<PAGE> 1
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 (NO FEE REQUIRED EFFECTIVE OCTOBER 7, 1996)
For the fiscal year ended December 31, 1997
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)
MICHIGAN 38-2559212
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
(616) 798-9100
5000 HAKES DRIVE (Registrant's telephone number,
NORTON SHORES, MI 49441 including area code)
(Address of principal executive offices,
including zip code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS TITLE OF EACH EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------------
Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERS 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. X
------
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $250,856,292 based on the closing sale price of
$12.00 per share as reported on the New York Stock Exchange on February 13,
1998.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of February 13, 1998 was 24,166,635.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents of the registrant are incorporated
herein by reference:
<TABLE>
<CAPTION>
DOCUMENT PART OF FORM 10-K
-------- -----------------
<S> <C>
Annual Report to Shareholders for the fiscal year ended December 31, 1997 II
</TABLE>
<PAGE> 2
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 the 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
Horizon 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, 1997, the Company owned and
operated 37 outlet centers containing an aggregate of approximately 9.9 million
square feet of GLA located in 21 states.
Commencing with its taxable year ended December 31, 1994, the Company has
elected to be treated as a self-administered and self-managed 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'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, 1997, owned approximately 85.1% of the outstanding
partnership interest ("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.
<PAGE> 3
BUSINESS DEVELOPMENTS
In December 1997, the Company acquired a 203,000 square foot outlet center
adjacent to the Company's existing center in Gilroy, California for $38.5
million, which was financed in its entirety by the Company's primary lender.
Results of operations for 1997 include a charge for asset impairment of
$7.8 million. At September 30, 1997, four outlet centers were reclassified by
the Company as held for sale, in addition to the two classified as held for
sale at December 31, 1996. This reclassification was made as a result of sales
agreements to sell, subject to certain contingencies, all but one of these
outlet centers. The loss on asset impairment was recorded to reduce the
carrying value of these outlet centers to an amount equal to the estimated
sales proceeds less costs to dispose. In November 1997, one property sold for
$4.5 million. The remaining sale agreements were subsequently terminated. It
was management's decision to then pursue the sale of only one of the outlet
centers classified as held for sale. The remaining four outlet centers were
reclassified to real estate assets during the fourth quarter of 1997 at their
fair values as of the date of the decision not to sell.
On November 12, 1997, the Company entered into a merger agreement (which
was amended and restated on February 1, 1998) with Prime Retail, Inc. ("Prime")
which provides for Prime to integrate 22 of the Company's existing outlet
centers into its portfolio and the Company's remaining 13 centers (as well as
two centers currently owned by Prime) to be operated by a newly formed entity.
The shares of the newly formed entity will be distributed following the merger,
on a pro rata basis, to the shareholders of both Prime and the Company. The
transaction will establish Prime as the largest owner/operator and developer of
factory outlet centers in the United States, with 48 centers totaling 13.4
million square feet of GLA in 26 states. The merger is conditioned upon, among
other things, the approvals of each company's shareholders and unit holders and
the satisfaction of other customary conditions.
As part of the proposed merger transaction with Prime, on February 1,
1998, the Company entered into a definitive agreement with Castle & Cooke
Properties, Inc. to release the Company from its obligations under its
long-term lease of the Dole Cannery outlet center in Honolulu, Hawaii, in
connection with the formation of a joint venture with certain affiliates of
Castle & Cooke, Inc. ("Castle & Cooke") to operate such property. Under the
terms of the agreement, Castle & Cooke Properties, Inc., the landlord of the
project, will release the Company from all post-closing obligations under the
lease, which expires in 2045, in exchange for the Company's conveyance to the
joint venture of its rights and obligations under such lease. The agreement
also provides that the Company will transfer to such joint venture substantially
all of the Company's economic interest in its outlet center in Lake Elsinore,
California together with vacant property located adjacent to the center. The
Company will hold a small minority interest in the joint venture but will have
no obligation or commitment with respect to the operations of the Dole Cannery
project following the closing. Closing of the transaction remains subject to
certain customary conditions but is expected to occur in the second quarter of
1998. Completion of the proposed merger with Prime is not a condition to such
closing.
<PAGE> 4
BUSINESS STRATEGY
The Company's business strategy consists primarily of increasing its focus
on the leasing of existing outlet centers, 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 one of its centers, and may also divest itself of additional centers.
SEASONALITY - The Company's revenues are primarily derived from long-term
leases with five to ten year terms. Accordingly, the Company's revenues are
not significantly affected by seasonal factors. The Company does, however,
generate a small amount of additional revenue, primarily from temporary tenant
income, in the fourth quarter resulting from the holiday season. Revenues in
the fourth quarter of 1997 also include $3.0 million from the acceleration of
revenue from a two year lease of its New Mexico outlet center that was
terminated early. Revenues for each quarter of 1997 and 1996 are as follows
(in thousands):
QUARTER ENDED FISCAL 1997 FISCAL 1996
------------- ----------- -----------
March 31 $38,756 $37,004
June 30 38,761 37,215
September 30 39,782 38,651
December 31 45,164 41,629
<PAGE> 5
FINANCING - In 1997, the Company financed 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, 1997, the Company had aggregate commitments under existing revolving lines
of credit of $4.0 million. While the Company has additional availability under
its loan agreements with its lenders, additional borrowings are effectively
limited by the financial ratios the Company is required to maintain. As of
December 31, 1997, 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 67%.
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,
1997 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, 1997. The Company may from time to time
re-evaluate and modify its debt policies in light of then current 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 limitations on the
amount 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.
<PAGE> 6
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 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 test
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.
<PAGE> 7
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
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.
<PAGE> 8
EMPLOYEES
As of December 31, 1997, the Company had 438 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.
MANAGEMENT
The executive officers of the Company, and their ages and positions as of
December 31, 1997 were as follows:
NAME AGE POSITION
---- --- --------
James S. Wassel 47 Chief Executive Officer, President and Director
Paul Comarato 46 Vice President of Operations/Asset Management
James S. Harris 49 Vice President of Retail Strategies
Stephen J. Moore 44 Senior Vice President of Marketing and Communications
Thomas A. Rumptz 37 Vice President of Real Estate
JAMES S. WASSEL. Mr. Wassel joined Horizon as President in April 1997 and
has served as President and Chief Executive Officer of Horizon since he was
made CEO in June 1997. From June 1994 to April 1997, Mr. Wassel served as
Senior Vice President of Asset Management with Crescent Real Estate Equities of
Fort Worth, Texas ("Crescent"), where he oversaw asset management, strategic
planning and implementation of value enhancement programs for Crescent's 30
million square foot portfolio of commercial real estate. From November 1990 to
January 1993, Mr. Wassel was a partner and Director of Asset Management with
Trammell Crow Realty Advisors of Dallas, Texas ("Trammell Crow"). While with
Trammell Crow, Mr. Wassel oversaw the disposition of $250 million in assets,
the redevelopment of other portfolio properties and was responsible for the
asset management of a portfolio of over $3.0 billion in assets. In addition,
Mr. Wassel also served as President of Trammell Crow Real Estate Investors, a
REIT, where he oversaw the revitalization of that company's under-performing
industrial and office properties. From September 1987 to October 1990, Mr.
Wassel served as Partner/Director of Asset Management with Jones Lang Wootton
Realty Advisors of New York, where he oversaw the asset management and
administration of a $1.0 billion portfolio of diversified assets on behalf of
public and corporate pension funds and served as President and Chief Operating
Officer of JLW Management Group. Earlier in his career, Mr. Wassel served as a
Vice President with The Rouse Company of Columbia, Maryland ("Rouse"), where he
directed the management of Rouse's centers in the Northeast United States and
oversaw development and re-merchandising efforts at Rouse's South Street
Seaport (New York), Faneuil Hall (Boston), Willowbrook Mall (Wayne, New Jersey)
and Paramus Park Mall (Paramus, New Jersey) properties.
<PAGE> 9
PAUL COMARATO. Mr. Comarato has served as Vice President of Operations of
Horizon since August 1997 and oversees all aspects of property level
operations, tenant construction and legal, business and strategic planning.
From June 1994 to July 1997, Mr. Comarato held a similar position managing East
Coast Operations for Chelsea GCA Realty, where he managed nearly two million
square feet of GLA, including Chelsea's flagship center in Woodbury, New York
and oversaw the opening of that company's two most recent developments. From
June 1990 to May 1994, Mr. Comarato served as General Manager at Wilmorite's
Freehold Raceway Mall in Freehold, New Jersey. Prior to his employment by
Wilmorite, Mr. Comarato served as General Manager of Paramus Park Mall in
Paramus, New Jersey and Willowbrook Mall in Wayne, New Jersey, both owned by
The Rouse Company.
JAMES S. HARRIS. Mr. Harris currently serves as Vice President--Retail
Strategies of Horizon. Mr. Harris oversees the strategic merchandising efforts
of Horizon. Mr. Harris joined Horizon in July 1995 in conjunction with
Horizon's merger with and assimilation of McArthur/Glen, where Mr. Harris
served as Vice President from November 1990 until he was appointed Chief
Operating Officer in July 1993. Prior to his employment by McArthur/Glen, Mr.
Harris spent six year managing and leasing regional shopping centers for the
Taubman Company of Bloomfield Hills, Michigan.
STEPHEN J. MOORE. Mr. Moore has served as Senior Vice President of
Marketing and Communications of Horizon since May 1997 and oversees all aspects
of corporate and property level marketing, advertising and public relations.
From April 1994 to April 1997, Mr. Moore served as Director of the Commercial
Division of The Becker Group in Baltimore, Maryland ("Becker"). From April
1979 to March 1993, Mr. Moore was with The Rouse Company, where he served as
Group Director of Sales and Marketing and directed all aspects of Marketing and
Strategic Planning for Rouse's East Coast properties in the United States and
properties in Canada.
THOMAS A. RUMPTZ. Mr. Rumptz currently serves as Vice President of Real
Estate of Horizon, and oversees the expansion of existing centers as well as
new development and residual land sales. In addition, Mr. Rumptz has overseen
the management of joint venture investments and development relationships for
Horizon. During his eight year tenure with Horizon, Mr. Rumptz has served as
Vice President of Finance, Director of Real Estate, Senior Acquisitions Analyst
and Controller. Prior to his employment by Horizon, Mr. Rumptz served as
Manager of Investment Real Estate with Foremost Insurance of Grand Rapids,
Michigan and Business Manager at Robert Grooter Development Company, a Grand
Rapids, Michigan based developer of commercial and light industrial facilities,
where he oversaw leasing, accounting and operations.
<PAGE> 10
ITEM 2 PROPERTIES
GENERAL
As of December 31, 1997, the Company's portfolio consisted of the
following Properties: (i) 37 outlet centers located in California, Colorado,
Florida, Georgia, Hawaii, Indiana, Kentucky, Maryland, Massachusetts, Michigan,
Minnesota, Missouri, Nevada, New Mexico, New York, Ohio, Pennsylvania, Texas,
Virginia, Washington and Wisconsin with an average size of approximately
267,800 square feet of GLA, aggregating approximately 9.9 million square feet
of GLA; and (ii) an aggregate of approximately 346 acres of outlots, retail
pads and expansion pads located adjacent to or near certain of the Company's
existing outlet centers (the "Undeveloped Parcels").
<TABLE>
<CAPTION>
YEAR OF OPENING/ TOTAL PERCENTAGE
MOST RECENT APPROXIMATE GLA AS GLA LEASED
NAME AND EXPANSION/ OF 12/31/97 AS OF
LOCATION OF CENTER NO. OF PHASES (SQ. FT.) 12/31/97 CERTAIN TENANTS
------------------ --------------- --------------------- ------------- --------------------
<S> <C> <C> <C> <C>
Bellport Outlet Center(1) 1992/1997 291,248 79.5% Anne Klein, Bass,
Patchogue, New York 3 Phases Corning/Revere,
Dress Barn, Gap,
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 720,983 97.3% American Eagle, Ann
Birch Run, Michigan 18 Phases Taylor, BOSE,
Dansk, Eddie Bauer,
Espirt, 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 Stevens
Burlington Outlet Center 1989/1993 174,105 98.7% Bass, Bugle Boy,
Burlington, Washington 3 Phases Fila, Guess?, J.
Crew, Jones New
York, Liz Claiborne,
Maidenform, Mikasa,
Tommy Hilfiger, Van Heusen
Calhoun Outlet Center 1992/1995 254,270 87.7% Dress Barn, J.Crew, Jones New
Calhoun, Georgia 2 Phases York, Liz Claiborne, London
Fog, Mikasa, Nike, Nine West,
OshKosh B'Kosh,
Springmaid-Wamsutta, Van Heusen
Conroe Outlet Center 1992/1994 281,436 92.4% Bass, Bugle Boy, Carter's
Conroe, Texas 3 Phases Childrenswear, 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 71.3% Guess?, Jones New York, Liz
Dry Ridge, Kentucky 2 Phases Claiborne, Mikasa, Nike, Nine
West, Van Heusen, Westport Ltd.
Horizon Outlet Center - Edinburgh 1989/1995 298,068 92.3% American Eagle, Ann Taylor,
Edinburgh, Indiana 2 Phases Bugle Boy, Corning/Revere,
Dansk, Eddie Bauer, Esprit,
Florsheim, Jockey, Lenox,
Levi's, Nautica, OshKosh B'Gosh,
Tommy Hilfiger, Spiegel, Van
Heusen
</TABLE>
- -----------------------
(1) Owned by a partnership in which the Company has an interest.
<PAGE> 11
<TABLE>
<CAPTION>
YEAR OF OPENING/ TOTAL PERCENTAGE
MOST RECENT APPROXIMATE GLA AS GLA LEASED
NAME AND EXPANSION/ OF 12/31/97 AS OF
LOCATION OF CENTER NO. OF PHASES (SQ. FT.) 12/31/97 CERTAIN TENANTS
------------------ --------------- --------------------- ------------- --------------------
<S> <C> <C> <C> <C>
Finger Lakes Outlet Center(2) 1995/1997 391,746 98.2% Bass, BOSE, Brooks
Waterloo, New York 3 Phases Brothers, Bugle
Boy, Calvin Klein,
Coach, Dockers,
Esprit, Etienne
Aigner, Fila,
Florsheim, Gap, 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 229,029 93.3% Ann Taylor, Bass, Bugle Boy,
Fremont, Indiana 3 Phases 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 1990/1995 576,699 97.1% Ann Taylor, Bass, BOSE, Brooks
Gilroy, California 5 Phases Brothers, Esprit, Etienne Aigner,
Eddie Bauer, Florsheim, Gap,
Guess?, J. Crew, Jones New York,
Lenox, Levi's, Liz Claiborne,
London Fog, Mikasa, Nike,
NordicTrack, Noritake, OshKosh
B'Gosh, Reebok, Reed & Barton,
Springmaid-Wamsutta, Timberland,
Van Heusen, Vanity Fair
Southwest Outlet Center at Hillsboro 1989/1995 359,255 98.7% American Eagle, Corning/Revere,
Hillsboro, Texas 3 Phases 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 1988/1990 185,769 72.8% Bass, Bugle Boy, Carter's
Holland, Michigan 2 Phases Childrenswear, Casual Corner,
Dress Barn, Eddie Bauer,
Florsheim, Jockey, Oneida,
Reebok, S&K Menswear, Van
Heusen
The Dole Cannery(3) 1996 254,999 40.5% Big Dog Sportswear, California
Honolulu, Hawaii 4 Phases Luggage, Dockers, Leathermode,
Levi's, 'Van's
Jeffersonville Outlet Center 1993/1994 314,102 82.3% Anne Klein, BD Baggies, Bass, Big
Jeffersonville, Ohio 3 Phases Dog Sportswear, Corning/Revere,
Dress Barn, Etienne Aigner,
Everything Rubbermaid, Genuine
Article, Jones New York, Linen
Barn, Liz Claiborne, Maidenform,
Mikasa, Reebok, Spiegel,
Van Heusen
Lakeside Marketplace 1988/1991 268,736 97.0% Anne Klein, Bass, Brooks Brothers,
Kenosha, Wisconsin 4 Phases Dansk, Etienne Aigner, Fila, Gap,
Genuine Article, J. Crew, Jones
New York, Liz Claiborne, London
Fog, Maidenform, Mikasa, Nike,
NordicTrack, Noritake,
Polo/Ralph Lauren, Reebok,
Timberland, Van Heusen, Woolrich
Lake Elsinore Outlet Center(3) 1991/1995 368,785 90.9% Bass, Bugle Boy, Corning/Revere,
Lake Elsinore, California 4 Phases Esprit, Etienne Aigner, Florsheim,
Jockey, Jones New York, Levi's,
Liz Claiborne, London Fog,
Maidenform, Mikasa, Nike, Nine
West, NordicTrack, OshKosh
</TABLE>
------------------
(2) Owned by a joint venture with an institutional investor.
(3) Subject to an agreement with Castle & Cooke, See "Business
Developments".
<PAGE> 12
<TABLE>
<CAPTION>
YEAR OF OPENING/ TOTAL PERCENTAGE
MOST RECENT APPROXIMATE GLA GLA LEASED
NAME AND EXPANSION/ AS OF 12/31/97 AS OF
LOCATION OF CENTER NO. OF PHASES (SQ. FT.) 12/31/97 CERTAIN TENANTS
- ------------------------ -------------- ------------------- ------------ ----------------------------------------------
<S> <C> <C> <C> <C>
B'Gosh, Reebok, Sony, Van Heusen,
Vanity Fair
Horizon Outlet Center - Laughlin 1996 258,312 79.2% Bass, Big Dog Sportswear, Bugle Boy,
Laughlin, Nevada Corning/Revere, Dress Barn, Levi's, Linen
Barn, Maidenform, Mikasa, OshKosh B'Gosh,
Polo/Ralph Lauren, Reebok, Van Heusen
Berkshire Outlet Village 1997 224,363 99.2% Anne Klein, Coach, Dockers, Etienne Aigner,
Lee, Massachusetts Fila, Gap, Guess?, J. Crew, Johnston &
Murphy, Jones New York, Levi's, Liz
Claiborne, Mikasa, Nautica, Polo/Ralph
Lauren, Reebok, Tommy Hilfiger, Waterford
Wedgewood
Medford Outlet Center 1991/1995 188,060 80.3% American Eagle, Bass, Bugle Boy, Casual
Medford, Minnesota 2 Phases Corner, Corning/Revere, Dress Barn, Etienne
Aigner, Guess?, Levi's, Liz Claiborne,
Mikasa, Nike, Van Heusen
Lighthouse Place 1987/1997 490,915 98.1% American Eagle, Ann Taylor, Anne Klein,
Michigan City, Indiana 7 Phases Bass, Big Dog Sportswear, Brooks Brothers,
Coach, Corning/Revere, Crate & Barrel, Eddie
Bauer, Esprit, Etienne Aigner, Gap, Guess?,
J. Crew, Jockey, Jones New York, Lenox,
Levi's, Liz Claiborne, 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 230,139 87.3% Bass, Bugle Boy, Carter's Childrenswear,
Monroe, Michigan 2 Phases Casual Corner, Corning/Revere, Dress Barn,
Hit or Miss, Levi's, Mikasa, Nike, Van
Heusen, WestPoint Stevens
Lakeshore Marketplace 1995 360,592 74.3% Barnes & Noble, Ben Franklin, Di's Hallmark,
Norton Shores, Michigan Dunham's Sporting Goods, Elder-Beerman,
Great Party, Old Navy, TJ Maxx, Toys 'R' Us
Horizon Outlet Center - Oshkosh 1989/1991 259,443 85.4% Bass, Bugle Boy, Dansk, Eddie Bauer,
Oshkosh, Wisconsin 2 Phases Florsheim, Jockey, Jones New York, Land's
End, Lenox, Levi's, London Fog, Nautica,
OshKosh B'Gosh, Polo/Ralph Lauren, Tommy
Hilfiger, Van Heusen
Perryville Outlet Center 1990 148,134 93.9% Bass, Dan River, Elisabeth, Etienne Aigner,
Perryville, Maryland Florsheim, Jones New York, Liz Claiborne,
Mikasa, Nike, Van Heusen
Pismo Beach Outlet Center 1994 147,576 98.0% Anne Klein, Bass, Big Dog Sportswear,
Pismo Beach, California Florsheim, Jockey, Jones New York, Levi's,
London Fog, Maidenform, Mikasa, Nine West,
Tommy Hilfiger, Van Heusen
Chesapeake Village at Queenstown 1989/1993 220,415 100.0% Big Dog Sportswear, Brooks Brothers,
Queenstown, Maryland 5 Phases 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 90.1% Bass, Bugle Boy, Dress Barn, Florsheim, J.
Sealy, Texas 2 Phases 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 92.9% American Eagle, Anne Klein, Bass, Big Dog
Silverthorne, Colorado 3 Phases Sportswear, Dansk, Eddie Bauer, Fila, Gap,
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
YEAR OF OPENING/ TOTAL PERCENTAGE
MOST RECENT APPROXIMATE GLA GLA LEASED
NAME AND EXPANSION/ AS OF 12/31/97 AS OF
LOCATION OF CENTER NO. OF PHASES (SQ. FT.) 12/31/97 CERTAIN TENANTS
- ---------------------- ------------------ ---------------- ------------ -------------------------------------------
<S> <C> <C> <C> <C>
Genuine Article, J. Crew, Jones New York,
Liz Claiborne, London Fog, Maidenform,
Mikasa, Nike, Nine West, Tommy Hilfiger, Van
Heusen
Horizon Outlet Center 1990 199,962 80.0% Bass, Brooks Brothers, Bugle Boy, Casual
- - Somerset Corner, Corning/Revere, Dress Barn, Jones
Somerset, Pennsylvania New York, Levi's, Mikasa, Polo/Ralph Lauren,
S&K Menswear, Van Heusen
Tracy Outlet Center 1994 153,000 94.5% Anne Klein, Big Dog Sportswear, Casual
Tracy, California Corner, Corning/Revere, Fila, Jones New
York, Levi's, Leathermode, Liz Claiborne,
Mikasa, Nine West, OshKosh B'Gosh, Reebok,
Sony
Horizon Outlet Center - 1990/1996 147,455 71.5% Bass, Bugle Boy, Carter's Childrenswear,
Traverse City 2 Phases Corning/Revere, Dansk, Levi's, London Fog,
Traverse City, Michigan S&K Menswear, Van Heusen
Horizon Outlet Center 1995 139,433 83.7% Bass, Big Dog Sportswear, Corning/Revere,
- - Tulare Jones New York, Linen Barn, Maidenform,
Tulare, California Mikasa, Polo/Ralph Lauren, Reebok, Van Heusen
Horizon Outlet Center 1994/1995 323,463 94.4% Ann Taylor, Anne Klein, Big Dog Sportswear,
- - Vero Beach 2 Phases BOSE, Bugle Boy, Dansk, Etienne Aigner,
Vero Beach, Florida 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 200,363 81.7% Bass, Corning/Revere, Jockey, Jones New
Warrenton, Missouri 2 Phases York, Levi's, Linen Barn, Liz Claiborne,
Mikasa, Nike, Nine West, Van Heusen
Berkeley Commons 1988/1995 274,565 100.0% American Eagle, Anne Klein, Bass, BOSE,
Outlet Center 4 Phases Brooks Brothers, Coach, Eddie Bauer, Etienne
Williamsburg, Virginia 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 Wedgewood
Horizon Outlet Center 1992/1994 249,208 92.6% American Eagle, Big Dog Sportswear, Bugle
Woodbury 3 Phases Boy, Casual Corner, Corning/Revere, Eddie
Woodbury, Minnesota Bauer, Fila, Levi's, Reebok, Spiegel, Van
Heusen, WestPoint Stevens
New Mexico Outlet Center(4) 1993 155,170
Algodones, New Mexico 1 Phase
---------- ----
TOTAL HORIZON PORTFOLIO 9,907,113 89.4%
========== ====
</TABLE>
------------------
(4) As of January 31, 1998, the center was unoccupied and held for
sale. See note 3 to the Consolidated Financial Statements.
<PAGE> 14
EXECUTIVE OFFICES
The Company owns its 35,000 square foot executive offices in Norton
Shores, Michigan.
STATE INFORMATION
The following table indicates, as of December 31, 1997, certain
information regarding the outlet centers presented by state.
<TABLE>
<CAPTION>
STATE NUMBER OF TOTAL GLA PERCENTAGE OF PERCENTAGE OF GLA TOTAL
PROPERTIES (SQ. FT.) TOTAL GLA LEASED ON OCCUPIED
DECEMBER 31, 1997 BASE RENT
<S> <C> <C> <C> <C> <C>
California 5 1,385,493 14.0% 93.9% $22,706,178
Colorado 1 257,470 2.6 92.9 3,937,864
Florida 1 323,463 3.3 94.4 4,125,131
Georgia 1 254,270 2.6 87.7 2,852,791
Hawaii 1 254,999 2.6 40.5 723,616
Indiana 3 1,018,012 10.3 95.3 12,549,876
Kentucky 1 117,980 1.2 71.3 545,725
Maryland 2 368,549 3.7 97.6 5,059,763
Massachusetts 1 224,363 2.3 99.2 3,745,012
Michigan 5 1,644,938 16.6 85.8 15,353,883
Minnesota 2 437,268 4.4 87.3 4,221,059
Missouri 1 200,363 2.0 81.7 2,026,827
Nevada 1 258,312 2.6 79.2 3,016,854
New Mexico 1 155,170 1.5 - -
New York 2 682,994 6.9 90.2 9,069,950
Ohio 1 314,012 3.2 82.3 3,035,163
Pennsylvania 1 199,962 2.0 80.0 1,363,240
Texas 3 832,556 8.4 94.6 10,226,495
Virginia 1 274,565 2.8 100.0 4,730,477
Washington 1 174,105 1.7 98.7 2,192,176
Wisconsin 2 528,179 5.3 91.3 6,466,519
-- --------- ----- ----- ------------
Total 37 9,907,113 100.0% 89.4% $117,948,599
== ========= ===== ===== ============
</TABLE>
<PAGE> 15
UNDEVELOPED PARCELS
The Company owns undeveloped parcels aggregating approximately 346 acres
of outlots, retail pads and expansion pads located near certain of the
Company's outlet centers. 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 base
rental revenues or total occupied GLA for the year ended December 31, 1997 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 OCCUPIED GLA INCOME
------ --------- ----------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Phillips-Van Heusen Retail Division 123 576,174 $ 8,142,269 6.7% 6.6%
Spiegel, Inc. 18 283,477 3,000,148 3.3 2.4
LCI Holdings, Inc. 31 271,413 2,821,250 3.2 2.3
Dress Barn, Inc. 34 220,942 3,320,674 2.6 2.7
Sara Lee Corporation 65 214,043 2,971,922 2.5 2.4
Mikasa, Inc. 27 208,647 2,543,044 2.4 2.1
Brown Retail Group, Inc. 46 204,706 3,041,900 2.4 2.5
Melru Corporation 59 182,090 2,979,331 2.1 2.4
Reebok International Ltd. 21 176,086 2,193,448 2.0 1.8
Other 1,664 6,253,792 91,468,013 72.8 74.8
</TABLE>
<PAGE> 16
TENANT LEASES. Substantially all of these leases require tenants to pay
their pro rata shares of all property operating expenses and real estate taxes.
During 1997, leases for approximately 621,000 square feet of GLA in the
Company's outlet centers came up for renewal. Of this amount, approximately
487,000 renewed at an average rental rate of $15.10, representing an 8.4%
increase from 1996 rental rates. In addition to renewals, in 1997 the Company
entered into new leases totaling 875,000 square feet of GLA at an average base
rental rate of $14.70 per square foot with an average base term of 5.0 years.
The Company's average tenant space is approximately 4,000 square feet of GLA.
As of December 31, 1997, executed leases at the Company's outlet centers had an
average base rent of $14.99 per square foot.
The following table sets forth, as of December 31, 1997, 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
DECEMBER 31, # OF LEASES GLA (SQ. FT.) ANNUAL BASE RENT
---------------- ----------- -------------------- --------------------
<S> <C> <C> <C>
1998 266 805,340 $11,237,577
1999 319 1,056,049 16,302,012
2000 425 1,433,374 22,213,053
2001 367 1,361,989 21,489,277
2002 365 1,390,871 21,658,273
2003 96 517,018 7,161,875
2004 71 379,366 5,452,987
2005 54 421,502 4,825,259
2006 41 412,316 4,122,149
2007 25 183,164 2,153,703
</TABLE>
<PAGE> 17
MORTGAGE DEBT
The following table sets forth, as of December 31, 1997, certain
information regarding the mortgages currently encumbering the Company's outlet
centers.
<TABLE>
<CAPTION>
ESTIMATED
12/31/97 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% $ 9,741,064 $ 976,400 Nov-05 8,223,900
Bellport, NY 10.25 10,891,034 1,284,000 Jun-18
Edinburgh, IN 9.50 6,985,835 754,900 Jun-01 6,619,300
Edinburgh, IN 9.50 10,212,077 1,088,800 May-01 9,748,900
Birch Run, MI 9.50 22,363,938 2,411,400 Jun-02 20,797,500
Birch Run, MI 9.50 4,861,727 524,200 Jun-02 4,521,200
Birch Run, MI 9.50 17,502,221 1,887,200 Jun-02 16,276,300
Birch Run, MI 9.50 10,471,570 1,111,344 June-01 10,003,600
Williamsburg, VA 8.75 14,004,323 1,633,100 Nov-00 12,698,700
Williamsburg, VA 8.25 9,759,024 1,022,500 Oct-00 9,090,600
Vero Beach, FL 7.875 26,798,254 2,528,900 Nov-05 22,284,000
Woodbury, MN 7.875 17,865,503 1,685,900 Nov-05 14,856,000
Conroe, TX 9.40 6,794,610 794,200 May-02 5,966,900
Conroe, TX 9.40 1,900,601 222,100 May-02 1,669,100
Conroe, TX 9.40 8,695,210 1,016,300 May-02 7,636,000
Jeffersonville, OH 9.40 7,459,827 871,900 May-02 6,551,000
Jeffersonville, OH 9.40 9,645,511 1,127,400 May-02 8,470,500
Jeffersonville, OH 9.40 2,185,684 255,500 May-02 1,919,400
First Horizon 8.57 63,761,603 6,319,700 Mar-06 54,458,700
Burlington, WA
Fremont, IN
Kenosha, WI
Oshkosh, WI
Second Horizon 9.06 98,668,991 9,639,400 Oct-06 90,933,800
Hillsboro, TX
Lake Elsinore, CA
Pismo Beach, CA
Queenstown, MD
Tracy, CA
Third Horizon LIBOR + 1.75 244,195,696 8,109,500 Jul-99 244,195,696
Calhoun, GA
Dry Ridge, KY
Gilroy, CA
Holland, MI
Laughlin, NV
Lee, MA
Medford, MN
Michigan City, IN
Monroe, MI
Norton Shores, MI
Sealy, TX
Silverthorne, CO
Somerset, PA
Traverse City, MI
Tulare, CA
Warrenton, MO
Third Horizon LIBOR + 2.25 9,724,304 200,800 Jul-99 9,724,304
Other 6.90-10.0 7,259,783 883,000 Aug-00-Dec-02 3,159,431
------------ ----------- ------------
$621,748,380 $46,348,400 $569,804,831
============ =========== ============
</TABLE>
<PAGE> 18
During 1997, the Company, through indirect wholly-owned subsidiaries
("Borrower"), entered into a $300.6 million credit facility with Lehman
Brothers Realty Corporation ("Lender"). The initial loan (the "Initial Loan")
of $250.6 million included an initial funding at closing of $212.1 million and
a reservation of financing for the acquisition of a certain specified property
(the "Additional Loan"). The Borrower may borrow an additional $50.0 million
in increments of no less than $10.0 million each, subject to the satisfaction
of certain conditions, including predefined debt service coverage ratios (the
"Second Loan" and collectively with the "Initial Loan," including the
"Additional Loan," the "Loan"). Subsequent to the Initial Loan, the Company
borrowed $38.5 million of the Additional Loan for the acquisition of an outlet
center and $11.0 million of the Second Loan. Interest on the Loan is payable
at the following rates: (i) 1.75% over the London interbank offered rate
("LIBOR") for the Initial Loan, and (ii) 2.25% over LIBOR for the Second Loan,
or (iii) if the Loan is converted to a prime rate loan under certain
circumstances at the Lender's discretion, the prime rate plus .75% with respect
to the Initial Loan and prime plus 1.25% with respect to the Second Loan.
While the Company has additional availability under the Second Loan, additional
borrowings may not be available due to the financial ratios the Company is
required to maintain. The maturity date of the Loan is July 1, 1999, unless
otherwise extended pursuant to the terms of the Loan. The net proceeds of the
Initial Loan were primarily used to retire the Company's aggregate outstanding
balances under the following: (i) a revolving credit facility with a subsidiary
of First Chicago NBD Corporation and other banks, (ii) construction financing
facilities with Canadian Imperial Bank of Commerce, (iii) four permanent loans
and (iv) one revolving credit facility. The Company recorded a $3.3 million
extraordinary charge, net of minority interests, upon repayment of the above
mentioned debt, comprised primarily of the write-off of unamortized debt
issuance costs associated with the debt retired. The Loan is guaranteed by the
Company and the Operating Partnership and is secured by a pool of 16 properties
transferred to Borrower. The Loan requires the Company to maintain certain
financial ratios and restricts the amount of dividends and distributions that
can be made.
The Company has a $4.0 million revolving credit facility for working
capital requirements. Interest on the facility is charged at prime and the
facility expires in August 1998. The outstanding balance on this line was $4.0
million at December 31, 1997.
During 1997, the Company issued approximately 320,000 shares of Common
Stock with net proceeds of $5.9 million under the Company's Dividend
Reinvestment Plan. The Company has discontinued further stock issuances under
the DRIP based on the current market price of the Company's Common Stock.
<PAGE> 19
In 1996, the Company formed a venture (the "Venture") with a pension fund
(the "Fund") advised by Heitman Capital Management. The Company contributed a
325,000 square foot center in the Finger Lakes region of New York in 1996 and
a 67,000 square foot expansion in 1997 to the Venture. In exchange for the
contribution, the Company received $34.9 million and $7.6 million in cash in
1996 and 1997, respectively, and a 50% interest in the Venture. The Fund
contributed, concurrent with the Company's contribution of property, $34.9
million and $7.6 million in cash in 1996 and 1997, respectively, in return for
a $38.2 million preferred equity position that earns a 9.6% return on the
outstanding balance and a 50% ownership in the Venture. The Fund's equity
position, upon election of the Fund, is convertible into 2.2 million shares of
the Company's Common Stock, which represents an exercise price of $19.63 per
share (the approximate market price of the Company's Common Stock on the date
of issuance). The Company manages and leases the property. The
accompanying financial statements consolidate the financial position and
results of operations of the Venture and the interest of the Fund has been
reflected as a component of minority interests.
TAXES
At December 31, 1997, the Company had an aggregate cost basis of $860.0
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, 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, 1997 was approximately $13.3 million. Estimated aggregate 1998
real estate taxes, taking into account planned expansions, are approximately
$14.4 million.
ITEM 3 LEGAL PROCEEDINGS
In December 1997, a purported shareholder of the Company filed a class
action lawsuit naming the Company and several of its current and former
directors as defendants. The lawsuit claims, among other things, that the
directors of the Company breached their fiduciary duties to the Company's
shareholders in approving the merger between the Company and Prime and that the
consideration to be paid to the Company's shareholders in such a merger is
unfair and inadequate. The lawsuit requests that the merger be enjoined or, in
the event that the merger is consummated, that the merger be rescinded or
damages be awarded to class members. The Company believes the suit is without
merit and intends to vigorously defend the action. The Company is unable to
predict the likely outcome of the action, but management does not believe the
ultimate outcome of the pending litigation will have a material adverse impact
on the Company's financial position and results of operations.
<PAGE> 20
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of fiscal 1997.
PART II
ITEM 5 MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDERS MATTER
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 per common share are 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 1997. The
approximate number of holders of record of the Common Stock was 806 as of
February 13, 1998.
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
1997.
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 1997 is incorporated herein by reference.
ITEM 8 MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTER
The consolidated financial statements and report of independent auditors
included in the Company's Annual Report to Shareholders for 1997 are
incorporated herein by reference.
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
<PAGE> 21
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The Board of Directors of the Company consists of eight members divided
into three classes serving staggered three-year terms. The term of office of
one class of directors expires each year in rotation so that one class is
elected at each annual meeting for a full three-year term. Messrs. Crocker,
Dickey, Higo, Robert Perlmutter, Piasecki and Sherman were previously elected
as directors by the shareholders of the Company; Norman Perlmutter was elected
by the Board of Directors upon the merger of McArthur/Glen Realty Corp. into
the Company on July 14, 1995. Mr. Wassel was elected by the Board of Directors
on June 19, 1997. The following table sets forth certain information with
respect to the directors of the Company:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION, NAME
FIRST BECAME A OF ORGANIZATION IN WHICH OCCUPATION
DIRECTOR OF TERM AS IS CARRIED ON, OFFICES AND POSITION,
NAME THE COMPANY DIRECTOR EXPIRES IF ANY, WITH THE COMPANY; AND AGE
- -------------------- -------------- ---------------- ------------------------------------
<S> <C> <C> <C>
Norman Perlmutter 1995 1998 Chairman of the Board and Chief Executive Officer of
Heitman Financial Ltd.; Chairman of the Board of Directors
of the Company; Age 64
James S. Wassel* 1997 2000 President and Chief Executive Officer of the Company; Age 47
Douglas Crocker II 1995 1999 President and Chief Executive Officer of Equity Residential
Properties Trust, President and Chief Executive Officer of First
Capital Corporation and Executive Vice President of Equity
Financial and Management Company; Age 57
William P. Dickey 1995 1999 President of the Dermot Company, Inc.; Age 54
Norman R. Higo 1997 2000 Retired; Age 59
Robert D. Perlmutter 1997 2000 President and Chief Executive Officer of
Heitman Retail Properties; Age 36
Ronald L. Piasecki 1993 1998 Director of Sun Communities, Inc.; Age 58
Martin Sherman 1995 1999 Senior Vice President of U.S. Shoe Corporation; Age 67
</TABLE>
* Mr. Wassel's biography is included in Item 1, Part I hereof under the
caption "Executive Officers of Registrant."
<PAGE> 22
NORMAN PERLMUTTER. Mr. Perlmutter has been the Chairman of the Board of
Directors of the Company since February 8, 1997. Since 1966 Mr. Perlmutter has
served as Chairman of the Board and Chief Executive Officer of Heitman
Financial Ltd., one of the largest full service real estate companies and real
estate investment managers for employee benefit plans in the U.S. Mr.
Perlmutter is also a Director of Chris-Craft Industries, Inc., Heitman/PRA
Securities Advisors, Inc. and United Television, Inc. Mr. Perlmutter
previously served on the boards of United Asset Management Corporation and
Warner Communications. He holds a B.S. degree from the University of Illinois.
Mr. Perlmutter is the spouse of Ms. McArthur and was elected as a director
pursuant to agreement with Ms. McArthur.
DOUGLAS CROCKER II. Mr. Crocker has been President and Chief Executive
Officer of Equity Residential Properties Trust and a Trustee since its
formation in March 1993. Mr. Crocker has been President and Chief Executive
Officer of First Capital Financial Corporation, a real estate company and a
subsidiary of Great American Management and Investment, Inc., since December
1992 and a Director since January 1993 and Executive Vice President of Equity
Financial and Management Company since November 1992. From September 1992
until November 1992, Mr. Crocker was a Managing Director of Investment Banking
with Prudential Securities. Mr. Crocker was a Director and President of
Republic Savings Bank, F.S.B. from December 1988 to June 1992. Mr. Crocker was
President and a Director of McKinley Financial Group, Inc., a real estate and
leveraged buyout company, from 1982 to 1989; President of American Invesco
Corporation, a real estate company, from 1979 to 1982; and Vice President of
Arlen Realty and Development Corporation from 1971 to 1979. Mr. Crocker is a
member of the Urban Land Institute, the National Association of Real Estate
Investment Trusts ("NAREIT"), the National Apartment Association, and an
Executive Committee member of the National Multi-Housing Council. Mr. Crocker
received his B.A. from Harvard College.
WILLIAM P. DICKEY. Mr. Dickey is the owner and President of the Dermot
Company, Inc., a California real estate investment and advisory firm. Prior to
forming the Dermot Company, Inc. in October 1991, Mr. Dickey was a Managing
Director at The First Boston Corporation, a New York investment banking firm
(now CS First Boston) from February 1986 to November 1990. Prior to joining
First Boston, Mr. Dickey was a partner with the New York law firm of Cravath,
Swaine & Moore from May 1980 to February 1986. From 1964 to 1970, Mr. Dickey
was an officer in the U.S. Air Force and during that time served tours in the
Philippines and Vietnam as an intelligence officer, and at the U.S. Air Force
Academy as an instructor. Mr. Dickey is a Trustee of the Retail Property
Trust, an institutionally-owned REIT with investments in regional shopping
centers. Mr. Dickey is a Director of Price Enterprises, Inc., Mezzanine
Capital Property Investors, Inc. and Kilroy Realty Corporation. Mr. Dickey
holds a J.D. degree from Columbia Law School, an M.A. degree in International
Affairs from Georgetown University, and a B.S. degree from the U.S. Air Force
Academy.
<PAGE> 23
NORMAN R. HIGO. Mr. Higo was employed in a variety of positions by Mikasa
Inc. from 1971 until October 1995, including Executive Vice President, Chief
Operating Officer of International Operations and Director of Retail Site
Selection. Mr. Higo also served as a director and member of the executive
committee of Mikasa. Mr. Higo, a CPA, received a Bachelor's of Science degree
in accounting from the University of Southern California.
ROBERT D. PERLMUTTER. Since 1990, Mr. Perlmutter has been Chairman and
Chief Executive Officer of Heitman Retail Properties, a subsidiary of Heitman
Financial, Ltd., who as asset manager is listed by Shopping Center World as the
fourth largest owner of regional mall shopping centers in the United States.
Mr. Perlmutter is a member of the International Council of Shopping Centers
("ICSC"), the Illinois ICSC Committee and NAREIT. Mr. Perlmutter received a
Bachelor of Science degree in business and real estate from the University of
Colorado in Boulder. Mr. Perlmutter is the son of Norman Perlmutter, the
Chairman of the Board of Directors of the Company.
RONALD L. PIASECKI. Mr. Piasecki served as President and Chief Executive
Officer of the Company from February 8, 1997 until June, 1997. Until May,
1996, Mr. Piasecki served as Executive Vice President and Secretary of Aspen
Enterprises, Ltd., which he organized in 1973. In May, 1996, Aspen
Enterprises, Ltd., an owner/operator/developer of manufactured housing parks,
was acquired by Sun Communities, Inc., of which Mr. Piasecki is now a director.
Mr. Piasecki is also the Chairman of the Board of Kurdziel Industries, Inc.
Mr. Piasecki obtained his Juris Doctor degree, cum laude from Wayne State
University Law School in Detroit, Michigan in 1968 and has a B.A. degree from
the University of Michigan.
MARTIN SHERMAN. Mr. Sherman has served as Senior Vice President of U.S.
Shoe Corporation and Chief Executive Officer of its Retail Development Division
since 1984. Mr. Sherman is also the President and Chief Executive Officer of M
& S Advisory Group, Inc., a retail strategy and development consulting service.
Mr. Sherman served as President of the Retail Development Division and
Corporate Vice President of U.S. Shoe Corporation from 1971 until 1984. Mr.
Sherman has been associated with U.S. Shoe Corporation since 1963 when he began
as an Account Executive for its Valsey Bristol Children's Shoe Division. Mr.
Sherman is an active member and a past Trustee of the International Council of
Shopping Centers. He attended Temple University School of Business
Administration. Mr. Sherman has an extensive retail background with a broad
range of responsibility for the growth and retail development for U.S. Shoe
Corporation since 1966. Under his guidance, the Retail Development Division of
U.S. Shoe Corporation was responsible for the negotiation and acquisition of
over 5,000 retail locations in North America and continental Europe.
EXECUTIVE OFFICERS
Information with respect to executive officers of the Company is included
in Item 1, Part I hereof under the caption "Executive Officers of Registrant."
<PAGE> 24
ITEM 11 EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the
compensation of the Chief Executive Officer and the four other most highly
compensated executive officers of the Company whose individual total annual
salary and bonus exceeds $100,000 for 1997 (the "Named Officers") for services
in all capacities while an executive officer for 1997, 1996 and 1995.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- --------------------
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OTHER COMPENSATION STOCK OPTIONS COMPENSATION
- ------------------------------- ---- -------- -------- ------------------ -------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
James S. Wassel(1) 1997 $230,539 $225,000 -- 400,000 --
President and Chief Executive 1996 -- -- -- -- --
Officer 1995 -- -- -- -- --
Ronald L. Piasecki (2) 1997 153,994 150,000 -- -- --
President and Chief Executive 1996 -- -- -- -- --
Officer 1995 -- -- -- -- --
Jeffrey A. Kerr (3)
Chairman, President 1997 37,020 -- -- -- --
and Chief Executive 1996 350,000 -- -- -- --
Officer 1995 304,285 175,000 -- -- --
James S. Harris 1997 250,000 50,000 -- -- --
Executive Vice President 1996 250,000 50,000 -- -- --
1995 115,545 124,562 -- -- --
Stephen J. Moore (4) 1997 96,058 45,730 -- -- --
Vice President 1996 -- -- -- -- --
1995 -- -- -- -- --
Joseph Cattivera (5) 1997 90,455 -- -- -- 220,000 (7)
Regional President 1996 210,000 10,000 -- -- --
and Chief Financial 1995 163,487 83,339 -- -- --
Officer
William M. Neville (6) 1997 159,020 -- -- -- 125,000 (8)
Regional President 1996 200,521 66,182 -- -- --
1995 -- -- -- -- --
</TABLE>
- ---------------
(1) Mr. Wassel became an executive officer and employee effective
April 24, 1997.
(2) Mr. Piasecki served as President from February 9, 1997 to April 23, 1997
and Chief Executive Officer from February 9, 1997 to June 18, 1997.
(3) Mr. Kerr resigned as Chairman, President and Chief Executive Officer
effective February 8, 1997.
(4) Mr. Moore became an executive officer and employee effective
May 12, 1997.
(5) Mr. Cattivera resigned effective May 14, 1997.
(6) Mr. Neville became an executive officer and employee in March 1996 and
resigned effective September 1997.
(7) Severance payment due upon Mr. Cattivera's resignation.
(8) Severance payment due upon Mr. Neville's resignation.
<PAGE> 25
OPTION GRANTS IN FISCAL 1997
The following table sets forth certain information concerning stock option
grants during fiscal 1997 for each of the Named Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM
-------------------------------------------------- -----------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
- ---------------- --------- ------------- ----------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
James S. Wassel 400,000 72.1% $10.25 3/31/07 $2,578,493 $6,534,408
Stephen J. Moore 10,000 1.8% $12.82 4/30/07 $ 80,624 $ 204,318
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION/SAR VALUES
- -----------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FISCAL OPTIONS/SARS AT
YEAR-END (#) FISCAL YEAR-END ($)
----------------------- --------------------
SHARES ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
(a) (b) (c) (d) (e)
- ------------------ -------------------- ------------------ -------------------- --------------------
<S> <C> <C> <C> <C>
James S. Wassel -- -- 200,000/200,000 137,480/137,480
Ronald L. Piasecki -- -- 10,000/0 0/0
Jeffrey A. Kerr -- -- 334,000/0 0/0
James S. Harris -- -- 129,600/0 0/0
Stephen J. Moore -- -- 0/10,000 0/0
Joseph Cattivera -- -- 0/0 0/0
William H. Neville -- -- 0/0 0/0
</TABLE>
<PAGE> 26
EMPLOYMENT AND CONSULTING CONTRACTS
The Company has entered into employment contracts or arrangements with
each Named Officer except Mr. Piasecki. The contracts provide that these
individuals devote substantially all of their business time to the operation of
the Company. The contract with Mr. Wassel provides for an initial three-year
term, as did the contract with Mr. Kerr. The contract with Mr. Harris provides
for a three-year term, as did the contract with Mr. Cattivera. The contract
with Mr. Neville provided for a two-year term. The arrangement with Mr. Moore
does not provide for a set term of employment.
Mr. Wassel's employment agreement, which was amended on November 12, 1997,
provides for an annual salary of $360,000 and a bonus of up to 100% of such
annual salary. The Company is also obligated to make certain payments to, as
well as to accelerate or convert certain stock options of, Mr. Wassel if Mr.
Wassel resigns or is terminated under certain conditions.
Prior to his resignation, effective February 8, 1997, Mr. Kerr's Amended
and Restated Employment Agreement provided that he would serve as Chairman of
the Board of Directors of the Company, President and Chief Executive Officer.
He received an annual base salary of $350,000 (subject to increase by the Board
of Directors) and was eligible for an annual bonus. The Company entered into
an agreement with Mr. Kerr dated as of February 8, 1997, to terminate Mr.
Kerr's Amended and Restated Employment Agreement. See "Certain Transactions".
Mr. Harris receives an annual base salary of $250,000 (subject to increase
by the Board of Directors) and is eligible for a bonus of up to 60% of his base
salary. In addition, during his term, Mr. Harris is entitled to a special
bonus of $50,000 per year on or before December 31 of each year (pro rated for
partial years). Mr. Moore receives an annual salary of $150,000, and is
eligible for a bonus of up to 50% of his base salary. Mr. Cattivera and Mr.
Neville each received an annual base salary of $210,000 and were eligible for
annual bonuses of up to 50% of their base salary.
Under each of the employment agreements described above, the Named
Officers participate in any incentive, bonus, stock option or other
compensation plan adopted by the Company's Board of Directors or the Operating
Partnership, and are entitled to receive other benefits provided to executive
personnel generally. These employment contracts (with the exception of Mr.
Moore's agreement) also provide that, with limited exceptions, such Named
Officers will not develop, own or operate manufacturer outlet shopping centers
except on behalf of the Company during their employment or in certain instances
one year after their employment ceases.
<PAGE> 27
If the employment of Mr. Harris is terminated "without cause" or is
terminated by Mr. Harris for "good reason" (as such terms are defined in Mr.
Harris' employment contract), Mr. Harris is entitled to severance in an amount
equal to his annual compensation. If the employment of Mr. Harris is
terminated after a "change in control" (as such term is defined in Mr. Harris'
employment contract), Mr. Harris is entitled to a lump sum payment in an amount
equal to three times his annual compensation.
REPORT OF COMPENSATION COMMITTEE OF BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The compensation of the individuals who served as Chief Executive Officer
of the Company during 1997, the four other most highly compensated executive
officers of the Company whose total annual salary and bonus exceeds $100,000
(the "Named Officers") is determined, subject to such Named Officer's
employment contract, if any, by the Compensation Committee (the "Committee") of
the Board of Directors, which is a standing committee that consists entirely of
independent directors. No member of the Committee is eligible to participate
in any of the compensation plans or programs it administers. The Company's
goal in structuring executive compensation is to closely align the interests of
executive officers with those of the Company's shareholders. The Company's
executive compensation package is accordingly comprised of the following four
elements:
- - Base salary set at levels sufficient to attract and retain employees
capable of contributing materially to the Company's long-term success;
- - Annual bonus related to the Company's results of operations, including
Adjusted Funds From Operations and a Committee evaluation of the
employee's performance;
- - Stock options to provide long-term incentives; and
- - Participation in other benefit programs available to employees generally.
In carrying out its responsibilities, the Committee reviews the executive
compensation programs and policies of the Company's competitors, in addition to
a broader group of REITs, to ensure that the Company's plans and practices are
competitive and appropriate based on the Company's performance and compensation
goals.
The Company has entered into employment agreements that establish (or
established) the base salaries of six of the Company's Named Officers and has
adopted stock option and bonus plans.
BASE SALARY. The respective employment agreements with Named Officers
provide an annual base salary of $360,000 in the case of Mr. Wassel, $250,000
in the case of Mr. Harris, and $150,000 in the case of Mr. Moore. Prior to
their resignations, employment agreements provided for annual base salaries of
$350,000 in the case of Mr. Kerr, and $210,000 in the case of Messrs. Cattivera
and Neville. Mr. Piasecki received $140,000 in salary for his services as
<PAGE> 28
Interim Chief Executive Officer. The Company expects to target future Named
Officers' base salaries at the average of a compared group of competitors and
REITs by conducting compensation surveys to determine base salary levels are in
line with the Company's objectives, with consideration given to such factors as
the Named Officer's scope of responsibility, performance, future potential and
overall competitive positioning relative to comparable positions at competitors
and other REITs.
ANNUAL BONUS. Annual bonuses are granted under the Company's Employee
Bonus Plan. Bonuses awarded under the Plan are limited to 50% of the amount of
the employee's annual base salary, based upon the contribution to the Company
by the employee, the results of operations of the Company, including but not
limited to increases in Funds From Operations, dividends, and other factors as
the Company may deem appropriate. Bonuses may be paid in cash, shares of
Common Stock or in combination thereof. Additional or special bonuses may be
granted pursuant to an employee's employment contract.
Pursuant to the Named Officer's employment contract and/or the Employee
Bonus Plan, the Committee awarded annual bonuses of $225,000 to Mr. Wassel,
$50,000 to Mr. Harris, $45,730 to Mr. Moore, $220,000 to Mr. Cattivera and
$25,000 to Mr. Neville. Mr. Piasecki was granted a bonus of $150,000 for his
services as Interim Chief Executive Officer. The determination of such bonuses
was based on the Company's 1997 results, the contribution to the Company by the
employee and such employee's employment contract.
STOCK OPTIONS. The Company's 1997 Stock Option Plan (the "1997 Plan")
provides officers and other key employees with long-term incentives in order to
create an interest in the Company parallel to that of the Company's
shareholders. Under the 1997 Plan, 950,000 shares of Common Stock of the
Company are reserved for issuance upon the exercise of options which may be
granted to key employees of the Company and its subsidiaries. Stock options
are granted to reinforce the importance of improving shareholder value over the
long-term, and to encourage and facilitate the stock ownership by executive
officers. Stock options are granted at not less than 100% of the fair market
value of the Common Stock on the date of grant to ensure that executive
officers could only be awarded for appreciation in the price of Common Stock
when the Company's shareholders are similarly benefited. While all of the
Company's executive officers are eligible to receive stock options, the size of
annual grants, if any, to executive officers is contingent on their performance
and future potential. During 1997 the Company granted stock options pursuant
to the 1997 Plan relating to 545,000 shares, consisting in part of (i) options
granted to Norman Perlmutter to acquire 125,000 shares, (ii) options granted to
James S. Wassel to acquire 400,000 shares, and (iii) options granted to Stephen
J. Moore to acquire 10,000 shares. In addition to the 1997 Plan, the Company
also has in place the 1993 Stock Option Plan (the "1993 Plan") having terms
substantially identical to the 1997 Plan. No options were granted under the
1993 Plan during 1997.
<PAGE> 29
Martin Sherman
Norman R. Higo
Douglas Crocker II
Members of the Compensation Committee
March 15, 1998
COMPENSATION OF DIRECTORS
Directors who are not officers of or employed by the Company
("Non-employee Directors") are paid an annual fee of $12,000 and a meeting fee
of $1,000 for each meeting of the Board of Directors or a committee of the
Board of Directors attended, in person or telephonically as compensation for
service as a director. Non-employee Directors are granted stock options under
the Company's 1993 Director Stock Option Plan. Each Non-employee Director
receives an option to purchase 5,000 shares of Common Stock under the Company's
1993 Director Stock Option Plan on the date he or she is first elected to the
Board of Directors. Thereafter, on the date of each annual meeting of the
Company's shareholders, each Non-employee Director elected to office at such
meeting will automatically receive an option to purchase 5,000 shares of Common
Stock. Non-employee Directors are also reimbursed for their out-of-pocket
expenses.
STOCK PRICE PERFORMANCE GRAPH
The Stock Price Performance Graph compares the percentage change in the
cumulative total shareholder return on the Company's Common Stock with the
cumulative total returns of the Standard and Poor's 500 Stock Index (the "S&P
500 Index") and the Total Return Index of equity real estate investment trusts
prepared by the National Association of Real Estate Investment Trusts (the
"NAREIT Equity Index"). The comparison assumes $100 investments on November 1,
1993, the first date of registration of the Company's Common Stock under
Section 12 of the Securities Exchange Act of 1934, in the Company's Common
Stock, the S&P 500 Index and the NAREIT Equity Index, and further assumes
reinvestment of dividends.
<TABLE>
<CAPTION>
[PERFORMANCE GRAPH]
NAREIT S&P
Horizon Group, Inc. Equity Index 500 Index
<S> <C> <C> <C>
11/1/93 100.00 100.00 100.00
12/31/93 96.86 94.41 100.28
12/31/94 117.36 97.41 101.60
12/31/95 109.50 112.29 139.62
12/31/96 103.37 151.88 171.67
12/31/97 61.98 182.65 228.97
</TABLE>
On December 31, 1997 and February 13, 1998, the last sale prices of the
Common Stock, as reported by the New York Stock Exchange Composite Tape, were
$10.94 and $12.00 per share, respectively.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<PAGE> 30
The following table sets forth information as of February 16, 1998 (except
as otherwise indicated) regarding the beneficial ownership of Common Stock by
each director and Named Officer (as defined herein) of the Company, by all
directors and executive officers of the Company as a group, and by each person
known to the Company to be the beneficial owner of more than five percent of
the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP OF
NUMBER OF PERCENTAGE OUTSTANDING
SHARES OWNERSHIP OF COMMON STOCK
BENEFICIALLY OUTSTANDING COMMON AFTER EXCHANGE OF
NAME(1) OWNED(2) STOCK(3) UNITS(4)
------- ------------ -------------------- --------------------
<S> <C> <C> <C>
Norman Perlmutter 1,145,399 4.53 3.66
Douglas Crocker II 4,999 * *
William P. Dickey 6,999 * *
Norman R. Higo 1,000 * *
Robert D. Perlmutter 2,000 * *
Ronald L. Piasecki(5) 274,314 1.12 *
Martin Sherman 5,999 * *
James S. Wassel 200,000 * *
James S. Harris 139,600 * *
Stephen J. Moore 0 * *
William H. Neville 1,159 * *
Joseph Cattivera 0 * *
Jeffrey A. Kerr 1,380,475 5.54 4.41
All directors and executive
officers as a group (12 persons) 1,781,469 6.68 5.70
United States National Bank of
Galveston(6) 1,240,058 5.13 3.97
FLOC, LLC 2,165,605 8.9 6.92
</TABLE>
- -----------------------
* Less than 1%
<PAGE> 31
(1) The business address of each shareholder who is a director or executive
officer of the Company is c/o the Company, 5000 Hakes Drive, Norton
Shores, Michigan 49441. The business address of Jeffrey Kerr is
2089. E. Sternberg Rd, Muskegon, Michigan 49444. The business address of
the United States National Bank of Galveston is 2201 Market Street,
Galveston, Texas 77550. The business address of FLOC, LLC is 180 North
LaSalle Street, Chicago, Illinois 60601.
(2) Includes shares subject to stock options which were exercisable on
February 16, 1998, or within sixty (60) days thereafter; Units of the
Operating Partnership, which are immediately exchangeable for shares of
Common Stock on a one-for-one basis (including 1,003,210 Units
beneficially owned by Mr. Norman Perlmutter, 264,314 beneficially owned by
Mr. Piasecki, 10,000 beneficially owned by Mr. Harris and 402,714
benefically owned by Mr. Kerr); or in which the person named in the table
otherwise has a beneficial interest.
(3) Outstanding shares of Common Stock for this purpose include (i) all
issued and outstanding shares of Common Stock of the Company, (ii) shares,
if any, issuable in exchange for Operating Partnership Units by the named
person or group and (iii) shares, if any, subject to stock options which
were exercisable on February 16, 1998, or within sixty (60) days
thereafter by the named person or group.
(4) Outstanding shares of Common Stock for this purpose include (i) all
issued and outstanding shares of Common Stock of the Company, (ii) all
shares issuable in exchange for outstanding Operating Partnership Units
and (iii) all shares subject to stock options which were exercisable on
February 16, 1998 or within sixty (60) days thereafter by all named
persons or groups.
(5) Mr. Piasecki also owns 95.0%, 99.0%, 99.0% and 99.0%, respectively of the
Class A stock in HGI Management Corp., MG Third Party Services Corp., First
HGI, Inc. and HGI Perryville, Inc. all of which are subsidiaries of the
Company. Mr. Piasecki receives 5.0% of the economic interest of each of
HGI Management Corp., MG Third Party Services Corp., First HGI, Inc. and
HGI Perryville, Inc. as a result of such stock ownership. In connection
with the contemplated merger of the Company with Prime, Mr. Piasecki has
executed a contract to sell such stock.
(6) According to a Schedule 13G filed with the SEC, as of February 4, 1998,
United States National Bank of Galveston lacked voting power with respect
to 113,085 of such shares and shared dispositive power with regard to
11,072 of such shares.
<PAGE> 32
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company performed development services for properties or entities
owned by Jeffrey A. Kerr and his affiliates during 1997 in the amount of
$426,000.
The Company has used, for Company business, an airplane owned by a company
wholly owned by Mr. Kerr. During 1997, the Company made payments to Mr. Kerr's
affiliated company for use of this airplane in the aggregate amount of
$68,000. The lease of this airplane was terminated March 31, 1997.
As previously disclosed, Mr. Kerr resigned from his positions as Chief
Executive Officer, President and Chairman of the Company effective February 8,
1997. Mr. Kerr and his affiliates were indebted to the Company in the amount
of $1,268,000 at March 31, 1997. This indebtedness included $288,000 of
development fees owed to the Company, amounts due with respect to personal or
non-corporate use of the leased airplane, interest at 7.8% per annum and
various other amounts advanced to and expenses incurred on behalf of Mr. Kerr
and/or his affiliates or related entities. The Company and Mr. Kerr entered
into an agreement pursuant by which these and certain other claims of the
Company and Mr. Kerr, including a termination claim by Mr. Kerr of $1,000,000
were settled; Mr. Kerr waived various claims and agreed to make a payment of
$240,000 to the Company, his options to purchase Common Stock of the Company
were amended to make them exercisable until February 7, 1999, and all joint
ventures between the Company and Mr. Kerr and/or related entities were
terminated. As a part of this unwinding of interrelationships and pursuant to
the agreement, affiliates of Mr. Kerr agreed to transfer to the Company their
interests in approximately 18 acres of land adjacent to the Company's Birch Run
Shopping Center at Mr. Kerr's and/or his affiliates' costs to subject that
property to a purchase contract, and the Company released 50,000 shares of
Common Stock held by Mr. Kerr from the agreement with the Company restricting
Mr. Kerr's sale of those shares and will release an additional 250,000 shares
over the next two years.
In connection with the merger of McArthur/Glen Realty Corp.
("McArthur/Glen") with and into the Company on July 14, 1995, the Company
entered into a consulting and non-competition agreement with Cheryl McArthur,
the spouse of Norman Perlmutter. Pursuant to such agreement, Ms. McArthur
provides consulting services to the Company during the five-year period ending
July 13, 2000 and has covenanted not to compete in any business relating to a
shopping center primarily tenanted by manufacturers operating outlet
merchandise stores for a period of 10 years from July 14, 1995 in exchange for
the payment to her of $3.2 million. During 1997 the Company paid an aggregate
of approximately $1.1 million to Ms. McArthur pursuant to such agreement.
<PAGE> 33
In 1996, the Company terminated and settled its obligations under an
employment contract with Alan Glen, who retired as a Director of the Company
November 20, 1997. Pursuant to this Agreement, Mr. Glen received a $900,000
severance benefit approximately one-third of which was paid in April 1996 and
the balance of which is being paid in four equal installments, plus interest
aggregating $100,000, over three years;
On November 21, 1996, the Company entered into a joint venture (the
"Venture") with a pension fund (the "Fund") advised by Heitman Capital
Management Corporation, an affiliate of Heitman Financial Ltd., of which Norman
Perlmutter, the Chairman of the Board of the Company, is Chairman of the Board
and Chief Executive Officer. Pursuant to the Venture, the Fund invested a
total of $42.5 million which, after proration adjustments and payoffs of
existing indebtedness, was distributed to the Company upon its contribution of
its Finger Lakes Outlet Center. The Fund invested $34.9 million in November,
1996, and invested the remaining $7.6 million in the second quarter of 1997.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(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-__ are submitted as a separate section of
this report.
An 8-K (dated September 25, 1997) was filed on October 10, 1997
reporting the Company's engagement of Lehman Brothers to
assist the Company in assessing strategic alternatives.
An 8-K (dated November 12, 1997) was filed on November 14, 1997
reporting the Company's agreement to merge with Prime.
An 8-K (dated December 12, 1997) was filed on December 10, 1997
reporting a purported shareholder's class action lawsuit filed
against the Company.
(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.
<PAGE> 34
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, there unto duly authorized.
Dated: March 31, 1998 HORIZON GROUP, INC.
By: /s/ James S. Wassel
--------------------------
Title: President
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.
SIGNATURE TITLE DATE
- -------------------- -------------------------------- ----------------
/s/ Norman Perlmutter Director and Chairman of the March 31, 1998
- ------------------------ Board of Directors
Norman Perlmutter
Director, President and Chief March 31, 1998
/s/ James S. Wassel Executive Officer
- ------------------------ (Principal Executive Officer
James S. Wassel and Principal Financial Officer)
/s/ Douglas Crocker II Director March 31, 1998
- ------------------------
Douglas Crocker II
/s/ William P. Dickey Director March 31, 1998
- ------------------------
William P. Dickey
/s/ Norman R. Higo Director March 31, 1998
- ------------------------
Norman R. Higo
/s/ Ronald L. Piasecki Director March 31, 1998
- ------------------------
Ronald L. Piasecki
/s/ Robert D. Perlmutter Director March 31, 1998
- ------------------------
Robert D. Perlmutter
/s/ Martin Sherman Director March 31, 1998
- ------------------------
Martin Sherman
/s/ Richard D. Stewart Assistant Controller March 31, 1998
- ------------------------ (Principal Accounting Officer)
Richard D. Stewart
<PAGE> 35
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, 1997, are incorporated by reference in Item 8:
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995 ..................................................................
Consolidated Balance Sheets as of December 31, 1997 and 1996 ...................
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995 ..................................................................
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995 ...............................................
Notes to Consolidated Financial Statements .....................................
Report of Independent Auditors .................................................
The following financial statement schedule of Horizon Group, Inc. is
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.
<PAGE> 36
HORIZON GROUP, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL DEVELOPMENT OF
INITIAL COST TO COMPANY(A) ACQUISITION(B)
----------------------------------------- -----------------------------
BUILDINGS AND BUILDINGS AND
ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- ---- ------------- ---- ------------
<S> <C> <C> <C> <C> <C>
Bellport $ 12,643,100 $ 460,700 $ 16,036,400 $ 355,800 $ 318,500
Birch Run 54,751,600 3,439,900 39,671,400 3,423,000 32,215,100
Burlington 13,117,300 3,568,200 21,629,200 -- 178,100
Calhoun 16,410,500 3,292,100 19,862,700 439,000 6,067,900
Conroe 18,179,000 2,100,900 37,483,100 -- 218,000
Dry Ridge 1,572,300 995,900 8,627,500 (1,700) (5,567,500)
Edinburgh 17,197,900 988,300 11,314,700 46,400 16,077,900
Finger Lakes -- 594,400 27,010,000 900 15,648,600
Fremont 14,200,900 2,434,800 10,268,700 -- 9,072,200
Gilroy 65,248,800 11,283,400 61,998,500 6,580,200 7,588,900
Hillsboro 28,318,900 6,397,700 44,761,100 50,100 3,850,100
Holland 3,242,800 791,600 12,265,800 3,100 (6,841,800)
Jeffersonville 20,165,800 1,629,700 37,073,300 1,900 830,600
Kenosha 22,242,500 6,299,100 34,658,100 5,100 1,758,800
Lake Elsinore 29,312,600 19,404,900 43,393,400 (234,500) 6,047,900
Laughlin 13,855,500 -- 43,571,500 -- 1,600
Lee 20,341,000 8,232,400 33,241,900 -- --
Medford 9,138,800 269,600 18,586,100 144,400 356,300
Michigan City 42,352,800 3,796,200 37,359,700 43,400 12,774,400
Monroe 8,450,900 815,000 17,982,900 225,800 1,936,800
Muskegon 8,844,000 3,538,300 22,346,900 225,900 1,094,700
Oshkosh 14,200,900 644,800 11,452,800 -- 4,987,100
Perryville 9,741,100 3,151,100 16,870,000 (136,200) (318,900)
Pismo Beach 11,725,000 8,774,900 16,255,100 (100) 253,800
Queenstown 17,289,400 3,455,300 28,620,000 (900) 358,300
Sealy 10,612,800 827,400 13,454,700 18,100 4,169,500
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD
-----------------------------------------------------
BUILDINGS AND ACCUMULATED DATE OF DATE
LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
---- ------------- ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Bellport $ 816,500 $ 16,354,900 $ 17,171,400 $ 2,072,400 1992 1995
Birch Run 6,862,900 71,886,500 78,749,400 9,038,100 1986 1995
Burlington 3,568,200 21,807,300 25,375,500 1,948,400 1989 1995
Calhoun 3,731,100 25,930,600 29,661,700 2,156,800 1992 1995
Conroe 2,100,900 37,701,100 39,802,000 3,536,500 1992 1995
Dry Ridge 994,200 3,060,000 4,054,200 -- 1991 1995
Edinburgh 1,034,700 27,392,600 28,427,300 4,816,200 1989 --
Finger Lakes 595,300 42,658,600 43,253,900 1,532,400 1995 1995
Fremont 2,434,800 19,340,900 21,775,700 2,704,900 1985 --
Gilroy 17,863,600 69,587,400 87,451,000 5,225,900 1992 1993
Hillsboro 6,447,800 48,611,200 55,059,000 4,350,400 1989 1995
Holland 794,700 5,424,000 6,218,700 297,300 1988 1995
Jeffersonville 1,631,600 37,903,900 39,535,500 3,444,700 1993 1995
Kenosha 6,304,200 36,416,900 42,721,100 3,239,200 1988 1995
Lake Elsinore 19,170,400 49,441,300 68,611,700 4,316,600 1991 1995
Laughlin -- 43,573,100 43,573,100 71,600 1996 --
Lee 8,232,400 33,241,900 41,474,300 59,000 1996 --
Medford 414,000 18,942,400 19,356,400 2,345,600 1991 1995
Michigan City 3,839,600 50,134,100 53,973,700 6,398,600 1987 1993
Monroe 1,040,800 19,919,700 20,960,500 5,829,800 1987 --
Muskegon 3,764,200 23,441,600 27,205,800 1,272,100 1995 --
Oshkosh 644,800 16,439,900 17,084,700 4,159,200 1989 --
Perryville 3,014,900 16,551,100 19,566,000 1,800,000 1990 1995
Pismo Beach 8,774,800 16,508,900 25,283,700 1,683,600 1994 1995
Queenstown 3,454,400 28,978,300 32,432,700 2,501,200 1989 1995
Sealy 845,500 17,624,200 18,469,700 1,316,100 1995 1995
</TABLE>
<PAGE> 37
HORIZON GROUP, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL DEVELOPMENT OF
INITIAL COST TO COMPANY (A) ACQUISITION (B)
-------------------------------------------- --------------------------
BUILDINGS AND BUILDINGS AND
ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS
------------ ------------ -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Silverthorne $ 27,121,500 $ 9,048,200 $ 36,000,000 $ 200 $ 251,500
Somerset 4,422,000 1,750,000 16,460,300 -- 237,100
Tracy 12,023,100 4,655,100 18,087,200 1,509,000 (1,000)
Traverse City 2,554,900 675,600 7,976,000 -- (5,000,500)
Tulare 8,156,000 3,330,900 16,188,000 416,200 1,752,600
Vero Beach 26,798,300 2,707,800 18,915,400 (100) 10,198,300
Warrenton 11,595,400 1,982,500 14,760,800 8,300 5,750,400
Williamsburg 24,033,300 10,086,500 27,728,200 (551,100) 7,327,000
Woodbury 17,865,500 1,139,900 8,992,400 -- 8,818,900
Miscellaneous 8,371,000 42,500 5,445,600 5,700 4,421,100
------------ ------------ ------------ ----------- ------------
$626,097,200 $132,605,600 $856,349,400 $12,577,900 $146,832,300
============ ============ ============ =========== ============
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD
--------------------------------------------------------------
BUILDINGS AND ACCUMULATED DATE OF DATE
LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
----------- ------------- -------------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Silverthorne $ 9,048,400 $ 36,251,500 $ 45,299,900 $ 3,176,800 1988 1995
Somerset 1,750,000 16,697,400 18,447,400 2,375,900 1990 1993
Tracy 6,164,100 18,086,200 24,250,300 1,811,100 1994 1995
Traverse City 675,600 2,975,500 3,651,100 29,800 1990 --
Tulare 3,747,100 17,940,600 21,687,700 658,300 1995 --
Vero Beach 2,707,700 29,113,700 31,821,400 3,461,600 1994 --
Warrenton 1,990,800 20,511,200 22,502,000 1,688,900 1993 1995
Williamsburg 9,535,400 35,055,200 44,590,600 2,895,700 1988 1995
Woodbury 1,139,900 17,811,300 18,951,200 2,764,100 1992 --
Miscellaneous 48,200 9,866,700 9,914,900 2,065,200 1995 --
------------ -------------- -------------- -----------
$145,183,500 $1,003,181,700 $1,148,365,200 $97,044,000
============ ============== ============== ===========
</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 $860.0 million as of December 31,
1997.
Notes:
(a) The Initial Cost amounts for assets purchased in the merger
with McArthur/Glen have been restated to reflect refinements in
the purchase price adjustments.
(b) Includes adjustments for the impairment of long-lived assets on
Dry Ridge, Holland, New Mexico, Traverse City and Hawaii.
<PAGE> 38
HORIZON GROUP, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION CONTINUED
NOTES TO SCHEDULE III
DECEMBER 31, 1997
1. RECONCILIATION OF REAL ESTATE PROPERTIES:
The following table reconciles the Real Estate Properties from January 1,
1995 to December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, Beginning of Period $1,073,490,500 $1,059,960,400 $305,987,300
Additions during Period
Development of New Projects 22,910,900 49,997,800 79,253,400
Improvements of Existing Properties 21,776,100 42,372,300 73,668,900
Acquisitions 38,520,000 - 601,050,800
Retirements (8,361,900) (1,115,000) -
Write Down to Net Book Value (c) - (6,997,000) -
Transfer of Assets Held for Sale 3,707,500 (23,754,000) -
Write-off of Impaired Properties (3,677,900) (46,974,000) -
-------------- -------------- --------------
Balance, End of Period $1,148,365,200 $1,073,490,500 $1,059,960,400
============== ============== ==============
</TABLE>
The following table reconciles the accumulated depreciation from January
1, 1995 to December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
-------------- ----------------- -----------------
<S> <C> <C> <C>
Balance, Beginning of Period $65,491,000 $37,838,900 $18,154,300
Additions during Period
Depreciation 38,892,100 34,819,400 19,684,600
Write Down to Net Book Value (c) - (6,997,000) -
Retirements During Period (7,339,100) (170,300) -
------------ ----------- -----------
Balance, End of Period $ 97,044,000 $65,491,000 $37,838,900
============ =========== ===========
</TABLE>
(c) The cost basis of the impaired assets held for sale have been
adjusted to reflect the write-off of accumulated depreciation.
<PAGE> 39
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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]
<PAGE> 40
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.8 Form of 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]
10.8 Loan Agreement, dated as of June 30, 1997, between HGL
Outlet Associates and Third Horizon Group Limited Partnership
and Lehman Brothers Realty Corporation [Incorporated
by reference to Exhibit 10.1 to the Company's current
report on Form 8-K dated June 30, 1997 (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)]
10.14 Amendment No. 1 to Consulting and Non-Competition Agreement
by and between McArthur/Glen Realty Corp., McG Outlet Centers
<PAGE> 41
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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 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]
10.27 Bonus Agreement by and between Horizon Group, Inc.,
Horizon/Glen Outlet Centers Limited Partnership and Richard
A. Phillips [Incorporated by reference to Exhibit 10.22 to
the Company's annual report on Form 10-K for fiscal year
ended December 31, 1996 (SEC File No. 1-12424)]
10.28 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. 1-12424)]
10.29 Agreement with Jeffrey A. Kerr dated April 11, 1997
[Incorporated by reference to Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarterly period ended
March 31, 1997 (SEC File No. 1-12424)]
10.30 Employment Agreement with James S. Wassel [Incorporated by
reference to Exhibit 10.2 to the Company's quarterly report
on Form 10-Q for the quarterly period ended March 31, 1997
(SEC File No. 1-12424)]
<PAGE> 42
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.31 1997 Stock Option Plan
10.32 Employment Letter to Stephen J. Moore dated April 24, 1997
10.33 Employment Letter to Paul Comarato dated July 23, 1997
10.34 Agreement with Norman Perlmutter dated as of October 23, 1997
10.35 Bonus grant to Ronald L. Piasecki
10.36 Agreement with Stephen J. Moore dated as of November 12,1997
10.37 Agreement with Paul Comarato dated as of November 12, 1997
10.38 Amended and Restated Agreement and Plan of Merger by and
among Prime Retail, Inc., Prime Retail, L.P., Horizon Group,
Inc., Sky Merger Corp., Horizon Group Properties, Inc.,
Horizon Group Properties, L.P. and Horizon/Glen Outlet Centers
Limited Partnership dated as of February 1, 1998
[Incorporated by reference to Exhibit (10)(a) to the
Company's current report on Form 8-K dated February 1,
1998 (SEC File No. 1-12424)]
10.39 Agreement by and among Prime Retail, Inc., Horizon Group,
Inc., Mr. David H. Murdoch and Pacific Holding Company dated
as of February 1, 1998 [Incorporated by reference to Exhibit
(10)(b) to the Company's current report on Form 8-K dated
February 1, 1998 (SEC File No. 1-12424)]
10.40 Contribution Agreement by and among Castle & Cooke
Commercial-CA, Inc., Castle & Cooke Retail, Inc. and
Horizon/Glen Outlet Centers Limited Partnership dated as of
February 1, 1998 [Incorporated by reference to Exhibit
(10)(c) to the Company's current report on Form 8-K dated
February 1, 1998 (SEC File No. 1-12424)]
13 Annual Report to Shareholders for the fiscal year ended
December 31, 1996
21 Subsidiaries of the Company
<PAGE> 43
EXHIBIT NO. DESCRIPTION
- ----------- -----------
23 Consent of Independent Auditors
24 Powers of Attorney
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.31
1997 Stock Option Plan
HORIZON GROUP, INC., a Michigan corporation (the "Company"), may from time
to time on or before February 28, 2007, grant to officers (whether or not
directors) and key employees (including consultants and advisors) of the
Company and its subsidiaries (including Horizon/Glen Outlet Centers Limited
Partnership) options to purchase shares of the Company's common stock, $.01 par
value per share (the "Common Stock") (the "Plan"). Options granted under this
Plan may be either options which are intended to be incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended ("incentive stock options"), or options which are not intended to be
incentive stock options ("non-statutory options"). The aggregate number of
shares of Common Stock which may be sold to all optionees pursuant to this Plan
shall not exceed nine hundred and fifty thousand (950,000) shares. Except as
otherwise provided for herein, selection of optionees and determination of the
form of option and the number of shares allocated to each optionee shall be
made by a committee of disinterested directors of the Company. The purchase
price per share to be specified in any option granted pursuant to this Plan
shall be not less than the fair market value of such stock on the date such
option is granted, and may be paid in cash, in shares of Common Stock or in any
combination thereof. The Board of Directors may provide for the exercise of
options under this Plan from time to time in installments or otherwise, and may
authorize the granting of such options upon such other terms and conditions and
for such periods up to ten years from the date of grant as it may in its
discretion determine; provided, however, that any option granted hereunder
shall not be transferable by the optionee other than by will or the laws of
descent and distribution and may be exercisable during such optionee's lifetime
only by the optionee or by such optionee's guardian or legal representative;
and further provided, however, that the aggregate fair market value (determined
at the time an option is granted) of shares with respect to which incentive
stock options are exercisable for the first time by an optionee during any
calendar year (under all incentive stock option plans of the Company and any
subsidiary corporations of the Company) shall not exceed $100,000.
The Company may from time to time grant to the holder of any option issued
hereunder the right to elect to exercise stock appreciation rights with respect
to all or any portion of the shares subject to such option in lieu of such
option rights thereunder by surrendering the option rights as to all or such
portion of the shares as to which option rights shall at such time be
exercisable under such option, and receiving, with respect to each share as to
which option rights are so surrendered, an amount in payment equal to the
excess of the fair market value of such share on the date of surrender over the
purchase price specified for such share in the option. Such payment may be
made in cash, in shares of Common Stock or in any combination thereof, subject,
in the case of cash, to the consent of the Company. The number of shares of
Common Stock to be issued and delivered by the Company upon the exercise of
stock appreciation rights hereunder shall be determined by dividing the amount
of the payment to be made in the form
<PAGE> 2
of shares of Common Stock by the fair market value of a share of Common Stock
as of the date of surrender, and the value of any fractional share shall be
paid by the Company in cash. No stock appreciation right shall, in any event,
be exercisable within six months of the date of its grant. For purposes of
determining the aggregate number of shares of Common Stock sold to all
optionees pursuant to this Plan, each share as to which option rights have been
surrendered upon the exercise of stock appreciation rights shall be treated as
if it were a share sold under this Plan.
At any time an optionee is required to pay to the optionee's employer an
amount required to be withheld under applicable income tax laws in connection
with the exercise of a non-statutory option, the optionee may satisfy this
obligation in whole or in part by electing (the "Election") to have the Company
withhold shares of Common Stock having a value equal to the amount required to
be withheld. The value of the shares to be withheld shall be based on the fair
market value of such shares on the date that the amount of tax to be withheld
shall be determined ("Tax Date"). Each Election must be made prior to the Tax
Date. The Board may disapprove of any Election or may suspend or terminate the
right to make Elections. An Election is irrevocable.
If the optionee is an officer or director of the Company within the
meaning of Section 16 of the Securities Exchange Act of 1934, as amended, then
the Election is subject to the following additional restrictions:
A. No Election shall be effective for a Tax Date which occurs within six
months of the grant of the option.
B. The Election must be made either six months prior to the Tax Date or
must be made during a period beginning on the third business day following the
date of release for publication of the Company's quarterly or annual summary
statements of sales and earnings and ending on the twelfth business day
following such date.
In the event of a stock dividend, stock split, combination or other
reduction in the number of issued shares of Common Stock, the Board of
Directors of the Company may make such adjustments in the number of unpurchased
shares subject to this Plan, the number of shares subject to options
outstanding in this Plan, the exercise price specified in options outstanding
under this Plan, and the number of shares subject to stock appreciation rights
outstanding under this Plan as it may determine to be appropriate and
equitable. In the event of a merger, consolidation, reorganization or
dissolution of the Company, or the sale or exchange of substantially all of the
Company's assets, the rights under options and stock appreciation rights
outstanding hereunder shall terminate, except to the extent and subject to such
adjustments as may be provided by the Board of Directors of the Company or by
the terms of the plan or agreement of merger, consolidation, reorganization,
dissolution or sale or exchange of such assets.
<PAGE> 3
The Board of Directors of the Company may, in its discretion, prescribe
such provisions and interpretations not inconsistent herewith as it shall deem
necessary or desirable for the implementation of this Plan. The Board of
Directors of the Company may, without shareholder consent, amend this Plan;
provided, however, any amendment that would (i) materially increase the
benefits accruing to participants hereunder, (ii) materially increase the
number of shares which may be issued hereunder, or (iii) materially modify the
requirements as to eligibility for participation hereunder, must be approved by
a vote of the shareholders of the Company.
<PAGE> 1
EXHIBIT 10.32
[HORIZON LETTERHEAD]
April 24, 1997
Via Facsimile (410) 226-5551
Mr. Steve Moore
PO Box 316
208 N. Morris St.
Oxford, Maryland 21654
Dear Steve:
I am very pleased to hear from Jim Wassel that you will be joining "Team
Horizon." As you know, Marty Sherman is a fan of yours, too, and is certain to
share my enthusiasm over your decision. We are anxious for you to become a key
player on Team Horizon. You will be the first member of Jim's new cabinet.
I have outlined the essential terms of our agreement for your verification.
Please review the following, and if any discrepancies exist between this
summary and your understanding, please bring them to my immediate attention:
Position: Sr. Vice President of Marketing & Communication
Base Salary: $150,000/year
Bonus Participation: Up to 50%, based on attainment of personal performance
and corporate profit objectives.
Stock: 10,000 shares of Horizon stock will be issued on
commencement of employment, subject to a one year
vesting period. All shares will be priced according
to the NYSE closing price on the date of issue.
Options: You will be issued a total of 150,000 options, to be
awarded in three equal installments; on the first,
second and third anniversaries of employment. All
options will be priced according to the NYSE closing
price on the date of award.
Start Date: May 12, 1997 or earlier.
Vacation: Three weeks per year, increasing to four on your third
anniversary of employment with Horizon.
<PAGE> 2
Benefits: Company-paid medical and dental insurance, as outlined in the
attached summary.
Relocation: Company-paid, subject to the terms of the Relocation Policy
(attached).
This offer is subject to approval by the Horizon Board of Directors.
Yours truly,
/s/ Ronald L. Piasecki
Ronald L. Piasecki
President and CEO
atts. (2)
cc: C. McWilliams
<PAGE> 1
EXHIBIT 10.33
July 23, 1997
Mr. Paul Comarato CPM
228 Hidden Glen Court
Franklin Lake, NJ 07417
Re: Employment Letter
Dear Paul,
I am very pleased to hear that you will be joining "Team Horizon." We are
anxious for you to become a key player on our team.
I have outlined the essential terms of our agreement for your verification.
Please review the following, and if any discrepancies exist between this
summary and your understanding, please bring them to my immediate attention:
Position: Vice President of Operations
Base Salary: $125,000/year
Bonus Participation: Up to 50%, based on attainment of
personal performance and corporate
profit objectives.
Options: 10,000 options to be awarded on the
date of hire at that day's strike
price. All subsequent options are
based on a set of predefined goals and
objectives. Second issue of 10,000
options to be awarded at the end of
1997 at hire date strike price. 15,000
options to be awarded at the end of the
1998 year with option price to be based
upon date of award.
Start Date: August 4, 1997.
Vacation: Three weeks per year, increasing to
four on your third anniversary of
employment with Horizon.
<PAGE> 2
Benefits: Company-paid medical and dental insurance, as
outlined in the attached summary.
Relocation: Company-paid, subject to the terms of the Relocation
Policy [attached].
This offer is subject to approval by the Horizon Board of Directors.
Yours truly,
James S. Wassel
President and CEO
JW/bl
atts. [2]
cc: Cristal McWilliams
Director of Human Resources
<PAGE> 1
EXHIBIT 10.34
AGREEMENT
---------
THIS AGREEMENT (the "Agreement") is made and entered as of the
twenty-third day of October, 1997, by and between HORIZON GROUP, INC., a
Michigan corporation ("HGI"), HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP,
a Delaware limited partnership ("H/G Partnership", together with HGI,
"Horizon"), and NORMAN PERLMUTTER ("Perlmutter").
WHEREAS, HGI is the sole general partner of H/G Partnership, and H/G
Partnership is a developer, owner and operator of manufacturer outlet centers
throughout the United States;
WHEREAS, Perlmutter has served as the unpaid Chairman of the Board of HGI;
WHEREAS, Perlmutter has made a most significant contribution to HGI by the
advice and counsel that he has given as Chairman of the Board;
WHEREAS, Perlmutter has been instrumental in the exploration of strategic
alternatives and counsel relating to several principal financing transactions,
including among other transactions, Horizon's loan from Lehman Brothers (the
"Lehman Loan Agreement") and the refinancing of pre-existing bank debt;
WHEREAS, the HGI Board of Directors wishes to be assured that Horizon will
continue to have the benefit of Perlmutter's expertise and experience from and
after January 1, 1998 (the "Effective Date");
WHEREAS, pursuant to the terms and conditions of the Lehman Loan Agreement
the failure of Perlmutter to continue to serve as the Chairman of the Board of
HGI, without the prior written consent of Lehman, constitutes an event of
default under such agreement; and
WHEREAS, Perlmutter is willing from and after the Effective Date to serve
as Chairman of the Board, if so elected, for a period equal to the shorter of
(i) three (3) years and (ii) the date on which the failure of Perlmutter to
serve as Chairman of the Board shall not cause a default under the Lehman Loan
Agreement (the "Termination Date").
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, the parties hereby agree as follows:
1. CHAIRMAN OF THE BOARD. From and after the Effective Date, Perlmutter
agrees to serve as Chairman of the Board (with the usual duties of a Chairman
of the Board), if so elected, until the Termination Date.
<PAGE> 2
2. COMPENSATION.
(a) Horizon shall pay to Perlmutter a fee for agreeing to serve and
serving as Chairman of the Board of HGI in the aggregate amount of One
Million Dollars ($1,000,000) which shall be paid in three equal annual
installments, the first of which is to be paid on the Effective Date,
with the subsequent payments being made on January 1, 1999 and January 1,
2000 (each a "Payment Date"). The payment of each installment shall be
made by Horizon by wire transfer in immediately available funds on each
Payment Date to an account of Perlmutter designated in writing to Horizon
by Perlmutter.
(b) In the event that the Termination Date occurs prior to
January 1, 2000 all outstanding installments not previously paid
shall automatically become immediately due and payable and shall
be paid to Perlmutter on the Termination Date.
(c) Such fee shall be paid notwithstanding Perlmutter's death or
disability, whether temporary or permanent and whether occurring prior to
or after the Effective Date, it being understood that the value of
Perlmutter's services is not to be measured by the amount of time
Perlmutter spends engaged in activities as Chairman of the Board of HGI
or by his unavailability by reason of death or disability.
3. RELATIONSHIP OF HGI AND PERLMUTTER. It is the intention and
understanding of the parties hereto that nothing contained herein shall be
deemed or construed to create the relationship of employer and employee as
between Horizon and Perlmutter.
4. DIRECTORS AND OFFICERS LIABILITY INSURANCE. Horizon hereby covenants
and agrees to maintain customary directors and officers liability insurance
which is satisfactory in form and substance to Perlmutter and his counsel.
5. INDEMNIFICATION. HGI hereby covenants and agrees to maintain the
indemnification provisions as currently included in its By-laws until the terms
and conditions of this agreement have been satisfied.
6. NOTICES. Any notice to Horizon required or permitted under this
Agreement shall be given in writing to Horizon, either by personal service, by
registered or certified mail, postage prepaid, or by facsimile transmission
with answer back confirmation, duly addressed to the Chief Executive Officer of
Horizon at its then principal place of business. Any such notice to Perlmutter
shall be given in a like manner and, if mailed, shall be addressed to
Perlmutter at his address then shown in the files of Horizon. For the purpose
of determining compliance with any time limit herein, a notice, if sent by
mail, shall be deemed given on the date it is deposited in the United States
mail plus three (3) days.
2
<PAGE> 3
7. MISCELLANEOUS PROVISIONS.
(a) SUCCESSORS AND ASSIGNS. This Agreement shall be binding on
Horizon and its successors and assigns. The obligations of Horizon under
this Agreement shall be assumed by any other corporation or other
business entity (the "Successor") which succeeds to all or substantially
all of the business of Horizon through merger, consolidation, corporate
reorganization or by acquisition of all or a majority of the assets of
Horizon.
(b) SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining
terms and provisions of this Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any court of competent jurisdiction shall find
any provision of this Agreement to be so broad as to be unenforceable,
such provision shall be interpreted to be only so broad as is enforceable.
(c) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware with
regard to conflicts of law principles thereof.
(d) WAIVER. Waiver by any of the parties of any breach of any
provision of this Agreement shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision of
this Agreement.
(e) ATTORNEYS' FEES. The prevailing party in any litigation
instituted to enforce this Agreement shall, in addition to any other
remedies, be entitled to be reimbursed by the other party for all
expenses of such litigation, including reasonable attorneys' fees. As
used herein, "attorneys' fees" shall mean the full and actual costs of any
legal services actually rendered in connection with the matters involved,
calculated on the basis of the usual fee charged by the attorneys
performing such services, and shall not be limited to "reasonable
attorneys' fees" as defined by any statute or rule of court.
(f) ENTIRE AGREEMENT. This instrument contains the entire agreement
of the parties with respect to the subject matter of this Agreement.
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, which taken together shall be deemed to constitute one
original.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have entered into and executed this
Agreement as of the date first above written.
HORIZON GROUP, INC.,
a Michigan corporation
By: /s/ James S. Wassel
--------------------------------
Name: James S. Wassel
---------------------------
Its: President
---------------------------
HORIZON/GLEN OUTLET CENTERS LIMITED
PARTNERSHIP, a Delaware limited
partnership
By: HORIZON GROUP, INC., a Michigan
corporation, its sole General
Partner
By: /s/ James S. Wassel
-------------------------------
Name: James S. Wassel
--------------------------
Its: President
---------------------------
NORMAN PERLMUTTER
/s/ Norman Perlmutter
-----------------------------------
4
<PAGE> 1
EXHIBIT 10.35
On November 4, 1997, the Compensation Committee of the Board of Directors of
the Company awarded Ronald L. Piasecki, a director and former Interim Chief
Executive Officer and Chairman of the Executive Committee of the Company, a
bonus in the amount of $150,000, to be paid in twelve equal monthly
installments beginning in January, 1998.
<PAGE> 1
EXHIBIT 10.36
AGREEMENT
---------
THIS AGREEMENT (the "Agreement") is made and entered as of the twelfth day
of November, 1997, by and between HORIZON GROUP, INC., a Michigan corporation
("HGI"), HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP, a Delaware limited
partnership ("H/G Partnership", together with HGI, "Horizon"), and Steve Moore
("Employee").
WHEREAS, HGI is the sole general partner of H/G Partnership, and H/G
Partnership is a developer, owner and operator of manufacturer outlet centers
throughout the United States;
WHEREAS, Employee is employed by Horizon;
WHEREAS, Employee is willing from and after the Effective Date to continue
his employment with Horizon until the occurrence of a merger or consolidation
between Horizon and another person, the corporate reorganization of Horizon or
the acquisition of a majority or more of the assets of Horizon by another
person (a "Transaction"); and
WHEREAS, Horizon wishes to be assured that it will continue to have the
benefit of Employee's expertise and experience from and after the date of this
Agreement until the closing of a Transaction (the "Effective Date").
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, the parties hereby agree as follows:
1. POSITION. From and after the date of this Agreement, Employee
agrees to continue his employment with Horizon until the occurrence of a
Transaction in order to earn the additional compensation set forth herein.
2. COMPENSATION. Provided that Employee continues his employment with
Horizon until the Effective Date,
(a) Horizon shall pay Employee a bonus for agreeing to continue his
employment with Horizon until the Effective Date in the amount of Two
Hundred Thirty-Six Thousand Two Hundred and Fifty Dollars ($236,250)
which shall be paid on the Effective Date. The payment of such bonus
shall be made by Horizon by wire transfer in immediately available funds
on the Effective Date to an account of Employee designated in writing to
Horizon by Employee.
(b) Horizon shall grant Employee options on the day
immediately preceding the Effective Date to purchase 50,000 shares
of HGI common stock under the 1997 Stock Option Plan (the
"Options"). The exercise price per share
<PAGE> 2
for the Options shall be the fair market value of such share on the last
trading day immediately preceding the Effective Date and the Options shall
be exercised on the terms and conditions set forth in the attached form
of Option. Such Options and any other Options granted under the 1997
Stock Option Plan shall become the obligations of any surviving entity
in a Transaction and the agreement(s) governing such Transaction shall
provide that the Options will be converted into options to purchase common
shares of the surviving entity of any Transaction on a fair and equitable
basis. All outstanding options heretofore granted to Employee under the
1997 Stock Option Plan are hereby deemed to be amended in the attached
form of Option.
3. EMPLOYMENT ARRANGEMENTS. It is the intention and understanding of
the parties hereto that the rights and obligations of each party under the terms
and conditions of this Arrangement are in addition to any rights and
obligations of the parties under any employment arrangement between them,
including but not limited to that certain Letter Agreement dated June 12, 1997
between Horizon and Employee. The terms of such employment arrangement shall
remain in full force and effect and shall not be affected in any manner by the
terms and conditions set forth in this Agreement.
4. NOTICES. Any notice to Horizon required or permitted under this
Agreement shall be given in writing to Horizon, either by personal service, by
registered or certified mail, postage prepaid, or by facsimile transmission
with answer back confirmation, duly addressed to the Chief Executive Officer of
Horizon at its then principal place of business. Any such notice to Employee
shall be given in a like manner and, if mailed, shall be addressed to Employee
at his/her address then shown in the files of Horizon. For the purpose of
determining compliance with any time limit herein, a notice, if sent by mail,
shall be deemed given on the date it is deposited in the United States mail
plus three (3) days.
5. MISCELLANEOUS PROVISIONS.
(a) SUCCESSORS AND ASSIGNS. This Agreement shall be binding on
Horizon and its successors and assigns. The obligations of Horizon under
this Agreement shall be assumed by any other corporation or other
business entity (the "Successor") which succeeds to all or substantially
all of the business of Horizon through merger, consolidation, corporate
reorganization or by acquisition of all or a majority of the assets of
Horizon.
(b) SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining
terms and provisions of this Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any
other
2
<PAGE> 3
jurisdiction. If any court of competent jurisdiction shall find
any provision of this Agreement to be so broad as to be unenforceable,
such provision shall be interpreted to be only so broad as is
enforceable.
(c) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Michigan with
regard to conflicts of law principles thereof.
(d) WAIVER. Waiver by any of the parties of any breach of any
provision of this Agreement shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision of
this Agreement.
(e) ATTORNEYS' FEES. The prevailing party in any litigation
instituted to enforce this Agreement shall, in addition to any other
remedies, be entitled to be reimbursed by the other party for all
expenses of such litigation, including reasonable attorneys' fees. As
used herein, "attorneys' fees" shall mean the full and actual costs of any
legal services actually rendered in connection with the matters involved,
calculated on the basis of the usual fee charged by the attorneys
performing such services, and shall not be limited to "reasonable
attorneys' fees" as defined by any statute or rule of court.
(f) ENTIRE AGREEMENT. This instrument contains the entire agreement
of the parties with respect to the subject matter of this Agreement.
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, which taken together shall be deemed to constitute one
original.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have entered into and executed this
Agreement as of the date first above written.
HORIZON GROUP, INC.,
a Michigan corporation
By: /s/ James S. Wassel
--------------------------------
Name: James S. Wassel
----------------------------
Its: President
----------------------------
HORIZON/GLEN OUTLET CENTERS LIMITED
PARTNERSHIP, a Delaware limited
partnership
By: HORIZON GROUP, INC., a Michigan
corporation, its sole General
Partner
By: /s/ James S. Wassel
--------------------------------
Name: James S. Wassel
---------------------------
Its: President
----------------------------
EMPLOYEE
/s/ Steve Moore
------------------------------------
Name: Steve Moore
4
<PAGE> 1
EXHIBIT 10.37
AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered as of the twelfth day
of November, 1997, by and between HORIZON GROUP, INC., a Michigan corporation
("HGI"), HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP, a Delaware limited
partnership ("H/G Partnership", together with HGI, "Horizon"), and Paul
Comarato ("Employee").
WHEREAS, HGI is the sole general partner of H/G Partnership, and H/G
Partnership is a developer, owner and operator of manufacturer outlet centers
throughout the United States;
WHEREAS, Employee is employed by Horizon;
WHEREAS, Employee is willing from and after the Effective Date to continue
his employment with Horizon until the occurrence of a merger or consolidation
between Horizon and another person, the corporate reorganization of Horizon or
the acquisition of a majority or more of the assets of Horizon by another
person (a "Transaction"); and
WHEREAS, Horizon wishes to be assured that it will continue to have the
benefit of Employee's expertise and experience from and after the date of this
Agreement until the closing of a Transaction (the "Effective Date").
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, the parties hereby agree as follows:
1. POSITION. From and after the date of this Agreement, Employee agrees
to continue his employment with Horizon until the occurrence of a Transaction
in order to earn the additional compensation set forth herein.
2. COMPENSATION. Provided that Employee continues his employment with
Horizon until the Effective Date,
(a) Horizon shall pay Employee a bonus for agreeing to continue his
employment with Horizon until the Effective Date in the amount of One
Hundred Ninety-Six Thousand Eight Hundred and Seventy-Five Dollars
($196,875) which shall be paid on the Effective Date. The payment of
such bonus shall be made by Horizon by wire transfer in immediately
available funds on the Effective Date to an account of Employee
designated in writing to Horizon by Employee.
(b) Horizon shall grant Employee options on the day
immediately preceding the Effective Date to purchase 15,000 shares
of HGI common stock under the 1997 Stock Option Plan (the
"Options"). The exercise price per share
<PAGE> 2
for the Options shall be the fair market value of such share on the last
trading day immediately preceding the Effective Date and the Options
shall be exercised on the terms and conditions set forth in the attached
form of Option. Such Options and any other Options granted under the
1997 Stock Option Plan shall become the obligations of any surviving
entity in a Transaction and the agreement(s) governing such Transaction
shall provide that the Options will be converted into options to purchase
common shares of the surviving entity of any Transaction on a fair and
equitable basis. All outstanding options heretofore granted to Employee
under the 1997 Stock Option Plan are hereby deemed to be amended in the
attached form of Option.
3. EMPLOYMENT ARRANGEMENTS. It is the intention and understanding of
the parties hereto that the rights and obligations of each party under the terms
and conditions of this Arrangement are in addition to any rights and
obligations of the parties under any employment arrangement between them,
including but not limited to that certain Letter Agreement dated June 12, 1997
between Horizon and Employee. The terms of such employment arrangement shall
remain in full force and effect and shall not be affected in any manner by the
terms and conditions set forth in this Agreement.
4. NOTICES. Any notice to Horizon required or permitted under this
Agreement shall be given in writing to Horizon, either by personal service, by
registered or certified mail, postage prepaid, or by facsimile transmission
with answer back confirmation, duly addressed to the Chief Executive Officer of
Horizon at its then principal place of business. Any such notice to Employee
shall be given in a like manner and, if mailed, shall be addressed to Employee
at his/her address then shown in the files of Horizon. For the purpose of
determining compliance with any time limit herein, a notice, if sent by mail,
shall be deemed given on the date it is deposited in the United States mail
plus three (3) days.
5. MISCELLANEOUS PROVISIONS.
(a) SUCCESSORS AND ASSIGNS. This Agreement shall be binding on
Horizon and its successors and assigns. The obligations of Horizon under
this Agreement shall be assumed by any other corporation or other
business entity (the "Successor") which succeeds to all or substantially
all of the business of Horizon through merger, consolidation, corporate
reorganization or by acquisition of all or a majority of the assets of
Horizon.
(b) SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining
terms and provisions of this Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any
other
2
<PAGE> 3
jurisdiction. If any court of competent jurisdiction shall find
any provision of this Agreement to be so broad as to be unenforceable,
such provision shall be interpreted to be only so broad as is
enforceable.
(c) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Michigan with
regard to conflicts of law principles thereof.
(d) WAIVER. Waiver by any of the parties of any breach of any
provision of this Agreement shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision of
this Agreement.
(e) ATTORNEYS' FEES. The prevailing party in any litigation
instituted to enforce this Agreement shall, in addition to any other
remedies, be entitled to be reimbursed by the other party for all
expenses of such litigation, including reasonable attorneys' fees. As
used herein, "attorneys' fees" shall mean the full and actual cots of any
legal services actually rendered in connection with the matters
involved, calculated on the basis of the usual fee charged by the
attorneys performing such services, and shall not be limited to
"reasonable attorneys' fees" as defined by any statute or rule of court.
(f) ENTIRE AGREEMENT. This instrument contains the entire agreement
of the parties with respect to the subject matter of this Agreement.
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, which taken together shall be deemed to constitute one
original.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have entered into and executed this
Agreement as of the date first above written.
HORIZON GROUP, INC.,
a Michigan corporation
By: /s/ James S. Wassel
--------------------------------
Name: James S. Wassel
---------------------------
Its: President
----------------------------
HORIZON/GLEN OUTLET CENTERS LIMITED
PARTNERSHIP, a Delaware limited
partnership
By: HORIZON GROUP, INC., a Michigan
corporation, its sole General
Partner
By: /s/ James S. Wassel
--------------------------------
Name: James S. Wassel
---------------------------
Its: President
----------------------------
EMPLOYEE
/s/ Paul Comarato
-----------------------------------
Name: Paul Comarato
4
<PAGE> 1
EXHIBIT 13
HORIZON GROUP, INC.
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Horizon Group,
Inc. (the "Company"), which includes the results of operations of McArthur/Glen
Realty Corp. ("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,
-----------------------------------------------------------
1997 1996 1995 1994 1993(A)
---- ---- ---- ---- -------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS, NUMBER PROPERTIES,
AND SHAREHOLDERS OF RECORD)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue................................. $ 162,463 $ 154,499 $ 93,929 $ 43,267 $ 22,247
Expenses................................ 156,481 124,277 66,558 26,073 19,274
Impairment and severance................ 7,798 65,355 -- -- --
Income (loss) before gain on sale of
real estate, minority interests and
extraordinary charge.................. (1,816) (35,133) 27,371 17,194 2,973
Gain on sale of real estate............. 8 563 776 287 272
Net income (loss) before minority
interests and extraordinary charge.... (1,808) (34,570) 28,147 17,481 3,245
Minority interests...................... (2,483) 7,715 (6,776) (2,940) (2,702)
Extraordinary charge.................... (3,293) (419) -- -- --
Net income (loss)....................... (7,584) (27,274) 21,371 14,541 543
Net income (loss) per common share
before extraordinary charge and gain
on sale of real estate(b)............. (.18) (1.34) 1.47 1.39 .03
Net income (loss) per common share(b)... (.32) (1.34) 1.52 1.42 .06
Dividends declared per common
share(c).............................. 1.050 2.095 2.131 1.755 .247
BALANCE SHEET DATA:
Real estate, net of accumulated
depreciation.......................... $1,051,321 $1,008,000 $1,023,745 $ 287,833 $176,512
Total assets............................ 1,115,531 1,095,221 1,059,090 300,043 218,146
Total mortgages and other debt.......... 626,097 557,672 503,246 96,929 24,888
Total shareholders' equity (deficit).... 351,234 363,881 341,896 148,849 152,165
OTHER DATA:
Funds From Operations before minority
interests(d)(e)....................... $ 44,926 $ 66,410 $ 47,549 $ 25,656 $ 6,860
Cash flows provided by (used in):
Operating activities.................. 49,778 32,442 35,719 26,713 9,557
Investing activities(e)............... (81,282) (96,854) (150,916) (114,330) (93,663)
Financing activities.................. 28,197 74,054 117,592 56,105 118,965
Total gross leasable area (square
feet)................................. 9,907 9,369 8,464 3,124 2,215
Number of properties.................... 37 37 35 13 12
SHARES AND SHAREHOLDERS (AT DECEMBER
31,):
Shares outstanding...................... 24,067 22,826 18,552 10,236 10,237
Shareholders of record.................. 936 883 642 315 239
</TABLE>
(See footnotes on next page.)
<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) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128. See the
accompanying notes to the consolidated financial statements. There is no
difference between basic and diluted earnings per share.
(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) Management believes that in order to facilitate a clear understanding of the
consolidated historical operating results of the Company, Funds From
Operations ("FFO") should be considered. Management generally considers FFO
to be an appropriate measure of the performance of an equity REIT. Funds
From Operations before minority interests is defined as net income before
minority interests (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 as
defined by the National Association of Real Estate Investment Trusts in
March 1995). The Company cautions that the calculation of FFO may vary from
entity to entity and as such the presentation of FFO by the Company may not
be comparable to other similarly titled measures of other reporting
companies. FFO does not represent cash flow from operating activities in
accordance with GAAP and is not indicative of cash available to fund all of
the Company's cash needs. FFO should not be considered as an alternative to
net income or any other GAAP measure as an indicator of performance and
should not be considered as an alternative to cash flow as a measure of
liquidity or the ability to service debt or to pay dividends. A
reconciliation of income (loss) before allocation to minority interests to
FFO is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss) before minority
interests and extraordinary charge $(1,808) $(34,570) $28,147 $17,481 $3,245
FFO Adjustments:
Depreciation and amortization 41,154 36,519 20,178 8,462 3,887
Loss on asset impairment 7,798 65,355 -- -- --
Merger expenses 1,001 -- -- -- --
Gain on sale of assets (8) (563) (776) (287) (272)
Joint venture adjustments (3,211) (331) -- -- --
------- -------- ------- ------- ------
Total FFO adjustments 46,734 100,980 19,402 8,175 3,615
------- -------- ------- ------- ------
FFO $44,926 $ 66,410 $47,549 $25,656 $6,860
======= ======== ======= ======= ======
</TABLE>
(e) Certain reclassifications have been made to previously reported balances in
order to provide comparability to the current year amounts. Those
reclassifications have not changed previously reported amounts or
shareholders' equity.
<PAGE> 3
HORIZON GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL OVERVIEW
Horizon Group Inc. (the "Company") is a self-administered and self-managed
real estate investment trust ("REIT") that is engaged in the ownership,
acquisition, development and operation of outlet centers. 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 a "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.
The Company has grown by developing new outlet centers, expanding existing
outlet centers, acquiring outlet centers and increasing rental revenue at its
existing outlet centers. At December 31, 1997, the Company operated 37 outlet
centers containing an aggregate of 9.9 million square feet of gross leasable
area ("GLA") in 21 states compared to 37 outlet centers with 9.4 million square
feet of GLA in 20 states at the end of 1996 and 35 factory outlet centers
containing an aggregate of 8.5 million square feet of GLA in 19 states at the
end of 1995. The increase in GLA from 1996 to 1997 was approximately 428,000
square feet of GLA due to the expansion of three outlet centers and the
development of one new outlet center. The Company also acquired an outlet center
adjacent to an existing outlet center owned by the Company that provided
approximately an additional 203,000 square feet. One center of approximately
161,000 square feet was sold for approximately $4.5 million in 1997. The
increase in GLA from 1995 to 1996 was approximately 905,000 square feet of
additional GLA from the expansion of eight outlet centers and the development of
three new outlet centers. The above mentioned factors increasing the GLA of the
Company's properties are collectively referred to as the "Portfolio Expansion."
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 (the "Merger"). At the merger date, McArthur/Glen
operated 20 outlet centers with 3.9 million square feet of GLA. See Note 3 in
the accompanying Consolidated Financial Statements for further information.
The Company's occupancy for stabilized properties was 92%, 89% and 95% at
December 31, 1997, 1996 and 1995, respectively. The Company's properties are
considered to be stabilized if they have been open for twelve months or,
earlier, if they have reached full occupancy (considered by the Company to be
95% occupied).
On November 12, 1997, the Company entered into a merger agreement (which
was amended and restated on February 1, 1998) with Prime Retail, Inc. ("Prime")
which provides for Prime to integrate 22 of the Company's existing outlet
centers into its portfolio and the Company's remaining 13 centers (as well as
two centers currently owned by Prime) to be operated by a newly formed entity.
The shares of the newly formed entity will be distributed following the merger,
on a pro rata basis, to the shareholders of both Prime and the Company. The
transaction will establish Prime as the largest owner/operator and developer of
factory outlet centers in the United States, with 48 centers totaling 13.4
million square feet of GLA in 26 states. The merger is conditioned upon, among
other things, the approvals of each company's shareholders and unit holders and
the satisfaction of other customary conditions.
As part of the proposed merger transaction with Prime, on February 1, 1998,
the Company entered into a definitive agreement with Castle & Cooke Properties,
Inc. to release the Company from its obligations under its long-term lease of
the Dole Cannery outlet center in Honolulu, Hawaii, in connection with the
formation of a joint venture with certain affiliates of Castle & Cooke, Inc.
("Castle & Cooke") to operate such property. Under the terms of the agreement,
Castle & Cooke, the landlord of the project, will release the Company from all
post-closing obligations under the lease, which expires in 2045, in exchange for
the Company's conveyance to the joint venture of its rights and obligations
under such lease. The
<PAGE> 4
agreement also provides that the Company will transfer to such joint venture
substantially all of the Company's economic interest in its outlet center in
Lake Elsinore, California together with vacant property located adjacent to the
center. The Company expects to record an approximate loss of $30.0 million to
reflect the transfer of this property and related financing to the joint
venture. The Company will hold a small minority interest in the joint venture
but will have no obligation or commitment with respect to the operations of the
Dole Cannery project following the closing. Closing of the transaction remains
subject to certain customary conditions. Completion of the proposed merger with
Prime is not a condition to such closing.
CONSOLIDATED RESULTS OF OPERATIONS
1997 COMPARED TO 1996
The net loss before minority interests and extraordinary charge was $1.8
million in 1997 compared to net loss before minority interests and extraordinary
charge of $34.6 million in 1996. The loss in 1997 resulted from a $7.8 million
loss on asset impairment and a $1.0 million charge for professional fees
incurred relating to the impending merger with Prime that, as the acquiree under
purchase accounting, is required to be expensed.
Total revenues increased $8.0 million, or 5.2%, to $162.5 million in 1997
from $154.5 million in 1996. This increase resulted principally from increased
GLA due to the Portfolio Expansion. Base rent increased $5.9 million, or 5.4%,
to $115.9 million in 1997 compared to $110.0 million in 1996. Percent rent was
$4.0 million in 1997 and $3.2 million in 1996, an increase of 26%. The increase
in base rent includes recording $3.0 million of deferred rent relating to the
Company's New Mexico Outlet Center. In July 1997, the Company leased its
Algodones, New Mexico outlet center to Chelsea GCA Realty Partnership, L.P.
("Chelsea") for $4.0 million over a period of two years. The $4.0 million was
prepaid at closing and is non-refundable. Pursuant to its rights under the
lease, Chelsea gave notice in 1997 that it would terminate the lease effective
January 2, 1998, and accordingly, the remaining $3.0 million of deferred rent
was recognized in 1997.
Tenant expense recoveries increased $.2 million, or .5%, to $34.1 million
in 1997 compared to $33.9 million in 1996 as a result of additional GLA from the
Portfolio Expansion offset by approximately $1.2 million of operating costs
relating to the Company's Dole Cannery project in Honolulu, Hawaii. As a result,
expense recoveries covered 87.5% of property operating and real estate tax
expenses in 1997 compared to 96.6% in 1996.
Other income increased $1.1 million, or 14.0%, to $8.5 million in 1997
compared to $7.4 million in 1996 principally from higher temporary tenant
income.
Property operating and real estate tax expenses increased $3.8 million, or
10.9%, to $39.0 million in 1997 from $35.1 million in 1996 principally from
increased GLA resulting from the Portfolio Expansion.
Land lease and other expense increased $10.8 million to $12.3 million in
1997 compared to $1.5 million in 1996, principally due to $8.2 million of space
lease expense, including $4.8 million of straight line expense, associated with
the Dole Cannery project and landlord marketing contributions.
General and administrative expenses increased $1.5 million, or 12.7%, to
$13.3 million in 1997 compared to $11.8 million in 1996 principally due to $1.6
million in increased professional fees and leasing costs offset by a $1.0
million decline in the provision for uncollectible accounts. As a result,
general and administrative expenses, as a percentage of total revenues,
increased to 8.2% in 1997 compared to 7.6% in 1996.
Depreciation and amortization increased $4.8 million, or 13.0%, to $42.0
million in 1997 compared to $37.2 million in 1996 principally from additional
GLA associated with the Portfolio Expansion. Interest expense increased $10.2
million, or 26.4%, to $48.9 million in 1997 compared to $38.7 million in 1996
due to increased debt levels primarily resulting from the Portfolio Expansion
and a $6.3 million decrease in capitalized interest due to decreased development
activity.
<PAGE> 5
HORIZON GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
A loss on asset impairment of $7.8 million was recognized in 1997 to reduce
six properties under sales agreements, subject to certain contingencies, to an
amount equal to estimated sales proceeds less costs to dispose and to record a
$0.9 million charge for undeveloped projects that will not be pursued. At
September 30, 1997, six outlet centers were classified as held for sale
resulting from these agreements. One center was sold in November 1997 for
approximately $4.5 million. The agreements for the remaining five properties
were terminated. Management then decided to pursue the sale of only one of the
outlet centers. The remaining four outlet centers were reclassified to real
estate assets in the fourth quarter of 1997 at their fair values as of the date
of the decision not to sell.
In 1997, the Company recorded an extraordinary charge of $3.3 million, net
of minority interests, related to the early retirement of debt. The charge
primarily consisted of the write-off of unamortized debt issuance costs
associated with the debt retired.
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 loss primarily for asset impairment, $2.2 million related to
discontinued development projects and $1.5 million in executive severance costs.
Total revenues increased $60.6 million, or 64.5%, to $154.5 million in 1996
from $93.9 million in 1995. Base rent increased $41.5 million, or 60.5%, to
$110.0 million in 1996 compared to $68.5 million in 1995. Percent rent was $3.2
million in 1996 and $2.4 million in 1995, an increase of 29.2%. These increases
resulted from increased GLA principally from the Portfolio Expansion and a full
year of operations of outlet centers obtained in the Merger compared to a
partial year of operations in 1995.
Tenant expense recoveries increased $15.0 million, or 79.3%, to $33.9
million in 1996 compared to $18.9 million in 1995 as a result of additional GLA
from the Portfolio Expansion and the Merger. Expense recoveries covered 96.6% of
property operating and real estate tax expenses compared to 92.3% in 1995.
Other income increased $3.4 million, or 84.5%, to $7.4 million in 1996
compared to $4.0 million in 1995 from higher lease termination income and income
related to marketing.
Property operating and real estate tax expenses have increased $14.6
million, or 71.4%, to $35.1 million in 1996 from $20.5 million in 1995
principally from increased GLA resulting from the Portfolio Expansion and the
Merger.
Land lease and other expense increased $.3 million to $1.5 million in 1996
compared to $1.2 million in 1995, principally due to the straight-line lease
expense associated with the Dole Cannery project.
General and administrative expenses increased $6.8 million, or 136.7%, to
$11.8 million in 1996 compared to $5.0 million in 1995 from the inclusion of a
full year of expense in 1996 from the Merger, 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.
Depreciation and amortization increased $16.5 million, or 80.1%, to $37.2
million in 1996 compared to $20.7 million in 1995 principally from a full year
of combined operations relating to the Merger and additional GLA associated with
the Portfolio Expansion. Interest expense increased $19.4 million, or 100.8%, to
$38.7 million in 1996 compared to $19.3 million in 1995 due to increased debt
levels primarily resulting from the Portfolio Expansion as well as debt assumed
from the Merger.
<PAGE> 6
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 as of December 31, 1996. Beginning in 1997, the Company has
expensed and not capitalized leasing, interest and 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. One of these properties
was sold in November 1997 and the other property was reclassified to real
estate as of December 31, 1997.
- 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
charge 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 principally from
increased GLA due to the Merger and the Portfolio Expansion.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company, through indirect wholly-owned subsidiaries
("Borrower"), entered into a $300.6 million credit facility with Lehman Brothers
Realty Corporation ("Lender"). The initial loan (the "Initial Loan") of $250.6
million included an initial funding at closing of $212.1 million and a
reservation of financing in the amount of $38.5 million for the acquisition of a
specified property (the "Additional Loan"). The Borrower may borrow an
additional $50.0 million in increments of no less than $10.0 million each,
subject to the satisfaction of certain conditions, including predefined debt
service coverage ratios (the "Second Loan" and collectively with the "Initial
Loan," including the "Additional Loan," the "Loan"). Subsequent to the Initial
Loan, the Company borrowed the entire $38.5 million of the Additional Loan for
the acquisition of the specified property and $11.0 million of the Second Loan.
While the Company has additional availability under the Second Loan, additional
borrowings may not be available due to the financial ratios the Company is
required to maintain. The Company repaid $7.7 million of the Loan in connection
with property sales and refinancing. Interest on the Loan is payable at the
following rates: (i) 1.75% over the London interbank offering rate ("LIBOR") for
the Initial Loan, and (ii) 2.25% over LIBOR for the Second Loan or (iii) if the
Loan is converted to a prime rate loan under certain circumstances at the
Lender's discretion, the prime rate plus .75% with respect to the Initial Loan
and plus 1.25% with respect to the Second Loan. The maturity date of the Loan is
July 1, 1999, unless otherwise extended pursuant to the terms of the Loan. The
net proceeds of the Initial Loan were primarily used to retire the Company's
aggregate outstanding balances under the following: (i) a revolving credit
facility with a subsidiary of First Chicago NBD Corporation and other banks
("FCNBD"), (ii) construction financing facilities with Canadian Imperial Bank of
Commerce ("CIBC"), (iii) four mortgage notes payable and (iv) one revolving
credit facility. The Company recorded a $3.3 million extraordinary charge, net
of minority interests, comprised primarily of unamortized debt issuance costs
associated with the debt retired. The Loan is guaranteed by the Company and the
Operating Partnership and is secured by a pool of 16 properties transferred to
Borrower. The Loan requires the Company to maintain certain financial ratios and
restricts the amount of dividends and distributions that can be made.
Additionally, the Company has an unsecured revolving credit facility that
expires in August 1998 for $4.0 million with a Michigan bank for working capital
requirements, which was completely outstanding as
<PAGE> 7
HORIZON GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
of December 31, 1997. Interest on borrowings under this facility is charged at
the prime rate and the facility is recourse to the Company.
In 1996, the Company formed a venture (the "Venture") with a pension fund
(the "Fund") advised by Heitman Capital Management. The Company contributed a
325,000 square foot center in the Finger Lakes region of New York in 1996 and a
67,000 square foot expansion in 1997 to the Venture. In exchange for the
contribution, the Company received $34.9 million and $7.6 million in cash in
1996 and 1997, respectively, and a 50% interest in the Venture. The Fund
contributed, concurrent with the Company's contribution of property, $34.9
million and $7.6 million in cash in 1996 and 1997, respectively, in return for a
$38.2 million preferred equity position that earns a 9.6% return on the
outstanding balance and a 50% ownership in the Venture. The Fund's entire equity
position, upon election of the Fund, is convertible into 2.2 million shares of
the Company's Common Stock. The Company manages and leases the property. The
accompanying financial statements consolidate the financial position and results
of operations of the Venture and the interest of the Fund has been reflected as
a component of minority interests.
In 1997, the Company issued .3 million shares of Common Stock under its
Dividend Reinvestment Plan (DRIP) for an aggregate price of $5.9 million. Net
proceeds from the foregoing sales of Common Stock were used to reduce amounts
outstanding under revolving credit facilities. The Company has discontinued
further stock issuances under the DRIP based on the current market price of the
Company's Common Stock.
During 1998, the Company has no plans to expand its outlet centers.
However, the Company plans to spend approximately $19.0 million for tenant
allowances and capital improvements to its outlet centers in 1998. The Company
plans to fund this expansion with existing cash balances, cash flow from
operations and proceeds from the sale of assets.
The Company expects to meet its short-term liquidity requirements generally
through working capital and cash flows from operations. The Company expects to
meet its long-term requirements, such as tenant allowances for new leases and
capital improvements, through the additional borrowing of long-term debt and the
potential offering of equity securities in the private or public capital
markets. As a result of the Company's leverage and the covenants related to its
debt, the Company's ability to obtain additional financing sources is limited.
There can be no assurances that the Company will be able to successfully obtain
such funding sources or, if obtained, on favorable terms.
Total tenant retail sales at Company outlet centers increased in 1997
compared to 1996. Tenant sales, on a comparative store basis, increased
approximately 3.1% in 1997 compared to 1996, comparable to the trend in the
industry. Lower sales by certain tenants may however have an 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 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
<PAGE> 8
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.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
The Company does not believe that the impact of the recognition of the year
2000 by its information and operating technology systems will have a material
adverse effect on the Company's financial condition and results of operations.
The majority of any necessary system changes will be upgraded in the normal
course of business. The Company has initiated formal communications with all of
its significant suppliers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own year 2000 issues. There can be no guarantee that the systems of other
companies, on which the Company's systems rely, will be timely converted and
would not have an adverse effect on the Company's systems.
FUNDS FROM OPERATIONS BEFORE MINORITY INTERESTS
Management believes that in order to facilitate a clear understanding of
the consolidated historical operating results of the Company, Funds From
Operations ("FFO") should be considered. Management generally considers FFO to
be an appropriate measure of the performance of an equity REIT. Funds From
Operations before minority interests is defined as net income before minority
interests (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 as defined by the National Association of Real Estate Investment
Trusts in March 1995). The Company cautions that the calculation of FFO may vary
from entity to entity and as such the presentation of FFO by the Company may not
be comparable to other similarly titled measures of other reporting companies.
FFO does not represent cash flow from operating activities in accordance with
GAAP and is not indicative of cash available to fund all of the Company's cash
needs. FFO should not be considered as an alternative to net income or any other
GAAP measure as an indicator of performance and should not be considered as an
alternative to cash flow as a measure of liquidity or the ability to service
debt or to pay dividends. Funds From Operations before minority interests in
1997 decreased $21.5 million, or 32.4%, to $44.9 million compared to $66.4
million in 1996. The decline was principally due to the costs associated with
the Dole Cannery project, and increased general and administrative and interest
costs. Funds From Operations before minority interests increased $18.9 million,
or 39.7%, to $66.4 million in 1996 compared to $47.5 million in 1995. The
increase in 1996 was due to a full year of operations of outlet centers obtained
in the Merger compared to a partial year of operations in 1995.
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
<PAGE> 9
HORIZON GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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.
<PAGE> 10
HORIZON GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
---- ---- ----
(THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUE
Base rent................................................. $115,929 $109,983 $68,533
Percentage rent........................................... 3,975 3,154 2,441
Expense recoveries........................................ 34,088 33,934 18,930
Other..................................................... 8,471 7,428 4,025
-------- -------- -------
TOTAL REVENUE.......................................... 162,463 154,499 93,929
-------- -------- -------
EXPENSES
Property operating........................................ 25,662 23,192 14,351
Real estate taxes......................................... 13,297 11,942 6,148
Land leases and other..................................... 12,323 1,476 1,159
General and administrative................................ 13,259 11,764 4,970
Merger expense............................................ 1,001
Depreciation and amortization............................. 42,045 37,209 20,660
Impairment and severance.................................. 7,798 65,355
Interest.................................................. 48,894 38,694 19,270
-------- -------- -------
TOTAL EXPENSES......................................... 164,279 189,632 66,558
-------- -------- -------
INCOME (LOSS) BEFORE GAIN ON SALE OF REAL ESTATE, MINORITY
INTERESTS AND EXTRAORDINARY CHARGE........................ (1,816) (35,133) 27,371
Gain on sale of real estate............................... 8 563 776
-------- -------- -------
NET INCOME (LOSS) BEFORE MINORITY INTERESTS AND
EXTRAORDINARY CHARGE...................................... (1,808) (34,570) 28,147
Minority interests........................................ (2,483) 7,715 (6,776)
-------- -------- -------
NET INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE............... (4,291) (26,855) 21,371
Extraordinary charge on debt prepayment, net of minority
interests.............................................. (3,293) (419)
-------- -------- -------
NET INCOME (LOSS)........................................... $ (7,584) $(27,274) $21,371
======== ======== =======
Weighted average common shares outstanding -- basic......... 23,848 20,395 14,016
Earnings per share -- basic and diluted:
Net income (loss) per common share before gain on sale of
real estate and extraordinary charge...................... $ (.18) $ (1.34) $ 1.47
Gain on sale of real estate................................. .02 .05
Net loss on extraordinary charge............................ (.14) (.02)
-------- -------- -------
Net income (loss) per common share.......................... $ (.32) $ (1.34) $ 1.52
======== ======== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 11
HORIZON GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
---- ----
(THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Real estate, at cost:
Land...................................................... $ 145,184 $ 135,078
Buildings and improvements................................ 989,660 855,707
Construction in progress.................................. 3,178 71,113
Furniture, fixtures and equipment......................... 10,343 11,592
Less accumulated depreciation............................. (97,044) (65,490)
---------- ----------
TOTAL REAL ESTATE...................................... 1,051,321 1,008,000
Cash and cash equivalents................................... 12,902 16,209
Restricted cash............................................. 1,670 2,363
Tenant accounts receivable.................................. 6,804 6,807
Due from joint venture...................................... 11,639 13,764
Assets held for sale........................................ 1,933 13,075
Deferred costs.............................................. 20,126 20,696
Other assets................................................ 9,136 14,307
---------- ----------
TOTAL ASSETS........................................... $1,115,531 $1,095,221
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgages and other debt.................................... $ 626,097 $ 557,672
Accounts payable and accrued expenses....................... 21,006 31,300
Prepaid rents and other tenant liabilities.................. 6,071 5,568
Other liabilities........................................... 8,164 5,524
Dividends and distributions payable......................... 15 14,832
---------- ----------
TOTAL LIABILITIES...................................... 661,353 614,896
---------- ----------
MINORITY INTERESTS.......................................... 102,944 116,444
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 47,000 shares authorized,
24,067 and 22,826 issued and outstanding as of December
31, 1997 and 1996, respectively........................... 241 228
Additional paid-in capital.................................. 468,593 448,637
Dividends in excess of net income........................... (117,600) (84,984)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY............................. 351,234 363,881
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $1,115,531 $1,095,221
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 12
HORIZON GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL DIVIDENDS IN
---------------- PAID-IN EXCESS OF SHAREHOLDERS'
NUMBER AMOUNT CAPITAL NET INCOME EQUITY
------ ------ ---------- ------------ -------------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995................... 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 common 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)
Adjustments to minority interest for
ownership changes........................ 7,672 7,672
------ ---- -------- --------- --------
BALANCE, DECEMBER 31, 1996................. 22,826 228 448,637 (84,984) 363,881
Issuance of common stock................... 320 3 5,937 5,940
Units exchanged for common shares.......... 921 10 14,367 14,377
Net loss................................... (7,584) (7,584)
Dividends declared......................... (25,032) (25,032)
Adjustment to minority interests for
ownership changes........................ (348) (348)
------ ---- -------- --------- --------
BALANCE, DECEMBER 31, 1997................. 24,067 $241 $468,593 $(117,600) $351,234
====== ==== ======== ========= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 13
HORIZON GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before extraordinary charge............. $ (4,291) $ (26,855) $ 21,371
Adjustments to reconcile net income (loss) before
extraordinary charge to net cash provided by operating
activities:
Minority interests in net income (loss)................. 2,483 (7,715) 6,776
Depreciation............................................ 39,084 35,214 19,655
Amortization............................................ 5,631 2,700 2,081
Gain on sale of real estate............................. (8) (563) (776)
Loss on asset impairment................................ 7,798 61,653
Compensation related to stock bonus arrangement......... 9 97
Changes in assets and liabilities:
Tenant accounts receivable.............................. 3 (287) (4,198)
Due from joint venture.................................. 2,125 (13,763)
Deferred costs and other assets......................... 1,197 (14,401) (7,909)
Accounts payable and accrued expenses................... (7,326) (6,511) (19)
Other liabilities....................................... 2,541 1,897 (589)
Prepaid rents and other tenant liabilities.............. 541 1,064 (770)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 49,778 32,442 35,719
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for real estate and improvements........... (86,618) (95,999) (146,165)
Proceeds from sale of real estate....................... 4,643 1,508 1,185
Investment in restricted cash........................... (2,363)
Proceeds from restricted cash........................... 693
Business acquired, net of cash received................. (5,936)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES................... (81,282) (96,854) (150,916)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock.............. 5,940 45,124
Dividends............................................... (37,129) (40,883) (25,392)
Contribution from joint venture......................... 7,600 34,900
Distributions minority interests....................... (11,639) (13,385) (7,086)
Proceeds from borrowings................................ 261,738 197,067 137,451
Principal payments on mortgages and other debt.......... (42,543) (115,633) (27,378)
Debt issue costs........................................ (5,375) (6,501) (2,805)
Net proceeds (repayments) on revolving credit
facilities........................................... (150,395) (26,635) 42,122
Proceeds from the exercise of stock options............. 680
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES............... 28,197 74,054 117,592
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (3,307) 9,642 2,395
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR....................................... 16,209 6,567 4,172
--------- --------- ---------
END OF YEAR............................................. $ 12,902 $ 16,209 $ 6,567
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 14
HORIZON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Horizon Group, Inc. (the "Company") is a self-administered and self-managed
Real Estate Investment Trust ("REIT") that is engaged in the ownership,
acquisition, development and operation of outlet centers. The accompanying
financial statements include the accounts of the Company and its operating
subsidiary, Horizon/Glen Outlet Centers Limited Partnership ("Operating
Partnership"), which was 85.1% and 81.6% owned by the Company, its sole general
partner, as of December 31, 1997 and 1996, respectively.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION -- The accounts of all wholly or majority owned subsidiaries
of the Company and its Operating Partnership have been consolidated in the
accompanying financial statements. All inter-company accounts and transactions
have been eliminated in consolidation.
USE OF ESTIMATES -- The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
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.
At December 31, 1997 and 1996, the Company had an aggregate cost basis of
$860.0 million and $873.4 million, respectively, in its real estate assets for
federal income tax purposes. The cost of real estate assets are depreciated on
the straight-line method over estimated useful lives which are:
<TABLE>
<S> <C>
Buildings 31.5 years
Improvements 10 years or lease term, if less
Furniture, fixtures or equipment 3-7 years
</TABLE>
In accordance with FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the 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
1997 and 1996, events and circumstances occurred which required a $7.8 million
and $61.7 million loss on the impairment of assets, respectively. See Note 5. It
is reasonably possible that the estimate of the loss on asset impairment may
change in the near term because of the degree of judgment involved in
determining fair value.
Periodically, in the course of reviewing the performance of its outlet
centers, the Company will determine that certain outlet centers no longer meet
the parameters the Company sets forth for its operating properties, and such
outlet centers are designated to be sold based on the Company's intent to sell
such property. As of December 31, 1996, two such centers, Port Huron, Michigan
and Holland,
<PAGE> 15
HORIZON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Michigan were classified as held for sale. As of December 31, 1997, the
Algodones, New Mexico outlet center was classified as held for sale. See Note 5.
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 $3.6 million and $2.6 million as of December 31,
1997 and 1996, 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 $2.4 million and $2.1 million as of December 31, 1997 and 1996,
respectively. The provision for doubtful accounts in 1997, 1996 and 1995 was
$1.1 million, $2.1 million and $0.3 million, respectively.
OTHER REVENUE -- Other revenue consists primarily of development,
management and leasing income related to other unconsolidated or managed
properties, 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.
RESTRICTED CASH -- Restricted cash consists of amounts deposited to secure
outstanding letters of credit and other amounts which use by the Company is
contractually restricted.
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 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 include the minority interests of
unitholders in the Operating Partnership and the minority interests of the
Company's consolidated subsidiaries that are not wholly owned. 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 in the REIT was 14.9% and
18.4% at December 31, 1997 and 1996, respectively.
STOCK OPTION PLAN -- The Company has elected to apply Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," in
accounting for its employee stock options because, as discussed in Note 11, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation," requires the use of option valuation models that were not
developed for use on valuing employee stock options. Under APB 25, 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 -- In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share," which the Company adopted, as required by
SFAS 128, on December 31, 1997. SFAS 128 replaced the calculation
<PAGE> 16
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and when appropriate, restated to conform to the SFAS 128
requirements. The conversion of Units to Common Shares has been excluded from
the calculation of basic earnings per share due to certain restrictions on the
conversion of Units to Common Shares.
RECLASSIFICATIONS -- Certain reclassifications have been made to previously
reported balances 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
On November 12, 1997, the Company entered into a merger agreement (which
was amended and restated on February 1, 1998) with Prime Retail, Inc. ("Prime")
which provides for Prime to integrate 22 of the Company's existing outlet
centers into its portfolio and the Company's remaining 13 centers (as well as
two centers currently owned by Prime) to be operated by a newly formed entity.
The shares of this newly formed entity will be distributed following the merger,
on a pro rata basis, to the shareholders of both Prime and the Company. The
Company has expensed costs of $1.0 million in 1997 in conjunction with this
merger. The merger is conditioned upon, among other things, the approvals of
each company's shareholders and unit holders and the satisfaction of other
customary conditions.
As part of the proposed merger transaction with Prime, on February 1, 1998,
the Company entered into a definitive agreement with Castle & Cooke Properties,
Inc. to release the Company from its obligations under its long-term lease of
the Dole Cannery outlet center in Honolulu, Hawaii, in connection with the
formation of a joint venture with certain affiliates of Castle & Cooke, Inc.
("Castle & Cooke") to operate such property. Under the terms of the agreement,
Castle & Cooke, the landlord of the project, will release the Company from all
post-closing obligations under the lease, which expires in 2045, in exchange for
the Company's conveyance to the joint venture of its rights and obligations
under such lease. The agreement also provides that the Company will transfer to
such joint venture substantially all of the Company's economic interest in its
outlet center in Lake Elsinore, California together with vacant property located
adjacent to the center. The Company expects to record an approximate loss of
$30.0 million to reflect the transfer of this property and related financing to
the joint venture. The Company will hold a small minority interest in the joint
venture but will have no obligation or commitment with respect to the operations
of the Dole Cannery project following the closing. Closing of the transaction
remains subject to certain customary conditions. Completion of the proposed
merger with Prime is not a condition to such closing.
In December 1997, the Company acquired a 203,000 square foot outlet center
adjacent to one of the Company's existing centers for $38.5 million, which was
financed in its entirety.
In 1996, the Company formed a venture (the "Venture") with a pension fund
(the "Fund") advised by Heitman Capital Management, a company whose chairman of
its board is also the chairman of the board of the Company. The Company
contributed a 325,000 square foot center in the Finger Lakes region of New York
in 1996 and a 67,000 square foot expansion in 1997 to the Venture. In exchange
for the contribution, the Company received $34.9 million and $7.6 million in
cash in 1996 and 1997, respectively, and a 50% interest in the Venture. The Fund
contributed, concurrent with the Company's contribution of property, $34.9
million and $7.6 million in cash in 1996 and 1997, respectively, in return for a
$38.2 million preferred equity position that earns a 9.6% return on the
outstanding balance and a 50% ownership in the Venture. The Fund's entire equity
position, upon election of the Fund, is convertible into 2.2 million shares of
the Company's Common Stock, which represents an exercise price of $19.63 per
share (the approximate market price of the Company's Common Stock on the issue
date). The accompanying financial statements consolidate the financial position
and results of operations of the Venture and the interest of the Fund has been
reflected as a component of minority interests. The Venture
<PAGE> 17
HORIZON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
is consolidated as a result of the Company's control over the operations,
leasing activity and disposition of the center (the principal asset of the
Venture).
In July 1995, McArthur/Glen Realty Corp. ("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 Operating 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 the Company's Common
Stock and each outstanding McArthur/Glen L.P. partnership unit was converted
into .64 units of the limited partnership interest of the Operating Partnership.
Each outstanding unit of Horizon Outlet Centers Limited Partnership was
converted into one unit of limited partnership interest in the Operating
Partnership. The purchase price of $600.4 million consisted of cash of $.9
million, cash of $6.3 million representing costs incurred by the Company in
connection with the Merger, 13.2 million of the Company's common shares and
Operating 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, 1997 and 1996, the Company had accrued termination and
severance costs of $0.3 million and $1.1 million related to the Merger,
respectively. The Company paid $0.8 million in 1997, $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
year ended December 31, 1995 assumes the Merger occurred as of January 1, 1995
(in thousands, except per share amounts).
<TABLE>
<CAPTION>
PRO FORMA
1995
---------
<S> <C>
Total revenue $131,804
Net income 26,575
Net income per share $ 1.46
</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 January 1, 1995.
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.
NOTE 4 -- 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.
<PAGE> 18
Minimum future rentals to be received under non-cancelable leases as of
December 31, 1997 are summarized as follows (in thousands):
<TABLE>
<S> <C>
1998 $112,567
1999 101,666
2000 82,362
2001 61,890
2002 39,716
Thereafter 80,389
--------
Total $478,590
========
</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, 1997,
future minimum cash rental commitments were as follows (in thousands):
<TABLE>
<S> <C>
1998 $4,297
1999 4,297
2000 4,297
2001 4,909
2002 4,909
Thereafter 462,145
--------
Total $484,854
========
</TABLE>
The Company recognized lease expense of $8.2 million in 1997 and $0.6
million in 1996, 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 three years by $4.8 million per year and $4.2 million
in years four and five. As discussed in Note 3, the Company expects to be
released from its obligations under the Dole Cannery lease in conjunction with
its joint venture agreement with Castle & Cooke.
In July 1997, the Company entered into an agreement with Chelsea GCA Realty
Partnership, L.P. ("Chelsea") for lease of the Company's outlet center in
Algodones, New Mexico (the "Center"). The term of the lease was two years, but
could be terminated at any time after December 31, 1997 by Chelsea upon 30 days
written notice. The agreement gave Chelsea the right, during the lease term, to
relocate any and all of the tenants to Chelsea's outlet center located in Santa
Fe, New Mexico. Chelsea was responsible for all costs of operating the Center
during the lease term. At closing, Chelsea prepaid the non-refundable $4.0
million rent, $3.0 million for year one and $1.0 million for year two. Rental
payments were recognized for financial statement purposes on a straight-line
basis over an expected two year lease term. In November 1997, Chelsea gave
written notice of termination, effective January 2, 1998. The Company recorded
approximately $3.0 million of deferred rent in 1997 as a result of the revised
lease term.
NOTE 5 -- IMPAIRMENT AND SEVERANCE
Results of operations for 1997 include a charge for asset impairment of
$6.9 million to reduce six properties under sales agreements, subject to certain
contingencies, to an amount equal to their estimated sales proceeds, less costs
to dispose. At September 30, 1997, these six outlet centers were classified as
held for sale resulting from these sales agreements. In November 1997, one
property sold for $4.5 million. The remaining sales agreements were subsequently
terminated. It was management's decision to then pursue the sale of only one of
the outlet centers, the Algodones, New Mexico outlet center, which was
classified as held for sale as of December 31, 1997. The remaining four outlet
centers were subsequently reclassified
<PAGE> 19
HORIZON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to real estate assets at their fair values as of the date of the decision not to
sell. The results of operations in 1997 also include a $.9 million charge due to
discontinued development projects.
Results of operations for 1996 include a charge of $65.4 million, comprised
of a $61.7 million charge for asset impairment, a $2.2 million charge related to
discontinued development projects and a $1.5 million charge 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 6 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income (loss) before gain on sale of real
estate and extraordinary charge $(4,299) $(27,418) $20,595
Gain on sale of real estate 8 563 776
Extraordinary charge (3,293) (419)
------- -------- -------
Net income (loss) -- basic (7,584) (27,274) 21,371
Minority interest of Unitholders (1,362) (8,108) 6,734
------- -------- -------
Net income (loss) -- diluted $(8,946) $(35,382) $28,105
======= ======== =======
Denominator:
Weighted average common shares outstanding --
basic 23,848 20,395 14,016
Effect of converting units to shares 4,422 5,982 4,522
------- -------- -------
Weighted average common shares outstanding --
diluted 28,270 26,377 18,538
======= ======== =======
Basic and diluted earnings per share:
Net income (loss) before gain on sale of real
estate and extraordinary charge $ (.18) $ (1.34) $ 1.47
Gain on sale of real estate .02 .05
Extraordinary charge (.14) (.02)
------- -------- -------
Net income (loss) $ (.32) $ (1.34) $ 1.52
======= ======== =======
</TABLE>
Outstanding options and convertible minority interests, other than the
unitholders' minority interest, were excluded because the effect of such items
were anti-dilutive for the periods presented.
<PAGE> 20
NOTE 7 -- DEFERRED COSTS AND OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Deferred costs consist of the following (in thousands):
Deferred leasing costs $17,288 $14,660
Deferred financing costs 10,430 10,553
Other 1,709 1,425
------- -------
29,427 26,638
Accumulated amortization (9,301) (5,942)
------- -------
$20,126 $20,696
======= =======
Other assets consist of the following (in thousands):
Future development projects $ 1,879 $ 3,115
Escrow deposits 4,505 6,064
Other 2,752 5,128
------- -------
$ 9,136 $14,307
======= =======
</TABLE>
At December 31, 1997 and 1996, the Company had $11.6 million and $13.8
million, respectively, 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 ("Joint Venture"). The
Company is also a guarantor of a $17.0 million construction loan of the Joint
Venture. The outstanding balance of the loan was $11.6 million at December 31,
1997. Cash receipts from debt obtained and net cash flows generated by the Joint
Venture are applied to outstanding advances to the Joint Venture from its
partners prior to distributions to the partners.
NOTE 8 -- MORTGAGES AND OTHER DEBT
Mortgages and other debt consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1997 1996
---- ----
<S> <C> <C>
Mortgage notes payable $621,748 $402,891
Revolving credit facilities 4,000 132,675
Construction loans 21,720
Capital lease obligations 349 386
-------- --------
$626,097 $557,672
======== ========
</TABLE>
Debt matures during each of the five years subsequent to 1997 as follows
(in thousands):
<TABLE>
<S> <C>
1998 $ 9,566
1999 259,968
2000 29,131
2001 32,319
2002 80,707
Thereafter 214,406
--------
$626,097
========
</TABLE>
At December 31, 1997 and 1996, the Company had mortgage notes payable with
various lending institutions with outstanding amounts of $621.7 million and
$402.9 million, respectively. Investments in rental property collateralizes all
mortgage notes payable.
During 1997, the Company, through indirect wholly-owned subsidiaries
("Borrower"), entered into a $300.6 million credit facility with Lehman Brothers
Realty Corporation ("Lender"). The initial loan (the
<PAGE> 21
HORIZON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
"Initial Loan") of $250.6 million included an initial funding at closing of
$212.1 million and a reservation of financing in the amount of $38.5 million for
the acquisition of a specified property (the "Additional Loan"). The Borrower
may borrow an additional $50.0 million in increments of no less than $10.0
million each, subject to the satisfaction of certain conditions, including
predefined debt service coverage ratios (the "Second Loan" and collectively with
the "Initial Loan," including the "Additional Loan," the "Loan"). Subsequent to
the Initial Loan, the Company borrowed the entire $38.5 million of the
Additional Loan for the acquisition of the specified property and $11.0 million
of the Second Loan. While the Company has additional availability under the
Second Loan, additional borrowings may not be available due to the financial
ratios the Company is required to maintain. Interest on the Loan is payable at
the following rates: (i) 1.75% over the London interbank offering rate ("LIBOR")
for the Initial Loan, and (ii) 2.25% over LIBOR for the Second Loan or (iii) if
the Loan is converted to a prime rate loan under certain circumstances at the
Lender's discretion, the prime rate plus .75% with respect to the Initial Loan
and plus 1.25% with respect to the Second Loan. The maturity date of the Loan is
July 1, 1999, unless otherwise extended pursuant to the terms of the Loan. The
net proceeds of the Initial Loan were primarily used to retire the Company's
aggregate outstanding balances under the following: (i) a revolving credit
facility with a subsidiary of First Chicago NBD Corporation and other banks
("FCNBD"), (ii) construction financing facilities with Canadian Imperial Bank of
Commerce ("CIBC"), (iii) four mortgage notes payable and (iv) one revolving
credit facility. The Company recorded a $3.3 million extraordinary charge net of
minority interests comprised primarily of unamortized debt issuance costs
associated with the debt retired. The Loan is guaranteed by the Company and the
Operating Partnership and is secured by a pool of 16 properties transferred to
Borrower. The Loan requires the Company to maintain certain financial ratios and
restricts the amount of dividends and distributions that can be made. The
Company is currently in compliance with all its financial covenants relating to
its existing credit facilities at December 31, 1997.
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 has 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 amounts outstanding under revolving credit facilities.
Remaining notes payable mature at various dates through 2018. These loans
bear interest at fixed rates ranging between 7.875% and 10.5%. Of the December
31, 1997 mortgage notes payable balance, $61.6 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, 1997 a premium of $3.7 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%.
The Company has a $4.0 million revolving credit facility for working
capital requirements, expiring in August 1998, with interest charged at prime.
The outstanding balance on this line was $4.0 million at December 31, 1997. No
amounts were borrowed under this line at December 31, 1996. At December 31,
1996, the Company had a secured revolving line of credit from FCNBD of $205.0
million, of which $132.7 million was outstanding at that date. The FCNBD line
was repaid from proceeds from the Loan during 1997. Interest was based, at the
election of the Company, at prime plus .25% or LIBOR plus 2%. Average daily
short-term interest-bearing borrowings during 1997 and 1996 were $75.3 million
and $165.7 million, with a weighted average interest rate of 7.9% and 7.7%,
respectively. The maximum short-term borrowings outstanding at any month end
during 1997 and 1996 were $151.8 million and $198.7 million, respectively.
At December 31, 1996, the Company had a $125.0 million construction line of
credit (the "Construction Line") with CIBC which was charged 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%,
<PAGE> 22
or (ii) LIBOR plus 2.5%. As of December 31, 1996, borrowings under the
Construction Line were $21.7 million. Average daily short-term interest-bearing
borrowings during 1997 and 1996 were $11.9 million and $44.8 million,
respectively, with a weighted average interest rate of 9.4% and 8.6%,
respectively. The maximum short-term borrowings outstanding at any month end
during 1997 and 1996 were $28.0 million and $58.4 million, respectively. The
Construction Line was repaid in 1997 with proceeds from the Loan.
At December 31, 1997, the Company had an outstanding $0.7 million letter of
credit which was secured by cash on deposit.
The carrying amounts of the Company's borrowings under its notes payable
and revolving credit agreements approximate their fair value as of December 31,
1997 and 1996. The fair value of the Company's long-term debt is estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. 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, 1997, 1996 and 1995
(net of interest capitalized of $2.6 million, $8.9 million, and $5.1 million)
was $47.0 million, $38.7 million, and $15.7 million, respectively. Debt issue
cost amortization, classified as a component of interest expense, (net of
amounts capitalized of $0.1 million, $0.2 million, and $0.2 million) was $2.3
million, $1.1 million, and $0.9 million in 1997, 1996 and 1995, respectively.
NOTE 9 -- RELATED PARTY TRANSACTIONS
Summary information regarding income from dividends, development, leasing
and management services performed for properties owned by Jeffrey Kerr, who
served as Chief Executive Officer, President and Chairman of the Board of
Directors of the Company until February 8, 1997, and his affiliates, not
included in the consolidation in 1997, 1996, and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Development fees $426 $252 $
Leasing fees 32 34
Management fees 30 111
Other 23 14
---- ---- ----
Total $426 $337 $159
==== ==== ====
</TABLE>
In 1996, the Company leased an aircraft from a company owned by Mr. Kerr
for $0.2 million. At December 31, 1996, the Company had a $1.1 million
receivable from Mr. Kerr and his affiliates, which was repaid in 1997.
NOTE 10 -- 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 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 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 1997 and 1996, 0.3 million and 0.8 million
common shares were issued for total
<PAGE> 23
HORIZON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
proceeds of $5.9 million and $16.2 million, respectively. The Company has
discontinued further stock issuances under the Dividend Reinvestment Plan based
on the current market price of the Company's Common Stock.
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. 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, 1997. In
1997, 1996 and 1995, dividends declared of $1.05, $2.095 and $2.131 per share
represented a $.018, $1.213 and $1.392 distribution of ordinary income for
federal income tax purposes and a $1.032, $.691 and $.739 return of capital for
federal income tax purposes, respectively.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Dividends in excess of net income at beginning of period $ (84,984) $(14,093) $ (5,410)
Net income (loss) (7,584) (27,274) 21,371
Less: dividends declared (25,032) (43,617) (30,054)
--------- -------- --------
Dividends in excess of net income at end of period $(117,600) $(84,984) $(14,093)
========= ======== ========
Per common share:
Net income (loss) -- basic and diluted $ (.32) $ (1.34) $ 1.52
Dividends declared $ 1.05 $ 2.095 $ 2.131
</TABLE>
NOTE 11 -- STOCK OPTION PLAN AND STOCK BONUS ARRANGEMENT
Under the Company's 1997 Stock Option Plan, options to acquire 950,000
shares of Common Stock may be granted to key employees, including officers of
the Company, through 2007. 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 grant. During 1997, options to
purchase 545,000 shares were granted. At December 31, 1997, options to purchase
325,000 shares were exercisable.
Under the Company's 1993 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 outstanding options became 100%
vested. In 1996, options to purchase 383,677 shares were granted. At December
31, 1997 and 1996, options to acquire 419,669 and 621,000 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 1997, 1996 and 1995, options
to purchase 10,000, 15,000 and 35,000 shares, respectively, were granted. At
December 31, 1997 and 1996, options to acquire 28,333 and 25,000 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, 1997 and 1996,
options to acquire 656,432 shares were exercisable.
<PAGE> 24
The fair value of options granted for the purpose of presenting pro forma
information, in accordance with SFAS 123, has been estimated using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Expected dividend yield 7.0% 7.73%
Expected stock price volatility .268 .211
Risk free interest rate 6.0% 6.0%
Expected life of options 7 years 7 years
</TABLE>
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 loss and net loss per share (basic and diluted) for 1997, computed on a
pro forma basis under the requirements of SFAS 123 equals $8,070,000 and $.34,
respectively. Net income (loss) and earnings (loss) per share for 1996 and 1995
do not differ materially from the amounts reported in the Company's consolidated
financial statements. The pro forma computations completed for 1997, 1996 and
1995, however, may not be indicative of the effects of SFAS 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>
1997 1996 1995
------------------------ ------------------------ ------------------------
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, Beginning of
Year 1,646,709 $19.75-38.28 1,327,932 $21.50-38.28 657,900 $22.88-25.00
Granted 555,000 10.25-12.82 383,677 19.75-21.63 35,000 22.50-24.38
McArthur/Glen conversion -- -- -- -- 687,712 21.50-38.28
Exercised -- -- -- -- (31,280) 21.68-23.44
Canceled (503,443) 20.56-25.00 (64,900) 20.56-24.00 (21,400) 24.00
--------- ------------ --------- ------------ --------- ------------
Outstanding, End of Year 1,698,266 $10.25-38.28 1,646,709 $19.75-38.28 1,327,932 $21.50-38.28
========= ============ ========= ============ ========= ============
</TABLE>
The following table represents the weighted average per share price option
information:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average fair value of options granted $ 1.58 $ 1.85 $ 2.27
Weighted average exercise price on grant date 10.97 21.00 24.11
Weighted average exercise price at December 31,(a) 17.95 23.25 23.25
Weighted average price of options canceled during year 22.72 23.91 24.00
</TABLE>
- -------------------------
(a) Excludes 184,000 options at $33.59 per share and 159,000 stock options at
$38.28 per share in 1997 and 224,000 stock options at $33.59 and 115,000
stock options at $38.28 in 1996 and 1995.
The weighted average remaining contractual life of options outstanding at
December 31, 1997 and 1996 is 7.1 and 7.6 years, respectively.
<PAGE> 25
HORIZON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information regarding non-cash investing and
financing activities are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Reclassification of assets held for sale to real estate
assets $6,458
Reclassification of real estate assets to assets held for
sale 2,638 $13,075
Acquisition of property for debt assumed $8,700
</TABLE>
NOTE 13 -- CONTINGENCIES
In December 1997, a purported shareholder of the Company filed a class
action lawsuit naming the Company and several of its current and former
directors as defendants. The lawsuit claims, among other things, that the
directors of the Company breached their fiduciary duties to the Company's
shareholders in approving the merger between the Company and Prime and that the
consideration to be paid to the Company's shareholders in such a merger is
unfair and inadequate. The lawsuit requests that the merger be enjoined or, in
the event that the merger is consummated, that the merger be rescinded or
damages be awarded to class members. The Company believes the suit is without
merit and intends to vigorously defend the action. The Company is unable to
predict the likely outcome of the action, but management does not believe the
ultimate outcome of the pending litigation will have a material adverse impact
on the Company's financial position and results of operations.
<PAGE> 26
NOTE 14 -- QUARTERLY FINANCIAL DATA (Unaudited)
Summarized financial data by quarter for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------- ------------------ ------------------ -------------------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
Revenue $38,756 $38,761 $39,782 $ 45,164
Expenses 36,441 36,141 40,896 43,003
Impairment 6,877 921
Gain on sale of real estate 8
------- ------- ------- --------
Net income (loss) before minority
interests and extraordinary
charge 2,315 2,620 (7,991) 1,248
Minority interests (983) (1,088) 602 (1,014)
------- ------- ------- --------
Net income (loss) before
extraordinary charge 1,332 1,532 (7,389) 234
Extraordinary charge (3,293)
------- ------- ------- --------
Net income (loss) $ 1,332 $(1,761) $(7,389) $ 234
======= ======= ======= ========
Net income (loss) per share --
basic and diluted $ .06 $ (.07) $ (.31) $ .01
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 real estate 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 --
basic and diluted $ .39 $ .37 $ .28 $ (2.16)
1997 price range of
common stock:
High $ 19 3/8 $ 13 11/16 $ 13 1/2 $ 14 3/4
Low 12 7/8 10 3/8 11 13/16 10 11/16
1997 dividends per common share $ .35 $ .35 $ .35 $ --
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
</TABLE>
<PAGE> 27
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") as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
March 13, 1998
<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
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 March 13, 1998,
included in the 1997 Annual Report to Shareholders of the Company.
Our audits also included the financial statement schedule of the Company listed
in Item 14(a). This schedule ("Schedule III") 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 March 13, 1998, with
respect to the consolidated financial statements and Schedule III incorporated
by reference or included in this Annual Report (Form 10-K) of Horizon Group,
Inc. for the year ended December 31, 1997.
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 March 13, 1998, with respect to
the consolidated financial statements and Schedule III incorporated by reference
or included in this Annual Report (Form 10-K) of Horizon Group, Inc. for the
year ended December 31, 1997.
Chicago, Illinois
March 27, 1998
/s/ Ernst & Young LLP
------------------------
ERNST & YOUNG LLP
<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 and JAMES
S. WASSEL, 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 or
regulations 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, and any
amendment, post-effective amendment, supplement 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,
as of this 30th day of March, 1998.
/s/ Norman Perlmutter Director and Chairman of the Board of Directors
- ---------------------------
Norman Perlmutter
/s/ James S. Wassel Director, President and Chief Executive Officer
- --------------------------- (Principal Executive Officer and Principal
James S. Wassel Financial Officer)
/s/ Douglas Crocker II Director
- ---------------------------
Douglas Crocker II
/s/ William P. Dickey Director
- ---------------------------
William P. Dickey
/s/ Norman R. Higo Director
- ---------------------------
Norman R. Higo
/s/ Ronald L. Piasecki Director
- ---------------------------
Ronald L. Piasecki
/s/ Robert D. Perlmutter Director
- ---------------------------
Robert D. Perlmutter
/s/ Martin Sherman Director
- ---------------------------
Martin Sherman
/s/ Richard D. Stewart Assistant Controller (Principal Accounting
- --------------------------- Officer)
Richard D. Stewart
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,902
<SECURITIES> 0
<RECEIVABLES> 6,804
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,115,531
<CURRENT-LIABILITIES> 0
<BONDS> 626,097
0
0
<COMMON> 241
<OTHER-SE> 350,993
<TOTAL-LIABILITY-AND-EQUITY> 1,115,531
<SALES> 0
<TOTAL-REVENUES> 162,463
<CGS> 0
<TOTAL-COSTS> 81,004
<OTHER-EXPENSES> 13,259
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,894
<INCOME-PRETAX> (4,291)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,291)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,293)
<CHANGES> 0
<NET-INCOME> (7,584)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
