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): February 5, 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 February 5, 1999 acquisition of
National City Center (the "Property"), a 766,965 square foot office building
located in Cleveland, Ohio, for a purchase price of $100.0 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
National City Center (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 Propertys 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
February 12, 1999
2
<PAGE>
<TABLE>
NATIONAL CITY CENTER
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(in thousands)
<CAPTION>
Period from
January 1, 1998
through
September 30, 1998
------------------
<S> <C>
Revenue
Rental.................................................... $ 7,928
Tenant reimbursements..................................... 2,482
Other .................................................... 1,033
------------------
Total revenue............................................. 11,443
------------------
Expenses
Cleaning.................................................. 745
Utilities................................................. 1,144
Other property operating.................................. 1,480
Real estate taxes......................................... 1,692
------------------
Total expenses............................................ 5,061
------------------
Revenue in excess of certain expenses..................... $ 6,382
==================
<FN>
See accompanying notes.
</FN>
</TABLE>
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NATIONAL CITY CENTER
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
(in thousands)
1. Business
The accompanying Statement of Revenue and Certain Expenses relates to the
operations of National City Center, an office building located in Cleveland,
Ohio (the "Property"). As of September 30, 1998, the Property had two tenants
which accounted for approximately 84% 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:
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
Period from October 1 through December 31
1998............................................. $ 2,523
Year ended December 31
1999............................................. 10,189
2000............................................. 10,663
2001............................................. 9,683
2002............................................. 7,716
Thereafter....................................... 29,064
-----------
$ 69,838
===========
</TABLE>
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4. Ground Lease
The Property is subject to a ground lease on a portion of land underneath
the building. The ground lease provides for quarterly payments of $8 through the
end of the lease term, August 31, 2051.
5. Subsequent Event
On February 5, 1999, the Property was acquired by Prime Group Realty Trust
for a purchase price of approximately $100,000.
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 and 33 West
Monroe Street (collectively, the "1999 Acquisitions") for $203.3 million ($102.0
million for the Property, which includes a $2.0 million adjustment to reflect an
assumed above market interest rate mortgage note payable to a current market
interest rate and $101.3 million for 33 West Monroe Street) with cash of $34.3
million ($16.5 million for the Property and $17.8 million for 33 West Monroe
Street), advances from our credit facilities of $15.0 million (for 33 West
Monroe Street), $22.0 million in borrowings from short-term financing facilities
(for the Property) and proceeds from new and assumed mortgage notes payable of
$128.6 million ($63.1 million for the Property and $65.0 million for 33 West
Monroe Street). 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 Consolidated Condensed Financial
Statements should be read in conjunction with our Annual Report on Form 10-K for
the year ended December 31, 1997, our Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 and our Current Report on Form 8-K dated
January 29, 1999 and filed on February 12, 1999. 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 1999 Acquisitions for approximately $203.3 million (Land
of $26.1 million and building and improvements of $177.2 million), funded as
described above. In addition, we incurred $1.5 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 $10.6 million ($6.6 million
related to accrued real estate taxes). No other adjustments of our Balance Sheet
as of September 30, 1998 are necessary.
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<PAGE>
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 1999 Acqusitions (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:
6
<PAGE>
<TABLE>
PRIME GROUP REALTY TRUST
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<CAPTION>
1999 Acquisitions
--------------------------
Prime Group 1998 33 West National City Pro Forma As
Realty Trust (1) Acquisitions (2) Monroe (3) Center (3) Adjustments Adjusted
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Rental $ 69,525 $ 8,968 $ 9,631 $ 7,928 $ -- $ 96,052
Tenant reimbursement 27,889 2,940 6,108 2,482 -- 39,419
Mortgage note interest 4,429 -- -- -- -- 4,429
Other 5,083 560 315 1,033 -- 6,991
--------------------------------------------------------------------------------------------
Total revenue 106,926 12,468 16,054 11,443 -- 146,891
Expenses:
Property operations 20,758 3,662 4,990 3,369 -- 32,779
Real estate taxes 19,101 2,587 4,969 1,692 -- 28,349
Depreciation and amortization 18,186 1,320 -- -- 3,708 (4) 23,214
Interest 22,091 1,714 -- -- 8,862 (5) 32,667
General and administrative 4,695 -- -- -- -- 4,695
--------------------------------------------------------------------------------------------
Total expenses 84,831 9,283 9,959 5,061 12,570 121,704
--------------------------------------------------------------------------------------------
Income before minority interest and
extraordinary item 22,095 3,185 6,095 6,382 (12,570) 25,187
Minority interest (9,069) -- -- -- (1,269)(6) (10,338)
--------------------------------------------------------------------------------------------
Income before extraordinary item 13,026 3,185 6,095 6,382 (13,839) 14,849
Extraordinary item: Loss on
extinguishment of debt,
net of minority interest (525) -- -- -- -- (525)
--------------------------------------------------------------------------------------------
Net income 12,501 3,185 6,095 6,382 (13,839) 14,324
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 $ 6,382 $ (17,698) $ 5,474
============================================================================================
Earnings per weighted average
common share of basic
and diluted (8):
Income before extraordinary item $ 0.54 $ (0.13) $ 0.41
Extraordinary item (0.03) -- (0.03)
============== ==========================
Net income $ 0.51 $ (0.13)(8) $ 0.38
============== ==========================
<FN>
See accompanying notes.
</FN>
</TABLE>
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<TABLE>
PRIME GROUP REALTY TRUST
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<CAPTION>
Pro Forma Prime Group
Adjustment to Realty Trust
Prime Group Prime Group Before 1998 1999 Acquisitions
Realty Trust Realty Trust Acquisitions -------------------
and and and 1998 33 West National Consolidating Pro Forma
Predecessor Predecessor 1999 Acquisitions Monroe City Pro Forma As
(1) (9) Acquisitions (2) (3) Center (3) Adjustments Adjusted
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Rental $ 35,240 $ 30,969 $ 66,209 $ 29,661 $ 12,841 $ 9,296 $ -- $ 118,007
Tenant reimbursement 14,531 12,393 26,924 10,547 8,023 3,104 -- 48,598
Mortgage note interest 248 5,779 6,027 -- -- -- -- 6,027
Other 1,763 (615) 1,148 605 429 1,822 -- 4,004
----------------------------------------------------------------------------------------------------
Total revenue 51,782 48,526 100,308 40,813 21,293 14,222 -- 176,636
Expenses:
Property operations 10,835 7,471 18,306 15,222 6,645 5,160 -- 45,333
Real estate taxes 10,340 6,798 17,138 7,858 6,498 1,712 -- 33,206
Depreciation and
amortization 13,719 6,029 19,748 5,672 -- -- 4,944 (4) 30,364
Interest 36,097 (17,674) 18,423 7,213 -- -- 11,817 (5) 37,453
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 13,143 6,872 16,761 154,085
----------------------------------------------------------------------------------------------------
Income before minority
interest and
extraordinary item (27,623) 46,587 18,964 4,848 8,150 7,350 (16,761) 22,551
Minority interest 31 (8,470) (8,439) -- -- -- (1,596)(6) (10,035)
----------------------------------------------------------------------------------------------------
Income before extraordinary
item (27,592) 38,117 10,525 4,848 8,150 7,350 (18,357) 12,516
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 7,350 (18,357) 12,516
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 $ 7,350 $ (27,357) $ 716
====================================================================================================
Earnings per weighted
average common share of
basic and diluted (8):
Income before extraordinary
item $ 0.04 $ 0.56 $ 0.60 $ (0.55) $ 0.05
Extraordinary item -- -- - -- --
====================================== ========================
Net income $ 0.04 $ 0.56 $ 0.60 $ (0.55)(8) $ 0.05
====================================== ========================
<FN>
See accompanying notes.
</FN>
</TABLE>
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PRIME GROUP REALTY TRUST
ADJUSTMENTS TO PRO FORMA CONSOLIDATED CONDENSED 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, our Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, and our Current
Report on Form 8-K dated January 29, 1999 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 1999 Acquisitions under the
previous owners.
(4) Represents depreciation expense (40 year depreciable life) based upon our
ownership of the 1999 Acquisitions and amortization expense associated with
the new deferred loan fees (approximately 3 years) incurred in the purchase
of the 1999 Acquisitions:
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<TABLE>
<CAPTION>
Nine Months Ended Year Ended December
September 30, 1998 31, 1997
--------------------------------------------
<S> <C> <C>
National City Center:
Depreciation expense $ 1,649 $ 2,199
Amortization expense 178 237
33 West Monroe Street:
Depreciation expense 1,674 2,232
Amortization expense 207 276
--------------------------------------------
Depreciation and
amortization expense $ 3,708 $ 4,944
============================================
</TABLE>
(5) Represents interest expense based upon our ownership of the 1999
Acquisitions.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended December
September 30, 1998 31, 1997
--------------------------------------------
<S> <C> <C>
National City Center $ 4,458 $ 5,944
33 West Monroe Street 4,404 5,873
--------------------------------------------
Interest Expense $ 8,862 $ 11,817
============================================
</TABLE>
The purchase price for National City Center was primarily funded through
the assumption of a mortgage note payable, with an interest rate of 8.367%.
We have adjusted the mortgage note payable to a current market rate,
assumed to be 6.75%, resulting in an adjustment to the principal balance
and real estate costs of $2,044 and total mortgage note payable of $63,621.
A portion of the purchase price was funded with short-term financing
facilities totaling $22,000, with interest at LIBOR plus 200 basis points.
The interest expense adjustment represents interest associated with the
assumed mortgage note payable at 6.75% and the short-term financing
facilities borrowings.
The purchase price for 33 West Monroe Street 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 interests' share of
income before minority interest and extraordinary items added by the 1998
and 1999 Acquisitions.
(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 14,772, our weighted average common shares
outstanding during the nine months ended September 30, 1998. This
represents the number of shares that would have been outstanding at January
1, 1997 had all of the above described transactions occurred.
11
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The adjustment represents net income available to common shares added by
the 1998 Acquisitions and the 1999 Acquisitions, 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.
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
12
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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 22, 1999 By: /s/ W. Michael Karnes
W. Michael Karnes
Executive Vice President and
Chief Financial Officer
13
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 February 12, 1999
Expenses of National City Center for the
period from January 1, 1998 to September
30, 1998 included in the Current Report
(Form 8-K) of Prime Group Realty Trust
dated February 5, 1999.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 19, 1999
