<PAGE> 1
------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission file number 1-13092
MALAN REALTY INVESTORS, INC.
(Exact name of registrant as specified in charter)
Michigan 38-1841410
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
30200 Telegraph Rd., Ste. 105 48025
Bingham Farms, Michigan (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (248) 644-7110
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. YES [X] NO [ ]
As of November 10, 2000, 5,174,220 shares of Common Stock, Par Value $.01
Per share, were outstanding.
<PAGE> 2
MALAN REALTY INVESTORS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 3
Statements of Operations (unaudited) for
the three months and nine months
ended September 30, 2000 and 1999 4
Statements of Cash Flows (unaudited) for the
nine months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements (unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION 16
SIGNATURES 17
</TABLE>
2
<PAGE> 3
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate
Land, buildings and improvements $ 265,360 $ 267,117
Less: accumulated depreciation (30,383) (26,584)
--------- ---------
Total 234,977 240,533
Accounts receivable, net 2,573 1,149
Deferred financing and other 6,977 7,554
Cash and cash equivalents 2,460 1,857
Restricted cash - mortgage escrow deposits 1,621 2,387
--------- ---------
TOTAL ASSETS $ 248,608 $ 253,480
========= =========
Liabilities
Mortgages $ 128,141 $ 126,601
Convertible debentures 42,743 42,743
Convertible notes 27,000 27,000
Accounts payable and other 2,121 2,699
Accrued distributions payable 2,199 2,198
Accrued property taxes 2,226 1,315
Accrued interest payable 2,193 3,783
--------- ---------
Total Liabilities 206,623 206,339
--------- ---------
SHAREHOLDERS' EQUITY
Common stock ($.01 par value, 30 million shares authorized,
5,174,220 and 5,172,404 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively) 52 52
Additional paid in capital 74,193 74,169
Accumulated distributions in excess of net income (32,260) (27,080)
--------- ---------
Total shareholders' equity 41,985 47,141
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 248,608 $ 253,480
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Minimum rent $ 7,297 $ 7,619 $ 22,213 $ 23,074
Percentage and overage rents 259 260 943 727
Recoveries from tenants 2,542 2,434 7,730 8,154
Interest and other income 218 91 584 250
Gain (loss) on sale of real estate (12) (126) 3,158 1,625
----------- ----------- ----------- -----------
Total Revenues 10,304 10,278 34,628 33,830
----------- ----------- ----------- -----------
EXPENSES
Property operating and maintenance 642 660 2,268 2,559
Other operating expenses 470 430 1,302 1,273
Real estate taxes 1,977 1,948 6,150 6,265
General and administrative 495 488 1,651 1,501
Proxy contest and related change in control costs (231) 3,170
Depreciation and amortization 1,831 1,626 5,100 4,748
----------- ----------- ----------- -----------
Total Operating Expenses 5,184 5,152 19,641 16,346
----------- ----------- ----------- -----------
OPERATING INCOME 5,120 5,126 14,987 17,484
INTEREST EXPENSE 4,499 4,407 13,477 13,222
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 621 719 1,510 4,262
EXTRAORDINARY ITEM:
Loss on extinguishment of debt (93) (459)
----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 621 719 1,417 3,803
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (522)
----------- ----------- ----------- -----------
NET INCOME $ 621 $ 719 $ 1,417 $ 3,281
=========== =========== =========== ===========
EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
Basic $ 0.12 $ 0.14 $ 0.29 $ 0.83
=========== =========== =========== ===========
Diluted $ 0.12 $ 0.14 $ 0.29 $ 0.82
=========== =========== =========== ===========
EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE:
Basic $ 0.12 $ 0.14 $ 0.27 $ 0.74
=========== =========== =========== ===========
Diluted $ 0.12 $ 0.14 $ 0.27 $ 0.73
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic $ 0.12 $ 0.14 $ 0.27 $ 0.64
=========== =========== =========== ===========
Diluted $ 0.12 $ 0.14 $ 0.27 $ 0.63
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 5,174,220 5,170,827 5,173,392 5,169,920
=========== =========== =========== ===========
Diluted 5,180,770 5,182,333 5,179,942 5,181,426
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 1,417 $ 3,281
-------- --------
Adjustments to reconcile net income to
net cash flows provided by operating activities:
Depreciation and amortization 5,100 4,748
Amortization of deferred financing costs 1,257 1,405
Directors compensation issued in stock 24 36
Net gain on sales of real estate (3,158) (1,625)
Loss on extinguishment of debt 93 459
Change in operating assets and liabilities that
used cash:
Accounts receivable and other assets (2,958) (717)
Accounts payable, deferred income and
other accrued liabilities (1,257) (1,786)
-------- --------
Total adjustments (899) 2,520
-------- --------
NET CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES 518 5,801
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate developed, acquired or improved (2,009) (11,318)
Deposits to escrow (14,510) (15,424)
Disbursements from escrow 15,276 15,556
Net proceeds from sales of real estate 6,531 7,637
-------- --------
NET CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES 5,288 (3,549)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgages (1,960) (5,038)
Proceeds from mortgages 3,800
Debt issuance costs (113) (189)
Draws on lines of credit 5,500 16,994
Repayments on lines of credit (2,000) (12,500)
Proceeds from options exercised 4
Debt extinguishment costs (34)
Distributions to shareholders (6,596) (6,595)
-------- --------
NET CASH FLOWS USED FOR FINANCING ACTIVITIES (5,203) (3,524)
-------- --------
Net increase (decrease) in cash and cash equivalents 603 (1,272)
Cash and cash equivalents at beginning of period
1,857 2,898
-------- --------
Cash and cash equivalents at end of period $ 2,460 $ 1,626
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION-
CASH PAID FOR INTEREST DURING THE PERIOD $ 13,810 $ 13,576
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 6
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation - The accompanying interim consolidated financial
statements and related notes of the Company are unaudited; however, they have
been prepared in accordance with generally accepted accounting principles for
interim financial reporting, the instructions to Form 10-Q and the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared under generally accepted accounting principles have been condensed or
omitted pursuant to such rules. In the opinion of management, all adjustments
considered necessary for a fair presentation of the Company's consolidated
financial position, results of operations and cash flows have been included. The
results of such interim periods are not necessarily indicative of the results of
operations for the full year.
Principles of Consolidation - The accompanying consolidated financial statements
include the activity of the Company and its wholly owned subsidiaries, Malan
Mortgagor, Inc., Malan Meadows, Inc., Malan Revolver, Inc., Malan Aurora Corp.
and Malan Midwest, LLC. All significant inter-company balances and transactions
have been eliminated.
Reclassifications- Certain reclassifications have been made to prior year
financial statements in order to conform with the current year presentation.
Management Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Impact of Recently Adopted Accounting Standards- In December 1999, the SEC
issued Staff Accounting Bulletin (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 lessee's
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 1999. The
cumulative effect of such adoption is a reduction in percentage rental revenue
of approximately $522,000 as of January 1, 1999. The 1999 financial information
has been restated to conform with the provisions of SAB 101.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" effective for
fiscal year beginning after June 15, 2000. This Statement 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 would be accounted for depending on the use of the derivatives and
whether it qualifies for hedge accounting.
6
<PAGE> 7
The Company is evaluating the impact of this statement on its consolidated
financial statements.
2. COMPENSATION PLANS
The activity in the Directors Stock Compensation Plan for the nine
months ended September 30, 2000 consisted of 1,816 shares issued at
$12.75-$13.67 per share. Compensation expense in connection with the Company's
401(k) retirement plan for the nine months ended September 30, 2000 was
approximately $26,500.
3. EARNINGS PER SHARE
Earnings per share ("EPS") data were computed as follows (in thousands
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended, Nine Months Ended,
September 30, September 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before extraordinary item and
cumulative effect of change in accounting principle ............... $ 621 $ 719 $ 1,510 $ 4,262
========= ========== ========== =========
Income before cumulative effect of change in
accounting principle .............................................. $ 621 $ 719 $ 1,417 $ 3,803
========= ========== ========== =========
Net income ......................................................... $ 621 $ 719 $ 1,417 $ 3,281
========= ========== ========== =========
BASIC EPS:
Weighted-Average Shares Outstanding ................................ 5,174 5,171 5,173 5,170
========= ========== ========== =========
Basic earnings per share before extraordinary
item and cumulative effect of change in
accounting principle .............................................. $ 0.12 $ 0.14 $ 0.29 $ 0.83
========= ========== ========== =========
Basic earnings per share before cumulative
effect of change in accounting principle .......................... $ 0.12 $ 0.14 $ 0.27 $ 0.74
========= ========== ========== =========
Basic earnings per share ........................................... $ 0.12 $ 0.14 $ 0.27 $ 0.64
========= ========== ========== =========
DILUTED EPS:
Weighted-average shares outstanding ................................ 5,174 5,171 5,173 5,170
Shares issuable under employment agreement ......................... 7 7
Net shares issuable upon exercise of dilutive options .............. 11 11
--------- ---------- ---------- ---------
Shares applicable to diluted earnings .............................. 5,181 5,182 5,180 5,181
========= ========== ========== =========
Diluted earnings per share before extraordinary item
and cumulative effect of change in accounting principle............ $ 0.12 $ 0.14 $ 0.29 $ 0.82
========= ========== ========== =========
Diluted earnings per share before cumulative effect
of change in accounting principle ................................. $ 0.12 $ 0.14 $ 0.27 $ 0.73
========= ========== ========== =========
Diluted earnings per share ......................................... $ 0.12 $ 0.14 $ 0.27 $ 0.63
========= ========== ========== =========
</TABLE>
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.
7
<PAGE> 8
4. MORTGAGES
Effective October 1, 2000, the Company and Bank One amended a revolving
line of credit agreement collateralized by the Orchard-14 Shopping Center in
Farmington Hills, Michigan. Terms of the amended agreement include payments of
interest only at the bank's prime rate or 200 basis points over LIBOR, at the
Company's option, and maximum borrowings of $3,000,000 subject to adjustment
downward quarterly based upon the property's operating cash flow. The line is
due in full on September 30, 2001.
5. PROXY CONTEST AND RELATED CHANGE IN CONTROL COSTS
Earlier in the year, the Company was engaged in a proxy contest with
its largest shareholder, Kensington Investment Group, Inc. ("Kensington").
Kensington prevailed in electing a slate of five new directors at the Company's
Annual Shareholder Meeting held on May 10, 2000. Total costs incurred by the
Company relating to the proxy contest including reimbursement to Kensington and
other shareholders were approximately $860,000.
The change in the Board of Directors resulting from the proxy contest
triggered certain lump sum payments and other obligations to the then three
executive officers of the Company pursuant to the terms of their respective
"change in control" agreements. These obligations included lump sum payments
totaling $1.750 million and an accrued liability of $800,000 relating to the
Company's future obligation to provide lifetime health insurance benefits to the
officers. In August 2000, the Company entered into an employment agreement with
one of the officers. As part of the agreement, the officer relinquished his
right to the lifetime health insurance and was granted 6,550 shares of the
Company's Common Stock. The relinquishment of the health insurance benefits
attributable to the officer was recognized as a reduction of expenses in the
third quarter 2000.
6. SHAREHOLDER RIGHTS PLAN
In September 2000, the Company amended its Shareholder Rights
Agreement. The amendment caused the rights to expire on September 15, 2000 and
terminated the Rights Agreement.
7. STOCK REPURCHASE PLAN
In August 2000, the Company announced the resumption of a Stock
Repurchase Plan originally approved in 1995. The Company's Board of Directors
authorized the repurchase of up to 250,000 shares of its Common Stock, such
purchases to be made in the open market, with the timing dependent upon market
conditions and pending corporate events. No shares had been repurchased as of
September 30, 2000.
8. PROPERTY TRANSACTIONS
In June 2000, the Company realized a gain of $3.17 million on the sale
of a 117,000 square foot shopping center in Manchester, Missouri. Net proceeds
after repayment of related debt of $1.5 million and transaction fees were $5.0
million. In conjunction with the sale, the Company incurred an extraordinary
loss of $93,000 on the early extinguishment of debt, resulting primarily from a
prepayment penalty and the charge off of unamortized deferred financing costs
associated with the debt.
8
<PAGE> 9
In September 2000, the Company entered into an agreement to sell a
portion of its property in Arkansas City, Kansas. The property consists of a
vacant parcel of land adjacent to a freestanding retail building. The agreement
calls for a contract price of $275,000 and is expected to close in December 2000
once lender approval is obtained and due diligence by the purchaser is
completed.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 2000 to Three Months Ended
September 30, 1999
Total revenues increased $26,000 from 1999. Approximately $114,000 of
the increase resulted from a decrease in losses on sales of properties. Minimum
rents and recoveries from tenants decreased approximately $322,000 and $108,000,
respectively, due to lease termination agreements that were executed with four
tenants at the end of 1999 and the beginning of 2000, as well as a decrease
attributable to properties sold in 1999 and 2000. Interest and other income
increased $127,000 primarily due to lease termination income recognized in the
third quarter of 2000.
Total operating expenses increased approximately $32,000 from 1999 to 2000. A
recovery of expenses recorded previously associated with a proxy contest and
related change in control, discussed further below, totaling $350,000 offset by
additional costs incurred of $119,000, resulted in a net reduction of $231,000
in the third quarter 2000. Depreciation and amortization increased approximately
$205,000 primarily due to capital improvements and redevelopments that were
completed in 1999 and 2000, offset by decreases attributable to property sales.
Interest expense (including related amortization of deferred financing
costs) increased approximately $92,000 primarily due to increases in interest
rates on the Company's lines of credit over 1999.
Overall, net income decreased by $98,000 resulting primarily from
decreases in revenues resulting from lease terminations, offset by a decrease in
losses incurred on property sales and the recovery of a nonrecurring expense
related to the proxy contest and related change in control expenses.
Comparison of Nine Months Ended September 30, 2000 to Nine Months Ended
September 30, 2000
Total revenues increased $798,000 from 1999. Minimum rents and
recoveries from tenants decreased $1.285 million primarily due to sales of
properties in 1999 and 2000, lease termination agreements executed with four
tenants in late 1999 and early 2000 and a decrease in deferred minimum rents
recognized on the lease up in 1999 of vacant space formerly occupied by Kmart.
Percentage rent increased $216,000 primarily due to a settlement of additional
percentage rents from prior years and an overall increase in percentage rents
from Kmart and Wal-Mart, the Company's two largest tenants. Interest and other
income increased $334,000 primarily due to lease termination fees received in
2000. Net gains on sales of properties increased $1.533 million over 1999.
Total operating expenses increased $3.295 million from 1999 primarily
due to proxy contest and related change in control costs totaling $3.170
million, discussed further below. Property operating and maintenance expense
decreased $291,000 primarily due to lower cost of snow removal in 2000 and lower
maintenance costs resulting from the sale of properties in 1999 and 2000. The
sale of properties also contributed to a decrease in real estate taxes of
$115,000 in 2000. General and administrative costs increased $150,000 primarily
due to legal and professional fees incurred in connection with the Company's
strategic operational review. Depreciation and amortization increased $352,000
due to capital improvements and redevelopments that were completed in 1999 and
2000 offset by decreases attributable to property sales.
Interest expense including related amortization of deferred financing
costs increased $255,000 primarily due to increases in interest rates on the
Company's lines of credit in 2000.
The Company incurred a loss on early extinguishment of debt in 2000 of
$93,000 related to the paydown of debt in connection with a sale of property in
Manchester, Missouri. In 1999, the Company incurred a similar loss
10
<PAGE> 11
totaling $459,000 on the paydown of debt in connection with a sale of property
in Colma, California. The losses resulted primarily from the charge off of
unamortized deferred financing costs and prepayment penalties.
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 is a reduction in percentage rental revenue
of approximately $522,000 as of January 1, 1999.
Overall, net income decreased approximately $1.864 million primarily as
a result of nonrecurring items related to costs associated with a proxy contest
and related change in control 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.
FUNDS FROM OPERATIONS
Management considers Funds From Operations ("FFO") to be an appropriate
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 and amortization of real estate assets and including
items from nonrecurring events except for those that are defined as
extraordinary items under generally accepted accounting principles. 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.
The Company reports FFO on both a basic and diluted basis. The diluted
basis assumes the conversion of the Company's convertible debentures and
convertible notes into shares of common stock as well as other common stock
equivalents including those which are antidilutive to earnings per share.
11
<PAGE> 12
The following table shows the components that comprise the Company's FFO
for the three months and nine months ended September 30, 2000 and 1999 and the
reconciliation of basic to diluted FFO. The 1999 presentation has been restated
to conform with 2000.
<TABLE>
<CAPTION>
Three Months Ended, Nine Months Ended,
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME ........................................................ $ 621 $ 719 $ 1,417 $ 3,281
Depreciation of buildings and improvements ....................... 1,611 1,534 4,702 4,511
Amortization of tenant allowances and tenant improvements ........ 182 51 276 127
Amortization of leasing costs .................................... 36 40 118 106
(Gain) loss on sale of real estate ............................... 12 126 (3,158) (1,625)
Loss on extinguishment of debt ................................... 93 459
Cumulative effect of change in accounting principle .............. 522
-------- -------- -------- --------
FUNDS FROM OPERATIONS, BASIC ...................................... $ 2,462 $ 2,470 $ 3,448 $ 7,381
Interest expense on convertible securities ....................... 1,588 1,641 4,766 4,922
Amortization of deferred financing costs on convertible securities 67 71 207 214
-------- -------- -------- --------
FUNDS FROM OPERATIONS, DILUTED .................................... $ 4,117 $ 4,182 $ 8,421 $ 12,517
======== ======== ======== ========
Weighted avarage shares outstanding:
Basic ........................................................... 5,174 5,171 5,173 5,170
======== ======== ======== ========
Diluted, assuming conversion of convertible securities .......... 9,283 9,413 9,282 9,412
======== ======== ======== ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is the principal source of capital to fund
the Company's ongoing operations. Current efforts to increase cash flow have
centered on additional acquisitions of properties and redevelopment
opportunities at certain of the Company's existing properties.
Acquisitions
In February 2000, the Company completed the acquisition of a ground
lease interest in a portion of its property in Topeka, Kansas. Total cost of the
acquisition was $544,000 which was funded out of proceeds from the Company's
lines of credit. As a result of the acquisition, the Company now owns the fee
interest in the entire property.
Redevelopments
Phase II of the redevelopment of the Pine Ridge Plaza in Lawrence,
Kansas is in process. The Company is finalizing lease negotiations with two
national retailers for spaces consisting of 12,000 and 22,000 square feet,
respectively. Current plans also call for an additional freestanding building of
approximately 23,000 square feet. Construction on the two big box retailers is
anticipated to begin in December 2000. Total costs of the Phase II development
are estimated to be approximately $3.4 million and are anticipated to be
expended over the next twelve to eighteen months. Possible sources of funding
for the project include the Company's lines of credit and property specific
financing.
The redevelopment of 24,280 square feet of formerly vacant space at the
Company's property in Topeka, Kansas was completed in April 2000. The space was
subdivided at a cost of approximately $486,000, including capitalized interest,
taxes and leasing commissions, which was funded primarily from the Company's
line of credit with Greenwich Capital Markets, Inc. The property, which also
includes an 84,000 square foot Kmart store, is now 100 % leased with Harbor
Freight Tools leasing 10,380 square feet of the redeveloped space and
12
<PAGE> 13
Sav-a-Lot leasing the remaining 13,900 square feet.
In September 2000 the Company completed redevelopment of 24,026 square
feet of formerly vacant space in Garden City, KS, under a lease agreement with
Westlake Hardware. The 39,797 square foot building was subdivided at a cost of
approximately $375,000 including capitalized interest, taxes and leasing
commissions, which was funded from available working capital. The remaining
space of 15,771 square feet is currently available for lease.
Capital Expenditures
The Company incurs capital expenditures in the ordinary course of
business in order to maintain its properties. Such capital expenditures
typically include roof, parking lot and other structural repairs, some of which
are reimbursed by tenants. For the nine months ended September 30, 2000, the
Company had incurred approximately $1.1 million of capital expenditures which
was funded out of reserves required under the Company's collateralized mortgages
and operating cash flows. An additional $100,000 in capital expenditures is
anticipated to be incurred by year end 2000 to be funded by these same sources.
The Company will occasionally provide inducements such as building
allowances or space improvements and/or pay leasing commissions to outside
brokers in order to procure new tenants or renegotiate expiring leases with
current tenants. The total cost of these expenditures in 2000 is estimated to be
approximately $657,000 (of which $323,000 had been incurred in the nine months
ended September 30, 2000). These expenditures are generally funded by operating
cash flows.
Sources of Capital
In August 2000, the Company announced the resumption of a Stock
Repurchase Plan originally approved in 1995. The Company's Board of Directors
authorized the repurchase of up to 250,000 shares of its Common Stock, such
purchases to be made in the open market, with the timing dependent upon market
conditions and pending corporate events. No shares had been repurchased as of
September 30, 2000.
The Company has in place a plan to repurchase and retire up to $15
million aggregate principal of its 9.5% Subordinated Convertible Debentures
("Debentures") due July 2004. Through September 30, 2000, the Company had
repurchased $11.807 million of Debentures under the plan. No Debentures were
repurchased during the nine months ended September 30, 2000; however, the
Company may make additional purchases in the future as funds become available.
In June 2000, the Company completed the sale of its property in
Manchester, Missouri for $6.8 million. Net proceeds of the sale after repayment
of debt of $1.5 million and transaction fees were approximately $5.0 million.
The proceeds were used for general corporate purposes, including working
capital, and to pay down the outstanding balance on the Company's lines of
credit.
In September 2000, the Company entered into an agreement to sell a
portion of its property in Arkansas City, Kansas. The property consists of a
vacant parcel of land adjacent to a freestanding retail building. The agreement
calls for a contract price of $275,000 and is expected to close in December 2000
once lender approval is obtained and due diligence by the purchaser is
completed.
In September 2000, Meridian Entertainment Group, Inc. ("Meridian"), a
tenant at Bricktown Square Shopping Center in Chicago, Illinois, vacated a six
screen theater operation in violation of its lease agreement. The lease, which
was assigned to Meridian by Plitt Theaters, Inc., ("Plitt") a subsidiary of
Loews Cineplex Entertainment Corporation, runs through June 30, 2008. The
Company is attempting to negotiate a settlement
13
<PAGE> 14
agreement for current and future lease obligations with Meridian and Plitt, each
of which remain primarily liable under the lease. Annual revenues under the
lease are approximately $930,000. The company is attempting to find a
replacement tenant and/or alternative use for the space. If the company is
unable to negotiate a settlement with the tenant or is unable to retenant the
space in the short-term, future cash flows may be materially impacted.
The Company anticipates that its cash flow from operations will be
sufficient to fund its cash needs for payment of expenses, capital expenditures
(other than acquisitions and redevelopments) and to maintain the Company's
current distribution policy. The Company currently has two lines of credit
available for temporary working capital needs and intends to enter into other
secured and unsecured financing agreements in the future as the need arises.
The Company's line of credit with Bank One (the "Bank One Line") is a
revolving line of credit which expires September 30, 2001. The Bank One Line
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.
The Company's line of credit with Greenwich Capital Markets, Inc. (the
"Greenwich Capital Line") is a revolving line of credit which expires November
2001 and is collateralized by 17 properties owned by the Company's wholly owned
subsidiary, Malan Revolver, Inc. The Greenwich Capital Line requires monthly
payments of interest only at LIBOR plus 250 basis points. Amounts outstanding as
of September 30, 2000 under the Greenwich Capital Line and the Bank One Line
were $11.7 million and $3.0 million, respectively, and the maximum available
borrowings under each line as of that date were $18.9 million and $3.0 million,
respectively.
Proxy Contest and Related Change in Control Payments
During 2000, the Company was involved in a proxy contest with its
largest shareholder, Kensington Investment Group, Inc. ("Kensington"). At the
Company's Annual Meeting on May 10, 2000, Kensington proposed a slate of five
Directors to replace the Company's then existing Board of Directors. The
Kensington nominees were elected and the new Board was seated on May 18, 2000.
The Company incurred approximately $860,000 in costs related to the
proxy contest including expenditures for attorneys, solicitors, public relations
advisors and advertising, printing, transportation and related expenses. This
amount includes approximately $470,000 in costs incurred by Kensington and other
shareholders which were subsequently approved by the Board of Directors for
payment by the Company.
In accordance with the terms of agreements with its then three
executive officers, the replacement of the Board of Directors constituted a
"change in control" triggering certain payment obligations to the officers.
Included in these obligations were lump sum payments totaling $1.750 million
paid to the officers and an accrued liability of $800,000 relating to the
Company's future obligation to provide lifetime health insurance benefits to the
officers. In August 2000, the Company entered into an employment agreement with
one of the officers. As part of the agreement, the officer relinquished his
right to the lifetime health insurance and was granted 6,550 shares of the
Company's Common Stock. The proxy contest expenses and lump sum payments under
the change in control agreements were funded out of operating cash flows and
available working capital.
MANAGEMENT CHANGES
In July 2000, the Company announced the departure of its President and
Chief Executive Officer Anthony S. Gramer. In August 2000, the Company promoted
Michael Kaline to President and subsequently announced the appointment of
Jeffrey D. Lewis as Chief Executive Officer. Mr. Lewis had previously been
elected to the Company's Board of Directors in May 2000.
14
<PAGE> 15
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 economic downturns, successful and timely completion of
acquisitions, renovations and development programs, leasing activities, the
outcome of the proxy contest and other risks associated with the commercial real
estate business, and as detailed in the Management's Discussion and Analysis of
Financial Condition and Results of Operations.
INFLATION
The Company's long-term leases contain provisions to mitigate the
adverse impact of inflation on its results of operations. Such provisions
include clauses entitling the Company to receive (i) scheduled base rent
increases and (ii) percentage rents based upon tenants' gross sales, which
generally increase as prices rise. In addition, many of the Company's non-anchor
leases are for terms of less than ten years, which permits the Company to seek
increases in rents upon re-rental at then current market rates if rents provided
in the expiring leases are below then existing market rates. Most of the
Company's leases require tenants to pay a share of operating expenses, including
common area maintenance, real estate taxes, insurance and utilities, thereby
reducing the Company's exposure to increases in costs and operating expenses
resulting from inflation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has exposure to interest rate risk on certain of its debt
obligations and interest rate instruments. Based on the Company's outstanding
variable rate debt at September 30, 2000, a one percent increase or decrease in
interest rates would decrease or increase, respectively, the Company earnings
and cash flows by approximately $147,000 on an annualized basis.
15
<PAGE> 16
MALAN REALTY INVESTORS, INC.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
NONE
Item 2: Changes in Securities
NONE
Item 3: Defaults Upon Senior Securities
NONE
Item 4: Submission of Matters to a Vote of Security Holders
NONE
Item 5: Other Information
NONE
Item 6: Exhibits and Reports on Form 8-K
a) Exhibit Index:
27 Financial Data Schedule Filed with
this document
*10(u) Employment Agreement dated Filed with
August 10, 2000 by and between this document
the Company and Michael Kaline
*10(v) Employment Agreement dated Filed with
September 26, 2000 by and between this document
the Company and Jeffrey Lewis
*A management contract or compensatory plan or arrangement required
to be filed pursuant to Instruction 2 of 601(b) (10) of
Regulation S-K.
b) Reports on Form 8-K
During the three months ended September 30, 2000 there was a
report filed on Form 8-K dated July 28, 2000 announcing the
departure of Anthony S. Gramer as the Company's President and
Chief Executive Officer and the appointment of Vice President
Michael K. Kaline to fulfill Mr. Gramers duties until further
management appointments are made.
A report on Form 8-K dated September 14, 2000 was filed on
September 28, 2000 announcing the amendment of the Company's
Rights Agreement and the appointment of Jeffrey Lewis as Chief
Executive Officer.
16
<PAGE> 17
MALAN REALTY INVESTORS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MALAN REALTY INVESTORS, INC.
By: /s/ Jeffrey D. Lewis
--------------------------------------
Jeffrey D. Lewis
Chief Executive Officer
By: /s/ Elliott J. Broderick
------------------------------------
Elliott J. Broderick
Chief Accounting Officer
Dated: November 10, 2000
17
<PAGE> 18
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10(u) Employment Agreement dated August 10, 2000 by
and between the Company and Michael Kaline
10(v) Employment Agreement dated September 26, 2000
by and between the Company and Jeffery Lewis
27 Financial Data Schedule
</TABLE>
