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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 September 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
incorporation or organization) Identification Number)
30200 Telegraph Rd., Ste. 105 48025
Bingham Farms, Michigan (Zip Code)
(Address of principal executive 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 November 7, 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 September 30, 2003 (unaudited), and December 31, 2002 3
Statements of Changes in Net Assets in Liquidation
(unaudited) for the three months and nine months ended
September 30, 2003 4
Notes to Consolidated Financial Statements (unaudited) 5-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II OTHER INFORMATION 19
SIGNATURES 20
EXHIBITS 21-23
2
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
(Liquidation Basis)
(in thousands)
SEPTEMBER 30, DECEMBER 31,
2003 2002
(UNAUDITED)
ASSETS
Real estate held for sale $122,901 $191,802
Cash and cash equivalents 16,748 $ 10,008
Restricted cash - litigation 1,824 -
Restricted cash - mortgage escrow deposits 2,071 $ 1,753
Accounts receivable 1,733 3,761
Other assets 625 622
-------- --------
Total Assets 145,902 207,946
-------- --------
Liabilities
Mortgages 63,231 91,330
Convertible debentures 42,593 42,593
Convertible notes 27,000
Accounts payable and other 6,939 13,011
Reserve for estimated liquidation costs 4,133 7,582
-------- --------
Total Liabilities 116,896 181,516
-------- --------
NET ASSETS IN LIQUIDATION $ 29,006 $ 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)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2003
------------- -------------
Net Assets in Liquidation beginning of period $ 28,640 $ 26,430
Operating Income 2,546 5,177
Changes in net assets in liquidation:
Distribution to shareholders (2,611) (2,611)
Realized loss on sale of assets (720) (407)
Increase in fair value of real estate 1,427 762
Increase in reserve for estimated liquidation costs (276) (345)
-------- --------
Net Assets in Liquidation as of September 30, 2003 $ 29,006 $ 29,006
======== ========
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 consisted only of normal recurring
adjustments considered necessary for a fair presentation of the Company's
consolidated financial position, results of operations and cash flows 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 the 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 Pine Ridge LLC, Malan Midwest, LLC, Malan Standby LLC, Malan WSC, LLC, and
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.
5
2. COMPENSATION PLANS
During the nine months ended September 30, 2003, the Company paid
approximately $47,000 in employee matching contributions to its 401(k)
retirement plan.
3. LIQUIDATING DISTRIBUTIONS
The Company estimates that shareholders will receive total liquidating
distributions ranging from $4.50 per share to $6.25 per share, although they
could receive less than this estimate. This range includes the $.51 per share
distributed on September 30, 2003. 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 was required to make a distribution
of its 2002 federal taxable income to its shareholders during 2003. A
distribution of $.51 per share was declared and paid in September 2003. The
dividend was based on the Company's 2002 taxable income of $2.6 million. The
Company may also be required to make distributions of 2003 taxable income.
4. DEBT OBLIGATIONS
As of September 30, 2003, the Company had the following debt
obligations:
RECOURSE (R) MATURITY BALANCE
COLLATERAL NON-RECOURSE (N) DATE SEPTEMBER 30, 2003
---------- ---------------- ---- ------------------
(in thousands)
Convertible Unsecured R 7/15/04 $ 42,593
Debentures
Salomon Bros. 4 Wal-Mart N 8/11/04 12,071
Realty Corp. anchored
shopping centers
Wells Fargo Bank Westland N 11/2007 5,543
Shopping Center
Bank of America, N. Aurora, IL N 11/2009 5,338
USA Tinseltown
Theater
Wells Fargo Bank 13 Retail N 6/2028 19,809
(formerly Properties
Bloomfield
Acceptance Corp.)
UBS Warburg Bricktown Square N 8/2005 20,470
---------
Total $ 105,824
=========
During the third quarter the Company retired the following debt:
$27 million 8.5% Secured Convertible Notes due July 15, 2003 - In July
2003 the notes were retired utilizing a combination of proceeds from property
sales and a $20.5 million loan with UBS Warburg Real Estate Investments, Inc.
which is 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
6
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.
JDI Loan due August 9, 2003 - 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 sales 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 loan was repaid in
August 2003 out of available working capital.
Cohen Financial loan due September 1, 2003 - In July 2003 the company
completed the sale of a Kmart building in Franklin Park, Illinois. The net
proceeds of $3.187 million were utilized to pay down the Cohen loan to a balance
of $5.367 million. The remaining balance of the 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. This loan had an original due date of August 11,
2003. The Company negotiated an extension of the loan to August 11, 2004 with
substantially similar terms.
In September 2003, the Company completed the sale of the Orchard-14
Shopping Center in Farmington Hills, Michigan. Upon the sale, the Company's line
of credit with Bank One was extinguished. At that time, there was no outstanding
balance on the line of credit.
On September 25, 2003 the Company announced a partial redemption call
for $10 million of 9.5% Convertible Subordinated Debentures which are due July
15, 2004. The redemption was paid October 27, 2003. The portion of the
Debentures being called were redeemed at par, plus accrued but unpaid interest,
and retired.
On November 7, 2003, the Company announced a second partial redemption
call for $13 million of 9.5% convertible Subordinated Debentures. The portion of
the Debentures being called will be redeemed at par, plus accrued but unpaid
interest, and retired. The payment date is December 18, 2003. After the December
redemption the Debenture balance will be $19.593 million.
5. PROPERTY TRANSACTIONS AND CLASSIFICATIONS
During the nine months ended September 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 98 $ 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 Lawrence, KS
Theater 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
GROSS
LEASABLE NET PROCEEDS
AREA CONTRACT AFTER DEBT
DATE PROPERTY LOCATION (SQ. FT.) PRICE REPAYMENT
---- -------- -------- --------- ----- ---------
7/28/03 Kmart Oshkosh, WI 104 1,550 --
8/13/03 Kmart Franklin Park, IL 96 3,550 --
8/13/03 Cinemark 10 Melrose Park, IL 69 5,664 5,365
8/14/03 Wal-Mart Plaza Columbus, IN 190 7,050 6,745
9/12/03 The Shops at
Fairlane
Meadows Dearborn, MI 137 19,350 7,007
9/15/03 Orchard-14
Shopping Center Farmington Hills, MI 139 6,200 5,765
10/20/03 Kmart Lansing, IL 96 4,200 4,094
11/6/03 Kmart Plaza Kenosha, WI 120 2,800 2,639
11/6/03 Kmart Plaza Ft. Atkinson, WI 89 1,000 910
11/6/03 Kmart Chicago, IL 96 3,400 3,273
-- ----- -----
Total 2,072 $ 83,924 $ 43,376
===== ========= ======
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 November 12, 2003, the following properties were under contract
for sale:
PROPERTY LOCATION CONTRACT PRICE
-------- -------- --------------
(in thousands)
Hobby Lobby Fairview Heights, IL $ 2,300
Tinseltown 17 North Aurora, IL 6,300
Westland Plaza Madison, WI 4,300
Vacant Land Lawrence, KS 635
Westland Center Westland, MI 5,900
Wal-Mart Plaza Wood River, IL 6,200
Kmart Milwaukee, WI 2,700
Harbor Freight Topeka, KS 1,000
-----
Total $ 29,335
========
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 also has signed letters of intent for the sale of 17
properties for a total of $51.8 million as of November 12, 2003.
The Company has six properties that are not under contract or letter of
intent.
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
8
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 met all obligations under the employment
agreement and accordingly did not record a liability prior to the Court's
decision since it did not consider an unfavorable decision to be probable. As a
result of the Court's ruling in July 2003, the Company recorded a liability of
$1.4 million in the second quarter, 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. The letter of credit is collateralized by a restricted cash
account with Bank One.
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 has re-leased
approximately 60% of the former vacant Kmart space in Milwaukee, Wisconsin at an
annual rent of approximately $186,000. The Company has executed a letter of
intent to purchase the property at a contract price of $2.7 million. The Company
has received a contract to purchase the property in Topeka, Kansas at a price of
$1.0 million. 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. Because the Company is in voluntary
liquidation it does not anticipate that its cash flows will be materially
affected by the revenues lost from the rejected leases.
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 $2.23
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
9
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 Liquidations Costs for
the three months ended September 30, 2003 is detailed as follows:
BALANCE BALANCE
JULY 1, 2003 PAYMENTS ADJUSTMENTS SEPTEMBER 30, 2003
------------ -------- ----------- ------------------
Severance, Retention and Bonus $ 1,557 $ (480) $ (78) $ 999
Payroll and Personnel Costs 1,820 (551) 113 1,382
Provision for State Taxes 510 (58) (63) 389
Professional Fees 1,133 (483) 283 933
Office & Administrative Expenses 573 (164) 21 430
---- ---- --- -----
Total $ 5,593 $(1,736) $ 276 $ 4,133
======= ======= ========= =========
10
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 September 30, 2003
Net Assets in Liquidation increased $366,000 from July 1, 2003 to
September 30, 2003. Operating income including income from properties and
interest expense on corporate and property specific debt was approximately
$2.546 million during the period. Realized loss from the sale of assets was
approximately $720,000 and the estimated fair value on the remaining properties
held for sale increased $1.427 million based on executed contracts for sale. The
reserve for estimated liquidation costs increased approximately $276,000
primarily due to increases in actual legal fees over what was previously
projected. A distribution of $2.611 million to shareholders was made September
30, 2003.
Nine Months Ended September 30, 2003
Net Assets in Liquidation increased $2.576 million from December 31,
2002 to September 30, 2003. Operating income including income from properties
and interest expense on corporate and property specific debt was approximately
$5.177 million 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 $1.8 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 loss from the sale of
assets was approximately $407,000 and the estimated fair value on the remaining
properties held for sale increased $762,000 based on executed contracts. The
reserve for estimated liquidation costs increased approximately $345,000 and is
primarily due to increases in actual legal fees over what was previously
projected. A distribution of $2.611 million to shareholders was made September
30, 2003.
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, refinancing of unencumbered properties
and the leasing of vacant space and retention of existing tenants.
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 2004, the Company may need to refinance some properties and/or request
extensions of existing financing agreements or obtain back-up financing
arrangements (see "Financings" below).
11
The Company estimates that shareholders will receive total liquidating
distributions ranging from $4.50 per share to $6.25 per share, although they
could receive less than this estimate. This range includes a distribution of
$.51 per share, which was paid on September 30, 2003. 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 was required to make a
distribution of its 2002 federal taxable income to its shareholders during 2003.
A distribution of $.51 per share was declared September 9, 2003 and was paid
September 30, 2003 to shareholders of record as of September 19, 2003. The
dividend was based on the Company's 2002 taxable income of $2.6 million. The
Company may also be required to make distributions of 2003 taxable income upon
final determination of the amounts.
DEVELOPMENTS AND REDEVELOPMENT
Consistent with the Plan of Liquidation discussed below, the Company
does not anticipate any new developments or substantial 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 $320,000 is anticipated to be incurred
in 2003 for capital expenditures (of which $115,600 were incurred during the
nine months ended September 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
$110,000 were incurred during the nine months ended September 30, 2003). These
expenditures are generally funded by operating cash flows.
SOURCES OF CAPITAL
The Company sold the following properties during the nine months ended
September 30, 2003 and subsequent (in thousands):
GROSS
LEASABLE NET PROCEEDS
AREA CONTRACT AFTER DEBT
DATE PROPERTY LOCATION (SQ. FT.) PRICE REPAYMENT
---- -------- -------- --------- ----- ---------
3/31/03 Strip Center Springfield, MO 98 $ 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 Lawrence, KS
Theater 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 --
8/13/03 Kmart Franklin Park, IL 96 3,550 --
12
GROSS
LEASABLE NET PROCEEDS
AREA CONTRACT AFTER DEBT
DATE PROPERTY LOCATION (SQ. FT.) PRICE REPAYMENT
---- -------- -------- --------- ----- ---------
8/13/03 Cinemark 10 Melrose Park, IL 69 5,664 5,365
8/14/03 Wal-Mart Plaza Columbus, IN 190 7,050 6,745
9/12/03 The Shops at
Fairlane Dearborn, MI
Meadows 137 19,350 7,007
9/15/03 Orchard-14
Shopping Center Farmington Hills, MI 139 6,200 5,765
10/20/03 Kmart Lansing, IL 96 4,200 4,094
11/6/03 Kmart Plaza Kenosha, WI 120 2,800 2,639
11/6/03 Kmart Plaza Ft. Atkinson, WI 89 1,000 910
11/6/03 Kmart Chicago, IL 96 3,400 3,273
-- ----- -----
Total 2,072 $ 83,924 $ 43,376
===== ========= ===========
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 November 12, 2003, the following properties were under contract
for sale:
PROPERTY LOCATION CONTRACT PRICE
-------- -------- --------------
(in thousands)
Hobby Lobby Fairview Heights, IL $ 2,300
Tinseltown 17 North Aurora, IL 6,300
Westland Plaza Madison, WI 4,300
Vacant Land Lawrence, KS 635
Westland Center Westland, MI 5,900
Wal-Mart Plaza Wood River, IL 6,200
Kmart Milwaukee, WI 2,700
Harbor Freight Topeka, KS 1,000
-----
Total $ 29,335
========
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 also has signed letters of intent for the sale of 17
properties for a total of $51.8 million as of November 12, 2003.
The Company has six properties that are not under contract or letter of
intent.
DEBT OBLIGATIONS
The Company's line of credit with Bank One, collateralized by Orchard-14
Shopping Center in Farmington Hills, Michigan, was cancelled effective with the
sale of that property on September 15, 2003. The line was used to collateralize
two separate standby letters of credit issued by the bank. The Company has
subsequently funded two separate bank accounts to replace the letters of credit.
13
As of September 30, 2003, the Company had the following debt
obligations:
RECOURSE (R) MATURITY BALANCE
COLLATERAL NON-RECOURSE (N) DATE SEPTEMBER 30, 2003
---------- ---------------- ---- ------------------
(in thousands)
Convertible Unsecured R 7/15/04 $ 42,593
Debentures
Salomon Bros. 4 Wal-Mart N 8/11/04 12,071
Realty Corp. anchored
shopping centers
Wells Fargo Bank Westland N 11/2007 5,543
Shopping Center
Bank of America, N. Aurora, IL N 11/2009 5,338
USA Tinseltown
Theater
Wells Fargo Bank 13 Retail N 6/2028 19,809
(formerly Properties
Bloomfield
Acceptance Corp.)
UBS Warburg Bricktown Square N 8/2005 20,470
-------
Total $ 105,824
=========
$27 million 8.5% Secured Convertible Notes due July 15, 2003 - In July
2003 the notes were retired utilizing a combination of proceeds from property
sales and a $20.5 million loan with UBS Warburg Real Estate Investments, Inc.
which is 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.
JDI Loan due August 9, 2003 - 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 sales 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 loan was repaid in
August 2003 out of available working capital.
Cohen Financial loan due September 1, 2003 - In July 2003 the company
completed the sale of a Kmart building in Franklin Park, Illinois. The net
proceeds of $3.187 million were utilized to pay down the Cohen loan to a balance
of $5.367 million. The remaining balance of the 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. This loan had an original due date of August 11,
2003. The Company negotiated an extension of the loan to August 11, 2004 with
substantially similar terms.
On September 25, 2003 the Company announced a partial redemption call
for $10 million of 9.5% Convertible Subordinated Debentures which are due July
15, 2004. The redemption was paid October 27, 2003. The portion of the
Debentures being called were redeemed at par, plus accrued but unpaid interest,
and retired.
14
On November 7, 2003, the Company announced a second partial redemption
call for $13 million of 9.5% convertible Subordinated Debentures. The portion of
the Debentures being called will be redeemed at par, plus accrued but unpaid
interest, and retired. The payment date is December 18, 2003. After the December
redemption the Debenture balance will be $19.593 million.
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 met all obligations under the employment
agreement and accordingly did not record a liability prior to the Court's
decision since it did not consider an unfavorable decision to be probable. As a
result of the Court's ruling in July 2003, the Company recorded a liability of
$1.4 million in the second quarter, 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. The letter of credit is collateralized by a restricted cash
account with Bank One.
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 has re-leased
approximately 60% of the former vacant Kmart space in Milwaukee, Wisconsin at an
annual rent of approximately $186,000. The Company has received a letter of
intent to purchase the property at a contract price of $2.7 million. The Company
has executed a contract to purchase the property in Topeka, Kansas at a price of
$1.0 million. 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. Because the Company is in voluntary
liquidation it does not anticipate that its cash flows will be materially
affected by the revenues lost from the rejected leases.
15
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 $2.23
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.
The change in the Company's Reserve for Estimated Liquidation Costs for
the three months ended September 30, 2003 is detailed as follows in thousands:
BALANCE BALANCE
JULY 1, 2003 PAYMENTS ADJUSTMENTS SEPTEMBER 30, 2003
------------ -------- ----------- ------------------
Severance, Retention and Bonus $ 1,557 $ (480) $ (78) $ 999
Payroll and Personnel Costs 1,820 (551) 113 1,382
Provision for State Taxes 510 (58) (63) 389
Professional Fees 1,133 (483) 283 933
Office & Administrative Expenses 573 (164) 21 430
---- ---- -- -----
Total $ 5,593 $(1,736) $ 276 $ 4,133
======== ====== ======= ========
The Company estimates that shareholders will receive total liquidating
distributions ranging from $4.50 per share to $6.25 per share (including
distributions made since approval of the plan) 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 former chief financial officer
(both of whom were covered by employment agreements), and employees who worked
at the Northway Mall in Marshfield,
16
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. On September 1, 2003, six employees were
terminated and a total of $403,000 in severance was paid to the terminated and
retained employees. The Company currently has 13 employees.
EMPLOYMENT CONTRACTS AND MANAGEMENT CHANGES
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 have an agreement for Mr.
Broderick to provide consulting services after the contract expiration date of
September 30, 2003. The term of the agreement is from October 1, 2003 through
January 31, 2004, but can be terminated upon 30 days prior written notice by
either party.
In October 2003, then Controller Melinda M. Hale was appointed Acting
Chief Financial Officer by the Board of Directors.
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, 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, 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, other
17
risks associated with the commercial real estate business, and other concerns as
detailed in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
INFLATION
Some of 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 September 30, 2003, a one-percent increase or decrease in interest rates
could decrease or increase, respectively, the Company earnings and cash flows by
approximately $325,000 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 acting
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 reasonably likely to materially affect, the Company's internal controls
over financial reporting.
18
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 Conditions 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:
31.1 Certification of the Chief Executive Officer Filed with this document
31.2 Certification of the Acting Chief Filed with this document
Financial Officer
32.1 Written Statement of the Chief Executive Officer Filed with this document
Acting Chief Financial Officer
b) Reports on Form 8-K
DATED FURNISHED PURPOSE OF REPORT
July 9, 2003 July 10, 2003 Press release announcing court of appeals
decision in former CEO's lawsuit
July 15, 2003 July 18, 2003 Press release announcing property sales and
retirement of convertible notes
August 12, 2003 August 21, 2003 Press release announcing net assets in
liquidation at second quarter and property
sales
August 20, 2003 August 21, 2003 Press release announcing property sales
September 9, 2003 September 15, 2003 Press release announcing cash dividend
distribution
September 18, 2003 September 19, 2003 Press release announcing property sales
September 25, 2003 September 29, 2003 Press release announcing partial redemption
call of 9.5% convertible subordinated
debentures
19
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/ Melinda M. Hale
-------------------
Melinda M. Hale
Acting Chief Financial Officer (acting principal accounting officer)
Dated: November 12, 2003
20
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31.1 Certification of the Chief Executive Officer
31.2 Certification of the Acting Chief Financial
Officer
32.1 Written Statement of the Chief Executive Officer
Acting Chief Financial Officer