KILROY REALTY CORP, 10-Q, 2000-05-15

KILROY REALTY CORP
10-Q, 2000-05-15
REAL ESTATE INVESTMENT TRUSTS

Previous: INTERNATIONAL SPORTS WAGERING INC, 10QSB, 2000-05-15

Next: FEDERAL HOME LOAN MORTGAGE CORP, 13F-HR, 2000-05-15

<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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 March 31, 2000

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from to

Commission file number 1-12675

KILROY REALTY CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
Maryland 95-4598246
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>

2250 East Imperial Highway, Suite 1200, El Segundo, California 90245
(Address of principal executive offices)

(310) 563-5500
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last
report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

As of May 10, 2000, 26,223,309 shares of common stock, par value $.01 per
share, were outstanding.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

KILROY REALTY CORPORATION

QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2000

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----

PART I--FINANCIAL INFORMATION

<C> <S> <C>
Item 1. FINANCIAL STATEMENTS (unaudited)

Consolidated Balance Sheets as of March 31, 2000 and December
31, 1999....................................................... 3

Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and 1999.................................. 4

Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999.................................. 5

Notes to Consolidated Financial Statements..................... 6

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 12

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 22

PART II--OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.............................................. 26

Item 2. CHANGES IN SECURITIES.......................................... 26

Item 3. DEFAULTS UPON SENIOR SECURITIES................................ 26

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 26

Item 5. OTHER INFORMATION.............................................. 26

Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 26

SIGNATURES..................................................... 27
</TABLE>

2
<PAGE>

PART I--FINANCIAL INFORMATION

ITEM 1. Financial Statements

KILROY REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share data)

<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------

ASSETS
------

<S> <C> <C>
INVESTMENT IN REAL ESTATE (Note 2):
Land and improvements.................................. $ 276,318 $ 274,463
Buildings and improvements............................. 959,035 946,130
Undeveloped land and construction in progress, net..... 220,472 189,645
---------- ----------
Total investment in real estate...................... 1,455,825 1,410,238
Accumulated depreciation and amortization.............. (182,453) (174,427)
---------- ----------
Investment in real estate, net....................... 1,273,372 1,235,811

CASH AND CASH EQUIVALENTS............................... 9,301 26,116
RESTRICTED CASH......................................... 5,361 6,636
TENANT RECEIVABLES, NET................................. 24,760 22,078
DEFERRED FINANCING AND LEASING COSTS, NET............... 30,306 27,840
PREPAID EXPENSES AND OTHER ASSETS....................... 3,659 2,020
---------- ----------
TOTAL ASSETS......................................... $1,346,759 $1,320,501
========== ==========

<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

<S> <C> <C>
LIABILITIES:
Mortgage debt (Notes 2 & 3)............................ $ 332,842 $ 325,516
Unsecured line of credit (Note 3)...................... 292,500 228,000
Accounts payable and accrued expenses.................. 25,792 26,260
Accrued distributions (Note 8)......................... 13,513 13,456
Rents received in advance and tenant security
deposits.............................................. 19,083 20,287
---------- ----------
Total liabilities.................................... 683,730 613,519
---------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS (Note 4):
8.075% Series A Cumulative Redeemable Preferred
unitholders........................................... 73,716 73,716
9.375% Series C Cumulative Redeemable Preferred
unitholders........................................... 34,464 34,464
9.250% Series D Cumulative Redeemable Preferred
unitholders........................................... 44,322 44,022
Common unitholders of the Operating Partnership........ 63,468 71,920
Minority interests in Development LLCs................. 9,599 9,931
---------- ----------
Total minority interests............................. 225,569 234,053
---------- ----------
STOCKHOLDERS' EQUITY (Note 5):
Preferred stock, $.01 par value, 26,200,000 shares
authorized, none issued and outstanding...............
8.075% Series A Cumulative Redeemable Preferred stock,
$.01 par value, 1,700,000 shares authorized, none
issued and outstanding................................
Series B Junior Participating Preferred stock, $.01
par value, 400,000 shares authorized, none issued and
outstanding...........................................
9.375% Series C Cumulative Redeemable Preferred stock,
$.01 par value, 700,000 shares authorized, none
issued and outstanding................................
9.250% Series D Cumulative Redeemable Preferred stock,
$.01 par value, 1,000,000 shares authorized, none
issued and outstanding................................
Common stock, $.01 par value, 150,000,000 shares
authorized, 26,223,309 and 27,808,410 shares issued
and outstanding, respectively......................... 262 278
Additional paid-in capital............................. 457,974 491,204
Distributions in excess of earnings.................... (20,776) (18,553)
---------- ----------
Total stockholders' equity........................... 437,460 472,929
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $1,346,759 $1,320,501
========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

3
<PAGE>

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share data)

<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
REVENUES (Note 6):
Rental income........................................ $ 37,702 $ 32,818
Tenant reimbursements................................ 4,694 4,123
Interest income...................................... 294 400
Other income......................................... 1,074 209
---------- ----------
Total revenues..................................... 43,764 37,550
---------- ----------

EXPENSES:
Property expenses.................................... 5,458 5,134
Real estate taxes.................................... 3,387 3,009
General and administrative expenses.................. 2,632 2,314
Ground leases........................................ 389 337
Interest expense..................................... 7,828 5,759
Depreciation and amortization........................ 9,323 7,217
---------- ----------
Total expenses..................................... 29,017 23,770
---------- ----------

INCOME FROM OPERATIONS BEFORE LOSS ON DISPOSITION OF
OPERATING PROPERTY, EQUITY IN INCOME OF UNCONSOLIDATED
SUBSIDIARY AND MINORITY INTERESTS..................... 14,747 13,780
LOSS ON DISPOSITION OF OPERATING PROPERTY.............. (305)
EQUITY IN INCOME OF UNCONSOLIDATED SUBSIDIARY.......... 7
---------- ----------
INCOME BEFORE MINORITY INTERESTS....................... 14,449 13,780
---------- ----------

MINORITY INTERESTS:
Distributions on Cumulative Redeemable Preferred
units............................................... (3,375) (2,334)
Minority interest in earnings of Operating
Partnership......................................... (1,372) (1,536)
Minority interest in earnings of Development LLCs.... (124)
---------- ----------
Total minority interests........................... (4,871) (3,870)
---------- ----------

NET INCOME............................................. $ 9,578 $ 9,910
========== ==========

Net income per common share--basic (Note 7)............ $ 0.35 $ 0.36
========== ==========

Net income per common share--diluted (Note 7).......... $ 0.35 $ 0.36
========== ==========

Weighted average shares outstanding--basic (Note 7).... 27,228,497 27,632,543
========== ==========

Weighted average shares outstanding--diluted (Note 7).. 27,228,887 27,632,594
========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

4
<PAGE>

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 9,578 $ 9,910
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 9,323 7,217
Provision for uncollectable tenant receivables and
unbilled deferred rent................................. 482 376
Minority interest in earnings of Operating Partnership
and Development LLCs................................... 1,496 1,536
Restricted stock compensation........................... 102 127
Loss on disposition of operating property............... 305
Other................................................... (192) (218)
Changes in assets and liabilities:
Tenant receivables..................................... (3,164) (857)
Deferred leasing costs................................. (1,716) (872)
Prepaid expenses and other assets...................... (1,638) (734)
Accounts payable and accrued expenses.................. 687 1,553
Rents received in advance and tenant security
deposits.............................................. (1,204) (95)
Accrued distributions to Cumulative Redeemable
Preferred unitholders................................. 300 73
--------- ---------
Net cash provided by operating activities............. 14,359 18,016
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for operating properties................... (1,484) (18,645)
Expenditures for undeveloped land and construction in
progress............................................... (39,218) (43,240)
Proceeds from disposition of operating property......... 3,350
Proceeds from disposition of undeveloped land........... 1,387
Net advances to unconsolidated subsidiary............... (1,154) (1,173)
--------- ---------
Net cash used in investing activities................. (38,506) (61,671)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock............................. (41,267)
Net borrowings (repayments) on unsecured line of
credit................................................. 64,500 (40,000)
Proceeds from issuance of mortgage debt................. 95,000
Principal payments on mortgage debt..................... (1,174) (547)
Financing costs......................................... (2,088) (1,322)
Decrease (increase) in restricted cash.................. 1,275 (561)
Distributions paid to minority interests in Development
LLCs................................................... (457)
Distributions paid to common stockholders and common
unitholders............................................ (13,457) (12,895)
--------- ---------
Net cash provided by financing activities............. 7,332 39,675
--------- ---------
Net decrease in cash and cash equivalents................ (16,815) (3,980)
Cash and cash equivalents, beginning of period........... 26,116 6,443
--------- ---------
Cash and cash equivalents, end of period................. $ 9,301 $ 2,463
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized interest..... $ 7,218 $ 5,111
========= =========
Distributions paid to Cumulative Redeemable Preferred
unitholders............................................ $ 3,077 $ 2,261
========= =========
NON-CASH TRANSACTIONS:
Accrual of distributions payable (Note 8)............... $ 13,513 $ 13,567
========= =========
Issuance of mortgage note payable in connection with
undeveloped land acquisition (Note 2).................. $ 8,500
=========
Issuance of common units of the Operating Partnership to
acquire operating properties and undeveloped land...... $ 9,915
=========
Minority interest recorded in connection with
Development LLCs undeveloped land acquisitions......... $ 9,733
=========
Note receivable from related parties repaid in
connection with operating property acquisition......... $ 2,267
=========
Note receivable from related parties satisfied in
connection with Development LLC undeveloped land
acquisitions........................................... $ 6,531
=========
</TABLE>
See accompanying notes to consolidated financial statements.

5
<PAGE>

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2000 and 1999
(Unaudited)

1. Organization and Basis of Presentation

Organization

Kilroy Realty Corporation (the "Company") develops, owns, and operates
office and industrial real estate, primarily in Southern California. The
Company, which operates as a self-administered real estate investment trust
("REIT"), commenced operations upon the completion of its initial public
offering in January 1997. As of March 31, 2000, the Company's stabilized
portfolio of operating properties consisted of 85 office buildings (the
"Office Properties") and 85 industrial buildings (the "Industrial
Properties"), which encompassed approximately 6.2 million and 6.4 million
rentable square feet, respectively, and was 96.8% occupied. The Company's
stabilized portfolio consists of all of the Company's office and industrial
properties excluding properties recently developed by the Company that have
not yet reached 95.0% occupancy ("lease-up" properties) and projects currently
under construction or in pre-development. As of March 31, 2000, the Company
had nine office properties under construction which when completed are
expected to encompass an aggregate of 993,400 rentable square feet. The
Company did not have any properties in lease-up at March 31, 2000 since all of
the properties developed and completed by the Company during 2000 and 1999
were stabilized.

The Company owns its interests in all of its properties through Kilroy
Realty, L.P. (the "Operating Partnership") and Kilroy Realty Finance
Partnership, L.P. and conducts substantially all of its operations through the
Operating Partnership. The Company owned an 87.3% general partnership interest
in the Operating Partnership as of March 31, 2000.

Basis of Presentation

The accompanying interim financial statements have been prepared by the
Company's management in accordance with generally accepted accounting
principles and in conjunction with the rules and regulations of the Securities
and Exchange Commission ("SEC"). Certain information and footnote disclosures
required for annual financial statements have been condensed or excluded
pursuant to SEC rules and regulations. Accordingly, the interim financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles in the United States of America for
complete financial statements. In the opinion of management, the interim
financial statements presented herein reflect all adjustments of a normal and
recurring nature which are considered necessary for a fair presentation of the
results for the interim periods presented. The results of operations for the
interim period are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. These financial statements
should be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.

Certain prior year amounts have been reclassified to conform to the current
period's presentation.

2. Acquisitions, Dispositions and Completed Development Projects

Acquisitions

In March 2000, the Company acquired 17 acres of undeveloped land in San
Diego, California from an unaffiliated third party for $11.3 million,
consisting of a cash payment of $2.8 million and the issuance of an $8.5
million mortgage note payable due to the seller. The $8.5 million mortgage
note payable due to the seller will be payable upon the earlier of the
successful completion of infrastructure improvements to the undeveloped land
that the seller is obligated to perform, or December 31, 2003, the note's
stated maturity. The $8.5 million

6
<PAGE>

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

mortgage note payable bears interest at 10.00% until December 31, 2000, the
date upon which the seller is expected to complete the infrastructure
improvements, and after December 31, 2000, will not accrue any additional
interest. In addition, the principal balance of the note will be reduced at
the rate of $1,000 per day commencing on January 1, 2001. The cash portion of
the purchase price was funded primarily with existing working capital.

Dispositions

In January 2000, the Company sold two industrial buildings to unaffiliated
third parties for an aggregate sales price of approximately $3.4 million in
cash. The two buildings, which encompassed approximately 45,300 aggregate
rentable square feet, are located in Lake Forest, California. The Company used
the sale proceeds to fund development expenditures.

Completed Development Projects

During the three months ended March 31, 2000, the Company completed the
development of one office building in Del Mar, California containing
approximately 72,300 rentable square feet. The property was included in the
Company's stabilized portfolio of operating properties at March 31, 2000 since
it was 100% occupied upon completion.

3. Unsecured Line of Credit and Mortgage Debt

As of March 31, 2000, the Company had borrowings of $293 million
outstanding under its revolving unsecured line of credit (the "Credit
Facility") and availability of approximately $24.7 million. Availability under
the Credit Facility depends upon the value of the Company's unencumbered
assets. The Company expects to use the Credit Facility to finance development
expenditures, to fund acquisitions and for general corporate uses. In April
2000, the Credit Facility agreement was amended to increase the funds
available on the unencumbered asset pool and to increase the unsecured
leverage ratio. The Company expects to use the approximately $30.0 million of
additional availability provided by the amendment to finance development
expenditures.

In February 2000, the Company entered into an interest rate swap agreement
with a total notional amount of $150 million to effectively limit interest
expense on the Company's floating rate debt during periods of increasing
interest rates. The agreement, which expires in February 2002, requires the
Company to pay fixed rate interest payments based on an interest rate of 6.95%
and receive floating rate interest payments based on one-month LIBOR.

In February 2000, the Company entered into an interest rate cap agreement
with a total notional amount of $150 million to effectively limit interest
expense on the Company's floating rate debt during periods of increasing
interest rates. The agreement, which begins in July 2000 when the Company's
existing $150 million of cap agreements expire, has a LIBOR based cap rate of
6.50% and expires in January 2002. The Company's exposure is limited to the
$1.9 million cost of the cap agreement which the Company will amortize over
the life of the agreement and include as a component of interest expense in
the consolidated statements of operations.

7
<PAGE>

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

companies based in Visalia, California. The project is expected to encompass
approximately 550,000 rentable square feet of office space upon completion of
all phases. The construction loan is secured by the land for the entire
project, the one phase of the project that the Company completed during the
fourth quarter of 1999, and all improvements to be constructed.

In May 2000, one of the Development LLCs entered into an interest rate cap
agreement with a LIBOR based cap rate of 8.50% to effectively limit interest
expense on it's floating rate construction loan during periods of increasing
interest rates. The agreement has an initial notional amount of $21.1 million
that increases to $57.0 million during the period from May 2000 through August
2001, and then remains at $57.0 million until expiration in April 2002. The
Development LLC's exposure is limited to the $0.1 million cost of the cap
agreement which will be amortized over the life of the agreement and included
as a component of interest expense in the Company's consolidated statements of
operations.

Total interest capitalized for the three months ended March 31, 2000 and
1999 was $4.0 million and $2.1 million, respectively.

4. Minority Interests

Minority interests represent the preferred and common limited partnership
interests in the Operating Partnership and interests held by The Allen Group
in the Development LLCs. The Company owned an 87.3% general partnership
interest in the Operating Partnership as of March 31, 2000.

During the three months ended March 31, 2000, 424,199 common units of the
Operating Partnership were exchanged into shares of the Company's common stock
on a one-for one basis. Of these 424,199 common units, 364,200 common units
were owned by Kilroy Industries, an entity owned by John B. Kilroy, Sr., the
Chairman of the Company's Board of Directors, and John B. Kilroy, Jr., the
Company's President and Chief Executive Officer. Neither the Company nor the
Operating Partnership received any of the proceeds from the issuance of the
common stock to the identified common unitholders.

5. Stockholders Equity

During the first quarter of 2000, the Company repurchased approximately 2.0
million shares of its common stock in open market transactions for an
aggregate repurchase price of $41.2 million or $20.58 per share. Repurchases
transacted during the first quarter of 2000 were funded primarily through
working capital and borrowings on the Company's unsecured revolving credit
facility.

In April 2000, the Company filed a registration statement on Form S-3 with
the SEC which registered the potential issuance and resale of up to a total of
380,333 shares of the Company's common stock in exchange for 380,333 common
limited partnership units of the Operating Partnership previously issued in
connection with certain 1999 and 1998 property acquisitions. The common
limited partnership units may be exchanged at the Company's option into shares
of the Company's common stock on a one-for-one basis. Neither the Company nor
the Operating Partnership will receive any proceeds from the issuance of the
common stock to the identified common unitholders. The SEC declared the
registration statement effective on May 8, 2000.

8
<PAGE>

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6. Segment Disclosure

The Company evaluates the performance of its segments based upon net
operating income. Net operating income is defined as operating revenues
(rental income, tenant reimbursements and other property income) less property
and related expenses (property expenses, real estate taxes and ground leases)
and does not include interest income and expense, depreciation and
amortization and corporate general and administrative expenses. All operating
revenues are comprised of amounts received from external tenants.

<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Revenues and Expenses:
Office Properties:
Operating revenues......................................... $29,867 $25,558
Property and related expenses.............................. 7,117 6,486
------- -------
Net operating income, as defined........................... 22,750 19,072
------- -------
Industrial Properties:
Operating revenues......................................... 13,603 11,592
Property and related expenses.............................. 2,117 1,994
------- -------
Net operating income, as defined........................... 11,486 9,598
------- -------
Total Reportable Segments:
Operating revenues......................................... 43,470 37,150
Property and related expenses.............................. 9,234 8,480
------- -------
Net operating income, as defined........................... 34,236 28,670
------- -------
Reconciliation to Consolidated Net Income:
Total net operating income, as defined, for reportable
segments.................................................. 34,236 28,670
Other unallocated revenues:
Interest income.......................................... 294 400
Other unallocated expenses:
General and administrative expenses...................... 2,632 2,314
Interest expense......................................... 7,828 5,759
Depreciation and amortization............................ 9,323 7,217
------- -------
Net income from operations before loss on disposition of
operating property, equity in income of unconsolidated
subsidiary and minority interests......................... 14,747 13,780
Loss on disposition of industrial operating property....... (305)
Equity in income of unconsolidated subsidiary.............. 7
Minority interests......................................... (4,871) (3,870)
------- -------
Net income................................................. $ 9,578 $ 9,910
======= =======
</TABLE>

9
<PAGE>

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

7. Earnings Per Share

Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing net income by the sum of the
weighted-average number of common shares outstanding for the period plus the
number of common shares issuable assuming the exercise of all dilutive
securities. The Company does not consider common units of the Operating
Partnership to be dilutive since the exchange of common units into common
stock is on a one-for-one basis and would not have any effect on diluted
earnings per share. The following table reconciles the numerator and
denominator of the basic and diluted per-share computations for net income.

<TABLE>
<CAPTION>
Three Months Ended March 31, 2000 Three Months Ended March 31, 1999
----------------------------------- -----------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------ --------- ---------- ------------ ---------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic................... $9,578 27,228,497 $0.35 $9,910 27,632,543 $0.36
Effect of dilutive
securities:
Stock options
granted.............. 390 51
------ ---------- ----- ------ ---------- -----
Diluted ................ $9,578 27,228,887 $0.35 $9,910 27,632,594 $0.36
====== ========== ===== ====== ========== =====
</TABLE>

At March 31, 2000, Company employees and directors held options to purchase
approximately 2.0 million shares of the Company's common stock that were
antidilutive to the diluted earnings per share computation. These options
could become dilutive in future periods if the average market price of the
Company's common stock exceeds the exercise price of the outstanding options.

8. Subsequent Events

On April 17, 2000, aggregate distributions of $13.5 million were paid to
common stockholders and common unitholders of record on March 31, 2000.

On April 28, 2000, the Company sold one office building containing
approximately 110,200 aggregate rentable square feet for a sales price of
approximately $6.3 million at a gain of approximately $0.5 million.

On April 12, 2000, one of the Development LLCs obtained a $57.0 million
construction loan (see Note 3).

On May 2, 2000, one of the Development LLCs entered into an interest-rate
cap agreement with a LIBOR based cap rate of 8.50%. The agreement has an
initial notional amount of $21.1 million that increases to $57.0 million
during the period from May 2, 2000 through August 31, 2001, and then remains
at $57.0 million until expiration on April 30, 2002 (see Note 3).

On May 1, 2000, the Company initiated actions that has put it in a position
to potentially acquire the fee interest in a three building office complex
located in El Segundo, California. The complex, which encompasses
approximately 366,000 aggregate rentable square feet, is currently owned by
Kilroy Airport Imperial Co. ("KAICO"), a partnership owned by John B. Kilroy,
Sr., the Company's Chairman of the Board of Directors, John B. Kilroy, Jr. the
Company's President and Chief Executive Officer, and certain other Kilroy
family members. The complex is comprised of two office buildings and a parking
structure. One of the office buildings is occupied by Hughes Space &
Communications Company ("Hughes") and the other office building is vacant. The
lease with Hughes contains a 60-day right of first offer that gives Hughes the
right to purchase the complex.

10
<PAGE>

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In the first step of the transaction, on May 1, 2000, the Company purchased
a non-recourse note receivable with an outstanding principal balance of $60.8
million and accrued interest of $10.2 million from an institutional lender for
a discounted price of $45.3 million. The note is secured by a first trust deed
on the complex and has a contractual interest rate of 9.63% and contractual
maturity date of February 1, 2005. At the time of the acquisition, KAICO was
in payment default under the contractual terms of the note. The Company
recorded its investment in the impaired note at the $45.3 million purchase
price and recorded no additional impairment allowance since the Company
believes that the purchase price of the note is less than the fair market
value of the complex securing it. The acquisition of the note was funded with
borrowings under the Company's revolving credit facility.

As a result of the acquisition of the note, the Company receives all of the
net operating income from the complex under a related lockbox agreement. In
addition, KAICO also agreed to pay the Company approximately $0.1 million per
month, for six months, as additional debt service for amounts due under the
note. The Company expects to earn a return of approximately 10.0% on the
purchase price it paid for the note through the combined effect of the net
operating income and the additional payment by KAICO. The Company will record
the interest income on a cash basis.

The Company and KAICO also entered into an agreement whereby the Company
agreed to pay KAICO approximately $3.7 million for the reimbursement of
expenditures incurred by KAICO on the complex since 1997 and for the
modification of an existing option that the Company holds to purchase the
complex. Of the $3.7 million, $2.3 million was paid to KAICO on May 1, 2000 at
the time of the note acquisition. The Company, in its capacity as manager of
the property, has been named as a codefendant in litigation currently pending
between KAICO and Hughes with respect to the lease on the complex between the
two parties. The Company believes there would be no material adverse effect
upon its financial condition, results of operations and cash flows if the
litigation were determined unfavorably to KAICO or the Company.

11
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion relates to the consolidated financial statements
of the Company and should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this report. Statements contained in
this "Management's Discussion and Analysis of Financial Condition and Results
of Operations" that are not historical facts may be forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those projected.
You are cautioned not to place undue reliance on these forward-looking
statements.

Overview and Background

Results of Operations

The Company continues to focus its efforts on its substantial development
pipeline which at March 31, 2000 consisted of 1.4 million aggregate rentable
square feet of committed office development projects and 1.6 million of future
office development projects that the Company expects to add to its stabilized
portfolio. During the three months ended March 31, 2000, the Company completed
the development of one office building encompassing approximately 72,300
rentable square feet. During the year ended December 31, 1999, the Company
completed the development of six office and four industrial buildings
encompassing an aggregate of 472,000 and 390,200 rentable square feet,
respectively. All of the aforementioned completed development properties were
included in the Company's portfolio of stabilized operating properties at
March 31, 2000. The Company's stabilized portfolio of operating properties
consists of all of the Company's Office and Industrial properties excluding
properties recently developed by the Company that have not yet reached 95.0%
occupancy ("lease-up properties") and projects currently under construction or
in pre-development. The Company did not have any lease-up properties at March
31, 2000 since all of the development projects completed during 2000 and 1999
were stabilized. At March 31, 2000, the Company had nine office projects under
construction which when completed are expected to encompass an aggregate of
approximately 993,400 rentable square feet.

During the three months ended March 31, 2000, the Company sold two
industrial buildings encompassing 45,300 rentable square feet for an aggregate
sales price of $3.4 million. The Company did not acquire any operating
properties during the three months ended March 31, 2000. During the year ended
December 31, 1999, the Company acquired three office buildings encompassing
176,900 aggregate rentable square feet for an aggregate acquisition cost of
$30.6 million and disposed of five office and five industrial buildings
encompassing 113,700 and 335,800 aggregate rentable square feet, respectively,
for an aggregate sales price of $22.6 million.

As a result of the properties acquired and the projects developed by the
Company subsequent to March 31, 1999, net of the effect of properties disposed
of subsequent to March 31, 1999, rentable square footage in the Company's
portfolio of stabilized properties increased 0.8 million rentable square feet,
or 6.5% to 12.6 million rentable square feet at March 31, 2000 compared to
11.8 million rentable square feet at March 31, 1999. As of March 31, 2000, the
Company's stabilized portfolio was comprised of 85 office properties (the
"Office Properties") encompassing 6.2 million rentable square feet and 85
industrial properties (the "Industrial Properties") encompassing 6.4 million
rentable square feet. The stabilized portfolio occupancy rate at March 31,
2000 was 96.8%, with the Office and Industrial Properties 96.5% and 97.2%
occupied, respectively.

12
<PAGE>

Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999

<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------- Dollar Percentage
2000 1999 Change Change
------- ------- ------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Rental income............................. $37,702 $32,818 $4,884 14.9%
Tenant reimbursements..................... 4,694 4,123 571 13.8
Interest income........................... 294 400 (106) (26.5)
Other income.............................. 1,074 209 865 413.9
------- ------- ------
Total revenues.......................... 43,764 37,550 6,214 16.5
------- ------- ------
Expenses:
Property expenses......................... 5,458 5,134 324 6.3
Real estate taxes......................... 3,387 3,009 378 12.6
General and administrative expenses....... 2,632 2,314 318 13.7
Ground leases............................. 389 337 52 15.4
Interest expense.......................... 7,828 5,759 2,069 35.9
Depreciation and amortization............. 9,323 7,217 2,106 29.2
------- ------- ------
Total expenses.......................... 29,017 23,770 5,247 22.1
------- ------- ------

Income from operations before loss on
disposition of operating property, equity
in income of unconsolidated subsidiary and
minority interests......................... $14,747 $13,780 $ 967 7.0%
======= ======= ======
</TABLE>

Rental Operations

Management evaluates the operations of its portfolio based on operating
property type. The following tables compare the net operating income, defined
as operating revenues less property and related expenses (property expenses,
real estate taxes and ground leases) before depreciation, for the Office and
Industrial Properties for the three months ended March 31, 2000 and 1999.

Office Properties

<TABLE>
<CAPTION>
Total Office Portfolio Core Office Portfolio
---------------------------------- ----------------------------------
Dollar Percentage Dollar Percentage
2000 1999 Change Change 2000 1999 Change Change
------- ------- ------ ---------- ------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues:
Rental income......... $26,578 $22,541 $4,037 17.9% $22,982 $22,015 $ 967 4.4%
Tenant
reimbursements....... 3,162 2,818 344 12.2 2,859 2,808 51 1.8
Other income.......... 127 199 (72) (36.2) 123 70 53 75.7
------- ------- ------ ------- ------- ------
Total............... 29,867 25,558 4,309 16.9 25,964 24,893 1,071 4.3
------- ------- ------ ------- ------- ------
Property and related
expenses:
Property expenses..... 4,499 4,285 214 5.0 4,150 4,206 (56) (1.3)
Real estate taxes..... 2,229 1,864 365 19.6 1,862 1,823 39 2.1
Ground leases......... 389 337 52 15.4 351 324 27 8.3
------- ------- ------ ------- ------- ------
Total............... 7,117 6,486 631 9.7 6,363 6,353 10 0.2
------- ------- ------ ------- ------- ------

Net operating income, as
defined................ $22,750 $19,072 $3,678 19.3% $19,601 $18,540 $1,061 5.7%
======= ======= ====== ======= ======= ======
</TABLE>

13
<PAGE>

Total revenues from Office Properties increased $4.3 million, or 16.9% to
$29.9 million for the three months ended March 31, 2000 compared to $25.6
million for the three months ended March 31, 1999. Rental income from office
properties increased $4.0 million, or 17.9% to $26.5 million for the three
months ended March 31, 2000 compared to $22.5 million for the three months
ended March 31, 1999. Rental income generated by the stabilized office
properties owned at January 1, 1999 and still owned at March 31, 2000 (the
"Core Office Portfolio") increased $1.0 million, or 4.4% for the three months
ended March 31, 2000 as compared to the three months ended March 31, 1999.
Average occupancy in the Core Office Portfolio increased 2.0% to 96.1% for the
three months ended March 31, 2000 compared to 94.1% for the three months ended
March 31, 1999. In addition, there was an increase in rental rates of 2.4%. Of
the remaining increase of $3.0 million in rental income from office
properties, an increase of $2.6 million was generated by the office properties
developed by the Company in 2000 and 1999 (the "Office Development
Properties"), and an increase of $0.4 million was generated by the office
properties acquired in 1999, offset by the effect of the office properties
sold during 1999 (the "Net Office Acquisitions").

Tenant reimbursements from Office Properties increased $0.3 million, or
12.2% to $3.2 million for the three months ended March 31, 2000 compared to
$2.8 million for the three months ended March 31, 1999. An increase of $0.2
million in tenant reimbursements was generated by the Office Development
Properties and the remaining increase of $0.1 million was generated by the Net
Office Acquisitions. Tenant reimbursements generated by the Core Office
Portfolio remained consistent for the three months ended March 31, 2000
compared to the three months ended March 31, 1999. Other income from Office
Properties decreased $0.1 million or 36.2% to $0.1 million for the three
months ended March 31, 2000 compared to $0.2 million for the three months
ended March 31, 1999. Other income for the three months ended March 31, 1999
included a $0.1 million gain on the sale of eight acres of undeveloped land in
Calabasas, California. The remaining amounts in other income from Office
Properties for both periods consisted primarily of management fees and tenant
late charges.

Total expenses from Office Properties increased $0.6 million, or 9.7% to
$7.1 million for the three months ended March 31, 2000 compared to $6.5
million for the three months ended March 31, 1999. Property expenses increased
$0.2 million, or 5.0% to $4.5 million for the three months ended March 31,
2000 compared to $4.3 million for the three months ended March 31, 1999. An
increase of $0.3 million in property expenses attributable to the Office
Development Properties was offset by a decrease of $0.1 million in property
expenses attributable to the Core Office Portfolio. Real estate taxes
increased $0.3 million, or 19.6% to $2.2 million for the three months ended
March 31, 2000 as compared to $1.9 million for the three months ended March
31, 1999. This increase was primarily attributable to real estate taxes on the
Net Office Acquisitions and the Office Development Properties. Property taxes
for the Core Office Portfolio remained consistent for the three months ended
March 31, 2000 as compared to the three months ended March 31, 1999. Ground
lease expense from Office Properties increased $50,000, or 15.4% for the three
months ended March 31, 2000 compared to the three months ended March 31, 1999
which was attributable to increases in ground lease expense at several of the
Core Office Portfolio properties.

Net operating income, as defined, from Office Properties increased $3.7
million, or 19.3% to $22.8 million for the three months ended March 31, 2000
compared to $19.1 million for the three months ended March 31, 1999. Of this
increase, $1.1 million was generated by the Core Office Portfolio and
represented a 5.7% increase in net operating income for the Core Office
Portfolio. Of the remaining increase of $2.6 million, $2.1 million was
generated by the Office Development Properties and $0.5 million was generated
by the Net Office Acquisitions.

14
<PAGE>

Industrial Properties

<TABLE>
<CAPTION>
Total Industrial Portfolio Core Industrial Portfolio
--------------------------------- ---------------------------------
Dollar Percentage Dollar Percentage
2000 1999 Change Change 2000 1999 Change Change
------- ------- ------ ---------- ------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues:
Rental income......... $11,124 $10,277 $ 847 8.2% $ 9,918 $9,493 $ 425 4.5%
Tenant
reimbursements....... 1,532 1,305 227 17.4 1,316 1,247 69 5.5
Other income.......... 947 10 937 9,370.0 947 8 939 11,737.5
------- ------- ------ ------- ------ ------
Total............... 13,603 11,592 2,011 17.3 12,181 10,748 1,433 13.3
------- ------- ------ ------- ------ ------
Property and related
expenses:
Property expenses..... 959 850 109 12.8 881 779 102 13.1
Real estate taxes..... 1,158 1,144 14 1.2 1,030 1,069 (39) (3.6)
------- ------- ------ ------- ------ ------
Total............... 2,117 1,994 123 6.2 1,911 1,848 63 3.4
------- ------- ------ ------- ------ ------

Net operating income, as
defined................ $11,486 $ 9,598 $1,888 19.7% $10,270 $8,900 $1,370 15.4%
======= ======= ====== ======= ====== ======
</TABLE>

Total revenues from Industrial Properties increased $2.0 million, or 17.3%
to $13.6 million for the three months ended March 31, 2000 compared to $11.6
million for the three months ended March 31, 1999. Rental income from
Industrial Properties increased $0.8 million, or 8.2% to $11.1 million for the
three months ended March 31, 2000 compared to $10.3 million for the three
months ended March 31, 1999. An increase of $0.4 million was generated by the
stabilized industrial properties owned at January 1, 1999 and still owned at
March 31, 2000 (the "Core Industrial Portfolio") and represented a 4.5%
increase in rental income for the Core Industrial Portfolio. This increase is
net of a $0.4 million write-off of the deferred rent receivable balance for a
tenant that early terminated their lease. Excluding this write-off, rental
income from the Core Industrial Portfolio increased $0.8 million, or 8.7% for
the three months ended March 31, 2000 compared to the three months ended March
31, 1999. This increase in rental income from the Core Industrial Portfolio is
primarily attributable to an increase in rental rates. Average occupancy in
the Core Industrial Portfolio increased 0.3% to 96.7% for the three months
ended March 31, 2000 as compared to 96.4% for the three months ended March 31,
1999. An increase of $0.8 million in rental income was generated by the
industrial properties developed by the Company in 2000 and 1999 (the
"Industrial Development Properties"), offset by a decrease of $0.4 million in
rental income attributed to the seven industrial buildings sold during 1999
and the first quarter of 2000 (the "Industrial Dispositions").

Tenant reimbursements from Industrial Properties increased $0.2 million, or
17.4% to $1.5 million for the three months ended March 31, 2000 compared to
$1.3 million for three months ended March 31, 1999. Of this increase, $0.1
million was generated by the Core Industrial Portfolio and $0.2 million was
attributable to the Industrial Development Properties offset by a $0.1 million
decrease attributable to the Industrial Dispositions. Other income from
Industrial Properties increased by $0.9 million for the three months ended
March 31, 2000 compared to the three months ended March 31, 1999. Other income
for the three months ended March 31, 2000 included a $0.9 million lease
termination fee from a building in El Segundo, California. Net of the $0.4
million write-off of the deferred rent receivable balance discussed above, the
Company recognized a net lease termination fee of $0.5 million on this
transaction. The building was subsequently re-leased to a single tenant under
a 15-year lease at a higher rental rate.

Total expenses from Industrial Properties increased $0.1 million, or 6.2%
to $2.1 million for the three months ended March 31, 2000 compared to $2.0
million for the three months ended March 31, 1999. Property expenses from
Industrial Properties increased by $0.1 million, or 12.8% to $1.0 million for
the three months ended March 31, 2000 compared to $0.9 million for the three
months ended March 31, 1999. An increase of $0.1 million in the Core
Industrial Portfolio and $0.1 million in the Industrial Development Portfolio
were

15
<PAGE>

offset by a decrease of $0.1 million in real estate taxes for the Industrial
Dispositions. Increases of $0.1 million in real estate taxes for the
Industrial Development Portfolio was offset by a decrease of $0.1 million for
the Industrial Dispositions. Real estate taxes for the Core Industrial
Portfolio were consistent for the three months ended March 31, 2000 compared
to the three months ended March 31, 1999.

Net operating income, as defined, from Industrial Properties increased $1.9
million, or 19.7% to $11.5 million for the three months ended March 31, 2000
compared to $9.6 million for the three months ended March 31, 1999. Of this
increase, $1.4 million was generated by the Core Industrial Portfolio and
represented a 15.4% increase in net operating income for the Core Industrial
Portfolio. An increase of $0.9 million generated by the Industrial Development
Properties was offset by a decrease of $0.4 million from the Industrial
Dispositions.

Non-Property Related Income and Expenses

Interest income decreased $0.1 million, or 26.5% to $0.3 million for the
three months ended March 31, 2000 compared to $0.4 million for the three
months ended March 31, 1999. The decrease was due primarily to the receipt of
interest income on notes receivable from related parties during the three
months ended March 31, 1999 which were repaid prior to March 31, 2000.

General and administrative expenses increased $0.3 million, or 13.7% to
$2.6 million for the three months ended March 31, 2000 compared to $2.3
million for the three months ended March 31, 2000. This increase was due
primarily to higher salaries and benefits.

Interest expense increased $2.1 million, or 35.9% to $7.8 million for the
three months ended March 31, 2000 compared to $5.7 million for the three
months ended March 31, 1999, primarily due to a net increase in aggregate
indebtedness and higher interest rates. The Company's weighted average
interest rate increased approximately 1.0% to 8.0% at March 31, 2000 as
compared to 7.0% at March 31, 1999.

Depreciation and amortization increased $2.1 million, or 29.2% to $9.3
million for the three months ended March 31, 2000 compared to $7.2 million for
the three months ended March 31, 1999. The increase was due primarily to a
full quarter of depreciation on properties acquired and developed by the
Company during 1999.

Liquidity and Capital Resources

The Company has a $400 million unsecured revolving credit facility (the
"Credit Facility") which bears interest at a rate between LIBOR plus 1.13% and
LIBOR plus 1.75% (7.66% at March 31, 2000), depending upon the Company's
leverage ratio at the time of borrowing, and matures in November 2002. As of
March 31, 2000, the Company had borrowings of $293 million outstanding under
the Credit Facility and availability of approximately $24.7 million.
Availability under the Credit Facility depends upon the value of the Company's
unencumbered assets. The Company expects to use the Credit Facility to finance
development expenditures, to fund acquisitions and for general corporate uses.
In April 2000, the Credit Facility agreement was amended to increase the funds
available on the unencumbered asset pool and to increase the unsecured
leverage ratio. The Company expects to use the approximately $30.0 million of
additional availability provided by the amendment to finance development
expenditures.

In April 2000, one of the Development LLCs obtained a non-recourse
construction loan with a total commitment of $57.0 million. The construction
loan bears interest at LIBOR + 2.70% and matures on April 17, 2002 with an
option to extend for up to two six-month periods. The proceeds from the
construction loan will be used to finance the development of one of the multi-
phased office projects that the Company is developing in San Diego,
California, with The Allen Group. The project is expected to encompass
approximately 550,000 rentable square feet of office space upon completion of
all phases. The construction loan is secured by the land for the entire
project, the one phase of the project that the Company completed during the
fourth quarter of 1999, and all improvements to be constructed.

16
<PAGE>

The following table sets forth the composition of the Company's mortgage
debt at March 31, 2000 and December 31, 1999:

<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(in thousands)
<S> <C> <C>
Mortgage note payable, due April 2009, fixed interest at
7.20%,
monthly principal and interest payments................ $ 93,591 $ 93,953
Mortgage note payable, due October 2003, interest at
LIBOR + 1.75%, (7.81% and 7.94% at March 31, 2000 and
December 31, 1999, respectively),
monthly interest-only payments......................... 90,000 90,000
Mortgage note payable, due February 2022, fixed interest
at 8.35%,
monthly principal and interest payments(a)............. 80,494 80,812
Mortgage note payable, due May 2017, fixed interest at
7.15%,
monthly principal and interest payments................ 29,223 29,440
Mortgage note payable, due December 2005, fixed interest
at 8.45%,
monthly principal and interest payments................ 12,863 12,973
Mortgage note payable, due November 2014, fixed interest
at 8.43%,
monthly principal and interest payments................ 10,871 10,966
Mortgage note payable, due October 2013, fixed interest
at 8.21%,
monthly principal and interest payments................ 7,300 7,372
Mortgage note payable, due December 2003, fixed interest
at 10.0%,
monthly interest payments through December 31, 2000,
no interest payments thereafter........................ 8,500
-------- --------
$332,842 $325,516
======== ========
</TABLE>
- --------
(a) Beginning February 2005, the mortgage note is subject to increases in the
effective interest rate to the greater of 13.35% or the sum of the
interest rate for U.S. Treasury Securities maturing 15 years from the
reset date plus 2.00%.

The following table sets forth certain information with respect to the
Company's aggregate debt composition at March 31, 2000 and December 31, 1999:

<TABLE>
<CAPTION>
Weighted Average
% of Total Debt Interest Rate
---------------------- ----------------------
March 31, December 31, March 31, December 31,
2000 1999 2000 1999
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Secured vs. unsecured:
Secured..................... 53.2% 58.8% 7.9% 7.8%
Unsecured................... 46.8% 41.2% 8.1% 7.6%
Fixed rate vs. variable rate:
Fixed rate (1), (4)......... 62.8% 42.5% 8.1% 7.8%
Variable rate (2), (3)...... 37.2% 57.5% 7.8% 7.7%
</TABLE>
- --------
(1) At March 31, 2000, the Company had an interest rate swap agreement to fix
$150 million of its floating rate debt that expires in February 2002.

(2) At March 31, 2000, the Company had an interest rate cap agreement to cap
LIBOR on $150 million of its floating rate debt at 6.5% which expires in
July 2000.

(3) In February 2000, the Company entered into an 18-month interest rate cap
agreement to cap LIBOR on $150 million of its floating rate debt at 6.5%
starting in July 2000 and expiring in January 2002.

(4) The percentage of fixed rate debt to total debt at March 31, 2000 does not
take into consideration the portion of floating rate debt capped by the
Company's $150 million interest-rate cap agreement since LIBOR rates were
below the 6.5% cap rate at March 31, 2000. Including the effects of the
interest-rate cap agreement, the Company had fixed or capped approximately
86.8% of its total outstanding debt at March 31, 2000.

17
<PAGE>

In December 1999, the Company announced the implementation of its share
repurchase program, pursuant to which the Company is authorized to repurchase
up to an aggregate of 3.0 million shares of its outstanding common stock,
representing up to approximately 11% of the Company's currently outstanding
shares at the time the program was announced. During the first quarter of
2000, the Company repurchased approximately 2.0 million shares of its common
stock in open market transactions for an aggregate repurchase price of
$41.2 million or $20.58 per share. Repurchases to date total approximately 2.3
million shares. Repurchases transacted during the first quarter of 2000 were
funded primarily through working capital and borrowings on the Company's
unsecured revolving credit facility. Depending on changes in the Company's
stock price, the Company intends to finance the continuation of its share
repurchase program in 2000 through proceeds from a targeted dispositions
program of non-strategic and mature industrial assets. Repurchases during 2000
may be made from time to time in the open market or through privately
negotiated transactions, and may be discontinued at any time.

In February 1998, the SEC declared effective the Company's "shelf"
registration statement on Form S-3 with respect to $400 million of the
Company's equity securities. As of May 10, 2000, an aggregate of $313 million
of equity securities were available for issuance under the registration
statement.

Capital Expenditures

As of March 31, 2000, the Company had approximately 1.4 million rentable
square feet of office space that was either under construction or committed
for construction at a total budgeted cost of approximately $284 million. The
Company has spent an aggregate of $146 million on these projects as of March
31, 2000. The Company intends to finance the presently budgeted $138 million
of remaining development costs, $26.9 million of which relates to the
Company's Peregrine Systems Corporate Center project which is being financed
with proceeds from the $57.0 million construction loan obtained in April 2000,
with additional construction loan financing, proceeds from a targeted
dispositions program of non-strategic and mature industrial assets, borrowings
under the Credit Facility and working capital.

In connection with an agreement signed with The Allen Group in October
1997, the Company has agreed to purchase one office property encompassing
128,000 rentable square feet, subject to the property meeting certain
occupancy thresholds. The purchase price for this property will be determined
at the time of acquisition based on the net operating income at that time. The
Company expects that in the event that this acquisition does occur, it would
be financed with borrowings under the Credit Facility and the issuance of
common limited partnership units of the Operating Partnership.

On May 1, 2000, the Company initiated actions that has put it in a position
to potentially acquire the fee interest in a three building office complex
located in El Segundo, California (see Note 8 to the consolidated financial
statements included at Item 1 for further discussion of this transaction). In
the first step of the transaction, the Company purchased a non-recourse note
receivable with an outstanding principal balance of $60.8 million and accrued
interest of $10.2 million from an institutional lender for a discounted price
of $45.3 million. If the Company acquires the fee interest, the Company
currently estimates that it could invest up to an additional $20.0 million to
$30.0 million related to this complex and expects to spend approximately
$10.0 million to $20.0 million over the next twelve months.

The Company believes that it will have sufficient capital resources to
satisfy its obligations and planned capital expenditures for the next twelve
months. The Company expects to meet its long-term liquidity requirements
including possible future development and property acquisitions, through
retained cash flow, long-term secured and unsecured borrowings, proceed from
the Company's targeted dispositions program, or the issuance of common or
preferred units of the Operating Partnership.

18
<PAGE>

Building and Lease Information

The following tables set forth certain information regarding the Company's
Office and Industrial Properties at March 31, 2000:

Occupancy by Segment Type

<TABLE>
<CAPTION>
Square Feet
Number of -----------------------------------------
Region Buildings Total Leased Available Occupancy
------ --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Office Properties:
Los Angeles.............. 28 2,554,453 2,492,882 61,571 97.6%
Orange County............ 22 912,972 785,020 127,952 86.0
San Diego................ 29 2,048,102 2,029,881 18,221 99.1
Other.................... 6 709,615 697,844 11,771 98.3
--- ---------- ---------- -------
85 6,225,142 6,005,627 219,515 96.5
--- ---------- ---------- ------- -----
Industrial Properties:
Los Angeles.............. 7 554,225 435,463 118,762 78.6
Orange County............ 63 4,503,551 4,442,753 60,798 98.6
San Diego................ 2 122,592 122,592 100.0
Other.................... 13 1,251,507 1,251,507 100.0
--- ---------- ---------- -------
85 6,431,875 6,252,315 179,560 97.2
--- ---------- ---------- -------
Total Portfolio.......... 170 12,657,017 12,257,942 399,075 96.8%
=== ========== ========== =======
</TABLE>

Lease Expirations by Segment Type

<TABLE>
<CAPTION>
Percentage
Total of Total
Square Leased Annual Base
Footage Square Feet Rent Under
Number of of Represented Expiring
Expiring Expiring by Expiring Leases
Year of Lease Expiration Leases(1) Leases Leases(2) (in 000's)(3)
------------------------ --------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Office Properties:
Remaining 2000............... 64 258,687 4.4% $ 5,441
2001......................... 87 964,884 16.4 16,095
2002......................... 67 483,792 8.2 8,144
2003......................... 47 257,283 4.4 4,945
2004......................... 51 818,826 13.9 18,437
2005......................... 27 771,916 13.1 11,417
--- --------- ---- -------
343 3,555,388 60.4 64,479
--- --------- -------
Industrial Properties:
Remaining 2000............... 50 697,393 11.3 5,522
2001......................... 65 789,173 12.8 5,524
2002......................... 38 312,904 5.1 2,826
2003......................... 31 761,613 12.4 5,944
2004......................... 17 594,181 9.6 4,517
2005......................... 11 533,660 8.7 3,541
--- --------- ---- -------
212 3,688,924 59.9 27,874
--- --------- -------
Total Portfolio.............. 555 7,244,312 60.1% $92,353
=== ========= =======
</TABLE>
- --------
(1) Represents the total number of tenants. Some tenants have multiple leases.
Excludes leases for amenity, retail, parking and month to month tenants.

(2) Based on total leased square footage for the respective portfolios as of
March 31, 2000.

(3) Determined based upon aggregate base rent to be received over the term,
divided by the term in months, multiplied by 12, including all leases
executed on or before April 1, 2000.

19
<PAGE>

Leasing Activity by Segment Type

<TABLE>
<CAPTION>
Number of Weighted
Leases Square Feet Average
----------- --------------- Retention Lease Term
New Renewal New(1) Rate Renewal (in months)
--- ------- ------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
For the Three Months Ended
March 31, 2000:
Office Properties........... 9 15 18,327 89,705 67.4% 24
Industrial Properties....... 13 15 196,840 324,827 65.6% 68
--- --- ------- -------
Total Portfolio............. 22 30 215,167 414,532 66.0% 60
=== === ======= =======
</TABLE>
- --------
(1) The lease-up of 215,167 square feet to new tenants for the three months
ended March 31, 2000 includes re-leasing of 67,237 square feet and first
generation leasing of 147,930 square feet.

Historical Cash Flows

The principal sources of funding for development, acquisitions, and capital
expenditures are the Credit Facility, cash flow from operating activities,
secured debt financing and proceeds from the Company's targeted dispositions
program. The Company's net cash provided by operating activities decreased
$3.6 million, or 20.3% to $14.4 million for the three months ended March 31,
2000 compared to $18.0 million for the three months ended March 31, 1999. This
decrease was primarily attributable to an increase in tenant receivables and
cash paid for deferred leasing costs and prepaid expenses.

Cash used in investing activities decreased $23.2 million, or 37.6% to
$38.5 million for the three months ended March 31, 2000 compared to $61.7
million for the three months ended March 31, 1999. Cash used in investing
activities for the three months ended March 31, 2000 consisted primarily of
the purchase of 17 acres of undeveloped land for $11.3 million (net of an $8.5
million mortgage note payable issued in connection with the acquisition), the
sale of two office buildings for $3.4 million, expenditures for construction
in progress of $36.4 million, and $1.5 million in additional tenant
improvements and capital expenditures. Cash used in investing activities for
three months ended March 31, 1999 consisted primarily of the purchase of one
office property for $15.2 million (net of $3.6 million of contributed value in
exchange for which the Company issued common units of the Operating
Partnership and the repayment of an existing $2.3 million note receivable),
the purchase of 58 acres of undeveloped land for $16.5 million (net of $6.3
million of contributed value in exchange for which the Company issued common
units of the Operating Partnership), the sale of eight acres of undeveloped
land for $1.4 million, expenditures for construction in progress of $26.7
million, and $3.1 million in additional tenant improvements and capital
expenditures.

Cash provided by financing activities decreased $32.4 million, or 81.5% to
$7.3 million for the three months ended March 31, 2000 compared to $39.7
million for the three months ended March 31, 1999. Cash provided by financing
activities for the three months ended March 31, 2000 consisted primarily of
$64.5 million in borrowings under the Credit Facility, partially offset by
$13.5 million in distributions paid to common stockholders and common
unitholders, $0.5 million in distributions paid to the minority interests in
the Development LLCs, and $41.3 million paid for the Company's stock
repurchase program. Cash provided by financing activities for the three months
ended March 31, 1999 consisted primarily of proceeds of $95.0 million from the
issuance of mortgage debt, partially offset by $40.0 million in repayments to
the Credit Facility and $12.9 million in distributions paid to common
stockholders and common unitholders.

Funds from Operations

Industry analysts generally consider Funds From Operations, as defined by
NAREIT, an alternative measure of performance for an equity REIT. Funds From
Operations is defined by NAREIT to mean net income (loss) before minority
interests of common unitholders (computed in accordance with GAAP), excluding
gains (or losses) from debt restructuring and sales of property, plus real
estate related depreciation and amortization (excluding amortization of
deferred financing costs and depreciation of non-real estate assets), and
after

20
<PAGE>

adjustment for unconsolidated partnerships and joint ventures. The Company
considers Funds From Operations an appropriate measure of performance of an
equity REIT because it is predicated on cash flow analyses. The Company
believes that in order to facilitate a clear understanding of the historical
operating results of the Company, Funds From Operations should be examined in
conjunction with net income as presented in the financial statements included
elsewhere in this report. The Company computes Funds From Operations in
accordance with standards established by the Board of Governors of NAREIT in
its March 1995 White Paper, which may differ from the methodologies used by
other equity REITs and, accordingly, may not be comparable to Funds From
Operations published by such other REITs. Funds From Operations should not be
considered as an alternative to net income (loss) (computed in accordance with
GAAP) as an indicator of the properties' financial performance or to cash flow
from operating activities (computed in accordance with GAAP) as an indicator
of the properties' liquidity, nor is it indicative of funds available to fund
the properties' cash needs, including the Company's ability to pay dividends
or make distributions.

The following table presents the Company's Funds From Operations for the
three months ended March 31, 2000 and 1999.

<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Net income................................................. $ 9,578 $ 9,910
Adjustments:
Minority interest in earnings of Operating
Partnership........................................... 1,372 1,536
Depreciation and amortization.......................... 9,323 7,217
Loss on disposition of operating property.............. 305
Other.................................................. 102 127
------- -------
Funds From Operations...................................... $20,680 $18,790
======= =======
</TABLE>

Inflation

The majority of the Company's tenant leases require tenants to pay most
operating expenses, including real estate taxes and insurance, and increases
in common area maintenance expenses, which reduce the Company's exposure to
increases in costs and operating expenses resulting from inflation.

21
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Changes in Primary Risk Exposures

Changes from December 31, 1999 to March 31, 2000

In February 2000, the Company entered into an interest-rate swap agreement
with a total notional amount of $150 million to effectively limit interest
expense on the Company's floating rate debt during periods of increasing
interest rates. The agreement, which expires in February 2002, requires the
Company to pay fixed rate interest payments based on an interest rate of 6.95%
and receive floating rate interest payments based on one-month LIBOR. As a
result of the execution of the interest-rate swap agreement, the Company's
ratio of fixed rate debt to total debt (excluding Cumulative Redeemable
Preferred units) increased 20.3% from 42.5% at December 31, 1999 to 62.8% at
March 31, 2000. This percentage does not take into consideration the portion
of the floating rate debt capped by the Company's existing interest-rate cap
agreements since LIBOR rates were below the contractual cap rates at March 31,
2000. The Company currently has interest-rate cap agreements to cap LIBOR on
$150 million of its floating rate debt at 6.50% through January 2002.
Including the effect of the interest-rate cap agreements, the Company had
fixed or capped approximately 86.8% of its total outstanding debt at March 31,
2000.

Changes Subsequent to March 31, 2000

In May 2000, one of the Development LLCs entered into an interest rate cap
agreement with a LIBOR based cap rate of 8.50% to effectively limit interest
expense on it's floating rate construction loan during periods of increasing
interest rates. The agreement has an initial notional amount of $21.1 million
that increases from $21.1 million to $57.0 million during the period from May
2000 through August 2001, and than remains at $57.0 million until expiration
in April 2002. Including the effects of this additional interest-rate cap
agreement, the Company had fixed or capped approximately 84.6% of its total
outstanding debt at May 10, 2000.

Tabular Presentation of Market Risk

The tabular presentations below provide information about the Company's
interest rate sensitive financial and derivative instruments as of March 31,
2000 and 1999. All of the Company's interest rate sensitive financial and
derivative instruments are designated as held for purposes other than trading.

Presentation at March 31, 2000

For the Credit Facility, the table presents the assumption that the
outstanding principal balance at March 31, 2000 will be paid upon the Credit
Facility's maturity in November 2002. The table also presents the related
expected maximum contractual interest rate index for outstanding Credit
Facility borrowings from 2000 through 2002.

For variable rate mortgage debt, the table presents the assumption that the
outstanding principal balance at March 31, 2000 will be paid upon maturity in
October 2003. The table also presents the related contractual interest rate
index for outstanding variable rate mortgage debt borrowings from 2000 through
2003.

For fixed rate mortgage debt, the table presents the assumption that the
outstanding principal balance at March 31, 2000 will be paid according to
scheduled principal payments and that the Company will not prepay any of the
outstanding principal balance. The table also presents the related contractual
weighted-average interest rate at March 31, 2000 for outstanding fixed rate
mortgage debt borrowings from 2000 through 2004 and thereafter.

22
<PAGE>

Company's 8.075% Series A and 9.375% Series C Cumulative Redeemable Preferred
stock, respectively, in 2008 when the Preferred units become exchangeable at
the option of the majority of the holders. For the Series D Cumulative
Redeemable Preferred units (the "Preferred units"), the table reflects the
assumption that the Company is not contractually obligated to repay the
outstanding balance of the Preferred units since the Preferred units will
either remain outstanding or be converted into shares of the 9.250% Series D
Cumulative Redeemable Preferred stock, in 2009 when the Preferred units become
exchangeable at the option of the majority of the holders. The table also
presents the related weighted-average interest rate at March 31, 2000 for
outstanding Preferred units from 2000 through the exchange date. The same
interest rates will apply when the Preferred units are exchanged into the
Cumulative Redeemable Preferred stock.

For interest-rate caps, the table presents notional amounts, average cap
rates and the related interest rate index upon which cap rates are based, by
contractual maturity date. For interest-rate swaps, the table presents
notional amounts, average maximum contractual fixed pay rates, and the related
interest rate index upon which the floating rate receive rates are based, by
contractual maturity date. Notional amounts are used solely to calculate the
contractual cash flow to be received under the contract and do not reflect
outstanding principal balances March 31, 2000.

Interest Rate Risk Analysis--Tabular Presentation
Financial Assets and Liabilities
Outstanding Principal by Expected Maturity Date
March 31, 2000
(dollars in millions)

<TABLE>
<CAPTION>
Maturity Date
----------------------------------------- Fair Value at
There- March 31,
2000 2001 2002 2003 2004 after Total 2000
----- ----- ------ ----- ---- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Unsecured line of
credit:
Variable rate......... $292.5 $292.5 $292.5
Average interest LIBOR LIBOR LIBOR
rate index........... +1.50% +1.50% +1.50%

Mortgage debt:
Variable rate......... $90.0 $ 90.0 $ 90.0
Average interest LIBOR LIBOR LIBOR LIBOR
rate index........... +1.75% +1.75% +1.75% +1.75%

Fixed rate............ $ 3.7 $ 5.2 $ 5.6 $14.6 $6.6 $207.1 $242.8 $240.5
Average interest
rate................. 7.82% 7.82% 7.82% 7.82% 7.82% 7.82%

Series A, C and D
Preferred units:
Fixed rate............ $142.1
Average interest
rate................. 8.71% 8.71% 8.71% 8.71% 8.71% 8.71%
</TABLE>

23
<PAGE>

Interest Rate Risk Analysis--Tabular Presentation
Financial Derivative Instruments
Notional Amounts by Contractual Maturity
March 31, 2000
(dollars in millions)

<TABLE>
<CAPTION>
Maturity Date
------------------------------------- Fair Value at
There- March 31,
2000 2001 2002 2003 2004 after Total 2000
------ ---- ------ ---- ---- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
Derivatives Used to
Hedge Variable Rate
Debt:
Interest rate cap
agreements:
Notional amount....... $150.0 $150.0 $300.0 $ 1.5
Cap rate.............. 6.50% 6.50%
Forward rate index.... LIBOR LIBOR

Interest rate swap
agreements:
Notional amount....... $150.0 $150.0 $(0.1)
Fixed pay interest
rate................. 8.45%
Floating receive
interest LIBOR
rate index........... +1.50%
</TABLE>

Presentation at March 31, 1999

For the unsecured line of credit, the table presents that the outstanding
principal balance at March 31, 1999 was paid in November 1999 when the Company
obtained its new $400 million Credit Facility. The table also presents the
related maximum interest rate index for outstanding Credit Facility borrowings
in 1999.

For variable rate mortgage debt, the table presents that the outstanding
principal balance at March 31, 1999 was paid in April 1999 when the Company
subsequently repaid this loan. The table also presents the related interest
rate index.

For fixed rate mortgage debt, the table presents the assumption that the
outstanding principal balance at March 31, 1999 will be paid according to
scheduled principal payments and that the Company will not prepay any of the
outstanding principal balance. The table also presents the related weighted-
average interest rate at March 31, 1999 for outstanding fixed rate mortgage
debt borrowings from 1999 through 2003 and thereafter.

For the Series A and Series C Cumulative Redeemable Preferred units (the
"Preferred units"), the table reflects the assumption that the Company is not
contractually obligated to repay the outstanding balance of the Preferred
units since the Preferred units will either remain outstanding or be converted
into shares of the Company's 8.075% Series A and 9.375% Series C Cumulative
Redeemable Preferred stock, respectively, in 2008 when the Preferred units
become exchangeable at the option of the majority of the holders. The table
also presents the related weighted-average interest rate for outstanding
Preferred units at March 31, 1999 from 1999 through the exchange date, however
the same interest rates will apply when the Preferred units are exchanged into
the Cumulative Redeemable Preferred stock.

For interest rate caps, the table presents notional amounts, average cap
rates and the related interest rate index upon which cap rates are based, by
contractual maturity date. Notional amounts are used solely to calculate the
contractual cash flow to be received under the contract and do not reflect
outstanding principal balances at March 31, 1999. For interest-rate caps, the
unamortized cost of the premiums at March 31, 1999 is shown as the market
value at March 31, 1999 since the Company's exposure is limited to the costs
paid to enter into such agreements.

24
<PAGE>

Interest Rate Sensitivity Analysis
Financial Assets and Liabilities
Outstanding Principal by Expected Maturity Date
March 31, 1999
(dollars in millions)

<TABLE>
<CAPTION>
Fair Value
Maturity Date at
------------------------------------------ March 31,
1999 2000 2001 2002 2003 Thereafter Total 1999
------ ---- ---- ---- ---- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Line of credit:
Variable rate......... $232.0 $232.0 $232.0
Average interest rate LIBOR
index................ +1.38%

Mortgage debt:
Variable rate......... $ 19.0 $ 19.0 $ 19.0
Average interest rate LIBOR
index................ +1.50%

Fixed rate............ $ 2.6 $3.9 $4.2 $4.6 $5.0 $188.5 $208.8 $211.9
Average interest
rate................. 7.83% 7.83% 7.83% 7.83% 7.83% 7.83%

Series A and C Preferred
units:
Fixed rate............ $107.0 $107.0 $ 99.2
Average interest
rate................. 8.49% 8.49% 8.49% 8.49% 8.49% 8.49%
</TABLE>

Interest Rate Sensitivity Analysis
Financial Derivative Instruments
Notional Amounts by Contractual Maturity
March 31, 1999
(dollars in millions)

<TABLE>
<CAPTION>
Unamortized
Cost
Maturity Date at
---------------------------------------- March 31,
1999 2000 2001 2002 2003 Thereafter Total 1999
----- ------ ---- ---- ---- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
Derivatives Used to
Hedge the Line of
Credit:
Interest rate cap
agreements:
Notional amount....... $150.0 $150.0 $0.1
Cap rate.............. 6.50% 6.50%
Forward rate index.... LIBOR LIBOR
</TABLE>

25
<PAGE>

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

During the three months ended March 31, 2000, no legal proceedings were
initiated against or on behalf of the Company, which if determined unfavorably
to the Company, would have a material adverse effect upon the financial
condition, results of operations and cash flows of the Company.

ITEM 2. CHANGES IN SECURITIES

During the first quarter of 2000, common unitholders of the Operating
Partnership exchanged 424,199 common limited partnership units for shares of
the Company's common stock on a one-for-one basis. The 424,199 common shares
issued in connection with the redemption were registered on registration
statements declared effective by the SEC in September and October 1999. The
common units that were redeemed in connection with the exchange were
previously issued in reliance upon an exemption from registration provided by
Regulation D under the Securities Act as a transaction by an issuer not
involving a public offering.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES--None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--None

ITEM 5. OTHER INFORMATION--None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*27.1 Financial Data Schedule.
</TABLE>
- --------
*Filed herewith.

(b) Reports on Form 8-K

The Company filed a Report on Form 8-K, dated May 3, 2000.

26
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on May 15, 2000.

Kilroy Realty Corporation

/s/ John B. Kilroy, Jr.
By: _________________________________
John B. Kilroy, Jr.
President and Chief Executive
Officer
(Principal Executive Officer)

/s/ Richard E. Moran Jr.
By: _________________________________
Richard E. Moran Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

/s/ Ann Marie Whitney
By: _________________________________
Ann Marie Whitney
Senior Vice President and
Controller
(Principal Accounting Officer)

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 9,301 2,463
<SECURITIES> 0 0
<RECEIVABLES> 26,343 16,391
<ALLOWANCES> (1,583) (577)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,455,825 1,283,228
<DEPRECIATION> (182,453) (151,939)
<TOTAL-ASSETS> 1,346,759 1,178,821
<CURRENT-LIABILITIES> 0 0
<BONDS> 625,342 459,836
0 0
0 0
<COMMON> 262 276
<OTHER-SE> 437,198 475,027
<TOTAL-LIABILITY-AND-EQUITY> 1,346,759 1,178,821
<SALES> 0 0
<TOTAL-REVENUES> 43,764 37,550
<CGS> 0 0
<TOTAL-COSTS> 21,189 18,011
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7,828 5,759
<INCOME-PRETAX> 14,747 13,780
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 14,747 13,780
<DISCONTINUED> (305) 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9,578<F1> 9,910
<EPS-BASIC> 0.35 0.36
<EPS-DILUTED> 0.35 0.36
<FN>
<F1>NET INCOME IS AFTER MONETARY INTERESTS OF ($4,871) AND EQUITY IN INCOME OF
UNCONSOLIDATED SUBSIDIARY OF $7.
</FN>

</TABLE>