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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 11, 2000, 5,174,220 shares of Common Stock, Par Value $.01
Per share, were outstanding.
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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 June 30, 2000
(unaudited) and December 31, 1999 3
Statements of Operations (unaudited) for
the three months and six months
ended June 30, 2000 and 1999 4
Statements of Cash Flows (unaudited) for the
six months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements (unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II OTHER INFORMATION 15-16
SIGNATURES 17
</TABLE>
2
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MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------- ---------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Real estate
Land, buildings and improvements $264,878 $267,117
Less: accumulated depreciation (29,215) (26,584)
--------------------------- ---------------------------
Total 235,663 240,533
Accounts receivable, net 3,195 1,149
Deferred financing and other 7,424 7,554
Cash and cash equivalents 8,066 1,857
Restricted cash - mortgage escrow deposits 2,293 2,387
--------------------------- ---------------------------
Total Assets $256,641 $253,480
=========================== ===========================
LIABILITIES
Mortgages $130,309 $126,601
Convertible debentures 42,743 42,743
Convertible notes 27,000 27,000
Accounts payable and other 3,589 2,699
Accrued distributions payable 2,199 2,198
Accrued property taxes 3,383 1,315
Accrued interest payable 3,855 3,783
--------------------------- ---------------------------
Total Liabilities 213,078 206,339
--------------------------- ---------------------------
SHAREHOLDERS' EQUITY
Common stock ($.01 par value, 30 million shares
authorized, 5,174,220 and 5,172,404 shares
issued and outstanding at June 30, 2000 and
December 31, 1999, respectively) 52 52
Additional paid in capital 74,193 74,169
Accumulated distributions in excess of net income (30,682) (27,080)
--------------------------- ---------------------------
Total shareholders' equity 43,563 47,141
--------------------------- ---------------------------
Total Liabilities and Shareholders' Equity $256,641 $253,480
=========================== ===========================
</TABLE>
See Notes to Consolidated Financial Statements
3
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MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
REVENUES
Minimum rent $ 7,455 $ 7,773 $ 14,916 $ 15,455
Percentage and overage rents 165 222 684 467
Recoveries from tenants 2,401 2,736 5,188 5,720
Interest and other income 104 72 366 159
Gain on sale of real estate 3,170 3,170 1,751
---------------- ----------------- ----------------- ----------------
Total Revenues 13,295 10,803 24,324 23,552
EXPENSES
Property operating and maintenance 682 729 1,626 1,899
Other operating expenses 452 475 832 843
Real estate taxes 2,099 2,159 4,173 4,317
General and administrative 634 468 1,156 1,013
Proxy contest and related change in control costs 3,351 3,401
Depreciation and amortization 1,637 1,543 3,269 3,122
---------------- ----------------- ----------------- ----------------
Total Operating Expenses 8,855 5,374 14,457 11,194
---------------- ----------------- ----------------- ----------------
OPERATING INCOME 4,440 5,429 9,867 12,358
Interest Expense 4,499 4,377 8,978 8,815
---------------- ----------------- ----------------- ----------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPAL (59) 1,052 889 3,543
EXTRAORDINARY ITEM:
Loss on extinguishment of debt (93) (93) (459)
---------------- ----------------- ----------------- ----------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (152) 1,052 796 3,084
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (522)
---------------- ----------------- ----------------- ----------------
NET INCOME (LOSS) ($152) $1,052 $796 $2,562
================ ================= ================= ================
EARNINGS (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
Basic ($0.01) $0.20 $0.17 $0.69
================ ================= ================= ================
Diluted ($0.01) $0.20 $0.17 $0.68
================ ================= ================= ================
EARNINGS (LOSS) PER SHARE BEFORE CUMMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE:
Basic ($0.03) $0.20 $0.15 $0.60
================ ================= ================= ================
Diluted ($0.03) $0.20 $0.15 $0.59
================ ================= ================= ================
EARNINGS (LOSS) PER SHARE:
Basic ($0.03) $0.20 $0.15 $0.50
================ ================= ================= ================
Diluted ($0.03) $0.20 $0.15 $0.49
================ ================= ================= ================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 5,173,361 5,170,016 5,172,975 5,169,456
================ ================= ================= ================
Diluted 5,173,361 5,184,429 5,174,767 5,183,869
================ ================= ================= ================
</TABLE>
See Notes to Consolidated Financial Statements
4
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MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
------------------------ ----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 796 $ 2,562
------------------------ ----------------------
Adjustments to reconcile net income to
net cash flows provided by operating activities:
Depreciation and amortization 3,269 3,122
Amortization of deferred financing costs 839 948
Directors compensation issued in stock 24 24
Gain on sales of real estate (3,170) (1,751)
Loss on extinguishment of debt 93 459
Change in operating assets and liabilities that
provided (used) cash:
Accounts receivable and other assets (2,938) (1,195)
Accounts payable, deferred income and
other accrued liabilities 3,030 1,162
------------------------ ----------------------
Total adjustments 1,147 2,769
------------------------ ----------------------
NET CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES 1,943 5,331
------------------------ ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate developed, acquired or improved (1,527) (11,274)
Deposits to escrow (10,101) (10,257)
Disbursements from escrow 10,195 10,337
Net proceeds from sales of real estate 6,531 7,175
------------------------ ----------------------
NET CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES 5,098 (4,019)
------------------------ ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgages (1,792) (4,888)
Proceeds from mortgages 3,800
Debt issuance costs (109) (188)
Draws on lines of credit 5,500 11,294
Repayments on lines of credit (8,500)
Proceeds from options exercised 4
Debt extinguishment costs (34)
Distributions to shareholders (4,397) (4,397)
------------------------ ----------------------
NET CASH FLOWS USED FOR (832) (2,875)
FINANCING ACTIVITIES ------------------------ ----------------------
Net increase (decrease) in cash and cash equivalents 6,209 (1,563)
Cash and cash equivalents at beginning of period 1,857 2,898
------------------------ ----------------------
Cash and cash equivalents at end of period $ 8,066 $ 1,335
======================== ======================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION-
CASH PAID FOR INTEREST DURING THE PERIOD $ 8,096 $ 7,944
======================== ======================
</TABLE>
See Notes to Consolidated Financial Statements
5
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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 years
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 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.
6
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2. COMPENSATION PLANS
The activity in the Directors Stock Compensation Plan for the six months
ended June 30, 2000 consisted of 1,816 shares issued at $12.75-$13.625 per
share. Compensation expense in connection with the Company's 401(k) retirement
plan for the six months ended June 30, 2000 was $17,000.
3. EARNINGS PER SHARE
Earnings per share ("EPS") data were computed as follows (in thousands
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Month Ended June 30,
--------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (loss) before extraordinary item and
cumulative effect of change in accounting principle .............. $ (59) $ 1,052 $ 889 $3,543
======= ======= ====== ======
Income (loss) before cumulative effect of change in
accounting principle ............................................. $ (152) $ 1,052 $ 796 $3,084
======= ======= ====== ======
Net income (loss) ................................................. $ (152) $ 1,052 $ 796 $2,562
======= ======= ====== ======
BASIC EPS:
Weighted-Average Shares Outstanding ............................. 5,173 5,170 5,173 5,169
======= ======= ====== ======
Basic earnings per share before extraordinary
items and cumulative effect of change in
accounting principle ........................................... $ (0.01) $ 0.20 $ 0.17 $ 0.69
======= ====== ====== ======
Basic earnings per share before cumulative
effect of change in accounting principle ....................... $ (0.03) $ 0.20 $ 0.15 $ 0.60
======= ====== ====== ======
Basic earnings per share ........................................ $ (0.03) $ 0.20 $ 0.15 $ 0.50
======= ====== ====== ======
DILUTED EPS:
Weighted-average shares outstanding ............................. 5,173 5,170 5,173 5,169
Net shares issuable upon exercise of dilutive options ........... 14 2 15
------- ------ ------ ------
Shares applicable to diluted earnings ........................... 5,173 5,184 5,175 5,184
======= ====== ====== ======
Diluted earnings per share before extraordinary item
and cumulative effect of change in accounting principle ........ $ (0.01) $ 0.20 $ 0.17 $ 0.68
======= ====== ====== ======
Diluted earnings per share before cumulative effect
of change in accounting principle .............................. $ (0.03) $ 0.20 $ 0.15 $ 0.59
======= ====== ====== ======
Diluted earnings per share ...................................... $ (0.03) $ 0.20 $ 0.15 $ 0.49
======= ====== ====== ======
</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
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4. MORTGAGES
In May 2000, the Company extended its revolving line of credit with
Bank One through September 30, 2000.
5. PROXY CONTEST AND RELATED CHANGE IN CONTROL COSTS
During the six months ended June 30, 2000, the Company was engaged in a
proxy contest with its largest shareholder, Kensington Investment Group, Inc.
("Kensington"). Kensington ultimately prevailed in electing a proposed 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 estimated costs incurred by Kensington were $825,000.
The change in the Board of Directors resulting from the proxy contest
triggered certain lump sum payments and other obligations to the three executive
officers of the Company pursuant to the terms of their respective "change in
control" agreements. These obligations included lump sum payments totaling $1.75
million and an accrued liability of $800,000 relating to the Company's future
obligation to provide lifetime health insurance benefits to the officers.
6. 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 write off of unamortized deferred financing costs
associated with the debt.
7. SUBSEQUENT EVENTS
In July 2000, the Company announced that its President and Chief
Executive Officer, Anthony S. Gramer, was no longer associated with the Company.
In August 2000 the Company promoted Vice President Michael Kaline to President.
Mr. Gramer was paid $1 million upon the election of the new Board of
Directors in May 2000. In addition, a portion of the $800,000 accrued liability
relating to the Company's future obligation to provide lifetime health insurance
benefits to three officers is attributable to Mr. Gramer. The Company believes
that no further payments are due or payable to Mr. Gramer pursuant to his
employment agreement or otherwise.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 30, 2000 to Three Months Ended
June 30, 1999
Total revenues increased $2.492 million from 1999. Approximately $3.170
million of the increase resulted from a gain on the sale of a retail shopping
center located in Manchester, Missouri in June 2000. Minimum rents and
recoveries from tenants decreased approximately $653,000, 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 the 1999 sale
of a property in Gary, Indiana. Percentage rents decreased $57,000 primarily due
to timing differences in the receipt of payments from certain tenants. Interest
and other income increased $32,000 mainly due to lease termination income
recognized in the second quarter of 2000.
Total operating expenses increased approximately $3.481 million from
1999 to 2000 primarily due to nonrecurring costs in connection with a proxy
contest and related change in control payments discussed further below. Property
operating and maintenance expense and real estate taxes decreased $107,000
primarily due to the sale of Gary, Indiana in 1999. Other operating expenses
decreased approximately $23,000 due to lower compensation expense in 2000.
General and administrative expenses increased by $166,000 primarily due to legal
and professional fees incurred in connection with the Company's strategic
operational review. Depreciation and amortization increased by $94,000 primarily
due to acquisitions and redevelopments that were completed in 1999.
Interest expense (including related amortization of deferred financing
costs) increased approximately $122,000 primarily due to increases in interest
rates on the Company's lines of credit over 1999.
In June 2000, the Company incurred a loss on extinguishment of debt of
$93,000, primarily from the charge off of deferred financing costs associated
with the pay down of debt related to the Manchester sale and a related
prepayment penalty.
Overall net income decreased by $1.204 million resulting primarily from
nonrecurring expenses related to a proxy contest and related change in control
payments and decreases in revenues resulting from lease terminations, offset by
a gain on the sale of a property.
Comparison of Six Months Ended June 30, 2000 to Six Months Ended June 30, 1999
Total revenues increased $772,000 from 1999. Rents and recoveries from
tenants decreased $1.071 million primarily due to the sales of two properties in
1999, lease termination agreements executed with four tenants in late 1999 and
early 2000 and a decrease from 1999 in deferred minimum rents recognized on the
lease up of vacant space formerly occupied by Kmart. Percentage rent increased
$217,000 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 $207,000
primarily due to lease termination fees received in 2000. Revenues related to
the gains on sales of properties increased by $1.419 million compared to 1999.
Total operating expenses increased $3.263 million from 1999 primarily
due to proxy contest and related change in control payments totaling $3.401
million discussed further below. Property operating and maintenance expense
decreased $273,000 primarily due to lower cost of snow removal in 2000 and lower
maintenance costs
9
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relating to two properties in sold 1999. The sale of properties also contributed
to a decrease in real estate taxes of $144,000 in 2000. General and
administrative costs increased $143,000 primarily due to legal and professional
fees incurred in connection with the Company's strategic operational review.
Depreciation and amortization increased $147,000 due to acquisitions and
redevelopment that were completed in 1999 offset by decreases resulting from the
property sales.
Interest expense (including related amortization of deferred financing
costs) increased $163,000 primarily due to increases in interest rates on the
Company's lines of credit during the first half of 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 the June 2000 sale of
the Manchester property. In 1999, the Company incurred a similar loss on the pay
down 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 $1.766 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.
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The following table shows the components that comprise the Company's FFO for the
three months and six months ended June 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 June 30, Six Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME (loss).................................................. $ (152) $ 1,052 $ 796 $ 2,562
Depreciation of buildings and improvements ................... 1,546 1,470 3,091 2,977
Amortization of tenant allowances and tenant improvements .... 47 38 94 76
Amortization of leasing costs ................................ 43 33 82 66
Gain on sale of real estate ...................................... (3,170) (3,170) (1,751)
Loss on extinguishment of debt ................................... 93 93 459
Cumulative effect of change in accounting principle .............. 522
------- ------- ------ -------
FUNDS FROM OPERATIONS, BASIC...................................... $ (1593) $ 2,593 $ 986 $ 4,911
Interest expense on convertible securities ....................... 1,589 1,640 3,178 3,281
Amortization of deferred financing costs on convertible
securities.................................................... 71 72 140 143
------- ------- ------- -------
Funds From Operations, Diluted ..................................... $ 67 $ 4,305 $ 4,304 $ 8,335
======= ======= ======= =======
Weighted average shares outstanding:
Basic ............................................................. 5,173 5,170 5,173 5,169
======= ======= ======= =======
Diluted, assuming conversion of convertible securities ............ 9,278 9.415 9,277 9,415
======= ======= ======= =======
</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. Revised plans now call for the addition of two "big box"
national retailers consisting of 12-22,000 square feet each and an additional
freestanding retail building of approximately 20,000 square feet. Construction
on the two big box retailers is anticipated to begin in the third quarter 2000,
after finalization of lease terms. 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.
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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 has
been 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
Sav-a-Lot leasing the remaining 13,900 square feet.
Capital Expenditures
The Company incurs capital expenditures in the ordinary course of
business in order to maintain its properties. Such capital expenditures
typically include roof, parking lot and other structural repairs, some of which
are reimbursed by tenants. For the six months ended June 30, 2000, the Company
had incurred approximately $405,000 of capital expenditures which was funded out
of reserves required under the Company's collateralized mortgages and operating
cash flows. An additional $695,000 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 $288,000 had been incurred in the six months
ended June 30, 2000). These expenditures are generally funded by operating cash
flows.
Sources of Capital
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 June 30, 2000, the Company had repurchased
$11.807 million of Debentures under the plan. No Debentures were repurchased
during the six months ended June 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.
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, 2000. The Bank One Line
calls for monthly payments of interest at the rate of 200 basis points over
LIBOR 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 June 30, 2000 under the
Greenwich Capital Line and the Bank One Line were $13.7 million and $3.0
million, respectively, and the maximum available borrowings under each line as
of that date were $18.9 million and $4.5 million, respectively.
12
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Proxy Contest and Related Change in Control Payments
During the six months ended June 30, 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 existing Board of
Directors. The Kensington nominees were elected and the new Board was seated on
May 18, 2000.
The Company incurred approximately $825,000 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 $425,000 in estimated costs incurred by
Kensington. In June 2000, the Board of Directors approved the payment of these
expenses on behalf of Kensington.
In accordance with the terms of agreements with its three executive
officers, the replacement of the Board of Directors constituted a "change in
control" triggering certain payment obligations to the officers. For the six
months ended June 30, 2000, a total cost of $2.6 million was incurred relating
to these change in control obligations including lump sum payments totaling
$1.75 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. 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
On July 24, 2000 the Company announced the departure of its President
and Chief Executive Officer Anthony S. Gramer. In August 2000, the Board of
Directors appointed Michael K. Kaline, President of the Company, to assume Mr.
Gramer's responsibilities.
Mr. Gramer was paid $1 million upon the election of the new Board of
Directors in May 2000. In addition, a portion of the $800,000 accrued liability
relating to the Company's future obligation to provide lifetime health insurance
benefits to three officers is attributable to Mr. Gramer. The Company believes
that no further payments are due or payable to Mr. Gramer pursuant to his
employment agreement or otherwise.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has exposure to interest rate risk on its debt obligations
and interest rate instruments. Based on the Company's outstanding variable rate
debt at June 30, 2000, a one percent increase or decrease in interest rates
would decrease or increase, respectively, the Company earnings and cash flows by
approximately $167,000 on an annualized basis.
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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
The following matters were submitted to a vote of the security holders
of the Company at its Annual Meeting of Shareholders held on May 10,
2000
(a) Election of Directors
Two separate slates of five Directors each were nominated at the Annual
Shareholders Meeting. The first slate, nominated by the Company, consisted of
the re-election of existing Directors, Anthony S. Gramer, Robert D. Kemp, Jr.,
William McBride III, William F. Pickard and Richard T. Walsh. The second slate,
nominated by Kensington Investment Group, Inc. consisted of Paul Gray II, Jill
Holup, John Patrick Kramer, Jeffrey Lewis and Andrew Miller. The Kensington
nominees were elected by the shareholders to serve until the next annual meeting
of shareholders and until their respective successors have been elected and
qualified.
NOMINEES VOTES FOR VOTES WITHHELD
Anthony S. Gramer 1,687,938 39,796
Robert D. Kemp 1,709,838 37,296
William McBride III 1,683,538 44,196
William F. Pickard 1,690,738 36,996
Richard T. Walsh 1,689,688 38,046
Paul Gray II 2,411,474 12,225
Jill Holup 2,432,944 10,155
John Patrick Kramer 2,413,244 10,455
Jeffrey Lewis 2,413,544 10,155
Andrew Miller 2,413,544 10,155
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(b) Ratification of Auditors
The shareholders ratified the selection of Deloitte & Touche LLP as the
Company's independent auditors for 2000:
Votes cast for ratification 4,099,298
Votes cast against ratification 30,157
Votes which abstained 41,378
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
b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months
ended June 30, 2000. There was one 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. Gramer's duties until further management appointments are made.
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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/ Michael K. Kaline
----------------------------------
Michael K. Kaline
President
By: /s/ Elliott J. Broderick
------------------------------------
Elliott J. Broderick
Chief Accounting Officer
Dated: August 14, 2000
17
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Exhibit Index
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<TABLE>
<CAPTION>
Exhibit No. Description
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<S> <C>
27 Financial Date Schedule
</TABLE>
