-----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, J+n3HjxWUV1qks2eF+i95OpBKmjmNvcKLRoIVRTHNylFfGNTxDIuH7U1wcVFC03S bpMMxT5jfTEWztlOev1kFA== 0001029869-98-000080.txt : 19980203 0001029869-98-000080.hdr.sgml : 19980203 ACCESSION NUMBER: 0001029869-98-000080 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980202 SROS: NONE 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: 98519427 BUSINESS ADDRESS: STREET 1: 30 ROWES WHARF CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6173305335 MAIL ADDRESS: STREET 1: 30 ROWES WHARF 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, 1997 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 by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of January 29, 1998, the aggregate market value of the voting shares of the Registrant held by non-affiliates of the Registrant was $339,718,775. Common Shares Outstanding as of January 29, 1998: 13,721,124 The information required by Part III of Form 10-K will be incorporated by reference to a definitive proxy statement involving the election of Trustees which is expected to be filed by the Registrant pursuant to Regulation 14A within 120 days after the close of its fiscal year ended November 30, 1997. TABLE OF CONTENTS Page PART I .......................................................................1 Item 1. Business..................................................1 Item 2. Properties...............................................10 Item 3. Legal Proceedings........................................12 Item 4. Submission of Matters to a Vote 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 PART IV .....................................................................24 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................24 POWER OF ATTORNEY ...........................................................28 SIGNATURES...................................................................28 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(R) 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. 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 "Investment and Operating Policies" and "Portfolio" below and the description of dividend policy included under Item 5 of this Annual Report on Form 10-K for the year ended November 30, 1997 (the "Report"). References herein to the Trust include its wholly-owned subsidiaries. NARRATIVE DESCRIPTION OF BUSINESS - --------------------------------- MGI is a self-administered equity REIT that owns and operates a diversified portfolio of income producing real estate consisting at November 30, 1997 of 58 commercial properties and interests in five multi-family residential properties. Effective July 1997, MGI began internalizing the property management function with the objective of having its New England properties substantially under management by the end of fiscal 1998. As of November 30, 1997, 1.8 million square feet were under MGI property management. Since 1992, the Trust has focused on the commercial segment of the real estate market, specifically industrial, office/research and development and office properties located in New England. At November 30, 1997, 57%, based upon cost, of MGI's real estate assets were located in New England. The region contributed approximately 60% of the Trust property operating income for fiscal 1997 up from 51% in fiscal 1996. At the end of fiscal 1997, MGI's commercial properties were leased to 321 tenants and aggregated 5,373,000 square feet (2,048,000 industrial, 1,149,000 office research and development, 1,369,000 office and 807,000 retail). The multi-family properties consist of five residential communities aggregating 1,335 units. At November 30, 1997, the commercial and residential properties were 95.8% and 93.9% leased, respectively. The Trust, formerly known as Mortgage Growth Investors(R), was organized in 1971 as a Massachusetts common law business trust. MGI initially operated as a hybrid REIT with a significant portion of its assets invested in mortgage loans. In 1985, the Trust began the conversion to an equity REIT, which has direct ownership of income producing properties. The conversion was completed by January 1993. The Trust employs thirty-five persons. INVESTMENT AND OPERATING POLICIES - --------------------------------- The Trust's primary business objective is to increase funds from operations ("FFO"), while building additional value of its real estate investments through income growth and capital appreciation. The investment policy of the Trust in its broadest aspect is to seek income of the types permitted to a REIT under Section 856 of the Internal Revenue Code, consistent with its Declaration of Trust. Under its Declaration of Trust, the Trust is permitted to invest in a broad -1- range of real estate investments, including, but not limited to, equity interests, interests in securities, whether or not secured by mortgages, interests in rents and any other interests related to real property. The Trust's policies are subject to ongoing review by the Board of Trustees and may be modified from time to time to take into consideration changes in business or economic conditions or otherwise as circumstances warrant. The Trust seeks to achieve its primary business objective by (1) 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 will support high occupancy rates, leasing attractiveness to quality tenants and increasing rental rates and (3) the acquisition of high quality properties. The Trust's investment focus with respect to type of property has, during the last several years, been directed primarily toward the commercial segment of the New England real estate market, particularly industrial, office/research and development and office properties. MGI currently intends to continue this policy, but also intends to retain modest geographic diversity, as well as diversification by property type. Although MGI expects the percentage of its real estate portfolio represented by New England properties to increase, MGI, to a lesser extent, will consider property acquisitions in other markets in which favorable opportunities are similarly perceived and where MGI has a substantial presence or where the purchase of properties, on an individual or portfolio basis, or over time would establish such a presence. In the past, MGI has periodically changed its emphasis from one sector to another in accordance with its perception of market opportunities. MGI's philosophy has been to seek what management believes to be value-creating opportunities by frequently acquiring quality properties that have not met their full potential, at a cost believed to be below replacement value. Management believes that its investments can be actively managed to create a total return which includes current income and capital appreciation. The Trust has recently operated with an individual investment parameter of below $20,000,000 (but has exceeded and may occasionally exceed this parameter) and in most cases acquires properties at prices below $10,000,000. The successful execution of this strategy has permitted MGI to profitably dispose of assets from time to time. The decision to sell specific properties or investments involves a number of factors, including the economic climate (giving effect also to the impact of tax laws and other regulatory factors), future potential and reinvestment alternatives. As indicated above, the investment focus may change, based upon the ongoing review of the Trust's policies by the Board of Trustees. MGI's acquisition criteria generally include several of the following factors: (i) a purchase price believed to represent a discount to estimated replacement costs; (ii) well located, high quality general purpose properties; (iii) locations in market areas that allow MGI to build upon its market presence and knowledge; (iv) sellers, frequently institutions, with an objective to liquidate, not operate, real estate; (v) properties believed capable of strong total return performance; (vi) existing leases at below market rents which may enable MGI to increase rental rates as lease terms expire; (vii) vacancies or leases with near term expirations which will enable MGI to enhance revenue through the leasing of available space; and (viii) an all cash purchase where it results in a more favorable purchase price. MGI's commercial portfolio, as well as the focus of its recent acquisition activity, is generally comprised of general purpose, functional buildings rather than properties characterized by demand limited to a specific type and size of tenant. Many of the Trust's properties are easily divisible so as to accommodate users of various amounts of space. MGI frequently focuses on owning and acquiring properties located in recognized business parks or at nodes with easy access to highways and commercial areas and sufficient residential support. When it is practicable, MGI seeks to increase its presence within parks or submarket locations where its owns property because of the potential operating and tenant retention benefits. -2- MGI's leasing, maintenance and tenant and capital improvement activities are designed to attract and retain quality tenants and maintain high occupancy rates. Management believes that the internalization of the property management function with respect to its New England properties will improve service, reduce operating costs and provide a strategic competitive advantage. With regard to certain properties outside of New England, MGI believes that using local property management companies currently provides cost effective management and results in improved access to significant market information and improved tenant satisfaction as a result of the personnel dedicated solely to MGI's properties. MGI officers typically work with local property managers to actively manage these properties. Generally, MGI is directly involved in establishing the strategic direction for each property, identifying new tenants, negotiating leases, budgeting and monitoring operating performance and implementing and directing significant renovations and rehabilitations. MGI seeks to maintain a well-balanced, conservative and flexible capital structure by: (i) maintaining a conservative dividend pay-out ratio that enables MGI to both reinvest in capital and tenant improvements for existing properties and increase cash available for investment; (ii) borrowing primarily at fixed rates; (iii) extending and sequencing the maturity dates of its debt; and (iv) maintaining conservative debt service coverage ratios. Management believes that these strategies have enabled and should continue to enable the Trust to access debt and equity capital markets for its long-term investment requirements, upon satisfactory terms, although there can be no assurance thereof. As is common with any real estate owner or lender investing in equity real estate, partnerships, mortgage loans and other investments, the Trust from time to time may restructure its financial arrangements with partners, tenants or borrowers who encounter financial or other difficulties. Accordingly, the Trust, as circumstances warrant, has modified and will modify a lease, partnership, loan or other agreement if, after investigation, it is established that such modification would be economically feasible and in the best interests of the Trust. The Trust's business is limited to investments in real estate, direct or indirect, including investments in and possible future acquisitions of real estate companies, including those with development or property management capability. To the extent that the Trust has assets not otherwise invested in real estate, the Trust may invest such assets in other securities, including United States government obligations and commercial paper, so long as, in the opinion of the Trustees, such securities may be held without jeopardizing the Trust's qualification as a REIT under the Internal Revenue Code. Funds necessary to conduct operations are provided from rental and interest income, mortgaging of equity investments, lines of credit, corporate borrowings, the sale of marketable securities, loan repayments and amortization. Such operations include the Trust's continuous incurrence of costs, reimbursed and unreimbursed, for improvements and renovations of its existing properties in order to maintain and enhance their value. From time to time, as and to the extent conditions warrant, the Trust operates on a leveraged basis by incurring indebtedness in order to increase its capital available for investment when, in the Board of Trustees' judgment, the Trust will benefit thereby (see "Risk Factors -- Leverage"). There is no assurance at any given time that borrowed funds will be available or that the terms and conditions of such borrowings will be satisfactory. The Trust may employ short-term or long-term borrowings to fund some of its investments. Reference is made to Note 4 of the Notes to Consolidated Financial Statements included in Item 14 below. -3- PORTFOLIO - --------- The Trust's portfolio at November 30, 1997 consisted of investments in fifty-eight commercial properties and five multi-family residential properties. The Trust's real estate investments can be classified by type of properties and geographic location. As of November 30, 1997, the Trust's real estate investments were diversified by property type as follows:
% of Portfolio % of Based on 1997 Portfolio Property Number of Square Feet/ Based Operating % Properties Units on Cost Income Leased ---------- ----- ------- ------ ------ Industrial 18 2,048,000 19.6% 23.7% 95.4% Office/R&D 13 1,149,000 14.4% 16.9% 100.0% Office 18 1,369,000 32.6% 31.1% 95.9% Retail 6 807,000 16.7% 12.9% 90.4% Land and Other 3 -- 0.7% 0.9% 100.0% -- --------- ----- ---- ----- Total Commercial 58 5,373,000 84.0% 85.5% 95.8% ========= ===== Multi-family 5 1,335 16.0% 14.5% 93.9% -- ===== ----- ----- ===== Total Portfolio 63 100.0% 100.0% 95.4% == ===== ===== =====
As of November 30, 1997, the Trust's real estate investments were diversified by geographic region as follows:
% of Portfolio % of Based on 1997 Square Feet of Portfolio Property Number of Commercial Apartment Based Operating % Location Properties Property Units on Cost Income Leased - -------- ---------- -------- ----- ------- ------ ------ New England 44 3,987,000 -- 57.2% 59.7% 96.6% Mid-West 5 395,000 722 18.4% 19.1% 83.0% Southeast 10 637,000 376 13.8% 10.6% 97.1% Mid-Atlantic 4 354,000 237 10.6% 10.6% 99.0% -- --------- ----- ----- ----- ---- Total Portfolio 63 5,373,000 1,335 100.0% 100.0% 95.4% == ========= ===== ===== ===== ====
-4- Lease terms relating to the Trust's properties range from tenancies-at-will up to eighteen years. The Trust leases commercial space to 321 commercial tenants, including 182 office tenants, 64 retail tenants, 54 industrial tenants and 21 office/research and development tenants. Additional information concerning the Trust's mortgage and real estate investments is set forth under Item 2 and in Notes 1, 2, 3 and 4 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 depends, 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 may be a wide variety of competing investors and lenders. The Trust competes with life insurance companies, real estate investment trusts, pension funds, other financial institutions, partnerships, corporations, individuals and other business entities, both domestic and foreign. An increase in the number of competing investors and lenders and the availability of investment funds can have the effect of increasing competition for investments in real estate and reducing the yields realizable with respect to such investments. 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 by reason of the diverse make-up of the Trust's income producing properties, as well as their modest geographic diversity (as of November 30, 1997, 57% of the Trust's properties were in New England) and the diversity of their tenant base. However, recessionary economic conditions in certain regions or any adverse changes in local or national 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. Management believes, however, that by reason of the factors stated above and the Trust's financial strength and operating practices, particularly its ability to implement renovations and improvements, it will be able to maintain occupancies and, over time, increase rental income from its properties, although there can be no assurance thereof. RISK FACTORS - ------------ Leverage The Trust's obligations for borrowed money totaled $113.2 million at November 30, 1997. Although the Trust currently intends to limit the extent of its borrowing to not more than 45% 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 -5- reserve the right to increase such leverage. The Trust has been actively exploring property acquisitions in the past and expects to continue to do so in the future. In connection with these activities or in connection with the refinancing of existing indebtedness, the Trust may incur additional borrowings in the future. Increases in the Trust's leverage could increase the risk of default under its outstanding indebtedness. 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. The Trust's debt obligations subject to floating interest rates at November 30, 1997 aggregated approximately $21.3 million at a weighted average interest rate of approximately 7.2% and represented 18.8% of the Trust's outstanding debt. Significant increases in interest rates on floating rate debt would adversely affect the net income, funds from operations and cash available for distribution to shareholders. These risks may inhibit the Trust's ability to raise capital, particularly through the issuance of equity securities. Geographic Concentration The Trust's operating income and the value of its 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). At November 30, 1997, approximately 57% of MGI's real estate assets, based on cost, were located in New England, primarily in the suburban Boston area. The concentration of the Trust's assets in the New England area may increase in the near term. The Trust's performance and its ability to make distributions to shareholders is 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 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. Miscellaneous Real Estate Investment Considerations 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. The Trust's operating income and the value of its properties may be adversely affected by a number of factors, including the national economic climate; 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 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 industrial 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 properties. Significant development of office or industrial 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. -6- The Trust is 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 upon particular circumstances. 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 rates, then the Trust's cash flow and ability to make distributions to shareholders may be adversely affected. Although the Trust believes its properties are generally multi-purpose 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. In addition, the Internal Revenue Code limits the Trust's ability to sell properties held for less than four years, which may affect the Trust's ability to sell properties without adversely affecting returns to holders of Common Shares. 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 which would require significant unanticipated 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 a tenant, 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. Furthermore, protection of the Trust's investments may require foreclosure or other action leading to acquisition of title to properties underlying its mortgage loans or similar investments. As of January 29, 1998, one significant tenant (Bradlees, Inc.) is operating under Chapter 11 of the Federal Bankruptcy Code. Although its lease with the Trust has been affirmed, there can be no assurance that future operating performance will not be adversely affected by developments with respect to Bradlees, Inc. -7- Possible 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. Substantially all of the Trust's 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, nor is the Trust aware of any environmental liability with respect to its properties that it believes would 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. For example, the Trust's assessments may not reveal all environmental liabilities 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 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. 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 -8- subject. By reason of the high cost of earthquake and flood insurance and the fluctuations in price and availability, management has determined that the risk of loss due to earthquake and flood does not currently justify the cost of such coverage, however, management may periodically reconsider its position. ADVERSE CONSEQUENCE 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 be able to continue to operate in a manner so as to qualify or remain so qualified. 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 distributions to shareholders equal to 95% of its REIT taxable income (excluding net capital gains). Further, 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 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 failure to qualify as a REIT may also constitute a default under certain Trust indebtedness. -9- Item 2. Properties. The following table sets forth certain information concerning the Trust's properties at November 30, 1997.
- ------------------------------------------------------------------------------------------------------------------------------------ Net Carrying Value Weighted Scheduled lease Number Per Percentage Average Expirations of Lease INDUSTRIAL Sq. Ft. Dollars Sq. Ft. Leased Rent 1998 1999 Tenants Principal Tenant Expiration - ------------------------------------------------------------------------------------------------------------------------------------ Distribution and Manufacturing Wilmington, MA 294,000 $ 6,662,000 $22.66 100% $ 4.07 14% -- 3 Avon Dispatch, Inc. 05/31/00 N. Charleston, SC 191,900 2,184,000 11.38 100% 2.35 100% -- 1 Mill Transportation 12/31/97 Northborough, MA 102,300 2,224,000 21.75 100% 3.89 -- -- 2 Filene's Basement 09/15/01 Franklin, MA 65,300 3,108,000 47.60 -- -- -- -- -- Flex Tewksbury, MA 189,200 10,696,000 56.53 100% 8.45 -- -- 1 Avid Technology, Inc. 06/30/10 Nashua, NH 150,300 5,104,000 33.96 81% 4.50 16% 15% 7 Logicraft, Inc. 12/31/00 Wilmington, MA 109,500 4,313,000 39.39 100% 5.40 8% -- 3 United Shoe Machinery 12/31/01 Westford, MA 107,600 3,435,000 31.92 100% 3.50 -- 100% 1 Mack Technologies, Inc. 11/30/98 Methuen, MA 106,800 4,774,000 44.70 100% 5.28 -- -- 2 Microtouch Systems, Inc. 04/30/03 Wilmington, MA 100,200 2,405,000 24.00 100% 3.94 -- 52% 2 Datawatch Corporation 04/30/99 Thermo Instruments Franklin, MA 100,000 4,962,000 49.62 100% 5.94 -- -- 1 Systems 01/31/98 Nashua, NH 98,100 3,135,000 31.96 100% 3.97 9% 54% 11 Pure Distributors, Inc. 02/14/00 Bedford, MA 93,200 2,429,000 26.06 100% 6.32 -- 19% 3 Imaging Technology, Inc. 07/31/01 Chromatic Technologies, Franklin, MA 83,600 3,699,000 44.24 100% 5.40 -- -- 2 Inc. 06/30/02 Andover, MA 82,500 4,500,000 54.55 100% 5.60 7% 9% 5 LANcity Corporation 04/30/01 Marlborough, MA 75,000 3,087,000 41.16 100% 6.51 25% -- 4 The Concorde Group 09/30/02 Marlborough, MA 59,400 2,272,000 38.24 100% 5.16 59% -- 4 Diebold Incorporated 11/30/02 Separation Methuen, MA 38,700 1,734,000 44.81 100% 5.66 50% -- 2 Technologists, Inc. 12/31/01 - ------------------------------------------------------------------------------------------------------------------------------------ Total 2,047,600 $70,723,000 $34.54 95% $ 4.92 17% 13% 54 - -------------------------------------------------------------- --------------------------------------------------------------------- OFFICE/RESEARCH & DEVELOPMENT - ------------------------------------------------------------------------------------------------------------------------------------ Tewksbury, MA 140,000 $ 8,631,000 $61.65 100% $ 9.30 -- -- 1 Avid Technology, Inc. 06/30/10 Andover, MA 128,400 6,017,000 46.86 100% 5.00 -- 100% 1 Hewlett-Packard Company 07/31/99 Billerica, MA 122,300 4,487,000 36.69 100% 4.67 -- -- 1 Precision Robots, Inc. 07/31/01 Chelmsford, MA 108,600 4,431,000 40.79 100% 7.02 -- -- 2 Telebit, Inc. 12/31/99 Andover, MA 105,500 6,661,000 63.14 100% 11.60 -- 100% 1 ISI Systems, Inc. 04/30/99 Billerica, MA 100,000 4,002,000 40.01 100% 5.09 100% -- 1 Bay Networks, Inc. 12/02/97 Chelmsford, MA 70,900 1,887,000 26.62 100% 5.86 37% -- 4 Schafer Corporation 07/31/98 Atex Media Solutions, Bedford, MA 70,600 2,085,000 29.54 100% 3.50 -- -- 1 Inc. 07/31/98 Littleton, MA 66,500 2,263,000 34.02 100% 5.58 62% -- 4 X-Rite, Inc. 12/31/02 Andover, MA 60,600 3,890,000 64.19 100% 6.75 -- -- 1 Cabletron Systems, Inc. 05/31/01 Billerica, MA 60,000 1,934,000 32.24 100% 4.75 -- -- 1 Bay Networks, Inc. 03/30/00 Westford, MA 59,700 3,458,000 57.93 100% 5.22 48% -- 2 Hewlett-Packard Company 05/14/00 Billerica, MA 56,300 1,907,000 33.87 100% 3.80 -- -- 1 Bay Networks, Inc. 12/31/99 - ------------------------------------------------------------------------------------------------------------------------------------ Total 1,149,400 $51,653,000 $44.94 100% $ 6.32 17% 20% 21 - ------------------------------------------------------------------------------------------------------------------------------------
-10-
- ----------------------------------------------------------------------------------------------------------------------------------- Net Carrying Value Weighted Scheduled lease Number Per Percentage Average Expirations of Lease OFFICE Sq. Ft. Dollars Sq. Ft. Leased Rent 1998 1999 Tenants Principal Tenant Expiration - ----------------------------------------------------------------------------------------------------------------------------------- Distribution and Manufacturing Somerset, NJ 178,600 $ 14,298,000 $ 80.06 98% $16.71 8% 1% 13 Merrill Lynch 06/30/00 Portland, ME 149,200 16,488,000 110.51 99% 18.93 1% 5% 13 UNUM Life Insurance Co. 01/31/01 Tampa, FL 122,400 8,904,000 72.74 92% 11.55 8% 8% 18 Olsten Kimberly Quality Care 02/28/02 Boston, MA 111,000 10,063,000 90.66 94% 24.95 3% -- 5 Cambridge Associates, Inc. 12/31/02 Northeast Energy Framingham, MA 108,000 7,022,000 65.02 92% 19.79 2% 10% 26 Services, Inc. 05/31/01 Portland, ME 104,600 11,959,000 114.33 98% 18.78 9% 7% 10 People's Heritage Bank 07/31/04 Andover, MA 97,800 7,594,000 77.65 97% 15.74 -- 15% 12 Computer Associates 12/31/02 Ann Arbor, MI 81,700 6,295,000 77.05 100% 12.33 -- 13% 2 Comshare 02/28/05 Farmington, CT 68,100 5,597,000 82.19 93% 15.52 -- -- 4 McGraw-Hill Companies, Inc. 07/31/00 Nashua, NH 66,200 4,605,000 69.55 95% 11.58 32% 25% 13 Hesser, Inc. 08/31/98 Greenville, SC 49,100 1,986,000 40.44 100% 10.22 28% 17% 28 S.C. Tax Commision 06/30/01 Greenville, SC 46,300 1,425,000 30.79 100% 11.16 26% 35% 6 S.C. Voc. Rehab. Dept. 11/30/98 Glastonbury, CT 40,900 3,836,000 93.79 100% 20.38 56% 44% 4 Hewlett-Packard Company 03/31/98 Glastonbury, CT 39,900 3,652,000 91.53 100% 16.94 -- -- 4 Equator U.S.A., Inc. 12/31/99 Nashua, NH 36,000 2,269,000 63.03 73% 13.22 34% 23% 8 Conway Quality, Inc. 12/31/97 Boston, MA 27,100 1,610,000 59.42 92% 17.61 27% -- 10 N. E. Realty Resources, Inc. 11/03/03 Nashua, NH 26,000 1,557,000 59.92 97% 13.49 66% 8% 4 Promis Systems Corp. 05/31/98 Novacare Orthotics Charlotte, NC 16,100 896,000 55.67 100% 14.52 47% -- 2 Prosthetics East 12/31/01 - ------------------------------------------------------------------------------------------------------------------------------------ Total 1,369,000 $110,056,000 $ 80.39 96% $16.46 11% 10% 182 - ------------------------------------------------------------------------------------------------------------------------------------ RETAIL - ------------------------------------------------------------------------------------------------------------------------------------ Aurora, IL 313,100 $25,892,000 $ 82.69 78% $ 8.04 17% 2% 22 Best Buy 01/31/11 Baltimore, MD 134,800 6,268,000 46.50 100% 6.21 3% 9% 14 Kmart Corp. 11/30/05 Nashville, TN 111,400 3,551,000 31.88 99% 5.05 -- 3% 9 Burlington Coat Factory 01/31/10 Peabody, MA 106,900 9,999,000 93.53 100% 11.75 -- -- 1 Bradlees, Inc. 10/31/15 Temple Terrace, FL 100,500 7,694,000 76.56 91% 9.80 5% 4% 17 Publix Super Market, Inc. 11/30/06 Hagerstown, MD 40,200 1,350,000 33.60 100% 5.22 -- -- 1 Giant Food Stores, Inc. 12/31/04 - ------------------------------------------------------------------------------------------------------------------------------------ Total 806,900 $54,754,000 $ 67.86 90% $ 7.86 8% 3% 64 - ------------------------------------------------------------------------------------------------------------------------------------ Net Carrying Value Percentage APARTMENT Units Dollars Per unit Leased - ------------------------------------------------------------------------------------------------------------------------------------ Harrison Township, MI 376 $ 8,351,000 $22,209 89% Bloomfield Hills, MI 346 13,426,000 38,804 94% Tampa, FL 264 7,347,000 27,832 97% Laurel, MD 237 10,857,000 45,806 97% Tampa, FL 112 4,845,000 43,258 97% - ------------------------------------------------------------------------------------------------------------------------------------ Total 1,335 $44,826,000 $33,577 94% - ------------------------------------------------------------------------------------------------------------------------------------ Net Carrying Value LAND AND OTHER Dollars - ------------------------------------------------------------------------------------------------------------------------------------ Portland, ME $2,321,000 Tampa, FL 427,000 Mount Clemens, MI 25,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total $2,773,000 - ------------------------------------------------------------------------------------------------------------------------------------
-11- Reference is made to Notes 1, 2 and 3 in the Notes to the Consolidated Financial Statements and Schedule III of the Financial Statement Schedule 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. The building is owned by the Trust and, accordingly, no rent expense or rental income has been recorded since the Trust commenced occupying the space in April 1996. 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 their property 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 1997 High Low Dividends - ----------- ---- --- --------- First Quarter $22 3/4 $20 1/8 $.27 Second Quarter $22 3/8 $20 3/8 $.27 Third Quarter $23 5/8 $20 3/4 $.28 Fourth Quarter $25 3/8 $22 1/8 $.28 Sales Price ---------------------------- Fiscal 1996 High Low Dividends - ----------- ---- --- --------- First Quarter $17 1/4 $15 7/8 $.24 Second Quarter $17 1/2 $16 1/4 $.24 Third Quarter $18 5/8 $16 5/8 $.25 Fourth Quarter $20 3/8 $18 1/8 $.25 On December 18, 1997, the Board of Trustees declared a dividend of $.29 per share payable on January 16, 1998 to shareholders of record on January 8, 1998. Future dividends will be determined by the Trust's Board of Trustees and will 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 dividends 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 January 29, 1998) - -------------- ------------------------ Common Shares, $1.00 2,304 par value -13- Item 6. Selected Financial Data
=============================================================================================================================== Year Ended November 30, --------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Rental income $ 62,567,000 $ 54,507,000 $ 44,875,000 $ 43,486,000 $ 36,185,000 Property operating expenses and real estate taxes (22,827,000) (20,589,000) (17,423,000) (17,392,000) (14,284,000) - ------------------------------------------------------------------------------------------------------------------------------- Property operating income 39,740,000 33,918,000 27,452,000 26,094,000 21,901,000 Interest income 639,000 421,000 514,000 394,000 713,000 Less expenses: Depreciation and amortization 10,662,000 9,463,000 8,339,000 8,116,000 7,407,000 Interest 9,539,000 9,198,000 5,807,000 5,781,000 5,059,000 General and administrative 3,206,000 2,873,000 2,651,000 2,580,000 2,191,000 - ------------------------------------------------------------------------------------------------------------------------------- Income before net gains 16,972,000 12,805,000 11,169,000 10,011,000 7,957,000 Net gains and extraordinary item 3,494,000 11,500,000 3,150,000 4,480,000 -- - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 20,466,000 $ 24,305,000 $ 14,319,000 $ 14,491,000 $ 7,957,000 =============================================================================================================================== Net income per share $1.54 $2.11 $1.25 $1.26 $ .75 =============================================================================================================================== Dividends per share $1.10 $ .98 $ .90 $ .86 $ .81 =============================================================================================================================== Funds from operations $ 27,526,000 $ 22,169,000 $ 19,492,000 $ 18,111,000 $ 15,346,000 =============================================================================================================================== Weighted average shares outstanding 13,289,781 11,540,972 11,487,677 11,450,451 10,574,104 =============================================================================================================================== SUMMARY OF FINANCIAL POSITION Investments in real estate, at cost $381,943,000 $356,024,000 $293,469,000 $267,530,000 $258,663,000 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $362,044,000 $339,664,000 $274,651,000 $255,971,000 $246,700,000 - ------------------------------------------------------------------------------------------------------------------------------- Mortgage loans payable $113,171,000 $138,547,000 $ 84,506,000 $ 70,954,000 $ 66,949,000 - ------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity $242,385,000 $194,435,000 $180,540,000 $176,095,000 $171,039,000 ===============================================================================================================================
Note: 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 owns and operates a diversified portfolio of income producing real estate consisting of 58 commercial properties and five multifamily residential properties. Since 1992, the Trust has focused on the commercial segment of the real estate market, specifically industrial and office properties located in New England. At November 30, 1997, 57%, based upon cost, of MGI's real estate assets were located in New England. The region contributed approximately 60% of the Trust's property operating income for fiscal 1997 up from 51% in fiscal 1996. This percentage will likely grow in 1998 as the Trust continues to acquire properties within New England, and as it periodically sells properties in other regions.
New England Other Regions - --------------------- ------------------------------------------ ------------------------------------------ Property Type Number Total Cost Sq. Feet Number Total Cost Sq. Feet - --------------------- ------------------------------------------ ------------------------------------------ Office 12 $ 79,555,000 875,000 6 $ 44,983,000 494,000 Industrial 17 71,649,000 1,856,000 1 3,075,000 192,000 Office/R&D 13 54,841,000 1,149,000 -- -- -- Retail 1 10,329,000 107,000 5 53,518,000 700,000 Multi-family -- -- -- 5 61,219,000 -- Land and Other 1 2,321,000 -- 2 453,000 -- ------------------------------------------ ------------------------------------------ Total 44 $ 218,695,000 3,987,000 19 $ 163,248,000 1,386,000 == ============ ========== == ============ =========
The multi-family properties consist of five residential communities aggregating 1,335 units. At November 30, 1997, the commercial and residential properties were 95.8% and 93.9% leased, respectively. During 1997 the Trust acquired 13 properties, which were all located in New England, totaling 921,000 square feet for an aggregate cost of $48.0 million. In addition, the Trust sold a partnership interest and nine properties: seven industrial properties located in St. Louis, Missouri, one office building located in Naperville, Illinois and a small Boston, Massachusetts office building. RESULTS OF OPERATIONS 1997 Compared to 1996 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. Net income for 1996 of $24.3 million, or $2.11 per share, included net gains of $11.5 million, which resulted from the sale of three industrial buildings as well as the sale of a partnership interest. Income before net gains increased from $12.8 million in 1996 to $17.0 million in 1997. - 15 - Funds from operations ("FFO") totaled $27.5 million for fiscal 1997, compared to $22.2 million in 1996. 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 unconsolidated partnerships and joint ventures. MGI believes FFO is an appropriate supplemental measure of operating performance. The following is a reconciliation of net income to funds from operations: Year Ended November 30, ----------------------- 1997 1996 ---- ---- Net income $20,466,000 $ 24,305,000 Less net gains and extraordinary item (3,494,000) (11,500,000) Plus building depreciation 8,385,000 7,337,000 Plus tenant improvement and commission amortization 2,169,000 2,027,000 ----------- ----------- Funds from operations $27,526,000 $ 22,169,000 ========== =========== The $4.2 million increase in income before net gains from 1996 to 1997 resulted principally from a $5.8 million increase ( $33.9 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 and depreciation and amortization expense. The increase in interest expense of $0.3 million was due primarily to debt incurred in connection with the acquisition of properties. Depreciation and amortization increased by $1.2 million, reflecting the greater number of properties owned. Additionally, general and administrative costs increased by $0.3 million, primarily reflecting higher personnel costs. Interest income increased by $0.2 million, reflecting higher average cash balances. The change in 1997 FFO, when compared to 1996, is attributable to the same factors that affected income before net gains in such periods, excluding the effect of changes in depreciation and amortization expense. The change in property operating income from 1996 to 1997 reflects improved results from comparable properties (which is defined as properties owned throughout both 1996 and 1997), as well as the effect of the sale and acquisition of properties, as detailed below:
Net Change in Property Properties Held 1997 and 1996 1997 and 1996 Operating Property Type Both Years Acquisitions Sales Income - ------------- ---------- ------------ ------------------- -------------- Office $ 491,000 $2,912,000 $ 28,000 $3,431,000 Industrial 64,000 2,115,000 (647,000) 1,532,000 Office/R&D (78,000) 881,000 -- 803,000 Multi-family 286,000 -- -- 286,000 Retail 34,000 -- -- 34,000 Land and Other (122,000) 218,000 (360,000) (264,000) --------- ---------- --------- ---------- Total $ 675,000 $6,126,000 $(979,000) $5,822,000 ======= ========= ======== =========
- 16 - The increase in property operating income from comparable properties largely reflects leasing completed during 1997, particularly at properties located in Massachusetts where leases totaling 469,000 square feet were executed at substantially higher rents. Base rents on leases signed or renewed in 1997 are expected to generate approximately $1.2 million of additional revenues in fiscal 1998 as such leases become effective. For the comparable office properties, rents from leases executed in 1997 are, in aggregate, 27% higher than rents previously in place. Retail operating results were relatively unchanged from 1996. Nevertheless, the combination of retail leases executed in 1997 and year to date in fiscal 1998, at the Aurora, Illinois property should positively impact this segment based upon scheduled expirations. Bradlees, Inc., which, pursuant to Chapter 11 of the Federal Bankruptcy Code, affirmed its lease at the Peabody, Massachusetts store owned by MGI, has obtained an extension to submit a reorganization plan until August 1998. The multi-family properties experienced revenue growth of 4%, which reflected higher rental rates offset by a slight decline in occupancy at two Michigan apartment properties. Property operating income from the office/r&d and industrial properties combined did not change significantly from fiscal 1996 but should benefit in fiscal 1998 from recently executed leases. Subsequent to the end of fiscal 1997, the Trust completed the sale of a 102,000 square-foot industrial property located in Northborough, Massachusetts and realized a gain of $1.3 million. In addition, the Trust has executed contracts for the sale of two Florida apartment complexes, a South Carolina industrial property and a Nashville, Tennessee retail property, although the sales are subject to the satisfactory completion of certain terms and conditions, including due diligence by the potential purchasers. With the completion of the pending sale of the South Carolina industrial property, all of the Trust's office/r&d and industrial properties will be located in New England. Commercial leases signed in 1997, the percentage of the commercial properties leased and scheduled commercial lease expirations in 1997 and 1998 (in square feet) are as follows: 1997 Leased at Scheduled Expirations Property Type Leasing November 30, 1997 1998 1999 - ------------- ------- ----------------- -------- -------- Industrial 490,200 95.4% 355,500 260,300 Office/R&D 173,500 100.0% 196,000 233,900 Office 282,300 95.9% 156,400 131,600 Retail 58,500 90.4% 61,800 25,400 ------- ------- -------- -------- Total 1,004,500 95.8% 769,700 651,200 ========= ======= ======= ======= The 1997 leasing includes 340,000 square feet for properties that were sold during 1997. With regard to the leasing for properties owned at the end of the year, lease renewals totaled 299,000 square feet, leases signed with new tenants totaled 308,000 square feet and leases related to space that was vacant as of December 1, 1996 totaled 57,000 square feet. Scheduled expirations in 1998 represent 14.3% of the Trust's total commercial square feet at November 30, 1997, compared to scheduled expirations in 1997 of 478,400 square feet, which represented 11.7% of the Trust's total commercial square feet at November 30, 1996. The fiscal 1998 expirations are scheduled as follows: 418,000 square feet in the first quarter, 57,000 square feet in the second quarter, 152,000 square feet in the third quarter and 143,000 square feet in the fourth quarter. In the Trust's Massachusetts portfolio, leases relating to 339,200 and 444,500 square feet are scheduled to expire in 1998 and 1999, respectively, which management believes are subject to rents that are generally below the current market. - 17 - Subsequent to 1997, the Trust executed leases for 45,000 square feet of vacant space and for 50,000 square feet scheduled to expire in 1998 at Yorkshire Plaza in Aurora, Illinois. Regarding an office/r&d building located in Billerica, Massachusetts, MGI elected to enter into an early termination of a lease which was expiring in 1998, and signed a new lease for 100,000 square feet. The space was vacated early in December and, following completion of tenant improvements, the new tenant is expected to begin occupancy at the start of the second quarter of 1998 at a materially increased rental rate. In addition, a lease was executed for a 65,300 square-foot industrial building, located in Franklin, Massachusetts, that was vacant at November 30, 1997. 1996 Compared to 1995 Net income for 1996 of $24.3 million, or $2.11 per share, included net gains of $11.5 million, which resulted from (i) the sale of three industrial buildings, and (ii) the sale of the Trust's partnership interest in a San Bruno, California apartment complex. The sale of the partnership interest resulted in a gain of $9.4 million, which included a previously deferred gain of $3.7 million. Net income for 1995 was $14.3 million, or $1.25 per share, which included net gains from property sales of $3.2 million. Income before net gains increased from $11.2 million in 1995 to $12.8 million in 1996. FFO in 1996 totaled $22.2 million compared to $19.5 million in 1995. The following is a reconciliation of net income to FFO: Year Ended November 30, ----------------------- 1996 1995 ---- ---- Net income $ 24,305,000 $14,319,000 Less net gains (11,500,000) (3,150,000) Plus building depreciation 7,337,000 6,840,000 Plus tenant improvement and commission amortization 2,027,000 1,483,000 ----------- ----------- Funds from operations $ 22,169,000 $19,492,000 ============ =========== The increase in income before net gains from 1995 to 1996 resulted principally from a $6.5 million increase in property operating income (which is defined as rental and other income less property operating expenses and real estate taxes), offset by increases in interest and depreciation expense. The increase in interest expense of $3.4 million was due primarily to debt incurred in connection with the acquisition of properties. Depreciation and amortization increased by $1.1 million, reflecting the greater number of properties owned. Additionally, general and administrative costs increased by $0.2 million, primarily reflecting higher personnel costs. The change in 1996 FFO, when compared to 1995, is attributable to the same factors that affected income before net gains in such periods, excluding the effect of changes in depreciation and amortization expense. - 18 - The change in property operating income from 1995 to 1996 reflects improved results from comparable properties (which is defined as properties owned throughout both 1995 and 1996), as well as the effect of the sale and acquisition of properties as detailed below. Income growth from comparable properties is largely due to improved performance from the Trust's comparable office properties, which generally experienced lower vacancy and slightly higher rental rates, offset in part by increased operating expenses. Net Change ---------- 1996 and 1995 comparable properties $ 615,000 1996 and 1995 acquisitions 7,346,000 1996 and 1995 sales (1,495,000) ---------- Total $ 6,466,000 ========= The following table describes the changes in property operating income from 1995 to 1996 attributable to the Trust's different property types, including a breakdown of New England and non-New England properties: Non- New England New England Property Type Properties Properties Net Change - ------------- ---------- ---------- ---------- Industrial $2,478,000 $ (174,000) $ 2,304,000 Office/R&D 1,767,000 -- 1,767,000 Office 1,820,000 675,000 2,495,000 Multi-family -- (1,055,000) (1,055,000) Retail 1,048,000 26,000 1,074,000 Land and Other 149,000 (268,000) (119,000) -------- ----------- --------- Total $7,262,000 $ (796,000) $ 6,466,000 ========= ======= ========= New England properties represented approximately 50% of total operating income for the year ended November 30, 1996. The changes in industrial and office/research and development property operating income relating to New England properties was primarily due to the increase in the number of properties owned in New England. The increase in office property operating income relating to New England properties was primarily due to the Portland Square, Portland, Maine acquisition, which contributed $1.4 million to the net change. The increase in the retail segment was largely due to the contribution of the Bradlees, Inc. store in Peabody, Massachusetts, which began paying rent in November 1995, following the affirmation of its lease under Chapter 11 of the Federal Bankruptcy Code. The primary factor in the decline in property operating income from industrial properties located outside of New England was a decrease from an overall 100% leased rate at November 30, 1995 to an overall 98% leased rate at November 30, 1996. Higher revenues from the non-New England office buildings contributed to the increase in office property operating income. The decrease in operating income from 1995 to 1996 in the multi-family segment is largely due to the sale of the Posada del Rey Apartments in Metairie, Louisiana in September 1995. The decrease in property operating income from the non-New England other properties was directly related to the sale of a partnership interest in a San Bruno, California apartment complex. - 19 - LIQUIDITY Shareholders' equity at November 30, 1997 was $242.4 million, compared to $194.4 million at November 30, 1996. The increase primarily reflects the net proceeds of $41.6 million from an equity offering of 2,000,000 common shares and other shares issued as well as the excess of net income over distributions paid. At November 30, 1997, financial liquidity was provided by $14.0 million in cash and cash equivalents and by $29.5 million available under lines of credit aggregating $45.0 million. The principal sources and uses of cash in 1997 are summarized as follows: Sources of Cash --------------- Trust operations $ 29,100,000 Sales of real estate, net 15,600,000 Proceeds from the issuance of common shares 41,600,000 New borrowings, net of fees 26,500,000 ---------- Total $112,800,000 =========== Uses of Cash ------------ Real estate acquisitions $ 48,000,000 Dividends 14,400,000 Additions to real estate 5,800,000 Repayment of mortgage loans payable 43,200,000 Other 2,600,000 ------------ Total $114,000,000 =========== During 1997 the Trust acquired 13 properties totaling 921,000 square feet for an aggregate cost of $48.0 million. In addition, the Trust sold a partnership interest and nine properties that had an aggregate net book value of $24.0 million. A summary of the 1997 real estate acquisitions is as follows:
Square Property Type Location Date Acquired Feet Cost - ------------- -------- ------------- ---- ---- Industrial Methuen, Massachusetts 12/96 106,800 $ 4,855,000 Methuen, Massachusetts 12/96 38,700 1,762,000 Westford, Massachusetts 3/97 107,600 3,481,000 Andover, Massachusetts 5/97 82,500 4,543,000 Nashua, New Hampshire 9/97 150,300 5,119,000 Nashua, New Hampshire 9/97 98,100 3,145,000 Office / R&D Westford, Massachusetts 4/97 59,700 3,494,000 Office Glastonbury, Connecticut 4/97 40,900 3,884,000 Glastonbury, Connecticut 4/97 39,900 3,670,000 Nashua, New Hampshire 9/97 66,200 4,620,000 Nashua, New Hampshire 9/97 36,000 2,267,000 Nashua, New Hampshire 9/97 26,100 1,563,000 Farmington, Connecticut 11/97 68,100 5,597,000 ------- ----------- Total 920,900 $48,000,000 ======= ===========
- 20 - Mortgage loans payable totaled $113.2 million at November 30, 1997, a net decrease of $25.4 million, compared to $138.5 million at November 30, 1996. The Trust utilized $28.0 million of the offering proceeds to repay the outstanding balances on its lines of credit and subsequently, increased the line by $15.5 million in connection with property acquisitions. In connection with the St Louis property sales, an $8.7 million mortgage loan was assigned to the purchaser. In addition, the Trust refinanced a $12.3 million, 9.3% mortgage loan with an $11.0 million loan bearing interest at a rate of 8.12%. The balance of the change represents scheduled principal payments. Scheduled loan principal payments due within twelve months of November 30, 1997 total $18.4 million, which includes $15.5 million of the Trust's lines of credit. MGI believes it will continue to be able to extend or refinance maturing mortgage loans upon satisfactory terms. Subsequent to November 30, 1997, the Trust closed on a ten-year, $11.6 million fixed rate non-recourse loan bearing interest at a rate of 7.12% and also signed a commitment letter for a $75.0 million unsecured revolving credit facility. Cash requirements in 1998 will include distributions to shareholders, capital and tenant improvements and leasing expenditures. During 1997, expenditures for capital and tenant improvements totaled $3.1 million and $2.7 million, respectively. Included in the amount for capital improvements were $1.4 million of costs associated with building renovations. During 1998, budgeted capital expenditures are anticipated to aggregate $2.6 million. Tenant improvements relating to anticipated leasing activity are budgeted at $3.9 million in 1998, of which $1.6 million relates to recently executed leases. Sources of funds in the future are expected to be from property operations, mortgaging or refinancing of existing mortgages on properties, borrowing under MGI's lines of credit and MGI's portfolio of investment securities. Other potential sources of funds include the proceeds of public or private offerings of additional equity or debt securities or the sale of real estate investments. It is presently anticipated that the purchase of additional properties in 1998 will be primarily financed by debt and, to a lesser extent, by cash flow from operations, short-term investments and the proceeds, if any, from the sale of real estate or of equity and debt securities. 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 short- and long-term liquidity requirements. OTHER During the past three years, the impact of inflation on MGI's operations and investment activity has not been significant. 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 region and property type and its diverse tenant base somewhat reduce the risks associated with these factors and enhances opportunities for cash flow growth and capital gains potential, although there can be no assurance thereof. - 21 - Forward-Looking Statements The Trust's Annual Report on Form 10-K for the year ended November 30, 1997 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 include, among other things, adverse changes in the real estate markets; risk of default under the Trust's outstanding indebtedness due to increased borrowing; financial condition and bankruptcy of tenants; environmental/safety requirements; adequacy of insurance coverage; and general and local economic and business conditions. Investors should review the more detailed risks and uncertainties set forth under the captions Risk Factors and Competition, Regulation and Other 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. 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 The information required by Items 10, 11, 12 and 13 of this Part III has been omitted from this Report since the Registrant intends to file with the Securities and Exchange Commission a definitive proxy statement which involves the election of Trustees not later than 120 days after the close of the Registrant's last fiscal year. - 23 - 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, 1997 and 1996 Consolidated Statements of Earnings, Years ended November 30, 1997, 1996 and 1995 Consolidated Statements of Cash Flows, Years ended November 30, 1997, 1996 and 1995 Consolidated Statements of Changes in Shareholders' Equity, Years ended November 30, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE Financial Statement Schedule (as of or for the year ended November 30, 1997): Schedule III, Real Estate and Accumulated Depreciation Exhibit XI - Computation of Net Income Per Share Assuming Full Dilution Exhibit XXVII - Financial Data Schedule for year ended November 30, 1997 (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. - 24 - (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. (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. - 25 - (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. (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) By-Law, adopted on December 24, 1982 incorporated by reference to the Trust's Report on Form 8-K, filed on January 12, 1983. (o) 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. (p) By-Law adopted December 18, 1997, relating to shareholder proposals and nominations.* 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. - 26 - (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. (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 11 Computation of Net Income Per Share, Assuming Full Dilution, included under Item 14 of this Report. 24 Auditors' consent. (b) REPORTS ON FORM 8-K: None *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. - 27 - 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: January 30, 1998 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 --------- ----- ---- /s/ W. Pearce Coues Chairman of the Board - --------------------------- of Trustees and Chief W. Pearce Coues Executive Officer January 30, 1998 /s/ Phillip C. Vitali Principal Financial Officer January 30, 1998 - --------------------------- Phillip C. Vitali /s/ David P. Morency Principal Accounting Officer January 30, 1998 - --------------------------- David P. Morency /s/ George S. Bissell Trustee January 30, 1998 - --------------------------- George S. Bissell /s/ Herbert D. Conant Trustee January 30, 1998 - --------------------------- Herbert D. Conant /s/ Francis P. Gunning Trustee January 30, 1998 - --------------------------- Francis P. Gunning /s/ George M. Lovejoy, Jr. Trustee January 30, 1998 - --------------------------- George M. Lovejoy, Jr. /s/ William F. Murdoch, Jr. Trustee January 30, 1998 - --------------------------- William F. Murdoch, Jr. /s/ Rodger P. Nordblom Trustee January 30, 1998 - --------------------------- Rodger P. Nordblom -28- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS November 30, 1997 MGI PROPERTIES MGI PROPERTIES Index to Consolidated Financial Statements and Schedules
Page ---- Independent Auditors' Report F - 1 Financial Statements: Consolidated Balance Sheets, November 30, 1997 and 1996 F - 2 Consolidated Statements of Earnings, Years ended November 30, 1997, 1996 and 1995 F - 3 Consolidated Statements of Cash Flows, Years ended November 30, 1997, 1996 and 1995 F - 4 Consolidated Statements of Changes in Shareholders' Equity, Years ended November 30, 1997, 1996 and 1995 F - 5 Notes to Consolidated Financial Statements F - 6-- F - 13 Financial Statement Schedule (as of or for the year ended November 30, 1997): Schedule III - Real Estate and Accumulated Depreciation F - 14--F - 16 Exhibit XI - Computation of Net Income Per Share, Assuming Full Dilution F - 17
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 The Board of Trustees and Shareholders MGI Properties: We have audited the consolidated financial statements of MGI Properties and subsidiaries 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended November 30, 1997 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. KPMG Peat Marwick LLP Boston, Massachusetts December 18, 1997 F - 1 MGI PROPERTIES Consolidated Balance Sheets November 30, 1997 and 1996
Assets 1997 1996 Real estate (notes 2, 3 and 4): Land $ 82,989,000 $ 77,169,000 Buildings and improvements 288,095,000 267,391,000 Tenant improvements 10,859,000 11,464,000 ---------------- ---------------- Total real estate, at cost 381,943,000 356,024,000 Accumulated depreciation and amortization (47,158,000) (44,810,000) ---------------- ---------------- Net investments in real estate 334,785,000 311,214,000 Cash and cash equivalents (note 4) 13,964,000 15,140,000 Accounts receivable 3,654,000 3,665,000 Other assets 9,641,000 9,645,000 ---------------- ------------ $ 362,044,000 $ 339,664,000 ================ ================ Liabilities and Shareholders' Equity Liabilities: Mortgage loans payable (note 4) $ 113,171,000 $ 138,547,000 Other liabilities 6,488,000 6,682,000 ---------------- ---------------- Total liabilities 119,659,000 145,229,000 Shareholders' equity (notes 5, 6 and 7): Common shares - $1 par value: 17,500,000 shares authorized; 13,625,489 issued (11,563,199 at November 30, 1996) 13,625,000 11,563,000 Additional paid-in capital 207,031,000 167,185,000 Undistributed net income 21,729,000 15,687,000 ---------------- ---------------- Total shareholders' equity 242,385,000 194,435,000 ---------------- ---------------- $ 362,044,000 $ 339,664,000 ================ ================
See accompanying notes to consolidated financial statements. F - 2 MGI PROPERTIES Consolidated Statements of Earnings
Year ended November 30, 1997 1996 1995 Income: Rental $ 62,567,000 $ 54,507,000 $ 44,875,000 Interest 639,000 421,000 514,000 -------------- -------------- --------------- Total income 63,206,000 54,928,000 45,389,000 -------------- -------------- --------------- Expenses: Property operating expenses 15,384,000 14,099,000 11,823,000 Real estate taxes 7,443,000 6,490,000 5,600,000 Depreciation and amortization 10,662,000 9,463,000 8,339,000 Interest 9,539,000 9,198,000 5,807,000 General and administrative 3,206,000 2,873,000 2,651,000 -------------- -------------- --------------- Total expenses 46,234,000 42,123,000 34,220,000 -------------- -------------- --------------- Income before net gains 16,972,000 12,805,000 11,169,000 Net gains 3,800,000 11,500,000 3,150,000 -------------- -------------- --------------- Income before extraordinary item 20,772,000 24,305,000 14,319,000 Extraordinary item - prepayment of debt (306,000) - - -------------- -------------- -------------- Net income $ 20,466,000 $ 24,305,000 $ 14,319,000 ============== ============== =============== PER SHARE DATA Income per share before extraordinary item $ 1.56 $ 2.11 $ 1.25 ===== ==== ===== Net income per share $ 1.54 $ 2.11 $ 1.25 ===== ====== ===== Weighted average shares outstanding 13,289,781 11,540,972 11,487,677 ============== ============== ===============
See accompanying notes to consolidated financial statements. F - 3 MGI PROPERTIES Consolidated Statements of Cash Flows
Year ended November 30, 1997 1996 1995 Cash flows from operating activities: Net income $ 20,466,000 $ 24,305,000 $ 14,319,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,662,000 9,463,000 8,339,000 Net gains (3,800,000) (11,500,000) (3,150,000) Extraordinary item 306,000 - - Other 1,456,000 (1,231,000) (202,000) ------------ ------------- ----------- Net cash provided by operating activities 29,090,000 21,037,000 19,306,000 ------------ ------------- ----------- Cash flows from investing activities: Acquisitions of real estate (48,000,000) (38,667,000) (38,302,000) Additions to real estate (3,114,000) (3,234,000) (1,825,000) Tenant improvements (2,669,000) (2,702,000) (2,542,000) Deferred tenant charges (2,085,000) (1,348,000) (1,634,000) Net proceeds from sales of real estate interests 15,562,000 11,103,000 16,902,000 Other (112,000) 35,000 (289,000) ------------ ------------- ----------- Net cash used in investing activities (40,418,000) (34,813,000) (27,690,000) ------------ ------------- ----------- Cash flows from financing activities: Proceeds from sale of common shares 41,566,000 678,000 322,000 Repayment of mortgage loans payable (43,184,000) (2,242,000) (25,473,000) Additions to mortgage loans payable 26,500,000 34,743,000 38,025,000 Mortgage prepayment penalty (306,000) - - Cash distributions (14,424,000) (11,308,000) (10,337,000) ------------ ------------- ----------- Net cash provided by financing activities 10,152,000 21,871,000 2,537,000 ------------ ------------- ----------- Net increase (decrease) in cash and cash equivalents (1,176,000) 8,095,000 (5,847,000) Cash and cash equivalents: Beginning of year 15,140,000 7,045,000 12,892,000 ------------ ------------- ----------- End of year $ 13,964,000 $ 15,140,000 $ 7,045,000 ============ ============= ===========
See accompanying notes to consolidated financial statements. F - 4 MGI PROPERTIES Consolidated Statements of Changes in Shareholders' Equity
Additional Common paid-in Undistributed shares capital net income Balance at November 30, 1994 $ 11,466,000 $ 165,921,000 $ (1,292,000) Net income - - 14,319,000 Distributions (note 7) - - (10,337,000) Dividend reinvestment and share purchase plan (note 5) 19,000 250,000 - Options exercised and other (note 6) 17,000 177,000 - -------------- ---------------- -------------- Balance at November 30, 1995 11,502,000 166,348,000 2,690,000 Net income - - 24,305,000 Distributions (note 7) - - (11,308,000) Dividend reinvestment and share purchase plan (note 5) 23,000 357,000 - Options exercised and other (note 6) 38,000 480,000 - -------------- ---------------- -------------- Balance at November 30, 1996 11,563,000 167,185,000 15,687,000 Net income - - 20,466,000 Distributions (note 7) - - (14,424,000) Sale of common shares (note 5) 2,000,000 39,075,000 - Dividend reinvestment and share purchase plan (note 5) 18,000 365,000 - Options exercised and other (note 6) 44,000 406,000 - -------------- ---------------- -------------- Balance at November 30, 1997 $ 13,625,000 $ 207,031,000 $ 21,729,000 ============== ================ ===============
See accompanying notes to consolidated financial statements. F - 5 MGI PROPERTIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies (a) Consolidation The consolidated financial statements of the Trust include the accounts of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (b) Income Taxes The Trust intends to continue to qualify to be taxed as a real estate investment trust under Sections 856-860 of the Internal Revenue Code of 1986 and the related regulations. In order to qualify as a real estate investment trust 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. (c) Real Estate Generally, real estate assets are stated at cost less depreciation. Real estate investments, excluding land costs, are depreciated using the straight-line method over their estimated useful lives. Tenant improvements are 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. Real estate assets held for sale are carried at the lower of depreciated cost or fair value less cost to sell and are not depreciated while they are held for sale. In 1997, the Trust adopted 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. This Statement requires that long-lived assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Statement requires the use of undiscounted estimated cash flows expected from the asset's operations and eventual disposition. If the sum of the expected future cash flows is less than the carrying value of the asset, an impairment loss is recognized based on the fair value of the asset. Adoption of this pronouncement had no effect on the consolidated statement of earnings for the year ended November 30, 1997. (d) Revenues Rental income from leases with scheduled rent increases is recognized using the straight-line method over the life of the lease. (Continued) F - 6 MGI PROPERTIES Notes to Consolidated Financial Statements (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. During 1997, the Trust sold seven industrial properties for $14.9 million in a single transaction. The properties were secured by a $8.7 million loan payable which was assigned to the purchaser at closing. During 1996, the Trust acquired three properties that were subject to an aggregate of $21.3 million of existing debt. Only the cash portion of these transactions is reflected in the accompanying consolidated statements of cash flows. Cash interest payments of $8.7 million, $8.6 million and $6.0 million were made for the years ended November 30, 1997, 1996 and 1995, respectively. During 1995, the Trust capitalized interest of $.4 million. (g) Fair Value of Financial Instruments The Trust estimated the fair values of its financial instruments at November 30, 1997 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 mortgage note receivable which was received in connection with a transaction not qualifying as a sale for financial accounting purposes and accordingly not reflected in the Trust's consolidated balance sheet. 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 Net income per share is computed based on the weighted average number of common shares outstanding; common stock equivalents are not dilutive. (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. (Continued) F - 7 MGI PROPERTIES Notes to Consolidated Financial Statements (j) Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. (2) Real Estate Assets At November 30, 1997, the Trust's real estate investment portfolio consisted of the following (based on cost): office - 33%; office/research and development - 14%; industrial - 20%; retail - 17%; and multi-family - 16%. In addition, at November 30, 1997, 57% of the Trust's real estate investments based on cost were located in New England, with 18% in the Mid-West, 14% in the Southeast and 11% in Mid-Atlantic states. At November 30, 1997, the Trust had entered into signed agreements for the sale of five properties having a net carrying value of $20.2 million. Although the sales were subject to the satisfactory completion of certain terms and conditions, including due diligence by the potential purchasers, the Trust had deemed these five properties held for sale at November 30, 1997 and had ceased depreciating these properties. On December 2, 1997, the Trust completed the sale of one of the properties deemed held for sale, a 102,000 square foot industrial building with a net carrying value of $2.2 million, and realized a gain of $1.3 million. In light of the uncertainties inherent in real estate transactions, there can be no assurance that the sale of the remaining four properties deemed held for sale will be successfully completed. (3) Leases All leases relating to real estate investments are operating leases; accordingly, rental income is reported when earned. Operating leases on apartments generally have a term of one year or less. Future minimum lease payments on noncancelable operating leases at commercial properties at November 30, 1997 are: $42.8 million in 1998, $38.1 million in 1999, $30.9 million in 2000, $23.5 million in 2001, $18.6 million in 2002; and $98.9 million thereafter. The above amounts do not include contingent 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. Contingent rental income was $8.1 million in 1997, $7.4 million in 1996 and $5.9 million in 1995. (Continued) F - 8 MGI PROPERTIES Notes to Consolidated Financial Statements One of the Trust's real estate investments, a 107,000 square foot retail building, is being leased in its entirety by Bradlees, Inc. which filed for bankruptcy under Chapter 11 of the Federal Bankruptcy Code in June 1995. In October 1995, Bradlees affirmed its lease with the Trust and is current with its rent through November 30, 1997. (4) Mortgage Loans Payable Mortgage loans payable at November 30 follow:
1997 1996 Mortgage loans, maturing 2000 through 2014, at effective interest rates ranging from 7.5% to 8.9% $ 91,921,000 $ 104,797,000 Housing revenue bond, maturing 2007, at 5.9% and 5.5% at November 30, 1997 and 1996, respectively 5,750,000 5,750,000 Amounts outstanding under lines of credit, at an effective interest rate of 7.7% and 7.6% at November 30, 1997 and 1996, respectively 15,500,000 28,000,000 --------------- ---------------- $ 113,171,000 $ 138,547,000 =============== ================ Weighted average interest rate 7.89% 7.95% ==== ====
The mortgage loans payable are nonrecourse and are collateralized by certain real estate investments having a net carrying value of $142.2 million and the Trust's guarantee of $4.5 million. Loans require monthly principal amortization and/or a balloon payment at maturity. The housing revenue bond is tax exempt and is secured by real estate having a net carrying value of $4.9 million. The bond is also secured by a letter of credit which is collateralized by $2.4 million of short-term investments and U.S. Government securities. The Trust has also guaranteed $3.0 million of the debt. The base interest rate is fixed for a one-year term ending October 31, 1998 and was 3.85% at November 30, 1997 (an effective interest rate of 5.9% due to the payment of fees). The Trust has lines of credit aggregating $45 million which mature in August 1998. The lines contain restrictive covenants that, among other things, require the Trust to maintain certain financial ratios and restrict the incurrence of certain indebtedness and the making of certain investments. Borrowings under the lines are secured by mortgage and security interests in real estate having a net carrying value of $54.3 million and are subject to a variable interest rate. A fee, which does not exceed .25% per annum, is charged on the unused amounts. (Continued) F - 9 MGI PROPERTIES Notes to Consolidated Financial Statements Principal payments on mortgage loans payable, inclusive of the lines of credit, due in the next five years and thereafter are as follows: $18.4 million in 1998, $3.2 million in 1999, $14.9 million in 2000, $3.3 million in 2001, $3.5 million in 2002, and $69.9 million thereafter. As of November 30, 1997, the Trust had entered into an agreement for an $11.6 million fixed rate non-recourse loan secured by one of its investments bearing interest at a rate of 7.12% and having a term of 10 years. This loan closed in the first quarter of fiscal 1998. Subsequent to the close of fiscal 1997, the Trust signed a commitment letter for a $75 million unsecured line of credit that is expected to close in the second quarter of 1998. (5) 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. (b) Dividend Reinvestment and Share Purchase Plan Under the Trust's Dividend Reinvestment and Share Purchase Plan, shareholders of record who own 100 shares or more have 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 is at a 3% discount in the case of newly issued shares. If MGI purchases shares in the open market for the plan, the price for such shares is 100% of the average purchase price paid. Participants in the plan may make additional cash purchases of shares at the same price as shares purchased through the reinvestment of dividends. During the years ended November 30, 1997, 1996 and 1995, the Trust issued 18,217, 22,808 and 18,828, respectively, common shares through its Dividend Reinvestment and Share Purchase Plan. (c) Preferred Shares At November 30, 1997 and 1996, the Trust had authorized six million of preferred shares, $1 par value, of which none were issued. (Continued) F - 10 MGI PROPERTIES Notes to Consolidated Financial Statements (d) Shareholder Rights Plan On June 21, 1989, the Board of Trustees adopted a shareholder rights plan. Under this plan, one right was attached to each outstanding common share on July 5, 1989, and one right is attached to each share issued thereafter. Each right entitles the holder to purchase, under certain conditions, one one-hundredth of a share of Series A participating preferred stock for $60. The rights may also, under certain conditions, entitle the holders to receive common shares of the Trust, common shares of an entity acquiring the Trust, or other consideration, each having a value equal to twice the exercise price of each right ($120). One hundred fifty thousand preferred shares have been designated as Series A participating preferred shares and are reserved for issuance under the shareholder rights plan. The rights are redeemable by the Trust at a price of $.01 per right. If not exercised or redeemed, all rights expire in July 1999. (6) Stock Option Plans Under the Trust's 1997, 1994 and 1988 stock option plans for key employees and Trustees (the "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 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. Changes in options outstanding during the years ended November 30 were as follows:
1997 1996 1995 ----------------------- ------------------------------- ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- ----- ------ ----- ------- ----- Outstanding, beginning of year 810,411 $13.68 669,411 $13.02 549,632 $12.62 Granted 240,000 $21.42 161,500 $16.24 132,000 $14.36 Exercised (51,792) $12.31 (14,500) $11.86 (7,221) $ 7.88 Expired or forfeited (1,000) $21.00 (6,000) $12.63 (5,000) $12.63 ------- ------- ------- Outstanding, end of year 997,619 $15.59 810,411 $13.68 669,411 $13.02 ======= ======= ======= Options exercisable, end of year 893,619 $14.91 739,661 $13.42 613,411 $12.86 ======= ======= ======= Weighted average fair value of options granted during the year $3.44 $2.28 $2.21 ===== ===== =====
(Continued) F - 11 MGI PROPERTIES Notes to Consolidated Financial Statements The following table summarizes information about stock options outstanding at November 30, 1997:
Options Outstanding Options Exercisable ---------------------------------------------------------- ---------------------------------------- Weighted Average Weighted Range of Number Remaining Weighted Average Number Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price ----------------- ----------- ---------------- -------------- ------------- ---------------- $7.375 to $11.125 66,500 3.6 years $ 9.65 66,500 $ 9.65 $12.625 to $16.75 692,119 5.1 years $14.14 692,119 $14.14 $21 to $24.75 239,000 9.2 years $21.42 135,000 $21.42 ------- ------- $7.375 to $24.75 997,619 6.0 years $15.59 893,619 $14.91 ======= =======
Subsequent to November 30, 1997, 218,000 options were granted, of which half are immediately exercisable and half are exercisable in fiscal 1999. During 1997, the Trust adopted SFAS No. 123, Accounting for Stock-Based Compensation. This statement provides entities a choice between fair value-based or intrinsic value-based methods of accounting for stock-based compensation plans. The Trust has elected to continue using the intrinsic value method. Accordingly, no compensation cost has been recognized. Had compensation cost for the plan been determined based on the fair value at the grant dates for awards under the plan 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: 1997 1996 Net income: As reported $ 20,466,000 $ 24,305,000 Pro forma $ 19,842,000 $ 23,969,000 Net income per share: As reported $ 1.54 $ 2.11 Pro forma $ 1.49 $ 2.08 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 6.2% for 1997 and 6.9% for 1996; expected volatility of 24.8% for 1997 and 26.1% for 1996; expected lives of seven years for both years; and risk-free interest rates of 6.38% for 1997 and 6.78% for 1996. (Continued) F - 12 MGI PROPERTIES Notes to Consolidated Financial Statements (7) Cash Distributions The Trust made cash distributions of $14.4 million in 1997, $11.3 million in 1996 and $10.3 million in 1995, which is allocated between taxable ordinary income and taxable capital gain, on a per share basis, as follows: Total Ordinary Capital Taxable Income Gain Income 1997 $1.06 $0.04 $1.10 1996 $0.56 $0.42 $0.98 1995 $0.69 $0.21 $0.90 On December 18, 1997, the Trust declared a dividend of $.29 per share payable on January 16, 1998 to shareholders of record on January 8, 1998. (8) Quarterly Financial Information (Unaudited) Quarterly results of operations for the years ended November 30, 1997 and 1996 follow:
Quarter Ended 1997 February 28 May 31 August 31 November 30 Total income $ 15,088,000 $ 15,574,000 $ 16,145,000 $ 16,399,000 Total expenses 11,433,000 11,310,000 11,601,000 11,890,000 -------------- -------------- -------------- -------------- Income before net gains and extraordinary item 3,655,000 4,264,000 4,544,000 4,509,000 Net gains and extra- ordinary item 294,000 -- -- 3,200,000 -------------- -------------- -------------- -------------- Net income $ 3,949,000 $ 4,264,000 $ 4,544,000 $ 7,709,000 ============== ============== ============== ============== Net income per share $ .32 $ .31 $ .33 $ .57 === === === === Quarter Ended 1996 February 29 May 31 August 31 November 30 Total income $ 12,784,000 $ 13,222,000 $ 14,187,000 $ 14,735,000 Total expenses 9,819,000 10,031,000 10,895,000 11,378,000 -------------- -------------- -------------- -------------- Income before net gains 2,965,000 3,191,000 3,292,000 3,357,000 Net gains -- 9,350,000 -- 2,150,000 -------------- -------------- -------------- -------------- Net income $ 2,965,000 $ 12,541,000 $ 3,292,000 $ 5,507,000 ============== ============== ============== ============== Net income per share $ .26 $ 1.09 $ .28 $ .48 === ==== === ===
(Continued) F - 13 MGI PROPERTIES Schedule III ------------- Real Estate and Accumulated Depreciation November 30, 1997
Initial Cost ---------------------------- Costs Building capitalized and subsequent to Description Encumbrances Land Improvements acquisition Office: - ------- Charlotte, NC $ - $ 150,000 $ 933,000 $ 168,000 Greenville, SC - 246,000 2,490,000 489,000 Greenville, SC - 213,000 1,647,000 716,000 Ann Arbor, MI - 686,000 5,618,000 1,751,000 Tampa, FL - 2,667,000 8,980,000 603,000 Somerset, NJ - 3,264,000 13,379,000 983,000 Boston, MA (A) 1,730,000 6,925,000 2,388,000 Framingham, MA (A) 2,105,000 5,109,000 566,000 Andover, MA 4,894,000 1,263,000 6,417,000 321,000 Boston, MA - 861,000 507,000 316,000 Portland, ME 9,097,000 996,000 11,182,000 190,000 Portland, ME 8,526,000 1,577,000 15,369,000 98,000 Glastonbury, CT - 649,000 3,011,000 36,000 Glastonbury, CT - 616,000 3,257,000 11,000 Nashua, NH - 1,106,000 3,504,000 10,000 Nashua, NH - 452,000 1,110,000 0 Nashua, NH - 499,000 1,768,000 9,000 Farmington, CT - 766,000 4,831,000 0 ------------- ----------- ----------- ---------- 22,517,000 19,846,000 96,037,000 8,655,000 ------------- ----------- ----------- ---------- Office/Research & Development: - ------------------------------ Billerica, MA (A) 376,000 1,749,000 1,000 Bedford, MA (A) 662,000 1,585,000 0 Andover, MA 4,321,000 1,441,000 5,799,000 9,000 Billerica, MA (A) 752,000 3,611,000 0 Billerica, MA (A) 420,000 1,652,000 0 Andover, MA 3,681,000 1,185,000 5,307,000 0 Chelmsford, MA - 354,000 1,567,000 125,000 Billerica, MA - 681,000 4,111,000 14,000 Littleton, MA - 285,000 2,091,000 0 Chelmsford, MA - 946,000 3,680,000 4,000 Tewksbury, MA 4,780,000 1,640,000 7,289,000 22,000 Andover, MA - 1,171,000 2,818,000 1,000 Westford, MA - 1,058,000 2,436,000 0 ------------- ----------- ----------- ---------- 12,782,000 10,971,000 43,695,000 176,000 ------------- ----------- ----------- ---------- Gross amounts at which carried at close of period --------------------------------------- Accumulated Building Depreciation and and Date Depreciable Description Land Improvements Total amortization acquired Life (years) Office: - ------- Charlotte, NC $ 150,000 $ 1,101,000 $ 1,251,000 $ 355,000 1/85 40 Greenville, SC 246,000 2,979,000 3,225,000 1,239,000 11/86 20 Greenville, SC 253,000 2,323,000 2,576,000 1,151,000 11/86 20 Ann Arbor, MI 686,000 7,369,000 8,055,000 1,760,000 12/88 40 Tampa, FL 2,667,000 9,583,000 12,250,000 3,346,000 12/88 25 Somerset, NJ 3,264,000 14,362,000 17,626,000 3,328,000 12/88 40 Boston, MA 1,730,000 9,313,000 11,043,000 980,000 6/93 40 Framingham, MA 2,020,000 5,760,000 7,780,000 758,000 9/93 40 Andover, MA 1,263,000 6,738,000 8,001,000 407,000 10/95 40 Boston, MA 861,000 823,000 1,684,000 74,000 11/95 40 Portland, ME 996,000 11,372,000 12,368,000 409,000 7/96 40 Portland, ME 1,577,000 15,467,000 17,044,000 556,000 7/96 40 Glastonbury, CT 651,000 3,045,000 3,696,000 44,000 4/97 40 Glastonbury, CT 618,000 3,266,000 3,884,000 48,000 4/97 40 Nashua, NH 1,106,000 3,514,000 4,620,000 15,000 9/97 40 Nashua, NH 452,000 1,110,000 1,562,000 5,000 9/97 40 Nashua, NH 499,000 1,777,000 2,276,000 7,000 9/97 40 Farmington, CT 766,000 4,831,000 5,597,000 0 11/97 40 ------------ ----------- ----------- ---------- 19,805,000 104,733,000 124,538,000 14,482,000 ------------ ----------- ----------- ---------- Office/Research & Development: - ------------------------------ Billerica, MA 376,000 1,750,000 2,126,000 192,000 7/93 40 Bedford, MA 662,000 1,585,000 2,247,000 162,000 11/93 40 Andover, MA 1,441,000 5,808,000 7,249,000 588,000 11/93 40 Billerica, MA 752,000 3,611,000 4,363,000 361,000 12/93 40 Billerica, MA 420,000 1,652,000 2,072,000 165,000 12/93 40 Andover, MA 1,185,000 5,307,000 6,492,000 475,000 5/94 40 Chelmsford, MA 354,000 1,692,000 2,046,000 159,000 11/94 40 Billerica, MA 681,000 4,125,000 4,806,000 319,000 11/94 40 Littleton, MA 285,000 2,091,000 2,376,000 113,000 9/95 40 Chelmsford, MA 946,000 3,684,000 4,630,000 199,000 10/95 40 Tewksbury, MA 1,648,000 7,303,000 8,951,000 320,000 3/96 40 Andover, MA 1,171,000 2,819,000 3,990,000 100,000 7/96 40 Westford, MA 1,058,000 2,436,000 3,494,000 36,000 4/97 40 ------------ ----------- ----------- ---------- 10,979,000 43,863,000 54,842,000 3,189,000 ------------ ----------- ----------- ---------- F-14 Initial Cost ------------------------------- Costs Building capitalized and subsequent to Description Encumbrances Land Improvements acquisition Industrial Properties: - ---------------------- N. Charleston, SC - 300,000 2,738,000 37,000 Bedford, MA (A) 512,000 2,062,000 154,000 Wilmington, MA 4,179,000 2,390,000 4,638,000 209,000 Wilmington, MA (A) 1,394,000 3,208,000 73,000 Wilmington, MA (A) 501,000 2,013,000 61,000 Tewksbury, MA 8,448,000 1,739,000 8,994,000 723,000 Northborough, MA - 514,000 1,810,000 21,000 Marlborough, MA - 1,040,000 1,303,000 8,000 Marlborough, MA - 579,000 2,244,000 378,000 Franklin, MA - 599,000 3,256,000 0 Franklin, MA - 706,000 2,523,000 0 Franklin, MA - 932,000 4,160,000 0 Methuen, MA - 540,000 1,220,000 2,000 Methuen, MA - 1,334,000 3,518,000 3,000 Westford, MA - 698,000 2,783,000 0 Andover, MA - 1,084,000 3,444,000 15,000 Nashua, NH - 785,000 2,360,000 0 Nashua, NH - 1,478,000 3,641,000 0 ------------- ----------- ----------- ---------- 12,627,000 17,125,000 55,915,000 1,684,000 ------------- ----------- ----------- ---------- Retail: - ------- Hagerstown, MD - 364,000 1,459,000 0 Nashville, TN (A) 1,570,000 2,655,000 447,000 Baltimore, MD (A) 2,000,000 5,710,000 109,000 Temple Terrace, FL 4,873,000 2,600,000 6,540,000 307,000 Aurora, IL 12,593,000 12,576,000 15,372,000 1,810,000 Peabody, MA - 4,705,000 5,623,000 1,000 ------------- ----------- ----------- ---------- 17,466,000 23,815,000 37,359,000 2,674,000 ------------- ----------- ----------- ---------- Apartments: - ----------- Harrison Township, MI (A) 700,000 1,948,000 11,309,000 Tampa, FL 5,071,000 1,850,000 7,009,000 844,000 Tampa, FL 5,750,000 1,178,000 4,466,000 359,000 Bloomfield Hills, MI 10,502,000 4,325,000 12,126,000 1,881,000 Laurel, MD 9,223,000 613,000 12,722,000 (112,000) ------------- ----------- ----------- ---------- 30,546,000 8,666,000 38,271,000 14,281,000 ------------- ----------- ----------- ---------- Other - ----- Portland, ME 1,733,000 2,309,000 12,000 - Tampa, FL - 427,000 - - Mount Clemens, MI - 25,000 - - ------------- ----------- ----------- ------------ 1,733,000 2,761,000 12,000 0 ------------- ----------- ----------- ------------ $ 97,671,000 $ 83,184,000 $271,289,000 $ 27,470,000 =========== =========== ============ Lines of credit $ 15,500,000 ------------- Gross amounts at which carried at close of period ------------------------------------------ Accumulated Building Depreciation and and Date Depreciable Description Land Improvements Total amortization acquired Life (years) Industrial Properties: N. Charleston, SC 300,000 2,775,000 3,075,000 891,000 12/84 40 Bedford, MA 512,000 2,216,000 2,728,000 299,000 10/92 40 Wilmington, MA 2,390,000 4,847,000 7,237,000 575,000 5/93 40 Wilmington, MA 1,394,000 3,281,000 4,675,000 362,000 8/93 40 Wilmington, MA 501,000 2,074,000 2,575,000 170,000 11/94 40 Tewksbury, MA 1,739,000 9,717,000 11,456,000 760,000 3/95 40 Northborough, MA 514,000 1,831,000 2,345,000 121,000 5/95 40 Marlborough, MA 1,040,000 1,311,000 2,351,000 79,000 6/95 40 Marlborough, MA 579,000 2,622,000 3,201,000 114,000 12/95 40 Franklin, MA 599,000 3,256,000 3,855,000 156,000 12/95 40 Franklin, MA 706,000 2,523,000 3,229,000 121,000 12/95 40 Franklin, MA 932,000 4,160,000 5,092,000 130,000 8/96 40 Methuen, MA 541,000 1,221,000 1,762,000 28,000 12/96 40 Methuen, MA 1,335,000 3,520,000 4,855,000 81,000 12/96 40 Westford, MA 698,000 2,783,000 3,481,000 46,000 3/97 40 Andover, MA 1,088,000 3,455,000 4,543,000 43,000 5/97 40 Nashua, NH 785,000 2,360,000 3,145,000 10,000 9/97 40 Nashua, NH 1,478,000 3,641,000 5,119,000 15,000 9/97 40 ------------ ----------- ----------- ---------- 17,131,000 57,593,000 74,724,000 4,001,000 ------------ ----------- ----------- ---------- Retail: Hagerstown, MD 364,000 1,459,000 1,823,000 473,000 12/84 40 Nashville, TN 1,570,000 3,102,000 4,672,000 1,121,000 8/86 40 Baltimore, MD 1,832,000 5,987,000 7,819,000 1,551,000 7/87 40 Temple Terrace, FL 2,600,000 6,847,000 9,447,000 1,753,000 12/87 40 Aurora, IL 12,576,000 17,182,000 29,758,000 3,866,000 5/90 25 Peabody, MA 4,705,000 5,624,000 10,329,000 330,000 8/95 40 ------------ ----------- ----------- ---------- 23,647,000 40,201,000 63,848,000 9,094,000 ------------ ----------- ----------- ---------- Apartments: Harrison Township, MI 700,000 13,257,000 13,957,000 5,606,000 11/74 40 Tampa, FL 1,850,000 7,853,000 9,703,000 2,356,000 10/86 40 Tampa, FL 1,178,000 4,825,000 6,003,000 1,158,000 3/88 40 Bloomfield Hills, MI 4,325,000 14,007,000 18,332,000 4,906,000 1/89 40 Laurel, MD 613,000 12,610,000 13,223,000 2,366,000 9/90 40 ------------ ----------- ----------- ---------- 8,666,000 52,552,000 61,218,000 16,392,000 ------------ ----------- ----------- ---------- Other Portland, ME 2,309,000 12,000 2,321,000 - 7/96 Tampa, FL 427,000 - 427,000 - 12/95 Mount Clemens, MI 25,000 - 25,000 - 7/86 ------------ ----------- ----------- ---------- 2,761,000 12,000 2,773,000 0 ------------ ----------- ----------- ---------- $ 82,989,000 $298,954,000 $381,943,000 $ 47,158,000 ============ =========== =========== ==========
F-15 (A) These properties collateralize the Trust's $45 million credit facility. Schedule III (Continued) MGI PROPERTIES Real Estate and Accumulated Depreciation Years ended November 30, 1997, 1996 and 1995 A summary of real estate investments and accumulated depreciation and amortization for the three years ended November 30 follows: Real Estate Investments
1997 1996 1995 Balance at beginning of year $ 356,024,000 $ 293,469,000 $ 267,530,000 Add: Investments 48,000,000 59,950,000 38,302,000 Building improvements 3,114,000 3,307,000 1,825,000 Tenant improvements 2,669,000 2,702,000 2,542,000 ------------- ------------- ------------- 409,807,000 359,428,000 310,199,000 Deduct: Real estate dispositions 24,046,000 3,404,000 15,385,000 Fully amortized assets and other 3,818,000 -- 1,345,000 ------------- ------------- ------------- Balance at end of year $ 381,943,000 $ 356,024,000 $ 293,469,000 ============= ============= ============= Accumulated Depreciation and Amortization Balance at beginning of year $ 44,810,000 $ 36,375,000 $ 32,029,000 Add: Depreciation and amortization 9,874,000 8,832,000 7,798,000 Deduct: Real estate dispositions 4,292,000 397,000 1,701,000 Other 3,234,000 -- 1,751,000 ------------- ------------- ------------- Balance at end of year $ 47,158,000 $ 44,810,000 $ 36,375,000 ============= ============= =============
The aggregate cost for Federal income tax purposes of the above investments at November 30, 1997 is approximately $378 million. Refer to Note 1 regarding the Trust's accounting policies on real estate investments and depreciation and amortization. F - 16 Exhibit XI MGI PROPERTIES Computation of Net Income Per Share Assuming Full Dilution Year ended November 30,
1997 1996 1995 1994 1993 Net income $ 20,466,000 $ 24,305,000 $ 14,319,000 $ 14,491,000 $ 7,957,000 =========== =========== =========== ========== ========== Weighted average number of common shares outstanding 13,289,781 11,540,972 11,487,677 11,450,451 10,574,104 Additional number of share equivalents assuming exercise of options 348,740 180,257 82,408 91,834 55,312 ----------- ----------- ----------- ----------- ---------- Weighted average number of shares assuming full dilution 13,638,521 11,721,229 11,570,085 11,542,285 10,629,416 =========== =========== =========== ========== ========== Net income per share assuming full dilution $ 1.50 $ 2.07 $ 1.24 $ 1.26 $ .75 ==== ==== ==== ==== ===
F - 17 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 December 18, 1997, relating to the consolidated balance sheets of MGI Properties and subsidiaries as of November 30, 1997 and 1996, and the related consolidated statements of earnings and cash flows for each of the years in the three-year period ended November 30, 1997, and related schedule, which report appears in the November 30, 1997 annual report on Form 10-K of MGI Properties and subsidiaries. KPMG Peat Marwick LLP Boston, Massachusetts December 18, 1997 EX-3.(P) 2 MGI PROPERTIES BY-LAWS MGI PROPERTIES By-Law Adopted on December 18, 1997 Pursuant to ss.10.7 of the Declaration of Trust, as Amended Article I Meetings of Shareholders Section 1. Annual Meetings. The annual meeting of shareholders of the Trust shall be held annually in the City of Boston, at such place and at such hour as the Board of Trustees may fix, on a day, time and place designated by the Board of Trustees, for the election of directors and for the transaction of such other business as may properly come before the meeting. At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Trustees, otherwise properly brought before the meeting by or at the direction of the Board of Trustees, or otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the Trust. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Trust, not less than 61 days nor more than 80 days prior to the meeting; provided, however, that in the event the annual meeting is scheduled to be held on a date which is less than 330 days from the date of the previous annual meeting, in order for notice by the shareholder to be timely it must be so received not later than the close of business on the 10th day following the day on which such notice of the annual meeting was mailed by the Trust. A shareholder's notice to the secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the shareholder proposing such business, (iii) the class and number of shares of the Trust which are beneficially owned by the shareholder, along with sufficient evidence of such beneficial ownership, and (iv) any material interest of the shareholder in such business. Notwithstanding anything in the by-laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 1 of Article I and the applicable rules and regulations of the Securities and Exchange Commission, including Rule 14a-8, provided, however, that nothing in this Section 1 of Article I shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting in accordance with said procedure. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 1 of Article I, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding any other provision hereof, this provision or any other provision of these by-laws may be amended or altered only when and as authorized and approved by the affirmative vote of not less than two-thirds of the whole Board of Trustees, as that term is defined in Section 13.1 of the Declaration of Trust, as amended, at a meeting duly called and held and as thereafter authorized or approved, at any meeting of shareholders called for the purpose, by the affirmative vote of the holders of shares representing not less than 80% of the total number of votes authorized to be cast by the shares of all classes then outstanding and entitled to vote thereon. In the event that this provision is found to conflict with the terms of the Declaration of Trust, as amended, then in such case the Declaration of Trust shall control. -2- Article II Nominations of Trustees at Annual Meeting of Shareholders Subject to Sections 10.2, 10.3 and 10.4 of the Declaration of Trust, as amended, and in addition to any other applicable requirements, upon the expiration of the term of a Trustee, or in the case that the term of office of a Trustee shall terminate and a vacancy shall occur in the event of the death, resignation, bankruptcy, adjudicated incompetence or other incapacity to exercise the duties of the office, or removal of a Trustee, in order for a nomination for a new Trustee to be properly brought before an annual meeting of shareholders to elect a new Trustee, the nominating shareholder must have given timely notice of such nomination in writing to the secretary of the Trust. To be timely, a shareholder's notice of such nomination must be delivered to or mailed and received at the principal executive offices of the Trust, not less than 61 days nor more than 80 days prior to the meeting at which the election is to be held; provided, however, that in the event the meeting is scheduled to be held on a date which is less than 330 days from the date of the previous annual meeting, in order for notice of such nomination by the shareholder to be timely it must be so received not later than the close of business on the 10th day following the day on which such notice of the annual meeting was mailed by the Trust. A shareholder's notice to the secretary shall set forth (i) the names(s) and address(es) of the shareholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the shareholder (a) is a holder of record of stock of the Trust entitled to vote at such meeting, (b) will continue to hold such stock through the date on which the meeting is held, and (c) intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination is to be made by the shareholder; (iv) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to Regulation 14A promulgated under Section 14 of the Securities Exchange Act of 1934, as amended, as now in effect of hereafter modified, had the nominee been nominated by the Board of Trustees; and (v) the consent of each nominee to serve as a Trustee of the Trust if so elected. The Trust may require any proposed nominee to furnish such other information as may reasonably be required by the Trust to determine the qualifications of such person to serve as Trustee. Notwithstanding anything in the by-laws to the contrary, nominations of Trustees by shareholders shall also be subject to the applicable rules and regulations of the Securities and Exchange Commission, including but not limited to Rules 14a-8(c)(8) and 14a- 11, all of which shall be complied with by the nominating -3- shareholder. No nominations of Trustees by shareholders shall be accepted except those nominations made in accordance with the procedures set forth in this Article II. The chairman of a meeting at which new Trustees are to be appointed shall, if the facts warrant, determine and declare to the meeting that a nomination was not properly made in accordance with the provisions of this Section 1 of Article II, and if he should so determine, he shall so declare to the meeting and any such nomination not properly made shall not be made or voted upon. Notwithstanding any other provision hereof, this provision or any other provision of these by-laws may be amended or altered only when and as authorized and approved by the affirmative vote of not less than two-thirds of the whole Board of Trustees, as that term is defined in Section 13.1 of the Declaration of Trust, as amended, at a meeting duly called and held and as thereafter authorized or approved, at any meeting of shareholders called for the purpose, by the affirmative vote of the holders of shares representing not less than 80% of the total number of votes authorized to be cast by the shares of all classes then outstanding and entitled to vote thereon. In the event that this provision is found to conflict with the terms of the Declaration of Trust, as amended then in such case the Declaration of Trust shall control. -4- EX-27 3 R14 FINANCIAL DATA SCHEDULE FOR 1997 10-K
5 1,000 12-MOS NOV-30-1997 NOV-30-1997 13,964 000 3,654 000 000 9,641 381,943 47,158 362,044 6,488 113,171 13,625 000 000 228,760 362,044 0 632,068 000 36,695 0 000 9,539 16,972 000 16,972 3,800 (306) 000 20,466 1.54 1.54
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