UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A
(Amendment No. 1)
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of The Securities Exchange Act of 1934
MONTGOMERY REALTY GROUP, INC.
(Name of Small Business Issuer in its charter)
Nevada 88-0377199
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Oyster Point Blvd., Suite 415
So. San Francisco, CA 94080
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: Telephone (650) 266-8080
Telecopy (650) 266-8089
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001
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(Title of class)
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SPECIAL NOTE ABOUT FORWARD-LOOKING INFORMATION
This registration statement contains statements about the future,
sometimes referred to as "forward-looking" statements. Forward-looking
statements are typically identified by the use of the words "believe," "may,"
"will," "should," "expect," "anticipate," "estimate," "project," "propose,"
"plan," "intend," and similar words and expressions. Statements that describe
Montgomery's future strategic plans, goals or objectives are also
forward-looking statements. Any forward-looking statements, including those
regarding Montgomery or its management's current beliefs, expectations,
anticipations, estimations, projections, proposals, plans or intentions, are not
guarantees of future performance, results, or events and involve risks and
uncertainties, such as those discussed below.
The forward-looking statements are based on present circumstances and
on Montgomery's predictions respecting events that have not occurred, which may
not occur, or which may occur with different consequences and timing than those
now assumed or anticipated. Actual events or results may differ materially from
those discussed in the forward-looking statements as a result of various
factors, including the risk factors discussed below. These cautionary statements
are intended to be applicable to all forward-looking statements wherever they
appear in this registration statement.
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PART I
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ITEMS 1 and 3. DESCRIPTION OF BUSINESS AND PROPERTIES
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History
Montgomery Realty Group, Inc. ("Montgomery"), was organized on August
20, 1997. Shortly after organization, Montgomery issued to its founders 300,000
shares of common stock at $0.05 per share, of which 225,000 shares were
purchased by its then officers and directors. Subsequently, Montgomery sold
200,000 shares of common stock to the public at an offering price of $1.00 per
share for gross proceeds of approximately $200,000.
Between August 1997 and approximately June 1998, Montgomery's
activities were limited to maintaining its good standing as a corporation under
the laws of Nevada and seeking to identify ongoing assets and operations that
Montgomery could acquire in exchange for its common stock. In this effort,
management reviewed a number of unimproved and improved properties for possible
acquisition, but none was purchased. Otherwise, Montgomery did not engage in
business operations or have any income. In March 1998, Keith Cannon, a Company
stockholder who was aware of the Company's search for operations, introduced
Company officers to Dinesh Maniar, who Mr. Cannon knew to have significant real
estate holdings, operations, and experience. In approximately March 1998,
representatives of Montgomery initiated a review of certain properties and
assets of Dinesh Maniar. As this review was being completed, Montgomery and Mr.
Maniar initiated discussions of the terms of a possible transaction. For several
months after the initial contacts between Company officers and Mr. Maniar, they
discussed from time to time the terms of a possible transaction while Company
management also considered other opportunities. Finally, the negotiations
between Company officers and Mr. Maniar led to the execution on January 12,
1999, of a letter of intent to acquire these properties from him.
In June 1999, Montgomery completed the acquisition of its four
properties from Mr. Maniar in the San Francisco Bay Area in exchange for
16,000,000 shares of common stock and Montgomery's assumption of approximately
$12,400,000 of indebtedness secured by the properties. In connection with the
transaction, Mr. Maniar was appointed president of Montgomery, and persons
designated by him were appointed as four of Montgomery's five directors.
Property management and development services, as well as general and
administrative support, are provided under a contract with Diversified
Investment and Management Corporation ("DIMC"), an entity affiliated with Mr.
Maniar. See "ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Montgomery's executive offices are located at 400 Oyster Point
Boulevard, Suite 415, South San Francisco, California 94080. Its telephone
number is (650) 266-8080, and its facsimile number is (650) 266-8089.
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Business Strategy
Montgomery emphasizes the following strategies:
o Lease and operate improved properties to generate current
positive cash flow while holding such properties for possible
long-term appreciation. Montgomery seeks to purchase or
develop commercial properties that can be leased to tenants
that management believes are financially sound, based on a
review of tenant financial statements, public filings with the
SEC, if any, credit reports, and other financial information
provided by the tenant or obtained from public sources, on
terms that will provide sufficient cash flow to meet or exceed
requirements for related mortgage amortization and operating
expenses. This enables Montgomery to generate current positive
cash flow while achieving possible investment return through
potential long-term appreciation. The San Ramon Retail Center
and Orchard Supply Shopping Center are examples of the
implementation of this strategy.
o Develop selected properties for either long-term leasing or
short term sale. Montgomery seeks to identify and acquire
unimproved properties or improved properties with renovation
potential that meet Montgomery's cash flow and potential
appreciation criteria. In some instances, Montgomery may
acquire and hold unimproved properties for future development
where the initial acquisition and holding costs are warranted,
in the opinion of management, in view of the projected
development potential. This approach is illustrated by the
Eccles Project in which the unimproved land was acquired from
a third party in 1980 by Mr. Maniar and may potentially be
developed by Montgomery. Montgomery's Keker & Van Nest Office
Building was acquired from a third party in 1980. Thereafter,
Montgomery completed substantial renovations, including a
seismic upgrade in 1989. This illustrates the purchase and
substantial renovation of an improved property to
significantly increase cash flow and appreciation potential.
o Realization of accumulated appreciation in properties through
refinancing or sale or exchange. By generating positive
current cash flow, Montgomery is able to retain long-term
ownership of properties that Montgomery believes have the
potential for significant appreciation. When circumstances
warrant, in the opinion of management, Montgomery may seek to
realize on appreciation in value by selling a property in
order to use the capital for opportunities with greater
potential financial return or directly exchanging the property
for another property management believes will offer Montgomery
a greater potential financial return. In other circumstances,
Montgomery may refinance a property to realize on a portion of
the appreciated value while retaining the property for
potential additional appreciation.
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Properties
Montgomery owns and operates three commercial leased properties
containing an aggregate of approximately 80,000 square feet of rentable space.
Montgomery also owns a 7.4 acre undeveloped parcel of land in South San
Francisco which it is currently evaluating to determine its intended use. Its
three improved properties, located in San Francisco and San Ramon, California,
are leased under long-term leases, with each anchor tenant being a reputable and
financially sound tenant, such that the properties currently provide positive
cash flow after payment of related mortgage amortization and operating expenses.
Montgomery's properties are summarized as follows:
<TABLE>
<CAPTION>
Land Building Constructed/ Lease Appraised
Property Use (sq. ft.) (sq. ft.) Renovated Expiration (1) Value (2)
-------- --- --------- --------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Keker & Van Nest Office Building Professional 6,300 22,300 1907/1989 2004 $6,750,000
710 Sansome Street offices
San Francisco, CA
Orchard Supply Shopping Center Retail 176,854 54,700 1987 2013(3)
1041-1061 Market Place 6,500,000
San Ramon, CA
San Ramon Retail Center Retail 9,300 4,823 1987 2005 to
1021 Market Place 2009 1,140,000
San Ramon, CA
Eccles Project To be
South San Francisco, CA determined 322,344 --(4) N/A N/A 8,950,000
------- ------ ---------
514,798 81,823 $23,340,000
======= ====== ===========
</TABLE>
(1) Excluding renewal options.
(2) Based on third party MAI appraisals obtained between September 1998 and
November 1999.
(3) Approximately 51,518 square feet are leased to a single tenant (Orchard
Supply Hardware, a wholly-owned subsidiary of Sears Roebuck & Co.)
under a lease expiring June 2013. The remaining 3,186 square feet are
leased to three small tenants under leases expiring at various times
between 2003 and 2005.
(4) Montgomery has prepared plans that would provide for construction of a
195,000 square foot office building. However, management is presently
evaluating alternatives to determine whether to undertake development
of the office building or a hotel, sale, or exchange the property, or
enter into a ground lease with a third party.
Montgomery will continue to manage and operate, through DIMC, the Keker
& Van Nest Office Building, the Orchard Supply Shopping Center, and the San
Ramon Retail Center. Management is presently identifying and considering the
available alternatives with respect to the Eccles Project land. Additionally,
Montgomery will continue to evaluate, purchase, lease, operate, develop,
finance, and sell other properties as deemed appropriate by management and as
circumstances permit.
Eccles Project
The Eccles Project area consists of approximately 7.4 acres of
unimproved land located at Eccles Avenue and Gull Road in South San Francisco,
California. This area, known as Oyster Point, is approximately four miles from
the downtown central business district of South San Francisco. The area has a
variety of mixed uses and is dominated by industrial buildings and office parks,
many of which have a bioengineering emphasis, such as the Genentech campus in
South San Francisco. Marriott Hotels is constructing a new hotel to the west of
the Eccles Project at the Oyster Point Blvd. junction with Highway 101.
Additionally, Montgomery has recently learned that Hilton Hotels, Inc., has been
approved for the development of a 325 room hotel on land across the street from
the Eccles Project land.
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The Eccles Project is accessed from the Oyster Point exit of Highway 101,
leading to Oyster Point Boulevard, a two-lane road that is currently being
widened into four lanes.
The Eccles Project land was acquired by Mr. Maniar from a third-party
in 1980. The property is currently subject to a First Deed of Trust in favor of
Redwood Bank respecting a line of credit in the amount of approximately
$2,000,000, bearing interest at the prime rate plus 1%, with no amortization,
due and payable in full March 2000. Redwood Bank has executed a commitment in
favor of Montgomery to extend the term of this loan for 15 months, to June 2001.
The terms of the commitment call for Montgomery to pay $1,000 as a loan
extension fee together with certain other associated costs totaling
approximately $3,000 (appraisal fees, title fees, etc.) and to reduce the
outstanding principal balance on the loan by $100,000. Montgomery has sufficient
cash to meet these outlays, however in order to conserve operating funds,
Montgomery has made arrangements to borrow $100,000 from Mr. Maniar at 10%
interest for one (1) year. At their February 8, 2000 meeting, the board of
directors approved the terms of the Redwood Bank loan extension and, with Mr.
Maniar abstaining, approved the $100,000 loan to Montgomery from Mr. Maniar.
In November 1999, Montgomery obtained an appraisal of $8,950,000 for
the Eccles Project from The Property Sciences Group, Inc., an independent
appraisal company licensed as such in California and whose President is an
"MAI", that is a member in good standing of the Appraisal Institute. The
Appraisal Institute is an appraisal industry certification organization that
specifies minimum appraisal procedures and practices for its members. MAI is a
designation awarded by the Appraisal Institute to members that are experienced
in the valuation and evaluation of commercial, industrial, residential, and
other types of properties.
The November 1999 valuation was based upon the vacant land with
proposed entitlements to construct a proposed 195,000 square foot office
building. The appraisal does not take into consideration costs for the
development of plans from architects, surveyors, environmental reports, city
planning review and recommendation to city council, public review, costs
incurred as a result of changes in plans and risks associated with restricted
designs. The costs associated with this approval process are typically not
quantifiable. Of course, there can be no assurance that Montgomery will be able
to obtain approval for its proposed plan or any other development plan.
Management is presently evaluating three alternatives with respect to
the Eccles Project land: (i) development by Montgomery, either alone or through
a joint venture with third parties; (ii) sale or exchange of the property; or
(iii) a long-term ground lease.
Montgomery has prepared conceptual designs for construction of a
195,000 square foot office building with underground and surface parking areas
providing space for 800 vehicles on the Eccles Project land. Montgomery may now
proceed to the permitting stage and seek building permits and related consents
if management so chooses. It is estimated by management that the construction
would increase the appraised value of the property from $8,950,000 to
approximately $50,000,000, based on management's review of recent valuations of
nearby properties with similar improvements and market rate capitalization of
estimated possible rental rates. Management has recently been reconsidering its
development plans because of the approval for Hilton Hotels, Inc., to commence
construction of a 325 room hotel on land across the street from the Eccles
Project and the number of new hotels that are being developed in the South San
Francisco area. These hotels are being constructed to accommodate the recent
expansion of the San Francisco International Airport. Management believes that
the Eccles Project area has promising potential for construction of a new hotel
because it is one of the largest undeveloped sites in the South San Francisco
area.
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In the event that Montgomery undertakes development of the Eccles
Project and constructs either the proposed office building or a hotel,
management estimates that it will require approximately $30,000,000 in
construction and permanent financing to undertake such proposed development.
This estimated construction cost of approximately $150 per square foot is based
on management's experience and familiarity with construction costs for similar
buildings in the area. Actual construction and permanent financing may vary
materially from this estimate, which is based on management's development
experience and not on any third party development, construction and financing
evaluation. Montgomery has not obtained binding commitments for such financing
and will be dependent on the availability of such financing from commercial
lending sources. As a new entrant into the real estate development business in
the San Francisco Bay Area, Montgomery may not be able to obtain required
financing on favorable terms or at all. Montgomery may attempt to obtain a
portion of any such funds and thereby decrease the risk of development by
entering into a joint venture or other arrangement with third parties to develop
the Eccles Project. However, this would also decrease Montgomery's return on its
investment for any development. Some sources of financing may demand that Mr.
Maniar, as a principal stockholder, president, and director of Montgomery,
personally guarantee company indebtedness, and Mr. Maniar is under no obligation
to do so.
In addition to development of the Eccles Project, as described,
management is considering the possibility of selling or exchanging the Eccles
Project land or entering into a long-term ground lease. Management is also
considering structuring a tax-free exchange which would allow Montgomery to
exchange the Eccles Project for another property that would provide additional
opportunities to Montgomery consistent with its strategies. In the event the
Eccles Project is sold, significant federal income tax liability could result.
Therefore, it may be advantageous to structure any disposition as a tax free
exchange. As well as a direct sale or exchange, management has discussed the
possibility of entering into a long-term ground lease. This would provide cash
flow to Montgomery while eliminating any tax liability associated with the sale
of the Eccles Project.
Management will continue to evaluate the available options to determine
how to proceed with the Eccles Project in a manner that provides the greatest
return and cash flow to Montgomery while minimizing risk and advancing
Montgomery's strategy. There can be no assurance that management will indeed be
successful in identifying and pursuing the best possible use for the Eccles
Project.
Keker & Van Nest Office Building
The Keker & Van Nest Office Building is located at 710 Sansome Street,
San Francisco, California, with a total land area of approximately 0.1447 acres.
The office building is four-stories (including the basement), containing a total
leasable floor area of approximately 22,300 square feet. The building is a
reinforced masonry building constructed in 1907. The building was renovated in
1989 to meet seismic and other building code requirements and subsequently
leased in its entirety to the current tenant, a San Francisco law firm. The law
firm leased the building at a monthly rental of $56,395 through December 1,
1999. Pursuant to a lease option exercise by the tenant, the monthly rent
increased to $59,190 per month and the lease term was extended for five years
until December 2004, unless extended at the option of the tenant for another
five years. The building is in excellent condition, based on a third-party
property condition report dated November 1998.
The property is located just north of the downtown central business
district in the Jackson Square neighborhood, a historical area consisting
primarily of low-rise buildings. Many buildings in this area are of brick
construction and have been renovated to accommodate office use. The area has
become a niche market location for law firms, graphic designers, and
consultants. Retail activity in the area is also
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niche-oriented with a high concentration of antique dealers in addition to
restaurants and business support services. Interstate 80 is located
approximately one mile south of the area.
The property has been owned by Mr. Maniar since he acquired it from an
unrelated party in 1980. The property is secured by a First Deed of Trust in
favor of Wells Fargo Bank in the approximate principal amount of $4,800,000,
bearing interest at the fixed rate of 6.67% per annum, amortized over 30 years,
with the unpaid balance due January 2009. An independent MAI appraiser (The
Property Group Sciences Group, Inc.) valued this property at $6,750,000 as of
October 1998. This property illustrates implementation of Montgomery's strategy
of acquiring improved properties that can be renovated significantly to improve
cash flow and appreciation potential.
Orchard Supply Shopping Center
The Orchard Supply Shopping Center is located at 1041-1061 Market
Place, San Ramon, California 94583. The lot on which the Shopping Center is
located contains approximately 176,854 square feet. The shopping center consists
of one building containing 51,518 square feet and another containing 3,186
square feet. The larger building is leased to Orchard Supply Hardware under a
lease, with monthly rental payments of $40,802, that expires June 2013. The
smaller building is leased to three separate small businesses, for aggregate
monthly rentals of $9,510. The property is located in the incorporated city of
San Ramon in Contra Costa County, California, approximately 25 miles east of San
Francisco and 15 miles east of Oakland.
Beginning in 1980, major companies began relocating large office
facilities to central Contra Costa County, causing an office development boom
throughout the subsequent decade. Major corporations have chosen Contra Costa
County because of lower rental prices and availability of larger floor-space
office space. The property is adjacent to the Bishop Ranch residential
development and is defined by numerous retail shopping centers. In addition, the
county has undergone residential growth due to its proximity to Silicon Valley
and comparatively reasonable real estate prices.
The property was purchased by Mr. Maniar in December 1991 from an
unrelated third-party. The Orchard Supply Shopping Center is secured by a First
Deed of Trust in favor of Greenwich Capital Products, Inc., in the approximate
principal amount of $5,100,000, bearing interest at 7.05% per annum, amortized
over 30 years with the unpaid balance due August 2008. In May 1998, Mr. Maniar
obtained an independent MAI appraisal by The Property Group Sciences Group,
Inc., of the improved property of $6,500,000.
There are approximately 220 asphalt-paved parking spaces on the east
and southern sides of the shopping center. The improvements were constructed in
approximately 1987.
San Ramon Retail Center
The San Ramon Retail Center was originally part of the Orchard Supply
Shopping Center. In 1996, Mr. Maniar caused a subdivision to be created whereby
the San Ramon Retail Center became a separate legal parcel.
The 4,823 square foot building at the San Ramon Retail Center is fully
leased to three tenants for approximately $9,500 per month. GST Telecom (a
national company whose stock is publicly traded) which occupies approximately
1,281 square feet at a base rent of $2,369.85 per month, together with a monthly
impound of $439 per month. GST Telecom's lease expires in March 2008 (subject to
option periods). Green Valley Cleaners occupies approximately 1,666 square feet
at a monthly rent of
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$3,165.40 together with a monthly impound of $383. The Green Valley lease
expires February 28, 2008 and is personally guaranteed by the owners of Green
Valley. Cave Adsum Corporation dba Alphagraphics 503 (an Alphagraphics
franchise) occupies the remaining 1,876 square feet at a monthly rent of
$3,975.62 together with a monthly impound of $770. The Alphagraphics lease
expires October 31, 2004 (subject to a 5 year option) and is personally
guaranteed by Donald & Wendy Jardine, the owners of the Alphagraphics franchise.
Monthly impounds are charged to each of these three tenants as discussed above,
in order to reimburse Montgomery for real estate taxes and certain expenses
related to the operation and maintenance of the common areas. The San Ramon
Retail Center is 100% occupied.
The San Ramon Retail Center consists of an approximately 9, 298 square
foot site and is located adjacent to Montgomery's Orchard Supply Shopping Center
in San Ramon. This property includes approximately 20 parking spaces.
Additionally, the site has a reciprocal parking arrangement with the Orchard
Supply Shopping Center to the west.
Mr. Maniar has owned the property since December 1991, when he
purchased it from an unrelated third party. The property is secured by a First
Deed of Trust in favor of Gross Mortgage Company, Inc., in the approximate
principal amount of $545,000, bearing interest at 11% per annum, with no
amortization and the unpaid balance is due in June 2000. In January 1999, Mr.
Maniar obtained an independent MAI appraisal by The Property Group Sciences
Group, Inc., valuing the property at $1,140,000, "as is," or at $1,200,000,
fully leased.
Risk Factors
Montgomery's proposed operations are subject to the following
substantial risks.
Montgomery's operations will be substantially dependent on Dinesh Maniar.
In June 1999, Mr. Dinesh Maniar was appointed president of Montgomery.
Montgomery will be substantially dependent on the continued participation of Mr.
Maniar. The loss of Mr. Maniar's knowledge and abilities could have a material
adverse affect on Montgomery's operations and the results of its proposed
development and operation of its properties. Mr. Maniar will manage the
day-to-day affairs of Montgomery. However, he also owns and manages three other
business activities in California: a commercial vineyard operation on
approximately 530 acres in Napa and Sonoma Counties; two thoroughbred race horse
operations; together with an apartment complex and a retail shopping center. Day
to day management of these other businesses is delegated to employees, but Mr.
Maniar determines all significant or strategic decisions. Mr. Maniar will not
devote his full time and attention to the affairs of Montgomery.
Montgomery will require substantial additional funds to develop the Eccles
Project.
Montgomery is presently evaluating certain alternatives with respect to
the development, lease, or sale of the Eccles Project land. In the event
development and construction is undertaken by Montgomery, management estimates
that it will require approximately $30,000,000 in construction and permanent
financing to undertake such development. Montgomery has not obtained binding
commitments for such financing and will be dependent on the availability of such
financing from commercial sources. As a new entrant into the real estate
development business in the San Francisco Bay Area, Montgomery may not be able
to obtain required financing on favorable terms or at all. Montgomery may
attempt to diversify the risk by entering into joint ventures or other
arrangements with third-parties. However, this would also decrease Montgomery's
return on its investment. Some sources of financing may demand that Mr. Maniar,
as a principal stockholder, president, and director of
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Montgomery, personally guarantee company indebtedness, and Mr. Maniar is under
no obligation to do so. If Montgomery cannot obtain the required funds, it will
be unable to develop the Eccles Project.
Montgomery is subject to the general risks of real estate ownership.
Ownership and operation of real estate involves certain risks that may
be beyond the control of Montgomery or its officers and directors, including:
o adverse changes in general economic conditions;
o adverse changes in local conditions, such as excessive
building resulting in an oversupply of commercial units in an
area where Montgomery's properties are located;
o reduction in the appeal of particular types of properties;
o reduction in the cost of operating competing properties or
decreases in employment that reduce the demand for properties
in the area;
o the possible need for unanticipated renovations, particularly
in older structures;
o adverse changes in surrounding land values;
o adverse changes in zoning laws, other laws and regulations and
real property tax rates;
o damage from earthquakes or other natural disasters;
o the availability and expense of liability insurance; and
o the ability of the enterprise to provide for adequate
maintenance of its property.
There can be no assurance that any property will be sufficiently occupied at
rents sufficient to ensure sustained operations or allow adequate cash flows to
Montgomery. The success of Montgomery and any of Montgomery's investments will
depend upon factors that may be beyond the control of Montgomery, Montgomery's
directors, or any of its officers, and cannot be predicted at this time.
Montgomery's properties are subject to substantial encumbrances.
In acquiring its current properties, Montgomery assumed related
liabilities aggregating approximately $12,400,000, as compared to independent
MAI appraisals of market value dated between September 1998 and November 1999,
aggregating $23,340,000. Montgomery will have to incur substantial additional
indebtedness to develop the Eccles Project if it determines to undertake
development and construction. In the event Montgomery is unable to make any
required payments due under any indebtedness secured by its properties, the
secured party could foreclose on the related property and Montgomery's
operations would be adversely affected.
Management may not identify the optimum use of the Eccles Project land.
Although management is presently evaluating alternatives to develop,
sale, exchange, or lease the Eccles Project and is seeking to pursue the
alternative that will provide the greatest financial return while minimizing
economic risk to Montgomery, there can be no assurance that management will in
fact be successful in these efforts.
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Montgomery's development of the Eccles Project will be subject to construction
and development risks.
In the event Montgomery undertakes development of the Eccles Project or
any other property, such construction and development activities will expose
Montgomery to certain risks such as cost overruns, carrying costs, availability
and costs of materials and labor, weather conditions and government regulation.
Additionally, Montgomery will incur costs in connection with the design and
implementation of any development and costs in connection with performing
certain oversight and review functions, including costs for reviewing
construction design proposals, negotiating and contracting for feasibility
studies and supervising compliance with local, state or federal laws and
regulations.
Montgomery's officers and directors are subject to conflicts of interest.
Montgomery's officers and directors and their affiliates have been,
are, and will continue to be subject to significant conflicts of interest.
Officers and directors will be subject to competing demands for their limited
time as they divide their attention between managing Montgomery and their other
business and investment interests. In some instances, officers and directors,
particularly Mr. Maniar, will invest in real estate without participation by
Montgomery. Such persons will be responsible for allocating such portions of
their time as they may deem appropriate to the business affairs of Montgomery.
Mr. Maniar is the sole owner, president, and a director of DIMC, which provides
a broad array of services to Montgomery. The terms of the arrangement under
which Montgomery obtains property management services, legal, accounting, and
bookkeeping services, administrative support and office use from DIMC are all
provided pursuant to the terms of a management contract pursuant to which DIMC
receives a minimum of $7,500 per month as payment for these services (increasing
to $10,000 per month in June 2000 and $15,000 per month in June 2001). While
this contract was approved by a unanimous vote of Montgomery's outside directors
(Mr. Maniar abstained because of the conflict of interest resulting from his
affiliation with both Montgomery and DIMC), this does not guarantee the absence
of a conflict of interest. There can be no assurance that any of the foregoing
or other conflicts of interest will be resolved in favor of Montgomery or its
stockholders. Montgomery has adopted no policies respecting the resolution of
actual or potential conflicts of interest.
Under Nevada law, Montgomery's officers and directors are obligated to
exercise their powers in good faith and with a view to the interests of the
corporation, considering both the long-term and short-term interests of the
corporation and its stockholders, including the possibility that these interests
may best be served by the continued independence of the corporation from
ownership by an acquiring entity. No transaction between Montgomery and one or
more of its officers or directors, an entity in which such officers or directors
also serve as officers or directors, or in which they have a financial interest,
is void or voidable if any of the following occur:
o the fact of such common directorship, office, or interest is
disclosed or known to the board or committee and noted in the
minutes and a majority of the board or committee approves the
transaction in good faith, without counting the vote of common
or interested directors;
o the fact of such common directorship, office, or interest is
disclosed or known to the stockholders and the transaction is
approved by the holders of a majority of the common stock,
with the stock of the common or interested directors voting;
o the fact of the common directorship, office, or financial
interest is not known to the person having such common
directorship, office or financial interest when it is
considered by the board of directors; or
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o the transaction is fair to Montgomery at the time it is
approved or ratified.
Although Mr. Maniar has abstained, in accordance with the foregoing
provision, from voting as a director on matters in which he has a conflicting
interest, he is not required and does not intend to abstain in matters submitted
to the stockholders for approval under the foregoing provisions. Inasmuch as Mr.
Maniar currently owns beneficially approximately 97.3% of the issued and
outstanding common stock, he would be able to assure stockholder approval of any
transaction in which he is an interested person.
See "Item 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Montgomery's articles of incorporation provide that the personal
liability to the corporation of officers and directors for breach of fiduciary
duty is limited to acts or omissions that involve intentional misconduct, fraud,
or a knowing violation of law.
Mr. Maniar, as the beneficial owner of approximately 97.3 of
Montgomery's issued and outstanding common stock, also owes a fiduciary duty to
Montgomery and its other stockholders, particularly when considering mergers,
sales of assets, or other extraordinary matters requiring stockholder approval.
Such fiduciary duty generally may be breached if Mr. Maniar acts as a
controlling stockholder to oppress the minority or approve matters that are
unfair to Montgomery and its other stockholders.
The appraisals of the properties acquired by Montgomery from Dinesh Maniar are
subject to numerous uncertainties.
The number of shares of common stock that Montgomery issued to acquire
its principal properties from Mr. Maniar was determined in large part on the
aggregate appraised market valuation of such properties by independent MAI
appraisers. There are numerous uncertainties inherent in estimating the value of
real estate. The estimated values set forth in the appraisals are based on
various comparisons to sales prices of other properties; predictions about
market conditions, demand, vacancy rates, and other factors; assumptions about
the property's condition, conformance with laws and regulations, absence of
material defects, and a variety of numerous other factors; estimates of lease
revenues and operating expenses, and other items. Any significant change in
these comparisons, predictions, assumptions, and estimates, most of which are
beyond the control of Montgomery, could materially and adversely affect such
estimated market values. Montgomery cannot assure that it would be able sell the
properties at a price at or above their appraised market valuation.
In obtaining the property appraisals, it was in Mr. Maniar's best
interest to obtain high market valuations in order to enhance his ability to
obtain desired refinancing of the related indebtedness and to increase the
number of shares of common stock issuable to him on conveyance of the properties
to Montgomery.
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<PAGE>
Montgomery's operations will be affected by variances in rental income.
Montgomery's real property investment returns depend in large part on
the capital appreciation in property values and amount of income earned as
compared to related expenses incurred. Most of Montgomery's properties are
leased under long-term arrangements that restrict Montgomery's ability to
increase rents. If Montgomery's properties do not generate revenues sufficient
to meet operating expenses, debt service and capital expenditures, which may be
subject to increases outside of Montgomery's control, Montgomery's income will
be adversely affected. Further, Montgomery cannot assure that the value of its
properties will appreciate.
Montgomery's expenditures for property ownership are fixed.
Various significant expenditures associated with an investment in real
estate, such as mortgage payments, real estate taxes and maintenance expenses,
generally are not reduced when circumstances cause a reduction in revenue from
the investment. Thus, Montgomery's operating results and cash flow may decline
materially if its rental income is reduced, since its expenses will not be
correspondingly reduced.
Montgomery's real estate investments may be illiquid.
Real estate investments are relatively illiquid, which limits
Montgomery's short-term ability to restructure its portfolio in response to
changes in economic or other conditions. The appraisals obtained for the
properties estimate a 9-12 month period for marketing the properties such that
immediate liquidity at said values is not available.
Montgomery's properties are geographically concentrated.
All of Montgomery's properties are located in the San Francisco Bay
Area. Adverse economic factors or other changes in this area could adversely
impact Montgomery's operations and revenues.
Montgomery has few tenants.
Most of Montgomery's properties are occupied by a single tenant or a
limited number of tenants, many of which are large, financially stable entities.
Two tenants currently occupy about 90% of Montgomery's leaseable square feet and
lease revenues from the two tenants represented approximately 88% and 91% of
Montgomery's income during 1998 and 1997, respectively. Losing a key tenant
could adversely affect Montgomery's operating results while it seeks a qualified
replacement from a limited number of potential large tenants. Montgomery may
incur costs for renovation, leasing emissions or the construction of leasehold
improvements if tenants are changed, particularly if a property with a single
large tenant is converted to multiple tenant use.
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<PAGE>
Title to Properties
In connection with acquiring its properties from Mr. Maniar, Montgomery
conducted a due diligence review of title to the properties. In addition,
Montgomery purchased title insurance coverage from a major title insurance
company, insuring marketable title to all four properties in the name of
Montgomery in the full amount of the valuation set forth in the appraisals
obtained by Mr. Maniar in connection with refinancing of the properties in 1998
and 1999. Based on the foregoing, Montgomery believes it has clear and
marketable title to the properties, except for the obligations assumed and
outlined above.
Operational Hazards and Insurance
Montgomery does not directly operate its properties but instead has
engaged DIMC, a licensed property management company affiliated with Mr. Maniar,
to render such services. This procedure allows Montgomery to transfer most
operational matters to DIMC, which is 100% owned by Mr. Maniar; he is a director
(one of three) and the President. DIMC maintains liability insurance in the
amount of $1,000,000, but does not have any other insurance on which Montgomery
could rely should DIMC be negligent in its duties.
Montgomery maintains $1,000,000 in liability insurance with respect to
each of its properties, together with a $10,000,000 umbrella policy which is
placed with A+ VIII or better companies, as determined by Best's Rating System.
Montgomery also maintains property insurance for each of its properties in an
amount Montgomery believes represents the full replacement cost, except that
Montgomery does not maintain any property insurance for the building occupied by
Orchard Supply Hardware, as Sears, Roebuck & Co., the parent corporation,
self-insures the property damage risk on that property, pursuant to the terms of
the lease.
Montgomery's insurance is an "All Risks" type of insurance and covers
most commercial risks associated with the ownership of real property. All of
Montgomery's properties are located in areas that are subject to earthquake
activity. Except for the Keker & Van Nest Office Building, Montgomery's
insurance policies do not cover damage caused by seismic activity, although they
do cover losses from fires after an earthquake. Additionally, the amount of
earthquake insurance may not be adequate to cover all losses. Montgomery does
not maintain any other insurance that would protect it from acts of nature, war,
or other catastrophe, as Montgomery generally does not consider such insurance
coverage to be economical. If an earthquake or other similar catastrophe occurs
and results in substantial damage, Montgomery's investment could be lost, which
would have a material adverse effect on Montgomery's financial condition and
operating results. Notwithstanding the damage or destruction of properties and
related improvements, Montgomery could remain obligated to repay the
indebtedness secured by such property.
Government Regulation
Montgomery's activities are subject to extensive federal, state and
local laws and regulations which can have substantial impact upon the
acquisition, development, and management of real estate. Present as well as
future legislation and regulations could cause additional expenditures,
restrictions and delays in Montgomery's business, the extent of which cannot be
predicted.
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State and Local Regulation
The commercial real estate industry is subject to extensive state and
local government regulation, including zoning restrictions, building code
requirements, environmental law, the Americans with Disabilities Act of 1990
(the "ADA") and similar laws. All of the properties owned by Montgomery
currently comply with all relevant zoning, building, environmental, and ADA
laws; however, there can be no assurance that these laws might be changed so as
to impose upon Montgomery the legal duty to make changes to its properties so as
to comply with said laws.
Prior to its acquisition of the properties from Mr. Maniar and as part
of its due diligence review, Montgomery reviewed the Phase I environmental
reports, seismic studies, building condition reports, and certain other relevant
documentation to assure that the properties acquired were in good to excellent
condition and did not violate any applicable governmental law or regulation.
Although Montgomery concluded that no such difficulties exist, it is possible
that a latent defect or other condition was unknown at the time of the
acquisition (or not ascertainable) and which would impose liability on
Montgomery.
Environmental Regulations
Under various federal, state, and local laws and regulations, an owner
of real estate is liable for the costs of removal or remediation of certain
hazardous substances on its property. Such laws often impose liability without
regard to whether the owner knew of, or was responsible for, the presence of
hazardous substances. The costs of remediation or removal may be substantial,
and the presence of the hazardous substances, or the failure to promptly
remediate them, may adversely affect the owner's ability to sell the real estate
or to borrow using the real estate as collateral. In connection with its
ownership and operations of the properties, Montgomery may be potentially liable
for the costs of removal or remediation of hazardous substances.
Phase I environmental reports on Montgomery's properties dated as
follows report an absence of any significant or adverse quantities of toxic
waste or hazardous materials at the properties:
Keker & Van Nest Office Building November 1998
Orchard Supply Shopping Center May 1998
San Ramon Retail Center November 1995
Eccles Center March 1998
Safety and Health Regulations
Montgomery's properties are subject to the ADA. Under the ADA, all
places of public accommodation are required to comply with certain federal
requirements related to access and use by disabled persons. The ADA has separate
compliance requirements for "public accommodations" and "commercial facilities"
but generally requires that buildings and services (including restaurants and
retail stores) be made accessible and available to people with disabilities. The
ADA requirements could require removal of access barriers and could result in
the imposition of injunctive relief, monetary penalties, or, in some cases, an
award of damages.
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<PAGE>
Competition
The real estate business is intensely competitive in all of its phases,
and Montgomery competes with many real estate investment and development firms,
including individuals, insurance companies, real estate investment trusts and
other entities, most of which have greater financial resources. Montgomery
expects keen competition from a variety of sources for attractive real estate
investment and development opportunities. Competition among private and
institutional purchasers of real property has increased substantially in recent
years, with resulting increases in the purchase prices paid for real property
and higher fixed costs.
Employees and Consultants
Montgomery obtains all of its services through outside management
companies and through outside consultants. Montgomery does not have any
employees other than the officers of Montgomery, who presently serve without
compensation (other than appreciation in stock prices). In December 1999, it was
determined each director would receive $300 for each meeting attended.
Additionally, on December 22, 1999, Montgomery granted each existing director
options to purchase 10,000 shares of common stock, exercisable until December
31, 2002, at an exercise price of $3.125 per share, which is greater than the
market value of the common stock as of the date of grant. Montgomery obtains all
of its property management services from DIMC and must rely upon the employees
and other facilities of DIMC for all day-to-day management decisions and
actions. See "ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Montgomery's legal and accounting work is done primarily through outside law
firms and CPA firms, although most routine transactions are handled through the
staff attorneys, accountants, and other employees of DIMC. The management
contract with DIMC has a five-year term.
Offices and Facilities
Montgomery obtains the shared use of executive space and related
services at 400 Oyster Point Boulevard, Suite 415, South San Francisco,
California 94080, under a cost reimbursement arrangement with DIMC, an
affiliated company. See "ITEM 7. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- --------------------------------------------------------------------------------
Overview
The following discussion should be read in conjunction with the
Financial Statements of Montgomery and the Notes thereto appearing elsewhere
herein.
Montgomery is a real estate company that emphasizes investment in both
development real estate assets and income producing real estate assets.
Montgomery is engaged in the ownership, leasing, management, operation,
development, redevelopment, acquisition, and sale of real estate assets in the
Greater San Francisco Bay Area. Montgomery currently owns retail shopping
centers and an office building and has a project ready for development or sale
as either an office or as a hotel convenient to the San Francisco International
Airport. Montgomery conducts all of its real property management activities
through a written management agreement with a related corporation, Diversified
Investment & Management Corporation ("DIMC"), which is 100% owned by the
majority stockholder, Mr. Maniar. Mr. Maniar currently owns in excess of 96% of
the stock of Montgomery.
Montgomery's financial condition and results of operations were
substantially changed by the acquisition of its four (4) properties from Mr.
Maniar in June 1999. These four properties are: (1) the Keker & Van Nest Office
Building in San Francisco; (2) the Orchard Supply Shopping Center in San Ramon,
California; (3) the San Ramon Retail Center in San Ramon, California; and (4)
the Eccles Project land located in South San Francisco, California. These
assets, which have an appraised value of approximately $23,340,000 based on
independent appraisals, were sold to Montgomery by Mr. Maniar in exchange for
16,000,000 shares of Montgomery's stock and the assumption of related
indebtedness by Montgomery of approximately $12,400,000, together with payment
of certain costs associated with the transfer. The transaction with Mr. Maniar
closed on June 8, 1999.
With the acquisition of these assets, Montgomery became an operating
real estate company with approximately 80,000 square feet of leaseable property
and approximately 7.4 acres of land ready for development in South San
Francisco, California. The lease space is currently 100% occupied. Plans for the
development, sale, or lease of the Eccles Project are currently being evaluated
by management.
Basis of Presentation of Financial Information
The acquisition of the four properties was accounted for as a "reverse
acquisition" whereby, for accounting purposes, the properties acquired
Montgomery under the purchase method of accounting and, due to the lack of
significant prior Montgomery operations, was substantially recorded as a
recapitalization. Accordingly, the historical financial statements have been
restated after giving effect to the June 8, 1999, acquisition of Montgomery. The
financial statements were prepared to give retroactive effect to January 1,
1998, of the reverse acquisition completed on June 8, 1999, and represent the
operations of the properties. Consistent with reverse acquisition accounting:
(i) all properties, assets, liabilities, and accumulated deficit are reflected
at the properties' combined historical cost (as the accounting acquirer); and
(ii) the preexisting outstanding shares of Montgomery (the accounting acquiree)
are reflected at their net asset value as if issued on June 8, 1999. In
addition, the benefit of deferred tax assets created by the contribution of the
properties on June 8, 1999, has been recorded as additional capital.
Distributions shown in the accompanying statement of stockholders' deficit
represent
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<PAGE>
the properties' cash flows, and refinancing proceeds distributed to Mr. Maniar
prior to the reverse acquisition.
Results of Operations
Comparison of 1999 and 1998
Montgomery's net loss (after extraordinary items) decreased from
$361,051 to $154,902, or 57.1%, for 1999 compared to 1998.
Montgomery's total revenues increased from $1,316,794 in 1998 to
$1,369,977 in 1999, or 4.0%, primarily because of two factors: (a) rental
payments commenced November 1999 under the new lease with Alphagraphics 503 at
the San Ramon Retail Center, and (b) rental increases took effect December 1,
1999 in the base rent from Keker & Van Nest. Additionally, increases in tenant
recoverables attributable to both the Orchard Supply Shopping Center and the San
Ramon Retail Center effected total revenue. Montgomery expects that it will
continue to incur minor variations in rental income due to differing levels of
expenses reimbursable under the lease, as well as by reason of increases in
certain base rents due to increases in the Consumer Price Index. Currently, with
the exception of the Eccles Project, all of Montgomery's properties are 100%
leased under lease terms extending beyond the end of 2000 so that no rent
reductions due to vacancies are expected for the balance of the current year.
Total operating expenses increased to $642,960 during 1999 from
$590,504 during 1998, or approximately 9.1%, due primarily to an increase in
administrative expenses.
Net interest expense was approximately equal during 1999 and 1998,
reflecting a lower weighted average interest rate in 1999 offset by larger loan
amounts. As a result of refinancings in late 1998 and early 1999, the previous
outstanding loans with principal balances aggregating approximately $10,500,000
at a weighted average interest rate of 8.3% per annum were refinanced with loans
with aggregate original principal balances of approximately $12,400,000 with a
weighted average interest rate of 7.35%.
Extraordinary item expenses of $153,077 for 1998 was a non-recurring
item. Extraordinary items include prepayment penalties and unamortized loan fees
that were written off due to the early extinguishment of debt in connection with
1998 refinancing activity.
Liquidity and Capital Resources
Montgomery has met its requirements for liquidity and capital resources
principally from cash provided by operating and financing activities.
Operating Activities
Operating activities provided net cash of $145,518 and $11,467 for 1999
and 1998, respectively. Noncash expenses related to depreciation and
amortization of $275,188 in 1999 more than offset the net loss. In 1998,
depreciation and amortization of $329,566 and write-off of deferred loan costs
of $101,558 together more than offset the net loss. In addition, during 1999,
fluctuations in accrued interest and security deposits and prepaid rent provided
an aggregate of $77,974 in cash. During 1998, fluctuations in accrued interest
and security deposits and prepaid rent used cash of $131,210.
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<PAGE>
Investing Activities
During 1999 and 1998, investing activities used varying amounts of cash
due to additions to properties for tenant improvements or payments for lease
commissions and loan costs. These amounts will continue to vary depending on the
level of activities of Montgomery in refinancing existing obligations, entering
into new leases, or constructing improvements.
Financing Activities
Montgomery's financing activities reflect the results of its debt and
equity transactions. During 1999, financing activities provided net cash of
$52,770 as a result of both issuances of common stocks and notes offset by
distributions and principal payments on notes.
During 1998, financing activities provided net cash of $199,080,
reflecting the net funds provided by refinancing of certain of Montgomery's
secured indebtedness and the distribution of financing proceeds to Mr. Maniar.
Montgomery has net cash flow from its current activities, which it
believes it will be able to continue on a long-term basis, providing sufficient
cash to cover activities other than new acquisitions or developments while
sheltering cash flow from income tax by reason of the net taxable loss that is
generated by depreciation and amortization. However, Montgomery's positive cash
flow may not be sufficient to fund expansion or acquisitions. Montgomery
currently generates positive cash flow from operations with noncash expenses
such as depreciation and amortization generating a net loss. Montgomery plans to
achieve net income once the Eccles Project is either developed or sold, as
either course of action will substitute an income producing asset for a real
estate asset that currently generates a net loss based upon its carrying costs.
Equity in Real Estate
Montgomery's properties have a value of approximately $23,340,000 based
on independent appraisals obtained between September 1998 and November 1999, as
compared to the historical cost, net of depreciation, of $8,513,506 with which
such properties are reported in its financial statements as of December 31,
1999. The related indebtedness secured by such properties totaled $12,338,166 as
of December 31, 1999. Montgomery believes that the amount by which the appraised
value of its properties exceeds the related indebtedness provides an important
financial resource. When circumstances warrant, in the opinion of management,
Montgomery may seek to refinance a property to realize on a portion of the
appreciated value while retaining the property for potential additional
appreciation. Generally, Montgomery will try to structure such refinancing so
that the property will continue to provide sufficient cash flow to meet or
exceed requirements for related mortgage amortization and operating expenses.
Montgomery's goal is to generate current positive cash flow while achieving
possible investment return through potential long-term appreciation. Proceeds
from such refinancings will be used for Montgomery's capital requirements.
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Capital Requirements
Montgomery plans to expand its asset base in the future. Expansion is
currently focused primarily upon the Eccles Project in South San Francisco,
California that may be developed by Montgomery for offices or a hotel, sale or
exchange, or a long-term ground lease. If Montgomery undertakes development of
the Eccles Project, it anticipates that approximately $30,000,000 in development
funding will be required. Montgomery may seek to borrow required development
funding from commercial financial sources, either alone or in conjunction with a
possible development partner, in order to spread developmental risks and costs.
Montgomery has not obtained any commitment for any development funding or
entered into discussions with any possible development partner, and there is no
assurance that it will be able to do so. In lieu of developing the Eccles
Project, either alone or with a development partner, Montgomery may seek to sell
or exchange the property or enter into a long-term ground lease, in either of
which cases, no additional capital would be required by Montgomery.
Montgomery believes that diversification is the key to long-term real
estate industry viability and success. Therefore, Montgomery plans to diversify
its current portfolio with future acquisitions of income producing real estate
and/or real estate with development potential. Montgomery will seek the capital
for such growth and diversification through both commercial loan sources as well
as the sale of equity or debt securities. Although there are no current specific
plans for additional capital at this time, as a long-term strategy, Montgomery
intends to raise sufficient equity to allow it to expand its asset base.
Montgomery anticipates that it will combine the proceeds from any equity
financing with proceeds from loans secured by the properties purchased. In
addition to purchasing either a large single asset or multiple income producing
assets, Montgomery may purchase potential development sites. No specific
properties have been identified for possible acquisition.
Other Matters
Montgomery has reviewed all recently issued, but not yet accepted,
accounting standards in order to determine their effects, if any, on
Montgomery's financial condition or results of operations. Based on that review,
Montgomery believes that none of these pronouncements will have a significant
effect on current or future earnings or operations.
Year 2000
To date, Montgomery has not experienced adverse impacts from its
software and systems as a result of the Year 2000 computer problem, nor has it
received notice from any of its suppliers, tenants, or lenders of any impacts
resulting from the Year 2000 problem. However, there can be no assurance that
this will continue to be the case or that adverse impacts will not result in the
future from the Year 2000 problem. Montgomery has no year 2000 compliance
covenants in any of its leases or loan agreements.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
The following table sets forth, as of the date of this prospectus, the
name, address and shareholdings of each person who owns of record, or was known
by Montgomery to own beneficially, 5% or more of the common stock currently
issued and outstanding; the name and stockholdings of each director; and the
stockholdings of all executive officers and directors as a group. Unless
otherwise indicated, all shares consist of common stock, and all such shares are
owned beneficially and of record by the named person or group.
<TABLE>
<CAPTION>
Nature of Number of Percentage of
Name of Person or Group (1) Ownership(2) Shares Ownership(3)
- ----------------------------------------------- ------------------- ---------------- ---------------------
Directors and Principal Stockholders
<S> <C> <C> <C>
Dinesh Maniar Common Stock 16,060,000(4) 97.3%
President and Chairman Options 10,000 0.0%
400 Oyster Point Boulevard, Suite 415 ------------
South San Francisco, CA 94080 Total 16,070,000 97.3%
Keith A. Cannon Common Stock 200,700(5) 1.2%
Director Options 10,000 0.0%
------------
Total 210,700 1.3%
O. Lee Barnett Options 10,000 0.0%
Director, Treasurer and Assistant Secretary
James M. Hanavan Options 10,000 0.0%
Director and Secretary
Arthur A. Torres Options 10,000 0.0%
Director
All Executive Officers and Directors as a Common Stock 16,260,700 98.5%
Group (five persons) Options 50,000 0.3%
-------------
Total 16,315,700 98.6%
</TABLE>
- -------------------------
(1) Unless otherwise indicated, the address of the foregoing persons is in
care of Montgomery at its corporate office.
(2) Except as other noted, shares are owned beneficially and of record, and
such record stockholder has sole voting, investment, and dispositive
power. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and generally includes voting
or investment power with respect to securities. Shares of common stock
subject to stock options and warrants currently exercisable or
exercisable within 60 days are deemed to be outstanding for computing
the percentage ownership of the person holding such options and the
percentage ownership of any group of which the holder is a member, but
are not deemed outstanding for computing the percentage of any other
person.
(3) Calculations of total percentages of shares outstanding for each
individual assumes the exercise of options and warrants and conversion
of convertible debt held by that individual to which the percentage
relates. Percentages calculated for totals of all executive officers
and directors as a group assume the exercise of all options and
warrants and conversion of convertible debt held by the indicated
group.
(4) Includes 16,000,000 shares held of record by Dinesh Maniar and 60,000
shares held by his wife. Does not include 60,000 shares held by an
adult child living outside of Mr. Maniar's house.
(5) Includes shares held in Mr. Cannon's individual retirement accounts and
13,000 shares owned by Mr. Cannon's wife.
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ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
- --------------------------------------------------------------------------------
Executive Officers and Directors
Montgomery's articles of incorporation provide for the election of the
entire board of directors at each annual meeting of stockholders, each director
to serve until the next annual meeting and until such director's successor is
elected and qualified. Officers are elected and serve at the pleasure of the
board of directors.
On May 26, 1999, at a special meeting of stockholders, Montgomery's
stockholders elected a new board of directors. O. Lee Barnett, who was
previously a director, continued as member of the new board and the following
persons (nominees of Mr. Maniar) were elected: Dinesh Maniar, Keith A. Cannon,
Arthur A. Torres, and James M. Hanavan.
The following table sets forth the name, age, and position of each
current director and executive officer of the Company.
Name Age Title
---------------- ----- -----------------------------------
Dinesh Maniar 59 Chairman of the Board of Directors
and President
Keith A. Cannon 59 Director
O. Lee Barnett 60 Director and Assistant Secretary
James M. Hanavan 55 Director and Secretary
Arthur A. Torres 53 Director
Dinesh Maniar has been an industrial and commercial real estate
developer since 1973. Mr. Maniar is president of the Maniar Investment Group,
consisting principally of Diversified Investment and Management Corporation and
several affiliated companies active in residential, retail, and office
development, management, and investment. Mr. Maniar has built and leased
commercial buildings of approximately 2,000,000 square feet. Several of Mr.
Maniar's projects have been purchased by such companies as Prudential Life
Insurance Company, Bank of America Trust Company, Equitable Life Assurance
Company and Grosvenor International. Mr. Maniar's projects have been occupied by
leading national and international firms such as Japan Foods (Kikkoman), Coca
Cola, Duracell, Aero Electronics, Bally, OMI, Mead Paper, and National
Semiconductor.
Keith A. Cannon, a resident of Carlsbad, California, has been for over
five years a stockbroker and registered representative of Wilson-Davis & Co., a
broker-dealer based in Salt Lake City, Utah. Since March 1993, he has served as
branch president.
O. Lee Barnett has been self-employed since 1961 as a tax accountant
and management consultant. From 1969 until 1989, Mr. Barnett was also a trustee
of Mortgage Investment Trust of Utah, located in Salt Lake City, Utah, a real
estate investment trust investing in discounted real estate contracts and other
real estate evidences of indebtedness as well as unimproved and improved
commercial and residential real estate. From 1961 to the present, Mr. Barnett
has been an investor in various real estate properties. Mr. Barnett was involved
in the development of real estate subdivisions in Salt Lake County, Utah,
between 1986 and 1989. Mr. Barnett holds a Bachelor of Science degree from the
University of Utah, Salt Lake City, Utah, in Banking and Finance which was
obtained in 1961.
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<PAGE>
James M. Hanavan has been a stockholder in the San Francisco office of
the law firm of Bullivant Houser Bailey since June 1997. Previously, Mr. Hanavan
was a senior litigation partner with Gordon & Rees, LLP. Mr. Hanavan has over 20
years experience specializing in the defense of accountants, attorneys,
financial planners, ERISA plan administrators, real estate brokers, and other
professionals. Mr. Hanavan has substantial experience in real estate-related
litigation, as well as in providing business counseling and transactional
services for a variety of clients. Mr. Hanavan received his B.S. degree from
Pennsylvania State University in 1967 and his juris doctor degree from American
University, Washington College of Law in 1973.
Arthur A. Torres is chairman of the California Democratic Party since
February 1996. He served as a California State Senator from 1982 to 1994 and a
California State Assemblyman from 1972 to 1982. He serves on the board of
directors for the California Planning and Conservation League, Heal the Bay,
Coalition for Clean Air, and Los Angeles Educational Alliance for Restructuring
Now. As a senator, he served on numerous committees advocating healthcare
insurance reform, environmental protection, and business. Mr. Torres received
his B.A. degree from the University of California, Santa Cruz, and his juris
doctor degree from the University of California, Davis-School of Law.
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ITEM 6. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
To date, Montgomery has not compensated any of its executive officers
or directors for their services as such. Montgomery does not intend to
compensate its chief executive officer, Mr. Maniar, during 2000. Certain
executive officers will be compensated indirectly through the reimbursement of
allocable costs for certain services provided.
On December 21, 1999, it was determined that the board of directors
would receive a $300 honorarium payment per meeting. Prior to such date, no
individuals received payment for services as a director. Additionally, each
member of the board of directors received options to purchase 10,000 shares of
common stock, such options exercisable through December 31, 2002, at an exercise
price of $3.125 per share. James T Graeb, general counsel to DIMC, received
options to purchase 5,000 shares of common stock, such options exercisable
through December 31, 2002, at an exercise price of $3.125 per share.
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ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
Unless otherwise indicated, the terms of the following transactions
between related parties were not determined as a result of arm's length
negotiations.
Issuance of Common Stock at Organization
In connection with its organization, Montgomery issued for $0.05 per
share, or an aggregate of $15,000, an aggregate of 300,000 shares of common
stock to three persons, including 125,000 shares to Clemons F. (Bud) Walker and
100,000 shares to O. Lee Barnett, both of whom were then executive officers and
directors.
Public Offering of Common Stock
In late 1997, Montgomery sold a total of 200,000 shares of common stock
at $1.00 per share for a total of $200,000 in reliance on registration
exemptions provided by Rule 504 promulgated under Regulation D under the
Securities Act of 1933. The offering was made pursuant to a prospectus dated
November 26, 1997.
Refinancing of Properties Conveyed to Montgomery
Between October 1997 and March 1999, Mr. Maniar refinanced the previous
loans on the four parcels of improved and unimproved real estate that were
thereafter conveyed to Montgomery in June 1999 in exchange for 16,000,000 shares
of common stock and the assumption of such related indebtedness. Each of the
previous loans contained a provision that would have required repayment of the
entire outstanding principal balance plus accrued interest on conveyance of the
properties to Montgomery. Prior to such refinancings, the previous outstanding
loans had principal balances aggregating approximately $10,532,388 at a weighted
average interest rate of 8.30% per annum. The new loans, assumed by Montgomery
as permitted by the provisions of the new loans when the properties were
conveyed to it, had an aggregate original principal balance of approximately
$12,400,000 with a weighted average interest rate of 7.35%. The approximately
$1,860,000 by which the net proceeds from the new loans exceeded the amount
required to repay the loans refinanced plus approximately $100,000 in related
costs was retained by Mr. Maniar. Such amount has been reported as part of the
distributions for 1998 and 1997 in the accompanying financial statements.
Issuance of Common Stock to Acquire Properties
In June 1999, Montgomery issued and delivered 16,000,000 shares of
common stock and assumed approximately $12,400,000 in indebtedness in connection
with the acquisition of four parcels of improved and unimproved real estate from
Mr. Maniar. As part of the transaction for the conveyance of such properties to
Montgomery, the board of directors was expanded from two to five persons, one
incumbent director, Clemons F. (Bud) Walker resigned to devote his time to other
business interests, and Mr. Maniar and persons designated by him were elected to
the resulting four vacancies. Mr. Maniar was appointed president of Montgomery.
This acquisition of Montgomery's current principal properties has been
accounted for as a "reverse acquisition" in which Mr. Maniar is treated as the
acquiring company and Montgomery is
24
<PAGE>
treated as the acquired company, even though the legal structure of and the
transaction designates Montgomery as the acquiring company and Mr. Maniar's four
properties as the acquired company. For a more detailed description of the
accounting treatment, see "ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION."
The terms of the foregoing transaction were the result of arm's length
negotiations between Montgomery's management and board of directors and Mr.
Maniar. The board of directors of Montgomery concluded that the issuance of
16,000,000 shares of common stock in exchange for the properties acquired was in
the best interest of Montgomery and its stockholders in view of the equity in
such properties as reflected by the amount by which the $22,565,000 aggregate
appraised market value (now $23,340,000 based on recent appraisals obtained by
Montgomery) exceeded the approximately $12,400,000 in aggregate indebtedness
assumed and the prospects and opportunities that such acquisition and the
related expertise and experience of new management afforded Montgomery.
Promissory Note to Stockholder
Montgomery agreed to pay the closing costs associated with the
acquisition of the properties from Mr. Maniar. In order to allow Montgomery to
maintain its liquidity, Mr. Maniar did not demand immediate reimbursement, but
instead agreed to advance $80,000 of said costs. Montgomery issued to Mr. Maniar
a promissory note in the amount of $80,000 bearing interest at 10% per annum as
repayment of the amount advanced. The promissory note was paid in full in 1999.
Reimbursement to DIMC for Office Use and Administrative Support
Montgomery obtains the use of office facilities and related
administrative support from DIMC, a corporation owned by Mr. Maniar, president,
director, and principal stockholder of Montgomery. DIMC's executive offices are
located at 400 Oyster Point Boulevard, Suite 415, South San Francisco,
California. In addition, Montgomery reimburses DIMC for the use of
communications and data processing systems, secretarial and administrative
services, office supplies, and related support at their approximate allocable
direct cost, as estimated by DIMC, with a minimum monthly payment of $7,500
(such minimum monthly payment to be increased to $10,000 at June 2000 and
$15,000 at June 2001). Management estimates that the total amount to be
reimbursed to DIMC for office use and administrative support during 1999 will
not exceed $52,500.
Montgomery uses DIMC's professional property management and development
staff, including attorneys, accountants, engineers, and similar professionals,
as determined by the management of Montgomery to be needed in connection with
its business activities, subject to coordination with DIMC. Montgomery will
reimburse DIMC its direct costs for such services, including allocable payroll
burdens, employee benefits, and related costs. Such costs will vary, depending
on the nature and extent of services actually required by Montgomery. Montgomery
estimates that costs incurred for such purposes in connection with the
development of the Eccles Property could range from $400,000 to $500,000, unless
unusual or extraordinary development problems or delays are encountered, in
which case amounts actually reimbursed my be larger. Further, Montgomery will
reimburse DIMC for property leasing and related management services in
connection with re-leasing any of Montgomery's properties on the expiration or
termination of any existing lease.
Amounts reimbursed by Montgomery to DIMC under the foregoing
arrangements may include reimbursement of salaries to persons who may also serve
as officers and directors of Montgomery.
25
<PAGE>
Conflicts of Interest in Future Transactions
In future transactions between the Company and one or more of its
officers or directors, an entity in which such officers or directors also serve
as officers or directors, or in which they have a financial interest, the common
or interested director is obligated to disclose such full circumstances to the
board of directors who will then consider the terms of the transaction and
determine whether it is in the best interest of and fair to Montgomery, without
the participation or vote of the common or interested director.
- --------------------------------------------------------------------------------
ITEM 8. DESCRIPTION OF SECURITIES
- --------------------------------------------------------------------------------
Montgomery is authorized to issue 80,000,000 shares of common stock,
$0.001 par value; and 20,000,000 shares of preferred stock, $0.001 par value.
Common Stock
As of the date of this registration statement, Montgomery had
16,500,000 shares of common stock issued and outstanding. The holders of common
stock are entitled to one vote per share on each matter submitted to a vote at
any meeting of stockholders. Holders of common stock do not have cumulative
voting rights, and therefore, a majority of the outstanding shares voting at a
meeting of stockholders are able to elect the entire Board of Directors, and if
they do so, minority stockholders would not be able to elect any members to the
Board of Directors. Montgomery's bylaws provide that a majority of the issued
and outstanding shares of Montgomery constitutes a quorum for stockholders'
meetings, except with respect to certain matters for which a greater percentage
quorum is required by statute.
Stockholders of Montgomery have no preemptive rights to acquire
additional shares of common stock or other securities. The common stock is not
subject to redemption and carries no subscription or conversion rights. In the
event of liquidation of Montgomery, the shares of common stock are entitled to
share equally in corporate assets after satisfaction of all liabilities and the
payment of any liquidation preferences.
Holders of common stock are entitled to receive such dividends as the
Board of Directors may from time to time declare out of funds legally available
for the payment of dividends. Montgomery seeks growth and expansion of its
business through the reinvestment of profits, if any, and does not anticipate
that it will pay dividends on the common stock in the foreseeable future.
Preferred Stock
Under Montgomery's articles of incorporation, the board of directors is
authorized, without stockholder action, to issue up to 20,000,000 shares of
preferred stock in one or more series and to fix the number of shares and
rights, preferences and limitations of each series. Among the specific matters
that may be determined by the board of directors are the dividend rate, the
redemption price, if any, conversion rights, if any, the amount payable in the
event of any voluntary liquidation or liquidation of the Company, and voting
rights, if any.
26
<PAGE>
Penny Stock
The Securities and Exchange Commission has promulgated rules governing
over-the-counter trading in penny stocks, defined generally as securities
trading below $5 per share that are not quoted on a national securities exchange
or Nasdaq or which do not meet other substantive criteria. Under such rules,
Montgomery's common stock is regulated as a penny stock. As a penny stock, the
common stock is subject to regulations that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors, generally institutions with
assets in excess of $5,000,000 or individuals with net worth in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their
spouse. For transactions covered by the rule, the broker-dealer must make a
special suitability determination for the purchaser and transaction prior to the
sale. Consequently, the rule may affect the ability of broker-dealers to sell
securities of Montgomery and may also affect the ability of purchasers of
Montgomery's common stock to sell their shares in the secondary market. This may
also cause fewer broker-dealers willing to make a market and it may affect the
level of news coverage received by Montgomery.
Further, if the price of the common stock is below $5 per share and the
issuer does not have $2,000,000 or more in net tangible assets or is not listed
on a registered national securities exchange or Nasdaq, sales of such stock in
the secondary trading market are subject to certain additional rules promulgated
by the Securities and Exchange Commission. Montgomery's stock is currently
subject to these additional rules. These rules generally require, among other
things, that brokers engaged in secondary trading of penny stocks provide
customers with written disclosure documents, monthly statements of the market
value of penny stocks, disclosure of the bid and asked prices, and disclosure of
the compensation to the broker-dealer and the salesperson working for the
broker-dealer in connection with the transaction. These rules and regulations
may affect the ability of broker-dealers to sell Montgomery's securities,
thereby effectively limiting the liquidity of Montgomery's securities. These
rules may also adversely affect the ability of persons who acquire common stock
of Montgomery to resell their securities in any trading market that may exist at
the time of such intended sale.
27
<PAGE>
PART II
- --------------------------------------------------------------------------------
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
Limited Trading Market
Montgomery completed a public offering of 200,000 shares of common
stock in December 1997, to approximately 25 purchasers in Nevada and 25
purchasers outside of the United States. Since approximately January 20, 1998,
Montgomery's common stock has been quoted on the OTCEBB under the symbol "MGRY."
On January 14, 2000, Montgomery's stock symbol was appended with an "E"
symbolizing that as of said date, Montgomery had not registered its common stock
under the Securities and Exchange Act of 1934, as required by recently adopted
regulations.
There has been no established, consistent trading market for
Montgomery's common stock at any time. Quotations are published only
intermittently. Therefore, there is no reliable information from which to
present data respecting regular trading prices and market activity. As a result,
the trading volumes and prices for Montgomery's common stock are expected to
fluctuate without regard to the business activities of Montgomery. There can be
no assurance that a viable trading market will develop for Montgomery's common
stock in the future.
The trading volume of the common stock is extremely limited, reflecting
the small number of shares believed by Montgomery to be eligible for public
trading and the limited number of stockholders. Montgomery believes that less
than 200,000 shares of the 16,500,000 currently issued and outstanding shares of
common stock are eligible for sale in any trading market that may exist for the
common stock. This small number of shares available to be publicly traded
creates the potential for significant changes in the trading price of the common
stock as a result of relatively minor changes in the supply and demand. It is
likely that trading prices and volumes for the common stock will fluctuate in
the future, without regard to the business activities of Montgomery.
Only a very limited number of transactions in the common stock are
believed to have occurred. Because of the lack of specific transaction
information and Montgomery's belief that such quotations are particularly
sensitive to actual or anticipated volume of supply and demand, Montgomery does
not believe that such quotations are reliable indicators of a trading market for
the common stock. In this limited market, brokers typically publish no fixed
quotations to purchase a minimum number of shares at a published price, but
express a willingness to buy or sell the securities and from time to time
complete transactions in the securities at negotiated prices. As of March 9,
2000, the common stock was quoted, subject to the foregoing limitations and
qualifications, at $2.875 bid.
As of the date of this amended registration statement, the last
reported sale for the common stock was at $2.875 per share.
28
<PAGE>
Between April 23, 1998, and February 9 ,2000, the common stock was
traded on the OTCEBB under the symbol "MGRY." Since February 10, 2000, the
common stock has been quoted in the "pink sheets" published by the National
Quotations Bureau. There was no public trading market for Montgomery's common
stock prior to April 23, 1998. The following table sets forth the high and low
closing bid quotations for Montgomery's common stock as reported on the OTCEBB
or the "pink sheets," as the case may be, for the periods indicated, based on
interdealer bid quotations, without markup, markdown, commissions, or
adjustments (which may not reflect actual transactions).
High Low
------------ -------------
1999
Fourth Quarter.............................. $ 2.50 $ 2.875
Third Quarter............................... $ 2.0625 $ 2,875
Second Quarter.............................. $ 2.00 $ 3.0625
First Quarter............................... $ 1.625 $ 2.00
1998
Fourth Quarter.............................. $ 1.50 $ 1.75
Third Quarter............................... $ 1.50 $ 1.625
Second Quarter (commencing April 23, 1998).. $ 1.00 $ 1.625
Montgomery estimates that as of March 15, 2000, it had approximately 47
stockholders.
Penny Stock Regulations
Montgomery's stock is presently regulated as a penny stock and
broker-dealers will be subject to such regulations which impose additional
requirements on Montgomery and on broker-dealers who want to publish quotations
or make a market in the Montgomery common stock. See "ITEM 8. DESCRIPTION OF
SECURITIES."
Dividend Policy
Montgomery has never paid cash dividends on the common stock or its
preferred stock and does not anticipate that it will pay dividends in the
foreseeable future. Montgomery currently intends to continue a policy of using
retained earnings primarily for the expansion of its business.
Transfer Agent
Montgomery's registrar and transfer agent is Silver State Registrar &
Transfer Corp., 3541 Summer Estates Circle, Salt Lake City, Utah 84121.
29
<PAGE>
- --------------------------------------------------------------------------------
ITEM 2. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
Montgomery is not a party to, and its properties are not the subject
of, any material pending legal proceedings, and no material legal proceedings
have been threatened by Montgomery or, to the best of its knowledge, against it.
- --------------------------------------------------------------------------------
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- --------------------------------------------------------------------------------
None.
- --------------------------------------------------------------------------------
ITEM 4. RECENT SALES ON UNREGISTERED SECURITIES
- --------------------------------------------------------------------------------
Since inception, Montgomery has sold securities without registration
under the Securities Act on the terms and circumstances described in the
following paragraphs.
In connection with the organization of Montgomery, it issued for $0.05
per share, or an aggregate of $15,000, an aggregate of 300,000 shares of common
stock to three persons, including 125,000 shares to Clemons F. (Bud) Walker and
100,000 shares to O. Lee Barnett, both of whom were then executive officers and
directors and accredited investors, as defined under the Securities Act, and
Delta Financial Resources. Delta Financial Resources ("Delta"), George Town,
Cayman Islands, and British West Indies, acquired its shares at the time of
incorporation of Montgomery. Delta signed a subscription agreement in connection
with this transaction, confirming that it was a sophisticated investor with
training and experience in financial and investment matters, was able to bear
the risks of this investment, and was acquiring the stock for investment as
"restricted securities." No offers were made to any other persons in connection
with the transaction.
In May 1999, Montgomery issued 16,000,000 shares of common stock to Mr.
Dinesh Maniar, subject to a stop transfer instruction which was removed at the
closing on June 8, 1999. At the closing Montgomery assumed approximately
$12,400,000 in indebtedness in connection with the acquisition of four parcels
of improved and unimproved real estate from Mr. Maniar with fair market value by
third-party appraisals between September 1998 and January 1999 aggregating
$23,340,000 ($22,565,000 at the time of the transaction). As part of the
transaction for the conveyance of such properties to Montgomery, the board of
directors was expanded from two to five persons, one incumbent director
resigned, and Mr. Maniar and persons designated by him were elected to the
resulting four vacancies. Mr. Maniar was appointed president of Montgomery. Mr.
Maniar is an accredited investor, as defined under the Securities Act.
The securities issued in the transactions described above were issued
in reliance on the exemption from the registration and prospectus delivery
requirements of the Securities Act provided in ss. 4(2) thereof. Each of the
persons or entities acquiring the securities acknowledged that the securities
30
<PAGE>
were "restricted securities" as defined in rule 144 under the Securities Act;
that such shares could not be transferred without registration or an available
exemption therefrom, that such purchaser was required to bear the economic risk
of the investment for an indefinite period, and that Montgomery would restrict
the transfer of the securities in accordance with such representations. The
certificates representing the foregoing shares bear an appropriate restrictive
legend conspicuously on their face, and stop transfer instructions were noted on
Montgomery's stock transfer records. No underwriter participated in any sales.
In December 1997, Montgomery sold a total of 200,000 shares of common
stock at $1.00 per share for a total of $200,000 to approximately 25
stockholders in Nevada and 25 stockholders outside the United States. The
securities were sold pursuant to a disclosure document dated November 26, 1997,
which contained certain information about Montgomery and the offering. The
public offering was completed in reliance on the exemption from registration
provided by Rule 504 promulgated under the Securities Act.
Montgomery believes the exemption provided by Rule 504 was available
for the offering because of the following circumstances: (i) the aggregate
offering price, when integrated with all sales within the previous twelve
months, did not exceed $1,000,000; (ii) Montgomery was not subject to the
reporting requirements of section 13 or 15(d) of the Securities Exchange Act of
1934, as amended; (iii) Montgomery was not an investment company; and (iv)
Montgomery was not a development stage company with no specific business plan or
purpose but was organized for the purpose of managing and acquiring an ownership
interest in commercial and industrial income producing real estate.
31
<PAGE>
- --------------------------------------------------------------------------------
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
Montgomery's articles of incorporation contain provisions providing for
the indemnification of officers and directors by Montgomery to the full extent
permitted by Nevada corporate law.
PART F/S
The financial statements of Montgomery Realty Group, including the
auditors' report, are included beginning at page F-1 immediately following the
signature page of this report.
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 16, 2000. MONTGOMERY REALTY GROUP, INC.
(Registrant)
By Dinesh Maniar
------------------------------
Dinesh Maniar, President
32
<PAGE>
MONTGOMERY REALTY GROUP, INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS:
Balance Sheets - December 31, 1999 and 1998 F-3
Statements of Operations - Years Ended December 31, 1999 and 1998 F-4
Statement of Stockholders' Deficit - Years Ended December 31, 1999
and 1998 F-5
Statements of Cash Flows - Years Ended December 31, 1999 and 1998 F-6
Notes to Financial Statements F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Montgomery Realty Group, Inc.:
We have audited the accompanying balance sheets of Montgomery Realty Group, Inc.
(the "Company") as of December 31, 1999 and 1998, and the related statements of
operations, stockholders' deficit and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1999 and
1998, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
January 21, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY REALTY GROUP, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------
1999 1998
ASSETS
PROPERTY:
<S> <C> <C>
Land $ 2,699,500 $ 2,699,500
Building 5,040,000 5,040,000
Improvements 3,279,384 3,257,784
----------- -----------
Total 11,018,884 10,997,284
Less accumulated depreciation (2,505,378) (2,284,673)
----------- -----------
Property, net 8,513,506 8,712,611
CASH 134,361 130
TENANT RECEIVABLES 31,137 3,527
PREPAID EXPENSES AND OTHER ASSETS 36,949 5,884
DEFERRED LEASE COMMISSIONS, Net of accumulated amortization of
$3,081 and $146,402, respectively 13,995 23,667
DEFERRED LOAN COSTS, Net of accumulated amortization of $25,384
and $32,341, respectively 134,906 137,260
DEFERRED RENT RECEIVABLE 40,425 74,321
DEFERRED TAX ASSET 1,492,435 -
----------- -----------
TOTAL ASSETS $10,397,714 $ 8,957,400
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES:
Notes payable $12,338,166 $12,376,326
Accounts payable 67,292 52,170
Accrued interest 68,112 49,835
Security deposits and prepaid rent 103,150 43,453
----------- -----------
TOTAL LIABILITIES 12,576,720 12,521,784
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' DEFICIT:
Common stock, $0.001 par value; authorized 80,000,000 shares; issued and
outstanding, 16,500,000 shares at December 31, 1999,
16,000,000 shares at December 31, 1998 16,500 16,000
Preferred stock, $0.001 par value; authorized 20,000,000 shares; no
shares issued and outstanding at December 31, 1999 and 1998 - -
Additional capital 1,692,742 -
Accumulated deficit (3,888,248) (3,580,384)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (2,179,006) (3,564,384)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $10,397,714 $ 8,957,400
=========== ===========
</TABLE>
See notes to the financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY REALTY GROUP, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -----------------------------------------------------------------------------------------------------------------------
1999 1998
REVENUES:
<S> <C> <C>
Rent $ 1,367,749 $ 1,316,285
Other 2,228 509
----------- -----------
Total revenues 1,369,977 1,316,794
----------- -----------
EXPENSES:
Real estate taxes 99,288 105,978
Utilities 11,900 12,799
Repairs and maintenance 10,559 6,260
General building 16,383 17,302
Administration 136,178 67,699
Insurance 20,109 9,296
Management fee 73,355 41,604
Depreciation 220,705 220,345
Amortization (Note 1) 54,483 109,221
----------- -----------
Total expenses 642,960 590,504
----------- -----------
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND
EXTRAORDINARY ITEM 727,017 726,290
INTEREST EXPENSE, NET (925,004) (934,264)
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM AND INCOME TAXES (197,987) (207,974)
EXTRAORDINARY ITEM, EARLY EXTINGUISHMENT OF DEBT - (153,077)
----------- -----------
LOSS BEFORE INCOME TAXES (197,987) (361,051)
DEFERRED INCOME TAX BENEFIT 43,085 -
----------- -----------
NET LOSS $ (154,902) $ (361,051)
=========== ===========
LOSS PER COMMON SHARE BEFORE EXTRAORDINARY
ITEM, BASIC AND DILUTED $ (0.010) $ (0.013)
EXTRAORDINARY ITEM PER COMMON SHARE, BASIC
AND DILUTED - (0.010)
----------- -----------
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.010) $ (0.023)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES,
BASIC AND DILUTED 16,282,967 16,000,000
=========== ===========
</TABLE>
See notes to the financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY REALTY GROUP, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ----------------------------------------------------------------------------------------------------------------------------
Shares of
Common Common Additional Accumulated
Stock Stock Capital Deficit Total
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 16,000,000 $ 16,000 $(1,574,475) $(1,558,475)
DISTRIBUTIONS (1,644,858) (1,644,858)
NET LOSS (361,051) (361,051)
---------- -------- ----------- -----------
BALANCE, December 31, 1998 16,000,000 16,000 (3,580,384) (3,564,384)
DISTRIBUTIONS
January 1, 1999 through
June 8, 1999 (152,962) (152,962)
CONTRIBUTIONS $ 28,892 28,892
REVERSE ACQUISITION OF
MONTGOMERY REALTY
GROUP, INC., June 8, 1999 500,000 500 214,500 - 215,000
REVERSE ACQUISITION -
TAX BENEFIT 1,449,350 1,449,350
NET LOSS (154,902) (154,902)
---------- -------- ----------- ----------- -----------
BALANCE, December 31, 1999 16,500,000 $ 16,500 $ 1,692,742 $(3,888,248) $(2,179,006)
========== ======== =========== =========== ============
</TABLE>
See notes to the financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY REALTY GROUP, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -----------------------------------------------------------------------------------------------------------------------
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(154,902) $ (361,051)
Depreciation and amortization 275,188 329,566
Deferred rent receivable 33,896 47,092
Deferred taxes 43,085 -
Write-off of deferred loan costs - 101,558
Adjustments to reconcile net loss to net cash provided by
operating activities:
Tenant receivables (27,610) 527
Prepaid expenses and other assets (31,065) (910)
Accounts payable 15,122 25,895
Accrued interest 18,277 (78,184)
Security deposits and prepaid rent 59,697 (53,026)
--------- ------------
Net cash provided by operating activities 145,518 11,467
--------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property (21,600) -
Payment of lease commissions and loan costs (42,457) (210,417)
--------- ------------
Net cash used in investing activities (64,057) (210,417)
--------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 52,990 12,475,063
Payments on notes payable (91,150) (10,631,125)
Issuance of common stock 215,000 -
Distributions (152,962) (1,644,858)
Additional capital contribution 28,892 -
--------- ------------
Net cash provided by financing activities 52,770 199,080
--------- ------------
INCREASE IN CASH 134,231 130
CASH, BEGINNING OF YEAR 130 -
--------- ------------
CASH, END OF YEAR $ 134,361 $ 130
========= ============
</TABLE>
See notes to the financial statements.
F-6
<PAGE>
MONTGOMERY REALTY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION, BASIS OF PRESENTATION, AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Organization and Ownership Structure - Montgomery Realty Group, Inc. (the
"Company") was formed on August 20, 1997 and did not have significant
operations from its formation through June 7, 1999. On June 8, 1999, the
Company completed the acquisition of four properties in the San Francisco
Bay Area (the "Properties") held by Dinesh Maniar, a private investor
("Mr. Maniar"), in exchange for 16,000,000 shares of the Company's common
stock and the assumption of the outstanding indebtedness of the
Properties. The acquisition of the Properties has been accounted for as a
"reverse acquisition" and recapitalization whereby, for financial
reporting purposes, the Properties acquired the Company. See "Basis of
Presentation," below.
The Properties are summarized as follows:
<TABLE>
<CAPTION>
Maniar
Name Location Use Acquisition Date
<S> <C> <C> <C>
Keker & Van Nest Office
Building San Francisco, CA Professional offices 1980
Orchard Supply Shopping
Center San Ramon, CA Retail shopping center 1991
San Ramon Retail Center San Ramon, CA Retail shopping center 1991
Eccles Project South San Francisco, CA Land 1980
</TABLE>
Basis of Presentation - The acquisition of the Properties was accounted
for as a "reverse acquisition" whereby, for accounting purposes, the
Properties acquired the Company under the purchase method of accounting
and, due to the lack of significant prior Company operations, was
substantially recorded as a recapitalization. Accordingly, the historical
financial statements have been restated after giving effect to the June 8,
1999 acquisition of the Company. The financial statements have been
prepared to give retroactive effect of the reverse acquisition completed
on June 8, 1999 and represent the operations of the Properties. Consistent
with reverse acquisition accounting: (i) all of the Properties' assets,
liabilities and accumulated deficit are reflected at their combined
historical cost (as the accounting acquirer) and (ii) the preexisting
outstanding shares of the Company (the accounting acquiree) are reflected
at their net asset value as if issued on June 8, 1999. In addition, the
benefit of deferred tax assets created by the contribution of the
Properties on June 8, 1999 has been recorded as additional capital.
Distributions shown in the accompanying statement of stockholders' deficit
represent the Properties' cash flows and refinancing proceeds distributed
to Mr. Maniar prior to the reverse acquisition.
Management Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
F-7
<PAGE>
Property is stated at cost. Depreciation is computed on the straight-line
method over the estimated useful lives of the assets, which range from ten
to 40 years. When the Company concludes that the recovery of the carrying
value of a property is impaired, it reduces such carrying amount to the
estimated fair value of the investment.
Maintenance and minor repairs and replacements are expensed when incurred.
Impairment of Long-Lived Assets - The Company evaluates the recoverability
of its long-lived assets in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of. SFAS No. 121 requires recognition of impairment losses
related to long-lived assets in the event the net carrying value of such
assets exceeds the future undiscounted cash flows attributable to such
assets. The Company assesses the impairment of its long-lived assets when
events or charges in circumstances indicate that the carrying value of an
asset may not be recoverable.
Deferred lease commissions are amortized on a straight-line basis over the
lives of the related leases.
Deferred loan costs are amortized on a straight-line basis over the term
of the loan.
Revenue Recognition - Rental revenue is recognized in an amount equal to
minimum base rent plus fixed rental increases amortized on a straight-line
basis over the term of the lease. Differences between revenue recognized
and amounts due under the lease agreement are recorded as deferred rent
receivable in the accompanying balance sheets. Tenant recoveries are
recognized when earned.
Stock-Based Compensation - The Company accounts for stock-based employee
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
The Company reports non-employee stock-based compensation in accordance
with SFAS No. 123, Accounting for Stock-Based Compensation.
Income taxes are accounted for using the asset and liability method, under
which deferred taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets
and liabilities. The operations of the Properties have been excluded from
the calculation of the tax provision for the period prior to June 8, 1999
as the income taxes of such operations were the responsibility of Mr.
Maniar.
Basic and diluted loss per share are computed by dividing net loss by the
weighted average number of shares outstanding of 16,282,967 in 1999 and
16,000,000 in 1998.
F-8
<PAGE>
2. PROPERTY
Net book value of the property at December 31, 1999 and 1998 and the most
recent appraisal value are as follows:
<TABLE>
<CAPTION>
Net Book Value Appraisal Appraisal
Property 1999 1998 Value Date
<S> <C> <C> <C> <C>
Keker & Van Nest Office
Building $3,052,132 $3,172,727 $ 6,750,000 October 1998
San Ramon Retail Center
and Orchard Supply September 1998/
Shopping Center 4,921,874 5,000,384 7,640,000 December 1998
Eccles Project 539,500 539,500 8,950,000 November 1999
---------- ---------- -----------
Total $8,513,506 $8,712,611 $23,340,000
=========== =========== ===========
</TABLE>
Appraisal values are derived from independent appraisal reports prepared
by members of the Appraisal Institute. Determination of estimated market
value involves subjective judgement because the actual market value of a
real estate investment can be determined only by negotiation between the
parties in a sales transaction.
The San Ramon Retail Center and Orchard Supply Shopping Center includes
the net book values and appraisal values of both properties as they are
adjoining properties.
F-9
<PAGE>
3. NOTES PAYABLE
Notes payable as of December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Promissory note with a bank in the principal amount of
$4,800,000, dated November 25, 1998. The note is
secured by deeds of trust and assignment of rents on
Keker & Van Nest Office Building and bears interest at
the fixed rate of 6.67% per annum through January 1,
2009. Monthly interest and principal payments of
$32,251 are required through January 1, 2009 when the
remaining principal and accrued interest are due and
payable. $ 4,756,125 $ 4,800,000
Line of credit with a bank for a maximum borrowing of
$2,000,000, dated March 23, 1998. The line is secured
by deeds of trust and assignment of rents on Eccles
Project and bears interest at the prime rate plus 1.0%
(9.50% at December 31, 1999). Monthly interest payments
are required through March 23, 2000. 1,999,000 1,946,010
Promissory note with a bank in the principal amount of
$5,100,000, dated July 22, 1998. The note is secured by
deeds of trust and assignment of rents on Orchard
Supply Shopping Center and bears interest at the fixed
rate of 7.05% per annum through August 1, 2008. Monthly
interest and principal payments of $34,102 are required
through August 1, 2008 when the remaining principal and
accrued interest are due and payable. 5,038,041 5,085,316
Promissory note with a bank in the principal amount of
$545,000, dated September 29, 1998. The note is secured
by deeds of trust and assignment of rents on San Ramon
Retail Center and note bears interest at the fixed rate
of 11% per annum through June 1, 2000, when the
principal and accrued interest are due and payable.
545,000 545,000
----------- -----------
Total $12,338,166 $12,376,326
=========== ===========
</TABLE>
On June 2, 1999, the Company entered into a shareholder loan in the
principal amount of $80,000. The note bore interest at the fixed rate of
10.00% per annum through December 1, 1999. The note was repaid in full
upon maturity.
Interest paid on the notes in 1999 and 1998 was $911,436 and $1,017,177,
respectively.
F-10
<PAGE>
Principal installments due on the notes payable subsequent to December 31,
1999 are as follows:
2000 $ 2,642,642
2001 105,654
2002 113,165
2003 120,519
2004 129,088
Thereafter 9,227,098
-----------
Total $12,338,166
===========
Losses resulting from early extinguishment of debt, such as prepayment
penalties and write-offs of deferred loan costs, are recognized as
extraordinary items in the accompanying statements of operations.
4. OPERATING LEASES WITH TENANTS
The rental operations include leasing commercial office and retail space
to tenants under non-cancelable operating leases. As of December 31, 1999
and 1998, two tenants occupied 90% of leasable square feet and represented
87% and 88% of total 1999 and 1998 revenue, respectively.
Minimum future rent under noncancelable operating leases extending past
December 31, 1999 are summarized as follows:
2000 $ 1,359,000
2001 1,345,000
2002 1,331,000
2003 1,328,000
2004 1,264,000
Thereafter 4,369,000
-----------
Total $10,996,000
===========
5. TRANSACTIONS WITH AFFILIATES AND COMMITMENTS AND CONTINGENCIES
The Properties and the Company entered into management agreements with
Diversified Investment and Management Corporation ("DIMC"), an affiliate
of Mr. Maniar. The current agreement, dated June 9, 1999, extends through
December 31, 2005 and requires management fees to be paid to DIMC equal to
the greater of 3% of gross revenues or a fixed amount equal to $7,500 per
month for the first twelve months, $10,000 per month for the second twelve
months, and $15,000 per month thereafter. Management fees paid were
$52,500 and $41,604 in 1999 and 1998, respectively. Accrued management
fees of $20,855 are included in accounts payable at December 31, 1999.
6. STOCK OPTIONS
In December 1999, the Company granted stock options to purchase 55,000
shares of common stock exercisable through December 31, 2002 at an
exercise price of $3.125 per share. The options were granted to its
directors (50,000 shares) and the general counsel to DIMC (5,000 shares).
No compensation expense has been recognized in the financial statements
for the stock options. The fair value of the stock based awards is de
minimus at December 31, 1999.
F-11
<PAGE>
7. INCOME TAXES
The Company provides a deferred tax expense or benefit equal to the change
in the deferred tax assets during the year. Deferred tax assets and
liabilities at December 31, 1999 related primarily to temporary
differences resulting from differing tax and book bases of fixed assets,
net operating loss carryforwards, and deferred state taxes. Significant
components of the Company's net deferred tax balances at December 31, 1999
were as follows:
Deferred tax assets:
Differing bases of fixed assets $1,527,889
Net operating loss carryforwards 38,461
Other 92,965
----------
Total deferred tax assets 1,659,315
----------
Deferred tax liabilities:
Deferred state taxes (112,479)
Other (54,401)
----------
Total deferred tax liabilities (166,880)
----------
Net deferred tax assets $1,492,435
==========
The 1999 income tax benefit consists of the following:
Deferred income tax benefit:
Federal $37,300
State 5,785
-------
Total income tax benefit $43,085
=======
The reconciliation between the Company's 1999 effective tax rate on
earnings before income taxes and the statutory federal income tax rate of
34% was as follows:
Statutory federal rate 34.0%
State income taxes, net of federal income tax benefit 1.9
Income excluded from provision (14.2)
------
Effective tax rate 21.7%
******
F-12
