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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, 2004
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 13, 2004 5,125,370 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, 2004 (unaudited), and December 31, 2003 3
Statements of Changes in Net Assets in Liquidation
(unaudited) for the three months and the six months ended
June 30, 2004 and 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 10-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 16
PART II OTHER INFORMATION 17
SIGNATURES 19
EXHIBITS 20-22
2
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2004 2003
---- ----
(UNAUDITED)
ASSETS
Real estate held for sale $ 75,047 $ 97,350
Cash and cash equivalents 4,473 9,794
Restricted cash - litigation 1,831
Restricted cash - mortgage escrow deposits 2,584 2,635
Accounts receivable 1,347 1,635
Other assets 148 704
----------- ------------
Total Assets $ 83,599 $ 113,949
=========== ============
LIABILITIES
Mortgages $ 43,895 $ 52,198
Convertible debentures 19,593
Accounts payable and other 4,412 7,624
Reserve for estimated liquidation costs 5,207 6,601
----------- ------------
Total Liabilities 53,514 86,016
----------- ------------
NET ASSETS IN LIQUIDATION $ 30,085 $ 27,933
=========== ============
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 ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
Net Assets in Liquidation beginning of period $ 27,427 $ 27,902 $ 27,933 $ 26,430
Operating Income 1,685 911 3,294 2,631
Changes in net assets in liquidation:
Distribution to shareholders (1,536)
Realized loss on sale of assets (319) 313 (337) 313
Increase (decrease) in fair value of real estate 1,692 (665) 1,468 (665)
Increase in reserve for estimated liquidation costs (400) 179 (737) (69)
-------- -------- -------- --------
Net Assets in Liquidation as of end of period $ 30,085 $ 28,640 $ 30,085 $ 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 was expected to take up to twenty-four
months to complete. To the extent that the process will take longer than 24
months, the assets and liabilities of the Company will be transferred into a
liquidating trust.
Transfer to Liquidating Trust - The Company is continuing to liquidate its
assets and currently expects that no later than August 27, 2004, any then
remaining assets and liabilities will be transferred to the Malan Liquidating
Trust (the "Trust"), a Delaware trust created July 30, 2004. Each shareholder of
the Company will automatically become the holder of one unit of beneficial
interest in the Trust for each share of Company common stock, and all
outstanding shares of Company common stock will automatically be deemed
cancelled. The Company has requested that the staff of the Securities and
Exchange Commission ( the "SEC") permit the Trust to file abbreviated reports
with the SEC in the form in which the Trust will report periodically to its
beneficiaries, in lieu of filing the periodic reports that would be required to
be filed with the SEC under Section 13 of the Securities Exchange Act of 1934.
Subject to limited exceptions related to transfer by will, intestate
succession or operation of law, the units WILL NOT BE TRANSFERABLE nor will a
unit holder have authority, opportunity or power to sell or in any other manner
dispose of any units. As a result, the beneficial interests in the Trust will
not be listed on any securities exchange or quoted on any automated quotation
system of a registered securities association. Shareholders who may need or wish
liquidity with respect to their Company common stock before the Trust makes
liquidating distributions should look into selling their shares while the common
stock is still traded on an established market.
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
5
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 and results of operations 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, 2003.
Principles of Consolidation - The accompanying consolidated financial statements
include the activity of the Company and its wholly owned subsidiaries, Malan
Meadows, Inc., Malan Aurora Corp., Malan Pine Ridge LLC, Malan Midwest, LLC,
Malan WSC, 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, 2004, the Company paid approximately
$17,000 in employer matching contributions to its 401(k) retirement plan.
3. LIQUIDATING DISTRIBUTIONS
During the process of adopting the Plan of Liquidation in 2002, the
Company estimated that total liquidating distributions would be in the range of
$4.75 to $8.50 per share. Subsequently, in July 2003 the Company revised this
estimate downward to a range of $4.50 - $6.25 per share. The precise timing of
distributions was uncertain. Through June 2004, total distributions have been
$0.81 per share, with $0.51 per share being distributed in September 2003 and an
additional $0.30 per share being distributed in January 2004. The liquidating
distributions were made to maintain the Company's REIT status. The timing of
future distributions remains uncertain.
The Company's Net Assets in Liquidation as of June 30, 2004 (as shown in
the Consolidated Statement of Net Assets in Liquidation found on page 3), are
$30.085 million. This equates to approximately $5.87 per share.
The stated range of shareholder distributions are estimates and actual
results may be higher or lower than estimated. Due to the nature of the
Company's assets and liabilities, there is very little potential for significant
variance on the high end of the range of estimated distributions. This is
because it is unlikely that the balance of the real estate assets owned by the
Company would be sold for markedly more than the value carried on the
Consolidated Statement of Net Assets in Liquidation.
The potential for variance on either end of the range could occur for the
following reasons. 1) Although every effort has been made to anticipate all of
the costs associated with the liquidation, it is possible that there will be
unanticipated costs that could reduce net assets actually realized. 2) If the
Company were to wind up business significantly faster than anticipated some of
the anticipated costs may not be necessary and net assets could be higher. 3)
Although all of the remaining real estate assets are being valued based upon the
Company's best current estimate of what the assets are worth, circumstances may
change and the actual net
6
proceeds realized from the sale of some of the assets might be less, or
significantly less, than currently estimated. Two possible reasons could be the
discovery of new environmental issues or loss of a tenant, although there could
be other reasons.
4. DEBT OBLIGATIONS
As of June 30, 2004 and December 31, 2003, the Company had the following
debt obligations:
RECOURSE (R) MATURITY BALANCE BALANCE
COLLATERAL NON-RECOURSE (N) DATE JUNE 30, 2004 DECEMBER 31, 2003
---------- ---------------- ---- ------------- -----------------
(in thousands) (in thousands)
Convertible
Debentures Unsecured R 7/15/04 $ 0 $ 19,593
Salomon Bros. 3 Wal-Mart anchored
Realty Corp. shopping centers N 8/11/04 4,071 12,071
Wells Fargo Bank 13 Retail Properties N 6/2028 19,624 19,747
UBS Warburg Bricktown Square N 8/2005 20,200 20,380
---------- ----------
Total $ 43,895 $ 71,791
========== ==========
On March 4, 2004 the Company announced a partial redemption call for $5
million of 9.5% convertible Subordinated Debentures. The portion of the
Debentures being called were redeemed at par, plus accrued but unpaid interest,
and retired. The payment was made April 14, 2004.
On April 30, 2004 the Company announced the final redemption call for the
remaining balance of $7.093 million of 9.5% convertible Subordinated Debentures.
The remaining Debentures being called were redeemed at par, plus accrued but
unpaid interest, and retired on June 1, 2004.
Also in June 2004 the Company completed the sale of Woodriver Shopping
Center generating proceeds of approximately $6.0 million, which were utilized to
pay down the Salomon Brothers Realty Corp. loan to a balance of approximately
$6.071 million. The Company made three additional paydowns on this loan out of
excess working capital to fully retire this debt as of August 6, 2004. The
payments were made as follows:
Date of Payment Amount (in thousands)
- --------------- ---------------------
June 10, 2004 $2,000
July 12, 2004 1,071
August 6, 2004 2,866
------
Total $5,937
======
The final payment was offset by available funds on reserve with the lender
of approximately $134,000.
5. PROPERTY TRANSACTIONS AND CLASSIFICATIONS
During the six months ended June 30, 2004 and subsequent, the Company
disposed of the following properties (in thousands):
7
GROSS
LEASABLE NET PROCEEDS
AREA CONTRACT AFTER DEBT
DATE PROPERTY LOCATION (SQ. FT.) PRICE REPAYMENT
---- -------- -------- --------- -------- ------------
1/21/04 Vacant Land Lawrence, KS $ 635 $ 594
2/11/04 Hobby Lobby Fairview Heights, IL 96 2,300 2,298
3/1/04 Former Kmart Milwaukee, WI 118 2,700 2,550
3/25/04 Prairie View
Plaza Kansas City, MO 104 3,565 3,411
4/7/04 Harbor Freight Topeka, KS 109 1,000 865
4/26/04 Kmart Loves Park, IL 106 1,550 1,429
4/28/04 Broadway Center Merrillville, IN 178 6,700 6,411
Woodriver Woodriver, IL 147 6,200 0
6/1/04 Shopping Center
7/20/04 Kmart Valparaiso, IN 94 1,875 1,764
--- -------- --------
Total 952 $ 26,525 $ 19,322
=== ======== ========
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 referenced in footnote 4.
As of August 5, 2004, the following propertiy is under contract for sale:
PROPERTY LOCATION CONTRACT PRICE
-------- -------- --------------
(in thousands)
Bricktown Square Shopping Center Chicago, IL $27,000
The above contract is subject to due diligence and other contingencies
and is expected to close within the next 30 to 60 days from the date of this
filing pending waiver of such contingencies.
The Company has a signed letter of intent for the sale of 13 properties
that were previously under contract. While the original contract and subsequent
amendments have expired the Company retains the earnest money deposit and is in
active negotiations with the buyer to reinstate the original contract.
The Company has five properties that are not under contract or letter of
intent.
6. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL ISSUES
Prospective buyers of the Company's properties have raised environmental
questions on certain properties during the due diligence period of purchase
contracts. The issues generally involve residual contamination from (1)
underground storage tanks removed from the properties a number of years ago or
(2) solvents used by dry cleaner tenants. The Company has, with assistance from
its environmental consultants, assessed the extent of contamination, the
potential costs of any required remediation, and the viability of
indemnification from third parties for all its properties. The Company's
original estimates of the total costs related to investigation, assessment,
review of these issues and remediation of known contamination was approximately
$3.1 million at December 31, 2002. During 2003 the Company reduced its estimate
of
8
environmental investigation and remediation costs by approximately $1.5 million
based on actual costs and revisions in estimated remediation costs at several of
the properties based on test results and further investigation of the issues.
The Company has incurred approximately $1.2 million through June 30, 2004 and
has a remaining accrual of anticipated costs of $577,000
OTHER
The Company is obligated to provide lifetime health insurance benefits to
its former CEO Anthony Gramer. At June 30, 2004 and December 31, 2003 the
Company had approximately $350,000 and $116,000, respectively, reserved for this
purpose although the actual amount could be greater. The increased reserve is
based on valuations of health insurance plans currently being considered.
7. 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 Liquidations Costs for
the three months ended June 30, 2004 is detailed as follows:
BALANCE BALANCE
MARCH 31, 2004 PAYMENTS ADJUSTMENTS JUNE 30, 2004
-------------- -------- ----------- -------------
Severance, Retention and Bonus $ 755 $ (13) $ (75) $ 667
Payroll and Personnel Costs 661 (326) 62 397
Provision for State Taxes 326 - 50 376
Professional Fees 1,533 (437) 501 1,597
Office & Administrative Expenses 2,513 (205) (138) 2,170
--------- ----- ----- --------
Total $ 5,788 $(981) $ 400 $ 5,207
========= ===== ===== =========
The adjustment for the period is primarily due to legal and professional
fees higher than anticipated.
8. SUBSEQUENT EVENTS
In July 2004 4,000 shares of Company stock were issued upon the exercise
of stock options by two directors of the Company under the Company's stock
option plan for non-employee directors. The weighted average exercise price was
$4.10.
Also in July the Company received 10,886 shares of Kmart Holding Corp.
stock in settlement of certain non-secured bankruptcy claims. The Company had a
receivable of approximately $450,000 related to its former Kmart stores all of
which had been fully reserved for. The bankruptcy claim was based on money owed
as well as lost future revenue to the Company as a result of rejection of the
store leases by Kmart. The Company sold the shares on July 26, 2004 for net
proceeds of approximately $820,000.
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, 2004
Net Assets in Liquidation increased $2.658 million from March 31, 2004 to
June 30, 2004. Operating income including income from properties and interest
expense on corporate and property specific debt was approximately $1.685 million
during the period. Realized loss from the sale of assets was approximately
$319,000 and the estimated fair value on the remaining properties held for sale
increased $1.692 million based on updated analysis and signed contracts. The
reserve for estimated liquidation costs increased approximately $400,000
primarily due to increases in actual other professional fees and legal fees over
what was previously projected.
Six Months Ended June 30, 2004
Net Assets in Liquidation increased $2.152 million from December 31, 2003
to June 30, 2004. Operating income including income from properties and interest
expense on corporate and property specific debt was approximately $3.294 million
during the period. Realized loss from the sale of assets was approximately
$337,000 and the estimated fair value on the remaining properties held for sale
increased $1.468 million based on updated analysis and signed contracts. The
reserve for estimated liquidation costs increased approximately $737,000
primarily due to increases in actual other professional fees and legal fees over
what was previously projected. A distribution of $1.536 million to shareholders
was made January 26, 2004
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 "debt obligations" below).
During the process of adopting the Plan of Liquidation in 2002, the
Company estimated that total liquidating distributions would be in the range of
$4.75 to $8.50 per share. Subsequently, in July 2003 the Company revised this
estimate downward to a range of $4.50 - $6.25 per share. The precise timing of
10
distributions was uncertain. Through June 2004, total distributions have been
$0.81 per share, with $0.51 per share being distributed in September 2003 and an
additional $0.30 per share being distributed in January 200. The liquidating
distributions were made to maintain the Company's REIT status. The timing of
future distributions remains uncertain.
The Company's Net Assets in Liquidation as of June 30, 2004 (as shown in
the Consolidated Statement of Net Assets in Liquidation found on page 2), are
$30.085 million. This equates to approximately $5.87 per share.
The stated range of shareholder distributions are estimates and actual
results may be higher or lower than estimated. Due to the nature of the
Company's assets and liabilities, there is very little potential for significant
variance on the high end of the range of estimated distributions. This is
because it is unlikely that the balance of the real estate assets owned by the
Company would be sold for markedly more than the value carried on the
Consolidated Statement of Net Assets in Liquidation.
The potential for variance on either end of the range could occur for the
following reasons. 1) Although every effort has been made to anticipate all of
the costs associated with the liquidation, it is possible that there will be
unanticipated costs that could reduce net assets actually realized. 2) If the
Company were to wind up business significantly faster than anticipated some of
the anticipated costs may not be necessary and net assets could be higher. 3)
Although all of the remaining real estate assets are being valued based upon the
Company's best current estimate of what the assets are worth, circumstances may
change and the actual net proceeds realized from the sale of some of the assets
might be less, or significantly less, than currently estimated. Two possible
reasons could be the discovery of new environmental issues or loss of a tenant,
although there could be other reasons.
DEVELOPMENTS AND REDEVELOPMENT
Consistent with the Plan of Liquidation discussed below, the Company does
not anticipate any new developments or substantial redevelopments. Selected
redevelopment consistent with the Plan of Liquidation may occur.
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 $1.1 million is anticipated to be incurred in 2004 for
capital expenditures (of which $65,000 has been incurred during the six months
ended June 30, 2004).
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 2004 is estimated to be approximately $668,000 (of which $5,000
was incurred during the six months ended June 30, 2004). These expenditures are
generally funded out of operating cash flows.
11
SOURCES OF CAPITAL
During the six months ended June 30, 2004 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
---- -------- -------- --------- -------- ------------
1/21/04 Vacant Land Lawrence, KS $ 635 $ 594
2/11/04 Hobby Lobby Fairview Heights, IL 96 2,300 2,298
3/1/04 Former Kmart Milwaukee, WI 118 2,700 2,550
3/25/04 Prairie View Plaza Kansas City, MO 104 3,565 3,411
4/7/04 Harbor Freight Topeka, KS 109 1,000 865
4/26/04 Kmart Loves Park, IL 106 1,550 1,429
4/28/04 Broadway Center Merrillville, IN 178 6,700 6,411
Woodriver Woodriver, IL 147 6,200 0
6/1/04 Shopping Center
7/20/04 Kmart Valparaiso, IN 94 1,875 1,764
--- -------- --------
Total 952 $ 26,525 $ 19,322
=== ======== ========
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 5, 2004, the following propertiy is under contract for sale:
PROPERTY LOCATION CONTRACT PRICE
-------- -------- --------------
(in thousands)
Bricktown Square Shopping Center Chicago, IL $27,000
The above contract is subject to due diligence and other contingencies
and is expected to close within the next 30 to 60 days from the date of this
filing pending waiver of such contingencies.
The Company has a signed letter of intent for the sale of 13 properties
that were previously under contract. While the original contract and subsequent
amendments have expired the Company retains the earnest money deposit and is in
active negotiations with the buyer to reinstate the original contract.
The Company has five properties that are not under contract or letter of
intent.
12
DEBT OBLIGATIONS
As of June 30, 2004, the Company had the following debt obligations:
RECOURSE (R) MATURITY BALANCE
COLLATERAL NON-RECOURSE (N) DATE JUNE 30, 2004
---------- ---------------- ---- -------------
(in thousands)
Salomon Bros. Realty 3 Wal-Mart anchored
Corp. shopping centers N 8/11/04 $ 4,071
Wells Fargo Bank
(formerly Bloomfield 13 Retail Properties N 6/2028 19,624
Acceptance Corp.)
UBS Warburg Bricktown Square N 8/2005 20,200
--------
Total $ 43,895
========
On March 4, 2004 the Company announced a partial redemption call for $5
million of 9.5% convertible Subordinated Debentures. The portion of the
Debentures being called were redeemed at par, plus accrued but unpaid interest,
and retired. The payment was made April 14, 2004.
On April 30, 2004 the Company announced the final redemption call for the
remaining balance of $7.093 million of 9.5% convertible Subordinated Debentures.
The remaining Debentures being called were redeemed at par, plus accrued but
unpaid interest, and retired on June 1, 2004.
Also in June 2004 the Company completed the sale of Woodriver Shopping
Center generating proceeds of approximately $6.0 million, which were utilized to
pay down the Salomon Brothers Realty Corp. loan to a balance of approximately
$6.071 million. The Company made three additional paydowns on this loan out of
excess working capital to fully retire this debt as of August 6, 2004. The
payments were made as follows:
Date of Payment Amount (in thousands)
- --------------- ---------------------
June 10, 2004 $ 2,000
July 12, 2004 1,071
August 6, 2004 2,866
-------
Total $ 5,937
=======
The final payment was offset by available funds on reserve with the lender
of approximately $134,000.
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 was expected to take up to twenty-four
months from the date of approval to complete. In 2002, to assist in disposing
its assets under the Plan of
13
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.
The Company is continuing to liquidate its assets and currently expects that no
later than August 27, 2004, any then remaining assets and liabilities will be
transferred to the Malan Liquidating Trust (the "Trust"), a Delaware trust
created July 30, 2004. Each shareholder of the Company will automatically become
the holder of one unit of beneficial interest in the Trust for each share of
Company common stock, and all outstanding shares of Company common stock will
automatically be deemed cancelled. The Company has requested that the staff of
the Securities and Exchange Commission ( the "SEC") permit the Trust to file
abbreviated reports with the SEC in the form in with the Trust will report
periodically to its beneficiaries, in lieu of filing the periodic reports that
would be required to be filed with the SEC under Section 13 of the Securities
Exchange Act of 1934.
Subject to limited exceptions related to transfer by will, intestate
succession or operation of law, the units WILL NOT BE TRANSFERABLE nor will a
unit holder have authority, opportunity or power to sell or in any other manner
dispose of any units. As a result, the beneficial interests in the Trust will
not be listed on any securities exchange or quoted on any automated quotation
system of a registered securities association. Shareholders who may need or wish
liquidity with respect to their Company common stock before the Trust makes
liquidating distributions should look into selling their shares while the common
stock is still traded on an established market.
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 Liquidations Costs for
the three months ended June 30, 2004 is detailed as follows:
BALANCE BALANCE
MARCH 31, 2004 PAYMENTS ADJUSTMENTS JUNE 30, 2004
-------------- -------- ----------- -------------
Severance, Retention and Bonus $ 755 $ (13) $ (75) $ 667
Payroll and Personnel Costs 661 (326) 62 397
Provision for State Taxes 326 - 50 376
Professional Fees 1,533 (437) 501 1,597
Office & Administrative Expenses 2,513 (205) (138) 2,170
--------- ------ ----- -------
Total $ 5,788 $ (981) $ 400 $ 5,207
========= ====== ===== =======
The adjustment for the period is primarily due to legal and professional
fees higher than anticipated.
14
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. At the August 2004 board meeting the Board of Directors extended
this agreement through December 31, 2004.
As of April 30, 2004 the Company terminated the consulting contract that
had been in effect since October 1, 2003 with its former Chief Financial
Officer, Secretary and Treasurer, Elliott J. Broderick.
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.
SAFE HARBOR STATEMENT
Each of the above statements regarding anticipated 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
effect of changes in proceeds from property sales on liquidating distributions
due to the Company's capital structure, economic downturns, leasing activities,
bankruptcies and other financial difficulties of tenants, the cost of addressing
environmental concerns, unforeseen contingent liabilities, other 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.
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, 2004, a one percent increase or decrease in interest rates would
decrease or increase, respectively, the Company earnings and cash flows by
approximately $243,000 on an annualized basis.
The interest expense increase associated with a rise in interest rates
would only occur to the extent that notes rose to a level that cause the
interest rate charged to exceed the interest rate floor with respect to the UBS
Warburg loan. Currently interest rates are at a level such that interest expense
is being paid based upon the "floor" of 6.5%.
15
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-15(e)
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 acting
principal accounting officer have concluded that the Company's disclosure
controls and procedures are effective.
There has been no changes 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 material affect, the Company's internal controls over
financial reporting
16
MALAN REALTY INVESTORS, INC.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
NONE
Item 2: Changes in Securities
ISSUER PURCHASES OF EQUITY SECURITIES
Maximum Number
Total Number of of Convertible
Convertible Debentures that
Total Number of Debentures May Yet Be
Convertible Average price Paid Purchased as Part of Purchased Under
Debentures per Convertible Publicly Announced the Plans of
Period Purchased Debenture Plans or Programs Programs
- ------------------ --------------- ------------------ -------------------- ---------------
April 1 - 30, 2004 0
May 1 - 31, 2004 0
June 1 - 30, 2004 7,093,000 $1 7,093,000 0
--------- ----- --------- ---
Total 7,093,000 $1 7,093,000 0
========= ===== ========= ===
The Company had Convertible Debentures which were convertible into shares
of Common Stock at a price of $17 per share. The Debentures were unsecured
general obligations of the Company due July 15, 2004. In September 2003 the
Company began a series of partial redemptions to retire the Debentures. The
final redemption call was paid June 1, 2004 fully retiring this obligation.
Item 3: Defaults Upon Senior Securities
NONE
Item 4: Submission of Matters to a Vote of Security Holders
NONE
Item 5: Other Information
NONE
17
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 Financial Officer Filed with
this document
32.1 Written Statement of the Chief Executive Officer Acting Chief
Financial Officer Filed with this document
b) Reports on Form 8-K
DATED FURNISHED PURPOSE OF REPORT
April 29, 2004 May 3, 2004 Press release announcing sale of three properties
and partial redemption call of 9.5% convertible
subordinated debentures
May 14, 2004 June 4, 2004 Press release announcing net assets in liquidation at
March 31, 2004
June 3, 2004 June 7, 2004 Press release announcing property sale and final redemption
call of 9.5% convertible subordinated debentures
18
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: August 13, 2004
19
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