HORIZON GROUP PROPERTIES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended DECEMBER 31, 1999

OR

[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 0-24123
-------------------------------

HORIZON GROUP PROPERTIES, INC.
------------------------------
(Exact Name of Registrant as Specified in Its Charter)

MARYLAND 38-3407933
- ------------------------------------------ ---------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)

77 WEST WACKER DRIVE, SUITE 4200 (312) 917-8870
CHICAGO, IL 60601 ---------------------------------
- ------------------------------------------ (Registrant's telephone number)
(Address of principal executive offices) including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
-----------------------------------------------------------

Common Stock, $0.01 par value

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
-----------------------------------------------------------

None

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

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

The aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $7,656,000 based on the closing sale price of
$2.6875 per share as reported on the NASDAQ on February 16, 2000.

The number of shares of the registrant's common stock, $.01 par value,
outstanding as of February 16, 2000 was 2,848,819.

DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------

Portions of the following documents of the registrant are incorporated herein by
reference: None

HORIZON GROUP PROPERTIES, INC.

FORM 10-K

DECEMBER 31, 1999

TABLE OF CONTENTS

DESCRIPTION PAGE NO.
- ----------- --------

Part I
Item 1. Business............................................................................................... 3
Item 2. Properties............................................................................................. 5
Item 3. Legal Proceedings...................................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders.................................................... 7

Part II
Item 5. Market for the Company's Common Shares and Related Stockholder Matters.................................. 7
Item 6. Selected Financial Data................................................................................. 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risks............................................. 15
Item 8. Financial Statements and Supplementary Data............................................................. 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 37

Part III
Item 10. Directors and Executive Officers of the Company......................................................... 37
Item 11. Executive Compensation.................................................................................. 40
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................... 44
Item 13. Certain Relationships and Related Transactions.......................................................... 46

Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................ 47
Signatures.............................................................................................. 50

2

HORIZON GROUP PROPERTIES, INC.
FORM 10-K, ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1999

PART I

ITEM 1 - BUSINESS

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

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

The operations of the Company are primarily conducted through a subsidiary
limited partnership, Horizon Group Properties, L.P. ("HGP LP"), of which the
Company is the sole general partner. As of December 31, 1999, HGP owned
approximately 83.9% of the partnership interests (the "Common Units") of HGP LP.
In connection with the Merger, the Common Units were distributed to the original
holders (other than Prime) of partnership interests of a limited partnership
affiliate of Prime and a limited partnership affiliate of Horizon, respectively,
in accordance with the exchange ratios set forth in the Merger Agreement. Common
Units are exchangeable for shares of Common Stock on a one-for-one basis at any
time (or for an equivalent cash amount at the Company's election).

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

Bellport Outlet Center in Bellport, New York
Dry Ridge Outlet Center in Dry Ridge, Kentucky
Holland Outlet Center in Holland, Michigan
Horizon Outlet Center-Laughlin in Laughlin, Nevada
Horizon Outlet Center-Monroe in Monroe, Michigan
Horizon Outlet Center-Traverse City in Traverse City, Michigan
Horizon Outlet Center-Tulare in Tulare, California
Lakeshore Marketplace in Norton Shores, Michigan
Medford Outlet Center in Medford, Minnesota
New Mexico Outlet Center in Algodones, New Mexico (vacant)
Sealy Outlet Center in Sealy, Texas
The Factory Shops in Georgian Place in Somerset, Pennsylvania
Warrenton Outlet Center in Warrenton, Missouri

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

Immediately after the Merger, the Company acquired the two properties listed
below for total consideration of $26,015,000.

Nebraska Crossings Factory Stores in Gretna, Nebraska
Indiana Factory Shops in Daleville, Indiana

Each property was purchased from an affiliate of Prime.

3

The following summarizes the assets, liabilities and equity contributed to and
assumed by the Company pursuant to the Contribution Agreement including the
acquisition of the two centers from Prime as of June 15, 1998. The amounts
presented include purchase accounting adjustments made to the original
preliminary estimates during 1999. The net effect of these adjustments was a
$1,362,000 decrease in real estate, a $980,000 increase in other assets and a
$382,000 decrease in other liabilities.

(In thousands)

Real estate $141,158
Other assets 21,258
--------
$162,416
========
Mortgages and other debt $115,514
Other liabilities 6,337
Minority interests 7,763
Shareholders' equity 32,802
--------
$162,416
========

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

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

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

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

TAX STATUS

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

Horizon elected to be taxed as a REIT commencing with the taxable year ending
December 31, 1994. As a REIT, Horizon was not taxed on income since it
distributed its REIT taxable income to its shareholders and satisfied certain
other requirements as defined in the Code. Accordingly, neither the consolidated
nor the combined financial statements include any federal income tax expense.

ENVIRONMENTAL MATTERS

Under various federal, state and local laws and regulations, an owner of real
estate is liable for the costs of removal or remediation of certain hazardous
substances on their property. Such laws often impose liability without regard to
whether the owner knew of, or was responsible for, the presence of hazardous
substances. The costs of remediation or removal may be substantial, and the
presence of the hazardous substances, or the failure to promptly remediate them,
may adversely affect the owner's ability to sell the real estate or to borrow
using the real estate as collateral. In connection with its ownership and
operation of the properties, the Company may be potentially liable for the costs
of removal or remediation of hazardous substances.

EMPLOYEES

As of December 31, 1999, the Company had 188 employees. The Company believes
that its relations with its employees are satisfactory.

4

ITEM 2 - PROPERTIES

The following table and accompanying notes set forth information concerning each
property in which the Company owns an equity interest as of December 31, 1999.
See also Schedule III in Item 8 for additional information.

PORTFOLIO OF PROPERTIES

DECEMBER 31, 1999

INITIAL PERCENTAGE
NAME AND LOCATION OF CENTER CONSTRUCTION GLA (SQ. FT) LEASED (1)
- --------------------------- ------------ ------------ ---------

Dry Ridge Outlet Center in Dry Ridge, Kentucky October 1991 117,980 71.4

Holland Outlet Center in Holland, Michigan September 1988 193,775 90.0

Horizon Outlet Center-Laughlin in Laughlin, Nevada July 1996 256,915 85.2

Horizon Outlet Center-Monroe in Monroe, Michigan November 1987 225,121 82.5

Horizon Outlet Center-Traverse City in Traverse City, Michigan October 1990 153,975 88.9

Horizon Outlet Center-Tulare in Tulare, California November 1995 138,647 100.0

Indiana Factory Shops in Daleville, Indiana November 1994 234,149 73.9

Lakeshore Marketplace in Norton Shores, Michigan (Power Center) October 1995 356,592 85.1

Medford Outlet Center in Medford, Minnesota June 1991 223,160 91.1

Nebraska Crossing Factory Stores in Gretna, Nebraska October 1993 191,500 84.6

Sealy Outlet Center in Sealy, Texas August 1995 191,587 89.3

The Factory Shops in Georgian Place in Somerset, Pennsylvania April 1990 189,532 62.9

Warrenton Outlet Center in Warrenton, Missouri September 1993 199,963 96.2
---------- ----

TOTAL CENTERS 2,672,896 84.7%
========= ====

NOTES:

(1) Percentage reflects executed leases as of December 31, 1999 as a percent of
total gross leasable area ("GLA"). Includes only leases which have total
terms of or for which tenants have been in occupancy for 12 months or
longer.

(2) In the opinion of HGP's management, all of the properties described above
are adequately covered by insurance.

LEASE INFORMATION

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

5

LEASE EXPIRATIONS - PROPERTIES

The following table shows lease expirations for the next five years at the
Company's properties (as of December 31, 1999 and assuming no lease renewals or
extensions):

APPROXIMATE GLA
YEAR NUMBER OF LEASES EXPIRING (SQ. FT.)
---- ------------------------- ---------------

2000 144 531,965
2001 122 515,850
2002 78 359,451
2003 39 137,730
2004 47 191,731

TENANT INFORMATION

HGP's shopping centers feature a variety of retailers of widely recognized,
traditional brand name merchandise. The following table sets information as to
HGP's major tenants as of and for the year ended December 31, 1999.

OCCUPIED
NUMBER OF GLA PERCENTAGE OF PERCENTAGE OF
TENANT STORES (SQ. FT) TOTAL REVENUES GLA OCCUPIED
- ------ ------ --------- -------------- ------------

Phillips Van Heusen Corp. 28 141,599 7.31% 6.35%
Elder-Beerman Stores Corp. 1 87,185 2.31% 3.91%
Salisbury Sales Corp. 8 85,415 2.80% 3.83%
Dress Barn, Inc. 10 80,114 4.65% 3.59%
Mikasa, Inc. 9 68,336 3.21% 3.06%

COMPETITION

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

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

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

ITEM 3- LEGAL PROCEEDINGS

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

On January 20, 1999, a purported shareholder of HGP filed a purported class
action lawsuit in the Circuit Court of Cook County, Illinois against HGP, Prime
Capital Holding, LLC ("PCH") and the Directors of HGP claiming, among other
things, that HGP's directors breached their fiduciary duties to HGP's
shareholders in connection with a business combination proposal made by PCH. The
lawsuit requests that the transaction with PCH be enjoined, or, in the event
that the transaction is consummated, that the transaction be rescinded and that
damages be awarded to the purported class members. On March 17, 1999, the
Company received a letter from PCH withdrawing its proposal for a business
combination with HGP. On July 27, 1999, this lawsuit was dismissed without
prejudice.

6

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

No matters were submitted to a vote of security holders during the quarter ended
December 31, 1999.

PART II

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

The Company's common shares commenced trading on the Nasdaq SmallCap Market of
The Nasdaq Stock Market, Inc. ("Nasdaq") on a when-issued basis on June 16, 1998
and on a regular-way basis on June 18, 1998 (three days after the distribution
of the Company's shares in connection with the Merger), under the trading symbol
"HGPI".

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

MARKET PRICE PER COMMON SHARE
1999

--------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
--------------------------------------------------------------------------------

High 4.000 3.750 4.500 5.500
Low 3.031 2.625 3.250 3.875
Dividends declared - - - -

MARKET PRICE PER COMMON SHARE
1998
--------------------------------------------------------------------------------
FOURTH THIRD JUNE 16, 1998 TO
QUARTER QUARTER JUNE 30, 1998
--------------------------------------------------------------------------------

High $4.500 $6.750 $7.125
Low 1.875 2.375 3.500
Dividends declared - - -

The approximate number of holders of record of the common shares was 517 as of
February 16, 2000.

7

ITEM 6- SELECTED FINANCIAL DATA

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

HORIZON GROUP
PROPERTIES, INC.
AS OF PREDECESSOR
HORIZON GROUP DECEMBER 31, 1998 PROPERTIES
PROPERTIES, INC. OR FOR THE PERIOD FOR THE PERIOD
AS OF OR FOR FROM FROM
THE YEAR ENDED JUNE 15, 1998 TO JANUARY 1, 1998
DECEMBER 31, 1999 DECEMBER 31, 1998 TO JUNE 14,
------------------ ------------------ ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

OPERATING DATA
Revenues $ 30,378 $ 17,147 $ 12,607
Expenses 30,094 16,701 16,362
Impairment (1) - - -
Income (loss) from joint ventures (622) (59) (207)
--------- --------- ---------

Income (loss) before minority

interests and extraordinary charge (338) 387 (3,962)

Minority interests (2) 31 (69) -
--------- --------- ---------

Income (loss) before extraordinary (307) 318 (3,962)
charge

Extraordinary charge on debt prepayment (568) - -
--------- --------- ---------

Net Income (loss) $ (875) $ 318 $ (3,962)
========= ========= =========
Net Income (loss) per share - basic and
diluted (3) $ (0.31) $ .11
========= =========
Dividends per share (4) $ - $ -
========= =========

BALANCE SHEET DATA:

Real estate, net of accumulated
depreciation $ 141,419 $ 142,588 -
Total assets 155,000 165,678 -
Debt (allocation from Horizon for
Predecessor Properties) 107,128 114,752 -
Net assets - - -
Total shareholders' equity 33,528 33,614

Other Data:
Cash flows provided by (used in):
Operating activities 6,673 2,760 $ 1,447
Investing activities (832) (2,455) (1,703)
Financing activities (3,572) (761) 325

Total gross leasable area (square feet) 2,673 2,795 2,247

PREDECESSOR PROPERTIES AS OF
OR FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------
1997 1996 1995
---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

OPERATING DATA
Revenues $ 30,228 $ 27,721 $ 15,481
Expenses 33,732 21,986 11,810
Impairment (1) 6,949 24,631 -
Income (loss) from joint ventures 113 281 128
--------- --------- ---------

Income (loss) before minority

interests and extraordinary charge (10,340) (18,615) 3,799

Minority interests (2) - - -
--------- --------- ---------

Income (loss) before extraordinary (10,340) (18,615) 3,799
charge

Extraordinary charge on debt prepayment (764) (155) -
--------- --------- ---------

Net Income (loss) $ (11,104) $ (18,770) $ 3,799
========= ========= =========
Net Income (loss) per share - basic and
diluted (3)

Dividends per share (4)

BALANCE SHEET DATA:

Real estate, net of accumulated
depreciation $ 198,528 $ 195,541 $ 197,845
Total assets 221,976 230,744 206,799
Debt (allocation from Horizon for
Predecessor Properties) 131,793 113,885 87,901
Net assets 83,162 107,360 105,248
Total shareholders' equity

Other Data:
Cash flows provided by (used in):
Operating activities 6,310 (7,686) 8,788
Investing activities (11,244) (33,452) (81,876)
Financing activities 4,152 44,883 72,982

Total gross leasable area (square feet) 2,247 2,371 1,965

NOTES:

(1) In 1997, represents a $6.0 million charge to reduce the carrying value of
four centers subject to a sale agreement to their estimated sales value
less costs to dispose and a $0.9 million impairment charge related to
development projects that were not pursued. In 1996, represents a $22.8
million charge to reduce the carrying value of four centers that resulted
from management's effort to market one center for sale and revised
occupancy estimates on three centers that indicated a permanent
impairment in their value. In addition, the impairment expense includes a
$1.8 million charge related to development projects which were not
pursued.

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

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

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

8

SELECTED QUARTERLY FINANCIAL DATA

HORIZON GROUP PROPERTIES, INC.
-----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ------------- -------------- ---------------
(IN THOUSANDS)

1999
----
Revenue $ 7,504 $ 7,308 $ 7,602 $ 7,964
Expenses 7,723 7,268 7,514 7,589
Loss from joint ventures (306) (152) (164) -
------- ------- ------- -------

Income (loss) before minority interests and extraordinary
charge (525) (112) (76) 375

Minority interests 90 14 (7) (66)
------- ------- ------- -------

Income (loss) before extraordinary charge (435) (98) (83) 309

Extraordinary charge - - (568) -
------- ------- ------- -------

Net income (loss) $ (435) $ (98) $ (651) $ 309
======= ======= ======= =======

Net income (loss) per share - basic and diluted $ (0.16) $ (0.03) $ (0.23) $ 0.11
======= ======= ======= =======

PREDECESSOR PROPERTIES HORIZON GROUP PROPERTIES, INC.
--------------------------- ------------ ------------- ---------------
FIRST 4/1 - 6/15 - THIRD FOURTH
QUARTER 6/14/98 6/30/98 QUARTER QUARTER
---------- ------------ ------------- -------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1998
----
Revenue $ 6,718 $ 5,889 $ 1,161 $ 7,715 $ 8,271
Expenses 8,397 7,965 1,200 7,646 7,855
Income (loss) from joint ventures (81) (126) 1 (19) (41)
------- ------- ------- ------- -------

Income (loss) before minority interests (1,760) (2,202) (38) 50 375

Minority interests (1) 6 (16) (59)
------- ------- -------

Net income (loss) $(1,760) $(2,202) $ (32) $ 34 $ 316
======= ======= ======= ======= =======

Net income (loss) per share - basic and
diluted (2) $ (0.01) $ 0.01 $ 0.11
======= ======= =======

NOTES:

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

(2) No per share net income is presented for the Predecessor Properties due to
the change in the capital structure resulting from the Merger.

9

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

INTRODUCTION

The following discussion and analysis of the consolidated financial condition
and results of operations of Horizon Group Properties, Inc. (together with its
subsidiaries "HGP" or the "Company") and the Predecessor Properties (as
hereinafter defined) should be read in conjunction with the Consolidated and
Combined Financial Statements and Notes thereto. The Company's operations are
conducted primarily through a subsidiary limited partnership, Horizon Group
Properties, L.P. ("HGP LP"). The Company is the sole general partner of HGP LP
and, as of December 31, 1999, owned approximately 83.9% of the partnership
interests of HGP LP ("Common Units"). Common Units of HGP LP are exchangeable
for shares of Common Stock on a one-for-one basis at any time (or for an
equivalent cash amount at the Company's election). The Company controls HGP LP
and is dependent on distributions or other payments from HGP LP to meet its
financial obligations.

CAUTIONARY STATEMENTS

The following discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect management's current views with respect to future events and financial
performance. Such forward-looking statements are subject to certain risks and
uncertainties; including, but not limited to, the effects of future events on
the Company's financial performance; the risk that the Company may be unable to
refinance its current debt as it matures; risks related to the retail industry
in which the Company's shopping centers compete, including the potential adverse
impact of external factors, such as inflation, consumer confidence, unemployment
rates and consumer tastes and preferences; risks associated with the Company's
property acquisitions, such as the lack of predictability with respect to
financial returns; risks associated with the Company's property development
activities, such as the potential for cost overruns, delays and the lack of
predictability with respect to the financial returns associated with these
development activities; the potential impact of Year 2000 issues, the risk of
potential increase in market interest rates from current levels; and risks
associated with real estate ownership, such as the potential adverse impact of
changes in local economic climate on the revenues and the value of the Company's
properties. For further information on factors which could impact the Company
and the statements contained herein, reference is made to the Company's other
filings with the Securities and Exchange Commission, including the Company's
Registration Statement on Form 10, as amended, dated as of June 4, 1998, with
respect to the Company's initial registration of its common stock under the
Securities Exchange Act of 1934, as amended and the Sky Merger Corp.
Registration Statement on Form S-4, as filed with the Securities and Exchange
Commission on May 12, 1998 (Registration No. 333-51285).

GENERAL OVERVIEW

The Company is a self-administered and self-managed corporation that was
established in connection with the merger of Horizon Group, Inc., a Michigan
corporation ("Horizon") with and into Prime Retail, Inc., a Maryland corporation
("Prime") which was consummated on June 15, 1998 ("the Merger"). As of December
31, 1999, HGP's portfolio consisted of 12 factory outlet centers and one power
center located in 10 states comprising an aggregate of approximately 2.7 million
square feet of gross leasable area ("GLA"). Ten of the factory outlet centers
and the power center were contributed to the Company in connection with the
consummation of the Merger by Horizon pursuant to a Contribution Agreement
entered into in connection with the Merger (the "Contribution Agreement") and
two factory outlet centers were purchased by the Company from Prime immediately
subsequent to the consummation of the Merger.

RESULTS OF OPERATIONS

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

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

10

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

1999 Compared to 1998

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

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

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

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

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

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

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

Net loss for the year ended December 31, 1999 was $0.31 per share on a basic and
diluted basis. This included an extraordinary charge of $0.20 per share
(discussed below). Funds from operations for the year ended December 31, 1999
was $1.72 per share on a diluted basis.

Included in the net loss for 1999 is a $568,000 extraordinary charge resulting
from the early repayment of a portion of the Nomura debt with the proceeds from
a debt financing with Morgan Guaranty Trust Company of New York. There was no
similar charge in 1998.

1998 Compared to 1997

Rental revenue for the Predecessor Properties (excluding the Algodones, New
Mexico center which was vacant in 1998) for the year ended December 31, 1998
increased 8% compared to the prior year. Rental revenue for the Algodones, New
Mexico center totaled $4,687,000 for the year ended December 31, 1997. Operating
expenses and real estate taxes for the year ended December 31, 1998 for the
Predecessor Properties (excluding the Algodones, New Mexico center) decreased
approximately 4% compared to the prior year. Operating expenses and real estate
taxes for the Algodones, New Mexico center were $314,000 for the year ended
December 31, 1997.

11

The financial statements for the year ended December 31, 1998 include a net
charge of $700,000 as part of a budgeted 1998 marketing landlord contribution.
This total contribution was used primarily to supplement the funds received from
tenants to market five key centers. In 1997, such charges totaled $734,000.

Average occupancy for the Predecessor Properties (excluding the Algodones, New
Mexico center) for the year ended December 31, 1997 was 75.0%. As of December
31, 1998, occupancy of the Company's total operating portfolio was 80.4%.

Net income for the period from June 15, 1998 to December 31, 1998 was $.12 per
share on a basic and diluted basis. Funds from operations for the period from
June 15, 1998 to December 31, 1998 was $.90 per share on a diluted basis. Per
share information is not presented for periods prior to the Merger due to the
change in capital structure resulting from the Merger.

Impairment charges of $6.9 million were recorded in the year ended December 31,
1997 based on a contingent sales contract related to four centers and the
abandonment of certain development projects. No similar charges were recorded in
the period from June 15, 1998 to December 31, 1998.

Included in the net loss for 1997 is a $0.8 million extraordinary charge
resulting from an early prepayment of debt. Horizon refinanced its outstanding
short-term debt during the second quarter of 1997 and the extraordinary charge
represents the Predecessor Properties' proportionate share of Horizon's expense.
There was no similar charge in the period from June 15, 1998 to December 31,
1998.

The Company operates primarily from the former headquarters of Horizon in Norton
Shores, Michigan in an office building previously owned by Horizon and now owned
by the Company. Most employees of the Company, with the exception of some of its
senior management, were former employees of Horizon. In connection with the
Merger, a substantial number of former Horizon employees were either not offered
employment with the Company or offered continued employment for a limited period
of time. The Company has currently leased a small portion of its office building
to an unrelated tenant and is seeking additional tenants to occupy the space not
required by the Company to accommodate its operations. The Company also leases
office space in Chicago, Illinois for its senior management. During the third
quarter of 1998, the Company amended its lease in Virginia and relocated to
smaller offices thereby reducing rental expense. As a result of the above
mentioned factors, among others, the general and administrative expenses of the
Company for the periods subsequent to June 15, 1998 are not necessarily
representative of the expenses which will be incurred on an ongoing basis.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1999, the aggregate amount of outstanding mortgage notes and
other debt was approximately $107.1 million, of which $3.1 million is payable in
2000 pursuant to the terms of such notes and indebtedness. The Company is
contemplating an expansion at its Tulare Outlet Center and has completed
approximately 36,000 square feet of partially finished space at its center in
Medford, Minnesota. The Company is obligated to make capital improvements and
repairs to certain of its outlet centers pursuant to the terms of the HGP Credit
Facility with Nomura (each as hereinafter defined). At December 31, 1999, there
was approximately $1.1 million deposited in escrows with Nomura and JP Morgan,
which the Company believes is sufficient to complete the work required under the
HGP Credit Facility and JP Morgan loans. The Company expects to fund other
capital improvements with additional borrowings, existing cash balances or cash
flows from operations.

The Company is required to make monthly deposits with Nomura and JP Morgan for
future debt service payments, real estate taxes, insurance, operating expenses
and capital expenditures. These deposits totaled $3.8 million as of December 31,
1999, including the capital improvement escrows described above. Funds are
dispersed to or on behalf of the Company for the above mentioned uses. Funds in
excess of those specified in the loan agreement with Nomura are dispersed to the
Company monthly.

In connection with the Merger, the Company entered into a Working Capital
Agreement with Prime (the "Working Capital Agreement"). The Working Capital
Agreement provides that Prime will transfer to the Company sufficient cash to
result in net working capital of $545,000, after consideration of the current
assets and current liabilities of the Predecessor Properties and the two
centers which the Company purchased from Prime as of the date of the Merger.
At the date of the Merger, Prime transferred $3.0 million to the Company as a
partial payment of amounts due under the Working Capital Agreement. On
September 1, 1999, the Company reached an agreement with Prime to settle
amounts due under the Working Capital Agreement in connection with the sale
of its interests in the joint ventures related to the outlet center in
Bellport, New York (see Note 1). The consideration for the transfer of the
Bellport interests was $7.5 million and approximately 95 acres of land in
Muskegon, Michigan, subject to $800,000 of land contract payments.

The proceeds from the settlement of the Working Capital Agreement and the
transfer of the Bellport interests were used to repay $9.3 million of current
and future obligations owed by the Company to Prime. These obligations
included (i) $2.2 million which the Company had borrowed from Prime to make
principal repayments on the Nomura facility, (ii) $4.0 million which the
Company had borrowed from Prime to repay a credit facility assumed in the
Merger, (iii) $2.3 million related to the PVH Agreement, and (iv) $800,000
related to the guarantee fee associated with Prime's guarantee of certain of
the Company's debt obligations (see Note 9). The Company also received
$230,000 in cash.

12

The Company expects to meet its short-term liquidity requirements generally
through working capital and cash flows from operations. The Company expects to
meet its long-term requirements, such as tenant allowances for new leases and
capital improvements, through the use of working capital and cash flows from
operations and, if necessary and available, the additional borrowing of
long-term debt and the potential offering of equity securities in the private or
public capital markets. As a result of the Company's leverage, the Company's
ability to obtain additional financing sources is limited. The Company is
currently seeking to mitigate its interest rate risk through refinancing the HGP
Credit Facility with fixed rate, longer-term debt. There can be no assurance
that the Company will be able to complete such refinancing or on what terms such
refinancing may be accomplished.

The Company has outstanding commitments for capital expenditures on leases
signed at December 31, 1999 in the amount of $825,000 for tenant allowances,
$460,000 for construction costs and $50,000 for brokerage commissions. These
costs are expected to be paid during 2000 and a portion will be reimbursed from
the capital improvement escrows (see Note 2).

On June 15, 1998, certain wholly owned affiliates of the Company entered into a
credit facility (the "HGP Credit Facility") with Nomura Asset Capital
Corporation ("Nomura"). The facility had an initial balance of $108.2 million
and has a balance of $57.1 million at December 31, 1999. The HGP Credit Facility
is guaranteed by HGP and HGP LP. The HGP Credit Facility expires July 11, 2001
and bears interest at the 30-day LIBOR Rate (as defined in the HGP Credit
Facility) plus 1.90% per annum. The HGP Credit Facility is cross-collateralized
by mortgages on six of the Company's 12 outlet centers and one power center and
requires monthly payments of interest. In addition, the HGP Credit Facility
requires principal payments totaling $1.5 million, $1.5 million and $2.0 million
during the first, second and third years, respectively, payable in equal monthly
installments. The HGP Credit Facility contains restrictions on the ability of
HGP and HGP LP to incur additional indebtedness, and under certain
circumstances, requires the Company to enter into an interest rate lock
arrangement which would fix the interest rate on the full outstanding amount of
the HGP Credit Facility.

On July 9, 1999, the Company completed a $46.7 million debt financing with
Morgan Guaranty Trust Company of New York ("the JP Morgan Loans"). The proceeds
from the loans, together with Company funds, were used to repay $46.8 million of
indebtedness under the HGP Credit Facility. The JP Morgan Loans consist of (i)
nonrecourse loans totaling $22.9 million secured by three factory outlet centers
located in Daleville, Indiana, Somerset, Pennsylvania, and Tulare, California
and (ii) nonrecourse loans totaling $23.8 million secured by three factory
outlet centers located in Gretna, Nebraska, Sealy, Texas, and Traverse City,
Michigan. The outstanding balance was $46.4 million at December 31, 1999. The
loans bear interest at a fixed rate of 8.46%, mature on August 1, 2009 and
require the monthly payment of interest and principal based on a 25-year
amortization schedule. The JP Morgan Loans also require the monthly funding of
escrow accounts for the payment of real estate taxes, insurance and capital
improvements. Such escrow accounts currently total $1.3 million for the JP
Morgan Loans.

The Company paid a fee of $468,000 to Nomura in connection with the repayment of
$46.8 million of principal under the HGP Credit Facility which was charged to
expense in the third quarter of 1999. This fee was payable if a lender other
than Nomura was the source of repayment of amounts under the HGP Credit
Facility. The Company is recognizing estimated potential repayment fees related
to the remaining amounts due under the HGP Credit Facility as an expense over
the remaining term of the Facility beginning in the third quarter of 1999.

Prime has guaranteed approximately $10.0 million of obligations under the HGP
Credit Facility, together with other indebtedness (the "Prime Guarantee"). The
terms of the Working Capital Agreement require the Company to repay any
outstanding balance on indebtedness on which Prime is contingently liable to the
extent of net proceeds from an equity offering. The Company intends to use the
net proceeds from the sale of the outlet center in Algodones, New Mexico to pay
down the Nomura loan on or before its maturity pursuant to the terms of the
Prime Guarantee agreement. In connection with the Prime Guarantee, HGP has
agreed to pay Prime a fee of $400,000 per annum until Prime is released from its
guarantee obligations related to the HGP Credit Facility. The Company has paid
this fee through June 2000.

The Company has loans secured by a mortgage on the office building and related
equipment which the Company utilizes as a corporate office in Norton Shores,
Michigan. The principal balance on these loans was $2.7 million and $3.0 million
on December 31, 1999 and 1998, respectively. This building was previously owned
by an affiliate of Horizon and was contributed to the Company pursuant to the
Contribution Agreement. The consent of the lender to the previous owner of the
property was required in connection with the transfer of the property to the
Company. The Company is currently seeking such consent but as of February 16,
2000, such consent had not been obtained. The consolidated financial statements
of the Company do not include any adjustments that may result from the ultimate
outcome of this uncertainty.

The Company acquired approximately 95 acres of undeveloped land in Muskegon,
Michigan in the transfer of its interests in the Bellport Outlet Center (see
Note 10). This land is subject to land contracts with a total balance of
$776,000 as of December 31, 1999. The interest rates vary from 6.9% to 10.0%.
Monthly debt service payments total $6,000 through May 2000 and $1,000
through June 2001 with balloon payments due on these two dates of $646,000
and $125,000, respectively.

13

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

On December 28, 1999, the Company sold the vacant outlet center located in
Algodones, New Mexico. This center has been vacant and classified as held for
sale since December 1997. A gain on sale of $82,000 was realized and has been
included in the statement of operations as a component of other income.

The Company had a $4.0 million revolving credit facility that matured April
30, 1999 and required monthly interest payments calculated at the lender's
prime rate. In January 1999, Prime loaned the Company $1.0 million to make a
principal repayment against this credit facility, and on April 30, 1999,
loaned the Company an additional $3.0 million to repay this credit facility
in full, all at an interest rate of 10.0%. These loans (the "Prime Loan")
were made pursuant to the terms of a Working Capital Agreement between the
Company and Prime (the "Working Capital Agreement"). These loans were repaid
as part of the previously discussed settlement of the Working Capital
Agreement and the transfer of the Bellport interests.

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

YEAR 2000

The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.

The Company's plan to resolve the Year 2000 Issue involved the following four
phases: assessment, remediation, testing and implementation. The Company's
assessment indicated that its significant information processing technology
systems could have been affected, particularly the general ledger and billing
systems. The assessment also indicated that software and hardware used in
certain equipment (including security, lighting, automatic sprinklers, and
heating and ventilating systems) at the Company's properties could also have
been at risk.

The Company upgraded its JD Edwards based accounting system and the IBM AS/400
on which it is run. The Company also upgraded its payroll processing software
and numerous desktop computers which are connected via a network to the IBM
AS/400. The majority of these items would have been done in the Company's
ordinary course of business. Total costs of approximately $10,000 were spent to
implement these system upgrades.

As a result of the actions taken, the Company experienced no substantial
problems related to the Year 2000 Issue. The Company continues to monitor
activities and is working with its hardware and software vendors to ensure
prompt resolution of any minor issues that may arise.

14

ITEM 7A -
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk exposure is associated with the HGP Credit
Facility from Nomura. This facility had a balance of $57.1 million at December
31, 1999. The interest rate is set monthly at a rate equal to the 30 day London
Interbank Offered Rate ("LIBOR") plus 190 basis points. The facility matures in
July of 2001. The monthly interest rates applicable from June 15, 1998 to
December 31, 1999 ranged from 6.80% to 8.36%. As of December 31, 1999, the
effective rate was 8.36%. The Company is currently seeking to mitigate this
interest rate risk through refinancing the facility with fixed rate, longer-term
debt. There can be no assurance that the Company will be able to complete such
refinancing or on what terms such refinancing may be accomplished.

The following table shows sensitivity of annual interest expense and net income
per share - diluted based on an increase in the LIBOR of 156 basis points
(1.56%).

PRINCIPAL AMOUNT CHANGE IN LIBOR RATE CHANGE IN INTEREST EXPENSE PER SHARE - DILUTED
---------------- -------------------- -------------------------- -------------------

$57,100,000 1.56% $891,000 $.26

INFLATION

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

LEGAL PROCEEDINGS

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

On January 20, 1999, a purported shareholder of HGP filed a purported class
action lawsuit in the Circuit Court of Cook County, Illinois against HGP, PCH
and the Directors of HGP claiming, among other things, that HGP's directors
breached their fiduciary duties to HGP's shareholders in connection with a
business combination proposal made by PCH. The lawsuit requests that the
transaction with PCH be enjoined, or, in the event that the transaction is
consummated, that the transaction be rescinded and that damages be awarded to
the purported class members. On March 17, 1999, the Company received a letter
from PCH withdrawing its proposal for a business combination with HGP. On July
27, 1999, this lawsuit was dismissed without prejudice.

15

HORIZON GROUP PROPERTIES, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

PAGE
----

Report of independent auditors ..........................................................................................17

Consolidated Balance Sheets of the Company at December 31, 1999 and December 31, 1998 ...................................18

Consolidated Statements of Operations of the Company for the year ended December
31, 1999 and the period from June 15, 1998 to December 31, 1998 and Combined
Statements of Operations of the Predecessor Properties for the period from
January 1, 1998 to June 14, 1998 and the year ended December 31, 1997 ................................................19

Consolidated Statement of Changes in Shareholders' Equity and Combined Statement of Changes in Net Assets..........20

Consolidated Statements of Cash Flows of the Company for year ended December 31,
1999 and the period from June 15, 1998 to December 31, 1998 and Combined
Statements of Cash Flows of the Predecessor Properties for the period from
January 1, 1998 to June 14, 1998 and the year ended December 31, 1997
....................................................................................................................21

Notes to Consolidated and Combined Financial Statements .................................................................22

Schedule as of December 31, 1999:

III - Real Estate and Accumulated Depreciation .......................................................................35

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

16

ITEM 8 - FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of Horizon Group
Properties, Inc. (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year ended December 31, 1999, and for the period from June 15,
1998 to December 31, 1998. We have also audited the accompanying combined
statements of operations, changes in net assets and cash flows of the
Predecessor Properties for the period from January 1, 1998 to June 14, 1998, and
for the year ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Horizon Group
Properties, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for the year ended December 31, 1999 and for
the period from June 15, 1998 to December 31, 1998, and the combined results of
the operations and cash flows of the Predecessor Properties for the period from
January 1, 1998 to June 14, 1998 and for the year ended December 31, 1997, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the consolidated financial statements taken as a whole, presents
fairly in all material respects, the information set forth therein.

Ernst & Young LLP

Chicago, Illinois
February 16, 2000

17

HORIZON GROUP PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------- ------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

ASSETS
Real estate - at cost:
Land $ 13,094 $ 11,914
Buildings and improvements 135,479 133,061
Less accumulated depreciation (7,154) (2,387)
----------- ----------
Total net real estate 141,419 142,588

Cash and cash equivalents 4,955 2,686
Restricted cash 3,757 4,465
Tenant accounts receivable 1,351 1,280
Investments in and advances to joint ventures - 8,527
Real estate held for sale - 2,500
Deferred costs (net of accumulated amortization of $372 and $103 at
December 31, 1999 and 1998, respectively) 1,810 826
Other assets 1,708 2,806
----------- -----------
Total assets $155,000 $165,678
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgages and other debt $107,128 $114,752
Accounts payable and accrued expenses 5,229 5,676
Prepaid rents and other tenant liabilities 1,795 976
Other liabilities 901 3,322
------------ -----------
Total liabilities 115,053 124,726

MINORITY INTERESTS 6,419 7,338

SHAREHOLDERS' EQUITY:
Common shares ($.01 par value, 50,000 shares authorized,
2,845 and 2,782 issued and outstanding at December 31, 1999
and 1998, respectively) 29 28
Additional paid-in capital 34,056 33,268
Accumulated earnings (deficit) (557) 318
------------ ------------
Total shareholders' equity 33,528 33,614
---------- ----------
Total liabilities and shareholders' equity $155,000 $165,678
======== ========

SEE ACCOMPANYING NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS.

18

HORIZON GROUP PROPERTIES, INC.

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

HORIZON GROUP PROPERTIES, INC. PREDECESSOR PROPERTIES
---------------------------------------------- ----------------------------------------------
FOR THE FOR THE PERIOD FROM FOR THE PERIOD FROM FOR THE YEAR
YEAR ENDED JUNE 15, 1998 TO JANUARY 1, 1998 ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 TO JUNE 14, 1998 DECEMBER 31, 1997
-------------------- ------------------------ ------------------------ --------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

REVENUE
Base rent $ 22,688 $ 12,952 $ 9,167 $ 21,794
Percentage rent 169 53 44 119
Expense recoveries 6,011 3,286 2,631 6,716
Other 1,510 856 765 1,599
-------- --------- --------- ---------
Total revenue 30,378 17,147 12,607 30,228
-------- --------- --------- ---------

EXPENSES
Property operating 6,527 3,513 2,634 5,699
Real estate taxes 3,000 1,622 1,379 2,879
Land leases and other 1,929 1,344 785 2,162
Depreciation and amortization 4,986 2,393 4,640 9,280
General and administrative 4,453 2,597 1,061 2,680
Provision for impairment - - - 6,949
Interest 9,199 5,232 5,863 11,032
-------- --------- --------- ---------
Total expenses 30,094 16,701 16,362 40,681
-------- --------- --------- ---------

Income (loss) from joint ventures (622) (59) (207) 113
-------- --------- --------- ---------

Income (loss) before minority
interests and extraordinary charge (338) 387 (3,962) (10,340)

Minority interests 31 (69) - -
-------- --------- --------- ---------

Income (loss) before extraordinary
charge (307) 318 (3,962) (10,340)

Extraordinary charge on debt
prepayment (net of minority
interests of $100 for December 31,
1999) (568) - - (764)
-------- --------- --------- ---------

NET INCOME (LOSS) $ (875) $ 318 $ (3,962) $(11,104)
======== ========= ========= ========

PER COMMON SHARE - BASIC AND DILUTED:
Income (loss) per share - before
extraordinary charge $ (0.11) $ 0.12
======== =========
Extraordinary charge $ (0.20) $ -
======== =========
Net income (loss) $ (0.31) $ 0.12
======== =========

Weighted average common shares
outstanding 2,823 2,765
======== =========

SEE ACCOMPANYING NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS.

19

HORIZON GROUP PROPERTIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND
COMBINED STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)

COMMON SHARES ADDITIONAL
------------------------------------ PAID-IN ACCUMULATED SHAREHOLDERS'
NUMBER AMOUNT CAPITAL EARNINGS (DEFICIT) EQUITY
------------------------------------ -------------- ---------------------- --------------

Horizon Group Properties, Inc.
Shareholders' Equity
- --------------------
Balance, June 15, 1998 2,739 $ 27 $ 32,750 $ - $ 32,777

Units exchanged for common shares 43 1 518 - 519
Net income - - - 318 318
------- ------ --------- --------- ---------

Balance, December 31, 1998 2,782 $ 28 $33,268 $ 318 $ 33,614

Units exchanged for common shares 63 1 788 - 789
Net loss - - - (875) (875)
------- ------ --------- --------- ---------

Balance, December 31, 1999 2,845 $ 29 $ 34,056 $(557) $ 33,528
===== ====== ========= ===== =========

Net Assets of Predecessor Properties
------------------------------------

Net assets at January 1, 1997 $ 107,360
Net distributions to Horizon (13,094)
Net loss (11,104)
----------

Net assets at December 31, 1997 83,162
Net distributions to Horizon (4,625)
Net loss (3,962)
-----------

Net assets at June 14, 1998 $ 74,575
==========

SEE ACCOMPANYING NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS.

20

HORIZON GROUP PROPERTIES, INC.

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

HORIZON GROUP PROPERTIES, INC. PREDECESSOR PROPERTIES
------------------- ---------------------- --------------------- -------------------
FOR THE PERIOD FROM FOR THE PERIOD FROM
FOR THE YEAR ENDED JUNE 15, 1998 TO JANUARY 1, 1998 TO FOR THE YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 JUNE 14, 1998 DECEMBER 31, 1997
------------------- ---------------------- -------------------- -------------------
(IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (875) $ 318 $ (3,962) $(11,104)
Gain on sale of assets (108) - - -
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
(Income) loss from joint ventures 622 59 (207) 113
Minority interests in net income (loss) (31) 69 - -
Extraordinary charge on prepayment of
debt, net of minority interests of
$100 for December 31, 1999 568 - - 764
Depreciation 4,789 2,387 4,260 8,595
Amortization 374 104 771 1,127
Provision for impairment - - - 6,949
Changes in assets and liabilities:
Restricted cash 708 (929) - -
Tenant accounts receivable 23 (687) (409) 482
Investments in and advances to joint
ventures - 21 2,267 2,507
Deferred costs and other assets (183) (1,836) 446 (644)
Accounts payable and accrued
expenses (314) 2,955 (1,306) (1,160)
Other liabilities 281 - (47) (1,089)
Prepaid rents and other tenant liabilities 819 299 (366) (230)
-------- -------- -------- --------
Net cash provided by operating activities 6,673 2,760 1,447 6,310
-------- -------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for building and
improvements (3,812) (2,455) (1,703) (11,244)
Proceeds from sale of real estate 2,980 - - -
-------- -------- -------- --------
Net cash used in investing activities (832) (2,455) (1,703) (11,244)
-------- -------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net distributions - - (4,625) (13,094)
Principal payments on mortgages and
other debt (52,861) (2,961) - -
Proceeds from borrowings 50,655 2,200 - -
Proceeds from net increase in debt - - 5,090 17,910
Debt issue costs (858) - (140) (664)
Prepayment penalty (508) - - -
-------- -------- -------- --------
Net cash provided by (used in)
financing activities (3,572) (761) 325 4,152
-------- -------- -------- --------

Net increase (decrease) in cash and
cash equivalents 2,269 (456) 69 (782)

CASH AND CASH EQUIVALENTS:
Beginning of period 2,686 3,142 3,729 4,511
-------- -------- -------- --------
End of period $ 4,955 $ 2,686 $ 3,798 $ 3,729
======== ======== ======== ========

SEE ACCOMPANYING NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

21

HORIZON GROUP PROPERTIES, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

NOTE 1 - FORMATION OF THE COMPANY

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

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

The operations of the Company are primarily conducted through a subsidiary
limited partnership, Horizon Group Properties, L.P. ("HGP LP") in which the
Company is the sole general partner. As of December 31, 1999, HGP owns
approximately 83.9% of the partnership interests (the "Common Units") of HGP LP.
In connection with the Merger, the Common Units were distributed to the original
holders (other than Prime) of partnership interests of a limited partnership
affiliate of Prime and a limited partnership affiliate of Horizon, respectively,
in accordance with the exchange ratios set forth in the Merger Agreement. Common
Units are exchangeable for shares of Common Stock on a one-for-one basis at any
time (or for an equivalent cash amount at the Company's election).

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

Bellport Outlet Center in Bellport, New York
Dry Ridge Outlet Center in Dry Ridge, Kentucky
Holland Outlet Center in Holland, Michigan
Horizon Outlet Center-Laughlin in Laughlin, Nevada
Horizon Outlet Center-Monroe in Monroe, Michigan
Horizon Outlet Center-Traverse City in Traverse City, Michigan
Horizon Outlet Center-Tulare in Tulare, California
Lakeshore Marketplace in Norton Shores, Michigan
Medford Outlet Center in Medford, Minnesota
New Mexico Outlet Center in Algodones, New Mexico (vacant)
Sealy Outlet Center in Sealy, Texas
The Factory Shops at Georgian Place in Somerset, Pennsylvania
Warrenton Outlet Center in Warrenton, Missouri

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

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

Nebraska Crossing Factory Stores in Gretna, Nebraska
Indiana Factory Shops in Daleville, Indiana

22

HORIZON GROUP PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

The following summarizes the assets, liabilities and equity contributed to and
assumed by the Company pursuant to the Contribution Agreement including the
acquisition of the two centers from Prime as of June 15, 1998. The amounts
presented include purchase accounting adjustments made to the original
preliminary estimates during 1999. The net effect of these adjustments was a
$1,362,000 decrease in real estate, a $980,000 increase in other assets, and a
$382,000 decrease in other liabilities.

(IN THOUSANDS)

Real estate $141,158
Other assets 21,258
----------
$162,416
----------
----------

Mortgages and other debt $115,514
Other liabilities 6,337
Minority interests 7,763
Shareholders' equity 32,802
----------
$162,416
----------
----------

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

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

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

STATEMENTS OF PREDECESSOR PROPERTIES

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

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

23

stand-alone interest cost of doing business. General and administrative
expenses of Horizon have been allocated to the Predecessor Properties based
upon the ratio of gross leasable area ("GLA") of the Predecessor Properties'
portfolio compared to Horizon's total historical portfolio.

Cash and cash equivalents have been included in the combined financial
statements of the Predecessor Properties based upon the respective period's
ratio of GLA of the Predecessor Properties compared to Horizon's total
historical portfolio. Horizon considered all highly liquid investments with a
maturity of three months or less when purchased to be cash and cash
equivalents.

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

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

USE OF ESTIMATES

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

REAL ESTATE AND DEPRECIATION

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

At December 31, 1999 and 1998, the Company had an aggregate cost basis of
$237.2 million and $247.6 million, respectively, in its real estate assets
for federal income tax purposes. Amounts included under buildings and
improvements on the consolidated balance sheets include the following types
of assets and are depreciated on the straight-line method over estimated
useful lives which are:

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

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

During the year ended December 31, 1997, events and circumstances occurred
which required a charge of $6.9 million for the impairment of assets related
to the Predecessor Properties (see Note 5).

Periodically, in the course of reviewing the performance of its portfolio,
management may determine that certain properties no longer meet the
parameters set forth for its properties and accordingly, such properties will
be classified as held for sale. As of December 31, 1998, the Algodones, New
Mexico outlet center was vacant and classified as held for sale. On December
28, 1999, the center was sold and a gain on sale of $82,000 was realized and
has been included in the statement of operations as a component of other
income.

24

CASH EQUIVALENTS

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

RESTRICTED CASH

Restricted cash consists of amounts deposited in accounts with the Company's
primary lenders (see Note 9) and includes $1.1 million in capital improvement
reserves, $1.4 million in real estate tax, insurance and ground lease
escrows, and $1.3 million for debt service and operating expenses at December
31, 1999.

INVESTMENTS IN AND ADVANCES TO JOINT VENTURES

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

DEFERRED COSTS

Leasing and deferred financing costs are capitalized at cost. Amortization of
deferred leasing costs is recorded on the straight-line method over the life
of the lease. Amortization of deferred financing costs is recorded using a
method that approximates the effective interest method over the life of the
related debt and is included as a component of interest expense.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

NET DISTRIBUTIONS

Net distributions, as reflected on the Predecessor Properties financial
statements are the net amounts advanced from and repaid to Horizon. Excess
cash flows have been reflected as being distributed back to Horizon.

INCOME TAXES

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

Horizon elected to be taxed as a REIT commencing with the taxable year ending
December 31, 1994. As a REIT, Horizon was not taxed on income since it
distributed its REIT taxable income to its shareholders and satisfied certain
other requirements as defined in the Code. Accordingly, neither the
consolidated nor the combined financial statements include any federal income
tax expense.

25

MINORITY INTERESTS

Minority interests represent the interests of unitholders of HGP LP. The
unitholder minority interest is adjusted at the end of each period to reflect
the ownership at that time. The unitholder minority interest in HGP was
approximately 16.1% at December 31, 1999. During the year ended December 31,
1999, 63,023 units were converted into shares of common stock.

REVENUE RECOGNITION

Leases with tenants are accounted for as operating leases. Minimum annual
rentals are recognized on a straight-line basis over the term of the
respective lease. As a result of recording rental revenue on a straight-line
basis, tenant accounts receivable include $437,000 and $169,000, as of
December 31, 1999 and 1998, respectively, which are expected to be collected
over the remaining life of the leases. Rents which represent basic occupancy
costs, including fixed amounts and amounts computed as a function of sales,
are classified as base rent. Amounts which may become payable in addition to
base rent and which are computed as a function of sales in excess of certain
thresholds are classified as percentage rents. Expense recoveries based on
common area maintenance expenses and certain other expenses are accrued in
the period in which the related expense is incurred. For periods beginning on
and after April 1, 1998, percentage rents are accrued on the basis of
reported tenant sales only after the sales exceed the thresholds above which
such rent is due. For periods prior to April 1, 1998, percentage rents were
accrued based upon an estimate of total percentage rent expected to be
collected for the year.

Total tenant accounts receivable are reflected net of reserves of $748,000
and $427,000 as of December 31, 1999 and 1998, respectively. The provision
for doubtful accounts was $448,000 and $93,000 for the year ended December
31, 1999 and for the period from June 15, 1998 to December 31, 1998,
respectively.

OTHER REVENUE

Other revenue consists primarily of interest income and income related to
marketing services that is recovered from tenants pursuant to lease
agreements.

SHARE OPTIONS

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

RECLASSIFICATIONS

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

NOTE 3- LEASES

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

(IN THOUSANDS)

2000 $17,729
2001 14,038
2002 10,052
2003 7,296
2004 5,557
Thereafter 19,082

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

26

The Company is the lessee under a land lease for one of the outlet centers
under an operating lease agreement expiring in the year 2056. At December 31,
1999, minimum cash rental commitments to the expiration date were $31
million, of which $0.5 million is due in each of the next five years,
adjusted biannually for changes in the Consumer Price Index. Land lease
expense for the year ended December 31, 1999 and the period from June 15,
1998 to December 31, 1998 was $547,000 and $293,000, respectively.

In 1997 the Company leased the outlet center in Algodones, New Mexico, in its
entirety. The Company reported $4.0 million of rental revenue related to this
lease in 1997. This agreement gave the lessee the right to relocate the
tenants. At December 31, 1997 and 1998, the center was vacant and classified
as held for sale. On December 28, 1999, the center was sold and a gain on
sale of $82,000 was realized and has been included in the statement of
operations as a component of other income.

NOTE 4 - SUMMARIZED FINANCIAL INFORMATION

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

FOR THE EIGHT MONTHS FOR THE YEAR ENDED
ENDED AUGUST 31, 1999 DECEMBER 31, 1998
------------------------ --------------------
(IN THOUSANDS)

Total revenue $ 2,711 $ 4,551

Net loss (1,317) (1,292)

Total assets 30,672 31,613

Total liabilities 33,275 32,899

NOTE 5 - IMPAIRMENT

In 1997, Horizon entered into an agreement, subject to certain contingencies,
to sell four outlet centers. Results of operations in 1997 for the
Predecessor Properties include a charge for asset impairment of $6.0 million
to reduce the carrying value of these outlet centers to their estimated sales
value, less cost to dispose. In the fourth quarter of 1997, the agreement to
sell the four centers was terminated. It was subsequently decided to pursue
the sale of only one of the properties, the Algodones, New Mexico center,
which was classified as held for sale as of December 31, 1998 and sold in
December of 1999. The remaining outlet centers were reclassified to real
estate assets at their fair values (as of the date of the decision not to
sell) in the combined financial statements of the Predecessor Properties. The
results of operations for 1997 also include an impairment charge of $0.9
million for development projects that were not pursued.

27

NOTE 6 - EARNINGS PER SHARE

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

FOR THE PERIOD FROM
FOR THE YEAR ENDED JUNE 15, 1998 TO
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ -------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NUMERATOR:
Income (loss) before extraordinary charge $ (307) $ 318
Extraordinary charge - net (568) -
---------- -----------
Net income (loss) $ (875) $ 318
========= ========

DENOMINATOR:
Weighted average common shares outstanding 2,823 2,765
========= ========

PER SHARE - BASIC AND DILUTED:
Income (loss) before extraordinary charge $ (0.11) $ .12
Extraordinary charge (0.20) -
---------- ------------

Net income (loss) $ (0.31) $ .12
========= =========

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

NOTE 7 - LONG TERM STOCK INCENTIVE PLAN

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

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

FOR THE PERIOD FROM
FOR THE YEAR ENDED JUNE 15, 1998 TO
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------- ---------------------

Expected dividend yield 0.00% 0.00%
Expected stock price volatility 1.086 .593
Risk free interest rate 6.44% 5.22%
Expected life of options 10 years 10 years

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

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

28

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

FOR THE PERIOD FROM
FOR THE YEAR ENDED JUNE 15, 1998 TO
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------------- --------------------------------
SHARES PRICE SHARES PRICE
--------------------------------- --------------------------------

Outstanding, beginning of the period 313,000 $5.00 - $6.49 - -
Granted 30,000 $ 5.00 313,000 $5.00 - $6.49
Exercised - - - -
Canceled 60,000 $ 6.49 - -
------- ------------- ------- -------------
Outstanding, End of the Period 283,000 $5.00 - $6.49 313,000 $5.00 - $6.49
======== =======

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

FOR THE PERIOD FROM
FOR THE YEAR ENDED JUNE 15, 1998 TO
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ --------------------

Weighted average fair value of options granted $3.36 $4.64
Weighted average fair value of options canceled 4.77 -
Weighted average exercise price on grant date 5.00 6.39

The weighted average exercise price for options outstanding at December 31, 1999
and 1998 was $6.22 and $6.39, respectively. The weighted average contractual
life of options outstanding at December 31, 1999 and 1998 was 8.6 years and 9.5
years, respectively.

NOTE 8 - COMMITMENTS

The Company has outstanding commitments for capital expenditures on leases
signed at December 31, 1999 in the amount of $825,000 for tenant allowances,
$460,000 for construction costs and $50,000 for brokerage commissions. These
costs are expected to be paid during 2000 and a portion will be reimbursed from
the capital improvement escrow (see Note 2).

NOTE 9 - MORTGAGE DEBT AND OTHER LIABILITIES

On June 15, 1998, certain wholly owned affiliates of the Company entered into a
credit facility (the "HGP Credit Facility") with Nomura Asset Capital
Corporation, succeeded by Capital Corporation of America, ("Nomura") providing
for initial borrowings of $108.2 million. The outstanding balance equaled $57.1
million and $105.4 million as of December 31, 1999 and 1998, respectively. On
July 9, 1999, the Company refinanced six of the centers originally securing the
HGP Credit Facility and repaid $46.8 million of principal related to those
centers. The HGP Credit Facility is guaranteed by HGP and HGP LP. The HGP Credit
Facility matures in July 2001 and bears interest at the 30-day LIBOR Rate (as
defined in the HGP Credit Facility) plus 1.90% per annum. The effective rate was
8.36% and 7.45% as of December 31, 1999 and 1998, respectively. The HGP Credit
Facility was cross-collateralized by mortgages on six of the Company's operating
outlet centers and one power center at December 31, 1999. The HGP Credit
Facility requires monthly payments of interest. In addition, the HGP Credit
Facility requires principal payments totaling $1.5 million, $1.5 million and
$2.0 million during the first, second and third years, respectively, payable in
equal monthly installments. The HGP Credit Facility contains restrictions on the
ability of HGP and HGP LP to incur additional indebtedness and, under certain
circumstances, requires the Company to enter into an interest rate lock
arrangement which would fix the interest rate on the full outstanding amount of
the HGP Credit Facility. In connection with the HGP Credit Facility, the Company
established certain escrow accounts and cash collection accounts for the benefit
of Nomura which are classified on the balance sheet of the Company as restricted
cash (see Note 2).

The HGP Credit Facility contains a contingent repayment penalty equal to 1% of
amounts repaid during the first loan year and 2% of amounts repaid thereafter
through the stated maturity date. Such penalty is not payable in the event the
Company refinances the HGP Credit Facility with Nomura. The Company sought
long-term financing from Nomura, but was unable to secure such financing.
Accordingly, the Company incurred a 1% penalty in connection with the prepayment
of $46.8 million, as described above. This penalty

29

was an amount negotiated with Nomura and was recognized as a component of the
extraordinary charge on prepayment of debt in 1999. The repayment penalty and
other fees paid to Nomura totaled $508,000. The Company also expensed the
unamortized balance of the financing costs associated with this debt totaling
$160,000. The extraordinary charge on prepayment of debt on the Company's
statements of operations includes these costs, net of $100,000 of minority
interests. Although the Company currently intends to seek long-term financing
from Nomura for the remainder of the HGP Credit Facility on or before its
maturity, there can be no assurance that Nomura will provide such financing.
The Company is recognizing estimated potential repayment fees related to the
remaining amounts due under the HGP Credit Facility as an expense over the
remaining term of the HGP Credit Facility beginning July 1, 1999.

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

The Company has loans secured by a mortgage on the office building and
related equipment which the Company utilizes as a corporate office in Norton
Shores, Michigan. The principal balance on these loans was $2.7 million on
December 31, 1999 and $3.0 million on December 31, 1998. The corporate office
loan matures in December 2002, bears an interest rate of LIBOR plus 2.50% per
annum, and requires monthly debt service payments of $22,500. The effective
rate was 8.45% and 7.8% at December 31, 1999 and 1998, respectively. The
corporate office equipment and fixture loan matures in December 2000, bears
interest at the lender's prime rate, and requires monthly debt service
payments of $13,000. The effective rate was 8.5% and 7.8% at December 31,
1999 and 1998, respectively. The consent of the lender was required in
connection with the transfer of the property to the Company in the Merger.
The Company is currently seeking such consent but as of February 16, 2000,
such consent has not been obtained. The Company can give no assurances that
it will be able to obtain the above mentioned consent. Any such failure to
obtain such consent could have a material adverse effect upon the Company.
The consolidated financial statements of the Company do not include any
adjustments that may result from the ultimate outcome of this uncertainty.

The Company acquired approximately 95 acres of undeveloped land in Muskegon,
Michigan as part of the consideration from the transfer of its interests in
the Bellport Outlet Center (see Note 10). This land is subject to land
contracts with a total balance of $776,000 as of December 31, 1999. The
interest rates vary from 6.9% to 10.0%. Monthly debt service payments total
$6,000 through May 2000 and $1,000 from that time through June 2001 with
balloon payments due on these two dates of $646,000 and $125,000,
respectively.

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

In connection with the Merger, Prime Retail became potentially liable for, or
agreed to guarantee certain indebtedness of the Company. As of December 31,
1999, the components of such indebtedness included (1) the loans
collateralized by the Company's corporate office building and equipment in
Norton Shores, Michigan (with a principal balance of $2.7 million on December
31, 1999 and $3.0 million as of December 31, 1998), and (2) $10.0 million of
the Company's obligations under its credit facility with Nomura. The terms of
the Working Capital Agreement require the Company to repay any outstanding
balance on the Prime Loan or other related indebtedness on which Prime is
contingently liable to the extent of net proceeds from an equity offering.
The Company intends to use the net proceeds from the sale of the outlet
center in Algodones, New Mexico to pay down the Nomura loan on or before its
maturity pursuant to the terms of the Prime Guarantee agreement. The Company
has indemnified Prime Retail for any amounts advanced under the guarantees.
There is a $400,000 annual fee due to Prime under the guarantees, which has
been prepaid through June 2000.

Cash paid for interest for the year ended December 31, 1999 was $9.3 million
and for the period from June 15, 1998 to December 31, 1998 was $4.4 million.
Cash paid for interest was $6.0 million for the period from January 1, 1998
to June 14, 1998. For the year ended December 31, 1997, cash paid for
interest was $11.9 million. Capitalized interest was $0.9 million for the
year ended December 31, 1997. The weighted average rate of interest was 7.5%
for the year ended December 31, 1999, was 7.8% for the period from June 15,

30

1998 to December 31, 1998, was 8.8% for the period from January 1, 1998 to
June 14, 1998, and was 9.6% for the year ended December 31, 1997.

Mortgages and other debt, as of December 31, 1999 and 1998, consists of the
following (in thousands):

1999 1998
------------ -----------

Mortgage notes payable $106,219 $108,330
Revolving credit facilities - 4,000
Land contracts and other 909 2,422
------------ -----------
$107,128 $114,752
============ ===========

Debt maturities subsequent to 1999 are as follows (in thousands):

2000 $ 3,146
2001 56,140
2002 3,129
2003 685
2004 735
Thereafter 43,293
----------
$107,128
==========

Debt allocated to the Predecessor Properties as of December 31, 1997,
reflects an allocation of debt from Horizon that is based upon the
proportionate use of debt proceeds used by the Predecessor Properties for
development and expansion compared to Horizon's total portfolio which
resulted in an allocation of 23.5% of Horizon's debt to the Predecessor
Properties as of December 31, 1997.

An extraordinary charge resulting from the early retirement of debt was
allocated from Horizon to the Predecessor Properties based upon the
aforementioned debt allocation methodology and equaled $0.8 million for the
year ended December 31, 1997.

NOTE 10 - RELATED PARTY TRANSACTIONS

The Company utilizes Thilman & Filippini as its agent for insurance and risk
management programs. E. Thomas Thilman is a Director of the Company and a
partner in Thilman & Filippini. During the year ended December 31, 1999 and
the period from June 15, 1998 to December 31, 1998, the Company paid premiums
totaling approximately $666,000 and $457,000, respectively, on insurance
policies placed by Thilman & Filippini.

The Company sub-leases office space on a month to month basis for its senior
executives at 77 W. Wacker, Chicago, Illinois from The Prime Group, Inc. The
Prime Group, Inc. is an affiliate of Michael W. Reschke, a Director of the
Company. During the year ended December 31, 1999 and the period from June 15,
1998 to December 31, 1998, the Company incurred rent expense of approximately
$121,000 and $65,000, respectively.

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

In connection with the Merger, the Company entered into a Working Capital
Agreement with Prime (the "Working Capital Agreement"). The Working Capital
Agreement provided that Prime will transfer to the Company sufficient cash to
result in net working capital of $545,000, after consideration of the current
assets and current liabilities of the Predecessor Properties and the two
centers which the Company purchased from Prime as of the date of the Merger.
At the date of the Merger Prime transferred $3.0 million to the Company as a
partial payment of amounts due under the Working Capital Agreement. On
September 1, 1999, the Company reached an agreement with Prime to settle
amounts due under the Working Capital Agreement in connection with the
transfer of its interests in the joint ventures related to the outlet center
in Bellport, New York (see Note 1). The consideration for the transfer of the
Bellport interests was $7.5

31

million and approximately 95 acres of land in Muskegon, Michigan subject to
$800,000 of land contract payments. No gain or loss was recognized in
conjunction with the settlement of the Working Capital Agreement.

The proceeds from the settlement of the Working Capital Agreement and the
transfer of the Bellport interests were used to repay $9.3 million of current
and future obligations owed by the Company to Prime. These obligations
included (i) $2.2 million which the Company had borrowed from Prime to make
principal repayments on the Nomura facility, (ii) $4.0 million which the
Company had borrowed from Prime to repay a credit facility assumed in the
Merger, (iii) $2.3 million related to the PVH Agreement, and (iv) $800,000
related to the guarantee fee associated with Prime's guarantee of certain of
the Company's debt obligations (see Note 9). The Company also received
$230,000 in cash.

NOTE 11 - SHAREHOLDERS' EQUITY

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

NOTE 12 - PRO FORMA INFORMATION

The following unaudited pro forma information for the years ended December
31, 1998 and 1997 reflects the following transactions, which occurred June
15, 1998, as if they had occurred on January 1, 1997: (a) the contribution of
the Predecessor Properties and the acquisition of the two centers from Prime;
(b) the entry into the HGP Credit Facility; and (c) the issuance of Common
Stock and Common Units. In addition, the 1997 pro forma data excludes $6.9
million of impairment losses reflected in the historical results of
operations.

The pro forma condensed financial information shown below is not necessarily
indicative of the results which would actually have been obtained had the
transactions described above been completed on the date indicated or which
may be obtained in the future.

YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997
--------------- ---------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)

Total revenue $32,963 $37,230

Income before extraordinary items
and minority interests 2,084 6,253

Net income 1,689 5,051

Net income per share 0.62 1.82

32

NOTE 13 - NON-CASH INVESTING AND FINANCING ACTIVITIES

The transfer of the Bellport interests and the settlement of the Working
Capital Agreement, as discussed in Note 10, resulted in non-cash operating
activities of $1.0 million, investing activities of $7.1 million and
financing activities of $8.1 million.

Supplemental disclosures of non-cash investing and financing activities are
as follows:

1997
--------------

Reclassification of assets held for sale to real estate assets $6,458
Reclassification of real estate assets to assets held for sale 2,638

NOTE 14 - SEGMENT INFORMATION

During the fourth quarter of 1998, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("Statement No. 131"). Statement No. 131 superseded FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise". Statement No.
131 establishes standards for the way that public business enterprises report
information regarding reportable operating segments. The adoption of
Statement No. 131 did not affect the results of operations or financial
position of the Company.

The Company operates thirteen shopping centers located in ten states. The
Company separately evaluates the performance of each of its centers. However,
because each of the centers has similar economic characteristics, facilities
and/or tenants, the shopping centers have been aggregated into a single
dominant shopping center segment.

The Company evaluates performance and allocates resources primarily based on
the Funds From Operations ("FFO") expected to be generated by an investment
in each individual shopping center. FFO is a widely used measure of the
operating performance of REITs, which provides a relevant basis for
comparison to other REITs. FFO, as defined by the National Association of
Real Estate Investment Trusts, means net income excluding gains (or losses)
from debt restructuring and sales of property or other non-recurring items,
plus depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. FFO should not be considered as an
alternative to net income computed under generally accepted accounting
principles. A reconciliation of income (loss) before minority interests and
extraordinary charge to diluted FFO is as follows:

HORIZON GROUP PROPERTIES, INC. PREDECESSOR PROPERTIES
------------------------------------------- ----------------------------------------
FOR THE PERIOD FROM FOR THE PERIOD FROM
FOR THE YEAR ENDED JUNE 15, 1998 TO JANUARY 1, 1998 TO FOR THE YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 JUNE 14, 1998 DECEMBER 31, 1997
------------------ --------------------- ----------------------------------------

Income (loss) before minority interests
and extraordinary charge $ (338) $ 387 $ (3,962) $ (10,340)
FFO ADJUSTMENTS:
Depreciation and amortization (1) 5,652 2,667 4,543 8,414
Provision for impairment - - - 6,949
Non-recurring merger expense (2) 333 - - -
Non-recurring debt restructuring
costs (3) 190 - - -
---------- ---------- ---------- ----------
Total FFO adjustments 6,175 2,667 4,543 15,363
---------- ---------- ---------- ----------

FFO $ 5,837 $ 3,054 $ 581 $ 5,023
========== ========== ========== ==========

NOTES:

(1) Includes depreciation of the operating real estate and allocated amounts
relating to the joint venture investments accounted for under the equity
method.

(2) Includes costs incurred in connection with the pursuit of an unsuccessful
merger transaction.

(3) Includes unsuccessful debt restructuring investigatory costs incurred in
evaluating financing alternatives.

33

For periods beginning on or after January 1, 2000, the definition of FFO has
been changed to eliminate the adjustment for non-recurring items that are not
considered extraordinary items under generally accepted accounting
principles. Under this new definition, the FFO for the year ended December
31, 1999 would have been $5,314,000.

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

NOTE 15 - OTHER MATTERS

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

34

HORIZON GROUP PROPERTIES, INC.

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999

COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL DEVELOPMENT OR
INITIAL COST TO COMPANY ACQUISITION
----------------------- ----------------------
BUILDINGS AND BUILDINGS AND
ENCUMBRANCE(1) LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- ----------- ------------- ------ --------------

Dry Ridge $ 2,356,500 $ 1,014,300 $ 3,132,300 $ - $ 190,800

Holland 2,071,200 630,100 4,467,800 - 482,700

Laughlin 16,672,200 8,100 20,366,800 - 418,600

Medford 10,179,100 241,600 11,045,900 - 1,049,800

Monroe 3,982,600 437,000 8,610,100 - 1,313,500

Lakeshore 8,746,900 653,500 9,736,000 - 564,600

Sealy 11,059,400 489,400 12,308,300 - 44,600

Somerset 2,638,800 622,600 6,415,000 - 286,600

Traverse City 5,179,000 898,600 4,606,700 - 351,300

Tulare 9,285,500 1,282,200 7,916,700 - 858,100

Warrenton 13,049,100 1,264,000 13,265,100 - 249,000

Daleville 10,829,000 147,200 14,271,700 - 37,000

Gretna 7,447,600 1,268,700 9,849,700 - 282,900

Miscellaneous/ 3,631,300 4,136,600 3,276,400 - 80,500
Corporate ----------- ----------- ----------- ---- ---------
Office(2)

Total $107,128,200 $ 13,093,900 $129,268,500 $ - $ 6,210,000
===== ============ ============ ============ ==== ===========

GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD
--------------------------------------------------------------------------------------
BUILDINGS AND ACCUMULATED DATE OF DATE
LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
---------- ------------- ------- ------------ ------------ --------

Dry Ridge $ 1,014,300 $3,323,100 $4,337,400 $186,800 1991 1998

Holland 630,100 4,950,500 5,580,600 308,900 1988 1998

Laughlin 8,100 20,785,400 20,793,500 1,037,300 1996 1998

Medford 241,600 12,095,700 12,337,300 580,600 1991 1998

Monroe 437,000 9,923,600 10,360,600 600,400 1987 1998

Lakeshore 653,500 10,300,600 10,954,100 501,300 1995 1998

Sealy 489,400 12,352,900 12,842,300 621,800 1995 1998

Somerset 622,600 6,701,600 7,324,200 335,300 1990 1998

Traverse City 898,600 4,958,000 5,856,600 249,300 1990 1998

Tulare 1,282,200 8,774,800 10,057,000 434,800 1995 1998

Warrenton 1,264,000 13,514,100 14,778,100 681,200 1993 1998

Daleville 147,200 14,308,700 14,455,900 701,800 1994 1998

Gretna 1,268,700 10,132,600 11,401,300 500,600 1993 1998

Miscellaneous/ 4,136,600 3,356,900 7,493,500 413,900 1995 1998
Corporate ----------- ----------- ------------ ---------
Office(2)

TOTAL $13,093,900 $135,478,500 $148,572,400 $7,154,000
===== ============ ============= ============= ===========

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

Buildings and improvements 31.5 years
Tenant improvements 10 years or lease term,
if less

(1) All properties except the Corporate Office are collateral for borrowings of
$57.1 million from Nomura Asset Capital Corporation or $46.4 million from
Morgan Guaranty Trust Company of New York at December 31, 1999. For the
Nomura loan, the amounts shown represent allocated loan amounts for each
property pursuant to the loan agreement with Nomura. For the JP Morgan
loans, the amounts represent individual property loan balances.

(2) Includes $706,000 of cost and $282,000 of accumulated depreciation for
furniture and equipment for the corporate office, as well as raw land in
Muskegon, Michigan of $1.8 million.

The aggregate gross cost of property included above for federal income tax
purposes is approximately $237.2 million as of December 31, 1999. The purchase
accounting values listed in the "Initial Cost to Company" columns reflect final
purchase accounting entries recorded in 1999.

35

HORIZON GROUP PROPERTIES, INC.

SCHEDULE III - REAL ESTATE AND ACCUMULATION DEPRECIATION (CONTINUED)
NOTES TO SCHEDULE III
DECEMBER 31, 1999

1. RECONCILIATION OF REAL ESTATE PROPERTIES:

The following table reconciles the real estate for the period from June 15, 1998
to December 31, 1999:

FOR THE PERIOD FROM
YEAR ENDED JUNE 15, 1998 TO
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- ------------------

Balance, beginning of period $144,975,400 $142,520,300
Additions during period
Improvements of existing properties 5,099,500 (A) 2,455,100
Final purchase allocations, net (1,362,000) -
Retirements during period (140,500) -
---------------- -------------
Balance, end of period $148,572,400 $144,975,400
================ =============

(A) The additions during the period include $1,287,500 of land and
improvements that were acquired in the transfer of the Bellport
interests (see Note 10 to the consolidated and combined financial
statements).

The following table reconciles the accumulated depreciation from June 15,
1998 to December 31, 1999:

FOR THE PERIOD FROM
YEAR ENDED JUNE 15, 1998 TO
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -------------------

Balance, beginning of period $ 2,387,100 $ -
Additions during period
Depreciation 4,789,400 2,387,100
Retirements during period (22,500) -
----------- -----------
Balance, end of period $ 7,154,000 $ 2,387,100
=========== ===========

36

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

None

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE
OFFICERS OF THE COMPANY

EXECUTIVE OFFICERS

The following table sets forth the names, positions and, as of December 31,
1999, ages of the executive officers of the Company:

NAME POSITION AGE
- ---- -------- ---

Gary J. Skoien Chairman of the Board, President, 45
Chief Executive Officer

David R. Tinkham Senior Vice President, Chief Financial Officer 44

Richard A. Berman Senior Vice President, General Counsel, Secretary 48

John R. Terrell (1) Senior Vice President of Development and Operations 49

Andrew F. Pelmoter Senior Vice President of Leasing 37

Thomas A. Rumptz Senior Vice President of Real Estate 39

Susan M. Crusoe Senior Vice President of Marketing 42

(1) Mr. Terrell resigned effective January 1, 2000.

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

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

RICHARD A. BERMAN. Richard A. Berman has served as General Counsel since June
1998 and Secretary since July 1998. For thirteen years prior to his
employment by HGP in 1998, Mr. Berman was employed by Strategic Realty
Advisors, Inc. and its predecessor company, VMS Realty Partners, a Chicago,
Illinois real estate company, where he most recently served as Senior Vice
President and General Counsel, and was responsible for all legal activities
of the company, as well as investor relations, risk and asset management for
its hotel and office portfolios, and strategic planning. Prior to joining VMS
Realty Partners, Mr. Berman was a partner in the Chicago law firm of Gottlieb
and Schwartz, and practiced in the areas of corporate, real estate and tax
law. Mr. Berman received his J.D. CUM LAUDE from Northwestern University
School of Law and his BA with high honors from the University of Illinois.

37

JOHN R. TERRELL. John R. Terrell has served as Senior Vice President and
Director of Development since June 1998. Prior to his employment by HGP, Mr.
Terrell founded in 1988 and managed for ten years his own real estate
development and consulting firm, Terrell Associates in Boston, Massachusetts.
Prior to forming his own firm, Mr. Terrell was associated with the Prudential
Property Company, Inc. in Newark, New Jersey and Urban Investment &
Development Corporation in Chicago, Illinois. Mr. Terrell filed a petition
for protection under Chapter 13 of the U.S. bankruptcy laws on November 26,
1991 which was converted into a Chapter 7 proceeding on January 18, 1996 and
discharged as of July 15, 1996. Mr. Terrell received a Bachelors of
Architecture from the University of Illinois at Chicago.

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

THOMAS A. RUMPTZ. Thomas Rumptz has served as Senior Vice President of Real
Estate since June 1998. Mr. Rumptz's responsibilities with HGP include
evaluating new projects for acquisitions, handling dispositions of excess
real estate, and managing all joint venture relationships on behalf of the
Company. He is also responsible for overseeing property operations. For eight
years prior to his employment at HGP, Mr. Rumptz worked for the predecessor
company, Horizon Group, Inc., where he held many different positions
including Controller, Vice President of Finance, and most recently, Vice
President of Real Estate. Prior to working for Horizon Group, Inc., Mr.
Rumptz served as Manager of Investment Real Estate for Foremost Insurance.
Mr. Rumptz received his MBA from Grand Valley State University and a Bachelor
of Business Administration from the University of Michigan.

SUSAN M. CRUSOE. Ms. Crusoe has served as Senior Vice President of Marketing
since November 1998. Previously, she was principal of Crusoe Marketing, a
shopping center marketing consulting firm. Prior to forming her own company,
from 1996 to 1998, Ms. Crusoe was Vice President of Marketing at FAC Realty
Trust, Inc., predecessor to Konover Property Trust (NYSE:KPT). From 1993 to
1996, she was Senior Regional Marketing Manager with Charter Oak Partners. In
1990, Ms. Crusoe received the ICSC Certified Marketing Director (CDM)
designation and in 1997 was awarded the Senior Certified Marketing Director
(SCMD) designation. She is currently a member of the ICSC CMD and MAXI
Committees and also served on the ICSC Market Research Data Sub-Committee,
Holiday Sales Task Force and as a Faculty Member of the ICSC School for
Professional Development.

BOARD OF DIRECTORS

The following table sets forth the names, term, principal occupations and, as
of December 31, 1999, ages of the Board of Directors of the Company.

PRINCIPAL OCCUPATION, NAME OF ORGANIZATION,
NAME TERM AS DIRECTOR EXPIRES AGE AND OFFICES AND POSITIONS WITH THE COMPANY
- ---- ------------------------ --- ------------------------------------------

Gary J. Skoien 2001 45 Chairman of the Board, President, and Chief Executive
Officer of the Company, Director of the Company

Michael W. Reschke 2001 44 Chairman of the Board, Chief Executive Officer and
President of Prime Group, Inc., Director of the
Company

Norman Perlmutter (1) 2000 65 Chairman of the Board of Heitman Financial Ltd.,
Director of the Company

Margaret A. Gilliam 2002 60 President of Gilliam & Co., Director of the Company

E. Thomas Thilman 2002 58 Partner of Thilman & Filippini, Director of the
Company

(1) Mr. Perlmutter resigned from the Board of Directors effective
February 29, 2000.

38

MICHAEL W. RESCHKE. Mr. Reschke has been the Chairman of the Board of
Directors, Chief Executive Officer and President of Prime Group, Inc. ("PGI")
since its founding in 1981. Mr. Reschke is also Chairman of the Board of
Brookdale Living Communities, Inc., Prime Retail, Inc., Prime Capital
Holding, L.L.C. and Prime Group Realty Trust. Mr. Reschke received a Juris
Doctorate degree (SUMMA CUM LAUDE) from the University of Illinois after
having received a B.A. degree (SUMMA CUM LAUDE) in Accounting from Northern
Illinois University. Mr. Reschke is licensed to practice law in the State of
Illinois and is a certified public accountant. Mr. Reschke is a member of the
Chairman's Roundtable and the Executive Committee of the National Realty
Committee, as well as a full member of the Urban Land Institute.

NORMAN PERLMUTTER. Since 1966, Mr. Perlmutter has served as Chairman of the
Board of Heitman Financial Ltd., one of the largest full service real estate
companies and real estate investment managers for employee benefit plans in
the United States. Mr. Perlmutter is also a director of Chris-Craft
Industries, Inc., Heitman Financial Ltd., Prime Retail, Inc. and United
Television, Inc. Mr. Perlmutter previously served on the boards of United
Asset Management Corporation, Horizon Group Inc. and Warner Communications.
He holds a BS degree from the University of Illinois.

MARGARET A. GILLIAM. Ms. Gilliam is President of Gilliam & Co., which she
founded in 1997. Gilliam & Co. advises potential investors in both public and
private situations, and individual businesses on strategic initiatives. From
1975 to 1997, Ms. Gilliam oversaw investment research in retail and soft
goods industries where her most recent title was Director - Equity Research
for Credit Suisse First Boston. Ms. Gilliam is a graduate of McGill
University and The Harvard-Radcliffe Program in Business Administration.

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

All Directors were first elected in June 1998.

The Board of Directors held seven meetings during the year ended December 31,
1999. All directors attended at least 75% of the meetings of the Board and
committee meetings on which they served. The Company has two standing
committees of the Board of Directors, the Audit Committee and the
Compensation Committee, which are described further below.

AUDIT COMMITTEE

The Audit Committee, which consists of Ms. Gilliam, Mr. Perlmutter (up to and
including February 29, 2000, the date of his resignation), and Mr. Thilman,
makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services provided by
the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit
fees, reviews any recommendations made by the Company's auditors regarding
the Company's accounting methods and the adequacy of its system of internal
control and reviews any related party transactions. The Audit Committee held
one meeting during the year ended December 31, 1999.

COMPENSATION COMMITTEE

The Compensation Committee, which consists of Ms. Gilliam, Mr. Reschke, and
Mr. Thilman, determines the compensation paid to executives of the Company,
grants employee stock options and makes other determinations regarding the
administration of employee stock option plans, approves management incentive
(bonus and long-term) plans and determines the standards of performance for
incentive payments. The Compensation Committee held three meetings during the
year ended December 31, 1999.

COMPENSATION OF DIRECTORS

Directors who are not officers of or employed by the Company ("Non-employee
Directors") are paid an annual fee of $15,000 plus a meeting fee of $1,000
for each meeting of the Board of Directors and $500 for each committee
meeting, and receive reimbursement for their out-of-pocket expenses. Each
Non-employee Director received an option to purchase 10,000 shares of Common
Stock under the Company's 1998 Long-term Stock Incentive Plan on the date he
or she was elected to the Board of Directors.

39

ITEM 11 - EXECUTIVE COMPENSATION

The following table shows the compensation of the Company's five most highly
compensated executive officers, including the Chief Executive Officer, during
the year ended December 31, 1999 (the "Named Officers").

ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------ -------------------------------------------------------
AWARDS PAYOUTS
-------------------------- -------------------------

OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY (1) BONUS COMPENSATION AWARD STOCK OPTIONS PAYOUTS COMPENSATION
------------------ ---- ---------- -------- ------------ ---------- ------------- ------- ------------
Gary J. Skoien 1999 $ 227,290 $112,500 $5,000 - - - -
Chief Executive 1998 123,300 42,000 - - 90,000 - -
Officer

David R. Tinkham 1999 145,500 72,500 1,900 - - - -
Chief Financial 1998 76,700 33,000 1,100 - 35,000 - -
Officer

Richard A. Berman 1999 146,500 72,500 2,000 - - - -
General Counsel 1998 79,500 27,500 - - 35,000 - -

John R. Terrell (2) 1999 151,500 18,000 - - - - -
Senior Vice President 1998 82,200 22,000 - - 25,000 - -

Andrew F Pelmoter 1999 154,000 58,000 3,400 - 30,000 - -
Senior Vice President 1998 91,500 27,800 1,600 - - - -

NOTES:

(1) 1998 salary amounts represent the salary paid to the Named Officers during
the period from June 15, 1998 to December 31, 1998. Annual salaries for
the Named Officers for 1998 were $225,000 for Mr. Skoien, $140,000 for
Mr. Tinkham, $145,000 for Mr. Berman and $150,000 for Mr. Terrell.

(2) Mr. Terrell resigned effective January 1, 2000.

40

OPTION GRANTS IN FISCAL 1999 AND 1998

The following table sets forth certain information concerning stock option
grants during fiscal 1999 and 1998 for each of the Named Officers.

POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION FOR OPTION TERM (1)
---------------------------------------------------------------- --------------------------------------
PERCENTAGE OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO EXERCISE OR
UNDERLYING OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
- ---- ------------------ - ------------ ----------- ---------- -------- --------

1999
- ----
Andrew F. Pelmoter 30,000 100.0% $5.00 6/14/09 94,334 239,061

1998
- ----
Gary J. Skoien 90,000 28.8% $6.49 6/14/08 367,337 930,905
David R. Tinkham 35,000 11.2% $6.49 6/14/08 142,853 362,019
Richard A. Berman 35,000 11.2% $6.49 6/14/08 142,853 362,019
John R. Terrell (2) 25,000 8.0% $6.49 6/14/08 142,853 362,019

NOTE:

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

(2) Mr. Terrell resigned effective January 1, 2000.

EMPLOYMENT CONTRACTS

The Company has entered into employment agreements with Mr. Skoien, Mr.
Tinkham and Mr. Berman dated as of June 15, 1998. The employment agreements
provide that these individuals will receive minimum cash compensation of
$225,000, $140,000 and $145,000, respectively, per annum plus annual
performance bonuses determined by the HGP Compensation Committee and other
employee benefits. Each of the employment agreements provide for an initial
three-year term and automatically extends for one year terms unless either
party gives, prior to 120 days before the end of the respective renewal term,
written notice of its intention to terminate the agreement. The employment
agreements contain non-competition provisions which generally prohibit these
executives from directly or indirectly competing with the business of the
Company during the term of employment and for a two year period after
termination "without good reason" by the employee or for a one year period
after termination under other circumstances. If the employment of these
individuals is terminated after a "change in control" (as such term is
defined in the respective contracts), the individual is entitled to a lump
sum payment in an amount equal to two times the annual salary and last
performance bonus for Mr. Skoien and the annual salary and last performance
bonus for Messrs. Tinkham and Berman. Additionally, Mr. Skoien is permitted
to continue certain responsibilities he has with The Prime Group, Inc. The
Company has also entered into an agreement with Mr. Pelmoter which provides
for contingent bonus payments based on the closing of certain capital
transactions and the achievement of certain occupancy levels at the Company's
shopping centers. The agreement also provides for severance benefits in the
event his employment is terminated prior to December 31, 2000.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors, which is required to
have a majority of outside directors who are neither employees nor officers
of the Company, is charged with determining compensation for the Company's
executive officers and to implement and administer the Company's Long-term
Stock Incentive Plan. Ms. Gilliam, Mr. Reschke, and Mr. Thilman currently
serve on the Compensation Committee. See "Compensation of Directors."

No executive officer of the Company served as a Director or member of (1) the
compensation committee of another entity in which one of the executive
officers of such entity served on the Company's Compensation Committee, (2)
the Board of Directors or another entity in which one of the executive
officers of such entity served on the Company's Compensation Committee, or
(3) the compensation

41

committee of any other entity in which one of the executive officers of such
entity served as a member of the Company's Board of Directors, during the
year ended December 31, 1999.

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

REPORT OF COMPENSATION COMMITTEE

Compensation of the Chairman, President and Chief Executive Officer and the
four other most highly compensated executive officers of the Company is
determined by the Compensation Committee of the Board of Directors. The
Compensation Committee was formed in June 1998 in connection with the Merger.
The current members of the Compensation Committee are Ms. Gilliam, Mr.
Reschke, and Mr. Thilman.

The Company's compensation programs are designed to attract and retain highly
qualified individuals while providing the economic incentive necessary to
achieve the Company's performance goals. The Company intends to maintain
compensation policies, plans and programs which will reward management and
provide additional incentives for the enhancement of cash flows, and
consequently real property and shareholder values. The Compensation Committee
believes that, through their ownership of equity interests in the Company,
the Operating Partnership and the grant of incentive share options in the
Company, as applicable, the financial interests (and net worth) of the
Company's senior executives are aligned with the interests of the
shareholders.

While the Compensation Committee will continue to evaluate the compensation
practices of the Company's industry peer group as an important factor in
determining executive compensation, the Company's achievement of its
performance goals and the contribution of senior executives to such
achievement will greatly influence whether the Company's compensation program
remains at or exceeds the median or its peer group. The peer group of
companies identified by the Compensation Committee is further described in
the Performance Graph.

The Company's executive compensation programs consist of the following
components:

- Employment agreements with its most senior executives setting
base salary at fixed levels, and containing such other
provisions, sufficient to attract and retain employees capable of
contributing to the Company's performance objectives with
discretionary increases by the Compensation Committee after
review at least annually;

- Incentive bonuses determined by the Board of Directors or the
Compensation Committee upon achievement of such corporate and
individual performance goals and objectives as may be determined
by the Board of Directors or the Compensation Committee, in
order to reward executive officers for attaining performance
goals;

- Share options with scheduled vesting periods to align the
interests of the executive with those of the Company's
shareholders; and

- Participation in other benefit programs available to employees
generally.

The Company has entered into Employment Agreements with its Chairman,
President and Chief Executive Officer, its Chief Financial Officer and its
General Counsel. The Employment Agreements established the base salaries of
such executives for 1998. The annualized base salary of the Chairman,
President and Chief Executive Officer for the period from June 15, 1998 to
December 31, 1998 was $225,000. The annualized base salary of the Chief
Financial Officer for the period from June 15, 1998 to December 31, 1998 was
$140,000. The annualized base salary of the General Counsel for the period
from June 15, 1998 to December 31, 1998 was $145,000. See "Executive
Compensation - Employment Contracts." As provided in the Employment
Agreements, annual base salary adjustments will be made by the Compensation
Committee based on individual performance reviews as well as other market
factors. The Company has also entered into an agreement with Mr. Pelmoter
which provides for contingent bonus payments based on the closing of certain
capital transactions and the achievement of certain occupancy levels at the
Company's shopping centers. The agreement also provides for severance
benefits in the event his employment is terminated prior to December 31, 2000.

Executive officers are eligible to receive annual incentive bonuses. The
amount of any executive officer's bonus is based upon each individual's
contributions to the Company's achievement of financial and operating goals
and, to a lesser degree, factors such as leadership and contribution to
strategy development. The Compensation Committee will continue to establish
overall performance goals for the Company based primarily on the growth in
funds from operations; satisfaction of expansion, development, operating and
occupancy goals; and the relative performance of the Company in comparison
with its industry peer group.

42

In connection with the Merger, the Company granted share options to the
Chairman, President and Chief Executive Officer and certain other executive
officers of the Company. The Company determined the number of share options
to be granted to each executive officer based upon a comparative analysis of
compensation programs for public companies similar to the Company. The
Chairman, President and Chief Executive Officer, the Chief Financial Officer
and the General Counsel were granted options to purchase 90,000, 35,000, and
35,000 common shares, respectively. The Compensation Committee believes the
options granted under the Long-term Stock Incentive Plan and the vesting
schedules thereof will continue to align the interests of management with
those of the Company's shareholders by emphasizing long-term share ownership
and increases in shareholder value. See "Executive Compensation - Option
Grants in Fiscal 1999 and 1998."

The Internal Revenue Code of 1986, as amended, limits the ability of a
publicly-held corporation such as the Company to deduct compensation for its
Chief Executive Officer and the four highest paid officers other than the
Chief Executive Officer in excess of $1,000,000 per individual, per year.
Performance-based compensation is not counted toward the $1,000,000 limit. It
is the Company's policy to take this rule into account in setting the
compensation of its affected executives. The Company will not be denied any
deduction under Section 162(m) for compensation paid during its taxable year
ending December 31, 1999. Based upon proposed Treasury regulations, bonuses
payable to the Company's executives under their current employment agreements
and compensation attributable to options (both statutory and non-statutory)
granted under the Long-term Stock Incentive Plan may be considered as
compensation subject to the Section 162(m) limitation. Accordingly, it is
possible that in some future year some portion of the compensation to a
Company executive will not be tax deductible under Section 162(m). This will
depend upon the market price of the Company's shares on the date the
non-statutory options are exercised and the number of non-statutory options
exercised in any one taxable year.

Margaret A. Gilliam
Michael W. Reschke
E. Thomas Thilman
Members of Compensation Committee
February 16, 2000

PERFORMANCE GRAPH

The following performance graph compares the Company's performance to the
Russell 2000 and a peer group of companies engaged in the ownership of
factory outlet centers. This group consists of Prime Retail, Inc., Chelsea
GCA Realty, Inc., Konover Property Trust, Inc., and Tanger Factory Outlet
Centers, Inc. Share price performance is for the period from June 15, 1998
through December 31, 1999. All share price performance assumes an initial
investment of $100 at the beginning of the period and assumes the
reinvestment of any dividends.

6/16/98 12/31/98 12/31/99
------- -------- --------

HGPI $100.00 $ 110.71 $ 96.43
Russell 2000 100.00 97.26 116.34
Peer Group 100.00 84.94 72.06

43

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN
OWNERS AND MANAGEMENT

PRINCIPAL SHAREHOLDERS

The following table sets forth information as of February 16, 2000 regarding
the beneficial ownership of Common Stock by each Director and Named Officers
(as defined herein) of the Company, by all Directors and executive officers
of the Company as a group, and by each person known to the Company to be the
beneficial owner of more than five percent of the outstanding shares of
Common Stock. Unless otherwise indicated in the footnotes, all such interests
are owned directly, and the indicated person has sole voting and investment
power. The number of shares represents the number of shares of Common Stock
the person holds or the number of Common Units held by such person which are
exchangeable for shares of Common Stock. The extent to which a person holds
Common Units as opposed to Common Stock is set forth in the footnotes.

PERCENTAGE
PERCENTAGE OWNERSHIP OF
NUMBER OF SHARES/ OWNERSHIP OF OUTSTANDING
NAME AND ADDRESS OF COMMON UNITS OUTSTANDING COMMON STOCK/
BENEFICIAL OWNER (1) BENEFICIALLY OWNED (2) COMMON STOCK (3) COMMON UNITS (4)
-------------------- ---------------------- ---------------- ----------------

Michael W. Reschke (5) 979,624 29.75% 28.13%
77 West Wacker Drive
Chicago, Illinois 60601

Howard M. Amster (6) 269,855 9.47% 7.96%
25812 Fairmont Boulevard
Beachwood, Ohio 44122

Maurice A. Halperin (7) 229,074 8.04% 6.76%
2500 North Military Trail
Suite 225
Boca Raton, Florida 33431

Magten Asset Management Company (8) 218,341 7.66% 6.44%
35 East 21st Street
New York, New York 10010

Norman Perlmutter (9) 64,074 2.25% 1.84%

Margaret A. Gilliam 3,300 .12% .09%

E. Thomas Thilman 8,300 .29% .24%

Gary J. Skoien 88,835 3.09% 2.55%

David R. Tinkham 39,401 1.38% 1.13%

Richard A. Berman 14,550 .51% .42%

John R. Terrell (10) 10,250 .36% .29%

Andrew F. Pelmoter 9,900 .35% .28%

Directors and officers of the 1,229,674 36.33% 35.31%
Company as a group (16 persons)
(11)

44

NOTES:

(1) All of the Directors and executive officers of the Company may be
contacted c/o Horizon Group Properties, Inc., 77 West Wacker Drive,
Suite 4200, Chicago, Illinois, 60601.

(2) The beneficial ownership of shares of Common Stock reported herein is
based upon filings with the Securities and Exchange Commission
(the "Commission") pursuant to certain provisions of the Exchange Act
and is subject to confirmation by the Company that such ownership does
not violate the ownership restrictions in the Company's Charter.
"Beneficial ownership" is defined differently in Rule 13d-3 under the
Exchange Act and the Code. The ownership of Common Units reported herein
is derived from the transfer records maintained by the transfer agent for
Horizon Group Properties, L.P.(the "Operating Partnership") and on
information provided by certain limited partners of the Operating
Partnership. Information presented includes Common Stock issuable upon
exercise of Stock Options which have vested or will vest within 60 days
of March 2, 2000 as follows: Mr. Reschke 3,300; Mr. Perlmutter 3,300;
Ms. Gilliam 3,300; Mr. Thilman 3,300; Mr. Skoien 29,700; Mr. Tinkham
11,550; Mr. Berman 11,550; Mr. Terrell 8,250; and Mr. Pelmoter 9,900.

(3) Information presented assumes exchange or conversion only of Common Units
owned by such beneficial owner for shares of Common Stock. The Common
Units may be exchanged on a one-for-one basis for Common Stock (or, at the
Company's election, cash of an equivalent value) at any time.

(4) Information presented assumes exchange or conversion of all outstanding
Common Units for shares of Common Stock.

(5) Individual directly owns 8,206 shares of Common Stock and 3,300 shares of
Common Stock which Mr. Reschke has the right to acquire upon exercise of
certain options granted by the Company. Under the definition of
"beneficial ownership" applicable to Exchange Act filings, Mr. Reschke may
be deemed to share beneficial ownership of: (1) 527,418 shares of Common
Stock and 75,620 Common Units directly owned by Prime Group Limited
Partnership, an Illinois limited partnership ("PGLP"), (2) 277,850 Common
Units directly owned by Prime Financing Limited Partnership, an Illinois
limited partnership ("PFLP"), (3) 42,281 Common Units directly owned by
Prime Group II, L.P., an Illinois limited partnership ("PG-II"), (4) 3,081
Common Units directly owned by Prime Group III, L.P., an Illinois limited
partnership ("PG-III"), (5) 6,818 Common Units directly owned by Prime
Group IV, L.P., an Illinois limited partnership ("PG-IV"), and (6) 35,050
Common Units directly owned by Prime Group V, L.P., and Illinois limited
partnership ("PG-V") by virtue of his position as managing general partner
of PGLP and his ability to control PFLP, PG-II, PG-III, PG-IV and PG-V.

(6) Information presented is based on a Schedule 13D filed with the Securities
and Exchange Commission on July 20, 1998 by Howard Amster ("Amster") and
certain affiliates. This Schedule 13D indicates that Amster may be deemed
to be the beneficial owner of 269,855 shares of Common Stock by virtue of
his relationships with the following persons, each a holder of Common
Stock of the Company: Amster Trading Company; Amster Trading Company
Charitable Remainder Unitrusts; Gould Trading Company; Howard Amster &
Tamra F. Gould Charitable Unitrust; Howard M. Amster Charitable Remainder
Unitrust; Jeffrey Shafer; Pleasant Lake Apts. Corp.; Ramat Securities Ltd.
and Tamra F. Gould. This Schedule 13D indicates that Amster disclaims
beneficial ownership of the shares of the Common Stock owned by Howard
Amster & Tamra F. Gould Charitable Unitrust; Howard M. Amster Charitable
Remainder Unitrust and Tamra F. Gould.

(7) Information presented is based on a Schedule 13D filed with the Securities
and Exchange Commission on March 5, 1999 by Maurice A. Halperin
("Halperin"). This Schedule 13D indicates that Halperin directly owns
229,074 shares of Common Stock.

(8) Information presented is based on Schedule 13D filed with the Securities
and Exchange Commission on February 16, 1999 by Magten Asset Management
Company. This Schedule 13D indicates that Magten Assset Management Company
beneficially owned 218,341 shares of Common Stock.

(9) Mr. Perlmutter directly owns 20,056 shares of Common Stock and may be
deemed to be the beneficial owner of 40,665 shares of Common Stock
directly owned by Cheryl McArthur, his wife, and 53 shares owned by
Perlmutter's minor sons. There are also 3,300 shares of Common Stocks
that Mr. Perlmutter has the right to acquire upon the exercise of Stock
Options granted by the Company. Mr. Perlmutter disclaims beneficial
ownership with respect to the 40,665 Common Units owned by his wife and
the 53 shares owned by his minor sons. Mr. Perlmutter resigned from the
Board of Directors effective February 29, 2000.

(10) Mr. Terrell resigned effective January 1, 2000.

(11) Information presented includes 64,107 shares of Common Stock directly and
beneficially owned by Mr. Perlmutter who resigned from the Company's Board
of Directors effective February 29, 2000.

SECTION 16(a) - BENEFICIAL OWNERSHIP REPORT COMPLIANCE

The Company believes that all filing requirements under Section 16(a) of the
Securities Exchange Act of 1934 were complied with in fiscal 1999 with the
exception of Form 4s for Mr. Reschke and Prime Group Limited Partnership
reporting transactions for the month of August 1999, a Form 4 for Mr. Thilman
reporting transactions for the month of September 1999, and a Form 3 for Mr.
Pelmoter, all of which were not timely filed.

45

ITEM 13 - CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS

PRIME RETAIL, INC. GUARANTEE

Prime Retail, Inc., of which Mr. Reschke is Chairman of the Board and Mr.
Perlmutter is a member of the Board (both of whom are also members of the
Company's Board), has guaranteed, pursuant to that certain Guaranty dated as
of June 15, 1998 (the "Prime Retail Guarantee"), approximately $10.0 million
of obligations under a Loan Agreement between Nomura Asset Capital
Corporation and certain subsidiaries of the Company (the "Credit Facility").
In connection with the Prime Retail Guarantee, the Company has agreed to pay
Prime a fee of $400,000 per annum until Prime is released from its guarantee
obligation related to the HGP Credit Facility. The guarantee fee has been
prepaid through June 2000.

INSURANCE BROKERAGE WITH THILMAN & FILIPPINI

The Company has an ongoing relationship with respect to insurance brokerage
services with Thilman & Filippini, a general partnership in which Mr.
Thilman, a Director of the Company, is a general partner. Thilman & Filippini
provides insurance brokerage services for the Company in connection with the
Company's insurance programs and Thilman & Filippini receives commissions on
the sale of such policies and related products. During the year ended
December 31, 1999 and the period from June 15, 1998 to December 31, 1998, the
Company paid premiums totaling approximately $666,000 and $457,000,
respectively, on insurance policies placed by Thilman & Filippini.

OFFICE SUB-LEASE

The Company sub-leases office space on a month to month basis for its senior
executives at 77 W. Wacker, Chicago, Illinois from The Prime Group, Inc. The
Prime Group, Inc. is an affiliate of Michael W. Reschke, a Director of the
Company. During the year ended December 31, 1999 and the period from June 15,
1998 to December 31, 1998 the Company incurred rent expense of approximately
$121,000 and $65,000, respectively.

OTHER INDEBTEDNESS AND RELATIONSHIPS

LOANS SECURED BY THE NORTON SHORES, MICHIGAN OFFICE BUILDING. The Company has
loans totaling $2.7 million as of December 31, 1999 collateralized by a
mortgage on the office building and related equipment which the Company
utilizes as a corporate office in Norton Shores, Michigan. Prime Retail LP,
as the successor to Horizon/Glen LP in the Merger, is jointly and severally
liable with the Company for any and all obligations arising under such loans.
This building was previously owned by an affiliate of Horizon and was
contributed to the Company by Horizon in connection with the Merger. The
consent of the lender to the previous owner of the property is required in
connection with the transfer of the property to the Company. The Company is
currently seeking such consent but as of February 16, 2000, such consent has
not been obtained.

REVOLVING CREDIT FACILITY. The Company also had a $4.0 million revolving
credit facility that matured April 30, 1999. In January, 1999, Prime loaned
the Company $1.0 million to make a principal repayment against this credit
facility and on April 31, 1999, loaned the Company an additional $3.0 million
to repay this credit facility in full all at an interest rate of 10.0% (the
"Prime Loan") pursuant to the terms of a Working Capital Agreement between
the Company and Prime (the "Working Capital Agreement"). This loan was repaid
on September 1, 1999, in connection with the transfer of the Company's
interests in the Bellport, New York center to Prime.

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

GARY J. SKOIEN'S EMPLOYMENT WITH THE PRIME GROUP, INC. Gary J. Skoien,
Chairman, President and Chief Executive Officer of the Company, is also the
Executive Vice President and Chief Operating Officer of The Prime Group, Inc.
Mr. Skoien's responsibilities with respect to this employment are primarily
related to the Huntley project, a mixed-use development project located in
suburban Chicago. Mr. Reschke, also a Director of the Company, is Chairman
and Chief Executive Officer of The Prime Group, Inc. The Prime Group, Inc. is
a large stockholder in Prime Retail, Inc., which owns, operates and develops
factory outlet centers and may be considered to be in competition with the
Company.

WORKING CAPITAL AGREEMENT. In connection with the Merger, the Company entered
into a Working Capital Agreement with Prime (the "Working Capital
Agreement"). The Working Capital Agreement provides that Prime will transfer
to the Company sufficient cash to

46

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

The proceeds from the settlement of the Working Capital Agreement and the
sale of the Bellport interests were used to repay $9.3 million of current and
future obligations owed by the Company to Prime. These obligations included
(i) $2.2 million which the Company had borrowed from Prime to make principal
repayments on the Nomura facility, (ii) $4.0 million which the Company had
borrowed from Prime to repay a credit facility assumed in the Merger, (iii)
$2.3 million related to the PVH Agreement, and (iv) $800,000 related to the
guarantee fee associated with Prime's guarantee of certain of the Company's
debt obligations (see Note 9). The Company also received $230,000 in cash.

PART IV

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

(a) 1. Financial Statements

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

2. Financial Statement Schedules

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

3. Exhibits

The agreement listed in the index to exhibits as shown under this Item
14(a) is filed with this annual report.

(b) Reports on Form 8-K

A Form 8-K was filed January 7, 1999 by the Company announcing that it had
received a proposal from Prime Capital Holding LLC regarding a proposed business
combination with the Company.

A Form 8-K was filed January 29, 1999 by the Company announcing that a purported
class action lawsuit was filed against the Company against the Company, it
Directors and Prime Capital Holding LLC in connection with the proposed business
combination of the Company and Prime Capital Holding, LLC.

A Form 8-K was filed March 18, 1999 by the Company announcing that Prime Capital
Holding, LLC had withdrawn its proposal for a business combination with the
Company. The Form 8-K also announced that the Company had reviewed its prior
decision to not elect REIT status and had determined to elect REIT status.

A Form 8-K was filed on August 3, 1999 by the Company announcing that it had
completed a $46.6 million debt financing with Morgan Guaranty Trust Company of
New York.

A Form 8-K was filed on September 1, 1999 by the Company announcing it had
completed the transfer of its interests in the Bellport Outlet Center to an
affiliate of Prime Retail, Inc.

A Form 8-K was filed on September 24, 1999 by the Company announcing it had
hired Secured Capital Corp as a financial advisor to assist the Company in
studying strategic alternatives to enhance shareholder value.

47

HORIZON GROUP PROPERTIES, INC.
INDEX TO EXHIBITS
(ITEM 14(A) )

DESCRIPTION

Exhibit 3(i) Articles of Incorporation of Horizon Group Properties, Inc.
(the "Company")(1)

Exhibit 3(ii) By-laws of the Company(1)

Exhibit 3(iii) Amendment to By-laws of the Company dated March 17, 1999 (4)

Exhibit 4.1 Specimen certificate for common stock, $0.1 par value per
share, of the Company(1)

Exhibit 10.1 Sky Merger Corp. Registration Statement on Form S-4
(excluding exhibits thereto), as filed with the Securities and
Exchange Commission on May 12, 1998 (Registration No.
333-51285)(1)

Exhibit 10.2 Amended and Restated Agreement and Plan of Merger by and
among Prime Retail, Inc., Prime Retail, L.P., Horizon Group,
Inc., Sky Merger Corp., the Company, Horizon Group Properties,
L.P. and Horizon/Glen Outlet Centers Limited Partnership dated
as of February 1, 1998 (Incorporated by reference to Exhibit
10(a) to Horizon Group, Inc.'s current report on Form 8-K
dated February 1, 1998 (SEC File No. 1-12424))(1)

Exhibit 10.3 Form of 1998 Stock Option Plan of the Company(1)

Exhibit 10.4 Employment Agreement between Gary J. Skoien and the Company(1)

Exhibit 10.5 Employment Agreement between David R. Tinkham and the
Company(1)

Exhibit 10.6 Form of Indemnification Agreement for the Board of Directors
of the Company(1)

Exhibit 10.7 Form of Registration Rights Agreement(1)

Exhibit 10.8 Form of Contribution Agreement (incorporated by reference to
Appendix E to Exhibit 10.1)(1)

Exhibit 10.9 Employment Agreement between Richard Berman and the Company(3)

Exhibit 10.10 Working Capital Agreement with Prime, Inc.(3)

Exhibit 10.11 Loan Agreement dated as of June 15, 1998 by and 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, LLC and Morgan Guaranty
Trust Company of New York related to the financing of the
factory outlet center in Gretna, Nebraska (8)

Exhibit 10.21 Deed of Trust and Security agreement for the benefit of
Morgan Guaranty Trust Company of New York, as lender, from
Gretna, Sealy, Traverse City Outlet Centers, LLC, as borrower,
related to the financing of the factory outlet center in
Gretna, Nebraska (8)

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 (8)

Exhibit 10.23 Agreement between Andrew F. Pelmoter and the Company

Exhibit 27 Financial Data Schedule

Exhibit 99 Excerpt of Press Release issued by the Company on June 15,
1998 announcing the completion of the debt financing with
Nomura Asset Capital Corporation (2)

Exhibit 99.3 Letter dated January 5, 1999 from Prime Capital Holding, LLC
to the Company (5)

Exhibit 99.4 Press release issued by the Company on January 7, 1999
regarding the proposal by Prime Capital Holding, LLC of a
business combination with the Company (5)

Exhibit 99.5 Press release issued by the Company on January 27, 1999
regarding a purported class action lawsuit filed on January
20, 1999 in the Circuit Court of Cook County, Illinois against
Horizon, Prime Capital Holding, LLC and the directors of
Horizon (6)

Exhibit 99.6 Letter dated March 17, 1999 from Prime Capital Holding, LLC to
the Company (7)

48

Exhibit 99.7 Press release issued by the Company on March 17, 1999
regarding withdrawal of business combination proposal by Prime
Capital Holding, LLC and determination by the Company's Board
of Directors to elect REIT status (7)

Exhibit 99.8 Press release issued by the Company on July 12, 1999 regarding
the financing of six of the Company's factory outlet centers
(8)

Exhibit 99.9 Press release issued by the Company on September 3, 1999
announcing the transfer of the Company's interests in the
Bellport Outlet Center to Prime Retail, Inc. (9)

Exhibit 99.10 Press release issued by the Company on September 24, 1999
announcing the engagement of a financial advisor to explore
strategic alternatives (10)

1 Incorporated by 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 by reference to the Company's Current Report on Form 8-K
dated as of June 30, 1998 (Commission file no. 0-24123).

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

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

5 Incorporated by reference to the Company's Current Report on Form 8-K
dated as of January 7, 1999 (Commission file no. 0-24123)

6 Incorporated by reference to the Company's Current Report on Form 8-K
dated as of January 29, 1999 (Commission file no. 0-24123)

7 Incorporated by reference to the Company's Current Report on Form 8-K
dated as of March 18, 1999 (Commission file no. 0-24123)

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

9 Incorporated by reference to the Company's Current Report on Form 8-K
dated as of September 1, 1999 (Commission file no. 0-24123)

10 Incorporated by reference to the Company's Current Report on Form 8-K
dated as of September 24, 1999 (Commission file no. 0-24123)

49

SIGNATURES

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

HORIZON GROUP PROPERTIES, INC.

/s/ Gary J. Skoien Director and Chairman of the Board,
- -------------------------- President and Chief Executive Officer
Gary J. Skoien (Principal Executive Officer) March 6, 2000

/s/ David R. Tinkham Chief Financial Officer
- -------------------------- (Principal Financial Officer) March 6, 2000
David R. Tinkham

/s/ Michael W. Reschke
- --------------------------
Michael W. Reschke Director March 6, 2000

- --------------------------
Margaret A. Gilliam Director

/s/ E. Thomas Thilman
- --------------------------
E. Thomas Thilman Director March 6, 2000

50