ITEM 1. BUSINESS
Malan Realty Investors, Inc. (the "Company") is a self-administered and self-managed real estate investment trust ("REIT") engaged in the ownership, management and leasing, of commercial retail properties. Prior to December 2001, the Company was also engaged in acquisition, development and redevelopment of such properties. The Company's operating units are comprised of approximately 58 community shopping centers, free-standing retail stores and theater complexes. All financial results are aggregated into one operating segment since the properties have similar economic characteristics. The Company also manages properties owned by unrelated third parties on a limited basis.
The Company's major tenants include Kmart Corporation ("Kmart") and Wal-Mart Corporation ("Wal-Mart") as well as other national retailers and theater operators. In 2001, Kmart and Wal-Mart accounted for approximately 27.6% and 5.4%, respectively, of the Company's total revenues and 46.8% and 8.5%, respectively, of its gross leasable area ("GLA") at December 31, 2001. Total GLA was approximately 5.5 million square feet as of December 31, 2001.
In January 2002, Kmart Corporation filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. The Company has a total of 27 stores under lease to Kmart, with an average annual base rent of $2.78 per square foot, which account for revenues totaling approximately $11.2 million annually. Under the bankruptcy laws, within a specified time frame, Kmart could reject and terminate any of their leases or affirm a lease with the ability to assign the lease or re-lease the space to a third party. In February 2002, Kmart affirmed one of its leases with the Company. Subsequently in March 2002, Kmart announced the closure of 284 of its operating stores including four stores owned by the Company. As of March 27, 2002, Kmart had neither affirmed nor rejected the leases on these stores.
During 2001, the Company began a plan of selling assets to retire various debt obligations which mature over the next several years. As a result of several factors including the Company's debt obligations, substantial over-leverage of one of the Company's other properties, impediments to the redevelopment of another property, as well as the Kmart bankruptcy, the Company's Board of Directors voted in March 2002 to recommend a plan of liquidation to its shareholders. The proposed plan contemplates the sale of all of the Company's properties and other assets and is subject to shareholder approval as well as to agreements with some of the Company's lenders. While the Company will undertake to proceed expeditiously, the liquidation process could take up to twenty-four months or more. It is anticipated that cash generated from operations and property sales during this period will be used first to make required repayments of debt and other liabilities and then distributed to common shareholders.
The Company is currently taxed as a REIT under Section 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company generally is not subject to federal income taxes to the extent it distributes at least 90% of its real estate investment trust taxable income (as defined in the Code) to its shareholders.
The Company presently has 20 full-time employees and believes that its relationship with its employees is good.
ITEM 2.
ITEM 2. PROPERTIES
- ------------------------- (A) Includes only Company owned square footage.
(B) These stores and the underlying pads are owned and managed by third parties not related to the Company.
(C) Kmart subleases this property.
(D) In addition to the operating properties listed, the Company leases approximately 6,200 square feet of office space for its headquarters in Bingham Farms, Michigan.
(E) This property is currently vacant.
TENANT LEASE EXPIRATIONS AND RENEWALS
The following table shows tenant lease expirations for the next ten years at the Company's properties, assuming that none of the tenants exercise any of their renewal options:
Kmart Lease Information
The following table shows information for leases with Kmart included in the above table:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in routine litigation, none of which is expected to have a material adverse effect on the Company. The Company also is currently involved in a lawsuit filed on November 13, 2000 by Anthony S. Gramer, its former President and Chief Executive Officer. In May 2001 the Circuit Court in Oakland County, Michigan granted summary disposition in favor of Gramer in litigation seeking more than $1 million for breach of an employment agreement. The Court upheld the decision in September 2001 ruling in Gramer's favor in a lump sum amount. The Company believes that the order was entered in error and has filed an appeal with the Michigan Court of Appeals.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange under the symbol "MAL". As of February 28, 2002 the Company had approximately 159 shareholders of record. The following table sets forth, for the periods indicated, the high and low sales price as reported on the New York Stock Exchange, the dividends declared and paid by the Company per common share for each such period, and the income tax treatment of such distributions:
Prior to the second quarter 2001, the Company paid regular quarterly distributions on its Common Stock to its shareholders of $.425 per share dating back to its initial public offering in June 1994. In June 2001, the Company began paying quarterly distributions of $.25 per share based on its estimated cash available for distribution ("CAD"). The Company defines CAD as funds from operations ("FFO") as defined by the National Association of Real Estate Investment Trusts (NAREIT) plus non-cash expenses not added back to net income in calculating FFO, less recurring capital expenditures and payments of mortgage principal amortization. In March 2002, the Company announced that it was suspending regular quarterly cash distributions to shareholders in conjunction with its proposed plan of liquidation.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the Company on a historical basis and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and all of the financial statements and notes thereto included elsewhere in this Form 10-K.
SELECTED FINANCIAL DATA
- ------------------------- (1) In accordance with Statement of Financial Accounting Standards, No. 128, "Earnings per Share", conversion of all of the debt securities would be antidilutive and as such are not included in the weighted average diluted shares reported above.
(2) Management considers funds from operations ("FFO") to be a standard supplemental measure of performance of an equity real estate investment trust. The Company calculates FFO as net income or (loss) excluding gains and losses from sales of operating property, further adjusted for certain non-cash items including depreciation, amortization and impairment of real estate assets. It is the opinion of management that reduction for or inclusion of these items is not meaningful in evaluating income-producing real estate which, in general, has historically not depreciated. 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. See "Funds From Operations" in Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the "Selected Financial Data" and the Company's consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K.
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000
The total gross leasable area ("GLA") of the Company decreased from approximately 5.921 million square feet at December 31, 2000 to approximately 5.455 million square feet at December 31, 2001 due to the sale of properties in 2001. The percentage of GLA leased at December 31, 2001 remained at 94% compared to December 31, 2000. Total revenue decreased $1.111 million from 2000. Minimum rents and recoveries from tenants decreased $1.359 million primarily due to the closure of a theater tenant at Bricktown Square and the sale of six properties in 2001. Percentage and overage rents decreased $162,000 due to the receipt in 2000 of a one-time settlement of percentage rents offset by an overall increase in 2001 percentage rents from the Company's anchor tenants. Interest and other income decreased $262,000 primarily due to non-recurring lease termination income from tenants recognized in 2000. Net gains on the sale of real estate increased $672,000 in 2001.
Total operating expenses increased $12.412 million in 2001. Property and operating maintenance expense increased $102,000 primarily due to the higher cost of snow removal and overall increases in utilities and insurance offset by decreases due to properties sold. Other operating expenses decreased $303,000 in 2001 primarily due to a state tax refund received in 2001 and a decrease in bad debt expense from 2000. Nonrecurring expenses included $3.2 million incurred in 2000 relating to a proxy contest and related expenses and an impairment of real estate of approximately $15.266 million recorded in 2001. The impairment of real estate relates to a reduction in the carrying value in accordance with Statement of Financial Accounting Standards (SFAS) No. 121 of the Company's interests in twenty-seven assets. Under SFAS No. 121, aggregate impairment losses cannot be reduced by unrealized appreciation of other properties. General and administrative expenses increased $823,000 primarily due to (1) legal fees related to tenancy issues at Bricktown Square and other litigation and (2) professional fees related to the development of and execution of the Company's strategic plan.
Interest expense (including related amortization of deferred financing costs) decreased approximately $252,000 primarily due to a reduction in amortization of rate cap costs as a result of the adoption of SFAS No. 133, which addresses accounting for derivative instruments and hedging activities, and lower interest rates on the Company's variable rate financing offset by an increase in amortization of deferred financing costs on new financing. The cumulative effect of a change in accounting principle under SFAS No. 133 was a reduction in net income of $450,000 as of January 1, 2001.
On a same-store basis, property-operating revenues, consisting of minimum and percentage rents and recoveries from tenants decreased approximately $377,000 from 2000 to 2001 due to an overall increase in tenant vacancies. Property operating expenses, consisting of property operating and maintenance and real estate taxes increased approximately $283,000 as a result of increased snowplowing and increases in real estate taxes at several properties. Overall property net operating income decreased approximately $660,000 on a same-store basis from 2000.
Overall, net income decreased $13.628 million resulting primarily from charges for impairment of real estate and the cumulative effect of a change in accounting principle and a decrease in rents due to a closure of a theater tenant and sales of properties offset by a decrease in costs related to a proxy contest and related expenses and an increase in net gains on sale of real estate.
Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999
The total GLA of the Company decreased from approximately 6.034 million square feet at December 31, 1999 to approximately 5.921 million square feet at December 31, 2000 due to the sale of a property in 2000. The percentage of GLA leased at December 31, 2000 decreased to 94% from 95% at December 31, 1999. Total revenue increased $128,000 from 1999. Minimum rents and recoveries from tenants decreased $1.698 million primarily due to sales of properties in 1999 and 2000 and lease termination agreements executed with four tenants in late 1999 and early 2000. Percentage rent increased approximately $224,000 from 1999 primarily due to a settlement of additional percentage rents from prior years and an overall increase in percentage rents from the Company's anchor tenants. Interest and other income increased approximately $46,000 primarily from the receipt of nonrecurring lease termination fees from two tenants in 2000. Net gains on sales of properties increased $1.556 million over 1999. Total operating expenses increased $4.245 million from 1999 primarily due to proxy contest and related costs totaling $3.2 million. Property operating and maintenance expense increased $100,000 primarily due to extraordinary snow removal costs incurred in December 2000. Other operating expenses increased $399,000 primarily due to an increase in bad debt expense to provide for the potential uncollectibility of past due rents from a former theater tenant at Bricktown Square. General and administrative costs increased $132,000 primarily due to legal and professional fees incurred in connection with the Company's strategic operational review of the Company performed in early 2000. Depreciation and amortization increased $427,000 primarily due to capital improvements and redevelopments that were completed in 1999 and 2000 offset by decreases attributable to property sales. Real estate taxes decreased approximately $203,000 due to the sale of a property in Manchester, Missouri in June 2000. In 2000, the Company recorded a loss on impairment of real estate of approximately $190,000 due to the reduction of the Company's carrying value of its interest in its property in Great Bend, Kansas to its net realizable value in accordance with SFAS No. 121.
Interest expense (including related amortization of deferred financing costs) increased approximately $412,000 due to increases in interest rates on the Company's lines of credit in 2000 and additional borrowings. Interest capitalized on redevelopment projects in 2000 was $32,000 compared to $161,000 in 1999.
The Company recorded a loss on early extinguishment of debt in 2000 of $93,000 related to the repayment of debt in connection with the sale of property in Manchester, Missouri. In 1999, the Company recorded a net extraordinary loss of $289,000 on the early extinguishment of debt in connection with the repayment of a portion of the Company's Securitized Mortgage Loan and repurchases of its 9 1/2 percent Subordinated Convertible Debentures due 2004.
In 1999, the Company elected to apply the provisions of SEC Staff Accounting Bulletin No. 101, which addresses the proper recognition of certain revenue items including contingent (percentage) rents. The cumulative effect of the change in accounting principle was a reduction in percentage rental revenue of $522,000 as of January 1, 1999.
Overall, net income decreased approximately $3.811 million in 2000 primarily as a result of nonrecurring items related to costs associated with a proxy contest and related payments offset, in part, by an increase in gains on property sales and reductions in losses on extinguishment of debt and the cumulative effect of a change in accounting principle.
Impact of Recently Adopted Accounting Standards
In August 2001, the Financial Accounting Standards Board approved SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." The Statement retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. As individual properties will qualify as components under the provisions of SFAS No. 144, the Company expects the operations of all properties sold or classified as held for sale after December 31, 2001 to be shown as discontinued operations. In addition, operations for such properties for all prior periods presented will be reclassified to discontinued operations. The Company does not expect this statement to have a material impact on the consolidated financial position or results of operations.
Funds From Operations
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 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. Prior years amounts have been restated to conform with the current year presentation.
The following table shows the components that comprise the Company's FFO for each of the three years ended December 31, 2001.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with generally accepted accounting principles, which requires the Company to make certain estimates and assumptions. A summary of the
Company's significant accounting policies is provided in Note 1 to the consolidated financial statements. The following section is a summary of certain aspects of those accounting policies that require management estimates and judgment.
Revenue Recognition
Minimum rents are recognized on a straight-line basis over the terms of the leases. The Company records percentage rental revenue when lessees' specified sale targets are achieved. Recoveries from tenants are recognized as revenue in the period that applicable costs are chargeable to tenants.
Impairment of Real Estate
The Company reviews its properties on a quarterly basis for impairment and provides a provision if impairments are determined. To determine if impairment may exist, the Company reviews its properties and identifies those that have had either an event of change or event of circumstances warranting further assessment of recoverability. If further assessment of recoverability is needed, the Company estimates the future net cash flows expected to result from the use of the property and its eventual disposition, on an individual property basis. If the sum of the expected future net cash flows (undiscounted and without interest charges) over the Company's anticipated holding period of the asset is less than the carrying amount of the property on an individual property basis, the Company will recognize an impairment loss based upon the estimated fair value of such properties. Aggregate impairment losses are not reduced by unrealized appreciation of other assets.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is the principal source of capital to fund the Company's ongoing operations. Recent efforts to increase cash flow have centered on redevelopment opportunities at certain of the Company's existing properties, disposition of non-core assets and refinancing of unencumbered properties.
Developments and Redevelopments
Phase II of the redevelopment of the Pine Ridge Plaza in Lawrence, Kansas is complete. The Company completed its work on the construction of a 22,000 square foot Old Navy and a 12,000 square foot Famous Footwear in April 2001. Both stores opened in the second quarter 2001. Total costs of construction through December 31, 2001 were approximately $2.2 million. Construction of Phase III, an additional freestanding building of 23,500 square feet, was completed in December 2001. Approximately 10,000 square feet has been leased and it is anticipated the balance will be subdivided into spaces ranging from 2,500 to 5,000 square feet each. Total costs for Phase II and Phase III were approximately $4.6 million and were funded partially through a $10 million loan with Cohen Financial discussed further below and draws on the Company's line of credit.
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 $600,000 of which $240,000 were incurred through December 31, 2001. The project is anticipated to be completed in June 2002.
In March 2001, the Company obtained city approval to redevelop up to 90 acres of property in Farmington Hills, Michigan, contiguous to and inclusive of the Company's existing 12 acre Orchard-14 Shopping Center, under a Planned Unit Development agreement with the city. Prior to approval by the city, the Company signed an agreement to enter into a joint development with Grand/Sakwa Acquisition, L.L.C. ("Grand /Sakwa") to acquire and redevelop portions of the 90 acres in various phases through a joint venture. In June 2001, Grand/Sakwa filed suit in the Circuit Court in Oakland County, Michigan seeking to declare the joint development agreement unenforceable. The Company denied the contention that the agreement is unenforceable and filed a counter-claim seeking specific performance of the agreement, alleging breach of contract and claiming a breach of duty by Grand/Sakwa to negotiate in good faith. In December 2001 the
Company entered into a settlement agreement with Grand/Sakwa whereby each party agreed to forego any claims against the other and discontinue the joint development
Consistent with its proposed plan of liquidation (See "Proposed Plan of Liquidation" 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 twelve months ended December 31, 2001, the Company incurred $729,000 of capital expenditures, which were funded out of reserves required under the Company's collateralized mortgages and operating cash flows. Approximately $720,000 is anticipated to be incurred in 2002 for capital expenditures, also to be funded from similar sources.
In order to procure new tenants or renegotiate expiring leases with current tenants the Company will provide inducements including building allowances and space improvements and pay leasing commissions to outside brokers in accordance with prevailing market conditions. The total cost of these expenditures in 2001 was approximately $682,000. Anticipated costs for 2002 are estimated to be approximately $1.5 million. These expenditures are generally funded by operating cash flows.
Sources of Capital
The Company anticipates that its cash flow from operations will be sufficient to fund its cash needs for payment of operating expenses and anticipated capital expenditures. However, the Company has substantial debt obligations maturing over the next several years which will require refinancing or sale of assets to satisfy (See "Financings" below).
The Company has in place a Stock Repurchase Plan for up to 500,000 shares of its Common Stock, such purchases to be made in the open market, with the timing dependent upon market conditions, pending corporate events and availability of funds. During the twelve months ended December 31, 2001, the Company repurchased 48,100 shares at an average cost of $8.26 per share.
The Company has outstanding as of December 31, 2001 and December 31, 2000 $42.743 million of 9.5% Convertible Debentures ("Debentures") and $27 million of 8.5% Convertible Notes ("Notes") which are convertible into shares of Common Stock at a price of $17 per share. In January 2002, Moody's Investor Services, Inc. downgraded its rating of the Debentures from B3 to CAA and simultaneously withdrew its rating. The Debentures are due July 2004 and the Notes are due July 2003.
The Company has in place a plan to repurchase and retire up to $15 million aggregate principal of Debentures. Through December 31, 2001, the Company had repurchased $11.807 million of Debentures under the plan. No Debentures were repurchased during the twelve months ended December 31, 2001 or 2000. The Company may make additional purchases in the future consistent with its proposed plan of liquidation as funds become available.
The Company sold the following properties in 2001 (in thousands):
Net cash generated from the sales was used for general working capital purposes and to pay down the outstanding balance on the Company's lines of credit.
Financings
In September 2001, the Company extended its line of credit with Bank One (the "Bank One Line") through September 30, 2002. The Bank One Line is a revolving line of credit, which calls for monthly payments of interest at the Bank's prime rate or 200 basis points over LIBOR, at the Company's option, and is collateralized by the Company's interest in Orchard-14 Shopping Center in Farmington Hills, Michigan. In October 2001, the available borrowing was reduced by approximately $1.573 million as a condition of the issuance of a letter of credit by Bank One required for an appeal bond in connection with litigation with the Company's former president and CEO (See "Litigation" below). There were no borrowings outstanding on the line as of December 31, 2001. As of December 31, 2001, the Company was in violation of two corporate financial covenants on the Bank One Line as the result of an impairment of assets under SFAS No. 121 recorded in 2001. Subsequent to year-end the Company received a waiver of the covenants from Bank One for the fourth quarter.
The Company's line of credit with Greenwich Capital Markets, Inc., a revolving line of credit, expired November 2001. The Company made a final payment to satisfy its remaining obligation from proceeds from the above property sales prior to the due date.
In May 2001, the Company entered into a $10 million loan agreement with Oaktree CF Lender, L.L.C., an affiliate of Cohen Financial. The loan is for a term of 12 months with interest at the rate of 400 basis points over the 30-day LIBOR rate and a floor of 8% per annum. The loan is collateralized by the Pine Ridge Plaza shopping center development in Lawrence, Kansas. Initial funding of approximately $7.6 million was received upon closing in May 2001 and the balance of the loan is to be disbursed as construction of the additional retail space in the center is completed and tenant leases are executed. An additional draw on the loan totaling approximately $1.9 million was received in January 2002. The Company is currently negotiating an extension of the loan with the lender and anticipates that the loan will be paid off through a subsequent sale of the property. The loan agreement contains a provision whereby the Company is required to deposit cash or a letter of credit in the amount of $2 million with the lender should Kmart cease to be open for business in its space at the shopping center. As of March 27, 2002, the Kmart store remained in operation and was not slated for closure by Kmart at that time (See "Kmart Bankruptcy" below).
The Company has several large debt obligations coming due in the near term and over the next several years which it intends to satisfy through 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 has listed its real estate assets for sale and expects to sell properties generating sufficient proceeds to pay off the Securitized Mortgage Loan by the due date. The Company is also negotiating with several lenders to refinance the Securitized Mortgage Loan on a short-term basis in the event that all or a portion of the loan is not retired by the due date. In the event that the
Securitized Mortgage Loan is not completely satisfied by the due date, the lender may institute foreclosure proceedings against the collateral.
Approximate scheduled principal payments for the years subsequent to December 31, 2001 are as follows (in thousands):
Certain of the Company's debt obligations contain cross-default and cross-acceleration provisions.
Bricktown Square Shopping Center
The Company owns Bricktown Square in Chicago, Illinois which collateralizes two loans, the 8.5% Secured Convertible Notes due July 2003 (the "Convertible Notes") and the City of Chicago UDAG Loan (the "UDAG Loan") with outstanding balances of $27 million and approximately $7.8 million, respectively, at December 31, 2001. The UDAG Loan is secondary to the Convertible Notes and is nonrecourse to the Company. Net operating income and cash flows from Bricktown have declined significantly since 1998.
The Company believes the current value of Bricktown Square is substantially below the debt obligations that it collateralizes. In March 2001, the Company entered into a standstill agreement with the City of Chicago to suspend payments on the UDAG Loan until December 2001. In December 2001, the Company failed to make a required payment of interest and principal totaling approximately $370,000 after its request for an extension of the standstill agreement was denied by the City. The Company did not make an additional payment of interest and principal totaling approximately $185,000 due in March 2002. Under the UDAG Loan agreement, the City has the right to declare the Company in default for nonpayment of the amounts due. If such default remains uncured, further defaults could result under the Convertible Notes and certain other of the Company's debt agreements thereby causing potential acceleration of amounts due under these agreements. The City has not declared the Company in default of the UDAG Loan Agreement as of March 27, 2002.
In May 2001, the Company executed a lease at the property with a health club for a 35,000 square foot space formerly occupied by a theater tenant. In 2001, the Company recorded an impairment of real estate of approximately $ 4.6 million to reduce its carrying value in Bricktown Square to its net realizable value in accordance with SFAS No. 121. The Company is currently marketing Bricktown Square for sale.
Litigation
In May 2001 the Circuit Court in Oakland County, Michigan granted summary disposition in favor of Anthony S. Gramer, Malan's former president and CEO, in litigation brought by Gramer seeking more than $1 million for breach of an employment agreement. The Court upheld the decision in September 2001 ruling in Gramer's favor in a lump sum amount. 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. 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. The Company has a total of 27 stores under lease to Kmart with an average annual base rent of $2.78 per square foot. Leases with Kmart account for approximately 25 percent of the Company's annualized minimum rent and 47 percent of its gross leasable area. Under the bankruptcy laws, within a specified time frame, Kmart could reject and terminate any of their leases or affirm a lease with the ability to assign the lease or re-let the space to a third party. In February 2002, Kmart affirmed its lease with the Company for the store located in Fairview Heights, Illinois.
Kmart has stated in its bankruptcy filings that it expects "to emerge from Chapter 11 having improved their operations and rationalized their capital structure". As part of its plan of reorganization, Kmart announced in March 2002 that it intended to close 284 of its operating stores including four stores owned by the Company. Revenues derived from the four stores, which are located in Topeka, Kansas, Forestville, Maryland and Madison and Marshfield, Wisconsin, total approximately $1.5 million annually.
Three of these four properties also have other in-line tenants that may be adversely affected by the closures. The effect on future cash flows resulting from these closures cannot be determined at this time, however, in preparing the accompanying the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities. Nevertheless, actual results may differ from these estimates under different assumptions or conditions.
Kmart has announced that it may close additional stores in the future. Should Kmart reject the leases on the above stores it intends to close, or close additional stores in the Company's portfolio, future cash flows may be materially impacted. As of March 27, 2002, Kmart had neither affirmed nor rejected the leases on any of the four stores mentioned above.
Proposed Plan of Liquidation
As a result of several factors including the Company's debt structure, including the over-leverage of Bricktown Square, impediments to the redevelopment of the property in Farmington Hills, Michigan, and the bankruptcy filing of Kmart Corporation, the Company's Board of Directors voted in March 2002 to recommend a plan of liquidation to its shareholders. The proposed plan contemplates the sale of all the Company's properties and other assets and will be subject to shareholder approval at the 2002 annual meeting of shareholders, as well as to agreements from some of the Company's lenders. If the plan is approved by the shareholders, the Company expects to achieve reductions in operating costs during the liquidation period. While the Company will undertake to proceed expeditiously, the liquidation process could take up to twenty-four months or longer to complete. In conjunction with the recommendation to liquidate, the Board announced that it was indefinitely suspending regular quarterly cash distributions. It is currently contemplated that cash generated from operations and property sales during the liquidation period will be used first to make required payments of debt and other liabilities and then distributed to common shareholders. The Company has entered into listing agreements for its real estate assets consistent with its previously announced strategic plan.
MANAGEMENT CHANGES
In January 2002, in response to the discontinuation of its acquisition and development plans, the Company entered into a separation agreement with its president, Michael Kaline which supercedes its previous employment agreement with Mr. Kaline. As part of the agreement Mr. Kaline resigned as an employee of the Company and was placed on leave of absence until August 9, 2002. In addition, he received a lump sum payment of $54,000 in February 2002, will continue to draw his salary of $15,000 per month until August 9, 2002 and will receive an additional lump sum payment of $15,000 immediately following August 10,
2002. He will also be entitled to certain other benefits during this period. In March 2002, Jeffrey D. Lewis assumed the title of president in addition to his responsibilities as chief executive officer.
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 results of the Company's restructuring of the Bricktown Square debt described above, the Company's ability to retire or refinance its other indebtedness as it comes due, the Company's success in selling assets and implementing its strategic plan, 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, 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 from operations. Such provisions include clauses entitling the Company to receive (i) scheduled base rent increases and (ii) percentage rents based upon tenants' gross sales, which generally increase as prices rise. In addition, many of the Company's non-anchor leases are for terms of less than ten years, which permits the Company to seek increases in rents upon re-rental at 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 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company has exposure to interest rate risk on its debt obligations and interest rate instruments. Based on the Company's outstanding variable rate debt at December 31, 2001, a one percent increase or decrease in interest rates would no have no effect on the Company's earnings or cash flows or the fair value of the debt outstanding at that date.
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Schedules other than the ones above are omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Malan Realty Investors, Inc.
In our opinion, the accompanying consolidated balance sheet as of December 31, 2001 and the related consolidated statements of operations, shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Malan Realty Investors, Inc. and its subsidiaries at December 31, 2001, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements of the Company as of December 31, 2000 and 1999 and for the years then ended were audited by other independent accountants whose report dated January 31, 2001 expressed an unqualified opinion on those statements.
As discussed in Note 2 to the financial statements, the Company is delinquent with respect to required payments on a mortgage loan which could result in the acceleration of certain other losses. Additionally, the Company has significant debt obligations coming due in the near term. As discussed in Note 15 to the financial statements, the Company's largest tenant has filed for bankruptcy protection. As discussed in Note 15 to the financial statements, the Company's Board of Directors has recommended a plan of liquidation to its shareholders. The financial statements do not include any adjustments that might result from the outcome of these matters.
As discussed in Note 10 to the financial statements, the Company changed its method for accounting for interest rate cap agreements.
PricewaterhouseCoopers LLP
Chicago, Illinois March 27, 2002
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Malan Realty Investors, Inc.
We have audited the accompanying consolidated balance sheets of Malan Realty Investors, Inc. and subsidiaries (the "Corporation") as of December 31, 2000 and the related consolidated statements of operations, shareholders' equity, cash flows and consolidated financial statement schedules listed at Item 8 for the years ended December 31, 2000 and 1999. These financial statements and financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Malan Realty Investors, Inc. and subsidiaries as of December 31, 2000, and the results of their operations and their cash flows for the years ended December 31, 2000 and 1999, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basis consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 11 to the financial statements, in 1999 the Company changed its method of accounting for percentage rents.
DELOITTE & TOUCHE LLP
Detroit, Michigan January 31, 2001
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
See Notes to Consolidated Financial Statements
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
See Notes to Consolidated Financial Statements
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
See Notes to Consolidated Financial Statements
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See Notes to Consolidated Financial Statements
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting principles which management believes are the most important to aid in fully understanding and evaluating the Company's reported financial results are the following:
General -- The Company is engaged in the ownership, management, leasing, acquisition, development and redevelopment of shopping centers and entertainment facilities and leases space to tenants pursuant to lease agreements. The lease agreements provide for terms ranging from one to 25 years and, in some cases, for annual rentals, which are subject to upward adjustment based on operating expense levels and sales volume.
Basis of Combination and Principles of Consolidation -- The accompanying consolidated financial statements include the activity of the Company and its wholly owned subsidiaries, Malan Mortgagor, Inc., Malan Meadows, Inc., Malan Revolver, Inc., Malan Aurora Corp., Malan Pine Ridge LLC and Malan Midwest, LLC. All significant inter-company balances and transactions have been eliminated.
Reclassifications -- Certain reclassifications have been made to prior years financial statements in order to conform to the current year presentation.
Real Estate is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets as follows:
Maintenance and repairs are charged to expense as incurred. Renovations, which improve or extend the life of the asset are capitalized. Interest costs, real estate taxes and other directly related costs incurred during construction periods are capitalized and depreciated commencing with the date placed in service, on the same basis as the related assets.
The Company reviews its properties on a quarterly basis for impairment and provides a provision if impairments are determined. To determine if impairment may exist, the Company reviews its properties and identifies those that have had either an event of change or event of circumstances warranting further assessment of recoverability. If further assessment of recoverability is needed, the Company estimates the future net cash flows expected to result from the use of the property and its eventual disposition, on an individual property basis. If the sum of the expected future net cash flows (undiscounted and without interest charges) over the Company's anticipated holding period is less than the carrying amount of the property on an individual property basis, the Company will recognize an impairment loss based upon the estimated fair value of such properties. Aggregate impairment losses are not reduced by unrealized appreciation of other assets. See Note 9 for the impairment of real estate.
Real Estate Held For Sale -- The Company classifies real estate as held for sale at the time it executes a binding contract for the sale of the asset. At that point, the Company no longer records depreciation expense on the asset. If the sale is not completed within the time period specified in the sale agreement (including any extensions of time) the asset is reclassified as used in a trade or business and depreciation expense resumed from the point that the contract becomes null and void.
Gain on Sale of Real Estate is recognized using the full accrual method. As the assets are sold, their costs and related accumulated depreciation are removed from the accounts with resulting gains or losses reflected in
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net income or loss. Estimated future costs to be incurred by the Company after completion of each sale are included in the determination of the gains on sales.
Fair Value of Financial Instruments -- The Company's financial instruments include short-term investments, and mortgage loans payable. The fair values of the short-term investments were not materially different from their carrying or contract values due to the short term nature of these financial instruments. See Note 6 for the fair values of the mortgage loans payable.
Deferred Financing and Other consists primarily of deferred financing costs and lease procurement costs. Deferred financing costs at December 31, 2001 and 2000 of $12,243,000 and $11,846,000, respectively, are amortized on a straight-line basis over the terms of the applicable debt agreements. Accumulated amortization of deferred financing costs at December 31, 2001 and 2000 was $10,300,000 and $8,250,000, respectively. Amortization expense is included in interest expense in the Consolidated Statement of Operations.
Lease procurement costs of $5,912,000 and $4,210,000 at December 31, 2001 and 2000, respectively, consist of direct leasing costs, tenant allowances and tenant improvements and are amortized on a straight line basis over the terms of the applicable tenant lease. Accumulated amortization of lease procurement costs at December 31, 2001 and 2000 was $1,903,000 and $1,157,000, respectively, and amortization expense for 2001, 2000 and 1999 was $775,000, $536,000 and $318,000, respectively.
Revenue Recognition -- Minimum rents are recognized on a straight-line basis over the terms of the leases. The Company records percentage rental revenue when lessees' specified sale targets are achieved. Recoveries from tenants are recognized as revenue in the period that applicable costs are chargeable to tenants.
Income Taxes -- The Company has elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company generally will not be subject to federal income taxation at the corporate level to the extent it distributes annually at least 90% (95% prior to 2001) of its real estate investment trust taxable income, as defined in the Code, to its shareholders and satisfies certain other requirements. Accordingly, no provision has been made for federal income taxes in the accompanying financial statements.
Earnings per common share -- Earnings per share ("EPS") are computed on both a basic and diluted basis. Basic EPS excludes potential share dilution and is computed by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding for the period. 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.
Distributions of $1.175, $1.70 and $1.70 per common share were declared for each of the years ended December 31, 2001, 2000 and 1999, respectively, of which $0.52, $1.42 and $0.92, respectively, represent a return of capital for federal income tax purposes.
Cash and cash equivalents consist of deposits in banks and certificates of deposit with maturities of three months or less at the date of purchase.
Management estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Segment Information -- The Company's operating units are comprised of approximately 58 commercial retail properties. All financial results are aggregated into one operating segment since the properties have similar economic characteristics.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impact of Recently Adopted Accounting Standards -- In August 2001, the Financial Accounting Standards Board approved Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." The Statement retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. As individual properties will qualify as components under the provisions of SFAS No. 144, the Company expects the operations of all properties sold or classified as held for sale after December 31, 2001 to be shown as discontinued operations. In addition, operations for such properties for all prior periods presented will be reclassified to discontinued operations. The Company does not expect this statement to have a material impact on the consolidated financial position or results of operations.
2. MORTGAGES, DEBENTURES AND NOTES
The following tables set forth certain information regarding the Company's debt:
- ------------------------- (1) Loan agreement terminated November 2001 and was paid in full.
(2) Overall blended rate. The interest rate on four different tranches are either fixed or capped through the use of interest rate cap agreements. The effective interest rate is fixed at 7.59% through February 10, 2002; thereafter, the interest
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rate on $38.375 million of mortgage loans converts to a variable rate based on certain requirements. Net settlement costs paid under interest rate cap agreements are recorded on an accrual basis and recognized as an adjustment to interest expense.
(3) Loan is a 30-year loan expiring June 11, 2028. The loan is pre-payable at the end of 15 years, or June 11, 2013. Subsequent to that date, all cash flow from the property is excess of operating expenses is to be applied against accrued interest and principal with the balance of the loan due no later than June 11, 2028.
(4) Nonrecourse loans may contain customary carve-out provisions that are recourse to the Company.
(5) The Company believes the current value of Bricktown Square is insufficient to satisfy the debt obligations it collateralizes.
The Company has a revolving line of credit, which expires September 2002, with Bank One which allows for borrowings up to $3.0 million. The line is collateralized by the Company's interest in Orchard-14 Shopping Center in Farmington Hills, Michigan. In October 2001, the available borrowing was reduced by approximately $1.573 million as a condition of the issuance of a letter of credit by Bank One required for an appeal bond in connection with litigation with the Company's former president and CEO. As of December 31, 2001 there were no outstanding borrowings on the line. As of December 31, 2001, the Company was in violation of two quarterly corporate level loan covenants on the line primarily as a result of an impairment of real estate under SFAS No. 121 recorded in the fourth quarter 2001. The Company subsequently received a waiver of the covenants from Bank One for the fourth quarter 2001.
The Company has Convertible Debentures (the "Debentures") and Convertible Notes (the "Notes"), which are convertible into shares of Common Stock at a price of $17 per share. The Debentures are unsecured general obligations of the Company due July 15, 2004. In January 2002, Moody's Investors Services, Inc. downgraded its rating of the Debentures from B3 to CAA and simultaneously withdrew its rating. The Notes are general obligations due July 15, 2003 collateralized by a first mortgage on Bricktown Square in Chicago, Illinois. The Debentures are redeemable by the Company at par beginning July 15, 2001.
The Company has in place a plan to repurchase and retire up to $15 million aggregate principal of Debentures. Approximately $11.807 million principal of Debentures has been repurchased under the plan. The Company did not make any repurchases in either 2001 or 2000. An extraordinary gain of approximately $171,000 was recorded in 1999 related to Debenture repurchases.
In December 2001, the Company failed to make a required payment of interest and principal totaling $370,000 on the UDAG loan. Subsequent to year-end the Company did not make an additional payment due March 2002 totaling approximately $185,000. Under the UDAG Loan agreement, the City of Chicago has the right to declare the Company in default for the nonpayment(s). If such default remains uncured, further defaults could result under the Convertible Notes and certain other of the Company's debt agreements thereby causing potential acceleration of amounts due under those agreements. The City has not declared the Company in default of the UDAG Loan agreement as of March 27, 2002.
The Company plans on satisfying debt obligations coming due in the near term and over the next several years through 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 has listed its real estate assets for sale and expects to sell properties generating sufficient proceeds to pay off the Securitized Mortgage Loan by the due date. The Company is also negotiating with several lenders to refinance the Securitized Mortgage Loan on a short-term basis in the event that all or a portion of the loan is not retired by the due date. In the event that the Securitized Mortgage Loan is not completely satisfied by the due date the lender may institute foreclosure proceedings against the collateral.
Interest capitalized as part of the cost of redevelopment projects totaled $84,000, $32,000 and $161,000 in 2001, 2000 and 1999, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximate scheduled principal payments for the years subsequent to December 31, 2001 are as follows (in thousands):
Certain of the Company's debt obligations contain cross-default and cross-acceleration provisions.
3. STOCK OPTION AND COMPENSATION PLANS
Employee Option Plan -- The Company has a stock option plan (the "Employee Option Plan") to enable its employees to participate in the ownership of the Company. Under the Employee Option Plan, executive officers and employees of the Company may be granted options to acquire shares of Common Stock of the Company ("Options"). The Employee Option Plan is administered by the Compensation Committee of the Board of Directors (the "Board"), which is authorized to select the executive officers and other employees to whom Options are to be granted. No member of the Compensation Committee is eligible to participate in the Employee Option Plan. The aggregate number of shares of Common Stock that may be issued upon the exercise of all Options is 400,000 shares.
The exercise price of each Option granted is equal to the fair market value of the underlying shares on the date of grant. With the exception of those granted on the date of the Company's initial public offering, which vested over a three-year period at the rate of 33 1/3% per year, Options vest over a five-year period at the rate of 20% per year, beginning on the first anniversary of the date of grant and are exercisable until the tenth anniversary of the date of grant. All options that were granted but not vested at the time the current board was elected in May 2000 became 100% vested at that time.
Directors Option Plan -- The Company has a stock option plan for non-employee directors (the "Directors Option Plan"). Under the Directors Option Plan, following each Annual Meeting of the Board each non-employee Director is automatically granted an option to purchase 1,000 shares of Common Stock.
All Options granted under the Directors Option Plan will have an exercise price equal to the fair market value of the underlying shares on the date of the grant. Each Option granted will vest immediately upon grant but will not become exercisable by the Director until six months following the date of grant. Options granted to a Director will remain exercisable until the tenth anniversary of the date of grant, or if earlier, until one year after the Director ceases to be a member of the Board for any reason. The aggregate number of shares that may be issued under the Directors Option Plan is 80,000 shares.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity for the Company's Stock Option Plans:
The Company has elected to report compensation by applying the requirements of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and therefore has recorded no charge to income for stock options. The effect on the Company's net income and earnings per share for 2001, 2000 and 1999 would have been immaterial had the Company recognized compensation expense using the Black-Scholes option pricing model utilizing the following values and weighted-average assumptions:
The outstanding stock options at December 31, 2001 have a weighted average contractual life of 6.13 years.
Stock Compensation Plan -- In order to provide an opportunity for Board members to increase their ownership, the Company has a stock compensation plan for non-employee directors (the "Stock Compensation Plan"). Under the Stock Compensation Plan, each non-employee Director may make an election by June 30 of each year to receive all or a portion of the Director's compensation for the following calendar year in the form of Common Stock of the Company in lieu of cash. Once made, the election is irrevocable for the following year's compensation.
The number of shares of Common Stock to be paid to a Director instead of cash compensation will be determined based on the closing price of the Common Stock on the New York Stock Exchange on the day
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
before the compensation is earned by the Director (i.e., the day before a Board meeting). A maximum of 100,000 shares may be issued under the Stock Compensation Plan. During 2001 there were no shares issued. During 2000 and 1999, a total of 1,816 and 3,362 shares, respectively, were issued under the plan reflecting compensation of $24,000 and $48,000, respectively.
401(K) Plan -- The Company has a 401(k) retirement plan (the "401(k) Plan") covering all of its employees. Under the 401(k) plan, participants are able to defer, until termination of employment with the Company, up to 20% of their annual compensation. The Company intends to match a portion of the participant's contributions in an amount to be determined each year by the Board. Compensation expense in connection with the 401(k) Plan for 2001, 2000 and 1999 was $46,000, $47,000 and $34,000, respectively.
4. STOCK REPURCHASE PLAN
The Company has in place a Stock Repurchase Plan for up to 500,000 shares of its Common Stock, such purchases to be made in the open market, with the timing dependent upon market conditions, pending corporate events and availability of funds. During the twelve months ended December 31, 2001, the Company repurchased 48,100 shares at an average cost of $8.26 per share.
5. COMMITMENTS AND CONTINGENCIES
Revenues derived from the Company's major tenant, Kmart, amounted to 27.7%, 27.2% and 28.8% of total revenues for the years ended December 31, 2001, 2000 and 1999, respectively. Amounts billed and owing from the major tenant were $99,000 and $135,000 at December 31, 2001 and 2000, respectively. In addition, at December 31, 2001, Kmart was responsible for $2.162 million in real estate taxes assessed in 2001 payable in 2002.
In connection with the mortgage agreement with Bank of America, collateralized by the Tinseltown Theater in North Aurora, Illinois, the Company has a standby letter of credit agreement with Bank One in the amount of $250,000. The letter of credit serves as additional collateral to guarantee performance of certain environmental remediation of the property, which is the responsibility of a former tenant.
The Company's loan agreement with Cohen Financial contains a provision whereby the Company is required to deposit cash or a letter of credit in the amount of $2 million with the lender should Kmart cease to be open for business in its space at Pine Ridge Plaza in Lawrence, Kansas.
Approximate future minimum rent under operating leases, in which the Company is the lessor, for the years subsequent to December 31, 2001, assuming no new or renegotiated leases or option extensions, are as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximate future minimum rental payments under the terms of all non-cancelable operating leases in which the Company is the lessee, principally for ground leases and office rent, subsequent to December 31, 2001, are as follows (in thousands):
Rent expense for operating leases for the years ended December 31, 2001, 2000 and 1999 was $476,000, $488,000 and $482,000, respectively.
The Company, as an owner of real estate, is subject to various environmental laws. Compliance by the Company with existing laws has not had a material adverse financial effect during the three-year period ended December 31, 2001, nor does management believe it will have a material impact in the future. However, management cannot predict the impact of new or changed laws or regulations on its current properties or properties that it may require.
In May 2001 the Circuit Court in Oakland County, Michigan granted summary disposition in favor of Anthony S. Gramer, Malan's former president and CEO, in litigation brought by Gramer seeking more than $1 million for breach of an employment agreement. The Court upheld the decision in September 2001 ruling in Gramer's favor in a lump sum amount. 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.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value was determined using available market information and appropriate valuation methodologies.
Cash and Cash Equivalents -- The carrying amount for cash and cash equivalents approximates fair value due to the short maturity of these instruments.
Interest Rate Hedging Instruments -- The Company entered into interest rate agreements to reduce its exposure to changes in the cost of the floating rate portion of its Securitized Mortgage Loan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2001, the following interest rate cap agreements were outstanding:
The Company is exposed to credit risk in the event of nonperformance by the counter parties to its interest rate cap agreements, but has no off-balance sheet risk of loss. The Company anticipates that its counter parties will fully perform their obligations under the agreements.
The carrying value and fair value of the interest rate caps as of December 31, 2001 was zero. The carrying value and fair value as of December 31, 2000 was $452,000 and $2,000, respectively.
Mortgages -- The fair value of the mortgages is based on the present value of contractual cash flows limited by the value of the underlying collateral and is as follows at December 31 (in thousands):
Convertible Debentures and Convertible Notes -- The fair value of the Convertible Debentures is based on the traded value at the close of business at year-end. The carrying value of the Convertible Debentures as of December 31, 2001 and 2000 was $42.743 million for both years. The estimated fair value based upon the traded value at the close of business on December 31, 2001 and 2000 was $38.469 million and $35.477 million, respectively. Management believes that the carrying value of the Convertible Notes as of December 31, 2001 and 2000 approximates the fair value.
The fair value estimates presented herein are based on information available to management as of December 31, 2001 and 2000. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such financial instruments have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SIGNIFICANT NONCASH TRANSACTIONS
Significant non-cash transactions for the three years ended December 31, 2001 are as follows:
8. PROPERTY ACQUISITIONS AND DISPOSITIONS
During the three years ended December 31, 2001, the Company acquired and disposed of the following properties:
9. IMPAIRMENT OF REAL ESTATE
In 2001, the Company recorded an impairment of real estate under SFAS No. 121 totaling of $15.266 million related to a reduction in the carrying value of 27 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. An impairment of real estate totaling $190,000 related to one property was recorded in 2000. Under SFAS No. 121, aggregate impairment losses are not reduced by unrealized appreciation of other assets.
10. CHANGE IN METHOD OF ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001 the Company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended, requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives are accounted for depending on the use of the derivatives and whether they qualify for hedge accounting. The Company's derivatives consist of interest rate cap agreements which the Company purchased to reduce its exposure to increase in rates on its floating rate debt. The cumulative effect of the adjustment as of January 1, 2001 was a reduction in net income of $450,000. The adjustment reduced the carrying amount of the interest rate caps to $0. The fair value of the interest rate caps, which mature in 2002 is $0 at December 31, 2001.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CHANGE IN METHOD OF ACCOUNTING FOR PERCENTAGE RENTAL REVENUE
In December 1999, the SEC issued SAB No. 101 -- Revenue Recognition in Financial Statements which addresses the proper recognition of certain revenue items including contingent (percentage) rents. Certain of the Company's leases contain provisions whereby additional rent is due from a tenant once the tenant has achieved a certain sales level i.e. contingent rental.
Under SAB No. 101, a lessor should not recognize contingent rental income until the changes in the factors on which the contingent lease payments are based actually occur. The Company had previously recorded accrued percentage rental income as lessees' specified sales targets were met or achievement of the sales target was probable.
The Company elected to adopt the provisions of SAB No. 101 in the fourth quarter 1999, effective January 1, 1999. The cumulative effect of such adoption was a reduction in percentage rental revenue as of January 1, 1999 of approximately $522,000.
The effect of the change on the quarters and year-end 1999 is as follows (in thousands, except per share amounts):
- ------------------------- (1) Net income as previously reported in the Company's Form 10-Q as filed for the applicable quarter.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the three-month periods indicated are as follows.
- ------------------------- (1) Second quarter 2001 results are impacted by a $3.59 million impairment of real estate due to the reduction of the Company's carrying value of Bricktown Square in Chicago, Illinois and Stevens Point, Wisconsin.
(2) Fourth Quarter 2001 results are impacted by an $11.447 million impairment of real estate due to the reduction of carrying value of 25 properties.
(3) Fourth quarter 2000 results are impacted by a $190,000 impairment of real estate due to the reduction of the carrying value of Great Bend, Kansas and by additional bad debt expense of $250,000 due to the potential uncollectibility of past due rents from a former tenant at the Bricktown Square.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. EARNINGS PER SHARE
Earnings per share ("EPS") data were computed as follows (in thousands except per share amounts):
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.
14. PROXY CONTEST AND RELATED COSTS
At the Company's Annual Shareholder Meeting in May 2000, a slate of five Directors was elected and replaced the Company's then existing Board of Directors. The Company paid approximately $890,000 in costs relating to the proxy contest including reimbursements to shareholders.
In connection with the proxy contest, the Company made payments in May 2000 to the three then officers of the Company, totaling $1.75 million. Certain of these payments are currently the subject of litigation. The Company also recorded an accrued liability of $800,000 relating to its future obligation (also the subject of litigation) to provide lifetime health insurance benefits to the officers. The accrued liability was subsequently reduced when the Company entered into an employment agreement with one of the officers. The agreement, which was signed in August 2000, included the relinquishment of any right to lifetime health insurance by that officer and a grant of 6,550 shares of the Company's Common Stock. The accrued liability related to the health insurance benefit was approximately $477,000 at December 31, 2001.
15. SUBSEQUENT EVENTS
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. Approximately 25 percent of the Company's annualized minimum rent is derived from, and 47 percent of its gross leasable area is attributable to, leases with Kmart. As part of its plan of reorganization, Kmart announced in March 2002 that it intended to close 284 of its operating stores including four stores owned by the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues derived from the four stores, which are located in Topeka, Kansas, Forestville, Maryland and Madison and Marshfield, Wisconsin, total approximately $1.5 million annually. In addition, three of the properties have other in-line tenants that may be adversely affected by the closures. The effect on future cash flows resulting from these closures cannot be determined at this time; however, in preparing these financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities. Nevertheless, actual results may differ from these estimates under different assumptions or conditions. Kmart had previously affirmed one of its leases with the Company in February 2002. Kmart has also announced that it may close additional stores in the future.
Proposed Plan of Liquidation -- As a result of several factors including the Company's debt structure, including over-leverage of Bricktown Square, impediments to the redevelopment of its property in Farmington Hills, Michigan, and the bankruptcy filing of Kmart Corporation, the Company's Board of Directors voted in March 2002 to recommend a plan of liquidation to its shareholders. The proposed plan contemplates the sale of all the Company's properties and other assets and will be subject to shareholder approval at the 2002 annual meeting of shareholders, as well as to agreements from some of the Company's lenders. In conjunction with the recommendation, the Board announced that it was indefinitely suspending regular quarterly cash distributions.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Malan Realty Investors, Inc.:
Our audit of the consolidated financial statements referred to in our report dated March 27, 2002 of Malan Realty Investors, Inc. and subsidiaries, which report and consolidated financial statements are included in this Annual Report on Form 10-K, also included an audit of the financial statement schedules listed in the Index to Consolidated Financial Statements and Supplementary Data on page 17 of this Form 10-K as of and for the year ended December 31, 2001. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois March 27, 2002
MALAN REALTY INVESTORS, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
MALAN REALTY INVESTORS, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001 (IN THOUSANDS)
- ------------------------- * Certain properties are included as collateral for securitized mortgages
The changes in total real estate for the three years ended December 31, 2001 are as follows:
The changes in accumulated depreciation for the three years ended December 31, 2001 are as follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The firm of Deloitte & Touche, LLP was previously the principal accountants for the Registrant. On April 27, 2001, that firm's appointment as principal accountants was terminated and PricewaterhouseCoopers LLP was engaged as principal accountants for the fiscal year ending December 31, 2001. The decision to change accountants was recommended by the Registrant's Audit Committee and approved by the board of directors. The reports of Deloitte & Touche, LLP on the Registrant's financial statements for the two fiscal years ended December 31, 2000 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with the audits of the two fiscal years ended December 31, 2000, and the subsequent interim period through April 27, 2001, there were no disagreements with Deloitte & Touche, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference to the subject matter of the disagreement in connection with their reports.
During its two fiscal years ended December 31, 2000, and the subsequent interim period through April 27, 2001, the Registrant did not consult with PricewaterhouseCoopers regarding (i) the application of accounting principles to a specified transaction or the type of audit opinion that might be rendered on the Registrant's financial statements or (ii) any matter that was either the subject of a disagreement or a reportable event.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The board of directors currently consists of seven members. Under the Company's Amended and Restated Articles of Incorporation, at least a majority of the Company's directors must be "independent" (i.e., not employed by the Company). All directors serve for a term of one year or until the election of their respective successors. Officers of the Company are hired by and report to the board of directors.
Edward T. Boutrous, a director since 2000, has advised the board of directors that he will not stand for re-election at the Company's 2002 annual meeting. The board of directors has voted to reduce the size of the board from seven to five, effective with the 2002 annual meeting.
The following provides biographical information for each of the executive officers and the members of the board of directors.
Jeffrey D. Lewis, age 57, has been a director of the Company since May 2000, became the Chief Executive Officer of the Company in September 2000 and was also named President in March 2002. He has been in the real estate business since 1971. Prior to becoming the Company's Chief Executive Officer in September 2000, Mr. Lewis was a Vice President at Kennedy Associates Real Estate Counsel, Inc. ("KAREC"), a real estate investment firm. Mr. Lewis joined KAREC in 1998 and was responsible for managing one of the two KAREC national asset management teams in addition to having direct responsibility for several properties. Prior to joining KAREC, Mr. Lewis was employed by the California Public Employees' Retirement System (CaIPERS) for ten years. When he left he was a Principal Investment Officer and had
general responsibility for the fund's national office portfolio of 35 properties totaling over 15 million square feet and values of approximately $1.4 billion.
Elliott J. Broderick, age 44, has been the Chief Financial Officer of the Company since January 2001 and also serves as the Secretary and Treasurer of the Company. Prior to that he was the Chief Accounting Officer. Mr. Broderick oversees the accounting and reporting functions of the Company, as well as regulatory and tax compliance, short-term investments, information systems and fiscal planning and budgets. Prior to joining the Company as Controller in 1991, Mr. Broderick was employed for seven years by Plante & Moran, Michigan's largest regional CPA firm. Mr. Broderick is a certified public accountant, a licensed real estate sales person and a member of the American Institute of Certified Public Accountants and the Michigan Association of Certified Public Accountants.
Alan K. Warnke, 47, is a 25-year veteran of the real estate industry. He joined Malan in 1997 as director of property management and is currently Vice President, Leasing, Property Management and Construction. Prior to joining the Company he served in management positions at Urban Retail Properties Company, the Equity Group and Landau & Heyman. His experience includes managing several enclosed shopping malls and strip centers across the Midwest. Mr. Warnke earned a Bachelor of Science from Ball State University in Muncie, Indiana.
Edward T. Boutrous, age 56, is the founder and managing member of The Boutrous Companies, LLC, a developer and manager of neighborhood shopping centers and single-tenant commercial buildings in southeastern Michigan since 1981. Mr. Boutrous received a Bachelor of Science in Finance from the University of Detroit and a Masters Degree in Business Administration from the Harvard Business School.
Paul Gray, age 36, has been in the real estate business since 1987. He is Executive Vice President and co-founder of Kensington Investment Group, Inc., a registered investment advisor engaged in the business of managing investments in real estate securities. Mr. Gray has overall responsibility for investment decision-making on behalf of Kensington's portfolios and is the director of Kensington's research group.
Mr. Gray was previously a partner of Golden State Financial Services, a mortgage brokerage company, from 1992 to 1994. From 1987 to 1992, Mr. Gray was a senior analyst at Liquidity Fund Investment Corporation where he managed the firm's REIT portfolios and developed the models used to evaluate limited partnerships. He was simultaneously Director of Research for the National Real Estate Index where he was instrumental in designing the methodology and systems used to track real estate values throughout the United States.
Mr. Gray received a Bachelor of Science in Finance and Real Estate in 1988 from the Haas School of Business at the University of California, Berkeley. He is a licensed real estate broker in the state of California. Mr. Gray is Chairman of the Board.
Jill Holup, age 39, has been in the real estate investment business since 1985. She is a Partner at John McStay Investment Counsel, an investment management firm, which she joined in 1997. Her responsibilities include research, portfolio management and new business development.
Ms. Holup received her Masters Degree in Business Administration from the Haas School of Business at the University of California, Berkeley. She earned her bachelor's degree in finance at the University of Texas, El Paso in 1985.
John P. Kramer, age 44, has been in the real estate business since 1985. He is President and co-founder of Kensington Investment Group, Inc., a registered investment advisor engaged in the business of managing investments in real estate securities. He is involved in all aspects of the organization and is primarily responsible for directing the firm's investment policies.
Prior to co-founding Kensington in 1993, Mr. Kramer was previously Executive Vice President at Liquidity Fund Investment Corporation where he was responsible for directing the research, marketing and trading activities of the firm. Mr. Kramer worked at Liquidity Fund Investment Corporation from 1985 to 1993.
Prior to joining Liquidity Fund in 1985, Mr. Kramer was an associate with Federal Reserve Chairman Alan Greenspan's economic consulting firm, Townsend-Greenspan & Co. in New York City, and an account executive at Sutro & Co., Inc. and Prudential-Bache Securities in San Francisco.
Mr. Kramer received his Masters Degree in Business Administration from the University of California, Berkeley in 1986, receiving an award for his work in real estate finance while at the Business School. He received a Bachelor of Arts in 1980 from the State University of New York, Oneonta, in Economics.
Andrew Miller, age 47, has been in the real estate business since 1981. He is currently the President of Miller Capital Advisory, Inc. ("MCA"), an advisory business focused on real estate capital markets and asset management. Mr. Miller is responsible for the firm's strategic and marketing initiatives as well as delivery of services. Mr. Miller founded MCA in 1996.
Prior to forming MCA, Mr. Miller was employed by Homart Development Co. for 15 years, where he was responsible for asset disposition, acquisition, financing and joint venture structuring activities, among others.
Mr. Miller received his Masters Degree from the University of Chicago and holds a Bachelor of Science degree from the University of Illinois, Urbana.
Edward J. Russell, III, age 42, is managing partner of Russell Development Co., a commercial and residential real estate development company located in Grosse Pointe Farms, Michigan. Mr. Russell has been employed by Russell Development in various capacities since 1980. Russell Development's commercial business focuses on the construction, management, sales and acquisition of retail strip centers in southeast Michigan anchored by such tenants as CVS Drugs, Wal-Mart, Blockbuster Video and Lowes. Mr. Russell oversees the areas of job cost and budget analysis, tenant lease structuring and negotiation, and is responsible for creating and maintaining tenant relationships and identifying development opportunities for the company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's officers and directors and persons who own more than 10% of a registered class of the Company's equity securities file reports of ownership and changes in ownership with the Securities and Exchange Commission. These insiders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file. To the Company's knowledge, based solely on the Company's review of the filings made by the Company's insiders and written representations, all Section 16(a) filing requirements applicable to the Company's officers, directors and greater than 10% beneficial owners were satisfied in a timely manner, except that Alan K. Warnke filed a late Form 3 after becoming an executive officer.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company pays its directors who are not employees of the Company an annual fee of $12,000 plus $1,000 for each regular or special meeting of the board of directors attended in person. The Company also reimburses its outside directors for expenses incurred in attending meetings. John P. Kramer and Paul Gray have declined all compensation that is payable to non-employee directors.
Pursuant to the terms of the Malan Realty Investors, Inc. 1995 Stock Option Plan for Non-Employee Directors, each non-employee director of the Company is automatically granted a non-qualified stock option to purchase 1,000 shares of common stock of the corporation following the annual meeting of the board of directors. In the event a vacancy arises on the board of directors following the annual meeting of shareholders in any year and a non-employee director is nominated to fill such vacancy prior to December 31 of the same year, such non-employee director would automatically be granted an option to acquire 1,500 shares of common stock (instead of the normal 1,000 share grant) immediately following the next annual meeting of the board of directors. Following each annual meeting of the board of directors thereafter, the non-employee director would receive the normal 1,000-share grant, assuming he or she is re-elected to the board.
The aggregate number of shares of common stock issuable under the stock option plan for non-employee directors is 80,000, subject to certain adjustments. All options granted must have an exercise price equal to the fair market value of the underlying shares on the date of grant. Options vest upon grant but do not become exercisable by the director until six months following the date of grant. Options remain exercisable until the tenth anniversary of the date of grant or, if earlier, until one year after the director ceases to be a member of the board.
Under the Company's 1995 Stock Compensation Plan for Non-Employee Directors, non-employee directors may make an election each year to receive all or a portion of their director's compensation for the following calendar year in the form of common stock of the Company instead of cash. Once made, the election is irrevocable for the following year's compensation. The number of shares to be paid to a director in lieu of cash compensation is determined based on the closing price of the common stock on the New York Stock Exchange on the day before the compensation is earned by a director (i.e., the closing price on the day before a board meeting).
EXECUTIVE COMPENSATION
The following table provides information on the compensation paid or accrued by the Company for services rendered during the last three fiscal years to the Company's chief executive officer and most highly compensated executive officers (the "named executive officers") during the last fiscal year.
SUMMARY COMPENSATION TABLE
- ------------------------- (1) See "Stock Option Plan" and "Compensation of Directors."
(2) Includes (A) loan forgiveness by the Company; (B) employer's contribution to the Malan Realty Investors, Inc. 401(k) Profit Sharing Plan; (C) payment received in connection with the change in the Company's board of directors in 2000 and (D) Stock grant in the following amounts:
STOCK OPTION PLAN
Prior to the Company's initial public offering in June 1994, the Company adopted the Malan Realty Investors, Inc. 1994 Stock Option Plan to enable employees of the Company to participate in the ownership of the Company. The stock option plan is designed to align the interests of management with those of the shareholders, to provide employees with incentives to stay with the Company, to attract new employees with outstanding qualifications and to promote the success of the Company's long-term business objectives.
Under the stock option plan, executive officers and employees of the Company may be granted options to acquire shares of common stock of the Company. The stock option plan is administered by the compensation committee, which is authorized to select the executive officers and other employees to whom options are to be granted. No member of the compensation committee is eligible to participate in the stock option plan.
The compensation committee determines the number of options to be granted to an employee. However, in accordance with the requirements of the Internal Revenue Code for performance-based compensation, the provisions of the stock option plan limit the total number of option shares that the compensation committee may grant to an executive officer during any single year to 100,000 shares.
The exercise price of each option is equal to the fair market value of the underlying shares on the date of grant. With the exception of those options granted on the date of the IPO, options vest over a five-year period at the rate of 20% per year, beginning on the first anniversary of the date of grant. If an option holder's employment is terminated within the first year of the date of grant for any reason other than death, disability, or retirement, the right to exercise the option is forfeited. If an option holder's employment is terminated more than one year after the date of grant for reasons other than death, disability, or retirement, the option may be exercised to the extent it was exercisable at the time of termination of employment unless the termination of employment is for cause. If the termination of employment is because of death, disability, or retirement, the option may be exercised in full. No option may be exercised ten years after the date of grant.
Notwithstanding the foregoing paragraph, the compensation committee may accelerate the vesting of any option that has been held by an option holder for at least six months from the date of grant of the stock option.
OPTION GRANTS
The following table sets forth information on stock options granted to the named executive officers during 2001.
- ------------------------- (1) The option term for this option grant is ten years. The option vests and becomes exercisable over a five-year period at the rate of 20% per year.
(2) The actual value, if any, that may be realized by each individual will depend on the fair market value of the common stock on the date on which the options are exercised. The appreciation rates used in the table are provided to comply with rules and regulations under the Securities Exchange Act of 1934 and do not necessarily reflect the views of management as to the potential realizable value of the options.
TOTAL OPTION EXERCISES IN 2001 AND YEAR-END OPTION VALUES
The following table shows the number of shares covered by both exercisable and non-exercisable stock options held by the named executive officers as of December 31, 2001. This table also shows the value on that date of the "in-the-money" options, which is the positive spread, if any, between the exercise price of existing stock options and $ 6.70 per share (the closing market price of the Company's common stock on December 31, 2001.
OTHER COMPENSATION AND BENEFITS
Messrs. Lewis, Kaline, Broderick and Warnke also receive medical, group life insurance and other benefits (including matching contributions under the Company's 401(k) plan) that are available generally to all of the Company's full-time employees.
EMPLOYMENT AGREEMENTS
In September, 2000, the Company entered into a three-year employment agreement with Jeffrey D. Lewis, whereby Mr. Lewis became the Company's Chief Executive Officer. At the end of the three-year term, the employment agreement will automatically renew itself for one-year terms unless either party gives the other 90 days' notice terminating the employment agreement. Mr. Lewis' employment agreement provides for an annual salary of $230,000, which may be increased by the board of directors. In addition to his base salary, Mr. Lewis will be eligible to receive an annual bonus with a target amount equal to 30% of his base salary, and a maximum amount equal to 50% of his base salary. The employment agreement also includes provisions restricting Mr. Lewis from competing directly or indirectly with the Company during the term of his employment with the Company and for one year following termination of the agreement.
In January 2002, the Company entered into a separation agreement with its president, Michael Kaline which supercedes its previous employment agreement with Mr. Kaline. As part of the agreement Mr. Kaline resigned as an employee of the Company and was placed on leave of absence until August 9, 2002. In addition, he received a lump sum payment of $54,000 in February 2002, will continue to draw his salary of $15,000 per month until August 9, 2002 and will receive an additional lump sum payment of $15,000 immediately following August 10, 2002. He will also be entitled to certain other benefits during this period.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of the Company's common stock by the Company's directors, named executive officers and shareholders who own more than 5% of the Company's common stock as of March 15, 2002. On that date, there were 5,121,370 shares of the Company's common stock outstanding. In preparing this table, the Company has relied upon information supplied by its officers, directors, and certain shareholders and upon information contained in filings with the Securities and Exchange Commission.
- ------------------------- * Less than 1%
(1) Shares issuable upon exercise of stock options, which by their terms are currently exercisable or become exercisable within 60 days. See "Executive Compensation -- Stock Option Plan."
(2) Mr. Kaline resigned as President and has been on a leave of absence since January 31, 2002.
(3) Also includes 2,058 shares issuable upon conversion of debentures owned by Mr. Broderick's wife.
(4) These shares are beneficially owned by Kensington Investment Group, Inc. Mr. Kramer controls more than a majority of the stock of Kensington and accordingly may be deemed to beneficially own the shares of common stock owned by Kensington. Mr. Kramer disclaims beneficial ownership of such shares.
(5) Includes shares held by Russell & Associates Co. LLC of which Mr. Russell is the Managing Member and majority owner.
(6) See Notes 1 through 5 above.
(7) Includes 1,588,235 shares issuable upon conversion of notes that are convertible into common stock at a price of $17 per share.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this report:
(a)(1) Consolidated Financial Statements:
See Index to Consolidated Financial Statements and Supplementary Data on page 17 of this Annual Report on Form 10-K.
(a)(2) Consolidated Financial Statement Schedules:
See Index to Consolidated Financial Statements and Supplementary Data on page 17 of this Annual Report on Form 10-K.
(a)(3) Exhibits:
The following exhibits listed on the attached Exhibit Index are included as part of this Annual Report on Form 10-K as required by Item 601 of Regulation S-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 Date: March 27, 2002
Pursuant to the requirements of the Securities Exchange act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
MALAN REALTY INVESTORS, INC. FORM 10-K EXHIBIT INDEX
- ------------------------- * A management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K.