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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER: 1-12424
HORIZON GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<C> <C>
MICHIGAN 38-2559212
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
5000 HAKES DRIVE (616) 798-9100
NORTON SHORES, MI 49441 (Registrant's telephone number,
(Address of principal executive offices, including area code)
including zip code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS TITLE OF EACH EXCHANGE ON WHICH REGISTERED
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<C> <C>
Common Stock, $.01 par value
New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $357,281,488 based on the closing sale price of
$16.00 per share as reported on the New York Stock Exchange on February 14,
1997.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of February 14, 1997 was 23,781,583.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents of the registrant are incorporated herein by
reference:
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DOCUMENT PART OF FORM 10-K
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Annual Report to Shareholders for the fiscal year ended
December 31, 1996......................................... II
Proxy Statement for the 1997 annual meeting of
shareholders.............................................. III
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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, and 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.
PART I
ITEM 1 -- BUSINESS
As used in this report, the "Company" means Horizon Group, Inc. ("Horizon")
and Horizon/Glen Outlet Centers Limited Partnership (the "Operating
Partnership"), a Delaware limited partnership of which Horizon is the general
partner, and their respective subsidiaries and predecessors.
GENERAL
The Company is one of the largest owners, operators and developers of
outlet centers in the United States, based on total gross leasable area ("GLA"),
number of tenants and total revenue. At December 31, 1996, the Company owned and
operated 37 outlet centers containing an aggregate of approximately 9.4 million
square feet of GLA located in 20 states. On July 14, 1995, McArthur/Glen Realty
Corp. ("McArthur/Glen"), another leading outlet center company merged into
Horizon (the "Merger") and Horizon Outlet Centers Limited Partnership ("Horizon
Operating Partnership") and McG Outlet Centers Limited Partnership
("McArthur/Glen Operating Partnership") were consolidated into the Operating
Partnership ("Consolidation"). Commencing with its taxable year ended December
31, 1994, Horizon has elected to be treated as a Real Estate Investment Trust
("REIT") for Federal income tax purposes and Horizon believes that it has
operated in such a manner as to qualify for taxation as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"). Horizon intends to
continue to operate in the manner required to continue to be taxed as a REIT.
The Company is self-administered and self-managed.
The Company's properties (the "Properties") are held by, and all of the
Company's operations are conducted through, the Operating Partnership and its
subsidiaries. Horizon is the general partner of the Operating Partnership and,
as of December 31, 1996, owned approximately 81.6% of the outstanding
partnership interests ("Units"). The Units are exchangeable, subject to certain
limitations to protect the Company's status as a REIT, into shares of common
stock of the Company ("Common Stock") on a Unit-for-share basis.
RECENT DEVELOPMENTS
As a result of the Company's fourth quarter review of the carrying value of
its long-lived assets, the Company was required to incur write-downs totaling
$61.7 million during the fourth quarter of 1996 primarily pursuant to FASB
Statement 121 as follows:
- Cost overruns and limited success in leasing the Company's Dole Cannery
project in Honolulu, Hawaii, required a write-down of the Company's
investment in that project and a reserve against a related receivable.
Beginning in 1997, the Company will expense and not capitalize internal
leasing, interest or operating costs incurred on the project. In the
fourth quarter of 1996, interest and operating expenses totaled $1.2
million (exclusive of the obligations under a lease expiring in 2045)
were capitalized and are included in the write-down. While cash lease
payments due on the lease in 1997 are $3.2 million, straight-line lease
expense accrued for financial reporting purposes (including funds from
operations computations) will be $8.0 million for 1997 and a similar
amount will be required to be accrued for each remaining year of the
lease.
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- The Company decided to market for sale two centers, one in Holland,
Michigan and one in Port Huron, Michigan. Based upon the expected net
proceeds, the Company was required to write-down the carrying value of
such centers to their fair value less cost to sell.
- Revised occupancy expectations indicated a permanent impairment of value
of three other centers, therefore requiring a write-down of the carrying
value of those centers to their fair value.
In addition, the Company's fourth quarter and year end results reflect
charges of $2.2 million related to development projects which will not be
pursued and a $1.5 million provision for executive severance costs.
BUSINESS STRATEGY
The Company's goal is to increase its Funds From Operations and Adjusted
Funds From Operations per share. The Company defines "Adjusted Funds From
Operations" to mean income before minority interest, excluding (1) gains or
losses from real estate sales or debt restructuring, certain other one-time
charges and write-downs and sales of property, (2) depreciation of real estate,
(3) amortization other than the amortization of deferred financing cost, and (4)
adjustments for unconsolidated partnerships and joint ventures ("Funds From
Operations" as defined by the National Association of Real Estate Investment
Trusts in March 1995), then further adjusted to, (a) eliminate the effect of
straight-lined rental income and rental expense and, (b) deduct normalized
capital expenditures associated with leasing, tenant improvements and
non-revenue enhancing upkeep of properties.
Due to recent changes in the outlet center industry, the Company has
adopted a new business strategy for 1997 which consists primarily of increasing
its focus on the leasing of existing outlet centers, developments and expansions
delivered in 1997, reducing general and administrative expenses and limiting new
development to the expansion of certain selected existing outlet centers where
the Company anticipates high demand for additional retail space. While the
Company may engage in new developments or acquisitions, it will do so only in
limited circumstances with compelling business rationale. In addition, the
Company is also attempting to divest itself of two of its centers, and may also
divest itself of additional centers.
FINANCING. The Company finances its operations, expansions and development
with undistributed cash flow, bank or other borrowings from institutional
lenders and the issuance of equity securities. As of December 31, 1996, the
Company had aggregate commitments under existing revolving lines of credit of
approximately $354.0 million, $73.2 million of which are subject to the pledge
of additional collateral. Although current in the payment of principal and
interest, as a result of the Company's operating results for the year ended
December 31, 1996, including $65.4 million of charges and write-downs, the
Company, as of December 31, 1996, was not in compliance with certain financial
covenants contained in certain of its credit facilities. Each of the affected
lenders has provided waivers to the Company. The Company currently anticipates
that similar waivers may be required for subsequent quarters unless amendments
or refinancings are obtained. While the Company has no reason to believe such
waivers will not be given and that it will not be able to obtain refinancing
with a coverage test or amendments that will permit the Company to satisfy the
new terms on a going forward basis if required, there can be no assurance that
such waivers will be given or such amendments or refinancing will be available
on terms acceptable to the Company. On February 26, 1997, the Company commenced
actively exploring replacement credit facilities. As of December 31, 1996, the
Company had a debt to total market capitalization (the aggregate of the market
value of the Company's outstanding Common Stock, including Units exchangeable
for Common Stock, and its long-term debt) ratio of approximately 51%.
The Company's general financing strategy has been not to incur additional
debt if such additional debt would cause its ratio of debt to total market
capitalization to exceed 40%, however, the Company may incur additional debt if
the total consolidated debt of the Company does not exceed 55% of the then fair
market value of the real estate owned by the Company. Due primarily to the
decline in the market price of Horizon Common Stock from the time the debt was
incurred, the Company's debt to total market capitalization at December 31, 1996
exceeded 40%, however, the Company does not believe that its total consolidated
debt exceeded 55% of the current market value of the real estate owned by the
Company at December 31, 1996. The Company may from time to time re-evaluate and
modify its debt policies in light of then current
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economic conditions, relative costs of debt and equity capital, the market value
of its properties, growth and acquisition opportunities and other factors. The
governing instruments of the Company do not contain any limitation on the amount
or percentage of indebtedness the Company may incur.
Any additional debt financing, including additional lines of credit, may be
secured by mortgages on its properties. Such mortgages may be recourse or
non-recourse and/or cross-collateralized and/or may contain cross-default
provisions. The Company does not have a policy limiting the number of mortgages
that may be placed on, or the amount of indebtedness that may be secured by, any
particular property, but mortgage financing instruments usually limit additional
indebtedness on such properties.
MANAGED PROPERTIES
At December 31, 1996, HGI Management Corp. and MG Third Party Services
Corp. (the "Management Companies") provide development, leasing and management
services for properties not owned directly or indirectly by the Operating
Partnership. The capital stock of the Management Companies is divided into
voting and non-voting stock with the voting stock of HGI Management Corp. and MG
Third Party Services Corp. owned 5% and 1% by the Operating Partnership and 95%
and 99% by Jeffrey A. Kerr. The non-voting stock of the Management Companies is
owned 100% by the Operating Partnership. The Operating Partnership receives 95%
of the economic interest as a result of such stock ownership.
As of December 31, 1996, the Management Companies managed two outlet
centers owned by others, a center in Denton, Texas having approximately 132,500
square feet of GLA and a center in Gilroy, California having approximately
202,795 square feet of GLA. The Management Companies also managed, until August
1, 1996, two shopping centers having an aggregate of 192,000 square feet of GLA
in which Jeffrey A. Kerr had a significant ownership interest.
COMPETITION
The Company's outlet centers compete for customers primarily with outlet
centers built and operated by other developers, traditional shopping malls and
"off-price" retailers. The Company believes that the location of the other
outlet centers near its centers generally is not harmful to its business since a
concentration of value retail stores tends to create a shopping destination. The
Company carefully considers the degree of existing and planned competition in a
proposed area before deciding to build or acquire a new center or expand an
existing center.
The Company's outlet centers compete to a limited extent with various full-
and off-price retailers in the highly fragmented retailing industry. However,
the Company believes that the majority of its customers visit outlet centers
because they are intent on buying first-quality, name-brand goods at discounted
prices. Traditional full- and off-price retailers are often unable to provide
such a variety of products at attractive prices.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following supplements the discussion of the Company's primary strategy
as set forth elsewhere in this report. The Company's policies with respect to
those activities and the matters discussed below have been determined by the
Board of Directors of the Company and may be amended or revised from time to
time at the discretion of the Board of Directors without a vote of the
shareholders of the Company.
INVESTMENT POLICIES. The Company may expand existing properties, develop
new properties, purchase or lease income-producing properties for long-term
investment, expand and improve the properties it owns or sell such properties,
in whole or in part, when circumstances warrant. The Company may also
participate with other entities in property ownership through joint ventures or
other types of co-ownership. Equity investments may be subject to existing
mortgage financing and other indebtedness which have priority over the equity
interest of the Company.
While the Company has emphasized equity real estate investments, it may, in
its discretion, invest in mortgages and other real estate interests. The Company
has not previously invested in mortgages and it does
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not presently intend to invest to a significant extent in mortgages or deeds of
trust, but it may invest in participating or convertible mortgages if it
concludes that it may benefit from the cash flow or any appreciation in the
value of the subject property.
Subject to the percentage of ownership limitations and gross income tests
which must be satisfied to qualify as a REIT, the Company may also invest in
securities of concerns engaged in real estate activities or in securities of
other issuers. The Company does not intend to invest in the securities of any
other issuer for the purpose of exercising control; however, the Company may in
the future acquire all or substantially all of the securities or assets of other
REITs, management companies or similar entities where such investments would be
consistent with the Company's investment policies. In any event, the Company
does not intend that its investments in securities would require the Company to
register as an investment company under the Investment Company Act of 1940, and
the Company would divest securities before any such registration would be
required.
POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES. The Company may, but
does not presently intend to, make investments other than as previously
described. The Company has authority to offer its capital shares or other senior
securities in exchange for property and to repurchase or otherwise reacquire its
Common Stock or any other securities and may engage in such activities in the
future. During the last four years, the Company has not engaged in trading,
underwriting or agency distribution or resale of securities of other issuers and
does not intend to do so. At all times, the Company intends to make investments
in such a manner as to be consistent with the requirements of the Internal
Revenue Code of 1986 to qualify as a REIT unless, because of changed
circumstances, the Board of Directors determines that it is no longer in the
best interests of the Company to qualify as a REIT.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
such property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of toxic or hazardous substances can, under
certain circumstances, also result in claims for personal injury and property
damage. The presence of such substances may adversely affect the owner's ability
to sell such real estate or to borrow using such real estate as collateral. Such
costs or liabilities may exceed the value of such real estate. In addition,
persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility, whether or not such facility
is owned by such person. In connection with its ownership and operation of the
Properties, the Company may be potentially liable for the costs described above.
However, the Company has not been notified by any governmental authority of any
non-compliance, liability or other claim in connection with any of the
Properties. The Company is not aware of any other environmental condition with
respect to any of the Properties that it believes would have a material adverse
effect on the Company's business, assets, results of operations, or competitive
conditions nor does the Company believe that compliance with Federal, state or
local environmental laws and regulations will have a material adverse effect on
the capital expenditures, earnings or competitive position of the Company. It is
the Company's policy to obtain Phase I environmental studies before acquiring
properties.
INSURANCE
Management believes that each of the Properties is covered by adequate
fire, flood, property and, in the case of the Lake Elsinore, Gilroy, Pismo
Beach, Tracy and Tulare centers in California, the Burlington center in
Washington and the Laughlin center in Nevada, earthquake insurance provided by
reputable companies and with commercially reasonable deductibles and limits.
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EMPLOYEES
As of December 31, 1996, the Company had 465 full-time employees. The
Company believes that this staffing will be sufficient to manage the Company and
its 37 outlet centers. The Company believes that its relations with its
employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of December 31, 1996 were:
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OFFICER OF THE
NAME AGE POSITION WITH THE COMPANY COMPANY SINCE
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Jeffrey A. Kerr(1)................... 42 Chairman of the Board of Directors, 1984
President, and Chief Executive Officer
Joseph Cattivera..................... 55 Executive Vice President 1994
James S. Harris...................... 48 Executive Vice President 1995
William H. Neville................... 52 Regional President 1996
Robert L. Doran...................... 44 Vice President 1996
Heidi J. Holwerda(2)................. 31 Vice President 1996
James S. O'Brien..................... 44 Vice President, Secretary and Treasurer 1996
Richard A. Phillips.................. 44 Vice President 1996
Thomas Rumptz........................ 36 Vice President 1996
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(1) Jeffrey A. Kerr resigned as Chairman of the Board of Directors, President
and Chief Executive Officer effective February 8, 1997. Norman Perlmutter, a
director of the Company, was named Chairman of the Board of Directors
effective February 8, 1997. Ronald L. Piasecki, a director of the Company,
was named President and Chief Executive Officer effective February 8, 1997.
(2) Heidi J. Holwerda resigned from the Company effective March 4, 1997.
JEFFREY A. KERR -- CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE
OFFICER. Prior to his resignation in February 1997, Mr. Kerr had served as
Chairman of the Board, President, Chief Executive Officer and a Director of the
Company since its founding by him in November 1984. From 1982 to November 1984,
he served as Vice President of Centres, Inc., a commercial real estate
development firm, with active involvement in the development of factory outlet
centers. For five years prior to joining Centres, Inc., Mr. Kerr served as Vice
President of Fairfield Corporation, a commercial real estate development firm.
In addition to his duties with the Company, Mr. Kerr is a former President of
the Developers of Outlet Centers Association, and a Trustee of the International
Council of Shopping Centers. Mr. Kerr holds a B.S. degree with honors from the
University of Southern California.
JOSEPH CATTIVERA -- EXECUTIVE VICE PRESIDENT. Mr. Cattivera has served as
an Executive Vice President of the Company since May 1994. From December 1993
until May 1994, Mr. Cattivera served as an exclusive consultant for the
Management Company. From April 1993 until November 1993, Mr. Cattivera served as
an independent consultant. From 1979 until April 1993, Mr. Cattivera served as
the President and Chief Operating Officer of Angeles Corporation, an investment
management company specializing in real estate and securities management. As a
result of the downturn in the real estate market beginning in 1987, in April
1993, Angeles Corporation filed a petition under the federal bankruptcy laws.
Mr. Cattivera, a certified public accountant, holds a B.S. degree in accounting
from Pepperdine University.
JAMES S. HARRIS -- EXECUTIVE VICE PRESIDENT. Mr. Harris has served as an
Executive Vice President of the Company since July 1995. Mr. Harris served as
Chief Operating Officer of McArthur/Glen from July 1993 to July 1995. Prior to
this post, Mr. Harris served McArthur/Glen as Vice President from 1988 until
1993. Prior to joining McArthur/Glen in 1988, Mr. Harris spent six years with
the Taubman Company of Bloomfield Hills, Michigan, initially managing large
regional shopping centers and subsequently leasing
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projects in the Northeast and Mid-Atlantic regions. Prior to his affiliation
with Taubman, Mr. Harris worked in the I. Magnin Division of Federated
Department Stores. Mr. Harris graduated from Seattle University.
JAMES S. O'BRIEN -- VICE PRESIDENT, SECRETARY AND TREASURER. Mr. O'Brien
has served as Vice President -- Administration of the Company since March, 1996,
Secretary of the Company since April 1996 and Treasurer of the Company since
June, 1996. Mr. O'Brien served as Director of Leasing of the Company from 1993
until July, 1995. Prior to joining the Company, Mr. O'Brien served as Director
of Leasing for Eddie Bauer, Inc. Mr. O'Brien holds a B.A. in Business from the
College of St. Thomas in St. Paul, Minnesota.
RICHARD A. PHILLIPS -- VICE PRESIDENT -- CONTROLLER. Mr. Phillips has
served as Vice President -- Controller of the Company since March, 1996. From
1994 until March, 1996, Mr. Phillips served as Controller of the Company. Prior
to assuming this position, from 1982 until 1994, Mr. Phillips held various
positions, most recently as Vice President, Controller and Treasurer of GEO
International. Mr. Phillips, a certified public accountant, holds a B.S. in
Business Administration from California State University at Northridge.
HEIDI J. HOLWERDA -- VICE PRESIDENT. Ms. Holwerda has served as a Vice
President -- Marketing of the Company since March, 1996. Prior to assuming this
position, Ms. Holwerda served as Director of Marketing and Communications for
the Company since July, 1995. Ms. Holwerda holds a B.A. in Communication from
the University of Michigan and a M.A. in Organizational Communication from
Western Michigan University.
THOMAS RUMPTZ -- VICE PRESIDENT. Mr. Rumptz has served as Vice
President -- Real Estate of the Company since July, 1996. From May 1994 to July
1996, Mr. Rumptz served as the Company's Director of Real Estate and Senior
Analyst. From October 1991 until May 1994, Mr. Rumptz served as Controller of
the Company. Mr. Rumptz holds a B.A. in Accounting from the University of
Michigan in Dearborn, and a M.B.A. in Management from Grand Valley State
University.
ROBERT L. DORAN -- VICE PRESIDENT -- FINANCE. Mr. Doran has served as Vice
President -- Finance of the Company since November, 1996. From February, 1986 to
November, 1996, Mr. Doran served as Vice President - Commercial Real Estate of
First Chicago NBD Corporation. Mr. Doran holds a B.S. in Business and an M.B.A.
in Finance from Central Michigan University.
WILLIAM H. NEVILLE -- REGIONAL PRESIDENT. Mr. Neville has served as
Regional President of the Company since March, 1996. From March, 1990 until
December, 1995, Mr. Neville was employed by Charter Oak Partners, where he
served as Vice President -- Leasing, Executive Vice President and President. Mr.
Neville holds a B.S. in Business from St. Joseph's University and an M.B.A. in
Management from Fairlaigh-Dickenson University.
The Company has entered into employment contracts with Jeffrey A. Kerr,
Joseph Cattivera, James S. Harris and William H. Neville. The contracts provide
that these individuals devote substantially all of their business time to the
operation of the Company. The contract with Mr. Kerr provides for an initial
three-year term which may be extended for an additional year. The contracts with
Mr. Cattivera and Mr. Harris provides for a three-year term. The contract with
Mr. Neville provides for a two-year term. The Company has also entered into a
contract with Richard A. Phillips which provides for a bonus to be paid to Mr.
Phillips if he remains employed by the Company until March 31, 1997.
ITEM 2 -- PROPERTIES
GENERAL
As of December 31, 1996, the Company's portfolio consisted of the following
Properties: (i) 37 outlet centers located in California, Colorado, Florida,
Georgia, Hawaii, Indiana, Kentucky, Maryland, Michigan, Minnesota, Missouri,
Nevada, New Mexico, New York, Ohio, Pennsylvania, Texas, Virginia, Washington
and Wisconsin with an average size of approximately 253,000 square feet of GLA,
aggregating approximately 9.4 million square feet of GLA; and (ii) an aggregate
of approximately 360 acres of outlots, retail pads and expansion pads located
adjacent to or near certain of the Company's existing outlet centers (the
"Undeveloped Parcels").
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The following table summarizes certain information as of December 31, 1996
with respect to the Company's 37 centers in operation.
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YEAR OF TOTAL
OPENING/ APPROXIMATE PERCENTAGE
MOST RECENT GLA AS OF GLA LEASED
NAME AND EXPANSION/ 12/31/96 AS OF
LOCATION OF CENTER NO. OF PHASES (SQ. FT.) 12/31/96 CERTAIN TENANT BRANDS
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Bellport Outlet Center(3).............. 1992/1996 151,415 89.5% Anne Klein, Bass, Chaus,
Patchogue, New York 2 Phases Corning/Revere, Jockey, Jones
New York, Liz Claiborne,
London Fog, Maidenform, Nike,
Nine West, OshKosh B'Gosh,
Reebok, Van Heusen, Vanity
Fair
Outlets at Birch Run................... 1986/1996 720,708 95.6% American Eagle, Ann Taylor,
Birch Run, Michigan 18 Phases BOSE, Chaus, Dansk, Eddie
Bauer, Espirit, Etienne
Aigner, Fila, Gap, Guess?, J.
Crew, Lenox, Levi's, Liz
Claiborne, Mikasa, Nautica,
Nike, Nine West, NordicTrack,
Noritake, OshKosh B'Gosh,
Polo/Ralph Lauren, Reebok,
Sony, Spiegel,
Springmaid-Wamsutta, Tommy
Hilfiger, Van Heusen, Vanity
Fair, WestPoint Pepperell
Burlington Outlet Center............... 1989/1993 174,105 91.7% Bass, Bugle Boy, Fila,
Guess?,
Burlington, Washington 3 Phases J. Crew, Jones New York, Liz
Claiborne, Maidenform,
Mikasa, Reebok, Van Heusen
Calhoun Outlet Center.................. 1992/1995 254,270 80.3% Anne Klein, Chaus, J. Crew,
Calhoun, Georgia 2 Phases Jones New York, Liz
Claiborne, London Fog,
Mikasa, Nike, Nine West,
OshKosh B'Gosh,
Springmaid-Wamsutta, Van
Heusen
Conroe Outlet Center................... 1992/1994 281,436 94.0% Bass, Bugle Boy, Carter's
Conroe, Texas 3 Phases Childrenswear, Chaus,
Corning/Revere, Elisabeth,
Etienne Aigner, Fila, Guess?,
Jockey, Levi's, Liz
Claiborne, Mikasa, Nike, Nine
West, OshKosh B'Gosh,
Springmaid-Wamsutta, Van
Heusen
Dry Ridge Outlet Center................ 1991/1994 117,980 85.3% Carter's Childrenswear,
Guess?,
Dry Ridge, Kentucky 2 Phases Jones New York, Liz
Claiborne, Mikasa, Nike, Nine
West, Spiegel, Van Heusen
Horizon Outlet Center -- Edinburgh..... 1989/1995 298,068 96.6% American Eagle, Ann Taylor,
Edinburgh, Indiana 2 Phases Bugle Boy, Corning/Revere,
Dansk, Eddie Bauer, Espirit,
Florsheim, Jockey, Lenox,
Levi's, Nautica, OshKosh
B'Gosh, Spiegel, Van Heusen
</TABLE>
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<TABLE>
<CAPTION>
YEAR OF TOTAL
OPENING/ APPROXIMATE PERCENTAGE
MOST RECENT GLA AS OF GLA LEASED
NAME AND EXPANSION/ 12/31/96 AS OF
LOCATION OF CENTER NO. OF PHASES (SQ. FT.) 12/31/96 CERTAIN TENANT BRANDS
------------------ ------------- ----------- ---------- ---------------------
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Finger Lakes Outlet Center(4).............. 1995/1996 324,399 96.0% Bass, BOSE, Bugle Boy,
Waterloo, New York 2 Phases Coach, Corning/Revere, Espirit,
Etienne Aigner, Fila, Florsheim,
J. Crew, Jockey, Jones New York,
Levi's, Liz Claiborne, London
Fog, Mikasa, Nautica, Nine West,
OshKosh B'Gosh, Polo/Ralph
Lauren, Reebok,
Springmaid-Wamsutta, Van Heusen,
Vanity Fair, Waterford Wedgwood
Horizon Outlet Center -- Fremont........... 1985/1994 228,530 95.0% Ann Taylor, Bass, Bugle Boy,
Fremont, Indiana 3 Phases Chaus, Coach, Corning/Revere,
Florsheim, Jockey, Jones New
York, Levi's, London Fog,
Mikasa, Nautica, OshKosh B'Gosh,
Polo/Ralph Lauren, Reebok, Tommy
Hilfiger, Van Heusen
Outlets at Gilroy.......................... 1992/1995 373,904 96.3% Ann Taylor, Bass, BOSE,
Gilroy, California 3 Phases Brooks Brothers, Espirit,
Etienne Aigner, Florsheim, Gap,
Guess?, J. Crew, Lenox, London
Fog, NordicTrack, Noritake,
OshKosh B'Gosh, Reebok, Reed &
Barton, Springmaid-Wamsutta,
Timberland, Van Heusen, Vanity
Fair
Southwest Outlet Center at Hillsboro....... 1989/1995 359,255 97.6% American Eagle, Chaus, Corning/
Hillsboro, Texas 3 Phases Revere, Eddie Bauer, Etienne
Aigner, Fila, Florsheim, Gap,
Guess, J. Crew, Jockey, Jones
New York, Levi's, Liz Claiborne,
Mikasa, Nike, Nine West, OshKosh
B'Gosh, Reebok,
Springmaid-Wamsutta, Van Heusen
Horizon Outlet Center -- Holland(5)........ 1988/1990 185,769 72.3% Bass, Bugle Boy, Carter's
Holland, Michigan 2 Phases Childrenswear, Casual Corner,
Eddie Bauer, Florsheim, Jockey,
Oneida, Reebok, Van Heusen
The Dole Cannery........................... 1996 254,999 35.0% Big Dog Sportswear, California
Honolulu, Hawaii 4 Phases Luggage, Dockers, Leathermode,
Levi's, OshKosh B'Gosh, Van's
Jeffersonville Outlet Center............... 1993/1994 309,722 82.7% Anne Klein, BD Baggies, Bass,
Jeffersonville, Ohio....................... 3 Phases Big Dog Sportswear,
Corning/Revere, Etienne Aigner,
Everything Rubbermaid, Genuine
Article, Jones New York, Liz
Claiborne, Maidenform, Mikasa,
Reebok, Spiegel, Van Heusen
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
YEAR OF TOTAL
OPENING/ APPROXIMATE PERCENTAGE
MOST RECENT GLA AS OF GLA LEASED
NAME AND EXPANSION/ 12/31/96 AS OF
LOCATION OF CENTER NO. OF PHASES (SQ. FT.) 12/31/96 CERTAIN TENANT BRANDS
------------------ ------------- ----------- ---------- ---------------------
<S> <C> <C> <C> <C>
Lakeside Marketplace....................... 1988/1991 268,736 98.3% Anne Klein, Bass, Brooks
Kenosha, Wisconsin 4 Phases Brothers, Dansk, Etienne Aigner,
Fila, Genuine Article, J. Crew,
Jones New York, Liz Claiborne,
London Fog, Maidenform, Mikasa,
Nike, NordicTrack, Noritake,
Polo/Ralph Lauren, Timberland,
Van Heusen, Woolrich
Lake Elsinore Outlet Center................ 1991/1995 368,785 91.7% Bass, Bugle Boy, Corning/
Lake Elsinore, California 4 Phases Revere, Espirit, Etienne Aigner,
Florsheim, Jockey, Jones New
York, Levi's, Liz Claiborne,
London Fog, Maidenform, Mikasa,
Nike, Nine West, NordicTrack,
OshKosh B'Gosh, Sony, Van
Heusen, Vanity Fair
Horizon Outlet Center -- Laughlin.......... 1996 259,241 69.0% Bass, Big Dog Sportswear,
Laughlin, Nevada Bugle Boy, Corning/Revere,
Levi's, Maidenform, Mikasa,
OshKosh B'Gosh, Polo/Ralph
Lauren, Reebok, Van Heusen
Medford Outlet Center...................... 1991/1995 188,060 86.7% American Eagle, Bass, Bugle
Medford, Minnesota 2 Phases Boy, Corning/Revere, Etienne
Aigner, Guess?, Levi's, Liz
Claiborne, Mikasa, Nike, Van
Heusen
Lighthouse Place........................... 1987/1995 433,415 98.7% American Eagle, Ann Taylor,
Michigan City, Indiana 6 Phases Anne Klein, Bass, Big Dog
Sportswear, Brooks Brothers,
Chaus, Corning/Revere, Crate &
Barrel, Eddie Bauer, Etienne
Aigner, J. Crew, Jockey, Jones
New York, Lenox, Levi's, London
Fog, Mikasa, Nautica, Nine West,
NordicTrack, OshKosh B'Gosh,
Polo/Ralph Lauren, Reebok,
Spiegel, Timberland, Tommy
Hilfiger, Van Heusen
Horizon Outlet Center -- Monroe............ 1987/1989 232,639 87.1% Bass, Bugle Boy, Carter's
Monroe, Michigan 2 Phases Childrenswear, Casual Corner,
Corning/Revere, Easy Spirit, Hit
or Miss, Levi's, Mikasa, Nike,
Van Heusen, WestPoint Pepperell
Lakeshore Marketplace...................... 1995 360,533 73.1% Barnes & Noble, Ben Franklin,
Norton Shores, Michigan Di's Hallmark, Dunham's Sporting
Goods, Elder-Beerman, Great
Party, Toys 'R' Us, Witmark
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
YEAR OF TOTAL
OPENING/ APPROXIMATE PERCENTAGE
MOST RECENT GLA AS OF GLA LEASED
NAME AND EXPANSION/ 12/31/96 AS OF
LOCATION OF CENTER NO. OF PHASES (SQ. FT.) 12/31/96 CERTAIN TENANT BRANDS
------------------ ------------- ----------- ---------- ---------------------
<S> <C> <C> <C> <C>
New Mexico Outlet Center................... 1993 155,170 89.6% Bass, Bugle Boy, Carter's
Algodones, New Mexico Childrenswear, Chaus,
Corning/Revere, Florsheim,
Levi's, Liz Claiborne, Mikasa,
OshKosh B'Gosh, Springmaid-
Wamsutta
Horizon Outlet Center -- Oshkosh........... 1989/1991 259,443 95.4% Bass, Bugle Boy, Dansk,
Oshkosh, Wisconsin 2 Phases Florsheim, Jockey, Jones New
York, Lands' End, Lenox, Levi's,
London Fog, Nautica, OshKosh
B'Gosh, Polo/Ralph Lauren, Tommy
Hilfiger, Van Heusen
Perryville Outlet Center................... 1990 148,134 91.8% Bass, Dan River, Elisabeth,
Perryville, Maryland Etienne Aigner, Florsheim, Jones
New York, Liz Claiborne,
Maidenform, Mikasa, Nike, Van
Heusen
Pismo Beach Outlet Center.................. 1994 147,576 92.5% Anne Klein, Bass, Big Dog
Pismo Beach, California Sportswear, Florsheim, Jockey,
Jones New York, Levi's, London
Fog, Maidenform, Mikasa, Nine
West, Tommy Hilfiger, Van Heusen
Horizon Outlet Center -- Port Huron(6)..... 1992/1993 161,210 75.0% Bass, Bugle Boy, Carter's
Port Huron, Michigan 2 Phases Childrenswear, Casual Corner,
Corning/Revere, Hit or Miss,
Levi's, Van Heusen
Chesapeake Village at Queenstown........... 1989/1993 218,915 97.3% Anne Klein, Big Dog Sportswear,
Queenstown, Maryland 5 Phases Brooks Brothers, Chaus,
Corning/Revere, Dockers, Etienne
Aigner, Guess?, Jones New York,
Lenox, Levi's, Liz Claiborne,
Nike, Nine West,
Springmaid-Wamsutta, St. John
Knits, Van Heusen, Vanity Fair
Sealy Outlet Center........................ 1995/1996 191,865 85.0% Bass, Bugle Boy, Florsheim,
Sealy, Texas 2 Phases J. Crew, Jockey, Jones New York,
Liz Claiborne, Mikasa, Nine
West, OshKosh B'Gosh, Reebok,
Spiegel, Springmaid-Wamsutta,
Van Heusen
Silverthorne Factory Stores................ 1988/1993 257,470 94.0% American Eagle, Anne Klein,
Silverthorne, Colorado 3 Phases Bass, Big Dog Sportswear, Dansk,
Eddie Bauer, Fila, Gap, Genuine
Article, J. Crew, Jones New
York, Liz Claiborne, London Fog,
Maidenform, Mikasa, Nike, Nine
West, Tommy Hilfiger, Van Heusen
Horizon Outlet Center -- Somerset.......... 1990 199,962 82.2% Bass, Brooks Brothers, Bugle
Somerset, Pennsylvania Boy, Casual Corner,
Corning/Revere, Johnston &
Murphy, Jones New York, Levi's,
Mikasa, Nine West, Polo/Ralph
Lauren, Van Heusen
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
YEAR OF TOTAL
OPENING/ APPROXIMATE PERCENTAGE
MOST RECENT GLA AS OF GLA LEASED
NAME AND EXPANSION/ 12/31/96 AS OF
LOCATION OF CENTER NO. OF PHASES (SQ. FT.) 12/31/96 CERTAIN TENANT BRANDS
------------------ ------------- ----------- ---------- ---------------------
<S> <C> <C> <C> <C>
Tracy Outlet Center........................ 1994 153,000 95.6% Anne Klein, Big Dog Sportswear,
Tracy, California Casual Corner, Corning/Revere,
Fila, Jones New York, Levi's,
Leathermode, Liz Claiborne,
Maidenform, Mikasa, Nine West,
OshKosh B'Gosh, Reebok, Sony
Horizon Outlet Center -- Traverse City..... 1990/1996 147,455 84.2% Bass, Bugle Boy, Carter's
Traverse City, Michigan 2 Phases Childrenswear, Corning/Revere,
Dansk, Geoffrey Beene, Levi's,
London Fog, Van Heusen
Tulare..................................... 1995 132,232 73.8% Bass, Big Dog Sportswear,
Tulare, California Corning/Revere, Maidenform,
Mikasa, NordicTrack, Polo/Ralph
Lauren, Reebok, Van Heusen
Horizon Outlet Center -- Vero Beach........ 1994/1995 326,213 96.4% Ann Taylor, Anne Klein, Big
Vero Beach, Florida 2 Phases Dog Sportswear, BOSE, Bugle Boy,
Dansk, Etienne Aigner, Guess?,
Jockey, Jones New York, Levi's,
Liz Claiborne, London Fog,
Mikasa, Nautica, Nine West,
Polo/Ralph Lauren, Reebok, Reed
& Barton, Spiegel,
Springmaid-Wamsutta, Timberland,
Van Heusen
Warrenton Outlet Center.................... 1993/1995 200,365 82.0% Bass, Chaus, Corning/Revere,
Warrenton, Missouri 2 Phases Jockey, Jones New York, Levi's,
Liz Claiborne, Maidenform,
Mikasa, Nike, Nine West, Van
Heusen
Berkeley Commons Outlet Center............. 1988/1995 274,565 99.2% American Eagle, Anne Klein,
Williamsburg, Virginia 4 Phases Bass, BOSE, Brooks Brothers,
Coach, Eddie Bauer, Etienne
Aigner, Guess?, J. Crew, Jones
New York, Liz Claiborne, Lladro,
Mikasa, Nautica, Nike, Nine
West, NordicTrack, OshKosh
B'Gosh, Reebok, Timberland,
Tommy Hilfiger, Van Heusen,
Waterford Wedgwood
Horizon Outlet Center Woodbury............. 1992/1994 249,208 95.0% American Eagle, Big Dog
Woodbury, Minnesota 3 Phases Sportswear, Bugle Boy, Carter's
Childrenswear, Casual Corner,
Corning/Revere, Eddie Bauer,
Fila, Levi's, Reebok, Spiegel,
Van Heusen, WestPoint Pepperell
--------- ----
TOTAL HORIZON PORTFOLIO.................... 9,368,752 88.8%
========= ====
</TABLE>
- -------------------------
(3) Owned by a partnership in which the Company has an interest.
(4) Owned by a joint venture with an institutional investor.
(5) The Company is presently seeking to divest itself of this center.
(6) The Company is presently seeking to divest itself of this center.
12
<PAGE> 13
STATE INFORMATION
The following table indicates, as of December 31, 1996, certain information
regarding the Company's outlet centers, broken down by State.
<TABLE>
<CAPTION>
PERCENT OF % OF BASE
TOTAL RENTAL REVENUE
PERCENTAGE GLA AS OF 12/31/96
NUMBER OF TOTAL GLA OF TOTAL LEASED ON REPRESENTED
STATE PROPERTIES (SQ. FT.) GLA 12/31/96 BY LEASES
----- ---------- --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Michigan.......................... 6 1,808,314 19.3% 84.9% 14.8%
California........................ 5 1,175,497 12.5% 91.8% 16.7%
Indiana........................... 3 960,013 10.2% 97.2% 10.7%
Texas............................. 3 832,556 8.9% 93.5% 10.0%
Maryland.......................... 2 367,049 3.9% 95.0% 4.5%
Minnesota......................... 2 437,268 4.7% 91.5% 4.3%
New York.......................... 2 475,814 5.1% 94.0% 5.9%
Wisconsin......................... 2 528,179 5.6% 96.9% 6.2%
All Other......................... 12 2,784,062 29.7% 82.1% 26.9%
-- --------- ------ ----- ------
Total........................ 37 9,368,752 100.0% 88.8% 100.0%
== ========= ====== ===== ======
</TABLE>
UNDEVELOPED PARCELS
The Company owns Undeveloped Parcels aggregating approximately 360 acres of
outlots, retail pads and expansion pads located near certain of the Company's
outlet centers. The Undeveloped Parcels include all of the outlots previously
owned by the various partnerships which exchanged these properties for interests
in the Operating Partnership, except for four parcels that were under contract
for sale to unaffiliated persons at such time. The Company intends to pursue an
aggressive marketing program to lease, develop or sell the parcels owned by it.
However, the sale of property by a REIT is subject to significant restrictions
imposed by the Internal Revenue Code of 1986. Accordingly, such restrictions may
limit the number, size and timing of such sales.
TENANTS
GENERAL. The Company's portfolio features a diverse mix of tenants. The
Company's tenants are typically the retailing outlet of large publicly traded
manufacturers. Substantially all of the leases require tenants to pay their pro
rata share of all property operating expenses and real estate taxes.
The following table sets forth certain information, with respect to each
tenant which individually accounts for more than 2% of the Company's total GLA
or base rental revenues for the year ended December 31, 1996 and to all other
tenants as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OCCUPIED TOTAL ANNUAL PERCENTAGE OF BASE RENTAL
TENANT OF STORES GLA (SF) BASE RENT GLA OCCUPIED INCOME
------ --------- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Phillips-Van Heusen Retail
Division........................... 156 673,085 9,258,117 8.1% 8.1%
Spiegel, Inc. ....................... 18 282,393 2,880,986 3.4% 2.5%
LCI Holdings, Inc. .................. 25 243,990 2,460,790 2.9% 2.2%
Sara Lee Corporation................. 65 210,478 2,626,270 2.5% 2.3%
Mikasa, Inc. ........................ 26 201,074 2,120,812 2.4% 1.9%
VF Corporation....................... 19 199,694 2,176,849 2.4% 1.9%
Dress Barn, Inc. .................... 34 190,312 2,626,095 2.3% 2.3%
OshKosh B'Gosh, Inc. ................ 34 159,499 2,306,717 1.9% 2.0%
Other................................ 1,696 6,136,530 87,525,520 73.9% 76.7%
</TABLE>
13
<PAGE> 14
TENANT LEASES. The majority of the leases with the Company's tenants have
remaining initial terms of between four and five years, which expire between
2000 and 2001. Substantially all of these leases require tenants to pay their
pro rata shares of all property operating expenses and real estate taxes.
During 1996, leases for approximately 622,000 square feet of GLA in the
Company's outlet centers came up for renewal. During 1996, the Company had
entered into new leases totalling 1.0 million square feet of GLA at an average
base rental rate of $15.58 per square foot with an average base term of 5.8
years. The Company's average tenant space is approximately 4,000 square feet of
GLA. As of December 31, 1996, executed leases at the Company's outlet centers
had an average base rent of $14.50 per square foot.
The following table sets forth, as of December 31, 1996, tenant lease
expirations for the next ten years at the Company's outlet centers (assuming
that none of the tenants exercises any renewal option):
<TABLE>
<CAPTION>
YEAR ENDING APPROXIMATE ANNUAL BASE
DECEMBER 31, # OF LEASES GLA (SQ. FT.) RENT
- ------------ ----------- ------------- -----------
<S> <C> <C> <C>
1997.................................................. 288 953,992 12,267,561
1998.................................................. 249 816,664 12,087,978
1999.................................................. 348 1,133,641 17,195,519
2000.................................................. 398 1,315,772 20,331,817
2001.................................................. 365 1,281,211 19,544,002
2002.................................................. 92 429,362 6,043,884
2003.................................................. 93 487,717 6,490,542
2004.................................................. 54 331,059 4,368,153
2005.................................................. 60 441,057 4,726,874
2006.................................................. 39 373,257 3,660,204
</TABLE>
14
<PAGE> 15
MORTGAGE DEBT
The following table sets forth, as of December 31, 1996, certain
information regarding the mortgages currently encumbering the factory outlet
centers.
<TABLE>
<CAPTION>
ESTIMATED
12/31/96 BALLOON
ANNUAL PRINCIPAL ANNUAL DEBT MATURITY PAYMENT
PROPERTY INTEREST RATE BALANCE SERVICE DATE AT MATURITY
-------- ------------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Perryville, MD................ 8.625% $ 9,871,142 $ 976,400 Nov-05 $ 8,223,900
Bellport, NY.................. 10.25 11,119,406 1,284,000 Jun-18
Medford, MN................... LIBOR + 2.80 8,175,000 1,022,600 Apr-98 7,650,000
Edinburgh, IN................. 9.50 7,072,538 754,900 Jun-01 6,619,300
Edinburgh, IN................. 9.50 10,324,840 1,088,800 May-01 9,748,900
Holland, MI................... 9.50 10,600,000 1,111,344 June-01 10,003,600
Somerset, PA.................. 10.50 10,138,824 1,235,000 Jun-16
Birch Run, MI................. 9.50 22,636,541 2,411,400 Jun-02 20,797,500
Birch Run, MI................. 9.50 4,920,988 524,200 Jun-02 4,521,200
Birch Run, MI................. 9.50 17,715,559 1,887,200 Jun-02 16,276,300
Williamsburg, VA.............. 8.75 14,393,358 1,633,100 Nov-00 12,698,700
Williamsburg, VA.............. 8.25 9,966,974 1,022,500 Oct-00 9,090,600
Vero Beach, FL................ 7.875 27,199,463 2,528,900 Nov-05 22,284,000
Woodbury, MN.................. 7.875 18,132,975 1,685,900 Nov-05 14,856,000
Conroe, TX.................... 9.40 6,942,458 794,200 May-02 5,966,900
Conroe, TX.................... 9.40 1,941,953 222,100 May-02 1,669,100
Conroe, TX.................... 9.40 8,884,411 1,016,300 May-02 7,636,000
Jeffersonville, OH............ 9.40 7,622,146 871,900 May-02 6,551,000
Jeffersonville, OH............ 9.40 9,855,388 1,127,400 May-02 8,470,500
Jeffersonville, OH............ 9.40 2,233,242 255,500 May-02 1,919,400
Norton Shores, MI............. 8.37 5,000,000 418,500 Sep-97 5,000,000
Dry Ridge, KY................. prime + 2.25 6,478,628 970,000 Mar-98 5,990,000
First Horizon................. 8.57 64,503,406 6,319,700 Mar-06 54,458,700
Burlington, WA
Fremont, IN
Kenosha, WI
Oshkosh, WI
Second Horizon................ 9.06 99,217,643 9,639,400 Oct-06 90,933,800
Hillsboro, TX
Lake Elsinore, CA
Pismo Beach, CA
Queenstown, MD
Tracy, CA
Other......................... 6.90-10.0 7,944,017 671,580 May-00-Dec-02 3,958,467
------------ ----------- ------------
$402,890,900 $41,472,824 $335,323,867
============ =========== ============
</TABLE>
The Company has a $205 million revolving credit facility agreement with a
subsidiary of First Chicago NBD Corporation and other banks ("FCNBD"), which
expires in June, 1999. At the Company's election, interest is charged at the
rate of 1/4 of 1 percent over prime or 2 percent over the London interbank
offered rate ("LIBOR"). Borrowings under the FCNBD lines of credit are primarily
used for acquisitions, property expansion and development activities and are
collateralized by certain properties owned by the Company. On December 31, 1996,
the FCNBD lines of credit were not fully collateralized resulting in a borrowing
base limitation of $132.7 million. Additionally, the Company has a $20.0 million
and a $4.0 million revolving credit facility with Michigan banks for working
capital requirements. Interest on borrowings under the two facilities is charged
at the prime rate. As of December 31, 1996 the Company had no borrowings under
these revolving credit facilities.
The Company has a $125.0 million construction line of credit (the
"Construction Line") with Canadian Imperial Bank of Commerce ("CIBC"). At the
Company's option, fundings under the Construction Line bear interest at either
(i) 1 1/2% per annum over the greater of (A) the construction lender's prime
rate, or (B) the overnight Federal Funds rate plus 1%, or (ii) LIBOR plus
2 1/2%. During 1996, the Company elected
15
<PAGE> 16
to use the rate of LIBOR plus 2 1/2%. The Company has entered into interest rate
protection agreements with financial institutions protecting the Company from
LIBOR interest rate increases above 6 1/2% during 1997. The Construction Line is
secured by the properties built with funds provided by the Construction Line,
and expires in October, 1998. At December 31, 1996 borrowings under the
Construction Line were $21.7 million.
The Company received a $65.0 million mortgage loan in the first quarter of
1996 from an institutional investor at a fixed interest rate of 8.574%. Proceeds
from the mortgage loan were used to reduce current debt maturities and amounts
outstanding under revolving credit facilities, as well as for working capital
needs.
In September 1996, the Company received a $99.3 million mortgage loan from
an institutional lender at a fixed interest rate of 9.06 percent and a $10.0
million mortgage loan 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, as well as for working
capital needs. The Company has also received a $21.2 million mortgage commitment
from a life insurance company which is scheduled to close before August, 1997.
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, as of
December 31, 1996, the Company had issued approximately 839,000 shares of common
stock for an aggregate price of $16.2 million under the Company's Dividend
Reinvestment Plan (the "Plan").
The Company received a commitment, dated July 1, 1996, from a pension fund
(the "Fund") advised by Heitman Capital Management Corporation, 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 provided that the
Fund would invest a total of $42.5 million which, after proration adjustments
and payoffs of existing indebtedness, would be distributed to the Company upon
its contribution of the Property and current expansion phases under development
to the Venture. In November, 1996, the Company conveyed to the Venture its
interests in two completed phases of the Property in conjunction with a $34.9
million investment by the Fund. It is anticipated that the development of the
remaining phase of the Property will be completed in the second quarter of 1997,
and when completed, it is expected to be conveyed to the Venture in conjunction
with the remaining $7.6 million investment by the Fund. Pursuant to an agreement
(the "Option Agreement") entered into between the Company and the Fund in
connection with the Venture, the Fund has the right to convey its interest in
the Venture to the Company in exchange for an amount of Common Stock to be
determined under the terms of the Option Agreement.
Although current in the payment of principal and interest, as a result of
the Company's operating results for the year ended December 31, 1996, including
$65.4 million of charges and write-downs, the Company, as of December 31, 1996,
was not in compliance with certain financial covenants contained in certain of
its credit facilities. Each of the affected lenders has agreed to provide
waivers to the Company. The Company currently anticipates that similar waivers
may be required for subsequent quarters unless amendments or refinancings are
obtained. While the Company has no reason to believe such waivers will not be
given and that it will not be able to obtain refinancing with a coverage test or
amendments that will permit the Company to satisfy the new terms on a going
forward basis if required, there can be no assurance that such waivers will be
given or such amendments or refinancing will be available on terms acceptable to
the Company. The Company is actively exploring replacement credit facilities.
Subject to the foregoing, the Company anticipates that the cash flow from
operations together with cash from existing credit facilities will be sufficient
to meet the Company's reduced cash requirements during 1997. As of the date
hereof, the Company has no commitment for any such renewal or replacement and
there can be no assurance that any such renewal or replacement will be available
on terms acceptable to the Company.
TAXES
At December 31, 1996, the Company had an aggregate cost basis of $873.8
million in its real estate assets for federal income tax purposes. Depreciation
for income tax purposes is calculated using the straight line method over the
estimated useful lives of the assets, which for buildings placed in service
prior to May 13,
16
<PAGE> 17
1993 is 31.5 years (resulting in a rate of 3.2% per year) and buildings placed
in service after May 13, 1993 is 39 years (resulting in a rate of 2.6% per
year).
The Company's aggregate real estate tax obligation during the year ended
December 31, 1996 was approximately $11.9 million. Estimated aggregate 1997 real
estate taxes, taking into account planned expansions, are $12.9 million.
EXECUTIVE OFFICES
The Company owns its 35,000 square foot executive offices in Norton Shores,
Michigan.
ITEM 3 -- LEGAL PROCEEDINGS
There were no material pending legal proceedings at December 31, 1996.
ITEM 4 -- SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1996.
PART II
ITEM 5 -- MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Information with respect to the principal market for the Company's Common
Stock, the high and low sales prices of the Company's Common Stock and dividends
is incorporated herein by reference to the information contained under the
caption "Stock Trading" and "Quarterly Financial Data" in the Company's Annual
Report to Shareholders for 1996. The approximate number of holders of record of
the Common Stock was 912 as of February 14, 1997. The Company estimates that its
shares are held by more than 18,000 persons beneficially.
ITEM 6 -- SELECTED FINANCIAL DATA
Information with respect to a summary of selected financial data is
incorporated herein by reference to the information set forth under the caption
"Selected Financial Data" in the Company's Annual Report to Shareholders for
1996.
ITEM 7 -- MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" in the Company's
Annual Report to Shareholders for 1996 is incorporated herein by reference.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and report of independent auditors
included in the Company's Annual Report to Shareholders for 1996 are
incorporated herein by reference.
ITEM 9 -- CHANGES IN ACCOUNTANTS
Not applicable.
17
<PAGE> 18
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company is incorporated herein
by reference to the information under the captions entitled "Board of Directors
- -- Members and Nominees for Election" on pages 4, 5, 6 and 7 of the Company's
proxy statement for the 1997 Annual Meeting of Shareholders (SEC File No.
1-12424).
Information with respect to executive officers of the Company is included
in Item 1, Part I hereof under the caption "Executive Officers of the
Registrant."
ITEM 11 -- EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein
by reference to the information under the captions "Executive Compensation," on
pages 8, 9, 10, 11 and 12, "Board of Directors -- Compensation of Directors" on
page 7 and "Stock Price Performance Graph" on page 13 of the Company's proxy
statement for the 1997 Annual Meeting of Shareholders (SEC File No. 1-12424).
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management of the Company is incorporated herein by reference to the
information under the caption "Principal Shareholders" on pages 2 and 3 of the
Company's proxy statement for the 1997 Annual Meeting of Shareholders. (SEC File
No. 1-12424).
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and transactions is
incorporated herein by reference to the information under the caption "Certain
Transactions" on pages 13, 14 and 15 of the Company's proxy statement for the
1997 Annual Meeting of the Shareholders (SEC File No. 1-12424).
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a)(1) and (2) The response to this section of Item 14 is submitted as a
separate section of this report.
(a)(3) The exhibits, as listed in the Exhibit Index set forth on
pages E-1 through E-5 are submitted as a separate section of
this report.
(b) No current reports on Form 8-K were filed during the quarter
ended December 31, 1996.
(c) See Item 14(a)(3) above.
(d) The response to this portion of Item 14 is submitted as a
separate section of this report.
</TABLE>
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 31, 1997 HORIZON GROUP
By: /s/ RONALD L. PIASECKI
------------------------------------
Title:
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ NORMAN PERLMUTTER* Director and Chairman of the March 31, 1997
- ---------------------------------------------------- Board of Directors
Norman Perlmutter
/s/ RONALD L. PIASECKI* Director and President March 31, 1997
- ---------------------------------------------------- (Principal Executive Officer)
Ronald L. Piasecki
/s/ WILLIAM P. DICKEY* Director March 31, 1997
- ----------------------------------------------------
William P. Dickey
/s/ EDWIN N. HOMER* Director March 31, 1997
- ----------------------------------------------------
Edwin N. Homer
/s/ MARTIN SHERMAN* Director March 31, 1997
- ----------------------------------------------------
Martin Sherman
/s/ FRANCIS T. VINCENT, JR.* Director March 31, 1997
- ----------------------------------------------------
Francis T. Vincent, Jr.
/s/ JOSEPH CATTIVERA* Executive Vice President March 31, 1997
- ---------------------------------------------------- (Principal Financial Officer)
Joseph Cattivera
/s/ RICHARD A. PHILLIPS* Vice President (Principal March 31, 1997
- ---------------------------------------------------- Accounting Officer)
Richard A. Phillips
*By: /s/ RONALD L. PIASECKI Individually and as March 31, 1997
------------------------------------------------ Attorney-in-Fact
Ronald L. Piasecki
</TABLE>
19
<PAGE> 20
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(1) AND (2); (C) AND (D)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1996
HORIZON GROUP, INC.
F-1
<PAGE> 21
FORM 10-K -- ITEM 14(A)(1) AND (2)
HORIZON GROUP, INC.
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following financial statements of Horizon Group, Inc., included in the
annual report of the registrant to its shareholders for the year ended December
31, 1996, are incorporated by reference in Item 8:
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
<S> <C>
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994..........................
Consolidated Balance Sheets as of December 31, 1996 and
1995......................................................
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994..........................
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994..............
Notes to Consolidated Financial Statements..................
Report of Independent Auditors..............................
</TABLE>
The following financial statement schedules of Horizon Group, Inc. are
included in Item 14(d):
Schedule III -- Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
F-2
<PAGE> 22
HORIZON GROUP, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL DEVELOPMENT OR
INITIAL COST TO COMPANY(B) ACQUISITION(C)
--------------------------- --------------------------
BUILDINGS AND BUILDINGS AND
PROPERTY EMCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS
-------- ----------- ---- ------------- ---- -------------
<S> <C> <C> <C> <C> <C>
Bellport.............. $12,957,455 $ 460,700 $16,036,400 $ 355,600 $ 940,400
Birch Run............. 53,802,188 3,439,900 39,671,400 3,309,000 31,418,200
Burlington............ 13,269,900 3,568,200 21,629,200 439,000
Calhoun............... 13,600,147 3,292,100 19,862,700 387,600 5,702,800
Conroe................ 18,741,166 2,100,900 37,483,100 -- 132,300
Dry Ridge............. 6,478,628 995,900 8,627,500 (424,700) (3,425,400)
Edinburgh............. 17,397,378 988,300 11,314,700 46,400 15,908,400
Finger Lakes.......... -- 594,400 27,010,000 12,502,600
Fremont............... 14,366,100 2,434,800 10,268,700 9,024,200
Gilroy................ 24,896,968 2,809,000 31,952,900 5,723,100 7,117,500
Hillsboro............. 28,476,400 6,397,700 44,761,100 50,000 3,736,900
Jeffersonville........ 20,789,388 1,629,700 37,073,300 2,500 356,200
Kenosha............... 22,501,200 6,299,100 34,658,100 4,000 1,185,500
Lake Elsinore......... 29,475,500 19,404,900 43,393,400 5,137,500
Laughlin.............. 13,690,800 37,361,700
Lee................... -- 9,053,300 15,719,800
Medford............... 8,175,000 269,600 18,586,100 1,194,900
Michigan City......... 31,197,600 3,796,200 37,359,700 31,500 8,632,100
Monroe................ 6,956,400 815,000 17,982,900 225,800 2,100,400
New Mexico............ 7,895,900 1,079,500 14,307,800 (901,800) (11,899,700)
Norton Shores
--Lakeshore
Marketplace......... 5,000,000 3,538,300 22,346,900
Norton Shores
--Corporate
Office.............. 3,651,899 42,500 5,349,300 2,206,600
Oshkosh............... 14,366,100 644,800 11,452,800 4,928,000
Perryville............ 9,871,142 3,151,100 16,870,000 300 218,200
Pismo................. 11,790,200 8,774,900 16,255,100 164,200
Queenstown............ 17,385,600 3,455,300 28,620,000 544,400
Sealy................. 10,604,153 827,400 13,454,700 17,900 3,950,000
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD
--------------------------------------------------------
BUILDINGS AND ACCUMULATED DATE OF DATE OF
PROPERTY LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUISITION
-------- ---- ------------- ----- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Bellport.............. $ 816,300 $16,976,800 $17,793,100 $ 939,800 1992 1995
Birch Run............. 6,748,900 71,089,600 77,838,500 6,458,400(a) 1986 1995
Burlington............ 3,568,200 22,068,200 25,636,400 1,537,500 1989 1995
Calhoun............... 3,679,700 25,565,500 29,245,200 1,189,400 1992 1995
Conroe................ 2,100,900 37,615,400 39,716,302 2,216,200 1992 1995
Dry Ridge............. 571,200 5,202,100 5,773,300 -- 1991 1995
Edinburgh............. 1,034,700 27,223,100 28,257,800 3,858,300 1989 --
Finger Lakes.......... 594,400 39,512,600 40,107,000 141,300 1995 1995
Fremont............... 2,434,800 19,292,900 21,727,700 1,957,400 1985 --
Gilroy................ 8,532,100 39,070,400 47,602,500 3,721,200 1992 1993
Hillsboro............. 6,447,700 48,498,000 54,945,700 2,753,100 1989 1995
Jeffersonville........ 1,632,200 37,429,500 39,061,700 2,270,000 1993 1995
Kenosha............... 6,303,100 35,843,600 42,146,700 2,292,600 1988 1995
Lake Elsinore......... 19,404,900 48,530,900 67,935,800 2,564,000 1991 1995
Laughlin.............. 37,361,700 37,361,700 -- 1996
Lee................... 9,053,300 15,719,800 24,773,100 -- 1996
Medford............... 269,600 19,781,000 20,050,600 1,122,500 1991 1995
Michigan City......... 3,827,700 45,991,800 49,819,500 4,715,700 1987 1993
Monroe................ 1,040,800 20,083,300 21,124,100 5,483,900 1987 --
New Mexico............ 177,700 2,408,100 2,585,800 1993 1995
Norton Shores
--Lakeshore
Marketplace......... 3,538,300 22,346,900 25,885,200 156,200 1995 --
Norton Shores
--Corporate
Office.............. 42,500 7,555,900 7,598,400 1,304,900 1995 --
Oshkosh............... 644,800 16,380,800 17,025,600 3,676,000 1989 --
Perryville............ 3,151,400 17,088,200 20,239,600 1,212,900 1990 1995
Pismo................. 8,774,900 16,419,300 25,194,200 1,040,100 1994 1995
Queenstown............ 3,455,300 29,164,400 32,619,700 1,746,800 1989 1995
Sealy................. 845,300 17,404,700 18,250,000 622,100 1995 1995
</TABLE>
<PAGE> 23
HORIZON GROUP, INC.
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO INITIAL
DEVELOPMENT OR
INITIAL COST TO COMPANY(B) ACQUISITION(C)
---------------------------- ---------------------------
BUILDINGS AND BUILDINGS AND
PROPERTY ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS
-------- ----------- ---- ------------- ---- -------------
<S> <C> <C> <C> <C> <C>
Silverthorne.......... 15,873,700 9,048,200 36,000,000 100 458,000
Somerset.............. 10,138,824 1,750,000 16,460,300 246,600
Tracy................. 12,090,000 4,655,100 18,087,200 1,509,300 304,700
Traverse City......... 5,331,800 675,600 7,976,000 (3,342,200)
Tulare................ -- 3,330,900 16,188,000 417,400 375,700
Vero Beach............ 27,199,463 2,707,800 18,915,400 (100) 10,592,900
Warrenton............. 12,146,443 1,982,500 14,760,800 8,200 5,345,800
Williamsburg.......... 24,726,982 10,086,500 27,728,200 2,800 6,707,400
Miscellaneous......... 32,000,720.58 212,700 9,399,101 10,584,400
------------- ------------ ------------ ----------- ------------
Total............. $ 556,845,145 $124,312,800 $804,924,300 $10,764,900 $133,488,500
============= ============ ============ =========== ============
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD
------------------------------------------------------------
BUILDINGS AND ACCUMULATED DATE OF DATE OF
PROPERTY LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUISITION
-------- ---- ------------- ----- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Silverthorne.......... 9,048,300 36,458,000 45,506,300 2,070,200 1988 1995
Somerset.............. 1,750,000 16,706,900 18,456,900 1,803,200 1990 1993
Tracy................. 6,164,400 18,391,900 24,556,300 1,417,200 1994 1995
Traverse City......... 675,600 4,633,800 5,309,400 1990 --
Tulare................ 3,748,300 16,563,700 20,312,000 80,300 1995 --
Vero Beach............ 2,707,700 29,508,300 32,216,000 2,270,100 1994 --
Warrenton............. 1,990,700 20,106,600 22,097,300 934,700 1993 1995
Williamsburg.......... 10,089,300 34,435,600 44,524,900 1,782,900 1988 1995
Miscellaneous......... 212,700 19,983,500 20,196,200 2,151,100
------------ ------------ -------------- -----------
Total............. $135,077,700 $938,412,800 $1,073,490,500 $65,490,000
============ ============ ============== ===========
</TABLE>
Depreciation of the Company's investment in buildings and improvements reflected
in the Statements of Operations is calculated over the estimated useful lives of
the assets as follows:
Buildings 31.5 years
Improvements Shorter of 10 years or useful life
The aggregate gross cost of property included above for federal income tax
purposes approximated $873.4 million as of December 31, 1996.
Notes:
(a) Village Shops, a separate phase of Birch Run, was acquired at the merger
date.
(b) The Initial Costs amounts for assets purchased in the merger with McArthur
Glen have been restated to reflect refinements in the purchase price
adjustments.
(c) Includes adjustments for the impairment of long-lived assets on Dry Ridge,
New Mexico, Traverse City and Hawaii, which is included in miscellaneous.
<PAGE> 24
HORIZON GROUP, INC.
Schedule III - Real Estate and Accumulated Depreciation Cont-
NOTES TO SCHEDULE III
DECEMBER 31, 1996
1. RECONCILIATION OF REAL ESTATE PROPERTIES:
The following table reconciles the Real Estate Properties from January 1,
1994 to December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, Beginning of Period................... $1,059,960,400 $ 305,987,300 $ 186,932,800
Additions during Period
Development of New Projects............... 49,997,800 79,253,400 27,728,000
Improvements of Existing Properties....... 42,372,300 73,668,900 34,036,100
Acquisitions.............................. 0 601,050,800 57,290,400
Retirements............................... (1,115,000) 0 0
Write Down to Net Book Value(d)........... (6,997,000) 0 0
Transfer of Assets Held for Sale.......... (23,754,000) 0 0
Write Off of Impaired Properties.......... (46,974,000) 0 0
-------------- -------------- --------------
Balance, End of Period......................... $1,073,490,500 $1,059,960,400 $ 305,987,300
============== ============== ==============
</TABLE>
The following table reconciles the accumulated depreciation from January 1,
1994 to December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, Beginning of Period................... $ 37,838,900 $ 18,154,300 $ 10,420,800
Additions during Period
Depreciation.............................. 34,819,400 19,684,600 7,765,100
Write Down to Net Book Value(d)........... (6,997,000)
Retirements during period.................... (170,300) (31,600)
-------------- -------------- --------------
Balance, End of Period......................... $ 65,491,000 $ 37,838,900 $ 18,154,300
============== ============== ==============
</TABLE>
(d) The cost basis of the impaired assets have been adjusted to reflect the
write off of accumulated depreciation.
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company [Incorporated by
reference to Exhibit 3.1 to Registration Statement 33-95174]
3.2 Amended and Restated Bylaws of the Company [Incorporated by reference to Exhibit 3.2 to
the Company's quarterly report on Form 10-Q for the quarterly period ended June 30,
1996 (SEC File No. 1-12424)]
4 Specimen Common Stock Certificate (reference is also made to Exhibits 3.1 and 3.2)
[Incorporated by reference to Exhibit 4 to Registration Statement No. 33-91236]
10.1 Agreement of Limited Partnership of Horizon/Glen Outlet Centers Limited Partnership
[Incorporated by reference to Exhibit 10.1 to the Company's annual report on Form 10-K
for fiscal year ended December 31, 1995 (SEC File No. 1-12424)]
10.2 Registration Rights Agreement [Incorporated by reference to Exhibit 10.25 to
Registration Statement No. 33-68420]
10.3 Registration Rights Agreement between the Company and Jeffrey A. Kerr [Incorporated by
reference to Exhibit 10.26 to Registration Statement No. 33-68420]
10.4 Employee Bonus Plan [Incorporated by reference to Exhibit 10.27 to Registration
Statement No. 33-68420]
10.5 Director Stock Option Plan [Incorporated by reference to Exhibit 10.5 to the Company's
annual report on Form 10-K for fiscal year ended December 31, 1995 (SEC File No. 1-
2424)]
10.6 Amended and Restated 1993 Stock Option Plan [Incorporated by reference to Exhibit 10.29
to Registration Statement No. 33-68420]
10.7 Employee Stock Bonus Arrangement Agreement [Incorporated by reference to Exhibit 10.30
to Registration Statement No. 33-68420]
</TABLE>
E-1
<PAGE> 26
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.8 Indemnification Agreement by and between the Company and each of the Executive Officers
and Directors of the Company [Incorporated by reference to Exhibit 10.34 to
Registration Statement No. 33-68420]
10.9 Consolidated, Amended and Restated Revolving Credit Agreement among Horizon/Glen Outlet
Centers Limited Partnership, Horizon Group, Inc., The First National Bank of Chicago,
Wells Fargo Realty Advisors Funding, Incorporated and other banks. [Incorporated by
reference to Exhibit 10.6 to the Company's quarterly report on Form 10-Q for the
quarterly period ended June 30, 1996 (SEC File No. 1-12424)]
10.10 Option Agreement by and among Court Concept Associates, Inc., Jeffrey A. Kerr and the
Company [Incorporated by reference to Exhibit 10.41 to the Company's annual report on
Form 10-K for fiscal year ended December 31, 1994 (SEC File No. 1-12494)]
10.11 Horizon Outlet Centers, Inc. Profit Sharing/401(k) Plan [Incorporated by reference to
Exhibit 10.42 to the Company's annual report on Form 10-K for fiscal year ended
December 31, 1994 (SEC File No. 1-12494)]
10.12 Consulting and Non-Competition Agreement by and among McArthur/Glen Realty Corp., McG
Outlet Centers Limited Partnership, Horizon Outlet Centers, Inc., Horizon Outlet
Centers Limited Partnership, Cheryl McArthur and upon its formation, Horizon/Glen
Outlet Centers Limited Partnership dated as of March 13, 1995. [Incorporated by
reference to Exhibit (10)(d) to the Company's current report on Form 8-K dated
March 16, 1995 (SEC File No. 1-12424)]
10.13 Termination of Employment Agreement by and among McArthur/Glen Realty Corp., McG Outlet
Centers Limited Partnership, Horizon Outlet Centers, Inc., Horizon Outlet Centers
Limited Partnership, Cheryl McArthur and upon its formation, Horizon/Glen Outlet
Centers Limited Partnership dated as of March 13, 1995. [Incorporated by reference to
Exhibit (10)(e) to the Company's current report on Form 8-K dated March 16, 1995 (SEC
File No. 1-12424)]
</TABLE>
E-2
<PAGE> 27
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.14 Amendment No. 1 to Consulting and Non-Competition Agreement by and between
McArthur/Glen Realty Corp., McG Outlet Centers Limited Partnership, Horizon Outlet
Centers, Inc., Horizon Outlet Centers Limited Partnership, Cheryl McArthur and
Horizon/Glen Outlet Centers Limited Partnership dated as of March 13, 1995
[Incorporated by reference to Exhibit 2.3.1 to Registration Statement No. 33-91236]
10.15 Agreement dated as of May 15, 1995 by and between McArthur/Glen Realty Corp., McG
Outlet Centers Limited Partnership, Horizon Outlet Centers, Inc., Horizon Outlet
Centers Limited Partnership, Cheryl McArthur and Horizon/Glen Outlet Centers Limited
Partnership [Incorporated by reference to Exhibit 10(a) to the Company's current report
on Form 8-K dated May 16, 1995 (SEC File No. 1-12424)]
10.16 Agreement by and between HGI Realty, Inc., Horizon/Glen Outlet Centers Limited
Partnership and Alan Glen. [Incorporated by reference to Exhibit 10.5 to the Company's
quarterly report on Form 10-Q for the quarterly period ended June 30, 1996 (SEC File
No. 1-12424)]
10.17 Amended and Restated Employment Agreement by and between HGI Realty, Inc., Horizon/Glen
Outlet Centers Limited Partnership and Jeffrey A. Kerr [Incorporated by reference to
Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarterly period
ended June 30, 1996 (SEC File No. 1-12424)]
10.18 Form of Employment Agreement by and between HGI Realty, Inc., Horizon/Glen Outlet
Centers Limited Partnership and Joseph Cattivera [Incorporated by reference to
Exhibit 2.8.3 to Registration Statement 33-91236]
10.19 Form of Employment Agreement by and between HGI Realty, Inc., Horizon/Glen Outlet
Centers Limited Partnership and James S. Harris [Incorporated by reference to
Exhibit 2.8.6 to Registration Statement 33-91236]
10.20 Agreement by and between HGI Realty, Inc., Horizon/Glen Outlet Centers Limited
Partnership and George T. Haworth [Incorporated by reference to Exhibit 10.2 to the
Company's
</TABLE>
E-3
<PAGE> 28
<TABLE>
Exhibit No. Description
- ----------- -----------
<S> <C>
quarterly report on Form 10-Q for the quarterly period ended June 30, 1996 (SEC File No. 1-12424)]
10.21 Employment Agreement by and between HGI Realty, Inc., Horizon/Glen Outlet Centers
Limited Partnership and William H. Neville [Incorporated by reference to Exhibit 10.38
to the Company's annual report on Form 10-K for fiscal year ended December 31, 1995
(SEC File No. 1-2424)]
10.22 Bonus Agreement by and between Horizon Group, Inc., Horizon/Glen Outlet Centers Limited
Partnership and Richard A. Phillips
10.23 Termination Agreement by and between HGI Realty, Inc., Horizon/Glen Outlet Centers
Limited Partnership and Paul M. Sobol
10.24 Agreement by and between HGI Realty, Inc., Horizon/Glen Outlet Centers Limited
Partnership and Margaret M. Ernst [Incorporated by reference to Exhibit 10.4 to the
Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 1996
(SEC File No. 1-12424)]
10.25 Agreement by and between HGI Realty, Inc., Horizon/Glen Outlet Centers Limited
Partnership and Gary E. Geisler [Incorporated by reference to Exhibit 10.3 to the
Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 1996
(SEC File No. 1-12424)]
10.26 Consulting Agreement dated as of January 1, 1996 among M & S Advisor Group, Inc.,
Martin Sherman and HGI Realty, Inc. [Incorporated by reference to Exhibit 10.38 to the
Company's annual report on Form 10-K for fiscal year ended December 31, 1995 (SEC File
No. 1-2424)]
13 Annual Report to Shareholders for the fiscal year ended December 31, 1996
21 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
</TABLE>
E-4
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
24 Powers of Attorney
27 Financial Data Schedule
</TABLE>
E-5
<PAGE> 1
EXHIBIT 10.22
BONUS AGREEMENT
THIS BONUS AGREEMENT (this "Agreement") is made as of October 10, 1996
by and among HORIZON GROUP, INC. (the "Corporation"), HORIZON/GLEN OUTLET
CENTERS LIMITED PARTNERSHIP (the "Operating Partnership") (the Corporation and
the Operating Partnership collectively referred to herein as the "Company"),
and Richard A. Phillips (the "Employee").
W I T N E S S E T H :
WHEREAS, the Employee has been employed as Vice President, Controller
of the Corporation;
WHEREAS, the Company has determined to employ the Employee, and the
Employee wishes to accept such employment; and the Company and the Employee
wish to provide herein the terms of Employee's employment;
WHEREAS, the Corporation is the general partner in the Operating
Partnership;
WHEREAS, the Company presently owns and operates a retail center and
manufacturer outlet shopping centers throughout the United States;
WHEREAS, the Company owns or has options to acquire sites for and
currently plans to develop several new centers and expansions of existing and
new centers;
WHEREAS, the Company intends to pursue an aggressive development
strategy in order to take advantage of growth opportunities in the industry by
opening new manufacturer outlet centers in markets throughout the United
States; and
WHEREAS, the economics of the manufacturer outlet center industry are
such that the establishment by the Employee of an outlet center would
significantly impede the Company from opening a center within the same
geographic region serviced by the Employee's center;
NOW, THEREFORE, IT IS AGREED THAT:
Should the Employee remain with the Company until March 31, 1997, or
be terminated by the Company for other than cause, The Company will pay the
Employee a bonus of Thirty Thousand Dollars ($30,000) not later than thirty
days after the completion of that term or the effective date of the
termination, respectively.
<PAGE> 2
Termination for Cause. The Corporation may terminate the employment of
the Employee hereunder if the Employee during the Term (i) commits an act of
fraud with respect to the Company, (ii) is convicted of a felony, (iii)
continually fails to substantially perform his duties under Paragraph 3 hereof
(other than any such failure resulting from a material breach of the
obligations of the Company under Paragraph 3 hereof or the disability of the
Employee or any such failure occurring after any of the events constituting
"Good Reason" hereunder has occurred) for a period of sixty (60) days after
receipt by the Employee of a written demand for substantial performance has
been delivered by the President of the Corporation or the Executive Committee
of the Board of Directors to the Employee, which written demand specifically
identifies in reasonable detail the manner in which the Company believes that
the Employee has not substantially performed his duties hereunder, (iv) if the
Corporation and its legal counsel have corroborated evidence and believe, in
its (and its legal counsels) reasonable judgment, that the employee has engaged
in one or more acts of gross sexual harassment, or a second occurance of a
lesser sexual harassment following written notice of a prior sexual harassment
incident, or (v) the material breach by the Employee of any of his obligations
under Paragraphs 9 or 10 hereof and the failure of the Employee to correct such
breach within sixty (60) days after the receipt by the Employee of a written
notice from the President of the Corporation or the Executive Committee thereof
specifying in reasonable detail the nature of such breach. Termination
pursuant to this Paragraph 7(a) shall be herein referred to as a "Termination
for Cause." Upon a Termination for Cause, the Company shall have no further
obligation to pay the Employee's Base Salary or to provide any other employee
benefits hereunder except for any Base Salary or other benefits that have fully
accrued and vested but not been paid as of the effective date of such
termination.
Termination Without Cause. At any time during the Term, the President
of the Corporation or the Executive Committee thereof may terminate the
employment of the Employee hereunder without cause. Such termination shall be
effective by providing the Employee with a written notice of termination.
Termination pursuant to this Paragraph shall be herein referred to as
"Termination Without Cause." If the President of the Corporation or the
Executive Committee thereof terminates the Employee's employment under this
Paragraph, the Company's obligations hereunder shall be to pay the Employee the
Thirty Thousand Dollar ($30,000) Bonus and other benefits that have fully
accrued and vested but not been paid as of the effective date of such
termination
The Company shall pay all reasonable expenses (including attorneys'
fees) incurred by the Employee in successfully enforcing any provisions of this
Agreement or successfully prosecuting a claim for breach thereof, provided the
Employee is the prevailing party. The Employee shall pay all reasonable
expenses (including attorneys' fees) incurred by the Company in successfully
enforcing any provisions of this Agreement or successfully prosecuting a claim
for breach thereof, provided the Company is the prevailing party.
2
<PAGE> 3
This Agreement shall be non assignable, other than an assignment by the
Company in connection with a sale of all or substantially all the assets of the
Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
HORIZON GROUP, INC.
By: /s/ Jeffrey A. Kerr
-------------------------------
Name: Jeffery A. Kerr
Title: Chairman, President and Chief
Executive Officer
HORIZON/GLEN OUTLET CENTERS
LIMITED PARTNERSHIP,
By: HORIZON GROUP, INC., its General
Partner
By: /s/ Jeffrey A. Kerr
-------------------------------
Name: Jeffery A. Kerr
Title: Chairman, President and Chief
Executive Officer
/s/ Richard A. Phillips
-------------------------------------
RICHARD A. PHILLIPS
3
<PAGE> 1
EXHIBIT 10.23
FULL RELEASE AND AGREEMENT FOR TERMINATION OF EMPLOYMENT
AND PAYMENT OF SEPARATION BENEFITS
THIS AGREEMENT is made between Horizon Group, Inc. and its corporate affiliates
("Horizon") and PAUL SOBOL ("Sobol") in which you knowingly and voluntarily
release Horizon from all claims in exchange for separation benefits to which
you may not otherwise be entitled, and effective December 31, 1996, terminates
your Employment Agreement dated January 30, 1996. Receipt of your separation
benefits is conditional upon your acceptance of this agreement.
In return for your execution of this letter and agreement with each of its
terms and conditions, as shown by your signature below, you will receive a lump
sum payment of $150,000.00 in exchange for services to be rendered and paid for
by January 31, 1997, under the terms of the November 21, 1996 Agreement for
Services. In addition, at that time you will receive an additional $10,000.00
for relocation expenses and $3,000.00 in settlement of your automobile
allowance. Horizon will continue to pay for your medical, dental and life
insurance benefits for you and your eligible dependents until June 30, 1997.
You hereby acknowledge timely receipt of all wages, salary, and other amounts
payable pursuant to Michigan law.
By acceptance of this agreement and payment hereunder, you understand that
there will be no additional compensation of any kind from Horizon, except as
may be subsequently agreed to and mutually executed in writing. You, on behalf
of yourself, your relatives, heirs, agents, representatives, successors, and
assigns and all others acting by, for, on behalf of, or in concert with you
("you") and Horizon, and its representatives, successors, assigns,
subsidiaries, affiliates, owners, partners, shareholders, directors, officers,
agents, attorneys, and employees, and all others acting by, for, on behalf of
or in concert with Horizon hereinafter ("Releasees"), mutually release and
indemnify each other from any and all claims, actions, causes of action,
demands, damages, losses, costs, expenses, compensation, benefits, including
but not limited to claims arising out of contract, tort, statute, or regulation
(federal, state, or local) and from any and all other damages of whatsoever
kind or nature (including actual attorney fees and court costs), which either
party now have or may have in connection with any matter, occurrence,
transaction, or thing heretofore or presently existing, or existing any time in
the past, including specifically but not by way of limitation any and all
claims or causes of action arising from, during or related to your employment,
or your severance therefrom. You further agree that you will hold this
agreement and its terms in complete confidence and you will not disclose the
agreement or its terms to any other person, firm, organization, or entity other
than your family, attorney or other professional advisor (for any reason, at
any time, without the prior written consent of the Releasees or their attorney,
unless required by law).
Horizon additionally agrees to release you from all non-compete obligations
contained in your Employment Agreement dated January 30, 1996.
<PAGE> 2
Horizon agrees that effective January 31, 1997, the 1,379 shares of restricted
stock awarded to you under Paragraph 4(d) of your Employment Agreement shall be
fully vested and all restrictions removed.
Without limiting the scope of any other provision of this Agreement, you
confirm that this Agreement contains a release and waiver of all claims you may
have against Releasees under the Age Discrimination In Employment Act 29,
U.S.C., Section 621, et. seq., and confirm that you have been given the
opportunity to consider this Agreement for 45 days, and have been advised to
seek the advice of an attorney before signing the Agreement. By signing the
Agreement, you confirm you have either considered the Agreement for 45 days or
do not wish to do so.
You have 45 days from the date of your signature below to revoke this
Agreement. If you wish to revoke this Agreement, you must, within 45 days of
signing this Agreement, give notice of such decision to Horizon and, along with
such notice, return to Horizon the amounts paid to you pursuant to this
Agreement.
HORIZON: Sobol:
By: /s/ J.S. O'Brien Signature: /s/ Paul Sobol
-------------------------- ------------------------
Date: 11/21/96 Date: 11/21/96
------------------------- ------------------------
2
<PAGE> 1
EXHIBIT 13
HORIZON GROUP, INC.
SELECTED FINANCIAL DATA (A)
The following table sets forth selected financial data of Horizon Group,
Inc. (the "Company"), which includes the results of operations of McArthur/Glen
from July 14, 1995, the date of the merger. The following information should be
read in conjunction with the financial statements and notes thereto and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" contained elsewhere in this Annual Report.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(THOUSANDS, EXCEPT PER SHARE AMOUNTS, NUMBER OF PROPERTIES,
AND SHAREHOLDERS OF RECORD)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue................................. $ 154,499 $ 93,929 $ 43,267 $ 22,247 $ 15,776
Expenses................................ 124,277 66,558 26,073 19,274 15,506
Impairment and severance................ 65,355 -- -- -- --
Income (loss) before gain on sale of
real estate, minority interests and
extraordinary charge.................. (35,133) 27,371 17,194 2,973 270
Gain on sale of real estate............. 563 776 287 272 438
Net income (loss) before minority
interests and extraordinary charge.... (34,570) 28,147 17,481 3,245 708
Minority interests...................... 7,715 (6,776) (2,940) (2,702) --
Extraordinary charge.................... (419) -- -- -- --
Net income (loss)....................... (27,274) 21,371 14,541 543 708
Net income (loss) per common share
before extraordinary charge........... (1.32) 1.52 1.42 .06 --
Net income (loss) per common share for
extraordinary charge.................. (.02) -- -- -- --
Net income (loss) per common share...... (1.34) 1.52 1.42 .06 --
Dividends declared per common share
(c)................................... 2.095 2.131 1.755 .247 --
---------- ---------- --------- -------- --------
BALANCE SHEET DATA:
Real estate, net of accumulated
depreciation (b)...................... $1,008,000 $1,023,745 $ 287,833 $176,512 $ 85,318
Total assets............................ 1,095,221 1,059,090 300,043 218,146 89,695
Total mortgages and other debt.......... 557,672 503,246 96,929 24,888 86,613
Total shareholders' equity (deficit).... 363,881 341,896 148,849 152,165 (1,872)
---------- ---------- --------- -------- --------
OTHER DATA:
Funds From Operations before minority
interests (d)......................... $ 66,410 $ 48,885 $ 26,048 $ 7,537 $ 3,388
Adjusted Funds From Operations before
minority interests (d)................ 57,199 43,825 24,493 -- --
Cash flows provided by (used in):
Operating activities.................. 32,442 35,719 26,713 9,557 3,606
Investing activities.................. (94,491) (150,916) (114,330) (93,663) (21,591)
Financing activities.................. 74,054 117,592 56,105 118,965 18,423
Total gross leasable area (square
feet)................................. 9,369 8,464 3,124 2,215 1,353
Number of properties.................... 37 35 13 12 9
---------- ---------- --------- -------- --------
SHARES AND SHAREHOLDERS (AT DECEMBER
31,):
Shares outstanding...................... 22,826 18,552 10,236 10,237 --
Shareholders of record (e).............. 883 642 315 239 --
</TABLE>
(See footnotes on next page.)
1
<PAGE> 2
- -------------------------
(a) The selected financial data includes: for the period up to and including
November 7, 1993, the combined financial statements of Horizon Group, Inc.
and certain affiliated partnerships, the impact of the initial public
offering and related transactions as of November 8, 1993 and for the period
subsequent to November 8, 1993, the consolidated financial statements of
Horizon Group, Inc.
(b) Certain reclassifications have been made to previously reported balances in
order to provide comparability to the current year amounts. These
reclassifications have not changed previously reported results or
shareholders' equity.
(c) Included in 1995 is a special one-time dividend of $.111 per common share,
declared in connection with the merger with McArthur/Glen.
(d) Adjusted Funds From Operations before minority interests is defined as
income before minority interest (computed in accordance with generally
accepted accounting principles) excluding (1) gains or losses from debt
restructuring, certain one-time charges and write downs and sales of
property, (2) depreciation of real estate, (3) amortization other than the
amortization of deferred financing costs and (4) adjustments for
unconsolidated partnerships and joint ventures (Funds from Operations based
on the definition of the National Association of Real Estate Trusts in March
1995), then further adjusted to, (1) eliminate the effect of straight-line
rental income and rental expense and (2) deduct normalized capital
expenditures associated with leasing, tenant improvements and non-revenue
enhancing upkeep of properties.
(e) At December 31, 1996, does not include beneficial owners which exceed
18,000.
2
<PAGE> 3
HORIZON GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL OVERVIEW
Horizon Group Inc. (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. On July 14, 1995, the Company expanded its operations by merging with
McArthur/Glen Realty Corp. ("McArthur/Glen"), an owner, operator and developer
of factory outlet centers. At the merger date, McArthur/Glen operated 20 outlet
centers with 3.9 million square feet of gross leasable area ("GLA"). See Note 3
in the accompanying Consolidated Financial Statements for further information.
At December 31, 1996, the Company operated 37 outlet centers containing an
aggregate of 9.4 million square feet of GLA in 20 states compared to 35 outlet
centers with 8.5 million square feet of GLA in 19 states at the end of 1995 and
13 factory outlet centers containing an aggregate of 3.1 million square feet of
GLA in seven states at the end of 1994. The Company's occupancy for stabilized
properties was 89%, 95% and 96% at December 31, 1996, 1995 and 1994,
respectively. The Company's properties are considered to be stabilized if they
have been open for twelve months or if they have reached full occupancy.
The Company receives rental revenue through base rent, percentage rent and
expense recoveries from tenants. Base rent represents a minimum amount for which
tenants are contractually obligated. Percentage rent represents an amount
tenants are obligated to pay as additional rent based on a percentage of the
tenant's gross sales in excess of "breakpoint." Expense recoveries from tenants
relate to the portion of the operating expenses for which the tenants are
obligated to reimburse the Company, including real estate taxes, insurance,
utilities and common area maintenance charges.
CONSOLIDATED RESULTS OF OPERATIONS
1996 COMPARED TO 1995
The net loss before minority interests and extraordinary charge was $34.6
million in 1996 compared to net income before minority interests and
extraordinary charge of $28.1 million in 1995. The loss in 1996 resulted from
charges and asset write-downs aggregating $65.4 million, comprised of a $61.7
million provision primarily for asset impairment, $2.2 million related to
discontinued development projects and $1.5 million in executive severance costs.
As a result of the Company's review of the carrying value of its long-lived
assets, the Company was required to recognize write-downs totaling $61.7 million
during the fourth quarter of 1996 primarily pursuant to the provisions of
Statement of Financial Accounting Standards No. 121 "Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of" as follows:
- Cost over-runs and limited success in leasing the Company's Dole Cannery
project in Honolulu, Hawaii required a write-down of the Company's
investment in that project together with a reserve against a related
receivable. Beginning in 1997, the Company will expense and not
capitalize leasing, interest or operating costs incurred on the Dole
Cannery project.
- The decision to market for sale two centers that, based on the expected
net proceeds, required a write-down of the carrying values of such
centers to their estimated fair value less cost to sell.
- Revised occupancy expectations that indicated a permanent impairment of
value of three other centers. These centers were written-down to
estimated fair value.
In addition, fourth quarter 1996 results include charges of $2.2 million
related to development projects which will not be pursued and a $1.5 million
provision for executive severance costs.
Net income (loss) in 1996 before minority interests and extraordinary
charge, excluding the $65.4 million in charges and write-downs, improved $2.6
million in 1996 compared to 1995. The improvement resulted
3
<PAGE> 4
principally from increased GLA due to the merger with McArthur/Glen, which added
3.9 million square feet of GLA, and the opening of three additional centers and
the expansion of eight other centers which collectively added 905,000 square
feet of GLA.
Base and percentage rents increased $41.5 million and $0.7 million or 61%
and 29%, respectively, in 1996 compared to 1995. These increases resulted from
increased GLA due to the merger with McArthur/Glen and the opening and expansion
of centers.
Tenant expense recoveries increased $15.0 million or 79% in 1996 compared
to 1995 as a result of additional leased space. For the twelve months ended
December 31, 1996, expense recoveries covered 96.6% of property operating and
real estate expenses compared to 92.3% in 1995.
Depreciation and amortization increased $16.5 million or 80%, principally
from a full year of combined operations relating to the merger with
McArthur/Glen and additional development and expansion. Property operating and
real estate tax expenses increased $14.6 million or 71% reflecting the growth in
GLA.
Land lease and other expense increased $.3 million in 1996 compared to
1995, principally due to the straight-line lease expense associated with the
Dole Cannery project.
General and administrative expenses increased $6.8 million in 1996 compared
to 1995 from the inclusion of a full year of expense in 1996 from the merger
with McArthur/Glen, higher provisions for uncollectible accounts receivable and
increased leasing costs. Primarily as a result of higher provisions for
uncollectible accounts receivable and increased leasing costs, general and
administrative expenses, as a percentage of total revenues, increased to 7.6% in
1996 compared to 5.3% in 1995.
1995 COMPARED TO 1994
Net income before minority interests increased $10.7 million or 61%,
compared to the same period in 1994. These increases were primarily attributed
to the merger with McArthur/Glen and the opening of three additional centers,
the expansion of ten existing centers and the acquisition of one property
adjacent to an existing center which collectively added 5.3 million square feet
of GLA. 1995 also benefited from the inclusion for a full year of one additional
center, together with the expansion of five existing centers, and the
acquisition of three properties adjacent to existing centers open during 1994,
but not operational for all of 1994, totaling 909,000 square feet of GLA.
Depreciation and amortization increased $12.0 million or 140% resulting
from the increased GLA, principally from the merger with McArthur/Glen and
additional development, expansion and an acquisition. Property operating and
real estate tax expenses increased $11.4 million or 124% reflecting the growth
in GLA. General and administrative expenses increased $1.4 million in 1995
compared to 1994. As a result of operating efficiencies achieved through
managing a larger portfolio, general and administrative expenses as a percentage
of total revenues decreased to 5.3% in 1995 compared to 8.4% in 1994.
Base and percentage rents increased $38.7 million and $1.0 million or 130%
and 65%, respectively, in 1995 compared to 1994. These increases resulted from
increased GLA due principally to the merger with McArthur/Glen and development,
expansions and an acquisition.
Tenant expense recoveries increased $10.5 million or 124% in 1995 compared
to 1994 as a result of additional leased space. For the twelve months ended
December 31, 1995, expense recoveries covered 92.3% of property operating and
real estate tax expenses, compared to 92.5% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Although current in the payment of principal and interest, the Company was
not in compliance with certain financial covenants contained in its revolving
credit facilities and construction lines of credit which had outstanding
balances aggregating $154.4 million at December 31, 1996. Each of the affected
lenders has provided waivers to the Company. The Company currently anticipates
that similar waivers may be required for subsequent quarters unless amendments
or refinancing are obtained. While the Company has no reason to believe that
such waivers will not be given and that it will not be able to obtain
refinancing with a coverage
4
<PAGE> 5
tests or amendments that will permit the Company to satisfy the new terms on a
going forward basis if required, there can be no assurance that such waivers
will be given or that such amendments or refinancing will be available on terms
acceptable to the Company. The Company is actively pursuing replacement credit
facilities.
The Company has a $205.0 million revolving credit facility agreement with
First Chicago NBD and other banks ("FCNBD"), which expires in June 1999. At the
Company's election, interest is charged at the rate of 1/4 of 1 percent over
prime or 2 percent over the London Interbank Offered Rate ("LIBOR"). Borrowings
under the FCNBD line of credit is primarily used for acquisitions, property
expansion and development activities, and is collateralized by certain
properties owned by the Company. On December 31, 1996, the FCNBD line of credit
was not fully collateralized resulting in a borrowing base limitation of $132.7
million. The Company has fully borrowed on the collateralized portion of the
line of credit and would need to provide additional collateral to access the
remaining portion of the line of credit.
Additionally, the Company has unsecured revolving credit facilities
aggregating $24.0 million with two Michigan banks for working capital
requirements. As of December 31, 1996, the Company had no borrowings under these
revolving credit facilities. Interest on borrowings under these facilities is
charged at the prime rate.
The Company has a $125.0 million construction line of credit (the
"Construction Line") with the Canadian Imperial Bank of Commerce ("CIBC") which
expires October 1998. At the Company's option, fundings under the Construction
Line bear interest at either (i) 1 1/2% over the greater of the construction
lender's prime rate, or the overnight Federal Funds rate plus 1%, or (ii) LIBOR
plus 2 1/2%. During 1996, the Company elected to use the rate of LIBOR plus
2 1/2%. The Company has entered into interest rate protection agreements with
financial institutions protecting the Company from LIBOR interest rate increases
above 6.5% during 1997. The Construction Line contains financial covenants
including a limitation on the payment of dividends. The Construction Line is
secured by the properties built with funds provided by the Construction Line and
expires in October, 1998. At December 31, 1996, borrowings under the
Construction Line were $21.7 million.
All of the Company's lines of credit are recourse.
The Company plans to expand existing centers by 198,000 square feet of GLA
and complete development of a 223,000 square feet new center prior to December
31, 1997. Estimated cash requirements in 1997 to complete the 1997 delivery
schedule and commence 1998 projects is approximately $41.4 million.
In November 1996, the Company formed a venture (the "Venture") with a
pension fund (the "Fund") advised by Heitman Capital Management. The Company
contributed its Finger Lakes Outlet Center, a 325,000 square foot center in
Finger Lakes, New York, in exchange for $34.9 million and 50% ownership in the
Venture. The Fund contributed $34.9 million in cash for a $31.5 million
preferred equity position that earns a 9.6% return on the outstanding balance
and 50% ownership in the Venture. The Fund's equity position is convertible to
1.8 million shares of the Company's Common Stock. Upon completion of a future
expansion, to be contributed by the Company, the Fund will contribute an
additional $7.6 million in cash which will concurrently be distributed to the
Company. This second contribution by The Fund will be convertible to 0.4 million
shares of additional Common Stock of the Company.
The Company received a $65.0 million mortgage in the first quarter of 1996
and a $99.3 million mortgage in the third quarter of 1996 from an institutional
lender at fixed interest rates of 8.574% and 9.06%, respectively. Additionally,
the Company received a $10.0 million mortgage from a life insurance company at a
fixed rate of 8.25% with a four-year term. Proceeds from the mortgages were used
to reduce current debt maturities and amounts outstanding under revolving credit
facilities. The Company has also received a $21.5 million mortgage commitment
from a life insurance company to replace construction debt scheduled to close in
the third quarter of 1997.
During 1996, the Company sold 1.5 million shares of Common Stock at a 5%
discount to the then market price of $20.00 per share for an aggregate price of
$28.9 million. The Company additionally issued .8 million shares of Common Stock
under its Dividend Reinvestment Plan (DRIP) for an aggregate price of $16.4
million. Net proceeds from the foregoing sales of Common Stock were used to
reduce amounts outstanding
5
<PAGE> 6
under revolving credit facilities. Future proceeds from shares sold under the
DRIP are dependent upon the demand of current and future Shareholders which
cannot be estimated at this time.
Total tenant retail sales at Company centers increased in 1996 compared to
1995. In addition tenant sales, on a comparative store basis, increased
approximately 1.2 percent in 1996 compared to 1995, comparable to the trend in
the industry. Lower sales by certain tenants may however have a continuing
adverse effect on tenant plans for new store openings. It is the Company's
practice to achieve minimum pre-leasing levels prior to commencing construction
activities. The Company's results of operations are significantly dependent on
the overall health of the retail industry. Should declines in general retail
industry conditions continue to slow tenant leasing commitments, the Company may
delay construction of certain development and expansion projects pending the
attainment of minimum pre-leasing levels. Such a delay may adversely affect the
Company's ability to capitalize and defer a portion of its direct leasing and
development overhead costs to the extent that the Company does not reduce such
overhead costs.
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 in addition to
satisfying other requirements. 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 acquisition or
development of new properties as suitable opportunities arise, for the expansion
and renovation of its existing factory outlet centers, and for the retirement of
debt.
The Company anticipates that the cash flow from operations together with
cash available from borrowings and other sources will be adequate to meet the
capital and liquidity needs of the Company. The Company intends to meet its
short-term borrowing requirements primarily through fixed-rate debt financing
and its revolving and construction credit facilities. To meet its long-term
liquidity requirements for growth, the Company intends to obtain funds through
additional equity offerings or long-term debt financing in a manner consistent
with its debt to market capitalization policy. There is no assurance that any
such debt or equity financing will be available on acceptable terms.
OTHER INCOME
Other income increased in 1996 compared to 1995 from higher lease
termination income and income related to marketing. Other income increased in
1995 compared to 1994 from higher service fees and income related to marketing
services that is recovered from tenants partially offset by lower leasing and
development fees.
INTEREST EXPENSE
Interest costs increased in both 1996 and 1995, as compared to the
respective previous year, principally from higher average debt levels.
ADJUSTED FUNDS FROM OPERATIONS BEFORE MINORITY INTERESTS
The Company believes that Adjusted Funds From Operations before minority
interests is the primary 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. Adjusted Funds From Operations before minority
interests is defined as income before minority interest (computed in accordance
with generally accepted accounting principles) excluding (1) gains or losses
from debt restructuring, certain one-time charges and write downs and sales of
property, (2) depreciation of real estate, (3) amortization other than the
amortization of deferred financing costs and (4) adjustments for unconsolidated
partnerships and joint ventures (Funds from Operations based on the definition
of the National Association of Real Estate Trusts in March 1995), then further
adjusted to, (a) eliminate the effect of straight-line rental income and rental
expense and (b) deduct normalized capital expenditures associated with leasing,
tenant improvements and non-revenue enhancing upkeep of properties. Adjusted
Funds From Operations is the most significant factor considered by the Board of
Directors in determining the amount of cash distributions the Company will make
6
<PAGE> 7
to shareholders. Adjusted 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.
Adjusted Funds From Operations before minority interests and extraordinary
charge in 1996 increased $13.4 million or 31% compared to 1995. The increase
resulted principally from a full year of operations resulting from the merger on
July 14, 1995 with McArthur/Glen. Adjusted Funds From Operations before minority
interests and extraordinary charge increased $19.3 million or 79% in 1995
compared to 1994.
INFLATION
The Company's leases with the majority of its tenants require the tenants
to reimburse the Company for most operating expenses and increases in common
area maintenance expenses, which reduces the Company's exposure to increases in
costs and operating expenses resulting from inflation.
FORWARD LOOKING STATEMENTS
The statements contained herein, which are not historical facts, are
forward looking statements based upon economic forecast, budgets, and other
factors, which, by their nature, involve known risk, 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.
7
<PAGE> 8
HORIZON GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
---- ---- ----
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUE
Base rent................................................. $109,983 $68,533 $29,847
Percentage rent........................................... 3,154 2,441 1,481
Expense recoveries........................................ 33,934 18,930 8,461
Other..................................................... 7,428 4,025 3,478
-------- ------- -------
TOTAL REVENUE.......................................... 154,499 93,929 43,267
-------- ------- -------
EXPENSES
Property operating........................................ 23,192 14,351 6,110
Real estate taxes......................................... 11,942 6,148 3,034
Land leases and other..................................... 1,476 1,159 988
General and administrative................................ 11,764 4,970 3,613
Depreciation and amortization............................. 37,209 20,660 8,616
Provision for impairment and severance.................... 65,355 -- --
Interest.................................................. 38,694 19,270 3,712
-------- ------- -------
TOTAL EXPENSES......................................... 189,632 66,558 26,073
-------- ------- -------
INCOME (LOSS) BEFORE GAIN ON SALE OF REAL ESTATE, MINORITY
INTERESTS AND EXTRAORDINARY CHARGE........................ (35,133) 27,371 17,194
Gain on sale of real estate............................... 563 776 287
-------- ------- -------
NET INCOME (LOSS) BEFORE MINORITY INTERESTS AND
EXTRAORDINARY CHARGE...................................... (34,570) 28,147 17,481
Minority interests........................................ 7,715 (6,776) (2,940)
-------- ------- -------
NET INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE............... (26,855) 21,371 14,541
Extraordinary charge on debt prepayment................... (419) -- --
-------- ------- -------
NET INCOME (LOSS)........................................... $(27,274) $21,371 $14,541
======== ======= =======
Weighted average common shares outstanding.................. 20,395 14,016 10,237
Net income (loss) per common share before extraordinary
charge.................................................... $ (1.32) $ 1.52 $ 1.42
Net loss on extraordinary charge............................ (.02) --
-------- ------- -------
Net income (loss) per common share.......................... $ (1.34) $ 1.52 $ 1.42
======== ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
8
<PAGE> 9
HORIZON GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
---- ----
(THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Real estate, at cost:
Land...................................................... $ 135,078 $ 135,439
Buildings and improvements................................ 855,707 802,910
Construction in progress.................................. 71,113 114,983
Furniture, fixtures and equipment......................... 11,592 8,252
Less accumulated depreciation............................. (65,490) (37,839)
---------- ----------
TOTAL REAL ESTATE...................................... 1,008,000 1,023,745
Cash and cash equivalents................................... 18,572 6,567
Tenant accounts receivable.................................. 6,807 7,186
Due from joint venture...................................... 13,764 --
Assets held for sale........................................ 13,075 --
Deferred costs.............................................. 20,696 10,923
Other assets................................................ 14,307 10,669
---------- ----------
TOTAL ASSETS........................................... $1,095,221 $1,059,090
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgages and other debt.................................... $ 557,672 $ 503,246
Accounts payable and accrued expenses....................... 31,300 43,170
Prepaid rents and other tenant liabilities.................. 5,568 4,504
Other liabilities........................................... 5,524 3,627
Dividends and distributions payable......................... 14,832 12,950
---------- ----------
TOTAL LIABILITIES...................................... 614,896 567,497
---------- ----------
MINORITY INTERESTS.......................................... 116,444 149,697
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 47,000 shares authorized,
22,826 and 18,552 issued and outstanding as of December
31, 1996 and 1995, respectively........................... 228 186
Additional paid-in capital.................................. 448,637 355,803
Dividends in excess of net income........................... (84,984) (14,093)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY................................ 363,881 341,896
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ $1,095,221 $1,059,090
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
9
<PAGE> 10
HORIZON GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL DIVIDENDS IN
---------------- PAID-IN EXCESS OF NET SHAREHOLDERS'
NUMBER AMOUNT CAPITAL INCOME EQUITY
------ ------ ---------- ------------- -------------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994.................. 10,237 $102 $154,049 $ (1,986) $152,165
Compensation related to stock bonus
arrangement............................. (1) 108 108
Net income................................ 14,541 14,541
Dividends declared........................ (17,965) (17,965)
------ ---- -------- -------- --------
BALANCE, DECEMBER 31, 1994................ 10,236 102 154,157 (5,410) 148,849
Compensation related to stock bonus
arrangement............................. 97 97
Merger with McArthur/Glen................. 7,839 78 191,004 191,082
Units exchanged for common shares......... 446 5 9,865 9,870
Stock options exercised................... 31 1 680 681
Net income................................ 21,371 21,371
Dividends declared........................ (30,054) (30,054)
------ ---- -------- -------- --------
BALANCE, DECEMBER 31, 1995................ 18,552 186 355,803 (14,093) 341,896
Compensation related to stock bonus
arrangement............................. 9 9
Issuance of stock......................... 2,367 23 45,101 45,124
Units exchanged for common shares......... 1,907 19 40,052 40,071
Net loss.................................. (27,274) (27,274)
Dividends declared........................ (43,617) (43,617)
Adjustment to minority interests for
ownership changes....................... 7,672 7,672
------ ---- -------- -------- --------
BALANCE, DECEMBER 31, 1996................ 22,826 $228 $448,637 $(84,984) $363,881
====== ==== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
10
<PAGE> 11
HORIZON GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before extraordinary charge............ $ (26,855) $ 21,371 $ 14,541
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Minority interests in net income (loss)................ (7,715) 6,776 2,940
Depreciation........................................... 35,214 19,655 7,765
Amortization........................................... 2,700 2,081 1,171
Gain on sale of real estate............................ (563) (776) (287)
Provision for asset impairment......................... 61,653 -- --
Compensation related to stock bonus arrangement........ 9 97 108
Changes in assets and liabilities:
Tenant accounts receivable............................. (287) (4,198) (1,581)
Due from joint venture................................. (13,763) -- --
Deferred costs and other assets........................ (14,401) (7,909) (1,678)
Accounts payable and accrued expenses.................. (6,511) (19) 2,637
Other liabilities...................................... 1,897 (589) 380
Prepaid rents and other tenant liabilities............. 1,064 (770) 717
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 32,442 35,719 26,713
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for real estate and improvements.......... (95,999) (146,165) (114,804)
Proceeds from sale of real estate...................... 1,508 1,185 474
Business acquired, net of cash received................ -- (5,936) --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES.................. (94,491) (150,916) (114,330)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock............. 45,124 -- --
Dividends.............................................. (40,883) (25,392) (13,256)
Contribution from joint venture........................ 34,900 -- --
Distributions -- minority interests.................... (13,385) (7,086) (2,680)
Proceeds from borrowings............................... 197,067 137,451 14,812
Principal payments on mortgages and other debt......... (115,633) (27,378) (971)
Debt issue costs....................................... (6,501) (2,805)
Net proceeds (repayments) on revolving credit
facilities.......................................... (26,635) 42,122 58,200
Proceeds from the exercise of stock options............ -- 680 --
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 74,054 117,592 56,105
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 12,005 2,395 (31,512)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR...................................... 6,567 4,172 35,684
--------- --------- ---------
END OF YEAR............................................ $ 18,572 $ 6,567 $ 4,172
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
11
<PAGE> 12
HORIZON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of Horizon Group, Inc.
(the "Company"), formerly HGI Realty, Inc., for the three years ended December
31, 1996 include the accounts of the Company and its subsidiary, Horizon/Glen
Outlet Centers Limited Partnership ("Operating Partnership"), which was 81.6%,
72.3% and 83.1% owned as of December 31, 1996, 1995, and 1994, respectively. The
Company is engaged in the ownership, acquisition, development and operation of
outlet centers. On July 14, 1995, McArthur/Glen Realty Corp. ("McArthur/Glen")
merged with and into the Company, the surviving corporation. See Note 3 for
further information.
The Company prepares its consolidated financial statements and maintains
its books and records in conformity with generally accepted accounting
principles. The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE AND DEPRECIATION -- Real estate assets consist primarily of
outlet centers and are stated at cost, 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. Leasing costs and costs to obtain or refinance mortgages are capitalized
as incurred. The cost of buildings and improvements are depreciated on the
straight-line method over estimated useful lives which are: buildings, 31.5
years; improvements, shorter of 10 years or useful life.
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
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. Impairment losses are measured as the
difference between carrying value and fair value for assets to be held in
portfolio. For assets to be sold, impairment is measured as the difference
between carrying value and fair value, less costs to dispose. Fair value is
based on estimated cash flows discounted at a risk-adjusted rate of interest or
a value derived from comparable sales transactions in the marketplace. During
the fourth quarter of 1996, events and circumstances occurred which required a
$61.7 million provision primarily for the impairment of assets. See Note 4. It
is reasonably possible that the estimate of the provision for asset impairment
may change in the near term because of the degree of judgment involved in
determining fair value.
REVENUE RECOGNITION -- Leases with tenants are accounted for as operating
leases. Minimum annual rentals are generally recognized on a straight-line basis
over the term of the respective lease. As a result of recording rental revenue
on a straight-line basis, the Company has recorded receivables from tenants, net
of reserves, in the amount of $2.6 million and $1.0 million as of December 31,
1996 and 1995, respectively, which the Company expects to collect over the
remaining life of the leases rather than currently. Contingent rentals based on
common area maintenance expenses and certain other expenses are accrued in the
period in which the related expense is incurred. Percentage rents are accrued on
the basis of reported tenant sales. Accounts receivable are reflected net of
reserves of $2.1 million and $1.0 million as of December 31, 1996 and 1995,
respectively. The provision for doubtful accounts in 1996, 1995 and 1994 was
$2.1 million, $.3 million and $.2 million, respectively.
12
<PAGE> 13
INTEREST RATE PROTECTION CONTRACTS -- The Company uses interest rate
protection contracts, including interest rate caps and corridors, to manage
interest rate risk associated with floating rate debt. These contracts generally
involve limiting the Company's interest costs with an upper limit or specified
range on the underlying interest rate index. The costs of such contracts are
included in deferred costs and are amortized on a straight-line basis over the
life of the contracts as a component of interest expense. Amounts earned from
interest rate protection contracts are recorded as a reduction of interest
expense. The Company is exposed to credit losses in the event of counter-party
non-performance, but does not anticipate any such losses based on the
creditworthiness of the counter-parties.
OTHER REVENUE -- Other revenue consists primarily of development,
management, consulting, and leasing income related to other properties not
included in the consolidation, interest income and income related to marketing
services that is recovered from tenants pursuant to lease agreements.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
and cash equivalents.
DEFERRED COSTS AND OTHER ASSETS -- Leasing costs and direct financing costs
are capitalized at cost. Amortization is recorded on the straight-line method
over a ten year lease period or the life of the loan, respectively.
INCOME TAXES -- The Company elected to be taxed as a Real Estate Investment
Trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with the taxable year ending December 31, 1994. A corporate REIT is a
legal entity that holds real estate interests, and, through payments of
dividends to shareholders, is permitted to reduce or to avoid the payment of
federal income taxes at the corporate level. As a REIT, the Company generally
will not be taxed on income to the extent it distributes its REIT taxable income
as defined in the Code to its shareholders and satisfies certain other
requirements.
MINORITY INTERESTS -- Minority interests includes the minority interests of
the Company's consolidated subsidiaries and the minority interests of
unitholders in the operating subsidiary of the REIT. Minority interests in
earnings is calculated based on the proportion of ownership interest in the
earnings of the applicable subsidiary. The unitholder minority interest is
adjusted at each period end to reflect the ownership percentage at that
particular time. The unitholder minority interest was 18.4%, 27.7% and 16.9% at
December 31, 1996, 1995 and 1994, respectively.
STOCK OPTION PLAN -- In October 1995, the Financial Accounting Standards
Board issued Statement No. 123, "Accounting for Stock Based Compensation"
("Statement 123"), which the Company adopted as of January 1, 1996. In
accordance with Statement 123, the Company has elected to apply Accounting
Principles Board Opinion No 25, "Accounting for Stock Issued to Employees" and
related Interpretations in accounting for its employee stock options.
Accordingly, because the exercise price of the Company's employee stock options
equals or exceeds fair market value of the underlying stock on the date of
grant, no compensation expense is recognized.
NET INCOME (LOSS) PER SHARE -- Primary net income (loss) per share is
computed by dividing net income by the weighted average number of common and
dilutive common stock equivalents outstanding during the year. Common stock
equivalents include stock options and the convertible interests discussed in
Note 3.
RECLASSIFICATIONS -- Certain reclassifications have been made to previously
reported statements in order to provide comparability to the statements reported
herein. These reclassifications have not changed previously reported results or
shareholders' equity.
NOTE 3 -- BUSINESS COMBINATIONS AND ACQUISITIONS
In November 1996, the Company formed a venture (the "Venture") with a
pension fund (the "Fund") advised by Heitman Capital Management. The Company
contributed its Finger Lakes Outlet Center, a 325,000 square foot center in
Finger Lakes, New York, in exchange for $34.9 million and 50% ownership in the
Venture. The Fund contributed $34.9 million in cash for a $31.5 million
preferred equity position that earns a 9.6% return on the outstanding balance
and 50% ownership in the Venture. The Fund's equity position,
13
<PAGE> 14
upon election by The Fund, is convertible into 1.8 million shares of the
Company's Common Stock. Upon completion of a future expansion, to be contributed
by the Company, The Fund will contribute an additional $7.6 million in cash
which will concurrently be distributed to the Company. This second contribution
by The Fund will be convertible into 0.4 million shares of additional Common
Stock of the Company. The Company is developing the expansion pursuant to a
development agreement with the Venture and manages and leases the entire
property. As a result of the Company's control over the Venture, the 1996
financial statements include the assets and liabilities of the Venture and the
interests of The Fund have been reflected as a component of minority interest.
On July 14, 1995, McArthur/Glen merged with and into the Company as the
surviving corporation and the operating partnerships of the respective
companies, McArthur/Glen Outlet Centers Limited Partnership ("McArthur/Glen
L.P.") and Horizon Outlet Centers Limited Partnership, were consolidated into
the Horizon/Glen Outlet Centers Limited Partnership ("Horizon/Glen Partnership")
(the "Merger"). McArthur/Glen developed, owned and managed outlet centers. Each
outstanding share of McArthur/Glen common stock was converted into .64 shares of
HGI common stock and each outstanding McArthur/Glen L.P. partnership unit was
converted into .64 units of the limited partnership interest of the Horizon/Glen
Partnership. Each outstanding unit of Horizon Outlet Centers Limited Partnership
was converted into one unit of limited partnership interest in the Horizon/Glen
partnership. The purchase price of $600.4 million consisted of cash of $.9
million, cash of $6.3 million representing costs incurred by Horizon in
connection with the Merger, 13.2 million HGI common shares and Horizon/Glen
partnership units with a market value at the Merger date of $322.0 million, and
the assumption of $271.2 million in liabilities. The purchase price was
allocated based on estimated fair values at the date of the Merger. In addition,
outstanding employee stock options to purchase McArthur/Glen common stock were
converted into options to purchase approximately 688,000 shares of the Company's
common stock.
The Merger was accounted for using the purchase method in accordance with
Accounting Principles Board Opinion No. 16. The accompanying consolidated
financial statements include the results of operations of McArthur/Glen from the
date of the Merger.
At December 31, 1996 and 1995, the Company had accrued termination and
severance costs of $1.1 million and $6.9 million related to the merger,
respectively. The Company paid $2.5 million in 1996 and $1.2 million in 1995 for
termination and severance costs. During 1996, the Company reduced the remaining
accrual by $3.3 million, which was reflected as an adjustment of the purchase
price.
The following unaudited pro forma summarized results of operations for the
years ended December 31, 1995 and 1994 assumes the Merger occurred at the
beginning of the respective periods.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1995 1994
--------- ---------
(THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Total revenue............................................ $131,804 $108,380
Net income............................................... 26,575 24,292
Net income per share..................................... $ 1.46 $ 1.34
</TABLE>
The pro forma information is provided for information purposes only. It is
based on historical information and is not necessarily indicative of what actual
results of operations of the Company would have been, assuming the Merger had
been consummated as of the beginning of the period presented.
The following table summarizes non-cash investing and financing activity
related to the Company's merger with McArthur/Glen.
<TABLE>
<S> <C>
Fair value of assets acquired............................... $ 600,433
Horizon common stock and Horizon/Glen partnership units
issued.................................................... (322,034)
Cash paid................................................... (7,227)
---------
Liabilities assumed......................................... $ 271,172
=========
</TABLE>
14
<PAGE> 15
In 1995, the Company acquired an outlet center, adjacent to an existing
center owned by the Company, for a purchase price of $8.7 million, consisting
primarily of the assumption of existing mortgage indebtedness and unpaid real
estate tax obligations.
In 1994, the Company acquired three outlet centers adjacent to existing
outlet centers owned by the Company. The combined purchase price of all of the
properties was $56.3 million, consisting of $41.5 million in cash and the
assumption of $14.8 million of existing mortgage indebtedness.
NOTE 4 -- IMPAIRMENT AND SEVERANCE
Results of operations for 1996 include a charge of $65.4 million, comprised
of a $61.7 million provision for asset impairment, a $2.2 million charge related
to discontinued development projects and a $1.5 million provision for executive
severance costs. The asset impairment loss resulted from (1) cost over-runs and
limited leasing success in its Dole Cannery project, (2) an initiative by the
Company to market two centers for sale and (3) revised occupancy estimates on
three centers that indicated a permanent impairment in their value.
NOTE 5 -- MORTGAGES AND OTHER DEBT
Mortgages and other debt consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Construction............................................. $ 21,720 $ 42,131
Permanent................................................ 402,891 246,919
Corporate and other...................................... 133,061 214,196
-------- --------
$557,672 $503,246
======== ========
</TABLE>
Debt matures during each of the five years subsequent to 1996 as follows
(in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 11,110
1998........................................................ 41,459
1999........................................................ 138,985
2000........................................................ 29,331
2001........................................................ 32,657
Thereafter.................................................. 304,130
--------
$557,672
========
</TABLE>
Although current in the payment of principal and interest, the Company was
not in compliance with certain financial covenants contained in its revolving
credit facilities and construction line of credit at December 31, 1996. Each of
the affected lenders has provided waivers to the Company. The Company currently
anticipates that similar waivers may be required for subsequent quarters unless
amendments or refinancing are obtained. While the Company has no reason to
believe that such waivers will not be given and that it will not be able to
obtain refinancing with a coverage test or amendments that will permit the
Company to satisfy the new terms on a going forward basis if required, there can
be no assurance that such waivers will be given or that such amendments or
refinancing will be available on terms acceptable to the Company. The financial
statements do not include any adjustments relating to this uncertainty. The
Company is actively pursuing replacement credit facilities.
During 1996, the Company merged its First Chicago NBD and other banks
("FCNBD") secured revolving lines of credit of $105.0 million and $100.0 million
into one $205.0 million facility. Interest is based, at the election of the
Company, at prime plus 1/4% or LIBOR plus 2%. FCNBD also charges an availability
fee on the unborrowed portion of the line which ranges from .25% to .375%
depending upon usage. The line of credit, which expires June 1999, is secured by
certain of the Company's properties. On December 31, 1996, the FCNBD line
15
<PAGE> 16
of credit was not fully collateralized resulting in a borrowing base limitation
of $132.7 million. The Company has fully borrowed on the collateralized portion
of the line of credit and would need to provide additional collateral to access
the remaining portion of the line of credit. The Company also has a $20.0
million and a $4.0 million revolving credit facility for working capital
requirements, expiring in May 1997 and June 1998, respectively, with interest
under both facilities charged at prime. No amounts were borrowed under these
lines at December 31, 1996. Average daily short-term interest-bearing borrowings
during 1996 and 1995 were $165.7 million and $98.0 million, with a weighted
average interest rate of 7.7% and 8.4%. The maximum short-term borrowings
outstanding at any month end during 1996 and 1995 were $198.7 million and $159.3
million.
The Company has a $125.0 million construction line of credit (the
"Construction Line") with Canadian Imperial Bank of Commerce which bears
interest at the Company's option, either (i) 1.5% per annum over the greater of
the construction lender's prime rate or the overnight federal funds rate plus
1%, or (ii) LIBOR plus 2.5%. LIBOR equals 5.5% and 5.9375% at December 31, 1996
and 1995. During 1996 and 1995, the Company elected to use the rate of LIBOR
plus 2.5%. The Construction Line is secured by the properties built with funds
provided by the Construction Line, is recourse to the Company, and expires in
October of 1998. As of December 31, 1996 and 1995, borrowings under the
Construction Line were $21.7 million and $38.5 million, respectively. In
addition, $3.6 million was outstanding at December 31, 1995, under an additional
construction agreement. Average daily short-term interest-bearing borrowings
during 1996 and 1995 were $44.8 million and $5.1 million, with a weighted
average interest rate of 8.6% and 9.8%, respectively. The maximum short-term
borrowings outstanding at any month end during 1996 and 1995 were $58.4 million
and $44.4 million, respectively.
At December 31, 1996 and 1995, the Company had loans with various lending
institutions providing for $402.9 million and $246.9 million of permanent
financing, respectively. During 1996, the Company received a $99.3 million
mortgage and a $65.0 million mortgage from an institutional lender at fixed
interest rates of 9.06% and 8.574%, respectively. Each mortgage had a ten-year
term. In addition, the Company obtained a $10.0 million mortgage from a life
insurance company at a fixed rate of 8.25% with a four-year term. Proceeds from
the mortgages were used to repay debt outstanding under revolving credit
facilities.
Investment in rental property collateralizes all permanent loans which
mature at various dates principally through 2018. These loans bear interest,
primarily at fixed rates, ranging from 7.875% to 10.5%, except for variable
rates on a $8.1 million and a $9.4 million mortgage of prime plus 2.25% and
LIBOR plus 2.8%, respectively. The prime rate was 8.25% and 8.5% at December 31,
1996 and 1995, respectively. The outstanding balances on these mortgages was
$6.5 million and $8.2 million in 1996 and $7.7 million and $8.4 million in 1995.
Of the December 31, 1996 debt balance, $63.0 million was assumed on July
14, 1995 in connection with the Merger. The assumed debt was recorded at fair
market value, and at December 31, 1996 a premium of $4.3 million is being
amortized over the life of the respective loans on a straight-line basis
resulting in effective interest rates ranging from 7.9% to 8.16%.
In connection with the Merger, the Company assumed $65.0 million of debt
under a short-term credit agreement which had a balance at December 31, 1995 of
$54.7 million. The loan was repaid in 1996.
As of December 31, 1996, the Company had entered into interest rate
protection agreements, with financial institutions rated "A" or better,
protecting the Company from increases in interest rates and the financial
institution from decreases in interest rates as follows (dollars in thousands):
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT INDEX RATE COLLAR TERM
-------- ----- ----------- ----
<S> <C> <C> <C>
$75,000...................................... LIBOR 5.00%-6.5% 1996-1997
25,000...................................... LIBOR 5.00%-6.5% 1996-1997
50,000...................................... LIBOR 5.00%-6.5% 1996-1997
</TABLE>
At December 31, 1996 the Company also had an interest rate protection
agreement with a notional amount of $9.4 million, protecting a LIBOR rate
increase above 7.2%, which expires August, 1998. At
16
<PAGE> 17
December 31, 1995, the Company had an additional $8.1 million interest rate
protection agreement protecting a prime interest rate increase above 9.5%, which
expired in 1996.
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1995 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
(THOUSANDS)
<S> <C> <C> <C> <C>
Long-term debt........................ $503,246 $510,131 $557,672 $558,413
Interest rate protection agreements... 249 (636) 159 39
</TABLE>
The carrying amounts of the Company's borrowings under its revolving credit
agreements approximate their fair value. The fair value of the Company's
long-term debt is estimated using discounted cash flow analysis, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. The fair value for interest rate caps and collars is based on
dealer quotes and reflects the estimated amounts the Company would receive or
pay to terminate the contracts. The carrying value of cash and cash equivalents,
receivables and payables approximate their fair value.
Cash paid for interest for the years ended December 31, 1996, 1995 and 1994
(net of interest capitalized of $8.9 million, $5.1 million, and $1.4 million)
was $38.7 million, $15.7 million, and $3.0 million, respectively. Debt issue
cost amortization, classified as a component of interest expense, (net of
amounts capitalized of $0.2 million, $0.2 million, and $0.1 million) was $1.1
million, $0.9 million, and $0.2 million in 1996, 1995 and 1994, respectively.
NOTE 6 -- DEFERRED COSTS AND OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred costs consist of the following:
Deferred leasing costs................................... $14,660 $10,148
Deferred financing costs................................. 10,553 4,502
Other.................................................... 1,425 643
------- -------
26,638 15,293
Accumulated amortization................................. (5,942) (4,370)
------- -------
$20,696 $10,923
======= =======
Other assets consist of the following:
Future development projects.............................. $ 3,115 $ 4,541
Escrow deposits.......................................... 6,064 2,603
Other.................................................... 5,128 3,525
------- -------
$14,307 $10,669
======= =======
</TABLE>
At December 31, 1996, the Company had $13.8 million due from an
unconsolidated joint venture in which the Company has a 45% interest. The amount
due represents cash advances for construction of an expansion to an existing
center. The Company expects to be repaid in the third quarter of 1997 from the
proceeds of construction debt and a long-term mortgage of the joint venture.
NOTE 7 -- LEASES
Space in outlet centers is leased to various tenants under operating leases
which are generally for 5 to 10 year periods. The leases usually grant tenants
renewal options and provide for additional or contingent rents based on certain
operating expenses as well as tenants' sales volume. The Company expects
expiring leases will be renewed or replaced by other leases in the normal course
of business.
17
<PAGE> 18
Minimum future rentals to be received under non-cancelable leases are
summarized as follows:
<TABLE>
<CAPTION>
(THOUSANDS)
- -----------
<S> <C>
1997................................................. $106,803
1998................................................. 95,481
1999................................................. 82,866
2000................................................. 63,486
2001................................................. 43,834
Thereafter........................................... 133,696
--------
Total................................................ $526,166
========
</TABLE>
The Company is subject to the usual business risks associated with the
collection of the above scheduled rentals.
The Company leases land and a building for outlet centers under five
operating lease agreements expiring through the year 2093. At December 31, 1996,
minimum cash rental commitments to the expiration date were $493.0 million, of
which $4.4 million is due in each of the next four years and $5.0 million in
year five. The Company is required to recognize lease expense of $8.0 million,
on a straight-line basis, for its Dole Cannery project lease which expires in
2045. Lease expense for the Dole Cannery lease will exceed cash requirements in
the next four years by $4.8 million per year and $4.2 million in year five.
NOTE 8 -- SHAREHOLDERS' EQUITY
COMMON STOCK -- The authorized capital stock of the Company consists of
47,000,000 shares of Common Stock, 3,000,000 shares of Preferred Stock and
10,000,000 shares of Excess Stock, each $.01 par value per share. Each share of
Common Stock entitles the holder to one vote on all matters submitted for a vote
of shareholders, including the election of directors, and, except as otherwise
required by law or except as provided with respect to any other class or series
of stock, the holder of such Common Stock will possess the exclusive voting
power of the Company. There are no shares of Preferred Stock or Excess Stock
currently issued and outstanding.
In July 1996, the Company issued 1.5 million shares of Common Stock at a 5%
discount to the then fair market value of $20.00 per share. Proceeds, net of
associated professional fees, were $28.9 million. In addition, the Company
instituted a Dividend Reinvestment Plan in October 1996 that allows Shareholders
to reinvest cash dividends into shares of Common Stock at a discount of 0-5% at
the discretion of the Company. During 1996, .8 million common shares were issued
for total proceeds of $16.2 million.
DIVIDENDS IN EXCESS OF NET INCOME -- As described in Note 2, the Company
elected to be treated for federal income tax purposes as a REIT commencing with
the taxable year ending December 31, 1994. In reporting periods where dividends
exceed net income, Shareholders' equity will be reduced by the dividends in
excess of net income. The following table illustrates the reconciliation between
net income and dividends in excess of net income and the related per share data
for the three year period ended December 31, 1996. In 1996, 1995 and 1994,
dividends declared of $2.095, $2.131 and $1.755 per share represented a $1.213,
$1.392 and $1.512 distribution of ordinary income and a $.691, $.739 and $.243
return of capital, respectively.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Dividends in excess of net income at beginning of period.... $(14,093) $ (5,410) $ (1,986)
Net income (loss)........................................... (27,274) 21,371 14,541
Less: dividends declared.................................... (43,617) (30,054) (17,965)
-------- -------- --------
Dividends in excess of net income........................... $(84,984) $(14,093) $ (5,410)
======== ======== ========
Per common share:
Net income (loss)......................................... $ (1.34) $ 1.52 $ 1.42
Dividends declared........................................ $ 2.095 $ 2.131 $ 1.755
</TABLE>
18
<PAGE> 19
NOTE 9 -- RELATED PARTY TRANSACTIONS
Summary information regarding income from dividends, development, leasing
and management services performed for properties owned by Jeffrey Kerr, former
president of the Company, and his affiliates not included in the consolidation
in 1996, 1995, and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
Dividends............................................. $ -- $ -- $ 65
Development fees...................................... 252 -- 119
Leasing fees.......................................... 32 34 887
Management fees....................................... 30 111 171
Other................................................. 23 14 460
---- ---- ------
Total................................................. $337 $159 $1,702
==== ==== ======
</TABLE>
In 1996, the Company leased an aircraft from a company owned by Mr. Kerr
for $.2 million. At December 31, 1996, the Company had recorded a $1.1 million
receivable from Mr. Kerr and his affiliates.
On February 16, 1995, the Company acquired land for future development in
Muskegon, Michigan from Mr. Kerr, for $2.0 million consisting of $.4 million in
cash and the assumption of $1.6 million in existing mortgage indebtedness.
At December 31, 1995, the Company had approximately $.8 million in notes
receivable from executive officers relating to the purchase of Units of the
Operating Partnership. Upon termination of employment of these officers in March
1996, the Units were redeemed to the Company in lieu of repayment of the notes.
NOTE 10 -- STOCK OPTION PLAN AND STOCK BONUS ARRANGEMENT
Under the Company's Stock Option Plan, options to acquire 950,000 shares of
Common Stock may be granted to key employees, including officers of the Company,
through 2003. The options may be granted at a price not less than the fair
market value of the Common Stock on the date of grant. All options expire within
ten years after the date of the grant and become exercisable in three equal
annual installments beginning on the first anniversary of the date of grant of
such option. On the Merger date, all options became 100% vested. At December 31,
1996, 1995 and 1994, options to acquire 621,000, 626,500 and 202,795 shares
under this Plan, respectively, were exercisable.
Under the Company's Director Stock Option Plan, 100,000 shares may be
granted to non-employee directors with terms generally comparable to the Stock
Option Plan. The Director Stock Option Plan provides for the grant to each
non-employee director of the Company an option to purchase 5,000 shares of
Common Stock on the date of each election. During 1996, 1995 and 1994, options
to purchase 15,000, 35,000 and 15,000 shares, respectively, were granted. At
December 31, 1996, 1995 and 1994, options to acquire 25,000 shares, 15,000
shares and 5,000 shares, respectively, were exercisable.
The Company adopted the McArthur/Glen 1993 Long-term Incentive Plan in
connection with the Merger. Outstanding employee and director options to
purchase 1,074,550 shares of McArthur/Glen were converted into options to
purchase 687,712 shares of Horizon Group, Inc. All converted options were fully
vested and expire within ten years from the original date of grant. No options
are available for future grant under this plan. At December 31, 1996 and 1995,
options to acquire 656,432 shares were outstanding.
The fair value of options granted for the purpose of presenting 1996 and
1995 pro forma information, in accordance with Statement 123, has been estimated
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996:
<TABLE>
<S> <C>
Expected dividend yield.................................... 7.73%
Expected stock price volatility............................ .211
Risk free interest rate.................................... 6.0%
Expected life of options................................... 7 years
</TABLE>
19
<PAGE> 20
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Net income (loss) and earnings (loss) per share, computed on a pro forma
basis under the requirements of Statement 123, do not differ materially for the
amounts reported in the Company's consolidated financial statements. The pro
forma computations completed for 1996 and 1995, however, may not be indicative
of the effects of Statement 123 on reported net income (loss) for future years.
Options granted, exercised and canceled under the Company's Stock Option,
Director Stock Option and Long-term Incentive Plans are summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ ----------------------
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, Beginning of
Year.................... 1,327,932 $21.50-38.28 657,900 $22.88-25.00 623,400 $ 24.00
Granted................... 383,677 19.75-21.63 35,000 22.50-24.38 38,500 22.88-25.00
McArthur/Glen
conversion.............. -- -- 687,712 21.50-38.28 -- --
Exercised................. -- -- (31,280) 21.68-23.44 -- --
Canceled.................. (64,900) 20.56-24.00 (21,400) 24.00 (4,000) 24.00
--------- ------------ --------- ------------ ------- ------------
Outstanding, End of
Year.................... 1,646,709 $19.75-38.28 1,327,932 $21.50-38.28 657,900 $22.88-25.00
========= ============ ========= ============ ======= ============
</TABLE>
At December 31, 1996 and 1995, the weighted average exercise price of stock
options outstanding (excluding 224,000 stock options at $33.00 per share and
115,000 stock options at $38.28 per share at December 31, 1996 and 1995) was
approximately $23.25. In 1996, the weighted average exercise price of options
granted was $21.00 per share and the weighted average exercise price of stock
options cancelled was $23.91.
20
<PAGE> 21
NOTE 11 -- QUARTERLY FINANCIAL DATA (Unaudited)
Summarized financial data by quarter for 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996
Revenue................................................ $37,004 $37,215 $38,651 $ 41,629
Expenses............................................... 26,788 27,724 31,307 38,458
Impairment and severance............................... -- -- -- 65,355
Gain on sale of assets................................. -- -- 432 131
------- ------- ------- --------
Net income (loss) before minority interests and
extraordinary charge................................. 10,216 9,491 7,776 (62,053)
Minority interests..................................... (2,601) (2,286) (1,576) 14,178
------- ------- ------- --------
Net income (loss) before extraordinary charge.......... 7,615 7,205 6,200 (47,875)
Extraordinary charge................................... (136) -- (283) --
------- ------- ------- --------
Net income (loss)...................................... $ 7,479 $ 7,205 $ 5,917 $(47,875)
======= ======= ======= ========
Net income (loss) per share............................ $ .39 $ .37 $ .28 $ (2.16)
1995
Revenue................................................ $13,239 $13,852 $30,619 $ 36,219
Expenses............................................... 8,488 9,200 22,498 26,372
Gain on sale of assets................................. 225 273 163 115
------- ------- ------- --------
Net income before minority interests................... 4,976 4,925 8,284 9,962
Minority interests..................................... (842) (839) (2,298) (2,797)
------- ------- ------- --------
Net income............................................. $ 4,134 $ 4,086 $ 5,986 $ 7,165
======= ======= ======= ========
Net income per share................................... $ .40 $ .40 $ .35 $ .39
1996 price range of common stock:
High................................................... $23 1/4 $21 3/4 $21 3/8 $ 21 3/4
Low.................................................... 20 3/4 19 1/2 19 3/4 19
1996 dividends per common share........................ .505 .530 .530 .530
1995 price range of common stock:
High................................................... 26 24 3/8 25 3/8 24
Low.................................................... 21 7/8 20 3/4 23 3/8 21 1/2
1995 dividends per common share........................ .505 .616* .505 .505
</TABLE>
- -------------------------
* Included is a special one-time dividend of $.111 per common share declared in
connection with the merger with McArthur/Glen.
21
<PAGE> 22
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Horizon Group, Inc.
We have audited the accompanying consolidated balance sheets of Horizon
Group, Inc. (the "Company"), formerly HGI Realty, Inc., as of December 31, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Horizon Group,
Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Chicago, Illinois
February 26, 1997
/s/ ERNST & YOUNG LLP
------------------------
ERNST & YOUNG LLP
22
<PAGE> 1
EXHIBIT 21
The following entities are subsidiaries of Horizon Group, Inc., a Michigan
corporation:
Horizon/Glen Outlet Centers Limited Partnership, a Delaware limited
partnership
First Horizon Group Limited Partnership, a Delaware limited partnership
First HGI, Inc., a Delaware corporation
Second HGI, Inc., a Delaware corporation
H/G Perryville Limited Partnership, a Maryland limited partnership
HGI Perryville, Inc., a Maryland corporation
MG Third Party Services Corp., a Delaware corporation
HGI Management Corp., a Michigan corporation
MG Long Island Limited Partnership, a Virginia limited partnership
MG Patchogue Limited Partnership, a District of Columbia limited partnership
MG Patchogue Limited Partnership II, a Virginia limited partnership
MG Medford Limited Partnership, a District of Columbia limited partnership
HGL Outlet Associates, a Delaware general partnership
Second Horizon Group Limited Partnership, a Delaware limited partnership
Finger Lakes Outlet Center, LLC, a Delaware limited liability company
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Horizon Group, Inc. (the "Company") of our report dated February 26, 1997,
included in the 1996 Annual Report to Shareholders of Horizon Group, Inc.
Our audits also included the financial statement schedule of Horizon Group,
Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-3 No. 33-95174, No. 333-09315 and No. 33-95730 and Form S-4
No. 33-91236) of Horizon Group, Inc. of our report dated February 26, 1997,
with respect to the consolidated financial statements and schedule incorporated
by reference in this Annual Report (Form 10-K) of Horizon Group, Inc. for the
year ended December 31, 1996.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-79784) pertaining to the Amended and Restated 1993 Stock
Option Plan, the 1993 Director Stock Option Plan and the Employee Stock Bonus
Arrangement; the Registration Statement (Form S-8 No. 33-89152) pertaining to
the Profit Sharing/401(K) Plan; and the Registration Statement (Form S-8 No.
33-95308) pertaining to the McArthur/Glen Realty Corp. 1993 Long-Term Incentive
Plan of Horizon Group, Inc. of our report dated February 26, 1997, with respect
to the consolidated financial statements and schedule incorporated by reference
in this Annual Report (From 10-K) of Horizon Group, Inc. for the year ended
December 31, 1996.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 28, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a
director or officer, or both, of HORIZON GROUP, INC., a Michigan corporation
(the "Company"), does hereby constitute and appoint NORMAN PERLMUTTER, RONALD
L. PIASECKI and JAMES S. O'BRIEN, with full power to each of them to act alone,
as the true and lawful attorneys and agents of the undersigned, with full power
of substitution and resubstitution to each of said attorneys to execute, file
or deliver any and all instruments and to do all acts and things which said
attorneys and agents, or any of them, deem advisable to enable the Company to
comply with the Securities Exchange Act of 1934, as amended, and any
requirements of the Securities and Exchange Commission in respect thereto,
relating to annual reports on Form 10-K, including specifically, but without
limitation of the general authority hereby granted, the power and authority to
sign his name as a director or officer, or both, of the Company, as indicated
below opposite his signature, to annual reports on Form 10-K or any amendments
or papers supplemental thereto; and each of the undersigned does hereby fully
ratify and confirm all that said attorneys and agents, or any of them, or the
substitute of any of them, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed these presents,
this 18th day of March, 1997.
<TABLE>
<S> <C>
/s/ Norman Perlmutter Director and Chairman of the Board of
- ---------------------------------------------------
Norman Perlmutter Directors
/s/ Ronald L. Piasecki Director and President (Principal Executive
- ---------------------------------------------------
Ronald L. Piasecki Officer)
/s/ William P. Dickey Director
- ---------------------------------------------------
William P. Dickey
/s/ Edwin N. Homer Director
- ---------------------------------------------------
Edwin N. Homer
/s/ Martin Sherman Director
- ---------------------------------------------------
Martin Sherman
/s/ Francis T. Vincent, Jr. Director
- ---------------------------------------------------
Francis T. Vincent, Jr.
/s/ Joe Cattivera Executive Vice President (Principal Financial
- ---------------------------------------------------
Joe Cattivera Officer)
/s/ Richard Phillips Vice President (Principal Accounting Officer)
- ---------------------------------------------------
Richard Phillips
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,572
<SECURITIES> 0
<RECEIVABLES> 6,807
<ALLOWANCES> (2,100)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,073,490
<DEPRECIATION> (65,490)
<TOTAL-ASSETS> 1,095,221
<CURRENT-LIABILITIES> 57,224
<BONDS> 557,672
0
0
<COMMON> 228
<OTHER-SE> 363,653
<TOTAL-LIABILITY-AND-EQUITY> 1,095,221
<SALES> 0
<TOTAL-REVENUES> 154,499
<CGS> 150,938
<TOTAL-COSTS> 150,938
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,694
<INCOME-PRETAX> (26,855)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 419
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,274)
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.34
</TABLE>
