under bank lines of credit. Advances under bank lines of credit were made to purchase additional office properties and Company stock. Mortgage notes payable without recourse increased a net $96,621,000 due to the funding of a $97,000,000 fixed rate loan, the assumption of existing debt on the 111 Capitol Building recorded at a rate of 7% in the amount of $5,962,000, net of a purchase accounting adjustment of $315,000 to reflect the loan at the current rate, and scheduled principal payments of $6,341,000 during the year ended December 31, 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 twenty 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 45% although such ratio may from time to time temporarily exceed 45%, especially when the Company has incurred significant amounts of short-term debt in connection with property acquisitions. Stockholders' equity increased $83,210,000 during the year ended December 31, 1998 as a result of the following factors (in thousands): Increase (Decrease) ------------------- Net income $27,425 Shares issued-preferred stock 66,250 Shares purchased-Company common stock (28,722) Preferred stock dividends declared (3,913) Common stock dividends declared and paid (16,925) Exercise of stock options 470 Shares issued-stock offerings 38,560 Shares issued in lieu of directors fees 65 ------- $83,210 ======= 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 December 31, 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. On March 2, 1999, the Board of Directors approved the repurchase of an additional 500,000 shares of the Company's common stock. As of March 22, 1999, 26,034 additional shares have been purchased at an average price of $28.39. RESULTS OF OPERATIONS Comments are for the year ended December 31, 1998 compared to the year ended December 31, 1997. Net income available for common stockholders for the year ended December 31, 1998 was $23,512,000 ($2.24 per basic common share) as compared to $14,491,000 ($2.05 per basic common share) for the year ended December 31, 1997. Net income included net gains from the sale of real estate and mortgage loans in the amounts of $4,788,000 and $2,907,000 for the years ended December 31, 1998 and 1997, respectively. 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 ------------------------------- ------------- Forum II & III 01/07/97 Ashford II 01/28/97 Courtyard at Arapaho 03/06/97 Charlotte Park Executive Center 03/18/97 Meridian Building 03/31/97 Vestavia Centre 04/04/97 Sugar Grove 05/01/97 Lakewood II 07/10/97 NationsBank Tower 07/31/97 Fairway Plaza 08/12/97 First Tennessee Plaza 09/18/97 Morgan Keegan Tower 09/30/97 Hightower Centre 10/01/97 First Little Rock Plaza 11/07/97 Raytheon 11/17/97 Greenbrier Towers 11/25/97 Schlumberger 01/21/98 Brookdale Portfolio* 02/25/98 Southtrust 03/31/98 Atrium at Stoneridge 04/28/98 River Oaks Office Plaza 05/01/98 Pavilion Center 06/30/98 111 Capitol Building 07/01/98 Town Point Center 07/20/98 Westvaco Building 07/20/98 Winchester 12/18/98 Falls Building 12/31/98 *On February 25, 1998, the Company purchased a 13-building portfolio (the "Brookdale Portfolio") which totaled approximately 1,470,000 net rentable square feet that included properties located in five of its primary markets and three new markets. On July 1, 1998, the Company sold its investment portfolio of four office properties in Dallas, Texas for net proceeds of $52,471,000. 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): Year Ended December 31 ----------------- 1998 1997 ------- ------- Income............................ $95,438 $45,799 Operating expense................. (40,844) (19,697) ------- ------- 54,594 26,102 Interest expense.................. (11,660) (5,581) Depreciation and amortization..... (13,256) (6,033) Minority interest................. - (59) ------- ------- Net income........................ $29,678 $14,429 ======= ======= Operations of other real estate properties held for sale are summarized below (in thousands): Year Ended December 31 ----------------- 1998 1997 ------- ------- Income from other real estate properties............... $ - $ 722 Real estate operating expenses........................ (153) (462) ------- ------- Net income (loss).................$ (153) $ 260 ======= ======= The increase in interest expense on office properties is primarily due to the mortgage loans assumed and/or new loans placed during 1998 and 1997. The average interest rate on mortgage notes payable as of December 31, 1998 was 7.2%. The $2,580,000 increase in interest expense on banks notes for the year ending December 31, 1998 compared to the year ending December 31, 1997 is primarily due to advances made on bank lines of credit for purchases of office properties and Company stock in 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 (discussed further in "Liquidity"). 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 rate set at 6.573% as of December 31, 1998. The new credit facility reflects a 15 basis point interest rate reduction (based on leverage at December 31, 1998) 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. Comments are for the year ended December 31, 1997 compared to the year ended December 31, 1996. Net income available for common stockholders for the year ended December 31, 1997 was $14,491,000 ($2.05 per basic common share) as compared to $14,371,000 ($3.92 per basic common share) for the year ended December 31, 1996 and included $2,907,000 ($.41 per basic common share) in net gains from the sale of non- core assets. Net income available for common stockholders for the year ended December 31, 1996 included $10,458,000 ($2.86 per basic common share) in net gains from the sale of non-core assets. The primary reason for the increase in the Company's income before gains for 1997 as compared to 1996 is the reflection of the operations of the following office buildings subsequent to the date of purchase: Building Purchase Date ------------------------------- ------------- One Park 10 Plaza 03/07/96 400 North Belt 04/15/96 Woodbranch 04/15/96 Cherokee Business Center 07/09/96 8381 and 8391 Courthouse Road 07/09/96 Falls Pointe 08/09/96 Roswell North 08/09/96 BB&T Financial Center 09/30/96 Tensor 10/31/96 Forum II & III 01/07/97 Ashford II 01/28/97 Courtyard at Arapaho 03/06/97 Charlotte Park Executive Center 03/18/97 Meridian Building 03/31/97 Vestavia Centre 04/04/97 Sugar Grove 05/01/97 Lakewood II 07/10/97 NationsBank Tower 07/31/97 Fairway Plaza 08/12/97 First Tennessee Plaza 09/18/97 Morgan Keegan Tower 09/30/97 Hightower Centre 10/01/97 First Little Rock Plaza 11/07/97 Raytheon 11/17/97 Greenbrier Towers 11/25/97 Operations of office building properties are summarized below (in thousands): Year Ended December 31 ----------------- 1997 1996 ------- ------- Income............. $45,799 $18,840 Operating expense.. (19,697) (8,466) ------- ------- 26,102 10,374 Interest expense... (5,581) (3,526) Depreciation and amortization..... (6,033) (2,444) Minority interest.. (59) 28 ------- ------- Net income......... $14,429 $ 4,432 ======= ======= Operations of other real estate properties held for sale are summarized below (in thousands): Year Ended December 31 ------------------ 1997 1996 ------- -------- Income from other real estate properties.... $ 722 $ 1,773 Real estate operating expenses... (462) (1,379) ------- ------- Net income............. $ 260 $ 394 ======= ======= 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 mortgages. On December 31, 1997, the Company sold the Plantation Village retail center for $2,500,000 cash and a note receivable of $900,000 with a 10% interest rate. The note matures December 31, 2007 and payments are based on a 15-year amortization with a seven-year call. At December 31, 1997, the Company's investment in mortgage loans included three mortgage loans totaling $1,117,000 with an average interest rate of 10%. LIQUIDITY AND CAPITAL RESOURCES Statement of Cash Flows Cash and cash equivalents were $2,937,000 and $959,000 at December 31, 1998 and 1997, respectively. The Company generated $40,345,000 in cash flows from operating activities during the year ended December 31, 1998 compared to $17,554,000 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 year ending December 31, 1998 with a net of $220,377,000 being invested. In implementing its investment strategy, the Company used $259,857,000 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 assets and other assets of $4,374,000 and net cash proceeds of $52,471,000 from the sale of four office properties located in Dallas, Texas. The Company also spent $12,683,000 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 1998. Cash dividends of $16,925,000 and $2,705,000 ($1.60 per common share and $1.02 per preferred share) were paid to stockholders, 1,000,000 shares of common stock were repurchased for a total of $28,722,000 and principal payments of $6,341,000 were made on mortgage notes payable during the year ending December 31, 1998. Liquidity The Company plans to continue 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 December 31, 1998, the Company had $40,896,000 outstanding under two bank lines of credit. These lines of credit are 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 Company is exposed to interest rate changes primarily as a result of its lines of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate investment portfolio and operations. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows at fixed rates but also has a three-year $150 million unsecured revolving credit facility with a consortium of 14 banks with Chase Bank of Texas, National Association serving as the lead agent (the "$150 million line") and a three-year $10 million unsecured line of credit with First American Bank, operating as Deposit Guaranty National Bank (the "$10 million line"). The interest rates on the lines of credit are equal to the 30 day LIBOR rate plus 112.5 to 137.5 basis points, depending upon overall Company leverage. The interest rate on the $10 million line and the $150 million line was 6.797% and 6.573%, respectively, at December 31, 1998. The table below presents the principal payments due and weighted average interest rates for the fixed rate debt. Average Fixed Rate Debt Fair Value Interest Rate (In thousands) 12/31/98 ------------- --------------- ---------- 1999 8,990 7.38% 2000 9,679 7.37% 2001 10,421 7.37% 2002 11,221 7.37% 2003 12,082 7.36% Thereafter 149,448 7.25% -------- -------- Total $201,841 $207,151 ======== ======== 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 had the interest rate set at 6.797% as of December 31, 1998. 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 fees on the unused portion of the line 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 had the interest rate set at 6.573% as of December 31, 1998. 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 fees on the unused portion of the line 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 December 31, 1998, the Company had $201,841,000 of non- recourse fixed rate mortgage notes payable with an average interest rate of 7.246% secured by office properties and $40,896,000 drawn under bank lines of credit. Based on the Company's total market capitalization of approximately $624,962,000 at December 31, 1998 (using the December 31, 1998 closing price of $31.25 per share) the Company's debt represented approximately 38.8% of its total market capitalization. The Company plans to maintain a ratio of debt to total market capitalization from 25% to 45% although such ratio may from time to time temporarily exceed 45%, especially when the Company has incurred significant amounts of short term debt in connection with property acquisitions. Subsequent to December 31, 1998, the Company purchased the Moorefield I Building. Moorefield I is a 46,000 square foot building. This purchase was funded with advances under existing lines of credit and the assumption of an existing mortgage. The Company presently has plans to make capital improvements at its office properties in 1999 of approximately $21,000,000 These expenses include tenant improvements, capitalized acquisition costs and capitalized building improvements. Approximately $9,000,000 of these improvements relate to upgrades on properties acquired in 1998, 1997 and 1996 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. In the routine management of its portfolio of office properties, the Company evaluates changes in market conditions that indicate an opportunity or need to sell properties within that market in order to maximize shareholder value. The Company also evaluates other factors, including its ability to purchase sufficient property in a market to justify the implementation of self management, the speculative development of new office properties within the market and the demand for office space within the market as evidenced by job growth and office space absorption in deciding whether or not a property should be sold. As a result of this evaluation, the Company is considering selling its property located in Birmingham, Alabama. The Company has made numerous attempts to purchase sufficient property in the market to justify the implementation of self-management but has been unsuccessful, as prices have risen to amounts that make it difficult or impossible to make purchases that meet the Company's buying criteria. There can be no assurance that the Company will be able to sell this property or on what terms such sale would occur. 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") 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 years ended December 31, 1998 and 1997 (in thousands): Year Ended December ----------------- 1998 1997 ------- ------- Net income........................... $27,425 $14,491 Adjustments to derive funds from operations: Depreciation and amortization..... 13,256 6,033 Minority interest depreciation..... - (56) Equity in earnings................. (47) (46) Distributions from unconsolidated subsidiaries...... 24 42 Preferred dividends................ (3,913) - Gain on real estate and mortgage loans................... (4,788) (2,907) Amortization of discounts, deferred gains and other........ (6) (1) ------- ------- Funds from operations................ $31,951 $17,556 ======= ======= NAREIT has recommended supplemental disclosure concerning certain capital expenditures, leasing costs and straight-line rents as shown below (in thousands): Year Ended December 31 ----------------- 1998 1997 ------- ------- Straight-line rents.................. $ 763 $ 352 Building improvements................ 1,697 461 Tenant improvements: New leases......................... 1,023 494 Lease renewals..................... 1,598 1,742 Leasing commissions: New leases......................... 513 434 Lease renewals..................... 1,104 1,570 Non-core asset improvements.......... - 27 Leasing commissions amortized........ 663 330 Upgrades on acquisitions anticipated at the date of purchase ........... 6,748 1,902 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 rent if rents on the existing leases are below the then-existing market rate. Impact of Year 2000 In August 1998, the Company adopted a comprehensive uniform plan to address the issue of Year 2000 Compliance. The plan addresses problems that might arise in information technology systems, building systems that rely upon date sensitive microprocessors, and third party tenants, manufacturers, vendors and suppliers. The Company's plan is a multi-phase process whereby the following steps are taken: (1) inventory all company and building systems which could possibly be affected by the Year 2000 issue; (2) contact the manufacturer of each inventoried system and determine the Year 2000 Compliance status of each; (3) assign priorities based upon the relative importance of each system; (4) anticipate contingencies and develop a comprehensive plan to address issues that arise under various scenarios; (5) identify solutions to identified problems; and (6) test all systems and solutions. As of December 31, 1998, the inventory of all systems was 96% complete. Additionally, all inventoried systems were prioritized and a significant number of manufacturer, vendor and supplier responses to inquiries had been received. The testing of all systems is scheduled for the second quarter of 1999, and contingency planning will take place throughout the second, third and fourth quarters of 1999. Parkway has completed the upgrade of all critical business application services to full Year 2000 compliance standards. We have received the necessary updates on all core business applications and are in the process of installing these updates. We will begin the testing phase of our plan on these servers and their applications during the second quarter of 1999. All system workstations have been tested and those that were not compliant will be phased out before the end of the year. Building systems that rely upon date sensitive microprocessors include the hardware, software and associated embedded microprocessors used in the operation of all buildings owned by the Company. Testing of these systems is currently in process, and repair, retrofitting or replacement, is being performed as necessary. Internal evaluations and correspondence with equipment manufacturers have revealed that a vast majority of this equipment is not dependent upon the date sensitive microprocessors and will not require alteration to function properly before, during and after the Year 2000. Third party influences on the Company's Year 2000 Compliance status include tenants, suppliers and vendors. All have been contacted regarding their compliance status and their possible impact on the Company's operations as a result of the interoperability of applicable systems. All tenants have been contacted and informed of the Company's plan to be compliant. Additionally, inquiries have been forwarded to vendors with whom the Company conducts business (namely financial institutions and utility firms). Responses to these inquiries are still being received and evaluated to determine appropriate courses of action. Company contingency plans will address these responses, as well as the questions and needs of all tenants. The cost of the Company's Year 2000 compliance effort is not expected to be material to the company's financial position. Estimated total expenditures required to be Year 2000 compliant are expected to between $250,000 and $500,000 some portion of which would have been expended irrespective of the Year 2000 issue. The Company's plan is expected to reduce the level of uncertainty regarding the Year 2000 issue; however, uncertainty surrounding the issue still exists as a result of the uncertainty of the Year 2000 readiness of third party suppliers and vendors. As a result of this uncertainty, the Company is unable to determine, at this time, whether the consequences of Year 2000 failures will have a material impact on operations or financial condition. Forward-Looking Statements In addition to historical information, certain sections of this Form 10-K 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 and estimates of market rental rates. 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, 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-K. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as of the date hereof. The Company assumes no obligation to update forward- looking statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk See information appearing under the caption "Liquidity" appearing in Item 7, Management's Discussion and Analysis on page 25. Item 8. Financial Statements and Supplementary Data. Index to Consolidated Financial Statements Page Report of Independent Auditors.............................. 32 Consolidated Balance Sheets- as of December 31, 1998 and 1997.......................... 33 Consolidated Statements of Income- for the years ended December 31, 1998, 1997 and 1996...... 34 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996...... 35 Consolidated Statements of Stockholders' Equity- for the years ended December 31, 1998, 1997 and 1996...... 36 Notes to Consolidated Financial Statements.................. 37 Schedule III - Real Estate and Accumulated Depreciation..... 52 Note to Schedule III - Real Estate and Accumulated Depreciation.............................................. 56 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Parkway Properties, Inc. We have audited the accompanying consolidated balance sheets of Parkway Properties, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audit also included the financial statement schedule listed in the index under Item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Parkway Properties, Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein. /s/ Ernst & Young LLP --------------------------- Ernst & Young LLP Jackson, Mississippi February 5, 1999 PARKWAY PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands except share and per share data) December 31 December 31 1998 1997 ------------ ----------- Assets Real estate related investments: Office buildings...................... $589,271 $362,074 Office redevelopment................... 5,317 - Accumulated depreciation............... (26,344) (14,143) -------- -------- 568,244 347,931 Land held for sale..................... 4,599 6,030 Mortgage loans......................... 895 1,117 Real estate partnership................ 345 323 -------- -------- 574,083 355,401 Interest, rents receivable and other assets................................. 15,232 12,232 Cash and cash equivalents................ 2,937 959 -------- -------- $592,252 $368,592 ======== ======== Liabilities Notes payable to banks...................$ 40,896 $ 6,473 Mortgage notes payable without recourse.. 201,841 105,220 Accounts payable and other liabilities... 21,564 12,158 -------- -------- 264,301 123,851 -------- -------- 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, 10,109,891 and 9,765,176 shares issued and outstanding in 1998 and 1997, respectively......... 10 10 Additional paid-in capital............... 223,834 213,461 Retained earnings........................ 37,857 31,270 -------- -------- 327,951 244,741 -------- -------- $592,252 $368,592 ======== ======== See notes to consolidated financial statements. PARKWAY PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Year Ended December 31 ------------------------------ 1998 1997 1996 --------- --------- --------- Revenues Income from office properties... $95,438 $45,799 $18,840 Income from other real estate properties.................... - 722 1,773 Interest on mortgage loans...... 120 63 1,740 Management company income....... 464 539 784 Interest on investments......... 162 373 500 Dividend income................. 73 388 118 Deferred gains and other income. 226 203 324 -------- -------- -------- 96,483 48,087 24,079 -------- -------- -------- Expenses Office properties: Operating expense............. 40,844 19,697 8,466 Interest expense: Contractual................. 11,512 5,486 3,467 Amortization of loan costs.. 148 95 59 Depreciation and amortization. 13,256 6,033 2,444 Minority interest............. - 59 (28) Other real estate properties: Operating expense............. 153 462 1,379 Interest expense on bank notes: Contractual................... 3,390 810 281 Amortization of loan costs.... 959 187 72 Interest expense on wrap mortgages................ - - 340 Management company expenses..... 374 362 673 General and administrative...... 3,209 3,312 3,013 -------- -------- -------- 73,845 36,503 20,166 -------- -------- -------- Income before gains and minority interest............. 22,638 11,584 3,913 Gain on sales and minority interest Gain on real estate held for sale and mortgage loans... 4,788 2,907 9,909 Gain on securities.............. - - 549 Minority interest-unit holders.. (1) - - -------- -------- -------- Net income...................... 27,425 14,491 14,371 Dividends on preferred stock.... 3,913 - - -------- -------- -------- Net income available to common stockholders.................. $23,512 $14,491 $14,371 ======== ======== ======== Net income per common share: Basic......................... $ 2.24 $ 2.05 $ 3.92 ======== ======== ======== Diluted....................... $ 2.21 $ 2.01 $ 3.81 ======== ======= ======== Weighted average shares outstanding: Basic......................... 10,490 7,078 3,662 ======== ======= ======== Diluted....................... 10,621 7,214 3,776 ======== ======= ======== See notes to consolidated financial statements. PARKWAY PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31 ---------------------------- 1998 1997 1996 -------- -------- -------- Operating Activities Net income......................... $27,425 $ 14,491 $ 14,371 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.... 13,256 6,033 2,444 Gain on real estate held for sale and mortgage loans........ (4,788) (2,907) (9,909) Gain on securities............... - - (549) Equity in earnings and other..... (29) (5) 203 Changes in operating assets and liabilities: Increase in receivables........ (2,008) (5,017) (1,467) Increase in accounts payable and accrued expenses......... 6,489 4,959 2,277 -------- -------- -------- Cash provided by operating activities....................... 40,345 17,554 7,370 -------- -------- -------- Investing Activities Payments received on mortgage loans 395 230 400 Purchase of real estate related investments...................... (264,934) (213,863) (73,777) Investment in unconsolidated subsidiary....................... - - (325) Purchase of mortgage loans......... - - (600) Proceeds from sale of real estate held for sale and mortgage loans. 56,845 9,330 24,983 Proceeds from sale of real estate securities....................... - - 2,834 Improvements to real estate related investments.............. (12,683) (6,630) (2,037) -------- -------- -------- Cash used in investing activities. (220,377) (210,933) (48,522) -------- -------- -------- Financing Activities Principal payments on mortgage notes payable.................... (6,341) (2,475) (6,727) Proceeds from long-term financing. 97,000 30,000 34,970 Proceeds from bank borrowings..... 226,913 149,773 11,805 Principal payments on bank borrowings.................. (192,490) (143,300) (11,805) Stock options exercised........... 470 395 858 Dividends paid on common stock.... (16,925) (8,769) (2,552) Dividends paid on preferred stock. (2,705) - - Proceeds from sale of stock....... 104,810 160,661 16,612 Purchase of Company stock......... (28,722) - - -------- -------- -------- Cash provided by financing activities....................... 182,010 186,285 43,161 -------- -------- -------- Increase (decrease) in cash and cash equivalents............. 1,978 (7,094) 2,009 Cash and cash equivalents at beginning of year................ 959 8,053 6,044 -------- -------- -------- Cash and cash equivalents at end of year...................... $ 2,937 $ 959 $ 8,053 ======== ======== ======== See notes to consolidated financial statements. PARKWAY PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Year Ended December 31 ------------------------- 1998 1997 1996 -------- ---------------- 8.75% Series A Preferred stock, $.001 par value Balance at beginning of year........ $ - $ -$ - Shares issued....................... 66,250 - - -------- -------- ------- Balance at end of year.............. 66,250 - - -------- -------- ------- Common stock, $.001 par value Balance at beginning of year........ 10 4 2,008 Shares issued - stock dividend...... - - 1,006 Shares issued - stock offerings..... 1 5 1,140 Purchase of Company stock........... (1) - - Stock options exercised............. - 1 37 Reincorporation in Maryland......... - - (4,187) -------- -------- ------- Balance at end of year.............. 10 10 4 -------- -------- ------- Additional paid-in capital Balance at beginning of year........ 213,461 52,356 32,882 Shares issued - stock dividend...... - - (1,006) Shares issued - stock offerings..... 38,559 160,656 15,472 Purchase of Company stock........... (28,721) - - Shares issued in lieu of cash director's fees................... 65 55 - Stock options exercised............. 470 394 821 Reincorporation in Maryland......... - - 4,187 -------- -------- ------- Balance at end of year.............. 223,834 213,461 52,356 -------- -------- ------- Retained Earnings Balance at beginning of year........ 31,270 25,548 13,729 Net income.......................... 27,425 14,491 14,371 Preferred stock dividends declared.. (3,913) - - Common stock dividends declared and paid........................... (16,925) (8,769) (2,552) -------- -------- ------- Balance at end of year.............. 37,857 31,270 25,548 -------- -------- ------- Unrealized Gain on Securities Balance at beginning of year........ - - 592 Unrealized gain on securities....... - - (592) -------- -------- ------- Balance at end of year.............. - - - -------- -------- ------- Total stockholders' equity............$327,951 $244,741 $77,908 ======== ======== ======= See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - Summary of Significant Accounting Policies Principles of consolidation The consolidated financial statements include the accounts of Parkway Properties, Inc.("Parkway" or "the Company") and its 100% owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. 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 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. Business The Company's operations are exclusively in the real estate industry, principally with operation, management, and ownership of office buildings. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Investments in unconsolidated subsidiaries The Company shares voting control in the Wink/Parkway Partnership with a partner and, accordingly, accounts for its investment using the equity method of accounting. Real estate properties Gains from sales of real estate are recognized based on the provisions of Statement of Financial Accounting Standards ("SFAS") No. 66 which require upon closing, the transfer of rights of ownership to the purchaser, receipt from the purchaser of an adequate cash down payment and adequate continuing investment by the purchaser. If the requirements for recognizing gains have not been met, the sale and related costs are recorded, but the gain is deferred and recognized generally on the installment method of accounting as collections are received. Real estate properties are carried at cost less accumulated depreciation. Cost includes the carrying amount of the Company's investment plus any additional consideration paid, liabilities assumed, costs of securing title (not to exceed fair market value in the aggregate) and improvements made subsequent to acquisition. Depreciation of buildings is computed using the straight-line method over their estimated useful lives of 40 years. Depreciation of tenant improvements, including personal property, is computed using the straight-line method over the term of the lease involved. Maintenance and repair expenses are charged to expense as incurred, while improvements are capitalized and depreciated in accordance with the useful lives outlined above. Geographically, the Company's properties are concentrated in the Southeastern United States and Texas. Revenue from real estate rentals is recognized and accrued as earned on a pro rata basis over the term of the lease. Management continually evaluates the Company's office buildings and the markets they have office properties in to ensure that these buildings continue to meet their investment criteria. During 1997 management implemented a self management strategy for the Company's office buildings which requires the Company to have minimum square footage in an area in order for the strategy to be cost effective. If the office properties no longer meet management's investment criteria or the management of the building is not cost effective, management may consider a sale of the office property. If such a sale becomes probable, the office property is classified as available for sale. Management fee income and leasing and brokerage commissions are recorded in income as earned. Such fees on Company-owned properties are eliminated in consolidation. Non-core assets (see Note C) are carried at the lower of fair value minus estimated costs to sell or cost. Operating real estate held for investment is stated at the lower of cost or net realizable value. Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. As of January 1, 1998, the Company adopted the Financial Accounting Standards Board's ("FASB") 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 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. Interest income recognition Interest is generally accrued monthly based on the outstanding loan balances. Recognition of interest income is discontinued whenever, in the opinion of management, the collectibility of such income becomes doubtful. After a loan is classified as non-earning, interest is recognized as income when received in cash. Amortization Debt origination costs are deferred and amortized using the straight-line method over the term of the loan. Leasing costs are deferred and amortized using the straight- line method over the term of the respective lease. Stock based compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to or above the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees", and, accordingly, recognizes no compensation expense for the stock option grants. Income taxes Income taxes have been provided using the liability method with SFAS No. 109, "Accounting for Income Taxes". Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (b) operating loss and tax credit carryforwards. Net Income Per Common Share Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the year. In arriving at income available to common stockholders, preferred stock dividends were deducted in 1998. Diluted EPS reflects the potential dilution that could occur if dilutive operating partnership units, dilutive employee stock options and warrants were exercised or converted into common stock that then shared in the earnings of Parkway. Year Ended December 31 --------------------------- 1998 1997 1996 ------- ------- ------- (in thousands) Numerator: Basic and diluted net income available to common stockholders $23,512 $14,491 $14,371 ======= ======= ======= Denominator: Basic weighted average shares 10,490 7,078 3,662 Effect of employee stock options and warrants 131 136 114 ------- ------- ------- Diluted weighted average shares 10,621 7,214 3,776 ======= ======= ======= New Accounting Pronouncements In June 1998, the FASB 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 as of December 31, 1998; therefore, management does not anticipate that the adoption of the new Statement will have a significant effect on the consolidated results of operations or the financial position of the Company. Reclassifications Certain reclassifications have been made in the 1997 and 1996 consolidated financial statements to conform to the 1998 classifications. NOTE B - Investment in Office Properties At December 31, 1998, Parkway owned or had a direct interest in 50 office properties located in 11 states with an aggregate of 6,864,000 square feet of leasable space. During the year ended December 31, 1998, the Company purchased 23 office properties as follows: Number of Market Location Cost Properties -------------------- ---------- ---------- (in thousands) Houston, TX $ 72,784 3 Dallas, TX 27,050 2 Atlanta, GA 4,500 1 Jackson, MS* 15,750 2 Ft. Lauderdale, FL 22,300 2 St. Petersburg, FL 17,440 1 Memphis, TN 7,600 1 Knoxville, TN 9,330 1 Columbia, SC 8,330 1 Richmond, VA 44,510 5 Norfolk, VA 19,950 2 Northern VA 9,000 1 Other 5,700 1 -------- -- Total 1998 purchases $264,244 23 ======== == *The Company assumed a $5,647,000 first mortgage on one property with an 8% interest rate as part of the purchase. The mortgage note payable was recorded at $5,962,000 to reflect it at fair value based on the Company's current incremental borrowing rate of 7%. The unaudited pro forma effect on the Company's consolidated results of operations of the 1998 and 1997 purchases as if the purchases had occurred on January 1, 1998 and 1997, respectively is as follows (in thousands): Year Ended December 31 ------------------- 1998 1997 -------- -------- Revenues $10,229 $51,641 Net income $ 5,534 $15,751 Basic earnings per share $ .55 $ 1.56 Diluted earnings per share $ .54 $ 1.54 Pro-forma results do not proport to be indicative of actual results had the purchases been made at January 1, 1998 and 1997 or the results that may occur in the future. In addition to the 50 properties owned directly, the Company also owns a 50% interest in one office property in New Orleans, Louisiana through an investment in a real estate partnership. The building has 32,325 net rentable square feet and 100% of the building is leased and occupied by the other 50% partner, an unrelated party. The carrying amount of the partnership interest at December 31, 1998 and 1997 was $345,000 and $323,000, respectively. The following is a schedule by year of future approximate minimum rental receipts under noncancelable leases for office buildings owned as of December 31, 1998 (in thousands): 1999 $ 92,819 2000 82,257 2001 71,218 2002 57,831 2003 42,969 Subsequently 70,867 -------- $417,961 ======== NOTE C - Non-Core Assets At December 31, 1998, Parkway's investment in non-core assets consisted of the following (in thousands): Size Location Book Value -------------- ------------------ ---------- 29 acres New Orleans, LA $2,328 17 acres Charlotte, NC 1,721 3 acres Ft. Lauderdale, FL 550 Mortgage Loans Texas 895 ------- $5,494 ======= There were three mortgage loans outstanding at December 31, 1998 secured by land, residential real estate and a retail center. NOTE D - Notes Payable Notes payable to banks At December 31, 1998, the Company had $40,896,000 outstanding under two bank lines of credit. The lines of credit include 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. The interest rate on the note was 6.797% at December 31, 1998. 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 fees on the unused portion of the line 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. The interest rate on the note was 6.573% at December 31, 1998. The Company paid a facility fee of $150,000 and origination 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 fees on the unused portion of the line based upon overall Company leverage, with the current rate set at the maximum of 25 basis points.
Mortgage notes payable without recourse A summary of mortgage notes payable at December 31, 1998 and 1997 which are non-recourse to the Company, is as follows (in thousands):
Carrying Note Balance Amount ------------------- Office Interest Monthly Maturity of December 31 Building Rate Payment Date Collateral 1998 1997 - ---------------------- -------- ------- -------- ---------- -------- -------- Teachers Insurance and Annuity Association (13 properties) 6.945% $869 07/08 $165,520 $ 95,186 $ - One Jackson Place 7.850% 152 11/10 18,600 17,032 17,501 BB&T Financial Center 7.300% 137 11/12 23,841 14,428 15,000 First Tennessee Plaza 7.170% 136 12/12 29,978 14,422 15,000 SkyTel Centre 7.750% 118 01/08 13,240 9,121 9,796 Raytheon 8.125% 89 09/08 15,623 7,482 7,923 Lakewood II 8.080% 66 08/06 11,214 6,554 6,809 400 North Belt 8.250% 65 08/11 10,671 6,117 6,386 Falls Pointe 8.375% 63 01/12 8,843 5,981 6,225 111 Capitol Building 7.000% 59 06/11 12,383 5,816 - Waterstone 8.000% 54 07/11 8,148 5,082 5,311 One Park 10 Plaza 8.350% 46 08/11 6,971 4,262 4,448 IBM Building 7.700% 45 03/11 6,867 4,261 4,465 Roswell North 8.375% 33 01/12 4,757 3,152 3,281 Woodbranch 8.250% 32 08/11 4,019 2,945 3,075 -------- -------- -------- $340,675 $201,841 $105,220 ======== ======== ========
The aggregate annual maturities of notes payable at December 31, 1998 are as follows (in thousands): 1999 $ 8,990 2000 9,679 2001 10,421 2002 11,221 2003 12,082 Subsequently 149,448 -------- $201,841 ======== NOTE E - Income Taxes The tax effects of significant items comprising the Company's net deferred tax asset are as follows (in thousands): December 31 --------------------------- 1998 1997 1996 ------- ------- ------- Deferred tax asset (liability): Differences in book and tax basis of assets.... $ (315) $ 2,404 $ 675 Operating loss carryforwards.......... 3,183 3,435 3,527 Other................... 304 - - ------- ------- ------- 3,172 5,839 4,202 Valuation allowance..... (3,172) (5,839) (4,202) ------- ------- ------- Net deferred tax asset.. $ - $ - $ - ======= ======= ======= The Company's income differs for income tax and financial reporting purposes principally because (1) the timing of the deduction for the provision for possible losses or writedowns, (2) real estate owned has a different basis for tax and financial reporting purposes, producing different gains upon disposition, and (3) mortgage loans have a different basis for tax and financial reporting purposes, producing different gains upon collection of these receivables. The net decrease in the total valuation allowance for the year ended December 31, 1998 was $2,667,000 from 1997 primarily from differences in book and tax basis of real estate. At December 31, 1998, 1997 and 1996, the net deferred tax asset was entirely offset by a valuation allowance because realization of the net deferred tax asset was not assured. The following is a reconciliation between the amount reported for income taxes and the amount computed using the statutory federal tax rate (in thousands): Year Ended December 31 --------------------------- 1998 1997 1996 ------- ------- ------- Taxes at statutory rate.. $ 915 $ 915 $ 4,921 Operating loss carry forwards, as limited... (915) (915) (4,876) Other.................... - - (45) Federal alternative minimum tax............ 55 - - State income tax expense. 5 - 103 ------- ------- ------- Income tax expense....... $ 60 $ - $ 103 ======= ======= ======= At December 31, 1998, the Company had net operating loss ("NOL") carryforwards for federal income tax purposes of approximately $17,111,000 which expire at various dates through 2011. These carryforwards are limited to a maximum of approximately $2,700,000 that can be used in any given year, subject to increases for built-in gains recognized. The Company has qualified under Sections 856 - 860 of the Internal Revenue Code, as a Real Estate Investment Trust, ("REIT") effective January 1, 1997. In anticipation of converting to a REIT, the Company reincorporated in Maryland during 1996. If the Company distributes to its shareholders at least 95% of its REIT taxable income, it generally will not be subject to federal corporate income tax on that portion of its ordinary income or capital gain that is timely distributed to its shareholders. The Company will utilize the NOL carryforwards as a REIT to the extent that it has taxable income prior to the carryforward expiration dates, subject to the limitation as described above. The Company intends to continue to qualify as a REIT, although the Company will be subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at the prevailing corporate rates and would be ineligible to requalify as a REIT for four additional years. In January 1998, the Company completed its reorganization into an umbrella partnership REIT ("UPREIT") structure under which substantially all of the Company's office building real estate assets are owned by an operating partnership, Parkway Properties LP (the "Operating Partnership"). The Company anticipates that the UPREIT structure will enable it to pursue new investment opportunities by having the ability to offer units in the Operating Partnership to property owners in exchange for office properties in transactions that may have preferable tax characteristics. One such transaction was consummated during 1998. Presently, substantially all interests in the Operating Partnership are owned by the Company and a wholly-owned subsidiary. NOTE F - Stock Option Plans The Company has elected to follow APB No. 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock- Based Compensation", requires the use of option valuation models that were not developed for use in valuing employee stock options. The 1994 Stock Option Plan, as amended provides Parkway common shares ("Shares") to employees or officers of the Company and its subsidiaries upon the exercise of options and upon incentive grants pursuant to the Stock Option Plan. On July 1 of each year, the number of Shares available for grant shall automatically increase by one percent (1%) of the Shares outstanding on such date, provided that the number of Shares available for grant shall never exceed 12.5% of the Shares outstanding. In addition to the 1% automatic increased in 1998, the Stockholders voted to make available for grant an additional 250,000 shares. In accordance with these provisions, the Shares available for grant increased 360,683 and 62,892 in 1998 and 1997, respectively. Under the 1991 Directors Stock Option Plan, as amended, options for up to 250,000 shares may be granted to non- employee directors. Both plans have ten-year terms. Pro forma information regarding net income and net income per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black- Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996: risk-free interest of 5.5%, 6.0%, and 6.0%, respectively; dividend yield of 5%; volatility factor of the expected market price of the Company's common stock of .389, .427, and .493, respectively; and a weighted-average expected life of the options of 3 years for the 1994 Stock Option Plan and 5 years for the 1991 Directors Stock Option Plan. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options. The weighted average fair value of options granted during 1998, 1997 and 1996 was $7.20, $6.80 and $4.52, respectively. For purposes of pro forma disclosures, the estimated fair value of the options granted in 1998, 1997 and 1996 is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except per share information): Year Ended December 31 ---------------------------- 1998 1997 1996 -------- -------- -------- Pro forma net income available to common stockholders $ 22,586 $ 14,152 $ 14,087 Pro forma net income per common share: Basic........................ $ 2.15 $ 2.00 $ 3.85 Diluted...................... $ 2.13 $ 1.96 $ 3.73 A summary of the Company's stock option activity and related information is as follows: 1991 Directors 1994 Stock Option Stock Plan Option Plan ----------------- ---------------- Weighted Weighted Average Average Shares Price Shares Price ----------------- ---------------- Outstanding at January 1, 1996 243,272 $ 10.73 92,250 $ 7.64 Granted 44,291 18.80 13,500 16.00 Exercised (105,563) 10.00 (27,750) 8.12 Forfeited (6,562) 13.14 - - -------- ------- ------- ------- Outstanding at December 31, 1996 175,438 13.12 78,000 8.92 Granted 65,450 26.63 25,500 25.88 Exercised (29,990) 10.69 (15,750) 9.42 Forfeited (1,850) 22.22 - - -------- ------- ------- ------- Outstanding at December 31, 1997 209,048 17.62 87,750 13.76 Granted 369,650 30.68 25,500 31.13 Exercised (24,638) 11.49 (11,250) 17.42 Forfeited (10,875) 29.39 - - -------- ------- ------- ------- Outstanding at December 31, 1998 543,185 $ 26.55 102,000 $ 17.70 ======== ======= ======= ======= Following is a summary of the status of options outstanding at December 31, 1998: Exercisable Outstanding Options Options ----------------------------- ----------------- Weighted- Average Weighted Weighted- Exercise Remaining Average Average Price Contract- Exercise Exercise Range Number ual Life Price Number Price - ------------- ------- --------- --------- ------- --------- 1994 Stock Option Plan $ 9.19-$12.22 54,236 5.7 years $10.84 54,236 $10.84 $12.67-$15.75 43,324 7.1 years $14.14 43,324 $14.14 $21.00-$25.63 22,625 7.6 years $21.72 22,625 $21.72 $26.63-$31.38 423,000 9.2 years $30.10 31,675 $26.63 1991 Directors Stock Option Plan $ 4.00 15,000 2.7 years $ 4.00 15,000 $ 4.00 $ 8.00-$10.17 33,000 5.9 years $ 9.17 33,000 $ 9.17 $16.00 9,000 7.5 years $16.00 9,000 $16.00 $25.88-$31.13 45,000 9.0 years $28.85 45,000 $28.85 NOTE G - Other Matters The Company issued 2,650,000 shares of its 8.75% Series A Cumulative Redeemable Preferred Stock, $.001 par value per share ("Cumulative Preferred Stock") during 1998. Dividends on the Cumulative Preferred Stock are cumulative from the date of issue and are payable quarterly in arrears. The Cumulative Preferred Stock is not redeemable prior to April 23, 2003, but may be redeemed for cash, at the option of the Company, on or after that date at a redemption price of $25.00 per share, plus any accrued dividends. The Cumulative Preferred Stock has no stated maturity, will not be subject to any sinking fund or mandatory redemption and will not be convertible into any other securities of the Company. The Company issued 576,000 shares of its Class A Preferred Stock, $.001 par value per share ("Preferred Stock"), and in turn exchanged 576,000 shares of its Common Stock for the Preferred Stock outstanding during 1996. The Company paid a dividend of $138,000, or $.24 per share, on the Preferred Stock in the third quarter of 1996. The net proceeds from the sale of the Preferred Stock and the dividend paid are included in the shares issued- stock offerings and cash dividends, respectively, in the accompanying consolidated statements of stockholders' equity. Supplemental Profit and Loss Information Included in operating expenses are taxes, principally property taxes, of $9,326,000, $4,505,000 and $2,169,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Supplemental Cash Flow Information Year Ended December 31 ------------------------------- 1998 1997 1996 --------- --------- --------- (In thousands) Assumption of mortgage notes payable in connection with purchase of properties........ $ 5,962 $ 14,868 $ - Loans to facilitate sales of real estate and real estate securities........ 121 900 350 Loan foreclosures added to real estate held for sale................. - - 80 Interest paid................... 14,903 5,747 3,468 Income taxes paid............... 41 - 22 Litigation The Company is not presently engaged in any litigation other than ordinary routine litigation incidental to its business. Management believes such litigation will not materially affect the financial position, operations or liquidity of the Company. Accounts Payable and Other Liabilities December 31 ------------------ 1998 1997 ------- ------- (In thousands) Accrued expenses, other than property taxes.... $11,021 $ 5,155 Accrued property taxes......... 5,297 3,311 Accounts payable............... 295 413 Preferred dividend payable..... 1,208 - Security deposits.............. 2,621 2,185 Deferred gains................. 1,122 1,094 ------- ------- $21,564 $12,158 ======= ======= Interest, Rents Receivable and Other Assets December 31 ------------------ 1998 1997 ------- ------- (In thousands) Cash receivables.................... $ 4,636 $ 6,512 Escrow deposits of taxes............ 2,588 1,486 Unamortized loan costs.............. 3,341 1,184 Unamortized lease costs............. 3,066 2,180 Prepaid items....................... 156 207 Straight line rent receivable....... 1,334 571 Security deposits................... 111 92 ------- ------- $15,232 $12,232 ======= ======= NOTE H - Fair Values of Financial Instruments Cash and cash equivalents The carrying amounts for cash and cash equivalents approximated fair value at December 31, 1998 and 1997. Mortgage loans The fair values for mortgage loans are estimated based on net realizable value and discounted cash flow analysis, using interest rates currently being offered on loans with similar terms to borrowers of similar credit quality. The aggregate fair value of the mortgage loans at December 31, 1998 approximated its carrying amount of $895,000. The aggregate fair value of the mortgage loans at December 31, 1997, was $1,290,000 as compared to its carrying amount of $1,117,000. The fair value of the mortgage notes payable without recourse are estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The aggregate fair value of the mortgage notes payable without recourse at December 31, 1998 was $207,151,000 as compared to its carrying amount of $201,841,000. The aggregate fair value of the mortgage notes payable without recourse at December 31, 1997 was $108,971,000 as compared to its carrying amount of $105,220,000. NOTE J - Selected Quarterly Financial Data (Unaudited): Summarized quarterly financial data for the years ended December 31, 1998 and 1997 are as follows (in thousands, except per share data): 1998 ---------------------------------- First Second Third Fourth ------- ------- ------- ------- Revenues (other than gains)......... $19,914 $25,196 $25,182 $26,191 Expenses................... (15,296) (19,063) (19,851)(19,635) Gain (loss) on real estate and mortgage loans....... 952 387 3,547 (98) Minority interest - unit holders.................. - - (1) - ------- ------- ------- ------- Net income................. 5,570 6,520 8,877 6,458 Dividends on preferred stock.................... - 1,014 1,450 1,449 ------- ------- ------- ------- Net income available to common stockholders...... $ 5,570 $ 5,506 $ 7,427 $ 5,009 ======= ======= ======= ======= Basic per common share data: Net income................ $ 0.55 $ 0.50 $ 0.70 $ 0.50 Weighted average shares outstanding......... 10,156 11,086 10,611 10,107 Diluted per common share data: Net income................ $ 0.54 $ 0.49 $ 0.69 $ 0.49 Weighted average shares outstanding............. 10,301 11,221 10,734 10,222 Dividends paid on common stock............ $ 0.35 $ 0.35 $ 0.45 $ 0.45 1997 ------------------------------------ First Second Third Fourth ------------------------------------ Revenues (other than gains)......... $ 8,906 $10,404 $12,424 $16,353 Expenses................... (6,868) (7,796) (9,736)(12,103) Gain (loss) on real estate and mortgage loans....... 1,506 68 (483) 1,816 ------- ------- ------- ------- Net income available to common stockholders..... $ 3,544 $ 2,676 $ 2,205 $ 6,066 ======= ======= ======= ======= Basic per common share data: Net income................ $ .62 $ .43 $ .34 $ .62 Weighted average shares outstanding............. 5,718 6,288 6,532 9,736 Diluted per common share data: Net income................ $ .61 $ .42 $ .33 $ .61 Weighted average shares outstanding............. 5,848 6,405 6,675 9,891 Dividends paid on common stock........... $ .25 $ .25 $ .35 $ .35 SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998 (In thousands)
Initial Cost to the Company --------------------- Building and Capitalized Description Encumbrances Land Improvements Costs -------------------------------------------------- Real Estate Properties: Office Buildings: One Jackson Place - MS $ 17,032 $ 1,799 $ 19,730 $ 4,686 SkyTel Centre - MS 9,121 1,360 12,430 612 IBM Building - MS 4,261 1,169 5,336 927 River Oaks Plaza - MS - 277 4,139 591 111 Capitol Building - MS 5,816 915 10,825 781 Waterstone - GA 5,082 859 7,207 714 Falls Pointe - GA 5,981 1,431 7,659 242 Roswell North - GA 3,152 594 4,072 371 Meridian - GA - 994 9,547 178 Lakewood II - GA 6,554 617 10,923 84 Hightower - GA - 530 6,201 692 Pavilion Center - GA - 510 4,005 56 One Park Ten - TX 4,262 606 6,149 788 400 Northbelt - TX 6,117 419 9,655 1,417 Woodbranch - TX 2,945 303 3,805 212 Tensor - TX - 273 2,567 488 West Office - TX - 52 378 39 Ashford II - TX - 163 2,069 184 Sugar Grove - TX - 364 7,385 1,118 Raytheon - TX 7,482 856 15,175 3 Schlumberger - TX - 1,128 11,102 5 One Commerce Green - TX - 489 37,103 50 Comerica Bank Building - TX - 1,921 21,222 158 BB&T - NC 14,428 1,018 23,539 612 Charlotte Park - NC - 1,400 12,911 745 NationsBank Tower - SC - 316 20,350 146 Healthsource - SC - 555 5,176 49 Atrium at Stoneridge - SC - 572 7,775 151 Forum II & III - TN - 2,634 13,886 432 First Tennessee Plaza - TN 14,422 457 29,499 1,017 Morgan Keegan Tower - TN - - 36,549 200 Cedar Ridge - TN - 741 8,631 217 Falls Building - TN - - 7,608 - Vestavia - AL - 729 3,956 335 First Little Rock - AR - 965 9,307 121 Cherokee - VA - 158 3,366 97 Courthouse - VA - 553 7,059 382 Greenbrier Tower I - VA - 584 7,503 345 Greenbrier Tower II - VA - 573 7,354 216 Loudoun Plaza - VA - 420 8,624 20 Lynnwood Plaza - VA - 985 8,306 100 Town Point Center - VA - - 10,756 - Glen Forest - VA - 537 8,503 15 Moorefield II - VA - 469 4,752 42 Moorefield III - VA - 490 5,135 10 Westvaco - VA - 1,265 11,825 155 Winchester - VA - - 11,795 1 Corporate Square West - IN - 741 1,727 505 Hillsboro I-IV - FL - 1,129 7,734 281 Hillsboro V - FL - 1,325 12,249 216 Southtrust Bank Building - FL - 786 16,721 154 Teachers Insurance and Annuity Association (13 properties)(4) - - - - - ----------------------------------------------------------------------------------- 201,841 37,031 531,280 20,960 - ----------------------------------------------------------------------------------- Office Redevelopment: - ----------------------------------------------------------------------------------- Moore Building - TN - - 4,589 - Moore Garage - TN - - 728 - - ------------------------------------------------------------------------------------ - - 5,317 - - ----------------------------------------------------------------------------------- Total Real Estate Owned $201,841 $37,031 $536,597 $20,960 ===================================================================================
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) DECEMBER 31, 1998 (In thousands) Gross Amount at Which Carried at Close of Period - ------------------------------------------------------------------------------------------------
Building and Accumulated Year Year Description Land Improvements Total(1) Depreciation Acquired Constructed - ------------------------------------------------------------------------------------------------ Real Estate Properties: Office Buildings: One Jackson Place - MS 1,799 24,416 26,215 (7,615) 1986 1986 SkyTel Centre - MS 1,360 13,041 14,401 (1,162) 1995 (2)1987 IBM Building - MS 1,169 6,264 7,433 (567) 1995 1986 River Oaks Plaza - MS 277 4,730 5,007 (85) 1998 1981 111 Capitol Bldg. - MS 915 11,605 12,520 (138) 1998 1983 Waterstone - GA 859 7,921 8,780 (632) 1995 1987 Falls Pointe - GA 1,431 7,901 9,332 (488) 1996 1990 Roswell North - GA 594 4,443 5,037 (280) 1996 1986 Meridian - GA 994 9,724 10,718 (427) 1997 1985 Lakewood II - GA 617 11,008 11,625 (411) 1997 1986 Hightower - GA 530 6,893 7,423 (210) 1997 1983 Pavilion Center - GA 510 4,061 4,571 (51) 1998 1984 One Park Ten - TX 606 6,937 7,543 (572) 1996 1982 400 Northbelt - TX 419 11,072 11,491 (820) 1996 1982 Woodbranch - TX 303 4,017 4,320 (301) 1996 1982 Tensor - TX 273 3,055 3,328 (161) 1996 1983 West Office - TX 52 417 469 (67) 1994 1986 Ashford II - TX 163 2,253 2,416 (105) 1997 1979 Sugar Grove - TX 364 8,504 8,868 (362) 1997 1982 Raytheon - TX 856 15,178 16,034 (411) 1997 1983 Schlumberger - TX 1,128 11,107 12,235 (254) 1998 1983 One Commerce Green - TX 489 37,153 37,642 (778) 1998 1983 Comerica Bank Bldg. - TX 1,921 21,380 23,301 (448) 1998 1983 BB&T - NC 1,018 24,152 25,170 (1,328) 1996 1988 Charlotte Park - NC 1,400 13,656 15,056 (605) 1997 1982/84/86 NationsBank Tower - SC 316 20,496 20,812 (724) 1997 1973 Healthsource - SC 555 5,225 5,780 (109) 1998 1986 Atrium at Stoneridge - SC 572 7,926 8,498 (135) 1998 1986 Forum II & III - TN 2,634 14,317 16,951 (735) 1997 1985 First Tennessee Plaza - TN 457 30,516 30,973 (994) 1997 1978 Morgan Keegan Tower - TN - 36,749 36,749 (1,145) 1997 1985 Cedar Ridge - TN 741 8,848 9,589 (197) 1998 Falls Building - TN - 7,608 7,608 - 1998(3)1982/84/90 Vestavia - AL 729 4,291 5,020 (203) 1997 1988 First Little Rock - AR 965 9,428 10,393 (290) 1997 1986 Cherokee - VA 158 3,463 3,621 (241) 1996 1985 Courthouse - VA 553 7,441 7,994 (509) 1996 1984 Greenbrier I - VA 584 7,849 8,433 (224) 1997 1985/87 Greenbrier II - VA 573 7,570 8,143 (215) 1997 1985/87 Loudoun Plaza - VA 420 8,643 9,063 (181) 1998 1989 Lynnwood Plaza - VA 985 8,406 9,391 (179) 1998 1986 Town Point Center - VA - 10,756 10,756 (112) 1998 1987 Glen Forest - VA 537 8,517 9,054 (177) 1998 1985 Moorefield II - VA 469 4,794 5,263 (104) 1998 1985 Moorefield III - VA 490 5,145 5,635 (108) 1998 1985 Westvaco - VA 1,265 11,980 13,245 (126) 1998 1986 Winchester - VA - 11,797 11,797 - 1998 1987 Corporate Sq. West - IN 741 2,232 2,973 (600) 1990 1968 Hillsboro I-IV - FL 1,129 8,015 9,144 (180) 1998 1985 Hillsboro V - FL 1,325 12,465 13,790 (260) 1998 1985 Southtrust Bank Bldg. - FL 786 16,875 17,661 (318) 1998 1985 Teachers Insurance and Annuity Association (13 properties) (4) - - - - - - - --------------------------------------------------------------------------------------------- 37,031 552,240 589,271 (26,344) - - - --------------------------------------------------------------------------------------------- Office Redevelopment: - --------------------------------------------------------------------------------------------- Moore Building - TN - 4,589 4,589 - 1998 In process Moore Garage - TN - 728 728 - 1998 In process - --------------------------------------------------------------------------------------------- - 5,317 5,317 - - - - --------------------------------------------------------------------------------------------- Total Real Estate Owned $37,031 $557,557 $594,588 $(26,344) - - ============================================================================================= (1) The aggregate cost for Federal Income Tax purposes was approximately $589,048,000. (2) For SkyTel Centre, this is the date of a major renovation. (3) For the Falls Building, these are the dates of major renovations. (4) The properties secured on the TIAA loan are Comerica Bank Building, One Commerce Green, Charlotte Park, Healthsource, Cedar Ridge, Greenbrier I and II, Loudoun Plaza, Lynnwood Plaza, Glen Forest, Moorefield II, Moorefield III, Hillsboro I-IV and Hillsboro V.
NOTE TO SCHEDULE III (In thousands) As of December 31, 1998 and 1997 A summary of activity for real estate and accumulated depreciation is as follows: December 31 -------------------- 1998 1997 Real Estate: -------- -------- Balance at beginning of year...... $362,074 $132,309 Additions: Acquisitions and improvements.. 276,685 231,414 Office redevelopment........... 5,317 - Cost of real estate sold.......... (49,488) (1,649) -------- -------- Balance at close of year............. $594,588 $362,074 ======== ======== Accumulated Depreciation: Balance at beginning of year...... $ 14,143 $ 9,507 Depreciation expense.............. 12,538 4,874 Real estate sold.................. (337) (238) -------- -------- Balance at close of year.......... $ 26,344 $ 14,143 ======== ======== Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's fiscal year is incorporated herein by reference. Item 11. Executive Compensation. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's fiscal year is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's fiscal year is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's fiscal year is incorporated herein by reference. Forward-Looking Statements In addition to historical information, certain sections of this Annual Report 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 and estimates of market rental rates. 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 affecting 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 Annual Report. 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. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1)Consolidated Financial Statements Report of Independent Auditors Consolidated Balance Sheets- as of December 31, 1998 and 1997 Consolidated Statements of Income-- for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows-- for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity- for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements (2)Consolidated Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation Notes to Schedule III (3)Form 10-K Exhibits required by Item 601 of Regulation S-K: (a)Articles of Incorporation, as amended, of Parkway (incorporated by reference to Exhibit B to The Parkway Company's Proxy Material for its Annual Meeting of Stockholders held on July 18, 1996). (b)Bylaws of Parkway (incorporated by reference to Exhibit C to The Parkway Company's Proxy Material for its Annual Meeting of Stockholders held on July 18, 1996). (c)Amendments to Bylaws (incorporated by reference). (d)Articles Supplementary creating the Registrant's 8.75% Series A Cumulative Redeemable Preferred Stock (incorporated by reference to the Registrant's Form 8-A filed April 24, 1998). (10)Material Contracts: (a)Registrant's 1994 Stock Option Plan (incorporated by reference to Registrant's Proxy Statement dated November 8, 1994). (b)Registrant's 1991 Directors Stock Option Plan, as amended (incorporated by reference to the Registrant's proxy statement dated November 8, 1994). (c)Form of Change-in-Control Agreement that Registrant has entered into with Leland R. Speed, Steven G. Rogers and Sarah P. Clark (incorporated by reference to the Registrant's Form 10-KSB for the year ended December 31, 1996). (d)Form of Change-in-Control Agreement that the Registrant has entered into with David R. Fowler, G. Mitchell Mattingly and James M. Ingram (incorporated by the Registrant's Form 10-KSB for the year ended December 31, 1996). (e)The Registrant's 1997 Non-Employee Directors Stock Ownership Plan (Incorporated by references to Appendix B in the Registrant's Proxy Material for its June 6, 1997 Annual Meeting). (f)Sale Agreement and Amendments between Brookdale Investors, L.P., a Delaware limited partnership, and Parkway Properties LP, a Delaware limited partnership. (g)Credit Agreement among Parkway Properties LP, Chase Bank of Texas, National Association, and PNC Bank, National Association as agent (incorporated by reference to the Registrant's Form 8-K filed November 12, 1998). (h)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). (i)Purchase and Sale Agreement between Parkway Properties LP and Triad Properties Corporation (incorporated by reference to the Registrant's Form 8-K dated and filed April 22, 1998). (j)Purchase and Sale Agreement between Parkway Portfolio I LLC and Triad Properties Corporation, and Parkway Properties LP, a Delaware limited partnership (incorporated by reference to the Registrant's Form 8-K dated and filed April 22, 1998). (k)Amended and Restated Agreement of Limited Partnership of Parkway Properties LP, including Amended and Restated Exhibit A of the Amended and Restated Agreement of Limited Partnership (incorporated by reference to the Registrant's Form 8-K filed July 15, 1998). (l)Admission Agreement between Parkway Properties LP and Lane N. Meltzer (incorporated by reference to the Registrant's Form 8-K filed July 15, 1998). (m)Promissory Note between Parkway Properties LP and Teachers Insurance and Annuity Association of America (incorporated by reference to the Registrant's Form 8-K filed July 15, 1998). (n)Form of Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing Statement by Parkway Properties LP as borrower for the benefit of Teachers Insurance and Annuity Association of America as lender (incorporated by reference to the Registrant's Form 8-K filed July 15,1 998). (o)Conversion and Note Agreement between Parkway Properties LP, Parkway Properties, Inc. and Teachers Insurance and Annuity Association of America (incorporated by reference to the Registrant's Form 8-K filed July 15, 1998). (21)Subsidiaries of the Registrant, filed herewith. (23)Consent of Ernst & Young LLP, filed herewith. (27)Financial Data Schedule (28)Agreement of Registrant to furnish the Commission with copies of instruments defining the rights of holders of long-term debt (incorporated by reference to Exhibit 28E of the Registrant's Form S-4 (No. 33-2960) filed with the Commission on February 3, 1986). (99)The Company Shareholder Rights Plan dated September 7, 1995 (incorporated by reference to the Registrant's Form 8-A filed September 8, 1995). (b)Reports on Form 8-K. (1)8-K - Filed November 12, 1998 - Reporting Chase Bank Loan. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. PARKWAY PROPERTIES, INC. Registrant /s/ Steven G. Rogers President and Chief Executive Officer March 29, 1999 /s/ Sarah P. Clark Sarah P. Clark Chief Financial Officer March 29, 1999 /s/ Regina P. Shows Regina P. Shows Chief Accounting Officer March 29, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Daniel C. Arnold /s/ C. Herbert Magruder Daniel C. Arnold, Director C. Herbert Magruder, M.D., Director March 29, 1999 March 29, 1999 /s/ Roger P. Friou /s/ W. Lincoln Mossop, Jr. Roger P. Friou, Director W. Lincoln Mossop, Jr., Director March 29, 1999 March 29, 1999 /s/ Martin L. Garcia /s/ Steven G. Rogers Martin L. Garcia, Director Steven G. Rogers March 29, 1999 President and Director March 29, 1999 /s/ J. Michael Lipsey J. Michael Lipsey, Director /s/ Leland R. Speed March 29, 1999 Leland R. Speed Chairman of Board and Director March 29, 1999 /s/ Joe F. Lynch Joe F. Lynch, Director March 29, 1999 EX-21 2 Exhibit (21) List of Subsidiaries Name State Corporations: ------------ Parkway Properties General Partners, Inc. Delaware Golf Properties, Inc. North Carolina Partnerships: ------------ Moore Building Associates LP Delaware Moore Garage LLC Delaware Parkway Moore LLC Delaware Parkway Properties LP Delaware Parkway Realty Services LLC Delaware Wink/Parkway Partnership Louisiana 111 Capitol Building LP Mississippi Parkway Jackson LLC Mississippi Parkway Lamar LLC Mississippi Parkway Mississippi LLC Mississippi Parkway Properties Tax Administration LLC Mississippi EX-23 3 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement, as amended, (Form S-3, No. 333- 48161) and related Prospectus dated April 8, 1998 of Parkway Properties, Inc. and the Registration Statement (Form S-8 on Form S-3, No. 333-00311) pertaining to The Parkway Company 1994 Stock Option Plan, The Parkway Company 1991 Incentive Plan, and The Parkway Company 1991 Directors Stock Option Plan of our reports dated March 19, 1999 on the statements of rental revenue and direct operating expenses included in Parkway Properties, Inc.'s Current Report of Forms 8-K dated March 24, 1999. Ernst & Young LLP Jackson, Mississippi March 24, 1999 EX-27 4
5 1,000 YEAR DEC-31-1998 DEC-31-1998 2,937 0 15,232 0 0 0 0 26,344 592,252 264,301 0 0 66,250 10 261,691 592,252 0 96,483 0 0 57,836 0 16,009 27,425 0 27,425 0 0 0 27,425 2.24 2.21
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