PARKWAY PROPERTIES INC - 10-Q Quarterly Report

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, 2002 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		____

9,372,619 shares of Common Stock, $.001 par value, were outstanding as of November 8, 2002.

PARKWAY PROPERTIES, INC.

FORM 10-Q

TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2002

Pages

Part I. Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheets, September 30, 2002 and December 31, 2001...............		3

		Consolidated Statements of Income for the Three Months and Nine Months Ended
		September 30, 2002 and 2001............................................................................		4

		Consolidated Statements of Stockholders' Equity for the Nine Months Ended
		September 30, 2002 and 2001.............................................................................		6

		Consolidated Statements of Cash Flows for the Nine Months Ended
		September 30, 2002 and 2001.............................................................................		7

		Notes to Consolidated Financial Statements.................................................................		8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................................................................		12

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk..........................................		20

	Item 4.	Controls and Procedures.............................................................................................		20



	Part II. Other Information Part II. Other Information


	Item 6.	Exhibits and Reports on Form 8-K.............................................................................		21


	Signatures


Authorized Signatures........................................................................................................................			22


Certifications


Section 302 Certifications..................................................................................................................			23

PARKWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)

	September 30 2002	December 31 2001
	(Unaudited)
Assets
Real estate related investments:
Office and parking properties	$803,856	$875,889
Accumulated depreciation	(93,912)	(80,029)
	709,944	795,860

Land available for sale	3,733	3,733
Note receivable from Moore Building Associates LP	5,996	6,942
Mortgage loans	871	877
Investment in unconsolidated joint ventures	16,037	416
	736,581	807,828

Interest, rents receivable and other assets	27,115	30,326
Cash and cash equivalents	3,509	2,458
	$767,205	$840,612

Liabilities
Notes payable to banks	$133,442	$126,044
Mortgage notes payable without recourse	220,574	304,985
Accounts payable and other liabilities	33,913	34,002
	387,929	465,031

Stockholders' Equity
8.75% Series A Preferred stock, $.001 par value, 2,750,000 shares
authorized and 2,650,000 shares issued and outstanding	66,250	66,250
8.34% Series B Cumulative Convertible Preferred stock, $.001 par
value, 2,142,857 shares authorized, issued and outstanding	75,000	75,000
Series C Preferred stock, $.001 par value,
400,000 shares authorized, no shares issued	-	-
Common stock, $.001 par value, 64,707,143 shares
authorized, 9,309,342 and 9,249,954 shares
issued and outstanding in 2002 and 2001, respectively	9	9
Excess stock, $.001 par value, 30,000,000 shares
authorized, no shares issued	-	-
Additional paid-in capital	199,575	196,032
Unearned compensation	(548)	(2,190)
Accumulated other comprehensive loss	(666)	(1,694)
Retained earnings	39,656	42,174
	379,276	375,581
	$767,205	$840,612

See notes to consolidated financial statements.

PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

	Three Months Ended September 30
	2002	2001
	(Unaudited)
Revenues
Income from office and parking properties	$36,747	$36,967
Management company income	367	188
Interest on note receivable from Moore Building Associates LP	207	209
Incentive management fee from Moore Building Associates LP	93	61
Equity in earnings of unconsolidated joint ventures	322	16
Other income and deferred gains	39	36
	37,775	37,377
Expenses
Office and parking properties:
Operating expense	16,512	15,691
Interest expense:
Contractual	4,060	5,977
Amortization of loan costs	46	68
Depreciation and amortization	6,644	6,441
Operating expense for other real estate properties	9	9
Interest expense on bank notes:
Contractual	1,585	1,018
Amortization of loan costs	169	182
Management company expenses	102	96
General and administrative	1,079	1,160
	30,206	30,642

Net income	7,569	6,835
Change in market value of interest rate swaps	401	(934)
Comprehensive income	$ 7,970	$ 5,901

Net income available to common stockholders:
Net income	$ 7,569	$ 6,835
Dividends on preferred stock	(1,450)	(1,450)
Dividends on convertible preferred stock	(1,564)	(1,555)
Net income available to common stockholders	$ 4,555	$ 3,830

Net income per common share:
Basic	$ 0.49	$ 0.41
Diluted	$ 0.48	$ 0.40

Dividends per common share	$ 0.65	$ 0.63

Weighted average shares outstanding:
Basic	9,329	9,362
Diluted	9,493	9,490

See notes to consolidated financial statements.

PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

	Nine Months Ended September 30
	2002	2001
	(Unaudited)
Revenues
Income from office and parking properties	$115,758	$97,674
Dividend income	-	495
Management company income	851	624
Interest on note receivable from Moore Building Associates LP	689	642
Incentive management fee from Moore Building Associates LP	253	181
Equity in earnings of unconsolidated joint ventures	471	45
Other income and deferred gains	362	193
	118,384	99,854
Expenses
Office and parking properties:
Operating expense	49,974	40,998
Interest expense:
Contractual	14,777	14,500
Amortization of loan costs	186	170
Depreciation and amortization	20,697	16,916
Operating expense for other real estate properties	26	27
Interest expense on bank notes:
Contractual	4,520	3,555
Amortization of loan costs	418	499
Management company expenses	353	212
General and administrative	3,660	3,511
	94,611	80,388

Income before gain (loss), minority interest, discontinued
operations and extraordinary item	23,773	19,466

Gain (loss) on sale of joint venture interest, real estate and real estate
equity securities	(269)	1,611
Minority interest - unit holders	(1)	(2)

Income before discontinued operations and extraordinary item	23,503	21,075

Discontinued operations:
Income from discontinued operations	47	-
Gain on sale of real estate from discontinued operations	770	-

Income before extraordinary item	24,320	21,075

Extraordinary loss on early extinguishment of mortgage note payable	(18)	-

Net income	24,302	21,075
Change in unrealized gain on real estate equity securities	-	(821)
Change in market value of interest rate swaps	1,028	(1,689)

Comprehensive income	$ 25,330	$ 18,565

Net income available to common stockholders:
Net income	$ 24,302	$ 21,075
Dividends on preferred stock	(4,348)	(4,348)
Dividends on convertible preferred stock	(4,693)	(1,684)
Net income available to common stockholders	$ 15,261	$ 15,043

Net income per common share:
Basic:
Income excluding discontinued operations and extraordinary item	$ 1.55	$ 1.61
Discontinued operations	.09	-
Extraordinary item	-	-
Net income	$ 1.64	$ 1.61
Diluted:
Income excluding discontinued operations and extraordinary item	$ 1.52	$ 1.59
Discontinued operations	.09	-
Extraordinary item	-	-
Net income	$ 1.61	$ 1.59

Dividends per common share	$ 1.91	$ 1.82

Weighted average shares outstanding:
Basic	9,290	9,369
Diluted	9,467	9,472

See notes to consolidated financial statements.

PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)

	Nine Months Ended September 30
	2002	2001
	(Unaudited)
8.75% Series A Preferred stock, $.001 par value
Balance at beginning of period	$ 66,250		$ 66,250
Balance at end of period	66,250		66,250

8.34% Series B Cumulative Convertible
Preferred Stock, $.001 par value
Balance at beginning of period	75,000		-
Shares issued - stock offerings	-		75,000
Balance at end of period	75,000		75,000

Common stock, $.001 par value
Balance at beginning of period	9		10
Purchase of Company stock	-		(1)
Balance at end of period	9		9

Additional paid-in capital
Balance at beginning of period	196,032		214,568
Stock options exercised	2,602		1,333
Shares issued in lieu of Directors' fees	54		55
Restricted shares issued	-		60
Shares issued - employee excellence recognition program	1		1
Shares issued - DRIP plan	1,310		-
Shares issued - stock offerings	-		(1,998)
Purchase of Company stock	(424)		(17,276)
Balance at end of period	199,575		196,743

Unearned compensation
Balance at beginning of period	(2,190)		(3,402)
Restricted shares issued	-		(60)
Amortization of unearned compensation	1,642		725
Balance at end of period	(548)		(2,737)

Accumulated other comprehensive income (loss)
Balance at beginning of period	(1,694)		821
Change in net unrealized gain on real estate equity securities	-		(821)
Change in market value of interest rate swaps	1,028		(1,689)
Balance at end of period	(666)		(1,689)

Retained earnings
Balance at beginning of period	42,174		47,501
Net income	24,302		21,075
Preferred stock dividends declared	(4,348)		(4,348)
Convertible preferred stock dividends declared	(4,693)		(1,684)
Common stock dividends declared	(17,779)		(16,997)
Balance at end of period	39,656		45,547

Total stockholders' equity	$379,276		$379,123

See notes to consolidated financial statements.

PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	Nine Months Ended September 30
	2002	2001
	(Unaudited)
Operating activities
Net income	$ 24,302	$ 21,075
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization	20,697	16,916
Depreciation and amortization - discontinued operations	22	-
Amortization of loan costs	604	669
Amortization of unearned compensation	1,642	725
Extraordinary loss on early extinguishment of debt	18	-
Net gain on real estate held for sale, office property
and real estate equity securities	(770)	(1,611)
Loss on sale of joint venture interest	269	-
Equity in earnings of unconsolidated joint ventures	(471)	(45)
Other	(7)	(6)
Changes in operating assets and liabilities:
Increase in receivables and other assets	(2,351)	(8,767)
Increase in accounts payable and accrued expenses	6,035	7,535
Cash provided by operating activities	49,990	36,491

Investing activities
Payments received on mortgage loans	6	6
Net decrease in note receivable from Moore Building Associates LP	946	3,356
Distribution from unconsolidated joint venture	892	34
Investment in unconsolidated joint venture	(1,663)	-
Purchases of real estate related investments	(97,812)	(174,672)
Proceeds from sales of joint venture interest, real estate
and real estate equity securities	58,602	29,503
Real estate development	(230)	(68)
Improvements to real estate related investments	(15,054)	(11,026)
Cash used in investing activities	(54,313)	(152,867)

Financing activities
Principal payments on mortgage notes payable	(10,000)	(8,601)
Net proceeds from (payments on) bank borrowings	8,426	(16,144)
Proceeds from long-term financing	29,975	106,000
Prepayment premium on early extinguishment of debt	(18)	-
Stock options exercised	2,602	1,333
Dividends paid on common stock	(17,456)	(16,690)
Dividends paid on preferred stock	(9,041)	(4,477)
Purchase of Company stock	(424)	(17,277)
Proceeds from DRIP Plan	1,310	-
Proceeds from stock offerings	-	73,002
Cash provided by financing activities	5,374	117,146

Increase in cash and cash equivalents	1,051	770
Cash and cash equivalents at beginning of period	2,458	765

Cash and cash equivalents at end of period	$ 3,509	$ 1,535

See notes to consolidated financial statements.

Parkway Properties, Inc.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2002

(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 unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

The accompanying unaudited condensed consolidated 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. Operating results for the three months and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. The unaudited condensed consolidated financial statements should be read in conjunction with the annual report and the notes thereto.

The consolidated balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

(2) Reclassifications

Certain reclassifications have been made in the 2001 consolidated financial statements to conform to the 2002 classifications.

(3) Supplemental Cash Flow Information

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

	Nine Months Ended September 30
	2002	2001
Cash paid for interest	$19,246,000	$17,564,000
Income taxes paid	48,000	121,000
Restricted shares issued	-	60,000
Shares issued in lieu of Directors' fees	54,000	55,000
Mortgage transferred in sale of 70% interest
in Parkway 233 North Michigan LLC	73,289,000	-
Note receivable from the sale of 70% interest
in Parkway 233 North Michigan LLC	747,000	-

(4) Acquisitions and Dispositions

On May 30, 2002, Parkway sold a 70% interest in its investment in Parkway 233 North Michigan LLC (the "Joint Venture"), a subsidiary limited liability company that owns the 233 North Michigan Avenue building in Chicago, to an affiliate of Investcorp International, Inc. ("Investcorp") for a price equal to approximately 70% of the Company's original purchase price of the property plus all capital costs since it acquired the property in June 2001. Parkway continues to provide management and leasing for the building on a day-to-day basis. In connection with the sale, Parkway recognized a $250,000 acquisition fee in accordance with the terms of the joint venture agreement signed in October 2000 with Investcorp. The Company recorded a loss on the sale of the 70% interest in the Joint Venture of $269,000.

Prior to the Joint Venture, the subsidiary that owned 233 North Michigan Avenue was capitalized with equity of approximately $72 million and a 10-year first mortgage with a balance of approximately $105 million as of May 30, 2002. The first mortgage remained in place as an obligation of the Joint Venture. Parkway received net cash proceeds of approximately $55 million from the sale and used the proceeds to purchase new properties and to reduce short-term borrowings under the Company's line of credit. The Joint Venture is accounted for using the equity method of accounting.

On May 22, 2002, Parkway purchased the Park on Camelback (the "Park"), a 103,000 square foot office project in Phoenix, Arizona. Parkway acquired the Park at a purchase price of $12.4 million plus $318,000 for closing costs and estimated capital items in year one, for a total acquisition price of $12.7 million. The purchase was funded using proceeds from bank borrowings on a line of credit with JPMorgan Chase Bank at a rate equal to the 30-day Libor rate plus 137.5 basis points. The Park, a five-building two-story office project located in the Camelback Corridor sub-market, was constructed in 1981.

On May 31, 2002, Parkway purchased the Viad Corporate Center (the "Viad Purchase"), a 484,000 square foot office building in Phoenix, Arizona. Parkway acquired the Viad Purchase for $58 million. The purchase was funded using a combination of proceeds from the Joint Venture and bank borrowings on a line of credit with JPMorgan Chase Bank at a rate equal to the 30-day Libor rate plus 137.5 basis points. The Viad Purchase is a 24-story class A office tower located in the Downtown North sub-market.

On June 5, 2002, Parkway purchased a three-building suburban office portfolio consisting of 412,000 square feet in Houston, Texas (the "Houston Purchase"). The properties were acquired for a purchase price of $27.2 million plus an additional $941,000 in estimated first year improvements raising the total acquisition price to $28.1 million. The purchase was funded using proceeds from a new term loan with JPMorgan Chase Bank at a rate equal to the 30-day Libor rate plus 137.5 basis points.

The Houston Purchase portfolio consists of 1717 St. James Place, 5300 Memorial and Town & Country Central One. The 1717 St. James property is located in the Tanglewood sub-market, 5300 Memorial property is located in the Midtown sub-market and Town & Country Central One is located in the Katy Freeway/Energy Corridor sub-market.

On May 31, 2002, the Company closed on the cash sale of its 96,000 square foot office property in Indianapolis, Indiana for net proceeds of $3,192,000. The Company recorded a gain for financial reporting purposes of $770,000 on the sale in the second quarter. The net proceeds from the sale were used to reduce amounts outstanding on the Company's lines of credit.

(5) Investment in Unconsolidated Joint Ventures

As of September 30, 2002, the Company is invested in two joint ventures with unrelated investors. Parkway retained a minority interest of 30% in one joint venture and 50% in the other. As required by generally accepted accounting principles, the joint venture activity is accounted for using the equity method of accounting, as Parkway does not control either of these joint ventures. As a result, the assets and liabilities of the joint ventures are not included on Parkway's consolidated balance sheet as of September 30, 2002. Information relating to these consolidated joint ventures is detailed below.

On May 30, 2002, Parkway sold a 70% interest in its investment in Parkway 233 North Michigan LLC (the "Joint Venture"), a limited liability company that owns the 233 North Michigan Avenue building in Chicago, to an affiliate of Investcorp International, Inc. ("Investcorp") for a price equal to approximately 70% of the Company's original purchase price of the property plus all capital costs since it acquired the property in June 2001. Parkway continues to provide management and leasing for the building on a day-to-day basis. In connection with the sale, Parkway recognized a $250,000 acquisition fee in accordance with the terms of the joint venture agreement signed in October 2000 with Investcorp. The Company recorded a loss on the sale of the 70% interest in the Joint Venture of $269,000. The carrying amount of the joint venture interest at September 30, 2002 is $15,623,000.

In addition, the Company owns a 50% interest in an office property in New Orleans, Louisiana known as the Wink Building. The building is 100% leased and occupied by the other 50% partner. The carrying amount of the joint venture interest at September 30, 2002 is $414,000.

Balance sheet information for the unconsolidated joint ventures is summarized below as of September 30, 2002 and December 31, 2001 (in thousands):

Balance Sheet Information

		September 30, 2002			December 31, 2001
		233 North	Wink		233 North	Wink
		Michigan	Building	Total	Michigan	Building	Total

Unconsolidated Joint Ventures (at 100%):
Real estate, net	$172,220		$1,311	$173,531

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549

FORM 10-Q

NO

PARKWAY PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS(In thousands except share and per share data)

Office and parking properties

$803,856

$875,889

Accumulated other comprehensive income (loss)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

PARKWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)