-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O4Jr1y5nysjAYYhUs54io0XurB8g/XmKZ9Wh0DFFggj2f134L3ozmDheWkvurFYB SrxQpUmInfsPrzMZT5texw== 0000950146-00-000209.txt : 20000229 0000950146-00-000209.hdr.sgml : 20000229 ACCESSION NUMBER: 0000950146-00-000209 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MGI PROPERTIES CENTRAL INDEX KEY: 0000068330 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 046268740 STATE OF INCORPORATION: MA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06833 FILM NUMBER: 555952 BUSINESS ADDRESS: STREET 1: ONE WINTHROP SQUARE CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174226000 MAIL ADDRESS: STREET 1: ONE WINTHROP SQUARE CITY: BOSTON STATE: MA ZIP: 02110 FORMER COMPANY: FORMER CONFORMED NAME: MORTGAGE GROWTH INVESTORS DATE OF NAME CHANGE: 19880225 FORMER COMPANY: FORMER CONFORMED NAME: EASTERN SHOPPING CENTERS INC DATE OF NAME CHANGE: 19711121 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K --------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended November 30, 1999 Commission File No. 1-6833 MGI PROPERTIES - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Massachusetts 04-6268740 - ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) One Winthrop Square, Boston, Massachusetts 02110 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 422-6000 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------- ------------------- Common Shares New York Stock Exchange (par value $l per share) Securities registered pursuant to Section 12(g) of the Act: None 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 and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 25, 2000, the aggregate market value of the voting shares of the Registrant held by non-affiliates of the Registrant was $71,119,000. Common Shares Outstanding as of February 25, 2000: 13,774,221 TABLE OF CONTENTS Page ---- PART I........................................................................1 Item 1. Business.......................................................1 Item 2. Properties....................................................12 Item 3. Legal Proceedings.............................................12 Item 4. Submission of Matters to a Vote of Security Holders...........12 PART II......................................................................13 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............................13 Item 6. Selected Financial Data.......................................14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................15 Item 8. Financial Statements and Supplementary Data...................22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................22 PART III.....................................................................23 Item 10. Directors and Executive Officers of the Registrant ...........23 Item 11. Executive Compensation........................................25 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................28 Item 13. Certain Relationships and Related Transactions................29 PART IV......................................................................30 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................30 POWER OF ATTORNEY............................................................36 SIGNATURES...................................................................36 PART I Item 1. Business General MGI Properties(R) (the "Trust" or "MGI") is an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts. MGI commenced operations in 1971 as a real estate investment trust (a "REIT"). Since that time, the Trust has elected to be treated as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and expects to continue to operate in a manner which will entitle the Trust to be so treated, although there can be no assurance thereof. For each taxable year in which the Trust qualifies as a REIT under the Internal Revenue Code, taxable income distributed to the holders of its Common Shares will not be taxable to the Trust (other than certain items of tax preference which are subject to minimum tax in the hands of the Trust). See "Adoption and Implementation of Liquidation Plan," "Investment and Operating Policies" and "Portfolio" below. References herein to the Trust include its wholly-owned subsidiaries. Narrative Description of Business MGI is a self-administered equity REIT currently in the process of liquidating its assets and properties. MGI owns and operates a diversified portfolio of income producing real estate, which as of November 30, 1999, consisted of seven commercial properties and a parcel of land. As of such date, the commercial portfolio consisted of 920,000 square feet (versus 5.6 million square feet at November 30, 1998). At November 30, 1999, the commercial properties were 97.9% leased. The Trust currently employs seven persons. Adoption and Implementation of Liquidation Plan On June 18, 1998, the Trust publicly announced that its Board of Trustees had decided to undertake a review of strategic alternatives available to the Trust to maximize shareholder value, including a possible liquidation of the Trust's properties. The Trustees ultimately determined that the appropriate course for the Trust to maximize shareholder value was to pursue the sale of its assets pursuant to a plan of complete liquidation of the Trust. Accordingly, on August 12, 1998, the Trustees unanimously approved a Plan of Complete Liquidation and Termination of the Trust (the "Plan") and directed that the Plan be submitted to the Trust's shareholders for approval. The shareholders of the Trust approved the Plan at a special meeting held on October 14, 1998. The Trust's primary business objective has been to sell its assets pursuant to the Plan. MGI sold 61 properties in fiscal 1999 for an aggregate price, prior to the deduction of $8.0 million of selling expenses and closing adjustments paid at closing, of $482.3 million. In connection with the liquidation, $97.9 million of debt was repaid and $28.0 million assumed by the buyers. As a result of these sales, MGI made liquidating distributions totaling $24.16 per share in 1999. On December 16, 1999, MGI announced that based upon its current estimate of pricing with respect to the remaining properties, when added to funds held by MGI, additional net liquidating distributions is estimated to aggregate approximately $5.50 per share, after all fees and liquidation costs; however, no assurances can be given that per share net liquidating distributions will reach that amount. -1- Subsequent to November 30, 1999, MGI sold for $8.4 million two properties and has entered into three agreements to sell three additional properties, a retail center located in Maryland, a retail center located in Illinois and an office building in Michigan. The sale agreements are subject to the customary terms and conditions for transactions of this type including, among other things, the respective purchasers' satisfactory completion of due diligence, engineering and environmental inspections, and approval of titles and surveys. However, there can be no assurance that these sales will be successfully completed. It is also currently estimated that the liquidation will be substantially completed during MGI's third quarter ending August 31, 2000, although there can be no assurance thereof. It is currently anticipated that during the third quarter, any then remaining properties will be transferred to a liquidating trust. Such estimate does not anticipate renewal of adverse or other unstable economic conditions. The timing of any distributions of net cash proceeds or other considerations will be affected by, among other things, the timing of sales of assets, income tax considerations and the establishment of reserves. Accordingly, no assurances can be made as to the timing of such distributions, which could be made over a substantial period of time; provided, however, that in accordance with the Plan, the final distribution shall be made no later than October 14, 2000 (albeit a portion of such distributions could, as stated above, be made to a liquidating trust for the benefit of shareholders). It is not expected that the remaining properties would be sold to any persons deemed to be affiliates of the Trust, though it is possible that one or more shareholders of the Trust who could be deemed "affiliates" of the Trust could purchase properties by virtue of submitting the highest bids in respect of such properties. Each offer to purchase the Trust's assets must be acted upon by the Board of Trustees. As part of the Plan, existing debts and obligations of the Trust will be satisfied from existing cash balances and the proceeds of the sale of the Trust's assets. In addition, reserves may be established, as the Board of Trustees deems necessary, for liabilities or expenses, contingent or otherwise, that may arise. The remaining proceeds will be distributed on a schedule established by the Board of Trustees to the Trust's shareholders, on a pro rata basis, as full payment for the Common Shares held by each shareholder. Although it is expected that the Trust will continue to qualify under the Internal Revenue Code as a REIT for the period prior to the distribution of the Trust's assets to shareholders (including the possible transfer of assets to a liquidating trust if the liquidation is not completed within two years), no assurance can be given that the Trust will not lose or terminate its status as a REIT in the current fiscal year. In the event that the Trust is unable to dispose of all of its assets on or before October 14, 2000, or if it is otherwise advantageous or appropriate to do so, the Trustees will establish a liquidating trust to which the Trust could distribute in kind its unsold assets. The Trustees would not expect to transfer assets to a liquidating trust except (i) when such a transfer is required to avoid the imposition of federal income taxes on the Trust, (ii) if the Trustees deem it advantageous or appropriate to do so, or (iii) to establish reserves for liabilities and obligations of the Trust (contingent or otherwise) out of amounts that would otherwise be distributed to shareholders. -2- The Plan gives the Trust's Board of Trustees the power to sell any and all of the assets of the Trust without further approval by the shareholders. The Trustees intend to conduct the sale of the Trust's remaining properties in an orderly manner, and are seeking offers or executing contracts for individual sales of its remaining assets. The assets could be sold to one or more purchasers, in one or more transactions over a period of time, in which case the Trust would continue to operate until all investments are sold or transferred to a liquidating trust. It is currently estimated that the liquidation will be substantially completed during MGI's third quarter ending August 31, 2000, however, no assurances can be made as to the actual timing of such sales and subsequent distributions, which could be made over a longer period of time. It is not possible to determine with any precision the aggregate net proceeds that may ultimately be available for distribution to the Trust's shareholders upon liquidation. That amount will depend upon a variety of factors, including national and/or local economic conditions, including the availability of financing to buyers upon reasonable terms, the timing of and the net proceeds realized from the sale of the Trust's properties, as well as the ultimate amounts of liquidation-related expenses and other obligations and liabilities that must be satisfied by the Trust's assets. The possibility exists that there could be unforeseen events that adversely impact the price of the remaining (unsold) assets, and no assurance can be given that the net proceeds per share will therefore equal $5.50 per share. The Trustees also reserve the right to abandon the Plan at any time, due to adverse or unstable real estate or financial market conditions, although that is highly unlikely. Reference is made to the Trust's definitive Proxy Statement dated September 10, 1998, in respect of the Special Meeting of Shareholders held on October 14, 1998, which is incorporated herein by reference and filed as an exhibit to the Form 10-K dated January 29, 1999, for a discussion of the Trust's Plan of Liquidation, including the risk factors and certain other considerations associated therewith, as well as the income tax consequences of the Plan to shareholders and to the Trust and the consequences of establishing a liquidating trust. See also "Risk Factors" below. Liquidating Trust In the event that the Trust is unable to dispose of all of its assets prior to October 14, 2000, or if it is otherwise advantageous or appropriate to do so, the Trustees may establish a liquidating trust to which the Trust could distribute in kind its unsold assets. In any event, even if all of the Trust's assets were disposed of within 24 months after the adoption of the Plan, the Trustees believe that it may be necessary to establish a liquidating trust to retain cash reserves beyond such 24-month period to meet contingent liabilities of the Trust. Under the Code, a trust will be treated as a liquidating trust if it is organized for the primary purpose of liquidating and distributing the assets transferred to it, and if its activities are all reasonably necessary to and consistent with the accomplishment of that purposes. Although neither the Code nor the Regulations thereunder provide any specific guidance as the length of time a liquidating trust may last, the Internal Revenue Service's guidelines for issuing rulings with respect to liquidating trust status call for a term not to exceed three years, which period may be extended to cover the collection of installment obligations. It is currently anticipated that a liquidating trust would be established in the quarter ending August 31, 2000, particularly if there are any properties remaining unsold at that time. The duration of such a trust would be primarily dependent upon the completion of remaining sales and the nature of contingent liabilities. -3- An entity classified as a liquidating trust may receive assets, including cash, from the liquidating entity without incurring any tax. It will be treated as a grantor trust, and accordingly will also not be subject to tax on any income or gain recognized by it. Instead, each shareholder will be treated as the owner of his pro rata portion of each asset, including cash, received by and held by the liquidating trust. Accordingly, each shareholder will be treated as having received a liquidating distribution equal to his share of the amount of cash and the fair market value of any asset distributed to the liquidating trust and recognize gain to the extent such value is greater than his basis in his stock, notwithstanding that he may not currently receive a distribution of cash or any other assets with which to satisfy the resulting tax liability. In addition, each shareholder will be required to take into account in computing his own taxable income his pro rata share of each item of income, gain and loss of the liquidating trust. An individual shareholder who itemizes deductions may deduct his pro rata share of fees and expenses of the liquidating trust only to the extent that such amount, together with the shareholder's other miscellaneous deductions, exceeds 2% of his adjusted gross income. A shareholder will also recognize taxable gain or loss when all or part of his pro rata portion of an asset is disposed of for an amount greater or less than his pro rata portion of the fair market value of such asset at the time it was transferred to the liquidating trust. Any such gain or loss will be capital gain or loss so long as the shareholder holds his interest in the assets as a capital asset. If the liquidating trust fails to qualify as such, its treatment will depend, among other things, upon the reasons for its failure to so qualify. In such case, the liquidating trust would most likely be taxable as a corporation. In such case, the liquidating trust itself would be subject to tax, and shareholders could also be subject to tax upon the receipt of certain distributions from the liquidating trust. If the Trustees avail themselves of the use of a liquidating trust, it is anticipated that every effort will be made to ensure that it will be classified as such for Federal income tax purposes. Investment and Operating Policies The Trust's primary business objective, prior to the adoption of the Plan, had been to increase funds from operations ("FFO"), while building additional value of its real estate investments through income growth and capital appreciation. During the last six years, prior to the adoption of the Plan, the cornerstones of the Trust's operating policies were (1) the active management of its real estate, (2) a focus on maintaining the quality of its properties and the demand for its properties at a level that would support high occupancy rates, leasing attractiveness to quality tenants and increasing rental rates and (3) the acquisition of high quality properties. During these six years, the Trust's investment focus with respect to type of property has been directed primarily toward the commercial segment of the New England real estate market, particularly industrial, office/research and development and office properties. In fiscal 1999, the Trust completed the sale of all but one of its entire New England portfolio of 55 properties. As of November 30, 1999, the Trust had total properties with a carrying value of $56.3 million and a mortgage loan outstanding of $4.6 million. Reference is made to notes 3 and 5 of the Notes to Consolidated Financial Statement included in Item 14 below. -4- Portfolio The Trust's portfolio at November 30, 1999 consisted of investments in seven commercial properties and a 1.7 acre parcel of land. The Trust's real estate investments can be classified by type of properties and geographic location. As of November 30, 1999, the Trust's real estate investments were diversified by property type as follows: % of Portfolio Based on Adjusted Square Feet % of 1999 of Portfolio Property Number of Commercial Based Operating % Properties Property on Cost Income(1) Leased ---------- -------- ------- --------- ------ Office 2 203,900 25.5% 25.0% 99.1% Retail 4 716,100 73.9% 74.4% 97.5% Land and Other 2 -- .6% .6% 100.0% - ------- ----- ----- ----- Total Portfolio 8 920,000 100.0% 100.0% 97.9% = ======= ===== ===== ===== - ---------------- (1) Adjusted property operating income is defined as the 1999 property operating income from the eight properties owned at November 30, 1999. This amount approximated $7.6 million, or 23.5% of total 1999 property operating income. As of November 30, 1999, the Trust's real estate investments were diversified by geographic region as follows: % of Portfolio Based on Adjusted Square Feet % of 1999 of Portfolio Property Number of Commercial Based Operating % Location Properties Property on Cost Income(1) Leased - -------- ---------- -------- ------- --------- ------ New England 1 106,900 12.7% 16.3% 100.0% Mid-West 3 443,500 49.7% 46.7% 96.8% Southeast 3 222,900 28.0% 25.1% 97.7% Mid-Atlantic 1 146,700 9.6% 11.9% 100.0% - ------- ----- ----- ----- Total Portfolio 8 920,000 100.0% 100.0% 97.9% = ======= ===== ===== ===== - ---------------- (1) Adjusted property operating income is defined as the 1999 property operating income from the eight properties owned at November 30, 1999. This amount approximated $7.6 million, or 23.5% of total 1999 property operating income. -5- Lease terms relating to the Trust's properties range from tenancies-at-will up to 16 years. The Trust leases commercial space to 89 commercial tenants, including 26 office tenants and 63 retail tenants. Additional information concerning the Trust's real estate investments is set forth under Item 2 and in Notes 1, 2, 3, 4 and 5 in the Notes to Consolidated Financial Statements and Schedule III of the Financial Statement Schedule included in Item 14 below. Competition, Regulation and Other Factors The success of the Trust's operations has been dependent, among other factors, upon general economic conditions and trends, including interest rates, availability of credit, real estate trends, construction costs, income tax laws, governmental regulations and legislation, increases or decreases in operating expenses, zoning laws, population trends and the ability of the Trust to attract tenants and keep its properties leased at profitable levels. The Trust does not consider its real estate business to be seasonal in nature. In the areas of investment permitted to the Trust, there have been a wide variety of competing investors and lenders. The Trust has competed with life insurance companies, REITs, pension funds, other financial institutions, partnerships, corporations, individuals and other business entities, both domestic and foreign. With respect to properties presently owned by the Trust, or in which the Trust has an investment, the Trust competes with other owners of properties for tenants. The Trust's properties compete for tenants primarily on the basis of location, rent and the condition and design of improvements. Its properties compete with similar properties located in their geographic area, and such properties may be newer and larger than those in which the Trust has an interest. There are no statistics readily available which would enable the Trust to determine its position with respect to its competitors in the real estate investment industry. The Trust has been able to compete effectively despite recessionary conditions in certain regions from time to time and management believes that this will continue principally by reason of the diverse make-up of the Trust's income producing properties and the diversity of its tenant base. However, recessionary economic conditions in certain regions or any adverse changes in local, national or international economic conditions could result in the inability of some existing tenants of the Trust to meet their lease or other obligations and could otherwise adversely affect the Trust's ability to attract or retain tenants. Risk Factors Factors Pertaining to Plan of Liquidation No Assurances of Distributions. There can be no assurance that the Trust will be successful in disposing of its remaining properties for values approximating those currently estimated by the Trust or that related liquidating distributions will occur within the currently estimated timetable. If values of the Trust's assets decline or the costs and expenses related to such sales and to the liquidation process exceed those which are currently estimated by the Trust, the liquidation may not yield distributions as great as or greater than the recent market prices of the Common Shares. No assurances can be made as to the actual amount and timing of distributions, which could be made over a substantial period of time. The completion of the Plan, including the actual amount and timing of remaining distributions, could be affected by negative or unstable global, national or local economic conditions. -6- Decreased Liquidity. As the largest portion of the Trust's assets have been sold and liquidation proceeds equivalent to $24.16 per share have been distributed to shareholders since shareholder approval of the Plan, the market capitalization and "float" have diminished, and market interest in the Common Shares by the investment community has diminished, thereby reducing the market price, the market demand and liquidity for the Common Shares. At a later stage of the liquidation process, the New York Stock Exchange will likely cause the Common Shares to be delisted. Sales of Assets Not Subject to Shareholder Approval. The Trustees have the authority to sell any and all of the Trust's assets on such terms as the Board of Trustees determines appropriate. Notably, the shareholders will have no opportunity to vote on such matters and will, therefore, have no right to approve or disapprove the terms of such sales. Qualification as a REIT. The calculation of the estimated liquidation price per share set forth herein, assumes that the Trust will continue to qualify as a REIT under the Internal Revenue Code during the entire liquidation process and, therefore, no provision has been made for federal income taxes. Although the Trust may not maintain such REIT qualification in the current fiscal year, the consequences of losing such qualification would have minimal, if any, adverse tax consequences, by reason of the estimated tax loss resulting from incurring liquidation expenses and costs during the current fiscal year. See "Adverse Consequences of Failure to Qualify as a REIT and Other Tax Risks" below. Risks of Abandonment of Plan. In the unlikely event the Plan is abandoned by the Trustees due to unstable or unfavorable real estate or financial market conditions and at a time when the Trust is significantly reduced in size, certain operating risks will increase, as will the risk that the Trust's share price will trade at a greater discount to the perceived underlying value of its real estate holdings. Miscellaneous Real Estate Investment Considerations The Trust's operating income and the value of its remaining properties may be affected by a number of factors, including the local economic climate (which may be adversely impacted by business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply of or reduced demand for commercial or other properties). The Trust's ability to realize the sales values currently estimated on its remaining properties and its ability to make distributions to shareholders will continue to be largely dependent on the economic conditions in the markets where the Trust's properties are located. There can be no assurance as to the continued growth and stability of the economy in these markets or other markets upon which the Trust's tenants depend. Negative economic changes in these markets may, therefore, adversely affect the Trust. Real property investments are subject to varying degrees of risk. The returns available from equity investments in real estate depend in large part on the amount of income generated and expenses incurred. If the Trust's properties do not generate revenues sufficient to meet operating expenses, including debt service, tenant improvements, leasing commissions and other capital expenditures, the Trust may have to borrow additional amounts to cover costs, and the Trust's cash flow and ability to make distributions to its shareholders will be adversely affected. -7- The Trust's operating income and the value of its properties, as well as its ability to sell its properties, may also be adversely affected by a number of other factors, including the national economic climate (including the availability of financing upon reasonable terms); the local economic climate; local real estate conditions; the perceptions of prospective tenants of the attractiveness of the property; the ability of the Trust to continue to provide adequate management, maintenance and insurance; and increased operating costs (including real estate taxes and utilities). In addition, real estate values and income from properties are also affected by such factors as applicable laws, including tax laws, interest rate levels and the availability of financing. Numerous office and retail properties compete with the Trust's properties in attracting tenants to lease space. Some of these competing properties are newer or are in more desirable locations than some of the Trust's remaining properties. Significant development of office or retail properties in a particular area could have an adverse effect, material or otherwise, on the Trust's ability to lease space in its properties and on the rents charged. The Trust is also subject to the risks that upon expiration of leases for space located in its properties, the leases may not be renewed, the space may not be re-let or the terms of renewal or re-letting (including the cost of required renovations) may be less favorable than current lease terms. In addition, certain leases provide for early cancellation in certain events. If the Trust were unable to promptly re-let or renew the leases for all or a substantial portion of this space or if the rental rates upon such renewal or re-letting were significantly lower than expected, the Trust's cash flow and its ability to sell its properties and to make distributions to shareholders may be adversely affected. Although the Trust believes certain of its properties are generally functional in design and could be re-let to other tenants, some properties could require reconfiguration or remodeling before the property could be re-let to other tenants. Any such required activity could delay immediate occupancy by the re-letting tenant. Equity real estate investments are relatively illiquid. Such illiquidity will tend to limit the ability of the Trust to vary its portfolio promptly in response to changes in economic or other conditions. Furthermore, the tax laws impose a 100% tax on net gain from "prohibited transactions, "i.e., sales of property held primarily for sale to customers in the ordinary course of a trade or business. The 100% tax is not imposed on net gain from sales of property held for at least four years, if certain other conditions are met, including a limitation as to the number of such sales per year. Generally, the potential application of the 100% tax limits the Trust's ability to sell properties without adversely affecting returns to the holders of Common Shares. Although the Trust believes that the sale of the Trust's assets pursuant to the Plan of Liquidation should not be subject to the 100% tax, the Trust will nevertheless attempt to structure the sale or other disposition of the Trust's assets in a manner that will prevent such sales or dispositions from being taxed as prohibited transactions. Because increases in certain taxes and expenses are not always passed through to tenants under leases, such increases may adversely affect the Trust's cash flow and its ability to make distributions to shareholders. The Trust's properties are also subject to various federal, state and local regulatory requirements, such as the Americans with Disabilities Act and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. The Trust believes that the properties are currently in compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed that would require significant unanticipated -8- expenditures by the Trust and could have an adverse effect on the Trust's cash flow and distributions. Financial Condition (and Bankruptcy) of Tenants The Trust's net income, funds from operations and cash available for distribution would be adversely affected if a significant tenant or a significant number of tenants becomes unable to meet their obligations. In the event of a default by one or more tenants, the Trust could experience delays and incur substantial costs in enforcing its rights as lessor. Upon such a default, the Trust's cash flow could also be reduced if the Trust was unable to re-lease, upon satisfactory terms, any significant portion of its properties. At any time, a tenant of the Trust's properties may seek the protection of the bankruptcy laws, which could result in the rejection and termination of such tenant's lease and thereby cause a reduction in the Trust's net income, funds from operations and cash available for distribution. No assurance can be given that tenants will not file for bankruptcy protection in the future or, if any tenants file, that they will affirm their leases and continue to make rental payments in a timely manner. Potential Environmental Liabilities Under various Federal, state and local laws, ordinances and regulations, such as the Comprehensive Environmental Response Compensation and Liability Act or "CERCLA," and common laws, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property as well as certain other costs, including governmental fines and injuries to persons and property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to remediate such substances properly, may adversely affect the owner's or operator's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials into the air and third parties may seek recovery from owners or operators of real property for personal injuries associated with asbestos-containing materials. All of the Trust's remaining properties have been subjected to Phase I or similar environmental audits by independent environmental consultants. These environmental audit reports have not revealed any potential significant environmental liability. However, two of the remaining properties are subject to potential environmental liabilities as a result, in one case, of seepage from a nearby property which occurred more than five years ago, and in another, from a tenant which vacated the premises in mid-1999. Accordingly, the causes of these problems are no longer continuing. The Trust is not otherwise aware of any environmental liability with respect to its properties that it believes could have a material adverse effect on the Trust's business, properties or results of operations. This evaluation however, could prove to be incorrect depending on certain factors. The Trust's assessments may not reveal all environmental liabilities or the materiality of a potential liability (such as that described above) or there may be material environmental liabilities of which the Trust is unaware. In addition, assumptions regarding groundwater flow and the existence of contamination are based on available sampling data, and there are no assurances that the data is reliable in all cases. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability on the Trust or (ii) the current environmental -9- condition of the Trust's properties will not be affected by tenants, by the condition of land or operations in the vicinity of the Trust's properties (such as the presence of underground storage tanks), or by third parties unrelated to the Trust. Some tenants use or generate hazardous substances in the ordinary course of their respective businesses. These tenants are required under their leases to comply with all applicable laws and have agreed to indemnify the Trust for any claims resulting from noncompliance, and the Trust is not aware of any environmental problems resulting from the tenants' use or generation of hazardous substances. There are no assurances that all tenants will comply with the terms of their leases or remain solvent and that the Trust may not at some point be responsible for contamination caused by such tenants. Leverage The Trust's obligations for borrowed money totaled $4.6 million at November 30, 1999, representing 4.6% of its total assets. The formation documents of the Trust do not contain any limitation on the amount or percentage of indebtedness the Trust might incur. The Trustees reserve the right to increase such leverage in the unlikely event investment activities are resumed. Increases in the Trust's leverage could increase the risk of default under its outstanding indebtedness. Significant increases in interest rates could adversely affect the net income, funds from operations and cash available for distribution to shareholders. The Trust's failure to pay its debt obligations when due could result in the Trust's loss of the properties collateralizing such indebtedness or otherwise adversely affect the Trust. Insurance Although there can be no assurance thereof, MGI carries comprehensive general liability coverage and umbrella liability coverage on all of its properties with limits of liability deemed adequate to insure against liability claims and provide for cost of defense. The Trust is also insured against the risk of physical loss in amounts estimated to be adequate to reimburse it on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period. However, there can be no assurance that this coverage will be adequate or that it will insure all of the risks to which the Trust's properties are subject. By reason of the high cost of earthquake and flood insurance and the fluctuations in the price and availability, management determined that the risk of loss due to earthquake and flood did not justify the cost of such coverage, however, management could reconsider its position, although that is unlikely. In the event of an uninsured loss or a loss in excess of uninsured limits, the Trust could lose its equity in the subject property, as well as the anticipated future revenue from such property. Adverse Consequences of Failure to Qualify as a REIT and Other Tax Risks The Trust believes that it has operated in a manner that permits it to qualify as a REIT under the Internal Revenue Code for each taxable year since its formation. No assurance can be given that the Trust will continue to operate in a manner so as to qualify or remain so qualified. Although the Trust may not maintain such REIT qualification in the current fiscal year, management believes the consequences of losing such qualification would have minimal, if any, adverse tax consequences, by reason of the estimated tax loss resulting from incurring liquidating expenses and costs during the current fiscal year. -10- Qualification as a REIT involves the application of highly technical Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations and the determination of various factual matters and circumstances not entirely within the Trust's control. For example, in order to qualify as a REIT, at least 95% of the Trust's gross income in any year must be derived from qualifying sources and the Trust must make dividend distributions to shareholders equal to 95% of its REIT taxable income (excluding net capital gains). Distributions pursuant to the Plan made within 24 months after adoption of the Plan will satisfy this requirement. No assurance can be given that new legislation, regulations or administrative decisions will not change the tax laws with respect to REIT qualification or the Federal income tax consequences of such qualification. If the Trust fails to qualify as a REIT, it will be subject to Federal income tax (including any applicable alternative minimum tax) on its taxable income (including gains recognized in connection with liquidating sales of the Trust's assets) at corporate rates. Unless entitled to relief under certain statutory provisions, the Trust could also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. This treatment would reduce the net earnings available for investment or distribution to shareholders because of the additional tax liability for the year or years involved. In addition, distributions would no longer be required to be made. To the extent that distributions to shareholders have already been made in anticipation of its assumed qualification as a REIT, the Trust could be required to borrow funds or to liquidate certain of its investments to pay the applicable tax. The Plan contemplates a sale of the Trust's assets for cash. So long as the Trust continues to qualify as a REIT, any net gain from "prohibited transactions" (i.e., sales of property held primarily for sale to customers in the ordinary course of a trade or business) would be subject to a 100% tax. Whether a real estate asset is property held primarily for sale to customers in the ordinary course of a trade or business, the sale of which would be a prohibited transaction for a REIT, is a highly factual determination. The Trust does not believe that any of its property should be so characterized but rather that all of its properties are all held for investment and the production of rental income. Nevertheless, the Trust will attempt to continue to structure the dispositions of the Trust's properties in furtherance of the Plan in a manner that will prevent such dispositions from being treated as prohibited transactions. -11- Item 2. Properties The following table sets forth certain information concerning the Trust's properties at November 30, 1999.
==================================================================================================================================== Gross Carrying Cost, Before Scheduled Lease Valuation Reserve Expirations ----------------------- Percentage Weighted ------------- Number Principal Lease OFFICE Sq. Ft. Dollars Per Sq. Ft. Leased Average Rent 2000 2001 of Tenants Tenant Expiration - ------------------------------------------------------------------------------------------------------------------------------------ Tampa, FL 122,400 $ 8,850,000 $ 72.32 98% $12.56 7% 48% 24 Olsten Kimberly 02/28/02 Quality Care Ann Arbor, MI 81,500 $ 6,060,000 $ 74.40 100% $12.57 -- -- 2 Comshare, Inc. 02/28/05 - ------------------------------------------------------------------------------------------------------------------------------------ Total 203,900 $14,910,000 $ 73.15 99% $12.56 4% 29% 26 ==================================================================================================================================== RETAIL - ------------------------------------------------------------------------------------------------------------------------------------ Aurora, IL 362,000 $27,446,000 $ 75.82 96% $ 7.87 2% 18% 30 Best Buy 01/31/11 Baltimore, MD 146,700 6,133,000 41.79 100% 7.05 -- 3% 14 Kmart Corp. 11/30/05 Peabody, MA(1) 106,900 9,876,000 92.39 100% 11.75 -- -- 1 Bradlees, Inc. 10/31/15 Temple Terrace, FL 100,500 7,743,000 77.03 97% 10.47 3% 1% 18 Publix Super 11/30/06 Market, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ Total 716,100 $51,198,000 $ 71.50 98% $ 8.68 1% 10% 63 ====================================================================================================================================
Gross Carrying Cost, Before Valuation Reserve -------------------- LAND AND OTHER Dollars - -------------------------------------------------------------------------------- Tampa, FL $ 437,000 Mount Clemens, MI(2) 25,000 - -------------------------------------------------------------------------------- Total $ 462,000 ================================================================================ (1) In February 2000, this property was sold for $8.3 million. (2) In February 2000, this property was sold for $0.1 million. Reference is made to Notes 1, 2, 3, 4 and 5 in the Notes to the Consolidated Financial Statements and Schedule III, Real Estate and Accumulated Depreciation, under Item 14 of this report for descriptions of the Trust's investments and properties. Executive Office The Trust's headquarters, at One Winthrop Square, Boston, Massachusetts, includes approximately 9,320 square feet of office space and approximately 1,000 square feet of storage. The Trust pays $28,225 monthly rent pursuant to a lease that expires February 29, 2000. MGI has agreed to sublease its current space through April 30, 2000. Item 3. Legal Proceedings There are no material legal proceedings to which the Trust or any of its subsidiaries are a party or with respect to which any of its properties is subject. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. -12- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market Information and Dividends The principal market on which the Trust's common shares are traded is the New York Stock Exchange, under the symbol MGI. The table below sets forth, for the fiscal quarters indicated, the high and low sales prices on the New York Stock Exchange of the Trust's common shares and dividends paid per common share. Sales Price --------------------------- Fiscal 1999 High Low Distributions - ----------- ---- --- ------------- First Quarter $28 9/16 $27 3/16 $.33 Second Quarter $28 1/16 $26 3/16 $.33 Third Quarter $28 3/8 $9 1/4 $19.00 Fourth Quarter $10 $5 5/16 $4.50 Sales Price --------------------------- Fiscal 1998 High Low Dividends - ----------- ---- --- --------- First Quarter $25 13/16 $23 5/8 $.29 Second Quarter $25 7/8 $23 1/2 $.29 Third Quarter $27 13/16 $23 1/16 $.31 Fourth Quarter $29 1/2 $26 1/16 $.33 Future distributions will be determined by the Trust's Board of Trustees and will be dependent upon the results of the execution of the Plan, and in the interim will also be dependent upon the earnings, financial position and cash requirements of the Trust and other relevant factors existing at the time. The Trust must distribute at least 95% of the Trust's taxable income in order to enable it to qualify as a real estate investment trust for tax purposes. So long as the Trust continues to qualify as a REIT, shareholders will, therefore, receive in the form of distributions at least 95% of the taxable income of the Trust. Approximate Number of Holders of Common Shares - ---------------------------------------------- Approximate Number of Holders of Record Title of Class (as of February 25, 2000) - -------------- ------------------------- Common Shares, $1.00 par value 1,868 -13- Item 6. Selected Financial Data
==================================================================================================================================== Year Ended November 30, -------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ SUMMARY OF OPERATIONS Rental income $ 49,604,000 $ 70,338,000 $ 62,567,000 $ 54,507,000 $ 44,875,000 Property operating expenses and real estate taxes (17,097,000) (24,482,000) (22,827,000) (20,589,000) (17,423,000) - ------------------------------------------------------------------------------------------------------------------------------------ Property operating income 32,507,000 45,856,000 39,740,000 33,918,000 27,452,000 Interest income 3,472,000 651,000 639,000 421,000 514,000 Less expenses: Depreciation and amortization 1,229,000 10,379,000 10,662,000 9,463,000 8,339,000 Provision for loss on properties held for sale 11,031,000 -- -- -- -- Interest 6,276,000 10,122,000 9,539,000 9,198,000 5,807,000 General and administrative 2,912,000 3,592,000 3,206,000 2,873,000 2,651,000 Liquidation plan expense 19,194,000 972,000 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before net gains (4,663,000) 21,442,000 16,972,000 12,805,000 11,169,000 Net gains and extraordinary item 159,369,000 8,375,000 3,494,000 11,500,000 3,150,000 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $154,706,000 $ 29,817,000 $ 20,466,000 $ 24,305,000 $ 14,319,000 ==================================================================================================================================== Basic earnings per common share $11.23 $2.17 $1.54 $2.11 $1.25 ==================================================================================================================================== Distributions per common share $24.16 $1.22 $1.10 $.98 $.90 ==================================================================================================================================== Weighted average shares outstanding 13,773,426 13,736,729 13,289,781 11,540,972 11,487,677 ==================================================================================================================================== SUMMARY OF FINANCIAL POSITION Investments in real estate, at cost(1)(2) $ 56,310,000 $415,769,000 $381,943,000 $356,024,000 $293,469,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 98,511,000 $394,503,000 $362,044,000 $339,664,000 $274,651,000 - ------------------------------------------------------------------------------------------------------------------------------------ Loans payable $ 4,585,000 $130,517,000 $113,171,000 $138,547,000 $ 84,506,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity $ 78,838,000 $256,822,000 $242,385,000 $194,435,000 $180,540,000 ====================================================================================================================================
(1) Effective October 14, 1998 with the adoption of the Liquidation plan, the Trust reclassified $50.2 million of accumulated depreciation and amortization against the original cost of real estate assets, and captioned the resulting total of $365,543,000 as "Properties held for Sale" in the accompanying balance sheet as of November 30, 1998. Following the sale of 61 properties in 1999, the amount of the reclassified accumulated depreciation and amortization aggregated $14.7 million at November 30, 1999. (2) Associated with the properties owned at November 30, 1999, the Trust recognized a $10.3 million loss in 1999 on "Properties held for Sale" resulting in a net investment in real estate of $56,310,000 in the accompanying balance sheet as of November 30, 1999. Reference is made to the Index to Consolidated Financial Statements filed as part of this report under Item 14. Item 6, Selected Financial Data, should be read in conjunction with the Consolidated Financial Statements and the related notes appearing elsewhere herein. -14- Item 7. 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 definitive proxy statement dated September 10, 1998, which was circulated to shareholders in connection with the October 14, 1998 special meeting of shareholders. Through the 12 months ended November 30, 1999, MGI completed the sale of 61 properties totaling 4.7 million square feet and 959 residential apartment units, for an aggregate sales price, prior to the deduction of $8.0 million of selling expenses and closing adjustments at closing, of $482.3 million, which price included $48.8 million of mortgage debt that was repaid at closing and $28.0 million assumed by the buyers. In 1999, MGI made liquidating distributions that aggregated $24.16 per share. 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 $5.50 per share, after all fees and liquidation costs; however, no assurances can be given that per share net liquidating distributions will reach this amount. At November 30, 1999, MGI owned seven commercial properties, which aggregated 920,000 square feet, and a parcel of land, as compared to 69 properties, consisting of approximately 5.6 million square feet and 959 apartment units, owned at November 30, 1998. Subsequent to November 30, 1999, MGI sold for $8.3 million, a 106,900 square-foot retail property located in Peabody, Massachusetts and it completed the sale of 1.7 acres of land in Michigan for $120,000. In addition, MGI has entered into three agreements to sell three additional properties, an office building located in Michigan, a retail center located in Maryland and a retail center located in Illinois. The sale agreements are subject to the customary terms and conditions for transactions of this type, including, among other things, the respective purchasers' satisfactory completion of due diligence, engineering and environmental inspections, and approval of titles and surveys. Of these three properties, the buyer for MGI's Maryland retail center has completed its due diligence. These sales are expected to close in MGI's second fiscal quarter, although there can be no assurance that these sales will be successfully completed. It is currently estimated by management that the liquidation will be substantially completed during MGI's third quarter ending August 31, 2000, although there can be no assurance thereof. Results of Operations 1999 Compared to 1998 The sale during 1999 of 61 properties pursuant to the Plan created a fundamental transformation in MGI and is the primary factor in explaining the changes in operating results when 1999 is compared to prior years. Net income in 1999 was $154.7 million, or $11.23 per share (basic), as compared to $29.8 million, or $2.17 per share (basic), in 1998. Included in 1999 net income were net gains of $159.7 million as compared to $8.4 million recognized a year ago from the sale of seven properties. In connection with the 1999 property sales, MGI incurred a variety of expenses including legal, transfer fees, state and other taxes, broker fees and fees to advisors and property sales agents. -15- Income before net gains and extraordinary item was a loss of $4.7 million in 1999 as compared to income of $21.4 million in 1998. This $26.1 million decrease in income before net gain and extraordinary item when 1999 and 1998 are compared is primarily attributable to the disposition of 61 properties pursuant to the Plan. This change primarily resulted from the $18.2 million increase in Liquidation Plan expenses, the $11.0 million loss recognized on properties held for sale, and a $13.3 million decrease ($32.5 million in 1999 versus $45.8 million in 1998) in property operating income (which is defined as rental income less property operating expense and real estate taxes), which were partially offset by a $3.8 million reduction in interest expense, a $9.2 million decrease in depreciation and amortization, $.7 million in lower general and administrative expense and a $2.8 million increase in interest income. The $19.2 million in Liquidation Plan expense in 1999 is related to a variety of costs and fees, including fees to advisors and other professionals, severance and incentive compensation, expense related to stock options and other expenses related to liquidation. The two largest components are expenses related to stock options ($15.1 million) and severance compensation ($3.2 million). All option holders, in accordance with their option agreements, have elected, as an alternative to exercising their options, to receive in cash the difference between the per share option exercise price and the aggregate per share net liquidation proceeds to be distributed to shareholders (the "Cash Election"). Pursuant to the terms of the Election, these cash payments are only in amounts in excess of the per share option exercise price, commencing only at such time as the liquidating distributions exceed the per share exercise price, payable only as and when liquidating distributions are made to shareholders. Of the $15.1 million related to the Cash Election, approximately $6.8 million was paid in 1999, $4.6 million related to options with an exercise price less than $24.16 per share was accrued in anticipation of future payments and an additional $3.7 million was accrued and recognized as expense related to options with an exercise price higher than $24.16 per share, based on remaining estimated future net liquidating distributions of $5.50 per share. With respect to the $3.2 million severance compensation, approximately $2.2 million was unpaid at November 30, 1999. It is presently estimated that approximately an additional $.6 million of severance expense will be recognized subsequent to November 30, 1999. In 1999, MGI recognized an $11.0 million provision for a loss on properties held for sale, the amount by which the carrying value of certain properties exceeded their estimated fair value, according to management's estimates. The carrying amount of the properties are recorded at the lower of the sum of: the property's gross cost at the date of adoption of the Plan plus capital and tenant improvements since adoption of the Plan; or the estimated property fair value less expected sales costs. The estimated property fair value was derived from existing purchase and sale agreements, letters of intent to sell the property, purchase offers from third parties, conversations with sale brokers and internal valuations. This reevaluation occurred in connection with the Trust's decision to sell its remaining properties in single property sales and its evaluation of changing market conditions. Also reflecting the 1999 sale of 61 properties, was the decrease in interest expense of $3.8 million due primarily to the approximate $112.8 million of debt that was repaid or assumed in connection with the sale of properties and higher interest income of $2.8 million due to the amount of net sale proceeds held by MGI pending distributions to shareholders. Moreover, depreciation and amortization decreased by $9.2 million as the Trust stopped depreciating its real estate assets on October 14, 1998, the date shareholders approved the Plan. -16- Property operating income totaled $32.5 million in 1999, of which approximately 23.5%, or $7.6 million, related to the eight properties owned at November 30, 1999. The change in property operating income for these eight comparable or "same store" properties (i.e., owned for both fiscal years), was an increase of 17.3%, or $1.1 million, when 1999 is compared to 1998, and resulted primarily from increased revenues from MGI's retail portfolio, particularly an Illinois shopping center. 1998 Compared to 1997 Net income for 1998 of $29.8 million, or $2.17 per share, included net gains of $8.4 million, which resulted from the sale of seven properties. Net income for 1997 was $20.5 million, or $1.54 per share, which included gains of $3.8 million which was partially offset by an extraordinary item of $0.3 million incurred in connection with a loan refinancing prepayment fee. Income before net gains increased approximately 26.3% from $17.0 million in 1997 to $21.4 million in 1998. Funds from operations ("FFO") totaled $32.6 million for fiscal 1998 compared to $27.5 million in 1997, an 18.5% increase. MGI calculates FFO in conformity with the NAREIT definition which is net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for both unconsolidated partnerships and joint ventures, and for significant non-recurring events (such as Liquidation plan expenses). MGI believes FFO is an appropriate supplemental measure of operating performance. The following is a reconciliation of net income to FFO: Year Ended November 30, ----------------------- 1998 1997 ---- ---- Net income $29,817,000 $20,466,000 Less net gains and extraordinary item (8,375,000) (3,494,000) Plus building depreciation 7,801,000 8,385,000 Plus tenant improvement and commission amortization 2,411,000 2,169,000 Liquidation plan expenses 972,000 -- ----------- ----------- Funds from operations $32,626,000 $27,526,000 =========== =========== The $4.5 million increase in income before net gains, when 1998 is compared to 1997, resulted principally from a $6.1 million increase ($45.8 million versus $39.7 million, respectively) in property operating income (which is defined as rental income less property operating expenses and real estate taxes), offset by increases in interest, general and administrative expenses and liquidation plan expenses. The increase in interest expense of $0.6 million was due primarily to debt incurred in connection with the acquisition of properties. Additionally, general and administrative costs increased by $0.4 million, reflecting higher personnel costs as well as increased legal expenses and the costs associated with shareholder relations. Liquidation plan expenses of $1.0 million reflect those costs, principally professional fees associated with developing the Plan, including the consideration of strategic alternatives, and presenting the proposal to the Trust's shareholders. In addition, included in the amount is the recognition of related employee severance costs which are being recognized over a 15-month period beginning with the approval of the Plan. Depreciation and amortization decreased by $.3 million, as the Trust stopped depreciating its real estate assets on October 14, 1998, the date shareholders approved the Plan. The change in 1998 FFO when compared to 1997 is attributable to the same factors that affected income before net gains in such periods, excluding the effect of changes in depreciation and amortization and liquidation plan expenses. -17- The change in property operating income from 1997 to 1998 reflects improved results from comparable properties (which is defined as properties owned throughout both 1997 and 1998), as well as the effect of the sale and acquisition of properties, is detailed below: Net Change in Property Properties Held 1998 and 1997 1998 and 1997 Operating Property Type Both Years Acquisitions Sales Income - --------------- --------------- ------------- ------------- ------------- Office $1,069,000 $4,550,000 $ (837,000) $4,782,000 Office/R&D 704,000 1,362,000 -- 2,066,000 Industrial 244,000 1,262,000 (1,855,000) (349,000) Retail 251,000 -- (373,000) (122,000) Multi-family 280,000 -- (961,000) (681,000) Land and Other 439,000 -- (16,000) 423,000 ---------- ---------- ----------- ---------- Total $2,987,000 $7,174,000 $(4,042,000) $6,119,000 ========== ========== =========== ========== The increase in property operating income derived from the 43 comparable properties reflects leasing completed during the last two fiscal years, particularly in New England where leases were executed at substantially higher rents. Rental rates for leases signed during 1998 and 1997 increased by 32.6% and 30.6%, respectively, compared to the previous rents in place. Rental revenue has also been positively impacted by the portfolio's overall leased rate which increased from 95.4% at the end of fiscal 1997 to 97.3% at November 30, 1998. For the comparable office properties, rents from leases executed in 1998 are, in the aggregate, 15% higher than rents previously in place, with increases of approximately 20% in New England. The office properties also experienced lower operating expenses and lower management costs due to the internalization of property management. The retail operating results benefited from leases executed at the Aurora, Illinois property, which increased the overall 1998 retail leased level to 95.4%. The multi-family properties experienced revenue growth of 5.6%, which reflected higher rents and stable occupancy rates. The comparable office/research and development properties experienced the largest growth in rental rates with 324,900 square feet of leases signed at an average rate increase of 77%. Industrial properties benefited from the combined impact of higher overall occupancy and rental rates that increased by 18%. Commercial leases signed in 1998 and the percentage of the commercial properties leased are as follows: 1998 Leased at Property Type Leasing November 30, 1998 ------------- ----------- ----------------- Office 244,300 97.6% Office/R&D 358,200 100.0% Industrial 242,600 97.6% Retail 121,400 95.4% -------- ------- Total 966,500 97.9% ======== ======= -18- Liquidity Shareholders' equity at November 30, 1999 was $78.8 million, compared to $256.8 million at November 30, 1998. The decrease primarily reflects the excess of liquidating distributions paid over net income pursuant to the Plan. At November 30, 1999, financial liquidity was provided by $38.2 million in cash and cash equivalents. The principal sources and uses of cash in fiscal 1999 and 1998 are summarized as follows: Sources of Cash 1999 1998 --------------- ---- ---- Trust operations $ 19,163,000 $ 30,791,000 Sales of real estate, net 445,932,000 22,274,000 Proceeds from the issuance of common shares 95,000 1,137,000 New borrowings, net of fees 46,550,000 ------------ ------------ Total $465,190,000 $100,752,000 ============ ============ Uses of Cash 1999 1998 ------------ ---- ---- Liquidating distributions $332,785,000 $ -- Real estate acquisitions 339,000 57,140,000 Dividends -- 16,766,000 Additions to real estate 6,592,000 7,482,000 Deferred tenant charges and other 1,241,000 2,665,000 Repayment of loans payable and fees 98,266,000 18,398,000 ------------ ------------ Total $439,223,000 $102,451,000 ============ ============ Loans payable totaled $4.6 million at November 30, 1999, a net decrease of $125.9 million compared to $130.5 million at November 30, 1998. During 1999, the Trust repaid a $12.3 million mortgage loan that was secured by an Illinois retail center and another $76.8 of mortgage debt was repaid or assumed by the buyers of certain properties. Additionally, at the time of the June 1999 sale of 54 New England properties, MGI repaid the $36.0 million balance outstanding on its $75 million line of credit and terminated the line. Scheduled loan principal payments associated with the remaining unsold properties due within 12 months of November 30, 1999 approximate $0.2 million. MGI has no debt which was scheduled to mature prior to the anticipated completion of the Plan. Cash requirements in 2000 will include liquidating distributions to shareholders, 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 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 November 30, 1999, 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 properties and other resources are sufficient to meet its liquidity requirements while implementing the Plan. -19- Other Inflation During the past three years, the impact of inflation on MGI's operations and investment activity has not been significant. Real Estate Considerations Real estate investments and operations are subject to a number of factors, including changes in general economic climate, local conditions (such as an oversupply of space, a decline in effective rents or a reduction in the demand for real estate), competition from other available space, the ability of the owner to provide adequate maintenance or to fund capital and tenant improvements required to maintain market position and control of operating costs. In certain markets in which the Trust owns real estate, overbuilding and local or national economic conditions have, in the past, combined to produce lower effective rents and/or longer absorption periods for vacant space. As the Trust re-leases space, certain effective rents may be less than those earned previously. Management believes its modest diversification by property type and its diverse tenant base has somewhat reduced the risks associated with these factors and has enhanced opportunities for cash flow growth and capital gains potential, although there can be no assurance thereof. Year 2000 Compliance The Year 2000 compliance issue concerns the inability of computerized information systems to accurately calculate, store or use a date after 1999. This could result in computer system failures or miscalculations causing disruptions of operations. The Year 2000 issue affects almost all companies and organizations. Prior to January 1, 2000, MGI conducted an assessment of its core internal computer information systems and believed that its internal financial and information systems were substantially Year 2000 compliant. Also, MGI evaluated those computer systems that do not relate to financial and other information needs such as systems designed to operate buildings, its telecommunications systems, security systems, energy management systems and elevator systems and determined those systems were substantially year 2000 compliant. As of this date, the Year 2000 issue has not had an adverse effect on its business. Market Risk The Trust is presently exposed to interest rate changes primarily as a result of long-term debt. The Trust's interest rate risk management objective has been to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Trust does not enter into derivative or interest rate transactions. The carrying values of financial instruments including cash and cash equivalents, accounts receivable and accounts payable, approximate fair value because of the short maturity of these instruments. The Trust's only obligation for borrowed money at November 30, 1999 totaled $4.6 million, representing 4.6% of its total assets. This is a fixed rate mortgage loan with an average rate of 7.4%. The Trust has no debt obligations subject to floating interest rates at November 30, 1999. The carrying value of long-term debt approximates its fair value, as estimated by using discounted future cash flows based on the Trust's current incremental borrowing rates for similar types of borrowing arrangements and the estimated time to complete the Plan. -20- Forward-Looking Statements This Annual Report contains 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 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 properties, 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 the definitive Proxy Statement relating to the Trust's Special Shareholders' Meeting held on October 14, 1998, which is incorporated herein by reference and filed as an exhibit hereto. Investors should review the more detailed risks and uncertainties set forth under the caption Risk Factors in this report. 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. -21- Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data are included under Item 14 of this Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. -22- PART III -------- Item 10. Directors and Executive Officers of the Registrant Trustees And Executive Officers The trustees and executive officers of the Trust and their positions with the Trust are set forth below. Name Age Position - ------------------------ --- --------------------------------- W. Pearce Coues......... 59 Chairman of the Board of Trustees and Chief Executive Officer Phillip C. Vitali....... 49 Executive Vice President, Treasurer and Chief Financial Officer Robert Ware............. 61 Executive Vice President George M. Lovejoy, Jr... 69 Trustee Robert M. Melzer........ 59 Trustee George S. Bissell....... 69 Trustee William F. Murdoch, Jr.. 69 Trustee Rodger P. Nordblom...... 72 Trustee W. Pearce Coues has been Chairman of the Board of Trustees and Chief Executive Officer of the Trust since 1982. Phillip C. Vitali has been Executive Vice President of the Trust since December 1989 and Treasurer and Chief Financial Officer of the Trust since March 1986. He was Senior Vice President of the Trust from January 1987 to December 1989. Robert Ware has been Executive Vice President of the Trust since December 1989. He was Senior Vice President of the Trust from April 1986 to December 1989. George M. Lovejoy, Jr. has been a Trustee of the Trust since 1993. He has been President since 1994 and director since 1972 of Fifty Associates, a real estate investment trust. Mr. Lovejoy was Chairman of the Board of Meredith & Grew Incorporated, a real estate brokerage and management firm, from 1988 to March 1993. He is currently a Trustee of the following mutual funds: Scudder California Tax Free Trust; Scudder Cash Investment Trust; Scudder Funds Trust; Scudder GNMA Fund; Scudder Municipal Trust; Scudder Investment Trust; Scudder Portfolio Trust; Scudder State Tax Free Trust; Scudder Tax Free Trust; Scudder U.S. Treasury Money Fund and Scudder Tax Free Money Fund; and a Director of Scudder Global High Income Fund; Shared Investment Committee Chairman, Copley Investors Limited Partnership. -23- Robert M. Melzer has been a Trustee of the Trust since 1998. Until 1999, he had been President (since 1980) and Chief Executive Officer (since 1992) of Property Capital Trust, a real estate investment trust. Mr. Melzer is a Director of Genesee & Wyoming Inc., a railroad holding company, Beacon Capital Partners, Inc., a real estate investment trust and the Cronos Group, a lessor of intermodal marine containers. George S. Bissell has been a Trustee of the Trust since 1995. He has been Chairman of the Board of Vantagepoint Funds, a mutual fund sponsored by I.C.M.A. Retirement Corp. from start-up November 1998 until November 1999 and remains a Trustee to date. Previously, he was Chairman of the Funds Board of Evergreen Funds from January 1995 to January 1998; and Chairman of the Board and Chief Executive Officer from 1979 to December 1994 of Keystone Group, Inc., an investment management firm. William F. Murdoch, Jr. has been a Trustee of the Trust since 1996. He has been a principal of Murdoch Associates, a real estate development and consulting firm, since 1990. Rodger P. Nordblom has been a Trustee of the Trust since 1984. He has been Chairman of the Board for more than five years and former President of Nordblom Company, a real estate development, advisory and management firm. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Trust's officers and trustees, and persons who own more than ten percent of a registered class of the Trust's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "Commission"). Officers, trustees and greater than ten percent shareholders are required by the Commission's regulations to furnish the Trust with copies of all Section 16(a) forms they file. During the year ended November 30, 1999, to the Trust's knowledge, all of such forms were filed in a timely manner. Board Meetings and Committees The Board of Trustees held seven meetings during the year ended November 30, 1999. There is one committee of the Board of Trustees, the Administrative-Audit Committee (the "Administrative-Audit Committee"), which in addition to fulfilling the functions of an audit committee, has supervisory responsibility for Trustee nominations, executive officer compensation, including stock options, and certain administrative matters. The Administrative-Audit Committee, which is comprised of Messrs. Lovejoy, who serves as Chairman, Melzer and Murdoch, met once during the year ended November 30, 1999. The Administrative-Audit Committee may also make recommendations to the Board of Trustees and does not have the power to bind the Trust, except that such Committee is empowered to function as the Compensation and Stock Option Committee in administering all of the Trust's stock option and stock appreciation rights plans and in determining the compensation of executive officers. The Trust's policy, effective December 1, 1999, is to pay each Trustee other than Mr. Coues (i) a $15,000 annual fee and (ii) $1,000 per Board of Trustees or committee meeting attended; provided, however, that each of the Trustees receives $500 for each committee meeting attended on the same day a Board of Trustees' meeting is held. -24- Item 11. Executive Compensation The following table sets forth all compensation awarded to, earned by or paid to the Trust's Chief Executive Officer and each of the other most highly compensated executive officers of the Trust whose compensation exceeded $100,000 for the fiscal years ended November 30, 1999, 1998 and 1997 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE(1)
Long-Term Annual Compensation Compensation Awards ------------------- ------------------- Securities Underlying All Other Name and Principal Position Year Salary Bonus(2) Options/SARs(3) Compensation(4) --------------------------- ---- ------ -------- --------------- --------------- W. Pearce Coues 1999 $290,166 $ -- -- $ 59,000 Chairman of the Board and 1998 $280,000 $150,000 160,000 $ 59,000 Chief Executive Officer 1997 $279,231 $110,000 50,000 $ 59,000 Phillip C. Vitali Executive Vice President 1999 $200,349 $ 60,000 -- $ 30,210 Treasurer and 1998 $189,231 $125,000 140,000 $ 28,500 Chief Financial Officer 1997 $179,231 $ 60,000 30,000 $ 26,885 Robert Ware 1999 $190,037 $ -- -- $ 39,000 Executive Vice President 1998 $184,462 $ 64,750 70,000 $ 39,000 1997 $177,231 $ 60,000 30,000 $ 39,000
- ---------------- (1) This table covers all executive officers receiving compensation of at least $100,000 per annum. The Table does not include columns for Other Annual Compensation, Restricted Stock Awards and Long Term Incentive Plan Payouts as there was no information to report with respect to such matters. (2) Fiscal 1997 bonuses were paid in cash used to exercise outstanding stock options (except up to 30% may have been used to pay income taxes). (3) Options awarded under the 1994 and 1997 Employee Plans may include a tandem grant of stock appreciation rights ("SARs"). An SAR is exercisable at any time the option to which it relates can be exercised, but only upon a showing of "hardship" by the optionee and upon consent of the Administrative-Audit Committee. In addition, an SAR may be exercised only if prior to or simultaneously with the exercise thereof, the optionee has exercised or exercises an equivalent number of options granted under the Trust's stock option and stock appreciation rights plans. A Hostile Change in Control, as defined in such plans, abrogates the hardship requirement and the prior or simultaneous option exercise requirement. SARs terminate when the related option is exercised. Mr. Coues was granted, in tandem with stock options, 20,000 SARs in 1998 and 12,500 SARs in 1997. Messrs. Vitali and Ware were each granted, in tandem with stock options, 17,500 SARs in 1998 and 15,000 SARs in 1997. (4) All Other Compensation is comprised of contributions to the respective Simplified Employee Pension Plan ("SEPP") applicable to each individual and amounts accrued by or payments made by the Trust to the accounts of participants in the Trust's Supplemental Retirement Plan ("SERP"). The SEPP contribution for each of Messrs. Coues, Vitali and Ware was $24,000 in each of 1999, 1998 and 1997. The SERP contribution for Mr. Coues was $35,000 in each of 1999, 1998 and 1997. The accrued SERP contribution for Mr. Vitali was $6,210 in 1999, $4,500 in 1998 and $2,885 in 1997. The SERP contribution for Mr. Ware was $15,000 in each of 1999, 1998 and 1997. -25- Option/SAR Grants in Last Fiscal Year There were no options or SARs awarded in 1999 to the Named Executive Officers during the fiscal year ended November 30, 1999. The following table sets forth certain information regarding the stock options exercised by the Named Executive Officers during the fiscal year ended November 30, 1999 and held by the Named Executive Officers as of November 30, 1999. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Underlying Unexercised Value of Unexercised Shares Options/SARs In-the-Money Options/SARs At Acquired Value At Fiscal Year-End Fiscal Year-End Name On Exercise Realized($) Exercisable/Unexercisable Exercisable/Unexercisable ---- ----------- ----------- ------------------------- ------------------------- W. Pearce Coues - $1,853,875 (1)(2) 375,439/ (1) $2,265,164/ (1) Phillip C. Vitali 10,000 $1,416,457 (1)(2) 278,011/ (1) $1,672,717/ (1) Robert Ware - $1,089,660 (1)(2) 196,000/ (1) $1,189,825/ (1)
- ------------------------ (1) Following shareholder approval of the Plan on October 14, 1998, option holders, in accordance with their option agreements, have elected, as an alternative to exercising their options, to receive in cash the excess between the per share option exercise price and the aggregate per share net liquidation proceeds to be distributed to shareholders (the "Cash Election"). These payments are only in amounts in excess of the per share option exercise price, commencing only at such time as the liquidating distributions exceed the per share option exercise price, and are payable only as and when liquidating distributions are made to shareholders. (2) These amounts were paid pursuant to the Cash Elections made by Messrs. Coues and Ware. With respect to Mr. Vitali, the value realized included, in addition to the amount paid pursuant to his Cash Election, $181,500 related to his exercise of 10,000 options. Stock Option Plans As of February 25, 2000, the Trust's executive officers and Trustees as a group (eight persons) held presently exercisable options to purchase a total of 968,475 Common Shares under all of the Trust's stock option plans at exercise prices ranging from $11.125 to $26.50 per Common Share. Of all presently exercisable outstanding options, 10,167 were granted pursuant to the 1982 Incentive Plan, 128,172 were granted pursuant to the 1988 Employee Plan, 231,939 were granted pursuant to the 1994 Employee Plan, 362,172 were granted pursuant to the 1997 Employee Plan, 21,713 were granted pursuant to the 1982 Trustees Plan, 107,309 were granted pursuant to the 1988 Trustees Plan and 107,003 were granted pursuant to the 1994 Trustees Plan. -26- Severance Plan and Program Effective June 11, 1987, and as amended on December 19, 1989, the Board of Trustees adopted a severance compensation plan for officers in the event of a "hostile takeover" (the "Severance Plan"), which includes the following events, if not approved by two-thirds of the members of the Board of Trustees in office immediately prior to the occurrence of any such event: (i) the election as Trustee(s) in any year of one or more persons not nominated by at least two-thirds of the Board of Trustees in office prior to such election; (ii) a business combination such as a merger; (iii) the acquisition of 15% or more of the voting power of the Trust's securities by any person or entity; or (iv) the failure of the Trust to qualify as a REIT for tax purposes by reason of more than 50% in value of the Trust's voting securities outstanding being held by five or fewer individuals. All full time officers who have completed a minimum of thirty-six months of continuous employment with the Trust are eligible under such Severance Plan. An eligible officer is entitled to severance benefits if (i) such individual terminates his or her employment within two years after a hostile takeover for reasons such as a reduction in compensation, discontinuance of employee benefits plans, change in duties or status and certain changes in job location or (ii) if the individual is terminated for reasons other than "just cause" as defined in such plan. The severance payment is equal to three months compensation for each twelve months of employment based on the highest total annual compensation rate earned prior to the hostile change in control (up to a maximum of 24 months of compensation payable at such rate, but 36 months in the case of Messrs. Coues, Ware and Vitali). Fringe benefits are also continued for the number of months for which compensation is paid. On August 12, 1998, the Board of Trustees, upon consultation with and pursuant to the advice of PricewaterhouseCoopers LLP ("PWC"), independent compensation consultants, adopted an executive severance program for the several tiers of key employees of the Trust in conjunction with the Board's decision to adopt a plan of complete liquidation of the Trust. Pursuant to such program, on September 17, 1998, the Trust entered into severance agreements providing for lump sum cash severance payments to certain of the Named Executive Officers, as follows: W. Pearce Coues, $860,000, Phillip C. Vitali, $472,500 and Robert Ware, $576,346. These severance agreements were entered into to further encourage such executives to remain in the employ of the Trust in connection with the Trust's efforts to maximize shareholder value. (On August 12, 1998 the Trust announced that the Board had approved a plan of complete liquidation, which plan was approved by shareholders on October 14, 1998). Such severance payments will be made, among other reasons, in any of the following events: (i) a termination of the Trust pursuant to a plan of complete liquidation, (ii) a merger in which the Trust is not the surviving entity, (iii) during any 12 month period, individuals who at the beginning of such period constitute the Board of Trustees, cease for any reason to constitute a majority thereof; or (iv) the Trust files a report or proxy statement with the SEC indicating that a change in control (as defined) has occurred. In the event of the applicability of, and in the event of payments under these severance agreements, such payments would supersede and be in lieu of rights which these executives otherwise may have to receive payments under the Severance Plan. -27- Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth information concerning ownership of the Common Shares as of February 25, 2000 by (i) each Named Executive Officer of the Trust, (ii) each Trustee of the Trust, (iii) all Named Executive Officers and Trustees of the Trust as a group, and (iv) each person who, to the knowledge of management, owned beneficially more than 5% of the Common Shares. Unless otherwise indicated, the address of each person listed below is One Winthrop Square, Boston, Massachusetts 02110. Beneficial Owner(1) Common Shares Percent of Class(2) - ------------------- Beneficially Owned ------------------- ------------------ George S. Bissell.......... 26,000(3) * Warren E. Buffett.......... 1,854,500(4) 13.5% 144 Kiewit Plaza Omaha, Nebraska 68131 W. Pearce Coues............ 506,600(5) 3.6% George M. Lovejoy, Jr...... 25,300(6) * Robert M. Melzer........... 22,500(7) * William F. Murdoch, Jr..... 26,000(3) * Rodger P. Nordblom......... 26,800(8) * Taunus Corporation......... 714,342(9) 5.2% Phillip C. Vitali.......... 317,026(10) 2.3% Robert Ware................ 246,000(11) 1.8% All Executive Officers and Trustees as a group (eight persons) ........ 1,196,226(12) 8.0% - ---------------- * Less than 1%. (1) Except as specified herein, the persons named in the table, to the Trust's knowledge, have sole voting and dispositive power with respect to all shares shown as beneficially owned by them, subject to community property laws where applicable. (2) Calculations assume that all options which are exercisable by such person within 60 days after February 12, 1999 have been exercised. (3) Includes presently exercisable options to purchase an aggregate of 25,000 Common Shares granted pursuant to the Trust's 1988 Stock Option Plan for Trustees (the "1988 Trustees Plan") and the Trust's 1994 Trustees Stock Option Plan (the "1994 Trustees Plan"). (4) Based on a Schedule 13G/A dated February 14, 2000, Warren E. Buffett beneficially owned 1,854,500 Common Shares, representing 13.5% thereof as of such date. Mr. Buffett had sole voting and dispositive power with respect to all 1,854,500 of such shares. -28- (5) Includes presently exercisable options to purchase an aggregate of 375,439 Common Shares granted pursuant to the Trust's 1982 Stock Option Plan for Trustees (the "1982 Trustees Plan"), the 1988 Stock Option and Stock Appreciation Rights Plan for Key Employees (the "1988 Employee Plan"), the 1988 Trustees Plan, the Trust's 1994 Employee Stock Option and Stock Appreciation Rights Plan (the "1994 Employee Plan"), the 1994 Trustees Plan and the Trust's 1997 Employee Stock Option, Stock Appreciation Rights and Restricted Stock Plan (the "1997 Employee Plan"). Also includes 207 Common Shares owned by Mr. Coues' wife, as to which Mr. Coues disclaims beneficial ownership. (6) Includes presently exercisable options to purchase an aggregate of 24,025 Common Shares granted pursuant to the 1988 Trustees Plan and the 1994 Trustees Plan. (7) Includes presently exercisable options to purchase an aggregate of 20,000 Common Shares granted pursuant to the 1994 Trustees Plan. (8) Includes presently exercisable options to purchase an aggregate of 25,000 Common Shares granted pursuant to the 1982 Trustees Plan, the 1988 Trustees Plan and the 1994 Trustees Plan. (9) Based on a Schedule 13G dated February 11, 2000, Taunus Corporation, a holding company ("Taunus"), beneficially owned, through its indirect wholly owned subsidiaries of Deutsche Bank Securities, Inc., Bankers Trust Company and DB Alex.Brown LLC, 714,342 Common Shares, representing 5.2% thereof as of such date. Of such Common Shares, Taunus had (i) sole voting power with respect to 712,842 of such shares and (ii) sole disposition power with respect to 714,342 of such shares. (10) Includes presently exercisable options to purchase an aggregate of 278,011 Common Shares granted pursuant to the Trust's 1982 Incentive Stock Option Plan for Key Employees (the "1982 Incentive Plan"), the 1988 Employee Plan, the 1994 Employee Plan and the 1997 Employee Plan. (11) Includes presently exercisable options to purchase an aggregate of 196,000 Common Shares granted pursuant to the 1982 Incentive Plan, the 1988 Employee Plan, the 1994 Employee Plan and the 1997 Employee Plan. (12) Includes presently exercisable options to purchase an aggregate of 968,475 Common Shares. Item 13. Certain Relationships and Related Transactions Not Applicable -29- PART IV ------- Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K (a) 1. CONSOLIDATED FINANCIAL STATEMENTS INDEX - ----- Independent Auditors' Report Financial Statements: Consolidated Balance Sheets, November 30, 1999 and 1998 Consolidated Statements of Earnings, Years ended November 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows, Years ended November 30, 1999, 1998 and 1997 Consolidated Statements of Changes in Shareholders' Equity, Years ended November 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE Financial Statement Schedule (as of or for the year ended November 30, 1999): Schedule III, Real Estate and Accumulated Depreciation Exhibit XI - Computation of Diluted Earnings per Share Exhibit XXVII - Financial Data Schedule for year ended November 30, 1999 (EDGAR filing only) Other schedules are omitted for the reasons that they are not required, are not applicable, or the required information is set forth in the financial statements or notes thereto. 3. EXHIBITS 3(a) Second Amended and Restated Declaration of Trust, incorporated by reference to Exhibit 3 of the Trust's Annual Report on Form 10-K for the fiscal year ended November 30, 1981 (the "1981 10-K"). (b) Certificate of First Amendment of Second Amended and Restated Declaration of Trust, incorporated by reference to Exhibit 3 of the 1981 10-K. (c) Certificate of Second Amendment of Second Amended and Restated Declaration of Trust, incorporated by reference to the Trust's Report on Form 8-K, filed on January 13, 1983. (d) Certificate of Third Amendment of Second Amended and Restated Declaration of Trust, incorporated by reference to Exhibit 3(d) to Amendment No. 1 to the Trust's Registration Statement on Form S-2 filed on June 7, 1985. -30- (e) Certificate of Fourth Amendment of Second Amended and Restated Declaration of Trust, dated October 17, 1986, incorporated by reference to the Trust's Annual Report on Form 10-K for the year ended November 30, 1986. (f) Certificate of Fifth Amendment of Second Amended and Restated Declaration of Trust, dated March 25, 1987, incorporated by reference to Exhibit 3(f) of the Trust's Annual Report on Form 10-K for the fiscal year ended November 30, 1987. (g) Certificate of Sixth Amendment of Second Amended and Restated Declaration of Trust, dated February 10, 1988, incorporated by reference to Exhibit 4(g) of the Trust's Registration Statement on Form S-8 filed on May 3, 1988. (h) Certificate of Seventh Amendment of Second Amended and Restated Declaration of Trust, dated June 30, 1988, incorporated by reference to Exhibit 4.8 of the Trust's Registration Statement on Form S-4 filed on November 10, 1988 (Reg. No. 33-25495). (i) Certificate of Eighth Amendment of Second Amended and Restated Declaration of Trust, dated March 27, 1989, incorporated by reference to Exhibit 3(i) of the Trust's Annual Report on Form 10-K for the fiscal year ended November 30, 1989 (the "1989 10-K"). (j) Rights Agreement, dated as of June 21, 1989 between the Trust and The First National Bank of Boston as Rights Agent, incorporated by reference to Exhibit 1 to the Trust's Registration Statement on Form 8-A, filed on June 27, 1989. (k) Certificate of Vote of the Trustees Designating a Series of Preferred Shares, dated June 21, 1989, incorporated by reference to Exhibit 3(m) of the 1989 10-K. (l) Certificate of Eleventh Amendment of Second Amended and Restated Declaration of Trust which increased the authorized number of Common Shares from 15,000,000 to 17,500,000, incorporated by reference to Exhibit B to the Trust's Quarterly Report Form 10-Q for the ended May 31, 1996. -31- (m) Certificate of Twelfth Amendment of Second Amended and Restated Declaration of Trust which increased the authorized number of Preferred Shares from 2,000,000 to 6,000,000 incorporated by reference to Exhibit B to the Trust's Quarterly Report Form 10-Q for the quarter ended May 31, 1996. (n) Certificate of Thirteenth Amendment of Second Amended and Restated Declaration of Trust. (o) By-Law, adopted on December 24, 1982 incorporated by reference to the Trust's Report on Form 8-K, filed on January 12, 1983. (p) Certificate of Amendment of By-Laws, dated March 21, 1989, incorporated by reference to the Trust's Report on Form 8-K dated March 21, 1989. (q) By-Law adopted December 18, 1997, relating to shareholder proposals and nominations, incorporated by reference to the Trust's Annual Report on Form 10-K for the year ended November 30, 1997. 10(a) Mortgage Growth Investors Incentive Stock Option Plan for Key Employees, incorporated by reference to the Trust's Definitive Proxy Statement dated March 15, 1982 (b) Mortgage Growth Investors Stock 1982 Option Plan for Trustees, incorporated by reference to the Trust's Definitive Proxy Statement dated March 15, 1982 (c) MGI Properties 1988 Stock Option and Stock Appreciation Rights Plans for Key Employees and Trustees, incorporated by reference to the Trust's Definitive Proxy Statement, dated February 19, 1988. (d) Amendment to MGI Properties' 1988 Stock Option and Stock Appreciation Rights Plan for Key Employees, dated as of December 19, 1989, incorporated by reference to Exhibit 10(f) of the 1989 10-K. (e) Amendment to MGI Properties' 1988 Stock Option Plan for Trustees, dated as of December 19, 1989, incorporated by reference to Exhibit 10(g) of the 1989 10-K. -32- (f) Amended and Restated Severance Compensation Plan, dated as of December 19, 1989, incorporated by reference to Exhibit 10(i) of the 1989 10-K. (g) MGI Properties 1994 Stock Option and Stock Appreciation Rights Plan for Key Employees and Trustees incorporated by reference to the Trust's Definitive Proxy Statement, dated February 18, 1994. (h) The Dividend Reinvestment and Share Purchase Plan of MGI Properties incorporated by reference to the Trust's Report on Form S-3, filed on July 1, 1994. (i) MGI Properties 1997 Employee Stock Option, Stock Appreciation Rights and Restricted Stock Plan, incorporated by reference to the Trust's Definitive Proxy Statement, dated February 24, 1997 (j) Credit Agreement dated April 2, 1998 among MGI Properties, as Borrower, the Financial Institutions Party thereto and their Assignees under Section 13.5(a), as Lenders, Wells Fargo Bank, National Association, as Documentation Agent, Syndication Agent, and as Arranger and BankBoston, N.A., as Administrative Agent and as Co-Arranger, incorporated by reference to Exhibit 10.1 to the Trust's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998. (k) Form of Indemnity Agreement incorporated by reference to Exhibit 99 to the Trust's Quarterly Report on Form 10-Q for the quarter ended May 31, 1998. (l) Form of Severance Agreement for Key Employees, incorporated by reference to the Trust's Current Report on Form 8-K, dated August 12, 1998. (m) MGI Properties Long Term Performance Plan, incorporated by reference to the Trust's Current Report on Form 8-K dated August 15, 1998. (n) MGI Properties Definitive Proxy Statement dated September 10, 1998 in respect of the Special Meeting of Shareholders held on October 14, 1998. -33- (o) Certificate of Fourteenth Amendment to the Trust's Declaration of Trust incorporated by reference to Exhibit 99.1 to Form 8-K filed on March 31, 1999. (p) Amendment adopted on March 26, 1999 to the By-Law adopted on December 24, 1982 incorporated by reference to Exhibit 99.2 to Form 8-K filed on March 31, 1999 (q) Amendment No. 1 to Rights Agreement, dated as of March 26, 1999, between MGI Properties and BankBoston, N.A., incorporated by reference to Exhibit 1 to the Trust's Registration Statement on Form 8-A filed on April 8, 1999. (r) Purchase and Sale Agreement dated March 12, 1999, by and among the Trust, for itself and as agent for each of the entities listed therein, and BCIA Funding Corp. incorporated by reference to Exhibit 2.2 to the Trust's Form 8-K filed on July 6, 1999 and amended on September 3, 1999. (s) Amendment to Purchase and Sale Agreement dated March 28, 1999 incorporated by reference to Exhibit 2.2 to the Trust's Form 8-K filed on July 6, 1999 and amended on September 3, 1999. (t) Second Amendment to Purchase and Sale Agreement dated May 5, 1999 incorporated by reference to Exhibit 2.3 to the Trust's Form 8-K filed on July 6, 1999 and amended on September 3, 1999. 11 Computation of Diluted Earnings per Share, included under Item 14 of this Report. 24 Auditors' consent.* -34- (b) REPORTS ON FORM 8-K: Current Report on Form 8-K dated September 3, 1999 Current Report on Form 8-K dated October 15, 1999 Current Report on Form 8-K dated November 4, 1999 Current Report on Form 8-K dated December 20, 1999 - -------- * Filed herewith. MGI Properties (the "Trust") is a Massachusetts business trust and all persons dealing with the Trust must look solely to the property of the Trust for the enforcement of any claims against the Trust. Neither the Trustees, officers, agents nor shareholders of the Trust assume any personal liability in connection with its business or assume any personal liability for obligations entered into in its behalf. -35- POWER OF ATTORNEY ----------------- MGI Properties and each of the undersigned do hereby appoint W. Pearce Coues and Phillip C. Vitali and each of them severally, its or his true and lawful attorneys to execute on behalf of MGI Properties and the undersigned any and all amendments to this Report and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. Each of such attorneys shall have the power to act hereunder with or without the other. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 28, 2000 MGI PROPERTIES (Registrant) By: /s/ W. Pearce Coues -------------------------------------------------- W. Pearce Coues, Chairman of the Board of Trustees Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date --------- ----- ---- Chairman of the Board of /s/ W. Pearce Coues Trustees and Chief Executive February 28, 2000 - --------------------------- Officer W. Pearce Coues Principal Financial Officer /s/ Phillip C. Vitali and Principal Accounting February 28, 2000 - --------------------------- Officer Phillip C. Vitali /s/ George S. Bissell Trustee February 28, 2000 - --------------------------- George S. Bissell /s/ George M. Lovejoy, Jr. Trustee February 28, 2000 - --------------------------- George M. Lovejoy, Jr. /s/ Robert M. Melzer Trustee February 28, 2000 - --------------------------- Robert M. Melzer /s/ William F. Murdoch, Jr. Trustee February 28, 2000 - --------------------------- William F. Murdoch, Jr. /s/ Rodger P. Nordblom Trustee February 28, 2000 - --------------------------- Rodger P. Nordblom -36- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS November 30, 1999 MGI PROPERTIES MGI PROPERTIES Index to Consolidated Financial Statements and Schedules Page ---- Independent Auditors' Report F - 1 Financial Statements: Consolidated Balance Sheets, November 30, 1999 and 1998 F - 2 Consolidated Statements of Earnings, Years ended November 30, 1999, 1998 and 1997 F - 3 Consolidated Statements of Cash Flows, Years ended November 30, 1999, 1998 and 1997 F - 4 Consolidated Statements of Changes in Shareholders' Equity, Years ended November 30, 1999, 1998 and 1997 F - 5 Notes to Consolidated Financial Statements F - 6 -- F - 13 Schedules and Exhibits Financial Statement Schedule (as of or for the year ended November 30, 1999): Schedule III - Real Estate and Accumulated Depreciation F - 14 -- F - 15 Exhibit XI - Computation of Diluted Earnings per Share F - 16 Other schedules are omitted as they are not required, are not applicable, or the required information is set forth in the consolidated financial statements or notes thereto. Independent Auditors' Report To the Board of Trustees and Shareholders MGI Properties: We have audited the consolidated financial statements of MGI Properties and subsidiaries (the "Trust") as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Trust's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MGI Properties and subsidiaries as of November 30, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended November 30, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As further described in footnote 1, in 1998 the Trust announced its intention, and secured shareholder approval, to liquidate its assets, distribute the proceeds to shareholders and terminate the Trust. KPMG LLP Boston, Massachusetts February 16, 2000 F-1 MGI PROPERTIES Consolidated Balance Sheets November 30, 1999 and 1998
Assets 1999 1998 ------------- ------------- Properties held for sale (notes 2, 3, 4, and 5) $ 56,310,000 $ 365,543,000 Cash and cash equivalents 38,232,000 12,265,000 Accounts receivable 747,000 5,040,000 Other assets 3,222,000 11,655,000 ------------- ------------- $ 98,511,000 $ 394,503,000 ============= ============= Liabilities and Shareholders' Equity Liabilities: Loans payable (note 5) $ 4,585,000 $ 130,517,000 Liquidating liabilities (note 6) 12,715,000 880,000 Other liabilities (note 6) 2,373,000 6,284,000 ------------- ------------- Total liabilities 19,673,000 137,681,000 ------------- ------------- Shareholders' equity (notes 7, 8 and 9): Common shares - $1 par value; 17,500,000 shares authorized; 13,774,221 issued at November 30, 1999 (13,764,221 at November 30, 1998) 13,774,000 13,764,000 Additional paid-in capital 208,363,000 208,278,000 Undistributed (distributions in excess of) net income (143,299,000) 34,780,000 ------------- ------------- Total shareholders' equity 78,838,000 256,822,000 ------------- ------------- $ 98,511,000 $ 394,503,000 ============= =============
See accompanying notes to consolidated financial statements. F-2 MGI PROPERTIES Consolidated Statements of Earnings
Year ended November 30, -------------------------------------------------------- 1999 1998 1997 -------------- -------------- -------------- Income: Rental $ 49,604,000 $ 70,338,000 $ 62,567,000 Interest 3,472,000 651,000 639,000 -------------- -------------- -------------- Total income 53,076,000 70,989,000 63,206,000 -------------- -------------- -------------- Expenses: Property operating expenses 11,398,000 16,348,000 15,384,000 Real estate taxes 5,699,000 8,134,000 7,443,000 Depreciation and amortization 1,229,000 10,379,000 10,662,000 Provision for loss on properties held for sale 11,031,000 - - Interest 6,276,000 10,122,000 9,539,000 General and administrative 2,912,000 3,592,000 3,206,000 Liquidation plan expenses 19,194,000 972,000 - -------------- -------------- -------------- Total expenses 57,739,000 49,547,000 46,234,000 -------------- -------------- -------------- Income (loss) before net gains (4,663,000) 21,442,000 16,972,000 Net gains on sale of real estate assets 159,655,000 8,375,000 3,800,000 -------------- -------------- -------------- Income before extraordinary item 154,992,000 29,817,000 20,772,000 Extraordinary item - prepayment of debt (286,000) -- (306,000) -------------- -------------- -------------- Net income $ 154,706,000 $ 29,817,000 $ 20,466,000 ============== ============== ============== PER SHARE DATA: Basic earnings $11.23 $2.17 $1.54 ====== ===== ===== Diluted earnings $11.06 $2.12 $1.51 ====== ===== ===== Weighted average shares outstanding 13,773,426 13,736,729 13,289,781 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-3 MGI PROPERTIES Consolidated Statements of Cash Flows
Year ended November 30, ----------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Cash flows from operating activities: Net income $ 154,706,000 $ 29,817,000 $ 20,466,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,229,000 10,379,000 10,662,000 Net gains (159,655,000) (8,375,000) (3,800,000) Provision for loss on properties held for sale 11,031,000 -- -- Extraordinary item 286,000 -- 306,000 Liquidating liabilities 10,030,000 880,000 -- Other operating assets and liabilities 1,536,000 (1,910,000) 1,456,000 ------------- ------------- ------------- Net cash provided by operating activities 19,163,000 30,791,000 29,090,000 ------------- ------------- ------------- Cash flows from investing activities: Acquisitions of real estate (339,000) (57,140,000) (48,000,000) Additions to real estate (1,560,000) (3,816,000) (3,114,000) Tenant improvements (5,032,000) (3,666,000) (2,669,000) Deferred tenant charges (1,468,000) (2,579,000) (2,085,000) Net proceeds from sales of real estate 445,932,000 22,274,000 15,562,000 Other 227,000 (86,000) (112,000) ------------- ------------- ------------- Net cash provided by (used in) investing activities 437,760,000 (45,013,000) (40,418,000) ------------- ------------- ------------- Cash flows from financing activities: Proceeds from sale of common shares 95,000 1,137,000 41,566,000 Repayment of loans payable (97,980,000) (18,398,000) (43,184,000) Additions to loans payable -- 46,550,000 26,500,000 Mortgage prepayment penalty (286,000) -- (306,000) Cash distributions (332,785,000) (16,766,000) (14,424,000) ------------- ------------- ------------- Net cash (used in) provided by financing activities (430,956,000) 12,523,000 10,152,000 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 25,967,000 (1,699,000) (1,176,000) Cash and cash equivalents: Beginning of year 12,265,000 13,964,000 15,140,000 ------------- ------------- ------------- End of year $ 38,232,000 $ 12,265,000 $ 13,964,000 ============= ============= =============
See accompanying notes to consolidated financial statements. F-4 MGI PROPERTIES Consolidated Statements of Changes in Shareholders' Equity
Undistributed Additional (distributions Common paid-in in excess of) shares capital net income ------------- ------------- ------------- Balance at November 30, 1996 $ 11,563,000 $ 167,185,000 $ 15,687,000 Net income -- -- 20,466,000 Dividend reinvestment and share purchase plan (note 7) 18,000 365,000 -- Distributions (note 9) -- -- (14,424,000) Sales of common shares (note 7) 2,000,000 39,075,000 -- Options exercised and other (note 8) 44,000 406,000 -- ------------- ------------- ------------- Balance at November 30, 1997 13,625,000 207,031,000 21,729,000 Net income -- -- 29,817,000 Dividend reinvestment and share purchase plan (note 7) 13,000 333,000 -- Distributions (note 9) -- -- (16,766,000) Options exercised and other (note 8) 126,000 914,000 -- ------------- ------------- ------------- Balance at November 30, 1998 13,764,000 208,278,000 34,780,000 Net income -- -- 154,706,000 Distributions (note 9) -- -- (332,785,000) Options exercised (note 8) 10,000 85,000 -- ------------- ------------- ------------- Balance at November 30, 1999 $ 13,774,000 $ 208,363,000 ($143,299,000) ============= ============= =============
See accompanying notes to consolidated financial statements. F-5 MGI PROPERTIES Notes to Consolidated Financial Statements November 30, 1999 (1) The Trust (a) Organization MGI Properties (the "Trust" or "MGI"), an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts, is a self-administered equity real estate investment trust (a "REIT") currently in the process of liquidating its assets and properties. MGI commenced operations in 1971 as a REIT. The Trust qualifies to be treated as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"). MGI directly and through its wholly-owned subsidiaries owns and operates a diversified portfolio of real estate assets. At November 30, 1999, the Trust owned seven commercial properties, consisting of approximately 920,000 square feet, and a parcel of land, as compared to 65 commercial properties and three multi-family residential properties, consisting of approximately 5.6 million square feet and 959 units, respectively, and a parcel of land, owned at November 30, 1998. (b) Plan of Liquidation On August 12, 1998, the Board of Trustees unanimously approved a Plan of Complete Liquidation and Termination of the Trust (the "Plan") and directed that the Plan be submitted to the Trust's shareholders for approval. The shareholders of the Trust approved 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. In 1999, liquidating distributions aggregated $24.16 per share (see note 9). It is presently estimated that the liquidation will be substantially completed during the quarter ending August 31, 2000, although there can be no assurance thereof and that net proceeds will be distributed on a schedule to be determined by the Board of Trustees. 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 possible transfer of assets to a liquidating trust), no assurance can be given that the Trust will not lose or terminate its status as a REIT. (2) Summary of Significant Accounting Policies (a) Consolidation The consolidated financial statements of MGI include the accounts of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (Continued) F-6 MGI PROPERTIES Notes to Consolidated Financial Statements November 30, 1999 (b) Income Taxes The Trust believes that it has operated in a manner that permits it to qualify as a REIT under the Code. In order to qualify as a REIT for tax purposes, the Trust, among other things, must distribute to shareholders at least 95% of its taxable income. It has been the Trust's policy to distribute 100% of its taxable income to shareholders; 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. (See notes 1 and 9.) (c) Real Estate As a result of the Plan, all of the Trust's real estate assets are classified as held for sale and in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, are reported at the lower of carrying amount plus capital improvements or estimated fair market value less estimated cost to sell at the balance sheet date. The Trust ceased depreciating real estate assets on October 14, 1998 based upon shareholder approval of the Plan. The Trust is engaged in an ongoing marketing program of its remaining properties and currently estimates that the liquidation will be substantially completed during the quarter ending August 31, 2000, although there can be no assurance thereof. Prior to the adoption of the Plan, real estate assets were stated at cost less depreciation. Real estate investments, excluding land costs, were previously depreciated using the straight-line method over their estimated useful lives. Tenant improvements were amortized over the shorter of their estimated useful lives or lease terms. Maintenance and repairs are charged to expense as incurred; major improvements are capitalized. (d) Revenues Rental income from leases with scheduled rent increases is recognized using the straight-line method over the life of the lease. (e) Deferred Financing and Leasing Costs Included in other assets are costs incurred in connection with financing or leasing which are capitalized and amortized using the straight-line method over the terms of the related loan or lease. Amortization of deferred financing costs is included in interest expense in the consolidated statements of earnings. Unamortized deferred costs are charged to expense upon the early termination of the lease or upon the early prepayment of the financing. (f) Statements of Cash Flows For purposes of the statements of cash flows, short-term investments with a maturity at date of purchase of three months or less are considered to be cash equivalents. (Continued) F-7 MGI PROPERTIES Notes to Consolidated Financial Statements November 30, 1999 During 1999, MGI sold 61 properties for an aggregate price of $482.3 million prior to the deduction of an aggregate $8.0 million in selling expenses and other closing adjustments paid at closing. The properties secured mortgage loans totaling $76.8 million, of which $28.0 million was assumed by the purchasers and $48.8 million repaid at closing. During 1998, the Trust sold two apartment complexes for $15.6 million. The properties secured mortgage loans totaling $10.8 million which were assigned to the purchaser at closing. During 1997, the Trust sold seven industrial properties for $14.9 million in a single transaction. The properties secured an $8.7 million loan mortgage which was assigned to the purchaser at closing. Only the cash portion of these transactions is reflected in the accompanying consolidated statements of cash flows. Cash interest payments of $6.0 million, $9.5 million and $8.7 million were made for the years ended November 30, 1999, 1998 and 1997, respectively. (g) Fair Value of Financial Instruments The Trust estimated the fair values of its financial instruments at November 30, 1999 and 1998 using discounted cash flow analysis and quoted market prices. Such financial instruments include short-term investments, U.S. Government securities, mortgage loans payable and a line of credit. The excess of the aggregate fair value of the Trust's financial instruments over their aggregate carrying amounts is not material. (h) Net Income Per Share During fiscal 1998, the Trust adopted SFAS No. 128, Earnings Per Share. Basic earnings per common share is computed based upon the weighted average number of common shares outstanding during the period. Diluted earnings per common share is based upon the weighted average number of shares outstanding during the period and includes the effect of the potential issuance of additional shares if stock options were exercised or converted into common shares. (i) Use of 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. (3) Real Estate Assets Upon shareholder approval of the plan of liquidation 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 of $50,226,000 against the original cost of real estate assets. A summary of real estate assets at November 30 follows: (Continued) F-8 MGI PROPERTIES Notes to Consolidated Financial Statements November 30, 1999 1999 1998 ------------- ------------ Land $ 25,519,000 $ 83,129,000 Buildings and improvements, net 37,061,000 272,115,000 Tenant improvements, net 3,990,000 10,299,000 Estimated loss on properties held for sale (10,260,000) - ------------- ------------ Properties held for sale $ 56,310,000 $365,543,000 ============= ============ Properties held for sale at November 30, 1999 consist of 204,000 square feet of office space and 716,000 square feet of retail space. (4) Leases All leases relating to real estate investments are operating leases; accordingly, rental income is reported when earned. Future minimum lease payments on noncancelable operating leases at November 30, 1999 are: $8.4 million in 2000, $7.8 million in 2001, $6.0 million in 2002, $4.6 million in 2003, and $26.8 million thereafter. The above amounts do not include rental income which is received under certain leases based upon tenant sales, ad valorem taxes, property operating expenses and/or costs to maintain common areas. This rental income was $7.3 million in 1999, $10.1 million in 1998 and $8.1 million in 1997. (5) Loans Payable Loans payable at November 30 follow: 1999 1998 ---- ---- Mortgage loan, maturing 2005, at an effective interest rate of 7.56% $ 4,585,000 $ 4,734,000 Mortgage loans repaid or assumed by others in 1999, maturity dates of 2000 through 2014, at effective rates ranging from 7.5% to 8.9% - 90,783,000 Amounts outstanding under the line of credit, at an effective interest rate of 6.53% at November 30, 1998 - 35,000,000 ----------- ------------ $ 4,585,000 $130,517,000 =========== ============ Weighted average interest rate 7.56% 7.75% ==== ==== Mortgage Loans The mortgage loan payable at November 30, 1999 is nonrecourse and is collateralized by a certain real estate investment having a net carrying value of $7.7 million. The loan requires monthly principal amortization and a balloon payment at maturity. (Continued) F-9 MGI PROPERTIES Notes to Consolidated Financial Statements November 30, 1999 At November 30, 1999, scheduled principal payments due in the next five years and thereafter on the mortgage loan payable are as follows: $.16 million in 2000, $.17 million in 2001, $.19 million in 2002, $.20 million in 2003, $.22 million in 2004, and $3.65 million thereafter. Line of Credit During fiscal 1998, MGI entered into a three-year $75 million unsecured syndicated credit facility which replaced two secured lines of credit that totaled $45 million. The credit facility provided for interest at either LIBOR plus 1.25% or prime. The outstanding balance on the line of credit was repaid and the credit facility was terminated in connection with a June 1999 sale of 54 properties. (6) Liabilities (a) Liquidating Liabilities In connection with the Plan, MGI has incurred and anticipates incurring a variety of costs and fees including costs related to sales, fees to advisors and other professionals, severance and incentive compensation, expenses related to stock options (see note 8), and other expenses related to the liquidation. Recognized in 1999 as part of the Plan expense was $3.2 million of severance compensation ($.4 million in 1998), of which $2.2 million was unpaid and accrued in liquidating liabilities at year end; and $15.1 million related to the election made by option holders in lieu of exercising their options (see note 8), of which $8.3 million was unpaid and accrued in liquidating liabilities at year end. Also included in liquidating liabilities was $1.8 million of accrued costs related to the 1999 sales. (b) Other Liabilities In 1991, MGI established the MGI Properties Supplemental Retirement Plan and the MGI Properties Supplemental Plan Trust (collectively, the "SERP") to supplement the retirement benefits of certain key employees. The terms of the SERP provide, among other items, for each participant to self-direct the investment activity with respect to the contributions made for the benefit of that participant. Each participant is entitled to the outstanding balance in his account upon death, disability, a change in control or termination without cause. During 1999, there were seven participants in the SERP. Included in other liabilities is the outstanding SERP balance for all remaining participants which aggregated approximately $1.0 million at November 30, 1999 and $.7 million at November 30, 1998. (7) Shareholders' Equity (a) Shelf Registration In October 1996, the Trust filed a shelf registration with the Securities and Exchange Commission to register $100 million of common shares, preferred shares, debt securities, warrants, rights or units that the Trust may issue through underwriters or in privately negotiated transactions from time to time. In January 1997, the Trust completed a public offering of 2,000,000 common shares at a price of $22 per share. (Continued) F-10 MGI PROPERTIES Notes to Consolidated Financial Statements November 30, 1999 (b) Dividend Reinvestment and Share Purchase Plan In September 1999, the Trust terminated its Dividend Reinvestment and Share Purchase Plan (the "DRIP"), which had been suspended on July 9, 1999. Prior to the July 1999 suspension of the DRIP, shareholders of record who owned 100 shares or more had the option of electing to receive, in full or in part, dividends in the form of MGI shares in lieu of cash. The price of shares purchased with reinvested dividends was at a 3% discount in the case of newly issued shares or if MGI purchased shares in the open market for the plan, the price for such shares was 100% of the average purchase price paid. Participants in the plan were allowed to make additional cash purchases of shares at the same price as shares purchased through the reinvestment of dividends. During the years ended November 30, 1998 and 1997, the Trust issued 13,456 and 18,217, respectively, common shares through its DRIP. (c) Preferred Shares At November 30, 1999 and 1998, the Trust had six million preferred shares, $1 par value authorized, of which none were issued. (8) Stock Option Plans Following shareholder approval of the Plan on October 14, 1998, option holders, in accordance with their option agreements, have elected, as an alternative to exercising their options, to receive in cash the difference between the per share option exercise price and the aggregate per share net liquidation proceeds to be distributed to shareholders (the "Cash Election"). Pursuant to the terms of the election, these cash payments are only in amounts in excess of the per share option exercise price, commencing only at such time as the liquidating distributions exceed the per share exercise price, payable only as and when liquidating distributions are made to shareholders. The Cash Election is irrevocable; however, if the Plan is abandoned by MGI, it is rescinded. Additionally, the Cash Election may be withdrawn upon the written consent of the Board of Trustees. Holders of approximately 1.5 million options with an aggregate average per share exercise price of approximately $19.84 have made the Cash Election. During 1999, liquidating distributions aggregated $24.16 per share and holders of approximately 812,000 options received, pursuant to the Cash Election, approximately $6.8 million and an additional $4.6 million was accrued, based on remaining estimated future net liquidating distributions of $5.50 per share, and recognized as liquidation expense. At November 30, 1999, there were 703,000 options with exercise prices in excess of $24.16 per share and MGI accrued and recognized an additional $3.7 million of liquidation expense associated with the Cash Election for these options, based on remaining estimated future net liquidating distributions of $5.50 per share. Under the Trust's 1997 and 1994 stock option plans for key employees and Trustees (the "Option Plans"), incentive stock options or nonqualified options and related stock appreciation rights and restricted stock awards may be granted to employees, and nonqualified options may be granted to Trustees. Under the Option Plans, options may be granted at an exercise price not less than fair market value of the Trust's common shares on the date of grant. During 1999, 10,000 options having an average exercise price of $9.475 per share were exercised. (Continued) F-11 MGI PROPERTIES Notes to Consolidated Financial Statements November 30, 1999 Prior to 1999, as provided for in the Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, the Trust applied APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost had been recognized. Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under the plans consistent with the method prescribed by SFAS No. 123, the Trust's net income and net income per share would have been reduced to the pro forma amounts indicated as follows: Year ended November 30: 1998 1997 ------------ ------------ Net income: As reported $ 29,817,000 $ 20,466,000 Pro forma $ 27,825,000 $ 19,842,000 Net income per share: Basic earnings per share $ 2.17 $ 1.54 Pro forma $ 2.03 $ 1.49 For purposes of this pro forma disclosure, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants: dividend yield of 5.7% for 1998 and 6.2% for 1997; expected volatility of 19.1% for 1998 and 24.8% for 1997; expected lives of seven years for all two years; and risk-free interest rates of 5.57% for 1998 and 6.38% for 1997. (9) Cash Distributions The Trust made cash distributions of $332.8 million in 1999, $16.8 million in 1998 and $14.4 million in 1997, which is allocated among liquidating distributions, taxable ordinary income and taxable capital gain, on a per share basis, as follows: Liquidating Ordinary Capital Taxable Distributions Income Gain Income ------------- ------ ---- ------ Year Ended November 30, 1999 $24.16 $ - $ - $ - 1998 $ - $1.08 $0.14 $1.22 1997 $ - $1.06 $0.04 $1.10 Under the provisions of the 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 used to reduce a shareholder's basis in his or her shares of MGI with any excess constituting a capital gain if the shares were held as a capital asset. If the sum of all liquidating distributions is less than a shareholder's basis, the difference will constitute a capital loss to the shareholder. (Continued) F-12 MGI PROPERTIES Notes to Consolidated Financial Statements November 30, 1999 (10) Quarterly Financial Information (Unaudited) Quarterly results of operations for the years ended November 30, 1999 and 1998 follow:
Quarter Ended --------------------------------------------------------------- 1999 February 28 May 31 August 31 November 30 ------------- ------------- ------------- ------------- Total income $ 18,811,000 $ 18,926,000 $ 10,487,000 $ 4,852,000 Total expenses 10,945,000 12,129,000 24,023,000 10,642,000 ------------- ------------- ------------- ------------- Income (loss) before net gains 7,866,000 6,797,000 (13,536,000) (5,790,000) Net (loss) gains and extraordinary item (429,000) -- 137,797,000 22,001,000 ------------- ------------- ------------- ------------- Net income $ 7,437,000 $ 6,797,000 $ 124,261,000 $ 16,211,000 ============= ============= ============= ============= Per Share Data Basic earnings $ .54 $ .49 $ 9.02 $ 1.18 === === === === Diluted earnings $ .52 $ .48 $ 8.55 $ 1.13 === === === === Quarter Ended --------------------------------------------------------------- 1998 February 28 May 31 August 31 November 30 ------------- ------------- ------------- ------------- Total income $ 16,488,000 $ 17,584,000 $ 18,277,000 $ 18,640,000 Total expenses 11,735,000 12,459,000 13,387,000 11,968,000 ------------- ------------- ------------- ------------- Income before net gains 4,753,000 5,125,000 4,890,000 6,672,000 Net gains 6,075,000 1,950,000 350,000 -- ------------- ------------- ------------- ------------- Net income $ 10,828,000 $ 7,075,000 $ 5,240,000 $ 6,672,000 ============= ============= ============= ============= Per Share Data Basic earnings $ .79 $ .51 $ .38 $ .48 === === === === Diluted earnings $ .78 $ .50 $ .37 $ .47 === === === ===
(11) Subsequent Events In February 2000, MGI sold a 107,000 square-foot retail property located in Peabody, Massachusetts for $8.3 million. In addition, MGI has entered into two agreements to sell two additional properties, a retail center located in Maryland and a retail center located in Illinois. The sale agreements are 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, engineering and environmental inspections, and approval of titles and surveys. Of these two properties, the buyer for MGI's Maryland retail center has completed its due diligence. These sales are expected to close in MGI's second quarter, although there can be no assurance that these sales will be successfully completed. F-13 MGI PROPERTIES Schedule III Real Estate and Accumulated Depreciation ------------ November 30, 1999
Gross amounts at which Initial Cost carried at close of period * --------------------------- Costs ---------------------------------------------- Building capitalized Building and subsequent to and Date Description Encumbrances Land Improvements acquisition Land Improvements Total acquired ----------- ------------ ---- ------------ ----------- ---- ------------ ----- -------- Office: - ------- Ann Arbor, MI $ - $ 686,000 $ 5,618,000 $ 1,806,000 $ 686,000 $ 5,374,000 $ 6,060,000 12/88 Tampa, FL - 2,667,000 8,980,000 983,000 2,667,000 6,183,000 8,850,000 12/88 ------------ ------------ ------------ ------------ ----------- ------------ ------------- - 3,353,000 14,598,000 2,789,000 3,353,000 11,557,000 14,910,000 ------------ ------------ ------------ ------------ ----------- ------------ ------------- Retail: - ------- Baltimore, MD - 2,000,000 5,710,000 131,000 1,832,000 4,301,000 6,133,000 7/87 Temple Terrace, FL 4,585,000 2,600,000 6,540,000 528,000 2,600,000 5,143,000 7,743,000 12/87 Aurora, IL - 12,576,000 15,372,000 4,265,000 12,576,000 14,870,000 27,446,000 5/90 Peabody, MA - 4,705,000 5,623,000 1,000 4,705,000 5,171,000 9,876,000 8/95 ------------ ------------ ------------ ------------ ----------- ------------ ------------- 4,585,000 21,881,000 33,245,000 4,925,000 21,713,000 29,485,000 51,198,000 ------------ ------------ ------------ ------------ ----------- ------------ ------------- Other - ----- Tampa, FL - 427,000 - 10,000 427,000 10,000 437,000 12/95 Mount Clemens, MI - 25,000 - - 25,000 - 25,000 7/86 ------------ ------------ ------------ ------------ ----------- ------------ ------------- - 452,000 - 10,000 452,000 10,000 462,000 ------------ ------------ ------------ ------------ ----------- ------------ ------------- 66,570,000 ------------- Provision for loss on properties held for sale - - - - - - 10,260,000** ------------ ------------ ------------ ------------ ----------- ------------ ------------- $ 4,585,000 $ 25,686,000 $ 47,843,000 $ 7,724,000 $ 25,518,000 $ 41,052,000 $ 56,310,000 ============ ============ ============ ============ =========== ============ =============
* Effective October 14, 1998, upon the adoption of the Plan, the Trust reclassified $14.7 million of accumulated depreciation and amortization related to the above properties against the original cost of real estate assets, and captioned the resulting total as "Properties held for Sale" in the accompanying balance sheets. ** The carrying amount of the properties are recorded at the lower of the sum of: the property's gross cost amount at the date of adoption of the Plan plus capital and tenant improvements since the adoption of the Plan; or the estimated property fair value less expected sales costs. The estimated fair value was derived from existing purchase and sale agreements, letters of intent to sell the property, purchase offers from third parties, conversations with sales brokers and internal valuations. F-14 Schedule III (continued) MGI PROPERTIES Real Estate and Accumulated Depreciation Years ended November 30, 1999, 1998 and 1997 A summary of real estate investments and accumulated depreciation and amortization as of and for the three years ended November 30 follows:
1999 1998 1997 --------------- -------------- -------------- Real Estate Investments Balance at beginning of year $ 365,543,000 $ 381,943,000 $ 356,024,000 Add: Investments 339,000 57,140,000 48,000,000 Building improvements 1,560,000 3,816,000 3,114,000 Tenant improvements 5,032,000 3,666,000 2,669,000 --------------- -------------- -------------- 372,474,000 446,565,000 409,807,000 Deduct: Real estate dispositions 305,904,000 30,796,000 24,046,000 Fully amortized assets and other -- -- 3,818,000 Estimated loss on properties held for sale 10,260,000 -- -- Reclassification to properties held for sale -- 50,226,000 -- --------------- -------------- -------------- Balance at end of year $ 56,310,000 $ 365,543,000 $ 381,943,000 =============== ============== ============== Accumulated Depreciation and Amortization Balance at beginning of year $ -- $ 47,158,000 $ 44,810,000 Add: Depreciation and amortization -- 9,200,000 9,874,000 Deduct: Real estate dispositions -- 6,132,000 4,292,000 Fully amortized and other -- -- 3,234,000 Reclassification to properties held for sale -- 50,226,000 -- --------------- -------------- -------------- Balance at end of year $ -- $ -- $ 47,158,000 =============== ============== ==============
The aggregate cost, net of accumulated tax basis depreciation and amortization, for Federal income tax purposes of the above investments at November 30, 1999 was approximately $61 million. Refer to note 2 of the consolidated financial statements regarding the Trust's accounting policies on real estate investments and depreciation amortization. F-15 EX-11 2 COMPUTATION OF DILUTED EARNINGS PER SHARE Exhibit XI MGI PROPERTIES Computation of Diluted Earnings per Share
Year ended November 30 ------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ Net income $154,706,000 $ 29,817,000 $ 20,466,000 $ 24,305,000 $ 14,319,000 ============ ============ ============ ============ ============ Weighted average number of common shares outstanding 13,773,426 13,736,729 13,289,781 11,540,972 11,487,677 Additional number of share equivalents assuming exercise of options 211,077 337,400 302,326 180,257 82,408 ------------ ------------ ------------ ------------ ------------ Weighted average number of shares assuming full dilution 13,984,503 14,074,129 13,592,107 11,721,229 11,570,085 ============ ============ ============ ============ ============ Diluted earnings per share $ 11.06 $ 2.12 $ 1.51 $ 2.07 $ 1.24 ============ ============ ============ ============ ============
F-16 EX-24 3 CONSENT OF INDEPENDENT AUDITORS Consent of Independent Auditors The Board of Trustees MGI Properties: We consent to incorporation by reference in the registration statements (Nos. 33-21584, 2-97270, 33-65844, 33-53433 and 33-63901) on Form S-8 of MGI Properties and subsidiaries of our report dated February 16, 2000, relating to the consolidated balance sheets of MGI Properties and subsidiaries as of November 30, 1999 and 1998, and the related consolidated statements of earnings, changes in shareholders' equity and cash flows for each of the years in the three-year period ended November 30, 1999, and related schedule, which report appears in the November 30, 1999 annual report on Form 10-K of MGI Properties and subsidiaries. KPMG LLP Boston, Massachusetts February 16, 2000 EX-27 4 R14 FINANCIAL DATA SCHEDULE FOR 1999 10-K WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 12-MOS NOV-30-1999 NOV-30-1999 38,232 000 747 000 000 3,222 56,310 000 98,511 15,088 4,585 13,774 000 000 65,064 98,511 0 53,076 000 40,432 0 11,031 6,276 (4,663) 000 (4,663) 159,655 (286) 000 154,706 11.23 11.06
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