<PAGE>
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, 1999
------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number: 0-24123
-------------------------------
HORIZON GROUP PROPERTIES, INC.
------------------------------
(Exact name of Registrant as specified in its Charter)
MARYLAND 38-3407933
-------- ----------
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
77 WEST WACKER DRIVE, SUITE 4200, CHICAGO , IL 60601
- ---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(312) 917-8870
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
Former name, former address and former fiscal year, if
changed since last report.
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
NUMBER OF COMMON SHARES OUTSTANDING AT NOVEMBER 10, 1999 2,845,096
------------
------------
1
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Index to Form 10-Q
September 30, 1999
<TABLE>
<CAPTION>
Part I. Financial Information: Page No.
<S> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations of the Company for the
Three Months Ended September 30, 1999 and September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations of the Company for the Nine
Months Ended September 30, 1999 and for the period from June 15, 1998 to
September 30, 1998 and Condensed Combined Statement of Operations of the
Predecessor Properties for the
period from January 1, 1998 to June 14, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Condensed Consolidated Balance Sheets of the Company at September 30, 1999 and
December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Condensed Consolidated Statements of Cash Flows of the Company for the Nine
Months Ended September 30, 1999 and for the period from June 15, 1998 to
September 30, 1998 and Condensed Combined Statement of Cash
Flows of the Predecessor Properties for the period from January 1, 1998 to June 14, 1998 . . . . . . . . 6
Notes to Condensed Consolidated and Combined Financial Statements . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 3. Quantitative and Qualitative Disclosure of Market Risk . . . . . . . . . . . . . . . . . . . . . . . 26
Part II. Other Information:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 6. Exhibits or Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
2
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1999 September 30, 1998
------------------ ------------------
(thousands, except per share data)
<S> <C> <C>
REVENUE
Base rent $ 5,677 $ 5,721
Percentage rent 53 57
Expense recoveries 1,502 1,473
Other 370 464
----- -----
Total revenue 7,602 7,715
----- -----
EXPENSES
Property operating 1,555 1,473
Real estate taxes 799 905
Land leases and other 418 456
Depreciation and amortization 1,244 1,250
General and administrative 1,037 1,157
Interest 2,461 2,405
----- -----
Total expenses 7,514 7,646
----- -----
Loss from joint ventures (164) (19)
----- -----
Income (loss) before minority interests and
extraordinary charge (76) 50
Minority interests (7) (16)
----- -----
Income (loss) before extraordinary charge (83) 34
Extraordinary charge on prepayment of debt,
net of minority interests of $100 (568) -
----- ----
Net income (loss) $ (651) $ 34
----- ----
----- ----
PER COMMON SHARE - BASIC AND DILUTED:
Income (loss) before extraordinary charge $ (0.03) $ 0.01
Extraordinary charge (0.20) -
----- -----
Net income (loss) $ (0.23) $ 0.01
----- -----
----- -----
Weighted average common shares outstanding 2,844 2,754
----- -----
----- -----
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS.
3
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Condensed Consolidated and Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Horizon Group Horizon Group
Properties, Inc. Properties, Inc. Predecessor Properties
for the nine for the period from for the period from
months ended June 15, 1998 to January 1, 1998
September 30, 1999 September 30, 1998 to June 14, 1998
------------------ ----------------- --------------------
(thousands, except per share data)
<S> <C> <C> <C>
REVENUE
Base rent $ 16,735 $ 6,674 $ 9,167
Percentage rent 117 57 44
Expense recoveries 4,549 1,624 2,631
Other 1,013 521 765
-------- -------- --------
Total revenue 22,414 8,876 12,607
-------- ------- --------
EXPENSES
Property operating 4,711 1,672 2,634
Real estate taxes 2,516 1,042 1,379
Land leases and other 1,362 479 785
Depreciation and amortization 3,651 1,494 4,640
General and administrative 3,468 1,383 1,061
Interest 6,798 2,775 5,863
-------- -------- -------
Total expenses 22,506 8,845 16,362
-------- -------- -------
Loss from joint ventures (622) (18) (207)
-------- -------- -------
Income (loss) before minority interests and
extraordinary charge (714) 13 (3,962)
Minority interests 98 (10) -
Income (loss) before extraordinary charge (616) 3 (3,962)
Extraordinary charge on prepayment of debt,
net of minority interests of $100 (568) - -
-------- -------- -------
Net income (loss) $ (1,184) $ 3 $ (3,962)
-------- -------- --------
-------- -------- --------
PER COMMON SHARE - BASIC AND DILUTED:
Income (loss) before extraordinary charge $ (0.22) $ 0.00
Extraordinary charge (0.20) -
-------- --------
Net income (loss) $ (0.42) $ 0.00
-------- --------
-------- --------
Weighted average common shares outstanding 2,816 2,752
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED
AND COMBINED FINANCIAL STATEMENTS.
4
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Condensed Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(thousands)
<S> <C> <C>
ASSETS
Real estate - at cost:
Land $ 14,069 $ 11,914
Buildings and improvements 134,450 133,061
Less accumulated depreciation (5,890) (2,387)
--------- --------
Total net real estate 142,629 142,588
--------- --------
Cash and cash equivalents 1,735 2,686
Restricted cash 3,817 4,465
Tenant accounts receivable 564 1,280
Investments in and advances to joint ventures - 8,527
Assets held for sale 2,000 2,500
Deferred costs (net of accumulated amortization of $274 and 1,590 826
$103 at September 30, 1999 and December 31, 1998,
respectively)
Other assets 1,428 2,806
--------- ---------
Total assets $ 153,763 $ 165,678
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgages and other debt $ 107,700 $ 114,752
Accounts payable and accrued expenses 4,639 5,676
Prepaid rents and other tenant liabilities 938 976
Other liabilities 915 3,322
--------- --------
Total liabilities 114,192 124,726
MINORITY INTERESTS 6,358 7,338
SHAREHOLDERS' EQUITY:
Common shares ($.01 par value, 50,000 shares authorized, 28 28
2,845 and 2,782 issued and outstanding at September 30,
1999 and December 31, 1998, respectively)
Additional paid-in capital 34,050 33,268
Retained earnings (deficit) (865) 318
--------- --------
Total shareholders' equity 33,213 33,614
--------- ---------
Total liabilities and shareholders' equity $ 153,763 $ 165,678
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS.
5
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Condensed Consolidated and Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Horizon Group Horizon Group Predecessor
Properties, Inc. Properties, Inc. Properties
for the nine for the period from for the period from
months ended June 15, 1998 to January 1, 1998 to
September 30, 1999 September 30, 1998 June 14, 1998
------------------ ------------------- -------------------
(thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,184) $ 3 $ (3,962)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Loss from joint ventures 622 18 207
Minority interests in net income (loss) (98) 10 -
Extraordinary charge on prepayment of debt, net of
minority interests of $100 568 - -
Depreciation 3,517 1,494 4,260
Amortization 269 - 771
Changes in assets and liabilities:
Restricted cash 648 (567) -
Tenant accounts receivable 809 (299) (409)
Investments in and advances to joint ventures - 1,044 1,853
Deferred costs and other assets (125) (2,808) 446
Accounts payable and accrued expenses (655) 1,993 (1,306)
Other liabilities 297 (17) (47)
Prepaid rents and other tenant liabilities (38) 220 (366)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,630 1,091 1,447
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for real estate and improvements (2,614) (2,101) (1,703)
-------- -------- --------
CASH USED IN INVESTING ACTIVITIES (2,614) (2,101) (1,703)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net contributions/distributions - - (4,625)
Principal payments on mortgages and other debt (52,289) (314) -
Proceeds from borrowings 50,655 - -
Proceeds from net increase in debt - - 5,090
Prepayment penalty (508) - -
Debt issue costs (825) - (140)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,967) (314) 325
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (951) (1,324) 69
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 2,686 3,168 3,729
-------- -------- --------
END OF PERIOD $ 1,735 $ 1,844 $ 3,798
-------- -------- --------
-------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS.
6
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated and Combined Financial Statements
(unaudited)
NOTE 1 - FORMATION OF THE COMPANY
- ---------------------------------
Horizon Group Properties, Inc. (together with its subsidiaries "HGP" or the
"Company") is a self-administered and self-managed Maryland corporation that
was established in connection with the merger of Horizon Group, Inc., a
Michigan corporation ("Horizon") with and into Prime Retail, Inc., a Maryland
corporation ("Prime") which was consummated on June 15, 1998 ("the Merger").
HGP's initial portfolio consisted of 14 factory outlet centers and one power
center located in 12 states. Twelve of the factory outlet centers and the
power center were contributed to the Company by Horizon in connection with
the consummation of the Merger pursuant to a Contribution Agreement entered
into in connection with the Merger (the "Contribution Agreement") and two
factory outlet centers were purchased by the Company from Prime immediately
subsequent to the consummation of the Merger.
Also in connection with the Merger and pursuant to the Amended and Restated
Agreement and Plan of Merger dated as of February 1, 1998 by and among Prime,
Horizon, HGP and other parties thereto (the "Merger Agreement"), the shares
of Common Stock of the Company, $.01 par value per share (the "Common
Stock"), were distributed to the holders of Common Stock, Series B Preferred
Stock, and Series C Preferred Stock of Prime and the holders of Common Stock
of Horizon in accordance with the applicable exchange ratio for each such
security as set forth in the Merger Agreement.
The operations of the Company are primarily conducted through a subsidiary
limited partnership, Horizon Group Properties, L.P. ("HGP LP") of which the
Company is the sole general partner. As of September 30, 1999, HGP owned
approximately 83.9% of the partnership interests (the "Common Units") of HGP
LP. In connection with the Merger, the Common Units were distributed to the
original holders (other than Prime) of partnership interests of a limited
partnership affiliate of Prime and a limited partnership affiliate of
Horizon, respectively, in accordance with the exchange ratios set forth in
the Merger Agreement. Common Units are exchangeable for shares of Common
Stock on a one-for-one basis at any time (or for an equivalent cash amount at
the Company's election).
The Company owns Horizon's former administrative office building located in
Norton Shores, Michigan and the following centers which were owned by Horizon
prior to the Merger and contributed to the Company pursuant to the
Contribution Agreement (collectively, such assets are referred to as the
"Predecessor Properties" for periods prior to the Merger):
Bellport Outlet Center in Bellport, New York
Dry Ridge Outlet Center in Dry Ridge, Kentucky
Holland Outlet Center in Holland, Michigan
Horizon Outlet Center-Laughlin in Laughlin, Nevada
Horizon Outlet Center-Monroe in Monroe, Michigan
Horizon Outlet Center-Traverse City in Traverse City, Michigan
Horizon Outlet Center-Tulare in Tulare, California
Lakeshore Marketplace in Norton Shores, Michigan
Medford Outlet Center in Medford, Minnesota
New Mexico Outlet Center in Algodones, New Mexico (vacant)
Sealy Outlet Center in Sealy, Texas
The Factory Shops at Georgian Place in Somerset, Pennsylvania
Warrenton Outlet Center in Warrenton, Missouri
The merger was accounted for under the purchase method of accounting under
which contributed assets acquired and liabilities assumed were recorded at
their relative fair values as of the date of the Merger. The consolidated
financial statements include the accounts of the Company's subsidiary, HGP
LP, and other wholly owned subsidiaries. The Company accounts for its
investments in and advances to two joint ventures using the equity method of
accounting. Under this method of accounting, the net equity investment of the
Company is reflected on the balance sheet and the statements of operations
include the Company's share of the net income or loss from the joint ventures.
7
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated and Combined Financial Statements
(unaudited)
Immediately after the Merger, the Company acquired the two properties listed
below for total consideration of $26,015,000. Each property was purchased
from an affiliate of Prime.
Nebraska Crossing Factory Stores in Gretna, Nebraska
Indiana Factory Shops in Daleville, Indiana
The following summarizes the assets, liabilities and equity contributed to
and assumed by the Company pursuant to the Contribution Agreement including
the acquisition of the two centers from Prime as of June 15, 1998. The
amounts presented include purchase accounting adjustments made to the
original preliminary estimates during the nine months ended September 30,
1999. The net effect of these adjustments was a $1,470,000 decrease in real
estate, a $1,088,000 increase in other assets and a $382,000 decrease in
other liabilities.
<TABLE>
<CAPTION>
<S> <C>
(IN THOUSANDS)
Real estate $141,050
Other assets 21,366
--------
$162,416
--------
--------
Mortgages and other debt $115,514
Other liabilities 6,337
Minority interests 7,763
Shareholders' equity 32,802
--------
$162,416
--------
--------
</TABLE>
Pursuant to the Contribution Agreement, the Company agreed to assume,
undertake to pay, satisfy and discharge when due in accordance with their
terms certain assumed liabilities (the "Assumed Liabilities"), which are
defined to include all liabilities of Horizon which arise from the ownership
and operation of the Predecessor Properties and include (i) all obligations
to indemnify present and former officers and directors of Horizon under
certificates or articles of incorporation, by-laws, partnership agreements,
employment agreements, indemnification agreements or otherwise, for any
matter existing or occurring after the Merger, (ii) all leases and related
contracts, and service contracts, relating to any Contributed Asset (as
defined in the Contribution Agreement) and (iii) certain other specified
obligations.
Also pursuant to the Contribution Agreement, certain partnership interests in
three joint ventures, MG Patchogue Limited Partnership and MG Patchogue II
Limited Partnership, which own the Bellport Outlet Center, and MG Long Island
Limited Partnership, which owned vacant land, were transferred from an
affiliate of Horizon to HGP LP and an affiliate of HGP LP. These partnership
interests were subsequently transferred by the Company back to Prime on
September 1, 1999 (see Note 7).
8
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated and Combined Financial Statements
(unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
STATEMENTS OF PREDECESSOR PROPERTIES
- ------------------------------------
The financial statements for the dates and periods prior to the Merger
reflect the results of operations, financial position, and cash flows of the
Predecessor Properties prior to the Merger as if the Company had been a
separate entity and owned such assets for all periods presented. The
historical results of operations and financial condition of the Predecessor
Properties are based on the manner in which Horizon historically managed such
net assets. Accordingly, the combined financial statements of the Predecessor
Properties have been prepared using Horizon's historical basis of the assets
and liabilities and historical results of operations related to the
Predecessor Properties. In this regard, because Horizon owned the Predecessor
Properties together with other properties which were not contributed to the
Company in connection with the Merger, the Predecessor Properties were not
insulated from the obligations and commitments of Horizon. Certain
assumptions relating to the allocation of cash and cash equivalents, debt and
financing costs, interest expense, general and administrative expenses, all
of which were historically aggregated by Horizon, have been made in the
combined financial statements for the periods prior to the Merger. These
statements have been combined based upon the historical common ownership and
management of the properties.
These statements include an allocation of the aggregate debt balances of
Horizon (which had historically been secured by a pool of Horizon's assets)
based upon the proportionate use of debt proceeds by the Predecessor
Properties compared to Horizon's total historical portfolio of properties.
Financing costs were allocated based upon the same ratio. Interest expense
has been estimated based upon the aforementioned proportionate debt balances
and the historical weighted average interest rate incurred by Horizon on its
debt balances. The allocation was made in this manner because management
believes it best represented the use of funds borrowed during the periods
presented and because allocating the debt in this manner results in the
statements of operations of the Predecessor Properties reflecting the
stand-alone interest cost of doing business. General and administrative
expenses of Horizon have been allocated to the Predecessor Properties based
upon the ratio of gross leasable area ("GLA") of the Predecessor Properties'
portfolio compared to Horizon's total historical portfolio.
Cash and cash equivalents have been included in the combined financial
statements of the Predecessor Properties based upon the respective period's
ratio of GLA of the Predecessor Properties compared to Horizon's total
historical portfolio. Horizon considered all highly liquid investments with a
maturity of three months or less when purchased to be cash and cash
equivalents.
Net contributions (distributions) are the net amounts advanced from and
repaid to Horizon. Excess cash flows have been reflected as being distributed
back to Horizon. Net contributions represent Horizon's funding of the
Predecessor Properties' development cost needs in excess of cash flows
generated from the Predecessor Properties' operations.
The aforementioned allocations may not reflect actual balances had the
Company existed as a separate entity. Management of the Company believes,
however, that such allocations are reasonable.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
9
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated and Combined Financial Statements
(unaudited)
INTERIM PERIOD FINANCIAL PRESENTATION
- -------------------------------------
The condensed consolidated financial statements as of September 30, 1999 and
for the nine months ended September 30, 1999 include the accounts of the
Company's subsidiary, HGP LP, and other wholly owned subsidiaries.
The accompanying unaudited condensed consolidated financial statements are
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, and, therefore, should be read
in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
The financial statements have been prepared in conformity with generally
accepted accounting principles which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
(including disclosure of contingent assets and liabilities) at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In the opinion of management, all adjustments necessary for a fair statement
of the financial position and results of operations for the interim periods
presented have been included in these financial statements and are of a
normal and recurring nature. Certain amounts in prior periods have been
reclassified to conform to the current presentation.
Operating results for the three and nine month periods ended September 30,
1999 are not necessarily indicative of the results that may be achieved in
future periods.
REAL ESTATE AND DEPRECIATION
- ----------------------------
The carrying values of the Predecessor Properties for the period prior to the
Merger are stated at Horizon's historic cost, less accumulated depreciation.
For the period subsequent to the Merger, the Predecessor Properties are
stated on the books of the Company at fair value as of June 15, 1998, the
date the Predecessor Properties were contributed to the Company, less
accumulated depreciation. The two centers purchased from an affiliate of
Prime are stated at their purchase prices, less accumulated depreciation.
Costs incurred for the acquisition, development, construction and improvement
of properties, as well as significant renovations and betterments to the
properties, are capitalized. Maintenance and repairs are charged to expense
as incurred. Interest costs incurred with respect to qualified expenditures
relating to the construction of assets are capitalized during the
construction period.
Amounts included under buildings and improvements on the condensed
consolidated balance sheets include the following types of assets and are
depreciated on the straight-line method over estimated useful lives which are:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements 31.5 years
Tenant improvements 10 years or lease term, if less
Furniture, fixtures or equipment 3 - 7 years
</TABLE>
Periodically, in the course of reviewing the performance of its properties,
management may determine that certain properties no longer meet the
parameters set forth for its properties and accordingly, such properties will
be classified as held for sale. As of September 30, 1999 and December 31,
1998, the Algodones, New Mexico outlet center was vacant and classified as
held for sale.
CASH EQUIVALENTS
- ----------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
10
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated and Combined Financial Statements
(unaudited)
RESTRICTED CASH
- ---------------
Restricted cash consists of amounts deposited in accounts with the Company's
two primary lenders (see Note 6) and includes $1.2 million in capital
improvement and tenant allowance reserves, $1.5 million in real estate tax,
insurance and ground lease escrows, and $1.1 million for debt service and
operating expenses at September 30, 1999.
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
- ---------------------------------------------
Prior to September 1, 1999, the Company owned a 50% partnership interest in
MG Patchogue Limited Partnership and a 45% partnership interest in and
interest bearing construction advances to MG Patchogue II Limited
Partnership, which partnerships own the Bellport Outlet Center. The Company
also owned a 95% interest in MG Long Island Limited Partnership which owned
14 acres of raw land. Such interests were recorded at fair value upon
formation of the Company based on the estimated fair value of the Company's
interests in the underlying real estate. The Company accounted for such
investments (in consideration of its priority return position) under the
equity method of accounting reflecting the Company's attributable share of
income and loss in the statements of operations. On September 1, 1999, the
Company transferred its interests in these partnerships to Prime (see Note 7).
DEFERRED COSTS
- ---------------
Leasing and deferred financing costs are capitalized at cost. Amortization is
recorded on the straight-line method over the life of the lease or the debt,
respectively. Amortization of deferred financing costs is included as a
component of interest expense.
NET CONTRIBUTIONS (DISTRIBUTIONS)
- ---------------------------------
Net contributions (distributions), as reflected on the Predecessor Properties
financial statements are the net amounts advanced by and repaid to Horizon.
Excess cash flows have been reflected as being distributed back to Horizon.
Net contributions represent Horizon's funding of development cost needs in
excess of cash flows generated from operations.
INCOME TAXES
- -------------
The Company has elected to be taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"). A REIT is a
legal entity that holds real estate interests, and, through payments of
dividends to shareholders, is permitted to reduce or to eliminate the payment
of federal income taxes. As a REIT, HGP intends to distribute its REIT
taxable income to its shareholders and satisfy certain other requirements as
defined in the Code so as to reduce or eliminate federal income tax
liability. Based on its taxable income generated since the Merger, the
Company is not obligated to make any dividend distributions to qualify as a
REIT.
Horizon elected to be taxed as a REIT commencing with the taxable year ending
December 31, 1994. As a REIT, Horizon was not taxed on income since it
distributed its REIT taxable income to its shareholders and satisfied certain
other requirements as defined in the Code. Accordingly, neither the
consolidated nor the combined financial statements include any federal income
tax expense.
MINORITY INTERESTS
- ------------------
Minority interests represent the interests of unitholders of HGP LP. The
unitholder minority interest is adjusted at the end of each period to reflect
the ownership at that time. The unitholder minority interest in HGP was
approximately 16.1% at September 30, 1999. During the nine months ended
September 30, 1999, 63,023 units were converted into shares of common stock.
11
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated and Combined Financial Statements
(unaudited)
REVENUE RECOGNITION
- -------------------
Leases with tenants are accounted for as operating leases. Minimum annual
rentals are generally recognized on a straight-line basis over the term of
the respective lease. As a result of recording rental revenue on a
straight-line basis, tenant accounts receivable include $371,000 and $169,000
of accrued straight line rents at September 30, 1999 and December 31, 1998,
respectively, which are expected to be collected over the remaining life of
the leases. Rents which represent basic occupancy costs, including fixed
amounts and amounts computed as a function of sales, are classified as base
rent. Amounts which may become payable in addition to base rent and which are
computed as a function of sales in excess of certain thresholds are
classified as percentage rents. Expense recoveries based on common area
maintenance expenses and certain other expenses are accrued in the period in
which the related expense is incurred. For periods beginning on and after
April 1, 1998, percentage rents are accrued on the basis of reported tenant
sales only after the sales exceed the thresholds above which such rent is
due. For periods prior to April 1, 1998, percentage rents were accrued based
upon an estimate of total percentage rent expected to be collected for the
year.
Total tenant receivables are reflected net of allowances of $760,000 and
$427,000 as of September 30, 1999 and December 31, 1998, respectively. For
the nine months ended September 30, 1999, $109,000 was charged directly
against the allowance and net income was reduced by $539,000 for additional
allowances.
OTHER REVENUE
- -------------
Other revenue consists primarily of interest income and income related to
marketing services that is recovered from tenants pursuant to lease
agreements.
SHARE OPTIONS
- -------------
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"), in accounting for its
options on common shares. Under APB 25, no compensation expense is recognized
because the exercise price of the Company's employee share options equals or
exceeds the market price of the underlying shares at the date of grant.
RECLASSIFICATIONS
- -----------------
Certain reclassifications have been made to the previously reported
statements of the Predecessor Properties in order to provide comparability
with the Company's statements reported herein. These reclassifications have
not changed the previously reported results.
12
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated and Combined Financial Statements
(unaudited)
NOTE 3 - SUMMARIZED FINANCIAL INFORMATION
- -----------------------------------------
Historical condensed combined financial information of the joint ventures
which owned the Bellport Outlet Center in Bellport, New York, in which the
Company held interests prior to September 1, 1999 (see Note 7), is summarized
as follows:
<TABLE>
<CAPTION>
For the For the
eight months ended nine months ended
August 31, 1999 September 30, 1998
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Total revenue $ 2,711 $3,353
Net loss (1,317) (922)
Total assets 30,672 31,597
Total liabilities 33,275 32,513
</TABLE>
NOTE 4 - EARNINGS PER SHARE
- ---------------------------
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
For the period
Three months ended Three months ended Nine months ended from June 15, 1998
September 30, 1999 September 30, 1998 September 30, 1999 to September 30, 1998
------------------- ------------------ ------------------ ---------------------
<S> <C> <C> <C> <C>
NUMERATOR:
Income (loss) before
extraordinary charge $ (83) $ 34 $ (616) 3
Extraordinary charge - net (568) - (568) -
------- ------- ------- -------
Net income (loss) $ (651) $ 34 $(1,184) $ 3
------- ------- ------- -------
------- ------- ------- -------
DENOMINATOR:
Weighted average shares
outstanding 2,844 2,754 2,816 2,752
PER SHARE - BASIC AND DILUTED:
Income (loss) before
extraordinary charge $ (0.03) $ 0.01 $ (0.22) $ 0.00
Extraordinary charge (0.20) - (0.20) -
------- ------- ------- -------
Net income (loss) $ (0.23) $ 0.01 $ (0.42) $ 0.00
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Partnership units and outstanding stock options were excluded in computing
diluted earnings per share because the effect of such items was anti-dilutive
for the periods presented.
13
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated and Combined Financial Statements
(unaudited)
NOTE 5 - LONG TERM STOCK INCENTIVE PLAN
- ---------------------------------------
The Company has adopted the HGP 1998 Long Term Stock Incentive Plan (the "HGP
Stock Plan") to advance the interests of the Company by encouraging and
enabling the acquisition of a financial interest in the Company by key
employees and directors of the Company and its subsidiaries through equity
awards. The Company reserved 338,900 common shares for issuance pursuant to
the HGP Stock Plan, an amount equal to approximately 10% of the aggregate of
the total outstanding common shares of the Company and outstanding common
units of HGP LP as of September 30, 1999.
NOTE 6 - MORTGAGE DEBT AND OTHER LIABILITIES
- --------------------------------------------
On June 15, 1998, certain wholly owned affiliates of the Company entered into
a credit facility (the "HGP Credit Facility") with Nomura Asset Capital
Corporation, succeeded by Capital Corporation of America, ("Nomura")
providing for initial borrowings of $108,205,000. The outstanding balance
equaled $57,432,565 and $105,375,000 as of September 30, 1999 and December
31, 1998, respectively. On July 9, 1999, the Company refinanced six of the
centers originally securing the HGP Credit Facility and repaid $46.8 million
of principal related to those centers. The HGP Credit Facility is guaranteed
by HGP and HGP LP. The HGP Credit Facility matures in July 2001 and bears
interest at the 30-day LIBOR Rate (as defined in the HGP Credit Facility)
plus 1.90% per annum. The effective rate was 7.28% and 7.45% as of September
30, 1999 and December 31, 1998, respectively. The HGP Credit Facility is
cross-collateralized by mortgages on six of the Company's operating outlet
centers and one power center at September 30, 1999. The HGP Credit Facility
requires monthly payments of interest. In addition, the HGP Credit Facility
requires principal payments totaling $1.5 million, $1.5 million and $2.0
million during the first, second and third years, respectively, payable in
equal monthly installments. The HGP Credit Facility contains restrictions on
the ability of HGP and HGP LP to incur additional indebtedness and, under
certain circumstances, requires the Company to enter into an interest rate
lock arrangement which would fix the interest rate on the full outstanding
amount of the HGP Credit Facility. In connection with the HGP Credit
Facility, the Company established certain escrow accounts and cash collection
accounts for the benefit of Nomura which are classified on the balance sheet
of the Company as restricted cash (see Note 2).
The HGP Credit Facility contains a contingent repayment penalty equal to 1%
of amounts repaid during the first loan year and 2% of amounts repaid
thereafter through the stated maturity date. Such penalty is not payable in
the event the Company refinances the HGP Credit Facility with Nomura. The
Company sought long-term financing from Nomura, but was unable to secure such
financing. Accordingly, the Company incurred a 1% penalty in connection with
the prepayment of $46.8 million, as described above. This penalty was an
amount negotiated with Nomura and was recognized as a component of the
extraordinary charge on prepayment of debt in the third quarter of 1999. The
repayment penalty and other fees paid to Nomura totaled $508,000. The Company
also expensed the unamortized balance of the financing costs associated with
this debt totaling $160,000. The extraordinary charge on prepayment of debt
on the Company's statements of operations includes these costs, net of
$100,000 of minority interests. Although the Company currently intends to
seek long-term financing from Nomura for the remainder of the HGP Credit
Facility on or before its maturity, there can be no assurance that Nomura
will provide such financing. The Company is recognizing estimated potential
repayment fees related to the remaining amounts due under the HGP Credit
Facility as an expense over the remaining term of the HGP Credit Facility
beginning in the third quarter of 1999.
14
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated and Combined Financial Statements
(unaudited)
On July 9, 1999 the Company completed a $46.7 million debt financing with
Morgan Guaranty Trust Company of New York ("the JP Morgan Loans"). The JP
Morgan Loans consist of (i) nonrecourse loans totaling $22.9 million secured
by three factory outlet centers located in Daleville, Indiana, Somerset,
Pennsylvania and Tulare, California and (ii) nonrecourse loans totaling $23.8
million secured by three factory outlet centers located in Gretna, Nebraska,
Sealy, Texas and Traverse City, Michigan. The outstanding balance of both
loans totaled $46.6 million at September 30, 1999. The loans bear interest at
a fixed rate of 8.46%, mature on August 1, 2009 and require the monthly
payment of interest and principal based on a 25-year amortization schedule.
The proceeds from the loans, together with Company funds, were used to repay
$46.8 million of indebtedness under the HGP Credit Facility, as described
above. The Company has established certain escrow accounts in connection with
this loan which are classified on the balance sheet of the Company as
restricted cash (see Note 2).
The Company has loans secured by a mortgage on the office building and
related equipment which the Company utilizes as a corporate office in Norton
Shores, Michigan. The principal balance on these loans was $2.8 million on
September 30, 1999 and $3.0 million on December 31, 1998. This building was
previously owned by an affiliate of Horizon and was contributed to the
Company pursuant to the Contribution Agreement. The corporate office loan
matures in December 2002, bears an interest rate of 90 day LIBOR plus 2.50%
per annum, and requires monthly debt service payments of $22,500. The
effective rate was 7.9% and 7.8% at September 30, 1999 and December 31, 1998,
respectively. The corporate office equipment and fixture loan matures in
December 2000, bears interest at the lender's prime rate, and requires
monthly debt service payments of $13,000. The effective rate was 8.3% and
7.8% at September 30, 1999 and December 31, 1998, respectively. The consent
of the lender to the previous owner of the property was required in
connection with the transfer of the property to the Company. The Company is
currently seeking such consent, but as of November 10, 1999 such consent had
not been obtained. The Company can give no assurances that it will be able to
obtain the above mentioned consent. Any such failure to obtain such consent
could have a material adverse effect upon the Company. The consolidated
financial statements of the Company do not include any adjustments that may
result from the ultimate outcome of this uncertainty.
The Company acquired approximately 95 acres of undeveloped land in Muskegon,
Michigan as part of the consideration from the sale of its interests in the
Bellport Outlet Center (see Note 7). This land is subject to land contracts
with a total balance of $780,000 as of September 30, 1999. The interest rates
vary from 6.9% to 10.0%. Monthly debt service payments total $6,000 through
May 2000 and $1,000 from that time through June 2001 with balloon payments
due on these two dates of $646,000 and $125,000, respectively.
The Company also had a $4.0 million revolving credit facility that matured
April 30, 1999 and required monthly interest payments calculated at the
lender's prime rate. In January, 1999, Prime loaned the Company $1.0 million
to make a principal repayment against this credit facility and on April 30,
1999 loaned the Company an additional $3.0 million to repay this credit
facility in full, all at an interest rate of 10.0% (the "Prime Loan"),
pursuant to the terms of a Working Capital Agreement between the Company and
Prime (the "Working Capital Agreement") (see Note 7). This loan was repaid on
September 1, 1999 in connection with the transfer of the Company's interests
in the Bellport, New York center to Prime (see Note 7).
In connection with the Merger, Prime became potentially liable for, or agreed
to guarantee certain indebtedness of the Company. As of September 30, 1999,
the components of such indebtedness included (1) the loans collateralized by
the Company's corporate office building and equipment in Norton Shores,
Michigan (with a principal balance of $2.8 million on September 30, 1999 and
$3.0 million on December 31, 1998), and (2) $10.0 million of the Company's
obligations under its credit facility with Nomura. The Company has
indemnified Prime for any amounts advanced under the guarantees. There is a
$400,000 annual fee due to Prime under the guarantees which has been prepaid
through June 2000.
15
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated and Combined Financial Statements
(unaudited)
NOTE 7 - RELATED PARTY TRANSACTIONS
- -----------------------------------
The Company utilizes Thilman & Filippini as its agent for insurance and risk
management programs. E. Thomas Thilman is a Director of the Company and a
partner in Thilman & Filippini. During the nine months ended September 30,
1999, the Company paid premiums totaling approximately $561,000 on insurance
policies placed by Thilman & Filippini.
The Company sub-leases office space on a month to month basis for its senior
executives at 77 W. Wacker, Chicago, Illinois from The Prime Group, Inc. The
Prime Group, Inc. is an affiliate of Michael W. Reschke, a Director of the
Company. During the nine months ended September 30, 1999, the Company
incurred rent expense of $90,000.
Prior to the Merger, Horizon entered into an agreement (the "PVH Agreement")
with Phillips Van Heusen, Inc. ("PVH") which modified certain provisions of
PVH leases for the benefit of Horizon in exchange for certain payments. Prime
is liable for future payments related to the PVH Agreement, but the Company
was obligated to pay $2,334,000 to Prime for payments related to the PVH
Agreement. This amount was paid in connection with the sale of the Company's
interests in the Bellport Outlet Center and the settlement of the Working
Capital Agreement discussed below.
In connection with the Merger, the Company entered into a Working Capital
Agreement with Prime (the "Working Capital Agreement"). The Working Capital
Agreement provides that Prime will transfer to the Company sufficient cash to
result in net working capital of $545,000, after consideration of the current
assets and current liabilities of the Predecessor Properties and the two
centers which the Company purchased from Prime as of the date of the Merger.
Prime had previously transferred $3.0 million to the Company as partial
payment of amounts due under the Working Capital Agreement. On September 1,
1999, the Company reached an agreement with Prime to settle amounts due under
the Working Capital Agreement in connection with the sale of its interests in
the joint ventures related to the outlet center in Bellport, New York (see
Note 1). The consideration for the sale of the Bellport interests was $7.5
million and approximately 95 acres of land in Muskegon, Michigan subject to
$800,000 of land contract payments.
The proceeds from the settlement of the Working Capital Agreement and the
sale of the Bellport interests were used to repay $9.3 million of current and
future obligations owed by the Company to Prime. These obligations included
(i) $2.2 million which the Company had borrowed from Prime to make principal
repayments on the Nomura facility, (ii) $4.0 million which the Company had
borrowed from Prime to repay a credit facility assumed in the Merger, (iii)
$2.3 million related to the PVH Agreement, and (iv) $800,000 related to the
guarantee fee associated with Prime's guarantee of certain of the Company's
debt obligations (see Note 6). The Company also received $230,000 in cash.
The sale of the Bellport interests and the settlement of the Working Capital
Agreement resulted in non-cash operating activities of $1.0 million,
investing activities of $7.1 million and financing activities of $8.1 million.
NOTE 8 - PRO FORMA INFORMATION
- ------------------------------
The following unaudited pro forma information for the nine months ended
September 30, 1998 reflects the following transactions, which occurred June
15, 1998, as if they had occurred on January 1, 1998: (a) the contribution of
the Predecessor Properties and the acquisition of the two centers from Prime;
(b) the entry into the HGP Credit Facility; and (c) the distribution of
Common Stock and Common Units.
16
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated and Combined Financial Statements
(unaudited)
The pro forma condensed financial information shown below is not necessarily
indicative of the results which would actually have been obtained had the
transactions described above been completed on the date indicated or which
may be obtained in the future.
<TABLE>
<CAPTION>
For the nine
months ended
September 30, 1998
------------------
(thousands, except per share data)
<S> <C>
Total revenue $24,443
Income before extraordinary items
and minority interests 1,392
Net income 1,117
Net income per share - diluted .41
</TABLE>
NOTE 9 - SEGMENT INFORMATION
- ----------------------------
During the fourth quarter of 1998, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("Statement No. 131"). Statement No. 131 superseded FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise". Statement No.
131 establishes standards for the way that public business enterprises report
information regarding reportable operating segments. The adoption of
Statement No. 131 did not affect the results of operations or financial
position of the Company.
The Company operates thirteen shopping centers located in eleven states. The
Company separately evaluates the performance of each of its centers. However,
because each of the centers has similar economic characteristics, facilities
and tenants, the shopping centers have been aggregated into a single dominant
shopping center segment.
17
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated and Combined Financial Statements
(unaudited)
The Company evaluates performance and allocates resources primarily based on
the Funds From Operations ("FFO") expected to be generated by an investment
in each individual shopping center. FFO is a widely used measure of the
operating performance of REITs, which provides a relevant basis for
comparison to other REITs. FFO, as defined by the National Association of
Real Estate Investment Trusts, means net income excluding gains (or losses)
from debt restructuring and sales of property or other non-recurring items,
plus depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. FFO should not be considered as an
alternative to net income computed under generally accepted accounting
principles. A reconciliation of income (loss) before minority interests to
diluted FFO is as follows:
<TABLE>
<CAPTION>
Horizon Group Horizon Group Predecessor
Properties, Inc. Properties, Inc. Properties
for the for the period from for the period from
nine months ended June 15, 1998 to January 1, 1998 to
September 30, 1999 September 30, 1998 June 14, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Income (loss) before minority interests $(1,382) $ 13 $(3,962)
FFO ADJUSTMENTS
Depreciation and amortization (1) 4,318 1,585 4,766
Non-recurring merger expense (2) 333 - -
Non-recurring debt restructuring costs (3) 858 - -
------- ------- -------
Total FFO adjustments 5,509 1,585 4,766
------- ------- -------
FFO $ 4,127 $ 1,598 $ 804
------- ------- -------
------- ------- -------
FFO per share $ 1.22 $ .47
------- -------
------- -------
</TABLE>
NOTE:
(1) Includes depreciation of the operating real estate and
allocated amounts relating to joint venture investments
accounted for under the equity method.
(2) Investigating costs incurred in connection with the pursuit
of an unsuccessful merger transaction.
(3) Includes extraordinary charge on debt repayment and
unsuccessful debt restructuring investigatory costs
incurred in evaluating financing alternatives.
NOTE 10 - OTHER MATTERS
- -----------------------
On September 27, 1999, the Company hired Secured Capital Corp as financial
advisor to assist the Company in studying strategic alternatives to enhance
shareholder value including, but not limited to, the sale or other
disposition of some or all of its real estate portfolio. Concurrently, the
Company is assessing alternative business opportunities going forward. There
can be no assurance that a transaction will result involving the Company.
On October 6, 1999, the Company sold six acres of land in Muskegon, Michigan
to CBL & Associates Properties, Inc. ("CBL") and was reimbursed for prior
development efforts. The Company received $600,000 in cash and a $520,000
note. This note is non-interest bearing and is due at the earlier of (i)
CBL's construction of a regional mall with three anchor tenants or (ii) two
years.
18
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three and nine months ended September 30, 1999
(unaudited)
INTRODUCTION
- ------------
The following discussion and analysis of the consolidated financial condition
and results of operations of Horizon Group Properties, Inc. (together with
its subsidiaries "HGP" or the "Company") and the Predecessor Properties (as
hereinafter defined) should be read in conjunction with the Condensed
Consolidated and Combined Financial Statements and Notes thereto. The
Company's operations are conducted primarily through a subsidiary limited
partnership, Horizon Group Properties, L.P. ("HGP LP"). The Company is the
sole general partner of HGP LP and, as of September 30, 1999, owned
approximately 83.9% of the HGP LP partnership interests ("Common Units").
Common Units of HGP LP are exchangeable for shares of Common Stock on a
one-for-one basis at any time (or for an equivalent cash amount at the
Company's election). The Company controls HGP LP and is dependent on
distributions or other payments from HGP LP to meet its financial obligations.
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 views 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 the Company's financial
performance; the risk that the Company may be unable to finance its planned
acquisition and development activities; risks related to the retail industry
in which the Company's outlet centers compete, including the potential
adverse impact of external factors, such as inflation, consumer confidence,
unemployment rates and consumer tastes and preferences; risks associated with
the Company's property acquisitions, such as the lack of predictability with
respect to financial returns; risks associated with the Company's property
development activities, such as the potential for cost overruns, delays and
the lack of predictability with respect to the financial returns associated
with these development activities; the potential impact of Year 2000 issues;
the risk of potential increase in market interest rates from current levels;
and risks associated with real estate ownership, such as the potential
adverse impact of changes in local economic climate on the revenues and the
value of the Company's properties. For further information on factors which
could impact the Company and the statements contained herein, reference is
made to the Company's other filings with the Securities and Exchange
Commission, including the Company's Registration Statement on Form 10, as
amended, dated as of June 4, 1998, with respect to the Company's initial
registration of its common stock under the Securities Exchange Act of 1934,
as amended and the Sky Merger Corp. Registration Statement on Form S-4, as
filed with the Securities and Exchange Commission on May 12, 1998
(Registration No. 333-51285).
GENERAL OVERVIEW
- ----------------
The Company is a self-administered and self-managed corporation that was
established in connection with the merger of Horizon Group, Inc., a Michigan
corporation ("Horizon") with and into Prime Retail, Inc., a Maryland
corporation ("Prime") which was consummated on June 15, 1998 ("the Merger").
As of September 30, 1999, HGP's portfolio consisted of 12 factory outlet
centers and one power center located in 10 states comprising an aggregate of
approximately 2.6 million square feet of gross leasable area ("GLA"). Ten of
the factory outlet centers and the power center were contributed to the
Company in connection with the consummation of the Merger by Horizon pursuant
to a Contribution Agreement entered into in connection with the Merger (the
"Contribution Agreement") and two factory outlet centers were purchased by
the Company from Prime immediately subsequent to the consummation of the
Merger.
19
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three and nine months ended September 30, 1999
(unaudited)
RESULTS OF OPERATIONS
- ---------------------
The statements for the periods subsequent to June 15, 1998, (the date of the
Company's acquisition of 12 outlet centers, one power center and Horizon's
former administrative office from Horizon (the "Predecessor Properties") and
the purchase of two properties from Prime (the "Prime Transferred
Properties") reflect the operation of the Company as a separate entity. The
financial statements of the Company for the periods subsequent to June 15,
1998 are not directly comparable to the statements of the Predecessor
Properties for periods prior to the Merger due to a number of factors,
including (1) a significant change in the indebtedness of the Company which
occurred in conjunction with the Merger; (2) the acquisition by the Company
of two additional outlet centers immediately after the Merger, the results of
which are not included in the financial statements of the Predecessor
Properties; and (3) the carrying values of the Predecessor Properties for the
periods prior to the Merger are stated at Horizon's historic cost and
depreciation expense is based on those costs. The Predecessor Properties are
stated at the fair value as of the date of the Merger, resulting in a lower
carrying value compared to periods prior to the Merger and a related decrease
in depreciation expense.
The financial statements for the periods prior to the Merger reflect the
results of operations, financial position, and cash flows of the Predecessor
Properties prior to the Merger as if the Predecessor Properties had been a
separate entity which owned such assets for all periods presented. The
historical results of operations and financial condition of the Predecessor
Properties are based on the manner in which Horizon historically managed such
net assets. Accordingly, the combined financial statements of the Predecessor
Properties have been prepared using Horizon's historical basis of the assets
and liabilities and historical results of operations related to the
Predecessor Properties. In this regard, because Horizon owned the Predecessor
Properties, together with other properties which were not contributed to the
Company, the Predecessor Properties were not insulated from the obligations
and commitments of Horizon. Certain assumptions relating to the allocation of
cash and cash equivalents, debt and financing costs, interest expense and
general and administrative expenses, all of which were historically
aggregated by Horizon, have been made in the combined financial statements
for the periods prior to the Merger. See Note 2 to the condensed consolidated
and combined financial statements. These statements have been combined based
upon the historical common ownership and management of the properties. For
these and other reasons, the operating results of HGP are not comparable to
those of the Predecessor Properties.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1998
- ---------------------------------------------------------------------------
The net loss before minority interests and extraordinary charge was $76,000
for the three months ended September 30, 1999 compared to net income before
minority interests and extraordinary charge of $50,000 for the three months
ended September 30, 1998. This decrease was primarily attributable to
$115,000 of unsuccessful debt restructuring costs, which were charged to
expense in the current quarter.
Total revenues decreased $113,000, or 1.5%, to $7.6 million in the three
months ended September 30, 1999 compared to $7.7 million in the three months
ended September 30, 1998. This decrease was primarily the result of lease
termination income of $176,000 reported in the three months ended September
30, 1998 with no lease termination income in the same period of the current
year.
Real estate tax expense decreased $106,000, or 11.7%, to $799,000 in the
three months ended September 30, 1999 compared to $905,000 in the three
months ended September 30, 1998. This decrease was mainly due to a decrease
in the tax assessments on several properties.
20
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three and nine months ended September 30, 1999
(unaudited)
General and administrative expenses decreased $120,000, or 10.4%, to
$1,037,000 in the three months ended September 30, 1999 compared to
$1,157,000 in the three months ended September 30, 1998. This decrease was
mainly the result of reductions in corporate staff, closing the McLean,
Virginia office formerly operated by Horizon, and placing a portion of the
Muskegon, Michigan corporate office building for lease. These decreases were
offset in part by the debt restructuring costs mentioned previously
recognized in the current period.
The Company accounted for its investments in the joint ventures, which own
the Bellport Outlet Center, utilizing the equity method. The center
experienced a decrease in rental revenue in the third quarter of 1999
compared to the same period in the prior year primarily as a result of the
conversion of tenants from fixed base rent to rent based on a percentage of
sales and a slight decline in occupancy. Depreciation and amortization
expense at the Bellport Outlet Center increased in the current quarter
compared to the same period in the prior year due to the write-off of tenant
allowances related to the tenants who left the center.
On September 1, 1999, the Company transferred its investments in the Bellport
joint ventures to an affiliate of Prime. The Company received $7.5 million in
cash and approximately 95 acres of undeveloped land in Muskegon, Michigan
(see Note 7).
An extraordinary charge on debt prepayment of $568,000, net of minority
interests, was incurred in the three months ended September 30, 1999. This
charge reflected the exit fees paid and unamortized loan fees charged to
expense in connection with the refinancing of six properties with JP Morgan
(see Note 6).
Average occupancy for the Company's total portfolio of properties for the
three months ended September 30, 1999 was 81.5% compared to 79.3% for the
three months ended September 30, 1998. Occupancy of the Company's total
portfolio at September 30, 1999 and 1998, was 81.8% and 80.2%, respectively.
COMPARISON OF PREDECESSOR PROPERTY INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998
- ------------------------------------------------------------------------
Rental revenue for the Predecessor Properties for the nine months ended
September 30, 1999 increased 5.9% compared to the same period in the prior
year. This increase was primarily attributable to increased occupancy
compared to the prior period.
Operating expenses and real estate taxes for the Predecessor Properties for
the nine months ended September 30, 1999 decreased 4.5% compared to the same
period in the prior year. This decrease was primarily the result of reduced
insurance premiums and lower tax expense due to a decrease in the tax
assessments on several properties.
On January 5, 1999, the Company received a proposal from Prime Capital
Holding ("PCH") regarding a possible business combination with the Company.
On March 17, 1999, PCH informed the Company that it was withdrawing its
earlier proposal based on proposed changes to the income tax laws affecting
REITs. During the first nine months of 1999, the Company incurred
approximately $333,000 investigating and considering the potential business
combination. This amount was charged to general and administrative expense
upon the withdrawal of the PCH proposal.
The Company accounted for its investments in the joint ventures, which own
the Bellport Outlet Center, utilizing the equity method. The center
experienced a decrease in rental revenue in the nine months ended September
30, 1999 compared to the same period in the prior year primarily as the
result of rent credits and accruals arising from the conversion of tenants
from fixed base rent to rent based on a percentage of sales. A slight
decrease in occupancy has also lowered rental revenue and increased
depreciation expense due to the write-off of the related tenant allowances.
21
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three and nine months ended September 30, 1999
(unaudited)
Average occupancy for the Predecessor Properties (excluding the Algodones,
New Mexico center) for the nine months ended September 30, 1999 was 82.4%
compared to 77.4% for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of September 30, 1999, the aggregate amount of outstanding mortgages and
other debt was approximately $107.7 million. The Company is contemplating the
expansion of its Tulare Outlet Center and is in the process of completing
approximately 36,000 square feet of partially finished space at its center in
Medford, Minnesota. The Company is obligated to make capital improvements and
repairs to certain of its outlet centers pursuant to the terms of the HGP
Credit Facility with Nomura (each as hereinafter defined). At September 30,
1999 there was approximately $0.6 million deposited in escrows with Nomura
and JP Morgan which the Company believes is sufficient to complete the work
required under the HGP Credit Facility and JP Morgan loans. The Company
expects to fund other capital improvements with additional borrowings,
existing cash balances (including $0.6 million held in escrow for such
expenses by Nomura and JP Morgan) or cash flow from operations.
The Company is required to make monthly deposits with Nomura and JP Morgan
for future debt service payments, real estate taxes, insurance, operating
expenses and capital expenditures. These deposits totaled $3.8 million as of
September 30, 1999, including the capital improvement escrow described above.
Funds are dispersed to or on behalf of the Company for the above mentioned
uses. Funds in excess of those specified in the loan agreement with Nomura
are dispersed to the Company.
In connection with the Merger, the Company entered into a Working Capital
Agreement with Prime (the "Working Capital Agreement"). The Working Capital
Agreement provides that Prime will transfer to the Company sufficient cash to
result in net working capital of $545,000, after consideration of the current
assets and current liabilities of the Predecessor Properties and the two
centers which the Company purchased from Prime as of the date of the Merger.
Prime had previously transferred $3.0 million to the Company as partial
payment of amounts due under the Working Capital Agreement. On September 1,
1999, the Company reached an agreement with Prime to settle amounts due under
the Working Capital Agreement in connection with the sale of its interests in
the joint ventures related to the outlet center in Bellport, New York (see
Note 1). The consideration for the sale of the Bellport interests was $7.5
million and approximately 95 acres of land in Muskegon, Michigan subject to
$800,000 of land contract payments.
The proceeds from the settlement of the Working Capital Agreement and the
sale of the Bellport interests were used to repay $9.3 million of current and
future obligations owed by the Company to Prime. These obligations included
(i) $2.2 million which the Company had borrowed from Prime to make principal
repayments on the Nomura facility, (ii) $4.0 million which the Company had
borrowed from Prime to repay a credit facility assumed in the Merger, (iii)
$2.3 million related to the PVH Agreement, and (iv) $800,000 related to the
guarantee fee associated with Prime's guarantee of certain of the Company's
debt obligations (see Note 6). The Company also received $230,000 in cash.
The Company expects to meet its short-term liquidity requirements generally
through working capital and cash flows from operations. The Company expects
to meet its long-term requirements, such as tenant allowances for new leases
and capital improvements, through the use of working capital and cash flows
from operations and, if necessary and available, the additional borrowing of
long-term debt and the potential offering of equity securities in the private
or public capital markets. As a result of the Company's leverage, the
Company's ability to obtain additional financing sources is limited. There
can be no assurance that the Company will be able to successfully obtain such
funding sources or, if obtained, on favorable terms.
22
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three and nine months ended September 30, 1999
(unaudited)
On June 15, 1998, certain wholly owned affiliates of the Company entered into
a credit facility (the "HGP Credit Facility") with Nomura Asset Capital
Corporation ("Nomura"). The facility had an initial balance of $108.2 million
and has a balance of $57.4 million at September 30, 1999. The HGP Credit
Facility is guaranteed by HGP and HGP LP. The HGP Credit Facility expires
July 11, 2001 and bears interest at the 30-day LIBOR Rate (as defined in the
HGP Credit Facility) plus 1.90% per annum. The HGP Credit Facility is
cross-collateralized by mortgages on six of the Company's 12 outlet centers
and one power center and requires monthly payments of interest. In addition,
the HGP Credit Facility requires principal payments totaling $1.5 million,
$1.5 million and $2.0 million during the first, second and third years,
respectively, payable in equal monthly installments. The HGP Credit Facility
contains restrictions on the ability of HGP and HGP LP to incur additional
indebtedness, and under certain circumstances, requires the Company to enter
into an interest rate lock arrangement which would fix the interest rate on
the full outstanding amount of the HGP Credit Facility.
On July 9, 1999 the Company completed a $46.7 million debt financing with
Morgan Guaranty Trust Company of New York ("the JP Morgan Loans"). The
proceeds from the loans, together with Company funds, were used to repay
$46.8 million of indebtedness under the HGP Credit Facility. The JP Morgan
Loans consist of (i) nonrecourse loans totaling $22.9 million secured by
three factory outlet centers located in Daleville, Indiana, Somerset,
Pennsylvania and Tulare, California and (ii) nonrecourse loans totaling $23.8
million secured by three factory outlet centers located in Gretna, Nebraska,
Sealy, Texas and Traverse City, Michigan. The outstanding balance was $46.6
million at September 30, 1999. The loans bear interest at a fixed rate of
8.46%, mature on August 1, 2009 and require the monthly payment of interest
and principal based on a 25-year amortization schedule. The JP Morgan Loans
also require the monthly funding of escrow accounts for the payment of real
estate taxes, insurance and capital improvements. Such escrow accounts
currently total $1.4 million for the JP Morgan Loans.
The Company paid a fee of $468,000 to Nomura in connection with the repayment
of $46.8 million of principal under the HGP Credit Facility which was charged
to expense in the third quarter of 1999. This fee was payable if a lender
other than Nomura was the source of repayment of amounts under the HGP Credit
Facility. The Company recognizes estimated potential repayment fees related
to the remaining amounts due under the HGP Credit Facility as an expense over
the remaining term of the Facility beginning in the third quarter of 1999.
Prime has guaranteed approximately $10.0 million of obligations under the HGP
Credit Facility, together with other indebtedness (the "Prime Guarantee"). In
connection with the Prime Guarantee, HGP has agreed to pay Prime a fee of
$400,000 per annum until the Prime Guarantee terminates. The Company has paid
this fee through June 2000.
The Company has loans secured by a mortgage on the office building and
related equipment which the Company utilizes as a corporate office in Norton
Shores, Michigan. The principal balance on these loans was $2.8 million on
September 30, 1999 and $3.0 million on December 31, 1998. This building was
previously owned by an affiliate of Horizon and was contributed to the
Company pursuant to the Contribution Agreement. The consent of the lender to
the previous owner of the property was required in connection with the
transfer of the property to the Company. The Company is currently seeking
such consent but, as of November 10, 1999 such consent had not been obtained.
The Company acquired approximately 95 acres of undeveloped land in Muskegon,
Michigan in the sale of it's interests in the Bellport Outlet Center (see
Note 7). This land is subject to land contracts with a total balance of
$780,000 as of September 30, 1999. The interest rates vary from 6.9% to
10.0%. Monthly debt service payments total $6,000 through May 2000 and $1,000
through June 2001 with balloon payments due on these two dates of $646,000
and $125,000, respectively.
23
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three and nine months ended September 30, 1999
(unaudited)
The Company had a $4.0 million revolving credit facility that matured April
30, 1999 and required monthly interest payments calculated at the lender's
prime rate. In January, 1999, Prime loaned the Company $1.0 million to make a
principal repayment against this credit facility and on April 30, 1999 loaned
the Company an additional $3.0 million to repay this credit facility in full,
all at an interest rate of 10%. These loans, (the "Prime Loan") were made
pursuant to the terms of a Working Capital Agreement between the Company and
Prime (the "Working Capital Agreement"). These loans were repaid as part of
the previously discussed settlement of the Working Capital Agreement and the
sale of the Bellport interests.
On September 27, 1999, the Company hired Secured Capital Corp as financial
advisor to assist the Company in studying strategic alternatives to enhance
shareholder value including, but not limited to, the sale or other
disposition of some or all of its real estate portfolio. Concurrently, the
Company is assessing alternative business opportunities going forward. There
can be no assurance that a transaction will result involving the Company.
YEAR 2000
- ---------
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY ("IT") AND NON-IT SYSTEMS
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
Based on recent assessments, the Company has determined that it will be
required to modify or replace certain portions of its software and certain
hardware so that those systems will properly utilize dates beyond December
31, 1999. The Company presently believes that with the modifications or
replacements of existing software and certain hardware, the Year 2000 Issue
can be mitigated. However, if such modifications and replacements are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing and implementation. To date, the
Company has completed the assessment of all systems that could be
significantly affected by the Year 2000. The results of the assessment
indicate that most of the Company's significant information processing
technology systems could be affected, particularly the general ledger and
billing systems. That assessment also indicated that software and hardware
used in certain equipment at the Company's properties are also at risk.
Potentially affected systems include security, lighting, automatic
sprinklers, and heating and ventilating systems.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE
FOR COMPLETION OF EACH REMAINING PHASE
The Company has completed the assessment and upgrade of its most critical
information technology systems. The Company uses a JD Edwards based
accounting system which is currently Year 2000 compliant. The Company is
working closely with JD Edwards to assure that any subsequent Year 2000
corrections are implemented in a timely fashion. The accounting system is run
on an IBM AS/400 which required an updated operating system in order to be
Year 2000 compliant. The Company installed such software during the first
quarter of 1999. The Company has numerous desktop computers which are
connected via a network to the AS/400. These computers are Year 2000
compliant.
24
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three and nine months ended September 30, 1999
(unaudited)
The assessment phase of the other less critical components of the Company's
information technology hardware and software began in the fourth quarter of
1998 and was completed during the first quarter of 1999. The remediation,
testing and implementation of those components will be completed in the
fourth quarter of 1999.
The Company has completed the assessment phase of non-information technology
exposures. The remediation, testing and implementation of those systems were
completed in the third quarter of 1999.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR
2000
The Company has identified significant suppliers and other third parties with
which the Company does business to assess their compliance with and the
Company's exposure to their non-compliance with Year 2000 issues. With the
exclusion of the utility companies, the Company has completed this assessment.
RISKS
Management of the Company believes it has an effective program in place to
resolve Year 2000 issues in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
the Company does not complete any additional phases of the Year 2000 program,
the Company would be unable to fully utilize its general ledger and billing
computer systems. The Company could experience delays in collecting rents
from tenants in the event their systems are not Year 2000 compliant. The
Company also faces operational risks at its operating properties if certain
equipment located at or related to the operation of those properties is not
Year 2000 compliant. In addition, disruptions in the economy generally
resulting from Year 2000 issues could also materially adversely affect the
Company. The amount of lost revenue cannot be reasonably estimated at this
time.
CONTINGENCY PLANS
The Company has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans include, among
other actions, utilizing off-site vendor hardware and software to process
general ledger and billing transactions related to the operation of the
Company and its properties and the manual operation of certain equipment at
the Company's operating properties. Since the Company cannot anticipate all
possible future outcomes of the year 2000 problem, nor predict the readiness
of entities with which it transacts business, there can be no assurance these
events will not have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
OTHER YEAR 2000 ISSUES
The majority of actions previously taken and expected to be taken by the
Company to be Year 2000 compliant with respect to its software have been or
would have been made in the ordinary course of utilizing such software.
Typically, such actions involve updating existing software with newer
versions, which the Company typically does on an ongoing basis. The Company
maintains an agreement with JD Edwards which entitles it to upgrades of its
general ledger and billing systems on a periodic basis. The Company expects
to spend a total of approximately $10,000 to upgrade the software used in its
voice-mail system, the operating system and network software related to the
Company's AS/400 computer in order to make them Year 2000 compliant. The
Company expects to internally fund or lease the hardware or software required
to become Year 2000 compliant.
The Company's IT department is conducting its Year 2000 compliance programs
simultaneously with its other functions. To date, such actions have not, and
the Company does not expect future actions in this regard, to significantly
impact other projects undertaken by the IT department.
25
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Quantitative and Qualitative Disclosure of Market Risk
(unaudited)
The Company's primary market risk exposure is associated with the HGP Credit
Facility from Nomura. This facility had a balance of $57.4 million at
September 30, 1999. The interest rate is set monthly at a rate equal to the
30 day London Interbank Offered Rate ("LIBOR") plus 190 basis points. The
facility matures in July of 2001. Since the facility was put in place June
15, 1998, the LIBOR rate to which the facility is tied has moved in a fairly
narrow range. The monthly interest rates applicable from June 15, 1998 to
September 30, 1999 ranged from 6.80% to 7.56%. As of September 30, 1999, the
effective rate was 7.28%. The Company is currently seeking to mitigate this
interest rate risk through refinancing the facility with fixed rate,
longer-term debt. There can be no assurance that the Company will be able to
complete such refinancing or on what terms such refinancing may be
accomplished.
The following table shows sensitivity of annual interest expense and net
income per share - diluted based on an increase in the LIBOR of 80 basis
points (.8%) based on the amount outstanding after repayment in connection
with the JP Morgan Loans.
<TABLE>
<CAPTION>
Principal Amount Change in LIBOR Rate Change in Interest Expense Per Share - Diluted
<S> <C> <C> <C>
$57,400,000 .8% $459,200 $.14
</TABLE>
INFLATION
- ---------
HGP's leases with the majority of its tenants require the tenants to
reimburse HGP for most operating expenses and increases in common area
maintenance expense, which reduces HGP's exposure to increases in costs and
operating expenses resulting from inflation.
26
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
On January 20, 1999, a purported shareholder of HGP filed a purported class
action lawsuit in the Circuit Court of Cook County, Illinois against HGP,
Prime Capital Holding, LLC ("PCH") and the Directors of HGP claiming, among
other things, that HGP's directors breached their fiduciary duties to HGP's
shareholders in connection with a business combination proposal made by PCH.
The lawsuit requests that the transaction with PCH be enjoined, or, in the
event that the transaction is consummated, that the transaction be rescinded
and that damages be awarded to the purported class members. On March 17,
1999, the Company received a letter from PCH withdrawing its proposal for a
business combination with HGP. On July 27, 1999, this lawsuit was dismissed
without prejudice.
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company has loans totaling $2.8 million and $3.0 million as of September
30, 1999 and December 31, 1998, respectively, secured by a mortgage on the
office building and related equipment which the Company utilizes as a
corporate office in Norton Shores, Michigan. This building was previously
owned by an affiliate of Horizon and was contributed to the Company pursuant
to the Contribution Agreement. The consent of the lender to the previous
owner of the property was required in connection with the transfer of the
property to the Company. The Company is currently seeking such consent but,
as of November 10, 1999 such consent had not been obtained.
The Company can give no assurances that it will be able to obtain the above
mentioned consent. Any such failure to obtain such consent could have a
material adverse effect upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
27
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Part II - Other Information
ITEM 6. EXHIBITS OR REPORTS ON FORM 8-K
- ----------------------------------------
(a) Exhibits
Exhibit 3(i) Articles of Incorporation of Horizon Group Properties, Inc.
(the "Company") (1)
Exhibit 3(ii) By-laws of the Company (1)
Exhibit 3(iii) Amendment to By-laws of the Company dated March 17, 1999 (4)
Exhibit 4.1 Specimen certificate for common stock, $.01 par value per
share, of the Company (1)
Exhibit 10.1 Sky Merger Corp. Registration Statement on Form S-4
(excluding exhibits thereto), as filed with the Securities
and Exchange Commission on May 12, 1998 (Registration No.
333-51285) (1)
Exhibit 10.2 Amended and Restated Agreement and Plan of Merger by and
among Prime Retail, Inc., Prime Retail, L.P., Horizon Group,
Inc., Sky Merger Corp., the Company, Horizon Group
Properties, L.P. and Horizon/Glen Outlet Centers Limited
Partnership dated as of February 1, 1998 (Incorporated by
reference to Exhibit 10(a) to Horizon Group, Inc.'s current
report on Form 8-K dated February 1, 1998
(SEC File No. 1-12424) (1)
Exhibit 10.3 Form of 1998 Stock Option Plan of the Company (1)
Exhibit 10.4 Employment Agreement between Gary J. Skoien and the Company
(1)
Exhibit 10.5 Employment Agreement between David R. Tinkham and the Company
(1)
Exhibit 10.6 Form of Indemnification Agreement for the Board of Directors
of the Company (1)
Exhibit 10.7 Form of Registration Rights Agreement (1)
Exhibit 10.8 Form of Contribution Agreement (incorporated by reference to
Appendix E to Exhibit 10.1) (1)
Exhibit 10.9 Employment Agreement between Richard Berman and the Company
(3)
Exhibit 10.10 Working Capital Agreement with Prime Retail, Inc. (3)
Exhibit 10.11 Loan Agreement dated as of June 15, 1998 by and among Third
Horizon Group Limited Partnership, Nebraska Crossing Factory
Shops, L.L.C., and Indiana Factory Shops, L.L.C. and Nomura
Asset Capital Corporation (2)
Exhibit 10.12 Form of Deed of Trust, Assignment of Leases and Rents and
Security Agreement with Nomura Asset Capital Corporation (2)
Exhibit 10.13 Form of Mortgage, Assignment of Leases and Rents and Security
Agreement by and between Horizon Group Properties, Inc. and
Nomura Asset Capital Corporation (2)
Exhibit 10.14 Form of Assignment of Leases and Rents by and between Horizon
Group Properties, Inc. and Nomura Asset Capital Corporation
(2)
Exhibit 10.15 Guaranty dated as of June 15, 1998 by the Company and Horizon
Group Properties, L.P. to and for the benefit of Nomura Asset
Capital Corporation (2)
Exhibit 10.16 Guaranty and Indemnity Agreement dated as of June 15, 1998 by
and among the Company, Horizon Group Properties, L.P., Prime
Retail, Inc., and Prime Retail, L.P. (2)
Exhibit 10.17 Assignment and Assumption Agreement, dated as of June 15, 1998
by and among Prime Retail, Inc., Prime Retail, L.P.,
Indianapolis Factory Shops Limited Partnership, and Indiana
Factory Shops, L.L.C. (3)
Exhibit 10.18 Assignment and Assumption Agreement, dated as of June 15, 1998
by and among Prime Retail, Inc., Prime Retail, L.P., Nebraska
Factory Shops Limited Partnership, and Nebraska Factory Shops
L.L.C. (3)
Exhibit 10.19 Form of Option Agreement (3)
Exhibit 10.20 Fixed Rate Note dated as of July 9, 1999 between Gretna,
Sealy, Traverse City Outlet Centers, L.L.C. and Morgan
Guaranty Trust Company of New York related to the financing
of the factory outlet center in Gretna, Nebraska (8)
Exhibit 10.21 Deed of Trust and Security Agreement for the benefit of
Morgan Guaranty Trust Company of New York, as lender, from
Gretna, Sealy, Traverse City Outlet Centers, L.L.C., as
borrower, related to the financing of the factory outlet
center in Gretna, Nebraska (8)
Exhibit 10.22 Guaranty for the benefit of Morgan Guaranty Trust Company of
New York by Horizon Group Properties, Inc. related to the
Gretna, Sealy and Traverse City loans (8)
Exhibit 27 Financial Data Schedule
28
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Part II - Other Information
Exhibit 99.3 Letter dated January 5, 1999 from Prime Capital Holding, LLC
to the Company (5)
Exhibit 99.4 Press release issued by the Company on January 7, 1999
regarding the proposal by Prime Capital Holding, LLC of a
business combination with the Company (5)
Exhibit 99.5 Press release issued by the Company on January 27, 1999
regarding a purported class action lawsuit filed on January
20, 1999 in the Circuit Court of Cook County, Illinois
against Horizon, Prime Capital Holding, LLC and the directors
of Horizon (6)
Exhibit 99.6 Letter dated March 17, 1999 from Prime Capital Holding, LLC
to the Company (7)
Exhibit 99.7 Press release issued by the Company on March 17, 1999
regarding withdrawal of business combination proposal by
Prime Capital Holding, LLC and determination by the Company's
Board of Directors to elect REIT status (7)
Exhibit 99.8 Press release issued by the Company on July 12, 1999
regarding the financing of six of the Company's factory
outlet centers (8)
Exhibit 99.9 Press release issued by the Company on September 3, 1999
announcing the transfer of the Company's interests in the
Bellport Outlet Center to Prime Retail, Inc. (9)
Exhibit 99.10 Press release issued by the Company on September 24, 1999
announcing the engagement of a financial advisor to explore
strategic alternatives (10)
1 Incorporated by reference to the Company's Registration Statement on
Form 10, as amended, dated as of June 4, 1998 (Commission file no.
0-24123).
2 Incorporated by reference to the Company's Current Report on Form 8-K
dated as of June 30, 1998 (Commission file no. 0-24123).
3 Incorporated by reference to the Company's Form 10-Q dated as of
August 14, 1998 (Commission file no. 0-24123).
4 Incorporated by reference to the Company's Form 10-Q dated as of May
17, 1998 (Commission file no. 0-24123).
5 Incorporated by reference to the Company's Current Report on Form 8-K
dated as of January 7, 1999 (Commission file no. 0-24123).
6 Incorporated by reference to the Company's Current Report on Form 8-K
dated as of January 29, 1999 (Commission file no. 0-24123).
7 Incorporated by reference to the Company's Current Report on Form 8-K
dated as of March 18, 1999 (Commission file no. 0-24123).
8 Incorporated by reference to the Company's Current Report on Form 8-K
dated as of August 3, 1999 (Commission file no. 0-24123).
9 Incorporated by reference to the Company's Current Report on Form 8-K
dated as of September 1, 1999 (Commission file no. 0-24123).
10 Incorporated by reference to the Company's Current Report on Form 8-K
dated as of September 24, 1999 (Commission file no. 0-24123).
(b) Reports on Form 8-K
A Form 8-K was filed on September 1, 1999 by the Company announcing that it
had transferred the Company's interests in the Bellport Outlet Center to
Prime Retail for undeveloped land in Muskegon, Michigan and cash.
A Form 8-K was filed on September 24, 1999 by the Company announcing that it
had hired Secured Capital Corp as a financial advisor to study strategic
alternatives to enhance shareholder value.
29
<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.
HORIZON GROUP PROPERTIES, INC.
Registrant
Date: November 15, 1999 By: /s/ GARY J. SKOIEN
- -------------------------- ----------------------
Gary J. Skoien, President and
Chief Executive Officer
Date: November 15, 1999 By: /s/ DAVID R. TINKHAM
- -------------------------- ------------------------
David R. Tinkham, Chief Accounting
and Chief Financial Officer
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,735
<SECURITIES> 0
<RECEIVABLES> 564
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 148,519
<DEPRECIATION> (5,890)
<TOTAL-ASSETS> 153,763
<CURRENT-LIABILITIES> 0
<BONDS> 107,700
0
0
<COMMON> 28
<OTHER-SE> 33,185
<TOTAL-LIABILITY-AND-EQUITY> 153,763
<SALES> 0
<TOTAL-REVENUES> 22,414
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,708
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,798
<INCOME-PRETAX> (714)
<INCOME-TAX> 0
<INCOME-CONTINUING> (714)
<DISCONTINUED> 0
<EXTRAORDINARY> (568)
<CHANGES> 0
<NET-INCOME> (1,184)
<EPS-BASIC> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
