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, 2000
------------------
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
---------------------------------
(State or other jurisdiction
of incorporation or organization)
38-3407933
-----------------------------------
(I.R.S. employer identification no.)
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 6, 2000 2,870,194
=========
1
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Index to Form 10-Q
September 30, 2000
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations of the Company for the
Three Months Ended September 30, 2000 and September 30, 1999.................................................3
Condensed Consolidated Statements of Operations of the Company for the
Nine Months Ended September 30, 2000 and September 30, 1999..................................................4
Condensed Consolidated Balance Sheets of the Company at September 30, 2000 and
December 31, 1999............................................................................................5
Condensed Consolidated Statements of Cash Flows of the Company
for the Nine Months Ended September 30, 2000 and September 30, 1999..........................................6
Notes to Condensed Consolidated Financial Statements...........................................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................................16
Item 3. Quantitative and Qualitative Disclosure of Market Risk..................................................21
Part II. Other Information:
Item 1. Legal Proceedings.......................................................................................22
Item 2. Changes in Securities...................................................................................22
Item 3. Defaults Upon Senior Securities.........................................................................22
Item 4. Submission of Matters to a Vote of Security Holders.....................................................22
Item 5. Other Information.......................................................................................22
Item 6. Exhibits or Reports on Form 8-K.........................................................................23
Signatures.......................................................................................................25
</TABLE>
2
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 2000 September 30, 1999
-------------------------- --------------------------
(thousands, except per share data)
<S> <C> <C>
REVENUE
Base rent $ 5,454 $ 5,677
Percentage rent 58 53
Expense recoveries 1,194 1,502
Other 302 370
-------- -------
Total revenue 7,008 7,602
------- -------
EXPENSES
Property operating 1,515 1,555
Real estate taxes 719 799
Land leases and other 339 418
Depreciation and amortization 1,494 1,244
General and administrative 860 1,037
Interest 2,513 2,461
------- -------
Total expenses 7,440 7,514
------- -------
Loss from joint ventures - (164)
-------- -------
Loss before minority interests and extraordinary charge (432) (76)
Minority interests 62 (7)
--------- -------
Loss before extraordinary charge (370) (83)
Extraordinary charge on prepayment of debt in 1999, net - (568)
of minority interests of $100
---------- --------
Net loss $ (370) $ (651)
====== ========
PER COMMON SHARE - BASIC AND DILUTED:
Loss before extraordinary charge $ (0.13) $ (0.03)
Extraordinary charge - (0.20)
---------- --------
Net loss $ (0.13) $ (0.23)
======= =======
Weighted average common shares outstanding
Basic 2,870 2,844
======= =======
Diluted 3,388 3,389
======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------------- --------------------------
(thousands, except per share data)
<S> <C> <C>
REVENUE
Base rent $ 15,851 $16,735
Percentage rent 127 117
Expense recoveries 3,771 4,549
Other 960 1,013
------- ------
Total revenue 20,709 22,414
------- -------
EXPENSES
Property operating 4,635 4,711
Real estate taxes 1,828 2,516
Land leases and other 1,023 1,362
Depreciation and amortization 4,093 3,651
General and administrative 2,783 3,468
Interest 7,385 6,798
-------- -------
Total expenses 21,747 22,506
------- -------
Loss from joint ventures - (622)
-------- -------
Loss before minority interests and extraordinary charge (1,038) (714)
Minority interests 153 98
-------- -------
Loss before extraordinary charge (885) (616)
Extraordinary charge on prepayment of debt in 1999, net - (568)
of minority interests $100
--------- --------
Net loss $ (885) $(1,184)
========== ========
PER COMMON SHARE - BASIC AND DILUTED:
Net loss before extraordinary charge $ (0.31) $ (0.22)
Extraordinary charge - (0.20)
---------- --------
Net loss $ (0.31) $ (0.42)
======== ========
Weighted average common shares outstanding
Basic 2,860 2,816
======== ========
Diluted 3,389 3,389
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Condensed Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
----------------------- ------------------------
(thousands)
<S> <C> <C>
ASSETS
Real estate - at cost:
Land $ 13,122 $ 13,094
Buildings and improvements 137,125 135,479
Less accumulated depreciation (10,935) (7,154)
---------- -----------
Total net real estate 139,312 141,419
--------- ---------
Cash and cash equivalents 3,242 4,955
Restricted cash 3,643 3,757
Tenant accounts receivable 1,599 1,351
Deferred costs (net of accumulated amortization of $691 and 1,742 1,810
$372 at September 30, 2000 and December 31, 1999,
respectively)
Other assets 1,614 1,708
----------- -----------
Total assets $ 151,152 $ 155,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgages and other debt $ 105,055 $ 107,128
Accounts payable and accrued expenses 4,638 5,229
Prepaid rents and other tenant liabilities 1,712 1,795
Other liabilities 859 901
------------ ------------
Total liabilities 112,264 115,053
MINORITY INTERESTS 5,894 6,419
SHAREHOLDERS' EQUITY:
Common shares ($.01 par value, 50,000 shares authorized, 2,870 29 29
and 2,845 issued and outstanding at September 30, 2000 and
December 31, 1999, respectively)
Additional paid-in capital 34,407 34,056
Retained earnings (deficit) (1,442) (557)
----------- ------------
Total shareholders' equity 32,994 33,528
---------- ----------
Total liabilities and shareholders' equity $ 151,152 $ 155,000
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------ ------------------
(thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (885) $(1,184)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Loss from joint ventures - 622
Minority interests in net loss (153) (98)
Extraordinary charge on prepayment of debt, net
of minority interests of $0 - 568
and $100 respectively
Depreciation 3,934 3,517
Amortization 295 269
Changes in assets and liabilities:
Restricted cash 114 648
Tenant accounts receivable (248) 809
Deferred costs and other assets (133) (125)
Accounts payable and accrued expenses (590) (655)
Other liabilities (42) 297
Prepaid rents and other tenant liabilities (83) (38)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,209 4,630
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for real estate and improvements (1,829) (2,614)
------ -------
CASH USED IN INVESTING ACTIVITIES (1,829) (2,614)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of HGP partnership units (20) -
Principal payments on mortgages and other debt (2,073) (52,289)
Proceeds from borrowings - 50,655
Prepayment penalty - (508)
Debt issue costs - (825)
---------- --------
NET CASH USED IN FINANCING ACTIVITIES (2,093) (2,967)
------ -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,713) (951)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 4,955 2,686
------- -------
END OF PERIOD $3,242 $ 1,735
====== ======
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated 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, 2000, HGP owned
approximately 84.8% 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).
Horizon's former administrative office building located in Norton Shores,
Michigan and the following centers 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 condensed consolidated
financial statements include the accounts of the Company's subsidiary, HGP LP,
and other wholly owned subsidiaries. The Company accounted 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 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 1999. The net effect of these adjustments was a
$1,362,000 decrease in real estate, a $980,000 increase in other assets and a
$382,000 decrease in other liabilities.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Real estate $141,158
Other assets 21,258
----------
$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 owns 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).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM PERIOD FINANCIAL PRESENTATION
The condensed consolidated financial statements 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 accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States 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, 1999.
8
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States 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 September 30, 2000 are not
necessarily indicative of the results that may be achieved in future periods.
REAL ESTATE AND DEPRECIATION
For periods 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>
<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, 2000 and December 31, 1999, no properties
were classified as held for sale.
CASH EQUIVALENTS
The Company considers all 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 lenders (see Note 6) and includes $1.1 million in capital improvement
and tenant allowance reserves, $1.8 million in real estate tax, insurance and
ground lease escrows, and $.7 million for debt service and operating expenses at
September 30, 2000.
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
9
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 and related
advances. 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 of
deferred leasing costs is recorded on the straight-line method over the life of
the lease. Amortization of deferred financing costs is recorded using a method
that approximates the effective interest method over the life of the related
debt and is included as a component of interest expense.
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, receives a deduction for such dividends for federal income tax
purposes. 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 loss
generated since the Merger, the Company is not obligated to make any dividend
distributions to qualify as a REIT.
MINORITY INTERESTS
Minority interests represent the interests of unitholders of HGP LP, other than
the Company. 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 15.2% at September 30, 2000. During the nine months
ended September 30, 2000, 25,098 units were converted into shares of common
stock.
REVENUE RECOGNITION
Leases with tenants are accounted for as operating leases. Minimum annual
rentals are generally recognized on a straight-line basis over the terms of the
respective leases. As a result of recording rental revenue on a straight-line
basis, tenant accounts receivable include $812,000 and $437,000 of accrued
straight line rents at September 30, 2000 and December 31, 1999, respectively,
which are expected to be collected over the remaining lives 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.
Percentage rents are accrued on the basis of reported tenant sales only after
the sales exceed the thresholds above which such rent is due. Expense recoveries
based on common area maintenance expenses and certain other expenses are accrued
in the period in which the related expense is incurred.
OTHER REVENUE
Other revenue consists primarily of interest income, income related to marketing
services that is recovered from tenants pursuant to lease agreements and income
from tenants with lease terms of less than one year.
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
10
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
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>
Eight months ended
August 31, 1999
------------------
(IN THOUSANDS)
<S> <C>
Total revenue $ 2,711
Net loss (1,317)
Total assets 30,672
Total liabilities 33,275
</TABLE>
NOTE 4 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended Three months ended Nine months ended Nine months ended
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
------------------ ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net loss - basic $ (370) $ (651) $ (885) $ (1,184)
Extraordinary charge - net - 568 - 568
Minority interests of unitholders (62) 7 (153) (98)
------ --------- --------- ---------
Net loss - diluted $ (432) $ (76) $ (1,038) $ (714)
====== ========= ======== =========
DENOMINATOR:
Weighted average shares outstanding - 2,870 2,844 2,860 2,816
basic
Effect of diluted securities:
Converting units to shares 515 545 528 573
Employee stock options 3 - 1 -
------ ------- ----- --------
Weighted average shares outstanding - 3,388 3,389 3,389 3,389
diluted ====== ======= ====== ========
Net loss per share - before $(0.13) $ (0.03) $ (0.31) $ (0.22)
extraordinary charge
Extraordinary charge - (0.20) - (0.20)
------- ------- ---------- ---------
Net loss $(0.13) $ (0.23) $ (0.31) $ (0.42)
======= ======= ========= ========
</TABLE>
11
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Outstanding stock options and the potential conversion of units to shares were
excluded in computing diluted earnings per share because the effect of such
items was anti-dilutive for the periods 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.
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 $108.2 million. The outstanding balance equaled $55.8
million and $57.1 million as of September 30, 2000 and December 31, 1999,
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 8.52% and 8.36% as of September 30, 2000 and
December 31, 1999, 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, 2000. 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 1999. 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 July 1, 1999.
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 with initial balances totaling $22.9 million
secured by three factory outlet centers located in Daleville, Indiana, Somerset,
Pennsylvania and Tulare, California and (ii) nonrecourse loans with initial
balances 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 $46.0 million at September 30, 2000 and $46.4
million at December 31, 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).
12
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 $2.5 million on September 30,
2000 and $2.7 million on December 31, 1999. 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 9.1%
and 8.5% at September 30, 2000 and December 31, 1999, respectively.
The Company owns approximately 89 acres of undeveloped land in Muskegon,
Michigan, which it acquired as part of the consideration from the transfer of
its interests in the Bellport Outlet Center (see Note 7). Portions of this land
are subject to land contracts with a total balance of $591,000 as of September
30, 2000 and $776,000 at December 31, 1999. As of September 30, 2000, the
interest rates vary from 9.5% to 10.0%. Monthly debt service payments total
$5,200 through June 2001, and $4,200 through January 2002 with balloon payments
due on these two dates of $125,000 and $458,000, respectively.
In connection with the Merger, Prime became potentially liable for, or agreed to
guarantee certain indebtedness of the Company. As of September 30, 2000, 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 $2.5 million on September 30, 2000 and $2.7 million
on December 31, 1999), and (2) $10.0 million of the Company's obligations under
its credit facility with Nomura. The terms of the Working Capital Agreement
require the Company to repay any outstanding balance on the Prime Loan or other
related indebtedness on which Prime is contingently liable to the extent of net
sale proceeds or from an equity offering. The Company intends to use the net
proceeds from the sale of the outlet center in Algodones, New Mexico to pay down
the Nomura loan on or before its maturity pursuant to the terms of the Prime
Guarantee Agreement. 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 paid through September 2000.
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, 2000
and 1999, the Company paid premiums totaling approximately $576,000 and
$561,000, respectively, 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, 2000 and 1999, the Company
incurred rent expense of $80,000 and $90,000, respectively.
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 transfer 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. At the date of the merger, Prime transferred
$3.0 million to the Company as a 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 transfer of its interests in the joint ventures
13
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
related to the outlet center in Bellport, New York (see Note 1). The
consideration for the transfer 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. No gain or loss was recognized in conjunction with the
settlement of the Working Capital Agreement.
The proceeds from the settlement of the Working Capital Agreement and the
transfer 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 made a $1.5 million loan to Prime Outdoor, LLC, an affiliate of
Prime Group, Inc. The Prime Group, Inc. is an affiliate of Michael W. Reschke, a
Director of the Company. The interest rate on the loan was at 10% and was
secured by a pledge of all of the unencumbered assets of Prime Outdoor, LLC,
Prime Group Inc.'s ownership interest in Prime Outdoor, LLC and 410,783 units in
Horizon Group Properties, LP owned by Prime Group, Inc. and its affiliates. The
loan was approved by a committee of independent directors of the Company. The
loan was repaid on June 9, 2000.
NOTE 8 - SEGMENT INFORMATION
The Company currently operates thirteen shopping centers located in ten states.
The Company separately evaluates the performance of each of its centers.
However, because each of the centers has similar economic characteristics,
facilities and/or 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 extraordinary items (as defined by accounting principles generally
accepted in the United States ("GAAP")) and gains and losses from sales of
depreciable operating property, plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. This definition,
approved by NAREIT in October 1999, clarified the treatment of non-recurring
items that were not considered "extraordinary" under GAAP. NAREIT adopted this
new definition effective January 1, 2000 and required that prior periods be
restated accordingly. FFO should not be considered as an alternative to net
income computed under accounting principles generally accepted in the United
States. A reconciliation of income (loss) before minority interests to diluted
FFO is as follows:
14
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
<TABLE>
<CAPTION>
Nine Nine
months ended months ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Loss before minority interests $ (1,038) $ (1,381)
FFO adjusted depreciation and amortization (1) 3,955 4,318
Extraordinary charge, including minority
interests - 668
----------- ---------
FFO $ 2,917 $ 3,605
========= =========
FFO per share $ .86 $ 1.06
========= =========
</TABLE>
NOTE:
(1) Includes depreciation of the operating real estate and allocated amounts
relating to joint venture investments accounted for under the equity
method.
NOTE 9 - 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. There can be no assurance that a
transaction will result involving the Company.
15
<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, 2000
(unaudited)
INTRODUCTION
The following discussion and analysis of the condensed consolidated financial
condition and results of operations of Horizon Group Properties, Inc. (together
with its subsidiaries "HGP" or the "Company") should be read in conjunction with
the Condensed Consolidated 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, 2000, owned approximately 84.8% 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 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, 2000, HGP's portfolio consisted of 12 factory outlet centers and one power
center located in 10 states comprising an aggregate of approximately 2.7 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.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1999
16
<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, 2000
(unaudited)
The net loss before minority interests was $432,000 for the three months ended
September 30, 2000 compared to a net loss before minority interests of $76,000
for the three months ended September 30, 1999. The main components of this
change were lower rents and increased depreciation expense, partially offset by
decreases in general and administrative expense and the loss recorded in 1999
from joint ventures which were transferred to Prime Retail on September 1, 1999.
Total revenue decreased $594,000 in the three months ended September 30, 2000
compared to the same period in the prior year primarily as a result of a
decrease in base rents due to reductions in rental rates for several tenants,
and a reduction in expense recoveries due to a decline in the percentage of
tenants subject to these charges.
Real estate tax expense decreased $80,000 in the three months ended September
30, 2000 compared to the same period in the prior year mainly due to decreases
in the tax assessments for several properties and the sale of the New Mexico
Center in December 1999.
General and administrative expense decreased $177,000 in the three months ended
September 30, 2000 compared to the same period in the prior year mainly as a
result of reductions in corporate staffing and indirect debt restructuring fees
of $115,000 reported in the three months ended September 30, 1999. This decrease
was partially offset by higher legal fees in the three months ended September
30, 2000 partially due to the amendment of the Company's charter.
Interest expense increased $52,000 in the three months ended September 30, 2000
compared to the same period in the prior year. The primary factors causing the
increase were higher interest rates, which affected the Company's floating rate
debt, and the refinancing of a portion of the Nomura debt with the proceeds from
the JP Morgan loans in July 1999. The JP Morgan loans carry a fixed interest
rate, but that rate was greater than the effective rate on the Nomura loan for
the same period in the prior year. Partially offsetting the increase in interest
rates was a net reduction in debt outstanding of $2.6 million from September 30,
1999 to September 30, 2000.
The average effective interest rate on the Nomura facility for the three months
ended September 30, 1999 was 7.09% compared to 8.53% for the three months ended
September 30, 2000. The balance of the Nomura facility was $57.4 million as of
September 30, 1999 and $55.8 million as of September 30, 2000. The total
principal balance of the JP Morgan loans was $46.6 million as of September 30,
1999 and $46.0 million as of September 30, 2000 with interest at a fixed rate of
8.46%. In September 1999, the Company assumed loans totaling $591,000 as of
September 30, 2000 in connection with land located in Muskegon, Michigan. The
average interest rate on these loans was approximately 9.60% for the three
months ended September 30, 2000.
The Company accounted for its investments in the joint ventures which own the
Bellport Outlet Center utilizing the equity method. On September 1, 1999, the
Company transferred its investments in the Bellport joint ventures to an
affiliate of Prime.
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). There were no similar costs recorded in the three months ended September 30,
2000.
Average occupancy for the Company's total portfolio of properties for the three
months ended September 30, 2000 was 83.3% compared to 81.5% for the three months
ended September 30, 1999. Occupancy of the Company's total portfolio at
September 30, 2000 and 1999, was 83.3% and 81.8%, respectively.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
17
<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, 2000
(unaudited)
Total revenue decreased $1.7 million in the nine months ended September 30, 2000
compared to the same period in the prior year primarily as the result of a
decrease in rental revenue due to reductions in rental rates for several
tenants, and a reduction in expense recoveries due to a decline in the
percentage of tenants subject to these charges.
Real estate tax expense decreased $688,000 in the nine months ended September
30, 2000 compared to the same period in the prior year mainly due to a refund of
a portion of the 1997 through 1999 taxes at the outlet center in Monroe,
Michigan and a decrease in the current tax assessments for this and several
other properties. Land lease and other expense decreased $339,000 in the nine
months ended September 30, 2000 compared to the same period in the prior year
mainly due to reductions in marketing landlord contributions and a reduction in
bad debt reserves.
General and administrative expense decreased $685,000 in the nine months ended
September 30, 2000 compared to the same period in the prior year mainly as a
result of unsuccessful merger costs of $333,000 and indirect debt restructuring
fees of $189,000 reported in the nine months ended September 30, 1999. There
were no similar costs recorded in the nine months ended September 30, 2000. In
addition, savings were realized in the nine months ended September 30, 2000 due
to a reduction in corporate staffing compared to the same period in the prior
year.
Interest expense increased $587,000 in the nine months ended September 30, 2000
compared to the same period in the prior year. The primary factors causing the
increase were higher interest rates, which affected the Company's floating rate
debt and the refinancing of a portion of the Nomura debt with the proceeds from
the JP Morgan loans in July 1999. The JP Morgan loans carry a fixed interest
rate, but that rate was greater than the effective rate on the Nomura loan for
the same period in the prior year. Offsetting the increase in interest rates was
a net reduction in debt outstanding of $2.6 million from September 30, 1999 to
September 30, 2000.
The average effective interest rate on the Nomura facility for the nine months
ended September 30, 1999 was 6.93% compared to 8.20% for the nine months ended
September 30, 2000. In September 1999, the Company assumed loans totaling
$591,000 as of September 30, 2000 in connection with land located in Muskegon,
Michigan. The average interest rate on these loans was approximately 9.6% for
the nine months ended September 30, 2000.
The Company accounted for its investments in the joint ventures which own the
Bellport Outlet Center utilizing the equity method. On September 1, 1999, the
Company transferred its investments in the Bellport joint ventures to an
affiliate of Prime.
An extraordinary charge on debt prepayment of $568,000, net of minority
interests, was incurred in the nine 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).
There were no similar costs recorded in the nine months ended September 30,
2000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the aggregate amount of outstanding mortgages and
other debt was approximately $105.1 million. The Company is contemplating the
expansion of its Tulare Outlet Center and has completed 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 and
the JP Morgan loans (each as hereinafter defined). At September 30, 2000 there
was approximately $1.1 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 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 $3.6 million as of September
30, 2000, including the capital improvement escrows described above. Funds are
dispersed to or on behalf
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, 2000
(unaudited)
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 monthly.
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. The Company is
currently seeking to mitigate its interest rate risk through refinancing the HGP
Credit 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.
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 $55.8 million at September 30, 2000. 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 $46.0 million at September 30, 2000. 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.
Prime has guaranteed approximately $10.0 million of obligations under the HGP
Credit Facility, together with other indebtedness (the "Prime Guarantee"). The
terms of the Working Capital Agreement require the Company to repay any
outstanding balance on indebtedness on which Prime is contingently liable to the
extent of net sale proceeds or from an equity offering. The Company intends to
use the net proceeds from the sale of the outlet center in Algodones, New
Mexico, to pay down the Nomura loan on or before its maturity pursuant to the
terms of the Prime Guarantee Agreement. In connection with the Prime Guarantee,
HGP has agreed to pay Prime a fee of $400,000 per annum until Prime is released
from its guarantee obligations related to the HGP Credit Facility. The Company
has paid this fee through September 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 $2.5 million on September 30,
2000 and $2.7 million on December 31, 1999. This building was previously owned
by an affiliate of Horizon and was contributed to the Company pursuant to the
Contribution Agreement.
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, 2000
(unaudited)
The Company acquired approximately 95 acres of undeveloped land in Muskegon,
Michigan in the transfer of its interests in the Bellport Outlet Center.
Portions of this land are subject to land contracts with a total balance of
$591,000 as of September 30, 2000. The interest rates vary from 9.5% to 10.0%.
Monthly debt service payments total $5,200 through June 2001, and $4,200 through
January 2002 with balloon payments due on these two dates of $125,000 and
$458,000, respectively.
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.
The Company made a $1.5 million loan to Prime Outdoor, LLC, an affiliate of
Prime Group, Inc. on April 18, 2000. The Prime Group, Inc. is an affiliate of
Michael W. Reschke, a Director of the Company. The interest rate on the loan was
10% and was secured by a pledge of all of the unencumbered assets of Prime
Outdoor, LLC, Prime Group Inc.'s ownership interest in Prime Outdoor, LLC and
410,783 units in Horizon Group Properties, LP owned by Prime Group, Inc. and its
affiliates. The loan was approved by a committee of independent directors of the
Company. The loan was repaid on June 9, 2000.
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, receives a deduction for such dividends for federal income tax
purposes. 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 loss
generated since the Merger, the Company is not obligated to make any dividend
distributions to qualify as a REIT.
20
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Quantitative and Qualitative Disclosures 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 $55.8 million at September
30, 2000. 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. The monthly interest rates applicable from June 15, 1998 to
September 30, 2000 ranged from 6.80% to 8.54%. As of September 30, 2000, the
effective rate was 8.52%. 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 174 basis points
(1.74%).
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT CHANGE IN LIBOR RATE CHANGE IN INTEREST EXPENSE PER SHARE - DILUTED
---------------- -------------------- -------------------------- -------------------
<S> <C> <C> <C>
$55,800,000 1.74% $970,900 $.29
</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.
21
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES
The shareholders of the Company approved amendments to the corporate charter at
the annual meeting held on August 29, 2000, which limit the ownership by any
shareholder to no more than 4.9% of the Company's shares. Shareholders owning
more than 4.9% of the Company's shares prior to the filing of the amendments to
the charter remain subject to the former 9.9% limit. The corporate charter was
amended to preserve the ability to utilize the Company's net operating losses
for federal income tax purposes. The shareholders approved this change subject
to the receipt of a favorable ruling from the Internal Revenue Service that the
amendments would not affect the Company's status as a Real Estate Investment
Trust. The Company received this favorable opinion and such amendments first
became effective as of October 20, 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the Company was held on August 29,
2000. At such meeting, the shareholders of the Company elected Governor Jim
Edgar (for: 2,843,019 shares; withheld: 14,508 shares) as a director of the
Company. The shareholders also ratified the appointment of Ernst & Young LLP
(for: 2,852,780 shares; against: 1,883 shares; withheld: 2,860 shares) as the
Company's independent auditors for the fiscal year ending December 31, 2000. The
shareholders also approved the Articles of Amendment and Restatement of the
Corporation (for: 2,573,290 shares; against: 277,520 shares; withheld: 6,717
shares) conditioned upon the receipt of a favorable ruling from the Internal
Revenue Service ("IRS") that the amendments would not affect the company's
status as a Real Estate Investment Trust. The Company received this favorable
opinion and such amendments first became effective as of October 20, 2000.
ITEM 5. OTHER INFORMATION - None
22
<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 3(iv) Articles of Amendment and Restatement of the Company (8)
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 (5)
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 (5)
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 (5)
Exhibit 10.23 Agreement between Andrew F. Pelmoter and the Company (6)
Exhibit 10.24 Agreement of Purchase and Sale and Escrow Instructions dated
March 24, 2000 between Third Horizon Group Limited Partnership
and Triple Net Properties, LLC. (7)
Exhibit 10.25 First Amendment to Agreement of Purchase and Sale and Escrow
Instructions between Third Horizon Group Limited Partnership
and Triple Net Properties, LLC, dated as of April 21, 2000 (7)
23
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Part II - Other Information
Exhibit 10.26 Second Amendment to Agreement of Purchase and Sale and Escrow
Instructions between Third Horizon Group Limited Partnership
and Triple Net Properties, LLC, dated as of April 25, 2000 (7)
Exhibit 10.27 Promissory Note dated April 18, 2000, between Horizon Group
Properties, LP as Lender and Prime Outdoor Group, LLC as
Borrower (7)
Exhibit 10.28 Security Agreement dated April 18, 2000, between Horizon Group
Properties, LP and Prime Outdoor Group, LLC (7)
Exhibit 10.29 Pledge Agreement by and among Horizon Group Properties, LP;
Prime Group Limited Partnership; Prime Group II, LP; Prime
Group III, LP; Prime Group IV, LP; Prime Group V, LP and Prime
Financing Limited Partnership (7)
Exhibit 10.30 Collateral Assignment of Membership Interests dated April 18,
2000, between Horizon Group Properties, LP and The Prime
Group, Inc. (7)
Exhibit 10.31 Guarantee dated April 18, 2000, between Horizon Group
Properties, LP; Prime Group Limited Partnership; Prime Group
II, LP; Prime Group III, LP; Prime Group IV, LP; Prime Group
V, LP and Prime Financing Limited Partnership (7)
Exhibit 10.32 Letter Agreement dated April 18, 2000, between Horizon Group
Properties, Inc., Prime Group, Inc. and Prime Outdoor Group,
LLC (7)
Exhibit 10.33 Agreement between Andrew F. Pelmoter and the Company (7)
Exhibit 10.34 Amendment to Employment Agreement between Gary J. Skoien and
the Company dated as of August 29, 2000
Exhibit 10.35 Amendment to Employment Agreement between David R. Tinkham and
the Company dated as of August 29, 2000
Exhibit 27 Financial Data Schedule
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 August 3, 1999 (Commission file no. 0-24123).
6 Incorporated by reference to the Company's Form 10-K dated as of March 6,
2000 (Commission file no. 0-24123).
7 Incorporated by reference to the Company's Form 10-Q dated as of May 15,
2000 (Commission file no. 0-24123).
8 Incorporated by reference to the Company's Definitive Proxy Statement dated
as of July 12, 2000 (Commission file no. 0-24123).
(b) Reports on Form 8-K - None
24
<PAGE>
HORIZON GROUP PROPERTIES, INC.
Part II - Other Information
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 13, 2000 By: /s/ Gary J. Skoien
-------------------------- --------------------------------------------
Gary J. Skoien, President and
Chief Executive Officer
Date: November 13, 2000 By: /s/ David R. Tinkham
-------------------------- --------------------------------------------
David R. Tinkham, Chief Accounting
and Chief Financial Officer
25
