HORIZON GROUP PROPERTIES INC, 10-Q, 1999-08-16

HORIZON GROUP PROPERTIES INC
10-Q, 1999-08-16
REAL ESTATE INVESTMENT TRUSTS

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934

For the quarterly period ended JUNE 30, 1999

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

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

HORIZON GROUP PROPERTIES, INC.
------------------------------
(Exact name of Registrant as specified in its Charter)

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

77 WEST WACKER DRIVE, SUITE 4200, CHICAGO , IL 60601
- ---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)

(312) 917-8870
--------------
(Registrant's telephone number, including area code)

NOT APPLICABLE
--------------

Former name, former address and former fiscal year,
if changed since last report.

Indicate by check mark whether the registrant (1) has filed all 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

NUMBER OF COMMON SHARES OUTSTANDING AT AUGUST 10, 1999 2,845,096
---------------
---------------

<PAGE>

HORIZON GROUP PROPERTIES, INC.
Index to Form 10-Q
June 30, 1999

<TABLE>
<CAPTION>
Part I. Financial Information: PAGE NO.
--------
<S> <C>
Item 1. Financial Statements (unaudited)

Condensed Consolidated Statements of Operations of the Company
for the Three Months Ended June 30, 1999 and for the period from June 15,
1998 to June 30, 1998 and Condensed Combined Statement of Operations of the
Predecessor Properties for the period from April 1, 1998 to June 14, 1998 . . . . . . . . . . . . . . . . 3

Condensed Consolidated Statements of Operations of the Company for the Six Months
Ended June 30, 1999 and for the period from June 15, 1998 to June 30, 1998
and Condensed Combined Statement of Operations of the Predecessor Properties for the
period from January 1, 1998 to June 14, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Condensed Consolidated Balance Sheets of the Company at June 30, 1999 and
December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Condensed Consolidated Statements of Cash Flows of the Company
for the Six Months Ended June 30, 1999 and for the period from June 15,
1998 to June 30, 1998 and Condensed Combined Statement of
Cash Flows of the Predecessor Properties for the period from January 1, 1998 to June 14, 1998 . . . . . . . .6

Notes to Condensed Consolidated and Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . .7

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Item 3. Quantitative and Qualitative Disclosure of Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .26

Part II. Other Information:

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . .27
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Item 6. Exhibits or Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
</TABLE>

2
<PAGE>

HORIZON GROUP PROPERTIES, INC.
Condensed Consolidated and Combined Statements of Operations
(unaudited)

Horizon Group
Horizon Group Properties, Inc. Predecessor Properties
Properties, Inc. for the period from for the period from
for the three months June 15, 1998 April 1, 1998
ended June 30, 1999 to June 30, 1998 to June 14, 1998
-------------------- ------------------- ----------------------
(thousands, except per share data)
<S> <C> <C> <C>
REVENUE
Base rent $ 5,538 $ 953 $ 4,170
Percentage rent 34 1 13
Expense recoveries 1,533 150 1,335
Other 203 57 371
-------- ------- -------
Total revenue 7,308 1,161 5,889
-------- ------- -------

EXPENSES
Property operating 1,533 200 1,332
Real estate taxes 852 137 622
Land leases and other 329 22 476
Depreciation and amortization 1,208 244 2,185
General and administrative 1,177 226 609
Interest 2,169 371 2,741
-------- ------- -------
Total expenses 7,268 1,200 7,965
-------- ------- -------

Income (loss) from joint ventures (152) 1 (126)
-------- ------- -------

Loss before minority interests (112) (38) (2,202)

Minority interests 14 6 --
-------- ------- -------

Net loss $ (98) $ (32) $(2,202)
-------- ------- -------
-------- ------- -------
PER COMMON SHARE - BASIC AND DILUTED:
Net loss - basic and diluted $ (0.03) $ (0.01)
-------- -------
-------- -------

Weighted average common shares outstanding
- basic 2,810 2,762
-------- -------
-------- -------
- diluted 3,389 3,389
-------- -------
-------- -------
</TABLE>

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS.

3
<PAGE>

HORIZON GROUP PROPERTIES, INC.
Condensed Consolidated and Combined Statements of Operations
(unaudited)

<TABLE>
<CAPTION>
Horizon Group Horizon Group
Properties, Inc. Properties, Inc. Predecessor Properties
for the six for the period from for the period from
months ended June 15, 1998 to January 1, 1998
June 30, 1999 June 30, 1998 to June 14, 1998
--------------------- ------------------- ------------------------
(thousands, except per share data)
<S> <C> <C> <C>
REVENUE
Base rent $ 11,058 $ 953 $ 9,167
Percentage rent 64 1 44
Expense recoveries 3,047 150 2,631
Other 642 57 765
-------- ------- --------
Total revenue 14,811 1,161 12,607
-------- ------- --------

EXPENSES
Property operating 3,153 200 2,634
Real estate taxes 1,717 137 1,379
Land leases and other 944 22 785
Depreciation and amortization 2,407 244 4,640
General and administrative 2,431 226 1,061
Interest 4,337 371 5,863
-------- ------- --------
Total expenses 14,989 1,200 16,362
-------- ------- --------

Income (loss) from joint ventures (459) 1 (207)
-------- ------- --------

Loss before minority interests (637) (38) (3,962)

Minority interests 104 6 -
-------- ------- --------

Net loss $ (533) $ (32) $ (3,962)
-------- ------- --------
-------- ------- --------

PER COMMON SHARE - BASIC AND DILUTED:
Net loss - basic and diluted $ (0.19) $ (0.01)
-------- -------
-------- -------

Weighted average common shares outstanding
- basic 2,801 2,762
-------- -------
-------- -------
- diluted 3,389 3,389
-------- -------
-------- -------
</TABLE>

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS.

4
<PAGE>

HORIZON GROUP PROPERTIES, INC.
Condensed Consolidated and Combined Balance Sheets
(unaudited)

<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------ --------------------
(thousands)
<S> <C> <C>
ASSETS
Real estate - at cost:
Land $ 11,851 $ 11,914
Buildings and improvements 134,334 133,061
Less accumulated depreciation (4,722) (2,387)
--------- ---------
Total net real estate 141,463 142,588
--------- ---------

Cash and cash equivalents 2,837 2,686
Restricted cash 3,993 4,465
Tenant accounts receivable 326 1,280
Investments in and advances to joint ventures 8,054 8,527
Assets held for sale 2,500 2,500
Deferred costs (net of accumulated amortization of $263 and 1,161 826
$103 at June 30, 1999 and December 31, 1998,
respectively)
Other assets 3,123 2,806
--------- ---------
Total assets $ 163,457 $ 165,678
--------- ---------
--------- ---------

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:

Mortgages and other debt $ 113,858 $ 114,752
Accounts payable and accrued expenses 4,474 5,676
Prepaid rents and other tenant liabilities 1,305 976
Other liabilities 3,505 3,322
--------- ---------
Total liabilities 123,142 124,726

MINORITY INTERESTS 6,515 7,338

SHAREHOLDERS' EQUITY:
Common shares ($.01 par value, 50,000 shares authorized, 28 28
2,842 and 2,782 issued and outstanding at June 30, 1999
and December 31, 1998, respectively)
Additional paid-in capital 33,987 33,268
Retained earnings (deficit) (215) 318
--------- ---------
Total shareholders' equity 33,800 33,614
--------- ---------
Total liabilities and shareholders' equity $ 163,457 $ 165,678
--------- ---------
--------- ---------
</TABLE>

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS.

5
<PAGE>

HORIZON GROUP PROPERTIES, INC.
Condensed Consolidated and Combined Statements of Cash Flows
(unaudited)

<TABLE>
<CAPTION>
Horizon Group Horizon Group Predecessor
Properties, Inc. Properties, Inc. Properties
for the six for the period for the period from
months ended from June 15, 1998 January 1, 1998 to
June 30, 1999 to June 30, 1998 June 14, 1998
------------------- ------------------ -------------------
(thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (533) $ (32) $(3,962)
Adjustments to reconcile net loss
to net cash provided by operating
activities:

Income (loss) from joint ventures 459 (1) 207
Minority interests in net loss (104) (6) -
Depreciation 2,337 244 4,260
Amortization 160 24 771
Changes in assets and liabilities:
Restricted cash 472 (65) -
Tenant accounts receivable 919 (457) (409)
Investments in and advances to joint ventures - (87) 1,853
Deferred costs and other assets (243) (1,247) 446
Accounts payable and accrued expenses (820) 1,494 (1,306)
Other liabilities 183 (3) (47)
Prepaid rents and other tenant liabilities 329 49 (366)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,159 (87) 1,447
-------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for real estate and improvements (1,933) (72) (1,703)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,933) (72) (1,703)
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net contributions/distributions - - (4,625)
Principal payments on mortgages and other debt (4,894) - -
Proceeds from borrowings 4,000 - -
Proceeds from net increase in debt - - 5,090
Debt issue costs (181) - (140)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,075) - 325
-------- -------- --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 151 (159) 69

CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 2,686 3,018 3,729
-------- -------- --------
END OF PERIOD $ 2,837 $ 2,859 $ 3,798
-------- -------- --------
-------- -------- --------
</TABLE>

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS.

6
<PAGE>

HORIZON GROUP PROPERTIES, INC.
Notes to Condensed Consolidated and Combined Financial Statements
(unaudited)

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 portfolio consists 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 share (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 June 30, 1999, HGP owned
approximately 83.84% 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 Patchogue, New York (held in joint ventures)
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 statement of operations
include the Company's share of the net income or loss from the joint ventures.

7
<PAGE>

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

The following summarizes the assets, liabilities and equity contributed to
and assumed by the Company on June 15, 1998 pursuant to the Contribution
Agreement including the acquisition of the two centers from Prime. The
amounts presented include final purchase accounting adjustments made during
the six months ended June 30, 1999. The net effect of these adjustments was a
$721,000 decrease in real estate, a $339,000 increase in other assets and a
$382,000 decrease in other liabilities.

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Real estate $141,799
Other assets 20,617
--------
$162,416
--------
--------

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

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
two joint ventures, MG Patchogue Limited Partnership and MG Patchogue II
Limited Partnership, which own the Bellport Outlet Center, were transferred
from an affiliate of Horizon to HGP LP and an affiliate of HGP LP. The
Company is currently seeking the consents of the limited partners to such
transfers but, as of August 10, 1999, such consents had not been obtained.

Additionally, the transfer of the general partnership interest in MG
Patchogue Limited Partnership pursuant to the Contribution Agreement required
the consent of MG Patchogue Limited Partnership's mortgage lender. The
Company is currently seeking such consent but, as of August 10, 1999 such
consent had not been obtained. The Company accounts for its investment in
these partnerships using the equity method of accounting.

The lender to the previous owner for the mortgage on the corporate office
building and related equipment in Norton Shores, Michigan, as of August 10,
1999, had not given its consent in connection with the transfer of the
property (see Note 6).

The Company can give no assurances that it will be able to obtain the above
mentioned consents or that it will be able to finance or refinance its
indebtedness as it matures or that any such financing will be obtained on
favorable terms. Any such failure to obtain such consents or such financings
could have a material adverse effect upon the Company. The condensed
consolidated financial statements of the Company do not include any
adjustments that may result from the ultimate outcome of these uncertainties.

8
<PAGE>

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
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.

INTERIM PERIOD FINANCIAL PRESENTATION

The condensed consolidated financial statements as of June 30, 1999 and for
the six months ended June 30, 1999 include the accounts of the Company's
subsidiary, HGP LP, and other wholly owned subsidiaries.

9
<PAGE>

The accompanying unaudited condensed consolidated financial statements are
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements, and, therefore, should be read
in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.

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

In the opinion of management, all adjustments necessary for a fair statement
of the financial position and results of operations for the interim periods
presented have been included in these financial statements and are of a
normal and recurring nature. Certain amounts in prior periods have been
reclassified to conform to the current presentation.

Operating results for the three and six month periods ended June 30, 1999 are
not necessarily indicative of the results that may be achieved in future
periods.

REAL ESTATE AND DEPRECIATION

The carrying values of the Predecessor Properties for the period prior to the
Merger are stated at Horizon's historic cost, less accumulated depreciation.
For the period 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.

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

<TABLE>
<S> <C>
Buildings and improvements 31.5 years
Tenant improvements 10 years or lease term, if less
Furniture, fixtures or equipment 3 - 7 years
</TABLE>

Periodically, in the course of reviewing the performance of its properties,
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 June 30, 1999 and December 31, 1998,
the Algodones, New Mexico outlet center was vacant and classified as held for
sale.

CASH EQUIVALENTS

The Company considers all highly 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 lender (see Note 6) and includes $1.3 million in capital improvement
reserves, $1.6 million in real estate tax, insurance and ground lease
escrows, and $1.1 million for debt service and operating expenses at June 30,
1999.

10
<PAGE>

INVESTMENTS IN AND ADVANCES TO JOINT VENTURES

The Company owns 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. Such interests were recorded at
fair value upon formation of the Company based on the estimated fair value of
the underlying real estate. The Company accounts for such investments (in
consideration of its priority return position) under the equity method of
accounting reflecting the Company's attributable share of income and loss in
the statements of operations.

DEFERRED COSTS

Leasing and deferred financing costs are capitalized at cost. Amortization is
recorded on the straight-line method over the life of the lease or the debt,
respectively. Amortization of deferred financing costs is included as a
component of interest expense.

NET CONTRIBUTIONS (DISTRIBUTIONS)

Net contributions (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.
Net contributions represent Horizon's funding of development cost needs in
excess of cash flows generated from operations.

INCOME TAXES

The Company intends to elect to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"). A REIT is
a legal entity that holds real estate interests, and, through payments of
dividends to shareholders, is permitted to reduce or to eliminate the payment
of federal income taxes. As a REIT, HGP intends to distribute its REIT
taxable income to its shareholders and satisfy certain other requirements as
defined in the Code so as to reduce or eliminate federal income tax
liability. Based on its taxable income 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.

MINORITY INTERESTS

Minority interests represent the interests of unitholders of HGP LP. The
unitholder minority interest is adjusted each period end to reflect the
ownership at that particular time. The unitholder minority interest in HGP
was approximately 16.16% at June 30, 1999. During the six months ended June
30, 1999, 59,608 units were converted into shares of common stock.

11
<PAGE>

REVENUE RECOGNITION

Leases with tenants are accounted for as operating leases. Minimum annual
rentals are generally 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 $325,000 and $169,000
of accrued straight line rents at June 30, 1999 and December 31, 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 receivables are reflected net of allowances of $528,000 and
$427,000 as of June 30, 1999 and December 31, 1998, respectively. For the six
months ended June 30, 1999, $109,000 was charged directly against the
allowance and net income was reduced by $301,000 for additional allowances.

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 - 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 hold interests, is summarized as follows:

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Total revenue $2,001 $ 2,284

Net loss (975) (548)

Total assets 30,765 32,161

Total liabilities 33,026 32,704

</TABLE>

<PAGE>

NOTE 4 - EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
For the period
Six months ended Three months ended from June 15, 1998
June 30, 1999 June 30, 1999 to June 30, 1998
----------------- ------------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
NUMERATOR:
Net loss - basic $ (533) $ (98) $ (32)
Minority interests of unitholders (104) (14) (6)
------ ------ ------
Net loss - diluted $ (637) $ (112) $ (38)
------ ------ ------
------ ------ ------

DENOMINATOR:
Weighted average common shares outstanding - basic 2,801 2,810 2,762
Effect of converting units to shares 588 579 627
------ ------ ------
Weighted average common shares outstanding - diluted 3,389 3,389 3,389
------ ------ ------
------ ------ ------

Net loss per share - basic and diluted $(0.19) $(0.03) $(0.01)
------ ------ ------
------ ------ ------
</TABLE>

Outstanding stock options were excluded in computing diluted earnings per
share because the effect of such items was anti-dilutive for the periods
presented.

NOTE 5 - 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, an amount equal to approximately 10% of the aggregate of
the total outstanding common shares of the Company and outstanding common
units of HGP LP as of June 30, 1999.

NOTE 6 - 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 $108,205,000. The outstanding balance was $104,625,000
and $105,375,000 as of June 30, 1999 and December 31, 1998, respectively. The
HGP Credit Facility is guaranteed by HGP and HGP LP. The HGP Credit Facility has
a term of three years 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 6.86% and
7.45% as of June 30, 1999 and December 31, 1998, respectively. The HGP Credit
Facility is cross-collateralized by mortgages on the Company's twelve wholly
owned operating outlet centers and one power center. 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. A principal payment of $2.2 million which was due on October 31,
1998 was paid on November 10, 1998 with the proceeds of a loan from Prime (as
described below). 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

13
<PAGE>

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).

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 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.

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 repayment of $46.8 million, with the proceeds from the JP Morgan Loans.
This penalty was an amount negotiated with Nomura and will be charged to
expense in the third quarter of 1999. 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 will recognize 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.

The Company has loans totaling $2.9 million and $3.0 million as of June 30,
1999 and December 31, 1998, respectively, secured by a mortgage on the office
building and related equipment which the Company utilizes as a corporate
office in Norton Shores, Michigan. This building was previously owned by an
affiliate of Horizon and was contributed to the Company pursuant to the
Contribution Agreement. 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 7.4% and 7.8% at
June 30, 1999 and December 31, 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 7.8% at June 30, 1999 and December 31, 1998. 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 August 10, 1999 such consent had
not been obtained.

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"). The terms of the Working Capital
Agreement require the Company to repay the Prime Loan or other related
indebtedness on which Prime is contingently liable to the extent of net
proceeds from an equity offering or the sale of the Company's Algodones, New
Mexico outlet center.

The Company borrowed $2.2 million from Prime on November 10, 1998. The
proceeds from the loan were utilized to make a principal payment on the
Company's credit facility with Nomura. The terms of the borrowing are under
negotiation, but management expects that the loan will bear annual interest
at the rate of 10.0% and have a term of two years.

14
<PAGE>

MG Patchogue II Limited Partnership, of which the Company is 1% general
partner and 44% limited partner, is subject to indebtedness totaling
approximately $11.8 million as of June 30, 1999 and December 31, 1998 and
which matures September 1, 1999. The Company has guaranteed the indebtedness.
Prime is also a guarantor on the indebtedness.

In connection with the Merger, Prime became potentially liable for, or agreed
to guarantee certain indebtedness of the Company. As of June 30, 1999 and
December 31, 1998, respectively, the components of such indebtedness included
(1) the loan collateralized by Phases II and III of the Bellport, New York
outlet center with a principal balance of $11.8 million as of June 30, 1999
and December 31, 1998, (2) the loan collateralized by Phase I of the
Bellport, New York outlet center with a principal balance of $10.6 million
and $10.7 million as of June 30, 1999 and December 31, 1998, respectively,
(3) the loans collateralized by the Company's corporate office building and
equipment in Norton Shores, Michigan with a principal balance of $2.9 million
and $3.0 million as of June 30, 1999 and December 31, 1998, respectively, and
(4) $10.0 million of the Company's obligations under its credit facility with
Nomura. The Company has indemnified Prime for any amounts advanced under the
guarantees. There is a $400,000 annual fee due to Prime under the guarantees.

The Company can give no assurances that it will be able to obtain the above
mentioned consents or that it will be able to finance or refinance its
indebtedness as it matures or that any such financing will be obtained on
favorable terms. Any such failure to obtain such consents or such financings
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 these uncertainties.

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
is obligated to reimburse Prime for two payments relating to the PVH
Agreement totaling $2,334,000, payable each in the amount of $1,167,000 on
June 15, 1999 and June 15, 2000. This obligation was assumed by HGP at the
date of the Merger and is reflected as a liability on the condensed
consolidated balance sheets as of June 30, 1999 and December 31, 1998.

NOTE 7 - 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 six months ended June 30, 1999,
the Company paid premiums totaling approximately $162,000 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 six months ended June 30, 1999, the Company incurred rent
expense of $60,000.

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.
Prime transferred $3.0 million in cash to the Company at the closing of the
Merger representing 75% of the estimated amount due under the Working Capital
Agreement. The Company has recorded a receivable from Prime for the balance
of the amount due under the Working Capital Agreement. Also due under the
Working Capital Agreement is $710,200 for retention payments made to Horizon
employees. The balances due are included in other assets on the condensed
consolidated balance sheets.

15
<PAGE>

NOTE 8 - PRO FORMA INFORMATION

The following unaudited pro forma information for the six months ended June
30, 1998 reflects the following transactions, which occurred June 15, 1998,
as if they had occurred on January 1, 1998: (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 distribution of Common
Stock and Common Units.

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.

<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, 1998
-------------
<S> <C>
Total revenue $16,748

Income before extraordinary items
and minority interests 1,159

Net income 944

Net income per share .34
</TABLE>

NOTE 9 - 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 fourteen shopping centers located in eleven states. The
Company separately evaluates the performance of each of its centers. However,
because each of the centers has similar economic characteristics, facilities
and 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 net loss to diluted FFO is as follows:

16
<PAGE>

<TABLE>
<CAPTION>
HORIZON GROUP HORIZON GROUP PREDECESSOR
PROPERTIES, INC. PROPERTIES, INC. PROPERTIES
FOR THE FOR THE PERIOD FROM FOR THE PERIOD FROM
SIX MONTHS ENDED JUNE 15, 1998 TO JANUARY 1, 1998 TO
JUNE 30, 1999 JUNE 30, 1998 JUNE 14, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net loss $ (637) $ (38) $(3,962)
------ ---- -------
FFO ADJUSTMENT
Depreciation and amortization (1) 2,972 253 4,766
Non-recurring merger expense 333 - -
Non-recurring debt restructuring costs 74 - -
------ ---- -------
Total FFO adjustments 3,379 253 4,766
------ ---- -------

FFO $2,742 $ 215 $ 804
------ ---- -------
------ ---- -------
FFO per share $ .81 $.06
------ ----
------ ----
</TABLE>

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

17
<PAGE>

HORIZON GROUP PROPERTIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three and six months ended June 30, 1999
(unaudited)

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
herein after defined) should be read in conjunction with the Condensed
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 June 30, 1999, owned approximately
83.84% of the HGP LP partnership interests ("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 finance its planned
acquisition and development activities; risks related to the retail industry
in which the Company's outlet 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").
HGP's portfolio consists of 14 factory outlet centers and one power center
located in 12 states comprising an aggregate of approximately 3.1 million
square feet of gross leasable area ("GLA"). Twelve 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.

18
<PAGE>

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; and (3) the carrying values of the Predecessor
Properties for the periods prior to the Merger are stated at Horizon's
historic cost and depreciation expense is based on those costs. The
Predecessor Properties are stated at the fair value as of the date of the
Merger, resulting in a lower carrying value compared to periods prior to the
Merger and a related decrease in depreciation expense.

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

Rental revenue for the Predecessor Properties for the three months ended June
30, 1999 increased 4.0% compared to the same period in the prior year. This
increase was primarily attributable to increased occupancy compared to the
prior period. Operating expenses and real estate taxes for the three months
ended June 30, 1999 for the Predecessor Properties decreased 11.0% compared
to the same period in the prior year. This decrease is primarily the result
of reduced insurance premiums and lower tax expense due to a decrease in the
tax assessments on several properties.

Rental revenue for the Predecessor Properties for the six months ended June
30, 1999 increased 2.7% compared to the same period in the prior year. This
increase was primarily attributable to increased occupancy compared to the
prior period. Operating expenses and real estate taxes for the six months
ended June 30, 1999 decreased 7.3% compared to the same period in the prior
year. This decrease is primarily the result of reduced insurance premiums and
lower tax expense due to a decrease in the tax assessments on several
properties.

Average occupancy for the Predecessor Properties (excluding the Algodones,
New Mexico Center) for the three months ended June 30, 1999 was 80.14%
compared to 76.08% for the same period in the prior year. As of June 30,
1999, occupancy of the Company's total operating portfolio was 81.47%.

Average occupancy for the Predecessor Properties (excluding the Algodones,
New Mexico center) for the six months ended June 30, 1999 was 81.12% compared
to 76.04% for the same period in the prior year.

19
<PAGE>

The Company accounts 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 the first quarter of 1999 compared to the same
period in the prior year primarily as the result of rent credits and accruals
arising from the conversion of tenants from fixed base rent to rent based on
a percentage of sales for the tenants' lease years. The decline in rental
revenue was the most significant factor in the increase in the net loss of
the joint ventures for the first quarter of 1999 compared to the same period
in the prior year. In the second quarter of 1999 there were no similar
adjustments.

Net loss for the three and six months ended June 30, 1999 was $.03 and $.19
per share, respectively, on a basic and diluted basis. Funds from operations
for the three months ended June 30, 1999 was $.43 per share on a diluted
basis. Funds from operations for the six months ended June 30, 1999 was $.81
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.

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.

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 first six months of 1999, the Company incurred
approximately $333,000 investigating and considering the potential business
combination. This amount was charged to general and administrative expense
upon the withdrawal of the PCH proposal.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 1999, the aggregate amount of outstanding mortgages and other
debt on the Company's balance sheet was approximately $113.9 million. The
Company is contemplating the expansion of its Tulare Outlet Center and the
completion of 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 June 30, 1999 there was approximately $1.1 million deposited in escrow
with Nomura which the Company believes is sufficient to complete the work
required under the HGP Credit Facility. The Company expects to fund other
capital improvements with additional borrowings, existing cash balances
(including $0.2 million held in escrow for such expenses by Nomura) or cash
flow from operations.

The Company is required to make monthly deposits with Nomura for future debt
service payments, real estate taxes, insurance, operating expenses and
capital expenditures. These deposits totaled $4.0 million as of June 30,
1999, including the capital improvement escrow 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.

20
<PAGE>

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.
Prime transferred $3.0 million in cash to the Company at the closing of the
Merger as 75% of the estimated amount due under the Working Capital
Agreement. The Company has recorded a receivable from Prime for the balance
of the amount due under the Working Capital Agreement. Also due under the
Working Capital Agreement is $710,200 for retention payments made to Horizon
employees. The balances due are included in other assets on the consolidated
balance sheets.

The Company expects to meet its short-term liquidity requirements generally
through working capital, cash flows from operations and from the proceeds of
the loan which Prime is obligated to make to the Company pursuant to the
terms of the Working Capital Agreement. The Company expects to meet its
long-term requirements, such as tenant allowances for new leases and capital
improvements, through 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. There can be no assurance
that the Company will be able to successfully obtain such funding sources or,
if obtained, on favorable terms.

On June 15, 1998, certain wholly owned affiliates of the Company entered into
a credit facility (the "HGP Credit Facility") with Nomura Asset Capital
Corporation ("Nomura") which has a current balance of $104.6 million at June
30, 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 the Company's 12
wholly owned 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. A principal payment of $2.2 million which was due on October
31, 1998 was paid on November 10, 1998 with the proceeds of a loan from
Prime. 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.

21
<PAGE>

The interest rate on the JP Morgan Loans of 8.46% is 1.4% greater than the
average interest rate on the HGP Credit Facility over the twelve month period
ended June 30, 1999. On an annual basis, this differential would have
resulted in additional interest expense of approximately $680,000 compared to
the interest on the portion of the HGP Credit facility repaid with the
proceeds of the JP Morgan Loans. The JP Morgan Loans require principal
payments based on a 25-year amortization schedule. During the first year,
total principal payments of approximately $499,000 are due on the JP Morgan
Loans in addition to the required principal payments due under the HGP Credit
Facility.

The JP Morgan Loans also require the monthly funding of escrow accounts for
the payment of real estate taxes, insurance and capital improvements. Such
monthly fundings currently total $143,000 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 will be
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 will recognize 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"). In
connection with the Prime Guarantee, HGP has agreed to pay Prime a fee of
$400,000 per annum until the Prime Guarantee terminates.

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%. 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"). The terms of the
Working Capital Agreement require the Company to repay the Prime Loan or
other related indebtedness on which Prime is contingently liable to the
extent of net proceeds from an equity offering or the sale of the Company's
Algodones, New Mexico outlet center.

The transfer of the general partnership interest in MG Patchogue Limited
Partnership pursuant to the Contribution Agreement also required the consent
of MG Patchogue Limited Partnership's mortgage lender. The Company is
currently seeking such consent but, as of August 10, 1999, such consent had
not been obtained. The Company accounts for its investment in this
partnership using the equity method of accounting.

22
<PAGE>

MG Patchogue II Limited Partnership, of which the Company is 1% general
partner and 44% limited partner, is subject to indebtedness totaling
approximately $11.8 million which matures September 1, 1999. Prime is a
guarantor on the indebtedness.

The Company can give no assurances that it will be able to obtain the above
mentioned consents or that it will be able to finance or refinance its
indebtedness as it matures or that any such financing will be obtained on
favorable terms. Any such failure to obtain such consents or such financing
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 these uncertainties.

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
is obligated to reimburse Prime for two payments relating to the PVH
Agreement totaling $2,334,000, payable each in the amount of $1,167,000 on
June 15, 1999 and June 15, 2000. This obligation was assumed by HGP at the
date of the Merger and is reflected as a liability on the balance sheet as of
June 30, 1999 and December 31, 1998.

YEAR 2000

GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY ("IT") AND NON-IT SYSTEMS

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.

Based on recent assessments, the Company has determined that it will be
required to modify or replace certain portions of its software and certain
hardware so that those systems will properly utilize dates beyond December
31, 1999. The Company presently believes that with the modifications or
replacements of existing software and certain hardware, the Year 2000 Issue
can be mitigated. However, if such modifications and replacements are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.

23
<PAGE>

The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing and implementation. To date, the
Company has completed the assessment of all systems that could be
significantly affected by the Year 2000. The results of the assessment
indicate that most of the Company's significant information processing
technology systems could be affected, particularly the general ledger and
billing systems. That assessment also indicated that software and hardware
used in certain equipment at the Company's properties are also at risk.
Potentially affected systems include security, lighting, automatic
sprinklers, and heating and ventilating systems.

STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR
COMPLETION OF EACH REMAINING PHASE

The Company has completed the assessment and upgrade of its most critical
information technology systems. The Company uses a JD Edwards based
accounting system which is currently Year 2000 compliant. The Company is
working closely with JD Edwards to assure that any subsequent Year 2000
corrections are implemented in a timely fashion. The accounting system is run
on an IBM AS/400 which required an updated operating system in order to be
Year 2000 compliant. The Company installed such software during the first
quarter of 1999. The Company has numerous desktop computers which are
connected via a network to the AS/400. Most of these computers are Year 2000
compliant, but certain older computers may require software upgrades to be
fully Year 2000 compliant. Such upgrades are generally available at no charge
and the Company has substantially completed their installation at the end of
the second quarter of 1999 and expects to finish this process during the
third quarter of 1999.

The assessment phase of the other less critical components of the Company's
information technology hardware and software began in the fourth quarter of
1998 and was completed during the first quarter of 1999. The remediation,
testing and implementation of those components is expected to be completed by
the end of the third quarter of 1999.

The Company has completed the assessment phase of non-information technology
exposures. The remediation, testing and implementation of those systems are
expected to be completed by the end of the third quarter of 1999.

NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE
YEAR 2000

The Company has identified significant suppliers and other third parties with
which the Company does business to assess their compliance with and the
Company's exposure to their non-compliance with Year 2000 issues. With the
exclusion of the utility companies, the Company has completed this assessment.

RISKS

Management of the Company believes it has an effective program in place to
resolve Year 2000 issues in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
the Company does not complete any additional phases of the Year 2000 program,
the Company would be unable to fully utilize its general ledger and billing
computer systems. The Company could experience delays in collecting rents
from tenants in the event their systems are not Year 2000 compliant. The
Company also faces operational risks at its operating properties if certain
equipment located at or related to the operation of those properties is not
Year 2000 compliant. In addition, disruptions in the economy generally
resulting from Year 2000 issues could also materially adversely affect the
Company. The amount of lost revenue cannot be reasonably estimated at this
time.

24
<PAGE>

CONTINGENCY PLANS

The Company has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans include, among
other actions, utilizing off-site vendor hardware and software to process
general ledger and billing transactions related to the operation of the
Company and its properties and the manual operation of certain equipment at
the Company's operating properties. Since the Company cannot anticipate all
possible future outcomes of the year 2000 problem, nor predict the readiness
of entities with which it transacts business, there can be no assurance these
events will not have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.

OTHER YEAR 2000 ISSUES

The majority of actions previously taken and expected to be taken by the
Company to be Year 2000 compliant with respect to its software have been or
would have been made in the ordinary course of utilizing such software.
Typically, such actions involve updating existing software with newer
versions, which the Company typically does on an ongoing basis. The Company
maintains an agreement with JD Edwards which entitles it to upgrades of its
general ledger and billing systems on a periodic basis. The Company expects
to spend a total of approximately $10,000 to upgrade the software used in its
voice-mail system, the operating system and network software related to the
Company's AS/400 computer in order to make them Year 2000 compliant. The
Company expects to internally fund or lease the hardware or software required
to become Year 2000 compliant.

The Company's IT department is conducting its Year 2000 compliance programs
simultaneously with its other functions. To date, such actions have not, and
the Company does not expect future actions in this regard, to significantly
impact other projects undertaken by the IT department.

25
<PAGE>

HORIZON GROUP PROPERTIES, INC.
Quantitative and Qualitative Disclosure of Market Risk
(unaudited)

The Company's primary market risk exposure is associated with the HGP Credit
Facility from Nomura. This facility had a balance of $104.6 million at June
30, 1999, but was reduced to $57.8 million with the proceeds of the JP Morgan
Loans. 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. Since the facility was put in place June 15, 1998, the LIBOR
rate to which the facility is tied has moved in a fairly narrow range. The
monthly interest rates applicable from June 15, 1998 to June 30, 1999 ranged
from 6.80% to 7.56%. As of June 30, 1999, the effective rate was 6.86%. 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 80 basis
points (.8%) based on the amount outstanding after repayment in connection
with the JP Morgan Loans.

<TABLE>
<CAPTION>
PRINCIPAL AMOUNT CHANGE IN LIBOR RATE CHANGE IN INTEREST EXPENSE PER SHARE - DILUTED
---------------- -------------------- -------------------------- -------------------
<S> <C> <C> <C>
$57,800,000 .8% $462,400 $.14
</TABLE>

INFLATION

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

26
<PAGE>

HORIZON GROUP PROPERTIES, INC.
Part II - Other Information

ITEM 1. LEGAL PROCEEDINGS

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.

ITEM 2. CHANGES IN SECURITIES - None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

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% (the "Prime Loan") pursuant
to the terms of a Working Capital Agreement between the Company and Prime
(the "Working Capital Agreement"). The terms of the Working Capital Agreement
require the Company to repay the Prime Loan or other related indebtedness on
which Prime is contingently liable to the extent of net proceeds from an
equity offering or the sale of the Company's Algodones, New Mexico outlet
center.

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

The annual meeting of the shareholders of the Company was held on June 15,
1999. At such meeting, the shareholders of the Company elected Margaret A.
Gilliam (for: 2,487,165 shares; against: 3,949 shares; withheld: 0 shares)
and E. Thomas Thilman (for: 2,487,122 shares; against: 3,992 shares;
withheld: 0 shares) as directors of the Company. The shareholders also
ratified the appointment of Ernst & Young LLP (for: 2,486,884 shares;
against: 2,169 shares; withheld: 2,061 shares) as the Company's independent
auditors for the fiscal year ending December 31, 1999.

27
<PAGE>

ITEM 5. OTHER INFORMATION - None

ITEM 6. EXHIBITS OR REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
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, $.01 par value per share,
of the Company(1)
Exhibit 10.1 Sky Merger Corp. Registration Statement on Form S-4 (excluding
exhibits thereto), as filed with the Securities and Exchange
Commission on May 12, 1998 (Registration No. 333-51285)(1)
Exhibit 10.2 Amended and Restated Agreement and Plan of Merger by and among
Prime Retail, Inc., Prime Retail, L.P., Horizon Group, Inc.,
Sky Merger Corp., the Company, Horizon Group Properties, L.P.
and Horizon/Glen Outlet Centers Limited Partnership dated as
of February 1, 1998 (Incorporated by reference to Exhibit
10(a) to Horizon Group, Inc.'s current report on Form 8-K
dated February 1, 1998 (SEC File No. 1-12424)(1)
Exhibit 10.3 Form of 1998 Stock Option Plan of the Company(1)
Exhibit 10.4 Employment Agreement between Gary J. Skoien and the Company(1)
Exhibit 10.5 Employment Agreement between David R. Tinkham and the
Company(1)
Exhibit 10.6 Form of Indemnification Agreement for the Board of Directors
of the Company(1)
Exhibit 10.7 Form of Registration Rights Agreement(1)
Exhibit 10.8 Form of Contribution Agreement (incorporated by reference to
Appendix E to Exhibit 10.1)(1)
Exhibit 10.9 Employment Agreement between Richard Berman and the Company (3)
Exhibit 10.10 Working Capital Agreement with Prime Retail, Inc. (3)
Exhibit 10.11 Loan Agreement dated as of June 15, 1998 by and among Third
Horizon Group Limited Partnership, Nebraska Crossing Factory
Shops, L.L.C., and Indiana Factory Shops, L.L.C. and Nomura
Asset Capital Corporation(2)
Exhibit 10.12 Form of Deed of Trust, Assignment of Leases and Rents and
Security Agreement with Nomura Asset Capital Corporation(2)
Exhibit 10.13 Form of Mortgage, Assignment of Leases and Rents and Security
Agreement by and between Horizon Group Properties, Inc. and
Nomura Asset Capital Corporation(2)
Exhibit 10.14 Form of Assignment of Leases and Rents by and between Horizon
Group Properties, Inc. and Nomura Asset Capital Corporation(2)
Exhibit 10.15 Guaranty dated as of June 15, 1998 by the Company and Horizon
Group Properties, L.P. to and for the benefit of Nomura Asset
Capital Corporation(2)
Exhibit 10.16 Guaranty and Indemnity Agreement dated as of June 15, 1998 by
and among the Company, Horizon Group Properties, L.P., Prime
Retail, Inc., and Prime Retail, L.P.(2)
Exhibit 10.17 Assignment and Assumption Agreement, dated as of June 15, 1998
by and among Prime Retail, Inc., Prime Retail, L.P.,
Indianapolis Factory Shops Limited Partnership, and Indiana
Factory Shops, L.L.C. (3)
Exhibit 10.18 Assignment and Assumption Agreement, dated as of June 15, 1998
by and among Prime Retail, Inc., Prime Retail, L.P., Nebraska
Factory Shops Limited Partnership, and Nebraska Factory Shops
L.L.C. (3)
Exhibit 10.19 Form of Option Agreement (3)
Exhibit 10.20 Fixed Rate Note dated as of July 9, 1999 between Gretna,
Sealy, Traverse City Outlet Centers, L.L.C. and Morgan
Guaranty Trust Company of New York related to the financing of
the factory outlet center in Gretna, Nebraska (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, L.L.C., as borrower,
related to the financing of the factory outlet center in
Gretna, Nebraska (8)

28
<PAGE>

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 27 Financial Data Schedule
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)
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)
</TABLE>

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 the Company's Form 10-Q dated as of May 17,
1998 (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).

(b) Reports on Form 8-K

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

29
<PAGE>

SIGNATURES

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

HORIZON GROUP PROPERTIES, INC.
Registrant

DATE: August 16, 1999 BY: /S/ GARY J. SKOIEN
----------------- -------------------------------
Gary J. Skoien, President and
Chief Executive Officer

DATE: August 16, 1999 BY: /S/ DAVID R. TINKHAM
----------------- -------------------------------
David R. Tinkham, Chief Accounting
and Chief Financial Officer

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,837
<SECURITIES> 0
<RECEIVABLES> 326
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 146,185
<DEPRECIATION> (4,722)
<TOTAL-ASSETS> 163,457
<CURRENT-LIABILITIES> 0
<BONDS> 113,858
0
0
<COMMON> 28
<OTHER-SE> 33,772
<TOTAL-LIABILITY-AND-EQUITY> 163,457
<SALES> 0
<TOTAL-REVENUES> 14,811
<CGS> 0
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<OTHER-EXPENSES> 10,652
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,337
<INCOME-PRETAX> (637)
<INCOME-TAX> 0
<INCOME-CONTINUING> (637)
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<CHANGES> 0
<NET-INCOME> (533)
<EPS-BASIC> (0.19)
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</TABLE>