<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED AUGUST 27, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 27, 1997)
7,000,000 SHARES
[LOGO]
DUKE REALTY INVESTMENTS, INC.
COMMON STOCK
------------------
Duke Realty Investments, Inc. (the "Company") is a self-administered and
self-managed real estate investment trust that began operations through a
related entity in 1972. As of June 30, 1997, the Company owned a diversified
portfolio of 262 in-service industrial, office and retail properties,
encompassing approximately 31.4 million square feet located in seven states, and
26 buildings and one building expansion encompassing approximately 4.1 million
square feet under development. The Company also owned approximately 1,300 acres
of land for future development. The Company has the largest commercial real
estate operations in Indianapolis and Cincinnati and is one of the largest real
estate companies in the Midwest. The Company expects to continue to pay regular
quarterly dividends to its shareholders.
All of the shares of Common Stock offered hereby are being sold by the
Company. The Common Stock is listed on the New York Stock Exchange under the
symbol DRE. The last reported sale price for the Common Stock on August 27, 1997
was $21 3/16 per share.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS
TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.............................................. $ $ $
Total (3).............................................. $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $400,000.
(3) The Company has granted to the several Underwriters an option to purchase up
to an additional 1,050,000 shares of Common Stock to cover over-allotments,
if any. If all of such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
--------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the shares of
Common Stock will be made in New York, New York on or about September , 1997.
--------------------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
A.G. EDWARDS & SONS, INC.
LEGG MASON WOOD WALKER
INCORPORATED
MCDONALD & COMPANY
SECURITIES, INC.
MORGAN STANLEY DEAN WITTER
--------------------------
The date of this Prospectus Supplement is September , 1997.
<PAGE>
[MAP entitled "Duke Realty Investments Principal Markets" and consisting of (1)
a map of the continental United States on which the states of Missouri,
Wisconsin, Illinois, Indiana, Kentucky, Tennessee and Ohio are shaded and (2) a
larger map of such states on which the city of Indianapolis, Indiana is shown as
the Corporate Headquarters; the cities of Chicago, Illinois, St. Louis,
Missouri, Columbus, Ohio, Cincinnati, Ohio and Nashville, Tennessee are shown as
Regional Office locations; and the city of Milwaukee, Wisconsin is shown as
Other Markets.]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING EXERCISING THE OVER-ALLOTMENT OPTION, ENTERING STABILIZING BIDS,
EFFECTING SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR DOCUMENTS INCORPORATED
HEREIN AND THEREIN BY REFERENCE. UNLESS INDICATED OTHERWISE, THE INFORMATION
CONTAINED IN THIS PROSPECTUS SUPPLEMENT IS PRESENTED AS OF JUNE 30, 1997. SHARE
AND PER SHARE AMOUNTS IN THIS PROSPECTUS SUPPLEMENT REFLECT THE COMPANY'S
TWO-FOR-ONE STOCK SPLIT WHICH OCCURRED ON AUGUST 25, 1997. SEE "--RECENT
DEVELOPMENTS." ALL REFERENCES TO THE "COMPANY" IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS INCLUDE THE COMPANY AND THOSE ENTITIES OWNED OR
CONTROLLED BY THE COMPANY, UNLESS THE CONTEXT INDICATES OTHERWISE.
WHEN USED IN THIS PROSPECTUS SUPPLEMENT, THE WORDS "BELIEVES," "EXPECTS" 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. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE COMPANY 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.
THE COMPANY
The Company is a self-administered and self-managed real estate investment
trust (a "REIT") that began operations through a related entity in 1972. At June
30, 1997, the Company owned a diversified portfolio of 262 in-service
industrial, office and retail properties (the "Properties"), encompassing
approximately 31.4 million square feet located in seven states, and 26 buildings
and one building expansion encompassing approximately 4.1 million square feet
under development. The Company also owned approximately 1,300 acres of
unencumbered land (the "Land") for future development, of which approximately
75% is zoned for industrial use and which is typically located adjacent to the
Properties. The Company provides leasing, management, construction, development
and other tenant-related services for the Properties and certain properties
owned by third parties. The Company has the largest commercial real estate
operations in Indianapolis and Cincinnati and is one of the largest real estate
companies in the Midwest. The Company believes that the Midwest offers a
relatively strong and stable economy compared to other regions of the United
States and provides significant growth potential due to its central location,
established manufacturing base, skilled work force and moderate labor costs.
The Company has developed over 50 million square feet of commercial property
since its founding including an average of approximately 4.1 million square feet
per year during the last five years. In addition, the Company acquired
approximately 8.9 million square feet during the three years ended December 31,
1996. During the six months ended June 30, 1997, the Company placed in service
2.6 million square feet of new development and acquired 1.8 million square feet
of property.
The Company manages over 43 million square feet of property, including over
8.1 million square feet owned by third parties. The Company manages
approximately 35% and 29% of all competitive suburban office, warehousing and
light manufacturing space in Indianapolis and Cincinnati, respectively. In
addition to providing services to approximately 1,800 tenants in the Properties,
the Company provides such services to over 900 tenants in 92 properties owned by
third parties. Based on market data maintained by the Company, the Company
believes that it was responsible in the first six months of 1997 for
approximately 67% and 34% of the net absorption (gross space leased minus lease
terminations and expirations) of competitive suburban office, warehousing and
light manufacturing space in Indianapolis and Cincinnati, respectively. The
Company believes that its dominant position in the primary markets in which it
operates gives it a competitive advantage in its real estate activities.
All of the Company's interests in the Properties and Land are held directly
or indirectly by, and substantially all of its operations relating to the
Properties are conducted through Duke Realty Limited Partnership (the "Operating
Partnership"). Partnership interests ("Units") in the Operating Partnership
S-3
<PAGE>
may be exchanged by the holders thereof, other than the Company, for Common
Stock of the Company on a one-for-one basis. Upon an exchange of Units for
Common Stock, the Company's percentage interest in the Operating Partnership
will increase. The Company controls the Operating Partnership as the sole
general partner and owner, as of June 30, 1997, of approximately 90% of the
Units. In addition, the senior management team of the Company owns approximately
12.5% of the Company through Common Stock and Unit ownership.
The following table provides an overview of the Properties.
SUMMARY OF PROPERTIES
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
PERCENT
ANNUAL OF TOTAL
PERCENT NET NET EFFECTIVE OCCUPANCY
SQUARE OF TOTAL EFFECTIVE ANNUAL AT
TYPE OF PROPERTY FEET SQUARE FEET RENT(1) RENT(1) JUNE 30, 1997
- -------------------------------------- --------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Industrial............................ 21,753 69% $ 77,384 42% 95.5%
Office................................ 7,943 25 91,739 50 96.3%
Retail................................ 1,710 6 15,471 8 95.2%
--------- ----- ------------ -----
Total................................. 31,406 100% $ 184,594 100% 95.7%
--------- ----- ------------ -----
--------- ----- ------------ -----
</TABLE>
- ------------------------
(1) Represents annual net effective rent due from tenants in occupancy as of
June 30, 1997. Net effective rent ("Net Effective Rent") equals the average
annual rental property revenue over the terms of the respective leases,
excluding additional rent due as operating expense reimbursements, landlord
allowances for operating expenses and percentage rents.
SQUARE FOOTAGE AND ANNUAL NET EFFECTIVE RENT OF PROPERTIES
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
SQUARE FEET ANNUAL PERCENT OF
----------------------------------------------------------- NET ANNUAL
PERCENT OF EFFECTIVE NET EFFECTIVE
PRIMARY MARKET INDUSTRIAL OFFICE RETAIL TOTAL TOTAL RENT(1) RENT
- ----------------------- ----------- ----------- --------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Indianapolis........... 13,621 1,417 194 15,232 49% $ 61,635 33%
Cincinnati............. 4,003 2,961 799 7,763 25 55,113 31
Columbus............... 1,749 1,481 219 3,449 11 25,759 14
St. Louis.............. 924 680 -- 1,604 5 12,626 7
Cleveland.............. 332 1,059 -- 1,391 4 13,669 7
Nashville.............. 562 -- -- 562 2 3,896 2
Chicago................ -- 345 -- 345 1 5,961 3
Other (2).............. 562 -- 498 1,060 3 5,935 3
----------- ----- --------- --------- ----- ------------ -----
Total.................. 21,753 7,943 1,710 31,406 100% $ 184,594 100%
----------- ----- --------- --------- ----- ------------ -----
----------- ----- --------- --------- ----- ------------ -----
Percent of Total
Square feet.......... 69% 25% 6% 100%
----------- ----- --------- ---------
----------- ----- --------- ---------
</TABLE>
- ------------------------
(1) Represents annual Net Effective Rent due from tenants in occupancy as of
June 30, 1997, excluding additional rent due as a result of operating
expense reimbursements, landlord allowances for operating expenses and
percentage rents.
(2) Represents properties not located in the Company's primary markets. These
properties are located in other similar Midwestern markets.
S-4
<PAGE>
RECENT DEVELOPMENTS
OPERATING PERFORMANCE, DIVIDEND INCREASE AND STOCK SPLIT
For the six months ended June 30, 1997, the Company reported the following
information as compared to the same period in 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-----------------------
1997 1996
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net income available for common shareholders...... $ 29,682 $ 21,947
Revenues.......................................... 111,572 83,744
Funds From Operations............................. 48,123 34,911
Cash flow provided by (used by):
Operating activities.......................... 71,462 39,116
Investing activities.......................... (175,407) (93,598)
Financing activities.......................... 101,718 49,041
</TABLE>
On July 24, 1997, the Company's Board of Directors raised its regular
quarterly common dividend from $.51 per share to $.59 per share, payable on
August 29, 1997 to common shareholders of record on August 15, 1997. The new
dividend is an increase of $.32 per year which is a 15.7% increase over the
previous amount. This dividend equals $2.36 on an annualized basis. The Board of
Directors also declared a two-for-one split of the Company's common stock (the
"Stock Split") to be effected as a 100% share dividend, payable on August 25,
1997 to common shareholders of record on August 18, 1997. The Company also
announced that its Board of Directors anticipates the Company's regular
quarterly dividend amount to be $.30 per common share on a post-Stock Split
basis. This would equate to a dividend increase of 1.7% and follows the
Company's 15.7% dividend increase announced July 24, 1997. The official
declaration for this new dividend is expected to be on October 23, 1997, the
date of the Company's next regularly scheduled Board of Directors' meeting.
Share and per share amounts in this Prospectus Supplement have been restated to
reflect the effect of the Stock Split.
FINANCING
In July 1997, the Company issued 3.0 million Depositary Shares, each
representing 1/10 of a Series B Cumulative Step-Up Redeemable Preferred Share,
raising net proceeds of $146.1 million. These securities are not redeemable
prior to September 30, 2007 and offer a cumulative distribution of 7.99% through
September 2012, and 9.99% thereafter. The proceeds of this financing were fully
used to reduce the outstanding balance on the Company's unsecured line of credit
and to fund the development and acquisition of additional rental properties.
In August 1997, the Company issued $100 million of unsecured Pass-through
Asset Trust Securities ("PATS"). The PATS bear interest at a coupon rate of
6.95% and mature on August 15, 2004. The effective rate of the PATS is 7.347%,
which includes the effect of the settlement of a forward Treasury lock agreement
which the Company entered into in April 1997. The Company and an affiliate of
the placement agent for the PATS can effectively agree to reset the interest
rate and remarket the underlying notes with a maturity of August 15, 2011.
The Company reduced the interest rate on its $150.0 million unsecured line
of credit from the 30-day London Interbank Offered Rate ("LIBOR") plus 1.25% to
LIBOR plus 1.00% effective March 27, 1997. Effective August 28, 1997, the
unsecured line of credit will be increased to $200.0 million and the interest
rate will be reduced to LIBOR plus .80%. This line of credit also includes a
"competitive bid option" and matures in April 2001.
S-5
<PAGE>
Concurrently with the Offering, the Company is considering offering
approximately $15 million of Common Stock to an institutional buyer at the
prevailing market price of the stock. There can be no assurance that this
transaction will be consummated.
DEVELOPMENT AND ACQUISITIONS
During the first seven months of 1997, the Company completed development of
and placed in service 10 properties and one property expansion comprising 2.6
million square feet at a total cost of $79.5 million. The Company has 27
properties and one property expansion under development at July 31, 1997
comprising 4.2 million square feet which will have a total cost of $204.1
million upon completion. Also during the first seven months of 1997, the Company
acquired 9 properties with 1.9 million square feet at a total cost of $120.5
million.
These property additions (the "New Properties"), totaling 8.7 million square
feet, consist of 73% industrial, 23% office, and 4% retail projects. The total
cost of the New Properties is expected to be $404.1 million. At July 31, 1997,
the New Properties which have been placed in service are 88% leased, and the New
Properties under construction are 58% pre-leased for a combined total of 73%
leased. The New Properties are expected to provide a weighted average
unleveraged return on cost (computed as property annual contractual net
operating income ("NOI") divided by total project costs) of 11.3% with
anticipated leasing activity. The annual contractual NOI to be generated from
the New Properties, once placed in service, will be $45.7 million with
anticipated additional leasing. The cost of the New Properties to be placed in
service in the third quarter of 1997 is $47.1 million, in the fourth quarter of
1997 is $78.9 million, and in 1998 is $78.1 million.
The Company's expectations of total cost and weighted average unleveraged
stabilized return on cost constitute forward-looking information that is subject
to risks inherent in the completion of construction of the properties under
development and the leasing of any unleased portion of the properties. Such
risks could cause actual results to differ materially from the Company's
expectations.
CHICAGO, ILLINOIS. In May 1997, the Company entered the Chicago, Illinois
market. Through a joint venture with an institutional investor, the Company
purchased the six-story, 345,200 square foot Central Park of Lisle 96% occupied
office property in Lisle, Illinois, a western suburb of Chicago. The acquisition
also included a 17-acre site, located adjacent to the existing property, for
future office development. The Company is establishing a regional office in
Chicago. The Company believes that the Chicago market will offer additional
profitable development and acquisition opportunities in select sub-markets.
While the Company does not anticipate dominating the Chicago market because of
its magnitude, it believes that entry into the Chicago market is in accordance
with its strategy of entering attractive Midwestern markets.
S-6
<PAGE>
The following table sets forth information regarding each of the New
Properties as of July 31, 1997.
<TABLE>
<CAPTION>
IN-SERVICE OR
ANTICIPATED PROPERTY
IN-SERVICE DATE PROJECT/TENANT LOCATION TYPE
- ------------------------------ ------------------------------ ---------------- ----------
<S> <C> <C> <C>
DEVELOPMENT COMPLETED IN 1997:
1st Qtr. 1997 Park Fletcher Building 33 Indianapolis, IN Industrial
1st Qtr. 1997 Dukeport 2 St. Louis, MO Industrial
2nd Qtr. 1997 Silver Burdett Ginn Expansion Indianapolis, IN Industrial
2nd Qtr. 1997 Vanstar Indianapolis, IN Industrial
2nd Qtr. 1997 North Airport Park Bldg. 2 Indianapolis, IN Industrial
2nd Qtr. 1997 Pamida Lebanon, IN Industrial
2nd Qtr. 1997 Skyport Building 1 Cincinnati, OH Industrial
2nd Qtr. 1997 Parkwood Place Columbus, OH Office
2nd Qtr. 1997 Sofa Express - Florence Florence, KY Retail
2nd Qtr. 1997 Purity Wholesale Lebanon, IN Industrial
3rd Qtr. 1997 Freedom Square III Cleveland, OH Office
UNDER DEVELOPMENT:
3rd Qtr. 1997 Mr. Coffee Cleveland, OH Industrial
3rd Qtr. 1997 Southpointe C Columbus, OH Industrial
3rd Qtr. 1997 Three Parkwood Indianapolis, IN Office
3rd Qtr. 1997 Anthem Cincinnati, OH Office
3rd Qtr. 1997 Haywood Oaks Building 8 Nashville, TN Industrial
3rd Qtr. 1997 Fountain Place Cincinnati, OH Retail
4th Qtr. 1997 Beiersdorf Cincinnati, OH Industrial
4th Qtr. 1997 Park Fletcher Building 35 Indianapolis, IN Industrial
4th Qtr. 1997 Southpointe Building D Columbus, OH Industrial
4th Qtr. 1997 Southpointe Building E Columbus, OH Industrial
4th Qtr. 1997 Hamilton Crossing Building 2 Indianapolis, IN Office
4th Qtr. 1997 Park 100 Building 133 Indianapolis, IN Industrial
4th Qtr. 1997 Landerbrook Corporate Ctr. Cleveland, OH Office
4th Qtr. 1997 4660 Governor's Pointe Cincinnati, OH Office
4th Qtr. 1997 Mosteller II Cincinnati, OH Industrial
4th Qtr. 1997 Park Fletcher Building 34 Indianapolis, IN Industrial
4th Qtr. 1997 Compmanagement Columbus, OH Office
4th Qtr. 1997 Park 100 Building 132 Indianapolis, IN Office
4th Qtr. 1997 Lowes Cincinnati, OH Retail
4th Qtr. 1997 Dukeport 3 St. Louis, MO Industrial
4th Qrt. 1997 Biggs B-Shoppes Cincinnati, OH Retail
1st Qtr. 1998 Prentice Hall Lebanon, IN Industrial
1st Qtr. 1998 Software Artistry Indianapolis, IN Office
1st Qtr. 1998 Park 100 Building 135 Indianapolis, IN Office
2nd Qtr. 1998 Rings Road Office Building Columbus, OH Office
2nd Qtr. 1998 Sterling 4 Columbus, OH Office
2nd Qtr. 1998 MCI St. Louis, MO Office
3rd Qtr. 1998 Creekside Crossing One Nashville, TN Office
1997 ACQUISITIONS:
2nd Qtr. 1997 NGIC/Pointe 70 St. Louis, MO Office
2nd Qtr. 1997 Dyment/Johnson Controls Cleveland, OH Industrial
2nd Qtr. 1997 Central Park of Lisle Chicago, IL Office
2nd Qtr. 1997 8555 Keystone Crossing Indianapolis, IN Office
2nd Qtr. 1997 Sun TV Columbus, OH Industrial
3rd Qtr. 1997 7910 and 7920 Kentucky Drive Cincinnati, OH Industrial
<CAPTION>
IN-SERVICE OR PERCENT
ANTICIPATED PERCENTAGE SQUARE LEASED OR INITIAL LEASE
IN-SERVICE DATE OWNERSHIP FEET PRE-LEASED(1) TERM(2)
- ------------------------------ --------- --------- ------------- -------------
<S> <C> <C> <C> <C>
DEVELOPMENT COMPLETED IN 1997:
1st Qtr. 1997 50% 112,710 100% 5 years
1st Qtr. 1997 100% 244,800 65% 5 years
2nd Qtr. 1997 100% 183,950 100% 7 years
2nd Qtr. 1997 100% 415,680 100% 10 years
2nd Qtr. 1997 100% 377,280 100% 5 years
2nd Qtr. 1997 100% 200,000 100% 10 years
2nd Qtr. 1997 100% 316,800 9% Varies
2nd Qtr. 1997 100% 156,000 100% 15 years
2nd Qtr. 1997 100% 20,250 100% 10 years
2nd Qtr. 1997 100% 556,248 100% 10 years
3rd Qtr. 1997 100% 71,025 74% Varies
---------
2,654,743 85%
---------
UNDER DEVELOPMENT:
3rd Qtr. 1997 100% 458,000 100% 15 years
3rd Qtr. 1997 100% 322,000 0%(3) N/A
3rd Qtr. 1997 100% 121,246 73% Varies
3rd Qtr. 1997 100% 78,240 100% 10 years
3rd Qtr. 1997 100% 71,500 0% N/A
3rd Qtr. 1997 25% 207,170 95% 20 years
4th Qtr. 1997 100% 252,000 100% 10 years
4th Qtr. 1997 50% 96,000 0% N/A
4th Qtr. 1997 100% 116,520 35% 15 years
4th Qtr. 1997 100% 82,520 0% N/A
4th Qtr. 1997 100% 32,800 77% 10 years
4th Qtr. 1997 100% 20,530 100% 15 years
4th Qtr. 1997 100% 110,148 51% Varies
4th Qtr. 1997 100% 76,465 71% Varies
4th Qtr. 1997 100% 261,440 0% N/A
4th Qtr. 1997 50% 230,400 33% 5 years
4th Qtr. 1997 100% 67,841 59% 15 years
4th Qtr. 1997 100% 27,600 44% 10 years
4th Qtr. 1997 100% 128,747 100% 20 years
4th Qtr. 1997 100% 214,400 0% N/A
4th Qrt. 1997 100% 13,000 58% 5 years
1st Qtr. 1998 100% 577,340 100% 10 years
1st Qtr. 1998 100% 108,273 75% 15 years
1st Qtr. 1998 100% 77,125 67% 10 years
2nd Qtr. 1998 100% 145,000 0% N/A
2nd Qtr. 1998 100% 94,219 100% 15 years
2nd Qtr. 1998 100% 97,356 100% 10 years
3rd Qtr. 1998 100% 112,800 0% N/A
---------
4,200,680 58%
---------
1997 ACQUISITIONS:
2nd Qtr. 1997 100% 215,549 99% Varies
2nd Qtr. 1997 100% 331,550 100% 10 years
2nd Qtr. 1997 50% 345,200 96% Varies
2nd Qtr. 1997 100% 75,545 94% Varies
2nd Qtr. 1997 100% 789,175 81% 5 years
3rd Qtr. 1997 100% 132,274 100% Varies
---------
1,889,293 91%
---------
8,744,716 73%
---------
---------
</TABLE>
- ----------------------------------------
(1) Represents completed leasing activity through July 31, 1997.
(2) Represents lease term of the building's primary tenant or tenants.
(3) In August 1997, the Company signed a lease totaling 168,000 square feet with
a lease term of eight years bringing this property to 52% occupancy.
S-7
<PAGE>
PENDING ACQUISITIONS
The Company has entered into contracts or letters of intent to purchase
certain properties in St. Louis and in the Chicago suburbs (the "Pending
Acquisitions") for an aggregate purchase price of approximately $247.3 million.
The Company currently expects to complete the Pending Acquisitions by October 1,
1997. However, the purchase of each of the Pending Acquisitions is subject to
various closing conditions. Accordingly, no assurances can be made that the
Company will close any or all of the Pending Acquisitions.
In addition to the Pending Acquisitions, as part of its ongoing business,
the Company continually engages in discussions with other real estate owners
regarding possible portfolio or single asset acquisitions in its current and
other attractive Midwestern markets. No assurances can be made that the Company
will acquire any of the properties or portfolios currently being evaluated.
The following describes each of the Pending Acquisitions.
BAUR PROPERTIES. In August 1997, the Company entered into a letter of
intent to acquire Baur Properties' existing rental properties and operations in
St. Louis, Missouri. Baur Properties has been in operation in St. Louis for over
43 years and is one of the leading suburban office developers and operators in
the Midwest. The Baur rental property portfolio consists of eight suburban
office buildings totaling 904,000 square feet and three industrial buildings
totaling 78,000 square feet. Seven of the suburban office projects are located
in Maryville Centre, one of the premier suburban office parks in St. Louis. The
acquisition will also include undeveloped land to accommodate approximately one
million square feet of additional suburban office development and the property
management and development operations of Baur Properties. Accordingly, Edward T.
Baur, the Chairman of Baur Properties, will become Vice President and General
Manager of Duke's St. Louis operations. The purchase price of this acquisition
is expected to be paid through the assumption of $57.5 million in existing
mortgage debt with a weighted average interest rate of 8.13%, the payment of
approximately $25.0 million in cash and the remainder in Units. Along with its
existing operations in St. Louis, the Company believes this acquisition will
make it the dominant real estate developer in this market. The Company believes
this acquisition is in accordance with its strategy of dominating its Midwestern
markets.
The following table sets forth information regarding the Baur Properties as
of July 31, 1997.
<TABLE>
<CAPTION>
RENTABLE YEAR PERCENT
PROPERTY TYPE SQUARE FEET BUILT LEASED
- ------------------------------------------------------------ ------------------ ----------- --------- -----------
<S> <C> <C> <C> <C>
500 Maryville............................................... Suburban Office 165,544 1984 100.00%
530 Maryville............................................... Suburban Office 107,957 1990 100.00%
540 Maryville............................................... Suburban Office 107,973 1990 100.00%
550 Maryville............................................... Suburban Office 97,109 1988 95.68%
625 Maryville(1)............................................ Suburban Office 101,576 1994 100.00%
635-645 Maryville........................................... Suburban Office 148,307 1987 99.86%
655 Maryville............................................... Suburban Office 90,499 1994 100.00%
Twin Oaks................................................... Suburban Office 85,066 1980 100.00%
Southport I................................................. Service Center 20,810 1977 100.00%
Southport II................................................ Service Center 22,400 1978 100.00%
Southport Commerce Center................................... Service Center 34,873 1978 100.00%
-----------
TOTAL..................................................... 982,114 99.55%
-----------
-----------
</TABLE>
- ------------------------
(1) The Company currently intends to acquire a 49% interest in this property.
S-8
<PAGE>
EXECUTIVE TOWERS. In August 1997, the Company entered into a contract to
purchase Executive Towers West, a three-building, 650,000 square foot, suburban
office complex in Downers Grove, Illinois, a western suburb of Chicago. This
property is near the Company's previously announced Central Park of Lisle
acquisition. The purchase price of this acquisition will be paid entirely in
cash. The Company believes this acquisition is in accordance with its strategy,
as discussed above, of expanding into select sub-markets in Chicago.
The following table sets forth information regarding Executive Towers as of
July 31, 1997.
<TABLE>
<CAPTION>
RENTABLE YEAR PERCENT
PROPERTY TYPE SQUARE FEET BUILT LEASED
- ------------------------------------------------------------ ------------------ ----------- --------- -----------
<S> <C> <C> <C> <C>
Executive Towers I.......................................... Suburban Office 203,302 1983 94.00%
Executive Towers II......................................... Suburban Office 224,140 1984 96.98%
Executive Towers III........................................ Suburban Office 222,400 1987 100.00%
-----------
TOTAL..................................................... 649,842 97.08%
-----------
-----------
</TABLE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered.............. 7,000,000 shares (1)
Common Stock to be Outstanding
After the Offering.............. 70,319,232 shares (2)
Use of Proceeds................... To retire the outstanding balance on the Lines of Credit
(as defined herein) and to fund development and
acquisition of additional rental properties, including
the Pending Acquisitions.
New York Stock Exchange Symbol.... DRE
</TABLE>
- ------------------------
(1) Assumes the Underwriters' over-allotment option to purchase up to 1,050,000
shares of Common Stock is not exercised. See "Underwriting."
(2) Excludes 6,759,846 Units issued by the Operating Partnership which are
exchangeable by the holders for shares of Common Stock, 2,400 shares of
Common Stock issued subsequent to June 30, 1997 as directors' compensation,
2,161,036 shares of Common Stock issuable upon exercise of outstanding
employee stock options and 10,490 shares of Common Stock issued subsequent
to June 30, 1997 in connection with the Company's direct stock purchase
plan, all as adjusted for the Stock Split.
S-9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial and operating
information for the Company. The information was derived from the Company's
consolidated financial statements, which are incorporated by reference in the
accompanying Prospectus.
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the Company and the consolidated financial statements
incorporated by reference in the accompanying Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PROPERTIES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Revenues:
Rental Operations................................. $ 102,504 $ 74,261 $ 162,160 $ 113,641 $ 89,299
Service Operations................................ 9,068 9,483 19,929 17,777 18,473
--------- --------- --------- --------- ---------
TOTAL REVENUES........................................ $ 111,572 $ 83,744 $ 182,089 $ 131,418 $ 107,772
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NET INCOME AVAILABLE FOR COMMON SHARES................ $ 29,682 $ 21,947 $ 50,872 $ 35,019 $ 26,216
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SHARE DATA (1):
Net Income per Common Share....................... $ .48 $ .41 $ .91 $ .77 $ .76
Dividends Declared per Common Share............... .55 .50 1.01 .97 .93
Weighted Average Common Shares Outstanding........ 62,400 53,428 56,134 45,358 34,278
BALANCE SHEET DATA:
Total Assets...................................... $1,550,879 $1,177,792 $1,361,142 $1,045,588 $ 774,901
Total Debt........................................ $ 614,857 $ 431,856 $ 525,815 $ 454,820 $ 298,640
Total Shareholders' Equity........................ $ 835,221 $ 677,846 $ 754,932 $ 534,789 $ 445,384
Total Common Shares Outstanding (1)(2)............ 63,320 58,640 58,972 48,304 40,782
OTHER DATA:
Funds From Operations (3)......................... $ 48,123 $ 34,911 $ 76,079 $ 54,746 $ 38,198
Cash Flow Provided by (Used by):
Operating activities.......................... $ 71,462 $ 39,116 $ 95,135 $ 78,620 $ 51,873
Investing activities.......................... $(175,407) $ (93,598) $(276,748) $(289,569) $(116,238)
Financing activities.......................... $ 101,718 $ 49,041 $ 181,220 $ 176,243 $ 94,733
NUMBER OF IN-SERVICE PROPERTIES AT END OF PERIOD...... 262 219 249 202 128
IN-SERVICE SQUARE FEET AVAILABLE AT END OF PERIOD..... 31,406 23,219 27,402 20,073 12,896
</TABLE>
- ------------------------------
(1) All share data has been restated to reflect the effect of the Stock Split.
(2) Excludes Units held by persons other than the Company which are exchangeable
for Common Stock.
(3) Funds from Operations ("FFO") is defined by the National Association of Real
Estate Investment Trusts ("NAREIT") as net income or loss excluding gains or
losses from debt restructuring and sales of property plus depreciation and
amortization, and after adjustments for minority interest, unconsolidated
partnerships and joint ventures (adjustments for minority interests,
unconsolidated partnerships and joint ventures are calculated to reflect FFO
on the same basis). FFO 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 Company's
operating performance and is not indicative of cash available to fund all
cash flow needs.
S-10
<PAGE>
THE COMPANY
The Company is a self-administered and self-managed REIT that began
operations through a related entity in 1972. At June 30, 1997, the Company owned
a diversified portfolio of 262 in-service industrial, office and retail
Properties, encompassing approximately 31.4 million square feet located in seven
states, and 26 buildings and one building expansion encompassing approximately
4.1 million square feet under development. The Company also owned approximately
1,300 acres of unencumbered Land for future development, of which approximately
75% is zoned for industrial use and which is typically located adjacent to the
Properties. The Company provides leasing, management, construction, development
and other tenant-related services for the Properties and certain properties
owned by third parties. The Company has the largest commercial real estate
operations in Indianapolis and Cincinnati and is one of the largest real estate
companies in the Midwest. The Company believes that the Midwest offers a
relatively strong and stable economy compared to other regions of the United
States and provides significant growth potential due to its central location,
established manufacturing base, skilled work force and moderate labor costs.
The Company has developed over 50 million square feet of commercial property
since its founding including an average of approximately 4.1 million square feet
per year during the last five years. In addition, the Company acquired
approximately 8.9 million square feet during the three years ended December 31,
1996. Through the six months ended June 30, 1997, the Company placed in service
2.6 million square feet of new development and acquired 1.8 million square feet
of property.
The Company manages over 43 million square feet of property, including over
8.1 million square feet owned by third parties. The Company manages
approximately 35% and 29% of all competitive suburban office, warehousing and
light manufacturing space in Indianapolis and Cincinnati, respectively. In
addition to providing services to approximately 1,800 tenants in the Properties,
the Company provides such services to over 900 tenants in 92 properties owned by
third parties. Based on market data maintained by the Company, the Company
believes that it was responsible in the first six months of 1997 for
approximately 67% and 34% of the net absorption (gross space leased minus lease
terminations and expirations) of competitive suburban office, warehousing and
light manufacturing space in Indianapolis and Cincinnati, respectively. The
Company believes that its dominant position in its primary markets gives it a
competitive advantage in its real estate activities.
All of the Company's interests in the Properties and Land are held directly
or indirectly by, and substantially all of its operations relating to the
Properties are conducted through, the Operating Partnership. Units in the
Operating Partnership may be exchanged by the holders thereof, other than the
Company, for Common Stock of the Company on a one-for-one basis. Upon an
exchange of Units for Common Stock, the Company's percentage interest in the
Operating Partnership will increase. The Company controls the Operating
Partnership as the sole general partner and owner, as of June 30, 1997, of
approximately 90% of the Units.
BUSINESS STRATEGY
The Company's business objective is to increase its Funds From Operations by
(i) maintaining and increasing property occupancy and rental rates through the
aggressive management of its portfolio of existing properties; (ii) expanding
existing properties; (iii) developing and acquiring new properties; and (iv)
providing a full line of real estate services to the Company's tenants and to
third parties.
The Company believes that the analysis of real estate opportunities and
risks can be done most effectively at regional or local levels. As a result, the
Company intends to continue its emphasis on increasing its market share and
effective rents in its existing markets primarily within the Midwest. The
Company also expects to utilize its approximately 1,300 acres of unencumbered
Land and its many business relationships with more than 2,700 commercial tenants
to expand its build-to-suit business (development projects substantially
pre-leased to a single tenant) and to pursue other development and
S-11
<PAGE>
acquisition opportunities in its existing markets and elsewhere, primarily in
the Midwest. The Company believes that this regional focus will allow it to
assess market supply and demand for real estate more effectively as well as to
capitalize on its strong relationships with its tenant base.
The Company's policy is to seek to develop and acquire substantially
pre-leased Class A commercial properties located in markets with attractive
investment potential for Fortune 500 companies and other quality regional and
local firms. The Company's industrial and suburban office development focuses on
business parks and mixed use developments suitable for development of multiple
projects on a single site and where the Company can create and control the
business environment. These business parks and mixed use developments generally
include restaurants and other amenities which the Company believes create an
atmosphere that is particularly efficient and desirable. The Company's retail
development focuses on community, power and neighborhood centers in its existing
markets. As a fully integrated real estate company, the Company is able to
arrange for or provide to its industrial, office and retail tenants not only
well located and well maintained facilities, but also additional services such
as build-to-suit construction, tenant finish construction, expansion flexibility
and advertising and marketing services.
FINANCING STRATEGY
The Company seeks to maintain a well-balanced, conservative and flexible
capital structure by: (i) currently targeting a ratio of long-term debt to total
market capitalization in the range of 25% to 40%; (ii) extending and sequencing
the maturity dates of its debt; (iii) borrowing primarily at fixed rates; (iv)
generally pursuing current and future long-term debt financings and refinancings
on an unsecured basis; (v) maintaining conservative debt service and fixed
charge coverage ratios; and (vi) maintaining a conservative dividend payout
ratio. Management believes that these strategies have enabled and should
continue to enable the Company to access the debt and equity capital markets for
their long-term requirements such as debt refinancings and financing for
development and acquisitions of additional rental properties. The Company has
demonstrated its ability to access the equity and debt markets to finance the
activities of the Company through recent public offerings of Common Stock,
Preferred Stock and unsecured notes since October 1993 which generated aggregate
net proceeds of $1.24 billion.
MIDWESTERN FOCUS
The Company believes that the Midwest offers a relatively strong and stable
economy compared to other regions of the United States and provides attractive
new opportunities due to its central location, established manufacturing base,
skilled work force and moderate labor costs. In addition, the interstate highway
systems serving Indianapolis, Cincinnati and Columbus, markets in which
approximately 78% and 85% of the Properties, in terms of both dollar value of
Net Effective Rent and square footage, respectively, are located, help make
those cities prime industrial and office property locations.
Employment statistics are generally a useful measure of the viability of a
commercial real estate market because the demand for industrial and office space
in a geographic area is usually linked to the levels of business activity and
disposable income. According to the United States Department of Labor's Bureau
of Labor Statistics, the unemployment rate for June 1997 was 2.6%, 3.6% and 2.8%
in the Indianapolis, Cincinnati and Columbus metropolitan areas, respectively,
compared to 5.0% for the United States. Additionally, total non-farm employment
has increased 15.5%, 11.4% and 16.5% from December 1989 to December 1996 for the
Indianapolis, Cincinnati and Columbus metropolitan areas, respectively, as
compared to 11.0% for the United States.
Management believes that the Company's assets are located in strong real
estate markets with good investment potential. The Spring 1997 issue of
MarketScore, a National Real Estate Index and Ernst & Young Kenneth Leventhal
Real Estate Group publication ("MarketScore"), rated 64 metropolitan areas in
the United States in terms of their real estate investment potential for the
succeeding two years. The study
S-12
<PAGE>
segmented each metropolitan area by property type and considered real estate,
economic and demographic variables such as vacancy rates, construction, rental
trends, job growth, population and household growth, and household income.
Approximately 34.4 million square feet of the Company's in-service and
under-development Properties are in markets considered by MarketScore to have
good or excellent investment potential.
INDIANAPOLIS, INDIANA. With more than 1.5 million residents, Indianapolis
is Indiana's largest metropolitan area. With a central location at the
intersection of four interstate highways, Indianapolis continues to attract new
growth by offering a skilled work force and stable economic base. Indianapolis'
economic base includes distribution, government, manufacturing, retail trade,
service and tourism related industries. According to CB Commercial Real Estate
Group, Inc. ("CB Commercial"), the industrial vacancy rate was 9.5% as of
December 31, 1996. The Indianapolis suburban office market strengthened over the
24-month period ending March 31, 1997. According to CB Commercial, at March 31,
1997, Indianapolis had an 8.5% suburban office vacancy rate compared to a
national average of 10.6%.
CINCINNATI, OHIO. Cincinnati is the second largest metropolitan area in
Ohio with a population of 1.6 million. With an unemployment rate which is below
the national average, Cincinnati's economic base is healthy and diverse.
Balanced between major Fortune 500 employers and entrepreneurial enterprises,
Cincinnati's economic base includes banking, distribution, manufacturing, retail
trade and service related industries. Relatively low taxes, an expanding airport
(a major North American hub for Delta Airlines) and aggressive state and local
incentive packages designed to attract new business have contributed to major
corporate relocations in Cincinnati. Indicative of the economic strength in
Cincinnati, the industrial vacancy rate as reported by CB Commercial declined by
0.7% over the 24 months ended December 31, 1996 to 3.0%, less than half the
national average of 7.3%. As reported by CB Commercial, the Cincinnati suburban
office market vacancy rate declined by 6.1% over the twenty-four month period
ended March 31, 1997 to 8.4%, compared to the national average of 10.6%, and the
Cincinnati downtown office vacancy rate declined 1.2% over the same period to
13.7%.
COLUMBUS, OHIO. The Columbus metropolitan area has a population of
approximately 1.4 million and is the third largest metropolitan area in Ohio.
The city's central location, well-trained work force and high quality of life
have established Columbus as a major transportation and distribution center.
Columbus' economic base includes distribution, government, manufacturing, retail
trade and service-related industries. As reported by CB Commercial, as of
December 31, 1996, the industrial vacancy rate in Columbus was 6.1% compared to
the national average of 7.3%. As of March 31, 1997, the suburban office vacancy
rate in Columbus was 10.6%, equal to the national average.
CLEVELAND, OHIO. Cleveland is the largest metropolitan area in Ohio with a
population of 2.2 million. The city is a major center for industry, technology,
and service industries, including banking, health, research and development and
the legal and accounting professions. Twenty-eight Fortune 500 companies have
located their headquarters in Cleveland. As reported by CB Commercial, as of
December 31, 1996 the industrial vacancy rate in Cleveland was 7.3%, equal to
the national average and, as of March 31, 1997, the suburban office vacancy rate
was 8.4% compared to the national average of 10.6%.
ST. LOUIS, MISSOURI. St. Louis is Missouri's largest metropolitan area with
a population of 2.5 million. With its central location, St. Louis is within 500
miles of one-third of the U.S. population and businesses and it has the lowest
total mileage from the 24 largest metro areas in the mid-U.S. to the same 24
metro areas. Twenty-three Fortune 500 companies have located their headquarters
in St. Louis. As reported by CB Commercial, as of December 31, 1996 the
industrial vacancy rate in St. Louis was 2.5% compared to the national average
of 7.3% and, as of March 31, 1997, the suburban office vacancy rate was 6.2%
compared to the national average of 10.6%.
S-13
<PAGE>
The following table summarizes important economic and performance statistics
for the Company's principal markets and for the United States.
<TABLE>
<CAPTION>
MARCH 1997
JUNE 1997 DECEMBER 1996 SUBURBAN
UNEMPLOYMENT JOB GROWTH INDUSTRIAL PROPERTY OFFICE
RATE (1) SINCE 1989 (1) VACANCY RATE (2) VACANCY RATE (2)
------------------- ----------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
Cincinnati, Ohio............................. 3.6% 11.4% 3.0% 8.4%
Cleveland, Ohio.............................. 4.2% 5.7% 7.3% 8.4%
Columbus, Ohio............................... 2.8% 16.5% 6.1% 10.6%
Indianapolis, Indiana........................ 2.6% 15.5% 9.5% 8.5%
St. Louis, Missouri.......................... 4.0% 7.2% 2.5% 6.2%
United States................................ 5.0% 11.0% 7.3% 10.6%
</TABLE>
- --------------------------
(1) Source: United States Department of Labor's Bureau of Labor Statistics.
(2) Source: CB Commercial.
QUALITY TENANT BASE
The Company's Properties have a diverse and stable base of approximately
1,800 tenants. Many of the tenants are Fortune 500 companies and engage in a
wide variety of businesses, including manufacturing, retailing, wholesale trade,
distribution, and professional services. Approximately 50% of the square footage
of the Properties is occupied by tenants with a net worth based on book value of
$100 million or greater. Approximately 75% of the gross leasable area of the
Properties is occupied by tenants who have been in business for more than 10
years. The Company renewed 84% of the square feet of tenants up for renewal in
the first six months of 1997 on approximately 1.3 million square feet up for
renewal. No single tenant accounts for more than 2.5% of the Company's total
gross effective rent (computed using the average annual rental property revenue
over the terms of the respective leases including landlord operating expense
allowances but excluding additional rent due as operating expense
reimbursements).
The following table sets forth information regarding the 10 largest tenants
of the Properties based upon annualized gross effective rents as of June 30,
1997.
<TABLE>
<CAPTION>
ANNUALIZED PERCENTAGE OF
YEAR OF PERCENTAGE OF GROSS ANNUALIZED
LEASE SQUARE TOTAL SQUARE EFFECTIVE GROSS EFFECTIVE
TENANT PRIMARY LOCATION EXPIRATION(1) FOOTAGE FEET RENT(2) RENT
- ---------------------- ---------------- ------------ --------- --------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
LCI Communications,
Inc................. Columbus 2001 - 2012 370,320 1.23% $ 5,054,129 2.47%
Budget Rent-A-Car
Corporation......... Chicago 2006 160,488 0.53 3,780,095 1.85
Sterling Commerce..... Columbus 2000 - 2012 228,460 0.76 3,595,084 1.76
Nationwide Mutual Ins.
Co.................. Columbus 1997 - 2006 317,799 1.06 3,446,602 1.69
National General
Insurance........... St. Louis 2005 112,000 0.37 2,935,249 1.44
General Electric...... Cincinnati 1997 - 2001 223,872 0.74 2,859,326 1.40
Anheuser-Busch........ St. Louis 1997 - 2002 155,568 0.52 2,687,656 1.31
Lenscrafter........... Cincinnati 1998 - 2005 284,761 0.95 2,535,349 1.24
SDRC.................. Cincinnati 1997 - 2011 221,215 0.74 2,426,142 1.19
Associated Group...... Indianapolis 1997 - 1999 264,897 0.88 2,351,341 1.15
--------- --- -------------- -----
2,339,380 7.78% $ 31,670,973 15.50%
--------- --- -------------- -----
--------- --- -------------- -----
</TABLE>
- --------------------------
(1) Where multiple years are listed, the tenant represents more than one lease
with maturities during the indicated range of years.
(2) Represents annual gross effective rents due from tenants in service as of
June 30, 1997. Annual gross effective rents equals the average annual rental
property revenue over the terms of the respective leases including landlord
operating expense allowance and excluding additional rent due as operating
expense reimbursements.
S-14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are expected to be approximately $140.5 million (approximately $161.6
million if the Underwriters' over-allotment option is exercised in full),
assuming an offering price of $21 3/16 (the closing price of the Common Stock on
the New York Stock Exchange on August 27, 1997). The Company presently intends
to use the net proceeds as well as the net proceeds of its PATS offering of
approximately $100.0 million to retire the outstanding balance on its lines of
credit (the "Lines of Credit") and to fund development and acquisition of
additional rental properties, including the cash portion of the Pending
Acquisitions, expected to total in excess of $120 million. The remaining costs
to be funded on the 4.2 million square feet of property under development at
July 31, 1997 total $108.8 million with $73.7 million expected to be spent by
December 31, 1997. See "Prospectus Supplement Summary--Recent Developments." The
Lines of Credit are expected to have an outstanding balance of approximately
$65.0 million on September 15, 1997, bearing interest at LIBOR plus .75% to
..80%.
PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY
The Common Stock is listed on the New York Stock Exchange under the symbol
DRE. The following table sets forth the high and low sale prices of the Common
Stock for the periods indicated and the dividend paid per share during each such
period. All share price and dividend information has been adjusted to reflect
the effect of the Stock Split.
<TABLE>
<CAPTION>
CLOSING PRICES
PER SHARE
-------------------- DIVIDENDS
QUARTERLY PERIOD HIGH LOW PER SHARE
- ----------------------------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
1995
First Quarter.................................................................... $ 13.94 $ 12.57 $ 0.235
Second Quarter................................................................... 14.63 13.13 0.235
Third Quarter.................................................................... 15.82 13.82 0.245
Fourth Quarter................................................................... 15.88 13.82 0.245
1996
First Quarter.................................................................... 16.25 14.57 0.245
Second Quarter................................................................... 15.25 14.19 0.245
Third Quarter.................................................................... 16.63 14.50 0.255
Fourth Quarter................................................................... 19.25 16.38 0.255
1997
First Quarter.................................................................... 21.44 19.13 0.255
Second Quarter................................................................... 20.81 17.44 0.255
Third Quarter (through August 27, 1997).......................................... 22.75 19.88 0.295
</TABLE>
The last reported sale price of the Common Stock on the New York Stock
Exchange on August 27, 1997 was $21 3/16 per share. As of August 27, 1997, there
were 4,065 registered holders of Common Stock.
On July 24, 1997, the Company's Board of Directors raised its regular
quarterly common dividend from $.255 per share to $.295 per share, payable on
August 29, 1997 to common shareholders of record on August 15, 1997. The new
dividend is an increase of $.16 per year which is a 15.7% increase over the
previous amount. This dividend equals $1.18 on an annualized basis.
The Company has announced that its Board of Directors anticipates the
Company's regular quarterly dividend amount to be $.30 per common share on a
post Stock-Split basis. This would equate to a dividend increase of 1.7% and
follows the Company's 15.7% dividend increase announced July 24, 1997. The
official declaration for this new dividend is expected to be on October 23,
1997, the date of the Company's next regularly scheduled Board of Directors'
meeting.
S-15
<PAGE>
Since its organization in 1986, the Company has paid regular and
uninterrupted dividends. The Company intends to continue to declare quarterly
dividends on its Common Stock. However, no assurances can be given as to the
amounts of future dividends as such dividends are subject to the Company's cash
flow from operations, earnings, financial condition, capital requirements and
such other factors as the Board of Directors deems relevant. The Company has
determined that approximately 1% of the per share distribution for 1996
represented return of capital to the shareholders for income tax purposes. No
assurance can be given that such percentage will not change in future years.
DIVIDEND REINVESTMENT PLAN
The Company has an Automatic Dividend Reinvestment Plan (the "Plan") which
allows shareholders to acquire additional shares of Common Stock by
automatically reinvesting cash dividends. Common Stock is acquired pursuant to
the Plan at a price equal to the prevailing market price of such Common Stock
less a 4% discount, without payment of any brokerage commission or service
charge. The Plan also allows persons to purchase Common Stock at a price equal
to the prevailing market price of such Common Stock (without any discount but
without payment of any brokerage commission or service charge) in the same
manner as cash dividends are invested in amounts of not less than $100 ($25 for
automated funds transfers) and not more than $5,000 per month for participating
shareholders and in amounts of not less than $250 and more than $5,000 per month
for initial investments by persons who are not shareholders. Shareholders who do
not participate in the Plan continue to receive cash dividends, as declared.
S-16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company and its
subsidiaries as of June 30, 1997 and as adjusted to give effect to issuance of
the 7,000,000 shares of Common Stock offered hereby and the application of the
net proceeds thereof as described under "Use of Proceeds." The table should be
read in conjunction with the Company's consolidated financial statements
incorporated herein by reference.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------
HISTORICAL AS ADJUSTED
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Secured Debt (1).................................................................... $ 271,857 $ 261,857
Unsecured Debt (2).................................................................. 240,000 340,000
Unsecured Line of Credit (3)........................................................ 103,000 --
------------ ------------
Total Debt.......................................................................... $ 614,857 $ 601,857
------------ ------------
Minority Interest..................................................................... 18,867 18,867
------------ ------------
Shareholders' Equity:
Preferred Stock ($.01 par value), 5,000 shares authorized:
9.10% Series A Cumulative Redeemable Preferred Shares, liquidation preference $250
per share, 300 shares issued and outstanding.................................... 72,288 72,288
7.99% Series B Cumulative Step-Up Premium Rate-SM- Preferred Shares, liquidation
preference $500 per share, 300 shares issued and
outstanding..................................................................... -- 146,050
Common Stock and Paid-in Capital ($.01 par value), 150,000 shares authorized; 63,320
outstanding; 70,320 outstanding as adjusted (4)................................... 813,625 954,122
Distributions in excess of net income............................................... (50,692) (50,692)
------------ ------------
Total Shareholders' Equity.......................................................... $ 835,221 $ 1,121,768
------------ ------------
Total Capitalization.................................................................. $ 1,468,945 $ 1,742,492
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) The Company had the full amount outstanding on its $10 million secured line
of credit at June 30, 1997.
(2) In August 1997, the Company issued $100 million of unsecured Pass-Through
Asset Trust Securities ("PATS"). These PATS bear interest at a coupon rate
of 6.95% and mature on August 15, 2004. The effective rate of the PATS is
7.347%, which includes the effect of the settlement of a forward Treasury
lock agreement which the Company entered into in April 1997. The Company and
an affiliate of the placement agent for the PATS can effectively agree to
reset the interest rate and remarket the underlying notes with a maturity of
August 15, 2011.
(3) The Company paid down the $103 million outstanding on its unsecured line of
credit at June 30, 1997 with a portion of the proceeds of the $146.1 million
Series B Cumulative Step-Up Premium Rate Preferred Shares which were issued
in July 1997.
(4) Does not include 6,760 shares reserved for issuance upon exchange of issued
and outstanding Units. Shares issued and outstanding have been adjusted to
reflect the effect of the Stock Split.
S-17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial and operating information
for the Company on a historical basis. The information was derived from the
Company's financial statements, which are incorporated by reference in the
accompanying Prospectus.
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the Company and the financial statements incorporated by
reference in the accompanying Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
RENTAL OPERATIONS:
Revenues:
Rental Income..................................... $ 98,860 $ 71,714 $ 156,392 $ 112,931 $ 88,243
Equity in earnings of unconsolidated companies.... 3,644 2,547 5,768 710 1,056
---------- ---------- ---------- ---------- ----------
102,504 74,261 162,160 113,641 89,299
---------- ---------- ---------- ---------- ----------
Operating expenses:
Rental expenses................................... 18,022 13,814 29,669 20,922 17,074
Real estate taxes................................. 9,115 6,507 14,244 9,683 8,256
Interest expense.................................. 17,951 14,617 31,344 21,424 18,920
Depreciation and amortization..................... 20,241 16,157 32,571 24,337 18,036
---------- ---------- ---------- ---------- ----------
65,329 51,095 107,828 76,366 62,286
---------- ---------- ---------- ---------- ----------
Earnings from rental operations................... 37,175 23,166 54,332 37,275 27,013
---------- ---------- ---------- ---------- ----------
SERVICE OPERATIONS:
Revenues:
Property management, maintenance and leasing
fees............................................ 5,855 5,662 11,496 11,138 11,084
Construction management and development fees...... 2,711 3,153 6,895 5,582 6,107
Other income...................................... 502 668 1,538 1,057 1,282
---------- ---------- ---------- ---------- ----------
9,068 9,483 19,929 17,777 18,473
---------- ---------- ---------- ---------- ----------
Operating expenses:
Payroll........................................... 4,885 4,617 9,176 7,606 8,141
Maintenance....................................... 916 717 1,526 1,344 1,069
Office and other.................................. 1,093 1,339 2,791 2,258 2,188
---------- ---------- ---------- ---------- ----------
6,894 6,673 13,493 11,208 11,398
---------- ---------- ---------- ---------- ----------
Earnings from service operations.................. 2,174 2,810 6,436 6,569 7,075
---------- ---------- ---------- ---------- ----------
General and administrative expense................ (2,890) (2,263) (4,719) (3,536) (3,261)
---------- ---------- ---------- ---------- ----------
Operating income.................................. 36,459 23,713 56,049 40,308 30,827
OTHER INCOME (EXPENSE):
Interest income..................................... 427 613 1,194 1,900 1,115
Earnings from property sales........................ 382 1,604 4,532 283 2,198
Other expense....................................... (419) (67) (174) (31) (84)
Other minority interest in earnings of
subsidiaries...................................... (425) (430) (986) (911) (1,088)
Minority interest in earnings of unitholders........ (3,330) (3,486) (7,184) (6,530) (6,752)
---------- ---------- ---------- ---------- ----------
Net income............................................ 33,094 21,947 53,431 35,019 26,216
Dividends on preferred shares......................... (3,412) -- (2,559) -- --
---------- ---------- ---------- ---------- ----------
Net income available for common shares................ $ 29,682 $ 21,947 $ 50,872 $ 35,019 $ 26,216
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
S-18
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
---------------------------- -----------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate investments................. $ 1,459,765 $ 1,110,108 $ 1,290,676 $ 963,499 $ 723,713
Accumulated depreciation................ (96,491) (69,250) (82,207) (56,335) (38,058)
------------- ------------- ------------- ------------- -----------
Net real estate investments........... 1,363,274 1,040,858 1,208,469 907,164 685,655
Cash.................................... 3,107 286 5,334 5,727 40,433
Investments in unconsolidated
companies............................. 112,837 73,164 79,362 67,771 8,418
Other assets............................ 71,661 63,484 67,977 64,926 40,395
------------- ------------- ------------- ------------- -----------
Total assets.......................... 1,550,879 1,177,792 1,361,142 $ 1,045,588 $ 774,901
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
Secured debt............................ 271,857 281,856 $ 261,815 $ 259,820 $ 298,640
Unsecured debt.......................... 240,000 150,000 240,000 150,000 --
Unsecured line of credit................ 103,000 -- 24,000 45,000 --
------------- ------------- ------------- ------------- -----------
Total debt............................ 614,857 431,856 525,815 454,820 298,640
Other liabilities....................... 81,934 55,310 67,312 51,243 29,543
------------- ------------- ------------- ------------- -----------
Total liabilities..................... 696,791 487,166 593,127 506,063 328,183
------------- ------------- ------------- ------------- -----------
Minority interest....................... 18,867 12,780 13,083 4,736 1,334
------------- ------------- ------------- ------------- -----------
Shareholders' equity.................... 835,221 677,846 754,932 534,789 445,384
------------- ------------- ------------- ------------- -----------
Total liabilities and shareholders'
equity.............................. $ 1,550,879 $ 1,177,792 $ 1,361,142 $ 1,045,588 $ 774,901
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PROPERTIES DATA)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations
Available to Common Shareholders (1)............ $ 48,123 $ 34,911 $ 76,079 $ 54,746 $ 38,198
Cash flow provided by (used in):
Operating activities.......................... 71,462 39,116 95,135 78,620 51,873
Investing activities.......................... (175,407) (93,598) (276,748) (289,569) (116,238)
Financing activities.......................... 101,718 49,041 181,220 176,243 94,733
Weighted average common shares outstanding
(2)........................................... 62,400 53,428 56,134 45,358 34,278
Number of in-service Properties at end of
period........................................ 262 219 249 202 128
In-service square feet available at end of
period........................................ 31,406 23,219 27,402 20,073 12,896
</TABLE>
- ------------------------
(1) FFO is defined by NAREIT as net income or loss excluding gains or losses
from debt restructuring and sales of property plus depreciation and
amortization, and after adjustments for minority interest, unconsolidated
partnerships and joint ventures (adjustments for minority interests,
unconsolidated partnerships and joint ventures are calculated to reflect FFO
on the same basis). FFO 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 Company's
operating performance and is not indicative of cash available to fund all
cash flow needs.
(2) Adjusted to reflect the effect of the Stock Split.
S-19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company'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 Company's rental space in its primary markets.
In addition, the Company'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 Company'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 Company's
occupancy rate of its in-service portfolio has exceeded 92% the last two years
and was at 95.7% at June 30, 1997. The Company expects to continue to maintain
its overall occupancy levels at comparable levels and also expects to be able to
increase rental rates as leases are renewed or new leases are executed. This
stable occupancy as well as increasing rental rates should improve the Company's
results of operations from its in-service properties. The Company's strategy for
continued growth also includes developing and acquiring additional rental
properties in its primary markets and expanding into other attractive Midwestern
markets.
The following table sets forth information regarding the Company's
in-service portfolio of rental properties as of June 30, 1997 and 1996 (in
thousands, except percentages):
<TABLE>
<CAPTION>
TOTAL PERCENT OF PERCENT OCCUPIED
SQUARE FEET TOTAL SQUARE FEET
-------------------- -------------------- --------------------
TYPE 1997 1996 1997 1996 1997 1996
- --------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL
Service Centers............................ 3,051 2,971 9.7% 12.8% 94.9% 93.6%
Bulk....................................... 18,702 12,926 59.5 55.7 95.6% 90.5%
OFFICE
Suburban................................... 6,875 4,684 21.9 20.2 96.9% 97.1%
CBD........................................ 699 699 2.2 3.0 91.1% 81.3%
Medical.................................... 369 333 1.2 1.4 95.8% 90.3%
RETAIL....................................... 1,710 1,606 5.5 6.9 95.2% 93.0%
--------- --------- --------- ---------
Total...................................... 31,406 23,219 100.0% 100.0% 95.7% 92.1%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Management expects occupancy of the in-service property portfolio to remain
stable because (i) only 5.5% and 10.8% of the Company's occupied square footage
is subject to leases expiring in the remainder of 1997 and in 1998,
respectively, and (ii) the Company's renewal percentage averaged 80%, 65% and
73% in 1996, 1995 and 1994, respectively. For the first six months of 1997, the
renewal percentage was 84%.
S-20
<PAGE>
The following table reflects the Company's in-service portfolio lease
expiration schedule as of June 30, 1997 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
---------------------- ------------------------ ------------------------ ----------------------
YEAR OF SQUARE CONTRACTUAL CONTRACTUAL CONTRACTUAL SQUARE CONTRACTUAL
EXPIRATION FEET RENT SQUARE FEET RENT SQUARE FEET RENT FEET RENT
- ----------------------- --------- ----------- ----------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997................... 1,334 $ 5,285 299 $ 3,111 25 $ 277 1,658 $ 8,673
1998................... 2,357 9,029 769 8,348 111 1,182 3,237 18,559
1999................... 2,217 9,568 1,036 11,164 117 1,191 3,370 21,923
2000................... 2,112 8,862 788 9,513 107 1,290 3,007 19,665
2001................... 2,644 10,248 874 9,688 88 1,061 3,606 20,997
2002................... 2,604 9,161 1,002 10,787 157 1,669 3,763 21,617
2003................... 301 1,816 249 2,849 40 342 590 5,007
2004................... 934 3,810 213 2,609 13 125 1,160 6,544
2005................... 1,440 4,586 698 9,736 177 1,507 2,315 15,829
2006................... 2,284 7,141 509 8,078 5 67 2,798 15,286
2007 and Thereafter.... 2,555 7,878 1,213 15,856 787 6,760 4,555 30,494
--------- ----------- ----- ----------- ----- ----------- --------- -----------
Total Leased........... 20,782 $ 77,384 7,650 $ 91,739 1,627 $ 15,471 30,059 $ 184,594
--------- ----------- ----- ----------- ----- ----------- --------- -----------
--------- ----------- ----- ----------- ----- ----------- --------- -----------
Total Portfolio
Square Feet............ 21,753 7,943 1,710 31,406
--------- ----- ----- ---------
--------- ----- ----- ---------
Annualized net
effective rent per
square foot.......... $ 3.72 $ 11.99 $ 9.51 $ 6.14
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
This stable occupancy, along with stable rental rates in each of the
Company's markets, will allow the in-service portfolio to continue to provide a
comparable or increasing level of earnings from rental operations. The Company
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 Midwestern markets; and (iii)
the completion of the 4.1 million square feet of properties under development at
June 30, 1997 over the next five quarters. The 4.1 million square feet of
properties under development should provide future earnings from rental
operations growth for the Company as they are placed in service as follows (in
thousands, except percent leased and stabilized returns):
<TABLE>
<CAPTION>
ANTICIPATED
PERCENT PROJECT STABILIZED
ANTICIPATED IN-SERVICE DATE SQUARE FEET LEASED COSTS RETURN
- ----------------------------------------------------------------------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
3rd Quarter 1997....................................................... 1,329 65% $ 54,840 11.3%
4th Quarter 1997....................................................... 1,717 37% 77,353 11.5%
1st Quarter 1998....................................................... 699 95% 25,086 11.3%
Thereafter............................................................. 352 27% 38,151 11.9%
----- ----------
4,097 55% $ 195,430 11.5%
----- ----------
----- ----------
</TABLE>
S-21
<PAGE>
RESULTS OF OPERATIONS
Following is a summary of the Company's operating results and property
statistics for the six months ended June 30, 1997 and 1996 (in thousands, except
number of properties and per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Rental Operations revenue................................................................ $ 102,504 $ 74,261
Service Operations revenue............................................................... 9,068 9,483
Earnings from Rental Operations.......................................................... 37,175 23,166
Earnings from Service Operations......................................................... 2,174 2,810
Operating income......................................................................... 36,459 23,713
Net income available for common shares................................................... $ 29,682 $ 21,947
Weighted average common shares outstanding (1)........................................... 62,400 53,428
Net income per common share (1).......................................................... $ .48 $ .41
Number of in-service properties at end of period......................................... 262 219
In-service square footage at end of period............................................... 31,406 23,219
Under development square footage at end of period........................................ 4,097 3,400
</TABLE>
- ------------------------
(1) All share and per share data has been restated to reflect the effect of the
Stock Split.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO SIX MONTHS ENDED JUNE 30, 1996
RENTAL OPERATIONS. The Company increased its in-service portfolio of rental
properties from 219 properties comprising 23.2 million square feet at June 30,
1996 to 262 properties comprising 31.4 million square feet at June 30, 1997
through the acquisition of 28 properties totaling 3.6 million square feet and
the completion of 19 properties and four building expansions totaling 5.1
million square feet developed by the Company. The Company also disposed of four
properties totaling 495,000 square feet. These 43 net additional rental
properties primarily account for the $28.2 million increase in revenues from
Rental Operations from 1996 to 1997. The Company also received a $1.2 million
net lease termination payment made by a tenant in one of the Company's office
properties which is included in rental income for the six months ended June 30,
1997. The increase from 1996 to 1997 in rental expenses, real estate taxes and
depreciation and amortization expense is also a result of the additional 43
in-service rental properties.
Interest expense increased by approximately $3.3 million from $14.6 million
for the six months ended June 30, 1996 to $17.9 million for the six months ended
June 30, 1997 due to additional unsecured debt issued in its medium-term note
program in the last two quarters of 1996 to fund the development and acquisition
of additional rental properties.
As a result of the above-mentioned items, earnings from rental operations
increased $14.0 million from $23.2 million for the six months ended June 30,
1996 to $37.2 million for the six months ended June 30, 1997.
SERVICE OPERATIONS. Service Operation revenues decreased to $9.1 million
for the six months ended June 30, 1997 as compared to $9.5 million for the six
months ended June 30, 1996. This decrease was primarily the result of a decrease
in construction management fees caused by certain higher profit third-party
construction projects that were in process during the six months ended June 30,
1996 which resulted in higher revenue margins. Service Operation operating
expenses increased from $6.7 million to $6.9 million for the six months ended
June 30, 1997 as compared to the six months ended June 30, 1996 primarily as a
result of an increase in operating expenses resulting from the overall growth of
the Company.
S-22
<PAGE>
As a result of the above-mentioned items, earnings from Service Operations
decreased from $2.8 million for the six months ended June 30, 1996 to $2.2
million for the six months ended June 30, 1997.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased from $2.3 million for the six months ended June 30, 1996 to $2.9
million for the six months ended June 30, 1997 primarily as a result of
increased state and local taxes due to the growth in revenues and net income of
the Company.
OTHER INCOME (EXPENSE). Interest income decreased from $613,000 for the six
months ended June 30, 1996 to $427,000 for the six months ended June 30, 1997
primarily as a result of interest income which was earned on certain escrows
during the six months ended June 30, 1996 which were refunded later in 1996.
Other expense consists of the write-off of costs incurred during the pursuit of
various build-to-suit development projects or the acquisition of real estate
assets. During the six months ended June 30, 1997, approximately $312,000 of
costs were written-off in connection with the decision to terminate the pursuit
of the acquisition of a large real estate portfolio.
NET INCOME AVAILABLE FOR COMMON SHARES. Net income available for common
shares for the six months ended June 30, 1997 was $29.7 million compared to net
income available for common shares of $21.9 million for the six months ended
June 30, 1996. 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 $71.5 million and $39.1
million for the six months ended June 30, 1997 and 1996, respectively,
represents the primary source of liquidity to fund distributions to
shareholders, unitholders and the other minority interests and to fund recurring
costs associated with the renovation and re-letting of the Company's properties.
This increase is primarily a result of, as discussed above under "Results of
Operations," the increase in net income resulting from the expansion of the
in-service portfolio through development and acquisitions of additional rental
properties.
Net cash used by investing activities totaling $175.4 million and $93.6
million for the six months ended June 30, 1997 and 1996, respectively,
represents the investment of funds by the Company to expand its portfolio of
rental properties through the development and acquisition of additional rental
properties net of proceeds received from property sales. In 1997, $153.3 million
was invested in the development and acquisition of additional rental properties
and the acquisition of land held for development. In 1996, the investment in the
development and acquisition of additional rental properties and land held for
development was $132.7 million. During the six months ended June 30, 1997, the
Company invested over $30 million in a newly formed joint venture with an
institutional investor which allowed the joint venture to purchase a 345,000
square foot office property in Chicago, Illinois which was over 95% occupied.
Net cash provided by financing activities totaling $101.2 million and $49.0
million for the six months ended June 30, 1997 and 1996, respectively,
represents the source of funds from equity and debt offerings and borrowings on
the lines of credit to fund the Company's investing activities. Also included in
financing activities are the distribution of funds to shareholders and minority
interests. In 1996, the Company received $126.1 million of net proceeds from a
common equity offering which was used to pay down amounts outstanding on the
unsecured line of credit and to fund current development and acquisition
activity. In January 1997, the Company received $56.7 million of net proceeds
from a common equity offering which was used to pay down amounts outstanding on
the unsecured line of credit and to fund current development activity. During
the six months ended June 30, 1997, the Company also received $7.0 million of
net proceeds from the issuance of common stock under its Direct Stock Purchase
and Dividend Reinvestment Plan and the exercise of employee stock options.
The Company has a $200 million unsecured line of credit which matures in
April 2001. In January 1996, the borrowing rate was LIBOR plus 1.625%. In
September 1996, the borrowing rate was reduced to LIBOR plus 1.25%. On March 27,
1997, the borrowing rate was further reduced to LIBOR plus 1.00%.
S-23
<PAGE>
On August 28, 1997, the borrowing rate will be reduced to LIBOR plus .80%. The
line of credit will also include a "competitive bid option" and matures in April
2001. The Company also has a demand $10 million secured revolving credit
facility which is available to provide working capital. This facility bears
interest payable at the 30-day LIBOR rate plus .75%.
The Company currently has on file Form S-3 Registration Statements with the
Securities and Exchange Commission ("Shelf Registrations") which, after
completion of this Offering, will have remaining availability of approximately
$612 million to issue common stock, preferred stock or unsecured debt
securities. The Company intends 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 Company intends to maintain a conservative capital structure. The
Company's debt to total market capitalization ratio at June 30, 1997 was 29.1%.
Following the Offering, the Company's debt to total market capitalization ratio
will be 24.4% based on a market price of the Company's Common Stock of $21 3/16
per share.
The total debt outstanding at June 30, 1997 consists of notes totaling
$614.9 million with a weighted average interest rate of 7.44% maturing at
various dates through 2017. The Company has $343.0 million of unsecured debt and
$271.9 million of secured debt outstanding at June 30, 1997. Scheduled principal
amortization of such debt totaled $1.5 million for the six months ended June 30,
1997.
Following is a summary of the scheduled future amortization and maturities
of the Company's indebtedness at June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SCHEDULED INTEREST RATE OF
YEAR AMORTIZATION MATURITIES TOTAL FUTURE REPAYMENTS
- ------------------------------------------------------- ------------ ----------- ----------- -------------------
<S> <C> <C> <C> <C>
1997................................................... $ 2,033 $ 10,000 $ 12,033 6.61%
1998................................................... 4,574 149,590 154,164 6.84%
1999................................................... 5,323 28,470 33,793 6.17%
2000................................................... 3,418 44,853 48,271 7.39%
2001................................................... 3,137 59,954 63,091 8.71%
2002................................................... 3,412 50,000 53,412 7.37%
2003................................................... 1,144 68,216 69,360 8.48%
2004................................................... 1,239 50,000 51,239 7.15%
2005................................................... 1,346 100,000 101,346 7.48%
2006................................................... 1,465 - 1,465 7.58%
Thereafter............................................. 17,391 9,292 26,683 7.71%
------------ ----------- -----------
Total $ 44,482 $ 570,375 $ 614,857 7.44%
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
The 1997 maturities consist of the outstanding balance on the Company's $10
million demand secured line of credit. The 1998 maturities consist mainly of the
outstanding balance on the Company's $150 million unsecured line of credit. This
outstanding balance was repaid with a portion of the proceeds of the $146.1
million Series B Cumulative Step-Up Premium Rate Preferred Shares which were
issued in July 1997.
The Company intends to pay regular quarterly dividends from net cash
provided by operating activities. A quarterly dividend of $.59 per Common Share
was declared on July 24, 1997 payable on August 29, 1997 to shareholders of
record on August 15, 1997, which represents an annualized dividend of $2.36 per
share. A quarterly dividend of $.56875 per depositary share of Series A
Preferred Shares was declared on July 24, 1997 which is payable on August 29,
1997 to preferred shareholders of record on July 24, 1997. On July 24, 1997, the
Board of Directors declared a dividend of $.88778 per depositary share
S-24
<PAGE>
on the Series B Cumulative Step-up Redeemable Preferred Shares. The dividend is
payable on September 30, 1997 to preferred shareholders of record on September
16, 1997 and is applicable to the period beginning July 11, 1997 and ending
September 30, 1997.
FUNDS FROM OPERATIONS
Management believes that FFO, which is defined by NAREIT as net income or
loss excluding gains or losses from debt restructuring and sales of property
plus depreciation and amortization, and after adjustments for minority interest,
unconsolidated partnerships and joint ventures (adjustments for minority
interest, unconsolidated partnerships and joint ventures are calculated to
reflect FFO on the same basis), is the industry standard for reporting the
operations of real estate investment trusts.
The following table reflects the calculation of the Company's FFO for the
six months ended June 30 as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net income available for common shares.................................................... $ 29,682 $ 21,947
Add back:
Depreciation and amortization........................................................... 19,551 15,554
Share of joint venture depreciation and amortization.................................... 1,314 883
Earnings from property sales............................................................ (382) (1,604)
Minority interest share of add-backs.................................................... (2,042) (1,869)
---------- ----------
Funds From Operations..................................................................... $ 48,123 $ 34,911
---------- ----------
---------- ----------
Cash flow provided by (used by):
Operating activities.................................................................... $ 71,462 $ 39,116
Investing activities.................................................................... (175,407) (93,598)
Financing activities.................................................................... 101,718 49,041
</TABLE>
The increase in FFO for the six months ended June 30, 1997 compared to the
six months ended June 30, 1996 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 Company'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 Company's operating performance, and is not indicative of cash
available to fund all cash flow needs.
S-25
<PAGE>
PROPERTIES
GENERAL
The Company owns a diversified portfolio of properties which includes (i)
the in-service Properties, consisting of 262 industrial, office and retail
properties located in Indiana, Ohio, Illinois, Tennessee, Kentucky, Wisconsin
and Missouri; (ii) 26 buildings and one building expansion currently under
development; and (iii) the Land, consisting of approximately 1,300 acres of
unencumbered land for future development in Indiana, Ohio, Missouri, Illinois,
Kentucky, and Tennessee. The Company owns the entire equity interest in 219 of
the Properties, including property under development, and a partial interest in
the remainder of the Properties. The Properties are comprised of a broad range
of product types which include bulk and medium bulk warehouse and distribution
facilities, light manufacturing facilities, multi-tenant flex space buildings,
suburban office buildings, downtown office buildings, and neighborhood, power
and community shopping centers. The Company believes that its Properties are of
the highest quality available to tenants in its markets. The total square
footage of the in-service Properties is approximately 31.4 million, consisting
of approximately 21.8 million square feet of industrial space, approximately 7.9
million square feet of office space and approximately 1.7 million square feet of
retail space. The total square footage of the 26 buildings and one building
expansion currently under development is approximately 4.1 million square feet,
consisting of approximately 2.7 million square feet of industrial space,
approximately 1.0 million square feet of office space and approximately 350,000
square feet of retail space. The current development projects are 55% leased as
of June 30, 1997. The total annual Net Effective Rental income of the Properties
based upon tenants in occupancy as of June 30, 1997 is approximately $184.6
million, with $77.4 million relating to the industrial Properties, $91.7 million
relating to the office Properties and $15.5 million relating to the retail
Properties. At June 30, 1997, the Properties were approximately 95.7% leased.
The following table provides an overview of the Properties.
SUMMARY OF PROPERTIES
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
PERCENT OF
PERCENT OF ANNUAL NET TOTAL NET
SQUARE TOTAL SQUARE EFFECTIVE EFFECTIVE OCCUPANCY AT
TYPE OF PROPERTY FEET FEET RENT(1) ANNUAL RENT JUNE 30, 1997
- ------------------------------------------------ --------- --------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Industrial...................................... 21,753 69% $ 77,384 42% 95.5%
Office.......................................... 7,943 25 91,739 50 96.3%
Retail.......................................... 1,710 6 15,471 8 95.2%
--------- --- ------------ ---
Total........................................... 31,406 100% $ 184,594 100% 95.7%
--------- --- ------------ ---
--------- --- ------------ ---
</TABLE>
- ------------------------
(1) Represents annual Net Effective Rent due from tenants in occupancy as of
June 30, 1997. Net Effective Rent equals the average annual rental property
revenue over the terms of the respective leases, excluding additional rent
due as operating expense reimbursements, landlord allowances for operating
expenses and percentage rents.
S-26
<PAGE>
The following table sets forth the aggregate average percent leased for all
of the Properties during the indicated periods.
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY
(ALL PROPERTIES)
SQUARE FEET AVERAGE
YEAR AVAILABLE OCCUPANCY
- ---------------------------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
June 30, 1997........................................................................... 31,406,042 95.4%
1996.................................................................................... 27,402,150 95.2%
1995.................................................................................... 20,072,666 95.1%
1994.................................................................................... 12,894,603 93.8%
</TABLE>
The following table shows lease expirations for leases in place as of June
30, 1997 for each of the ten years beginning with 1997 for the Properties,
assuming none of the tenants exercises early termination or renewal options.
LEASE EXPIRATIONS
(ALL PROPERTIES)
<TABLE>
<CAPTION>
ANNUAL NET PERCENT OF PERCENT OF
EFFECTIVE ANNUAL NET TOTAL
RENT PER EFFECTIVE LEASED
NET RENTABLE ANNUAL NET SQ. FT. RENT SQ. FT.
NUMBER OF AREA (IN SQ. EFFECTIVE RENT UNDER REPRESENTED REPRESENTED
LEASES FT.) SUBJECT TO UNDER EXPIRING EXPIRING BY EXPIRING BY EXPIRING
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES (1) LEASES (1) LEASES LEASES
- -------------------------------- ----------- --------------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS) (IN THOUSANDS)
1997............................ 199 1,658 $ 8,673 $ 5.23 4.70% 5.52%
1998............................ 330 3,237 18,559 $ 5.73 10.05 10.77
1999............................ 336 3,370 21,923 $ 6.51 11.88 11.21
2000............................ 290 3,007 19,665 $ 6.54 10.65 10.00
2001............................ 294 3,606 20,997 $ 5.82 11.37 12.00
2002............................ 196 3,763 21,617 $ 5.74 11.71 12.52
2003............................ 35 590 5,007 $ 8.49 2.71 1.96
2004............................ 28 1,160 6,544 $ 5.64 3.55 3.86
2005............................ 47 2,315 15,829 $ 6.84 8.58 7.70
2006............................ 42 2,798 15,286 $ 5.46 8.28 9.31
2007 and
thereafter...................... 59 4,555 30,494 $ 6.69 16.52 15.15
----- ------ -------------- ----------- -----------
Total........................... 1,856 30,059 $ 184,594 $ 6.14 100.00% 100.00%
----- ------ -------------- ----------- -----------
----- ------ -------------- ----------- -----------
</TABLE>
- ------------------------
(1) Represents annual Net Effective Rent due from tenants in occupancy as of
June 30, 1997.
INDUSTRIAL PROPERTIES
The 157 industrial Properties are primarily located in industrial or
business parks that have been developed by the Company and consist of 109 bulk
distribution facilities and 48 service center facilities. Approximately 86% of
the square footage of the industrial Properties is contained in bulk
distribution facilities. The bulk distribution facilities accommodate the needs
of large warehouse and distribution users with ceiling clear heights of 20 feet
or more while providing leased space to many large tenants including users of
more than 500,000 square feet. The service center facilities are also known as
flex buildings or light industrial properties which generally have 12 to 18 foot
ceiling heights and a combination of drive-up and dock loading access. These
service center facilities accommodate users of 1,200 square feet and up. The
S-27
<PAGE>
diversity of the industrial buildings allows the Company to cater to many
segments of the industrial market and renders the Company less dependent upon
any specific market segment. Over 89% of the industrial Properties are in the
Company's markets of Indianapolis, Cincinnati and Columbus.
OFFICE PROPERTIES
The Company owns a portfolio of 81 office Properties, including 72 suburban
office buildings which range from single-story to mid-rise and are located in
developed business parks and mixed use developments with excellent interstate
access and visibility. Six of the suburban office buildings are medical
buildings, including a single tenant facility with a 20 year lease and two
multi-tenant properties attached to a hospital. In addition, the Company owns
three downtown office buildings consisting of two new high-rise buildings and
one rehabilitated building. The Company believes that these primarily Class A
office Properties are among the highest quality available to tenants in its
markets. This diverse mix of office buildings is occupied by tenants spanning
all segments of the office market.
RETAIL PROPERTIES
The retail Properties, which cater to a variety of retail markets, include
one regional shopping center, 12 neighborhood shopping centers, three shopping
centers designed primarily to serve the business parks in which they are located
and eight free-standing single-tenant buildings. The regional and neighborhood
shopping centers either have well known anchor tenants such as Wal-Mart and Pet
Food Supermarket, or are located adjacent to major retailers such as Kroger or
in areas where other large commercial facilities draw consumers. The retail
Properties are generally located in upscale suburban and high growth areas.
LAND
Substantially all of the approximately 1,300 acres of unencumbered Land is
located adjacent to the Properties in industrial or business parks that have
been developed by the Company. Approximately 75% of the Land is zoned for
industrial use, with the remainder zoned for either office or retail use. All of
the Land is unencumbered, has available to it appropriate utilities and is ready
for immediate development. The Company believes that approximately 17 million
square feet of commercial development can be constructed on the Land. The
Company believes that the Land gives it a competitive advantage over other real
estate companies operating in its markets.
S-28
<PAGE>
MANAGEMENT
The directors and senior officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATIONS AND POSITIONS
- --------------------------- --- -------------------------------------------------------------------------------
<S> <C> <C>
John W. Wynne 64 Director and Chairman of the Board.
Thomas L. Hefner 50 Director and President and Chief Executive Officer.
Darell E. Zink, Jr. 50 Director and Executive Vice President and Chief Financial Officer.
Geoffrey Button 48 Director; Independent real estate and financing consultant.
Ngaire E. Cuneo 46 Director; Executive Vice President, Corporate Development, Conseco, Inc.
Howard L. Feinsand 49 Director; Principal, Choir Capital Ltd.
L. Ben Lytle 50 Director; President and Chief Executive Officer of Anthem, Inc.
John D. Peterson 64 Director; Chairman of City Securities Corporation.
James E. Rogers 49 Director; Vice Chairman, President and Chief Operating Officer of CINergy.
Daniel C. Staton 44 Director; Principal, Walnut Capital Partners.
Jay J. Strauss 61 Director; Chairman and Chief Executive Officer of Regent Realty Group, Inc.
Gary A. Burk 45 President of Construction Services and Executive Vice President of Duke
Services, Inc.
Richard W. Horn 39 Executive Vice President, Office.
William E. Linville, III 42 Executive Vice President, Industrial.
David R. Mennel 43 General Manager of Services Operations and President of Duke Services, Inc.
Dennis D. Oklak 43 Vice President and Treasurer.
John R. Gaskin 36 Vice President, General Counsel and Secretary.
John M. Nemecek 42 President of Asset/Property Management.
</TABLE>
S-29
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
For a discussion of material federal income tax consequences applicable to
distributions to shareholders and the Company's election to be taxed as a REIT,
see "Federal Income Tax Considerations" in the accompanying Prospectus.
Prospective purchasers should be aware that the recently enacted Taxpayer
Relief Act of 1997 (the "1997 Act") made numerous changes to the Code, including
reducing the maximum tax imposed on net capital gains from the sale of assets
held for more than 18 months by individuals, trusts and estates. The 1997 Act
also makes certain changes to the requirements to qualify as a REIT and to the
taxation of REITs and their shareholders.
The 1997 Act contains significant changes to the taxation of capital gains
of individuals, trusts and estates and certain changes to the REIT Requirements
and the taxation of REITs. For gains realized after July 28, 1997, and subject
to certain exceptions, the maximum rate of tax on net capital gains of
individuals, trusts and estates from the sale or exchange of assets held for
more than 18 months has been reduced to 20%, and the maximum rate is reduced to
18% for assets acquired after December 31, 2000 and held for more than five
years. For taxpayers who would be subject to a maximum tax rate of 15%, the rate
on net capital gains is reduced to 10%, and effective for taxable years
commencing after December 31, 2000, the rate is reduced to 8% for assets held
for more than five years. The maximum rate for net capital gains attributable to
the sale of depreciable real property held for more than 18 months is 25% to the
extent of the deductions for depreciation with respect to such property.
Long-term capital gain allocated to a shareholder by the Company will be subject
to the 25% rate to the extent that the gain does not exceed depreciation on real
property sold by the Company. The maximum rate of capital gains tax for capital
assets held more than one year but not more than 18 months remains at 28%. The
taxation of capital gains of corporations was not changed by the 1997 Act.
The 1997 Act also includes several provisions that are intended to simplify
the taxation of REITs. These provisions are effective for taxable years
beginning after the date of enactment of the 1997 Act which, as to the Company,
is its taxable year commencing January 1, 1998. First, in determining whether a
REIT satisfies the income tests, a REIT's rental income from a property will not
cease to qualify as "rents from real property" merely because the REIT performs
services for a tenant other than permitted customary services if the amount that
the REIT is deemed to have received as a result of performing impermissible
services does not exceed one percent of all amounts received directly or
indirectly by the REIT with respect to such property. The amount that a REIT
will be deemed to have received for performing impermissible services is at
least 150% of the direct cost to the REIT of providing those services. Second,
certain non-cash income, including income from cancellation of indebtedness and
original issue discount will be excluded from income in determining the amount
of dividends that a REIT is required to distribute. Third, a REIT may elect to
retain and pay income tax on any net long-term capital gains and require its
shareholders to include such undistributed net capital gains in their income. If
a REIT makes such an election, the REIT's shareholders would receive a tax
credit attributable to their share of capital gains tax paid by a REIT on the
undistributed net capital gains that was included in the shareholders' income,
and such shareholders will receive an increase in the basis of their shares in
the amount of undistributed net capital gain included in their income reduced by
the amount of the credit. Fourth, the 1997 Act repeals the requirement that a
REIT receive less than 30% of its gross income from the sale or disposition of
stock or securities held for less than one year, gain from prohibited
transactions, and gain from certain sales of real property held less than four
years. Finally, the 1997 Act contains a number of technical provisions that
reduce the risk that a REIT will inadvertently cease to qualify as a REIT.
S-30
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the terms agreement and
related underwriting agreement (collectively, the "Underwriting Agreement"), the
Company has agreed to sell to each of the Underwriters named below, and each of
the Underwriters for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Alex. Brown & Sons Incorporated, A.G. Edwards & Sons, Inc., Legg Mason Wood
Walker, Incorporated, McDonald & Company Securities, Inc. and Morgan Stanley &
Co. Incorporated are acting as representatives (the "Representatives") has
severally agreed to purchase from the Company, the respective number of shares
of Common Stock set forth after its name below. The Underwriting Agreement
provides that the obligations of the Underwriters are subject to certain
conditions precedent, and that the Underwriters will be obligated to purchase
all of the shares of Common Stock if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................................
Alex. Brown & Sons Incorporated.............................................
A.G. Edwards & Sons, Inc....................................................
Legg Mason Wood Walker, Incorporated........................................
McDonald & Company Securities, Inc..........................................
Morgan Stanley & Co. Incorporated...........................................
----------------
Total............................................................. 7,000,000
----------------
----------------
</TABLE>
The Representatives have advised the Company that they propose initially to
offer the Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus Supplement, and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $ to certain
other dealers. After the Offering, the public offering price, concession and
discounts may be changed.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus Supplement, to purchase up
to an aggregate of 1,050,000 additional shares of Common Stock at the price to
the public set forth on the cover page of this Prospectus Supplement, less the
underwriting discount. The Underwriters may exercise this option only to cover
over-allotments, if any. If the Underwriters exercise this option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of shares of
Common Stock to be purchased by it shown in the foregoing table bears to the
7,000,000 shares of Common Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the Underwriters may be required to make in respect
thereof.
The Company and the executive officers of the Company and the Directors have
agreed that for a period of 90 days from the date of this Prospectus Supplement
they will not, without prior and written consent of the Representatives, offer,
sell or otherwise dispose of any shares of Common Stock or any other security
convertible into or exercisable for shares of Common Stock (except pursuant to
the Company's stock option or dividend reinvestment plans and certain other
agreements).
In connection with the Offering, the rules of the Securities and Exchange
Commission permit the Representatives to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
S-31
<PAGE>
If the Underwriters create a short position in the Common Stock in
connection with the Offering (I.E., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement), the
Representatives may reduce that short position by purchasing Common Stock in the
open market. The Representatives also may elect to reduce any short position by
exercising all or part of the over-allotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") from
time to time provides investment banking and financial advisory services to the
Company. Merrill Lynch also acted as representative of various underwriters in
connection with public offerings of the Company's Common Stock, Depositary
Shares and debt securities in 1993 through 1997.
LEGAL MATTERS
In addition to the legal opinions referred to under "Legal Opinions" in the
accompanying Prospectus, the description of Federal income tax matters contained
in this Prospectus Supplement entitled "Certain Federal Income Tax
Considerations" is based upon the opinion of Bose McKinney & Evans.
S-32
<PAGE>
PROSPECTUS
$545,000,000
DUKE REALTY INVESTMENTS, INC.
COMMON STOCK, PREFERRED STOCK AND DEPOSITARY SHARES
DUKE REALTY LIMITED PARTNERSHIP
DEBT SECURITIES
Duke Realty Investments, Inc. (the "Company") may from time to time offer in
one or more series (i) shares of Common Stock, $.01 par value ("Common Stock"),
(ii) shares of preferred stock, $.01 par value ("Preferred Stock") and (iii)
shares of Preferred Stock represented by depositary shares (the "Depositary
Shares"), with an aggregate public offering price of up to $325,000,000 (or its
equivalent in another currency based on the exchange rate at the time of sale)
in amounts, at prices and on terms to be determined at the time of offering.
Duke Realty Limited Partnership (the "Operating Partnership") may from time to
time offer in one or more series unsecured non-convertible investment grade debt
securities ("Debt Securities"), with an aggregate public offering price of up to
$220,000,000 (or its equivalent in another currency based on the exchange rate
at the time of sale) in amounts, at prices and on terms to be determined at the
time of offering. The Common Stock, Preferred Stock, Depositary Shares and Debt
Securities (collectively, the "Securities") may be offered, separately or
together, in separate series, in amounts, at prices and on terms to be set forth
in one or more supplements to this Prospectus (each a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Common Stock, any initial
public offering price; (ii) in the case of Preferred Stock, the specific title
and stated value, any dividend, liquidation, redemption, conversion, voting and
other rights, and any initial public offering price; (iii) in the case of
Depositary Shares, the fractional share of Preferred Stock represented by each
such Depositary Share; and (iv) in the case of Debt Securities, the specific
title, aggregate principal amount, currency, form (which may be registered or
bearer, or certificated or global), authorized denominations, maturity, rate (or
manner of calculation thereof) and time of payment of interest, terms for
redemption at the option of the Operating Partnership or repayment at the option
of the holder, terms for sinking fund payments, covenants and any initial public
offering price. In addition, such specific terms may include limitations on
direct or beneficial ownership and restrictions on transfer of the Securities,
in each case as may be appropriate to preserve the status of the Company as a
real estate investment trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities covered
by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company or the Operating Partnership, or to or through
underwriters or dealers. If any agents or underwriters are involved in the sale
of any of the Securities, their names, and any applicable purchase price, fee,
commission or discount arrangement between or among them, will be set forth, or
will be calculable from the information set forth, in an accompanying Prospectus
Supplement. See "Plan of Distribution." No Securities may be sold without
delivery of a Prospectus Supplement describing the method and terms of the
offering of such series of Securities.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 27, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company and the Operating Partnership are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, the Company files reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"), and the Operating Partnership files reports with the Commission.
Such reports, proxy statements and other information can be inspected and copied
at the Public Reference Section maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549; Chicago Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, 7 World Trade Center, New York, New York 10048. Such reports, proxy
statements and other information concerning the Company can also be inspected at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005. The Commission maintains a Web site (http:// www.sec.gov) that contains
reports, proxy and information statements and other information regarding the
Company and the Operating Partnership.
The Company and the Operating Partnership will provide without charge to
each person to whom a copy of this Prospectus is delivered, upon their written
or oral request, a copy of any or all of the documents incorporated herein by
reference (other than exhibits to such documents). Written requests for such
copies should be addressed to 8888 Keystone Crossing, Suite 1200, Indianapolis,
Indiana 46240, Attn: Investor Relations, telephone number (317) 574-3531.
The Company and the Operating Partnership have filed with the Commission a
registration statement on Form S-3 (the "Registration Statement") under the
Securities Act of 1933 as amended (the "Securities Act"), with respect to the
Securities offered hereby. For further information with respect to the Company,
the Operating Partnership and the Securities offered hereby, reference is made
to the Registration Statement and exhibits thereto. Statements contained in this
Prospectus as to the contents of any contract or other documents are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or documents filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company under the Exchange Act with the
Commission are incorporated in this Prospectus by reference and are made a part
hereof:
1. The Company's Annual Report on Form 10-K (file no. 1-9044), for the year
ended December 31, 1996.
2. The Operating Partnership's Annual Report on Form 10-K (file no.
0-20625) for the year ended December 31, 1996.
3. The Company's proxy statement dated March 21, 1997.
4. The Company's Quarterly Report on Form 10-Q (file no. 1-9044) for the
quarter ended March 31, 1997.
5. The Operating Partnership's Quarterly Report on Form 10-Q (file no.
0-20625) for the quarter ended March 31, 1997.
6. The description of the Common Stock of the Company contained in the
Registration Statement on Form 10, File No. 1-9044, as amended.
Each document filed by the Company or the Operating Partnership subsequent
to the date of this Prospectus pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act and prior to termination of the offering of all Securities to
which this Prospectus relates shall be deemed to be incorporated by reference in
this Prospectus and shall be part hereof from the date of filing of such
document. Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained in this Prospectus (in the case of a statement in a previously-filed
document incorporated or deemed to be incorporated by reference herein), in any
accompanying Prospectus Supplement relating to a specific
2
<PAGE>
offering of Securities or in any other subsequently filed document that is also
incorporated or deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus or any accompanying Prospectus Supplement. Subject to the foregoing,
all information appearing in this Prospectus and each accompanying Prospectus
Supplement is qualified in its entirety by the information appearing in the
documents incorporated by reference.
THE COMPANY AND THE OPERATING PARTNERSHIP
The Company is a self-administered and self-managed real estate investment
trust that began operations through a related entity in 1972. At March 31, 1997,
the Company owned direct or indirect interests in a portfolio of 250 in-service
industrial, office and retail properties (the "Properties"), together with over
1,100 acres of land (the "Land") for future development. The Properties are
located in Indiana, Ohio, Illinois, Kentucky, Michigan, Missouri, Tennessee and
Wisconsin. As of March 31, 1997, the Properties contained approximately 27.7
million square feet, which were approximately 95.5% leased to approximately
1,800 tenants.
All of the Company's interests in the Properties and Land are held by, and
substantially all of its operations relating to the Properties and Land are
conducted through, the Operating Partnership. The Operating Partnership holds a
100% interest in all but 65 of the Properties and substantially all of the Land.
The Company controls the Operating Partnership as the sole general partner and
owner, as of March 31, 1997, of approximately 90.3% of the outstanding units of
voting partnership interest of the Operating Partnership ("Units"). Each Unit,
other than those held by the Company, may be exchanged by the holder thereof,
subject to certain holding periods, for one share (subject to certain
adjustments) of the Common Stock. With each such exchange, the number of Units
owned by the Company and, therefore, the Company's percentage interest in the
Operating Partnership, will increase.
In addition to owning the Properties and the Land, the Operating Partnership
also provides services associated with leasing, property management, real estate
development, construction and miscellaneous tenant services (the "Related
Businesses") for the Properties. The Company also provides services associated
with the Related Businesses to third parties through Duke Realty Services
Limited Partnership on a fee basis.
The Company's experienced staff provides a full range of real estate
services from executive offices headquartered in Indianapolis, and from seven
regional offices located in the Cincinnati, Cleveland, Columbus, Decatur,
Detroit, Nashville and St. Louis metropolitan areas.
The Company is an Indiana corporation that was originally incorporated in
the State of Delaware in 1985, and reincorporated in the State of Indiana in
1992. The Operating Partnership is an Indiana limited partnership that was
formed in 1993. The Company's and the Operating Partnership's executive offices
are located at 8888 Keystone Crossing, Suite 1200, Indianapolis, Indiana 46240,
and their telephone number is (317) 574-3531.
USE OF PROCEEDS
The Company is required, by the terms of the partnership agreement of the
Operating Partnership, to invest the net proceeds of any sale of Common Stock,
Preferred Stock or Depositary Shares in the Operating Partnership in exchange
for additional Units or preferred Units, as the case may be. Unless otherwise
specified in the applicable Prospectus Supplement, the Company and the Operating
Partnership intend to use the net proceeds from the sale of Securities for
general corporate purposes, including the development and acquisition of
additional rental properties and other acquisition transactions, the payment of
certain outstanding debt, and improvements to certain properties in the
Company's portfolio.
3
<PAGE>
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's and the Operating Partnership's
ratios of earnings to fixed charges for the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, COMPANY PARTNERSHIP
- ------------------------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
1996...................................................................................... 2.18 2.20
1995...................................................................................... 2.38 2.38
1994...................................................................................... 2.33 2.33
1993...................................................................................... 1.58 2.51(1)
1992...................................................................................... (2) NA
</TABLE>
- ------------------------
(1) From date of formation on October 4, 1993 to December 31, 1993.
(2) Prior to completion of the Company's reorganization in October, 1993, the
Company maintained a different capital structure. As a result, although the
original properties have historically generated positive net cash flow, the
financial statements of the Company show net losses for the fiscal year
ended December 31, 1992. Consequently, the computation of the ratio of
earnings to fixed charges for such period indicates that earnings were
inadequate to cover fixed charges by approximately $0.7 million for the
fiscal year ended December 31, 1992.
The Company's and the Operating Partnership's ratios of earnings to fixed
charges for the three months ended March 31, 1997 were 2.30 and 2.32,
respectively.
For purposes of computing these ratios, earnings have been calculated by
adding fixed charges, excluding capitalized interest, to income (loss) before
gains or losses on property sales and (if applicable) minority interest in the
Operating Partnership. Fixed charges consist (if applicable) of interest costs,
whether expensed or capitalized, the interest component of rental expense and
amortization of debt issuance costs.
The recapitalization of the Company effected in connection with the
reorganization permitted the Company to significantly deleverage, resulting in
an improved ratio of earnings to fixed charges for periods subsequent to the
reorganization.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities will be issued under an Indenture (the "Indenture"),
between the Operating Partnership and The First National Bank of Chicago, as
trustee. The Indenture is incorporated by reference as an exhibit to the
Registration Statement of which this Prospectus is a part and is available for
inspection at the corporate trust office of the trustee at 14 Wall Street,
Eighth Floor, New York, New York 10005 or as described above under "Available
Information." The Indenture is subject to, and governed by, the Trust Indenture
Act of 1939, as amended (the "TIA"). The statements made herein relating to the
Indenture and the Debt Securities to be issued thereunder are summaries of
certain provisions thereof and do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all provisions of the
Indenture and such Debt Securities. All section references appearing herein are
to sections of the Indenture, and capitalized terms used but not defined herein
shall have the respective meanings set forth in the Indenture.
GENERAL
The Debt Securities will be direct, unsecured obligations of the Operating
Partnership and will rank equally with all other unsecured and unsubordinated
indebtedness of the Operating Partnership. At March 31, 1997, the total
outstanding debt of the Operating Partnership was $506.1 million, of which
$261.1 million was secured debt and $245.0 million was unsecured debt. The Debt
Securities may be issued without limit as to aggregate principal amount, in one
or more series, in each case as established from time to
4
<PAGE>
time in or pursuant to authority granted by a resolution of the Board of
Directors of the Company as sole general partner of the Operating Partnership or
as established in one or more indentures supplemental to the Indenture. All Debt
Securities of one series need not be issued at the same time and, unless
otherwise provided, a series may be reopened, without the consent of the holders
of the Debt Securities of such series, for issuances of additional Debt
Securities of such series (Section 301).
The Indenture provides that there may be more than one trustee (the
"Trustee") thereunder, each with respect to one or more series of Debt
Securities. Any Trustee under the Indenture may resign or be removed with
respect to one or more series of Debt Securities, and a successor Trustee may be
appointed to act with respect to such series (Section 608). In the event that
two or more persons are acting as Trustee with respect to different series of
Debt Securities, each such Trustee shall be a trustee of a trust under the
Indenture separate and apart from the trust administered by any other Trustee
(Section 609), and, except as otherwise indicated herein, any action described
herein to be taken by a Trustee may be taken by each such Trustee with respect
to, and only with respect to, the one or more series of Debt Securities for
which it is Trustee under the Indenture.
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities being offered for the specific terms thereof, including:
(1) the title of such Debt Securities;
(2) the aggregate principal amount of such Debt Securities and any limit on
such aggregate principal amount;
(3) the percentage of the principal amount at which such Debt Securities
will be issued and, if other than the principal amount thereof, the
portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof;
(4) the date or dates, or the method for determining such date or dates, on
which the principal of such Debt Securities will be payable;
(5) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
(6) the date or dates, or the method for determining such date or dates,
from which any interest will accrue, the dates on which any such
interest will be payable, the record dates for such interest payment
dates, or the method by which any such date shall be determined, the
person to whom such interest shall be payable, and the basis upon which
interest shall be calculated if other than that of a 360-day year of
twelve 30-day months;
(7) the place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, such Debt
Securities may be surrendered for registration of transfer or exchange
and notices or demands to or upon the Operating Partnership in respect
of such Debt Securities and the Indenture may be served;
(8) the period or periods within which, the price or prices at which and the
terms and conditions upon which such Debt Securities may be redeemed, as
a whole or in part, at the option of the Operating Partnership, if the
Operating Partnership is to have such an option;
(9) the obligation, if any, of the Operating Partnership to redeem, repay or
purchase such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a holder thereof, and the period or
periods within which, the price or prices at which and the terms and
conditions upon which such Debt Securities will be redeemed, repaid or
purchased, as a whole or in part, pursuant to such obligation;
5
<PAGE>
(10) if other than U.S. dollars, the currency or currencies in which such
Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite
currency or currencies, and the terms and conditions relating thereto;
(11) whether the amount of payments of principal of (and premium, if any) or
interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not be, based on a currency, currencies, currency
unit or units or composite currency or currencies) and the manner in
which such amounts shall be determined;
(12) the events of default or covenants of such Debt Securities, to the
extent different from or in addition to those described herein;
(13) whether such Debt Securities will be issued in certificated and/or
book-entry form;
(14) whether such Debt Securities will be in registered or bearer form and,
if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the
denominations thereof if other than $5,000 and terms and conditions
relating thereto;
(15) the applicability, if any, of the defeasance and covenant defeasance
provisions described herein, or any modification thereof;
(16) if such Debt Securities are to be issued upon the exercise of debt
warrants, the time, manner and place for such Debt Securities to be
authenticated and delivered;
(17) whether and under what circumstances the Operating Partnership will pay
additional amounts on such Debt Securities in respect of any tax,
assessment or governmental charge and, if so, whether the Operating
Partnership will have the option to redeem such Debt Securities in lieu
of making such payment;
(18) with respect to any Debt Securities that provide for optional redemption
or prepayment upon the occurrence of certain events (such as a change of
control of the Operating Partnership), (i) the possible effects of such
provisions on the market price of the Operating Partnership's or the
Company's securities or in deterring certain mergers, tender offers or
other takeover attempts, and the intention of the Operating Partnership
to comply with the requirements of Rule 14e-1 under the Exchange Act and
any other applicable securities laws in connection with such provisions;
(ii) whether the occurrence of the specified events may give rise to
cross-defaults on other indebtedness such that payment on such Debt
Securities may be effectively subordinated; and (iii) the existence of
any limitation on the Operating Partnership's financial or legal ability
to repurchase such Debt Securities upon the occurrence of such an event
(including, if true, the lack of assurance that such a repurchase can be
effected) and the impact, if any, under the Indenture of such a failure,
including whether and under what circumstances such a failure may
constitute an Event of Default; and
(19) any other terms of such Debt Securities.
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). If material or applicable, special U.S.
federal income tax, accounting and other considerations applicable to Original
Issue Discount Securities will be described in the applicable Prospectus
Supplement.
Except as described under "Merger, Consolidation or Sale" or as may be set
forth in any Prospectus Supplement, the Indenture does not contain any other
provisions that would limit the ability of the Operating Partnership to incur
indebtedness or that would afford holders of the Debt Securities protection in
the event of (i) a highly leveraged or similar transaction involving the
Operating Partnership, the management of the Operating Partnership or the
Company, or any affiliate of any such party, (ii) a change of
6
<PAGE>
control, or (iii) a reorganization, restructuring, merger or similar transaction
involving the Operating Partnership that may adversely affect the holders of the
Debt Securities. In addition, subject to the limitations set forth under
"Merger, Consolidation or Sale," the Operating Partnership may, in the future,
enter into certain transactions, such as the sale of all or substantially all of
its assets or the merger or consolidation of the Operating Partnership, that
would increase the amount of the Operating Partnership's indebtedness or
substantially reduce or eliminate the Operating Partnership's assets, which may
have an adverse effect on the Operating Partnership's ability to service its
indebtedness, including the Debt Securities. In addition, restrictions on
ownership and transfers of the Company's common stock and preferred stock are
designed to preserve its status as a REIT and, therefore, may act to prevent or
hinder a change of control. See "Description of Common Stock -- Certain
Provisions Affecting Change of Control" and "Description of Preferred Stock --
Restrictions on Ownership." Reference is made to the applicable Prospectus
Supplement for information with respect to any deletions from, modifications of
or additions to the events of default or covenants that are described below,
including any addition of a covenant or other provision providing event risk or
similar protection.
Reference is made to "-- Certain Covenants" below and to the description of
any additional covenants with respect to a series of Debt Securities in the
applicable Prospectus Supplement. Except as otherwise described in the
applicable Prospectus Supplement, compliance with such covenants generally may
not be waived with respect to a series of Debt Securities by the Board of
Directors of the Company as sole general partner of the Operating Partnership or
by the Trustee unless the Holders of at least a majority in principal amount of
all outstanding Debt Securities of such series consent to such waiver, except to
the extent that the defeasance and covenant defeasance provisions of the
Indenture described under "-- Discharge, Defeasance and Covenant Defeasance"
below apply to such series of Debt Securities. See "-- Modification of the
Indenture."
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series which are registered securities, other than registered
securities issued in global form (which may be of any denomination), shall be
issuable in denominations of $1,000 and any integral multiple thereof and the
Debt Securities which are bearer securities, other than bearer securities issued
in global form (which may be of any denomination), shall be issuable in
denominations of $5,000 (Section 302).
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and premium, if any) and interest on any series of Debt Securities
will be payable at the corporate trust office of the Trustee, initially located
at 14 Wall Street, Eighth Floor, New York, New York, 10005, provided that, at
the option of the Operating Partnership, payment of interest may be made by
check mailed to the address of the Person entitled thereto as it appears in the
applicable Security Register or by wire transfer of funds to such Person at an
account maintained within the United States (Sections 301, 307 and 1002).
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the Holder on the applicable Regular Record
Date and may either be paid to the Person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
Trustee, notice whereof shall be given to the Holder of such Debt Security not
less than 10 days prior to such Special Record Date, or may be paid at any time
in any other lawful manner, all as more completely described in the Indenture.
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the Trustee referred to above.
In addition, subject to certain limitations imposed upon Debt Securities issued
in book-entry form, the Debt Securities of any series may be surrendered for
registration of transfer thereof at the corporate trust office of the Trustee
referred to above.
7
<PAGE>
Every Debt Security surrendered for registration of transfer or exchange shall
be duly endorsed or accompanied by a written instrument of transfer. No service
charge will be made for any registration of transfer or exchange of any Debt
Securities, but the Trustee or the Operating Partnership may require payment of
a sum sufficient to cover any tax or other governmental charge payable in
connection therewith (Section 305). If the applicable Prospectus Supplement
refers to any transfer agent (in addition to the Trustee) initially designated
by the Operating Partnership with respect to any series of Debt Securities, the
Operating Partnership may at any time rescind the designation of any such
transfer agent or approve a change in the location through which any such
transfer agent acts, except that Operating Partnership will be required to
maintain a transfer agent in each place of payment for such series. The
Operating Partnership may at any time designate additional transfer agents with
respect to any series of Debt Securities (Section 1002).
Neither the Operating Partnership nor the Trustee shall be required (i) to
issue, register the transfer of or exchange any Debt Security if such Debt
Security may be among those selected for redemption during a period beginning at
the opening of business 15 days before selection of the Debt Securities to be
redeemed and ending at the close of business on (A) if such Debt Securities are
issuable only as Registered Securities, the day of the mailing of the relevant
notice of redemption and (B) if such Debt Securities are issuable as Bearer
Securities, the day of the first publication of the relevant notice of
redemption or, if such Debt Securities are also issuable as Registered
Securities and there is no publication, the mailing of the relevant notice of
redemption, or (ii) to register the transfer of or exchange any Registered
Security so selected for redemption in whole or in part, except, in the case of
any Registered Security to be redeemed in part, the portion thereof not to be
redeemed, or (iii) to exchange any Bearer Security so selected for redemption
except that such a Bearer Security may be exchanged for a Registered Security of
that series and like tenor, PROVIDED that such Registered Security shall be
simultaneously surrendered for redemption, or (iv) to issue, register the
transfer of or exchange any Security which has been surrendered for repayment at
the option of the Holder, except the portion, if any, of such Debt Security not
to be so repaid (Section 305).
MERGER, CONSOLIDATION OR SALE
The Operating Partnership may consolidate with, or sell, lease or convey all
or substantially all of its assets to, or merge with or into, any other entity,
provided that (a) the Operating Partnership shall be the continuing entity, or
the successor entity (if other than the Operating Partnership) formed by or
resulting from any such consolidation or merger or which shall have received the
transfer of such assets shall expressly assume payment of the principal of (and
premium, if any) and interest on all the Debt Securities and the due and
punctual performance and observance of all of the covenants and conditions
contained in the Indenture; (b) immediately after giving effect to such
transaction and treating any indebtedness which becomes an obligation of the
Operating Partnership or any Subsidiary as a result thereof as having been
incurred by the Operating Partnership or such Subsidiary at the time of such
transaction, no Event of Default under the Indenture, and no event which, after
notice or the lapse of time, or both, would become such an Event of Default,
shall have occurred and be continuing; and (c) an officer's certificate and
legal opinion covering such conditions shall be delivered to the Trustee
(Sections 801 and 803).
CERTAIN COVENANTS
EXISTENCE. Except as permitted under "Merger, Consolidation or Sale," the
Operating Partnership is required to do or cause to be done all things necessary
to preserve and keep in full force and effect its existence, rights and
franchises; PROVIDED, HOWEVER, that the Operating Partnership shall not be
required to preserve any right or franchise if it determines that the
preservation thereof is no longer desirable in the conduct of its business and
that the loss thereof is not disadvantageous in any material respect to the
Holders of the Debt Securities (Section 1007).
MAINTENANCE OF PROPERTIES. The Operating Partnership is required to cause
all of its material properties used or useful in the conduct of its business or
the business of any Subsidiary to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and to cause
to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the judgment
8
<PAGE>
of the Operating Partnership may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times;
PROVIDED, HOWEVER, that the Operating Partnership and its Subsidiaries shall not
be prevented from selling or otherwise disposing for value their respective
properties in the ordinary course of business (Section 1008).
INSURANCE. The Operating Partnership is required to, and is required to
cause each of its Subsidiaries to, keep all of its insurable properties insured
against loss or damage at least equal to their then full insurable value with
financially sound and reputable insurance companies (Section 1009).
PAYMENT OF TAXES AND OTHER CLAIMS. The Operating Partnership is required to
pay or discharge or cause to be paid or discharged, before the same shall become
delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon it or any Subsidiary or upon its income, profits or property or
that of any Subsidiary, and (ii) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien upon the property of the
Operating Partnership or any Subsidiary; PROVIDED, HOWEVER, that the Operating
Partnership shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount, applicability
or validity is being contested in good faith by appropriate proceedings (Section
1010).
PROVISION OF FINANCIAL INFORMATION. The Holders of Debt Securities will be
provided with copies of the annual reports and quarterly reports of the
Operating Partnership. Whether or not the Operating Partnership is subject to
Section 13 or 15(d) of the Exchange Act and for so long as any Debt Securities
are outstanding, the Operating Partnership will, to the extent permitted under
the Exchange Act, be required to file with the Commission the annual reports,
quarterly reports and other documents which the Operating Partnership would have
been required to file with the Commission pursuant to such Section 13 or 15(d)
(the "Financial Statements") if the Operating Partnership were so subject, such
documents to be filed with the Commission on or prior to the respective dates
(the "Required Filing Dates") by which the Operating Partnership would have been
required so to file such documents if the Operating Partnership were so subject.
The Operating Partnership will also in any event (x) within 15 days of each
Required Filing Date (i) transmit by mail to all Holders of Debt Securities, as
their names and addresses appear in the Security Register, without cost to such
Holders, copies of the annual reports and quarterly reports which the Operating
Partnership would have been required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act if the Operating Partnership were
subject to such Sections and (ii) file with the Trustee copies of the annual
reports, quarterly reports and other documents which the Operating Partnership
would have been required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act if the Operating Partnership were subject to such
Sections and (y) if filing such documents by the Operating Partnership with the
Commission is not permitted under the Exchange Act, promptly upon written
request and payment of the reasonable cost of duplication and delivery, supply
copies of such documents to any prospective Holder (Section 1011).
ADDITIONAL COVENANTS. Any additional or different covenants of the
Operating Partnership with respect to any series of Debt Securities will be set
forth in the Prospectus Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The Indenture provides that the following events are "Events of Default"
with respect to any series of Debt Securities issued thereunder: (a) default for
30 days in the payment of any installment of interest on any Debt Security of
such series; (b) default in the payment of the principal of (or premium, if any,
on) any Debt Security of such series at its maturity; (c) default in making any
sinking fund payment as required for any Debt Security of such series; (d)
default in the performance of any other covenant of the Operating Partnership
contained in the Indenture (other than a covenant added to the Indenture solely
for the benefit of a series of Debt Securities issued thereunder other than such
series), such default having continued for 60 days after written notice as
provided in the Indenture; (e) default in the payment of an aggregate principal
amount exceeding $5,000,000 of any evidence of recourse indebtedness of the
Operating Partnership or any
9
<PAGE>
mortgage, indenture or other instrument under which such indebtedness is issued
or by which such indebtedness is secured, such default having occurred after the
expiration of any applicable grace period and having resulted in the
acceleration of the maturity of such indebtedness, but only if such indebtedness
is not discharged or such acceleration is not rescinded or annulled; (f) certain
events of bankruptcy, insolvency or reorganization, or court appointment of a
receiver, liquidator or trustee of the Operating Partnership or any Significant
Subsidiary or any of their respective property; and (g) any other Event of
Default provided with respect to a particular series of Debt Securities. The
term "Significant Subsidiary" means each significant subsidiary (as defined in
Regulation S-X promulgated under the Securities Act) of the Operating
Partnership.
If an Event of Default under the Indenture with respect to Debt Securities
of any series at the time Outstanding occurs and is continuing, then in every
such case the Trustee or the Holders of not less than 25% in principal amount of
the Outstanding Debt Securities of that series may declare the principal amount
(or, if the Debt Securities of that series are Original Issue Discount
Securities or Indexed Securities, such portion of the principal amount as may be
specified in the terms thereof) of all of the Debt Securities of that series to
be due and payable immediately by written notice thereof to the Operating
Partnership (and to the Trustee if given by the Holders). However, at any time
after such a declaration of acceleration with respect to Debt Securities of such
series (or of all Debt Securities then Outstanding under the Indenture, as the
case may be) has been made, but before a judgment or decree for payment of the
money due has been obtained by the Trustee, the Holders of not less than a
majority in principal amount of Outstanding Debt Securities of such series (or
of all Debt Securities then Outstanding under the Indenture, as the case may be)
may rescind and annul such declaration and its consequences if (a) the Operating
Partnership shall have deposited with the applicable Trustee all required
payments of the principal of (and premium, if any) and interest on the Debt
Securities of such series (or of all Debt Securities then Outstanding under the
Indenture, as the case may be), plus certain fees, expenses, disbursements and
advances of the Trustee and (b) all Events of Default, other than the
non-payment of accelerated principal of (or specified portion thereof), or
premium (if any) or interest on the Debt Securities of such series (or of all
Debt Securities then Outstanding under the Indenture, as the case may be) have
been cured or waived as provided in the Indenture (Section 502). The Indenture
also provides that the Holders of not less than a majority in principal amount
of the Outstanding Debt Securities of any series (or of all Debt Securities then
Outstanding under the Indenture, as the case may be) may waive any past default
with respect to such series and its consequences, except a default (x) in the
payment of the principal of (or premium, if any) or interest on any Debt
Security or such series or (y) in respect of a covenant or provision contained
in the Indenture that cannot be modified or amended without the consent of the
Holder of each Outstanding Debt Security affected thereby (Section 513).
The Trustee will be required to give notice to the Holders of Debt
Securities within 90 days of a default under the Indenture unless such default
has been cured or waived; PROVIDED, HOWEVER, that the Trustee may withhold
notice to the Holders of any series of Debt Securities of any default with
respect to such series (except a default in the payment of the principal of (or
premium, if any) or interest on any Debt Security of such series or in the
payment of any sinking fund installment in respect of any Debt Security of such
series) if specified Responsible Officers of the Trustee consider such
withholding to be in the interest of such Holders (Section 601).
The Indenture provides that no Holders of Debt Securities of any series may
institute any proceedings, judicial or otherwise, with respect to the Indenture
or for any remedy thereunder, except in the case of failure of the Trustee, for
60 days, to act after it has received a written request to institute proceedings
in respect of an Event of Default from the Holders of not less than 25% in
principal amount of the Outstanding Debt Securities of such series, as well as
an offer of indemnity reasonably satisfactory to it (Section 507). This
provision will not prevent, however, any holder of Debt Securities from
instituting suit for the enforcement of payment of the principal of (and
premium, if any) and interest on such Debt Securities at the respective due
dates thereof (Section 508).
10
<PAGE>
Subject to provisions in the Indenture relating to its duties in case of
default, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any Holders of any
series of Debt Securities then Outstanding under the Indenture, unless such
Holders shall have offered to the Trustee thereunder reasonable security or
indemnity (Section 602). The Holders of not less than a majority in principal
amount of the Outstanding Debt Securities of any series (or of all Debt
Securities then Outstanding under the Indenture, as the case may be) shall have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or of exercising any trust or power
conferred upon the Trustee. However, the Trustee may refuse to follow any
direction which is in conflict with any law or the Indenture, which may involve
the Trustee in personal liability or which may be unduly prejudicial to the
holders of Debt Securities of such series not joining therein (Section 512).
Within 120 days after the close of each fiscal year, the Operating
Partnership must deliver to the Trustee a certificate, signed by one of several
specified officers of the Company, stating whether or not such officer has
knowledge of any default under the Indenture and, if so, specifying each such
default and the nature and status thereof.
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture will be permitted to be made
only with the consent of the Holders of not less than a majority in principal
amount of all Outstanding Debt Securities or series of Outstanding Debt
Securities which are affected by such modification or amendment; PROVIDED,
HOWEVER, that no such modification or amendment may, without the consent of the
Holder of each such Debt Security affected thereby, (a) change the Stated
Maturity of the principal of, or premium (if any) or any installment of interest
on, any such Debt Security; (b) reduce the principal amount of, or the rate or
amount of interest on, or any premium payable on redemption of, any such Debt
Security, or reduce the amount of principal of an Original Issue Discount
Security that would be due and payable upon declaration of acceleration of the
maturity thereof or would be provable in bankruptcy, or adversely affect any
right of repayment of the holder of any such Debt Security; (c) change the place
of payment, or the coin or currency, for payment of principal of, premium, if
any, or interest on any such Debt Security; (d) impair the right to institute
suit for the enforcement of any payment on or with respect to any such Debt
Security; (e) reduce the above-stated percentage of outstanding Debt Securities
of any series necessary to modify or amend the Indenture, to waive compliance
with certain provisions thereof or certain defaults and consequences thereunder
or to reduce the quorum or voting requirements set forth in the Indenture; or
(f) modify any of the foregoing provisions or any of the provisions relating to
the waiver of certain past defaults or certain covenants, except to increase the
required percentage to effect such action or to provide that certain other
provisions may not be modified or waived without the consent of the Holder of
such Debt Security (Section 902).
The Indenture provides that the Holders of not less than a majority in
principal amount of a series of Outstanding Debt Securities have the right to
waive compliance by the Operating Partnership with certain covenants relating to
such series of Debt Securities in the Indenture (Section 1014).
Modifications and amendments of the Indenture will be permitted to be made
by the Operating Partnership and the Trustee without the consent of any Holder
of Debt Securities for any of the following purposes: (i) to evidence the
succession of another Person to the Operating Partnership as obligor under the
Indenture; (ii) to add to the covenants of the Operating Partnership for the
benefit of the Holders of all or any series of Debt Securities or to surrender
any right or power conferred upon the Operating Partnership in the Indenture;
(iii) to add Events of Default for the benefit of the Holders of all or any
series of Debt Securities; (iv) to add or change any provisions of the Indenture
to facilitate the issuance of, or to liberalize certain terms of, Debt
Securities in bearer form, or to permit or facilitate the issuance of Debt
Securities in uncertificated form, PROVIDED that such action shall not adversely
affect the interests of the Holders of the Debt Securities of any series in any
material respect; (v) to change or eliminate any provisions of the Indenture,
PROVIDED that any such change or elimination shall become effective only when
there are no Debt Securities Outstanding of any series created prior thereto
which are entitled to the benefit of such provision;
11
<PAGE>
(vi) to secure the Debt Securities; (vii) to establish the form or terms of Debt
Securities of any series; (viii) to provide for the acceptance of appointment by
a successor Trustee or facilitate the administration of the trusts under the
Indenture by more than one Trustee; (ix) to cure any ambiguity, defect or
inconsistency in the Indenture, PROVIDED that such action shall not adversely
affect the interests of Holders of Debt Securities of any series in any material
respect; or (x) to supplement any of the provisions of the Indenture to the
extent necessary to permit or facilitate defeasance and discharge of any series
of such Debt Securities, PROVIDED that such action shall not adversely affect
the interests of the Holders of the Debt Securities of any series in any
material respect (Section 901).
The Indenture provides that in determining whether the Holders of the
requisite principal amount of Outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of Holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be Outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of a Debt Security denominated in a foreign currency that shall be deemed
Outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (i) above), (iii) the
principal amount of an Indexed Security that shall be deemed Outstanding shall
be the principal face amount of such Indexed Security at original issuance,
unless otherwise provided with respect to such Indexed Security pursuant to the
Indenture, and (iv) Debt Securities owned by the Operating Partnership or any
other obligor upon the Debt Securities or any affiliate of the Operating
Partnership or of such other obligor shall be disregarded.
The Indenture contains provisions for convening meetings of the Holders of
Debt Securities of a series (Section 1501). A meeting will be permitted to be
called at any time by the Trustee, and also, upon request, by the Operating
Partnership or the holders of at least 10% in principal amount of the
Outstanding Debt Securities of such series, in any such case upon notice given
as provided in the Indenture (Section 1502). Except for any consent that must be
given by the Holder of each Debt Security affected by certain modifications and
amendments of the Indenture, any resolution presented at a meeting or adjourned
meeting duly reconvened at which a quorum is present will be permitted to be
adopted by the affirmative vote of the Holders of a majority in principal amount
of the Outstanding Debt Securities of that series; PROVIDED, HOWEVER, that,
except as referred to above, any resolution with respect to any request, demand,
authorization, direction, notice, consent, waiver or other action that may be
made, given or taken by the Holders of a specified percentage, which is less
than a majority, in principal amount of the Outstanding Debt Securities of a
series may be adopted at a meeting or adjourned meeting duly reconvened at which
a quorum is present by the affirmative vote of the Holders of such specified
percentage in principal amount of the Outstanding Debt Securities of that
series. Any resolution passed or decision taken at any meeting of Holders of
Debt Securities of any series duly held in accordance with the Indenture will be
binding on all Holders of Debt Securities of that series. The quorum at any
meeting called to adopt a resolution, and at any reconvened meeting, will be
Persons holding or representing a majority in principal amount of the
Outstanding Debt Securities of a series; PROVIDED, HOWEVER, that if any action
is to be taken at such meeting with respect to a consent or waiver which may be
given by the Holders of not less than a specified percentage in principal amount
of the Outstanding Debt Securities of a series, the Persons holding or
representing such specified percentage in principal amount of the Outstanding
Debt Securities of such series will constitute a quorum (Section 1504).
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of Holders of Debt Securities of any series with respect to any request,
demand, authorization, direction, notice, consent, waiver or other action that
the Indenture expressly provides may be made, given or taken by the Holders of a
specified percentage in principal amount of all Outstanding Debt Securities
affected thereby, or of the Holders of such series and one or more additional
series: (i) there shall be no minimum quorum requirement
12
<PAGE>
for such meeting and (ii) the principal amount of the Outstanding Debt
Securities of such series that vote in favor of such request, demand,
authorization, direction, notice, consent, waiver or other action shall be taken
into account in determining whether such request, demand, authorization,
direction, notice, consent, waiver or other action has been made, given or taken
under the Indenture (Section 1504).
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The Operating Partnership may discharge certain obligations to Holders of
any series of Debt Securities that have not already been delivered to the
Trustee for cancellation and that either have become due and payable or will
become due and payable within one year (or scheduled for redemption within one
year) by irrevocably depositing with the Trustee, in trust, funds in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities in respect of principal (and
premium, if any) and interest to the date of such deposit (if such Debt
Securities have become due and payable) or to the Stated Maturity or Redemption
Date, as the case may be (Sections 1401 and 1404).
The Indenture provides that, if the provisions of Article Fourteen are made
applicable to the Debt Securities of or within any series pursuant to Section
301 of the Indenture, the Operating Partnership may elect either (a) to defease
and be discharged from any and all obligations with respect to such Debt
Securities (except for the obligation to pay additional amounts, if any, upon
the occurrence of certain events of tax, assessment or governmental charge with
respect to payments on such Debt Securities and the obligations to register the
transfer or exchange of such Debt Securities, to replace temporary or mutilated,
destroyed, lost or stolen Debt Securities, to maintain an office or agency in
respect of such Debt Securities and to hold moneys for payment in trust)
("defeasance") (Section 1402) or (b) to be released from its obligations with
respect to such Debt Securities under Sections 1004 to 1011, inclusive, of the
Indenture (including the restrictions described under "Certain Covenants") and
its obligations with respect to any other covenant, and any omission to comply
with such obligations shall not constitute a default or an Event of Default with
respect to such Debt Securities ("covenant defeasance") (Section 1403), in
either case upon the irrevocable deposit by the Operating Partnership with the
Trustee, in trust, of an amount, in such currency or currencies, currency unit
or units or composite currency or currencies in which such Debt Securities are
payable at Stated Maturity, or Government Obligations (as defined below), or
both, applicable to such Debt Securities which through the scheduled payment of
principal and interest in accordance with their terms will provide money in an
amount sufficient to pay the principal of (and premium, if any) and interest on
such Debt Securities, and any mandatory sinking fund or analogous payments
thereon, on the scheduled due dates therefor.
Such a trust will only be permitted to be established if, among other
things, the Operating Partnership has delivered to the Trustee an Opinion of
Counsel (as specified in the Indenture) to the effect that the Holders of such
Debt Securities will not recognize income, gain or loss for U.S. federal income
tax purposes as a result of such defeasance or covenant defeasance and will be
subject to U.S. federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance or covenant
defeasance had not occurred, and such Opinion of Counsel, in the case of
defeasance, must refer to and be based upon a ruling of the Internal Revenue
Service or a change in applicable United States federal income tax law occurring
after the date of the Indenture (Section 1404).
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (ii) obligations of
a person controlled or supervised by and acting as an agency or instrumentality
of the United States of America or such government which issued the foreign
currency in which the Debt Securities of such series are payable, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or such other government, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian
13
<PAGE>
with respect to any such Government Obligation or a specific payment of interest
on or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt, PROVIDED that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Operating Partnership has deposited funds and/or Government Obligations to
effect defeasance or covenant defeasance with respect to Debt Securities of any
series, (a) the Holder of a Debt Security of such series is entitled to, and
does, elect pursuant to the Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security, or
(b) a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security shall be deemed to have been, and
will be, fully discharged and satisfied through the payment of the principal of
(and premium, if any) and interest on such Debt Security as they become due out
of the proceeds yielded by converting the amount so deposited in respect of such
Debt Security into the currency, currency unit or composite currency in which
such Debt Security becomes payable as a result of such election or such
Conversion Event based on the applicable market exchange rate. "Conversion
Event" means the cessation of use of (i) a currency, currency unit or composite
currency both by the government of the country which issued such currency and
for the settlement of transactions by a central bank or other public
institutions of or within the international banking community, (ii) the ECU both
within the European Monetary System and for the settlement of transactions by
public institutions of or within the European Community or (iii) any currency
unit or composite currency other than the ECU for the purposes for which it was
established. Unless otherwise provided in the applicable Prospectus Supplement,
all payments of principal of (and premium, if any) and interest on any Debt
Security that is payable in a foreign currency that ceases to be used by its
government of issuance shall be made in U.S. dollars.
In the event the Operating Partnership effects covenant defeasance with
respect to any Debt Securities and such Debt Securities are declared due and
payable because of the occurrence of any Event of Default other than the Event
of Default described in clause (d) under "Events of Default, Notice and Waiver"
with respect to Sections 1004 to 1011, inclusive, of the Indenture (which
sections would no longer be applicable to such Debt Securities) or described in
clause (g) under "Events of Default, Notice and Waiver" with respect to any
other covenant as to which there has been covenant defeasance, the amount in
such currency, currency unit or composite currency in which such Debt Securities
are payable, and Government Obligations on deposit with the Trustee, will be
sufficient to pay amounts due on such Debt Securities at the time of their
Stated Maturity but may not be sufficient to pay amounts due on such Debt
Securities at the time of the acceleration resulting from such Event of Default.
However, the Operating Partnership would remain liable to make payment of such
amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
NO CONVERSION RIGHTS
The Debt Securities will not be convertible into or exchangeable for any
capital stock of the Company or equity interest in the Operating Partnership.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary (the "Depositary") identified in
the applicable Prospectus Supplement relating to such series. Global Securities
may be
14
<PAGE>
issued in either registered or bearer form and in either temporary or permanent
form. The specific terms of the depositary arrangement with respect to a series
of Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
DESCRIPTION OF PREFERRED STOCK
GENERAL
The Company is authorized to issue 5,000,000 shares of preferred stock, $.01
par value per share, of which 300,000 shares of Series A Cumulative Redeemable
Preferred Stock were outstanding at March 31, 1997.
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation") and Bylaws and any applicable
amendment to the Articles of Incorporation designating terms of a series of
Preferred Stock (a "Designating Amendment").
TERMS
Subject to the limitations prescribed by the Articles of Incorporation, the
board of directors is authorized to fix the number of shares constituting each
series of Preferred Stock and the designations and powers, preferences and
relative, participating, optional or other special rights and qualifications,
limitations or restrictions thereof, including such provisions as may be desired
concerning voting, redemption, dividends, dissolution or the distribution of
assets, conversion or exchange, and such other subjects or matters as may be
fixed by resolution of the board of directors. The Preferred Stock will, when
issued, be fully paid and nonassessable by the Company (except as described
under "-- Shareholder Liability" below) and will have no preemptive rights.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the liquidation
preference per share and the offering price of such Preferred Stock;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such Preferred Stock;
(4) The date from which dividends on such Preferred Stock shall accumulate,
if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) The provision for a sinking fund, if any, for such Preferred Stock;
(7) The provision for redemption, if applicable, of such Preferred Stock;
(8) Any listing of such Preferred Stock on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred Stock
will be convertible into Common Stock of the Company, including the
conversion price (or manner of calculation thereof);
(10) Whether interests in such Preferred Stock will be represented by
Depositary Shares;
(11) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock;
(12) A discussion of federal income tax considerations applicable to such
Preferred Stock;
15
<PAGE>
(13) The relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company;
(14) Any limitations on issuance of any series of Preferred Stock ranking
senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company; and
(15) Any limitations on direct or beneficial ownership and restrictions on
transfer, in each case as may be appropriate to preserve the status of
the Company as a REIT.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred Stock
will, with respect to dividend rights and rights upon liquidation, dissolution
or winding up of the Company, rank (i) senior to all classes or series of Common
Stock of the Company, and to all equity securities ranking junior to such
Preferred Stock; (ii) on a parity with all equity securities issued by the
Company the terms of which specifically provide that such equity securities rank
on a parity with the Preferred Stock; and (iii) junior to all equity securities
issued by the Company the terms of which specifically provide that such equity
securities rank senior to the Preferred Stock. The term "equity securities" does
not include convertible debt securities.
DIVIDENDS
Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the board of directors of the Company, out of assets
of the Company legally available for payment, cash dividends at such rates and
on such dates as will be set forth in the applicable Prospectus Supplement. Each
such dividend shall be payable to holders of record as they appear on the share
transfer books of the Company on such record dates as shall be fixed by the
board of directors of the Company.
Dividends on any series of the Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the board of directors of the Company fails
to declare a dividend payable on a dividend payment date on any series of the
Preferred Stock for which dividends are non-cumulative, then the holders of such
series of the Preferred Stock will have no right to receive a dividend in
respect of the dividend period ending on such dividend payment date, and the
Company will have no obligation to pay the dividend accrued for such period,
whether or not dividends on such series are declared payable on any future
dividend payment date.
If Preferred Stock of any series is outstanding, no dividends will be
declared or paid or set apart for payment on any capital stock of the Company of
any other series ranking, as to dividends, on a parity with or junior to the
Preferred Stock of such series for any period unless (i) if such series of
Preferred Stock has a cumulative dividend, full cumulative dividends have been
or contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payment on the Preferred Stock of such
series for all past dividend periods and the then current dividend period or
(ii) if such series of Preferred Stock does not have a cumulative dividend, full
dividends for the then current dividend period have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for such payment on the Preferred Stock of such series. When dividends
are not paid in full (or a sum sufficient for such full payment is not so set
apart) upon Preferred Stock of any series and the shares of any other series of
Preferred Stock ranking on a parity as to dividends with the Preferred Stock of
such series, all dividends declared upon Preferred Stock of such series and any
other series of Preferred Stock ranking on a parity as to dividends with such
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share of Preferred Stock of such series and such other series of
Preferred Stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the Preferred Stock of such series (which shall
not include any accumulation in respect of unpaid dividends for prior
16
<PAGE>
dividend periods if such Preferred Stock does not have a cumulative dividend)
and such other series of Preferred Stock bear to each other. No interest, or sum
of money in lieu of interest, shall be payable in respect of any dividend
payment or payments on Preferred Stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for all past dividend periods and the then current
dividend period, and (ii) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for the then current dividend
period, no dividends (other than in shares of Common Stock or other capital
shares ranking junior to the Preferred Stock of such series as to dividends and
upon liquidation) shall be declared or paid or set aside for payment or other
distribution shall be declared or made upon the Common Stock, or any other
capital shares of the Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or upon liquidation, nor shall
any shares of Common Stock, or any other capital shares of the Company ranking
junior to or on a parity with the Preferred Stock of such series as to dividends
or upon liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any such shares) by the Company (except by conversion into or
exchange for other capital shares of the Company ranking junior to the Preferred
Stock of such series as to dividends and upon liquidation).
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred Stock
will be subject to mandatory redemption or redemption at the option of the
Company, as a whole or in part, in each case upon the terms, at the times and at
the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
shall not, if such Preferred Stock does not have a cumulative dividend, include
any accumulation in respect of unpaid dividends for prior dividend periods) to
the date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of capital shares of the Company, the terms of such
Preferred Stock may provide that, if no such capital shares shall have been
issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Stock shall
automatically and mandatorily be converted into the applicable capital shares of
the Company pursuant to conversion provisions specified in the applicable
Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all shares of any series
of Preferred Stock shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the then current dividend period, and (ii) if such
series of Preferred Stock does not have a cumulative dividend, full dividends of
the Preferred Stock of any series have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then current dividend period, no shares of any series of
Preferred Stock shall be redeemed unless all outstanding Preferred Stock of such
series is simultaneously redeemed; PROVIDED, HOWEVER, that the foregoing shall
not prevent the purchase or acquisition of Preferred Stock of such series to
preserve the REIT status of the Company or pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding Preferred Stock of
such series. In addition, unless (i) if such series of
17
<PAGE>
Preferred Stock has a cumulative dividend, full cumulative dividends on all
outstanding shares of any series of Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for all past dividends periods and the
then current dividend period, and (ii) if such series of Preferred Stock does
not have a cumulative dividend, full dividends on the Preferred Stock of any
series have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for the then
current dividend period, the Company shall not purchase or otherwise acquire
directly or indirectly any shares of Preferred Stock of such series (except by
conversion into or exchange for capital shares of the Company ranking junior to
the Preferred Stock of such series as to dividends and upon liquidation);
PROVIDED, HOWEVER, that the foregoing shall not prevent the purchase or
acquisition of Preferred Stock of such series to preserve the REIT status of the
Company or pursuant to a purchase or exchange offer made on the same terms to
holders of all outstanding Preferred Stock of such series.
If fewer than all of the outstanding shares of Preferred Stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
the Company and such shares may be redeemed pro rata from the holders of record
of such shares in proportion to the number of such shares held or for which
redemption is requested by such holder (with adjustments to avoid redemption of
fractional shares) or by lot in a manner determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the share transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and series of the Preferred Stock to be redeemed; (iii) the redemption
price; (iv) the place or places where certificates for such Preferred Stock are
to be surrendered for payment of the redemption price; (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date; and (vi) the
date upon which the holder's conversion rights, if any, as to such shares shall
terminate. If fewer than all the shares of Preferred Stock of any series are to
be redeemed, the notice mailed to each such holder thereof shall also specify
the number of shares of Preferred Stock to be redeemed from each such holder. If
notice of redemption of any Preferred Stock has been given and if the funds
necessary for such redemption have been set aside by the Company in trust for
the benefit of the holders of any Preferred Stock so called for redemption, then
from and after the redemption date dividends will cease to accrue on such
Preferred Stock, and all rights of the holders of such shares will terminate,
except the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Stock or any other class or series of capital
shares of the Company ranking junior to the Preferred Stock in the distribution
of assets upon any liquidation, dissolution or winding up of the Company, the
holders of each series of Preferred Stock shall be entitled to receive out of
assets of the Company legally available for distribution to shareholders
liquidating distributions in the amount of the liquidation preference per share
(set forth in the applicable Prospectus Supplement), plus an amount equal to all
dividends accrued and unpaid thereon (which shall not include any accumulation
in respect of unpaid dividends for prior dividend periods if such Preferred
Stock does not have a cumulative dividend). After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of
Preferred Stock will have no right or claim to any of the remaining assets of
the Company. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the available assets of the Company are
insufficient to pay the amount of the liquidating distributions on all
outstanding Preferred Stock and the corresponding amounts payable on all shares
of other classes or series of capital shares of the Company ranking on a parity
with the Preferred Stock in the distribution of assets, then the holders of the
Preferred Stock and all other such classes or series of capital shares shall
share ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
18
<PAGE>
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of capital shares ranking junior to
the Preferred Stock upon liquidation, dissolution or winding up, according to
their respective rights and preferences and in each case according to their
respective number of shares. For such purposes, the consolidation or merger of
the Company with or into any other corporation, trust or entity, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Whenever dividends on any shares of Preferred Stock shall be in arrears for
six or more consecutive quarterly periods, the holders of such shares of
Preferred Stock (voting separately as a class with all other series of preferred
stock upon which like voting rights have been conferred and are exercisable)
will be entitled to vote for the election of two additional directors of the
Company at a special meeting called by the holders of record of at least ten
percent (10%) of any series of Preferred stock so in arrears (unless such
request is received less than 90 days before the date fixed for the next annual
or special meeting of the stockholders) or at the next annual meeting of
stockholders, and at each subsequent annual meeting until (i) if such series of
Preferred Stock has a cumulative dividend, all dividends accumulated on such
shares of Preferred Stock for the past dividend periods and the then current
dividend period shall have been fully paid or declared and a sum sufficient for
the payment thereof set aside for payment or (ii) if such series of Preferred
Stock does not have a cumulative dividend, four consecutive quarterly dividends
shall have been fully paid or declared and a sum sufficient for the payment
thereof set aside for payment. In such case, the entire board of directors of
the Company will be increased by two directors.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock remain outstanding, the Company will not, without the
affirmative vote or consent of the holders of at least two-thirds of the shares
of each series of Preferred Stock outstanding at the time, given in person or by
proxy, either in writing or at a meeting (such series voting separately as a
class), (i) authorize or create, or increase the authorized or issued amount of,
any class or series of capital stock ranking prior to such series of Preferred
Stock with respect to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up or reclassify any authorized capital
stock of the Company into such shares, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (ii) amend, alter or repeal the provisions of the Company's
Articles of Incorporation or the Designating Amendment for such series of
Preferred Stock, whether by merger, consolidation or otherwise (an "Event"), so
as to materially and adversely affect any right, preference, privilege or voting
power of such series of Preferred Stock or the holders thereof; PROVIDED,
HOWEVER, with respect to the occurrence of any of the Events set forth in (ii)
above, so long as the Preferred Stock remains outstanding with the terms thereof
materially unchanged, taking into account that upon the occurrence of an Event,
the Company may not be the surviving entity, the occurrence of any such Event
shall not be deemed to materially and adversely affect such rights, preferences,
privileges or voting power of holders of Preferred Stock and provided further
that (x) any increase in the amount of the authorized Preferred Stock or the
creation or issuance of any other series of Preferred Stock, or (y) any increase
in the amount of authorized shares of such series or any other series of
Preferred Stock, in each case ranking on a parity with or junior to the
Preferred Stock of such series with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting powers.
19
<PAGE>
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall have
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
Under Indiana law, notwithstanding anything to the contrary set forth above,
holders of each series of Preferred Stock will be entitled to vote as a class
upon any proposed amendment to the Articles of Incorporation, whether or not
entitled to vote thereon by the Articles of Incorporation, if the amendment
would (i) increase or decrease the aggregate number of authorized shares of such
series; (ii) effect an exchange or reclassification of all or part of the shares
of the series into shares of another series; (iii) effect an exchange or
reclassification, or create the right of exchange, of all or part of the shares
of another class or series into shares of the series; (iv) change the
designation, rights, preferences or limitations of all or a part of the shares
of the series; (v) change the shares of all or part of the series into a
different number of shares of the same series; (vi) create a new series having
rights or preferences with respect to distributions or dissolution that are
prior, superior or substantially equal to the shares of the series; (vii)
increase the rights, preferences or number of authorized shares of any class or
series that, after giving effect to the amendment, have rights or preferences
with respect to distributions or to dissolution that are prior, superior or
substantially equal to the shares of the series; (viii) limit or deny an
existing preemptive right of all or part of the shares of the series; or (ix)
cancel or otherwise affect rights to distributions or dividends that have
accumulated but have not yet been declared on all or part of the shares of the
series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Stock
is convertible into shares of Common Stock will be set forth in the applicable
Prospectus Supplement relating thereto. Such terms will include the number of
shares of Common Stock into which the shares of Preferred Stock are convertible,
the conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of the
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such series of Preferred Stock.
SHAREHOLDER LIABILITY
As discussed below under "Description of Common Stock -- General,"
applicable Indiana law provides that no shareholder, including holders of
Preferred Stock, shall be personally liable for the acts and obligations of the
Company and that the funds and property of the Company shall be the only
recourse for such acts or obligations.
RESTRICTIONS ON OWNERSHIP
As discussed below under "Description of Common Stock -- Certain Provisions
Affecting Change of Control," for the Company to qualify as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"), not more than 50% in
value of its outstanding capital shares may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year. To assist the Company in meeting this
requirement, the Company may take certain actions to limit the beneficial
ownership, directly or indirectly, by a single person of the Company's
outstanding equity securities, including any Preferred Stock of the Company.
Therefore, the Designating Amendment for each series of Preferred Stock may
contain provisions restricting the ownership and transfer of the Preferred
Stock. The applicable Prospectus Supplement will specify any additional
ownership limitation relating to a series of Preferred Stock.
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
20
<PAGE>
DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may issue receipts ("Depositary Receipts") for Depositary
Shares, each of which will represent a fractional interest of a share of a
particular series of Preferred Stock, as specified in the applicable Prospectus
Supplement. Shares of Preferred Stock of each series represented by Depositary
Shares will be deposited under a separate deposit agreement (each, a "Deposit
Agreement") among the Company, the depositary named therein (a "Preferred Stock
Depositary") and the holders from time to time of the Depositary Receipts.
Subject to the terms of the applicable Deposit Agreement, each owner of a
Depositary Receipt will be entitled, in proportion to the fractional interest of
a share of a particular series of Preferred Stock represented by the Depositary
Shares evidenced by such Depositary Receipt, to all the rights and preferences
of the Preferred Stock represented by such Depositary Shares (including
dividend, voting, conversion, redemption and liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the issuance
and delivery of the Preferred Stock by the Company to a Preferred Stock
Depositary, the Company will cause such Preferred Stock Depositary to issue, on
behalf of the Company, the Depositary Receipts. Copies of the applicable form of
Deposit Agreement and Depositary Receipt may be obtained from the Company upon
request, and the statements made hereunder relating to Deposit Agreements and
the Depositary Receipts to be issued thereunder are summaries of certain
anticipated provisions thereof and do not purport to be complete and are subject
to, and qualified in their entirety by reference to, all of the provisions of
the applicable Deposit Agreement and related Depositary Receipts.
DIVIDENDS AND OTHER DISTRIBUTIONS
A Preferred Stock Depositary will be required to distribute all cash
dividends or other cash distributions received in respect of the applicable
Preferred Stock to the record holders of Depositary Receipts evidencing the
related Depositary Shares in proportion to the number of such Depositary
Receipts owned by such holders, subject to certain obligations of holders to
file proofs, certificates and other information and to pay certain charges and
expenses to such Preferred Stock Depositary.
In the event of a distribution other than in cash, a Preferred Stock
Depositary will be required to distribute property received by it to the record
holders of Depositary Receipts entitled thereto, subject to certain obligations
of holders to file proofs, certificates and other information and to pay certain
charges and expenses to such Preferred Stock Depositary, unless such Preferred
Stock Depositary determines that it is not feasible to make such distribution,
in which case such Preferred Stock Depositary may, with the approval of the
Company, sell such property and distribute the net proceeds from such sale to
such holders.
No distribution will be made in respect of any Depositary Share to the
extent that it represents any Preferred Stock which has been converted or
exchanged.
WITHDRAWAL OF STOCK
Upon surrender of the Depositary Receipts at the corporate trust office of
the applicable Preferred Stock Depositary (unless the related Depositary Shares
have previously been called for redemption or converted), the holders thereof
will be entitled to delivery at such office, to or upon each such holder's
order, of the number of whole or fractional shares of the applicable Preferred
Stock and any money or other property represented by the Depositary Shares
evidenced by such Depositary Receipts. Holders of Depositary Receipts will be
entitled to receive whole or fractional shares of the related Preferred Stock on
the basis of the proportion of Preferred Stock represented by each Depositary
Share as specified in the applicable Prospectus Supplement, but holders of such
shares of Preferred Stock will not thereafter be entitled to receive Depositary
Shares therefor. If the Depositary Receipts delivered by the holder evidence a
number of
21
<PAGE>
Depositary Shares in excess of the number of Depositary Shares representing the
number of shares of Preferred Stock to be withdrawn, the applicable Preferred
Stock Depositary will be required to deliver to such holder at the same time a
new Depositary Receipt evidencing such excess number of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems shares of Preferred Stock held by a Preferred
Stock Depositary, such Preferred Stock Depositary will be required to redeem as
of the same redemption date the number of Depositary Shares representing shares
of the Preferred Stock so redeemed, provided the Company shall have paid in full
to such Preferred Stock Depositary the redemption price of the Preferred Stock
to be redeemed plus an amount equal to any accrued and unpaid dividends thereon
to the date fixed for redemption. The redemption price per Depositary Share will
be equal to the redemption price and any other amounts per share payable with
respect to the Preferred Stock. If fewer than all the Depositary Shares are to
be redeemed, the Depositary Shares to be redeemed will be selected pro rata (as
nearly as may be practicable without creating fractional Depositary Shares) or
by any other equitable method determined by the Company that preserves the REIT
status of the Company.
From and after the date fixed for redemption, all dividends in respect of
the shares of Preferred Stock so called for redemption will cease to accrue, the
Depositary Shares so called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the Depositary Receipts evidencing
the Depositary Shares so called for redemption will cease, except the right to
receive any moneys payable upon such redemption and any money or other property
to which the holders of such Depositary Receipts were entitled upon such
redemption upon surrender thereof to the applicable Preferred Stock Depositary.
VOTING OF THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the applicable
Preferred Stock are entitled to vote, a Preferred Stock Depositary will be
required to mail the information contained in such notice of meeting to the
record holders of the Depositary Receipts evidencing the Depositary Shares which
represent such Preferred Stock. Each record holder of Depositary Receipts
evidencing Depositary Shares on the record date (which will be the same date as
the record date for the Preferred Stock) will be entitled to instruct such
Preferred Stock Depositary as to the exercise of the voting rights pertaining to
the amount of Preferred Stock represented by such holder's Depositary Shares.
Such Preferred Stock Depositary will be required to vote the amount of Preferred
Stock represented by such Depositary Shares in accordance with such
instructions, and the Company will agree to take all reasonable action which may
be deemed necessary by such Preferred Stock Depositary in order to enable such
Preferred Stock Depositary to do so. Such Preferred Stock Depositary will be
required to abstain from voting the amount of Preferred Stock represented by
such Depositary Shares to the extent it does not receive specific instructions
from the holders of Depositary Receipts evidencing such Depositary Shares. A
Preferred Stock Depositary will not be responsible for any failure to carry out
any instruction to vote, or for the manner or effect of any such vote made, as
long as any such action or non-action is in good faith and does not result from
negligence or willful misconduct of such Preferred Stock Depositary.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of each Depositary Receipt will be
entitled to the fraction of the liquidation preference accorded each share of
Preferred Stock represented by the Depositary Share evidenced by such Depositary
Receipt, as set forth in the applicable Prospectus Supplement.
CONVERSION OF PREFERRED STOCK
The Depositary Shares, as such, will not be convertible into Common Stock or
any other securities or property of the Company. Nevertheless, if so specified
in the applicable Prospectus Supplement relating to an offering of Depositary
Shares, the Depositary Receipts may be surrendered by holders thereof to the
applicable Preferred Stock Depositary with written instructions to such
Preferred Stock Depositary to
22
<PAGE>
instruct the Company to cause conversion of the Preferred Stock represented by
the Depositary Shares evidenced by such Depositary Receipts into whole shares of
Common Stock, other shares of Preferred Stock of the Company or other shares of
stock, and the Company will agree that upon receipt of such instructions and any
amounts payable in respect thereof, it will cause the conversion thereof
utilizing the same procedures as those provided for delivery of Preferred Stock
to effect such conversion. If the Depositary Shares evidenced by a Depositary
Receipt are to be converted in part only, a new Depositary Receipt or Receipts
will be issued for any Depositary Shares not to be converted. No fractional
shares of Common Stock will be issued upon conversion, and if such conversion
will result in a fractional share being issued, an amount will be paid in cash
by the Company equal to the value of the fractional interest based upon the
closing price of the Common Stock on the last business day prior to the
conversion.
AMENDMENT AND TERMINATION OF A DEPOSIT AGREEMENT
Any form of Depositary Receipt evidencing Depositary Shares which will
represent Preferred Stock and any provision of a Deposit Agreement will be
permitted at any time to be amended by agreement between the Company and the
applicable Preferred Stock Depositary. However, any amendment that materially
and adversely alters the rights of the holders of Depositary Receipts or that
would be materially and adversely inconsistent with the rights granted to the
holders of the related Preferred Stock will not be effective unless such
amendment has been approved by the existing holders of at least two-thirds of
the applicable Depositary Shares evidenced by the applicable Depositary Receipts
then outstanding. No amendment shall impair the right, subject to certain
anticipated exceptions in the Deposit Agreements, of any holder of Depositary
Receipts to surrender any Depositary Receipt with instructions to deliver to the
holder the related Preferred Stock and all money and other property, if any,
represented thereby, except in order to comply with law. Every holder of an
outstanding Depositary Receipt at the time any such amendment becomes effective
shall be deemed, by continuing to hold such Depositary Receipt, to consent and
agree to such amendment and to be bound by the applicable Deposit Agreement as
amended thereby.
A Deposit Agreement will be permitted to be terminated by the Company upon
not less than 30 days' prior written notice to the applicable Preferred Stock
Depositary if (i) such termination is necessary to preserve the Company's status
as a REIT or (ii) a majority of each series of Preferred Stock affected by such
termination consents to such termination, whereupon such Preferred Stock
Depositary will be required to deliver or make available to each holder of
Depositary Receipts, upon surrender of the Depositary Receipts held by such
holder, such number of whole or fractional shares of Preferred Stock as are
represented by the Depositary Shares evidenced by such Depositary Receipts
together with any other property held by such Preferred Stock Depositary with
respect to such Depositary Receipts. The Company will agree that if a Deposit
Agreement is terminated to preserve the Company's status as a REIT, then the
Company will use its best efforts to list the Preferred Stock issued upon
surrender of the related Depositary Shares on a national securities exchange. In
addition, a Deposit Agreement will automatically terminate if (i) all
outstanding Depositary Shares thereunder shall have been redeemed, (ii) there
shall have been a final distribution in respect of the related Preferred Stock
in connection with any liquidation, dissolution or winding up of the Company and
such distribution shall have been distributed to the holders of Depositary
Receipts evidencing the Depositary Shares representing such Preferred Stock or
(iii) each share of the related Preferred Stock shall have been converted into
stock of the Company not so represented by Depositary Shares.
CHARGES OF A PREFERRED STOCK DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of a Deposit Agreement. In addition, the
Company will pay the fees and expenses of a Preferred Stock Depositary in
connection with the performance of its duties under a Deposit Agreement.
However, holders of Depositary Receipts will pay the fees and expenses of a
Preferred Stock Depositary for any duties requested by such holders to be
performed which are outside of those expressly provided for in the applicable
Deposit Agreement.
23
<PAGE>
RESIGNATION AND REMOVAL OF DEPOSITARY
A Preferred Stock Depositary will be permitted to resign at any time by
delivering to the Company notice of its election to do so, and the Company will
be permitted at any time to remove a Preferred Stock Depositary, any such
resignation or removal to take effect upon the appointment of a successor
Preferred Stock Depositary. A successor Preferred Stock Depositary will be
required to be appointed within 60 days after delivery of the notice of
resignation or removal and will be required to be a bank or trust company having
its principal office in the United States and having a combined capital and
surplus of at least $50,000,000.
MISCELLANEOUS
A Preferred Stock Depositary will be required to forward to holders of
Depositary Receipts any reports and communications from the Company which are
received by such Preferred Stock Depositary with respect to the related
Preferred Stock.
Neither a Preferred Stock Depositary nor the Company will be liable if it is
prevented from or delayed in, by law or any circumstances beyond its control,
performing its obligations under a Deposit Agreement. The obligations of the
Company and a Preferred Stock Depositary under a Deposit Agreement will be
limited to performing their duties thereunder in good faith and without
negligence (in the case of any action or inaction in the voting of Preferred
Stock represented by the applicable Depositary Shares), gross negligence or
willful misconduct, and neither the Company nor any applicable Preferred Stock
Depositary will be obligated to prosecute or defend any legal proceeding in
respect of any Depositary Receipts. Depositary Shares or shares of Preferred
Stock represented thereby unless satisfactory indemnity is furnished. The
Company and any Preferred Stock Depositary will be permitted to rely on written
advice of counsel or accountants, or information provided by persons presenting
shares of Preferred Stock represented thereby for deposit, holders of Depositary
Receipts or other persons believed in good faith to be competent to give such
information, and on documents believed in good faith to be genuine and signed by
a proper party.
In the event a Preferred Stock Depositary shall receive conflicting claims,
requests or instructions from any holders of Depositary Receipts, on the one
hand, and the Company, on the other hand, such Preferred Stock Depositary shall
be entitled to act on such claims, requests or instructions received from the
Company.
DESCRIPTION OF COMMON STOCK
GENERAL
The authorized capital stock of the Company includes 150,000,000 shares of
Common Stock, $.01 par value per share. Each outstanding share of Common Stock
entitles the holder to one vote on all matters presented to shareholders for a
vote. Holders of Common Stock have no preemptive rights. At March 31, 1997,
there were 31,442,291 shares of Common Stock outstanding, 3,377,709 shares
reserved for issuance upon exchange of outstanding Units and 1,053,781 shares
reserved for issuance upon the exercise of outstanding stock options.
Shares of Common Stock currently outstanding are listed for trading on the
New York Stock Exchange (the "NYSE"). The Company will apply to the NYSE to list
the additional shares of Common Stock to be sold pursuant to any Prospectus
Supplement, and the Company anticipates that such shares will be so listed.
The Articles of Incorporation of the Company provide for the board of
directors to be divided into three classes of directors, each class to consist
as nearly as possible of one-third of the directors. At each annual meeting of
shareholders, the class of directors to be elected at such meeting will be
elected for a three-year term and the directors in the other two classes will
continue in office. The overall effect of the provisions in the Articles of
Incorporation with respect to the classified board may be to render more
difficult a change of control of the Company or removal of incumbent management.
Holders of Common Stock have no right to cumulative voting for the election of
directors. Consequently, at each annual meeting of shareholders, the
24
<PAGE>
holders of a plurality of the shares of Common Stock are able to elect all of
the successors of the class of directors whose term expires at that meeting.
Directors may be removed only for cause and only with the affirmative vote of
the holders of a majority of the shares of Common Stock entitled to vote in the
election of directors.
All shares of Common Stock issued will be duly authorized, fully paid, and
non-assessable. Distributions may be paid to the holders of Common Stock if and
when declared by the board of directors of the Company out of funds legally
available therefor. The Company intends to continue to pay quarterly dividends.
Under Indiana law, shareholders are generally not liable for the Company's
debts or obligations. If the Company is liquidated, subject to the right of any
holders of preferred stock, if any, to receive preferential distributions, each
outstanding share of Common Stock will be entitled to participate pro rata in
the assets remaining after payment of, or adequate provision for, all known
debts and liabilities of the Company.
CERTAIN PROVISIONS AFFECTING CHANGE OF CONTROL
GENERAL. Pursuant to Indiana law, the Company cannot merge with or sell all
or substantially all of the assets of the Company, except pursuant to a
resolution approved by shareholders holding a majority of the shares voting on
the resolution. The Company's Articles of Incorporation also contain provisions
which may discourage certain types of transactions involving an actual or
threatened change of control of the Company, including: (i) a requirement that,
in the case of certain mergers, sales of assets, liquidations or dissolutions,
or reclassifications or recapitalizations involving persons owning 10% or more
of the capital stock of the Company, such transactions be approved by a vote of
the holders of 80% of the issued and outstanding shares of capital stock of the
Company or three-fourths of the continuing directors, or provide for payment of
a price to affected shareholders for their shares not less than as specified in
the Articles of Incorporation; (ii) a requirement that any amendment or
alteration of certain provisions of the Articles of Incorporation affecting
change of control be approved by the holders of 80% of the issued and
outstanding capital stock of the Company; and (iii) a staggered board of
directors and a limitation on removal of directors to removal for cause as
described above.
The partnership agreement for the Operating Partnership also contains
provisions which could discourage transactions involving an actual or threatened
change of control of the Company, including (i) a requirement that holders of at
least 90% of the outstanding Units held by the Company and other Unit holders
approve any voluntary sale, exchange or other disposition, including merger or
consolidation (other than a disposition occurring upon a financing or
refinancing of the Operating Partnership), of all or substantially all of the
assets of the Operating Partnership in a single transaction or a series of
related transactions; (ii) a restriction against any assignment or transfer by
the Company of its interest in the Operating Partnership; and (iii) a
requirement that holders of more than 90% of the Units approve any merger,
consolidation or other combination of the Company with or into another entity,
or sale of all or substantially all of the Company's assets, or any
reclassification or recapitalization or change of outstanding shares of Common
Stock (other than certain changes in par value, stock splits, stock dividends or
combinations) unless after the transaction substantially all of the assets of
the surviving entity are contributed to the Operating Partnership in exchange
for Units. On these matters, the Company's Units will be voted at the discretion
of the directors of the Company who are not officers or employees of the Company
and do not hold Units.
OWNERSHIP LIMITS. For the Company to qualify as a REIT under the Code, no
more than 50% in value of its outstanding capital shares may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year or during a
proportionate part of a shorter taxable year. The Common Stock must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year or during a proportionate part of a shorter taxable year. Because the
Company expects to continue to qualify as a REIT, the Articles of Incorporation
of the Company contain restrictions on the acquisition of Common Stock intended
to ensure compliance with these requirements.
25
<PAGE>
The Articles of Incorporation contain a restriction which authorizes, but
does not require, the board of directors to refuse to give effect to a transfer
of Common Stock which, in its opinion, might jeopardize the status of the
Company as a REIT. This provision also renders null and void any purported
acquisition of shares which would result in the disqualification of the Company
as a REIT. The provision also gives the board of directors the authority to take
such actions as it deems advisable to enforce the provision. Such actions might
include, but are not limited to, refusing to give effect to, or seeking to
enjoin, a transfer which might jeopardize the Company's status as a REIT. The
provision also requires any shareholder to provide the Company such information
regarding his direct and indirect ownership of Common Stock as the Company may
reasonably require.
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations relevant
to the Company is based on current law, is not exhaustive of all possible tax
considerations, does not include a detailed discussion of any state, local or
foreign tax considerations and does not purport to deal with all aspects of
taxation that may be relevant to an investor in light of his or her particular
circumstances or to certain types of investors (including insurance companies,
tax-exempt entities, financial institutions or broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States)
who are subject to special treatment under the federal income tax laws. The tax
treatment of an investor will also vary depending upon the terms of the specific
securities acquired by such investor. Additional federal income tax
considerations that are material to investors in securities other than common
stock may be provided in the applicable Prospectus Supplement relating thereto.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS
SUPPLEMENT AS WELL AS HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF SECURITIES IN
AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND
ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
GENERAL. The Company expects to continue to be taxed as a REIT for Federal
income tax purposes. Management believes that the Company was organized and has
operated in such a manner as to meet the requirements for qualification and
taxation as a REIT under the Internal Revenue Code of 1986, as amended (the
"Code"), and that the Company intends to continue to operate in such a manner.
No assurance, however, can be given that the Company has qualified as a REIT or
will continue to operate in a manner so as to remain qualified as a REIT.
In the opinion of Bose McKinney & Evans which has acted as counsel to the
Company ("Counsel"), assuming the Company was organized in conformity with and
has satisfied the requirements for qualification and taxation as a REIT under
the Code for each of its taxable years from and including the first year for
which the Company made the election to be taxed as a REIT, and the assumptions
and representations referred to below are true, the proposed methods of
operation of the Company, the Operating Partnership and Duke Realty Services
Limited Partnership (the "Services Partnership") will permit the Company to
continue to qualify to be taxed as a REIT for its current and subsequent taxable
years. This opinion is based upon certain assumptions relating to the
organization and operation of Duke Services, Inc. ("DSI"), the Operating
Partnership and the Services Partnership and is conditioned upon certain
representations made
26
<PAGE>
by Company personnel and affiliates as to certain factual matters relating to
the Company's past operations and the intended manner of future operation of the
Company, the Operating Partnership, and the Services Partnership. The opinion is
further based upon a letter ruling received by the Company from the IRS dated
September 30, 1994, which concluded that the Company's and the Operating
Partnership's distributive shares of the gross income of the Services
Partnership will be in proportion to their respective percentage shares of the
capital interests of the partners of the Services Partnership. Counsel is not
aware of any facts or circumstances which are inconsistent with these
assumptions and representations. Unlike a tax ruling, an opinion of counsel is
not binding upon the IRS, and no assurance can be given that the IRS will not
challenge the status of the Company as a REIT for Federal income tax purposes.
The Company's qualification and taxation as a REIT has depended and will depend
upon, among other things, the Company's ability to meet on a continuing basis,
through ownership of assets, actual annual operating results, receipt of
qualifying real estate income, distribution levels and diversity of stock
ownership, the various qualification tests imposed under the Code discussed
below. Counsel will not review compliance with these tests on a periodic or
continuing basis. Accordingly, no assurance can be given respecting the
satisfaction of such tests. See "Taxation of the Company--Failure to Qualify."
The following is a general summary of the Code sections which govern the
Federal income tax treatment of a REIT and its shareholders. These sections of
the Code are highly technical and complex. This summary is qualified in its
entirety by the applicable Code provisions, Treasury Regulations, and
administrative and judicial interpretations thereof as currently in effect.
So long as the Company qualifies for taxation as a REIT and distributes at
least 95% of its REIT taxable income (computed without regard to net capital
gain or the dividends paid deduction) for its taxable year to its shareholders,
it will generally not be subject to federal income tax with respect to income
which it distributes to its shareholders. However, the Company may be subject to
federal income tax under certain circumstances, including taxes at regular
corporate rates on any undistributed REIT taxable income, the "alternative
minimum tax" on its items of tax preference, and taxes imposed on income and
gain generated by certain extraordinary transactions.
REQUIREMENT FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association: (1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation but for Sections 856 through 859 of the Code; (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) which has the calendar year as its taxable year; (6)
the beneficial ownership of which is held by 100 or more persons; (7) during the
last half of each taxable year not more than 50% in value of the outstanding
stock of which is owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities); and (8) which meets
certain income and asset tests, described below. The Company believes it
currently satisfies all requirements.
DSI is a "qualified REIT subsidiary" and is not treated as a separate
corporation. Thus, in applying the requirements described herein, DSI will be
ignored for federal income tax purposes, and all of its assets, liabilities, and
items of income, deduction, and credit will be treated as assets, liabilities,
and items of income, deduction, and credit of the Company. DSI, therefore, will
not be subject to federal corporate income taxation, although it may be subject
to state and local taxation.
INCOME TESTS. In order to qualify as a REIT, there are three gross income
tests that must be satisfied annually. For purposes of these tests, the Company
is deemed to be entitled to a share of the gross income attributable to its
proportionate interest in any partnerships in which it holds an interest. First,
at least 75% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property (including "rents from
real property," gain from the sale of real property and, in certain
circumstances, interest) or from qualified types of temporary investments.
Second, at least 95% of the Company's gross income (excluding gross income
27
<PAGE>
from prohibited transactions) for each taxable year must be derived from the
same items which qualify under the 75% income tests or from dividends, interest
and gain from the sale or disposition of stock or securities, or from any
combination of the foregoing. Third, less than 30% of the Company's gross income
(including gross income from prohibited transactions) must be derived from gain
in connection with the sale or other disposition of stock or securities held for
less than one year, property in a prohibited transaction, and real property held
for less than four years (other than involuntary conversions and foreclosure
property).
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income tests for a REIT described above only if several
conditions (related to the relationship of the tenant to the Company, the method
of determining the rent payable and nature of the property leased) are met. The
Company does not anticipate receiving rents in excess of a de minimis amount
that fail to meet these conditions. Finally, for rents received to qualify as
"rents from real property," the Company generally must not operate or manage the
property or furnish or render services to tenants, other than through an
"independent contractor" that is adequately compensated and from whom the
Company derives no income; provided, however, that the Company may perform
services "usually or customarily rendered" in connection with the rental of
space for occupancy only and not otherwise considered "rendered to the occupant"
("Permissible Services").
The Company provides certain management, development, construction and other
tenant-related services (collectively, "Real Estate Services") with respect to
the Properties through the Operating Partnership, which is not an independent
contractor. Management believes that the Real Estate Services provided to
tenants by the Operating Partnership are Permissible Services. To the extent
Real Estate Services to tenants do not constitute Permissible Services, such
services are performed by independent contractors.
The Company derives a portion of its income from the Operating Partnership's
interest as a limited partner in the Services Partnership and its ownership of
DSI which is a general partner of the Services Partnership. The Services
Partnership receives fees for Real Estate Services with respect to properties
that are not owned by the Operating Partnership and fees in consideration for
the performance of management and administrative services with respect to
Properties that are not entirely owned by the Operating Partnership. All or a
portion of such fees will not qualify as "rents from real property" for purposes
of the 75% or 95% gross income tests. Pursuant to Treasury Regulations, a
partner's capital interest in a partnership determines its proportionate
interest in the partnership's gross income from partnership assets for purposes
of the 75% and 95% gross income tests. For this purpose, the capital interest of
a partner is determined by dividing its capital account by the sum of all
partners' capital accounts. The partnership agreement of the Services
Partnership provides, however, for varying allocations of income which differ
from capital interests, subject to certain limitations on the aggregate amount
of gross income which may be allocated to the Operating Partnership and DSI. The
Company has obtained a letter ruling from the IRS that allocations according to
capital interests are proper for applying the 75% and 95% gross income tests.
Thus, for purposes of these gross income tests, the Services Partnership
allocates its gross income to the Operating Partnership and DSI based on their
capital interests in the Services Partnership. Although certain of the fees
allocated from the Services Partnership do not qualify under the 75% or 95%
gross income tests as "rents from real property," the Company believes that the
aggregate amount of such fees (and any other non-qualifying income) allocated to
the Company in any taxable year has not and will not cause the Company to exceed
the limits on non-qualifying income under the 75% or 95% gross income tests
described above.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. It is not
possible, however, to state whether in all circumstances the Company would be
entitled to the benefit of these relief provisions. Even if these relief
provisions apply, a tax would be imposed on certain excess net income.
ASSET TESTS. In order for the Company to maintain its qualification as a
REIT, at the close of each quarter of its taxable year, it must also satisfy
three tests relating to the nature of its assets. First, at least 75%
28
<PAGE>
of the value of the Company's total assets must be represented by "real estate
assets," cash, cash items, and government securities. Second, not more than 25%
of the Company's total assets may be represented by securities other than those
in the 75% assets class. Third, of the assets held in securities other than
those in the 75% assets class, the value of any one issuer's securities owned by
the Company may not exceed 5% of the value of the Company's total assets, and
the Company may not own more than 10% of any one issuer's outstanding voting
securities (excluding securities of a qualified REIT subsidiary as defined in
the Code or another REIT).
The Company is deemed to directly hold its proportionate share of all real
estate and other assets of the Operating Partnership as well as its
proportionate share of all assets deemed owned by the Operating Partnership and
DSI through their ownership of partnership interests in the Services Partnership
and other partnerships. As a result, management believes that more than 75% of
the company's assets are real estate assets. In addition, management does not
expect the Company to hold (1) any securities representing more than 10% of any
one issuer's voting securities other than DSI, which is a qualified REIT
subsidiary, nor (2) securities of any one issuer exceeding 5% of the value of
the Company's gross assets (determined in accordance with generally accepted
accounting principles).
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, generally must distribute dividends (other than capital gain dividends) to
its shareholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain), and (ii) 95% of the net income
(after tax) if any, from foreclosure property, minus (B) the sum of certain
items of non-cash income. To the extent that the Company does not distribute all
of its net capital gain or distributes at least 95%, but less than 100%, of its
"REIT taxable income," as adjusted, it will be subject to tax on the
undistributed amount at regular capital gains and ordinary corporate tax rates.
Furthermore, if the Company should fail to distribute during each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
of its REIT net capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company will be subject to regular
capital gains and ordinary corporate tax rates on undistributed income and also
may be subject to a 4% excise tax on undistributed income in certain events. The
Company believes that it has made and intends to continue to make timely
distributions sufficient to satisfy the annual distribution requirements. In
this regard, the partnership agreement of the Operating Partnership authorizes
the Company, as general partner, to take such steps as may be necessary to cause
the Operating Partnership to distribute to its partners an amount sufficient to
permit the Company to meet these distribution requirements. It is possible,
however, that the Company, from time to time, may not have sufficient cash or
other liquid assets to meet the 95% distribution requirement due primarily to
the expenditure of cash for nondeductible expenses such as principal
amortization or capital expenditures. In such event, the Company may borrow or
may cause the Operating Partnership to arrange for short-term or other borrowing
to permit the payment of required dividends or pay dividends in the form of
taxable stock dividends. If the amount of nondeductible expenses exceeds
non-cash deductions, the Operating Partnership may refinance its indebtedness to
reduce principal payments and borrow funds for capital expenditures.
FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a REIT
in any taxable year, the Company will be subject to tax (including any
applicable corporate alternative minimum tax) on its taxable income at regular
corporate rates. Distributions to shareholders in any year in which the Company
fails to qualify will not be required to be made and, if made, will not be
deductible by the Company. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN PARTNERSHIPS
EFFECT OF TAX STATUS OF OPERATING PARTNERSHIP AND SERVICES PARTNERSHIP AND
OTHER PARTNERSHIPS ON REIT QUALIFICATION. All of the Company's investments are
through DSI and the Operating Partnership, which in
29
<PAGE>
turn hold interests in other partnerships, including the Services Partnership.
The Company believes that the Operating Partnership, and each other partnership
in which it holds an interest, is properly treated as a partnership for tax
purposes (and not as an association taxable as a corporation). If, however, the
Operating Partnership, the Services Partnership or any of the other partnerships
were treated as an association taxable as a corporation, the Company would cease
to qualify as a REIT.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. The Operating Partnership
was formed by way of contributions of appreciated property (including certain of
the Properties) to the Operating Partnership. When property is contributed to a
partnership in exchange for an interest in the partnership, the partnership
generally takes a carryover basis in that property for tax purposes equal to the
adjusted basis of the contributing partner in the property, rather than a basis
equal to the fair market value of the property at the time of contribution (this
difference is referred to as "Book-Tax Difference"). The partnership agreement
of the Operating Partnership requires allocations of income, gain, loss and
deduction with respect to a contributed Property be made in a manner consistent
with the special rules of Section 704(c) of the Code and the regulations
thereunder, which will tend to eliminate the Book-Tax Differences with respect
to the contributed Properties over the life of the Operating Partnership.
However, because of certain technical limitations, the special allocation rules
of Section 704(c) may not always entirely eliminate the Book-Tax Differences on
an annual basis or with respect to a specific taxable transaction such as a
sale. Thus, the carryover basis of the contributed Properties in the hands of
the Operating Partnership could cause the Company (i) to be allocated lower
amounts of depreciation and other deductions for tax purposes than would be
allocated to the Company if all Properties were to have a tax basis equal to
their fair market value at the time of contribution, and (ii) possibly to be
allocated taxable gain in the event of a sale of such contributed Properties in
excess of the economic or book income allocated to the Company as a result of
such sale. The foregoing principles also apply in determining the earnings and
profits of the Company for purposes of determining the portion of distributions
taxable as dividend income. The application of these rules over time may result
in a higher portion of distributions being taxed as dividends than would have
occurred had the Company purchased its interests in the Properties at their
agreed values.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions that are designated as
capital gain dividends will be taxed as long-term capital gains (to the extent
they do not exceed the Company's actual net capital gain for the taxable year).
However, corporate holders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. Distributions in excess of current and
accumulated earnings and profits will not be taxable to a holder to the extent
that they do not exceed the adjusted tax basis of the holder's shares, but
rather will reduce the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a holder's shares they will be
included in income as long-term capital gain (or short-term capital gain if the
shares have been held for one year or less) assuming the shares are a capital
asset in the hands of the holder. In addition, any dividend declared by the
Company in October, November or December of any year payable to a shareholder of
record on a specified date in any such month shall be treated as both paid by
the Company and received by the shareholder on December 31 of such year;
provided that the dividend is actually paid by the Company during January of the
following calendar year. Shareholders may not include in their individual income
tax returns any net operating losses or capital losses of the Company.
In general, a domestic shareholder will realize capital gain or loss on the
disposition of common stock equal to the difference between (i) the amount of
cash and the fair market value of any property received on such disposition and
(ii) the shareholder's adjusted basis of such common stock. Such gain or loss
generally will constitute long-term capital gain or loss if the shareholder has
held such shares for more than one year. Loss upon a sale or exchange of common
stock by a shareholder who has held such common stock for six
30
<PAGE>
months or less (after applying certain holding period rules) will be treated as
a long-term capital loss to the extent of distributions from the Company
required to be treated by such shareholder as long-term capital gain.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income ('UBTI"). While many investments in
real estate generate UBTI, the IRS has issued a published ruling that dividend
distributions from a REIT to an exempt employee pension trust do not constitute
UBTI, provided that the shares of the REIT are not otherwise used in an
unrelated trade or business of the exempt employee pension trust. Based on that
ruling, amounts distributed by the Company to Exempt Organizations generally
should not constitute UBTI. However, if an Exempt Organization finances its
acquisitions of the common shares with debt, a portion of its income from the
Company will constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of
Code section 501(c) are subject to different UBTI rules, which generally will
require them to characterize distributions from the Company as UBTI.
In addition, in certain circumstances, a pension trust that owns more than
10% of the Company's shares is required to treat a percentage of the dividends
from the Company as UBTI (the "UBTI Percentage"). The UBTI Percentage is the
gross income derived by the Company from an unrelated trade or business
(determined as if the Company were a pension trust) divided by the gross income
of the Company for the year in which the dividends are paid. The UBTI rule
applies to a pension trust holding more than 10% of the Company's stock only if
(i) the UBTI Percentage is at least 5%, (ii) the Company qualifies as a REIT by
reason of the modification of the "five or fewer" stock ownership requirement
that allows the beneficiaries of the pension trust to be treated as holding
shares of the Company in proportion to their actuarial interests in the pension
trust, and (iii) either (A) one pension trust owns more that 25% of the value of
the Company's shares or (B) a group of pension trusts individually holding more
than 10% of the value of the Company's shares collectively owns more than 50% of
the value of the Company's shares.
BACKUP WITHHOLDING
The Company will report to its domestic shareholders and the IRS the amount
of dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A shareholder that does not provide the Company with his correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the shareholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status to the Company.
The Treasury Department recently issued proposed regulations regarding the
withholding and information reporting rules discussed above. In general, the
proposed regulations do not alter the substantive withholding requirements but
unify current certification procedures and forms, and clarify and modify
reliance standards. If finalized in their current form, the proposed regulations
would generally be effective for payments made after December 31, 1997, subject
to certain transition rules.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. Federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are
31
<PAGE>
complex, and no attempt will be made herein to provide more than a limited
summary of such rules. Prospective Non-U.S. Shareholders should consult with
their own tax advisors to determine the impact of U.S. Federal, state and local
income tax laws with regard to an investment in common stock, including any
reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company of U.S. real property interests and not designated by the Company as
capital gain dividends will be treated as dividends of ordinary income to the
extent that they are made out of current or accumulated earnings and profits of
the Company. Such distributions, ordinarily, will be subject to a withholding
tax equal to 30% of the gross amount of the distribution unless an applicable
tax treaty reduces that tax. Distributions in excess of current and accumulated
earnings and profits of the Company will not be taxable to a Non-U.S.
Shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's common stock, but rather will reduce the adjusted basis of such
common stock. To the extent that such distributions exceed the adjusted tax
basis of a Non-U.S. Shareholder's common stock, they will give rise to tax
liability if the Non-U.S. Shareholder would otherwise be subject to tax on any
gain from the sale or disposition of his common stock as described below (in
which case they also may be subject to a 30% branch profits tax if the
shareholder is a foreign corporation). As a result of a legislative change made
by the Small Business Job Protection Act of 1996, effective for distributions
made after August 20, 1996, the Company is required to withhold 10% of any
distribution in excess of the Company's current accumulated earnings and
profits. Consequently, although the Company intends to withhold at a rate of 30%
on the entire amount of any distribution, to the extent that the Company does
not do so any portion of a distribution not subject to withholding at a rate of
30% will be subject to withholding at a rate of 10%. However, the Non-U.S.
Shareholder may seek a refund of such amounts from the IRS if it is subsequently
determined that such distribution was, in fact, in excess of current or
accumulated earnings and profits of the Company, and the amount withheld exceeds
the Non-U.S. Shareholder's United States tax liability, if any, with respect to
the distribution.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") at the
normal capital gain rates applicable to domestic shareholders (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Also, distributions subject to FIRPTA
may be subject to a 30% branch profits tax in the hands of a corporate Non-U.S.
Shareholder not entitled to treaty relief or exemption. The Company is required
to withhold 35% of any distribution that is or could be designated by the
Company as a capital gain dividend. The amount withheld is creditable against
the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of common stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. The Company believes that it is a
"domestically controlled REIT," and, therefore, that the sale of common stock
will not be subject to taxation under FIRPTA. If the gain on the sale of common
stock were to be subject to tax under FIRPTA, the Non-U.S. Shareholder would be
subject to the same treatment as domestic shareholders with respect to such gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals), and the purchaser of the
common stock would be required to withhold and remit to the IRS 10% of the
purchase price.
STATE AND LOCAL TAXES
The Company or its shareholders or both may be subject to state, local or
other taxation in various state, local or other jurisdictions, including those
in which they transact business or reside. The tax treatment in such
jurisdictions may differ from the Federal income tax consequences discussed
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
shares of the Company.
32
<PAGE>
PLAN OF DISTRIBUTION
The Company and the Operating Partnership may sell Securities to or through
underwriters, and also may sell Securities directly to other purchasers or
through agents.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
In connection with the sale of Securities, underwriters may receive
compensation from the Company, from the Operating Partnership or from purchasers
of Securities, for whom they may act as agents, in the form of discounts,
concessions, or commissions. Underwriters may sell Securities to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions, or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agents. Underwriters, dealers, and agents
that participate in the distribution of Securities may be deemed to be
underwriters, and any discounts or commissions they receive from the Company or
the Operating Partnership, and any profit on the resale of Securities they
realize may be deemed to be underwriting discounts and commissions, under the
Securities Act. Any such underwriter or agent will be identified, and any such
compensation received from the Company or the Operating Partnership will be
described, in the Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each series
of Securities will be a new issue with no established trading market, other than
the Common Stock which is listed on the NYSE. Any shares of Common Stock sold
pursuant to a Prospectus Supplement will be listed on such exchange, subject to
official notice of issuance. The Company or the Operating Partnership may elect
to list any series of Debt Securities, Preferred Stock or Depositary Shares on
an exchange, but neither is obligated to do so. It is possible that one or more
underwriters may make a market in a series of Securities, but will not be
obligated to do so and may discontinue any market making at any time without
notice. Therefore, no assurance can be given as to the liquidity of the trading
market for the Securities.
Under agreements the Company and the Operating Partnership may enter into,
underwriters, dealers, and agents who participate in the distribution of
Securities may be entitled to indemnification by the Company or the Operating
Partnership against certain liabilities, including liabilities under the
Securities Act.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, or be customers of, the Company or the Operating Partnership in
the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company or the
Operating Partnership, as the case may be, will authorize underwriters or other
persons acting as the Company's or the Operating Partnership's agents to solicit
offers by certain institutions to purchase Securities from the Company or the
Operating Partnership pursuant to contracts providing for payment and delivery
on a future date. Institutions with which such contracts may be made include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and others, but in all cases
such institutions must be approved by the Company or the Operating Partnership,
as the case may be. The obligations of any purchaser under any such contract
will be subject to the condition that the purchase of the Securities shall not
at the time of delivery be prohibited under the laws of the jurisdiction to
which such purchaser is subject. The underwriters and such other agents will not
have any responsibility in respect of the validity or performance of such
contracts.
33
<PAGE>
LEGAL OPINIONS
The legality of the Securities offered hereby is being passed upon for the
Company by Bose McKinney & Evans, Indianapolis, Indiana. In addition, the
description of Federal income tax matters contained in this Prospectus entitled
"Federal Income Tax Considerations" is based upon the opinion of Bose McKinney &
Evans. John W. Wynne and Darell E. Zink, Jr., officers and directors of the
Company, were partners in Bose McKinney & Evans through 1987 and 1982,
respectively, and were of counsel to that firm until December, 1990.
EXPERTS
The Consolidated Financial Statements and related Schedules of the Company
and of the Operating Partnership as of December 31, 1996 and 1995, and for each
of the years in the three-year period ended December 31, 1996, each incorporated
herein by reference have been incorporated herein in reliance upon the reports
of KPMG Peat Marwick LLP, independent certified public accountants, also
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
With respect to the unaudited interim financial information for the periods
ended March 31, 1997 and 1996, incorporated by reference herein, the independent
certified public accountants have reported that they applied limited procedures
in accordance with professional standards for a review of such information.
However, their separate reports included in the Company's and the Operating
Partnership's quarterly reports on Form 10-Q for the quarter ended March 31,
1997, and incorporated by reference herein, state that they did not audit and
they do not express an opinion on that interim financial information.
Accordingly, the degree of reliance on their reports on such information should
be restricted in light of the limited nature of the review procedures applied.
The accountants are not subject to the liability provisions of section 11 of the
Securities Act of 1933 for their reports on the unaudited interim financial
information because those reports are not a "report" or a "part" of the
registration statement prepared or certified by the accountants within the
meaning of sections 7 and 11 of such Act.
34
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESMAN OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER AND THEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS SUPPLEMENT OR IN THE PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.................. S-3
The Company.................................... S-11
Use of Proceeds................................ S-15
Price Range of Common Stock and Dividend
History....................................... S-15
Capitalization................................. S-17
Selected Consolidated Financial Data........... S-18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... S-20
Properties..................................... S-26
Management..................................... S-29
Certain Federal Income Tax Considerations...... S-30
Underwriting................................... S-31
Legal Matters.................................. S-32
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain Documents by
Reference..................................... 2
The Company and the Operating Partnership...... 3
Use of Proceeds................................ 3
Ratios of Earnings to Fixed Charges............ 4
Description of Debt Securities................. 4
Description of Preferred Stock................. 15
Description of Depositary Shares............... 21
Description of Common Stock.................... 24
Federal Income Tax Considerations.............. 26
Plan of Distribution........................... 33
Legal Opinions................................. 34
Experts........................................ 34
</TABLE>
7,000,000 SHARES
[LOGO]
COMMON STOCK
-------------------
PROSPECTUS SUPPLEMENT
-------------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
A.G. EDWARDS & SONS, INC.
LEGG MASON WOOD WALKER
INCORPORATED
MCDONALD & COMPANY
SECURITIES, INC.
MORGAN STANLEY DEAN WITTER
SEPTEMBER , 1997
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
