10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Period Ended: May 31, 2000 Commission File Number: 1-6833 ------------ ------ MGI PROPERTIES -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-6268740 ------------------------------ --------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 50 Congress Street, Suite 222, Boston, Massachusetts 02109 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 248-2300 ------------------------- N/A -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. 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 the past 90 days. Yes X No -------- ------- Common shares outstanding as of July 14, 2000: 13,774,221 Page 1 of 15 pages Exhibit Index appears on Page 13 MGI PROPERTIES INDEX PART I: FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Earnings 4 Consolidated Statements of Cash Flows 5 Consolidated Statement of Changes in Shareholders' Equity 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Market Risk Quantitative and Qualitative Disclosures about Market Risk 12 PART II: OTHER INFORMATION Items 1 - 6 13 Signatures 14 Exhibit 11. Computation of Earnings Per Share 15 -2- MGI PROPERTIES PART I -- FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------------------ May 31, 2000 November 30, 1999 ------------------------------------------------------------------------------------------------------------------------------------ (unaudited) ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Properties held for sale $ 14,333,000 $ 56,310,000 Cash and cash equivalents 38,894,000 38,232,000 Accounts receivable 111,000 747,000 Other assets 2,092,000 3,222,000 ---------------------------------------------------------------------------------------------------------------------- $ 55,430,000 $ 98,511,000 ====================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Loan payable $ 4,506,000 $ 4,585,000 Liquidating liabilities 7,409,000 12,715,000 Other liabilities 1,956,000 2,373,000 ---------------------------------------------------------------------------------------------------------------------- Total liabilities 13,871,000 19,673,000 ---------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common shares -- $1 par value; 17,500,000 shares authorized; 13,774,221 issued 13,774,000 13,774,000 Additional paid-in capital 208,363,000 208,363,000 Distributions in excess of net income (180,578,000) (143,299,000) ---------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 41,559,000 78,838,000 ---------------------------------------------------------------------------------------------------------------------- $ 55,430,000 $ 98,511,000 ======================================================================================================================
See accompanying notes to consolidated financial statements. -3- MGI PROPERTIES CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended ------------------ ---------------- May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999 ------------------------------------------------------------------------------------------------------------------------------------ INCOME Rental $ 1,578,000 $18,787,000 $ 4,141,000 $ 37,454,000 Interest 689,000 139,000 1,260,000 283,000 ----------------------------------------------------------------------------------------------------------------------------------- Total income 2,267,000 18,926,000 5,401,000 37,737,000 ----------------------------------------------------------------------------------------------------------------------------------- EXPENSES Property operating expenses 353,000 4,080,000 788,000 8,186,000 Real estate taxes 92,000 2,212,000 402,000 4,427,000 Depreciation and amortization 67,000 376,000 147,000 735,000 Provision for loss on properties held for sale 523,000 1,200,000 523,000 1,200,000 Interest 86,000 2,330,000 173,000 4,890,000 General and administrative 692,000 1,026,000 1,279,000 1,853,000 Liquidation plan 309,000 905,000 850,000 1,783,000 ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 2,122,000 12,129,000 4,162,000 23,074,000 ----------------------------------------------------------------------------------------------------------------------------------- Income before net gains 145,000 6,797,000 1,239,000 14,663,000 Net gains (loss) on sale of real estate assets 2,721,000 -- 2,804,000 (143,000) ----------------------------------------------------------------------------------------------------------------------------------- Income before extraordinary item 2,866,000 6,797,000 4,043,000 14,520,000 Extraordinary item - prepayment of debt -- -- -- (286,000) ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 2,866,000 $ 6,797,000 $ 4,043,000 $ 14,234,000 =================================================================================================================================== PER SHARE DATA Basic earnings $ 0.21 $ 0.49 $ 0.29 $ 1.03 =================================================================================================================================== Diluted earnings $ 0.19 $ 0.48 $ 0.26 $ 1.00 =================================================================================================================================== Weighted average shares outstanding 13,774,221 13,774,221 13,774,221 13,772,628 ===================================================================================================================================
See accompanying notes to consolidated financial statements. -4- MGI PROPERTIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended May 31, 2000 May 31, 1999 ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 4,043,000 $ 14,234,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 147,000 735,000 Net (gains) loss on sale of real estate assets (2,804,000) 143,000 Provision for loss on properties held for sale 523,000 1,200,000 Extraordinary item - prepayment of debt -- 286,000 Liquidating liabilities (3,959,000) 350,000 Other operating assets and liabilities (1,257,000) 3,406,000 ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (3,307,000) 20,354,000 ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Acquisitions of real estate -- (339,000) Additions to real estate (204,000) (912,000) Tenant improvements (41,000) (1,621,000) Deferred tenant charges (6,000) (974,000) Net proceeds from sales of real estate 45,437,000 1,190,000 Other 184,000 (367,000) ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 45,370,000 (3,023,000) ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Cash distributions (41,322,000) (9,091,000) Additions to loans payable, net -- 1,000,000 Repayment of loans payable (79,000) (13,896,000) Mortgage prepayment penalty -- (286,000) Proceeds from issuance of common shares -- 95,000 ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (41,401,000) (22,178,000) ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 662,000 (4,847,000) ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents: Beginning of period 38,232,000 12,265,000 ----------------------------------------------------------------------------------------------------------------------------------- End of period $ 38,894,000 $ 7,418,000 ===================================================================================================================================
See accompanying notes to consolidated financial statements -5- MGI PROPERTIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
----------------------------------------------------------------------------------------------------------------------------------- Additional Common Paid-In Undistributed Shares Capital Net Income ----------------------------------------------------------------------------------------------------------------------------------- Balance at November 30, 1999 $13,774,000 $208,363,000 ($143,299,000) Net income -- -- 4,043,000 Cash liquidating distributions -- -- ( 41,322,000) ----------------------------------------------------------------------------------------------------------------------------------- Balance at May 31, 2000 $13,774,000 $208,363,000 ($180,578,000) ===================================================================================================================================
See accompanying notes to consolidated financial statements. -6- MGI PROPERTIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1: The results of the interim period are not necessarily indicative of results to be expected for the entire fiscal year. The figures contained in this interim report are unaudited and may be subject to adjustments. Certain prior year amounts have been reclassified to conform with the current year presentation. In the opinion of management, all adjustments necessary for a fair presentation of financial position and results of operations have been included and such adjustments include only the normal accruals. NOTE 2: The shareholders of the Trust approved a Plan of Complete Liquidation and Termination of the Trust (the "Plan") at a special meeting held on October 14, 1998. The Plan calls for the sale of all of the Trust's assets. Net sales proceeds and available cash will be used to satisfy debts and obligations with remaining funds to be distributed to shareholders. It is presently anticipated that MGI Properties will transfer its assets and liabilities to a liquidating trust prior to October 14, 2000, after which the beneficial interests in the successor entity will be non-transferable. The termination of MGI Properties will occur at the time all remaining assets are transferred to a liquidating trust. With the termination of MGI Properties, the liquidation will be completed for tax purposes, although distribution of the remaining cash and net proceeds from future asset sales is expected to occur subsequent to the establishment of a liquidating trust. Although MGI believes that it has operated in a manner that permits it to qualify as a REIT, no assurance can be given that the Trust will continue to qualify as a REIT for the period prior to the distribution of MGI's remaining assets to shareholders (including the transfer of the remaining assets to a liquidating trust) and will not lose or terminate its status as a REIT. NOTE 3: On March 16, 2000, the Board of Trustees declared a liquidating distribution of $3.00 per share, paid on April 13, 2000 to shareholders of record at the close of business on April 4, 2000. This distribution aggregated $41.3 million. Since the October 14, 1998 liquidation vote, liquidating distributions total $27.16 per share. The amount and timing of remaining distributions will be determined by the Trustees based upon funds available, net proceeds realized from remaining property sales, the timing of such sales, the level of reserves deemed necessary or appropriate, and other considerations. Under the provisions of the Internal Revenue Code, distributions made within 24 months of the adoption of the Plan are considered liquidating distributions and will not be dividend income when received by shareholders. Distributions in liquidation should first be applied to reduce a shareholder's tax basis in his or her shares of MGI with the excess constituting a capital gain. If the sum of all liquidating distributions is less than a shareholder's basis, the difference will constitute a capital loss to the shareholder. -7- MGI PROPERTIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) NOTE 4: Upon shareholder approval of the Plan on October 14, 1998, the Trust reclassified its real estate assets to "properties held for sale" and on that date ceased depreciation of the assets and reclassified accumulated depreciation and amortization against the original cost of real estate assets. During the first two quarters of 2000, the Trust completed the sale of three retail properties totaling 615,600 square feet, one office property totaling 81,500 square feet, and a 1.7 acre parcel of land. The aggregate sales price of these five transactions totaled $46.9 million before selling expenses. As of July 14, 2000, MGI owned three properties, and is renegotiating an agreement to sell one retail property located in Florida. The sale agreement is subject to the customary terms and conditions for transactions of this type, including the purchaser's satisfactory completion of due diligence, which includes engineering and environmental inspections, and approval of titles and surveys. This sale is expected to close late in MGI's third fiscal quarter or in MGI's fourth quarter, although there can be no assurance that it will be successfully completed. NOTE 5: Cash applied to interest payments amounted to $0.1 million and $0.2 million for the three and six-month periods ended May 31, 2000, respectively, and $2.3 million and $4.9 million for the three and six-month periods ended May 31, 1999, respectively. NOTE 6: MGI believes that it has operated in a manner that permits it to qualify as a real estate investment trust under the provisions of the Internal Revenue Code of 1986, as amended. Accordingly, no provision has been made for Federal income taxes. No assurance can be given that the Trust will be able to continue to operate in a manner so as to qualify or remain so qualified. -8- MGI PROPERTIES PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW MGI is a self-administered equity REIT that is operating under a Plan of Complete Liquidation and Termination of the Trust (the "Plan"). The shareholders of the Trust approved the Plan at a special meeting held on October 14, 1998. The Plan is discussed in the Trust's Form 10-Ks for the years ended November 30, 1999 and 1998, and in the definitive proxy statement dated September 10, 1998. Since approval of the Plan, MGI, to date, has completed the sale of 66 properties totaling 5.4 million square feet and 959 residential apartment units, for aggregate sales prices, prior to the deduction of $9.6 million of selling expenses and closing adjustments, of $529.2 million, which prices included $48.8 million of mortgage debt that was repaid at closing and $28.0 million assumed by the buyers. MGI has made liquidating distributions aggregating $27.16 per share since the October 1998 special shareholders' meeting. Currently, management believes that the current estimate of pricing with respect to the remaining unsold properties, when added to funds held by MGI, is estimated to result in additional net liquidating distributions aggregating approximately $2.50 per share, after deducting all fees and liquidation costs; however, no assurances can be given that per share net liquidating distributions will reach this amount. At May 31, 2000, MGI owned three properties, which aggregated 223,000 square feet. As of July 14, 2000, MGI is renegotiating an agreement to sell a retail property located in Florida. The sale agreement is subject to the customary terms and conditions for transactions of this type, including, among other things, the respective purchaser's satisfactory completion of due diligence, which includes engineering and environmental inspections, and approval of titles and surveys. This sale is expected to close late in MGI's third fiscal quarter or in MGI"s fourth quarter, although there can be no assurance that this sale will be successfully completed. It is presently anticipated that MGI Properties will transfer its assets and liabilities to a liquidating trust prior to October 14, 2000, after which the beneficial interests in the successor entity will be non-transferable. The termination of MGI Properties will occur at the time all remaining assets are transferred to a liquidating trust. With the termination of MGI Properties, the liquidation will be completed for tax purposes, although distribution of the remaining cash and net proceeds from future asset sales is expected to occur subsequent to the establishment of a liquidating trust. Although it is expected that the Trust will continue to qualify as a REIT for the period prior to the distribution of MGI's remaining assets to shareholders (including the transfer of remaining net assets to a liquidating trust), no assurance can be given that the Trust will not lose or terminate its status as a REIT. -9- MGI PROPERTIES PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) As of May 31, 2000, the Trust's real estate investments were diversified by property type as follows:
% of Portfolio Based Square Feet of % of on Adjusted 2000 Number of Commercial Portfolio Based Property Operating % Properties Property on Cost Income(1) Leased ---------- -------- ------- --------- ------ Office 1 122,400 55.6% 48.0% 98.5% Retail 1 100,500 42.4% 48.6% 94.4% Other 1 -- 2.0% 3.4% 100.0% - ------- --- --- ----- Total Portfolio 3 222,900 100.0% 100.0% 96.6% = ======= ======= ===== =====
(1) Adjusted property operating income is defined as the 2000 property operating income from the three properties owned at May 31, 2000. This amount approximated $0.9 million, or 31.5% of total 2000 property operating income. RESULTS OF OPERATIONS The sale of five properties in the first six months of 2000 and 61 properties during 1999, pursuant to the Plan created a fundamental transformation in MGI and is the primary factor in explaining the changes in operating results when 2000 is compared to prior years. Net income for the quarter ended May 31, 2000 was $2.9 million, or $0.21 per share (basic), as compared to $6.8 million, or $0.49 per share (basic), in the second quarter of 1999. Included in 2000 second quarter net income were net gains of $2.7 million from the sale of two properties. No gains were recorded in the second quarter of 1999. Pursuant to the required accounting for properties held for sale, there was no depreciation or amortization of real estate assets recognized in either the first six months of 2000 or 1999. Net income for the six months ended May 31, 2000 was $4.0 million, or $0.29 per share (basic) as compared to $14.2 million, or $1.03 per share (basic), a year ago. Income before net gain and extraordinary item was $1.2 million and $14.7 million for the six months ended May 31, 2000 and May 31, 1999, respectively. Included in the 2000 year-to-date net income were $2.8 million of net gains from the sale of five properties, liquidation-related expenses of $0.8 million and a $0.5 million provision for loss on properties held for sale. Included in 1999 year-to-date net income was a $0.1 million net loss from the sale of one property, a $0.3 million loan prepayment fee, liquidation-related expenses of $1.8 million and a $1.2 million provision for loss on properties held for sale. -10- MGI PROPERTIES PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Income before net gains and extraordinary item was $1.2 million in 2000 as compared to $14.7 million in the comparable six months of 1999. In comparing the first six months of 2000 and 1999, the $13.4 million decrease in income before net gains and extraordinary item is primarily attributable to the disposition of 66 properties pursuant to the Plan. This change primarily resulted from the $21.9 million decrease in property operating income, which is defined as rental income less property operating expense and real estate taxes ($2.9 million in 2000 versus $24.8 million in 1999). Property operating income totaled $2.9 million in the first six months of 2000, of which approximately 31.5%, or $0.9 million, related to the three properties owned at May 31, 2000. The change in property operating income for these three comparable or "same store" properties (i.e., owned for both fiscal years), was a decrease of 7.7%, or $78,000, when 2000 is compared to 1999. This decrease is primarily attributable to expenses associated with sales that did not close. The decrease in income before net gains was partially due to a $4.7 million reduction in interest expense, a $0.6 million decrease in depreciation and amortization, and a $1.0 million increase in interest income, all of which also results from the sale of 66 properties. Additional factors were a $0.6 million decrease in general and administrative expense, a $0.9 million decrease in liquidation plan expenses, and a $0.7 million decrease in provision for loss on properties held for sale. LIQUIDITY Shareholders' equity at May 31, 2000 was $41.6 million, compared to $78.8 million at November 30, 1999. The decrease primarily reflects the amount of cash distribution offset by net income earned in the first six months of 2000. At May 31, 2000, financial liquidity was provided by $38.9 million in cash and cash equivalents. Cash requirements in 2000 (exclusive of liquidating distributions to shareholders) will include capital and tenant improvements and leasing expenditures required to maintain MGI's occupancy levels. Additionally, in connection with the Plan, MGI anticipates incurring a variety of costs and fees including costs related to sales, fees to advisors and other professionals, severance and incentive compensation, payments to holders of stock options, and other expenses related to liquidation. MGI anticipates meeting these obligations through its position of cash and cash equivalents held at May 31, 2000, the net sale proceeds of its remaining properties, and property operations. MGI believes the combination of available cash and cash equivalents, the value of MGI's unencumbered property and other resources are sufficient to meet its liquidity requirements while implementing the Plan. -11- MGI PROPERTIES PART I, ITEM 3 -- MARKET RISK QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK MGI is presently exposed to interest rate changes primarily as a result of long term debt and the rate of return earned on its cash and cash equivalent investments. MGI's only obligation for borrowed money at May 31, 2000 totaled $4.5 million, representing 8.1% of its total assets. This is a fixed rate mortgage loan with a rate of 7.4%. FORWARD LOOKING STATEMENTS Statements made or incorporated in this Report may contain forward-looking statements, estimates or plans within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of MGI to be materially different from results or plans expressed or implied by such forward-looking statements. Such factors generally include, among other things, adverse changes in the real estate markets; risk of default under the Trust's outstanding indebtedness; financial condition and bankruptcy of tenants; environmental/safety issues and requirements; adequacy of insurance coverage; and general and local economic and business conditions. With respect, in particular, to the Plan, such factors include, among other things, the risks of future action or inaction by the Board of Trustees (and the actual results thereof) with respect to the Plan (including the possibility of litigation pertaining thereto), the net realizable value of the remaining properties, the timing of remaining property sales and distributions to shareholders, the effects of financial market conditions and general economic conditions, maintaining the current occupancy and rent levels at the properties, as well as those risk factors set forth in MGI's Form 10-K for the year ended November 30, 1999, including those set forth under "Forward-Looking Statements," "Other" and Item 1 - "Adoption and Implementation of Liquidation Plan." Although the Trust believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included or incorporated by reference in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Trust or any other person that the objectives and plans of the Trust will be achieved. -12- MGI PROPERTIES PART II - OTHER INFORMATION Item 1: Legal Proceedings: Not applicable. Item 2: Changes in Securities and Use of Proceeds: Not applicable. Item 3: Defaults upon Senior Securities: Not applicable. Item 4: Submission of matters to a vote of security holders: None. Item 5: Other Information: Not applicable. Item 6: Exhibits and Reports on Form 8-K: a) Exhibits: Part I - Exhibit 11 - Computation of Earnings per Share (see page 15) b) Reports on Form 8-K: Dated March 6, 2000, filed on March 17, 2000 Dated April 10, 2000, filed on April 24, 2000 -13- - 15 - MGI PROPERTIES SIGNATURES Pursuant to the requirements to 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. Date: July 14, 2000 /s/ Phillip C. Vitali ------------- --------------------- Phillip C. Vitali Executive Vice President and Treasurer (Principal Financial and Accounting Officer) -14-