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.
On November 12, 1997, the Company entered into a merger agreement (which was amended and restated on February 1, 1998) with Prime Retail, Inc. ("Prime") which provides for Prime to integrate 22 of the Company's existing outlet centers into its portfolio and the Company's remaining 13 centers (as well as two centers currently owned by Prime) to be operated by a newly formed entity. The shares of the newly formed entity will be distributed following the merger, on a pro rata basis, to the shareholders of both Prime and the Company. The transaction will establish Prime as the largest owner/operator and developer of factory outlet centers in the United States, with 48 centers totaling 13.4 million square feet of GLA in 26 states. The merger is conditioned upon, among other things, the approvals of each company's shareholders and unit holders and the satisfaction of other customary conditions.
As part of the proposed merger transaction with Prime, on February 1, 1998, the Company entered into a definitive agreement with Castle & Cooke Properties, Inc. to release the Company from its obligations under its long-term lease of the Dole Cannery outlet center in Honolulu, Hawaii, in connection with the formation of a joint venture with certain affiliates of Castle & Cooke, Inc. ("Castle & Cooke") to operate such property. Under the terms of the agreement, Castle & Cooke Properties, Inc., the landlord of the project, will release the Company from all post-closing obligations under the lease, which expires in 2045, in exchange for the Company's conveyance to the joint venture of its rights and obligations under such lease. The agreement also provides that the Company will transfer to such joint venture substantially all of the Company's economic interest in its outlet center in Lake Elsinore, California together with vacant property located adjacent to the center. The Company will hold a small minority interest in the joint venture but will have no obligation or commitment with respect to the operations of the Dole Cannery project following the closing. Closing of the transaction remains subject to certain customary conditions but is expected to occur in the second quarter of 1998. Completion of the proposed merger with Prime is not a condition to such closing.
BUSINESS STRATEGY
The Company's business strategy consists primarily of increasing its focus on the leasing of existing outlet centers, reducing general and administrative expenses and limiting new development to the expansion of certain selected existing outlet centers where the Company anticipates high demand for additional retail space. While the Company may engage in new developments or acquisitions, it will do so only in limited circumstances with compelling business rationale. In addition, the Company is also attempting to divest itself of one of its centers, and may also divest itself of additional centers.
SEASONALITY - The Company's revenues are primarily derived from long-term leases with five to ten year terms. Accordingly, the Company's revenues are not significantly affected by seasonal factors. The Company does, however, generate a small amount of additional revenue, primarily from temporary tenant income, in the fourth quarter resulting from the holiday season. Revenues in the fourth quarter of 1997 also include $3.0 million from the acceleration of revenue from a two year lease of its New Mexico outlet center that was terminated early. Revenues for each quarter of 1997 and 1996 are as follows (in thousands):
QUARTER ENDED FISCAL 1997 FISCAL 1996 ------------- ----------- -----------
March 31 $38,756 $37,004 June 30 38,761 37,215 September 30 39,782 38,651 December 31 45,164 41,629
FINANCING - In 1997, the Company financed its operations, expansions and development with undistributed cash flow, bank or other borrowings from institutional lenders and the issuance of equity securities. As of December 31, 1997, the Company had aggregate commitments under existing revolving lines of credit of $4.0 million. While the Company has additional availability under its loan agreements with its lenders, additional borrowings are effectively limited by the financial ratios the Company is required to maintain. As of December 31, 1997, the Company had a debt to total market capitalization (the aggregate of the market value of the Company's outstanding Common Stock, including Units exchangeable for Common Stock, and its long-term debt) ratio of approximately 67%.
The Company's general financing strategy has been not to incur additional debt if such additional debt would cause its ratio of debt to total market capitalization to exceed 40%, however, the Company may incur additional debt if the total consolidated debt of the Company does not exceed 55% of the then fair market value of the real estate owned by the Company. Due primarily to the decline in the market price of Horizon Common Stock from the time the debt was incurred, the Company's debt to total market capitalization at December 31, 1997 exceeded 40%; however, the Company does not believe that its total consolidated debt exceeded 55% of the current market value of the real estate owned by the Company at December 31, 1997. The Company may from time to time re-evaluate and modify its debt policies in light of then current economic conditions, relative costs of debt and equity capital, the market value of its properties, growth and acquisition opportunities and other factors. The governing instruments of the Company do not contain any limitations on the amount of indebtedness the Company may incur.
Any additional debt financing, including additional lines of credit, may be secured by mortgages on its properties. Such mortgages may be recourse or non-recourse and/or cross-collateralized and/or may contain cross-default provisions. The Company does not have a policy limiting the number of mortgages that may be placed on, or the amount of indebtedness that may be secured by, any particular property, but mortgage financing instruments usually limit additional indebtedness on such properties.
COMPETITION
The Company's outlet centers compete for customers primarily with outlet centers built and operated by other developers, traditional shopping malls and "off-price" retailers. The Company believes that the location of the other outlet centers near its centers generally is not harmful to its business since a concentration of value retail stores tends to create a shopping destination. The Company carefully considers the degree of existing and planned competition in a proposed area before deciding to build or acquire a new center or expand an existing center.
The Company's outlet centers compete to a limited extent with various full- and off-price retailers in the highly fragmented retailing industry. However, the Company believes that the majority of its customers visit outlet centers because they are intent on buying first-quality, name brand goods at discounted prices. Traditional full- and off-price retailers are often unable to provide such a variety of products at attractive prices.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following supplements the discussion of the Company's primary strategy as set forth elsewhere in this report. The Company's policies with respect to those activities and the matters discussed below have been determined by the Board of Directors of the Company and may be amended or revised from time to time at the discretion of the Board of Directors without a vote of the shareholders of the Company.
INVESTMENT POLICIES - The Company may expand existing properties, develop new properties, purchase or lease income-producing properties for long-term investment, expand and improve the properties it owns or sell such properties, in whole or in part, when circumstances warrant. The Company may also participate with other entities in property ownership through joint ventures or other types of co-ownership. Equity investments may be subject to existing mortgage financing and other indebtedness which have priority over the equity interest of the Company.
While the Company has emphasized equity real estate investments, it may, in its discretion, invest in mortgages and other real estate interests. The Company has not previously invested in mortgages and it does not presently intend to invest to a significant extent in mortgages or deeds of trust, but it may invest in participating or convertible mortgages if it concludes that it may benefit from the cash flow or any appreciation in the value of the subject property.
Subject to the percentage of ownership limitations and gross income test which must be satisfied to qualify as a REIT, the Company may also invest in securities of concerns engaged in real estate activities or in securities of other issuers. The Company does not intend to invest in the securities of any other issuer for the purpose of exercising control; however, the Company may in the future acquire all or substantially all of the securities or assets of other REITs, management companies or similar entities where such investments would be consistent with the Company's investment policies. In any event, the Company does not intend that its investments in securities would require the Company to register as an investment company under the Investment Company Act of 1940, and the Company would divest securities before any such registration would be required.
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.
MANAGEMENT
The executive officers of the Company, and their ages and positions as of December 31, 1997 were as follows:
NAME AGE POSITION ---- --- --------
James S. Wassel 47 Chief Executive Officer, President and Director
Paul Comarato 46 Vice President of Operations/Asset Management
James S. Harris 49 Vice President of Retail Strategies
Stephen J. Moore 44 Senior Vice President of Marketing and Communications
Thomas A. Rumptz 37 Vice President of Real Estate
JAMES S. WASSEL. Mr. Wassel joined Horizon as President in April 1997 and has served as President and Chief Executive Officer of Horizon since he was made CEO in June 1997. From June 1994 to April 1997, Mr. Wassel served as Senior Vice President of Asset Management with Crescent Real Estate Equities of Fort Worth, Texas ("Crescent"), where he oversaw asset management, strategic planning and implementation of value enhancement programs for Crescent's 30 million square foot portfolio of commercial real estate. From November 1990 to January 1993, Mr. Wassel was a partner and Director of Asset Management with Trammell Crow Realty Advisors of Dallas, Texas ("Trammell Crow"). While with Trammell Crow, Mr. Wassel oversaw the disposition of $250 million in assets, the redevelopment of other portfolio properties and was responsible for the asset management of a portfolio of over $3.0 billion in assets. In addition, Mr. Wassel also served as President of Trammell Crow Real Estate Investors, a REIT, where he oversaw the revitalization of that company's under-performing industrial and office properties. From September 1987 to October 1990, Mr. Wassel served as Partner/Director of Asset Management with Jones Lang Wootton Realty Advisors of New York, where he oversaw the asset management and administration of a $1.0 billion portfolio of diversified assets on behalf of public and corporate pension funds and served as President and Chief Operating Officer of JLW Management Group. Earlier in his career, Mr. Wassel served as a Vice President with The Rouse Company of Columbia, Maryland ("Rouse"), where he directed the management of Rouse's centers in the Northeast United States and oversaw development and re-merchandising efforts at Rouse's South Street Seaport (New York), Faneuil Hall (Boston), Willowbrook Mall (Wayne, New Jersey) and Paramus Park Mall (Paramus, New Jersey) properties.
PAUL COMARATO. Mr. Comarato has served as Vice President of Operations of Horizon since August 1997 and oversees all aspects of property level operations, tenant construction and legal, business and strategic planning. From June 1994 to July 1997, Mr. Comarato held a similar position managing East Coast Operations for Chelsea GCA Realty, where he managed nearly two million square feet of GLA, including Chelsea's flagship center in Woodbury, New York and oversaw the opening of that company's two most recent developments. From June 1990 to May 1994, Mr. Comarato served as General Manager at Wilmorite's Freehold Raceway Mall in Freehold, New Jersey. Prior to his employment by Wilmorite, Mr. Comarato served as General Manager of Paramus Park Mall in Paramus, New Jersey and Willowbrook Mall in Wayne, New Jersey, both owned by The Rouse Company.
JAMES S. HARRIS. Mr. Harris currently serves as Vice President--Retail Strategies of Horizon. Mr. Harris oversees the strategic merchandising efforts of Horizon. Mr. Harris joined Horizon in July 1995 in conjunction with Horizon's merger with and assimilation of McArthur/Glen, where Mr. Harris served as Vice President from November 1990 until he was appointed Chief Operating Officer in July 1993. Prior to his employment by McArthur/Glen, Mr. Harris spent six year managing and leasing regional shopping centers for the Taubman Company of Bloomfield Hills, Michigan.
STEPHEN J. MOORE. Mr. Moore has served as Senior Vice President of Marketing and Communications of Horizon since May 1997 and oversees all aspects of corporate and property level marketing, advertising and public relations. From April 1994 to April 1997, Mr. Moore served as Director of the Commercial Division of The Becker Group in Baltimore, Maryland ("Becker"). From April 1979 to March 1993, Mr. Moore was with The Rouse Company, where he served as Group Director of Sales and Marketing and directed all aspects of Marketing and Strategic Planning for Rouse's East Coast properties in the United States and properties in Canada.
THOMAS A. RUMPTZ. Mr. Rumptz currently serves as Vice President of Real Estate of Horizon, and oversees the expansion of existing centers as well as new development and residual land sales. In addition, Mr. Rumptz has overseen the management of joint venture investments and development relationships for Horizon. During his eight year tenure with Horizon, Mr. Rumptz has served as Vice President of Finance, Director of Real Estate, Senior Acquisitions Analyst and Controller. Prior to his employment by Horizon, Mr. Rumptz served as Manager of Investment Real Estate with Foremost Insurance of Grand Rapids, Michigan and Business Manager at Robert Grooter Development Company, a Grand Rapids, Michigan based developer of commercial and light industrial facilities, where he oversaw leasing, accounting and operations.
ITEM 2
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").
- ----------------------- (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.
STATE INFORMATION
The following table indicates, as of December 31, 1997, certain information regarding the outlet centers presented by state.
UNDEVELOPED PARCELS
The Company owns undeveloped parcels aggregating approximately 346 acres of outlots, retail pads and expansion pads located near certain of the Company's outlet centers. The Company intends to pursue an aggressive marketing program to lease, develop or sell the parcels owned by it. However, the sale of property by a REIT is subject to significant restrictions imposed by the Internal Revenue Code of 1986. Accordingly, such restrictions may limit the number, size and timing of such sales.
TENANTS
GENERAL. The Company's portfolio features a diverse mix of tenants. The Company's tenants are typically the retailing outlet of large publicly traded manufacturers. Substantially all of the leases require tenants to pay their pro rata share of all property operating expenses and real estate taxes.
The following table sets forth certain information with respect to each tenant which individually accounts for more than 2% of the Company's total base rental revenues or total occupied GLA for the year ended December 31, 1997 and to all other tenants as a group:
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):
MORTGAGE DEBT
The following table sets forth, as of December 31, 1997, certain information regarding the mortgages currently encumbering the Company's outlet centers.
During 1997, the Company, through indirect wholly-owned subsidiaries ("Borrower"), entered into a $300.6 million credit facility with Lehman Brothers Realty Corporation ("Lender"). The initial loan (the "Initial Loan") of $250.6 million included an initial funding at closing of $212.1 million and a reservation of financing for the acquisition of a certain specified property (the "Additional Loan"). The Borrower may borrow an additional $50.0 million in increments of no less than $10.0 million each, subject to the satisfaction of certain conditions, including predefined debt service coverage ratios (the "Second Loan" and collectively with the "Initial Loan," including the "Additional Loan," the "Loan"). Subsequent to the Initial Loan, the Company borrowed $38.5 million of the Additional Loan for the acquisition of an outlet center and $11.0 million of the Second Loan. Interest on the Loan is payable at the following rates: (i) 1.75% over the London interbank offered rate ("LIBOR") for the Initial Loan, and (ii) 2.25% over LIBOR for the Second Loan, or (iii) if the Loan is converted to a prime rate loan under certain circumstances at the Lender's discretion, the prime rate plus .75% with respect to the Initial Loan and prime plus 1.25% with respect to the Second Loan. While the Company has additional availability under the Second Loan, additional borrowings may not be available due to the financial ratios the Company is required to maintain. The maturity date of the Loan is July 1, 1999, unless otherwise extended pursuant to the terms of the Loan. The net proceeds of the Initial Loan were primarily used to retire the Company's aggregate outstanding balances under the following: (i) a revolving credit facility with a subsidiary of First Chicago NBD Corporation and other banks, (ii) construction financing facilities with Canadian Imperial Bank of Commerce, (iii) four permanent loans and (iv) one revolving credit facility. The Company recorded a $3.3 million extraordinary charge, net of minority interests, upon repayment of the above mentioned debt, comprised primarily of the write-off of unamortized debt issuance costs associated with the debt retired. The Loan is guaranteed by the Company and the Operating Partnership and is secured by a pool of 16 properties transferred to Borrower. The Loan requires the Company to maintain certain financial ratios and restricts the amount of dividends and distributions that can be made.
The Company has a $4.0 million revolving credit facility for working capital requirements. Interest on the facility is charged at prime and the facility expires in August 1998. The outstanding balance on this line was $4.0 million at December 31, 1997.
During 1997, the Company issued approximately 320,000 shares of Common Stock with net proceeds of $5.9 million under the Company's Dividend Reinvestment Plan. The Company has discontinued further stock issuances under the DRIP based on the current market price of the Company's Common Stock.
In 1996, the Company formed a venture (the "Venture") with a pension fund (the "Fund") advised by Heitman Capital Management. The Company contributed a 325,000 square foot center in the Finger Lakes region of New York in 1996 and a 67,000 square foot expansion in 1997 to the Venture. In exchange for the contribution, the Company received $34.9 million and $7.6 million in cash in 1996 and 1997, respectively, and a 50% interest in the Venture. The Fund contributed, concurrent with the Company's contribution of property, $34.9 million and $7.6 million in cash in 1996 and 1997, respectively, in return for a $38.2 million preferred equity position that earns a 9.6% return on the outstanding balance and a 50% ownership in the Venture. The Fund's equity position, upon election of the Fund, is convertible into 2.2 million shares of the Company's Common Stock, which represents an exercise price of $19.63 per share (the approximate market price of the Company's Common Stock on the date of issuance). The Company manages and leases the property. The accompanying financial statements consolidate the financial position and results of operations of the Venture and the interest of the Fund has been reflected as a component of minority interests.
TAXES
At December 31, 1997, the Company had an aggregate cost basis of $860.0 million in its real estate assets for federal income tax purposes. Depreciation for income tax purposes is calculated using the straight line method over the estimated useful lives of the assets, which for buildings placed in service prior to May 13, 1993 is 31.5 years (resulting in a rate of 3.2% per year) and buildings placed in service after May 13, 1993 is 39 years (resulting in a rate of 2.6% per year).
The Company's aggregate real estate tax obligation during the year ended December 31, 1997 was approximately $13.3 million. Estimated aggregate 1998 real estate taxes, taking into account planned expansions, are approximately $14.4 million.
ITEM 3
ITEM 3 LEGAL PROCEEDINGS
In December 1997, a purported shareholder of the Company filed a class action lawsuit naming the Company and several of its current and former directors as defendants. The lawsuit claims, among other things, that the directors of the Company breached their fiduciary duties to the Company's shareholders in approving the merger between the Company and Prime and that the consideration to be paid to the Company's shareholders in such a merger is unfair and inadequate. The lawsuit requests that the merger be enjoined or, in the event that the merger is consummated, that the merger be rescinded or damages be awarded to class members. The Company believes the suit is without merit and intends to vigorously defend the action. The Company is unable to predict the likely outcome of the action, but management does not believe the ultimate outcome of the pending litigation will have a material adverse impact on the Company's financial position and results of operations.
ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter of fiscal 1997.
PART II
ITEM 5
ITEM 5 MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTER
Information with respect to the principal market for the Company's Common Stock, the high and low sales prices of the Company's Common Stock and dividends per common share are incorporated herein by reference to the information contained under the caption "Stock Trading" and "Quarterly Financial Data" in the Company's Annual Report to Shareholders for 1997. The approximate number of holders of record of the Common Stock was 806 as of February 13, 1998.
ITEM 6
ITEM 6 SELECTED FINANCIAL DATA
Information with respect to a summary of selected financial data is incorporated herein by reference to the information set forth under the caption "Selected Financial Data" in the Company's Annual Report to Shareholders for 1997.
ITEM 7
ITEM 7 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Company's Annual Report to Shareholders for 1997 is incorporated herein by reference.
ITEM 8
ITEM 8 MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTER
The consolidated financial statements and report of independent auditors included in the Company's Annual Report to Shareholders for 1997 are incorporated herein by reference.
ITEM 9
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The Board of Directors of the Company consists of eight members divided into three classes serving staggered three-year terms. The term of office of one class of directors expires each year in rotation so that one class is elected at each annual meeting for a full three-year term. Messrs. Crocker, Dickey, Higo, Robert Perlmutter, Piasecki and Sherman were previously elected as directors by the shareholders of the Company; Norman Perlmutter was elected by the Board of Directors upon the merger of McArthur/Glen Realty Corp. into the Company on July 14, 1995. Mr. Wassel was elected by the Board of Directors on June 19, 1997. The following table sets forth certain information with respect to the directors of the Company:
* Mr. Wassel's biography is included in Item 1, Part I hereof under the caption "Executive Officers of Registrant."
NORMAN PERLMUTTER. Mr. Perlmutter has been the Chairman of the Board of Directors of the Company since February 8, 1997. Since 1966 Mr. Perlmutter has served as Chairman of the Board and Chief Executive Officer of Heitman Financial Ltd., one of the largest full service real estate companies and real estate investment managers for employee benefit plans in the U.S. Mr. Perlmutter is also a Director of Chris-Craft Industries, Inc., Heitman/PRA Securities Advisors, Inc. and United Television, Inc. Mr. Perlmutter previously served on the boards of United Asset Management Corporation and Warner Communications. He holds a B.S. degree from the University of Illinois. Mr. Perlmutter is the spouse of Ms. McArthur and was elected as a director pursuant to agreement with Ms. McArthur.
DOUGLAS CROCKER II. Mr. Crocker has been President and Chief Executive Officer of Equity Residential Properties Trust and a Trustee since its formation in March 1993. Mr. Crocker has been President and Chief Executive Officer of First Capital Financial Corporation, a real estate company and a subsidiary of Great American Management and Investment, Inc., since December 1992 and a Director since January 1993 and Executive Vice President of Equity Financial and Management Company since November 1992. From September 1992 until November 1992, Mr. Crocker was a Managing Director of Investment Banking with Prudential Securities. Mr. Crocker was a Director and President of Republic Savings Bank, F.S.B. from December 1988 to June 1992. Mr. Crocker was President and a Director of McKinley Financial Group, Inc., a real estate and leveraged buyout company, from 1982 to 1989; President of American Invesco Corporation, a real estate company, from 1979 to 1982; and Vice President of Arlen Realty and Development Corporation from 1971 to 1979. Mr. Crocker is a member of the Urban Land Institute, the National Association of Real Estate Investment Trusts ("NAREIT"), the National Apartment Association, and an Executive Committee member of the National Multi-Housing Council. Mr. Crocker received his B.A. from Harvard College.
WILLIAM P. DICKEY. Mr. Dickey is the owner and President of the Dermot Company, Inc., a California real estate investment and advisory firm. Prior to forming the Dermot Company, Inc. in October 1991, Mr. Dickey was a Managing Director at The First Boston Corporation, a New York investment banking firm (now CS First Boston) from February 1986 to November 1990. Prior to joining First Boston, Mr. Dickey was a partner with the New York law firm of Cravath, Swaine & Moore from May 1980 to February 1986. From 1964 to 1970, Mr. Dickey was an officer in the U.S. Air Force and during that time served tours in the Philippines and Vietnam as an intelligence officer, and at the U.S. Air Force Academy as an instructor. Mr. Dickey is a Trustee of the Retail Property Trust, an institutionally-owned REIT with investments in regional shopping centers. Mr. Dickey is a Director of Price Enterprises, Inc., Mezzanine Capital Property Investors, Inc. and Kilroy Realty Corporation. Mr. Dickey holds a J.D. degree from Columbia Law School, an M.A. degree in International Affairs from Georgetown University, and a B.S. degree from the U.S. Air Force Academy.
NORMAN R. HIGO. Mr. Higo was employed in a variety of positions by Mikasa Inc. from 1971 until October 1995, including Executive Vice President, Chief Operating Officer of International Operations and Director of Retail Site Selection. Mr. Higo also served as a director and member of the executive committee of Mikasa. Mr. Higo, a CPA, received a Bachelor's of Science degree in accounting from the University of Southern California.
ROBERT D. PERLMUTTER. Since 1990, Mr. Perlmutter has been Chairman and Chief Executive Officer of Heitman Retail Properties, a subsidiary of Heitman Financial, Ltd., who as asset manager is listed by Shopping Center World as the fourth largest owner of regional mall shopping centers in the United States. Mr. Perlmutter is a member of the International Council of Shopping Centers ("ICSC"), the Illinois ICSC Committee and NAREIT. Mr. Perlmutter received a Bachelor of Science degree in business and real estate from the University of Colorado in Boulder. Mr. Perlmutter is the son of Norman Perlmutter, the Chairman of the Board of Directors of the Company.
RONALD L. PIASECKI. Mr. Piasecki served as President and Chief Executive Officer of the Company from February 8, 1997 until June, 1997. Until May, 1996, Mr. Piasecki served as Executive Vice President and Secretary of Aspen Enterprises, Ltd., which he organized in 1973. In May, 1996, Aspen Enterprises, Ltd., an owner/operator/developer of manufactured housing parks, was acquired by Sun Communities, Inc., of which Mr. Piasecki is now a director. Mr. Piasecki is also the Chairman of the Board of Kurdziel Industries, Inc. Mr. Piasecki obtained his Juris Doctor degree, cum laude from Wayne State University Law School in Detroit, Michigan in 1968 and has a B.A. degree from the University of Michigan.
MARTIN SHERMAN. Mr. Sherman has served as Senior Vice President of U.S. Shoe Corporation and Chief Executive Officer of its Retail Development Division since 1984. Mr. Sherman is also the President and Chief Executive Officer of M & S Advisory Group, Inc., a retail strategy and development consulting service. Mr. Sherman served as President of the Retail Development Division and Corporate Vice President of U.S. Shoe Corporation from 1971 until 1984. Mr. Sherman has been associated with U.S. Shoe Corporation since 1963 when he began as an Account Executive for its Valsey Bristol Children's Shoe Division. Mr. Sherman is an active member and a past Trustee of the International Council of Shopping Centers. He attended Temple University School of Business Administration. Mr. Sherman has an extensive retail background with a broad range of responsibility for the growth and retail development for U.S. Shoe Corporation since 1966. Under his guidance, the Retail Development Division of U.S. Shoe Corporation was responsible for the negotiation and acquisition of over 5,000 retail locations in North America and continental Europe.
EXECUTIVE OFFICERS
Information with respect to executive officers of the Company is included in Item 1, Part I hereof under the caption "Executive Officers of Registrant."
ITEM 11
ITEM 11 EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the compensation of the Chief Executive Officer and the four other most highly compensated executive officers of the Company whose individual total annual salary and bonus exceeds $100,000 for 1997 (the "Named Officers") for services in all capacities while an executive officer for 1997, 1996 and 1995.
- ---------------
(1) Mr. Wassel became an executive officer and employee effective April 24, 1997. (2) Mr. Piasecki served as President from February 9, 1997 to April 23, 1997 and Chief Executive Officer from February 9, 1997 to June 18, 1997. (3) Mr. Kerr resigned as Chairman, President and Chief Executive Officer effective February 8, 1997. (4) Mr. Moore became an executive officer and employee effective May 12, 1997. (5) Mr. Cattivera resigned effective May 14, 1997. (6) Mr. Neville became an executive officer and employee in March 1996 and resigned effective September 1997. (7) Severance payment due upon Mr. Cattivera's resignation. (8) Severance payment due upon Mr. Neville's resignation.
OPTION GRANTS IN FISCAL 1997
The following table sets forth certain information concerning stock option grants during fiscal 1997 for each of the Named Officers.
EMPLOYMENT AND CONSULTING CONTRACTS
The Company has entered into employment contracts or arrangements with each Named Officer except Mr. Piasecki. The contracts provide that these individuals devote substantially all of their business time to the operation of the Company. The contract with Mr. Wassel provides for an initial three-year term, as did the contract with Mr. Kerr. The contract with Mr. Harris provides for a three-year term, as did the contract with Mr. Cattivera. The contract with Mr. Neville provided for a two-year term. The arrangement with Mr. Moore does not provide for a set term of employment.
Mr. Wassel's employment agreement, which was amended on November 12, 1997, provides for an annual salary of $360,000 and a bonus of up to 100% of such annual salary. The Company is also obligated to make certain payments to, as well as to accelerate or convert certain stock options of, Mr. Wassel if Mr. Wassel resigns or is terminated under certain conditions.
Prior to his resignation, effective February 8, 1997, Mr. Kerr's Amended and Restated Employment Agreement provided that he would serve as Chairman of the Board of Directors of the Company, President and Chief Executive Officer. He received an annual base salary of $350,000 (subject to increase by the Board of Directors) and was eligible for an annual bonus. The Company entered into an agreement with Mr. Kerr dated as of February 8, 1997, to terminate Mr. Kerr's Amended and Restated Employment Agreement. See "Certain Transactions".
Mr. Harris receives an annual base salary of $250,000 (subject to increase by the Board of Directors) and is eligible for a bonus of up to 60% of his base salary. In addition, during his term, Mr. Harris is entitled to a special bonus of $50,000 per year on or before December 31 of each year (pro rated for partial years). Mr. Moore receives an annual salary of $150,000, and is eligible for a bonus of up to 50% of his base salary. Mr. Cattivera and Mr. Neville each received an annual base salary of $210,000 and were eligible for annual bonuses of up to 50% of their base salary.
Under each of the employment agreements described above, the Named Officers participate in any incentive, bonus, stock option or other compensation plan adopted by the Company's Board of Directors or the Operating Partnership, and are entitled to receive other benefits provided to executive personnel generally. These employment contracts (with the exception of Mr. Moore's agreement) also provide that, with limited exceptions, such Named Officers will not develop, own or operate manufacturer outlet shopping centers except on behalf of the Company during their employment or in certain instances one year after their employment ceases.
If the employment of Mr. Harris is terminated "without cause" or is terminated by Mr. Harris for "good reason" (as such terms are defined in Mr. Harris' employment contract), Mr. Harris is entitled to severance in an amount equal to his annual compensation. If the employment of Mr. Harris is terminated after a "change in control" (as such term is defined in Mr. Harris' employment contract), Mr. Harris is entitled to a lump sum payment in an amount equal to three times his annual compensation.
REPORT OF COMPENSATION COMMITTEE OF BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The compensation of the individuals who served as Chief Executive Officer of the Company during 1997, the four other most highly compensated executive officers of the Company whose total annual salary and bonus exceeds $100,000 (the "Named Officers") is determined, subject to such Named Officer's employment contract, if any, by the Compensation Committee (the "Committee") of the Board of Directors, which is a standing committee that consists entirely of independent directors. No member of the Committee is eligible to participate in any of the compensation plans or programs it administers. The Company's goal in structuring executive compensation is to closely align the interests of executive officers with those of the Company's shareholders. The Company's executive compensation package is accordingly comprised of the following four elements:
- - Base salary set at levels sufficient to attract and retain employees capable of contributing materially to the Company's long-term success;
- - Annual bonus related to the Company's results of operations, including Adjusted Funds From Operations and a Committee evaluation of the employee's performance;
- - Stock options to provide long-term incentives; and
- - Participation in other benefit programs available to employees generally.
In carrying out its responsibilities, the Committee reviews the executive compensation programs and policies of the Company's competitors, in addition to a broader group of REITs, to ensure that the Company's plans and practices are competitive and appropriate based on the Company's performance and compensation goals.
The Company has entered into employment agreements that establish (or established) the base salaries of six of the Company's Named Officers and has adopted stock option and bonus plans.
BASE SALARY. The respective employment agreements with Named Officers provide an annual base salary of $360,000 in the case of Mr. Wassel, $250,000 in the case of Mr. Harris, and $150,000 in the case of Mr. Moore. Prior to their resignations, employment agreements provided for annual base salaries of $350,000 in the case of Mr. Kerr, and $210,000 in the case of Messrs. Cattivera and Neville. Mr. Piasecki received $140,000 in salary for his services as
Interim Chief Executive Officer. The Company expects to target future Named Officers' base salaries at the average of a compared group of competitors and REITs by conducting compensation surveys to determine base salary levels are in line with the Company's objectives, with consideration given to such factors as the Named Officer's scope of responsibility, performance, future potential and overall competitive positioning relative to comparable positions at competitors and other REITs.
ANNUAL BONUS. Annual bonuses are granted under the Company's Employee Bonus Plan. Bonuses awarded under the Plan are limited to 50% of the amount of the employee's annual base salary, based upon the contribution to the Company by the employee, the results of operations of the Company, including but not limited to increases in Funds From Operations, dividends, and other factors as the Company may deem appropriate. Bonuses may be paid in cash, shares of Common Stock or in combination thereof. Additional or special bonuses may be granted pursuant to an employee's employment contract.
Pursuant to the Named Officer's employment contract and/or the Employee Bonus Plan, the Committee awarded annual bonuses of $225,000 to Mr. Wassel, $50,000 to Mr. Harris, $45,730 to Mr. Moore, $220,000 to Mr. Cattivera and $25,000 to Mr. Neville. Mr. Piasecki was granted a bonus of $150,000 for his services as Interim Chief Executive Officer. The determination of such bonuses was based on the Company's 1997 results, the contribution to the Company by the employee and such employee's employment contract.
STOCK OPTIONS. The Company's 1997 Stock Option Plan (the "1997 Plan") provides officers and other key employees with long-term incentives in order to create an interest in the Company parallel to that of the Company's shareholders. Under the 1997 Plan, 950,000 shares of Common Stock of the Company are reserved for issuance upon the exercise of options which may be granted to key employees of the Company and its subsidiaries. Stock options are granted to reinforce the importance of improving shareholder value over the long-term, and to encourage and facilitate the stock ownership by executive officers. Stock options are granted at not less than 100% of the fair market value of the Common Stock on the date of grant to ensure that executive officers could only be awarded for appreciation in the price of Common Stock when the Company's shareholders are similarly benefited. While all of the Company's executive officers are eligible to receive stock options, the size of annual grants, if any, to executive officers is contingent on their performance and future potential. During 1997 the Company granted stock options pursuant to the 1997 Plan relating to 545,000 shares, consisting in part of (i) options granted to Norman Perlmutter to acquire 125,000 shares, (ii) options granted to James S. Wassel to acquire 400,000 shares, and (iii) options granted to Stephen J. Moore to acquire 10,000 shares. In addition to the 1997 Plan, the Company also has in place the 1993 Stock Option Plan (the "1993 Plan") having terms substantially identical to the 1997 Plan. No options were granted under the 1993 Plan during 1997.
Martin Sherman Norman R. Higo Douglas Crocker II Members of the Compensation Committee March 15, 1998
COMPENSATION OF DIRECTORS
Directors who are not officers of or employed by the Company ("Non-employee Directors") are paid an annual fee of $12,000 and a meeting fee of $1,000 for each meeting of the Board of Directors or a committee of the Board of Directors attended, in person or telephonically as compensation for service as a director. Non-employee Directors are granted stock options under the Company's 1993 Director Stock Option Plan. Each Non-employee Director receives an option to purchase 5,000 shares of Common Stock under the Company's 1993 Director Stock Option Plan on the date he or she is first elected to the Board of Directors. Thereafter, on the date of each annual meeting of the Company's shareholders, each Non-employee Director elected to office at such meeting will automatically receive an option to purchase 5,000 shares of Common Stock. Non-employee Directors are also reimbursed for their out-of-pocket expenses.
STOCK PRICE PERFORMANCE GRAPH
The Stock Price Performance Graph compares the percentage change in the cumulative total shareholder return on the Company's Common Stock with the cumulative total returns of the Standard and Poor's 500 Stock Index (the "S&P 500 Index") and the Total Return Index of equity real estate investment trusts prepared by the National Association of Real Estate Investment Trusts (the "NAREIT Equity Index"). The comparison assumes $100 investments on November 1, 1993, the first date of registration of the Company's Common Stock under Section 12 of the Securities Exchange Act of 1934, in the Company's Common Stock, the S&P 500 Index and the NAREIT Equity Index, and further assumes reinvestment of dividends.
On December 31, 1997 and February 13, 1998, the last sale prices of the Common Stock, as reported by the New York Stock Exchange Composite Tape, were $10.94 and $12.00 per share, respectively.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 16, 1998 (except as otherwise indicated) regarding the beneficial ownership of Common Stock by each director and Named Officer (as defined herein) of the Company, by all directors and executive officers of the Company as a group, and by each person known to the Company to be the beneficial owner of more than five percent of the outstanding shares of Common Stock.
- ----------------------- * Less than 1%
(1) The business address of each shareholder who is a director or executive officer of the Company is c/o the Company, 5000 Hakes Drive, Norton Shores, Michigan 49441. The business address of Jeffrey Kerr is 2089. E. Sternberg Rd, Muskegon, Michigan 49444. The business address of the United States National Bank of Galveston is 2201 Market Street, Galveston, Texas 77550. The business address of FLOC, LLC is 180 North LaSalle Street, Chicago, Illinois 60601.
(2) Includes shares subject to stock options which were exercisable on February 16, 1998, or within sixty (60) days thereafter; Units of the Operating Partnership, which are immediately exchangeable for shares of Common Stock on a one-for-one basis (including 1,003,210 Units beneficially owned by Mr. Norman Perlmutter, 264,314 beneficially owned by Mr. Piasecki, 10,000 beneficially owned by Mr. Harris and 402,714 benefically owned by Mr. Kerr); or in which the person named in the table otherwise has a beneficial interest.
(3) Outstanding shares of Common Stock for this purpose include (i) all issued and outstanding shares of Common Stock of the Company, (ii) shares, if any, issuable in exchange for Operating Partnership Units by the named person or group and (iii) shares, if any, subject to stock options which were exercisable on February 16, 1998, or within sixty (60) days thereafter by the named person or group.
(4) Outstanding shares of Common Stock for this purpose include (i) all issued and outstanding shares of Common Stock of the Company, (ii) all shares issuable in exchange for outstanding Operating Partnership Units and (iii) all shares subject to stock options which were exercisable on February 16, 1998 or within sixty (60) days thereafter by all named persons or groups.
(5) Mr. Piasecki also owns 95.0%, 99.0%, 99.0% and 99.0%, respectively of the Class A stock in HGI Management Corp., MG Third Party Services Corp., First HGI, Inc. and HGI Perryville, Inc. all of which are subsidiaries of the Company. Mr. Piasecki receives 5.0% of the economic interest of each of HGI Management Corp., MG Third Party Services Corp., First HGI, Inc. and HGI Perryville, Inc. as a result of such stock ownership. In connection with the contemplated merger of the Company with Prime, Mr. Piasecki has executed a contract to sell such stock.
(6) According to a Schedule 13G filed with the SEC, as of February 4, 1998, United States National Bank of Galveston lacked voting power with respect to 113,085 of such shares and shared dispositive power with regard to 11,072 of such shares.
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company performed development services for properties or entities owned by Jeffrey A. Kerr and his affiliates during 1997 in the amount of $426,000.
The Company has used, for Company business, an airplane owned by a company wholly owned by Mr. Kerr. During 1997, the Company made payments to Mr. Kerr's affiliated company for use of this airplane in the aggregate amount of $68,000. The lease of this airplane was terminated March 31, 1997.
As previously disclosed, Mr. Kerr resigned from his positions as Chief Executive Officer, President and Chairman of the Company effective February 8, 1997. Mr. Kerr and his affiliates were indebted to the Company in the amount of $1,268,000 at March 31, 1997. This indebtedness included $288,000 of development fees owed to the Company, amounts due with respect to personal or non-corporate use of the leased airplane, interest at 7.8% per annum and various other amounts advanced to and expenses incurred on behalf of Mr. Kerr and/or his affiliates or related entities. The Company and Mr. Kerr entered into an agreement pursuant by which these and certain other claims of the Company and Mr. Kerr, including a termination claim by Mr. Kerr of $1,000,000 were settled; Mr. Kerr waived various claims and agreed to make a payment of $240,000 to the Company, his options to purchase Common Stock of the Company were amended to make them exercisable until February 7, 1999, and all joint ventures between the Company and Mr. Kerr and/or related entities were terminated. As a part of this unwinding of interrelationships and pursuant to the agreement, affiliates of Mr. Kerr agreed to transfer to the Company their interests in approximately 18 acres of land adjacent to the Company's Birch Run Shopping Center at Mr. Kerr's and/or his affiliates' costs to subject that property to a purchase contract, and the Company released 50,000 shares of Common Stock held by Mr. Kerr from the agreement with the Company restricting Mr. Kerr's sale of those shares and will release an additional 250,000 shares over the next two years.
In connection with the merger of McArthur/Glen Realty Corp. ("McArthur/Glen") with and into the Company on July 14, 1995, the Company entered into a consulting and non-competition agreement with Cheryl McArthur, the spouse of Norman Perlmutter. Pursuant to such agreement, Ms. McArthur provides consulting services to the Company during the five-year period ending July 13, 2000 and has covenanted not to compete in any business relating to a shopping center primarily tenanted by manufacturers operating outlet merchandise stores for a period of 10 years from July 14, 1995 in exchange for the payment to her of $3.2 million. During 1997 the Company paid an aggregate of approximately $1.1 million to Ms. McArthur pursuant to such agreement.
In 1996, the Company terminated and settled its obligations under an employment contract with Alan Glen, who retired as a Director of the Company November 20, 1997. Pursuant to this Agreement, Mr. Glen received a $900,000 severance benefit approximately one-third of which was paid in April 1996 and the balance of which is being paid in four equal installments, plus interest aggregating $100,000, over three years;
On November 21, 1996, the Company entered into a joint venture (the "Venture") with a pension fund (the "Fund") advised by Heitman Capital Management Corporation, an affiliate of Heitman Financial Ltd., of which Norman Perlmutter, the Chairman of the Board of the Company, is Chairman of the Board and Chief Executive Officer. Pursuant to the Venture, the Fund invested a total of $42.5 million which, after proration adjustments and payoffs of existing indebtedness, was distributed to the Company upon its contribution of its Finger Lakes Outlet Center. The Fund invested $34.9 million in November, 1996, and invested the remaining $7.6 million in the second quarter of 1997.
PART IV
ITEM 14
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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
Dated: March 31, 1998 HORIZON GROUP, INC.
By: /s/ James S. Wassel -------------------------- Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE - -------------------- -------------------------------- ----------------
/s/ Norman Perlmutter Director and Chairman of the March 31, 1998 - ------------------------ Board of Directors Norman Perlmutter
Director, President and Chief March 31, 1998 /s/ James S. Wassel Executive Officer - ------------------------ (Principal Executive Officer James S. Wassel and Principal Financial Officer)
/s/ Douglas Crocker II Director March 31, 1998 - ------------------------ Douglas Crocker II
/s/ William P. Dickey Director March 31, 1998 - ------------------------ William P. Dickey
/s/ Norman R. Higo Director March 31, 1998 - ------------------------ Norman R. Higo
/s/ Ronald L. Piasecki Director March 31, 1998 - ------------------------ Ronald L. Piasecki
/s/ Robert D. Perlmutter Director March 31, 1998 - ------------------------ Robert D. Perlmutter
/s/ Martin Sherman Director March 31, 1998 - ------------------------ Martin Sherman
/s/ Richard D. Stewart Assistant Controller March 31, 1998 - ------------------------ (Principal Accounting Officer) Richard D. Stewart
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.
HORIZON GROUP, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
HORIZON GROUP, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
Depreciation of the Company's investment in buildings and improvements reflected in the Statements of Operations is calculated over the estimated useful lives of the assets as follows:
Buildings 31.5 years Improvements Shorter of 10 years or useful life
The aggregate gross cost of property included above for federal income tax purposes approximated $860.0 million as of December 31, 1997.
Notes:
(a) The Initial Cost amounts for assets purchased in the merger with McArthur/Glen have been restated to reflect refinements in the purchase price adjustments.
(b) Includes adjustments for the impairment of long-lived assets on Dry Ridge, Holland, New Mexico, Traverse City and Hawaii.
HORIZON GROUP, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION CONTINUED NOTES TO SCHEDULE III DECEMBER 31, 1997
1. RECONCILIATION OF REAL ESTATE PROPERTIES:
The following table reconciles the Real Estate Properties from January 1, 1995 to December 31, 1997:
The following table reconciles the accumulated depreciation from January 1, 1995 to December 31, 1997:
(c) The cost basis of the impaired assets held for sale have been adjusted to reflect the write-off of accumulated depreciation.
EXHIBIT INDEX -------------
EXHIBIT NO. DESCRIPTION - ----------- -----------
3.1 Amended and Restated Articles of Incorporation of the Company [Incorporated by reference to Exhibit 3.1 to Registration Statement 33-95174]
3.2 Amended and Restated Bylaws of the Company [Incorporated by reference to Exhibit 3.2 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 1996 (SEC File No. 1-12424)]
4 Specimen Common Stock Certificate (reference is also made to Exhibits 3.1 and 3.2) [Incorporated by reference to Exhibit 4 to Registration Statement No. 33-91236]
10.1 Agreement of Limited Partnership of Horizon/Glen Outlet Centers Limited Partnership [Incorporated by reference to Exhibit 10.1 to the Company's annual report on Form 10-K for fiscal year ended December 31, 1995 (SEC File No. 1-12424)]
10.2 Registration Rights Agreement [Incorporated by reference to Exhibit 10.25 to Registration Statement No. 33-68420]
10.3 Registration Rights Agreement between the Company and Jeffrey A. Kerr [Incorporated by reference to Exhibit 10.26 to Registration Statement No. 33-68420]
10.4 Employee Bonus Plan [Incorporated by reference to Exhibit 10.27 to Registration Statement No. 33-68420]
10.5 Director Stock Option Plan [Incorporated by reference to Exhibit 10.5 to the Company's annual report on Form 10-K for fiscal year ended December 31, 1995 (SEC File No. 1-2424)]
10.6 Amended and Restated 1993 Stock Option Plan [Incorporated by reference to Exhibit 10.29 to Registration Statement No. 33-68420]
10.7 Employee Stock Bonus Arrangement Agreement [Incorporated by reference to Exhibit 10.30 to Registration Statement No. 33-68420]
EXHIBIT NO. DESCRIPTION - ----------- -----------
10.8 Form of Indemnification Agreement by and between the Company and each of the Executive Officers and Directors of the Company [Incorporated by reference to Exhibit 10.34 to Registration Statement No. 33-68420]
10.8 Loan Agreement, dated as of June 30, 1997, between HGL Outlet Associates and Third Horizon Group Limited Partnership and Lehman Brothers Realty Corporation [Incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K dated June 30, 1997 (SEC File No. 1-12424)]
10.10 Option Agreement by and among Court Concept Associates, Inc., Jeffrey A. Kerr and the Company [Incorporated by reference to Exhibit 10.41 to the Company's annual report on Form 10-K for fiscal year ended December 31, 1994 (SEC File No. 1-12494)]
10.11 Horizon Outlet Centers, Inc. Profit Sharing/401(k) Plan [Incorporated by reference to Exhibit 10.42 to the Company's annual report on Form 10-K for fiscal year ended December 31, 1994 (SEC File No. 1-12494)]
10.12 Consulting and Non-Competition Agreement by and among McArthur/Glen Realty Corp., McG Outlet Centers Limited Partnership, Horizon Outlet Centers, Inc., Horizon Outlet Centers Limited Partnership, Cheryl McArthur and upon its formation, Horizon/Glen Outlet Centers Limited Partnership dated as of March 13, 1995 [Incorporated by reference to Exhibit (10)(d) to the Company's current report on Form 8-K dated March 16, 1995 (SEC File No. 1-12424)]
10.13 Termination of Employment Agreement by and among McArthur/Glen Realty Corp., McG Outlet Centers Limited Partnership, Horizon Outlet Centers, Inc., Horizon Outlet Centers Limited Partnership, Cheryl McArthur and upon its formation, Horizon/Glen Outlet Centers Limited Partnership dated as of March 13, 1995 [Incorporated by reference to Exhibit (10)(e) to the Company's current report on Form 8-K dated March 16, 1995 (SEC File No. 1-12424)]
10.14 Amendment No. 1 to Consulting and Non-Competition Agreement by and between McArthur/Glen Realty Corp., McG Outlet Centers
EXHIBIT NO. DESCRIPTION - ----------- -----------
Limited Partnership, Horizon Outlet Centers, Inc., Horizon Outlet Centers Limited Partnership, Cheryl McArthur and Horizon/Glen Outlet Centers Limited Partnership dated as of March 13, 1995 [Incorporated by reference to Exhibit 2.3.1 to Registration Statement No. 33-91236]
10.15 Agreement dated as of May 15, 1995 by and between McArthur/Glen Realty Corp., McG Outlet Centers Limited Partnership, Horizon Outlet Centers, Inc., Horizon Outlet Centers Limited Partnership, Cheryl McArthur and Horizon/Glen Outlet Centers Limited Partnership [Incorporated by reference to Exhibit 10(a) to the Company's current report on Form 8-K dated May 16, 1995 (SEC File No. 1-12424)]
10.16 Form of Employment Agreement by and between HGI Realty, Inc., Horizon/Glen Outlet Centers Limited Partnership and James S. Harris [Incorporated by reference to Exhibit 2.8.6 to Registration Statement 33-91236]
10.27 Bonus Agreement by and between Horizon Group, Inc., Horizon/Glen Outlet Centers Limited Partnership and Richard A. Phillips [Incorporated by reference to Exhibit 10.22 to the Company's annual report on Form 10-K for fiscal year ended December 31, 1996 (SEC File No. 1-12424)]
10.28 Consulting Agreement dated as of January 1, 1996 among M & S Advisor Group, Inc., Martin Sherman and HGI Realty, Inc. [Incorporated by reference to Exhibit 10.38 to the Company's annual report on Form 10-K for fiscal year ended December 31, 1995 (SEC File No. 1-12424)]
10.29 Agreement with Jeffrey A. Kerr dated April 11, 1997 [Incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarterly period ended March 31, 1997 (SEC File No. 1-12424)]
10.30 Employment Agreement with James S. Wassel [Incorporated by reference to Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarterly period ended March 31, 1997 (SEC File No. 1-12424)]
EXHIBIT NO. DESCRIPTION - ----------- -----------
10.31 1997 Stock Option Plan
10.32 Employment Letter to Stephen J. Moore dated April 24, 1997
10.33 Employment Letter to Paul Comarato dated July 23, 1997
10.34 Agreement with Norman Perlmutter dated as of October 23, 1997
10.35 Bonus grant to Ronald L. Piasecki
10.36 Agreement with Stephen J. Moore dated as of November 12,1997
10.37 Agreement with Paul Comarato dated as of November 12, 1997
10.38 Amended and Restated Agreement and Plan of Merger by and among Prime Retail, Inc., Prime Retail, L.P., Horizon Group, Inc., Sky Merger Corp., Horizon Group Properties, Inc., Horizon Group Properties, L.P. and Horizon/Glen Outlet Centers Limited Partnership dated as of February 1, 1998 [Incorporated by reference to Exhibit (10)(a) to the Company's current report on Form 8-K dated February 1, 1998 (SEC File No. 1-12424)]
10.39 Agreement by and among Prime Retail, Inc., Horizon Group, Inc., Mr. David H. Murdoch and Pacific Holding Company dated as of February 1, 1998 [Incorporated by reference to Exhibit (10)(b) to the Company's current report on Form 8-K dated February 1, 1998 (SEC File No. 1-12424)]
10.40 Contribution Agreement by and among Castle & Cooke Commercial-CA, Inc., Castle & Cooke Retail, Inc. and Horizon/Glen Outlet Centers Limited Partnership dated as of February 1, 1998 [Incorporated by reference to Exhibit (10)(c) to the Company's current report on Form 8-K dated February 1, 1998 (SEC File No. 1-12424)]
13 Annual Report to Shareholders for the fiscal year ended December 31, 1996
21 Subsidiaries of the Company
EXHIBIT NO. DESCRIPTION - ----------- -----------
23 Consent of Independent Auditors
24 Powers of Attorney
27.1 Financial Data Schedule