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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------
Commission file number 1-13092
MALAN REALTY INVESTORS, INC.
(Exact name of registrant as specified in charter)
Michigan 38-1841410
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
30200 Telegraph Rd., Ste. 105
Bingham Farms, Michigan 48025
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (248) 644-7110
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 at least the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of May 12, 2003, 5,121,370 shares of Common Stock, Par Value $.01 Per
share, were outstanding.
MALAN REALTY INVESTORS, INC.
FORM 10-Q
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Statement of Net Assets in Liquidation (Liquidation Basis)
as of March 31, 2003 (unaudited) and December 31, 2002 3
Statements of Changes in Net Assets in Liquidation
(unaudited) for the three months ended March 31,
2003 4
Notes to Consolidated Financial Statements (unaudited) 5-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II OTHER INFORMATION 16
SIGNATURES 17
CERTIFICATIONS 18-19
2
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
ASSETS
Real estate held for sale $191,379 $191,802
Cash and cash equivalents 7,862 $10,008
Restricted cash - mortgage escrow deposits 2,247 $1,753
Accounts receivable 3,370 3,761
Other assets 629 622
--------------------- --------------------
Total Assets 205,487 207,946
--------------------- --------------------
LIABILITIES
Mortgages 90,666 91,330
Convertible debentures 42,593 42,593
Convertible notes 27,000 27,000
Accounts payable and other 10,653 13,011
Reserve for estimated liquidation costs 6,673 7,582
--------------------- --------------------
Total Liabilities 177,585 181,516
--------------------- --------------------
NET ASSETS IN LIQUIDATION $ 27,902 $ 26,430
===================== ====================
See Notes to Consolidated Financial Statements
3
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSET
LIQUIDATION
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31, 2003
---------------------------
Net Assets in Liquidation as of December 31, 2002 $26,430
Operating Income 1,720
Changes in net assets in liquidation:
Increase in reserve for estimated liquidation costs (248)
---------------------------
Net Assets in Liquidation as of March 31, 2003 $27,902
===========================
See Notes to Consolidated Financial Statements
4
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
In August 2002, based upon approval and recommendation of its Board of
Directors, the Company's shareholders approved a plan of complete liquidation
(the "Plan of Liquidation") of the Company. The Plan of Liquidation provides for
the orderly sale of assets for cash or such other form of consideration as may
be conveniently distributed to shareholders, payment of or establishing reserves
for the payment of liabilities and expenses, distribution of net proceeds of the
liquidation to common shareholders, and wind up of operations and dissolution of
the company. The liquidation process is expected to take up to twenty-four
months to complete, although it could take longer.
Liquidation basis of accounting -- As a result of the approval of the Plan of
Liquidation by its shareholders, the Company adopted the liquidation basis of
accounting for all periods beginning after September 30, 2002. On September 30,
2002, in accordance with the liquidation basis of accounting, assets were
adjusted to estimated net realizable value and liabilities were adjusted to
estimated settlement amounts, including estimated costs associated with carrying
out the liquidation. The valuation of real estate held for sale is based on
current contracts, estimates and other indications of sales value net of
estimated selling costs. Actual values realized for assets and settlement of
liabilities may differ materially from the amounts estimated. Due to the
uncertainty in timing of anticipated sales of property, no provision has been
made for estimated future cash flows from property operations.
Basis of Presentation - The accompanying interim consolidated financial
statements and related notes of the Company are unaudited; however, they have
been prepared in accordance with generally accepted accounting principles for
interim financial reporting for a company in voluntary liquidation, the
instructions to Form 10-Q and the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared under generally accepted
accounting principles have been condensed or omitted pursuant to such rules. In
the opinion of management, all adjustments considered necessary for a fair
presentation of the interim period have been included. The results of such
interim periods are not necessarily indicative of the results of operations for
the full year. These financial statements should be read in conjunction with the
Company's audited financial statements and other information included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
Principles of Consolidation - The accompanying consolidated financial statements
include the activity of the Company and its wholly owned subsidiaries, Malan
Mortgagor, Inc., Malan Meadows, Inc., Malan Revolver, Inc., Malan Aurora Corp.,
Malan Midwest LLC, Malan Standby LLC, Malan WSC LLC, Malan WSC Manager LLC, and
Malan KMSC LLC. All significant inter-company balances and transactions have
been eliminated.
Management Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and 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.
2. COMPENSATION PLANS
During the three months ended March 31, 2003, the Company paid $13,000
in employee matching
5
contributions to its 401(k) retirement plan.
3. LIQUIDATING DISTRIBUTIONS
The Company estimates that shareholders will receive liquidating
distributions ranging from $4.75 per share to $6.50 per share, although they
could receive less than this estimate. The Company does not intend to make
liquidation distributions to shareholders until all of its debts have been
provided for, unless required to do so in order to maintain status as a real
estate investment trust (REIT). The Board of Directors has not established a
firm timetable for future distributions to stockholders. However in order to
maintain its status as a REIT, the Company will be required to make a
distribution of its 2002 federal taxable income to its shareholders during 2003.
The distribution must be declared prior to September 15, 2003 and must be
payable prior to January 1, 2004 and before any distributions of 2003 taxable
income can be made. The Board intends to distribute 100% of 2002 taxable income,
which management currently estimates to be approximately $3.3 million. The
Company may also be required to make distributions of 2003 taxable income upon
final determination of the amounts.
4. MORTGAGES
The Company has the following debt obligations maturing in 2003:
BALANCE
RECOURSE (R) MATURITY MARCH 31,
COLLATERAL NON-RECOURSE (N) DATE 2003
---------- ---------------- ---- ----
Convertible Bricktown
Notes Square R 7/15/03 $27,000
JDI Loans LLC 8 Kmart anchored
shopping centers
-- Columbus, IN R 8/9/03 12,333
Fairview Heights, IL
Salomon 4 Wal-Mart
Bros. Realty anchored shopping N 8/11/03 23,000
Corp. centers; Clinton
Pointe Shopping
Center
Cohen 5 Kmart anchored R 9/1/03 9,016
Financial shopping centers
--------
Total $ 71,349
========
The Company intends to satisfy the above debt primarily through proceeds
of property sales. In the event that such sales fail to materialize or close
prior to the due dates of the loans, the Company intends to obtain back-up
financing through the refinance of certain properties sufficient to retire the
existing debt or through the extension of existing facilities. The Company is
currently in negotiation with several lenders regarding these arrangements and
anticipates obtaining financing commitments within the next 30 to 60 days.
5. PROPERTY TRANSACTIONS AND CLASSIFICATIONS
During the three months ended March 31, 2003 and subsequent, the Company
disposed of the following properties:
6
GROSS NET
LEASABLE PROCEEDS
AREA CONTRACT AFTER DEBT
DATE PROPERTY LOCATION (SQ. FT.) PRICE REPAYMENT
---- -------- -------- --------- ----- ---------
(IN THOUSANDS)
3/31/03 Strip Center Springfield, 8 $ 425 $ --
MO
4/29/03 Vacant --
Former Kmart Forestville, 84 2,900 2,877
MD --- ------------ ----------
Total 92 $ 3,325 $ 2,877
============ ==========
Net cash generated from the sales was used for general working capital
purposes and to pay down the outstanding balances on the Company's debt
obligations.
As of May 12, 2003, the following properties were under contract for
sale:
PROPERTY LOCATION CONTRACT PRICE
-------- -------- --------------
(in thousands)
Orchard-14 Shopping Center Farmington Hills, MI $6,200
Hobby Lobby Fairview Heights, IL 2,300
Kmart Oshkosh, WI 1,550
Kmart Rockford, IL 2,100
Kmart Cape Girardeau, MO 1,400
Southwind Theaters Lawrence, KS 5,000
Northway Mall Marshfield, WI 3,600
Wal-Mart Plaza Columbus, IN 7,050
Tinseltown 17 North Aurora, IL
Kmart Franklin Park, IL
Cinemark 10 Melrose Park, IL 16,350
-------
Total $45,550
=======
Some of the above contracts are subject to due diligence and other
contingencies and are expected to close within the next 30 to 120 days pending
waiver of such contingencies. In addition to the above contracts, Kmart
Corporation has elected to exercise its right of first refusal to purchase its
store in Springfield, Missouri at a price of $2.560 million. This sale is
expected to close with the next 30 days.
The Company's property in Hays, Kansas is under an option for sale
expiring November 30, 2003 at a price of $900,000.
The Company also has three signed letters of intent for the sale of
twenty-six other properties for a total price of $98.275 million as of May 12,
2003.
6. COMMITMENTS AND CONTINGENCIES
Litigation
In September 2001 the Circuit Court in Oakland County, Michigan affirmed
its previous decision granting summary disposition in favor of Anthony S.
Gramer, the former president and CEO of the Company, in litigation brought by
Gramer seeking more than $1 million for breach of an employment
7
agreement. The Company believes that the order was entered in error and has
filed an appeal with the Michigan Court of Appeals.
Gramer contends that he is entitled under his agreements with the
Company to both change in control payments and termination payments through
December 2003, in a lump sum. The Company has not recorded a liability related
to this lawsuit and intends to vigorously pursue all available avenues open in
the litigation because the Company strongly believes that it has met all
obligations under the employment agreement.
In October 2001, the Company posted a bond totaling approximately $1.573
million with the court representing maximum potential damages and anticipated
interest should the Company be unsuccessful in its appeal. Requirements of the
bond include an irrevocable letter of credit in the total amount of the bond.
Terms of the letter of credit, which was issued by Bank One included a reduction
in the available borrowing on the Company's line of credit in the principal
amount of the letter.
7. KMART BANKRUPTCY
In January 2002, the Company's major tenant, Kmart Corporation
("Kmart"), filed a voluntary petition for reorganization relief under Chapter 11
of the U.S. Bankruptcy Code. As part of its plan of reorganization, Kmart closed
four of its stores owned by the Company in May 2002 and subsequently rejected
the leases on three of these stores and assigned the lease on its store in
Madison, Wisconsin to Burlington Coat Factory in June 2002. Total revenues from
leases that were rejected by Kmart for these stores, which are located in
Forestville, Maryland, Marshfield, Wisconsin and Topeka, Kansas, are
approximately $1.1 million annually. Two of these properties have other in-line
tenants that may be adversely affected by the closures. In January 2003, Kmart
announced its intention to close an additional store located in Milwaukee,
Wisconsin and subsequently rejected the lease in April 2003. Total revenues from
the Milwaukee store were approximately $400,000 annually.
The Company has listed all its properties for sale including those
affected by the lease rejections. In April 2003, the Company completed the sale
of Forestville, Maryland at a price of $2.9 million and currently has a contract
for the sale of Marshfield, Wisconsin for $3.6 million. The Company is also
attempting to re-lease the vacant Kmart spaces in Marshfield and Milwaukee,
Wisconsin and Topeka, Kansas. In addition, under the bankruptcy laws, a landlord
is entitled to rejection damages within certain limitations, which are currently
estimated to be approximately 40% of the total claim. While the actual effect on
future cash flows resulting from the store closures and lease rejections cannot
be determined at this time, the Company does not anticipate that its cash flows
will be materially affected by the revenues lost from the rejected leases over
the short term as a result of proceeds received on the sale of Forestville,
Maryland.
In April 2003, Kmart's plan of reorganization was confirmed by the
Bankruptcy Court and on May 6, 2003, it announced that it had emerged from
Chapter 11 bankruptcy.
8. ESTIMATED LIQUIDATION COSTS
Under the liquidation basis of accounting, the Company is required to
estimate and record the costs associated with executing the plan of liquidation
as a liability. These amounts can vary significantly due to, among other things,
the timing and realized proceeds from property sales, the costs of retaining
personnel, the costs of insurance, the timing and amounts associated with
discharging known and contingent liabilities and the costs associated with
cessation of the Company's operations. These costs are estimates and are
expected to be paid out over the liquidation period.
8
The change in the Company's Reserve for Estimated Liquidation Costs for
the three months ended March 31, 2003 is detailed as follows in thousands:
BALANCE BALANCE
JANUARY 1, 2003 PAYMENTS ADJUSTMENTS MARCH 31, 2003
--------------- -------- ----------- --------------
Severance, Retention and Bonus $ 1,748 $ - $ - $ 1,748
Payroll and Personnel Costs 2,987 (561) 117 2,543
Provision for State Taxes 697 (128) 50 619
Professional Fees 1,246 (259) 62 1,049
Office & Administrative Expenses 904 (209) 19 714
-------- -------- -------- ---------
Total $ 7,582 $(1,157) $ 248 $ 6,673
======== ======== ======== =========
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
In August 2002, the Company's shareholders approved a complete plan of
liquidation of the Company (See "Plan of Liquidation" below). As a result, the
Company adopted the liquidation basis of accounting for a periods beginning
after September 30, 2002. Accordingly, the Company ceased to record revenues and
expenses after that date, and reports only the changes in Net Assets in
Liquidation for the periods thereafter.
CHANGES IN NET ASSETS IN LIQUIDATION
Three Months Ended March 31, 2003
Net Assets in Liquidation increased $1.472 million from December 31,
2002 to March 31, 2003. Operating income including income from properties and
interest expense on corporate and property specific debt was approximately
$1.720 million during the period. The reserve for estimated liquidation costs
increased approximately $248,000 primarily from increased personnel costs and
estimated tax payments.
LIQUIDITY AND CAPITAL RESOURCES
Prior to approval by its shareholders in August 2002 of the Plan of
Liquidation, cash flow from operations was the principal source of capital to
fund the Company's ongoing operations. Efforts to increase cash flow over the
past twelve months for repayment and retirement of impending debt maturities
have centered on disposition of assets and refinancing of unencumbered
properties.
The Company anticipates that its cash flow from operations and sales of
property will be sufficient to fund its cash needs for payment of expenses
during the liquidation period, capital expenditures, recurring debt service
payments and repayment of debt maturities. Because of differences between the
timing of property sales and the maturity of certain debt obligations coming due
in 2003, the Company may need to refinance some properties and/or request
extensions of existing financing agreements or obtain back-up financing
arrangements in order to meet debt maturities (see "Financings" below).
The Company does not intend to make liquidating distributions to
shareholders until all of its debts have been provided for unless required to do
so in order to maintain its status as a real estate investment trust (REIT). To
maintain its REIT status the Company will be required to make a distribution of
its 2002 federal taxable income to its shareholders. The distribution must be
declared prior to September 15, 2003 and must be payable prior to January 1,
2004 and before any distributions of 2003 taxable income can be made. The
Company's Board of Directors intends to distribute 100% of 2002 taxable income,
which management currently estimates to be approximately $3.3 million. The
Company may also be required to make distributions of 2003 taxable income based
upon final determination of the amounts.
DEVELOPMENTS AND REDEVELOPMENT
Consistent with the Plan of Liquidation discussed below, the Company
does not anticipate any further new developments or redevelopments.
CAPITAL EXPENDITURES
The Company incurs capital expenditures in the ordinary course of
business in order to maintain its properties. Such capital expenditures
typically include roof, parking lot and other structural repairs, some of which
are reimbursed by tenants. Approximately $964,000 is anticipated to be incurred
in 2003 for capital
10
expenditures (of which $247,000 was incurred during the three months ended
March 31, 2003).
In order to procure new tenants or renegotiate expiring leases with
current tenants, the Company will provide inducements such as building
allowances or space improvements and will pay leasing commissions to outside
brokers in accordance with prevailing market conditions. The total cost of these
expenditures in 2003 is estimated to be approximately $225,000 (of which $88,000
were incurred during the three months ended March 31, 2003). These expenditures
are generally funded by operating cash flows.
SOURCES OF CAPITAL
The Company sold the following properties during the three months ended
March 31, 2003 and subsequent (in thousands):
GROSS NET
LEASABLE PROCEEDS
AREA AFTER DEBT
DATE PROPERTY LOCATION (SQ. FT.) PRICE REPAYMENT
---- -------- -------- --------- ----- -----------
3/31/03 Strip Center Springfield, MO 8 $ 425 $ --
4/29/03 Vacant -
Former Kmart Forestville, MD 84 2,900 2,877
-- -------- --------
Total 92 $ 3,325 $ 2,877
== ======== ========
Net cash generated from the sales was used for general working capital
purposes and to pay down the outstanding balances on the Company's debt
obligations.
As of May 12, 2003, the following properties were under contract for
sale:
PROPERTY LOCATION CONTRACT PRICE
-------- -------- --------------
(in thousands)
Orchard-14 Shopping Center Farmington Hills, MI $6,200
Hobby Lobby Fairview Heights, IL 2,300
Kmart Oshkosh, WI 1,550
Kmart Rockford, IL 2,100
Kmart Cape Girardeau, MO 1,400
Southwind Theaters Lawrence, KS 5,000
Northway Mall Marshfield, WI 3,600
Wal-Mart Plaza Columbus, IN 7,050
Tinseltown 17 North Aurora, IL
Kmart Franklin Park, IL
Cinemark 10 Melrose Park, IL 16,350
-------
Total $45,550
=======
Some of the above contracts are subject to due diligence and other
contingencies and are expected to close within the next 30 to 120 days pending
waiver of such contingencies. In addition to the above contracts, Kmart
Corporation has elected to exercise its right of first refusal to purchase its
store in Springfield, Missouri at a price of $2.560 million. This sale is
expected to close with the next 30 days.
The Company's property in Hays, Kansas is under an option for sale
expiring November 30, 2003 at a price of $900,000.
The Company also has three signed letters of intent for the sale of
twenty-six other properties for a
11
total price of $98.275 million as of May 12, 2003.
FINANCINGS
The Company has a line of credit with Bank One, which expires October
25, 2003 and is collateralized by Orchard-14 Shopping Center in Farmington
Hills, Michigan. Maximum borrowings under the line are approximately $1.8
million, which is the total face value of two separate standby letters of credit
issued by the bank. Terms of the loan agreement also include a reduction in the
available borrowing by the same amount until the letters of credit are
discharged.
The Company has the following debt obligations maturing in the next
twelve months:
BALANCE
RECOURSE (R) MATURITY MARCH 31,
LOAN COLLATERAL NON-RECOURSE (N) DATE 2003
---- ---------- ---------------- ---- ----
Convertible Bricktown
Notes Square R 7/15/03 $27,000
JDI Loans LLC 8 Kmart anchored
shopping centers --
Columbus, IN R 8/9/03 12,333
Fairview Heights,
IL
Salomon 4 Wal-Mart
Bros. Realty anchored shopping N 8/11/03 23,000
Corp. centers; Clinton
Pointe Shopping
Center
Cohen 5 Kmart anchored R 9/1/03 9,016
Financial shopping centers
--------
Total $ 71,349
========
The Company intends to satisfy the above debt primarily through proceeds
of property sales (see "Sources of Capital" above). In the event that such sales
fail to materialize or close prior to the due dates of the loans, the Company
intends to obtain back-up financing through the refinance of certain properties
sufficient to retire the existing debt or through the extension of existing
facilities. The Company is currently in negotiation with several lenders
regarding these arrangements and anticipates obtaining financing commitments
within the next 30 to 60 days.
LITIGATION
In September 2001, the Circuit Court in Oakland County, Michigan
affirmed its previous decision granting summary disposition in favor of Anthony
S. Gramer, the former president and CEO of the Company, in litigation brought by
Gramer seeking more than $1 million for breach of an employment agreement. The
Company believes that the order was entered in error and has filed an appeal
with the Michigan Court of Appeals.
Gramer contends that he is entitled under his agreements with the
Company to both change in control payments and termination payments through
December 2003, in a lump sum. The Company has not recorded a liability related
to this lawsuit and intends to vigorously pursue all available avenues open in
the litigation because the Company strongly believes that it has met all
obligations under the employment agreement.
12
The Company has posted a bond totaling approximately $1.573 million with
the court representing maximum potential damages and anticipated interest should
the Company be unsuccessful in its appeal. Requirements of the bond include an
irrevocable letter of credit in the total amount of the bond. Terms of the
letter of credit issued by Bank One included a reduction in the available
borrowing on the Company's line of credit in the principal amount of the letter.
KMART BANKRUPTCY
In January 2002, the Company's major tenant, Kmart Corporation
("Kmart"), filed a voluntary petition for reorganization relief under Chapter 11
of the U.S. Bankruptcy Code. As part of its plan of reorganization, Kmart closed
four of its stores owned by the Company in May 2002 and subsequently rejected
the leases on three of these stores and assigned the lease on its store in
Madison, Wisconsin to Burlington Coat Factory in June 2002. Total revenues from
leases that were rejected by Kmart for these stores, which are located in
Forestville, Maryland, Marshfield, Wisconsin and Topeka, Kansas, are
approximately $1.1 million annually. Two of these properties have other in-line
tenants that may be adversely affected by the closures. In January 2003, Kmart
announced its intention to close an additional store located in Milwaukee,
Wisconsin and subsequently rejected the lease in April 2003. Total revenues from
the Milwaukee store were approximately $400,000 annually.
The Company has listed all its properties for sale including those
affected by the lease rejections. In April 2003, the Company completed the sale
of Forestville, Maryland at a price of $2.9 million and currently has a contract
for the sale of Marshfield, Wisconsin for $3.6 million. The Company is also
attempting to re-lease the vacant Kmart spaces in Marshfield and Milwaukee,
Wisconsin and Topeka, Kansas. In addition, under the bankruptcy laws, a landlord
is entitled to rejection damages within certain limitations, which are currently
estimated to be approximately 40% of the total claim. While the actual effect on
future cash flows resulting from the store closures and lease rejections cannot
be determined at this time, the Company does not anticipate that its cash flows
will be materially affected by the revenues lost from the rejected leases over
the short term as a result of proceeds received on the sale of Forestville,
Maryland.
In April 2003, Kmart's plan of reorganization was confirmed by the
Bankruptcy Court and on May 6, 2003, it announced that it had emerged from
Chapter 11 bankruptcy.
PLAN OF LIQUIDATION
In August 2002, the Company's shareholders approved the Plan of
Liquidation of the Company. The Plan of Liquidation provides for the orderly
sale of assets for cash or such other form of consideration as may be
conveniently distributed to shareholders, payment of or establishing reserves
for the payment of liabilities and expenses, distribution of net proceeds of the
liquidation to common shareholders, and wind up of operations and dissolution of
the company. The liquidation process is expected to take up to twenty-four
months to complete, although it could take longer. To assist in disposing its
assets under the Plan of Liquidation, the Company hired CB Richard Ellis, Inc.,
a leading national real estate brokerage firm, under an exclusive sales listing
agreement, for the sale of substantially all of its real estate assets.
As a result of the approval of the Plan of Liquidation, the Company
adopted the liquidation basis of accounting for all periods beginning after
September 30, 2002. On September 30, 2002, in accordance with the liquidation
basis of accounting, assets were adjusted to estimated net realizable value and
liabilities were adjusted to estimated settlement amounts, including estimated
costs associated with carrying out the liquidation. The valuation of real estate
held for sale is based on current contracts, estimates and other indications of
sales value net of estimated selling costs. Actual values realized for assets
and settlement of liabilities may differ materially from the amounts estimated.
13
Under the liquidation basis of accounting, the Company is required to
estimate and record the costs associated with executing the plan of liquidation
as a liability. These amounts can vary significantly due to, among other things,
the timing and realized proceeds from property sales, the costs of retaining
personnel, the costs of insurance, the timing and amounts associated with
discharging known and contingent liabilities and the costs associated with
cessation of the Company's operations. These costs are estimates and are
expected to be paid out over the liquidation period.
The following table reflects the composition of the Company's Reserve
for Estimated Liquidation Costs beginning January 1, 2003, subsequent payments
and adjustments, and the balance at March 31, 2003:
BALANCE BALANCE
JANUARY 1, 2003 PAYMENTS ADJUSTMENTS MARCH 31, 2003
--------------- -------- ----------- --------------
Severance, Retention and Bonus $ 1,748 $ - $ - $ 1,748
Payroll and Personnel Costs 2,987 (561) 117 2,543
Provision for State Taxes 697 (128) 50 619
Professional Fees 1,246 (259) 62 1,049
Office & Administrative Expenses 904 (209) 19 714
-------- -------- ---------- ---------
Total $ 7,582 $(1,157) $ 248 $ 6,673
======== ======== ========== =========
The Company estimates that shareholders will receive liquidating
distributions ranging from $4.75 per share to $6.50 per share although they
could receive less than this.
The Board of Directors approved a severance and retention bonus plan
(the "Severance Plan") for its employees, which became effective upon approval
of the Plan of Liquidation by the shareholders in August 2002. With the
exception of the chief executive officer and chief financial officer (both of
whom have employment agreements), and employees working at the Northway Mall in
Marshfield, Wisconsin, each regular employee whose employment is involuntarily
terminated pursuant to the plan of liquidation will be eligible to participate
in the Severance Plan unless the employee is terminated for cause.
The Severance Plan divides eligible employees into two classes of
participants: non-retained participants and retained participants. Upon the
satisfaction of certain conditions described in the Severance Plan, the Company
will pay over 36 months to each participant the lesser of 1) nine months of the
participant's current annualized salary, or 2) the greater of a) two weeks of
the participant's current annualized salary for each consecutive six-month
period in which the participant has worked full time for the Company from the
last date of hire until (i) the date of termination for non-retained
participants or (ii) the date the participant was classified as a retained
participant (the "Classification Date"); or b) six weeks of the participant's
current annualized base salary.
Additionally, under the Severance Plan retained participants will be
entitled to receive a retention bonus over 36 months equal to the lesser of: 1)
twelve months of the retained participant's annualized salary as of the
Classification Date, or 2) the greater of (A) four months of the retained
participant's annualized salary as of the Classification Date, or (B) 5% of the
retained participant's annualized base salary as of the Classification Date for
each full month the retained participant remains employed by the Company
following such date. In February 2003, the Company determined the Classification
Date to be September 1, 2003.
SAFE HARBOR STATEMENT
Each of the above statements regarding anticipated operating results are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company
14
believes the statements and projections are based upon reasonable assumptions,
actual results may differ from those projected.
Key factors that could cause actual results to differ materially include
uncertainties regarding the length of time required to sell the Company's
properties and execute the Plan of Liquidation and expenses incurred during the
liquidation period, the Company's ability to retire or refinance its
indebtedness as it comes due, the Company's success in selling assets, and the
changing market conditions affecting the sales price of its properties, the
disproportionate effect of changes in proceeds from property sales on
liquidating distributions due to the Company's capital structure, economic
downturns, leasing activities, the outcome of the litigation filed by the
Company's former President, bankruptcies and other financial difficulties of
tenants, the cost of addressing environmental concerns, unforeseen contingent
liabilities, and other risks associated with the commercial real estate
business, and as detailed in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
INFLATION
The Company's long-term leases contain provisions to mitigate the
adverse impact of inflation on its results from operations. Such provisions
include clauses entitling the Company to receive (i) scheduled base rent
increases and (ii) percentage rents based upon tenants' gross sales, which
generally increase as prices rise. In addition, many of the Company's non-anchor
leases are for terms of less than ten years, which permits the Company to seek
increases in rents upon re-rental at the then current market rates if rents
provided in the expiring leases are below then existing market rates. Most of
the Company's leases require tenants to pay a share of operating expenses,
including common area maintenance, real estate taxes, insurance and utilities,
thereby reducing the Company's exposure to increases in costs and operating
expenses resulting from inflation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company has exposure to interest rate risk on its debt obligations
and interest rate instruments. Based on the Company's outstanding variable rate
debt at March 31, 2003, a one percent increase or decrease in interest rates
would decrease or increase, respectively, the Company earnings and cash flows by
approximately $444,000 on an annualized basis.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including the Company's principal executive officer and principal
financial officer, the Company conducted an evaluation of its disclosure
controls and procedures, as such term is defined under Rule 13a-14(c)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), within 90 days of the filing date of this report. Based on such
evaluation, the Company's principal executive officer and principal accounting
officer have concluded that the Company's disclosure controls and procedures are
effective.
There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced above.
15
MALAN REALTY INVESTORS, INC.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
See "Litigation" under Liquidity and Capital Resources in Management's
Discussion and Analysis of Financial Condition and Results of Operations
Item 2: Changes in Securities
NONE
Item 3: Defaults Upon Senior Securities
NONE
Item 4: Submission of Matters to a Vote of Security Holders
NONE
Item 5: Other Information
NONE
Item 6: Exhibits and Reports on Form 8-K
a) Exhibit Index:
99.1 Written Statement of the Chief Executive Officer Filed with this document
99.2 Written Statement of the Chief Financial Officer Filed with this document
b) Reports on Form 8-K
NONE
16
MALAN REALTY INVESTORS, INC.
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.
MALAN REALTY INVESTORS, INC.
By: /s/ Jeffrey D. Lewis
---------------------
Jeffrey D. Lewis
Chief Executive Officer
By: /s/ Elliott J. Broderick
------------------------
Elliott J. Broderick
Chief Financial Officer (principal accounting officer)
Dated: May 12, 2003
17
CERTIFICATIONS
I, JEFFREY D. LEWIS, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Malan Realty Investors,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
7. A signed original of this written statement required by Section 906 has been
provided to Malan Realty Investors, Inc. and will be retained by Malan Realty
Investors, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.
Date: May 12, 2003
/s/ Jeffrey D. Lewis
--------------------
Jeffrey D. Lewis
Chief Executive Officer
18
CERTIFICATIONS
I, ELLIOTT J. BRODERICK, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Malan Realty Investors,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
7. A signed original of this written statement required by Section 906 has been
provided to Malan Realty Investors, Inc. and will be retained by Malan Realty
Investors, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.
Date: May 12, 2003
/s/ Elliott J. Broderick
-------------------------
Elliott J. Broderick
Chief Financial Officer
(principal accounting officer)
19
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
99.1 Written Statement of the Chief Executive Officer
99.2 Written Statement of the Chief Financial Officer