<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended September 30, 2000.
Commission file number 000-29039
SECURITY ASSET CAPITAL CORPORATION
----------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
NEVADA 95-4729666
------ --------------------
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
701 B Street, Suite 1775, San Diego, California 92101
-----------------------------------------------------
(Address of Principal Executive Offices)
(619) 232-9950
--------------
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirement for the past 90 days.
Yes X No
------- -------
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 12,521,000 OF COMMON STOCK SHARES AS
OF SEPTEMBER 30, 2000.
Transitional Small Business Disclosure Format (check one):
Yes No X
------ --------
<PAGE>
ITEM 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of September 30, 2000:
Number of Shares
----------------
Common Stock, $.001 par Value 12,521,000
Total Common Stock Outstanding 12,521,000
----------
These consolidated financial statements of Security Asset Capital Corporation
(the "Company") do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements and
should be read in conjunction with the financial statements and notes thereto
included in the Company's Form 8K for 1999. In the opinion of management, the
financial information set forth in the accompanying consolidated financial
statements reflect all adjustments necessary for a fair statement of the periods
reported, and all such adjustments were of a normal and recurring nature.
Interim results are not necessarily indicative of results for a full year.
F-1
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and December 31, 1999
ASSETS
------
(Unaudited) (Audited)
September 30, December 31,
2000 1999
------------ ------------
Current assets:
Cash $ 35,829 $ 29,580
Cash in Transit - 1,649,972
Loan portfolio assets 2,171,671 3,243,864
Related party receivables - directors 100,509 14,000
Notes and advances receivable 216,149 36,149
------------ ------------
Total current assets 2,524,158 4,973,565
------------ ------------
Rental real estate, net 3,766,195 4,069,663
Furniture and equipment, net 62,703 49,489
Other assets:
Patent and patents pending 1,552,500 1,552,500
Investment The Debt Registry 1,373,980 B
Goodwill (Universal View Corp) 1,025,000
Deferred financing costs, net 407,822 404,247
Miscellaneous assets 336,088 15,800
------------ ------------
8,524,288 1,972,547
------------ ------------
Total assets $11,048,446 $11,065,264
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-2
<PAGE>
<TABLE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and December 31, 1999
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
(Unaudited) (Audited)
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 195,600 $ 97,882
Loan sales payable to third parties - 999,428
Loan portfolio payable - 732,736
Due to related parties - 18,066
Accrued expenses and other liabilities 47,687 46,578
Notes payable (including accrued interest of
$239,820 and $170,795 at September 30, 2000 and
December 31, 1999, respectively) 6,893,578 4,987,110
Current portion of long term debt 109,703 119,513
------------- -------------
Total current liabilities 7,246,568 7,001,313
------------- -------------
Long term debt, net of current portion 2,637,737 2,908,780
Deferred income taxes 250,000 250,000
------------- -------------
Total liabilities 10,134,305 10,160,093
------------- -------------
Commitments and contingencies (Notes 12 and 18)
Shareholders' equity (deficit):
Common stock, $0.001 par value, 25,000,000
shares authorized; 12,721,000 and 9,910,000
shares issued and outstanding in September 30, 2000 and 1999,
respectively; 925,000 shares issuable at December 31, 1999 12,521 10,826
Additional paid-in capital 5,940,834 3,422,274
Accumulated deficit (5,039,214) (2,527,929)
------------- -------------
Total shareholders' equity (deficit) 914,141 905,171
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 11,048,446 $ 11,065,264
============= =============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarter Ended September 30, 2000 and 1999
<CAPTION>
(Unaudited) (Unaudited)
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Revenues:
Portfolio revenue $ 80,596 $ 1,241,897
Rental revenue 112,693 -
------------- -------------
Total revenues 193,289 1,241,897
------------- -------------
Expenses:
Portfolio expenses 38,232 1,022,511
Rental expenses 55,879 -
General and administrative 457,840 162,513
------------- -------------
Total expenses 551,951 1,185,024
------------- -------------
Loss from operations (358,662) 56,873
Other income (expense):
Other income 3,398 2,509
Interest expense (including amortization of deferred
Financing costs of $303,982 and $192,024 in
3nd Quarter 2000 and 1999, respectively) (572,601) (277,680)
Other expenses - -
------------- -------------
Total other expense (569,203) (275,171)
------------- -------------
Net loss $ (927,865) $ (218,298)
============= =============
Basic and diluted loss before extraordinary item per share $ (0.08) $ (0.03)
============= =============
Basic and diluted net loss per share $ (0.08) $ (0.03)
============= =============
Shares used to compute basic and diluted net loss per share
and loss before extraordinary item per share 12,361,000 8,910,000
============= =============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2000 and 1999
<CAPTION>
(Unaudited) (Unaudited)
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Portfolio revenue $ 1,376,202 $ 1,249,745
Rental revenue 327,731 -
------------ ------------
Total revenues 1,703,933 1,249,745
------------ ------------
Expenses:
Portfolio expenses 1,095,183 1,024,330
Rental expenses 171,939 -
General and administrative 1,436,091 505,746
------------ ------------
Total expenses 2,703,213 1,530,076
------------ ------------
Loss from operations (999,280) (280,331)
Other income (expense):
Other income 93,706 2,509
Interest expense (including amortization of deferred
Financing costs of $897,554 and $328,202 in
1st Three Quarters 2000 and 1999, respectively) (1,605,711) (525,611)
Other expenses - -
------------ ------------
Total other expense (1,512,005) (523,102)
------------ ------------
Loss before income taxes (2,511,285) (803,433)
Income tax expense - 866
------------ ------------
Net loss $(2,511,285) $ (804,299)
============ ============
Basic and diluted loss before extraordinary item per share $ (0.20) $ (0.09)
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
For the Quarter Ended September 30, 2000
(Unaudited)
<CAPTION>
Common Stock Additional
---------------------------- Paid-In Accumulated
Stock Amount Capital Deficit Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 10,826,000 10,826 $ 3,422,274 $ (2,527,929) $ 905,171
(See Note Below)
Acquisition of the Debt Registry
shares issuable 600,000 600 1,349,400 - 1,350,000
Settlement of legal dispute 75,000 75 12,300 - 12,375
Issuance of stock for consulting
services 310,000 310 50,840 - 51,150
Issuance of stock to officer and
an employee for services 150,000 150 24,600 - 24,750
Contribution of executives services - - 10,369 - 10,369
Issuance of stock for Universal
View Corp. 400,000 400 899,600 - 900,000
Contribution of executives services - - 10,011 - 10,011
Issuance of stock for consulting
services 160,000 160 161,440 - 161,600
Net loss for Nine Months ended
September 30, 2000 - - - (2,511,285) (924,294)
----------------------------------------------------------------------------------
Balance, September 30, 2000 12,521,000 $ 12,521 $ 5,940,834 $ (5,039,214) $ 1,685,250
==================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2000 and 1999
(Unaudited)
<CAPTION>
2000 1999
-----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,511,285) $ (804,300)
Adjustments to reconcile net loss to net cash flows
(used in) provided by operating activities:
Depreciation & Amortization 67,428 4,688
Amortization of deferred financing costs 890,822 328,202
Issuances of common stock for settlement of dispute 12,375 20,138
Issuances of common stock for consulting and other services 212,750 223,600
Issuances of common stock for other employee 24,750 -
Contributed services of executive officers 20,380 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Cash in transit 1,649,972 -
Loan portfolio receivable 1,072,193 (3,897,324)
Advances receivable and other current assets (180,000) (33,100)
Increase (decrease) in:
Payables, accrued expenses and other liabilities (1,634,446) 1,037,716
Deferred income taxes payable - -
-----------------------------
Net cash flows (used in) provided by
operating activities 2,136,224 (2,316,080)
-----------------------------
Cash flows from investing activities:
Acquisition/additions to other assets (322,753) (116,960)
Purchase/Sale of property and equipment - Net 222,824 (53,361)
Purchase of The Debt Registry
(Cash outlay in addition $1,350,000 in stock was issued) (23,980) -
Purchase of Universal View Corp
(Cash outlay in addition $900,000 in stock was issued) (125,000) -
-----------------------------
Net cash flows provided by
investing activities (248,909) (170,321)
-----------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-7
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Nine Months Ended September 30, 2000 and 1999
(Unaudited)
2000 1999
-----------------------------
Cash flows from financing activities:
Increase in deferred financing costs $ (890,822) (633,313)
Borrowings of notes payable 1,906,468 3,956,874
Borrowings of long-term debt (280,852) -
Loans - related parties (104,575) (27,457)
-----------------------------
Net cash flows provided by
financing activities 630,219 3,296,104
-----------------------------
Net (decrease) increase in cash 6,249 5,403
Cash at beginning of period 29,580 115,138
-----------------------------
Cash at end of period $ 35,829 $ 120,541
=============================
The accompanying notes are an integral part of the
consolidated financial statements.
F-8
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
ORGANIZATION AND BUSINESS
Security Asset Capital Corporation ("SACC"), a Nevada corporation,
traded under the symbol ("SCYA"), operates through the following wholly
owned subsidiaries:
Security Asset Management, Inc. ("SAM"), a California
corporation, which, together with SACC, acquires, manages,
collects and markets distressed consumer credit portfolios for
their own account and third parties.
Security Asset Properties, Inc. ("SAP"), a Nevada corporation,
owns and operates nineteen income producing residential
properties in San Diego County, California. This corporation,
formerly known as Four D Corporation, was acquired in a stock
swap on October 31, 1999, whereby SACC acquired 100% of the
outstanding common stock of Four D Corporation in exchange for
900,000 shares of Security Asset Capital Corporation's common
stock. This transaction has been recorded as a purchase. The
excess fair value of assets acquired over liabilities assumed
of $1,067,810 was allocated to rental real estate. The results
of operations of the acquired business have been included in
Security Asset Capital Corporation and subsidiaries'
consolidated results of operations from the date of
acquisition. Had the acquisition occurred on January 1, 1999,
the pro forma net rental real estate at December 31, 1999
would have been $4,025,228, a decrease of $25,500, and the pro
forma net loss and basic and diluted net loss per share for
the year ended December 31, 1999 would have been $(1,738,987)
and $(0.19), respectively, an increase of $147,806 and no
change, respectively. The pro forma charge for the 1st Quarter
1999 for Four D would have been $(59,120). The pro forma net
income for the second quarter 1999 for Four D would have been
$15,136 for net loss first six month of 1999 of ($43,984).
Broadband Technologies, Inc. ("Tech"), a Nevada corporation,
was formed in 1999. Tech was capitalized by the contribution
from SACC of a patent and certain patents pending and
licensing for direct on-line full screen video technology,
which was acquired for cash and stock in 1999 by SACC. Tech
will continue development of its capability for video
streaming on-line and enhanced distributive database
management on the Internet.
SACC acquired certain technology and rights related to an
online market place for buyers and sellers of distressed debt
portfolios in 1999, internally known as TheDebtTrader.com.
These assets were contributed to a new wholly owned
subsidiary, TheDebtTrader.com, LLC ("Trader") in January 2000.
The consolidated group, collectively referred to as the "Company", has
incurred losses from operations since inception. During the 2nd Quarter
of 2000, the Company further pursued the development of the Debt
Registry and acquired the stock of Universal View Corporation for
stock.
F-9
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements consolidate the accounts of
Security Asset Capital Corporation and its wholly owned subsidiaries,
Security Asset Management, Inc., Security Asset Properties, Inc.,
Broadband Technologies, Inc. and TheDebtTrader.com. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for
cash, cash in transit, accounts payable, loan sales payable to third
parties, loan portfolio payable, accrued expenses and notes payable
approximate fair value due to the immediate short-term maturity of
these financial instruments. The fair value of the Company's long-term
obligations approximates the carrying amount based on the current rates
offered to the Company for debt of the same remaining maturities with
similar collateral requirements.
FAIR VALUE OF LOAN PORTFOLIO ASSETS
The fair value of the Loan Portfolio Assets as evaluated by management
is estimated by using available market information and other valuation
methodologies. The fair value of the Company's Loan Portfolio Assets is
estimated to exceed the related book value, unless otherwise indicated.
Management estimates that the gross potential collections from the Loan
Portfolio Assets held as of September 30, 1999 will be in the range of
$5,430,000 to $6,520,000, with estimated related collection costs of
approximately 30% or $1,630,000 to $1,960,000, for an estimated net
value of $3,800,000 to $4,560,000. These assets are carried on the
books of the Company at cost, which approximates $2,172,000.
CONCENTRATIONS
During 1999, the Company purchased a substantial portion of its debt
portfolios from and jointly with one company, Exterra Credit. The
Company has access to multiple sellers of debt portfolios and does not
believe the reliance on Exterra Credit limits its ability to acquire
debt portfolios economically in the future.
F-10
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------
CASH AND CASH EQUIVALENTS
The Company considers all cash accounts, which are not subject to
withdrawal restrictions or penalties, and certificates of deposit and
money market funds purchased with an original maturity of three months
or less to be cash equivalents.
The Company maintains its primary checking and savings accounts at two
financial institutions located in California. Accounts at these banks
are insured by the Federal Deposit Insurance Corporation (FDIC) up to
$100,000. The Company has not experienced any losses in such accounts
and management believes it places its cash on deposit with financial
institutions, which are financially stable.
LOAN PORTFOLIO ASSETS AND REVENUE RECOGNITION
Loan Portfolio Assets ("Portfolio Assets") represent liquidating loan
portfolios of delinquent accounts, which have been purchased by SACC
for collection and resale and are, stated at cost. The cost of the Loan
Portfolio Assets is the actual dollars spent for the purchase of the
portfolio, including related brokerage commissions, if any. Management
believes that the net realizable value of these assets exceeds the
cost.
Loan Portfolio Asset costs are written off by a percentage of cash
collections on a portfolio-by-portfolio basis. Management presently
estimates that Portfolio Assets in collection will realize gross
collections equal to approximately three times the purchase price of
the Portfolio Assets. The Company, therefore, writes off one dollar of
cost of Portfolio Assets for every three dollars in gross collection.
Certain Loan Portfolio Assets are sold in part or in whole by the
Company. Gains and losses from the sale of all or part of Loan
Portfolio Assets are recorded as appropriate when Loan Portfolio Assets
are sold. The amount of the portfolio cost written off is the cost of
percentage of the face amount sold using the experiences, if any, in
sales of the specific loan portfolio assets. As a number of sales have
and will in the future occur, with any one portfolio, various sales
prices are considered in determining the write off of the portfolio
costs against the sales proceeds.
The Company considers a sale to have taken place when there has been a
transfer of Loan Portfolio Assets and where the Company surrenders
control over the Loan Portfolio Assets to the extent that consideration
other than beneficial interests in the transferred Loan Portfolio
Assets is received in exchange for the Loan Portfolio Assets.
F-11
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------
FURNITURE AND EQUIPMENT
Furniture and equipment is recorded at cost. Depreciation is calculated
on the straight-line basis over the estimated useful life of five
years.
INVESTMENTS IN REAL ESTATE AND REVENUE RECOGNITION
Real estate is carried as cost, net of accumulated depreciation.
Improvements, major renovations and certain costs directly related to
the acquisition, improvement and leasing of real estate are
capitalized. Expenditures for maintenance and repairs are charged to
operations as incurred. Depreciation for buildings and improvements is
computed using the straight-line method over the estimated useful lives
of the assets, which is estimated to be 27.5 years. Depreciation for
furniture and fixtures is computed using the declining balance method
over the estimated useful lives of the assets, which is estimated to be
7 years.
An impairment loss is recognized, on a property-by-property basis, when
expected undiscounted cash flows are less than the carrying value of
the asset. In cases where the Company does not expect to recover its
carrying costs, the Company reduces its carrying costs to fair value.
No such reductions have occurred to date.
SAP, a wholly owned subsidiary owns and operates nineteen (19) rental
real estate properties located in San Diego County, California. The
properties include fifteen (15) single-family dwellings, three (3)
residential duplexes and one (1) apartment property consisting of 24
units. All rental property units are rented as of December 31, 1999
with current monthly rents of approximately $39,000. Several of the
single-family dwellings are leased with an option granted to the tenant
to purchase the properties. The appraised value of the properties as of
October 31, 1999, the date of acquisition is approximately $4,365,000.
The properties are encumbered by various notes payable secured by deeds
of trust totaling approximately $3,028,000. The cumulative debt service
for the properties is approximately $26,000 per month. The individual
properties are security for their related long-term notes payable.
Certain of the notes payable were taken out and remain in the name of
an executive of SAP.
As of September 30, 2000, SAP has liabilities to tenants of
approximately $25,000 for security deposits. These funds are not
segregated as most are applied to the final months rental payments.
The Company, as a lessor, has retained substantially all of the risks
and benefits of ownership of the rental properties and accounts for its
leases as operating leases. Income on leases, which includes scheduled
increases in rental rates during the lease term, is recognized on a
straight-line basis.
DEFERRED FINANCING COSTS
Deferred financing costs represent debt financing costs, which have
been capitalized and are being amortized on a straight-line basis over
the terms of the respective loans.
F-12
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------
NET LOSS PER SHARE
Basic net loss per share excludes dilution and is computed by dividing
net loss by the weighted average number of common shares outstanding
during the reported periods. Diluted net loss per share reflects the
potential dilution that could occur if stock options and other
commitments to issue common stock were exercised. During the years
ended December 31, 1999, options to purchase 1,350,000 common shares,
respectively, were anti-dilutive and have been excluded from the
weighted average share computation. Additional options for 100,000
common shares have been issued in 2000.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of otemporary differenceso by
applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred tax
assets will not be realized.
STOCK BASED COMPENSATION
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. This statement encourages, but does not
require, companies to recognize compensation expense for grants of
stock, stock options, and other equity instruments based on a
fair-value method of accounting.
Companies that do not choose to adopt the expense recognition rules of
SFAS No. 123 will continue to apply the existing accounting rules
contained in Accounting Principles Board Opinion (APB) No. 25, but will
be required to provide pro forma disclosures of the compensation
expense determined under the fair-value provisions of SFAS No. 123. APB
No. 25 requires no recognition of compensation expense for most of the
stock-based compensation arrangements provided by the Company, namely,
broad-based employee stock purchase plans and option grants where the
exercise price is equal to the market price at the date of the grant.
The Company has adopted the disclosure provisions of SFAS No. 123
effective January 1, 1998. The Company has opted to follow the
accounting provisions of APB No. 25 for stock-based compensation and to
furnish the pro forma disclosures required under SFAS No. 123. See Note
14.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates include
the estimation of the fair value of rental real estate acquired and the
fair value of the broadband technology acquired. Actual results could
materially differ from those estimates.
F-13
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------
COMPREHENSIVE INCOME
The FASB issued Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income." This statement establishes
standards for reporting and display of comprehensive income and its
components. The Company adopted this statement effective January 1,
1998. For the quarter ended September 30, 2000, the Company had no
material items that were required to be recognized as components of
comprehensive income.
ACCOUNTING FOR INTERNAL COSTS RELATING TO REAL ESTATE PROPERTY
ACQUISITIONS
In March 1998, the Emerging Issues Task For ("EITF") of the FASB issued
EITF 97-11, "Accounting for Internal Costs Relating to Real Estate
Property Acquisitions," which provides that internal costs of
identifying and acquiring operating property should be expensed as
incurred. This pronouncement was effective March 19,1998.
SEGMENT INFORMATION
The FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement requires companies
to report certain information about operating segments. The Company
adopted this statement effective January 1, 1998. For the year ended
December 31, 1999, the Company had three operating segments; (i)
consumer credit portfolio, (ii) rental real estate, and (iii) broadband
technology. The Company rental real estate operations are located in
only one geographic area, the County of San Diego, California.
DERIVATIVE INSTRUMENTS
In November 1998, the FASB issued SFAS No. 133, "Accounting For
Derivative Instruments And Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that entities recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
Depending on the intended use of the derivatives, changes in its fair
value will be reported in the period of change as either a component of
earnings or a component of other comprehensive income.
In June 1999, the FASB issued SFAS No. 137, "Accounting For Derivatives
Instruments And Hedging Activities - Deferral Of The Effective Date Of
FASB Statement No. 133, ("SFAS No. 137"). SFAS No. 137 delays the
effective date of implementation of SFAS No. 133 for one year making
SFAS No. 133 effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Retroactive application to periods prior
to adoption is not allowed. The Company has not quantified the impact
of adoption on its consolidated financial statements or the date it
intends to adopt.
F-14
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------
MANAGEMENT'S PLANS FOR FUTURE OPERATIONS AND FINANCING
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. At present,
the Company's working capital plus limited capital resources will not
be sufficient to meet the Company's objectives as structured. The
Company estimates it needs substantial new capital to achieve its
operations as planned, and is seeking up to $5 million in equity
financing via a private offering exempted under Sections 4(2) and 4(6)
of the Securities Act of 1933 and Regulation D promulgated there under.
In the event financing is not obtained the Company will adjust its
corporate infrastructure to reflect current operations.
NOTE 2 - CASH IN TRANSIT
------------------------
On December 30, 1999 the Company sold portions of certain loan
portfolios totaling $1,649,972. As of December 31, 1999 the proceeds
from this sale were held in escrow. The Company received these funds on
January 4, 2000 (See Note 8).
NOTE 3 - LOAN PORTFOLIO ASSETS
------------------------------
Loan portfolio assets are comprised of liquidating loan portfolios,
which have been purchased by the Company for collection and resale. As
discussed in Note 1 the Loan Portfolio Assets are recorded at
$2,242,359 at March 31, 2000 and $2,208,406 at June 30, 2000.
NOTE 4 - INVESTMENTS IN RENTAL REAL ESTATE
------------------------------------------
(Unaudited)
September 30, 2000
------------------
Land $ 1,589,445
Buildings and improvements 2,418,372
------------
4,007,817
Less: accumulated depreciation (241,622)
------------
$ 3,766,195
============
NOTE 5 - FURNITURE AND EQUIPMENT
--------------------------------
(Unaudited)
September 30, 2000
------------------
Furniture and fixtures $ 78,069
Less: accumulated depreciation (15,366)
------------
$ 62,703
============
F-15
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 6 - PATENTS AND PATENTS PENDING
------------------------------------
During 1999, the Company acquired a patent, certain patents pending and
licensing for direct on-line full screen video technology in exchange
for stock. The patent and patents pending have been recorded at fair
market value at the date of acquisition based on an appraisal obtained
by management. The Company will begin amortizing these intangible
assets when the product pertaining to the patents is available for use
by outside parties.
NOTE 7 - DEFERRED FINANCING COSTS
---------------------------------
Deferred financing costs consist of the following at September 30,
2000:
September 30, 2000
------------------
Deferred financing costs on notes payable
(See Note 10) $ 1,826,063
Deferred financing costs associated with
long-term mortgages secured by
rental real estate - Net 44,847
Less: accumulated amortization (1,463,198)
------------
$ 407,712
============
NOTE 8 - ACQUISITION OF "THE DEBT REGISTRY"
-------------------------------------------
On February 28, 2000, the Company acquired ownership of certain assets
and the rights to non-binding letters of intent, which will be known as
the "Debt Registry", in return for 600,000 shares of Company common
stock. Using the technology acquired in 1999, the Company will develop
the Debt Registry. The Debt Registry will use the acquired technology,
develop it further, and apply it to the registration and tracking of
individual debt accounts sold by lending institutions to third parties.
The CUSIP type tracking system will bring order and accountability to
the buying and selling of debt portfolios in a manner similar to what
the title companies did for the real estate industry. The Company has
tentative agreements with five major banks and companies to require the
registration of their credit card accounts when they are sold to third
parties. The Company anticipates the Debt Registry will be operating
prior to the end of the year 2000. The final purchase agreement was
signed March 27, 2000.
NOTE 9 - Not Used
-----------------
F-16
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 10 - NOTES PAYABLE
-----------------------
In December 1998, the Company entered into a funding agreement with
Secure Investments, Inc. in which Secure Investments, Inc. has agreed
to provide up to $24,000,000 in notes payable ("Investor Notes") to be
used for the purchase of debt portfolios and related note expenses. The
Investor Notes are structured as nine (9) month notes carrying interest
at 12% per annum. The investor has a choice of being paid interest
quarterly or at the end of the term. The agreement with Secure
Investments, Inc. provides that any notes that are not renewed at the
end of nine (9) months will be replaced by Secure Investments, Inc.
with a new investor of like or greater amount.
At March 31, 2000 the Company has outstanding liabilities of
approximately $5,967,615 to various individuals, family trusts,
retirement accounts and organizations. At September 30, 2000 the
Company has outstanding liabilities of approximately $6,476,400 to
various individuals, family trusts, retirement accounts and
organizations. The Investor Notes carry an annual interest rate of 12%.
The Company pays significant commissions to various entities and
individuals for arranging the funding of the Investor Notes (See Note
7).
Funds from the Investor Notes have been used primarily to fund
acquisitions of distressed consumer loan portfolios and pay costs
related to notes including commissions and interest.
Through April 13, 2000, the Company's experience has been that
approximately eighty-three (83%) percent of the principal amount of the
Investor Notes and more than twenty (20%) percent of the accrued
interest related to the Investor Notes are converted into new Investor
Notes. This experience continued in through the 3rd Quarter 2000.
NOTE 11 - LONG-TERM DEBT
------------------------
Long-term debt consists of the following as of September 30, 2000:
Loan term mortgages with various terms total $ 2,747,441
=============
In April 2000, SAP sold two properties. The total debt paid in connection the
sales was $252,655.
F-17
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 11 - LONG-TERM DEBT (Continued)
------------------------
TRANSFER OF PROPERTY TITLE AND ASSUMPTION OF OBLIGATIONS
Properties acquired and the related borrowings against these properties
were originally obtained in the name of the shareholders of SAP. At the
time of acquisition of each property, the shareholder transferred each
property and the related borrowing to SAP. As of March 31, 2000, the
obligations associated with SAP's rental properties were in the
original borrower's name. Additionally, many of these borrowings
contain "due on sale" terms. Prior to and during the year ended March
31, 2000, the title transfer to several of the properties was recorded
with the County Recorders Office of San Diego. Subsequent to year-end
all of the properties but one (1) have had the title transferred to
SAP. SAP has not been notified by any of the lenders of their desire to
demand repayment of the loan. Management believes that any loans, which
are required to be repaid, can be replaced with loans of similar terms.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
LITIGATION
As of September 30, 2000, the Company has no significant litigation
pending.
LEASES
The Company, as of September 30, 2000, does not have any long term or
operating lease obligations. The Company's corporate office leases were
for one year in January 2000 at the rate of approximately $5,300 per
month.
RENTAL RECEIPTS UNDER OPERATING LEASES
The Company receives rental income from the leasing of single-family
residences and apartments under operating leases. The majority of the
Company's properties are leased on a month-to-month basis
OPTIONS TO PURCHASE PROPERTY GRANTED TO TENANTS
SAP grants certain tenants the option to purchase the property being
leased in exchange for an option deposit paid by the tenant. SAP
recognizes these deposits as income upon the termination of the lease
and the election of the tenant not to exercise the option.
F-18
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 13 - SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------
CONTRIBUTED SERVICES OF EXECUTIVE OFFICERS
SAP occupies office space in a building owned by one of the
shareholders. The shareholders use this building to house the office of
related business entities owned by the shareholders. In addition, the
executive officers of SAP contributed services at no cost. This amount
of $20,380 is included in additional paid-in capital and in general and
administrative expenses for the year ended September 30, 2000.
STOCKHOLDERS EQUITY
In the 1st Quarter 2000, the Company committed to issue a total of
1,135,000 shares of common stock. The shares were granted in the amount
and for the purposes described below:
Purpose Number of Shares
------- ----------------
Acquisition of the Debt Registry 600,000
Issued to employees for services 150,000
Issued to third parties for services (See below) 310,000
Issued in settlements (See below) 75,000
During January 2000 the Company issued a total of 310,000 shares of
common stock to third parties as compensation for consulting services
provided to the Company. For the quarter ended March 31, 2000 the
Company recognized $51,150 as compensation expense associated with
these grants, based on the fair value of the stock at the time of
grant.
In January 2000, the following shares were issued to obtain general
release from legal issues. The Company recognized expense totaling
approximately $12,375 as a result of these issuances.
Archie Fischer 25,000 Shares of Common Stock
14th St. & Beardsly Ltd. Prshp 25,000 Shares of Common Stock
Payson Ridge Co., Inc. 25,000 Shares of Common Stock
In the 2nd Quarter 2000, 400,000 shares of common stock were issued for
the acquisition of Universal View Corp. In the 35d quarter, 160,000
shares of common stocke were issured for consulting services.
F-19
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 14 - STOCK OPTION PLAN
---------------------------
The Company has adopted a stock option plan (the Plan) under which
options to purchase up to 10,000,000 shares of common stock may be
granted to officers, employees or directors of the Company, as well as
consultants, independent contractors or other service providers of the
Company. "Nonqualified" options may be granted under the Plan.
Nonqualified options may be granted at an exercise price determined by
the Board of Directors. Individual option agreements will contain such
additional terms as may be determined by the Board of Directors at the
time of the grant. The Plan provides for grants of options with a term
of up to ten years.
STOCK OPTIONS
The Company has elected to account for nonqualified grants and grants
under its Plan following APB No. 25 and related interpretations.
Accordingly, no compensation costs have been recognized for
nonqualified options for the nine months ended September 30, 2000 or
for years ended December 31, 1999 and 1998, respectively. Under FASB
Statement No.123, Accounting for Stock-Compensation, the fair value of
each option granted during the years ended December 31, 1999 and 1998
was estimated on the measurement date utilizing the then current fair
value of the underlying shares less the exercise price discounted over
the average expected life of the options of ten years, with an average
risk free interest rate of 4.88% to 6.29%, price volatility of 1 and no
dividends. Had compensation cost for all awards been determined based
on the fair value method as prescribed by FASB Statement No.123,
reported net (loss) and (loss) per common share would have been as
follows:
December 31, December 31,
1999 1998
---------------------------
Net (loss):
As reported $(1,591,181) $ (38,075)
Pro forma $(1,591,181) $ (70,888)
Basic and diluted net (loss) per share:
As reported $ (0.19) $ (0.01)
Pro forma $ (0.19) $ (0.01)
F-20
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 14 - STOCK OPTION PLAN (Continued)
---------------------------
A summary of the activity of the stock options for the years ended
December 31, 1999 and 1998 is as follows:
Year ended Year ended
December 31, 1999 December 31, 1998
------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------------
Outstanding at beginning of 450,000 $ 0.08 - $ -
period
Granted 900,000 0.25 450,000 0.08
Forfeited - - - -
Expired - - - -
------------------------------------------------
Outstanding at end of period 1,350,000 $ 0.19 450,000 $ 0.08
================================================
Exercisable at end of period 1,350,000 $ 0.19 450,000 $ 0.08
================================================
A further summary of options outstanding at December 31, 1999 is as
follows:
Options Outstanding Options Exercisable
-----------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
-----------------------------------------------------------------------
450,000 9.0 years $ 0.08 450,000 $ 0.08
100,000 9.5 years 0.25 100,000 0.25
500,000 9.75 years 0.25 500,000 0.25
300,000 10.0 years 0.25 300,000 0.25
----------- -----------
1,350,000 1,350,000
=========== ===========
On January 24, 2000, stock options for 50,000 common shares at $0.25
were granted. During the 2nd Quarter 2000 Stock options for 315,000
additional shares 90,000 shares at $0.25 and the remainder at $1.25.
This brings the total stock options outstanding to 1,715,000.
F-21
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 15 - INCOME TAXES
----------------------
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for
financial reporting and the amounts used for income tax purposes. The
tax effect of temporary differences consisted of the following as of
December 31:
1999 1998
---------- ----------
Deferred tax assets:
Net operating loss carryforwards $ 704,000 $ 189,300
Compensation element of
stock options issued 34,800 -
Cash to accrual adjustment
of subsidiary 7,600 -
---------- ----------
Gross deferred tax assets 746,400 189,300
Less valuation allowance (481,300) (189,300)
---------- ----------
Net deferred tax assets 265,100 -
Deferred tax liabilities, difference in basis
on rental real estate between financial and
tax purposes (515,100) -
---------- ----------
Net deferred tax liability $ 250,000 $ -
========== ==========
Realization of deferred tax assets is dependant upon sufficient future
taxable income during the period that deductible temporary differences
and carryforwards are expected to be available to reduce taxable
income. As the achievement of required future taxable income is
uncertain, the Company recorded a valuation allowance. The valuation
allowance increased by $292,000 and $13,700 from 1998 and 1997,
respectively. The Company will continue to assess the valuation
allowance and to the extent it is determined that such allowance is no
longer required, the tax benefit of the remaining net deferred tax
assets will be recognized in the future.
As of December 31, 1999, the Company has net operating loss
carryforwards for both federal and state income tax purposes. Federal
net operating loss carryforwards totaling approximately $1,908,000
(approximately $220,000 available solely to SAP) expire in the years
2008 through 2019. State net operating loss carryforwards totaling
approximately $976,000 expire in the years 2000 through 2004. Due to
Internal Revenue Service regulations, the availability of the operating
loss carryforwards may be limited upon a substantial change in
ownership. During 1999 such a change occurred with respect to SAP.
Therefore the utilization of SAP's operating loss carryforwards will be
limited to approximately $64,000 a year and can only be offset against
future SAP taxable income.
Due to the limited availability of SAP's operating loss carryforwards
to offset the financial reporting and tax basis difference associated
with its rental real estate the Company has recorded a net deferred tax
liability and related tax expense of $250,000. Nothing has materially
change during the 1st & 2nd quarter 2000 related to the provision for
income taxes.
F-22
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 15 - INCOME TAXES (Continued)
----------------------
A reconciliation of the effective tax rates with the federal statutory
rate is as follows as of December 31:
1999 1998
---------- ----------
Income tax benefit at 35% statutory rate $(473,700) $ (13,300)
Change in valuation allowance 292,000 13,700
State income taxes, net (78,500) (2,200)
Other 10,200 1,800
---------- ----------
$(250,000) $ -
========== ==========
Nothing materially has changed in the 1st or 2nd quarter 2000 related
to the reconciliation of the effective tax rates.
NOTE 16 - Not Used
------------------
NOTE 17 - SEGMENT INFORMATION
-----------------------------
The Company has three reportable segments: consumer credit portfolio,
rental real estate portfolio and broadband. The consumer credit
portfolio segment acquires, manages, collects and markets distressed
consumer credit portfolios. The rental real estate portfolio acquires,
manages and sells residential properties located in San Diego County,
California. The broadband segment holds a patent, certain patents
pending and licensing for direct on-line full screen video technology.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company
evaluates performance based on income or loss from operations before
income taxes not including nonrecurring gains and losses. The Company's
reportable segments are strategic business units that offer different
products or services. They are managed separately because each business
requires different marketing strategies.
F-23
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 17 - SEGMENT INFORMATION (Continued)
-----------------------------
Information about reported segment profit or loss and segment assets
for the year to date September 30, 2000 and 1999 is as follows:
Consumer Rental
Credit Real Estate TheDebtTrader
Portfolio Portfolio Broadband Total
----------- ----------- ----------- ------------
2000 Revenues $1,376,202 $ 327,731 $ - $ 1,704,033
1999 Revenues - - - -
2000 Interest expense 517,605 193,242 B 710,847
1999 Interest expense 194,848 - - 194,848
2000 Profit (loss) (2,482,439) 4,662 (33,508) (2,511,285)
1999 Profit (loss) (804,299) - - (804,299)
2000 Assets 4,350,576 3,766,195 2,931,675 11,048,446
1999 Assets 4,569,268 - 7,500 4,561,768
F-24
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE 18 - SIGNIFICANT EVENTS
----------------------------
During January 2000, the Company granted an option to acquire 50,000
shares of common stock, exercisable at $0.25 per share to the CFO.
On March 23, 2000, the Company entered into a reverse merger
transaction whereby it acquired control of a reporting public shell
corporation. The reorganization will be accounted for as a reverse
merger under the purchase method. The public shell corporation
shareholders received $125,000 in cash and 400,000 restricted shares of
the resulting company. Acquisition was completed April 6, 2000 and the
400,000 shares issued.
F-25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
selected historical financial data, financial statements and notes thereto and
the other historical financial information of Security Asset Capital Corporation
contained elsewhere in this Form 10-QSB. The statements contained in this Form
10-QSB that are not historical are forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act of 1934, including statements regarding Security Asset Capital
Corporation's expectations, intentions, beliefs or strategies regarding the
future. Forward-looking statements include Security Asset Capital Corporation's
statements regarding liquidity, anticipated cash needs and availability and
anticipated expense levels. All forward-looking statements included in this Form
10-QSB are based on information available to Security Asset Capital Corporation
on the date hereof, and Security Asset Capital Corporation assumes no obligation
to update any such forward-looking statement. It is important to note that
Security Asset Capital Corporation's actual results could differ materially from
those in such forward-looking statements.
OVERVIEW
Security Asset Capital Corporation, or SCYA, is publicly traded on the Over the
Counter Electronic Bulletin Board (OTC:BB),. The Company and all of its
subsidiaries are well positioned to become a dominant force in both the booming
industries of asset liquidation and e-commerce technology. The Company is
completing the funding of a private placement for $5 million and will apply for
listing on the NASDAQ upon its completion.
A leader in the booming asset liquidation industry, Security Asset Capital
Corporation recognized the need for technological advancement in the industry
and seized the opportunity to oversee its development. The Company plans to
become the debt buying industry's technological leader with its launch of The
Debt Registry, a financial sector registration system that will initially serve
the credit card, consumer loan, and medical debt marketplaces. The Debt Registry
is currently in discussions with Bank of America, G.E. Capital, Citibank, Chase,
and Bank One to participate in the new process as well as approval of the four
major rating agencies. The Debt Registry is projected to be operational with
cash flow within the next six months and has projections estimating a profit
within its first year of operations of approximately $19 million. The Debt
Registry is the defining element in the corporate mission,: to be the
technological leader in the financial services industry.
The company's management team has over 60 years of hands-on industry experience
and enjoys the reputation necessary to attract additional staff from a talent
pool of industry professionals nationwide. SCYA expects to become one of a
handful of companies with a fully developed infrastructure necessary to achieve
and maintain national reach in both technology and financial services.
2
<PAGE>
Founded on September 22, 1993, the Company stands by its original objective to
build through acquisition and development a team of vertically integrated
companies structured to achieve maximum economic advantage within the asset
liquidation industry. The industry is ranked among the fastest growing and most
lucrative arenas in American business today. Profits are earned in the industry
through the purchase of portfolios of non-performing loans or assets, at low
prices, and either collected at a high rate of return or sold at the wholesale
or retail level for immediate profits. Overall, current inventories available at
financial institutions are estimated at over $90 billion. Via acquisitions,
Security Asset Capital Corporation has grown over the past several years to
become a fully reporting entity and has acquired:
Security Asset Properties, a property company with $4.6 million of performing
rental real estate.
The DebtTtrader.com, the premiere Internet portal for buying and selling assets
in the lucrative debt buying industry.
Broadband Technologies, Inc., a proprietary e-commerce technology with five
patents and patents pending that pertain to the offering of full screen,
video-on-demand and multimedia storage and delivery.
The Debt Registry(TM), wherein the Company will provide a structured approach to
documenting ownership of assets in the unsecured debt market, similar to CUSIP
numbers for publicly held stocks. This product has received excellent reception
among leading industry professionals as well as the approval of the country's
four top rating agencies.
The Debt Registry(TM)
Throughout 1999 and the first half of 2000, Security Asset Capital Corporation,
a leader in the debt buying industry, expanded its focus to develop The Debt
Registry. The following is an overview of The Debt Registry process and system,
its products and revenue streams, and its benefits to the industry.
The Debt Registry is an asset ownership registration and tracking system for the
asset liquidation and purchasing industry. The closest counterpart to this
system is the process of UCC filings for assets held for collateral by lending
institutions. The asset liquidation and purchasing industry is the largest
industry in which assets are bought and sold without the benefits of asset
titles or filed ownership documents. As a result, a number of problems and
issues exist, or have the potential to exist, in the industry. These include
lack of verifiable ownership of assets within the industry; difficulty of
verifying age, experience, and other important details of a particular account;
potential fraud from key data changes and multiple sales; difficulty in
reporting correct information to the credit bureaus; difficulty in obtaining
documentation from originators on a timely basis; and inability or difficulty in
locating sold accounts by debtors.
The debt buying industry will continue to grow rapidly as more financial
institutions are faced with dramatic increases in consumer debt. The industry is
the largest industry in which assets are bought and sold without the benefits of
asset titles or filed ownership documents. As a result, a number of problems and
issues exist which create potential liabilities for all of the companies in the
industry, including the originators of debt, the companies buying and collecting
the debt, and the credit bureaus reporting the status of the account. The
implementation of The Debt Registry will provide the industry with much needed
structure that should allow the industry to continue to expand in the future
without inviting government regulation.
3
<PAGE>
ACCOUNT REGISTRATION
--------------------
As banks and other originators charge off non-performing debts, they are either
placed for collection with contingency collection firms, or sold in portfolios
to the secondary market. At present, no third party tracks accounts or maintains
ownership records. The results of no supervision are potential fraud, lack of
verifiable ownership following sales, and difficulties in verifying age,
experience, and details of an account.
Under The Debt Registry process, each time an account changes ownership, a
record of that sale is forwarded to the Registry. Included in the record are
identification data for the accounts, as well as experience information (agency
placement, etc.). The buyer of the accounts pays the registration fee, and
receives a registration document relating to the accounts. Each account is
assigned a registration number that is updated and tracked as ownership changes
through the life of the account. Once the debt is sold the second time (from the
second to the third owners), the accounts are re-registered to document both the
new ownership and the new collection experience. Addresses and payment
information are updated at this time. At each successive sale, the account is
re-registered with The Debt Registry.
At the sale of the accounts, the new buyer can verify the registration by
contacting The Debt Registry and checking a sampling of the accounts. If the new
buyer chooses, he can submit the full listing of accounts for verification. As
in all sales, the buyer pays for the registration and verification processes. It
is anticipated that the price of registration will not be a hindrance to any
transaction, since registration costs will be less than 1.0% of the purchase
price.
The ability to track the ownership of a particular account is also a benefit to
the debtor. Debtors often cannot locate the current owner of their old debt, due
to a lack of information from the originator regarding successive sales. Instead
of calling each "link" in the chain of title, a debtor will need only visit
www.FindMyDebts.com for up to the minute account status information.
ACCOUNT DOCUMENTATION
---------------------
Account statements and signed applications are the backbone of legal collection
efforts. Every collector understands the frustration of spending hours "working"
an account for which no documentation can ultimately be obtained. The Debt
Registry's proposed Documentation Clearinghouse will virtually eliminate these
types of problems.
The Registry's Clearinghouse will initially act as the hub for document requests
to various banks and credit grantors, which are overwhelmed by current industry
demands. All incoming requests for applications or statements will be send
directly to the clearinghouse and credit grantors would need only respond to one
entity for documentation requests.
In its second phase of development, the Clearinghouse would develop a means of
maintaining all documentation for all sold debt in an electronic format, which
will significantly speed up the forwarding process.
4
<PAGE>
SOURCES OF REVENUE
------------------
DOCUMENTATION REQUESTS
Charged-off credit card accounts are currently sold with little or no
documentation. Collectors who need account documents typically order them on an
account-by-account basis at roughly $5.00 to $7.00 per document. Banks and other
credit grantors price this service to recover their costs.
REGISTRY MEMBERSHIPS
All regular users of The Debt Registry would be offered membership at an annual
fee. Their membership will entitle them to a monthly newsletter, access to
verification services, and to account location services. For many of the
secondary and later owners, this service will generate significant additional
revenues, while allowing more debtors to settle accounts. The account owner will
pay a locating fee to The Debt Registry.
ACCOUNT REGISTRATION FEES
Account registration will generate significant revenue for The Debt Registry.
Although charged-off debt accounts are sold in large portfolios, each individual
account will be registered, and the fees would be based on per account pricing.
However, the cost of registration will not be a significant part of the purchase
price, and will therefore not be a deterrent to the sale transaction. In
secondary and successive sales, the cost of registration will likely be a
negotiating point in the sale, similar to closing cost in a home purchase.
WWW.FINDMYDEBTS.COM
Located online at www.FindMyDebts.com, this service will to allow consumers to
easily locate debts that have been sold by the original credit grantor to other
parties. This page facilitates the payment of debt and helps the debtor to
regain their good credit. Debtors enter their correct personal information and
the account numbers of the accounts that they want to resolve. The possibility
of fraud is virtually eliminated, as consumers can now ensure that they are
paying the correct party. The system is designed for consumers who intend to
both LOCATE and SETTLE old accounts, and debtors are forewarned that their
contact information will be shared with the account owners. The FindMyDebts
service is provided at no extra cost to consumers, as debt owners will pay all
fees. In the long run, this will constitute the greatest source of revenue for
The Debt Registry.
The mission of Security Asset Capital Corporation's wholly owned subsidiary,
Broadband Technologies, Inc. is to be the technological leader in the financial
services industry and in the electronic registration of debt, loans and other
assets. Through an alliance with Internet strategists Center 7, Inc. of Salt
Lake City, the Company has developed an integrated hardware and software system
for The Debt Registry, a new financial sector registration system that will
provide the financial, lending and asset liquidation industries with much needed
structure and technological expansion. The Debt Registry is currently in
discussions with Bank of America, G.E. Capital, Citibank, Chase and Bank One to
require mandatory registration of all charged off loan portfolios.
5
<PAGE>
One of the Company's other wholly owned subsidiaries; Broadband Technologies,
Inc. remains dedicated to bringing full screen, on-demand video to the consumer
via the Internet. Just as companies rely on express mail services to rapidly
deliver packages, companies will rely on a service provider to store and deliver
video content. Some industries that will benefit from the ability to cast video
content directly to its consumers include pay TV, video rental, high-end product
sales, corporate advertising, infomercials, travel and real estate, auction
centers, and corporate training.
The challenge of bringing on-demand video to the consumer hinges mainly on the
storage of dense video content. Broadband Technology Inc.'s data warehousing
methods, combined with currently available technology, could allow us to
infinitely scale for the inventory demands of the future. Broadband
Technologies, Inc. has filed five patent applications, all of which have been
granted a patent pending status. These applications cover the key proprietary
features of the video delivery system. The following is a summary of these five
patent applications:
DISTRIBUTIVE NETWORK. The system utilizes a very complex and specific "Intranet"
network configuration. It allows for complete redundancy of the information
contained within the network and provides for fail-proof communications.
HARDWARE AND SOFTWARE CONFIGURATIONS. The configuration of hardware and software
that the system employs in its viewing centers is both specific and very unique.
The combination of software provided allows for the proper functionality of all
hardware components.
DUAL MPEG STREAMING. This patent pertains to the heart of the system. It
protects the actual process of delivering MPEG video streams. In addition, it
will guard the only method known to date for allowing a single processor CPU to
stream two different MPEG files simultaneously.
GRAPHICAL USER INTERFACE. Under this patent, the "look and feel" of the system
is protected. The graphical user interface ("GUI") is created by a unique
combination of display device drivers, file types and formats, that creates an
environment extremely intricate in delivery, yet very intuitive and user
friendly.
DESIGN. The design and engineering of the "viewing center" is protected under
this claim.
It is anticipated that the bulk of the video on demand revenue will come from
storage and delivery fees, as these will be our primary services. Companies
wishing to deliver "infomercials" or training videos, as well as those that
store product content in video format constitute our prospective industrial
market. We foresee industries such as real estate, education, travel and tourism
all depending upon technology and services, like those that Broadband
Technologies, Inc. intends to provide, for their success.
The Company's short-term objectives are to implement The Debt Registry into a
bottom line cash-producing vehicle, while at the same time improving the
existing proprietary technologies through investment in qualified technical
personnel. The Company's status as a stable, income-generating company gives it
the unique advantage of enjoying profit while researching and developing
opportunities in the video-on-demand niche markets.
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RESULTS OF OPERATIONS FOR EACH OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
1999.
REVENUE
Revenue for the nine months ended June 30, 2000 increased from $1,249,745 to
$1,703,933 or an increase of $454,188 over the nine months ended September 30,
1999. The increase is primarily attributable to added revenues from Portfolio
Revenue and Rental Revenue.
LOSS FROM OPERATION
Loss from Operations is calculated by subtracting operating expenses from net
revenue. Net Loss from Operation for the nine months ended September 30, 2000
increased to $999,280 as compared to $280,331 for the nine months ended
September 30, 1999. This increased loss was primarily attributable to increased
financing costs and expense related to development of the Debt Registry and fund
raising efforts and addition of the rental real estate expenses.
OPERATING EXPENSES
Operating expenses include administrative and management benefits and salaries,
advertising and promotion, office and general, interest, professional fees and
occupancy costs. Operating expenses for the nine months ended September 30, 2000
increased by $930,345 to $1,436,091, as compared to $505,746 for the nine months
ended September 30, 1999. This increase was primarily attributable to increase
in Portfolio activities and related increase in costs and staff and increase in
expenses related to marketing and the Debt Registry.
NET LOSS
Net loss for the nine months ended September 30, 2000 increased by $1,706,986
from a net loss of $804/299 for the nine months ended September 30, 1999 to a
net loss of $2,511,285 for the nine months ended September 30, 2000. This
increase is primarily attributable to the increase in financial costs and
expenses related to development of the Debt Registry and fund raising efforts.
The loss includes an expense for stock issued for services of $237,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash and cash flow from operations are its
short-term and long-term debt and increased gross revenues. At September 30,
2000, the Company had cash and cash equivalents of $35,829.
The Company plans to continue funding operations through revenue earned from its
asset portfolio purchase and sale operations, development of the Debt Registry
and additional debt and equity capital raises.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes In Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Articles of Incorporation of Securities Asset Capital Corporation are
incorporated herein by reference to Exhibit 3.1 to the report on Form
8-K filed April 5, 2000.
3.2 By-Laws of Security Asset Capital Corporation incorporated herein by
reference to Exhibit 3.2 to the report on Form 8-K filed April 5, 2000.
4. Form of Security Asset Capital Corporation's Common Stock Certificate
incorporated herein by reference to Exhibit 4 to the report on Form
10QSB filed May 18, 2000.
27. Financial Data Schedule.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SECURITY ASSET CAPITAL CORPORATION,
a Nevada corporation
Date: November 20, 2000 /S/ DAVID R. WALTON
----------------------------------------
David R. Walton, Chief Executive Officer
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