** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC  20549**

 

**FORM 10-K**

 

| **ý****   ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                    |
| **For the fiscal year ended December  31, 2002**                                                                        |
|                                                                                                                    |
| **OR**                                                                                                                  |
|                                                                                                                    |
| **o****   TRANSITIONAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                    |
| **Commission file number:  0-24123**                                                                               |

 

| **HORIZON  GROUP PROPERTIES, INC.**                              |
|------------------------------------------------------------------|
| (Exact Name of  Registrant as Specified in Its Charter)          |
|                                                             |   |   |
| **Maryland**                                                     |   | **38-3407933** |
| (State or other  jurisdiction of  incorporation or organization) |   | (IRS employer  identification no.) |
|                                                             |   |   |
| **77 West Wacker Drive, Suite 4200  Chicago, IL 60601**          |   | **(312) 917-8870** |
| (Address of  principal executive offices)                        |   | (Registrant’s  telephone number)  including area code) |
|                                                             |   |   |
| Securities  registered pursuant to Section 12(b) of the Act:     |
|                                                             |   |   |
| **Common Stock, $0.01 par value**                                |
|                                                             |   |   |
| Securities  registered pursuant to Section 12(g) of the Act:     |
|                                                             |   |   |
| **None**                                                         |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes     ý    No     o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).   Yes     o    No     ý

 

Theaggregate market value of the common stock held by non-affiliates of theregistrant was $7,835,630 based on the closing sale price of $2.73 per share asreported on the NASDAQ on February 21, 2003.

 

Thenumber of shares of the registrant’s common stock, $.01 par value, outstandingas of February 21, 2003 was 2,870,194.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portionsof the following documents of the registrant are incorporated herein byreference:  None

 

 

----

 

**HORIZONGROUP PROPERTIES, INC.**

 

**Form10-K**

 

**December31, 2002**

 

**TABLE OF CONTENTS**

 
| **Description** |      |                                                                                        |
|-----------------|-----------|---------------------------------------------------------------------------------------------|
|            |      |
| Part I          |      |
|            | Item 1.   | Business                                                                                    |
|            | Item 2.   | Properties                                                                                  |
|            | Item  3.  | Legal  Proceedings                                                                          |
|            | Item 4.   | Submission of Matters to  a Vote of Security Holders                                        |
|            |      |                                                                                        |
| Part II         |      |
|            | Item  5.  | Market  for the Company’s Common Shares and Related Stockholder Matters                |
|            | Item 6.   | Selected Financial Data                                                                     |
|            | Item  7.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|            | Item 7A.  | Quantitative and Qualitative  Disclosures about Market Risks                                |
|            | Item  8.  | Financial  Statements and Supplementary Data                                                |
|            | Item  9.  | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure       |
|            |      |                                                                                        |
| Part III        |      |
|            | Item  10. | Directors  and Executive Officers of the Company                                            |
|            | Item 11.  | Executive Compensation                                                                      |
|            | Item  12. | Security  Ownership of Certain Beneficial Owners and Management                             |
|            | Item  13. | Certain  Relationships and Related Transactions                                             |
|            | Item 14.  | Controls and  Procedures                                                                    |
|            |      |                                                                                        |
| Part IV         |      |
|            | Item 15.  | Exhibits, Financial  Statement Schedules, and Reports on Form 8-K                           |
|            |      | Signatures                                                                                  |
|                 |           |                                                                                             |  |

 

2

----

 

**HORIZONGROUP PROPERTIES, INC.****FORM10-K, ANNUAL REPORT****FOR THEYEAR ENDED DECEMBER 31, 2002**

**PART I**

 

**ITEM 1 - BUSINESS**

 

HorizonGroup Properties, Inc. (“HGPI” or, together with its subsidiaries “HGP” or the“Company”) is a self-administered and self-managed Maryland corporation that wasestablished in connection with the merger of Horizon Group, Inc., a Michigancorporation (“Horizon”) with and into Prime Retail, Inc., a Marylandcorporation (“Prime” or “Prime Retail”) which was consummated on June 15, 1998(the “Merger”).

 

HGP’sinitial portfolio consisted of 14 factory outlet centers and one power centerlocated in 12 states.  Twelve of theinitial factory outlet centers and the power center (the “PredecessorProperties”) were contributed to the Company by Horizon pursuant to a ContributionAgreement entered into in connection with the Merger (the “ContributionAgreement”).  Two factory outlet centers(the “Prime Transferred Properties”) were purchased by the Company from Primeimmediately subsequent to the consummation of the Merger.  As of December 31, 2002, HGP’s operatingportfolio consisted of 11 factory outlet centers located in nine states.  The Company also owns one shopping centerwhich is classified as discontinued operations at December 31, 2002.

 

Theoperations of the Company are primarily conducted through a subsidiary limitedpartnership, Horizon Group Properties, L.P. (“HGP LP”), of which the HGPI isthe sole general partner.  As ofDecember 31, 2002, HGPI owned approximately 79.6% of the partnership interests(the “Common Units”) of HGP LP.  Ingeneral, Common Units are exchangeable for shares of Common Stock on aone-for-one basis (or for an equivalent cash amount at the Company’s election).

 

Sixof the Company’s properties collateralize two pools of loans which are currentlyin default.  The Company recorded animpairment charge of $18.0 million during 2001 and an additional impairmentcharge of $17.0 million in 2002 related to four of these properties and aparcel of land adjacent to one of the properties.  The Company continues to manage the properties pursuant tomanagement agreements entered into in conjunction with the origination of theloans and has been negotiating the restructuring of the loans.  There can be no assurance that thesenegotiations will result in a restructuring of the loans.  The loans are non-recourse to HGPI, subjectto certain customary exceptions including fraud, willful misconduct orintentional material misrepresentation; the filing of bankruptcy by a borrower;violation of the single purpose entity provisions of the loan documents; themisappropriation of rents, insurance proceeds or condemnation awards; any actof actual waste or arson; or a transfer of any of the properties securing theloans without lender approval.

 

TheCompany sold a vacant outlet center in New Mexico in December 1999 and anoutlet center in Kentucky in January 2001.

 

OnDecember 27, 2002, HGPI sold 145,349 units of Horizon Group Properties, LP toHoward Amster, a Director of HGPI, for aggregate consideration of $750,000, or$5.16 per unit.  HGPI may consideradditional sales of units in Horizon Group Properties, LP to Mr. Amster orothers in the future.

 

TheCompany is actively marketing the following assets for sale:  Lakeshore Marketplace in Norton Shores,Michigan; the single tenant building in Roseville, Michigan leased to Petsmart,Inc., and seven parcels of vacant land totaling approximately 100 acres inNorton Shores, Michigan, Fruitport Township, Michigan, Daleville, Indiana,Gretna, Nebraska, Tulare, California and Medford, Minnesota.  These assets are listed on the consolidatedbalance sheets as Real Estate - Discontinued Operations.  The net proceeds from the sale of theseassets would be available for general corporate purposes, subject to certainrestrictions and repayment obligations contained in the mortgage loans to whichthey are subject.  Pursuant to therequirements of SFAS 144, the Company has reclassified the real estate assetsfor these properties to Real Estate - Discontinued Operations on the balance sheetsand reports the revenue and expenses from the properties as Income fromDiscontinued Operations on the statements of operations.  SFAS 144 also requires that any prior periodfinancial statements presented are also reclassified for comparability.  This reclassification has no effect on theCompany’s reported results of operations or funds from operations.

 

TaxStatus

 

TheCompany has elected to be taxed as a REIT under Sections 856 through 860 of theInternal Revenue Code of 1986, as amended (the “Code”).  A REIT is a legal entity that holds realestate interests and receives a deduction for dividends paid to itsshareholders for federal income tax purposes. HGP intends to distribute its REIT taxable income to its shareholdersand satisfy certain other requirements as defined in the Code so as to reduceor eliminate federal income tax liability. Based on its taxable loss in the current period and past fiscal years,the Company is not and has not been obligated to make any dividenddistributions to qualify as a REIT.

 

3

----

 

In2000, the Company amended its Charter to impose a limit on share ownership withrespect to any shareholder of no more than 4.9% of the value of all classes ofthe Company’s outstanding shares.  Thislimitation is intended to prevent the application of the limitations on theutilization of the Company’s net operating losses for federal income taxpurposes.  The revisions to the Charterallow the Board of Directors to set a higher share ownership limit with respectto specific shareholders, provided such higher limit would not jeopardize theCompany’s status as a REIT within the meaning of the Code.  Additionally, shareholders which owned morethan 4.9% of the Company’s outstanding shares as of the effective date of theamendments are not subject to the 4.9% ownership limit, but are subject to theownership limit of 9.9% of the value of the Company’s outstanding shares asprovided in the Charter prior to its amendment.

 

InJuly 2002, the Company established an exception to its share ownership limitswhich permits Howard M. Amster to own a maximum of 29.9% of the Company’soutstanding shares.  All otherindividual shareholders of the Company are limited to an ownership level of4.9% of the Company’s outstanding shares. Mr. Amster is a member of the Company’s Board of Directors.

 

EnvironmentalMatters

 

Undervarious federal, state and local laws and regulations, an owner of real estateis liable for the costs of removal or remediation of certain hazardoussubstances on their property.  Such lawsoften impose liability without regard to whether the owner knew of, or wasresponsible for, the presence of hazardous substances.  The costs of remediation or removal may besubstantial, and the presence of the hazardous substances, or the failure topromptly remediate them, may adversely affect the owner’s ability to sell thereal estate or to borrow using the real estate as collateral.  In connection with its ownership andoperation of the properties, the Company may be potentially liable for thecosts of removal or remediation of hazardous substances.  No environmental matters are known to affectthe properties owned by the Company at December 31, 2002.

 

Employees

 

Asof December 31, 2002, the Company had 129 employees.  The Company believes that its relations with its employees aresatisfactory.

 

4

----

 

**ITEM 2 - PROPERTIES**

 

Thefollowing table and accompanying notes set forth information concerning eachproperty in which the Company owns an equity interest as of December 31,2002.  See Schedule III in Item 8 foradditional information.

 

**Portfolioof  Shopping Center Properties**

 

***December 31,2002***

 
| **Name and  Location of Center(2)(3)**                              |   | **Initial  Construction** |   | **GLA (sq.  ft)** |   | **Percentage  Leased(1)** |   |
|---------------------------------------------------------------------|--------|---------------------------|--------|-------------------|--------|---------------------------|--------|
|                                                                |   |                      |   |              |   |                      |   |
| Holland Outlet Center  in Holland, Michigan                         |   | September 1988            |   | 193,775           |   | 69.8                      | %      |
|                                                                |   |                      |   |              |   |                      |   |
| Horizon Outlet  Center-Laughlin in Laughlin, Nevada                 |   | July 1996                 |   | 256,799           |   | 92.2                      | %      |
|                                                                |   |                      |   |              |   |                      |   |
| Horizon Outlet  Center-Monroe in Monroe, Michigan                   |   | November 1987             |   | 225,121           |   | 66.1                      | %      |
|                                                                |   |                      |   |              |   |                      |   |
| Horizon Outlet  Center-Traverse City in Traverse City, Michigan     |   | October 1990              |   | 153,975           |   | 89.8                      | %      |
|                                                                |   |                      |   |              |   |                      |   |
| Horizon Outlet  Center-Tulare in Tulare, California                 |   | November 1995             |   | 138,647           |   | 84.5                      | %      |
|                                                                |   |                      |   |              |   |                      |   |
| Indiana Factory Shops  in Daleville, Indiana                        |   | November 1994             |   | 233,605           |   | 38.6                      | %      |
|                                                                |   |                      |   |              |   |                      |   |
| Lakeshore Marketplace  in Norton Shores, Michigan (Power Center)(4) |   | October 1995              |   | 357,128           |   | 94.7                      | %      |
|                                                                |   |                      |   |              |   |                      |   |
| Medford Outlet Center  in Medford, Minnesota                        |   | June 1991                 |   | 223,960           |   | 91.5                      | %      |
|                                                                |   |                      |   |              |   |                      |   |
| Nebraska Crossing  Factory Stores in Gretna, Nebraska               |   | October 1993              |   | 191,500           |   | 65.0                      | %      |
|                                                                |   |                      |   |              |   |                      |   |
| Sealy Outlet Center in  Sealy, Texas                                |   | August 1995               |   | 191,587           |   | 58.3                      | %      |
|                                                                |   |                      |   |              |   |                      |   |
| The Factory Shops in Georgian  Place in Somerset, Pennsylvania      |   | April 1990                |   | 189,532           |   | 57.9                      | %      |
|                                                                |   |                      |   |              |   |                      |   |
| Warrenton Outlet Center  in Warrenton, Missouri                     |   | September 1993            |   | 199,963           |   | 95.0                      | %      |
|                                                                |   |                      |   |              |   |                      |   |
| **Total  Centers**                                                  |   |                      |   | 2,555,592         |   | 76.1                      | %      |

 

----

*Notes:*

(1)          Reflectsarea leased as of December 31, 2002 as a percentage of total gross leasablearea (“GLA”).  Includes only leases withterms which have commenced on or before 12/31/02 and which have total terms ofor for which tenants have been in occupancy for 12 months or longer.

(2)        In theopinion of management, all of the properties described above are adequatelycovered by insurance.

(3)        Excludes theRoseville, Michigan property which is leased to Petsmart, Inc. and 22,869square feet of the Company’s corporate office building which is held for rent.

(4)        LakeshoreMarketplace is classified as discontinued operations at December 31, 2002 onthe Company’s balance sheet.

 

**Lease Information**

 

Ingeneral, the leases have initial terms of one to five years.  Some leases provide for the payment ofpercentage rent based on annual sales in excess of certain thresholds.  In addition, some leases provide for thepayment of a tenant’s proportionate share of actual common area maintenance,refuse removal, insurance, and real estate taxes as well as a payment foradvertising and promotion and an administrative fee.  Common area maintenance includes such items as common areautilities, security, parking lot cleaning, maintenance and repair of commonareas, capital replacement reserves, landscaping, seasonal decorations, publicrestroom maintenance and certain administrative expenses.

 

5

----

 

**LeaseExpirations - Properties**

 

Thefollowing table shows leases scheduled to expire each year for the next fiveyears at the Company’s properties, including Lakeshore Marketplace which isconsidered discontinued operations (as of December 31, 2002 and assuming nolease renewals or extensions):

 
|     |   | **Operating  Portfolio**        |   | **Discontinued  Operations** |   |
|----------|--------|---------------------------------|--------|------------------------------|--------|
| **Year** |   | **Number  of Leases  Expiring** |   | **GLA  (sq. ft.)**           |   | **Number  of Leases  Expiring** |   | **GLA  (sq. ft.)** |   |
| 2003     |   | 127                             |   | 552,355                      |   | 1 |   | 1,894 |   |
| 2004     |   | 100                             |   | 444,270                      |   | 3 |   | 10,376 |   |
| 2005     |   | 47                              |   | 192,562                      |   | 4 |   | 12,735 |   |
| 2006     |   | 42                              |   | 209,179                      |   | 4 |   | 58,889 |   |
| 2007     |   | 18                              |   | 67,290                       |   | 2 |   | 63,650 |   |

 

**Tenant Information**

 

HGP’sshopping centers feature a variety of retailers of widely recognized,traditional brand name merchandise.  Thefollowing table sets forth information as to HGP’s major tenants, includingtenants at Lakeshore Marketplace which is considered discontinued operations,as of and for the year ended December 31, 2002.

 
|                             |   | **Number  of  Stores** |   | **Occupied  (sq. ft)** |   | **Percentage  of Total  Revenues** |   | **Percentage  of  GLA Occupied** |   |
|----------------------------------|--------|------------------------|--------|------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                             |   |                   |   |                   |   |                               |   |                             |   |
| Phillips-Van Heusen  Corporation |   | 27                     |   | 134,275                |   | 8.05                               | %      | 6.90                             | %      |
| Dress Barn, Inc.                 |   | 10                     |   | 79,272                 |   | 4.74                               | %      | 4.08                             | %      |
| The Gap, Inc.                    |   | 11                     |   | 109,984                |   | 4.60                               | %      | 5.66                             | %      |
| Brown Group Retail,  Inc.        |   | 12                     |   | 66,570                 |   | 4.43                               | %      | 3.42                             | %      |
| Mikasa                           |   | 7                      |   | 53,350                 |   | 3.73                               | %      | 2.69                             | %      |
| Elder-Beerman                    |   | 1                      |   | 87,185                 |   | 3.28                               | %      | 4.48                             | %      |
| Sara Lee Stores                  |   | 12                     |   | 51,289                 |   | 2.99                               | %      | 2.64                             | %      |

 

**Competition**

 

HGP’s shopping centerscompete for customers primarily with factory outlet centers, traditionalshopping malls and off-price retailers. HGP believes that the majority of its customers visit factory outletcenters because they are intent on buying first-quality and name-brand goods atdiscounted prices.  Traditional full andoff-price retailers are often unable to provide such a variety of products atattractive prices at a single location every day.

 

Numerous developers andreal estate companies are engaged in the development or ownership of factoryoutlet centers and other retail complexes that compete with HGP in seekingtenants for its centers.  HGP competesfor tenants with many large national and small developers of factory outletcenters.  The development of a new,competing factory outlet center with a more convenient location or morefavorable rental terms may attract HGP’s tenants or cause them to renegotiatetheir leases at or prior to renewal.

 

As HGP continues toimplement its business plan to enhance the value of its real estate assets byexploring alternative retail and non-retail uses, it will compete directly witha broader array of national and regional real estate management and developmentcompanies, many of which are larger and have greater financial resources thanHGP.

 

**ITEM 3- LEGAL PROCEEDINGS**

 

In the ordinary course ofbusiness the Company is subject to certain legal actions.  While any litigation contains an element ofuncertainty, management believes the losses, if any, resulting from suchmatters will not have a material adverse effect on the consolidated financialstatements of the Company.

 

6

----

 

**ITEM 4- SUBMISSION OF MATTERS****TO A VOTE OF SECURITY HOLDERS**

 

No matters were submittedto a vote of security holders during the quarter ended December 31, 2002.

 

**PART II**

 

**ITEM5-MARKET FOR THE COMPANY’S COMMON SHARES ANDRELATED STOCKHOLDER MATTERS**

 

TheCompany’s common shares trade on the NASDAQ SmallCap Market of The NASDAQ StockMarket, Inc. (“Nasdaq”) under the trading symbol “HGPI”.

 

Thefollowing table sets forth the quarterly high and low sales prices per share ofthe Company’s common shares, as reported by Nasdaq.

 

|               |   | **Market Price Per Common Share  2002** |   |
|--------------------|--------|-----------------------------------------|--------|
|               |   | **Fourth  Quarter**                     |   | **Third  Quarter** |   | **Second  Quarter** |   | **First  Quarter** |   |
| High               |   | $                                       | 3.50   |   | $ | 3.32 |   | $ | 2.25 |   | $ | 2.55 |   |
| Low                |   | 2.50                                    |   | 1.50 |   | 1.70 |   | 1.70 |   |
| Dividends declared |   | —                                  |   | — |   | — |   | — |   |
|                    |        |                                         |        |  |  |  |  |  |  |  |  |  |  |

 

|               |   | **Market Price Per Common Share  2001** |   |
|--------------------|--------|-----------------------------------------|--------|
|               |   | **Fourth  Quarter**                     |   | **Third  Quarter** |   | **Second  Quarter** |   | **First  Quarter** |   |
| High               |   | $                                       | 3.45   |   | $ | 3.65 |   | $ | 2.99 |   | $ | 3.31 |   |
| Low                |   | 1.75                                    |   | 2.38 |   | 2.21 |   | 2.56 |   |
| Dividends declared |   | —                                  |   | — |   | — |   | — |   |
|                    |        |                                         |        |  |  |  |  |  |  |  |  |  |  |

 

Theapproximate number of holders of record of the common shares was 428 as ofJanuary 15, 2003.

 

7

----

 

**ITEM 6-SELECTED FINANCIAL DATA**

 

Thefollowing table presents selected historical financial data of HGP and thePredecessor Properties (as defined herein) and should be read in conjunctionwith the consolidated financial statements and notes thereto included in PartII, Item 8.  The Predecessor Propertieshistorical information has been derived from the operations and historicalbasis of 13 of Horizon’s 35 shopping centers (including one power center) thatwere contributed to HGP by Horizon in connection with the Prime Retailmerger.  As HGP was not a separate legalentity with its own capital structure prior to June 15, 1998, per share datafor net income and dividends is not presented for these periods.  The historical financial information may notbe indicative of HGP’s future performance and does not necessarily reflect whatthe financial position and results of operations of HGP would have been had HGPoperated as a separate, stand-alone entity during the periods prior to June 15,1998.  The selected financial data setforth does not include the operating results or financial position of the PrimeTransferred Properties (as defined herein) for the periods prior to theiracquisition on June 15, 1998.

 
|                                                                                         |   |                                                                          |                 |                  |                   |               |   |     |    | **Horizon Group**          |   |              |   |
|----------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|----------------------|-----------------------|------------------------|--------------------|--------|----------|---------|----------------------------|--------|-------------------|--------|
|                                                                                         |   |                                                                          |                 |                  |                   |               |   |     |    | **Properties, Inc. as of** |   | **Predecessor**   |   |
|                                                                                         |   |                                                                          |                 |                  |                   |               |   |     |    | **December 31, 1998**      |   | **Properties**    |   |
|                                                                                         |   | **Horizon Group Properties, Inc.  as of or for the year ended  December 31,** |                 | **or for the period** |                   | **for the period** |   |
|                                                                                         |   |                                                                          | **from**             |                  | **from**               |               |
|                                                                                         |   |                                                                          | **June 15, 1998 to** |                  | **January 1, 1998 to** |               |
|                                                                                         |   | **2002**                                                                      |                 | **2001**              |                   | **2000**           |   | **1999** |    | **December 31, 1998**      |   | **June 14, 1998** |   |
|                                                                                         |   | **(In thousands, except per share  data)**                                    |                 |
| **Operating Data**                                                                           |   |                                                                          |                 |                  |                   |               |   |     |    |                       |   |              |   |
| Revenues                                                                                     |   | $                                                                             | 17,947               |                  | $                      | 20,261             |   | $        | 24,808  |                       | $      | 28,033            |   | $ | 15,895 |   | $ | 11,372 |   |
| Expenses                                                                                     |   | 26,910                                                                        |                 | 27,258                |                   | 27,770             |   | 28,800   |    | 15,613                     |   | 14,985            |   |
| Impairment(1)                                                                                |   | 17,027                                                                        |                 | 18,000                |                   | 1,568              |   | —   |    | —                     |   | —            |   |
| Loss  from joint ventures                                                                    |   | —                                                                        |                 | —                |                   | —             |   | (622     | )       | (59                        | )      | (207              | )      |
|                                                                                         |   |                                                                          |                 |                  |                   |               |   |     |    |                       |   |              |   |
| Income/(loss)  from continuing operations before minority interests and extraordinary charge |   | (25,990                                                                       | )                    | (24,997               | )                      | (4,530             | )      | (1,389   | )       | 223                        |   | (3,820            | )      |
| Minority  interests(2)                                                                       |   | 3,965                                                                         |                 | 3,725                 |                   | 708                |   | 180      |    | (99                        | )      | —            |   |
|                                                                                         |   |                                                                          |                 |                  |                   |               |   |     |    |                       |   |              |   |
| Income/(loss)  from continuing operations                                                    |   | (22,025                                                                       | )                    | (21,272               | )                      | (3,822             | )      | (1,209   | )       | 124                        |   | (3,820            | )      |
| Income/(loss)  from discontinued operations, net of minority interests                       |   | 212                                                                           |                 | 558                   |                   | 730                |   | 902      |    | 194                        |   | (142              | )      |
| Net  gain on sale of real estate, net of minority interests                                  |   | 150                                                                           |                 | 1,316                 |                   | 202                |   | —   |    | —                     |   | —            |   |
|                                                                                         |   |                                                                          |                 |                  |                   |               |   |     |    |                       |   |              |   |
| Income/(loss)  before extraordinary charge                                                   |   | (21,663                                                                       | )                    | (19,398               | )                      | (2,890             | )      | (307     | )       | 318                        |   | (3,962            | )      |
| Extraordinary  charge on debt prepayment                                                     |   | —                                                                        |                 | —                |                   | —             |   | (568     | )       | —                     |   | —            |   |
|                                                                                         |   |                                                                          |                 |                  |                   |               |   |     |    |                       |   |              |   |
| Net  income/(loss)                                                                           |   | $                                                                             | (21,663              | )                     | $                      | (19,398            | )      | $        | (2,890  | )                          | $      | (875              | )      | $ | 318 |   | $ | (3,962 | ) |
| Net  income/(loss) per share - basic and diluted(3)                                          |   | $                                                                             | (7.55                | )                     | $                      | (6.76              | )      | $        | (1.01   | )                          | $      | (0.31             | )      | $ | 0.12 |   |   |   |
| Dividends  per share(4)                                                                      |   | $                                                                             | —               |                  | $                      | —             |   | $        | —  |                       | $      | —            |   | $ | — |   |   |   |
|                                                                                         |   |                                                                          |                 |                  |                   |               |   |     |    |                       |   |              |   |
| **Balance Sheet Data:**                                                                      |   |                                                                          |                 |                  |                   |               |   |     |    |                       |   |              |   |
| Real  estate, net of accumulated depreciation                                                |   | $                                                                             | 80,873               |                  | $                      | 98,583             |   | $        | 122,209 |                       | $      | 129,616           |   | $ | 131,668 |   |   |   |
| Cash  and cash equivalents                                                                   |   | 1,237                                                                         |                 | 1,096                 |                   | 2,866              |   | 4,955    |    | 2,686                      |   |              |   |
| Real  estate - held for sale                                                                 |   | —                                                                        |                 | 446                   |                   | 2,468              |   | —   |    | 2,500                      |   |              |   |
| Real  estate - discontinued operations                                                       |   | 15,318                                                                        |                 | 15,976                |                   | 12,258             |   | 12,157   |    | 11,014                     |   |              |   |
| Total  assets                                                                                |   | 104,677                                                                       |                 | 124,383               |                   | 147,968            |   | 155,000  |    | 165,678                    |   |              |   |
| Debt                                                                                         |   | 103,752                                                                       |                 | 103,135               |                   | 104,401            |   | 107,128  |    | 114,752                    |   |              |   |
|                                                                                         |   |                                                                          |                 |                  |                   |               |   |     |    |                       |   |              |   |
| Total  shareholders’ equity (deficit)                                                   |   | (9,028                                                                        | )                    | 11,632                |                   | 30,988             |   | 33,528   |    | 33,614                     |   |              |   |
|                                                                                         |   |                                                                          |                 |                  |                   |               |   |     |    |                       |   |              |   |
| Other  Data:                                                                                 |   |                                                                          |                 |                  |                   |               |   |     |    |                       |   |              |   |
| Cash  flows provided by/(used in):                                                           |   |                                                                          |                 |                  |                   |               |   |     |    |                       |   |              |   |
| Operating  activities                                                                        |   | $                                                                             | 2,541                |                  | $                      | 202                |   | $        | 2,115   |                       | $      | 6,673             |   | $ | 2,760 |   | $ | 1,447 |   |
| Investing  activities                                                                        |   | (282                                                                          | )                    | 436                   |                   | (1,450             | )      | (832     | )       | (2,455                     | )      | (1,703            | )      |
| Financing  activities                                                                        |   | (2,118                                                                        | )                    | (2,408                | )                      | (2,754             | )      | (3,572   | )       | (761                       | )      | 325               |   |
|                                                                                         |   |                                                                          |                 |                  |                   |               |   |     |    |                       |   |              |   |
| Total  gross leasable area (square feet)                                                     |   | 2,556                                                                         |                 | 2,556                 |                   | 2,673              |   | 2,673    |    | 2,795                      |   | 2,247             |   |

 

8

----

 

----

*Notes:*

(1)          In 2002 and 2001, represents charges to reduce the carrying value offour centers to their estimated fair value. In 2000, represents a charge to reduce the carrying value of a centersubject to a sales agreement to its estimated sales value less costs todispose.

(2)          No minority interest was allocated to the Predecessor Properties due tothe change in the capital structure resulting from the Merger.

(3)          No per share net income or loss information is presented for thePredecessor Properties due to the change in the capital structure resulting fromthe Merger.

(4)          No dividend information is shown for the Predecessor Properties due tothe change in the capital structure resulting from the Merger.

 

9

----

 

**SELECTEDQUARTERLY FINANCIAL DATA**

 
|                                                            |   | **2002**           |   |
|-----------------------------------------------------------------|--------|--------------------|--------|
|                                                            |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
|                                                            |   | **(In thousands)** |   |
| Revenue                                                         |   | $                  | 4,451  |   | $ | 4,465 |   | $ | 4,478 |   | $ | 4,553 |   |
| Expenses                                                        |   | 6,697              |   | 6,547 |   | 6,781 |   | 6,886 |   |
| Provision for  impairment                                       |   | —             |   | — |   | — |   | 17,027 |   |
|                                                            |   |               |   |   |   |   |   |   |   |
| Loss from continuing operations  before minority interests      |   | (2,246             | )      | (2,082 | ) | (2,303 | ) | (19,360 | ) |
| Minority interests                                              |   | 334                |   | 308 |   | 342 |   | 2,981 |   |
|                                                            |   |               |   |   |   |   |   |   |   |
| Loss from continuing  operations                                |   | (1,912             | )      | (1,774 | ) | (1,961 | ) | (16,379 | ) |
| Income from  discontinued operations, net of minority interests |   | 87                 |   | 29 |   | 80 |   | 16 |   |
| Net gain on sale of  real estate, net of minority interests     |   | 132                |   | — |   | 19 |   | — |   |
|                                                            |   |               |   |   |   |   |   |   |   |
| Net loss                                                        |   | $                  | (1,693 | ) | $ | (1,745 | ) | $ | (1,862 | ) | $ | (16,363 | ) |
|                                                            |   |               |   |   |   |   |   |   |   |
| Net loss per share -  basic and diluted                         |   | $                  | (0.59  | ) | $ | (0.61 | ) | $ | (0.65 | ) | $ | (5.70 | ) |

 
|                                                            |   | **2001**           |   |
|-----------------------------------------------------------------|--------|--------------------|--------|
|                                                            |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
|                                                            |   | **(In thousands)** |   |
| Revenue                                                         |   | $                  | 5,340  |   | $ | 5,096 |   | $ | 4,881 |   | $ | 4,945 |   |
| Expenses                                                        |   | 6,723              |   | 6,827 |   | 6,876 |   | 6,834 |   |
| Provision for  impairment                                       |   | —             |   | — |   | 18,000 |   | — |   |
|                                                            |   |               |   |   |   |   |   |   |   |
| Loss from continuing  operations before minority interests      |   | (1,383             | )      | (1,731 | ) | (19,995 | ) | (1,889 | ) |
| Minority interests                                              |   | 213                |   | 266 |   | 2,966 |   | 280 |   |
|                                                            |   |               |   |   |   |   |   |   |   |
| Loss from continuing  operations                                |   | (1,170             | )      | (1,465 | ) | (17,029 | ) | (1,609 | ) |
| Income from  discontinued operations, net of minority interests |   | 255                |   | 182 |   | 54 |   | 68 |   |
| Net gain on sale of  real estate, net of minority interests     |   | (5                 | )      | 775 |   | 36 |   | 510 |   |
|                                                            |   |               |   |   |   |   |   |   |   |
| Net loss                                                        |   | $                  | (920   | ) | $ | (508 | ) | $ | (16,939 | ) | $ | (1,031 | ) |
|                                                            |   |               |   |   |   |   |   |   |   |
| Net loss per share -  basic and diluted                         |   | $                  | (0.32  | ) | $ | (0.18 | ) | $ | (5.90 | ) | $ | (0.36 | ) |

 

10

----

 

**ITEM 7- MANAGEMENT’S DISCUSSION ANDANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Introduction

 

Thefollowing discussion and analysis of the consolidated financial condition andresults of operations of Horizon Group Properties, Inc. (“HGPI” or, togetherwith its subsidiaries “HGP” or the “Company”) should be read in conjunctionwith the Consolidated Financial Statements and Notes thereto. The Company’soperations are conducted primarily through a subsidiary limited partnership,Horizon Group Properties, L.P. (“HGP LP”). HGPI is the sole general partner of HGP LP and, as of December 31, 2002,owned approximately 79.6% of the HGP LP partnership interests (“Common Units”).In general, Common Units of HGP LP are exchangeable for shares of Common Stockon a one-for-one basis at any time (or for an equivalent cash amount at theCompany’s election).  HGPI controls HGPLP and is dependent on distributions or other payments from HGP LP to meet itsfinancial obligations.

 

CautionaryStatements

 

Thefollowing discussion in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” contains certain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 which reflect management’s current views with respect to future eventsand financial performance.  Suchforward-looking statements are subject to certain risks and uncertaintiesincluding, but not limited to, the effects of future events on the Company’sfinancial performance; the risk that the Company may be unable to refinance itscurrent debt as it matures; risks related to the retail industry in which the Company’sshopping centers compete, including the potential adverse impact of externalfactors, such as competition from existing or newly constructed shoppingcenters, inflation, consumer confidence, unemployment rates and consumer tastesand preferences; risks associated with the Company’s property acquisitions,such as the lack of predictability with respect to financial returns; risksassociated with the Company’s property development activities, such as thepotential for cost overruns, delays and the lack of predictability with respectto the financial returns associated with these development activities; the riskof potential increases in market interest rates from current levels; and risksassociated with real estate ownership, such as the potential adverse impact ofchanges in local economic climate on the revenues and the value of theCompany’s properties.  For furtherinformation on factors which could affect the Company and the statementscontained herein, reference is made to the Company’s other filings with theSecurities and Exchange Commission, including the Company’s RegistrationStatement on Form 10, as amended, dated as of June 4, 1998, with respect to theCompany’s initial registration of its common stock under the SecuritiesExchange Act of 1934, as amended and the Sky Merger Corp. RegistrationStatement on Form S-4, as filed with the Securities and Exchange Commission onMay 12, 1998 (Registration No. 333-51285).

 

Thestatements of financial condition and results of operations of the Company reflectthe application of the Company’s accounting policies, the most significant ofwhich are outlined in Note 2 to the Consolidated Financial Statements.  These policies are applied in accordancewith accounting principles generally accepted in the United States and reflectsignificant assumptions and estimates of the management of the Company.

 

GeneralOverview

 

TheCompany is a self-administered and self-managed corporation that wasestablished in connection with the merger of Horizon Group, Inc., a Michigancorporation (“Horizon”) with and into Prime Retail, Inc., a Marylandcorporation (“Prime” or “Prime Retail”) which was consummated on June 15, 1998(“the Merger”).  As of December 31,2002, HGP’s operating portfolio consisted of 11 factory outlet centers locatedin nine states comprising an aggregate of approximately 2.2 million square feetof gross leasable area (“GLA”).  TheCompany also owns one power center which is classified as discontinuedoperations at December 31, 2002.  Nineof the factory outlet centers and the power center were contributed to theCompany by Horizon pursuant to a Contribution Agreement entered into inconnection with the Merger (the “Contribution Agreement”) and two factoryoutlet centers were purchased by the Company from Prime immediately subsequentto the consummation of the Merger.

 

TheCompany currently is in default with respect to the obligations of two pools ofloans originated by JP Morgan in July 1999 (the “JP Morgan Loans”).  The defaults are the result of the Company’sfailure to pay in full the amounts due under the loans commencing with thepayment due October 1, 2001.  Each poolof loans is secured by a group of three properties.  The first group consists of the Indiana Factory Shops, TheFactory Shops in Georgian Place and Horizon Outlet Center – Tulare; the secondgroup consists of Nebraska Crossing Factory Stores, Sealy Outlet Center andHorizon Outlet Center – Traverse City. The loans are non-recourse to HGPI, subject to certain customaryexceptions.  The Company continues tomanage the centers and remit the net cash flow each month as partial payment onthe loans.  Interest expense sinceOctober 2001 has been accrued at the default rate of interest (an annual rateof 13.46%) together with a penalty equal to 5% of each monthly amount due underthe related notes.  The results ofoperations of the Company reflect the revenues and expenses, including accruedinterest and penalties, of the properties subject to the JP Morgan Loanstogether with the revenues and expenses of the other 

 

11

----

 

propertiesowned by the Company.  The defaultsunder the loan agreements allow the respective lenders to exercise theirvarious remedies contained in the loan agreements, including termination of theCompany as manager of the centers, application of escrow balances to delinquentpayments and foreclosure on the properties which collateralize the loans.

 

InDecember 2002, the Company engaged a broker to market Lakeshore Marketplace, itspower center in Norton Shores, Michigan. The Company is currently evaluating the offers it has received.  The Company is also marketing for sale itsproperty in Roseville, Michigan, which is net-leased to Petsmart, Inc.  Pursuant to the requirements of Statement ofFinancial Accounting Standards No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” (“SFAS 144”), the Company has reclassified thereal estate assets for these properties to Real Estate - DiscontinuedOperations on the balance sheet and reports the revenue and expenses from theproperties as Income from Discontinued Operations on the statements ofoperations.  SFAS 144 also requires thatany prior period financial statements presented are also reclassified forcomparability.  This reclassificationhas no effect on the Company’s reported results of operations or funds fromoperations.

 

2002Compared to 2001

 

Baserent decreased $1.6 million in the year ended December 31, 2002 compared to theprior year primarily due to a decline in occupancy and reductions in rentalrates for many tenants.  Of the totaldecrease, $980,000 is related to the six properties which secure the JP MorganLoans and $570,000 is related to the Company’s five other outlet centers(excluding the center in Dry Ridge, Kentucky which was sold in January, 2001(“Dry Ridge”)).  The remainingdifference relates to Dry Ridge and other corporate activities.  Average occupancy for the six propertiessubject to the JP Morgan Loans was 66.6% and 68.9% for the years ended December31, 2002 and 2001, respectively. Average occupancy for the Company’s five other outlet centers (excludingDry Ridge) was 81.2% and 81.8% for the years ended December 31, 2002 and 2001,respectively.

 

Baserent (both fixed base rent and base rent calculated as a percentage of sales)and expense recovery revenue are recorded based on management’s interpretationof the language contained in the leases and certain related tenant and shoppingcenter performance measures.  Base rentsrelated to leases which contain uneven rental obligations are recognized at theaverage rental rates over the terms of the related leases based on management’sjudgement with respect to the collectibility of those rents.  If future events differ from management’sjudgements, a significant change in the amount of reported revenue couldresult.  This is a significantaccounting policy, which is discussed more fully in Note 2 to the ConsolidatedFinancial Statements.

 

Expenserecovery revenue decreased $419,000 in the year ended December 31, 2002compared to the prior year due to a decline in the percentage of tenantssubject to those charges.  Of the totaldecrease, $189,000 was related to the six properties which secure the JP MorganLoans and $236,000 was related to the Company’s five other outlet centers(excluding Dry Ridge).  The remainingdifference relates to Dry Ridge and other corporate activities.

 

Expenserecovery revenue represents payments by tenants of a portion of propertyoperating expenses and real estate taxes. Tenants generally pay an estimate of these amounts to the Companymonthly.  The Company accrues expenserecovery revenue based on an estimate of expenses and each tenant’s obligationto reimburse its share of those expenses. The final amounts due are determined after the end of the year.  Any difference between the actual andaccrued amounts are recorded in the period in which such determination is made.

 

Propertyoperating expense increased $318,000 in the year ended December 31, 2002compared to the prior year.  The primaryfactor was an increase in insurance premiums in the new policy year includingthe addition of terrorism coverage required by some of the Company’s lenders.  The higher insurance premiums were partiallyoffset by overall cost-cutting programs inplemented company-wide.  Of the total increase, $68,000 was relatedto the six properties which secure the JP Morgan Loans and $262,000 was relatedto the Company’s five other outlet centers (excluding Dry Ridge).  The remaining difference relates to DryRidge and other corporate activities.

 

Realestate tax expense decreased $134,000 in the year ended December 31, 2002compared to the prior year mainly due to a refund received in 2002 of a portionof the 2000 and 2001 taxes and a reduction in the 2002 taxable value at theoutlet center in Gretna, Nebraska.

 

Forsome properties, real estate taxes for the current year are not due and payableuntil the next calendar year.  Weestimate the amounts due for each period based on historical trends for aparticular property or local area.  Wealso use information from our consultants who review the methodology used bythe local taxing authorities to determine the real estate taxes we owe.  If the local taxing authority were to changethe methodology it uses to determine real estate taxes or the rates they apply,the amounts estimated to be paid in future years could vary from management’sestimates.

 

Landlease and other expense decreased $867,000 in the year ended December 31, 2002compared to the prior year.  Thisdecrease was mainly due to a decrease in bad debt expense and the Company’sacquisition of the land under its center in Laughlin, Nevada as of February2002.  The Company had previously leasedthis land (see Note 8 to the Consolidated Financial Statements).  Of the total decrease, $536,000 

 

12

----

 

wasrelated to this Laughlin land lease.  Ofthe remaining decrease, $55,000 was related to the six properties subject tothe JP Morgan Loans and $287,000 was related to the Company’s five other outletcenters (excluding Dry Ridge).  Theremaining difference relates to Dry Ridge and other corporate activities.  The Company recognized net bad debt expenseof $142,000 and $632,000 in 2002 and 2001, respectively, based on its analysisof collectibility.  The determination ofthis amount involves an estimate by management based on, among other factors,the period of time an amount is past due and the financial condition of theobligor.  Future conditions which differfrom management’s estimates may result in a significant difference in theamounts actually collected.  This is asignificant accounting policy, which is discussed more fully in Note 2 to theConsolidated Financial Statements.

 

Depreciationand amortization expense decreased $980,000 compared to the prior year.  Of the total decrease, $699,000 was relatedto the six properties securing the JP Morgan Loans and $212,000 was related tothe Company’s five other outlet centers (excluding Dry Ridge).  The remaining difference relates to DryRidge and other corporate activities. This decrease primarily resulted from the reductions in the carryingvalues from impairment of four of the properties subject to the JP Morgan Loanswhich were recorded in September 2001 and a decrease of $280,000 for charges ofunamortized capitalized costs related to unscheduled tenant move-outs in 2002compared to 2001.

 

Generaland administrative expense decreased $313,000 in the year ended December 31,2002 compared to the prior year primarily as a result of legal fees associatedwith a proxy dispute between the Company and certain shareholders incurred in2001.  No similar charges were incurredin the current year.

 

Impairmentcharges totaling $17.0 million and $18.0 million were recorded in the yearsended December 31, 2002 and 2001, respectively, to adjust the carrying valuesof four of the properties subject to the JP Morgan Loans to their current fairmarket values (see Note 4 to the Consolidated Financial Statements).  The determination of the current fair marketvalues involves estimates by management of future cash flows, occupancy levels,comparable sales values and replacement costs, among other things.  If future conditions differ frommanagement’s estimates, a significant change in this charge could bewarranted.  This is a significantaccounting policy which is discussed more fully in Note 2 to the ConsolidatedFinancial Statements.

 

Interestexpense increased $1.6 million in the year ended December 31, 2002 compared tothe prior year primarily as a result of default interest and late fees totaling$2.6 million in 2002 compared to $575,000 in 2001 related to the JP Morgan Loandefault (see Note 8 to the Consolidated Financial Statements).  The JP Morgan Loans are non-recourse toHGPI, subject to limited customary exceptions. Currently, the net cash flow from the collateral properties is beingremitted as a partial payment of the contractual debt service.

 

Inthe first quarter of 2001, the Company sold Dry Ridge and recognized a loss of$6,000.  In the second quarter of 2001,the Company sold 18.8 acres of vacant land in Norton Shores, Michigan for $1.7million and recognized a gain of $913,000. In the third quarter of 2001, the Company sold land ancillary to itscenter in Holland, Michigan and recognized a gain of $42,000.  In the fourth quarter of 2001, the Companyhad three property transactions.  Thefirst was the sale of an outparcel at its center in Sealy, Texas which resultedin a loss of $29,000.  The second was thesale of an outparcel at its center in Monroe, Michigan which resulted in a gainof $236,000.  The third transaction wasthe sale of an outparcel in Norton Shores, Michigan which resulted in a gain of$394,000.

 

InJanuary 2002, the Company sold 7.1 acres of land ancillary to its center inWarrenton, Missouri and recognized a loss of $1,000.  In February 2002, the Company sold a parcel of land adjacent toits shopping center in Norton Shores, Michigan and recognized a gain of$156,900.  In September 2002, theCompany sold excess office furniture to a tenant at the Michigan corporateoffice and recognized a gain of $22,000. The gains and losses from all of these transactions are reflected in theConsolidated Statements of Operations of the Company.

 

Inaccordance with SFAS 144 effective for financial statements issued for fiscalyears beginning after December 15, 2001, the results of operations andgain/(loss) on real estate properties sold or held for sale subsequent toDecember 31, 2001 are reflected in the consolidated statements of operations as“Income from Discontinued Operations” for all periods presented.

 

Incomefrom Discontinued Operations decreased $346,000 in the year ended December 31,2002 compared to the prior year.  Thisline item on the Company’s Statement of Operations contains the revenue andexpenses from the two properties classified as discontinued operations on theCompany’s balance sheets pursuant to SFAS 144 (see Note 2 to the ConsolidatedFinancial Statements).  This decrease isprimarily related to higher interest expense at the shopping center in NortonShores, Michigan due to its mortgage loan being refinanced in July 2001 at botha higher principal balance and a higher interest rate (see Note 8 to theConsolidated Financial Statements).

 

Averageoccupancy for the Company’s total operating portfolio for the years endedDecember 31, 2002 and 2001 was 73.9% and 75.4%, respectively.  The Company’s total operating portfoliooccupancy was 73.0% as of both December 31, 2002 and 2001.  These occupancy figures exclude theproperties which are considered discontinued operations.

 

Netloss for the years ended December 31, 2002 and 2001 was $7.55 and $6.76 pershare, respectively, on a basic and diluted basis.

 

13

----

 

2001Compared to 2000

 

Baserent decreased $3.3 million in the year ended December 31, 2001 compared to theprior year primarily due to a decline in occupancy and reductions in rentalrates for many tenants.  Of the totaldecrease, $1.7 million relates to the six properties which secure the JP MorganLoans, $559,000 is associated with Dry Ridge and $1.0 million  relates to the Company’s five other outletcenters. The remaining difference relates to other corporate activities.  Average occupancy for the six propertiessubject to the JP Morgan Loans was 68.9% and 78.9% for the years ended December31, 2001 and 2000, respectively. Average occupancy for the Company’s five other outlet centers (excludingDry Ridge) was 81.8% and 88.1% for the years ended December 31, 2001 and 2000,respectively.

 

Baserent (both fixed base rent and base rent calculated as a percentage of sales)and expense recovery revenue are recorded based on management’s interpretationof the language contained in the leases and certain related tenant and shoppingcenter performance measures.  Base rentsrelated to leases which contain uneven rental obligations are recognized at theaverage rental rates over the terms of the related leases based on management’sjudgement with respect to the collectibility of those rents.  If future events differ from management’sjudgements, a significant change in the amount of reported revenue couldresult.  This is a significantaccounting policy, which is discussed more fully in Note 2 to the ConsolidatedFinancial Statements.

 

Expenserecovery revenue decreased $800,000 in the year ended December 31, 2001compared to the prior year due to a decrease in the operating expenses subjectto recovery totaling $199,000 and a decrease in the area leased to tenantssubject to these charges.  Of the totaldecrease, $468,000 was related to the six properties subject to the JP MorganLoans and $268,000 was related to the Company’s other five outlet centers (excludingDry Ridge).  The remaining differencerelates to Dry Ridge and other corporate activities.

 

Expenserecovery revenue represents payments by tenants of a portion of propertyoperating expenses and real estate taxes. Tenants generally pay an estimate of these amounts to the Companymonthly.  The Company accrues expenserecovery revenue based on an estimate of expenses and each tenant’s obligationto reimburse its share of those expenses. The final amounts due are determined after the end of the year.  Any difference between the actual and accruedamounts are recorded in the period in which such determination is made.

 

Propertyoperating expense decreased $232,000 in the year ended December 31, 2001compared to the prior year primarily due to the sale of the Company’s outletcenter in Dry Ridge, Kentucky in January 2001.

 

Forsome properties, real estate taxes for the current year are not due and payableuntil the next calendar year.  Weestimate the amounts due for each period based on historical trends for aparticular property or local area.  Wealso use information from our consultants who review the methodology used bythe local taxing authorities to determine the real estate taxes we owe.  If the local taxing authority were to changethe methodology it uses to determine real estate taxes or the rates they apply,the amounts estimated to be paid in future years could vary from management’sestimates.

 

Landlease and other expense increased $337,000 in the year ended December 31, 2001as compared to the prior year mainly due to an increase in bad debt expense asa result of several tenant bankruptcies. Of the total increase $80,000 was related to the six properties subjectto the JP Morgan Loans and $332,000 was related to the Company’s five other outletcenters (excluding Dry Ridge).  Land leaseand other expense decreased $75,000 at Dry Ridge.  The Company recognized net bad debt expense of $632,000 and$277,000 in 2001 and 2000, respectively, based on its analysis ofcollectibility.  The determination ofthis amount involves an estimate by management based on, among other factors,the period of time an amount is past due and the financial condition of theobligor.  Future conditions which differfrom management’s estimates may result in a significant difference in theamounts actually collected. This is a significant accounting policy, which isdiscussed more fully in Note 2 to the Consolidated Financial Statements.

 

Depreciationand amortization expense increased $441,000 in the year ended December 31, 2001as compared to the prior year.  Of thetotal increase, $152,000 was related to the six properties subject to the JPMorgan Loans and $466,000 was related to the Company’s five other outletcenters (excluding Dry Ridge).  Theremaining difference relates to Dry Ridge and other corporate activities.  The increase in expense resulted fromdepreciation on Phase III of the Company’s center in Medford, Minnesota (whichwas placed in service in the fourth quarter of 2000) and an increase of$390,000 for charges of unamortized capitalized costs related to unscheduledtenant move-outs in 2001 compared to 2000.

 

Generaland administrative expense decreased $589,000 in the year ended December 31,2001 compared to the prior year primarily due to reductions in corporatestaffing levels and reductions in corporate bonuses.  The decrease in expense also reflects a portion of the reductionin property taxes on the Company’s corporate office building.  Legal fees increased in the current year asa result of costs related to a proxy dispute which were charged to expense inthe second quarter.  In the prior year,however, legal fees were incurred related to several potential transactionswhich were not consummated.  No similarcharges were incurred in the current year.

 

14

----

 

Impairmentcharges totaling $18.0 million were recorded in the year ended December 31,2001 to adjust the carrying value of four of the properties subject to the JPMorgan Loans to their current fair market values (See Note 4 to the ConsolidatedFinancial Statements).  Impairmentcharges of $1.6 million were recorded in the year ended December 31, 2000 basedon a contract for the sale of the outlet center in Dry Ridge, Kentucky whichclosed in January 2001.  Thedetermination of the current fair market values involves estimates bymanagement of future cash flows, occupancy levels, comparable sales values andreplacement costs, among other things. If future conditions differ from management’s estimates, a significantchange in this charge could be warranted. This is a significant accounting policy which is discussed more fully inNote 2 to the Consolidated Financial Statements.

 

Interestexpense decreased $502,000 in the year ended December 31, 2001 compared to theprior year.  The primary factors causingthe decrease were a reduction in LIBOR, which affected the Company’s floatingrate debt, a reduction in the Prime guarantee fee effective June 15, 2001, andthe sale of Dry Ridge, (see Note 12 to the Consolidated Financial Statements).  These decreases were mostly offset byinterest penalties and late fees totaling $291,000 related to the extension ofthe maturity date of the HGP Credit Facility in July 2001, and default interestand late fees totaling $575,000 related to the JP Morgan Loan default (see Note8 to the Consolidated Financial Statements). The JP Morgan Loans are non-recourse to HGPI, subject to limitedcustomary exceptions.  Currently, thenet cash flow from the collateral properties is being remitted as a partialpayment of the contractual debt service.

 

Inthe first quarter of 2001, the Company sold Dry Ridge and recognized a loss of$6,000.  In the second quarter of 2001,the Company sold 18.8 acres of vacant land in Norton Shores, Michigan for $1.7million and recognized a gain of $913,000. In the third quarter of 2001, the Company sold land ancillary to itscenter in Holland, Michigan and recognized a gain of $42,000.  In the fourth quarter of 2001, the Companyhad three property transactions.  Thefirst was the sale of an outparcel at its center in Sealy, Texas which resultedin a loss of $29,000.  The second wasthe sale of an outparcel at its center in Monroe, Michigan which resulted in again of $236,000.  The third transactionwas the sale of an outparcel in Norton Shores, Michigan which resulted in again of $394,000.

 

Inaccordance with SFAS 144 effective for financial statements issued for fiscalyears beginning after December 15, 2001, the results of operations andgain/(loss) on real estate properties sold or held for sale subsequent toDecember 31, 2001 are reflected in the consolidated statements of operations as“Income from Discontinued Operations” for all periods presented.

 

Incomefrom Discontinued Operations decreased $374,000 in the year ended December 31,2002 compared to the prior year.  Thisline item on the Company’s Statement of Operations contains the revenue andexpenses from the two properties classified as discontinued operations on theCompany’s balance sheets pursuant to SFAS 144 (see Note 2 to the ConsolidatedFinancial Statements).  This decrease isprimarily related to higher interest expense at the shopping center in NortonShores, Michigan due to its mortgage loan being refinanced in July 2001 at botha higher principal balance and a higher interest rate (see Note 8 to theConsolidated Financial Statements) and the management fees the new entity issubject to pursuant to a management agreement entered into in connection withthis refinancing.

 

Averageoccupancy for the Company’s total operating portfolio for the year endedDecember 31, 2001 was 75.4%.  As ofDecember 31, 2001 and 2000, occupancy of the Company’s total operatingportfolio was 73.0% and 80.9%, respectively. These occupancy figures exclude the properties which are considereddiscontinued operations.

 

Netloss for the years ended December 31, 2001 and 2000 was $6.76 and $1.01 pershare, respectively, on a basic and diluted basis.

 

Liquidityand Capital Resources

 

On July 11, 2002,the Company repaid in full the HGP Credit Facility (see Note 8 to theConsolidated Financial Statements) with the proceeds of loans originated by UBSWarburg Real Estate Investments Inc. (“UBS”) and Beal Bank, S.S.B. (“BealBank”).

 

The UBS loansconsist of senior loans with a total initial principal balance of $22.0 million(the “UBS Senior Loans”) and mezzanine loans with a total initial principalbalance of $3.5 million (the “UBS Mezzanine Loans”, or collectively, the “UBSLoans”).  The UBS Senior Loans and UBSMezzanine Loans each consist of three loans, each secured by an outletcenter.  The centers which secure theUBS Loans are in Laughlin, Nevada, Medford, Minnesota and Warrenton, Missouri,each of which was transferred to a new wholly owned subsidiary of the Company.  These new entities are restricted from owningany assets other than the outlet centers and may not incur additionalliabilities, other than normal trade payables. The UBS Loans are cross-collateralized and non-recourse to the Company,subject to certain customary exceptions. The UBS Loans require that the Company maintain a Leverage Ratio (asdefined in the loan documents) that is no more than 5% greater than the InitialLeverage Ratio (as defined in the loan documents) calculated as of July 11,2002.

 

The UBS Senior Loansmature July 11, 2009, require monthly principal payments based on a 25-yearamortization schedule and bear interest at a fixed rate of 8.15%.  At December 31, 2002, the balances totaled$21.9 million.  These loans also requirethe monthly funding of escrow accounts for the payment of future debt service,real estate taxes, insurance, capital and tenant improvements and leasingcommissions (See 

 

15

----

 

Note 2 to the CondensedConsolidated Financial Statements). Funds in excess of those specified in the loan agreements are disbursedto the new entities at least monthly.

 

The UBS Mezzanine Loansmature July 11, 2005 and may be prepaid without penalty after two years.  These loans require monthly payments basedon a three-year amortization schedule and bear interest at a fixed rate of17.0%.  At December 31, 2002, thebalances totaled $3.1 million.

 

The Beal Bank loans total$7.0 million (the “Beal Bank Loans”) and consist of (i) a $3.0 million loansecured by vacant land located in Norton Shores, Michigan and FruitportTownship, Michigan (the “Beal Bank Loan I”), and (ii) a $4.0 million loansecured by the outlet center in Monroe, Michigan (the “Beal Bank LoanII”).  These loans are cross-collateralizedand are recourse to the Company.  TheBeal Bank Loans mature July 10, 2005. Principal payments of up to $2.0 million are permitted without penaltyat any time and the loans may be prepaid in whole or in part without penaltyafter July 10, 2004.  Approximately$450,000 of the proceeds were used to pay in full a land contract related toland in Fruitport Township which is included in the collateral for Beal BankLoan I.

 

The Beal Bank Loansrequire monthly payments of interest only at rates of (i) the greater of theWall Street Journal Prime Rate plus 4.5% or 12.0% for the Beal Bank Loan I and(ii) the greater of the Wall Street Journal Prime Rate plus 2.5% or 9.9% forthe Beal Bank Loan II, each of which adjusts monthly.

 

The Beal Bank Loan II isguaranteed by Prime Retail, Inc., of which Mr. Skoien and Mr. Amster, Directorsof the Company, are members of the Board of Directors, up to a maximum amountof $4,000,000 (the “Prime-Beal Guaranty”). The Prime-Beal Guaranty will be released when the total outstanding balance of the Beal Bank Loans isequal to or less than $5,000,000.  TheCompany is obligated to make quarterly payments of $15,000 to Prime Retail,Inc. as long as this guaranty is in effect.

 

Initial monthly debtservice on the UBS Loans equals $297,000, of which approximately $200,000 wasinterest expense. Monthly interest payments on the Beal Bank Loans total$63,000.  Debt service on the HGP CreditFacility for the month prior to its repayment was $440,000, of which $215,000was interest expense

 

TheCompany currently is in default with respect to the obligations of two pools ofloans originated by JP Morgan in July 1999 with an aggregate principal balanceof $45.2 million at December 31, 2002 (excluding accrued interest andpenalties).  The defaults are the resultof the Company’s failure to pay in full the amounts due under the loanscommencing with the payment due October 1, 2001.  Each pool of loans is secured by a group of threeproperties.  The loans are non-recourseto HGPI, subject to limited customary exceptions (see Note 8 to theConsolidated Financial Statements).

 

TheCompany remits monthly all available cash flow, after a reserve for monthlyoperating expenses, as partial payment of the debt service.  The failure to pay the full amount dueconstitutes a default under the loan agreements which allows the respectivelenders to exercise their various remedies contained in the loan agreements,including application of escrow balances to delinquent payments and foreclosureon the properties which collateralize the loans. The Company and the servicersof the JP Morgan Loans are currently attempting to negotiate a restructuring ofthe loans.  There can be no assurancethat such negotiations will result in any settlement of the loans or in anymodification of the terms of the loans.

 

TheJP Morgan Loans require the monthly funding of escrow accounts for the paymentof real estate taxes, insurance and capital improvements which totaled $397,000at December 31, 2002.  In addition,$464,000 of monthly available cash flow remitted as debt service has beenplaced in special purpose escrow accounts by the loan servicers, rather thanbeing applied to the balances due on the loan. The Company continues to manage the properties pursuant to a managementagreement which is subject to cancellation by the servicers of the loans.  The Company receives fees of approximately$25,000 per month for such services.

 

Thedeclining results of operations resulting in the inability to service the JPMorgan Loans was judged to represent an indication of possible impairment inthe value of the properties which secure the loans.  In the third quarter of 2001, the Company estimated the currentvalue of the six centers which secure the loans and concluded that the carryingvalue of four of the centers exceeded the fair values of those centers.  Accordingly, the results of operations for2001 include a provision for asset impairment of $18.0 million, representing awrite-down of the carrying values of the assets to their estimated fairvalue.  Based on continued negotiationswith the lender and additional declines in occupancy and revenues, the Companyrecorded an additional provision for asset impairment of $17.0 million in thefourth quarter of 2002 to further reduce the carrying values of the same fourproperties, including approximately $100,000 related to a parcel of landadjacent to one of the properties.  Theaggregate carrying value of the real estate of the properties collateralizingthe JP Morgan Loans was approximately $20.1 million at December 31, 2002.  This value is less than the currentoutstanding loan balances totaling $45.2 million and accrued interest andpenalties totaling $6.5 million.  If thelender were to foreclose on the collateral properties in full satisfaction ofthe loans, the Company would record a gain for the difference between thecarrying value of the properties and related net assets and the outstandingloan balances plus accrued interest and penalties.  The estimation of the fair value of the six centers securing theJP Morgan Loans involved estimates by 

 

16

----

 

managementwith respect to future cash flows, market conditions and valuations applicableto such properties.  Future events couldoccur which would cause the Company to conclude that the carrying values of theCompany’s properties may need to be further adjusted.

 

Themortgage loan secured by the Company’s outlet center in Holland, Michigan wasmade by Republic Bank.  The $3.5 millionloan matures in July 2006, requires monthly debt service payments of $30,000based on a 20-year amortization schedule, and bears interest at a fixed rate of8.21%.  The principal balance on thisloan was $3.4 million at December 31, 2002. The net proceeds from the loan were used to reduce the balance of theHGP Credit Facility.  This loan requiresthe monthly funding of an escrow account for the payment of real estate taxeswhich had a balance of $59,000 at December 31, 2002.  The loan requires that the cash flow from the property be atleast 130 percent of the debt service on the loan.  In the event that the cash flow is less than that amount, theCompany may make principal payments to reduce the outstanding balance of theloan to an amount which reduces debt service to a level which is in compliancewith this requirement.

 

The mortgage loansecured by the Company’s power center in Norton Shores, Michigan was made byGreenwich Capital Financial Products, Inc. (“Greenwich”).  The $16.0 million loan matures in July 2011,requires monthly payments based on a 30-year amortization schedule and bearsinterest at a fixed rate of 7.647%.  Theprincipal balance on this loan was $15.8 million at December 31, 2002.  The loan is non-recourse to HGPI (subject tolimited customary exceptions). In connection with the Greenwich loan, LakeshoreMarketplace was transferred to a new entity, Lakeshore Marketplace, LLC, awholly owned subsidiary of the Company. Lakeshore Marketplace LLC, and its managing member, Lakeshore MarketplaceFinance Company, Inc., are restricted from owning any assets other thanLakeshore Marketplace and may not incur additional liabilities, other thannormal trade payables.  All of theassets of Lakeshore Marketplace, LLC are pledged as security for the Greenwichloan.  This loan requires monthly fundingof escrow accounts for the payment of future debt service payments, real estatetaxes, insurance, capital improvements, tenant improvements and leasingcommissions.  These accounts had a totalbalance of $613,000 at December 31, 2002. Funds in excess of certain amounts specified in the loan agreement aredisbursed to Lakeshore Marketplace, LLC monthly.  The Company is actively marketing this power center for sale andthus, pursuant to SFAS 144, its real estate assets are listed as discontinuedoperations on the Consolidated Balance Sheets and its revenue and expenses areincluded in Income from Discontinued Operations on the Consolidated Statementsof Operations.

 

TheCompany has extended the maturity of a mortgage loan secured by its corporateoffice building and related equipment in Norton Shores, Michigan from December2002 to April 30, 2003.  The principalbalance on this loan was $2.2 million at December 31, 2002. During the originalterm, the interest rate on the loan was LIBOR plus 2.5% per annum and monthlydebt service payments of $22,500 were required.  During the extension period, the loan bears interest at LIBORplus 5.5% per annum and requires monthly debt service payments of $50,000.  The Company is currently seeking torefinance this loan.  There can be noassurance that the Company will be able to complete such refinancing or on whatterms such refinancing may be accomplished.

 

TheCompany owns a property in Roseville, Michigan, which is net-leased toPetsmart, Inc. and is subject to a $3.2 million mortgage.  The rent payable under the lease is equal tothe debt service due under the loan secured by the property (the “PetsmartLoan”).  The Petsmart Loan matures onJanuary 8, 2008, bears interest at a fixed rate of 8.77% and requires the monthlypayment of principal computed on a 25-year schedule.  The loan is non-recourse to HGPI. The Company is marketing thisproperty for sale and thus, pursuant to SFAS 144, its real estate assets arelisted as Real Estate - Discontinued Operations on the Consolidated BalanceSheets and its revenue and expenses are included in Income from DiscontinuedOperations on the Consolidated Statements of Operations.

 

TheCompany is the obligor on a $2.0 million unsecured promissory note incurred inconnection with the acquisition of the land underlying its center in Laughlin,Nevada.  The note matures in June 2012,bears interest at a rate of 2.0% above the weighted average cost of funds indexfor the Eleventh District Savings Institutions, adjusted annually, and requiresamortization based on a ten year schedule. The interest rate payable on the loan through February 28, 2003 is5.074%.  The outstanding principalbalance on this note was $1.9 million at December 31, 2002.

 

Pursuantto the terms of the UBS Loans, Greenwich loan and the JP Morgan Loans, theCompany is required to keep the properties in good general repair and to makecapital improvements and repairs to certain of its outlet centers.  At December 31, 2002, there wasapproximately $704,000 deposited in escrows with the loan servicers, which theCompany believes is sufficient to fund its ongoing capital requirements.  Any additional capital improvements areexpected to be funded with additional borrowings, existing cash balances orcash flow from operations.

 

TheCompany has outstanding commitments for capital expenditures on leases signedat December 31, 2002 in the amount of $964,000 for tenant allowances and$526,000 for construction costs.  Thesecosts are expected to be paid during 2003 and a portion will be reimbursed fromthe capital improvement escrows (see Note 2). In February 2003, the Company signed a contract for $1.4 million with ageneral contractor for the construction of a second phase at its outlet centerin Tulare, California.

 

The Companyexpects to meet its short-term liquidity requirements generally throughadditional borrowings, working capital, cash flows from operations, the sale ofreal estate classified as Real Estate – Discontinued Operations on theconsolidated balance sheets and the potential 

 

17

----

 

offering of equitysecurities in the private or public capital markets.  The Company expects to meet its long-term requirements, such astenant allowances for new leases and capital improvements and expansionscurrently being considered at its centers in Tulare, California, and Medford,Minnesota, through the use of working capital and cash flows from operationsand, if necessary and available, additional borrowings of long-term debt andthe potential offering of equity securities in the private or public capitalmarkets.  The Company’s ability tosecure new loans is limited by the fact that virtually all of the Company’sreal estate assets are currently pledged as collateral for its current loans.

 

Debt maturities andprincipal payments, including debt secured by the properties classified asdiscontinued operations, due subsequent to 2002 are as follows (in thousands):

 

|       |   | **Operating  Portfolio** |   | **Discontinued  Operations** |   |
|------------|--------|--------------------------|--------|------------------------------|--------|
| 2003       |   | $                        | 49,031 |                         | $      | 176 |   |
| 2004       |   | 1,774                    |   | 187                          |   |
| 2005       |   | 8,434                    |   | 206                          |   |
| 2006       |   | 3,662                    |   | 222                          |   |
| 2007       |   | 568                      |   | 241                          |   |
| Thereafter |   | 21,297                   |   | 17,954                       |   |
|       |   | $                        | 84,766 |                         | $      | 18,986 |   |

 

TheJP Morgan Loans, on which the Company is in default, are reflected as a 2003maturity (see above and Note 8 to the consolidated financial statements).

 

In2003, 127 leases covering an aggregate of 552,000 square feet are scheduled toexpire, excluding the properties classified as discontinued operations.  Historically, 88% of expiring leases haverenewed or remained in occupancy past their expiration, but not necessarily onequivalent economic terms.  Anadditional 3% of leases which have expired are still under negotiation.  While the Company does not currently believethat the proportion of leases scheduled to expire in 2003, which will actuallybe renewed will differ materially from its historical experience, there can beno assurance that it will renew an equivalent proportion of such leases, northat the economics of such renewals will be as favorable as those contained inthe current leases.

 

DiscontinuedOperations

 

TheCompany is actively marketing the following assets for sale:  Lakeshore Marketplace in Norton Shores,Michigan; the single tenant building in Roseville, Michigan leased to Petsmart,Inc., and seven parcels of vacant land totaling approximately 100 acres inNorton Shores, Michigan, Fruitport Township, Michigan, Daleville, Indiana,Gretna, Nebraska, Tulare, California and Medford, Minnesota.  These assets are listed on the consolidatedbalance sheets as Real Estate – Discontinued Operations.  The net proceeds from the sale of theseassets would be available for general corporate purposes, subject to certainrestrictions and repayment obligations contained in the mortgage loans to whichthey are subject.  Pursuant to therequirements of SFAS 144, the Company has reclassified the real estate assetsfor these properties to Real Estate – Discontinued Operations on the balancesheets and reports the revenue and expenses from the properties as Income fromDiscontinued Operations on the statements of operations.  SFAS 144 also requires that any prior periodfinancial statements presented are also reclassified for comparability.  This reclassification has no effect on theCompany’s reported results of operations or funds from operations.

 

18

----

 

Saleof Partnership Units

 

OnDecember 27, 2002, HGPI sold 145,349 units of Horizon Group Properties, LP toHoward Amster, a Director of HGPI, for aggregate consideration of $750,000, or$5.16 per unit.  HGPI may consideradditional sales of units in Horizon Group Properties, LP to Mr. Amster orothers in the future.

 

SubsequentEvents

 

On March 13, 2003,HGPI sold 261,628 limited partner units in HGP LP to Pleasant Lake Apts., Ltd.,an affiliate of Howard M. Amster, a director and principalshareholder of HGPI, for aggregate consideration of $1.35 million, or $5.16 perunit.  On March 14, 2003, the Companyused $1.3 million of the proceeds from the sale to fund a secured loan toRetail Partners Limited Partnership and Retail Partners, Inc. (collectively“Retail Partners”).  The loan is for aterm of 14 months and bears interest at the rate of 5.0%, payable at maturity.  The Company received a 3.25% net profitsinterest in a real estate development owned by Huntley Development LP andHuntley Meadow Residential Venture (collectively “Huntley”) subject to thecurrent lender’s interest in distributions from Huntley.  Pursuant to the loan agreement, the Companyis obligated to negotiate an option to acquire an additional 48.75% ownershipinterest in Huntley.  Huntley and RetailPartners are owned by The Prime Group, Inc. Gary J. Skoien, Chairman, Chief Executive Officer andPresident of the Company, is Executive Vice President and Chief OperatingOfficer of The Prime Group, Inc. and has a net profits interest in Huntley.

 

In February 2003, theCompany signed a contract for $1.4 million with a general contractor for theconstruction of a second phase at its outlet center in Tulare, California.

 

19

----

 

**ITEM7A -****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Market Risk

 

Market risk isthe  risk of loss from adverse changesin market prices and interest rates. The Company’s future earnings and cash flows may be affected by changesin market interest rates.  The fairvalue of the Company’s debt obligations may also be affected by future changesin market interest rates.  The primarymarket risk facing the Company is related to its long-term indebtedness, whichbears interest at fixed and variable rates. The Company seeks fixed rate non-recourse debt to manage marketrisk.  At December 31, 2002, fixed ratedebt represented approximately 89.3% or $92.6 million of the Company’s debt.  Loans with a fixed rate of interest andlevel amortization schedules minimize interest rate risk related to cash flowsand interest expense until the maturity of such loans.

 

At December 31,2002, variable rate debt represented 10.7% or $11.1 million of the Company’stotal debt.  At December 31, 2002, theaverage interest rate on variable rate debt was approximately 8.46%.  Certain of the Company’s variable rate loansare subject to minimum interest rates that, as of December 31, 2002, were inexcess of the contractual variable rates. The $4.0 million Beal Bank Loan I bears interest at the greater of theWall Street Journal Prime Rate (the “Prime Rate”) plus 4.5% or 12.0%.  At December 31, 2002, the Prime Rate was4.25%.  Thus, a 3.25% increase in thePrime Rate would not affect the interest payable on the Beal Bank I Loan.  The $3.0 million Beal Bank Loan II bearsinterest at the greater of the Prime Rate plus 2.5% or 9.9%.  Thus, a 3.15% increase in the Prime Ratewould not affect the interest payable by the Company on the Beal Bank II Loan.

 

The variable rate loan onthe Company’s corporate office building in Norton Shores, Michigan requiresfixed monthly payments of $50,000 and has an interest rate of LIBOR plus 5.5%per annum.  As of December 31, 2002, theeffective interest rate on this loan was approximately 6.9%, resulting inmonthly interest expense of approximately $13,600 based on a principal balanceof $2.2 million as of December 31, 2002. Thus, an increase in the LIBOR rate would not change the required debtservice payment or monthly net cash flow of the Company related to thisloan.  Any change in the LIBOR ratewould affect the reported interest expense related to this loan.

 

If market interest ratesapplicable to the Company’s variable rate debt were to increase by 100 basispoints, interest expense on the variable rate debt (taking into account theminimum interest rates applicable to the Beal Bank loans) would increase$41,000 annually.  The cash flows of theCompany would decrease by $19,000 annually due to such increase in interestrates.  The fair value of total debtoutstanding (excluding the JP Morgan Loans, on which the Company is currentlyin default) would decrease by $2.2 million based on a 100 basis point increasein interest rates.

 

If market interest ratesapplicable to the Company’s variable rate debt were to decrease by 100 basispoints, interest expense on the variable rate debt (taking into account theminimum interest rates applicable to the Beal Bank loans) would decrease$41,000 annually.  The cash flows of theCompany would increase by $19,000 annually due to such decrease in interestrates.  The fair value of total debtoutstanding (excluding the JP Morgan Loans, on which the Company is currentlyin default) would increase by $2.3 million based on a 100 basis point increasein interest rates.

 

These amounts weredetermined solely by considering the effect on the current debt of the Companyof a hypothetical change in interest rates and assumes that there is no changein the current structure of interest rates, the underwriting standards oflenders or the overall capital structure or financial situation of the Company.

 

Inflation

 

HGP’s leases withsome of its tenants require the tenants to reimburse HGP for most operatingexpenses and increases in common area maintenance expense, which reduces HGP’sexposure to increases in costs and operating expenses resulting from inflation.

 

Legal Proceedings

 

In the ordinary course ofbusiness the Company is subject to certain legal actions.  While any litigation contains an element ofuncertainty, management believes the losses, if any, resulting from suchmatters will not have a material adverse effect on the consolidated financialstatements of the Company.

 

20

----

 

**ITEM 8- FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA**

 

 

**Horizon Group Properties, Inc.****Index toFinancial Statements****andFinancial Statement Schedules**
| Report of Independent  Auditors                                                             |
|---------------------------------------------------------------------------------------------|
|                                                                                        |
| Consolidated Balance Sheets  at December 31, 2002 and December 31, 2001                     |
|                                                                                        |
| Consolidated  Statements of Operations for the years ended December 31, 2002, 2001 and 2000 |
|                                                                                        |
| Consolidated  Statement of Changes in Shareholders’ Equity                             |
|                                                                                        |
| Consolidated  Statements of Cash Flows for years ended December 31, 2002, 2001 and 2000     |
|                                                                                        |
| Notes to  Consolidated Financial Statements                                                 |
|                                                                                        |
| Schedule  as of December 31, 2002-  III - Real Estate and Accumulated Depreciation          |

 

All other schedules areomitted since the required information is not present or is not present inamounts sufficient to require submission of the schedule, or because theinformation required is included in the financial statements and notes thereto.

 

21

----

 

**REPORT OF INDEPENDENT AUDITORS**

 

To the Shareholders andBoard of DirectorsHorizon Group Properties, Inc.

 

Wehave audited the accompanying consolidated balance sheets of Horizon GroupProperties, Inc. (the “Company”) as of December 31, 2002 and 2001, and therelated consolidated statements of operations, shareholders’ equity and cashflows for each of the three years in the period ended December 31, 2002.  Our audits also included the financialstatement schedule listed in the Index. These financial statements and schedule are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these financial statements andschedule based on our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Horizon GroupProperties, Inc. at December 31, 2002 and 2001, and the consolidated results ofits operations and its cash flows for each of the three years in the periodended December 31, 2002, in conformity with accounting principles generallyaccepted in the United States.  Also, inour opinion, the related financial statement schedule, when considered inrelation to the consolidated financial statements taken as a whole, presentsfairly in all material respects, the information set forth therein.

 

Asdiscussed in Note 2 to the consolidated financial statements, in 2002, theCompany changed its method of accounting for discontinued operations.

 

 

Ernst& Young LLP

 

 

Chicago, IllinoisFebruary 21, 2003,except for Note 14 asto which the date isMarch 14, 2003

 

22

----

 

**HORIZON GROUP PROPERTIES, INC.**

 

**ConsolidatedBalance Sheets**

*(Inthousands, except per share amounts)*

 
|                                                                                                                    |   | **December  31, 2002** |    | **December  31, 2001** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|------------------------|--------|
| **ASSETS**                                                                                                              |   |                   |    |                   |   |
| Real estate - at cost:                                                                                                  |   |                   |    |                   |   |
| Land                                                                                                                    |   | $                      | 8,843   |                   | $      | 7,194 |   |
| Buildings and  improvements                                                                                             |   | 85,465                 |    | 106,737                |   |
| Less accumulated  depreciation                                                                                          |   | (13,435                | )       | (15,348                | )      |
| Total net real estate                                                                                                   |   | 80,873                 |    | 98,583                 |   |
|                                                                                                                    |   |                   |    |                   |   |
| Cash and cash  equivalents                                                                                              |   | 1,237                  |    | 1,096                  |   |
| Restricted cash                                                                                                         |   | 2,707                  |    | 3,506                  |   |
| Tenant accounts  receivable, net                                                                                        |   | 1,072                  |    | 1,270                  |   |
| Real estate - held for  sale                                                                                            |   | —                 |    | 446                    |   |
| Real estate -  discontinued operations                                                                                  |   | 15,318                 |    | 15,976                 |   |
| Deferred costs (net of  accumulated amortization of $663 and $1,228, at December 31, 2002 and 2001,  respectively)      |   | 2,231                  |    | 1,960                  |   |
| Other assets                                                                                                            |   | 1,239                  |    | 1,546                  |   |
| Total assets                                                                                                            |   | $                      | 104,677 |                   | $      | 124,383 |   |
|                                                                                                                    |   |                   |    |                   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                                                |   |                   |    |                   |   |
| **Liabilities:**                                                                                                        |   |                   |    |                   |   |
| Mortgages and other  debt                                                                                               |   | $                      | 103,752 |                   | $      | 103,135 |   |
| Accrued interest                                                                                                        |   | 6,741                  |    | 2,169                  |   |
| Accounts payable and  accrued expenses                                                                                  |   | 3,292                  |    | 3,301                  |   |
| Prepaid rents and other  tenant liabilities                                                                             |   | 1,170                  |    | 1,310                  |   |
| Other liabilities                                                                                                       |   | 716                    |    | 769                    |   |
| Total liabilities                                                                                                       |   | 115,671                |    | 110,684                |   |
|                                                                                                                    |   |                   |    |                   |   |
| **Minority  interests**                                                                                                 |   | (2,303                 | )       | 2,067                  |   |
|                                                                                                                    |   |                   |    |                   |   |
| **Shareholders’  equity (deficit):**                                                                               |   |                   |    |                   |   |
| Common shares, ($.01  par value, 50,000 shares authorized, 2,870 issued and outstanding at December  31, 2002 and 2001) |   | 29                     |    | 29                     |   |
| Additional paid-in  capital                                                                                             |   | 35,788                 |    | 34,448                 |   |
| Accumulated deficit                                                                                                     |   | (44,508                | )       | (22,845                | )      |
| Total shareholders’  equity (deficit)                                                                              |   | (8,691                 | )       | 11,632                 |   |
| Total liabilities and  shareholders’ equity (deficit)                                                              |   | $                      | 104,677 |                   | $      | 124,383 |   |

 

23

----

 

**HORIZONGROUP PROPERTIES, INC.**

 

**ConsolidatedStatements of Operations**

*(Inthousands, except per share amounts)*

 
|                                                            |   | **Year  ended  December 31, 2002** |    | **Year  ended  December 31, 2001** |   | **Year  ended  December 31, 2000** |   |
|-----------------------------------------------------------------|--------|------------------------------------|---------|------------------------------------|--------|------------------------------------|--------|
| **REVENUE**                                                     |   |                               |    |                               |   |                               |   |
| Base  rent                                                      |   | $                                  | 14,209  |                               | $      | 15,762                             |   | $ | 19,023 |   |
| Percentage  rent                                                |   | 173                                |    | 214                                |   | 144                                |   |
| Expense  recoveries                                             |   | 2,931                              |    | 3,350                              |   | 4,149                              |   |
| Other                                                           |   | 634                                |    | 935                                |   | 1,492                              |   |
| Total  revenue                                                  |   | 17,947                             |    | 20,261                             |   | 24,808                             |   |
| **EXPENSES**                                                    |   |                               |    |                               |   |                               |   |
| Property  operating                                             |   | 6,128                              |    | 5,810                              |   | 6,042                              |   |
| Real  estate taxes                                              |   | 1,955                              |    | 2,089                              |   | 2,056                              |   |
| Land  leases and other                                          |   | 852                                |    | 1,719                              |   | 1,382                              |   |
| Depreciation  and amortization                                  |   | 4,625                              |    | 5,605                              |   | 5,164                              |   |
| General  and administrative                                     |   | 2,645                              |    | 2,958                              |   | 3,547                              |   |
| Provision  for impairment                                       |   | 17,027                             |    | 18,000                             |   | 1,568                              |   |
| Interest                                                        |   | 10,705                             |    | 9,077                              |   | 9,579                              |   |
| Total  expenses                                                 |   | 43,937                             |    | 45,258                             |   | 29,338                             |   |
|                                                            |   |                               |    |                               |   |                               |   |
| Loss  from continuing operations before minority interests      |   | (25,990                            | )       | (24,997                            | )      | (4,530                             | )      |
| Minority  interests                                             |   | 3,965                              |    | 3,725                              |   | 708                                |   |
|                                                            |   |                               |    |                               |   |                               |   |
| Loss  from continuing operations                                |   | (22,025                            | )       | (21,272                            | )      | (3,822                             | )      |
| Income  from discontinued operations, net of minority interests |   | 212                                |    | 558                                |   | 730                                |   |
| Net  gain on sale of real estate, net of minority interests     |   | 150                                |    | 1,316                              |   | 202                                |   |
|                                                            |   |                               |    |                               |   |                               |   |
| **Net loss**                                                    |   | $                                  | (21,663 | )                                  | $      | (19,398                            | )      | $ | (2,890 | ) |
|                                                            |   |                               |    |                               |   |                               |   |
| **Per Common Share - Basic and Diluted:**                       |   |                               |    |                               |   |                               |   |
| Net  loss per share                                             |   | $                                  | (7.55   | )                                  | $      | (6.76                              | )      | $ | (1.01 | ) |
| Weighted  average shares outstanding - basic                    |   | 2,870                              |    | 2,870                              |   | 2,862                              |   |
| Weighted  average shares outstanding - diluted                  |   | 3,394                              |    | 3,381                              |   | 3,388                              |   |

 

*Seeaccompanying notes to consolidated financial statements.*

 

24

----

 

**HORIZON GROUP PROPERTIES, INC.**

 

**Consolidated Statement of Changes in Shareholders’ Equity**

*(In thousands)*

** **
|                                 |   |               |   |       |   | **Additional  Paid -In  Capital** |   | **Accumulated  Earnings (Deficit)** |   | **Shareholders’  Equity** |    |
|--------------------------------------|--------|--------------------|--------|------------|--------|-----------------------------------|--------|-------------------------------------|--------|--------------------------------|---------|
|                                 |   | **Common  Shares** |   |       |   |                              |
|                                 |   | **Number**         |   | **Amount** |   |                              |   |                                |
|                                 |   |               |   |       |   |                              |   |                                |   |                           |    |
| Balance,  January 1, 2000            |   | 2,845              |   | $          | 29     |                              | $      | 34,056                              |   | $                              | (557    | ) | $ | 33,528 |   |
|                                 |   |               |   |       |   |                              |   |                                |   |                           |    |
| Units  exchanged for common shares   |   | 25                 |   | —     |   | 350                               |   | —                              |   | 350                            |    |
| Net  loss                            |   | —             |   | —     |   | —                            |   | (2,890                              | )      | (2,890                         | )       |
|                                 |   |               |   |       |   |                              |   |                                |   |                           |    |
| Balance,  December 31, 2000          |   | 2,870              |   | 29         |   | 34,406                            |   | (3,447                              | )      | 30,988                         |    |
|                                 |   |               |   |       |   |                              |   |                                |   |                           |    |
| Other                                |   | —             |   | —     |   | 42                                |   | —                              |   | 42                             |    |
| Net  loss                            |   | —             |   | —     |   | —                            |   | (19,398                             | )      | (19,398                        | )       |
|                                 |   |               |   |       |   |                              |   |                                |   |                           |    |
| Balance,  December 31, 2001          |   | 2,870              |   | 29         |   | 34,448                            |   | (22,845                             | )      | 11,632                         |    |
|                                 |   |               |   |       |   |                              |   |                                |   |                           |    |
| Other                                |   | —             |   | —     |   | 747                               |   | —                              |   | 747                            |    |
| Units  sold to principal shareholder |   | —             |   | —     |   | 593                               |   | —                              |   | 593                            |    |
| Net  loss                            |   | —             |   | —     |   | —                            |   | (21,663                             | )      | (21,663                        | )       |
|                                 |   |               |   |       |   |                              |   |                                |   |                           |    |
| Balance,  December 31, 2002          |   | 2,870              |   | $          | 29     |                              | $      | 35,788                              |   | $                              | (44,508 | ) | $ | (8,691 | ) |

 

*Seeacompanying notes to consolidated financial statements.*

 

25

----

 

**HORIZON GROUP PROPERTIES, INC.**

 

**Consolidated Statements of Cash Flows**

*(Inthousands)*

 
|                                                                             |   | **Year  ended  December 31, 2002** |    | **Year  ended  December 31, 2001** |   | **Year  ended  December 31, 2000** |   |
|----------------------------------------------------------------------------------|--------|------------------------------------|---------|------------------------------------|--------|------------------------------------|--------|
| **Cash flows from operating activities:**                                        |   |                               |    |                               |   |                               |   |
| Net  loss                                                                        |   | $                                  | (21,663 | )                                  | $      | (19,398                            | )      | $ | (2,890 | ) |
| Net  gain on sale of real estate                                                 |   | (150                               | )       | (1,316                             | )      | (202                               | )      |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |   |                               |    |                               |   |                               |   |
| Minority  interests in net loss                                                  |   | (3,965                             | )       | (3,725                             | )      | (708                               | )      |
| Minority  interests in discontinued operations                                   |   | 38                                 |    | 99                                 |   | 134                                |   |
| Depreciation                                                                     |   | 4,616                              |    | 5,346                              |   | 5,294                              |   |
| Amortization,  including deferred financing costs                                |   | 1,419                              |    | 1,172                              |   | 445                                |   |
| Provision  for impairment                                                        |   | 17,027                             |    | 18,000                             |   | 1,568                              |   |
| HGP  partnership unit grants                                                     |   | 120                                |    | —                             |   | —                             |   |
| Changes  in assets and liabilities:                                              |   |                               |    |                               |   |                               |   |
| Restricted  cash                                                                 |   | 799                                |    | (28                                | )      | 279                                |   |
| Tenant  accounts receivable                                                      |   | 198                                |    | 164                                |   | (164                               | )      |
| Deferred  costs and other assets                                                 |   | (268                               | )       | (587                               | )      | (790                               | )      |
| Accounts  payable and accrued expenses                                           |   | 4,563                              |    | 554                                |   | (313                               | )      |
| Other  liabilities                                                               |   | (53                                | )       | (76                                | )      | (56                                | )      |
| Prepaid  rents and other tenant liabilities                                      |   | (140                               | )       | (3                                 | )      | (482                               | )      |
| Net  cash provided by operating activities                                       |   | 2,541                              |    | 202                                |   | 2,115                              |   |
|                                                                             |   |                               |    |                               |   |                               |   |
| **Cash flows from investing activities:**                                        |   |                               |    |                               |   |                               |   |
| Acquisition  of land                                                             |   | (500                               | )       | —                             |   | —                             |   |
| Expenditures  for buildings and improvements                                     |   | (416                               | )       | (4,635                             | )      | (1,818                             | )      |
| Net  proceeds from sale of real estate                                           |   | 634                                |    | 5,071                              |   | 368                                |   |
| Net  cash provided by/(used in) investing activities                             |   | (282                               | )       | 436                                |   | (1,450                             | )      |
|                                                                             |   |                               |    |                               |   |                               |   |
| **Cash flows from financing activities:**                                        |   |                               |    |                               |   |                               |   |
| Sale  of HGP partnership units                                                   |   | 750                                |    | —                             |   | —                             |   |
| Purchase  of HGP partnership units                                               |   | —                             |    | (4                                 | )      | (27                                | )      |
| Principal  payments on mortgages and other debt                                  |   | (33,883                            | )       | (57,431                            | )      | (2,727                             | )      |
| Proceeds  from borrowings                                                        |   | 32,500                             |    | 56,165                             |   | —                             |   |
| Debt  issue costs                                                                |   | (1,485                             | )       | (1,138                             | )      | —                             |   |
| Net  cash used in financing activities                                           |   | (2,118                             | )       | (2,408                             | )      | (2,754                             | )      |
|                                                                             |   |                               |    |                               |   |                               |   |
| Net  increase/(decrease) in cash and cash equivalents                            |   | 141                                |    | (1,770                             | )      | (2,089                             | )      |
|                                                                             |   |                               |    |                               |   |                               |   |
| **Cash and cash equivalents:**                                                   |   |                               |    |                               |   |                               |   |
| Beginning  of period                                                             |   | 1,096                              |    | 2,866                              |   | 4,955                              |   |
| End  of period                                                                   |   | $                                  | 1,237   |                               | $      | 1,096                              |   | $ | 2,866 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

 

26

----

 

**HORIZONGROUP PROPERTIES, INC.**

**Notesto Consolidated Financial Statements**

 

Note1 - Formation of the Company

 

HorizonGroup Properties, Inc. (“HGPI” or, together with its subsidiaries “HGP” or the“Company”) is a self-administered and self-managed Maryland corporation thatwas established in connection with the merger of Horizon Group, Inc., aMichigan corporation (“Horizon”) with and into Prime Retail, Inc., a Marylandcorporation (“Prime” or “Prime Retail”) which was consummated on June 15, 1998(the “Merger”).

 

HGP’sinitial portfolio consisted of 14 factory outlet centers and one power centerlocated in 12 states.  Twelve of theinitial factory outlet centers and the power center (the “PredecessorProperties”) were contributed to the Company by Horizon pursuant to aContribution Agreement entered into in connection with the Merger (the “ContributionAgreement”).  Two factory outlet centers(the “Prime Transferred Properties”) were purchased by the Company from Primeimmediately subsequent to the consummation of the Merger.  As of December 31, 2002, HGP’s operatingportfolio consisted of 11 factory outlet centers located in 9 states.  The Company also owns one shopping centerwhich is classified as discontinued operations at December 31, 2002.

 

Theoperations of the Company are primarily conducted through a subsidiary limitedpartnership, Horizon Group Properties, L.P. (“HGP LP”), of which the HGPI isthe sole general partner.  As ofDecember 31, 2002, HGPI owned approximately 79.6% of the partnership interests(the “Common Units”) of HGP LP.  Ingeneral, Common Units are exchangeable for shares of Common Stock on aone-for-one basis (or for an equivalent cash amount at the Company’s election).

 

Note2 - Summary of Significant Accounting Policies

 

Principlesof Consolidation

 

Theconsolidated financial statements include the accounts of the Company and allsubsidiaries that the Company controls, including HGP LP.  The Company considers itself to control anentity if it is the majority owner of and has voting control over such entity.  All significant intercompany balances andtransactions have been eliminated in consolidation.

 

Reclassifications

 

Certainprior year amounts have been reclassified to conform to the current yearpresentation.

 

Useof Estimates

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes.  Actual resultscould differ from those estimates.

 

DiscontinuedOperations

 

Inaccordance with SFAS 144 “Accounting for the Impairment or Disposal of LongLived Assets,” (“SFAS 144”) effective for financial statements issued forfiscal years beginning after December 15, 2001, the results of operations andgain/(loss) on real estate properties sold or held for sale subsequent toDecember 31, 2001 are reflected in the consolidated statements of operations as“Income from Discontinued Operations” for all periods presented.

 

Impactof Recently Issued Accounting Standards

 

InApril 2002, the Financial Accounting Standards Board (“FASB”) issued 145,“Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 1, and Technical Correction” (“SFAS No. 145”).  Statement 4, “Reporting Gains and Losses from Extinguishment ofDebt” (“SSFAS No. 4”), required that gains and losses from the extinguishmentof debt that were included in the determination of net income be aggregatedand, if material, classified as an extraordinary item.  The provisions of SFAS No. 145 related tothe recission of SFAS No. 4 will require the Company to reclassify prior perioditems into continuing operations, including those recorded in the currentperiod, that do not meet the extraordinary classification.  Additionally, future gains and lossesrelated to debt extinguishment may be required to be classified in income fromcontinuing operations.  The provisionsof SFAS No. 145 related to the recission of SFAS No. 4 

 

27

----

 

becomeeffective in fiscal years beginning after May 15, 2002.  The Company, from time to time, incurs suchcharges and is currently assessing the impact that this statement will have onits consolidated financial statements.

 

RealEstate and Depreciation

 

Costsincurred for the acquisition, development, construction and improvement ofproperties, as well as significant renovations and betterments to theproperties, are capitalized. Maintenance and repairs are charged to expense as incurred.  Interest costs incurred with respect toqualified expenditures relating to the construction of assets are capitalizedduring the construction period.

 

AtDecember 31, 2002 and 2001, the Company had an aggregate cost basis of $221.8million and $227.5 million, respectively, in its real estate assets for federalincome tax purposes.  Amounts includedunder buildings and improvements on the consolidated balance sheets include thefollowing types of assets and are depreciated on the straight-line method overestimated useful lives which are:

 

| Buildings  and improvements       |   | 31.5  years                      |
|-----------------------------------|--------|----------------------------------|
| Tenant  improvements              |   | 10  years or lease term, if less |
| Furniture,  fixtures or equipment |   | 3-7  years                       |

 

Inaccordance with SFAS 144, and prior to the adoption of SFAS 144, under SFAS No.121, the Company records impairment losses on long-lived assets used inoperations when events and circumstances indicate that the assets might beimpaired and the undiscounted cash flows estimated to be generated over theirexpected holding periods are less than the carrying amounts of those assets.  Impairment losses are measured as thedifference between carrying value and fair value for assets to be held in theportfolio.  For assets to be sold,impairment is measured as the difference between carrying value and fair value,less costs to dispose.  Fair value maybe based upon estimated cash flows discounted at a risk-adjusted rate ofinterest, comparable or anticipated sales in the marketplace, or estimatedreplacement cost, as adjusted to consider the costs of retenanting andrepositioning those properties which have significant vacancy issues, dependingon the facts and circumstances of each property.

 

Depreciationand amortization expense includes charges for unamortized capitalized costsrelated to unscheduled tenant move-outs totaling $204,000, $484,000 and$96,000, excluding properties classified as discontinued operations, for theyears ended December 31, 2002, 2001 and 2000, respectively.

 

CashEquivalents

 

TheCompany considers all liquid investments with a maturity of three months orless when purchased to be cash equivalents.

 

RestrictedCash

 

Restrictedcash consists of amounts deposited in accounts with the Company’s primarylenders (see Note 8) and at December 31, 2002 included $704,000 in capitalimprovement and tenant allowance reserves, $792,000 in real estate tax andinsurance escrows, and approximately $1.2 million for debt service andoperating expenses, including $464,000 of cash flow remitted as debt service onthe JP Morgan Loans after October 31, 2002 (See Note 8).

 

TenantAccounts Receivable

 

Managementregularly reviews accounts receivable and estimates the necessary amounts to berecorded as an allowance for uncollectibility. These reserves are established on a tenant-specific basis and are basedupon, among other factors, the period of time an amount is past due and thefinancial condition of the obligor.

 

Totaltenant accounts receivable are reflected net of reserves of $314,000 and$565,000 as of December 31, 2002 and 2001, respectively.  The provision for doubtful accounts was$142,000, $632,000 and $277,000, excluding properties classified asdiscontinued operations, for the years ended December 31, 2002, 2001 and 2000,respectively.  This charge is includedin the line item entitled “Land leases and other” on the statement of operations.

 

DiscontinuedOperations

 

Periodically,in the course of reviewing the performance of its portfolio, management maydetermine that it is appropriate for the Company to offer certain propertiesfor sale, and accordingly, such properties will be classified as discontinuedoperations on the Company’s balance sheets. In accordance with SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”, assets held for sale are valued at the lower ofcarrying value or fair value less costs to dispose.  As of December 31, 2002, the Company is actively marketing thefollowing 

 

28

----

 

assetsfor sale:  Lakeshore Marketplace inNorton Shores, Michigan; the single tenant building in Roseville, Michigan leasedto Petsmart, Inc.; and seven parcels of vacant land totaling approximately 100acres in Norton Shores, Michigan, Fruitport Township, Michigan, Daleville,Indiana, Gretna, Nebraska, Tulare, California and Medford, Minnesota.  Pursuant to the requirements of SFAS 144,the Company has reclassified the real estate assets for these properties toReal Estate — Discontinued Operations on the balance sheets and reports therevenue and expenses from the properties as Income from Discontinued Operationson the statements of operations.  SFAS144 also requires that any prior period financial statements presented are alsoreclassified for comparability.  Thisreclassification has no effect on the Company’s previously reported results ofoperations or funds from operations.

 

DeferredCosts

 

Deferredleasing costs consist of fees and direct internal costs incurred to initiateand renew operating leases and are amortized on the straight-line method overthe initial lease term or renewal period. Deferred financing costs are amortized as interest expense over the lifeof the related debt.  Fully amortizeddeferred financing costs of $834,000 and $233,000, excluding propertiesclassified as discontinued operations, were written-off during the years endedDecember 31, 2002, and 2001, respectively. There were no similar costs written-off during the year ended December31, 2000.

 

FairValue of Financial Instruments

 

Thefair value of the Company’s debt is approximately $63.2 million as of December31, 2002, excluding the JP Morgan Loans on which the Company is in default andin negotiations with the lender (see Note 8). This value is estimated using a discounted cash flow analysis, based onthe incremental borrowing rates for similar types of borrowingarrangements.  The carrying value ofcash and cash equivalents, receivables and payables approximate their fairvalues due to their short-term nature.

 

IncomeTaxes

 

TheCompany has elected to be taxed as a REIT under Sections 856 through 860 of theInternal Revenue Code of 1986, as amended (the “Code”).  A REIT is a legal entity that holds realestate interests and receives a deduction for dividends paid to itsshareholders for federal income tax purposes. HGP intends to distribute its REIT taxable income to its shareholders andsatisfy certain other requirements as defined in the Code so as to reduce oreliminate federal income tax liability. Based on its taxable loss in the current period and past fiscal years,the Company is not and has not been obligated to make any dividenddistributions to qualify as a REIT. Accordingly, the consolidated financial statements do not include anyfederal income tax expense.

 

MinorityInterests

 

Minorityinterests represent the interests of unitholders of HGP LP, other than HGPI, inthe net earnings and net equity of HGP LP. The unitholder minority interest is adjusted at the end of each periodto reflect the ownership at that time. The unitholder minority interest in HGP was approximately 20.4% atDecember 31, 2002.  During the yearended December 31, 2002, HGPI sold 145,349 units of HGP LP to Howard Amster, adirector and principal shareholder of HGPI, for aggregate consideration of$750,000, or $5.16 per unit.  Proceedsin excess of HGPI’s carrying value of these units was recognized as an increasein additional paid in capital.  HGPI mayconsider additional sales of units in HGP LP to Mr. Amster or others in thefuture.  During the year ended December31, 2001, 1,471 units were purchased by HGPI for cash at an amount equal to thevalue of an equivalent number of common shares.  During the year ended December 31, 2000, 25,098 units wereconverted into shares of common stock. There were no unit conversions or repurchases during the year endedDecember 31, 2002.  In September 2002,43,695 units of HGP LP were granted to key employees as follows:  Gary Skoien, President and Chief ExecutiveOfficer – 13,682 units; David Tinkham, Chief Financial Officer – 9,730 units;Thomas Rumptz, Senior Vice President of Operations, Acquisitions and Dispositions– 6,716 units; Andrew Pelmoter, Senior Vice President of Leasing – 6,486 units:Terri Springstead, Vice President and Controller – 4,730 units; Robert Torz,Vice President of Finance – 1,351 units and Regina Slechta, Senior VicePresident of Marketing – 1,000 units. The fair value of these unit grants was approximately $120,000 and acharge for this amount is included in the line item entitled “General andAdministrative” in the Statement of Operations for the year ended December 31,2002.  These units cannot be convertedto shares of Common Stock for one year from the date of grant.

 

RevenueRecognition

 

Leaseswith tenants are accounted for as operating leases.  Minimum annual rentals are recognized on a straight-line basisover the terms of the respective leases. As a result of recording rental revenue on a straight-line basis, tenantaccounts receivable included $788,000 and $830,000, as of December 31, 2002 and2001, respectively, which is expected to be collected over the remaining livesof the leases.  Rents which representbasic occupancy costs, including fixed amounts and amounts computed as afunction of sales, are classified as base rent.  Amounts which may become payable in addition to base rent andwhich are computed as a function of sales in excess of certain thresholds are 

 

29

----

 

classifiedas percentage rents and are accrued only after the reported tenant sales exceedthe applicable thresholds.  Expenserecoveries based on common area maintenance expenses and certain other expensesare accrued in the period in which the related expense is incurred.

 

OtherRevenue

 

Otherrevenue consists primarily of interest income and income related to certainmarketing services that is recovered from tenants pursuant to lease agreementsand income from tenants with lease terms of less than one year.

 

ShareOptions

 

TheCompany has elected to follow Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”), in accounting for itsoptions on common shares.  Under APB 25,no compensation expense is recognized because the exercise price of theCompany’s employee share options equals or exceeds the market price of theunderlying shares at the date of grant.

 

Note3- Leases

 

Spacein the Company’s centers is leased to various tenants under operating leaseswhich are generally for one to five year periods. Some leases contain renewaloptions and may also provide for the payment of a tenant’s share of certainoperating expenses.  Leases may alsoobligate a tenant to pay rent based on a percentage of tenant sales in excessof certain thresholds.  Minimum futurerentals to be received under non-cancelable leases are summarized as follows(in thousands):

 

|       |   | **Operating  Portfolio** |   | **Discontinued  Operations** |   |
|------------|--------|--------------------------|--------|------------------------------|--------|
| 2003       |   | $                        | 11,666 |                         | $      | 2,539 |   |
| 2004       |   | 8,241                    |   | 2,515                        |   |
| 2005       |   | 5,836                    |   | 2,406                        |   |
| 2006       |   | 3,480                    |   | 1,970                        |   |
| 2007       |   | 1,893                    |   | 1,600                        |   |
| Thereafter |   | 6,481                    |   | 6,782                        |   |
|            |        |                          |        |                              |        |  |  |

 

Theabove scheduled rentals are subject to the usual business risks associated withcollection.

 

Note4 - Impairment  

 

In2000, HGP entered into an agreement to sell its outlet center in Dry Ridge,Kentucky.  Results of operations in 2000includes a charge for asset impairment of $1.6 million to reduce the carryingvalue of this outlet center to its estimated sales value, less costs todispose.  In January 2001, this centerwas sold.

 

OnOctober 10, 2001, the Company notified the servicers of the JP Morgan Loansthat the net cash flow from the properties securing the loans was insufficientto fully pay the required monthly debt service.  Since that date, the Company has remitted monthly all availablecash flow, after a reserve for operating expenses, as partial payment of thedebt service. The failure to pay the full the amount due constitutes a defaultunder the loan agreements which would allow the respective lenders to exercisetheir various remedies contained in the loan agreements, including applicationof escrow balances to delinquent payments and foreclosure on the propertieswhich collateralize the loans.  TheCompany and the servicers of the JP Morgan Loans are currently attempting tonegotiate a restructuring of the loans, but the Company can give no assurancethat such negotiations will result in any settlement of the loans or in anymodification of the terms of the loans. Both loans are non-recourse to HGPI, subject to limited customaryexceptions.

 

Thedeclining results of operations, which resulted in the inability to fullyservice the JP Morgan Loans was judged to be an indicator of possibleimpairment in the value of the collateral properties.  The Company estimated the current value of  the six centers that collateralize the loansand concluded that the carrying values of four of the centers exceed the fairvalues of those centers.  Accordingly,the results of operations for the year ended December 31, 2001, include aprovision for asset impairment of $18.0 million, representing a write-down ofthe carrying values of the assets to their estimated fair values.  Based on continued negotiations with thelender and additional declines in occupancy and revenues, the Company recordedan additional provision for asset impairment of $17.0 million in the fourthquarter of 2002 to further reduce the carrying values of the same four centers,including approximately $100,000 related to a parcel of land adjacent to one ofthe properties.  The aggregate carryingvalue of the real estate of such properties collateralizing the JP Morgan Loanswas approximately $20.1 million at December 31, 2002.  Such value is less than the current outstanding loan balances,which total $45.2 million and accrued interest 

 

30

----

 

andpenalties totaling $6.5 million.  If thelender were to foreclose on the collateral properties, the Company would recorda gain for the difference between the carrying value of the properties andrelated net assets and the outstanding loan balances and relatedliabilities.  The estimation of fair valueof the six centers securing the JP Morgan Loans involved estimates bymanagement with respect to future cash flows, market conditions and valuationsapplicable to such properties.  Futureevents could occur which could cause the Company to conclude that the carryingvalues of the Company’s properties may need to be further adjusted.

 

Note5 - Earnings Per Share

 

Thefollowing table sets forth the computation of basic and diluted earnings pershare:

 
|                                                                                                                              |   | **For the years ended**                       |    |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                                                                              |   | **December 31, 2002**                         |    | **December 31, 2001** |   | **December 31, 2000** |   |
|                                                                                                                              |   | **(In thousands, except per share  amounts)** |    |
| **Numerator:**                                                                                                                    |   |                                          |    |   |   |   |   |
| Net loss - basic                                                                                                                  |   | $                                             | (21,663 | ) | $ | (19,398 | ) | $ | (2,890 | ) |
| Minority interests of  unitholders (in loss from continuing operations, discontinued operations and  gain on sale of real estate) |   | (3,900                                        | )       | (3,393 | ) | (537 | ) |
| Net loss - diluted                                                                                                                |   | $                                             | (25,563 | ) | $ | (22,791 | ) | $ | (3,427 | ) |
|                                                                                                                              |   |                                          |    |   |   |   |   |
| **Denominator:**                                                                                                                  |   |                                          |    |   |   |   |   |
| Weighted average common  shares outstanding - basic                                                                               |   | 2,870                                         |    | 2,870 |   | 2,862 |   |
|                                                                                                                              |   |                                          |    |   |   |   |   |
| **Effect  of dilutive securities:**                                                                                               |   |                                          |    |   |   |   |   |
| Converting units to  shares                                                                                                       |   | 524                                           |    | 511 |   | 524 |   |
| Employee stock options                                                                                                            |   | —                                        |    | — |   | 2 |   |
| Weighted average shares  outstanding-diluted                                                                                      |   | 3,394                                         |    | 3,381 |   | 3,388 |   |
|                                                                                                                              |   |                                          |    |   |   |   |   |
| Net loss per share -  basic and diluted                                                                                           |   | $                                             | (7.55   | ) | $ | (6.76 | ) | $ | (1.01 | ) |
|                                                                                                                              |   |                                          |    |   |   |   |   |
| Loss from continuing  operations                                                                                                  |   | $                                             | (22,025 | ) | $ | (21,272 | ) | $ | (3,822 | ) |
|                                                                                                                              |   |                                          |    |   |   |   |   |
| Loss from continuing  operations per share - basic and diluted                                                                    |   | $                                             | (7.67   | ) | $ | (7.41 | ) | $ | (1.34 | ) |

 

Outstandingstock options and the potential conversion of units to shares were excluded in2001 and 2002 in computing diluted earnings per share because the effect wasanti-dilutive.

 

Note6 - Long Term Stock Incentive Plan

 

TheCompany has adopted the HGP 1998 Long Term Stock Incentive Plan (the “HGP StockPlan”) to advance the interests of the Company by encouraging and enabling theacquisition of a financial interest in the Company by key employees anddirectors of the Company and its subsidiaries through equity awards.  The Company reserved 338,900 common sharesfor issuance pursuant to the HGP Stock Plan and options covering 326,000 shareswere outstanding at December 31, 2002.

 

31

----

 

The fair value of optionsgranted for the purpose of presenting pro forma information, in accordance withStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”), has been estimated using aBlack-Scholes option pricing model with the following weighted-averageassumptions:

 
|                             |   | **For  the year ended  December 31, 2002** |   | **For  the year ended  December 31, 2001** |   | **For  the year ended  December 31, 2000** |    |
|----------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|---------|
|                             |   |                                       |   |                                       |   |                                       |    |
| Expected  dividend yield         |   | 0.00                                       | %      | 0.00                                       | %      | 0.00                                       | %  |
| Expected  stock price volatility |   | .447                                       |   | .675                                       |   | 1.053                                      |    |
| Risk  free interest rate         |   | 3.82                                       | %      | 5.03                                       | %      | 5.11                                       | %       |
| Expected  life options           |   | 10 years                                   |   | 10 years                                   |   | 10 years                                   |    |

 

The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions which have no vesting restrictions and are fully transferable.  In addition, option valuation models requirethe input of highly subjective assumptions including the expected stock pricevolatility.  Because the Company’semployee stock options have characteristics significantly different from thoseof traded options, and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management’s opinion, theexisting models do not necessarily provide a reliable single measure of thefair value of its employee stock options.

 

Net income (loss)and net income (loss) per share (basic and diluted) for the years endedDecember 31, 2002, 2001 and 2000, computed on a pro forma basis underrequirements of SFAS 123 equals $(21,698,000) and $(7.56), $(19,514,000) and$(6.80), and $(2,980,000) and $(1.04), respectively.

 

Options granted,exercised and canceled under the Long-term Stock Incentive Plan are summarizedbelow:

 
|                                |   | **For  the year ended  December 31, 2002** |   | **For  the year ended  December 31, 2001** |   | **For  the year ended  December 31, 2000** |   |
|-------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
|                                |   | **Shares**                                 |   | **Price**                                  |   | **Shares**                                 |   | **Price** |   | **Shares** |   | **Price** |   |
|                                |   |                                       |   |                                       |   |                                       |   |   |   |   |   |   |   |
| Outstanding, beginning  of the year |   | 326,000                                    |   | $3.40 - $6.49                              |   | 326,000                                    |   | $3.40 - $6.49 |   | 283,000 |   | $5.00 - $6.49 |   |
| Granted                             |   | —                                     |   | —                                     |   | —                                     |   | — |   | 133,000 |   | $3.40 - $4.49 |   |
| Exercised                           |   | —                                     |   | —                                     |   | —                                     |   | — |   | — |   | — |   |
| Canceled                            |   | —                                     |   | —                                     |   | —                                     |   | — |   | 90,000 |   | $5.00 - $6.49 |   |
|                                |   |                                       |   |                                       |   |                                       |   |   |   |   |   |   |   |
| Outstanding, end of the  year       |   | 326,000                                    |   | $3.40 - $6.49                              |   | 326,000                                    |   | $3.40 - $6.49 |   | 326,000 |   | $3.40 - $6.49 |   |

 

Thefollowing table represents the weighted average per share price optioninformation:

 
|                                             |   | **For  the year ended  December 31, 2002** |   | **For  the year ended  December 31, 2001** |   | **For  the year ended  December 31, 2000** |   |
|--------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
|                                             |   |                                       |   |                                       |   |                                       |   |
| Weighted average fair  value of options granted  |   | n/a                                        |   | n/a                                        |   | $                                          | 3.39   |   |
| Weighted average fair  value of options canceled |   | n/a                                        |   | n/a                                        |   | 4.33                                       |   |
| Weighted average  exercise price on grant date   |   | n/a                                        |   | n/a                                        |   | 3.48                                       |   |
|                                                  |        |                                            |        |                                            |        |                                            |        |  |

 

Theweighted average exercise price for options outstanding at December 31, 2002,2001 and 2000 was $5.12, $5.12 and $5.12, respectively.  The weighted average contractual life ofoptions outstanding at December 31, 2002, 2001 and 2000 was 5.27 years, 6.02years and 6.77 years, respectively.

 

InSeptember 2002, the Company granted 43,695 units of HGP LP to key employees(See Note 2, “Minority Interests”).

 

32

----

 

Note 7 - Commitments

 

The Company hasoutstanding commitments for capital expenditures on leases signed at December31, 2002 in the amount of $964,000 for tenant allowances and $526,000 forconstruction costs.  These costs areexpected to be paid during 2003 and a portion will be reimbursed from thecapital improvement escrows (see Note 2). In February 2003, the Company signed a contract for $1.4 million with ageneral contractor for the construction of a second phase at its outlet centerin Tulare, California.

 

Note8 - Mortgage Debt and Other Liabilities

 

*HGP Credit Facility*

 

OnJune 15, 1998, certain wholly owned affiliates of the Company entered into acredit facility (the “HGP Credit Facility”) with Nomura Asset CapitalCorporation (“Nomura”), which initially matured on July 11, 2001 (the “InitialMaturity Date”).  The HGP CreditFacility was acquired from Nomura by CDC Mortgage Capital, Inc. (“CDC”).  On July 30, 2001, certain of the terms ofthe HGP Credit Facility were modified, including the maturity date, which wasextended to July 11, 2002 (the “Extended Maturity Date”).  On July 11, 2002, the Company repaid in fullthe HGP Credit Facility with the proceeds of loans originated by UBS WarburgReal Estate Investments Inc. (“UBS”) and Beal Bank, S.S.B. (“Beal Bank”).

 

The UBS loansconsist of senior loans with a total initial principal balance of $22.0 million(the “UBS Senior Loans”) and mezzanine loans with a total initial principalbalance of $3.5 million (the “UBS Mezzanine Loans”, or collectively, the “UBSLoans”).  The UBS Senior Loans and UBSMezzanine Loans each consist of three loans, each secured by an outletcenter.  The centers which secure theUBS Loans are in Laughlin, Nevada, Medford, Minnesota and Warrenton, Missouri,each of which was transferred to a new wholly owned subsidiary of theCompany.  These new entities arerestricted from owning any assets other than the outlet centers and may notincur additional liabilities, other than normal trade payables.  The UBS Loans are cross-collateralized andnon-recourse to the Company, subject to certain customary exceptions.  The UBS Loans require that the Companymaintain a Leverage Ratio (as defined in the loan documents) that is no morethan 5% greater than the Initial Leverage Ratio (as defined in the loandocuments) calculated as of July 11, 2002.

 

The UBS Senior Loansmature July 11, 2009, require monthly principal payments based on a 25-yearamortization schedule and bear interest at a fixed rate of 8.15%.  The outstanding balances of these loans totaled$21.9 million at December 31, 2002. These loans also require the monthly funding of escrow accounts for thepayment of future debt service, real estate taxes, insurance, capital andtenant improvements and leasing commissions (See Note 2).  Funds in excess of those specified in theloan agreements are disbursed to the new entities at least monthly.

 

The UBS Mezzanine Loansmature July 11, 2005 and may be prepaid without penalty after July 11,2004.  These loans require monthlypayments based on a three-year amortization schedule and bear interest at afixed rate of 17.0%.  The outstandingbalances of these loans totaled $3.1 million at December 31, 2002.

 

The Beal Bank loans total$7.0 million (the “Beal Bank Loans”) and consist of (i) a $3.0 million loansecured by vacant land located in Norton Shores, Michigan and FruitportTownship, Michigan (the “Beal Bank Loan I”), and (ii) a $4.0 million loansecured by the outlet center in Monroe, Michigan (the “Beal Bank Loan II”).  These loans are cross-collateralized and arerecourse to the Company.  The Beal BankLoans mature July 10, 2005.  Principalpayments of up to $2.0 million are permitted without penalty at any time and theloans may be prepaid in whole or in part without penalty after July 10, 2004.  Approximately $450,000 of the proceeds wereused to pay in full a land contract related to land in Fruitport Township whichis a portion of the collateral for Beal Bank Loan I.

 

The Beal Bank Loansrequire monthly payments of interest only at rates of (i) the greater of theWall Street Journal Prime Rate plus 4.5% or 12.0% for the Beal Bank Loan I and(ii) the greater of the Wall Street Journal Prime Rate plus 2.5% or 9.9% forthe Beal Bank Loan II, each of which adjusts monthly.

 

The Beal Bank LoanII is guaranteed by Prime Retail, Inc., of which Mr. Skoien and Mr. Amster,Directors of the Company, are members of the Board of Directors, up to amaximum amount of $4,000,000 (the “Prime-Beal Guaranty”).  The Prime-Beal Guaranty will be  released when the total outstanding balanceof the Beal Bank Loans is equal to or less than $5,000,000.  The Company is obligated to make quarterlypayments of $15,000 to Prime Retail, Inc. as long as this guaranty is ineffect.  Prime had guaranteed $10.0million of obligations under the HGP Credit Facility, (the “PrimeGuarantee”).  In connection with thePrime Guarantee, HGP paid Prime a fee of $400,000 per annum from June 15, 1998through June 15, 2001.  In connectionwith the extension of the maturity date of the HGP Credit Facility, Primereaffirmed its obligations with respect to the Prime Guarantee.  From June 15, 2001 through June 15, 2002,the Company paid Prime an annual fee of $150,000.  Pursuant to the Prime Guarantee, Prime is also the guarantor ofthe indebtedness related to the Company’s corporate office building, which hada balance of $2.3 million as of December 31, 2002 (see Other Borrowings below).

 

33

----

 

Priorto Initial Maturity Date, the HGP Credit Facility bore interest at the 30-dayLIBOR rate plus 1.90% per annum and required annual principal payments of $1.5million, $1.5 million and $2.0 million during the first, second and thirdyears, respectively.  From July 1999 tothe Initial Maturity Date, exit fees which totaled $1.2 million were recognizedas a component of interest expense. Subsequent to the Initial Maturity Date,the HGP Credit Facility bore interest at the 30-day LIBOR rate (but not lessthan 4.1%) plus 3.95% per annum and required monthly principal payments of$225,000.  An extension fee of 2% of theloan amount was incurred in conjunction with the extension of the loan whichwas recognized as a component of interest expense over the extension period.  The balance of the HGP Credit Facility was $32.1million at December 31, 2001.

 

OnJune 29, 2001, the Company completed a $3.5 million refinancing of its outletcenter in Holland, Michigan, with Republic Bank.  The outstanding balance of this loan was $3.4 million at December31, 2002.  The loan is for a term offive years, requires monthly debt service payments of $30,000 based on atwenty-year amortization schedule, and bears interest at a fixed rate of8.21%.  The net proceeds from the loanwere used to reduce the balance of the HGP Credit Facility.

 

OnJuly 31, 2001 the Company completed a $16.0 million refinancing of its powercenter in Norton Shores, Michigan, with Greenwich Capital Financial Products,Inc. (“Greenwich”).  The outstandingbalance of this loan was $15.8 million at December 31, 2002.  The non-recourse loan is for a term of tenyears, requires monthly payments based on a 30-year amortization schedule andbears interest at a fixed rate of 7.647%. The net proceeds from the loan were used to reduce the balance of theHGP Credit Facility.  In connection withthe Greenwich loan, title to Lakeshore Marketplace was transferred to a newentity, Lakeshore Marketplace, LLC, a wholly owned subsidiary of theCompany.  Lakeshore Marketplace LLC, andits managing member, Lakeshore Marketplace Finance Company, Inc., arerestricted from owning any assets other than Lakeshore Marketplace and may notincur additional liabilities, other than normal trade payables.  All of the assets of Lakeshore Marketplace,LLC are pledged as security for the Greenwich loan. The Company is activelymarketing this power center for sale and thus, pursuant to SFAS 144, its realestate assets are listed as Real Estate – Discontinued Operations on theConsolidated Balance Sheets and its revenue and expenses are included in Incomefrom Discontinued Operations on the Consolidated Statements of Operations.

 

*JP Morgan Loans*

 

OnJuly 9, 1999 the Company completed a debt financing totaling $46.7 million withMorgan Guaranty Trust Company of New York (“the JP Morgan Loans”).  The JP Morgan Loans consist of (i) loanstotaling $22.9 million secured by three factory outlet centers located inDaleville, Indiana, Somerset, Pennsylvania and Tulare, California and (ii)loans totaling $23.8 million secured by three factory outlet centers located inGretna, Nebraska, Sealy, Texas and Traverse City, Michigan.  The total outstanding principal balance ofthese loans (excluding accrued interest and penalties) was $45.2 million and$45.5 million at December 31, 2002 and 2001, respectively. In the absence of adefault, each loan bears interest at a fixed rate of 8.46%, matures on August1, 2009 and requires the monthly payment of interest and principal based on a25-year amortization schedule.  Bothloans are non-recourse to HGPI, subject to certain customary exceptions.  The Company has established certain escrowaccounts in connection with this loan that are classified on the balance sheetof the Company as restricted cash (see Note 2).  The escrow accounts related to the JP Morgan Loans have a balanceof $861,000 at December 31, 2002.

 

OnOctober 10, 2001, the Company notified the servicers of the JP Morgan Loansthat the net cash flow from the properties securing the loans was insufficientto fully pay the required monthly debt service.  The Company remits monthly all available cash flow, after areserve for monthly operating expenses, as partial payment of the debtservice.  The failure to pay the fullamount due constitutes a default under the loan agreements which would allowthe respective lenders to exercise their various remedies contained in the loanagreements, including application of escrow balances to delinquent payments andforeclosure on the properties which collateralize the loans.  The interest rate applicable during theoccurrence and continuance of an Event of Default (as defined in the loanagreements) is 13.46%.  In addition, apenalty of 5% of each monthly installment is imposed in the event that suchmonthly installment is not timely made in full.  The default interest and monthly penalty have been accrued in theconsolidated financial statements since October 2001.  Interest expense for the years ended December 31, 2002 and 2001includes $2.6 million and $575,000, respectively, for these charges.  The Company and the servicers of the JPMorgan Loans are currently attempting to negotiate a restructuring of theloans, but the Company can give no assurance that such negotiations will resultin any settlement of the loans or any modification of the terms of the loans.

 

TheJP Morgan Loans require the monthly funding of escrow accounts for the paymentof real estate taxes, insurance and capital improvements.  Such escrow accounts totaled $397,000 atDecember 31, 2002.  In addition,$464,000 of cash flow remitted as debt service after October 31, 2002 has beenplaced in special purpose escrow accounts by the loan servicers.  These escrow accounts are classified on thebalance sheet as restricted cash (see Note 2). The Company continues to manage the properties which secure the JPMorgan Loans pursuant to a management agreement which is subject tocancellation by the servicers of the loans. The Company receives fees of approximately $25,000 per month for suchservices.

 

The declining results ofoperations resulting in the inability to service the JP Morgan Loans was judgedto represent an indicator of possible impairment in the value of the collateralproperties.  The Company estimated thecurrent value of the six centers that collateralize the loans and 

 

34

----

 

concluded that thecarrying value of four of the centers exceed the fair values of thosecenters.  Accordingly, the results ofoperations for 2001 include a provision for asset impairment of $18.0 million,representing a write-down of the carrying values of the assets to theirestimated fair values.  Based oncontinued negotiations with the lender and additional declines in occupancy andrevenues, the Company recorded an additional provision for asset impairment of$17.0 million in the fourth quarter of 2002 to further reduce the carryingvalues of the same four properties, including approximately $100,000 related toa parcel of land adjacent to one of the properties.  The aggregate carrying value of the real estate of suchproperties collateralizing the JP Morgan Loans was approximately $20.1 millionat December 31, 2002.  Such value isless than the current outstanding loan balances which total $45.2 million,excluding accrued interest and penalties of approximately $6.5 million.  If the lender were to foreclose on thecollateral properties, the Company would record a gain for the differencebetween the carrying value of the properties and related net assets and theoutstanding loan balances and related liabilities.  The estimation of the fair value of the six centers securing theJP Morgan Loans involved estimates by management with respect to future cashflows, market conditions and valuations applicable to such properties.  Future events could occur which would causethe Company to conclude that the carrying values of the Company’s propertiesmay need to be further adjusted.

 

*Other Borrowings*

 

OnJuly 20, 2001, the Company acquired the ownership of a triple net leasedproperty in Roseville, Michigan, which is leased to Petsmart, Inc., as areplacement property for its center in Dry Ridge, Kentucky in a transactionstructured as a tax deferred exchange under the provisions of Section 1031 ofthe Code.  The purchase price of $3.35million included the assumption of a $3.2 million mortgage.  The rent payable under the lease is equal tothe debt service due under the loan secured by the property (the “PetsmartLoan”).  The Petsmart Loan matures onJanuary 8, 2008, bears interest at a fixed rate of 8.77% and requires themonthly payment of principal computed on a 25 year schedule.  The loan is non-recourse to HGPI.  The balance of the Petsmart Loan was $3.2million at December 31, 2002 and 2001. The Company is marketing this propertyfor sale and thus, pursuant to SFAS 144, its real estate assets are listed asdiscontinued operations on the Consolidated Balance Sheets and its revenue andexpenses are included in Income from Discontinued Operations on theConsolidated Statements of Operations.

 

TheCompany has extended a mortgage loan collateralized by its corporate officebuilding and related equipment in Norton Shores, Michigan from December 2002 toApril 30, 2003.  The principal balanceon this loan was $2.2 million and $2.4 million at December 31, 2002 and 2001,respectively.  During the original term,the interest rate on the loan was LIBOR plus 2.5% per annum and monthly debtservice payments of $22,500 were required. During the extension period, the loan bears interest at LIBOR plus 5.5%per annum and requires monthly debt service payments of $50,000.  The Company is currently seeking torefinance this loan.  There can be noassurance that the Company will be able to complete such refinancing or on whatterms such refinancing may be accomplished.

 

Aparcel of approximately 25 acres of undeveloped land in Norton Shores, Michiganwas subject to a land contract with a balance of $457,000 at December 31,2001.  The contract was paid in full onJuly 11, 2002 and the Company acquired title to the land (see discussion ofBeal Bank Loans above).  The interestrate on the contract was 8.5% and monthly debt service payments were $4,200.

 

OnJune 4, 2002, the Company purchased the land underlying its center in Laughlin,Nevada for $2.5 million pursuant to a purchase option contained in the groundlease.  The ground rent was prorated toFebruary 25, 2002.  The Company paidapproximately $500,000 at closing and a $2.0 million unsecured promissory notewas provided by the seller.  The notematures in June 2012, bears interest at a rate of 2.0% above the weightedaverage cost of funds index for the Eleventh District Savings Institutions,adjusted annually and requires amortization based on a ten year schedule.  The initial interest rate payable on theloan through February 28, 2003 is 5.074%. The outstanding principal balance on this note was $1.9 million atDecember 31, 2002.

 

Cash paid for interest,including on the properties classified as discontinued operations, for theyears ended December 31, 2002, 2001 and 2000 was $7.7 million $9.2 million and$9.5 million, respectively.  Theweighted average rate of interest, including on the properties classified asdiscontinued operations, was 10.5%, 9.0% and 8.4% for the years ended December31, 2002, 2001 and 2000, respectively.

 

35

----

 

Substantially all of theCompany’s real estate assets are pledged as collateral for the Company’scurrent outstanding loans.  Mortgagesand other debt, including debt secured by the assets discontinued operations, asof December 31, 2002 and 2001, consists of the following (in thousands):

 

|                      |   | **2002** |    | **2001** |   |
|---------------------------|--------|----------|---------|----------|--------|
|                      |   |     |    |     |   |
| Mortgage  notes payable   |   | $        | 101,883 |     | $      | 102,678 |   |
| Land  contracts and other |   | 1,869    |    | 457      |   |
|                      |   | $        | 103,752 |     | $      | 103,135 |   |

 

Debt maturities andprincipal payments, including debt secured by the assets classified asdiscontinued operations, due subsequent to 2002 are as follows (in thousands):

 

|       |   | **Operating  Portfolio** |   | **Discontinued  Operations** |   |
|------------|--------|--------------------------|--------|------------------------------|--------|
| 2003       |   | $                        | 49,031 |                         | $      | 176 |   |
| 2004       |   | 1,774                    |   | 187                          |   |
| 2005       |   | 8,434                    |   | 206                          |   |
| 2006       |   | 3,662                    |   | 222                          |   |
| 2007       |   | 568                      |   | 241                          |   |
| Thereafter |   | 21,297                   |   | 17,954                       |   |
|       |   | $                        | 84,766 |                         | $      | 18,986 |   |

 

TheJP Morgan Loans, on which the Company is in default, are reflected as a 2003maturity (see “JP Morgan Loans” above).

 

Note9 - Related Party Transactions

 

TheCompany utilizes Thilman & Filippini as its agent for insurance and riskmanagement programs.  E. Thomas Thilmanis a Director of the Company and a partner in Thilman & Filippini.  During the years ended December 31, 2002,2001 and 2000, the Company paid premiums totaling approximately $1.1 million,$663,000 and $739,000, respectively, on insurance policies placed by Thilman& Filippini.  This includesinsurance premiums for the properties classified as discontinued operations.

 

TheCompany sub-leases office space on a month to month basis for its seniorexecutives at 77 W. Wacker, Chicago, Illinois from an affiliate of Michael W.Reschke, a former Director of the Company. During the years ended December 31, 2002, 2001 and 2000 the Company incurredrent expense of $47,000, $53,000 and $95,000, respectively.

 

PrimeRetail, Inc. (“Prime”), of which Mr. Skoien and Mr. Amster, Directors of theCompany, are members of the Board of Directors, has guaranteed the Beal BankLoan II up to a maximum amount of $4,000,000 (the “Prime-Beal Guaranty”).  The Prime-Beal Guaranty will be releasedwhen the total outstanding balance of the Beal Bank Loans is equal to or lessthan $5,000,000.  The Company isobligated to make quarterly payments of $15,000 to Prime as long as thisguaranty is in effect.  Prime hadguaranteed $10.0 million of obligations under the HGP Credit Facility, (the“Prime Guarantee”).  In connection withthe Prime Guarantee, HGP paid Prime a fee of $400,000 per annum from June 15,1998 through June 15, 2001.  Inconnection with the extension of the maturity date of the HGP Credit Facility,Prime reaffirmed its obligations with respect to the Prime Guarantee.  From June 15, 2001 through June 15, 2002,the Company paid Prime an annual fee of $150,000.  Pursuant to the Prime Guarantee, Prime is also the guarantor ofthe indebtedness related to the Company’s corporate office building, which hada balance of $2.3 million as of December 31, 2002.

 

OnApril 18, 2000, the Company made a $1.5 million loan to Prime Outdoor, LLC, anaffiliate of Prime Group, Inc.  ThePrime Group, Inc. is an affiliate of Michael W. Reschke, a Director of theCompany.  The interest rate on the loanwas at 10% and was secured by a pledge of all of the unencumbered assets ofPrime Outdoor, LLC, Prime Group, Inc.’s ownership interest in Prime Outdoor,LLC, and 410,783 units in Horizon Group Properties, LP owned by Prime Group,Inc. and its affiliates.  The loan wasapproved by a committee of independent directors of the Company.  The loan was repaid on June 9, 2000.

 

OnDecember 27, 2002, HGPI sold 145,349 units of Horizon Group Properties, LP toHoward Amster, a Director of HGPI, for aggregate consideration of $750,000, or$5.16 per unit.  HGPI may consideradditional sales of units in Horizon Group Properties, LP to Mr. Amster orothers in the future.

 

36

----

 

Note10 - Shareholders’ Equity

 

Theauthorized capital stock of HGPI consists of 50,000,000 shares of common stock,50,000,000 shares of preferred stock, and 50,000,000 shares of excess stockwhich consists of 25,000,000 shares of excess common stock and 25,000,000shares of excess preferred stock, each $.01 par value per share.  Each share of common stock entitles theholder to one vote on all matters submitted to a vote of stockholders,including the election of directors, and, except as provided with respect toany other class or series of stock, the holders of HGPI common stock willpossess exclusive voting power.  Thereis no cumulative voting in the election of directors, which means that theholders of a majority of the outstanding HGPI common stock can elect all of thedirectors then standing for election. Holders of HGPI common stock have no preference, conversion, exchange,sinking fund, redemption or appraisal rights and have no preemptive rights tosubscribe for any securities of HGPI. There are no shares of preferred stock or excess stock currently issuedand outstanding.

 

Note11 - Segment Information

 

During the years ended December 31, 2002, 2001 and2000, the Company operated twelve shopping centers located in nine states,thirteen shopping centers located in ten states and fourteen shopping centerslocated in eleven states, respectively, including one shopping center which isclassified as discontinued operations at December 31, 2002 and 2001.  The Company separately evaluates theperformance of each of its centers. However, because each of the centers has similar economic characteristics,facilities and/or tenants, the shopping centers have been aggregated into asingle dominant shopping center segment. The Company evaluates performance and allocates resources primarilybased on the Funds From Operations (“FFO”) expected to be generated by aninvestment in each individual shopping center. FFO is a widely used measure ofthe operating performance of REITs, but may not be comparable to other REITs ifthey do not define similarly entitled items exactly as the Company definesthem.  FFO, as defined by the NationalAssociation of Real Estate Investment Trusts (“NAREIT”), means net incomeexcluding extraordinary items (as defined by accounting principles generallyaccepted in the United States (“GAAP”)) and gains and losses from sales ofdepreciable operating property, plus depreciation and amortization, and afteradjustments for unconsolidated partnerships and joint ventures.  Gains and losses on non-depreciable realestate assets, including land parcels, are included in FFO. FFO should not beconsidered as an alternative to either net income or cash flows from operatingactivities computed under accounting principles generally accepted in theUnited States.

 

A reconciliation of the loss before minority intereststo diluted FFO is as follows:

 
|                                                                                                                              |   | **For  the year ended** |    |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                                              |   | **December  31, 2002**  |    | **December  31, 2001** |   | **December  31, 2000** |   |
|                                                                                                                              |   |                    |    |   |   |   |   |
| Net  loss                                                                                                                         |   | $                       | (21,663 | ) | $ | (19,398 | ) | $ | (2,890 | ) |
| Minority  interests of unitholders (in loss from continuing operations, discontinued  operations and gain on sale of real estate) |   | (3,900                  | )       | (3,393 | ) | (537 | ) |
| Loss  before minority interests                                                                                                   |   | (25,563                 | )       | (22,791 | ) | (3,427 | ) |
|                                                                                                                              |   |                    |    |   |   |   |   |
| Adjustments  for depreciation and amortization                                                                                    |   | 5,227                   |    | 5,958 |   | 5,376 |   |
| Provision  for impairment                                                                                                         |   | 17,027                  |    | 18,000 |   | 1,568 |   |
| FFO                                                                                                                               |   | $                       | (3,309  | ) | $ | 1,167 |   | $ | 3,517 |   |

 

The line itementitled general and administrative expenses on the Company’s statements ofoperations represents corporate level general and administrative expenses.

 

Note 12 – PropertyDispositions

 

On November 9,2000, the Company sold an outparcel at its power center in Norton Shores,Michigan.  A gain on sale of $239,000 isreflected on the statement of operations, net of minority interests, for theyear ended December 31, 2000.

 

37

----

 

On January 26,2001, the Company sold its outlet center in Dry Ridge, Kentucky for $2.5million.  The net proceeds were used toreduce the outstanding balance on the HGP Credit Facility (See Note 8).  In conjunction with the disposition, theCompany acquired replacement property in Roseville, Michigan in a transactionstructured as a tax deferred exchange under the provisions of Sections 1031 ofthe Code.

 

In May 2001, theCompany sold 18.8 acres of vacant land in Norton Shores, Michigan.  The proceeds of this transaction wereapproximately $1.7 million, with a gain recognized on the transaction of$913,000.  A portion of the NortonShores land was subject to a land contract totaling $125,000, which was paidoff at the time of the sale.

 

In July 2001, theCompany sold one acre of land ancillary to its center in Holland, Michigan for$50,000. The Company recognized a gain of $42,000 on the sale.

 

In October 2001,the Company sold an outparcel adjacent to its center in Sealy, Texas.  The proceeds were $72,000 and a net loss of$29,000 was recognized on the transaction.

 

On November 7,2001, the Company sold a one acre outparcel adjacent it its center in Monroe,Michigan.  A gain was recognized on thetransaction of $236,000 and net proceeds of approximately $250,000 were appliedto the outstanding principal balance of the HGP Credit Facility.

 

On November 8,2001, the Company sold a 1.3 acre outparcel at its power center in NortonShores, Michigan for approximately $627,000. A gain of $394,000 was recognized on the transaction.  The purchaser assumed a portion of specialroad assessments on the land which totaled approximately $40,000.

 

On January 25,2002, the Company sold 7.1 acres of land ancillary to its center in Warrenton,Missouri.  The proceeds from this salewere $235,000 and a loss on sale of $1,000 was recognized.  This land was classified as held for sale onthe Company’s balance sheet at December 31, 2001.

 

On February 15,2002, a tenant exercised its option to purchase the land subject to its groundlease at Lakeshore Marketplace in Norton Shores, Michigan.  The proceeds from this sale were $373,000and a gain on sale of $156,000 was recognized. This land was classified as held for sale on the Company’s balance sheetat December 31, 2001.

 

In September 2002,the Company sold excess office furniture to a tenant at the Michigan corporateoffice for $37,000 resulting in a gain of $22,000.

 

Note 13 –Discontinued Operations

 

In accordance withSFAS 144 effective for financial statements issued for fiscal years beginningafter December 15, 2001, the results of operations and gain/(loss) on realestate properties sold or held for sale subsequent to December 31, 2001 arereflected in the consolidated statements of operations as “Income fromDiscontinued Operations” for all periods presented.

 

The followingtable is a summary of the results of operations of the properties classified asdiscontinued operations (in thousands):

 
|                                |   | **For the year ended December 31,** |   |
|-------------------------------------|--------|-------------------------------------|--------|
|                                |   | **2002**                            |   | **2001** |   | **2000** |   |
| Total revenue                       |   | $                                   | 3,328  |   | $ | 3,031 |   | $ | 2,946 |   |
| Total expenses                      |   | 3,078                               |   | 2,374 |   | 2,082 |   |
| Income before minority interests    |   | 250                                 |   | 657 |   | 864 |   |
| Minority interests                  |   | (38                                 | )      | (99 | ) | (134 | ) |
| Income from discontinued operations |   | $                                   | 212    |   | $ | 558 |   | $ | 730 |   |

 

38

----

 

Note 14 –Subsequent Events

 

On March 13, 2003,HGPI sold 261,628 limited partner units in HGP LP to Pleasant Lake Apts., Ltd.,an affiliate of Howard M. Amster, a director and principal shareholder of HGPI,for aggregate consideration of $1.35 million, or $5.16 per unit.  On March 14, 2003, the Company used $1.3 millionof the proceeds from the sale to fund a secured loan to Retail Partners LimitedPartnership and Retail Partners, Inc. (collectively “Retail Partners”).  The loan is for a term of 14 months andbears interest at the rate of 5.0%, payable at maturity.  The Company received a 3.25% net profitsinterest in a real estate development owned by Huntley Development LP andHuntley Meadow Residential Venture (collectively “Huntley”) subject to thecurrent lender’s interest in distributions from Huntley.  Pursuant to the loan agreement, the Companyis obligated to  negotiate an option toacquire an additional 48.75% ownership interest in Huntley.  Huntley and Retail Partners are owned by ThePrime Group, Inc.  Gary J. Skoien,Chairman, Chief Executive Officer and President of the Company, is ExecutiveVice President and Chief Operating Officer of The Prime Group, Inc. and has anet profits interest in Huntley.

 

In February 2003,the Company signed a contract for $1.4 million with a general contractor forthe construction of a second phase at its outlet center in Tulare, California.

 

39

----

 

**HORIZON GROUP PROPERTIES, INC.**

**SCHEDULE III – REAL ESTATE ANDACCUMULATED DEPRECIATION**

**DECEMBER 31, 2002**

*(in thousands)*

 
|                             |   |                 |    | **Initial Cost to  Company(3)** |     | **Costs Capitalized  Subsequent  to Acquisition** |                            | **Gross Amount at which Carried  Close of Period** |              | **Year of  Construction/  Acquisition** |                                  |
|----------------------------------|--------|----------------------|---------|---------------------------------|----------|---------------------------------------------------|---------------------------------|----------------------------------------------------|-------------------|-----------------------------------------|---------------------------------------|
|                             |   |                 |    |                            |     |                                              |
|                             |   |                 |    |                            | **Land** |                                              | **Buildings and  Improvements** |                                               | **Total  (7)(8)** |                                    | **Accumulated  Depreciation  (6)(9)** |   |   |
| **Property**                     |   | **Encumbrance  (2)** |    | **Land**                        |     | **Buildings and  Improvements**                   |                            | **Land**                                           |              | **Buildings and  Improvements**         |                                  |   |   |   |   |   |
| Holland                          |   | $                    | 3,395   |                            | $        | 623                                               |                            | $                                                  | 4,468             |                                    | $                                     | — |   | $ | 475 |   | $ | 623 |   | $ | 4,943 |   | $ | 5,566 |   | $ | 799 |   | 1988/1998 |   |
|                             |   |                 |    |                            |     |                                              |                            |                                               |              |                                    |                                  |   |   |   |   |   |   |   |   |   |   |
| Laughlin                         |   | 12,510               |    | 8                               |     | 20,367                                            |                            | 2,500                                              |              | 870                                     |                                  | 2,508 |   | 21,237 |   | 23,745 |   | 3,353 |   | 1996/1998 |   |
|                             |   |                 |    |                            |     |                                              |                            |                                               |              |                                    |                                  |   |   |   |   |   |   |   |   |   |   |
| Medford                          |   | 7,362                |    | 242                             |     | 11,046                                            |                            | —                                             |              | 1,598                                   |                                  | 242 |   | 12,644 |   | 12,886 |   | 2,095 |   | 1991/1998 |   |
|                             |   |                 |    |                            |     |                                              |                            |                                               |              |                                    |                                  |   |   |   |   |   |   |   |   |   |   |
| Monroe                           |   | 7,000                |    | 427                             |     | 8,610                                             |                            | —                                             |              | 1,478                                   |                                  | 427 |   | 10,088 |   | 10,515 |   | 1,798 |   | 1987/1998 |   |
|                             |   |                 |    |                            |     |                                              |                            |                                               |              |                                    |                                  |   |   |   |   |   |   |   |   |   |   |
| Lakeshore(4)                     |   | 15,824               |    | —                          |     | —                                            |                            | —                                             |              | —                                  |                                  | — |   | — |   | — |   | — |   | 1995/1998 |   |
|                             |   |                 |    |                            |     |                                              |                            |                                               |              |                                    |                                  |   |   |   |   |   |   |   |   |   |   |
| Sealy                            |   | 10,821               |    | 150                             |     | 647                                               |                            | —                                             |              | 2                                       |                                  | 150 |   | 649 |   | 799 |   | — |   | 1995/1998 |   |
|                             |   |                 |    |                            |     |                                              |                            |                                               |              |                                    |                                  |   |   |   |   |   |   |   |   |   |   |
| Somerset                         |   | 2,587                |    | 100                             |     | 157                                               |                            | —                                             |              | 325                                     |                                  | 100 |   | 482 |   | 582 |   | — |   | 1990/1998 |   |
|                             |   |                 |    |                            |     |                                              |                            |                                               |              |                                    |                                  |   |   |   |   |   |   |   |   |   |   |
| Traverse  City                   |   | 5,003                |    | 899                             |     | 4,607                                             |                            | —                                             |              | 758                                     |                                  | 899 |   | 5,365 |   | 6,264 |   | 940 |   | 1990/1998 |   |
|                             |   |                 |    |                            |     |                                              |                            |                                               |              |                                    |                                  |   |   |   |   |   |   |   |   |   |   |
| Tulare                           |   | 8,984                |    | 1,350                           |     | 7,917                                             |                            | —                                             |              | 417                                     |                                  | 1,350 |   | 8,334 |   | 9,684 |   | 1,387 |   | 1995/1998 |   |
|                             |   |                 |    |                            |     |                                              |                            |                                               |              |                                    |                                  |   |   |   |   |   |   |   |   |   |   |
| Warrenton                        |   | 5,149                |    | 1,032                           |     | 13,265                                            |                            | —                                             |              | 267                                     |                                  | 1,032 |   | 13,532 |   | 14,564 |   | 2,066 |   | 1993/1998 |   |
|                             |   |                 |    |                            |     |                                              |                            |                                               |              |                                    |                                  |   |   |   |   |   |   |   |   |   |   |
| Daleville                        |   | 10,619               |    | 145                             |     | 568                                               |                            | —                                             |              | 5                                       |                                  | 145 |   | 573 |   | 718 |   | — |   | 1994/1998 |   |
|                             |   |                 |    |                            |     |                                              |                            |                                               |              |                                    |                                  |   |   |   |   |   |   |   |   |   |   |
| Gretna                           |   | 7,228                |    | 250                             |     | 3,637                                             |                            | —                                             |              | 13                                      |                                  | 250 |   | 3,650 |   | 3,900 |   | — |   | 1993/1998 |   |
|                             |   |                 |    |                            |     |                                              |                            |                                               |              |                                    |                                  |   |   |   |   |   |   |   |   |   |   |
| Miscellaneous  / Corporate(1)(5) |   | 7,270                |    | 991                             |     | 3,324                                             |                            | 126                                                |              | 644                                     |                                  | 1,117 |   | 3,968 |   | 5,085 |   | 997 |   | 1995/1998 |   |
|                             |   |                 |    |                            |     |                                              |                            |                                               |              |                                    |                                  |   |   |   |   |   |   |   |   |   |   |
| Total                            |   | $                    | 103,752 |                            | $        | 6,217                                             |                            | $                                                  | 78,613            |                                    | $                                     | 2,626 |   | $ | 6,852 |   | $ | 8,843 |   | $ | 85,465 |   | $ | 94,308 |   | $ | 13,435 |   |   |   |

 

40

----

 

**HORIZON GROUP PROPERTIES, INC.**

**SCHEDULE III – NOTES**

**DECEMBER 31, 2002**

*(in thousands)*

 

----

(1)                                  Includes$703,700 of cost and $606,000 of accumulated depreciation for furniture andequipment for the corporate office building.

 

(2)                                  Seedescription of mortgage, notes and loans payable in Note 8 of the Notes toConsolidated Financial Statements.

 

(3)                                  Includes$35.0 million of impairment charges recorded on the Daleville, Gretna, Sealyand Somerset properties, including $100,000 related to an outparcel adjacent toone of the properties.

 

(4)                                  LakeshoreMarketplace is classified as discontinued operations on the Company’s balancesheets.

 

(5)                                  Thesingle tenant building in Roseville, Michigan, which is leased to Petsmart,Inc. is classified as discontinued operations on the Company’s balance sheets.

 

(6)                                  Depreciationof the Company’s investment in buildings and improvements reflected in thestatements of operations is calculated over the estimated useful lives of theassets as follows:

 

| Buildings    |   | 31.5 years                         |
|--------------|--------|------------------------------------|
| Improvements |   | Shorter of 10  years or lease term |

 

(7)                                  Theaggregate cost of property included above for federal income tax purposesapproximated $221.8 million as of December 31, 2002.

 

(8)                                  Thefollowing table reconciles the Real Estate Properties from January 1, 2000 toDecember 31, 2002:

 
|                                 |   | **Years ended**       |    |
|--------------------------------------|--------|-----------------------|---------|
|                                 |   | **December 31, 2002** |    | **December 31, 2001** |   | **December 31, 2000** |   |
|                                 |   |                  |    |   |   |   |   |
| Balance,  beginning of period        |   | $                     | 113,931 |   | $ | 133,270 |   | $ | 136,269 |   |
| Additions  during period:            |   |                  |    |   |   |   |   |
| Improvements  of existing properties |   | 488                   |    | 987 |   | 1,730 |   |
| Acquisitions                         |   | 2,500                 |    | — |   | — |   |
| Retirements                          |   | (346                  | )       | (2,536 | ) | (383 | ) |
| Write  down to net book value        |   | (5,739                | )       | — |   | (310 | ) |
| Transfer  of assets held for sale    |   | —                |    | — |   | (2,468 | ) |
| Write  down for impaired property    |   | (16,526               | )       | (17,790 | ) | (1,568 | ) |
|                                 |   |                  |    |   |   |   |   |
| Balance,  end of period              |   | $                     | 94,308  |   | $ | 113,931 |   | $ | 133,270 |   |

 

41

----

 

(9)           The following table reconciles theaccumulated depreciation from January 1, 2000 to December 31, 2002:

 
|                                    |   | **Years ended**       |   |
|-----------------------------------------|--------|-----------------------|--------|
|                                    |   | **December 31, 2002** |   | **December 31, 2001** |   | **December 31, 2000** |   |
|                                    |   |                  |   |   |   |   |   |
| Balance,  beginning of period           |   | $                     | 15,348 |   | $ | 11,061 |   | $ | 6,653 |   |
| Addition  during period -  Depreciation |   | 4,116                 |   | 4,939 |   | 4,940 |   |
| Write  down to net book value           |   | (5,739                | )      | — |   | (310 | ) |
| Retirements  during period              |   | (290                  | )      | (652 | ) | (222 | ) |
|                                    |   |                  |   |   |   |   |   |
| Balance,  end of period                 |   | $                     | 13,435 |   | $ | 15,348 |   | $ | 11,061 |   |

 

The tables shownin Notes 8 and 9 above have been changed to reflect the reclassification of thepower center located in Norton Shores, Michigan and the single tenant buildingin Roseville, Michigan leased to Petsmart, Inc. and other parcels of land, inboth 2001 and 2000 of net real estate assets of $13,731 and $11,594,respectively, from real estate assets to discontinued operations.

 

42

----

 

### **ITEM 9 - CHANGESIN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES**

 

None

 

**PARTIII**

 

**ITEM 10 - DIRECTORS AND EXECUTIVEOFFICERS OF THE COMPANY**

 

Executive Officers

 

The following table setsforth the names, positions and, as of December 31, 2002, ages of the executiveofficers of the Company:

 
| **Name**           |   | **Position**                                                   |   | **Age** |
|--------------------|--------|----------------------------------------------------------------|--------|---------|
|               |   |                                                           |   |    |
| Gary J. Skoien     |   | Chairman of the Board,  President, and Chief Executive Officer |   | 48      |
|               |   |                                                           |   |    |
| David R. Tinkham   |   | Senior Vice President,  Chief Financial Officer, Secretary     |   | 47      |
|               |   |                                                           |   |    |
| Andrew F. Pelmoter |   | Senior Vice President  of Leasing                              |   | 40      |
|               |   |                                                           |   |    |
| Thomas A. Rumptz   |   | Senior Vice President  of Asset and Property Management        |   | 42      |

 

GARY J. SKOIEN.  Gary J. Skoien has served as Chairman of theBoard, President, Chief Executive Officer and a Director since June 1998.  Mr. Skoien also serves, and has served since1994, as Executive Vice President and Chief Operating Officer of The PrimeGroup, Inc. (“PGI”) where he is responsible for the land development divisionand corporate management functions. Prior to this role, Mr. Skoien served as Senior Vice President and ChiefOperating Officer of the Retail Division of PGI (currently Prime Retail, Inc.)from 1992 to 1993.  From 1983 to 1991,Mr. Skoien was the Executive Director of The Illinois Capital Development Boardand from 1980 to 1983, Mr. Skoien was an Assistant to the IllinoisGovernor.  Mr. Skoien is a director ofPrime Retail, Inc., Vice Chairman of the Board of Trustees of Northern IllinoisUniversity, on the Board of Directors of the Chicagoland Chamber of Commerceand the Vice Chairman of the Civic Federation. Mr. Skoien received his A.B. CUM LAUDE from Colgate University andreceived his Master of Public Policy from the University of Michigan.

 

DAVID R. TINKHAM.  David R. Tinkham has served as ChiefFinancial Officer since June 1998.  Forfifteen years prior to his employment with HGP, Mr. Tinkham was responsible forcapital markets access, treasury, accounting, tax, insurance, investorrelations, information technology and SEC compliance at The Chicago Dock andCanal Trust where he served as Chief Financial Officer.  Prior to joining The Chicago Dock and CanalTrust, Mr. Tinkham was a Senior Tax Accountant at Arthur Andersen &Co.  Mr. Tinkham received his Masters ofManagement degree from Northwestern University and a Bachelors of BusinessAdministration in Accounting from The University of Michigan.  Mr. Tinkham is a member of the AmericanInstitute of Certified Public Accountants, Economic Club of Chicago, and theRealty Club of Chicago and an associate member of the Urban Land Institute.

 

ANDREW F. PELMOTER.  Andrew F. Pelmoter has served as Senior VicePresident of Leasing since February 1999. Prior to his employment with HGP, Mr. Pelmoter was Director of Leasingfor Horizon from 1997 to 1998.  Prior tojoining Horizon, Mr. Pelmoter was employed for 11 years with Mills Corporation,where he held numerous positions, including Director of Leasing, Director ofLease Administration, and Senior Leasing Executive.  Mr. Pelmoter graduated from the University of Delaware with aBachelor’s Degree in Business Administration.

 

THOMAS A. RUMPTZ.  Thomas A. Rumptz has served as Senior VicePresident of Asset and Property Management since June 1999 and Senior VicePresident of Real Estate since June 1998. Mr. Rumptz’s role with HGP includes responsibility for propertyoperations, development, disposition of residual land, construction and humanresources.  For eight years prior to hisemployment at HGP, Mr. Rumptz worked for the predecessor company, HorizonGroup, Inc., where he held many different positions including Controller, VicePresident of Finance, and most recently, Vice President of Real Estate.  Prior to working for Horizon Group, Inc.,Mr. Rumptz served as Manager of Investment Real Estate for ForemostInsurance.  Mr. Rumptz received his MBAfrom Grand Valley State University and a Bachelor of Business Administrationfrom the University of Michigan.  Mr.Rumptz is a member of the International Council of Shopping Centers andpossesses a State of Michigan real estate license.

 

43

----

 

###### Boardof Directors

 

The following table setsforth the names, term, principal occupations and, as of December 31, 2002, agesof the Board of Directors of the Company.

 
| **Name**            |   | **Term as  Director Expires** |   | **Age** |   | **Principal  Occupation, Name of Organization,  and Offices and Positions with the Company**                             |
|---------------------|--------|-------------------------------|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------|
|                |   |                          |   |    |   |                                                                                                                     |
| Gary J. Skoien      |   | 2004                          |   | 48      |   | Chairman of the Board,  President and Chief Executive Officer of the Company, Director of the Company                    |
|                |   |                          |   |    |   |                                                                                                                     |
| Howard M. Amster    |   | 2005                          |   | 55      |   | Real Estate  Professional, Director of the Company                                                                       |
|                |   |                          |   |    |   |                                                                                                                     |
| Governor Jim Edgar  |   | 2003                          |   | 57      |   | Distinguished Fellow at  the University of Illinois Institute of Government and Public Affairs,  Director of the Company |
|                |   |                          |   |    |   |                                                                                                                     |
| Margaret A. Gilliam |   | 2005                          |   | 63      |   | President of Gilliam  & Co., Director of the Company                                                                 |
|                |   |                          |   |    |   |                                                                                                                     |
| E. Thomas Thilman   |   | 2005                          |   | 61      |   | Partner of Thilman  & Filippini, Director of the Company                                                             |

 

HOWARD M. AMSTER.  Mr. Amster is an owner and operator ofmultiple real estate investments.  SinceMarch 1998, Mr. Amster has served as President of Pleasant Lake Apts.Corp, a corporate general partner of Pleasant Lake Apts. Limited Partnership, areal estate partnership.  Mr. Amster hasalso been a Securities Principal with Ramat Securities Ltd., a securitiesbrokerage firm, since June 2000.  From1992 to June 2000, Mr. Amster was an investment consultant with First UnionSecuri9ties (formerly EVEREN Securities and formerly Kemper Securities).  Mr. Amster serves as a director of thefollowing public companies:  Astrex,Inc., Wiltshire Financial Services Group, Inc. and Prime Retail, Inc.  Mr. Amster was formerly a Trustee ofCleveTrust Realty Investors, a former real estate company.

 

GOVERNOR JIM EDGAR.  Governor Edgar is currently a DistinguishedFellow at the University of Illinois Institute of Government and Public Affairswhere he is also a teacher and lecturer. He has been in this position since January 1999.  He was appointed to the Board of Directorsof the Company in March 2000.  He wasalso a Resident Fellow at the John F. Kennedy School of Government at HarvardUniversity in the 1999 fall semester. Gov. Edgar served as Governor of Illinois from January 14, 1991 throughJanuary 11, 1999.  Prior to hiselection, Gov. Edgar served as Illinois Secretary of State from 1981 to1991.  Gov. Edgar’s retirement frompublic office marked 30 years of state government service.  Gov. Edgar serves of the Boards of Directorsof Kemper Insurance Companies, Scudder Mutual Funds, John B. Sanfilippo &Sons, Inc., Clayton Residential Home, Inc., Youbet.com, B & D HotelCorporation, Alberto-Culver Company and the Board of Directors of theAssociation of Governing Boards of Universities and Colleges.  He is also a member of the Board ofDirectors of the National Center for Public Policy and Higher Education.

 

MARGARET A. GILLIAM.  Ms. Gilliam is President of Gilliam &Co., which she founded in 1997.  Gilliam& Co. advises potential investors in both public and private situations,and individual businesses on strategic initiatives.  From 1975 to 1997, Ms. Gilliam oversaw investment research inretail and soft goods industries where her most recent title was Director –Equity Research for Credit Suisse First Boston.  Ms. Gilliam is a director of Harold’s Stores, Inc. and Mayor’sJewelers, Inc.  Ms. Gilliam is agraduate of McGill University and The Harvard-Radcliffe Program in BusinessAdministration.

 

E. THOMAS THILMAN.  Since the founding of Thilman &Filippini in 1980, Mr. Thilman has been a partner.  Thilman & Filippini is a Chicago-based insurance brokerageand consulting agency.  Mr. Thilman receivedhis M.B.A. from the University of Chicago and a bachelors in Business from theUniversity of Notre Dame.  Mr. Thilmanis a Certified Public Accountant.

 

Michael W. Reschke was aDirector of the Company from the Company’s inception through July 31, 2002 whenhe resigned his position in connection with Mr. Amster’s purchase of the interestsin the HGPI and HGP LP previously held by The Prime Group, Inc. and itsaffiliated entities.  The Prime Group,Inc. is a private company of which Mr. Reschke is Chairman, Chief ExecutiveOfficer and principal shareholder.

 

The Board of Directorsheld six meetings during the year ended December 31, 2002.  All directors attended at least 75% of themeetings of the Board and committee meetings on which they served.  The Company has three standing committees ofthe Board of Directors, the Audit Committee, the Executive Compensation andStock Incentive Plan Committee and the Executive Committee, each of which isdescribed further below.

 

44

----

 

###### AuditCommittee

 

The Audit Committee,which consists of Governor Edgar, Ms. Gilliam and Mr. Thilman, held one meetingduring the year ended December 31, 2002. The Audit Committee makes recommendations concerning the engagement ofindependent public accountants, reviews with the independent public accountantsthe plans and results of the audit engagement, approves professional servicesprovided by the independent public accountants, reviews the independence of theindependent public accountants, considers the range of audit and non-auditfees, reviews any recommendations made by the Company’s auditors regarding theCompany’s accounting methods and the adequacy of its system of internal controland reviews any related party transactions. The Company has determined that each of the members of the AuditCommittee is an “independent director” as that term is defined by the NationalAssociation of Securities Dealers.

 

###### ExecutiveCompensation and Stock Incentive Plan Committee

 

The Executive Compensation and Stock Incentive Plan Committee (the“Compensation Committee”), which consists of Ms. Gilliam and Mr. Thilman,determines the compensation paid to executives of the Company, grants employeestock options and makes other determinations regarding the administration ofemployee stock option plans, approves management incentive (bonus andlong-term) plans and determines the standards of performance for incentivepayments.  The Compensation Committeeheld one meeting during the year ended December 31, 2002.  Prior to his resignation from the Board ofDirectors in July 2002, Mr. Reschke was also a member of the CompensationCommittee.

 

###### ExecutiveCommittee

 

The Executive Committee,which consists of Mr. Amster and Mr. Skoien, makes recommendations to the Boardof Directors of the Company with respect to significant dispositions andfinancings of the Company’s properties and potential significant acquisitionsof additional properties.  The ExecutiveCommittee did not meet during the year ended December 31, 2002.

 

###### Compensationof Directors

 

Directors who are notofficers of or employed by the Company (“Non-employee Directors”) are paid anannual fee of $15,000 plus a meeting fee of $1,000 for each meeting of theBoard of Directors and $500 for each committee meeting, and receivereimbursement for their out-of-pocket expenses.  Each Non-employee Director received an option to purchase 10,000shares of Common Stock under the Company’s 1998 Long-term Stock Incentive Planon the date he or she was elected to the Board of Directors.  An additional grant to purchase 7,500 shareswas made to each Director in August 2000. Mr. Amster did not receive either of these grants since he did notbecome a member of the Board of Directors until 2001.

 

45

----

 

 

**ITEM 11 – EXECUTIVE COMPENSATION**

 

Thefollowing table shows the compensation of the Company’s five most highlycompensated executive officers, including the Chief Executive Officer, duringthe year ended December 31, 2002 (the “Named Officers”).

 
|                             |   |     |   | **Annual Compensation** |    | **Long-Term  Compensation  Awards** |   |                            |   |
|----------------------------------|--------|----------|--------|-------------------------|---------|-------------------------------------|--------|---------------------------------|--------|
| **Name and  Principal Position** |   | **Year** |   | **Salary**              |    | **Bonus**                           |   | **Other  Annual  Compensation** |   | **Securities  Underlying  Stock Options** |   | **All Other  Compensation(1)** |   |
| Gary J. Skoien                   |   | 2002     |   | $                       | 225,000 |                                | $      | 22,000                          |   | $ | 8,000 |   |   | — |   | $ | 37,626 |   |
| Chief Executive  Officer         |   | 2001     |   | 225,000                 |    | 55,000                              |   | 5,296                           |   | — |   | — |   |
|                             |   | 2000     |   | 225,000                 |    | 90,000                              |   | 5,452                           |   | 39,000 |   | — |   |
|                             |   |     |   |                    |    |                                |   |                            |   |   |   |   |   |
| David R. Tinkham                 |   | 2002     |   | 160,000                 |    | 19,200                              |   | 8,000                           |   | — |   | 26,758 |   |
| Chief Financial  Officer         |   | 2001     |   | 157,692                 |    | 41,000                              |   | 5,100                           |   | — |   | — |   |
|                             |   | 2000     |   | 145,000                 |    | 58,000                              |   | 2,100                           |   | 19,000 |   | — |   |
|                             |   |     |   |                    |    |                                |   |                            |   |   |   |   |   |
| Andrew F. Pelmoter               |   | 2002     |   | 160,000                 |    | 12,800                              |   | 7,552                           |   | — |   | 17,837 |   |
| Senior Vice President            |   | 2001     |   | 155,038                 |    | 24,000                              |   | 4,618                           |   | — |   | — |   |
|                             |   | 2000     |   | 145,000                 |    | 58,000                              |   | 3,580                           |   | 17,500 |   | — |   |
|                             |   |     |   |                    |    |                                |   |                            |   |   |   |   |   |
| Thomas A. Rumptz                 |   | 2002     |   | 137,000                 |    | 13,120                              |   | 7,145                           |   | — |   | 18,469 |   |
| Senior Vice President            |   | 2001     |   | 132,000                 |    | 25,200                              |   | 5,100                           |   | — |   |   |   |
|                             |   | 2000     |   | 129,087                 |    | 60,000                              |   | 2,721                           |   | 17,500 |   | — |   |
|                             |   |     |   |                    |    |                                |   |                            |   |   |   |   |   |
| Terri J. Springstead             |   | 2002     |   | 104,000                 |    | 50,000                              |   | 5,656                           |   | — |   | 13,008 |   |
| Vice President                   |   | 2001     |   | 100,000                 |    | 11,500                              |   | 5,100                           |   | — |   | 70,000 |   |
|                             |   | 2000     |   | 85,000                  |    | 20,000                              |   | 4,050                           |   | — |   | 30,000 |   |
|                                  |        |          |        |                         |         |                                     |        |                                 |        |  |  |  |  |  |  |  |  |  |

 

----

*Note:*

(1)  Other compensation represents HGP LP unitgrants to key employees in 2002 and retention payments made to Ms. Springsteadin 2001 and 2000.

 

Option Grants inFiscal 2002, 2001 and 2000

 

There were no stockoption grants during fiscal 2002 and 2001 for the Named Officers.  The following table sets forth certaininformation concerning stock option grants during fiscal 2000 for each of theNamed Officers.

 
|                |   | **Individual  Grants**                                 |   | **Potential  Realizable Value at  Assumed Annual Rates of Stock Price  Appreciation for Option Term(1)** |   |
|---------------------|--------|--------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|
| **Name**            |   | **Number of  Securities  Underlying  Options Granted** |   | **Percentage  of  Total Options  Granted to  Employees in  Fiscal Year**                                 |   | **Exercise  or  Base Price  ($/Share)** |   | **Expiration  Date** |   | **5%** |   | **10%** |   |
| Gary J. Skoien      |   | 39,000                                                 |   | 41.94                                                                                                    | %      | $ | 3.40 |   | 8/28/10 |   | $ | 83,391 |   | $ | 211,330 |   |
| David  R. Tinkham   |   | 19,000                                                 |   | 20.43                                                                                                    | %      | $ | 3.40 |   | 8/28/10 |   | 40,627 |   | 102,956 |   |
| Andrew  F. Pelmoter |   | 17,500                                                 |   | 18.82                                                                                                    | %      | $ | 3.40 |   | 8/28/10 |   | 37,419 |   | 94,828 |   |
| Thomas  A. Rumptz   |   | 17,500                                                 |   | 18.82                                                                                                    | %      | $ | 3.40 |   | 8/28/10 |   | 37,419 |   | 94,828 |   |
|                     |        |                                                        |        |                                                                                                          |        |  |  |  |  |  |  |  |  |  |  |  |

 

----

*Note**:***

(1)  The amounts shown above for each of theNamed Officers as potential realizable values are based on assumed annualizedrates of stock price appreciation of 5% and 10% over the full ten year term ofthe options, as required by the applicable regulations of the Securities andExchange Commission.  Actual gains, ifany, on stock option exercises and common stock holdings will be dependent on thefuture performance of the Company and overall stock market conditions.

 

46

----

 

EquityCompensation Plans

 

TheCompany has adopted a long term stock incentive plan (see Note 6 to theConsolidated Financial Statements) and has granted a series of individualgrants pursuant to individual agreements not pursuant to a plan. The followingtable shows information related to the Company’s equity compensation plans asof December 31, 2002.

 
| **Plan Category**                                           |   | **Number of  securities  to be issued upon  exercise of  outstanding options,  warrants and rights** |   | **Weighted  average  exercise price of  outstanding options,  warrants and rights** |   | **Number of  securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in column (a)** |   |
|-------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Equity compensation plans approved by security  holders     |   | 308,500                                                                                              |   | $                                                                                   | 5.12   |                                                                                                                                                  | 30,400 |   |
| Equity  compensation plans not approved by security holders |   | 43,695                                                                                               |   |                                                                                | (A)    |                                                                                                                                                  | (A)    |
| Total                                                       |   | 352,195                                                                                              |   | $                                                                                   | 5.12   |                                                                                                                                                  | 30,400 |   |

 

----

*Note:*

(A)  The Company issued Units of HGP LP toofficers and key employees that are convertible into Common Stock of theCompany on a one for one basis.  Suchconversion right is first effective on September 17, 2003.

 

EmploymentContracts

 

The Company hasentered into employment agreements with Mr. Skoien and Mr. Tinkham dated as ofJune 15, 1998 and amended as of August 29, 2000.  The employment agreements provide that these individuals willreceive minimum cash compensation of $225,000 and $140,000, respectively, perannum plus annual performance bonuses determined by the HGP CompensationCommittee and other employee benefits. Each of the employment agreements provide for an initial three-year termand automatically extends for one year terms unless either party gives, priorto 120 days before the end of the respective renewal term, written notice ofits intention to terminate the agreement. The employment agreements contain non-competition provisions whichgenerally prohibit these executives from directly or indirectly competing withthe business of the Company during the term of employment and for a two yearperiod after termination “without good reason” by the employee or for a oneyear period after termination under other circumstances.  If the employment of these individuals isterminated after a “change in control” (as such term is defined in therespective contracts), the individual is entitled to a lump sum payment in anamount equal to two times the annual salary and last performance bonus for Mr.Skoien and one and one-half times annual salary and the last performance bonusfor Mr. Tinkham.  Additionally, Mr.Skoien is permitted to continue certain responsibilities he has with The PrimeGroup, Inc.  The Company has alsoentered into agreements with Messrs. Pelmoter and Rumptz which provides forpayments based on the closing of certain capital transactions with respect tothe Company’s shopping centers.  Theagreements also provide for severance benefits in the event their employment isterminated prior to December 31, 2005 for Mr. Pelmoter and June 30, 2003 forMr. Rumptz.

 

###### CompensationCommittee Interlocks and Insider Participation

 

The CompensationCommittee of the Board of Directors, which is required to have a majority ofoutside directors who are neither employees nor officers of the Company, ischarged with determining compensation for the Company’s executive officers andto implement and administer the Company’s Long-term Stock Incentive Plan.  Ms. Gilliam and Mr. Thilman currently serveon the Compensation Committee.  Prior tohis resignation from the Board of Directors, Mr. Reschke was also a member ofthe Compensation Committee.  See“Compensation of Directors”.

 

No executiveofficer of the Company served as a Director or member of (1) the CompensationCommittee of another entity in which one of the executive officers of suchentity served on the Company’s Compensation Committee, (2) the Board ofDirectors or another entity in which one of the executive officers of suchentity served on the Company’s Compensation Committee, or (3) the CompensationCommittee of any other entity in which one of the executive officers of suchentity served as a member of the Company’s Board of Directors, during the yearended December 31, 2002.

 

The Companyutilizes Thilman & Filippini as its agent for insurance and risk managementprograms.  E. Thomas Thilman is aDirector of the Company and a partner in Thilman & Filippini.  During the year ended December 31, 2002, theCompany paid premiums totaling approximately $1.1 million for insurancepolicies placed by Thilman & Filippini.

 

47

----

 

Report ofCompensation Committee

 

Compensation ofthe Chairman, President and Chief Executive Officer and the four other mosthighly compensated executive officers of the Company is determined by theCompensation Committee of the Board of Directors.  The Compensation Committee was formed in June 1998 in connectionwith the initial operations of the Company. The current members of the Compensation Committee are Ms. Gilliam andMr. Thilman.

 

The Company’scompensation programs are designed to attract and retain highly qualifiedindividuals while providing the economic incentive necessary to achieve theCompany’s performance goals.  TheCompany intends to maintain compensation policies, plans and programs whichwill reward management and provide additional incentives for the enhancement ofcash flows, and consequently real property and shareholder values.  The Compensation Committee believes that, throughtheir ownership of equity interests in the Company, the Operating Partnershipand the grant of incentive share options in the Company, as applicable, thefinancial interests (and net worth) of the Company’s senior executives arealigned with the interests of the shareholders.

 

While theCompensation Committee will continue to evaluate the compensation practices ofthe Company’s industry peer group as an important factor in determiningexecutive compensation, the Company’s achievement of its performance goals andthe contribution of senior executives to such achievement will greatlyinfluence whether the Company’s compensation program remains at or exceeds themedian or its peer group.  The peergroup of companies identified by the Compensation Committee is furtherdescribed in the Performance Graph.

 

The Company’sexecutive compensation programs consist of the following components:

 

•                       Employment agreements with itsmost senior executives setting base salary at fixed levels, and containing suchother provisions, sufficient to attract and retain employees capable ofcontributing to the Company’s performance objectives with discretionaryincreases by the Compensation Committee after review at least annually;

 

•                       Incentive bonuses determined bythe Board of Directors or the Compensation Committee upon achievement of suchcorporate and individual performance goals and objectives as may be determinedby the Board of Directors or the Compensation Committee, in order to rewardexecutive officers for attaining performance goals;

 

•                       Unit grants and share optionswith scheduled vesting periods to align the interests of the executive withthose of the Company’s share holders; and

 

•                       Participation in other benefitprograms available to employees generally.

 

The Company hasentered into Employment Agreements with its Chairman, President and ChiefExecutive Officer and its Chief Financial Officer.  The Employment Agreements established annual base salaries of notless than $225,000 for the Chairman, President and Chief Executive Officer andnot less than $140,000 for the Chief Financial Officer.  See “Executive Compensation – EmploymentContracts”.  As provided in theEmployment Agreements, annual base salary adjustments will be made by theCompensation Committee based on individual performance reviews as well as othermarket factors.  The Committeeestablished annual salaries for Messers. Skoien and Thinkham of $225,000 and$160,000, respectively, for the period March 1, 2003 toMarch 1, 2004.  The Companyhas also entered into agreements with Messers. Pelmoter and Rumptz whichprovide for contingent bonus payments based on the closing of certain capitaltransactions involving the Company’s shopping centers.  The agreements also provide for severancebenefits in the event their employment is terminated prior toDecember 31, 2005 for Mr. Pelmoter and June 30, 2003 forMr. Rumptz.

 

Executive officers areeligible to receive annual performance bonuses.  The amount of any executive officer’s bonus is based upon eachindividual’s contributions to the Company’s achievement of financial andoperating goals and, to a lesser degree, factors such as leadership andcontribution to strategy development. The Compensation Committee will continue to establish overallperformance goals for the Company based primarily on the growth in funds fromoperations; satisfaction of expansion, development, operating the occupancygoals; and the relative performance of the Company in comparison with itsindustry peer group.

 

The CompensationCommittee decided to defer the payment of the annual performance bonus toMessers. Skoien, Tinkham, Pelmoter and Rumptz related to calendar 2002 untilthe completion of certain transactions.

 

The Internal Revenue Codeof 1986, as amended, limits the ability of a publicly-held corporation such asthe Company to deduct compensation for its Chief Executive Officer and the fourhighest paid officers other than the Chief Executive Officer in excess of$1,000,000 per individual, per year. Performance-based compensation is not counted toward the $1,000,000limit.  It is the Company’s policy totake this rule into account in setting the compensation of its affectedexecutives.  The Company will not bedenied any deduction under Section 162(m) for compensation paid during itstaxable year ending December 31, 2002. Based upon proposed Treasury regulations, bonuses payable to thecompany’s executives under their current employment agreements and compensationattributable to options (both statutory and non-statutory) granted under theLong-term Stock Incentive Plan may be considered as compensation subject to theSection 162(m) limitation.  Accordingly,it is possible that in some future year some portion of the compensation to aCompany executive will not be tax deductible under Section 162(m).

 

48

----

 

This will depend upon themarket price for he Company’s shares on the date the non-statutory options areexercised and the number of non-statutory options exercised in any one taxableyear.

 
|   | Margaret A. Gilliam                                |
|--------|----------------------------------------------------|
|   | E. Thomas Thilman                                  |
|   | Members of Compensation  Committee  March 24, 2003 |

 

49

----

 

###### PerformanceGraphs

 

The following performancegraphs compare the Company’s performance to the Russell 2000 and a peer groupof companies engaged in the ownership of factory outlet centers.  This group consists of Prime Retail, Inc.,Chelsea GCA Realty, Inc., Konover Property Trust, Inc., and Tanger FactoryOutlet Centers, Inc.  Share priceperformance is for the period from June 16, 1998 through December 31,2002.  On June 25, 2002, KonoverProperty Trust, Inc. merged with and was acquired by PSCO AcquisitionCorp.  Konover Property Trust, Inc. wasformerly a member of the Company’s peer group. The graph line below labeled “Peer Group I” includes the originalmembers of the peer group.  The linelabeled “Peer Group II” excludes Konover Property Trust, Inc.  All share price performance assumes aninitial investment of $100 at the beginning of the period and assumes thereinvestment of any dividends.

 

 

 

50

----

 

**ITEM 12 – SECURITY OWNERSHIP OFCERTAIN OWNERS AND MANAGEMENT**

 

PrincipalShareholders

 

The following tables setsforth information as of March 17, 2003 regarding the beneficial ownership ofCommon Stock by each Director and Named Officer (as defined herein) of theCompany, by all Directors and executive officers of the Company as a group, andby each person known to the Company to be the beneficial owner of more thanfive percent of the outstanding shares of Common Stock.  Unless otherwise indicated in the footnotes,all such interests are owned directly, and the indicated person has sole votingand investment power.  The number ofshares represents the number of shares of Common Stock the person holds or thenumber of Common Units held by each person which are exchangeable for shares ofCommon Stock.  The extent to which aperson holds Common Units as opposed to Common Stock is set forth in thefootnotes.

 
| **Name and Address of  Beneficial Owner(1)**                  |   | **Number of  Shares/  Common Units  Beneficially Owned(2)** |   | **Percentage  Ownership of  Outstanding  Common Stock(3)** |    | **Percentage  Ownership of  Outstanding Common  Stock/Units(4)** |    |
|---------------------------------------------------------------|--------|-------------------------------------------------------------|--------|------------------------------------------------------------|---------|------------------------------------------------------------------|---------|
|                                                          |   |                                                        |   |                                                       |    |                                                             |    |
| Howard  M. Amster(5)                                          |   | 1,668,694                                                   |   | 29.90                                                      | %       | 36.58                                                            | %       |
| 25812  Fairmont Boulevard                                     |   |                                                        |   |                                                       |    |                                                             |    |
| Beachwood,  Ohio 44122                                        |   |                                                        |   |                                                       |    |                                                             |    |
|                                                          |   |                                                        |   |                                                       |    |                                                             |    |
| Thomas  G. Berlin(6)                                          |   | 282,859                                                     |   | 9.86                                                       | %       | 7.35                                                             | %       |
| 37500  Eagle Road                                             |   |                                                        |   |                                                       |    |                                                             |    |
| Willoughby  Hills, Ohio  44094                           |   |                                                        |   |                                                       |    |                                                             |    |
|                                                          |   |                                                        |   |                                                       |    |                                                             |    |
| Governor  Jim Edgar                                           |   | 14,800                                                      |   |                                                       | *  |                                                             | *  |
|                                                          |   |                                                        |   |                                                       |    |                                                             |    |
| Margaret  A. Gilliam                                          |   | 14,800                                                      |   |                                                       | *  |                                                             | *  |
|                                                          |   |                                                        |   |                                                       |    |                                                             |    |
| E.  Thomas Thilman                                            |   | 19,800                                                      |   |                                                       | *  |                                                             | *  |
|                                                          |   |                                                        |   |                                                       |    |                                                             |    |
| Gary  J. Skoien                                               |   | 220,298                                                     |   | 7.34                                                       | %       | 5.73                                                             | %       |
|                                                          |   |                                                        |   |                                                       |    |                                                             |    |
| David  R. Tinkham                                             |   | 94,262                                                      |   | 3.21                                                       | %       | 2.45                                                             | %       |
|                                                          |   |                                                        |   |                                                       |    |                                                             |    |
| Andrew  F. Pelmoter                                           |   | 49,686                                                      |   | 1.70                                                       | %       | 1.29                                                             | %       |
|                                                          |   |                                                        |   |                                                       |    |                                                             |    |
| Thomas  A. Rumptz                                             |   | 28,010                                                      |   |                                                       | *  |                                                             | *  |
|                                                          |   |                                                        |   |                                                       |    |                                                             |    |
| Terri  J. Springstead                                         |   | 4,730                                                       |   |                                                       | *  |                                                             | *  |
|                                                          |   |                                                        |   |                                                       |    |                                                             |    |
| Directors  and officers of the Company as a group (8 persons) |   | 2,115,080                                                   |   | 40.71                                                      | %       | 48.18                                                            | %       |

 

----

**  Less than onepercent*

 

*Notes:*

(1)          All of the Directors andexecutive officers of the Company may be contacted c/o Horizon GroupProperties, Inc., 77 W. Wacker Drive, Suite 4200, Chicago, Illinois  60601.

(2)          The beneficial ownershipof shares of Common Stock reported herein is based upon filings with theSecurities and Exchange Commission (the “Commission”) pursuant to certainprovisions of the Exchange Act and is subject to confirmation by the Companythat such ownership does not violate the ownership restrictions in theCompany’s Charter.  “Beneficialownership” is defined differently in Rule 13d-3 under the Exchange Act and theCode.  The ownership of Common Unitsreported herein is derived from the transfer records maintained by the transferagent for Horizon Group Properties, L.P. (the “Operating Partnership”) and oninformation provided by certain limited partners of the OperatingPartnership.  Information presentedincludes Common Stock issuable upon exercise of Stock Options which have vestedor will vest within 60 days of March 17, 2003 as follows:  Gov. Edgar 11,200; Ms. Gilliam 14,800; Mr.Thilman 14,800; Mr. Skoien 114,960; Mr. Tinkham 47,160; Mr. Pelmoter 41,200 andMr. Rumptz 19,200.

(3)          Information presentedassumes exchange or conversion only of Common Units owned by such beneficialowner for shares of Common Stock.  TheCommon Units may be exchanged on a one-for-one basis for Common Stock (or, atthe Company’s election, cash of an 

 

51

----

 

equivalent value) at anytime.  Percentage ownership reflects thelimitation on share ownership applicable to Mr. Amster (See footnote 5 below).

(4)          Information presentedassumes exchange or conversion of all outstanding Common Units for shares ofCommon Stock.  It excludes the 261,628Common Units as to which Mr. Amster has waived the right to convert into CommonStock.

(5)          Information presented isbased on Form 4 filed with the Securities and Exchange Commission on March 13,2003 by Howard M. Amster and certain affiliates.  This Form 4 indicates that Mr. Amster directly owns 658,557shares of Common Stock and 444,223 Units and may be deemed the beneficial ownerof an additional 158,937 shares of Common Stock and 406,977 Units by virtue ofhis relationships with the following persons, each a holder of Common Stock ofHGPI or of Units of HGP LP:  AmsterLimited Partnership, Amster Trading Company, Pleasant Lake Apts. Corp.,Pleasant Lake Apts. Limited Partnership and Ramat Securities Ltd.  Mr. Amster is subject to an ownership limitof 29.9% of the total outstanding shares of HGPI.  Accordingly, a portion of the Common Units owned or controlled byMr. Amster are not currently convertible into Common Stock based on thisownership limit.  In addition, Mr.Amster has waived the right to convert 261,628 Common Units into Common Stock.

(6)          Information presented isbased on Schedule 13D filed with the Securities and Exchange Commission onNovember 15, 2001 by Thomas G. Berlin (“Berlin”) and certain affiliates.  This Schedule 13D indicates that Berlin directlyowns 138,900 shares of Common Stock and may be deemed the beneficial owner ofan additional 143,959 shares of Common Stock by virtue of his relationshipswith the following persons, Berlin Capital Growth, L.P. (“BCG”) and BerlinFinancial, Ltd. (“BFL”).  BCG holds the143,959 shares of Common Stock, BFL is the general partner of BCG, and Berlinis the sole member of BFL.  ThisSchedule 13D indicates that each of Berlin and BFL disclaims beneficialownership of the others’ shares of Common Stock.

 

Section 16(a) – Beneficial Ownership Report Compliance

 

The Companybelieves that all filing requirements under Section 16(a) of the SecuritiesExchange Act of 1934 were complied with in fiscal 2002.

 

**ITEM 13 – CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS**

 

PrimeRetail, Inc. (“Prime”), of which Mr. Skoien and Mr. Amster, Directors of theCompany, are members of the Board of Directors, has guaranteed the Beal BankLoan II up to a maximum amount of $4,000,000 (the “Prime-Beal Guaranty”).  The Prime-Beal Guaranty will be releasedwhen the total outstanding balance of the Beal Bank Loans is equal to or lessthan $5,000,000.  The Company isobligated to make quarterly payments of $15,000 to Prime as long as thisguaranty is in effect.  Prime hadguaranteed $10.0 million of obligations under the HGP Credit Facility, (the“Prime Guarantee”).  In connection withthe Prime Guarantee, HGP paid Prime a fee of $400,000 per annum from June 15,1998 through June 15, 2001.  Inconnection with the extension of the maturity date of the HGP Credit Facility,Prime reaffirmed its obligations with respect to the Prime Guarantee.  From June 15, 2001 through June 15, 2002,the Company paid Prime an annual fee of $150,000.  Pursuant to the Prime Guarantee, Prime is also the guarantor ofthe indebtedness related to the Company’s corporate office building, which hada balance of $2.3 million as of December 31, 2002.

 

The Company has anongoing relationship with respect to insurance brokerage services with Thilman& Filippini, a general partnership in which Mr. Thilman, a Director of theCompany, is a general partner.  Thilman& Filippini provides insurance brokerage services for the Company inconnection with the Company’s insurance programs and Thilman & Filippinireceives commissions on the sale of such policies and related products.  During the years ended December 31, 2002,2001 and 2000 the Company paid premiums totaling approximately $1.1 million,$663,000 and $739,000.

 

The Company sub-leasesoffice space on a month to month basis for its senior executives at 77 W.Wacker, Chicago, Illinois from an affiliate of Michael W. Reschke, a formerDirector of the Company.  During theyears ended December 31, 2002, 2001 and 2000 the Company incurred rent expenseof $47,000, $53,000 and $95,000, respectively.

 

Gary J. Skoien, Chairman,President and Chief Executive Officer of the Company, is also the ExecutiveVice President and Chief Operating Officer of The Prime Group, Inc.  Mr. Skoien’s responsibilities with respect tothis employment are primarily related to the Huntley project, a mixed-usedevelopment project located in suburban Chicago.  Mr. Reschke, a former Director of the Company, is Chairman andchief Executive Officer of The Prime Group, Inc.  The Prime Group, Inc. is a large stockholder in Prime Retail,Inc. which owns, operates and develops factory outlet centers and may beconsidered to be in competition with the Company.

 

On April 18, 2000, theCompany made a $1.5 million loan to Prime Outdoor, LLC, an affiliate of PrimeGroup, Inc.  The Prime Group, Inc. is anaffiliate of Michael W. Reschke, a former Director of the Company.  The interest rate on the loan was at 10% andwas secured by a pledge of all of the unencumbered assets of Prime Outdoor, LLC,Prime Group, Inc.’s ownership interest in Prime Outdoor, LLC, and 410,783 unitsin Horizon Group Properties, LP owned by Prime Group, Inc. and itsaffiliates.  The loan was approved by acommittee of independent directors of the Company.  The loan was repaid on June 9, 2000.

 

52

----

 

On December 27, 2002,HGPI sold 145,349 units of Horizon Group Properties, LP to Howard Amster, aDirector of HGPI, for aggregate consideration of $750,000, or $5.16 perunit.  HGPI may consider additionalsales of units in Horizon Group Properties, LP to Mr. Amster or others in thefuture.

 

### **ITEM 14 – CONTROLSAND PROCEDURES**

 

The Company’sChief Executive Officer and Chief Financial Officer have evaluated theCompany’s disclosure controls and procedures (as defined in Rule 13a-4(c) and15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90days prior to the filing date of this Annual Report on Form 10-K (the“Evaluation Date”).  They have concludedthat, as of the Evaluation Date, the Company’s disclosure controls andprocedures were adequate and effective. There have been no significant changes in the Company’s internalcontrols or in other factors that could significantly affect the Company’sdisclosure controls and procedures subsequent to the Evaluation Date and up tothe filing date of this Annual Report on Form 10-K.

 

53

----

 

**PARTIV**

 

**ITEM15 - E****XHIBITS, FINANCIAL STATEMENTSCHEDULES, AND REPORTS ON FORM 8-K**

 

(a)          1.  Financial Statements

 

The financial statementslisted in the index as shown under Item 8 are filed as part of this annualreport.

 

2.  Financial Statement Schedules

 

The financial statementschedule listed in the index as shown under Item 8 is filed as part of thisannual report.

 

3.  Exhibits

 

The exhibits listed inthe index to exhibits as shown under this Item 15(a) are filed as a part ofthis annual report.

 

(b)         Reports on Form 8-K

 

The reports listed in theindex to exhibits as shown under this Item 15(b) are filed as a part of thisannual report.

 

54

----

 

**Horizon Group Properties, Inc.**

**Index to Exhibits**

**(Item 15(a) )**

**Description**

 

(a)        Exhibits

 
| Exhibit  3(i)     |   | Articles  of Amendment and Restatement of Horizon Group Properties, Inc. (the  “Company”)(8)                                                                                                                                                                                                                                                                                                                                 |
|-------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit  3(ii)    |   | By-laws  of the Company(1)                                                                                                                                                                                                                                                                                                                                                                                                             |
| Exhibit  3(iii)   |   | Amendment  to By-laws of the Company dated March 17, 1999(4)                                                                                                                                                                                                                                                                                                                                                                           |
| Exhibit  3(iv)    |   | Amendment  to By-laws of the Company dated June 8, 2000(12)                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit  3(v)     |   | Amendment  to By-laws of the Company dated May 4, 2001(12)                                                                                                                                                                                                                                                                                                                                                                             |
| Exhibit  3(vi)    |   | Amendment  to By-laws of the Company dated May 29, 2001(13)                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit  3 (vii)  |   | Articles  Supplementary of the Company dated June 7, 2001(17)                                                                                                                                                                                                                                                                                                                                                                          |
| Exhibit  3 (viii) |   | Excepted  Holders Certificate dated July 30, 2002(17)                                                                                                                                                                                                                                                                                                                                                                                  |
| Exhibit  4.1      |   | Specimen  certificate for common stock, $.01 par value per share, of the Company(1)                                                                                                                                                                                                                                                                                                                                                    |
| Exhibit  10.1     |   | Sky  Merger Corp. Registration Statement on Form S-4 (excluding exhibits thereto),  as filed with the Securities and Exchange Commission on May 12, 1998 (Registration  No. 333-51285)(1)                                                                                                                                                                                                                                              |
| Exhibit  10.2     |   | Amended  and Restated Agreement and Plan of Merger by and among Prime Retail, Inc.,  Prime Retail, L.P., Horizon Group, Inc., Sky Merger Corp., the Company,  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 Horizon Group, Inc.’s current report on Form 8-K dated  February 1, 1998 (SEC File No. 1-12424)(1) |
| Exhibit  10.3     |   | Form  of 1998 Stock Option Plan of the Company(1)                                                                                                                                                                                                                                                                                                                                                                                      |
| Exhibit  10.4     |   | Employment  Agreement between Gary J. Skoien and the Company(1)                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit  10.5     |   | Employment  Agreement between David R. Tinkham and the Company(1)                                                                                                                                                                                                                                                                                                                                                                      |
| Exhibit  10.6     |   | Form  of Indemnification Agreement for the Board of Directors of the Company(1)                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit  10.7     |   | Form  of Registration Rights Agreement(1)                                                                                                                                                                                                                                                                                                                                                                                              |
| Exhibit  10.8     |   | Form  of Contribution Agreement (incorporated by reference to Appendix E to Exhibit  10.1)(1)                                                                                                                                                                                                                                                                                                                                          |
| Exhibit  10.9     |   | Employment  Agreement between Richard Berman and the Company(3)                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit  10.10    |   | Working  Capital Agreement with Prime Retail, Inc.(3)                                                                                                                                                                                                                                                                                                                                                                                  |
| Exhibit  10.11    |   | Loan  Agreement dated as of June 15, 1998 by and among Third Horizon Group Limited  Partnership, Nebraska Crossing Factory Shops, L.L.C., and Indiana Factory  Shops, L.L.C. and Nomura Asset Capital Corporation(2)                                                                                                                                                                                                                   |
| Exhibit  10.12    |   | Form  of Deed of Trust, Assignment of Leases and Rents and Security Agreement with  Nomura Asset Capital(2)                                                                                                                                                                                                                                                                                                                            |
| Exhibit  10.13    |   | Form  of Mortgage, Assignment of Leases and Rents and Security Agreement by and  between Horizon Group Properties, Inc. and Nomura Asset Capital  Corporation(2)                                                                                                                                                                                                                                                                       |
| Exhibit  10.14    |   | Form  of Assignment of Leases and Rents by and between Horizon Group Properties,  Inc. and Nomura Asset Capital Corporation(2)                                                                                                                                                                                                                                                                                                         |
| Exhibit  10.15    |   | Guaranty  dated as of June 15, 1998 by the Company and Horizon Group Properties, L.P.  to and for the benefit of Nomura Asset Capital Corporation(2)                                                                                                                                                                                                                                                                                   |
| Exhibit  10.16    |   | Guaranty  and Indemnity Agreement dated as of June 15, 1998 by and among the Company,  Horizon Group Properties, L.P., Prime Retail, Inc., and Prime Retail, L.P.(2)                                                                                                                                                                                                                                                                   |
| Exhibit  10.17    |   | Assignment  and Assumption Agreement, dated as of June 15, 1998 by and among Prime  Retail, Inc., Prime Retail, L.P., Indianapolis Factory Shops Limited  Partnership, and Indiana Factory Shops, L.L.C.(3)                                                                                                                                                                                                                            |
| Exhibit  10.18    |   | Assignment  and Assumption Agreement, dated as of June 15, 1998 by and among Prime  Retail, Inc., Prime Retail, L.P., Nebraska Factory Shops Limited Partnership,  and Nebraska Factory Shops L.L.C.(3)                                                                                                                                                                                                                                |
| Exhibit  10.19    |   | Form  of Option Agreement(3)                                                                                                                                                                                                                                                                                                                                                                                                           |
| Exhibit  10.20    |   | Fixed  Rate Note dated as of July 9, 1999 between Gretna, Sealy, Traverse City  Outlet Centers, L.L.C. and Morgan Guaranty Trust Company of New York related  to the financing of the factory outlet center in Gretna, Nebraska(5)                                                                                                                                                                                                     |
| Exhibit  10.21    |   | Deed  of Trust and Security Agreement for the benefit of Morgan Guaranty Trust  Company of New York, as lender, from Gretna, Sealy, Traverse City Outlet  Centers, L.L.C., as borrower, related to the financing of the factory outlet  center in Gretna, Nebraska(5)                                                                                                                                                                  |
| Exhibit  10.22    |   | Guaranty  for the benefit of Morgan Guaranty Trust Company of New York by Horizon Group  Properties, Inc. related to the Gretna, Sealy and Traverse City loans(5)                                                                                                                                                                                                                                                                      |
| Exhibit  10.23    |   | Agreement  between Andrew F. Pelmoter and the Company(6)                                                                                                                                                                                                                                                                                                                                                                               |
| Exhibit  10.24    |   | Agreement  of Purchase and Sale and Escrow Instructions dated March 24, 2000 between  Third Horizon Group Limited Partnership and Triple Net Properties, LLC.(7)                                                                                                                                                                                                                                                                       |
| Exhibit  10.25    |   | First  Amendment to Agreement of Purchase and Sale and Escrow Instructions between  Third Horizon Group Limited Partnership and Triple Net Properties, LLC, dated  as of April 21, 2000(7)                                                                                                                                                                                                                                             |
| Exhibit  10.26    |   | Second  Amendment to Agreement of Purchase and Sale and Escrow Instructions between  Third Horizon Group Limited Partnership and Triple Net Properties, LLC, dated  as of April 25, 2000(7)                                                                                                                                                                                                                                            |

 

55

----

 
| Exhibit  10.27 |   | Promissory  Note dated April 18, 2000, between Horizon Group Properties, LP as Lender and  Prime Outdoor Group, LLC as Borrower(7)                                                                                                                                                                          |
|----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit  10.28 |   | Security  Agreement dated April 18, 2000, between Horizon Group Properties, LP and  Prime Outdoor Group, LLC(7)                                                                                                                                                                                             |
| Exhibit  10.29 |   | Pledge  Agreement by and among Horizon Group Properties, LP; Prime Group Limited  Partnership; Prime Group II, LP; Prime Group III, LP; Prime Group IV, LP;  Prime Group V, LP and Prime Financing Limited Partnership(7)                                                                                   |
| Exhibit  10.30 |   | Collateral  Assignment of Membership Interests dated April 18, 2000, between Horizon  Group Properties, LP and The Prime Group, Inc.(7)                                                                                                                                                                     |
| Exhibit  10.31 |   | Guarantee  dated April 18, 2000, between Horizon Group Properties, LP; Prime Group  Limited Partnership; Prime Group II, LP; Prime Group III, LP; Prime Group IV,  LP; Prime Group V, LP and Prime Financing Limited Partnership(7)                                                                         |
| Exhibit  10.32 |   | Letter  Agreement dated April 18, 2000, between Horizon Group Properties, Inc., Prime  Group, Inc. and Prime Outdoor Group, LLC(7)                                                                                                                                                                          |
| Exhibit  10.33 |   | Agreement  between Andrew F. Pelmoter and the Company(7)                                                                                                                                                                                                                                                    |
| Exhibit  10.34 |   | Amendment  to Employment Agreement between Gary J. Skoien and the Company dated as of  August 29, 2000(9)                                                                                                                                                                                                   |
| Exhibit  10.35 |   | Amendment  to Employment Agreement between David R. Tinkham and the Company dated as of  August 29, 2000(9)                                                                                                                                                                                                 |
| Exhibit  10.36 |   | Amendment  to Employment Agreement between Andrew F. Pelmoter and the Company dated  October 9, 2000(10)                                                                                                                                                                                                    |
| Exhibit  10.37 |   | Amendment  to Employment Agreement between Thomas R. Rumptz and the Company dated  November 11, 2000(10)                                                                                                                                                                                                    |
| Exhibit  10.38 |   | Additional  Amendment to Employment Agreement between Andrew F. Pelmoter and the Company  dated April 26, 2001(12)                                                                                                                                                                                          |
| Exhibit  10.39 |   | Additional  Amendment to Employment Agreement between Thomas R. Rumptz and the Company  dated April 3, 2001(12)                                                                                                                                                                                             |
| Exhibit  10.40 |   | Settlement  Agreement, dated as of May 4, 2001, by and among the Company, Howard M.  Amster, John C. Loring and Robert M. Schwartzberg(11)                                                                                                                                                                  |
| Exhibit  10.41 |   | Promissory  Note, dated as of July 30, 2001, between Lakeshore Marketplace, LLC and  Greenwich Capital Financial Products, Inc.(14)                                                                                                                                                                         |
| Exhibit  10.42 |   | Mortgage,  dated as of July 30, 2001, between Lakeshore Marketplace, LLC and Greenwich  Capital Financial Products, Inc.(14)                                                                                                                                                                                |
| Exhibit  10.43 |   | Collection  and Deposit Account Agreement, dated as of July 30, 2001, by and among  LaSalle Bank National Association, Lakeshore Marketplace, LLC and Greenwich  Capital Financial Products, Inc.(14)                                                                                                       |
| Exhibit  10.44 |   | Second  Amended and Restated Note dated as of July 31, 2001 between Third Horizon  Group Limited Partnership and CDC Mortgage Capital, Inc.(14)                                                                                                                                                             |
| Exhibit  10.45 |   | Second  Amendment to Loan Agreement and Settlement Agreement dated as of July 31,  2001 by and among Third Horizon Group Limited Partnership, Horizon Group  Properties, Inc., Horizon Group Properties, LP and CDC Mortgage Capital,  Inc.(14)                                                             |
| Exhibit  10.46 |   | Reaffirmation  of Guaranty dated as of July 31, 2001 by Horizon Group Properties, Inc. and  Horizon Group Properties, LP(14)                                                                                                                                                                                |
| Exhibit  10.47 |   | Reaffirmation  of Guaranty dated as of July 31, 2001 by Prime Retail, LP(14)                                                                                                                                                                                                                                |
| Exhibit  10.48 |   | Pledge  and Security Agreement dated as of July 31, 2001 by and among Horizon Group  Properties, LP, Third HGI, LLC and CDC Mortgage Capital, Inc.(14)                                                                                                                                                      |
| Exhibit  10.49 |   | Amended  and Restated Guaranty and Indemnity Agreement dated as of July 31, 2001 by  and among Horizon Group Properties, Inc., Horizon Group Properties, LP, Prime  Retail, Inc., and Prime Retail, LP(14)                                                                                                  |
| Exhibit  10.50 |   | Amendment  to Retention Letter between Thomas R. Rumptz and the Company dated August 29,  2001.(15)                                                                                                                                                                                                         |
| Exhibit  10.51 |   | Amendment  to Retention Letter between Thomas R. Rumptz and the Company dated November 28,  2001.(15)                                                                                                                                                                                                       |
| Exhibit  10.52 |   | Amendment  to Retention Letter between Thomas R. Rumptz and the Company dated February  25, 2002.(15)                                                                                                                                                                                                       |
| Exhibit  10.53 |   | Amendment  to Retention Letter between Andrew Pelmoter and the Company dated May 30,  2001.(15)                                                                                                                                                                                                             |
| Exhibit  10.54 |   | Promissory  Note I dated as of July 10, 2002 between Monroe Outlet Center LLC and Beal  Bank, S.S.B. related to the financing of vacant land in Norton Shores,  Michigan and Fruitport Township, Michigan.(16)                                                                                              |
| Exhibit  10.55 |   | Promissory  Note II dated as of July 10, 2002 between Monroe Outlet Center LLC and Beal  Bank, S.S.B. related to the financing of the outlet center in Monroe,  Michigan.(16)                                                                                                                               |
| Exhibit  10.56 |   | Commercial  Mortgage dated July 10, 2002 between Monroe Outlet Center LLC and Beal Bank,  S.S.B. related to the financing of the outlet center in Monroe, Michigan.(16)                                                                                                                                     |
| Exhibit  10.57 |   | Guaranty  Agreement dated July 10, 2002 in favor of Beal Bank, S.S.B. related to the  Monroe Outlet Center LLC loans.(16)                                                                                                                                                                                   |
| Exhibit  10.58 |   | Second  Amended and Restated Guaranty and Indemnity Agreement dated July 11, 2002 by  and among Horizon Group Properties, Inc., Horizon Group Properties, L.P.,  Prime Retail, Inc. and Prime Retail, L.P. related to the financing of the  outlet center in Monroe, Michigan.(16)                          |
| Exhibit  10.59 |   | Loan  Agreement dated as of July 11, 2002 by and among UBS Warburg Real Estate  Investments, Inc., Laughlin Outlet Center LLC, Warrenton Outlet Center LLC  and Medford Outlet Center LLC related to the financing of the Laughlin,  Nevada, Medford, Minnesota and Warrenton, Missouri outlet centers.(16) |
| Exhibit  10.60 |   | Promissory  Note dated July 11, 2002 between UBS Warburg Real Estate Investments, Inc.  and Laughlin Outlet Center LLC related to the financing of the outlet center  in Laughlin, Nevada.(16)                                                                                                              |

 

56

----

 
| Exhibit  10.61 |   | Deed  of Trust, Assignment of Leases and Rents and Security Agreement dated as of  July 11, 2002 between Laughlin Outlet Center LLC and Fidelity National Title  Insurance Company for the benefit of UBS Warburg Real Estate Investments Inc.  related to the financing of the outlet center in Laughlin, Nevada.(16)                                                                          |
|----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit  10.62 |   | Guarantor  Deed of Trust, Assignment of Leases and Rents, Security Agreement and  Guaranty dated as of July 11, 2002 between Laughlin Outlet Center LLC and  Fidelity National Title Insurance Company for the benefit of UBS Warburg Real  Estate Investments Inc. related to the financing of the Laughlin, Nevada,  Medford, Minnesota and Warrenton Missouri outlet centers.(16)            |
| Exhibit  10.63 |   | Guaranty  of Recourse Obligations dated as of July 11, 2002 by Horizon Group  Properties, Inc. and Horizon Group Properties, L.P. for the benefit of UBS  Warburg Real Estate Investments Inc. related to the financing of the  Laughlin, Nevada, Medford, Minnesota and Warrenton, Missouri outlet  centers.(16)                                                                               |
| Exhibit  10.64 |   | Cash  Management Agreement dated as of July 11, 2002 among Laughlin Outlet Center  LLC, Medford Outlet Center LLC, Warrenton Outlet Center LLC, Wachovia Bank,  National Association, UBS Warburg Real Estate Investments Inc., and Horizon  Group Properties, L.P. related to the financing of the Laughlin, Nevada,  Medford, Minnesota and Warrenton, Missouri outlet centers.(16)           |
| Exhibit  10.65 |   | Environmental  Indemnity Agreement dated as of July 11, 2002 by Laughlin Outlet Center LLC,  Medford Outlet Center LLC, Warrenton Outlet Center LLC, Horizon Group  Properties, Inc. and Horizon Group Properties, L.P. in favor of UBS Warburg  Real Estate Investments Inc. related to the financing of the Laughlin,  Nevada, Medford, Minnesota and Warrenton, Missouri outlet centers.(16) |
| Exhibit  10.66 |   | Mezzanine  Loan Document dated as of July 11, 2002 by and among Laughlin Holdings LLC,  Medford Holdings LLC and Warrenton Holdings LLC and UBS Warburg Real Estate  Investments Inc. related to the mezzanine financing of the Laughlin, Nevada,  Medford, Minnesota and Warrenton, Missouri outlet centers.(16)                                                                               |
| Exhibit  10.67 |   | Promissory  Note dated July 11, 2002 between Laughlin Holdings LLC and UBS Warburg Real  Estate Investments Inc. related to the mezzanine financing of the Laughlin,  Nevada outlet center.(16)                                                                                                                                                                                                 |
| Exhibit  10.68 |   | Guaranty  of Recourse Obligations dated as of July 11, 2002 by Horizon Group  Properties, Inc. and Horizon Group Properties, L.P. for the benefit of UBS  Warburg Real Estate Investments Inc. related to the mezzanine financing of  the Laughlin, Nevada, Medford, Minnesota and Warrenton, Missouri outlet  centers.(16)                                                                     |
| Exhibit  10.69 |   | Pledge  and Security Agreement dated as of July 11, 2002 between Laughlin Holdings  LLC and UBS Warburg Real Estate Investments Inc. related to the mezzanine  financing of the Laughlin, Nevada outlet center.(16)                                                                                                                                                                             |
| Exhibit  10.70 |   | Guarantor  Pledge and Security Agreement dated as of July 11, 2002 between Laughlin  Holdings LLC and UBS Warburg Real Estate Investments Inc. related to the  mezzanine financing of the Laughlin, Nevada, Medford, Minnesota and  Warrenton, Missouri outlet centers.(16)                                                                                                                     |
| Exhibit  10.71 |   | Subordinate  Cash Management Agreement dated as of July 11, 2002 among Laughlin Holdings  LLC, Medford Holdings LLC, Warrenton Holdings LLC, Wachovia Bank, National  Association and UBS Warburg Real Estate Investments Inc. related to the  mezzanine financing of the Laughlin, Nevada, Medford, Minnesota and  Warrenton, Missouri outlet centers.(16)                                     |
| Exhibit  10.72 |   | Environmental  Indemnity Agreement dated as of July 11, 2002 by Laughlin Holdings LLC,  Medford Holdings LLC, Warrenton Holdings LLC, Horizon Group Properties, Inc.  and Horizon Group Properties, L.P. in favor of UBS Warburg Real Estate  Investments Inc. related to the mezzanine financings of the Laughlin, Nevada,  Medford, Minnesota and Warrenton, Missouri outlet centers.(16)     |
| Exhibit  10.73 |   | Form  of Horizon Group Properties, L.P. Common Unit Award Agreement.(18)                                                                                                                                                                                                                                                                                                                        |
| Exhibit  10.74 |   | Amendment  to Employment Agreement between Thomas R. Rumptz and the Company dated August  21, 2002(18)                                                                                                                                                                                                                                                                                          |
| Exhibit  10.75 |   | Letter  Agreement between Pleasant Lake Apts., Ltd. and Horizon Group Properties,  Inc. dated December 23, 2002, regarding the sale of partnership units in  Horizon Group Properties, L.P.(19)                                                                                                                                                                                                 |
| Exhibit  10.76 |   | Amendment  No.1 to Amended and Restated Agreement of Limited Partnership of Horizon  Group Properties, L.P.(20)                                                                                                                                                                                                                                                                                 |
| Exhibit  10.77 |   | Amendment  to Employment Agreement between Thomas R. Rumptz and the Company dated  December 19, 2002                                                                                                                                                                                                                                                                                            |
| Exhibit  21    |   | Subsidiaries  of the Company.                                                                                                                                                                                                                                                                                                                                                                   |
| Exhibit  99.1  |   | Press  release issued by the Company on July 15, 2002 regarding the loans provided  by Beal Bank, S.S.B. and UBS Warburg Real Estate Investments Inc. on July 11,  2002(16)                                                                                                                                                                                                                     |
| Exhibit  99.2  |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 signed by Gary J. Skoien, Chief Executive Officer  on March 31, 2003                                                                                                                                                                                                   |
| Exhibit  99.3  |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 signed by David R. Tinkham on March 31, 2003                                                                                                                                                                                                                           |
| Exhibit  99.4  |   | Press  release issued by the Company on December 24, 2002 regarding the Company’s  agreement to sell limited partner units of Horizon Group Properties, L.P.(19)                                                                                                                                                                                                                           |
| Exhibit  99.5  |   | Press  release issued by the Company on December 27, 2002 regarding the closing of  the Company’s sale of limited partner units in Horizon Group Properties,  L.P.(20)                                                                                                                                                                                                                     |

 

----

(1)               Incorporatedby reference to the Company’s Registration Statement on Form 10, as amended,dated as of June 4, 1998 (Commission file no. 0-24123).

(2)               Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of June 30,1998

 

57

----

 

(Commissionfile no. 0-24123).

(3)               Incorporatedby reference to the Company’s Form 10-Q dated as of August 14, 1998(Commission file no. 0-24123).

(4)               Incorporatedby reference to the Company’s Form 10-Q dated as of May 17, 1998 (Commission file no. 0-24123).

(5)               Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of August 3,1999 (Commission file no. 0-24123).

(6)               Incorporatedby reference to the Company’s Form 10-K dated as of  March 6, 2000 (Commission file no. 0-24123).

(7)               Incorporatedby reference to the Company’s Form 10-Q dated as of May 15, 2000 (Commission file no. 0-24123).

(8)               Incorporatedby reference to the Company’s Definitive Proxy Statement dated as of July 12,2000  (Commission file no. 0-24123).

(9)               Incorporatedby reference to the Company’s Form 10-Q dated as of November 14, 2000 (Commission file no. 0-24123).

(10)         Incorporatedby reference to the Company’s Form 10-K dated as of March 23, 2001 (Commission file no. 0-24123)

(11)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of May 4,2001 (Commission file no. 0-24123)

(12)         Incorporatedby reference to the Company’s Form 10-Q dated as of May 15, 2001 (Commission file no. 0-24123)

(13)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of May 29,2001(Commission file no. 0-24123)

(14)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of August 13,2001 (Commission file no. 0-24123)

(15)         Incorporatedby reference to the Company’s Form 10-K dated as of March 28, 2002(Commission file no. 0-24123)

(16)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of August 9,2002 (Commission file no. 0-24123)

(17)         Incorporatedby reference to the Company’s Form 10-Q dated as of August 14, 2002 (Commission file no. 0-24123)

(18)         Incorporatedby reference to the Company’s form 10-Q dated as of November 14, 2002 (Commission file no. 0-24123)

(19)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of December24, 2002 (Commission file no. 0-24123)

(20)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of December27, 2002 (Commission file no. 0-24123)

 

(b)       Reports onForm 8-K 

 

AForm 8-K was filed on December 24, 2002, regarding the Company’s agreement tosell limited partner units in Horizon Group Properties, L.P. to Pleasant LakeApts., Ltd.

 

AForm 8-K was filed on December 27, 2002, regarding the closing of the Company’ssale of limited partner units in Horizon Group Properties, L.P. to PleasantLake Apts., Ltd. on December 27, 2002.

 

58

----

 

**Signatures**

 

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed in its behalf by theundersigned, thereunto duly authorized.

 

HORIZON GROUP PROPERTIES,INC.

 

 
|                    |   | Director and Chairman  of the Board,    |   | March 31, 2003 |
|-------------------------|--------|-----------------------------------------|--------|----------------|
| /s/ Gary J. Skoien      |   | President and Chief  Executive Officer  |   |           |
| Gary J. Skoien          |   | (Principal Executive  Officer)          |   |           |
|                    |   |                                    |   |           |
| /s/ David R. Tinkham    |   | Chief Accounting and  Financial Officer |   | March 31, 2003 |
| David R. Tinkham        |   | (Principal Financial  Officer)          |   |           |
|                    |   |                                    |   |           |
| /s/ Margaret A. Gilliam |   | Director                                |   | March 31, 2003 |
| Margaret A. Gilliam     |   |                                    |   |           |
|                    |   |                                    |   |           |
| /s/ Jim Edgar           |   | Director                                |   | March 31, 2003 |
| Governor Jim Edgar      |   |                                    |   |           |
|                    |   |                                    |   |           |
| /s/ E. Thomas Thilman   |   | Director                                |   | March 31, 2003 |
| E. Thomas Thilman       |   |                                    |   |           |
|                    |   |                                    |   |           |
| /s/ Howard M. Amster    |   | Director                                |   | March 31, 2003 |
| Howard M. Amster        |   |                                    |   |           |

 

59

----

 

CERTIFICATION

 

I,Gary J. Skoien, certify that:

 

1.             I have reviewed this annual report on Form 10-K ofHorizon Group Properties, Inc.;

 

2.             Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report;

 

3.             Based on my knowledge, the financial statements, andother financial information included in this annual report, fairly present inall material respects the financial condition, results of operations and cashflows of the registrant as of and for, the periods presented in this annualreport;

 

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a)             Designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b)            Evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

 

c)             Presented in this annual report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)             All significant deficiencies in the design or operationof internal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

b)            Any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’s internalcontrols; and

 

6.             The registrant’s other certifying officers and I haveindicated in this annual report whether there were significant changes ininternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

 
| Dated: | March 31, 2003 |   | /s/ Gary J. Skoien      |   |
|--------|----------------|--------|-------------------------|--------|
|   |           |   | Gary J. Skoien          |
|   |           |   | Chief Executive Officer |

 

60

----

 

CERTIFICATION

 

I,David R. Tinkham, certify that:

 

1.             I have reviewed this annual report on Form 10-K ofHorizon Group Properties, Inc.;

 

2.             Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report;

 

3.             Based on my knowledge, the financial statements, andother financial information included in this annual report, fairly present inall material respects the financial condition, results of operations and cashflows of the registrant as of and for, the periods presented in this annualreport;

 

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a)             Designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b)            Evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

 

c)             Presented in this annual report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)             All significant deficiencies in the design or operationof internal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

b)            Any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.             The registrant’s other certifying officers and I haveindicated in this annual report whether there were significant changes ininternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

 
| Dated: | March 31, 2003 |   | /s/ David R. Tinkham    |   |
|--------|----------------|--------|-------------------------|--------|
|   |           |   | David R. Tinkham        |
|   |           |   | Chief Financial Officer |

 

61

----