-----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, QjQyWt6fVFebo0WWW9idum1MbXFEUzLdOZ7kZ4LAOEAg0cHKJx5iS9UQSeSkgcIN t5EyroBa5xERve2ndLV03Q== 0000783280-99-000045.txt : 19991117 0000783280-99-000045.hdr.sgml : 19991117 ACCESSION NUMBER: 0000783280-99-000045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DUKE WEEKS 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: 99755373 BUSINESS ADDRESS: STREET 1: 8888 KEYSTONE CROSSING STREET 2: SUITE 1100 CITY: INDIANAPOLIS STATE: IN ZIP: 46240 BUSINESS PHONE: 3178086000 MAIL ADDRESS: STREET 1: 8888 KEYSTONE CROSSING STREET 2: STE 1100 CITY: INDIANAPOLIS STATE: IN ZIP: 46240 FORMER COMPANY: FORMER CONFORMED NAME: DUKE REALTY LIMITED PARTNERSHIP DATE OF NAME CHANGE: 19951114 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 September 30, 1999 ------------------ OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . -------- --------- - ----------------------------------------------------------------------- Commission File Number: 0-20625 ------- DUKE-WEEKS 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 November 12, 1999 was 144,130,784. DUKE-WEEKS REALTY LIMITED PARTNERSHIP INDEX PART I - FINANCIAL INFORMATION PAGE - ------------------------------ ---- ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of September 30, 1999 (Unaudited) and December 31, 1998 2 Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 1999 and 1998 (Unaudited) 3 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 (Unaudited) 4 Condensed Consolidated Statement of Partners' Equity for the nine months ended September 30, 1999 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6-11 Independent Accountants' Review Report 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13-22 PART II - OTHER INFORMATION Item 1. Legal Proceedings 22 Item 2. Changes in Securities 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 23 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DUKE-WEEKS REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
September 30, December 31, 1999 1998 ------------- ------------ ASSETS (Unaudited) ------ Real estate investments: Land and improvements $ 596,499 $ 312,022 Buildings and tenant improvements 3,920,925 2,091,757 Construction in progress 370,595 185,950 Investments in unconsolidated companies 168,101 125,746 Land held for development 231,323 146,911 --------- --------- 5,287,443 2,862,386 Accumulated depreciation (234,071) (179,887) --------- --------- Net real estate investments 5,053,372 2,682,499 Cash and cash equivalents 44,812 6,626 Accounts receivable from tenants, net of allowance of $2,361 and $896 17,720 9,641 Straight-line rent receivable, net of allowance of $841 27,265 20,332 Receivables on construction contracts 32,914 29,162 Deferred financing costs, net of accumulated amortization of $8,478 and $11,064 14,780 11,316 Deferred leasing and other costs, net of accumulated amortization of $20,749 and $16,838 67,880 53,281 Escrow deposits and other assets 77,449 41,205 --------- --------- $5,336,192 $2,854,062 ========= ========= LIABILITIES AND PARTNERS' EQUITY -------------------------------- Indebtedness: Secured debt $ 522,997 $ 326,317 Unsecured notes 1,175,860 590,000 Unsecured lines of credit 265,000 91,000 --------- --------- 1,964,857 1,007,317 Construction payables and amounts due subcontractors 92,752 55,012 Accounts payable 4,089 4,836 Accrued expenses: Real estate taxes 60,174 36,075 Interest 14,603 10,329 Other expenses 38,250 21,676 Other liabilities 29,112 21,928 Tenant security deposits and prepaid rents 33,845 18,534 --------- --------- Total liabilities 2,237,682 1,175,707 --------- --------- Minority interest 608 367 --------- --------- Partners' equity: General partner: Common equity 2,079,173 1,223,260 Preferred equity 587,385 348,366 --------- --------- 2,666,558 1,571,626 Limited partners' common equity 328,389 106,362 Limited partners' preferred equity 102,955 - --------- --------- Total partners' equity 3,097,902 1,677,988 --------- --------- $5,336,192 $2,854,062 ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements - 2 - DUKE-WEEKS REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) (UNAUDITED)
Three months ended Nine months ended September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- RENTAL OPERATIONS: Revenues: Rental income $157,001 $87,699 $360,849 $245,037 Equity in earnings of unconsolidated companies 3,272 2,649 8,559 8,066 ------- ------ ------- ------- 160,273 90,348 369,408 253,103 ------- ------ ------- ------- Operating expenses: Rental expenses 25,095 16,115 61,222 43,799 Real estate taxes 16,408 8,984 38,899 24,871 Interest expense 25,960 16,701 59,080 43,926 Depreciation and amortization 32,738 17,660 74,127 48,445 ------- ------ ------- ------- 100,201 59,460 233,328 161,041 ------- ------ ------- ------- Earnings from rental operations 60,072 30,888 136,080 92,062 ------- ------ ------- ------- SERVICE OPERATIONS: Revenues: Property management, maintenance and leasing fees 7,255 3,606 14,676 10,240 Construction management and development fees 7,817 3,425 20,976 8,115 Other income 330 253 910 851 ------- ------ ------- ------- 15,402 7,284 36,562 19,206 ------- ------ ------- ------- Operating expenses: Payroll 5,916 3,178 12,972 9,865 Maintenance 4,215 613 5,817 1,811 Office and other 1,400 678 5,284 2,000 ------- ------ ------- ------- 11,531 4,469 24,073 13,676 ------- ------ ------- ------- Earnings from service operations 3,871 2,815 12,489 5,530 ------- ------ ------- ------- General and administrative expense (4,626) (2,792) (11,737) (8,235) ------- ------ ------- ------- Operating income 59,317 30,911 136,832 89,357 OTHER INCOME (EXPENSE): Interest income 699 518 1,844 1,107 Earnings from property sales 3,095 661 7,380 1,615 Other expense (133) (131) (471) (192) Other minority interest in earnings of subsidiaries (617) (692) (1,497) (946) ------- ------ ------- ------- Net income 62,361 31,267 144,088 90,941 Dividends on preferred units (14,356) (4,702) (32,452) (14,108) ------- ------ ------- ------ Net income available for common units $ 48,005 $26,565 $111,636 $76,833 ======= ====== ======= ====== Net income per common unit: Basic $ .35 $ .29 $ 1.00 $ .85 ======= ====== ======= ====== Diluted $ .35 $ .29 $ 1.00 $ .84 ======= ====== ======= ====== Weighted average number of common units outstanding 137,721 92,434 111,086 90,355 ======= ====== ======= ====== Weighted average number of common and dilutive potential common units 138,923 93,279 112,106 91,252 ======= ====== ======= ======
See accompanying Notes to Condensed Consolidated Financial Statements - 3 - DUKE-WEEKS REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, (IN THOUSANDS) (UNAUDITED)
1999 1998 ---- ---- Cash flows from operating activities: Net income $144,088 $ 90,941 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of buildings and tenant improvements 66,993 43,039 Amortization of deferred financing costs 1,324 1,018 Amortization of deferred leasing and other costs 7,134 5,406 Minority interest in earnings 1,497 946 Straight-line rental income (7,462) (4,763) Earnings from property sales (7,380) (1,615) Construction contracts, net 29,741 (7,311) Other accrued revenues and expenses, net 23,766 25,152 Equity in earnings in excess of distributions received from unconsolidated companies (942) (4,651) ------ ------- Net cash provided by operating activities 258,759 148,162 ------- ------- Cash flows from investing activities: Rental property development costs (306,031) (163,682) Acquisition of rental properties (124,968) (231,338) Acquisition of land held for development and infrastructure costs (82,995) (25,139) Recurring costs: Tenant improvements (14,003) (7,611) Leasing commissions (7,952) (4,668) Building improvements (1,564) (1,572) Other deferred leasing costs (17,126) (11,533) Other deferred costs and other assets (39,103) (18,278) Proceeds from property sales, net 35,524 7,498 Other distributions received from unconsolidated companies 16,802 - Net investment in and advances to unconsolidated companies (30,048) (14,095) ------- ------- NET CASH USED BY INVESTING ACTIVITIES (571,464) (470,418) ------- ------- Cash flows from financing activities: Contributions from general partner 299,978 136,661 Proceeds from indebtedness 300,000 250,000 Borrowings (repayments) on lines of credit, net 174,000 96,000 Payments on indebtedness including principal amortization (264,711) (48,269) Distributions to partners (119,382) (84,876) Distributions to preferred unitholders (32,452) (14,108) Distributions to minority interest (1,401) (681) Deferred financing costs (5,141) (1,355) ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 350,891 333,372 ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 38,186 11,116 Cash and cash equivalents at beginning of period 6,626 10,372 ------- ------- Cash and cash equivalents at end of period $ 44,812 $ 21,488 ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements - 4 - DUKE-WEEKS REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS) (UNAUDITED)
General Partner Limited Limited --------------------- Partners' Partners' Common Preferred Common Preferred Equity Equity Equity Equity Total --------- ---------- --------- --------- --------- BALANCE AT DECEMBER 31, 1998 $1,223,260 $348,366 $106,362 $ - $1,677,988 Net income 98,451 30,350 13,185 2,102 144,088 Capital contribution from General Partner 204,332 96,519 - - 300,851 Acquisition of Partnership interest for common stock of General Partner 49,457 - - - 49,457 Acquisition of property in exchange for Limited Partner Units - - 2,501 - 2,501 Merger with Weeks Corporation 608,755 142,500 220,641 102,955 1,074,851 Distributions to preferred unitholders - (30,350) - (2,102) (32,452) Distributions to partners ($.94 per Common Unit) (105,227) - (14,155) - (119,382) --------- ------- ------- ------- --------- BALANCE AT SEPTEMBER 30, 1999 $2,079,027 $587,385 $328,534 $102,955 $3,097,902 ========= ======= ======= ======= ========= COMMON UNITS OUTSTANDING AT SEPTEMBER 30, 1999 125,180 18,919 144,099 ========= ======= =========
See accompanying Notes to Condensed Consolidated Financial Statements - 5 - DUKE-WEEKS REALTY LIMITED PARTNERSHIP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. FINANCIAL STATEMENTS In July 1999, Duke Realty Investments, Inc. (the "General Partner") and Weeks Corporation ("Weeks") consummated a merger transaction (the "Weeks Merger") whereby Weeks and its consolidated subsidiary, Weeks Realty L.P. ("Weeks Operating Partnership") merged with and into the General Partner and Duke Realty Limited Partnership ("Duke Operating Partnership"). The combined operating partnerships continued operating under the name Duke-Weeks Realty Limited Partnership ("the Partnership"). Financial information and references throughout this document are labeled "the Partnership" for both pre-merger and post-merger periods as a result of the Weeks Merger. The Partnership's financial statements and related footnotes as of and for the three and nine months ended September 30, 1999, give effect to the Weeks Merger which was accounted for under the purchase method. See Note 7 for a more complete discussion of the Weeks Merger. The interim condensed consolidated financial statements included herein have been prepared by the 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 The Partnership was formed on October 4, 1993, when 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 86.9% of the Partnership at September 30, 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 units 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 units 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. - 6 - 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 the following lines of credit available (in thousands):
Outstanding Borrowing Maturity Interest at September Description Capacity Date Rate 30, 1999 - ----------------------- ---------- --------- -------- ------------- Unsecured Line of Credit $450,000 April 2001 LIBOR + .70% $265,000 Unsecured Line of Credit 300,000 April 2001 LIBOR + .90% 0
Both lines of credit are used to fund development and acquisition of additional rental properties and to provide working capital. Effective July 2, 1999, the interest rate on the $450 million line of credit was adjusted from LIBOR + .80% to LIBOR + .70%. Additionally, the $450 million line of credit allows the Partnership an option to obtain borrowings from the financial institutions that participate in the line of credit at rates lower than the stated interest rate, subject to certain restrictions. Amounts outstanding on the line of creidt at September 30, 1999 are at LIBOR + .65% to .70%. The $300 million line of credit was obtained July 2, 1999, following the Weeks Merger (see Note 7). 3. RELATED PARTY TRANSACTIONS The 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 $2.0 million for such services for both the nine months ended September 30, 1999 and 1998. Management believes the terms for such services are equivalent to those available in the market. The 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 units by the weighted average number of common units outstanding for the period. Diluted net income per unit is computed by dividing net income available for common units by the sum of the weighted average number of common units and dilutive potential common units outstanding for the period. - 7 - The following table reconciles the components of basic and diluted net income per common unit for the three and nine months ended September 30:
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Basic net income available for common units $ 48,005 $26,565 $111, 636 $76,833 ======= ====== ======== ====== Weighted average number of common units outstanding 137,721 92,434 111,086 90,355 Dilutive units for long-term compensation plans 1,202 845 1,020 897 ======= ====== ======= ====== Weighted average number of common units and dilutive potential common units 138,923 93,279 112,106 91,252 ======= ====== ======= ======
The Preferred D Series Convertible equity (see Note 6) and Preferred G Convertible units (see Note 6) were both anti-dilutive at September 30, 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 unconsolidated companies. Non-segment assets to reconcile to total assets consist of corporate assets including cash, deferred financing costs and investments in unconsolidated companies. The Partnership assesses and measures segment operating results based on an industry performance measure referred to as Funds From Operations ("FFO"). The National Association of Real Estate Investment Trusts defines FFO as net income or loss, excluding gains or losses from debt restructuring and sales of depreciated operating property, plus operating property depreciation and amortization and adjustments for minority interest and unconsolidated companies on the same basis. FFO is not a measure of operating results or cash flows from operating activities as measured by generally accepted accounting principles, is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. Interest expense and other non-property specific revenues and expenses are not allocated to individual segments in determining the Partnership's performance measure. The revenues and FFO for each of the reportable segments for the three and nine months ended September 30, 1999 and 1999 and the assets for each of the reportable segments as of September 30, 1999 and December 31, 1999 are summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues Rental Operations: Office Properties $ 77,676 $56,266 $200,328 $155,794 Industrial Properties 73,486 26,170 141,876 74,011 Retail Properties 6,491 5,298 18,569 15,365 Service Operations 15,402 7,284 36,562 19,206 ------- ------ ------- ------- Total Segment Revenues 173,055 95,018 397,335 264,376 Non-Segment Revenue 2,620 2,614 8,635 7,933 ------- ------ ------- ------- Consolidated Revenue $175,675 $97,632 $405,970 $272,309 ======= ====== ======= ======= - 8 - Funds From Operations Rental Operations: Office Properties $ 51,794 $38,296 $137,199 $109,122 Industrial Properties 56,435 18,663 109,488 57,078 Retail Properties 5,366 4,323 15,295 12,648 Services Operations 3,871 2,816 12,489 5,531 ------- ------ ------- ------- Total Segment FFO $117,466 $64,098 $274,471 $184,379 Non-Segment FFO: Interest expense (25,960) (16,701) (59,080) (43,926) Interest income 699 518 1,844 1,107 General and administrative expense (4,626) (2,792) (11,737) (8,235) Other revenues and expenses, net 2,459 1,188 (149) (2,672) Minority interest in earnings-other (617) (692) (1,497) (946) Joint venture FFO 4,542 3,749 12,585 10,716 Dividends on preferred units (14,356) (4,703) (32,452) (14,109) ------- ------ ------- ------- Consolidated FFO 79,607 44,665 183,985 126,314 Depreciation and amortization (32,738) (17,660) (74,127) (48,445) Share of joint venture adjustments (1,270) (1,101) (4,026) (2,651) Earnings from depreciated property sales 2,406 661 5,804 1,615 ------- ------ ------- ------- Net Income Available for Common Units $ 48,005 $26,565 $111,636 $ 76,833 ======= ====== ======= =======
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ----------- Assets - ------ Rental Operations: Office Properties $2,395,813 $1,409,162 Industrial Properties 2,103,070 907,656 Retail Properties 190,313 161,675 Service Operations 84,383 55,268 --------- --------- Total Segment Assets 4,773,579 2,533,761 Non-Segment Assets 562,613 320,301 --------- --------- Consolidated Assets $5,336,192 $2,854,062 ========= =========
6. PARTNERS' EQUITY The following series of preferred equity are outstanding as of September 30, 1999 (in thousands, except percentages):
Units Dividend Redemption Liquidation Conver- Description Outstanding Rate Date Preference Book Value tible - ----------- ----------- -------- ---------- ----------- ---------- ------- 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% 12/31/03 135,000 129,600 Yes Preferred E Series 400 8.250% 01/20/04 100,000 96,519 No Preferred F Series 600 8.000% 10/10/02 150,000 142,500 No
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. - 9 - PREFERRED UNITS On July 2, 1999, in accordance with the terms of the Weeks Merger, the Partnership converted 1,400,000 Weeks Operating Partnership 8% Series C cumulative redeemable preferred limited partnership interests into 1,400,000 8% Series G cumulative redeemable preferred limited partnership interests (the "Series G Preferred Units"). The Series G Preferred Units were recorded at a value of $35,000,000 based upon the estimated fair market value at the date of the merger announcement. The Series G Preferred Units have a liquidation preference of $25.00 per preferred unit and are redeemable by the Partnership on or after November 6, 2003, at a redemption price of $25.00 per preferred unit. In combination with the conversion of the Series G Preferred Units, the Partnership issued a warrant that entitles its holder to purchase either 1,046,729 shares of the 1,400,000 shares of 8% Series I Preferred Stock at a price of $25.00 per share. The Series G Preferred Units are authomatically redeemed upon the exercise of the warrant. The warrant has a perpetual term unless the Series G Preferred units are redeemed by the Partnership, in which case the warrant expires within 30 days of redemption. Alson on July 2, 1999 and in accordance with the terms of the Weeks Merger, the Partnership converted 2,600,000 Weeks Operating Partnership 8.625% Series D cumulative redeemable preferred limited partnership interest into 2,600,000 8.625% Series H cumulative redeemable preferred limited partnership interest (the "Series H Preferred Units"). The Series H Preferred Units were recorded at a value of $67,955,000 based upon the estimated fair market value at the date of the merger announcment. The Series H Preferred Units have a liquidation preference of $25.00 per preferred unit and are redeemable at the option of the Partnership on or after November 12, 2003, at a redemption price of $25.00 per preferred unit. COMMON UNITS On July 2, 1999, in accordance with the terms of the Weeks Merger, the Partnership issued 10,144,424 Partnership common units to Weeks Operating Partnership limited partnership unitholders at a rate of 1.38 Partnership common units for each Weeks Operating Partnership limited partnership unit outstanding. 7. MERGER WITH WEEKS CORPORATION In July 1999, the General Partner and Weeks approved a merger transaction whereby Weeks, a self-administered, self-managed geographically focused Real Estate Investment Trust ("REIT") which operated primarily in the southeastern United States and its consolidated subsidiary, Weeks Operating Partnership, were merged with and into the General Partner and its consolidated subsidiary, Duke Operating Partnership. The combined Operating Partnership has continued under the name Duke-Weeks Realty Limited Partnership. In accordance with the terms of the Weeks Merger, each outstanding Weeks Operating Partnership common unit was converted into the right to receive 1.38 common units of the Partnership and each outstanding Weeks Operating Partnership Series A preferred equity was converted into the right to receive one unit of a new class of the Partnership Series F preferred equity. The total purchase price of Weeks and Weeks Operating Partnership aggregated approximately $1.9 billion, which included the assumption of the outstanding debt and liabilities of Weeks Operating Partnership of approximately $775 million. - 10 - The following summarized pro forma unaudited information represents the combined historical operating results of Weeks Operating Partnership and Duke Operating Partnership with the appropriate purchase accounting adjustments, assuming the Weeks Merger had occurred on January 1, 1998. The pro forma financial information presented is not necessarily indicative of what the Partnership's actual operating results would have been had Weeks Operating Partnership and Duke Operating Partnership constituted a single entity during such periods (in thousands, except per unit amounts):
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- (Actual) (Pro Forma) (Pro Forma) (Pro Forma) Rental Income $157,001 $127,312 $451,932 $354,720 ======= ======= ======= ======= Net earnings attributable to Common Units $ 48,005 $ 35,577 $136,623 $102,677 ======= ======= ======= ======= Weighted average Common Units outstanding: Basic 137,721 128,012 136,350 126,075 ======= ======= ======= ======= Diluted 138,923 130,061 137,540 127,209 ======= ======= ======= ======= Earnings attributable to Common Units: Basic $ .35 $ .28 $ 1.00 $ .82 ====== ====== ======= ======= Diluted $ .35 $ .27 $ .99 $ .81 ====== ====== ======= =======
8. SUBSEQUENT EVENTS The Board of Directors of the General Partner declared the following distributions on October 27, 1999:
Quarterly Class Amount/Unit Record Date Payment Date - ---------- ------------ ----------- -------------- Common $ 0.39 November 19, 1999 November 30, 1999 Preferred: Series A $0.56875 November 16, 1999 November 30, 1999 Series B $0.99875 December 17, 1999 December 31, 1999 Series D $0.46094 December 17, 1999 December 31, 1999 Series E $0.51563 December 17, 1999 December 31, 1999 Series F $0.50000 January 17, 2000 January 31, 2000
- 11 - INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Partners DUKE-WEEKS REALTY LIMITED PARTNERSHIP: We have reviewed the condensed consolidated balance sheet of Duke- Weeks Realty Limited Partnership and subsidiaries as of September 30, 1999, the related condensed consolidated statements of operations for the three months and nine months ended September 30, 1999 and 1998, the related condensed consolidated statements of cash flows for the nine months ended September 30, 1999 and 1998, and the related condensed consolidated statement of partners' equity for the nine months ended September 30, 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-Weeks 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 26, 1999 (except as to Note 12, which is as of March 1, 1999), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1998 is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG LLP Indianapolis, Indiana October 26, 1999 - 12 - 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 have continued to offer strong and stable local economies and have provided attractive new development opportunities because of their established manufacturing base, skilled work force and moderate labor costs. Consequently, the Partnership's occupancy rate of its in-service portfolio has averaged 94.3% the last two years. The Partnership expects to continue to maintain its overall occupancy at comparable levels and also expects to be able to increase rental rates as leases are renewed or new leases are executed. This stable occupancy as well as increasing rental rates should improve the 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 Merger with Weeks Operating Partnership below). The following table sets forth information regarding the Partnership's in-service portfolio of rental properties as of September 30, 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 11,313 5,601 12.8% 11.3% 93.9% 93.7% Bulk 56,527 29,009 64.0% 58.6 92.4% 95.1% Office Suburban 16,751 11,950 19.0% 24.1 92.7% 96.0% CBD 861 699 1.0% 1.4 92.2% 97.0% Retail 2,836 2,249 3.2% 4.6 93.7% 97.0% ------ ------ ------ ------ Total 88,288 49,508 100.0% 100.0% 92.7% 95.3% ====== ====== ====== ======
Management expects occupancy of the in-service property portfolio to remain stable because (i) only 4.3% and 9.8% 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% and 80% in 1998, 1997 and 1996, respectively. - 13 - The following table reflects the Partnership's in-service portfolio lease expiration schedule as of September 30, 1999 by product type indicating square footage and annualized net effective rents under expiring leases (in thousands, except per square foot amounts):
Total Portfolio Industrial Office Retail ----------------------- ------------------ --------------- ------------ Yr of Sq. Rent Sq. Rent Sq. Rent Sq. Rent Exp Ft. $ % Ft. $ Ft. $ Ft. $ - ----- ---- -------- ---- ------ -------- ------ -------- ---- ------- 1999 3,499 $ 22,043 4% 2,947 $ 15,510 538 $ 6,367 14 $ 166 2000 8,056 47,778 9% 6,283 26,933 1,600 19,236 173 1,609 2001 9,265 56,896 11% 7,220 31,712 1,942 23,956 103 1,228 2002 10,605 69,527 13% 8,151 39,697 2,318 28,166 136 1,664 2003 9,314 64,880 12% 7,180 36,099 1,959 25,805 175 2,976 2004 9,028 65,467 12% 6,784 34,658 2,112 29,557 132 1,252 2005 6,009 37,242 7% 4,536 18,280 1,223 16,794 250 2,168 2006 4,745 30,825 6% 3,798 17,061 936 13,614 11 150 2007 4,572 25,338 5% 3,882 16,074 626 8,680 64 584 2008 5,379 34,303 6% 4,368 19,440 965 14,249 46 614 2009 and There- after 11,365 80,417 15% 7,705 35,807 2,107 30,173 1,553 14,437 ------ ------- ---- ------ ------ ----- ------- ------ ------ Total Leased 81,837 $534,716 100% 62,854 $291,271 16,326 $216,597 2,657 $26,848 ====== ======= ==== ====== ======= ====== ======= ===== ====== Total Port- folio Square Feet 88,288 67,840 17,612 2,836 ====== ====== ====== ===== Annualized net effective rent per square foot $ 6.53 $ 4.63 $ 13.27 $ 10.10 ======= ======= ======= ======
This stable occupancy, along with stable rental rates in each of the Partnership's 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 Merger with Weeks Corporation below); and (iii) the completion of the 12.5 million square feet of properties under development at September 30, 1999 over the next three quarters and thereafter. The 12.5 million square feet of properties under development should provide future earnings from rental operations growth for the 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 - -------------- ------- ------ ------- ----------- 4th Quarter 1999 5,379 56% $294,528 11.4% 1st Quarter 2000 3,048 35% 222,649 10.9% 2nd Quarter 2000 2,256 52% 140,531 11.2% Thereafter 1,796 55% 149,537 11.7% ------ ------- 12,479 50% $807,245 11.3% ====== =======
MERGER WITH WEEKS OPERATING PARTNERSHIP In July 1999, the General Partner and Weeks approved a merger transaction ("Weeks Merger") whereby Weeks, a self-administered, self-managed geographically focused Real Estate Investment Trust ("REIT") which operated primarily in the southeastern United States, and its consolidated subsidiary, Weeks Operating Partnership, were merged with and into the General Partner and its consolidated subsidiary, Duke Operating Partnership. The combined Operating Partnership has continued its existence under the name Duke-Weeks Realty Limited Partnership. In accordance with the terms of the Weeks Merger, each outstanding Weeks Operating Partnership common unit was converted into the right to receive 1.38 common units of the Partnership and each outstanding Weeks - 14 - Operating Partnership Series A preferred equity was converted into the right to receive one unit of a new class of the Partnership Series F preferred equity. The total purchase price of Weeks and Weeks Operating Partnership aggregated approximately $1.9 billion, which included the assumption of the outstanding debt and liabilities of Weeks Operating Partnership of approximately $775 million. The following summarized pro forma unaudited information represents the combined historical operating results of Weeks Operating Partnership and Duke Operating Partnership with the appropriate purchase accounting adjustments, assuming the Weeks Merger had occurred on January 1, 1998. The pro forma financial information presented is not necessarily indicative of what the Partnership's actual operating results would have been had Weeks Operating Partnership and Duke Operating Partnership constituted a single entity during such periods (in thousands, except per unit amounts):
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- (Actual) (Pro Forma) (Pro Forma) (Pro Forma) Rental Income $157,001 $127,312 $451,932 $354,720 ======= ======= ======= ======= Net earnings attributable to Common Units $ 48,005 $ 35,577 $136,623 $102,677 ======= ======= ======= ======= Weighted average Common Units outstanding: Basic 137,721 128,012 136,350 126,075 ======= ======= ======= ======= Diluted 138,923 130,061 137,540 127,209 ======= ======= ======= ======= Earnings attributable to Common Units: Basic $ .35 $ .28 $ 1.00 $ .82 ======= ======= ======= ======= Diluted $ .35 $ .27 $ .99 $ .81 ======= ======= ======= =======
RESULTS OF OPERATIONS Following is a summary of the Partnership's operating results and property statistics for the three and nine months ended September 30, 1999 and 1998 (in thousands, except number of properties and per unit amounts):
Three months ended Nine months ended September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Rental Operations revenue $160,273 $ 90,348 $369,408 $253,103 Service Operations revenue 15,402 7,284 36,562 19,206 Earnings from Rental Operations 60,072 30,888 136,080 92,062 Earnings from Service Operations 3,871 2,815 12,489 5,530 Operating income 59,317 30,911 136,832 89,357 Net income available for common shares $ 41,462 $23,449 $ 98,452 $ 67,569 Weighted average common shares outstanding 118,820 81,594 97,966 79,461 Weighted average common and dilutive potential common shares 138,923 93,279 112,106 91,252 Basic income per common share $ .35 $ .29 $ 1.00 $ .85 Diluted income per common share $ .35 $ .29 $ 1.00 $ .84 Number of in-service properties at end of period 841 428 841 428 In-service square footage at end of period 88,288 49,508 88,288 49,508 Under development square footage at end of period 12,479 5,088 12,479 5,088
- 15 - COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THREE MONTHS ENDED SEPTEMBER 30, 1998 - ------------------------------------------------------------------- Rental Operations - ----------------- The Partnership increased its in-service portfolio of rental properties from 428 properties comprising 49.5 million square feet at September 30, 1998 to 841 properties comprising 88.3 million square feet at September 30, 1999 through the acquisition of 374 properties totaling 32.2 million square feet and the completion of 49 properties and six building expansions totaling 7.5 million square feet developed by the Partnership. Of these additional properties, 335 properties totaling 28.6 million square feet relate to the merger with Weeks Corporation. The Partnership also disposed of ten properties totaling 868,000 square feet. These 413 net additional rental properties primarily account for the $69.9 million increase in revenues from Rental Operations from 1998 to 1999. The increase from 1998 to 1999 in rental expenses, real estate taxes and depreciation and amortization expense is also a result of the additional 413 in-service rental properties. Interest expense increased by approximately $9.3 million from $16.7 million for the three months ended September 30, 1998 to $26.0 million for the three months ended September 30, 1999 primarily as a result of $300.0 million of unsecured debt issued in the first two quarters of 1999 to fund development and acquisition activity, and $240 million of secured debt and $287 million of unsecured debt assumed July 2, 1999 in the merger with Weeks (see Merger with Weeks Corporation below). As a result of the above-mentioned items, earnings from rental operations increased $29.2 million from $30.9 million for the three months ended September 30, 1998 to $60.1 million for the three months ended September 30, 1999. Service Operations - ------------------ Service Operation revenues increased by $8.1 million from $7.3 million for the three months ended September 30, 1998 to $15.4 million for the three months ended September 30, 1999 primarily as a result of increases in construction management fee revenue due to an increase in third-party construction volume. As a result of the above-mentioned items, earnings from Service Operations increased from $2.8 million for the three months ended September 30, 1998 to $3.9 million for the three months ended September 30, 1999. Net Income Available for Common Unitholders - ------------------------------------------- Net income available for common unitholders for the three months ended September 30, 1999 was $48.0 million compared to net income available for common unitholders of $26.6 million for the three months ended September 30, 1998. This increase results primarily from the operating result fluctuations in rental and service operations explained above. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED SEPTEMBER 30, 1998 - ------------------------------------------------------------------ Rental Operations - ----------------- The Partnership increased its in-service portfolio of rental properties from 428 properties comprising 49.5 million square feet at September 30, 1998 to 841 properties comprising 88.3 million square feet - 16 - at September 30, 1999 through the acquisition of 374 properties totaling 32.2 million square feet and the completion of 49 properties and six building expansions totaling 7.5 million square feet developed by the Partnership. Of these additional properties, 335 properties totaling 28.6 million square feet relate to the merger with Weeks Corporation. The Partnership also disposed of ten properties totaling 868,000 square feet. These 413 net additional rental properties primarily account for the $116.3 million increase in revenues from Rental Operations from 1998 to 1999. The increase from 1998 to 1999 in rental expenses, real estate taxes and depreciation and amortization expense is also a result of the additional 413 in- service rental properties. Interest expense increased by approximately $15.2 million from $43.9 million for the nine months ended September 30, 1998 to $59.1 million for the nine months ended September 30, 1999 primarily as a result of $300.0 million of unsecured debt issued in the first two quarters of 1999 to fund development and acquisition activity, and $240 million of secured debt and $287 million of unsecured debt assumed July 2, 1999 in the merger with Weeks (see Merger with Weeks Corporation below). As a result of the above-mentioned items, earnings from rental operations increased $44.0 million from $92.1 million for the nine months ended September 30, 1998 to $136.1 million for the nine months ended September 30, 1999. Service Operations - ------------------ Service Operation revenues increased by $17.4 million from $19.2 million for the nine months ended September 30, 1998 to $36.6 million for the nine months ended September 30, 1999 primarily as a result of increases in construction management fee revenue due to an increase in third-party construction volume, particularly a 265,000 square foot suburban office build-to-suit building which resulted in substantial revenue during the period. Service Operations operating expenses increased from $13.7 million to $24.1 million for the nine months ended September 30, 1999 as compared to the nine months ended September 30, 1998 primarily as a result of an increase in construction activity and an increase in income taxes resulting from the growth in net income related to third party construction. As a result of the above-mentioned items, earnings from Service Operations increased from $5.5 million for the nine months ended September 30, 1998 to $12.5 million for the nine months ended September 30, 1999. General and Administrative Expense - ---------------------------------- General and administrative expense increased from $8.2 million for the nine months ended September 30, 1998 to $11.7 million for the nine months ended September 30, 1999 primarily as a result of internal acquisition costs which are no longer permitted to be capitalized being charged to general and administrative expense as well as an increase in state and local taxes due to the overall growth of the Partnership. Net Income Available for Common Unitholders - ------------------------------------------- Net income available for common unitholders for the nine months ended September 30, 1999 was $111.6 million compared to net income available for common unitholders of $76.8 million for the nine - 17 - months ended September 30, 1998. This increase results primarily from the operating result fluctuations in rental and service operations explained above. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities totaling $258.8 million and $148.2 million for the nine months ended September 30, 1999 and 1998, respectively, represents the primary source of liquidity to fund distributions to preferred unitholders and the other minority interests and to fund recurring costs associated with the renovation and re-letting of the Partnership's properties. Net cash used by investing activities totaling $571.5 million and $470.4 million for the nine months ended September 30, 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 $350.9 million and $333.4 million for the nine months ended September 30, 1999 and 1998, respectively, is comprised of debt and equity issuances, net of distributions to unitholders and repayments of outstanding indebtedness. In the first nine months of 1999, the Partnership received $203.5 million of net proceeds from the issuance of common shares by the General Partner and $96.5 million of net proceeds from a preferred stock offering by the General Partner. The Partnership also issued $300.0 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 nine months of 1998, the Partnership received $136.7 million of net proceeds from the issuance of common shares by the General Partner and issued $250.0 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. The Partnership has the following lines of credit available (in thousands):
Outstanding Borrowing Maturity Interest at September Description Capacity Date Rate 30, 1999 - ------------------------ ---------- ---------- --------- ------------- Unsecured Line of Credit $450,000 April 2001 LIBOR + .70% $265,000 Unsecured Line of Credit 300,000 April 2001 LIBOR + .90% 0
Both lines of credit are used to fund development and acquisition of additional rental properties and to provide working capital. Effective July 2, 1999, the interest rate on the $450 million line of credit was adjusted from LIBOR + .80% to LIBOR + .70%. Additionally, the $450 million line of credit allows the Partnership an option to obtain borrowings from the financial institutions that participate in the line of credit at rates lower than the stated interest rate, subject to certain restrictions. Amounts outstanding on the line of credit at September 30, 1999 are at LIBOR + .65% to .70%. The $300 million line of credit was obtained July 2, 1999, following with the Merger with Weeks Corporation. - 18 - The Partnership and the General Partner currently have on file three Form S-3 Registration Statements with the Securities and Exchange Commission ("Shelf Registrations") which had remaining availability as of September 30, 1999 of approximately $417.9 million to issue common stock, preferred stock or unsecured debt securities. The Partnership and the General Partner 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 Partnership and General Partner also plan to file additional shelf registrations as necessary. The total debt outstanding at September 30, 1999 consists of notes totaling $2.0 billion with a weighted average interest rate of 7.16% maturing at various dates through 2028. The Partnership has $1.4 billion of unsecured debt and $523.0 million of secured debt outstanding at September 30, 1999. Scheduled principal amortization of such debt totaled $7.6 million for the nine months ended September 30, 1999. Following is a summary of the scheduled future amortization and maturities of the Partnership's indebtedness at September 30, 1999 (in thousands):
Future Repayments ------------------------------------------ Weighted Average Scheduled Interest Rate of Year Amortization Maturities Total Future Repayments ----- ------------ ---------- ------------- ----------------- 1999 $ 4,018 $ 27,935 $ 31,953 6.25% 2000 15,363 66,561 81,924 7.09% 2001 13,684 442,120 455,804 6.71% 2002 13,542 55,037 68,579 7.42% 2003 12,651 243,194 255,845 7.62% 2004 12,282 176,151 188,433 7.41% 2005 11,256 313,662 324,918 7.16% 2006 10,575 146,156 156,731 7.40% 2007 8,910 16,555 25,465 7.44% 2008 8,068 100,000 108,068 6.80% Thereafter 36,121 231,016 267,137 7.16% ------- --------- --------- Total $146,470 $1,818,387 $1,964,857 7.16% ======= ========= =========
FUNDS FROM OPERATIONS Management believes that Funds From Operations ("FFO"), which is defined by the National Association of Real Estate Investment Trusts as net income or loss, excluding gains or losses from debt restructuring and sales of depreciated property, plus operating property depreciation and amortization and adjustments for minority interest and unconsolidated companies on the same basis, is the industry standard for reporting the operations of real estate investment trusts. The following table reflects the calculation of the Partnership's FFO for the three and nine months ended September 30 as follows (in thousands):
Three months ended Nine months ended September 30, September 30, ------------------- ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net income available for common units $ 48,005 $ 26,565 $111,636 $ 76,833 Add back: Depreciation and amortization 32,738 17,660 74,127 48,445 Share of joint venture adjustments 1,270 1,101 4,026 2,651 Earnings from depreciated property sales (2,406) (661) (5,804) (1,615) ------- ------- ------- ------- FUNDS FROM OPERATIONS $ 79,607 $ 44,655 $183,985 $126,314 ======= ======= ======= ======= CASH FLOW PROVIDED BY (USED BY): Operating activities $176,189 $ 47,928 $258,759 $148,162 Investing activities (248,488) (118,517) (571,464) (470,418) Financing activities (50,985) 70,169 350,891 333,372
- 19 - The increase in FFO for the three and nine months ended September 30, 1999 compared to the three and nine months ended September 30, 1998 results primarily from the increased in-service rental property portfolio as discussed above under "Results of Operations." While management believes that FFO is the most relevant and widely used measure of the 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. YEAR 2000 The Year 2000 problem refers to the inability of certain computer programs to recognize the year 2000 and other key dates thus resulting in a variety of possible problems including data corruption and total system failures. Commonly thought of as a mainframe computer problem, the Year 2000 problem can also affect software and embedded microchips which run systems that control building functions, such as elevators, security (including access), heating, ventilation and air conditioning and fire protection. The terms "Year 2000 ready" and "Year 2000 readiness" are often used to describe a computer system that will continue to operate properly prior to, during and after January 1, 2000 (taking into account that the Year 2000 is a leap year) and is thus not affected by the Year 2000 problem. Duke-Weeks Realty Corporation (the "Partnership") is committed to ensuring the highest level of tenant satisfaction reasonably possible and clearly recognizes the importance to our tenants, as well as our unitholders, of having in place a Year 2000 readiness plan. In February, 1998, the Partnership formed a Year 2000 Task Force to address the Year 2000 problem on a company-wide basis, including properties and information systems. The Task Force is comprised of representatives from senior management in the areas of Property and Asset Management, Construction, Information Systems and Legal. The Board of Directors and Audit Committee of the 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. This Year 2000 readiness plan consists of eight (8) steps focusing on the identification, prioritization and remediation of potential Year 2000 problems arising from software and embedded chips located within the building systems at the Partnership's properties. The Partnership recognizes that the Year 2000 problem could affect it operations as well as the proper functioning of the embedded systems included in the Partnership's properties. In particular property, the problem could affect the functioning of elevators, heating and air conditioning systems, security systems and other automated building systems. Management has identified and inventoried the building systems and equipment at the Partnership's existing properties to determine which systems could be affected by the Year 2000 problem. The inventory has been entered into a data base containing a readiness status of each such system. This data base allows Management to quickly monitor ongoing progress related to the Year 2000 readiness of all affected building systems. Under the direction of the Year 2000 Task Force, the property manager of each building has contacted in writing each building system manufacturer or supplier that has supplied an active and affected building system. Each manufacturer or supplier was sent a comprehensive questionnaire designed to - 20 - 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 complete. The Partnership's contingency plans generally provide for obtaining or allowing alternative access, limited electrical and telephone service and, security and other basic services. The Partnership's contingency plans focus on those operational systems and utilities which, if interrupted, could cause the greatest disruption to the Partnership's properties and business operations. The contingency plans establish in detail the actions to be followed in the event of a system or utility failure. The contingency plans also identify key contacts for purposes of remediating system and utility failures and other requirements such as staffing, equipment, office supplies and quality assurance issues. The 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. Based upon a cost assessment prepared by the Task Force, the Partnership has budgeted approximately $250,000 of non-reimbursable expenses for the upgrade and replacement of certain building systems having potential Year 2000 related problems. In addition to assessing the readiness of the building systems of the Partnership's properties, the Partnership continues to actively contact and monitor the compliance efforts of utility companies and telecommunication providers which provide services to the Partnership's properties. The Partnership has contacted 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 provide fire, police and other necessary services upon the Year 2000. The readiness of these providers and municipalities has been taken into consideration in preparing contingency plans for the Partnership and its properties. 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 have been and continues to be added to the contingency plans. The Partnership 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, - 21 - budgeting and tenant services. The initial phase of identification and assessment of the Partnership's information systems was completed April 1, 1999 at a cost of $75,000. A budget and timetable for replacement, upgrade of or contingencies for the foregoing systems, that are not Year 2000 ready has been developed and is being implemented. The estimated cost associated with such replacement and upgrade is budgeted to be $340,000. There can be no assurance that the 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. PART II - OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- None Item 2. Changes in Securities - ------------------------------ None Item 3. Defaults upon Senior Securities - ---------------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ None. Item 5. Other Information - -------------------------- When used in this Form 10-Q, the words "believes," "expects," "estimates" and similar expressions are intended to identify forward looking-statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially. In particular, among the factors that could cause actual results to differ materially are continued qualification as a real estate investment trust, general business and economic conditions, competition, increases in real estate construction costs, interest rates, accessibility of debt and equity capital markets and other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters and illiquidity of real estate investments. Readers are cautioned not to place undue reliance on these forward- looking statements, which speak only as of the date hereof. The 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 29, 1996 for additional information concerning these risks. - 22 - 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 an 8-K on July 16, 1999, to file exhibits in connection with the merger with Weeks Operating Partnership. The Partnership filed an 8-K on August 31, 1999, to file exhibits, including financial statements, in connection with the merger with Weeks Operating Partnership. - 23 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DUKE-WEEKS REALTY LIMITED PARTNERSHIP By: Duke Realty Investments, Inc., General Partner Registrant Date: November 12, 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 - 24 - EX-15 2 AUDITORS' LETTER Exhibit 15 The Partners DUKE-WEEKS REALTY LIMITED PARTNERSHIP: RE: Registration Statement No. 333-04695, 333-26845 and 333-49911 With respect to the subject registration statement, we acknowledge our awareness of the use therein of our report dated October 26, 1999 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant, or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. KPMG LLP Indianapolis, Indiana November 11, 1999 EX-27 3 1999 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMTION EXTRACTED FROM DUKE-WEEKS REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES' CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 SEP-30-1999 44,812 0 81,101 (3,202) 0 172,895 5,053,372 (234,071) 5,336,192 272,825 1,964,857 0 0 0 3,097,902 5,336,192 0 415,194 0 (210,529) (33,949) 0 (59,080) 111,636 0 111,636 0 0 0 111,636 $1.00 $1.00
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