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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

(Mark One)

|/x/ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2000

OR

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

Commission file number 0-24123

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HORIZON GROUP PROPERTIES, INC.(Exact name of registrant as specified in its charter)

Maryland(State or other jurisdiction of
incorporation or organization)

38-3407933(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

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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.   Yes /x/  No / /

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /x/

The
aggregate market value of the common stock held by non-affiliates of the registrant was approximately $6,708,396 based on the closing sale price of $3.00 per share as
reported on the NASDAQ on February 15, 2001.

The
number of shares of the registrant's common stock, $.01 par value, outstanding as of February 15, 2001 was 2,870,194.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents of the registrant are incorporated herein by reference:

Description of Document

Portion of Form 10-K Where IncorporatedPortions of the Registrant's definitive Proxy Statement, to be filed pursuant to Regulation 14A, issued in connection with it Annual Meeting of Shareholders to be held on May 9, 2001. to be held on March
 9, 2001.

Part III, Items 10, 11, 12 and 13


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HORIZON GROUP PROPERTIES, INC.

Form 10-K    December 31, 2000    TABLE OF CONTENTS

|Description |          |            |                                                                                       | Page No.
|----------- | -------- | ---------- | ------------------------------------------------------------------------------------- | --------
|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                                        |         
|Part IV     |          |            |                                                                                       |         
|            | Item 14. |            | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |         
|            |          | Signatures |                                                                                       | 44      

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HORIZON GROUP PROPERTIES, INC.
FORM 10-K, ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2000

PART I

ITEM 1BUSINESS

Horizon Group Properties, Inc. (together with its subsidiaries "HGP" or the "Company") is a self-administered and self-managed
Maryland corporation that was established in connection with the merger of Horizon Group, Inc., a Michigan corporation ("Horizon") with and into Prime Retail, Inc., a Maryland
corporation ("Prime" or "Prime Retail") which was consummated on June 15, 1998 (the "Merger"). HGP's initial portfolio consisted of 14 factory outlet centers and one power center located in 12
states. Twelve of the factory outlet centers and the power center were contributed to the Company by Horizon in connection with the consummation of the Merger pursuant to a Contribution Agreement
entered into in connection with the Merger (the "Contribution Agreement") and two factory outlet centers were purchased by the Company from Prime immediately subsequent to the consummation of the
Merger.

Also
in connection with the Merger and pursuant to the Amended and Restated Agreement and Plan of Merger dated as of February 1, 1998 by and among Prime, Horizon, HGP and other
parties thereto (the "Merger Agreement"), the shares of Common Stock of the Company, $.01 par value per stock (the "Common Stock"), were distributed to the holders of Common Stock, Series B
Preferred Stock and Series C Preferred Stock of Prime and the holders of Common Stock of Horizon in accordance with the applicable exchange ratio for each such security as set forth in the
Merger Agreement.

The
operations of the Company are primarily conducted through a subsidiary limited partnership, Horizon Group Properties, L.P. ("HGP LP"), of which the Company is the sole general
partner. As of
December 31, 2000, HGP owned approximately 84.9% of the partnership interests (the "Common Units") of HGP LP. In connection with the Merger, the Common Units were distributed to the original
holders (other than Prime) of partnership interests of a limited partnership affiliate of Prime and a limited partnership affiliate of Horizon, respectively, in accordance with the exchange ratios set
forth in the Merger Agreement. Common Units are exchangeable for shares of Common Stock on a one-for-one basis at any time (or for an equivalent cash amount at the Company's
election).

Horizon's
former administrative office building located in Norton Shores, Michigan and the following centers were owned by Horizon prior to the Merger and contributed to the Company
pursuant to the Contribution Agreement (collectively, such assets are referred to as the "Predecessor Properties" for periods prior to the Merger):



3

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The merger was accounted for under the purchase method of accounting under which contributed assets acquired and liabilities assumed were recorded at their relative fair values as of
the date of the Merger. The consolidated financial statements include the accounts of the Company's subsidiary, HGP LP, and other wholly owned subsidiaries. The Company accounted for its
investments in and advances to two joint ventures using the equity method of accounting. Under this method of accounting, the net equity investment of the Company is reflected on the balance sheet and
the statements of operations include the Company's share of the net income or loss from the joint ventures.

Immediately
after the Merger, the Company acquired the two properties listed below for total consideration of $26,015,000. Each property was purchased from an affiliate of Prime.



The
following summarizes the assets, liabilities and equity contributed to and assumed by the Company pursuant to the Contribution Agreement including the acquisition of the two
centers from Prime.

(In thousands)Real estate

$
141,158Other assets


21,258$
162,416Mortgages and other debt

$
115,514Other liabilities


6,362Minority interests


7,763Shareholders' equity


32,777$
162,416


Pursuant
to the Contribution Agreement, the Company agreed to assume, undertake to pay, satisfy and discharge when due in accordance with their terms certain assumed liabilities (the
"Assumed Liabilities"), which are defined to include all liabilities of Horizon which arise from the ownership and operation of the Predecessor Properties and include (i) all obligations to
indemnify present and former officers and directors of Horizon under certificates or articles of incorporation, by-laws, partnership agreements, employment agreements, indemnification
agreements or otherwise, for any matter existing or occurring after the Merger, (ii) all leases and related contracts, and service contracts, relating to any Contributed Asset (as defined in
the Contribution Agreement) and (iii) certain other specified obligations.

Also
pursuant to the Contribution Agreement, certain partnership interests in three joint ventures, MG Patchogue Limited Partnership and MG Patchogue II Limited Partnership, which own
the Bellport Outlet Center, and MG Long Island Limited Partnership, which owns vacant land, were transferred from an affiliate of Horizon to HGP LP and an affiliate of HGP LP. These partnership
interests were subsequently transferred by the Company back to Prime on September 1, 1999 (see Note 10 to the consolidated and combined financial statements).

The
vacant center in New Mexico was sold on December 28, 1999. This property was classified as held for sale on the balance sheet as of December 31, 1998.

On
September 27, 1999, the Company hired Secured Capital Corp as financial advisor to assist the Company in studying strategic alternatives to enhance shareholder value
including, but not limited to, the sale or other disposition of some or all of its real estate portfolio. Concurrently, the Company is

4

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assessing alternative business opportunities. There can be no assurance that a transaction will result involving the Company.

In
2000, HGP entered into an agreement to sell its outlet center in Dry Ridge, Kentucky to Sugar Oak Corporation for $2.5 million. This outlet center was classified as held for
sale at December 31, 2000 and was sold in January 2001. Results of operations in 2000 include a charge for asset impairment of $1.6 million to reduce the carrying value of this
outlet center to its estimated sales value, less cost to dispose.

With
the assistance of Secured Capital Corporation, the Company is currently pursuing refinancing of the HGP Credit Facility in anticipation of the July 2001 maturity date.
There can be no assurances that management will be successful in its efforts. The consolidated financial statements do not contain any adjustments that may ultimately arise from the outcome of this
uncertainty.

Tax Status

The Company has elected and currently intends to elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Code"). A REIT is a legal entity that holds real estate interests, and through payments of dividends to shareholders, receives a deduction for such dividends for federal income tax purposes. As
a REIT, HGP intends to distribute its
REIT taxable income to its shareholders and satisfy certain other requirements as defined in the Code so as to reduce or eliminate federal income tax liability. Based on its taxable loss generated
since the Merger, the Company has not been obligated to make any dividend distributions to qualify as a REIT.

In
2000, the Company amended its Charter to impose a limit on share ownership with respect to any shareholder of no more than 4.9% of the value of all classes of the Company's
outstanding shares. This limitation is intended to prevent the application of the limitations on the utilization of the Company's net operating losses for federal tax purposes. The revisions to the
Charter allow the Board of Directors to set a higher share ownership limit with respect to specific shareholders, provided such higher limit would not jeopardize the Company's status as a REIT within
the meaning of Section 856 of the Code. Additionally, shareholders which owned more than 4.9% of the Company's outstanding shares as of the effective date of the amendments are not subject to
the 4.9% ownership limit, but are subject to the ownership limit of 9.9% of the value of the Company's outstanding shares as provided in the Charter prior to its amendment.

Environmental Matters

Under various federal, state and local laws and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous
substances on their property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous substances. The costs of remediation or
removal may be substantial, and the presence of the hazardous substances, or the failure to promptly remediate them, may adversely affect the owner's ability to sell the real estate or to borrow using
the real estate as collateral. In connection with its ownership and operation of the properties, the Company may be potentially liable for the costs of removal or remediation of hazardous substances.
No environmental matters are known to affect the properties owned by the Company at December 31, 2000.

Employees

As of December 31, 2000, the Company had 163 employees. The Company believes that its relations with its employees are satisfactory.

5

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ITEM 2PROPERTIES

The following table and accompanying notes set forth information concerning each property in which the Company owns an equity interest as of
December 31, 2000. See also Schedule III in Item 8 for additional information.

Portfolio of PropertiesDecember 31, 2000

|Name and Location of Center                                     |  | Initial Construction |  | GLA (sq. ft.) |  | Percentage Leased(1) |  
|--------------------------------------------------------------- |  | -------------------- |  | ------------- |  | -------------------- | -
|Dry Ridge Outlet Center in Dry Ridge, Kentucky(2)               |  | October 1991         |  | 117,980       |  | 67.6                 | %
|Holland Outlet Center in Holland, Michigan                      |  | September 1988       |  | 193,775       |  | 80.2                 | %
|Horizon Outlet CenterLaughlin in Laughlin, Nevada              |  | July 1996            |  | 256,799       |  | 88.1                 | %
|Horizon Outlet CenterMonroe in Monroe, Michigan                |  | November 1987        |  | 225,121       |  | 78.2                 | %
|Horizon Outlet CenterTravese City in Traverse City, Michigan   |  | October 1990         |  | 153,975       |  | 82.5                 | %
|Horizon Outlet CenterTulare in Tulare, California              |  | November 1995        |  | 138,647       |  | 93.0                 | %
|Indiana Factory Shops in Daleville, Indiana                     |  | November 1994        |  | 233,605       |  | 64.4                 | %
|Lakeshore Marketplace in Norton Shores, Michigan
(Power Center) |  | October 1995         |  | 356,592       |  | 86.8                 | %
|Medford Outlet Center in Medford, Minnesota                     |  | June 1991            |  | 223,960       |  | 92.8                 | %
|Nebraska Crossing Factory Stores in Gretna, Nebraska            |  | October 1993         |  | 191,534       |  | 86.2                 | %
|Sealy Outlet Center in Sealy, Texas                             |  | August 1995          |  | 191,587       |  | 84.5                 | %
|The Factory Shops in Georgian Place in Somerset, Pennsylvania   |  | April 1990           |  | 189,532       |  | 58.1                 | %
|Warrenton Outlet Center in Warrenton, Missouri                  |  | September 1993       |  | 199,963       |  | 92.0                 | %
|                                                                |  |                      |  |               |  |                      |  
|Total Centers                                                   |  |                      |  | 2,673,070     |  | 81.6                 | %
|                                                                |  |                      |  |               |  |                      |  

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Notes:

Lease Information

In general, the leases have initial terms of one to five years. Most leases provide for the payment of percentage rent for annual sales in excess of certain
thresholds. In addition, HGP's typical leases provide for the recovery of all of a tenant's proportionate share of actual common area maintenance, refuse removal, insurance, and real estate taxes as
well as a collection for advertising and promotion and an administrative fee. Common area maintenance includes such items as common area utilities,
security, parking lot cleaning, maintenance and repair of common areas, capital replacement reserves, landscaping, seasonal decorations, public restroom maintenance and certain administrative
expenses.

6

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Lease ExpirationsProperties

The following table shows lease expirations for the next five years at the Company's properties (as of December 31, 2000 and assuming no lease renewals
or extensions):

Year

Number of Leases Expiring

Approximate GLA (Sq. Ft.)2001

175

711,1052002

84

397,1432003

50

188,2002004

51

213,3942005

35

143,261


Tenant Information

HGP's shopping centers feature a variety of retailers of widely recognized, traditional brand name merchandise. The following table sets information as to
HGP's major tenants as of and for the year ended December 31, 2000.

Tenant

Number of Stores

Occupied (Sq. Ft.)

Percentage of
Total Revenues

Percentage of GLA OccupiedPhillips-Van Heusen Corporation

27

138,829

7.44
%
6.73
%Elder-Beerman Stores Corporation

1

87,185

2.37
%
4.23
%Salisbury Sales Corporation

8

85,115

3.21
%
4.13
%Dress Barn, Incorporated

10

79,642

4.16
%
3.86
%Gap Outlet

8

78,036

1.77
%
3.78
%Brown Group Retail, Incorporated

14

73,570

3.76
%
3.57
%


Competition

HGP's shopping centers compete for customers primarily with factory outlet centers built and operated by other developers, traditional shopping malls and
off-price retailers. HGP believes that the majority of its customers visit factory outlet centers because they are intent on buying first-quality and name-brand goods at
discounted prices. Traditional full and off-price retailers are often unable to provide such a variety of products at attractive prices at a single location every day.

Numerous
developers and real estate companies are engaged in the development or ownership of factory outlet centers and other retail complexes that compete with HGP in seeking tenants
for its centers. Management believes that HGP competes with many large national and small developers of factory outlet centers. This results in competition for tenants to lease space in the factory
outlet centers that HGP and its competitors own or operate. The development of a new, competing factory outlet center with a more convenient location or more favorable rental terms may attract HGP's
tenants or cause them to renegotiate their leases at or prior to renewal.

As
HGP continues to implement its business plan to enhance the value of its real estate assets by exploring alternative retail and non-retail uses, it will compete
directly with a broader array of national and regional real estate management and development companies, many of which are larger and have greater financial resources than HGP.

ITEM 3LEGAL PROCEEDINGS

In the ordinary course of business the Company is subject to certain legal actions. While any litigation contains an element of uncertainty, management
believes the losses, if any, resulting from such matters will not have a material adverse effect on the consolidated financial statements of the Company.

ITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarter ended December 31, 2000.

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EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the names, positions and, as of December 31, 2000, ages of the executive officers of the Company:

|Name               |  | Position                                                  |  | Age
|------------------ |  | --------------------------------------------------------- |  | ---
|Gary J. Skoien     |  | Chairman of the Board, President, Chief Executive Officer |  | 46 
|David R. Tinkham   |  | Senior Vice President, Chief Financial Officer, Secretary |  | 45 
|Andrew F. Pelmoter |  | Senior Vice President of Leasing                          |  | 37 
|Thomas A. Rumptz   |  | Senior Vice President of Asset and Property Management    |  | 40 

GARY
J. SKOIEN.  Gary J. Skoien has served as Chairman of the Board, President, Chief Executive Officer and a Director since June 1998.
Mr. Skoien also serves, and has served since 1994, as Executive Vice President and Chief Operating Officer of The Prime Group, Inc. ("PGI") where he is responsible for managing the land
development division and corporate management functions. Prior to this role, Mr. Skoien served as Senior Vice President and Chief Operating Officer of the Retail Division of PGI (currently
Prime Retail, Inc.) from 1992 to 1993. In this role, he oversaw strategic planning, development and management of the rapidly growing division. He oversaw the development of nearly one million
square feet of factory outlet shopping centers. From 1983 to 1991, Mr. Skoien was the Executive Director of The Illinois Capital Development Board and from 1980 to 1983, Mr. Skoien was
an Assistant to the Illinois Governor. Mr. Skoien is a Trustee of Northern Illinois University and on the Boards of Directors of the Chicagoland Chamber of Commerce and the Civic Federation.
Mr. Skoien received his A.B. CUM LAUDE from Colgate University and received his Master of Public Policy from the University of Michigan.

DAVID
R. TINKHAM.  David R. Tinkham has served as Chief Financial Officer since June 1998. For fifteen years prior to his employment with HGP, Mr. Tinkham
was responsible for capital markets access, treasury, accounting, tax, insurance, investor relations, information technology and SEC compliance at The Chicago Dock and Canal Trust where he served as
Chief Financial Officer. Prior to joining The Chicago Dock and Canal Trust, Mr. Tinkham was a Senior Tax Accountant at Arthur Andersen & Co. Mr. Tinkham received his Masters of
Management degree from Northwestern University and a Bachelors of Business Administration in Accounting from The University of Michigan. Mr. Tinkham is a member of the American Institute of
Certified Public Accountants, Economic Club of Chicago, and the Realty Club of Chicago and an associate member of the Urban Land Institute and NAREIT.

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

THOMAS
A. RUMPTZ.  Thomas A. Rumptz has served as Senior Vice President of Asset and Property Management since June 1999 and Senior Vice President of Real Estate
since June 1998. Mr. Rumptz's role with HGP includes responsibility for property operations, development, construction and human resources. For eight years prior to his employment at
HGP, Mr. Rumptz worked for the predecessor company, Horizon Group, Inc., where he held many different positions including Controller, Vice President 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 Foremost Insurance. Mr. Rumptz received his MBA from
Grand Valley State University and a Bachelor of Business Administration from the University of Michigan.

8

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PART II

ITEM 5MARKET FOR THE COMPANY'S COMMON SHARES AND RELATED STOCKHOLDER MATTERS

The Company's common shares trade on the Nasdaq SmallCap Market of The Nasdaq Stock Market, Inc. ("Nasdaq") under the trading symbol "HGPI".

The
following table sets forth the quarterly high and low sales prices per share of the Company's common shares, as reported by Nasdaq.

|                   |  | Market Price Per Common Share
2000
|------------------ |  | ----------------------------------
|
|High               |  | $                                 
|Low                |  |                                   
|Dividends declared |  |                                   

|                   |  | Market Price Per Common Share
1999
|------------------ |  | ----------------------------------
|
|High               |  | $                                 
|Low                |  |                                   
|Dividends declared |  |                                   

The
approximate number of holders of record of the common shares was 432 as of February 15, 2001.

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ITEM 6SELECTED FINANCIAL DATA

The following table presents selected historical financial data of HGP and the Predecessor Properties (as defined herein) and should be read in conjunction
with the consolidated and combined financial statements and notes thereto included in Part II, Item 8. The Predecessor Properties historical information has been derived from the operations and
historical basis of 13 of Horizon's 35 outlet centers (including one power center) that were contributed to HGP by Horizon in connection with the Prime Retail merger. As historically HGP was not a
separate legal entity with its own capital structure, per share data for net income and dividends have not been presented. The historical financial information may not be indicative of HGP's future
performance and does not necessarily reflect what the financial position and results of operations of HGP would have been had HGP operated as a separate, stand-alone entity during the periods prior to
June 15, 1998. See Note 2 to the consolidated and combined financial statements. The selected financial data set forth does not include the operating results or financial position of the
Prime Transferred Properties (as defined herein) for the periods prior to their acquisition on June 15, 1998.

|                                                                                              |                      |   |         |        |   | Horizon Group
Properties, Inc. as of
December 31, 1998
or for the period from
June 15, 1998 to
December 31, 1998 |        |   |         |        |   |        |       
|--------------------------------------------------------------------------------------------- | -------------------- | - | ------- | ------ | - | ---------------------------------------------------------------------------------------------------------------- | ------ | - | ------- | ------ | - | ------ | ------
|
|
|
|
|
|Operating Data                                                                                |                      |   |         |        |   |                                                                                                                  |        |   |         |        |   |        |       
|Revenues                                                                                      |                      | $ | 27,754  |        | $ | 30,378                                                                                                           |        | $ | 17,147  |        | $ | 12,607 |       
|Expenses                                                                                      |                      |   | 29,852  |        |   | 30,094                                                                                                           |        |   | 16,701  |        |   | 16,362 |       
|Impairment(1)                                                                                 |                      |   | 1,568   |        |   |                                                                                                                 |        |   |        |        |   |       |       
|Income (loss) from joint ventures                                                             |                      |   |        |        |   | (622                                                                                                             | )      |   | (59     | )      |   | (207   | )     
|                                                                                              |                      |   |         |        |   |                                                                                                                  |        |   |         |        |   |        |       
|Income (loss) before gain on sale of real estate, minority interests and extraordinary charge |                      |   | (3,666  | )      |   | (338                                                                                                             | )      |   | 387     |        |   | (3,962 | )     
|Gain on sale of real estate                                                                   |                      |   | 239     |        |   |                                                                                                                 |        |   |        |        |   |       |       
|                                                                                              |                      |   |         |        |   |                                                                                                                  |        |   |         |        |   |        |       
|Income (loss) before minority interests and extraordinary charge                              |                      |   | (3,427  | )      |   | (338                                                                                                             | )      |   | 387     |        |   | (3,962 | )     
|Minority interests(2)                                                                         |                      |   | 537     |        |   | 31                                                                                                               |        |   | (69     | )      |   |       |       
|                                                                                              |                      |   |         |        |   |                                                                                                                  |        |   |         |        |   |        |       
|Income (loss) before extraordinary charge                                                     |                      |   | (2,890  | )      |   | (307                                                                                                             | )      |   | 318     |        |   | (3,962 | )     
|Extraordinary charge on debt prepayment                                                       |                      |   |        |        |   | (568                                                                                                             | )      |   |        |        |   |       |       
|                                                                                              |                      |   |         |        |   |                                                                                                                  |        |   |         |        |   |        |       
|Net Income (loss)                                                                             |                      | $ | (2,890  | )      | $ | (875                                                                                                             | )      | $ | 318     |        | $ | (3,962 | )     
|                                                                                              |                      |   |         |        |   |                                                                                                                  |        |   |         |        |   |        |       
|Net Income (loss) per share  basic and diluted(3)                                            |                      | $ | (1.01   | )      | $ | (0.31                                                                                                            | )      | $ | .11     |        |   |        |       
|                                                                                              |                      |   |         |        |   |                                                                                                                  |        |   |         |        |   |        |       
|Dividends per share(4)                                                                        |                      | $ |        |        | $ |                                                                                                                 |        | $ |        |        |   |        |       
|                                                                                              |                      |   |         |        |   |                                                                                                                  |        |   |         |        |   |        |       
|Balance Sheet Data:                                                                           |                      |   |         |        |   |                                                                                                                  |        |   |         |        |   |        |       
|Real estate, net of accumulated depreciation                                                  |                      | $ | 133,803 |        | $ | 141,419                                                                                                          |        | $ | 142,588 |        |   |        |       
|Total assets                                                                                  |                      |   | 147,968 |        |   | 155,000                                                                                                          |        |   | 165,678 |        |   |        |       
|Debt (allocation from Horizon for Predecessor Properties)                                     |                      |   | 104,401 |        |   | 107,128                                                                                                          |        |   | 114,752 |        |   |        |       
|Net assets                                                                                    |                      |   |         |        |   |                                                                                                                  |        |   |         |        |   |        |       
|Total shareholders' equity                                                                    |                      |   | 30,988  |        |   | 33,528                                                                                                           |        |   | 33,614  |        |   |        |       
|Other Data:                                                                                   |                      |   |         |        |   |                                                                                                                  |        |   |         |        |   |        |       
|Cash flows provided by (used in):                                                             |                      |   |         |        |   |                                                                                                                  |        |   |         |        |   |        |       
|                                                                                              | Operating activities |   |         | 2,083  |   |                                                                                                                  | 6,673  |   |         | 2,760  |   | $      | 1,447 
|                                                                                              | Investing activities |   |         | (1,418 | ) |                                                                                                                  | (832   | ) |         | (2,455 | ) |        | (1,703
|                                                                                              | Financing activities |   |         | (2,754 | ) |                                                                                                                  | (3,572 | ) |         | (761   | ) |        | 325   
|Total gross leasable area (square feet)                                                       |                      |   | 2,673   |        |   | 2,673                                                                                                            |        |   | 2,795   |        |   | 2,247  |       

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|Notes:
|------
|(1)   

10

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|(2) |  | No minority interest was allocated to the Predecessor Properties due to the change in the capital structure resulting from the Merger.                       
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) |  | No per share net income or loss information is presented for the Predecessor Properties due to the change in the capital structure resulting from the Merger.
|(4) |  | No dividend information is shown for the Predecessor Properties due to the change in the capital structure resulting from the Merger.                        

SELECTED QUARTERLY FINANCIAL DATA

|                                                               |  | 2000 |      
|-------------------------------------------------------------- |  | ---- | -----
|
|
|Revenue                                                        |  | $    | 6,775
|Expenses                                                       |  |      | 7,312
|Provision for impairment                                       |  |      |     
|                                                               |  |      |      
|Loss before gain on sale of real estate and minority interests |  |      | (537 
|Gain on sale of real estate                                    |  |      |     
|                                                               |  |      |      
|Loss before minority interests                                 |  |      | (537 
|Minority interests                                             |  |      | 73   
|                                                               |  |      |      
|Net loss                                                       |  | $    | (464 
|                                                               |  |      |      
|Net loss per sharebasic and diluted                           |  | $    | (0.16
|                                                               |  |      |      

|                                              |  | 1999 |      
|--------------------------------------------- |  | ---- | -----
|
|
|Revenue                                       |  | $    | 7,504
|Expenses                                      |  |      | 7,723
|Loss from joint ventures                      |  |      | (306 
|                                              |  |      |      
|Income (loss) before minority interests       |  |      | (525 
|Minority interests                            |  |      | 90   
|                                              |  |      |      
|Income (loss) before extraordinary charge     |  |      | (435 
|Extraordinary charge                          |  |      |     
|                                              |  |      |      
|Net income (loss)                             |  | $    | (435 
|                                              |  |      |      
|Net income (loss) per sharebasic and diluted |  | $    | (0.16
|                                              |  |      |      

11

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ITEM 7MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The following discussion and analysis of the consolidated financial condition and results of operations of Horizon Group Properties, Inc. (together with
its subsidiaries "HGP" or the "Company") and the Predecessor Properties (as hereinafter defined) should be read in conjunction with the Consolidated and Combined Financial Statements and Notes
thereto. The Company's operations are conducted primarily through a subsidiary limited partnership, Horizon Group Properties, L.P. ("HGP LP"). The Company is the sole general partner of HGP LP and, as
of December 31, 2000, owned approximately 84.9% of the partnership interests of HGP LP ("Common Units"). Common Units of HGP LP are exchangeable for shares of Common Stock on a
one-for-one basis at any time (or for an equivalent cash amount at the Company's election). The Company controls HGP LP and is dependent on distributions or other payments from
HGP LP to meet its financial obligations.

Cautionary Statements

The following discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect management's current views with respect to future events and financial performance. Such forward-looking
statements are subject to certain risks and uncertainties; including, but not limited to, the effects of future events on the Company's financial performance; the risk that the Company may be unable
to refinance its current debt as it matures; risks related to the retail industry in which the Company's shopping centers compete, including the potential adverse impact of external factors, such as
inflation, consumer confidence, unemployment rates and consumer tastes and preferences; risks associated with the Company's property acquisitions, such as the lack of predictability with respect to
financial returns; risks associated with the Company's property development activities, such as the potential for cost overruns, delays and the lack of predictability with respect to the financial
returns associated with these development activities; the risk of potential increase in market interest rates from current levels; and risks associated with real estate ownership, such as the
potential adverse impact of changes in local economic climate on the revenues and the value of the Company's properties. For further information on factors which could impact the Company and the
statements contained herein, reference is made to the Company's other filings with the
Securities and Exchange Commission, including the Company's Registration Statement on Form 10, as amended, dated as of June 4, 1998, with respect to the Company's initial registration of
its common stock under the Securities Exchange Act of 1934, as amended and the Sky Merger Corp. Registration Statement on Form S-4, as filed with the Securities and Exchange
Commission on May 12, 1998 (Registration No. 333-51285).

General Overview

The Company is a self-administered and self-managed corporation that was established in connection with the merger of Horizon
Group, Inc., a Michigan corporation ("Horizon") with and into Prime Retail, Inc., a Maryland corporation ("Prime") which was consummated on June 15, 1998 ("the Merger"). As of
December 31, 2000, HGP's portfolio consisted of 12 factory outlet centers and one power center located in 10 states comprising an aggregate of approximately 2.7 million square feet of
gross leasable area ("GLA"). Ten of the factory outlet centers and the power center were contributed to the Company in connection with the consummation of the Merger by Horizon pursuant to a
Contribution Agreement entered into in connection with the Merger (the "Contribution Agreement") and two factory outlet centers were purchased by the Company from Prime immediately subsequent to the
consummation of the Merger.

12

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Results of Operations

The statements for the periods subsequent to June 15, 1998, (the date of the Company's acquisition of the 12 outlet centers, one power center and
Horizon's former administrative office from Horizon (the "Predecessor Properties") and the purchase of two properties from Prime (the "Prime Transferred Properties")) reflect the operation of the
Company as a separate entity. The financial statements of the Company for the periods subsequent to June 15, 1998 are not directly comparable to the statements of the Predecessor Properties for
periods prior to the Merger due to a number of factors, including (1) a significant change in the indebtedness of the Company which occurred in conjunction with the Merger; (2) the
acquisition by the Company of two additional outlet centers immediately after the Merger, the results of which are not included in the financial statements of the Predecessor Properties;
(3) the fact that the outlet center in Algodones, New Mexico was substantially occupied during the periods presented prior to 1998 but was vacant during the periods subsequent to
June 15, 1998 and (4) the carrying value of the Predecessor Properties for the periods prior to the Merger are stated at Horizon's historic cost and depreciation expense is based on
those costs. The Predecessor Properties are stated at the fair value as of the date of the Merger, resulting in a lower carrying value compared to periods prior to the Merger and a related decrease in
depreciation expense.

The
financial statements for the periods prior to the Merger reflect the results of operations, financial position, and cash flows of the Predecessor Properties prior to the Merger as
if the Predecessor Properties had been a separate entity which owned such assets for all periods presented. The historical results of operations and financial condition of the Predecessor Properties
are based on the manner in which Horizon historically managed such net assets. Accordingly, the combined financial statements of the Predecessor Properties have been prepared using Horizon's
historical basis of the assets and liabilities and historical results of operations related to the Predecessor Properties. In this regard, because Horizon owned the Predecessor Properties, together
with other properties which were not contributed to the Company, the Predecessor Properties were not insulated from the obligations and commitments of Horizon. Certain assumptions relating to the
allocation of cash and cash equivalents, debt and financing costs, interest expense and general and administrative expenses, all of which were historically aggregated by Horizon, have been made in the
combined financial statements for the periods prior to the Merger. See Note 2 to the consolidated and combined financial statements. These statements have been combined based upon the
historical common ownership and management of the outlet centers. For these and other reasons, the operating results of HGP are not comparable to those of the Predecessor Properties.

2000
Compared to 1999

Base
rent decreased $1.6 million in the year ended December 31, 2000 compared to the prior year primarily due to reductions in rental rates for several tenants. The
centers experiencing the largest decreases in base rent were located in Daleville, Indiana, Sealy, Texas, and Somerset, Pennsylvania totaling $1.9 million. This was partially offset by the
centers with the largest increase in base rents located in Medford, Minnesota and Norton Shores, Michigan which totaled $610,000.

Expense
recovery revenue decreased $1.0 million in the year ended December 31, 2000 compared to the prior year due to a decline in the related property expenses and the
percentage of tenants subject to these charges.

The
Company made a $1.5 million loan to Prime Outdoor, LLC, an affiliate of Prime Group, Inc. on April 18, 2000. The Prime Group, Inc. is an affiliate of
Michael W. Reschke, a Director of the Company. The interest rate on the loan was 10% and was 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 units in Horizon Group Properties, LP owned by Prime Group, Inc. and its affiliates. The loan was approved by a committee of independent
directors of the Company. The loan was repaid on June 9, 2000.

13

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Real estate tax expense decreased $465,000 in the year ended December 31, 2000, compared to the prior year mainly due to a refund of a portion of the 1997 through 1999 taxes at
the outlet center in Monroe, Michigan and a decrease in the current tax assessments for this and several other properties.

Landlease
and other expense decreased $530,000 in the year ended December 31, 2000, compared to the prior year mainly due to reductions in marketing landlord contributions and
a reduction in bad debt reserves.

General
and administrative expense decreased $906,000 in the year ended December 31, 2000, compared to the prior year mainly as a result of a reduction in corporate staffing.
In addition, the year ended December 31, 1999 included unsuccessful merger costs of $333,000 and indirect debt restructuring fees of $189,000. There were no similar costs recorded in the
current year.

Depreciation
and amortization expense increased $600,000 or 12% compared to the prior year, principally from additions for tenant improvements and the stabilization of Medford Phase
III in 2000.

Interest
expense increased $1.1 million in the year ended December 31, 2000, compared to the prior year. The primary factors causing the increase were higher interest
rates, which affected the Company's floating rate debt and the refinancing of a portion of the Nomura debt with the proceeds from the JP Morgan loans in July 1999. The JP Morgan
loans carry a fixed interest rate, which was greater than the effective rate on the Nomura loan for the prior year. The year ended December 31, 2000, also includes an accrual of $723,000 for
the repayment fees on the remaining Nomura debt. Offsetting the increase in interest rates was a net reduction in debt outstanding of $2.7 million from December 31, 2000 to
December 31, 1999.

The
average effective interest rate on the Nomura facility for the year ended December 31, 2000 was 8.63% compared to 8.36% for the prior year. In September 1999, the
Company assumed loans, in connection with land located in Muskegon, Michigan. The outstanding balance on these loans was $590,000 as of December 31, 2000. The average interest rate on these
loans was approximately 7.4% and 9.6% at December 31, 2000 and 1999, respectively.

The
financial statements for the years ended December 31, 2000 and 1999 include net charges of $377,000 and $697,000, respectively, for marketing landlord contributions. These
contributions were used to supplement funds received from tenants to market key centers.

Average
occupancy for the Company's total operating portfolio for the year ended December 31, 2000 was 83.2%. As of December 31, 2000 and 1999, occupancy of the
Company's total operating portfolio was 81.6% and 84.7%, respectively.

The
Company accounted for its investments in the joint ventures which own the Bellport Outlet Center utilizing the equity method. On September 1, 1999, the Company transferred
its investments in the Bellport joint ventures to an affiliate of Prime. The Company received $7.5 million in cash and approximately 95 acres of undeveloped land in Muskegon, Michigan (see
Note 10 to the consolidated and combined financial statements).

Net
loss for the years ended December 31, 2000 and 1999, was $1.01 and $0.31per share on a basic and diluted basis, respectively. Funds from operations for the years ended
December 31, 2000 and 1999, was $.58 and $1.74 per share on a diluted basis, respectively.

Impairment
charges of $1.6 million were recorded in the year ended December 31, 2000 based on a contract for the sale of the outlet center in Dry Ridge, Kentucky which
closed in January, 2001. No similar charges were recorded in the year ended December 31, 1999.

On
November 9, 2000 the Company sold an outparcel located in front of its power center in Norton Shores, Michigan for $375,000. A gain on sale of $239,000 is reflected on the
statement of

14

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operations for the year ended December 31, 2000. There was no similar item recorded in the year ended December 31, 1999.

An
extraordinary charge on debt prepayment of $568,000, net of minority interests, was incurred in the year ended December 31, 1999. This charge reflected the exit fees paid
and unamortized loan fees charged to expense in connection with the refinancing of six properties with JP Morgan (see Note 9 to the consolidated and combined financial statements). There
was no similar cost recorded in the year ended December 31, 2000.

1999
Compared to 1998

Rental
revenue for the Predecessor Properties (excluding the Algodones, New Mexico center which was vacant in 1999 and 1998) for the year ended December 31, 1999 increased 3%
compared to the prior year. This increase was primarily attributable to increased occupancy compared to the prior year. Operating expenses and real estate taxes for the year ended December 31,
1999 for the Predecessor Properties (excluding the New Mexico center) decreased approximately 5% compared to the prior year. This decrease was primarily the result of reduced insurance premiums and
lower tax expense due to a decrease in the tax assessments on several properties. Operating expenses and real estate taxes for the Algodones, New Mexico center were $95,000 and $293,000 for the years
ended December 31, 1999 and 1998, respectively.

The
financial statements for the years ended December 31, 1999 and 1998 include net charges of $697,000 and $700,000, respectively, for marketing landlord contributions. These
contributions were used to supplement funds received from tenants to market key centers.

Average
occupancy for the Company's total operating portfolio for the year ended December 31, 1999 was 81.2%.As of December 31, 1999 and 1998, occupancy of the Company's
total operating portfolio was 84.7% and 80.4%, respectively.

The
Company accounted for its investments in the joint ventures which own the Bellport Outlet Center utilizing the equity method. The center experienced a decrease in rental revenue
in 1999 compared to the prior year primarily as a result of the conversion of tenants from fixed base rent to rent based on a percentage of sales and a decline in occupancy. Depreciation and
amortization expense at the Bellport Outlet Center increased in 1999 compared to the prior year due to the write-off of tenant allowances related to the tenants who left the center.

On
September 1, 1999, the Company transferred its investments in the Bellport joint ventures to an affiliate of Prime. The Company received $7.5 million in cash and
approximately 95 acres of undeveloped land in Muskegon, Michigan (see Note 10 to the consolidated and combined financial statements).

Other
income for the year ended December 31, 1999 includes an $82,000 gain on the sale of the vacant center in Algodones, New Mexico. The net proceeds from this sale will be
used to pay down the Nomura loan on or before its maturity pursuant to the terms of the Prime Guarantee agreement. This property was classified as held for sale on the balance sheet as of
December 31, 1998.

On
January 5, 1999, the Company received a proposal from Prime Capital Holding ("PCH") regarding a possible business combination with the Company. On March 17, 1999, PCH
informed the Company that it was withdrawing its earlier proposal based on proposed changes to the income tax laws affecting REITs. During the year ended December 31, 1999, the Company incurred
approximately $333,000 of expense to investigate and consider the potential business combination. This amount was charged to general and administrative expense upon the withdrawal of the PCH proposal.

Net
loss for the year ended December 31, 1999 was $0.31 per share on a basic and diluted basis. This included an extraordinary charge of $0.20 per share (discussed below).
Funds from operations for the year ended December 31, 1999 was $1.74 per share on a diluted basis.

15

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An extraordinary charge on debt prepayment of $568,000, net of minority interests, was incurred in the year ended December 31, 1999. This charge reflected the exit fees paid
and unamortized loan fees charged to expense in connection with the refinancing of six properties with JP Morgan (see Note 6 to the consolidated and combined financial statements). There
was no similar cost recorded in the year ended December 31, 1998.

Liquidity and Capital Resources

As of December 31, 2000, the aggregate amount of outstanding mortgages and other debt was approximately $104.4 million, of which
$56.1 million is payable in 2001 pursuant to the terms of such notes and indebtedness. The net proceeds from the sale of the Dry Ridge, Kentucky outlet center in January 2001 have been
used to reduce this outstanding balance. The Company has hired Secured Capital Corporation to assist in the pursuit of replacement financing and/or the sale of properties in order to satisfy the debt
coming due in 2001. There can be no assurance that a transaction will result involving the Company.

The
Company is contemplating an expansion at its outlet centers in Tulare, California and Medford, Minnesota. The Company is required to keep the properties in good general repair and
to make capital improvements and repairs at certain of its outlet centers pursuant to the terms of the HGP Credit Facility with Nomura and the JP Morgan loans (each as hereinafter defined). At
December 31, 2000, there was approximately $1.3 million deposited in escrows with Nomura and JP Morgan which the Company believes is sufficient to fund its ongoing capital
requirements. Any additional capital improvements are expected to be funded with additional borrowings, existing cash balances or cash flow from operations.

The
Company is required to make monthly deposits with Nomura and JP Morgan for future debt service payments, real estate taxes, insurance, operating expenses and capital
expenditures. These deposits totaled $2.9 million as of December 31, 2000, including the capital improvement escrows described above. Funds are dispersed to or on behalf of the Company
for the above mentioned uses. Funds in excess of those specified in the loan agreement with Nomura are dispersed to the Company monthly.

The
Company expects to meet its short-term operating liquidity requirements generally through working capital and cash flows from operations. The Company expects to meet
its long-term requirements, such as tenant allowances for new leases and capital improvements, through the use of working capital and cash flows from operations and, if necessary and
available, the additional borrowing of long-term debt and the potential offering of equity securities in the private or public capital markets. As a result of the Company's leverage, the
Company's ability to obtain additional financing sources is limited. The Company is currently seeking to refinance the HGP Credit Facility, which matures in July 2001. There can be no assurance
that the Company will be able to complete such refinancing or on what terms such refinancing may be accomplished. The consolidated financial statements of the Company do not contain any adjustments
that may ultimately arise from the outcome of this uncertainty.

The
Company has outstanding commitments for capital expenditures on leases signed at December 31, 2000 in the amount of $277,000 for tenant allowances, $182,000 for
construction costs and $24,000 for brokerage commissions. These costs are expected to be paid during 2001 and a portion will be reimbursed from the capital improvement escrows (see Note 2 to
the consolidated and combined financial statements).

On
June 15, 1998, certain wholly owned affiliates of the Company entered into a credit facility (the "HGP Credit Facility") with Nomura Asset Capital Corporation ("Nomura").
The facility had an initial balance of $108.2 million and a balance of $55.3 million at December 31, 2000. The HGP Credit Facility is guaranteed by HGP and HGP LP. The HGP Credit
Facility expires July 11, 2001 and bears

16

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interest at the 30-day LIBOR Rate (as defined in the HGP Credit Facility) plus 1.90% per annum. The HGP Credit Facility is cross-collateralized by mortgages on six of the Company's 12
outlet centers and one power center and requires monthly payments of interest. In addition, the HGP Credit Facility requires principal payments totaling $1.5 million, $1.5 million and
$2.0 million during the first, second and third years, respectively, payable in equal monthly installments. The HGP Credit Facility contains restrictions on the ability of HGP and HGP LP to
incur additional indebtedness, and under certain circumstances, requires the Company to enter into an interest rate lock arrangement which would fix the interest rate on the full outstanding amount of
the HGP Credit Facility.

The
Company incurred a 1% repayment fee in connection with the prepayment of $46.8 million, as described above. This fee was an amount negotiated with Nomura and was recognized
as a component of the extraordinary charge on prepayment of debt in 1999. The Company is recognizing a repayment fee of 2% related to the remaining amounts due under the HGP Credit Facility as an
expense over the remaining term of the HGP Credit Facility. This item is reflected as a component of interest expense in the statements of operations.

On
July 9, 1999, the Company completed a $46.7 million debt financing with Morgan Guaranty Trust Company of New York ("the JP Morgan Loans"). The proceeds from
the loans, together with Company funds, were used to repay $46.8 million of indebtedness under the HGP Credit Facility. The JP Morgan Loans consist of (i) nonrecourse loans
totaling $22.9 million secured by three factory outlet centers located in Daleville, Indiana, Somerset, Pennsylvania, and Tulare, California and (ii) nonrecourse loans totaling
$23.8 million secured by three factory outlet centers located in Gretna, Nebraska, Sealy, Texas, and Traverse City, Michigan. The outstanding balance was $45.9 million at
December 31, 2000. The loans bear interest at a fixed rate of 8.46%, mature on August 1, 2009 and require the monthly payment of interest and principal based on a 25-year
amortization schedule. The JP Morgan Loans also require the monthly funding of escrow accounts for the payment of real estate taxes, insurance and capital improvements. Such escrow accounts
currently total $1.3 million for the JP Morgan Loans.

Prime
has guaranteed $10.0 million of obligations under the HGP Credit Facility, together with other indebtedness (the "Prime Guarantee"). The terms of the Working Capital
Agreement require the Company to repay any outstanding balance on indebtedness on which Prime is contingently liable to the extent of net proceeds from an equity offering. The Company intends to use
the net proceeds from the sale of the outlet center in Algodones, New Mexico to pay down the Nomura loan on or before its maturity pursuant to the terms of the Prime Guarantee agreement. In connection
with the Prime Guarantee, HGP has agreed to pay Prime a fee of $400,000 per annum until Prime is released from its guarantee obligations related to the HGP Credit Facility.

The
Company has a loan secured by a mortgage on the office building and related equipment, which the Company utilizes as a corporate office in Norton Shores, Michigan. The principal
balance on this loan was $2.5 million and $2.7 million on December 31, 2000 and 1999, respectively. This building was previously owned by an affiliate of Horizon and was
contributed to the Company pursuant to the Contribution Agreement.

The
Company acquired approximately 95 acres of undeveloped land in Muskegon, Michigan in connection with the transfer of its interests in the Bellport Outlet Center (see
Note 10 to the consolidated and combined financial statements). Portions of this land are subject to two separate land contracts with a total balance of $590,000 as of December 31, 2000.
The interest rates are 9.5% and
10.0%. Monthly debt service payments total $5,200 through June 2001 and $4,200 through January 2002 with balloon payments due on these two dates of $125,000 and $458,000, respectively.

On
October 6, 1999, the Company sold six acres of land in Muskegon, Michigan to CBL & Associates Properties, Inc. ("CBL") and was reimbursed for
prior development efforts. The Company received $600,000 in cash and a $520,000 note. This note is non-interest bearing and is due at the

17

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earlier of (i) CBL's construction of a regional mall with three anchor tenants or (ii) October 2001. No gain or loss was recognized on this sale.

On
September 27, 1999, the Company hired Secured Capital Corp as financial advisor to assist the Company in studying strategic alternatives to enhance shareholder value,
including, but not limited to, the sale or other disposition of some or all of its real estate portfolio. Concurrently, the Company is assessing alternative business opportunities going forward.
Secured Capital Corp is currently assisting the Company to refinance the Nomura indebtedness which matures in July 2001. There can be no assurance that a transaction will result involving the
Company.

On
January 26, 2001, the Company sold the outlet center in Dry Ridge, Kentucky to Sugar Oak Corporation for $2.5 million. The net proceeds were used to pay down the
outstanding balance on the Nomura Loan.

In
2001, 187 leases covering an aggregate of 764,915 square feet are scheduled to expire. Historically, the Company has entered into renewals on 64% of leases which have expired, but
not necessarily on equivalent economic terms. An additional 7% of leases which have expired are still under negotiation. While the company does not currently believe that proportion of leases
scheduled to expire in 2001 which will actually be renewed will differ materially from its historical experience, there can be no assurance that it will renew an equivalent proportion of such leases,
nor that the economics of such renewals will be as favorable as those contained in the current leases.

ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk exposure is associated with the HGP Credit Facility from Nomura. This facility had a balance of $55.3 million at
December 31, 2000. The interest rate is set monthly at a rate equal to the 30 day London Interbank Offered Rate ("LIBOR") plus 190 basis points. The facility
matures in July of 2001. The monthly interest rates applicable from June 15, 1998 to December 31, 2000 fluctuated 1.83% from 6.80% to 8.63%. As of December 31, 2000, the effective
rate was 8.63%. The Company is currently seeking to mitigate this interest rate risk through refinancing the facility with fixed rate, longer-term debt. There can be no assurance that the
Company will be able to complete such refinancing or on what terms such refinancing may be accomplished.

The
following table shows sensitivity of annual interest expense and net income per sharediluted based on an increase in the effective interest rate of 1%.

Principal Amount

Change in LIBOR Rate

Change in Interest Expense

Per ShareDiluted$
55,300,000

1.00
%
$
553,000

$
.16


Inflation

HGP's leases with the majority of its tenants require the tenants to reimburse HGP for most operating expenses and increases in common area maintenance
expense, which reduces HGP's exposure to increases in costs and operating expenses resulting from inflation.

Legal Proceedings

In the ordinary course of business the Company is subject to certain legal actions. While any litigation contains an element of uncertainty, management
believes the losses, if any, resulting from such matters will not have a material adverse effect on the consolidated financial statements of the Company.

18

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ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Horizon Group Properties, Inc.  Index to Financial Statements  and Financial Statement Schedules

|                                                                                                                                                                                                                                                                                   |                                              | Page
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ----
|Report of independent auditors                                                                                                                                                                                                                                                     |                                              | 20  
|Consolidated Balance Sheets of the Company at December 31, 2000 and December 31, 1999                                                                                                                                                                                              |                                              | 21  
|Consolidated Statements of Operations of the Company for the years ended December 31, 2000 and 1999 and the period from June 15, 1998 to December 31, 1998 and Combined Statement of Operations of the Predecessor Properties for the
period from January 1, 1998 to June 14, 1998 |                                              | 22  
|Consolidated Statement of Changes in Shareholders' Equity and Combined Statement of Changes in Net Assets                                                                                                                                                                          |                                              | 23  
|Consolidated Statements of Cash Flows of the Company for years ended December 31, 2000 and 1999 and the period from June 15, 1998 to December 31, 1998 and Combined Statement of Cash Flows of the Predecessor Properties for the period
from January 1, 1998 to June 14, 1998     |                                              | 24  
|Notes to Consolidated and Combined Financial Statements                                                                                                                                                                                                                            |                                              | 25  
|Schedule as of December 31, 2000:                                                                                                                                                                                                                                                  |                                              |     
|                                                                                                                                                                                                                                                                                   | IIIReal Estate and Accumulated Depreciation |     

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

19

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REPORT OF INDEPENDENT AUDITORS

To
the Shareholders and Board of Directors
Horizon Group Properties, Inc.

We
have audited the accompanying consolidated balance sheets of Horizon Group Properties, Inc. (the "Company") as of December 31, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 2000 and 1999, and for the period from June 15, 1998 to December 31,
1998. We have also audited the accompanying combined statements of operations, changes in net assets and cash flows of the Predecessor Properties for the period from January 1, 1998 to
June 14, 1998. Our audits also included the financial statement schedule listed in the Index. These financial statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and schedule based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Horizon Group Properties, Inc. at
December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for the years ended December 31, 2000 and 1999 and for the period from June 15, 1998
to December 31, 1998, and the combined results of the operations and cash flows of the Predecessor Properties for the period from January 1, 1998 to June 14, 1998, in conformity
with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements
taken as a whole, presents fairly in all material respects, the information set forth therein.

Ernst &
Young LLP

Chicago,
Illinois
February 15, 2001

20

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HORIZON GROUP PROPERTIES, INC.        Consolidated Balance Sheets(In thousands, except per share amounts)

|                                                                                                                                              |                               | December 31, 2000                          |         | December 31, 1999 |        
|--------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ------------------------------------------ | ------- | ----------------- | -------
|ASSETS                                                                                                                                        |                               |                                            |         |                   |        
|Real estate  at cost:                                                                                                                        |                               |                                            |         |                   |        
|                                                                                                                                              | Land                          |                                            | $       | 12,049            |        
|                                                                                                                                              | Buildings and improvements    |                                            |         | 133,670           |        
|                                                                                                                                              | Less accumulated depreciation |                                            |         | (11,916           | )      
|                                                                                                                                              |                               |                                            |         |                   |        
|                                                                                                                                              | Total net real estate         |                                            |         | 133,803           |        
|Cash and cash equivalents                                                                                                                     |                               |                                            | 2,866   |                   |        
|Restricted cash                                                                                                                               |                               |                                            | 3,478   |                   |        
|Tenant accounts receivable                                                                                                                    |                               |                                            | 1,803   |                   |        
|Real estate held for sale                                                                                                                     |                               |                                            | 2,468   |                   |        
|Deferred costs (net of accumulated amortization of $773 and $372, at December 31, 2000 and 1999, respectively)                                |                               |                                            | 1,987   |                   |        
|Other assets                                                                                                                                  |                               |                                            | 1,563   |                   |        
|                                                                                                                                              |                               |                                            |         |                   |        
|                                                                                                                                              | Total assets                  |                                            | $       | 147,968           |        
|                                                                                                                                              |                               |                                            |         |                   |        
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                          |                               |                                            |         |                   |        
|Liabilities:                                                                                                                                  |                               |                                            |         |                   |        
|Mortgages and other debt                                                                                                                      |                               | $                                          | 104,401 |                   | $      
|Accounts payable and accrued expenses                                                                                                         |                               |                                            | 4,916   |                   |        
|Prepaid rents and other tenant liabilities                                                                                                    |                               |                                            | 1,313   |                   |        
|Other liabilities                                                                                                                             |                               |                                            | 845     |                   |        
|                                                                                                                                              |                               |                                            |         |                   |        
|                                                                                                                                              | Total liabilities             |                                            |         | 111,475           |        
|Minority interests                                                                                                                            |                               |                                            | 5,505   |                   |        
|Shareholders' equity:                                                                                                                         |                               |                                            |         |                   |        
|Common Shares, ($.01 par value, 50,000 shares authorized, 2,870 and 2,845 issued and outstanding at December 31, 2000 and 1999, respectively) |                               |                                            | 29      |                   |        
|Additional paid-in capital                                                                                                                    |                               |                                            | 34,406  |                   |        
|Accumulated deficit                                                                                                                           |                               |                                            | (3,447  | )                 |        
|                                                                                                                                              |                               |                                            |         |                   |        
|                                                                                                                                              | Total shareholders' equity    |                                            |         | 30,988            |        
|                                                                                                                                              |                               |                                            |         |                   |        
|                                                                                                                                              |                               | Total liabilities and shareholders' equity |         | $                 | 147,968
|                                                                                                                                              |                               |                                            |         |                   |        

See accompanying notes to consolidated and combined financial statements.

21

---



HORIZON GROUP PROPERTIES, INC.        Consolidated and Combined Statements of Operations(In thousands, except per share amounts)

|                                                                                                  |                                                       | Horizon Group Properties, Inc. |        |        |       
|------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ------------------------------ | ------ | ------ | ------
|
|REVENUE                                                                                           |                                                       |                                |        |        |       
|                                                                                                  | Base rent                                             |                                | $      | 21,115 |       
|                                                                                                  | Percentage rent                                       |                                |        | 155    |       
|                                                                                                  | Expense recoveries                                    |                                |        | 4,988  |       
|                                                                                                  | Other                                                 |                                |        | 1,496  |       
|                                                                                                  |                                                       |                                |        |        |       
|                                                                                                  |                                                       | Total Revenue                  |        |        | 27,754
|                                                                                                  |                                                       |                                |        |        |       
|EXPENSES                                                                                          |                                                       |                                |        |        |       
|                                                                                                  | Property operating                                    |                                |        | 6,490  |       
|                                                                                                  | Real estate taxes                                     |                                |        | 2,535  |       
|                                                                                                  | Land leases and other                                 |                                |        | 1,399  |       
|                                                                                                  | Depreciation and amortization                         |                                |        | 5,561  |       
|                                                                                                  | General and administrative                            |                                |        | 3,547  |       
|                                                                                                  | Provision for impairment                              |                                |        | 1,568  |       
|                                                                                                  | Interest                                              |                                |        | 10,320 |       
|                                                                                                  |                                                       |                                |        |        |       
|                                                                                                  |                                                       | Total expenses                 |        |        | 31,420
|                                                                                                  |                                                       |                                |        |        |       
|Loss from joint ventures                                                                          |                                                       |                                |       |        |       
|                                                                                                  |                                                       |                                |        |        |       
|Income (loss) before gain on sale of real estate, minority interests and extraordinary charge     |                                                       |                                | (3,666 | )      |       
|Gain on sale of real estate                                                                       |                                                       |                                | 239    |        |       
|                                                                                                  |                                                       |                                |        |        |       
|Income (loss) before minority interests and extraordinary charge                                  |                                                       |                                | (3,427 | )      |       
|Minority interests                                                                                |                                                       |                                | 537    |        |       
|                                                                                                  |                                                       |                                |        |        |       
|Income (loss) before extraordinary charge                                                         |                                                       |                                | (2,890 | )      |       
|Extraordinary charge on debt prepayment (net of minority interests of $100 for December 31, 1999) |                                                       |                                |       |        |       
|                                                                                                  |                                                       |                                |        |        |       
|Net income (loss)                                                                                 |                                                       | $                              | (2,890 | )      | $     
|                                                                                                  |                                                       |                                |        |        |       
|Per Common Share  Basic and Diluted:                                                             |                                                       |                                |        |        |       
|                                                                                                  | Income (loss) per share  before extraordinary charge |                                | $      | (1.01  | )     
|                                                                                                  | Extraordinary charge                                  |                                |        |       |       
|                                                                                                  |                                                       |                                |        |        |       
|                                                                                                  | Net income (loss)                                     |                                | $      | (1.01  | )     
|                                                                                                  |                                                       |                                |        |        |       
|Weighted average shares outstanding  basic                                                       |                                                       |                                | 2,862  |        |       
|                                                                                                  |                                                       |                                |        |        |       
|Weighted average shares outstanding  diluted                                                     |                                                       |                                | 3,388  |        |       
|                                                                                                  |                                                       |                                |        |        |       

See accompanying notes to consolidated and combined financial statements.

22

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HORIZON GROUP PROPERTIES, INC.        Consolidated Statement of Changes in Shareholders' Equity and  Combined Statement of Changes in Net Assets(In thousands)

|                                  |  | Common Shares |  |   |    |  |   |        | 
|--------------------------------- |  | ------------- |  | - | -- |  | - | ------ | 
|
|
|Horizon Group Properties, Inc.    |  |               |  |   |    |  |   |        | 
|Shareholders' Equity              |  |               |  |   |    |  |   |        | 
|Balance, June 15, 1998            |  | 2,739         |  | $ | 27 |  | $ | 32,750 | 
|Units exchanged for common shares |  | 43            |  |   | 1  |  |   | 518    | 
|Net income                        |  |              |  |   |   |  |   |       | 
|                                  |  |               |  |   |    |  |   |        | 
|Balance, December 31, 1998        |  | 2,782         |  |   | 28 |  |   | 33,268 | 
|Units exchanged for common shares |  | 63            |  |   | 1  |  |   | 788    | 
|Net loss                          |  |              |  |   |   |  |   |       | 
|                                  |  |               |  |   |    |  |   |        | 
|Balance, December 31, 1999        |  | 2,845         |  |   | 29 |  |   | 34,056 | 
|Units exchanged for common shares |  | 25            |  |   |   |  |   | 350    | 
|Net Loss                          |  |              |  |   |   |  |   |       | 
|                                  |  |               |  |   |    |  |   |        | 
|Balance, December 31, 2000        |  | 2,870         |  | $ | 29 |  | $ | 34,406 | 
|                                  |  |               |  |   |    |  |   |        | 

Net Assets of Predecessor PropertiesNet assets at January 1, 1998

$
83,162Net distributions to Horizon


(4,625
)Net loss


(3,962
)Net assets at June 14, 1998

$
74,575


See accompanying notes to consolidated and combined financial statements.

23

---



HORIZON GROUP PROPERTIES, INC.        Consolidated and Combined Statements of Cash Flows(In thousands)

|                                                                                         |                                                | Horizon Group Properties, Inc.                                                                      |        |        |      
|---------------------------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------------------------------------------------------------------- | ------ | ------ | -----
|
|Cash flows from operating activities:                                                    |                                                |                                                                                                     |        |        |      
|Net income (loss)                                                                        |                                                | $                                                                                                   | (2,890 | )      | $    
|Gain on sale of assets                                                                   |                                                |                                                                                                     | (239   | )      |      
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                |                                                                                                     |        |        |      
|                                                                                         |                                                | Loss from joint ventures                                                                            |        |        |     
|                                                                                         |                                                | Minority interests in net income (loss)                                                             |        |        | (537 
|                                                                                         |                                                | Extraordinary charge on prepayment of debt, net of minority interests of $100 for December 31, 1999 |        |        |     
|                                                                                         |                                                | Depreciation                                                                                        |        |        | 5,294
|                                                                                         |                                                | Amortization                                                                                        |        |        | 445  
|                                                                                         |                                                | Provision for impairment                                                                            |        |        | 1,568
|                                                                                         | Changes in assets and liabilities:             |                                                                                                     |        |        |      
|                                                                                         |                                                | Restricted cash                                                                                     |        |        | 279  
|                                                                                         |                                                | Tenant accounts receivable                                                                          |        |        | (452 
|                                                                                         |                                                | Investments in and advances to joint ventures                                                       |        |        |     
|                                                                                         |                                                | Deferred costs and other assets                                                                     |        |        | (502 
|                                                                                         |                                                | Accounts payable and accrued expenses                                                               |        |        | (313 
|                                                                                         |                                                | Other liabilities                                                                                   |        |        | (56  
|                                                                                         |                                                | Prepaid rents and other tenant liabilities                                                          |        |        | (482 
|                                                                                         |                                                |                                                                                                     |        |        |      
|Net cash provided by operating activities                                                |                                                |                                                                                                     | 2,115  |        |      
|                                                                                         |                                                |                                                                                                     |        |        |      
|Cash flows from investing activities:                                                    |                                                |                                                                                                     |        |        |      
|Expenditures for building and improvements                                               |                                                |                                                                                                     | (1,818 | )      |      
|Proceeds from sale of real estate                                                        |                                                |                                                                                                     | 368    |        |      
|                                                                                         |                                                |                                                                                                     |        |        |      
|Net cash used in investing activities                                                    |                                                |                                                                                                     | (1,450 | )      |      
|                                                                                         |                                                |                                                                                                     |        |        |      
|Cash flows from financing activities:                                                    |                                                |                                                                                                     |        |        |      
|                                                                                         | Net distributions                              |                                                                                                     |        |       |      
|                                                                                         | Purchase of HGP partnership units              |                                                                                                     |        | (27    | )    
|                                                                                         | Principal payments on mortgages and other debt |                                                                                                     |        | (2,727 | )    
|                                                                                         | Proceeds from borrowings                       |                                                                                                     |        |       |      
|                                                                                         | Debt issue costs                               |                                                                                                     |        |       |      
|                                                                                         | Prepayment penalty                             |                                                                                                     |        |       |      
|                                                                                         |                                                |                                                                                                     |        |        |      
|Net cash provided by (used in) financing activities                                      |                                                |                                                                                                     | (2,754 | )      |      
|                                                                                         |                                                |                                                                                                     |        |        |      
|Net increase (decrease) in cash and cash equivalents                                     |                                                |                                                                                                     | (2,089 | )      |      
|Cash and cash equivalents:                                                               |                                                |                                                                                                     |        |        |      
|                                                                                         | Beginning of period                            |                                                                                                     |        | 4,955  |      
|                                                                                         |                                                |                                                                                                     |        |        |      
|                                                                                         | End of period                                  |                                                                                                     | $      | 2,866  |      
|                                                                                         |                                                |                                                                                                     |        |        |      

See accompanying notes to consolidated and combined financial statements.

24

---



HORIZON GROUP PROPERTIES, INC.  Notes to Consolidated and Combined Financial Statements

Note 1Formation of the Company

Horizon Group Properties, Inc. (together with its subsidiaries "HGP" or the "Company") is a self-administered and self-managed
Maryland corporation that was established in connection with the merger of Horizon Group, Inc., a Michigan corporation ("Horizon") with and into Prime Retail, Inc., a Maryland
corporation ("Prime") which was consummated on June 15, 1998 (the "Merger"). HGP's initial portfolio consisted of 14 factory outlet centers and one power center located in 12 states. Twelve of
the factory outlet centers and the power center were contributed to the Company by Horizon in connection with the consummation of the Merger pursuant to a Contribution Agreement entered into in
connection with the Merger (the "Contribution Agreement") and two factory outlet centers were purchased by the Company from Prime immediately subsequent to the consummation of the Merger.

Also
in connection with the Merger and pursuant to the Amended and Restated Agreement and Plan of Merger dated as of February 1, 1998 by and among Prime, Horizon, HGP and other
parties thereto (the "Merger Agreement"), the shares of Common Stock of the Company, $.01 par value per stock (the "Common Stock"), were distributed to the holders of Common Stock, Series B
Preferred Stock and Series C Preferred Stock of Prime and the holders of common stock of Horizon in accordance with the applicable exchange ratio for each such security as set forth in the
Merger Agreement.

The
operations of the Company are primarily conducted through a subsidiary limited partnership, Horizon Group Properties, L.P. ("HGP LP") in which the Company is the sole general
partner. As of December 31, 2000, HGP owns approximately 84.9% of the partnership interests (the "Common Units") of HGP LP. In connection with the Merger, the Common Units were distributed to
the original holders (other than Prime) of partnership interests of a limited partnership affiliate of Prime and a limited partnership affiliate of Horizon, respectively, in accordance with the
exchange ratios set forth in the Merger Agreement. Common Units are exchangeable for shares of Common Stock on a one-for-one basis at any time (or for an equivalent cash amount
at the Company's election).

The
Company owns Horizon's former administrative office building located in Norton Shores, Michigan and the following centers were owned by Horizon prior to the Merger and contributed
to the Company pursuant to the Contribution Agreement (collectively, such assets are referred to as the "Predecessor Properties" for periods prior to the Merger):



The
Merger was accounted for under the purchase method of accounting under which contributed assets acquired and liabilities assumed were recorded at their relative fair values as of
the date of the

25

---

Merger. The consolidated financial statements include the accounts of the Company's subsidiary, HGP LP and other wholly owned subsidiaries. The Company accounted for its investments in and advances to
two joint ventures using the equity method of accounting. Under this method of accounting, the net equity investment of the Company is reflected on the balance sheet and the statements of operations
include the Company's share of the net income or loss from joint ventures.

Immediately
after the Merger, the Company acquired the two properties listed below for total consideration of $26,015,000. Each property was purchased from an affiliate of Prime.



The
following summarizes the assets, liabilities and equity contributed to and assumed by the Company pursuant to the Contribution Agreement including the acquisition of the two
centers from Prime as of June 15, 1998. The amounts presented include purchase accounting adjustments made to the original preliminary estimates during 1999.

(In thousands)Real estate

$
141,158Other assets


21,258$
162,416Mortgages and other debt

$
115,514Other liabilities


6,362Minority interests


7,763Shareholders' equity


32,777$
162,416


Pursuant
to the Contribution Agreement, the Company agreed to assume, undertake to pay, satisfy and discharge when due in accordance with their terms certain assumed liabilities (the
"Assumed Liabilities"), which are defined to include all liabilities of Horizon which arise from the ownership and operation of the Predecessor Properties and include (i) all obligations to
indemnify present and former officers and directors of Horizon under certificates or articles of incorporation, by-laws, partnership agreements, employment agreements, indemnification
agreements or otherwise, for any matter existing or occurring after the Merger, (ii) all leases and related contracts, and service contracts, relating to any Contributed Asset (as defined in
the Contribution Agreement) and (iii) certain other specified obligations.

Also
pursuant to the Contribution Agreement, certain partnership interests in three joint ventures, MG Patchogue Limited Partnership and MG Patchogue II Limited Partnership, which own
the Bellport Factory Outlet Center, and MG Long Island Limited Partnership, which owns vacant land, were transferred from an affiliate of Horizon to HGP LP and an affiliate of HGP LP. These
partnership interests were subsequently transferred by the Company back to Prime on September 1, 1999 (see Note 10).

Note 2Summary of Significant Accounting Policies

Statements of Predecessor Properties

The financial statements for the dates and periods prior to the Merger reflect the results of operations, financial position, and cash flows of the Predecessor
Properties prior to the Merger as if the Company had been a separate entity and owned such assets for all periods presented. The historical results of operations and financial condition of the
Predecessor Properties are based on the manner in

26

---

which Horizon historically managed such net assets. Accordingly, the combined financial statements of the Predecessor Properties have been prepared using Horizon's historical basis of the assets and
liabilities and historical results of operations related to the Predecessor Properties. In this regard, because Horizon owned the Predecessor Properties, together with other properties which were not
contributed to the Company in connection with the Merger, the Predecessor Properties were not insulated from the obligations and commitments of Horizon. Certain assumptions relating to the allocation
of cash and cash equivalents, debt and financing costs, interest expense, general and administrative expenses, all of which were historically aggregated by Horizon, have been made in the combined
financial statements for the periods prior to the Merger. These statements have been combined based upon the historical common ownership and management of the properties.

These
statements include an allocation of the aggregate debt balances of Horizon (which had historically been secured by a pool of Horizon's assets) based upon the proportionate use
of debt proceeds by the Predecessor Properties compared to Horizon's total historical portfolio of properties. Financing costs were allocated based upon the same ratio. Interest expense has been
estimated based upon the aforementioned proportionate debt balances and the historical weighted average interest rate incurred by Horizon on its debt balances. The allocation was made in this manner
because management believes it best represented the use of funds borrowed during the periods presented and because allocating the debt in this manner results in the statements of operations of the
Predecessor Properties reflecting the stand-alone interest cost of doing business. General and administrative expenses of Horizon have been allocated to the Predecessor Properties based upon the ratio
of gross leasable area ("GLA") of the Predecessor Properties' portfolio compared to Horizon's total historical portfolio.

Net
contributions (distributions) are the net amounts advanced from and repaid to Horizon. Excess cash flows have been reflected as being distributed back to Horizon. Net
contributions represent
Horizon's funding of the Predecessor Properties' development cost needs in excess of cash flows generated from the Predecessor Properties' operations.

The
aforementioned allocations may not reflect actual balances had the Company existed as a separate entity. Management of the Company believes, however, that such allocations are
reasonable.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Real Estate and Depreciation

The carrying values of the Predecessor Properties for the periods prior to the Merger are stated at Horizon's historic cost, less accumulated depreciation. For
the periods subsequent to the Merger, the Predecessor Properties are stated on the books of the Company at fair value as of June 15, 1998, the date the Predecessor Properties were contributed
to the Company, less accumulated depreciation. The two centers purchased from an affiliate of Prime are stated at their purchase prices, less accumulated depreciation. Costs incurred for the
acquisition, development, construction and improvement of properties, as well as significant renovations and betterments to the properties, are capitalized. Maintenance and repairs are charged to
expense as incurred. Interest costs incurred with respect to qualified expenditures relating to the construction of assets are capitalized during the construction period.

At
December 31, 2000 and 1999, the Company had an aggregate cost basis of $233.5 million and $237.2 million, respectively, in its real estate assets for federal
income tax purposes. Amounts included

27

---

under buildings and improvements on the consolidated balance sheets include the following types of assets and are depreciated on the straight-line method over estimated useful lives which
are:

Buildings and improvements

31.5 yearsTenant improvements

10 years or lease term, if lessFurniture, fixtures or equipment

3-7 years


In
accordance with FASB Statement No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of", the
financial statements reflect impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash
flows estimated to be generated by those assets are less than the carrying amounts of those assets. The Company adjusts the net book value of real estate to fair value, if the sum of the expected
undiscounted future cash flows or sales proceeds is less than book value. For assets to be sold, impairment is measured as the difference between carrying value and fair value, less costs to dispose.
Fair value is based on estimated cash flows discounted at a risk-adjusted rate of interest or a value derived from comparable sales transactions in the marketplace or sales value, less
cost to dispose.

Cash Equivalents

The Company considers all liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Restricted Cash

Restricted cash consists of amounts deposited in accounts with the Company's primary lenders (see Note 9) and includes $1.3 million in capital
improvement and tenant allowance reserves, $1.6 million in real estate tax, insurance and ground lease escrows, and $.6 million for debt service and operating expenses at
December 31, 2000.

Investments in and Advances to Joint Ventures

Prior to September 1, 1999, the Company owned a 50% partnership interest in MG Patchogue Limited Partnership and a 45% partnership interest in and
interest bearing construction advances to MG Patchogue II Limited Partnership, which partnerships own the Bellport Outlet Center. The Company also owned a 95% interest in MG Long Island Limited
Partnership which owns 14 acres of raw land. Such interests were recorded at fair value upon formation of the Company based on the estimated fair value of the Company's interests in the underlying
real estate and related advances. The Company accounted for such investments (in consideration of its priority return position) under the equity method of accounting reflecting the Company's
attributable share of income and loss in the statements of operations. On September 1, 1999, the Company transferred its interests in these partnerships to Prime (see Note 10). No gain
or loss was recognized on this transfer.

Deferred Costs

Leasing and deferred financing costs are capitalized at cost. Amortization of deferred leasing costs is recorded on the straight-line method over
the life of the lease. Amortization of deferred financing costs is recorded using a method that approximates the effective interest method over the life of the related debt and is included as a
component of interest expense and amounted to $178,000 and $177,000 in 2000 and 1999, respectively.

28

---

Fair Value of Financial Instruments

The carrying amounts of the Company's debt approximate their fair values. The fair value of the Company's long-term debt is estimated using a
discounted cash flow analysis, based on the incremental borrowing rates for similar types of borrowing arrangements. The carrying value of cash and cash equivalents, receivables and payables
approximate their fair values due to their short-term nature.

Income Taxes

The Company has elected and currently intends to elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Code"). A REIT is a legal entity
that holds real estate interests, and, through payments of dividends to shareholders receives a deduction for such dividends for federal income tax purposes. As a REIT, HGP intends to distribute its
REIT taxable income to its shareholders and satisfy certain other requirements as defined in the Code so as to reduce or eliminate federal income tax liability. Based on the taxable loss generated
since the Merger, the Company was not obligated to make any dividend distributions to qualify as a REIT.

Horizon
also elected to be taxed as a REIT. As a REIT, Horizon was not taxed on income since it distributed its REIT taxable income to its shareholders and satisfied certain other
requirements as defined in the Code. Accordingly, neither the consolidated nor the combined financial statements include any federal income tax expense.

Minority Interests

Minority interests represent the interests of unitholders of HGP LP, other than the Company. The unitholder minority interest is adjusted at the end of each
period to reflect the ownership at that time. The unitholder minority interest in HGP was approximately 15.1% at December 31, 2000. During the year ended December 31, 2000, 25,098 units
were converted into shares of common stock and 8,296 units were purchased by the Company for cash at an amount equal to the value of an equivalent number of common shares.

Revenue Recognition

Leases with tenants are accounted for as operating leases. Minimum annual rentals are recognized on a straight-line basis over the term of the
respective leases. As a result of recording rental revenue on a straight-line basis, tenant accounts receivable include $821,000 and $437,000, as of December 31, 2000 and 1999,
respectively, which are expected to be collected over the remaining lives of the leases. Rents which represent basic occupancy costs, including fixed amounts and amounts computed as a function of
sales, are classified as base rent. Amounts which may become payable in addition to base rent and which are computed as a function of sales in excess of certain thresholds are classified as percentage
rents. For periods beginning on and after April 1, 1998, percentage rents are accrued on the basis of reported tenant sales only after the sales exceed the thresholds above which such rent is
due. For periods prior to April 1, 1998, percentage rents were accrued based upon an estimate of total percentage rent expected to be collected for the year. Expense recoveries based on common
area maintenance expenses and certain other expenses are accrued in the period in which the related expense is incurred.

Total
tenant accounts receivable are reflected net of reserves of $446,000 and $418,000 as of December 31, 2000 and 1999, respectively. The provision for doubtful accounts was
$271,000, $448,000 and $93,000 for the years ended December 31, 2000 and 1999 and for the period from June 15, 1998 to December 31, 1998, respectively.

29

---

Other Revenue

Other revenue consists primarily of interest income and income related to marketing services that is recovered from tenants pursuant to lease agreements and
income from tenants with lease terms of less than one year.

Share Options

The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), in accounting for
its options on common shares. Under APB 25, no compensation expense is recognized because the exercise price of the Company's employee share options equals or exceeds the market price of the
underlying shares at the date of grant.

Reclassifications

Certain reclassifications have been made to the previously reported statements of the Predecessor Properties in order to provide comparability with the
Company's statements reported herein. These reclassifications have not changed the previously reported results.

Note 3Leases

Space in the Company's centers is leased to various tenants under operating leases which are generally for one to five year periods. The leases usually grant
tenants renewal options and provide for additional or contingent rents based on certain operating expenses as well as tenants' sales volume. Minimum
future rentals to be received under non-cancelable leases for the HGP properties are summarized as follows:

(In thousands)2001

$
15,1872002


11,6382003


8,8782004


6,7752005


5,100Thereafter


17,026


The
above scheduled rentals are subject to the usual business risks associated with collection.

The
Company is the lessee under a land lease for one of the outlet centers under an operating lease agreement expiring in the year 2056. At December 31, 2000, minimum cash
rental commitments to the expiration date were $32 million, of which $.6 million is due in each of the next five years, adjusted biannually for changes in the Consumer Price Index. Land
lease expense for the years ended December 31, 2000 and 1999 was $557,000 and $547,000, respectively.

30

---

Note 4Summarized Financial Information

Historical condensed combined financial information of the joint ventures which owned the Bellport Outlet Center in Bellport, New York, in which the Company
held interests prior to September 1, 1999 (see Note 10), is summarized as follows:

For the eight months
ended August 31, 1999

For the year ended
December 31, 1998(In thousands)Total revenue

$
2,711

$
4,551Net loss


(1,317
)

(1,292
)Total assets


30,672


31,613Total liabilities


33,275


32,899


Note 5Impairment

In 2000, HGP entered into an agreement to sell its outlet center in Dry Ridge, Kentucky. Results of operations in 2000 include a charge for asset impairment of
$1.6 million to reduce the carrying value of this outlet center to its estimated sales value, less cost to dispose. The net carrying cost of $2.5 million for this outlet center was
transferred from real estate to assets held for sale as of December 31, 2000. In January 2001, this center was sold.

Note 6Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

|                                                           |                            | For the year ended
December 31, 2000 |        | For the year ended
December 31, 1999 |   | For the period from
June 15, 1998 to
December 31, 1998
|---------------------------------------------------------- | -------------------------- | ------------------------------------ | ------ | ------------------------------------ | - | ------------------------------------------------------
|
|Numerator:                                                 |                            |                                      |        |                                      |   |                                                       
|Net income (loss)  basic                                  |                            | $                                    | (2,890 | )                                    | $ | (875                                                  
|Minority Interests of unitholders                          |                            |                                      | (537   | )                                    |   | (31                                                   
|                                                           |                            |                                      |        |                                      |   |                                                       
|Net income (loss)  diluted                                |                            | $                                    | (3,427 | )                                    | $ | (906                                                  
|                                                           |                            |                                      |        |                                      |   |                                                       
|Denominator:                                               |                            |                                      |        |                                      |   |                                                       
|Weighted average common shares outstanding  basic         |                            |                                      | 2,862  |                                      |   | 2,823                                                 
|Effect of diluted securities:                              |                            |                                      |        |                                      |   |                                                       
|                                                           | Converting units to shares |                                      |        | 524                                  |   |                                                       
|                                                           | Employee stock options     |                                      |        | 2                                    |   |                                                       
|                                                           |                            |                                      |        |                                      |   |                                                       
|Weighted average shares outstanding  diluted              |                            |                                      | 3,388  |                                      |   | 3,389                                                 
|                                                           |                            |                                      |        |                                      |   |                                                       
|Net income (loss) per share  before extradordinary charge |                            | $                                    | (1.01  | )                                    | $ | (0.11                                                 
|Extraordinary charge                                       |                            |                                      |       |                                      |   | (0.20                                                 
|                                                           |                            |                                      |        |                                      |   |                                                       
|Net income (loss) per share  basic and diluted            |                            | $                                    | (1.01  | )                                    | $ | (0.31                                                 
|                                                           |                            |                                      |        |                                      |   |                                                       

Outstanding
stock options and the potential conversion of units to shares were excluded in 1999 in computing diluted earnings per share because the effects of such items were
anti-dilutive.

31

---

Note 7Long Term Stock Incentive Plan

The Company has adopted the HGP 1998 Long Term Stock Incentive Plan (the "HGP Stock Plan") to advance the interests of the Company by encouraging and enabling
the acquisition of a financial interest in the Company by key employees and directors of the Company and its subsidiaries through equity awards. The Company reserved 338,900 common shares for issuance
pursuant to the HGP Stock Plan.

The
fair value of options granted for the purpose of presenting pro forma information, in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), has been estimated using a Black-Scholes option pricing model with the following weighted-average assumptions:

|                                |  | For the year ended
December 31, 2000 |  | For the year ended
December 31, 1999 |  | For the period from
June 15, 1998 to
December 31, 1998
|------------------------------- |  | ------------------------------------ |  | ------------------------------------ |  | ------------------------------------------------------
|Expected dividend yield         |  | 0.00%                                |  | 0.00%                                |  | 0.00%                                                 
|Expected stock price volatility |  | 1.053                                |  | 1.086                                |  | .593                                                  
|Risk free interest rate         |  | 5.11%                                |  | 6.44%                                |  | 5.22%                                                 
|Expected life of options        |  | 10 years                             |  | 10 years                             |  | 10 years                                              

The
Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Net
income (loss) and net income (loss) per share (basic and diluted) for the years ended December 31, 2000 and 1999, and for the period from June 15, 1998 to
December 31, 1998, computed on a pro forma basis under requirements of SFAS 123 equals $(2,980,000) and $(1.04), $(989,000) and $(.35), and $255,000 and $.09, respectively.

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

|                                     |  | For the year ended
December 31, 2000 |  | For the year ended
December 31, 1999 |  | For the period from
June 15, 1998 to
December 31, 1998
|------------------------------------ |  | ------------------------------------ |  | ------------------------------------ |  | ------------------------------------------------------
|
|Outstanding, beginning of the period |  | 283,000                              |  | $5.00  $6.49                        |  | 313,000                                               
|Granted                              |  | 133,000                              |  | $3.40  $4.49                        |  | 30,000                                                
|Exercised                            |  |                                     |  |                                     |  |                                                      
|Canceled                             |  | 90,000                               |  | $5.00  $6.49                        |  | 60,000                                                
|                                     |  |                                      |  |                                      |  |                                                       
|Outstanding, End of the Period       |  | 326,000                              |  | $3.40  $6.49                        |  | 283,000                                               
|                                     |  |                                      |  |                                      |  |                                                       

32

---

The
following table represents the weighted average per share price option information:

|                                                |  | For the year ended
December 31, 2000 |      | For the year ended
December 31, 1999 |   | For the period from
June 15, 1998 to
December 31, 1998
|----------------------------------------------- |  | ------------------------------------ | ---- | ------------------------------------ | - | ------------------------------------------------------
|Weighted average fair value of options granted  |  | $                                    | 3.39 |                                      | $ | 3.36                                                  
|Weighted average fair value of options canceled |  |                                      | 4.33 |                                      |   | 4.77                                                  
|Weighted average exercise price on grant date   |  |                                      | 3.48 |                                      |   | 5.00                                                  

The
weighted average exercise price for options outstanding at December 31, 2000 and 1999 was $5.12 and $6.22, respectively. The weighted average contractual life of options
outstanding at December 31, 2000 and 1999 was 6.77 years and 8.6 years, respectively.

Note 8Commitments

The Company has outstanding commitments for capital expenditures on leases signed at December 31, 2000 in the amount of $277,000 for tenant allowances,
$182,000 for construction costs and $24,000 for brokerage commissions. These costs are expected to be paid during 2001 and a portion will be reimbursed from the capital improvement escrow (see
Note 2).

Note 9Mortgage Debt and Other Liabilities

On June 15, 1998, certain wholly owned affiliates of the Company entered into a credit facility (the "HGP Credit Facility") with Nomura Asset Capital
Corporation, succeeded by Capital Corporation of America, ("Nomura") providing for initial borrowings of $108.2 million. The outstanding balance equaled $55.3 million and
$57.1 million as of December 31, 2000 and 1999, respectively. On July 9, 1999, the Company refinanced six of the centers originally securing the HGP Credit Facility and repaid
$46.8 million of principal related to those centers. The HGP Credit Facility is guaranteed by HGP and HGP LP. The HGP Credit Facility matures in July 2001 and bears interest at the
30-day LIBOR Rate (as defined in the HGP Credit Facility) plus 1.90% per annum. The effective rate was 8.63% and 8.36% as of December 31, 2000 and 1999, respectively. The HGP Credit
Facility is cross-collateralized by mortgages on six of the Company's operating outlet centers and one power center at December 31, 2000. The HGP Credit Facility requires monthly payments of
interest. In addition, the HGP Credit Facility requires principal payments totaling $1.5 million, $1.5 million and $2.0 million during the first, second and third years,
respectively, payable in equal monthly installments. The HGP Credit Facility contains restrictions on the ability of HGP and HGP LP to incur additional indebtedness and, under certain circumstances,
requires the Company to enter into an interest rate lock arrangement which would fix the interest rate on the full outstanding amount of the HGP Credit Facility. The Company is currently pursuing
refinancing of the HGP Credit Facility in anticipation of the July 2001 maturity date. There can be no assurances that management will be successful. The consolidated financial statements do
not contain any adjustments that may ultimately arise from the outcome of this uncertainty. In connection with the HGP Credit Facility, the Company established certain escrow accounts and cash
collection accounts for the benefit of Nomura which are classified on the balance sheet of the Company as restricted cash (see Note 2).

The
Company incurred a 1% repayment fee in connection with the prepayment of $46.8 million, as described above. This fee was an amount negotiated with Nomura and was recognized
as a component of the extraordinary charge on prepayment of debt in 1999. The Company is recognizing repayment fees of 2% related to the remaining amounts due under the HGP Credit Facility as an
expense over the remaining term of the HGP Credit Facility.

33

---

On July 9, 1999, the Company completed a $46.7 million debt financing with Morgan Guaranty Trust Company of New York (the "JP Morgan Loans"). The JP Morgan Loans consist
of (i) nonrecourse loans with initial balances totaling $22.9 million secured by three factory outlet centers located in Daleville, Indiana, Somerset, Pennsylvania and Tulare, California
and (ii) nonrecourse loans with initial balances totaling $23.8 million secured by three factory outlet centers located in Gretna, Nebraska, Sealy, Texas and Traverse City, Michigan. The
outstanding balance of both loans totaled $45.9 million and $46.4 million at December 31, 2000 and 1999, respectively. The loans bear interest at a fixed rate of 8.46%, mature on
August 1, 2009, and require the monthly payment of interest and principal based on a 25-year amortization schedule. The proceeds from the loans, together with Company funds, were
used to repay $46.8 million of indebtedness under the HGP Credit Facility, as described above. The Company has established certain escrow accounts in connection with this loan which are
classified on the balance sheet of the Company as restricted cash (see Note 2).

The
Company has a loan secured by a mortgage on the office building and related equipment, which the Company utilizes as a corporate office in Norton Shores, Michigan. The principal
balance on this loan was $2.5 million on December 31, 2000 and $2.7 million on December 31, 1999. The corporate office
loan matures in December 2002, bears an interest rate of LIBOR plus 2.50% per annum, and requires monthly debt service payments of $22,500. The effective rate was 9.2% and 8.5% at
December 31, 2000 and 1999, respectively.

The
Company owns approximately 95 acres of undeveloped land in Muskegon, Michigan which it acquired as part of the consideration from the transfer of its interests in the Bellport
Outlet Center (see Note 10). Portions of this land are subject to land contracts with a total balance of $590,000 and $776,000 as of December 31, 2000 and 1999, respectively. The
interest rates vary from 9.5% to 10.0%. Monthly debt service payments total $5,200 through June 2001 and $4,200 from that time through January 2002 with balloon payments due on these two
dates of $125,000 and $458,000, respectively.

The
Company also had a $4.0 million revolving credit facility that matured April 30, 1999 and required monthly interest payments calculated at the lender's prime rate.
In January 1999, Prime loaned the Company $1.0 million to make a principal repayment against this credit facility and on April 30, 1999, loaned the Company an additional
$3.0 million to repay this credit facility in full, all at an interest rate of 10.0% (the "Prime Loan"), pursuant to the terms of a Working Capital Agreement between the Company and Prime (the
"Working Capital Agreement"). This loan was repaid on September 1, 1999 in connection with the transfer of the Company's interests in the Bellport, New York center to Prime (see
Note 10).

In
connection with the Merger, Prime became potentially liable for, or agreed to guarantee certain indebtedness of the Company. As of December 31, 2000, the components of such
indebtedness included (1) the loan collateralized by the Company's corporate office building in Norton Shores, Michigan (with a principal balance of $2.5 million on December 31,
2000 and $2.7 million as of December 31, 1999), and (2) $10.0 million of the Company's obligations under its credit facility with Nomura. The terms of the Working Capital
Agreement require the Company to repay any outstanding balance on the Prime Loan or other related indebtedness on which Prime is contingently liable to the extent of net proceeds from an equity
offering. The Company has indemnified Prime Retail for any amounts advanced under the guarantees. There is a $400,000 annual fee due to Prime under the guarantees.

Cash
paid for interest for the years ended December 31, 2000 and 1999 was $9.5 million and $9.3 million respectively. For the period from June 15, 1998 to
December 31, 1998, cash paid for interest was $4.4 million. Cash paid for interest was $6.0 million for the period from January 1, 1998 to June 14, 1998. The
weighted average rate of interest was 8.4% and 7.5% for the years ended December 31, 2000 and 1999, respectively, was 7.8% for the period from June 15, 1998 to December 31, 1998
and was 8.8% for the period from January 1, 1998 to June 14, 1998.

34

---

Mortgages and other debt, as of December 31, 2000 and 1999, consists of the following (in thousands):

2000

1999Mortgage notes payable

$
103,763

$
106,219Land contracts and other


638


909$
104,401

$
107,128


Debt
maturities subsequent to 2000 are as follows (in thousands):

2001

$
56,0992002


3,5892003


6852004


7352005


812Thereafter


42,481$
104,401


Note 10Related Party Transactions

The
Company utilizes Thilman & Filippini as its agent for insurance and risk management programs. E. Thomas Thilman is a Director of the Company and a partner in
Thilman & Filippini. During the years
ended December 31, 2000 and 1999, the Company paid premiums totaling approximately $739,000 and $666,000, respectively, on insurance policies placed by Thilman & Filippini.

The
Company sub-leases office 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
Director of the Company. During the years ended December 31, 2000 and 1999 the Company incurred rent expense of $95,000 and $121,000, respectively.

Prior
to the Merger, Horizon entered into an agreement (the "PVH Agreement") with Phillips Van Heusen, Inc. ("PVH") which modified certain provisions of PVH leases for the
benefit of Horizon in exchange for certain payments. Prime is liable for future payments related to the PVH Agreement, but the Company was obligated to pay $2,334,000 to Prime for payments related to
the PVH Agreement. This amount was paid in connection with the transfer of the Company's interests in the Bellport Outlet Center and the settlement of the Working Capital Agreement discussed below.

In
connection with the Merger, the Company entered into a Working Capital Agreement with Prime (the "Working Capital Agreement"). The Working Capital Agreement provides that Prime
will transfer to the Company sufficient cash to result in net working capital of $545,000, after consideration of the current assets and current liabilities of the Predecessor Properties and the two
centers which the Company purchased from Prime as of the date of the Merger. At the date of the merger, Prime transferred $3.0 million to the Company as a partial payment of amounts due under
the Working Capital Agreement. On September 1, 1999, the Company reached an agreement with Prime to settle amounts due under the Working Capital Agreement in connection with the transfer of its
interests in the joint ventures related to the outlet center in Bellport, New York (see Note 1). The consideration for the transfer of the Bellport interests was $7.5 million and
approximately 95 acres of land in Muskegon, Michigan subject to $800,000 of land contract payments. No gain or loss was recognized in conjunction with the settlement of the Working Capital Agreement.

The
proceeds from the settlement of the Working Capital Agreement and the transfer of the Bellport interests were used to repay $9.3 million of current and future obligations
owed by the

35

---

Company to Prime. These obligations included (i) $2.2 million which the Company had borrowed from Prime to make principal repayments on the Nomura facility,
(ii) $4.0 million which the Company had borrowed from Prime to repay a credit facility assumed in the Merger, (iii) $2.3 million related to the PVH Agreement, and
(iv) $800,000 related to the guarantee fee associated with Prime's guarantee of certain of the Company's debt obligations (see Note 9). The Company also received $230,000 in cash.

On
April 18, 2000, the Company made a $1.5 million loan to Prime Outdoor, LLC, an affiliate of Prime Group, Inc. The Prime Group, Inc. is an affiliate of
Michael W. Reschke, a Director of the Company. The interest rate on the loan was at 10% and was 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 units in Horizon Group Properties, LP owned by Prime Group, Inc. and its affiliates. The loan was approved by a committee of independent
directors of the Company. The loan was repaid on June 9, 2000.

Note 11Shareholders' Equity

The authorized capital stock of the Company consists of 50,000,000 shares of common stock, 50,000,000 shares of preferred stock, and 50,000,000 shares of
excess stock which consists of 25,000,000 shares of excess common stock and 25,000,000 shares of excess preferred stock, each $.01 par value per share. Each share of common stock entitles the holder
to one vote on all matters submitted to a vote of stockholders, including the election of directors, and, except as provided with respect to any other class or series of stock, the holders of HGP
common stock will possess exclusive voting power. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding HGP common stock can elect
all of the directors then standing for election. Holders of HGP common stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any securities of HGP. There are no shares of preferred stock or excess stock currently issued and outstanding.

Note 12Segment Information

The Company operates thirteen shopping centers located in ten states. The Company separately evaluates the performance 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 a single dominant shopping center segment. The Company evaluates
performance and allocates resources primarily based on the Funds From Operations ("FFO") expected to be generated by an investment in each individual shopping center. FFO is a widely used measure of
the operating performance of REITs, which provides a relevant basis for comparison to other REITs. FFO, as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), means net
income excluding extraordinary items (as defined by accounting principles generally accepted in the United States ("GAAP") and gains and losses from sales of depreciable operating property, plus
depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. The definition, approved by NAREIT in October 1999, clarified the treatment of
non-recurring items that were not considered "extraordinary" under GAAP. NAREIT adopted this new definition effective January 1, 2000, and required that prior periods be restated
accordingly. The FFO balances below reflect the gain on sale of undepreciable land parcels. FFO should not be considered as an alternative to net income computed

36

---

under accounting principles generally accepted in the United States. A reconciliation of income (loss) before minority interests and extraordinary charge to diluted FFO is as follows:

|                                                                 |                                                 | Horizon Group Properties, Inc. |        |       |  
|---------------------------------------------------------------- | ----------------------------------------------- | ------------------------------ | ------ | ----- | -
|
|
|Income (loss) before minority interests and extraordinary charge |                                                 | $                              | (3,427 | )     | $
|                                                                 | FFO adjusted depreciation and amortization (1)  |                                |        | 5,376 |  
|                                                                 | Provision for impairment                        |                                |        | 1,568 |  
|                                                                 | Extraordinary charge, net of minority interests |                                |        |      |  
|                                                                 |                                                 |                                |        |       |  
|                                                                 | FFO                                             |                                | $      | 3,517 |  
|                                                                 |                                                 |                                |        |       |  

---

Notes:

Phillips
Van Heusen Corp. ("PVH") is the only tenant from which the Company derived more than 10% of its total revenues for the period June 15, 1998 to December 31,
1998. PVH represented 11.1% of total revenues for that period. During the years ended December 31, 2000 and 1999 no single tenant provided more than 10% of the Company's total revenues.

The
line item entitled general and administrative expenses on the Company's statements of operations represents corporate level general and administrative expenses.

Note 13Land Sale Transactions

On October 6, 1999, the Company sold six acres of land in Muskegon, Michigan to CBL & Associates Properties, Inc. ("CBL")
and was reimbursed for prior development efforts. The Company received $600,000 in cash and a $520,000 note. Interest is imputed on this non-interest bearing note and it is due at the
earlier of (i) CBL's completion of construction of a regional mall with three anchor tenants or (ii) two years. No gain or loss was recognized on this sale.

On
November 9, 2000 the Company sold an outparcel located in front of its power center in Norton Shores, Michigan to Delta Investments Associates, LLC for $375,000. A gain on
sale of $239,000 is reflected on the statement of operations.

37

---



HORIZON GROUP PROPERTIES, INC.  Schedule III  Real Estate and Accumulated Depreciation  DECEMBER 31, 2000

|                            |       |   |            | Initial Cost to Company |   | Costs Capitalized
Subsequent to
Initial Development or
Acquisition |            | Gross Amount at which Carried at Close of Period |            |             |   |       
|--------------------------- | ----- | - | ---------- | ----------------------- | - | ------------------------------------------------------------------ | ---------- | ------------------------------------------------ | ---------- | ----------- | - | ------
|
|Dry Ridge                   |       | $ | 2,284,200  |                         | $ |                                                                   |            | $                                                |           |             | $ |      
|Holland                     |       |   | 2,007,700  |                         |   | 630,100                                                            |            |                                                  | 4,467,800  |             |   |      
|Laughlin                    |       |   | 16,160,900 |                         |   | 8,100                                                              |            |                                                  | 20,366,800 |             |   |      
|Medford                     |       |   | 9,866,900  |                         |   | 241,600                                                            |            |                                                  | 11,045,900 |             |   |      
|Monroe                      |       |   | 3,860,500  |                         |   | 437,000                                                            |            |                                                  | 8,610,100  |             |   |      
|Lakeshore                   |       |   | 8,478,600  |                         |   | 653,500                                                            |            |                                                  | 9,736,000  |             |   |      
|Sealy                       |       |   | 10,935,300 |                         |   | 489,400                                                            |            |                                                  | 12,308,300 |             |   |      
|Somerset                    |       |   | 2,609,400  |                         |   | 622,600                                                            |            |                                                  | 6,415,000  |             |   |      
|Traverse City               |       |   | 5,120,800  |                         |   | 898,600                                                            |            |                                                  | 4,606,700  |             |   |      
|Tulare                      |       |   | 9,182,000  |                         |   | 1,282,200                                                          |            |                                                  | 7,916,700  |             |   |      
|Warrenton                   |       |   | 12,648,800 |                         |   | 1,264,100                                                          |            |                                                  | 13,265,100 |             |   |      
|Daleville                   |       |   | 10,708,300 |                         |   | 147,200                                                            |            |                                                  | 14,271,700 |             |   |      
|Gretna                      |       |   | 7,364,000  |                         |   | 1,268,700                                                          |            |                                                  | 9,849,700  |             |   |      
|Miscellaneous/Corporate (2) |       |   | 3,174,000  |                         |   | 4,016,100                                                          |            |                                                  | 3,276,400  |             |   | 89,400
|                            |       |   |            |                         |   |                                                                    |            |                                                  |            |             |   |       
|                            | Total |   | $          | 104,401,400             |   | $                                                                  | 11,959,200 |                                                  | $          | 126,136,200 |   | $     
|                            |       |   |            |                         |   |                                                                    |            |                                                  |            |             |   |       

Depreciation of the Company's investment in buildings and improvements reflected in the Statements of Operations is calculated over the estimated useful lives of the assets as
follows:

Buildings 31.5
years              Improvements 10 years or lease term, if less

(1)
All properties except the Corporate Office are collateral for borrowings of $55.3 million from Nomura Asset Capital Corporation and $45.9 million from Morgan Guaranty Trust Company
of New York, at December 31, 2000. For the Nomura loan, the amounts shown represent allocated loan amounts for each property pursuant to the loan agreement with Nomura.

(2)
Includes $713,000 of cost and $474,000 of accumulated depreciation for furniture and equipment for the corporate office.

The
aggregate cost of property included above for federal income tax purposes is approximately $233.5 million as of December 31, 2000.

38

---



HORIZON GROUP PROPERTIES  SCHEDULE III  NOTES  DECEMBER 31, 2000

1. Reconciliation of Real Estate Properties:

The following table reconciles the Real Estate Properties from June 15, 1998 to December 31, 2000:

|                             |                                  | Year Ended
December 31, 2000        |             | Year Ended
December 31, 1999 |           | For the Period from
June 15, 1998 to
December 31, 1998
|---------------------------- | -------------------------------- | ----------------------------------- | ----------- | ---------------------------- | --------- | ------------------------------------------------------
|Balance, beginning of period |                                  | $                                   | 148,572,400 |                              | $         | 144,975,400                                           
|                             | Additions during period          |                                     |             |                              |           |                                                       
|                             |                                  | Improvements of existing properties |             |                              | 1,876,300 |                                                       
|                             | Final purchase allocations, net  |                                     |             |                             |           |                                                       
|                             | Retirements                      |                                     |             | (383,500                     | )         |                                                       
|                             | Write-down to net book value (B) |                                     |             | (310,200                     | )         |                                                       
|                             | Transfer of assets held for sale |                                     |             | (2,467,500                   | )         |                                                       
|                             | Write down for impaired property |                                     |             | (1,568,300                   | )         |                                                       
|                             |                                  |                                     |             |                              |           |                                                       
|Balance, end of period       |                                  | $                                   | 145,719,200 |                              | $         | 148,572,400                                           
|                             |                                  |                                     |             |                              |           |                                                       

The
following table reconciles the accumulated depreciation from June 15, 1998 to December 31, 2000:

|Balance, beginning of period |                           | $                                | 7,154,000  |          | $         | 2,387,100 |         | $         |         
|---------------------------- | ------------------------- | -------------------------------- | ---------- | -------- | --------- | --------- | ------- | --------- | ---------
|                             | Additions during period   |                                  |            |          |           |           |         |           |          
|                             |                           | Depreciation                     |            |          | 5,294,400 |           |         | 4,789,400 |          
|                             |                           | Write-down to net book value (B) |            |          | (310,200  | )         |         |          |          
|                             | Retirements during period |                                  |            | (221,900 | )         |           | (22,500 | )         |          
|                             |                           |                                  |            |          |           |          
|Balance, end of period       |                           | $                                | 11,916,300 |          | $         | 7,154,000 |         | $         | 2,387,100
|                             |                           |                                  |            |          |           |          

---

Notes:

39

---



ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None

PART III

ITEM 10DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 2001.
Information concerning the Executive Officers is included in Part I on page 8.

ITEM 11EXECUTIVE COMPENSATION

Incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 2001.

ITEM 12SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT

Incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 2001.

ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 2001.

PART IV

ITEM 14EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)
Financial Statements

The
financial statements listed in the index as shown under Item 8 are filed as part of this annual report.

2.
Financial Statement Schedules

The
financial statement schedule listed in the index as shown under Item 8 is filed as part of this annual report.

3.
Exhibits

The
exhibits listed in the index to exhibits as shown under this Item 14(a) are filed as a part of this annual report.

(b)
Reports on Form 8-KNone

40

---



Horizon Group Properties, Inc.  Index to Exhibits  (Item 14(a))

|Description    |  |                                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 3(i)   |  | Articles of Incorporation of Horizon Group Properties, Inc. (the "Company")(1)                                                                                                                                                                                                                                                                                                                                              
|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)  |  | Articles of Amendment and Restatement of the Company (8)                                                                                                                                                                                                                                                                                                                                                                    
|Exhibit 4.1    |  | Specimen certificate for common stock, $0.1 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 Corporation(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)                                                                                                                                                                                                                                                                                                                                                                                                 

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|Exhibit 10.20 |  | Fixed Rate Note dated as of July 9, 1999 between Gretna, Sealy, Traverse City Outlet Centers, LLC 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, LLC, 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 dated as of April 25, 2000 (7)                                                                                                                                                                                                   
|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 II, 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 Thomas A. Rumptz and the Company.                                                                                                                                                                                    
|Exhibit 10.37 |  | Amendment to Employment Agreement between Andrew F. Pelmoter and the Company.                                                                                                                                                                                  

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Signatures

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

|HORIZON GROUP PROPERTIES, INC.
|------------------------------

|                                          |  |                                                                                                         |  | 
|----------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | 
|/s/GARY J. SKOIENGary J. Skoien           |  | Director and Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) |  | 
|/s/DAVID R. TINKHAMDavid R. Tinkham       |  | Chief Financial Officer (Principal Financial Officer)                                                   |  | 
|/s/MICHAEL W. RESCHKEMichael W. Reschke   |  | Director                                                                                                |  | 
|/s/MARGARET A. GILLIAMMargaret A. Gilliam |  | Director                                                                                                |  | 
|/s/JIM EDGARGovernor Jim Edgar            |  | Director                                                                                                |  | 
|/s/E. THOMAS THILMANE. Thomas Thilman     |  | Director                                                                                                |  | 

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