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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