**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**ý**** Quarterly Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934**

 

**For thequarterly period ended June 30, 2003**

 

**OR**

 

**o**** Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934**

 

**Commissionfile number:  0-24123**

 

**HORIZONGROUP PROPERTIES, INC.**

(Exact name of Registrantas 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 mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.
|   | Yes      ý      No      o |
|--------|--------------------------------------------------------------------------------------------------------------------------|

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).
|   | Yes      o      No      ý |
|--------|--------------------------------------------------------------------------------------------------------------------------|

 

**Number of common shares outstandingat August 11, 2003      2,870,194**

 

 

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HORIZON GROUP PROPERTIES,INC.

Index to Form 10-Q

June 30, 2003

 
| Part I.                                                                                                      | Financial Information:                                                                                                      |   |
|--------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                         |                                                                                                                        |
| Item 1.                                                                                                      | Financial Statements (unaudited)                                                                                            |   |   |
|                                                                                                         |
|                                                                                                         | Condensed  Consolidated Statements of Operations of the Company for the  Three Months Ended June 30, 2003 and June 30, 2002 |
|                                                                                                         |
|                                                                                                         |                                                                                                                        |
|                                                                                                         | Condensed  Consolidated Statements of Operations of the Company for the  Six Months Ended June 30, 2003 and June 30, 2002   |
|                                                                                                         |
|                                                                                                         |                                                                                                                        |
|                                                                                                         | Condensed  Consolidated Balance Sheets of the Company at June 30, 2003 and  December 31, 2002                               |
|                                                                                                         |
|                                                                                                         |                                                                                                                        |
|                                                                                                         | Condensed  Consolidated Statements of Cash Flows of the Company  for the Six Months Ended June 30, 2003 and June 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

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HORIZON GROUP PROPERTIES,INC.

Condensed ConsolidatedStatements of Operations

(unaudited)

 
|                                                                   |   | **Three months ended  June 30, 2003**     |   | **Three months ended   June 30, 2002** |   |
|------------------------------------------------------------------------|--------|-------------------------------------------|--------|----------------------------------------|--------|
|                                                                   |   | **(thousands, except per share amounts)** |   |
| **REVENUE**                                                            |   |                                      |   |                                   |   |
| Base rent                                                              |   | $                                         | 3,367  |                                   | $      | 3,340 |   |
| Percentage rent                                                        |   | 35                                        |   | 48                                     |   |
| Expense recoveries                                                     |   | 723                                       |   | 659                                    |   |
| Other                                                                  |   | 184                                       |   | 163                                    |   |
| Total revenue                                                          |   | 4,309                                     |   | 4,210                                  |   |
|                                                                   |   |                                      |   |                                   |   |
| **EXPENSES**                                                           |   |                                      |   |                                   |   |
| Property operating                                                     |   | 1,358                                     |   | 1,222                                  |   |
| Real estate taxes                                                      |   | 431                                       |   | 410                                    |   |
| Land lease and other                                                   |   | 222                                       |   | 84                                     |   |
| Depreciation and  amortization                                         |   | 956                                       |   | 1,024                                  |   |
| General and administrative                                             |   | 765                                       |   | 640                                    |   |
| Interest                                                               |   | 2,074                                     |   | 2,172                                  |   |
| Total expenses                                                         |   | 5,806                                     |   | 5,552                                  |   |
|                                                                   |   |                                      |   |                                   |   |
| Loss from continuing  operations before minority interests             |   | (1,497                                    | )      | (1,342                                 | )      |
|                                                                   |   |                                      |   |                                   |   |
| Minority interests                                                     |   | 460                                       |   | 198                                    |   |
|                                                                   |   |                                      |   |                                   |   |
| Loss from continuing  operations                                       |   | (1,037                                    | )      | (1,144                                 | )      |
|                                                                   |   |                                      |   |                                   |   |
| Income/(loss) from  discontinued operations, net of minority interests |   | 11,781                                    |   | (601                                   | )      |
|                                                                   |   |                                      |   |                                   |   |
| **Net  income/(loss)**                                                 |   | $                                         | 10,744 |                                   | $      | (1,745 | ) |
|                                                                   |   |                                      |   |                                   |   |
| **Per Common  Share - Basic and Diluted -**                            |   |                                      |   |                                   |   |
| Net income/(loss) - basic  and diluted                                 |   | $                                         | 3.74   |                                   | $      | (0.61 | ) |
| Weighted average shares  outstanding:                                  |   |                                      |   |                                   |   |
| Basic                                                                  |   | 2,870                                     |   | 2,870                                  |   |
| Diluted                                                                |   | 3,651                                     |   | 3,380                                  |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

3

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HORIZON GROUP PROPERTIES,INC.

Condensed ConsolidatedStatements ofOperations

(unaudited)

 
|                                                                   |   | **Six months ended  June 30, 2003**       |   | **Six months ended  June 30, 2002** |   |
|------------------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------|--------|
|                                                                   |   | **(thousands, except per share amounts)** |   |
| **REVENUE**                                                            |   |                                      |   |                                |   |
| Base rent                                                              |   | $                                         | 6,665  |                                | $      | 6,593 |   |
| Percentage rent                                                        |   | 104                                       |   | 89                                  |   |
| Expense recoveries                                                     |   | 1,474                                     |   | 1,403                               |   |
| Other                                                                  |   | 406                                       |   | 346                                 |   |
| Total revenue                                                          |   | 8,649                                     |   | 8,431                               |   |
|                                                                   |   |                                      |   |                                |   |
| **EXPENSES**                                                           |   |                                      |   |                                |   |
| Property operating                                                     |   | 2,614                                     |   | 2,394                               |   |
| Real estate taxes                                                      |   | 858                                       |   | 837                                 |   |
| Land lease and other                                                   |   | 441                                       |   | 363                                 |   |
| Depreciation and amortization                                          |   | 1,932                                     |   | 2,024                               |   |
| General and administrative                                             |   | 1,424                                     |   | 1,289                               |   |
| Interest                                                               |   | 4,183                                     |   | 4,331                               |   |
| Total expenses                                                         |   | 11,452                                    |   | 11,238                              |   |
|                                                                   |   |                                      |   |                                |   |
| Loss from continuing  operations before minority interests             |   | (2,803                                    | )      | (2,807                              | )      |
|                                                                   |   |                                      |   |                                |   |
| Minority interests                                                     |   | 751                                       |   | 415                                 |   |
|                                                                   |   |                                      |   |                                |   |
| Loss from continuing  operations                                       |   | (2,052                                    | )      | (2,392                              | )      |
|                                                                   |   |                                      |   |                                |   |
| Net gain on sale of real  estate, net of minority interests            |   | —                                    |   | 132                                 |   |
|                                                                   |   |                                      |   |                                |   |
| Income/(loss) from  discontinued operations, net of minority interests |   | 11,445                                    |   | (1,178                              | )      |
|                                                                   |   |                                      |   |                                |   |
| **Net income/(loss)**                                                  |   | $                                         | 9,393  |                                | $      | (3,438 | ) |
|                                                                   |   |                                      |   |                                |   |
| **Per Common  Share - Basic and Diluted -**                            |   |                                      |   |                                |   |
| Net income/(loss) - basic  and diluted                                 |   | $                                         | 3.27   |                                | $      | (1.20 | ) |
|                                                                   |   |                                      |   |                                |   |   |   |
| Weighted average shares  outstanding:                                  |   |                                      |   |                                |   |
| Basic                                                                  |   | 2,870                                     |   | 2,870                               |   |
| Diluted                                                                |   | 3,610                                     |   | 3,380                               |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

4

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HORIZON GROUP PROPERTIES,INC.

Condensed ConsolidatedBalance Sheets

(unaudited)

 
|                                                                                    |   | **June 30, 2003** |    | **December 31, 2002** |   |
|-----------------------------------------------------------------------------------------|--------|-------------------|---------|-----------------------|--------|
|                                                                                    |   | **(thousands)**   |    |
| **ASSETS**                                                                              |   |              |    |                  |   |
| Real estate - at cost:                                                                  |   |              |    |                  |   |
| Land                                                                                    |   | $                 | 7,889   |                  | $      | 7,889 |   |
| Buildings and improvements                                                              |   | 84,833            |    | 84,410                |   |
| Less accumulated  depreciation                                                          |   | (14,480           | )       | (13,435               | )      |
|                                                                                    |   | 78,242            |    | 78,864                |   |
| Land held for investment                                                                |   | 30,600            |    | —                |   |
| Total net real estate                                                                   |   | 108,842           |    | 78,864                |   |
|                                                                                    |   |              |    |                  |   |
| Cash and cash equivalents                                                               |   | 1,190             |    | 1,237                 |   |
| Restricted cash                                                                         |   | 6,278             |    | 2,707                 |   |
| Tenant accounts receivable                                                              |   | 1,067             |    | 1,072                 |   |
| Real estate - discontinued  operations                                                  |   | 15,954            |    | 17,333                |   |
| Deferred costs (net of  accumulated amortization of $1,091 and $818, respectively)      |   | 2,127             |    | 2,225                 |   |
| Other assets                                                                            |   | 1,494             |    | 1,239                 |   |
| Total assets                                                                            |   | $                 | 136,952 |                  | $      | 104,677 |   |
|                                                                                    |   |              |    |                  |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                |   |              |    |                  |   |
| **Liabilities:**                                                                        |   |              |    |                  |   |
| Mortgages and other debt -  continuing operations                                       |   | $                 | 92,404  |                  | $      | 71,560 |   |
| Mortgages and other debt -  discontinued operations                                     |   | 18,898            |    | 32,192                |   |
| Accrued interest                                                                        |   | 5,067             |    | 6,741                 |   |
| Accounts payable and other  accrued expenses                                            |   | 4,671             |    | 3,292                 |   |
| Prepaid rents and other  tenant liabilities                                             |   | 1,061             |    | 1,170                 |   |
| Participation interests and  other liabilities                                          |   | 11,132            |    | 716                   |   |
| Total liabilities                                                                       |   | 133,233           |    | 115,671               |   |
|                                                                                    |   |              |    |                  |   |
| **Minority  interests**                                                                 |   | 1,133             |    | (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                                                              |   | 37,670            |    | 35,451                |   |
| Accumulated deficit                                                                     |   | (35,113           | )       | (44,508               | )      |
| Total shareholders’ equity  (deficit)                                              |   | 2,586             |    | (9,028                | )      |
| Total liabilities and  shareholders’ equity (deficit)                              |   | $                 | 136,952 |                  | $      | 104,677 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

5

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HORIZON GROUPPROPERTIES, INC.

Condensed ConsolidatedStatements of Cash Flows

(unaudited)

 
|                                                                                      |   | **Six months ended  June 30, 2003** |   | **Six months ended  June 30, 2002** |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
|                                                                                      |   | **(thousands)**                     |   |
|                                                                                      |   |                                |   |                                |   |
| **Cash  flows from operating activities:**                                                |   |                                |   |                                |   |
| Net income/(loss)                                                                         |   | $                                   | 9,393  |                                | $      | (3,438 | ) |
| Net gain on sale of real  estate                                                          |   | —                              |   | (132                                | )      |
| Adjustments to reconcile  net income/(loss) to net cash provided by operating activities: |   |                                |   |                                |   |
| Minority interests in net  income/(loss)                                                  |   | (751                                | )      | (415                                | )      |
| Minority interests in  discontinued operations                                            |   | 4,493                               |   | (207                                | )      |
| Depreciation                                                                              |   | 1,748                               |   | 2,313                               |   |
| Amortization, including  deferred financing costs                                         |   | 369                                 |   | 759                                 |   |
| HGP partnership unit  grants                                                              |   | 225                                 |   | —                              |   |
| Changes in assets and  liabilities:                                                       |   |                                |   |                                |   |
| Restricted cash                                                                           |   | (1,511                              | )      | (237                                | )      |
| Tenant accounts receivable                                                                |   | 5                                   |   | 293                                 |   |
| Deferred costs and other  assets                                                          |   | (755                                | )      | (72                                 | )      |
| Accounts payable and  accrued expenses and accrued interest                               |   | (2,469                              | )      | 2,648                               |   |
| Participation interests  and other liabilities                                            |   | 286                                 |   | (26                                 | )      |
| Prepaid rents and other  tenant liabilities                                               |   | (109                                | )      | (284                                | )      |
| **Net cash  provided by operating activities**                                            |   | 10,924                              |   | 1,202                               |   |
|                                                                                      |   |                                |   |                                |   |
| **Cash  flows from investing activities:**                                                |   |                                |   |                                |   |
| Expenditures for building  improvements                                                   |   | (1,126                              | )      | (87                                 | )      |
| Acquisition of land held  for investment                                                  |   | (9,300                              | )      | (2,517                              | )      |
| Net proceeds from sale of  real estate                                                    |   | 1,382                               |   | 601                                 |   |
| **Net cash  used in investing activities**                                                |   | (9,044                              | )      | (2,003                              | )      |
|                                                                                      |   |                                |   |                                |   |
| **Cash  flows from financing activities:**                                                |   |                                |   |                                |   |
| Sale of HGP LP partnership  units                                                         |   | 1,350                               |   | —                              |   |
| Principal payments on  mortgages and other debt                                           |   | (16,353                             | )      | (1,608                              | )      |
| Proceeds from borrowings                                                                  |   | 13,197                              |   | 2,000                               |   |
| Debt issue costs                                                                          |   | (121                                | )      | —                              |   |
| **Net cash  provided by financing activities**                                            |   | (1,927                              | )      | 392                                 |   |
|                                                                                      |   |                                |   |                                |   |
| **Net  decrease in cash and cash equivalents**                                            |   | (47                                 | )      | (409                                | )      |
|                                                                                      |   |                                |   |                                |   |
| **Cash and  cash equivalents:**                                                           |   |                                |   |                                |   |
| **Beginning  of period**                                                                  |   | 1,237                               |   | 1,096                               |   |
| **End of  period**                                                                        |   | $                                   | 1,190  |                                | $      | 687 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

6

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HORIZON GROUP PROPERTIES,INC.

Notes to CondensedConsolidated Financial Statements

 (unaudited)

 

Note 1 - Formation and Business of the Company

 

Horizon Group Properties, Inc. (“HGPI” or, togetherwith its subsidiaries “HGP” or the “Company”) is a self-administered andself-managed Maryland corporation that was established in connection with themerger of Horizon Group, Inc., a Michigan corporation (“Horizon”) with and intoPrime Retail, Inc., a Maryland corporation (“Prime Retail”) which wasconsummated on June 15, 1998 (“the Merger”).

 

As of June 30, 2003, HGP’s operating portfolioconsisted of nine factory outlet centers located in seven states comprising anaggregate of approximately 1.8 million square feet of gross leasable area(“GLA”).  The Company also owns onepower center, which is subject to a contract for sale and is classified asdiscontinued operations at June 30, 2003. Eight of the nine outlet centers and the power center were contributedby Horizon pursuant to a Contribution Agreement entered into in connection withthe Merger and one factory outlet center was purchased by the Company fromPrime immediately subsequent to the consummation of the Merger.  At June 30, 2003, the Company owns andmanages a total of 2.6 million square feet of GLA.

 

The operations of the Company are primarily conductedthrough a subsidiary limited partnership, Horizon Group Properties, L.P. (“HGPLP”) of which the Company is the sole general partner.  As of June 30, 2003, HGPI ownedapproximately 70.3% of the partnership interests (the “Common Units”) of HGPLP.  In general,  Common Units are exchangeable for shares ofCommon Stock in HGPI on a one-for-one basis (or for an equivalent cash amountat the Company’s election).

 

On May 31, 2003 the Company sold the partnership thatowns two outlet centers located in Daleville, Indiana and Somerset,Pennsylvania.  The investment group thatacquired the centers includes Gary J. Skoien, Chairman, Chief Executive Officerand President of the Company and an affiliate of Howard Amster, a director andsignificant shareholder of the Company (see Note 8).  The investment group has hired the Company to manage and leasethe two properties.  The leasing andmanagement agreement provides that the Company will receive 50% of the netprofit from the subsequent sale of the centers after the owners receive a 12%annual return on their investment.  Theindependent directors of the Company approved this transaction and the Companybelieves the transaction reflects market terms.

 

On June 13, 2003 the Company purchased controllinginterest in two partnerships which own approximately 655 acres of land inHuntley, Illinois (“Huntley”) from affiliates of The Prime Group, Inc. (“PrimeGroup”).  Gary J. Skoien, Chairman,Chief Executive 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.  At June 30, 2003,purchase price allocation estimates are preliminary and will be finalized uponobtaining additional information regarding the liabilities assumed atacquisition.  Direct costs incurred fordevelopment activities at Huntley are capitalized to Land Held for Investmenton the Company’s balance sheets, while indirect costs and holding costs areexpensed in 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).

 

7

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The following summarizes the preliminary estimate ofthe assets acquired and liabilities assumed by the Company on June 13, 2003pursuant 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 |   |

 

Note 2 - Summary of Significant Accounting Policies

 

Interim Period Financial Presentation

 

The accompanying unaudited condensed consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements, and, therefore, shouldbe read in conjunction with the Company’s Annual Report on Form 10-K for theyear ended December 31, 2002.

 

The financial statements have been prepared inconformity with accounting principles generally accepted in the United States,which require management to make estimates and assumptions that affect thereported amounts of assets and liabilities (including disclosure of contingentassets and liabilities) at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

In the opinion of management, all adjustmentsnecessary for a fair statement of the financial position and results ofoperations for the interim periods presented have been included in thesefinancial statements and are of a normal and recurring nature.  Certain amounts in prior periods have beenreclassified to conform to the current presentation.

 

Operating results for the three and six months endedJune 30, 2003 are not necessarily indicative of the results that may beachieved in future periods.

 

Principles of Consolidation

 

The condensed consolidated financial statementsinclude the accounts of the Company and all subsidiaries that the Companycontrols, including HGP LP.  The Companyconsiders itself to control an entity if it is the majority owner of and hasvoting control over such entity.  Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

 

Impact of Recently Issued Accounting Standards

 

In April 2002, the Financial Accounting StandardsBoard (“FASB”) issued Statement 145, “Recission of FASB Statements No. 4, 44,and 64, Amendment of FASB Statement No. 1 and Technical Correction” (“SFAS No.145”).  Statement 4, “Reporting Gainsand Losses from Extinguishment of Debt” (“SFAS No. 4”), required that gains andlosses from the extinguishment of debt that were included in the determinationof net income be aggregated and, if material, classified as an extraordinaryitem.  The provisions of SFAS No. 145related to the recission of SFAS No. 4 require the Company to reclassify priorperiod items into continuing operations, including those recorded in thecurrent 

 

8

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period, that do not meet the extraordinaryclassification.  Additionally, futuregains and losses related to debt extinguishment may be required to beclassified in income from continuing operations.  The provisions of SFAS No. 145 related to the recission of SFASNo. 4 became effective in fiscal years beginning after May 15, 2002.  The Company recorded a gain on theextinguishment of debt in the three months ended June 30, 2003 which isincluded in Income from Discontinued Operations on the Company’s statements ofoperations.

 

Real Estate and Depreciation

 

Costs incurred for the acquisition, development,construction and improvement of properties, as well as significant renovationsand betterments to the properties, are capitalized. Maintenance and repairs arecharged to expense as incurred. Interest costs incurred with respect toqualified expenditures relating to the construction of assets are capitalizedduring the construction period.  Duringthe three months ended June 30, 2003, $3,000 of interest was capitalized relatedto the construction of Phase II of the outlet center in Tulare, California.

 

Amounts included under buildings and improvements onthe condensed consolidated balance sheets include the following types of assetsand are depreciated on the straight-line method over estimated useful liveswhich 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 with SFAS 144, and prior to the adoptionof SFAS 144, under SFAS 121, the Company records impairment losses onlong-lived assets used in operations when events and circumstances indicatethat the assets might be impaired and the undiscounted cash flows estimated tobe generated over their expected holding periods are less than the carrying amountsof those assets.  For assets to be heldin the portfolio, impairment losses are measured as the difference betweencarrying value and fair value.  Forassets to be sold, impairment is measured as the difference between carryingvalue and fair value, less costs to dispose. Fair value may be based upon estimated cash flows discounted at arisk-adjusted rate of interest, comparable or anticipated sales in themarketplace, or estimated replacement cost, as adjusted to consider the costsof retenanting and repositioning those properties which have significantvacancy issues, depending on the facts and circumstances of each property.

 

Depreciation and amortization expense includes chargesfor unamortized capitalized costs related to unscheduled tenant move-outstotaling $65,000 and $43,000 for the three months ended June 30, 2003 and 2002,respectively, and $120,000 and $68,000 for the six months ended June 30, 2003and 2002, respectively, both excluding properties classified as discontinuedoperations.

 

Cash Equivalents

 

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

 

Restricted Cash

 

Restricted cash consists of amounts deposited inaccounts with (1) the Company’s primary lenders in connection with certainloans (See Note 5), (2) in escrow accounts for infrastructure requirementsrelated to land sales in Huntley and (3) with the trustee for the TIF Bonds (ashereinafter defined) until certificates of occupancy are received for previouslysold Huntley land parcels which secure the US Bank Mortgage (see Note 5).  At June 30, 2003 the escrow accounts relatedto the Company’s primary lenders include $983,000 in capital improvement andtenant allowance reserves, $1.2 million in real estate tax and insuranceescrows, and approximately $2.0 million for debt service and operatingexpenses, including $1.1 million of cash flow remitted as debt service afterOctober 12, 2002 on the three JP Morgan Loans which remain in default (See Note5).  The Huntley infrastructure escrowaccounts total $592,000 and the US Bank Mortgage account has a balance of $1.5million at June 30, 2003.

 

9

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Tenant Accounts Receivable

 

Management regularly reviews accounts receivable andestimates the necessary amounts to be recorded as an allowance foruncollectibility.  These reserves areestablished on a tenant-specific basis and are based upon, among other factors,the period of time an amount is past due and the financial condition of theobligor.

 

Total tenant accounts receivable are reflected net ofreserves of $150,000 and $314,000 as of June 30, 2003 and December 31, 2002,respectively.  The provision fordoubtful accounts was $65,000 and $20,000 for the three months ended June 30,2003 and 2002, respectively, and $71,000 and $51,000 for the six months endedJune 30, 2003 and 2002, respectively. This charge is included in the line item entitled “Land lease and other”on the statement of operations.

 

Discontinued Operations

 

Periodically, in the course of reviewing theperformance of its portfolio, management may determine that it is appropriatefor the Company to offer certain properties for sale, and accordingly, suchproperties will be classified as discontinued operations on the Company’sbalance sheets.  In accordance with SFAS144 “Accounting for the Impairment or Disposal of Long Lived Assets,” (“SFAS144”), assets held for sale are valued at the lower of carrying value or fairvalue less costs to dispose.  For fiscalyears beginning after December 15, 2001, SFAS 144 requires that the results ofoperations and gain/(loss) on real estate properties sold or held for salesubsequent to December 31, 2001 are reflected in the consolidated statements ofoperations as “Income from Discontinued Operations” for all periodspresented.  As of June 30, 2003, theCompany is actively marketing the following assets for sale: the single tenantbuilding in Roseville, Michigan leased to Petsmart, Inc. and 14 parcels ofvacant land totaling approximately 108 acres in Norton Shores, Michigan;Fruitport Township, Michigan; Daleville, Indiana; Gretna, Nebraska and Medford,Minnesota and has executed a contract for the sale of Lakeshore Marketplace inNorton Shores, Michigan.  Pursuant tothe requirements of SFAS 144, the Company has reclassified the real estateassets for these properties to Real Estate-Discontinued Operations on thebalance sheets and reports the revenue and expenses from the properties asIncome from Discontinued Operations on the statements of operations.  The Company ceased depreciating these assetsat December 31, 2002.  In addition,operations from the outlet centers located in Daleville, Indiana and Somerset,Pennsylvania, which were sold in May 2003 are also included in the DiscontinuedOperations line items 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 costs consist of fees and directinternal costs incurred to initiate and renew operating leases and areamortized on the straight-line method over the initial lease term or renewalperiod.  Deferred financing costs areamortized as interest expense over the life of the related debt.

 

Income Taxes 

 

The Company has elected to be taxed as a REIT underSections 856 through 860 of the Internal Revenue Code of 1986, as amended (the“Code”).  A REIT is a legal entity thatholds real estate interests and receives a deduction for dividends paid to itsshareholders for federal income tax purposes. HGP intends to distribute its REIT taxable income to its shareholdersand satisfy certain other requirements as defined in the Code so as to reduceor eliminate federal income tax liability. Based on its taxable loss in the current period and past fiscal years,the Company is not and has not been obligated to make any dividenddistributions to qualify as a REIT. Accordingly, the condensed consolidated financial statements do notinclude any federal income tax expense.

 

10

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Minority Interests

 

Minority interests represent the interests ofunitholders of HGP LP, other than HGPI in the net earnings and net equity ofHGP LP.  The unitholder minorityinterest is adjusted at the end of each period to reflect the ownership at thattime.  The unitholder minority interestin HGP LP was approximately 29.7% at June 30, 2003.  On March 13, 2003, HGPI sold 261,628 units in HGP LP to HowardAmster, a director and principal shareholder of HGPI, for aggregateconsideration of $1.35 million, or $5.16 per unit.  These units cannot be converted into shares of Common Stock ofHGPI.  Proceeds in excess of HGPI’scarrying value of these units was recognized as an increase in additional paidin capital.  HGPI may consideradditional sales of units in HGP LP to Mr. Amster or others in the future.  There were no unit conversions orrepurchases in the three or six months ended June 30, 2003 or 2002.

 

Revenue Recognition

 

Leases with tenants are accounted for as operatingleases. Minimum annual rentals are recognized on a straight-line basis over theterms of the respective leases.  As aresult of recording rental revenue on a straight-line basis, tenant accountsreceivable included $388,000 and $402,000, as of June 30, 2003 and December 31,2002, respectively, which is expected to be collected over the remaining livesof the leases.  Rents which representbasic occupancy costs, including fixed amounts and amounts computed as afunction of sales, are classified as base rent.  Amounts which may become payable in addition to base rent andwhich are computed as a function of sales in excess of certain thresholds areclassified as percentage rents and are accrued after the reported tenant 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 consists primarily of interest income,income related to marketing services that is recovered from tenants pursuant tolease agreements and income from tenants with lease terms of less than oneyear.

 

Share Options

 

The Company has elected to follow AccountingPrinciples Board Opinion No. 25 “Accounting for Stock Issued to Employees”(“APB 25”), in accounting for its options on common shares.  Under APB 25, no compensation expense isrecognized because the exercise price of the Company’s employee share optionsequals or exceeds the market price of the underlying shares at the date ofgrant.

 

Legal Proceedings

 

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

 

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Note 3 - Earnings Per Share

 

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

 
|                                                                                                                              |   | **Three  months  ended**                           |   | **Three  months  ended** |   | **Six months  ended** |   | **Six months  ended** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|--------------------------|--------|-----------------------|--------|-----------------------|--------|
|                                                                                                                              |   | **June 30, 2003**                                  |   | **June 30, 2002**        |   | **June 30, 2003**     |   | **June 30, 2002**     |   |
|                                                                                                                              |   | ***(in thousands, except per share information)*** |   |
| **Numerator:**                                                                                                                    |   |                                               |   |                     |   |                  |   |                  |   |
| Net  income/(loss) - basic                                                                                                        |   | $                                                  | 10,744 |                     | $      | (1,745                | )      | $                     | 9,393  |   | $ | (3,438 | ) |
| Minority  interests of unitholders (in loss from continuing operations, discontinued  operations and gain on sale of real estate) |   | 3,435                                              |   | (303                     | )      | 3,080                 |   | (599                  | )      |
| Net  income/(loss) – diluted                                                                                                 |   | $                                                  | 14,179 |                     | $      | (2,048                | )      | $                     | 12,473 |   | $ | (4,037 | ) |
|                                                                                                                              |   |                                               |   |                     |   |                  |   |                  |   |
| **Denominator:**                                                                                                                  |   |                                               |   |                     |   |                  |   |                  |   |
| Weighted average  shares  outstanding - basic                                                                                     |   | 2,870                                              |   | 2,870                    |   | 2,870                 |   | 2,870                 |   |
| Effect of  dilutive securities  -  Converting units to shares                                                                |   | 781                                                |   | 510                      |   | 740                   |   | 510                   |   |
| Weighted average  shares  outstanding - diluted                                                                                   |   | 3,651                                              |   | 3,380                    |   | 3,610                 |   | 3,380                 |   |
|                                                                                                                              |   |                                               |   |                     |   |                  |   |                  |   |
| Net  income/(loss) per share:                                                                                                     |   |                                               |   |                     |   |                  |   |                  |   |
| Basic                                                                                                                             |   | $                                                  | 3.74   |                     | $      | (0.61                 | )      | $                     | 3.27   |   | $ | (1.20 | ) |
| Diluted                                                                                                                           |   | $                                                  | 3.74   |                     | $      | (0.61                 | )      | $                     | 3.27   |   | $ | (1.20 | ) |
|                                                                                                                              |   |                                               |   |                     |   |                  |   |                  |   |
| Loss from  continuing operations                                                                                                  |   | $                                                  | (1,037 | )                        | $      | (1,144                | )      | $                     | (2,052 | ) | $ | (2,392 | ) |
|                                                                                                                              |   |                                               |   |                     |   |                  |   |                  |   |
| Loss from  continuing operations  per share -                                                                                     |   |                                               |   |                     |   |                  |   |                  |   |
| Basic and  Diluted                                                                                                                |   | $                                                  | (0.36  | )                        | $      | (0.40                 | )      | $                     | (0.71  | ) | $ | (0.83 | ) |

 

Outstanding stock options and the potential conversionof units to shares were excluded in computing diluted earnings per sharebecause the effect was anti-dilutive in the three and six months ended June 30,2003 and 2002.

 

Minority interests of unitholders excludes theminority interests for the non-convertible units purchased by Howard Amster.

 

Note 4 - Long Term Stock Incentive Plan

 

The Company has adopted the HGP 1998 Long Term StockIncentive Plan (the “HGP Stock Plan”) to advance the interests of the Companyby encouraging and enabling the acquisition of a financial interest in theCompany by key employees and directors of the Company and its subsidiariesthrough equity awards.  The Company reserved338,900 common shares for issuance pursuant to the HGP Stock Plan and optionscovering 326,000 shares were outstanding at June 30, 2003.  The Company uses the intrinsic value methodof accounting for its stock-based compensation.

 

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The following table sets forth net loss and net lossper share computed on a proforma basis under the requirements of SFAS 123.

 
|                                                                                                          |   | **Three  months**  |   | **Three  months**  |   | **Six months**     |   | **Six months**     |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------------------|--------|--------------------|--------|--------------------|--------|
|                                                                                                          |   | **ended**          |   | **ended**          |   | **ended**          |   | **Ended**          |   |
|                                                                                                          |   | **June 30,  2003** |   | **June 30,  2002** |   | **June 30,  2003** |   | **June 30,  2002** |   |
|                                                                                                          |   |               |   |               |   |               |   |               |   |
| Net  income/(loss)-basic                                                                                      |   | $                  | 10,744 |               | $      | (1,745             | )      | $                  | 9,393  |   | $ | (3,438 | ) |
| 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 |   | 11                 |   | 10                 |   | 21                 |   | 21                 |   |
| Proforma net  income/(loss)-basic and diluted                                                                 |   | $                  | 10,733 |               | $      | (1,755             | )      | $                  | 9,372  |   | $ | (3,459 | ) |
|                                                                                                          |   |               |   |               |   |               |   |               |   |
| Income/(loss)  per share:                                                                                     |   |               |   |               |   |               |   |               |   |
| Basic and diluted  - as reported                                                                              |   | $                  | 3.74   |               | $      | (0.61              | )      | $                  | 3.27   |   | $ | (1.20 | ) |
| Basic and  diluted -proforma                                                                                  |   | $                  | 3.74   |               | $      | (0.61              | )      | $                  | 3.27   |   | $ | (1.21 | ) |

 

Note 5 - Mortgage Debt and Other Liabilities

 

*HGPCredit Facility*

 

On June 15, 1998, certain wholly owned affiliates ofthe Company entered into a credit facility (the “HGP Credit Facility”) withNomura Asset Capital Corporation (“Nomura”), which initially matured on July11, 2001 (the “Initial Maturity Date”). The HGP Credit Facility was acquired from Nomura by CDC Mortgage Capital,Inc. (“CDC”).  On July 30, 2001, certainof the terms of the HGP Credit Facility were modified, including the maturitydate, which was extended to July 11, 2002 (the “Extended Maturity Date”).  On July 11, 2002, the Company repaid in fullthe HGP Credit Facility with the proceeds of loans originated by UBS WarburgReal Estate Investments Inc.  (“UBS”)and Beal Bank, S.S.B. (“Beal Bank”).

 

The UBS loans consist of senior loans with a totalinitial principal balance of $22.0 million (the “UBS Senior Loans”) andmezzanine 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 mature July 11, 2009, requiremonthly principal payments based on a 25-year amortization schedule and bearinterest at a fixed rate of 8.15%.  Theoutstanding balances of these loans totaled $21.8 million and $21.9 million atJune 30, 2003 and December 31, 2002, respectively.  These loans also require the monthly funding of escrow accountsfor the payment of future debt service, real estate taxes, insurance, capitaland tenant improvements and leasing commissions (see Note 2).  Funds in excess of those specified in the loanagreements are disbursed to the new entities at least monthly.

 

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The UBS Mezzanine Loans mature July 11, 2005 and maybe prepaid without penalty after July 11, 2004.  These loans require monthly payments based on a three-yearamortization schedule and bear interest at a fixed rate of 17.0%.  The outstanding balances of these loanstotaled $2.6 million and $3.1 million at June 30, 2003 and December 31, 2002,respectively.

 

Beal Bank provided two loans totaling $7.0 million(the “Beal Bank Loans”) and consist of (i) a $3.0 million loan secured byvacant land located in Norton Shores, Michigan and Fruitport Township, Michigan(the “Beal Bank Loan I”), and (ii) a $4.0 million loan secured by the outletcenter in Monroe, Michigan (the “Beal Bank Loan II”).  These loans are cross-collateralized and are recourse to theCompany.  The Beal Bank Loans matureJuly 10, 2005.  Principal payments of upto $2.0 million are permitted without penalty at any time and the loans may beprepaid in whole or in part without penalty after July 10, 2004.

 

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

 

The Beal Bank Loan II is guaranteed by Prime Retail upto a maximum of $4.0 million (the “Prime-Beal Guaranty”).  Mr. Skoien and Mr. Amster, Directors of theCompany, are members of the Board of Directors of Prime Retail.  The Prime-Beal Guaranty will be releasedwhen the total outstanding balance of the Beal Bank Loans is equal to or lessthan $5.0 million.  The Company isobligated to make quarterly payments of $15,000 to Prime Retail as long as thisguaranty is in effect.  Prime Retail hadguaranteed $10.0 million of obligations under the HGP Credit Facility, (the“Prime Retail Guarantee”).  Inconnection with the Prime Retail Guarantee, HGP paid Prime Retail a fee of$400,000 per annum from June 15, 1998 through June 15, 2001.  In connection with the extension of thematurity date of the HGP Credit Facility, Prime Retail reaffirmed itsobligations with respect to the Prime Retail Guarantee.  From June 15, 2001 through June 15, 2002,the Company paid Prime Retail an annual fee of $150,000.  Pursuant to the Prime Retail Guarantee,Prime Retail is also the guarantor of the indebtedness related to the Company’scorporate office building, which had a balance of $2.0 million and $2.2 millionas of June 30, 2003 and December 31, 2002, respectively (see Other Borrowingsbelow).

 

Subsequent to the Initial Maturity Date, the HGPCredit Facility bore interest at the 30-day LIBOR rate (but not less than 4.1%)plus 3.95% per annum and required monthly principal payments of $225,000.  An extension fee of 2% of the loan amountwas incurred in conjunction with the extension of the loan which was recognizedas a component of interest expense over the extension period.

 

On June 29, 2001, the Company completed a $3.5 millionrefinancing of its outlet center in Holland, Michigan, with Republic Bank.  The outstanding balance of this loan was$3.4 million at June 30, 2003 and December 31, 2002.  The loan is for a term of five years, requires monthly debtservice payments of $30,000 based on a twenty-year amortization schedule, andbears interest at a fixed rate of 8.21%. The net proceeds from the loan were used to reduce the balance of theHGP Credit Facility.

 

On July 31, 2001 the Company completed a $16.0 millionrefinancing of its power center in Norton Shores, Michigan, with GreenwichCapital Financial Products, Inc. (“Greenwich”).  The outstanding balance of this loan was $15.8 million at June30, 2003 and December 31, 2002.  Thenon-recourse loan is for a term of ten years, requires monthly payments basedon a 30-year amortization schedule and bears interest at a fixed rate of7.647%.  The net proceeds from the loanwere used to reduce the balance of the HGP Credit Facility.  In connection with the Greenwich loan, titleto Lakeshore Marketplace was transferred to a new entity, LakeshoreMarketplace, LLC, a wholly owned subsidiary of the Company.  Lakeshore Marketplace, LLC, and its managingmember, Lakeshore Marketplace Finance Company, Inc., are restricted from owningany assets other than Lakeshore Marketplace and may not incur additionalliabilities, other than normal trade payables. All of the assets of Lakeshore Marketplace, LLC are pledged as securityfor the Greenwich loan.  The Company hasexecuted a contract for the sale of this power center, and thus, pursuant toSFAS 144, its real estate assets are listed as Real Estate-DiscontinuedOperations on the Company’s balance sheets and its revenue and expenses areincluded in Income from Discontinued Operations on the Company’s statements ofoperations.

 

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*JPMorgan Loans*

 

On July 9, 1999 the Company completed a debt financingtotaling $46.7 million with Morgan Guaranty Trust Company of New York (the “JPMorgan Loans”).  The JP Morgan Loansinitially consisted of (i) loans totaling $22.9 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. The Company has established certain escrow accounts in connection withthis loan that are classified on the balance sheet of the Company as restrictedcash (see Note 2).  The escrow accountsrelated to the JP Morgan Loans have a balance of $1.4 million at June 30, 2003.

 

On October 10, 2001, the Company notified theservicers of the JP Morgan Loans that the net cash flow from the propertiessecuring the loans was insufficient to fully pay the required monthly debtservice.  The Company remits monthly allavailable cash flow, after a reserve for monthly operating expenses, as partialpayment of the debt service.  Thefailure to pay the full amount due constitutes a default under the loanagreements which would allow the respective lenders to exercise their variousremedies contained in the loan agreements, including application of escrowbalances to delinquent payments and foreclosure on the properties whichcollateralize the loans.  The interestrate applicable during the occurrence and continuance of an Event of Default(as defined in the loan agreements) is 13.46%. In addition, a penalty of 5% of each monthly installment is imposed inthe event that such monthly installment is not timely made in full.  The default interest and monthly penaltyhave been accrued in the consolidated financial statements since October2001.  Interest expense for the threeended June 30, 2003 and 2002 includes $361,000 and $909,000, respectively, andfor the six months ended June 30, 2003 and 2002 includes $705,000 and $1.4million, respectively, for these charges.

 

On May 22, 2003, the Company restructured the DSTLoans.  The restructuring involved (1)the acquisition of the loans secured by outlet centers in Daleville, Indianaand Somerset, Pennsylvania (the “Daleville and Somerset Loans”) which had anaggregate principal balance of $13.2 million, excluding accrued interest andpenalties, and (2) the reinstatement of the loan secured by an outlet center inTulare, California (the “Tulare Loan”) for a total payment by the Company of$1.98 million.  The funds for thistransaction were provided by a $2.0 million loan made on May 20, 2003 from anaffiliate of Howard Amster, a director and significant shareholder of theCompany.  This note bears interest at arate of 5% and is due upon demand.  OnMay 30, 2003, this loan was repaid in full in connection with the sale of thecenters in Daleville, Indiana and Somerset, Pennsylvania to an investment groupincluding Gary J. Skoien, Chairman, Chief Executive Officer and President ofthe Company and Howard Amster, a director and significant shareholder of theCompany.  The independent directors ofthe Company approved this transaction and the Company believes this transactionreflects market terms.  Therestructuring of the Tulare Loan resulted in the immediate foregiveness of$798,000 of accrued penalties and default interest.  Additional accrued interest of $448,000 will be forgiven if theCompany makes the scheduled debt service payments through September 2003.  Pursuant to FASB Statement No. 15“Accounting by Debtors and Creditors for Troubled Debt Restructurings”, thecarrying amount and prospective effective interest rate on the Tulare Loan willbe adjusted for the forgiven interest and penalties applicable to thisproperty.  At June 30, 2003, the TulareLoan had an outstanding principal balance of $9.0 million and an unamortizedrestructuring adjustment of $1.2 million which will be amortized as a reductionof future interest expense under the restructured loan.  The Tulare Loan is no longer in default.  The gain on debt restructuring related to theDaleville and Somerset Loans of $14.4 million is included in Income fromDiscontinued Operations on the statement of operations because these twoproperties were sold on May 30, 2003 (see Note 8).

 

The Company remains in default on the GST Loans.  The Company and the special servicer of theGST Loans are currently negotiating a restructuring of the GST Loans.  There can be no assurance that suchnegotiations will result in any settlement of the loans or any modification ofthe terms of the loans.

 

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The JP Morgan Loans require the monthly funding ofescrow accounts for the payment of real estate taxes, insurance and capitalimprovements.  Such escrow accountstotaled $310,000 at June 30, 2003.  Inaddition, $1.1 million of monthly available cash flow remitted as debt serviceafter October 12, 2002 on the GST Loans has been placed in special purposeescrow accounts by the loan servicers. These escrow accounts are classified on the balance sheet as restrictedcash (see Note 2).  The Companycontinues to manage the properties which secure the GST Loans pursuant to amanagement agreement which is subject to cancellation by the servicers of theloans with respect to the loans which remain in default.  The Company receives fees of approximately$12,000 per month for such services.

 

The declining results of operations resulting in theinability to service the JP Morgan Loans was judged to represent an indicatorof possible impairment in the value of the collateral properties.  The Company estimated the value of the sixcenters that collateralized the loans and concluded that the carrying value offour of the centers exceeded the fair values of those centers.  Accordingly, the results of operations forthe third quarter of 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 values.  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 values of the same fourproperties.  The aggregate carryingvalue of the real estate of properties collateralizing the GST Loans wasapproximately $9.9 million at June 30, 2003. The current outstanding loan balances of the GST Loans totaled $23.1million, plus accrued interest and penalties of approximately $4.8million.  If the lender were toforeclose on the GST Properties, the Company would record a gain for thedifference between the carrying value of the properties and related net assetsand the outstanding loan balances and related liabilities.  The estimation of the fair value of thecenters which secure the GST Loans involved estimates by management withrespect to future cash flows, market conditions and valuations applicable tosuch properties.  Future events couldoccur which would cause the Company to conclude that the carrying values of theCompany’s properties may need to be further adjusted.

 

*HuntleyDebt*

 

On June 12, 2003 the Company borrowed $9.1 millionfrom Amster Trading Company, an affiliate of Howard Amster, a director andsignificant shareholder of the Company (the “Huntley Amster Loan”) which fundedthe purchase of Huntley from Prime Group and its affiliates.  The Huntley Amster Loan bears interest at arate of 11.0% per annum, payable monthly, and matures on June 12, 2004, withthe option for a one-year extension.  Aone percent (1%) origination fee was paid to Amster Trading Company.  The Huntley Amster Loan may not be prepaidin whole or in part prior to September 1, 2003 and thereafter requires aprepayment fee according to the following schedule:

 
| **Payment made during the period:**      |   | **Prepayment  Fee** |   |
|------------------------------------------|--------|---------------------|--------|
| September 1,  2003 to September 30, 2003 |   | 3.0                 | %      |
| 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 Loan is guaranteed by HGPI and HGPLP and is secured by a pledge of the partnership interests in the partnershipswhich own Huntley, subject to any required lender consents.  The independent directors of the Companyapproved this transaction and the Company believes this transaction reflectsmarket terms.

 

In connection with the Company’s acquisition ofHuntley, the Company assumed a $10.7 million loan secured by Huntley providedby Beal Bank with a principal balance of $10.7 million at June 30, 2003 (the“Huntley Beal Loan”).  This loanrequires monthly payments of interest at a rate equal to the greater of (i) theWall Street Journal Prime Rate plus four percent (4%) or (ii) twelve percent(12%) per annum.  The Huntley Beal Loanmay only be prepaid, prior to maturity, from the net proceeds from the sale ofall or any portion of the collateral land.  Beal Bank must approve any collateral land sales in writing andmay grant or withhold such consent in their sole discretion.  The loan matures on

 

16

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October 31, 2003, and allows for two one-yearextensions upon the satisfaction of certain customary conditions.  The Huntley Beal Loan is guaranteed by HGPI.

 

Pursuant to the terms of the Amended and RestatedAgreement and Assignment of Net Profits Interest dated October 27, 1999, aslater amended (the “Beal Net Profits Agreement”), Beal Bank has a 35% interestin the Net Profits of the partnerships which own Huntley, subject to certainpreferences in their distribution.  TheBeal Net Profits Agreement was granted in connection with a prior loan made byBeal Bank to Huntley.  Net cashgenerated by Huntley is to be distributed in the following order:  first to the owners of Huntley in the amountof the Approved Contributions (which total approximately $11.6 million at June30, 2003 and from which the Huntley Beal Loan is required to be repaid), secondto Beal Bank for the Beal Account (which had a balance of approximately $6.6million at June 30, 2003), third to Huntley for its account (which had abalance of approximately $12.2 million at June 30, 2003) and thereafter, 35% toBeal Bank and 65% to Huntley.  TheApproved Contributions include operating and development expenditures fundedfor Huntley (excluding interest on the Huntley Beal Loan).  For purposes of determining distributionpreferences under the Beal Net Profits Agreement, the Approved Contributions,the Huntley account and the Beal Account accrue interest per the terms of theBeal Net Profits Agreement.  On thematurity date of the Huntley Beal Loan, Huntley is required to pay Beal Bankthe fair market value of Beal Bank’s Net Profits interest.  Pursuant to purchase accountingrequirements, the Company has recorded an estimated liability for the Beal NetProfits Agreement in the amount of $9.1 million, reflecting the estimated valueof the Beal Bank Net Profits interest liability.  Such estimate is subject to change.  Some of the factors that could cause a significant revision tothe estimate include changes in zoning and changes in the market demand forreal estate in the area.  The Beal Banknet profits interest has been included in Participation Interests and OtherLiabilities on the Company’s balance sheets. Certain affiliates of Prime Group have continuing guarantees related tothe Beal Net Profits Agreement.  TheCompany has idemnified such guarantors against any liability in connection withtheir guarantees.  Capitalized terms inthis paragraph which are not defined herein shall have the meanings given suchterms in the Beal Net Profits Agreement, as amended.

 

Gary J. Skoien, Chairman, Chief Executive Officer andPresident of the Company, is also the Executive Vice President and ChiefOperating Officer of Prime Group.  Inconnection with his employment with Prime Group, Mr. Skoien was previouslygranted an interest (the “Skoien Net Profits Interest”) in the net proceedsgenerated by Huntley, which he retained after the Company’s purchase ofHuntley.  The Skoien Net ProfitsInterest consists of a 9.675% participation in the Net Cash Flow (as defined inMr. Skoien’s Net Profits Agreement) distributed to the Company (excludingdistributions of all amounts contributed or advanced by the Company to Huntleyplus interest per the terms of the agreement). Pursuant to purchase accounting requirements, the Company has recorded aliability for the Skoien Net Profits Interest in the amount of $1.0 million,which represents its estimated fair value and which amount has been included inParticipation Interests and Other Liabilities on the Company’s balance sheets.

 

As additional consideration for the partnership interests,Huntley granted to Prime Group, and certain of its affiliates, a participationinterest of 26% of the net cash flow distributed by Huntley (the “Prime GroupParticipation Interest”) with respect to the interests acquired by the Company.  No amount is payable to Prime Group untilthe Company has received distributions from Huntley in excess of the purchaseprice plus advances made by the Company to Huntley plus a 40% return on suchamounts compounded quarterly.  Aggregateamounts payable pursuant to the Prime Group Participation Interest shall notexceed $5.0 million.  No liability hasbeen recorded 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 of Huntley (the “Village”)created a Tax Increment Financing District (the “TIF District”) which isauthorized to issue up to $108.0 million of tax-exempt, tax-increment bonds(the “TIF Bonds”) to reimburse Huntley for a portion of the land cost and thecost of infrastructure improvements.  In1995, the Village sold $7.0 million of Series A bonds and $14.0 million of SeriesB bonds.  Huntley owns the Series Cbonds with a total principal amount of $25.0 million plus accruedinterest.  The Series C bonds aresubordinate to the Series A and Series B bonds.  Currently there is no portion of the tax increment available tothe Series C bonds and no value has been ascribed to them by the Company.

 

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The source of repayment for the TIF Bonds is (a) 100%of the increase in real estate taxes on the land in the TIF District above thetaxes in place when the TIF District was created, and (b) one-half of theVillage’s one percent (1%) sales tax collected on retail sales occurring withinthe TIF District.  The TIF Districtcontains approximately 900 acres of land owned or previously owned byHuntley.  Debt service reserve fundswere initially established with $700,000 for the Series A bonds and $3.09million for the Series B bonds as security for the payment of principal andinterest on the TIF Bonds.  To theextent the reserve funds are not needed to service the bonds, they will bereturned to Huntley.  These funds areheld in interest bearing accounts under the control of the trustee and totaledapproximately $3.6 million at June 30, 2003. There can be no assurance that these funds will be returned to Huntleyand, therefore, they are not reflected on the balance sheets of theCompany.  The TIF Bonds are notobligations of the Company and are not reflected on the Company’s balance sheetand no value has been ascribed to them by the Company.

 

As additional security for the Series B bonds, Huntleygranted a mortgage to U.S. Bank Trust National Association (“US Bank”), astrustee for the holders of the Series B bonds, covering approximately 131 acresof land (the “US Bank Mortgage”).  Uponthe sale of any parcel of land subject to the US Bank Mortgage, such parcelwill be released from the US Bank Mortgage provided that Huntley deposits intoa collateral account (the “US Bank Collateral Account”) an amount equal to thegreater of (i) 50% of the July 1997 appraised value of such parcel or (ii) anamount per square foot of the parcel sold as set forth in Exhibit B to theAmended and Restated Intercreditor Agreement. Amounts deposited into the US Bank Collateral Account are released toHuntley upon the issuance of a certificate of occupancy for the subject landparcel.  The balance in the US BankCollateral Account was approximately $1.5 million at June 13, 2003 and isincluded in Restricted Cash on the Company’s balance sheets (see Note 2).  Based on a third-party review of the currentincremental real estate and sales tax revenue and the available debt servicereserve funds, the Company believes that there are sufficient funds to make thescheduled debt service payments on the Series A and B bonds.  Further, Huntley has no continuing legalobligation related to the proceeds received from the TIF Bonds and thus, noliability has been recognized related 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.

 

*TulareConstruction Loan*

 

On April 24, 2003, the Company closed on a $3.1million loan for the construction of Phase II of its outlet center in Tulare,California (the “Tulare II Loan”).  Uponthe completion of the retail expansion construction, the loan will convert intoa permanent loan maturing in August 2009. The loan is secured by a first mortgage on the land and improvements andwill bear interest at the greater of LIBOR plus 300 basis points or 5.5%.  The outstanding principal balance on theTulare II Loan was $861,000 at June 30, 2003. The loan was made by Amster Trading Company Charitable RemainderUnitrust dated March 10, 2003, an affiliate of Howard Amster, a Director andprincipal shareholder of HGPI.

 

*OtherBorrowings*

 

On July 20, 2001, the Company acquired the ownershipof a triple net leased property in Roseville, Michigan, which is leased toPetsmart, Inc., as a replacement property for its center in Dry Ridge, Kentuckyin a transaction structured as a tax deferred exchange under the provisions ofSection 1031 of the Code.  The purchaseprice of $3.35 million included the assumption of a $3.2 million mortgage.  The rent payable under the lease is equal tothe debt service due under the loan secured by the property (the “PetsmartLoan”).  The Petsmart Loan matures onJanuary 8, 2008, bears interest at a fixed rate of 8.77% and requires themonthly payment of principal computed on a 25 year schedule.  The loan is non-recourse to HGPI.  The balance of the Petsmart Loan was $3.1million at June 30, 2003 and $3.2 million at December 31, 2002.  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 balance sheets and its revenue andexpenses are included in Income from Discontinued Operations on the statementsof operations.

 

The Company has a mortgage loan secuitized by itscorporate office building and related equipment in Norton Shores,Michigan.  The loan was originallyscheduled to mature in December 2002 and has been extended to July 30, 2003.

 

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The principal balance on this loan was $2.0 millionand $2.2 million as of June 30, 2003 and December 31, 2002, respectively.  During the original term, the interest rateon the loan was LIBOR plus 2.5% per annum and monthly debt service payments of$22,500 were required.  During theextension period, the loan bears interest at LIBOR plus 5.5% per annum andrequires monthly debt service payments of $50,000.  As of the date of this filing, there has not been an additionalextension requested from the current lender because the Company expects toclose shortly on replacement financing. There can be no assurance that the Company will be able to complete suchrefinancing or on what terms such refinancing may be accomplished.

 

On June 4, 2002, the Company purchased the land underlyingits center in Laughlin, Nevada for $2.5 million pursuant to a purchase optioncontained in the ground lease.  Theground rent was prorated to February 25, 2002. The Company paid approximately $500,000 at closing and a $2.0 millionunsecured promissory note was provided by the seller.  This note matures in June 2012, bears interest at a rate of 2.0%above the weighted average cost of funds index for the Eleventh DistrictSavings Institutions, adjusted annually and requires amortization based on aten year schedule.  The initial interestrate payable on the loan was 5.074% through February 28, 2003 and is 4.375%through February 29, 2004.  Theoutstanding principal balance on this note was $1.8 million and $1.9 million atJune 30, 2003 and December 31, 2002, respectively.

 

Debt maturities and principal payments, including debtsecured by the assets classified as discontinued operations, due subsequent toJune 30, 2003 are as follows (in thousands):

 
|                                  |   | **Operating** |   | **Discontinued** |   |
|---------------------------------------|--------|---------------|--------|------------------|--------|
| **Due by:**                           |   | **Portfolio** |   | **Operations**   |   |
| June 30, 2004                         |   | $             | 46,657 |             | $      | 179 |   |
| June 30, 2005                         |   | 2,062         |   | 198              |   |
| June 30, 2006                         |   | 7,920         |   | 214              |   |
| June 30, 2007                         |   | 3,808         |   | 232              |   |
| June 30, 2008                         |   | 776           |   | 3,163            |   |
| Thereafter                            |   | 29,118        |   | 14,912           |   |
|                                  |   | 90,341        |   | $                | 18,898 |   |
| Tulare Loan  restructuring adjustment |   | 1,202         |   |             |   |
| Tulare II Loan  (construction loan)   |   | 861           |   |             |   |
|                                  |   | $             | 92,404 |             |   |   |

 

The GST Loans, on which the Company is in default, arereflected as current year maturities (see “JP Morgan Loans” above).  The Huntley Beal Loan and the Huntley AmsterLoans are reflected as current year maturities, but each loan contains aprovision for extension, upon the satisfaction of certain customary conditions(see “Huntley Debt” above).

 

The Company’s ability to secure new loans is limitedby the fact that virtually all of the Company’s real estate assets arecurrently pledged as collateral for its current loans.

 

Note 6 - Related Party Transactions

 

The Company utilizes Thilman & Filippini as itsagent for insurance and risk management programs.  E. Thomas Thilman is a Director of the Company and a partner inThilman & Filippini.  The Companypaid premiums totaling approximately $2,000 and $96,000 during the three monthsended June 30, 2003 and 2002, respectively and $238,000 and $242,000 during thesix months ended June 30, 2003 and 2002, respectively, on insurance policiesplaced by Thilman & Filippini.  Thisincludes insurance premiums for the properties classified as discontinuedoperations.

 

The Company sub-leases office space on a month tomonth basis for its senior executives at 77 W. Wacker, Chicago, Illinois fromPrime Group. The Company incurred rent expense of $13,000 and $12,000 duringthe three months ended June 30, 2003 and 2002, respectively and $26,000 and$24,000 during the six months ended June 30, 2003 and 2002, respectively.

 

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On March 13, 2003, HGPI sold 261,628 limitedpartnership units in HGP LP to Pleasant Lake Apts. Ltd., an affiliate of HowardAmster, for aggregate consideration of $1.35 million, or $5.16 per unit.  Proceeds in excess of HGPI’s carrying valueof these units was recognized as an increase in additional paid-incapital.  On March 14, 2003, the Companyused $1.3 million of the proceeds from the sale to fund a secured loan toRetail Partners Limited Partnership and Retail Partners, Inc. (collectively“Retail Partners”) 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 June 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 is included inLand Held for Investment.  Such valuewill be recognized over the term of the loan as an adjustment to the yield.HGPI may consider additional sales of units in HGP LP to Mr. Amster or othersin 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% and is due upon demand (see Note5).  This loan was repaid in connectionwith the sale of two outlet centers discussed below.

 

On May 31, 2003, the Company sold the partnership thatowns two outlet centers located in Daleville, Indiana and Somerset,Pennsylvania to an investment group which includes Gary J. Skoien and HowardAmster.  The investment group has hiredthe Company to manage and lease the two properties.  The leasing and management agreement provides that the Companyreceive 50% of the net profit from the subsequent sale of the centers after theowners receive a 12% annual return on their investment (see Note 8).

 

On June 12, 2003, theCompany borrowed $9.1 million from Amster Trading Company, an affiliate ofHoward Amster ( the “Huntley Amster Loan”) which funded the purchase of Huntleyfrom Prime Group and its affiliates on June 13, 2003.  The Huntley Amster Loan is guaranteed by HGPI and HGP LP and issecured by a pledge of the partnership interests in the partnerships which ownHuntley, subject to any required lender consents.  The Huntley Amster Loan bears interest at a rate of 11.0% perannum, payable monthly and matures on June 12, 2003, with the option for aone-year extension.  In connection withthe purchase of Huntley, the Company assumed the liabilities for the Beal NetProfits Agreement, the Skoien Net Profits Interest and the Prime GroupParticipation Interest (see Note 5).

 

Gary J. Skoien, Chairman, Chief Executive Officer andPresident of the Company is also Executive Vice President and Chief OperatingOfficer of Prime Group.  Howard Amsteris a director and significant shareholder of the Company.

 

Note 7 -Segment Information

 

During the six monthsended June 30, 2003, and June 30, 2002, the Company operated twelve shoppingcenters located in nine states including two shopping centers which were soldin May 2003 and one shopping center which was held for sale at June 30, 2003,all of which are accounted for as discontinued operations on the statements ofoperations.  The Company separatelyevaluates the performance of each of its centers.  However, because each of the centers has similar economiccharacteristics, facilities and/or tenants, the shopping centers have beenaggregated into a single dominant shopping center segment.  In addition, the Company has a corporatesegment and an investment land segment. The Company evaluates performance and allocates resources primarilybased on the Funds From Operations (“FFO”) expected to be generated by aninvestment in each individual shopping center. FFO is a widely used measure of the operating performance of REITs, butmay not be comparable to other REITs if they do not define similarly entitled itemsexactly as the Company defines them. FFO, as defined by the National Association of Real Estate InvestmentTrusts (“NAREIT”), means net income excluding extraordinary items (as definedby accounting principles generally accepted in the United States (“GAAP”)) andgains and losses from sales of depreciable operating property, plusdepreciation and amortization, and after adjustments for unconsolidatedpartnerships and joint ventures.  Gainsand losses on non-depreciable real estate assets, including land parcels, areincluded in FFO.  FFO should not beconsidered as an alternative to either net income or cash flows from operatingactivities computed under accounting principles generally accepted in theUnited States.

 

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A reconciliation of the loss before minority interests to FFO is asfollows:

 

|                                                                                                                              |   | **Six  months ended  June 30, 2003** |   | **Six  months ended  June 30, 2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                              |   | ***(in thousands)***                 |   |
|                                                                                                                              |   |                                 |   |                                 |   |
| Net income/(loss)                                                                                                                 |   | $                                    | 9,393  |                                 | $      | (3,438 | ) |
| Minority interests of unitholders (in loss  from continuing operations, discontinued operations and gain on sale of real  estate) |   | 3,742                                |   | (599                                 | )      |
| Income/(loss) before minority interests                                                                                           |   | 13,135                               |   | $                                    | (4,037 | ) |
| Adjustments for depreciation and  amortization                                                                                    |   | 1,929                                |   | 2,578                                |   |
|                                                                                                                              |   |                                 |   |                                 |   |
| FFO                                                                                                                               |   | $                                    | 15,064 |                                 | $      | (1,459 | ) |

 

The line item entitled general and administrative expenses on theCompany’s statements of operations represents corporate level general andadministrative expenses.

 

The above schedule includes the operating results of the Company’sinvestment land segment which had a net loss of $45,000 for the three monthsended June 30, 2003.  This investmentland was acquired by the Company on June 13, 2003 (see Note 5).  The acquisition of this land was recorded asa purchase under generally accepted accounting principles in the United Statesand the total assets related to this segment, including the estimatedacquisition amounts, were $32.7 million at June 30, 2003.

 

The remaining amounts in the table above comprise the results of theshopping 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, a tenant exercised its option to purchase theland subject to its ground lease at Lakeshore Marketplace in Norton Shores,Michigan.  The proceeds from this salewere $373,000 and a gain on sale of $156,000 was recognized.

 

On March 12, 2003, the Company received a condemnation award for landadjacent to the Company’s center in Gretna, Nebraska.  The land was condemned by Sarpy County in Nebraska in order towiden Highway I-80 that runs along the center. Proceeds from this sale were $37,000 and a gain on sale of $29,000 wasrecognized, which is included in Income from Discontinued Operations on theCompany’s statement of operations.

 

On May 30, 2003 the Company sold a parcel of land adjacent to itscenter located in Tulare, California. The proceeds from the sale were $650,000 and a gain of $548,000 wasrecognized, which is included in Income from Discontinued Operations on theCompany’s statements of operations.

 

On May 31, 2003, the Company sold the partnership that owns two outletcenters located in Daleville, Indiana and Somerset, Pennsylvania for $1.98million. A net gain on sale of $1.3 million was recognized, which is includedin Income from Discontinued Operations on the Company’s statements ofoperations.  The investment group thatacquired the partnership includes Gary J. Skoien, Chairman, Chief ExecutiveOfficer and President of the Company and an affiliate of Howard M. Amster, adirector and significant shareholder of the Company.  The independent directors of the Company approved thistransaction and the Company believes this transaction reflects marketterms.  The investment group has hiredthe Company to manage and lease the two properties.  The leasing and management

 

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agreement provides that the Company will receive 50% of the net profitfrom the subsequent sale of the centers after the owners receive a 12% annualreturn on their investment.  There canbe no assurance that the Company will receive any funds from such sales.

 

## Note 9 - DiscontinuedOperations

 

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

 

The following table is a summary of the results of operations of theproperties classified as discontinued operations (in thousands):

 
|                                                                                        |   | **Three  months  ended  June 30, 2003** |   | **Three  months  ended  June 30, 2002** |   | **Six months  ended  June 30, 2003** |   | **Six months  ended  June 30, 2002** |   |
|---------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                                                                                        |   |                                    |   |                                    |   |                                 |   |                                 |   |
| Total revenue                                                                               |   | $                                       | 1,070  |                                    | $      | 960                                  |   | $                                    | 2,146  |   | $ | 2,069 |   |
| Total expenses                                                                              |   | 909                                     |   | 1,666                                   |   | 2,442                                |   | 3,454                                |   |
| Gain on debt restructuring                                                                  |   | 14,406                                  |   | —                                  |   | 14,406                               |   | —                               |   |
| Income/(loss) before minority interests                                                     |   | 14,567                                  |   | (706                                    | )      | 14,110                               |   | (1,385                               | )      |
| Minority interests                                                                          |   | (4,118                                  | )      | 105                                     |   | (4,019                               | )      | 207                                  |   |
| Net gain on sale of real estate,  net of minority interests of $467  and $474, respectively |   | 1,332                                   |   | —                                  |   | 1,354                                |   | —                               |   |
| Income/(loss) from discontinued  operations                                                 |   | $                                       | 11,781 |                                    | $      | (601                                 | )      | $                                    | 11,445 |   | $ | (1,178 | ) |

 

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Management’s Discussion and Analysis of Financial Condition

and Results of Operations

For the three and six months ended June 30,2003

(unaudited)

 

Introduction

 

The following discussion and analysis of the condensed consolidatedfinancial condition and results of operations of Horizon Group Properties, Inc.(“HGPI” or, together with its subsidiaries “HGP” or the “Company”) should beread in conjunction with the Condensed Consolidated Financial Statements andNotes thereto. The Company’s operations are conducted primarily through asubsidiary limited partnership, Horizon Group Properties, L.P. (“HGP LP”).  HGPI is the sole general partner of HGP LPand, as of June 30, 2003, owned approximately 70.3% of the HGP LP partnershipinterests (“Common Units”).  In general,Common Units of HGP LP are exchangeable for shares of Common Stock of HGPI on aone-for-one basis at any time (or for an equivalent cash amount at theCompany’s election).  HGPI controls HGPLP and is dependent on distributions or other payments from HGP LP to meet itsfinancial obligations.

 

Cautionary Statements

 

The following discussion in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” contains certain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 which reflect management’s current views with respect to future eventsand financial performance.  Suchforward-looking statements are subject to certain risks and uncertainties;including, but not limited to, the effects of future events on the Company’sfinancial performance; the risk that the Company may be unable to refinance itscurrent debt as it matures; risks related to the retail industry in which theCompany’s shopping centers compete, including the potential adverse impact ofexternal factors, such as competition from existing or newly constructedshopping centers, inflation, consumer confidence, unemployment rates andconsumer tastes and preferences; risks associated with the Company’s propertyacquisitions, such as the lack of predictability with respect to financialreturns; risks associated with the Company’s property development activities,such as the potential for cost overruns, delays and the lack of predictabilitywith respect to the financial returns associated with these development activities;the risk of potential increase in market interest rates from current levels;and risks associated with real estate ownership,  such as the potential adverse impact of changes in local economicclimate on the revenues and the value of the Company’s properties.  For further information on factors whichcould impact the Company and the statements contained herein, reference is madeto the Company’s other filings with the Securities and Exchange Commission,including the Company’s Registration Statement on Form 10, as amended, dated asof June 4, 1998, with respect to the Company’s initial registration of itscommon stock under the Securities Exchange Act of 1934, as amended and the SkyMerger Corp. Registration Statement on Form S-4, as filed with the Securitiesand Exchange Commission on May 12, 1998 (Registration No. 333-51285).

 

The statements of financial condition and results of operations of theCompany reflect the application of the Company’s accounting policies, the mostsignificant of which are outlined in Note 2 to the Condensed ConsolidatedFinancial Statements.  These policiesare applied in accordance with accounting principles generally accepted in theUnited States and reflect significant assumptions and estimates of themanagement of the Company.

 

General Overview

 

The Company is a self-administered and self-managed 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 June 30, 2003, theCompany’s operating portfolio consisted of nine factory outlet centers locatedin seven states comprising an aggregate of approximately 1.8 million squarefeet of gross leasable area (“GLA”). The Company also owns one power center, which is classified asdiscontinued operations.  Eight of thenine factory outlet centers and the power center were contributed to theCompany by Horizon pursuant to a Contribution Agreement entered into inconnection with the Merger (the “Contribution Agreement”) and one factoryoutlet center was purchased by the Company from Prime Retail immediatelysubsequent to the consummation of the Merger. At June 30, 2003, the Company owns and manages a total of 2.6 millionsquare feet of GLA.

 

 

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Prior to May 23, 2003, the Company was in default with respect to theobligations of two pools of loans originated by JP Morgan in July 1999 (the “JPMorgan Loans”).  The defaults were theresult of the Company’s failure to pay in full the amounts due under the loanscommencing with the payment due October 1, 2001.  Each pool of loans was secured by a group of threeproperties.  The first group consistedof three factory outlet centers located in Daleville, Indiana, Somerset,Pennsylvania and Tulare, California (the “DST Loans”); the second groupconsisted of three factory outlet centers located in Gretna, Nebraska, Sealy,Texas and Traverse City, 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% 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 in default on the GST Loans at June 30, 2003.  The Company and the special servicer of theGST Loans are currently 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, the Company restructured the DST Loans.  The restructuring involved (1) theacquisition of the loans secured by outlet centers in Daleville, Indiana andSomerset, Pennsylvania (the “Daleville and Somerset Loans”) which had anaggregate principal balance of $13.2 million, excluding accrued interest andpenalties, and (2) the reinstatement of the loan secured by an outlet center inTulare, California (the “Tulare Loan”) for a total payment by the Company of$1.98 million.  The funds for thistransaction were provided by a $2.0 million loan made on May 20, 2003 from anaffiliate of Howard Amster, a director and significant shareholder of theCompany.  This note bears interest at arate of 5% and is due upon demand.  OnMay 30, 2003 this loan was repaid in full in connection with the sale of thecenters in Daleville, Indiana and Somerset, Pennsylvania to an investment groupincluding Gary J. Skoien, Chairman, Chief Executive Officer and President ofthe Company and Howard 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 restructuringof the Tulare Loan resulted in the immediate foregiveness of $798,000 ofaccrued penalties and default interest. Additional accrued interest of $448,000 will be forgiven if the Companymakes the scheduled debt service payments through September 2003.  The centers in Daleville, Indiana andSomerset, Pennsylvania were then sold for $1.98 million to an investment groupincluding Gary Skoien, Chairman, Chief Executive Officer and President of theCompany and an affiliate of Howard Amster, a Director and significantshareholder of the Company.  Theinvestment 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 of operations.

 

In December 2002, the Company engaged a broker to market LakeshoreMarketplace, its power center in Norton Shores, Michigan.  The Company has executed a contract for thesale of this power center.  The Companyis also marketing for sale its property in Roseville, Michigan, which isnet-leased to Petsmart, Inc. and 14 parcels of vacant land.  Pursuant to the requirements of Statement ofFinancial Accounting Standards No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” (“SFAS 144”), the Company has reclassified thereal estate assets for these properties to Real Estate-Discontinued Operationson the balance sheet and reports the revenue and expenses from the propertiesas Income from Discontinued Operations on the statements of operations. SFAS144 also requires that any prior period financial statements presented are alsoreclassified for comparability.  Thisreclassification has no effect on the Company’s reported results of operationsor funds from operations.

 

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On June 13, 2003 the Company purchased controlling interest in twopartnerships which own approximately 655 acres of land in Huntley, Illinois(“Huntley”) from affiliates of The Prime Group, Inc. (“Prime Group”).  This purchase was accounted for under thepurchase method of accounting under which assets acquired and liabilitiesassumed were recorded at their relative fair values as of the date of thepurchase.  At June 30, 2003, purchaseprice allocation estimates are preliminary and will be finalized upon obtainingadditional information regarding the liabilities assumed at acquisition. Directcosts incurred for development activities at Huntley are capitalized to LandHeld for Investment on the Company’s balance sheets, while indirect costs andholding costs are expensed in general and administrative expense on thestatements of operations.  The Companyhad previously acquired a 3.25% net profits interest in Huntley in connectionwith a loan made to Retail Partners (as defined herein) in March 2003.  The value of this interest is included inLand Held for Investment on the balance sheets (see Note 5 to the CondensedConsolidated Financial Statements).  Theindependent directors of the Company approved this transaction and the Companybelieves this transaction reflects market terms.

 

Comparison of the Three Months Ended June 30, 2003 to the Three MonthsEnded June 30, 2002

 

The net loss from continuing operations before minority interestsincreased $155,000 for the three months ended June 30, 2003 compared to thesame period in the prior year.  The maincomponents of this change were an increase in insurance premiums, legal fees anduncollectible accounts partially offset by a decrease in interest expense dueto the restructuring of the Tulare Loan.

 

Total revenue increased $99,000 in the three months ended June 30,2003, compared to the same period in the prior year.  The primary factor was an increase in expense recovery income asa result of the significant increase in insurance premiums for the new policyyear, including the addition of terrorism coverage as required by certain ofthe Company’s lenders.

 

Average occupancy for the three properties remaining in default on theJP Morgan Loans (the “GST Properties”) was 68.2% and 72.6% for the three monthperiods ended June 30, 2003 and 2002, respectively.  Total revenue for those properties was $673,000 and $779,000 forthe three month periods ended June 30, 2003 and 2002, respectively.  Average occupancy for the Company’s sixother outlet centers was 78.8% and 79.8% for the three month periods ended June30, 2003 and 2002, respectively.  Totalrevenue for those properties was $3.5 million for each of the three monthperiods ended June 30, 2003 and 2002.

 

Property operating expenses increased $136,000 in the three monthsended June 30, 2003 compared to the same period in the prior year.  The primary factors were an increase inplanned maintenance projects at several centers and an increase in insurancepremiums in the new policy year, including the addition of terrorism coveragerequired by some of the Company’s lenders. Of the total increase, $9,000 was related to the GST Properties and$91,000 was related to the Company’s six other outlet centers.  The remaining increase related to corporateoffice rental activities.

 

Land lease and other expenses increased $138,000 in the three monthsended June 30, 2003 compared to the same period in the prior year, primarily asa result of an increase in bad debt expense due to tenant bankruptcies andspecific tenant account collection issues.

 

Depreciation and amortization expense decreased $68,000 in the threemonths ended June 30, 2003, compared to the same period in the prior yearprimarily due to reductions in the carrying values from impairment recorded inDecember 2002 of two of the GST Properties.

 

General and administrative expense increased $125,000 in the threemonths ended June 30, 2003, compared to the same period in the prior yearmainly due to an increase in insurance premiums, legal costs and independentdirector fees.

 

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The decrease in interest expense of $98,000 in the three months endedJune 30, 2003 compared to the same period in the prior year was primarily theresult of the restructuring of the Tulare Loan which was previously in default(see Note 5 to the Condensed Consolidated Financial Statements).  The decrease was partially offset byinterest related to indebtedness incurred and debt assumed in connection withthe acquisition of Huntley (see Note 5 to the Condensed Consolidated FinancialStatements).

 

Income/(loss) from discontinued operations increased $12.4 million forthe three months ended June 30, 2003 compared to the same period in the prioryear.  This line item on the Company’sstatement of operations contains the revenue and expenses from the propertiesclassified as discontinued operations on the Company’s balance sheets, or soldduring the period, pursuant to SFAS 144 (see Note 2 to the CondensedConsolidated Financial Statements).  Theincrease is primarily related to a gain resulting from the restructuring of theDaleville and Somerset Loans and the sale of the partnership that owns theoutlet centers in Daleville, Indiana and Somerset, Pennsylvania (see Note 5 tothe Condensed Consolidated Financial Statements).

 

The weighted average minority interest percentage for the three monthsended June 30, 2003 was 29.7% as compared to 15.1% in the three months endedJune 30, 2002 due to the Company’s sale of 261,628 units in HGP LP, on March13, 2003, to Howard Amster, a director and principal shareholder of HGPI.  These units can not be converted into sharesof Common Stock of HGPI.

 

Net income for the three months ended June 30, 2003 was $10.7 millionand $3.74 per share on a basic and diluted basis, respectively, and net lossfor the three months ended June 30, 2002 was $1.7 million and $0.61 per shareon a basic and diluted basis.

 

Average occupancy for the Company’s total operating portfolio for thethree months ended June 30, 2003 was 75.6% compared to 77.6% for the threemonths ended June 30, 2002.  Occupancyof the Company’s total portfolio (excluding the centers in Daleville, Indianaand Somerset, Pennsylvania which were sold in May 2003) at June 30, 2003 and2002 was 76.5% and 81.6%, respectively.

 

Comparison of the Six Months Ended June 30, 2003 to the Six MonthsEnded June 30, 2002

 

Total revenue increased $218,000 in the six months ended June 30, 2003,compared to the same period in the prior year. The primary factors were an increase in expense recovery income as aresult of the significant increase in insurance premiums for the new policyyear, including the addition of terrorism coverage as required by some of theCompany’s lenders and an increase in interest income from the loan made toRetail Partners (see Note 6 to the Condensed Consolidated FinancialStatements).

 

Average occupancy for the GST Properties was 67.6% and 73.2% for thesix-month periods ended June 30, 2003 and 2002, respectively.  Total revenue for those properties was $1.4million and $1.6 million for the six month periods ended June 30, 2003 and2002, respectively.  Average occupancyfor the Company’s other six outlet centers was 77.8% and 80.4% for thesix-month periods ended June 30, 2003 and 2002, respectively.  Total revenue for those properties was $7.0million and $6.9 million for the six month periods ended June 30, 2003 and2002, respectively.

 

Property operating expense increased $220,000 in the six months endedJune 30, 2003 compared to the same period in the prior year.  The primary factors were an increase inplanned maintenance projects at several centers and an increase in insurancepremiums in the new policy year, including the addition of terrorism coveragerequired by some of the Company’s lenders. These increases were partially offset by overall cost-cutting programsimplemented company wide.  Of the totalincrease, $33,000 was related to the GST Properties and $168,000 was related tothe Company’s other six outlet centers. The remaining difference relates to corporate activities.

 

Land lease and other expenses increased $78,000 in the six months endedJune 30, 2003 compared to the same period in the prior year.  The increase primarily resulted from anincrease in the Company’s contribution to marketing

 

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expense for the properties and an increase in  bad debt expense due to tenant bankruptcies offset by a decreasein land lease expense as a result of the Company’s acquisition of land underits center in Laughlin, Nevada.

 

Depreciation and amortization expense decreased $92,000 in the sixmonths ended June 30, 2003, compared to the same period in the prior year.  This decrease is the result of reductions incarrying values from impairment recorded in December 2002 of two of the GSTProperties.

 

General and administrative expense increased $135,000 in the six  months ended June 30, 2003, compared to thesame period in the prior year mainly as a result of an increase in insurancepremiums, legal costs and independent director fees.

 

The decrease in interest expense of $148,000 in the six months endedJune 30, 2003 compared to the same period in the prior year was primarily theresult of the restructuring of the Tulare Loan which was previously in default(see Note 5 to the Condensed Consolidated Financial Statements).  The decrease was partially offset byinterest related to the acquisition of Huntley (see Note 5 to the CondensedConsolidated Financial Statements).

 

In January 2002, the Company sold 7.1 acres of land ancillary to itscenter in Warrenton, Missouri and recognized a loss of $1,000.  In February 2002, the Company sold a parcelof land adjacent to its center in Norton Shores, Michigan and recognized a gainof $156,000.  The gains and losses fromthese transactions are reflected in the Condensed Consolidated Statements ofOperations of the Company.

 

In March 2003, the Company received a condemnation award for landadjacent to the Company’s center in Gretna, Nebraska.  The land was condemned by Sarpy County in Nebraska in order towiden Highway No. I-80 that runs along the center.  The Company recognized a gain of $29,000 as a result of thecondemnation, which is reflected in Income from Discontinued Operations on theCompany’s statements of operations.

 

Income/(loss) from discontinued operations increased $12.6 million forthe six months ended June 30, 2003 compared to the same period in the prioryear.  This line item on the Company’sstatement of operations contains the revenue and expenses from the propertiesclassified as discontinued operations on the Company’s balance sheets, or soldduring the period, pursuant to SFAS 144 (see Note 2 to the CondensedConsolidated Financial Statements).  Theincrease is primarily related to a gain resulting from the restructuring of theDaleville and Somerset Loans and the sale of the partnership that owns theoutlet centers in Daleville, Indiana and Somerset, Pennsylvania (see Note 5 tothe Condensed Consolidated Financial Statements).

 

The weighted average minority interest percentage for the six monthsended June 30, 2003 was 25.9% as compared to 15.1% in the six months ended June30, 2002 due to the Company’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 sharesof Common Stock of HGPI.

 

Net income for the six months ended June 30, 2003 was $9.4 million and$3.27 per share on a basic and diluted basis, respectively, and net loss forthe six months ended June 30, 2002 was $3.4 million and $1.20 per share on abasic and diluted basis.

 

Average occupancy for the Company’s total operating portfolio for thesix months ended June 30, 2003 was 74.7% compared to 78.2% for the six monthsended June 30, 2002.

 

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Liquidity and Capital Resources

 

On July 11, 2002, the Company repaid in full the HGP Credit Facility(see Note 5 to the Condensed Consolidated Financial Statements) with theproceeds of loans originated by UBS Warburg Real Estate Investments Inc.(“UBS”) and Beal Bank, S.S.B. (“Beal Bank”).

 

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

 

The UBS Senior Loans mature July 11, 2009, require monthly principalpayments based on a 25-year amortization schedule and bear interest at a fixedrate of 8.15%.  At June 30, 2003 andDecember 31, 2002, the balances totaled $21.8 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.

 

The UBS Mezzanine Loans mature July 11, 2005 and may be prepaid withoutpenalty after July 11, 2004.  Theseloans require monthly payments based on a three-year amortization schedule andbear interest at a fixed rate of 17.0%. At June 30, 2003 and December 31, 2002, the balances totaled $2.6million and $3.1 million, respectively.

 

Beal Bank provided two loans totaling $7.0 million (the “Beal BankLoans”) and consist of (i) a $3.0 million loan secured by vacant land locatedin Norton Shores, Michigan and Fruitport Township, Michigan (the “Beal BankLoan I”), and (ii) a $4.0 million loan secured by the outlet center in Monroe,Michigan (the “Beal Bank Loan II”). These loans are cross-collateralized and are recourse to theCompany.  The Beal Bank Loans matureJuly 10, 2005.  Principal payments of upto $2.0 million are permitted without penalty at any time and the loans may beprepaid in whole or in part without penalty after July 10, 2004.

 

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

 

The Beal Bank Loan II is guaranteed by Prime Retail up to a maximum of$4.0 million (the “Prime-Beal Guaranty”). Mr. Skoien and Mr. Amster, Directors of the Company, are members of theBoard of Directors of Prime Retail.  ThePrime-Beal Guaranty will be released when the total outstanding balance of theBeal Bank Loans is equal to or less than $5.0 million.  The Company is obligated to make quarterlypayments of $15,000 to Prime Retail, Inc. as long as this guaranty is ineffect.

 

As of June 30, 2003, the Company was in default with respect to theobligations of one pool of loans originated by JP Morgan in July 1999 which iscollateralized by three properties in Gretna, Nebraska, Sealy, Texas andTraverse City, Michigan (the “GST Properties” and the “GST Loans”) with anaggregate principal balance of $23.1 million at June 30, 2003 and December 31,2002 (excluding accrued interest and penalties).  The defaults are the result of the Company’s failure to pay infull the amounts due under the loans commencing with the payment due October 1,2001.

 

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Each loan is secured by a group of three properties.  The loans are non-recourse to HGPI, subjectto limited customary exceptions (see Note 5 to the Condensed ConsolidatedFinancial Statements).

 

The Company had previously been in default on a second pool of loansoriginated by JP Morgan which was secured by properties in Daleville, Indiana,Somerset, Pennsylvania and Tulare, California (the “DST Loans”).  On May 22, 2003, the Company restructuredthe DST Loans.  The restructuringinvolved (1) the acquisition of the two loans secured by outlet centers inDaleville, Indiana and Somerset, Pennsylvania (the “Daleville and SomersetLoans”) which had an aggregate principal balance of $13.2 million, excludingaccrued interest and penalties, and (2) the reinstatement of the loan securedby an outlet center in Tulare, California (the “Tulare Loan”) for a totalpayment 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.  This notebears interest at a rate of 5% and is due upon demand.  On May 30, 2003, this loan was repaid infull in connection with the sale of the centers in Daleville, Indiana andSomerset, Pennsylvania to an investment group which includes Gary J. Skoien,Chairman, Chief Executive Officer and President of the Company and HowardAmster, a director and significant shareholder of the Company.  The independent directors of the Companyapproved this transaction and the Company believes this transaction reflectsmarket terms.  The restructuring of theTulare Loan resulted in the immediate foregiveness of $798,000 of accruedpenalties and default interest. Additional accrued interest of $448,000 will be forgiven if the Companymakes the scheduled debt service payments through September 2003.  Pursuant to FASB Statement No. 15“Accounting by Debtors and Creditors for Troubled Debt Restructurings”, thecarrying amount and prospective effective interest rate on the Tulare Loan willbe adjusted for the $1.2 million of forgiven interest and penalties applicableto this property.  At June 30, 2003, theTulare Loan had an outstanding principal balance of $9.0 million and anunamortized restructuring adjustment of $1.2 million which will be amortized asa reduction of future interest expense under the restructured loan.  The gain on debt restructuring related tothe Daleville and Somerset Loans of $14.4 million is included in Income fromDiscontinued Operations on the statement of operations because these twoproperties were sold on May 30, 2003 (see Note 8 to the Condensed ConsolidatedFinancial Statements).

 

The Company remits monthly all available cash flow, after a reserve formonthly operating expenses, as partial payment of the debt service on the GSTLoans.  The failure to pay the fullamount due constitutes a default under the loan agreements which allows 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 Company and the special servicer of theGST Loans are negotiating a restructuring of the GST Loans.  There can be no assurance that suchnegotiations will result in any settlement of the loans or in any modificationof the terms of the loans.

 

The JP Morgan Loans require the monthly funding of escrow accounts forthe payment of real estate taxes, insurance and capital improvements whichtotaled $310,000 at June 30, 2003.  Inaddition, $1.1 million of monthly available cash flow remitted as debt serviceafter October 12, 2002 on the GST Loans has been placed in special purposeescrow accounts by the loan servicers, rather than being applied to thebalances due on the loan.  The Companycontinues to manage these properties pursuant to a management agreement, whichis subject to cancellation by the servicers of the loans.  The Company receives fees of approximately$12,000 per month for such services.

 

The declining results of operations resulting in the inability toservice the JP Morgan Loans was judged to represent an indicator of possibleimpairment in the value of the collateral properties.  In the third quarter of 2001, the Company estimated the currentvalue of the six centers that collateralized the loans and concluded that thecarrying value of four of the centers exceeded the fair values of thosecenters.  Accordingly, the results ofoperations for 2001 include a provision for asset impairment of $18.0 million,including $9.2 million related to properties which are included in Income fromDiscontinued Operations, representing a write-down of the carrying values ofthe assets to their estimated fair value. Based on continuing negotiations with the lender and additional declinesin occupancy and revenues, the Company recorded an additional provision forasset impairment of $17.0 million in the fourth quarter of 2002, including $8.9million related to properties which are included in Income from DiscontinuedOperations, to further reduce the carrying values of the same fourproperties.  The aggregate carryingvalue of the real estate of the properties

 

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collateralizing the GST Loans was approximately $9.9 million at June30, 2003.  The current outstanding loanbalances totaled $23.1 million and accrued interest and penalties totaling $4.8million.  If the lender were toforeclose on the GST Properties in full satisfaction of the loans, the Companywould record a gain for the difference between the carrying value of theproperties and related net assets and the outstanding loan balances and relatedliabilities.  The estimation of the fairvalue of the centers which secured the GST Loans involved estimates by managementwith respect to future cash flows, market conditions and valuations applicableto such properties.  Future events couldoccur which would cause the Company to conclude that the carrying values of theCompany’s properties may need to be further adjusted.

 

The mortgage loan secured by the Company’s outlet center in Holland,Michigan was made by Republic Bank.  The$3.5 million loan matures in July 2006, requires monthly debt service paymentsof $30,000 based on a 20-year amortization schedule, and bears interest at afixed rate of 8.21%.  The principalbalance on this loan was $3.4 million at June 30, 2003 and December 31,2002.  This loan requires the monthlyfunding of an escrow account for the payment of real estate taxes which had abalance of $142,000 at June 30, 2003. Beginning in July 2004, the loan requires that the cash flow from theproperty be at least 130 percent of the debt service on the loan.  In the event that the cash flow is less thanthat amount, the Company may make principal payments to reduce the outstandingbalance of the loan to an amount which reduces debt service to a level which isin compliance with this requirement.

 

The mortgage loan secured by the Company’s power center in NortonShores, Michigan was made by Greenwich Capital Financial Products, Inc.(“Greenwich”).  The $16.0 million loanmatures in July 2011, requires monthly payments based on a 30-year amortizationschedule and bears interest at a fixed rate of 7.647%.  The principal balance on this loan was $15.8million at June 30, 2003 and December 31, 2002.  The loan is non-recourse to HGPI (subject to limited customaryexceptions).  In connection with theGreenwich loan, Lakeshore Marketplace was transferred to a new entity, LakeshoreMarketplace, LLC, a wholly owned subsidiary of the Company.  Lakeshore Marketplace LLC, and its managingmember, Lakeshore Marketplace Finance Company, Inc., are restricted from owningany assets other than Lakeshore Marketplace and may not incur additionalliabilities, other than normal trade payables. All of the assets of Lakeshore Marketplace, LLC are pledged as securityfor the Greenwich loan.  This loanrequires monthly funding of escrow accounts for the payment of future debtservice payments, real estate taxes, insurance, capital improvements, tenantimprovements and leasing commissions. These accounts had a total balance of $834,000 at June 30, 2003.  Funds in excess of certain amounts specifiedin the loan agreement are disbursed to Lakeshore Marketplace, LLC monthly.  The Company has executed a contract for thesale of the center for sale and thus, pursuant to SFAS 144, its real estateassets are listed as Real Estate-Discontinued Operations on the Company’sbalance sheets and its revenue and expenses are included in Income fromDiscontinued Operations on the Company’s statements of operations.

 

The Company has a mortgage loan securitized by its corporate officebuilding and related equipment in Norton Shores, Michigan.  The loan was originally scheduled to maturein December 2002 and has been extended to July 30, 2003.  The principal balance on this loan was $2.0million and $2.2 million at June 30, 2003 and December 31, 2002,respectively.  During the original term,the interest rate on the loan was LIBOR plus 2.5% per annum and monthly debtservice payments of $22,500 were required. During the extension period, the loan bears interest at LIBOR plus 5.5%per annum and requires monthly debt service payments of $50,000.  As of the date of this filing, there has notbeen an additional extension requested from the current lender because theCompany expects to close shortly on replacement financing.  There can be no assurance that the Companywill be able to complete such refinancing or on what terms such refinancing maybe accomplished.

 

The Company owns a property in Roseville, Michigan, which is net-leasedto Petsmart, Inc. and is subject to a mortgage with a principal balance of $3.1million and $3.2 million at June 30, 2003 and December 31, 2002respectively.  The rent payable underthe lease is equal to the debt service due under the loan secured by theproperty (the “Petsmart Loan”).  ThePetsmart Loan matures on January 8, 2008, bears interest at a fixed rate of8.77% and requires the monthly payment of principal computed on a 25-yearschedule.  The loan is non-recourse toHGPI.  The Company is marketing thisproperty for sale and thus, pursuant to SFAS 144, its real estate assets arelisted as Real

 

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Estate-Discontinued Operations on the Company’s balance sheets and itsrevenue and expenses are included in Income from Discontinued Operations on theCompany’s statements of operations.

 

The Company is the obligor on a $2.0 million unsecured promissory noteincurred in connection with the acquisition of the land underlying its centerin Laughlin, Nevada.  The note maturesin June 2012, bears interest at a rate of 2.0% above the weighted average costof funds index for the Eleventh District Savings Institutions, adjustedannually and requires monthly amortization based on a 10 year schedule.  The interest rate payable on the loan was5.074% through February 28, 2003 and 4.375% through February 29, 2004.  The outstanding principal balance on this notewas $1.8 million and $1.9 million at June 30, 2003 and December 31, 2002, respectively.

 

Pursuant to the terms of the UBS Loans, Greenwich loan and the JPMorgan Loans, the Company is required to keep the properties in good generalrepair and to make capital improvements and repairs to certain of its outletcenters.  At June 30, 2003, there wasapproximately $983,000 deposited in escrows with the loan servicers, which theCompany believes is sufficient to fund its ongoing capital requirements.  Any additional capital improvements areexpected to be funded with additional borrowings, existing cash balances orcash flow from operations.

 

On April 24, 2003, the Company closed on a $3.1 million loan for theconstruction of Phase II of its outlet center in Tulare, California (the“Tulare II Loan”).  The loan willconvert into a permanent loan maturing in August 2009 upon completion of theretail expansion.  The loan is securedby a first mortgage on the land and improvements and will bear interest at thegreater of LIBOR plus 300 basis points or 5.5%.  The outstanding principal balance on the Tulare II Loan was$861,000 at June 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.  The independent directors of theCompany approved this transaction and the Company believes this transactionreflects market terms.

 

On June 12, 2003 the Company borrowed $9.1 million from Amster TradingCompany, an affiliate of Howard Amster, a director and significant shareholderof the Company (the “Huntley Amster Loan”) which funded the purchase of Huntleyfrom Prime Group and its affiliates. The Huntley Amster Loan bears interest at a rate of 11.0% per annum,payable monthly, and matures on June 12, 2004, with the option for a one-yearextension.  A one percent (1%)origination fee was paid to Amster Trading Company.  The Huntley Amster Loan may not be prepaid in whole or in partprior to September 1, 2003 and thereafter requires a prepayment fee accordingto the following schedule:

 

| **Payment made during the period:**     |   | **Prepayment  Fee** |   |
|-----------------------------------------|--------|---------------------|--------|
| September 1, 2003 to September 30, 2003 |   | 3.0                 | %      |
| 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 Loan is guaranteed by HGPI and HGP LP and is securedby a pledge of the partnership interests in the partnerships which own Huntley,subject to any required lender consents.

 

In connection with the Company’s acquisition of Huntley, the Companyassumed a $10.7 million loan secured by Huntley provided by Beal Bank with aprincipal balance of $10.7 million at June 30, 2003 (the “Huntley BealLoan”).  This loan requires monthlypayments of interest at a rate equal to the greater of (i) the Wall StreetJournal Prime Rate plus four percent (4%) or (ii) twelve percent (12%) perannum.  The Huntley Beal Loan may onlybe prepaid, prior to maturity, from the net proceeds from the sale of all orany portion of the collateral land. Beal Bank must approve any collateral land sales in writing and maygrant or withhold such consent in their sole discretion.  The loan matures on October 31, 2003, andallows for two one-year extensions upon the satisfaction of certain customaryconditions.  The Huntley Beal Loan isguaranteed by HGPI.

 

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Pursuant to the terms of the Amended and Restated Agreement andAssignment of Net Profits Interest dated October 27, 1999, as later amended(the “Beal Net Profits Agreement”), Beal Bank has a 35% interest in the NetProfits of the partnerships which own Huntley, subject to certain preferencesin their distribution.  The Beal NetProfits Agreement was granted in connection with a prior loan made by Beal Bankto Huntley.  Net cash generated byHuntley is to be distributed in the following order:  first to the owners of Huntley in the amount of the ApprovedContributions (which total approximately $11.6 million at June 30, 2003 andfrom which the Huntley Beal Loan is required to be repaid), second to Beal Bankfor the Beal Account (which had a balance of approximately $6.6 million at June30, 2003), third to Huntley for its account (which had a balance ofapproximately $12.2 million at June 30, 2003) and thereafter, 35% to Beal Bankand 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 interest liability.  Such estimate is subject to change.  Some of the factors that could cause asignificant revision to the estimate include changes in zoning and changes inthe market demand for real estate in the area. The Beal Bank net profits interest has been included in ParticipationInterests and Other Liabilities on the Company’s balance sheets.  Certain affiliates of Prime have continuingguarantees related to the Beal Net Profits Agreement.  The Company has idemnified such guarantors against any liabilityin connection with their guarantees. Capitalized terms in this paragraph which are not defined herein shallhave the meanings given such terms in the Beal Net Profits Agreement, asamended.

 

Gary J. Skoien, Chairman, Chief Executive Officer and President of theCompany, is also the Executive Vice President and Chief Operating Officer ofPrime Group.  In connection with hisemployment with Prime Group, Mr. Skoien was previously granted an interest (the“Skoien Net Profits Interest”) in the net proceeds generated by Huntley, whichhe retained after the Company’s purchase of Huntley.  The Skoien Net Profits Interest consists of a 9.675%participation in the Net Cash Flow (as defined in Mr. Skoien’s Net ProfitsAgreement) distributed to the Company (excluding distributions of all amountscontributed or advanced by the Company to Huntley plus interest per the termsof the agreement).  Pursuant to purchaseaccounting requirements, the Company has recorded a liability for the SkoienNet Profits Interest in the amount of $1.0 million, which represents itsestimated fair value and which amount has been included in ParticipationInterests and Other Liabilities on the Company’s balance sheets.

 

As additional consideration for the partnership interests, Huntleygranted to Prime Group, and certain of its affiliates, a participation interestof 26% of the net cash flow distributed by Huntley (the “Prime GroupParticipation Interest”) with respect to the interests acquired by theCompany.  No amount is payable to PrimeGroup until the Company has received distributions from Huntley in excess ofthe purchase price plus advances made by the Company to Huntley  plus a 40% return on such amounts compoundedquarterly.  Aggregate amounts payablepursuant to the Prime Group Participation Interest shall not exceed $5.0million.  No liability has been recordedby the Company for the Prime Group Participation Interest as its current fairvalue is estimated to be zero.  Gary J.Skoien, Chairman, Chief Executive Officer and President of the Company is alsothe Executive Vice President and Chief Operating Officer of Prime Group.

 

In 1993, the Village of Huntley (the “Village”) created a Tax IncrementFinancing District (the “TIF District”) which is authorized to issue up to$108.0 million of tax-exempt, tax-increment bonds (the “TIF Bonds”) toreimburse Huntley for a portion of the land cost and the cost of infrastructureimprovements.  In 1995, the Village sold$7.0 million of Series A bonds and $14.0 million of Series B bonds.  Huntley owns the Series C bonds with a totalprincipal amount of $25.0 million plus accrued interest.  The Series C bonds are subordinate to theSeries A and Series B bonds.  Currentlythere is no portion of the tax increment available to the Series C bonds and novalue has been ascribed to them by the Company.

 

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The source of repayment for the TIF Bonds is (a) 100% of the increasein real estate taxes on the land in the TIF District above the taxes in placewhen the TIF District was created, and (b) one-half of the Village’s onepercent (1%) sales tax collected on retail sales occurring within the TIFDistrict.  The TIF District containsapproximately 900 acres of land owned or previously owned by Huntley.  Debt service reserve funds were initiallyestablished with $700,000 for the Series A bonds and $3.09 million for theSeries B bonds as security for the payment of principal and interest on the TIFBonds.  To the extent the reserve fundsare not needed to service the bonds, they will be returned to Huntley.  These funds are held in interest bearingaccounts under the control of the trustee and total approximately $3.6 millionat June 30, 2003.  There can be noassurance that these funds will be returned to Huntley and, therefore, they arenot reflected on the balance sheets of the Company.  The TIF Bonds are not obligations of the Company and are notreflected on the Company’s balance sheet.

 

As additional security for the Series B bonds, Huntley granted amortgage to U.S. Bank Trust National Association (“US Bank”), as trustee forthe holders of the Series B bonds, covering on approximately 131 acres of land(the “US Bank Mortgage”).  Upon the saleof any parcel of land subject to the US Bank Mortgage, such parcel will bereleased from the US Bank Mortgage provided that Huntley deposits into acollateral account (the “US Bank Collateral Account”) an amount equal to thegreater of (i) 50% of the July 1997 appraised value of such parcel or (ii) anamount per square foot of the parcel sold as set forth in Exhibit B to theAmended and Restated Intercreditor Agreement. Amounts deposited into the US Bank Collateral Account are released toHuntley upon the issuance of a certificate of occupancy for the subject land parcel.  The balance in the US Bank CollateralAccount was approximately $1.5 million at June 13, 2003 and is included inRestricted Cash on the Company’s balance sheets (see Note 2 to the CondensedConsolidated Financial Statements). 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 continuing legal obligation related to the proceedsreceived from the TIF Bonds and thus, no liability has been recognized relatedto this mortgage.

 

The independent directors of the Company approved the acquisition ofHuntley and the assumption of the related net profits interest liabilities andthe Company believes that the transaction reflects market terms.

 

On March 14, 2003, the Company made a secured loan to Retail PartnersLimited Partnership and Retail Partners, Inc. (collectively “RetailPartners”).  The loan is for a term of14 months and bears interest at the rate of 5.0%, payable at maturity.  The principal balance on the loan was$500,000 at June 30, 2003.  The Companyreceived a 3.25% net profits interest in a real estate development owned byHuntley Development LP and Huntley Meadow Residential Venture (collectively“Huntley”) subject to the current lender’s interest in distributions fromHuntley.  The fair value of the profitsinterest has been preliminarily estimated at $350,000.  The value of this interest is included in LandHeld for Investment.  Such value will berecognized over the term of the loan as an adjustment to the yield.  Prime Group owns Retail Partners and Gary J.Skoien, Chairman, Chief Executive Officer and President of the Company, isExecutive Vice President and Chief Operating Officer of Prime Group and has anet profits interest in Huntley.  Theindependent directors of the Company approved this transaction as being at fairmarket conditions.

 

The Company expects to meet its short-term liquidity requirementsgenerally through additional borrowings, working capital, cash flows fromoperations, the sale of real estate classified as Real Estate-DiscontinuedOperations on the Company’s balance sheets and the potential offering of equitysecurities in the private or public capital markets.  The Company expects to meet its long-term requirements, such astenant allowances for new leases and capital improvements and expansionscurrently being considered at its center in Medford, Minnesota, through the useof working capital and cash flows from operations and, if necessary andavailable, additional borrowings of long-term debt and the potential offeringof equity securities in the private or public capital markets.  The Company’s ability to secure new loans islimited by the fact that virtually all of the Company’s real estate assets arecurrently pledged as collateral for its current loans.

 

33

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Discontinued Operations

 

The Company is actively marketing the following assets for sale:  the single tenant building in Roseville,Michigan leased to Petsmart, Inc., and 14 parcels of vacant land totalingapproximately 108 acres in Norton Shores, Michigan; Fruitport Township,Michigan; Daleville, Indiana; Gretna, Nebraska and Medford, Minnesota and hasexecuted a contract for the sale of Lakeshore Marketplace in Norton Shores,Michigan.  The net proceeds from thesale of these assets would be available for general corporate purposes, subjectto certain restrictions and repayment obligations contained in the mortgageloans to which they are subject. 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.  In addition, the outletcenters located in Daleville, Indiana and Somerset, Pennsylvania, which weresold in May 2003, are also classified as discontinued operations.  SFAS 144 also requires that any prior periodfinancial statements presented are also reclassified for comparability.  This reclassification has no effect on theCompany’s reported net income or loss.

 

Sale of Partnership Units

 

On December 27, 2002, HGPI sold 145,349 units of HGP LP to Howard M.Amster, a Director and principal shareholder of HGPI, for aggregateconsideration of $750,000, or $5.16 per unit. On March 13, 2003, HGPI sold 261,628 units of HGP LP to Mr. Amster foraggregate consideration of $1.35 million, or $5.16 per unit.  Proceeds in excess of HGPI’s carrying valueof these units was recognized as an increase in additional paid in capital.  The 261,628 units sold on March 13, 2003 arenot convertible into Common Shares of HGPI.

 

Nasdaq Compliance

 

The shares of the Company are currently listed on the NASDAQ SmallCapMarket (“NASDAQ”).  As of December 31,2002 and March 31, 2003, the Company did not meet NASDAQ’s financialrequirements for continued listing based on the declining balance ofshareholders’ equity.  NASDAQ grantedthe Company an extension to meet that requirement.  In connection with this extension, the Company agreed to filewith NASDAQ and the SEC the filings required in connection with the Company’ssale of the Lakeshore Marketplace in Norton Shores, Michigan and reportingshareholders’ equity of at least $2.5 million. There can be no assurance that the Company will continue to meet theNASDAQ requirements applicable to the listing of its shares.

 

Legal Proceedings

 

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

 

34

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Quantitative and Qualitative Disclosure of Market Risk

(unaudited)

 

Item 3.  Quantitative andQualitative Disclosure of Market Risk

 

Market risk is the risk of loss from adverse changes in market pricesand interest rates.  The Company’sfuture earnings and cash flows may be affected by changes in market interestrates.  The fair value of the Company’sdebt obligations may also be affected by future changes in market interestrates.  The primary market risk facingthe Company is related to its long-term indebtedness, which bears interest atfixed and variable rates.  The Companyseeks fixed rate non-recourse debt to manage market risk.  At June 30, 2003, fixed rate debtrepresented approximately 79.9% or $88.9 million of the Company’s debt.  Loans with a fixed rate of interest andlevel amortization schedules minimize interest rate risk related to cash flowsand interest expense until the maturity of such loans.

 

At June 30, 2003, variable rate debt represented 20.1% or $22.4 millionof the Company’s total debt.  At June30, 2003, the average interest rate on variable rate debt was approximately10.3%.  Certain of the Company’s variablerate loans are subject to minimum interest rates that, as of June 30, 2003,were in excess of the contractual variable rates.  The $4.0 million Beal Bank Loan I bears interest at the greaterof the Wall Street Journal Prime Rate (the “Prime Rate”) plus 4.5% or12.0%.  At June 30, 2003, the Prime Ratewas 4.0%.  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 $850,000 Tulare ConstructionLoan bears interest at the greater of LIBOR plus 3.0% or 5.5%.  At June 30, 2003, LIBOR was 1.3%.  Thus, a 1.2% 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.

 

The variable rate loan on the Company’s corporate office building inNorton Shores, Michigan requires fixed monthly payments of $50,000 and has aninterest rate of LIBOR plus 5.5% per annum. As of June 30, 2003, the effective interest rate on this loan wasapproximately 6.8%, resulting in monthly interest expense of approximately$11,500 based on a principal balance of $2.0 million as of June 30, 2003.  Thus, an increase in the LIBOR rate wouldnot change the required debt service payment or monthly net cash flow of theCompany related to this loan.  Anychange in the LIBOR rate would affect the reported interest expense related tothis loan.

 

If market interest rates applicable to the Company’s variable rate debtwere to increase by 100 basis points, interest expense on the variable ratedebt (taking into account the minimum interest rates applicable to certain ofthe Company’s variable rate loans) would increase $38,000 annually.  The cash flows of the Company would decreaseby $18,000 annually due to such increase in interest rates (taking into accountthe minimum interest rates applicable to certain of the Company’s variable rateloans).  The fair value of total debtoutstanding (excluding the JP Morgan Loans, on which the Company is currentlyin default) would decrease by $2.6 million based on a 100 basis point increasein interest rates.

 

If market interest rates applicable to the Company’s variable rate debtwere to decrease by 100 basis points, interest expense on the variable ratedebt (taking into account the minimum interest rates applicable to certain ofthe Company’s variable rate loans) would decrease $38,000 annually.  The cash flows of the Company would increaseby $18,000 annually due to such decrease in interest rates (taking into accountthe minimum interest rates applicable to certain of the Company’s variable rateloans).  The fair value of total debtoutstanding (excluding the JP Morgan Loans on which the Company is currently indefault) would increase by $2.8 million based on a 100 basis point decrease ininterest rates.

 

These amounts were determined solely by considering the effect on thecurrent debt of the Company of a hypothetical change in interest rates andassumes that there is no change in the current structure of interest rates, theunderwriting standards of lenders or the overall capital structure or financialsituation of the Company.

 

35

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Inflation

 

HGP’s leases with some of its tenants require the tenants to reimburseHGP for most operating expenses and increases in common area maintenanceexpense, which reduces HGP’s exposure to increases in costs and operatingexpenses resulting from inflation.

 

36

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Controls andProcedures

(unaudited)

 

Item 4.  Controls and Procedures.

 

Effective as of June 30, 2003, the Company carried out an evaluation,under the supervision and with the participation of management, including theChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures(as defined in Rules 13a-15(e) under the Exchange Act).  Based upon that evaluation, the Company’sChief Executive Officer and Chief Financial Officer concluded that thedisclosure controls and procedures are effective to timely alert them tomaterial information relating to the Company (including its consolidatedsubsidiaries) required to be included in the Company’s Exchange Actfilings.  There have been no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation.

 

37

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Part II — Other Information

 

Item 1.  Legal Proceedings- None

 

Item 2.  Changes inSecurities - None

 

Item 3.  Defaults UponSenior Securities

 

On October 10, 2001, the Company notified the servicers of the JPMorgan Loans that the net cash flow from the properties securing the loans wasinsufficient to fully pay the required monthly debt service.  The Company remitted available cash flow,after a reserve for monthly operating expenses, as partial payment of debtservice.  The failure to pay in full theamounts due constitutes a default under the loan agreements, which would allowthe respective lenders to exercise their various remedies contained in the loanagreements, including foreclosure on the properties which secure the loans.

 

On May 22, 2003, the Company restructured the DST Loans.  The restructuring included the acquisitionof the Daleville and Somerset Loans and the reinstatement of the TulareLoan.  The Company and the specialservicer of the JP Morgan Loans are currently attempting to negotiate arestructuring of the GST Loans.  Therecan be no assurance that such discussions will result in any modification ofthe terms of the loans.  The GST Loansare non-recourse to HGPI, subject to certain customary exceptions.  See Note 5 to the Condensed ConsolidatedFinancial Statements for further details.

 

On July 30, 2003 the Company’s loan secured by its corporate officebuilding and related equipment in Norton Shores, Michigan matured.  This loan was originally scheduled to maturein December 2002.  The Company has notrequested an additional extension from the current lender because the Companyexpects to close shortly on replacement financing.  There can be no assurance that the Company will be able tocomplete such refinancing or on what terms such refinancing may beaccomplished.

 

Item 4.  Submission of Mattersto a Vote of Security Holders - None

 

Item 5.  Other Information- None

 

38

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Item 6.  Exhibits or Reports onForm 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                                                                                                                                                                                                                                                                                                                                                                               |
| Exhibit 3(viii) |   | Excepted Holders Certificate dated July 30, 2002                                                                                                                                                                                                                                                                                                                                                                                       |
| 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)                                                                                                                                                                                                    |
| 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)                                                                                                                                                                                                                                                                     |

 

39

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| 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 dated April 11,  2000. (7)                                                                                                                                                                 |
| Exhibit 10.34 |   | Amendment to Employment Agreement between Gary J. Skoien and the  Company dated as of August 29, 2000 (9)                                                                                                                                       |
| Exhibit 10.35 |   | Amendment to Employment Agreement between David R. Tinkham and the  Company dated as of August 29, 2000 (9)                                                                                                                                     |
| Exhibit 10.36 |   | Amendment to Employment Agreement between Andrew F. Pelmoter and the  Company dated October 9, 2000 (10)                                                                                                                                        |
| Exhibit 10.37 |   | Amendment to Employment Agreement between Thomas R. Rumptz and the  Company dated November 11, 2000 (10)                                                                                                                                        |
| Exhibit 10.38 |   | Additional Amendment to Employment Agreement between Andrew F.  Pelmoter and the Company dated April 26, 2001 (12)                                                                                                                              |
| Exhibit 10.39 |   | Additional Amendment to Employment Agreement between Thomas R. Rumptz  and the Company dated April 3, 2001 (12)                                                                                                                                 |
| Exhibit 10.40 |   | Settlement Agreement, dated as of May 4, 2001, by and among the  Company, Howard M. Amster, John C. Loring and Robert M. Schwartzberg (11)                                                                                                      |
| Exhibit 10.41 |   | Promissory Note, dated as of July 30, 2001, between Lakeshore  Marketplace, LLC and Greenwich Capital Financial Products, Inc. (14)                                                                                                             |
| Exhibit 10.42 |   | Mortgage, dated as of July 30, 2001, between Lakeshore Marketplace,  LLC and Greenwich Capital Financial Products, Inc. (14)                                                                                                                    |
| Exhibit 10.43 |   | Collection and Deposit Account Agreement, dated as of July 30, 2001,  by and among LaSalle Bank National Association, Lakeshore Marketplace, LLC  and Greenwich Capital Financial Products, Inc. (14)                                           |
| Exhibit 10.44 |   | Second Amended and Restated Note dated as of July 31, 2001 between  Third Horizon Group Limited Partnership and CDC Mortgage Capital, Inc. (14)                                                                                                 |
| Exhibit 10.45 |   | Second Amendment to Loan Agreement and Settlement Agreement dated as  of July 31, 2001 by and among Third Horizon Group Limited Partnership,  Horizon Group Properties, Inc., Horizon Group Properties, LP and CDC Mortgage  Capital, Inc. (14) |
| Exhibit 10.46 |   | Reaffirmation of Guaranty dated as of July 31, 2001 by Horizon Group  Properties, Inc. and Horizon Group Properties, LP (14)                                                                                                                    |
| Exhibit 10.47 |   | Reaffirmation of Guaranty dated as of July 31, 2001 by Prime Retail,  LP (14)                                                                                                                                                                   |
| Exhibit 10.48 |   | Pledge and Security Agreement dated as of July 31, 2001 by and among  Horizon Group Properties, LP, Third HGI, LLC and CDC Mortgage Capital, Inc.  (14)                                                                                         |
| Exhibit 10.49 |   | Amended and Restated Guaranty and Indemnity Agreement dated as of  July 31, 2001 by and among Horizon Group Properties, Inc., Horizon Group  Properties, LP, Prime Retail, Inc., and Prime Retail, LP (14)                                      |

 

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| 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. for the benefit of UBS Warburg Real  Estate Investments Inc. related to the financing of the Laughlin, Nevada, Medford,  Minnesota and Warrenton, Missouri outlet centers.  (16)                    |
| Exhibit 10.64 |   | Cash Management Agreement dated as of July 11, 2002 among Laughlin  Outlet Center LLC, Medford Outlet Center LLC, Warrenton Outlet Center LLC,  Wachovia Bank, National Association, UBS Warburg Real Estate Investments  Inc., and Horizon Group Properties, L.P. related to the financing of the  Laughlin, Nevada, Medford, Minnesota and Warrenton, Missouri outlet  centers.  (16)           |
| Exhibit 10.65 |   | Environmental Indemnity Agreement dated as of July 11, 2002 by  Laughlin Outlet Center LLC, Medford Outlet Center LLC, Warrenton Outlet  Center LLC, Horizon Group Properties, Inc. and Horizon Group Properties, L.P.  in favor of UBS Warburg Real Estate Investments Inc. related to the financing  of the Laughlin, Nevada, Medford, Minnesota and Warrenton, Missouri outlet  centers.  (16) |
| Exhibit 10.66 |   | Mezzanine Loan Document dated as of July 11, 2002 by and among  Laughlin Holdings LLC, Medford Holdings LLC and Warrenton Holdings LLC and  UBS Warburg Real Estate Investments Inc. related to the mezzanine financing  of the Laughlin, Nevada, Medford, Minnesota and Warrenton, Missouri outlet  centers.  (16)                                                                               |
| Exhibit 10.67 |   | Promissory Note dated July 11, 2002 between Laughlin Holdings LLC and  UBS Warburg Real Estate Investments Inc. related to the mezzanine financing  of the Laughlin, Nevada outlet center.   (16)                                                                                                                                                                                                 |

 

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| Exhibit 10.68 |   | Guaranty of Recourse Obligations dated as of July 11, 2002 by Horizon  Group Properties, Inc. and Horizon Group Properties, L.P. for the benefit of  UBS Warburg Real Estate Investments Inc. related to the mezzanine financing  of the Laughlin, Nevada, Medford, Minnesota and Warrenton, Missouri outlet  centers.  (16)                                                                  |
|---------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 10.69 |   | Pledge and Security Agreement dated as of July 11, 2002 between  Laughlin Holdings LLC and UBS Warburg Real Estate Investments Inc. related to  the mezzanine financing of the Laughlin, Nevada outlet center.  (16)                                                                                                                                                                          |
| Exhibit 10.70 |   | Guarantor Pledge and Security Agreement dated as of July 11, 2002  between Laughlin Holdings LLC and UBS Warburg Real Estate Investments Inc.  related to the mezzanine financing of the Laughlin, Nevada, Medford,  Minnesota and Warrenton, Missouri outlet centers.  (16)                                                                                                                  |
| Exhibit 10.71 |   | Subordinate Cash Management Agreement dated as of July 11, 2002 among  Laughlin Holdings LLC, Medford Holdings LLC, Warrenton Holdings LLC, Wachovia  Bank, National Association and UBS Warburg Real Estate Investments Inc.  related to the mezzanine financing of the Laughlin, Nevada, Medford,  Minnesota and Warrenton, Missouri outlet centers.  (16)                                  |
| Exhibit 10.72 |   | Environmental Indemnity Agreement dated as of July 11, 2002 by  Laughlin Holdings LLC, Medford Holdings LLC, Warrenton Holdings LLC, Horizon  Group Properties, Inc. and Horizon Group Properties, L.P. in favor of UBS  Warburg Real Estate Investments Inc. related to the mezzanine financings of  the Laughlin, Nevada, Medford, Minnesota and Warrenton, Missouri outlet  centers.  (16) |
| Exhibit 10.73 |   | Form of Horizon Group Properties, L.P. Common Unit Award Agreement.  (18)                                                                                                                                                                                                                                                                                                                          |
| Exhibit 10.74 |   | Amendment to Employment Agreement between Thomas R. Rumptz and the  Company dated August 21, 2002 (18)                                                                                                                                                                                                                                                                                             |
| Exhibit 10.75 |   | Letter Agreement between Pleasant Lake Apts., Ltd. and Horizon Group  Properties, Inc. dated December 23, 2002, regarding the sale of partnership  units in Horizon Group Properties, L.P. (19)                                                                                                                                                                                                    |
| Exhibit 10.76 |   | Amendment No.1 to Amended and Restated Agreement of Limited  Partnership of Horizon Group Properties, L.P. (20)                                                                                                                                                                                                                                                                                    |
| Exhibit 10.77 |   | Amendment to Employment Agreement between Thomas R. Rumptz and the  Company dated December 19, 2002 (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)                                                                                                                                                          |
| 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)                                                                                                                                                      |

 

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| 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)                                                                                                                                                                                                                                                                                                                  |
| 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)                                                                                                                                                                              |

 

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| 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                                                                              |
| 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 99.1   |   | Press release issued by the Company on March 14, 2003 announcing the  sale of limited partner units in HGP LP to Howard M. Amster and the Company’s  loan to Retail Partners (22)                                          |
| Exhibit 99.2   |   | Press release issued by the Company on March 31, 2003 announcing  fourth quarter 2002 earnings (23)                                                                                                                             |
| Exhibit 99.3   |   | Press release issued by the Company on April 25, 2003 announcing the  closing on a loan for the construction of Phase II of the Company’s outlet  center in Tulare, California (24)                                        |
| Exhibit 99.6   |   | Press release issued by the Company on May 30, 2003 announcing the  restructuring of three loans which had been in default since October 2001  (25)                                                                             |
| Exhibit 99.7   |   | Press release issued by the Company on June 3, 2003 announcing the  sale of the partnership that owns the two outlet centers in Daleville,  Indiana and Somerset, Pennsylvania (26)                                             |
| Exhibit 99.8   |   | Press release issued by the Company on June 13, 2003 announcing the  acquisition of controlling interest in the Huntley Partnerships (27)                                                                                       |

 

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1                            Incorporated by referenceto the Company’s Registration Statement on Form 10, as amended, dated as ofJune 4, 1998 (Commission file no. 0-24123)

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

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

4                          Incorporated by reference tothe Company’s Form 10-Q dated as of May 17, 1999(Commission file no. 0-24123)

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

6                            Incorporated by referenceto the Company’s Form 10-K dated as of March 6, 2000(Commission file no. 0-24123)

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

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

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

10                      Incorporated by reference to theCompany’s Form 10-K dated as of March 23, 2001(Commission file no. 0-24123)

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

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

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

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

 

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

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

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

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

19                      Incorporated by reference to theCompany’s Current Report on Form 8-K dated as of December 24, 2002(Commission file no. 0-24123)

20                      Incorporated by reference to theCompany’s Current Report on Form 8-K dated as of December 27, 2002(Commission file no. 0-24123)

21                      Incorporated by reference to theCompany’s Form 10-K dated as of March 31, 2003(Commission file no. 0-24123)

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

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

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

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

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

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

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

 

(a)                  Report on Form 8-K

 

A Form 8-K was filed on April 3, 2003, regarding the Company’s pressrelease announcing its results of operations for the fourth quarter of 2002.

 

A Form 8-K was filed on April 28, 2003, regarding the Company’s pressrelease announcing the closing on a $3.1 million loan for the construction ofPhase II of the Company’s outlet center in Tulare, California.

 

A Form 8-K was filed on June 4, 2003, regarding the Company’s pressrelease announcing the restructuring of three loans which had been in defaultsince October 2001.

 

A Form 8-K was filed on June 4, 2003, regarding the Company’s pressrelease announcing the sale of the partnership that owns the two outlet centersin Daleville, Indiana and Somerset, Pennsylvania.

 

A Form 8-K was filed on June 30, 2003, regarding the Company’sacquisition of controlling interest in Huntley.

 

A Form 8-K was filed on July16, 2003, regarding the Company’s publication of its unaudited condensed consolidatedbalance sheet as of May 31, 2003 in response to a request from the NASDAQSmallCap Market.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

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

 

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