<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 March 31, 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) 917-1500
--------------
(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 MAY 10, 1999 2,796,878
-------------
-------------
1
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Index to Form 10-Q
March 31, 1999
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements (unaudited)
Consolidated Statement of Operations of the Company for the
Three Months Ended March 31, 1999 and Combined
Statement of Operations of the Predecessor Properties for the
Three Months Ended March 31, 1998 . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets of the Company at March 31, 1999 and
December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows of the Company
for the Three Months Ended March 31, 1999 and Combined
Statement of Cash Flows of the Predecessor Properties
for the Three Months Ended March 31, 1998 . . . . . . . . . . . . . . 5
Notes to Consolidated and Combined Financial Statements . . . . . . . .6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . .16
Item 3. Quantitative and Qualitative Disclosure of Market Risk . . . . . .23
Part II. Other Information:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .24
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . .24
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . .24
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . .25
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . .25
Item 6. Exhibits or Reports on Form 8-K . . . . . . . . . . . . . . . . .26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
</TABLE>
2
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Consolidated and Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Horizon Group
Properties, Inc. Predecessor Properties
for the three months for the three months
ended March 31, 1999 ended March 31, 1998
---------------------------------------------------------
(thousands, except per share data)
<S> <C> <C>
REVENUE
Base rent $5,520 $ 4,997
Percentage rent 30 31
Expense recoveries 1,515 1,296
Other 439 394
-------- ---------
Total revenue 7,504 6,718
------- --------
EXPENSES
Property operating 1,621 1,302
Real estate taxes 865 757
Land leases and other 616 309
Depreciation and amortization 1,199 2,455
General and administrative 1,254 452
Interest 2,168 3,122
------- --------
Total expenses 7,723 8,397
------- --------
Loss from joint ventures (306) (81)
------- ---------
Loss before minority interests (525) (1,760)
Minority interests 90 -
--------- -----------
Net loss $ (435) $(1,760)
========= ===========
PER COMMON SHARE - BASIC AND DILUTED:
Net loss - basic and diluted $ (0.16)
=========
Weighted average common shares outstanding
- basic 2,791
=========
- diluted 3,389
=========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS.
3
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------------------------------------
(thousands)
<S> <C> <C>
ASSETS
Real estate - at cost:
Land $ 11,914 $ 11,914
Buildings and improvements 134,195 133,061
Less accumulated depreciation (3,554) (2,387)
----------- ----------
Total net real estate 142,555 142,588
Cash and cash equivalents 1,340 2,686
Restricted cash 4,087 4,465
Tenant accounts receivable 864 1,280
Investments in and advances to joint ventures 8,221 8,527
Assets held for sale 2,500 2,500
Deferred costs (net of accumulated amortization of $181 and
$103 at March 31, 1999 and December 31, 1998,
respectively) 752 826
Other assets 3,277 2,806
----------- -----------
Total assets $163,596 $165,678
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgages and other debt $114,306 $114,752
Accounts payable and accrued expenses 4,729 5,676
Prepaid rents and other tenant liabilities 756 976
Other liabilities 3,378 3,322
----------- -----------
Total liabilities 123,169 124,726
MINORITY INTERESTS 7,067 7,338
SHAREHOLDERS' EQUITY:
Common shares ($.01 par value, 50,000 shares authorized, 2,797 and 2,782 issued
and outstanding at March 31, 1999
and December 31, 1998, respectively) 28 28
Additional paid-in capital 33,449 33,268
Retained earnings (deficit) (117) 318
------------ ------------
Total shareholders' equity 33,360 33,614
------------ ------------
Total liabilities and shareholders' equity $163,596 $165,678
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS.
4
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Consolidated and Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Horizon Group Predecessor
Properties, Inc. Properties
for the three months for the three months
ended March 31, 1999 ended March 31, 1998
-------------------------------------------------
(thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (435) $ (1,760)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Loss from joint ventures 306 81
Minority interests in net loss (90) -
Depreciation 1,167 2,268
Amortization 77 393
Changes in assets and liabilities:
Restricted cash 378 -
Tenant accounts receivable 416 (450)
Investments in and advances to joint ventures - 1,755
Deferred costs and other assets (476) (772)
Accounts payable and accrued expenses (980) (610)
Other liabilities 58 (35)
Prepaid rents and other tenant liabilities (220) (14)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 201 856
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for real estate and improvements (1,101) (958)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (1,101) (958)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net contributions/distributions - 38
Principal payments on mortgages and other debt (1,446) -
Proceeds from borrowings 1,000 -
Proceeds from net increase in debt - 227
Debt issue costs - (52)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (446) 213
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,346) 111
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 2,686 3,729
---------- ----------
END OF PERIOD $ 1,340 $ 3,840
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS.
5
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Consolidated and Combined Financial Statements
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 portfolio
consists 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") in which the
Company is the sole general partner. As of March 31, 1999, HGP, owned
approximately 82.52% 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 offices 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 Patchogue, New York (held in joint ventures)
Dry Ridge Outlet Center in Dry Ridge, Kentucky
Horizon Outlet Center-Holland in Holland, Michigan
Horizon Outlet Center-Laughlin in Laughlin, Nevada
Horizon Outlet Center-Monroe in Monroe, Michigan
Horizon Outlet Center-Somerset in Somerset, Pennsylvania
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
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. At March 31, 1999, allocation
estimates are preliminary. The consolidated financial statements as of March 31,
1999 and for the three months ended March 31, 1999 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 statement of
operations include the Company's share of the net income or loss from the joint
ventures.
6
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Consolidated and Combined Financial Statements
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 Shops in Gretna, Nebraska
Indiana Factory Shops in Daleville, Indiana
The following summarizes the assets, liabilities and equity contributed to and
assumed by the Company on June 15, 1998 pursuant to the Contribution Agreement
including the acquisition of the two centers from Prime:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Real estate $ 142,520
Other assets 20,278
-----------
$ 162,798
-----------
-----------
Mortgages and other debt $ 115,514
Other liabilities 6,719
Minority interests 7,763
Shareholders' equity 32,802
-----------
$ 162,798
-----------
-----------
</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
two joint ventures, MG Patchogue Limited Partnership and MG Patchogue II Limited
Partnership, which own the Bellport Outlet Center, were transferred from an
affiliate of Horizon to HGP LP and an affiliate of HGP LP. The Company is
currently seeking the consents of the limited partners to such transfers, but as
of May 10, 1999 such consents had not been obtained.
Additionally, the transfer of the general partnership interest in MG Patchogue
Limited Partnership pursuant to the Contribution Agreement required the consent
of MG Patchogue Limited Partnership's mortgage lender. The Company is currently
seeking such consent but, as of May 10, 1999 such consent had not been obtained.
The Company accounts for its investment in these partnerships using the equity
method of accounting.
The lender to the previous owner for the mortgage on the corporate office
building and related equipment in Norton Shores, Michigan, as of May 10, 1999,
has also not given its consent in connection with the transfer of the property
(see Note 6).
The Company can give no assurances that it will be able to obtain the above
mentioned consents or that it will be able to finance or refinance its
indebtedness as it matures or that any such financing will be obtained on
favorable terms. Any such failure to obtain such consents or such financings
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 these uncertainties.
7
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Consolidated and Combined Financial Statements
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.
INTERIM PERIOD FINANCIAL PRESENTATION
The consolidated financial statements as of March 31, 1999 and for the three
months ended March 31, 1999 include the accounts of the Company's subsidiary,
HGP LP, and other wholly owned subsidiaries.
8
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Consolidated and Combined Financial Statements
The accompanying unaudited 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 months ended March 31, 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. The allocation of the
purchase price to the carrying values of the Predecessor Properties as of March
31, 1999 is preliminary. 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 consolidated balance
sheets include the following types of assets and are depreciated on the
straight-line method over estimated useful lives which are:
<TABLE>
<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>
In accordance with FASB Statement No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of", the financial
statements reflect impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. Impairment losses are measured as the
difference between carrying value and fair value for assets to be held in the
portfolio. For assets to be sold, impairment is measured as the difference
between carrying value and fair value, less costs to dispose. Fair value is
based on estimated cash flows discounted at a risk-adjusted rate of interest or
a value derived from comparable sales transactions in the marketplace.
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 March 31, 1999 and December 31, 1998 the Algodones, New
Mexico outlet center was vacant and classified as held for sale.
9
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Consolidated and Combined Financial Statements
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
RESTRICTED CASH
Restricted cash consists of amounts deposited in accounts with the Company's
primary lender (see Note 6) and includes $1.5 million in capital improvement
reserves, $2.0 million in real estate tax, insurance and ground lease escrows,
and $0.6 million for debt service and operating expenses at March 31, 1999.
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
The Company owns 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. Such interests were recorded at fair value upon formation of the Company
based on the estimated fair value of the underlying real estate. The Company
accounts 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.
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 from 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 intends to elect 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 each period end to reflect the
ownership at that particular time. The unitholder minority interest in HGP was
approximately 17.48% at March 31, 1999. During the three months ended March 31,
1999, 14,805 units were converted into shares of common stock.
10
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Consolidated and Combined Financial Statements
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 $258,000 and $169,000 of accrued
straight line rents at March 31, 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 reserves of $547,000 and $427,000
as of March 31, 1999 and December 31, 1998, respectively. For the three months
ended March 31, 1999, $23,000 was charged directly against the reserves and net
income was reduced by $214,000 for additional reserves.
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.
NOTE 3 - SUMMARIZED FINANCIAL INFORMATION
Historical condensed combined financial information of the joint ventures which
own the Bellport Outlet Center in Bellport, New York, in which the Company hold
interests, is summarized as follows:
<TABLE>
<CAPTION>
For the three months ended
--------------------------
March 31, 1999 March 31, 1998
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Total revenue $960 $1,185
Net loss (580) (232)
Total assets 30,892 32,829
Total liabilities 32,758 32,969
</TABLE>
11
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Consolidated and Combined Financial Statements
NOTE 4 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended
March 31, 1999
-------------------
<S> <C>
NUMERATOR:
Net loss - basic $(435)
Minority interests of unitholders (90)
-------
Net loss - diluted $(525)
=======
DENOMINATOR:
Weighted average common shares outstanding - basic 2,791
Effect of converting units to shares 598
-------
Weighted average common shares outstanding - diluted 3,389
=======
Net loss per share - basic and diluted $(0.16)
======
</TABLE>
Outstanding stock options were excluded in computing diluted earnings per share
because the effect of such items was anti-dilutive for the period presented.
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 March
31, 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 ("Nomura") providing for initial borrowings of $108,205,000. The
outstanding balance was $105,000,000 and $105,375,000 as of March 31, 1999 and
December 31, 1998, respectively. The HGP Credit Facility is guaranteed by HGP
and HGP LP. The HGP Credit Facility has a term of three years 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 6.85% and 7.45% as of March 31, 1999 and December
31, 1998, respectively. The HGP Credit Facility is cross-collateralized by
mortgages on the Company's twelve wholly owned operating outlet centers and one
power center. 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. A principal payment of $2.2
million which was due on October 31, 1998 was paid on November 10, 1998 with the
proceeds of a loan from Prime (as described below). The HGP Credit Facility also
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 currently intends to seek such
financing from Nomura on or before the maturity of the HGP Credit Facility and
accordingly does not currently anticipate that such fee will be paid. As a
result, the consolidated financial statements do not include any adjustment
relating to this
12
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Consolidated and Combined Financial Statements
penalty. 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 Company has loans totaling $2.9 million and $3.0 million as of March 31,
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 corporate office loan matures in December 2002, bears an interest
rate of LIBOR plus 2.50% per annum, and requires monthly debt service payments
of $22,500. The effective rate was 7.5% and 7.8% at March 31, 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 7.8% at March
31, 1999 and December 31, 1998. The consent of the lender to the previous owner
of the property is required in connection with the transfer of the property to
the Company. The Company is currently seeking such consent, but as of May 10,
1999, such consent had not been obtained.
The Company also has a $4.0 million revolving credit facility that matured April
30, 1999 and required monthly interest payments calculated at the lender's prime
rate which was 7.75% at March 31, 1999 and December 31, 1998. 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%
(the "Prime Loan"), pursuant to the terms of a Working Capital Agreement between
the Company and Prime (the "Working Capital Agreement"). The terms of the
Working Capital Agreement require the Company to repay the Prime Loan or other
related indebtedness on which Prime is contingently liable to the extent of net
proceeds from an equity offering or the sale of the Company's Algodones, New
Mexico outlet center.
The Company borrowed $2.2 million from Prime on November 10, 1998. The proceeds
from the loan were utilized to make a principal payment on the Company's credit
facility with Nomura. The terms of the borrowing are under negotiation, but
management expects that the loan will bear annual interest at the rate of 10.0%
and have a term of two years.
The Company has guaranteed the indebtedness collateralized by Phases II and III
of the Bellport, New York outlet center. The outlet center is owned by MG
Patchogue II Limited Partnership of which the Company is the sole general
partner. The principal balance of this debt was $11.8 million as of March 31,
1999 and December 31, 1998.
In connection with the Merger, Prime became potentially liable for, or agreed to
guarantee certain indebtedness of the Company. As of March 31, 1999 and December
31, 1998, respectively, the components of such indebtedness included (1) the
loan collateralized by Phases II and III of the Bellport, New York outlet center
with a principal balance of $11.8 million as of March 31, 1999 and December 31,
1998, (2) the loan collateralized by Phase I of the Bellport, New York outlet
center with a principal balance of $10.7 million as of March 31, 1999 and
December 31, 1998, (3) the loans collateralized by the Company's corporate
office building and equipment in Norton Shores, Michigan with a principal
balance of $2.9 million and $3.0 million as of March 31, 1999 and December 31,
1998, respectively, and (4) $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.
The Company can give no assurances that it will be able to obtain the above
mentioned consents or that it will be able to finance or refinance its
indebtedness as it matures or that any such financing will be obtained on
favorable terms. Any such failure to obtain such consents or such financings
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 these uncertainties.
13
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Consolidated and Combined Financial Statements
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 relating to the PVH Agreement, but the Company is
obligated to reimburse Prime for two payments relating to the PVH Agreement
totaling $2,334,000, payable each in the amount of $1,167,000 on June 15, 1999
and June 15, 2000. This obligation was assumed by HGP at the date of the Merger
and is reflected as a liability on the consolidated balance sheets as of March
31, 1999 and December 31, 1998.
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. In the three months ended March 31, 1999, the
Company paid premiums totaling approximately $143,000 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. In the three months ended March 31, 1999, the Company incurred rent
expense of $30,000.
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
transferred $3.0 million in cash to the Company at the closing of the Merger
representing 75% of the estimated amount due under the Working Capital
Agreement. The Company has recorded a receivable from Prime for the balance of
the amount due under the Working Capital Agreement. Also due under the Working
Capital Agreement is $710,200 for retention payments made to Horizon employees.
The balances due are included in other assets on the consolidated balance
sheets.
NOTE 8 - PRO FORMA INFORMATION
The following unaudited pro forma information for the three months ended March
31, 1998 reflect 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.
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 three
months ended
March 31, 1998
--------------
<S> <C>
Total revenue $8,195
Income before extraordinary items
and minority interests 752
Net income 608
Net income per share $0.22
</TABLE>
14
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Consolidated and Combined Financial Statements
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 fourteen 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.
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 net loss to
FFO is as follows:
<TABLE>
<CAPTION>
HORIZON GROUP PREDECESSOR
PROPERTIES, INC. PROPERTIES
FOR THE FOR THE
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Net loss $ (525) $ (1,760)
FFO ADJUSTMENTS:
Depreciation and amortization (1) 1,511 2,513
Non-recurring merger expense 301 -
------- --------
Total FFO adjustments 1,812 2,513
------- --------
FFO $1,287 $753
------- --------
------- --------
</TABLE>
NOTE:
(1) Includes depreciation of the operating real estate and allocated
amounts relating to joint venture investments accounted for under the
equity method.
15
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three months ended March 31, 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 herein
after defined) should be read in conjunction with the 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
March 31, 1999, owned approximately 82.52% 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"). HGP's portfolio
consists of 14 factory outlet centers and one power center located in 12 states
comprising an aggregate of approximately 3.1 million square feet of gross
leasable area ("GLA"). Twelve 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.
RESULTS OF OPERATIONS
The statements for the periods subsequent to June 15, 1998, (the date of the
Company's acquisition of the 12 outlet centers, one power center and Horizon's
former administrative office from Horizon (the "Predecessor Properties"))
16
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three months ended March 31, 1999
(unaudited)
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
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.
Rental revenue for the Predecessor Properties for the three months ended March
31, 1999 increased 1.3% 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 three months ended
March 31, 1999 for the Predecessor Properties decreased 5.5% compared to the
same period in the prior year. This decrease is primarily the result of a
reduced insurance premiums and lower tax expense due to a decrease in the tax
assessments on several properties.
Average occupancy for the Predecessor Properties (excluding the Algodones, New
Mexico Center) for the three months ended March 31, 1999 was 80.1% compared to
78.4% for the same period in the prior year. As of March 31, 1999, occupancy of
the Company's total operating portfolio was 79.2%.
The company accounts 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 first quarter of 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 for the tenants' lease years. The decline in rental revenue
was the most significant factor in the increase in the net loss of the joint
ventures for the first quarter of 1999 compared to the same period in the prior
year.
Net loss for the three months ended March 31, 1999 was $.16 per share on a basic
and diluted basis. Funds from operations for the three months ended March 31,
1999 was $.38 per share on a diluted basis. Per share information is not
presented for periods prior to the Merger due to the change in capital structure
resulting from the Merger.
The Company operates primarily from the former headquarters of Horizon in Norton
Shores, Michigan in an office building previously owned by Horizon and now owned
by the Company. Most employees of the Company, with the
17
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three months ended March 31, 1999
(unaudited)
exception of some of its senior management, were former employees of Horizon.
In connection with the Merger, a substantial number of former Horizon
employees were either not offered employment with the Company or offered
continued employment for a limited period of time. The Company has currently
leased a small portion of its office building to an unrelated tenant and is
seeking additional tenants to occupy the space not required by the Company to
accommodate its operations.
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 quarter of 1999, the Company incurred approximately $305,000 investigating
and considering the potential business combination. This amount was charged to
general and administrative expense upon the withdrawal of the PCH proposal.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the aggregate amount of outstanding mortgages and other
debt on the Company's balance sheet was approximately $114.3 million. The
Company is contemplating the expansion of its Tulare Outlet Center and the
completion of 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 March
31, 1999 there was approximately $1.2 million deposited in escrow with Nomura
which the Company believes is sufficient to complete the work required under the
HGP Credit Facility. The Company expects to fund other capital improvements with
additional borrowings, existing cash balances (including $367,000 held in escrow
for such expenses by Nomura) or cash flow from operations.
The Company is required to make monthly deposits with Nomura for future debt
service payments, real estate taxes, insurance, operating expenses and capital
expenditures. These deposits totaled $4.1 million as of March 31, 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
transferred $3.0 million in cash to the Company at the closing of the Merger as
75% of the estimated amount due under the Working Capital Agreement. The Company
has recorded a receivable from Prime for the balance of the amount due under the
Working Capital Agreement. Also due under the Working Capital Agreement is
$710,200 for retention payments made to Horizon employees. The balances due are
included in Other Assets on the consolidated balance sheets.
The Company expects to meet its short-term liquidity requirements generally
through working capital, cash flows from operations and from the proceeds of the
loan which Prime is obligated to make to the Company pursuant to the terms of
the Working Capital Agreement. The Company expects to meet its long-term
requirements, such as tenant allowances for new leases and capital improvements,
through 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.
18
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three months ended March 31, 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") which has a current balance of $105.0 million at March
31, 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 the Company's 12
wholly owned 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. A principal payment of $2.2 million which was due on October
31, 1998 was paid on November 10, 1998 with the proceeds of a loan from
Prime. The HGP Credit Facility also 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 currently intends to seek such financing from Nomura on
or before the maturity of the HGP Credit Facility and accordingly does not
currently anticipate that such fee will be paid. As a result, the
consolidated financial statements do not include any adjustment relating to
this penalty. 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.
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 loans totaling $2.9 million and $3.0 million as of March 31,
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 May 10, 1999 such consent
had not been obtained.
The Company also has a $4.0 million revolving credit facility that matured April
30, 1999 and required monthly interest payments calculated at the lender's prime
rate which was 7.75% at March 31, 1999 and December 31, 1998. 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"). The terms of the Working Capital Agreement require the Company to
repay the Prime Loan or other related indebtedness on which Prime is
contingently liable to the extent of net proceeds from an equity offering or the
sale of the Company's Algodones, New Mexico outlet center.
The transfer of the general partnership interest in MG Patchogue Limited
Partnership pursuant to the Contribution Agreement also required the consent of
MG Patchogue Limited Partnership's mortgage lender. The Company is currently
seeking such consent but as of May 10, 1999, such consent had not been obtained.
The Company accounts for its investment in this partnership using the equity
method of accounting.
MG Patchogue II Limited Partnership, of which the Company is 1% general partner
and 44% limited partner, is subject to indebtedness totaling approximately $11.8
million which matured April 30, 1999. The lender is currently considering our
request for an extension but, as of May 10, 1999 such extension had not been
obtained. Nomura originally issued a commitment to lend the partnership $14.0
million under the HGP Credit Facility on or before September 1, 1998, and has
verbally indicated that it may consider such refinancing after such date. The
consent of
19
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three months ended March 31, 1999
(unaudited)
the limited partners is required in order to complete such financing with
Nomura. The Company is currently seeking such consent but as of May 10, 1999,
such consent had not been obtained. Prime is a guarantor on the indebtedness.
If the financing with Nomura is completed, the Company will utilize the
proceeds of such financing to repay the existing indebtedness and repay the
$2.2 million loan which it received from Prime as discussed above in
connection with the HGP Credit Facility.
The Company can give no assurances that it will be able to obtain the above
mentioned consents or that it will be able to finance or refinance its
indebtedness as it matures or that any such financing will be obtained on
favorable terms. Any such failure to obtain such consents or such financing
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 these uncertainties.
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 relating to the PVH Agreement, but the Company is
obligated to reimburse Prime for two payments relating to the PVH Agreement
totaling $2,334,000, payable each in the amount of $1,167,000 on June 15, 1999
and June 15, 2000. This obligation was assumed by HGP at the date of the Merger
and is reflected as a liability on the balance sheet as of March 31, 1999 and
December 31, 1998.
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.
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.
20
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three months ended March 31, 1999
(unaudited)
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 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. Most of these computers are Year 2000 compliant, but
certain older computers may require software upgrades to be fully Year 2000
compliant. Such upgrades are generally available at no charge and the Company
intends to install such upgrades by the end of the second quarter of 1999.
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 is expected to be completed by the end of the
third quarter of 1999.
The Company has completed the assessment phase of non-information technology
exposures. The remediation, testing and implementation of those systems are
expected to be completed by the end of 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.
21
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three months ended March 31, 1999
(unaudited)
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 has spent or 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.
22
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Part II - Other Information
The Company's primary market risk exposure is associated with the HGP Credit
Facility from Nomura. This facility had a balance of $105.0 million at March 31,
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 March 31, 1999 ranged from 6.84%
to 7.56%. As of March 31, 1999, the effective rate was 6.85%. 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%).
<TABLE>
<CAPTION>
Principal Amount Change in LIBOR Rate Change in Interest Expense Per Share - Diluted
---------------- -------------------- -------------------------- -------------------
<S> <C> <C> <C>
105,000,000 .8% $840,000 $.25
</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.
23
<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. HGP has obtained an extension to answer the complaint and
the Company believes that the lawsuit is without merit and intends to contest
the lawsuit vigorously.
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company has loans totaling $2.9 million and $3.0 million as of March 31,
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 May 10, 1999, such consent
had not been obtained.
The Company also has a $4.0 million revolving credit facility that matured April
30, 1999 and required monthly interest payments calculated at the lender's prime
rate which was 7.75% at March 31, 1999 and December 31, 1998. 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%
(the "Prime Loan") pursuant to the terms of a Working Capital Agreement between
the Company and Prime (the "Working Capital Agreement"). The terms of the
Working Capital Agreement require the Company to repay the Prime Loan or other
related indebtedness on which Prime is contingently liable to the extent of net
proceeds from an equity offering or the sale of the Company's Algodones, New
Mexico outlet center.
The transfer of the general partnership interest in MG Patchogue Limited
Partnership pursuant to the Contribution Agreement also required the consent of
MG Patchogue Limited Partnership's mortgage lender. The Company is currently
seeking such consent but, as of May 10, 1999 such consent had not been obtained.
MG Patchogue II Limited Partnership, of which the Company is 1% general partner
and 44% limited partner, is subject to indebtedness totaling approximately $11.8
million which matured April 30, 1999. The lender is currently considering our
request for an extension but, as of May 10, 1999 such extension had not been
obtained. Nomura originally issued a commitment to lend the partnership $14.0
million under the HGP Credit Facility on or before September 1, 1998, and has
verbally indicated that it may consider such refinancing after such date. The
consent of the limited partners is required in order to complete such financing
with Nomura. The Company is currently seeking such consent but as of May 10,
1999, such consent had not been obtained. Prime is a guarantor on the
indebtedness. If the financing with Nomura is completed, the Company will
utilize the proceeds of such financing to repay the existing indebtedness and
repay the $2.2 million loan which it received from Prime as discussed above in
connection with the HGP Credit Facility.
The Company can give no assurances that it will be able to obtain the above
mentioned consents or that it will be able to finance or refinance its
indebtedness as it matures or that any such financing will be obtained on
favorable terms. Any such failure to obtain such consents or such financings
could have a material adverse effect upon the Company.
24
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Part II - Other Information
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None.
25
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Part II - Other Information
ITEM 6. EXHIBITS OR REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
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
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 27 Financial Data Schedule
Exhibit 99 Excerpt of Press Release issued by the Company on June 15,
1998 announcing the completion of the debt financing with
Nomura Asset Capital Corporation(2)
</TABLE>
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).
26
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Part II - Other Information
(b) Reports on Form 8-K
A Form 8-K was filed January 7, 1999 by the Company announcing that it had
received a proposal from Prime Capital Holding LLC regarding a proposed business
combination with the Company.
A Form 8-K was filed January 29, 1999 by the Company announcing that a purported
class action lawsuit was filed against the Company, it Directors and Prime
Capital Holding LLC in connection with the proposed business combination of the
Company and Prime Capital Holding, LLC.
A Form 8-K was filed March 18, 1999 by the Company announcing that Prime Capital
Holding, LLC had withdrawn its proposal for a business combination with the
Company. The Form 8-K also announced that the Company had reviewed its prior
decision to not elect REIT status and had determined to elect REIT status.
27
<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: May 17, 1999 By: /s/ Gary J. Skoien
- --------------------------- ----------------------
Gary J. Skoien, President and
Chief Executive Officer
Date: May 17, 1999 By: /s/ David R. Tinkham
- --------------------------- ------------------------
David R. Tinkham, Chief Accounting
and Chief Financial Officer
28
<PAGE>
AMENDED AND RESTATED
HORIZON GROUP PROPERTIES, INC.
BY-LAWS
Originally adopted as of April 28, 1998
First Amendment adopted as of March 17, 1999
Pursuant to Article 10 of the Amended and Restated By-Laws of Horizon
Group Properties, Inc. (the "Corporation") and by the action of the Board of
Directors of the Corporation at the meeting of the Board of Directors on March
17, 1999, Section 2.02 of the Amended and Restated By-Laws of the Corporation is
hereby replaced in its entirety with the following new Section 2.02:
"Section 2.02 ANNUAL MEETING. The 1999 annual meeting of the
stockholders shall be held on Tuesday, June 15, 1999 at 11:00 a.m.,
local time. Each succeeding annual meeting of the stockholders shall be
held on the second Tuesday in May, at such place and time as determined
by the Board of Directors. At each annual meeting, stockholders
entitled to vote shall elect the members of the Board of Directors and
transact such other business as may be properly brought before the
meeting in accordance with the Articles of Amendment and Restatement of
the Corporation (the "Articles") and, to the extent not inconsistent
therewith, notice procedures specified in Section 2.04 below."
This first Amendment to the Amended and Restated By-Laws of the Corporation is
adopted as of March 17, 1999.
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,340
<SECURITIES> 0
<RECEIVABLES> 864
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 146,109
<DEPRECIATION> (3,554)
<TOTAL-ASSETS> 163,596
<CURRENT-LIABILITIES> 0
<BONDS> 114,306
0
0
<COMMON> 28
<OTHER-SE> 33,332
<TOTAL-LIABILITY-AND-EQUITY> 163,596
<SALES> 0
<TOTAL-REVENUES> 7,504
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,168
<INCOME-PRETAX> (525)
<INCOME-TAX> 0
<INCOME-CONTINUING> (525)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (435)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
