-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LkvBEMkYK2k/t0qR0GqmEtIx91UBKsdCPGNoqNhBj8wvmkVV3qV6mQMxqB60csFj iheNpLu/L33BnVibE6CQtw== 0000783280-99-000009.txt : 19990517 0000783280-99-000009.hdr.sgml : 19990517 ACCESSION NUMBER: 0000783280-99-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DUKE REALTY LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0001003410 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 351898425 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20625 FILM NUMBER: 99624403 BUSINESS ADDRESS: STREET 1: 8888 KEYSTONE CROSSING STREET 2: SUITE 1100 CITY: INDIANAPOLIS STATE: IN ZIP: 46240 BUSINESS PHONE: 3175743631 MAIL ADDRESS: STREET 1: 8888 KEYSTONE CROSSING STREET 2: STE 1100 CITY: INDIANAPOLIS STATE: IN ZIP: 46240 10-Q 1 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 --------- --------. -------------------------------------------------------------------------- Commission File Number: 0-20625 ------- DUKE REALTY LIMITED PARTNERSHIP State of Incorporation: IRS Employer ID Number: Indiana 35-1898425 - ----------------------- ----------------------- 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 Limited Partnership Units outstanding as of May 7, 1999 was 8,867,272. DUKE REALTY LIMITED PARTNERSHIP 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 Partners' 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 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, December 31, 1999 1998 ASSETS ---------- ------------ ------ (UNAUDITED) 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 34,981 6,626 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 $11,064 12,864 11,316 Deferred leasing and other costs, net of accumulated amortization of $15,913 and $16,838 52,642 53,281 Escrow deposits and other assets 47,290 41,205 --------- --------- $3,069,006 $2,854,062 ========= ========= LIABILITIES AND PARTNERS' 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 expenses 16,629 21,676 Other liabilities 26,392 21,928 Tenant security deposits and prepaid rents 22,005 18,534 --------- --------- Total liabilities 1,280,255 1,175,707 --------- --------- Minority interest 501 367 --------- --------- Partners' equity: General partner: Common equity 1,236,437 1,223,260 Preferred equity (liquidation preference of $460,000) 444,885 348,366 --------- --------- 1,681,322 1,571,626 Limited partners' common equity 106,928 106,362 --------- --------- Total partners' equity 1,788,250 1,677,988 --------- --------- $3,069,006 $2,854,062 ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements - 2 - DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31 (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) (UNAUDITED)
1999 1998 ---- ---- 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 599 177 Earnings from property sales 2,314 586 Other expense (232) (31) Minority interest in earnings of unitholders (430) - ------- ----- Net income 39,771 30,145 Dividends on preferred units (8,842) (4,703) ------- ------ Net income available for common unitholders $ 30,929 $25,442 ======= ====== Net income per common unit: Basic $ .32 $ .29 ======= ====== Diluted $ .32 $ .29 ======= ====== Weighted average number of common units outstanding 97,198 87,650 ====== ====== Weighted average number of common and dilutive potential common units 98,094 88,596 ====== ======
See accompanying Notes to Condensed Consolidated Financial Statements - 3 - DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, (IN THOUSANDS) (UNAUDITED)
1999 1998 ---- ---- Cash flows from operating activities: Net income $ 39,771 $30,145 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 430 - Straight-line rental income (1,770) (1,416) Earnings from property sales (2,314) (586) Construction contracts, net (34,091) (5,135) Other accrued revenues and expenses, net 9,253 3,083 Equity in earnings in excess of distributions received from unconsolidated companies (21) (2,085) -------- ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 32,068 38,620 -------- ------ 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 commissions (2,706) (1,197) Building improvements (259) (692) Other deferred leasing costs (3,288) (3,370) Other deferred costs and other assets (4,654) (2,588) Proceeds from property sales, net 8,003 1,177 Other distributions received from unconsolidated companies 16,802 - Net investment in and advances to unconsolidated companies (7,993) (6,870) ------- ------- NET CASH USED BY INVESTING ACTIVITIES (167,069) (109,051) ------- ------- Cash flows from financing activities: Contributions from general partner 110,376 42,560 Proceeds from indebtedness 125,000 100,000 Repayments on lines of credit, net (26,000) (20,000) Payments on indebtedness including principal amortization (1,873) (4,021) Distributions to partners (33,032) (26,176) Distributions to preferred unitholders (8,842) (4,703) Distributions to minority interest (296) (193) Deferred financing costs (1,977) 1,356 ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 163,356 88,823 ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 28,355 18,392 ------- ------- Cash and cash equivalents at beginning of period 6,626 10,372 ------- ------- Cash and cash equivalents at end of period $ 34,981 $ 28,764 ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements - 4 - DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1999 (IN THOUSANDS) (UNAUDITED)
General Partner Limited ---------------------- Partners' Common Preferred Common Equity Equity Equity Total ------- --------- --------- ----------- BALANCE AT DECEMBER 31, 1998 $1,223,260 $348,366 $106,362 $1,677,988 Net income 27,395 8,842 3,534 39,771 Capital contribution from General Partner 14,624 96,519 - 111,143 Acquisition of Partnership interest for common stock of Duke Realty Investments, Inc. 507 - - 507 Acquisition of property in exchange for Limited Partner Units - - 715 715 Distributions to preferred unitholders - (8,842) - (8,842) Distributions to partners ($.34 per Common Unit) (29,349) - (3,683) (33,032) --------- ------- ------- --------- BALANCE AT MARCH 31, 1999 $1,236,437 $444,885 $106,928 $1,788,250 ========= ======= ======= ========= COMMON UNITS OUTSTANDING AT MARCH 31, 1999 86,745 10,809 97,554 ========= ======= =========
See accompanying Notes to Condensed Consolidated Financial Statements - 5 - DUKE REALTY LIMITED PARTNERSHIP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. FINANCIAL STATEMENTS The interim condensed consolidated financial statements included herein have been prepared by Duke Realty Limited Partnership (the "Partnership") 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 Partnership's Annual Financial Statements. THE PARTNERSHIP Duke Realty Limited Partnership (the "Partnership") was formed on October 4, 1993, when Duke Realty Investments, Inc. (the "Predecessor Partnership" or the "General Partner") contributed all of its properties and related assets and liabilities along with the net proceeds from the issuance of an additional 14,000,833 units through a common stock offering to the Partnership. Simultaneously, the Partnership completed the acquisition of Duke Associates, a full-service commercial real estate firm operating in the Midwest. The General Partner was formed in 1985 and qualifies as a real estate investment trust under provisions of the Internal Revenue Code. The General Partner is the sole general partner of the Partnership and owns 88.9% of the Partnership at March 31, 1999. The remaining limited partnership interest ("Limited Partner Units") (together with the units of general partner interests, the ("Common Units")) are mainly owned by the previous partners of Duke Associates. The Limited Partner Units are exchangeable for shares of the General Partner's common stock on a one-for-one basis subject generally to a one-year holding period. The General Partner periodically acquires a portion of the minority interest in the Partnership through the issuance of shares of common stock for a like number of Common Units. The acquisition of the minority interest is accounted for under the purchase method with assets acquired recorded at the fair market value of the General Partner's common stock on the date of acquisition. The service operations are conducted through Duke Realty Services Limited Partnership and Duke Construction Limited Partnership, in which the Partnership has an 89% profits interest (after certain preferred returns on partners' capital accounts) and effective control of their operations. The consolidated financial statements include the accounts of the Partnership and its majority-owned or controlled subsidiaries. The equity interests in these majority-owned or controlled subsidiaries not owned by the Partnership are reflected as minority interests in the consolidated financial statements. 2. LINES OF CREDIT The Partnership 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 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 Partnership has - 6 - 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 Partnership 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 Partnership provides management, maintenance, leasing, construction, and other tenant related services to properties in which certain executive officers have continuing ownership interests. The Partnership was paid fees totaling $972,000 and $600,000 for such services for the three months ended March 31, 1999 and 1998, respectively. Management believes the terms for such services are equivalent to those available in the market. The Partnership 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 UNIT Basic net income per Common Unit is computed by dividing net income available for Common Unitholders by the weighted average number of Common Units outstanding for the period. Diluted net income per Common Unit is computed by dividing the sum of net income available for Common Unitholders by the sum of the weighted average number of Common Units and dilutive potential Common Units outstanding for the period. The following table reconciles the components of basic and diluted net income per Common Unit for the three months ended March 31:
1999 1998 ---- ---- Basic net income available for Common Unitholders $30,929 $25,442 ====== ====== Weighted average Common Units outstanding 97,198 87,650 Dilutive units for long-term compensation plans 896 946 ------ ------ Weighted average number of Common Units and dilutive potential Common Units 98,094 88,596 ====== ======
The Preferred D Series Convertible equity was anti-dilutive at March 31, 1999; therefore, no conversion to Common Units is included in weighted units outstanding. 5. SEGMENT REPORTING The Partnership 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 Partnership'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. - 7 - The Partnership 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 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 Partnership'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:
MARCH 31, MARCH 31, 1999 1998 -------- -------- 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 $41,214 $35,366 Industrial 24,759 18,001 Retail 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 599 177 General and administrative expense (3,615) (2,340) Other expenses (773) (2,591) Minority interest in earnings (430) - Joint venture FFO 4,022 3,640 Dividends on preferred shares (8,842) (4,703) ------ ------ Consolidated FFO 50,584 39,698 Depreciation and amortization (20,454) (14,260) Share of joint venture adjustments (1,515) (582) Earnings from property sales 2,314 586 ------ ------ Net Income Available for Common Shareholders $ 30,929 $25,442 ====== ======
MARCH 31, DECEMBER 31, 1999 1998 -------- ----------- 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 379,693 320,301 --------- --------- Consolidated Assets $3,069,006 $2,854,062 ========= =========
- 8 - 6. PARTNERS' EQUITY The following series of preferred equity is outstanding as of March 31, 1999 (in thousands, except percentages):
Units Dividend Redemption Liquidation Book Value Description Outstanding Rate Date Preference At 3/31/99 Convert. - ----------- ----------- -------- ---------- ----------- ---------- -------- 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
All series of preferred equity 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 contributions of the General Partner, which may include other classes or series of preferred equity. The Preferred Series D equity is convertible at a conversion rate of 9.3677 Common Units for each preferred unit outstanding. The dividend rate on the Preferred B Series equity increases to 9.99% after September 12, 2012. 7. MERGER WITH WEEKS CORPORATION On March 1, 1999, the General Partner 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 and its consolidated subsidiary, Weeks Realty L.P. ("Weeks Operating Partnership"), will merge with and into the General Partner and the Partnership. Weeks is a self-administered, self-managed, geographically focused REIT that was organized in 1994. As of December 31, 1998, its 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, the Weeks primary markets and the concentration of its 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, the Weeks Operating Partnership had approximately 7.3 million Common Units outstanding, and approximately $654 million aggregate principal amount of outstanding indebtedness. In the merger, each outstanding Common Unit of Weeks Operating Partnership will be converted into the right to receive 1.38 Common Units of the Partnership and each outstanding unit of 8.0% Series A Cumulative Redeemable Preferred Equity of Weeks Operating Partnership will be converted into the right to receive one preference unit of the Partnership representing 1/1000 of a unit of 8.0% Series F Cumulative Redeemable Preferred Equity of the Partnership. The terms of the Partnership's preference units to be issued in the merger will be substantially identical to the terms of the Weeks Operating Partnership Series A preferred equity. The merger of the Weeks Operating Partnership into the Partnership 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 shareholders of both the General Partner and Weeks Corporation and satisfaction of customary closing conditions. - 9 - If the merger between the Partnership and the Weeks Operating Partnership is consummated as expected, the combined company will have significant operations and assets located is southeastern markets where the Partnership and its management have not traditionally operated or owned assets. Since substantially all of the member of the Weeks Operating Partnership management are expected to remain with the combined company for the foreseeable future after the merger, the Partnership 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, a quarterly distribution of $.34 per Common Unit was declared, payable on May 28, 1999, to common unitholders of record on May 13, 1999. On April 21, 1999, a quarterly distribution of $.56875 per depositary unit of Series A Cumulative Preferred Units was declared, payable on May 28, 1999, to preferred unitholders of record on May 14, 1999. On April 21, 1999, a quarterly distribution of $.99875 per depositary unit of Series B Cumulative Step-up Redeemable Preferred Units was declared, payable on June 30, 1999, to preferred unitholders of record on June 16, 1999 On April 21, 1999, a quarterly distribution of $.46094 per depositary unit of Series D Convertible Redeemable Preferred Units was declared, payable on June 30, 1999, to preferred unitholders of record on June 16, 1999. On April 21, 1999, a quarterly distribution of $.51563 per depositary unit of Series E Cumulative Redeemable Preferred Units was declared, payable on June 30, 1999, to preferred unitholders of record on June 16, 1999. - 10 - INDEPENDENT ACCOUNTANTS' REVIEW REPORT - -------------------------------------- The Partners DUKE REALTY LIMITED PARTNERSHIP: We have reviewed the condensed consolidated balance sheet of Duke Realty Limited Partnership 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 partners' equity for the three months ended March 31, 1999. These condensed consolidated financial statements are the responsibility of the Partnership'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 Limited Partnership and subsidiaries as of December 31, 1998, and the related consolidated statements of operations and cash flows for the year then ended (not presented herein); and in our report dated January 28, 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 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW - -------- The Partnership'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 Partnership's rental space in its primary markets. In addition, the Partnership'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 Partnership'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 Partnership's occupancy rate of its in-service portfolio has exceeded 93.7% the last two years. The Partnership 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 Partnership's results of operations from its in-service properties. The Partnership'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 Partnership's in- service portfolio of rental properties as of March 31, 1999 and 1998 (in thousands, except percentages):
Total Percent of Square Feet Total Square Feet Percent Occupied ---------------- ----------------- ---------------- Type 1999 1998 1999 1998 1999 1998 - ---- ---- ---- ---- ---- ---- ---- 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% ====== ====== ===== =====
Management expects occupancy of the in-service property portfolio to remain stable because (i) only 9.6% and 9.4% of the Partnership's occupied square footage is subject to leases expiring in the remainder of 1999 and in 2000, respectively, and (ii) the Partnership's renewal percentage averaged 69%, 81%, 80% in 1998, 1997 and 1996, respectively. - 12 - The following table reflects the Partnership'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):
Industrial Office Retail Total Portfolio ----------------- ---------------- --------------- ------------------ Yr of Sq Cont Sq Cont Sq Cont Sq Cont Exp Ft Rent Ft Rent Ft Rent Ft Rent - ----- ----- ------ ----- ------ ---- ----- ----- ----- 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 ==== ===== ==== ====
This stable occupancy, along with stable rental rates in each of the Partnership's Midwestern markets, will allow the in-service portfolio to continue to provide a comparable or increasing level of earnings from rental operations. The Partnership 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 Partnership 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 Partnership as they are placed in service as follows (in thousands, except percent leased and stabilized returns):
Anticipated Anticipated In-Service Square Percent Project Stabilized Date Feet Leased Costs Return ------------ ------- -------- --------- ------------ 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% ===== =======
- 13 - RESULTS OF OPERATIONS - ---------------------- Following is a summary of the Partnership'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):
1999 1998 ---- ---- 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 $ 30,929 $25,442 Weighted average common shares outstanding 97,198 87,650 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
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 TO THREE MONTHS ENDED MARCH 31, 1998 - --------------------------------------------------------------------- Rental Operations - ----------------- The Partnership 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 Partnership. The Partnership 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 volume, particularly a 265,000 square foot suburban office build-to-suit building which incurred substantial volume in the first quarter. - 14 - 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 Partnership. Net Income Available for Common Unitholders - ------------------------------------------- Net income available for common unitholders for the three months ended March 31, 1999 was $30.9 million compared to net income available for common unitholders of $25.4 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 $32.1 million and $38.6 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 Partnership'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 $167.1 million and $109.1 million for the three months ended March 31, 1999 and 1998, respectively, represents the investment of funds by the Partnership 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 $163.4 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 Partnership 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 Partnership also issued $125.0 million of unsecured debt. The Partnership used the net proceeds to reduce amounts outstanding under the Partnership's lines of credit and to fund the development and acquisition of additional rental properties. In the first quarter of 1998, the Partnership received $42.6 million of net proceeds from the issuance of common shares and issued $100.0 million of unsecured debt. The Partnership used the net proceeds to reduce amounts outstanding under the Partnership's lines of credit and to fund the development and acquisition of additional rental properties. - 15 - The Partnership 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 Partnership 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 LOC at March 31, 1999 are at LIBOR plus .675% to .80%. The Partnership 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 General Partner and the Partnership currently have 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 General Partner and the Partnership intend 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 Partnership 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 Partnership's indebtedness at March 31, 1999 (in thousands):
Repayments -------------------------------------- Weighted Average Scheduled Interest Rate of Year Amortization Maturities Total Future Repayments - ---- ------------ ---------- ------- ------------------ 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% There- after 36,077 175,000 211,077 6.81% ------ --------- --------- Total $90,562 $1,022,998 $1,113,560 7.21% ====== ========= =========
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 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. - 16 - The following table reflects the calculation of the Partnership's FFO for the three months ended March 31 as follows (in thousands):
1999 1998 ------ ------ Net income available for common shares $ 30,929 $ 25,442 Add back: Depreciation and amortization 20,454 14,260 Share of joint venture adjustments 1,515 582 Earnings from property sales (2,314) (586) ------- ------- FUNDS FROM OPERATIONS $ 50,584 $ 39,698 ======= ======= CASH FLOW PROVIDED BY (USED BY): Operating activities $ 32,068 $ 38,620 Investing activities (167,069) (109,051) Financing activities 163,356 88,823
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 Partnership'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 Partnership'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 General Partner 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 and its consolidated subsidiary, Weeks Realty L.P. ("Weeks Operating Partnership"), will merge with and into the General Partner and the Partnership. Weeks is a self-administered, self-managed, geographically focused REIT that was organized in 1994. As of December 31, 1998, its 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, the Weeks primary markets and the concentration of its 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, the Weeks Operating Partnership had approximately 7.3 million Common Units outstanding, and approximately $654 million aggregate principal amount of outstanding indebtedness. In the merger, each outstanding Common Unit of Weeks Operating Partnership will be converted into the right to receive 1.38 Common Units of the Partnership and each outstanding unit of 8.0% Series A Cumulative Redeemable Preferred Equity of Weeks Operating Partnership will be converted into the right to receive one preference unit of the Partnership representing 1/1000 of a unit of 8.0% Series F Cumulative Redeemable Preferred Equity of the Partnership. The terms of the Partnership's preference units to be issued in the merger will be identical to the terms of the Weeks Operating Partnership Series A preferred equity. The merger of the Weeks Operating Partnership into the Partnership is expected to qualify as a tax-free reorganization and will be accounted for under the purchase method of accounting. - 17 - The transactions are expected to close in the second or third quarter of 1999, subject to receipt of necessary approvals by the shareholders of both the General Partner and Weeks Corporation and satisfaction of customary closing conditions. If the merger between the Partnership and the Weeks Operating Partnership is consummated as expected, the combined company will have significant operations and assets located is southeastern markets where the Partnership and its management have not traditionally operated or owned assets. Since substantially all of the member of the Weeks Operating Partnership management are expected to remain with the combined company for the foreseeable future after the merger, the Partnership 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 Partnership is committed to ensuring the highest level of tenant satisfaction reasonably possible and clearly recognizes the importance to our tenants, as well as the General Partner's 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 Partnership to-date. In February 1998, the Partnership formed a Year 2000 Task Force to address the Year 2000 problem on a Partnership-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 Partnership are advised quarterly of the status of the activities undertaken by the Task Force. The Partnership 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 Partnership'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 Partnership'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 Partnership'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 - 18 - 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 Partnership's properties for the Year 2000. In many cases the Partnership 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 Partnership's properties, the Partnership has been actively contacting and monitoring the compliance efforts of utility companies and telecommunication providers which provide services to the Partnership's properties. The Partnership is also in the process of contacting the various municipalities where the Partnership's properties are located to assess the readiness of these municipalities where the Partnership's properties are located to assess the readiness of these municipalities to provide fire, police and other necessary services upon the Year 2000. The Partnership 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 Partnership 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. The Partnership has made Year 2000 readiness an important aspect of its building acquisition due diligence and inspection process. The Partnership endeavors to obtain Year 2000 representations from sellers and conducts inspections of critical systems. Newly acquired facilities are promptly subjected to the Partnership's eight-step plan and results are added to the database. The Partnership has retained a third-party consultant to identify and assess the Year 2000 readiness of the Partnership'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 Partnership'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 Partnership'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 Partnership's financial condition or operations and would not excuse the payment of rents under the leases. Furthermore, the Partnership 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 Partnership 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. - 19 - There can be no assurance that the Partnership 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 Partnership or received to date, Management does not currently expect that the Year 2000 problem will have a material impact on the Partnership'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 Partnership's properties, our vendors, suppliers, service providers and tenants, and the Partnership's information systems. - 20 - PART II - OTHER INFORMATION Item 1. Legal Proceedings - --------------------------- The Partnership is engaged as a defendant in certain litigation known as LCI International, Inc. v. Duke Associates No. 70 Limited Partnership, the 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 Partnership breached the lease as well as an award of damages. Specifically, LCI claimed that the Partnership was liable for net cash flow proceeds and other amounts under the lease. The Partnership answered the litigation and filed a counterclaim for declaratory judgment that the Partnership 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 Partnership. 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 Partnership 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 Partnership'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. - 21 - Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- Exhibits The Following exhibits are filed or incorporated by reference as a part of this report: Exhibit 15. Letter regarding unaudited interim financial information Exhibit 27. Financial Data Schedule (EDGAR Filing Only) Reports on Form 8-K -------------------- The Partnership filed Form 8-K on February 12, 1999, to file exhibits in connection with an unsecured debt offering -22 - 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 LIMITED PARTNERSHIP ------------------------------- By: Duke Realty Investments, Inc., General Partner 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 - 23 - EX-15 2 AUDITORS' LETTER Exhibit 15 - ---------- The Partners Duke Realty Limited Partnership: Gentlemen: RE: Registration Statement No. 333-04695, 333-49911 and 333-26845 With respect to the subject registration statement, 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 EX-27 3 1999 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES' MARCH 31, 1999 CONSOLIDATED FINANCIAL STATEMENTS 1,000 3-MOS DEC-31-1999 MAR-31-1999 34,981 0 89,540 (1,381) 0 148,766 3,021,926 (188,856) 3,069,006 166,695 1,113,560 0 0 0 1,788,250 3,069,006 0 117,167 0 60,975 9,272 0 15,991 30,929 0 30,929 0 0 0 30,929 .32 .32
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