<PAGE> 1
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, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number: 1-12424
HORIZON GROUP, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
MICHIGAN 38-2559212
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
5000 HAKES DRIVE, NORTON SHORES, MI 49441
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(616) 798-9100
----------------------------------------------------
(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 8, 1996 21,987,939
1
<PAGE> 2
HORIZON GROUP, INC. AND SUBSIDIARY
Index to Form 10-Q
September 30, 1996
Page No.
Part I.Financial Information:
Consolidated Condensed Statements of Income for the
three months and nine months ended September 30, 1996 and 1995... 3
Consolidated Condensed Balance Sheets as of
September 30, 1996 and December 31, 1995 ........................ 4
Consolidated Condensed Statements of Cash Flows for the
nine months ended September 30, 1996 and 1995.................... 5
Notes to Consolidated Condensed Financial Statements .............. 6-7
Management's Discussion and Analysis of Results of Operations
and Financial Condition ......................................... 8-11
Part II.
Other Information.................................................. 12
Signatures ........................................................ 13
2
<PAGE> 3
HORIZON GROUP, INC. AND SUBSIDIARY
Consolidated Condensed Statements of Income
For the three and nine months ended September 30, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------- ------------------
1996 1995 1996 1995
------- ------- -------- -------
<S> <C> <C> <C> <C>
(thousands, except per share data)
REVENUE
Base rent $27,529 $22,326 $ 82,087 $41,846
Percentage rent 589 885 1,785 1,739
Expense recoveries 8,758 6,264 24,354 11,756
Other 1,775 1,144 4,644 2,369
------- ------- -------- -------
Total revenue 38,651 30,619 112,870 57,710
------- ------- -------- -------
EXPENSES
Property operating 5,657 4,464 16,631 8,409
Real estate taxes 3,436 2,293 8,827 4,345
Land leases and other 454 308 729 879
Depreciation and amortization 9,420 7,424 25,748 12,993
General and administrative 2,639 1,591 6,378 3,021
Interest 9,701 6,418 27,506 10,539
------- ------- -------- -------
Total expenses 31,307 22,498 85,819 40,186
------- ------- -------- -------
Income before gain on sale of real estate 7,344 8,121 27,051 17,524
Gain on sale of real estate 432 163 432 661
------- ------- -------- -------
Net income before extraordinary charge
and minority interest 7,776 8,284 27,483 18,185
Extraordinary charge on prepayment of
debt (283) - (419) -
------- ------- -------- -------
Net income before minority interest 7,493 8,284 27,064 18,185
Minority interest (1,576) (2,298) (6,463) (3,979)
------- ------- -------- -------
NET INCOME $ 5,917 $ 5,986 $ 20,601 $14,206
======= ======= ======== =======
PER SHARE:
Net income before extraordinary charge $ .29 $ .35 $ 1.06 $ 1.13
Extraordinary charge on prepayment
of debt (.01) - (.02) -
------- ------- -------- -------
Net income $ .28 $ .35 $ 1.04 $ 1.13
======= ======= ======== =======
Cash dividend $ .53 $ .505 $ 1.565 $ 1.626
======= ======= ======== =======
Average common shares outstanding 20,860 17,017 19,808 12,522
======= ======= ======== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
HORIZON GROUP, INC. AND SUBSIDIARY
Consolidated Condensed Balance Sheets
as of September 30, 1996 and December 31, 1995
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
ASSETS (thousands)
<S> <C> <C>
Real estate - at cost:
Land $ 134,840 $ 133,815
Buildings and improvements 1,009,191 926,145
Less accumulated depreciation (62,080) (37,839)
---------- ----------
Total real estate 1,081,951 1,022,121
Cash 2,030 6,567
Prepaid expenses 1,370 1,408
Due from related parties 1,160 1,020
Deferred charges and other assets 40,096 27,974
---------- ----------
Total assets $1,126,607 $1,059,090
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgages and other debt $ 563,452 $ 503,246
Accounts payable and accrued expenses 34,029 43,170
Dividends payable 14,397 12,950
Other liabilities 8,319 8,131
---------- ----------
Total liabilities 620,197 567,497
---------- ----------
MINORITY INTEREST 115,483 149,697
---------- ----------
SHAREHOLDERS' EQUITY:
Common shares 215 186
Additional paid-in capital 415,724 355,803
Distributions in excess of net income (25,012) (14,093)
---------- ----------
Total shareholders' equity 390,927 341,896
---------- ----------
Total liabilities and shareholders' equity $1,126,607 $1,059,090
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
HORIZON GROUP, INC. AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
For the nine months ended September 30, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1996 1995
--------- ---------
(thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income before extraordinary charge $ 21,020 $ 14,206
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interest in net income 6,463 3,979
Depreciation and amortization 26,407 13,256
Gain on sale of real estate (432) (661)
Compensation related to stock bonus arrangements 71 73
Changes in assets and liabilities:
Prepaid expenses 38 (402)
Deferred charges and other assets (15,711) (6,653)
Accounts payable and accrued expenses (10,265) 7,378
Other liabilities (105) 508
-------- --------
Net cash provided by operating activities 27,486 31,684
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for real estate and improvements (82,882) (100,094)
Proceeds from sale of real estate 1,083 1,079
Business acquired, net of cash received - (5,936)
-------- --------
Net cash used in investing activities (81,799) (104,951)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 179,982 66,188
Principal payments on mortgages and other debt (19,615) (15,295)
Net payments (proceeds from) on revolving credit facility (99,882) 43,946
Proceeds from issuance of common stock 28,835 682
Dividends (29,836) (16,183)
Distributions - minority interest (9,708) (3,296)
-------- --------
Net cash provided by financing activities 49,776 76,042
-------- --------
Net increase (decrease) in cash (4,537) 2,775
CASH:
Beginning of period 6,567 4,172
-------- --------
End of period $ 2,030 $ 6,947
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 6
HORIZON GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
(unaudited)
(1) Financial Statement Presentation
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the instructions to Form 10-Q and
do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows
in conformity with generally accepted accounting principles since it is
assumed the user of these statements is reading them in conjunction with
the most recent year-end audited financial statements. In the opinion
of management, the consolidated condensed financial statements contain
all normal, recurring adjustments necessary for a fair statement of
financial results for the interim periods presented. For further
information, refer to the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1995.
Certain reclassifications have been made to the previously reported 1995
statements in order to provide comparability with the 1996 statements
reported herein. These reclassifications have not changed the 1995
results.
(2) Long-Lived Assets
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 Company is required to record 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. Through September 30, 1996, no
assets were deemed to be impaired; however, the Company reviews
compliance with FASB Statement No. 121 on a quarterly basis and may be
required to write down asset carrying values due to future events and
circumstances.
(3) Mortgage and Other Debt
In September, 1996, the Company received a $99.3 million mortgage from
an institutional lender at a fixed interest rate of 9.06 percent with
a ten-year term and a $10.0 million mortgage from a life insurance
company at a fixed rate of 8.25 percent with a four-year term. Proceeds
from the mortgages were used to repay debt outstanding under revolving
credit facilities.
6
<PAGE> 7
HORIZON GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (continued)
(unaudited)
(4) Shareholders' Equity
During the third quarter of 1996, the Company sold 1.525 million shares
of Common Stock to Smith Barney Inc. ("Smith Barney") at a 5 percent
discount to the then market price of $20.00 per share for an aggregate
price of $28.9 million. Net proceeds of $28.8 million from the sale of
Common Stock were used to reduce amounts outstanding under revolving
credit facilities.
(5) Joint Venture
The Company received a commitment, dated July 1, 1996, from Heitman
Capital Management Corporation ("Heitman"), acting as an advisor for an
institutional advisory client, to form a new venture (the "Venture")
for the purposes of acquiring and owning the Company's Finger Lakes
Outlet Center (the "Property"). A fourth quarter 1996 closing is
anticipated. The commitment provides that Heitman will invest a total
of $42.5 million which will be distributed to the Company upon its
contribution of the Property and current expansion phases under
development to the Venture. The Company will develop these additional
phases of the Property pursuant to a development agreement with the
Venture and will manage and lease the Property. The commitment also
provides that Heitman has the right to convert its interest in the
Venture into 1.95 million shares of Common Stock. The commitment is
subject to the completion of final due diligence by Heitman and the
execution of definitive venture agreements. Norman Perlmutter, a
director of the Company, is Chairman of the Board and Chief Executive
Officer of Heitman Financial Limited, of which Heitman is a
wholly-owned subsidiary.
7
<PAGE> 8
HORIZON GROUP, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Results of Operations
and Financial Condition
For the three months and nine months ended September 30, 1996
(unaudited)
General Overview
Horizon Group, Inc. and Subsidiary (the "Company") has grown by developing new
outlet shopping centers, expanding existing outlet shopping centers, acquiring
outlet shopping centers and increasing rental revenue at its existing outlet
shopping centers. The operations of the Company are conducted through
Horizon/Glen Outlet Centers Limited Partnership (the "Operating Partnership").
On July 14, 1995, the Company expanded its operations by merging with
McArthur/Glen Realty Corp. ("McArthur/Glen"), an owner, operator and developer
of outlet shopping centers. The accompanying consolidated condensed financial
statements include the results of operations of McArthur/Glen from the date of
the merger. As of September 30, 1996, the Company owned 79.4 percent of the
Operating Partnership.
Results of Operations
Net income before minority interest in the current three month period decreased
$ .8 million compared to the corresponding 1995 period due primarily to higher
allowances for doubtful accounts and strategic rent concessions at certain
properties. Net income before minority interest increased $8.9 million to
$27.1 million in the current nine months compared to the prior year. The
increase in the nine month period was primarily attributable to the merger with
McArthur/Glen and secondarily, the opening of four additional centers and ten
expansions which collectively added 1.3 million square feet of gross leaseable
area ("GLA"), partially offset by the aforementioned allowances for doubtful
accounts and rent concessions. Depreciation and amortization in the three- and
nine- month periods of 1996 increased $2.0 million and $12.8 million compared
to the prior year due to the increased GLA. Property operating and real estate
tax expenses increased $2.3 million and $12.7 million in the current three and
nine months reflecting the growth in center GLA partially offset by operating
efficiencies and economies of scale. General and administrative expenses in
1996 increased $1.0 million and $3.4 million in the three and nine months
comparable periods. As a result of operating efficiencies achieved through
managing a larger portfolio, general and administrative expenses, before
reserves for doubtful accounts receivable, as a percentage of total revenues
decreased in the current quarter to 4.2 percent compared to 5.2 percent in the
prior year and declined in the current nine months to 3.9 percent from 5.2
percent in the prior year. The general and administrative cost savings in 1996
were offset by increased provisions for doubtful accounts receivable.
8
<PAGE> 9
HORIZON GROUP, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
For the three months and nine months ended September 30, 1996
(unaudited)
Consolidated revenues were as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------------- -------------------------------------
Percentage Percentage
1996 1995 Increase 1996 1995 Increase
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Base rent $27,529 $22,326 23.3 % $ 82,087 $41,846 96.2 %
Percentage rent 589 885 (33.4) % 1,785 1,739 2.6 %
Expense recoveries 8,758 6,264 39.8 % 24,354 11,756 107.2 %
Other 1,775 1,144 55.2 % 4,644 2,369 96.0 %
------- ------- -------- -------- ------- -------
$36,851 $30,619 20.4 % $112,870 $57,710 95.6 %
======= ======= ======== ======== ======= =======
</TABLE>
Base rents increased in the current comparable three- and nine- month periods
principally due to increased GLA. Percentage rent decreased in the current
comparable three months due to lease modifications which increased base rents
but, lowered percentage rents together with lower estimated tenant sales.
Percentage rent increased in the current nine months due to increased GLA.
Weighted average rent per square foot of GLA as of September 30, 1996, was
$14.45 compared to $14.05 as of September 30, 1995. Increases in expense
recoveries from tenants in the current quarter and nine months as compared to
the prior year resulted principally from additional GLA. Other income
increased in both the three- and nine- month periods from higher fee and lease
termination income.
Interest expense increased $3.3 million and $17.0 million in the current three-
and nine-month comparable periods from higher debt levels.
Liquidity and Capital Resources
The Company received a $65.0 million mortgage in the first quarter of 1996 from
an institutional lender at a fixed interest rate of 8.574 percent. Proceeds
from the $65.0 million mortgage were used to reduce current debt maturities and
amounts outstanding under revolving credit facilities. In September 1996, the
Company received a $99.3 million mortgage from an institutional lender at a
fixed interest rate of 9.06 percent and a $10.0 million mortgage from a life
insurance company at a fixed interest rate of 8.25 percent. Proceeds from the
$99.3 million and $10.0 mortgages were used to repay debt outstanding under
revolving credit facilities. The Company has also received a $21.2 million
mortgage commitment from a life insurance company which is scheduled to close
before December 31, 1996.
In July 1996, the Company sold 1.5 million shares of Common Stock for an
aggregate price of $28.9 million. Proceeds from the sale were used to reduce
amounts outstanding under revolving credit facilities. Additionally, in October
1996, the Company issued approximately 0.3 million shares of common stock for
an aggregate price of $6.0 million under the Company's Dividend Reinvestment
Plan (the "Plan"). The Company anticipates receiving an additional $7.0
million from the sale of common stock under the Plan during the fourth quarter
of 1996.
9
<PAGE> 10
HORIZON GROUP, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
For the three months and nine months ended September 30, 1996
(unaudited)
The Company received a commitment, dated July 1, 1996, from Heitman Capital
Management Corporation ("Heitman"), acting as an advisor for an institutional
advisory client, to form a new venture (the "Venture") for the purposes of
acquiring and owning the Company's Finger Lakes Outlet Center (the "Property").
The commitment provides that Heitman will invest a total of $42.5 million
which will be distributed to the Company upon its contribution of the Property
and current expansion phases under development to the Venture. A fourth
quarter 1996 closing is anticipated. See Note 3 in the accompanying
consolidated condensed financial statements for further information.
During the fourth quarter of 1996 and in calendar 1997, the Company plans to
spend approximately $27.0 million and $85.0 million, respectively, to continue
expansion or development of its centers. The Company plans to fund this
expansion and development with existing cash balances, additional equity
offerings, cash flow from operations and additional borrowings.
The Company believes it will have access to the capital resources necessary to
expand and develop its business. The Company anticipates that existing cash
balances and cash flow from operations, together with cash from borrowings and
other sources, will be adequate to meet the capital and liquidity needs of the
Company. The Company expects to meet its short-term borrowing requirements
primarily through its existing revolving credit facilities and a construction
line of credit. The revolving credit facilities, which aggregate $229.0
million, were not fully collateralized resulting in a borrowing base limitation
of $155.4 million and had availability of $16.9 million at September 30, 1996.
The Company believes it has sufficient unencumbered assets to fully
collateralize these credit facilities. At September 30, 1996, borrowings
under the Company's $125.0 million construction line of credit were $21.5
million. To meet its long-term liquidity requirements, the Company intends to
obtain funds through construction credit facilities, revolving credit
facilities, equity offerings, or long-term fixed-rate debt financing in a
manner consistent with its debt to total market capitalization policy.
The Company declared a $.505, $.53 and $.53 dividend per common share in the
first, second and third quarter of 1996, respectively. In order to qualify as
a Real Estate Investment Trust ("REIT") for federal income tax purposes, the
Company is required to pay dividends to its shareholders of at least 95% of its
REIT taxable income. The Company intends to pay those dividends from cash flow
from operations which is expected to increase due to future growth in rental
revenues at existing outlet shopping centers and cash flow from expansions,
acquisitions and new developments. Although the Company intends to make
distributions to its shareholders in accordance with the requirements of the
Internal Revenue Code of 1986, as amended, it also intends to retain such
amounts as it considers necessary from time to time for the acquisitions or
development of new properties as suitable opportunities arise and for the
expansion and renovation of its outlet shopping centers.
10
<PAGE> 11
HORIZON GROUP, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
For the three months and nine months ended September 30, 1996
(unaudited)
Funds From Operations
The Company believes that Funds From Operations provides an indicator of the
financial performance of the Company and is influenced by both the operations
of the properties and the capital structure of the Company. Funds From
Operations is defined as net income (computed in accordance with generally
accepted accounting principles), excluding gains or losses from debt
restructuring, plus depreciation and amortization of real estate assets and
adjustments for other noncash items and unconsolidated partnerships and joint
ventures. The Company expects that Funds From Operations will be the most
significant factor considered by the Board of Directors in determining the
amount of cash distributions the Company will make to shareholders. Funds From
Operations does not represent cash flow from operations as defined by generally
accepted accounting principles and is not necessarily indicative of cash
available to fund all cash flow needs.
For the comparable three and nine months ended September 30, 1996, Funds From
Operations before minority interest increased $1.4 million and $21.8 million or
9.1 and 70.4 percent, respectively, compared to the prior year periods.
Other Information
The statements contained herein which are not historical facts are forward
looking statements based upon economic forecasts, budgets, and other factors
which, by their nature, involve known risks, uncertainties and other factors
which may cause the actual results, performance or achievements of Horizon
Group, Inc. to be materially different from any future results implied by such
statements. In particular, among the factors that could cause actual results
to differ materially are the following: business conditions and general
economy; competitive factors; interest rates and other risks inherent in the
real estate business. 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.
11
<PAGE> 12
HORIZON GROUP, INC. AND SUBSIDIARY
Part II - Other Information
Exhibits and Reports on Form 8-K
a) Exhibit 27 Financial Data Schedule (Edgar filing only)
b) On July 23, 1996, a Current Report on Form 8-K, dated July 17, 1996,
was filed which reported item 5 and item 7.
12
<PAGE> 13
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, INC.
--------------------
Registrant
Date: November 12 , 1996 By: /s/ Joseph Cattivera
---------------------------------------
Joseph Cattivera, Executive Vice President
and Principal Financial Officer
13
<PAGE> 14
HORIZON GROUP INC.
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
27 Financial Data Schedule 15
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,030
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,144,031
<DEPRECIATION> 62,080
<TOTAL-ASSETS> 1,126,607
<CURRENT-LIABILITIES> 0
<BONDS> 563,452
0
0
<COMMON> 215
<OTHER-SE> 390,712
<TOTAL-LIABILITY-AND-EQUITY> 1,126,607
<SALES> 0
<TOTAL-REVENUES> 112,870
<CGS> 0
<TOTAL-COSTS> 26,187
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,506
<INCOME-PRETAX> 27,483
<INCOME-TAX> 0
<INCOME-CONTINUING> 27,483
<DISCONTINUED> 0
<EXTRAORDINARY> 419
<CHANGES> 0
<NET-INCOME> 20,601
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
</TABLE>
