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 March 31, 2003 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
Registrant's web site www.pky.com

(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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] As of June 28, 2002, the last business day of the registrant's completed second fiscal quarter in 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was $315,989,000. 10,127,003 shares of Common Stock, $.001 par value, were outstanding as of May 8, 2003.

PARKWAY PROPERTIES, INC.

FORM 10-Q

TABLE OF CONTENTS
FOR THE QUARTER ENDED MARCH 31, 2003

Page

Part I. Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheets, March 31, 2003 and December 31, 2002		3

		Consolidated Statements of Income for the Three Months Ended
		March 31, 2003 and 2002		4

		Consolidated Statements of Stockholders' Equity for the Three Months Ended
		March 31, 2003 and 2002		5

		Consolidated Statements of Cash Flows for the Three Months Ended
		March 31, 2003 and 2002		6

		Notes to Consolidated Financial Statements		7

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		11

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		19

	Item 4.	Controls and Procedures		19


	Part II. Other Information


	Item 6.	Exhibits and Reports on Form 8-K		20


	Signatures


Authorized signatures			21


Certifications


Section 302 Certifications			22

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

	March 31 2003	December 31 2002
	(Unaudited)
Assets
Real estate related investments:
Office and parking properties	$ 786,086	$ 806,000
Accumulated depreciation	(104,550)	(99,449)
	681,536	706,551

Land available for sale	3,528	3,528
Note receivable from Moore Building Associates LP	5,996	5,996
Mortgage loans	867	869
Investment in unconsolidated joint ventures	20,368	15,640
	712,295	732,584

Interest, rents receivable and other assets	27,428	29,759
Cash and cash equivalents	2,158	1,594
Total assets	$ 741,881	$ 763,937

Liabilities
Notes payable to banks	$ 86,231	$ 141,970
Mortgage notes payable without recourse	228,196	209,746
Accounts payable and other liabilities	29,999	35,400
	344,426	387,116
Total liabilities

Stockholders' Equity
8.75% Series A Preferred stock, $.001 par value, 2,760,000 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, 64,697,143 shares authorized, 10,100,815 and 9,385,420 shares issued and outstanding in 2003 and 2002, respectively	10	9
Excess stock, $.001 par value, 30,000,000 shares authorized, no shares issued	-	-
Common stock held in trust, at cost, 128,000 shares in 2003	(4,321)	-
Additional paid-in capital	224,887	199,979
Accumulated other comprehensive loss	(118)	(170)
Retained earnings	35,747	35,753
Total stockholders' equity	397,455	376,821
Total liabilities and stockholders' equity	$741,881	$763,937

See notes to consolidated financial statements.

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

	Three Months Ended March 31
	2003	2002
	(Unaudited)
Revenues
Income from office and parking properties	$37,057	$40,592
Management company income	461	126
Interest on note receivable from Moore Building Associates LP	202	237
Incentive management fee from Moore Building Associates LP	68	60
Equity in earnings of unconsolidated joint ventures	431	16
Other income and deferred gains	206	49
	38,425	41,080
Expenses
Office and parking properties:
Operating expense	16,562	16,928
Interest expense:
Contractual	3,970	5,544
Prepayment expenses	-	18
Amortization of loan costs	57	83
Depreciation and amortization	7,354	6,972
Operating expense for other real estate properties	10	9
Interest expense on bank notes:
Contractual	1,029	1,479
Amortization of loan costs	177	112
Management company expenses	66	96
General and administrative	1,182	1,316
	30,407	32,557

Income before gain and minority interest	8,018	8,523

Gain on sale of joint venture interest	1,096	-
Minority interest - unit holders	(1)	-

Net income	9,113	8,523

Change in market value of interest rate swap	52	515

Comprehensive income	$ 9,165	$ 9,038

Net income available to common stockholders:
Net income	$ 9,113	$ 8,523
Dividends on preferred stock	(1,449)	(1,449)
Dividends on convertible preferred stock	(1,564)	(1,564)
Net income available to common stockholders	$ 6,100	$ 5,510

Net income per common share:
Basic	$ 0.65	$ 0.60
Diluted	$ 0.63	$ 0.59

Dividends per common share	$ 0.65	$ 0.63

Weighted average shares outstanding:
Basic	9,449	9,254
Diluted	9,610	9,401

See notes to consolidated financial statements.

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

	Three Months Ended March 31
	2003	2002
	(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		75,000
Balance at end of period	75,000		75,000

Common stock, $.001 par value
Balance at beginning of period	9		9
Shares issued - stock offering	1		-
Balance at end of period	10		9

Common stock held in trust
Balance at beginning of period	-		-
Shares contributed to deferred compensation plan	(4,321)		-
Balance at end of period	(4,321)		-

Additional paid-in capital
Balance at beginning of period	199,979		196,032
Stock options exercised	924		466
Shares issued - employee excellence recognition program	2		-
Shares issued - DRIP plan	80		-
Purchase of Company stock	(366)		-
Shares issued - stock offering	24,268		-
Balance at end of period	224,887		196,498

Unearned compensation
Balance at beginning of period	-		(2,190)
Amortization of unearned compensation	-		548
Balance at end of period	-		(1,642)

Accumulated other comprehensive income (loss)
Balance at beginning of period	(170)		(1,694)
Change in market value of interest rate swap	52		515
Balance at end of period	(118)		(1,179)

Retained earnings
Balance at beginning of period	35,753		42,174
Net income	9,113		8,523
Preferred stock dividends declared	(1,449)		(1,449)
Convertible preferred stock dividends declared	(1,564)		(1,564)
Common stock dividends declared	(6,106)		(5,838)
Balance at end of period	35,747		41,846

Total stockholders' equity	$397,455		$376,782

See notes to consolidated financial statements.

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

	Three Months Ended March 31
	2003	2002
	(Unaudited)
Operating activities
Net income	$ 9,113	$ 8,523
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization	7,354	6,972
Amortization of loan costs	234	195
Amortization of unearned compensation	-	548
Gain on sale of joint venture interest	(1,096)	-
Equity in earnings of unconsolidated joint ventures	(431)	(16)
Other	(3)	(3)
Changes in operating assets and liabilities:
Decrease in receivables and other assets	1,865	2,124
Decrease in accounts payable and accrued expenses	(10,053)	(7,099)
Cash provided by operating activities	6,983	11,244

Investing activities
Payments received on mortgage loans	2	2
Net decrease in note receivable from Moore Building Associates LP	-	116
Distributions from unconsolidated joint ventures	770	-
Investments in unconsolidated joint ventures	(272)	-
Purchases of real estate related investments	(12,700)	(57)
Proceeds from sale of joint venture interest	54,311	-
Real estate development	-	(230)
Improvements to real estate related investments	(5,926)	(5,033)
Cash provided by (used in) investing activities	36,185	(5,202)

Financing activities
Principal payments on mortgage notes payable	(2,705)	(4,347)
Net (payments on) proceeds from bank borrowings	(55,687)	6,370
Stock options exercised	924	466
Dividends paid on common stock	(6,106)	(5,732)
Dividends paid on preferred stock	(3,013)	(3,013)
Purchase of Company stock	(366)	-
Proceeds from DRIP plan	80	-
Proceeds from stock offerings	24,269	-
Cash used in financing activities	(42,604)	(6,256)

Change in cash and cash equivalents	564	(214)
Cash and cash equivalents at beginning of period	1,594	2,458

Cash and cash equivalents at end of period	$ 2,158	$ 2,244

See notes to consolidated financial statements.

Parkway Properties, Inc.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2003

(1) Basis of Presentation

The consolidated financial statements include the accounts of Parkway Properties, Inc. ("Parkway" or "the Company") and its majority 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 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 ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. The financial statements should be read in conjunction with the annual report and the notes thereto.

The balance sheet at December 31, 2002 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 2002 consolidated financial statements to conform to the 2003 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.

	Three Months Ended March 31
	2003	2002
	(in thousands)
Cash paid for interest	$ 4,957	$ 6,555
Income taxes paid	1	7
Mortgage assumed in purchase	19,665	-

(4) Acquisitions and Dispositions

On February 11, 2003, Parkway purchased the Citrus Center, a 258,000 square foot office building in Orlando, Florida. Parkway acquired the Citrus Center for $32 million plus $2.6 million in closing costs and anticipated first year capital expenditures and leasing commissions. The purchase was funded by the assumption of an existing first mortgage on the building of $19.7 million and with the remaining proceeds from the 233 North Michigan joint venture, which was completed in May 2002, of $12.3 million. The non-recourse first mortgage assumed on the purchase of the Citrus Center has a stated interest rate of 7.91% and matures August 1, 2007. The mortgage note payable has been recorded at $21,153,000 to reflect it at fair value based on Parkway's current incremental borrowing rate of 6.00%. The Citrus Center, which is located in the central business district, is a nineteen-story office building with 648 structured parking spaces and 32 surface parking spaces.

On March 6, 2003, Parkway sold a 70% interest in Viad Corporate Center ("Viad Joint Venture"), a 482,000 square foot office building in Phoenix, Arizona, to Investcorp International, Inc. ("Investcorp") for a total of $42 million. Parkway continues to provide management and leasing for the building on a day-to-day basis. In connection with the sale, Parkway recognized a $175,000 acquisition fee in accordance with the terms of the joint venture agreement signed in October 2000 with Investcorp. The Company recorded a gain on the sale of the 70% joint venture interest of $1.1 million.

Simultaneous with closing the Viad Joint Venture, the partnership that owns the property closed a $42.5 million mortgage on the building. The non-recourse first mortgage is interest-only for a term of two years with three one-year extension options. The mortgage bears interest at LIBOR plus 260 basis points. For $15.5 million of the loan, LIBOR can not be lower than 2.25%. At March 31, 2003, the interest rate on the mortgage was 4.27%. Parkway received net cash proceeds from the sale and the financing of $54.3 million. The proceeds were used to reduce amounts outstanding on the Company's lines of credit, pending reinvestment in new properties. The Viad Joint Venture

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549

FORM 10-Q

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

Accumulated other comprehensive income (loss)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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