UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 29, 1999
PRIME GROUP REALTY TRUST
(Exact name of registrant as specified in its charter)
Maryland 1-13589 36-4173047
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
77 West Wacker Drive, Suite 3900, Chicago Illinois 60601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 917-1300
N/A
(Former name of former address, if changed since last report)
1
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
The Registrant submits this Form 8-K in order to supply the financial
statements and schedules required pursuant to Rule 3-05(b) of Regulation S-X and
the pro forma financial information required pursuant to Article 11 of
Regulation S-X with respect to the Registrant's January 29, 1999 acquisition of
33 West Monroe Street (the "Property"), a 846,759 square foot office building
located in Chicago, Illinois, for $100.5 million.
a) Financial statements of businesses acquired.
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Statement of Revenue and Certain Expenses of 33
West Monroe (the Property) for the period from January 1, 1998 through September
30, 1998. The Statement of Revenue and Certain Expenses is the responsibility of
the Property's management. Our responsibility is to express an opinion on the
Statement of Revenue and Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Statement of Revenue and Certain Expenses is free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures made in the Statement of Revenue
and Certain Expenses. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation of the Statement of Revenue and Certain
Expenses. We believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Current Report on Form 8-K of Prime
Group Realty Trust as described in Note 2 and is not intended to be a complete
presentation of the Property's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to above
presents fairly, in all material respects, the revenue and certain expenses,
described in Note 2, of the Property for the period from January 1, 1998 through
September 30, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
December 24, 1998, except for
Note 5, as to which the date is
January 29, 1999
2
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<TABLE>
33 WEST MONROE
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(in thousands)
<CAPTION>
Period from
January 1, 1998
through
September 30, 1998
------------------
<S> <C>
Revenue
Rental.................................................... $ 9,631
Tenant reimbursements..................................... 6,108
Other .................................................... 315
---------------
Total revenue............................................. 16,054
---------------
Expenses
Cleaning.................................................. 875
Utilities................................................. 1,056
Other property operating.................................. 1,821
Real estate taxes......................................... 4,969
Ground rent............................................... 1,238
---------------
Total expenses............................................ 9,959
---------------
Revenue in excess of certain expenses..................... $ 6,095
===============
<FN>
See accompanying notes.
</FN>
</TABLE>
3
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33 WEST MONROE
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(in thousands)
1. Business
The accompanying Statement of Revenue and Certain Expenses relates to the
operations of 33 West Monroe Street, an office building located in Chicago,
Illinois (the "Property"). As of September 30, 1998, the Property had one tenant
which accounted for approximately 67% of rental revenue for the period from
January 1, 1998 through September 30, 1998.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Current Report on Form 8-K of Prime
Group Realty Trust. The statement is not representative of the actual operations
of the Property for the period presented nor indicative of future operations as
certain expenses, primarily depreciation and amortization, which may not be
comparable to the expenses expected to be incurred by Prime Group Realty Trust
in future operations of the Property, have been excluded.
Revenue and Expense Recognition
Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
certain expenses during the reporting period. Actual results could differ from
these estimates.
3. Rentals
The Property has lease agreements with lease terms ranging from one year to
twenty years. The leases generally provide for tenants to share in increases in
operating expenses and real estate taxes in excess of specified base amounts.
The total future minimum rentals to be received under such noncancelable
operating leases executed through September 30, 1998, exclusive of tenant
reimbursements and contingent rentals, are as follows:
Amount
--------
Period from October 1 through December 31
1998............................................. $ 3,277
Year ended December 31
1999............................................. 13,187
2000............................................. 13,135
2001............................................. 11,460
2002............................................. 10,619
Thereafter....................................... 134,489
---------
$ 186,167
=========
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4. Ground Lease
The Property is subject to a ground lease on a portion of land. The ground
lease provides for monthly payments of $128 plus 2% of gross rental income, as
defined, through April 30, 2008. On April 30, 2008 and every ten years
thereafter through the end of the lease term in April 2048, base rent and
additional rent are subject to adjustment based upon the fair value of the land
and an appraisal of real estate taxes,as defined in our ground lease.
5. Subsequent Event
On January 29, 1999, the Property was acquired by Prime Group Realty Trust
for approximately $100,500.
b) Pro forma financial information.
The unaudited Pro Forma Balance Sheet of Prime Group Realty Trust is
presented as if at September 30, 1998, we had purchased the Property with cash
of $17.8 million, advances from our credit facilities of $15.0 million and
proceeds from a mortgage note payable of $65.0 million. The unaudited Pro Forma
Consolidated Condensed Statements of Operations for the year ended December 31,
1997 and the nine months ended September 30, 1998 are presented as if the above
transaction occurred as of January 1, 1997. Our unaudited Pro Forma Condensed
Financial Statements should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 1997 and our Quarterly Report on Form
10-Q for the quarter ended September 30, 1998. In management's opinion, all
adjustments necessary to reflect the transaction have been made.
Our unaudited Pro Forma Consolidated Condensed Financial Statements are not
necessarily indicative of what the actual results of operations would have been
assuming the acquisition of the Property had occurred at January 1, 1997, nor do
they purport to represent our future results of operations.
Basis of Presentation
We purchased the Property, a portion of which is subject to a ground lease,
for approximately $100.5 million (Land of $12.0 million and building and
improvements of $89.3 million, which includes $0.8 million of other closing
costs), funded with advances from our credit facilities of $15.0 million,
proceeds from a mortgage note payable of $65.0 million and cash of $17.8
million. In addition, we incurred $0.8 million in deferred loan fees, funded
$5.4 million in restricted cash accounts ($2.6 million related to a real estate
tax escrow) and assumed liabilities of $9.5 million ($6.6 million related to
accrued real estate taxes). No other adjustments of our Balance Sheet as of
September 30, 1998 are necessary.
Our Pro Forma Consolidated Condensed Statements of Operations include our
historical operations (For the period from January 1, 1998 through September 30,
1998 and the period from November 17, 1997 through December 31, 1997), our
Predecessor (For the period from January 1, 1997 through November 16, 1997), the
properties either acquired or contributed at our initial public offering (For
the period from January 1, 1997 through November 16, 1997), the properties
acquired in 1997 after our initial public offering (For the period from January
1, 1997 to their date of acquisition in 1997), the properties acquired in 1998
("1998 Acquisitions" - for the period from January 1, 1998 to their date of
acquisition and the year ended December 31, 1997) and the Property (For the
period from January 1, 1998 through September 30, 1998 and for the year ended
December 31, 1997). The Pro Forma Adjustments to Prime Group Realty Trust and
the Predecessor represents the effects of our initial public offering and the
operations of properties either acquired or contributed at our initial public
offering or acquired in 1997 after our initial public offering (collectively,
the "1997 Acquisition") prior to either November 17, 1997 or our date of
acquisition. The foregoing transactions are described below along with their pro
forma effects on our consolidation:
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<TABLE>
PRIME GROUP REALTY TRUST
PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Prime Group 1998 33 West Pro Forma As
Realty Trust (1) Acquisitions (2) Monroe (3) Adjustments Adjusted
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental $ 69,525 $ 8,968 $ 9,631 $ -- $ 88,124
Tenant reimbursement 27,889 2,940 6,108 -- 36,937
Mortgage note interest 4,429 -- -- -- 4,429
Other 5,083 560 315 -- 5,958
---------------------------------------------------------------------------------------------
Total revenue 106,926 12,468 16,054 -- 135,448
Expenses:
Property operations 20,758 3,661 4,990 -- 29,409
Real estate taxes 19,101 2,587 4,969 -- 26,657
Depreciation and amortization 18,186 1,320 -- 1,881 (4) 21,387
Interest 22,091 1,714 -- 4,404 (5) 28,209
General and administrative 4,695 -- -- -- 4,695
---------------------------------------------------------------------------------------------
Total expenses 84,831 9,283 9,959 6,285 110,358
---------------------------------------------------------------------------------------------
Income before minority interest and
extraordinary item 22,095 3,185 6,095 (6,285) 25,090
Minority interest (9,069) -- -- (1,229) (6) (10,298)
---------------------------------------------------------------------------------------------
Income before extraordinary item 13,026 3,185 6,095 (7,514) 14,792
Extraordinary item: Loss on
extinguishmentof debt,
net of minority interest (525) -- -- -- (525)
---------------------------------------------------------------------------------------------
Net income 12,501 3,185 6,095 (7,514) 14,267
Net income allocated to preferred
shareholders (4,991) (3,859) (7) (8,850)
=============================================================================================
Net income available to common
shareholders $ 7,510 $ 3,185 $ 6,095 $ (11,373) $ 5,417
=============================================================================================
Earnings per weighted average common
share of basic and diluted (8):
Income before extraordinary item $ 0.54 $ (0.14) $ 0.40
Extraordinary item (0.03) -- (0.03)
================= ================================
Net income $ 0.51 $ (0.14) (8) $ 0.37
================= ================================
<FN>
See accompanying notes.
</FN>
</TABLE>
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<TABLE>
PRIME GROUP REALTY TRUST
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Pro Forma
Adjustments Prime Group
to Realty Trust
Prime Group Prime Group Before 1998
Realty Trust Realty Trust Acquisitions
and and 1998 and 33 West Consolidating Pro Forma
Predecessor Predecessor 33 West Acquisitions Monroe Pro Forma as
(1) (9) Monroe (2) (3) Adjustments Adjusted
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Rental $ 35,240 $ 30,969 $ 66,209 $ 29,661 $ 12,841 $ -- $ 108,712
Tenant reimbursement 14,531 12,393 26,924 10,547 8,023 -- 45,494
Mortgage note interest 248 5,779 6,027 -- -- -- 6,027
Other 1,763 (615) 1,148 605 429 -- 2,182
-----------------------------------------------------------------------------------------------
Total revenue 51,782 48,526 100,308 40,813 21,293 -- 162,414
Expenses:
Property operations 10,835 7,471 18,306 15,221 6,645 -- 40,172
Real estate taxes 10,340 6,798 17,138 7,858 6,498 -- 31,495
Depreciation and amortization 13,719 6,029 19,748 5,672 -- 2,508 (4) 27,928
Interest 36,097 (17,674) 18,423 7,213 -- 5,873 (5) 31,509
General and administrative 2,681 1,843 4,524 -- -- -- 4,524
Financing fees 1,180 (1,180) -- -- -- -- --
Property management fees 1,348 (1,348) -- -- -- -- --
Provision for environmental
remediation 3,205 -- 3,205 -- -- -- 3,205
-----------------------------------------------------------------------------------------------
Total expenses 79,405 1,939 81,344 35,965 13,144 8,381 138,834
-----------------------------------------------------------------------------------------------
Income before minority interest
and extraordinary item (27,623) 46,587 18,964 4,848 8,150 (8,381) 3,581
Minority interest 31 (8,470) (8,439) -- -- (2,054)(6) (10,493)
-----------------------------------------------------------------------------------------------
Income before extraordinary item (27,592) 38,117 10,525 4,848 8,150 (10,435) 13,087
Extraordinary item: Loss on
extinguishment of debt,
net of minority interest 65,990 (65,990) -- -- -- -- --
-----------------------------------------------------------------------------------------------
Net income 38,398 (27,873) 10,525 4,848 8,150 (10,435) 13,087
Net income allocated to preferred
shareholders (345) (2,455) (2,800) -- -- (9,000)(7) (11,800)
===============================================================================================
Net income available to common
shareholders $ 38,053 $ (30,328) $ 7,725 $ 4,848 $ 8,150 $ (19,435) $ 1,287
===============================================================================================
Earnings per weighted average
common share of basic and
diluted (8):
Income before extraordinary item $ 0.04 $ 0.56 $ 0.60 $ (0.50) $ 0.10
Extraordinary item -- -- -- -- --
=========================================== ========================
Net income $ 0.04 $ 0.56 $ 0.60 $ (0.50) $ 0.10
=========================================== ========================
<FN>
See accompanying notes.
</FN>
</TABLE>
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PRIME GROUP REALTY TRUST
ADJUSTMENTS TO PRO FORMA STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND YEAR ENDED DECEMBER 31, 1997
(In thousands, except per share amounts)
(Unaudited)
(1) Represents Prime Group Realty Trust's and the Predecessor's historical
operations for the periods periods presented. See our Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998 and our Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 for additional
information.
(2) Represents the historical operations of the properties we purchased in 1998
(1998 Acquisitions) prior to our date of acquisition. The following are the
properties we acquired in 1998:
Property Month Acquired
--------------------------------------------------------------------------
33 North Dearborn Street January
Commerce Point February
208 South LaSalle Street March
122 South Michigan Avenue April
2100 Swift Drive April
6400 Shafer Court May
Two Century Centre June
2000 York Road June
The amounts reflected for all revenue line items, property operations and
real estate tax expenses represent the historical operations of the
previous owners. The amounts reflected for depreciation amortization and
interest expense are based upon our ownership of these properties.
(3) Represents the historical operations of the Property under the previous
owner.
(4) Represents depreciation expense (40 year depreciable life) based upon our
ownership of the Property and amortization expense associated with the new
deferred loan fees (3 years) incurred in the purchase of the Property:
Nine Months Year Ended
Ended September 30, December 31,
1998 1997
-----------------------------------
Depreciation expense $ 1,674 $ 2,232
Amortization expense 207 276
===================================
Depreciation and amortization expense $ 1,881 $ 2,508
===================================
8
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(5) Represents interest expense based upon our ownership of the Property.
The purchase price for the Property was primarily funded through a $65,000
mortgage note payable (interest at LIBOR plus 200 basis points), and
$15,000 in advances from our credit facilities (interest at LIBOR plus 195
basis points). The interest expense adjustment represents the interest
associated with the mortgage note payable and the credit facilities
advance.
(6) Represents the adjustment to reflect the minority interest's share of
income before minority interest and extraordinary items added by the 1998
Acquisitions and the Property.
(7) Represents the adjustment to reflect dividends on our 9.0% Series-B
preferred shares that were issued on June 5, 1998.
(8) Earnings per weighted average common share of basic and diluted has been
calculated based upon our weighted average common shares outstanding during
the periods presented as follows:
Nine Months Year Ended
Ended September 30, December 31,
1998 1997
-----------------------------------
Weighted average common shares
outstanding 14,772 12,980
===================================
The adjustment represents net income available to common shares added by
the 1998 Acquisitions and the Property, net of the effect of our 9.0%
Series-B preferred shares.
(9) Represents the adjustments to reflect the effects of our initial public
offering, the contribution of the Predecessor's operations, the operations
of the 1997 Acquisitions and the repayment and forgiveness of debt related
to the Predecessor's properties.
9
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This current report on Form 8-K contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. When
used in this report, the words "believes," "expects," "anticipates,"
"estimates," "projects," and similar words and expressions are generally
intended to identify forward-looking statements. Statements that describe our
future strategic plans, goals, objectives or expectations are also
forward-looking statements. Readers of this report are cautioned that any
forward-looking statements, including those regarding the intent, belief, or
current expectations of our Company or management, are not guarantees of future
performance, results or events and involve risks and uncertainties, and that
actual results and events may differ materially from those in the
forward-looking statements as a result of various factors, including, but not
limited to (i) general economic conditions in the markets in which we operate,
(ii) competitive pressures within the industry and/or the markets in which we
operate, (iii) the effect of future legislation or regulatory changes on our
operations and (iv) other factors described from time to time in our filings
with the Securities and Exchange Commission. The forward-looking statements
included in this report are made only as of the date hereof. We undertake no
obligation to update such forward-looking statements to reflect subsequent
events or circumstances.
c) Exhibits.
Exhibit
Number Description
------ -------------------------------
23 Consent of Independent Auditors
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SIGNATURE 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
Dated: February 12, 1999 By:/s/ W. Michael Karnes
----------------------------
W. Michael Karnes
Executive Vice President and
Chief Financial Officer
11
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
indicated below of Prime Group Realty Trust of our report indicated below filed
with the Securities and Exchange Commission.
Registration Statements
- -----------------------
Form S-8 No. 333-65147
Form S-3 No. 333-70369
Financial Statements Date of Auditor's Report
- ------------------------------------------ ----------------------------------
The Statement of Revenue and Certain December 24, 1998, except for Note
Expenses of 33 West Monroe for the period 5 as to which the date is
from January 1, 1998 to September 30, January 29, 1999.
1998 included in the Current Report (Form
8-K) of Prime Group Realty Trust dated
January 29, 1999.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 10, 1999
