U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
MONTGOMERY REALTY GROUP, INC.
NEVADA 88-0377199
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
400 Oyster Point Blvd., Suite 415
South San Francisco, CA 94080
(Address of principal executive offices)
(650) 266-8080
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of the registrant's common stock as of August
8, 2000: 16,500,000
<PAGE>
MONTGOMERY REALTY GROUP, INC.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 2000 and December 31, 1999...........3
Statements of Operations for the six months ended
June 30, 2000 and 1999.............................................4
Statements of Operations for the three months ended
June 30, 2000 and 1999.............................................5
Statements of Cash Flows for the six months ended
June 30, 2000 and 1999.............................................6
Notes to Financial Statements......................................7
Item 2. Management's Discussion and Analysis or Plan of Operations.........9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K..................................13
Signatures.................................................................13
2
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY REALTY GROUP, INC.
BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
-------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
----------- -----------
ASSETS
PROPERTY:
<S> <C> <C>
Land $ 2,699,500 $ 2,699,500
Building 5,040,000 5,040,000
Improvements 3,279,384 3,279,384
----------- -----------
Total 11,018,884 11,018,884
Less accumulated depreciation (2,612,806) (2,505,378)
----------- -----------
Property, net 8,406,078 8,513,506
CASH 67,249 134,361
TENANT RECEIVABLES 9,290 31,137
PREPAID EXPENSES AND OTHER ASSETS 51,667 36,949
DEFERRED LEASE COMMISSIONS 12,902 13,995
DEFERRED LOAN COSTS 122,004 134,906
DEFERRED RENT RECEIVABLE 27,180 40,425
DEFERRED TAX ASSET 1,541,200 1,492,435
TOTAL ASSETS $10,237,570 $10,397,714
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES:
Notes payable $12,189,132 $12,338,166
Loan from stockholder 100,000 -
Accounts payable 46,198 67,292
Accrued interest 67,017 68,112
Security deposits and prepaid rent 67,202 103,150
----------- -----------
TOTAL LIABILITIES 12,469,549 12,576,720
----------- -----------
STOCKHOLDERS' DEFICIT:
Common stock, $0.001 par value; authorized 80,000,000 shares;
issued and outstanding, 16,500,000 shares at June 30, 2000 and,
December 31, 1999 16,500 16,500
Preferred stock, $0.001 par value; authorized 20,000,000 shares; no
shares issued and outstanding at June 30, 2000 and December 31, 1999 - -
Additional capital 1,692,742 1,692,742
Accumulated deficit (3,941,221) (3,888,248)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (2,231,979) (2,179,006)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $10,237,570 $10,397,714
----------- -----------
</TABLE>
See notes to the financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY REALTY GROUP, INC.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
------------------------------------------------------------------------------------------------------------------------
2000 1999
----------- -----------
REVENUES:
<S> <C> <C>
Rent $ 712,832 $ 683,042
Other 304 498
----------- -----------
Total revenues 713,136 683,540
----------- -----------
EXPENSES:
Real estate taxes 52,586 52,932
Utilities 7,641 5,928
Repairs and maintenance 15,276 4,214
General building 10,055 8,870
Administration 61,186 36,785
Insurance 11,318 9,824
Management fee 47,500 41,258
Depreciation 107,430 110,174
Amortization 30,513 28,084
----------- -----------
Total expenses 343,505 298,069
----------- -----------
INCOME BEFORE INTEREST EXPENSE
AND INCOME TAXES 369,631 385,471
INTEREST EXPENSE, NET (471,369) (455,946)
----------- -----------
LOSS BEFORE INCOME TAXES (101,738) (70,475)
INCOME TAX BENEFIT 48,765 -
NET LOSS $ (52,973) $ (70,475)
=========== ===========
NET LOSS PER COMMON SHARE,
BASIC AND DILUTED $ (0.003) $ (0.004)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES,
BASIC AND DILUTED 16,500,000 16,063,889
=========== ===========
</TABLE>
See notes to the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY REALTY GROUP, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
------------------------------------------------------------------------------------------------------------------------
2000 1999
----------- -----------
REVENUES:
<S> <C> <C>
Rent $ 356,841 $ 345,095
Other 159
----------- -----------
Total revenues 357,000 345,095
----------- -----------
EXPENSES:
Real estate taxes 27,655 26,466
Utilities 4,387 2,964
Repairs and maintenance 12,668 2,107
General building 4,524 4,435
Administration 32,116 18,018
Insurance 5,742 4,912
Management fee 25,000 20,659
Depreciation 51,804 55,087
Amortization 7,102 14,042
----------- -----------
Total expenses 170,998 148,690
----------- -----------
INCOME BEFORE INTEREST EXPENSE
AND INCOME TAXES 186,002 196,405
INTEREST EXPENSE, NET (239,755) (227,973)
----------- -----------
LOSS BEFORE INCOME TAXES (53,753) (31,568)
INCOME TAX BENEFIT 24,370 -
----------- -----------
NET LOSS $ (29,383) $ (31,568)
=========== ===========
NET LOSS PER COMMON SHARE,
BASIC AND DILUTED $ (0.002) $ (0.002)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES,
BASIC AND DILUTED 16,500,000 16,127,778
=========== ===========
</TABLE>
See notes to the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
MONTGOMERY REALTY GROUP, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
------------------------------------------------------------------------------------------------------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (52,973) $ (70,475)
Depreciation and amortization 137,943 138,258
Deferred rent receivable 13,245 30,757
Deferred taxes (48,765) -
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Tenant receivables 21,847 (271)
Prepaid expenses and other assets (14,718) 5,884
Accounts payable (21,094) 3,939
Accrued interest (1,095) 13,621
Security deposits and prepaid rent (35,948) 18,892
Other - 3,698
----------- -----------
Net cash (used in) provided by operating activities (1,558) 144,303
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 100,000
Payments on notes payable (149,034) (19,120)
Payment of loan costs (16,520) -
Distributions - (75,222)
----------- -----------
Net cash used in financing activities (65,554) (94,342)
----------- -----------
(DECREASE) INCREASE IN CASH (67,112) 49,961
CASH, BEGINNING OF PERIOD 134,361 130
----------- -----------
CASH, END OF PERIOD $ 67,249 $ 50,091
=========== ===========
</TABLE>
See notes to the financial statements.
6
<PAGE>
MONTGOMERY REALTY GROUP, iNC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The interim financial data is unaudited. However, in the opinion of
management, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
Company's financial position and results of operations for the interim
period. Such statements have been prepared from the Company's accounting
records in accordance with the instructions to Form 10-QSB, and should be
used in conjunction with Montgomery's Registration Statement on Form
10-SB, as amended, including the financial statements and notes thereto.
2. TRANSACTIONS WITH AFFILIATE
Property management fees of $47,500 and $41,258 were paid to an affiliate
of the majority stockholder for the six months ended June 30, 2000 and
1999, respectively.
3. BASIC AND DILUTED INCOME (LOSS) PER SHARE OF BENEFICIAL INTEREST
Basic and diluted income (loss) per share are computed by dividing net
income (loss) by the weighted average number of shares outstanding of
16,500,000 and 16,063,889 for the six months ended June 30, 2000 and 1999,
respectively, and 16,500,000 and 16,127,778 for the three months ended
June 30, 2000 and 1999, respectively.
4. LOAN FROM STOCKHOLDER
On March 27, 2000, the Company borrowed $100,000 from its majority
stockholder. The loan bears interest at 10% and is due on March 31, 2001.
The proceeds from the loan were used to reduce the principal of the
Redwood Bank mortgage (Notes 5 and 7).
5. NOTES PAYABLE
On March 23, 2000, the $1,999,000 mortgage on the Eccles Project matured.
The lender, Redwood Bank, extended the term of the loan and on April 4,
2000, loan extension documents were recorded. The new maturity date on the
loan is March 31, 2001. As part of the extension, principal was reduced by
$100,000.
The $545,000 mortgage on the San Ramon Retail Center originally matured on
June 1, 2000. The lender, Gross Mortgage Company, has provided an
extension to December 1, 2000.
6. SALES CONTRACT
On May 2, 2000, the Company entered into a written contract to sell the
Eccles Project land to Sand Hill Property Company for approximately
$14,500,000. The contract calls for a closing on or about January 2, 2001,
subject to various conditions, including the satisfaction by the buyer of
certain due diligence contingencies and the Company obtaining appropriate
planning department permits so as to allow the construction of a 200,000
square foot office building at the site.
7
<PAGE>
7. SUBSEQUENT EVENTS
Repayment of Loan from Stockholder - On August 2, 2000, the principal and
all accrued interest on the loan from Mr. Maniar was paid in full from the
proceeds from the refinancing of the San Ramon Retail Center as discussed
below.
Notes Payable - San Ramon Retail Center - On August 2, 2000, the Company
paid off the $545,000 mortgage on the San Ramon Retail Center with the
proceeds of a new loan in the principal amount of $800,000 from a bank,
secured by a first mortgage on the San Ramon Retail Center. The note calls
for amortized principal and interest payments, with interest rates fixed
for the first three years at 9.1%. Amortization is based on a 30-year
period, with the entire principal and accrued and unpaid interest due on
July 31, 2010.
Sales Contract - Eccles Property - On July 3, 2000, the prospective
purchaser of the Eccles Property proposed either to renegotiate the
purchase terms due to an easement encroaching on the Eccles Property that
the Company had not removed or to terminate the proposed purchase. The
Company believes that the City of South San Francisco may now approve an
approximately 300,000 square foot rather than a 200,000 square foot office
building as previously planned. Such a larger building would increase
development and carrying costs until the building is fully leased as well
as the potential financial return. The Company and the prospective
purchaser currently are renegotiating their agreement and discussing a
possible joint venture to develop an approximately 300,000 square foot
office building. The prospective purchaser would buy a partial interest
rather than the entire property, and the Company and the prospective
purchaser would convey their respective interests in the property to a
joint venture for development. If a revised agreement is not reached with
the prospective purchaser, the Company will continue its plan to sell,
exchange or develop this property.
8
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operations
Forward-Looking Information May Prove Inaccurate
This report 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 future strategic plans, goals or
objectives of the Company are also forward-looking statements. The Company
intends the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in Section 27A of the
Securities Act and Section 21E of the Exchange Act.
Readers of this report are cautioned that any forward-looking statements,
including those regarding The Company or its management's current beliefs,
expectations, anticipations, estimations, projections, proposals, plans or
intentions are not guarantees of future performance or results of events and
involve risks and uncertainties. The forward-looking information is based on
present circumstances and on the Company's predictions respecting events that
have not occurred, which may not occur or which may occur with different
consequences from 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. The forward-looking statements included in this
report are made only as of the date of this report. The Company is not obligated
to update such forward-looking statements to reflect subsequent events or
circumstances.
The following discussion should be read in conjunction with the Financial
Statements of the Company and the Notes thereto.
Overview
The Company is a real estate company that emphasizes investment in both
development real estate assets and income-producing real estate assets. The
Company is engaged in the ownership, leasing, management, operation,
development, redevelopment, acquisition and sale of real estate assets in the
greater San Francisco Bay Area. The Company currently owns retail shopping
centers and an office building. The lease space is currently 100% occupied. The
Company also owns an undeveloped parcel of land referred to as the "Eccles
Project" in South San Francisco. As discussed in more detail below, the Company
currently proposes to sell or exchange all or a part of its interest in this
property or participate in the development of an office building on the
property. The Company conducts all of its real property management and brokerage
activities through a written agreement with a related corporation, Diversified
Investment & Management Corporation ("DIMC"), which is 100% owned by the
Company's majority stockholder, Mr. Maniar. Mr. Maniar currently owns in excess
of 96% of the stock of the Company.
Basis of Presentation of Financial Information
The Company's financial condition and results of operations were
substantially changed by the acquisition of its four properties from Mr. Maniar
in June 1999. The acquisition of the four 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 business operations by the Company prior to the June 8, 1999
acquisition, the transaction was reported as a recapitalization. Accordingly,
the historical financial statements were prepared to give retroactive effect to
the reverse acquisition completed June 8, 1999. Consistent with reverse
acquisition accounting: (i) the
9
<PAGE>
comparative results of operations for the periods ended March 31, 2000 and March
31, 1999, therefore show revenue and expense from the properties for a
comparative period, with the March 31, 2000 operations also reflecting the
Company's additional expenses of conducting business as a public company; (ii)
all properties, assets, liabilities and accumulated deficit are reflected at the
properties' combined historical cost (as the accounting acquiror); and (iii) the
preexisting outstanding shares of the Company (the accounting acquiree) are
reflected at their net cash value as if issued on June 8, 1999. In addition, the
benefit of deferred tax assets generated by the contribution of the properties
to the Company with a tax basis in excess of book basis has been recorded as
additional paid in capital.
Results of Operations
Six Months Ended June 30, 2000 and 1999:
The Company's net loss for the six months ended June 30, 2000, decreased
to $52,973 from $70,475 for the six months ended June 30, 1999, or 24.8%.
The Company's total revenues for the six months ended June 30, 2000,
increased to $713,136 from $683,540 for the six months ended June 30, 1999, or
4.3%. This increase is primarily attributable to two factors: (a) rental
payments commencing November 1999, under a new lease with AlphaGraphics 503 at
the San Ramon Retail Center; and (b) rental increases that took effect December
1, 1999, in the base rent paid by Keker & Van Nest, the sole tenant at that
property. With the exception of the Eccles Project land, all of the Company'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
year nor are significant rent increases likely, absent early termination of an
existing lease and a releasing. Revenues will vary slightly due to changes in
the amount of expenses reimbursable under net leases.
Total operating expenses for the six months ended June 30, 2000, increased
to $343,505 from $298,069 during the six months ended June 30, 1999, or 15.2%.
While most operating expenses showed expected variations due to variable costs,
such as utilities and insurance, administrative costs increased from $36,785 for
the six months ended June 30, 1999, to $61,186 for the six months ended June 30,
2000. This increase was due primarily to the increased costs of outside
accounting and legal services that are associated with the public company status
of the Company. Operating expenses also increased because of approximately
$7,000 in parking lot resurfacing and restripping at the Orchard Supply Shopping
Center that was expensed as a repair during the six months ended June 30, 2000.
Management fees also increased from $7,500 per month to $10,000 per month
commencing June 1, 2000, pursuant to the terms of the written management fee
agreement.
Net interest expense for the six months ended June 30, 1999, was $455,946
and increased to $471,369 for the six months ended June 30, 2000, or 3.8%, due
primarily to increases in the prime interest rate on the Eccles Project loan
with Redwood Bank, together with the $12,413 paid as a loan extension fee in
connection with the Gross Mortgage Company loan.
Quarter ended June 30, 2000 and 1999:
The Company's net loss for the three months ended June 30, 2000, decreased
to $29,383 from $31,568 for the three months ended June 30, 1999, or 6.9%.
The Company's total revenues for the three months ended June 30, 2000,
increased to $357,000 from $345,095 for the three months ended June 30, 1999, or
3.4%.
10
<PAGE>
Total operating expenses for the three months ended June 30, 2000,
increased to $170,998 from $148,690 during the three months ended June 30, 1999,
or 15.0%. While most operating expenses showed expected variations due to
variable costs, such as utilities and insurance, the following categories
constitute the bulk of the $22,308 difference: (a) administrative costs
associated with the public company status of the Company; (b) parking lot
repaving and restripping at the San Ramon Retail Center; and (c) increased
management fees.
Net interest expense for the three months ended June 30, 1999, was
$227,973 and increased to $239,755 for the three months ended June 30, 2000, or
5.2%, due primarily to increases in the prime interest rate on the Eccles
Project loan with Redwood Bank, together with the $12,413 paid as a loan
extension fee in connection with the Gross Mortgage Company loan.
Liquidity and Capital Resources
The Company has met its requirements for liquidity and capital resources
principally from cash provided by operations and provided by financing
activities that permitted partial realization of the real property equity
appreciation.
Operating Activities
Operating activities for the six months ended June 30, 1999, provided net
cash of $144,303 compared to net cash used in operating activities for the six
months ended June 30, 2000, of $1,558, a decrease of $145,861. This decrease
results from a combination of factors, including decreases in prepaid rent,
accounts payable and prepaid expenses, together with other factors. Noncash
expenses related to depreciation and amortization were $137,943 and $138,258 for
the six months ended 1999 and 2000, respectively, which depreciation and
amortization more than offset the net cash income generated in those same
periods.
Investing Activities
There was no cash flow generated or used with respect to investing
activities in the six months ended June 30, 2000 or 1999.
Financing Activities
The Company's financing activities in the six months ended June 30, 2000,
reflect $16,250 expended, of which $12,413 is attributable to the mortgage loan
extension fees paid to Gross Mortgage Company in connection with the $545,000
mortgage loan on the San Ramon Retail Center. On June 1, 2000, the Gross
Mortgage Company loan was extended for six months to December 1, 2000. The loan
was paid in full on August 2, 2000, with the proceeds from the Affinity Bank
loan, as discussed below.
For the six months ended June 30, 2000, financing activities used cash of
$149,034, which represents the reduction in the principal balance of the Redwood
Bank note as discussed below and the amortization of principal on other
indebtedness. Investing activities for the six months ended June 30, 1999, used
cash of $19,120, which represents reductions of principal resulting from
principal amortization.
On May 31, 2000, the Company borrowed $100,000 from Mr. Maniar, the
principal shareholder of the Company, as disclosed in prior filings. The
proceeds of this loan were used to reduce the principal of the Redwood Bank
mortgage loan, which was extended on April 4, 2000, as discussed below.
11
<PAGE>
Subsequent to the close of the second quarter, the Company repaid this loan in
full, together with all accrued interest, from the proceeds of the refinancing
of the San Ramon Retail Center as discussed below.
On April 4, 2000, Redwood Bank recorded a one-year extension of its first
mortgage loan encumbering the Eccles Project. The mortgage had a principal
balance of $1,999,000 at June 30, 1999, and has a reduced principal balance of
$1,899,000 as of June 30, 2000. The interest rate on the mortgage loan is
variable, at prime plus one percent (1%). The new maturity date is May 31, 2001.
The Company distributed $75,222 to Mr. Maniar during the six months ended
June 30, 1999. These distributions relate to the distribution of loan proceeds
during the period prior to Mr. Maniar's sale of the real properties to the
Company, and therefore represent pre-incorporation funds. No distributions have
been made to Mr. Maniar since his sale of the real estate to the Company in June
1999, and no such distributions are planned in the future.
Subsequent to the June 30, 2000, financial statements, the Company
recorded a new loan on the San Ramon Retail Center from Affinity Bank. The new
loan recorded on August 2, 2000, and is in the principal amount of $800,000 with
interest fixed for three years at 9.10% per annum, with a 30-year amortization
of principal. The term of the loan is for 10 years. The loan proceeds were used
to: (a) pay off the $100,000 loan from Mr. Maniar; and (b) increase the working
capital of the Company.
Eccles Property
On July 3, 2000, the prospective purchaser of the Eccles Property proposed
either to renegotiate the purchase terms due to an easement encroaching on the
Eccles Property that the Company had not removed or to terminate the proposed
purchase. The Company believes that the City of South San Francisco may now
approve a 300,000 square foot rather than a 200,000 square foot office building
as previously planned. Such a larger building would increase development and
carrying costs until the building is fully leased as well as increasing
potential financial return.
The Company and the prospective purchaser currently are renegotiating
their agreement and discussing a possible joint venture to develop an
approximately 300,000 square foot office building. The prospective purchaser
would buy a partial interest rather than the entire property, and the Company
and the prospective purchaser would then convey their respective interests in
the property to a joint venture for development. The Company and the prospective
purchaser would bear their pro rata share of construction and other costs, as
well as any financial return from the successful building, leasing and ultimate
sale of the project after it is completed. The Company estimates that it would
cost approximately $60.0 million to construct an approximately 300,000 square
foot building.
If a revised agreement is not reached with the prospective purchaser, the
Company will continue its plan to sell, exchange, or develop this property. The
Company believes that a percentage joint venture ownership interest in a joint
venture development of the property could provide a greater long-term financial
return to the Company than an immediate sale of the entire property.
The Company has reached a preliminary understanding to extinguish the
easement to which the prospective purchaser took exception and anticipates that
a final agreement will be executed by the end of the third quarter of 2000.
12
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are included as part of this report:
Exhibit SEC Reference
Number Number Title of Document
---------- -------------- -------------------------------------------
Item 10 Material Contracts
---------- -------------- -------------------------------------------
10.01 10 Sand Hill Property Company July 3, 2000,
letter notice and proposed First
Amendment to Purchase and Sale Agreement
between Montgomery Realty Group, Inc.
and Sand Hill Property Company effective
May 2, 2000.
Item 27 Financial Data Schedule
---------- -------------- -------------------------------------------
27.01 27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 2000, the Company filed no reports on
Form 8-K.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MONTGOMERY REALTY GROUP, INC.
(Registrant)
Date: August 10, 2000 By: /s/ Dinesh Maniar
--------------------------
Dinesh Maniar
President
13
