<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------------------
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from ________ to ________
Commission File Number 1-11533
Parkway Properties, Inc.
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 74-2123597
- ------------------------------ ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Jackson Place Suite 1000
188 East Capitol Street
P. O. Box 24647
Jackson, Mississippi 39225-4647
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (601) 948-4091
--------------
- -----------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
10,101,414 shares of Common Stock, $.001 par value, were
outstanding as of November 12, 1999.
<PAGE>
PARKWAY PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
- -----------------------------------------------------------------
Pages
-----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets, September 30, 1999 and
December 31, 1998 3
Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Stockholders' Equity for the
Nine Months Ended September 30, 1999 and 1998 6
Consolidated Statements of Cash Flow for the
Nine Months Ended September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
Signatures
Authorized signatures 21
<PAGE>
<TABLE>
PARKWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
September 30 December 31
1999 1998
------------ -----------
(Unaudited)
Assets
Real estate related investments:
<S> <C> <C>
Office buildings...................... $622,489 $589,271
Office buildings held for sale........ 19,986 -
Office redevelopment.................. 12,816 5,317
Accumulated depreciation.............. (37,024) (26,344)
-------- --------
618,267 568,244
Land held for sale.................... 4,283 4,599
Mortgage loans........................ 891 895
Real estate partnership............... 352 345
-------- --------
623,793 574,083
Interest, rents receivable and other
assets............................... 15,350 15,232
Cash and cash equivalents.............. 933 2,937
-------- --------
$640,076 $592,252
======== ========
Liabilities
Notes payable to banks.................. $ 76,607 $ 40,896
Mortgage notes payable without recourse. 217,165 201,841
Accounts payable and other liabilities.. 21,539 21,564
-------- --------
315,311 264,301
-------- --------
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 1999 and 1998....................... 66,250 66,250
Common stock, $.001 par value, 70,000,000
shares authorized, 10,130,655 and
10,109,891 shares issued and outstand-
ing in 1999 and 1998, respectively..... 10 10
Additional paid-in capital.............. 225,113 223,834
Unearned compensation................... (5,058) -
Retained earnings........................ 38,450 37,857
-------- --------
324,765 327,951
-------- --------
$640,076 $592,252
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months Ended
September 30
---------------------
1999 1998
-------- --------
(Unaudited)
Revenues
<S> <C> <C>
Income from office properties $29,520 $24,839
Interest on mortgage loans 23 34
Management company income 318 158
Interest on investments 16 98
Dividend income 18 -
Deferred gains and other income 14 53
------- -------
29,909 25,182
------- -------
Expenses
Office properties:
Operating expense 12,558 10,594
Interest expense:
Contractual 3,736 3,687
Amortization of loan costs 37 38
Depreciation and amortization 4,568 4,290
Other real estate properties:
Operating expense 16 10
Interest expense on bank notes:
Contractual 1,290 47
Amortization of loan costs 114 216
Management company expenses 179 122
General and administrative 1,380 847
------- -------
23,878 19,851
------- -------
Income before gains and minority
interest 6,031 5,331
Gain on sales and minority interest
Gain on real estate held for
sale and mortgage loans - 3,547
Minority interest - unit holders..... (1) (1)
------- -------
Net income 6,030 8,877
Dividends on preferred stock 1,450 1,450
------- -------
Net income available to common
stockholders $ 4,580 $ 7,427
======= =======
Net income per common share:
Basic $ .45 $ .70
======= =======
Diluted $ .45 $ .69
======= =======
Dividends per common share:
Basic $ .50 $ .35
======= =======
Diluted $ .50 $ .35
======= =======
Weighted average shares outstanding:
Basic 10,124 10,611
======= =======
Diluted 10,263 10,734
======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Nine Months Ended
September 30
---------------------
1999 1998
-------- --------
(Unaudited)
Revenues
<S> <C> <C>
Income from office properties $83,763 $69,464
Interest on mortgage loans 69 97
Management company income 657 391
Interest on investments 43 113
Dividend income...................... 66
44
Deferred gains and other income 124 183
------- -------
84,722 70,292
------- -------
Expenses
Office properties:
Operating expense 34,997 29,249
Interest expense:
Contractual 11,180 7,767
Amortization of loan costs. 124 89
Depreciation and amortization 12,868 10,205
Other real estate properties:
Operating expense 99 84
Interest expense on bank notes:
Contractual 2,524 3,153
Amortization of loan costs 400 785
Management company expenses 429 299
General and administrative 3,086 2,579
------- -------
65,707 54,210
------- -------
Income before gains and minority
interest 19,015 16,082
Gain on sales and minority interest
Gain on real estate held for sale
and mortgage loans 86 4,886
Minority interest - unit holders (2) (1)
------- -------
Net income 19,099 20,967
Dividends on preferred stock 4,348 2,464
------- -------
Net income available to common
stockholders $14,751 $18,503
======= =======
Net income per common share:
Basic $ 1.46 $ 1.74
======= =======
Diluted $ 1.45 $ 1.72
======= =======
Dividends per common share:
Basic............................... $ 1.40 $ 1.15
======= =======
Diluted $ 1.40 $ 1.15
======= =======
Weighted average shares outstanding:
Basic............................ 10,086 10,619
======= =======
Diluted 10,202 10,758
======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Nine Months Ended
September 30
----------------------
1999 1998
-------- --------
(Unaudited)
8.75% Series A Preferred stock,
$.001 par value
<S> <C> <C>
Balance at beginning of period...... $ 66,250 $ -
Shares issued - stock offering...... - 66,250
-------- --------
Balance at end of period............ 66,250 66,250
-------- --------
Common stock, $.001 par value
Balance at beginning of period...... 10 10
Shares issued - stock offering...... - 1
Purchase of Company stock........... - (1)
-------- --------
Balance at end of period............ 10 10
-------- --------
Additional paid-in capital
Balance at beginning of period...... 223,834 213,461
Stock options exercised............. 212 307
Shares issued - stock offering...... - 38,559
Shares issued in lieu of Directors'
fees.............................. 72 65
Shares issued - IRS Plan............ 5,357 -
Purchase of Company stock........... (4,362) (28,507)
-------- --------
Balance at end of period............ 225,113 223,885
-------- --------
Unearned compensation
Balance at beginning of period...... - -
Restricted shares issued............ (5,358) -
Amortization of unearned
compensation...................... 300 -
-------- --------
Balance at end of period............ (5,058) -
-------- --------
Retained earnings
Balance at beginning of period...... 37,857 31,270
Net income.......................... 19,099 20,967
Preferred stock dividends declared.. (4,348) (2,464)
Common stock dividends declared..... (14,158) (12,375)
-------- --------
Balance at end of period............ 38,450 37,398
-------- --------
Total stockholders' equity............ $324,765 $327,543
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Nine Months Ended
September 30
---------------------
1999 1998
-------- --------
(Unaudited)
Operating activities
<S> <C> <C>
Net income........................... $19,099 $20,967
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 12,868 10,205
Amortization of unearned
compensation..................... 300 -
Gain on real estate held for
sale and mortgage loans.......... (86) (4,886)
Equity in earnings and other....... (56) (16)
Changes in operating assets and
liabilities:
(Increase) decrease in
receivables.................. 258 (1,606)
Increase (decrease) in accounts
payable and accrued expenses. (134) 3,440
-------- --------
Cash provided by operating activities 32,249 28,104
-------- --------
Investing activities
Payments received on mortgage loans.. 4 394
Purchase of real estate related
investments........................ (42,771) (240,181)
Proceeds from sale of real estate
held for sale and mortgage loans... 401 55,853
Real estate development.............. (7,499) -
Improvements to real estate related
investments........................ (10,977) (7,654)
-------- --------
Cash used in investing activities.... (60,842) (191,588)
-------- --------
Financing activities
Principal payments on mortgage notes
payable............................ (6,712) (4,196)
Proceeds from long-term financing.... 20,100 97,000
Net proceeds from bank borrowings.... 35,711 7,552
Stock options exercised.............. 212 307
Dividends paid on common stock....... (14,012) (12,375)
Dividends paid on preferred stock.... (4,348) (1,256)
Proceeds from sale of stock.......... - 104,810
Purchase of Company stock............ (4,362) (28,508)
-------- --------
Cash provided by financing activities 26,589 163,334
-------- --------
Decrease in cash and
cash equivalents................... (2,004) (150)
Cash and cash equivalents at
beginning of period................ 2,937 959
-------- --------
Cash and cash equivalents at end of
period............................. $ 933 $ 809
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Parkway Properties, Inc.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1999
(1) Basis of Presentation
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.
The accompanying financial statements reflect all
adjustments which are, in the opinion of management, necessary
for a fair statement of the results for the interim periods
presented. All such adjustments are of a normal recurring
nature. The financial statements should be read in conjunction
with the annual report and the notes thereto.
(2) Reclassifications
Certain reclassifications have been made in the 1998
financial statements to conform to the 1999 classifications.
(3) Supplemental Cash Flow Information
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
<TABLE>
Nine Months Ended
September 30
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash paid for interest........ $13,831,000 $10,984,000
Mortgage assumed in purchase.. 1,936,000 5,647,000
Income taxes paid............. 194,000 35,000
Restricted shares issued...... 5,358,000 -
</TABLE>
(4) Acquisitions and Dispositions
On January 12, 1999, the Company purchased the 46,000 square
foot Moorefield I building in Richmond, Virginia for $3,900,000
including the assumption of $1,936,000 mortgage note payable with
a 7.625% interest rate. The Moorefield I office building was
constructed in 1984 and is located in western suburban Richmond.
On July 1, 1999, the Company purchased the 466,000 square
foot Capitol Center building in Columbia, South Carolina for
$38,000,000. The Capitol Center building was constructed in 1987
and is located in the Columbia Central Business District.
(5) Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which is required to be adopted in years
beginning after June 15, 2000. The Company has no derivative or
hedging instruments outstanding as of September 30, 1999;
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.
<PAGE>
(6) Capital Transactions
On March 2, 1999, the Board of Directors approved the
repurchase of up to 500,000 shares of the Company's common stock.
As of November 12, 1999, 185,116 shares have been purchased at an
average price of $28.36.
On June 3, 1999, the stockholders of the Company approved
amendments to the Company's 1994 Stock Option and Long-Term
Compensation Plan that authorized the Compensation Committee to
issue restricted stock awards. The Compensation Committee
authorized the issuance of 150,000 shares of restricted stock to certain
officers of the Company effective June 3, 1999. The stock price
on date of grant was $34. The vesting period for the stock is
10 years or 46 months if certain operating results are achieved
by the Company. Effective September 14, 1999, the Compensation
Committee approved the issuance of an additional 8,000 shares of
restricted stock to officers of the Company added subsequent to
June 3, 1999. The stock price on the date of the grant was
$32.1875. The vesting period for the stock is 9.5 years or 40
months if certain operating results are achieved by the Company.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Financial Condition
Comments are for the balance sheet dated September 30, 1999
compared to the balance sheet dated December 31, 1998.
During the nine months ending September 30, 1999, the
Company purchased two office properties. Total assets increased
$47,824,000 and office properties (before depreciation) increased
$54,633,000 or 9.3%.
Parkway's direct investment in office buildings and office
redevelopment increased $50,023,000 net of depreciation to a
carrying amount of $618,267,000 at September 30, 1999 and
consisted of 52 properties.
On January 12, 1999 the Company purchased the 46,000 square
foot Moorefield I building in Richmond, Virginia for $3,900,000
including the assumption of a $1,936,000 mortgage note payable
with a 7.625% interest rate. The Moorefield I office building
was constructed in 1984 and is located in western suburban
Richmond.
On July 1, 1999, the Company purchased the 466,000 square
foot Capitol Center building in Columbia, South Carolina for
$38,000,000. The Capitol Center building was constructed in 1987
and is located in the Columbia Central Business District.
During the nine months ending September 30, 1999, the
Company also capitalized building improvements and additional
purchase expenses of $12,754,000 and recorded depreciation
expense of $12,129,000.
Office buildings held for sale of $19,986,000 consisted of
a single-story office building in Houston, Texas and three
Northern Virginia properties that the Company decided to sell
during the quarter ended September 30, 1999. The decision to
sell the Company's three office buildings in Northern Virginia
was based on management's belief that office properties in this
market may be peaking in value. Although the Company has received
letters of intent for the sale of these properties, there can
be no assurance that the Company will be able to sell these properties
or on what terms such sale would occur.
During the nine months ending September 30, 1999, the
Company incurred office redevelopment costs of $7,499,000. Costs
incurred included capitalized interest costs of $341,000. The
Company's redevelopment costs are associated with the historic
renovation of the William R. Moore Building in downtown Memphis
and an adjacent 777-space parking garage. The building is 100%
pre-leased to three tenants on 15-year non-cancelable leases with
built-in escalations, and is expected to be completed in the
first half of 2000.
Parkway sold various non-core assets during the nine months
that resulted in gains for financial reporting purposes of
$86,000 and net proceeds of $401,000. At September 30, 1999, non-
core assets, other than mortgage loans, totaled $4,283,000. The
Company expects to continue its efforts to liquidate these
assets.
<PAGE>
Notes payable to banks totaled $76,607,000 at September 30,
1999 and are the result of advances under bank lines of credit to
purchase additional office properties, make improvements to
office properties and purchase Company stock.
Mortgage notes payable without recourse increased
$15,324,000 during the nine months ended September 30, 1999 due
to the funding of a $20,100,000 fixed rate loan and scheduled
principal payments of $6,712,000 offset by the assumption of
existing debt on the purchase of the Moorefield I building
recorded at a rate of 7.625% in the amount of $1,936,000. On
September 13, 1999, the Company closed a $20,100,000 non-
recourse, twenty-year fully amortizing mortgage on the Morgan
Keegan Tower in Memphis, Tennessee. The loan was funded from
Massachusetts Mutual Life Insurance Company at a fixed rate of
7.6%. The loan includes a provision which will allow the loan
to be converted to an unsecured loan during the first three years
of the loan term upon receipt of an investment grade rating from
one of the major rating agencies.
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 decreased $3,186,000 during the nine
months ended September 30, 1999 as a result of the following
factors (in thousands):
<TABLE>
Increase (Decrease)
-------------------
<S> <C>
Net income $19,099
Shares purchased-Company common stock (4,362)
Preferred stock dividends declared (4,348)
Common stock dividends declared (14,158)
Exercise of stock options 212
Shares issued in lieu of directors' fees 72
Restricted shares issued 5,357
Unearned compensation (5,358)
Amortization of unearned compensation 300
-------
$(3,186)
=======
</TABLE>
On March 2, 1999, the Board of Directors approved the
repurchase of up to 500,000 shares of the Company's common stock.
As of September 30, 1999, 155,250 shares have been purchased at
an average price of $27.90.
On June 3, 1999, the stockholders of the Company approved
amendments to the Company's 1994 Stock Option and Long-Term
Compensation Plan that authorized the Compensation Committee to
issue restricted stock awards. The Compensation Committee
authorized the issuance of 150,000 shares of restricted stock to
officers of the Company effective June 3, 1999. The stock price
on date of grant was $34. The vesting period for the stock is
10 years or 46 months if certain operating results are achieved
by the Company. Effective September 14, 1999, the Compensation
Committee approved the issuance of an additional 8,000 shares
<PAGE>
of restricted stock to officers of the Company. The stock price
on the date of the grant was $32.1875. The vesting period for
the stock is 9.5 years or 40 months if certain operating results
are achieved by the Company.
RESULTS OF OPERATIONS
Comments are for the three months and nine months ended September
30, 1999 compared to the three months and nine months ended
September 30, 1998.
Net income available for common stockholders for the three
months ended September 30, 1999 was $4,580,000 ($.45 per basic
common share) as compared to $7,427,000 ($.70 per basic common
share) for the three months ended September 30, 1998. Net income
available for common stockholders for the nine months ended
September 30, 1999 was $14,751,000 ($1.46 per basic common share)
as compared to $18,503,000 ($1.74 per basic common share) for the
nine months ended September 30, 1998. Net income included net
gains from the sale of the real estate and mortgage loans in the
amounts of $86,000 and $4,886,000 for the nine months ended
September 30, 1999 and 1998, respectively.
The primary reason for the increase in the Company's income
before gains for 1999 as compared to 1998 is the reflection of
the operations of the following office buildings subsequent to
the date of purchase:
<TABLE>
Building Purchase Date Sq. Feet
------------------------------- ------------- ----------
<S> <C> <C>
Schlumberger 01/21/98 155,000
Brookdale Portfolio* 02/25/98 1,470,000
Southtrust 03/31/98 196,000
Atrium at Stoneridge 04/28/98 109,000
River Oaks Office Plaza 05/01/98 73,000
Pavilion Center 06/30/98 44,000
111 East Capitol Building 07/01/98 172,000
Town Point Center 07/20/98 130,000
Westvaco Building 07/20/98 144,000
Winchester 12/18/98 126,000
Falls Building 12/31/98 147,000
Moorefield I 01/12/99 46,000
Capitol Center 07/01/99 466,000
</TABLE>
*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 two properties acquired in the
Brookdale Portfolio with a total square footage of 251,000.
<PAGE>
Operations of office building properties are summarized
below (in thousands):
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income $ 29,520 $ 24,839 $ 83,763 $ 69,464
Operating expense (12,558) (10,594) (34,997) (29,249)
-------- -------- -------- --------
16,962 14,245 48,766 40,215
Interest expense (3,773) (3,725) (11,304) (7,856)
Depreciation and
amortization (4,568) (4,290) (12,868) (10,205)
-------- -------- -------- --------
Net Income $ 8,621 $ 6,230 $ 24,594 $ 22,154
======== ======== ======== ========
</TABLE>
Net losses on operations of other real estate properties
held for sale were $99,000 and $84,000 for the nine months ending
September 30, 1999 and 1998, respectively.
The increase in interest expense on office properties is
primarily due to the mortgage loans assumed and/or new loans
placed in 1999 and 1998. The average interest rate on mortgage
notes payable as of September 30, 1999 and 1998 was 7.4%.
On September 13, 1999, the Company closed a $20,100,000 non-
recourse, twenty-year fully amortizing mortgage on the Morgan
Keegan Tower in Memphis, Tennessee. The loan was funded from
Massachusetts Mutual Life Insurance Company at a fixed rate of
7.6%. The loan includes a provision which will allow the loan to
be converted to an unsecured loan during the first three years of
the loan term upon receipt of an investment grade rating from one
of the major rating agencies.
The $1,014,000 decrease in interest expense on bank notes
for the nine months ending September 30, 1999 compared to the
nine months ending September 30, 1998 is primarily due to the
decrease in weighted average interest rates under existing bank
lines of credit from 7.06% as of September 30, 1998 compared to
6.6% as of September 30, 1999. The balance in notes payable to
banks during the nine months ended September 30, 1998 included an
advance of $75,000,000 on an unsecured loan from NationsBank, NA.
This loan was repaid in full on June 30, 1998 with proceeds from
a $97,000,000 mortgage note payable at 6.945% that amortizes over
a 15-year term and matures July 1, 2008.
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 6.625% as of September 30, 1999 compared to 7.056% as of
September 30, 1998. The new credit facility reflects a .431%
interest rate reduction (based on leverage at September 30, 1999)
and a $50 million increase over the previous lines of credit,
which were secured lines of credit.
General and administrative expenses were $3,086,000 and
$2,579,000 for the nine months ended September 30, 1999 and 1998,
respectively. The primary reason for the $507,000 increase is
due to the one time non-recurring charge of approximately
<PAGE>
$450,000 recorded in the third quarter for certain expenses
related to an unsuccessful merger transaction. The one time non-
recurring charge includes the cost of legal, accounting, travel,
interview, inspections and professional fees associated with
documents, tax matters, environmental reviews and financial
studies to examine the impact of the proposed merger.
LIQUIDITY AND CAPITAL RESOURCES
Statement of Cash Flows
Cash and cash equivalents were $933,000 and $2,937,000 at
September 30, 1999 and December 31, 1998, respectively. The
Company generated $32,249,000 in cash flows from operating
activities during the nine months ending September 30, 1999
compared to $28,104,000 for the same period of 1998. The Company
used $60,842,000 in investing activities during the nine months
ending September 30, 1999. In implementing its investment
strategy, the Company used $39,964,000, not including closing
costs and certain capitalized expenses, to purchase office
properties while receiving net cash proceeds from the sale of non-
core assets of $401,000. The Company also spent $10,977,000 to
make capital improvements at its office properties and $7,499,000
toward the Memphis real estate redevelopment project. Cash
dividends of $18,360,000($1.40 per common share and $1.64 per
preferred share) were paid to stockholders, 155,250 shares of
common stock were repurchased for a total of $4,362,000 and
principal payments of $6,712,000 were made on mortgage notes
payable during the nine months ending September 30, 1999.
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 office properties held for sale
and cash balances to fund those acquisitions. At September 30,
1999, the Company had $76,607,000 outstanding under two bank
lines of credit.
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 6.75%
and 6.625%, respectively, at September 30, 1999.
The $10 million line is unsecured and is expected to fund
the daily cash requirements of the Company's treasury management
<PAGE>
system. This line of credit matures September 30, 2001 and has
an interest rate equal to the 30 day LIBOR rate plus 112.5 to
137.5 basis points, depending upon overall Company leverage, with
the current rate set at LIBOR plus 125 basis points. The Company
paid a facility fee of 40 basis points ($40,000) upon closing of
the loan and will pay an annual administration fee of $3,000.
The Company will also pay 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, with the current rate
set at LIBOR plus 125 basis points. The Company paid a facility
fee of $150,000 and originating fees of $432,500 (28.8 basis
points) upon closing of the loan and will pay an annual
administration fee of $37,500. The Company will also pay unused
fees on the unused portion of the line based upon overall Company
leverage, with the current rate set at the maximum of 25 basis
points.
At September 30, 1999, the Company had $217,165,000 of non-
recourse fixed rate mortgage notes payable with an average
interest rate of 7.40% secured by office properties and
$76,607,000 drawn under bank lines of credit. Based on the
Company's total market capitalization of approximately
$686,778,000 at September 30, 1999 (using the September 30, 1999
closing price of $32.25 per common share), the Company's debt
represented approximately 42.8% 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.
The table below presents the principal payments due and
weighted average interest rates for the fixed rate debt.
<TABLE>
Average Fixed Rate Debt Fair Value
Interest Rate (In thousands) 9/30/99
------------- --------------- ----------
<C> <C> <C> <C>
1999* 7.40% $ 2,428
2000 7.40% 10,179
2001 7.40% 10,961
2002 7.40% 11,803
2003 7.39% 14,374
2004 7.39% 13,619
Thereafter 7.58% 153,801
-------- --------
Total $217,165 $217,440
======== ========
</TABLE>
*Remaining three months
The Company presently has plans to make capital improvements
at its office properties in 1999 of approximately $20,000,000.
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 recent years that were anticipated at
the time of purchase. All such improvements are expected to be
<PAGE>
financed by cash flow from the properties and advances on the
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.
The decision to put the Northern Virginia portfolio on the market
for sale was based on management's belief that office properties
in this market may be peaking in value. In addition, a single-
story office building in Houston, Texas has been placed on
the market for sale. Accordingly, the Northern Virginia office
buildings and Houston building have been classified as office buildings
held for sale on the balance sheet dated September 30, 1999. Although
the Company has received letters of intent for the sale of the
properties, there can be no assurance that the Company will be
able to sell these properties or on what terms such sale would
occur. The Company is also considering selling its property located
in Birmingham, Alabama. The Company has made numerous attempts to
purchase sufficient property in the Birmingham 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.
The Company anticipates that its current cash balance,
operating cash flows, proceeds from the sale of office properties
held for sale and borrowings (including borrowings under the
working capital line of credit) will be adequate to pay the
Company's (i) operating and administrative expenses, (ii) debt
service obligations, (iii) distributions to shareholders, (iv)
capital improvements, and (v) normal repair and maintenance
expenses at its properties both in the short and long term.
Funds From Operations
Management believes that funds from operations ("FFO") are
an appropriate measure of performance for equity REITs. Funds
from operations are defined by the National Association of Real
Estate Investment Trusts (NAREIT) as net income or loss,
excluding gains or losses from debt restructuring and sales of
properties, plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures.
In March 1995, NAREIT issued a clarification of the definition of
FFO. The clarification provides that amortization of deferred
financing costs and depreciation of non-real estate assets are
not to be added back to net income to arrive at FFO. Funds from
operations does not represent cash generated from operating
activities in accordance with generally accepted accounting
principles and is not an indication of cash available to fund
cash needs. Funds from operations should not be considered an
alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flow as a
measure of liquidity.
<PAGE>
The following table presents the Company's FFO for the three
months and nine months ended September 30, 1999 and 1998 (in
thousands):
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 6,030 $ 8,877 $19,099 $20,967
Adjustments to
derive funds from
operations:
Preferred dividends (1,450) (1,450) (4,348) (2,464)
Depreciation and
amortization 4,568 4,290 12,868 10,205
Equity in earnings (12) (12) (26) (35)
Distributions from
unconsolidated
subsidiaries - 5 19 24
Gain on real estate - (3,547) (86) (4,886)
Amortization of
discounts, deferred
gains and other (13) (1) (48) (5)
------- ------- ------- -------
Funds from Operations $ 9,123 $ 8,162 $27,478 $23,806
======= ======= ======= =======
</TABLE>
NAREIT has recommended supplemental disclosure concerning
capital expenditures, leasing costs and straight-line rents which
are given below (in thousands):
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Straight-line rents $ 300 $ 223 $ 993 $ 462
Building improvements 690 474 1,660 1,202
Tenant improvements:
New leases 511 54 1,201 348
Lease renewals 391 399 1,640 861
Leasing commissions:
New leases 227 111 513 316
Lease renewals 135 320 517 724
Leasing commissions
amortized 249 181 691 473
Upgrades on recent
acquisitions 1,680 1,944 5,446 4,202
</TABLE>
Inflation
In the last five years, inflation has not had a significant
impact on the Company because of the relatively low inflation
rate in the Company's geographic areas of operation. Most of the
leases require the tenants to pay their pro rata share of
operating expenses, including common area maintenance, real
estate taxes and insurance, thereby reducing the Company's
exposure to increases in operating expenses resulting from
inflation. In addition, the Company's leases typically have
three to five-year terms, which may enable the Company to replace
existing leases with new leases at a higher base if rents on the
<PAGE>
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 September 30, 1999, the inventory of all systems was
100% complete. Additionally, all inventoried systems were
prioritized and a significant number of manufacturer, vendor and
supplier responses to inquiries had been received. Although the
majority of testing of systems is complete, the testing of all
systems is scheduled to be completed in the fourth quarter of
1999, and contingency planning will be completed in the fourth
quarter of 1999. Modifications to contingency plans will be made
during the fourth quarter of 1999 as information provided by
third party vendors and suppliers may change.
Parkway has completed the upgrade of all critical business
application services to full Year 2000 compliance standards. The
Company has received the necessary updates on all core business
applications and is in the process of installing these updates.
The Company will continue the testing phase of the plan on these
servers and their applications during the fourth 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 has been
completed, 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 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 have been received
<PAGE>
and evaluated to determine appropriate courses of action.
Company contingency plans 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.
Expenditures reported to date in order to be Year 2000 compliant
total $474,000, of which $402,000 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 the Company's operations
or financial condition.
Forward-Looking Statements
In addition to historical information, certain sections of
this Form 10-Q that are not in the present or past tense or
discuss the Company's expectations are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934, such as
those pertaining to the Company's capital resources,
profitability and portfolio performance. Forward-looking
statements involve numerous risks and uncertainties. The
following factors, among others discussed herein, could cause
actual results and future events to differ materially from those
set forth or contemplated in the forward-looking statements:
defaults or non-renewal of leases, increased interest rates and
operating costs, failure to obtain necessary outside financing,
difficulties in identifying properties to acquire and in
effecting acquisitions, failure to qualify as a real estate
investment trust under the Internal Revenue Code of 1986, as
amended (the "Code"), environmental uncertainties, risks related
to natural disasters, financial market fluctuations, changes in
real estate and zoning laws, increases in real property tax rates
and the ability of the Company and the parties on which the
Company relies to successfully comply with the Year 2000 issues.
The success of the Company also depends upon the trends of the
economy, including interest rates, income tax laws, governmental
regulation, legislation, population changes and those risk
factors discussed elsewhere in this Form 10-Q. Readers are
cautioned not to place undue reliance on forward-looking
statements, which reflect management's analysis only as the date
hereof. The Company assumes no obligation to update forward-
looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
See information appearing under the caption "Liquidity" in
Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 14.
<PAGE>
PARKWAY PROPERTIES, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) (10) - Parkway Properties, Inc. 1994 Stock Option
and Long-Term Incentive Plan (incorporated
by reference to Appendix A to the Company's
proxy material for its June 3, 1999 Annual
Meeting).
(27) - Financial Data Schedule attached hereto.
(b) Reports on Form 8-K
(1) 8-K Filed - None
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
DATED: November 15, 1999 PARKWAY PROPERTIES, INC.
/s/ Regina P. Shows
Regina P. Shows, CPA
Chief Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 933
<SECURITIES> 0
<RECEIVABLES> 15,350
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,283
<PP&E> 655,291
<DEPRECIATION> 37,024
<TOTAL-ASSETS> 640,076
<CURRENT-LIABILITIES> 98,146
<BONDS> 217,165
0
66,250
<COMMON> 10
<OTHER-SE> 258,505
<TOTAL-LIABILITY-AND-EQUITY> 640,076
<SALES> 84,420
<TOTAL-REVENUES> 84,722
<CGS> 0
<TOTAL-COSTS> 35,525
<OTHER-EXPENSES> 15,954
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,228
<INCOME-PRETAX> 19,099
<INCOME-TAX> 0
<INCOME-CONTINUING> 19,099
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,099
<EPS-BASIC> 1.46
<EPS-DILUTED> 1.45
</TABLE>
