UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
------- -------
------------------------------------------------------------------
Commission File Number: 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 August 12, 1999 was 117,218,486
($.01 par value).
<PAGE>
DUKE-WEEKS REALTY CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance
Sheets as of June 30, 1999 (Unaudited)
and December 31, 1998 2
Condensed Consolidated Statements of
Operations for the three and six months
ended June 30, 1999 and 1998 (Unaudited) 3
Condensed Consolidated Statements of Cash
Flows for the six months ended June 30,
1999 and 1998 (Unaudited) 4
Condensed Consolidated Statement of
Shareholders' Equity for the six months
ended June 30, 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-10
Independent Accountants' Review Report 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12-21
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote
of Security Holders 21-22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
<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>
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
------ -------- ------------
(UNAUDITED)
<S> <C> <C>
Real estate investments:
Land and improvements $ 355,804 $ 312,022
Buildings and tenant improvements 2,364,216 2,091,757
Construction in progress 204,609 185,950
Investments in unconsolidated companies 114,570 125,746
Land held for development 181,274 146,911
--------- ---------
3,220,473 2,862,386
Accumulated depreciation (204,750) (179,887)
--------- ---------
Net real estate investments 3,015,723 2,682,499
Cash and cash equivalents 172,744 6,950
Accounts receivable from tenants, net
of allowance of $625 and $896 10,720 9,641
Straight-line rent receivable,
net of allowance of $841 23,581 20,332
Receivables on construction contracts 75,343 29,162
Deferred financing costs, net of
accumulated amortization of $7,803
and $11,754 15,014 11,382
Deferred leasing and other costs,
net of accumulated amortization
of $17,934 and $16,838 57,720 53,281
Escrow deposits and other assets 56,867 40,406
--------- ---------
$3,427,712 $2,853,653
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Indebtedness:
Secured debt $ 341,556 $ 326,317
Unsecured notes 890,000 590,000
Unsecured line of credit 159,000 91,000
--------- ---------
1,390,556 1,007,317
Construction payables and amounts
due subcontractors 60,776 55,012
Accounts payable 3,911 4,836
Accrued expenses:
Real estate taxes 39,348 36,075
Interest 14,235 10,329
Other 19,623 22,781
Other liabilities 22,080 21,928
Tenant security deposits and prepaid rents 18,973 18,534
--------- ---------
Total liabilities 1,569,502 1,176,812
--------- ---------
Minority interest 109,248 106,729
--------- ---------
Shareholders' equity:
Preferred shares and paid-in capital
($.01 par value); 5,000 shares
authorized 444,317 347,798
Common shares and paid-in capital
($.01 par value); 150,000 shares
authorized; 89,747 and 86,053
shares issued and outstanding 1,375,166 1,290,313
Distributions in excess of net income (70,521) (67,999)
--------- ---------
Total shareholders' equity 1,748,962 1,570,112
--------- ---------
$3,427,712 $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 SIX MONTHS ENDED
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
RENTAL OPERATIONS:
Revenues:
Rental income $104,369 $80,503 $203,848 $157,338
Equity in earnings of
unconsolidated companies 2,779 2,576 5,287 5,417
------- ------ ------- -------
107,148 83,079 209,135 162,755
------- ------ ------- -------
Operating expenses:
Rental expenses 17,501 13,839 36,127 27,684
Real estate taxes 11,674 8,053 22,491 15,887
Interest expense 17,129 14,346 33,120 27,225
Depreciation and amortization 20,935 16,525 41,389 30,785
------- ------ ------- -------
67,239 52,763 133,127 101,581
------- ------ ------- -------
Earnings from rental
operations 39,909 30,316 76,008 61,174
------- ------ ------- -------
SERVICE OPERATIONS:
Revenues:
Property management,
maintenance and
leasing fees 3,795 3,597 7,421 6,634
Construction management and
development fees 4,812 3,131 13,159 4,690
Other income 286 294 580 598
------- ------ ------- -------
8,893 7,022 21,160 11,922
------- ------ ------- -------
Operating expenses:
Payroll 3,339 3,804 7,056 6,687
Maintenance 807 594 1,602 1,198
Office and other 1,165 804 3,884 1,322
------- ------ ------- -------
5,311 5,202 12,542 9,207
------- ------ ------- -------
Earnings from
service operations 3,582 1,820 8,618 2,715
------- ------ ------- -------
General and
administrative expense (3,496) (3,103) (7,111) (5,443)
------- ------ ------- -------
Operating income 39,995 29,033 77,515 58,446
OTHER INCOME (EXPENSE):
Interest income 546 400 1,145 589
Earnings from property sales 1,971 368 4,285 954
Other expense (106) (30) (338) (61)
Minority interest in earnings
of unitholders (3,106) (2,956) (6,641) (6,148)
Other minority interest in
earnings of subsidiaries (450) (254) (880) (254)
------- ------ ------- -------
Net income $ 38,850 $26,561 $ 75,086 $ 53,526
Dividends on preferred shares (9,254) (4,703) (18,096) (9,406)
------- ------ ------- -------
Net income available
for common shareholders $ 29,596 $21,858 $ 56,990 $ 44,120
======= ====== ======= =======
Net income per common share:
Basic $ 0.33 $ 0.27 $ 0.65 $ 0.56
======= ====== ======= =======
Diluted $ 0.33 $ 0.27 $ 0.65 $ 0.56
======= ====== ======= =======
Weighted average number
of common shares outstanding 88,353 80,080 87,367 78,376
======= ====== ======= =======
Weighted average number
of common and dilutive
potential common shares 98,855 91,830 98,477 90,222
======= ====== ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 3 -
DUKE-WEEKS REALTY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 75,086 $53,526
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of buildings and
tenant improvements 37,049 27,385
Amortization of deferred financing
costs 725 656
Amortization of deferred leasing
and other costs 4,340 3,400
Minority interest in earnings 7,521 6,402
Straight-line rent adjustment (3,748) (3,107)
Earnings from property sales (4,285) (954)
Construction contracts, net (40,417) (2,185)
Other accrued revenues and
expenses, net 6,714 18,559
Equity in earnings in excess
of distributions received from
unconsolidated companies (499) (3,371)
------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 82,486 100,311
------- -------
Cash flows from investing activities:
Rental property development costs (161,843) (101,464)
Acquisition of real estate investments (87,827) (194,703)
Acquisition of land held for development
and infrastructure costs (60,973) (19,377)
Recurring costs:
Tenant improvements (7,845) (5,216)
Leasing commissions (4,993) (2,528)
Building improvements (666) (894)
Other deferred leasing costs (8,439) (8,049)
Other deferred costs and other assets (14,255) (7,769)
Proceeds from property sales, net 24,695 3,980
Distributions from unconsolidated
companies 16,802 -
Net investment in and advances to
unconsolidated companies (13,017) (15,468)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (318,361) (351,488)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common
shares, net 37,909 102,912
Proceeds from issuance of preferred
shares, net 96,519 -
Proceeds from indebtedness 300,000 250,000
Borrowings (repayments) on lines
of credit, net 61,000 (20,000)
Repayments on indebtedness including
principal amortization (3,947) (5,730)
Distributions to common shareholders (59,512) (47,093)
Distributions to preferred shareholders (18,096) (9,406)
Distributions to minority interest (7,646) (6,741)
Deferred financing costs (4,558) (739)
------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 401,669 263,203
------- -------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 165,794 12,026
Cash and cash equivalents at
beginning of period 6,950 10,353
------- -------
Cash and cash equivalents at end of period $172,744 $ 22,379
======= =======
</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 SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Common
Shares 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 - 38,728 - 38,728
Issuance of preferred
shares, net of
underwriting
discounts and
offering costs of
$3,481 96,519 - - 96,519
Acquisition of
minority interest - 46,125 - 46,125
Net income - - 75,086 75,086
Distributions to
common shareholders - - (59,512) (59,512)
Distributions to
preferred
shareholders - - (18,096) (18,096)
------- --------- ------- ---------
BALANCE AT
JUNE 30, 1999 $444,317 $1,375,166 $(70,521) $1,748,962
======= ========= ======= =========
</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
On June 18, 1999, the shareholders of Duke Realty Investments, Inc.
("Duke") and Weeks Corporation ("Weeks") approved a merger
transaction (the "Merger") which was consummated in July 1999,
whereby Weeks was merged with and into Duke. The combined company
has continued operating under the name Duke-Weeks Realty
Corporation ("the Company"). See Note 7 for a more complete
discussion of the merger.
The accompanying condensed financial statements of the Company
represent the financial position and results of operations for Duke
on a stand alone basis and do not reflect the financial position or
results of operations for Weeks or the combined company, unless
otherwise indicated, since the Merger was consummated after June
30, 1999.
The interim condensed consolidated financial statements included
herein have been prepared by the 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
90.9% at June 30, 1999. The remaining interests in DWRLP are
exchangeable for shares of the Company's common stock on a one-for-
one basis. In addition, the Company conducts 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 (LOC) available:
<TABLE>
<CAPTION>
Borrowing Outstanding at
Capacity Maturity Interest June 30, 1999
Description (in 000's) Date Rate (in 000's)
- ----------- ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C>
Unsecured Line of Credit $450,000 April 2001 LIBOR + .70% $159,000
Unsecured Line of Credit $300,000 April 2001 LIBOR + .90% $ 0
</TABLE>
- 6 -
<PAGE>
Both LOC are used to fund development and acquisition of additional
rental properties and to provide working capital.
Effective July 2, 1999, the interest rate on the $450 million LOC
was adjusted from LIBOR + .80% to LIBOR + .70% in conjunction with
the Company's new debt rating following the Merger (see Note 7).
Additionally, the $450 million LOC allows the Company an option to
obtain borrowings from the financial institutions that participate
in the LOC at rates lower than the stated interest rate, subject to
certain restrictions. Amounts outstanding on the LOC at June 30,
1999 are at LIBOR + .80%.
The $300 million LOC was obtained July 2, 1999, following the
Merger (see Note 7). On July 2, 1999, the Company repaid certain out-
standing debt balances of Weeks using a combination of cash on hand
and the LOC. The balance on the combined LOC following these paydowns
was $285 million.
3. RELATED PARTY TRANSACTIONS
The 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 $1.4 million and $1.1
million for such services for the six months ended June 30, 1999
and 1998, respectively.
Management believes the terms for such services are equivalent to
those available in the market. The 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 shareholders 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 shareholders 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 six months ended June
30:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic net income available for
common shareholders $29,596 $21,858 $56,990 $44,120
Minority interest in earnings
of unitholders 3,106 2,956 6,641 6,148
------ ------ ------ ------
Diluted net income available
for common shareholders
and dilutive potential
common shares $32,702 $24,814 $63,631 $50,268
====== ====== ====== ======
Weighted average number of
common shares outstanding 88,353 80,080 87,367 78,376
Weighted average partnership
units outstanding 9,541 10,850 10,181 10,923
Dilutive shares for long-term
compensation plans 961 900 929 923
------ ------ ------ ------
Weighted average number of
common shares and dilutive
potential common shares 98,855 91,830 98,477 90,222
====== ====== ====== ======
</TABLE>
The Preferred D Series Convertible stock was anti-dilutive at June
30, 1999; therefore, no conversion to common shares is included in
weighted shares outstanding.
- 7 -
<PAGE>
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 industry performance measures referred to as Funds From
Operations ("FFO"). The National Association of Real Estate Investment
Trusts defines FFO as net income or loss, excluding gains or losses
from debt restructuring and sales of operating property, plus operating
property depreciation and amortization and adjustments for minority
interest and unconsolidated companies on the same basis. FFO is not a
measure of operating results or cash flows from operating
activities as measured by generally accepted accounting principles,
is not necessarily indicative of cash available to fund cash needs
and should not be considered an alternative to cash flows as a
measure of liquidity. Interest expense and other non-property
specific revenues and expenses are not allocated to individual
segments in determining the Company's performance measure.
The revenues and FFO for each of the reportable segments for the
three and six months ended June 30, 1999 and 1998 and the assets
for each of the reportable segments as of June 30, 1999 and
December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
- --------
Rental Operations:
Office Properties $ 63,001 $50,011 $122,652 $ 99,528
Industrial Properties 35,820 25,288 68,390 47,841
Retail Properties 6,273 5,043 12,078 10,067
Service Operations 8,893 7,022 21,160 11,922
------- ------ ------- -------
Total Segment Revenues 113,987 87,364 224,280 169,358
Non-Segment Revenue 2,054 2,737 6,015 5,319
------- ------ ------- -------
Consolidated Revenue $116,041 $90,101 $230,295 $174,677
======= ====== ======= =======
- 8 -
<PAGE>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Funds From Operations
- ---------------------
Rental Operations:
Office Properties $ 44,191 $35,460 $ 85,405 $ 70,826
Industrial Properties 28,294 20,414 53,053 38,415
Retail Properties 5,324 4,193 9,929 8,325
Services Operations 3,582 1,820 8,618 2,715
------- ------ ------- -------
Total Segment FFO 81,391 61,887 157,005 120,281
Non-Segment FFO:
Interest expense (17,129) (14,346) (33,120) (27,225)
Interest income 546 400 1,145 589
General and
administrative
expense (3,496) (3,103) (7,111) (5,443)
Other revenues
and expenses, net (1,835) (1,269) (2,608) (3,860)
Minority interest
in earnings (3,556) (3,210) (7,521) (6,402)
Minority interest
share of FFO
adjustments (2,064) (2,050) (4,253) (3,838)
Joint venture FFO 4,021 3,327 8,043 6,967
Dividends on
preferred shares (9,254) (4,703) (18,096) (9,406)
------- ------- ------- -------
Consolidated FFO 48,624 36,933 93,484 71,663
Depreciation and
amortization (20,935) (16,525) (41,389) (30,785)
Share of joint
venture adjustments (1,241) (968) (2,756) (1,550)
Earnings from
operating property
sales 1,084 368 3,398 954
Minority Interest
share of FFO
adjustments 2,064 2,050 4,253 3,838
------- ------ ------- -------
Net Income
Available for
Common
Shareholders $ 29,596 $21,858 $ 56,990 $ 44,120
======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Rental Operations:
Office Properties $1,590,742 $1,409,162
Industrial Properties 1,081,302 907,656
Retail Properties 174,821 161,675
Service Operations 70,686 55,268
--------- ---------
Total Segment Assets 2,917,551 2,533,761
Non-Segment Assets 510,161 319,892
--------- ---------
Consolidated Assets $3,427,712 $2,853,653
========= =========
</TABLE>
6. SHAREHOLDERS' EQUITY
The following series of preferred stock are outstanding as of June
30, 1999 (in thousands, except percentages):
<TABLE>
<CAPTION>
Shares Dividend Redemption Liquidation Book Conver-
Description Outstanding Rate Date Preference Value tible
- ----------- ----------- -------- ---------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Preferred A
Series 300 9.100% 8/31/01 $ 75,000 $ 72,288 No
Preferred B
Series 300 7.990% 9/30/07 150,000 146,050 No
Preferred D
Series 540 7.375% 12/31/03 135,000 129,460 Yes
Preferred E
Series 400 8.250% 1/20/04 100,000 96,519 No
</TABLE>
All series of preferred 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
On June 18, 1999, the shareholders of both Duke and Weeks approved
a merger transaction which was consummated in July 1999, whereby
Weeks, a self-administered, self-managed geographically focused
Real Estate Investment Trust ("REIT") which operated primarily in
the southeastern United States, was merged into Duke. The combined
company has continued under the name Duke-Weeks Realty Corporation
and is traded on the New York Stock Exchange ("NYSE") under the
symbol "DRE." In accordance with the terms of the 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 share of a new class of the Company Series F preferred shares.
In addition, the Company assumed Weeks' debt and other liabilities
upon consummation of the Merger. The Merger was structured as a tax-
free merger and was accounted for under the purchase method.
Based on the in-service properties of Duke and Weeks at June 30,
1999, the Company would have had 882 in-service properties totaling
86.1 million square feet, which were approximately 93% leased. The
Company has operations in 15 cities in the midwestern and
southeastern United States. Additionally, the combined Company's total
market capitalization would have been approximately $5.8 billion at
June 30, 1999.
8. SUBSEQUENT EVENTS
The Board of Directors declared the following dividends on July 28,
1999:
<TABLE>
<CAPTION>
QUARTERLY
CLASS AMOUNT/SHARE RECORD DATE PAYMENT DATE
----------- ------------ ----------- ------------
<S> <C> <C> <C>
Common $0.39 August 16, 1999 August 31, 1999
Preferred:
Series A $0.56875 August 17, 1999 August 31, 1999
Series B $0.99875 September 16, 1999 September 30, 1999
Series D $0.46094 September 16, 1999 September 30, 1999
Series E $0.51563 September 16, 1999 September 30, 1999
Series F $0.50000 October 15, 1999 October 29, 1999
</TABLE>
- 10 -
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
--------------------------------------
The Board of Directors
DUKE-WEEKS REALTY CORPORATION:
We have reviewed the condensed consolidated balance sheet of Duke-
Weeks Realty Corporation and subsidiaries as of June 30, 1999, the
related condensed consolidated statements of operations for the
three months and the six months ended June 30, 1999 and 1998, the
related condensed consolidated statements of cash flows for the six
months ended June 30, 1999 and 1998, and the related condensed
consolidated statement of shareholders' equity for the six months
ended June 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
August 3, 1999
- 11 -
<PAGE>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information presented in "Item 2. Management's Discussion and
Analysis of Financial Condition and Result of Operations" is based
on the financial position and results of operations of Duke on a
stand-alone basis and does not consider Weeks or the combined
Company (unless otherwise indicated), since the Merger was
consummated after June 30, 1999. See further discussion below under
Merger with Weeks Corporation.
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 93.9% the last two years. The
Company expects to continue to maintain its overall occupancy in
its Midwestern markets at comparable levels and also expects to be
able to increase rental rates in these markets as leases are
renewed or new leases are executed. This stable occupancy as well
as increasing rental rates should improve the 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 discussion of Weeks merger
below).
The following table sets forth information regarding the Company's
in-service portfolio of rental properties as of June 30, 1999 and
1998 (in thousands, except percentages):
<TABLE>
<CAPTION>
Total Percent of
Square Feet Total Square Feet Percent Occupied
--------------- ----------------- ----------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Type
----
INDUSTRIAL
Service Centers 6,672 5,296 11.55% 10.98% 92.71% 93.58%
Bulk 34,121 28,368 59.06 58.83 93.87% 93.69%
OFFICE
Suburban 13,575 11,819 23.50 24.51 94.84% 96.21%
CBD 861 699 1.49 1.45 93.76% 92.67%
RETAIL 2,548 2,041 4.41 4.23 92.36% 95.67%
------ ------ ------ ------
Total 57,777 48,223 100.00% 100.00% 93.90% 94.37%
====== ====== ====== ======
</TABLE>
Management expects occupancy of the in-service property portfolio
to remain stable because (i) only 6.0% and 9.5% of the 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%, 80% in 1998, 1997 and 1996,
respectively.
- 12 -
<PAGE>
The following table reflects the Company's in-service portfolio
lease expiration schedule as of June 30, 1999 by product type
indicating square footage and annualized net effective rents under
expiring leases (in thousands, except per square foot amounts):
<TABLE>
<CAPTION>
Industrial Office Retail Total Portfolio
---------------- ---------------- --------------- ------------------
Yr.of Sq. Cont. Sq. Cont. Sq. Cont. Sq. Cont.
Exp. Ft. Rent Ft. Rent Ft. Rent Ft. Rent
- ----- ----- ------ ----- ------ ----- ------ ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 2,344 $ 10,934 844 $ 9,206 43 $ 472 3,231 $ 20,612
2000 3,662 15,518 1,384 17,096 121 1,494 5,167 34,108
2001 3,957 17,118 1,795 22,496 91 1,113 5,843 40,727
2002 4,767 20,552 1,753 20,460 126 1,494 6,646 42,506
2003 3,903 18,265 1,519 19,885 145 1,554 5,567 39,704
2004 3,526 15,586 1,459 20,099 79 959 5,064 36,644
2005 3,625 11,991 1,149 15,781 225 1,972 4,999 29,744
2006 2,733 10,417 787 11,385 8 108 3,528 21,910
2007 2,641 8,587 530 7,488 71 675 3,242 16,750
2008 2,841 10,364 596 7,908 46 614 3,483 18,886
2009
and
There-
after 4,218 17,580 1,858 26,173 1,398 12,773 7,474 56,526
------ ------- ------ ------- ----- ------ ------ -------
Total
Leased 38,217 $156,912 13,674 $177,977 2,353 $23,228 54,244 $358,117
====== ======= ====== ======= ===== ====== ====== =======
Total
Port-
folio
Sq.
Ft. 40,793 14,436 2,548 57,777
====== ====== ===== ======
Annualized
net
effective
rent
per
sq.ft. $ 4.11 $ 13.02 $ 9.87 $ 6.60
======= ======= ====== =======
</TABLE>
This stable occupancy, along with stable rental rates in each of
the Company's Midwestern 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 discussion of Weeks merger below); and (iii) the completion of
the 7.3 million square feet of properties under development by the
Company at June 30, 1999 over the next three quarters and
thereafter. The 7.3 million square feet of properties under
development should provide future earnings from rental operations
growth for the Company as they are placed in service as follows (in
thousands, except percent leased and stabilized returns):
<TABLE>
<CAPTION>
Anticipated Anticipated
In-Service Square Percent Project Stabilized
Date Feet Leased Costs Return
----------- ------ ------- ------- ------------
<S> <C> <C> <C> <C>
3rd Quarter 1999 1,453 35% $100,007 11.8%
4th Quarter 1999 2,699 38% 113,573 11.3%
1st Quarter 2000 2,306 46% 178,783 10.8%
Thereafter 845 23% 93,967 12.0%
----- -------
7,303 38% $486,330 11.4%
===== =======
</TABLE>
- 13 -
<PAGE>
RESULTS OF OPERATIONS
Following is a summary of the Company's operating results and
property statistics for the three and six months ended June 30,
1999 and 1998 (in thousands, except number of properties and per
share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Rental Operations revenue $107,148 $83,079 $209,135 $162,755
Service Operations revenue 8,893 7,022 21,160 11,922
Earnings from Rental
Operations 39,909 30,316 76,008 61,174
Earnings from Service
Operations 3,582 1,820 8,618 2,715
Operating income 39,995 29,033 77,515 58,446
Net income available for
common shares $ 29,596 $21,858 $ 56,990 $ 44,120
Weighted average common
shares outstanding 88,353 80,080 87,367 78,376
Weighted average common
and dilutive potential
common shares 98,855 91,830 98,477 90,222
Basic income per
common share $ 0.33 $ 0.27 $ 0.65 $ 0.56
Diluted income per
common share $ 0.33 $ 0.27 $ 0.65 $ 0.56
Number of in-service
properties
at end of period 486 419 486 419
In-service square
footage at end
of period 57,777 48,223 57,777 48,223
Under development
square footage
at end of period 7,303 4,149 7,303 4,149
</TABLE>
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 TO THREE MONTHS ENDED
JUNE 30, 1998
--------------------------------------------------------------------
Rental Operations
-----------------
The Company increased its in-service portfolio of rental properties
from 419 properties comprising 48.2 million square feet at June 30,
1998 to 486 properties comprising 57.8 million square feet at June
30, 1999 through the acquisition of 33 properties totaling 3.6
million square feet and the completion of 41 properties and five
building expansions totaling 6.4 million square feet developed by
the Company. The Company also disposed of seven properties totaling
420,000 square feet. These 67 net additional rental properties
primarily account for the $24.1 million increase in revenues from
Rental Operations from 1998 to 1999. The increase from 1998 to 1999
in rental expenses, real estate taxes and depreciation and
amortization expense is also a result of the additional 67 in-
service rental properties.
Interest expense increased by approximately $2.8 million from $14.3
million for the three months ended June 30, 1998 to $17.1 million
for the three months ended June 30, 1999 primarily as a result of
additional unsecured debt issued in the second quarter of 1998 to
fund the development and acquisition of additional rental
properties as well as $300.0 million of unsecured debt issued in
the first two quarters of 1999 to fund development and acquisition
activity.
As a result of the above-mentioned items, earnings from rental
operations increased $9.6 million from $30.3 million for the three
months ended June 30, 1998 to $39.9 million for the three months
ended June 30, 1999.
Service Operations
------------------
Service Operation revenues increased by $1.9 million from $7.0
million for the three months ended June 30, 1998 to $8.9 million
for the three months ended June 30, 1999 primarily as a result of
increases in construction management fee revenue due to an increase
in third-party construction volume.
- 14 -
<PAGE>
As a result of the above-mentioned items, earnings from Service
Operations increased from $1.8 million for the three months ended
June 30, 1998 to $3.6 million for the three months ended June 30,
1999.
Net Income Available for Common Shareholders
--------------------------------------------
Net income available for common shareholders for the three months
ended June 30, 1999 was $29.6 million compared to net income
available for common shareholders of $21.9 million for the three
months ended June 30, 1998. This increase results primarily from
the operating result fluctuations in rental and service operations
explained above.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO SIX MONTHS ENDED
JUNE 30, 1998
--------------------------------------------------------------------
Rental Operations
-----------------
The Company increased its in-service portfolio of rental properties
from 419 properties comprising 48.2 million square feet at June 30,
1998 to 486 properties comprising 57.8 million square feet at June
30, 1999 through the acquisition of 33 properties totaling 3.6
million square feet and the completion of 41 properties and five
building expansions totaling 6.4 million square feet developed by
the Company. The Company also disposed of seven properties totaling
420,000 square feet. These 67 net additional rental properties
primarily account for the $46.3 million increase in revenues from
Rental Operations from 1998 to 1999. The increase from 1998 to 1999
in rental expenses, real estate taxes and depreciation and
amortization expense is also a result of the additional 67 in-
service rental properties.
Interest expense increased by approximately $5.9 million from $27.2
million for the six months ended June 30, 1998 to $33.1 million for
the six months ended June 30, 1999 primarily as a result of
additional unsecured debt issued in the second quarter of 1998 to
fund the development and acquisition of additional rental
properties as well as $300.0 million of unsecured debt issued in
the first quarter of 1999 to fund development and acquisition
activity.
As a result of the above-mentioned items, earnings from rental
operations increased $14.8 million from $61.2 million for the six
months ended June 30, 1998 to $76.0 million for the six months
ended June 30, 1999.
Service Operations
------------------
Service Operation revenues increased by $9.3 million from $11.9
million for the six months ended June 30, 1998 to $21.2 million for
the six months ended June 30, 1999 primarily as a result of
increases in construction management fee revenue due to an increase
in third-party construction volume, particularly a 265,000 square
foot suburban office build-to-suit building which resulted in
substantial revenue in the first quarter.
Service Operations operating expenses increased from $9.2 million
to $12.5 million for the six months ended June 30, 1999 as compared
to the six months ended June 30, 1998 primarily as a result of an
increase in construction activity and an increase in income taxes
resulting from the growth in net income related to third party
construction.
- 15 -
<PAGE>
As a result of the above-mentioned items, earnings from Service
Operations increased from $2.7 million for the six months ended
June 30, 1998 to $8.6 million for the six months ended June 30,
1999.
General and Administrative Expense
--------------------------
General and administrative expense increased from $5.4 million for
the six months ended June 30, 1998 to $7.1 million for the six
months ended June 30, 1999 primarily as a result of internal
acquisition costs which are no longer permitted to be capitalized
being charged to general and administrative expense as well as an
increase in state and local taxes due to the overall growth of the
Company.
Net Income Available for Common Shareholders
--------------------------------------------
Net income available for common shareholders for the six months
ended June 30, 1999 was $57.0 million compared to net income
available for common shareholders of $44.1 million for the six
months ended June 30, 1998. This increase results primarily from
the operating result fluctuations in rental and service operations
explained above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaling $82.5 million
and $100.3 million for the six months ended June 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 $318.4 million and
$351.5 million for the six months ended June 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 $401.7 million
and $263.2 million for the six months ended June 30, 1999 and 1998,
respectively, is comprised of debt and equity issuances, net of
distributions to shareholders and minority interests and repayments
of outstanding indebtedness. In the first six months of 1999, the
Company received $37.9 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 six months of 1998, the Company received $102.9 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.
- 16 -
<PAGE>
The Company has the following lines of credit (LOC) available:
<TABLE>
<CAPTION>
Borrowing Outstanding at
Capacity Maturity Interest June 30, 1999
Description (in 000's) Date Rate (in 000's)
----------------------- ---------- -------- -------- --------------
<S> <C> <C> <C> <C>
Unsecured Line of Credit $450,000 April 2001 LIBOR + .70% $159,000
Unsecured Line of Credit $300,000 April 2001 LIBOR + .90% $ 0
</TABLE>
Both LOC are used to fund development and acquisition of additional
rental properties and to provide working capital.
Effective July 2, 1999, the interest rate on the $450 million LOC
was adjusted from LIBOR + .80% to LIBOR + .70% in conjunction with
the Company's new debt rating following the Merger (see Note 7).
Additionally, the $450 million LOC allows the Company an option to
obtain borrowings from the financial institutions that participate
in the LOC at rates lower than the stated interest rate, subject to
certain restrictions. Amounts outstanding on the LOC at June 30,
1999 are at LIBOR + .80%.
The $300 million LOC was obtained July 2, 1999, following with the
Merger (see Note 7). On July 2, 1999, the Company repaid certain out-
standing debt balances of Weeks using a combination of cash on hand
and the LOC. The balance on the combined LOC following thses payments
was $285 million.
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 June 30,
1999 of approximately $567.9 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 June 30, 1999 consists of notes
totaling $1.4 billion with a weighted average interest rate of
7.16% maturing at various dates through 2028. The Company has $1.0
billion of unsecured debt and $341.6 million of secured debt
outstanding at June 30, 1999. Scheduled principal amortization of
such debt totaled $3.9 million for the six months ended June 30,
1999.
Following is a summary of the scheduled future amortization and
maturities of the Company's indebtedness at June 30, 1999 (in
thousands):
<TABLE>
<CAPTION>
Future Repayments
------------------------------------ Weighted Average
Scheduled Interest Rate of
Year Amortization Maturities Total Future Repayments
---- ------------ ---------- ------- -----------------
<S> <C> <C> <C> <C>
1999 $ 4,530 $ 28,430 $ 32,960 5.92%
2000 6,592 64,850 71,442 6.94%
2001 6,909 249,829 256,738 6.47%
2002 7,179 50,000 57,179 7.40%
2003 5,285 241,144 246,429 7.63%
2004 4,330 177,035 181,365 7.41%
2005 4,678 100,000 104,678 7.50%
2006 5,061 100,000 105,061 7.09%
2007 4,616 14,939 19,555 7.81%
2008 4,071 100,000 104,071 6.77%
Thereafter 36,078 175,000 211,078 6.82%
------ --------- ---------
Total $89,329 $1,301,227 $1,390,556 7.16%
====== ========= =========
</TABLE>
- 17 -
<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 operating property, plus operating
depreciation and amortization, and adjustments for minority
interest and unconsolidated companies (adjustments for minority
interest and unconsolidated companies are calculated to reflect FFO
on the same basis), is the industry standard for reporting the
operations of real estate investment trusts.
The following table reflects the calculation of the Company's FFO
for the three and six months ended June 30 as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income available
for common shares $29,596 $21,858 $56,990 $44,120
Add back:
Depreciation and
amortization 20,935 16,525 41,389 30,785
Share of joint venture
adjustments 1,241 968 2,756 1,550
Earnings from operating
property sales (1,084) (368) (3,398) (954)
Minority interest share
of FFO adjustments (2,064) (2,050) (4,253) (3,838)
------ ------- ------- -------
FUNDS FROM OPERATIONS $48,624 $ 36,933 $ 93,484 $ 71,663
======= ======= ======= =======
CASH FLOW PROVIDED
BY (USED BY):
Operating activities $ 50,160 $ 61,260 $ 82,486 $ 100,311
Investing activities (150,741) (242,439) (318,361) (351,488)
Financing activities 238,329 174,389 401,669 263,203
</TABLE>
The increase in FFO for the three and six months ended June 30,
1999 compared to the three and six months ended June 30, 1998
results primarily from the increased in-service rental property
portfolio as discussed above under "Results of Operations."
While management believes that FFO is the most relevant and widely
used measure of the 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.
MERGER WITH WEEKS CORPORATION
On June 18, 1999, the shareholders of both Duke and Weeks approved
a merger transaction which was consummated in July 1999, whereby
Weeks, a self-administered, self-managed geographically focused
Real Estate Investment Trust ("REIT") which operated primarily in
the southeastern United States, was merged into Duke. The combined
company has continued its existence under the name Duke-Weeks
Realty Corporation and is traded on the New York Stock Exchange
("NYSE") under the symbol "DRE." In accordance with the terms of
the 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 share of a new class of the Company Series F
preferred shares. In addition, the Company assumed Weeks' debt and
other liabilities upon consummation of the Merger. The Merger was
structured as a tax-free merger and was accounted for under the
purchase method.
- 18 -
<PAGE>
Based on the in-service properties of Duke and Weeks at June 30, 1999,
the Company would have had 882 in-service properties totaling 86.1
million square feet, which were approximately 93% leased. The
Company has operations in 15 cities in the midwestern and
southeastern United States. Additionally, the combined Company's total
market capitalization would have been approximately $5.8 billion at
June 30, 1999.
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. 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.
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 its
operations as well as the property functioning of the embeded
systems included in the Company's properties. In any particular
property, the problem could affect the functioning of elevators,
heating and air conditioning systems, security systems, and other
automated building systems. Management has identified and
inventoried the building systems and equipment at the Company's
existing properties to determine which systems or equipment could
be affected by the Year 2000 problem. The inventory has been
entered into a data base containing a readiness status of each such
system. This data base allows Management to quickly monitor ongoing
progress related to the Year 2000 readiness of all affected
building systems and equipment. Under the direction of the Year
2000 Task Force, the property manager of each building has
contacted in writing each building system manufacturer or supplier
that has supplied an active and affected building system. Each
manufacturer or supplier was sent a comprehensive questionnaire
designed to assess the manufacturer's effort in assuring that the
affected building systems are or, in sufficient time prior to
January 1, 2000, will be Year 2000 ready.
- 19 -
<PAGE>
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 ongoing and such plans continue to be refined as new
information is obtained. The contingency plans generally provide
for obtaining or allowing alternative access, limited electrical
and telephone service and, security and other basic services.
The 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.
Based upon a cost assessment prepared by the Task Force, the
Company has budgeted approximately $125,000 of non-reimbursable
expenses for the upgrade and replacement of certain building
systems and internal software having potential Year 2000 related
problems and attorney's fees.
In addition to assessing the readiness of the building systems of
the 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 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
continue 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 $50,000. A budget and
timetable for replacement, upgrade of or contingencies for the
foregoing systems, that are not Year 2000 ready has been developed
and is being implemented. The estimated cost associated with such
replacement and upgrade is budgeted to be $25,000.
There can be no assurance that the 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
- 20 -
<PAGE>
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, its vendors, suppliers, service
providers and tenants, and the Company's information systems.
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
------------------------------------------------------------
At the annual meeting of the shareholders of the Company held on
June 18, 1999, there were 86,751,130 common shares and 1,540,000
preferred shares outstanding and the following matters received the
following votes:
1. Proposal to Approve the Merger of Weeks, a Georgia Corporation, with and
into Duke and the Agreement and Plan of Merger by and between Weeks and
Duke dated as of February 28, 1999:
Votes For Votes Against Votes Abstained
---------- ------------- ---------------
70,166,716 1,000,878 248,211
2. Proposal to Consider and Vote upon an Amendment to Duke's Articles of
Incorporation in connection with the Proposed Merger which would increase
the maximum size of Duke's Board of Directors from 15 to 23:
Votes For Votes Against Votes Abstained
---------- ------------- ---------------
70,135,510 4,135,678 522,813
3. Proposal to Consider and Vote upon two additional amendments to Duke's
Articles of Incorporation which would (1) change the existing requirement
that 80% of the shares of capital stock of Duke approve certain amendments
to Duke's Articles of Incorporation to require the approval of 80% of the
common shares of Duke and (2) change the existing requirement that 80% of
the shares of Capital Stock approve any amendment to the provisions of the
Articles of Incorporation relating to the number, classes, terms of office
and qualifications of directors, to require the approval of a majority of
the common shares of Duke.
Votes For Votes Against Votes Abstained
---------- ------------- ---------------
66,816,928 4,796,741 719,684
- 21 -
<PAGE>
4. Election of three Directors to serve until the earlier to occur of (1)
the effective time of the merger, or (2) if the merger is not approved or
completed, the ordinary expiration of their terms in 2002:
Votes For Votes Against
--------- -------------
Thomas L. Hefner 79,215,105 4,431,333
L. Ben Lytle 79,202,755 4,443,687
Edward T. Baur 79,205,150 4,441,289
5. Proposal to Consider and Approve the 1999 Directors' Stock Option and
Dividend Increase Plan of Duke:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
73,959,876 6,568,491 666,606
6. Proposal to Consider and Approve the 1999 Salary Replace Stock Option
and Dividend Increase Unit Plan of Duke:
Votes For Votes Against Votes Abstained
---------- ------------- ---------------
80,163,592 2,735,735 747,101
7. Proposal to Consider and Approve an Amendment to Duke's 1996 Directors'
Stock Payment Plan authorizing the issuance of an additional 100,000 shares
of Duke Common Shares under the Plan:
Votes For Votes Against Votes Abstained
---------- ------------- ---------------
80,629,760 2,245,786 770,875
Item 5. Other Information
--------------------------
When used in this Form 10-Q, the words "believes," "expects,"
"estimates" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain
risks and uncertainties which could cause actual results to differ
materially. In particular, among the factors that could cause
actual results to differ materially are continued qualification as
a real estate investment trust, general business and economic
conditions, competition, increases in real estate construction
costs, interest rates, accessibility of debt and equity capital
markets and other risks inherent in the real estate business
including tenant defaults, potential liability relating to
environmental matters and illiquidity of real estate investments.
Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. The
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 28, 1996 for
additional information concerning these risks.
- 22 -
<PAGE>
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)
Reports on Form 8-K
-------------------
None.
- 23 -
<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: August 16, 1999 /s/ Thomas L. Hefner
----------------------------
President and
Chief Executive Officer
/s/ Darell E. Zink, Jr.
----------------------------
Executive Vice President and
Chief Financial Officer
/s/ Dennis D. Oklak
----------------------------
Executive Vice President and
Chief Administrative Officer
(Chief Accounting Officer)
- 24 -
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
August 3, 1999 related to our review of interim financial
information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such
report is not considered a part of a registration statement
prepared or certified by an accountant, or a report prepared or
certified by an accountant within the meaning of sections 7 and 11
of the Act.
KPMG LLP
Indianapolis, Indiana
August 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
DUKE-WEEKS REALTY CORPORATION AND SUBSIDIARIES' JUNE 30, 1999
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 172,744
<SECURITIES> 0
<RECEIVABLES> 111,110
<ALLOWANCES> (1,466)
<INVENTORY> 0
<CURRENT-ASSETS> 315,674
<PP&E> 3,220,473
<DEPRECIATION> (204,750)
<TOTAL-ASSETS> 3,427,712
<CURRENT-LIABILITIES> 178,946
<BONDS> 1,390,556
0
444,317
<COMMON> 1,304,645
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,427,712
<SALES> 0
<TOTAL-REVENUES> 235,725
<CGS> 0
<TOTAL-COSTS> (119,998)
<OTHER-EXPENSES> (25,617)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (33,120)
<INCOME-PRETAX> 56,990
<INCOME-TAX> 0
<INCOME-CONTINUING> 56,990
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,990
<EPS-BASIC> $.65
<EPS-DILUTED> $.65
</TABLE>
