UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington,D.C. 20549

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**FORM 10-K**

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                                                                                        T                      **ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008OR**

                                                                                        £                 **TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from           to          Commission file number 1-11533**

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**Parkway Properties, Inc.**

(Exact name of registrant as specifiedin its charter)

 

| **Maryland**                      | **74-2123597**      |
|-----------------------------------|---------------------|
| (State or other jurisdiction      | (I.R.S. Employer    |
| of incorporation or organization) | Identification No.) |

**One Jackson Place Suite 1000188 East Capitol StreetJackson, Mississippi 39201**(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 theAct: **Common Stock, $.001 Par Value8.00% Series D Cumulative Redeemable Preferred Stock $.001 Par ValueNew York Stock Exchange**Securities registered pursuant to Section 12(g) of the Act: **None**

        Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  

 £YesTNo

 

        Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of the Act.   

 £YesTNo

 

        Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90days.   T Yes £ No

 

        Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant's knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.   T

 

        Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer ora smaller reporting company.  See definition of “large accelerated filer” inRule 12b-2 of the Exchange Act.  (Check one):

 

                                                                                                Largeaccelerated filer        £                              Acceleratedfiler                       £

 

                                                                                                Non-acceleratedfiler         £                             Smaller reporting company     £

 

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

 £YesTNo

 

        The aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was last sold, or the average bid and askedprice of such common equity, at June 30, 2008 was $488.5 million.

The number of shares outstanding in the registrant's class of common stock at February27, 2009 was 15,373,396.

**DOCUMENTS INCORPORATED BY REFERENCE**

 

        Portions of the Registrant's Proxy Statementfor the 2009 Annual Meeting of Shareholders are incorporated by reference intoPart III.

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**PARKWAYPROPERTIES, INC.TABLE OF CONTENTS**

|                  |                                                                                            | **Page** |
|-----------------------|-------------------------------------------------------------------------------------------------|----------|
|                  |                                                                                            |     |
| **PART I.**           |                                                                                            |     |
| Item 1.               | Business                                                                                        | 3        |
| Item 1A.              | Risk Factors                                                                                    | 8        |
| Item 1B.              | Unresolved Staff Comments                                                                       | 13       |
| Item 2.               | Properties                                                                                      | 13       |
| Item 3.               | Legal Proceedings                                                                               | 17       |
| Item 4.               | Submission of Matters to a Vote of Security Holders                                             | 17       |
|                  |                                                                                            |     |
| **PART II.**          |                                                                                            |     |
| Item 5.               | Market for Registrant's Common  Equity, Related Stockholder Matters and Issuer Purchases        |     |
|                  | of Equity Securities                                                                            | 17       |
| Item 6.               | Selected Financial Data                                                                         | 20       |
| Item 7.               | Management's Discussion and  Analysis of Financial Condition and Results of Operations          | 21       |
| Item 7A.              | Quantitative and Qualitative  Disclosures About Market Risk                                     | 44       |
| Item 8.               | Financial Statements and  Supplementary Data                                                    | 44       |
| Item 9.               | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure           | 86       |
| Item 9A.              | Controls and Procedures                                                                         | 86       |
| Item 9B.              | Other Information                                                                               | 89       |
|                  |                                                                                            |     |
| **PART III.**         |                                                                                            |     |
| Item 10.              | Directors, Executive Officers and  Corporate Governance                                         | 89       |
| Item 11.              | Executive Compensation                                                                          | 89       |
| Item 12.              | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters | 89       |
| Item 13.              | Certain Relationships and  Related Transactions, and Director Independence                      | 90       |
| Item 14               | Principal Accounting Fees and  Services                                                         | 90       |
|                  |                                                                                            |     |
| **PART IV.**          |                                                                                            |     |
| Item 15.              | Exhibits and Financial  Statement Schedules                                                     | 90       |
|                  |                                                                                            |     |
| **SIGNATURES**        |                                                                                            |
| Authorized Signatures | 93                                                                                              |

 

 

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**PART I**

**ITEM 1.  *Business*.**

*****Overview*

       Parkway Properties, Inc. is a realestate investment trust ("REIT") specializing in the operation,leasing, acquisition and ownership of office properties.  The Company performsthese services for its own account and for other institutional investorsthrough co-ownership structures such as discretionary funds and/orpartnerships.  The terms “we,” “us,” “our,” “Parkway,” or the “Company” referto Parkway Properties, Inc. individually or together with its subsidiaries.    TheCompany is geographically focused on the Southeastern and Southwestern UnitedStates and Chicago.  Parkway and its predecessors have been public companiesengaged in the real estate business since 1971, and the management team has hadexperience managing a public real estate company through all phases of the realestate business cycle.  As part of its strategy, the Company places an emphasison property operations and customer satisfaction with an ultimate goal ofachieving a high level of customer retention.    The Company isself-administered, in that it provides its own investment and administrativeservices internally through its own employees.  The Company is also self-managed,as it internally provides the management, maintenance and other real estateservices that its properties require through its own employees, such asproperty managers and engineers and in some cases, leasing professionals.  Inaddition Parkway is self-leased for renewal leases for the majority of itsoffice property portfolio.

 

       AtJanuary 1, 2009, Parkway owned or had an interest in 67 office propertieslocated in 11 states with an aggregate of approximately 13.5 million squarefeet of leasable space.  Included in the portfolio are one discretionary fundand several partnership arrangements which encompass 21 properties totaling 3.8million square feet, representing 28% of the portfolio.  With the discretionaryfund and/or partnerships, the Company receives fees for asset management,property management, leasing and construction management services andpotentially receives incentive fees upon sale if certain investment targets areachieved.  Increasing the number of co-investments, and consequently the relatedfee income, is part of the Company’s strategy to transform itself to anoperator-owner versus an owner-operator.   The strategy highlights theCompany’s strength in providing excellent service in the operation andacquisition of office properties for investment clients in addition to itsdirect ownership of real estate assets. Fee-based real estate services areoffered through the Company’s wholly-owned subsidiary, Parkway Realty ServicesLLC, which also manages and/or leases approximately 1.8 million square feet forthird-party owners at January 1, 2009.

 

*Strategic Planning*

 

       Parkwayis a focused office REIT with a hands-on, service-oriented approach, adisciplined capital allocation program and a willingness to recycle assets. However, we see the future transformation taking Parkway from being anowner-operator to being an operator-owner.  On January 1, 2006, the Companyinitiated a three-year operating plan referred to as the “GEAR UP” Plan, whichwas completed on December 31, 2008.  The plan served as the spring board totransform Parkway from being first an owner of real estate and secondarily anoperator of real estate for others to being first an operator of real estatefor others that also owns an interest in the real estate.  Parkway achieved theGEAR UP Plan financial goal of $7.18 cumulative adjusted funds available fordistribution per diluted share for the three year period.  The goals of theGEAR UP Plan and related accomplishments are discussed below:

 
    -  ***Great     People***.  Great customer service starts with hiring great people,     training them well and retaining them.  It took great people to accomplish     the ambitious goals of the GEAR UP Plan.  Parkway retained and recruited     great people through expansion of the intern program, boot camp program     and parachute program.  These programs are used to train our people on the     culture of the Company and its uncompromising focus on operations so that     they are familiar with all disciplines of the Company.

 
    -  ***Equity     Opportunities. ***Over the last several years management has created     a broad array of equity opportunities for Parkway.  On the private equity     side this includes the use of  discretionary funds, such as the funds with     Ohio Public Employees Retirement System (“Ohio PERS Fund I”) and Teacher     Retirement System of Texas (“Texas Teachers Fund II”), and partnerships.      The judicious use of private equity provides a greater return on equity to     the public shareholders.  On the public equity side, this includes the     judicious use of common equity and preferred equity to manage the balance     sheet and growth.  Parkway accomplished the following ***Equity     Opportunities*** goals during 2006 through 2008:

 

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    *Fund II Formation. *On      May 14, 2008, Parkway entered into Texas Teachers Fund II, a $750.0      million discretionary fund with the Teacher Retirement System of Texas      (“TRS”) for the purpose of acquiring office properties.  TRS is a 70%      investor and Parkway is a 30% investor.

 
    *Equity Offering. *On      December 18, 2006, the Company sold 600,000 shares of common stock to      Banc of America Securities LLC at a gross offering price of $50.25 per      share and a net price of $49.37 per share. The Company used the net      proceeds of approximately $29.6 million to repay indebtedness outstanding      under a $19.3 million mezzanine loan incurred in connection with the      purchase of One Illinois Center and to fund our equity contributions for      Ohio PERS Fund I investments.

 
    -  ***Asset Recycling***.     The Company has demonstrated its willingness in the past to sell assets     when management believed the time was right.  At the start of the GEAR UP     Plan, Parkway identified 25 buildings in 12 markets, totaling     approximately 5.0 million rentable square feet to be part of the asset     recycling program.  Most of these properties were smaller assets or     located in smaller markets that do not fit with the Company’s strategy of     owning larger assets in institutional markets.  The dispositions that were     planned would help align the Company’s portfolio with its current     acquisition criteria, which focuses on larger properties in institutional     markets.  This was a fluid list of assets based on the Company’s     evaluation of specific market conditions and review of the portfolio.  The     other side of Asset Recycling is the reinvestment of proceeds from     dispositions into other assets, either owned in the fee-simple format or     owned jointly with a partner.  Parkway accomplished the following ***Asset     Recycling*** goals during 2006 through 2008:

 

o   *Dispositions. * Parkway sold 13 office properties for agross sales proceeds of $240.1 million and recorded a total gain on the salesfor financial reporting purposes in the amount of $65.7 million.  Subsequent toDecember 31, 2008, Parkway sold one asset for a gross sales price of $7.8million and has another asset under contract for a gross sales price of $7.7million with $125,000 in non-refundable earnest money.  The Company plans tocontinue the work started during the GEAR UP Plan and complete many of thenon-strategic asset sales outlined previously, subject to market conditions.

 

o   *Fund I Acquisitions*.  Parkway completed the investment forthe Ohio PERS Fund I.  During 2006 through 2008, 11 office properties werepurchased at an aggregate contract purchase price of $465.9 million, which iscomprised of investments by the fund totaling $444.3 million plus an additionalinvestment by Parkway of $21.6 million.

* *

o   *Fee Simple Purchases.*  In July 2006, Parkway purchased OneIllinois Center in Chicago, Illinois at a contract purchase price of $198.0million.

* *

o   *Other Purchases.*  Parkway purchased an additional interestin Moore Building Associates, LP, which owns the Toyota Center in Memphis, Tennessee, for $1.4 million raising Parkway’s total ownership interest to 75.025%.

 

o   *Office Property Development. *The Pinnacle at JacksonPlace in Jackson, Mississippi, opened on December 8, 2008, at a total cost ofapproximately $50.4 million, which includes the cost of the adjacent parkingfacility.  The completion of the Company’s only development project consists ofan 189,000 net rentable square foot Class-A office building and a 1,734 spaceparking facility that is leased from the City of Jackson for a period of 90years.  

 

       Thesetwo goals, ***Equity Opportunities***and***Asset Recycling****,*are what combine to transform Parkway from being an owner-operator to being anoperator-owner.  Management believes that these actions will result in Parkwaybetter leveraging its core strength of operating office properties and will beadvantageous for the Company’s shareholders over the long term. So whether weare in an economy characterized by growth or recession, purchasing assets witha good partner and leveraging our operating expertise through earning recurringfees allows us to increase our core portfolio in larger and more institutionalmarkets and increase our earnings potential from the services provided.

 

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    -  ***Retain Customers. ***Customer     retention remains the cornerstone of the Company’s business.  We believe     that our focus on the customer is why partners choose to partner with     Parkway.  The goal was a customer retention rate of 70% to 75%.  The     average customer retention rate during the GEAR UP Plan was 71.9%.

 
    -  ***Uncompromising Focus on     Operations. ***Parkway reaffirmed its commitment to do that which it     does best, and that is to operate office properties for maximum returns.  During     the GEAR UP Plan, Parkway increased occupancy from 88.9% at January 1,     2006 to 90.1% at January 1, 2009.  Additionally, embedded rent growth     increased from a negative $0.74 per square foot at January 1, 2006 to a     positive $1.11 per square foot at January 1, 2009.  Parkway currently	expects embedded rent growth per square foot to decrease in 2009.

*** ***
    -  ***Performance. ***In     the planning process, management first decided what actions to take     strategically over the three years of the GEAR UP Plan and secondly,     modeled the economic impact of these actions.  Given the large component     of Asset Recycling in the Plan, management selected a financial metric     that would be most appropriate to measure the success of the Plan.   This     led to the adoption of Cumulative Adjusted Funds Available for     Distribution (“Cumulative Adjusted FAD”) as the metric for the GEAR UP     Plan, with a target of $7.18 per share cumulative over three years.      Parkway achieved an actual Cumulative Adjusted FAD for the plan of $7.20     per diluted share.

 

*Discretionary Funds andPartnerships*

* *

        Parkway intends tocontinue raising discretionary funds and forming partnerships with selectinvestors.  Under the terms of these funds and partnerships, where applicable, Parkwaywill manage all phases of the investment cycle including acquisition,financing, operations, leasing and dispositions.   The Company will receivefees for providing these services.  At December 31, 2008, Parkway had twodiscretionary funds and five partnership agreements of this nature.

 

        On July 6, 2005, Parkway,through affiliated entities, entered into a limited partnership agreementforming Ohio PERS Fund I, a $500.0 million discretionary fund with Ohio PERS,for the purpose of acquiring high-quality multi-tenant office properties.  OhioPERS is a 75% investor and Parkway is a 25% investor in the fund, which is capitalizedwith approximately $200.0 million of equity capital and $300.0 million ofnon-recourse, fixed-rate first mortgage debt.  At February 15, 2008, the OhioPERS Fund I was fully invested. 

       The Ohio PERS Fund I targetedproperties with a leveraged internal rate of return of greater than 11%. Parkway serves as the general partner of the fund and provides assetmanagement, property management, leasing and construction management servicesto the fund, for which it is paid market-based fees.  After each partner hasreceived a 10% annual cumulative preferred return and a return of invested capital,20% of the excess cash flow will be paid to the general partner and 80% will bepaid to the limited partners.    Through its general partner and limitedpartner ownership interests, Parkway may receive a distribution of the cashflow equivalent to 40%.   The term of the Ohio PERS Fund I will be seven years untilFebruary 2015, with provisions to extend the term for two additional one-yearperiods. 

 

        On May 14, 2008, Parkway,through affiliated entities, entered into a limited partnership agreement formingTexas Teachers Fund II, a $750.0 million discretionary fund with the TRS, forthe purpose of acquiring high-quality multi-tenant office properties.  TRS is a70% investor and Parkway is a 30% investor in the fund, which will becapitalized with approximately $375.0 million of equity capital and $375.0million of non-recourse, fixed-rate first mortgage debt.  Parkway’s share ofthe equity contribution for the fund will be $112.5 million and will be fundedwith proceeds from asset sales, line of credit advances and/or sales of equity securities. The Texas Teachers Fund II targets acquisitions in the core markets of Houston,Austin, San Antonio, Chicago, Atlanta, Phoenix, Charlotte, Memphis, Nashville,Jacksonville, Orlando, Tampa/St. Petersburg,  and other growth markets to bedetermined by Parkway.

 

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        The Texas Teachers FundII targets properties with an anticipated leveraged internal rate of return ofgreater than 10%.  Parkway serves as the general partner of the fund andprovides asset management, property management, leasing and constructionmanagement services to the fund, for which it will be paid market-based fees. Cash will be distributed pro rata to each partner until a 9% annual cumulativepreferred return is received and invested capital is returned.  Thereafter, 56%will be distributed to TRS and 44% to Parkway.  Parkway has four years from theinception date of Texas Teachers Fund II to identify and acquire properties(the “Investment Period”), with funds contributed as needed to close acquisitions. Parkway will exclusively represent the fund in making acquisitions within thetarget markets and acquisitions with certain predefined criteria.  Parkway willnot be prohibited from making fee-simple or joint venture acquisitions inmarkets outside of the target markets, acquiring properties within the targetmarkets that do not meet Texas Teachers Fund II’s specific criteria or sellingor joint venturing currently owned properties.  The term of Texas Teachers FundII will be seven years from the expiration of the Investment Period, withprovisions to extend the term for two additional one-year periods at thediscretion of Parkway.

 

* Third-Party Management*

       The Company benefits from a fullyintegrated management infrastructure, provided by its wholly-owned managementsubsidiary, Parkway Realty Services LLC ("Parkway Realty").  Inaddition to the Company’s owned properties, Parkway Realty currently managesand/or leases approximately 5.7 million net rentable square feet forthird-party owners, joint venture interests and fund properties.  The Companyintends to expand its third-party fee business through funds or similarventures.

*Financing Strategy*

* *

        The Company expects tocontinue seeking fixed rate, non-recourse mortgage financing with maturitiesfrom five to ten years typically amortizing over 25 to 30 years on selectoffice building investments as additional capital is needed.  The Companymonitors the total debt to total asset value ratio as defined in the loanagreements for the $311.0 million unsecured line of credit.  In addition to thetotal debt to total asset value ratio, the Company monitors interest, fixedcharge and modified fixed charge coverage ratios.  Management believes thetotal debt to total asset value, interest coverage, fixed charge coverage andmodified fixed charge coverage ratios provide useful information on total debtlevels as well as the Company’s ability to cover interest, principal and/orpreferred dividend payments with current income.

 

        Parkway may, in appropriatecircumstances, acquire one or more properties in exchange for Parkway's equitysecurities.  Parkway has no set policy as to the amount or percentage of itsassets which may be invested in any specific property.  Rather than a specificpolicy, Parkway evaluates each property in terms of whether and to what extentthe 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 toreview by, Parkway's Board of Directors which may change such strategies orpolicies based upon their evaluation of the state of the real estate market,the performance of Parkway's assets, capital and credit market conditions, andother relevant factors.  

* *

*Capital Allocation*

 

        Capital allocationreceives constant review by management and the Board of Directors consideringmany factors including the capital markets, our weighted average cost ofcapital, buying criteria (written and published), the real estate market andmanagement of the risk associated with the rate of return.  We examine allaspects of each type of investment whether it is a fund asset, Parkway commonstock, a mortgage loan receivable or a fee simple purchase. Each carries arelationship to replacement cost which is still an important underwritingdiscipline for us. Each has a current yield and a leveraged and unleveragedinternal rate of return that can be measured on a relative and absolute basis. Currently, management views the funds and similar ventures as the highestpriority of our capital allocation because it produces the highest riskadjusted return as measured by internal rate of return and current cash return.  Other investment alternatives areavailable to us but with lesser return or slightly higher risk so we areprincipally focused on funds or similar ventures at the present time.  During2008, the REIT industry experienced significant volatility in capitalizationrates.  As a result, the Company continues to monitor its buying criteria andexercise discipline when making capital allocation decisions.

 

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*Industry Segments*

****       Parkway’s primary business is theoperation and ownership of office properties. The Company accounts for eachoffice property or groups of related office properties as an individualoperating segment.  Parkway has aggregated its individual operating segmentsinto a single reporting segment due to the fact that the individual operatingsegments have similar operating and economic characteristics.   

       The individual operating segmentsexhibit similar economic characteristics such as being leased by the squarefoot, sharing the same primary operating expenses and ancillary revenueopportunities and being cyclical in the economic performance based on currentsupply and demand conditions.  The individual operating segments are alsosimilar in that revenues are derived from the leasing of office space tocustomers and each office property is managed and operated consistently inaccordance with Parkway’s standard operating procedures.  The range and type ofcustomer uses of our properties is similar throughout our portfolio regardlessof location or class of building and the needs and priorities of our customersdo not vary from building to building.  Therefore, Parkway’s managementresponsibilities do not vary from location to location based on the size of thebuilding, geographic location or class.

*Management Team*

**       Parkway'smanagement team consists of experienced office property specialists with provencapabilities in office property (i) operations; (ii) leasing; (iii) management;(iv) acquisition/disposition; (v) financing; (vi) capital allocation; and (vii)accounting and financial reporting.  Parkway's 14 senior officers have anaverage of 22 years of real estate industry experience, and have workedtogether at Parkway for an average of 16 years.  Management has developed ahighly service-oriented operating culture and believes that its focus onoperations, proactive leasing, property management and asset managementactivities will result in higher customer retention and occupancy and willtranslate into enhanced stockholder value.

* Administration*       The Company is self-administeredand self-managed and maintains its principal executive offices in Jackson,Mississippi.  At December 31, 2008, the Company had 286 employees.  Theoperations of the Company are conducted from approximately 20,000 square feetof office space located at 188 East Capitol Street, One Jackson Place, Suite1000, Jackson, Mississippi.  The building is owned by Parkway and is leased by Parkwayat market rental rates.

*Available Information*

**       **Parkway makes available freeof charge on the “Investor Relations” page of its web site, www.pky.com, itsfiled and furnished reports on Form 10-K, 10-Q and 8-K and all amendments thereto,as soon as reasonably practicable after Parkway electronically files suchmaterial with, or furnishes it to, the Securities and Exchange Commission.

**       **The Company’s CorporateGovernance Guidelines, Code of Business Conduct and Ethics and the Charters ofthe Audit Committee, Nominating and Corporate Governance Committee andCompensation Committee of the Board of Directors are available on the “InvestorRelations” page of Parkway’s web site.  Copies of these documents are alsoavailable free of charge in print upon written request addressed to InvestorRelations, Parkway Properties, Inc., One Jackson Place Suite 1000, 188 EastCapitol Street, Jackson, Mississippi 39201.

 

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**ITEM 1A.  *RiskFactors.***

****       **In addition to the otherinformation contained or incorporated by reference in this document, readers shouldcarefully consider the following risk factors.  Any of these risks or theoccurrence of any one or more of the uncertainties described below could have amaterial adverse effect on the Company's financial condition and theperformance of its business.  The Company refers to itself as “we” or “our” inthe following risk factors.

* *

*Our performance is subject torisks inherent in owning real estate investments.*

** **

**       **Ourinvestments are generally made in office properties.  We are, therefore,generally subject to risks incidental to the ownership of real estate.  Theserisks include:

 
    -  changes in supply of or demand     for office properties or customers for such properties in an area in which     we own buildings;

 
    -  the ongoing need for capital     improvements;

 
    -  increased operating costs, which     may not necessarily be offset by increased rents, including insurance     premiums, utilities and real estate taxes, due to inflation and other     factors;

 
    -  changes in tax, real estate and     zoning laws;

 
    -  changes in governmental rules     and fiscal policies; and

 
    -  civil unrest, acts of war, acts     of God, including earthquakes, hurricanes and other natural disasters (which may     result in uninsured losses) and other factors beyond our control.

** **

**       **Shouldany of these events occur, our financial condition and our ability to makeexpected distributions to stockholders could be adversely affected.

 

*Theeconomic conditions of our primary markets affect our operations. *

**       **Substantiallyall of our properties are located in the Southeastern and Southwestern UnitedStates and Chicago and, therefore, our financial condition and ability to makedistributions to our stockholders is linked to economic conditions in thesemarkets as well as the market for office space generally in these markets.   Adownturn in these markets may adversely affect our cash flows and ability tomake distributions to stockholders.

*Customerdefaults could adversely affect our operations. *

**       **Substantiallyall of our revenues and income come from rental income from real property.  Assuch, our revenues and income could be adversely affected if a significantnumber of our customers defaulted under their lease obligations.  Our abilityto manage our assets is also subject to federal bankruptcy laws and state lawsthat limit creditors' rights and remedies available to real property owners tocollect delinquent rents.  If a customer becomes insolvent or bankrupt, wecannot be sure that we could recover the premises from the customer promptly orfrom a trustee or debtor-in-possession in any bankruptcy proceeding relating tothat customer.  We also cannot be sure that we would receive rent in theproceeding sufficient to cover our expenses with respect to the premises.  If acustomer becomes bankrupt, the federal bankruptcy code will apply and, in someinstances, may restrict the amount and recoverability of our claims against thecustomer.  A customer’s default on its obligations to us could adversely affectour financial condition and the cash we have available for distributions to ourstockholders.

*Illiquidityof real estate may limit our ability to vary our portfolio. *

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**       **Realestate investments are relatively illiquid.  Our ability to vary our portfolioby selling properties and buying new ones in response to changes in economicand other conditions may therefore be limited.  In addition, the InternalRevenue Code limits our ability to sell our properties by imposing a penaltytax of 100% on the gain derived from prohibited transactions, which are definedas sales of property held primarily for sale to customers in the ordinarycourse of a trade or business.  The frequency of sales and the holding periodof the property sold are two primary factors in determining whether theproperty sold fits within this definition.  These considerations may limit ouropportunities to sell our properties.  If we must sell an investment, we cannotassure you that we will be able to dispose of the investment in the time periodwe desire or that the sales price of the investment will recoup or exceed ourcost for the investment, or that the penalty tax would not be assessed.

*Ourcurrent and future joint venture investments could be adversely affected by thecapital markets, our lack of sole decision-making authority, our reliance onjoint venture partners' financial condition and any disputes that may arisebetween us and our joint venture partners.*

**       **Co-investingwith third parties through joint ventures is a part of our ongoing businessstrategy.  We may not be in a position to exercise sole decision-makingauthority regarding the properties owned through joint ventures.  Investmentsin joint ventures may, under certain circumstances, involve risks not presentwhen a third party is not involved, including reliance on our joint venturepartners and the possibility that joint venture partners might become bankruptor fail to fund their share of required capital contributions, thus exposing usto liabilities in excess of our share of the investment.  The funding ofParkway’s capital contributions may be dependent on proceeds from asset sales,line of credit advances and/or sales of equity securities.  In limited cases,such as gross neglect, the Company can be terminated as the provider of certainfee-based services. Joint venture partners may have business interests or goalsthat are inconsistent with our business interests or goals and may be in aposition to take actions contrary to our policies or objectives.  Any disputesthat may arise between us and joint venture partners may result in litigationor arbitration that would increase our expenses.

*We areexposed to potential environmental liability. *

**       **Undervarious federal, state, and local laws, ordinances and regulations, we may beconsidered an owner or operator of real property and may be responsible forpaying for the disposal or treatment of hazardous or toxic substances releasedon or in our property or disposed of by us, as well as certain other potentialcosts which could relate to hazardous or toxic substances (includinggovernmental fines and injuries to persons and property).  This liability maybe imposed whether or not we knew about, or were responsible for, the presenceof hazardous or toxic substances.

*Uninsuredand underinsured losses may adversely affect operations.*

**       **We,or in certain instances, customers of our properties, carry commercial generalliability, fire and extended coverage insurance with respect to ourproperties.  This coverage has policy specifications and insured limits that webelieve are customarily carried for similar properties.  We plan to obtainsimilar coverage for properties we acquire in the future.  However, certaintypes of losses, generally of a catastrophic nature, such as earthquakes andfloods, may be either uninsurable or not economically insurable.  Should aproperty sustain damage, we may incur losses due to insurance deductibles, to co-paymentson insured losses or to uninsured losses.  In the event of a substantialproperty loss, the insurance coverage may not be sufficient to pay the fullcurrent market value or current replacement cost of the property.   In theevent of an uninsured loss, we could lose some or all of our capitalinvestment, cash flow and anticipated profits related to one or moreproperties.  Inflation, changes in building codes and ordinances, environmentalconsiderations, and other factors also might make it not feasible to useinsurance proceeds to replace a property after it has been damaged ordestroyed.  Under such circumstances, the insurance proceeds we receive mightnot be adequate to restore our economic position with respect to suchproperty.  

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*We haveexisting debt and refinancing risks that could affect our cost of operations.*

**       **Wecurrently have both fixed and variable rate indebtedness and may incurindebtedness in the future, including borrowings under our credit facilities,to finance possible acquisitions and for general corporate purposes.  As aresult, we are and expect to be subject to the risks normally associated withdebt financing including:
    -  that     interest rates may rise;  
    -  that our     cash flow will be insufficient to make required payments of principal and     interest;
    -  that we     will be unable to refinance some or all of our debt;
    -  that any     refinancing will not be on terms as favorable as those of the existing     debt;  
    -  that     required payments on mortgages and on our other debt are not reduced if     the economic performance of any property declines;
    -  that debt     service obligations will reduce funds available for distribution to our     stockholders;  
    -  that any     default on our debt, due to noncompliance with financial covenants or	otherwise, could result in acceleration of those obligations; and
    -  that we     may be unable to refinance or repay the debt as it becomes due.

**       **Anincrease in interest rates would reduce our net income and funds fromoperations.  We may not be able to refinance or repay debt as it becomes duewhich may force us to refinance or to incur additional indebtedness at higherrates and additional cost or, in the extreme case, to sell assets or seekprotection from our creditors under applicable law.

*A lack ofany limitation on our debt could result in our becoming more highly leveraged. *

**       **Ourgoverning documents do not limit the amount of indebtedness we may incur. Accordingly, our Board of Directors may incur additional debt and would do so,for example, if it were necessary to maintain our status as a REIT.  We mightbecome more highly leveraged as a result, and our financial condition and cashavailable for distribution to stockholders might be negatively affected and therisk of default on our indebtedness could increase.

*The costand terms of mortgage financings may render the sale or financing of a propertydifficult or unattractive.*

        Thesale of a property subject to a mortgage may trigger pre-payment penalties,yield maintenance payments or make-whole payments to the lender, which wouldreduce the amount of gain or increase our loss on the sale of a property andcould make the sale of a property less likely.  Certain of our mortgages willhave significant outstanding principal balances on their maturity dates,commonly known as "balloon payments."  There is no assurance that wewill be able to refinance such balloon payments on the maturity of the loans,which may force disposition of properties on disadvantageous terms or requirereplacement with debt with higher interest rates, either of which would have anadverse impact on our financial performance and ability to pay distributions toinvestors.

*The recent market disruptionscould limit demand for our office properties and affect the overallavailability and cost of credit. *

 

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        The continuation orintensification of the turmoil in the global financial markets may have anadverse impact on the availability of credit to businesses generally and couldlead to a further weakening of the U. S. and global economies.  At this time,it is unclear whether and to what extent the actions taken or contemplated bythe U. S. government will mitigate the effects of the crisis.  With respect toParkway, currently these conditions have not impaired our ability to accesscredit markets and finance our operations.  However, the impact of the currentcrisis on our ability to obtain financing in the future, and the cost and termsof same, is unclear.  Furthermore, deteriorating economic conditions includingbusiness layoffs, downsizing, industry slowdowns and other similar factors thataffect our customers could negatively impact commercial real estatefundamentals and result in lower occupancy, lower rental rates and decliningvalues in our real estate portfolio.  Additionally, the economic situationcould have an impact on our lenders or customers, causing them to fail to meettheir obligations to us.  No assurances can be given that the effects of thecurrent crisis will not have a material adverse effect on our business,financial condition and results of operations.

* *

*We mayamend our investment strategy and business policies without your approval.*

**       **OurBoard of Directors determines our growth, investment, financing,capitalization, borrowing, REIT status, operating and distribution policies. Although the Board of Directors has no present intention to amend or revise anyof these policies, these policies may be amended or revised without notice to andapproval from stockholders.  Accordingly, stockholders may not have controlover changes in our policies. 

*Loss ofour tax status as a real estate investment trust would have significant adverseconsequences to us and the value of our securities.*

**       **Webelieve that we qualify for taxation as a REIT for federal income tax purposes,and we plan to operate so that we can continue to meet the requirements fortaxation as a REIT.  To qualify as a REIT we must satisfy numerous requirements(some on an annual and quarterly basis) established under the highly technicaland complex provisions of the Internal Revenue Code applicable to REITs, whichinclude:
    -  maintaining     ownership of specified minimum levels of real estate related assets;
    -  generating     specified minimum levels of real estate related income;
    -  maintaining     certain diversity of ownership requirements with respect to our shares;     and  
    -  distributing     at least 90% of our taxable income on an annual basis.  

Thedistribution requirement noted above could adversely affect our ability to useearnings for improvements or acquisitions because funds distributed tostockholders will not be available for capital improvements to existingproperties or for acquiring additional properties.

**       **Onlylimited judicial and administrative interpretations exist of the REIT rules. In addition, qualification as a REIT involves the determination of variousfactual matters and circumstances not entirely within our control.

**       **Ifwe fail to qualify as a REIT, we will be subject to federal income tax(including any applicable alternative minimum tax) on our taxable income atcorporate rates.  In addition, unless entitled to relief under certainstatutory provisions, we will be disqualified from treatment as a REIT for thefour taxable years following the year during which we failed to qualify.  Thistreatment would reduce net earnings available for investment or distribution tostockholders because of the additional tax liability for the year or yearsinvolved.  In addition, we would no longer be required to make distributions toour stockholders.  To the extent that distributions to stockholders had beenmade based on our qualifying as a REIT, we might be required to borrow funds orto liquidate certain of our investments to pay the applicable tax. 

**       **Asa REIT, we have been and will continue to be subject to certain federal, stateand local taxes on our income and property. 

*There isa risk of changes in the tax law applicable to real estate investment trusts*. 

**       **Sincethe Internal Revenue Service, the United States Treasury Department andCongress frequently review federal income tax legislation, we cannot predictwhether, when or to what extent new federal tax laws, regulations,interpretations or rulings will be adopted.  Any of such legislative action mayprospectively or retroactively modify our tax treatment and, therefore, mayadversely affect taxation of us and/or our investors.

Page 11 of 93

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*Limitationson the ownership of our common stock may preclude the acquisition or change of controlof our Company. *

**       **Certainprovisions contained in our charter and bylaws and certain provisions ofMaryland law may have the effect of discouraging a third party from making anacquisition proposal for us and may thereby inhibit a change of control. Provisions of our charter are designed to assist us in maintaining ourqualification as a REIT under the Code by preventing concentrated ownership ofour capital stock that might jeopardize REIT qualification.  Among otherthings, these provisions provide that, if a transfer of our stock or a changein our capital structure would result in (1) any person (as defined in thecharter) directly or indirectly acquiring beneficial ownership of more than9.8% (in value or in number, whichever is more restrictive) of our outstandingequity stock excluding Excess Stock, (2) our outstanding shares beingconstructively or beneficially owned by fewer than 100 persons, or (3) ourbeing "closely held" within the meaning of Section 856(h) of theCode, then:
    -  any     proposed transfer will be void from the beginning and we will not     recognize such transfer;
    -  we may     institute legal proceedings to enjoin such transfer;
    -  we will have     the right to redeem the shares proposed to be transferred; and  
    -  the shares     proposed to be transferred will be automatically converted into and     exchanged for shares of a separate class of stock, the Excess Stock.

**       **ExcessStock has no dividend or voting rights but holders of Excess Stock do havecertain rights in the event of our liquidation, dissolution or winding up.  Ourcharter provides that we will hold the Excess Stock as trustee for the personor persons to whom the shares are ultimately transferred, until the time thatthe shares are retransferred to a person or persons in whose hands the shareswould not be Excess Stock and certain price-related restrictions aresatisfied.  These provisions may have an anti-takeover effect by discouraging tenderoffers or purchases of large blocks of stock, thereby limiting the opportunityfor stockholders to receive a premium for their shares over then-prevailingmarket prices.  Under the terms of our charter, our Board of Directors has theauthority to waive these ownership restrictions.

**       **Furthermore,under our charter, the Board of Directors has the authority to classify andreclassify any of our unissued shares of capital stock into shares of capitalstock with such preferences, rights, powers and restrictions as the Board of Directorsmay determine. The authorization and issuance of a new class of capital stockcould have the effect of delaying or preventing someone from taking control ofus, even if a change in control were in our stockholders' best interests.

*Maryland business statutes may limit the ability of a third party to acquirecontrol of us.*

**       **Maryland law provides protection for Maryland corporations against unsolicited takeovers bylimiting, among other things, the duties of the directors in unsolicitedtakeover situations.  The duties of directors of Maryland corporations do notrequire them to (a) accept, recommend or respond to any proposal by a personseeking to acquire control of the corporation, (b) authorize the corporation toredeem any rights under, or modify or render inapplicable, any stockholdersrights plan, (c) make a determination under the Maryland Business CombinationAct, or (d) act or fail to act solely because of the effect of the act orfailure to act may have on an acquisition or potential acquisition of controlof the corporation or the amount or type of consideration that may be offeredor paid to the stockholders in an acquisition.  Moreover, under Maryland law the act of a director of a Maryland corporation relating to or affecting anacquisition or potential acquisition of control is not subject to any higherduty or greater scrutiny than is applied to any other act of a director.  Maryland law also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable standards of conduct for directors under Maryland law.

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**       **TheMaryland Business Combination Act provides that unless exempted, a Marylandcorporation may not engage in business combinations, including mergers,dispositions of 10 percent or more of its assets, certain issuances of sharesof stock and other specified transactions, with an "interestedstockholder" or an affiliate of an interested stockholder for five yearsafter the most recent date on which the interested stockholder became aninterested stockholder, and thereafter unless specified criteria are met.  Aninterested stockholder is generally a person owning or controlling, directly orindirectly, 10 percent or more of the voting power of the outstanding stock ofthe Maryland corporation.

**ITEM 1B.  *UnresolvedStaff Comments.***

******None.

**ITEM 2.  *Properties*.**

**General**

       The Company operates and investsprincipally in office properties in the Southeastern and Southwestern UnitedStates and Chicago, but is not limited to any specific geographical region orproperty type.  At January 1, 2009, the Company owned or had an interest in 67office properties comprising approximately 13.5 million square feet of officespace located in 11 states.

       Property acquisitions in 2008, 2007 and2006 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.         Saleof joint venture interests,

e.         Contributions from partners,

f.         Fixed rate, non-recourse mortgage financing with maturities rangingfrom five to ten years,

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

h.         Sales of Parkway common stock, and

i.          Advances on the Company’s line of credit.

** **

**Office Buildings**

       Other than as discussed under"Item 1. Business", the Company intends to hold and operate itsportfolio of office buildings for investment purposes.  The Company does notpropose any program for the renovation or improvement of any of the officebuildings, except as called for under the renewal of existing leases or thesigning of new leases or improvements necessary to upgrade recent acquisitionsto the Company's operating standards.  All such improvements are expected to befinanced by cash flow from the portfolio of office properties, advances on theCompany’s line of credit or contributions from partners.

        The Pinnacle development in Jackson, Mississippi, opened on December 8,2008, at an estimated total cost of approximately $50.4 million, which includesthe cost of the adjacent parking facility.  The completion of the Company’sonly development project consists of an 189,000 net rentable square footClass-A office building, which is currently 82% leased, and a 1,734 spaceparking facility that is leased from the City of Jackson for a period of 90years.  The property is secured by $29.5 million in combined debt at a weightedaverage interest rate of 5.2% per annum.  The mortgage debt has a statedmaturity of December 27, 2047, but it contains an early repayment optionwhereby the lender may call the debt in December 2014.  In the event the lenderexercises the early repayment option, the outstanding principal balance will bereduced by $3.0 million.

 

       Webelieve that our insurance coverage contains policy specifications and insuredlimits that are customary for similar properties, business activities andmarkets, and we believe our properties are adequately insured.  However, an uninsuredloss could result in loss of capital investment and anticipated profits. 

       All office building investmentscompete for customers with similar properties located within the same marketprimarily on the basis of location, rent charged, services provided and thedesign and condition of the improvements.  The Company also competes with otherREITs, financial institutions, pension funds, partnerships, individualinvestors and others when attempting to acquire office properties.

 

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       Thefollowing table sets forth certain information about office properties theCompany owned or had an interest in at January 1, 2009:

 

| ** **         | ** **        | ** **         | ** **    | ** **   | **Estimated** | ** **   | ** **   |
|--------------------|-------------------|--------------------|---------------|--------------|---------------|--------------|--------------|
| ** **         | ** **        | ** **         | ** **    | ** **   | **Average**   | **% of**     | ** **   |
| ** **         | **Number**        | **Total Net**      | **% of**      | **Average**  | **Market**    | **Leases**   | **%**        |
| ** **         | **of**            | **Rentable**       | **Total Net** | **Rent Per** | **Rent Per**  | **Expiring** | **Leased**   |
| ** **         | **Office**        | **Square Feet**    | **Rentable**  | **Square**   | **Square**    | **In**       | **at**       |
| **Location**       | **Properties(1)** | **(in thousands)** | **Feet**      | **Foot (2)** | **Foot (3)**  | **2009 (4)** | **1/1/2009** |
| Chicago, IL        | 4                 | 2,891              | 21.4%         | $29.94       | $30.28        | 13.2%        | 91.9%        |
| Houston, TX        | 14                | 2,301              | 17.0%         | 20.29        | 23.49         | 23.4%        | 97.0%        |
| Atlanta, GA        | 9                 | 1,782              | 13.2%         | 22.01        | 22.27         | 15.8%        | 91.7%        |
| Memphis, TN        | 6                 | 1,199              | 8.9%          | 21.00        | 21.63         | 5.0%         | 91.5%        |
| Jackson, MS        | 7                 | 1,109              | 8.2%          | 17.39        | 19.83         | 7.3%         | 89.0%        |
| Orlando, FL        | 5                 | 923                | 6.8%          | 23.07        | 23.01         | 10.9%        | 88.3%        |
| Phoenix, AZ        | 3                 | 686                | 5.0%          | 27.30        | 26.73         | 3.1%         | 83.2%        |
| Richmond, VA       | 6                 | 499                | 3.6%          | 17.68        | 17.07         | 13.0%        | 58.8%        |
| Jacksonville, FL   | 4                 | 482                | 3.6%          | 19.19        | 19.23         | 18.4%        | 92.0%        |
| Nashville, TN      | 1                 | 432                | 3.2%          | 15.99        | 19.25         | 2.3%         | 97.0%        |
| Columbia, SC       | 2                 | 407                | 3.0%          | 15.48        | 16.21         | 6.5%         | 86.2%        |
| Charlotte, NC      | 1                 | 326                | 2.4%          | 18.62        | 20.00         | 26.8%        | 94.4%        |
| Hampton Roads, VA  | 2                 | 254                | 1.9%          | 18.48        | 19.00         | 18.7%        | 87.4%        |
| Ft. Lauderdale, FL | 2                 | 216                | 1.6%          | 23.01        | 24.43         | 18.5%        | 64.6%        |
| Other Markets      | 1                 | 32                 | 0.2%          | 8.00         | 8.00          | 100.0%       | 100.0%       |
| ** **         | 67                | 13,539             | 100.0%        | $22.50       | $23.61        | 13.7%        | 90.1%        |

(1)    Includes 46 office properties owned directly and 21office properties owned through joint ventures.

 

(2)    Averagerent per square foot is defined as the weighted average current gross rentalrate including expense escalations for leased office space in the building atJanuary 1, 2009.

(3)    Estimated average gross market rent per square footis based upon information obtained from (i) the Company's own experience inleasing space at the properties; (ii) leasing agents in the relevant marketswith respect to quoted rental rates and completed leasing transactions for comparableproperties in the relevant markets; and (iii) publicly available data withrespect thereto.  Estimated average market rent is weighted by the net rentablesquare feet expiring in each property.

(4)    The percentage of leases expiring in 2009 representsthe ratio of square feet under leases expiring in 2009 divided by total netrentable square feet.

 

Page 14 of 93

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       Thefollowing table sets forth scheduled lease expirations for properties owned atJanuary 1, 2009 on leases executed at January 1, 2009, assuming no customerexercises renewal options:

 

| ** **     | ** ** | **Net**            |            | **Annualized**            | **Weighted**         | **Weighted Est**     |
|----------------|------------|--------------------|-----------------|---------------------------|----------------------|----------------------|
| ** **     | ** ** | **Rentable**       | **Percent of**  | **Rental**                | **Expiring Gross**   | **Avg Market**       |
| **Year of**    | **Number** | **Square Feet**    | **Total Net**   | **Amount**                | **Rental Rate  Per** | **Rent Per Net**     |
| **Lease**      | **of**     | **Expiring**       | **Rentable**    | **Expiring (1)**          | **Net Rentable**     | **Rentable**         |
| **Expiration** | **Leases** | **(in thousands)** | **Square Feet** | **(in thousands)**        | **Square Foot  (2)** | **Square Foot  (3)** |
| 2009           | 312        | 1,859              | 13.7%           |  $  41,532 | $22.34               | $  23.42             |
| 2010           | 283        | 1,409              | 10.4%           | 29,853                    | 21.18                | 21.72                |
| 2011           | 295        | 2,427              | 17.9%           | 57,614                    | 23.74                | 24.31                |
| 2012           | 176        | 1,558              | 11.5%           | 34,809                    | 22.35                | 23.03                |
| 2013           | 151        | 1,152              | 8.5%            | 25,475                    | 22.11                | 22.75                |
| 2014           | 70         | 1,117              | 8.3%            | 26,492                    | 23.72                | 24.65                |
| Thereafter     | 121        | 2,678              | 19.8%           | 58,709                    | 21.92                | 23.03                |
|           | 1,408      | 12,200             | 90.1%           | $274,484                  | $22.50               | $23.61               |

 

(1)    Annualizedrental amount expiring is defined as net rentable square feet expiringmultiplied by the weighted average expiring annual rental rate per net rentablesquare foot.

(2)    Weighted average expiring gross rental rate is theweighted current rental rate including escalations for operating expenses.

(3)    Estimated average market rent is based uponinformation obtained from (i) the Company’s own experience in leasing space atthe properties; (ii) leasing agents in the relevant markets with respect toquoted rental rates and completed leasing transactions for comparableproperties in the relevant markets; and (iii) publicly available data withrespect thereto.  Estimated average market rent is weighted by the new rentablesquare feet expiring in each property.

 

Page 15 of 93

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**Customers**

 

       Theoffice properties are leased to 1,408 customers, which are in a wide variety ofindustries including banking, insurance, professional services (includinglegal, accounting, and consulting), energy, financial services andtelecommunications.  Our largest customer and 25 largest customers accountedfor 4.7% and 40.9% respectively, of our annualized rental revenue.  Thefollowing table sets forth information concerning the 25 largest customers ofthe properties owned directly or through joint ventures at January 1, 2009 (inthousands):

 

|     |                                              |            |                             |                     |                                      |                     |                     |                     | **Leased**   | **Annualized**  |
|-----|----------------------------------------------|------------|-----------------------------|---------------------|--------------------------------------|---------------------|---------------------|---------------------|--------------|-----------------|
|     |                                              | **No. of** | **Square Footage Expiring** | **Square**          | **Rental**                           |
|     | **Customer**                                 | **Props.** | **2009**                    | **2010**            | **2011**                             | **2012**            | **2013**            | **Thereafter**      | **Feet (1)** | **Revenue (1)** |
|     |                                              |            |                             |                     |                                      |                     |                     |                     |              |                 |
|     | General Services Administration (GSA)        | 14         | 213                    | 69             | 25                              | 21             | 56             | 61             | 445     |  $         | 10,114  |
| (2) | Blue Cross Blue Shield of  Georgia, Inc.     | 1          | 20                     | -    | -                     | -    | -    | 252            | 272     | 6,979      |
| (3) | Health Care Service  Corporation             | 1          | -            | -    | -                     | 61             | -    | 202            | 263     | 6,434      |
|     | Cox Enterprises                              | 2          | -            | 19             | 193                             | -    | 90             | -    | 302     | 6,186      |
|     | Regions Financial  Corporation               | 2          | 2                      | 5              | 17                              | -    | 8              | 250            | 282     | 5,366      |
| (4) | U.S. Cellular Corporation                    | 1          | 4                      | -    | 175                             | -    | -    | -    | 179     | 5,170      |
|     | Young & Rubicam                          | 1          | 2                      | -    | 122                             | -    | -    | -    | 124     | 4,386      |
|     | Nabors Industries/Nabors  Corporate Services | 1          | -            | 205            | -                     | -    | -    | -    | 205     | 3,990      |
|     | Federal Home Loan Bank of  Chicago           | 1          | 3                      | -    | 113                             | -    | -    | -    | 116     | 3,588      |
|     | United Healthcare Services                   | 1          | -            | -    | -                     | 67             | -    | -    | 67      | 3,135      |
|     | Clear Channel Communications                 | 1          | -            | -    | -                     | -    | -    | 74             | 74      | 2,662      |
| (5) | Forman, Perry, Watkins,  Krutz & Tardy   | 2          | 10                     | -    | 158                             | -    | -    | -    | 168     | 2,571      |
|     | Schlumberger Technology                      | 1          | -            | -    | -                     | 155            | -    | -    | 155     | 2,561      |
|     | Bank of America, NA                          | 2          | -            | -    | -                     | 181            | -    | 12             | 193     | 2,505      |
|     | Honeywell                                    | 1          | -            | 112            | -                     | -    | -    | -    | 112     | 2,457      |
| (6) | DHL Airways                                  | 1          | -            | -    | 99                              | -    | -    | -    | 99      | 2,430      |
|     | Golin-Harris Communications,  Inc.           | 1          | -            | -    | -                     | 67             | -    | -    | 67      | 2,278      |
|     | Federal Express                              | 4          | 1                      | -    | 1                               | -    | -    | 90             | 92      | 2,172      |
|     | Career Builder                               | 1          | 70                     | -    | -                     | -    | -    | -    | 70      | 2,130      |
|     | Louisiana-Pacific  Corporation               | 1          | -            | -    | -                     | -    | -    | 105            | 105     | 2,054      |
|     | Extra Space Storage                          | 1          | -            | -    | -                     | -    | -    | 91             | 91      | 2,054      |
|     | CB Richard Ellis                             | 2          | -            | 41             | -                     | 11             | -    | -    | 52      | 2,031      |
|     | Stein Mart, Inc.                             | 1          | -            | -    | -                     | -    | -    | 107            | 107     | 1,994      |
|     | Motorola, Inc.                               | 1          | -            | -    | 68                              | -    | -    | -    | 68      | 1,917      |
|     | The Meridian Resource  Corporation           | 1          | -            | -    | 78                              | -    | -    | -    | 78      | 1,794      |
|     |                                              |            |                             |                     |                                      |                     |                     |                     |              |                 |
|     |                                              |            | 325                    | 451            | 1,049                           | 563            | 154            | 1,244          | 3,786   |  $         | 88,958  |
|     |                                              |            |                             |                     | Total Rentable Square  Footage (1)   | 13,539         |                     |
|     |                                              |            |                             |                     | Total Annualized Rental  Revenue (1) |  $             | 217,435        |                     |
|     |                                              |            |                             |                     |                                      |                     |                     |                     |              |                 |  |  |

 

| (1)    | Annualized  Rental Revenue represents the gross rental rate (including escalations) per  square foot at January 1, 2009, multiplied by the number of square feet  leased by the customer.  Annualized rent for customers in unconsolidated  joint ventures is calculated based on our ownership interest.  However,  leased square feet represents 100% of square feet leased through direct  ownership or through joint ventures. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (2)    | The  Blue Cross Blue Shield of Georgia, Inc. lease provides a cancellation option  in June 2012, which requires a 15-month notice.  Additionally, the customer  exercised a contraction option for 20,030 square feet effective June 30,  2009.                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (3)    | The  Health Care Service Corporation lease provides a cancellation option in March  2012, with a notice date in September 2010.                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (4)    | U.S.  Cellular Corporation has the option to cancel 3,161 square feet at anytime  with six months written notice.                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (5)    | The  Forman, Perry, Watkins, Krutz and Tardy lease provides certain cancellation  rights which began July 2007 and also has certain cancellation rights pending  changes in litigation legislation.  Additionally, the customer has exercised  its cancellation rights on 15,638 square feet effective February 2009.                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (6)    | DHL  Airways’ lease provides a cancellation option in November 2009, with nine  months written notice.  In February 2009, the customer exercised its  cancellation option on 98,649 square feet effective November 30, 2009.                                                                                                                                                                                                       |

Page 16 of 93

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Non-Core Assets

       Since January 1, 1996, Parkway haspursued a strategy of liquidating its non-core assets and using the proceedsfrom such sales to acquire office properties and pay down short-term debt.  TheCompany defines non-core assets as all assets other than office and parkingproperties, which at December 31, 2008 consisted of undeveloped land.  The bookvalue of the land was $750,000 at December 31, 2008 with a carrying cost of approximately$4,000 annually.  

 

        A non-cash impairmentloss of $717,000 was recorded during 2008 in connection with the valuation ofapproximately 12 acres of land available for sale in New Orleans, Louisiana. After recording the write down, the carrying value corresponds with the netrealizable value of the land based on market research and comparable sales inthe area.

** **

**ITEM 3.  *LegalProceedings.***

       The Company and its subsidiaries are,from time to time, parties to litigation arising from the ordinary course oftheir business.  Management of Parkway does not believe that any suchlitigation will materially affect the financial position or operations ofParkway.

 

**ITEM 4.  *Submissionof Matters to a Vote of Security Holders.***

       None.

** **

**PART II**

** **

**ITEM 5.  *Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities.***

       The Company’s common stock ($.001 parvalue) 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 January 1, 2009,was 2,456.

       At February 27, 2009, the lastreported sales price per common share on the New York Stock Exchange was $11.63. The following table sets forth, for the periods indicated, the high and lowlast reported sales prices per share of the Company’s common stock and the pershare cash distributions paid by Parkway during each quarter.

 

| ** **        | **Year Ended**        | ** ** | **Year Ended**        |
|-------------------|-----------------------|------------|-----------------------|
| ** **        | **December 31, 2008** | ** ** | **December 31, 2007** |
| **Quarter Ended** | **High**              | **Low**    | **Distributions**     | ** ** | **    High** | **Low** | **Distributions** |
| March 31          | $38.76                | $31.80     | $0.650                |   | $57.70 | $51.00 | $0.65 |
| June 30           | $40.60                | $33.72     | 0.650                 |   | $54.09 | $47.10 | 0.65 |
| September 30      | $41.89                | $31.47     | 0.650                 |   | $49.12 | $40.58 | 0.65 |
| December 31       | $37.82                | $11.10     | 0.325                 |   | $48.51 | $34.85 | 0.65 |
|              |                  |       | $2.275                |   |   |   | $2.60 |

       Common stock distributions during 2008and 2007 ($2.275 and $2.60 per share, respectively) were taxable as follows forfederal income tax purposes:

 

|                                       | **                     Year  Ended**  |
|--------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                 | **                     December  31** |
| ** **                                 | **2008**                                                                                                                                  | **2007** |
| Ordinary  income                           | $0.844                                                                                                                                    | $1.38 |
| Post May 5,  2003 capital gain             | 0.197                                                                                                                                     | 0.38 |
| Unrecaptured  Section 1250 gain            | 0.893                                                                                                                                     | 0.65 |
| Return of  capital                         | 0.341                                                                                                                                     | 0.19 |
|         | $2.275                                                                                                                                    | $2.60 |

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       Thefollowing table shows the high and low Series D preferred share prices and pershare distributions paid for each quarter of 2008 and 2007 reported by the NewYork Stock Exchange.

 

| ** **        | **Year  Ended**        | ** ** | **Year  Ended**        |
|-------------------|------------------------|------------|------------------------|
| ** **        | **December  31, 2008** | ** ** | **December  31, 2007** |
| **Quarter Ended** | **High**               | **Low**    | **Distributions**      | ** ** | **High** | **Low** | **Distributions** |
| March 31          | $24.95                 | $22.95     | $0.50                  |   | $26.60 | $25.36 | $0.50 |
| June 30           | $25.57                 | $23.52     | 0.50                   |   | 26.50 | 25.44 | 0.50 |
| September 30      | $25.01                 | $18.95     | 0.50                   |   | 25.40 | 23.65 | 0.50 |
| December 31       | $22.50                 | $12.00     | 0.50                   |   | 25.16 | 22.75 | 0.50 |
|              |                   |       | $2.00                  |   |   |   | $2.00 |

 

       AtJanuary 1, 2009, there were 5 holders of record of the Company's 2.4 millionoutstanding shares of Series D preferred stock.  Series D preferred stockdistributions during 2008 and 2007 were taxable as follows for federal incometax purposes:

 

|                            | **Year  Ended**

**December 31** |
|---------------------------------|----------------------------------|
|                            | **2008**                         | **2007** |
| Ordinary  income                | $1.16                            | $1.21 |
| Post  May 5, 2003 capital gain  | 0.15                             | 0.29 |
| Unrecaptured  Section 1250 gain | 0.69                             | 0.50 |
|                            | $2.00                            | $2.00 |

**Purchases of Equity Securities by the Issuer**

 

| ** **           | ** **            | ** **     | **Total Number**         | **Maximum Number**         |
|----------------------|-----------------------|----------------|--------------------------|----------------------------|
| ** **           | ** **            | ** **     | **of Shares  Purchased** | **of Shares that**         |
| ** **           | **Total Number**      | **Average**    | **as Part of  Publicly** | **May Yet Be**             |
| ** **           | **of Shares**         | **Price Paid** | **Announced Plans**      | **Purchased Under**        |
| **Period**           | **Purchased**         | **per Share**  | **or Programs**          | **the Plans or  Programs** |
|                 |                  |           |                     |                       |
| 10/01/08 to 10/31/08 | 447(1)                | $23.57         | -                        | -                          |
| 11/01/08 to 11/30/08 | -      | -              | -                        | -                          |
| 12/01/08 to 12/31/08 | -      | -              | -                        | -                          |
| Total                | 447    | $23.57         | -                        |                       |

                                                                   

(1)   As permitted under the Company's equity compensation plan, theseshares were withheld by the Company to satisfy tax withholding obligations foremployees in connection with the vesting of stock.  Shares withheld for taxwithholding obligations do not affect the total number of shares available forrepurchase under any approved common stock repurchase plan.  At December 31,2008, the Company did not have an authorized stock repurchase plan in place.

**Securities Authorized for Issuance Under Equity Compensation Plans**

      See Item 12 of this Annual Report on Form10-K, “Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters,” for certain information regarding the Company’sequity compensation plans.

 

Page 18 of 93

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**Performance Graph**

 

       Thefollowing graph provides a comparison of cumulative stockholder return for theperiod from December 31, 2003 through December 31, 2008 among Parkway, theStandard & Poor’s 500 Index (“S&P 500”) and the National Association ofReal Estate Investment Trusts (“NAREIT”) Equity REIT Total Return Index(“NAREIT Equity”).  The stock performance graph assumes an investment of $100in the shares of Parkway common stock and each index and the reinvestment ofany dividends.  The historical information set forth below is not necessarilyindicative of future performance.

 

       Theperformance graph and related information shall not be deemed “solicitingmaterial” or deemed to be “filed” with the SEC, nor shall such information beincorporated by reference into any future filing, except to the extent that theCompany specifically incorporates it by reference into such filing.  

 

|   |
|--------|

 
|               | **Years Ended  December 31** |
|---------------|------------------------------|
|               | **2003**                     | **2004** | **2005** | **2006** | **2007** | **2008** |
| Parkway       |  $ 100.00               |  $ 128.89 |  $ 107.81 |  $ 144.83 |  $ 111.13 |  $   58.29 |
| NAREIT Equity |  $ 100.00               |  $ 131.58 |  $ 147.58 |  $ 199.32 |  $ 168.05 |  $ 104.64 |
| S & P 500 |  $ 100.00               |  $ 110.87 |  $ 116.32 |  $ 134.68 |  $ 142.08 |  $   89.51 |

 

Page 19 of 93

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**ITEM6.  *Selected Financial Data.***

 

|                                                                                                                                                                      | **Year  Ended  12/31/08**             | **Year  Ended  12/31/07** | **Year  Ended  12/31/06** | **Year  Ended  12/31/05** | **Year  Ended  12/31/04** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------|---------------------------|---------------------------|---------------------------|---------------------------|
|                                                                                                                                                                      | (In thousands, except per share data) |
| **Operating  Data**:                                                                                                                                                      |                                  |                      |                      |                      |                      |
| Revenues                                                                                                                                                                  |                                  |                      |                      |                      |                      |
|      Income  from office and parking properties                                                                                                  |  $                               | 263,475              |  $                   | 233,304              |  $                   | 197,889  |  $ | 175,977  |  $ | 140,271  |
|      Management  company income                                                                                                                  | 1,936                            | 1,605                | 5,329                | 2,997                | 3,832                |
| Total revenues                                                                                                                                                            | 265,411                          | 234,909              | 203,218              | 178,974              | 144,103              |
| Expenses                                                                                                                                                                  |                                  |                      |                      |                      |                      |
|      Property  operating expenses                                                                                                                | 126,169                          | 107,990              | 93,089               | 82,375               | 64,435               |
|      Depreciation  and amortization                                                                                                              | 91,716                           | 74,379               | 61,607               | 48,255               | 33,016               |
|      Management  company expense                                                                                                                 | 1,947                            | 1,188                | 1,141                | 607                  | 359                  |
|      General  and administrative                                                                                                                 | 9,725                            | 6,602                | 4,656                | 4,473                | 4,486                |
| Total expenses                                                                                                                                                            | 229,557                          | 190,159              | 160,493              | 135,710              | 102,296              |
| Operating income                                                                                                                                                          | 35,854                           | 44,750               | 42,725               | 43,264               | 41,807               |
| Other income and expense                                                                                                                                                  |                                  |                      |                      |                      |                      |
|      Interest  and other income                                                                                                                  | 1,333                            | 528                  | 40                   | 255                  | 37                   |
|      Equity  in earnings of unconsolidated joint ventures                                                                                        | 894                              | 1,008                | 751                  | 1,496                | 1,697                |
|      Gain  (loss) on real estate, joint venture interests and other assets                                                                       | (2,542)                               | 20,307               | 17,646               | 1,039                | 4,309                |
|      Interest  expense                                                                                                                           | (59,426)                              | (52,546)                  | (43,044)                  | (33,824)                  | (24,167)                  |
| Income (loss) before minority  interest and discontinued operations                                                                                                       | (23,887)                              | 14,047               | 18,118               | 12,230               | 23,683               |
| Minority interest - unit holders                                                                                                                                          | (1)                                   | (2)                       | (1)                       | (2)                       | (2)                       |
| Minority interest - real estate  partnerships                                                                                                                             | 11,369                           | 3,174                | 485                  | (187)                     | 127                  |
| Income (loss) from continuing  operations                                                                                                                                 | (12,519)                              | 17,219               | 18,602               | 12,041               | 23,808               |
|      Income  (loss) from discontinued operations                                                                                                 | (795)                                 | 2,473                | 1,997                | 4,585                | 5,707                |
|      Gain  on sale of real estate from discontinued operations                                                                                   | 22,588                           | -                    | 5,083                | 4,181                | -                    |
| Total discontinued operations                                                                                                                                             | 21,793                           | 2,473                | 7,080                | 8,766                | 5,707                |
| Net income                                                                                                                                                                | 9,274                            | 19,692               | 25,682               | 20,807               | 29,515               |
| Change in market value of  interest rate swaps                                                                                                                            | (7,370)                               | (1,190)                   | (73)                      | 1,131                | (226)                     |
| Change in unrealized gain (loss)  on equity securities                                                                                                                    | -                                | 4                    | 75                   | (79)                      | -                    |
| Comprehensive income                                                                                                                                                      |  $                               | 1,904                |  $                   | 18,506               |  $                   | 25,684  |  $ | 21,859  |  $ | 29,289  |
|                                                                                                                                                                      |                                  |                      |                      |                      |                      |
| Net income available to common  stockholders:                                                                                                                             |                                  |                      |                      |                      |                      |
| Net Income                                                                                                                                                                |  $                               | 9,274                |  $                   | 19,692               |  $                   | 25,682  |  $ | 20,807  |  $ | 29,515  |
| Dividends on preferred stock                                                                                                                                              | (4,800)                               | (4,800)                   | (4,800)                   | (4,800)                   | (4,800)                   |
| Dividends on convertible  preferred stock                                                                                                                                 | -                                | -                    | (1,773)                   | (2,346)                   | (5,186)                   |
| Net  income available to common stockholders                                                                                                                              |  $                               | 4,474                |  $                   | 14,892               |  $                   | 19,109  |  $ | 13,661  |  $ | 19,529  |
|                                                                                                                                                                      |                                  |                      |                      |                      |                      |
| Net  income per common share:                                                                                                                                             |                                  |                      |                      |                      |                      |
|      Basic:                                                                                                                                      |                                  |                      |                      |                      |                      |
|      Income  (loss) from continuing operations                                                                                                   |  $                               | (1.15)                    |  $                   | 0.80                 |  $                   | 0.84  |  $ | 0.34  |  $ | 1.22  |
|      Discontinued  operations                                                                                                                    | 1.45                             | 0.16                 | 0.50                 | 0.63                 | 0.51                 |
|      Net  income                                                                                                                                 |  $                               | 0.30                 |  $                   | 0.96                 |  $                   | 1.34  |  $ | 0.97  |  $ | 1.73  |
|                                                                                                                                                                      |                                  |                      |                      |                      |                      |
|      Diluted:                                                                                                                                    |                                  |                      |                      |                      |                      |
| **     **Income (loss) from continuing operations                                                                                                |  $                               | (1.15)                    |  $                   | 0.79                 |  $                   | 0.83  |  $ | 0.34  |  $ | 1.20  |
|      Discontinued  operations                                                                                                                    | 1.45                             | 0.16                 | 0.49                 | 0.62                 | 0.50                 |
|      Net  income                                                                                                                                 |  $                               | 0.30                 |  $                   | 0.95                 |  $                   | 1.32  |  $ | 0.96  |  $ | 1.70  |
|                                                                                                                                                                      |                                  |                      |                      |                      |                      |
| Book value per common share (at  end of year)                                                                                                                             |  $                               | 22.83                |  $                   | 25.09                |  $                   | 27.42  |  $ | 27.42  |  $ | 26.44  |
| Dividends per common share                                                                                                                                                |  $                               | 2.275                |  $                   | 2.60                 |  $                   | 2.60  |  $ | 2.60  |  $ | 2.60  |
| Weighted average shares  outstanding:                                                                                                                                     |                                  |                      |                      |                      |                      |
|      Basic                                                                                                                                       | 15,023                           | 15,482               | 14,306               | 14,065               | 11,270               |
|      Diluted                                                                                                                                     | 15,023                           | 15,648               | 14,487               | 14,233               | 11,478               |
| **Balance Sheet Data**:                                                                                                                                                   |                                  |                      |                      |                      |                      |
| **     **Office and  parking investments, net of depreciation                                                                                    |  $                               | 1,455,239            |  $                   | 1,314,602            |  $                   | 1,303,213  |  $ | 1,040,929  |  $ | 820,807  |
| **     **Investment in  unconsolidated joint ventures                                                                                            | 11,057                           | 11,236               | 11,179               | 12,942               | 25,294               |
| **     **Total assets                                                                                                                            | 1,687,855                        | 1,535,794            | 1,512,346            | 1,188,342            | 931,188              |
|      Notes  payable to banks                                                                                                                     | 185,940                          | 212,349              | 152,312              | 150,371              | 104,618              |
|      Mortgage  notes payable                                                                                                                     | 869,581                          | 714,501              | 696,012              | 483,270              | 353,975              |
|      Total  liabilities                                                                                                                          | 1,154,383                        | 1,015,346            | 931,724              | 701,010              | 511,802              |
|      Preferred  stock                                                                                                                            | 57,976                           | 57,976               | 57,976               | 57,976               | 57,976               |
|      Convertible  preferred stock                                                                                                                | -                                | -                    | -                    | 28,122               | 28,122               |
|      Stockholders'  equity                                                                                                                       | 406,248                          | 439,908              | 490,306              | 474,516              | 415,648              |
|                                                                                                                                                                      |                                  |                      |                      |                      |                      |
| Certain  reclassifications have been made in the 2007, 2006, 2005 and 2004 operating  data as a result of office properties being classified as discontinued  operations. |

** **

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**ITEM 7.  *Management's Discussion andAnalysis of Financial Condition and Results of Operations.***

**Overview**

       Parkway is a self-administered andself-managed REIT specializing in the acquisition, operations, leasing andownership of office properties.  The Company is geographically focused on theSoutheastern and Southwestern United States and Chicago.  At January 1, 2009Parkway owned or had an interest in 67 office properties located in 11 stateswith an aggregate of approximately 13.5 million square feet of leasable space. Included in the portfolio are 21 properties totaling 3.8 million square feetthat are owned jointly with other investors, representing 28% of theportfolio.  Beginning with the Company’s GEAR UP Plan, which started January 1,2006 and ended December 31, 2008, it is the Company’s goal to transform itsstrategy from being an owner-operator to being an operator-owner.    TheCompany will continue executing on this strategy, which highlights theCompany’s strength in providing excellent service in the operation of officeproperties in addition to its direct ownership of real estate assets. Fee-basedreal estate services are offered through the Company’s wholly-owned subsidiary,Parkway Realty Services LLC, which also manages and/or leases approximately 1.8million square feet for third-party owners at January 1, 2009.  The Companygenerates revenue primarily by leasing office space to its customers andproviding management and leasing services to third-party office property owners(including joint venture interests).  The primary drivers behind Parkway’srevenues are occupancy, rental rates and customer retention.  

       *Occupancy.*  Parkway’s revenuesare dependent on the occupancy of its office buildings.  At January 1, 2009,occupancy of Parkway’s office portfolio was 90.1% compared to 90.4% at October1, 2008 and 92.0% at January 1, 2008.  Not included in the January 1, 2009occupancy rate are 16 signed leases totaling 93,000 square feet, which commenceduring the first and second quarters of 2009 and will raise Parkway’s percentageleased to 90.8%.  To combat rising vacancy, Parkway utilizes innovativeapproaches to produce new leases.  These include the Broker Bill of Rights, a short-formservice agreement and customer advocacy programs which are models in theindustry and have helped the Company maintain occupancy around 90% during atime when the national occupancy rate is approximately 85%.  Parkway currently projectsan average annual occupancy range of approximately 88.5% to 89.5% during 2009for its office properties.

* *

*        Rental Rates*.  Anincrease in vacancy rates has the effect of reducing market rental rates andvice versa.  Parkway’s leases typically have three to seven year terms.  Asleases expire, the Company replaces the existing leases with new leases at thecurrent market rental rate.  At January 1, 2009, Parkway had $1.11 per squarefoot in rental rate embedded growth in its office property leases.  Embedded growthis defined as the difference between the weighted average in place cash rentsand the weighted average market rental rate.  Parkway currently expectsembedded rent growth per square foot to decrease in 2009.   

  

       *CustomerRetention.*  Keeping existing customers is important as high customerretention leads to increased occupancy, less downtime between leases, andreduced leasing costs.  Parkway estimates that it costs five to six times moreto replace an existing customer with a new one than to retain the customer.  Inmaking this estimate, Parkway takes into account the sum of revenue lost duringdowntime on the space plus leasing costs, which rise as market vacanciesincrease.  Therefore, Parkway focuses a great deal of energy on customerretention.  Parkway's operating philosophy is based on the premise that it isin the customer retention business.  Parkway seeks to retain its customers bycontinually focusing on operations at its office properties.  The Companybelieves in providing superior customer service; hiring, training, retainingand empowering each employee; and creating an environment of open communicationboth internally and externally with customers and stockholders.  Over the past tenyears, Parkway maintained an average 72.5% customer retention rate.  Parkway’scustomer retention for the year ending December 31, 2008 was 70.7% compared to 72.0%for the year ending December 31, 2007.  

* *

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*Strategic Planning*

 

       Parkwayis a focused office REIT with a hands-on, service-oriented approach, adisciplined capital allocation program and a willingness to recycle assets. However, we see the future transformation taking Parkway from being anowner-operator to being an operator-owner.  On January 1, 2006, the Companyinitiated a three-year operating plan referred to as the “GEAR UP” Plan, whichwas completed on December 31, 2008.  The plan served as the spring board totransform Parkway from being first an owner of real estate and secondarily anoperator of real estate for others to being first an operator of real estatefor others that also owns an interest in the real estate.  Parkway achieved theGEAR UP Plan financial goal of $7.18 cumulative adjusted funds available fordistribution per diluted share for the three year period.  The goals of theGEAR UP Plan and related accomplishments are discussed below:

 
    -  ***Great     People***.  Great customer service starts with hiring great people,     training them well and retaining them.  It took great people to accomplish     the ambitious goals of the GEAR UP Plan.  Parkway retained and recruited     great people through expansion of the intern program, boot camp program     and parachute program.  These programs are used to train our people on the     culture of the Company and its uncompromising focus on operations so that     they are familiar with all disciplines of the Company.

 
    -  ***Equity     Opportunities. ***Over the last several years management has created     a broad array of equity opportunities for Parkway.  On the private equity     side this includes the use of discretionary funds, such as the Ohio PERS     Fund I and Texas Teachers Fund II, and partnerships.  The judicious use of     private equity provides a greater return on equity to the public     shareholders.  On the public equity side, this includes the judicious use     of common equity and preferred equity to manage the balance sheet and     growth.  Parkway accomplished the following ***Equity Opportunities***     goals during 2006 through 2008:

 
    *Fund II Formation. *On      May 14, 2008, Parkway entered into Texas Teachers Fund II, a $750.0      million discretionary fund with the TRS for the purpose of acquiring      office properties.  TRS is a 70% investor and Parkway is a 30% investor.

 
    *Equity Offering. *On      December 18, 2006, the Company sold 600,000 shares of common stock to      Banc of America Securities LLC at a gross offering price of $50.25 per      share and a net price of $49.37 per share. The Company used the net      proceeds of approximately $29.6 million to repay indebtedness outstanding      under a $19.3 million mezzanine loan incurred in connection with the      purchase of One Illinois Center and to fund our equity contributions for      Ohio PERS Fund I investments.

 
    -  ***Asset Recycling***.     The Company has demonstrated its willingness in the past to sell assets     when management believed the time was right.  At the start of the GEAR UP     Plan, Parkway identified 25 buildings in 12 markets, totaling     approximately 5.0 million rentable square feet to be part of the asset     recycling program.  Most of these properties were smaller assets or     located in smaller markets that do not fit with the Company’s strategy of     owning larger assets in institutional markets.  The dispositions that were     planned would help align the Company’s portfolio with its current acquisition     criteria, which focuses on larger properties in institutional markets.      This was a fluid list of assets based on the Company’s evaluation of     specific market conditions and review of the portfolio.  The other side of     Asset Recycling is the reinvestment of proceeds from dispositions into     other assets, either owned in the fee-simple format or owned jointly with     a partner.  Parkway accomplished the following ***Asset Recycling***     goals during 2006 through 2008:

 

o   *Dispositions. * Parkway sold 13 office properties for grosssales proceeds of $240.1 million and recorded a total gain on the sales forfinancial reporting purposes in the amount of $65.7 million.  Subsequent toDecember 31, 2008, Parkway sold one asset for a gross sales price of $7.8million and has another asset under contract for a gross sales price of $7.7million with $125,000 in non-refundable earnest money.  The Company plans tocontinue the work started during the GEAR UP Plan and complete many of thenon-strategic asset sales outlined previously, subject to market conditions.

 

Page 22 of 93

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o   *Fund I Acquisitions*.  Parkway completed the investment forthe Ohio PERS Fund I.  During 2006 through 2008, 11 office properties werepurchased at an aggregate contract purchase price of $465.9 million, which iscomprised of investments by the fund totaling $444.3 million plus an additionalinvestment by Parkway of $21.6 million.

* *

o   *Fee Simple Purchases.*  In July 2006, Parkway purchased OneIllinois Center in Chicago, Illinois at a contract purchase price of $198.0million.

* *

o   *Other Purchases.*  Parkway purchased an additional interestin Moore Building Associates, LP, which owns the Toyota Center in Memphis, Tennessee, for $1.4 million raising Parkway’s total ownership interest to 75.025%.

 

o   *Office Property Development. *The Pinnacle at JacksonPlace in Jackson, Mississippi, opened on December 8, 2008, at a total cost ofapproximately $50.4 million, which includes the cost of the adjacent parkingfacility.  The completion of the Company’s only development project consists ofan 189,000 net rentable square foot Class-A office building and a 1,734 spaceparking facility that is leased from the City of Jackson for a period of 90years.  

 

       Thesetwo goals, ***Equity Opportunities***and***Asset Recycling****,*are what combine to transform Parkway from being an owner-operator to being anoperator-owner.  Management believes that these actions will result in Parkwaybetter leveraging its core strength of operating office properties and will beadvantageous for the Company’s shareholders over the long term. So whether weare in an economy characterized by growth or recession, purchasing assets witha good partner and leveraging our operating expertise through earning recurringfees allows us to increase our core portfolio in larger and more institutionalmarkets and increase our earnings potential from the services provided.

 
    -  ***Retain Customers. ***Customer     retention remains the cornerstone of the Company’s business.  We believe     that our focus on the customer is why partners choose to partner with     Parkway.  The goal was a customer retention rate of 70% to 75%.  The     average customer retention rate during the GEAR UP Plan was 71.9%.

 
    -  ***Uncompromising Focus on     Operations. ***Parkway reaffirmed its commitment to do that which it     does best, and that is to operate office properties for maximum returns.  During     the GEAR UP Plan, Parkway increased occupancy from 88.9% at January 1,     2006 to 90.1% at January 1, 2009.  Additionally, embedded rent growth     increased from a negative $0.74 per square foot at January 1, 2006 to a     positive $1.11 per square foot at January 1, 2009.  Parkway currently	expects embedded rent growth per square foot to decrease in 2009.

*** ***
    -  ***Performance. ***In     the planning process, management first decided what actions to take     strategically over the three years of the GEAR UP Plan and secondly,     modeled the economic impact of these actions.  Given the large component     of Asset Recycling in the Plan, management selected a financial metric     that would be most appropriate to measure the success of the Plan.   This     led to the adoption of Cumulative Adjusted FAD as the metric for the GEAR     UP Plan, with a target of $7.18 per share cumulative over three years.      Parkway achieved an actual Cumulative Adjusted FAD for the plan of $7.20     per diluted share.

 

*DiscretionaryFunds.*  On July 6, 2005, Parkway, through affiliated entities, entered intoa limited partnership agreement forming Ohio PERS Fund I for the purpose ofacquiring high-quality multi-tenant office properties.  Ohio PERS is a 75%investor and Parkway is a 25% investor in the Fund, which is capitalized withapproximately $200.0 million of equity capital and $300.0 million ofnon-recourse, fixed-rate first mortgage debt.  At February 15, 2008, Ohio PERSFund I was fully invested.

 

       TheOhio PERS Fund I targeted properties with an anticipated leveraged internalrate of return of greater than 11%.  Parkway serves as the general partner ofthe fund and provides asset management, property management, leasing andconstruction management services to the fund, for which it is paid market-basedfees.  After each partner has received a 10% annual cumulative preferred returnand a return of invested capital, 20% of the excess cash flow will be paid tothe general partner and 80% will be paid to the limited partners.  Through itsgeneral partner and limited partner ownership interests, Parkway may receive adistribution of the cash flow equivalent to 40%.  The term of Ohio PERS Fund Iwill be seven years until February 2015, with provisions to extend the term fortwo additional one-year periods. 

** **

Page 23 of 93

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        On May 14, 2008, Parkway,through affiliated entities, entered into a limited partnership agreementforming a $750.0 million discretionary fund, known as Texas Teachers Fund IIwith the TRS for the purpose of acquiring high-quality multi-tenant officeproperties.  TRS is a 70% investor and Parkway is a 30% investor in the fund,which will be capitalized with approximately $375.0 million of equity capitaland $375.0 million of non-recourse, fixed-rate first mortgage debt.  Parkway’sshare of the equity contribution for the fund will be $112.5 million and willbe funded with proceeds from asset sales, line of credit advances and/or salesof equity securities.  The Texas Teachers Fund II targets acquisitions in thecore markets of Houston, Austin, San Antonio, Chicago, Atlanta, Phoenix,Charlotte, Memphis, Nashville, Jacksonville, Orlando, Tampa/St. Petersburg, and other growth markets to be determined by Parkway.

 

        The Texas Teachers FundII targets properties with an anticipated leveraged internal rate of return ofgreater than 10%.  Parkway serves as the general partner of the fund andprovides asset management, property management, leasing and constructionmanagement services to the fund, for which it will be paid market-based fees. Cash will be distributed pro rata to each partner until a 9% annual cumulativepreferred return is received and invested capital is returned.  Thereafter, 56%will be distributed to TRS and 44% to Parkway.  Parkway has four years from theinception date of Texas Teachers Fund II to identify and acquire properties(the “Investment Period”), with funds contributed as needed to closeacquisitions.  Parkway will exclusively represent the fund in makingacquisitions within the target markets and acquisitions with certain predefinedcriteria.  Parkway will not be prohibited from making fee-simple or jointventure acquisitions in markets outside of the target markets, acquiringproperties within the target markets that do not meet Texas Teachers Fund II’sspecific criteria or selling or joint venturing currently owned properties. The term of Texas Teachers Fund II will be seven years from the expiration ofthe Investment Period, with provisions to extend the term for two additionalone-year periods at the discretion of Parkway.

** **

**Financial Condition**

***Comments are for the balance sheet dated December 31, 2008 as compared tothe balance sheet dated December 31, 2007.***

       *Office and Parking Properties. * In2008, Parkway continued the execution of its strategy of operating andacquiring office properties, joint venturing interests in office assets, aswell as liquidating non-core assets and office assets that either no longermeet the Company's investment criteria or the Company has determined value willbe maximized by selling.  During the year ended December 31, 2008, total assetsincreased $152.1 million or 9.9% and office and parking properties and realestate development (before depreciation) increased $171.8 million or 11.0%.

**Purchases, Improvements and Development**

       Parkway's investment in consolidated officeand parking properties increased $140.6 million net of depreciation, to acarrying amount of $1.5 billion at December 31, 2008 and consisted of 61 officeand parking properties.  The primary reason for the increase in office andparking properties relates to the net effect of the purchase of three officeproperties, building improvements, development costs, the sale of three officeproperties, and depreciation recorded during the year.

 

        For the year ended December31, 2008, the Company incurred $30.3 million in development costs for theconstruction of The Pinnacle at Jackson Place, which is a 189,000 net rentable squarefoot Class-A office building adjacent to the Company’s headquarters building inJackson, Mississippi.  The Pinnacle at Jackson Place was completed on December 8,2008, is currently 82% leased, and was the Company’s only development project.

 

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       Duringthe year ending December 31, 2008, the Ohio PERS Fund I purchased three officeproperties as follows (in thousands):

 

| ** **                   | ** **                     | ** **         | **Parkway** | **Square**    | **Date**  | **Purchase**        |
|------------------------------|--------------------------------|--------------------|-------------|---------------|-----------|---------------------|
| **Office Property**          | **Location**                   | **Ownership**      | **Feet**    | **Purchased** | **Price** |
|                         |                           |               |        |          |      |
| Ohio  PERS Fund I Purchases: |                           |               |        |          |      |
|                         | Gateway  Center                | Orlando,  Florida  | 25.0%       | 228           | 01/18/08  | $  55,000 |
|                         | Desert  Ridge Corporate Center | Phoenix,  Arizona  | 26.5%       | 293           | 01/31/08  | 81,600              |
|                         | Citicorp  Plaza                | Chicago,  Illinois | 40.0%       | 600           | 02/15/08  | 100,000             |
|                         |                           |               |        | 1,121         |      | $236,600            |

 

       Duringthe year ending December 31, 2008, the Company capitalized buildingimprovements and additional acquisition costs of $30.5 million and recordeddepreciation expense of $67.3 million related to its office and parkingproperties.

 

**Dispositions**

** **

       Duringthe year ending December 31, 2008, Parkway sold three office properties asfollows (in thousands):

 

| ** **          | ** **         | ** **                | **Square** | **Date**        | **Gross**           | ** **                     |
|---------------------|--------------------|---------------------------|------------|-----------------|---------------------|--------------------------------|
| **Office Property** | **Location**       | **Feet**                  | **Sold**   | **Sales Price** | **Gain**            |
|                |               |                      |       |            |                |
|                | Town  Point Center | Norfolk,  Virginia        | 131        | 07/15/08        | $  12,750 | $    1,559 |
|                | Wachovia  Plaza    | St.  Petersburg, Florida  | 186        | 08/18/08        | 26,010              | 9,338                          |
|                | Capitol  Center    | Columbia,  South Carolina | 460        | 09/05/08        | 47,500              | 11,691                         |
|                |               |                      | 777        |            | $  86,260 | $  22,588            |

 

        OnFebruary 20, 2009, the Company sold Lynwood Plaza, an 82,000 square foot officeproperty in Hampton Roads, Virginia to an unrelated third party for a grosssales price of $7.8 million.  During the fourth quarter of 2008, the Companyrecognized a non-cash impairment loss of approximately $1.1 million related tothis property.  Additionally, the Company entered into a contract to sell the Atriumat Stoneridge in Columbia, South Carolina.  The gross sales price is estimatedat $7.7 million with $125,000 in non-refundable earnest money.  In connectionwith the sale of the Atrium at Stoneridge, the Company expects to sellerfinance a $5.4 million note receivable that will bear interest at 6.75% perannum on an interest-only basis through maturity in 2014.  A non-cashimpairment loss of $727,000 was recorded during the fourth quarter of 2008 onthis asset.  The sale is subject to customary final closing requirements anddue diligence documentation, with the sale expected to be completed in thefirst quarter of 2009, but there can be no assurance that the transaction willbe completed.  These properties are not classified as held for sale on theCompany’s balance sheet at December 31, 2008 as the Company did not view thesales as probable until the first quarter of 2009 when earnest money becamenon-refundable.

 

*        Land Available forSale. *A non-cash impairment loss of $717,000 was recorded in the fourthquarter of 2008 in connection with the valuation of approximately 12 acres ofland available for sale in New Orleans, Louisiana, based on a change in theestimated fair value of the land.  After recording the impairment loss, thecarrying value corresponds with the net realizable value of the land based onmarket research and comparable sales.

 

       *IntangibleAssets, Net.*  For the year ending December 31, 2008, intangible assets netof related amortization increased $8.7 million or 12.4% and was primarily dueto the net effect of the purchase of three office investments during the yearand annual amortization of the existing intangible assets.  Parkway accountsfor its acquisitions of real estate in accordance with Statement of FinancialAccounting Standards No. 141, “Business Combinations”, which requires the fairvalue of the real estate acquired to be allocated to acquired tangible andintangible assets.

       *Notes Payable to Banks*.  Notespayable to banks decreased $26.4 million or 12.4% for the year ending December31, 2008.  At December 31, 2008, notes payable to banks totaled $185.9 millionand the net decrease is primarily attributable to proceeds received fromrefinancing the mortgage secured by Capital City Plaza in Atlanta, Georgia andthe sale of three office properties, offset by advances under the line ofcredit to purchase and develop real estate and make improvements to officeproperties.

 

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        On May 7, 2008, theCompany entered into an interest rate swap agreement with Regions Bank.  Theinterest rate swap is for a $100.0 million notional amount and fixes the 30-dayLIBOR interest rate at 3.635%, which equates to a total interest rate of 4.935%for the period January 1, 2009 through March 31, 2011.  The swap serves as ahedge on the variable interest rates on a portion of the borrowings under theCompany’s line of credit.

 

        During 2008, the Companyexercised the option to extend the line of credit, resulting in $311.0 millionin total line capacity now maturing in April 2011.  The Company paid one-timeextension fees totaling approximately $407,000, which will be amortized overthe remaining term of the line of credit.  

       The Company’s $311.0 millionunsecured credit facility requires compliance with a number of restrictivefinancial covenants, including tangible net worth, fixed charge coverage ratio,unencumbered interest coverage ratio, total debt to total asset ratio, secureddebt to total asset value ratio, secured recourse debt to total asset valueratio and unencumbered pool restrictions.  At December 31, 2008 theCompany was in compliance with these financial covenants.

 

       *MortgageNotes Payable.* Mortgage notes payable increased $155.1 million or 21.7%during the year ending December 31, 2008, as a result of the following (inthousands):

 

|                                                        | **Increase**   |
|-------------------------------------------------------------|----------------|
|                                                        | **(Decrease)** |
| Placement of mortgage debt by Ohio  PERS Fund I             | $142,200  |
| Placement of mortgage debt by  wholly-owned properties      | 60,000    |
| Advances on mortgage debt to  fund the Pinnacle development | 29,500    |
| Principal paid on early  extinguishment of debt             | (62,980)       |
| Scheduled principal payments                                | (13,640)       |
|                                                        | $155,080  |

 

        On February 1, 2008, theCompany paid off the mortgage notes payable secured by the 400 North Belt andWoodbranch buildings in Houston, Texas, with a total principal balance of $3.5million with advances under the Company’s line of credit.  The mortgages had aninterest rate of 8.25% and were scheduled to mature on August 1, 2011.  TheCompany recognized a total of $401,000 in expense associated with the prepaymentof these mortgages.

 

        In connection with the OhioPERS Fund I investments during the first quarter of 2008 discussed under“Financial Condition – Office and Parking Properties – Purchases, Improvementsand Development”,  total non–recourse first mortgage debt was placed in theamount of $142.2 million at a weighted average interest rate of 5.7%.  Theportion of mortgage debt attributable to the Ohio PERS Fund I was $129.2million and $13.0 million was attributable to Parkway.  The mortgages aresecured by the respective properties, have one to three year interest onlyperiods and mature in 2016.

 

        On April 4, 2008, theCompany entered into an interest rate swap agreement with US Bank.  Theinterest rate swap is for a $23.5 million notional amount and fixes the 30-dayLIBOR interest rate at 4.05%, which equates to a current total interest rate of5.8%, for the period January 1, 2009 through December 1, 2014.  The swap servesas a hedge of the variable interest rates on a portion of the mortgage debtplaced on the Pinnacle at Jackson Place.  The weighted average interest ratefor the total mortgage debt of $29.5 million placed on the Pinnacle at JacksonPlace is 5.2%.

 

        On May 2, 2008, theCompany completed a $60.0 million recourse mortgage loan related to therefinance of a $41.4 million mortgage that was scheduled to mature in September2008.  The loan is secured by the Company’s Capital City Plaza building inAtlanta, Georgia.  The interest rate on the loan is a variable rate based onLIBOR plus 165 basis points.  The loan term is for two years, with a one-yearextension option at the Company’s discretion. The excess loan proceeds ofapproximately $18.4 million were used to pay down the Company’s line ofcredit.  The Company recorded a gain on the prepayment of approximately $388,000associated with the write off of the debt premium in the second quarter of2008.  The mortgage represented the Company’s only outstanding maturity in2008.

 

        In connection with thesale of Capitol Center on September 5, 2008, the Company prepaid the $18.1million first mortgage plus $2.1 million in related mortgage prepaymentexpenses with proceeds received from the sale.

 

        On February 27, 2009, theCompany paid off the mortgage note payable secured by the 1717 St. James, 5300Memorial and Town and Country office buildings in Houston, Texas, with a totalprincipal balance of $21.8 million with advances under the Company’s line ofcredit.  The mortgage had an interest rate of 4.83% and was scheduled to matureMarch 1, 2009.

 

Page 26 of 93

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       TheCompany expects to continue seeking fixed-rate, non-recourse mortgage financingwith maturities from five to ten years typically amortizing over 25 to 30 yearson select office building investments as additional capital is needed.  TheCompany monitors the total debt to total asset value ratio as defined in theloan agreements for the $311.0 million unsecured line of credit.  In additionto the total debt to total asset value ratio, the Company monitors interest,fixed charge and modified fixed charge coverage ratios.  The interest coverageratio is computed by comparing the cash interest accrued to earnings beforeinterest, taxes, depreciation and amortization ("EBITDA"). The fixedcharge coverage ratio is computed by comparing the cash interest accrued,principal payments made on mortgage loans and preferred dividends paid toEBITDA.  The modified fixed charge coverage ratio is computed by comparing cashinterest accrued and preferred dividends paid to EBITDA.  Management believesthe total debt to total asset value, interest coverage, fixed charge coverageand modified fixed charge coverage ratios provide useful information on totaldebt levels as well as the Company’s ability to cover interest, principaland/or preferred dividend payments with current income.

 

 

Page 27 of 93

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      The computation of the Company’s proportionate share of the interest,fixed charge and modified fixed charge coverage ratios and the reconciliation ofnet income to EBITDA are as follows for the year ended December 31, 2008 and2007 (in thousands):

 

 

 

 

|                                                                                                                     | **     Year Ended**  |
|--------------------------------------------------------------------------------------------------------------------------|------------------------------------------|
|                                                                                                                     | **     December 31** |
|                                                                                                                     | **2008**                                 | ** ** | **2007** |
| **Net  income**                                                                                                          | $    9,274      |   | $  19,692  |
| **Adjustments  to net income:**                                                                                          |                                     |   |   |
|         Interest  expense                                                        | 58,616                              |   | 52,527  |
|         Amortization  of financing costs                                         | 1,825                               |   | 1,202  |
|         Prepayment  expenses - early extinguishment of debt                      | 2,153                               |   | 370  |
|         Depreciation  and amortization                                           | 93,589                              |   | 77,575  |
|         Amortization  of share-based compensation                                | 2,276                               |   | 1,521  |
|         Gain  on real estate and other assets                                    | (20,046)                                 |   | (20,307) |
|         Tax  expense                                                             | 2                                   |   | (27) |
|         EBITDA  adjustments - unconsolidated joint ventures                      | 1,270                               |   | 1,255  |
|         EBITDA  adjustments – minority interest in real estate partnerships | (32,750)                                 |   | (16,709) |
| ** **                                                                                                               |                                     |   |   |
| **EBITDA  (1)**                                                                                                          | $116,209                            |   | $117,099  |
| ** **                                                                                                               |                                     |   |   |
| **Interest  coverage ratio:**                                                                                            |                                     |   |   |
| EBITDA                                                                                                                   | $116,209                            |   | $117,099  |
| Interest  expense:                                                                                                       |                                     |   |   |
|         Interest  expense                                                        | $  58,616                 |   | $  52,527  |
|         Capitalized  interest                                                    | 836                                 |   | 242  |
|         Interest  expense - unconsolidated joint ventures                        | 509                                 |   | 513  |
|         Interest  expense – minority interest in real estate partnerships   | (11,837)                                 |   | (6,133) |
| Total  interest expense                                                                                                  | 48,124                              |   | $  47,149  |
| **Interest  coverage ratio**                                                                                             | 2.41                                |   | 2.48  |
| ** **                                                                                                               |                                     |   |   |
| **Fixed  charge coverage ratio:**                                                                                        |                                     |   |   |
| EBITDA                                                                                                                   | $116,209                            |   | $117,099  |
| Fixed  charges:                                                                                                          |                                     |   |   |
|         Interest  expense                                                        | $  48,124                 |   | $  47,149  |
|         Preferred  dividends                                                     | 4,800                               |   | 4,800  |
|         Principal  payments (excluding early extinguishment of debt)             | 13,640                              |   | 15,580  |
|         Principal  payments - unconsolidated joint ventures                      | 54                                  |   | 50  |
|         Principal  payments – minority interest in real estate partnerships | (337)                                    |   | (313) |
| Total  fixed charges                                                                                                     | $  66,281                 |   | $  67,266  |
| **Fixed  charge coverage ratio**                                                                                         | 1.75                                |   | 1.74  |
| ** **                                                                                                               |                                     |   |   |
| **Modified  fixed charge coverage ratio:**                                                                               |                                     |   |   |
| EBITDA                                                                                                                   | $116,209                            |   | $117,099  |
| Modified  fixed charges:                                                                                                 |                                     |   |   |
|         Interest  expense                                                        | $  48,124                 |   | $  47,149  |
|         Preferred  dividends                                                     | 4,800                               |   | 4,800  |
| Total  fixed charges                                                                                                     | $  52,924                 |   | $  51,949  |
| **Modified  fixed charge coverage ratio:**                                                                               | 2.20                                |   | 2.25  |

 

(1)       Parkwaydefines EBITDA, a non-GAAP financial measure, as net income before interest,income taxes, depreciation, amortization, losses on early extinguishment ofdebt and other gains and losses.  EBITDA, as calculated by us, is notcomparable to EBITDA reported by other REITs that do not define EBITDA exactlyas we do.

 

       TheCompany believes that EBITDA helps investors and Parkway’s management analyzethe Company’s ability to service debt and pay cash distributions.  However, thematerial limitations associated with using EBITDA as a non-GAAP financialmeasure compared to cash flows provided by operating, investing and financingactivities are that EBITDA does not reflect the Company’s historical cashexpenditures or future cash requirements for working capital, capitalexpenditures or the cash required to make interest and principal payments onthe Company’s outstanding debt.  Although EBITDA has limitations as ananalytical tool, the Company compensates for the limitations by only usingEBITDA to supplement GAAP financial measures.  Additionally, the Companybelieves that investors should consider EBITDA in conjunction with net incomeand the other required GAAP measures of its performance and liquidity toimprove their understanding of Parkway’s operating results and liquidity.  

       Parkway views EBITDA primarily as aliquidity measure and, as such, the GAAP financial measure most directlycomparable to it is cash flows provided by operating activities.  BecauseEBITDA is not a measure of financial performance calculated in accordance withGAAP, it should not be considered in isolation or as a substitute for operatingincome, net income, cash flows provided by operating, investing and financingactivities prepared in accordance with GAAP.  The following table reconcilesEBITDA to cash flows provided by operating activities for the year endedDecember 31, 2008 and 2007 (in thousands):

 

|                                                        | **         Year Ended**        |
|-------------------------------------------------------------|------------------------------------------------------------------------|
|                                                        | **          December 31** |
|                                                        | **2008**                                                               |   | **2007** |
|                                                        |                                                                   |   |   |
| EBITDA                                                      | $   116,209                                        |   | $   117,099  |
|                                                        |                                                                   |   |   |
| Amortization of above market  leases                        | 45                                                                |   | 788  |
| Amortization of mortgage loan  discount                     | (518)                                                                  |   | (71) |
| Operating distributions from  unconsolidated joint ventures | 1,042                                                             |   | 1,036  |
| Interest expense                                            | (58,616)                                                               |   | (52,527) |
| Prepayment expense – early  extinguishment of debt     | (2,153)                                                                |   | (370) |
| Tax expense                                                 | (2)                                                                    |   | 27  |
| Change in deferred leasing  costs                           | (8,738)                                                                |   | (7,080) |
| Change in receivables and other  assets                     | (274)                                                                  |   | (5,736) |
| Change in accounts payable and  other liabilities           | (2,165)                                                                |   | 11,491  |
| Adjustments for minority  interests                         | 21,382                                                            |   | 13,537  |
| Adjustments for unconsolidated  joint ventures              | (2,164)                                                                |   | (2,263) |
| Cash flows provided by  operating activities                | $    64,048                                   |   | $    75,931  |

       *Minority Interest – Real EstatePartnerships.* During the year ending December 31, 2008, minority interestassociated with real estate partnerships increased $46.7 million.  The increaseis attributable to the minority interest partner’s equity contribution towardthe three Ohio PERS Fund I office investments during the first quarter of 2008discussed under Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations - Financial Condition – Office and ParkingProperties – Purchases, Improvements and Development”.

 

Page 28 of 93

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       *Stockholders’Equity. *Stockholders' equity decreased $33.7 million or 7.7% during theyear ended December 31, 2008 as a result of the following (in thousands):

** **

|                                                    | **Increase**                         |
|---------------------------------------------------------|--------------------------------------|
|                                                    | **(Decrease)**                       |
| Net income                                              | $    9,274  |
| Change in  market value of interest rate swap           | (7,370)                              |
| Comprehensive  income                                   | 1,904                           |
| Common stock  dividends declared                        | (34,555)                             |
| Preferred  stock dividends declared                     | (4,800)                              |
| Purchase of  Company stock                              | (10)                                 |
| Exercise of  stock options                              | 792                             |
| Issuance  costs - shelf registration and stock offering | (52)                                 |
| Shares  issued - Directors’ fees                   | 140                             |
| Share-based  compensation expense                       | 2,276                           |
| Shares  distributed from deferred compensation plan     | 645                             |
|                                                    | $(33,660)                            |

 

**Results of Operations**

***Comments are for the year ended December 31, 2008 compared to the year endedDecember 31, 2007.***

       Net income available to commonstockholders for the year ended December 31, 2008, was $4.5 million ($0.30 perbasic common share) as compared to net income available to common stockholdersof $14.9 million ($0.96 per basic common share) for the year ended December 31,2007.  Net gains on the sale of real estate of $22.6 million were included innet income available to common stockholders for the year ended December 31, 2008. Additionally, for the year ended December 31, 2008, the Company recordednon-cash impairment losses totaling $2.5 million in connection with twocontracted office property sales and the valuation of approximately 12 acres ofland.  Net gains on the sale of real estate and other assets of $20.3 millionwere included in net income available to common stockholders for the year endedDecember 31, 2007.

 

       *Officeand Parking Properties. *The analysis below includes changes attributableto same-store properties, acquisitions and dispositions of office properties. Same-store properties are those that the Company owned during both the currentand prior year reporting periods, excluding properties classified asdiscontinued operations.  At December 31, 2008, same-store properties consistedof 57 properties comprising 11.3 million square feet.  Properties acquired ordeveloped in 2008 that do not meet the definition of same-store propertiesconsisted of four properties with 1.3 million square feet in 2008.

 

       Thefollowing table represents revenue from office and parking properties for theyears ended December 31, 2008 and 2007 (in thousands):

 

|                                                                         | **Year Ended  December 31** |
|------------------------------------------------------------------------------|-----------------------------|
|                                                                         | ** **                  | ** ** | **Increase** | **%** |
|                                                                         | **2008**                    | **2007** | **(Decrease)** | **Change** |
| Revenue from office and parking  properties:                                 |                        |   |   |
|       Same-store properties                              | $234,819               | $228,807 | $  6,012  | 2.6% |
|       Properties acquired in 2007    | 3,797                  | 423 | 3,374  | 797.6% |
|       Properties acquired in 2008                   | 24,704                 | - | 24,704  | 0.0% |
|       Office property development                   | 166                    | - | 166  | 0.0% |
|       Properties disposed                           | (11)                        | 4,074 | (4,085) | -100.3% |
| Total revenue from office and                                                |                        |   |   |   |
|       parking properties                                 | $263,475               | $233,304 | $ 30,171  | 12.9% |

 

Page 29 of 93

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       Revenue from office and parking properties for same-storeproperties increased $6.0 million or 2.6% for the year ended December 31, 2008compared to the same period for 2007.  The primary reason for the increase isdue to an increase in lease termination fee income of $1.7 million, an increasein expense reimbursement income as a result of higher operating expenses, andan increase in same-store average rental rates for same-store properties forthe year ended December 31, 2008 compared to December 31, 2007.  Same-storerental rates increased 2.5% for the year ended December 31, 2008 compared tothe same period of 2007.  

       The following table representsproperty operating expenses for the years ended December 31, 2008 and 2007 (inthousands):

 

|                                                             | **Year Ended December 31** |
|------------------------------------------------------------------|----------------------------|
|                                                             | ** **                 | ** ** | **Increase** | **%** |
|                                                             | **2008**                   | **2007** | **(Decrease)** | **Change** |
| Property operating expenses:                                     |                       |   |   |   |
|       Same-store properties        | $112,184              | $105,606 | $ 6,578  | 6.2% |
|       Properties acquired in  2007 | 2,023                 | 194 | 1,829  | 942.8% |
|       Properties acquired in  2008 | 11,795                | - | 11,795  | 0.0% |
|       Office property  development | 183                   | 93 | 90  | 96.8% |
|       Properties disposed          | (16)                       | 2,097 | (2,113) | -100.8% |
| Total property                                                   |                       |   |   |   |
|       operating expenses           | $126,169              | $107,990 | $18,179  | 16.8% |

        

       Propertyoperating expenses for same-store properties increased $6.6 million or 6.2% forthe year ended December 31, 2008 compared to the same period for 2007.  Theprimary reason for the increase is due to increased utilities, real estatetaxes and repairs associated with Hurricane Ike discussed below.

       Depreciation and amortization expenseattributable to office and parking properties increased $17.3 million or 23.3%for the year ended December 31, 2008 compared to the same period for 2007 andis due to additional depreciation associated with the acquisition of officeproperties and improvements to properties.

 

                *Hurricane IkeImpact*. The Company has 13 wholly-owned properties and one jointly-ownedproperty totaling 2.3 million square feet in Houston, Texas, which sustainedsome property damage from Hurricane Ike on September 13, 2008.  The currentestimate of damages for the 14 properties is between $6.5 million to $7.0million.  The Company estimates that its insurance deductible related to theseclaims will be approximately $3.0 million to $3.5 million.  Approximately$377,000 is estimated to represent repair and clean up costs with the remainderrepresenting capitalized costs.  The Company expects to record a net gain ofapproximately $1.1 million related to an involuntary conversion of the damagedassets.  The Company expects to record this gain in 2009 upon final settlementof the hurricane claim with its insurance carrier.

 

       *Share-BasedCompensation Expense.*  Effective January 1, 2006, Parkway adopted FASBStatement No. 123R, Share-Based Payment (“FAS 123R”) using themodified-prospective transition method. In the past the Company had grantedstock options for a fixed number of shares to employees and directors with anexercise price equal to or above the fair value of the shares at the date ofgrant.  However, no stock options have been granted to employees since 2002 orto directors since 2003.  Since 2003, Parkway has elected to grant restrictedshares and deferred incentive share units instead of stock options.  Therefore,the adoption of FAS 123R has not had a material impact on income fromcontinuing operations, net income, cash flow from operations, cash flow fromfinancing activities or basic and diluted earnings per share.  

 

       Share-basedcompensation expense of $2.3 million and $1.5 million was recognized for theyears ended December 31, 2008 and 2007, respectively.  Total compensationexpense related to nonvested awards not yet recognized was $3.1 million atDecember 31, 2008.  The weighted average period over which this expense isexpected to be recognized is approximately 2.2 years.  Total compensationexpense associated with shares that vest based on the Company meeting the goalsof the GEAR UP Plan was $1.4 million and was recorded in 2008.

 

Page 30 of 93

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       Duringthe year ended December 31, 2008, the Board of Directors approved the grant of 38,017shares to officers of the Company.  The shares were valued at $1.2 million and36,975 shares will vest four years from grant date and 1,042 shares vested uponthe achievement of the cumulative goals of the GEAR UP Plan, which endedDecember 31, 2008.  Compensation expense was recorded on the shares that veston performance conditions when the Company determined that it was probable thatthe goal would be achieved.

 

        On February 3, 2009, theBoard of Directors approved the grant of 120,000 restricted shares to officersof the Company.  The shares are valued at $1.9 million and will vest subject tocertain performance-based goals in 2009 at a rate of 30,000 shares per year overthe four years following the grant date.

 

       *Generaland Administrative Expense.* General and administrative expense increased $3.1million from $6.6 million in 2007 to $9.7 million in 2008 and is primarilyattributable to increased personnel costs, share-based compensation expense andprofessional fees.  In 2008, the Company recorded approximately $1.4 million inshare-based compensation expense as a result of achieving the GEAR UP Planfinancial goal.

 

*        Gain on Sale of RealEstate and Other Assets. *For the year ended December 31, 2008, the Companyrecorded a $22.6 million gain on the sale of three office properties. This gainhas been classified as a gain on sale of real estate from discontinuedoperations.  The Company also recognized an impairment loss of $2.5 million ontwo office properties and 12 acres of land in New Orleans, Louisiana during2008.  For the year ended December 31, 2007, Parkway recorded a gain on thesale of two office properties in Knoxville, Tennessee in the amount of $20.3 million.

 

       *InterestExpense. *Interest expense, including amortization, increased $6.9 millionor 13.1% for the year ended December 31, 2008 compared to the same period for2007 and is comprised of the following (in thousands):

 

|                                                                                                   | **                                            Year  Ended December 31** |
|--------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                   | ** **                                                                                                                                                                                                                                                                                     | ** ** | **Increase** | **%** |
|                                                                                                   | **2008**                                                                                                                                                                                                                                                                                       | **2007** | **(Decrease)** | **Change** |
| Interest expense:                                                                                      |                                                                                                                                                                                                                                                                                           |   |   |   |
|       Mortgage interest  expense                                         | $47,406                                                                                                                                                                                                                                                                                        | $39,988 | $7,418  | 18.6% |
|       Bank line interest  expense                                        | 10,196                                                                                                                                                                                                                                                                                         | 10,564 | (368) | -3.5% |
|       Subsidiary redeemable                                              |                                                                                                                                                                                                                                                                                           |   |   |   |
|             preferred  membership interest | -                                                                                                                                                                                                                                                                                              | 449 | (449) | -100.0% |
|       Debt prepayment expense                                                 | 13                                                                                                                                                                                                                                                                                             | 369 | (356) | -96.5% |
|       Mortgage loan cost  amortization                                   | 1,115                                                                                                                                                                                                                                                                                          | 758 | 357  | 47.1% |
|       Bank loan cost amortization                                        | 696                                                                                                                                                                                                                                                                                            | 418 | 278  | 66.5% |
|                                                                                                   |                                                                                                                                                                                                                                                                                           |   |   |   |
| Total interest expense                                                                                 | $59,426                                                                                                                                                                                                                                                                                        | $52,546 | $6,880  | 13.1% |

 

       Mortgageinterest expense increased $7.4 million or 18.6% for the year ended December31, 2008 compared to the same period for 2007 and is due to the net effect ofnew loans placed or assumed in 2008 and 2007, the refinancing of one loan andthe early extinguishment of three mortgages in 2008.  Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Financial Condition – Mortgage Notes Payable,” includes a discussion ofmortgages placed in 2008.  The average interest rate on mortgage notes payable atDecember 31, 2008 and 2007 was 5.5% and 5.6%, respectively.

 

       Bankline interest expense decreased $368,000 or 3.5% for the year ended December31, 2008 compared to the same period for 2007.  The change is primarily due tothe net effect of proceeds received from the sale of assets, borrowings due toadditional purchases of office investments and a decrease in average interestrate from 6.2% during the year ended December 31, 2007 as compared to 4.8% duringthe same period in 2008.  

 

Page 31 of 93

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       *DiscontinuedOperations.*  Discontinued operations is comprised of the following for theyears ended December 31, 2008 and 2007 (in thousands):

 

|                                                                                                  | **                                     Year  Ended December 31** |
|-------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                  | ** **                                                                                                                                                                                                                                           | ** ** | **Increase** | **%** |
|                                                                                                  | **2008**                                                                                                                                                                                                                                             | **2007** | **(Decrease)** | **Change** |
| Discontinued operations:                                                                              |                                                                                                                                                                                                                                                 |   |   |   |
|       Income (loss) from  discontinued operations                       | $   (795)                                                                                                                                                                                                                             | $2,473 | $(3,268) | -132.1% |
|       Gain on sale of real  estate                                      |                                                                                                                                                                                                                                                 |   |   |   |
|             from  discontinued operations | 22,588                                                                                                                                                                                                                                          | - | 22,588  | 0.0% |
|                                                                                                  |                                                                                                                                                                                                                                                 |   |   |   |
| Total discontinued operations                                                                         | $21,793                                                                                                                                                                                                                                         | $2,473 | $19,320  | 781.2% |

 

       Thenet gains and all current and prior period income from the following officeproperty dispositions are included in discontinued operations for the yearsended December 31, 2008 and 2007 (in thousands).

 

| ** **          | ** **                     | **Square** | **Date of** | **Gross Sales**     | **Net Book Value**  | **Gain**                       |
|---------------------|--------------------------------|------------|-------------|---------------------|---------------------|--------------------------------|
| **Office Property** | **Location**                   | **Feet**   | **Sale**    | **Price**           | **of Real Estate**  | **on Sale**                    |
|                |                           |       |        |                |                |                           |
| Town Point Center   |  Norfolk, Virginia        | 131        | 07/15/08    | $  12,750 | $  10,621 | $   1,559  |
| Wachovia Plaza      |  St. Petersburg, Florida  | 186        | 08/18/08    | 26,010              | 16,154              | 9,338                     |
| Capitol Center      |  Columbia, South Carolina | 460        | 09/05/08    | 47,500              | 35,101              | 11,691                    |
| 2008 Dispositions   |                           | 777        |        | $  86,260 | $  61,876 | $  22,588       |

***Comments are for the year ended December 31, 2007 compared to the year endedDecember 31, 2006.***

       Net income available to commonstockholders for the year ended December 31, 2007, was $14.9 million ($.96 perbasic common share) as compared to net income available to common stockholdersof $19.1 million ($1.34 per basic common share) for the year ended December 31,2006.  Net gains on the sale of real estate and other assets of $20.3 millionwere included in net income available to common stockholders for the year endedDecember 31, 2007.  Net gains on the sale of real estate and other assets of $22.7million were included in net income available to common stockholders for the yearended December 31, 2006.

 

       *Officeand Parking Properties. *The analysis below includes changes attributableto same-store properties, acquisitions and dispositions of office properties. Same-store properties are those that the Company owned during both the currentand prior year reporting periods, excluding properties classified asdiscontinued operations.  At December 31, 2007, same-store properties consistedof 50 properties comprising 10.0 million square feet.  Properties acquired in2006 and 2007 that do not meet the definition of same-store propertiesconsisted of five properties with 970,000 square feet in 2006 and twoproperties with 286,000 square feet in 2007.

 

       Thefollowing table represents revenue from office and parking properties for theyears ended December 31, 2007 and 2006 (in thousands):

 

|                                                                          | **Year Ended  December 31** |
|-------------------------------------------------------------------------------|-----------------------------|
|                                                                          | ** **                  | ** ** | **Increase** | **%** |
|                                                                          | **2007**                    | **2006** | **(Decrease)** | **Change** |
| Revenue from office and parking  properties:                                  |                        |   |   |
|       Same-store properties                               | $185,939                    | $182,320 | $  3,619  | 2.0% |
|       Properties acquired in  2006    | 43,622                      | 7,123 | 36,499  | 512.4% |
|       Properties acquired in 2007                    | 3,711                       | - | 3,711  | 0.0% |
|       Properties disposed                            | 32                          | 8,446 | (8,414) | -99.6% |
| Total revenue from office and                                                 |                        |   |   |   |
|       parking properties                                  | $233,304                    | $197,889 | $35,415  | 17.9% |

 

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       Revenue from office and parking properties for same-storeproperties increased $3.6 million or 2.0% for the year ended December 31, 2007compared to the same period for 2006.  The primary reason for the increase isdue to an increase in same-store occupancy for same-store properties for theyear ended December 31, 2007 compared to December 31, 2006.  Average same-storeoccupancy was 91.3% and 90.3% for the year ended December 31, 2007 and 2006, respectively.Additionally, same-store rental rates increased 2.1% for the year endedDecember 31, 2007 compared to the same period of 2006.

       The following table representsproperty operating expenses for the years ended December 31, 2007 and 2006 (inthousands):

 

|                                                             | **                            Year Ended December 31** |
|------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                             | ** **                                                                                                                                                                                    | ** ** | **Increase** | **%** |
|                                                             | **2007**                                                                                                                                                                                      | **2006** | **(Decrease)** | **Change** |
| Property operating expenses:                                     |                                                                                                                                                                                          |   |   |   |
|       Same-store properties        | $  85,844                                                                                                                                                                           | $  85,378 | $       466  | 0.5% |
|       Properties acquired in  2006 | 20,270                                                                                                                                                                                        | 3,352 | 16,918  | 504.7% |
|       Properties acquired in  2007 | 1,679                                                                                                                                                                                         | - | 1,679  | 0.0% |
|       Office property  development | 92                                                                                                                                                                                            | - | 92  | 0.0% |
|       Properties disposed          | 105                                                                                                                                                                                           | 4,359 | (4,254) | -97.6% |
| Total property                                                   |                                                                                                                                                                                          |   |   |   |
|       operating expenses           | $107,990                                                                                                                                                                                      | $  93,089 | $  14,901  | 16.0% |

        

       Propertyoperating expenses for same-store properties increased $466,000 or 0.5% for theyear ended December 31, 2007 compared to the same period for 2006.  The primaryreason for the increase is due to increased contract services and personnelcosts offset by utility savings.

       Depreciation and amortization expenseattributable to office and parking properties increased $12.8 million or 20.7%for the year ended December 31, 2007 compared to the same period for 2006 andis due to the increase in the net investment in office and parking propertiesbecause of additional purchases and improvements to properties.

 

       *ManagementCompany Income*.  The decrease in management company income of $3.7 millionfor the year ended December 31, 2007 compared to the year ended December 31,2006 is primarily due to the additional management fee and incentive feerecorded in 2006 as a result of the economic returns generated above aninternal rate of return hurdle rate achieved over the life of the Viad joint venture. The fees were received and recognized by Parkway in the second quarter of 2006at closing of the sale of Viad Corporate Center. 

 

       *Share-BasedCompensation Expense.*  Effective January 1, 2006, Parkway adopted FASBStatement No. 123R, Share-Based Payment (“FAS 123R”) using themodified-prospective transition method. In the past the Company had grantedstock options for a fixed number of shares to employees and directors with anexercise price equal to or above the fair value of the shares at the date ofgrant.  However, no stock options have been granted to employees since 2002 orto directors since 2003.  Since 2003, Parkway has elected to grant restrictedshares and deferred incentive share units instead of stock options.  Therefore,the adoption of FAS 123R has not had a material impact on income fromcontinuing operations, net income, cash flow from operations, cash flow fromfinancing activities or basic and diluted earnings per share.  

 

       Share-basedcompensation expense of $1.5 million and $863,000 was recognized for the yearsended December 31, 2007 and 2006, respectively.  Total compensation expenserelated to nonvested awards not yet recognized was $4.3 million at December 31,2007.  The weighted average period over which this expense is expected to berecognized is approximately 2.7 years.  Total potential compensation expenseassociated with shares that vest based on performance conditions was $1.5million at December 31, 2007.

 

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       OnJanuary 12, 2007, the Board of Directors approved the grant of 35,874 shares toofficers of the Company.  The shares were valued at $1.9 million and 34,875shares will vest four years from grant date and 999 shares will vest subject toachievement of the cumulative goals of the GEAR UP Plan, which will endDecember 31, 2008.  Compensation expense will not be recorded on the sharesthat vest on performance conditions until the Company determines that it isprobable that the goal will be achieved.  Therefore, no expense has beenrecorded to date for the shares that vest based on achievement of thecumulative goals of the GEAR UP Plan.

 

       *Generaland Administrative Expense.* General and administrative expense increased$1.9 million from $4.7 million in 2006 to $6.6 million in 2007 and is primarilyattributable to increased personnel costs, share-based compensation expense andprofessional fees.

 

       *Gainon Sale of Real Estate, Joint Venture Interests and Other Assets. *For theyear ended December 31, 2007, Parkway recorded a gain on the sale of two officeproperties in Knoxville, Tennessee in the amount of $20.3 million.  For theyear ended December 31, 2006, the Company recorded a gain on the sale of ViadCorporate Center in the amount of $13.6 million, a gain on the sale of threebuildings in Atlanta, Georgia in the amount of $1.6 million, a gain on the saleof Charlotte Park in the amount of $2.6 million and recognized an impairmentloss on investment securities in the amount of $119,000.

 

       *InterestExpense. *Interest expense, including amortization, increased $9.5 millionor 22.1% for the year ended December 31, 2007 compared to the same period for2006 and is comprised of the following (in thousands):

 

|                                                                                                   | **Year  Ended December 31** |
|--------------------------------------------------------------------------------------------------------|-----------------------------|
|                                                                                                   | ** **                  | ** ** | **Increase** | **%** |
|                                                                                                   | **2007**                    | **2006** | **(Decrease)** | **Change** |
| Interest expense:                                                                                      |                        |   |   |   |
|       Mortgage interest  expense                                         | $39,988                     | $31,112 | $8,876  | 28.5% |
|       Bank line interest  expense                                        | 10,563                      | 10,105 | 458  | 4.5% |
|       Subsidiary redeemable                                              |                        |   |   |   |
|             preferred  membership interest | 449                         | 752 | (303) | -40.3% |
|       Debt prepayment expense                                                 | 370                         | - | 370  | 0.0% |
|       Mortgage loan cost  amortization                                   | 758                         | 645 | 113  | 17.5% |
|       Bank loan cost amortization                                        | 418                         | 430 | (12) | -2.8% |
|                                                                                                   |                        |   |   |   |
| Total interest expense                                                                                 | $52,546                     | $43,044 | $9,502  | 22.1% |

 

       Mortgageinterest expense increased $8.9 million or 28.5% for the year ended December31, 2007 compared to the same period for 2006 and is due to the net effect ofnew loans placed or assumed in 2007 and 2006, and the early extinguishment oftwo mortgages in 2007.  The average interest rate on mortgage notes payable atDecember 31, 2007 and 2006 was 5.8%.

 

       Bankline interest expense increased $458,000 or 4.5% for the year ended December31, 2007 compared to the same period for 2006.  The change is primarily due tothe increase in the average balance of bank borrowings from $168.0 million forthe year ended December 31, 2006 to $171.5 million for the year ended December31, 2007.  Additionally, the weighted average interest rate on the Company’sline of credit increased from 5.9% during the year ended December 31, 2006 to6.2% during the same period in 2007.  The increase in bank borrowings isprimarily attributable to advances for purchases of office properties andParkway common stock.

 

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       *DiscontinuedOperations.*  Discontinued operations is comprised of the following for theyears ended December 31, 2007 and 2006 (in thousands):

 

|                                                                                                  | **Year  Ended December 31** |
|-------------------------------------------------------------------------------------------------------|-----------------------------|
|                                                                                                  | ** **                  | ** ** | **Increase** | **%** |
|                                                                                                  | **2007**                    | **2006** | **(Decrease)** | **Change** |
| Discontinued operations:                                                                              |                        |   |   |   |
|       Income from  discontinued operations                              | $2,473                      | $1,997 | $    476  | 23.8% |
|       Gain on sale of real  estate                                      |                        |   |   |   |
|             from  discontinued operations | -                           | 5,083 | (5,083) | -100.0% |
|                                                                                                  |                        |   |   |   |
| Total discontinued operations                                                                         | $2,473                      | $7,080 | $(4,607) | -65.1% |

 

       Thenet gains and all current and prior period income from the following officeproperty dispositions are included in discontinued operations for the yearsended December 31, 2007 and 2006 (in thousands).

 

| ** **                | ** **                     | **Square** | **Date of** | **Gross Sales**     | **Net Book Value**  | **Gain**                                             |
|---------------------------|--------------------------------|------------|-------------|---------------------|---------------------|------------------------------------------------------|
| **Office Property**       | **Location**                   | **Feet**   | **Sale**    | **Price**           | **of Real Estate**  | **on Sale**                                          |
|                      |                           |       |        |                |                |                                                 |
| Central Station  Building | St. Petersburg,  Florida       | 133        | 08/02/06    | $  15,000 | $  14,338 | $       211  |
| Richmond Centre           | Houston, Texas                 | 92         | 11/29/06    | 6,906               | 4,551               | 2,018                                           |
| Ashford II                | Houston, Texas                 | 59         | 12/07/06    | 5,250               | 2,185               | 2,854                                           |
| 2006  Dispositions        |                           | 284        |        | $  27,156 | $  21,074 | $    5,083                  |
|                      |                           |       |        |                |                |                                                 |
| Town Point Center         |  Norfolk, Virginia        | 131        | 07/15/08    | $  12,750 | $  10,621 | $    1,559                  |
| Wachovia Plaza            |  St. Petersburg, Florida  | 186        | 08/18/08    | 26,010              | 16,154              | 9,338                                           |
| Capitol Center            |  Columbia, South Carolina | 460        | 09/05/08    | 47,500              | 35,101              | 11,691                                          |
| 2008 Dispositions         |                           | 777        |        | $  86,260 | $  61,876 | $  22,588                             |

****Liquidity and Capital Resources**

       *Statement of Cash Flows.  *Cashand cash equivalents were $15.3 million and $11.3 million at December 31, 2008and December 31, 2007, respectively.  Cash flows provided by operatingactivities for the year ended December 31, 2008 were $64.0 million compared to$75.9 million for the same period of 2007.  The change in cash flows fromoperating activities is primarily attributable to the effect of the timing ofreceipt of revenues and payment of expenses.

 

       Cashused in investing activities was $206.1 million for the year ended December 31,2008 compared to cash used in investing activities of $57.0 million for thesame period of 2007.  The increase in cash used by investing activities of $149.1million is primarily due to the net effect of increased office propertypurchases and sales in 2008 and an increase in office property improvements anddevelopment costs in 2008.

 

       Cashprovided by financing activities was $146.1 million for the year ended December31, 2008 compared to cash used in financing activities of $12.0 million for thesame period of 2007.  The increase in cash provided by financing activities of$158.1 million is primarily due to additional mortgage placements in 2008 andcontributions from minority interest partners to fund office propertypurchases.

** **

       *Liquidity.  *The Company plans to continue pursuing the acquisition of additionalinvestments that meet the Company’s investment criteria and intends to use itsline of credit, proceeds from the refinancing of mortgages, proceeds from thesale of non-core assets and office properties, proceeds from the sale ofportions of owned assets through joint ventures, possible sales of securitiesand cash balances to fund those acquisitions.  

 

       TheCompany's cash flows are exposed to interest rate changes primarily as a resultof its lines of credit used to maintain liquidity and fund capital expendituresand expansion of the Company’s real estate investment portfolio andoperations.  The Company’s interest rate risk management objective is to limitthe impact of interest rate changes on earnings and cash flows and to lower itsoverall borrowing costs.  To achieve its objectives, the Company borrows atfixed rates, but also utilizes an unsecured revolving credit facility, anunsecured term-loan and an unsecured line of credit (collectively, the“Company’s line of credit”).

 

Page 35 of 93

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        The Company’s line ofcredit allows Parkway to borrow up to a combined $311.0 million and it maturesin April 2011.  At December 31, 2008, the Company had a total of $185.9 millionoutstanding under its line of credit.  At December 31, 2008, the following amountswere outstanding under the Company’s line of credit (in thousands):

 

| ** **                                   | ** **  | **Interest** | ** **   | **Outstanding**                            |
|----------------------------------------------|-------------|--------------|--------------|--------------------------------------------|
| **Line of Credit**                           | **Lender**  | **Rate**     | **Maturity** | **Balance**                                |
| $15.0 Million Unsecured Line of  Credit (1)  | PNC Bank    | 2.4%         | 04/27/11     | $      7,940 |
| $236.0 Million Unsecured Line  of Credit (2) | Wells Fargo | 2.1%         | 04/27/11     | 118,000                                    |
| $60.0 Million Unsecured Term  Loan (3)       | Wells Fargo | 5.6%         | 04/27/11     | 60,000                                     |
|                                         |        | 3.3%         |         | $  185,940                       |

 

(1)    The interest rate on the $15.0 million unsecured line of credit with PNCBank is currently LIBOR plus 200 basis points.  On December 23, 2008, theCompany renewed and extended this line to April 2011.  The Company paid anup-front fee of $52,500 and will pay fees on the unused portion of the line of25 basis points.

 

(2)    The $236.0 million unsecured line of credit is led by Wells Fargo andsyndicated to eight other banks.  The interest rate on the line of credit iscurrently LIBOR plus 130 basis points or the Prime interest rate plus 25 basispoints.  At December 31, 2008, all amounts outstanding under the line of creditwith interest rates not fixed by an interest rate swap agreement are borrowed atLIBOR plus 130 basis points.  The Company pays an annual administration fee of$35,000 and fees on the unused portion of the revolver ranging between 12.5 and20 basis points based upon overall Company leverage, with the rate set at 20basis points at December 31, 2008.  On October 29, 2008, the Company exercisedits right to extend this line to April 2011.  The Company paid a one-timeextension fee of $354,000 that will be amortized over the term of the line ofcredit.

 

(3)   The$60.0 million unsecured term loan is led by Wells Fargo and syndicated to eightother banks.  The interest rate on the term loan represents the weightedaverage interest rate of two interest rate swaps that expired December 31,2008.  Excluding the interest rate swaps, the interest rate on the term loan isLIBOR plus 130 basis points.

 

       Toprotect against the potential for rapidly rising interest rates, the Companyentered into interest rate swap agreements in 2008 and prior years.  TheCompany designated the swaps as hedges of the variable interest rates on theCompany’s borrowings under the Wells Fargo unsecured revolving credit facility anda portion of the debt placed on the Pinnacle development.  These swaps areconsidered to be fully effective and changes in the fair value of the swaps arerecognized in accumulated other comprehensive income.  The Company's interestrate hedge contracts at December 31, 2008 and 2007 are summarized as follows(in thousands):

 

| ** **  | ** **   | ** **   | ** **         | ** ** | **Fair**                                                                         |
|-------------|--------------|--------------|--------------------|------------|----------------------------------------------------------------------------------|
| ** **  | ** **   | ** **   | ** **         | ** ** | **Market  Value**                                                                |
| ** **  | ** **   | ** **   | ** **         | ** ** | **Asset/(Liability)**                                                            |
| **Type of** | **Notional** | **Maturity** | ** **         | **Fixed**  | **December  31**                                                                 |
| **Hedge**   | **Amount**   | **Date**     | **Reference Rate** | **Rate**   | **2008**                                                                         | **2007** |
| Swap        | $50,000      | 06/30/08     | 1  - Month LIBOR   | 4.380%     | $            -  | $         15  |
| Swap        | $30,000      | 08/31/08     | 1  - Month LIBOR   | 4.924%     | -                                                                           | (133) |
| Swap        | $40,000      | 12/31/08     | 1  - Month LIBOR   | 4.360%     | -                                                                           | (192) |
| Swap        | $20,000      | 12/31/08     | 1  - Month LIBOR   | 4.245%     | -                                                                           | (48) |
| Swap        | $100,000     | 03/31/11     | 1  - Month LIBOR   | 4.935%     | (5,262)                                                                          | -  |
| Swap        | $23,500      | 12/01/14     | 1  - Month LIBOR   | 5.800%     | (2,466)                                                                          | -  |
|        |         |         |               |       | $  (7,728)                                                             | $      (358) |

 

       AtDecember 31, 2008, the Company had $869.6 million in mortgage notes payablewith an average interest rate of 5.5% secured by office properties and $185.9million drawn under its line of credit.  Parkway's pro rata share ofunconsolidated joint venture debt was $9.8 million with an average interest rateof 5.1% at December 31, 2008.  

 

Page 36 of 93

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        TheCompany monitors the total debt to total asset value ratio as defined in theloan agreements for the $311.0 million unsecured line of credit.  In additionto the total debt to total asset value ratio, the Company also monitorsinterest, fixed charge and modified fixed charge coverage ratios.  The interestcoverage ratio is computed by comparing the cash interest accrued to earningsbefore interest, taxes, depreciation and amortization (“EBITDA”).  This ratiofor the years ended December 31, 2008 and 2007 was 2.41 and 2.48 times,respectively.  The fixed charge coverage ratio is computed by comparing thecash interest accrued, principal payments made on mortgage loans and preferreddividends paid to EBITDA.  This ratio for the years ended December 31, 2008 and2007 was 1.75 and 1.74 times, respectively.   The modified fixed chargecoverage ratio is computed by comparing the cash interest accrued and preferreddividends paid to EBITDA.  This ratio for the years ended December 31, 2008 and2007 was 2.20 and 2.25 times, respectively.  Management believes the total debtto total asset value, interest coverage, fixed charge coverage and modifiedfixed charge coverage ratios provide useful information on total debt levels aswell as the Company’s ability to cover interest, principal and/or preferreddividend payments with current income.

 

       The table below presents the principal payments due andweighted average interest rates for the mortgage notes payable at December 31,2008.

 

|                        |                   | **Total**      |               | **Recurring**    |
|------------------------|-------------------|----------------|---------------|------------------|
|                        | **Average**       | **Mortgage**   | **Balloon**   | **Principal**    |
|                        | **Interest Rate** | **Maturities** | **Payments**  | **Amortization** |
| 2009                   | 5.6%              |  $        | 35,299   |  $          | 21,766  |  $ | 13,533 |
| 2010                   | 5.8%              | 139,794   | 126,411  | 13,383      |
| 2011                   | 6.0%              | 112,753   | 102,694  | 10,059      |
| 2012                   | 5.9%              | 65,070    | 56,738   | 8,332       |
| 2013                   | 5.9%              | 8,434     | -        | 8,434       |
| Thereafter             | 5.3%              | 508,231   | 469,095  | 39,136      |
|                        |                   |  $        | 869,581  |  $          | 776,704  |  $ | 92,877  |
| Fair Value at 12/31/08 |  $           | 778,925   |               |                  |

 

On February 27,2009, the Company paid its only 2009 debt maturity in the amount of $21.8million utilizing its line of credit.  The Company has $126.4 million inmaturing debt in 2010.  Included in the 2010 debt maturities is the CapitalCity Plaza mortgage in the amount of $60.0 million that has a one-yearextension option at the Company’s discretion.  Assuming that the extensionoption is exercised, the Company’s total maturities for 2010 would be $66.4million, and its existing line of credit capacity could be utilized to pay thedebt maturities.  

 

On May 14, 2008Parkway formed Texas Teachers Fund II, a $750.0 million discretionary fund withthe TRS, for the purpose of acquiring high-quality multi-tenant officeproperties.   TRS will be a 70% investor, and Parkway will be a 30% investor inthe fund, which will be capitalized with approximately $375.0 million of equitycapital and $375.0 million of non-recourse, fixed-rate first mortgage debt.  Parkway’s share of the equity contribution for the fundwill be $112.5 million and will be funded with proceeds from asset sales, lineof credit advances and/or sales of equity securities.

 

       TheCompany presently has plans to make additional capital improvements at itsoffice properties in 2009 of approximately $33.0 million.  These expensesinclude tenant improvements, leasing costs, capitalized acquisition costs andcapitalized building improvements.  Approximately $9.0 million of theseimprovements relate to upgrades on properties acquired in recent years thatwere anticipated at the time of purchase.  All such improvements are expectedto be financed by cash flow from the properties, contributions from partnersand advances on the Company’s line of credit.

 

       The Company anticipates that its current cash balance,operating cash flows, contributions from partners and borrowings (includingborrowings under the working capital line of credit) will be adequate to paythe Company's (i) operating and administrative expenses, (ii) debt serviceobligations, (iii) distributions to shareholders, (iv) capital improvements,and (v) normal repair and maintenance expenses at its properties, both in theshort and long term.  In addition, the Company may use proceeds from sales ofassets, possible sales of securities and borrowings to fund propertyacquisitions and pay debts as they mature.  

****Page 37 of 93

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**Off-Balance Sheet Arrangements**

 

       At December 31,2008, the Company was invested in four unconsolidated joint ventures withunrelated investors. These joint ventures are accounted for using the equitymethod of accounting, as Parkway does not control, but has the ability tosignificantly influence the operations of the joint ventures and is not theprimary beneficiary, as that term is defined in FIN 46R.  As a result, theassets and liabilities of the joint ventures are not included in Parkway'sconsolidated balance sheet.  Information relating to the unconsolidatedjoint ventures at December 31, 2008 is detailed below (in thousands):

 

| ** **                 | ** **              | ** **      | **Parkway's** |
|----------------------------|-------------------------|-----------------|---------------|
| ** **                 | ** **              | ** **      | **Ownership** |
| **Joint Ventures**         | **Property Name**       | **Location**    | **Interest**  |
| ** **                 | ** **              | ** **      | ** **    |
| Wink-Parkway Partnership   | Wink Building           | New Orleans, LA | 50.0%         |
| Parkway Joint Venture, LLC | UBS Building/River Oaks | Jackson, MS     | 20.0%         |
| RubiconPark I, LLC         | Lakewood/Falls Pointe   | Atlanta, GA     | 20.0%         |
|                       | Carmel Crossing         | Charlotte, NC   |          |
| RubiconPark II, LLC        | Maitland 200            | Orlando, FL     | 20.0%         |

 

        Cash distributions fromunconsolidated joint ventures are made to each partner based on theirpercentage of ownership in each entity.  Cash distributions made topartners in joint ventures where the percentage of debt assumed isdisproportionate to the ownership percentage in the venture is distributedbased on each partner's share of cash available for distribution before debtservice, based on their ownership percentage, less the partner's share of debtservice based on the percentage of debt assumed by each partner.

 

        Parkway provides management,construction and leasing services for all of the unconsolidated joint venturesexcept for the Wink-Parkway Partnership, and receives market-based fees forthese services.  The portion of fees earned on unconsolidated jointventures attributable to Parkway's ownership interest is eliminated inconsolidation.

 

        Thefollowing information summarizes the financial position for the investments inwhich we held an interest at December 31, 2008 (in thousands):

 

| ** **                        | ** **          | **Mortgage** | ** **         | **Parkway's**                  |
|-----------------------------------|---------------------|--------------|--------------------|--------------------------------|
| **Summary of Financial Position** | **Total Assets**    | **Debt (1)** | **Total Equity**   | **Investment**                 |
| Parkway Joint Venture, LLC        | $  16,924 | $12,600      | $  3,624 | $    (310) |
| Wink-Parkway Partnership          | 1,625               | 67           | 1,519              | 760                       |
| RubiconPark I, LLC                | 73,825              | 52,000       | 20,252             | 5,484                     |
| RubiconPark II, LLC               | 29,876              | 18,154       | 11,094             | 5,123                     |
|                              | $122,250            | $82,821      | $36,489            | $11,057                   |

 

(1)     The mortgagedebt, all of which is non-recourse, is collateralized by the individual realestate property or properties within each venture, the net book value of whichtotaled $111.7 million at December 31, 2008.  Parkway's proportionateshare of the non-recourse mortgage debt totaled $9.8 million at December 31,2008.

 

        The following informationsummarizes the results of operations for the year ended December 31, 2008 forinvestments which impacted our 2008 results of operations (in thousands):

 

| ** **                    | ** **                    | ** Net**          | **Parkway's **               |
|-------------------------------|-------------------------------|------------------------|-----------------------------------|
| ** **                    | **Total**                     | **Income**             | **Share of Net**                  |
| **Summary of Operations**     | **Revenue**                   | **(Loss)**             | **Income (Loss)**                 |
| Phoenix OfficeInvest, LLC (1) | $     109 | $  107  | $    32  |
| Parkway Joint Venture, LLC    | 2,749                         | (13)                   | (4)                               |
| Wink-Parkway Partnership      | 382                           | 245               | 122                          |
| RubiconPark I, LLC            | 9,546                         | 840               | 331                          |
| RubiconPark II, LLC           | 4,584                         | 1,242             | 413                          |
|                          | $17,370                       | $2,421            | $  894             |

 

Page 38 of 93

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(1)     PhoenixOfficeInvest, LLC is a joint venture that owned Viad Corporate Center, anoffice property in Phoenix, Arizona, and a venture in which Parkway owned a 30%interest.  On June 23, 2006, the venture sold Viad Corporate Center.  Parkwayreceived net proceeds of $15.4 million and recognized a gain of $13.6 million fromthe sale in 2006.

 

**Contractual Obligations**

****       We have contractual obligationsincluding mortgage notes payable and lease obligations.  The table belowpresents total payments due under specified contractual obligations by yearthrough maturity at December 31, 2008 (in thousands):

 

|                                     | **Payments Due By Period** |
|------------------------------------------|----------------------------|
| **Contractual  Obligations**             | **Total**                  | **2009** | **2010** | **2011** | **2012** | **2013** | **Thereafter** |
| Long-Term Debt (Mortgage  Notes Payable) | $1,133,714                 | $83,426 | $184,371 | $150,830 | $98,230 | $39,149 | $577,708 |
| Capital  Lease Obligations               | 6,879                      | 279 | 140 | 140 | 133 | 113 | 6,074 |
| Operating  Leases                        | 753                        | 314 | 302 | 130 | 7 | - | - |
| Purchase  Obligations                    | 9,326                      | 8,899 | - | 427 | - | - | - |
| Ground  Lease                            | 15,643                     | 185 | 185 | 185 | 185 | 185 | 14,718 |
| Total                                    | $1,166,315                 | $93,103 | $184,998 | $151,712 | $98,555 | $39,447 | $598,500 |

 

        The amounts presentedabove for mortgage notes payable and capital lease obligations includeprincipal and interest payments.  The amounts presented for purchaseobligations represent the remaining tenant improvement allowances for leases inplace and commitments for building improvements and development costs atDecember 31, 2008.

 

        Parkway has a 75%ownership interest in MBALP and acts as the managing general partner.  MBALP isprimarily funded with financing from a third-party lender, which is secured bya first lien on the rental property of the partnership.  The creditors of MBALPdo not have recourse to Parkway.  In acting as the general partner, Parkway iscommitted to providing additional funding to partnership deficits up to anaggregate amount of $1.0 million.  To date Parkway has not been required toprovide any additional funding to MBALP.

 

        Parkwayhas a 30% ownership interest in Texas Teachers Fund II and acts as the generalpartner.  Texas Teachers Fund II will be capitalized with approximately $375.0million of equity capital and $375.0 million of non-recourse, fixed-rate firstmortgage debt.  Parkway’s share of the equity capital for the fund will be$112.5 million.  Parkway has four years from the inception date of TexasTeachers Fund II to identify and acquire properties, with funds contributed asneeded to purchase office investments.

 

**Critical Accounting Estimates**

       *General. *Parkway’sinvestments are generally made in office properties.  Therefore, the Company isgenerally subject to risks incidental to the ownership of real estate.  Some ofthese risks include changes in supply or demand for office properties ortenants for such properties in an area in which we have buildings; changes inreal estate tax rates; and changes in federal income tax, real estate andzoning laws.  The Company’s discussion and analysis of financial condition andresults of operations is based upon its Consolidated Financial Statements.  TheCompany’s Consolidated Financial Statements include the accounts of ParkwayProperties, Inc., its majority owned subsidiaries and joint ventures in whichthe Company has a controlling interest. Parkway also consolidates subsidiarieswhere the entity is a variable interest entity and Parkway is the primarybeneficiary, as defined in FASB Interpretation 46R “Consolidation of VariableInterest Entities” (“FIN 46R”).  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses for the reportingperiod.  Actual results could differ from our estimates.

       The accounting policies and estimatesused in the preparation of our Consolidated Financial Statements are more fullydescribed in the notes to our Consolidated Financial Statements.  However,certain of the Company’s significant accounting policies are consideredcritical accounting policies due to the increased level of assumptions used orestimates made in determining their impact on our Consolidated FinancialStatements.

 

       Parkwayconsiders critical accounting policies and estimates to be those used in thedetermination of the reported amounts and disclosure related to the following:

 

       (1) Revenue recognition;

       (2) Impairment or disposal of long-lived assets;

 

Page 39 of 93

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       (3) Depreciable lives applied to real estate and improvements to real estate;

       (4) Initial recognition, measurement and allocation of the cost of real estateacquired; and

       (5) Allowance for doubtful accounts

 

       *RevenueRecognition. *Revenue from real estate rentals is recognized on astraight-line basis over the terms of the respective leases.  The cumulativedifference between lease revenue recognized under this method and contractuallease payment terms is recorded as straight line rent receivable on theaccompanying balance sheets.  

 

       Whenthe Company is the owner of the tenant improvements, the leased space is readyfor its intended use when the tenant improvements are substantially completed.In limited instances, when the tenant is the owner of the tenant improvements,straight-line rent is recognized when the tenant takes possession of theunimproved space.

 

       Theleases also typically provide for tenant reimbursement of a portion of commonarea maintenance and other operating expenses.  Property operating costrecoveries from customers (“expense reimbursements”) are recognized as revenuein the period in which the expenses are incurred.  The computation of expensereimbursements is dependent on the provisions of individual customer leases. Most customers make monthly fixed payments of estimated expense reimbursements. The Company makes adjustments, positive or negative, to expense reimbursementincome quarterly to adjust the recorded amounts to the Company’s best estimateof the final property operating costs based on the most recent quarterlybudget.  After the end of the calendar year, the Company computes eachcustomer’s final expense reimbursements and issues a bill or credit for thedifference between the actual amount and the amounts billed monthly during theyear.  

 

       Managementcompany income represents market-based fees earned from providing management,construction, leasing, brokerage and acquisition services to third parties.Management fee income is computed and recorded monthly in accordance with theterms set forth in the stand alone management service agreements. Leasing andbrokerage commissions are recognized pursuant to the terms of the stand aloneagreements at the time underlying leases are signed, which is the point atwhich the earnings process is complete and collection of the fees is reasonablyassured. Fees relating to the purchase or sale of property are recognized whenthe earnings process is complete and collection of the fees is reasonablyassured, which usually occurs at closing. All fees on Company-owned propertiesand consolidated joint ventures are eliminated in consolidation.  The portionof fees earned on unconsolidated joint ventures attributable to Parkway'sownership interest is eliminated in consolidation. 

 

       *Impairmentor Disposal of Long-Lived Assets.*  Changes in the supply or demand oftenants for our properties could impact our ability to fill available space. Should a significant amount of available space exist for an extended period,our investment in a particular office building may be impaired.  We evaluateour real estate assets upon the occurrence of significant adverse changes toassess whether any impairment indicators are present that affect the recoveryof the carrying amount. 

 

Page 40 of 93

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       Real estate assets are classified asheld for sale or held and used in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” (“SFAS No. 144”).  We classify certain assets asheld for sale based on management having the authority and intent of enteringinto commitments for sale transactions to close in the next twelve months.  Weconsider an office property as held for sale once we have executed a contractfor sale, allowed the buyer to complete its due diligence review and received substantialnon-refundable deposit.  Until a buyer has completed its due diligence reviewof the asset, necessary approvals have been received and substantive conditionsto the buyer’s obligation to perform have been satisfied, we do not consider asale to be probable.  When the Company identifies an asset as held for sale, weestimate the net realizable value of such asset and discontinue recordingdepreciation on the asset.  In accordance with SFAS No. 144, the Company recordsassets held for sale at the lower of carrying amount or fair value less cost tosell.  With respect to assets classified as held and used, we periodicallyreview these assets to determine whether our carrying amount will berecovered.  A long-lived asset is considered impaired if its carrying valueexceeds the estimated fair value.  Fair value is based on the estimated andrealizable contract sales price (if available) for the asset less estimatedcosts to sell.  If a sales price is not available, the estimated undiscountedcash flows of the asset for the remaining useful life are used to determine ifthe carrying value is recoverable.  The cash flow estimates are based onassumptions about employing the asset for its remaining useful life.  Factorsconsidered in projecting future cash flows include but are not limited to:  existingleases, future leasing and terminations, market rental rates, capitalimprovements, tenant improvements, leasing commissions, inflation and otherknown variables.  Upon impairment, the Company would recognize an impairmentloss to reduce the carrying value of the long-lived asset to our estimate ofits fair value.  The estimate of fair value and cash flows to be generated fromproperties requires us to make assumptions.  If one or more assumptions proveincorrect or if the assumptions change, the recognition of an impairment losson one or more properties may be necessary in the future, which would result ina decrease in net income.

      In 2008,* *Parkway recorded animpairment loss on two contracted office property sales in the amount of $1.8million, and an impairment loss on 12 acres of land in New Orleans, Louisianain the amount of $717,000.

*       Depreciable Lives Applied to RealEstate and Improvements to Real Estate.*  Depreciation of buildings and parkinggarages is computed using the straight-line method over an estimated usefullife of 40 years.  Depreciation of building improvements is computed using thestraight-line method over the estimated useful life of the improvement.  If ourestimate of useful lives proves to be incorrect, the depreciation expenserecognized would also be incorrect.  Therefore, a change in the estimateduseful lives assigned to buildings and improvements would result in either anincrease or decrease in depreciation expense, which would result in an increaseor decrease in earnings.

*       Initial Recognition, Measurementand Allocation of the Cost of Real Estate Acquired.*  Parkway accounts forits acquisitions of real estate in accordance with Statement of FinancialAccounting Standards No. 141, “Business Combinations,” which requires the fairvalue of the real estate acquired to be allocated to the acquired tangibleassets, consisting of land, building, garage, building improvements and tenantimprovements, identified intangible assets and liabilities, consisting of thevalue of above and below market leases, customer relationships, lease costs andthe value of  in-place leases and any value attributable to above or belowmarket debt assumed with the acquisition.

*       *Parkway allocates the purchaseprice of properties to tangible and intangible assets based on fair values. TheCompany determines the fair value of the tangible and intangible componentsusing a variety of methods and assumptions all of which result in an approximationof fair value.  Differing assumptions and methods could result in differentestimates of fair value and thus, a different purchase price allocation andcorresponding increase or decrease in depreciation and amortization expense.

* *

*       Allowancefor Doubtful Accounts. *Accounts receivable are reduced by an allowance foramounts that may become uncollectible in the future.  Our receivable balance iscomprised primarily of rents and operating expense recoveries due from customers. Change in the supply of or demand for office properties could impact our customers’ability to honor their lease obligations, which could in turn affect ourrecorded revenues and estimates of the collectability of our receivables. Revenue from real estate rentals is recognized and accrued as earned on a prorata basis over the term of the lease.  We regularly evaluate the adequacy ofour allowance for doubtful accounts considering such factors as credit qualityof our customers, delinquency of payment, historical trends and currenteconomic conditions.  We provide an allowance for doubtful accounts for customerbalances that are over 90 days past due and for specific customer receivablesfor which collection is considered doubtful.  Actual results may differ fromthese estimates under different assumptions or conditions, which could resultin an increase or decrease in bad debt expense.

 

**New Accounting Pronouncements**

 

In September2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No.157”).  SFAS No. 157 defines fair value, establishes a framework for measuringfair value in generally accepted accounting principles (“GAAP”), and expandsdisclosures about fair value measurements.  The provisions of SFAS No. 157,with the exception of nonfinancial assets and liabilities, were effective forfinancial statements issued for fiscal years beginning after November 15,2007.  The FASB deferred for one year the Statement’s fair value measurementrequirements for nonfinancial assets and liabilities that are not required orpermitted to be measured at fair value on a recurring basis.  These provisionswill be effective for fiscal years beginning after November 15, 2008, and theCompany is in the process of evaluating the impact that the adoption of theseprovisions will have on the Company’s overall financial position and results ofoperations.  The application of SFAS No. 157 had an immaterial impact on theCompany’s overall financial position and results of operations upon adoptionJanuary 1, 2008.

 

In February2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities (“SFAS No. 159”).  SFAS No. 159 was effective forfiscal years beginning after November 15, 2007.  The Company did not elect thefair value option in regards to items not previously recorded at fair value. Therefore, the January 1, 2008 adoption of SFAS No. 159 did not have a materialimpact on the financial position or results of operations of the Company.

 

Page 41 of 93

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In December2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”),which revised the previously issued SFAS No. 141 (“SFAS No. 141”).  SFAS No.141(R) retains the fundamental requirements of SFAS No. 141, but expands thescope to include all transactions and other events in which one entity obtainscontrol over one or more other businesses.  SFAS No. 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or afterDecember 15, 2008.  SFAS No. 141(R) requires that the acquisition relatedtransaction costs be expensed as incurred.  SFAS No. 141(R) also includes newdisclosure requirements.  The impact of SFAS No. 141(R) on the Company’soverall financial position and results of operations will be determined by themarkets in which the Company invests.

 

In December2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements—an amendment of ARB No. 51” (“SFAS No. 160”).  SFAS No.160 amends ARB No. 51 to establish accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary.  SFAS No. 160 also amends certain of ARB No. 51’s consolidationprocedures for consistency with the requirements of SFAS No. 141(R).  SFAS No.160 is effective for fiscal years, and interim periods within those fiscalyears, beginning on or after December 15, 2008.  The application of SFAS No. 160will have an immaterial impact on the Company’s overall financial position andresults of operations upon adoption January 1, 2009, as this will only impactthe presentation of the Company’s consolidated financial statements.

 

In March 2008,the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities” (“SFAS No. 161”), which is an amendment of FASB StatementNo. 133. SFAS No. 161 requires all entities with derivative instruments todisclose information regarding how and why the entity uses derivativeinstruments and how derivative instruments and related hedged items affect theentity’s financial position, financial performance, and cash flows. TheStatement is effective prospectively for periods beginning on or after November15, 2008.  The application of SFAS No. 161 will have an immaterial impact onthe Company’s overall financial position and results of operations uponadoption January 1, 2009.

 

In May 2008,the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (“SFAS No. 162”).  SFAS No. 162 identifies the sources ofaccounting principles and the framework for selecting the principles to be usedin the preparation of financial statements of nongovernmental entities that arepresented in conformity with GAAP in the United States (the GAAP hierarchy). SFAS No. 162 is effective November 15, 2008, which represents 60 days followingthe SEC’s September 2008 approval of the Public Company Accounting OversightBoard amendments to AU Section 411, “The Meaning of**Present Fairly inConformity With Generally Accepted Accounting Principles.”  The application ofSFAS No. 162 did not have a material impact on the Company’s overall financialposition and results of operations.

 

Page 42 of 93

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**FundsFrom Operations**

 

       Management believes that funds fromoperations available to common shareholders (“FFO”) is an appropriate measureof performance for equity REITs and computes this measure in accordance withthe NAREIT definition of FFO.  Funds from operations is defined by NAREIT asnet income (computed in accordance GAAP), excluding gains or losses from salesof property and extraordinary items under GAAP, plus depreciation andamortization, and after adjustments to derive the Company’s pro rata share ofFFO of consolidated and unconsolidated joint ventures.  Further, the Companydoes not adjust FFO to eliminate the effects of non-recurring charges.  TheCompany believes that FFO is a meaningful supplemental measure of its operatingperformance because historical cost accounting for real estate assets inaccordance with GAAP implicitly assumes that the value of real estate assetsdiminishes predictably over time, as reflected through depreciation andamortization expenses.  However, since real estate values have historicallyrisen or fallen with market and other conditions, many industry investors andanalysts have considered presentation of operating results for real estatecompanies that use historical cost accounting to be insufficient.  Thus, NAREITcreated FFO as a supplemental measure of operating performance for real estateinvestment trusts that excludes historical cost depreciation and amortization,among other items, from net income, as defined by GAAP.  The Company believesthat the use of FFO, combined with the required GAAP presentations, has beenbeneficial in improving the understanding of operating results of real estateinvestment trusts among the investing public and making comparisons ofoperating results among such companies more meaningful.  FFO as reported byParkway may not be comparable to FFO reported by other REITs that do not definethe term in accordance with the current NAREIT definition.  Funds fromoperations do not represent cash generated from operating activities inaccordance with accounting principles generally accepted in the United States and is not an indication of cash available to fund cash needs.  Funds fromoperations should not be considered an alternative to net income as anindicator of the Company's operating performance or as an alternative to cashflow as a measure of liquidity.

 

       Thefollowing table presents a reconciliation of the Company's net income to FFOfor the years ended December 31, 2008 and 2007 (in thousands):

 

|  
**Year  Ended**
 
**December 31**
 
**2008**
**2007**
Net income
 $
9,274 
 $
19,692 
Adjustments to derive funds from operations:
 
 
     Depreciation  and amortization

91,716 
74,379 
     Depreciation  and amortization – discontinued operations

1,873 
3,196 
     Minority  interest depreciation and amortization

(20,644)

(10,414)

     Adjustments  for unconsolidated joint ventures

750 

732 

     Preferred  dividends
(4,800)

(4,800)

     Convertible  preferred dividends
- 

- 

     Gain  on real estate

(22,588)

(20,260)

     Minority  interest – unit holders

1 

2 

Funds from operations  applicable to common shareholders (1)
 $
55,582 
 $
62,527 
 

(1)     For 2008, FFOincludes large lease termination fee income in the amount of $3.7 million,offset by a reduction for a non-cash purchase accounting adjustment in theamount of $657,000, a non-cash impairment loss on real estate of $2.5 million,restricted stock expense of $1.4 million recognized upon the Company’sachievement of the GEAR UP Plan, a loss on the extinguishment of debt of $2.2million, included as a component of discontinued operations in the accompanyingconsolidated statement of income, and Hurricane Ike expense in the amount of$377,000.  For 2007, FFO includes lease termination fee income of $1.4 million,offset by a reduction for a $370,000 loss on extinguishment of debt, includedas a component of interest expense in the accompanying consolidated statementof income.  

**Inflation**

       Inflation has not had a significantimpact on the Company because of the relatively low inflation rate in theCompany’s geographic areas of operation.  Additionally, most of the leases requirethe customers to pay their pro rata share of operating expenses, includingcommon area maintenance, real estate taxes, utilities and insurance, therebyreducing the Company’s exposure to increases in operating expenses resultingfrom inflation.  The Company’s leases typically have three to seven year terms,which may enable the Company to replace existing leases with new leases atmarket base rent, which may be higher or lower than the existing lease rate.

**Forward-Looking Statements**

****       In addition to historicalinformation, certain sections of this Form 10-K may contain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934, such as those that are notin the present or past tense, that discuss the Company's beliefs, expectationsor intentions or those pertaining to the Company's capital resources,profitability and portfolio performance and estimates of market rental rates. Forward-looking statements involve numerous risks and uncertainties. Thefollowing factors, among others discussed herein and in the Company's filingsunder the Securities Exchange Act of 1934, could cause actual results andfuture events to differ materially from those set forth or contemplated in theforward-looking statements:  defaults or non-renewal of leases, increasedinterest rates and operating costs, failure to obtain necessary outsidefinancing, difficulties in identifying properties to acquire and in effectingacquisitions, failure to qualify as a real estate investment trust under theInternal Revenue Code of 1986, as amended, environmental uncertainties, risksrelated to natural disasters, financial market fluctuations, changes in realestate and zoning laws and increases in real property tax rates.  The successof the Company also depends upon the trends of the economy, including interestrates, income tax laws, governmental regulation, legislation, populationchanges and those risk factors discussed elsewhere in this Form 10-K and in theCompany's filings under the Securities Exchange Act of 1934.  Readers arecautioned not to place undue reliance on forward-looking statements, whichreflect management's analysis only as the date hereof.  The Company assumes noobligation to update forward-looking statements.****

Page 43 of 93
****
 
 
 

 

**ITEM 7A.  *Quantitativeand Qualitative Disclosures About Market Risk.***

****       See information appearing underthe caption "Liquidity" appearing in Item 7. "Management'sDiscussion and Analysis of Financial Condition and Results of Operations".

****       At December 31, 2008, totaloutstanding debt was $1.1 billion of which $269.4 million or 25.5% is variablerate debt.  If market rates of interest on the variable rate debt fluctuate by10% (or approximately 30 basis points), the change in interest expense on thevariable rate debt would increase or decrease future earnings and cash flows byapproximately $875,000 annually.

** **

**ITEM 8.  *FinancialStatements and Supplementary Data.***

 

**Index to Consolidated  Financial Statements**

**Page**

 

 

Reports  of Independent Registered Public Accounting Firm

45

Consolidated Balance Sheets - at  December 31, 2008 and 2007

48

Consolidated Statements of  Income - for the years ended December 31, 2008, 2007 and 2006

49

Consolidated Statements of Stockholders'  Equity - for the years ended December 31, 2008, 2007 and 2006

50

Consolidated Statements of Cash  Flows - for the years ended December 31, 2008, 2007 and 2006

51

Notes to Consolidated Financial  Statements

          52

Schedule  II - Valuations and Qualifying Accounts

          81

Schedule  III - Real Estate and Accumulated Depreciation

          82

Note  to Schedule III - Real Estate and Accumulated Depreciation

          85

Schedule  IV - Mortgage Loan on Real Estate

          86

Note  to Schedule IV – Mortgage Loan on Real Estate

          86

** **

Page 44 of 93
****
 
 
 

 

 

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

**THE BOARD OF DIRECTORS ANDSTOCKHOLDERS**

**PARKWAY PROPERTIES, INC.:**

 

We haveaudited the accompanying consolidated balance sheet of Parkway Properties, Inc.and subsidiaries as of December 31, 2008, and the related consolidatedstatements of income, stockholders’ equity, and cash flows for the year endedDecember 31, 2008.  In connection with our audit of the consolidated financialstatements, we also have audited financial statement schedules II, III and IV. Theseconsolidated financial statements and financial statement schedules are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements and financial statementschedules based on our audit. 

 

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Parkway Properties,Inc. and subsidiaries as of December 31, 2008, and the results of theiroperations and their cash flows for the year ended December 31, 2008, inconformity with U.S. generally accepted accounting principles.  Also, in ouropinion, the related financial statement schedules, when considered in relationto the basic consolidated financial statements taken as a whole, present fairly,in all material respects, the information set forth therein.

 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), Parkway Properties, Inc.’s internal controlover financial reporting as of December 31, 2008, based on the criteriaestablished in *Internal Control – Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated March 6, 2009, expressed an unqualified opinion on theeffectiveness of the Company’s internal control over financial reporting.

 

/s/ KPMG LLP

 

Jackson, Mississippi

March 6, 2009

 

 

 

Page 45 of 93
****
 

 

 

 

**Report of IndependentRegistered Public Accounting Firm**

** **

**The Board of Directors andShareholders of Parkway Properties, Inc.**

 

We haveaudited the accompanying consolidated balance sheets of Parkway Properties,Inc. as of December 31, 2007, and the related consolidated statements ofincome, stockholders' equity, and cash flows for each of the two years in theperiod ended December 31, 2007. Our audits also included the financialstatement Schedule II listed in the index at Item 15(a) 2 for each of the twoyears ended December 31, 2007. These financial statements and financialstatement schedule are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based onour audits.  We did not audit the financial statements of Parkway PropertiesOffice Fund, LP, a consolidated joint venture, which statements reflect totalassets of $276.7 million as of December 31, 2007 and total revenues of $33.5 million and $6.8 million for the years ended December 31, 2007 and 2006, respectively. Those statements were audited by other auditors whose report has beenfurnished to us, and our opinion, insofar as it relates to the amounts includedfor Parkway Properties Office Fund, LP, is based solely on the report of theother auditors.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Parkway Properties,Inc. at December 31, 2007, and the consolidated results of its operations andits cash flows for each of the two years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement Schedule II, listed inthe index at Item 15(a)2 for each of the two years ended December 31, 2007 when considered in relation to the basic financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

 

/s/ Ernst & Young LLP

 

Houston, Texas

February 27, 2008

 

Page 46 of 93
****
 
 
 

 

 

 

**Report of IndependentRegistered Public Accounting Firm**

** **

**The Partners ofParkway Properties Office Fund, LP:**

 

We have audited the consolidatedhistorical‐cost balance sheets of Parkway Properties Office Fund, LP (thePartnership) as of December 31, 2007 and 2006, and the related consolidated historical-coststatements of operations, changes in partners’ capital and cash flows for theyears then ended, not included herein. We also have audited the supplementalconsolidated current-value balance sheets of the Partnership as of December 31,2007 and 2006, and the related supplemental consolidated current-valuestatements of operations and changes in partners’ capital for the years thenended, not included herein. These consolidated financial statements are theresponsibility of the Partnership’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidatedhistorical-cost financial statements referred to above present fairly, in allmaterial respects, the financial position of Parkway Properties Office Fund, LPas of December 31, 2007 and 2006, and the results of its operations and its cashflows for the years then ended, in conformity with U.S. generally acceptedaccounting principles.

 

As described in note 11, thesupplemental consolidated current-value financial statements have been preparedby management to present relevant financial information that is not provided bythe consolidated historical-cost financial statements and are not intended tobe a presentation in conformity with U.S. generally accepted accountingprinciples. In addition, the supplemental consolidated current-value financialstatements do not purport to present the net realizable, liquidation, or marketvalue of the Partnership as a whole. Furthermore, amounts ultimately realizedby the Partnership from the disposal of properties may vary significantly fromthe current values presented.

 

In our opinion, the supplementalconsolidated current‐value financial statements referred to above presentfairly, in all material respects, the information set forth in them on thebasis of accounting described in note 11.

 

Our audits were made for thepurpose of forming an opinion on the consolidated historical-cost and consolidatedcurrent-value financial statements taken as a whole. The consolidatinginformation included in Schedules I - IV is presented for purposes ofadditional analysis of the consolidated current-value financial statementsrather than to present the financial position and results of operations of theindividual companies. The consolidating information has been subjected to theauditing procedures applied in the audits of the consolidated current-valuefinancial statements and, in our opinion, is fairly stated in all materialrespects in relation to the consolidated current-value financial statementstaken as a whole.

 

/s/ KPMG LLP

 

Jackson, Mississippi

February 26, 2008

 

Page 47 of 93
****
 

 

**PARKWAYPROPERTIES, INC.CONSOLIDATED BALANCE SHEETS**(In thousands, except share and per share data)

 

 

**December 31**

**December 31**

 

**2008**

**2007**

**Assets**

 

 

Real estate related investments:

 

 

     Office and parking  properties

$1,737,549 

$1,551,707 

     Real estate development

609 

14,686 

     Accumulated depreciation

(282,919)

(251,791)

 

1,455,239 

1,314,602 

 

 

 

     Land available for sale

750 

1,467 

     Mortgage loan

7,519 

7,001 

     Investment in unconsolidated  joint ventures

11,057 

11,236 

 

1,474,565 

1,334,306 

 

 

 

Rents receivable and other assets

118,512 

119,457 

Intangible assets, net

79,460 

70,719 

Cash and cash equivalents

15,318 

11,312 

 

$1,687,855 

$1,535,794 

** **

** **

** **

**Liabilities**

** **

** **

Notes payable to banks

$   185,940 

$   212,349 

Mortgage notes payable 

869,581 

714,501 

Accounts payable and other liabilities

98,862 

88,496 

 

1,154,383 

1,015,346 

** **

** **

** **

**Minority Interest**

** **

** **

Minority Interest – unit holders

32 

34 

Minority Interest – real estate partnerships

127,192   

80,506 

** **

127,224 

80,540 

** **

** **

** **

**Stockholders' Equity**

** **

** **

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, 67,600,000 shares  authorized,

 

 

     15,253,396 and 15,223,350  shares issued and outstanding

 

 

     in 2008 and 2007, respectively

15 

15 

Common stock held in trust, at cost, 85,300 and 104,500 

 

 

     shares in 2008 and 2007,  respectively 

(2,895)

(3,540)

Additional paid-in capital

428,367 

425,221 

Accumulated other comprehensive loss

(7,728)

(358)

Accumulated deficit

(69,487)

(39,406)

 

406,248 

439,908 

 

$1,687,855 

$1,535,794 

 

 

Seenotes to consolidated financial statements.

 

Page 48 of 93
****
 
 
 

 

 

 

**PARKWAYPROPERTIES, INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**(In thousands, except per share data)

 

**Year Ended December 31**

 

**2008**

**2007**

**2006**

**Revenues**

 

 

 

Income  from office and parking properties

$263,475 

$233,304 

$197,889 

Management company income

1,936 

1,605 

5,329 

      Total  revenues

265,411 

234,909 

203,218 

** **

 

 

 

**Expenses**

 

 

 

Property  operating expense

126,169 

107,990 

93,089 

Depreciation  and amortization

91,716 

74,379 

61,607 

Management  company expenses

1,947 

1,188 

1,141 

General  and administrative

9,725 

6,602 

4,656 

      Total  expenses

229,557 

190,159 

160,493 

** **

 

 

 

**Operating  income**

35,854 

44,750 

42,725 

** **

 

 

 

**Other  income and expenses**

 

 

 

Interest  and other income

1,333 

528 

40 

Equity  in earnings of unconsolidated joint ventures

894 

1,008 

751 

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

- 

20,307 

17,646 

Impairment  loss on real estate

(2,542)

- 

- 

Interest  expense

(59,426)

(52,546)

(43,044)

** **

 

 

 

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

(23,887)

14,047 

18,118 

Minority  interest - unit holders

(1)

(2)

(1)

Minority  interest - real estate partnerships

11,369 

3,174 

485 

** **

 

 

 

**Income  (loss) from continuing operations**

(12,519)

17,219 

18,602 

 

 

 

 

Discontinued  operations:

 

 

 

      Income  (loss) from discontinued operations

(795)

2,473 

1,997 

      Gain  on sale of real estate from discontinued operations

22,588 

- 

5,083 

            Total  discontinued operations

21,793 

2,473 

7,080 

** **

 

 

 

**Net  income**

9,274 

19,692 

25,682 

 

 

 

 

Change  in market value of interest rate swaps

(7,370)

(1,190)

(73)

Change  in unrealized gain on equity securities

- 

4 

75 

**Comprehensive  income**

$  1,904 

$18,506 

$  25,684 

** **

 

 

 

**Net  income available to common stockholders:**

** **

** **

** **

Net  income

$  9,274 

$19,692 

$  25,682 

Dividends  on preferred stock

(4,800)

(4,800)

(4,800)

Dividends  on convertible preferred stock

- 

- 

(1,773)

**Net  income available to common stockholders**

$  4,474 

$14,892 

$  19,109 

** **

 

 

 

**Net  income per common share:**

 

 

 

Basic:

 

 

 

      Income  (loss) from continuing operations

$   (1.15)

$     0.80 

$     0.84 

      Discontinued  operations

1.45 

0.16 

0.50 

      Net  income

$    0.30 

$     0.96 

$     1.34 

 

 

 

 

Diluted:

 

 

 

      Income  (loss) from continuing operations

$   (1.15)

$     0.79 

$     0.83 

      Discontinued  operations

1.45 

0.16 

0.49 

      Net  income

$    0.30 

$     0.95 

$     1.32 

** **

 

 

 

**Dividends per common share**

$  2.275 

$     2.60 

$     2.60 

** **

 

 

 

**Weighted  average shares outstanding:**

 

 

 

      Basic  

15,023 

15,482 

14,306 

      Diluted

15,023 

15,648 

14,487 

 

 

 

 

 

 

Seenotes to consolidated financial statements.

 

Page 49 of 93
****
 
 
 

 

 

 

**PARKWAY PROPERTIES, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY**

(In thousands)

 

**Year Ended December 31**

 

**2008**

**2007**

**2006**

** **

 

 

 

**8.34% Series B Cumulative  Convertible Preferred stock, $.001 par value**

 

 

 

     Balance  at beginning of year

$            - 

$             - 

$  28,122 

          Conversion  of preferred stock to common stock

- 

- 

(28,122)

     Balance  at end of year

- 

- 

- 

** **

 

 

 

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

 

 

 

     Balance  at beginning of year

57,976 

57,976 

57,976 

     Balance  at end of year

57,976 

57,976 

57,976 

** **

 

 

 

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

 

 

 

     Balance  at beginning of year

15 

16 

14 

          Purchase  of Company stock

- 

(1)

- 

          Shares  issued – stock offering

- 

- 

1 

          Shares  issued – conversion of preferred stock to common stock

- 

- 

1 

     Balance  at end of year

15 

15 

16 

 

 

 

 

**Common stock held in  trust**

 

 

 

     Balance  at beginning of year

(3,540)

(3,894)

(4,198)

          Shares  distributed from deferred compensation plan

645 

354 

304 

     Balance  at end of year

(2,895)

(3,540)

(3,894)

** **

** **

** **

** **

**Additional paid-in  capital**

** **

** **

** **

     Balance  at beginning of year

425,221 

449,141 

389,971 

          Stock  options and warrants exercised

792 

3,035 

6,034 

          Conversion  of preferred stock to common stock

- 

- 

28,121 

          Shares  issued in lieu of Directors' fees

140 

251 

170 

          Shares  issued - DRIP Plan

- 

363 

407 

          Proceeds/(issuance  costs) from stock offerings and shelf registration

(52)

(28)

29,487 

          Employee  Stock Purchase Plan

- 

75 

3 

          Purchase  of Company stock

(10)

(29,137)

(2,814)

          Share-based  compensation expense

2,276 

1,521 

863 

          Reclassification  upon the adoption of SFAS No. 123R

- 

- 

(3,101)

     Balance  at end of year

428,367 

425,221 

449,141 

** **

 

 

 

**Unearned compensation**

 

 

 

     Balance  at beginning of year

- 

- 

(3,101)

          Reclassification  upon the adoption of SFAS No. 123R

- 

- 

          3,101 

**     **Balance at end of year

- 

- 

- 

** **

** **

** **

** **

**Accumulated other  comprehensive income (loss)**

** **

** **

** **

     Balance  at beginning of year

(358)

828 

826 

          Change  in unrealized gain on equity securities

- 

4 

75 

          Change  in market value of interest rate swaps

(7,370)

(1,190)

(73)

     Balance  at end of year

(7,728)

(358)

828 

** **

** **

** **

** **

**Accumulated deficit**

** **

** **

** **

     Balance  at beginning of year

(39,406)

(13,761)

4,906 

          Net  income

9,274 

19,692 

25,682 

          Preferred  stock dividends declared

(4,800)

(4,800)

(4,800)

          Convertible  preferred stock dividends declared

- 

- 

(1,773)

          Common  stock dividends declared

(34,555)

(40,537)

(37,776)

     Balance  at end of year

(69,487)

(39,406)

(13,761)

**Total stockholders'  equity**

$406,248 

$439,908 

$490,306 

 

 

 

 

 

See notes toconsolidated financial statements.

 

Page 50 of 93
****
 

 

 

 

 

**PARKWAYPROPERTIES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**(In thousands)

 

**Year Ended December 31**

 

**2008**

**2007**

**2006**

**Operating  activities**

 

 

 

     Net  income

$      9,274 

$   19,692 

$    25,682 

     Adjustments  to reconcile net income to cash

 

 

 

          provided  by operating activities:

 

 

 

          Depreciation  and amortization

91,716 

74,379 

61,607 

          Depreciation  and amortization – discontinued operations

1,873 

3,196 

3,630 

          Amortization  of above market leases

45 

788 

1,582 

          Amortization  of mortgage loan discount

(518)

(71)

- 

          Amortization  of loan costs

1,825 

1,202 

1,100 

          Share-based  compensation expense

2,276 

1,521 

863 

          Operating  distributions from unconsolidated 

 

 

 

               joint  ventures

1,042 

1,036 

1,334 

          Loss  allocated to minority interests

(11,368)

(3,172)

(484)

          Net  gain on real estate, joint venture interests 

 

 

 

               and  other assets

(20,046)

(20,307)

(22,729)

          Equity  in earnings of unconsolidated joint ventures

(894)

(1,008)

(751)

          Increase  in deferred leasing costs

(8,738)

(7,080)

(5,937)

          Changes  in operating assets and liabilities:

 

 

 

               Change  in receivables and other assets

(274)

(5,736)

(25,465)

               Change  in accounts payable and 

 

 

 

                    other  liabilities

(2,165)

11,491 

7,118 

     **Cash  provided by operating activities**

64,048 

75,931 

47,550 

** **

 

 

 

**Investing  activities**

 

 

 

     Investment  in mortgage loan

- 

(6,930)

- 

     Distributions  from unconsolidated joint ventures

38 

89 

15,395 

     Investments  in unconsolidated joint ventures

- 

(75)

(113)

     Purchases  of real estate related investments

(229,707)

(55,428)

(328,909)

     Proceeds  from sales of real estate and joint venture interests

84,464 

56,795 

61,228 

     Real  estate development

(28,981)

(11,615)

- 

     Improvements  to real estate related investments

(31,916)

(39,877)

(28,223)

**     Cash  used in investing activities**

(206,102)

(57,041)

(280,622)

** **

 

 

 

**Financing  activities**

 

 

 

     Principal  payments on mortgage notes payable

(76,620)

(41,011)

(49,066)

     Proceeds  from long-term financing

231,700 

59,500 

213,700 

     Proceeds  from bank borrowings

189,452 

241,126 

153,098 

     Payments  on bank borrowings

(215,861)

(181,921)

(151,230)

     Redemption  of subsidiary redeemable preferred membership interests

- 

(10,741)

- 

     Debt  financing costs

(2,183)

(1,688)

(2,215)

     Stock  options and warrants exercised

792 

3,035 

6,034 

     Purchase  of Company stock

(10)

(29,138)

(2,814)

**     **Dividends paid on common stock

(34,410)

(40,222)

(37,480)

     Dividends  paid on preferred stock

(4,800)

(4,800)

(7,160)

     Contributions  from minority interest partners

60,593 

42,182 

82,621 

     Distributions  to minority interest partners

(2,541)

(48,784)

(1,203)

     Employee  stock purchase plan

- 

75 

3 

     Proceeds  from DRIP Plan

- 

363 

407 

     Proceeds/(issuance  costs) from stock offerings and shelf registration

(52)

(28)

29,488 

     **Cash  provided by (used in) financing activities**

146,060 

(12,052)

234,183 

**     Change  in cash and cash equivalents**

4,006 

6,838 

1,111 

**     Cash  and cash equivalents at beginning of year**

11,312 

4,474 

3,363 

     **Cash  and cash equivalents at end of year**

$    15,318 

$    11,312 

$     4,474 

 

Seenotes to consolidated financial statements.

 

Page 51 of 93
****
 

 

 

 

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2008**

****

**NOTE A - Summary ofSignificant Accounting Policies**

**Basis of Presentation and Principles of Consolidation**

 

        Theaccompanying financial statements are prepared following U.S. generallyaccepted accounting principles (“GAAP”) and the requirements of the Securities andExchange Commission (“SEC”).

       The consolidated financial statementsinclude the accounts of Parkway Properties, Inc. ("Parkway" or"the Company"), its wholly-owned subsidiaries and joint ventures inwhich the Company has a controlling interest.  The other partners’ equityinterests in the consolidated joint ventures are reflected as minorityinterests in the consolidated financial statements.  Parkway also consolidatessubsidiaries where the entity is a variable interest entity and Parkway is theprimary beneficiary, as defined in FASB Interpretation 46R “Consolidation ofVariable Interest Entities” (“FIN 46R”).  All significant intercompanytransactions and accounts have been eliminated in the accompanying financialstatements.

        The Company determines consolidation for joint ventures based onstandards set forth in EITF 96-16, “Investor’s Accounting for an Investee Whenthe Investor Has a Majority of the Voting Interest but the Minority Shareholderor Shareholders Have Certain Approval or Veto Rights”;**EITF 04-5, “DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights”; Statement of Position 78-9, “Accounting for Investments in Real EstateVentures”; and FIN 46R.  Based on the guidance set forth in thesepronouncements, the Company consolidates certain joint ventures where itexercises significant control over major operating and management decisions, orwhere the Company is the sole general partner and the limited partners do notpossess kick-out rights or other substantive participating rights or where theentity is a variable interest entity and Parkway is the primary beneficiary. The equity method of accounting is used for those joint ventures that do notmeet the criteria for consolidation and where Parkway exercises significantinfluence but does not control these joint ventures.

** **

        Theconsolidated statements of income for the year ended December 31, 2008, includea $657,000 non-cash reduction to net income as a result of a purchase accountingadjustment recorded to income during the third quarter of 2006 through the endof 2007.  The non-cash purchase accounting adjustment was corrected in thefirst quarter of 2008.  Parkway’s Management as well as the AuditCommittee of the Board of Directors have reviewed this accounting errorutilizing Securities and Exchange Commission Staff Accounting Bulletin Nos. 99and 108 and believe the impact of correcting this error is not material to anyperiods presented in the consolidated financial statements.

** **

**Business**

       The Company's operations areexclusively in the real estate industry, principally the operation, leasing,acquisition and ownership of office buildings. 

**Use of Estimates**

       The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Although the Company believes the assumptions and estimatesmade are reasonable and appropriate, as discussed in the applicable sectionsthroughout these consolidated financial statements, different assumptions andestimates could materially impact reported results.  The current economicenvironment has increased the degree of uncertainty inherent in these estimatesand assumptions, therefore, changes in market conditions could impact theCompany’s future operating results.  The Company’s most significant estimatesrelate to impairments on real estate and allowance for doubtful accounts.

 

 

Page 52 of 93
****
 
 
 

 

**Real Estate Properties**

 

      Real estate properties are stated at thelower of cost less accumulated depreciation, or fair value.  Cost includes thecarrying amount of the Company's investment plus any additional considerationpaid, liabilities assumed, costs of securing title and improvements madesubsequent to acquisition.  Depreciation of buildings and building improvementsis computed using the straight-line method over the estimated useful lives ofthe assets.  Depreciation of tenant improvements, including personal property,is computed using the straight-line method over the lesser of useful life orthe term of the lease involved.  Maintenance and repair expenses are charged toexpense as incurred.  

 

       Balancesof major classes of depreciable assets (in thousands) and their respectiveestimated useful lives are:

 

** **

** **

**December  31**

**December  31**

**Asset  Category**

**Estimated  Useful Life**

**2008**

**2007**

Land

Non-depreciable

$   171,367

$   147,779

Building and  garage

40 years

1,292,415

1,163,974

Building  improvements

7 to 40 years

108,704

90,563

Tenant  improvements

Lesser of useful life or term of  lease

165,063

149,391

 

 

$1,737,549

$1,551,707

       Depreciation expense related to theseassets of $67.3 million, $59.7 million and $49.7 million was recognized in 2008,2007 and 2006, respectively.

       The Company evaluates its real estateassets upon occurrence of significant adverse changes in their operations toassess whether any impairment indicators are present that affect the recoveryof the carrying amount.  The carrying amount includes the net book value oftangible and intangible assets.  Real estate assets are classified as held forsale or held and used in accordance with Statement of Financial AccountingStandards ("SFAS") No. 144, "Accounting for the Impairment orDisposal of Long-Lived Assets" (“SFAS No. 144”).  In accordance with SFASNo. 144, Parkway records assets held for sale at the lower of carrying amountor fair value less cost to sell.  With respect to assets classified as held andused, Parkway recognizes an impairment loss to the extent the carrying amountis not recoverable and exceeds its fair value.  Fair value is based on theestimated and realizable contract sales price (if available) for the asset lessestimated costs to sell.  If a sales price is not available, the estimatedundiscounted cash flows of the asset for the remaining useful life are used todetermine if the carrying value is recoverable.  The cash flow estimates arebased on assumptions about employing the asset for its remaining useful life. Factors considered in projecting future cash flows include but are not limitedto:  existing leases, future leasing and terminations, market rental rates,capital improvements, tenant improvements, leasing commissions, inflation andother known variables.  Upon impairment, Parkway recognizes an impairment lossto reduce the carrying value of the real estate asset to the estimate of itsfair value.

       Gains from sales of real estate arerecognized based on the provisions of SFAS No. 66, “Accounting for Sales ofReal Estate”, which require upon closing, the transfer of rights of ownershipto the purchaser, receipt from the purchaser of an adequate cash down paymentand adequate continuing investment by the purchaser.  If the requirements forrecognizing gains have not been met, the sale and related costs are recorded,but the gain is deferred and recognized generally on the installment method ofaccounting as collections are received.

       Land available for sale (see Note F) iscarried at the lower of cost or fair value less estimated cost to sell.

** **

**Purchase Price Allocation**

       Parkway accounts for its acquisitionsof real estate in accordance with SFAS No. 141, “Business Combinations” (“SFAS No.141”).  Parkway allocates the purchase price of real estate to tangible andintangible assets and liabilities based on fair values.  Tangible assetsconsist of land, building, garage, building improvements and tenantimprovements.  Intangible assets and liabilities consist of the value of aboveand below market leases, lease costs, the value of in-place leases, customerrelationships and any value attributable to above or below market debt assumedwith the acquisition.

 

Page 53 of 93
****
 

 

 

 

 

        The Company may engage independentthird-party appraisers to perform the valuations used to determine the fairvalue of these identifiable tangible and intangible assets.  These valuationsand appraisals use commonly employed valuation techniques, such as discountedcash flow analyses. Factors considered in these analyses include an estimate ofcarrying costs during hypothetical expected lease-up periods consideringcurrent market conditions, and costs to execute similar leases. Parkway alsoconsiders information obtained about each property as a result of itspre-acquisition due diligence, marketing and leasing activities in estimatingthe fair value of the tangible and intangible assets acquired. In estimatingcarrying costs, the Company includes real estate taxes, insurance and otheroperating expenses and estimates of lost rentals at market rates during theexpected lease-up periods depending on specific local market conditions anddepending on the type of property acquired. Additionally, Parkway estimatescosts to execute similar leases including leasing commissions, legal and otherrelated expenses to the extent that such costs are not already incurred inconnection with a new lease origination as part of the transaction.

 

       Thefair value of above or below market in-place lease values is the present valueof the difference between the contractual amount to be paid pursuant to thein-place lease and the estimated current market lease rate expected over theremaining non-cancelable life of the lease.  The capitalized above market leasevalues are amortized as a reduction of rental income over the remaining term ofthe respective leases. The capitalized below market lease values are amortizedas an increase to rental income over the remaining term of the respectiveleases.   Total amortization for above and below market leases was a netreduction of rental income of $45,000, $788,000 and $1.6 million for the yearsending December 31, 2008, 2007 and 2006, respectively.

       Amortization of above and belowmarket leases is projected as an increase (decrease) to rental income asfollows for the next five years (in thousands):

 

 

Amount

2009

$    (53)

2010

245 

2011

309 

2012

538 

2013

219 

       The fair value of customerrelationships represents the quantifiable benefits related to developing arelationship with the current customer.  Examples of these benefits would begrowth prospects for developing new business with the existing customer, theability to attract similar customers to the building, the tenant’s creditquality and expectations of lease renewals (including those existing under theterms of the lease agreement or management’s expectation for renewal), amongother factors.  Management believes that there would typically be little valueassociated with customer relationships that is in excess of the value of thein-place lease and their typical renewal rates.  Any value assigned to customerrelationships is amortized over the remaining terms of the respective leasesplus any expected renewal periods as a lease cost amortization expense. Currently, the Company has no value assigned to customer relationships.

       The fair value of at market in-placeleases is the present value associated with re-leasing the in-place lease as ifthe property was vacant.  Factors to be considered include estimates ofcarrying costs during hypothetical expected lease-up periods consideringcurrent market conditions and costs to execute similar leases.  In estimatingcarrying costs, the Company includes real estate taxes, insurance and otheroperating expenses and estimates of lost rentals at market rates during theexpected lease-up periods.  The value of at market in-place leases is amortizedas a lease cost amortization expense over the expected life of the lease,including expected renewals.  Total amortization expense for the value ofin-place leases was $15.0 million, $9.0 million and $8.4 million for the yearsending December 31, 2008, 2007 and 2006, respectively.

 

       Amortizationexpense for the value of in-place leases is projected as follows for the nextfive years (in thousands):

 

 

Amount

2009

$11,022

2010

9,921

2011

8,910

2012

6,598

2013

5,611

       A separate component of the fairvalue of in-place leases is identified for the lease costs.  The fair value oflease costs represents the estimated commissions and legal fees paid inconnection with the current leases in place.  Lease costs are amortized overthe non-cancelable terms of the respective leases as lease cost amortizationexpense.

 

Page 54 of 93
****
 

 

 

 

 

       In no event does the amortization periodfor intangible assets exceed the remaining depreciable life of the building.Should a customer terminate its lease, the unamortized portion of the tenantimprovement, in-place lease value, lease cost and customer relationshipintangibles would be charged to expense.  Additionally, the unamortized portionof above market in-place leases would be recorded as a reduction to rentalincome and the below market in-place lease value would be recorded as anincrease to rental income.

 

**Mortgage Loan Receivable**

** **

       Parkwayrecords its mortgage loan receivable at the stated principal amount net anypremium or discount.  At December 31, 2008 the carrying amount of the mortgageloan receivable was $7.5 million.  The Company recognizes the premium ordiscount over the life of the mortgage loan using the effective interestmethod.  Parkway evaluates the collectability of principal and interest on its mortgageloans, if circumstances warrant, to determine whether it is impaired.  A loanis impaired when based on current information and events, it is probable that theCompany will be unable to collect all amounts due according to the existingcontractual terms.  When a loan is impaired, the amount of the loss accrual iscalculated by comparing the recorded investment to the value determined bydiscounting the expected future cash flow at the loan’s effective interestrate.  No impairment loss has been recognized in connection with the mortgageloan receivable.

** **

**Investment in Unconsolidated Joint Ventures**

       At December 31, 2008 and 2007,Parkway had a non-controlling interest in four unconsolidated joint ventures,which are accounted for using the equity method of accounting.  Therefore,Parkway reports its share of income and losses based on its economic interestin these entities, as measured by its ownership interest or expected cashdistributions if materially different than distributions based on ownershipinterest.  Parkway classifies its interests as non-controlling when it holdsless than a majority voting interest in the entity and does not have the soleability, based on the terms of the joint venture agreements, to make decisionsabout the entities’ activities regarding items such as major leases,encumbering the entities with debt, major capital expenditures and whether todispose of the entities.

** **

     When circumstances indicatethere may have been a loss in value of an equity investment, the Companyevaluates the investment for impairment by estimating its ability to recoverits investment from future cash flows.  If Parkway determines the loss in valueis other than temporary, the Company recognizes an impairment charge to reflectthe investment at fair value.  The use of projected future cash flows and otherestimates of fair value, the determination of when a loss is other thantemporary, and the calculation of the amount of the loss are complex andsubjective.  Use of other estimates and assumptions may result in differentconclusions.  Changes in economic and operating conditions that occur subsequentto the Company’s review could impact these assumptions and result in futureimpairment charges of our equity investments.

** **

**Allowance for Doubtful Accounts**

**       **Accounts receivable are reducedby an allowance for amounts that the Company estimates to be uncollectible. The receivable balance is comprised primarily of rent and expense reimbursementincome due from the customers.  Management evaluates the adequacy of theallowance for doubtful accounts considering such factors as the credit qualityof our customers, delinquency of payment, historical trends and currenteconomic conditions.  The Company provides an allowance for doubtful accountsfor customer balances that are over 90 days past due and for specific customerreceivables for which collection is considered doubtful.

**Cash Equivalents**

       The Company considers all highlyliquid investments with a maturity of three months or less when purchasedto be cash equivalents.

** **

**Minority Interest**

*Minority Interest – Unit Holders*

       Minority interest in ParkwayProperties LP (the “Operating Partnership”) represents the limited partner’sproportionate share of the equity in the operating partnership.  The operatingpartnership pays a regular quarterly distribution to the holders of operatingunits.  Income is allocated to minority interest based on the economicpercentage ownership during the year.  At December 31, 2008, the minorityinterest in our operating partnership consisted of 1,318 operating units heldby a party other than the Company.

**

Page 55 of 93
****
 

 

 

 

 

*Minority Interest – RealEstate Partnerships*

       The Company has an interest in threejoint ventures that are included in its consolidated financial statements.Parkway has a 75.025% interest in Parkway Moore, LLC, which owns an interest inMoore Buildings Associates, LP.  The Company also owns a 25% and 30% interestin Parkway Properties Office Fund, LP and Parkway Properties Office Fund II,LP, respectively.

 

       MooreBuilding Associates, LP (“MBALP”) was established for the purpose of owning acommercial office building (the Toyota Center in Memphis, Tennessee).  Inacting as the general partner, Parkway is committed to providing additionalfunding to meet partnership operating deficits up to an aggregate amount of $1.0million.  Parkway receives income from MBALP in the form of interest from aconstruction note receivable, incentive management fees and property managementfees.  Parkway also receives interest income on a note receivable from ParkwayMoore, LLC (“PMLLC”).  Any intercompany asset, liability, revenue and expenseaccounts between Parkway and MBALP and PMLLC have been eliminated.

 

Parkway servesas the general partner of Parkway Properties Office Fund, LP (“Ohio PERS FundI”) and provides asset management, property management, leasing andconstruction management services to the fund, for which it is paid market-basedfees.  Cash distributions from the fund are made to each joint venture partnerbased on their percentage of ownership in the fund.  Since Parkway is the solegeneral partner and has the authority to make major decisions on behalf of thefund, Parkway is considered to have a controlling interest.  Accordingly,Parkway is required to consolidate the fund in its consolidated financialstatements.  At February 15, 2008, Ohio PERS Fund I was fully invested.

 

        On May 14, 2008, Parkway formedParkway Properties Office Fund II, LP (“Texas Teachers Fund II”), a $750.0million discretionary fund with the Teacher Retirement System of Texas (“TRS”),for the purpose of acquiring high-quality multi-tenant office properties.   TRSwill be a 70% investor, and Parkway will be a 30% investor in the fund, whichwill be capitalized with approximately $375.0 million of equity capital and$375.0 million of non-recourse, fixed-rate first mortgage debt.  Parkway’sshare of the equity contribution for the fund will be $112.5 million and willbe funded with proceeds from asset sales, line of credit advances and/or salesof equity securities.  The fund will target investments in office buildings inHouston, Austin, San Antonio, Chicago, Atlanta, Phoenix, Charlotte, Memphis,Nashville, Jacksonville, Orlando, Tampa/St. Petersburg, Ft. Lauderdale, as wellas other growth markets to be determined at Parkway’s discretion.

 

        Parkway will serve as thegeneral partner of Texas Teachers Fund II and will provide asset management,property management, and leasing and construction management services to thefund for which it will be paid market-based fees.  Parkway will have four yearsto identify and acquire properties, with funds contributed as needed tocomplete acquisitions.  Parkway will exclusively represent the fund in makingacquisitions within the target markets and within certain predefined criteria. Parkway may continue to make fee-simple acquisitions in markets outside of thetarget markets, acquire properties within the target markets that do not meet thefund’s specific criteria or sell any currently owned properties.  At December31, 2008, there have been no acquisitions of assets on behalf of Texas TeachersFund II.

 

        Minority interest in realestate partnerships represents the other partners’ proportionate share ofequity in the partnerships discussed above at December 31, 2008.  Income isallocated to minority interest based on the weighted average percentageownership during the year.

 

**Revenue Recognition**

       Revenue from real estate rentals isrecognized on a straight-line basis over the terms of the respective leases.  Thecumulative difference between lease revenue recognized under this method andcontractual lease payment terms is recorded as straight line rent receivable onthe accompanying balance sheets.  The straight line rent adjustment increasedrevenue by $3.8 million, $3.2 million and $5.2 million in 2008, 2007 and 2006,respectively.

 

       Whenthe Company is the owner of the tenant improvements, the leased space is readyfor its intended use when the tenant improvements are substantially completed.In limited instances, when the tenant is the owner of the tenant improvements,straight-line rent is recognized when the tenant takes possession of theunimproved space.

 

Page 56 of 93
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       The leases also typically provide fortenant reimbursement of a portion of common area maintenance and otheroperating expenses.  Property operating cost recoveries from customers(“expense reimbursements”) are recognized as revenue in the period in which theexpenses are incurred.  The computation of expense reimbursements is dependenton the provisions of individual customer leases.  Most customers make monthlyfixed payments of estimated expense reimbursements.  The Company makesadjustments, positive or negative, to expense reimbursement income quarterly toadjust the recorded amounts to the Company’s best estimate of the finalproperty operating costs based on the most recent quarterly budget.  After theend of the calendar year, the Company computes each customer’s final expensereimbursements and issues a bill or credit for the difference between theactual amount and the amounts billed monthly during the year.  Thesedifferences are recorded to expense reimbursement income in the period thefinal bills are prepared, usually beginning in February and completed by May inthe subsequent fiscal year.  The net amounts of any such adjustments were notmaterial for the years ended December 31, 2008, 2007 and 2006.  

       Management company income representsmarket-based fees earned from providing management, construction, leasing,brokerage and acquisition services to third parties. Management fee income iscomputed and recorded monthly in accordance with the terms set forth in thestand alone management service agreements. Leasing and brokerage commissionsare recognized pursuant to the terms of the stand alone agreements at the timeunderlying leases are signed, which is the point at which the earnings processis complete and collection of the fees is reasonably assured. Fees relating tothe purchase or sale of property are recognized when the earnings process iscomplete and collection of the fees is reasonably assured, which usually occursat closing. All fees on Company-owned properties and consolidated jointventures are eliminated in consolidation.  The Company recognizes its share offees earned from unconsolidated joint ventures in management company income.

**Amortization**

       Debt origination costs are deferredand amortized using a method that approximates the effective interest methodover the term of the loan.  Leasing costs are deferred and amortized usingthe straight-line method over the term of the respective lease.

**Early Extinguishment of Debt**

       When outstanding debt isextinguished, the Company records any prepayment premium and unamortized loancosts to interest expense.

**Derivative Financial Instruments**

       The Company follows SFAS No. 133 "Accountingfor Derivative Instruments and Hedging Activities" and recognizes allderivative instruments on the balance sheet at their fair value.  Changes inthe fair value of derivatives are recorded each period in current earnings orother comprehensive income, depending on whether a derivative is designated aspart of a hedge transaction and, if it is, the type of hedge transaction.  Theineffective portion of the hedge, if any, is immediately recognized inearnings.

**Share-Based Compensation**

       Effective January 1, 2003, thestockholders of the Company approved Parkway’s 2003 Equity Incentive Plan (the“2003 Plan”) that authorized the grant of up to 200,000 equity-based awards toemployees of the Company.  At present, it is Parkway’s intention to grantrestricted shares and/or deferred incentive share units instead of stockoptions.  Restricted shares and deferred incentive share units are valued basedon the New York Stock Exchange closing market price of Parkway common shares(NYSE ticker symbol, PKY) as of the date of grant.

 

       Compensationexpense, including estimated forfeitures, is recognized over the expectedvesting period, which is four to seven years from grant date for restrictedshares subject to service conditions and four years from grant date fordeferred incentive share units.  Certain restricted shares have been granted toofficers of the Company where vesting is contingent upon achieving thecumulative goals of the GEAR UP Plan, which began January 1, 2006 and endsDecember 31, 2008.  For 2008, the Company recognized $1.4 million incompensation expense as a result of the goals of the GEAR UP Plan beingachieved.

 

       Restrictedshares and deferred incentive share units are forfeited if an employee leavesthe Company before the vesting date.  Shares and/or units that are forfeitedbecome available for future grant under the 2003 Plan.

****

Page 57 of 93
****
 

 

 

 

 

**Income Taxes**

       Effective January 1, 1997, the Company elected to be taxed as a real estate investmenttrust (“REIT”) under the Internal Revenue Code of 1986, as amended.  TheCompany completed its reorganization into the UPREIT (“Umbrella PartnershipREIT”) structure effective January 1, 1998. The Company anticipates that the UPREIT structure will enable it to pursue additional investment opportunities byhaving the ability to offer tax-advantaged operating partnership units toproperty owners in exchange for properties.

 

       Acorporate REIT is a legal entity that holds real estate assets, and throughdistributions to stockholders, is exempt from the payment of Federal incometaxes at the corporate level.  To maintain qualification as a REIT, the Companyis subject to a number of organizational and operational requirements,including a requirement that it currently distribute to stockholders at least90% of its annual taxable income.

** **

**Net Income Per Common Share**

       Basic earnings per share (“EPS”) arecomputed by dividing income available to common stockholders by theweighted-average number of common shares outstanding for the year.  In arrivingat income available to common stockholders, preferred stock dividends arededucted.  Diluted EPS reflects the potential dilution that could occur ifshare equivalents such as employee stock options, restricted shares, deferredincentive share units, warrants and dilutive 8.34% Series B cumulativeconvertible preferred stock were exercised or converted into common stock thatthen shared in the earnings of Parkway.

The computation of diluted EPS is as follows:

 

 

**                  Year Ended  December 31**

 

**2008**

**2007**

**2006**

 

(in thousands,  except per share data)

Numerator:

 

 

 

    Basic  and diluted net income

 

 

 

        available  to common stockholders

$  4,474

$14,892

$19,109

Denominator:

 

 

 

    Basic  weighted average shares

15,023

15,482

14,306

    Effect  of employee stock options, deferred

 

 

 

        incentive  share units, restricted shares

 

 

 

        and  warrants

-

166

181

    Diluted  weighted average shares

15,023

15,648

14,487

Diluted  earnings per share

$    0.30

$    0.95

$    1.32

 

The computationof diluted EPS for 2008 did not include the effect of employee stock options,deferred incentive share units and restricted shares because their inclusionwould have been anti-dilutive.  The computation of diluted EPS for 2006 did notassume the conversion of the 8.34% Series B cumulative convertible preferredstock because their inclusion would have been anti-dilutive.  At December 31,2006, there were no shares of Series B preferred stock authorized andoutstanding.

Reclassifications

       Certainreclassifications have been made in the 2007 and 2006 consolidated financialstatements to conform to the 2008 classifications with no impact on previouslyreported net income or stockholders' equity.  

 

 

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****
 

 

**New Accounting Pronouncements**

 

 

In September2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No.157”).  SFAS No. 157 defines fair value, establishes a framework for measuringfair value in GAAP, and expands disclosures about fair value measurements.  Theprovisions of SFAS No. 157, with the exception of nonfinancial assets andliabilities, were effective for financial statements issued for fiscal yearsbeginning after November 15, 2007.  The FASB deferred for one year theStatement’s fair value measurement requirements for nonfinancial assets andliabilities that are not required or permitted to be measured at fair value ona recurring basis.  These provisions will be effective for fiscal yearsbeginning after November 15, 2008, and the Company is in the process ofevaluating the impact that the adoption of these provisions will have on theCompany’s overall financial position and results of operations.  Theapplication of SFAS No. 157 had an immaterial impact on the Company’s overallfinancial position and results of operations upon adoption January 1, 2008.

 

In February2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities (“SFAS No. 159”).  SFAS No. 159 was effective forfiscal years beginning after November 15, 2007.  The Company did not elect thefair value option in regards to items not previously recorded at fair value. Therefore, the January 1, 2008 adoption of SFAS No. 159 did not have a materialimpact on the financial position or results of operations of the Company.

 

In December2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”),which revised the previously issued SFAS No. 141 (SFAS No. 141).  SFAS No. 141(R)retains the fundamental requirements of SFAS No. 141, but expands the scope toinclude all transactions and other events in which one entity obtains controlover one or more other businesses.  SFAS No. 141(R) applies prospectively tobusiness combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December15, 2008.  SFAS No. 141(R) requires that the acquisition related transactioncosts be expensed as incurred.  SFAS No. 141(R) also includes new disclosurerequirements.  The impact of SFAS No. 141(R) on the Company’s overall financialposition and results of operation will be determined by the markets in which theCompany invests.

 

In December2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements—an amendment of ARB No. 51” (“SFAS No. 160”).  SFAS No.160 amends ARB No. 51 to establish accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary.  SFAS No. 160 also amends certain of ARB No. 51’s consolidationprocedures for consistency with the requirements of SFAS No. 141(R).  SFAS No.160 is effective for fiscal years, and interim periods within those fiscalyears, beginning on or after December 15, 2008.  The application of SFAS No. 160will have an immaterial impact on the Company’s overall financial position andresults of operations upon adoption January 1, 2009, as this will only impactthe presentation of the Company’s consolidated financial statements.

 

In March 2008,the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities” (“SFAS No. 161”), which is an amendment of FASB StatementNo. 133. SFAS No. 161 requires all entities with derivative instruments todisclose information regarding how and why the entity uses derivativeinstruments and how derivative instruments and related hedged items affect theentity’s financial position, financial performance, and cash flows. TheStatement is effective prospectively for periods beginning on or after November15, 2008.  The application of SFAS No. 161 will have an immaterial impact onthe Company’s overall financial position and results of operations uponadoption January 1, 2009.

 

In May 2008,the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (“SFAS No. 162”).  SFAS No. 162 identifies the sources ofaccounting principles and the framework for selecting the principles to be usedin the preparation of financial statements of nongovernmental entities that arepresented in conformity with GAAP in the United States (the GAAP hierarchy). SFAS No. 162 is effective November 15, 2008, which represents 60 days followingthe SEC’s September 2008 approval of the Public Company Accounting OversightBoard amendments to AU Section 411, “The Meaning of**Present Fairly inConformity With Generally Accepted Accounting Principles.”  The application ofSFAS No. 162 did not have a material impact on the Company’s overall financialposition and results of operations.

**Unaudited Statistical Information**

The square feet and percentage leased statistics presented in Notes B, E and Hare unaudited.

** **

** **

** **

** **

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**Note B - Investment in Officeand Parking Properties**

** **

        Included in investment inoffice and parking properties at December 31, 2008 are 61 office and parkingproperties located in nine states with an aggregate of 12.6 millionsquare feet of leasable space.  This excludesoffice properties in unconsolidated joint ventures, which are outlined in Note E– Investment in Unconsolidated Joint Ventures. The contract purchase price,excluding closing costs and other adjustments, of office properties acquiredduring the year ended December 31, 2008 is as follows:

 

** **

**Cost**

**Market Location**

**(in thousands)**

Orlando, Florida

$  55,000

Phoenix, Arizona

81,600

Chicago, Illinois

100,000

 

$236,600

 

        The Company’sacquisitions are accounted for by the purchase method.  The results of eachacquired property are included in the Company’s results of operations fromtheir respective purchase dates.

*Summary of Acquisitions*

 

        On January 18, 2008, OhioPERS Fund I, of which Parkway owns 25%, purchased Gateway Center, a 228,000square foot office property in the central business district of Orlando,Florida for a purchase price of $55.0 million.  The fund expects to spend anadditional $2.8 million for closing costs, building improvements, leasing costsand tenant improvements during the first two years of ownership.  The purchasewas funded with a $33.0 million first mortgage placement by the fund and withequity contributions from the partners.

 

        On January 31, 2008, OhioPERS Fund I purchased Desert Ridge Corporate Center, a 293,000 square footoffice project in Phoenix, Arizona for a purchase price of $81.6 million.  Anadditional $2.3 million is expected to be spent for closing costs, buildingimprovements, leasing costs and tenant improvements during the first two yearsof ownership.  The purchase was funded with a $49.2 million first mortgageplacement and with equity contributions from the partners.  Due to Ohio PERSFund I’s $80.0 million limit on a single investment, Parkway’s effectiveownership interest in this asset is 26.5%.

 

        On February 15, 2008, OhioPERS Fund I purchased Citicorp Plaza, a 600,000 square foot office project inChicago, Illinois for a purchase price of $100.0 million.  An additional $9.2million is expected to be spent for closing costs, building improvements,leasing costs and tenant improvements during the first two years of ownership. The purchase was funded with a $60.0 million first mortgage placement and with equitycontributions from the partners.  Due to the Ohio PERS Fund I’s $80.0 millionlimit on a single investment, Parkway’s effective ownership interest in thisasset is 40%.

 

        The total amount ofpurchase price allocated to intangible assets and (liabilities) and weightedaverage amortization period for each class of asset or liability is as followsfor 2008 office property acquisitions (in thousands): 

 

 

** **

**Weighted**

 

**Amount**

**Average Life**

Lease in place value

$17,322 

5

Above market leases

2,718 

5

Above market ground lease

8,536 

84

Below market leases

(1,521)

6

 

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*Summary of Dispositions*

 

        During 2008, the Companysold three non-strategic office properties described below.  The Companyreceived gross proceeds of $86.3 million and recorded gains on sale of $22.6million.  The net proceeds from the sales were used to extinguish $18.1 millionin first mortgage debt secured by Capitol Center and related prepaymentexpenses of $2.1 million and reduce amounts outstanding under its line ofcredit.  In accordance with GAAP, the gains on sale and all current and priorperiod income have been classified to discontinued operations.

 

•     On July 15, 2008, the Company sold Town Point Center, a 131,000square foot office building in Norfolk, Virginia, to an unrelated third partyfor a gross sales price of $12.8 million.  Parkway recorded a gain on the saleof $1.6 million in 2008.

 

•      On August 18, 2008, the Company sold Wachovia Plaza, a 186,000square foot office building in St. Petersburg, Florida, to an unrelated thirdparty for a gross sales price of $26.0 million.  Parkway recorded a gain on thesale of $9.3 million in 2008.

 

•      On September 5, 2008, the Company sold Capitol Center, a 460,000square foot office building in Columbia, South Carolina, to an unrelated thirdparty for a gross sales price of $47.5 million.  Parkway recorded a gain on thesale of $11.7 million in 2008.

 

*Dispositions– Subsequent Events*

 

        OnFebruary 20, 2009, the Company sold Lynwood Plaza, an 82,000 square foot officeproperty in Hampton Roads, Virginia to an unrelated third party for a grosssales price of $7.8 million.  During the fourth quarter of 2008, the Companyrecognized a non-cash impairment loss of approximately $1.1 million related tothis property.  Additionally, the Company entered into a contract to sell theAtrium at Stoneridge in Columbia, South Carolina.  The gross sales price isestimated at $7.7 million with $125,000 in non-refundable earnest money.  Inconnection with the sale of the Atrium at Stoneridge, the Company expects to sellerfinance a $5.4 million note receivable that will bear interest at 6.75% perannum on an interest-only basis through maturity in 2014.  A non-cashimpairment loss of $727,000 was recorded during the fourth quarter of 2008 onthis asset.  The sale is subject to customary final closing requirements anddue diligence documentation, with the sale expected to be completed in thefirst quarter of 2009, but there can be no assurance that the transaction willbe completed.  These properties are not classified as held for sale on theCompany’s balance sheet at December 31, 2008 as the Company did not view thesales as probable until the first quarter of 2009 when earnest money becamenon-refundable.

* *

*Hurricane Ike Impact*

 

        The Company has 13wholly-owned properties and one jointly-owned property totaling 2.3 millionsquare feet in Houston, Texas, which sustained some property damage fromHurricane Ike on September 13, 2008.  The current estimate of damages for the14 properties is between $6.5 million to $7.0 million.  The Company estimatesthat its insurance deductible related to these claims will be approximately$3.0 million to $3.5 million.  Approximately $377,000 is estimated to representrepair and clean up costs with the remainder representing capitalized costs. The Company expects to record a net gain of approximately $1.1 million relatedto an involuntary conversion of the damaged assets.  The Company expects torecord this gain in 2009 upon final settlement of the hurricane claim with itsinsurance carrier.

* *

*Contractual Obligations andMinimum Rental Receipts*

       Obligations for tenant improvementallowances for leases in place and commitments for building improvements anddevelopment costs at December 31, 2008 are as follows (in thousands):

 

2009

$   8,899

2010

-

2011

427

Total

$   9,326

 

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       Minimumfuture operating lease payments for various equipment leased at the officeproperties is as follows for operating leases in place at December 31, 2008 (inthousands):

 

2009

$       314

2010

302

2011

130

2012

7

Total

$       753

 

       Thefollowing is a schedule by year of future approximate minimum rentalreceipts under noncancelable leases for office buildings owned at December31, 2008 (in thousands):

 

2009

$201,672

2010

179,568

2011

148,674

2012

109,699

2013

87,633

Thereafter

183,034

 

$910,280

 

The following is a schedule byyear of future approximate minimum ground lease payments at December 31,2008 (in thousands):

 

2009

$       185

2010

185

2011

185

2012

185

2013

185

Thereafter

14,718

 

$  15,643

 

        At December 31, 2008, OhioPERS Fund I owned Desert Ridge Corporate Center in Phoenix, Arizona that issubject to a ground lease.  The lease has a remaining term of approximately 83years with an expiration date of July 2092.  Payments through July 13, 2013 arebased on a rental constant applied to a per acre value.  The rental constant isestablished for the duration of the ground lease and adjusts each five years. Starting July 2013, the rental payment is the higher of the amount previouslydescribed, or .35% of the valuation of the improvements of the previous year.

 

**Note C – Office PropertyDevelopment**

** **

        On December 8, 2008, ThePinnacle at Jackson Place at Jackson Place (“The Pinnacle”) opened.  ThePinnacle is an 189,000 net rentable square foot Class A office buildingadjacent to the Company’s headquarters building in Jackson, Mississippi.  AtDecember 31, 2008, the Company had incurred $45.7 million in total developmentcosts related to the project.  The building is currently 82% leased and was theCompany’s only development project.

 

**Note D – Mortgage Loan**

** **

       TheCompany owns the B participation piece (the “B piece”) of a first mortgagesecured by an 844,000 square foot office building in Dallas, Texas known as2100 Ross for $6.9 million.  The B piece was originated by Wachovia Bank, N.A.,a Wells Fargo Company, and has a face value of $10.0 million and a statedcoupon rate of 6.065%.  Upon maturity in May 2012, the Company will receive aprincipal payment of $10.0 million, which produces a yield to maturity of15.6%.  The balance of the mortgage loan was $7.5 million at December 31, 2008.

** **

 

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**Note E - Investment inUnconsolidated Joint Ventures**

 

****       In addition to the 61 office andparking properties included in the consolidated financial statements, theCompany is also invested in four unconsolidated joint ventures with unrelatedinvestors.  These investments are accounted for using the equity method ofaccounting, as Parkway does not control any of these joint ventures. Accordingly, the assets and liabilities of the joint ventures are not includedon Parkway's consolidated balance sheets at December 31, 2008 and 2007. Information relating to these unconsolidated joint ventures is detailed below(in thousands).

 

** **

** **

** **

**Parkway’s**

**Square**

**Percentage**

**Joint Venture Entity**

**Property Name**

**Location**

**Ownership %**

**Feet**

**Leased**

Wink-Parkway Partnership

Wink Building

New Orleans, LA

50.0%

32

100.0%

Parkway Joint Venture, LLC (“Jackson JV”)

UBS/River Oaks

Jackson, MS

20.0%

167

92.9%

RubiconPark I, LLC (“Rubicon JV”)

Lakewood/Falls Pointe

Atlanta, GA

20.0%

552

96.7%

 

Carmel Crossing

Charlotte, NC

 

 

 

RubiconPark II, LLC (“Maitland JV”)

Maitland 200

Orlando, FL

20.0%

205

98.2%

 

 

 

 

956

96.5%

       Cash distributions fromunconsolidated joint ventures are made to each partner based on theirpercentage of ownership in each entity.  Cash distributions made topartners in joint ventures where the percentage of debt assumed isdisproportionate to the ownership percentage in the venture is distributedbased on each partner’s share of cash available for distribution before debtservice, based on their ownership percentage, less the partner’s share of debtservice based on the percentage of debt assumed by each partner.

 

       Parkwayprovides management, construction and leasing services for all of theunconsolidated joint ventures except for the Wink-Parkway Partnership, andreceives market-based fees for these services.  The Company recognizes itsshare of fees earned from unconsolidated joint ventures in management companyincome.

 

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       Balancesheet information for the unconsolidated joint ventures is summarized below atDecember 31, 2008 and December 31, 2007 (in thousands):

 

 

**Balance Sheet Information**

 

**December 31,2008**

 

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

 

**Partnership**

**JV**

**JV**

**JV**

**Total**

**Unconsolidated  Joint Ventures (at 100%):**

** **

** **

** **

** **

** **

Real Estate, Net

 $

1,168 

 $

15,918 

 $

65,749 

 $

28,828 

 $

111,663 

Other Assets

457 

1,006 

8,076 

1,048 

10,587 

    Total Assets

 $

1,625 

 $

16,924 

 $

73,825 

 $

29,876 

 $

122,250 

 

 

 

 

 

 

Mortgage Debt

 $

67 

 $

12,600 

 $

52,000 

 $

18,154 

 $

82,821 

Other Liabilities

39 

700 

1,573 

628 

2,940 

Partners'/Shareholders'  Equity

1,519 

3,624 

20,252 

11,094 

36,489 

    Total Liabilities and Partners’/Shareholders’  Equity

 $

1,625 

 $

16,924 

 $

73,825 

 $

29,876 

 $

122,250 

** **

 

 

 

 

 

**Parkway’s Share of  Unconsolidated Joint Ventures:**

 

 

 

 

 

Real Estate, Net

 $

584 

 $

3,184 

 $

13,150 

 $

5,766 

 $

22,684 

Mortgage Debt

 $

34 

 $

2,520 

 $

7,200 

 $

- 

 $

9,754 

Investment in Joint Ventures

 $

760 

 $

(310)

 $

5,484 

 $

5,123 

 $

11,057 

 

** **

 

** **

 

**December 31, 2007**

 

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

 

**Partnership**

**JV**

**JV**

**JV**

**Total**

**Unconsolidated  Joint Ventures (at 100%):**

** **

** **

** **

** **

** **

Real Estate, Net

 $

1,191 

 $

15,945 

 $

66,914 

 $

29,341 

 $

113,391 

Other Assets

282 

1,444 

7,117 

 

1,109 

9,952 

    Total Assets

 $

1,473 

 $

17,389 

 $

74,031 

 $

30,450 

 $

123,343 

 

 

 

 

 

 

 

Mortgage Debt

 $

176 

 $

12,600 

 $

52,000 

 $

18,617 

 $

83,393 

Other Liabilities

23 

728 

1,580 

 

686 

3,017 

Partners'/Shareholders'  Equity

1,274 

4,061 

20,451 

 

11,147 

36,933 

    Total Liabilities and  Partners'/Shareholders' Equity

 $

1,473 

 $

17,389 

 $

74,031 

 $

30,450 

 $

123,343 

 

 

 

 

 

 

 

**Parkway’s  Share of Unconsolidated Joint Ventures:**

 

 

 

 

 

 

Real Estate, Net

 $

595 

 $

3,189 

 $

13,383 

 $

5,868 

 $

23,035 

Mortgage Debt

 $

88 

 $

2,520 

 $

7,200 

 $

- 

 $

9,808 

Net  Investment in Joint Ventures

 $

637 

 $

(244)

 $

5,433 

 $

5,410 

 $

11,236 

 

Page 64 of 93
****
 

 

 

 

 

       Incomestatement information for the unconsolidated joint ventures is summarized belowfor the years ended December 31, 2008 and 2007 (in thousands):

 

**Results of Operations**

 

**Year Ended December 31, 2008**

 

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

 

**JV (1)**

**Partnership**

**JV**

**JV**

**JV**

**Total**

 

 

 

 

 

 

 

**Unconsolidated Joint  Ventures (at 100%):**

 

 

 

 

 

 

 

 

 

 

Revenues

 $

109 

 $

382 

 $

2,749 

 $

9,546 

 $

4,584 

 $

17,370 

Operating  Expenses

(2)

(100)

(1,363)

(3,912)

 

(1,648)

(7,025)

    Net  Operating Income

107 

282 

1,386 

5,634 

 

2,936 

10,345 

Interest  Expense

- 

(11)

(736)

(2,572)

 

(806)

(4,125)

Loan  Cost Amortization

- 

(3)

(3)

(62)

 

(15)

(83)

Depreciation  and Amortization

- 

(23)

(660)

(2,160)

 

(873)

(3,716)

    Net  Income (Loss)

 $

107 

 $

245 

$

(13)

 $

840 

$

1,242 

 $

2,421 

**Parkway’s Share of  Unconsolidated Joint Ventures:**

 

 

 

 

 

 

 

 

 

Net  Income (Loss)

 $

32 

 $

122 

 $

(4)

 $

331 

$

413 

 $

894 

Depreciation  and Amortization

 $

- 

 $

12 

 $

132 

 $

432 

 $

174 

 $

750 

Property  Management Fees

 $

- 

 $

- 

 $

208 

 $

405 

 $

169 

 $

782 

Incentive  Fee

 $

5 

 $

- 

 $

- 

 $

- 

 $

- 

 $

5 

Interest  Expense

 $

- 

 $

6 

 $

147 

 $

356 

$

- 

 $

509 

Loan  Cost Amortization

 $

- 

 $

1 

 $

1 

 $

9 

$

- 

 $

11 

**Other  Supplemental Information:**

 

 

 

 

 

 

Distributions  from Unconsolidated

 

 

 

 

 

 

     Joint Ventures

 $

38 

 $

- 

 $

62 

 $

280 

$

700 

 $

1,080 

 

**Results of Operations**

 

**Year Ended December 31, 2007**

 

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

 

**JV (1)**

**Partnership**

**JV**

**JV**

**JV**

**Total**

 

 

 

 

 

 

 

**Unconsolidated Joint  Ventures (at 100%):**

 

 

 

 

 

 

 

 

 

 

Revenues

 $

- 

 $

373 

 $

2,875 

 $

10,228 

 $

4,363 

 $

17,839 

Operating  Expenses

(38)

(93)

(1,274)

(3,856)

 

(1,662)

(6,923)

    Net  Operating Income (Loss)

(38)

280 

1,601 

6,372 

 

2,701 

10,916 

Interest  Expense

- 

(22)

(736)

(2,565)

 

(825)

(4,148)

Loan  Cost Amortization

- 

(3)

(3)

(63)

 

(15)

(84)

Depreciation  and Amortization

- 

(23)

(865)

(2,017)

 

(720)

(3,625)

Income  (Loss) Before Gain on Sale of Real Estate

 

(38)

 

232 

 

(3)

 

1,727 

 

1,141 

 

3,059 

Gain  on Sale of Real Estate

 

166 

 

- 

 

- 

 

- 

 

- 

 

166 

    Net  Income (Loss)

 $

128 

 $

232 

$

(3)

 $

1,727 

$

1,141 

 $

3,225 

**Parkway’s Share of  Unconsolidated Joint Ventures:**

 

 

 

 

 

 

 

 

 

Income  (Loss) Before Gain on Sale of Real Estate

 $

(12)

 $

117 

 $

- 

 $

507 

$

396 

 $

1,008 

Gain  on Sale of Real Estate

 

50 

 

- 

 

- 

 

- 

 

- 

 

50 

Net  Income

 $

38 

 $

117 

 $

- 

 $

507 

$

396 

 $

1,058 

Depreciation  and Amortization

 $

- 

 $

12 

 $

173 

 $

403 

 $

144 

 $

732 

Property  Management Fees

 $

- 

 $

- 

 $

137 

 $

348 

 $

168 

 $

653 

Promote  Fee

 $

27 

 $

- 

 $

- 

 $

- 

 $

- 

 $

27 

Interest  Expense

 $

- 

 $

12 

 $

147 

 $

354 

 $

- 

 $

513 

Loan  Cost Amortization

 $

- 

 $

2 

 $

- 

 $

8 

 $

- 

 $

10 

**Other  Supplemental Information:**

 

 

 

 

 

 

Distributions  from Unconsolidated

 

 

 

 

 

 

     Joint Ventures

 $

89 

 $

20 

 $

92 

 $

750 

$

174 

 $

1,125 

 

(1)     PhoenixOfficeInvest, LLC (the “Viad JV”) was a joint venture that owned Viad CorporateCenter, an office property in Phoenix, Arizona, and a venture in which Parkway owneda 30% interest.  On June 23, 2006, the venture sold Viad Corporate Center. Parkway received net proceeds of $15.4 million and recognized a gain of $13.6million from the sale in 2006.

 

Page 65 of 93
****
 

 

 

 

 

       Inmost cases the Company’s share of debt related to its unconsolidated jointventures is the same as its ownership percentage in the venture.  However,in the case of the Rubicon Joint Venture and Maitland Joint Venture, theCompany’s share of debt is disproportionate to its ownership percentage. The disproportionate debt structure was created to meet the Company’s partner’sfinancing criteria.  In the Rubicon Joint Venture, Parkway owns a 20%interest in the venture but assumed 13.85% of the debt.  In the MaitlandJoint Venture, the Company owns a 20% interest in the venture and assumed noneof the debt. The terms related to Parkway's share of unconsolidated jointventure mortgage debt are summarized below for December 31, 2008 and 2007 (inthousands):

                                                                   

**Parkway’s Share of Unconsolidated Joint Ventures’  Debt**

** **

** **

** **

** **

**Parkway’s**

**Monthly**

**Loan**

**Loan**

** **

**Type of**

** **

** **

**Share**

**Debt**

**Balance**

**Balance**

**Description**

**Debt Service**

**Interest Rate**

**Maturity**

**of Debt**

**Service**

**12/31/08**

**12/31/07**

Wink Partnership

Amortizing

8.625%

07/01/09

50.00%

$         5 

$       34

$       88

Maitland JV

Interest Only

4.390%

06/01/11

0.00%

- 

-

-

Rubicon JV

Interest Only

4.865%

01/01/12

13.85%

30 

7,200

7,200

Jackson JV

Interest Only

5.840%

07/01/15

20.00%

12 

2,520

2,520

 

 

 

 

 

$       47 

$  9,754

$  9,808

 

 

 

 

 

 

 

 

**Weighted Average Interest Rate at End of Year**

 

 

 

5.130% 

5.149% 

****       Parkway's share of the scheduledprincipal payments on mortgage debt for the unconsolidated joint ventures foreach of the next five years and thereafter through maturity at December 31, 2008are as follows (in thousands) *(unaudited)*:

 

 

**Wink**

**Maitland**

**Rubicon**

**Jackson**

 

**Schedule  of Mortgage Maturities by Year:**

**Partnership**

**JV**

**JV**

**JV**

**Total**

2009

$      34

$         -

$     100

$       13

$     147

2010

-

-

114

32

146

2011

-

-

119

35

154

2012

-

-

6,867

37

6,904

2013

-

-

-

39

39

Thereafter

-

-

-

2,364

2,364

 

$      34

$         -

$  7,200

$  2,520

$  9,754

**Note F – Land Available for Sale**

****       At December 31, 2008, Parkway’sinvestment in land available for sale consisted of 12 acres of land in NewOrleans, Louisiana with a book value of $750,000 or .04% of total assets.  In2008, the Company recorded an impairment loss of $717,000 on the land.  Theloss was computed based on market research and comparable sales in the area.

**Note G - Notes Payable**

**Notes Payable to Banks**

       At December 31, 2008, the Company hada total of $185.9 million outstanding under the following lines of credit (collectively,the “Company’s line of credit”) (in thousands):

 

** **

** **

** **

** **

**Outstanding**

**Line of Credit**

**Lender**

**Interest Rate**

**Maturity**

**Balance**

$15.0 Million Unsecured Line of  Credit (1)

PNC Bank

2.4%

04/27/11

$         7,940

$236.0 Million Unsecured Line  of Credit (2)

Wells Fargo

2.1%

04/27/11

118,000

$60.0 Million Unsecured Term  Loan (3)

Wells Fargo

5.6%

04/27/11

60,000

 

 

3.3%

 

$     185,940

 

(1)     Theinterest rate on the $15.0 million unsecured line of credit with PNC Bank iscurrently LIBOR plus 200 basis points.  On December 23, 2008, the Companyrenewed and extended this line to April 2011.  The Company paid an up-front feeof $52,500 and will pay fees on the unused portion of the line of 25 basispoints.

 

 

Page 66 of 93
****
 

 

 

 

 

 

(2)     The $236.0million unsecured line of credit is led by Wells Fargo and syndicated to eightother banks.  The interest rate on the line of credit interest rate iscurrently LIBOR plus 130 basis points or the Prime interest rate plus 25 basispoints.  At December 31, 2008, all amounts outstanding under the line of creditwith interest rates not fixed by an interest rate swap agreement are borrowedagainst the LIBOR plus 130 basis points.  The Company pays an annualadministration fee of $35,000 and fees on the unused portion of the revolverranging between 12.5 and 20 basis points based upon overall Company leverage,with the rate set at 20 basis points at December 31, 2008.  On October 29,2008, the Company exercised its right to extend this line to April 2011.  TheCompany paid a one-time extension fee of $354,000 that will be amortized overthe term of the line of credit.

 

(3)     The $60.0million unsecured term loan is led by Wells Fargo and syndicated to eight otherbanks.  The interest rate on the term loan represents the weighted averageinterest rate of two interest rate swaps that expired December 31, 2008. Excluding the interest rate swaps, the interest rate on the term loan is LIBORplus 130 basis points.

 

On May 7, 2008,the Company entered into an interest rate swap agreement with Regions Bank fora $100.0 million notional amount that fixes the 30-day LIBOR interest rate at3.635, which equates to a total interest rate of 4.935%, for the periodJanuary 1, 2009, through March 31, 2011. The swap agreement serves as a hedgeof the variable interest rates on a portion of the borrowings under theCompany’s $311.0 million line of credit.

 

        TheCompany’s $311.0 million unsecured credit facility requires compliance with anumber of restrictive financial covenants, including tangible net worth, fixedcharge coverage ratio, unencumbered interest coverage ratio, total debt tototal asset ratio, secured debt to total asset value ratio, secured recourse debtto total asset value ratio and unencumbered pool restrictions.  At December31, 2008 the Company was in compliance with these financial covenants.

 

        To protect against thepotential for rapidly rising interest rates, the Company entered into interestrate swap agreements in 2008 and prior years.  The Company designated the swapsas cash flow hedges of the variable interest rates on the Company’s borrowingsunder the Wells Fargo unsecured revolving credit facility and a portion of the debtsecured by the Pinnacle at Jackson Place.  These swaps are considered to befully effective and changes in the fair value of the swaps are recognized inaccumulated other comprehensive income.  The Company's interest ratehedge contracts at December 31, 2008 and 2007 are summarized as follows (inthousands):

 

** **

** **

** **

** **

** **

**Fair**

** **

** **

** **

** **

** **

**Market  Value**

** **

** **

** **

** **

** **

**Asset/(Liability)**

**Type of**

**Notional**

**Maturity**

** **

**Fixed**

**December  31**

**Hedge**

**Amount**

**Date**

**Reference Rate**

**Rate**

**2008**

**2007**

Swap

$50,000

06/30/08

1  - Month LIBOR

4.380%

$            - 

$         15 

Swap

$30,000

08/31/08

1  - Month LIBOR

4.924%

- 

(133)

Swap

$40,000

12/31/08

1  - Month LIBOR

4.360%

- 

(192)

Swap

$20,000

12/31/08

1  - Month LIBOR

4.245%

- 

(48)

Swap

$100,000

03/31/11

1  - Month LIBOR

4.935%

(5,262)

- 

Swap

$23,500

12/01/14

1  - Month LIBOR

5.800%

(2,466)

- 

 

 

 

 

 

$  (7,728)

$      (358)

 

Page 67 of 93
****
 

 

 

 

 

**Mortgage Notes Payable**

       A summary of mortgage notes payableat December 31, 2008 and 2007 is as follows (in thousands):

 

** **

** **

** **

** **

** **

**Net Book**

** **

** **

** **

** **

** **

** **

** **

**Value**

**Note Balance**

** **

**Variable Rate**

**Fixed**

**Monthly**

**Maturity**

**of**

**December 31**

**Office Property**

**12/31/08**

**Rate**

**Payment**

**Date**

**Collateral**

**2008**

**2007**

**Wholly-Owned**

 

 

 

 

 

 

 

Capital City Plaza (1)

-

-

$        -

09/01/08

$              -

$           -

$  42,196

John Hancock Facility (3 properties) (2)

-

4.830%

138

03/01/09

29,485 

21,866

22,450

John Hancock Facility (3 properties)

-

5.270%

112

05/01/10

21,404 

17,779

18,190

Capital City Plaza (Refinance) (1)

3.570%

-

182 

05/01/10

56,612 

60,000

-

Capitol Center (3)

-

8.180%

-

09/01/10

-

-

18,465

One Jackson Place

-

7.850%

152

10/10/10

14,444 

9,635

10,661

Squaw Peak 

-

4.920%

261

12/01/10

39,340 

33,917

35,339

Forum I

-

5.250%

91

06/01/11

17,561 

11,246

11,731

Wells Fargo

-

4.390%

53

07/01/11

11,756 

9,112

9,345

233 N. Michigan

-

4.940%

763

07/11/11

149,495 

95,978

100,279

400 North Belt (4)

-

8.250%

-

08/01/11

-

-

2,431

Woodbranch (4)

-

8.250%

-

08/01/11

-

-

1,170

Bank of America Plaza

-

7.100%

146

05/10/12

32,224 

17,957

18,414

One Park 10 Plaza

-

7.100%

64

06/01/12

6,145 

8,850

8,974

Teachers Insurance and

-

 

 

 

 

 

 

    Annuity Association (5  properties)

-

6.210%

565

01/01/16

100,487 

81,403

83,074

111 East Wacker, LLC

-

6.290%

804

07/11/16

172,765 

148,500

148,500

Morgan Keegan Tower

-

7.620%

163

10/01/19

28,621 

14,432

15,258

Pinnacle at Jackson Place – Subordinate NMTC Loan (5)

-

3.000%

15

12/27/47

-

6,000

-

Pinnacle at Jackson Place – Sr NMTC Loan (5)

2.361%

-

46

12/27/47

44,259

23,501

-

**    Total Wholly-Owned**

 

 

3,555

 

724,598 

560,176

546,478

** **

** **

** **

** **

** **

 

** **

** **

**Consolidated Joint Ventures**

** **

** **

** **

** **

 

** **

** **

Moore Building Associates LP

-

7.895%

124

06/01/10

18,756 

11,456

12,006

Parkway Properties Office Fund, LP:

 

 

 

 

 

 

 

Renaissance Center

-

5.469%

97

06/01/12

33,741 

16,545

16,797

Maitland 100

-

4.920%

36

10/07/12

13,173 

8,820

8,820

555 Winderley Place

-

4.920%

34

10/07/12

11,387 

8,340

8,340

1401 Enclave

-

5.760%

134

07/10/15

40,997 

28,000

28,000

100 Ashford Center/Peachtree Ridge

-

5.606%

151

01/08/16

44,399 

31,044

31,060

Gateway Center

-

5.920%

163

02/10/16

50,655 

33,000

-

Desert Ridge Corporate Center

-

5.770%

237

02/10/16

62,710 

49,200

-

Citicorp Plaza

-

5.530%

277

03/10/16

86,109 

60,000

-

BellSouth Building/Centurion Centre

-

5.900%

71

06/10/16

20,381 

14,400

14,400

Chatham Centre

-

5.560%

79

01/10/17

24,881 

17,100

17,100

Overlook II

-

5.610%

152

03/01/17

39,076 

31,500

31,500

**    Total  Consolidated Joint Ventures**

 

 

1,555

 

446,265 

309,405

168,023

** **

 

 

 

 

 

 

 

**    Total  Secured Debt**

 

 

$5,110

 

$1,170,863 

$869,581

$714,501

 

(1)   On May 2, 2008, the Company completed a $60.0 million recourse mortgageloan related to the refinance of a $41.4 million mortgage that was scheduled tomature in September 2008.  The loan is secured by the Company’s Capital CityPlaza building in Atlanta, Georgia.  The interest rate on the loan is avariable rate based on LIBOR plus 165 basis points.  The loan has a two-yearterm, with a one-year extension option at the Company’s discretion.  TheCompany recorded a gain on the prepayment of approximately $388,000 associatedwith the write off of the debt premium in 2008. 

 

(2)   On February 27, 2009, the Company paid off the mortgage note payablesecured by the 1717 St. James, 5300 Memorial and Town and Country officebuildings in Houston, Texas, with a total principal balance of $21.8 millionwith advances under the Company’s line of credit.  The mortgage had an interestrate of 4.83% and was scheduled to mature March 1, 2009.

 

(3)   In connection with the sale of Capital Center on September 5, 2008, theCompany extinguished the $18.1 million in first mortgage debt secured by theproperty and recorded debt prepayment expenses of $2.1 million as a componentof interest expense within discontinued operations in the third quarter of2008.  The mortgage had an interest rate of 8.18% and was previously scheduledto mature on September 1, 2010.

 

 

Page 68 of 93
****
 

 

 

 

 

(4)  On February 1, 2008, the Company paid off the mortgage notes payablesecured by the 400 North Belt and Woodbranch buildings in Houston, Texas, witha total principal balance of $3.5 million with advances under the Company’sline of credit.  The mortgages had an interest rate of 8.25% and were scheduledto mature on August 1, 2011.  The Company recognized a total of $401,000 inexpense associated with the prepayment of these mortgages.

 

(5)  The New Markets Tax Credit loans have a stated maturity of December 27,2047, but contain an early repayment option whereby the lender may call theloans in December 2014.  In the event the lender exercises this option,the outstanding principal balance of the loans will be reduced by $3.0million.  Additionally, the loans provide for a full interest guaranty bythe Company during the term of the loan.  On April 4, 2008, the Companyentered into an interest rate swap agreement with US Bank for a $23.5 millionnotional amount that fixes the 30-day LIBOR interest rate at 4.05%, whichequates to a total current interest rate of 5.8%, for the period January 1,2009, through December 1, 2014. The swap agreement serves as a hedge of thevariable interest rates on the borrowings under the Pinnacle at Jackson PlaceSenior New Market Tax Credits mortgage loan.  The weighted average interestrate for the total New Markets Tax Credits loans is 5.2%.

 

       Theaggregate annual maturities of mortgage notes payable at December 31, 2008 areas follows (in thousands):

 

**Total**

**Recurring**

**Mortgage**

**Balloon**

**Principal**

**Maturities**

**Payments**

**Amortization**

2009

 $

35,299   

 $

21,766   

 $

	13,533

2010

139,794   

126,411   

13,383   

2011

112,753   

102,694   

10,059   

2012

65,070   

56,738   

8,332   

2013

8,434   

- 

8,434   

Thereafter

508,231   

469,095   

39,136   

 $

869,581   

 $

776,704   

 $

92,877   

 

        On February 27, 2009, theCompany paid its only 2009 debt maturity in the amount of $21.8 millionutilizing its line of credit.  The Company has $126.4 million in maturing debtin 2010.  Included in the 2010 debt maturities is the Capital City Plazamortgage in the amount of $60.0 million that has a one-year extension option atthe Company’s discretion.  Assuming that the extension option is exercised, theCompany’s total maturities for 2010 would be $66.4 million, and its existing lineof credit capacity could be utilized to pay the debt maturities.

 

**Note H - DiscontinuedOperations**

****       Allcurrent and prior period income from the following office property dispositionsare included in discontinued operations for the years ended December 31, 2008,2007 and 2006 (in thousands).

 

** **

** **

**Square**

**Date of**

**Gross Sales**

**Net Book Value**

**Gain**

**Office Property**

**Location**

**Feet**

**Sale**

**Price**

**of Real Estate**

**on Sale**

 

 

 

 

 

 

 

Central Station Building

 St. Petersburg, Florida 

133

08/02/06

$  15,000

$  14,338

$       211 

Richmond Centre

 Houston, Texas 

92

11/29/06

6,906

4,551

2,018 

Ashford II

 Houston, Texas 

59

12/07/06

5,250

2,185

2,854 

2006 Dispositions

 

284

 

$  27,156

$  21,074

$    5,083 

 

 

 

 

 

 

 

Town Point Center

 Norfolk, Virginia 

131

07/15/08

$  12,750

$  10,621

$    1,559 

Wachovia Plaza

 St. Petersburg, Florida 

186

08/18/08

26,010

16,154

9,338 

Capitol Center

 Columbia, South Carolina 

460

09/05/08

47,500

35,101

11,691 

2008 Dispositions

 

777

 

$  86,260

$  61,876

$  22,588 

       The Company made a decision to sellthe above assets because the properties are smaller assets or located insmaller markets that do not fit with the Company’s strategy of owning largerassets in institutional markets.  

 

Page 69 of 93
****
 

 

 

 

 

       Theamount of revenue and expense for these six office properties reported indiscontinued operations for the years ended December 31, 2008, 2007 and 2006 isas follows (in thousands):

** **

** **

**Year Ended  December 31**

** **

**2008**

** **

**2007**

** **

**2006**

Revenues

 

 

 

 

 

Revenue from office and parking properties

 $

9,049 

 

 $

13,440 

 

 $

15,161 

** **

9,049 

 

13,440 

 

15,161 

Expenses

 

 

 

 

 

Office and parking properties:

 

 

 

 

 

        Operating expense

4,803 

 

6,218 

 

7,946 

        Interest expense

3,168 

 

1,553 

 

1,588 

        Depreciation and amortization

1,873 

 

3,196 

 

3,630 

** **

9,844 

 

10,967 

 

13,164 

Income (loss) from discontinued operations

(795)

 

2,473 

 

1,997 

Gain on sale of real estate from discontinued operations

22,588 

 

- 

 

5,083 

Total discontinued operations

 $

21,793 

 

 $

2,473 

 

 $

7,080 

 

**Note I - Income Taxes**

       The Company elected to be taxed as a REITunder the Internal Revenue Code, commencing with its taxable year endedDecember 31, 1997.  To qualify as a REIT, the Company must meet a number oforganizational and operational requirements, including a requirement that itcurrently distribute at least 90% of its adjusted taxable income to itsstockholders.  It is management's current intention to adhere to theserequirements and maintain the Company's REIT status, and the Company was incompliance with all REIT requirements at December 31, 2008.  As a REIT, theCompany generally will not be subject to corporate level federal income tax ontaxable income it distributes currently to its stockholders.  If the Companyfails to qualify as a REIT in any taxable year, it will be subject to federalincome taxes at regular corporate rates (including any applicable alternativeminimum tax) and may not be able to qualify as a REIT for four subsequenttaxable years.  Even if the Company qualifies for taxation as a REIT, theCompany may be subject to certain state and local taxes on its income andproperty, and to federal income and excise taxes on its undistributed taxableincome. In addition, taxable income from non-REIT activities managed throughtaxable REIT subsidiaries is subject to federal, state and local income taxes.

       In January 1998, the Companycompleted its reorganization into an UPREIT structure under which substantiallyall of the Company's real estate assets are owned by an operating partnership,Parkway Properties LP.  Presently, substantially all interests in the OperatingPartnership are owned by the Company and a wholly-owned subsidiary.

       At December 31, 2008, the Company hadnet operating loss ("NOL") carryforwards for federal income taxpurposes of $3.8 million which expire at various dates beginning in 2009 through2018. The utilization of these NOLs can cause the Company to incur a smallalternative minimum tax liability.

 

Page 70 of 93
****
 

 

 

 

 

       TheCompany's income differs for income tax and financial reporting purposesprincipally because real estate owned has a different basis for tax andfinancial reporting purposes, producing different gains upon dispositionand different amounts of annual depreciation.  The following reconciles GAAPnet income to taxable income for the years ending December 31, 2008, 2007 and2006 (in thousands):

 

 

**2008**

**2007**

**2006**

 

**Estimate**

**Actual**

**Actual**

GAAP net income from REIT  operations (1) 

$  9,274 

$19,692 

$25,682 

GAAP to tax adjustments:

 

 

 

     Depreciation and  amortization

19,968 

19,489 

13,623 

     Gains and losses from  capital transactions

342 

(2,104)

4,283 

     Share-based compensation expense

2,276 

1,521 

863 

     Stock options exercised

(88)

(2,096)

(1,615)

     Deferred compensation  distributions

(1,143)

(712)

(466)

     Amortization of mortgage loan  discount

(519)

(103)

- 

     Other differences

(203)

(40)

182 

Taxable income before  adjustments

29,907 

35,647 

42,552 

Less:  NOL carryforward

- 

- 

- 

Adjusted taxable income subject  to 90% dividend requirement

$29,907 

$35,647 

$42,552 

(1)  GAAP net income from REIT operations is net of amountsattributable to minority interest.

       The following reconciles cashdividends paid with the dividends paid deduction for the years ending December31, 2008, 2007 and 2006 (in thousands):

 

 

**2008**

**2007**

**2006**

 

**Estimate**

**Actual**

**Actual**

Cash distributions paid

$38,978 

$44,849 

$44,009 

Less:  Dividends on deferred  compensation plan shares

(194)

(276)

(303)

Less:  Dividends absorbed by  current earnings and profits

(3,780)

(5,970)

(1,154)

Less:  Return of capital

(5,097)

(2,956)

- 

Dividends paid deduction

$29,907 

$35,647 

$42,552 

 

       Thefollowing characterizes distributions paid per common share for the yearsending December 31, 2008, 2007 and 2006:

 

 

**2008**

**2007**

**2006**

 

**Amount**

**Percentage**

**Amount**

**Percentage**

**Amount**

**Percentage**

Ordinary income

$0.844

37.1%

$1.38

53.1%

$0.99

38.1%

Post May 5, 2003 capital gain

0.197

8.7%

0.38

14.6%

1.17

45.0%

Unrecaptured Section 1250 gain

0.893

39.2%

0.65

25.0%

0.44

16.9%

Return of capital

0.341

15.0%

0.19

7.3%

- 

- 

 

$2.275

100.0%

$2.60

100.0%

$2.60

100.0%

**Note J - Stock Option and Long-Term Compensation Plans**

       Effective January 1, 2003, thestockholders of the Company approved the 2003 Plan that authorized the grant ofup to 200,000 equity-based awards to employees of the Company.  At present, itis Parkway’s intention to grant restricted shares and/or deferred incentiveshare units instead of stock options to employees of the Company, although the2003 Plan authorizes various forms of incentive awards, including options.  Oneach July 1 beginning with July, 2004, the number of shares available under theplan will increase automatically by .25% of the number of shares of commonstock outstanding on that date (increase of 38,225 and 39,750 shares in 2008and 2007, respectively), provided that the number of shares available for grantunder this plan and the 2001 Directors’ Plan shall not exceed 11.5% of theshares outstanding (less the restricted shares issued and outstanding) plusshares issuable on the conversion of outstanding convertible debt and equitysecurities or the exercise of warrants or other rights to purchase commonshares.  The 2003 Plan has a ten-year term.

 

Page 71 of 93
****
 

 

 

 

 

**     **Duringthe year ended December 31, 2008, the Board of Directors approved the grant of38,017 restricted shares to officers of the Company.  The shares are valued at$1.2 million and 36,975 shares will vest four years from grant date and 1,042shares vested on December 31, 2008 upon the Company’s achievement of the goalsof the GEAR UP Plan.

 

        At December 31, 2008, atotal of 220,641 shares of restricted stock have been granted to officers ofthe Company.  The shares are valued at $8.7 million, which equates to anaverage price per share of $39.49, with 99,000 shares vesting seven years fromthe grant date and 91,225 shares vesting four years from grant date.  Theremaining 30,416 shares vested on December 31, 2008, upon achievement of thegoals of the GEAR UP Plan.  The value, including estimated forfeitures, ofrestricted shares that vest based on service conditions will be amortized tocompensation expense ratably over the vesting period for each grant of stock. The value of restricted shares that vested upon achievement of the GEAR UP Plangoals were recognized as expense in 2008, once the Company determined that itwas probable that the goal would be achieved.  The portion of compensationexpense recognized in 2008 relating to vesting of GEAR UP performance-basedrestricted shares was $1.4 million.  At December 31, 2008, a total of 22,805deferred incentive share units have been granted to employees of the Company. The deferred incentive share units are valued at $858,000, which equates to anaverage price per share of $37.62, and the units vest four years from grantdate.  Total compensation expense related to the restricted stock and deferredincentive units of $2.3 million, $1.5 million and $863,000 was recognized in2008, 2007 and 2006, respectively.  Total compensation expense related tononvested awards subject to service conditions not yet recognized was $3.1million at December 31, 2008.  The weighted average period over which thisexpense is expected to be recognized is approximately 2.2 years.  

 

        On February 3, 2009, theBoard of Directors approved the grant of 120,000 restricted shares to officersof the Company.  The shares are valued at $1.9 million and will vest subject tocertain performance-based goals in 2009 at a rate of 30,000 shares per year overthe four years following the grant date.

 

       Asummary of the Company’s restricted stock and deferred incentive share unitactivity under the 2003 Equity Incentive Plan is as follows:

 

 

** **

**Weighted**

**Deferred**

**Weighted**

 

**Restricted**

**Average**

**Incentive**

**Average**

 

**Shares**

**Price**

**Share Units**

**Price**

**Outstanding at December 31, 2005**

124,000 

$36.16

13,828 

$45.38

Granted

67,500 

43.03

8,255 

47.78

Forfeited

(3,000)

37.11

(3,277)

45.98

**Outstanding at December 31, 2006**

188,500 

38.60

18,806 

46.33

Granted

35,874 

52.36

9,800 

45.09

Vested

- 

- 

(2,285)

44.84

Forfeited

(3,375)

46.14

(4,486)

46.15

**Outstanding at December 31, 2007**

220,999 

40.72

21,835 

45.96

Granted

38,017 

32.39

6,385 

15.69

Vested

- 

-

(1,815)

46.72

Forfeited

(38,375)

39.54

(3,600)

44.73

**Outstanding at December 31, 2008**

220,641 

$39.49

22,805 

$37.62

 

Page 72 of 93
****
 

 

 

 

 

       Asummary of the Company's stock option activity and related information is asfollows:

 

** **

**1994 Stock**

**1991 Directors**

**2001 Directors**

** **

**Option Plan**

**Stock Option Plan**

**Stock Option Plan**

** **

** **

**Weighted**

** **

**Weighted**

** **

**Weighted**

** **

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Shares**

**Price**

**Shares**

**Price**

**Shares**

**Price**

**Outstanding at December 31, 2005**

300,675 

$  30.72

35,250 

$  29.95

45,300 

$  37.31

Exercised                                

(104,865)

30.01

(2,250)

16.00

(6,000)

37.54

Forfeited                                        

(4,339)

35.91

- 

- 

- 

- 

**Outstanding at December 31, 2006**

191,471 

30.99

33,000 

30.90

39,300 

37.28

Exercised                                

(69,856)

30.31

(19,500)

30.76

(9,000)

35.26

**Outstanding at December 31, 2007**

121,615 

31.38

13,500 

31.10

30,300 

37.88

Exercised

(25,436)

31.15

- 

-

- 

- 

Forfeited

(500)

33.65

(7,500)

29.94

(8,800)

35.24

**Outstanding at December 31, 2008**

95,679 

$  31.43

6,000 

$  32.56

21,500 

$  38.96

**Vested and Exercisable at December 31, 2008**

95,679 

$  31.43

6,000 

$  32.56

21,500 

$  38.96

       The total intrinsic value of stockoptions exercised for the year ended December 31, 2008, 2007, and 2006 was $22,000,$1.7 million and $1.7 million, respectively.

 

       Following is asummary of the status of options outstanding at December 31, 2008:

 

 

**Outstanding  and Exercisable Options**

 

** **

**Weighted**

** **

** **

 

** **

**Average**

**Weighted**

**Aggregate**

** **

** **

**Remaining**

**Average**

**Intrinsic**

** **

** **

**Contractual**

**Exercise**

**Value**

**Exercise Price Range**

**Number**

**Life**

**Price**

**(in thousands)**

**1994 Stock Option Plan**

 

 

 

 

$26.18 - $31.42

59,300

1.3  years

 $29.96 

 $  122 

$31.43 - $36.65

36,379

2.6  years

33.82 

- 

** **

95,679

1.8  years

 $31.43 

 $  122 

**1991 Directors Stock Option Plan**

 

 

 

 

$26.18 - $31.42

3,000

1.4  years

 $31.13 

 $      3 

$31.43 - $36.65

3,000

0.4  years

34.00 

- 

 

6,000

0.9  years

 $32.56 

 $       3 

**2001 Directors  Stock Option Plan**

 

 

 

 

$26.18 - $31.42

3,000

2.4  years

 $30.70 

 $      4 

$31.43 - $36.65

3,000

3.4  years

36.12 

- 

$36.66 - $41.89

9,000

4.4  years

38.95 

- 

$41.90 - $47.12

6,500

4.8  years

44.10 

- 

 

21,500

4.1  years

 $38.96 

 $      4 

** **

**Defined Contribution Plan**

** **

        Parkway maintains a401(k) plan for its employees.  The Company makes matching contributions of 50%of the employee’s contribution (limited to 10% of compensation as defined bythe plan) and may also make annual discretionary contributions.  The Company’stotal expense for this plan was $952,000, $1.1 million and $625,000 for theyears ending December 31, 2008, 2007 and 2006, respectively.

** **

**Note K – Commitments andContingencies**

**Legal Matters**

       Parkway is subject to various legalproceedings and claims that arise in the ordinary course of business.  Thesematters are generally covered by insurance.  The Company believes that thefinal outcome of such matters will not have a material effect on our financialstatements.

Page 73 of 93
****
 

 

 

 

 

**Commitments**

       Parkway has an investment in MooreBuilding Associates LP (“MBALP”) established for the purpose of owning acommercial office building (the Toyota Center in Memphis, Tennessee).  Parkwayhas a 75% ownership interest in MBALP and acts as the managing general partnerof this partnership.  In acting as the general partner, the Company iscommitted to providing additional funding to meet partnership operatingdeficits up to an aggregate of $1.0 million.

** **

**Note L – Other Matters**

** **

**Supplemental Profit and LossInformation**

     Includedin operating expenses are taxes, principally property taxes, of $39.7 million, $32.8million and $27.4 million for the years ended December 31, 2008, 2007 and2006, respectively.

** **

**Supplemental Cash FlowInformation and Schedule of Non-Cash Investing and Financing Activity**

** **

** **

**Year Ended  December 31**

** **

**2008**

**2007**

**2006**

 

(In thousands)

**Supplemental cash flow  information:**

 

 

 

         Interest  paid, net of amount capitalized

$60,919 

$52,779 

$42,807

**Supplemental schedule of  non-cash investing    **

 

 

 

**         and  financing activity:**

 

 

 

         Mortgages  assumed in purchases

- 

- 

47,795

         Restricted  shares and deferred incentive

 

 

 

               share  units issued (forfeited)

(201)

1,954 

1,585

         Shares  issued in lieu of Directors' fees

140 

251 

170

         Capital  lease obligation

- 

4,040 

-

 

**Rents Receivable and OtherAssets**

 

** **

**December 31**

** **

**2008**

**2007**

** **

(In thousands)

 

 

 

Rents receivable 

$    3,858 

$    4,124 

Allowance for doubtful accounts

(1,122)

(1,004)

Straight line rent receivable

25,277 

20,976 

Other receivables

13,629 

6,800 

Lease costs (net of accumulated  amortization of

 

 

     $32,746 and $27,030,  respectively)

37,680 

34,233 

Loan costs (net of accumulated  amortization of

 

 

     $4,607 and $3,653,  respectively)

5,690 

5,309 

Escrow and other deposits

29,597 

39,014 

Prepaid items

1,479 

7,089 

Other assets

2,424 

2,916 

 

$118,512 

$119,457 

** **

Page 74 of 93
****
 

 

 

 

 

**Intangible Assets**

       The following table reflects theportion of the purchase price of office properties allocated to intangibleassets in accordance with SFAS No. 141, as discussed in “Note A”.  The portionof purchase price allocated to below market lease value and the relatedaccumulated amortization is reflected in the Schedule of Accounts Payable andOther Liabilities within this note.

 

** **

**December 31**

** **

**2008**

**2007**

** **

(In thousands)

 

 

 

Lease in place value

 $

89,364 

 $

77,648 

    Accumulated  amortization

(28,172)

(18,344)

Above market lease value

32,983 

23,208 

    Accumulated  amortization

(14,715)

(11,793)

 

 $

79,460  

 $

70,719 

** **

**Accounts Payable and OtherLiabilities**

 

** **

**December 31**

** **

**2008**

**2007**

** **

(In thousands)

Office property payables:

 

 

     Accrued  expenses and accounts payable

 $

26,401 

 $

28,115 

     Accrued  property taxes

29,447 

25,444 

     Security  deposits

4,492 

4,270 

     Below  market lease value

24,093 

19,878 

     Accumulated  amortization – below market

 

 

          lease  value

(11,906)

(7,792)

Capital lease obligations

3,834 

4,100 

Corporate payables

11,474 

2,642 

Deferred compensation plan  liability

4,067 

5,237 

Dividends payable

1,200 

1,200 

Accrued payroll

2,395 

2,291 

Interest payable

3,365 

3,111 

 

 $

98,862 

 $

88,496 

** **

**Preferred Stock**

** **

        In June 2003, the Companysold 2.4 million shares of 8.0% Series D Cumulative Redeemable Preferred Stockwith net proceeds to the Company of approximately $58.0 million.  The Series DPreferred Stock has a $25 liquidation value per share and will be redeemable atthe option of the Company on or after June 27, 2008.  The preferred stock hasno stated maturity, sinking fund or mandatory redemption and is not convertibleinto any other securities of the Company.  

 

        The Company declareddividends of $2.00 per share for the Series D Preferred stock for each of thethree years 2008, 2007 and 2006.

 

        The Company’s shares ofSeries D preferred stock are listed on the New York Stock Exchange and tradeunder the symbol “PKY PrD”.  

**Note M - Fair Values of Financial Instruments**

**Cash and cash equivalents**

       The carrying amounts for cashand cash equivalents approximated fair value at December 31, 2008 and 2007.

Page 75 of 93
**** 
 

 

 

 

**Mortgage notes payable**

       The fair value of the mortgage notespayable are estimated using discounted cash flow analysis, based on theCompany's current incremental borrowing rates for similar types ofborrowing arrangements.  The aggregate fair value of the mortgage notes payableat December 31, 2008 was $778.9 million as compared to its carrying amount of $869.6million.  The aggregate fair value of the mortgage notes payable at December31, 2007 was $714.6 million as compared to its carrying amount of $714.5million.

** **

**Interestrate swap agreements**

** **

**       **Thefair value of the interest rate swap agreements is estimated using theestimated cash flow from the trade.  The aggregate fair value liability of theinterest rate swaps at December 31, 2008 and 2007 was $7.7 million and$358,000, respectively.

**Note N – Segment Information**

       Parkway’s primary business is the ownershipand operation of office properties. The Company accounts for each officeproperty or groups of related office properties as an individual operatingsegment.  Parkway has aggregated its individual operating segments into asingle reporting segment due to the fact that the individual operating segmentshave similar operating and economic characteristics.   

 

       TheCompany believes that the individual operating segments exhibit similareconomic characteristics such as being leased by the square foot, sharing thesame primary operating expenses and ancillary revenue opportunities and beingcyclical in the economic performance based on current supply and demandconditions.  The individual operating segments are also similar in thatrevenues are derived from the leasing of office space to customers and eachoffice property is managed and operated consistently in accordance withParkway’s standard operating procedures.  The range and type of customer usesof our properties is similar throughout our portfolio regardless of location orclass of building and the needs and priorities of our customers do not varyfrom building to building.  Therefore, Parkway’s management responsibilities donot vary from location to location based on the size of the building,geographic location or class.

       The management of the Companyevaluates the performance of the reportable office segment based on FFO. Management believes that FFO is an appropriate measure of performance forequity REITs and computes this measure in accordance with the NAREIT definitionof FFO.  Funds from operations is defined by NAREIT as net income (computed inaccordance with GAAP), excluding gains or losses from sales of property andextraordinary items under GAAP, plus depreciation and amortization, and afteradjustments to derive the Company’s pro rata share of FFO of consolidated andunconsolidated joint ventures.  Further, the Company does not adjust FFO toeliminate the effects of non-recurring charges.  The Company believes that FFOis a meaningful supplemental measure of its operating performance becausehistorical cost accounting for real estate assets in accordance with GAAPimplicitly assumes that the value of real estate assets diminishes predictablyover time, as reflected through depreciation and amortization expenses. However, since real estate values have historically risen or fallen with marketand other conditions, many industry investors and analysts have consideredpresentation of operating results for real estate companies that use historicalcost accounting to be insufficient.  Thus, NAREIT created FFO as a supplementalmeasure of operating performance for real estate investment trusts thatexcludes historical cost depreciation and amortization, among other items, fromnet income, as defined by GAAP.  The Company believes that the use of FFO,combined with the required GAAP presentations, has been beneficial in improvingthe understanding of operating results of real estate investment trusts amongthe investing public and making comparisons of operating results among suchcompanies more meaningful.  FFO as reported by Parkway may not be comparable toFFO reported by other REITs that do not define the term in accordance with thecurrent NAREIT definition.  Funds from operations do not represent cashgenerated from operating activities in accordance with accounting principlesgenerally accepted in the United States and is not an indication of cashavailable to fund cash needs.  Funds from operations should not be consideredan alternative to net income as an indicator of the Company's operatingperformance or as an alternative to cash flow as a measure of liquidity.

 

Page 76 of 93
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       Thefollowing is a reconciliation of FFO and net income available to commonstockholders for office properties and total consolidated entities for theyears ending December 31, 2008, 2007 and 2006.  Amounts presented as“Unallocated and Other” represent primarily income and expense associated with providingmanagement services, corporate general and administration expense, interestexpense on unsecured lines of credit and preferred dividends.

** **

**At or for the year ended December 31, 2008**

** Office**

** Unallocated **

** Properties**

** and Other**

** Consolidated**

 (in thousands) 

Property operating revenues  (a)

 $

263,475  

 $

-  

 $

263,475  

Property operating expenses  (b)

(126,169)

-  

(126,169)

Property net operating  income from continuing operations

137,306  

-  

137,306  

Management company income

-  

1,936  

1,936  

Interest and other income

-  

1,333  

1,333  

Interest expense (c) 

(48,534)

(10,892)

(59,426)

Management company expenses

-  

(1,947)

(1,947)

General and administrative  expenses

-  

(9,725)

(9,725)

Equity in earnings of  unconsolidated joint ventures

894  

-  

894  

Adjustment for depreciation  and amortization - unconsolidated joint ventures

750  

-  

750  

Adjustment for depreciation  and amortization - discontinued operations

1,873  

-  

1,873  

Adjustment for minority  interest - real estate partnerships

(9,275)

-  

(9,275)

Income from discontinued  operations

(795)

-  

(795)

Impairment loss on real estate

(2,542)

-  

(2,542)

Dividends on preferred stock

-  

(4,800)

(4,800)

Funds from operations  available to common stockholders (d)

79,677  

(24,095)

55,582  

Depreciation and  amortization

(91,716)

-  

(91,716)

Depreciation and  amortization - unconsolidated joint ventures

(750)

-  

(750)

Depreciation and  amortization - discontinued operations

(1,873)

-  

(1,873)

Depreciation and  amortization - minority interest - real estate partnerships

20,644  

-  

20,644  

Gain on sale of real estate  from discontinued operations

22,588  

-  

22,588  

Minority interest - unit holders

-  

(1)

(1)

Net income (loss) available  to common stockholders

 $

28,570  

 $

(24,096)

 $

4,474  

Total assets

 $

1,671,459  

 $

16,396  

 $

1,687,855  

Office and parking  properties

 $

1,455,239  

 $

-    

 $

1,455,239  

Investment in unconsolidated  joint ventures

 $

11,057  

 $

-    

 $

11,057  

Capital expenditures (e)

 $

40,654  

 $

-    

 $

40,654  

(a)    Included in property  operating revenues are rental revenues, customer reimbursements, parking  income and other income.

(b)   Included  in property operating expenses are real estate taxes, insurance, contract  services, repairs and maintenance and property operating expenses.

(c)    Interest  expense for office properties represents interest expense on property secured  mortgage debt.  It does not include interest expense on the unsecured lines  of credit, which is included in “Unallocated and Other”.

 

(d)   For  2008, FFO includes large lease termination fee income of $3.7 million, offset  by a reduction for a non-cash purchase accounting adjustment in the amount of  $657,000, a non-cash impairment loss on real estate of $2.5 million,  restricted stock expense of $1.4 million recognized upon the Company’s  achievement of the GEAR UP Plan, a loss on the extinguishment of debt of $2.2  million, included as a component of discontinued operations in the  accompanying consolidated statement of income, and Hurricane Ike expenses in  the amount of $377,000.

 

(e)    Capital expenditures  include building improvements, tenant improvements and deferred leasing  costs.

 

** **

Page 77 of 93
****
 

 

 

 

 

** **

 

** At or for the year ended December 31, 2007**

 

** Office**

** Unallocated **

** **

 

** Properties**

** and Other**

** Consolidated**

 

 (in thousands) 

 

 

 

 

Property operating revenues  (a)

 $

233,304 

 $

- 

 $

233,304 

Property operating expenses  (b)

(107,990)

- 

(107,990)

Property net operating  income from continuing operations

125,314 

- 

125,314 

 

 

 

 

Management company income

- 

1,605 

1,605 

Interest and other income

- 

528 

528 

Interest expense (c) 

(41,564)

(10,982)

(52,546)

Management company expenses

- 

(1,188)

(1,188)

General and administrative  expenses

- 

(6,602)

(6,602)

Equity in earnings of  unconsolidated joint ventures

1,008 

- 

1,008 

Adjustment for depreciation  and amortization - unconsolidated joint ventures

732 

- 

732 

Adjustment for depreciation  and amortization - discontinued operations

3,196 

- 

3,196 

Adjustment for minority  interest - real estate partnerships

(7,240)

- 

(7,240)

Income from discontinued  operations

2,473 

- 

2,473 

Gain on non depreciable  assets

47 

- 

47 

Dividends on preferred stock

- 

(4,800)

(4,800)

Funds from operations available  to common stockholders (d)

83,966 

(21,439)

62,527 

 

 

 

 

Depreciation and  amortization

(74,379)

- 

(74,379)

Depreciation and  amortization - unconsolidated joint ventures

(732)

- 

(732)

Depreciation and  amortization - discontinued operations

(3,196)

- 

(3,196)

Depreciation and  amortization - minority interest - real estate partnerships

10,414 

- 

10,414 

Gain on sale of real estate

20,260 

- 

20,260 

Minority interest - unit holders

- 

(2)

(2)

Net income (loss) available  to common stockholders

 $

36,333 

 $

(21,441)

 $

14,892 

 

 

 

 

Total assets

 $

1,520,326 

 $

15,468 

 $

1,535,794 

 

 

 

 

Office and parking  properties

 $

1,314,602 

 $

- 

 $

1,314,602 

 

 

 

 

Investment in unconsolidated  joint ventures

 $

11,236 

 $

- 

 $

11,236 

 

 

 

 

Capital expenditures (e)

 $

46,957 

 $

- 

 $

46,957 

 

(a)   Included  in property operating revenues are rental revenues, customer reimbursements,  parking income and other income.

 

 

 

 

(b)   Included  in property operating expenses are real estate taxes, insurance, contract  services, repairs and maintenance and other property operating expenses.

 

 

 

 

(c)   Interest  expense for office properties represents interest expense on property secured  mortgage debt and interest on subsidiary redeemable preferred membership  interests.  It does not include interest expense on the unsecured lines of  credit, which is included in “Unallocated and Other”.

 

(d)   For  2007, FFO includes lease termination fee income of $1.4 million, offset by a  reduction for a $370,000 loss on extinguishment of debt, included as  component of interest expense in the accompanying consolidated statement of  income.

 

(e)   Capital  expenditures include building improvements, tenant improvements and deferred  leasing costs.

 

Page 78 of 93
****
 

 

 

 

 

 

 

** At or for the year ended December 31, 2006**

 

** Office**

** Unallocated **

** **

 

** Properties**

** and Other**

** Consolidated**

 

 (in thousands) 

 

 

 

 

Property operating revenues  (a)

 $

197,889 

 $

- 

 $

197,889 

Property operating expenses  (b)

(93,089)

- 

(93,089)

Property net operating  income from continuing operations

104,800 

- 

104,800 

 

 

 

 

Management company income

- 

5,329 

5,329  

Interest and other income

-  

40 

40  

Interest expense (c) 

(32,509)

(10,535)

(43,044)

Management company expenses

-  

(1,141)

(1,141)

General and administrative  expenses

-  

(4,656)

(4,656)

Equity in earnings of  unconsolidated joint ventures

751  

- 

751  

Adjustment for depreciation  and amortization - unconsolidated joint ventures

815  

- 

815  

Adjustment for depreciation  and amortization - discontinued operations

3,630  

- 

3,630  

Adjustment for minority  interest - real estate partnerships

(1,790)

- 

(1,790)

Income from discontinued  operations

1,997  

- 

1,997  

Loss on non depreciable  assets

(119)

- 

(119)

Dividends on preferred stock

-  

(4,800)

(4,800)

Dividends on convertible  preferred stock

-  

(1,773)

(1,773)

Funds from operations  available to common stockholders (d)

77,575  

(17,536)

60,039  

 

 

 

 

Depreciation and  amortization

(61,607)

- 

(61,607)

Depreciation and  amortization - unconsolidated joint ventures

(815)

- 

(815)

Depreciation and  amortization - discontinued operations

(3,630)

- 

(3,630)

Depreciation and  amortization - minority interest - real estate partnerships

2,275  

- 

2,275  

Gain on sale of real estate

17,765  

- 

17,765  

Gain on sale of real estate  from discontinued operations

5,083  

- 

5,083  

Minority interest - unit holders

-  

(1)

(1)

Net income (loss) available  to common stockholders

 $

36,646  

 $

(17,537)

 $

19,109  

 

 

 

 

Total assets

 $

1,506,753  

 $

5,593  

 $

1,512,346 

 

 

 

 

Office and parking  properties

 $

1,303,213  

 $

- 

 $

1,303,213  

 

 

 

 

Investment in unconsolidated  joint ventures

 $

11,179  

 $

- 

 $

11,179 

 

 

 

 

Capital expenditures (e)

 $

34,160  

 $

- 

 $

34,160 

 

(a)   Included  in property operating revenues are rental revenues, customer reimbursements,  parking income and other income.

 

 

 

 

(b)   Included  in property operating expenses are real estate taxes, insurance, contract  services, repairs and maintenance and other property operating expenses.

 

 

 

 

(c)   Interest  expense for office properties represents interest expense on property secured  mortgage debt and interest on subsidiary redeemable preferred membership  interests.  It does not include interest expense on the unsecured lines of  credit, which is included in “Unallocated and Other”.

 

(d)   For  2006, FFO includes lease termination fee income of $617,000, $4.2 million for  incentive and management fee income earned as result of the economic returns  generated above on internal rate of return hurdle rate over the life of the  Viad joint venture, offset by a $325,000 loss on extinguishment of debt  related to the first mortgage on the Viad joint venture, and a $119,000 loss  on securities.

 

(e)   Capital  expenditures include building improvements, tenant improvements and deferred  leasing costs.

 

 

Page 79 of 93
****
 

 

 

 

 

**Note O - Selected QuarterlyFinancial Data (Unaudited):**

       Summarized quarterly financial data for the years ended December 31, 2008and 2007 are as follows (in thousands, except per share data):

 

2008

First

Second

Third

Fourth

Revenues (other than gains)

 $

63,038 

 $

66,156 

 $

70,306 

 $

65,911 

Expenses

(54,147)

(56,479)

(59,537)

(59,394)

Operating income

8,891 

9,677 

10,769 

6,517 

Interest and other income

368 

306 

346 

313 

Interest expense

(15,139)

(14,972)

(14,843)

(14,472)

Equity in earnings of  unconsolidated joint ventures

258 

289 

255 

92 

Impairment loss on real  estate

- 

- 

- 

(2,542)

Minority interest - unit  holders

- 

- 

- 

(1)

Minority interest - real  estate partnerships

2,487 

2,063 

2,584 

4,235 

Loss from continuing  operations

(3,135)

(2,637)

(889)

(5,858)

Income (loss) from  discontinued operations

540 

701 

(2,001)

(35)

Gain on sale of real estate  from discontinued operations

- 

- 

22,588 

- 

Net income (loss)

(2,595)

(1,936)

19,698 

(5,893)

Dividends on preferred stock

(1,200)

(1,200)

(1,200)

(1,200)

Net income (loss) available  to common stockholders

 $

(3,795)

 $

(3,136)

 $

18,498 

 $

(7,093)

Net income (loss) per common  share:

Basic

 $

(0.25)

 $

(0.21)

 $

1.23 

 $

(0.47)

Diluted

 $

(0.25)

 $

(0.21)

 $

1.22 

 $

(0.47)

Dividends per common share

 $

0.65  

 $

0.65 

 $

0.65 

 $

0.325 

Weighted average shares  outstanding:

Basic

15,003 

15,024 

15,031 

15,033 

Diluted

15,003 

15,024 

15,173 

15,033 

2007

First

Second

Third

Fourth

Revenues (other than gains)

 $

58,646 

 $

58,257 

 $

57,754 

 $

60,252 

Expenses

(47,031)

(47,580)

(47,828)

(47,720)

Operating Income

11,615 

10,677 

9,926 

12,532 

Interest and other income

146 

72 

90 

220 

Interest expense

(12,692)

(13,663)

(12,987)

(13,204)

Equity in earnings of  unconsolidated joint ventures

305 

243 

234 

226 

Gain (loss) on sale of joint  venture interests and real estate

50 

20,260 

(3)

- 

Minority interest - unit  holders

- 

- 

(2)

- 

Minority interest - real  estate partnerships

471 

1,016 

1,088 

599 

Income (loss) from  continuing operations

(105)

18,605 

(1,654)

373 

Income from discontinued  operations

533 

635 

760 

545 

Net income (loss)

428  

19,240  

(894)

918 

Dividends on preferred stock

(1,200)

(1,200)

(1,200)

(1,200)

Net income (loss) available  to common stockholders

 $

(772)

 $

18,040  

 $

(2,094)

 $

(282)

Net income (loss) per common  share:

Basic

 $

(0.05)

 $

1.15 

 $

(0.14)

 $

(0.02)

Diluted

 $

(0.05)

 $

1.14 

 $

(0.14)

 $

(0.02)

Dividends per common share

 $

0.65 

 $

0.65 

 $

0.65 

 $

0.65 

Weighted average shares outstanding:

Basic

15,616 

15,672 

15,507 

15,138 

Diluted

15,616 

15,847 

15,507 

15,138 

 

Page 80 of 93
****
 

 

 

 

 

SCHEDULEII – VALUATIONS AND QUALIFYING ACCOUNTS

(In thousands)

** **

**Balance**

**Additions**

**Deductions**

**Balance**

** **

**Beginning**

**Charged to**

**Written Off as**

**End**

**Description**

**of Year**

**Cost &  Expenses**

**Uncollectible**

**of Year**

 

 

 

 

 

Allowance for Doubtful Accounts:

 

 

 

Year Ended:

 

 

 

 

December 31, 2008

$1,004

$1,871

$(1,753)

$1,122

December 31, 2007

356

1,024

(376)

1,004

December 31, 2006

450

494

(588)

356

 

 

 

 

 

Page 81 of 93
****
 

 

 

** **

**SCHEDULE III – REAL ESTATE AND ACCUMULATED  DEPRECIATION**

**DECEMBER 31, 2008**

(In thousands)

** **

 

**Initial Cost to the Company**

**Subsequent**

 

** **

 

 

**Building and**

**Capitalized**

**Total**

**Description**

**Encumbrances**

**Land**

**Improvements**

**Costs**

**Real Estate**

**Office  and Parking Properties:**

 

 

 

 

 

**Arizona**

 

 

 

 

 

Desert  Ridge Corporate Center I

$                   49,200

$              -

$                   60,705

$              4,135

$             64,840

Desert  Ridge Corporate Center II

-

-

-

204

204

The  Shops at Desert Ridge

-

-

2

52

54

Squaw  Peak Corp Center I

33,917

5,800

35,144

2,387

43,331

Squaw  Peak Corp Center II

-

-

-

2,286

2,286

Mesa  Corporate Center

-

3,353

15,243

858

19,454

**Florida**

 

 

 

 

 

Hillsboro  Center V

10,412

1,325

12,249

2,934

16,508

Hillsboro  Center I-IV

7,099

1,129

7,734

2,068

10,931

Bellsouth  Building

8,027

3,477

7,835

1,675

12,987

Centurion  Centre

6,373

2,951

6,022

1,125

10,098

Stein  Mart Building

-

1,653

16,636

3,955

22,244

Riverplace  South

-

2,316

5,412

2,379

10,107

Maitland  100

8,820

2,667

10,176

2,260

15,103

555  Winderley Place

8,340

2,100

9,470

1,203

12,773

Gateway  Center

33,000

14,281

35,070

2,755

52,106

Citrus  Center

-

4,000

26,712

6,849

37,561

**Georgia**

 

 

 

 

 

100  Ashford Center

15,491

6,258

15,615

1,905

23,778

Peachtree  Ridge

15,553

2,203

19,551

2,116

23,870

Overlook  II

31,500

5,393

33,878

2,487

41,758

Waterstone

6,052

859

7,207

2,246

10,312

Meridian

-

994

9,547

2,248

12,789

Peachtree  Dunwoody Pavilion

29,816

9,373

24,579

5,520

39,472

Capital  City Plaza

60,000

3,625

57,218

3,653

64,496

**Illinois**

 

 

 

 

 

Chatham  Centre

17,100

3,358

20,086

4,243

27,687

Citicorp  Plaza

60,000

10,010

67,400

13,067

90,477

233  North Michigan

95,978

18,181

133,595

25,562

177,338

111  East Wacker

148,500

23,285

123,804

47,555

194,644

**Mississippi**

 

 

 

 

 

One  Jackson Place

9,635

1,799

19,730

9,349

30,878

City  Centre

-

1,707

19,935

10,921

32,563

111  Capitol Building

-

915

10,830

6,994

18,739

The  Pinnacle at Jackson Place

29,501

1,275

36,020

6,470

43,765

Parking  at Jackson Place

-

-

4,129

2,655

6,784

**South  Carolina**

 

 

 

 

 

Tower  at 1301 Gervais

-

316

20,350

6,000

26,666

Atrium  at Stoneridge

-

506

5,041

2,016

7,563

**Tennessee**

 

 

 

 

 

Renaissance  Center

16,545

4,255

29,747

2,152

36,154

Forum  II & III

-

2,634

13,886

2,883

19,403

Morgan  Keegan Tower

14,432

-

36,549

3,995

40,544

Falls  Building

-

-

7,628

2,468

10,096

Moore  Building

11,456

190

22,716

88

22,994

Toyota  Garage

-

727

7,939

223

8,889

Forum  I

11,246

4,737

12,484

2,461

19,682

Bank  of America Plaza

17,957

1,464

28,712

9,775

39,951

**Texas**

 

 

 

 

 

1401  Enclave

28,000

5,160

36,037

2,141

43,338

One  Park Ten Plaza

8,850

606

6,149

3,760

10,515

400  North Belt

-

419

9,983

3,825

14,227

Woodbranch

-

303

3,805

3,000

7,108

Sugar  Grove

6,620

364

7,510

3,307

11,181

Honeywell

-

856

15,235

1,879

17,970

Schlumberger

-

1,013

11,102

4,105

16,220

One  Commerce Green

19,878

489

37,322

3,791

41,602

Comerica  Bank Building

14,198

1,921

21,222

3,043

26,186

550  Greens Parkway

5,107

1,006

8,062

293

9,361

1717  St. James

4,692

430

6,485

2,557

9,472

5300  Memorial Building

9,794

682

11,746

2,660

15,088

Town  and Country

7,380

436

8,139

2,921

11,496

Wells  Fargo

9,112

2,600

8,297

2,861

13,758

 

Page 82 of 93
****
 

 

 

 

 

 

**SCHEDULE III – REAL ESTATE AND ACCUMULATED  DEPRECIATION - (Continued)**

**DECEMBER 31, 2008**

(In thousands)

** **

 

**Initial Cost to the Company**

**Subsequent**

 

** **

 

 

**Building and**

**Capitalized**

**Total**

**Description**

**Encumbrances**

**Land**

**Improvements**

**Costs**

**Real Estate**

**Office  and Parking Properties:**

 

 

 

 

 

**Virginia**

 

 

 

 

 

Lynnwood  Plaza

-

832

5,113

2,303

8,248

Greenbrier  Tower I

-

584

7,503

2,512

10,599

Greenbrier  Tower II

-

573

7,354

2,183

10,110

Glen  Forest

-

537

8,503

1,638

10,678

Moorefield  II

-

469

4,752

896

6,117

Moorefield  III

-

490

5,135

1,235

6,860

Boulders  Center

-

1,265

11,825

2,704

15,794

Winchester  Building

-

956

10,852

3,003

14,811

Moorefield  I

-

260

3,698

973

4,931

** **

869,581

171,367

1,292,415

273,767

1,737,549

**Real  Estate Development:**

 

 

 

 

 

**Mississippi**

 

 

 

 

 

Land  Held for Development

-

609

-

-

609

**Total  Real Estate Owned**

$                869,581

$        171,976

$             1,292,415

$         273,767

$        1,738,158

** **

** **

Page 83 of 93
****
 
 
**SCHEDULE III – REAL ESTATE AND ACCUMULATED  DEPRECIATION – (Continued)**

**DECEMBER 31, 2008**

(In thousands)

** **

**Gross Amount at Which**

 

 

 

 

 

** **

**Carried at Close of Period**

 

 

 

 

 

 

 

**Bldg. and**

** **

**Accum.**

**Net Book Value**

**Year**

**Year**

**Depreciable**

**Description**

**Land**

**Imprv.**

**Total**

**Depr.**

**of Real Estate**

**Acquired**

**Constructed**

**Lives (Yrs.)**

**Office and Parking  Properties:**

 

 

 

 

 

 

 

 

**Arizona**

 

 

 

 

 

 

 

 

Desert Ridge Corporate  Center I

$            -

$      64,840

$        64,840

$     2,239

$                62,601

2008

2006/2007

(3)

Desert Ridge Corporate  Center II

-

204

204

-

204

2008

2006/2007

(3)

The Shops at Desert Ridge

-

54

54

-

54

2008

2006/2007

(3)

Squaw Peak Corp Center I

5,800

37,531

43,331

5,669

37,662

2004

1999/2000

(3)

Squaw Peak Corp Center II

-

2,286

2,286

605

1,681

2004

1999/2000

(3)

Mesa Corporate Center

3,353

16,101

19,454

1,623

17,831

2005

2000

(3)

**Florida**

 

 

 

 

 

 

 

 

Hillsboro Center V

1,325

15,183

16,508

4,794

11,714

1998

1985

(3)

Hillsboro Center I-IV

1,129

9,802

10,931

3,027

7,904

1998

1985

(3)

Bellsouth Building

3,477

9,510

12,987

1,602

11,385

2006

1996

(3)

Centurion Centre

2,951

7,147

10,098

1,010

9,088

2006

1993

(3)

Stein Mart Building

1,653

20,591

22,244

3,182

19,062

2005

1985

(3)

Riverplace South

2,316

7,791

10,107

1,564

8,543

2005

1981

(3)

Maitland 100

2,667

12,436

15,103

1,865

13,238

2005

1981

(3)

555 Winderley Place

2,100

10,673

12,773

1,334

11,439

2005

1985

(3)

Gateway Center

14,281

37,825

52,106

1,337

50,769

2008

1989

(3)

Citrus Center

4,000

33,561

37,561

6,343

31,218

2003

1971

(3)

**Georgia**

 

 

 

 

 

 

 

 

100 Ashford Center

6,258

17,520

23,778

1,434

22,344

2006

1987

(3)

Peachtree Ridge

2,203

21,667

23,870

1,654

22,216

2006

1986

(3)

Overlook II

5,393

36,365

41,758

2,552

39,206

2006

1985

(3)

Waterstone

859

9,453

10,312

3,717

6,595

1995

1987

(3)

Meridian

994

11,795

12,789

4,083

8,706

1997

1985

(3)

Peachtree Dunwoody Pavilion

9,373

30,099

39,472

6,122

33,350

2003

1976/1980

(3)

Capital City Plaza

3,625

60,871

64,496

7,882

56,614

2004

1989

(3)

**Illinois**

 

 

 

 

 

 

 

 

Chatham Centre

3,358

24,329

27,687

2,704

24,983

2006

1989

(3)

Citicorp Plaza

10,010

80,467

90,477

4,070

86,407

2008

(2)1980/1982/2006

(3)

233 North Michigan

18,181

159,157

177,338

27,869

149,469

2005

1972

(3)

111 East Wacker

23,285

171,359

194,644

21,909

172,735

2006

1970

(3)

**Mississippi**

 

 

 

 

 

 

 

 

One Jackson Place

1,799

29,079

30,878

16,433

14,445

1986

1986

(3)

City Centre

1,707

30,856

32,563

10,145

22,418

1995

(2)1987/2005

(3)

111 Capitol Building

915

17,824

18,739

6,493

12,246

1998

1983

(3)

The Pinnacle at Jackson  Place

1,275

42,490

43,765

116

43,649

2008

2008

(3)

Parking at Jackson Place

-

6,784

6,784

153

6,631

2007

1980

(3)

**South Carolina**

 

 

 

 

 

 

 

 

Tower at 1301 Gervais

316

26,350

26,666

8,027

18,639

1997

1973

(3)

Atrium at Stoneridge

506

7,057

7,563

785

6,778

1998

1986

(3)

**Tennessee**

 

 

 

 

 

 

 

 

Renaissance Center

4,255

31,899

36,154

2,318

33,836

2006

2000

(3)

Forum II & III

2,634

16,769

19,403

5,748

13,655

1997

1985

(3)

Morgan Keegan Tower

-

40,544

40,544

11,921

28,623

1997

1985

(3)

Falls Building

-

10,096

10,096

2,842

7,254

1998

(2) 1982/84/90

(3)

Moore Building

190

22,804

22,994

5,156

17,838

2000

2000

(3)

Toyota Garage

727

8,162

8,889

1,831

7,058

2000

2000

(3)

Forum I

4,737

14,945

19,682

2,048

17,634

2005

1982

(3)

Bank of America Plaza

1,464

38,487

39,951

7,726

32,225

2001

1977

(3)

**Texas**

** **

** **

** **

** **

** **

** **

** **

** **

1401 Enclave

5,160

38,178

43,338

2,236

41,102

2007

1999

(3)

One Park Ten Plaza

606

9,909

10,515

4,368

6,147

1996

1982

(3)

400 North Belt

419

13,808

14,227

3,264

10,963

1996

1982

(3)

Woodbranch

303

6,805

7,108

2,913

4,195

1996

1982

(3)

Sugar Grove

364

10,817

11,181

4,049

7,132

1997

1982

(3)

Honeywell

856

17,114

17,970

5,095

12,875

1997

1983

(3)

Schlumberger

1,013

15,207

16,220

5,281

10,939

1998

1983

(3)

One Commerce Green

489

41,113

41,602

12,852

28,750

1998

1983

(3)

Comerica Bank Building

1,921

24,265

26,186

7,408

18,778

1998

1983

(3)

550 Greens Parkway

1,006

8,355

9,361

1,679

7,682

2001

1999

(3)

1717 St. James

430

9,042

9,472

1,602

7,870

2002

1975/94

(3)

5300 Memorial Building

682

14,406

15,088

3,168

11,920

2002

1982

(3)

Town and Country

436

11,060

11,496

1,796

9,700

2002

1982

(3)

Wells Fargo

2,600

11,158

13,758

2,000

11,758

2003

1978

(3)

** **

 

 

 

 

 

 

 

 

 

Page 84 of 93
****
 

 

 

**SCHEDULE III – REAL ESTATE AND ACCUMULATED  DEPRECIATION – (Continued)**

**DECEMBER 31, 2008**

(In thousands)

** **

**Gross Amount at Which**

 

 

 

 

 

** **

**Carried at Close of Period**

 

 

 

 

 

 

 

**Bldg. and**

** **

**Accum.**

**Net Book Value**

**Year**

**Year**

**Depreciable**

**Description**

**Land**

**Imprv.**

**Total**

**Depr.**

**of Real Estate**

**Acquired**

**Constructed**

**Lives (Yrs.)**

**Office and Parking  Properties:**

 

 

 

 

 

 

 

 

**Virginia**

 

 

 

 

 

 

 

 

Lynnwood Plaza

832

7,416

8,248

1,265

6,983

1998

1986

(3)

Greenbrier Tower I

584

10,015

10,599

3,005

7,594

1997

1985/87

(3)

Greenbrier Tower II

573

9,537

10,110

3,097

7,013

1997

1985/87

(3)

Glen Forest

537

10,141

10,678

3,107

7,571

1998

1985

(3)

Moorefield II

469

5,648

6,117

1,583

4,534

1998

1985

(3)

Moorefield III

490

6,370

6,860

1,918

4,942

1998

1985

(3)

Boulders Center

1,265

14,529

15,794

3,818

11,976

1998

1986

(3)

Winchester Building

956

13,855

14,811

4,100

10,711

1998

1987

(3)

Moorefield I

260

4,671

4,931

1,383

3,548

1999

1984

(3)

** **

171,367

1,566,182

1,737,549

282,919

1,454,630

 

 

 

**Real Estate Development:**

 

 

 

 

 

 

 

 

**Mississippi**

 

 

 

 

 

 

 

 

Land Held for Development

609

-

609

-

609

2007

-

 

**Total Real Estate Owned**

$ 171,976

$ 1,566,182

$   1,738,158

$ 282,919

$          1,455,239

 

 

 

** **

 

 

 

 

 

 

 

 

(1)   The aggregate cost for  federal income tax purposes was approximately $1.8 billion.

(2)   The dates of major  renovations.

(3)   Depreciation of  buildings and improvements is calculated over lives ranging from the life of  the lease to 40 years.

 

 

**NOTE TO SCHEDULEIII**

**At December 31,2008, 2007 and 2006**

(In thousands)

 

A summary of activity for real estate and accumulateddepreciation is as follows:

 

 

**December 31**

 

**2008**

** **

**2007**

** **

**2006**

**Real Estate:**

 

 

 

 

* *

**Office and Parking Properties:**

 

 

 

 

* *

Balance at beginning of year

$1,566,393 

 

$1,512,104 

 

$1,220,565 

Additions:

 

 

 

 

 

Acquisitions and improvements

241,238 

 

91,261 

 

360,113 

Office property development

30,299 

 

14,686 

 

- 

Cost of real estate sold or  disposed

(99,772)

 

(51,658)

 

(68,574)

Balance at close of year

$1,738,158 

 

$1,566,393 

 

$1,512,104 

 

 

 

 

 

 

**Accumulated Depreciation:**

 

 

 

 

 

Balance at beginning of year

$   251,791 

 

$   208,891 

 

$   179,636 

Depreciation expense

65,618 

 

56,882 

 

46,497 

Depreciation expense - discontinued  operations

1,653 

 

2,072 

 

899 

Real estate sold or disposed

(36,143)

 

(16,054)

 

(18,141)

Balance at close of year

$   282,919 

 

$   251,791 

 

$   208,891 

 

Page 85 of 93
****
 

 

 

 

 

**SCHEDULE IV - MORTGAGE LOAN ON REAL ESTATE**

**DECEMBER 31, 2008**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

**Principal**

** **

** **

** **

** **

** **

** **

** **

**Amount of**

** **

** **

**Final**

**Periodic**

** **

**Face**

**Carrying**

**Loan Subject to**

** **

**Interest**

**Maturity**

**Payment**

**Prior**

**Amount of**

**Amount of**

**Delinquent Principal**

**Description**

**Rate**

**Date**

**Term**

**Liens**

**Mortgage**

**Mortgage (3)**

**and Interest**

2100 Ross Avenue (1)

6.065%

May 2012

Interest only (2)

None

$    10,000

$       7,519

$               -

 

 

 

 

 

 

 

 

(1) This is a B  participation piece of first mortgage secured by an 844,000 square foot  office building in Dallas, Texas.

(2) The note requires  interest only payments until maturity, at which time a principal payment of  $10.0 million will be due.

(3) The cost for federal tax  purposes is approximately $7.0 million.

 

 

 

 

 

**NOTE TO SCHEDULE  IV**

**At December 31,  2008 and 2007**

(In thousands)

 

 

 

 

 

 

 

 

 

**December 31**

 

 

 

**2008**

** **

**2007**

Balance at beginning of year

 $

7,001

 

 $

-  

Additions:

 

 

 

 

 

New mortgage loans

- 

 

6,930 

Amortization of discount

518

 

71 

Balance at end of year

 $

7,519

 

 $

7,001 

**Item 9.  *Changes in and Disagreements with Accountants onAccounting and Financial Disclosure*.**

        The Audit Committee of the Board of Directors of the Company, inaccordance with sound corporate governance practices, issued a request forproposal (“RFP”) with regard to the audit engagement of the Company.  The AuditCommittee decided to issue the RFP because it wanted to consolidate the auditsof Parkway, the Ohio PERS Fund I and the Texas Teachers Fund II with oneindependent registered public accounting firm and wanted the opportunity toreview other auditing firms as prospective independent registered publicaccounting firms.  This decision was not related to the quality of servicesprovided by Ernst & Young LLP (“E&Y”).  The RFP was issued to severallarge public accounting firms, including E&Y, in May 2008.  In June 2008,the Audit Committee unanimously approved the engagement of KPMG LLP (“KPMG”) asthe new independent registered public accounting firm, effective beginning in 2008. KPMG has audited the consolidated historical-cost and consolidatedcurrent-value financial statements of Ohio PERS Fund I since 2005.

 

        During the Company’s twomost recent fiscal years ended December 31, 2007, and in the interim periodbetween December 31, 2007 and June 30, 2008, there were no disagreementsbetween the Company and E&Y on any matter of accounting principles orpractices, financial statement disclosure or auditing scope or procedure which,if not resolved to E&Y’s satisfaction, would have caused E&Y to makereference to the matter of the disagreement in connection with their reports.  

** **

**Item 9A.  *Controls and Procedures*. **

       The Company’s management, with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of Parkway’s disclosure controls andprocedures at December 31, 2008.  Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that Parkway’sdisclosure controls and procedures were effective at December 31, 2008.  Therewere no changes in the Company’s internal control over financial reportingduring the fourth quarter of 2008 that has materially affected, or isreasonably likely to affect, the Company’s internal control over financialreporting.

       The Company’s internal control systemwas designed to provide reasonable assurance to the Company’s management and Boardof Directors regarding the preparation and fair presentation of publishedfinancial statements. All internal control systems, no matter how welldesigned, have inherent limitations.  Therefore, even those systems determinedto be effective can provide only reasonable assurance with respect to thefinancial statement preparation and presentation.

 

Page 86 of 93
****
 

 

 

 

 

**Management’s Report onInternal Control Over Financial Reporting**

       The Company’s management, with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, is responsible for establishing and maintaining adequate internalcontrol over financial reporting.  The Company’s management has assessed theeffectiveness of the Company’s internal control over financial reporting atDecember 31, 2008.  In making this assessment, we used the criteria set forthby the Committee of Sponsoring Organizations of the Treadway Commission (COSO)in *Internal Control – Integrated Framework*.  Based on our assessment we haveconcluded that, at December 31, 2008, the Company’s internal control overfinancial reporting is effective based on those criteria.  Our independentregistered public accounting firm, KPMG LLP, has provided an audit report onthe Company’s internal control over financial reporting at December 31, 2008.

 

Page 87 of 93
****
 

 

 

 

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

**THE BOARD OF DIRECTORS ANDSTOCKHOLDERS**

**PARKWAY PROPERTIES, INC.:**

 

We haveaudited Parkway Properties, Inc.’s internal control over financial reporting asof December 31, 2008, based on the criteria established in *Internal Control– Integrated Framework*issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO).  Parkway Properties, Inc.’s management is responsiblefor maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting,included in the accompanying *Management’s Report on Internal Control overFinancial Reporting.*Our responsibility is to express an opinion on theCompany’s internal control over financial**reporting based on our audit.

 

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists,and testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk. Our audit also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion. 

 

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements. 

 

Because ofits inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. 

 

In ouropinion, Parkway Properties, Inc. maintained, in all material respects,effective internal control over financial reporting as of December 31, 2008,based on the criteria established in *Internal Control – Integrated Framework*issued by the Committee of Sponsoring Organizations of the TreadwayCommission. 

 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheet of ParkwayProperties, Inc. and subsidiaries as of December 31, 2008, and the relatedconsolidated statements of income, stockholders’ equity, and cash flows for theyear ended December 31, 2008, and our report dated March 6, 2009, expressed anunqualified opinion on those consolidated financial statements.

 

/s/ KPMG LLP

 

Jackson, Mississippi 

March 6, 2009

 

Page 88 of 93
****
 

 

 

 

 

**Item 9B.  *Other Information*.**

       None.

**PART III**

**Item 10.  *Directors, Executive Officers and Corporate Governance.***

      The information regarding directors isincorporated herein by reference from the section entitled "Proposal One:Election of Director  − Nominees" in the Company's definitive ProxyStatement ("2009 Proxy Statement") to be filed pursuant to Regulation14A of the Securities Exchange Act of 1934, as amended, for the Company'sAnnual Meeting of Stockholders to be held on May 14, 2009.  The 2009 ProxyStatement will be filed within 120 days after the end of the Company's fiscalyear ended December 31, 2008. 

      The information regarding executiveofficers is incorporated herein by reference from the section entitled"Proposal 1: Election of Directors − Executive Officers" in theCompany's 2009 Proxy Statement.

      The information regarding compliance withSection 16(a) of the Securities Exchange Act of 1934 is incorporated herein byreference from the section entitled "Proposal 1: Election of Directors− Section 16(a) Beneficial Ownership Reporting Compliance" in theCompany's 2009 Proxy Statement. 

      Information regarding the Company's code ofbusiness conduct and ethics found in the subsection captioned "AvailableInformation" in Item 1 of Part I hereof is also incorporated herein byreference into this Item 10.

      The information regarding the Company'saudit committee, its members and the audit committee financial experts isincorporated by reference herein from the second paragraph in the sectionentitled "Proposal 1: Election of Directors − Board Committees andMeetings; Director Education" in the Company's 2009 Proxy Statement. 

**Item 11.  *Executive Compensation*.**

      The information included under thefollowing captions in the Company's 2009 Proxy Statement is incorporated hereinby reference: "Proposal 1: Election of Directors − CompensationDiscussion and Analysis, − Summary Compensation Table, − 2008 Grantsof Plan-Based Awards, − Outstanding Equity Awards at 2008 Fiscal Year-End, −2008 Option Exercises and Stock Vested, − Potential Payments upon Changein Control, − Compensation of Directors and − CompensationCommittee Interlocks."  The information included under the heading"Proposal 1: Election of Directors − Compensation CommitteeReport" in the Company's 2009 Proxy Statement is incorporated herein byreference; however, this information shall not be deemed to be "solicitingmaterial" or to be "filed" with the SEC or subject to Regulation14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Actof 1934, as amended.

**Item 12.  *Security Ownership of Certain Beneficial Ownersand Management and Related Stockholder Matters.***

      Information regarding security ownership ofcertain beneficial owners and management is incorporated herein by referencefrom the sections entitled "Security Ownership of Certain BeneficialOwners," "Proposal 1: Election of Directors − SecurityOwnership of Management and Directors" in the Company's 2009 ProxyStatement.

Page 89 of 93
****
 
 
 

 

**Equity Compensation Plans**

      The following table sets forth thesecurities authorized for issuance under Parkway's equity compensation plans atDecember 31, 2008:

 

** **

** **

** **

**(c)**

** **

** **

** **

**Number of  securities**

** **

** **

** **

**remaining  available for**

** **

**(a)**

**(b)**

**future issuance  under**

** **

**Number of  securities to**

**Weighted-average**

**equity compensation**

** **

**be issued upon  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

145,984

$27.68

367,351

 

 

 

 

Equity compensation plans 

 

 

 

not approved by security

 

 

 

holders

-

-

-

 

 

 

 

Total

145,984

$27.68

367,351

 

**Item 13.  *Certain Relationships and RelatedTransactions, and Director Independence.***

       The informationregarding transactions with related persons and director independence isincorporated herein by reference from the sections entitled “Independence” and“Certain Transactions and Relationships” in the Company's 2009 Proxy Statement.

**Item 14.  *Principal Accounting Fees and Services*.**

****       The information regardingprincipal auditor fees and services is incorporated herein by reference fromthe section entitled “Proposal 2: Ratification of Independent Accountants” in theCompany's 2009 Proxy Statement.

 

**PART IV**

**Item 15.  *Exhibits and Financial Statement Schedules*.**

(a)   1            Consolidated Financial Statements

                      Report ofIndependent Registered Public Accounting Firm

                      ConsolidatedBalance Sheets-at December 31, 2008 and 2007

                      ConsolidatedStatements of Income-for the years ended December 31, 2008, 2007 and 2006

                      ConsolidatedStatements of Stockholders’ Equity-for the years ended December 31, 2008, 2007and 2006

                      ConsolidatedStatements of Cash Flows-for the years ended December 31, 2008, 2007 and 2006

                      Notes toConsolidated Financial Statements

        2           ConsolidatedFinancial Statement Schedules

                      Schedule II – Valuations and QualifyingAccounts

                      Schedule III – RealEstate and Accumulated Depreciation

                      Note to ScheduleIII

                      Schedule IV –Mortgage Loan on Real Estate

                      Note to ScheduleIV

                     Allother schedules for which provision is made in the applicable accountingregulation of the Securities and Exchange Commission are not required under therelated

                     instructions or are inapplicable and therefore have been omitted.

        3           Form10-K Exhibits required by Item 601 of Regulation S-K:

 

**                      Exhibit                              **

**        No.        Description**

        3.1        Articles of Incorporation, as amended, of theCompany (incorporated by reference to Exhibit B to the Company's proxy materialfor its July 18, 1996 Annual Meeting).

 

Page 90 of 93
****
 

 

 

 

 

        3.2        Bylaws, as amended, of the Company (incorporated byreference to Exhibit 3.2 to the Company’s Form 10-K for the year ended December31, 2006).

        3.3        Amendment to Bylaws of the Company (incorporated byreference to Exhibit 3.1 to the Company’s Form 8-K filed on July 13, 2007).

        3.4        Articles Supplementary creating the Company’sSeries D Cumulative Redeemable Preferred Stock (incorporated by reference toExhibit 4 to the Company’s Form 8-A filed May 29, 2003).

        10         Material Contracts (*Denotes management contract orcompensatory plan or arrangement):

        10.1*    Parkway Properties, Inc. 1991 Directors Stock OptionPlan, as Amended (incorporated by reference to Appendix C to the Company’sproxy material for its June 6, 1997 Annual Meeting).

        10.2*    Parkway Properties, Inc. 1994 Stock Option andLong-Term Incentive Plan (incorporated by reference to Appendix A to the Company’sproxy material for its June 3, 1999 Annual Meeting).

        10.3*    Parkway Properties, Inc. 2001 Non-employee DirectorsEquity Compensation Plan, as amended (incorporated by reference to Exhibit 10.5to the Company’s Form 10-K for the year ended December 31, 2006).

        10.4*    Parkway Properties, Inc. 2003 Equity Incentive Plan,as amended (incorporated by reference to Exhibit 10.6 to the Company’s Form10-K for the year ended December 31, 2006).

        10.5      Amended and Restated Agreement of LimitedPartnership of Parkway Properties LP (incorporated by reference to Exhibit99(a) to the Company's Form 8-K filed July 15, 1998).

        10.6      Admission Agreement between Parkway Properties LPand Lane N. Meltzer (incorporated by reference to Exhibit 99(b) to the Company'sForm 8-K filed July 15, 1998).

        10.7      Promissory Note between Parkway Properties LP andTeachers Insurance and Annuity Association of America (incorporated byreference to Exhibit 10.1 to the Company's Form 8-K filed December 22, 2005).

        10.8      Form of Deed of Trust, Assignment of Leases andRents, Security Agreement and Fixture Filing by and between Parkway PropertiesLP as borrower and Jack Edelbrock as trustee for the benefit of TeachersInsurance and Annuity Association of America as lender (incorporated byreference to Exhibit 10.2 to the Company's Form 8-K filed December 22, 2005).

        10.9      Indenture of Mortgage, Security Agreement FinancingStatement Fixture Filing and Assignment of Leases, Rents and Security Depositsdated June 22, 2001 made by Parkway 233 North Michigan, LLC to German AmericanCapital Corporation (incorporated by reference to Exhibit 4(a) to the Company'sForm 8-K filed July 3, 2001).

        10.10    Promissory Note made as of June 22, 2001 by Parkway233 North Michigan, LLC in favor of German American Capital Corporation(incorporated by reference to Exhibit 4(a) to the Company's Form 8-K filed July3, 2001).

        10.11    Limited Partnership Agreement of Parkway PropertiesOffice Fund, L.P. by and among PKY Fund, LLC, Parkway Properties L.P. and PERSHolding Company Limited, L.L.C. (incorporated by reference to Exhibit 10 to theCompany's Form 8-K filed July 7, 2005).

        10.12    First Amendment to Limited Partnership Agreement ofParkway Properties Office Fund, L. P. by and among, PKY Fund, LLC, ParkwayProperties LP and PERS Holding Company Limited, L.L.C. (incorporated by reference to Exhibit10.14 to the Company’s Form 10-K for the year ended December 31, 2007).

        10.13    Second Amendment to Limited Partnership Agreement ofParkway Properties Office Fund, L. P. by and among, PKY Fund, LLC, ParkwayProperties LP and PERS Holding Company Limited, L.L.C. (incorporated byreference to Exhibit 10.15 to the Company’s Form 10-K for the year endedDecember 31, 2007).

        10.14    Limited Partnership Agreement of Parkway PropertiesOffice Fund II, L.P. by and among PPOF II, LLC, Parkway Properties, LP andTeacher Retirement System of Texas (incorporated by reference to Exhibit 10 tothe Company’s Form 8-K filed May 19, 2008).

        10.15* Performance measures for the Company's 2009 long-termequity compensation program and cash bonus awards for executive officers of theCompany (a written description thereof is set forth in Item 5.02 of theCompany’s Form 8-K filed February 4, 2009).

        10.16    First Amended and Restated Credit Agreement by andamong Parkway Properties LP, a Delaware limited partnership; Wachovia Bank,National Association, as Agent; PNC Bank, National Association, as SyndicationAgent; Bank of America, N.A., JPMorgan Chase Bank, N.A., and Wells Fargo Bank,National Association, as Co-Documentation Agents and the Lenders dated April27, 2006 (incorporated by reference to Exhibit 10 to the Company’s Form 8-Kfiled April 28, 2006).

 

Page 91 of 93
****
 

 

 

 

 

        10.17    First Amendment to Credit Agreement among ParkwayProperties, LP as Borrower; 111 Capitol Building Limited Partnership, ParkwayJackson, LLC, Parkway Lamar LLC, Parkway Properties, Inc. and ParkwayProperties General Partners, Inc. collectively as Guarantors; Wachovia Bank,National Association as Agent; Wachovia Capital Markets, LLC as Sole LeadArranger and Sole Book Runner; and the Lenders dated as of December 19, 2006 (incorporated by reference to Exhibit 10 to the Company’s Form 8-K filedDecember 20, 2006).

        10.18    Second Amendment to Credit Agreement among ParkwayProperties, LP as Borrower; 111 Capitol Building Limited Partnership, ParkwayJackson, LLC, Parkway Lamar LLC, Parkway Properties, Inc. and ParkwayProperties General Partners, Inc. collectively as Guarantors; Wachovia Bank,National Association as Agent; Wachovia Capital Markets, LLC as Sole LeadArranger and Sole Book Runner; and the Lenders identified therein dated as ofMay 31, 2007 (incorporated by reference to Exhibit 10.3 to the Company’s Form8-K filed on May 31, 2007).

        10.19* Parkway Properties, Inc. 2006 Employee Stock PurchasePlan, as amended (incorporated by reference to Exhibit 10.1 to the Company’sForm 8-K filed August 24, 2006).

        10.20    Mortgage, Security Agreement, Assignment of Rents andFixture Filing by 111 East Wacker LLC to Wachovia Bank, National Association(incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed July14, 2006).

        10.21    Promissory Note by 111 East Wacker LLC to WachoviaBank, National Association (incorporated by reference to Exhibit 10.5 to theCompany’s Form 8-K filed July 14, 2006).

        10.22* Adoption Agreement for the Executive Nonqualifed ExcessPlan (incorporated by reference to Exhibit 10.25 to the Company’s Form 10-K forthe year ended December 31, 2006).

        10.23* Appendix to Adoption Agreement for Parkway Properties,Inc Deferred Compensation Plan, as amended (incorporated by reference toExhibit 10.26 to the Company’s Form 10-K for the year ended December 31, 2006).

        10.24* Amendment to Change-in-Control Agreement that theCompany has entered into with the individuals listed in Exhibits 10.1 and 10.2above (incorporated by reference to Exhibit 10.27 to the Company’s Form 10-Kfor the year ended December 31, 2006).

        10.25* Form of Change in Control Agreement with each of theCompany’s Executive Officers (the Change in Control Agreements are identical insubstance for each of the Executive Officers, except that the Change in ControlAgreements for Steven G. Rogers, J. Mitchell Collins, William R. Flatt, JamesM. Ingram provide for a multiple of “2.99” in calculating the severance paymentunder each officer's Agreement and the Change in Control Agreement for Mandy M.Pope provides for a multiple of “2.5”) (incorporated by reference to Exhibit 10to the Company’s Form 8-K filed May 8, 2008).

        10.26* Form of Incentive Restricted Share Agreement forPerformance-Based Awards (incorporated by reference to Exhibit 10.1 to theCompany’s Form 8-K filed June 29, 2006).

        10.27* Form of Incentive Restricted Share Agreement forTime-Based Awards (incorporated by reference to Exhibit 10.2 to the Company’sForm 8-K filed June 29, 2006).

        10.28* Form of Incentive Restricted Share Agreement for 2009Long-Term Equity Compensation Program (incorporated by reference to Exhibit 10to the Company’s Form 8-K filed February 4, 2009).

        21         Subsidiaries of the Company (filed herewith).

        23.1      Consent of KPMP LLP (filed herewith).

        23.2      Consent of Ernst & Young LLP (filed herewith).

        23.3      Consent of KPMG LLP (filed herewith).

        31.1      Certification of Chief Executive Officer pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.

        31.2      Certification of Chief Financial Officer pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.

        32.1      Certification of Chief Executive Officer pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

        32.2      Certification of Chief Financial Officer pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

 

Page 92 of 93
****
 

 

 

 

 

** **

**SIGNATURES**

     Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 

 

 

PARKWAY  PROPERTIES, INC.

 

Registrant

 

 

 

 

 

/s/ Steven G. Rogers

 

Steven G. Rogers

 

President, Chief Executive

 

Officer and Director

 

March 6, 2009

 

 

 

 

 

/s/  J. Mitchell Collins

 

J.  Mitchell Collins

 

Executive  Vice President

 

and Chief Financial Officer

 

March 6, 2009

 

 

 

 

 

/s/ Mandy M. Pope

 

Mandy M. Pope

 

Senior Vice President and Controller

 

March 6, 2009

 

 

 

     Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.  

 

 

 

/s/ Daniel P. Friedman

/s/ Steven G. Rogers

Daniel P. Friedman, Director

Steven G. Rogers

March 6, 2009

President, Chief Executive  Officer and Director

 

March 6, 2009

 

 

/s/ Roger P. Friou

 

Roger P. Friou, Director

/s/ Leland R. Speed

March 6, 2009

Leland R. Speed

 

Chairman of the Board and  Director

 

March 6, 2009

/s/ Martin L. Garcia

 

Martin L. Garcia, Director

 

March 6, 2009

/s/ Troy A. Stovall

 

Troy A. Stovall, Director

 

March 6, 2009

/s/ Michael J. Lipsey

 

Michael J. Lipsey, Director

 

March 6, 2009

/s/  Lenore M. Sullivan

 

Lenore M. Sullivan, Director

 

March 6, 2009

 

Page 93 of 93
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