UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
------- ------
------------------------------------------------------------------------
Commission File Number: 1-9044
DUKE-WEEKS REALTY CORPORATION
State of Incorporation: IRS Employer ID Number:
Indiana 35-1740409
- ------------------------ -----------------------
Address of principal executive offices:
8888 Keystone Crossing, Suite 1200
----------------------------------
Indianapolis, Indiana 46240
-----------------------------
Telephone: (317) 808-6000
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of Common Shares outstanding as of November 12, 1999 was
125,211,882 ($.01 par value).
<PAGE>
DUKE-WEEKS REALTY CORPORATION
INDEX
Part I - Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets as of September 30, 1999
(Unaudited) and December 31, 1998 2
Condensed Consolidated Statements
of Operations for the three and nine
months ended September 30, 1999 and
1998 (Unaudited) 3
Condensed Consolidated Statements of
Cash Flows for the nine months ended
September 30, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statement of
Shareholders' Equity for the nine
months ended September 30, 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-11
Independent Accountants' Review Report 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13-22
Part II - Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities
24
Item 4. Submission of Matters to a Vote of
Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24-25
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUKE-WEEKS REALTY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------ ------------- ------------
(Unaudited)
<S> <C> <C>
Real estate investments:
Land and improvements $ 596,499 $ 312,022
Buildings and tenant improvements 3,920,925 2,091,757
Construction in progress 370,595 185,950
Investments in unconsolidated companies 168,101 125,746
Land held for development 231,323 146,911
--------- ---------
5,287,443 2,862,386
Accumulated depreciation (234,071) (179,887)
--------- ---------
Net real estate investments 5,053,372 2,682,499
Cash and cash equivalents 45,282 6,950
Accounts receivable from tenants, net
of allowance of $2,361 and $896 17,720 9,641
Straight-line rent receivable, net
of allowance of $841 27,265 20,332
Receivables on construction contracts 32,914 29,162
Deferred financing costs, net of
accumulated amortization of $8,478
and $11,754 14,860 11,382
Deferred leasing and other costs, net
of accumulated amortization of
$20,749 and $16,838 67,880 53,281
Escrow deposits and other assets 75,369 40,406
--------- ---------
$5,334,662 $2,853,653
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Indebtedness:
Secured debt $ 522,997 $ 326,317
Unsecured notes 1,176,860 590,000
Unsecured lines of credit 265,000 91,000
--------- ---------
1,964,857 1,007,317
Construction payables and amounts
due subcontractors 92,752 55,012
Accounts payable 4,089 4,836
Accrued expenses:
Real estate taxes 60,174 36,075
Interest 14,603 10,329
Other 38,328 22,781
Other liabilities 29,112 21,928
Tenant security deposits and prepaid rents 33,845 18,534
--------- ---------
Total liabilities 2,237,760 1,176,812
--------- ---------
Minority interest 432,096 106,729
--------- ---------
Shareholders' equity:
Preferred shares and paid-in capital
($.01 par value); 5,000 shares
authorized: 586,817 347,798
Common shares and paid-in capital
($.01 par value); 150,000 shares
authorized; 125,180 and 86,053
shares issued and outstanding 2,152,763 1,290,313
Distributions in excess of net income (74,774) (67,999)
--------- ---------
Total shareholders' equity 2,664,806 1,570,112
--------- ---------
$5,334,662 $2,853,653
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 2 -
<PAGE>
DUKE-WEEKS REALTY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
RENTAL OPERATIONS:
Revenues:
Rental income $157,001 $87,699 $360,849 $245,037
Equity in earnings of
unconsolidated companies 3,272 2,649 8,559 8,066
------- ------ ------- -------
160,273 90,348 369,408 253,103
------- ------ ------- -------
Operating expenses:
Rental expenses 25,095 16,115 61,222 43,799
Real estate taxes 16,408 8,984 38,899 24,871
Interest expense 25,960 16,701 59,080 43,926
Depreciation and amortization 32,738 17,660 74,127 48,445
------- ------ ------- -------
100,201 59,460 233,328 161,041
------- ------ ------- -------
Earnings from rental
operations 60,072 30,888 136,080 92,062
------- ------ ------- -------
SERVICE OPERATIONS:
Revenues:
Property management,
maintenance
and leasing fees 7,255 3,606 14,676 10,240
Construction management and
development fees 7,817 3,425 20,976 8,115
Other income 330 253 910 851
------- ------ ------- -------
15,402 7,284 36,562 19,206
------- ------ ------- -------
Operating expenses:
Payroll 5,916 3,178 12,972 9,865
Maintenance 4,215 613 5,817 1,811
Office and other 1,400 678 5,284 2,000
------- ------ ------- -------
11,531 4,469 24,073 13,676
------- ------ ------- -------
Earnings from service
operations 3,871 2,815 12,489 5,530
------- ------ ------- -------
General and administrative
expense (4,626) (2,792) (11,737) (8,235)
------- ------ ------- -------
Operating income 59,317 30,911 136,832 89,357
OTHER INCOME (EXPENSE):
Interest income 699 518 1,844 1,107
Earnings from property sales 3,095 661 7,380 1,615
Other expense (133) (131) (471) (192)
Minority interest in earnings
of common unitholders (6,543) (3,116) (13,184) (9,264)
Minority interest in earnings
of preferred unitholders (2,102) - (2,102) -
Other minority interest in
earnings of subsidiaries (617) (692) (1,497) (946)
------- ------ ------- -------
Net income 53,716 28,151 128,802 81,677
Dividends on preferred shares (12,254) (4,702) (30,350) (14,108)
------- ------ ------- -------
Net income available for
common shares $ 41,462 $23,449 $ 98,452 $67,569
======= ====== ======= =======
Net income per common share:
Basic $ .35 $ .29 $ 1.00 $ .85
======= ====== ======= ======
Diluted $ .35 $ .29 $ 1.00 $ .84
======= ====== ======= ======
Weighted average number
of common shares outstanding 118,820 81,594 97,966 79,461
======= ====== ======= =======
Weighted average number
of common and dilutive
potential common shares 138,923 93,279 112,106 91,252
======= ====== ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 3 -
<PAGE>
DUKE-WEEKS REALTY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $128,802 $ 81,677
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation of buildings and tenant improvements 66,993 43,039
Amortization of deferred financing costs 1,324 1,018
Amortization of deferred leasing and other costs 7,134 5,406
Minority interest in earnings 16,784 10,210
Straight-line rent adjustment (7,462) (4,763)
Earnings from property sales (7,380) (1,615)
Construction contracts, net 29,741 (7,311)
Other accrued revenues and expenses, net 22,725 26,099
Equity in earnings in excess of distributions
received from unconsolidated companies (942) (4,651)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 257,719 149,109
------- -------
Cash flows from investing activities:
Rental property development costs (306,031) (163,682)
Acquisition of rental properties (124,968) (231,338)
Acquisition of land held for development
and infrastructure costs (82,995) (25,139)
Recurring costs:
Tenant improvements (14,003) (7,611)
Leasing costs (7,952) (4,668)
Building improvements (1,564) (1,572)
Other deferred leasing costs (17,126) (11,533)
Other deferred costs and other assets (37,822) (18,661)
Proceeds from property sales, net 35,524 7,498
Other distributions received from
unconsolidated companies 16,802 -
Net investment in and advances to
unconsolidated companies (30,048) (14,095)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (570,183) (470,801)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common shares, net 203,365 136,661
Proceeds from issuance of preferred shares, net 96,519 -
Proceeds from indebtedness 300,000 250,000
Borrowings (repayments) on lines of credit, net 174,000 96,000
Repayments on indebtedness including
principal amortization (264,711) (48,269)
Distributions to common shareholders (105,227) (74,647)
Distributions to preferred shareholders (30,350) (14,108)
Distributions to minority interest (17,659) (10,910)
Deferred financing costs (5,141) (1,355)
------- -------
Net cash provided by financing activities 350,796 333,372
------- -------
Net increase in cash and cash equivalents 38,332 11,680
Cash and cash equivalents at beginning of period 6,950 10,353
------- -------
Cash and cash equivalents at end of period $ 45,282 $ 22,033
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 4 -
<PAGE>
DUKE-WEEKS REALTY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Shares Common Shares Distributions
and Paid-in and Paid-in in Excess of
Capital Capital Net Income Total
--------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Balance at
December 31, 1998 $347,798 $1,290,313 $(67,999) $1,570,112
Issuance of common
shares, net of
underwriting
discounts
and offering
costs of $100 - 204,238 - 204,238
Issuance of
preferred shares,
net of underwriting
discounts and
offering costs
of $3,481 96,519 - - 96,519
Acquisition of
minority interest - 49,457 - 49,457
Merger with
Weeks
Corporation 142,500 608,755 - 751,255
Net income - - 128,802 128,802
Distributions
to common
shareholders - - (105,227) (105,227)
Distributions
to preferred
shareholders - - (30,350) (30,350)
------- --------- -------- ---------
BALANCE AT
SEPTEMBER 30,
1999 $586,817 $2,152,763 $(74,774) $2,664,806
======= ========= ======= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 5 -
<PAGE>
DUKE-WEEKS REALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. FINANCIAL STATEMENTS
In July 1999, Weeks Corporation ("Weeks") was merged with and into
Duke Realty Investments, Inc. ("Duke"). This transaction is
hereafter referred to as the "Weeks Merger." Upon consummation of
the Weeks Merger, the name of the company was changed to Duke-Weeks
Realty Corporation ("the Company"). Financial information and
references throughout this document are labeled "the Company" for
both pre-merger and post-merger periods as a result of this name change.
The Company's financial statements and related footnotes as of and
for the three and nine months ended September 30, 1999 give effect
to the Weeks Merger which was accounted for under the purchase
method. See Note 7 for a more complete discussion of the Weeks
Merger.
The interim condensed consolidated financial statements included
herein have been prepared by the Company without audit. The
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the
instructions for Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. These
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in
Duke's Annual Report to Shareholders.
THE COMPANY
The Company's rental operations are conducted through Duke-Weeks
Realty Limited Partnership ("DWRLP"), of which the Company owns
86.9% at September 30, 1999. The remaining interests in DWRLP are
exchangeable for shares of the Company's common stock on a one-for-
one basis. The Company conducts service operations through Duke
Realty Services Limited Partnership and Duke Construction Limited
Partnership, in which the Company's wholly-owned subsidiary, Duke
Services, Inc., is the sole general partner. The consolidated financial
statements include the accounts of the Company and its majority-owned or
controlled subsidiaries. The equity interests in these majority-
owned or controlled subsidiaries not owned by the Company are
reflected as minority interests in the consolidated financial
statements.
2. LINES OF CREDIT
The Company has the following lines of credit available (in thousands):
<TABLE>
<CAPTION>
Outstanding
Borrowing Maturity Interest at September
Description Capacity Date Rate 30, 1999
----------------------- ---------- --------- ---------- -----------------
<S> <C> <C> <C> <C>
Unsecured Line of Credit $450,000 April 2001 LIBOR + .70% $265,000
Unsecured Line of Credit 300,000 April 2001 LIBOR + .90% 0
</TABLE>
- 6 -
<PAGE>
Both lines of credit are used to fund development and acquisition of
additional rental properties and to provide working capital.
Effective July 2, 1999, the interest rate on the $450 million line of credit
was adjusted from LIBOR + .80% to LIBOR + .70%. Additionally, the $450
million line of credit allows the Company an option to obtain borrowings
from the financial institutions that participate in the line of credit at
rates lower than the stated interest rate, subject to certain restrictions.
Amounts outstanding on the line of credit at September 30, 1999 are at
LIBOR + .65% to .70%.
The $300 million line of credit was obtained July 2, 1999, following the
Weeks Merger (see Note 7).
3. RELATED PARTY TRANSACTIONS
The Company provides management, maintenance, leasing,
construction, and other tenant related services to properties in
which certain executive officers have continuing ownership
interests. The Company was paid fees totaling $2.0 million for such
services for the nine months ended September 30, 1999 and 1998.
Management believes the terms for such services are equivalent to
those available in the market. The Company has an option to
purchase the executive officers' interest in each of these
properties which expires October 2003. The option price of each
property was established at the date the option was granted.
4. NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net
income available for common shares by the weighted average number
of common shares outstanding for the period. Diluted net income per
share is computed by dividing the sum of net income available for
common shares and minority interest in earnings of unitholders, by
the sum of the weighted average number of common shares and
dilutive potential common shares outstanding for the period.
The following table reconciles the components of basic and diluted
net income per common share for the three and nine months ended
September 30:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic net income available
for common shares $41,462 $23,449 $ 98,452 $67,569
Minority interest in earnings
of common unitholders 6,543 3,116 13,184 9,264
------ ------ ------- ------
Diluted net income available
for common shares and
dilutive potential shares $48,005 $26,565 $111,636 $76,833
====== ====== ======= ======
Weighted average number of
common shares outstanding 118,820 81,594 97,966 79,461
Weighted average common
partnership units
outstanding 18,901 10,840 13,120 10,894
Dilutive shares for
long-term compensation
plans 1,202 845 1,020 897
------- ------ ------- ------
Weighted average number
of common shares and
dilutive potential
common shares 138,923 93,279 112,106 91,252
======= ====== ======= ======
</TABLE>
- 7 -
<PAGE>
The Preferred D Series Convertible stock (see Note 6) and Preferred
G Convertible units (see Note 8) were both anti-dilutive at
September 30, 1999; therefore, no conversion to common shares is
included in weighted shares outstanding.
5. SEGMENT REPORTING
The Company is engaged in four operating segments; the ownership
and rental of office, industrial and retail real estate investments
and the providing of various real estate services such as property
management, maintenance, leasing and construction management to
third-party property owners ("Service Operations"). The Company's
reportable segments offer different products or services and are
managed separately because each requires different operating
strategies and management expertise. There are no material
intersegment sales or transfers.
Non-segment revenue to reconcile to total revenue consists mainly
of equity in earnings of unconsolidated companies. Non-segment
assets to reconcile to total assets consist of corporate assets
including cash, deferred financing costs and investments in
unconsolidated companies.
The Company assesses and measures segment operating results based
on an industry performance measure referred to as Funds From
Operations ("FFO"). The National Association of Real Estate
Investment Trusts defines FFO as net income or loss, excluding
gains or losses from debt restructuring and sales of depreciated
operating property, plus operating property depreciation and
amortization and adjustments for minority interest and
unconsolidated companies on the same basis. FFO is not a measure of
operating results or cash flows from operating activities as
measured by generally accepted accounting principles, is not
necessarily indicative of cash available to fund cash needs and
should not be considered an alternative to cash flows as a measure
of liquidity. Interest expense and other non-property specific
revenues and expenses are not allocated to individual segments in
determining the Company's performance measure.
The revenues and FFO for each of the reportable segments for the
three and nine months ended September 30, 1999 and 1999 and the
assets for each of the reportable segments as of September 30, 1999
and December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Rental Operations:
Office Properties $ 77,676 $56,266 $200,328 $ 155,794
Industrial Properties 73,486 26,170 141,876 74,011
Retail Properties 6,491 5,298 18,569 15,365
Service Operations 15,402 7,284 36,562 19,206
------- ------ ------- -------
Total Segment Revenues 173,055 95,018 397,335 264,376
Non-Segment Revenue 2,620 2,614 8,635 7,933
------- ------ ------- -------
Consolidated Revenue $175,675 $97,632 $405,970 $272,309
======= ====== ======= =======
- 8 -
<PAGE>
Funds From Operations
Rental Operations:
Office Properties $ 51,794 $38,296 $137,199 $109,122
Industrial Properties 56,435 18,663 109,488 57,078
Retail Properties 5,366 4,323 15,295 12,648
Services Operations 3,871 2,816 12,489 5,531
------- ------ ------- -------
Total Segment FFO $117,466 $64,098 $274,471 $184,379
Non-Segment FFO:
Interest expense (25,960) (16,701) (59,080) (43,926)
Interest income 699 518 1,844 1,107
General and
administrative expense (4,626) (2,792) (11,737) (8,235)
Other revenues and
expenses, net 2,459 1,188 (149) (2,672)
Minority interest in
earnings-common
unitholders (6,543) (3,116) (13,184) (9,264)
Minority interest in
earnings-preferred
unitholders (2,102) - (2,102) -
Minority interest in
earnings-other (617) (692) (1,497) (946)
Minority interest share
of FFO adjustments (4,292) (2,128) (8,545) (5,966)
Joint venture FFO 4,542 3,749 12,585 10,716
Dividends on preferred
shares (12,254) (4,703) (30,350) (14,109)
------- ------- ------- -------
Consolidated FFO 68,772 39,421 162,256 111,084
Depreciation and
amortization (32,738) (17,660) (74,127) (48,445)
Share of joint venture
adjustments (1,270) (1,101) (4,026) (2,651)
Earnings from
depreciated
property sales 2,406 661 5,804 1,615
Minority Interest
share of
FFO adjustments 4,292 2,128 8,545 5,966
------- ------- ------- -------
Net Income Available
for Common
Shareholders $ 41,462 $23,449 $ 98,452 $ 67,569
======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -----------
<S> <C> <C>
Assets
Rental Operations:
Office Properties $2,395,813 $1,409,162
Industrial Properties 2,103,070 907,656
Retail Properties 190,313 161,675
Service Operations 84,383 55,268
--------- ---------
Total Segment Assets 4,773,579 2,533,761
Non-Segment Assets 561,083 319,892
--------- ---------
Consolidated Assets $5,334,662 $2,853,653
========= =========
</TABLE>
6. SHAREHOLDERS' EQUITY
The following series of preferred stock are outstanding as of
September 30, 1999 (in thousands, except percentages):
<TABLE>
<CAPTION>
Shares Dividend Redemption Liquidation Conver-
Description Outstanding Rate Date Preference Book Value tible
----------- ----------- -------- ---------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Preferred A
Series 300 9.100% 08/31/01 $ 75,000 $ 72,288 No
Preferred B
Series 300 7.990% 09/30/07 150,000 146,050 No
Preferred D
Series 540 7.375% 12/31/03 135,000 129,460 Yes
Preferred E
Series 400 8.250% 01/20/04 100,000 96,519 No
Preferred F
Series 600 8.000% 10/10/02 150,000 142,500 No
</TABLE>
All series of preferred shares require cumulative distributions,
have no stated maturity date, and the redemption price of each
series may only be paid from the proceeds of other capital shares
of the Company, which may include other classes or series of
preferred shares.
The Preferred Series D shares are convertible at a conversion rate
of 9.3677 common shares for each preferred share outstanding.
The dividend rate on the Preferred B Series shares increases to 9.99%
after September 12, 2012.
- 9 -
<PAGE>
7. MERGER WITH WEEKS CORPORATION
In July 1999, Weeks, a self-administered, self-managed
geographically focused Real Estate Investment Trust ("REIT") which
operated primarily in the southeastern United States, was merged
with and into Duke. The combined company has continued its
existence under the name Duke-Weeks Realty Corporation ("the
Company") and is traded on the New York Stock Exchange ("NYSE")
under the symbol "DRE". In accordance with the terms of the Weeks
Merger, each outstanding Weeks common share was converted into the
right to receive 1.38 common shares of Duke and each outstanding
Weeks Series A preferred share was converted into the right to
receive one comparable share of a new class of the Company's Series
F cumulative redeemable preferred shares (the "Series F Preferred
Shares"). As a result, 27,437,487 common shares and 600,000 Series
F Preferred Shares were issued to Weeks' shareholders in exchange
for all of the outstanding Weeks common shares and Weeks Series A
preferred shares. The total purchase price of Weeks aggregated
approximately $1.9 billion, which included the assumption of the
outstanding debt and liabilities of Weeks of approximately $775
million. The transaction was structured as a tax-free merger and
was accounted for under the purchase method.
The following summarized pro forma unaudited information represents
the combined historical operating results of Weeks and Duke with
the appropriate purchase accounting adjustments, assuming the Weeks
Merger had occurred on January 1, 1998. The pro forma financial
information presented is not necessarily indicative of what the
Company's actual operating results would have been had Weeks and
Duke constituted a single entity during such periods (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
(Actual) (Pro Forma) (Pro Forma) (Pro Forma)
<S> <C> <C> <C> <C>
Rental Income $157,001 $127,312 $451,932 $354,720
======= ======= ======= =======
Net earnings attributable to
Common Shares $ 41,462 $ 30,187 $116,972 $ 86,902
======= ======= ======= =======
Weighted average Common Shares
outstanding:
Basic 118,820 108,606 116,735 105,849
======= ======= ======= =======
Diluted 138,923 130,061 137,540 127,209
======= ======= ======= =======
Earnings attributable to
Common Shares:
Basic $ .35 $ .28 $ 1.00 $ .82
======= ======= ======= =======
Diluted $ .35 $ .27 $ .99 $ .81
======= ======= ======= =======
</TABLE>
8. MINORITY INTERESTS IN THE OPERATING PARTNERSHIP
PREFERRED UNITS
On July 2, 1999, in accordance with the terms of the Weeks Merger,
DWRLP converted 1,400,000 Weeks 8% Series C cumulative redeemable
preferred limited partnership interests into 1,400,000 8% Series G
cumulative redeemable preferred limited partnership interests (the
"Series G Preferred Units"). The Series G Preferred Units were
recorded at a value of $35,000,000 based upon the estimated fair
market value at the date of the merger announcement. The Series G
Preferred Units have
- 10 -
<PAGE>
a liquidation preference of $25.00 per preferred unit and are
redeemable by DWRLP on or after November 6, 2003, at a redemption
price of $25.00 per preferred unit. In combination with the
conversion of the Series G Preferred Units, the Company issued a
warrant that entitles its holder to purchase either 1,046,729
shares of Company common stock at a price of $33.4375 per share, or
1,400,000 shares of 8% Series I Preferred Stock at a price of
$25.00 per share. The Series G Preferred Units are automatically
redeemed upon the exercise of the warrant. The warrant has a
perpetual term unless the Series G Preferred units are redeemed by
DWRLP, in which case the warrant expires within 30 days of
redemption.
Also on July 2, 1999 and in accordance with the terms of the Weeks
Merger, DWRLP converted 2,600,000 Weeks 8.625% Series D cumulative
redeemable preferred limited partnership interest into 2,600,000
8.625% Series H cumulative redeemable preferred limited partnership
interest (the "Series H Preferred Units"). The Series H Preferred
Units were recorded at a value of $67,955,000 based upon the
estimated fair market value at the date of the merger announcement.
The Series H Preferred Units have a liquidation preference of
$25.00 per preferred unit and are redeemable at the option of DWRLP
on or after November 12, 2003, at a redemption price of $25.00 per
preferred unit
COMMON UNITS
On July 2, 1999, in accordance with the terms of the Weeks Merger,
DWRLP issued 10,144,424 common units to Weeks limited partnership
unitholders at a rate of 1.38 DWRLP common units for each Weeks
limited partnership unit outstanding.
9. SUBSEQUENT EVENTS
The Board of Directors declared the following dividends on October
27, 1999:
<TABLE>
<CAPTION>
Quarterly
Class Amount/Share Record Date Payment Date
--------- ------------ ----------- -------------
<S> <C> <C> <C>
Common $ 0.39 November 19, 1999 November 30, 1999
Preferred:
Series A $0.56875 November 16, 1999 November 30, 1999
Series B $0.99875 December 17, 1999 December 31, 1999
Series D $0.46094 December 17, 1999 December 31, 1999
Series E $0.51563 December 17, 1999 December 31, 1999
Series F $0.50000 January 17, 2000 January 31, 2000
</TABLE>
- 11 -
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
--------------------------------------
The Board of Directors
DUKE-WEEKS REALTY CORPORATION:
We have reviewed the condensed consolidated balance sheet of Duke-
Weeks Realty Corporation and subsidiaries as of September 30, 1999,
the related condensed consolidated statements of operations for the
three months and nine months ended September 30, 1999 and 1998, the
related condensed consolidated statements of cash flows for the
nine months ended September 30, 1999 and 1998, and the related
condensed consolidated statement of shareholders' equity for the
nine months ended September 30, 1999. These condensed consolidated
financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the condensed consolidated financial
statements referred to above for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Duke Realty
Investments, Inc. and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, shareholders' equity
and cash flows for the year then ended (not presented herein); and
in our report dated January 26, 1999 (except as to Note 12, which
is as of March 1, 1999), we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1998 is fairly presented, in all
material respects, in relation to the consolidated balance sheet
from which it has been derived.
KPMG LLP
Indianapolis, Indiana
October 26, 1999
- 12 -
<PAGE>
ITEM 2. 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 have continued to offer strong and
stable local economies and have provided attractive new development
opportunities because of their established manufacturing base,
skilled work force and moderate labor costs. Consequently, the
Company's occupancy rate of its in-service portfolio has averaged
94.3% the last two years. The Company expects to continue to
maintain its overall occupancy 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 markets (see Merger with Weeks Corporation
below).
The following table sets forth information regarding the Company's
in-service portfolio of rental properties as of September 30, 1999
and 1998 (in thousands, except percentages):
<TABLE>
<CAPTION>
Total Percent of
Square Feet Total Square Feet Percent Occupied
------------------ ----------------- ----------------
Type 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Industrial
Service
Centers 11,313 5,601 12.8% 11.3% 93.9% 93.7%
Bulk 56,527 29,009 64.0% 58.6 92.4% 95.1%
Office
Suburban 16,751 11,950 19.0% 24.1 92.7% 96.0%
CBD 861 699 1.0% 1.4 92.2% 97.0%
Retail 2,836 2,249 3.2% 4.6 93.7% 97.0%
------ ------ ----- -----
Total 88,288 49,508 100.0% 100.0% 92.7% 95.3%
====== ====== ===== =====
</TABLE>
Management expects occupancy of the in-service property portfolio
to remain stable because (i) only 4.3% and 9.8% of the Company's
occupied square footage is subject to leases expiring in the
remainder of 1999 and in 2000, respectively, and (ii) the Company's
renewal percentage averaged 69%, 81% and 80% in 1998, 1997 and
1996, respectively.
- 13 -
<PAGE>
The following table reflects the Company's in-service portfolio
lease expiration schedule as of September 30, 1999 by product type
indicating square footage and annualized net effective rents under
expiring leases (in thousands, except per square foot amounts):
<TABLE>
<CAPTION>
Total
Portfolio Industrial Office Retail
-------------------- ---------------- ------------- --------------
Yr of Sq. Rent Sq. Rent Sq. Rent Sq. Rent
Exp Ft. $ % Ft. $ Ft. $ Ft. $
----- ---- ------ ----- ------ -------- ------ ------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 3,499 $ 22,043 4% 2,947 $ 15,510 538 $ 6,367 14 $ 166
2000 8,056 47,778 9% 6,283 26,933 1,600 19,236 173 1,609
2001 9,265 56,896 11% 7,220 31,712 1,942 23,956 103 1,228
2002 10,605 69,527 13% 8,151 39,697 2,318 28,166 136 1,664
2003 9,314 64,880 12% 7,180 36,099 1,959 25,805 175 2,976
2004 9,028 65,467 12% 6,784 34,658 2,112 29,557 132 1,252
2005 6,009 37,242 7% 4,536 18,280 1,223 16,794 250 2,168
2006 4,745 30,825 6% 3,798 17,061 936 13,614 11 150
2007 4,572 25,338 5% 3,882 16,074 626 8,680 64 584
2008 5,379 34,303 6% 4,368 19,440 965 14,249 46 614
2009
and
There-
after 11,365 80,417 15% 7,705 35,807 2,107 30,173 1,553 14,437
------ ------- ---- ------ ------- ------ ------- ----- ------
Total
Leased 81,837 $534,716 100% 62,854 $291,271 16,326 $216,597 2,657 $26,848
====== ======= ==== ====== ======= ====== ======= ===== ======
Total
Port-
folio
Sq.
Ft. 88,288 67,840 17,612 2,836
====== ====== ====== =====
Annualized
net
effective
rent per
square foot $ 6.53 $ 4.63 $ 13.27 $ 10.10
======= ======= ======= ======
</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 markets (see Merger with
Weeks Corporation below); and (iii) the completion of the 12.5
million square feet of properties under development at September
30, 1999 over the next three quarters and thereafter. The 12.5
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
In-Service Square Percent Project Stabilized
Date Feet Leased Costs Return
-------------- ------- ------ ------- -------------
<S> <C> <C> <C> <C>
4th Quarter 1999 5,379 56% $294,528 11.4%
1st Quarter 2000 3,048 35% 222,649 10.9%
2nd Quarter 2000 2,256 52% 140,531 11.2%
Thereafter 1,796 55% 149,537 11.7%
------ -------
12,479 50% $807,245 11.3%
====== =======
</TABLE>
MERGER WITH WEEKS CORPORATION
In July 1999, Weeks, a self-administered, self-managed
geographically focused Real Estate Investment Trust ("REIT") which
operated primarily in the southeastern United States, was merged
with and into Duke. The combined company has continued its
existence under the name Duke-Weeks Realty Corporation ("the
Company") and is traded on the New York Stock Exchange ("NYSE")
under the symbol "DRE". In accordance with the terms of the Weeks
Merger, each outstanding Weeks common share was converted into the
right to receive 1.38 common shares of
- 14 -
<PAGE>
Duke and each outstanding Weeks Series A preferred share was
converted into the right to receive one comparable share of a new
class of the Company's Series F cumulative redeemable preferred
shares (the "Series F Preferred Shares"). As a result, 27,437,487
common shares and 600,000 Series F Preferred Shares were issued to
Weeks' shareholders in exchange for all of the outstanding Weeks
common shares and Weeks Series A preferred shares. The total
purchase price of Weeks aggregated approximately $1.9 billion,
which included the assumption of the outstanding debt and
liabilities of Weeks of approximately $775 million. The transaction
was structured as a tax-free merger and was accounted for under the
purchase method.
The following summarized pro forma unaudited information represents
the combined historical operating results of Weeks and Duke with
the appropriate purchase accounting adjustments, assuming the Weeks
Merger had occurred on January 1, 1998. The pro forma financial
information presented is not necessarily indicative of what the
Company's actual operating results would have been had Weeks and
Duke constituted a single entity during such periods (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
(Actual) (Pro Forma) (Pro Forma) (Pro Forma)
<S> <C> <C> <C> <C>
Rental Income $157,001 $127,312 $451,932 $354,720
======= ======= ======= =======
Net earnings attributable
to Common Shares $ 41,462 $ 30,187 $116,972 $ 86,902
======= ======= ======= =======
Weighted average Common
Shares outstanding:
Basic 118,820 108,606 116,735 105,849
======= ======= ======= =======
Diluted 138,923 130,061 137,540 127,209
======= ======= ======= =======
Earnings attributable to
Common Shares:
Basic $ .35 $ .28 $ 1.00 $ .82
======= ====== ======= =======
Diluted $ .35 $ .27 $ .99 $ .81
======= ====== ======= =======
</TABLE>
RESULTS OF OPERATIONS
---------------------
Following is a summary of the Company's operating results and
property statistics for the three and nine months ended September
30, 1999 and 1998 (in thousands, except number of properties and
per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- -------- -----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Rental Operations revenue $160,273 $ 90,348 $369,408 $253,103
Service Operations revenue 15,402 7,284 36,562 19,206
Earnings from Rental
Operations 60,072 30,888 136,080 92,062
Earnings from Service
Operations 3,871 2,815 12,489 5,530
Operating income 59,317 30,911 136,832 89,357
Net income available for
common shares $ 41,462 $23,449 $ 98,452 $ 67,569
Weighted average common
shares outstanding 118,820 81,594 97,966 79,461
Weighted average common
and dilutive potential
common shares 138,923 93,279 112,106 91,252
Basic income per
common share $ .35 $ .29 $ 1.00 $ .85
Diluted income per
common share $ .35 $ .29 $ 1.00 $ .84
Number of in-service
properties
at end of period 841 428 841 428
In-service square
footage at
end of period 88,288 49,508 88,288 49,508
Under development square
footage at end of period 12,479 5,088 12,479 5,088
</TABLE>
- 15 -
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
-------------------------------------------------------------------------
Rental Operations
-----------------
The Company increased its in-service portfolio of rental properties
from 428 properties comprising 49.5 million square feet at
September 30, 1998 to 841 properties comprising 88.3 million square
feet at September 30, 1999 through the acquisition of 374
properties totaling 32.2 million square feet and the completion of
49 properties and six building expansions totaling 7.5 million
square feet developed by the Company. Of these additional properties,
335 properties totaling 28.6 million square feet relate to the merger
with Weeks Corporation. The Company also disposed of ten properties
totaling 868,000 square feet. These 413 net additional rental properties
primarily account for the $69.9 million increase in revenues from Rental
Operations from 1998 to 1999. The increase from 1998 to 1999 in rental
expenses, real estate taxes and depreciation and amortization expense
is also a result of the additional 413 in-service rental properties.
Interest expense increased by approximately $9.3 million from $16.7
million for the three months ended September 30, 1998 to $26.0
million for the three months ended September 30, 1999 primarily as
a result of $300.0 million of unsecured debt issued in the first
two quarters of 1999 to fund development and acquisition activity,
and $240 million of secured debt and $287 million of unsecured debt
assumed July 2, 1999 in the merger with Weeks (see Merger with
Weeks Corporation below).
As a result of the above-mentioned items, earnings from rental
operations increased $29.2 million from $30.9 million for the three
months ended September 30, 1998 to $60.1 million for the three
months ended September 30, 1999.
Service Operations
------------------
Service Operation revenues increased by $8.1 million from $7.3
million for the three months ended September 30, 1998 to $15.4
million for the three months ended September 30, 1999 primarily as
a result of increases in construction management fee revenue due to
an increase in third-party construction volume.
As a result of the above-mentioned items, earnings from Service
Operations increased from $2.8 million for the three months ended
September 30, 1998 to $3.9 million for the three months ended
September 30, 1999.
Net Income Available for Common Shareholders
--------------------------------------------
Net income available for common shareholders for the three months
ended September 30, 1999 was $41.5 million compared to net income
available for common shareholders of $23.5 million for the three
months ended September 30, 1998. This increase results primarily
from the operating result fluctuations in rental and service
operations explained above.
- 16 -
<PAGE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
-----------------------------------------------------------------------
Rental Operations
-----------------
The Company increased its in-service portfolio of rental properties
from 428 properties comprising 49.5 million square feet at
September 30, 1998 to 841 properties comprising 88.3 million square
feet at September 30, 1999 through the acquisition of 374 properties
totaling 32.2 million square feet and the completion of 49
properties and six building expansions totaling 7.5 million square
feet developed by the Company. Of these additional properties, 335
properties totaling 28.6 million square feet relate to the merger with
Weeks Corporation. The Company also disposed of ten properties totaling
868,000 square feet. These 413 net additional rental properties primarily
account for the $116.3 million increase in revenues from Rental Operations
from 1998 to 1999. The increase from 1998 to 1999 in rental expenses,
real estate taxes and depreciation and amortization expense is also a
result of the additional 413 in-service rental properties.
Interest expense increased by approximately $15.2 million from
$43.9 million for the nine months ended September 30, 1998 to $59.1
million for the nine months ended September 30, 1999 primarily as
a result of $300.0 million of unsecured debt issued in the first
two quarters of 1999 to fund development and acquisition activity,
and $240 million of secured debt and $287 million of unsecured debt
assumed July 2, 1999 in the merger with Weeks (see Merger with
Weeks Corporation below).
As a result of the above-mentioned items, earnings from rental
operations increased $44.0 million from $92.1 million for the nine
months ended September 30, 1998 to $136.1 million for the nine
months ended September 30, 1999.
Service Operations
------------------
Service Operation revenues increased by $17.4 million from $19.2
million for the nine months ended September 30, 1998 to $36.6
million for the nine months ended September 30, 1999 primarily as a
result of increases in construction management fee revenue due to
an increase in third-party construction volume, particularly a
265,000 square foot suburban office build-to-suit building which
resulted in substantial revenue during the period.
Service Operations operating expenses increased from $13.7 million
to $24.1 million for the nine months ended September 30, 1999 as
compared to the nine months ended September 30, 1998 primarily as
a result of an increase in construction activity and an increase in
income taxes resulting from the growth in net income related to
third party construction.
As a result of the above-mentioned items, earnings from Service
Operations increased from $5.5 million for the nine months ended
September 30, 1998 to $12.5 million for the nine months ended
September 30, 1999.
General and Administrative Expense
----------------------------------
General and administrative expense increased from $8.2 million for
the nine months ended September 30, 1998 to $11.7 million for the
nine months ended September 30, 1999 primarily as a result of
internal acquisition costs which are no longer permitted to be
capitalized being charged to general and administrative expense as
well as an increase in state and local taxes due to the overall
growth of the Company.
- 17 -
<PAGE>
Net Income Available for Common Shareholders
--------------------------------------------
Net income available for common shareholders for the nine months
ended September 30, 1999 was $98.5 million compared to net income
available for common shareholders of $67.6 million for the nine
months ended September 30, 1998. This increase results primarily
from the operating result fluctuations in rental and service
operations explained above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaling $257.7 million
and $149.1 million for the nine months ended September 30, 1999 and
1998, 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.
Net cash used by investing activities totaling $570.2 million and
$470.8 million for the nine months ended September 30, 1999 and
1998, 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.
Net cash provided by financing activities totaling $350.8 million
and $333.4 million for the nine months ended September 30, 1999 and
1998, respectively, is comprised of debt and equity issuances, net
of distributions to shareholders and minority interests and
repayments of outstanding indebtedness. In the first nine months of
1999, the Company received $203.4 million of net proceeds from the
issuance of common shares and $96.5 million of net proceeds from a
preferred stock offering. The Company also issued $300.0 million of
unsecured debt. The Company used the net proceeds to reduce amounts
outstanding under the Company's lines of credit and to fund the
development and acquisition of additional rental properties.
In the first nine months of 1998, the Company received $136.7
million of net proceeds from the issuance of common shares and
issued $250.0 million of unsecured debt. The Company used the net
proceeds to reduce amounts outstanding under the Company's lines of
credit and to fund the development and acquisition of additional
rental properties.
The Company has the following lines of credit available (in thousands):
<TABLE>
<CAPTION>
Outstanding
Borrowing Maturity Interest at September
Description Capacity Date Rate 30, 1999
------------------------ ---------- --------- -------- -------------
<S> <C> <C> <C> <C>
Unsecured Line of Credit $450,000 April 2001 LIBOR + .70% $265,000
Unsecured Line of Credit 300,000 April 2001 LIBOR + .90% 0
</TABLE>
Both lines of credit are used to fund development and acquisition of
additional rental properties and to provide working capital.
Effective July 2, 1999, the interest rate on the $450 million line of
credit was adjusted from LIBOR + .80% to LIBOR + .70%.
- 18 -
<PAGE>
Additionally, the $450 million line of credit allows the Company an
option to obtain borrowings from the financial institutions that
participate in the line of credit at rates lower than the stated
interest rate, subject to certain restrictions. Amounts
outstanding on the line of credit at September 30, 1999 are at
LIBOR + .65% to .70%.
The $300 million line of credit was obtained July 2, 1999, following
with the Merger with Weeks Corporation.
The Company currently has on file three Form S-3 Registration
Statements with the Securities and Exchange Commission ("Shelf
Registrations") which had remaining availability as of September
30, 1999 of approximately $417.9 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 also plans to file
additional shelf registrations as necessary.
The total debt outstanding at September 30, 1999 consists of notes
totaling $2.0 billion with a weighted average interest rate of
7.16% maturing at various dates through 2028. The Company has
$1.4 billion of unsecured debt and $523.0 million of secured debt
outstanding at September 30, 1999. Scheduled principal amortization of
such debt totaled $7.6 million for the nine months ended September 30,
1999.
Following is a summary of the scheduled future amortization and
maturities of the Company's indebtedness at September 30, 1999 (in
thousands):
<TABLE>
<CAPTION>
Future Repayments
------------------------------------------ Weighted Average
Scheduled Interest Rate of
Year Amortization Maturities Total Future Repayments
----- ------------ ---------- --------- ------------------
<S> <C> <C> <C> <C>
1999 $ 4,018 $ 27,935 $ 31,953 6.25%
2000 15,363 66,561 81,924 7.09%
2001 13,684 442,120 455,804 6.71%
2002 13,542 55,037 68,579 7.42%
2003 12,651 243,194 255,845 7.62%
2004 12,282 176,151 188,433 7.41%
2005 11,256 313,662 324,918 7.16%
2006 10,575 146,156 156,731 7.40%
2007 8,910 16,555 25,465 7.44%
2008 8,068 100,000 108,068 6.80%
Thereafter 36,121 231,016 267,137 7.16%
------- --------- ---------
Total $146,470 $1,818,387 $1,964,857 7.16%
======= ========= =========
</TABLE>
- 19 -
<PAGE>
FUNDS FROM OPERATIONS
Management believes that Funds From Operations ("FFO"), which is
defined by the National Association of Real Estate Investment Trusts
as net income or loss, excluding gains or losses from debt
restructuring and sales of depreciated property, plus operating
property depreciation and amortization and adjustments for minority
interest and unconsolidated companies 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 three and nine months ended September 30 as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income available for
common shares $ 41,462 $ 23,449 $ 98,452 $ 67,569
Add back:
Depreciation and amortization 32,738 17,660 74,127 48,445
Share of joint venture
adjustments 1,270 1,101 4,026 2,651
Earnings from depreciated
property sales (2,406) (661) (5,804) (1,615)
Minority interest share
of add-backs (4,292) (2,128) (8,545) (5,966)
------- ------- ------ -------
FUNDS FROM OPERATIONS $ 68,772 $ 39,421 $162,256 $111,084
======= ======= ======= =======
CASH FLOW PROVIDED BY
(USED BY):
Operating activities $175,233 $ 48,798 $257,719 $149,109
Investing activities (251,822) (119,313) (570,183) (470,801)
Financing activities (50,873) 70,169 350,796 333,372
</TABLE>
The increase in FFO for the three and nine months ended September
30, 1999 compared to the three and nine months ended September 30,
1998 results primarily from the increased in-service rental
property portfolio as discussed above under "Results of
Operations."
While management believes that FFO is the most relevant and widely
used measure of the 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.
YEAR 2000
The Year 2000 problem refers to the inability of certain computer
programs to recognize the year 2000 and other key dates thus
resulting in a variety of possible problems including data
corruption and total system failures. Commonly thought of as a
mainframe computer problem, the Year 2000 problem can also affect
software and embedded microchips which run systems that control
building functions, such as elevators, security (including access),
heating, ventilation and air conditioning and fire protection. The
terms "Year 2000 ready" and "Year 2000 readiness" are often used to
describe a computer system that will continue to operate properly
prior to, during and after January 1, 2000 (taking into account
that the Year 2000 is a leap year) and is thus not affected by the
Year 2000 problem. Duke-Weeks Realty Corporation (the "Company") is
committed to ensuring the highest level of tenant satisfaction
reasonably possible and clearly recognizes the importance to our
tenants, as well as our shareholders, of having in place a Year
2000 readiness plan.
- 20 -
<PAGE>
In February 1998, the Company formed a Year 2000 Task Force to
address the Year 2000 problem on a Company-wide basis, including
properties and information systems. The Task Force is comprised of
representatives from senior management in the areas of Property and
Asset Management, Construction, Information Systems and Legal. The
Board of Directors and Audit Committee of the Company are advised
quarterly of the status of the activities undertaken by the Task
Force.
The Company adopted a Year 2000 readiness plan for its buildings in
April, 1998 following the basic framework recommended by the
Building Owners and Managers Association. This Year 2000 readiness
plan consists of eight (8) steps focusing on the identification,
prioritization and remediation of potential Year 2000 problems
arising from software and embedded chips located within the
building systems at the Company's properties.
The Company recognizes that the Year 2000 problem could affect it
operations as well as the proper functioning of the embedded
systems included in the Company's properties. In particular
property, the problem could affect the functioning of elevators,
heating and air conditioning systems, security systems and other
automated building systems. Management has identified and
inventoried the building systems and equipment at the Company's
existing properties to determine which systems could be affected by
the Year 2000 problem. The inventory has been entered into a data
base containing a readiness status of each such system. This data
base allows Management to quickly monitor ongoing progress related
to the Year 2000 readiness of all affected building systems. Under
the direction of the Year 2000 Task Force, the property manager of
each building has contacted in writing each building system
manufacturer or supplier that has supplied an active and affected
building system. Each manufacturer or supplier was sent a
comprehensive questionnaire designed to assess the manufacturer's
effort in assuring that the affected building systems are or, in
sufficient time prior to January 1, 2000, will be Year 2000 ready.
Based on the responses received from the manufacturers and
suppliers of the building systems, Management developed a work plan
detailing the tasks and resources required to ready the operations
and systems of the Company's properties for the Year 2000. In many
cases the Company will be relying on these statements from outside
vendors as to the Year 2000 readiness of their systems, and will
not, in most circumstances, attempt any independent verification.
The work plan includes prioritization and appropriate timetables
for the necessary remediation and testing of affected building
systems, as well as the preparation of contingency plans if Year
2000 readiness can not be achieved.
The contingency planning process is complete. The Company's
contingency plans generally provide for obtaining or allowing
alternative access, limited electrical and telephone service and,
security and other basic services. The Company's contingency plans
focus on those operational systems and utilities which, if
interrupted, could cause the greatest disruption to the Company's
properties and business operations. The contingency plans establish
in detail the actions to be followed in the event of a system or
utility failure. The contingency plans also identify key contacts
for purposes of remediating system and utility failures and other
requirements such as staffing, equipment, office supplies and
quality assurance issues.
The Company has made Year 2000 readiness an important aspect of its
building acquisition due diligence and inspection process. The
Company endeavors to obtain Year 2000 representations from sellers
and conducts inspections of critical systems. Newly acquired
facilities are promptly subjected to the Company's eight-step plan
and results are added to the database.
- 21 -
<PAGE>
Based upon a cost assessment prepared by the Task Force, the
Company has budgeted approximately $250,000 of non-reimbursable
expenses for the upgrade and replacement of certain building
systems having potential Year 2000 related problems.
In addition to assessing the readiness of the building systems of
the Company's properties, the Company continues to actively contact
and monitor the compliance efforts of utility companies and
telecommunication providers which provide services to the Company's
properties. The Company has contacted the various municipalities
where the Company's properties are located to assess the readiness
of these municipalities where the Company's properties are located
to assess the readiness of these municipalities to provide fire,
police and other necessary services upon the Year 2000. The
readiness of these providers and municipalities has been taken into
consideration in preparing contingency plans for the Company and
its properties.
The Company does not anticipate that the other services provided
for the benefit of our tenants such as janitorial, tenant finish,
monthly itemized billing, and other tenant services will be
affected by the Year 2000 problem. The Company is proactively
contacting those types of suppliers, vendors and service providers
to make sure that there is no interruption or discontinuance of any
services or products provided for the benefit of our tenants at the
Year 2000. Any negative responses to such inquiries have been and
continues to be added to the contingency plans.
The Company retained a third-party consultant to identify and
assess the Year 2000 readiness of the Company's information
systems. Such systems include, but are not limited to, accounting
and property management, network operations, desktop and software
applications, internally developed software and other general
information systems and software utilized for payroll, human
resources, budgeting and tenant services. The initial phase of
identification and assessment of the Company's information systems
was completed April 1, 1999 at a cost of $75,000. A budget and
timetable for replacement, upgrade of or contingencies for the
foregoing systems, that are not Year 2000 ready has been developed
and is being implemented. The estimated cost associated with such
replacement and upgrade is budgeted to be $340,000.
There can be no assurance that the Company will be able to identify
and correct all aspects of the Year 2000 problem that affect it in
sufficient time, that its contingency plans or that the costs of
achieving Year 2000 readiness will not be material. However, based
on the information prepared by the Company or received to date,
Management does not currently expect that the Year 2000 problem
will have a material impact on the Company's business, operations
or financial condition. This expectation is based on Management's
analysis related to the Year 2000 readiness of the building systems
of the Company's properties, our vendors, suppliers, service
providers and tenants, and the Company's information systems.
- 22 -
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
None
Item 2. Changes in Securities
------------------------------
None
Item 3. Defaults upon Senior Securities
----------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None
Item 5. Other Information
--------------------------
When used in this Form 10-Q, the words "believes," "expects,"
"estimates" and similar expressions are intended to identify
forward looking-statements. Such statements are subject to certain
risks and uncertainties which could cause actual results to differ
materially. In particular, among the factors that could cause
actual results to differ materially are continued qualification as
a real estate investment trust, general business and economic
conditions, competition, increases in real estate construction
costs, interest rates, accessibility of debt and equity capital
markets and other risks inherent in the real estate business
including tenant defaults, potential liability relating to
environmental matters and illiquidity of real estate investments.
Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. The
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. Readers are also
advised to refer to the Company's Form 8-K Report as filed with the
U.S. Securities and Exchange Commission on March 29, 1996 for
additional information concerning these risks.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
Exhibits
--------
Exhibit 15. Letter regarding unaudited interim financial information
Exhibit 27. Financial Data Schedule (EDGAR Filing Only)
- 23 -
<PAGE>
Reports on Form 8-K
-------------------
The Company filed an 8-K on July 16, 1999, to file exhibits in
connection with the merger with Weeks Corporation.
The Company filed an 8-K/A on August 6, 1999, to file exhibits,
including financial statements, in connection with the merger with
Weeks Corporation.
The Company filed an 8-K on September 10, 1999, in connection with
a private offering of common stock.
The Company filed an 8-K on September 20, 1999, to file exhibits,
including financial statements, in connection with the merger with
Weeks Corporation.
- 24 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DUKE-WEEKS REALTY CORPORATION
-----------------------------
Registrant
Date: November 15, 1999 /s/Thomas L. Hefner
----------------- -------------------------------
President and
Chief Executive Officer
/s/ Darell E. Zink, Jr.
-------------------------------
Executive Vice President and
Chief Financial Officer
/s/ Dennis D. Oklak
------------------------------
Executive Vice President and
Chief Administrative Officer
(Chief Accounting Officer)
- 25 -
Exhibit 15
The Board of Directors
Duke-Weeks Realty Corporation
Gentlemen:
RE: Registration Statements Nos. 33-64567, 33-64659, 333-62381, 333-57755, 333-
42513, 333-39965,
333-49911, 333-50081, 33-55727, 333-04695, 333-24289, 333-26833, 333-66919, 333-
26845
and 333-85009
With respect to the subject registration statements, we
acknowledge our awareness of the use therein of our report dated
October 26, 1999 related to our review of interim financial
information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such
report is not considered a part of a registration statement
prepared or certified by an accountant, or a report prepared or
certified by an accountant within the meaning of sections 7 and 11
of the Act.
KPMG LLP
Indianapolis, Indiana
November 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
DUKE-WEEKS REALTY CORPORATION AND SUBSIDIARIES SEPTEMBER 30, 1999
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
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<RECEIVABLES> 81,101
<ALLOWANCES> (3,202)
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<CURRENT-LIABILITIES> 272,903
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586,817
<COMMON> 2,077,989
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