UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-13589
PRIME GROUP REALTY TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 36-4173047
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 WEST WACKER DRIVE, SUITE 3900, CHICAGO, ILLINOIS 60601
(Address of principal executive offices) (Zip Code)
(312) 917-1300
(Registrant's telephone number, including area code)
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At November 13, 1998, 15,122,594 of the Registrant's Common Shares of Beneficial
Interest were outstanding.
<PAGE>
PRIME GROUP REALTY TRUST
FORM 10-Q
INDEX
-----
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited) Page
----
Consolidated Balance Sheets of Prime Group Realty
Trust as of September 30, 1998 and December 31, 1997........... 3
Consolidated Statement of Income of Prime Group
Realty Trust for the Three Months Ended September 30,
1998 and the Combined Statement of Operations of the
Predecessor Properties (predecessor to Prime Group
Realty Trust) for the Three Months Ended September 30, 1997.... 4
Consolidated Statement of Income of Prime Group
Realty Trust for the Nine Months Ended September 30,
1998 and the Combined Statement of Operations of the
Predecessor Properties (predecessor to Prime Group
Realty Trust) for the Nine Months Ended September 30, 1997.... 5
Consolidated Statement of Cash Flows of Prime Group
Realty Trust for the Nine Months Ended September 30,
1998 and the Combined Statement of Cash Flows of the
Predecessor Properties (predecessor to Prime Group
Realty Trust) for the Nine Months Ended September 30, 1997..... 6 - 7
Notes to Consolidated and Combined Financial
Statements of Prime Group Realty Trust and of the
Predecessor Properties (predecessor to Prime Group
Realty Trust).................................................. 8 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 15 - 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 22
PART II: OTHER INFORMATION
Item 1. Legal Proceedings............................................... 23
Item 2. Changes in Securities and Use of Proceeds....................... 23
Item 3. Defaults Upon Senior Securities................................. 23
Item 4. Submission of Matters to a Vote of Security Holders............. 23
Item 5. Other Information............................................... 23
Item 6. Exhibits and Reports on Form 8-K................................ 24
Signatures .............................................................. 25
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<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PRIME GROUP REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Real estate and equipment, at cost:
Land ......................................... $ 138,964 $ 92,440
Building and improvements .................... 692,630 496,839
----------- -----------
831,594 589,279
Accumulated depreciation ..................... (18,240) (2,338)
----------- -----------
813,354 586,941
Property under development ................... 43,353 --
----------- -----------
856,707 586,941
Mortgage note receivable ......................... 58,590 56,511
Cash and cash equivalents ........................ 8,138 11,969
Tenant receivables ............................... 4,625 3,820
Restricted cash escrows .......................... 49,750 3,175
Deferred rent receivable ......................... 38,881 37,828
Deferred costs, net .............................. 31,623 28,472
Due from affiliates .............................. 8,037 5,258
Other ............................................ 29,917 7,494
----------- -----------
Total assets ..................................... $ 1,086,268 $ 741,468
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage notes payable ........................... $ 296,956 $ 90,610
Credit facilities ................................ 138,700 159,000
Mortgage note payable - Affiliate ................ -- 3,984
Bonds payable .................................... 74,450 74,450
Accrued interest payable ......................... 1,973 1,245
Accrued real estate taxes ........................ 31,836 17,915
Accounts payable and accrued expenses ............ 20,220 13,903
Liabilities for leases assumed ................... 4,790 5,758
Dividends payable ................................ 8,122 2,505
Other ............................................ 7,083 822
----------- -----------
Total liabilities ................................ 584,130 370,192
Minority interests:
Operating Partnership ........................ 148,859 147,207
Other ........................................ 1,000 --
Shareholders' equity:
Preferred shares, $0.1 par value, 30,000,000
authorized:
Series B Cumulative Redeemable Preferred
Shares, 4,600,000 designated; 4,000,000
issued and outstanding..................... 40 --
Series A Cumulative Convertible Preferred
Shares, 2,000,000 designated, issued and
outstanding................................ 20 20
Common shares, $.01 par value; 100,000,000
shares authorized; 15,325,594 and 12,980,000
shares issued and outstanding at September
30, 1998 and December 31, 1997,
respectively................................. 153 130
Additional paid-in capital ................... 361,954 225,632
Distributions in excess of earnings .......... (9,888) (1,713)
----------- -----------
Total shareholders' equity ....................... 352,279 224,069
----------- -----------
Total liabilities and shareholders' equity ....... $ 1,086,268 $ 741,468
=========== ===========
<FN>
See notes to consolidated and combined financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
PRIME GROUP REALTY TRUST (THE COMPANY)
AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY)
CONSOLIDATED STATEMENT OF INCOME OF THE COMPANY AND
COMBINED STATEMENT OF OPERATIONS OF THE PREDECESSOR
(000'S OMITTED, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
---------------------------
1998 1997
------------ ------------
PRIME GROUP PREDECESSOR
REALTY TRUST PROPERTIES
------------ ------------
<S> <C> <C>
REVENUE
Rental ........................................... $ 28,049 $ 8,839
Tenant reimbursements ............................ 9,488 3,875
Mortgage note interest ........................... 1,415 --
Other ............................................ 2,300 217
------------ ------------
Total revenue .................................... 41,252 12,931
EXPENSES
Property operations .............................. 8,817 2,497
Real estate taxes ................................ 6,869 2,361
Depreciation and amortization .................... 6,611 4,074
Interest ......................................... 7,615 6,885
Interest - Affiliates ............................ -- 2,978
Financing fees ................................... -- 294
Property and asset management fees - Affiliates .. -- 276
General and administrative ....................... 1,651 1,087
------------ ------------
Total expenses ................................... 31,563 20,452
------------ ------------
Income (loss) before minority interest ........... 9,689 (7,521)
Minority interest ................................ (3,902) 98
------------ ------------
Net income (loss) ................................ $ 5,787 $ (7,423)
------------ ============
Net income allocated to preferred shareholders ... (2,950)
------------
Net income available to common shareholders ...... $ 2,837
============
Net income available per weighted-average
common share of beneficial interest -
Basic and diluted............................... $ 0.18
============
<FN>
See notes to consolidated and combined financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
PRIME GROUP REALTY TRUST (THE COMPANY)
AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY)
CONSOLIDATED STATEMENT OF INCOME OF THE COMPANY AND
COMBINED STATEMENT OF OPERATIONS OF THE PREDECESSOR
(000'S OMITTED, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
1998 1997
------------ ------------
PRIME GROUP PREDECESSOR
REALTY TRUST PROPERTIES
------------ ------------
<S> <C> <C>
REVENUE
Rental............................................ $ 69,525 $ 24,970
Tenant reimbursements............................. 27,889 11,644
Mortgage note interest............................ 4,429 ---
Other ............................................ 5,083 906
----------- ------------
Total revenue..................................... 106,926 37,520
EXPENSES
Property operations............................... 20,758 6,815
Real estate taxes................................. 19,101 7,951
Depreciation and amortization..................... 18,186 10,566
Interest.......................................... 22,091 20,472
Interest - Affiliates............................. --- 8,627
Financing fees.................................... --- 934
Property and asset management fees - Affiliates... --- 1,077
General and administrative........................ 4,695 2,973
Provision for environmental remediation costs..... --- 3,205
------------ ------------
Total expenses.................................... 84,831 62,620
------------ ------------
Income (loss) before minority interest and
extraordinary item.............................. 22,095 (25,100)
Minority interest................................. (9,069) 466
------------ ------------
Income (loss) before extraordinary item........... 13,026 (24,634)
Extraordinary loss on extinguishment of debt,
net of minority interest of $375................ (525) ---
------------ ------------
Net income (loss)................................. $ 12,501 $ (24,634)
------------ ============
Net income allocated to preferred shareholders.... (4,991)
------------
Net income available to common shareholders ...... $ 7,510
============
Net income available per weighted-average
common share of beneficial interest -
Basic and diluted............................. $ 0.51
============
<FN>
See notes to consolidated and combined financial statements.
</FN>
</TABLE>
-5-
<PAGE>
<TABLE>
PRIME GROUP REALTY TRUST (THE COMPANY)
AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS OF THE COMPANY AND
COMBINED STATEMENT OF CASH FLOWS OF THE PREDECESSOR
(000'S OMITTED)
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
1998 1997
------------ ------------
PRIME GROUP PREDECESSOR
REALTY TRUST PROPERTIES
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $ 12,501 $ (24,634)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Amortization of costs for leases assumed
(included in rental revenue).................. 852 873
Depreciation and amortization................... 18,186 10,566
Interest added to principal on mortgage note
payable - Affiliate........................... --- 8,619
Standby loan fee-affiliate added to principal
on mortgage note payable - Affiliate.......... --- 393
Minority interest............................... 9,069 (466)
Extraordinary item, net......................... 525 ---
Changes in operating assets and liabilities:
Increase in tenant receivables................ (805) (3,559)
(Increase) decrease in deferred rent
receivable.................................. (1,053) 221
Increase in deferred costs.................... --- (1,601)
(Increase) decrease in other assets .......... (6,558) 473
Increase (decrease) in accrued interest
payable..................................... 728 (287)
Increase (decrease) in accrued real estate
taxes....................................... 13,921 (304)
Increase (decrease) in accounts payable and
accrued expenses............................ 999 (1,254)
Decrease in liabilities for leases assumed ... (968) (879)
Increase in other liabilities ................ 6,261 1,867
------------ ------------
Net cash provided by (used in) operating
activities...................................... 53,658 (9,972)
-6-
<PAGE>
PRIME GROUP REALTY TRUST (THE COMPANY)
AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS OF THE COMPANY AND
COMBINED STATEMENT OF CASH FLOWS OF THE PREDECESSOR (CONTINUED)
(000'S OMITTED)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
1998 1997
------------ ------------
PRIME GROUP PREDECESSOR
REALTY TRUST PROPERTIES
------------ ------------
INVESTING ACTIVITIES
Expenditures for real estate and equipment........ $ (281,974) $ (4,270)
Leasing costs..................................... (2,174) ---
Additions to mortgage note receivable............. (2,079) ---
Increase in restricted cash escrows............... (46,575) ---
(Increase) decrease in due from affiliates........ (2,779) 2,803
------------ ------------
Net cash used in investing activities............. (335,581) (1,467)
FINANCING ACTIVITIES
Proceeds from the sale of Series B Cumulative
Redeemable Preferred Shares..................... 94,369 ---
Common stock repurchases ......................... (4,013) ---
Proceeds from the private placement of common
shares.......................................... 47,194 ---
Proceeds from mortgage notes payable.............. 291,656 736
Proceeds from mortgage notes payable- affiliate... --- 2,820
Net repayment of Credit Facility.................. (20,300) ---
Repayment of mortgage notes payable............... (84,611) (62)
Repayment of mortgage note payable- affiliate..... (3,984) (225)
Financing costs................................... (19,520) ---
Increase in due to affiliates .................... --- 5,164
Contributions from minority interest - other ..... 1,000 ---
Distribution to minority interest - operating
partnership..................................... (8,641) ---
Distributions to partners......................... --- (3)
Dividends paid to preferred shareholders.......... (2,386) ---
Dividends paid to common shareholders............. (12,672) ---
------------ ------------
Net cash provided by financing activities......... 278,092 8,430
------------ ------------
Net decrease in cash and cash equivalents......... (3,831) (3,009)
Cash and cash equivalents at beginning of period.. 11,969 5,573
------------ ------------
Cash and cash equivalents at end of period........ $ 8,138 $ 2,564
============ ============
<FN>
See notes to consolidated and combined financial statements.
</FN>
</TABLE>
-7-
<PAGE>
PRIME GROUP REALTY TRUST (THE COMPANY)
AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated and combined financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 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 accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Prime Group Realty
Trust's annual report on Form 10-K for the fiscal year ended December 31, 1997
as filed with the Securities and Exchange Commission on March 31, 1998 ("Form
10-K").
Certain prior period amounts have been reclassified to conform with the current
financial statement presentation.
2. FORMATION OF THE COMPANY
Prime Group Realty Trust ("Prime" or the "company") was formed in Maryland on
July 21, 1997 to succeed to and expand the office and industrial real estate
business of The Prime Group, Inc. ("PGI"), which consisted of a portfolio of
five office and seventeen industrial properties, as well as a parking garage
facility and the office and industrial real estate ownership, acquisition,
development, leasing and management businesses historically conducted by PGI
(the "Predecessor Properties"). On November 17, 1997, Prime completed its
initial public offering ("IPO") of 12,980,000 common shares of beneficial
interest and the private placement of 2,000,000 Series A Cumulative Convertible
Preferred Shares of beneficial interest. Prime's assets are owned and controlled
by, and all of its operations are conducted through, Prime Group Realty, L.P.
(the "Operating Partnership") and other subsidiaries. PGI contributed its
interest in the Predecessor Properties to the Operating Partnership in exchange
for 3,375,000 common units of the Operating Partnership. The Operating
Partnership also sold 4,569,893 common units in the Operating Partnership for
$85.0 million to Primestone Investment Partners, L.P. ("Primestone Joint
Venture"), a joint venture between PGI and certain affiliates of Blackstone Real
Estate Advisors, L.P.
Pursuant to financing arrangements for the properties, the partnerships or
limited liability companies which are subsidiaries of the Operating Partnership
and own the properties, often have, as a partner or member, a separate corporate
subsidiary of Prime whose board of directors includes an independent director
that, as required by such financing arrangements, must approve the commencement
of any voluntary dissolution or insolvency proceeding with respect to such
subsidiary.
3. INCOME TAXES
Commencing with the period ended December 31, 1997, Prime has filed as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended. As a REIT, Prime generally will not be subject to federal income tax to
the extent that it distributes at least 95% of its REIT taxable income to its
shareholders. REITs are subject to a number of organizational and operational
requirements. If Prime fails to qualify as a REIT in any taxable year, Prime
will be subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate tax rates.
-8-
<PAGE>
PRIME GROUP REALTY TRUST (THE COMPANY)
AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
4. USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
5. RECENT DEVELOPMENTS
During the period from January 1, 1998 through September 30, 1998, Prime
acquired the following eight office properties:
<TABLE>
<CAPTION>
NET ACQUISITION MORTGAGE
RENTABLE COST DEBT (*)
SQUARE (IN (IN MONTH
PROPERTY LOCATION FEET MILLIONS) MILLIONS) ACQUIRED
-------- -------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
33 North Dearborn Chicago, IL 302,818 $ 34.4 $ 18.0 1/98
Commerce Point Arlington
Hts., IL 236,642 29.2 20.0 2/98
208 South LaSalle
Street Chicago, IL 827,494 61.2 45.8 3/98
122 South Michigan Chicago, IL 512,369 29.6 --- 4/98
2100 Swift Drive Oak Brook, IL 58,000 7.4 5.2 4/98
6400 Shafer Court Rosemont, IL 161,730 21.3 14.4 5/98
Two Century Centre Schaumburg, IL 217,960 35.7 --- 6/98
Oak Brook Business
Center Oak Brook, IL 199,245 16.2 --- 6/98
--------- ------- --------
2,516,258 $ 235.0 $ 103.4
========= ======= ========
</TABLE>
(*) See Management's Discussion and Analysis of Financial Condition and Results
of Operations -"Liquidity and Capital Resources" for a description of the debt
terms.
During the period from January 1, 1998 through September 30, 1998, Prime
acquired the following parcels of land:
<TABLE>
<CAPTION>
ACQUISITION
COST MONTH
PROPERTY LOCATION ACRES (IN MILLIONS) ACQUIRED
-------- -------- ----- ------------- --------
<S> <C> <C> <C> <C>
Aurora Land - I Aurora, IL 37.3 $ 3.1 6/98
Aurora Land - II Aurora, IL 17.4 1.4 6/98
DeKalb Land DeKalb, IL 42.1 0.6 7/98
Rolling Meadows Land Rolling Meadows, IL 0.6 0.1 7/98
Libertyville Industrial
Land Libertyville, IL 12.8 2.0 7/98
Libertyville Office
Land Libertyville, IL 21.6 3.3 9/98
------ -------
131.8 $ 10.5
====== =======
</TABLE>
The Aurora Land contracts require purchase of an additional 132.7 acres over a
three to five year period for additional consideration of $10.4 million. Certain
minimum installment payments are required; however, the timing of purchases is
at Prime's discretion. On September 26, 1998, Prime made a $170,000 installment
payment.
-9-
<PAGE>
PRIME GROUP REALTY TRUST (THE COMPANY)
AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
5. RECENT DEVELOPMENTS (CONTINUED)
Concurrently with the closing of its IPO, Prime obtained a secured revolving
credit facility (the "Credit Facility") from a group of financial institutions.
In March 1998, April 1998 and October 1998, the Credit Facility was amended to
provide that the commitments under the Credit Facility be reduced from $235.0
million to $200.0 million, $190.0 million and $80.0 million, respectively (see
Note 9).
In January 1998, Prime obtained a $15.0 million revolving line of credit with a
financial institution (the "Line of Credit"). The Line of Credit, which matures
in January 1999 and is subject to a one-year extension at Prime's option, is
collateralized by an industrial property known as 475 Superior Avenue.
Outstanding balances under the Line of Credit bear interest at a rate equal to
LIBOR plus 195 basis points. Generally, the covenants contained in the Line of
Credit are identical to the covenants contained in the Credit Facility.
Concurrently with the closing of its IPO, Prime borrowed $83.5 million in
financing on a short-term basis evidenced by two separate notes (the "New
Mortgage Notes") which were collateralized by first mortgages on certain office
and industrial properties. On April 1, 1998, Prime refinanced one of the New
Mortgage Notes (which had an original principal balance of $27.5 million) with a
loan of $29.4 million, which will mature on March 23, 2008. Interest on this
loan is fixed for 10 years at a rate of 6.85% and is payable monthly. The
remaining New Mortgage Note (which had an original principal balance of $56.0
million) was refinanced on May 1, 1998 with two loans, the first of which is a
$47.0 million loan which has principal and interest payable monthly, using a
30-year amortization period, with interest fixed at 7.17% and a maturity of May
1, 2008. The second loan is a $14.6 million loan which has interest only payable
monthly at 150 basis points over LIBOR or .50% plus the greater of (a) the
lender's U.S. prime rate or (b) the Federal Funds Rate plus 1.0%, and matures on
May 1, 2000, not including a six-month extension option. The refinanced notes
are collateralized by first mortgages on certain office and industrial
properties. As a result of the above refinancing, Prime recognized an
extraordinary item of $525,000, net of minority interest of $375,000,
representing the write-off of previously unamortized deferred financing fees.
In February 1998, Prime refinanced $48.8 million of letters of credit that
provided credit enhancements on certain of Prime's bonds payable from the Credit
Facility to a separate financing facility provided by a financial institution.
The new letters of credit have an annual fee of 1.4% of the face amount and are
collateralized by mortgages on certain industrial and office properties and a
$5.0 million cash collateral account.
On March 31, 1998 and on September 28, 1998, Prime issued a total of 22,500
common shares granted to two officers of the company and 2,500 common shares
granted a board member of the company pursuant to their employment agreements or
consulting agreement, as applicable.
On March 25, 1998, Prime completed a private placement of 2,579,994 common
shares to institutional investors and received proceeds, net of underwriter
discount, of approximately $49.2 million, which were used to fund the
acquisition of the office properties located at 208 South LaSalle Street and 122
South Michigan Avenue.
On March 30, 1998, Prime entered into a joint venture that acquired an
approximately 67,000 square foot vacant parcel of land located in the Chicago,
Illinois central business district ("Chicago CBD"). The parcel was acquired for
the potential development of a Class A multi-purpose facility, with
approximately 1,000,000 square feet of office space, approximately 100,000
square feet of retail space and a parking garage with a capacity for
approximately 250 cars. Prime has economic control of the joint venture and,
-10-
<PAGE>
PRIME GROUP REALTY TRUST (THE COMPANY)
AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
5. RECENT DEVELOPMENTS (CONTINUED)
therefore, has consolidated the operations of the joint venture from the date of
inception. The joint venture entered into a bank loan in the amount of $13.5
million to acquire the land. Interest is payable monthly at a rate of LIBOR plus
200 basis points or at the lender's prime rate. The note matures April 1, 1999,
not including a six-month extension option. The other joint venturer's interest
has been reflected as Minority Interest - Other at September 30, 1998.
On May 15, 1998, Prime obtained a 7.22% note payable with a principal balance of
$75.0 million, collateralized by a mortgage on the suburban office building
known as Continental Towers. The note matures in 2013, with a prepayment option
in 2005, and has monthly payments of principal and interest, using a 25-year
principal amortization payment schedule. Prime used $70.0 million of the
proceeds to repay a portion of the Credit Facility. The remaining proceeds were
utilized to pay related costs and to fund escrow reserves required by the terms
of the note.
On June 5, 1998, Prime completed the sale of 4.0 million shares of its Series B
Cumulative Redeemable Preferred Shares and received proceeds, net of
underwriters' discounts, of approximately $96.85 million, which were used to
fund (i) the acquisition of Two Century Centre and Oak Brook Business Center,
and (ii) repay borrowings under the Credit Facility and the Line of Credit.
Distributions on the Series B Redeemable Preferred Shares are payable quarterly
on or about the last day of January, April, July and October of each year, at
the rate of 9% (equivalent to $2.25 per annum per Series B Cumulative Redeemable
Preferred Share). The Series B Cumulative Redeemable Preferred Shares rank
senior to Prime's common shares and its Series A Convertible Preferred Shares as
to the payment of dividends and as to the distribution of assets. On and after
June 5, 2003, the Series B Cumulative Redeemable Preferred Shares may be
redeemed at Prime's option at a redemption price of $25.00 per share plus
accrued and unpaid distributions. The redemption price is payable solely out of
the proceeds from the sale of other Prime capital shares of beneficial interest.
In July 1998 and September 1998, respectively, Prime began construction of an
industrial facility with approximately 242,000 square feet and an office
building with approximately 33,000 square feet on the Libertyville land parcels.
On August 21, 1998 and August 25, 1998, Prime entered into two Treasury Lock
agreements with two financial institutions to determine the interest rate on 10
year Treasury notes effective on the date of the agreements. One of these
agreements was entered into in anticipation of a planned future securitization
of a $170.0 million loan related to the 77 West Wacker Drive property (see Note
9). The other agreement was entered into in anticipation of debt related to the
acquisition of the IBM Plaza and National City Center properties (see discussion
below). One of the agreements expires on December 21, 1998 and the other
agreement expires on February 18, 1999. Prime has made deposits as required by
the agreements which are included in other assets at September 30, 1998 and if
the yield on the U.S. ten-year Treasury note at settlement is less than the
locked yield, the calculated notional amount will be amortized over the terms of
the future debt instruments as an adjustment to interest expense. Prime intends
to consummate debt transactions equal to the notional value of the agreements.
During the quarter ended September 30, 1998, Prime entered into contracts to
acquire two land parcels and an option to acquire a third land parcel located in
the Chicago metropolitan area for a total purchase price of approximately $62.0
million. Restricted cash escrows at September 30, 1998 includes deposits of
approximately $10.2 million related to these contracts. Prime expects to
complete the above acquisitions by the first quarter of 1999. However, the
purchase of the acquisitions is subject to Prime's completion of due diligence
and the satisfaction of other customary closing conditions and there can be no
assurance that any or all of the acquisitions will be completed.
-11-
<PAGE>
PRIME GROUP REALTY TRUST (THE COMPANY)
AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
5. RECENT DEVELOPMENTS (CONTINUED)
On July 22, 1998, Prime entered into a purchase agreement to acquire two office
buildings (IBM Plaza and National City Center) for an aggregate purchase price
of approximately $357.0 million. On September 15, 1998, Prime terminated the
purchase agreement in accordance with the terms of the agreement, because the
sellers were unable to satisfy a material condition precedent to the closing of
these acquisitions. On September 21, 1998, the sellers notified Prime in writing
that they believed they were entitled to the $20.0 million earnest money
provided for by the agreement, and instructed the earnest money escrow agent to
draw an aggregate of $20.0 million under two earnest money letters of credit
provided by Prime under the terms of the purchase agreement. In accordance with
such instructions, the earnest money escrow agent drew down the earnest money
letters of credit and deposited the funds in an escrow account. Pursuant to the
terms of the purchase agreement, these earnest money funds will remain deposited
in the escrow account until the escrow agent receives a joint disbursement
direction from Prime and the sellers or until a court of competent jurisdiction
directs the disbursement of the escrow funds in a final order. The escrow
agent's draw in the earnest money letters of credit, which were issued under the
Credit Facility, increased Prime's outstanding indebtedness under the Credit
Facility by such earnest money funds. Prime believes that the sellers are not
entitled to the earnest money and intends to vigorously pursue available
remedies to obtain a return of these funds. On September 21, 1998, the sellers
filed a complaint against Prime alleging that Prime breached the contract and
seeking, among other things, the earnest money now held in the escrow account
(included in restricted cash escrows at September 30, 1998). On October 30,
1998, Prime filed its answer to the above complaint and denied all material
allegations of the complaint. Prime also filed a counterclaim against the
sellers alleging that the sellers breached the contract and seeking the return
of the above mentioned earnest money and other damages. Although Prime intends
to vigorously defend this lawsuit and prosecute its counterclaim, the company is
unable to predict the outcome of this dispute.
On September 14, 1998, Prime established a program to repurchase up to 1,550,000
of its common shares in the open market and privately negotiated transactions.
As of September 30, 1998, Prime had repurchased 294,400 common shares for an
aggregate purchase price of approximately $4.0 million.
6. RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities , which is effective for all fiscal years beginning after
June 15, 1999. Statement No. 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or a liability measured at its fair value with the changes in
fair value recognized in earnings unless specific hedge accounting criteria are
met. Prime intends to adopt Statement No. 133 in 2000.
Prime has not yet quantified the impact of adopting Statement No. 133 on its
financial statements. However, Statement 133 could increase volatility in net
income and other comprehensive income.
-12-
<PAGE>
PRIME GROUP REALTY TRUST (THE COMPANY)
AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income
available per Prime's weighted-average common shares for the three months and
nine months ended September 30, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
-------------- --------------
<S> <C> <C>
NUMERATOR:
Net income available to common shares
before extraordinary item................ $ 2,837 $ 8,035
Extraordinary item......................... --- (525)
------------- --------------
Numerator for basic earnings per share-
income available to common shares........ $ 2,837 $ 7,510
============= ==============
DENOMINATOR:
Denominator for basic and diluted
earnings per share - weighted average
common shares............................ 15,535,023 14,771,655
============= ==============
Basic and diluted earnings available to
common shares per weighted average
common share:
Net income before extraordinary item.. $ 0.18 $ 0.54
Extraordinary item.................... --- (0.3)
------------- --------------
Net income per common share........... $ 0.18 $ 0.51
============= ==============
</TABLE>
Options to purchase 1,165,000 of Prime's common shares at a weighted average
exercise price of $20.05 per share outstanding during the three and nine months
ended September 30, 1998, were not included in the computation of diluted
earnings per share because the conversion would be antidilutive.
Prime had 10,298,175 common units outstanding at September 30, 1998 held by
minority interests, of which 9,067,210 may be converted into common shares after
one year from the completion of Prime's IPO at the option of the company. The
convertible common units were not included in the computation of diluted
earnings per share because the conversion would be antidilutive.
Prime had 2,000,000 Series A Convertible Preferred Shares outstanding during the
nine months ended September 30, 1998 which were not included in the computations
of diluted earnings per share because the conversion would be antidilutive.
8. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying unaudited pro forma condensed consolidated statements of
operations information of Prime is presented as if, at January 1, 1997, (i)
Prime had completed its IPO, the Series A Convertible Preferred Share private
placement, the Series B Cumulative Redeemable Preferred Share offering, the
common share private placement and the sale of common units to Primestone Joint
Venture and used the net proceeds to acquire preferred units and common units of
the Operating Partnership, (ii) PGI and other individuals had contributed
certain of their respective properties and operations to the Operating
-13-
<PAGE>
PRIME GROUP REALTY TRUST (THE COMPANY)
AND PREDECESSOR PROPERTIES (THE PREDECESSOR TO THE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
8. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
Partnership in exchange for common units of the Operating Partnership, (iii) the
Operating Partnership acquired various office and industrial properties, a
mortgage note receivable and a property management company from various third
parties with cash and debt proceeds, (iv) the Operating Partnership repaid debt
on certain of the contribution properties and (v) the Operating Partnership had
borrowed and repaid certain other debt. The unaudited pro forma condensed
consolidated statements of operations information should be read in conjunction
with unaudited pro forma condensed consolidated financial statements and all of
the historical financial statements contained in Form 10-K. In management's
opinion, all adjustments necessary to reflect the transactions described above
have been made.
The unaudited pro forma condensed consolidated statements of operations
information of Prime is not necessarily indicative of what the actual results of
operations would have been assuming the transactions described above had
occurred at the dates indicated above, nor do they purport to present the future
results of operations of the company.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Total revenue (in 000's) $ 119,379 $ 106,608
============= =============
Net income (in 000's) $ 15,132 $ 5,645
============= =============
Net income (loss) available to common
shareholders (in 000's) $ 6,282 $ (3,205)
============= =============
Earnings (loss) per common share $ 0.41 $ (0.21)
============= =============
</TABLE>
9. SUBSEQUENT EVENTS
On October 1, 1998, Prime entered into a non-recourse mortgage loan with a
financial institution with a principal balance of $170.0 million and a maturity
of October 1, 1999. The loan bears interest at LIBOR plus 1%, payable monthly
(interest only), is collateralized by a first mortgage on the 77 West Wacker
property and is subject to various agreement covenants. Proceeds from the loan
were used to repay borrowings under the Credit Facility and the Line of Credit
and provide working capital.
On October 1, 1998, the Credit Facility was amended to amend certain loan
covenant compliance provisions and to provide that the commitments under the
Credit Facility be reduced to $80.0 million and the 77 West Wacker property no
longer be included as collateral for the Credit Facility.
On October 21, 1998, Prime entered into three non-recourse mortgage loans with a
financial institution with total principal balances of $52.5 million. Two of the
loans bear interest at a fixed rate of 7.375% and have maturities of November
11, 2008. The two loans require monthly payments of principal and interest, are
collateralized by a first mortgages on the two office buildings and are subject
to various agreement covenants. The third loan bears interest at LIBOR plus 2.5%
and if the interest rate exceeds 9.23%, the company is required to obtain an
interest rate hedging instrument to lock the interest rate at 9.23%. The loan
matures November 11, 2001, with options to extend the maturity for two, one year
periods, requires monthly payments of principal and interest and is
collateralized by a mortgage note receivable held by the company. Prime is
subject to various agreement covenants and has provided a $10.0 million
guarantee to the note holder. Prime intends to use the proceeds to fund working
capital needs and make future acquisitions.
-14-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Prime is a fully-integrated real estate company providing property management,
leasing, marketing, acquisition, development, redevelopment, construction,
finance and other related services. Prime has filed as a REIT for federal income
tax purposes. As of September 30, 1998, Prime (through the Operating
Partnership) owns 24 office properties containing an aggregate of approximately
5.8 million net rentable square feet, 46 industrial properties containing an
aggregate of approximately 5.8 million net rentable square feet, one retail
center and one parking facility. The properties are located primarily in the
Chicago, Illinois metropolitan area. In addition, Prime owns a mortgage on an
office property containing 728,406 net rentable square feet. Prime also owns
approximately 225.5 acres (including a development site containing approximately
67,000 square feet located in the Chicago CBD held by a joint venture with a
third party) and has rights to acquire approximately 325.8 acres of developable
land (including rights to acquire two development sites located in the Chicago
CBD containing approximately 119,000 square feet), which management believes
could be developed with approximately 5.4 million square feet of additional
office space and over 7.6 million square feet of additional industrial space
primarily in the Chicago metropolitan area.
In terms of net rentable square feet, approximately 90.1% of the Prime's office
properties and 87.5% of the its industrial properties are located in the Chicago
metropolitan area in prime business locations within established business
communities. The properties located in the Chicago metropolitan area account for
approximately 95.6% of Prime's rental revenue and tenant reimbursement revenue
for the nine months ended September 30, 1998. Prime's remaining office
properties are located in Nashville, Tennessee; Knoxville, Tennessee; and the
Milwaukee, Wisconsin metropolitan areas, and the remaining industrial properties
are located in the Columbus, Ohio metropolitan area. Prime intends to continue
to invest in the acquisition, development and redevelopment of office and
industrial properties primarily located in the Chicago metropolitan area.
Prime intends to access multiple sources of capital to fund future acquisition
and development activities. These capital sources may include undistributed cash
flow, borrowings under certain acquisition facilities, proceeds from the
issuance of long-term, tax-exempt bonds, joint venture arrangements and other
debt or equity securities and other bank and/or institutional borrowings. There
can be no assurance that any such financing will be obtained.
CAUTIONARY STATEMENTS
The following discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect management's current view with respect to future events and financial
performance. Such forward-looking statements are subject to certain risks and
uncertainties, including, but not limited to, the effects of future events on
Prime's financial performance; the risk that Prime may be unable to finance its
planned acquisition and development activities; risks related to the industrial
and office industry in which Prime's properties compete, including the potential
adverse impact of external factors such as inflation, consumer confidence,
unemployment rates and consumer tastes and preferences; risks associated with
Prime's development activities, such as the potential for cost overruns, delays
and lack of predictability with respect to the financial returns associated with
these development activities; the risk of potential increase in market interest
rates from current rates; and risks associated with real estate ownership, such
as the potential adverse impact of changes in the local economic climate on the
revenues and the value of Prime's properties.
-15-
<PAGE>
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 1998 of the Company to the
Three Months Ended September 30, 1997 of the Predecessor Properties
- --------------------------------------------------------------------------------
In analyzing the operating results for the quarter ended September 30, 1998, the
changes in rental and reimbursable income, property operating expenses, real
estate taxes and depreciation and amortization from 1997 are due principally to
the addition of operating results from properties contributed and acquired as
part of Prime's IPO as well as properties acquired after its IPO through
September 30, 1998.
The Predecessor Properties consisted of five office properties, 17 industrial
properties, as well as a parking facility. At the time of Prime's IPO, 11
additional office properties, 28 additional industrial properties and one retail
center were contributed or acquired. After the date of its IPO and through
September 30, 1998, Prime acquired ten additional office properties and the
first mortgage note encumbering one office property as described in the
footnotes to Prime's Form 10-K.
For the three months ended September 30, 1998, rental revenue and tenant
reimbursements income increased $24.8 million, or 195.3%, to $37.5 million,
other revenue increased $2.1 million to $2.3 million, property operating
expenses and real estate tax expense increased $10.8 million, or 225.1%, to
$15.7 million, and depreciation and amortization expense increased $2.5 million,
or 62.3%, to $6.6 million as compared to the three months ended September 30,
1997. The primary reason for the increases in the above revenue and expense
categories was the acquisition of new office and industrial properties made
since Prime's IPO. The additional office and industrial properties resulted in
total rental revenue and tenant reimbursements income of $27.3 million, other
revenue of $2.1 million, property operating expenses and real estate tax expense
of $12.7 million and depreciation and amortization expense of $3.4 million for
the three months ended September 30, 1998. Included in the rental revenue
increase is a $1.7 million lease termination. Rental revenue and tenant
reimbursement income for the Predecessor Properties decreased $2.4 million for
the three months ended September 30, 1998 compared to the same period in 1997,
primarily due to a change in tenant reimbursements income as a result of lower
than anticipated real estate tax expense in the third quarter of 1998. Property
operating expenses and real estate tax expense for the Predecessor Properties
decreased $1.9 million for the three months ended September 30, 1998 compared to
the same period in 1997 primarily due to a change in anticipated real estate tax
expense in the third quarter of 1998. Depreciation and amortization expense for
the Predecessor Properties decreased $0.9 million for the three months ended
September 30, 1998 compared to the same period in 1997 primarily due to the
elimination of amortization of deferred financing costs associated with
Predecessor Properties' debt that was either repaid or forgiven at Prime's IPO.
Mortgage note interest income increased by $1.4 million to $1.4 million due to
the acquisition of the first mortgage note encumbering the property known as 180
North LaSalle in December 1997.
Interest expense had a net decrease of $2.2 million, or 22.8%, to $7.6 million
during the three months ended September 30, 1998. The decrease was due to a $6.7
million increase due to mortgages obtained on certain of the properties which
were contributed or acquired after the IPO, as well as Credit Facility and Line
of Credit borrowings used to fund property acquisitions, offset by a $8.9
million decrease as a result of the repayment of debt with proceeds from Prime's
IPO.
General and administrative expense increased $0.6 million during the three
months ended September 30, 1998, reflecting costs related to Prime's new public
status and its increased size.
The decrease in financing fees and property and asset management fees is due to
these fees being incurred by the Predecessor Properties under their previous
ownership and the costs are no longer incurred by Prime.
Income allocated to minority interest increased $4.0 million to $3.9 million for
the three months ended September 30, 1998 compared to the same period in 1997
due to an increase in income before minority interest of $17.2 million, or
228.8%, to $9.7 million and a change in the ownership structure. The increase in
income before minority interest is due to additional properties either being
contributed or acquired and the effects they had on revenue and expenses
described above. The change in ownership structure is due to certain ownership
percentages changing during the IPO.
-16-
<PAGE>
Net income increased $13.2 million, or 178.0%, to $5.8 million for the three
months ended September 30, 1998 compared to the same period in 1997 due to the
changes in revenue, expenses and minority interest described above.
Comparison of the Nine Months Ended September 30, 1998 of the Company to the
Nine Months Ended September 30, 1997 of the Predecessor Properties
- --------------------------------------------------------------------------------
In analyzing the operating results for the nine months ended September 30, 1998,
the changes in rental and reimbursable income, property operating expenses, real
estate taxes and depreciation and amortization from 1997 are due principally to
the addition of operating results from properties contributed and acquired as
part of Prime's IPO as well as properties acquired after its IPO through
September 30, 1998.
For the nine months ended September 30, 1998, rental revenue and tenant
reimbursements income increased $60.8 million, or 166.1%, to $97.4 million,
other revenue increased $4.2 million to $5.1 million, property operating
expenses and real estate tax expense increased $25.1 million, or 170.0%, to
$39.9 million, and depreciation and amortization expense increased $7.6 million,
or 72.1%, to $18.2 million as compared to the nine months ended September 30,
1997. The primary reason for the increases in the above revenue and expense
categories was the acquisition of new office and industrial properties made
since Prime's IPO. The additional office and industrial properties resulted in
total rental revenue and tenant reimbursements income of $63.1 million, other
revenue of $4.2 million, property operating expenses and real estate tax expense
of $27.0 million and depreciation and amortization expense of $8.8 million for
the nine months ended September 30, 1998. Rental revenue and tenant
reimbursement income for the Predecessor Properties decreased $2.3 million for
the nine months ended September 30, 1998 compared to the same period in 1997,
primarily due to a major tenant of the 77 West Wacker Drive building defaulting
on its lease in the second quarter of 1997 and a change in tenant reimbursements
income as a result of lower than anticipated real estate tax expense in the
third quarter of 1998. Property operating expenses and real estate tax expense
for the Predecessor Properties decreased $1.9 million for the nine months ended
September 30, 1998 compared to the same period in 1997 primarily due to a change
in anticipated real estate tax expense in the third quarter of 1998.
Depreciation and amortization expense for the Predecessor Properties decreased
$1.1 million for the nine months ended September 30, 1998 compared to the same
period in 1997 primarily due to the elimination of amortization of deferred
financing costs associated with Predecessor Properties' debt that was either
repaid or forgiven at Prime's IPO.
Mortgage note interest income increased by $4.4 million to $4.4 million due to
the acquisition of the first mortgage note encumbering the property known as 180
North LaSalle in December 1997.
Interest expense had a net decrease of $7.0 million, or 24.1%, to $22.1 million
during the nine months ended September 30, 1998. The decrease was due to a $19.5
million increase due to mortgages obtained on certain of the properties which
were contributed or acquired after the IPO, as well as Credit Facility and Line
of Credit borrowings used to fund property acquisitions, offset by a $26.5
million decrease as a result of the repayment of debt with proceeds from Prime's
IPO.
General and administrative expense increased $1.7 million during the nine months
ended September 30, 1998, reflecting costs related to Prime's new public status
and its increased size.
The decrease in financing fees and property and asset management fees is due to
these fees being incurred by the Predecessor Properties under their previous
ownership and the costs are no longer incurred by Prime.
In 1997, the Predecessor Properties recorded a provision for environmental
remediation costs of $3.2 million as an estimate of costs to be incurred for
environmental clean-up of certain properties. In management's opinion, no
additional provision is necessary.
Income allocated to minority interest increased $9.5 million to $9.1 million for
the nine months ended September 30, 1998 compared to the same period in 1997 due
to an increase in income before minority interest of $47.2 million, or 188.0%,
to $22.1 million and a change in the ownership structure. The increase in income
-17-
<PAGE>
before minority interest is due to additional properties being either
contributed or acquired and the effects they had on revenue and expenses
described above. The change in ownership structure is due to the certain
ownership percentages changing during Prime's IPO.
Net income increased $37.1 million, or 150.7%, to $12.5 million for the nine
months ended September 30, 1998 compared to the same period in 1997 due to the
changes in revenue, expenses and minority interest described above.
LIQUIDITY AND CAPITAL RESOURCES
THE CREDIT FACILITY. As of September 30, 1998, Prime has a Credit Facility
of $190.0 million from a group of financial institutions. Borrowings under the
Credit Facility are available to fund acquisitions and development activities
and to provide letters of credit for $26.0 million of tax-exempt bonds. The
Credit Facility, which matures on November 17, 2000, was collateralized by the
77 West Wacker Building and all of Prime's properties located in Tennessee and
was secured by a pledge of the Company's mortgage note receivable on Continental
Towers until May 15, 1998 when the Company repaid $70.0 million of the Credit
Facility in connection with obtaining the $75.0 million loan collateralized by
Continental Towers described below under "1998 Mortgage Notes". Concurrently
with the loan transaction, the Credit Facility was reduced from $200.0 million
to $190.0 million. On October 1, 1998, Prime repaid $123.0 million of the Credit
Facility in connection with obtaining a $170.0 million non-recourse mortgage
loan collateralized by a first mortgage on the 77 West Wacker Building described
below under "1998 Mortgage Notes". Concurrently with the loan transaction, the
Credit Facility was further amended to amend certain loan covenant compliance
provisions and provide that the commitments under the Credit Facility be reduced
to $80.0 million and the 77 West Wacker property no longer be included as
collateral for the Credit Facility.
The Credit Facility, at Prime's election, bears interest on Eurodollar loans at
a floating rate based on a spread over the Eurodollar rate equal to 120 to 150
basis points, depending upon the Company's applicable leverage ratio, or the
higher of the financial institution's prime rate or the federal funds rate plus
50 basis points. Notwithstanding the foregoing, the Credit Facility was amended
to provide that for the period from December 15, 1997 through February 14, 1998,
the spread over the Eurodollar rate applicable to Eurodollar loans was equal to
175 basis points and for the period from February 15, 1998 through May 15, 1998,
such spread was equal to 200 basis points. Borrowings under the Credit Facility
may be repaid at any time, without penalty, except for the costs related to the
breakage of the Eurodollar rate loan, if any. The Credit Facility requires
monthly payments of interest only on prime rate and Eurodollar rate loans.
Eurodollar rate loans may be for periods of between 30 and 180 days. At
September 30, 1998 borrowings under the Credit Facility bore interest at a
weighted-average rate equal to 7.25%.
Prime's ability to borrow under the Credit Facility is subject to the company's
ongoing compliance with a number of financial and other covenants. The Credit
Facility, except under certain circumstances, limits Prime's ability to make
distributions in excess of 90% of its annual funds from operations.
NEW MORTGAGE NOTES. Prime borrowed $83.5 million in aggregate principal
amount under the New Mortgage Notes. The New Mortgage Notes consist of two
separate notes secured, respectively, by first mortgages on certain office and
industrial properties. Prior to their refinancing, interest on the New Mortgage
Notes was fixed to 7.19% (a rate equal to seven-year U.S. Treasury Notes, plus
1.27%). On March 23, 1998, Prime refinanced one of the New Mortgage Notes (which
had an original principal balance of $27.5 million) with a loan of $29.4
million, which will mature on April 1, 2008. Interest on this loan accrues at a
rate of 6.85% and is payable monthly. The remaining New Mortgage Note (which had
an original principal balance of $56.0 million) was refinanced on May 1, 1998
with two loans, the first of which is a $47.0 million loan which has principal
and interest payable monthly, using a 30-year amortization period, with interest
fixed at 7.17% and will mature on May 1, 2008. The second loan is a $14.6
million loan which has interest only payable monthly at 150 basis points over
LIBOR or 0.50% plus the greater of (a) the lender's U.S. prime rate or (b) the
Federal Funds rate plus 1.0% and will mature on May 1, 2001, not including a
six-month extension option. The refinanced notes are collateralized by first
mortgages on certain office and industrial properties. As a result of the above
refinancing, Prime recognized an extraordinary item of $525,000, net of minority
interest of $375,000, representing the write-off of previously unamortized
deferred financing fees.
-18-
<PAGE>
LINE OF CREDIT. In January 1998, Prime obtained a $15.0 million revolving
line of credit with LaSalle National Bank. The Line of Credit, which matures in
January 1999 and is subject to a one-year extension at the Company's option, is
collateralized by an industrial property known as 475 Superior Avenue.
Outstanding balances under the Line of Credit bear interest at a rate equal to
LIBOR plus 195 basis points. Generally, the covenants contained in the Line of
Credit are identical to the covenants contained in the Credit Facility.
1998 MORTGAGE NOTES. During 1998, Prime has acquired five of its eight new
office properties with proceeds from property mortgage loans. The following is a
summary of those loans:
<TABLE>
<CAPTION>
INITIAL
PRINCIPAL INTEREST
PROPERTY (IN MILLIONS) RATE (%) MATURITY
- -------------------- --------------- --------------------------- --------
<S> <C> <C> <C>
33 North Dearborn $ 18.0 LIBOR plus 165 basis points 1/2000
Commerce Point 20.0 7.070 2/2008
208 South LaSalle 45.8 7.785 4/2008
2100 Swift Drive 5.2 7.190 5/2028
6400 Shafer Court 14.4 7.090 5/2028
--------------
$ 103.4
==============
</TABLE>
Except for the loan relating to 33 North Dearborn, all of the loans require
monthly payments of principal and interest. The 33 North Dearborn loan requires
monthly payments of interest only.
On May 15, 1998, Prime obtained a 7.22% note payable, collateralized by the
company's note receivable encumbering a suburban office building known as
Continental Towers, with a principal balance of $75.0 million. The note matures
in 2013, with a prepayment option in 2005, and has monthly payments of principal
and interest, using a 25-year principal amortization payment schedule. Prime
used $70.0 million of the proceeds to repay a portion of the Credit Facility.
On October 1, 1998, Prime entered into a non-recourse mortgage loan with a
financial institution with a principal balance of $170.0 million and a maturity
of October 1, 1999. The loan bears interest at LIBOR plus 1%, payable monthly
(interest only), is collateralized by a first mortgage on the 77 West Wacker
Building and is subject to various agreement covenants. Proceeds from the loan
were used to repay borrowings under the Credit Facility, the Line of Credit and
to provide working capital.
On October 21, 1998, Prime entered into three non-recourse mortgage loans with a
financial institution with total principal balances of $52.5 million. Two of the
loans bear interest at a fixed rate of 7.375% and have maturities of November
11, 2008. The two loans require monthly payments of principal and interest, are
collateralized by a first mortgages on the two office buildings and are subject
to various agreement covenants. The third loan bears interest at LIBOR plus 2.5%
and if the interest rate exceeds 9.23%, the company is required to obtain an
interest rate hedging instrument to lock the interest rate at 9.23%. The loan
matures on November 11, 2001 (with options to extend for up to two one year
periods), requires monthly payments of principal and interest and is
collateralized by a mortgage note receivable held by the company. Prime is
subject to various agreement covenants and has provided a $10.0 million
guarantee to the note holder. Prime intends to use the proceeds to fund working
capital needs and make future acquisitions.
INTEREST RATE PROTECTION AGREEMENTS. On August 21, 1998 and August 25,
1998, Prime entered into two Treasury Lock agreements with two financial
institutions to determine the interest rate on 10 year Treasury notes effective
on the date of the swap agreements. One of these agreements was entered into in
anticipation of a planned future securitization of a $170.0 million loan related
to the 77 West Wacker Drive property (see note 9). The other agreement was
entered into in anticipation of debt related to the acquisition of the IBM Plaza
and National City Center properties (see discussion below). One of the
agreements expires on December 21, 1998 and the other agreement expires on
February 18, 1999. Prime has made deposits as required by the agreements which
are included in other assets at September 30, 1998 and if the yield on the U.S.
ten-year Treasury note at settlement is less than the locked yield, the
calculated notional amount will be amortized over the term of the future debt
instruments as an adjustment to interest expense. Prime intends to consummate
debt transactions equal to the notional value of the agreements.
-19-
<PAGE>
Prime has made deposits as required by the agreements which are included in
other assets at September 30, 1998 and which will be amortized over the terms of
the future debt instruments as an adjustment to interest expense. The deposits
related to any unused swap agreements will be expensed if the agreements expire
unused and are not extended.
LETTERS OF CREDIT. Prime has refinanced $48.8 million of letters of credit
that provided credit enhancements on certain of the company's bonds payable from
the Credit Facility to the new letters of credit. The new letters of credit have
a annual fee of 1.4% of the face amount and are collateralized by mortgages on
certain industrial and office properties and a $5.0 million cash collateral
account.
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES. Prime expects to meet its
short-term liquidity requirements generally through its working capital and net
cash provided by operations. The properties require periodic investments of
capital for tenant-related capital expenditures and for general capital
improvements. Prime expects that the average annual cost of recurring tenant
improvements and leasing commissions will be approximately $3.6 million based on
an average annual square feet for which leases expire during the next three
years. Prime expects the cost of general capital improvements to the properties
to average approximately $0.9 million annually based upon an estimate of $0.08
per square foot.
Prime expects to meet its long-term liquidity requirements for the funding of
property development, property acquisitions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness (including the
Credit Facility), joint venture agreements and the issuance of additional equity
securities from the company. The terms of the Credit Facility, the Series A
Convertible Preferred Shares and the Series B Cumulative Redeemable Preferred
Shares impose restrictions on Prime's ability to incur indebtedness and issue
additional preferred shares.
HISTORICAL CASH FLOWS
In analyzing cash flows for the quarter ended September 30, 1998, the changes in
1997 are due principally to the addition of cash flows from properties
contributed and acquired as part of Prime's IPO as well as properties acquired
after its IPO through September 30, 1998.
Prime had net cash provided by (used in) operating activities of $53.7 million
and $ (10.0) million for the nine months ended September 30, 1998 and 1997,
respectively. The $63.7 million increase is primarily due to a $37.1 million
increase in net income, a $7.6 million increase in depreciation and amortization
expense, a $9.5 million increase in income allocated to minority interest, a
$2.8 million decrease in tenant receivables, a $1.6 million decrease in deferred
costs, a $1.0 million increase in accrued interest payable, a $2.3 million
increase in accounts payable and accrued expenses, a $14.2 million increase in
accrued real estate taxes, and a $4.4 million increase in other liabilities,
offset by a $9.0 million decrease in interest expense and fees added to
principal on mortgage note payable affiliate, a $1.3 million increase in
deferred rent receivables, and a $7.0 million increase in other assets.
Prime had net cash used in investing activities of $335.6 million and $ 1.5
million for the nine months ended September 30, 1998 and 1997, respectively. The
$334.1 million increase in net cash used in investing activities from the period
ended September 30, 1997 as compared to the period ended September 30, 1998 was
primarily due to an $277.7 million increase in expenditures for real estate and
equipment, principally related to the acquisition of eight office properties and
six land parcels, $46.6 million increase in escrow deposits, a $5.6 million net
increase in advances to affiliates, $2.1 million in additional advances to
mortgage note receivable and a $2.2 million increase in leasing costs.
Prime had net cash provided by financing activities of $278.1 million and $8.4
million for the nine months ended September 30, 1998 and 1997, respectively. The
$269.1 million increase in net cash provided by financing activities from the
period ended September 30, 1997 as compared to the period ended September 30,
1998 was due to net proceeds of $94.4 million from Prime's sale of its Series B
Cumulative Redeemable Preferred Shares during 1998, net proceed of 47.2 million
from Prime's sale common shares during 1998, net proceeds from the Credit
Facility and mortgage notes payable of $291.7 million and additional minority
interest contributions of $1.0 million, offset by financing costs of $19.5
million, repayments of the Credit Facility and mortgage notes payable of $108.9
and distributions to preferred shareholders, common shareholders and minority
interest of $23.7 million.
-20-
<PAGE>
FUNDS FROM OPERATIONS
Industry analysts generally consider funds from operations, as defined by the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), an
alternative measure of performance of an equity REIT. Funds from operations is
defined by NAREIT to mean net income (loss) determined in accordance with GAAP,
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization (other than amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustment for
unconsolidated partnerships and joint ventures. Prime believes that in order to
facilitate a clear understanding of the combined historical operating results of
the company, funds from operations should be examined in conjunction with net
income (loss) as presented in the unaudited financial statements included
elsewhere in this Form 10-Q. The following table represents the unaudited
calculation of Prime's funds from operations for the nine months ended September
30, 1998 (in thousands):
<TABLE>
<S> <C>
Net income allocated to common shareholders................. $ 7,510
Real estate depreciation and amortization............ 16,955
Amortization of costs for leases assumed............. 852
Straight-line rental revenue adjustments............. (1,053)
Minority interest.................................... 9,069
Extraordinary loss................................... 525
-------------
Funds from operations (1)................................... $ 33,858
=============
</TABLE>
(1) Prime computes funds from operations in accordance with standards
established by the Board of Governors of NAREIT in its March 1995 White
Paper (with the exception that the company reports rental revenues on a
cash basis (based on contractual lease terms), rather than a straight-line
GAAP basis, which Prime believes results in a more accurate presentation of
its actual operating activities), which may differ from the methodology for
calculating funds from operations used by certain other office and/or
industrial REITs and, accordingly, may not be comparable to such other
REITs. As a result of Prime's reporting rental revenues on a cash basis,
contractual rent increases will cause reported funds from operations to
increase. Further, funds from operations does not represent amounts
available for management's discretionary use because of needed capital
replacement or expansion, debt repayment obligations, or other commitments
and uncertainties. Funds from operations should not be considered as an
alternative to net income (loss), as an indication of Prime's performance
or to cash flows as a measure of liquidity or the ability to pay dividends
or make distributions.
READINESS FOR YEAR 2000
Prime is currently evaluating the nature and extent of the work required to make
its systems and infrastructure Year 2000 compliant. Based on a recent
assessment, Prime will have to modify or replace significant portions of its
hardware and software so that its systems will function properly with respect to
the Year 2000 and beyond. Certain of these systems are currently in the process
of being modified and/or replaced. Prime believes that with modifications to
certain existing software and conversions to new software applications, in
addition to hardware upgrades on certain mechanical systems, the Year 2000 issue
will not pose significant operational problems. However, if such modifications
and conversions are not made, or are not completed in a timely manner, the Year
2000 issue could have a material impact on Prime's operations.
-21-
<PAGE>
Prime's plan to resolve the Year 2000 issues involves three phases: assessment,
remediation and implementation. To date, Prime has completed 75% of the
assessment phase and 25% of the remediation phase. Prime expects to complete the
remainder of the assessment and remediation phases by early to mid 1999 and
complete the implementation phase by mid 1999. Prime will utilize both internal
and external resources in order to upgradw and remediate, or replace, systems
that are not in compliance with the Year 2000. Prime has estimated the total
cost for its Year 2000 project to be $2.5 million. Of the total project cost,
Prime estimates approximately $2.0 million is attributable to the purchase and
implementation of new software and equipment which will be capitalized and the
remainder relates to the assessment, modifications to existing hardware and
software, and training which will be expensed as incurred.
Prime currently has no contingency plans in place in the event it does not
complete all phases of the Year 2000 program. Prime plans to evaluate the status
of completion in early 1999 and determine whether such a plan is necessary.
Prime is in the process of querying its significant vendors and tenants about
their Year 2000 compliance status. To date, Prime is not aware of any vendors or
tenants with a year 2000 issue that would have a material impact on the
company's results of operations, liquidity or capital resources. However, Prime
has no means of ensuring that its vendors or tenants will be Year 2000 ready.
The inability of these vendors and tenants to complete their Year 2000
resolution process in a timely fashion could materially impact the company. The
effect of non-compliance by significant vendors and tenants is not determinable.
Prime will continue to monitor its significant vendors' and tenants' compliance.
Prime's management believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. The project completion date is based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the ability of third parties to modify Prime's
systems on a timely basis. There can be no guarantee that the project will be
completed in a timely manner. Specific factors that might delay completion of
the project include, but are not limited to, the availability of qualified
personnel, the ability to locate and correct relevant computer codes, the
complexity of implementation of new hardware and software, hardware/software
availability and similar uncertainties.
INFLATION
Prime's leases with the majority of its tenants require the tenants to pay most
operating expenses, including real estate taxes and insurance, and increases in
common area maintenance expenses, which reduce the company's exposure to
increases in costs and operating expenses resulting from inflation. As of
September 30, 1998, approximately $259.3 million in principal amount of Prime's
indebtedness bore interest at floating rates and future indebtedness may bear
floating rate interest. Inflation, and its impact on floating interest rates,
could affect the amount of interest payments due on such indebtedness.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-22-
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings.
Except as discussed in the following paragraph, neither Prime nor any our
properties is subject to any material litigation, nor to Prime's knowledge, is
any material litigation threatened against any them, other than routine
litigation arising in the ordinary course of business, much of which is expected
to be covered by liability insurance. Prime has sued various parties in
connection with environmental remediation at certain of its industrial
properties.
On July 22, 1998, Prime entered into a purchase agreement to acquire two office
buildings (IBM Plaza and National City Center) for an aggregate purchase price
of approximately $357.0 million. On September 15, 1998, Prime terminated the
purchase agreement in accordance with the terms of the agreement, because the
sellers were unable to satisfy a material condition precedent to the closing of
these acquisitions. On September 21, 1998, the sellers notified Prime in writing
that they believed they were entitled to the $20.0 million earnest money
provided for by the agreement, and instructed the earnest money escrow agent to
draw an aggregate of $20.0 million under two earnest money letters of credit
provided by Prime under the terms of the purchase agreement. In accordance with
such instructions, the earnest money escrow agent drew down the earnest money
letters of credit and deposited the funds in an escrow account. Pursuant to the
terms of the purchase agreement, such earnest money funds will remain deposited
in the escrow account until the escrow agent receives a joint disbursement
direction from Prime and the sellers or until a court of competent jurisdiction
directs the disbursement of the escrow funds in a final order. The escrow
agent's draw in the earnest money letters of credit, which were issued under the
Credit Facility, increased Prime's outstanding indebtedness under the Credit
Facility by such earnest money funds. Prime believes that the sellers are not
entitled to the earnest money and intends to vigorously pursue available
remedies to obtain a return of the earnest money deposited in the escrow
account. On September 21, 1998, the sellers filed a complaint against Prime
alleging that Prime breached the contract and seeking, among other things, the
earnest money now held in the escrow account (which amount is included in
restricted cash escrow at September 30, 1998). On October 30, 1998, Prime filed
its answer to the above complaint and denied all material allegations of the
complaint. Prime also filed a counterclaim against the sellers alleging that the
sellers breached the contract and seeking the return of the above mentioned
earnest money and other damages. Although Prime intends to vigorously defend
this lawsuit and prosecute its counterclaim, the company is unable to predict
the outcome of this dispute.
ITEM 2. Changes in Securities and Use of Proceeds.
On September 14, 1998, Prime established a program to repurchase up to 1,550,000
of its common shares in the open market and privately negotiated transactions.
As of September 30, 1998, Prime had repurchased 259,400 of its common shares for
an aggregate purchase price of approximately $4.0 million.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
-23-
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------
3.1 Amendment No. 11 to the Amended and Restated Agreement of
Limited Partnership dated as of July 15, 1998
3.2 Amendment No. 12 to the Amended and Restated Agreement of Limited
Partnership dated as of August 15, 1998
3.3 Amendment No. 13 to the Amended and Restated Agreement of Limited
Partnership dated as of September 15, 1998
12.1 Computation of Ratios of Earnings to Fixed Charges and Preferred
Share Distributions
27.1 Financial Data Schedule
- ---------------
(b) Reports on Form 8-K:
None.
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIME GROUP REALTY TRUST
------------------------
Registrant
Date: November 16, 1998 /s/ Richard S. Curto
-------------------------------- ---------------------
Richard S. Curto
President and Chief Executive Officer
Date: November 16, 1998 /s/ William M. Karnes
-------------------------------- ----------------------
William M. Karnes
Executive Vice President and
Chief Financial Officer
-25-
AMENDMENT NO. 11 TO AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF PRIME GROUP REALTY, L.P.
This AMENDMENT NO. 11 TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF PRIME GROUP REALTY, L.P. (this "Amendment") is made as of July
15, 1998 by Prime Group Realty Trust, a Maryland real estate investment trust
("PGRT"), as the Managing General Partner of Prime Group Realty, L.P., a
Delaware limited partnership (the "Partnership"), and on behalf of the other
Partners (as hereinafter defined). Capitalized terms used but not otherwise
defined herein shall have the meanings given to such terms in the Amended and
Restated Agreement of Limited Partnership of the Partnership, dated as of
November 17, 1997, by and among PGRT and the other parties signatory thereto, as
amended thereafter (as so amended, the "Limited Partnership Agreement").
W I T N E S S E T H:
WHEREAS, pursuant to Section 4.3.C. of the Limited Partnership Agreement,
the Managing General Partner may raise all or any portion of Additional Funds
required by the Partnership for the acquisition of additional properties by
accepting additional Capital Contributions, including the issuance of Common
Units for Capital Contributions that consist of property or interests in
property;
WHEREAS, pursuant to that certain Exchange Agreement dated as of December
15, 1997 by and between H Group LLC, a Delaware limited liability company
("HG"), and the Partnership (the "Exchange Agreement"), HG agreed, among other
things, to grant to the Partnership an option (the "First Option") to exchange
the Underlying Option (as defined in the Exchange Agreement) for 220,000 Common
Units of Limited Partner Interest (subject to adjustment pursuant to the terms
of the Exchange Agreement), which grant of the First Option contemplated the
transfer by the Partnership to HG of 5,000 Common Units of Limited Partner
Interest on the date thereof and, subject to the terms of the First Option,
5,000 Common Units of Limited Partner Interest (subject to adjustment pursuant
to the terms of the Exchange Agreement) on the 15th day of each month thereafter
(each such transfer a "First Option Maintenance Transfer") for such number of
months set forth in the Exchange Agreement;
WHEREAS, the Partnership has agreed to the terms of the grant by HG of the
First Option set forth in the Exchange Agreement and desires to effect the First
Option Maintenance Transfer due on July 15, 1998;
WHEREAS, HG was admitted to the Partnership as an Additional Limited
Partner as of December 15, 1997 pursuant to Amendment No. 2 to the Limited
Partnership Agreement;
WHEREAS, the Partners desire to amend the Limited Partnership Agreement to
reflect the increase in outstanding Common Units resulting from the issuance of
Common Units to HG in connection with the First Option Maintenance Transfer due
on July 15, 1998; and
WHEREAS, Sections 2.4 and 12.3 of the Limited Partnership Agreement
authorize, among other things, the Managing General Partner, as true and lawful
agent and attorney-in fact, to execute, swear to, acknowledge, deliver, file and
record this Amendment on behalf of each Partner that has executed the Limited
Partnership Agreement and on behalf of the Partnership.
-1-
<PAGE>
NOW, THEREFORE, for good and adequate consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. ACCEPTANCE OF CAPITAL CONTRIBUTION IN EXCHANGE FOR COMMON UNITS.
(a) PGRT, as Managing General Partner and on behalf of the Partnership, hereby
accepts the grant of the rights consisting of the First Option during the eighth
month of the term of the First Option from HG as a Capital Contribution having a
value on the date hereof of $100,000, in exchange for 5,465 Common Units of
Limited Partner Interest which are hereby issued by the Partnership to HG
pursuant to Section 4.3.C. of the Limited Partnership Agreement, and which are
evidenced by Common Unit Certificate No. 31 of the Partnership.
(b) Each of the Common Units of Limited Partner Interest issued to HG
pursuant to this SECTION 1 shall have the same terms and provisions of the
Common Units of Limited Partner Interest issued by the Partnership on November
17, 1997 except that (i) the Exchange Rights relating thereto may be exercised
at any time after December 15, 1998 (as opposed to November 17, 1998) and (ii)
such Common Units of Limited Partner Interest will be subject to the
Registration Rights Agreement dated as of December 15, 1997 by and among PGRT,
the Partnership and HG as opposed to the Registration Rights Agreement entered
into by PGRT and the Partnership on November 17, 1997.
SECTION 2. AMENDMENT OF EXHIBIT A TO THE LIMITED PARTNERSHIP AGREEMENT.
Exhibit A to the Limited Partnership Agreement is hereby amended and restated to
reflect the aforementioned change(s) by deleting Exhibit A attached thereto in
its entirety, and by attaching in lieu thereof a replacement exhibit in the form
of EXHIBIT A attached hereto. From and after the effectiveness of this
Amendment, the amended and restated EXHIBIT A attached hereto shall be the only
Exhibit A to the Limited Partnership Agreement, unless and until it is hereafter
further amended.
SECTION 3. REFERENCE TO AND EFFECT ON THE LIMITED PARTNERSHIP AGREEMENT.
A. The Limited Partnership Agreement is hereby deemed to be amended to
the extent necessary to effect the matters contemplated by this Amendment.
Except as specifically provided for hereinabove, the provisions of the Limited
Partnership Agreement shall remain in full force and effect.
B. The execution, delivery and effectiveness of this Amendment shall
not operate (i) as a waiver of any provision, right or obligation of the
Managing General Partner, the other General Partner or any Limited Partner under
the Limited Partnership Agreement except as specifically set forth herein or
(ii) as a waiver or consent to any subsequent action or transaction.
SECTION 4. APPLICABLE LAW. This Amendment shall be construed in
accordance with and governed by the laws of the State of Delaware, without
regard to the principles of conflicts of law.
-2-
[signature page follows]
<PAGE>
AMENDMENT NO. 11 TO AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF PRIME
GROUP REALTY, L.P.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
MANAGING GENERAL PARTNER:
-------------------------
PRIME GROUP REALTY TRUST, a
Maryland real estate investment trust
By: /s/ Jeffrey A. Patterson
--------------------------------------
Name: Jeffrey A. Patterson
Title: Executive Vice President
LIMITED PARTNERS:
-----------------
Each Limited Partner hereby executes
this Amendment to the Limited
Partnership Agreement.
By: PRIME GROUP REALTY TRUST, a
Maryland real estate investment
trust, as attorney-in fact
By: /s/ Jeffrey A. Patterson
---------------------------------
Name: Jeffrey A. Patterson
Title: Executive Vice President
-3-
<PAGE>
EXHIBIT A*/
-
PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital
Managing General Partner Common Units Contribution
- ------------------------ ------------ ------------
Prime Group Realty Trust 15,572,494 **/
77 West Wacker Drive --
Suite 3900
Chicago, IL 60601
Attn: Richard S. Curto
James F. Hoffman
General Partner
- ---------------
The Nardi Group, L.L.C 927,100 $18,542,000
c/o Stephen J. Nardi
4100 Madison Street
Hillside, IL 60162
Limited Partners
- ----------------
Edward S. Hadesman 388,677 $7,773,540
Trust Dated May 22, 1992
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Grandville/Northwestern 9,750 $195,000
Management Corporation
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Carolyn B. Hadesman 54,544 $1,090,880
Trust Dated May 21, 1992
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
- --------
*/ As amended by Amendment No. 11 to the Amended and Restated Agreement of
- - Limited Partnership of Prime Group Realty, L.P.
**/ This amount shall be inserted by the Managing General Partner.
- --
<PAGE>
EXHIBIT A - CONT'D
PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital
Limited Partners (Cont'd) Common Units Contribution
- ------------------------- ------------ ------------
Lisa Hadesman 1991 Trust 169,053 $3,381,060
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Cynthia Hadesman 1991 Trust 169,053 $3,381,060
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Tucker B. Magid 33,085 $661,700
545 Ridge Road
Highland Park, IL 60035
Frances S. Shubert 28,805 $576,100
511 Lynn Terrace
Waukegan, IL 60085
Grandville Road Property, Inc. 7,201 $144,020
c/o Ms. Frances S. Shubert
511 Lynn Terrace
Waukegan, IL 60085
Sky Harbor Associates 62,149 $1,242,980
c/o Howard I. Bernstein
6541 North Kilbourn
Lincolnwood, IL 60646
Jeffrey A. Patterson 110,000 $2,200,000
c/o Prime Group Realty Trust
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Primestone Investment Partners, L.P. 7,944,893 **/
c/o The Prime Group, Inc. --
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Attn: Paul A. Roehri
- --------
**/ This amount shall be inserted by the Managing General Partner.
- --
<PAGE>
EXHIBIT A - CONT'D
PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital
Limited Partners (Cont'd) Common Units Contribution
- ------------------------- ------------ ------------
Prime Group Limited Partnership 47,525 $950,500
c/o The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Attn: Michael W. Reshcke
Robert J. Rudnik
H Group LLC 292,037 $5,700,000
c/o Heitman Financial Ltd.
180 N. LaSalle
Suite 3600
Chicago, IL 60601
Attn: Norman Perlmutter
Ray R. Grinvalds 5,216 $104,320
217 Deer Valley Drive
Barrington, IL 60010
Warren H. John 37,259 $745,180
1730 N. Clark Street
Chicago, IL 60614
<PAGE>
EXHIBIT A - CONT'D
PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital
Managing General Partner Preferred Units Contribution
- ------------------------ --------------- ------------
Prime Group Realty Trust 2,000,000 **/
77 West Wacker Drive Convertible Preferred --
Suite 3900 Units
Chicago, IL 60601
Attn: Richard S. Curto
James F. Hoffman
Prime Group Realty Trust 4,000,000 **/
77 West Wacker Drive Series B Preferred Units --
Suite 3900
Chicago, IL 60601
Attn: Richard S. Curto
James F. Hoffman
- --------
**/ This amount shall be inserted by the Managing General Partner.
- --
AMENDMENT NO. 12 TO AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF PRIME GROUP REALTY, L.P.
This AMENDMENT NO. 12 TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF PRIME GROUP REALTY, L.P. (this "Amendment") is made as of August
14, 1998 by Prime Group Realty Trust, a Maryland real estate investment trust
("PGRT"), as the Managing General Partner of Prime Group Realty, L.P., a
Delaware limited partnership (the "Partnership"), and on behalf of the other
Partners (as hereinafter defined). Capitalized terms used but not otherwise
defined herein shall have the meanings given to such terms in the Amended and
Restated Agreement of Limited Partnership of the Partnership, dated as of
November 17, 1997, by and among PGRT and the other parties signatory thereto, as
amended thereafter (as so amended, the "Limited Partnership Agreement").
W I T N E S S E T H:
WHEREAS, pursuant to Section 4.3.C. of the Limited Partnership Agreement,
the Managing General Partner may raise all or any portion of Additional Funds
required by the Partnership for the acquisition of additional properties by
accepting additional Capital Contributions, including the issuance of Common
Units for Capital Contributions that consist of property or interests in
property;
WHEREAS, pursuant to that certain Exchange Agreement dated as of December
15, 1997 by and between H Group LLC, a Delaware limited liability company
("HG"), and the Partnership (the "Exchange Agreement"), HG agreed, among other
things, to grant to the Partnership an option (the "First Option") to exchange
the Underlying Option (as defined in the Exchange Agreement) for 220,000 Common
Units of Limited Partner Interest (subject to adjustment pursuant to the terms
of the Exchange Agreement), which grant of the First Option contemplated the
transfer by the Partnership to HG of 5,000 Common Units of Limited Partner
Interest on the date thereof and, subject to the terms of the First Option,
5,000 Common Units of Limited Partner Interest (subject to adjustment pursuant
to the terms of the Exchange Agreement) on the 15th day of each month thereafter
(each such transfer a "First Option Maintenance Transfer") for such number of
months set forth in the Exchange Agreement;
WHEREAS, the Partnership has agreed to the terms of the grant by HG of the
First Option set forth in the Exchange Agreement and desires to effect the First
Option Maintenance Transfer due on August 14, 1998;
WHEREAS, HG was admitted to the Partnership as an Additional Limited
Partner as of December 15, 1997 pursuant to Amendment No. 2 to the Limited
Partnership Agreement;
WHEREAS, the Partners desire to amend the Limited Partnership Agreement to
reflect the increase in outstanding Common Units resulting from the issuance of
Common Units to HG in connection with the First Option Maintenance Transfer due
on August 14, 1998; and
WHEREAS, Sections 2.4 and 12.3 of the Limited Partnership Agreement
authorize, among other things, the Managing General Partner, as true and lawful
agent and attorney-in fact, to execute, swear to, acknowledge, deliver, file and
record this Amendment on behalf of each Partner that has executed the Limited
Partnership Agreement and on behalf of the Partnership.
-1-
<PAGE>
NOW, THEREFORE, for good and adequate consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. ACCEPTANCE OF CAPITAL CONTRIBUTION IN EXCHANGE FOR COMMON UNITS.
(a) PGRT, as Managing General Partner and on behalf of the Partnership, hereby
accepts the grant of the rights consisting of the First Option during the ninth
month of the term of the First Option from HG as a Capital Contribution having a
value on the date hereof of $100,000, in exchange for 5,429 Common Units of
Limited Partner Interest which are hereby issued by the Partnership to HG
pursuant to Section 4.3.C. of the Limited Partnership Agreement, and which are
evidenced by Common Unit Certificate No. 32 of the Partnership.
(b) Each of the Common Units of Limited Partner Interest issued to HG
pursuant to this SECTION 1 shall have the same terms and provisions of the
Common Units of Limited Partner Interest issued by the Partnership on November
17, 1997 except that (i) the Exchange Rights relating thereto may be exercised
at any time after December 15, 1998 (as opposed to November 17, 1998) and (ii)
such Common Units of Limited Partner Interest will be subject to the
Registration Rights Agreement dated as of December 15, 1997 by and among PGRT,
the Partnership and HG as opposed to the Registration Rights Agreement entered
into by PGRT and the Partnership on November 17, 1997.
SECTION 2. AMENDMENT OF EXHIBIT A TO THE LIMITED PARTNERSHIP AGREEMENT.
Exhibit A to the Limited Partnership Agreement is hereby amended and restated to
reflect the aforementioned change(s) by deleting Exhibit A attached thereto in
its entirety, and by attaching in lieu thereof a replacement exhibit in the form
of EXHIBIT A attached hereto. From and after the effectiveness of this
Amendment, the amended and restated Exhibit A attached hereto shall be the only
EXHIBIT A to the Limited Partnership Agreement, unless and until it is hereafter
further amended.
SECTION 3. REFERENCE TO AND EFFECT ON THE LIMITED PARTNERSHIP AGREEMENT.
A. The Limited Partnership Agreement is hereby deemed to be amended to
the extent necessary to effect the matters contemplated by this Amendment.
Except as specifically provided for hereinabove, the provisions of the Limited
Partnership Agreement shall remain in full force and effect.
B. The execution, delivery and effectiveness of this Amendment shall
not operate (i) as a waiver of any provision, right or obligation of the
Managing General Partner, the other General Partner or any Limited Partner under
the Limited Partnership Agreement except as specifically set forth herein or
(ii) as a waiver or consent to any subsequent action or transaction.
SECTION 4. APPLICABLE LAW. This Amendment shall be construed in accordance
with and governed by the laws of the State of Delaware, without regard to the
principles of conflicts of law.
[signature page follows]
-2-
<PAGE>
AMENDMENT NO. 12 TO AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF PRIME
GROUP REALTY, L.P.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
MANAGING GENERAL PARTNER:
-------------------------
PRIME GROUP REALTY TRUST, a
Maryland real estate investment trust
By: /s/ W. Michael Karnes
-------------------------------------
Name: W. Michael Karnes
Title: Executive Vice President
LIMITED PARTNERS:
-----------------
Each Limited Partner hereby executes
this Amendment to the Limited
Partnership Agreement.
By: PRIME GROUP REALTY TRUST, a
Maryland real estate investment
trust, as attorney-in fact
By: /s/ W. Michael Karnes
---------------------------------
Name: W. Michael Karnes
Title: Executive Vice President
-3-
<PAGE>
EXHIBIT A*/
-
PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital
Managing General Partner Common Units Contribution
- ------------------------ ------------ ------------
Prime Group Realty Trust 15,584,994 **/
77 West Wacker Drive --
Suite 3900
Chicago, IL 60601
Attn: Richard S. Curto
James F. Hoffman
General Partner
- ---------------
The Nardi Group, L.L.C 927,100 $18,542,000
c/o Stephen J. Nardi
4100 Madison Street
Hillside, IL 60162
Limited Partners
- ----------------
Edward S. Hadesman 388,677 $7,773,540
Trust Dated May 22, 1992
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Grandville/Northwestern 9,750 $195,000
Management Corporation
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Carolyn B. Hadesman 54,544 $1,090,880
Trust Dated May 21, 1992
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
- --------
*/ As amended by Amendment No. 12 to the Amended and Restated Agreement of
- - Limited Partnership of Prime Group Realty, L.P.
**/ This amount shall be inserted by the Managing General Partner.
- --
<PAGE>
EXHIBIT A - CONT'D
PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital
Limited Partners (Cont'd) Common Units Contribution
- ------------------------- ------------ ------------
Lisa Hadesman 1991 Trust 169,053 $3,381,060
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Cynthia Hadesman 1991 Trust 169,053 $3,381,060
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Tucker B. Magid 33,085 $661,700
545 Ridge Road
Highland Park, IL 60035
Frances S. Shubert 28,805 $576,100
511 Lynn Terrace
Waukegan, IL 60085
Grandville Road Property, Inc. 7,201 $144,020
c/o Ms. Frances S. Shubert
511 Lynn Terrace
Waukegan, IL 60085
Sky Harbor Associates 62,149 $1,242,980
c/o Howard I. Bernstein
6541 North Kilbourn
Lincolnwood, IL 60646
Jeffrey A. Patterson 110,000 $2,200,000
c/o Prime Group Realty Trust
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Primestone Investment Partners, L.P. 7,944,893 **/
c/o The Prime Group, Inc. --
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Attn: Paul A. Roehri
- --------
**/ This amount shall be inserted by the Managing General Partner.
- --
<PAGE>
EXHIBIT A - CONT'D
PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital
Limited Partners (Cont'd) Common Units Contribution
- ------------------------- ------------ ------------
Prime Group Limited Partnership 47,525 $950,500
c/o The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Attn: Michael W. Reshcke
Robert J. Rudnik
H Group LLC 297,466 $5,800,000
c/o Heitman Financial Ltd.
180 N. LaSalle
Suite 3600
Chicago, IL 60601
Attn: Norman Perlmutter
Ray R. Grinvalds 5,216 $104,320
217 Deer Valley Drive
Barrington, IL 60010
Warren H. John 37,259 $745,180
1730 N. Clark Street
Chicago, IL 60614
<PAGE>
EXHIBIT A - CONT'D
PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital
Managing General Partner Preferred Units Contribution
- ------------------------ --------------- ------------
Prime Group Realty Trust 2,000,000 **/
77 West Wacker Drive Convertible Preferred --
Suite 3900 Units
Chicago, IL 60601
Attn: Richard S. Curto
James F. Hoffman
Prime Group Realty Trust 4,000,000 **/
77 West Wacker Drive Series B Preferred Units --
Suite 3900
Chicago, IL 60601
Attn: Richard S. Curto
James F. Hoffman
- --------
**/ This amount shall be inserted by the Managing General Partner.
- --
AMENDMENT NO. 13 TO AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF PRIME GROUP REALTY, L.P.
This AMENDMENT NO. 13 TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF PRIME GROUP REALTY, L.P. (this "Amendment") is made as of
September 15, 1998 by Prime Group Realty Trust, a Maryland real estate
investment trust ("PGRT"), as the Managing General Partner of Prime Group
Realty, L.P., a Delaware limited partnership (the "Partnership"), and on behalf
of the other Partners (as hereinafter defined). Capitalized terms used but not
otherwise defined herein shall have the meanings given to such terms in the
Amended and Restated Agreement of Limited Partnership of the Partnership, dated
as of November 17, 1997, by and among PGRT and the other parties signatory
thereto, as amended thereafter (as so amended, the "Limited Partnership
Agreement").
W I T N E S S E T H:
WHEREAS, pursuant to Section 4.3.C. of the Limited Partnership Agreement,
the Managing General Partner may raise all or any portion of Additional Funds
required by the Partnership for the acquisition of additional properties by
accepting additional Capital Contributions, including the issuance of Common
Units for Capital Contributions that consist of property or interests in
property;
WHEREAS, pursuant to that certain Exchange Agreement dated as of December
15, 1997 by and between H Group LLC, a Delaware limited liability company
("HG"), and the Partnership (the "Exchange Agreement"), HG agreed, among other
things, to grant to the Partnership an option (the "First Option") to exchange
the Underlying Option (as defined in the Exchange Agreement) for 220,000 Common
Units of Limited Partner Interest (subject to adjustment pursuant to the terms
of the Exchange Agreement), which grant of the First Option contemplated the
transfer by the Partnership to HG of 5,000 Common Units of Limited Partner
Interest on the date thereof and, subject to the terms of the First Option,
5,000 Common Units of Limited Partner Interest (subject to adjustment pursuant
to the terms of the Exchange Agreement) on the 15th day of each month thereafter
(each such transfer a "First Option Maintenance Transfer") for such number of
months set forth in the Exchange Agreement;
WHEREAS, the Partnership has agreed to the terms of the grant by HG of the
First Option set forth in the Exchange Agreement and desires to effect the First
Option Maintenance Transfer due on September 15, 1998;
WHEREAS, HG was admitted to the Partnership as an Additional Limited
Partner as of December 15, 1997 pursuant to Amendment No. 2 to the Limited
Partnership Agreement;
WHEREAS, the Partners desire to amend the Limited Partnership Agreement to
reflect the increase in outstanding Common Units resulting from the issuance of
Common Units to HG in connection with the First Option Maintenance Transfer due
on September 15, 1998; and
WHEREAS, Sections 2.4 and 12.3 of the Limited Partnership Agreement
authorize, among other things, the Managing General Partner, as true and lawful
agent and attorney-in fact, to execute, swear to, acknowledge, deliver, file and
record this Amendment on behalf of each Partner that has executed the Limited
Partnership Agreement and on behalf of the Partnership.
-1-
<PAGE>
NOW, THEREFORE, for good and adequate consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. ACCEPTANCE OF CAPITAL CONTRIBUTION IN EXCHANGE FOR COMMON UNITS.
(a) PGRT, as Managing General Partner and on behalf of the Partnership, hereby
accepts the grant of the rights consisting of the First Option during the tenth
month of the term of the First Option from HG as a Capital Contribution having a
value on the date hereof of $100,000, in exchange for 6,399 Common Units of
Limited Partner Interest which are hereby issued by the Partnership to HG
pursuant to Section 4.3.C. of the Limited Partnership Agreement, and which are
evidenced by Common Unit Certificate No. 32 of the Partnership.
(b) Each of the Common Units of Limited Partner Interest issued to HG
pursuant to this SECTION 1 shall have the same terms and provisions of the
Common Units of Limited Partner Interest issued by the Partnership on November
17, 1997 except that (i) the Exchange Rights relating thereto may be exercised
at any time after December 15, 1998 (as opposed to November 17, 1998) and (ii)
such Common Units of Limited Partner Interest will be subject to the
Registration Rights Agreement dated as of December 15, 1997 by and among PGRT,
the Partnership and HG as opposed to the Registration Rights Agreement entered
into by PGRT and the Partnership on November 17, 1997.
SECTION 2. AMENDMENT OF EXHIBIT A TO THE LIMITED PARTNERSHIP AGREEMENT.
Exhibit A to the Limited Partnership Agreement is hereby amended and restated to
reflect the aforementioned change(s) by deleting Exhibit A attached thereto in
its entirety, and by attaching in lieu thereof a replacement exhibit in the form
of Exhibit A attached hereto. From and after the effectiveness of this
Amendment, the amended and restated Exhibit A attached hereto shall be the only
Exhibit A to the Limited Partnership Agreement, unless and until it is hereafter
further amended.
SECTION 3. REFERENCE TO AND EFFECT ON THE LIMITED PARTNERSHIP AGREEMENT.
A. The Limited Partnership Agreement is hereby deemed to be amended to
the extent necessary to effect the matters contemplated by this Amendment.
Except as specifically provided for hereinabove, the provisions of the Limited
Partnership Agreement shall remain in full force and effect.
B. The execution, delivery and effectiveness of this Amendment shall
not operate (i) as a waiver of any provision, right or obligation of the
Managing General Partner, the other General Partner or any Limited Partner under
the Limited Partnership Agreement except as specifically set forth herein or
(ii) as a waiver or consent to any subsequent action or transaction.
SECTION 4. APPLICABLE LAW. This Amendment shall be construed in accordance
with and governed by the laws of the State of Delaware, without regard to the
principles of conflicts of law.
[signature page follows]
-2-
<PAGE>
AMENDMENT NO. 13 TO AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF PRIME
GROUP REALTY, L.P.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
MANAGING GENERAL PARTNER:
-------------------------
PRIME GROUP REALTY TRUST, a
Maryland real estate investment trust
By: /s/ Jeffrey A. Patterson
-------------------------------------
Name: Jeffrey A. Patterson
Title: Executive Vice President
LIMITED PARTNERS:
-----------------
Each Limited Partner hereby executes
this Amendment to the Limited
Partnership Agreement.
By: PRIME GROUP REALTY TRUST, a
Maryland real estate investment
trust, as attorney-in fact
By: /s/ Jeffrey A. Patterson
--------------------------------
Name: Jeffrey A. Patterson
Title: Executive Vice President
-3-
<PAGE>
EXHIBIT A*/
-
PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital
Managing General Partner Common Units Contribution
- ------------------------ ------------ ------------
Prime Group Realty Trust 15,584,994 **/
77 West Wacker Drive --
Suite 3900
Chicago, IL 60601
Attn: Richard S. Curto
James F. Hoffman
General Partner
- ---------------
The Nardi Group, L.L.C 927,100 $18,542,000
c/o Stephen J. Nardi
4100 Madison Street
Hillside, IL 60162
Limited Partners
- ----------------
Edward S. Hadesman 388,677 $7,773,540
Trust Dated May 22, 1992
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Grandville/Northwestern 9,750 $195,000
Management Corporation
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Carolyn B. Hadesman 54,544 $1,090,880
Trust Dated May 21, 1992
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
- --------
*/ As amended by Amendment No. 13 to the Amended and Restated Agreement of
- - Limited Partnership of Prime Group Realty, L.P.
**/ This amount shall be inserted by the Managing General Partner.
- --
<PAGE>
EXHIBIT A - CONT'D
PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital
Limited Partners (Cont'd) Common Units Contribution
- ------------------------- ------------ ------------
Lisa Hadesman 1991 Trust 169,053 $3,381,060
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Cynthia Hadesman 1991 Trust 169,053 $3,381,060
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Tucker B. Magid 33,085 $661,700
545 Ridge Road
Highland Park, IL 60035
Frances S. Shubert 28,805 $576,100
511 Lynn Terrace
Waukegan, IL 60085
Grandville Road Property, Inc. 7,201 $144,020
c/o Ms. Frances S. Shubert
511 Lynn Terrace
Waukegan, IL 60085
Sky Harbor Associates 62,149 $1,242,980
c/o Howard I. Bernstein
6541 North Kilbourn
Lincolnwood, IL 60646
Jeffrey A. Patterson 110,000 $2,200,000
c/o Prime Group Realty Trust
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Primestone Investment Partners, L.P. 7,944,893 **/
c/o The Prime Group, Inc. --
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Attn: Paul A. Roehri
- --------
**/ This amount shall be inserted by the Managing General Partner.
- --
<PAGE>
EXHIBIT A - CONT'D
PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital
Limited Partners (Cont'd) Common Units Contribution
- ------------------------- ------------ ------------
Prime Group Limited Partnership 47,525 $950,500
c/o The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Attn: Michael W. Reshcke
Robert J. Rudnik
H Group LLC 303,865 $5,900,000
c/o Heitman Financial Ltd.
180 N. LaSalle
Suite 3600
Chicago, IL 60601
Attn: Norman Perlmutter
Ray R. Grinvalds 5,216 $104,320
217 Deer Valley Drive
Barrington, IL 60010
Warren H. John 37,259 $745,180
1730 N. Clark Street
Chicago, IL 60614
<PAGE>
EXHIBIT A - CONT'D
PARTNERS, NUMBER OF UNITS AND CAPITAL CONTRIBUTIONS
Number of Capital
Managing General Partner Preferred Units Contribution
- ------------------------ --------------- ------------
Prime Group Realty Trust 2,000,000 **/
77 West Wacker Drive Convertible Preferred --
Suite 3900 Units
Chicago, IL 60601
Attn: Richard S. Curto
James F. Hoffman
Prime Group Realty Trust 4,000,000 **/
77 West Wacker Drive Series B Preferred Units --
Suite 3900
Chicago, IL 60601
Attn: Richard S. Curto
James F. Hoffman
- --------
**/ This amount shall be inserted by the Managing General Partner.
- --
PRIME GROUP REALTY TRUST (THE COMPANY)
AND
PREDECESSOR PROPERTIES (THE PREDECESSOR OF THE COMPANY)
EXHIBIT 12.1: COMPUTATION OF RATIO OF EARNINGS COMBINED FIXED CHARGES AND
PREFERRED STOCK DISTRIBUTIONS AND DIVIDENDS
(Amounts in thousands, except for ratio information)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1998 1997
PRIME GROUP PREDECESSOR
REALTY TRUST PROPERTIES
------------- -------------
<S> <C> <C>
Income before minority interests
and extraordinary item.................... $ 22,095 $ (22,100)
Interest incurred........................... 22,091 29,099
Amortization of debt issuance costs......... 1,062 447
Less capitalized interest................... (1,403) --
------------- -------------
Earnings........................... 43,845 4,446
------------- -------------
Interest incurred........................... 22,091 29,099
Amortization of debt issuance costs......... 1,062 447
Preferred stock distributions............... 4,991 --
------------- -------------
Combined Fixed Charges and
Preferred Stock Distributions and
Dividends........................... 28,144 28,546
------------- -------------
Excess of Combined Fixed Charges
and Preferred Stock Distributions
and Dividends over Earnings............. $ (25,100)
=============
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Distributions and Dividends............. $ 1.56 x
=============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,138
<SECURITIES> 0
<RECEIVABLES> 110,133
<ALLOWANCES> 0
<INVENTORY> 111,290 <F1>
<CURRENT-ASSETS> 0
<PP&E> 874,947
<DEPRECIATION> (18,240)
<TOTAL-ASSETS> 1,086,268
<CURRENT-LIABILITIES> 223,883 <F2>
<BONDS> 510,106
0
60
<COMMON> 153
<OTHER-SE> 352,066
<TOTAL-LIABILITY-AND-EQUITY> 1,086,268
<SALES> 0
<TOTAL-REVENUES> 106,926
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 71,809 <F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,091
<INCOME-PRETAX> 13,026
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 525
<CHANGES> 0
<NET-INCOME> 12,501
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
<FN>
<F1> Amount includes restricted cash escrows ($49,750), net deferred costs
($31,623) and other assets ($29,917).
<F2> Amount includes accrued interest payable ($1,973), accrued real estate
taxes ($31,836), accounts payable and accrued expenses (20,220), liabilities for
leases assumed ($4,790), dividends declared ($8,122), other liabilities ($7,083)
and minority interest of ($149,859).
<F3>Amount includes property operations ($20,758), real estate taxes ($19,101),
depreciation and amortization ($18,186), general and administrative expenses
($4,695) and minority interest allocation of ($9,069).
</FN>
</TABLE>
