MALAN REALTY INVESTORS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-13092
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MALAN REALTY INVESTORS, INC.
(Exact name of registrant as specified in charter)

MICHIGAN 38-1841410
(State or other jurisdiction (I.R.S. Employer
of 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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Indicate by check mark whether the Registrant (1) has filed all reports 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K: YES [X] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $19,370,000 (computed on the basis of $4.34 per
share), which was the last sale price on the New York Stock Exchange on June 30,
2003. (For this computation, the Registrant has excluded the market value of all
shares of its Common Stock reported as beneficially owned by executive officers
and directors of the Registrant; such exclusion shall not be deemed to
constitute admission that any such person is an "affiliate" of the Registrant.)

As of March 21, 2004, 5,121,370 shares of Common Stock, Par Value $0.01 Per
Share, and $12,093,000 aggregate principal 9 1/2% Convertible Subordinated
Debentures due 2004, were outstanding.

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TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

Malan Realty Investors, Inc. (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") engaged in the ownership,
management and leasing of commercial retail properties. Prior to December 2001,
the Company was also engaged in acquisition, development and redevelopment of
such properties. As of December 31, 2003 the Company's operating units are
comprised of 27 community shopping centers and free-standing retail stores. All
financial results are aggregated into one operating segment since the properties
have similar economic characteristics. Prior to 2004 the Company had also
managed properties owned by unrelated third parties.

The Company is currently operating under a plan of complete liquidation
(the "Plan of Liquidation"). The Plan of Liquidation was approved by
shareholders at the 2002 annual meeting in August 2002 and 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 24 months from
the August 2002 adoption to complete, although it may take longer. To the extent
that the process does take longer than 24 months, the assets and liabilities of
the Company will be transferred into a liquidating trust as described below.

The Company is continuing to liquidate its assets and currently expects
that no later than the end of the third quarter, and possibly as early as the
second quarter of 2004, any then remaining assets and liabilities will be
transferred to a liquidating trust. 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 will seek
relief for the trust from registering the units under Section 12(g) of the
Securities Exchange Act of 1934, as amended, and its obligation to file periodic
reports. Subject to limited exceptions related to transfer by will, intestate
succession or operation of law, the units will not be transferable. As a result,
the beneficial interest in the liquidating trust will not be listed on any
securities exchange or quoted on any automated quotation system of a registered
securities association.

The Company's major tenants include Kmart Corporation ("Kmart") and
Wal-Mart Corporation ("Wal-Mart") as well as other national retailers. In 2003,
Kmart and Wal-Mart accounted for approximately 21% and 7%, respectively, of the
Company's total revenues, excluding gains on sale of assets. During 2003 the
Company sold 13 Kmart anchored properties and one Wal-Mart anchored property. As
of December 31, 2003 Kmart and Wal-Mart accounted for 23% and 15%, respectively,
of its gross leasable area ("GLA"). Total GLA was approximately 2.2 million
square feet as of December 31, 2003.

In January 2002, Kmart filed for bankruptcy protection under Chapter 11 of
the U.S. Bankruptcy Code. As part of its program to close unprofitable stores,
Kmart subsequently closed five of its stores operating in properties owned by
the Company, rejecting four of the leases and assuming and assigning the lease
of the fifth to an independent third party. On May 6, 2003, Kmart announced that
it had emerged from Chapter 11 bankruptcy. As of December 31, 2003, the company
has 5 stores leased to Kmart with an annual average base rent of $2.56 per
square foot.

During 2003, the Company sold 20 properties in connection with its Plan of
Liquidation. Total proceeds, before property specific debt repayment, on 2003
property sales were $96 million. Through March 26, 2004, the Company has sold
three additional properties and a four acre parcel of vacant land for total
proceeds of $8.9 million and entered into contracts for the sale of 18
additional properties at prices totaling $46.5 million. The Company also has six
remaining properties that are currently not under contract or letter of intent
to sell.

The Company is currently taxed as a REIT under Section 856 through 860 of
the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the
Company generally is not subject to federal income taxes to the extent it
distributes at least 100% of its real estate investment trust taxable income (as
defined in the

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Code) to its shareholders. In order to maintain its status as a REIT, the
Company made a distribution of its estimated 2003 federal taxable income to its
shareholders on January 26, 2004. Although it is expected that the Company will
continue to qualify as a REIT for the period prior to the distribution of the
Company's remaining assets to its shareholders or the formation of a liquidating
trust, given the change in the nature of our assets and in our sources of income
that could result from dispositions of assets and the need to retain assets to
meet liabilities, the Company cannot assure you that the Company will continue
to meet the REIT qualification tests. The Company presently has 12 full-time
employees and believes that its relationship with its employees is good.

The Company's internet address is http://www.malanreit.com

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ITEM 2. PROPERTIES

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(A)Includes only Company owned square footage.

(B)These stores and the underlying pads are owned and managed by third parties
not related to the Company.

(C)Property currently under contract for sale.

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(D)Rubloff Development subleases this property to Hobby Lobby. Property was sold
to Rubloff 2/12/04.

(E)The Company also owns approximately 4.2 acres of vacant land in Lawrence, KS.
The sale of this land was completed 1/22/04.

(F)In addition to the operating properties listed, the Company leases
approximately 6,200 square feet of office space for its headquarters in
Bingham Farms, Michigan.

(G)This property was sold 3/25/04.

(H)The Company subleases approximately 3,000 square feet of office space in
Seattle, WA.

(I)This property was sold 3/1/04.

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TENANT LEASE EXPIRATIONS AND RENEWALS

The following table shows tenant lease expirations, as of December 31,
2003, for the next ten years at the Company's properties, assuming that none of
the tenants exercise any of their renewal options:

Kmart Lease Information

The following table shows information for leases with Kmart included in the
above table:

Wal-Mart Lease Information

The following table shows information for leases with Wal-Mart included in
the above table:

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of business, the Company is involved in routine
litigation, none of which is expected to have a material adverse effect on the
results of operations, financial position or cash flows of the Company. The
Company was involved in a lawsuit filed on November 13, 2000 by Anthony S.
Gramer, its former President and Chief Executive Officer, seeking more than $1
million for breach of an employment agreement.

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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 Gramer. 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 filed a petition with the Michigan Supreme Court to review the appellate
court decision.

In January 2004, the Company announced that the Michigan Supreme Court had
denied its request to reconsider the previous decision upheld by the Michigan
Court of Appeals. The decision by the Supreme Court denying Malan's appeal
effectively upheld the lower courts' rulings and required the Company to pay
Gramer a lump-sum payment of approximately $1.4 million, including interest and
certain other court costs. Malan previously recorded a liability on its books of
$1.4 million in the event of an unfavorable decision by the court. On February
18, 2004, the Company paid approximately $1.4 million to Gramer in satisfaction
of the summary judgement.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "MAL". As of March 21, 2004 the Company had approximately 98
shareholders of record. The following table sets forth, for the periods
indicated, the high and low sales price as reported on the New York Stock
Exchange and the dividends declared by the Company per common share for each
such period:

The Company expects that it will transfer its remaining assets to a
liquidating trust no later than the end of the third quarter of 2004. Each
shareholder will receive a distribution of one unit in the liquidating trust for
each share of common stock they then own. The distributions will be a taxable
event to shareholders.

Interests in the liquidating trust will not be transferable. Accordingly,
shareholders who may need or wish liquidity with respect to their Company common
stock before the liquidating trust makes liquidating distributions should look
into selling their shares while the common stock is still traded on an
established market.

The Company had paid regular quarterly distributions on its Common Stock to
its shareholders of $.425 per share dating from July 1, 1994 through March 31,
2001 and $.25 per share from April 1 through December 31, 2001. In March 2002,
the Company announced that it was suspending regular quarterly cash
distributions to shareholders in conjunction with its proposed Plan of
Liquidation.

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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). 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
distribution was based on the Company's 2002 taxable income of $2.6 million and
is considered a liquidating distribution to shareholders for federal income tax
purposes. The Company also declared a distribution of $.30 per share on December
19, 2003, payable to shareholders of record at December 31, 2003. The
distribution was based on the Company's 2003 projected taxable income and was
paid January 26, 2004.

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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the
Company on a historical basis and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and all of the financial statements and notes thereto included
elsewhere in this Form 10-K.

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

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(1) As a result of the shareholder approval of the Plan of Liquidation, the
liquidation basis of accounting and financial statement presentation has
been adopted beginning September 30, 2002.
(2) In 2001, the Company changed its method of accounting for derivative
financial instruments in accordance with SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities." See Note 10 in the accompanying
financial statements. In 1999, the Company changed its method of accounting
for percentage rental revenue in accordance with SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements."
(3) In accordance with Statement of Financial Accounting Standards, No. 128,
"Earnings per Share", conversion of all of the debt securities would be
antidilutive and as such are not included in the weighted average diluted
shares reported above.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The following discussion should be read in conjunction with the "Selected
Financial Data" and the Company's consolidated financial statements and notes
thereto appearing elsewhere in this Form 10-K.

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

January 1, 2003 to December 31, 2003

Net Assets in Liquidation increased $1.503 million from January 1 2003, to
December 31, 2003. Operating income, including income from properties and
interest expense on corporate and property specific debt, was $6.324 million.
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 $1.5 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. Realized loss from the sale of assets was
approximately $532,000 and the estimated fair value on the remaining properties
held for sale increased $2.1 million based on executed contracts and estimated
valuations. The reserve for estimated liquidation costs increased approximately
$3.799 million and is primarily due to extending the time period estimated to
wind down the business and the associated costs. A distribution to shareholders
of $2.611 million was made September 30, 2003.

September 30, 2002 to December 31, 2002

Net Assets in Liquidation decreased $5.247 million from September 30, 2002
to December 31, 2002. Operating income, including income from properties and
interest expense on corporate and property specific debt, was $1.317 million
during the period. The fair value of real estate decreased $6.304 million due to
changes in anticipated proceeds from future property sales based on current
trends in the retail real estate market. The Company realized a net loss of
$185,000 on the sale of five properties during the period. The reserve for
estimated liquidation costs increased $75,000 primarily from changes in
assumptions in personnel costs and professional fees.

RESULTS OF OPERATIONS

Comparison of the Period January 1 through September 30, 2002 to the Year Ended
December 31, 2001

The following discussion of results of operations from January 1 through
September 30, 2002 compared to the year ended December 31, 2001 do not contain
comparable periods; however such comparison is provided to present a discussion
of general trends in the operating results of the Company.

Total revenues from continuing operations decreased approximately $17.535
million from 2001. Minimum rents decreased approximately $9.674 million due to
the sale of 13 properties executed between July 2001 and September 2002 offset
by rents received on the re-lease of a vacant space at Bricktown Square,
Chicago, Illinois and the reclassification of revenue from assets held for sale
as required under Statement of Financial Accounting Standards (SFAS) No. 144 to
discontinued operations, as discussed below. Percentage rents decreased $732,000
and recoveries from tenants decreased $3.078 million, also as a result of the
property sales. A gain on the sale of real estate of $3.830 million was recorded
for the year ended December 2001.

Total operating expenses from continuing operations decreased approximately
$14.156 million from December 31, 2001 to September 30, 2002. Other operating
expenses increased approximately $1.311 million due to a provision for
environmental investigation and remediation costs at several properties.
Property operating and maintenance and real estate taxes decreased $1.055
million and $2.536 million, respectively, due

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to the sale of properties offset by an increase in taxes due to taxes assumed by
the Company on leases rejected by Kmart Corporation in bankruptcy. Impairment of
real estate decreased $8.259 million.

Under the provisions of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which was adopted by the Company January 1, 2002,
all dispositions of properties and the results of operations of assets held for
sale will be reported as discontinued operations in the period in which they
occur and prior periods will be restated to conform with the current
presentation for comparison purposes. Income from discontinued operations
increased $2.312 million primarily from the gain on the sale of properties
offset by an increase in a provision for environmental costs recorded in
September 2002 of $3.1 million. Also included in discontinued operations for the
nine months ended September 30, 2002 is an impairment of real estate in
accordance with SFAS No. 144 of $114,000 reducing the carrying value of Emporia,
Kansas based on a contract for sale of the property.

Interest expense (including related amortization of deferred financing
costs) decreased approximately $6.183 million primarily due to the partial
pay-down and refinance of the balance of the Securitized Mortgage Loan, the
payoff of a line of credit in November 2001 and the reclassification of interest
paid on a loan secured by Lawrence, Kansas to discontinued operations.

The cumulative effect of a change in accounting principle under SFAS No.
133 was a reduction in net income of $450,000 as of January 1, 2001.

Overall, net loss decreased $5.566 million in the period ended 2002
primarily as a result of a decrease in impairment of real estate and interest
expense offset by an increase in environmental investigation and remediation
costs.

CRITICAL ACCOUNTING POLICIES

As a result of the adoption of the Plan of Liquidation and its approval by
the Company's 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.

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.

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. Since adoption of the Plan of
Liquidation, efforts to increase cash flow 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

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some properties and/or request extensions of existing financing agreements or
obtain back-up financing arrangements in order to meet debt maturities (see
"Financings" below).

The Company does not intend to make liquidating distributions to
shareholders until all of its debts have been provided for unless required to do
so in order to maintain its status as a REIT. To maintain its REIT status the
Company made a distribution of its 2002 federal taxable income to its
shareholders in 2003. The distribution of $.51 per share was paid on September
30, 2003. On December 19, 2003 the Company declared a distribution of $.30 per
share based on the estimated 2003 taxable income. The distribution was paid
January 26, 2004.

Developments and Redevelopments

Consistent with the Plan of Liquidation discussed below, the Company does
not anticipate any further new developments or 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. For the year ended December 31, 2003, the Company incurred $259,000 of
capital expenditures, which were funded out of reserves required under the
Company's collateralized mortgages and operating cash flow. Approximately
$870,000 is anticipated to be incurred in 2004 for capital expenditures, also to
be funded from similar sources.

In order to procure new tenants or negotiate extensions of expiring leases
with current tenants, the Company may provide inducements such as building
allowances or space improvements and may pay leasing commissions to outside
brokers in accordance with prevailing market conditions. The total cost of these
expenditures in 2003 was $187,000. Anticipated costs for 2004 are estimated to
be approximately $700,000. These expenditures are generally funded by operating
cash flows.

Sources of Capital

The Company anticipates that its cash flow from operations will be
sufficient to fund its cash needs for payment of operating expenses and
anticipated capital expenditures. However, the Company has substantial debt
obligations maturing during 2004, which will require refinancing or sale of
assets to satisfy (See "Financings" below).

The Company has in place a Stock Repurchase Plan for up to 500,000 shares
of its Common Stock, such purchases to be made in the open market, with the
timing dependent upon market conditions, pending corporate events and
availability of funds. There were no repurchases during the twelve months ended
December 31, 2003.

The Company had outstanding as of December 31, 2003 $19.593 million of 9.5%
Convertible Debentures ("Debentures") which are convertible into shares of
Common Stock at a price of $17 per share. In January 2002, Moody's Investor
Services, Inc. downgraded its rating of the Debentures from B3 to CAA and
simultaneously withdrew its rating. The Debentures are due July 2004.

The Company had a plan in place to repurchase, on the open market, up to
$15 million aggregate principal of Debentures. Through December 31, 2002, the
Company had repurchased $11.957 million of Debentures under the plan. During the
twelve months ended December 31, 2002 the Company repurchased $150,000 aggregate
principal of Debentures. In 2003 open market purchases ceased and Debentures
were retired using a redemption process. During 2003, $23 million aggregate
principal of Debentures were called and retired.

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The Company sold the following properties in 2003 (in thousands):

Net cash generated from the sales was used for general working capital
purposes, to pay down the outstanding balances on the Company's debt obligations
and to make required distributions to shareholders.

Subsequent to December 31, 2003 the following properties have been sold:

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
----- ------- -------
Total:................................................................. 318 9,200 $ 8,853
===== ======= =======

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As of March 21, 2004, the following properties were under contract for
sale:

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 if the
purchaser waives such contingencies.

Financings

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 extinguished both letters of credit.

During 2003, 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 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 -- 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 -- 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 February 2003 out of available
working capital.

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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 a loan with Salomon Brothers Realty Corp to a balance of
approximately $12.071 million. This loan had an original due date of February
11, 2003. The Company negotiated an extension of the loan to August 11, 2004
with substantially similar terms.

During 2003 the Company announced three partial redemption calls on the
9.5% Convertible Subordinated Debentures. The portion of the Debentures being
called were redeemed at par, plus accrued but unpaid interest, and retired. The
redemption activity was as follows:

After the January 2004 redemption the balance of the Debentures is $12.1
million.

Subsequent to year end the Company announced another partial redemption of
$5,000,000 on March 4, 2004 to be redeemed April 14, 2004 bringing the balance
after the April redemption to $7.1 million.

Approximate scheduled principal payments on all of the Company's debt
obligations for the years subsequent to December 31, 2003 are as follows (in
thousands):

2004........................................................ $32,275
2005........................................................ 20,295
2006........................................................ 297
2007........................................................ 320
2008........................................................ 341
2009 and thereafter......................................... 18,263
-------
Total....................................................... $71,791
=======

The Company intends to satisfy its debt maturing in 2004 primarily through
proceeds of property sales (see "Sources of Capital" above). In the event that
such sales fail to materialize or close prior to the due dates of the loans, the
Company intends to obtain back-up financing through the refinance of certain
properties sufficient to retire the existing debt or through the extension of
existing facilities.

Thirteen of the Company's properties are encumbered by a cross
collateralized loan, which contains restrictions on prepayment. The Company
intends to sell these properties in a single transaction subject to the
underlying debt and obtain lender consent for assignment of the debt. On those
properties that are encumbered by loans that do not contain such restrictive
provisions or in which prepayment penalties are insignificant or insubstantial,
the Company intends to utilize proceeds from the sale of the property to retire
such debt.

Certain of the Company's debt obligations contain cross-default and
cross-acceleration provisions.

Litigation

The Company was involved in a lawsuit filed on November 13, 2000 by Anthony
S. Gramer, its former President and Chief Executive Officer, seeking more than
$1 million for breach of an employment agreement.

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 Gramer. 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 filed a petition with the Michigan Supreme Court to review the appellate
court decision.

In January 2004, the Company announced that the Michigan Supreme Court had
denied its request to reconsider the previous decision upheld by the Michigan
Court of Appeals. The decision by the Supreme

15

Court denying Malan's appeal effectively upheld the lower courts' rulings and
required the Company to pay Gramer a lump-sum payment of approximately $1.4
million, including interest and certain other court costs. Malan previously
recorded a liability on its books of $1.4 million in the event of an unfavorable
decision by the court.

On February 18, 2004, the Company paid approximately $1.4 million to Gramer
in satisfaction of the summary judgement.

Kmart Bankruptcy

In January 2002, Kmart filed for bankruptcy protection under Chapter 11 of
the U.S. Bankruptcy Code. As part of its program to close unprofitable stores,
Kmart subsequently closed five of its stores owned by the Company, rejecting
four of the leases and assuming and assigning the lease of a fifth to an
independent third party. On May 6, 2003, Kmart announced that it had emerged
from Chapter 11 bankruptcy. As of December 31, 2003, the company has five stores
leased to Kmart with an annual average base rent of $2.56 per square foot.

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 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 December 31,
2003 and has a remaining accrual of anticipated costs of $631,000.

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 is expected to take up to twenty-four months from the
date of approval to complete, although it could take longer. In 2002, 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.

The Company is continuing to liquidate its assets and currently expects
that no later than the end of the third quarter, and possibly as early as the
second quarter of 2004, any then remaining assets and liabilities will be
transferred to a liquidating trust. 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 will seek
relief for the trust from registering the units under Section 12(g) of the
Securities Exchange Act of 1934, as amended, and its obligation to file periodic
reports. Subject to limited exceptions related to transfer by will, intestate
succession or operation of law, the units will not be transferable. As a result,
the beneficial interest in the liquidating trust will not be listed on any
securities exchange or quoted on any automated quotation system of a registered
securities association.

16

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
year ended December 31, 2003 is detailed as follows (in thousands):

The adjustment for the period is primarily due to an increase in the time
period anticipated to fully liquidate the Company.

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 March 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 timing of
future distributions remains uncertain, but it is unlikely that there will be
any additional distributions in the first half of 2004.

The Company's Net Assets in Liquidation as of December 31, 2003 (as shown
in the Consolidated Statement of Net Assets in Liquidation found in Item 8), are
$27.933 million. This equates to approximately $5.45 per share. After adjusting
to reflect the $0.30 per share distribution that was paid January 26, 2004 Net
Assets in Liquidation are $26.4 million or $5.15 per share. Adjusting the range
stated in the previous paragraph for the $0.81 already distributed the remaining
anticipated distributions fall within the adjusted range of $3.69 to $5.44.

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

17

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.

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, Wisconsin, each regular employee whose employment is
involuntarily terminated pursuant to the Plan of Liquidation was eligible to
participate in the Severance Plan unless the employee is terminated for cause.

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 12 employees.

Employment Contract

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 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 subsequent to the agreement expiration date of
September 30, 2003. The original term of the agreement was from October 1, 2003
through January 31, 2004. The agreement has been extended on a month to month
basis. For the period October 1, 2003 to December 31, 2000 Mr. Broderick
received $18,900 under this agreement.

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, but not eliminating, 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 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
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, and

18

other risks associated with the commercial real estate business, and as detailed
in Management's Discussion and Analysis of Financial Conditions and Results of
Operations.

ITEM 7A. 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 December 31, 2003, a one percent increase or decrease in interest rates would
decrease or increase, respectively, the Company earnings and cash flows by
approximately $325,000 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%.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

INDEX

Schedules other than the ones above are omitted because they are not
applicable, not required, or the information required to be set forth therein is
included in the consolidated financial statements or the notes thereto.

19

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and
Shareholders of Malan Realty Investors, Inc.

We have audited the consolidated statements of net assets in liquidation of
Malan Realty Investors, Inc. as of December 31, 2003 and December 31, 2002, and
the related consolidated statements of changes in net assets in liquidation for
the year ended December 31, 2003 and for the period from September 30, 2002
through December 31, 2002. In addition, we have audited the consolidated
statements of operations, shareholders' equity, and cash flows for the period
from January 1, 2002 through September 30, 2002 and the year ended December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As described in Note 1 to the consolidated financial statements, these
financial statements have been prepared on the liquidation basis of accounting,
which requires management to make significant assumptions and estimates
regarding the fair value of assets, the resolution of disputed claims, the
estimate of liquidating costs to be incurred, and the resolution and valuation
of current and potential litigation. Because of the inherent uncertainty related
to these estimates and assumptions, there will likely be differences between
these estimates and the actual results and those differences may be material.
Also, as discussed in Note 10 to the consolidated financial statements, on
January 1, 2002, the Company adopted the provisions of the Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Malan Realty Investors, Inc. for the period January 1, 2002
through September 30, 2002 and the year ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America
and the consolidated net assets in liquidation as of December 31, 2003 and
December 31, 2002, and the changes in consolidated net assets in liquidation for
the year ended December 31, 2003 and the period from September 30, 2002 through
December 31, 2002 applied on the basis described in the preceding paragraph.
PricewaterhouseCoopers LLP

Detroit, Michigan
March 12, 2004

20

MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
(IN THOUSANDS)

See Notes to Consolidated Financial Statements

21

MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
(IN THOUSANDS)

See Notes to Consolidated Financial Statements

22

MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(GOING CONCERN BASIS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

See Notes to Consolidated Financial Statements

23

MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(GOING CONCERN BASIS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

See Notes to Consolidated Financial Statements

24

MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(GOING CONCERN BASIS)
(IN THOUSANDS)

See Notes to Consolidated Financial Statements
25

MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

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 from the date of approval, although it could take longer.

LIQUIDATION BASIS OF ACCOUNTING

As a result of the adoption of the Plan of Liquidation and its approval by
the Company's 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 COMBINATION AND 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.

RECLASSIFICATIONS

Certain reclassifications have been made to prior years financial
statements presented on a going concern basis, in order to conform to the
presentation for the period through September 30, 2002.

REAL ESTATE

Prior to the adoption of the liquidation basis of accounting, real estate
was stated at cost or, in the case of real estate which management believed was
impaired, at the lower fair value of such properties. Additions, renovations and
improvements were capitalized. The Company reviewed real estate for impairment
whenever events or changes in circumstances indicated that an asset's book value
exceeded the undiscounted expected future cash flows to be derived from that
asset. Whenever undiscounted expected future cash flows were less than the book
value, the asset was reduced to a value equal to the net present value of the
expected future cash flows and an impairment loss was recognized. Accordingly,
during 2002, the Company recorded a non-cash charge of $6.697 million for
impairment of certain real estate properties. The impairment charge was based
upon a comprehensive review of all of the Company's properties, taking into
account the Company's intention to have shareholders vote to approve the Plan of
Liquidation, the Company's implementation of several steps in contemplation of a
liquidation, a significantly shortened holding period for the properties, and
current market conditions. As such, the carrying values of certain properties
were written down to the Company's

26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

estimates of fair value. Fair value was based on recent offers, or other
estimates of fair value, such as estimated discounted future cash flow.

Maintenance and repairs, which did not extend asset lives, were expensed as
incurred. Depreciation was computed using the straight-line method over
estimated useful lives ranging 10 to 40 years for improvements, and 40 years for
buildings.

Under the provisions of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which was adopted by the Company January 1, 2002,
all dispositions of properties and the results of operations of assets held for
sale will be reported as discontinued operations in the period in which they
occur and prior periods are restated to conform with the current presentation
for comparison purposes.

Prior to the adoption of the liquidation basis of accounting, real estate
assets that were under contract were adjusted to their estimated net realizable
value and classified as real estate held for sale.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments include short-term investments and
mortgage loans payable. The fair values of the short-term investments were not
materially different from their carrying or contract values due to the short
term nature of these financial instruments. See Note 6 for the fair values of
the mortgage loans payable.

REVENUE RECOGNITION

Minimum rents are recognized on a straight-line basis over the terms of the
leases. The Company records percentage rental revenue when lessees' specified
sale targets are achieved. Recoveries from tenants are recognized as revenue in
the period that applicable costs are chargeable to tenants.

INCOME TAXES

The Company has elected to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). As a
REIT, the Company generally will not be subject to federal income taxation at
the corporate level to the extent it distributes annually at least 100% of its
real estate investment trust taxable income, as defined in the Code, to its
shareholders and satisfies certain other requirements. Accordingly, no provision
has been made for federal income taxes in the accompanying financial statements.

DISTRIBUTIONS

Distributions of $.81 per common share were declared in the year ended
December 31, 2003.

The distributions made in 2003 are considered liquidating distributions and
are treated by shareholders as a return of capital to the extent of a
shareholder's basis in the Company's stock. Distributions in excess of the
shareholder's basis are treated as a capital gain.

Distributions of $1.175 per common share were declared for the year ended
December 31, 2001, of which $.52 represented a return of capital for federal
income tax purposes. There were no distributions paid to shareholders during
2002.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of deposits in banks and certificates of
deposit with maturities of three months or less at the date of purchase.

27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

SEGMENT INFORMATION

The Company's operating units were comprised of approximately 58 commercial
retail properties (of which 20 were disposed of in 2003 and 11 were disposed of
in 2002). As of December 31, 2003 there were 27 commercial retail properties
remaining. All financial results are aggregated into one operating segment since
the properties have similar economic characteristics.

2. MORTGAGES, DEBENTURES AND NOTES

The following tables set forth certain information regarding the Company's
debt:

- -------------------------
(1) Nonrecourse loans may contain customary carve-out provisions that are
recourse to the Company, including fraud, misappropriation and
misapplication of funds.

(2) The original due date of the loan was February 2003. A provision to extend
the loan for an additional 6 months was exercised in 2003. The loan was
subsequently extended to 8/2004.

28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) Loan is a 30-year loan expiring June 11, 2028. The loan is pre-payable at
the end of 15 years, or June 11, 2013. Subsequent to that date, all cash
flow from the property in excess of operating expenses is to be applied
against accrued interest and principal with the balance of the loan due no
later than June 11, 2028.

FINANCINGS

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 extinguished both letters of credit.

During 2003, 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 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 -- 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
February 2003 out of available working capital.

Cohen Financial Loan -- 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 February 11, 2003. The
Company negotiated an extension of the loan to August 11, 2004 with
substantially similar terms.

The Company has Convertible Debentures (the "Debentures"), which are
convertible into shares of Common Stock at a price of $17 per share. The
Debentures are unsecured general obligations of the Company due July 15, 2004.
In January 2002, Moody's Investors Services, Inc. downgraded its rating of the
Debentures from B3 to CAA and simultaneously withdrew its rating. The Debentures
are redeemable by the Company at par.

The Company has in place a plan to repurchase and retire up to $15 million
aggregate principal of Debentures. The Company repurchased $150,000 aggregate
principal of Debentures in 2002. Approximately $11.957 million principal of
Debentures has been repurchased under the plan.

29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 2003 the company announced three partial redemption calls of
Debentures. The portion of the Debentures being called were redeemed at par,
plus accrued, but unpaid, interest and retired. The redemption activity was as
follows:

The Company intends to satisfy its debt maturing in 2004 primarily through
proceeds of property sales. In the event that such sales fail to materialize or
close prior to the due dates of the loans, the Company intends to obtain back-up
financing through the refinance of certain properties sufficient to retire the
existing debt or through the extension of existing facilities.

Thirteen of the Company's properties are encumbered by a cross
collateralized loan, which contains restrictions on prepayment. The Company
intends to sell these properties in a single transaction subject to the
underlying debt and obtain lender consent for assignment of the debt. On those
properties that are encumbered by loans that do not contain such restrictive
provisions or in which prepayment penalties are insignificant or insubstantial,
the Company intends to utilize proceeds from the sale of the property to retire
such debt.

Certain of the Company's debt obligations contain cross-default and
cross-acceleration provisions.

Interest capitalized as part of the cost of redevelopment projects totaled
$1,000 and $84,000 in 2002 and 2001 respectively. There were no redevelopments
in 2003.

3. STOCK OPTION AND COMPENSATION PLANS

EMPLOYEE OPTION PLAN

The Company has a stock option plan (the "Employee Option Plan") to enable
its employees to participate in the ownership of the Company. Under the Employee
Option Plan, executive officers and employees of the Company may be granted
options to acquire shares of Common Stock of the Company ("Options"). The
Employee Option Plan is administered by the Compensation Committee of the Board
of Directors (the "Board"), which is authorized to select the executive officers
and other employees to whom Options are to be granted. No member of the
Compensation Committee is eligible to participate in the

30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Employee Option Plan. The aggregate number of shares of Common Stock that may be
issued upon the exercise of all Options is 400,000 shares.

The exercise price of each Option granted is equal to the fair market value
of the underlying shares on the date of grant. With the exception of those
granted on the date of the Company's initial public offering, which vested over
a three-year period at the rate of 33 1/3% per year, Options vest over a
five-year period at the rate of 20% per year, beginning on the first anniversary
of the date of grant and are exercisable until the tenth anniversary of the date
of grant. All options that were grante