UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
------ -------
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Commission File Number: 1-9044
------
DUKE REALTY INVESTMENTS, INC.
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 May 7, 1999 was 88,713,700
($.01 par value).
<PAGE>
DUKE REALTY INVESTMENTS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance
Sheets as of March 31, 1999
(Unaudited) and December 31, 1998 2
Condensed Consolidated Statements
of Operations for the three months
ended March 31, 1999 and 1998 (Unaudited) 3
Condensed Consolidated Statements of Cash
Flows for the three months ended March 31,
1999 and 1998 (Unaudited) 4
Condensed Consolidated Statement of
Shareholders' Equity for the three months
ended March 31, 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-10
Independent Accountants' Review Report 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-20
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 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
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
------ --------- ------------
(Unaudited)
<S> <C> <C>
Real estate investments:
Land and improvements $ 333,005 $ 312,022
Buildings and tenant
improvements 2,205,621 2,091,757
Construction in progress 182,266 185,950
Investments in unconsolidated
companies 115,527 125,746
Land held for development 185,507 146,911
--------- ---------
3,021,926 2,862,386
Accumulated depreciation (188,856) (179,887)
--------- ---------
Net real estate investments 2,833,070 2,682,499
Cash and cash equivalents 34,996 6,950
Accounts receivable from tenants,
net of allowance of $540 and $896 8,562 9,641
Straight-line rent receivable, net
of allowance of $841 21,664 20,332
Receivables on construction contracts 57,933 29,162
Deferred financing costs, net of
accumulated amortization of
$12,187 and $11,754 12,946 11,382
Deferred leasing and other costs,
net of accumulated amortization of
$15,913 and $16,838 52,642 53,281
Escrow deposits and other assets 47,042 40,406
--------- ---------
$3,068,855 $2,853,653
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Indebtedness:
Secured debt $ 333,560 $ 326,317
Unsecured notes 715,000 590,000
Unsecured line of credit 65,000 91,000
--------- ---------
1,113,560 1,007,317
Construction payables and amounts
due subcontractors 49,692 55,012
Accounts payable 2,783 4,836
Accrued expenses:
Real estate taxes 39,750 36,075
Interest 9,444 10,329
Other 17,992 22,781
Other liabilities 26,392 21,928
Tenant security deposits and prepaid rents 22,005 18,534
--------- ---------
Total liabilities 1,281,618 1,176,812
--------- ---------
Minority interest 107,429 106,729
--------- ---------
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; 86,745 and 86,053
shares issued and outstanding 1,305,445 1,290,313
Distributions in excess of net income (69,954) (67,999)
--------- ---------
Total shareholders' equity 1,679,808 1,570,112
--------- ---------
$3,068,855 $2,853,653
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 2 -
<PAGE>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
RENTAL OPERATIONS:
Revenues:
Rental income $ 99,479 $76,835
Equity in earnings of
unconsolidated companies 2,508 2,841
------- ------
101,987 79,676
------- ------
Operating expenses:
Rental expenses 18,626 13,845
Real estate taxes 10,817 7,834
Interest expense 15,991 12,879
Depreciation and amortization 20,454 14,260
------- ------
65,888 48,818
------- ------
Earnings from rental operations 36,099 30,858
------- ------
SERVICE OPERATIONS:
Revenues:
Property management, maintenance
and leasing fees 3,626 3,037
Construction management and
development fees 8,347 1,559
Other income 294 304
------- ------
12,267 4,900
------- ------
Operating expenses:
Payroll 3,717 2,883
Maintenance 795 604
Office and other 2,719 518
------- ------
7,231 4,005
------- ------
Earnings from service operations 5,036 895
------- -------
General and administrative expense (3,615) (2,340)
------- ------
Operating income 37,520 29,413
OTHER INCOME (EXPENSE):
Interest income 599 189
Earnings from property sales 2,314 586
Other expense (232) (31)
Minority interest in earnings of
unitholders (3,535) (3,192)
Other minority interest in earnings
of subsidiaries (430) -
------- ------
Net income 36,236 26,965
Dividends on preferred shares (8,842) (4,703)
------- ------
Net income available for common
shareholders $ 27,394 $22,262
======= ======
Net income per common share:
Basic $ .32 $ .29
======= ======
Diluted $ .32 $ .29
======= ======
Weighted average number of common
shares outstanding 86,370 76,655
======= ======
Weighted average number of common
and dilutive potential common shares 98,094 88,596
======= ======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 3 -
<PAGE>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 36,236 $ 26,965
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of buildings and
tenant improvements 18,260 12,650
Amortization of deferred
financing costs 356 354
Amortization of deferred leasing
and other costs 2,194 1,610
Minority interest in earnings 3,965 3,192
Straight-line rent adjustment (1,770) (1,416)
Earnings from property sales (2,314) (586)
Construction contracts, net (34,091) (5,135)
Other accrued revenues and expenses, net 9,511 3,502
Equity in earnings in excess of
distributions received from
unconsolidated companies (21) (2,085)
------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 32,326 39,051
------- -------
Cash flows from investing activities:
Rental property development costs (67,163) (48,522)
Acquisition of rental properties (54,854) (36,573)
Acquisition of land held for development
and infrastructure costs (47,809) (8,310)
Recurring costs:
Tenant improvements (3,148) (2,106)
Leasing costs (2,706) (1,197)
Building improvements (259) (692)
Other deferred leasing costs (3,288) (3,370)
Other deferred costs and other assets (5,205) (2,586)
Proceeds from property sales, net 8,003 1,177
Distribution received from
unconsolidated companies 16,802 -
Net investment in and advances
to unconsolidated companies (7,993) (6,870)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (167,620) (109,049)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common
shares, net 13,857 42,560
Proceeds from issuance of preferred
shares, net 96,519 -
Proceeds from indebtedness 125,000 100,000
Repayments on lines of credit, net (26,000) (20,000)
Repayments on indebtedness including
principal amortization (1,873) (4,021)
Distributions to common shareholders (29,349) (22,879)
Distributions to preferred shareholders (8,842) (4,703)
Distributions to minority interest (3,980) (3,490)
Deferred financing costs (1,992) 1,347
------- -------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 163,340 88,814
------- -------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 28,046 18,816
------- -------
Cash and cash equivalents at
beginning of period 6,950 10,353
------- -------
Cash and cash equivalents at end of period $ 34,996 $ 29,169
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 4 -
<PAGE>
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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 - 14,625 - 14,625
Issuance of preferred
shares, net of
underwriting discounts
and offering
costs of $3,481 96,519 - - 96,519
Acquisition of
minority
interest - 507 - 507
Net income - - 36,236 36,236
Distributions to
common share-
holders ($.34
per common
share) - - (29,349) (29,349)
Distributions to
preferred
shareholders - - (8,842) (8,842)
------- --------- ------ ---------
BALANCE AT
MARCH 31, 1999 $444,317 $1,305,445 $(69,954) $1,679,808
======= ========= ====== =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
- 5 -
<PAGE>
DUKE REALTY INVESTMENTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. FINANCIAL STATEMENTS
The interim condensed consolidated financial statements included
herein have been prepared by Duke Realty Investments, Inc. (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 the Company's Annual Report to Shareholders.
THE COMPANY
The Company's rental operations are conducted through Duke Realty
Limited Partnership ("DRLP"), of which the Company owns 88.9% at
March 31, 1999. The remaining interests in DRLP 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 a $450 million unsecured revolving credit facility
("LOC") which is available to fund the development and acquisition of
additional rental properties and to provide working capital. The
revolving LOC matures in April 2001 and bears interest payable monthly
at the 30-day London Interbank Offered Rate ("LIBOR") plus .80%. As part
of the current LOC agreement, the Company has the option to obtain borrowings
from the financial institutions which participate in the LOC at rates lower
than LIBOR plus .80%, subject to certain restrictions. Amounts outstanding
on the LOC at March 31, 1999 are at LIBOR plus .675% to .80%. The Company
also has a demand $7 million secured revolving credit facility which is
available to provide working capital. This facility bears interest payable
monthly at the 30-day LIBOR rate plus .65%.
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 $972,000 and $600,000 for such services for
the three months ended
- 6 -
<PAGE>
March 31, 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 months ended March 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Basic net income available for common
shareholders $27,394 $22,262
Minority interest in earnings of unitholders 3,535 3,192
------ ------
Diluted net income available for common
shareholders and dilutive potential shares $30,929 $25,454
====== ======
Weighted average number of common shares
outstanding 86,370 76,655
Weighted average partnership units outstanding 10,828 10,995
Dilutive shares for long-term compensation plans 896 946
------ ------
Weighted average number of common shares and
dilutive potential common shares 98,094 88,596
====== ======
</TABLE>
The Preferred D Series Convertible stock was anti-dilutive at March
31, 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 joint ventures. Non-segment assets to reconcile
to total assets consists of corporate assets including cash, deferred
financing costs and investments in unconsolidated subsidiaries.
The Company assesses and measures segment operating results based on
a 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 property, plus 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
- 7 -
<PAGE>
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 months ended March 31, 1999 and 1998 and the assets for each of
the reportable segments as of March 31, 1999 and December 31, 1998
are summarized as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
-------- --------
<S> <C> <C>
Revenues
--------
Rental Operations:
Office Properties $ 59,651 $49,517
Industrial Properties 32,570 22,553
Retail Properties 5,805 5,024
Service Operations 12,267 4,900
------- ------
Total Segment Revenues 110,293 81,994
Non-Segment Revenue 3,961 2,582
------- ------
Consolidated Revenue $114,254 $84,576
======= ======
Funds From Operations
---------------------
Rental Operations:
Office Properties $ 41,214 $35,366
Industrial Properties 24,759 18,001
Retail Properties 4,605 4,132
Services Operations 5,036 895
------- ------
Total Segment FFO 75,614 58,394
Non-Segment FFO:
Interest expense (15,991) (12,879)
Interest income 599 189
General and administrative
expense (3,615) (2,340)
Other expenses (773) (2,591)
Minority interest in earnings (3,965) (3,192)
Minority interest share of FFO
adjustments (2,189) (1,788)
Joint venture FFO 4,022 3,640
Dividends on preferred shares (8,842) (4,703)
------- ------
Consolidated FFO 44,860 34,730
Depreciation and amortization (20,454) (14,260)
Share of joint venture adjustments (1,515) (582)
Earnings from property sales 2,314 586
Minority Interest share of FFO
adjustments 2,189 1,788
------- ------
Net Income Available for
Common Shareholders $ 27,394 $22,262
======= ======
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Assets
------
Rental Operations:
Office Properties $1,475,609 $1,409,162
Industrial Properties 1,000,323 907,656
Retail Properties 165,479 161,675
Service Operations 47,902 55,268
--------- ---------
Total Segment Assets 2,689,313 2,533,761
Non-Segment Assets 379,542 319,892
--------- ---------
Consolidated Assets $3,068,855 $2,853,653
========= =========
</TABLE>
- 8 -
<PAGE>
6. SHAREHOLDERS' EQUITY
The following series of preferred stock is outstanding as of March
31, 1999 (in thousands, except percentages):
<TABLE>
<CAPTION>
Shares Dividend Redemption Liquidation Book Value
Description Outstanding Rate Date Preference At 3/31/99 Convert.
- ----------- ----------- -------- ---------- ----------- ---------- --------
<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
</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.
7. MERGER WITH WEEKS CORPORATION
On March 1, 1999, the Company announced that it entered into an
Agreement and Plan of Merger, dated as of February 28, 1999 (the
"Merger Agreement"), with Weeks Corporation ("Weeks"), pursuant to
which Weeks will merge with and into the Company. Weeks is a self-
administered, self-managed, geographically focused REIT that was
organized in 1994. As of December 31, 1998, Weeks' in-service
property portfolio consisted of 300 industrial properties, 34
suburban office properties and five retail properties comprising 28.1
million square feet. As of December 31, 1998, Weeks' primary markets
and the concentration of Weeks' portfolio (based on square footage of
in-service properties) were Atlanta, Georgia; Nashville, Tennessee;
Miami, Florida; Raleigh-Durham-Chapel Hill (the "Research Triangle"),
North Carolina; Dallas/Ft. Worth, Texas; Orlando, Florida; and
Spartanburg, South Carolina. In addition, 31 industrial, suburban
office and retail properties were under development, in lease-up or
under agreement to acquire at December 31, 1998, comprising an
additional 3.4 million square feet. At December 31, 1998, Weeks had
approximately 19.7 million shares of common stock and six million
shares of preferred stock outstanding, and approximately $654 million
aggregate principal amount of outstanding indebtedness. In the
merger, each outstanding share of common stock of Weeks will be
converted into the right to receive 1.38 shares of common stock of
the Company and each outstanding share of 8.0% Series A Cumulative
Redeemable Preferred Stock of Weeks will be converted into the right
to receive one preference share of the Company representing 1/1000 of
a share of 8.0% Series F Cumulative Redeemable Preferred Stock of the
Company. The terms of the Company's preference shares to be issued in
the merger will be substantially identical to the terms of the Weeks
Series A preferred stock. Weeks' principal operating subsidiary,
Weeks Realty, L.P. (the "Weeks Operating Partnership"), will be
merged with and into the Operating Partnership. In the partnership
merger, each outstanding common unit of Weeks Operating Partnership
will be converted into the right to receive 1.38 common units of the
Operating Partnership. At December 31, 1998, Weeks Operating
Partnership
- 9 -
<PAGE>
had approximately 7.3 million units of limited partnership interest
outstanding. The merger of Weeks into the Company is expected to
qualify as a tax-free reorganization and will be accounted for under
the purchase method of accounting. The transactions are expected to
close in the second or third quarter of 1999, subject to receipt of
necessary approvals by the Duke and Weeks shareholders and
satisfaction of customary closing conditions.
If the merger between the Company and Weeks is consummated as
expected, the combined company will have significant operations and
assets located in southeastern markets where the Company and its
management have not traditionally operated or owned assets. Since
substantially all of the members of Weeks' management are expected to
remain with the combined company for the foreseeable future after the
merger, the Company expects to have the necessary expertise to
operate successfully in the new markets. The combined company's
operating performance will, however, be exposed to the general
economic conditions of its new markets and could be adversely
affected if conditions, such as an oversupply of space or a reduction
in demand for the types of properties supplied by the combined
company, become unfavorable.
8. SUBSEQUENT EVENTS
On April 21, 1999, the Board of Directors declared a dividend of $.34
per share of common stock which is payable on May 28, 1999, to common
shareholders of record on May 13, 1999.
On April 21, 1999, the Board of Directors declared a dividend of
$.56875 per depositary share of Series A Cumulative Preferred Shares
which is payable on May 28, 1999, to preferred shareholders of record
on May 14, 1999. Each depositary share represents one-tenth of a
share of the Company's 9.10% Series A Preferred Shares.
On April 21, 1999, the Board of Directors declared a dividend of
$.99875 per depositary share of Series B Cumulative Step-up
Redeemable Preferred Shares which is payable on June 30, 1999, to
preferred shareholders of record on June 16, 1999. Each depositary
share represents one-tenth of a share of the Company's 7.99% Series B
Preferred Shares.
On April 21, 1999, the Board of Directors declared a dividend of
$.46094 per depositary share of Series D Convertible Redeemable
Preferred Shares which is payable on June 30, 1999, to preferred
shareholders of record on June 16, 1999. Each depositary share
represents one-tenth of a share of the Company's 7.375% Series D
Preferred Shares.
On April 21, 1999, the Board of Directors declared a dividend of
$.51563 per depositary share of Series E Cumulative Redeemable
Preferred Shares which is payable on June 30, 1999, to preferred
shareholders of record on June 16, 1999. Each depositary share
represents one-tenth of a share of the Company's 8.25% Series E
Preferred Shares.
- 10 -
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
--------------------------------------
The Board of Directors
DUKE REALTY INVESTMENTS, INC.:
We have reviewed the condensed consolidated balance sheet of Duke
Realty Investments, Inc. and subsidiaries as of March 31, 1999, the
related condensed consolidated statements of operations for the three
months ended March 31, 1999 and 1998, the related condensed
consolidated statements of cash flows for the three months ended
March 31, 1999 and 1998, and the related condensed consolidated
statement of shareholders' equity for the three months ended March
31, 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
May 3, 1999
- 11 -
<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 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 93.7% 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 March 31, 1999 and 1998
(in thousands, except percentages):
<TABLE>
<CAPTION>
Total Percent of
Square Feet Total Square Feet Percent Occupied
--------------- ----------------- ----------------
Type 1999 1998 1999 1998 1999 1998
- ---- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL
Service Centers 6,771 4,546 12.2% 10.4% 92.2% 92.2%
Bulk 32,295 26,093 58.2 59.6 94.4% 92.8%
OFFICE
Suburban 13,258 10,418 23.9 23.8 95.0% 96.3%
CBD 861 699 1.6 1.6 93.9% 95.2%
RETAIL 2,288 2,041 4.1 4.6 93.8% 95.3%
------ ------ ----- -----
Total 55,473 43,797 100.0% 100.0% 94.3% 93.7%
====== ====== ===== =====
</TABLE>
Management expects occupancy of the in-service property portfolio to
remain stable because (i) only 9.6% and 9.4% 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 March 31, 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 3,783 $ 14,507 1,150 $ 12,779 89 $ 852 5,022 $ 28,138
2000 3,358 14,530 1,421 17,545 118 1,450 4,897 33,525
2001 3,978 16,932 1,808 22,753 91 1,053 5,877 40,738
2002 4,360 18,840 1,721 19,827 129 1,531 6,210 40,198
2003 3,918 18,277 1,476 19,495 145 1,554 5,539 39,326
2004 2,852 12,280 1,139 15,729 38 419 4,029 28,428
2005 3,419 10,775 1,081 15,143 225 1,970 4,725 27,888
2006 2,280 9,049 767 11,059 8 108 3,055 20,216
2007 2,340 7,630 501 7,128 76 557 2,917 15,315
2008 2,829 10,315 450 6,116 46 614 3,325 17,045
2009
and
There-
After 3,619 15,328 1,885 26,202 1,181 10,426 6,685 51,956
------ ------- ------ ------- ----- ------ ------ -------
Total
Leased 36,736 $148,463 13,399 $173,776 2,146 $20,534 52,281 $342,773
====== ======= ====== ======= ===== ====== ====== =======
Total
Port-
folio
Sq Ft 39,066 14,119 2,288 55,473
====== ====== ===== ======
Annualized
net
effective
rent
per sq ft $4.04 $12.97 $9.57 $6.56
==== ===== ==== ====
</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 5.7 million
square feet of properties under development by the Company at March
31, 1999 over the next three quarters and thereafter. The 5.7 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>
2nd Quarter 1999 2,336 46% $112,347 11.3%
3rd Quarter 1999 1,444 30% 90,383 11.6%
4th Quarter 1999 900 77% 51,188 11.1%
Thereafter 1,033 50% 126,595 10.6%
----- -------
5,713 48% $380,513 11.1%
===== =======
</TABLE>
- 13 -
<PAGE>
RESULTS OF OPERATIONS
---------------------
Following is a summary of the Company's operating results and
property statistics for the three months ended March 31, 1999 and
1998 (in thousands, except number of properties and per share
amounts):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Rental Operations revenue $101,987 $79,676
Service Operations revenue 12,267 4,900
Earnings from Rental Operations 36,099 30,858
Earnings from Service Operations 5,036 895
Operating income 37,520 29,413
Net income available for common shares $ 27,394 $22,262
Weighted average common shares
outstanding 86,370 76,655
Weighted average common and dilutive
potential common shares 98,094 88,596
Basic income per common share $ .32 $ .29
Diluted income per common share $ .32 $ .29
Number of in-service properties
at end of period 474 381
In-service square footage at
end of period 55,473 43,797
Under development square footage
at end of period 5,713 4,294
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 TO THREE MONTHS ENDED
MARCH 31, 1998
---------------------------------------------------------------------
Rental Operations
-----------------
The Company increased its in-service portfolio of rental properties
from 381 properties comprising 43.8 million square feet at March 31,
1998 to 474 properties comprising 55.5 million square feet at March
31, 1999 through the acquisition of 62 properties totaling 5.7
million square feet and the completion of 34 properties and seven
building expansions totaling 6.1 million square feet developed by the
Company. The Company also disposed of three properties totaling
116,000 square feet. These 93 net additional rental properties
primarily account for the $22.3 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 93 in-service
rental properties.
Interest expense increased by approximately $3.1 million from $12.9
million for the three months ended March 31, 1998 to $16.0 million
for the three months ended March 31, 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 $125.0 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 $5.2 million from $30.9 million for the three
months ended March 31, 1998 to $36.1 million for the three months
ended March 31, 1999.
Service Operations
------------------
Service Operation revenues increased by $7.4 million from $4.9
million for the three months ended March 31, 1998 to $12.3 million
for the three months ended March 31, 1999 primarily as a result of
increases in construction management fee revenue due to an increase
in third-party construction
- 14 -
<PAGE>
volume, particularly a 265,000 square foot suburban office build-to-
suit building which incurred substantial volume in the first quarter.
Service Operations operating expenses increased from $4.0 million to
$7.2 million for the three months ended March 31, 1999 as compared to
the three months ended March 31, 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 $895,000 for the three months ended March
31, 1998 to $5.0 million for the three months ended March 31, 1999.
General and Administrative Expense
---------------------------------
General and administrative expense increased from $2.3 million for
the three months ended March 31, 1998 to $3.6 million for the three
months ended March 31, 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 three months
ended March 31, 1999 was $27.4 million compared to net income
available for common shareholders of $22.3 million for the three
months ended March 31, 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 $32.3 million and
$39.1 million for the three months ended March 31, 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. This increase is
primarily a result of, as discussed above under "Results of
Operations," the increase in net income resulting from the expansion
of the in-service portfolio through development and acquisitions of
additional rental properties.
Net cash used by investing activities totaling $167.6 million and
$109.0 million for the three months ended March 31, 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 $163.3 million and
$88.8 million for the three months ended March 31, 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 quarter of 1999, the
Company received $13.9 million of net proceeds from the issuance of
common shares and $96.5 million of net proceeds from a preferred
stock offering. The Company
- 15 -
<PAGE>
also issued $125.0 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 quarter of 1998, the Company received $42.6 million of
net proceeds from the issuance of common shares and issued $100.0
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 a $450 million LOC which matures in April 2001.
This facility was increased from $250 million in September 1998 and
bears interest payable at the 30-day LIBOR plus .80%. As part of the
current LOC agreement, the Company has the option to obtain borrowings
from the financial institutions which participate in the LOC at rates
lower than LIBOR plus .80%, subject to certin restrictions. Amounts
outstanding on the LOC at March 31, 1999 are at LIBOR plus .675% to .80%.
The Company also has a demand $7 million secured revolving credit facility
which is available to provide working capital. This facility bears
interest payable at the 30-day LIBOR rate plus .65%.
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 March 31, 1999
of approximately $742.9 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 total debt outstanding at March 31, 1999 consists of notes
totaling $1.114 billion with a weighted average interest rate of
7.21% maturing at various dates through 2028. The Company has $780.0
million of unsecured debt and $333.6 million of secured debt
outstanding at March 31, 1999. Scheduled principal amortization of
such debt totaled $1.9 million for the three months ended March 31,
1999.
Following is a summary of the scheduled future amortization and
maturities of the Company's indebtedness at March 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
Repayments
---------------------------------------- Weighted Average
Scheduled Interest Rate of
Year Amortization Maturities Total Future Repayments
----- ------------ ---------- ---------- -----------------
<S> <C> <C> <C> <C>
1999 $ 6,876 $ 34,935 $ 41,811 6.24%
2000 6,261 64,850 71,111 6.94%
2001 6,513 140,095 146,608 6.41%
2002 7,077 50,000 57,077 7.41%
2003 5,195 66,144 71,339 8.46%
2004 4,253 177,035 181,288 7.42%
2005 4,617 100,000 104,617 7.50%
2006 5,021 100,000 105,021 7.09%
2007 4,601 14,939 19,540 7.81%
2008 4,071 100,000 104,071 6.77%
Thereafter 36,077 175,000 211,077 6.81%
------ --------- ---------
Total $90,562 $1,022,998 $1,113,560 7.21%
====== ========= =========
</TABLE>
FUNDS FROM OPERATIONS
Management believes that Funds From Operations ("FFO"), which is
defined by the National Association of Real Estate Investment Trusts
as net income or loss excluding gains or losses from debt
- 16 -
<PAGE>
restructuring and sales of property, plus 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 months ended March 31 as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Net income available for common shares $ 27,394 $ 22,262
Add back:
Depreciation and amortization 20,454 14,260
Share of joint venture adjustments 1,515 582
Earnings from property sales (2,314) (586)
Minority interest share of add-backs (2,189) (1,788)
------- -------
Funds From Operations $ 44,860 $ 34,730
======= =======
Cash flow provided by (used by):
Operating activities $ 32,326 $ 39,051
Investing activities (167,620) (109,049)
Financing activities 163,340 88,814
</TABLE>
The increase in FFO for the three months ended March 31, 1999
compared to the three months ended March 31, 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 March 1, 1999, the Company announced that it entered into an
Agreement and Plan of Merger, dated as of February 28, 1999 (the
"Merger Agreement"), with Weeks Corporation ("Weeks"), pursuant to
which Weeks will merge with and into the Company. Weeks is a self-
administered, self-managed, geographically focused REIT that was
organized in 1994. As of December 31, 1998, Weeks' in-service
property portfolio consisted of 300 industrial properties, 34
suburban office properties and five retail properties comprising 28.1
million square feet. As of December 31, 1998, Weeks' primary markets
and the concentration of Weeks' portfolio (based on square footage of
in-service properties) were Atlanta, Georgia; Nashville, Tennessee;
Miami, Florida; Raleigh-Durham-Chapel Hill (the "Research Triangle"),
North Carolina; Dallas/Ft. Worth, Texas; Orlando, Florida; and
Spartanburg, South Carolina. In addition, 31 industrial, suburban
office and retail properties were under development, in lease-up or
under agreement to acquire at December 31, 1998, comprising an
additional 3.4 million square feet. At December 31, 1998, Weeks had
approximately 19.7 million shares of common stock and six million
shares of preferred stock outstanding, and approximately $654 million
aggregate principal amount of outstanding indebtedness. In the
merger, each outstanding share
- 17 -
<PAGE>
of common stock of Weeks will be converted into the right to receive
1.38 shares of common stock of the Company and each outstanding
share of 8.0% Series A Cumulative Redeemable Preferred Stock of Weeks
will be converted into the right to receive one preference share of
the Company representing 1/1000 of a share of 8.0% Series F
Cumulative Redeemable Preferred Stock of the Company.
The terms of the Company's preference shares to be issued in the
merger will be identical to the terms of the Weeks Series A preferred
stock. Weeks' principal operating subsidiary, Weeks Realty, L.P. (the
"Weeks Operating Partnership"), will be merged with and into the
Operating Partnership. In the partnership merger, each outstanding
common unit of Weeks Operating Partnership will be converted into the
right to receive 1.38 common units of the Operating Partnership. At
December 31, 1998, Weeks Operating Partnership had approximately 7.3
million units of limited partnership interest outstanding. The merger
of Weeks into the Company is expected to qualify as a tax-free
reorganization and will be accounted for under the purchase method of
accounting. The transactions are expected to close in the second or
third quarter of 1999, subject to receipt of necessary approvals by
the Duke and Weeks shareholders and satisfaction of customary closing
conditions.
If the merger between the Company and Weeks is consummated as
expected, the combined company will have significant operations and
assets located in southeastern markets where the Company and its
management have not traditionally operated or owned assets. Since
substantially all of the members of Weeks' management are expected to
remain with the combined company for the foreseeable future after the
merger, the Company expects to have the necessary expertise to
operate successfully in the new markets. The combined company's
operating performance will, however, be exposed to the general
economic conditions of its new markets and could be adversely
affected if conditions, such as an oversupply of space or a reduction
in demand for the types of properties supplied by the combined
company, become unfavorable.
YEAR 2000
The Year 2000 problem, which is commonly referred to as Y2K, 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 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 plan to identify, understand and
address the many issues and challenges presented by the Year 2000
problem. What follows is a description of the activities undertaken
by the Company to-date.
In February 1998, the Company formed a Year 2000 Task Force to
address the Year 2000 problem on a Company-wide basis. 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.
- 18 -
<PAGE>
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. The terms "Year 2000 ready" and
"Year 2000 readiness" are often used to describe a computer or
building 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's 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. In any particular property, the problem could affect the
functioning of elevators, heating and air conditioning systems,
security systems, fire and life safety 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.
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.
In addition to assessing the readiness of the building systems of the
Company's properties, the Company has been actively contacting and
monitoring the compliance efforts of utility companies and
telecommunication providers which provide services to the Company's
properties. The Company is also in the process of contacting 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 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 will be added to the contingency
plans.
- 19 -
<PAGE>
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.
The Company has 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 is complete and a timetable for
replacement, upgrade of or contingencies for the foregoing systems,
that are not Year 2000 ready, if any, has been developed and
implemented. Because the Company's major source of revenue is rental
payments under the leases with its tenants, a failure of any one or
all of the key information systems is not expected to have a material
affect on the Company's financial condition or operations and would
not excuse the payment of rents under the leases. Furthermore, the
Company expects the information systems within its control to be Year
2000 ready in the Third Quarter 1999.
Based upon a preliminary cost assessment prepared by the Task Force,
the Company has budgeted approximately $100,000 of non-reimbursable
expenses for the upgrade and replacement of building systems,
equipment and information systems having potential Year 2000 related
problems.
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.
- 20 -
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
The Company is engaged as a defendant in certain litigation known as
LCI International, Inc. v. Duke Associates No. 70 Limited
Partnership, Duke Realty Limited Partnership and Duke Realty
Investments, Inc., U.S. District Court, Southern District Court of
Ohio, Eastern Division, Case No. C2-98-499. The action was filed by
LCI International, Inc. ("LCI") on May 8, 1998 and arises out of a
lease agreement by and between LCI and Duke Associates No. 70 Limited
Partnership dated August 14, 1989, for certain property located at
4650 Lakehurst Court, Columbus, Ohio. LCI was seeking a declaratory
judgment that the Company breached the lease as well as an award of
damages. Specifically, LCI claimed that the Company was liable for
net cash flow proceeds and other amounts under the lease. The Company
answered the litigation and filed a counterclaim for declaratory
judgment that the Company was not in breach of the lease. The parties
have reached a tentative settlement agreement subject to execution of
a definitive settlement and release agreement, amendment to the lease
and the appropriate filings with the Court. The amounts, which have
been preliminarily agreed to by the parties for purposes of
settlement of this matter, will not have a material adverse affect on
the financial condition or operation of the Company. As previously
stated, the settlement arrangement is tentative and there can be no
assurance that the parties will be able to reach agreement on final
documentation to evidence the settlement.
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
- 21 -
<PAGE>
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.
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
-------------------
The Company filed Form 8-K on March 3, 1999, to file exhibits in
connection with the proposed merger with Weeks Corporation.
- 22 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DUKE REALTY INVESTMENTS, INC.
----------------------------
Registrant
Date: May 14, 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)
- 23 -
Exhibit 15
The Board of Directors
Duke Realty Investments, Inc.
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 and 333-26845
With respect to the subject registration statements, we
acknowledge our awareness of the use therein of our report dated
May 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
May 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
DUKE REALTY INVESTMENTS, INC. AND SUBSIDIARIES' MARCH 31, 1999
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 34,996
<SECURITIES> 0
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0
444,317
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</TABLE>
