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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- --------------
Commission file number 1-13092
MALAN REALTY INVESTORS, INC.
(Exact name of registrant as specified in charter)
Michigan 38-1841410
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
30200 Telegraph Rd., Ste. 105 48025
Bingham Farms, Michigan (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (248) 644-7110
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. YES [X] NO [ ]
As of July 31, 2002, 5,121,370 shares of Common Stock, Par Value $.01
Per share, were outstanding.
MALAN REALTY INVESTORS, INC.
FORM 10-Q
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets as of June 30, 2002
(unaudited) and December 31, 2001 3
Statements of Operations (unaudited) for
the three months and the six months ended
June 30, 2002 and 2001 4
Statements of Cash Flows (unaudited) for the
six months ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements (unaudited) 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II OTHER INFORMATION 20
SIGNATURES 21
2
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
--------- ------------
ASSETS
Real estate
Land, buildings and improvements 206,051 $ 248,053
Real estate held for sale 34,332
Less: accumulated depreciation (39,261) (36,570)
--------- ---------
Total 201,122 211,483
Accounts receivable, net 5,757 4,275
Deferred financing and other 4,814 5,427
Cash and cash equivalents 6,881 1,649
Restricted cash - mortgage escrow deposits 2,837 2,492
--------- ---------
Total Assets $ 221,411 $ 225,326
========= =========
LIABILITIES
Mortgages $ 122,041 $ 120,390
Convertible debentures 42,743 42,743
Convertible notes 27,000 27,000
Accounts payable and other 2,906 2,844
Accrued distributions payable 1,280
Accrued property taxes 8,455 6,965
Accrued interest payable 4,270 4,189
--------- ---------
Total Liabilities 207,415 205,411
--------- ---------
SHAREHOLDERS' EQUITY
Common stock ($.01 par value, 30 million shares
authorized, 5,121,370 issued and outstanding at
June 30, 2002 and December 31, 2001) 51 51
Additional paid in capital 73,751 73,751
Accumulated distributions in excess of net income (59,806) (53,887)
--------- ---------
Total shareholders' equity 13,996 19,915
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 221,411 $ 225,326
========= =========
See Notes to Consolidated Financial Statements
3
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
--------------- -------------- -------------- --------------
Revenues
Minimum rent $6,067 $6,371 $12,185 $12,806
Percentage and overage rents 175 123 486 536
Recoveries from tenants 2,296 2,239 4,758 4,936
Interest and other income 57 132 91 201
Gain on sale of real estate 768 768
--------------- -------------- -------------- --------------
Total Revenues 8,595 9,633 17,520 19,247
--------------- -------------- -------------- --------------
EXPENSES
Property operating and maintenance 616 631 1,422 1,650
Other operating expenses 620 385 1,038 757
Real estate taxes 1,802 1,901 3,599 3,754
General and administrative 576 804 1,428 1,479
Depreciation and amortization 1,224 1,459 2,468 2,939
Impairment of real estate 5,123 3,591 6,583 3,591
--------------- -------------- -------------- --------------
Total Operating Expenses 9,961 8,771 16,538 14,170
--------------- -------------- -------------- --------------
OPERATING INCOME (LOSS) (1,366) 862 982 5,077
INTEREST EXPENSE 3,601 4,380 7,466 8,665
--------------- -------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS (4,967) (3,518) (6,484) (3,588)
--------------- -------------- -------------- --------------
DISCONTINUED OPERATIONS:
Income (loss) from properties sold or held for sale 50 380 271 774
Gain on sale of properties sold 294 294
--------------- -------------- -------------- --------------
INCOME FROM DISCONTINUED OPERATIONS 344 380 565 774
--------------- -------------- -------------- --------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (4,623) (3,138) (5,919) (2,814)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (450)
--------------- -------------- -------------- --------------
NET LOSS ($4,623) ($3,138) ($5,919) ($3,264)
=============== ============== ============== ==============
BASIC EARNINGS (LOSS) PER SHARE :
LOSS FROM CONTINUING OPERATIONS ($0.97) ($0.68) ($1.27) ($0.70)
INCOME FROM DISCONTINUED OPERATIONS 0.07 .07 0.11 0.15
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (0.08)
--------------- -------------- -------------- --------------
NET LOSS ($0.90) ($0.61) ($1.16) ($0.63)
=============== ============== ============== ==============
DILUTED EARNINGS (LOSS) PER SHARE
LOSS FROM CONTINUING OPERATIONS ($0.97) ($0.68) ($1.26) ($0.70)
INCOME FROM DISCONTINUED OPERATIONS 0.07 .07 0.11 0.15
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (0.08)
--------------- -------------- -------------- --------------
NET LOSS ($0.90) ($0.61) ($1.15) ($0.63)
=============== ============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 5,121,370 5,133,431 5,121,370 5,149,129
=============== ============== ============== ==============
DILUTED 5,125,883 5,133,431 5,125,883 5,149,129
=============== ============== ============== ==============
See Notes to Consolidated Financial Statements
4
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ($5,919) ($3,264)
-------- --------
Adjustments to reconcile net loss to net cash flows provided by operating
activities:
Depreciation and amortization 3,182 3,367
Amortization of deferred financing costs 748 721
Officer compensation issued in stock 70
Gain on sales of real estate (294) (768)
Impairment of real estate 6,583 3,591
Cumulative effect of change in accounting principle 450
Change in operating assets and liabilities that
used cash:
Accounts receivable and other assets (1,722) (1,268)
Accounts payable, deferred income and
other accrued liabilities 1,633 (199)
-------- --------
Total adjustments 10,130 5,964
-------- --------
NET CASH FLOWS USED FOR
OPERATING ACTIVITIES 4,211 2,700
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate developed, acquired or improved (113) (2,262)
Additions to leasehold improvements and equipment (59)
Decrease (increase) in restricted cash (345) 540
Net proceeds from sales of real estate 1,212 3,530
-------- --------
NET CASH FLOWS PROVIDED BY
INVESTING ACTIVITIES 754 1,749
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgages (295) (272)
Debt issuance costs (104) (386)
Draws on lines of credit 900 5,500
Repayment of lines of credit (900) (8,000)
Proceeds from mortgages 1,946 7,618
Distributions to shareholders (1,280) (4,401)
Repurchase of common stock (315)
-------- --------
NET CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 267 (256)
-------- --------
Net increase in cash and cash equivalents 5,232 4,193
Cash and cash equivalents at beginning of period 1,649 821
-------- --------
Cash and cash equivalents at end of period $ 6,881 $ 5,014
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION-
CASH PAID FOR INTEREST DURING THE PERIOD $ 7,024 $ 7,887
======== ========
See Notes to Consolidated Financial Statements
5
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, the instructions to Form 10-Q and the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared under generally accepted accounting principles have been condensed or
omitted pursuant to such rules. In the opinion of management, all adjustments
considered necessary for a fair presentation of the Company's consolidated
financial position, results of operations and cash flows have been included. The
results of such interim periods are not necessarily indicative of the results of
operations for the full year.
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 and Malan Midwest, LLC. All significant inter-company
balances and transactions have been eliminated.
Reclassifications- Certain reclassifications have been made to prior year
financial statements in order to conform with the current year presentation.
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
Compensation expense in connection with the Company's 401(k) retirement
plan for the six months ended June 30, 2002 was approximately $28,000.
In June 2002, the Company granted 20,000 stock options to its president
and chief executive officer, Jeffrey Lewis. The options have an exercise price
of $3.60 per share, vest over a five-year period and expire June 2012.
Employment Contract
In July 2002, the Company entered into an employment contract with its
chief financial officer, Elliott J. Broderick through September 30, 2003,
extendable at the Company's option for an additional twelve months. Pursuant to
the agreement, Mr. Broderick will receive a guaranteed base salary, a
signing/retention bonus of $285,000 and is eligible to receive 1) a performance
bonus up to 50% of base salary 2) an incentive option bonus of up to 50% of base
salary, 3) a retention bonus of 5% of base salary for each month employed after
shareholder approval of a plan of liquidation and 4) severance pay equal to the
greater of $100,000 or the remaining balance due under the contract at the time
of separation.
6
In the employment agreement, Mr. Broderick has relinquished all claims
to any lifetime health benefits that may have arisen in connection with the
change of control of the Company's Board of Directors at its 2000 annual
meeting. As a result, in July 2002 the Company eliminated a previously accrued
liability in the amount of $374,000 recorded on the balance sheet for these
potential benefits.
Severance and Retention Bonus Plan
In conjunction with its recommendation to liquidate the Company, the
Board of Directors approved a severance and retention bonus plan (the "Plan")
for its employees in July 2002. The Plan will become effective upon approval of
a plan of liquidation by the shareholders. With the exception of the chief
executive officer and chief financial officer (both of whom have employment
agreements), and employees working at the Northway Mall in Marshfield,
Wisconsin, each regular employee whose employment is involuntarily terminated
pursuant to the plan of liquidation will be eligible to participate in the Plan
unless the employee is terminated for cause.
The Plan divides eligible employees into two classes of participants:
non-retained participants and retained participants. Upon the satisfaction of
certain conditions described in the Plan, the Company will pay over 36 months to
each participant the lesser of 1) nine months of the participant's current
annualized salary, or 2) the greater of a) two weeks of the participant's
current annualized salary for each consecutive six-month period in which the
participant has worked full time for the Company from the last date of hire
until (i) the date of termination for non-retained participants or (ii) the date
the participant was classified as a retained participant (the "Classification
Date"), or b) six weeks of the participant's current annualized base salary.
Additionally, under the Plan retained participants will be entitled to
receive a retention bonus over 36 months equal to the lesser of: 1) twelve
months of the retained participant's annualized salary as of the Classification
Date, or 2) the greater of (A) four months of the retained participant's
annualized salary as of the Classification Date, or (B) 5% of the retained
participant's annualized base salary as of the Classification Date for each full
month the retained participant remains employed by the Company following such
date.
7
3. EARNINGS PER SHARE
Earnings per share ("EPS") data were computed as follows (in thousands
except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ --------------------
2002 2001 2002 2001
--------- --------- ------- -------
Loss from continuing operations $ (4,967) $ (3,518) $(6,484) $(3,588)
Income (loss) from discontinued operations 344 380 565 (774)
--------- --------- ------- -------
Loss before cumulative effect of change in accounting principle (4,623) (3,138) (5,919) (2,814)
Cumulative effect of change in accounting principle (450)
--------- --------- ------- -------
Net loss $ (4,623) $ (3,138) $(5,919) $(3,264)
========= ========= ======= =======
Weighted Average Shares Outstanding
Basic 5,121 5,133 5,121 5,149
========= ========= ======= =======
Diluted 5,126 5,133 5,126 5,149
========= ========= ======= =======
Basic EPS:
Loss from continuing operations $ (.97) $ (.68) $ (1.27) $ (.70)
Income (loss) from discontinued operations .07 .07 .11 .15
Cumulative effect of change in accounting principle (.08)
--------- --------- ------- -------
Net loss per share $ (.90) $ (.61) $ (1.16) $ (.63)
========= ========= ======= =======
Diluted EPS:
Loss from continuing operations $ (.97) $ (.68) $ (1.26) $ (.70)
Discontinued operations .07 .07 (.11) .15
Cumulative effect of change in accounting principle (.08)
--------- --------- ------- -------
Net loss per share $ (.90) $ (.61) $ (1.15) $ (.63)
========= ========= ======= =======
Diluted EPS reflects the potential dilution of securities that could
share in the earnings but does not include shares issuable upon conversion of
securities that would have an antidilutive effect on earnings per share.
4. MORTGAGES
In January 2002 the Company received an additional draw of $1.9 million
on its loan with Oaktree CF Lender, L.L.C., an affiliate of Cohen Financial,
bringing the total outstanding to approximately $9.5 million. The loan was
repaid in full in July 2002 in conjunction with the sale of Pine Ridge Plaza
shopping center in Lawrence, Kansas which served as collateral for the loan.
At June 30, 2002, the Company was in violation of two quarterly
corporate level loan covenants on its line of credit with Bank One. There were
no outstanding borrowings on the line at that date. In July 2002, the Company
received a waiver of the covenants from Bank One for the quarter ended June 30,
2002.
8
The Company is currently in arrears approximately $555,000 on its UDAG
Loan with the City of Chicago, collateralized by a junior mortgage on Bricktown
Square in Chicago, Illinois. As of July 31, 2002, the City had not declared the
Company in default of the UDAG Loan agreement.
The Company intends to satisfy its debt obligations coming due in the
near term through short term financing and the sale of assets consistent with
its strategic plan adopted in 2001. Approximately $58 million is due August 10,
2002 on the Securitized Mortgage Loan which is collateralized by twenty-three of
the Company's properties. The Company plans on repaying the Securitized Mortgage
Loan by its due date as follows: a) approximately $14 million from net proceeds
from the sale of four Kmart anchored shopping centers, b) approximately $42
million from net proceeds of three separate refinancing loans, and c) the
balance of approximately $2 million out of existing cash reserves. The Company
has a loan commitment from Cohen Financial and loan applications pending with
two other lenders. Anticipated total proceeds from the loans which are expected
to close simultaneously on or about August 8, 2002 are $43.1 million. Details of
the loans are as follows:
INTEREST ANTICIPATED
LENDER COLLATERAL TERM RATE PROCEEDS
- ------ ---------- ---- ---- --------
(thousands)
Cohen Financial 5 Kmart anchored 12 months LIBOR+ $ 9,100
shopping centers 3.5% (7% floor)
Salomon Bros. 4 Wal-Mart anchored 6 months LIBOR+ 15,000
Realty Corp. shopping centers 2.50%
JDI Loans LLC 8 Kmart anchored shopping 12 months Prime+ 7.25% 19,000
centers, Columbus, IN, (11% floor, 13% cap
Fairview Heights, IL
Clinton Pointe Shopping
Center
-------
Total $43,100
=======
In the event that they Securitized Mortgage Loan is not completely
satisfied by the due date, the lender may implement any and all remedies under
the loan documents including foreclosure proceedings against the collateral.
5. PROPERTY TRANSACTIONS, CLASSIFICATIONS AND IMPAIRMENTS
During the six months ended June 30, 2002 and subsequent to quarter
end, the Company disposed of the following properties:
NET PROCEEDS
GROSS LEASABLE CONTRACT AFTER DEBT
DISPOSITION DATE PROPERTY LOCATION AREA (SQ. FT.) PRICE REPAYMENT
- ---------------- -------- -------- -------------- ----- ---------
(IN THOUSANDS)
5/31/02 Kmart Plaza Janesville, WI 104 $ 1,300 $1,141
7/16/02 Pine Ridge Plaza Lawrence, KS 250 $13,850 $3,153
9
As of July 31, 2002, the following properties were under contract for
sale:
Property Location Contract Price
-------- -------- --------------
(thousands)
Orchard-14 Shopping Center Farmington Hills, Michigan $ 6,200
Sherwood Plaza Springfield, Illinois $ 5,700
South City Center Wichita, Kansas 4,000
Kmart Salina, Kansas 2,300
Kmart Jefferson City, Missouri 2,800 14,800
----------
The Company had previously entered into three separate contracts for
the sale of Bricktown Square in Chicago, Illinois, Clinton Pointe Shopping
Center in Clinton Township, Michigan and seven Kmart anchored shopping centers,
respectively. In each instance, the purchaser exercised its option to terminate
the contract during the due diligence period.
Under the provisions of Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
which was adopted by the Company January 1, 2002, all dispositions and the
results of operations of assets classified as held for sale will be disclosed 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.
During the six months ended June 30, 2002, the Company recorded an
impairment of real estate in accordance with SFAS No. 144 of $6.583 million
reducing the carrying value of several properties. The impairment is based on
management's conclusion that the cost basis of these assets will not be
recovered over their intended holding periods through cash flows associated with
future operations or sale. The conclusions regarding valuation are reflective of
recent information provided in sales agreements, sales contract negotiations and
actual or anticipated changes in tenancy including three leases rejected in
bankruptcy by Kmart Corporation and anticipated closure of a store leased to
Wal-Mart Corporation in Columbus, Indiana. Under SFAS No. 144, aggregate
impairment losses are not reduced by unrealized appreciation of other assets.
6. COMMITMENTS AND CONTINGENCIES
Litigation
In September 2001 the Circuit Court in Oakland County, Michigan
affirmed its previous decision granting summary disposition in favor of Anthony
S. Gramer, Malan's former president and CEO of the Company, in litigation
brought by Gramer seeking more than $1 million for breach of an employment
agreement. The Company believes that the order was entered in error and has
filed an appeal with the Michigan Court of Appeals.
Gramer contends that he is entitled under his agreements with the
Company to both change in control payments and termination payments through
December 2003, in a lump sum. The Company has not recorded a liability related
to this lawsuit and intends to vigorously pursue all available avenues open in
the litigation because the Company strongly believes that it has met all
obligations under the employment agreement.
In October 2001, the Company posted a bond totaling approximately
$1.573 million with the court representing maximum potential damages and
anticipated interest should the Company be unsuccessful in its appeal.
Requirements of the bond include an irrevocable letter of credit in the total
amount of the bond. Terms of the letter of credit, which was issued by Bank One,
included a reduction in the available borrowing on the Company's line of credit
in the principal amount of the letter.
10
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 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 is in the process, with
assistance from its environmental consultants, of assessing the extent of
contamination, the potential costs of any required remediation, and the
viability of indemnification from third parties. While its assessment is still
in the preliminary stages, the Company has recorded a liability of $500,000 at
June 30, 2002 related to estimated costs of investigation, assessment, review of
these issues and remediation of known contamination. However, actual costs of
additional remediation, if necessary, cannot be determined at this time.
7. KMART BANKRUPTCY
In January 2002, the Company's major tenant, Kmart Corporation, filed a
voluntary petition for reorganization relief under Chapter 11 of the U.S.
Bankruptcy Code. As part of its plan of liquidation, Kmart closed four of its
stores owned by the Company in May 2002 and subsequently rejected the leases on
three of these stores and assigned the tenant designation rights on the fourth
in June 2002. Total revenues from leases which were rejected by Kmart for these
stores which are located in Forestville, Maryland, Marshfield, Wisconsin and
Topeka, Kansas are approximately $1.1 million annually. Two of these properties
have other in-line tenants that may be adversely affected by the closures. Kmart
may also close additional stores in the future.
The Company has listed the properties affected by the lease rejections
for sale and is attempting to re-lease the vacant Kmart spaces. In addition,
under the bankruptcy laws, a landlord is entitled to rejection damages within
certain limitations. While the actual effect on future cash flows resulting from
the store closures and lease rejections cannot be determined at this time, the
Company anticipates that its cash flows will be materially affected by the
revenues lost from the rejected leases over the short term and possibly longer.
8. PROPOSED PLAN OF LIQUIDATION
In March 2002, the Company's Board of Directors voted to recommend a
plan of complete liquidation to its shareholders. The proposed, plan which was
approved by the Board in July 2002 and is subject to shareholder approval at the
2002 annual meeting scheduled for August 28, 2002, contemplates the sale of all
of the Company's properties and other assets and repayment of all outstanding
debt.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 30, 2002 to Three Months Ended June 30,
2001
Total revenues from continuing operations decreased approximately
$1.038 million from 2001. Minimum rents decreased approximately $304,000.
Approximately $143,000 was due to the sale of seven properties executed in the
second half of 2001 offset by rents received on the re-lease of a former vacant
theater space with a health club in Bricktown Square, Chicago, Illinois.
Approximately $161,000 was due to the reclassification of revenue of assets held
for sale as required under Statement of Financial Accounting Standards (SFAS)
No. 144, as discussed below. Percentage rents increased $52,000 due to the
timing of receipts from tenants. Recoveries from tenants increased approximately
$57,000. Interest and other income decreased approximately $75,000 due to lower
interest and lease termination income received in 2002. A gain on the sale of
real estate of $768,000 was recorded in June 2001.
Total operating expenses from continuing operations increased
approximately $1.190 million from 2001 to 2002. Other operating expenses
increased approximately $235,000 due to a provision for environmental
investigation and remediation costs at several properties totaling $500,000
recorded in 2002 discussed further below ($253,000 of which is attributable to
assets held for sale and is in the discontinued operations section.) Real estate
taxes decreased $99,000 primarily due to the sale of properties in 2001. General
and administrative decreased $228,000 due to decreases in legal and other
professional fees. Depreciation and amortization decreased $235,000 due to the
sale of properties and the reclassification of assets under SFAS No. 144. During
the three months ended June 30, 2002, the Company recorded an impairment of real
estate in accordance with SFAS No. 144 of $5.123 million reducing the carrying
value of several properties. The impairment is based on management's conclusion
that the cost basis of these assets will not be recovered over their intended
holding periods through cash flows associated with future operations or sale.
The conclusions regarding valuation are reflective of recent information
provided in sales agreements, sales contract negotiations and actual or
anticipated changes in tenancy including three leases rejected in bankruptcy by
Kmart Corporation and anticipated closure of a store leased to Wal-Mart
Corporation in Columbus, Indiana. Under SFAS No. 144, aggregate impairment
losses are not reduced by unrealized appreciation of other assets.
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 disclosed 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
decreased $36,000 with the $294,000 gain on the sale of the Janesville,
Wisconsin property offset by a $330,000 net decrease in net income of the assets
held for sale. The decrease was attributable to the environmental provision
recorded in June 2002.
Interest expense (including related amortization of deferred financing
costs) decreased approximately $779,000 primarily due to the expiration of a
rate floor agreement associated with the Securitized Mortgage Loan and the
payoff of a line of credit in November 2001.
Overall, net loss increased $1.485 million in 2002 primarily as a
result of a decrease in revenues due to the sales of properties in 2001, a
provision for environmental liability expense, and an increase in impairment of
real estate offset by lower interest expense.
Comparison of Six Months Ended June 30, 2002 to Six Months Ended June 30, 2001
Total revenues from continuing operations decreased approximately
$1.727 million from 2001. Minimum rents decreased approximately $621,000.
Approximately $346,000 was due to the sale of seven properties executed in the
second half of 2001 offset by rents received on the re-lease of a former vacant
theater space with a health club in Bricktown Square, Chicago, Illinois.
Approximately $275,000 was due to the reclassification of revenue pursuant to
SFAS No. 144. Percentage rents decreased $50,000 due to the timing of receipts
from tenants. Recoveries from tenants decreased approximately $178,000 as a
result of decreased reimbursable property operating expenses discussed below.
Interest and other income decreased approximately $110,000 due to lower interest
and lease termination income received in 2002. A gain on sale of real estate of
$768,000 was recorded on the sale of two properties in the second quarter of
2001.
Total operating expenses from continuing operations increased
approximately $2.368 million from 2001. Property operating and maintenance
expense decreased $228,000 primarily due to the lower cost of snow removal.
12
Other operating expenses increased approximately $281,000 due to a provision for
environmental investigation and remediation costs at several properties totaling
$500,000 recorded in 2002 discussed further below ($253,000 of which is
attributable to assets held for sale and is in the discontinued operations
section.) Real estate taxes decreased approximately $155,000 due to the sale of
properties in 2001. General and administrative decreased $51,000 due to lower
legal and other professional fees offset by higher accounting fees and stock
exchange listing fees. Depreciation and amortization expense decreased $471,000
due to the sale of properties in 2001 and the reclassification of assets under
SFAS No. 144. During the six months ended June 30, 2002, the Company recorded an
impairment of real estate in accordance with SFAS No. 144 of $6.583 million
reducing the carrying value of several properties. The impairment is based on
management's conclusion that the cost basis of these assets will not be
recovered over their intended holding periods through cash flows associated with
future operations or sale. The conclusions regarding valuation are reflective of
recent information provided in sales agreements, sales contract negotiations and
actual or anticipated changes in tenancy including three leases rejected in
bankruptcy by Kmart Corporation and anticipated closure of a store leased to
Wal-Mart Corporation in Columbus, Indiana. Under SFAS No. 144, aggregate
impairment losses are not reduced by unrealized appreciation of other assets.
Under the provisions of Statement of Financial Accounting Standards
(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 disclosed 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 decreased $209,000 with the $294,000 gain on
the sale of the Janesville, Wisconsin property offset by a $503,000 net decrease
in net income of the assets held for sale. The decrease was attributable to the
environmental provision recorded in June 2002 and the interest expense on the
loan at the Lawrence, Kansas property which commenced June 2001.
Interest expense (including related amortization of deferred financing
costs) decreased approximately $1.199 million primarily due to the expiration of
a rate floor agreement associated with the Securitized Mortgage Loan and the
payoff of a line of credit in November 2001.
As a result of the adoption of SFAS No. 133 in January 2001, which
addresses accounting for derivative instruments and hedging activities, there
was a cumulative effect of the change in accounting principle resulting in a
reduction in net income of $450,000 in the first quarter of 2002.
Overall, net loss increased $2.655 million in 2002 primarily as a
result of a decrease in revenues due to the sales of properties in 2001, a
provision for environmental liability expense, and an increase in impairment of
real estate offset by lower interest expense.
FUNDS FROM OPERATIONS AND RELATED INFORMATION
Management considers Funds From Operations ("FFO") to be a standard
supplemental measure of performance of an equity real estate investment trust.
The Company uses the method of calculating FFO prescribed by the October 1999
White Paper issued by the National Association of Real Estate Investment Trusts
(NAREIT) which utilizes net income or loss excluding gains and losses from sales
of depreciable operating property, further adjusted for certain non-cash items
including depreciation, amortization and impairment of real estate assets and
including items from nonrecurring events except for those that are defined as
extraordinary items under generally accepted accounting principles.
FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs, including distributions. FFO
should not be considered as an alternative to net income as an indicator of the
Company's operating performance or as an alternative to cash flow as a measure
of liquidity or the ability to pay distributions but rather, as a supplemental
tool to be used in conjunction with these factors in analyzing the Company's
overall performance.
The Company reports FFO on both a basic and diluted basis. The Company
no longer considers its Convertible Debentures and Convertible Notes to be
common stock equivalents for purposes of calculating
13
diluted FFO because management believes that conversion of these securities is
remote at this time based upon the conversion price of the securities in
relation to the current market price of the Company's Common Stock.
The following table shows the components that comprise the Company's
FFO for the three months and the six months ending June 30, 2002 and 2001. Prior
years amounts have been restated to conform with the current year presentation.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
------- ------- ------- -------
(in thousands)
NET LOSS .................................... $(4,623) $(3,138) $(5,919) $(3,264)
Depreciation of buildings and improvements .. 1,407 1,528 2,820 3,046
Amortization of tenant allowances and
improvements ............................. 115 121 233 229
Amortization of leasing costs ............... 61 38 112 76
Gain on sale of real estate ................. (294) (768) (294) (768)
Impairment of real estate ................... 5,123 3,591 6,583 3,591
Cumulative effect of change in
accounting principle ..................... 450
------- ------- ------- -------
FUNDS FROM OPERATIONS, BASIC AND DILUTED .... $ 1,789 $ 1,372 $ 3,535 $ 3,360
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ....................................... 5,121 5,133 5,121 5,149
======= ======= ======= =======
Diluted ..................................... 5,126 5,133 5,126 5,149
======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is the principal source of capital to fund
the Company's ongoing operations. Current efforts to increase cash flow for
repayment and retirement of impending debt maturities have centered on
disposition of non-core assets and refinancing of unencumbered properties.
The Company anticipates that its cash flow from operations will be
sufficient to fund its cash needs for payment of expenses capital expenditures
and recurring debt service payments. In conjunction with its recommendation of a
plan of liquidation of the Company discussed below, the Board of Directors
indefinitely suspended regular quarterly cash distributions in March 2002.
Developments and Redevelopments
In February 2001, the Company began redevelopment of 34,600 square feet
of formerly vacant space at the Company's property in Wichita, Kansas. Total
estimated costs of the redevelopment are approximately $320,000 of which
$240,000 were incurred through June 30, 2002. The project is anticipated to be
completed by the end of the third quarter.
Consistent with its proposed plan of liquidation (See "Proposed Plan of
Liquidation" below) the Company does not anticipate any further new developments
or redevelopments.
14
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 six months ended June 30, 2002, the Company
incurred $32,000 of capital expenditures. Approximately $309,000 is anticipated
to be incurred by year-end 2002 to be funded out of reserves required under the
Company's collateralized mortgages and operating cash flows.
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 2002 is estimated to be approximately $1.5 million (of which
$200,000 had been incurred in the six months ended June 30, 2002). These
expenditures are generally funded by operating cash flows.
Sources of Capital
During the six months ended June 30, 2002 and subsequent to quarter
end, the Company disposed of the following properties:
NET PROCEEDS
GROSS LEASABLE CONTRACT AFTER DEBT
DISPOSITION DATE PROPERTY LOCATION AREA (SQ. FT.) PRICE REPAYMENT
- ---------------- -------- -------- -------------- ----- ---------
(IN THOUSANDS)
5/31/02 Kmart Plaza Janesville, WI 104 $ 1,300 $1,141
7/16/02 Pine Ridge Plaza Lawrence, KS 250 $13,850 $3,153
In conjunction with the sale of Pine Ridge Plaza a $9.5 million loan
with Oaktree CF Lender, L.L.C. was repaid.
The following properties are under contract for sale as of July 31,
2002:
Property Location Contract Price
-------- -------- --------------
(thousands)
Orchard-14 Shopping Center Farmington Hills, Michigan $ 6,200
Sherwood Plaza Springfield, Illinois $5,700
South City Center Wichita, Kansas 4,000
Kmart Salina, Kansas 2,300
Kmart Jefferson City, Missouri 2,800 14,800
----------
Proceeds from the sales are anticipated to be utilized to pay down the
Company's outstanding debt obligation.
The Company had previously entered into three separate contracts for
the sale of Bricktown Square in Chicago, Illinois, Clinton Pointe Shopping
Center in Clinton Township, Michigan and seven Kmart anchored shopping centers,
respectively. In each instance, the purchaser exercised its option to terminate
the contract during the due diligence period.
15
Financings
The Company has a revolving line of credit with Bank One which
expires September 30, 2002. As of June 30, 2002, the Company was in violation of
two corporate financial covenants on the line as the result of non-cash
impairments of assets recorded in 2001 and 2002. There was no amount outstanding
as of June 30, 2002. In July 2002 the Company received a waiver of the covenants
from Bank One for the second quarter.
In January 2002 the Company received $1.9 million on its loan with
Oaktree CF Lender, L.L.C., an affiliate of Cohen Financial, bringing the total
loan outstanding to approximately $9.5 million. The loan was repaid in full in
July 2002 in conjunction with the sale of Pine Ridge Plaza shopping center in
Lawrence, Kansas which served as collateral for the loan.
The Company is currently in arrears approximately $555,000 on its UDAG
Loan with The City of Chicago, collateralized by a junior mortgage on Bricktown
Square in Chicago, Illinois. As of July 31, 2002, the City had not declared the
Company in default of the UDAG Loan agreement.
The Company intends to satisfy its debt obligations coming due in the
near term through short term financing and the sale of assets consistent with
its strategic plan adopted in 2001. Approximately $58 million is due August 10,
2002 on the Securitized Mortgage Loan which is collateralized by twenty-three of
the Company's properties. The Company plans on repaying the Securitized Mortgage
Loan by its due date as follows: a) approximately $14 million from net proceeds
from the sale of four Kmart anchored shopping centers, b) approximately $42
million from net proceeds of three separate refinancing loans, and c) the
balance of approximately $2 million out of existing cash reserves. The Company
has a loan commitment from Cohen Financial and loan applications pending with
two other lenders. Anticipated total proceeds from the loans which are expected
to close simultaneously on or about August 8, 2002 are $43.1 million. Details of
the loans are as follows:
INTEREST ANTICIPATED
LENDER COLLATERAL TERM RATE PROCEEDS
- ------ ---------- ---- ---- --------
(thousands)
Cohen Financial 5 Kmart anchored 12 months LIBOR+ $ 9,100
shopping centers 3.5% (7% floor)
Salomon Bros. 4 Wal-Mart anchored 6 months LIBOR+ 15,000
Realty Corp. shopping centers 2.50%
JDI Loans LLC 8 Kmart anchored shopping 12 months Prime+ 7.25% 19,000
centers, Columbus, IN, (11% floor, 13% cap
Fairview Heights, IL
Clinton Pointe Shopping
Center
-------
Total $43,100
=======
In the event that they Securitized Mortgage Loan is not completely
satisfied by the due date the lender may implement any and all remedies under
the loan documents, including foreclosure proceedings against the collateral.
Litigation
In September 2001, the Circuit Court in Oakland County, Michigan
affirmed its previous decision granting summary disposition in favor of Anthony
S. Gramer, Malan's former president and CEO, in litigation
16
brought by Gramer seeking more than $1 million for breach of an employment
agreement. The Company believes that the order was entered in error and has
filed an appeal with the Michigan Court of Appeals.
Gramer contends that he is entitled under his agreements with the
Company to both change in control payments and termination payments through
December 2003, in a lump sum. The Company has not recorded a liability related
to this lawsuit and intends to vigorously pursue all available avenues open in
the litigation because the Company strongly believes that it has met all
obligations under the employment agreement.
In October 2001, the Company posted a bond totaling approximately
$1.573 million with the court representing maximum potential damages and
anticipated interest should the Company be unsuccessful in its appeal.
Requirements of the bond include an irrevocable letter of credit in the total
amount of the bond. Terms of the letter of credit, which was issued by Bank One,
included a reduction in the available borrowing on the Company's line of credit
in the principal amount of the letter.
Kmart Bankruptcy
In January 2002, the Company's major tenant, Kmart Corporation, filed a
voluntary petition for reorganization relief under Chapter 11 of the U.S.
Bankruptcy Code. As part of its plan of reorganization, Kmart closed four of its
stores owned by the Company in May 2002 and subsequently rejected the leases on
three of these stores and assigned the tenant designation rights on the fourth
in June 2002. Total revenues from leases which were rejected by Kmart for these
stores which are located in Forestville, Maryland, Marshfield, Wisconsin and
Topeka, Kansas are approximately $1.1 million annually. Two of these properties
have other in-line tenants that may be adversely affected by the closures. Kmart
may also close additional stores in the future.
The Company has listed the properties affected by the lease rejections
for sale and is attempting to re-lease the vacant Kmart spaces. In addition,
under the bankruptcy laws, a landlord is entitled to rejection damages within
certain limitations. While the actual effect on future cash flows resulting from
the store closures and lease rejections cannot be determined at this time, the
Company anticipates that its cash flows will be materially affected by the
revenues lost from the rejected leases over the short term and possibly longer.
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 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 is in the process, with
assistance from its environmental consultants, of assessing the extent of
contamination, the potential costs of any required remediation, and the
viability of indemnification from third parties. While its assessment is still
in the preliminary stages, the Company has recorded a liability of $500,000 at
June 30, 2002 related to estimated costs of investigation, assessment, review of
the issues and remediation of known contamination. However, actual costs of
additional remediation, if necessary, cannot be determined at this time.
Proposed Plan Of Liquidation
In March 2002, the Company's Board of Directors voted to recommend a
plan of complete liquidation to its shareholders. The proposed plan, which was
approved by the Board in July 2002 and is subject to shareholder approval at the
2002 annual meeting scheduled for August 28, 2002, contemplates the sale of all
of the Company's properties and other assets and repayment of all outstanding
debt.
In conjunction with its plan of liquidation, the Board of Directors
approved a severance and retention bonus plan (the "Plan") for its employees in
July 2002. The Plan will become effective upon approval of a plan
17
of liquidation by the shareholders. With the exception of the chief executive
officer and chief financial officer (both of whom have employment agreements),
and employees working at the Northway Mall in Marshfield, Wisconsin, each
regular employee whose employment is involuntarily terminated pursuant to the
plan of liquidation will be eligible to participate in the Plan unless the
employee is terminated for cause.
The Plan divides eligible employees into two classes of participants:
non-retained participants and retained participants. Upon the satisfaction of
certain conditions described in the Plan, the Company will pay over 36 months to
each participant the lesser of 1) nine months of the participant's current
annualized salary, or 2) the greater of a) two weeks of the participant's
current annualized salary for each consecutive six-month period in which the
participant has worked full time for the Company from the last date of hire
until (i) the date of termination for non-retained participants or (ii) the date
the participant was classified as a retained participant (the "Classification
Date"), or b) six weeks of the participant's current annualized base salary.
Additionally, under the Plan retained participants will be entitled to
receive a retention bonus over 36 months equal to the lesser of: 1) twelve
months of the retained participant's annualized salary as of the Classification
Date, or 2) the greater of (A) four months of the retained participant's
annualized salary as of the Classification Date, or (B) 5% of the retained
participant's annualized base salary as of the Classification Date for each full
month the retained participant remains employed by the Company following such
date.
Employment Contract
In July 2002, the Company entered into an employment contract with its
chief financial officer, Elliott J. Broderick through September 30, 2003,
extendable at the Company's option for an additional twelve months. Pursuant to
the agreement, Mr. Broderick will receive a guaranteed base salary, a
signing/retention bonus of $285,000 and is eligible to receive 1) a performance
bonus up to 50% of base salary 2) an incentive option bonus of up to 50% of base
salary, 3) a retention bonus of 5% of base salary for each month employed after
shareholder approval of a plan of liquidation and 4) severance pay equal to the
greater of $100,000 or the remaining balance due under the contract at the time
of separation.
In the employment agreement, Mr. Broderick has relinquished all claims
to any lifetime health benefits that may have arisen in connection with the
change of control of the Company's Board of Directors at its 2000 annual
meeting. As a result in July 2002, the Company eliminated a previously accrued
liability in the amount of $374,000 recorded on the balance sheet for these
potential benefits.
Safe Harbor Statement
Each of the above statements regarding anticipated operating results
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes the statements and
projections are based upon reasonable assumptions, actual results may differ
from those projected.
Key factors that could cause actual results to differ materially
include the Company's ability to retire or refinance its other indebtedness as
it comes due, the Company's success in selling assets, including Bricktown
Square, economic downturns, bankruptcies and other financial difficulties of
tenants, including the ultimate disposition of lease agreements with Kmart
Corporation, leasing activities, the outcome of the litigation filed by the
Company's former president, the cost of addressing environmental concerns, and
other risks associated with the commercial real estate business, and as detailed
in the Management's Discussion and Analysis of Financial Condition and Results
of Operations.
18
Inflation
The Company's long-term leases contain provisions to mitigate the
adverse impact of inflation on its results of 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 then current market rates if rents provided
in the expiring leases are below then existing market rates. Most of the
Company's leases require tenants to pay a share of operating expenses, including
common area maintenance, real estate taxes, insurance and utilities, thereby
reducing the Company's exposure to increases in costs and operating expenses
resulting from inflation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has exposure to interest rate risk on its debt obligations
and interest rate instruments. Based on the Company's outstanding variable rate
debt at June 30, 2002, a one percent increase or decrease in interest rates
would decrease or increase, respectively, the Company earnings and cash flows by
approximately $269,000 on an annualized basis.
19
MALAN REALTY INVESTORS, INC.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
See "Litigation" under Liquidity and Capital Resources in Management's
Discussion and Analysis of Financial Conditions and Results of
Operations
Item 2: Changes in Securities
NONE
Item 3: Defaults Upon Senior Securities
NONE
Item 4: Submission of Matters to a Vote of Security Holders
NONE
Item 5: Other Information
NONE
Item 6: Exhibits and Reports on Form 8-K
a) Exhibit Index:
*10(x) Employment Agreement Filed with this document
dated July 16, 2002 by
and between the Company
and Elliott Broderick
99 Written Statement of the Filed with this document
Chief Executive Officer
Written Statement of the
Chief Financial Officer Filed with this document
* A management contract or compensatory plan or arrangement
required to be filed pursuant to Instruction 2 of 601(b)(10) of
Regulation S-K.
b) Reports on Form 8-K
NONE
20
MALAN REALTY INVESTORS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MALAN REALTY INVESTORS, INC.
By: /s/ Jeffrey D. Lewis
--------------------------------------
Jeffrey D. Lewis
Chief Executive Officer
By: /s/ Elliott J. Broderick
------------------------------------
Elliott J. Broderick
Chief Financial Officer (principle accounting officer)
Dated: July 31, 2002
21