| PARKWAY PROPERTIES INC ITEM 1A Risk Factors |
| In addition to the other information contained or incorporated by reference in this document, readers should carefully consider the following risk factors |
| Any of these risks or the occurrence of any one or more of the uncertainties described below could have a material adverse effect on the Companyapstas financial condition and the performance of its business |
| The Company refers to itself as "e we "e or "e our "e in the following risk factors |
| Our performance is subject to risks inherent in owning real estate investments |
| Our investments are generally made in office properties |
| We are, therefore, generally subject to risks incidental to the ownership of real estate |
| changes in supply of or demand for office properties or customers for such properties in an area in which we have buildings; ? |
| the ongoing need for capital improvements; ? |
| increased operating costs, which may not necessarily be offset by increased rents, including insurance premiums, utilities and real estate taxes, due to inflation and other factors; ? |
| changes in tax, real estate and zoning laws; ? |
| changes in governmental rules and fiscal policies; and ? |
| civil unrest, acts of war, acts of God, including earthquakes and other natural disasters (which may result in uninsured losses) and other factors beyond our control |
| Should any of these events occur, our financial condition and our ability to make expected distributions to stockholders could be adversely affected |
| The economic conditions of our primary markets affect our operations |
| Substantially all of our properties are located in the Southeastern and Southwestern United States and Chicago and, therefore, our financial condition and ability to make distributions to our stockholders is linked to economic conditions in these markets as well as the market for office space generally in these markets |
| A downturn in these markets may adversely affect our cash flows and ability to make distributions to stockholders |
| Customer defaults could adversely affect our operations |
| Substantially all of our revenues and income come from rental income from real property |
| As such, our revenues and income could be adversely affected if a significant number of our customers defaulted under their lease obligations |
| Our ability to manage our assets is also subject to federal bankruptcy laws and state laws that limit creditors &apos rights and remedies available to real property owners to collect delinquent rents |
| If a customer becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the customer promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to that customer |
| We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises |
| If a customer becomes bankrupt, the federal bankruptcy code will apply and, in some instances, may restrict the amount and recoverability of our claims against the customer |
| A customerapstas default on its obligations to us could adversely affect our financial condition and the cash we have available for distributions to our stockholders |
| Page 7 of 79 ______________________________________________________________________ Illiquidity of real estate may limit our ability to vary our portfolio |
| Real estate investments are relatively illiquid |
| Our ability to vary our portfolio by selling properties and buying new ones in response to changes in economic and other conditions will therefore be limited |
| In addition, the Internal Revenue Code limits our ability to sell our properties by imposing a penalty tax of 100prca on the gain derived from prohibited transactions, which are defined as sales of property held primarily for sale to customers in the ordinary course of a trade or business |
| The frequency of sales and the holding period of the property sold are two primary factors in determining whether the property sold fits within this definition |
| These considerations may limit our opportunities to sell our properties |
| If we must sell an investment, we cannot assure you that we will be able to dispose of the investment in the time period we desire or that the sales price of the investment will recoup or exceed our cost for the investment, or that the penalty tax would not be assessed |
| Our current and future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners &apos financial condition and any disputes that may arise between us and our joint venture partners |
| Co-investing with third parties through joint ventures is a part of our ongoing business strategy |
| We may not be in a position to exercise sole decision-making authority regarding the properties owned through joint ventures |
| Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including reliance on our joint venture partners and the possibility that joint venture partners might become bankrupt or fail to fund their share of required capital contributions, thus exposing us to liabilities in excess of our share of the investment |
| Joint venture partners may have business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives |
| Any disputes that may arise between us and joint venture partners may result in litigation or arbitration that would increase our expenses |
| We are exposed to potential environmental liability |
| Under various federal, state, and local laws, ordinances and regulations, we may be considered an owner or operator of real property and may be responsible for paying for the disposal or treatment of hazardous or toxic substances released on or in our property or disposed of by us, as well as certain other potential costs which could relate to hazardous or toxic substances (including governmental fines and injuries to persons and property) |
| This liability may be imposed whether or not we knew about, or were responsible for, the presence of hazardous or toxic substances |
| Uninsured and underinsured losses may adversely affect operations |
| We, or in certain instances, customers of our properties, carry commercial general liability, fire and extended coverage insurance with respect to our properties |
| This coverage has policy specifications and insured limits that we believe are customarily carried for similar properties |
| However, certain types of losses, generally of a catastrophic nature, such as earthquakes and floods, may be either uninsurable or not economically insurable |
| Should a property sustain damage, we may incur losses due to insurance deductibles, to co-payments on insured losses or to uninsured losses |
| In the event of a substantial property loss, the insurance coverage may not be sufficient to pay the full current market value or current replacement cost of the property |
| In the event of an uninsured loss, we could lose some or all of our capital investment, cash flow and anticipated profits related to one or more properties |
| Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it not feasible to use insurance proceeds to replace a property after it has been damaged or destroyed |
| Under such circumstances, the insurance proceeds we receive might not be adequate to restore our economic position with respect to such property |
| We have existing debt and refinancing risks that could affect our cost of operations |
| We currently have both fixed and variable rate indebtedness and may incur indebtedness in the future, including borrowings under our credit facilities, to finance possible acquisitions and for general corporate purposes |
| As a result, we are and expect to be subject to the risks normally associated with debt financing including: ? |
| that interest rates may rise; ? |
| that our cash flow will be insufficient to make required payments of principal and interest; ? |
| that any refinancing will not be on terms as favorable as those of the existing debt; ? |
| that required payments on mortgages and on our other debt are not reduced if the economic performance of any property declines; Page 8 of 79 ______________________________________________________________________ ? |
| that debt service obligations will reduce funds available for distribution to our stockholders; ? |
| that any default on our debt could result in acceleration of those obligations; and ? |
| that we may be unable to refinance or repay the debt as it becomes due |
| An increase in interest rates would reduce our net income and funds from operations |
| We may not be able to refinance or repay debt as it becomes due which may force us to refinance or to incur additional indebtedness at higher rates and additional cost or, in the extreme case, to sell assets or seek protection from our creditors under applicable law |
| A lack of any limitation on our debt could result in our becoming more highly leveraged |
| Our governing documents do not limit the amount of indebtedness we may incur |
| Accordingly, our board of directors may incur additional debt and would do so, for example, if it were necessary to maintain our status as a REIT We might become more highly leveraged as a result, and our financial condition and cash available for distribution to stockholders might be negatively affected and the risk of default on our indebtedness could increase |
| The cost and terms of mortgage financings may render the sale or financing of a property difficult or unattractive |
| The sale of a property subject to a mortgage may trigger pre-payment penalties, yield maintenance payments or make-whole payments to the lender, which would reduce the amount of gain or increase our loss on the sale of a property and could make the sale of a property less likely |
| Certain of our mortgages will have significant outstanding principal balances on their maturity dates, commonly known as "e balloon payments "e |
| There is no assurance whether we will be able to refinance such balloon payments on the maturity of the loans, which may force disposition of properties on disadvantageous terms or require replacement with debt with higher interest rates, either of which would have an adverse impact on our financial performance and ability to pay distributions to investors |
| We may amend our investment strategy and business policies without your approval |
| Our Board of Directors determines our growth, investment, financing, capitalization, borrowing, REIT status, operating and distribution policies |
| Although the Board of Directors has no present intention to amend or revise any of these policies, these policies may be amended or revised without notice to and approval from stockholders |
| Accordingly, stockholders may not have control over changes in our policies |
| We cannot assure you that changes in our policies will serve fully the interests of all stockholders |
| Loss of our tax status as a real estate investment trust would have significant adverse consequences to us and the value of our securities |
| We believe that we qualify for taxation as a REIT for federal income tax purposes, and we plan to operate so that we can continue to meet the requirements for taxation as a REIT To qualify as a REIT we must satisfy numerous requirements (some on an annual and quarterly basis) established under the highly technical and complex provisions of the Code applicable to REITs, which include: • maintaining ownership of specified minimum levels of real estate related assets; • generating specified minimum levels of real estate related income; • maintaining certain diversity of ownership requirements with respect to our shares; and • distributing at least 90prca of our taxable income on an annual basis |
| The distribution requirement noted above could adversely affect our ability to use earnings for improvements or acquisitions because funds distributed to stockholders will not be available for capital improvements to existing properties or for acquiring additional properties |
| Only limited judicial and administrative interpretations exist of the REIT rules |
| In addition, qualification as a REIT involves the determination of various factual matters and circumstances not entirely within our control |
| Page 9 of 79 ______________________________________________________________________ If we fail to qualify as a REIT, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates |
| In addition, unless entitled to relief under certain statutory provisions, we will be disqualified from treatment as a REIT for the four taxable years following the year during which we failed to qualify |
| This treatment would reduce net earnings available for investment or distribution to stockholders because of the additional tax liability for the year or years involved |
| In addition, we would no longer be required to make distributions to our stockholders |
| To the extent that distributions to stockholders had been made based on our qualifying as a REIT, we might be required to borrow funds or to liquidate certain of our investments to pay the applicable tax |
| As a REIT, we have been and will continue to be subject to certain federal, state and local taxes on our income and property |
| There is a risk of changes in the tax law applicable to real estate investment trusts |
| Since the Internal Revenue Service, the United States Treasury Department and Congress frequently review federal income tax legislation, we cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted |
| Any of such legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us and/or our investors |
| Limitations on the ownership of our common stock may preclude the acquisition or change of control of our company |
| Certain provisions contained in our charter and bylaws and certain provisions of Maryland law may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change of control |
| Provisions of our charter are designed to assist us in maintaining our qualification as a REIT under the Code by preventing concentrated ownership of our capital stock that might jeopardize REIT qualification |
| Among other things, these provisions provide that, if a transfer of our stock or a change in our capital structure would result in (1) any person (as defined in the charter) directly or indirectly acquiring beneficial ownership of more than 9dtta8prca (in value or in number, whichever is more restrictive) of our outstanding equity stock excluding Excess Stock, (2) our outstanding shares being constructively or beneficially owned by fewer than 100 persons, or (3) our being "e closely held "e within the meaning of Section 856(h) of the Code, then: ? |
| any proposed transfer will be void from the beginning and we will not recognize such transfer; ? |
| we may institute legal proceedings to enjoin such transfer; ? |
| we will have the right to redeem the shares proposed to be transferred; and ? |
| the shares proposed to be transferred will be automatically converted into and exchanged for shares of a separate class of stock, the Excess Stock |
| Excess Stock has no dividend or voting rights but holders of Excess Stock do have certain rights in the event of our liquidation, dissolution or winding up |
| Our charter provides that we will hold the Excess Stock as trustee for the person or persons to whom the shares are ultimately transferred, until the time that the shares are retransferred to a person or persons in whose hands the shares would not be Excess Stock and certain price-related restrictions are satisfied |
| These provisions may have an anti-takeover effect by discouraging tender offers or purchases of large blocks of stock, thereby limiting the opportunity for stockholders to receive a premium for their shares over then-prevailing market prices |
| Under the terms of our charter, our board of directors has the authority to waive these ownership restrictions |
| The board of directors has waived the restrictions with respect to the ownership by Five Arrows Realty Securities III, LLC of shares of Series B preferred stock, the shares of common stock into which they may be converted, and the common stock issuable upon exercise of the warrant, subject to requirements that are meant to insure that our REIT qualification will not be jeopardized |
| Furthermore, under our charter, the board of directors has the authority to classify and reclassify any of our unissued shares of capital stock into shares of capital stock with such preferences, rights, powers and restrictions as the board of directors may determine |
| The authorization and issuance of a new class of capital stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders &apos best interests |
| Page 10 of 79 ______________________________________________________________________ Maryland business statutes may limit the ability of a third party to acquire control of us |
| Maryland law provides protection for Maryland corporations against unsolicited takeovers by limiting, among other things, the duties of the directors in unsolicited takeover situations |
| The duties of directors of Maryland corporations do not require them to (a) accept, recommend or respond to any proposal by a person seeking to acquire control of the corporation, (b) authorize the corporation to redeem any rights under, or modify or render inapplicable, any stockholders rights plan, (c) make a determination under the Maryland Business Combination Act or the Maryland Control Share Acquisition Act, or (d) act or fail to act solely because of the effect of the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition |
| Moreover, under Maryland law the act of a director of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director |
| Maryland law also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable standards of conduct for directors under Maryland law |
| The Maryland Business Combination Act provides that unless exempted, a Maryland corporation may not engage in business combinations, including mergers, dispositions of 10 percent or more of its assets, certain issuances of shares of stock and other specified transactions, with an "e interested stockholder "e or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder became an interested stockholder, and thereafter unless specified criteria are met |
| An interested stockholder is generally a person owning or controlling, directly or indirectly, 10 percent or more of the voting power of the outstanding stock of the Maryland corporation |
| The Maryland Control Share Acquisition Act provides that "e control shares "e of a corporation acquired in a "e control share acquisition "e shall have no voting rights except to the extent approved by a vote of two-thirds of the votes eligible to cast on the matter |
| "e Control Shares "e means shares of stock that, if aggregated with all other shares of stock previously acquired by the acquirer, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of the voting power: one-tenth or more but less than one-third, one-third or more but less than a majority or a majority or more of all voting power |
| A "e control share acquisition "e means the acquisition of control shares, subject to certain exceptions |
| If voting rights of control shares acquired in a control share acquisition are not approved at a stockholderapstas meeting, then subject to certain conditions and limitations, the issuer may redeem any or all of the control shares for fair value |
| If voting rights of such control shares are approved at a stockholderapstas meeting and the acquirer becomes entitled to vote a majority of the shares of stock entitled to vote, all other stockholders may exercise appraisal rights |