**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****  Quarterly ReportPursuant to Section 13 or 15(d)**

**of the Securities Exchange Actof 1934**

 

**For the quarterly period ended September 30, 2003**

 

**OR**

 

**o****  Transition ReportPursuant to Section 13 or 15(d)**

**of the Securities Exchange Actof 1934**

 

**Commission file number: 0-24123**

 

**HORIZON GROUP PROPERTIES, INC.**

(Exactname of Registrant as specified in its Charter)

 

| **Maryland**                                                                       |   | **38-3407933**                        |
|------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction  of incorporation or organization)                   |   | (I.R.S.  employer identification no.) |
|                                                                               |   |                                  |
| **77  West Wacker Drive, Suite 4200, Chicago , IL**                                |   | **60601**                             |
| (Address  of principal executive offices)                                          |   | (Zip  Code)                           |
|                                                                               |   |                                  |
| **(312)  917-8870**                                                                |
| (Registrant’s  telephone number, including area code)                         |
|                                                                               |   |                                  |
| **Not Applicable**                                                                 |
| Former  name, former address and former fiscal year, if changed since last report. |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes   ý    No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule12b-2 of theExchange Act)

 

Yes   o    No  ý

 

**Numberof common shares outstanding at November 10, 2003  2,870,194**

 

 

----

 

HORIZONGROUP PROPERTIES, INC.

Indexto Form 10-Q

September30, 2003

 
| Part I.   Financial Information:                                                                                            |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                  |   |
| Item 1.  Financial Statements (unaudited)                                                                                        |   |
|                                                                                                                                  |   |
| Condensed  Consolidated Statements of Operations of the Company for the Three Months  Ended September 30, 2003 and September 30, 2002 |   |
|                                                                                                                                  |   |
| Condensed  Consolidated Statements of Operations of the Company for the Nine Months  Ended September 30, 2003 and September 30, 2002  |   |
|                                                                                                                                  |   |
| Condensed  Consolidated Balance Sheets of the Company at September 30, 2003 and December  31, 2002                                    |   |
|                                                                                                                                  |   |
| Condensed  Consolidated Statements of Cash Flows of the Company for the Nine Months  Ended September 30, 2003 and September 30, 2002  |   |
|                                                                                                                                  |   |
| Notes  to Condensed Consolidated Financial Statements                                                                                 |   |
|                                                                                                                                  |   |
| Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations                            |   |
|                                                                                                                                  |   |
| Item 3.   Quantitative and Qualitative Disclosure of Market Risk                                                                 |   |
|                                                                                                                                  |   |
| Item 4.  Controls and Procedures                                                                                                 |   |
|                                                                                                                                  |   |
| Part II.  Other Information:                                                                                                     |   |
|                                                                                                                                  |   |
| Item 1.   Legal Proceedings                                                                                                      |   |
| Item 2.   Changes in Securities                                                                                                  |   |
| Item 3.   Defaults Upon Senior Securities                                                                                        |   |
| Item 4.   Submission of Matters to a Vote of Security Holders                                                                    |   |
| Item 5.   Other Information                                                                                                      |   |
| Item 6.   Exhibits or Reports on Form 8-K                                                                                        |   |
|                                                                                                                                  |   |
| Signatures                                                                                                                            |   |

 

2

----

 

HORIZONGROUP PROPERTIES, INC.

CondensedConsolidated Statements of Operations

(unaudited)

 
|                                                                   |   | **Three months ended  September 30, 2003** |   | **Three months ended  September 30, 2002** |   |
|------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
|                                                                   |   | **(thousands, except per share data)**     |   |
| **REVENUE**                                                            |   |                                       |   |                                       |   |
| Base  rent                                                             |   | $                                          | 3,312  |                                       | $      | 3,392 |   |
| Percentage  rent                                                       |   | 34                                         |   | 30                                         |   |
| Expense  recoveries                                                    |   | 681                                        |   | 692                                        |   |
| Other                                                                  |   | 279                                        |   | 64                                         |   |
| Total  revenue                                                         |   | 4,306                                      |   | 4,178                                      |   |
|                                                                   |   |                                       |   |                                       |   |
| **EXPENSES**                                                           |   |                                       |   |                                       |   |
| Property  operating                                                    |   | 1,203                                      |   | 1,217                                      |   |
| Real  estate taxes                                                     |   | 387                                        |   | 327                                        |   |
| Land  lease and other                                                  |   | 161                                        |   | 149                                        |   |
| Depreciation  and amortization                                         |   | 860                                        |   | 986                                        |   |
| General  and administrative                                            |   | 1,010                                      |   | 778                                        |   |
| Interest                                                               |   | 2,692                                      |   | 2,122                                      |   |
| Total  expenses                                                        |   | 6,313                                      |   | 5,579                                      |   |
|                                                                   |   |                                       |   |                                       |   |
| Loss  from continuing operations before minority interests             |   | (2,007                                     | )      | (1,401                                     | )      |
|                                                                   |   |                                       |   |                                       |   |
| Minority  interests                                                    |   | 572                                        |   | 202                                        |   |
|                                                                   |   |                                       |   |                                       |   |
| Loss  from continuing operations                                       |   | (1,435                                     | )      | (1,199                                     | )      |
|                                                                   |   |                                       |   |                                       |   |
| Gain  on sale of real estate, net of minority interests                |   | —                                     |   | 22                                         |   |
|                                                                   |   |                                       |   |                                       |   |
| Income/(loss)  from discontinued operations, net of minority interests |   | 8,116                                      |   | (686                                       | )      |
|                                                                   |   |                                       |   |                                       |   |
| Net  income/(loss)                                                     |   | $                                          | 6,681  |                                       | $      | (1,863 | ) |
|                                                                   |   |                                       |   |                                       |   |
| **Per  common share – basic and diluted:**                        |   |                                       |   |                                       |   |
| Loss  from continuing operations                                       |   | $                                          | (0.50  | )                                          | $      | (0.42 | ) |
| Net  income/(loss)                                                     |   | $                                          | 2.33   |                                       | $      | (0.65 | ) |
|                                                                   |   |                                       |   |                                       |   |
| Weighted  average common shares outstanding                            |   |                                       |   |                                       |   |
| Basic                                                                  |   | 2,870                                      |   | 2,870                                      |   |
| Diluted                                                                |   | 3,664                                      |   | 3,386                                      |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

3

----

 

HORIZONGROUP PROPERTIES, INC.

Condensed Consolidated Statements of Operations

(unaudited)

 
|                                                                   |   | **Nine months ended  September 30, 2003** |   | **Nine months ended  September 30, 2002** |   |
|------------------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|
|                                                                   |   | **(thousands, except per share data)**    |   |
| **REVENUE**                                                            |   |                                      |   |                                      |   |
| Base  rent                                                             |   | $                                         | 9,875  |                                      | $      | 9,855 |   |
| Percentage  rent                                                       |   | 138                                       |   | 120                                       |   |
| Expense  recoveries                                                    |   | 2,147                                     |   | 2,092                                     |   |
| Other                                                                  |   | 685                                       |   | 408                                       |   |
| Total  revenue                                                         |   | 12,845                                    |   | 12,475                                    |   |
|                                                                   |   |                                      |   |                                      |   |
| **EXPENSES**                                                           |   |                                      |   |                                      |   |
| Property  operating                                                    |   | 3,670                                     |   | 3,468                                     |   |
| Real  estate taxes                                                     |   | 1,217                                     |   | 1,135                                     |   |
| Land  lease and other                                                  |   | 581                                       |   | 487                                       |   |
| Depreciation  and amortization                                         |   | 2,722                                     |   | 2,943                                     |   |
| General  and administrative                                            |   | 2,434                                     |   | 2,066                                     |   |
| Interest                                                               |   | 6,696                                     |   | 6,370                                     |   |
| Total  expenses                                                        |   | 17,320                                    |   | 16,469                                    |   |
|                                                                   |   |                                      |   |                                      |   |
| Loss  from continuing operations before minority interests             |   | (4,475                                    | )      | (3,994                                    | )      |
|                                                                   |   |                                      |   |                                      |   |
| Minority  interests                                                    |   | 1,258                                     |   | 585                                       |   |
|                                                                   |   |                                      |   |                                      |   |
| Loss  from continuing operations                                       |   | (3,217                                    | )      | (3,409                                    | )      |
|                                                                   |   |                                      |   |                                      |   |
| Gain  on sale of real estate, net of minority interests                |   | —                                    |   | 153                                       |   |
|                                                                   |   |                                      |   |                                      |   |
| Income/(loss)  from discontinued operations, net of minority interests |   | 19,292                                    |   | (2,045                                    | )      |
|                                                                   |   |                                      |   |                                      |   |
| Net  income/(loss)                                                     |   | $                                         | 16,075 |                                      | $      | (5,301 | ) |
|                                                                   |   |                                      |   |                                      |   |
| **Per  common share – basic and diluted:**                        |   |                                      |   |                                      |   |
| Loss  from continuing operations                                       |   | $                                         | (1.12  | )                                         | $      | (1.19 | ) |
| Net  income/(loss)                                                     |   | $                                         | 5.60   |                                      | $      | (1.85 | ) |
|                                                                   |   |                                      |   |                                      |   |
| Weighted  average common shares outstanding                            |   |                                      |   |                                      |   |
| Basic                                                                  |   | 2,870                                     |   | 2,870                                     |   |
| Diluted                                                                |   | 3,627                                     |   | 3,382                                     |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

4

----

 

HORIZONGROUP PROPERTIES, INC.

CondensedConsolidated Balance Sheets

(unaudited)

 
|                                                                                    |   | **September 30, 2003** |    | **December 31, 2002** |   |
|-----------------------------------------------------------------------------------------|--------|------------------------|---------|-----------------------|--------|
|                                                                                    |   | **(thousands)**        |    |
|                                                                                    |   |                   |    |                  |   |
| **ASSETS**                                                                              |   |                   |    |                  |   |
| Real  estate – at cost:                                                            |   |                   |    |                  |   |
| Land                                                                                    |   | $                      | 7,673   |                  | $      | 7,673 |   |
| Buildings  and improvements                                                             |   | 82,604                 |    | 80,366                |   |
| Less  accumulated depreciation                                                          |   | (14,561                | )       | (12,818               | )      |
|                                                                                    |   | 75,716                 |    | 75,221                |   |
| Land  held for investment                                                               |   | 30,600                 |    | —                |   |
| Total  net real estate                                                                  |   | 106,316                |    | 75,221                |   |
|                                                                                    |   |                   |    |                  |   |
| Cash  and cash equivalents                                                              |   | 1,845                  |    | 1,237                 |   |
| Restricted  cash                                                                        |   | 7,011                  |    | 2,707                 |   |
| Tenant  accounts receivable                                                             |   | 1,144                  |    | 1,072                 |   |
| Real  estate – discontinued operations                                             |   | 7,926                  |    | 21,055                |   |
| Deferred  costs (net of accumulated amortization of $1,234 and $793, respectively)      |   | 2,038                  |    | 2,146                 |   |
| Other  assets                                                                           |   | 1,903                  |    | 1,239                 |   |
| Total  assets                                                                           |   | $                      | 128,183 |                  | $      | 104,677 |   |
|                                                                                    |   |                   |    |                  |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                          |   |                   |    |                  |   |
| **Liabilities:**                                                                        |   |                   |    |                  |   |
|                                                                                    |   |                   |    |                  |   |
| Mortgages  and other debt – continuing operations                                  |   | $                      | 91,282  |                  | $      | 71,560 |   |
| Mortgages  and other debt – discontinued operations                                |   | 3,134                  |    | 32,192                |   |
| Accrued  interest                                                                       |   | 4,971                  |    | 6,741                 |   |
| Accounts  payable and other accrued expenses                                            |   | 4,523                  |    | 3,292                 |   |
| Prepaid  rents and other tenant liabilities                                             |   | 958                    |    | 1,170                 |   |
| Participation  interests and other liabilities                                          |   | 10,470                 |    | 716                   |   |
| Total  liabilities                                                                      |   | 115,338                |    | 115,671               |   |
|                                                                                    |   |                   |    |                  |   |
| **Minority  interests**                                                                 |   | 1,778                  |    | (1,966                | )      |
|                                                                                    |   |                   |    |                  |   |
| **Shareholders’  equity (deficit):**                                               |   |                   |    |                  |   |
| Common  shares ($.01 par value, 50,000 shares authorized, 2,870 issued and outstanding) |   | 29                     |    | 29                    |   |
| Additional  paid-in capital                                                             |   | 39,469                 |    | 35,451                |   |
| Accumulated  deficit                                                                    |   | (28,431                | )       | (44,508               | )      |
| Total  shareholders’ equity (deficit)                                              |   | 11,067                 |    | (9,028                | )      |
| Total  liabilities and shareholders’ equity (deficit)                              |   | $                      | 128,183 |                  | $      | 104,677 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

5

----

 

HORIZONGROUP PROPERTIES, INC.

CondensedConsolidated Statements of Cash Flows

(unaudited)

 
|                                                                                      |   | **Nine months ended  September 30, 2003** |   | **Nine months ended  September 30, 2002** |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                      |   | **(thousands)**                           |   |
| **Cash  flows from operating activities:**                                                |   |                                      |   |                                      |   |
| Net  income/(loss)                                                                        |   | $                                         | 16,075 |                                      | $      | (5,301 | ) |
| Net  gain on sale of real estate                                                          |   | (12,889                                   | )      | (153                                      | )      |
| Net  gain on debt restructure                                                             |   | (14,406                                   | )      | —                                    |   |
| Adjustments  to reconcile net income/(loss) to net cash provided by operating activities: |   |                                      |   |                                      |   |
| Minority  interests in net loss                                                           |   | (1,258                                    | )      | (585                                      | )      |
| Minority  interests in discontinued operations and gain on sale of real estate            |   | 7,441                                     |   | (361                                      | )      |
| Depreciation                                                                              |   | 2,447                                     |   | 3,456                                     |   |
| Amortization,  including deferred financing costs                                         |   | 557                                       |   | 1,104                                     |   |
| HGP  partnership unit grants                                                              |   | 225                                       |   | 120                                       |   |
| Changes  in assets and liabilities:                                                       |   |                                      |   |                                      |   |
| Restricted  cash                                                                          |   | (2,031                                    | )      | (535                                      | )      |
| Tenant  accounts receivable                                                               |   | (72                                       | )      | 224                                       |   |
| Deferred  costs and other assets                                                          |   | (3,377                                    | )      | (138                                      | )      |
| Accounts  payable and accrued expenses and accrued interest                               |   | (18                                       | )      | 4,333                                     |   |
| Participation  interests and other liabilities                                            |   | (472                                      | )      | (39                                       | )      |
| Prepaid  rents and other tenant liabilities                                               |   | (226                                      | )      | (122                                      | )      |
| **Net  cash provided by /(used in) operating activities**                                 |   | (8,004                                    | )      | 2,003                                     |   |
|                                                                                      |   |                                      |   |                                      |   |
| **Cash  flows from investing activities:**                                                |   |                                      |   |                                      |   |
| Acquisition  of land                                                                      |   | —                                    |   | (2,500                                    | )      |
| Acquisition  of land held for investment                                                  |   | (9,300                                    | )      | —                                    |   |
| Expenditures  for buildings and improvements                                              |   | (3,743                                    | )      | (180                                      | )      |
| Net  proceeds from sale of real estate                                                    |   | 13,594                                    |   | 635                                       |   |
| **Net  cash provided by/(used in) investing activities**                                  |   | 551                                       |   | (2,045                                    | )      |
|                                                                                      |   |                                      |   |                                      |   |
| **Cash  flows from financing activities:**                                                |   |                                      |   |                                      |   |
| Sale  of HGP LP partnership units                                                         |   | 1,350                                     |   | —                                    |   |
| Principal  payments on mortgages and other debt                                           |   | (9,783                                    | )      | (33,120                                   | )      |
| Proceeds  from borrowings                                                                 |   | 16,700                                    |   | 34,500                                    |   |
| Debt  issue costs                                                                         |   | (206                                      | )      | (1,474                                    | )      |
| **Net  cash provided by /(used in) financing activities**                                 |   | 8,061                                     |   | (94                                       | )      |
|                                                                                      |   |                                      |   |                                      |   |
| **Net  increase/(decrease) in cash and cash equivalents**                                 |   | 608                                       |   | (136                                      | )      |
|                                                                                      |   |                                      |   |                                      |   |
| **Cash  and cash equivalents:**                                                           |   |                                      |   |                                      |   |
| **Beginning  of period**                                                                  |   | 1,237                                     |   | 1,096                                     |   |
| **End  of period**                                                                        |   | $                                         | 1,845  |                                      | $      | 960 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

6

----

 

HORIZON GROUP PROPERTIES, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Note 1 - Formation ofthe Company

 

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

 

As of September 30,2003, HGP’s operating portfolio consisted of nine factory outlet centerslocated in seven states comprising an aggregate of approximately 1.8 millionsquare feet of gross leasable area (“GLA”). Eight of the nine factory outlet centers were contributed to the Companyby Horizon pursuant to a Contribution Agreement entered into in connection withthe Merger (the “Contribution Agreement”) and one factory outlet center waspurchased by the Company from Prime immediately subsequent to the consummationof the Merger.  At September 30, 2003,the Company owned and managed a total of 2.2 million square feet of GLA.

 

The operations of theCompany are primarily conducted through a subsidiary limited partnership,Horizon Group Properties, L.P. (“HGP LP”) of which the Company is the solegeneral partner.  As of September 30,2003, HGPI owned approximately 70.3% of the partnership interests (the “CommonUnits”) of HGP LP. In general, Common Units are exchangeable for shares of CommonStock on a one-for-one basis (or for an equivalent cash amount at the Company’selection).

 

On May 31, 2003 theCompany sold the partnership that owns two outlet centers located in Daleville,Indiana and Somerset, Pennsylvania.  Theinvestment group that acquired the centers includes Gary J. Skoien, Chairman,Chief Executive Officer and President of the Company and an affiliate of HowardAmster, a director and significant shareholder of the Company (see Note8).  The investment group has hired theCompany to manage and lease the two properties.  The leasing and management agreement provides that the companywill receive 50% of the net profit from the subsequent sale of the centersafter the owners receive a 12% annual return on their investment.  The independent directors of the Companyapproved this transaction and the Company believes the transaction reflectsmarket terms.

 

On June 13, 2003, theCompany purchased controlling interest in two partnerships, which ownapproximately 655 acres of land in Huntley, Illinois (“Huntley”) from affiliatesof The Prime Group, Inc. (“Prime Group”) Gary J. Skoien, Chairman, ChiefExecutive Officer and President of the Company is also the Executive VicePresident and Chief Operating Officer of Prime Group.  The independent directors of the Company approved thistransaction and the Company believes the transaction reflects marketterms.  This purchase was accounted forunder the purchase method of accounting under which assets acquired andliabilities assumed were recorded at their relative fair values as of the dateof the purchase.  The initial purchaseprice allocation estimates are preliminary and will be finalized upon obtainingadditional information regarding the liabilities assumed at acquisition.  Direct costs incurred for developmentactivities at Huntley are capitalized to Land Held for Investment on theCompany’s balance sheets, while indirect costs and holding costs are expensedin general and administrative expense on the Company’s statements ofoperations.  The Company had previouslyacquired a 3.25% net profits interest in Huntley in connection with a loan madeto Retail Partners (as defined herein) in March 2003.  The value of this interest is included in Land Held forInvestment on the balance sheets (see Note 5).

 

The following summarizesthe preliminary estimate of the assets acquired and liabilities assumed by theCompany on June 13, 2003 pursuant to the purchase of Huntley:

 
|                                   |   | **(In thousands)** |   |
|----------------------------------------|--------|--------------------|--------|
| Land  held for investment              |   | $                  | 30,250 |   |
| Restricted  cash                       |   | 2,060              |   |
|                                   |   | $                  | 32,310 |   |
|                                   |   |               |   |
| Mortgages  and other debt              |   | $                  | 10,706 |   |
| Accounts  payable and accrued expenses |   | 2,174              |   |
| Other  liabilities                     |   | 10,130             |   |
| Contributed  capital (cash paid)       |   | 9,300              |   |
|                                   |   | $                  | 32,310 |   |

 

7

----

 

On August 19, 2003, theCompany sold the power center located in Norton Shores, Michigan and adjacentland parcels for $22.7 million.  Themortgage loan secured by the power center and made by Greenwich CapitalFinancial Products, Inc. was assumed by the purchaser (see Note 8).  Pursuant to the requirements of SFAS 144,the net real estate assets of this property and its results of operations havebeen classified as discontinued operations. A gain of $10.9 million was recognized and is included in Income from DiscontinuedOperations on the Company’s statements of operations.

 

Note 2 - Summary ofSignificant Accounting Policies

 

Interim Period FinancialPresentation

 

The accompanyingunaudited condensed consolidated financial statements are prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements, and, therefore, should be read in conjunctionwith the Company’s Annual Report on Form 10-K as updated on Form 8-K datedSeptember 26, 2003 for the year ended December 31, 2002.

 

The financial statementshave been prepared in conformity with accounting principles generally acceptedin the United States, which require management to make estimates andassumptions that affect the reported amounts of assets and liabilities(including disclosure of contingent assets and liabilities) at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates.

 

In the opinion ofmanagement, all adjustments necessary for a fair statement of the financialposition and results of operations for the interim periods presented have beenincluded in these financial statements and are of a normal and recurringnature.  Certain amounts in priorperiods have been reclassified to conform to the current presentation.

 

Operating results forthe three and nine months ended September 30, 2003 are not necessarilyindicative of the results that may be achieved in future periods.

 

Principles ofConsolidation

 

The condensedconsolidated financial statements include the accounts of the Company and allsubsidiaries that the Company controls, including HGP LP.  The company considers itself to control anentity if it is the majority owner of and has voting control over suchentity.  All significant intercompanybalances and transactions have been eliminated in consolidation.

 

Impact of RecentlyIssued Accounting Standards

 

In April 2002, theFinancial Accounting Standards Board (“FASB”) issued Statement 145, “Rescissionof FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 1 andTechnical Correction” (“SFAS No. 145”). Statement 4, “Reporting Gains and Losses from Extinguishment of Debt”(“SFAS No. 4”), required that gains and losses from the extinguishment of debtthat were included in the determination of net income be aggregated and, ifmaterial, classified as an extraordinary item. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4require the Company to reclassify prior period items into continuing operations,including those recorded in the current period, that do not meet theextraordinary classification. Additionally, future gains and losses related to debt extinguishment maybe required to be classified in income from continuing operations.  The provisions of SFAS No. 145 related tothe rescission of SFAS No. 4 became effective in fiscal years beginning afterMay 15, 2002.  The Company recorded again on the extinguishment of debt in the nine months ended September 30, 2003which is included in Income from Discontinued Operations on the Company’sstatements of operations.

 

8

----

 

Real Estate andDepreciation

 

Costs incurred for theacquisition, development, construction and improvement of properties, as well assignificant renovations and betterments to the properties, are capitalized.Maintenance and repairs are charged to expense as incurred. Interest costsincurred with respect to qualified expenditures relating to the construction ofassets are capitalized during the construction period.  During the three and nine months endedSeptember 30, 2003, $23,000 and $25,000, respectively, of interest wascapitalized related to the construction of Phase II of the outlet center inTulare, California.

 

Amounts included underbuildings and improvements on the condensed consolidated balance sheets includethe following types of assets and are depreciated on the straight-line methodover estimated useful lives, which are:

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

 

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets”, the Company recordsimpairment losses on long-lived assets used in operations when events andcircumstances indicate that the assets might be impaired and the undiscountedcash flows estimated to be generated over their expected holding periods areless than the carrying amounts of those assets.  For assets to be held in the portfolio, impairment losses aremeasured as the difference between carrying value and fair value.  For assets to be sold, impairment ismeasured as the difference between carrying value and fair value, less costs todispose.  Fair value may be based uponestimated cash flows discounted at a risk-adjusted rate of interest, comparableor anticipated sales in the marketplace, or estimated replacement cost, asadjusted to consider the costs of retenanting and repositioning thoseproperties which have significant vacancy issues, depending on the facts andcircumstances of each property.

 

Depreciation andamortization expense includes charges for unamortized capitalized costs relatedto unscheduled tenant move-outs totaling $6,000 and $25,000 for the threemonths ended September 30, 2003 and 2002, respectively, and $115,000 and$92,000 for the nine months ended September 30, 2003 and 2002, respectively,both excluding properties classified as discontinued operations.

 

Cash Equivalents

 

The Company considersall liquid investments with a maturity of three months or less when purchasedto be cash equivalents.

 

Restricted Cash

 

Restricted cash consistsof amounts deposited in accounts with (1) the Company’s primary lenders inconnection with certain loans (see Note 5), (2) in escrow accounts forinfrastructure requirements related to land sales in Huntley and futureinfrastructure expenses and interest payments related to Huntley and (3) withthe trustee for the TIF Bonds (as hereinafter defined) until certificates ofoccupancy are received for previously sold Huntley land parcels which securethe US Bank Mortgage (see Note 5).  AtSeptember 30, 2003, the escrow accounts related to the Company’s primarylenders include approximately $1.0 million in capital improvement and tenantallowance reserves, $707,000 in real estate tax and insurance escrows, andapproximately $839,000 for debt service and operating expenses, including$114,000 of cash flow remitted as debt service which has not yet been appliedto the loans on the three JP Morgan Loans which remain in default (see Note5).  The Huntley infrastructure escrowaccounts total $3.0 million and the US Bank Mortgage account has a balance ofapproximately $1.5 million at September 30, 2003.

 

Tenant AccountsReceivable

 

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

 

9

----

 

Total tenant accountsreceivable are reflected net of reserves of $157,000 and $314,000 as ofSeptember 30, 2003 and December 31, 2002, respectively.  The provision for doubtful accounts was$24,000 and $43,000 for the three months ended September 30, 2003 and 2002,respectively, and $105,000 and $87,000 for the nine months ended September 30,2003 and 2002, respectively.  Thischarge is included in the line item entitled “Land lease and other” on thestatement of operations.

 

Discontinued Operations

 

Periodically, in thecourse of reviewing the performance of its portfolio, management may determinethat it is appropriate for the Company to offer certain properties for sale,and accordingly, such properties will be classified as discontinued operationson the Company’s balance sheets.  Inaccordance with SFAS 144, assets held for sale are valued at the lower ofcarrying value or fair value less costs to dispose.  For fiscal years beginning after December 15, 2001, SFAS 144requires that the results of operations and gain/(loss) on real estateproperties sold or held for sale subsequent to December 31, 2001 be reflectedin the consolidated statements of operations as “Income from DiscontinuedOperations” for all periods presented. As of September 30, 2003, the Company is actively marketing thefollowing assets for sale: the single tenant building in Roseville, Michiganleased to Petsmart, Inc., the 103,000 square foot strip building at the outletcenter in Monroe, Michigan, and 8 parcels of vacant land totaling approximately88 acres. Pursuant to the requirements of SFAS 144, the Company has reclassifiedthe real estate assets for these properties to Real Estate-DiscontinuedOperations on the balance sheets and reports the revenue and expenses from theproperties as Income from Discontinued Operations on the statements ofoperations.  The Company ceaseddepreciating the building in Monroe, Michigan at September 30, 2003.  In addition, operations from the outletcenters located in Daleville, Indiana and Somerset, Pennsylvania, which weresold in May 2003 and the power center located in Norton Shores, Michigan whichwas sold in August 2003 are also included in the discontinued operations lineitems on the balance sheets and statements of operations.  SFAS 144 also requires that prior periodfinancial statements presented are also reclassified for comparability.  This reclassification has no effect on theCompany’s previously reported net income or loss.

 

Deferred Costs 

 

Deferred leasing costsconsist of fees and direct internal costs incurred to initiate and renewoperating leases and are amortized on the straight-line method over the initiallease term or renewal period.  Deferredfinancing costs are amortized as interest expense over the life of the relateddebt.

 

Income Taxes 

 

The Company has electedto be taxed as a REIT under Sections 856 through 860 of the Internal RevenueCode of 1986, as amended (the “Code”). A REIT is a legal entity that holds real estate interests and receives adeduction for dividends paid to its shareholders for federal income taxpurposes.  HGP intends to distribute itsREIT taxable income to its shareholders and satisfy certain other requirementsas defined in the Code so as to reduce or eliminate federal income taxliability.  Based on its taxable loss inthe current period and past fiscal years, the Company is not and has not beenobligated to make any dividend distributions to qualify as a REIT.  Accordingly, the condensed consolidatedfinancial statements do not include any federal income tax expense.

 

Minority Interests

 

Minority interestsrepresent the interests of unitholders of HGP LP, other than HGPI in the netearnings and net equity of HGP LP.  Theunitholder minority interest in HGP LP was approximately 29.7% at September 30,2003.  On March 13, 2003, HGPI sold261,268 units in HGP LP to Howard Amster, a director and principal shareholderof HGPI, for aggregate consideration of $1.35 million or $5.16 per unit.  These units cannot be converted into sharesof Common Stock of HGPI.  Proceeds inexcess of HGPI’s carrying value of these units was recognized as an increase inadditional paid in capital.  HGPI mayconsider additional sale of units in HGP LP to Mr. Amster or others in thefuture.  There were no unit conversionsor repurchases in the three or nine months ended September 30, 2003 or 2002.

 

10

----

 

Revenue Recognition

 

Leases with tenants areaccounted for as operating leases. Minimum annual rentals are recognized on astraight-line basis over the terms of the respective leases.  As a result of recording rental revenue on astraight-line basis, tenant accounts receivable include $390,000 and $402,000as of September 30, 2003 and December 31, 2002, respectively, which is expectedto 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, areclassified as base rent.  Amounts whichmay become payable in addition to base rent and which are computed as afunction of sales in excess of certain thresholds are classified as percentagerents and are accrued after the reported tenant sales only after the salesexceed the applicable thresholds. Expense recoveries based on common area maintenance expenses and certainother expenses are accrued in the period in which the related expense isincurred.

 

Other Revenue

 

Other revenue consistsprimarily of interest income, income related to marketing services that isrecovered from tenants pursuant to lease agreements and income from tenantswith lease terms of less than one year.

 

Share Options

 

The Company has electedto follow Accounting Principles Board Opinion No. 25 “Accounting for StockIssued to Employees” (“APB 25”), in accounting for its options on commonshares.  Under APB 25, no compensationexpense is recognized because the exercise price of the Company’s employeeshare options equals or exceeds the market price of the underlying shares atthe date of grant.

 

Legal Proceedings

 

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

 

11

----

 

Note 3 - Earnings PerShare

 

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

 
|                                                                                                                              |   | **Three months ended  September 30, 2003**        |   | **Three months ended  September 30, 2002** |   | **Nine months ended  September 30, 2003** |   | **Nine months ended  September 30, 2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                                              |   | **(in thousands, except per share  information)** |   |
| **Numerator:**                                                                                                                    |   |                                              |   |                                       |   |                                      |   |                                      |   |
| Net  income/(loss) – basic                                                                                                   |   | $                                                 | 6,681  |                                       | $      | (1,863                                    | )      | $                                         | 16,075 |   | $ | (5,301 | ) |
| Minority  interests of unitholders (in loss from continuing operations, discontinued  operations and gain on sale of real estate) |   | 1,840                                             |   | (324                                       | )      | 4,919                                     |   | (923                                      | )      |
| Net  income/(loss) – diluted                                                                                                 |   | $                                                 | 8,521  |                                       | $      | (2,187                                    | )      | $                                         | 20,994 |   | $ | (6,224 | ) |
|                                                                                                                              |   |                                              |   |                                       |   |                                      |   |                                      |   |
| **Denominator:**                                                                                                                  |   |                                              |   |                                       |   |                                      |   |                                      |   |
| Weighted  average shares outstanding – basic                                                                                 |   | 2,870                                             |   | 2,870                                      |   | 2,870                                     |   | 2,870                                     |   |
| Effect  of dilutive securities:                                                                                                   |   |                                              |   |                                       |   |                                      |   |                                      |   |
| Converting  units to shares                                                                                                       |   | 781                                               |   | 516                                        |   | 754                                       |   | 512                                       |   |
| Employee  stock options                                                                                                           |   | 13                                                |   | —                                     |   | 3                                         |   | —                                    |   |
| Weighted  average shares outstanding - diluted                                                                                    |   | 3,664                                             |   | 3,386                                      |   | 3,627                                     |   | 3,382                                     |   |
|                                                                                                                              |   |                                              |   |                                       |   |                                      |   |                                      |   |
| Net  income/(loss) per share – basic and diluted                                                                             |   | $                                                 | 2.33   |                                       | $      | (0.65                                     | )      | $                                         | 5.60   |   | $ | (1.85 | ) |
|                                                                                                                              |   |                                              |   |                                       |   |                                      |   |                                      |   |
| Loss  from continuing operations                                                                                                  |   | $                                                 | (1,435 | )                                          | $      | (1,199                                    | )      | $                                         | (3,217 | ) | $ | (3,409 | ) |
| Loss  from continuing operations per share – basic and diluted                                                               |   | $                                                 | (0.50  | )                                          | $      | (0.42                                     | )      | $                                         | (1.12  | ) | $ | (1.19 | ) |

 

Outstanding stockoptions and the potential conversion of units to shares were excluded incomputing diluted earnings per share because the effect was anti-dilutive.

 

Minority interests ofunitholders excludes the minority interests for the non-convertible unitspurchased by Howard Amster.

 

Note 4 - Long Term StockIncentive Plan

 

The Company has adoptedthe HGP 1998 Long Term Stock Incentive Plan (the “HGP Stock Plan”) to advancethe interests of the Company by encouraging and enabling the acquisition of afinancial interest in the Company by key employees and directors of the Companyand its subsidiaries through equity awards. The Company reserved 338,900 common shares for issuance pursuant to theHGP Stock Plan and options covering 326,000 shares were outstanding atSeptember 30, 2003.  The Company usesthe intrinsic value method of accounting for it stock – based compensation.

 

12

----

 

The following table setsforth net loss and net loss per share computed on a proforma basis under therequirements of SFAS 123.

 
|                                                                                                         |   | **Three  months  ended  September 30,  2003** |   | **Three  months  ended  September 30,  2002** |   | **Nine  months  ended  September 30,  2003** |   | **Nine  months  ended  September 30,  2002** |   |
|--------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                         |   |                                          |   |                                          |   |                                         |   |                                         |   |
| Net income/(loss) - basic                                                                                    |   | $                                             | 6,681  |                                          | $      | (1,863                                       | )      | $                                            | 16,075 |   | $ | (5,301 | ) |
| Add stock-based compensation expense included in net income/(loss)                                           |   | —                                        |   | —                                        |   | —                                       |   | —                                       |   |
| Deduct stock-based compensation expense determined under fair value  based method, net of minority interests |   | 23                                            |   | 6                                             |   | 45                                           |   | 27                                           |   |
|                                                                                                         |   |                                          |   |                                          |   |                                         |   |                                         |   |
| Proforma net income/(loss) - basic and diluted                                                               |   | $                                             | 6,658  |                                          | $      | (1,869                                       | )      | $                                            | 16,030 |   | $ | (5,328 | ) |
|                                                                                                         |   |                                          |   |                                          |   |                                         |   |                                         |   |
| Income/(loss) per share:                                                                                     |   |                                          |   |                                          |   |                                         |   |                                         |   |
| Basic and diluted - as reported                                                                              |   | $                                             | 2.33   |                                          | $      | (0.65                                        | )      | $                                            | 5.60   |   | $ | (1.85 | ) |
| Basic and diluted - proforma                                                                                 |   | $                                             | 2.32   |                                          | $      | (0.65                                        | )      | $                                            | 5.59   |   | $ | (1.86 | ) |

 

 

Note 5 - Mortgage Debtand Other Liabilities

 

*HGP Credit Facility*

 

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”),which initially matured on July 11, 2001 (the “Initial Maturity Date”).  The HGP Credit Facility was acquired fromNomura by CDC Mortgage Capital, Inc. (“CDC”). On July 30, 2001, certain of the terms of the HGP Credit Facility weremodified, including the maturity date, which was extended to July 11, 2002 (the“Extended Maturity Date”).  On July 11,2002, the Company repaid in full the HGP Credit Facility with the proceeds ofloans originated by UBS Warburg Real Estate Investments Inc. (“UBS”) and BealBank, S.S.B. (“Beal Bank”).

 

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

 

The UBS Senior Loans matureJuly 11, 2009, require monthly principal payments based on a 25-yearamortization schedule and bear interest at a fixed rate of 8.15%.  The outstanding balances of these loanstotaled $21.7 million and $21.9 million at September 30, 2003 and December 31,2002, respectively.  These loans alsorequire the monthly funding of escrow accounts for the payment of future debtservice, real estate taxes, insurance, capital and tenant improvements andleasing commissions (see Note 2).  Fundsin excess of those specified in the loan agreements are disbursed to the newentities at least monthly.

 

13

----

 

The UBS Mezzanine Loans matureJuly 11, 2005 and may be prepaid without penalty after July 11, 2004.  These loans require monthly payments basedon a three-year amortization schedule and bear interest at a fixed rate of 17.0%.  The outstanding balances of these loanstotaled $2.4 million and $3.1 million at September 30, 2003 and December 31,2002, respectively.

 

Beal Bank provided two loansinitially totaling $7.0 million (the “Beal Bank Loans”) and consisted of (i) a$3.0 million loan secured by vacant land located in Norton Shores, Michigan andFruitport Township, Michigan (the “Beal Bank Loan I”), and (ii) a $4.0 millionloan secured by the outlet center in Monroe, Michigan (the “Beal Bank LoanII”).  These loans are cross-collateralizedand are recourse to the Company.  TheBeal Bank Loans mature July 10, 2005. Principal payments of up to $2.0 million are permitted without penaltyat any time and the loans may be prepaid in whole or in part without penaltyafter July 10, 2004.  In connection withthe Company’s sale of the vacant land in Norton Shores, Michigan in August2003, $1.0 million was repaid on each of the Beal Bank Loans and the Beal BankLoans were cross defaulted with the Huntley Beal Loan.  The Company also granted a second mortgageon Huntley to Beal Bank as security for the Beal Bank Loans.  In addition, the Company granted Beal Bank afirst priority pledge and security interest in the net proceeds resulting fromthe sale of the partnerships that own the outlet center located in Laughlin,Nevada.  The balance of the Beal BankLoan I was $2.0 million and Beal Bank Loan II was $3.0 million at September 30,2003.

 

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

 

The Beal Bank Loan II isguaranteed by Prime Retail up to a maximum amount of $4.0 million (the“Prime-Beal Guaranty”).  Mr. Skoien andMr. Amster, Directors of the Company, are members of the board of Directors ofPrime Retail.  The Prime-Beal Guarantywas released on August 19, 2003, pursuant to the agreement, when the totaloutstanding balance of the Beal Bank Loans was reduced to $5.0 million.  The Company was obligated to make quarterlypayments of $15,000 to Prime Retail as long as this guaranty was in effect.  Prime had guaranteed $10.0 million ofobligations under the HGP Credit Facility, (the “Prime Retail Guarantee”).  In connection with the Prime RetailGuarantee, HGP paid Prime Retail a fee of $400,000 per annum from June 15, 1998through June 15, 2001.  In connectionwith the extension of the maturity date of the HGP Credit Facility, PrimeRetail reaffirmed its obligations with respect to the Prime RetailGuarantee.  From June 15, 2001 throughJune 15, 2002, the Company paid Prime Retail an annual fee of $150,000.  Pursuant to the Prime Retail Guarantee,Prime Retail was also the guarantor of the indebtedness related to theCompany’s corporate office building with National City Bank, which was repaidon August 19, 2003 (see Other Borrowings below).

 

On June 29, 2001, theCompany completed a $3.5 million refinancing of its outlet center in Holland,Michigan, with Republic Bank.  Theoutstanding balance of this loan was $3.3 million and $3.4 million at September30, 2003 and December 31, 2002, respectively. The loan is for a term of five years, requires monthly debt servicepayments of $30,000 based on a twenty-year amortization schedule, and bearsinterest at a fixed rate of 8.21%.  Thenet proceeds from the loan were used to reduce the balance of the HGP CreditFacility.

 

On August 19, 2003, theCompany sold its power center and several acres of adjacent vacant land locatedin Norton Shores, Michigan.  The powercenter had been security for a $16.0 million loan provided by Greenwich CapitalFinancial Products, Inc. (“Greenwich”) in July 2001.  This loan was assumed by the purchaser.  The non-recourse loan was for a term of ten years, requiredmonthly payments based on a 30-year amortization schedule and bore interest ata fixed rate of 7.647%.  The outstandingbalance of this loan was $15.7 million at August 19, 2003 and $15.8 million atDecember 31, 2002.  In connection withthe Greenwich loan, title to Lakeshore Marketplace was transferred to a newentity, Lakeshore Marketplace, LLC, a wholly owned subsidiary of theCompany.  Lakeshore Marketplace, LLC,and its managing member, Lakeshore Marketplace Finance Company, Inc., wererestricted from owning any assets other than Lakeshore Marketplace and couldnot incur additional liabilities, other than normal trade payables.  All of the assets of Lakeshore Marketplace,LLC were pledged as security for the Greenwich loan.

 

*JP Morgan Loans*

 

On July 9, 1999 theCompany completed a debt financing totaling $46.7 million with Morgan GuarantyTrust Company of New York (the “JP Morgan Loans”).  The JP Morgan Loans initially consisted of (i) loans totaling$22.9

 

14

----

 

million secured by threefactory outlet centers located in Daleville, Indiana, Somerset, Pennsylvaniaand Tulare, California (the “DST Loans”) and (ii) loans totaling $23.8 millionsecured by three factory outlet centers located in Gretna, Nebraska, Sealy,Texas and Traverse City, Michigan (the “GST Loans”).  In the absence of a default, each loan bears interest at a fixedrate of 8.46%, matures on August 1, 2009 and requires the monthly payment ofinterest and principal based on a 25-year amortization schedule.  Both pools of loans are non-recourse toHGPI, subject to certain customary exceptions.

 

On October 10, 2001, theCompany notified the servicers of the JP Morgan Loans that the net cash flowfrom the properties securing the loans was insufficient to fully pay therequired monthly debt service.  TheCompany remits monthly all available cash flow, after a reserve for monthlyoperating expenses, as partial payment of the debt service.  The failure to pay the full amount dueconstitutes a default under the loan agreements which would allow therespective lenders to exercise their various remedies contained in the loanagreements, including application of escrow balances to delinquent payments andforeclosure on the properties which collateralize the loans.  The interest rate applicable during theoccurrence and continuance of an Event of Default (as defined in the loanagreements) is 13.46%.  In addition, apenalty of 5.0% of each monthly installment is imposed in the event that suchmonthly installment is not timely made in full.  The default interest and monthly penalty have been accrued in theconsolidated financial statements since October 2001.  Interest expense for the three months ended September 30, 2003and 2002 includes $315,000 and $453,000, respectively, and for the nine monthsended September 30, 2003 and 2002 includes $1.4 million and $1.3 million,respectively, for these charges, excluding properties classified asdiscontinued operations.

 

On May 22, 2003, theCompany restructured the DST Loans.  Therestructuring involved (1) the acquisition of the loans secured by outletcenters located in Daleville, Indiana and Somerset, Pennsylvania (the “Dalevilleand Somerset Loans”) which had an aggregate principal balance of $13.2 million,excluding accrued interest and penalties, and (2) the reinstatement of the loansecured by an outlet center in Tulare, California (the “Tulare Loan”) for atotal payment by the Company of $1.98 million. The funds for this transaction were provided by a $2.0 million loan madeon May 20, 2003 from an affiliate of Howard Amster, a director and significantshareholder of the Company.  On May 30,2003 this loan was repaid in full in connection with the sale of the centers inDaleville, Indiana and Somerset, Pennsylvania to an investment group includingGary J. Skoien, Chairman, Chief Executive Officer and President of the Companyand Howard Amster.  The independentdirectors of the Company approved this transaction and the Company believesthis transaction reflects market terms. The restructuring of the Tulare Loan resulted in the immediateforegiveness of $798,000 of accrued penalties and default interest.  Additional accrued interest of $448,000 wasforgiven when the Company made the scheduled debt service payments throughSeptember 2003.  Pursuant to FASBStatement No. 15 “Accounting by Debtors and Creditors for Troubled Debt Restructurings”,the carrying amount and prospective effective interest rate on the Tulare Loanwas adjusted for the forgiven interest and penalties applicable to thisproperty.  At September 30, 2003, theTulare Loan had an outstanding principal balance of $8.9 million and anunamortized restructuring adjustment of $1.2 million which will be amortized asa reduction of future interest expense under the restructured loan.  The Tulare Loan is no longer indefault.  The gain on debt restructuringrelated to the Daleville and Somerset Loans of $14.4 million is included inIncome from Discontinued Operations on the statement of operations because thetwo properties were sold on May 30, 2003 (see Note 8).  The Company remains in default on the GSTLoans.  The Company and the specialservicer of the GST Loans are currently negotiating a restructuring of the GSTLoans.  There can be no assurance thatsuch negotiations will result in any settlement of the loans or anymodification of the terms of the loans (see Note 10 — Subsequent Events)

 

The JP Morgan Loans requirethe monthly funding of escrow accounts for the payment of real estate taxes,insurance and capital improvements. Such escrow accounts totaled $269,000 at September 30, 2003.  These escrow accounts are classified on thebalance sheet as restricted cash (see Note 2). The Company continues to manage the properties which secure the JPMorgan Loans pursuant to management agreements which are subject tocancellation by the servicers of the loans with respect to the loans whichremain in default.  The Company receivesfees of approximately $12,000 per month for such services.

 

The declining results ofoperations resulting in the inability to service the JP Morgan Loans was judgedto represent an indicator of possible impairment in the value of the collateralproperties.  The Company estimated thevalue of the six centers that collateralize the loans and concluded that thecarrying value of four of the centers exceeded the fair values of thosecenters.  Accordingly, the results ofoperations for the third quarter of 2001 include a provision for assetimpairment of $18.0 million, including $9.2 million related to properties whichare included in Income from

 

15

----

 

Discontinued Operations,representing a write-down of the carrying values of the assets to theirestimated fair values.  Based oncontinuing negotiations with the lender and additional declines in occupancyand revenues, the Company recorded an additional provision for asset impairmentof $17.0 million in the fourth quarter of 2002, including $8.9 million relatedto properties which are included in Income from Discontinued Operations, tofurther reduce the carrying values of the same four properties.  The aggregate carrying value of the realestate of properties collateralizing the GST Loans was approximately $9.9million at September 30, 2003.  Thecurrent outstanding loan balances of the GST Loans totaled $22.9 million, plusaccrued interest and penalties of approximately $4.7 million.  If the lender were to foreclose on the GSTProperties, the Company would record a gain for the difference between thecarrying value of the properties and related net assets and the outstandingloan balances and related liabilities. The estimation of the fair value of the centers which secure the GSTLoans involved estimates by management with respect to future cash flows,market conditions and valuations applicable to such properties.  Future events could occur which would causethe Company to conclude that the carrying values of the Company’s propertiesmay need to be further adjusted.

 

*Huntley Debt*

 

On June 12, 2003 theCompany borrowed $9.1 million from Amster Trading Company, an affiliate ofHoward Amster, a director and significant shareholder of the Company (the “HuntleyAmster Loan”) which funded the purchase of Huntley from Prime Group and itsaffiliates.  The Huntley Amster Loanbears interest at a rate of 11.0% per annum, payable monthly, and matures onJune 12, 2004, with the option for a one-year extension.  A one percent (1.0%) origination fee waspaid to Amster Trading Company.  TheHuntley Amster Loan may not be prepaid in whole or in part prior to September1, 2003 and thereafter requires a prepayment fee according to the followingschedule:

 
| **Payment made during the  period:**  |   | **Prepayment Fee** |   |
|---------------------------------------|--------|--------------------|--------|
| October  1, 2003 to October 31, 2003  |   | 2.0                | %      |
| November  1, 2003 to January 31, 2004 |   | 1.0                | %      |
| After  January 31, 2004               |   | None               |   |

 

The Huntley Amster Loanis guaranteed by HGPI and HGP LP and is secured by a pledge of the partnershipinterests in the partnerships which own Huntley, subject to any required lenderconsents.  The independent directors ofthe Company approved this transaction and the Company believes this transactionreflects market terms.

 

In connection with theCompany’s acquisition of Huntley, the Company assumed a $10.7 million loansecured by Huntley provided by Beal Bank with a principal balance of $10.7million at September 30, 2003 (the “Huntley Beal Loan”).  This loan requires monthly payments ofinterest at a rate equal to the greater of (i) the Wall Street Journal PrimeRate plus four percent (4%) or (ii) twelve percent (12%) per annum.  The Huntley Beal Loan may only be prepaid,prior to maturity, from the net proceeds from the sale of all or any portion ofthe collateral land.  Beal Bank mustapprove any collateral land sales in writing and may grant or withhold suchconsent in their sole discretion.  Theloan matures on October 31, 2004, and allows for a one-year extension upon thesatisfaction of certain customary conditions. The Huntley Beal Loan is guaranteed by HGPI.  In connection with the sale of the power center in Norton Shores,Michigan, Beal Bank granted the Company an option to extend the maturity of theHuntley Beal Loan until October 31, 2005. The Company agreed to cross default the Beal Bank Loans and the HuntleyBeal Loan.  The Company also granted asecond mortgage on Huntley to Beal Bank as security for the Beal Bank Loans.  In addition, the Company granted Beal Bank afirst priority pledge and security interest in the net proceeds resulting fromthe sale of the partnerships that own the outlet center located in Laughlin,Nevada.

 

Pursuant to the terms ofthe Amended and Restated Agreement and Assignment of Net Profits Interest datedOctober 27, 1999, as later amended (the “Beal Net Profits Agreement”), BealBank has a 35% interest in the Net Profits of the partnerships which ownHuntley, subject to certain preferences in their distribution.  The Beal Net Profits Agreement was grantedin connection with a prior loan made by Beal Bank to Huntley.  Net cash generated by Huntley is to bedistributed in the following order: first to the owners of Huntley in the amount of the ApprovedContributions (which total approximately $12.1 million at September 30, 2003and from which the Huntley Beal Loan is required to be repaid), second to BealBank for the Beal Account (which had a balance of approximately $6.6 million atSeptember 30, 2003), third to Huntley for its account (which had a balance ofapproximately $12.3 million at September 30, 2003) and thereafter, 35% to BealBank and 65% to Huntley.  The ApprovedContributions include operating and development expenditures funded for Huntley(excluding interest on the Huntley Beal Loan). For purposes of determining distribution preferences under the Beal NetProfits Agreement, the Approved Contributions, the Huntley

 

16

----

 

account and the BealAccount accrue interest per the terms of the Beal Net Profits Agreement.  On the maturity date of the Huntley BealLoan, Huntley is required to pay Beal Bank the fair market value of Beal Bank’sNet Profits interest.  Pursuant topurchase accounting requirements, the Company has recorded an estimatedliability for the Beal Net Profits Agreement in the amount of $9.1 million,reflecting the estimated value of the Beal Bank Net Profits interestliability.  Such estimate is subject tochange.  Some of the factors that couldcause a significant revision to the estimate include changes in zoning andchanges in the market demand for real estate in the area.  The Beal Bank net profits interest has beenincluded in Participation Interests and Other Liabilities on the Company’sbalance sheets.  Certain affiliates ofPrime Group have continuing guarantees related to the Beal Net ProfitsAgreement.  The Company has idemnifiedsuch guarantors against any liability in connection with their guarantees.  Capitalized terms in this paragraph whichare not defined herein shall have the meanings given such terms in the Beal NetProfits Agreement, as amended.

 

Gary J. Skoien,Chairman, Chief Executive Officer and President of the Company, is also theExecutive Vice President and Chief Operating Officer of Prime Group.  In connection with his employment with PrimeGroup, Mr. Skoien was previously granted an interest (the “Skoien Net ProfitsInterest”) in the net proceeds generated by Huntley, which he retained afterthe Company’s purchase of Huntley.  TheSkoien Net Profits Interest consists of a 9.675% participation in the Net CashFlow (as defined in Mr. Skoien’s Net Profits Agreement) distributed to theCompany (excluding distributions of all amounts contributed or advanced by theCompany to Huntley plus interest per the terms of the agreement).  Pursuant to purchase accountingrequirements, the Company has recorded a liability for the Skoien Net ProfitsInterest in the amount of $1.0 million, which represents its estimated fairvalue and which amount has been included in Participation Interests and OtherLiabilities on the Company’s balance sheets.

 

As additionalconsideration for the partnership interests, Huntley granted to Prime Group,and certain of its affiliates, a participation interest of 26% of the net cashflow distributed by Huntley (the “Prime Group Participation Interest”) withrespect to the interests acquired by the Company.  No amount is payable to Prime Group until the Company hasreceived distributions from Huntley in excess of the purchase price plusadvances made by the Company to Huntley plus a 40% return on such amountscompounded quarterly.  Aggregate amountspayable pursuant to the Prime Group Participation Interest shall not exceed$5.0 million.  No liability has beenrecorded by the Company for the Prime Group Participation Interest as itscurrent fair value is estimated to be zero. Gary J. Skoien, Chairman, Chief Executive Officer and President of theCompany is also the Executive Vice President and Chief Operating Officer ofPrime Group.

 

In 1993, the Village ofHuntley (the “Village”) created a Tax Increment Financing District (the “TIFDistrict”) which is authorized to issue up to $108.0 million of tax-exempt,tax-increment bonds (the “TIF Bonds”) to reimburse Huntley for a portion of theland cost and the cost of infrastructure improvements.  In 1995, the Village sold $7.0 million ofSeries A bonds and $14.0 million of Series B bonds.  Huntley owns the Series C bonds with a total principal amount of$25.0 million plus accrued interest. The Series C bonds are subordinate to the Series A and Series Bbonds.  Currently there is no portion ofthe tax increment available to the Series C bonds and no value has beenascribed to them by the Company.

 

The source of repaymentfor the TIF Bonds is (a) 100% of the increase in real estate taxes on the landin the TIF District above the taxes in place when the TIF District was created,and (b) one-half of the Village’s one percent (1%) sales tax collected onretail sales occurring within the TIF District.  The TIF District contains approximately 900 acres of land ownedor previously owned by Huntley.  Debtservice reserve funds were initially established with $700,000 for the Series Abonds and $3.09 million for the Series B bonds as security for the payment ofprincipal and interest on the TIF Bonds. To the extent the reserve funds are not needed to service the bonds,they will be returned to Huntley.  Thesefunds are held in interest bearing accounts under the control of the trusteeand totaled approximately $3.6 million at September 30, 2003.  There can be no assurance that these fundswill be returned to Huntley and, therefore, they are not reflected on thebalance sheets of the Company.  The TIFBonds are not obligations of the Company and are not reflected on the Company’sbalance sheet and no value has been ascribed to them by the Company.

 

As additional securityfor the Series B bonds, Huntley granted a mortgage to U.S. Bank Trust NationalAssociation (“US Bank”), as trustee for the holders of the Series B bonds,covering approximately 131 acres of land (the “US Bank Mortgage”).  Upon the sale of any parcel of land subjectto the US Bank Mortgage, such parcel will be released from the US Bank Mortgageprovided that Huntley deposits into a collateral account (the “US BankCollateral Account”) an amount equal to the greater of (i) 50% of the July 1997appraised value of such parcel or (ii) an amount per square

 

17

----

 

foot of the parcel soldas set forth in Exhibit B to the Amended and Restated IntercreditorAgreement.  Amounts deposited into theUS Bank Collateral Account are released to Huntley upon the issuance of acertificate of occupancy for the subject land parcel.  The balance in the US Bank Collateral Account was approximately$1.5 million at September 30, 2003 and is included in Restricted Cash on theCompany’s balance sheets (see Note 2). Based on a third-party review of the current incremental real estate andsales tax revenue and the available debt service reserve funds, the Companybelieves that there are sufficient funds to make the scheduled debt servicepayments on the Series A and B bonds. Further, Huntley has no continuing legal obligation related to theproceeds received from the TIF Bonds and thus, no liability has been recognizedrelated to this mortgage. The independent directors of the Company approved theacquisition of Huntley and the assumption of the related net profits interestliabilities.  The Company believes thistransaction reflects market terms.

 

*Tulare Construction Loan*

 

On April 24, 2003, theCompany closed on a $3.1 million loan for the construction of Phase II of itsoutlet center in Tulare, California (the “Tulare II Loan”).  Upon the completion of the retail expansionconstruction, the loan will convert into a permanent loan maturing in August2009.  The loan is secured by a firstmortgage on the land and improvements and will bear interest at the greater ofLIBOR plus 300 basis points or 5.5%. The outstanding principal balance on the Tulare II Loan was $2.1 millionat September 30, 2003.  The loan wasmade by Amster Trading Company Charitable Remainder Unitrust dated March 10,2003, an affiliate of Howard Amster, a Director and principal shareholder ofHGPI.

 

*Other Borrowings*

 

On July 20, 2001, the Companyacquired the ownership of a triple net leased property in Roseville, Michigan,which is leased to Petsmart, Inc., as a replacement property for its center inDry Ridge, Kentucky in a transaction structured as a tax deferred exchangeunder the provisions of Section 1031 of the Code.  The purchase price of $3.35 million included the assumption of a$3.2 million mortgage.  The rent payableunder the lease is equal to the debt service due under the loan secured by theproperty (the “Petsmart Loan”).  The PetsmartLoan matures on January 8, 2008, bears interest at a fixed rate of 8.77% andrequires the monthly payment of principal computed on a 25 year schedule.  The loan is non-recourse to HGPI.  The balance of the Petsmart Loan was $3.1million and $3.2 million at September 30, 2003 and December 31, 2002,respectively.  The Company is marketingthis property for sale and thus, pursuant to SFAS 144, its real estate assetsare listed as Real Estate-Discontinued Operations on the balance sheets and itsrevenue and expenses are included in Income from Discontinued Operations on thestatements of operations.

 

On August 19, 2003, theCompany refinanced its corporate office building in Norton Shores, Michiganwith a $2.25 million loan from UBS Real Estate Investments Inc. (“UBS” and the“UBS Office Loan”).  The UBS Office Loanrequires an officer of the Company to be personally liable for losses sufferedby UBS for environmental damages and the results of certain actions prohibitedunder the UBS Office Loan documents. Gary J. Skoien personally indemnified UBS for such losses anddamages.  The Company agreed toindemnify Mr. Skoien for any amounts paid under the UBS indemnification and topay Mr. Skoien an annual fee of $30,000 related to such indemnification until theloan is repaid (or Mr. Skoien is otherwise released from the UBSindemnification obligations).  Theoutstanding balance of this loan was $2.2 million at September 30, 2003.  The loan is for a term of ten years,requires monthly principal payments based on a 30-year amortization scheduleand bears interest at a fixed rate of 6.89%.

 

On June 4, 2002, theCompany purchased the land underlying its center in Laughlin, Nevada for $2.5million pursuant to a purchase option contained in the ground lease.  The ground rent was prorated to February 25,2002.  The Company paid approximately$500,000 at closing and a $2.0 million unsecured promissory note was providedby the seller.  This note matures inJune 2012, bears interest at a rate of 2.0% above the weighted average cost offunds index for the Eleventh District Savings Institutions, adjusted annuallyand requires amortization based on a ten year schedule.  The initial interest rate payable on theloan was 5.074% through February 28, 2003 and is 4.375% through February 29,2004.  The outstanding principal balanceon this note was $1.7 million and $1.9 million at September 30, 2003 andDecember 31, 2002, respectively.

 

18

----

 

Debt maturities andprincipal payments, including debt secured by the assets classified asdiscontinued operations, due subsequent to September 30, 2003 are as follows(in thousands):

 
| **Due by:**                           |   | **Operating  Portfolio** |   | **Discontinued  Operations** |   |
|---------------------------------------|--------|--------------------------|--------|------------------------------|--------|
| September  30, 2004                   |   | $                        | 33,876 |                         | $      | 39 |   |
| September  30, 2005                   |   | 17,637                   |   | 42                           |   |
| September  30, 2006                   |   | 3,869                    |   | 46                           |   |
| September  30, 2007                   |   | 766                      |   | 50                           |   |
| September  30, 2008                   |   | 817                      |   | 2,957                        |   |
| Thereafter                            |   | 31,046                   |   | —                       |   |
|                                  |   | 88,011                   |   | $                            | 3,134  |   |
| Tulare  Loan restructuring adjustment |   | 1,157                    |   |                         |   |
| Tulare  II Loan (construction loan)   |   | 2,114                    |   |                         |   |
|                                  |   | $                        | 91,282 |                         |   |   |

 

The GST Loans, on whichthe Company is in default, are reflected as current year maturities (see “JPMorgan Loans” above).  The HuntleyAmster Loan is reflected as a current year maturity, but the loan contains a provisionfor extension, upon the satisfaction of certain customary conditions (see“Huntley Debt” above).

 

The Company’s ability tosecure new loans is limited by the fact that virtually all of the Company’sreal estate assets are currently pledged as collateral for its current loans.

 

Note 6 - Related PartyTransactions

 

The Company utilizesThilman & Filippini as its agent for insurance and risk managementprograms.  E. Thomas Thilman is aDirector of the Company and a partner in Thilman & Filippini.  The Company paid premiums totalingapproximately $678,000 and $688,000 during the three months ended September 30,2003 and 2002, respectively and $917,000 and $929,000 during the nine monthsended September 30, 2003 and 2002, respectively, on insurance policies placedby Thilman & Filippini.  Thisincludes insurance premiums for the properties classified as discontinuedoperations.

 

The Company sub-leasesoffice space on a month to month basis for its senior executives at 77 W.Wacker, Chicago, Illinois from Prime Group. The Company incurred rent expense of $13,000 and $12,000 during thethree months ended September 30, 2003 and 2002, respectively and $39,000 and$36,000 during the nine months ended September 30, 2003 and 2002, respectively.

 

On March 13, 2003, HGPIsold 261,628 limited partnership units in HGP LP to Pleasant Lake Apts. Ltd.,an affiliate of Howard Amster, for aggregate consideration of $1.35 million, or$5.16 per unit.  Proceeds in excess ofHGPI’s carrying value of these units was recognized as an increase inadditional paid-in capital.  On March14, 2003, the Company used $1.3 million of the proceeds from the sale to fund asecured loan to Retail Partners Limited Partnership and Retail Partners, Inc.(collectively “Retail Partners”) which entities are owned by Prime Group.  The loan is for a term of 14 months andbears interest at the rate of 5.0%, payable at maturity.  Approximately $340,000 of this loan wasrepaid in connection with the Company’s purchase of Huntley on June 13,2003.  The principal balance on the loanwas $500,000 at September 30, 2003.  TheCompany received a 3.25% net profits interest in a real estate developmentowned by Huntley Development LP and Huntley Meadow Residential Venture(collectively “Huntley”) subject to the current lender’s interest indistributions from Huntley.  The fairvalue of the profits interest has been preliminarily estimated at$350,000.  The value of this interest isincluded in Land Held for Investment. Such value will be recognized over the term of the loan as an adjustmentto the yield. HGPI may consider additional sales of units in HGP LP to Mr.Amster or others in the future.

 

The Company obtained a$2.0 million loan on May 20, 2003 from an affiliate of Howard Amster.  The loan bears interest at a rate of 5.0%and was due upon demand (see Note 5). This loan was repaid in connection with the sale of two outlet centersdiscussed below.

 

19

----

 

On May 31, 2003, theCompany sold the partnership that owns two outlet centers located in Daleville,Indiana and Somerset, Pennsylvania to an investment group which includes GaryJ. Skoien and Howard Amster.  Theinvestment group has hired the Company to manage and lease the two properties.  The leasing and management agreementprovides that the Company receive 50% of the net profit from the subsequentsale of the centers after the owners receive a 12% annual return on theirinvestment (see Note 8).

 

OnJune 12, 2003, the Company borrowed $9.1 million from Amster Trading Company,an affiliate of Howard Amster (the “Huntley Amster Loan”) which funded thepurchase of Huntley from Prime Group and its affiliates on June 13, 2003.  The Huntley Amster Loan is guaranteed byHGPI and HGP LP and is secured by a pledge of the partnership interests in thepartnerships which own Huntley, subject to any required lender consents.  The Huntley Amster Loan bears interest at arate of 11.0% per annum, payable monthly and matures on June 12, 2004, with theoption for a one-year extension.  Inconnection with the purchase of Huntley, the Company assumed the liabilitiesfor the Beal Net Profits Agreement, the Skoien Net Profits Interest and thePrime Group Participation Interest (see Note 5).

 

On August 19, 2003, theCompany refinanced its corporate office building in Norton Shores, Michiganwith a $2.25 million loan from UBS Real Estate Investments Inc. (“UBS” and the“UBS Office Loan”).  The UBS Office Loanrequires an officer of the Company to be personally liable for losses sufferedby UBS for environmental damages and the results of certain actions prohibitedunder the UBS Office Loan documents. Gary J. Skoien personally indemnified UBS for such losses anddamages.  The Company agreed toindemnify Mr. Skoien for any amounts paid under the UBS indemnification and topay Mr. Skoien an annual fee of $30,000 related to such indemnification untilthe loan is repaid (or Mr. Skoien is otherwise released from the UBSindemnification obligations).  Theoutstanding balance of this loan was $2.2 million at September 30, 2003.  The loan is for a term of ten years,requires monthly principal payments based on a 30-year amortization scheduleand bears interest at a fixed rate of 6.89%.

 

Gary J. Skoien,Chairman, Chief Executive Officer and President of the Company is alsoExecutive Vice President and Chief Operating Officer of Prime Group.  Howard Amster is a director and significantshareholder of the Company.

 

Note 7 -Segment Information

 

During the nine months ended September 30, 2003 and September 30, 2002,the Company operated twelve shopping centers located in nine states includingtwo shopping centers which were sold in May 2003 and a power center which wassold in August 2003, all of which were accounted for as discontinued operationson the statements of operations.  TheCompany separately evaluates the performance of each of its centers.  However, because each of the centers hassimilar economic characteristics, facilities and/or tenants, the shoppingcenters have been aggregated into a single dominant shopping centersegment.  In addition, the Company has acorporate segment and an investment land segment.  The Company evaluates performance and allocates resourcesprimarily based on the Funds From Operations (“FFO”) expected to be generatedby an investment in each individual shopping center. FFO is a widely usedmeasure of the operating performance of REITs, but may not be comparable toother REITs if they do not define similarly entitled items exactly as theCompany defines them.  FFO, as definedby the National Association of Real Estate Investment Trusts (“NAREIT”), meansnet income excluding extraordinary items (as defined by accounting principlesgenerally accepted in the United States (“GAAP”)) and gains and losses fromsales of depreciable operating property, plus depreciation and amortization,and after adjustments for unconsolidated partnerships and joint ventures.  Gains and losses on non-depreciable realestate assets, including land parcels, are included in FFO.  FFO should not be considered as analternative to either net income or cash flows from operating activitiescomputed under accounting principles generally accepted in the United States.

 

20

----

 

A reconciliation of loss before minority interests to FFO, computedassuming full dilution from all outstanding shares and units, is as follows:

 
|                                                                                                                              |   | **Nine  months ended  September 30, 2003** |   | **Nine  months ended  September 30, 2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                                                              |   | **(in thousands)**                         |   |
| Net income/(loss)                                                                                                                 |   | $                                          | 16,075 |                                       | $      | (5,301 | ) |
| Minority interests of unitholders (in loss from  continuing operations, discontinued operations and gain on sale of real  estate) |   | 6,183                                      |   | (923                                       | )      |
| Income/(loss) before minority interests                                                                                           |   | 22,258                                     |   | (6,224                                     | )      |
| Adjustments for depreciation and amortization                                                                                     |   | 2,187                                      |   | 3,863                                      |   |
| FFO                                                                                                                               |   | $                                          | 24,445 |                                       | $      | (2,361 | ) |

 

The line item entitled generaland administrative expenses on the Company’s statements of operationsrepresents corporate level general and administrative expenses.

 

The above scheduleincludes the operating results of the Company’s investment land segment, whichhad a net loss of $854,000 for the period ended September 30, 2003.  This investment land was acquired by theCompany on June 13, 2003 (see Note 5). The acquisition of this land was recorded as a purchase under generallyaccepted accounting principles in the United States and the total assetsrelated to this segment approximate $31.0 million at September 30, 2003.

 

The remaining amounts in thetable above comprise the results of the shopping center segment.

 

# Note 8 – PropertyDispositions

 

On January 25, 2002, the Company sold 7.1 acres of land ancillary toits center in Warrenton, Missouri.  Theproceeds from this sale were $235,000 and a loss on sale of $1,000 wasrecognized.

 

On February 15, 2002, atenant exercised its option to purchase the land subject to its ground lease atLakeshore Marketplace in Norton Shores, Michigan.  The proceeds from this sale were $373,000 and a gain on sale of$156,000 was recognized.

 

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

 

In March 2003, theCompany received a condemnation award for land adjacent to the Company’s centerin Gretna, Nebraska.  The land wascondemned by Sarpy County in Nebraska in order to widen Highway No. I-80 thatruns along the center.  The Companyrecognized a gain of $29,000 as a result of the condemnation, which isreflected in Income from Discontinued Operations on the Company’s statements ofoperations.

 

On May 30, 2003 the Companysold a parcel of land adjacent to its center located in Tulare,California.  The proceeds from the salewere $650,000 and a gain of $548,000 was recognized, which is included inIncome from Discontinued Operations on the Company’s statements of operations.

 

On May 31, 2003, the Companysold the partnership that owns two outlet centers located in Daleville, Indianaand Somerset, Pennsylvania for $1.98 million. A net gain on sale of $1.3million was recognized, which is included in Income from DiscontinuedOperations on the Company’s statements of operations.  The investment group that acquired the partnership includes GaryJ. Skoien, Chairman, Chief Executive Officer and President of the Company andan affiliate of Howard M. Amster, a director and significant shareholder of theCompany.  The independent directors ofthe Company approved this transaction and the Company believes this transactionreflects market terms.  The investmentgroup has hired the Company to manage and lease the two properties.  The leasing and management agreementprovides that the Company will receive 50% of the net profit from thesubsequent sale of the centers after

 

21

----

 

the owners receive a 12% annualreturn on their investment.  There canbe no assurance that the Company will receive any funds from such sales.

 

On August 19, 2003, the Companysold the power center and adjacent land parcels located in Norton Shores,Michigan for $22.7 million, including the assumption of the mortgage withGreenwich Capital Financial Products, Inc. by the purchaser.  A gain of $10.9 million was recognized andis included in Income from Discontinued Operations on the Company’s statementsof operations.  The Company used $2.0million of the proceeds from the sale to pay $1.0 million each on the Beal BankLoans.  The vacant land parcels were aportion of the security for the Beal Bank Loan I.  The reduction of the principal balance on the Beal Bank Loans to$5.0 million released the Prime-Beal Guaranty. In addition, Beal Bank required that $3.0 million be deposited into anescrow account to fund infrastructure and interest payments for Huntley, sincethe mortgage it provided on that property is cross-collateralized with the BealBank Loans.

 

On September 16, 2003, theCompany sold 10 acres of vacant land in Fruitport Township, Michigan.  The proceeds from this sale were $226,000and a gain on sale of $116,000 was recognized, which is included in Income fromDiscontinued Operations on the Company’s statements of operations.

 

## **Note9 – Discontinued Operations**

 

In accordance with SFAS 144effective for financial statements issued for fiscal years beginning afterDecember 15, 2001, the results of operations and gain/(loss) on real estateproperties sold or held for sale subsequent to December 31, 2001 are reflectedin the consolidated statements of operations as “Income from DiscontinuedOperations” for all periods presented.

 

The following table is asummary of the results of operations of the properties classified asdiscontinued operations (in thousands):

 
|                                                                                                       |   | **Three  months  ended  September 30,  2003** |   | **Three  months  ended  September 30,  2002** |   | **Nine  months  ended  September 30,  2003** |   | **Nine  months  ended  September 30,  2002** |   |
|------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                       |   |                                          |   |                                          |   |                                         |   |                                         |   |
| Total revenue                                                                                              |   | $                                             | 634    |                                          | $      | 1,151                                        |   | $                                            | 2,891  |   | $ | 3,354 |   |
| Total expenses                                                                                             |   | 567                                           |   | 1,959                                         |   | 3,453                                        |   | 5,760                                        |   |
| Gain on debt restructuring                                                                                 |   | —                                        |   | —                                        |   | 14,406                                       |   | —                                       |   |
| Income/(loss) before minority interests                                                                    |   | 67                                            |   | (808                                          | )      | 13,844                                       |   | (2,406                                       | )      |
| Minority interests                                                                                         |   | —                                        |   | 122                                           |   | (3,934                                       | )      | 361                                          |   |
| Net gain on sale of real estate, net of  minority interests of $3.0 million and $3.5 million, respectively |   | 8,049                                         |   | —                                        |   | 9,382                                        |   | —                                       |   |
| Income/(loss) from discontinued operations                                                                 |   | $                                             | 8,116  |                                          | $      | (686                                         | )      | $                                            | 19,292 |   | $ | (2,045 | ) |

 

Note 10 – SubsequentEvents 

 

On October 3, 2003, theCompany commenced an offer for the purchase of all shares of its common stockheld by persons owning 20 or fewer shares as of the close of business onSeptember 26, 2003.  The Company willpay $5.00 for each share properly tendered by an eligible stockholder.  The offer is not conditioned on the receiptof any minimum number of tenders and will expire at 5:00 p.m., New York Citytime, on Wednesday, December 3, 2003, unless extended prior to that date.  If, after completion of the offer, theCompany has fewer than 300 stockholders of record, the Company intends toterminate the registration of its common stock under the Securities ExchangeAct of 1934 and become a non-reporting company and the common stock will nolonger be eligible for trading on the Nasdaq market.

 

22

----

 

On November 4, 2003, theCompany began restructuring the three GST Loans on which it had been in default(see Note 5).  The planned restructuringincludes the payoff at a discount of the loans secured by the outlet centers inSealy, Texas and Gretna, Nebraska and the reinstatement to current status ofthe loan secured by the outlet center in Traverse City, Michigan.  The loan secured by the outlet center inSealy was repaid on November 4, 2003 and the loan secured by the outlet centerin Gretna was repaid on November 6, 2003. The reinstatement of the loan secured by the outlet center in TraverseCity is expected to be completed by November 20, 2003.The restructuring of theGST Loans requires the payment of all current interest and principal on theTraverse City loan as of the date of its reinstatement together with additionalpayments totaling $4.0 million.

 

The repaid loans had anaggregate principal balance of approximately $18.0 million, excluding accruedinterest and penalties, as of the dates of repayment.  The reinstatement to current status of the loan secured by theoutlet center in Traverse City will result in the forgiveness of approximately$600,000 of accrued penalties and default interest.  The carrying amount and prospective effective interest rate onthe loan secured by the center in Traverse City will be adjusted for theforgiven interest and penalties applicable to this property.

 

The funds to accomplishthis restructuring were provided to the Company by an affiliate of Howard M.Amster, a director and principle shareholder of the Company.  The Company sold a 49% interest in Gretna,Sealy, Traverse City Outlet Centers, L.L.C. (“GST”), the entity that owned thethree outlet centers subject to the GST Loans, to an affiliate of Mr. Amsterfor $1.96 million.  An affiliate of Mr.Amster also made a $2.04 million loan to the Company.  The proceeds from this loan and the sale of the interests in GSTare required to be used to complete the planned debt restructuring.  The loan bears interest at 8.0% and matureson August 3, 2004.

 

23

----

 

HORIZONGROUP PROPERTIES, INC.

Management’sDiscussion and Analysis of Financial Condition and Results of Operations

Forthe three and nine months ended September 30, 2003

(unaudited)

 

Introduction

 

The following discussionand analysis of the condensed consolidated financial condition and results ofoperations of Horizon Group Properties, Inc. (“HGPI”, or together with itssubsidiaries “HGP” or the “Company”) should be read in conjunction with theCondensed Consolidated Financial Statements and Notes thereto. The Company’soperations are conducted primarily through a subsidiary limited partnership,Horizon Group Properties, L.P. (“HGP LP”). HGPI is the sole general partner of HGP LP and, as of September 30,2003, owned approximately 70.3% of the HGP LP partnership interests (“CommonUnits”).  In general, Common Units ofHGP LP are exchangeable for shares of Common Stock of HGPI on a one-for-onebasis at any time (or for an equivalent cash amount at the Company’selection).  HGPI controls HGP LP and isdependent on distributions or other payments from HGP LP to meet its financialobligations.

 

Cautionary Statements

 

The following discussionin “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” contains certain forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995 which reflect management’scurrent views with respect to future events and financial performance.  Such forward-looking statements are subjectto certain risks and uncertainties; including, but not limited to, the effectsof future events on the Company’s financial performance; the risk that theCompany may be unable to finance its current debt as it matures; risks relatedto the retail industry in which the Company’s outlet centers compete, includingthe potential adverse impact of external factors, such as competition fromexisting or newly constructed shopping centers, inflation, consumer confidence,unemployment rates and consumer tastes and preferences; risks associated withthe Company’s property acquisitions, such as the lack of predictability withrespect to financial returns; risks associated with the Company’s propertydevelopment activities, such as the potential for cost overruns, delays and thelack of predictability with respect to the financial returns associated withthese development activities; the risk of potential increase in market interestrates from current levels; and risks associated with real estateownership,  such as the potentialadverse impact of changes in local economic climate on the revenues and thevalue of the Company’s properties.  For furtherinformation on factors which could affect the Company and the statementscontained herein, reference is made to the Company’s other filings with theSecurities and Exchange Commission, including the Company’s RegistrationStatement on Form 10, as amended, dated as of June 4, 1998, with respect to theCompany’s initial registration of its common stock under the SecuritiesExchange Act of 1934, as amended and the Sky Merger Corp. RegistrationStatement on Form S-4, as filed with the Securities and Exchange Commission onMay 12, 1998 (Registration No. 333-51285).

 

The statements offinancial condition and results of operations of the Company reflect theapplication of the Company’s accounting policies, the most significant of whichare outlined in Note 2 to the Condensed Consolidated Financial Statements.  These policies are applied in accordancewith accounting principles generally accepted in the United States and reflectsignificant assumptions and estimates of the management of the Company.

 

General Overview

 

The Company is aself-administered and self-managed corporation that was established inconnection with the merger of Horizon Group, Inc., a Michigan corporation(“Horizon”) with and into Prime Retail, Inc., a Maryland corporation (“PrimeRetail”) which was consummated on June 15, 1998 (“the Merger”).  As of September 30, 2003, the Company’soperating portfolio consisted of nine factory outlet centers located in sevenstates comprising an aggregate of approximately 1.8 million square feet ofgross leasable area (“GLA”).  Eight ofthe nine factory outlet centers were contributed to the Company by Horizonpursuant to a Contribution Agreement entered into in connection with the Merger(the “Contribution Agreement”) and one factory outlet center was purchased bythe Company from Prime Retail immediately subsequent to the consummation of theMerger.  At September 30, 2003, theCompany owned and managed a total of 2.2 million square feet of GLA.

 

Prior to May 22, 2003,the Company was in default with respect to the obligations of two pools ofloans originated by JP Morgan in July 1999 (the “JP Morgan Loans”).  The defaults were the result of theCompany’s failure to pay in full the amounts due under the loans commencingwith the payment due October 1, 2001. Each pool of loans was secured by a group of three properties.  The first group consisted of three factoryoutlet centers located in Daleville, Indiana,

 

24

----

 

Somerset, Pennsylvaniaand Tulare, California (the “DST Loans”); the second group consisted of threefactory outlet centers located in Gretna, Nebraska, Sealy, Texas and TraverseCity, Michigan (the “GST Loans” and “GST Properties”).  The loans are non-recourse to HGPI, subjectto certain customary exceptions.  TheCompany continues to manage the centers and remit the net cash flow each monthas partial payment on the loans. Interest expense on the JP Morgan Loans since October 2001 has beenaccrued at the default rate of interest (an annual rate of 13.46%) togetherwith a penalty equal to 5.0% of each monthly amount due under the relatednotes.  The results of operations of theCompany reflect the revenues and expenses, including accrued interest andpenalties, of the properties subject to the JP Morgan Loans together with therevenues and expenses of the other properties owned by the Company.  The defaults under the loan agreements allowthe respective lenders to exercise their various remedies contained in the loanagreements, including termination of the Company as manager of the centers,application of escrow balances to delinquent payments and foreclosure on theproperties which collateralize the loans.

 

The Company remains indefault on the GST Loans at September 30, 2003.  The Company and the special servicer of the GST Loans arecurrently negotiating a restructuring of the GST Loans.  There can be assurance that suchnegotiations will result in any settlement of the loans or any modification ofthe terms of the loans.

 

On May 22, 2003, theCompany restructured the DST Loans.  Therestructuring involved (1) the acquisition of the loans secured by outletcenters located in Daleville, Indiana and Somerset, Pennsylvania (the“Daleville and Somerset Loans”) which had an aggregate principal balance of $13.2million, excluding accrued interest and penalties, and (2) the reinstatement ofthe loan secured by an outlet center in Tulare, California (the “Tulare Loan”)for a total payment by the Company of $1.98 million.  The funds for this transaction were provided by a $2.0 millionloan made on May 20, 2003 from an affiliate of Howard Amster, a director andsignificant shareholder of the Company. On May 30, 2003 this loan was repaid in full in connection with the saleof the centers in Daleville, Indiana and Somerset, Pennsylvania for $1.98million to an investment group including Gary J. Skoien, Chairman, ChiefExecutive Officer and President of the Company and Howard Amster. Theindependent directors of the Company approved this transaction and the Company believesthis transaction reflects market terms. The investment group has hired the Company to manage and lease the twoproperties.  The leasing and managementagreement provides that the Company receive 50% of the net profit from thesubsequent sale of the centers after the owners receive a 12% annual return ontheir investment.  There can be noassurance that the Company will receive any funds from this type oftransaction.  The operating results andgain on debt restructuring on the Daleville and Somerset Loans are included inIncome from Discontinued Operations on the Company’s statements ofoperations.  The restructuring of theTulare Loan resulted in the immediate foregiveness of $798,000 of accruedpenalties and default interest. Additional accrued interest of $448,000 was forgiven when the Companymade the scheduled debt service payments through September 2003.

 

The Company is marketingfor sale its property in Roseville, Michigan, which is net-leased to Petsmart,Inc. the 103,000 square foot strip building at the outlet center in Monroe,Michigan, and eight parcels of vacant. Pursuant to the requirements of Statement of Financial AccountingStandards No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets” (“SFAS 144”), the Company has reclassified the real estate assets forthese properties to Real Estate-Discontinued Operations on the balance sheetand reports the revenue and expenses from the properties as Income fromDiscontinued Operations on the statements of operations. SFAS 144 also requiresthat any prior period financial statements presented are also reclassified forcomparability.  This reclassificationhas no effect on the Company’s previously reported net income or loss.

 

On June 13, 2003 theCompany purchased controlling interest in two partnerships which ownapproximately 655 acres of land in Huntley, Illinois (“Huntley”) fromaffiliates of The Prime Group, Inc. (“Prime Group”).  This purchase was accounted for under the purchase method ofaccounting under which assets acquired and liabilities assumed were recorded attheir relative fair values as of the date of the purchase.  The initial purchase price allocationestimates are preliminary and will be finalized upon obtaining additionalinformation regarding the liabilities assumed at acquisition. Direct costsincurred for development activities at Huntley are capitalized to Land Held forInvestment on the Company’s balance sheets, while indirect costs and holdingcosts are expensed in general and administrative expense on the statements ofoperations.  The Company had previouslyacquired a 3.25% net profits interest in Huntley in connection with a loan madeto Retail Partners (as defined herein) in March 2003.  The value of this interest is included in Land Held for Investmenton the balance sheets (see Note 5 to the Condensed Consolidated FinancialStatements).  The independent directorsof the Company approved this transaction and the Company believes thistransaction reflects market terms.

 

25

----

 

On October 3, 2003, theCompany commenced an offer for the purchase of all shares of its common stockheld by persons owning 20 or fewer shares as of the close of business onSeptember 26, 2003.  The Company will pay$5.00 for each share properly tendered by an eligible stockholder.  The offer is not conditioned on the receiptof any minimum number of tenders and will expire at 5:00 p.m., New York Citytime, on Wednesday, December 3, 2003, unless extended prior to that date.  If, after completion of the offer, theCompany has fewer than 300 stockholders of record, the Company intends toterminate the registration of its common stock under the Securities ExchangeAct of 1934 and become a non-reporting company and the common stock will nolonger be eligible for trading on the Nasdaq market.

 

On November 4, 2003, theCompany began restructuring the three GST Loans on which it had been in default(See Note 5).  The planned restructuringincludes the payoff at a discount of the loans secured by the outlet centers inSealy, Texas and Gretna, Nebraska and the reinstatement to current status ofthe loan secured by the outlet center in Traverse City, Michigan.  The loan secured by the outlet center in Sealywas repaid on November 4, 2003 and the loan secured by the outlet center inGretna was repaid on November 6, 2003. The reinstatement of the loan secured by the outlet center in TraverseCity is expected to be completed by November 20, 2003. The restructuring of theGST Loans requires the payment of all current interest and principal on theTraverse City loan as of the date of its reinstatement together with additionalpayments totaling $4.0 million.

 

The repaid loans had anaggregate principal balance of approximately $18.0 million, excluding accruedinterest and penalties, as of the dates of repayment.  The reinstatement to current status of the loan secured by theoutlet center in Traverse City will result in the forgiveness of approximately$600,000 of accrued penalties and default interest.  The carrying amount and prospective effective interest rate onthe loan secured by the center in Traverse City will be adjusted for theforgiven interest and penalties applicable to this property.

 

The funds to accomplishthis restructuring were provided to the Company by an affiliate of Howard M.Amster, a Director and principle shareholder of the Company.  The Company sold a 49% interest in Gretna,Sealy, Traverse City Outlet Centers, L.L.C. (“GST”), the entity that owned thethree outlet centers subject to the GST Loans, to an affiliate of Mr. Amsterfor $1.96 million.  An affiliate of Mr.Amster also made a $2.04 million loan to the Company.  The proceeds from this loan and the sale of the interests in GSTare required to be used to complete the planned debt restructuring.  The loan bears interest at 8.0% and matureson August 3, 2004.

 

Comparison of the ThreeMonths Ended September 30, 2003 to the Three Months Ended September 30, 2002

 

The net loss fromcontinuing operations before minority interests increased $606,000 for thethree months ended September 30, 2003 compared to the same period in the prioryear.  The main components of thischange were an increase in general and administrative expenses from the operationof Huntley and the additional indebtedness assumed in connection with theacquisition of Huntley in May 2003.

 

Total revenues increased$128,000 in the three months ended September 30, 2003, compared to the sameperiod in the prior year.  The primaryfactors were increases in temporary tenant revenues, leasing services providedto managed properties and interest income.

 

Average occupancy forthe three properties remaining in default on the JP Morgan Loans (the “GSTProperties”) was 66.7% and 72.7% for the three month periods ended September30, 2003 and 2002, respectively.  Totalrevenue for those properties was $690,000 and $803,000 for the three monthperiods ended September 30, 2003 and 2002, respectively.  Average occupancy for the Company’s sixother outlet centers was 81.0% and 83.5% for the three month periods endedSeptember 30, 2003 and 2002, respectively. Total revenue for those properties was $3.5 million for both the threemonth periods ended September 30, 2003 and 2002.

 

Real estate tax expenseincreased $60,000 in the three months ended September 30, 2003 compared to thesame period in the prior year mainly due to a refund received in 2002 of aportion of the 2000 and 2001 taxes at the outlet center located in Gretna,Nebraska.

 

Depreciation andamortization expense decreased $126,000 for the three months ended September30, 2003 compared to the same period in the prior year, primarily due toreductions in the carrying values by impairment recorded in December 2002 totwo of the GST Properties.

 

26

----

 

General andadministrative expense increased $232,000 in the three months ended September30, 2003 compared to the same period in the prior year mainly due to theadditional indirect and holding costs incurred by Huntley, which was acquiredin June 2003.

 

Interest expense increased$570,000 for the three months ended September 30, 2003 compared to the sameperiod in the prior year.  The primaryfactor was the additional indebtedness assumed in connection with the acquisitionof Huntley in May 2003 (see Note 5 to the Condensed Consolidated FinancialStatements).

 

Income from discontinuedoperations increased $8.8 million for the three months ended September 30, 2003compared to the same period in the prior year. This line item on the Company’s statement of operations contains therevenue and expenses from the properties classified as discontinued operationson the Company’s balance sheets, or sold during the period, pursuant to SFAS144 (see Note 2 to the Condensed Consolidated Financial Statements).  The increase is primarily related to a gainresulting from the sale of the power center and adjacent land located in NortonShores, Michigan in August 2003 (see Note 8 to the Condensed Consolidated FinancialStatements).

 

The weighted average minorityinterest percentage for the three months ended September 30, 2003 was 29.7% ascompared to 15.2% in the three months ended September 30, 2002 due to theCompany’s sale of 261,628 units in HGP LP, on March 13, 2003, to Howard Amster,a director and principal shareholder of HGPI. These units can not be converted into shares of Common Stock of HGPI.

 

Net income for the threemonths ended September 30, 2003 was $6.7 million and $2.33 per share on a basicand diluted basis, respectively, and net loss for the three months endedSeptember 30, 2002 was $1.9 million and $0.65 per share on a basic and dilutedbasis.

 

Average occupancy forthe Company’s total operating portfolio for the three months ended September30, 2003 was 76.5% compared to 80.0% for the three months ended September 30,2002.  Occupancy of the Company’s totaloperating portfolio at September 30, 2003 and 2002 was 74.5% and 80.0%,respectively.

 

Comparison of the NineMonths ended September 30, 2003 to the Nine Months Ended September 30, 2002

 

The net loss fromcontinuing operations before minority interests increased $481,000 for the ninemonths ended September 30, 2003 compared to the same period in the prioryear.  The main components of the changewere an increase in general and administrative expenses from the operation ofHuntley and the additional indebtedness assumed in connection with theacquisition of Huntley in May 2003.

 

Total revenue increased$370,000 in the nine months ended September 30, 2003 compared to the sameperiod in the prior year.  The primaryfactors were an increase in interest income from the loan made to RetailPartners and the Company’s 3.25% net profits interest received in Huntley and alease termination fee received from a tenant.

 

Average occupancy forthe GST Properties was 67.2% and 72.9% for the nine month periods endedSeptember 30, 2003 and 2002, respectively. Total revenue for those properties was $2.1 million and $2.4 million forthe nine month periods ended September 30, 2003 and 2002, respectively.  Average occupancy for the Company’s othersix outlet centers was 81.8% and 83.5% for the nine month periods endedSeptember 30, 2003 and 2002, respectively. Total revenue for those properties was $10.4 million and $10.2 millionfor the nine month periods ended September 30, 2003 and 2002, respectively

 

Land lease and otherexpense increased $94,000 for the nine months ended September 30, 2003 comparedto the same period in the prior year. This decrease was primarily the result of an increase in the Company’scontribution to marketing expense for the properties offset by a decrease inland lease expense as a result of the Company’s acquisition of land under itscenter in Laughlin Nevada.

 

Depreciation andamortization expense decreased $221,000 in the nine months ended September 30,2003, compared to the same period in the prior year.  This decrease primarily resulted from reductions in the carryingvalues from impairment recorded in December 2002 to two of the GST Properties.

 

27

----

 

General andadministrative expense increased $368,000 in the nine months ended September30, 2003 compared to the same period in the prior year mainly as a result ofadditional indirect and holding costs incurred by Huntley, which was acquiredin June 2003.

 

In January 2002, theCompany sold 7.1 acres of land ancillary to its center in Warrenton, Missouriand recognized a loss of $1,000.  InFebruary 2002, the Company sold a parcel of land adjacent to its center in NortonShores, Michigan and recognized a gain of $156,000.  In September 2002, the Company sold excess office furniture to atenant at the Michigan corporate office and recognized a gain of $22,000.  The gains and losses from these transactionsare reflected in the Condensed Consolidated Statements of Operations of theCompany.

 

Income from discontinuedoperations increased $21.3 million for the nine months ended September 30, 2003compared to the same period in the prior year. This line item on the Company’s statement of operations contains therevenue and expenses from the properties classified as discontinued operationson the Company’s balance sheets, or sold during the period, pursuant to SFAS144 (see Note 2 to the Condensed Consolidated Financial Statements).  The increase is primarily related to a gainresulting from the restructuring of the Daleville and Somerset Loans, the saleof the partnership that owns the outlet centers in Daleville, Indiana andSomerset, Pennsylvania and the gain resulting from the sale of the center andadjacent land located in Norton Shores, Michigan (see Notes 5 and 8 to theCondensed Consolidated Financial Statements).

 

The weighted averageminority interest percentage for the nine months ended September 30, 2003 was27.2% as compared to 15.1% in the nine months ended September 30, 2002 due tothe Company’s sale of 261,628 units in HGP LP, on March 13, 2003, to HowardAmster, a director and principal shareholder of HGPI.  These units can not be converted into shares of Common Stock ofHGPI.

 

Net income for the ninemonths ended September 30, 2003 was $16.1 million and $5.60 per share on abasic and diluted basis, respectively, and net loss for the nine months endedSeptember 30, 2002 was $5.3 million and $1.85 per share on a basic and diluted basis.

 

Average occupancy forthe Company’s total operating portfolio for the nine months ended September 30,2003 was 77.2% compared to 80.1% for the nine months ended September 30, 2002.

 

Liquidity and CapitalResources

 

On July 11, 2002, theCompany repaid in full the HGP Credit Facility (see Note 5 to the CondensedConsolidated Financial Statements) with the proceeds of loans originated by UBSWarburg Real Estate Investments Inc. (“UBS”) and Beal Bank, S.S.B. (“BealBank”).

 

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

 

The UBS Senior Loans matureJuly 11, 2009, require monthly principal payments based on a 25-yearamortization schedule and bear interest at a fixed rate of 8.15%.  At September 30, 2003 and December 31, 2002,the balances totaled $21.7 million and $21.9 million, respectively.  These loans also require the monthly fundingof escrow accounts for the payment of future debt service, real estate taxes,insurance, capital and tenant improvements and leasing commissions (See Note 2to the Condensed Consolidated Financial Statements).  Funds in excess of those specified in the loan agreements aredisbursed to the new entities at least monthly.

 

28

----

 

The UBS Mezzanine Loans matureJuly 11, 2005 and may be prepaid without penalty after July 11, 2004.  These loans require monthly payments basedon a three-year amortization schedule and bear interest at a fixed rate of17.0%.  At September 30, 2003 andDecember 31, 2002, the balances totaled $2.4 million and $3.1 million,respectively.

 

Beal Bank provided two loansinitially totaling $7.0 million (the “Beal Bank Loans”) and consisted of (i) a$3.0 million loan secured by vacant land located in Norton Shores, Michigan andFruitport Township, Michigan (the “Beal Bank Loan I”), and (ii) a $4.0 millionloan secured by the outlet center in Monroe, Michigan (the “Beal Bank LoanII”).  These loans arecross-collateralized and are recourse to the Company.  The Beal Bank Loans mature July 10, 2005.  Principal payments of up to $2.0 million arepermitted without penalty at any time and the loans may be prepaid in whole orin part without penalty after July 10, 2004. In connection with the Company’s sale of the vacant land in Norton Shores,Michigan in August 2003, $1.0 million was repaid on each of the Beal Bank Loansand the Beal Bank Loans were cross defaulted with the Huntley Beal Loan.  The Company also granted a second mortgageon Huntley to Beal Bank as security for the Beal Bank Loans.  In addition, the Company granted Beal Bank afirst priority pledge and security interest in the net proceeds resulting fromthe sale of the partnerships that own the outlet center located in Laughlin,Nevada. The balance of the Beal Bank Loan I was $2.0 million and Beal Bank LoanII was $3.0 million at September 30, 2003.

 

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

 

The Beal Bank Loan II isguaranteed by Prime Retail, Inc. up to a maximum amount of $4.0 million (the“Prime-Beal Guaranty”).  Mr. Skoien andMr. Amster, Directors of the company, are members of the Board of Directors ofPrime Retail.  The Prime-Beal Guarantywas released on August 19, 2003, pursuant to the agreement, when the totaloutstanding balance of the Beal Bank Loans was reduced to $5.0 million.  The Company was obligated to make quarterlypayments of $15,000 to Prime Retail, Inc. as long as this guaranty was ineffect.

 

As of September 30,2003, the Company was in default with respect to the obligations of one pool ofloans originated by JP Morgan in July 1999 which is collateralized by threeproperties in Gretna, Nebraska, Sealy, Texas and Traverse City, Michigan (the“GST Properties” and the “GST Loans”) with an aggregate principal balance of$22.9 million and $23.0 million at September 30, 2003 and December 31, 2002,respectively (excluding accrued interest and penalties).  The defaults are the result of the Company’sfailure to pay in full the amounts due under the loans commencing with thepayment due October 1, 2001.  Each loanis secured by a group of three properties. The loans are non-recourse to HGPI, subject to limited customaryexceptions (see Note 5 to the Condensed Consolidated Financial Statements).

 

On November 4, 2003, theCompany began restructuring the three GST Loans on which it had been in default(See Note 5).  The planned restructuringincludes the payoff at a discount of the loans secured by the outlet centers inSealy, Texas and Gretna, Nebraska and the reinstatement to current status ofthe loan secured by the outlet center in Traverse City, Michigan.  The loan secured by the outlet center inSealy was repaid on November 4, 2003 and the loan secured by the outlet centerin Gretna was repaid on November 6, 2003. The reinstatement of the loan secured by the outlet center in TraverseCity is expected to be completed by November 20, 2003. The restructuring of theGST Loans requires the payment of all current interest and principal on theTraverse City loan as of the date of its reinstatement together with additionalpayments totaling $4.0 million.

 

The repaid loans had anaggregate principal balance of approximately $18.0 million, excluding accruedinterest and penalties, as of the dates of repayment.  The reinstatement to current status of the loan secured by theoutlet center in Traverse City will result in the forgiveness of approximately$600,000 of accrued penalties and default interest.  The carrying amount and prospective effective interest rate onthe loan secured by the center in Traverse City will be adjusted for theforgiven interest and penalties applicable to this property.

 

The funds to accomplishthis restructuring were provided to the Company by an affiliate of Howard M.Amster, a Director and principle shareholder of the Company.  The Company sold a 49% interest in Gretna,Sealy, Traverse City Outlet Centers, L.L.C. (“GST”), the entity that owned thethree outlet centers subject to the GST Loans, to an affiliate of Mr. Amsterfor $1.96 million.  An affiliate of Mr.Amster also made a $2.04 million loan to the Company.  The

 

29

----

 

proceeds from this loanand the sale of the interests in GST are required to be used to complete theplanned debt restructuring.  The loanbears interest at 8.0% and matures on August 3, 2004.

 

The Company had previously been in default on a secondpool of loans originated by JP Morgan which was secured by properties inDaleville, Indiana, Somerset, Pennsylvania and Tulare, California (the “DSTLoans”).  On May 22, 2003, the Companyrestructured the DST Loans.  Therestructuring involved (1) the acquisition of the two loans secured by outletcenters in Daleville, Indiana and Somerset, Pennsylvania (the “Daleville andSomerset Loans”) which had an aggregate principal balance of $13.2 million,excluding accrued interest and penalties, and (2) the reinstatement of the loansecured by an outlet center in Tulare, California (the “Tulare Loan”) for atotal payment by the Company of $1.98 million. The funds for this transaction were provided by a $2.0 million loan madeon May 20, 2003, from an affiliate of Howard Amster, a director and significantshareholder of the Company.  On May 30,2003, this loan was repaid in full in connection with the sale of the centersin Daleville, Indiana and Somerset, Pennsylvania to an investment group whichincludes Gary J. Skoien, Chairman, Chief Executive Officer and President of theCompany and Howard Amster.  Theindependent directors of the Company approved this transaction and the Companybelieves this transaction reflects market terms.  The restructuring of the Tulare Loan resulted in the immediateforegiveness of $798,000 of accrued penalties and default interest.  Additional accrued interest of $448,000 wasforgiven when the Company made the scheduled debt service payments throughSeptember 2003.  Pursuant to FASBStatement No. 15 “Accounting by Debtors and Creditors for Troubled DebtRestructurings”, the carrying amount and prospective effective interest rate onthe Tulare Loan was adjusted for the $1.2 million of forgiven interest andpenalties applicable to this property. At September 30, 2003, the Tulare Loan had an outstanding principalbalance of $8.9 million and an unamortized restructuring adjustment of $1.2million which will be amortized as a reduction of future interest expense underthe restructured loan.  The gain on debtrestructuring related to the Daleville and Somerset Loans of $14.4 million isincluded in Income from Discontinued Operations on the statement of operationsbecause these two properties were sold on May 30, 2003 (see Note 8 to theCondensed Consolidated Financial Statements).

 

The Company remitsmonthly all available cash flow, after a reserve for monthly operatingexpenses, as partial payment of the debt service on the GST Loans.  The failure to pay the full amount dueconstitutes a default under the loan agreements which allows the respectivelenders to exercise their various remedies contained in the loan agreements,including application of escrow balances to delinquent payments and foreclosureon the properties which collateralize the loans. The Company and the specialservicer of the GST Loans are negotiating a restructuring of the GSTLoans.  There can be no assurance thatsuch negotiations will result in any settlement of the loans or in any modificationof the terms of the loans.

 

The JP Morgan Loansrequire the monthly funding of escrow accounts for the payment of real estatetaxes, insurance and capital improvements which totaled $269,000 at September30, 2003.  The Company continues to managethe properties pursuant to management agreements which are subject tocancellation by the servicers of the loans with respect to the loans whichremain in default.  Company receivesfees of approximately $12,000 per month for such services.

 

The declining results ofoperations resulting in the inability to service the JP Morgan Loans was judgedto represent an indicator of possible impairment in the value of the collateralproperties.  The Company estimated thecurrent value of the six centers that collateralized the loans and concludedthat the carrying value of four of the centers exceeded the fair values ofthose centers.  Accordingly, the resultsof operations for 2001 include a provision for asset impairment of $18.0million, including $9.2 million related to properties, which are included inIncome from Discontinued Operations, representing a write-down of the carryingvalues of the assets to their estimated fair value.  Based on continuing negotiations with the lender and additionaldeclines in occupancy and revenues, the Company recorded an additionalprovision for asset impairment of $17.0 million in the fourth quarter of 2002,including $8.9 million related to properties which are included in Income fromDiscontinued Operations, to further reduce the carrying value of the same fourproperties.  The aggregate carryingvalue of the real estate of the properties collateralizing the GST Loans wasapproximately $9.9 million at September 30, 2003.  The current outstanding loan balances totaled $22.9 million, plusaccrued interest and penalties totaling $4.7 million.  If the lender were to foreclose on the GST Properties in fullsatisfaction of the loans, the Company would record a gain for the differencebetween the carrying value of the properties and related net assets and theoutstanding loan balances and related liabilities.  The estimation of the fair value of the centers which secured theGST Loans involved estimates by management with respect to future cash

 

30

----

 

flows, market conditionsand valuations applicable to such properties. Future events could occur which would cause the Company to conclude thatthe carrying values of the Company’s properties may need to be furtheradjusted.

 

The mortgage loan securedby the Company’s outlet center in Holland, Michigan was made by RepublicBank.  The $3.5 million loan matures inJuly 2006, requires monthly debt service payments of $30,000 based on a 20-yearamortization schedule, and bears interest at a fixed rate of 8.21%.  The principal balance on this loan was $3.3million and $3.4 million at September 30, 2003 and December 31, 2002,respectively. This loan requires the monthly funding of an escrow account forthe payment of real estate taxes which had a balance of $57,000 at September30, 2003.  Beginning in July 2004, theloan requires that the cash flow from the property be at least 130 percent ofthe debt service on the loan.  In theevent that the cash flow is less than that amount, the Company may make principalpayments to reduce the outstanding balance of the loan to an amount whichreduces debt service to a level which is in compliance with this requirement.

 

On August 19, 2003, theCompany sold its power center and several acres of adjacent vacant land locatedin Norton Shores, Michigan.  The powercenter had been security for a $16.0 million loan provided by Greenwich CapitalFinancial Products, Inc. (“Greenwich”), in July 2001.  This loan was assumed by the purchaser.  The non-recourse loan was for a term of ten years, requiredmonthly payments based on a 30-year amortization schedule and bore interest ata fixed rate of 7.647%.  The outstandingbalance of this loan was $15.7 million at August 19, 2003 and $15.8 million atDecember 31, 2002 (See Note 8 to the Condensed Consolidated FinancialStatements).

 

On August 19, 2003, theCompany refinanced its corporate office building in Norton Shores, Michiganwith a $2.25 million loan from UBS Real Estate Investments Inc. (“UBS” and the“UBS Office Loan”).  The UBS Office Loanrequires an officer of the Company to be personally liable for losses sufferedby UBS for environmental damages and the results of certain actions prohibitedunder the UBS Office Loan documents.  GaryJ. Skoien personally indemnified UBS for such losses and damages.  The Company agreed to indemnify Mr. Skoienfor any amounts paid under the UBS indemnification and to pay Mr. Skoien anannual fee of $30,000 related to such indemnification until the loan is repaid(or Mr. Skoien is otherwise released from the UBS indemnificationobligations).  The outstanding balanceof this loan was $2.2 million at September 30, 2003.  The loan is for a term of ten years, requires monthly principalpayments based on a 30-year amortization schedule and bears interest at a fixedrate of 6.89%.

 

The Company owns aproperty in Roseville, Michigan, which is net-leased to Petsmart, Inc. and issubject to a mortgage with a principal balance of $3.1 million and $3.2 millionat September 30, 2003 and December 31, 2002, respectively.  The rent payable under the lease is equal tothe debt service due under the loan secured by the property (the “PetsmartLoan”).  The Petsmart Loan matures onJanuary 8, 2008, bears interest at a fixed rate of 8.77% and requires themonthly payment of principal computed on a 25-year schedule.  The loan is non-recourse to HGPI.  The Company is marketing this property forsale and thus, pursuant to SFAS 144, its real estate assets are listed as RealEstate-Discontinued Operations on the Company’s balance sheets and its revenuesand expenses are included in Income from Discontinued Operations on theCompany’s statements of operations.

 

The Company is theobligor on a $2.0 million unsecured promissory note incurred in connection withthe acquisition of the land underlying its center in Laughlin, Nevada.  The note matures in June 2012, bearsinterest at a rate of 2.0% above the weighted average cost of funds index forthe Eleventh District Savings Institutions, adjusted annually and requiresmonthly amortization based on a 10 year schedule.  The interest rate payable on the loan was 5.074% through February28, 2003 and 4.375% through February 29, 2004. The outstanding principal balance on this note was $1.7 million and $1.9million at September 30, 2003 and December 31, 2002, respectively.

 

Pursuant to the terms ofthe UBS Loans and the JP Morgan Loans, the Company is required to keep theproperties in good general repair and to make capital improvements and repairsto certain of its outlet centers.  AtSeptember 30, 2003, there was approximately $1.0 million deposited in escrowswith the loan servicers, which the Company believes is sufficient to fund itsongoing capital requirements.  Anyadditional capital improvements are expected to be funded with additionalborrowings, existing cash balances or cash flow from operations.

 

On April 24, 2003, theCompany closed on a $3.1 million loan for the construction of Phase II of itsoutlet center in Tulare, California (the “Tulare II Loan”).  The loan will convert into a permanent loanmaturing in August 2009 upon completion of the retail expansion.  The loan is secured by a first mortgage onthe land and improvements and will

 

31

----

 

bear interest at thegreater of LIBOR plus 300 basis points or 5.5%.  The outstanding principal balance on the Tulare II Loan was $2.1million at September 30, 2003.  The loanwas made by Amster Trading Company Charitable Remainder Unitrust dated March10, 2003, an affiliate of Howard Amster, a Director and principal shareholderof HGPI.  The independent directors ofthe Company approved this transaction and the Company believes this transactionreflects market terms.

 

On June 12, 2003 theCompany borrowed $9.1 million from Amster Trading Company, an affiliate ofHoward Amster, a director and significant shareholder of the Company (the“Huntley Amster Loan”) which funded the purchase of Huntley from Prime Groupand its affiliates.  The Huntley AmsterLoan bears interest at a rate of 11.0% per annum, payable monthly, and matureson June 12, 2004, with the option for a one-year extension.  A one percent (1.0%) origination fee waspaid to Amster Trading Company.  TheHuntley Amster Loan may not be prepaid in whole or in part prior to September1, 2003 and thereafter requires a prepayment fee according to the followingschedule:

 
| **Payment made during the  period:**  |   | **Prepayment Fee** |   |
|---------------------------------------|--------|--------------------|--------|
| October  1, 2003 to October 31, 2003  |   | 2.0                | %      |
| November  1, 2003 to January 31, 2004 |   | 1.0                | %      |
| After  January 31, 2004               |   | None               |   |

 

The Huntley Amster Loanis guaranteed by HGPI and HGP LP and is secured by a pledge of the partnershipinterests in the partnerships which own Huntley, subject to any required lenderconsents.

 

In connection with theCompany’s acquisition of Huntley, the Company assumed a $10.7 million loansecured by Huntley provided by Beal Bank with a principal balance of $10.7million at September 30, 2003 (the “Huntley Beal Loan”).  This loan requires monthly payments of interestat a rate equal to the greater of (i) the Wall Street Journal Prime Rate plusfour percent (4%) or (ii) twelve percent (12%) per annum.  The Huntley Beal Loan may only be prepaid,prior to maturity, from the net proceeds from the sale of all or any portion ofthe collateral land.  Beal Bank mustapprove any collateral land sales in writing and may grant or withhold suchconsent in their sole discretion.  Theloan matures on October 31, 2004, and allows for a one-year extension upon thesatisfaction of certain customary conditions. The Huntley Beal Loan is guaranteed by HGPI.  In connection with the sale of the power center in Norton Shores,Michigan, Beal Bank granted the Company an option to extend the maturity of theHuntley Beal Loan until October 31, 2005. The Company agreed to cross default the Beal Bank Loans and the HuntleyBeal Loan.  The Company also granted asecond mortgage on Huntley to Beal Bank as security for the Beal BankLoans.  In addition, the Company grantedBeal Bank a first priority pledge and security interest in the net proceedsresulting from the sale of the partnerships that own the outlet center locatedin Laughlin, Nevada.  The Companydeposited $3.0 million of the net proceeds from the sale of the power center inNorton Shores, Michigan in a cash collateral account for the benefit of BealBank of which $750,000 may be used to pay interest on the Huntley Beal Loan andthe balance of which may be used to pay costs incurred by the Company indesigning and constructing improvements at Huntley.

 

Pursuant to the terms ofthe Amended and Restated Agreement and Assignment of Net Profits Interest datedOctober 27, 1999, as later amended (the “Beal Net Profits Agreement”), BealBank has a 35% interest in the Net Profits of the partnerships which ownHuntley, subject to certain preferences in their distribution.  The Beal Net Profits Agreement was grantedin connection with a prior loan made by Beal Bank to Huntley.  Net cash generated by Huntley is to bedistributed in the following order: first to the owners of Huntley in the amount of the ApprovedContributions (which total approximately $12.1 million at September 30, 2003and from which the Huntley Beal Loan is required to be repaid), second to BealBank for the Beal Account (which had a balance of approximately $6.6 million atSeptember 30, 2003), third to Huntley for its account (which had a balance ofapproximately $12.3 million at September 30, 2003) and thereafter, 35% to BealBank and 65% to Huntley.  The ApprovedContributions include operating and development expenditures funded for Huntley(excluding interest on the Huntley Beal Loan). For purposes of determining distribution preferences under the Beal NetProfits Agreement, the Approved Contributions, the Huntley account and the BealAccount accrue interest per the terms of the Beal Net Profits Agreement.  On the maturity date of the Huntley BealLoan, Huntley is required to pay Beal Bank the fair market value of Beal Bank’sNet Profits interest.  Pursuant topurchase accounting requirements, the Company has recorded an estimatedliability for the Beal Net Profits Agreement in the amount of $9.1 million,reflecting the estimated value of the Beal Bank Net Profits interestliability.  Such estimate is subject tochange.  Some of the factors that couldcause a significant revision to the estimate include changes in zoning andchanges in the market demand for real estate in the area.  The Beal Bank net profits

 

32

----

 

interest has beenincluded in Participation Interests and Other Liabilities on the Company’sbalance sheets.  Certain affiliates ofPrime have continuing guarantees related to the Beal Net ProfitsAgreement.  The Company has idemnifiedsuch guarantors against any liability in connection with their guarantees.  Capitalized terms in this paragraph whichare not defined herein shall have the meanings given such terms in the Beal NetProfits Agreement, as amended.

 

Gary J. Skoien,Chairman, Chief Executive Officer and President of the Company, is also theExecutive Vice President and Chief Operating Officer of Prime Group.  In connection with his employment with PrimeGroup, Mr. Skoien was previously granted an interest (the “Skoien Net ProfitsInterest”) in the net proceeds generated by Huntley, which he retained afterthe Company’s purchase of Huntley.  TheSkoien Net Profits Interest consists of a 9.675% participation in the Net CashFlow (as defined in Mr. Skoien’s Net Profits Agreement) distributed to theCompany (excluding distributions of all amounts contributed or advanced by theCompany to Huntley plus interest per the terms of the agreement).  Pursuant to purchase accountingrequirements, the Company has recorded a liability for the Skoien Net ProfitsInterest in the amount of $1.0 million, which represents its estimated fairvalue and which amount has been included in Participation Interests and OtherLiabilities on the Company’s balance sheets.

 

As additionalconsideration for the partnership interests, Huntley granted to Prime Group,and certain of its affiliates, a participation interest of 26% of the net cashflow distributed by Huntley (the “Prime Group Participation Interest”) withrespect to the interests acquired by the Company.  No amount is payable to Prime Group until the Company hasreceived distributions from Huntley in excess of the purchase price plusadvances made by the Company to Huntley plus a 40% return on such amountscompounded quarterly.  Aggregate amountspayable pursuant to the Prime Group Participation Interest shall not exceed$5.0 million.  No liability has beenrecorded by the Company for the Prime Group Participation Interest as itscurrent fair value is estimated to be zero. Gary J. Skoien, Chairman, Chief Executive Officer and President of theCompany is also the Executive Vice President and Chief Operating Officer ofPrime Group.

 

In 1993, the Village ofHuntley (the “Village”) created a Tax Increment Financing District (the “TIFDistrict”) which is authorized to issue up to $108.0 million of tax-exempt,tax-increment bonds (the “TIF Bonds”) to reimburse Huntley for a portion of theland cost and the cost of infrastructure improvements.  In 1995, the Village sold $7.0 million ofSeries A bonds and $14.0 million of Series B bonds.  Huntley owns the Series C bonds with a total principal amount of$25.0 million plus accrued interest. The Series C bonds are subordinate to the Series A and Series Bbonds.  Currently there is no portion ofthe tax increment available to the Series C bonds and no value has beenascribed to them by the Company.

 

The source of repaymentfor the TIF Bonds is (a) 100% of the increase in real estate taxes on the landin the TIF District above the taxes in place when the TIF District was created,and (b) one-half of the Village’s one percent (1%) sales tax collected onretail sales occurring within the TIF District.  The TIF District contains approximately 900 acres of land ownedor previously owned by Huntley.  Debtservice reserve funds were initially established with $700,000 for the Series Abonds and $3.09 million for the Series B bonds as security for the payment ofprincipal and interest on the TIF Bonds. To the extent the reserve funds are not needed to service the bonds,they will be returned to Huntley.  Thesefunds are held in interest bearing accounts under the control of the trusteeand totaled approximately $3.6 million at September 30, 2003.  There can be no assurance that these fundswill be returned to Huntley and, therefore, they are not reflected on the balancesheets of the Company.  The TIF Bondsare not obligations of the Company and are not reflected on the Company’sbalance sheet.

 

As additional securityfor the Series B bonds, Huntley granted a mortgage to U.S. Bank Trust NationalAssociation (“US Bank”), as trustee for the holders of the Series B bonds,covering approximately 131 acres of land (the “US Bank Mortgage”).  Upon the sale of any parcel of land subjectto the US Bank Mortgage, such parcel will be released from the US Bank Mortgageprovided that Huntley deposits into a collateral account (the “US BankCollateral Account”) an amount equal to the greater of (i) 50% of the July 1997appraised value of such parcel or (ii) an amount per square foot of the parcelsold as set forth in Exhibit B to the Amended and Restated Intercreditor Agreement.  Amounts deposited into the US BankCollateral Account are released to Huntley upon the issuance of a certificateof occupancy for the subject land parcel. The balance in the US Bank Collateral Account was approximately $1.5million at September 30, 2003 and is included in Restricted Cash on theCompany’s balance sheets (see Note 2 to the Condensed Consolidated FinancialStatements).  Based on a third-partyreview of the current incremental real estate and sales tax

 

33

----

 

revenue and theavailable debt service reserve funds, the Company believes that there aresufficient funds to make the scheduled debt service payments on the Series Aand B bonds.  Further, Huntley hascontinuing legal obligation related to the proceeds received from the TIF Bondsand thus, no liability has been recognized related to this mortgage.

 

The independentdirectors of the Company approved the acquisition of Huntley and the assumptionof the related net profits interest liabilities and the Company believes thatthe transaction reflects market terms.

 

On March 14, 2003, theCompany made a secured loan to Retail Partners Limited Partnership and RetailPartners, Inc. (collectively “Retail Partners”).  The loan is for a term of 14 months and bears interest at therate of 5.0%, payable at maturity.  Theprincipal balance on the loan was $500,000 at September 30, 2003.  The Company received a 3.25% net profitsinterest in a real estate development owned by Huntley Development LP andHuntley Meadow Residential Venture (collectively “Huntley”) subject to thecurrent lender’s interest in distributions from Huntley.  The fair value of the profits interest hasbeen preliminarily estimated at $350,000. The value of this interest is included in Land Held for Investment.  Such value will be recognized over the termof the loan as an adjustment to the yield. Prime Group owns Retail Partners and Gary J. Skoien, Chairman, ChiefExecutive Officer and President of the Company, is Executive Vice President andChief Operating Officer of Prime Group and has a net profits interest inHuntley.  The independent directors ofthe Company approved this transaction as being at fair market conditions.

 

The Company expects tomeet its short-term liquidity requirements generally through additionalborrowings, working capital, cash flows from operations and the sale of realestate classified as Real Estate-Discontinued Operations on the Company’sbalance sheets.  The Company expects tomeet its long-term requirements, such as tenant allowances for new leases andcapital improvements and expansions currently being considered at its center inTulare, California, and on some of its vacant land, through the use of workingcapital and cash flows from operations and, if necessary and available,additional borrowings of long-term debt and the potential offering of equitysecurities in the private markets.  TheCompany’s ability to secure new loans is limited by the fact that virtually allof the Company’s real estate assets are currently pledged as collateral for itscurrent loans.

 

Discontinued Operations

 

The Company is activelymarketing the following assets for sale: the single tenant building in Roseville, Michigan leased to Petsmart,Inc., the 103,000 square foot strip building at its outlet center in Monroe,Michigan and 8 parcels of vacant land totaling approximately 88 acres.  The net proceeds from the sale of theseassets would be available for general corporate purposes, subject to certainrestrictions and repayment obligations contained in the mortgage loans to whichthey are subject.  Pursuant to therequirements of SFAS 144, the Company has reclassified the real estate assetsfor these properties to Real Estate-Discontinued Operations on the balancesheets and reports the revenue and expenses from the properties as Income fromDiscontinued Operations on the statements of operations.  In addition, the outlet centers located inDaleville, Indiana and Somerset, Pennsylvania, which were sold in May 2003 andthe power center located in Norton Shores, Michigan which was sold in August2003, are also classified as discontinued operations.  SFAS 144 also requires that any prior period financial statementspresented are also reclassified for comparability.  This reclassification has no effect on the Company’s reported netincome or loss.

 

Sale of PartnershipUnits

 

On December 27, 2002,HGPI sold 145,349 units of HGP LP to Howard M. Amster, a Director and principalshareholder of HGPI, for aggregate consideration of $750,000, or $5.16 perunit.  On March 13, 2003, HGPI sold261,628 units of HGP LP to Mr. Amster for aggregate consideration of $1.35million, or $5.16 per unit.  Proceeds inexcess of HGPI’s carrying value of these units was recognized as an increase inadditional paid in capital.  The 261,628units sold on March 13, 2003 are not convertible into Common Shares of HGPI.

 

34

----

 

LegalProceedings

 

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

 

35

----

 

HORIZON GROUP PROPERTIES,INC.

Quantitative andQualitative Disclosure of Market Risk

(unaudited)

 

Item3.  Quantitativeand Qualitative Disclosure of Market Risk

 

Market risk is the riskof loss from adverse changes in market prices and interest rates.  The Company’s future earnings and cash flowsmay be affected by changes in market interest rates.  The fair value of the Company’s debt obligations may also beaffected by future changes in market interest rates.  The primary market risk facing the Company is related to itslong-term indebtedness, which bears interest at fixed and variable rates.  The Company seeks fixed rate non-recoursedebt to manage market risk.  AtSeptember 30, 2003, fixed rate debt represented approximately 79.3% or $74.9million of the Company’s debt.  Loanswith a fixed rate of interest and level amortization schedules minimizeinterest rate risk related to cash flows and interest expense until thematurity of such loans.

 

At September 30, 2003, variablerate debt represented 20.7% or $19.5 million of the Company’s total debt.  At September 30, 2003, the average interestrate on variable rate debt was approximately 10.3%.  Certain of the Company’s variable rate loans are subject tominimum interest rates that, as of September 30, 2003, were in excess of thecontractual variable rates.  The $2.0million Beal Bank Loan I bears interest at the greater of the Wall StreetJournal Prime Rate (the “Prime Rate”) plus 4.5% or 12.0%.  At September 30, 2003, the Prime Rate was4.0%.  Thus, a 3.5% increase in thePrime Rate would not affect the interest payable on the Beal Bank I Loan.  The $3.0 million Beal Bank Loan II bearsinterest at the greater of the Prime Rate plus 2.5% or 9.9%.  Thus, a 3.4% increase in the Prime Ratewould not affect the interest payable by the Company on the Beal Bank IILoan.  The $2.1 million TulareConstruction Loan bears interest at the greater of LIBOR plus 3.0% or 5.5%.  At September 30, 2003, LIBOR was 1.28%.  Thus, a 1.22% increase in LIBOR would notaffect the interest payable by the Company on the Tulare ConstructionLoan.  The $10.7 million Huntley BealLoan bears interest at the greater of the Prime Rate plus 4.0% or 12.0%.  Thus, a 4.0% increase in the Prime Ratewould not affect the interest payable by the Company on this loan.

 

If market interest ratesapplicable to the Company’s variable rate debt were to increase by 100 basispoints, interest expense on the variable rate debt (taking into account theminimum interest rates applicable to certain of the Company’s variable rateloans) would increase $17,000 annually. The cash flows of the Company would decrease by $17,000 annually due tosuch increase in interest rates (taking into account the minimum interest ratesapplicable to certain of the Company’s variable rate loans).  The fair value of total debt outstanding(excluding the JP Morgan Loans, on which the Company is currently in default)would decrease by $1.8 million based on a 100 basis point increase in interestrates.

 

If market interest ratesapplicable to the Company’s variable rate debt were to decrease by 100 basispoints, interest expense on the variable rate debt (taking into account theminimum interest rates applicable to certain of the Company’s variable rateloans) would decrease $17,000 annually. The cash flows of the Company would increase by $17,000 annually due tosuch decrease in interest rates (taking into account the minimum interest ratesapplicable to certain of the Company’s variable rate loans).  The fair value of total debt outstanding(excluding the JP Morgan Loans on which the Company is currently in default)would increase by $1.9 million based on a 100 basis point decrease in interestrates.

 

These amounts were determinedsolely by considering the effect on the current debt of the Company of ahypothetical change in interest rates and assumes that there is no change inthe current structure of interest rates, the underwriting standards of lendersor the overall capital structure or financial situation of the Company.

 

## **Inflation**

 

HGP’s leases with someof its tenants require the tenants to reimburse HGP for most operating expensesand increases in common area maintenance expense, which reduces HGP’s exposureto increases in costs and operating expenses resulting from inflation.

 

36

----

 

HORIZONGROUP PROPERTIES, INC.

Controlsand Procedures

(unaudited)

 

Item 4.  Controls and Procedures

 

Effective as ofSeptember 30, 2003, the Company carried out an evaluation, under thesupervision and with the participation of management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) under the Exchange Act).  Based upon that evaluation, the Company’s Chief Executive Officerand Chief Financial Officer concluded that the disclosure controls andprocedures are effective to timely alert them to material information relatingto the Company (including its consolidated subsidiaries) required to beincluded in the Company’s Exchange Act filings.  There have been no significant changes in the Company’s internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of their evaluation.

 

37

----

 

HORIZON GROUP PROPERTIES, INC.

Part II –Other Information

 

Item1.  Legal Proceedings - None

 

Item2.  Changes inSecurities

 

On October 3, 2003, theCompany commenced an offer for the purchase of all shares of its common stockheld by persons owning 20 or fewer shares as of the close of business onSeptember 26, 2003.  The Company willpay $5.00 for each share properly tendered by an eligible stockholder.  The offer is not conditioned on the receiptof any minimum number of tenders and will expire at 5:00 p.m., New York Citytime, on Wednesday, December 3, 2003, unless extended prior to that date.  If, after completion of the offer, theCompany has fewer than 300 stockholders of record, the Company intends toterminate the registration of its common stock under the Securities ExchangeAct of 1934 and become a non-reporting company and the common stock will nolonger be eligible for trading on the Nasdaq market.

 

Item3.  Defaults UponSenior Securities

 

On October 10, 2001, theCompany notified the servicers of the JP Morgan Loans that the net cash flowfrom the properties securing the loans was insufficient to fully pay therequired monthly debt service.  TheCompany remitted available cash flow, after a reserve for monthly operatingexpenses, as partial payment of debt service. The failure to pay in full the amounts due constitutes a default underthe loan agreements, which would allow the respective lenders to exercise theirvarious remedies contained in the loan agreements, including foreclosure on theproperties which secure the loans.

 

On May 22, 2003, theCompany restructured the DST Loans.  Therestructuring included the acquisition of the Daleville and Somerset Loans andthe reinstatement of the Tulare Loan. The Company and the special servicer of the JP Morgan Loans arecurrently attempting to negotiate a restructuring of the GST Loans.  There can be no assurance that suchdiscussions will result in any modification of the terms of the loans.  The GST Loans are non-recourse to HGPI,subject to certain customary exceptions. See Note 5 to the Condensed Consolidated Financial Statements forfurther details.

 

On November 4, 2003, theCompany began restructuring the three GST Loans on which it had been in default(See Note 5).  The planned restructuringincludes the payoff at a discount of the loans secured by the outlet centers inSealy, Texas and Gretna, Nebraska and the reinstatement to current status ofthe loan secured by the outlet center in Traverse City, Michigan.  The loan secured by the outlet center inSealy was repaid on November 4, 2003 and the loan secured by the outlet centerin Gretna was repaid on November 6, 2003. The reinstatement of the loan secured by the outlet center in TraverseCity is expected to be completed by November 20, 2003.The restructuring of theGST Loans requires the payment of all current interest and principal on theTraverse City loan as of the date of its reinstatement together with additionalpayments totaling $4.0 million.

 

The repaid loans had anaggregate principal balance of approximately $18.0 million, excluding accruedinterest and penalties, as of the dates of repayment.  The reinstatement to current status of the loan secured by theoutlet center in Traverse City will result in the forgiveness of approximately$600,000 of accrued penalties and default interest.  The carrying amount and prospective effective interest rate onthe loan secured by the center in Traverse City will be adjusted for theforgiven interest and penalties applicable to this property.

 

Item4.  Submission ofMatters to a Vote of Security Holders - None

 

Item5.  Other Information - None

 

38

----

 

Item6.  Exhibits orReports on Form 8-K

 

(a)       Exhibits

 
| Exhibit 3(i)     | Articles of Amendment  and Restatement of Horizon Group Properties, Inc. (the “Company”) (8)                                                                                                                                                                                                                                                                                                                                  |
|------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 3(ii)    | By-laws of the Company  (1)                                                                                                                                                                                                                                                                                                                                                                                                             |
| Exhibit 3(iii)   | Amendment to By-laws  of the Company dated March 17, 1999 (4)                                                                                                                                                                                                                                                                                                                                                                           |
| Exhibit 3(iv)    | Amendment to By-laws  of the Company dated June 8, 2000 (12)                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 3(v)     | Amendment to By-laws  of the Company dated May 4, 2001 (12)                                                                                                                                                                                                                                                                                                                                                                             |
| Exhibit 3(vi)    | Amendment to By-laws  of the Company dated May 29, 2001 (13)                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 3 (vii)  | Articles Supplementary  of the Company dated June 7, 2001 (17)                                                                                                                                                                                                                                                                                                                                                                          |
| Exhibit 3 (viii) | Excepted Holders  Certificate dated July 30, 2002 (17)                                                                                                                                                                                                                                                                                                                                                                                  |
| Exhibit 4.1      | Specimen certificate  for common stock, $.01 par value per share, of the Company (1)                                                                                                                                                                                                                                                                                                                                                    |
| Exhibit 10.1     | Sky Merger Corp.  Registration Statement on Form S-4 (excluding exhibits thereto), as filed  with the Securities and Exchange Commission on May 12, 1998 (Registration No.  333-51285) (1)                                                                                                                                                                                                                                              |
| Exhibit 10.2     | Amended and Restated  Agreement and Plan of Merger by and among Prime Retail, Inc., Prime Retail,  L.P., Horizon Group, Inc., Sky Merger Corp., the Company, Horizon Group  Properties, L.P. and Horizon/Glen Outlet Centers Limited Partnership dated as  of February 1, 1998 (Incorporated by reference to Exhibit 10(a) to Horizon  Group, Inc.’s current report on Form 8-K dated February 1, 1998 (SEC File No.  1-12424) (1) |
| Exhibit 10.3     | Form of 1998 Stock  Option Plan of the Company (1)                                                                                                                                                                                                                                                                                                                                                                                      |
| Exhibit 10.4     | Employment Agreement  between Gary J. Skoien and the Company (1)                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 10.5     | Employment Agreement  between David R. Tinkham and the Company (1)                                                                                                                                                                                                                                                                                                                                                                      |
| Exhibit 10.6     | Form of  Indemnification Agreement for the Board of Directors of the Company (1)                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 10.7     | Form of Registration  Rights Agreement (1)                                                                                                                                                                                                                                                                                                                                                                                              |
| Exhibit 10.8     | Form of Contribution  Agreement (incorporated by reference to Appendix E to Exhibit 10.1) (1)                                                                                                                                                                                                                                                                                                                                           |
| Exhibit 10.9     | Employment Agreement  between Richard Berman and the Company (3)                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 10.10    | Working Capital  Agreement with Prime Retail, Inc. (3)                                                                                                                                                                                                                                                                                                                                                                                  |
| Exhibit 10.11    | Loan Agreement dated  as of June 15, 1998 by and among Third Horizon Group Limited Partnership,  Nebraska Crossing Factory Shops, L.L.C., and Indiana Factory Shops, L.L.C.  and Nomura Asset Capital Corporation (2)                                                                                                                                                                                                                   |
| Exhibit 10.12    | Form of Deed of Trust,  Assignment of Leases and Rents and Security Agreement with Nomura Asset  Capital 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)                                                                                                                                                                                                                                                                                                                                                                                                           |
| Exhibit 10.20    | Fixed Rate Note dated  as of July 9, 1999 between Gretna, Sealy, Traverse City Outlet Centers,  L.L.C. and Morgan Guaranty Trust Company of New York related to the financing  of the factory outlet center in Gretna, Nebraska (5)                                                                                                                                                                                                     |

 

39

----

 
| Exhibit 10.21 | Deed of Trust and  Security Agreement for the benefit of Morgan Guaranty Trust Company of New  York, as lender, from Gretna, Sealy, Traverse City Outlet Centers, L.L.C., as  borrower, related to the financing of the factory outlet center in Gretna,  Nebraska (5) |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 10.22 | Guaranty for the  benefit of Morgan Guaranty Trust Company of New York by Horizon Group  Properties, Inc. related to the Gretna, Sealy and Traverse City loans (5)                                                                                                     |
| Exhibit 10.23 | Agreement between  Andrew F. Pelmoter and the Company (6)                                                                                                                                                                                                              |
| Exhibit 10.24 | Agreement of Purchase  and Sale and Escrow Instructions dated March 24, 2000 between Third Horizon  Group Limited Partnership and Triple Net Properties, LLC. (7)                                                                                                      |
| Exhibit 10.25 | First Amendment to  Agreement of Purchase and Sale and Escrow Instructions between Third Horizon  Group Limited Partnership and Triple Net Properties, LLC, dated as of April  21, 2000 (7)                                                                            |
| Exhibit 10.26 | Second Amendment to  Agreement of Purchase and Sale and Escrow Instructions between Third Horizon  Group Limited Partnership and Triple Net Properties, LLC, dated as of April  25, 2000 (7)                                                                           |
| Exhibit 10.27 | Promissory Note dated  April 18, 2000, between Horizon Group Properties, LP as Lender and Prime  Outdoor Group, LLC as Borrower (7)                                                                                                                                    |
| Exhibit 10.28 | Security Agreement  dated April 18, 2000, between Horizon Group Properties, LP and Prime Outdoor  Group, LLC (7)                                                                                                                                                       |
| Exhibit 10.29 | Pledge Agreement by  and among Horizon Group Properties, LP; Prime Group Limited Partnership;  Prime Group II, LP; Prime Group III, LP; Prime Group IV, LP; Prime Group V,  LP and Prime Financing Limited Partnership (7)                                             |
| Exhibit 10.30 | Collateral Assignment  of Membership Interests dated April 18, 2000, between Horizon Group  Properties, LP and The Prime Group, Inc. (7)                                                                                                                               |
| Exhibit 10.31 | Guarantee dated April  18, 2000, between Horizon Group Properties, LP; Prime Group Limited  Partnership; Prime Group II, LP; Prime Group III, LP; Prime Group IV, LP;  Prime Group V, LP and Prime Financing Limited Partnership (7)                                   |
| Exhibit 10.32 | Letter Agreement dated  April 18, 2000, between Horizon Group Properties, Inc., Prime Group, Inc. and  Prime Outdoor Group, LLC (7)                                                                                                                                    |
| Exhibit 10.33 | Agreement between  Andrew F. Pelmoter and the Company (7)                                                                                                                                                                                                              |
| Exhibit 10.34 | Amendment to  Employment Agreement between Gary J. Skoien and the Company dated as of  August 29, 2000 (9)                                                                                                                                                             |
| Exhibit 10.35 | Amendment to  Employment Agreement between David R. Tinkham and the Company dated as of  August 29, 2000 (9)                                                                                                                                                           |
| Exhibit 10.36 | Amendment to  Employment Agreement between Andrew F. Pelmoter and the Company dated October  9, 2000 (10)                                                                                                                                                              |
| Exhibit 10.37 | Amendment to  Employment Agreement between Thomas R. Rumptz and the Company dated November  11, 2000 (10)                                                                                                                                                              |
| Exhibit 10.38 | Additional Amendment  to Employment Agreement between Andrew F. Pelmoter and the Company dated  April 26, 2001 (12)                                                                                                                                                    |
| Exhibit 10.39 | Additional Amendment  to Employment Agreement between Thomas R. Rumptz and the Company dated April  3, 2001 (12)                                                                                                                                                       |
| Exhibit 10.40 | Settlement Agreement,  dated as of May 4, 2001, by and among the Company, Howard M. Amster, John C.  Loring and Robert M. Schwartzberg (11)                                                                                                                            |
| Exhibit 10.41 | Promissory Note, dated  as of July 30, 2001, between Lakeshore Marketplace, LLC and Greenwich Capital  Financial Products, Inc. (14)                                                                                                                                   |
| Exhibit 10.42 | Mortgage, dated as of  July 30, 2001, between Lakeshore Marketplace, LLC and Greenwich Capital  Financial Products, Inc. (14)                                                                                                                                          |
| Exhibit 10.43 | Collection and Deposit  Account Agreement, dated as of July 30, 2001, by and among LaSalle Bank  National Association, Lakeshore Marketplace, LLC and Greenwich Capital  Financial Products, Inc. (14)                                                                 |
| Exhibit 10.44 | Second Amended and  Restated Note dated as of July 31, 2001 between Third Horizon Group Limited  Partnership and CDC Mortgage Capital, Inc. (14)                                                                                                                       |

 

40

----

 
| Exhibit 10.45 | Second Amendment to  Loan Agreement and Settlement Agreement dated as of July 31, 2001 by and  among Third Horizon Group Limited Partnership, Horizon Group Properties,  Inc., Horizon Group Properties, LP and CDC Mortgage Capital, Inc. (14)                                                                                                                                             |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 10.46 | Reaffirmation of  Guaranty dated as of July 31, 2001 by Horizon Group Properties, Inc. and  Horizon Group Properties, LP (14)                                                                                                                                                                                                                                                               |
| Exhibit 10.47 | Reaffirmation of  Guaranty dated as of July 31, 2001 by Prime Retail, LP (14)                                                                                                                                                                                                                                                                                                               |
| Exhibit 10.48 | Pledge and Security  Agreement dated as of July 31, 2001 by and among Horizon Group Properties,  LP, Third HGI, LLC and CDC Mortgage Capital, Inc. (14)                                                                                                                                                                                                                                     |
| Exhibit 10.49 | Amended and Restated  Guaranty and Indemnity Agreement dated as of July 31, 2001 by and among  Horizon Group Properties, Inc., Horizon Group Properties, LP, Prime Retail,  Inc., and Prime Retail, LP (14)                                                                                                                                                                                 |
| Exhibit 10.50 | Amendment to Retention  Letter between Thomas R. Rumptz and the Company dated August 29, 2001. (15)                                                                                                                                                                                                                                                                                         |
| Exhibit 10.51 | Amendment to Retention  Letter between Thomas R. Rumptz and the Company dated November 28, 2001. (15)                                                                                                                                                                                                                                                                                       |
| Exhibit 10.52 | Amendment to Retention  Letter between Thomas R. Rumptz and the Company dated February 25, 2002. (15)                                                                                                                                                                                                                                                                                       |
| Exhibit 10.53 | Amendment to Retention  Letter between Andrew Pelmoter and the Company dated May 30, 2001. (15)                                                                                                                                                                                                                                                                                             |
| Exhibit 10.54 | Promissory Note I  dated as of July 10, 2002 between Monroe Outlet Center LLC and Beal Bank,  S.S.B. related to the financing of vacant land in Norton Shores, Michigan and  Fruitport Township, Michigan.  (16)                                                                                                                                                                       |
| Exhibit 10.55 | Promissory Note II  dated as of July 10, 2002 between Monroe Outlet Center LLC and Beal Bank,  S.S.B. related to the financing of the outlet center in Monroe,  Michigan.  (16)                                                                                                                                                                                                        |
| Exhibit 10.56 | Commercial Mortgage  dated July 10, 2002 between Monroe Outlet Center LLC and Beal Bank, S.S.B.  related to the financing of the outlet center in Monroe, Michigan.  (16)                                                                                                                                                                                                              |
| Exhibit 10.57 | Guaranty Agreement  dated July 10, 2002 in favor of Beal Bank, S.S.B. related to the Monroe  Outlet Center LLC loans.  (16)                                                                                                                                                                                                                                                            |
| Exhibit 10.58 | Second Amended and  Restated Guaranty and Indemnity Agreement dated July 11, 2002 by and among  Horizon Group Properties, Inc., Horizon Group Properties, L.P., Prime Retail,  Inc. and Prime Retail, L.P. related to the financing of the outlet center in  Monroe, Michigan.  (16)                                                                                                   |
| Exhibit 10.59 | Loan Agreement dated  as of July 11, 2002 by and among UBS Warburg Real Estate Investments, Inc.,  Laughlin Outlet Center LLC, Warrenton Outlet Center LLC and Medford Outlet  Center LLC related to the financing of the Laughlin, Nevada, Medford,  Minnesota and Warrenton, Missouri outlet centers.  (16)                                                                          |
| Exhibit 10.60 | Promissory Note dated  July 11, 2002 between UBS Warburg Real Estate Investments, Inc. and Laughlin  Outlet Center LLC related to the financing of the outlet center in Laughlin,  Nevada.  (16)                                                                                                                                                                                       |
| Exhibit 10.61 | Deed of Trust,  Assignment of Leases and Rents and Security Agreement dated as of July 11,  2002 between Laughlin Outlet Center LLC and Fidelity National Title Insurance  Company for the benefit of UBS Warburg Real Estate Investments Inc. related  to the financing of the outlet center in Laughlin, Nevada.  (16)                                                               |
| Exhibit 10.62 | Guarantor Deed of  Trust, Assignment of Leases and Rents, Security Agreement and Guaranty dated  as of July 11, 2002 between Laughlin Outlet Center LLC and Fidelity National  Title Insurance Company for the benefit of UBS Warburg Real Estate  Investments Inc. related to the financing of the Laughlin, Nevada, Medford,  Minnesota and Warrenton Missouri outlet centers.  (16) |
| Exhibit 10.63 | Guaranty of Recourse  Obligations dated as of July 11, 2002 by Horizon Group Properties, Inc. and  Horizon Group Properties, L.P. for the benefit of UBS Warburg Real Estate  Investments Inc. related to the financing of the Laughlin, Nevada, Medford,  Minnesota and Warrenton, Missouri outlet centers.  (16)                                                                     |
| Exhibit 10.64 | Cash Management  Agreement dated as of July 11, 2002 among Laughlin Outlet Center LLC, Medford  Outlet Center LLC, Warrenton Outlet Center LLC, Wachovia Bank, National                                                                                                                                                                                                                     |

 

41

----

 
|          | Association, UBS  Warburg Real Estate Investments Inc., and Horizon Group Properties, L.P.  related to the financing of the Laughlin, Nevada, Medford, Minnesota and  Warrenton, Missouri outlet centers.   (16)                                                                                                                                                                                  |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 10.65 | Environmental  Indemnity Agreement dated as of July 11, 2002 by Laughlin Outlet Center LLC,  Medford Outlet Center LLC, Warrenton Outlet Center LLC, Horizon Group  Properties, Inc. and Horizon Group Properties, L.P. in favor of UBS Warburg  Real Estate Investments Inc. related to the financing of the Laughlin,  Nevada, Medford, Minnesota and Warrenton, Missouri outlet centers.  (16) |
| Exhibit 10.66 | Mezzanine Loan  Document dated as of July 11, 2002 by and among Laughlin Holdings LLC,  Medford Holdings LLC and Warrenton Holdings LLC and UBS Warburg Real Estate  Investments Inc. related to the mezzanine financing of the Laughlin, Nevada,  Medford, Minnesota and Warrenton, Missouri outlet centers.  (16)                                                                               |
| Exhibit 10.67 | Promissory Note dated  July 11, 2002 between Laughlin Holdings LLC and UBS Warburg Real Estate  Investments Inc. related to the mezzanine financing of the Laughlin, Nevada  outlet center.  (16)                                                                                                                                                                                                 |
| Exhibit 10.68 | Guaranty of Recourse  Obligations dated as of July 11, 2002 by Horizon Group Properties, Inc. and  Horizon Group Properties, L.P. for the benefit of UBS Warburg Real Estate  Investments Inc. related to the mezzanine financing of the Laughlin, Nevada,  Medford, Minnesota and Warrenton, Missouri outlet centers.  (16)                                                                      |
| Exhibit 10.69 | Pledge and Security  Agreement dated as of July 11, 2002 between Laughlin Holdings LLC and UBS  Warburg Real Estate Investments Inc. related to the mezzanine financing of  the Laughlin, Nevada outlet center.   (16)                                                                                                                                                                            |
| Exhibit 10.70 | Guarantor Pledge and  Security Agreement dated as of July 11, 2002 between Laughlin Holdings LLC  and UBS Warburg Real Estate Investments Inc. related to the mezzanine  financing of the Laughlin, Nevada, Medford, Minnesota and Warrenton, Missouri  outlet centers.  (16)                                                                                                                     |
| Exhibit 10.71 | Subordinate Cash  Management Agreement dated as of July 11, 2002 among Laughlin Holdings LLC,  Medford Holdings LLC, Warrenton Holdings LLC, Wachovia Bank, National  Association and UBS Warburg Real Estate Investments Inc. related to the  mezzanine financing of the Laughlin, Nevada, Medford, Minnesota and  Warrenton, Missouri outlet centers.   (16)                                    |
| Exhibit 10.72 | Environmental  Indemnity Agreement dated as of July 11, 2002 by Laughlin Holdings LLC,  Medford Holdings LLC, Warrenton Holdings LLC, Horizon Group Properties, Inc.  and Horizon Group Properties, L.P. in favor of UBS Warburg Real Estate  Investments Inc. related to the mezzanine financings of the Laughlin, Nevada,  Medford, Minnesota and Warrenton, Missouri outlet centers.  (16)     |
| Exhibit 10.73 | Form of Horizon Group  Properties, L.P. Common Unit Award Agreement. (18)                                                                                                                                                                                                                                                                                                                              |
| Exhibit 10.74 | Amendment to Retention  Letter between Thomas R. Rumptz and the Company dated August 21, 2002 (18)                                                                                                                                                                                                                                                                                                     |
| Exhibit 10.75 | Letter Agreement  between Pleasant Lake Apts., Ltd. and Horizon Group Properties, Inc. dated  December 23, 2002, regarding the sale of partnership units in Horizon Group  Properties, L.P. (19)                                                                                                                                                                                                       |
| Exhibit 10.76 | Amendment No.1 to  Amended and Restated Agreement of Limited Partnership of Horizon Group  Properties, L.P. (20)                                                                                                                                                                                                                                                                                       |
| Exhibit 10.77 | Amendment to Retention  Letter between Thomas R. Rumptz and the Company dated December 19, 2002 (21)                                                                                                                                                                                                                                                                                                   |
| Exhibit 10.78 | Letter Agreement  between Pleasant Lake Apts., Ltd. and Horizon Group Properties, Inc. dated  March 13, 2003, regarding the sale of partnership interests in Horizon Group  Properties, L.P. (22)                                                                                                                                                                                                      |
| Exhibit 10.79 | Promissory Note dated  as of March 14, 2003 between Retail Partners, Inc. and Retail Partners  Limited Partnership as borrowers and Horizon Group Properties, Inc. as lender  dated March 13, 2003, regarding the sale of partnership interests in Horizon  Group Properties, L.P. (22)                                                                                                                |
| Exhibit 10.80 | Guaranty dated as of  March 14, 2003 by The Prime Group, Inc., Prime Group Limited Partnership,  Prime Group II, L.P., PFLP, Inc., and Prime International, Inc. as guarantors  in favor of Horizon Group Properties, Inc. as lender (22)                                                                                                                                                              |

 

42

----

 
| Exhibit 10.81 | Pledge and Security  Agreement dated as of March 14, 2003 by and between Retail Partners Limited  Partnership, Retail Partners, Inc. and Horizon Group Properties, Inc. (22)                                                                                                                                                                                                                                                          |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 10.82 | Letter Agreement dated  as of March 14, 2003 between Huntley Development Limited Partnership, Huntley  Meadow Residential Venture, The Prime Group, Inc. and Horizon Group  Properties, Inc. regarding the assignment of the profits interest (22)                                                                                                                                                                                    |
| Exhibit 10.83 | Construction and Term  Loan Agreement dated as of April 24, 2003 by and between Horizon Group  Properties, L.P. and Amster Trading Company Charitable Remainder Unitrust  dated March 10, 2003 (24)                                                                                                                                                                                                                                   |
| Exhibit 10.84 | Promissory Note dated  April 24, 2003 between Horizon Group Properties, L.P. and Amster Trading  Company Charitable Remainder Unitrust dated March 10, 2003 (24)                                                                                                                                                                                                                                                                      |
| Exhibit 10.85 | Construction Deed of  Trust, Security Agreement, Financing Statement and Fixture Filing (with  Assignment of Rents) dated as of April 24, 2003 by and among Horizon Group  Properties, L.P., First American Title and Amster Trading Company Charitable  Remainder Unitrust dated March 10, 2003 (24)                                                                                                                                 |
| Exhibit 10.86 | Guaranty of Payment  and Completion dated as of April 24, 2003 by Horizon Group Properties, Inc.  to and for the benefit of Amster Trading Company Charitable Remainder  Unitrust dated March 10, 2003 (24)                                                                                                                                                                                                                           |
| Exhibit 10.87 | Environmental  Indemnity Agreement dated as of April 24, 2003 by Horizon Group Properties,  L.P. and Horizon Group Properties, Inc. to and for the benefit of Amster  Trading Company Charitable Remainder Unitrust dated March 10, 2003 (24)                                                                                                                                                                                         |
| Exhibit 10.88 | Demand Promissory Note  dated as of May 20, 2003 between Horizon Group Properties, Inc., Pleasant  Lake Apts. Limited Partnership and Pleasant Lake Apts. Corp. (25)                                                                                                                                                                                                                                                                  |
| Exhibit 10.89 | Consent and Assumption  Agreement dated as of May 22, 2003 between and among Wells Fargo Bank  Minnesota, N.A., as successor in interest to Norwest Bank Minnesota, National  Association, as trustee for J.P. Morgan Commercial Mortgage Finance Corp.,  Mortgage Pass-Through Certificates, Series 2000-C9, Tulare Outlet Center,  L.P., Daleville, Sommerset, Tulare Outlet Centers, L.P. and Horizon Group  Properties, Inc. (25) |
| Exhibit 10.90 | Letter Agreement dated  May 20, 2003 between Pleasant Lake Apts. Limited Partnership and Horizon  Group Properties, Inc. (25)                                                                                                                                                                                                                                                                                                         |
| Exhibit 10.91 | Purchase Agreement  dated as of May 31, 2003 by and among Horizon Group Properties, Inc.,  Daleville, Sommerset, Tulare Finance Company, Inc., Horizon Group Properties,  L.P., Pleasant Lake Apts. Corp., Pleasant Lake Apts. Limited Partnership,  Richard Bongorno, Gary Skoien and David Zlatin (26)                                                                                                                              |
| Exhibit 10.92 | Partnership Interests  Purchase Agreement dated as of June 13, 2003 among The Prime Group, Inc.,  Huntley Development Company, Prime/Huntley Meadows Residential, Inc., PGLP  Holdings, L.L.C., Horizon Group Properties, Inc., Horizon Huntley Finance LLC  and Horizon Huntley LLC (27)                                                                                                                                             |
| Exhibit 10.93 | Assignment and  Assumption Agreement — Huntley Development Limited Partnership dated as of  June 13, 2003 by and among The Prime Group, Inc., Huntley Development  Company, Horizon Huntley LLC and Horizon Huntley Finance LLC (27)                                                                                                                                                                                             |
| Exhibit 10.94 | Assignment and  Assumption Agreement — Huntley Meadows Residential Venture dated as of June  13, 2003 by and among PGLP Holdings, L.L.C., Prime/Huntley Meadows  Residential, Inc., Horizon Huntley LLC and Horizon Huntley Finance LLC (27)                                                                                                                                                                                     |
| Exhibit 10.95 | Indemnification and  Guaranty Agreement dated as of June 13, 2003 by Horizon Huntley Finance LLC,  Horizon Huntley LLC, and Horizon Group Properties, Inc. in favor of The Prime  Group, Inc., Prime Group Limited Partnership, Prime Group II, L.P., Prime  Group III, L.P., and Michael W. Reschke (27)                                                                                                                             |
| Exhibit 10.96 | Amended, Restated and  Increased Promissory Note dated January 30, 2002 between Huntley Development  Limited Partnership and Beal Bank, S.S.B. (27)                                                                                                                                                                                                                                                                                   |
| Exhibit 10.97 | Letter Agreement dated  January 30, 2002 between Huntley Development Limited Partnership and Beal  Bank, S.S.B. (27)                                                                                                                                                                                                                                                                                                                  |

 

43

----

 
| Exhibit 10.98  | Third Modification and  Extension Agreement dated January 30, 2002 by and among Huntley Development  Limited Partnership, The Prime Group, Inc. and Beal Bank, S.S.B. (27)                                                                                                                                              |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 10.99  | Fourth Modification  Agreement dated June 13, 2003 by and among Huntley Development Limited  Partnership, The Prime Group, Inc., Horizon Group Properties, Inc. and Beal  Bank S.S.B. (27)                                                                                                                              |
| Exhibit 10.100 | Guaranty Agreement  dated as of October 27, 1999 by The Prime Group, Inc. in favor of Beal Bank,  S.S.B. (27)                                                                                                                                                                                                           |
| Exhibit 10.101 | Guaranty Agreement  dated June 13, 2003 by Horizon Group Properties, Inc. in favor of Beal Bank,  S.S.B. (27)                                                                                                                                                                                                           |
| Exhibit 10.102 | Mortgage, Security  Agreement, and Assignment of Leases and Rents executed October 27, 1999 by  Huntley Development Limited Partnership in favor of Beal Bank, S.S.B. (27)                                                                                                                                              |
| Exhibit 10.103 | First Amendment to  Mortgage, Security Agreement and Assignment of Leases and Rents and Related  Documents dated December 29, 1999 by and among Huntley Development Limited  Partnership, The Prime Group, Inc. and Beal Bank, S.S.B. (27)                                                                              |
| Exhibit 10.104 | Amended and Restated  Agreement and Assignment of Net Profits Interest dated October 27, 1999 by  Huntley Development Limited Partnership and Huntley Meadows Residential  Venture unto Beal Bank, S.S.B. (27)                                                                                                          |
| Exhibit 10.105 | First Amendment to  Amended and Restated Agreement and Assignment of Net Profits Interest dated  January 30, 2002 by Huntley Development Limited Partnership and Huntley  Meadows Residential Venture and Beal Bank, S.S.B. (27)                                                                                        |
| Exhibit 10.106 | Amended and Restated  Mortgage and Security Agreement dated as of December 14, 1999 by Huntley  Development Limited Partnership in favor of and for the benefit of U.S. Bank  Trust National Association formerly known as First Trust National Association  (27)                                                       |
| Exhibit 10.107 | Amended and Restated  Intercreditor Agreement dated as of December 14, 1999 by and among Huntley  Development Limited Partnership, Beal Bank, S.S.B., and U.S. Bank Trust  National Association formerly known as First Trust National Association (27)                                                                 |
| Exhibit 10.108 | Promissory Note dated  June 12, 2003 between Horizon Huntley LLC and Amster Trading Company (27)                                                                                                                                                                                                                        |
| Exhibit 10.109 | Horizon Group  Properties, Inc. Unaudited Condensed Consolidated Balance Sheet as of May 31,  2003 (28)                                                                                                                                                                                                                 |
| Exhibit 10.110 | Letter Agreement dated  June 11, 2003 between The Prime Group, Inc. and Gary J. Skoien regarding Mr.  Skoien’s Net Profits Interest in Huntley (29)                                                                                                                                                                |
| Exhibit 10.111 | Agreement of Purchase  and Sale dated April 18, 2003 by and between Lakeshore Marketplace, LLC,  Monroe Outlet Center, LLC and Ramco-Gershenson Properties, L.P. (30)                                                                                                                                                   |
| Exhibit 10.112 | Amendment to Agreement  of Purchase and Sale dated June 3, 2003 by and between Lakeshore Marketplace,  LLC, Monroe Outlet Center, LLC and Ramco-Gershenson Properties, L.P. (30)                                                                                                                                        |
| Exhibit 10.113 | Consent and Assumption  Agreement dated as of August 19, 2003 by and among Lakeshore Marketplace,  LLC, Ramco Lakeshore LLC, Lakeshore Marketplace Finance Company, Inc.,  Horizon Group Properties, L.P., Horizon Group Properties, Inc.,  Ramco-Gershenson Properties, L.P. and Wells Fargo Bank Minnesota, N.A. (30) |
| Exhibit 10.114 | First Modification  Agreement dated August 19, 2003 by and among Monroe Outlet Center, LLC,  Horizon Group Properties, Inc., Horizon Group Properties, L.P. and Beal Bank,  S.S.B. (30)                                                                                                                                 |
| Exhibit 10.115 | Fifth Modification  Agreement dated August 19, 2003 by and among Huntley Development Limited  Partnership, Horizon Group Properties, Inc., and Beal Bank, S.S.B. (30)                                                                                                                                                   |
| Exhibit 10.116 | Mortgage, Security  Agreement, and Assignment of Leases and Rents dated August 19, 2003 by  Huntley Development Limited Partnership to and in favor of Beal Bank, S.S.B.  (30)                                                                                                                                          |
| Exhibit 10.117 | Assignment of Account  and Security Agreement dated August 19, 2003 by and among Beal Bank, S.S.B.,  Monroe Outlet Center, LLC and Huntley Development Limited Partnership (30)                                                                                                                                         |
| Exhibit 10.118 | Pledge of Proceeds and  Security Agreement dated August 19, 2003 by and between Horizon Group  Properties, L.P. and Beal Bank, S.S.B. (30)                                                                                                                                                                              |
| Exhibit 10.119 | Letter Agreement dated  November 3, 2003 between Horizon Group Properties, L.P. and Pleasant Lake  Apts. Limited Partnership (32)                                                                                                                                                                                       |

 

44

----

 
| Exhibit 10.120 | Promissory Note dated  as of November 3, 2003 by Horizon Group Properties, L.P. to the order of Pleasant  Lake Apts. Limited Partnership (32)                                                                                   |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 10.121 | Guaranty of Payment  dated as of November 3, 2003 by Horizon Group Properties, Inc. to and for the  benefit of Pleasant Lake Apts. Limited Partnership (32)                                                                     |
| Exhibit 10.122 | Second Amendment to  Employment Agreement between Horizon Group Properties, Inc. and Gary J.  Skoien dated as of August 19, 2003                                                                                                |
| Exhibit 10.123 | Amendment to Retention  Letter between Thomas R. Rumptz and the Company dated September 17, 2003                                                                                                                                |
| Exhibit 10.124 | Indemnification and  Fee Agreement (UBS Loan) dated as of September 3, 2003 between Horizon Group  Properties, Inc. and Gary J. Skoien                                                                                          |
| Exhibit 21     | Subsidiaries of the  Company                                                                                                                                                                                                    |
| Exhibit 31.1   | Certification of Gary  J. Skoien, Chairman, Chief Executive Officer and President of Horizon Group Properties,  Inc., pursuant to 13a-14(a) under the Securities Exchange Act of 1934 as  amended                               |
| Exhibit 31.2   | Certification of David  R. Tinkham, Chief Financial Officer of Horizon Group Properties, Inc.,  pursuant to 13a-14(a) under the Securities Exchange Act of 1934 as amended                                                      |
| Exhibit 32.1   | Certification of Gary  J. Skoien, Chairman, Chief Executive Officer and President of Horizon Group  Properties, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
| Exhibit 32.2   | Certification of David  R. Tinkham, Chief Financial Officer of Horizon Group Properties, Inc.,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                       |
| Exhibit 99.4   | Press release issued  by the Company on August 20, 2003 announcing the sale of the power center and  adjacent land in Norton Shores, Michigan (29)                                                                              |
| Exhibit 99.5   | Press release issued  by the Company on November 4, 2003 announcing the restructuring of three  loans which had been in default since October 2001 (31)                                                                         |
| Exhibit 99.10  | Updated financial  information on the Company’s Annual Report on Form 10-K for the year ended  December 31, 2002 (30)                                                                                                      |

 

----

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

(2)               Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of June 30,1998 (Commission file no. 0-24123).

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

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

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

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

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

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

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

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

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

 

45

----

 

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

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

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

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

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

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

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

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

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

(21)         Incorporatedby reference to the Company’s Form 10-K dated as of March 31, 2003 (Commissionfile no. 0-24123)

(22)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of March 17,2003 (Commission file no. 0-24123)

(23)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of April 3,2003 (Commission file no. 0-24123)

(24)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of April 28,2003 (Commission file no. 0-24123)

(25)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of May 30,2003 (Commission file no. 0-24123)

(26)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of May 31,2003 (Commission file no. 0-24123)

(27)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of June 30,2003 (Commission file no. 0-24123)

(28)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of July 16,2003 (Commission file no. 0-24123)

(29)   Incorporated by reference to the Company'sForm 10-Q dated as of August 14, 2003 (Commission file no. 0-24123)

(30)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of August 29,2003 (Commission file no. 0-24123)

(31)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of September26, 2003 (Commission file no. 0-24123)

(32)         Incorporatedby reference to the Company’s Current Report on Form 8-K dated as of November3, 2003 (Commission file no. 0-24123)

 

46

----

 

(b)      Reports on Form 8-K

 

A Form 8-K was filed onJuly 16, 2003, regarding the Company’s publication of its unaudited condensedconsolidated balance sheet as of May 31, 2003 in response to a request from theNASDAQ SmallCap Market.

 

A Form 8-K was filed onAugust 29, 2003, announcing the Company’s sale of the power center and adjacentvacant land located in Norton Shores, Michigan.

 

A Form 8-K was filed onSeptember 26, 2003, updating the Company’s Annual Report on Form 10-K for theyear ended December 31, 2002.

 

A Form 8-K was filed onNovember 7, 2003, regarding the Company’s press release announcing therestructuring of three loans which had been in default since October 2001.

 

47

----

 

SIGNATURES

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                          | HORIZON GROUP  PROPERTIES, INC.                                  |
|-------------------------------|------------------------------------------------------------------|
|                          | Registrant                                                       |
|                          |                                                             |
|                          |                                                             |
| Date:  November 14, 2003 |                                                             | By: /s/ Gary J. Skoien |   |
|                          | Gary J. Skoien,  President and                                   |
|                          | Chief Executive  Officer                                         |
|                          |                                                             |
|                          |                                                             |
| Date:  November 14, 2003 |                                                             | By: /s/ David R.  Tinkham |   |
|                          | David R. Tinkham,  Chief Accounting  and Chief Financial Officer |

 

48

----