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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 Identification Number)
incorporation or organization)
30200 Telegraph Rd., Ste. 105 48025
Bingham Farms, Michigan (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (248) 644-7110
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of November 13, 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
Statement of Net Assets in Liquidation (Liquidation Basis)
as of September 30, 2002 (unaudited) 3
Balance Sheets (Going Concern Basis) as of
September 30, 2002 (unaudited) and December 31, 2001 4
Statements of Operations (Going Concern Basis)
(unaudited) for the three months and the nine months
ended September 30, 2002 and 2001 5
Statements of Cash Flows (Going Concern Basis)
(unaudited) for the nine months ended September 30,
2002 and 2001 6
Notes to Consolidated Financial Statements (unaudited) 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II OTHER INFORMATION 23
SIGNATURES 24
CERTIFICATIONS 25-26
2
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30,
2002
-------------
ASSETS
Real estate held for sale $200,888
Cash and cash equivalents 6,957
Restricted cash - mortgage escrow deposits 1,363
Accounts receivable 2,786
Other assets 635
--------
Total Assets $212,629
========
LIABILITIES
Mortgages $ 92,481
Convertible debentures 42,743
Convertible notes 27,000
Accounts payable and other 11,221
Reserve for estimated liquidation costs 7,507
--------
Total Liabilities 180,952
--------
NET ASSETS IN LIQUIDATION $ 31,677
========
See Notes to Consolidated Financial Statements
3
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(GOING CONCERN BASIS)
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------- ---------
(UNAUDITED)
ASSETS
Real estate
Land, buildings and improvements $ 199,118 $ 248,053
Real estate held for sale 13,401
Less: accumulated depreciation (36,661) (36,570)
--------- ---------
Total 175,858 211,483
Accounts receivable, net 5,325 4,275
Deferred financing and other 7,132 5,427
Cash and cash equivalents 6,957 1,649
Restricted cash - mortgage escrow deposits 1,363 2,492
--------- ---------
Total Assets $ 196,635 $ 225,326
========= =========
LIABILITIES
Mortgages $ 99,308 $ 120,390
Convertible debentures 42,743 42,743
Convertible notes 27,000 27,000
Accounts payable and other 4,826 2,844
Accrued distributions payable 1,280
Accrued property taxes 7,285 6,965
Accrued interest payable 2,788 4,189
--------- ---------
Total Liabilities 183,950 205,411
--------- ---------
SHAREHOLDERS' EQUITY
Common stock ($.01 par value, 30 million shares
authorized, 5,121,370 issued and outstanding at
September 30, 2002 and December 31, 2001) 51 51
Additional paid in capital 73,751 73,751
Accumulated distributions in excess of net income (61,117) (53,887)
--------- ---------
Total shareholders' equity 12,685 19,915
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 196,635 $ 225,326
========= =========
See Notes to Consolidated Financial Statements
4
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(GOING CONCERN BASIS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
--------- --------- ---------- ---------
REVENUES
Minimum rent $5,729 $5,924 $17,493 $18,250
Percentage and overage rents 158 290 633 805
Recoveries from tenants 2,047 2,061 6,697 6,888
Interest and other income 85 119 175 317
Gain on sale of real estate 2,840 3,608
--------- --------- ---------- ---------
Total Revenues 8,019 11,234 24,998 29,868
--------- --------- ---------- ---------
EXPENSES
Property operating and maintenance 680 676 2,061 2,282
Other operating expenses 2,117 587 3,151 1,335
Real estate taxes 1,964 1,781 5,446 5,406
General and administrative 705 725 2,134 2,204
Depreciation and amortization 1,246 1,234 3,668 4,025
Impairment of real estate 228 5,793 3,819
--------- --------- ---------- ---------
Total Operating Expenses 6,712 5,231 22,253 19,071
--------- --------- ---------- ---------
OPERATING INCOME 1,307 6,003 2,745 10,797
INTEREST EXPENSE 4,001 4,256 11,467 12,921
--------- --------- ---------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS (2,694) 1,747 (8,722) (2,124)
--------- --------- ---------- ---------
DISCONTINUED OPERATIONS:
Income (loss) from properties sold or held for sale (1,312) 391 (1,498) 1,448
Gain on sale of properties sold 2,695 2,989
--------- --------- ---------- ---------
INCOME FROM DISCONTINUED OPERATIONS 1,383 391 1,491 1,448
--------- --------- ---------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (1,311) 2,138 (7,231) (676)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (450)
--------- --------- ---------- ---------
NET INCOME (LOSS) ($1,311) $2,138 ($7,231) ($1,126)
========= ========= ========= =========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
EARNINGS (LOSS) FROM CONTINUING OPERATIONS ($0.53) $0.34 ($1.70) ($0.41)
INCOME FROM DISCONTINUED OPERATIONS 0.27 0.08 0.29 0.28
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (0.09)
--------- --------- ---------- ---------
NET INCOME (LOSS) ($0.26) $0.42 ($1.41) ($0.22)
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 5,121,370 5,132,470 5,121,370 5,143,515
========= ========= ========= =========
DILUTED 5,125,932 5,132,470 5,125,932 5,143,515
========= ========= ========= =========
See Notes to Consolidated Financial Statements
5
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(GOING CONCERN BASIS)
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET (LOSS) ($ 7,231) ($ 1,126)
-------- --------
Adjustments to reconcile net loss to
net cash flows provided by operating
activities:
Depreciation and amortization 4,618 4,996
Amortization of deferred financing costs 1,369 1,162
Officer compensation issued in stock 70
Gain on sales of real estate (2,989) (3,608)
Impairment of real estate 6,697 3,819
Gain on extinguishment of debt
Cumulative effect of change in accounting principle 450
Change in operating assets and liabilities that
used cash:
Accounts receivable and other assets (2,073) (2,690)
Accounts payable, deferred income and
other accrued liabilities 901 (152)
-------- --------
Total adjustments 8,523 4,047
-------- --------
NET CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES 1,292 2,921
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate developed, acquired or improved (594) (2,893)
Additions to leasehold improvements and equipment (12) (59)
Decrease (increase) in restricted cash 1,129 (711)
Net proceeds from sales of real estate 27,990 10,102
-------- --------
NET CASH FLOWS PROVIDED BY
INVESTING ACTIVITIES 28,513 6,439
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgages (66,682) (405)
Debt issuance costs (2,135) (386)
Draws on lines of credit 900 5,500
Repayment of lines of credit (900) (8,740)
Proceeds from mortgages 45,600 7,618
Distributions to shareholders (1,280) (5,684)
Repurchase of common stock (315)
-------- --------
NET CASH FLOWS USED FOR
FINANCING ACTIVITIES (24,497) (2,412)
-------- --------
Net increase in cash and cash equivalents 5,308 6,948
Cash and cash equivalents at beginning of period 1,649 821
-------- --------
Cash and cash equivalents at end of period $ 6,957 $ 7,769
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION-
CASH PAID FOR INTEREST DURING THE PERIOD $ 11,918 $ 13,440
======== ========
See Notes to Consolidated Financial Statements
6
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
On March 19, 2002, the Company's Board of Directors voted to recommend a plan of
complete liquidation (the "Plan of Liquidation") to shareholders at the 2002
annual meeting. The Plan of Liquidation was approved on August 28, 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 to complete, although it could take longer.
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. These financial statements should be read in
conjunction with the Company's audited financial statements and other
information included in the Company's Annual Report on the Form 10-K for the
year ended December 31, 2001.
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. 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.
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.
7
2. COMPENSATION PLANS
Compensation expense in connection with the Company's 401(k) retirement
plan for the nine months ended September 30, 2002 was approximately $43,000.
In June 2002, the Company granted 20,000 stock options with an exercise
price of $3.60 per share to its president and chief executive officer, Jeffrey
D. Lewis under its Employee Option Plan.
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 received a signing/retention bonus of $285,000,
will receive a guaranteed base salary during the term of the contract 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 the 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.
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 "Severance
Plan") for its employees in July 2002. The Severance Plan became effective upon
approval of the Plan of Liquidation by the shareholders in August 2002. With the
exception of the chief executive officer and chief financial officer (both of
whom have employment agreements), and employees working at the Northway Mall in
Marshfield, Wisconsin, each regular employee whose employment is involuntarily
terminated pursuant to the plan of liquidation will be eligible to participate
in the Severance Plan unless the employee is terminated for cause.
The Severance Plan divides eligible employees into two classes of
participants: non-retained participants and retained participants. Upon the
satisfaction of certain conditions described in the Severance Plan, the Company
will pay over 36 months to each participant the lesser of 1) nine months of the
participant's current annualized salary, or 2) the greater of a) two weeks of
the participant's current annualized salary for each consecutive six-month
period in which the participant has worked full time for the Company from the
last date of hire until (i) the date of termination for non-retained
participants or (ii) the date the participant was classified as a retained
participant (the "Classification Date"), or b) six weeks of the participant's
current annualized base salary.
Additionally, under the Severance Plan retained participants will be
entitled to receive a retention bonus over 36 months equal to the lesser of: 1)
twelve months of the retained participant's annualized salary as of the
Classification Date, or 2) the greater of (A) four months of the retained
participant's annualized salary as of the Classification Date, or (B) 5% of the
retained participant's annualized base salary as of the Classification Date for
each full month the retained participant remains employed by the Company
following such date.
8
3. EARNINGS PER SHARE
Earnings per share ("EPS") data were computed as follows (in thousands
except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
------- ------- ------- -------
Income (loss) from continuing operations $(2,694) $ 1,747 $(8,722) $(2,124)
Income from discontinued operations 1,383 391 1,491 1,448
------- ------- ------- -------
Income (loss) before cumulative effect of
change in accounting principle (1,311) 2,138 (7,231) (676)
Cumulative effect of change in accounting principle (450)
------- ------- ------- -------
Net income (loss) $(1,311) $ 2,138 $(7,231) $(1,126)
===== ===== ===== =====
Weighted Average Shares Outstanding
Basic 5,121 5,132 5,121 5,144
===== ===== ===== =====
Diluted 5,126 5,132 5,126 5,144
===== ===== ===== =====
Basic and Diluted EPS:
Income (loss) from continuing operations $ (.53) $ .34 $ (1.70) $ (.41)
Income from discontinued operations .27 .08 .29 .28
Cumulative effect of change in accounting principle (.09)
------- ------- ------- -------
Net income (loss) per share $ (.26) $ .42 $ (1.41) $ (.22)
==== ==== ==== ====
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 then outstanding balance 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.
In September 2002 the Company reached an agreement to extend and modify
its line of credit with Bank One. The agreement extends the maturity date to
October 25, 2003, reduces the maximum borrowing to $1,822,806 and eliminated
certain financial covenants. There were no outstanding borrowings on the line as
of September 30, 2002.
As of September 30, 2002 the Company was in arrears approximately
$740,000 on its UDAG Loan with the City of Chicago, collateralized by a junior
mortgage on Bricktown Square Shopping Center in Chicago, Illinois. On November
6, 2002, the City Council of Chicago approved a settlement agreement with the
Company in full and complete satisfaction of the UDAG Loan. Terms of the
agreement include a payment of $1.0 million by the Company and a provision to
ensure that any subsequent transfer of the property by the Company would not be
exempt from the City's municipal transfer tax. Upon payment of the settlement
amount the City will release its claim to any additional principal or interest
due under the UDAG Loan and will release its lien on the property. The Company
has adjusted its liability for the UDAG Loan and accrued interest at September
30, 2002 to the settlement amount in the Statement of Net Assets in Liquidation
(Liquidation Basis) but has made no adjustment to the financial statements
presented under the Going Concern Basis for the settlement. The Company paid the
settlement amount in November 2002.
9
On August 9, 2002 the Company satisfied its $58 million Securitized
Mortgage Loan out of proceeds of the sale of properties and three separate
refinancings. Details of the new loans are as follows:
RECOURSE (R) INTEREST MATURITY PRINCIPAL
LENDER COLLATERAL NON-RECOURSE (N) TERM RATE DATE AMOUNT
- ------ ---------- ---------------- ---- ---- ---- ------
(thousands)
Cohen Financial 5 Kmart anchored R 12 months LIBOR+ 9/03 $ 9,100
shopping centers 3.5% (7% floor)
Salomon Bros. 4 Wal-Mart anchored N (1) 6 months, LIBOR+ 2/03 $ 23,000
Realty Corp. shopping centers, with a 6 2.50%
Clinton Pointe month
Shopping extension
Center option
JDI Loans LLC 8 Kmart anchored R 12 months Prime+ 7.25% 8/03 $13,500 (2)
shopping centers, (11% floor, 13%
Columbus, IN, cap)
Fairview Heights, IL
(1) Contains customary carve-out provisions that are recourse to the
Company including fraud, misappropriation and misapplication of funds.
(2) A $750,000 principal payment was made on this loan prior to September
30, 2002
5. PROPERTY TRANSACTIONS, CLASSIFICATIONS AND IMPAIRMENTS
During the nine months ended September 30, 2002 the Company disposed of
the following properties:
GROSS NET
LEASABLE PROCEEDS
DISPOSITION AREA AFTER DEBT
DATE PROPERTY LOCATION (SQ. FT.) CONTRACT PRICE REPAYMENT
---- -------- -------- --------- -------------- ---------
(IN THOUSANDS)
5/31/02 Kmart Plaza Janesville,
Wisconsin 104 $ 1,300 $1,141
7/16/02 Pine Ridge Lawrence,
Plaza Kansas 250 $13,850 $3,153
8/8/02 Sherwood Springfield,
Plaza Illinois 124 $5,700
South City Wichita,
Center Kansas 130 4,000
Kmart Salina, Kansas 87 2,300
Kmart Jefferson City,
Missouri 124 2,800 $14,800 $13,600
-----
10
As of November 13, 2002, the following properties were under contract
for sale:
Property Location Contract Price
-------- -------- --------------
(thousands)
Orchard-14 Shopping Center Farmington Hills, Michigan $6,200
Former Kmart Forestville, Maryland 3,000
Former Stage/Staples Center Lincoln, Illinois $1,185
Westlake Ace Hardware Arkansas City, Kansas 295
Big Lots Emporia, Kansas 490
Westlake Ace Hardware Garden City, Kansas 295
Orscheln Farm & Home Supply Hays, Kansas 890
Former Food 4 Less Independence, Kansas 595 $3,750
---
The Company had previously entered into 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, that meet certain
criteria, 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.
During the nine months ended September 30, 2002, the Company recorded
an impairment of real estate in accordance with SFAS No. 144 of $6.697 million
($904,000 of which is in discontinued operations) 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 liquidation basis of
accounting all real estate assets are valued at their estimated realizable value
less costs to dispose in the Statement of Net Assets in Liquidation.
Total revenues from assets held for sale were $274,000 and $369,000 for
the three months ended September 30, 2002, and 2001, respectively, and $1.002
million and $1.168 million for the nine months ended September 30, 2002 and
2001, respectively.
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, the former president and CEO of the Company, in litigation brought by
Gramer seeking more than $1 million for breach of an employment agreement. The
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.
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 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 testing stages and is ongoing, evidence of contamination requiring
remediation at certain properties has been discovered. The Company estimates
that the total costs related to investigation, assessment and review of these
issues and remediation of known contamination could be up to $3.1 million or
more. The Company has recorded a liability of this amount at September 30, 2002
related to these costs.
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 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 its store in
Madison, Wisconsin 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. In September 2002, Kmart assigned its lease in Madison, Wisconsin to
Burlington Coat Factory.
The Company has listed all its properties for sale including those
affected by the lease rejections and currently has a contract for the sale of
Forestville, Maryland. The Company is also attempting to re-lease the vacant
Kmart spaces in Marshfield, Wisconsin and Topeka, Kansas. 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. ESTIMATED LIQUIDATION COSTS
Under the liquidation basis of accounting, the Company is required to
estimate and record the costs associated with executing the plan of liquidation
as a liability. These amounts can vary significantly due to, among other things,
the timing and realized proceeds from property sales, the costs of retaining
personnel, the costs of insurance, the timing and amounts associated with
discharging known and contingent liabilities and the costs associated with
cessation of the Company's operations. These costs are estimates and are
expected to be paid out over the liquidation period.
12
The Company's Reserve for Estimated Liquidation Costs as of September
30, 2002 is detailed as follows:
(thousands)
Severance, Retention and Bonus $1,810
Payroll and Personnel Costs 2,790
Provision for State Taxes 606
Professional Fees 1,380
Office and Administrative Expenses 921
------
Total $7,507
======
9. NET ASSETS IN LIQUIDATION
The following is a reconciliation of Total Shareholders Equity under
the Going Concern basis of accounting to Net Assets in Liquidation under the
Liquidation basis of accounting as of September 30, 2002:
(thousands)
Shareholders' Equity at September 30,
2002 $ 12,685
Increase to reflect estimated net
realizable values of certain real estate
properties 25,030
Increase to adjust UDAG loan and accrued
interest to settlement amount 7,957
Decrease to reflect net realizable value of
assets and payment of contingent
liabilities (6,488)
Reserve for estimated costs during the
period of liquidation (7,507)
--------
Net Assets in Liquidation at September 30,
2002 $ 31,677
========
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 2002 to Three Months Ended
September 30, 2001
Total revenues from continuing operations decreased approximately
$3.215 million from 2001. Minimum rents decreased approximately $195,000 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 $132,000
due to the timing of receipts from tenants. A gain on the sale of real estate of
$2.840 million was recorded in the three months ended September 2001.
Total operating expenses from continuing operations increased
approximately $1.481 million from 2001 to 2002. Other operating expenses
increased approximately $1.530 million due to a provision for environmental
investigation and remediation costs at several properties. Real estate taxes
increased $183,000 primarily due to taxes assumed by the Company resulting from
the rejection in bankruptcy of three leases by Kmart Corporation.
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 $992,000 primarily from the gain on the sale of properties offset by
an increase in a provision for environmental costs recorded in September 2002.
Also included in discontinued operations for the three 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 $255,000 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.
Overall, net income decreased $3.449 million in 2002 primarily as a
result of a decrease in revenues due to the sales of properties in 2001 and
2002, a provision for environmental liability expense, and an increase in
impairment of real estate offset by overall lower interest expense.
Comparison of Nine Months Ended September 30, 2002 to Nine Months Ended
September 30, 2001
Total revenues from continuing operations decreased approximately
$4.870 million from 2001. Minimum rents and recoveries from tenants decreased
approximately $757,000 and $191,000, respectively, 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 pursuant to SFAS No. 144 to
discontinued operations. Percentage rents decreased $172,000 due to the timing
of receipts from tenants and lower Kmart sales at the Company's properties.
Interest and other income decreased approximately $142,000 due to lower interest
and lease termination income received in 2002. A gain on sale of real estate of
$3.608 million was recorded on the sale of two properties in the third quarter
of 2001.
14
Total operating expenses from continuing operations increased
approximately $3.182 million from 2001. Property operating and maintenance
expense decreased $221,000 primarily due to the lower cost of snow removal and
reclassification of expenses to discontinued operations. Other operating
expenses increased approximately $1.816 million due to a provision for
environmental investigation and remediation costs at several properties recorded
in 2002. General and administrative decreased $70,000 due to lower legal and
other professional fees offset by higher accounting fees and stock exchange
listing fees. Depreciation and amortization expense decreased $357,000 due to
the sale of properties in 2001 and the reclassification of assets under SFAS No.
144.
During the nine months ended September 30, 2002, the Company recorded
an impairment of real estate in accordance with SFAS No. 144 of $6.697 million
($904,000 of which is attributable to assets held for sale and is in
discontinued operations) 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 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 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 $43,000 primarily due to the gain
on the sale of properties offset by a decrease in net income of the assets held
for sale primarily attributable to a provision for environmental costs recorded
in 2002 and an increase in interest expense on a loan collateralized by Pine
Ridge Plaza in Lawrence, Kansas.
Interest expense (including related amortization of deferred financing
costs) decreased approximately $1.454 million primarily due to the expiration of
a rate floor agreement associated with the Securitized Mortgage Loan, payoff of
a line of credit in November 2001 and the reclassification of interest paid on
the Lawrence, Kansas loan to discontinued operations.
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 2001.
Overall, net loss increased $6.105 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 recorded in 2002, and an increase
in impairment of real estate offset by lower interest expense.
FUNDS FROM OPERATIONS AND RELATED INFORMATION
Management has historically considered Funds from Operations ("FFO") as defined
by the National Association of Real Estate Investment Trusts (NAREIT) to be a
relevant supplemental measure of the performance of equity real estate
investment trusts (REITs) in general. Management also believes FFO is generally
helpful to investors as a measure of the performance of an equity REIT because,
along with cash flows from operating activities, financing activities, and
investing activities, it provides investors with an understanding of the ability
of a REIT to incur and service debt and make capital expenditures. However,
because the Company is liquidating, its ability to incur additional
indebtedness, make capital expenditures and finance new investments is no longer
meaningful. Accordingly, the Company no longer believes that FFO is meaningful
in understanding the performance of the Company and therefore no longer plans to
report FFO.
15
CRITICAL ACCOUNTING POLICIES
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.
LIQUIDITY AND CAPITAL RESOURCES
Prior to approval by its shareholders in August 2002 of a plan of
complete liquidation of the Company, cash flow from operations was the principal
source of capital to fund the Company's ongoing operations. Efforts to increase
cash flow over the past twelve months for repayment and retirement of impending
debt maturities have centered on disposition of non-core assets and refinancing
of unencumbered properties.
The Company anticipates that its cash flow from operations and sales
of property will be sufficient to fund its cash needs for payment of expenses
during the liquidation period, capital expenditures, recurring debt service
payments and repayment of debt maturities. 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.
Developments and Redevelopments
Consistent with its Plan of Liquidation discussed below the Company
does not anticipate any further new developments or redevelopments.
Capital Expenditures
The Company incurs capital expenditures in the ordinary course of
business in order to maintain its properties. Such capital expenditures
typically include roof, parking lot and other structural repairs, some of which
are reimbursed by tenants. For the nine months ended September 30, 2002, the
Company incurred $159,000 of capital expenditures. Approximately $267,000 is
anticipated to be incurred by year-end 2002.
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 $470,000 (of which
$230,000 had been incurred in the nine months ended September 30, 2002). These
expenditures are generally funded by operating cash flows.
16
Sources of Capital
During the nine months ended September 30, 2002 the Company disposed of
the following properties:
GROSS NET
LEASABLE PROCEEDS
DISPOSITION AREA AFTER DEBT
DATE PROPERTY LOCATION (SQ.FT.) CONTRACT PRICE REPAYMENT
---- -------- -------- -------- -------------- ---------
(IN THOUSANDS)
5/31/02 Kmart Plaza Janesville, $ 1,300 $1,141
Wisconsin 104
7/16/02 Pine Ridge Lawrence, $13,850 $3,153
Plaza Kansas 250
8/8/02 Sherwood Springfield, $5,700
Plaza Illinois 124
South City Wichita, 4,000
Center Kansas 130
Kmart Salina, Kansas 87 2,300
Kmart Jefferson
City, Missouri 124 2,800 $14,800 $13,600
-----
In conjunction with the sale of Pine Ridge Plaza, a $9.5 million loan
with Oaktree CF Lender, L.L.C. was repaid.
As of November 13, 2002, the following properties were under contract
for sale:
Property Location Contract Price
-------- -------- --------------
(thousands)
Orchard-14 Shopping Center Farmington Hills, Michigan $6,200
Former Kmart Forestville, Maryland 3,000
Former Stage/Staples Center Lincoln, Illinois $1,185
Westlake Ace Hardware Arkansas City, Kansas 295
Big Lots Emporia, Kansas 490
Westlake Ace Hardware Garden City, Kansas 295
Orscheln Farm & Home Supply Hays, Kansas 890
Former Food 4 Less Independence, Kansas 595 $3,750
---
The Company had previously entered into 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.
Financings
In September 2002 the Company reached an agreement to extend and modify
its line of credit with Bank One. This agreement extends the maturity date to
October 25, 2003, reduces the maximum borrowing to $1,822,806 and eliminates
certain loan covenants. There were no outstanding borrowings on the line as of
September 30, 2002.
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 then
outstanding loan balance 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.
As of September 30, 2002 the Company was in arrears approximately $740,000 on
its UDAG Loan with the City of Chicago, collateralized by a junior mortgage on
Bricktown Square in Chicago, Illinois. On November 6, 2002, the City Council of
Chicago approved a settlement agreement with the Company in full and complete
satisfaction of the UDAG Loan. Terms of the agreement include a payment of $1.0
million by the Company and a provision to ensure that any subsequent transfer of
the property by the Company would not be exempt from the City's municipal
transfer tax. The Company paid the settlement amount in November 2002.
17
At September 30, 2002, the Company has outstanding $27 million
aggregate principal of 8.5% Convertible Notes (the "Notes") which are
collateralized by a senior position on Bricktown Square and are due in July
2003. The Company believes that the current value of Bricktown Square is
substantially less than the balance due on the Notes. The Company anticipates
repaying the Notes out of proceeds from the sale of or refinance of the property
and several other currently unencumbered properties and available cash reserves.
On August 9, 2002 the Company satisfied its $58 million Securitized
Mortgage Loan out of proceeds of the sale of properties and three separate
refinancings. Details of the new loans are as follows:
RECOURSE (R) INTEREST MATURITY PRINCIPAL
LENDER COLLATERAL NON-RECOURSE (N) TERM RATE DATE AMOUNT
- ------ ---------- ---------------- ---- ---- ---- ------
(thousands)
Cohen Financial 5 Kmart anchored R 12 months LIBOR+ 9/03 $ 9,100
shopping centers 3.5% (7%
floor)
Salomon Bros. 4 Wal-Mart anchored N (1) 6 months, LIBOR+ 2/03 23,000
Realty Corp. shopping centers, with a 6 2.50%
Clinton Pointe month
Shopping extension
Center option
JDI Loans LLC 8 Kmart anchored R 12 months Prime+ 7.25% 8/03 13,500 (2)
shopping centers, (11% floor,
Columbus, IN, 13% cap)
Fairview Heights,
IL
(1) Contains customary carve-out provisions that are recourse to the
Company including fraud, misappropriation and misapplication of funds
(2) A $750,000 principal payment was made on this loan prior to September
30, 2002
Litigation
In September 2001, the Circuit Court in Oakland County, Michigan
affirmed its previous decision granting summary disposition in favor of Anthony
S. Gramer, the former president and CEO of the Company, in litigation brought by
Gramer seeking more than $1 million for breach of an employment agreement. The
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
18
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 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 its store in
Madison, Wisconsin 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. In September 2002, Kmart assigned its lease in Madison, Wisconsin to
Burlington Coat Factory.
The Company has listed all its properties for sale including these
affected by the lease rejections and currently has a contract for the sale of
Forestville, Maryland. The Company is also attempting to re-lease the vacant
Kmart spaces in Marshfield, Wisconsin and Topeka, Kansas. 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 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 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 testing stages and is ongoing, evidence of contamination requiring
remediation at certain properties has been discovered. The Company estimates
that the total costs related to investigation, assessment, review of these
issues and remediation of known contamination could be up to $3.1 million or
more. The Company has recorded a liability of this amount at September 30, 2002
related to these costs.
Plan Of Liquidation
On March 19, 2002, the Company's Board of Directors voted to recommend
a plan of complete liquidation of the Company (the "Plan of Liquidation") to
shareholders at the 2002 annual meeting. The Plan of Liquidation was approved on
August 28, 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 to complete, although it could take longer. In
October 2002, the Company signed an exclusive sales listing agreement with CB
Richard Ellis, Inc. a leading national real estate brokerage firm, for
substantially all of its real estate assets.
As a result of the approval of the Plan of Liquidation 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
19
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 Company's Reserve for Estimated Liquidation Costs as of September
30, 2002 is detailed as follows:
(thousands)
Severance, Retention and Bonus $1,810
Payroll and Personnel Costs 2,790
Provision for State Taxes 606
Professional Fees 1,380
Office and Administrative Expenses 921
------
Total $7,507
======
In conjunction with the Plan of Liquidation, the Board of Directors
approved a severance and retention bonus plan (the "Severance Plan") for its
employees in July 2002. The Severance Plan became effective upon approval of the
Plan of Liquidation by the shareholders in August 2002. With the exception of
the chief executive officer and chief financial officer (both of whom have
employment agreements), and employees working at the Northway Mall in
Marshfield, Wisconsin, each regular employee whose employment is involuntarily
terminated pursuant to the plan of liquidation will be eligible to participate
in the Severance Plan unless the employee is terminated for cause.
The Severance Plan divides eligible employees into two classes of
participants: non-retained participants and retained participants. Upon the
satisfaction of certain conditions described in the Severance Plan, the Company
will pay over 36 months to each participant the lesser of 1) nine months of the
participant's current annualized salary, or 2) the greater of a) two weeks of
the participant's current annualized salary for each consecutive six-month
period in which the participant has worked full time for the Company from the
last date of hire until (i) the date of termination for non-retained
participants or (ii) the date the participant was classified as a retained
participant (the "Classification Date"), or b) six weeks of the participant's
current annualized base salary.
Additionally, under the Severance Plan retained participants will be
entitled to receive a retention bonus over 36 months equal to the lesser of: 1)
twelve months of the retained participant's annualized salary as of the
Classification Date, or 2) the greater of (A) four months of the retained
participant's annualized salary as of the Classification Date, or (B) 5% of the
retained participant's annualized base salary as of the Classification Date for
each full month the retained participant remains employed by the Company
following such date.
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 received a signing/retention bonus of $285,000,
will receive a guaranteed base salary during the term of the contract and is
eligible to receive 1) a performance bonus up to
20
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 duration of the liquidation process, the costs of liquidation, 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.
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 September 30, 2002, a one percent increase or decrease in interest rates
would decrease or increase, respectively, the Company earnings and cash flows by
approximately $452,000 on an annualized basis.
21
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including the Company's principal executive officer and principal
financial officer, the Company conducted an evaluation of its disclosure
controls and procedures, as such term is defined under Rule13a-14(c) promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
within 90 days of the filing date of this report. Based on such evaluation, the
Company's principal executive officer and principal accounting officer have
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced above."
22
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
The following matters were submitted to a vote of the security holders
of the Company at its Annual Meeting of Shareholders held on August 28, 2002
Votes For Votes Against Abstain
--------- ------------- -------
(a) Approval of the 3,021,959 197,562 41,565
Plan of Liquidation
(b) Election of
Directors Nominees Votes For Votes Withheld
-------- --------- --------------
Jeffrey D. Lewis 4,653,432 345,029
Paul Gray II 4,653,432 345,029
Jill Holup 4,653,432 345,029
John P. Kramer 4,653,432 345,029
Edward J.
Russell III 4,653,432 345,029
Item 5: Other Information
NONE
Item 6: Exhibits and Reports on Form 8-K
a) Exhibit Index:
99.1 Written Statement of the Chief Executive Officer Filed with this document
99.2 Written Statement of the Chief Financial Officer Filed with this document
b) Reports on Form 8-K
NONE
23
MALAN REALTY INVESTORS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MALAN REALTY INVESTORS, INC.
By: /s/ Jeffrey D. Lewis
--------------------------------------
Jeffrey D. Lewis
Chief Executive Officer
By: /s/ Elliott J. Broderick
------------------------------------
Elliott J. Broderick
Chief Financial Officer (principal accounting officer)
Dated: November 14, 2002
24
CERTIFICATIONS
I, JEFFREY D. LEWIS, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Malan Realty Investors,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Jeffrey D. Lewis
-----------------------
Jeffrey D. Lewis
Chief Executive Officer
25
CERTIFICATIONS
I, ELLIOTT J. BRODERICK, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Malan Realty Investors,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Elliott J. Broderick
------------------------------
Elliott J. Broderick
Chief Financial Officer
(principal accounting officer)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
EX-99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002