UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form 10-K

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              [X]               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

 OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)

 

 

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:

www.pky.com
Registrant's website:
 

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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 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.    Yes   [x]   No  [  ]

      The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 1, 2003 was $319,521,000.

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  [x]   No  [  ]

      State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter:  $315,989,000.

      The number of shares outstanding in the registrant's class of common stock as of March 1, 2003 was 9,382,177.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of Shareholders are incorporated by reference into Part III.

 

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PARKWAY PROPERTIES, INC.

TABLE OF CONTENTS

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PART I

ITEM 1.  Business.

General Development of Business

Overview

       Parkway Properties, Inc. ("Parkway" or the "Company") is a real estate investment trust ("REIT") specializing in the operations, acquisition, ownership, management, and leasing of office properties.  The Company is self-administered, in that it provides its own investment and administrative services internally through its own employees.  The Company is also self-managed, as it internally provides the management and maintenance services that its properties require through its own employees, such as property managers and engineers and in some cases, leasing professionals.  The Company is geographically focused on the Southeastern and Southwestern United States and Chicago.  Parkway and its predecessors have been public companies engaged in the real estate business since 1971, and its present senior management has been with Parkway since the 1980's.  The management team has had experience managing a public real estate company through all phases of the real estate business cycle.  At March 1, 2003, Parkway owned or had an interest in 56 office properties located in eleven states with an aggregate of approximately 9.9 million square feet of leasable space.

       Parkway evaluates each individual asset considering a number of factors such as current market rents, vacancy rates and capitalization rates.  As part of this strategy, since July 1995, the Company has (i) completed the acquisition of 63 office properties, encompassing 10.5 million net rentable square feet, for a total purchase price of $991 million; (ii) sold or is in the process of selling all of its non-core assets; (iii) sold 11 office properties, encompassing approximately 1.1 million net rentable square feet primarily in markets that posed increasing risks and redeployed these funds; (iv) sold two joint venture interests in two office properties encompassing 1.6 million net rentable square feet; and (v) implemented self-management and self-leasing at most of its properties to promote a focus on tenant retention and superior service in meeting the needs of its tenants.  Parkway defines total investment  in office properties 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.

       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 shares of common stock which resulted from a common stock private placement in June 1996 and certain business combination transactions in 1994 and 1995 caused the use of Parkway's NOLs to be significantly limited in any one year. The Company anticipated that its taxable income would increase 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 Internal Revenue 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.  The Company's taxable income increased from $8.9 million in 1997 to approximately $37 million in 2002 before utilization of NOLs.  At December 31, 2002, the Company had NOL carryforwards for federal income tax purposes of approximately $9.1 million and expects to utilize this remaining NOL by December 2007.  For each year from 1997 through 2002, distributions of taxable income in the form of dividends as required by the Internal Revenue Code were made.

Self-Management and Third Party Management

       The Company self-manages approximately 99.2% of its current portfolio on a net rentable square footage basis.  In addition, the Company implemented self-leasing for renewals and currently self-leases approximately 82.5% of its portfolio on a net rentable square footage basis.  For new tenant leasing, which is a small portion of our business, we fully 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 believes self-management results in better customer service, higher tenant retention and allows the Company to enhance stockholder value through the application of its hands-on operating style.  The Company believes that its focus on tenant retention will benefit the Company and its stockholders by maintaining a stabilized revenue stream and avoiding higher capital expenditures and leasing commissions associated with new leases.  In order to self-manage properties, the Company seeks to reach critical mass in terms of square footage. Critical mass varies from market to market and is generally defined by the Company as owning or managing a minimum of 250,000 square feet.  The Company is considering the sale of its properties that are not self-managed because the inability to self-manage these properties limits the Company's ability to apply its hands-on operating strategy. In addition to its owned properties, Parkway Realty currently manages and/or leases approximately 2.2 million net rentable square feet for third-party owners (including joint venture interests).  The Company also intends to expand its third party fee business.

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       In addition to direct real estate acquisitions, Parkway's investment strategy includes the consummation of business combination transactions with other public real estate and financial companies which Parkway deems to be undervalued.  In evaluating a company to determine if it is undervalued, Parkway traditionally looks at the value the public market is placing on its assets versus what value the private market would pay for those same assets. Our preference is for office companies or those with a strong office component.  We then pursue these acquisitions by acquiring common stock, which is typically listed on one of the major national stock exchanges.  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. 

Joint Ventures

       Parkway intends to form joint ventures or partnerships with select investors.  During 2000, the Company formed a venture partnership with a division of Investcorp International, Inc. ("Investcorp") for the purposes of acquiring approximately $100 million in Central Business District (downtown) assets in the Southeastern and Southwestern United States and Chicago.  Under the terms of the joint venture agreement, Parkway will operate, manage, and lease the properties on a day-to-day basis, provide acquisition and construction management services to the joint venture, and receive fees for providing these services.  The joint venture will arrange first mortgage financing which will approximate 70% of the value of each office asset purchased.  This debt will be non-recourse, property specific debt.  Investcorp will provide 70 to 75% of the joint venture capital with Parkway to provide the balance, with distributions being made pro rata. 

       During 2002, Parkway entered into a joint venture agreement with respect to the 233 North Michigan building in  Chicago.  On May 30, 2002, Parkway sold a 70% interest in its investment in Parkway 233 North Michigan LLC, a subsidiary limited liability company that owns the 233 North Michigan Avenue building, to an affiliate of 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.  The Company recorded a loss on the sale of the 70% interest of $269,000.

Recent Developments

       Effective January 6, 2003, the Company entered into an interest rate swap agreement with a notional amount of $50 million which fixed 30-day LIBOR at 1.545%.  The agreement, which matures December 31, 2003, effectively fixes the interest rate at 2.92% on $50 million of variable rate borrowing.

       On February 11, 2003, Parkway purchased the Citrus Center, a 258,000 square foot office building in Orlando, Florida, for $32,000,000 plus $2,590,000 in closing costs and anticipated first year capital expenditures.  The purchase was funded by the assumption of an existing first mortgage on the building of $19,695,000 and $12,305,000 in cash, which represents the investment of the remaining proceeds from the 233 North Michigan joint venture with Investcorp, which was completed in May 2002.  The non-recourse mortgage with Legg Mason Real Estate Services, Inc. has a fixed interest rate of 7.91% and matures August 1, 2007.

       On March 6, 2003, Parkway sold a 70% interest in the Viad Corporate Center in Phoenix, Arizona to Investcorp (the "Viad Joint Venture") for a price of $42 million.  Parkway continues to provide management and leasing services for the building.  In connection with the sale, Parkway will recognize an acquisition fee of $175,000 in the first quarter of 2003.  The estimated gain on this transaction is approximately $900,000.

       Simultaneous with the sale, the Viad Joint Venture closed a $42.5 million mortgage with Bear Stearns.  The non-recourse first mortgage is interest-only for a term of two years with three one-year extension options.  Interest due under the mortgage will be floating rate, which at the time of closing was approximately 4.26%.  Parkway received net cash proceeds from this transaction of approximately $54 million and will use the proceeds to purchase new properties and to reduce short-term borrowings under the Company's lines of credit.  The joint venture will be accounted for using the equity method of accounting, and the Company's pro rata share of debt from the joint venture will be included in the calculation of the ratio of debt to total market capitalization.

Business Objectives and Strategy of the Company

Overview

       Parkway's business objective is to maximize total return to stockholders over time primarily through increases in dividends and share price appreciation.  During 2002, Parkway distributed $2.56 per share in dividends to common stockholders, representing a 4.5% increase over the 2001 dividends distributed of $2.45 per common share.  Distributions in 2002 of $2.56 per share represent a payout of 55.2% of the Company's funds from operations ("FFO") for the year.  The Company increased its dividend in 2002 in order to distribute all of its REIT taxable income.  To maintain qualification as a REIT, the Company must distribute to stockholders at least 90% of taxable income, excluding net capital gains.

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       Parkway's operating philosophy is based on the premise that we are in the customer retention business.  Parkway retains its customers by continually focusing on operations at its office properties.  We believe in providing superior customer service; hiring, training, retaining and empowering each employee; creating an environment of open communication both internally and with our stockholders; and simplicity.  We will strive to maximize our stockholders returns by setting, implementing and achieving goals, which increase profitability, dividends and stock price, while managing risks.  The Company seeks investments where our operational expertise can add value through direct management, a hands-on, service oriented operating philosophy and innovation.  The Company will invest directly in properties in the form of equity ownership.  In some instances the Company may take a minority interest in the ownership structure, such as a joint venture format, but will maintain control of the operations, as we believe this is where real estate value is created.  These investments may additionally include acquiring equity positions in private or publicly-traded real estate companies.

Strategic Plans

       For many 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 benefited Parkway's stockholders through increased FFO and dividend payments per share.  In 1998, Parkway adopted a strategic plan that set as its goal to increase Parkway's FFO per basic share without the issuance of new equity.  The review, accountability and reward of the plan aligned management and stockholder interests.  The goal of the strategic plan was to increase Parkway's FFO per basic share to $5.00 (before expense accruals for restricted share grants tied to its accomplishment) in 50 months (i.e., the end of 2002); hence the plan was referred to as the "5 in 50 Plan."  In 2000, the benchmark was raised to the new basic FFO per share of $5.23, a 5% increase over the previously disclosed goal of $5.00 due to the inadvertent benefit of the issuance of convertible preferred stock in 2001.  The plan set goals, assigned responsibility for the attainment of such goals to specific Parkway officers, and provided for follow-up evaluations to determine whether the officers responsible for the attainment of each goal were moving toward success. The major goals included realizing the embedded rental rate growth in Parkway's existing portfolio of office properties, investing $50 million per year (for a total of $200 million) at a positive spread of 250 basis points over the long-term cost of debt, selling Parkway's non-earning assets and re-deploying the proceeds in higher yielding assets, increasing the overall occupancy of Parkway's office portfolio, and taking numerous other actions to generate additional cash flow from Parkway's properties.  December 31, 2002 marked the end of the 5 in 50 Plan, and the Company was pleased to announce the accomplishment of the plan.  The Company's actual FFO per basic share before the amortization of incentive compensation in 2002 was $5.35, which is $.12 or 2.3% greater than the stated goal of $5.23 per basic share.

       Effective January 1, 2003, the Company adopted a new, three-year strategic plan referred to as VALUE² (Value Square).  This plan reflects the employees' commitment to create value for its shareholders while holding firm to the core values as espoused in the Parkway Commitment to Excellence.  The Company plans to create value by Venturing with best partners, Asset recycling, Leverage neutral growth, Uncompromising focus on operations and providing an Equity return to its shareholders that is 10% greater than that of its peer group, the National Association of Real Estate Investment Trusts ("NAREIT") office index.  Equity return is defined as growth in FFO per diluted share.

Operating Properties

       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 and Southwestern United States and Chicago, ranging in size from 100,000 to 1,000,000 net rentable square feet and which have current and projected occupancy levels in excess of 70% and adequate parking to accommodate full occupancy.  Office properties are designated Class A, A- or B+ based on a combination of factors including rent, building finishes, system standards and efficiency, building amenities, location/accessibility and market perception.  Class A properties represent the most prestigious buildings competing for premier office users with rents above average for the area.  These buildings generally have high quality standard finishes, state of the art systems, exceptional accessibility and a definite market presence.  Class B office buildings compete for a wide range of users with rents in the average range for the area.  Building finishes are fair to good for the area and systems are adequate, but the building does not compete with Class A at the same price.  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's focus on new property acquisitions will be on higher barrier-to-entry sub-markets in both central business districts and suburban markets.  Parkway strives to purchase office buildings at minimum initial unleveraged annual yields on its total investment of 9.5% for urban assets.  The Company defines initial unleveraged yield as net operating income ("NOI") divided by total investment (as previously defined), where NOI 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 20% below estimated replacement cost and whose current rental rates are at or below market rental rates.  

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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, 2002, the Company has acquired six office properties with approximately 1.3 million net rentable square feet for a total purchase price of $130 million, or approximately $100 per net rentable square foot.  The properties purchased are located in the central business district and suburban market in Phoenix, the suburban market in Houston and the central business district in Orlando.  Consistent with the qualification requirements of a REIT, the Company intends to hold and operate its portfolio of office buildings for investment purposes, but may determine to sell properties that no longer meet its investment criteria.

Real Estate Equity Securities

       In addition to investing in office properties, Parkway seeks to purchase common stock of other REITs that meet certain criteria.  This program is referred to as the REIT Significant Value Program or "RSVP".  The Company views the purchase of publicly-traded real estate equity securities to be an alternative to "fee simple" transactions for purchasing quality assets at attractive prices.  The existence of a sustainable dividend provides a yield on the investment while the Company positions itself for direct involvement.

       The general criteria for purchase includes strategic fit with Parkway with a preference to office, mixed office/industrial, diversified or special  situations with office, the ability for Parkway's direct involvement to add value to the REIT,  discounts to net asset value (NAV) generally 20% or greater,  sustainable dividend yields of 8% or greater, acceptable debt levels as measured by interest and fixed charge coverage ratios  and accretive investment economics.  All REITs in which Parkway makes an investment will be approved by the Parkway Board of Directors.  Although we currently have no investments, we will continue to pursue opportunities in the public market in accordance with the RSVP plan as conditions warrant.

Stock Repurchase Plan

       The Company has been engaged in the purchase of its outstanding common stock since June 1998.  Given the fluctuations in price of the Company's public equity without a corresponding change in valuation of the underlying real estate assets, the Company believes a well-executed repurchase program can add significant stockholder value.  During 2002, the Company repurchased 14,100 shares of its common stock at an average cost of $30.08 per share.  Since June 1998, the Company has purchased a total of 2,141,593 shares of its common stock, which represents approximately 19.3% of the Company stock outstanding when the buyback program was initiated on June 30, 1998.  The Company has the authority to purchase an additional 485,900 shares under its existing authorization from its Board of Directors.  When considering repurchasing shares, the Company evaluates the following items:  impact on the Company's VALUE² Plan, discount to net asset value; implied capitalization rate; implied value per square foot; impact on liquidity of common stock; and other investment alternatives that are available with a similar risk profile (capital allocation).

Management Team

       Parkway's management team consists of experienced office property specialists with proven capabilities in office property (i) operations; (ii) leasing; (iii) management; (iv) acquisition/disposition; (v) financing; (vi) capital allocation; and (vii) re-positioning.  The management team also has considerable experience in evaluating and completing mergers and/or acquisitions of other REITs.  Since 1979, the Company has completed eight such business combinations.  The Company believes these capabilities will allow Parkway to continue to create office property value in all phases of the real estate cycle.  These capabilities are enhanced by the fee based real estate services provided through Parkway's wholly owned subsidiary, Parkway Realty Services.  Parkway will continue its initiative to increase Parkway Realty Services through the acquisition of brokerage companies and through joint ventures.  Parkway's ten senior officers have an average of over 20 years of real estate industry experience, and have worked together at Parkway for an average of over 14 years.  Management has developed a highly service-oriented operating culture and believes that its focus on operations, proactive leasing, property management and asset management activities will result in higher tenant retention and occupancy and will continue to translate into enhanced stockholder value.

Financing Strategy

       The Company expects to continue seeking fixed rate, non-recourse mortgage financing at terms ranging from ten to thirty 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 50% although such ratio may from time to time temporarily exceed 50%, especially when the Company has incurred significant amounts of short-term debt in connection with acquisitions.  In addition, volatility in the price of the Company's common stock may result in a debt to total market capitalization ratio exceeding 50% from time to time.  The Company monitors interest and fixed charge coverage ratios.  See Item 7.  "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition."  Parkway has no present plans to issue senior securities.  Should the opportunity present itself, Parkway has the ability to issue modest amounts of common stock periodically through its dividend reinvestment plan.

 

       Parkway may, in appropriate circumstances, acquire one or more properties in exchange for Parkway's equity securities.  Parkway may provide financing  in connection with sales of property if market conditions so

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require, but it does not presently intend to make other loans.  Parkway has no set policy as to the amount or percentage of its assets which may be invested in any specific property.  Rather than a specific policy, Parkway evaluates each property in terms of  whether and to what extent the property meets Parkway's investment criteria and strategic objectives.  Parkway has no present intentions of underwriting securities of other issuers.  The strategies and policies set forth above were determined, and are subject to review by, Parkway's Board of Directors which may change such strategies or policies based upon their evaluation of the state of the real estate market, the performance of Parkway's assets, capital and credit market conditions, and other relevant factors.  Parkway provides annual reports to its stockholders that contain financial statements audited by Parkway's independent public accountants.

Dispositions

       Parkway has also pursued a strategy of liquidating its non-core 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 redeploying the proceeds. 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 and allocate capital judiciously.

       Since January 1, 1995, Parkway has sold non-core assets with a book value of approximately $45 million for approximately $68 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 $4.4 million as of December 31, 2002.

       Since January 1, 1998, the Company has sold 11 office properties, encompassing approximately 1.1 million net rentable square feet for net proceeds of $101 million, resulting in aggregate gains for financial reporting purposes of $13 million.  In 2002, the Company sold one office property in Indianapolis, Indiana, and in 2001, the Company sold one office property in Birmingham, Alabama.  The decision to sell these assets was based on the fact that they were suburban and were neither self-managed nor self-leased.  Currently, the Company is also considering the sale of its property in Greenville, South Carolina, primarily because the Company does not own sufficient office space in this market to justify self-management and self-leasing.  These investment decisions will be based upon the Company's analysis of existing markets and competing investment opportunities.

Administration

       The Company is self-administered and self-managed and maintains its principal executive offices in Jackson, Mississippi.  As of March 1, 2003, the Company had 220 employees.

       The operations of the Company are conducted from approximately 13,000 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.  Parkway's press releases, Securities and Exchange Commission filings, financial information and additional information about the Company are available on the Company's website at www.pky.com.

ITEM 2.  Properties.

General

       The Company operates and invests principally in office properties in the Southeastern and Southwestern United States and Chicago, but is not limited to any specific geographical region or property type.  As of March 1, 2003, the Company owned or had an interest in 56 office properties comprising approximately 9.9 million square feet of office space located in eleven states.

       In addition, the Company has an investment in the Toyota Center, formerly known as the Moore Building, which is a historic renovation adjacent to the Triple-A baseball stadium complex in downtown Memphis.  The Toyota Center was originally constructed in 1913 and consists of approximately 174,000 rentable square feet.  The Company constructed a multi-level, 770-space parking garage to accommodate the building and stadium parking needs.    This building is owned by Moore Building Associates LP (the "Partnership") and an institutional investor, Banc of America Historic Ventures, LLC ("BOA") with the Company's ownership interest being less than 1%.   At December 31, 2002, the note receivable from the Partnership totaled $5,996,000.

       Property acquisitions in 2002, 2001 and 2000 were funded through a variety of sources, including:

a.         Cash reserves and cash generated from operating activities,

b.         Sales of non-core assets,

c.         Sales of office properties,

d.         Sale of a joint venture interest,

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e.         Sales of investments in equity securities of other REITs,

f.          Fixed rate, non-recourse mortgage financing at terms ranging from 10 to 20 years,

g.         Assumption of existing fixed rate, non-recourse mortgages on properties purchased,

h.         Sales of Parkway preferred stock, and

i.          Advances on bank lines of credit.

Office Buildings

       Other than as discussed under "Item 1. Business", the Company intends to hold and operate its portfolio of office buildings for investment purposes.  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.  This is an area to which management has devoted a great deal of time and attention following the unfortunate events of September 11, 2001.

       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 the Company owned or had an interest in as of January 1, 2003:

 

(1)    Includes 53 office properties owned directly; a 32,000 square foot office property in which the Company owns a 50% interest located in New Orleans, Louisiana; and a 1,068,000 square foot office property in which the Company owns a 30% interest located in Chicago, Illinois.

(2)    Average rent per square foot is defined as the weighted average current gross rental rate including expense escalations for leased office space in the building as of January 1, 2003.

(3)    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)

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publicly available data with respect thereto.  Estimated average market rent is weighted by the net rentable square feet expiring in each property.

(4)    The percentage of leases expiring in 2003 represents the ratio of square feet under leases expiring in 2003 divided by total net rentable square feet.

       The following table sets forth scheduled lease expirations for properties owned as of January 1, 2003 for leases executed as of January 1, 2003, assuming no tenant exercises renewal options:

 

 

(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 expense 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.

       The Company has one non-recourse first mortgage note payable with a principal balance greater than 10% of its assets.  The lender is Teachers Insurance and Annuity Association of America ("TIAA Mortgage"), and the loan totals $78,051,000 at December 31, 2002.  The TIAA Mortgage is secured by 12 properties with a carrying amount of $157,620,000.  The TIAA Mortgage has a fixed interest rate of 6.945% and matures July 1, 2008 with payments based on a 15 year amortization.

       Other fixed-rate mortgage notes payable total $131,695,000 at December 31, 2002 and are secured by 13 properties in various markets with interest rates ranging from 7.00% to 8.375%.  Maturity dates on these mortgage notes payable range from July 2006 to October 2019 on 12 to 30 year amortizations.  See Note G to the consolidated financial statements.

       The majority of the Company's fixed rate secured debt contains prepayment provisions based on the greater of a yield maintenance penalty or 1.0% of the outstanding loan amount.  The yield maintenance penalty essentially compensates the lender for the difference between the fixed rate under the loan and the yield that the lender would receive if the lender reinvested the prepaid loan balance in U.S. Treasury Securities with a similar maturity as the loan.

 

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Customers

       The office properties are leased to approximately 1,054 customers, which are 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 25 largest customers of the properties owned directly or through joint ventures as of January 1, 2003 (in thousands, except square foot data):

 

 

(1)    Annualized Rental Revenue represents the gross rental rate (including escalations) per square foot as of January 1, 2003, multiplied by the number of square feet leased by the tenant.  Annualized rent for customers at 233 North Michigan is calculated based on our 30% ownership interest through our investments in joint ventures.  However, leased square feet represent 100% of our square feet leased through direct ownership or through joint ventures.

(2)    GSA leases 309,589 square feet and the leases expire as follows:

 

 

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(3)    Bank of America, NA leases 274,316 square feet in two properties under separate leases that expire as follows:  180,530 square feet in March 2012 at Bank of America Plaza in Nashville, TN and 93,786 square feet in June 2006 at Bank of America Tower in Columbia, SC.

(4)    South Carolina State Government Agencies lease 236,770 square feet and the leases expire as follows:

(5)    WorldCom, Inc. leases 184,445 square feet and the leases expire as follows:

 

 

         *WorldCom, Inc. currently occupies 13,000 square feet in One Jackson Place and is in negotiations with Parkway for a renewal.

(6)    Viad Corporation leases 159,299 square feet in the Viad Corporate Center under separate leases that expire as follows:  156,364 square feet in August 2011, 1,858 square feet in April 2005 and 1,077 square feet in February 2009.

(7)    Lynk Systems, Inc. leases 107,118 square feet in two properties under separate leases that expire as follows:  105,011 square feet in December 2009 in Falls Pointe and  2,107 square feet in January 2003 in Roswell North.

(8)    Boult, Cummings, Conners, & Berry, PLLC leases 98,813 square feet in the Bank of America Plaza under separate leases that expire as follows:  79,086 square feet in May 2009 and 19,727 square feet in May 2004.

(9)    Anthem Health Plans of Virginia, Inc. leases 69,111 square feet in two properties under separate leases that expire as follows:  37,584 square feet in December 2004 in Glen Forest and 31,527 square feet in June 2003 in Lynnwood Plaza.

(10)    Ernst & Young leases 47,393 square feet in four properties and the leases expire as follows:

 

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, pay down short-term debt and repurchase its own stock.  The Company defines non-core assets as all assets other than office and parking properties, which at December 31, 2002 consisted of land and mortgage loans. In accordance with this strategy, Parkway sold non-core assets with a book value of $550,000 for cash proceeds of $605,000 during 2001.  Aggregate gains for financial reporting purposes from sales of non-core assets during 2001 were $55,000.  Although there were no sales of non-core assets in 2002, the Company recorded  an impairment loss of $205,000 on an 11.856 acre parcel of land in New Orleans, Louisiana.  After recording the write down, the carrying value corresponds with the net realizable

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value of the land, based upon market research and comparable sales in the area.  The book value of all remaining non-office building real estate assets and mortgage loans, all of which are for sale, was $4,397,000 as of December 31, 2002.  Of this amount, $3,528,000 represents undeveloped land with a carrying cost of approximately $34,000 annually.

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.

       The Company's common stock ($.001 par value) is listed and trades on the New York Stock Exchange under the symbol "PKY".  The number of record holders of the Company's common stock at March 1, 2003, was approximately 2,887.

       As of March 7, 2003, the last reported sales price per common share on the New York Stock Exchange was $36.77.  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.

 

 

       Common stock distributions during 2002 and 2001 ($2.56 and $2.45 per share, respectively) were taxable as follows for federal income tax purposes:

 

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       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".  As of March 7, 2003, the last reported sales price per Series A preferred share on the New York Stock Exchange was $25.50.  The following table shows the high and low preferred share prices and per share distributions paid for each quarter of 2002 and 2001 reported by the New York Stock Exchange.

 

	Year Ended			Year Ended
	December 31, 2002			December 31, 2001
	-----------------------------------------			------------------------------------------
Quarter Ended	High	Low	Distributions	High	Low	Distributions
	-------------	---------	-----------------	-------------	------------	----------------
March 31.....................	$25.48	$24.65	$  .55	$23.25	$20.13	$  .55
June 30.........................	25.65	24.65	.55	25.10	23.00	.55
September 30...............	24.80	26.08	.55	25.20	23.95	.55
December 31.................	24.95	26.05	.54	25.25	24.40	.54
			------			------
			$2.19			$2.19
			====			====

       As of March 1, 2003, there were approximately 63 holders of record of the Company's 2,650,000 outstanding shares of Series A preferred stock.  Preferred stock distributions during 2002 and 2001 were taxable as follows for federal income tax purposes:

 

	Year Ended December 31
	------------------------
	2002	2001
	-----------	------------
Ordinary income...........................................................................................	$2.15	$2.19
Unrecaptured Section 1250 gain.............................................................................	.04	-
	------	------
	$2.19	$2.19
	====	====

      In 2001, the Company issued 2,142,857 shares of its Series B Cumulative Convertible Preferred Stock to Rothschild/Five Arrows for net proceeds of $73,006,000.  The funds were applied to the purchase of the 233 North Michigan Building and adjacent parking garage in Chicago, Illinois and were used to reduce amounts of debt outstanding on the Company's lines of credit.  The dividend payment rate on these shares is 8.34% and total dividends of $6,257,000 and $3,249,000 were declared on the stock in 2002 and 2001, respectively.  There is no public market for Parkway's Series B Cumulative Convertible Preferred Stock.  In connection with the sales of convertible preferred equity, Parkway issued a warrant to Five Arrows to purchase 75,000 shares of the Company's common stock at a price of $35 for a period of seven years.

Equity Compensation Plans

     The following table sets forth the securities authorized for issuance under Parkway's equity compensation plans as of December 31, 2002:

 

	(a)	(b)	(c)
			Number of securities
	Number of securities		remaining available for
	to		future issuance under
	be issued upon	Weighted-average	equity compensation
	exercise	exercise price of,	plans (excluding
	of outstanding options,	outstanding options,	securities reflected in
Plan category	warrants and rights	warrants and rights	column (a)
----------------------------	-------------------------	------------------------	-------------------------
Equity compensation plans		`
approved by security
holders..............