**SECURITIES AND 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  the quarterly period ended March 31, 2003**                                                            |
|                                                                                                          |
| **OR**                                                                                                        |
|                                                                                                          |
| **o****  Transition Report Pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934**     |
|                                                                                                          |
| **Commission  file number:  0-24123**                                                                    |

 

**HORIZON GROUP PROPERTIES, INC.**

(Exact name of 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) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes    ý    No   o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

Yes    o    No   ý

 

**Numberof common shares outstanding at  May 12,2003     2,870,194**

 

 

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HORIZON GROUP PROPERTIES,INC.

Index to Form 10-Q

March 31, 2003

 
| Part I.    | Financial Information:                                                                                                        |
|------------|-------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                          |
| Item 1.    | Financial Statements  (unaudited)                                                                                             |
|       |                                                                                                                          |
|       | Condensed  Consolidated Statements of Operations of the Company for the Three Months  Ended March 31, 2003 and March 31, 2002 |
|       |                                                                                                                          |
|       | Condensed  Consolidated Balance Sheets of the Company at March 31, 2003 and December 31,  2002                                |
|       |                                                                                                                          |
|       | Condensed  Consolidated Statements of Cash Flows of the Company for the Three Months  Ended March 31, 2003 and March 31, 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  March 31, 2003**    |   | **Three  months ended  March 31, 2002** |   |
|----------------------------------------------------------------|--------|--------------------------------------------|--------|-----------------------------------------|--------|
|                                                           |   | **(thousands,  except per share amounts)** |   |
| **REVENUE**                                                    |   |                                       |   |                                    |   |
| Base rent                                                      |   | $                                          | 3,424  |                                    | $      | 3,412 |   |
| Percentage rent                                                |   | 71                                         |   | 47                                      |   |
| Expense recoveries                                             |   | 771                                        |   | 760                                     |   |
| Other                                                          |   | 237                                        |   | 232                                     |   |
| Total revenue                                                  |   | 4,503                                      |   | 4,451                                   |   |
|                                                           |   |                                       |   |                                    |   |
| **EXPENSES**                                                   |   |                                       |   |                                    |   |
| Property operating                                             |   | 1,531                                      |   | 1,413                                   |   |
| Real estate taxes                                              |   | 517                                        |   | 525                                     |   |
| Land leases and other                                          |   | 297                                        |   | 344                                     |   |
| Depreciation and amortization                                  |   | 984                                        |   | 1,152                                   |   |
| General and administrative                                     |   | 637                                        |   | 633                                     |   |
| Interest                                                       |   | 2,570                                      |   | 2,630                                   |   |
| Total expenses                                                 |   | 6,536                                      |   | 6,697                                   |   |
|                                                           |   |                                       |   |                                    |   |
| Loss from continuing operations before minority interests      |   | (2,033                                     | )      | (2,246                                  | )      |
|                                                           |   |                                       |   |                                    |   |
| Minority interests                                             |   | 442                                        |   | 334                                     |   |
|                                                           |   |                                       |   |                                    |   |
| Loss from continuing operations, net of minority interests     |   | (1,591                                     | )      | (1,912                                  | )      |
|                                                           |   |                                       |   |                                    |   |
| Income from discontinued operations, net of minority interests |   | 240                                        |   | 87                                      |   |
| Net gain on sale of real estate, net of minority interests     |   | —                                     |   | 132                                     |   |
|                                                           |   |                                       |   |                                    |   |
| **Net loss**                                                   |   | $                                          | (1,351 | )                                       | $      | (1,693 | ) |
|                                                           |   |                                       |   |                                    |   |
| **Net Loss Per Common Share:**                                 |   |                                       |   |                                    |   |
| Basic                                                          |   | $                                          | (0.47  | )                                       | $      | (0.59 | ) |
| Diluted                                                        |   | $                                          | (0.48  | )                                       | $      | (0.59 | ) |
|                                                           |   |                                       |   |                                    |   |
| Weighted average shares outstanding                            |   |                                       |   |                                    |   |
| Basic                                                          |   | 2,870                                      |   | 2,870                                   |   |
| Diluted                                                        |   | 3,569                                      |   | 3,380                                   |   |

* *

*See accompanying notes to condensed consolidated financialstatements.*

 

3

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HORIZON GROUP PROPERTIES,INC.

Condensed ConsolidatedBalance Sheets

(unaudited)

 
|                                                                                    |   | **March 31,  2003** |    | **December  31, 2002** |   |
|-----------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                                                                    |   | **(thousands)**     |    |
| **ASSETS**                                                                              |   |                |    |                   |   |
| Real estate - at cost:                                                                  |   |                |    |                   |   |
| Land                                                                                    |   | $                   | 8,835   |                   | $      | 8,835 |   |
| Buildings and improvements                                                              |   | 85,515              |    | 85,465                 |   |
| Less accumulated depreciation                                                           |   | (14,194             | )       | (13,435                | )      |
| Total net real estate                                                                   |   | 80,156              |    | 80,865                 |   |
|                                                                                    |   |                |    |                   |   |
| Cash and cash equivalents                                                               |   | 952                 |    | 1,237                  |   |
| Restricted cash                                                                         |   | 3,310               |    | 2,707                  |   |
| Tenant accounts receivable, net                                                         |   | 1,142               |    | 1,072                  |   |
| Real estate - discontinued operations                                                   |   | 15,318              |    | 15,326                 |   |
| Deferred costs (net of accumulated amortization of $960 and $818,  respectively)        |   | 2,124               |    | 2,231                  |   |
| Other assets                                                                            |   | 2,671               |    | 1,239                  |   |
| Total assets                                                                            |   | $                   | 105,673 |                   | $      | 104,677 |   |
|                                                                                    |   |                |    |                   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                 |   |                |    |                   |   |
| **Liabilities:**                                                                        |   |                |    |                   |   |
| Mortgages and other debt                                                                |   | $                   | 103,217 |                   | $      | 103,752 |   |
| Accrued interest                                                                        |   | 8,316               |    | 6,741                  |   |
| Accounts payable and other accrued expenses                                             |   | 3,280               |    | 3,292                  |   |
| Prepaid rents and other tenant liabilities                                              |   | 1,151               |    | 1,170                  |   |
| Other liabilities                                                                       |   | 1,089               |    | 716                    |   |
| Total liabilities                                                                       |   | 117,053             |    | 115,671                |   |
|                                                                                    |   |                |    |                   |   |
| **Minority interests**                                                                  |   | (3,441              | )       | (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                                                              |   | 37,891              |    | 35,451                 |   |
| Accumulated deficit                                                                     |   | (45,859             | )       | (44,508                | )      |
| Total shareholders’ equity (deficit)                                               |   | (7,939              | )       | (9,028                 | )      |
| Total liabilities and shareholders’ equity (deficit)                               |   | $                   | 105,673 |                   | $      | 104,677 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

4

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HORIZON GROUP PROPERTIES,INC.

CondensedConsolidated Statements of Cash Flows

(unaudited)

 
|                                                                                       |   | **Three  months ended  March 31, 2003** |   | **Three  months ended  March 31, 2002** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                                                                                       |   | **(thousands)**                         |   |
|                                                                                       |   |                                    |   |                                    |   |
| **Cash  flows from operating activities:**                                                 |   |                                    |   |                                    |   |
| Net loss                                                                                   |   | $                                       | (1,351 | )                                       | $      | (1,693 | ) |
| Net gain on sale  of real estate                                                           |   | —                                  |   | (132                                    | )      |
| Adjustments to  reconcile net loss to net cash provided by/(used in) operating activities: |   |                                    |   |                                    |   |
| Minority  interests in net loss                                                            |   | (442                                    | )      | (334                                    | )      |
| Minority  interests in discontinued operations                                             |   | 59                                      |   | 15                                      |   |
| Depreciation                                                                               |   | 870                                     |   | 1,154                                   |   |
| Amortization,  including deferred financing costs                                          |   | 199                                     |   | 374                                     |   |
|                                                                                       |   |                                    |   |                                    |   |
| Changes in  assets and liabilities:                                                        |   |                                    |   |                                    |   |
| Restricted cash                                                                            |   | (603                                    | )      | 325                                     |   |
| Tenant accounts  receivable                                                                |   | (70                                     | )      | 266                                     |   |
| Deferred costs  and other assets                                                           |   | (1,524                                  | )      | 87                                      |   |
| Accounts payable  and accrued expenses and accrued interest                                |   | 1,561                                   |   | 752                                     |   |
| Other  liabilities                                                                         |   | 373                                     |   | (13                                     | )      |
| Prepaid rents  and other tenant liabilities                                                |   | (19                                     | )      | (271                                    | )      |
| **Net  cash provided by/(used in) operating activities**                                   |   | (947                                    | )      | 530                                     |   |
|                                                                                       |   |                                    |   |                                    |   |
| **Cash  flows from investing activities:**                                                 |   |                                    |   |                                    |   |
| Expenditures for  building and improvements                                                |   | (161                                    | )      | (60                                     | )      |
| Net proceeds  from sale of real estate                                                     |   | 8                                       |   | 601                                     |   |
| **Net  cash provided by/(used in) investing activities**                                   |   | (153                                    | )      | 541                                     |   |
|                                                                                       |   |                                    |   |                                    |   |
| **Cash  flows from financing activities:**                                                 |   |                                    |   |                                    |   |
| Sale of HGP  partnership units                                                             |   | 1,350                                   |   | —                                  |   |
| Principal  payments on mortgages and other debt                                            |   | (535                                    | )      | (781                                    | )      |
| **Net  cash provided by/(used in) financing activities**                                   |   | 815                                     |   | (781                                    | )      |
|                                                                                       |   |                                    |   |                                    |   |
| **Net  increase/(decrease) in cash and cash equivalents**                                  |   | (285                                    | )      | 290                                     |   |
|                                                                                       |   |                                    |   |                                    |   |
| **Cash  and cash equivalents:**                                                            |   |                                    |   |                                    |   |
| **Beginning  of period**                                                                   |   | 1,237                                   |   | 1,096                                   |   |
| **End  of period**                                                                         |   | $                                       | 952    |                                    | $      | 1,386 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

5

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HORIZON GROUP PROPERTIES,INC.

Notes to CondensedConsolidated Financial Statements

(unaudited)

 

Note 1 - Formation of the Company

 

Horizon Group Properties, Inc. (“HGPI” or, together with itssubsidiaries “HGP” or the “Company”) is a self-administered and self-managedMaryland corporation that was established in connection with the merger ofHorizon Group, Inc., a Michigan corporation (“Horizon”) with and into PrimeRetail, Inc., a Maryland corporation (“Prime”) which was consummated on June15, 1998 (“the Merger”).

 

As of March 31, 2003, HGP’s operating portfolio consisted of 11 factoryoutlet centers located in 9 states comprising an aggregate of approximately 2.2million square feet of gross leasable area (“GLA”).  The Company also owns one power center which is classified asdiscontinued operations at March 31, 2003. Nine of the outlet centers and the power center were contributed byHorizon pursuant to a Contribution Agreement entered into in connection withthe Merger (the “Contribution Agreement”) and two factory outlet centers werepurchased by the Company from Prime immediately subsequent to the consummationof the Merger.

 

The operations of the Company are primarily conducted through asubsidiary limited partnership, Horizon Group Properties, L.P. (“HGP LP”) ofwhich HGPI is the sole general partner. As of March 31, 2003, HGPI owned approximately 72.0% of the partnershipinterests (the “Common Units”) of HGP LP. In general, Common Units are exchangeable for shares of Common Stock inHGPI on a one-for-one basis (or for an equivalent cash amount at the Company’selection).

 

Note 2 - Summary of Significant Accounting Policies

 

Interim Period Financial Presentation

 

The condensed consolidated financial statements include the accounts ofthe Company’s subsidiary, HGP LP, and other wholly owned subsidiaries.

 

The accompanying unaudited condensed consolidated financial statementsare prepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements, and, therefore, should be read in conjunctionwith the Company’s Annual Report on Form 10-K for the year ended December 31,2002.

 

The financial statements have been prepared in conformity withaccounting principles generally accepted in the United States, which requiremanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities (including disclosure of contingent assets andliabilities) at the date of the financial statements and the reported amountsof revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

In the opinion of management, all adjustments necessary for a fairstatement of the financial position and results of operations for the interimperiods presented have been included in these financial statements and are of anormal and recurring nature.  Certainamounts in prior periods have been reclassified to conform to the currentpresentation.

 

Operating results for the three months ended March 31, 2003, are notnecessarily indicative of the results that may be achieved in future periods.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts ofthe Company and all subsidiaries that the Company controls, including HGPLP.  The Company considers itself tocontrol an entity if it is the majority owner of and has voting control oversuch entity.  All significantintercompany balances and transactions have been eliminated in consolidation.

 

6

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Reclassifications

 

Certain prior year amounts have been reclassified to conform to thecurrent year presentation.

 

Discontinued Operations

 

In accordance with SFAS 144 “Accounting for the Impairment or Disposalof Long Lived Assets,” (“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.

 

Impact of Recently Issued Accounting Standards

 

In April 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement 145, “Recission of FASB Statements No.4, 44, and 64, Amendment ofFASB Statement No. 1 and Technical Correction” (“SFAS No. 145”).  Statement 4, “Reporting Gains and Lossesfrom Extinguishment of Debt” (“SFAS No. 4”), required that gains and lossesfrom the extinguishment of debt that were included in the determination of netincome 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 the currentperiod, that do not meet the extraordinary classification.  Additionally, future gains and lossesrelated to debt extinguishment may be required to be classified in income fromcontinuing operations.  The provisionsof SFAS No. 145 related to the recission of SFAS No. 4 became effective infiscal years beginning after May 15, 2002. The Company, from time to time, incurs such charges and there was noimpact in the periods presented.

 

Real Estate and Depreciation

 

Costs incurred for the acquisition, development, construction andimprovement of properties, as well as significant renovations and bettermentsto the properties, are capitalized. Maintenance and repairs are charged toexpense as incurred. Interest costs incurred with respect to qualified expendituresrelating to the construction of assets are capitalized during the constructionperiod.

 

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

 

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

 

In accordance with SFAS 144, and prior to the adoption of SFAS 144,under SFAS No. 121, the Company records impairment losses on long-lived assetsused in operations when events and circumstances indicate that the assets mightbe impaired and the undiscounted cash flows estimated to be generated overtheir expected holding periods are less than the carrying amounts of thoseassets.  Impairment losses are measuredas the difference between carrying value and fair value for assets to be heldin the portfolio.  For assets to besold, impairment is measured as the difference between carrying value and fairvalue, less costs to dispose.  Fairvalue may be based upon estimated cash flows discounted at a risk-adjusted rateof interest, comparable or anticipated sales in the marketplace, or estimatedreplacement cost, as adjusted to consider the costs of retenanting andrepositioning those properties which have significant vacancy issues, dependingon the facts and circumstances of each property.

 

Depreciation and amortization expense includes charges for unamortizedcapitalized costs related to unscheduled tenant move-outs totaling $55,400 and$47,400, excluding properties classified as discontinued operations, for thethree months ended March 31, 2003 and 2002, respectively.

 

7

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Cash Equivalents

 

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

 

Restricted Cash

 

Restricted cash consists of amounts deposited in accounts with theCompany’s primary lenders (See Note 5) and at March 31, 2003 includes $895,000in capital improvement and tenant allowance reserves, $724,000 in real estatetax and insurance escrows, and approximately $1,691,000 for debt service andoperating expenses, including $849,000 of cash flow remitted as debt service onthe JP Morgan Loans after October 31, 2002 (See Note 5).

 

Tenant Accounts Receivable

 

Management regularly reviews accounts receivable and estimates thenecessary amounts to be recorded as an allowance for uncollectibility.  These reserves are established on atenant-specific basis and are based upon, among other factors, the period oftime an amount is past due and the financial condition of the obligor.

 

Total tenant accounts receivable are reflected net of reserves of$233,000 and $494,200 as of March 31, 2003 and 2002, respectively.  The provision for doubtful accounts was $800and $30,700, excluding properties classified as discontinued operations, forthe three months ended March 31, 2003 and 2002, respectively.  This charge is included in the line itementitled “Land leases and other” on the statement of operations.

 

Discontinued Operations

 

Periodically, in the course of reviewing the performance of itsportfolio, management may determine that it is appropriate for the Company tooffer certain properties for sale, and accordingly, such properties will beclassified as discontinued operations on the Company’s balance sheets.  In accordance with SFAS 144, assets held forsale are valued at the lower of carrying value or fair value less costs todispose.  As of March 31, 2003, theCompany is actively marketing the following assets for sale: LakeshoreMarketplace in Norton Shores, Michigan; the single tenant building in Roseville,Michigan leased to Petsmart, Inc.; and seven parcels of vacant land totalingapproximately 100 acres in Norton Shores, Michigan; Fruitport Township,Michigan; Daleville, Indiana; Gretna, Nebraska; Tulare, California and Medford,Minnesota. Pursuant to the requirements of SFAS 144, the Company hasreclassified the real estate assets for these properties to Real Estate –Discontinued Operations on the balance sheets and reports the revenue andexpenses from the properties as Income from Discontinued Operations on thestatements of operations.  The Companyceased depreciating these assets at December 31, 2002.  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 direct internal costsincurred to initiate and renew operating leases and are amortized on thestraight-line method over the initial lease term or renewal period.  Deferred financing costs are amortized asinterest expense over the life of the related debt.  There were no fully amortized deferred financing costs excludingproperties classified as discontinued operations, written-off during the threemonths ended March 31, 2003 and 2002.

 

Fair Value of Financial Instruments

 

The fair value of the Company’s debt is approximately $63.2 million asof March 31, 2003, excluding the JP Morgan Loans on which the Company is indefault and in negotiations with the lender (see Note 5).  This value is estimated using a discountedcash flow analysis, based on the incremental borrowing rates for similar typesof borrowing

 

8

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arrangements.  The carryingvalue of cash and cash equivalents, receivables and payables approximate theirfair values due to their short-term nature.

 

Income Taxes 

 

The Company has elected to be taxed as a REIT under Sections 856through 860 of the Internal Revenue Code of 1986, as amended (the “Code”).  A REIT is a legal entity that holds realestate interests and receives a deduction for dividends paid to itsshareholders for federal income tax purposes. HGPI 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 dividend distributionsto qualify as a REIT.  Accordingly, thecondensed consolidated financial statements do not include any federal incometax expense.

 

Minority Interests

 

Minority interests represent the interests of unitholders of HGP LP,other than HGPI, in the net earnings and net equity of HGP LP.  The unitholder minority interest is adjustedat the end of each period to reflect the ownership at that time.  The unitholder minority interest in HGP LPwas approximately 28.0% at March 31, 2003. During the three months ended March 31, 2003, HGPI sold 261,628 units inHGP LP to Howard Amster, a director and principal shareholder of HGPI, foraggregate consideration of $1.35 million, or $5.16 per unit.  These units cannot be converted into sharesof Common Stock of HGPI.  Proceeds inexcess of HGPI’s carrying value of these units was recognized as an increase inadditional paid in capital.  HGPI mayconsider additional sales of units in HGP LP to Mr. Amster or others in thefuture.  There were no unit conversionsor repurchases in the three months ended March 31, 2003 or 2002.

 

Revenue Recognition

 

Leases with tenants are accounted for as operating leases. Minimumannual rentals are recognized on a straight-line basis over the terms of therespective leases.  As a result ofrecording rental revenue on a straight-line basis, tenant accounts receivableincluded $391,000 and $402,000, as of March 31, 2003 and December 31, 2002,respectively, which is expected to be collected over the remaining lives of theleases.  Rents which represent basicoccupancy costs, including fixed amounts and amounts computed as a function ofsales, are classified as base rent. Amounts which may become payable in addition to base rent and which arecomputed as a function of sales in excess of certain thresholds are classifiedas percentage rents and are accrued after the reported tenant sales exceed theapplicable thresholds. Expense recoveries based on common area maintenanceexpenses and certain other expenses are accrued in the period in which therelated expense is incurred.

 

Other Revenue

 

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

 

Share Options

 

The Company has elected to follow Accounting Principles Board OpinionNo. 25 “Accounting for Stock Issued to Employees” (“APB 25”), in accounting forits options on common shares.  Under APB25, no compensation expense is recognized because the exercise price of theCompany’s employee share options equals or exceeds the market price of theunderlying shares at the date of grant.

 

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.

 

9

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Note 3 - Earnings Per Share

 

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

 
|                                                                                                                              |   | **Three months ended  March 31, 2003**       |   | **Three months ended  March 31, 2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                                              |   | **(in thousands, except per share amounts)** |   |
| **Numerator:**                                                                                                                    |   |                                         |   |                                   |   |
| Net  loss – basic                                                                                                            |   | $                                            | (1,351 | )                                      | $      | (1,693 | ) |
| Minority  interests of unitholders (in loss from continuing operations, discontinued  operations and gain on sale of real estate) |   | (355                                         | )      | (296                                   | )      |
| Net  loss – diluted                                                                                                          |   | $                                            | (1,706 | )                                      | $      | (1,989 | ) |
|                                                                                                                              |   |                                         |   |                                   |   |
| **Denominator:**                                                                                                                  |   |                                         |   |                                   |   |
| Weighted  average  common shares outstanding –  basic                                                                   |   | 2,870                                        |   | 2,870                                  |   |
|                                                                                                                              |   |                                         |   |                                   |   |
| Effect  of dilutive securities:                                                                                                   |   |                                         |   |                                   |   |
| Converting  units to shares                                                                                                       |   | 699                                          |   | 510                                    |   |
|                                                                                                                              |   |                                         |   |                                   |   |
| Weighted  average shares outstanding – diluted                                                                               |   | 3,569                                        |   | 3,380                                  |   |
|                                                                                                                              |   |                                         |   |                                   |   |
| Net  loss per share:                                                                                                              |   |                                         |   |                                   |   |
| Basic                                                                                                                             |   | $                                            | (0.47  | )                                      | $      | (0.59 | ) |
| Diluted                                                                                                                           |   | $                                            | (0.48  | )                                      | $      | (0.59 | ) |
|                                                                                                                              |   |                                         |   |                                   |   |
| Loss  from continuing operations                                                                                                  |   | $                                            | (1,591 | )                                      | $      | (1,912 | ) |
|                                                                                                                              |   |                                         |   |                                   |   |
| Loss  from continuing operations per share - basic and diluted                                                                    |   | $                                            | (0.55  | )                                      | $      | (0.67 | ) |

 

Outstanding stock options and the potential conversion of units toshares were excluded in computing diluted earnings per share because the effectwas anti-dilutive in the three months ended March 31, 2002.

 

Minority interests of unitholders excludes the minority interests forthe non-convertible units purchased by Howard Amster.

 

Note 4 - Long Term Stock Incentive Plan

 

The Company has adopted the HGP 1998 Long Term Stock Incentive Plan(the “HGP Stock Plan”) to advance the interests of the Company by encouragingand enabling the acquisition of a financial interest in the Company by keyemployees and directors of the Company and its subsidiaries through equityawards.  The Company reserved 338,900common shares for issuance pursuant to the HGP Stock Plan and options covering326,000 shares were outstanding at March 31, 2003.  The Company uses the intrinsic value method of accounting for itsstock-based compensation.

 

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

 

|                                                                                                          |   | **Three  months ended March 31,** |   |
|---------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                          |   | **2003**                          |   | **2002** |   |
|                                                                                                          |   |                              |   |   |   |
| Net loss - basic                                                                                              |   | $                                 | (1,351 | ) | $ | (1,693 | ) |
| Add stock-based  compensation expense included in net loss                                                    |   | —                            |   | — |   |
| Deduct stock-based  compensation expense determined under fair value based method, net of  minority interests |   | 11                                |   | 11 |   |
| Proforma net  loss-basic                                                                                      |   | (1,362                            | )      | (1,704 | ) |
| Minority interests of  unitholders  (excluding non-convertible units)                                         |   | (358                              | )      | (298 | ) |
| Proforma net  loss-diluted                                                                                    |   | $                                 | (1,720 | ) | $ | (2,002 | ) |
|                                                                                                          |   |                              |   |   |   |
| Loss per share:                                                                                               |   |                              |   |   |   |
| Basic-as  reported                                                                                            |   | $                                 | (0.47  | ) | $ | (0.59 | ) |
| Basic - proforma                                                                                              |   | $                                 | (0.48  | ) | $ | (0.59 | ) |
|                                                                                                          |   |                              |   |   |   |
| Diluted - as  reported                                                                                        |   | $                                 | (0.48  | ) | $ | (0.59 | ) |
| Diluted -  proforma                                                                                           |   | $                                 | (0.48  | ) | $ | (0.59 | ) |

 

Note 5 - Mortgage Debt and Other Liabilities

 

*HGP Credit Facility*

 

On June 15, 1998, certain wholly owned affiliates of the Companyentered into a credit facility (the “HGP Credit Facility”) with Nomura AssetCapital Corporation (“Nomura”), which initially matured on July 11, 2001 (the“Initial Maturity Date”).  The HGPCredit Facility was acquired from Nomura by CDC Mortgage Capital, Inc.(“CDC”).  On

 

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

 

The UBS loans consist 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 loandocuments) 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%.  The outstanding balancesof these loans totaled $21.8 million and $21.9 million at March 31, 2003 andDecember 31, 2002, respectively.  Theseloans also require the monthly funding of escrow accounts for the payment offuture debt service, real estate taxes, insurance, capital and tenantimprovements and leasing commissions (See Note 2).  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%. The outstanding balances of these loans totaled $2.9 million and $3.1million at March 31, 2003 and December 31, 2002, respectively.

 

The Beal Bank loans total $7.0 million (the “Beal Bank Loans”) andconsist of (i) a $3.0 million loan secured by vacant land located in NortonShores, Michigan and Fruitport Township, Michigan (the “Beal Bank Loan I”), and(ii) a $4.0 million loan secured by the outlet center in Monroe, Michigan (the“Beal Bank Loan II”).  These loans arecross-collateralized and are recourse to the Company.  The Beal Bank Loans mature July 10, 2005.  Principal payments of up to $2.0 million arepermitted without penalty at any time and the loans may be prepaid in whole orin part without penalty after July 10, 2004. Approximately $450,000 of the proceeds were used to pay in full a landcontract related to land in Fruitport Township which is a portion of thecollateral for Beal Bank Loan I.

 

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, Inc., of which Mr.Skoien and Mr. Amster, Directors of the Company, are members of the Board ofDirectors, up to a maximum amount of $4,000,000 (the “Prime-Beal Guaranty”).  The Prime-Beal Guaranty will be  released when the total outstanding balanceof the Beal Bank Loans is equal to or less than $5,000,000.  The Company is obligated to make quarterlypayments of $15,000 to Prime Retail, Inc. as long as this guaranty is ineffect.  Prime had guaranteed $10.0million of obligations under the HGP Credit Facility, (the “PrimeGuarantee”).  In connection with thePrime Guarantee, HGP paid Prime a fee of $400,000 per annum from June 15, 1998through June 15, 2001.  In connectionwith the extension of the maturity date of the HGP Credit Facility, Primereaffirmed its obligations with respect to the Prime Guarantee.  From June 15, 2001 through June 15, 2002,the Company paid Prime an annual fee of $150,000.  Pursuant to the Prime Guarantee, Prime is also the guarantor ofthe indebtedness related to the Company’s corporate office building, which hada balance of $2.1 million and $2.3 million as of March 31, 2003 and December31, 2002, respectively (see Other Borrowings below).

 

11

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Prior to Initial Maturity Date, the HGP Credit Facility bore interestat the 30-day LIBOR rate plus 1.90% per annum and required annual principalpayments of $1.5 million, $1.5 million and $2.0 million during the first, secondand third years, respectively.  FromJuly 1999 to the Initial Maturity Date, exit fees which totaled $1.2 millionwere recognized as a component of interest expense. Subsequent to the InitialMaturity Date, the HGP Credit Facility bore interest at the 30-day LIBOR rate(but not less than 4.1%) plus 3.95% per annum and required monthly principalpayments of $225,000.  An extension feeof 2% of the loan amount was incurred in conjunction with the extension of the loanwhich was recognized as a component of interest expense over the extensionperiod.  The balance of the HGP CreditFacility was $32.1 million at December 31, 2001.

 

On June 29, 2001, the Company completed a $3.5 million refinancing ofits outlet center in Holland, Michigan, with Republic Bank.  The outstanding balance of this loan was$3.4 million at March 31, 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 million refinancing ofits power center in Norton Shores, Michigan, with Greenwich Capital FinancialProducts, Inc. (“Greenwich”).  Theoutstanding balance of this loan was $15.8 million at March 31, 2003 andDecember 31, 2002.  The non-recourseloan is for a term of ten years, requires monthly payments based on a 30-yearamortization schedule and bears interest at a fixed rate of 7.647%.  The net proceeds from the loan were used toreduce the balance of the HGP Credit Facility. In connection with the Greenwich loan, title to Lakeshore Marketplacewas transferred to a new entity, Lakeshore Marketplace, LLC, a wholly ownedsubsidiary of the Company.  LakeshoreMarketplace LLC, and its managing member, Lakeshore Marketplace FinanceCompany, Inc., are restricted from owning any assets other than LakeshoreMarketplace and may not incur additional liabilities, other than normal tradepayables.  All of the assets ofLakeshore Marketplace, LLC are pledged as security for the Greenwich loan. TheCompany is actively marketing this power center for sale and thus, pursuant toSFAS 144, its real estate assets are listed as Real Estate – DiscontinuedOperations on the Condensed Consolidated Balance Sheets and its revenue andexpenses are included in Income from Discontinued Operations on the CondensedConsolidated Statements of Operations.

 

*JP Morgan Loans*

 

On July 9, 1999 the Company completed a debt financing totaling $46.7million with Morgan Guaranty Trust Company of New York (the “JP MorganLoans”).  The JP Morgan Loans consist of(i) loans totaling $22.9 million secured by three factory outlet centerslocated in Daleville, Indiana, Somerset, Pennsylvania and Tulare, Californiaand (ii) loans totaling $23.8 million secured by three factory outlet centerslocated in Gretna, Nebraska, Sealy, Texas and Traverse City, Michigan.  The total outstanding principal balance ofthese loans (excluding accrued interest and penalties) was $45.2 million atMarch 31, 2003 and December 31, 2002. In the absence of a default, each loanbears interest at a fixed rate of 8.46%, matures on August 1, 2009 and requiresthe monthly payment of interest and principal based on a 25-year amortizationschedule.  Both loans are non-recourseto HGPI, subject to certain customary exceptions.  The Company has established certain escrow accounts in connectionwith this loan that are classified on the balance sheet of the Company asrestricted cash (see Note 2).  Theescrow accounts related to the JP Morgan Loans have a balance of $964,000 atMarch 31, 2003.

 

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 remits monthly all availablecash flow, after a reserve for monthly operating expenses, as partial paymentof the debt service.  The failure to paythe full amount due constitutes a default under the loan agreements which wouldallow the respective lenders to exercise their various remedies contained inthe loan agreements, including application of escrow balances to delinquent paymentsand foreclosure on the properties which collateralize the loans.  The interest rate applicable during theoccurrence and continuance of an Event of Default (as defined in the loanagreements) is 13.46%.  In addition, apenalty of 5% of each monthly installment is imposed in the event that suchmonthly installment is not timely made in full.  The default interest and monthly penalty have been accrued in theconsolidated financial statements since October 2001.  Interest expense for the three months ended March 31, 2003 and2002

 

12

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includes $622,000 and $635,000, respectively, for these charges.  The Company and the servicers of the JPMorgan Loans are currently attempting to negotiate a restructuring of theloans, but the Company can give no assurance that such negotiations will resultin any settlement of the loans or any modification of the terms of the loans.

 

The JP Morgan Loans require the monthly funding of escrow accounts forthe payment of real estate taxes, insurance and capital improvements.  Such escrow accounts totaled $116,000 atMarch 31, 2003.  In addition, $848,000of cash flow remitted as debt service after October 31, 2002 has been placed inspecial purpose escrow accounts by the loan servicers.  These escrow accounts are classified on thebalance sheet as restricted cash (see Note 2). The Company continues to manage the properties which secure the JPMorgan Loans pursuant to a management agreement which is subject tocancellation by the servicers of the loans. The Company receives fees of approximately $25,000 per month for suchservices.

 

The declining results 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.  The Company estimated the current value of the six centers thatcollateralize the loans and concluded that the carrying value of four of thecenters exceed the fair values of those centers.  Accordingly, the results of operations for the third quarter of2001 include a provision for asset impairment of $18.0 million, representing awrite-down of the carrying values of the assets to their estimated fairvalues.  Based on continued negotiationswith the lender and additional declines in occupancy and revenues, the Companyrecorded an additional provision for asset impairment of $17.0 million in thefourth quarter of 2002 to further reduce the carrying values of the same fourproperties, including approximately $100,000 related to a parcel of landadjacent to one of the properties.  Theaggregate carrying value of the real estate of such properties collateralizingthe JP Morgan Loans was approximately $19.8 million at March 31, 2003.  Such value is less than the currentoutstanding loan balances which total $45.2 million, and accrued interest andpenalties of approximately $8.1 million. If the lender were to foreclose on the collateral properties, theCompany would record a gain for the difference between the carrying value ofthe properties and related net assets and the outstanding loan balances andrelated liabilities.  The estimation ofthe fair value of the six centers securing the JP Morgan Loans involvedestimates by management with respect to future cash flows, market conditionsand valuations applicable to such properties. Future events could occur which would cause the Company to conclude thatthe carrying values of the Company’s properties may need to be further adjusted.

 

*Other Borrowings*

 

On July 20, 2001, the Company acquired the ownership of a triple netleased property in Roseville, Michigan, which is leased to Petsmart, Inc., as areplacement property for its center in Dry Ridge, Kentucky in a transactionstructured as a tax deferred exchange under the provisions of Section 1031 ofthe Code.  The purchase price of $3.35million included the assumption of a $3.2 million mortgage.  The rent payable under the lease is equal tothe debt service due under the loan secured by the property (the “Petsmart Loan”).  The Petsmart Loan matures on January 8,2008, bears interest at a fixed rate of 8.77% and requires the monthly paymentof principal computed on a 25 year schedule. The loan is non-recourse to HGPI. The balance of the Petsmart Loan was $3.2 million at March 31, 2003 andDecember 31, 2002. The Company is marketing this property for sale and thus,pursuant to SFAS 144, its real estate assets are listed as Real Estate -Discontinued Operations on the Condensed Consolidated Balance Sheets and itsrevenue and expenses are included in Income from Discontinued Operations on theCondensed Consolidated Statements of Operations.

 

The Company has a mortgage loan collateralized 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 May 30, 2003.  The principal balance on this loan was $2.1million and $2.2 million at March 31, 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.  The Company is currently seeking to refinance this loan.  There can be no assurance that the Companywill be able to complete such refinancing or on what terms such refinancing maybe accomplished.

 

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On June 4, 2002, the Company purchased the land underlying its centerin Laughlin, Nevada for $2.5 million pursuant to a purchase option contained inthe ground lease.  The ground rent wasprorated to February 25, 2002.  TheCompany paid approximately $500,000 at closing and a $2.0 million unsecuredpromissory note was provided by the seller. The note matures in June 2012, bears interest at a rate of 2.0% abovethe weighted average cost of funds index for the Eleventh District SavingsInstitutions, adjusted annually and requires amortization based on a ten yearschedule.  The initial interest ratepayable on the loan was 5.074% through February 28, 2003 and is 4.375% throughFebruary 29, 2004.  The outstandingprincipal balance on this note was $1.8 million and $1.9 million at March 31,2003 and December 31, 2002, respectively.

 

Note 6 - Related Party Transactions

 

The Company utilizes Thilman & Filippini as its agent for insuranceand risk management programs.  E. ThomasThilman is a Director of the Company and a partner in Thilman &Filippini.  During the three monthsended March 31, 2003 and March 31, 2002, the Company paid premiums totalingapproximately $236,000 and $145,000, respectively, on insurance policies placedby Thilman & Filippini.  Thisincludes insurance premiums for the properties classified as discontinuedoperations.

 

The Company sub-leases office space on a month to month basis for itssenior executives at 77 W. Wacker, Chicago, Illinois from The Prime Group,Inc.  Gary J. Skoien, Chairman, ChiefExecutive Officer and President of the Company, is Executive Vice President andChief Operating Officer of The Prime Group, Inc.  During the three months ended March 31, 2003 and March 31, 2002,the Company incurred rent expense of $13,000 and $12,000, respectively.

 

On March 13, 2003, HGPI sold 261,628 limited partnership units in HGPLP to Pleasant Lake Apts. Ltd., an affiliate of Howard M. Amster, Director andprincipal shareholder of HGPI, for aggregate consideration of $1.35 million, or$5.16 per unit. Proceeds in excess of HGPI’s carrying value of these units wasrecognized as an increase in additional paid in capital.  On March 14, 2003, the Company used $1.3million of the proceeds from the sale to fund 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 $1.2million at March 31, 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 $400,000.  Such value will be recognized over the termof the loan as an adjustment to the yield. Pursuant to the loan agreement, the Company is obligated to negotiate anoption to acquire an additional 48.75% ownership interest in Huntley.  Huntley and Retail Partners are owned by ThePrime Group, Inc.  Gary J. Skoien,Chairman, Chief Executive Officer and President of the Company, is ExecutiveVice President and Chief Operating Officer of The Prime Group, Inc. and has anet profits interest in Huntley. HGPI may consider additional sales of units inHorizon Group Properties, L.P. to Mr. Amster or others in the future.

 

14

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Note 7 - Segment Information

 

During the three months ended March 31, 2003 and 2002, the Companyoperated twelve shopping centers located in nine states, including one shoppingcenter which is classified as discontinued operations at March 31, 2003.  The Company separately evaluates the performanceof each of its centers.  However,because each of the centers has similar economic characteristics, facilitiesand/or tenants, the shopping centers have been aggregated into a singledominant shopping center segment.  TheCompany evaluates performance and allocates resources primarily based on theFunds From Operations (“FFO”) expected to be generated by an investment in eachindividual shopping center. FFO is a widely used measure of the operatingperformance of REITs, but may not be comparable to other REITs if they do notdefine similarly entitled items exactly as the Company defines them.  FFO, as defined by the National Associationof Real Estate Investment Trusts (“NAREIT”), means net income excluding extraordinaryitems (as defined by accounting principles generally accepted in the UnitedStates (“GAAP”)) and gains and losses from sales of depreciable operatingproperty, plus depreciation and amortization, and after adjustments forunconsolidated partnerships and joint ventures.  Gains and losses on non-depreciable real estate assets, includingland parcels, are included in FFO. FFO should not be considered as analternative to either net income or cash flows from operating activitiescomputed under accounting principles generally accepted in the United States.

 

A reconciliation of the loss before minority interests to diluted FFOis as follows:

 
|                                                                                                                              |   | ***For the three months ended*** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                              |   | **March 31, 2003**               |   | **March 31, 2002** |   |
|                                                                                                                              |   |                             |   |   |   |
| Net  loss                                                                                                                         |   | $                                | (1,351 | ) | $ | (1,693 | ) |
| Minority  interests of unitholders (in loss from continuing operations, discontinued  operations and gain on sale of real estate) |   | (383                             | )      | (296 | ) |
| Loss before  minority interests                                                                                                   |   | (1,734                           | )      | (1,989 | ) |
|                                                                                                                              |   |                             |   |   |   |
| Adjustments for  depreciation and amortization                                                                                    |   | 971                              |   | 1,281 |   |
|                                                                                                                              |   |                             |   |   |   |
| FFO                                                                                                                               |   | $                                | (763   | ) | $ | (708 | ) |

 

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

 

Note 8 – Property Dispositions

 

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 Condensed Consolidated Statements of Operations for the three monthsended March 31, 2003.

 

15

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Note 9 – Discontinued Operations

 

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):

 

|                                                              |   | **For the  three  months ended March 31,** |   |
|-------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                              |   | **2003**                                   |   | **2002** |   |
|                                                              |   |                                       |   |   |   |
| Total revenue                                                     |   | $                                          | 913    |   | $ | 880 |   |
| Total expenses                                                    |   | 643                                        |   | 778 |   |
| Income before minority interests                                  |   | 270                                        |   | 102 |   |
| Minority interests                                                |   | (53                                        | )      | (15 | ) |
| Net gain on sale of real estate, net of minority  interests of $6 |   | 23                                         |   | — |   |
|                                                              |   |                                       |   |   |   |
| Income from discontinued operations                               |   | $                                          | 240    |   | $ | 87 |   |

 

Note 10 – Subsequent Events

 

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 loan will convert into a permanent loanmaturing in August 2009 upon completion of the retail expansion.  The loan is secured by a first mortgage onthe land and improvements and will bear interest at the greater of LIBOR plus300 basis points or 5.5%.  The loan wasmade by Amster Trading Company Charitable Remainder Unitrust dated March 10,2003, an affiliate of Howard M. Amster, a Director and principal shareholder ofHGPI.

 

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HORIZON GROUP PROPERTIES,INC.

Management’s Discussionand Analysis of Financial Condition

and Results of Operations

For the three monthsended March 31, 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 March 31, 2003, owned approximately 72.0% of the HGP LP partnershipinterests (“Common Units”). In general, Common Units of HGP LP are exchangeablefor shares of Common Stock of HGPI on a one-for-one basis at any time (or foran equivalent cash amount at the Company’s election).  HGPI controls HGP LP and is dependent on distributions or otherpayments from HGP LP to meet its financial 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 uncertaintiesincluding, but not limited to, the effects of future events on the Company’sfinancial performance; the risk that the Company may be unable to refinance itscurrent debt as it matures; risks related to the retail industry in which theCompany’s  shopping centers compete,including the potential adverse impact of external factors, such as competitionfrom existing or newly constructed shopping centers, inflation, consumerconfidence, unemployment rates and consumer tastes and preferences; risksassociated with the Company’s property acquisitions, such as the lack ofpredictability with respect to financial returns; risks associated with theCompany’s property development activities, such as the potential for costoverruns, delays and the lack of predictability with respect to the financialreturns associated with these development activities; the risk of potential increasesin market interest rates from current levels; and risks associated with realestate ownership,  such as the potentialadverse impact of changes in local economic climate on the revenues and thevalue of the Company’s properties.  Forfurther information on factors which could impact the Company and thestatements contained herein, reference is made to the Company’s other filingswith the Securities and Exchange Commission, including the Company’sRegistration Statement on Form 10, as amended, dated as of June 4, 1998, withrespect to the Company’s initial registration of its common stock under theSecurities Exchange Act of 1934, as amended and the Sky Merger Corp.Registration Statement on Form S-4, as filed with the Securities and ExchangeCommission 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”) which was consummated on June 15, 1998 (“theMerger”).  As of March 31, 2003,  HGP’s operating portfolio consisted of 11factory outlet centers located in nine states comprising an aggregate of approximately2.2 million square feet of gross leasable area (“GLA”).  The Company also owns one power center,which is classified as discontinued operations.  Nine of the factory outlet centers and the power center werecontributed to the Company by Horizon pursuant to a Contribution Agreement enteredinto in connection with the Merger (the “Contribution Agreement”) and twofactory outlet centers were purchased by the Company from Prime immediatelysubsequent to the consummation of the Merger.

 

17

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The Company currently is in default with respect to the obligations oftwo pools of loans originated by JP Morgan in July 1999 (the “JP MorganLoans”).  The defaults are the result ofthe Company’s failure to pay in full the amounts due under the loans commencingwith the payment due October 1, 2001. Each pool of loans is secured by a group of three properties.  The first group consists of the IndianaFactory Shops, The Factory Shops in Georgian Place and Horizon Outlet Center -Tulare; the second group consists of Nebraska Crossing Factory Stores, SealyOutlet Center and Horizon Outlet Center - Traverse City.  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 since October 2001 has been accrued at the default rateof interest (an annual rate of 13.46%) together with a penalty equal to 5% ofeach monthly amount due under the related notes.  The results of operations of the Company reflect the revenues andexpenses, including accrued interest and penalties, of the properties subjectto the JP Morgan Loans together with the revenues and expenses of the otherproperties owned by the Company.  Thedefaults under the loan agreements allow the respective lenders to exercisetheir various remedies contained in the loan agreements, including terminationof the Company as manager of the centers, application of escrow balances todelinquent payments and foreclosure on the properties which collateralize theloans.

 

In December 2002, the Company engaged a broker to market LakeshoreMarketplace, its power center in Norton Shores, Michigan.  The Company is currently evaluating theoffers it has received.  The Company isalso marketing for sale its property in Roseville, Michigan, which isnet-leased to Petsmart, Inc and seven 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 – DiscontinuedOperations on the balance sheet and reports the revenue and expenses from theproperties as Income from Discontinued Operations on the statements ofoperations.  SFAS 144 also requires thatany prior period financial statements presented are also reclassified forcomparability.  This reclassificationhas no effect on the Company’s reported results of operations or funds fromoperations.

 

Comparison of the Three Months Ended March 31, 2003 tothe Three Months Ended March 31, 2002

 

The loss from continuing operations before minority interests decreased$213,000 for the three months ended March 31, 2003 compared to the same periodin the prior year.  The main componentof this change was a decrease in depreciation and amortization expense due tothe 2002 write-down of the carrying value of four of the Company’s outletcenters.

 

Total revenues increased $52,000 in the three months ended March 31,2003, compared to the same period in the prior year.  The primary factor was an increase in the revenues generated fromtenant sales in excess of certain thresholds reflected on the statements ofoperations as Percentage Rent.

 

Average occupancy for the six properties subject to the JP Morgan Loansdecreased 4.7% to 60.9% in the current quarter from 65.6% in the same quarter ayear earlier.  Total revenue for thoseproperties decreased $126,000 to $1.3 million in the current quarter from $1.4million in the same quarter a year earlier. For the Company’s five other shopping centers, average occupancyincreased 0.7% to 79.2% in the current quarter from 78.5% in the same quarter ayear earlier.  Total revenue for thosefive properties increased $177,000 to $3.1 million in the current quarter from$2.9 in the same quarter a year earlier.

 

Property operating expense increased $118,000 in the three months endedMarch 31, 2003, compared to the same period in the prior year.  The primary factors were an increase in snowremoval costs due to heavy snowfall in the current period and an increase ininsurance premiums in the new policy year including the addition of terrorismcoverage required by some of the Company’s lenders.  These increases were partially offset by overall cost-cuttingprograms implemented company-wide.  Ofthe total increase, $58,000 was related to the six properties which secure theJP Morgan Loans and $78,000 was related to the Company’s five other outletcenters.  The offsetting decreaserelated to corporate activities.

 

18

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Land lease and other expense decreased $47,000 in the three monthsended March 31, 2003, compared to the same period in the prior year.  This decrease was mainly due to theCompany’s acquisition of the land under its center in Laughlin, Nevada as ofFebruary 2002.  The Company hadpreviously leased this land (see Note 5 to the Condensed Consolidated FinancialStatements).

 

Depreciation and amortization expense decreased $168,000 in the threemonths ended March 31, 2003, compared to the same period in the prioryear.  Of the total decrease, $250,000was related to the six properties securing the JP Morgan Loans, offset by anincrease of $77,000 for the Company’s five other outlet centers.  The remaining difference relates to othercorporate activities.  The decreaseprimarily resulted from the reductions in carrying values from impairment offour of the properties subject to the JP Morgan Loans, which were recorded inDecember 2002.

 

Interest expense decreased $60,000 in the three months ended March 31,2003 compared to the same period in the prior year.  This decrease was mainly due to the longer loan term for theamortization of financing costs related to the three UBS Loans compared to the oneyear extension of the HGP Credit Facility in the prior year.

 

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 shopping center in Norton Shores, Michigan andrecognized a gain of $156,900.  Thegains and losses from all of these transactions are reflected in the CondensedConsolidated Statements of Operations of the Company.

 

In March 2003, the Company received a condemnation award for a parcelof land at its center in Gretna, Nebraska. The land was condemned by Sarpy County, Nebraska in order to widenHighway 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 theCondensed Consolidated Statements of Operations of the Company.

 

Income from Discontinued Operations increased $153,000 for the threemonths ended March 31, 2003 compared to the same period in the prior year.  This line item on the Company’s Statement ofOperations contains the revenue and expenses from the two properties classifiedas discontinued operations on the Company’s balance sheets pursuant to SFAS 144(see Note 2 to the Condensed Consolidated Financial Statements).  The increase is primarily related to adecrease in depreciation and amortization for both properties that are held forsale, and a gain on sale of a parcel of land that was sold adjacent to thecenter in Gretna, Nebraska.

 

Average occupancy for the Company’s total operating portfolio for thethree months ended March 31, 2003 and 2002 was 70.1% and 72.1%,respectively.  The Company’s totaloperating portfolio occupancy was 68.9% as of March 31, 2003, and 72.8% as ofMarch 31, 2002.  The occupancy figuresexclude the properties which are classified as discontinued operations.

 

Net loss for the three months ended March 31, 2003 was $.47 and $.48per share on a basic and diluted basis, respectively, and for the three monthsended  March 31, 2002 was $.59 per shareon a basic and diluted basis.

 

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 are

 

19

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restricted from owning any assets other than the outlet centers and maynot incur additional liabilities, other than normal trade payables.  The UBS Loans are cross-collateralized andnon-recourse to the Company, subject to certain customary exceptions.  The UBS Loans require that the Companymaintain a Leverage Ratio (as defined in the loan documents) that is no morethan 5% greater than the Initial Leverage Ratio (as defined in the loandocuments) calculated as of July 11, 2002.

 

The UBS Senior 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 March 31, 2003 andDecember 31, 2002, the balances totaled $21.8 million and $21.9 million,respectively.  These loans also requirethe monthly funding of escrow accounts for the payment of future debt service,real estate taxes, insurance, capital and tenant improvements and leasingcommissions (See Note 2 to the Condensed Consolidated Financial Statements).  Funds in excess of those specified in theloan agreements are disbursed to the new entities at least monthly.

 

The UBS Mezzanine Loans mature July 11, 2005 and may be prepaid withoutpenalty after two years.  These loansrequire monthly payments based on a three-year amortization schedule and bearinterest at a fixed rate of 17.0%.  AtMarch 31, 2003 and December 31, 2002, the balances totaled $2.9 million and$3.1 million, respectively.

 

The Beal Bank loans total $7.0 million (the “Beal Bank Loans”) andconsist of (i) a $3.0 million loan secured by vacant land located in NortonShores, Michigan and Fruitport Township, Michigan (the “Beal Bank Loan I”), and(ii) a $4.0 million loan secured by the outlet center in Monroe, Michigan (the“Beal Bank Loan II”).  These loans arecross-collateralized and are recourse to the Company.  The Beal Bank Loans mature July 10, 2005.  Principal payments of up to $2.0 million arepermitted without penalty at any time and the loans may be prepaid in whole orin part without penalty after July 10, 2004. Approximately $450,000 of the proceeds were used to pay in full a landcontract related to land in Fruitport Township which is included in thecollateral for Beal Bank Loan I.

 

The Beal Bank Loans require monthly payments of interest only at rates of(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, Inc., of which Mr.Skoien and Mr. Amster, Directors of the Company, are members of the Board ofDirectors, up to a maximum amount of $4,000,000 (the “Prime-BealGuaranty”).  The Prime-Beal Guarantywill be  released when the totaloutstanding balance of the Beal Bank Loans is equal to or less than $5.0million.  The Company is obligated tomake quarterly payments of $15,000 to Prime Retail, Inc. as long as thisguaranty is in effect.

 

The Company currently is in default with respect to the obligations oftwo pools of loans originated by JP Morgan in July 1999 with an aggregateprincipal balance of $45.2 million at March 31, 2003 and December 31, 2002(excluding accrued interest and penalties). The defaults are the result of the Company’s failure to pay in full theamounts due under the loans commencing with the payment due October 1,2001.  Each pool of loans is secured bya group of three properties.  The loansare non-recourse to HGPI, subject to limited customary exceptions (see Note 5to the Condensed Consolidated Financial Statements).

 

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

 

20

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The JP Morgan Loans require the monthly funding of escrow accounts forthe payment of real estate taxes, insurance and capital improvements whichtotaled $116,000 at March 31, 2003.  Inaddition, $848,000 of monthly available cash flow remitted as debt serviceafter October 31, 2002 has been placed in special purpose escrow accounts bythe loan servicers, rather than being applied to the balances due on theloan.  The Company continues to managethe properties pursuant to a management agreement which is subject tocancellation by the servicers of the loans. The Company receives fees of approximately $25,000 per month for suchservices.

 

The declining results of operations resulting in the inability toservice the JP Morgan Loans was judged to represent an indication of possibleimpairment in the value of the properties which secure the loans.  In the third quarter of 2001, the Companyestimated the current value of the six centers which secure the loans andconcluded that the carrying value of four of the centers exceeded the fairvalues of those centers.  Accordingly,the results of operations for 2001 include a provision for asset impairment of$18.0 million, representing a write-down of the carrying values of the assetsto their estimated fair value.  Based oncontinued negotiations with the lender and additional declines in occupancy andrevenues, the Company recorded an additional provision for asset impairment of$17.0 million in the fourth quarter of 2002 to further reduce the carryingvalues of the same four properties, including approximately $100,000 related toa parcel of land adjacent to one of the properties.  The aggregate carrying value of the real estate of the propertiescollateralizing the JP Morgan Loans was approximately $19.8 million at March31, 2003.  This value is less than thecurrent outstanding loan balances totaling $45.2 million and accrued interestand penalties totaling $8.1 million.  Ifthe lender were to foreclose on the collateral properties in full satisfactionof the loans, the Company would record a gain for the difference between thecarrying value of the properties and related net assets and the outstandingloan balances plus accrued interest and penalties.  The estimation of the fair value of the six centers securing theJP Morgan Loans involved estimates by management with respect to future cashflows, market conditions and valuations applicable to such properties.  Future events could occur which would causethe Company to conclude that the carrying values of the Company’s propertiesmay need to be further adjusted.

 

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 March 31, 2003 and at December 31,2002.  The net proceeds from the loanwere used to reduce the balance of the HGP Credit Facility.  This loan requires the monthly funding of anescrow account for the payment of real estate taxes which had a balance of $104,000at March 31, 2003.  The loan requiresthat the cash flow from the property be at least 130 percent of the debtservice on the loan.  In the event thatthe cash flow is less than that amount, the Company may make principal paymentsto reduce the outstanding balance of the loan to an amount which reduces debtservice to a level which is in 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 March 31, 2003 and December 31, 2002.  The loan is non-recourse to HGPI (subject to limited customaryexceptions). In connection with the Greenwich loan, Lakeshore Marketplace wastransferred to a new entity, Lakeshore Marketplace, LLC, a wholly ownedsubsidiary of the Company.  LakeshoreMarketplace, LLC, and its managing member, Lakeshore Marketplace FinanceCompany, Inc., are restricted from owning any assets other than LakeshoreMarketplace and may not incur additional liabilities, other than normal tradepayables.  All of the assets ofLakeshore Marketplace, LLC are pledged as security for the Greenwich loan.  This loan requires monthly funding of escrowaccounts for the payment of future debt service payments, real estate taxes,insurance, capital improvements, tenant improvements and leasingcommissions.  These accounts had a totalbalance of $372,000 at March 31, 2003. Funds in excess of certain amounts specified in the loan agreement aredisbursed to Lakeshore Marketplace, LLC monthly.  The Company is actively marketing this power center for sale andthus, pursuant to SFAS 144, its real estate assets are listed as Real Estate -Discontinued Operations on the Condensed Consolidated Balance Sheets and itsrevenue and expenses are included in Income from Discontinued Operations on theCondensed Consolidated Statements of Operations.

 

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The Company has amortgage loan secured by its corporate office building and related equipment inNorton Shores, Michigan.  The loan wasoriginally scheduled to mature in December 2002 and has been extended to May30, 2003.  The principal balance on thisloan was $2.1 million and $2.2 million at March 31, 2003 and December 31, 2002,respectively. During the original term, the interest rate on the loan was LIBORplus 2.5% per annum and monthly debt service payments of $22,500 wererequired.  During the extension period,the loan bears interest at LIBOR plus 5.5% per annum and requires monthly debtservice payments of $50,000.  TheCompany is currently seeking to refinance this loan.  There can be no assurance that the Company will be able tocomplete such refinancing or on what terms such refinancing may beaccomplished.

 

The Company owns aproperty in Roseville, Michigan, which is net-leased to Petsmart, Inc. and issubject to a mortgage with a principal balance of $3.2 million at March 31,2003 and at December 31, 2002.  The rentpayable under the lease is equal to the debt service due under the loan securedby the property (the “Petsmart Loan”). The Petsmart Loan matures on January 8, 2008, bears interest at a fixedrate of 8.77% and requires the monthly payment of principal computed on a25-year schedule.  The loan isnon-recourse to HGPI. The Company is marketing this property for sale and thus,pursuant to SFAS 144, its real estate assets are listed as Real Estate -Discontinued Operations on the Condensed Consolidated Balance Sheets and itsrevenue and expenses are included in Income from Discontinued Operations on theCondensed Consolidated Statements of Operations.

 

The Company is theobligor on a $2.0 million unsecured promissory note incurred in connection withthe acquisition of the land underlying its center in Laughlin, Nevada.  The note matures in June 2012, bearsinterest at a rate of 2.0% above the weighted average cost of funds index forthe Eleventh District Savings Institutions, adjusted annually, and requiresamortization based on a ten year schedule. The interest rate payable on the loan is 5.074% through February 28,2003 and 4.375% through February 29, 2004. The outstanding principal balance on this note was $1.8 million and $1.9million at March 31, 2003 and December 31, 2002, respectively.

 

Pursuant to the terms ofthe UBS Loans, Greenwich loan and the JP Morgan Loans, the Company is requiredto keep the properties in good general repair and to make capital improvementsand repairs to certain of its outlet centers. At March 31, 2003, there was approximately $895,000 deposited in escrowswith the loan servicers, which the Company believes is sufficient to fund itsongoing capital requirements.  Anyadditional capital improvements are expected to be funded with additionalborrowings, existing cash balances or cash flow from operations.

 

On March 14, 2003, theCompany made a secured loan to Retail Partners Limited Partnership and RetailPartners, Inc. (collectively “Retail Partners”).  The loan is for a term of 14 months and bears interest at therate of 5.0%, payable at maturity.  Theprincipal balance on the loan was $1.2 million at March 31, 2003.  The Company received a 3.25% net profitsinterest in a real estate development owned by Huntley Development LP andHuntley Meadow Residential Venture (collectively “Huntley”) subject to thecurrent lender’s interest in distributions from Huntley.  Pursuant to the loan agreement, the Companyis obligated to negotiate an option to acquire an additional 48.75% ownershipinterest in Huntley.  Huntley and RetailPartners are owned by The Prime Group, Inc. Gary J. Skoien, Chairman, Chief Executive Officer and President of the Company,is Executive Vice President and Chief Operating Officer of The Prime Group,Inc. and has a net profits interest in Huntley.

 

On April 24, 2003, theCompany closed on a $3.1 million loan for the construction of Phase II of itsoutlet center in Tulare, California. The loan will convert into a permanent loan maturing in August 2009 uponcompletion of the retail expansion.  Theloan is secured by a first mortgage on the land and improvements and will bearinterest at the greater of LIBOR plus 300 basis points or 5.5%.  The loan was made by Amster Trading CompanyCharitable Remainder Unitrust dated March 10, 2003, an affiliate of Howard M.Amster, a Director and principal shareholder of HGPI.

 

The Company expects tomeet its short-term liquidity requirements generally through additionalborrowings, working capital, cash flows from operations, the sale of realestate classified as Real Estate – Discontinued Operations on the CondensedConsolidated Balance Sheets and the potential offering of equity securities inthe private or public capital

 

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HORIZON GROUP PROPERTIES,INC.

Management’s Discussionand Analysis of Financial Condition

and Results of Operations

For the three monthsended March 31, 2003

(unaudited)

 

markets.  The Company expects to meet its long-termrequirements, such as tenant allowances for new leases and capital improvementsand expansions currently being considered at its centers in Tulare, California,and Medford, Minnesota, through the use of working capital and cash flows fromoperations and, if necessary and available, additional borrowings of long-termdebt and the potential offering of equity securities in the private or publiccapital markets.  The Company’s abilityto secure new loans is limited by the fact that virtually all of the Company’sreal estate assets are currently pledged as collateral for its current loans.

 

Discontinued Operations

 

The Company is activelymarketing the following assets for sale: Lakeshore Marketplace in Norton Shores, Michigan; the single tenantbuilding in Roseville, Michigan leased to Petsmart, Inc., and seven parcels ofvacant land totaling approximately 100 acres in Norton Shores, Michigan,Fruitport Township, Michigan, Daleville, Indiana, Gretna, Nebraska, Tulare,California and Medford, Minnesota. These assets are listed on the Condensed Consolidated Balance Sheets asReal Estate – Discontinued Operations. The net proceeds from the sale of these assets would be available forgeneral corporate purposes, subject to certain restrictions and repaymentobligations contained in the mortgage loans to which they are subject.  Pursuant to the requirements of SFAS 144,the Company has reclassified the real estate assets for these properties toReal Estate – Discontinued Operations on the balance sheets and reports therevenue and expenses from the properties as Income from Discontinued Operationson the statements of operations.  SFAS144 also requires that any prior period financial statements presented are alsoreclassified for comparability.  Thisreclassification has no effect on the Company’s 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 andprincipal shareholder of HGPI, for aggregate consideration of $750,000 or $5.16per unit.  On March 13, 2003, HGPI sold261,628 units of HGP LP to Mr. Amster for aggregate consideration of $1.35million, or $5.16 per unit.  Proceeds inexcess of HGPI’s carrying value of these units were recognized as an increasein additional paid-in capital.  The261,628 units sold on March 13, 2003 are not convertible into Common Shares ofHGPI.

 

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HORIZON GROUP PROPERTIES,INC.

Quantitative andQualitative Disclosure of Market Risk

 (unaudited)

 

Market Risk

 

Market risk is the  risk of loss from adverse changes in marketprices and interest rates.  TheCompany’s future earnings and cash flows may be affected by changes in marketinterest rates.  The fair value of theCompany’s debt obligations may also be affected by future changes in marketinterest rates.  The primary market riskfacing the Company is related to its long-term indebtedness, which bearsinterest at fixed and variable rates. The Company seeks fixed rate non-recourse debt to manage marketrisk.  At March 31, 2003, fixed ratedebt represented approximately 89.4% or $92.2 million of the Company’sdebt.  Loans with a fixed rate ofinterest and level amortization schedules minimize interest rate risk relatedto cash flows and interest expense until the maturity of such loans.

 

At March 31, 2003,variable rate debt represented 10.6% or $11.0 million of the Company’s totaldebt.  At March 31, 2003, the averageinterest rate on variable rate debt was approximately 9.1%.  Certain of the Company’s variable rate loansare subject to minimum interest rates that, as of March 31, 2003, were inexcess of the contractual variable rates. The $4.0 million Beal Bank Loan I bears interest at the greater of theWall Street Journal Prime Rate (the “Prime Rate”) plus 4.5% or 12.0%.  At March 31, 2003, the Prime Rate was4.25%.  Thus, a 3.25% increase in thePrime Rate would not affect the interest payable on the Beal Bank I Loan.  The $3.0 million Beal Bank Loan II bearsinterest at the greater of the Prime Rate plus 2.5% or 9.9%.  Thus, a 3.15% increase in the Prime Ratewould not affect the interest payable by the Company on the Beal Bank II Loan.

 

The variable rate loan onthe Company’s corporate office building in Norton Shores, Michigan requiresfixed monthly payments of $50,000 and has an interest rate of LIBOR plus 5.5%per annum.  As of March 31, 2003, theeffective interest rate on this loan was approximately 6.8%, resulting inmonthly interest expense of approximately $12,100 based on a principal balanceof $2.1 million as of March 31, 2003. Thus, an increase in the LIBOR rate would not change the required debtservice payment or monthly net cash flow of the Company related to this loan.  Any change in the LIBOR rate would affectthe reported interest expense related to this loan.

 

If market interest ratesapplicable to the Company’s variable rate debt were to increase by 100 basispoints, interest expense on the variable rate debt (taking into account theminimum interest rates applicable to the Beal Bank loans) would increase$40,000 annually.  The cash flows of theCompany would decrease by $18,000 annually due to such increase in interest rates.  The fair value of total debt outstanding(excluding the JP Morgan Loans, on which the Company is currently in default)would decrease by $2.2 million based on a 100 basis point increase in interestrates.

 

If market interest ratesapplicable to the Company’s variable rate debt were to decrease by 100 basispoints, interest expense on the variable rate debt (taking into account theminimum interest rates applicable to the Beal Bank Loans) would decrease$41,000 annually.  The cash flows of theCompany would increase by $18,000 annually due to such decrease in interestrates.  The fair value of total debtoutstanding (excluding the JP Morgan Loans on which the Company is currently indefault) would increase by $2.3 million based on a 100 basis point decrease ininterest rates.

 

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

 

Inflation

 

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

 

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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 condensed consolidatedfinancial statements of the Company.

 

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HORIZON GROUP PROPERTIES,INC.

Controls and Procedures

(unaudited)

 

The Company’s ChiefExecutive Officer and Chief Financial Officer have evaluated the Company’sdisclosure controls and procedures (as defined in Rule 13a-4(c) and 15d-14(c)under the Securities Exchange Act of 1934) as of a date within 90 days prior tothe filing date of this Quarterly Report on Form 10-Q (the “EvaluationDate”).  They have concluded that, as ofthe Evaluation Date, the Company’s disclosure controls and procedures were adequateand effective.  There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect the Company’s disclosure controls and proceduressubsequent to the Evaluation Date.

 

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HORIZON GROUPPROPERTIES, INC.

Part II – OtherInformation

 

Item 1.  LegalProceedings - None

 

Item 2. Changes in Securities - None

 

Item 3. Defaults Upon Senior Securities

 

On October 10, 2001, theCompany notified the servicers of the JP Morgan Loans that the net cash flowfrom the properties securing the loans was insufficient to fully pay therequired monthly debt service.  TheCompany remitted available cash flow, after a reserve for monthly operatingexpenses, as partial payment of debt service. The failure to pay in full the amounts due constitutes a default underthe loan agreements, which would allow the respective lenders to exercise theirvarious remedies contained in the loan agreements, including foreclosure on theproperties which secure the loans.  TheCompany has initiated discussions with the servicers of the JP Morgan Loansregarding restructuring of the loans. There can be no assurance that such discussions will result in anymodification of the terms of the loans. Both are non-recourse to HGPI, subject to certain customaryexceptions.  See Note 5 to the CondensedConsolidated Financial Statements for further details.

 

Item 4. Submission of Matters to a Vote of Security Holders -None

 

Item 5.  OtherInformation - None

 

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Item 6. Exhibits or Reports on Form 8-K

 
| (a)  Exhibits |
|-------------------------|
|                    |
| Exhibit 3(i)            |   | Articles of Amendment  and Restatement of Horizon Group Properties, Inc. (the “Company”) (8) |
| Exhibit 3(ii)           |   | By-laws of the  Company(1) |
| Exhibit 3(iii)          |   | Amendment to By-laws of  the Company dated March 17, 1999(4) |
| Exhibit 3(iv)           |   | Amendment to By-laws of  the Company dated June 8, 2000(12) |
| Exhibit 3(v)            |   | Amendment to By-laws of  the Company dated May 4, 2001(12) |
| Exhibit 3 (vi)          |   | Amendment to By-laws of  the Company dated May 29, 2001(13) |
| Exhibit 3 (vii)         |   | Articles Suplementary  of the Company dated June 7, 2001(17) |
| Exhibit 3 (viii)        |   | Excepted Holders  Certificate dated July 30, 2002(17) |
| Exhibit 4.1             |   | Specimen certificate  for common stock, $.01 par value per share, of the Company(1) |
| Exhibit 10.1            |   | Sky Merger Corp.  Registration Statement on Form S-4 (excluding exhibits thereto), as filed  with the Securities and Exchange Commission on May 12, 1998 (Registration No.  333-51285)(1) |
| Exhibit 10.2            |   | Amended and Restated  Agreement and Plan of Merger by and among Prime Retail, Inc., Prime Retail,  L.P., Horizon Group, Inc., Sky Merger Corp., the Company, Horizon Group  Properties, L.P. and Horizon/Glen Outlet Centers Limited Partnership dated as  of February 1, 1998 (Incorporated by reference to Exhibit 10(a) to Horizon  Group, Inc.’s current report on Form 8-K dated February 1, 1998 (SEC File No.  1-12424)(1) |
| Exhibit 10.3            |   | Form of 1998 Stock  Option Plan of the Company(1) |
| Exhibit 10.4            |   | Employment Agreement  between Gary J. Skoien and the Company(1) |
| Exhibit 10.5            |   | Employment Agreement  between David R. Tinkham and the Company(1) |
| Exhibit 10.6            |   | Form of Indemnification  Agreement for the Board of Directors of the Company(1) |
| Exhibit 10.7            |   | Form of Registration  Rights Agreement(1) |
| Exhibit 10.8            |   | Form of Contribution  Agreement (incorporated by reference to Appendix E to Exhibit 10.1)(1) |
| Exhibit 10.9            |   | Employment Agreement  between Richard Berman and the Company(3) |
| Exhibit 10.10           |   | Working Capital  Agreement with Prime Retail, Inc.(3) |
| Exhibit 10.11           |   | Loan Agreement dated as  of June 15, 1998 by and among Third Horizon Group Limited Partnership,  Nebraska Crossing Factory Shops, L.L.C., and Indiana Factory Shops, L.L.C.  and Nomura Asset Capital Corporation(2) |
| Exhibit 10.12           |   | Form of Deed of Trust,  Assignment of Leases and Rents and Security Agreement with Nomura Asset  Capital Corporation(2) |
| Exhibit 10.13           |   | Form of Mortgage,  Assignment of Leases and Rents and Security Agreement by and between Horizon  Group Properties, Inc. and Nomura Asset Capital Corporation(2) |
| Exhibit 10.14           |   | Form of Assignment of  Leases and Rents by and between Horizon Group Properties, Inc. and Nomura  Asset Capital Corporation(2) |
| Exhibit 10.15           |   | Guaranty dated as of  June 15, 1998 by the Company and Horizon Group Properties, L.P. to and for  the benefit of Nomura Asset Capital Corporation(2) |
| Exhibit 10.16           |   | Guaranty and Indemnity  Agreement dated as of June 15, 1998 by and among the Company, Horizon Group  Properties, L.P., Prime Retail, Inc., and Prime Retail, L.P.(2) |
| Exhibit 10.17           |   | Assignment and  Assumption Agreement, dated as of June 15, 1998 by and among Prime Retail,  Inc., Prime Retail, L.P., Indianapolis Factory Shops Limited Partnership, and  Indiana Factory Shops, L.L.C.(3) |
| Exhibit 10.18           |   | Assignment and  Assumption Agreement, dated as of June 15, 1998 by and among Prime Retail,  Inc., Prime Retail, L.P., Nebraska Factory Shops Limited Partnership, and  Nebraska Factory Shops L.L.C.(3) |
| Exhibit 10.19           |   | Form of Option  Agreement(3) |
| Exhibit 10.20           |   | Fixed Rate Note dated  as of July 9, 1999 between Gretna, Sealy, Traverse City Outlet Centers,  L.L.C. and Morgan Guaranty Trust Company of New York related to the financing  of the factory outlet center in Gretna, Nebraska(5) |
| Exhibit 10.21           |   | Deed of Trust and Security  Agreement for the benefit of Morgan Guaranty Trust Company of New York, as  lender, from Gretna, Sealy, Traverse City Outlet Centers, L.L.C., as  borrower, related to the financing of the factory outlet center in Gretna,  Nebraska(5) |
| Exhibit 10.22           |   | Guaranty for the  benefit of Morgan Guaranty Trust Company of New York by Horizon Group  Properties, Inc. related to the Gretna, Sealy and Traverse City loans(5) |
| Exhibit 10.23           |   | Agreement between  Andrew F. Pelmoter and the Company(6) |

 

28

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| 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)                                    |
| Exhibit 10.50 |   | Amendment to Retention  Letter between Thomas R. Rumptz and the Company dated August 29, 2001.(15)                                                                                                                                             |

 

29

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| Exhibit 10.51 |   | Amendment to Retention  Letter between Thomas R. Rumptz and the Company dated November 28, 2001.(15)                                                                                                                                                                                                                                                                                            |
|---------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 10.52 |   | Amendment to Retention  Letter between Thomas R. Rumptz and the Company dated February 25, 2002.(15)                                                                                                                                                                                                                                                                                            |
| Exhibit 10.53 |   | Amendment to Retention  Letter between Andrew Pelmoter and the Company dated May 30, 2001.(15)                                                                                                                                                                                                                                                                                                  |
| Exhibit 10.54 |   | Promissory Note I dated  as of July 10, 2002 between Monroe Outlet Center LLC and Beal Bank, S.S.B.  related to the financing of vacant land in Norton Shores, Michigan and  Fruitport Township, Michigan.(16)                                                                                                                                                                                  |
| Exhibit 10.55 |   | Promissory Note II  dated as of July 10, 2002 between Monroe Outlet Center LLC and Beal Bank,  S.S.B. related to the financing of the outlet center in Monroe, Michigan.(16)                                                                                                                                                                                                                    |
| Exhibit 10.56 |   | Commercial Mortgage  dated July 10, 2002 between Monroe Outlet Center LLC and Beal Bank, S.S.B.  related to the financing of the outlet center in Monroe, Michigan.(16)                                                                                                                                                                                                                         |
| Exhibit 10.57 |   | Guaranty Agreement  dated July 10, 2002 in favor of Beal Bank, S.S.B. related to the Monroe  Outlet Center LLC loans.(16)                                                                                                                                                                                                                                                                       |
| Exhibit 10.58 |   | Second Amended and  Restated Guaranty and Indemnity Agreement dated July 11, 2002 by and among  Horizon Group Properties, Inc., Horizon Group Properties, L.P., Prime Retail,  Inc. and Prime Retail, L.P. related to the financing of the outlet center in  Monroe, Michigan.(16)                                                                                                              |
| Exhibit 10.59 |   | Loan Agreement dated as  of July 11, 2002 by and among UBS Warburg Real Estate Investments, Inc.,  Laughlin Outlet Center LLC, Warrenton Outlet Center LLC and Medford Outlet  Center LLC related to the financing of the Laughlin, Nevada, Medford,  Minnesota and Warrenton, Missouri outlet centers.(16)                                                                                     |
| Exhibit 10.60 |   | Promissory Note dated  July 11, 2002 between UBS Warburg Real Estate Investments, Inc. and Laughlin  Outlet Center LLC related to the financing of the outlet center in Laughlin,  Nevada.(16)                                                                                                                                                                                                  |
| Exhibit 10.61 |   | Deed of Trust,  Assignment of Leases and Rents and Security Agreement dated as of July 11,  2002 between Laughlin Outlet Center LLC and Fidelity National Title Insurance  Company for the benefit of UBS Warburg Real Estate Investments Inc. related  to the financing of the outlet center in Laughlin, Nevada.(16)                                                                          |
| Exhibit 10.62 |   | Guarantor Deed of  Trust, Assignment of Leases and Rents, Security Agreement and Guaranty dated  as of July 11, 2002 between Laughlin Outlet Center LLC and Fidelity National  Title Insurance Company for the benefit of UBS Warburg Real Estate  Investments Inc. related to the financing of the Laughlin, Nevada, Medford,  Minnesota and Warrenton Missouri outlet centers.(16)            |
| Exhibit 10.63 |   | Guaranty of Recourse  Obligations dated as of July 11, 2002 by Horizon Group Properties, Inc. and  Horizon Group Properties, L.P. for the benefit of UBS Warburg Real Estate  Investments Inc. related to the financing of the Laughlin, Nevada, Medford,  Minnesota and Warrenton, Missouri outlet centers.(16)                                                                                |
| Exhibit 10.64 |   | Cash Management  Agreement dated as of July 11, 2002 among Laughlin Outlet Center LLC, Medford  Outlet Center LLC, Warrenton Outlet Center LLC, Wachovia Bank, National  Association, UBS Warburg Real Estate Investments Inc., and Horizon Group  Properties, L.P. related to the financing of the Laughlin, Nevada, Medford,  Minnesota and Warrenton, Missouri outlet centers.(16)           |
| Exhibit 10.65 |   | Environmental Indemnity  Agreement dated as of July 11, 2002 by Laughlin Outlet Center LLC, Medford  Outlet Center LLC, Warrenton Outlet Center LLC, Horizon Group Properties,  Inc. and Horizon Group Properties, L.P. in favor of UBS Warburg Real Estate  Investments Inc. related to the financing of the Laughlin, Nevada, Medford, Minnesota  and Warrenton, Missouri outlet centers.(16) |
| Exhibit 10.66 |   | Mezzanine Loan Document  dated as of July 11, 2002 by and among Laughlin Holdings LLC, Medford  Holdings LLC and Warrenton Holdings LLC and UBS Warburg Real Estate  Investments Inc. related to the mezzanine financing of the Laughlin, Nevada,  Medford, Minnesota and Warrenton, Missouri outlet centers.(16)                                                                               |
| Exhibit 10.67 |   | Promissory Note dated  July 11, 2002 between Laughlin Holdings LLC and UBS Warburg Real Estate  Investments Inc. related to the mezzanine financing of the Laughlin, Nevada  outlet center.(16)                                                                                                                                                                                                 |
| Exhibit 10.68 |   | Guaranty of Recourse  Obligations dated as of July 11, 2002 by Horizon Group Properties, Inc. and  Horizon Group Properties, L.P. for the benefit of UBS Warburg Real Estate  Investments Inc. related                                                                                                                                                                                          |

 

30

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|          |   | 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.and Horizon Group Properties, Inc. dated March 13, 2003, regarding the  sale of partnership interest 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  Meadows 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 be and among Horizon Group  Properties, L.P., First American Title and Amster Trading Company Charitable  Remainder Unitrust dated March 10, 2003(24)                                                                                        |
| Exhibit 10.86 |   | Guaranty of Payment and  Completion dated as of April 24, 2003 by Horizon Group Properties, Inc. to  and for the benefit of Amster Trading Company Charitable Remainder Unitrust  dated March 10, 2003(24)                                                                                                                                                                                  |
| Exhibit 10.87 |   | Environmental Indemnity  Agreement dated as of April 24, 2003 by Horizon Group Properties, L.P. and  Horizon Group Properties, Inc. to and for the benefit of Amster Trading  Company Charitable Remainder Unitrust dated March 10, 2003(24)                                                                                                                                                |
| Exhibit 21    |   | Subsidiaries of the  Company.                                                                                                                                                                                                                                                                                                                                                               |

 

31

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| 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 99.4 |   | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 signed by Gary J. Skoien, Chief Executive Officer  on March 31, 2003 |
| Exhibit 99.5 |   | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 signed by David R. Tinkham on March 31, 2003                         |

 

----

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

2              Incorporated byreference to the Company’s Current Report on Form 8-K dated as of June 30, 1998

  (Commissionfile no. 0-24123).

3              Incorporated by reference to the Company’s Form 10-Qdated as of August 14, 1998

  (Commissionfile no. 0-24123).

4              Incorporated by reference to the Company’s Form 10-Qdated as of May 17, 1999

  (Commissionfile no. 0-24123).

5              Incorporated by reference to the Company’s CurrentReport on Form 8-K dated as of August 3, 1999

  (Commissionfile no. 0-24123).

6              Incorporated by reference to the Company’s Form 10-Kdated as of  March 6, 2000

  (Commissionfile no. 0-24123).

7              Incorporated by reference to the Company’s Form 10-Qdated as of May 15, 2000

  (Commission file no. 0-24123)

8              Incorporated by reference to the Company’s DefinitiveProxy Statement dated as of July 12, 2000

  (Commissionfile no. 0-24123)

9              Incorporated by reference to the Company’s Form 10-Qdated as of November 14, 2000

  (Commission file no. 0-24123)

10            Incorporated by reference to the Company’s Form 10-Kdated as of March 23, 2001

  (Commission file no. 0-24123)

11            Incorporated by reference to the Company’s Current Reporton Form 8-K dated as of May 4, 2001

  (Commissionfile no. 0-24123)

12            Incorporated by reference to the Company’s Form 10-Qdated as of May 15, 2001

  (Commissionfile no. 0-24123)

13            Incorporated by reference to the Company’s Current Reporton Form 8-K dated as of May 29, 2001

  (Commissionfile no. 0-24123)

14            Incorporated by reference to the Company’s Current Reporton Form 8-K dated as of August 13, 2001

  (Commissionfile no. 0-24123)

15            Incorporated by reference to the company’s Form 10-Kdated as of March 28, 2002

  (Commissionfile no. 0-24123)

16            Incorporated by reference to the Company’s Current Reporton Form 8-K dated as of August 9, 2002

  (Commissionfile no. 0-24123)

17            Incorporated by reference to the Company’s Form 10-Qdated as of August 14, 2002

  (Commissionfile no. 0-24123)

18            Incorporated by reference to the Company’s form 10-Qdated as of November 14, 2002

  (Commissionfile no. 0-24123)

19            Incorporated by reference to the Company’s Current Reporton Form 8-K dated as of December 24, 2002

  (Commissionfile no. 0-24123)

20            Incorporated by reference to the Company’s Current Reporton Form 8-K dated as of December 27, 2002

  (Commissionfile no. 0-24123)

21            Incorporated by reference to the Company’s Form 10-Kdated as of March 31, 2003

  (Commissionfile no. 0-24123)

22            Incorporated by reference to the Company’s Current Reporton Form 8-K dated as of March 17, 2003

  (Commissionfile no. 0-24123)

23            Incorporated by reference to the Company’s Current Reporton Form 8-K dated as of April 3, 2003

  (Commissionfile no. 0-24123)

 

32

----

 

24            Incorporated by reference to the Company’s Current Reporton Form 8-K dated as of April 28, 2003

  (Commissionfile no. 0-24123)

 

(b)           Report on Form 8-K

 

A Form 8-K was filed onMarch 17, 2003, regarding the Company’s press release announcing the sale of261,628 limited partner units in HGP LP to Howard M. Amster and the Company’sloan to Retail Partners.

 

A Form 8-K was filed onApril 3, 2003, regarding the Company’s press release announcing its results ofoperations for the fourth quarter of 2002.

 

A Form 8-K was filed onApril 28, 2003 regarding the Company’s press release announcing the closing ona $3.1 million loan for the construction of Phase II of the Company’s outletcenter in Tulare, California.

 

33

----

 

SIGNATURES

 

 

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

 
|                     | HORIZON GROUP  PROPERTIES, INC.                                  |
|--------------------------|------------------------------------------------------------------|
|                     | Registrant                                                       |
|                     |                                                             |
|                     |                                                             |
| Date:  May 15, 2003 |                                                             | By: /s/ Gary J. Skoien |   |
|                     | Gary J. Skoien,  President and                                   |
|                     | Chief Executive Officer                                          |
|                     |                                                             |
|                     |                                                             |
| Date:  May 15, 2003 |                                                             | By: /s/ David R.  Tinkham |   |
|                     | David R. Tinkham, Chief  Accounting  and Chief Financial Officer |

 

34

----

 

CERTIFICATION

 

 

I, Gary J. Skoien,certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Horizon Group Properties, Inc.;

 

2.     Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.     Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of and for, the periodspresented in this quarterly report;

 

4.     The registrants other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)     Designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made know to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)    Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)     Presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

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

 

a)     All significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)    Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.     The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Dated: | May 15, 2003 |                    | /s/ Gary J. Skoien |   |
|--------|--------------|-------------------------|--------------------|--------|
|   |         | Gary J. Skoien          |
|   |         | Chief Executive Officer |

 

35

----

 

CERTIFICATION

 

 

I, David R. Tinkham,certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Horizon Group Properties, Inc.;

 

2.     Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.     Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of and for, the periodspresented in this quarterly report;

 

4.     The registrants other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)     Designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made know to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b)    Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)     Presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

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

 

a)     All significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)    Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.     The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Dated: | May 15, 2003 |                    | /s/ David R. Tinkham |   |
|--------|--------------|-------------------------|----------------------|--------|
|   |         | David R. Tinkham        |
|   |         | Chief Financial Officer |

 

36

----