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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 June 30, 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 Identification
incorporation or organization) Number)
30200 Telegraph Rd., Ste. 105
Bingham Farms, Michigan 48025
(Address of principal executive offices) (Zip Code)
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 August 11, 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
June 30, 2003 (unaudited) and December 31, 2002 3
Statements of Changes in Net Assets in Liquidation (unaudited) for
the three months and six months ended June 30, 2003 4
Notes to Consolidated Financial Statements (unaudited) 5-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II OTHER INFORMATION 17
SIGNATURES 19
CERTIFICATIONS 20-22
2
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2003 2002
---- ----
(unaudited)
ASSETS
Real estate held for sale $179,297 $191,802
Cash and cash equivalents 14,760 10,008
Restricted cash - mortgage escrow deposits 2,591 1,753
Accounts receivable 1,635 3,761
Other assets 629 622
-------- --------
Total Assets 198,912 207,946
-------- --------
LIABILITIES
Mortgages 82,890 91,330
Convertible debentures 42,593 42,593
Convertible notes 27,000 27,000
Accounts payable and other liabilities 12,196 13,011
Reserve for estimated liquidation costs 5,593 7,582
-------- --------
Total Liabilities 170,272 181,516
-------- --------
NET ASSETS IN LIQUIDATION $ 28,640 $ 26,430
======== ========
See Notes to Consolidated Financial Statements
3
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2003
------------ -------------
Net Assets in Liquidation beginning of period $ 27,902 $ 26,430
Operating Income 10 573
Changes in net assets in liquidation:
Realized gain on sale of assets 313 313
Decrease in fair value of real estate (665) (665)
Decrease in reserve for estimated liquidation costs 1,080 1,989
------------ -------------
Net Assets in Liquidation as of June 30, 2003 $ 28,640 $ 28,640
============ =============
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,
Malan KMSC LLC and Bricktown Malan 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 six months ended June 30, 2003, the Company paid $21,000 in
employee matching contributions to its 401(k) retirement plan.
5
3. LIQUIDATING DISTRIBUTIONS
The Company estimates that shareholders will receive liquidating
distributions ranging from $4.50 per share to $6.25 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
As of June 30, 2003, the Company had the following debt obligations
maturing in 2003:
BALANCE
RECOURSE (R) MATURITY JUNE 30,
COLLATERAL NON-RECOURSE (N) DATE 2003
---------- ---------------- ---- --------------
(in thousands)
Convertible Bricktown
Notes Square R 7/15/03 $27,000
JDI Loans LLC 6 Kmart anchored
shopping centers --
Columbus, IN R 8/9/03 8,312
Fairview Heights, IL
Salomon Bros. 4 Wal-Mart anchored
Realty Corp. shopping centers; N 8/11/03 23,000
Clinton Pointe
Shopping Center
Cohen Financial 5 Kmart anchored R 9/1/03 8,763
shopping centers
-------
Total $67,075
=======
The $27 million 8.5% Secured Convertible Notes due July 15, 2003 were
retired in July 2003 utilizing a combination of proceeds from property sales and
a $20.5 million loan with UBS Warburg Real Estate Investments, Inc.
collateralized by the Company's interest in Bricktown Square Shopping Center in
Chicago, Illinois. The loan is for a two year term, maturing August 11, 2005
with interest payable monthly at a rate of 350 basis points over LIBOR with a
floor of 6.5% per annum. In addition, the loan requires monthly payments of
principal equal to $30,000 during the first year and the greater of $30,000 or
50% of net cash flow from the property as defined in the loan agreement in the
second year.
In July 2003 the Company completed the sales of two Kmart buildings
located in Cape Girardeau, Missouri and Oshkosh, Wisconsin. Net proceeds
generated from the sale of $1.339 million and $1.462 million, respectively, were
utilized to pay down the JDI loan to a balance of approximately $5.512 million.
The remaining balance of the JDI loan was repaid in August 2003 out of available
working capital.
6
Also in July 2003 the Company completed the sale of Clinton Pointe
Shopping Center generating proceeds of approximately $10.929 million, which were
utilized to pay down the Salomon Brothers Realty Corp. loan to a balance of
approximately $12.071 million. The Company subsequently negotiated an extension
of the loan to August 11, 2004 with substantially similar terms.
The Company is currently negotiating an extension of the Cohen
Financial loan in the event that property sales do not generate sufficient
proceeds to retire the loan by the September 1, 2003 maturity date.
5. PROPERTY TRANSACTIONS AND CLASSIFICATIONS
During the six months ended June 30, 2003 and subsequent, the Company
disposed of the following properties (in thousands):
GROSS
LEASABLE NET PROCEEDS
AREA CONTRACT 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
6/4/03 Kmart Bldg. Rockford, IL 110 2,100 --
6/5/03 Southwind Theater Lawrence, KS 43 5,000 1,414
6/23/03 Kmart Bldg. Springfield, MO 99 2,135 --
7/9/03 Kmart Cape Girardeau, MO 80 1,400 --
7/11/03 Northway Mall Marshfield, WI 287 3,600 3,287
7/11/03 Clinton Pointe 135 11,600 --
Shopping Center Clinton Twp., MI
7/28/03 Kmart Oshkosh, WI 104 1,550 --
--- --------- ----------
Total 950 $ 30,710 $ 7,578
=== ========= ==========
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 August 11, 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
Wal-Mart Plaza Columbus, IN 7,050
Tinseltown 17 North Aurora, IL 6,300
Kmart Franklin Park, IL 3,550
Cinemark 10 Melrose Park, IL 5,664
Westland Plaza Madison, WI 4,300
Vacant Land Lawrence, KS 635
Westland Center Westland, MI 5,900
The Shops at Fairlane Meadows Dearborn, MI 19,350
--------
Total $ 61,249
========
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.
7
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 a signed letter of intent for the sale of one
property for $2.065 million as of August 11, 2003.
6. COMMITMENTS AND CONTINGENCIES
Litigation
In July 2003, the Michigan Court of Appeals upheld a previous decision
by the Circuit Court in Oakland County, Michigan 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 Court of Appeals affirmed the decision that Gramer 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 filed
a petition with the Michigan Supreme Court to review the appellate court
decision. The Company believes it has met all obligations under the employment
agreement and accordingly did not record a liability previously since it did
not consider an unfavorable decision to be probable. As a result of the ruling,
the Company has recorded a liability of $1.4 million at June 30, 2003, based on
the amount of the award plus accrued interest through the expected date of
resolution.
The Company currently has a bond totaling approximately $1.573 million
posted with the court representing 125% of the award plus potential interest.
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, located in Forestville,
Maryland, Marshfield, Wisconsin and Topeka, Kansas, were approximately $1.1
million annually. 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 in July 2003 completed
the sale of Marshfield, Wisconsin for $3.6 million. The Company is also
attempting to re-lease the vacant Kmart space in 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 10% 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 sales of Forestville,
Maryland and Marshfield, Wisconsin.
8
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. To date, the Company has received approximately $2.077
million of its pre-petition bankruptcy claim from Kmart.
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.
The change in the Company's Reserve for Estimated Liquidation Costs for
the three months ended June 30, 2003 is detailed as follows in thousands:
BALANCE BALANCE
APRIL 1, 2003 PAYMENTS ADJUSTMENTS JUNE 30, 2003
------------- -------- ----------- -------------
Severance, Retention and Bonus $ 1,748 $ (63) $ (128) $ 1,557
Payroll and Personnel Costs 2,543 (344) (379) 1,820
Provision for State Taxes 619 (8) (101) 510
Professional Fees 1,049 (328) 412 1,133
Office & Administrative Expenses 714 (158) 17 573
------- ------- -------- ---------
Total $ 6,673 $ (901) $ (179) $ 5,593
======= ======= ======== =========
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 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 June 30, 2003
Net Assets in Liquidation increased $738,000 from March 31, 2003 to
June 30, 2003. Operating income including income from properties and interest
expense on corporate and property specific debt was approximately $10,000 during
the period. Included in operating income is a $1.4 million charge relating to an
unfavorable court decision against the Company issued in July 2003 (see
"Litigation" below) and a reduction in estimated environmental investigation and
remediation costs of $1.1 million due to revisions in actual and estimated
remediation costs at several of the properties based on test results and further
investigation of the issues. Realized gains from the sale of assets was
approximately $313,000 and the estimated fair value on the remaining properties
held for sale decreased $665,000 based on executed contracts for sale. The
reserve for estimated liquidation costs decreased approximately $1.08 million
primarily due to payments of and estimated decreases in personnel costs and
anticipated state and local income taxes.
Six Months Ended June 30, 2003
Net Assets in Liquidation increased $2.210 million from December 31,
2002 to June 30, 2003. Operating income including income from properties and
interest expense on corporate and property specific debt was approximately
$573,000 during the period. Included in operating income is a $1.4 million
charge relating to an unfavorable court decision against the Company issued in
July 2003 (see "Litigation" below) and a reduction in estimated environmental
investigation and remediation costs of $1.1 million due to revisions in actual
and estimated remediation costs at several of the properties based on test
results and further investigation of the issues. Realized gains from the sale of
assets was approximately $313,000 and the estimated fair value on the remaining
properties held for sale decreased $665,000 based on executed contracts. The
reserve for estimated liquidation costs decreased approximately $1.989 million
primarily due to payments of and estimated decreases in personnel costs and
anticipated state and local income taxes.
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).
10
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 $762,000 is anticipated to be incurred
in 2003 for capital expenditures (of which $12,000 were incurred during the six
months ended June 30, 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
$103,000 were incurred during the six months ended June 30, 2003). These
expenditures are generally funded by operating cash flows.
SOURCES OF CAPITAL
The Company sold the following properties during the six months ended
June 30, 2003 and subsequent (in thousands):
GROSS
LEASABLE NET PROCEEDS
AREA CONTRACT AFTER DEBT
DATE PROPERTY LOCATION (SQ. FT.) PRICE REPAYMENT
---- -------- -------- --------- ----- ---------
(IN THOUSANDS)
3/31/03 Strip Center Springfield, MO 8 $ 425 $ --
4/29/03 Vacant --
Former Kmart Forestville, MD 84 2,900 2,877
6/4/03 Kmart Bldg. Rockford, IL 110 2,100 --
6/5/03 Southwind Theater Lawrence, KS 43 5,000 1,414
6/23/03 Kmart Bldg. Springfield, MO 99 2,135 --
7/9/03 Kmart Cape Girardeau, MO 80 1,400 --
7/11/03 Northway Mall Marshfield, WI 287 3,600 3,287
7/11/03 Clinton Pointe
Shopping Center Clinton Twp., MI 135 11,600 --
7/28/03 Kmart Oshkosh, WI 104 1,550 --
--- --------- ---------
Total 950 $ 30,710 $ 7,578
=== ========= =========
11
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 August 11, 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
Wal-Mart Plaza Columbus, IN 7,050
Tinseltown 17 North Aurora, IL 6,300
Kmart Franklin Park, IL 3,550
Cinemark 10 Melrose Park, IL 5,664
Westland Plaza Madison, WI 4,300
Vacant Land Lawrence, KS 635
Westland Center Westland, MI 5,900
The Shops at Fairlane Meadows Dearborn, MI 19,350
--------
Total $ 61,249
========
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.
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 a signed letter of intent for the sale of one
property for $2.065 million as of August 11, 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.
As of June 30, 2003, the Company had the following debt obligations
maturing in the next twelve months:
BALANCE
RECOURSE (R) MATURITY JUNE 30,
LOAN COLLATERAL NON-RECOURSE (N) DATE 2003
---- ---------- ---------------- ---- --------------
(in thousands)
Convertible Bricktown
Notes Square R 7/15/03 $27,000
JDI Loans LLC 6 Kmart anchored
shopping centers --
Columbus, IN R 8/9/03 8,312
Fairview Heights, IL
Salomon Bros. 4 Wal-Mart anchored
Realty Corp. shopping centers; N 8/11/03 23,000
Clinton Pointe
Shopping Center
Cohen Financial 5 Kmart anchored R 9/1/03 8,763
shopping centers
-------
Total $67,075
=======
12
The $27 million Secured Convertible notes due July 15, 2003 were
retired in July 2003 utilizing a combination of proceeds from property sales and
a $20.5 million loan with UBS Warburg Real Estate Investments, Inc.
collateralized by the Company's interest in Bricktown Square Shopping Center in
Chicago, Illinois. The loan is for a two year term, maturing September 11, 2005
with interest payable monthly at a rate of 350 basis points over LIBOR with a
floor of 6.5%. In addition, the loan requires monthly payments of principal
equal to $30,000 during the first year and the greater of $30,000 or 50% of net
cash flow from the property as defined in the loan agreement in the second year.
In July 2003 the Company completed the sales of two Kmart buildings
located in Cape Girardeau, Missouri and Oshkosh, Wisconsin. Net proceeds
generated from the sale of $1.339 million and $1.462 million, respectively, were
utilized to pay down the JDI loan to a balance of approximately $5.512 million.
The remaining balance of the JDI loan was repaid in August 2003 out of available
working capital
Also in July 2003 the Company completed the sale of Clinton Pointe
Shopping Center generating proceeds of approximately $10.929 million, which were
utilized to pay down the Salomon Brothers Realty Corp. loan to a balance of
approximately $12.071 million. The Company subsequently negotiated an extension
of the loan to August 11, 2004 with substantially similar terms.
The Company is currently negotiating an extension of the Cohen
Financial loan in the event that property sales do not generate sufficient
proceeds to retire the loan by the September 1, 2003 maturity date.
LITIGATION
In July 2003, the Michigan Court of Appeals upheld a previous decision
by the Circuit Court in Oakland County, Michigan 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 Court of Appeals affirmed the decision that Gramer 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 filed
a petition with the Michigan Supreme Court to review the appellate court
decision. The Company believes it has met all obligations under the employment
agreement and accordingly did not record a liability previously since it did
not consider an unfavorable decision to be probable. As a result of the ruling,
the Company has recorded a liability of $1.4 million at June 30, 2003, based on
the amount of the award plus accrued interest through the expected date of
resolution.
The Company currently has a bond totaling approximately $1.573 million
posted with the court representing 125% of the award plus potential interest.
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.
13
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, located in Forestville,
Maryland, Marshfield, Wisconsin and Topeka, Kansas, were approximately $1.1
million annually. 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 in July 2003 completed
the sale of Marshfield, Wisconsin for $3.6 million. The Company is also
attempting to re-lease the vacant Kmart space in 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 10% 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 sales of Forestville,
Maryland and Marshfield, Wisconsin.
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. To date, the Company has received approximately $2.077
million of its pre-petition bankruptcy claim from Kmart.
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.
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.
14
The change in the Company's Reserve for Estimated Liquidation Costs for
the three months ended June 30, 2003 is detailed as follows in thousands:
BALANCE BALANCE
APRIL 1, 2003 PAYMENTS ADJUSTMENTS JUNE 30, 2003
------------- -------- ----------- -------------
Severance, Retention and Bonus $ 1,748 $ (63) $ (128) $ 1,557
Payroll and Personnel Costs 2,543 (344) (379) 1,820
Provision for State Taxes 619 (8) (101) 510
Professional Fees 1,049 (328) 412 1,133
Office & Administrative Expenses 714 (158) 17 573
--------- --------- --------- ---------
$ 6,673 $ (901) $ (179) $ 5,593
========= ========= ========= =========
Total
The Company estimates that shareholders will receive liquidating
distributions ranging from $4.50 per share to $6.25 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.
EMPLOYMENT CONTRACTS
In May 2003, the Board of Directors approved an amendment to extend its
employment agreement with its President and Chief Executive Officer, Jeffrey D.
Lewis, through September 30, 2004. Terms of the amendment include an increase in
base salary to $275,000 per year, a non-renewal payment of $50,000 and a
liquidation bonus based upon aggregate liquidating distributions to
shareholders.
The Company has elected not to exercise an option to extend its
employment agreement with its Chief Financial Officer, Secretary and Treasurer,
Elliott J. Broderick. The Company and Mr. Broderick are currently negotiating an
agreement for Mr. Broderick to provide services after the contract expiration
date of September 30, 2003.
15
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 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 Company's appeal of the
Court's decision affirming the Gramer litigation, 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 June 30, 2003, a one percent increase or decrease in interest rates
would decrease or increase, respectively, the Company earnings and cash flows by
approximately $401,000 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"), as of the end of the period covered by 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 has been no significant change in the Company's internal controls
over financial reporting identified in connection with the evaluation referred
to above that occurred during the last quarter and that has materially affected,
or is reasonable likely to material affect, the Company's internal controls over
financial reporting.
16
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
The following matters were submitted to a vote of the security holders
of the Company at its Annual Meeting of Shareholders held on May 13, 2003
Election of
Directors Nominees Votes For Votes Withheld
-------- ---------- --------------
Jeffrey D. Lewis 4,798,801 189,361
Paul Gray II 4,798,801 189,361
Jill Holup 4,799,801 188,361
John P. Kramer 4,799,801 188,361
Edward J. Russell III 4,799,801 188,361
Item 5: Other Information
NONE
Item 6: Exhibits and Reports on Form 8-K
a) Exhibit Index:
*10 (y) Amendment no. 1 dated May 13, 2003, to
Employment Agreement dated September 26,
2000 by and between the Company and Jeffrey D. Lewis Filed with this document
*10 (z) Amendment no. 1 dated May 13, 2003, to
Employment Agreement dated July 16, 2002 by
and between the Company and Elliott J. Broderick Filed with this document
31.1 Certification of Chief Executive Officer Filed with this document
31.2 Certification of Chief Financial Officer Filed with this document
32.1 Written Statement of the Chief Executive Officer
and Chief Financial Officer Filed with this document
* A management contract or compensatory plan or arrangement
required to be filed pursuant to Instruction 2 of 601
(b)(10) of Regulation S-K
b) Reports on Form 8-K
A Form 8-K dated May 14, 2003 and furnished May 19, 2003 reported
net assets in liquidation and sales activity for the first quarter
of 2003.
17
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: August 11, 2003
18
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-
EX-
EX- 10(y)
EX- *10 (y) Amendment no. 1 dated May 13, 2003, to
Employment Agreement dated September 26,
2000 by and between the Company and Jeffrey D. Lewis
EX- *10 (z) Amendment no. 1 dated May 13, 2003, to
Employment Agreement dated July 16, 2002 by
and between the Company and Elliott J. Broderick
EX- 31.1 Certification of Chief Executive Officer
EX- 31.2 Certification of Chief Financial Officer
EX- 32.1 Written Statement of the Chief Executive Officer
and Chief Financial Officer