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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
AMENDMENT NO. 1
HORIZON GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
MICHIGAN 1-12424 38-2559212
(State of (Commission File (I.R.S. Employer
incorporation) Number) Identification No.)
</TABLE>
5000 HAKES DRIVE, NORTON SHORES, MICHIGAN 49441
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (616) 798-9100
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained herein which are not historical facts are forward
looking statements based upon economic forecasts, budgets, and other factors
which, by their nature, involve known risks, uncertainties and other factors
which may cause the actual results, performance or achievements of Horizon
Group, Inc. to be materially different from any future results implied by such
statements. In particular, among the factors that could cause actual results to
differ materially are the following: Business conditions and 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.
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.
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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.
On April 1, 1998, the Company consummated an agreement with Castle & Cooke
Properties, Inc. which released 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, released 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
provided that the Company 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 a net loss of $30.0 million to reflect the transfer of
the economic interest in this property. The Company holds a small minority
interest in the joint venture but has no obligation or commitment with respect
to the operations of the Dole Cannery project following the closing.
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):
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QUARTER ENDED FISCAL 1997 FISCAL 1996
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March 31.................................. $37,303 $37,004
June 30................................... 37,281 37,215
September 30.............................. 38,023 38,651
December 31............................... 43,119 40,916
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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%.
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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.
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
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purpose of exercising control; however, the Company may in the future acquire
all or substantially all of the securities or assets of other REITs, management
companies or similar entities where such investments would be consistent with
the Company's investment policies. In any event, the Company does not intend
that its investments in securities would require the Company to register as an
investment company under the Investment Company Act of 1940, and the Company
would divest securities before any such registration would be required.
POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES
The Company may, but does not presently intend to, make investments other
than as previously described. The Company has authority to offer its capital
shares or other senior securities in exchange for property and to repurchase or
otherwise reacquire its Common Stock or any other securities and may engage in
such activities in the future. During the last four years, the Company has not
engaged in trading, underwriting or agency distribution or resale of securities
of other issuers and does not intend to do so. At all times, the Company intends
to make investments in such a manner as to be consistent with the requirements
of the Internal Revenue Code of 1986 to qualify as a REIT unless, because of
changed circumstances, the Board of Directors determines that it is no longer in
the best interests of the Company to qualify as a REIT.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
such property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of toxic or hazardous substances can, under
certain circumstances, also result in claims for personal injury and property
damage. The presence of such substances may adversely affect the owner's ability
to sell such real estate or to borrow using such real estate as collateral. Such
costs or liabilities may exceed the value of such real estate. In addition,
persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal 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.
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.
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MANAGEMENT
The executive officers of the Company, and their ages and positions as of
December 31, 1997 were as follows:
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NAME AGE POSITION
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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
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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.
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
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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.
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").
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<CAPTION>
YEAR OF TOTAL
OPENING/ APPROXIMATE PERCENTAGE
MOST RECENT 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
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<S> <C> <C> <C> <C>
Bellport Outlet Center(1).............. 1992/1997 291,248 79.5% Anne Klein, Bass, Corning/
Patchogue, New York 3 Phases 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 Taylor,
Birch Run, Michigan 18 Phases 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, Fila,
Burlington, Washington 3 Phases 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
Calhoun, Georgia 2 Phases New York, Liz Claiborne,
London Fog, Mikasa, Nike,
Nine West, OshKosh B'Gosh,
Springmaid-Wamsutta, Van
Heusen
</TABLE>
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<TABLE>
<CAPTION>
YEAR OF TOTAL
OPENING/ APPROXIMATE PERCENTAGE
MOST RECENT 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
------------------ ------------- ----------- ---------- ---------------
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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
Finger Lakes Outlet Center(2).......... 1995/1997 391,746 98.2% Bass, BOSE, Brooks Brothers,
Waterloo, New York 3 Phases 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,
Gilroy, California 5 Phases Brooks 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
</TABLE>
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<TABLE>
<CAPTION>
YEAR OF TOTAL
OPENING/ APPROXIMATE PERCENTAGE
MOST RECENT 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>
Southwest Outlet Center at Hillsboro... 1989/1995 359,255 98.7% American Eagle, Corning/
Hillsboro, Texas 3 Phases Revere, Eddie Bauer, Etienne
Aigner, Fila, Florsheim, Gap,
Guess?, J. Crew, Jockey,
Jones New York, Levi's, Liz
Claiborne, Mikasa, Nike, Nine
West, OshKosh B'Gosh, Reebok,
Springmaid-Wamsutta, Van
Heusen
Horizon Outlet Center -- Holland....... 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 4 Phases 254,999 40.5% Big Dog Sportswear,
Honolulu, Hawaii California Luggage, Dockers,
Leathermode, Levi's, 'Van's
Jeffersonville Outlet Center........... 1993/1994 314,102 82.3% Anne Klein, BD Baggies, Bass,
Jeffersonville, Ohio 3 Phases Big 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
Kenosha, Wisconsin 4 Phases Brothers, 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/
Lake Elsinore, California 4 Phases Revere, Esprit, Etienne
Aigner, Florsheim, Jockey,
Jones New York, Levi's, Liz
Claiborne, London Fog,
Maidenform, Mikasa, Nike,
Nine West, NordicTrack,
OshKosh B'Gosh, Reebok, Sony,
Van Heusen, Vanity Fair
Horizon Outlet Center -- Laughlin...... 1996 258,312 79.2% Bass, Big Dog Sportswear,
Laughlin, Nevada Bugle Boy, Corning/Revere,
Dress Barn, Levi's, Linen
Barn, Maidenform, Mikasa,
OshKosh B'Gosh, Polo/Ralph
Lauren, Reebok, Van Heusen
</TABLE>
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<TABLE>
<CAPTION>
YEAR OF TOTAL
OPENING/ APPROXIMATE PERCENTAGE
MOST RECENT 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>
Berkshire Outlet Village............... 1997 224,363 99.2% Anne Klein, Coach, Dockers,
Lee, Massachusetts Etienne Aigner, 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
Medford, Minnesota 2 Phases Boy, Casual 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,
Michigan City, Indiana 7 Phases Anne Klein, 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
Monroe, Michigan 2 Phases Childrenswear, 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,
Norton Shores, Michigan Di's Hallmark, 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
Oshkosh, Wisconsin 2 Phases Bauer, 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,
Perryville, Maryland Etienne Aigner, Florsheim,
Jones New York, Liz
Claiborne, Mikasa, Nike, Van
Heusen
Pismo Beach Outlet Center.............. 1994 147,576 98.0% Anne Klein, Bass, Big Dog
Pismo Beach, California Sportswear, Florsheim,
Jockey, Jones New York,
Levi's, London Fog,
Maidenform, Mikasa, Nine
West, Tommy Hilfiger, Van
Heusen
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
YEAR OF TOTAL
OPENING/ APPROXIMATE PERCENTAGE
MOST RECENT 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>
Chesapeake Village at Queenstown....... 1989/1993 220,415 100.0% Big Dog Sportswear, Brooks
Queenstown, Maryland 5 Phases Brothers, 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,
Sealy, Texas 2 Phases Florsheim, J. Crew, Jockey,
Jones New York, Liz
Claiborne, Mikasa, Nine West,
OshKosh B'Gosh, Reebok,
Spiegel, Springmaid-Wamsutta,
Van Heusen
Silverthorne Factory Stores............ 1988/1993 257,470 92.9% American Eagle, Anne Klein,
Silverthorne, Colorado 3 Phases Bass, Big Dog Sportswear,
Dansk, Eddie Bauer, Fila,
Gap, Genuine Article, J.
Crew, Jones New York, Liz
Claiborne, London Fog,
Maidenform, Mikasa, Nike,
Nine West, Tommy Hilfiger,
Van Heusen
Horizon Outlet Center.................. 1990 199,962 80.0% Bass, Brooks Brothers, Bugle
- -- Somerset Boy, Casual Corner, Corning/
Somerset, Pennsylvania Revere, Dress Barn, Jones 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
Tracy, California Sportswear, Casual 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
Traverse City 2 Phases Childrenswear,
Traverse City, Michigan Corning/Revere, Dansk,
Levi's, London Fog, S&K
Menswear, Van Heusen
Horizon Outlet Center.................. 1995 139,433 83.7% Bass, Big Dog Sportswear,
- -- Tulare Corning/Revere, Jones New
Tulare, California York, Linen Barn, Maidenform,
Mikasa, Polo/Ralph Lauren,
Reebok, Van Heusen
Horizon Outlet Center.................. 1994/1995 323,463 94.4% Ann Taylor, Anne Klein, Big
- -- Vero Beach 2 Phases Dog Sportswear, BOSE, Bugle
Vero Beach, Florida Boy, Dansk, Etienne Aigner,
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
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
YEAR OF TOTAL
OPENING/ APPROXIMATE PERCENTAGE
MOST RECENT 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>
Warrenton Outlet Center................ 1993/1995 200,363 81.7% Bass, Corning/Revere, Jockey,
Warrenton, Missouri 2 Phases Jones New 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,
Outlet Center 4 Phases Bass, BOSE, Brooks Brothers,
Williamsburg, Virginia Coach, Eddie Bauer, Etienne
Aigner, Guess?, J. Crew,
Jones New York, Liz
Claiborne, Lladro, Mikasa,
Nautica, Nike, Nine West,
NordicTrack, OshKosh B'Gosh,
Reebok, Timberland, Tommy
Hilfiger, Van Heusen,
Waterford Wedgewood
Horizon Outlet Center.................. 1992/1994 249,208 92.6% American Eagle, Big Dog
Woodbury 3 Phases Sportswear, Bugle Boy, Casual
Woodbury, Minnesota Corner, Corning/Revere, Eddie
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>
- -------------------------
(1) Owned by a partnership in which the Company has an interest.
(2) Owned by a joint venture with an institutional investor.
(3) Subject to an agreement with Castle & Cooke, See "Business Developments".
(4) As of January 31, 1998, the center was unoccupied and held for sale. See
note 3 to the Consolidated Financial Statements.
EXECUTIVE OFFICES
The Company owns its 35,000 square foot executive offices in Norton Shores,
Michigan.
12
<PAGE> 13
STATE INFORMATION
The following table indicates, as of December 31, 1997, certain information
regarding the outlet centers presented by state.
<TABLE>
<CAPTION>
PERCENTAGE
OF GLA
PERCENTAGE LEASED ON TOTAL
NUMBER OF TOTAL GLA OF TOTAL DECEMBER 31, OCCUPIED
STATE PROPERTIES (SQ. FT.) GLA 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............................ 1 314,102 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>
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.
13
<PAGE> 14
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 GLA OCCUPIED 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>
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 ANNUAL
DECEMBER 31, # OF LEASES GLA (SQ. FT.) BASE RENT
------------ ----------- ------------- ---------
<S> <C> <C> <C>
1998.................................................... 263 805,337 $11,233,077
1999.................................................... 318 1,056,048 16,302,012
2000.................................................... 388 1,331,800 20,602,713
2001.................................................... 346 1,281,811 20,215,217
2002.................................................... 341 1,288,618 20,066,706
2003.................................................... 90 498,550 6,862,590
2004.................................................... 71 379,366 5,452,987
2005.................................................... 49 374,102 4,306,609
2006.................................................... 41 412,316 4,122,149
2007.................................................... 23 172,164 1,948,703
</TABLE>
14
<PAGE> 15
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 1,111,300 Jun-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
------------ ----------- ------------
$621,748,390 $46,348,400 $569,804,831
============ =========== ============
</TABLE>
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
15
<PAGE> 16
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.
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 Venture is a limited liability corporation in which the Company
owns 50% of the voting interest; therefore, the Venture is accounted for under
the equity method of accounting.
TAXES
At December 31, 1997, the Company had an aggregate cost basis of $868.9
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 $13.0 million. Estimated aggregate 1998 real
estate taxes, taking into account planned expansions, are approximately $14.1
million.
16
<PAGE> 17
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.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to
this report to be signed on its behalf by the undersigned, there unto duly
authorized.
Dated: May 11, 1998 HORIZON GROUP, INC.
By: /s/ JAMES S. WASSEL
--------------------------------------
Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 to this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C>
NORMAN PERLMUTTER* Director and Chairman of the Board of May 11, 1998
--------------------------------------------- Directors
Norman Perlmutter
/s/ JAMES S. WASSEL Director, President and Chief May 11, 1998
--------------------------------------------- Executive Officer (Principal
James S. Wassel Executive Officer) and Principal
Financial Officer)
DOUGLAS CROCKER II* Director May 11, 1998
---------------------------------------------
Douglas Crocker II
WILLIAM P. DICKEY* Director May 11, 1998
---------------------------------------------
William P. Dickey
NORMAN R. HIGO* Director May 11, 1998
---------------------------------------------
Norman R. Higo
RONALD L. PIASECKI* Director May 11, 1998
---------------------------------------------
Ronald L. Piasecki
ROBERT D. PERLMUTTER* Director May 11, 1998
---------------------------------------------
Robert D. Perlmutter
MARTIN SHERMAN* Director May 11, 1998
---------------------------------------------
Martin Sherman
RICHARD D. STEWART* Assistant Controller (Principal May 11, 1998
--------------------------------------------- Accounting Officer)
Richard D. Stewart
*By: /s/ JAMES S. WASSEL
---------------------------------------
James S. Wassel
Attorney-in-fact
</TABLE>
18
<PAGE> 19
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.
F-1
<PAGE> 20
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
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 --
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> 21
HORIZON GROUP, INC.
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO INITIAL
DEVELOPMENT OR
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 $132,011,200 $829,339,400 $12,577,000 $131,183,700
============ ============ ============ =========== ============
<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 --
------------ ------------ -------------- -----------
$144,588,200 $960,523,100 $1,105,111,300 $95,511,600
============ ============ ============== ===========
</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 $868.9 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> 22
HORIZON GROUP, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATION DEPRECIATION CONT. -
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................... $1,037,734,500 $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) --
Contribution of Assets to Venture......... (7,497,900) (35,756,000) --
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......................... $1,105,111,300 $1,037,734,500 $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................... $ 65,401,000 $ 37,838,900 $ 18,154,300
Additions during Period
Depreciation.............................. 37,449,700 34,729,400 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......................... $ 95,511,600 $ 65,401,000 $ 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> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*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]
*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)]
</TABLE>
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*10.14 Amendment No. 1 to Consulting and Non-Competition Agreement
by and between McArthur/Glen Realty Corp., McG Outlet
Centers Limited Partnership, Horizon Outlet Centers, Inc.,
Horizon Outlet Centers Limited Partnership, Cheryl McArthur
and Horizon/Glen Outlet Centers Limited Partnership dated as
of March 13, 1995 [Incorporated by reference to Exhibit
2.3.1 to Registration Statement No. 33-91236]
*10.15 Agreement dated as of May 15, 1995 by and between
McArthur/Glen Realty Corp., McG Outlet Centers Limited
Partnership, Horizon Outlet Centers, Inc., Horizon Outlet
Centers Limited Partnership, Cheryl McArthur and
Horizon/Glen Outlet Centers Limited Partnership
[Incorporated by reference to Exhibit 10(a) to the Company's
current report on Form 8-K dated May 16, 1995 (SEC File No.
1-12424)]
*10.16 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)]
*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 Ex-
hibit (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
</TABLE>
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
*21 Subsidiaries of the Company
23 Consent of Independent Auditors
*24 Powers of Attorney
27.1 Financial Data Schedule
</TABLE>
- -------------------------
* Previously filed.
<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................................. $ 155,726 $ 153,786 $ 93,929 $ 43,267 $ 22,247
Expenses................................ 153,220 123,929 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.................. (5,292) (35,498) 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.... (5,284) (34,935) 28,147 17,481 3,245
Minority interests...................... 993 8,080 (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.......................... $1,009,599 $ 972,334 $1,023,745 $ 287,833 $176,512
Total assets............................ 1,072,666 1,059,539 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)....................... $ 43,406 $ 66,258 $ 47,549 $ 25,656 $ 6,860
Cash flows provided by (used in):
Operating activities.................. 46,010 29,947 35,719 26,713 9,557
Investing activities(e)............... (75,126) (59,535) (150,916) (114,330) (93,663)
Financing activities.................. 24,743 39,485 117,592 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.)
2
<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 $(5,284) $(34,935) $28,147 $17,481 $3,245
FFO Adjustments:
Depreciation and amortization 39,634 36,367 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 265 34 -- -- --
------- -------- ------- ------- ------
Total FFO adjustments 48,690 101,193 19,402 8,175 3,615
------- -------- ------- ------- ------
FFO $43,406 $ 66,258 $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.
3
<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.
On April 1, 1998, the Company consummated an agreement with Castle & Cooke
Properties, Inc. which released 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, released
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 provided that the
Company transfer to such
4
<PAGE> 4
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 net loss of
$30.0 million to reflect the transfer of the economic interest in this property.
The Company holds a small minority interest in the joint venture but has no
obligation or commitment with respect to the operations of the Dole Cannery
project following the closing.
CONSOLIDATED RESULTS OF OPERATIONS
1997 COMPARED TO 1996
The net loss before minority interests and extraordinary charge was $5.3
million in 1997 compared to net loss before minority interests and extraordinary
charge of $34.9 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 $1.9 million, or 1.2%, to $155.7 million in 1997
from $153.8 million in 1996. This increase resulted principally from increased
GLA due to the Portfolio Expansion. Base rent increased $1.3 million, or 1.2%,
to $110.8 million in 1997 compared to $109.5 million in 1996. Percent rent was
$3.9 million in 1997 and $3.1 million in 1996, an increase of 25%. 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 decreased $1.1 million, or 3.3%, to $32.7 million
in 1997 compared to $33.8 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 87.3% of property operating and real estate tax
expenses in 1997 compared to 96.6% in 1996.
Other income increased $1.0 million, or 13.5%, to $8.4 million in 1997
compared to $7.4 million in 1996 principally from higher temporary tenant
income.
Property operating and real estate tax expenses increased $2.5 million, or
7.1%, to $37.4 million in 1997 from $35.0 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 $1.3 million, or 11.1%, to
$13.0 million in 1997 compared to $11.7 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 8.4% in 1997 compared to 7.6% in 1996.
Depreciation and amortization increased $3.4 million, or 9.2%, to $40.5
million in 1997 compared to $37.1 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.
A loss on asset impairment of $6.9 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
5
<PAGE> 5
HORIZON GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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 $34.9
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 $59.9 million, or 63.8%, to $153.8 million in 1996
from $93.9 million in 1995. Base rent increased $41.0 million, or 59.9%, to
$109.5 million in 1996 compared to $68.5 million in 1995. Percent rent was $3.1
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 $14.9 million, or 78.8%, to $33.8
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 $14.5
million, or 70.7%, to $35.0 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 $6.7 million, or 134.0%, to
$11.7 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 $16.4 million, or 79.2%, to $37.1
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.
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
6
<PAGE> 6
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 $2.3
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 of December 31, 1997. Interest
on borrowings under this facility is charged at the prime rate and the facility
is recourse to the Company.
7
<PAGE> 7
HORIZON GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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 Venture is a limited liability corporation in
which the Company owns 50% of the voting interest; therefore, the Venture is
accounted for under the equity method of accounting.
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
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.
8
<PAGE> 8
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 $22.9 million, or 34.5%, to $43.4 million compared to $66.3
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 $18.8 million,
or 39.6%, to $66.3 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
Horizon Group, Inc., to be materially different from any future results implied
by such statements. In
9
<PAGE> 9
HORIZON GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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.
10
<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................................................. $110,753 $109,462 $68,533
Percentage rent........................................... 3,924 3,136 2,441
Expense recoveries........................................ 32,686 33,776 18,930
Other..................................................... 8,363 7,412 4,025
-------- -------- -------
TOTAL REVENUE.......................................... 155,726 153,786 93,929
-------- -------- -------
EXPENSES
Property operating........................................ 24,511 23,041 14,351
Real estate taxes......................................... 12,930 11,913 6,148
Land leases and other..................................... 12,317 1,476 1,159
General and administrative................................ 13,047 11,749 4,970
Merger expense............................................ 1,001
Depreciation and amortization............................. 40,525 37,057 20,660
Impairment and severance.................................. 7,798 65,355
Interest.................................................. 48,889 38,693 19,270
-------- -------- -------
TOTAL EXPENSES......................................... 161,018 189,284 66,558
-------- -------- -------
INCOME (LOSS) BEFORE GAIN ON SALE OF REAL ESTATE, MINORITY
INTERESTS AND EXTRAORDINARY CHARGE........................ (5,292) (35,498) 27,371
Gain on sale of real estate............................... 8 563 776
-------- -------- -------
NET INCOME (LOSS) BEFORE MINORITY INTERESTS AND
EXTRAORDINARY CHARGE...................................... (5,284) (34,935) 28,147
Minority interests........................................ 993 8,080 (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.
11
<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...................................................... $ 144,589 $ 134,506
Buildings and improvements................................ 947,144 830,548
Construction in progress.................................. 3,120 61,157
Furniture, fixtures and equipment......................... 10,258 11,523
Less accumulated depreciation............................. (95,512) (65,400)
---------- ----------
TOTAL REAL ESTATE...................................... 1,009,599 972,334
Cash and cash equivalents................................... 12,091 16,464
Restricted cash............................................. 751
Tenant accounts receivable.................................. 6,489 6,471
Due from joint venture...................................... 11,639 13,764
Assets held for sale........................................ 1,933 13,075
Deferred costs.............................................. 18,708 20,145
Other assets................................................ 11,456 17,286
---------- ----------
TOTAL ASSETS........................................... $1,072,666 $1,059,539
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgages and other debt.................................... $ 626,097 $ 557,672
Accounts payable and accrued expenses....................... 20,516 30,709
Prepaid rents and other tenant liabilities.................. 5,769 5,411
Other liabilities........................................... 7,955 5,524
Dividends and distributions payable......................... 15 14,832
---------- ----------
TOTAL LIABILITIES...................................... 660,352 614,148
---------- ----------
MINORITY INTERESTS.......................................... 61,080 81,510
---------- ----------
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............. $1,072,666 $1,059,539
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
12
<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.
13
<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)................. (993) (8,080) 6,776
Depreciation............................................ 37,642 35,069 19,655
Amortization............................................ 5,524 2,690 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.............................. (18) 46 (4,198)
Due from joint venture.................................. 2,125 (13,763)
Deferred costs and other assets......................... 2,727 (15,961) (7,909)
Accounts payable and accrued expenses................... (7,224) (7,103) (19)
Other liabilities....................................... 2,332 1,897 (589)
Prepaid rents and other tenant liabilities.............. 396 908 (770)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 46,010 29,947 35,719
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for real estate and improvements........... (86,618) (95,943) (146,165)
Proceeds from sale of real estate....................... 4,643 1,508 1,185
Investment in restricted cash........................... (751)
Distributions from joint venture........................ 7,600 34,900
Business acquired, net of cash received................. (5,936)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES................... (75,126) (59,535) (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)
Distributions to minority interests..................... (7,493) (13,054) (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............... 24,743 39,485 117,592
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (4,373) 9,897 2,395
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR....................................... 16,464 6,567 4,172
--------- --------- ---------
END OF YEAR............................................. $ 12,091 $ 16,464 $ 6,567
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
14
<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
$868.9 million and $855.8 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,
15
<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 $3.3 million and $2.5 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
16
<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.
On April 1, 1998, the Company consummated an agreement with Castle & Cooke
Properties, Inc. which released 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, released
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 provided that the
Company 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 net loss of $30.0 million to reflect the transfer of the
economic interest in this property. The Company holds a small minority interest
in the joint venture but has no obligation or commitment with respect to the
operations of the Dole Cannery project following the 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 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.
17
<PAGE> 17
HORIZON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 $106,748
1999 95,787
2000 77,397
2001 57,875
2002 37,648
Thereafter 75,683
--------
Total $451,138
========
</TABLE>
The Company is subject to the usual business risks associated with the
collection of the above scheduled rentals.
18
<PAGE> 18
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 $ 1,864
1999 1,053
2000 1,053
2001 1,053
2002 1,053
Thereafter 75,091
-------
Total $81,167
=======
</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. As discussed in Note 3 and reflected in the above table,
the Company was 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 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.
19
<PAGE> 19
HORIZON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 venture interests, other than the
unitholders' minority interest, were excluded because the effect of such items
were anti-dilutive for the periods presented.
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 $16,838 $14,650
Deferred financing costs 10,410 10,533
Other 646 895
------- -------
27,894 26,078
Accumulated amortization (9,186) (5,933)
------- -------
$18,708 $20,145
======= =======
Other assets consist of the following (in thousands):
Future development projects $ 1,879 $ 3,115
Escrow deposits 4,505 6,064
Investment in Finger Lakes venture 2,320 2,979
Other 2,752 5,128
------- -------
$11,456 $17,286
======= =======
</TABLE>
20
<PAGE> 20
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.
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 Venture is a limited liability corporation in which the Company owns
50% of the voting interest, therefore, the Venture is accounted for under the
equity method of accounting.
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 "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").
21
<PAGE> 21
HORIZON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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%, 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
22
<PAGE> 22
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 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.
23
<PAGE> 23
HORIZON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
24
<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.
25
<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
Contribution of assets to Venture 8,471 36,317
</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.
26
<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>
1997
Revenue $37,303 $37,281 $38,023 $ 43,119
Expenses 35,693 35,486 40,031 42,010
Impairment 6,877 921
Gain on sale of real estate 8
------- ------- ------- --------
Net income (loss) before minority
interests and extraordinary charge 1,610 1,795 (8,885) 196
Minority interests (278) (263) 1,496 38
------- ------- ------- --------
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 $ 40,916
Expenses 26,788 27,724 31,307 38,110
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 (62,418)
Minority interests (2,601) (2,286) (1,576) 14,543
------- ------- ------- --------
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>
27
<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,
except for the second
paragraph of Note 3 and
the fourth and fifth paragraphs
of Note 4, as to which the date is
April 1, 1998
28
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K/A)
of Horizon Group, Inc. (the "Company") of our report dated March 13, 1998
(except for the second paragraph of Note 3 and the fourth and fifth paragraphs
of Note 4, as to which the date is April 1, 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
(except for the second paragraph of Note 3 and the fourth and fifth paragraphs
of Note 4, as to which the date is April 1, 1998), with respect to the
consolidated financial statements and Schedule III incorporated by reference
or included in this Annual Report (Form 10-K/A) 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 (except for the
second paragraph of Note 3 and the fourth and fifth paragraphs of Note 4, as to
which the date is April 1, 1998), with respect to the consolidated financial
statements and Schedule III incorporated by reference or included in this
Annual Report (Form 10-K/A) of Horizon Group, Inc. for the year ended
December 31, 1997.
/s/ Ernst & Young LLP
------------------------
ERNST & YOUNG LLP
Chicago, Illinois
May 7, 1998
<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> 12,091
<SECURITIES> 0
<RECEIVABLES> 6,489
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,009,599
<CURRENT-LIABILITIES> 0
<BONDS> 626,097
0
0
<COMMON> 241
<OTHER-SE> 350,993
<TOTAL-LIABILITY-AND-EQUITY> 1,009,599
<SALES> 0
<TOTAL-REVENUES> 155,726
<CGS> 0
<TOTAL-COSTS> 90,283
<OTHER-EXPENSES> 13,047
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,889
<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>
