UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- -------.
---------------------------------------------------------
Commission File Number: 0-20625
-------
DUKE-WEEKS REALTY LIMITED PARTNERSHIP
State of Incorporation: IRS Employer ID Number:
Indiana 35-1898425
- - ----------------------- ----------------------
Address of principal executive offices:
8888 Keystone Crossing, Suite 1200
----------------------------------
Indianapolis, Indiana 46240
----------------------------
Telephone: (317) 808-6000
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
The number of Limited Partnership Units outstanding as of August 12,
1999 was 19,069,953.
<PAGE>
DUKE-WEEKS REALTY LIMITED PARTNERSHIP
INDEX
PART I - FINANCIAL INFORMATION PAGE
- - ------------------------------ ----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance
Sheets as of June 30, 1999
(Unaudited) and December 31, 1998 2
Condensed Consolidated Statements
of Operations for the three and
six months ended June 30, 1999
and 1998 (Unaudited) 3
Condensed Consolidated Statements
of Cash Flows for the six months
ended June 30, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statement
of Partners' Equity for the six
months ended June 30, 1999 (Unaudited) 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6-10
Independent Accountants' Review Report 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 12-20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote
of Security Holders 21-22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUKE-WEEKS REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
---------- ------------
ASSETS (UNAUDITED)
------
<S> <C> <C>
Real estate investments:
Land and improvements $ 355,804 $ 312,022
Buildings and tenant improvements 2,364,216 2,091,757
Construction in progress 204,609 185,950
Investments in unconsolidated companies 114,570 125,746
Land held for development 181,274 146,911
--------- ---------
3,220,473 2,862,386
Accumulated depreciation (204,750) (179,887)
--------- ---------
Net real estate investments 3,015,723 2,682,499
Cash and cash equivalents 168,096 6,626
Accounts receivable from tenants,
net of allowance of $625 and $896 10,720 9,641
Straight-line rent receivable,
net of allowance of $841 23,581 20,332
Receivables on construction contracts 75,343 29,162
Deferred financing costs, net of
accumulated amortization of $7,803
and $11,064 14,732 11,316
Deferred leasing and other costs, net
of accumulated amortization of $17,934
and $16,838 57,720 53,281
Escrow deposits and other assets 62,281 41,205
--------- ---------
$3,428,196 $2,854,062
========= =========
LIABILITIES AND PARTNERS' EQUITY
Indebtedness:
Secured debt $ 341,556 $ 326,317
Unsecured notes 890,000 590,000
Unsecured line of credit 159,000 91,000
--------- ---------
1,390,556 1,007,317
Construction payables and amounts
due subcontractors 60,776 55,012
Accounts payable 3,911 4,836
Accrued expenses:
Real estate taxes 39,348 36,075
Interest 14,235 10,329
Other expenses 18,602 21,676
Other liabilities 22,080 21,928
Tenant security deposits and prepaid rents 18,973 18,534
--------- ---------
Total liabilities 1,568,481 1,175,707
Minority interest 317 367
--------- ---------
Partners' equity:
General partner:
Common equity 1,305,582 1,223,260
Preferred equity 444,885 348,366
--------- ---------
1,750,467 1,571,626
Limited partners' common equity 108,931 106,362
--------- ---------
Total partners' equity 1,859,398 1,677,988
--------- ---------
$3,428,196 $2,854,062
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 2 -
<PAGE>
DUKE-WEEKS REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
RENTAL OPERATIONS:
Revenues:
Rental income $104,369 $80,503 $203,848 $157,338
Equity in earnings of
unconsolidated companies 2,779 2,576 5,287 5,417
------- ------ ------- -------
107,148 83,079 209,135 162,755
------- ------ ------- -------
Operating expenses:
Rental expenses 17,501 13,839 36,127 27,684
Real estate taxes 11,674 8,053 22,491 15,887
Interest expense 17,129 14,346 33,120 27,225
Depreciation and amortization 20,935 16,525 41,389 30,785
------- ------ ------- -------
67,239 52,763 133,127 101,581
------- ------ ------- -------
Earnings from rental
operations 39,909 30,316 76,008 61,174
------- ------ ------- -------
SERVICE OPERATIONS:
Revenues:
Property management,
maintenance and leasing fees 3,795 3,597 7,421 6,634
Construction management and
development fees 4,812 3,131 13,159 4,690
Other income 286 294 580 598
------- ------ ------- -------
8,893 7,022 21,160 11,922
------- ------ ------- -------
Operating expenses:
Payroll 3,339 3,804 7,056 6,687
Maintenance 807 594 1,602 1,198
Office and other 1,165 804 3,884 1,322
------- ------ ------- -------
5,311 5,202 12,542 9,207
------- ------ ------- -------
Earnings from service
operations 3,582 1,820 8,618 2,715
------- ------ ------- ------
General and administrative
expense (3,496) (3,103) (7,111) (5,443)
------- ------ ------- ------
Operating income 39,995 29,033 77,515 58,446
OTHER INCOME (EXPENSE):
Interest income 546 412 1,145 589
Earnings (loss) from
property sales 1,971 368 4,285 954
Other expense (106) (30) (338) (61)
Other minority interest
in earnings of subsidiaries (450) (254) (880) (254)
------- ------ ------- -------
Net income $ 41,956 $29,529 $ 81,727 $ 59,674
Dividends on preferred units (9,254) (4,703) (18,096) (9,406)
------- ------ ------- -------
Net income available for common
unitholders $ 32,702 $24,826 $ 63,631 $ 50,268
======= ====== ======= =======
Net income per common unit:
Basic $ 0.33 $ 0.27 $ 0.65 $ 0.56
======= ====== ======= =======
Diluted $ 0.33 $ 0.27 $ 0.65 $ 0.56
======= ====== ======= =======
Weighted average number of
common units outstanding 97,894 90,930 97,548 89,299
======= ====== ======= =======
Weighted average number of
common and dilutive
potential common units 98,855 91,830 98,477 90,222
======= ====== ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 3 -
<PAGE>
DUKE-WEEKS REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 81,727 $ 59,674
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of buildings
and tenant improvements 37,049 27,385
Amortization of deferred
financing costs 725 656
Amortization of deferred
leasing and other costs 4,340 3,400
Minority interest in earnings 880 254
Straight-line rental income (3,748) (3,107)
Earnings from property sales (4,286) (954)
Construction contracts, net (40,417) (2,185)
Other accrued revenues and
expenses, net 6,799 18,482
Equity in earnings in excess
of distributions received from
unconsolidated companies (499) (3,371)
------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 82,570 100,234
------- -------
Cash flows from investing activities:
Rental property development costs (161,843) (101,464)
Acquisition of rental properties (87,827) (194,703)
Acquisition of land held for development
and infrastructure costs (60,973) (19,377)
Recurring costs:
Tenant improvements (7,845) (5,216)
Leasing commissions (4,993) (2,528)
Building improvements (666) (894)
Other deferred leasing costs (8,439) (8,049)
Other deferred costs and other assets (18,870) (8,182)
Proceeds from property sales, net 24,695 3,980
Other distributions received from
unconsolidated companies 16,802 -
Net investment in and advances to
unconsolidated companies (13,017) (15,468)
------- -------
Net cash used by investing activities (322,976) (351,901)
------- -------
Cash flows from financing activities:
Contributions from general partner 134,420 102,912
Proceeds from indebtedness 300,000 250,000
Borrowings (repayments) on lines
of credit, net 61,000 (20,000)
Payments on indebtedness including
principal amortization (3,947) (5,730)
Distributions to partners (66,229) (53,641)
Distributions to preferred unitholders (18,096) (9,406)
Distributions to minority interest (930) (193)
Deferred financing costs (4,342) (739)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 401,876 263,203
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 161,470 11,536
Cash and cash equivalents at beginning of
period 6,626 10,372
------- -------
Cash and cash equivalents at end of period $168,096 $ 21,908
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 4 -
<PAGE>
DUKE-WEEKS REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
General Partner Limited
------------------------ Partners'
Common Preferred Common
Equity Equity Equity Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER
31, 1998 $1,223,260 $348,366 $106,362 $1,677,988
Net income 56,989 18,096 6,642 81,727
Capital contribution from
General Partner 38,720 96,519 - 135,239
Acquisition of Partnership
interest for common stock
of the General Partner 46,125 - - 46,125
Acquisition of property in
exchange for Limited Partner
Units - - 2,644 2,644
Distributions to preferred
unitholders - (18,096) - (18,096)
Distributions to partners (59,512) - (6,717) (66,229)
--------- ------- ------- ---------
BALANCE AT JUNE 30, 1999 $1,305,582 $444,885 $108,931 $1,859,398
========= ======= ======= =========
COMMON UNITS OUTSTANDING
AT JUNE 30, 1999 89,747 8,926 98,673
========= ======= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 5 -
<PAGE>
DUKE-WEEKS REALTY LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. FINANCIAL STATEMENTS
On June 18, 1999, the shareholders of Duke Realty Investments, Inc.
(the "General Partner") and Weeks Corporation ("Weeks"), approved a
merger transaction (the "Merger") which was consummated in July 1999,
whereby Weeks and its consolidated subsidiary, Weeks Realty L.P.
("Weeks Operating Partnership") merged with and into the General
Partner and Duke Realty Limited Partnership ("Duke Operating
Partnership"). The combined operating partnerships continued operating
under the name Duke-Weeks Realty Limited Partnership (the
"Partnership"). See Note 7 for a more complete discussion of the
Merger.
The accompanying condensed financial statements of the Partnership
represent the financial position and results of operations for Duke
Operating Partnership on a stand-alone basis and do not reflect the
financial position or results of operations for Weeks Operating
Partnership or the combined partnership, unless otherwise indicated,
since the Merger was consummated after June 30, 1999.
The interim condensed consolidated financial statements included
herein have been prepared by the Partnership without audit. The
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the
instructions for Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for
a fair presentation have been included. These financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto included in the Partnership's Annual
Financial Statements.
THE PARTNERSHIP
The Partnership was formed on October 4, 1993, when the General Partner
contributed all of its properties and related assets and liabilities
along with the net proceeds from the issuance of an additional 14,000,833
units through a common stock offering to the Partnership. Simultaneously,
the Partnership completed the acquisition of Duke Associates, a full-
service commercial real estate firm operating in the Midwest. The
General Partner was formed in 1985 and qualifies as a real estate
investment trust under provisions of the Internal Revenue Code. The
General Partner is the sole general partner of the Partnership and
owns 90.9% of the Partnership at June 30, 1999. The remaining limited
partnership interest ("Limited Partner Units") (together with the
units of general partner interests, the ("Common Units")) are mainly
owned by the previous partners of Duke Associates. The Limited Partner
Units are exchangeable for units of the General Partner's common stock
on a one-for-one basis subject generally to a one-year holding period.
The General Partner periodically acquires a portion of the minority
interest in the Partnership through the issuance of units of common
stock for a like number of Common Units. The acquisition of the
minority interest is accounted for under the purchase method with
assets acquired recorded at the fair market value of the General
Partner's common stock on the date of acquisition.
- 6 -
<PAGE>
The service operations are conducted through Duke Realty Services
Limited Partnership and Duke Construction Limited Partnership, in
which the Partnership has an 89% profits interest (after certain
preferred returns on partners' capital accounts) and effective control
of their operations. The consolidated financial statements include the
accounts of the Partnership and its majority-owned or controlled
subsidiaries. The equity interests in these majority-owned or
controlled subsidiaries not owned by the Partnership are reflected as
minority interests in the consolidated financial statements.
2. LINES OF CREDIT
The Partnership has the following lines of credit (LOC)
available:
<TABLE>
<CAPTION>
Borrowing Outstanding at
Capacity Maturity Interest June 30, 1999
Description (in 000's) Date Rate (in 000's)
- - ------------------------ ---------- ---------- -------- --------------
<S> <C> <C> <C> <C>
Unsecured Line of Credit $450,000 April 2001 LIBOR + .70% $159,000
Unsecured Line of Credit $300,000 April 2001 LIBOR + .90% $ 0
</TABLE>
Both LOC are used to fund development and acquisition of additional
rental properties and to provide working capital.
Effective July 2, 1999, the interest rate on the $450 million LOC was
adjusted from LIBOR + .80% to LIBOR + .70% in conjunction with the
Partnership's new debt rating following the Merger (see Note 7).
Additionally, the $450 million LOC allows the Partnership an option to
obtain borrowings from the financial institutions that participate in
the LOC at rates lower than the stated interest rate, subject to
certain restrictions. Amounts outstanding on the LOC at June 30, 1999
are at LIBOR + .80%.
The $300 million LOC was obtained July 2, 1999, following the Merger
(see Note 7). On July 2, 1999, the Partnership repaid certain outstanding
debt balances of Weeks Operating Partnership using a combination of cash
on hand and the LOC. The balance on the combined LOC following these
paydowns was $285 million.
3. RELATED PARTY TRANSACTIONS
The Partnership provides management, maintenance, leasing,
construction, and other tenant related services to properties in which
certain executive officers have continuing ownership interests. The
Partnership was paid fees totaling $1.4 million and $1.1 million for
such services for the six months ended June 30, 1999 and 1998,
respectively.
Management believes the terms for such services are equivalent to
those available in the market. The Partnership has an option to
purchase the executive officers' interest in each of these properties
which expires October 2003. The option price of each property was
established at the date the option was granted.
4. NET INCOME PER COMMON UNIT
Basic net income per common unit is computed by dividing net income
available for common unitholders by the weighted average number of
common units outstanding for the period. Diluted net income per unit
is computed by dividing net income available for common unitholders by
the sum of the weighted average number of common units and dilutive
potential common units outstanding for the period.
- 7 -
<PAGE>
The following table reconciles the components of basic and diluted net
income per common unit for the three and six months ended June 30:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic net income available
for common unitholders $32,702 $24,826 $63,631 $50,268
====== ====== ====== ======
Weighted average common
units outstanding 97,894 90,930 97,548 89,299
Dilutive units for long-term
compensation plans 961 900 929 923
------ ------ ------ ------
Weighted average number of
common units and dilutive
potential common units 98,855 91,830 98,477 90,222
====== ====== ======= ======
</TABLE>
The Preferred D Series Convertible equity was anti-dilutive at June
30, 1999; therefore, no conversion to common units is included in
weighted units outstanding.
5. SEGMENT REPORTING
The Partnership is engaged in four operating segments; the ownership
and rental of office, industrial and retail real estate investments
and the providing of various real estate services such as property
management, maintenance, leasing and construction management to third-
party property owners ("Service Operations"). The Partnership's
reportable segments offer different products or services and are
managed separately because each requires different operating
strategies and management expertise. There are no material
intersegment sales or transfers.
Non-segment revenue to reconcile to total revenue consists mainly of
equity in earnings of unconsolidated companies. Non-segment assets to
reconcile to total assets consists of corporate assets including cash,
deferred financing costs and investments in unconsolidated companies.
The Partnership assesses and measures segment operating results based on
industry performance measures referred to as Funds From Operations ("FFO").
The National Association of Real Estate Investment Trusts defines FFO
as net income or loss, excluding gains or losses from debt restructuring
and sales of operating property, plus operating property depreciation and
amortization and adjustments for minority interest and unconsolidated
companies on the same basis. FFO is not a measure of operating results
or cash flows from operating activities as measured by generally accepted
accounting principles, is not necessarily indicative of cash available to
fund cash needs and should not be considered an alternative to cash flows
as a measure of liquidity. Interest expense and other non-property specific
revenues and expenses are not allocated to individual segments in determining
the Partnership's performance measure.
The revenues and FFO for each of the reportable segments for the three
and six months ended June 30, 1999 and 1998 and the assets for each of
the reportable segments as of June 30, 1999 and December 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
- - --------
Rental Operations:
Office Properties $ 63,001 $50,011 $122,652 $ 99,528
Industrial Properties 35,820 25,288 68,390 47,841
Retail Properties 6,273 5,043 12,078 10,067
Service Operations 8,893 7,022 21,160 11,922
------- ------ ------- -------
Total Segment Revenues 113,987 87,364 224,280 169,358
Non-Segment Revenue 2,054 2,737 6,015 5,319
------- ------ ------- -------
Consolidated Revenue $116,041 $90,101 $230,295 $174,677
======= ====== ======= =======
- 8 -
<PAGE>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
Funds From Operations
- - ---------------------
Rental Operations:
Office Properties $ 44,191 $35,460 $ 85,405 $ 70,826
Industrial Properties 28,294 20,414 53,053 38,415
Retail Properties 5,324 4,193 9,929 8,325
Services Operations 3,582 1,820 8,618 2,715
------- ------ ------- -------
Total Segment FFO 81,391 61,887 157,005 120,281
Non-Segment FFO:
Interest expense (17,129) (14,346) (33,120) (27,225)
Interest income 546 412 1,145 589
General and administrative
expense (3,496) (3,103) (7,111) (5,443)
Other revenues and expenses,
net (1,835) (1,269) (2,608) (3,860)
Minority interest in earnings (450) (254) (880) (254)
Joint venture FFO 4,021 3,327 8,043 6,967
Dividends on preferred units (9,254) (4,703) (18,096) (9,406)
------- ------ ------- -------
Consolidated FFO 53,794 41,951 104,378 81,649
Depreciation and amortization (20,935) (16,525) (41,389) (30,785)
Share of joint venture
adjustments (1,241) (968) (2,756) (1,550)
Earnings from operating
property sales 1,084 368 3,398 954
------- ------ ------- -------
Net Income Available for
Common Unitholders $ 32,702 $24,826 $ 63,631 $ 50,268
======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Assets
Rental Operations:
Office Properties $1,590,742 $1,409,162
Industrial Properties 1,081,302 907,656
Retail Properties 174,821 161,675
Service Operations 70,686 55,268
--------- ---------
Total Segment Assets 2,917,551 2,533,761
Non-Segment Assets 510,645 320,301
--------- ---------
Consolidated Assets $3,428,196 $2,854,062
========= =========
</TABLE>
6. PARTNERS' EQUITY
The following series of preferred equity are outstanding as of June 30,
1999 (in thousands, except percentages):
<TABLE>
<CAPTION>
Units Dividend Redemption Liquidation Book Conver-
Description Outstanding Rate Date Preference Value tible
- - ----------- ----------- -------- ---------- ----------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Preferred A
Series 300 9.100% 8/31/01 $ 75,000 $ 72,288 No
Preferred B
Series 300 7.990% 9/30/07 150,000 146,050 No
Preferred D
Series 540 7.375% 12/31/03 135,000 129,460 Yes
Preferred E
Series 400 8.250% 1/20/04 100,000 96,519 No
</TABLE>
All series of preferred equity require cumulative distributions, have
no stated maturity date, and the redemption price of each series may
only be paid from the proceeds of other capital contributions of the
General Partner, which may include other classes or series of
preferred equity.
The Preferred Series D equity is convertible at a conversion rate of
9.3677 common units for each preferred unit outstanding.
The dividend rate on the Preferred B Series equity increases to 9.99%
after September 12, 2012.
- 9 -
<PAGE>
7. MERGER WITH WEEKS CORPORATION
On June 18, 1999, the shareholders of both the General Partner and
Weeks approved a merger transaction which was consummated in July
1999, whereby Weeks, a self-administered, self-managed geographically
focused Real Estate Investment Trust ("REIT") which operated primarily
in the southeastern United States, and its consolidated subsidiary,
Weeks Operating Partnership, were merged with and into the General
Partner and its consolidated subsidiary, Duke Operating Partnership.
The combined Operating Partnership has continued under the name Duke-
Weeks Realty Limited Partnership. In accordance with the terms of the
Merger, each outstanding Weeks Operating Partnership common unit was
converted into the right to receive 1.38 common units of the
Partnership and each outstanding Weeks Operating Partnership Series A
preferred equity was converted into the right to receive one unit of a
new class of the Partnership Series F preferred equity. In addition,
the Partnership assumed Weeks Operating Partnership debt and other
liabilities upon consummation of the Merger. The Merger was structured
as a tax-free merger and was accounted for under the purchase method.
Based on the in-service properties of Duke Operating Partnership and Weeks
Operating Partnership at June 30, 1999, the Partnership would have had 882
in-service properties totaling 86.1 million square feet, which were
approximately 93% leased. The Partnership has operations in 15 cities
in the midwestern and southeastern United States.
8. SUBSEQUENT EVENTS
The Board of Directors of the General Partner declared the following
distributions on July 28, 1999:
<TABLE>
<CAPTION>
QUARTERLY
CLASS AMOUNT/UNIT RECORD DATE PAYMENT DATE
- - --------- ----------- ----------- --------------------
<S> <C> <C> <C>
Common $0.39 August 16, 1999 August 31, 1999
Preferred:
Series A $0.56875 August 17, 1999 August 31, 1999
Series B $0.99875 September 16, 1999 September 30, 1999
Series D $0.46094 September 16, 1999 September 30, 1999
Series E $0.51563 September 16, 1999 September 30, 1999
Series F $0.50000 October 15, 1999 October 29, 1999
</TABLE>
- 10 -
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
- - --------------------------------------
The Partners
DUKE-WEEKS REALTY LIMITED PARTNERSHIP:
We have reviewed the condensed consolidated balance sheet of Duke-
Weeks Realty Limited Partnership and subsidiaries as of June 30, 1999,
the related condensed consolidated statements of operations for the
three months and the six months ended June 30, 1999 and 1998, the
related condensed consolidated statements of cash flows for the six
months ended June 30, 1999 and 1998, and the related condensed
consolidated statement of partners' equity for the six months ended
June 30, 1999. These condensed consolidated financial statements are
the responsibility of the Partnership's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Duke Realty
Limited Partnership and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations and cash flows for the
year then ended (not presented herein); and in our report dated
January 28, 1999 (except as to note 12, which is as of March 1, 1999),
we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31,
1998 is fairly presented, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
KPMG LLP
Indianapolis, Indiana
August 3, 1999
- 11 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information presented in "Item 2. Management's Discussion and
Analysis of Financial Condition and Result of Operations" is based on
the financial position and results of operations of Duke Operating
Partnership on a stand-alone basis and does not consider Weeks
Operating Partnership or the combined Partnership, unless otherwise
indicated, since the Merger was consummated after June 30, 1999. See
further discussion below under Merger with Weeks Corporation.
OVERVIEW
- - --------
The Partnership's operating results depend primarily upon income from
the rental operations of its industrial, office and retail properties
located in its primary markets. This income from rental operations is
substantially influenced by the supply and demand for the
Partnership's rental space in its primary markets. In addition, the
Partnership's continued growth is dependent upon its ability to
maintain occupancy rates and increase rental rates of its in-service
portfolio and to continue development and acquisition of additional
rental properties.
The Partnership's primary markets in the Midwest have continued to
offer strong and stable local economies and have provided attractive
new development opportunities because of their central location,
established manufacturing base, skilled work force and moderate labor
costs. Consequently, the Partnership's occupancy rate of its in-
service portfolio has exceeded 93.9% the last two years. The
Partnership expects to continue to maintain its overall occupancy in
its Midwestern markets at comparable levels and also expects to be
able to increase rental rates in these markets as leases are renewed
or new leases are executed. This stable occupancy as well as
increasing rental rates should improve the Partnership's results of
operations from its in-service properties. The Partnership's strategy
for continued growth also includes developing and acquiring additional
rental properties in its primary markets and expanding into other
attractive markets (see discussion of Weeks merger below).
The following table sets forth information regarding the Partnership's
in-service portfolio of rental properties as of June 30, 1999 and 1998
(in thousands, except percentages):
<TABLE>
<CAPTION>
Total Percent of
Square Feet Total Square Feet Percent Occupied
--------------- ----------------- ----------------
Type 1999 1998 1999 1998 1999 1998
- - -------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL
Service Centers 6,672 5,296 11.55% 10.98% 92.71% 93.58%
Bulk 34,121 28,368 59.06 58.83 93.87% 93.69%
OFFICE
Suburban 13,575 11,819 23.50 24.51 94.84% 96.21%
CBD 861 699 1.49 1.45 93.76% 92.67%
RETAIL 2,548 2,041 4.41 4.23 92.36% 95.67%
------ ------ ------ ------
Total 57,777 48,223 100.00% 100.00% 93.90% 94.37%
====== ====== ====== ======
</TABLE>
Management expects occupancy of the in-service property portfolio to
remain stable because (i) only 6.0% and 9.5% of the Partnership's
occupied square footage is subject to leases expiring in the remainder
of 1999 and in 2000, respectively, and (ii) the Partnership's renewal
percentage averaged 69%, 81%, 80% in 1998, 1997 and 1996,
respectively.
- 12 -
<PAGE>
The following table reflects the Partnership's in-service portfolio
lease expiration schedule as of June 30, 1999 by product type
indicating square footage and annualized net effective rents under
expiring leases (in thousands, except per square foot amounts):
<TABLE>
<CAPTION>
Industrial Office Retail Total Portfolio
---------------- ---------------- ---------------- ------------------
Yr.of Sq. Cont. Sq. Cont. Sq. Cont. Sq. Cont.
Exp. Ft. Rent Ft. Rent Ft. Rent Ft. Rent
- - ----- ----- ------ ----- ------ ----- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 2,344 $ 10,934 844 $ 9,206 43 $ 472 3,231 $ 20,612
2000 3,662 15,518 1,384 17,096 121 1,494 5,167 34,108
2001 3,957 17,118 1,795 22,496 91 1,113 5,843 40,727
2002 4,767 20,552 1,753 20,460 126 1,494 6,646 42,506
2003 3,903 18,265 1,519 19,885 145 1,554 5,567 39,704
2004 3,526 15,586 1,459 20,099 79 959 5,064 36,644
2005 3,625 11,991 1,149 15,781 225 1,972 4,999 29,744
2006 2,733 10,417 787 11,385 8 108 3,528 21,910
2007 2,641 8,587 530 7,488 71 675 3,242 16,750
2008 2,841 10,364 596 7,908 46 614 3,483 18,886
2009
and
There-
After 4,218 17,580 1,858 26,173 1,398 12,773 7,474 56,526
------ ------- ------ ------- ----- ------ ------ -------
Total
Leased 38,217 $156,912 13,674 $177,977 2,353 $23,228 54,244 $358,117
====== ======= ====== ======= ===== ====== ====== =======
Total
Port-
folio
Sq.
Ft. 40,793 14,436 2,548 57,777
====== ====== ===== ======
Annualized
net
effective
rent per
Sq.Ft. $ 4.11 $ 13.02 $ 9.87 $ 6.60
======= ======= ====== =======
</TABLE>
This stable occupancy, along with stable rental rates in each of the
Partnership's Midwestern markets, will allow the in-service portfolio
to continue to provide a comparable or increasing level of earnings
from rental operations. The Partnership also expects to realize growth
in earnings from rental operations through (i) the development and
acquisition of additional rental properties in its primary markets;
(ii) the expansion into other attractive markets (see discussion of
Weeks merger below); and (iii) the completion of the 7.3 million
square feet of properties under development by the Partnership at June
30, 1999 over the next three quarters and thereafter. The 7.3 million
square feet of properties under development should provide future
earnings from rental operations growth for the Partnership as they are
placed in service as follows (in thousands, except percent leased and
stabilized returns):
<TABLE>
<CAPTION>
Anticipated
In-Service Square Percent Project Stabilized
Date Feet Leased Costs Return
----------- ------ ------- ------- ----------
<S> <C> <C> <C> <C>
3rd Quarter 1999 1,453 35% $100,007 11.8%
4th Quarter 1999 2,699 38% 113,573 11.3%
1st Quarter 2000 2,306 46% 178,783 10.8%
Thereafter 845 23% 93,967 12.0%
----- -------
7,303 38% $486,330 11.4%
===== =======
</TABLE>
- 13 -
<PAGE>
RESULTS OF OPERATIONS
Following is a summary of the Partnership's operating results and
property statistics for the three and six months ended June 30, 1999
and 1998 (in thousands, except number of properties and per unit
amounts):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
[S] [C] [C] [C] [C]
Rental Operations
revenue $107,148 $83,079 $209,135 $162,755
Service Operations
revenue 8,893 7,022 21,160 11,922
Earnings from Rental
Operations 39,909 30,316 76,008 61,174
Earnings from Service
Operations 3,582 1,820 8,618 2,715
Operating income 39,995 29,033 77,515 58,446
Net income available
for common units $ 32,702 $24,826 $ 63,631 $ 50,268
Weighted average common
units outstanding 97,894 90,930 97,548 89,299
Weighted average common
and dilutive potential
common units 98,855 91,830 98,477 90,222
Basic income per
common unit $ 0.33 $ 0.27 $ 0.65 $ 0.56
Diluted income per
common unit $ 0.33 $ 0.27 $ 0.65 $ 0.56
Number of in-service
properties
at end of period 486 419 486 419
In-service square
footage at end
of period 57,777 48,223 57,777 48,223
Under development
square footage
at end of period 7,303 4,149 7,303 4,149
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 TO THREE MONTHS ENDED
JUNE 30, 1998
- - ----------------------------------------------------------------------
Rental Operations
- - -----------------
The Partnership increased its in-service portfolio of rental
properties from 419 properties comprising 48.2 million square feet at
June 30, 1998 to 486 properties comprising 57.8 million square feet at
June 30, 1999 through the acquisition of 33 properties totaling 3.6
million square feet and the completion of 41 properties and five
building expansions totaling 6.4 million square feet developed by the
Partnership. The Partnership also disposed of seven properties
totaling 420,000 square feet. These 67 net additional rental
properties primarily account for the $24.1 million increase in
revenues from Rental Operations from 1998 to 1999. The increase from
1998 to 1999 in rental expenses, real estate taxes and depreciation
and amortization expense is also a result of the additional 67 in-
service rental properties.
Interest expense increased by approximately $2.8 million from $14.3
million for the three months ended June 30, 1998 to $17.1 million for
the three months ended June 30, 1999 primarily as a result of
additional unsecured debt issued in the second quarter of 1998 to fund
the development and acquisition of additional rental properties as
well as $300.0 million of unsecured debt issued in the first two
quarters of 1999 to fund development and acquisition activity.
As a result of the above-mentioned items, earnings from rental
operations increased $9.6 million from $30.3 million for the three
months ended June 30, 1998 to $39.9 million for the three months ended
June 30, 1999.
Service Operations
- - ------------------
Service Operation revenues increased by $1.9 million from $7.0 million
for the three months ended June 30, 1998 to $8.9 million for the three
months ended June 30, 1999 primarily as a result of increases in
construction management fee revenue due to an increase in third-party
construction volume.
- 14 -
<PAGE>
As a result of the above-mentioned items, earnings from Service
Operations increased from $1.8 million for the three months ended June
30, 1998 to $3.6 million for the three months ended June 30, 1999.
Net Income Available for Common Unitholders
- - -------------------------------------------
Net income available for common unitholders for the three months ended
June 30, 1999 was $32.7 million compared to net income available for
common unitholders of $24.8 million for the three months ended June
30, 1998. This increase results primarily from the operating result
fluctuations in rental and service operations explained above.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO SIX MONTHS ENDED
JUNE 30, 1998
- - ----------------------------------------------------------------
Rental Operations
- - -----------------
The Partnership increased its in-service portfolio of rental
properties from 419 properties comprising 48.2 million square feet at
June 30, 1998 to 486 properties comprising 57.8 million square feet at
June 30, 1999 through the acquisition of 33 properties totaling 3.6
million square feet and the completion of 41 properties and five
building expansions totaling 6.4 million square feet developed by the
Partnership. The Partnership also disposed of seven properties
totaling 420,000 square feet. These 67 net additional rental
properties primarily account for the $46.3 million increase in
revenues from Rental Operations from 1998 to 1999. The increase from
1998 to 1999 in rental expenses, real estate taxes and depreciation
and amortization expense is also a result of the additional 67 in-
service rental properties.
Interest expense increased by approximately $5.9 million from $27.2
million for the six months ended June 30, 1998 to $33.1 million for
the six months ended June 30, 1999 primarily as a result of additional
unsecured debt issued in the second quarter of 1998 to fund the
development and acquisition of additional rental properties as well as
$300.0 million of unsecured debt issued in the first quarter of 1999
to fund development and acquisition activity.
As a result of the above-mentioned items, earnings from rental
operations increased $14.8 million from $61.2 million for the six
months ended June 30, 1998 to $76.0 million for the six months ended
June 30, 1999.
Service Operations
- - ------------------
Service Operation revenues increased by $9.3 million from $11.9
million for the six months ended June 30, 1998 to $21.2 million for
the six months ended June 30, 1999 primarily as a result of increases
in construction management fee revenue due to an increase in third-
party construction volume, particularly a 265,000 square foot suburban
office build-to-suit building which resulted in substantial revenue in
the first quarter.
Service Operations operating expenses increased from $9.2 million to
$12.5 million for the six months ended June 30, 1999 as compared to
the six months ended June 30, 1998 primarily as a result of an
increase in construction activity and an increase in income taxes
resulting from the growth in net income related to third party
construction.
As a result of the above-mentioned items, earnings from Service
Operations increased from $2.7 million for the six months ended June
30, 1998 to $8.6 million for the six months ended June 30, 1999.
- 15 -
General and Administrative Expense
- - ----------------------------------
General and administrative expense increased from $5.4 million for the
six months ended June 30, 1998 to $7.1 million for the six months
ended June 30, 1999 primarily as a result of internal acquisition
costs which are no longer permitted to be capitalized being charged to
general and administrative expense as well as an increase in state and
local taxes due to the overall growth of the Partnership.
Net Income Available for Common Unitholders
- - -------------------------------------------
Net income available for common unitholders for the six months ended
June 30, 1999 was $63.6 million compared to net income available for
common unitholders of $50.3 million for the six months ended June 30,
1998. This increase results primarily from the operating result
fluctuations in rental and service operations explained above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaling $82.6 million and
$100.2 million for the six months ended June 30, 1999 and 1998,
respectively, represents the primary source of liquidity to fund
distributions to unitholders and the other minority interests and to
fund recurring costs associated with the renovation and re-letting of
the Partnership's properties.
Net cash used by investing activities totaling $323.0 million and
$351.9 million for the six months ended June 30, 1999 and 1998,
respectively, represents the investment of funds by the Partnership to
expand its portfolio of rental properties through the development and
acquisition of additional rental properties net of proceeds received
from property sales.
Net cash provided by financing activities totaling $401.9 million and
$263.2 million for the six months ended June 30, 1999 and 1998,
respectively, is comprised of debt and equity issuances, net of
distributions to unitholders and minority interests and repayments of
outstanding indebtedness. In the first six months of 1999, the
Partnership received $37.9 million of net proceeds from the issuance
of common shares by the General Partner and $96.5 million of net
proceeds from a preferred stock offering by the General Partner. The
Partnership also issued $300.0 million of unsecured debt. The
Partnership used the net proceeds to reduce amounts outstanding under
the Partnership's lines of credit and to fund the development and
acquisition of additional rental properties.
In the first six months of 1998, the Partnership received $102.9
million of net proceeds from the issuance of common shares by the
General Partner and issued $250.0 million of unsecured debt. The
Partnership used the net proceeds to reduce amounts outstanding under
the Partnership's lines of credit and to fund the development and
acquisition of additional rental properties.
The Partnership has the following lines of credit (LOC)
available:
<TABLE>
<CAPTION>
Borrowing Outstanding at
Capacity Maturity Interest June 30, 1999
Description (in 000's) Date Rate (in 000's)
----------------------- ---------- --------- --------- --------------
<S> <C> <C> <C> <C>
Unsecured Line of Credit $450,000 April 2001 LIBOR + .70% $159,000
Unsecured Line of Credit $300,000 April 2001 LIBOR + .90% $ 0
</TABLE>
- 16 -
<PAGE>
Both LOC are used to fund development and acquisition of additional
rental properties and to provide working capital.
Effective July 2, 1999, the interest rate on the $450 million LOC was
adjusted from LIBOR + .80% to LIBOR + .70% in conjunction with the
Partnership's new debt rating following the Merger (see Note 7).
Additionally, the $450 million LOC allows the Partnership an option to
obtain borrowings from the financial institutions that participate in
the LOC at rates lower than the stated interest rate, subject to
certain restrictions. Amounts outstanding on the LOC at June 30, 1999
are at LIBOR + .80%.
The $300 million LOC was obtained July 2, 1999, following the Merger
(see Note 7). On July 2, 1999, the Partnership repaid certain outstanding
debt balances of Weeks Operating Partnership using a combination of cash
on hand and the LOC. The balance on the combined LOC following these
paydowns was $285 million.
The General Partner and the Partnership currently have on file three
Form S-3 Registration Statements with the Securities and Exchange
Commission ("Shelf Registrations") which had remaining availability as
of June 30, 1999 of approximately $567.9 million to issue common
stock, preferred stock or unsecured debt securities. The General
Partner and the Partnership intend to issue additional equity or debt
under these Shelf Registrations as capital needs arise to fund the
development and acquisition of additional rental properties. The
General Partner and the Partnership also plan to file additional shelf
registrations as necessary.
The total debt outstanding at June 30, 1999 consists of notes totaling
$1.4 billion with a weighted average interest rate of 7.16% maturing
at various dates through 2028. The Partnership has $1.0 billion of
unsecured debt and $341.6 million of secured debt outstanding at June
30, 1999. Scheduled principal amortization of such debt totaled $3.9
million for the six months ended June 30, 1999.
Following is a summary of the scheduled future amortization and
maturities of the Partnership's indebtedness at June 30, 1999 (in
thousands):
<TABLE>
<CAPTION>
Future Repayments
-------------------------------------------- Weighted Average
Scheduled Interest Rate of
Year Amortization Maturities Total Future Repayments
---- ------------ ---------- --------- -----------------
<S> <C> <C> <C> <C>
1999 $ 4,530 $ 28,430 $ 32,960 5.92%
2000 6,592 64,850 71,442 6.94%
2001 6,909 249,829 256,738 6.47%
2002 7,179 50,000 57,179 7.40%
2003 5,285 241,144 246,429 7.63%
2004 4,330 177,035 181,365 7.41%
2005 4,678 100,000 104,678 7.50%
2006 5,061 100,000 105,061 7.09%
2007 4,616 14,939 19,555 7.81%
2008 4,071 100,000 104,071 6.77%
Thereafter 36,078 175,000 211,078 6.82%
------ --------- ---------
Total $89,329 $1,301,227 $1,390,556 7.16%
====== ========= =========
</TABLE>
FUNDS FROM OPERATIONS
Management believes that Funds From Operations ("FFO"), which is
defined by the National Association of Real Estate Investment Trusts
as net income or loss excluding gains or losses from debt
restructuring and sales of operating property, plus operating
depreciation and amortization, and adjustments for minority interest
and unconsolidated companies (adjustments for minority interest and
unconsolidated companies are calculated to reflect FFO on the same
basis), is the industry standard for reporting the operations of real
estate investment trusts.
- 17 -
<PAGE>
The following table reflects the calculation of the Partnership's FFO
for the three and six months ended June 30 as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income available for
common units $ 32,702 $ 24,826 $ 63,631 $ 50,268
Add back:
Depreciation and
amortization 20,935 16,525 41,389 30,785
Share of joint
venture adjustments 1,241 968 2,756 1,550
Earnings from operating
property sales (1,084) (368) (3,398) (954)
------- ------- ------- -------
Funds From Operations $ 53,794 $ 41,951 $104,378 $ 81,649
======= ======= ======= =======
Cash flow provided by
(used by):
Operating activities $ 50,502 $ 61,614 $ 82,570 $100,234
Investing activities (155,907) (242,850) (322,976) (351,901)
Financing activities 238,520 174,380 401,876 263,203
</TABLE>
The increase in FFO for the three and six months ended June 30, 1999
compared to the three and six months ended June 30, 1998 results
primarily from the increased in-service rental property portfolio as
discussed above under "Results of Operations."
While management believes that FFO is the most relevant and widely
used measure of the Partnership's operating performance, such amount
does not represent cash flow from operations as defined by generally
accepted accounting principles, should not be considered as an
alternative to net income as an indicator of the Partnership's
operating performance, and is not indicative of cash available to fund
all cash flow needs.
MERGER WITH WEEKS CORPORATION
On June 18, 1999, the shareholders of both the General Partner and
Weeks approved a merger transaction which was consummated in July
1999, whereby Weeks, a self-administered, self-managed geographically
focused Real Estate Investment Trust ("REIT") which operated primarily
in the southeastern United States, and its consolidated subsidiary,
Weeks Operating Partnership, were merged with and into the General
Partner and its consolidated subsidiary, Duke Operating Partnership.
The combined Operating Partnership has continued under the name Duke-
Weeks Realty Limited. In accordance with the terms of the Merger, each
outstanding Weeks Operating Partnership common unit was converted into
the right to receive 1.38 common units of the Partnership and each
outstanding Weeks Operating Partnership Series A preferred equity was
converted into the right to receive one unit of a new class of the
Partnership Series F preferred equity. In addition, the Partnership
assumed Weeks Operating Partnership debt and other liabilities upon
consummation of the Merger. The Merger was structured as a tax-free
merger and was accounted for under the purchase method.
Based on the in-service properties of Duke Operating Partnership and Weeks
Operating Partnership at June 30, 1999, the Partnership would have had 882
in-service properties totaling 86.1 million square feet, which were
approximately 93% leased. The Partnership has operations in 15 cities
in the midwestern and southeastern United States.
YEAR 2000
The Year 2000 problem refers to the inability of certain computer
programs to recognize the year 2000 and other key dates thus resulting
in a variety of possible problems including data corruption and total
system failures. Commonly thought of as a mainframe computer problem,
the Year 2000 problem can
- 18 -
<PAGE>
also affect software and embedded microchips which run systems that
control building functions, such as elevators, security (including
access), heating, ventilation and air conditioning and fire
protection. The terms "Year 2000 ready" and "Year 2000 readiness" are
often used to describe a computer system that will continue to operate
properly prior to, during and after January 1, 2000 (taking into
account that the Year 2000 is a leap year) and is thus not affected by
the Year 2000 problem. The Partnership is committed to ensuring the
highest level of tenant satisfaction reasonably possible and clearly
recognizes the importance to our tenants, as well as our unitholders,
of having in place a Year 2000 readiness plan.
In February 1998, the Partnership formed a Year 2000 Task Force to
address the Year 2000 problem on a company-wide basis, including
properties and information systems. The Task Force is comprised of
representatives from senior management in the areas of Property and
Asset Management, Construction, Information Systems and Legal. The
Board of Directors and Audit Committee of the Partnership are advised
quarterly of the status of the activities undertaken by the Task
Force.
The Partnership adopted a Year 2000 readiness plan for its buildings
in April 1998 following the basic framework recommended by the
Building Owners and Managers Association. This Year 2000 readiness
plan consists of eight (8) steps focusing on the identification,
prioritization and remediation of potential Year 2000 problems arising
from software and embedded chips located within the building systems
at the Partnership's properties.
The Partnership recognizes that the Year 2000 problem could affect its
operations as well as the property functioning of the embedded systems
included in the Partnership's properties. In any particular property,
the problem could affect the functioning of elevators, heating and air
conditioning systems, security systems, and other automated building
systems. Management has identified and inventoried the building
systems and equipment at the Partnership's existing properties to
determine which systems or equipment could be affected by the Year
2000 problem. The inventory has been entered into a data base
containing a readiness status of each such system. This data base
allows Management to quickly monitor ongoing progress related to the
Year 2000 readiness of all affected building systems and equipment.
Under the direction of the Year 2000 Task Force, the property manager
of each building has contacted in writing each building system
manufacturer or supplier that has supplied an active and affected
building system. Each manufacturer or supplier was sent a
comprehensive questionnaire designed to assess the manufacturer's
effort in assuring that the affected building systems are or, in
sufficient time prior to January 1, 2000, will be Year 2000 ready.
Based on the responses received from the manufacturers and suppliers
of the building systems, Management developed a work plan detailing
the tasks and resources required to ready the operations and systems
of the Partnership's properties for the Year 2000. In many cases the
Partnership will be relying on these statements from outside vendors
as to the Year 2000 readiness of their systems, and will not, in most
circumstances, attempt any independent verification. The work plan
includes prioritization and appropriate timetables for the necessary
remediation and testing of affected building systems, as well as the
preparation of contingency plans if Year 2000 readiness can not be
achieved. The contingency planning process is ongoing and such plans
continue to be refined as new information is obtained. The contingency
plans generally provide for obtaining or allowing alternative access,
limited electrical and telephone service and, security and other basic
services.
The Partnership has made Year 2000 readiness an important aspect of
its building acquisition due diligence and inspection process. The
Partnership endeavors to obtain Year 2000 representations from sellers
and conducts inspections of critical systems. Newly acquired
facilities are promptly subjected to the Partnership's eight-step plan
and results are added to the database.
- 19 -
<PAGE>
Based upon a cost assessment prepared by the Task Force, the
Partnership has budgeted approximately $125,000 of non-reimbursable
expenses for the upgrade and replacement of certain building systems
and internal software having potential Year 2000 related problems and
attorney's fees.
In addition to assessing the readiness of the building systems of the
Partnership's properties, the Partnership continues to actively
contact and monitor the compliance efforts of utility companies and
telecommunication providers which provide services to the
Partnership's properties. The Partnership has contacted the various
municipalities where the Partnership's properties are located to
assess the readiness of these municipalities to provide fire, police
and other necessary services upon the Year 2000. The readiness of
these providers and municipalities has been taken into consideration
in preparing contingency plans for the Partnership and its properties.
The Partnership does not anticipate that the other services provided
for the benefit of our tenants such as janitorial, tenant finish,
monthly itemized billing, and other tenant services will be affected
by the Year 2000 problem. The Partnership is proactively contacting
those types of suppliers, vendors and service providers to make sure
that there is no interruption or discontinuance of any services or
products provided for the benefit of our tenants at the Year 2000. Any
negative responses to such inquiries have been and continue to be
added to the contingency plans.
The Partnership retained a third-party consultant to identify and
assess the Year 2000 readiness of the Partnership's information
systems. Such systems include, but are not limited to, accounting and
property management, network operations, desktop and software
applications, internally developed software and other general
information systems and software utilized for payroll, human
resources, budgeting and tenant services. The initial phase of
identification and assessment of the Partnership's information systems
was completed April 1, 1999 at a cost of $50,000. A budget and
timetable for replacement, upgrade of or contingencies for the
foregoing systems that are not Year 2000 ready has been developed and
is being implemented. The estimated cost associated with such
replacement and upgrade is budgeted to be $25,000.
There can be no assurance that the Partnership will be able to
identify and correct all aspects of the Year 2000 problem that affect
it in sufficient time, that its contingency plans or that the costs of
achieving Year 2000 readiness will not be material. However, based on
the information prepared by the Partnership or received to date,
Management does not currently expect that the Year 2000 problem will
have a material impact on the Partnership's business, operations or
financial condition. This expectation is based on Management's
analysis related to the Year 2000 readiness of the building systems of
the Partnership's properties, its vendors, suppliers, service
providers and tenants, and the Partnership's information systems.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- - ---------------------------
None
Item 2. Changes in Securities
- - ------------------------------
None
- 20 -
<PAGE>
Item 3. Defaults upon Senior Securities
- - ----------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- - ------------------------------------------------------------
At the annual meeting of the shareholders of the General Partner held
on June 18, 1999, there were 86,751,130 common shares and 1,540,000
preferred shares outstanding and the following matters received the
following votes:
1. Proposal to Approve the Merger of Weeks, a Georgia Corporation,
with and into General Partner and the Agreement and Plan of Merger by
and between Weeks and General Partner dated as of February 28, 1999:
Votes For Votes Against Votes Abstained
- - --------- ------------- ---------------
70,166,716 1,000,878 248,211
2. Proposal to Consider and Vote upon an Amendment to General
Partner's Articles of Incorporation in connection with the Proposed
Merger which would increase the maximum size of General Partner's Board
of Directors from 15 to 23:
Votes For Votes Against Votes Abstained
- - ---------- ------------- ---------------
70,135,510 4,135,678 522,813
3. Proposal to Consider and Vote upon two additional amendments to
General Partner's Articles of Incorporation which would (1) change the
existing requirement that 80% of the shares of capital stock of General
Partner approve certain amendments to General Partner's Articles of
Incorporation to require the approval of 80% of the common shares of
General Partner and (2) change the existing requirement that 80% of the
shares of Capital Stock approve any amendment to the provisions of the
Articles of Incorporation relating to the number, classes, terms of
office and qualifications of directors, to require the approval of a
majority of the common shares of General Partner.
Votes For Votes Against Votes Abstained
- - ---------- ------------- ---------------
66,816,928 4,796,741 719,684
4. Election of three Directors to serve until the earlier to occur of
(1) the effective time of the merger, or (2) if the merger is not
approved or completed, the ordinary expiration of their terms in 2002:
Votes For Votes Against
---------- -------------
Thomas L. Hefner 79,215,105 4,431,333
L. Ben Lytle 79,202,755 4,443,687
Edward T. Baur 79,205,150 4,441,289
5. Proposal to Consider and Approve the 1999 Directors' Stock Option
and Dividend Increase Plan of General Partner:
Votes For Votes Against Votes Abstained
- - ---------- ------------- ---------------
73,959,876 6,568,491 666,606
- 21 -
6. Proposal to Consider and Approve the 1999 Salary Replace Stock
Option and Dividend Increase Unit Plan of General Partner:
Votes For Votes Against Votes Abstained
- - ----------- ------------- ---------------
80,163,592 2,735,735 747,101
7. Proposal to Consider and Approve an Amendment to General Partner's
1996 Directors' Stock Payment Plan authorizing the issuance of an
additional 100,000 shares of General Partner Common Shares under the
Plan:
Votes For Votes Against Votes Abstained
- - ---------- ------------- ---------------
80,629,760 2,245,786 770,875
Item 5. Other Information
- - -------------------------
When used in this Form 10-Q, the words "believes," "expects,"
"estimates" and similar expressions are intended to identify forward-
looking statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially.
In particular, among the factors that could cause actual results to
differ materially are continued qualification as a real estate
investment trust, general business and economic conditions,
competition, increases in real estate construction costs, interest
rates, accessibility of debt and equity capital markets and other
risks inherent in the real estate business including tenant defaults,
potential liability relating to environmental matters and illiquidity
of real estate investments. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of
the date hereof. The Partnership undertakes no obligation to publicly
release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
Readers are also advised to refer to the Partnership's Form 8-K Report
as filed with the U.S. Securities and Exchange Commission on March 28,
1996 for additional information concerning these risks.
Item 6. Exhibits and Reports on Form 8-K
- - -----------------------------------------
Exhibits
The Following exhibits are filed or incorporated by reference as a
part of this report:
Exhibit 15. Letter regarding unaudited interim financial
information
Exhibit 27. Financial Data Schedule (EDGAR Filing Only)
Reports on Form 8-K
The Partnership filed Form 8-K on June 29, 1999, to file exhibits
in connection with an unsecured debt offering
-22 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DUKE-WEEKS REALTY LIMITED PARTNERSHIP
-------------------------------------
By: Duke Realty Investments, Inc.,
General Partner
Registrant
Date: August 16, 1999 /s/ Thomas L. Hefner
----------------------------
President and
Chief Executive Officer
/s/ Darell E. Zink, Jr.
----------------------------
Executive Vice President and
Chief Financial Officer
/s/ Dennis D. Oklak
----------------------------
Executive Vice President and
Chief Administrative Officer
- 23 -
Exhibit 15
The Partners
Duke-Weeks Realty Limited Partnership:
Gentlemen:
RE: Registration Statement No. 333-04695, 333-49911 and 333-26845
With respect to the subject registration statement, we
acknowledge our awareness of the use therein of our report
dated August 3, 1999 related to our review of interim
financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933,
such report is not considered a part of a registration
statement prepared or certified by an accountant, or a report
prepared or certified by an accountant within the meaning of
sections 7 and 11 of the Act.
KPMG LLP
Indianapolis, Indiana
August 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
DUKE-WEEKS REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES' CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 168,096
<SECURITIES> 0
<RECEIVABLES> 111,110
<ALLOWANCES> (1,466)
<INVENTORY> 0
<CURRENT-ASSETS> 316,440
<PP&E> 3,220,473
<DEPRECIATION> (204,750)
<TOTAL-ASSETS> 3,428,196
<CURRENT-LIABILITIES> 177,925
<BONDS> 1,390,556
0
0
<COMMON> 0
<OTHER-SE> 1,859,398
<TOTAL-LIABILITY-AND-EQUITY> 3,428,196
<SALES> 0
<TOTAL-REVENUES> 235,725
<CGS> 0
<TOTAL-COSTS> (119,998)
<OTHER-EXPENSES> (18,976)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (33,120)
<INCOME-PRETAX> 63,631
<INCOME-TAX> 0
<INCOME-CONTINUING> 63,631
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,631
<EPS-BASIC> $.65
<EPS-DILUTED> $.65
</TABLE>
