| ** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

** **

_____________________________________________

** **

** **

**FORM 10-Q**

**                                                    Quarterly Report Pursuant to Section 13 or 15(d)**

**of the Securities Exchange Act of 1934  For Quarterly Period Ended September 30, 2006  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  o

 

        Indicate  by check mark whether the registrant is a large accelerated filer, an  accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of  the Exchange Act).

Large  accelerated filer  o      Accelerated filer  x        Non-accelerated filer  o

 

        Indicate  by check mark whether the registrant is a shell company (as defined in Rule  12b-2 of the Exchange Act).

Yes   o  No  x  

        14,879,879 shares of Common Stock, $.001 par value, were outstanding as  of  November 1, 2006.

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 1 of 41

**PARKWAY PROPERTIES, INC.FORM 10-QTABLE OF CONTENTSFOR THE QUARTER ENDED SEPTEMBER 30, 2006**

**Part I. Financial Information**

Item  1.

Financial  Statements 

**Page**

Consolidated  Balance Sheets, September 30, 2006 and December 31, 2005

3

Consolidated  Statements of Income for the Three Months and Nine Months Ended 

       September  30, 2006 and 2005

4

Consolidated  Statements of Stockholders' Equity for the Nine Months Ended

       September  30, 2006 and 2005

6

Consolidated  Statements of Cash Flows for the Nine Months Ended 

       September  30, 2006 and 2005

7

Notes  to Consolidated Financial Statements

8

Item  2.

Management's  Discussion and Analysis of Financial Condition and Results of Operations

24

Item  3. 

Quantitative  and Qualitative Disclosures about Market Risk

40

Item  4.

Controls  and Procedures

40

**Part II. Other Information**

Item  1A.

Risk  Factors

40

Item  2.

Unregistered  Sales of Equity Securities and Use of Proceeds

40

Item  6. 

Exhibits

40

**Signatures**

41

Authorized  signatures

 
 

Page 2 of 41

**PARKWAY PROPERTIES, INC.**

**CONSOLIDATED BALANCE SHEETS**

(In thousands, except share data)

** **

** **
   
** **
   
   
   
**September 30**
   
**December 31**
   
**2006**
   
**2005**
   
(Unaudited)
      
**Assets**
         
Real estate related  investments:
      

Office and parking  properties

$      1,415,654 
   
$          1,220,565 

Accumulated depreciation

(210,531)
   
(179,636)

1,205,123 
   
1,040,929 

   

Land available for sale

1,467 
   
1,467 

Investment in  unconsolidated joint ventures

11,126 
   
12,942 

1,217,716 
   
1,055,338 

   

Rents receivable and other  assets

96,195 
   
69,480 

Intangible assets, net

73,751 
   
60,161 

Cash and cash equivalents

5,168 
   
3,363 

** **

$      1,392,830 
   
$           1,188,342 

**Liabilities**

   

Notes payable to banks

$         176,167 
   
$              150,371 

Mortgage notes payable

654,143 
   
483,270 

Accounts payable and other  liabilities

71,402 
   
56,628 

Subsidiary redeemable  preferred membership interests

10,741 
   
10,741 

** **

912,453 
   
701,010 

**Minority Interest**

   

Minority Interest - unit  holders

37 
   
38 

Minority Interest - real  estate partnerships

16,012 
   
12,778 

16,049 
   
12,816 

**Stockholders' Equity**

   

8.34% Series B Cumulative  Convertible Preferred stock,

   

        $.001 par value,  2,142,857 shares authorized,

   

        270,000 and 803,499  shares issued and outstanding 

   

        in 2006 and 2005,  respectively

9,450 
   
28,122 

8.00% Series D Preferred  stock, $.001 par value, 2,400,000 

   

        shares authorized,  issued and outstanding

57,976 
   
57,976 

Common stock, $.001 par  value, 65,457,143 shares authorized,

   

        14,878,975 and  14,167,292 shares issued and outstanding 

   

        in 2006 and 2005,  respectively

15 
   
14 

Excess stock, $.001 par  value, 30,000,000 shares authorized,

   

        no shares issued

- 
   
- 

Common stock held in trust,  at cost, 115,000 and 124,000 

   

        shares in 2006 and  2005, respectively

(3,894)
   
(4,198)

Additional paid-in capital

409,279 
   
389,971 

Unearned compensation

- 
   
(3,101)

Accumulated other  comprehensive income 

832 
   
826 

Retained earnings (deficit)

(9,330)
   
4,906 

** **

464,328 

474,516 

** **

$      1,392,830 

$           1,188,342 

 

See notes to consolidated financial statements.
 
Page 3 of 41

**PARKWAY PROPERTIES, INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

(In thousands, except per share data)

** **

**Three Months Ended**

** **

**September 30**

** **

**2006**

**2005**

** **

(Unaudited)

**Revenues**

Income  from office and parking properties

$                       55,401 

$                       47,423 

Management  company income

284 

315 

        Total  revenues

55,685 

47,738 

** **

**Expenses**

Property  operating expense

26,917 

23,043 

Depreciation  and amortization

17,360 

11,583 

Operating  expense for other real estate properties

1 

2 

Management  company expenses

223 

121 

General  and administrative

1,282 

791 

        Total  expenses

45,783 

35,540 

**Operating  income**

9,902 

12,198 

**Other  income and expenses**

Interest  and other income

8 

5 

Equity  in earnings of unconsolidated joint ventures

198 

330 

Loss  on sale of real estate 

- 

(26)

Interest  expense

(12,565)

(8,805)

**Income  (loss) before minority interest and discontinued operations**

(2,457)

3,702 

Minority  interest - unit holders

(1)

- 

Minority  interest - real estate partnerships

225 

20 

** **

**Income  (loss) from continuing operations**

(2,233)

3,722 

**Discontinued  operations:**

Income  from discontinued operations

82 

597 

Gain  on sale of real estate from discontinued operations

211 

4,181 

** **

**Net  income (loss)**

(1,940)

8,500 

Change  in unrealized loss on equity securities

- 

60 

Change  in market value of interest rate swaps

(799)

469 

**Comprehensive  income (loss)**

$                       (2,739)

$                         9,029 

** **

**Net  income (loss) available to common stockholders:**

Net  income (loss)

$                       (1,940)

$                         8,500 

Dividends  on preferred stock

(1,200)

(1,200)

Dividends  on convertible preferred stock

(481)

(586)

**Net  income (loss) available to common stockholders**

$                       (3,621)

$                         6,714 

** **

**Net  income (loss) per common share:**

Basic:

        Income  (loss) from continuing operations

$                         (0.27)

$                           0.14 

        Discontinued  operations

0.02 

0.34 

        Net  income (loss)

$                         (0.25)

$                           0.48 

Diluted:

        Income  (loss) from continuing operations

$                         (0.27)

$                           0.14 

        Discontinued  operations

0.02 

0.33 

        Net  income (loss)

$                         (0.25)

$                           0.47 

** **

**Dividends  per common share**

$                         0.65 

$                           0.65 

** **

**Weighted  average shares outstanding:**

Basic

14,236 

14,116  

Diluted

14,236 

14,295  

 

See notes to consolidated financial statements.
 
Page 4 of 41

**PARKWAY PROPERTIES, INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

(In thousands, except per share data)

** **

**Nine Months Ended**

** **

**September 30**

** **

**2006**

**2005**

** **

(Unaudited)

**Revenues**

Income  from office and parking properties

$                     153,768 

$                     140,770 

Management  company income

5,082 

2,597 

        Total  revenues

158,850 

143,367 

** **

**Expenses**

Property  operating expense

74,031 

66,035 

Depreciation  and amortization

45,175 

37,115 

Operating  expense for other real estate properties

4 

4 

Management  company expenses

898 

478 

General  and administrative

3,405 

3,341 

        Total  expenses

123,513 

106,973 

**Operating  income**

35,337 

36,394 

**Other  income and expenses**

Interest  and other income

34 

246 

Equity  in earnings of unconsolidated joint ventures

524 

1,095 

Gain  on sale of joint venture interests, real estate and other assets

13,465 

965 

Interest  expense

(31,787)

(25,572)

**Income  before minority interest and discontinued operations**

17,573 

13,128 

Minority  interest - unit holders

(1)

(1)

Minority  interest - real estate partnerships

369 

(301)

** **

**Income  from continuing operations**

17,941 

12,826 

**Discontinued  operations:**

Income  from discontinued operations

808 

1,847 

Gain  on sale of real estate from discontinued operations

211 

4,181 

** **

**Net  income**

18,960 

18,854 

Change  in unrealized loss on equity securities

79 

7 

Change  in market value of interest rate swaps

(73)

859 

**Comprehensive  income**

$                       18,966 

$                       19,720 

** **

**Net  income available to common stockholders:**

Net  income

$                       18,960 

$                       18,854 

Dividends  on preferred stock

(3,600)

(3,600)

Dividends  on convertible preferred stock

(1,654)

(1,759)

**Net  income available to common stockholders**

$                      13,706 

$                      13,495 

** **

 20,900 

**Net  income per common share:**

Basic:

        Income  from continuing operations

$                           0.90 

$                           0.53 

        Discontinued  operations

0.07 

0.43 

        Net  income

$                           0.97 

$                           0.96 

Diluted:

        Income  from continuing operations

$                           0.89 

$                           0.53 

        Discontinued  operations

0.07 

0.42 

        Net  income

$                           0.96 

$                           0.95 

** **

**Dividends  per common share**

$                           1.95 

$                           1.95 

** **

**Weighted  average shares outstanding:**

Basic

14,108 

14,035 

Diluted

14,284 

14,216 

 

See notes to consolidated financial statements.
 
Page 5 of 41

**PARKWAY PROPERTIES, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY**

(In thousands)

** **

**Nine Months Ended**

**September 30**

**2006**

**2005**

(Unaudited)

** **

** **

**8.34% Series B Cumulative  Convertible**

         **Preferred stock,  $.001 par value**

        Balance at beginning  of period

$                         28,122 

$                         28,122 

                Conversion  of preferred stock to common stock

(18,672)

- 

        Balance at end of  period

9,450 

28,122 

** **

**8.00% Series D Preferred  stock, $.001 par value**

        Balance at beginning  of period

57,976 

57,976 

        Balance at end of  period

57,976 

57,976 

** **

**Common stock, $.001 par  value**

        Balance at beginning  of period

14 

12 

                Shares issued  - stock offering

- 

2 

                Share issued  - conversion of preferred stock to common stock

1 

- 

        Balance at end of  period

15 

14 

** **

**Common stock held in  trust**

        Balance at beginning  of period

(4,198)

(4,400)

                Shares  distributed from deferred compensation plan

304 

202 

        Balance at end of  period

(3,894)

(4,198)

** **

**Additional paid-in  capital**

        Balance at beginning  of period

389,971 

310,455 

                Stock  options exercised

5,659 

1,794 

                Conversion  of preferred stock to common stock

18,671 

- 

                Shares  issued in lieu of Directors' fees

170 

193 

                Restricted  shares forfeited

- 

(679)

                Deferred  incentive share units forfeited  

- 

(40)

                Shares  issued - DRIP plan

149 

1,361 

                Shares  issued - stock offering

- 

75,809 

                Employee  stock purchase plan

(10)

- 

                Share based  compensation expense

584 

- 

                Purchase of  Company stock

(2,814)

- 

                Reclassification  upon the adoption of SFAS No. 123R

(3,101)

- 

        Balance  at end of period

409,279 

388,893 

** **

**Unearned compensation**

        Balance at beginning  of period

(3,101)

(4,122)

                Restricted  shares forfeited

- 

679 

                Deferred  incentive share units forfeited

- 

40 

                Share based  compensation expense

- 

351 

                Reclassification  upon the adoption of SFAS No. 123R

3,101 

- 

        Balance at end of  period

- 

(3,052)

** **

**Accumulated other  comprehensive income (loss)**

        Balance at beginning  of period

826 

(226)

                Change in  unrealized gain on equity securities

79 

7 

                Change in  market value of interest rate swaps

(73)

859 

        Balance at end of  period

832 

640 

** **

**** |