<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 21, 2000
----------------
Security Asset Capital Corporation
(Exact Name of Registrant as Specified in Its Charter)
Nevada
(State or Other Jurisdiction of Incorporation)
000-29039 95-4729666
--------- ----------
(Commission File Number) (IRS Employer Identification No.)
701 "B" Street, Suite 1775, San Diego, California 92101
-------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(619) 232-9950
(Registrant's Telephone Number, Including Area Code)
UNIVERSAL VIEW CORPORATION
270 N. Canon Drive, Suite 203
Beverly Hills, California 90210
(Former Name or Former Address, if Changed Since Last Report)
1
<PAGE> 2
AMENDMENT NO. 1
The undersigned Registrant, Security Asset Capital Corporation ("the
Company"), hereby amends the following items, financial statements, exhibits or
other portions of its Current Report on Form 8-K filed April 4, 2000 as set
forth in the pages attached hereto:
Item 1. CHANGES IN CONTROL OF REGISTRANT.
MANAGEMENT COMPENSATION. The following table sets forth the annualized base
salary that we have paid to David R. Walton, our Chief Executive Officer. All
other compensation for our executives or directors has not exceeded $100,000 on
an annualized basis. We reimburse our officers and directors for any reasonable
out-of-pocket expenses incurred on our behalf.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
NAME AND PRINCIPAL --------------------- STOCK UNDERLYING
POSITION YEAR SALARY ($) AWARDS(a)(b) OPTIONS(c)
-------- ----- ---------- ------------ ----------
<S> <C> <C> <C> <C>
David R. Walton 1997 0 0 0
Chief Executive Officer and 1998 1,000 0 $18,000
Co-Chairman of the Board 1999 160,510 32,813 0
</TABLE>
(a) Mr. Walton is the sole shareholder of Jade Corporation, a Nevada
corporation, that owns 1,000,000 shares of the Company's Common Stock. 900,000
of the shares were issued on July 24, 1995. The additional 100,000 shares were
issued on February 21, 1997. These shares are unrestricted.
(b) No dividends will be paid on the restricted stock reported.
(c) In 1998, Mr. Walton acquired an option to purchase 225,000 shares of the
Company at $.08 per share expiring on December 4, 2008.
Item 4. CHANGE OF REGISTRANT'S CERTIFYING ACCOUNTANTS
On February 4, 2000, the Company engaged Pannell Kerr Forester,
Certified Public Accountants, as its independent auditor for fiscal 1999 and
1998. The Company did not engage an auditor during 1998 and 1999.
<PAGE> 3
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT.....................................................................F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1999 and 1998.........................F-2 - F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998...........................................................F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the
Years Ended December 31, 1999 and 1998...............................................F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999 and 1998.........................................F-6 - F-7
Notes to Consolidated Financial Statements..........................................F-8 - F-25
SECURITY ASSET PROPERTIES, INC.
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT....................................................................F-26
FINANCIAL STATEMENTS
Balance Sheets
as of December 31, 1998 and September 30, 1999 (Unaudited)...................F-27 - F-28
Statements of Operations for the years ended
December 31, 1997, 1998 and for the nine months ended
September 30, 1998 and 1999 (Unaudited).............................................F-29
Statements of Changes in Shareholders' Deficit
for the years ended December 31, 1997, 1998 and for the
nine months ended September 30, 1999 (Unaudited)....................................F-30
Statements of Cash Flows for the years ended December 31, 1997, 1998 and
for the nine months ended
September 30, 1998 and 1999 (Unaudited)......................................F-31 - F-32
Notes to Financial Statements............................................................F-33 - F-39
UNAUDITED FINANCIAL INFORMATION
Unaudited Proforma Consolidated Statement of Operations ........................................F-40
Notes to Unaudited Proforma Consolidated Statement of Operations ...............................F-41
</TABLE>
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Security Asset Capital Corporation and Subsidiaries
San Diego, California
We have audited the consolidated balance sheets of Security Asset Capital
Corporation and Subsidiaries (the "Company") as of December 31, 1999 and 1998
and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Security Asset Capital Corporation and Subsidiaries as of December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
San Diego, California PANNELL KERR FORSTER
April 13, 2000 (except for Note 18 Certified Public Accountants
as to which the date is April 21, 2000) A Professional Corporation
F-1
<PAGE> 5
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 29,580 $ 115,138
Cash in transit 1,649,972 -
Loan portfolio assets 3,243,864 -
Related party receivables - directors 14,000 -
Notes and advances receivable 36,149 -
----------- -----------
Total current assets 4,973,565 115,138
----------- -----------
Rental real estate, net 4,069,663 -
Furniture and equipment, net 49,489 2,868
Other assets:
Patent and patents pending 1,552,500 -
Deferred financing costs, net 404,247 31,047
Miscellaneous assets 15,800 -
----------- -----------
1,972,547 31,047
----------- -----------
Total assets $11,065,264 $ 149,053
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 6
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 97,882 $ 34,040
Loan sales payable to third parties 999,428 -
Loan portfolio payable 732,736 -
Due to related parties 18,066 -
Accrued expenses and other liabilities 46,578 2,730
Notes payable (including accrued interest of
$170,795 and $1,414 at December 31, 1999
and 1998, respectively) 4,987,110 471,978
Notes payable - directors - 24,776
Current portion of long term debt 119,513 -
------------ ------------
Total current liabilities 7,001,313 533,524
------------ ------------
Long term debt, net of current portion 2,908,780 -
Deferred income taxes 250,000 -
------------ ------------
Total liabilities 10,160,093 533,524
------------ ------------
Commitments and contingencies (Notes 12 and 18)
Shareholders' equity (deficit):
Common stock, $0.001 par value, 25,000,000
shares authorized; 9,901,000 and 6,910,000
shares issued and outstanding in 1999 and 1998,
respectively; and 925,000 shares issuable at
December 31, 1999 10,826 6,910
Additional paid-in capital 3,422,274 545,367
Accumulated deficit (2,527,929) (936,748)
------------ ------------
Total shareholders' equity (deficit) 905,171 (384,471)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 11,065,264 $ 149,053
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 7
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Portfolio revenue $ 1,728,367 $
Rental revenue 74,586 -
----------- -----------
Total revenues 1,802,953 -
----------- -----------
Expenses:
Portfolio expenses 1,375,928 -
Rental expenses 49,535 -
General and administrative 917,831 16,646
----------- -----------
Total expenses 2,343,294 16,646
----------- -----------
Loss from operations (540,341) (16,646)
Other income (expense):
Other income 4,273 707
Interest expense (including amortization of deferred financing
costs of $572,732 and $0 in 1999 and 1998, respectively) (925,425) (11,754)
Other expenses (23,438) (10,382)
----------- -----------
Total other expense (944,590) (21,429)
----------- -----------
Loss before income taxes and
extraordinary item (1,484,931) (38,075)
Income tax expense (250,000) -
----------- -----------
Loss before extraordinary item (1,734,931) (38,075)
Extraordinary item - debt forgiveness,
net of tax effect of $0 (Note 13) 143,750 -
----------- -----------
Net loss $(1,591,181) $ (38,075)
=========== ===========
Basic and diluted loss before extraordinary item per share $ (0.21) $ (0.01)
=========== ===========
Basic and diluted net loss per share $ (0.19) $ (0.01)
=========== ===========
Shares used to compute basic and diluted net loss per share and
loss before extraordinary item per share 8,391,500 6,910,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 8
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Common Stock Additional
---------------------------- Paid-In Accumulated
Stock Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 6,910,000 $ 6,910 $ 545,367 $ (898,673) $ (346,396)
Net loss for the year
ended December 31, 1998 - - - (38,075) (38,075)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 6,910,000 6,910 545,367 (936,748) (384,471)
Issuances of common stock:
Consulting services:
May 1999 1,700,000 1,700 157,675 - 159,375
December 1999 75,000 75 9,300 - 9,375
Acquisition of asset,
Broadband technology patent
and patents pending (Note 13) 810,000 810 1,511,690 - 1,512,500
Acquisition of asset technology
(Note 13) 6,000 6 5,994 - 6,000
Acquisition of subsidiary
(Note 13) 900,000 900 1,066,910 - 1,067,810
Conversion of note payable
(Note 13) 250,000 250 31,000 - 31,250
Settlement of legal disputes
(Note 13) 175,000 175 20,138 - 20,313
Issuance of common stock options
for consulting services - - 67,200 - 67,200
Contributed services of
executive officers - - 7,000 - 7,000
Net loss for the year ended
December 31, 1999 - - - (1,591,181) (1,591,181)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 10,826,000 $ 10,826 $ 3,422,274 $(2,527,929) $ 905,171
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 9
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,591,181) $ (38,075)
Adjustments to reconcile net loss to net cash flows
(used in) provided by operating activities:
Extraordinary gain on debt forgiveness (143,750) -
Depreciation 17,740 10,527
Amortization of technology acquired 6,000 -
Amortization of deferred financing costs 572,732 -
Loss on disposition of property and equipment - 3,736
Issuances of common stock for settlement of legal disputes 20,313 -
Issuances of common stock for consulting and other services 60,938 -
Issuances of common stock for consulting and other
services of executive officers 107,812 -
Contributed services of executive officers 7,000 -
Issuance of common stock options for consulting and
other services 67,200 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Cash in transit (1,649,972) -
Loan portfolio receivable (3,243,864) -
Advances receivable and and other current assets (48,402) -
Increase (decrease) in:
Payables, accrued expenses and other liabilities 1,955,079 24,565
Deferred income taxes payable 250,000 -
----------- -----------
Net cash flows (used in) provided by
operating activities (3,612,355) 753
----------- -----------
Cash flows from investing activities:
Acquisition/additions to rental properties (95,354) -
Purchase of property and equipment (53,361) -
Purchase of patent and patents pending technology (40,000) -
Proceeds from sale of rental properties, net 324,427 -
Cash acquired on acquisition of subsidiary 9,630 -
----------- -----------
Net cash flows provided by
investing activities 145,342 -
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 10
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Increase in deferred financing costs $ (901,577) $ (31,040)
Repayments of notes payable (101,227) (59,618)
Borrowings of notes payable 4,620,564 202,443
Repayments of long-term debt (211,529) -
Repayment of notes payable - related parties (24,776) (970)
Borrowing of notes payable - related parties - 3,562
----------- -----------
Net cash flows provided by
financing activities 3,381,455 114,377
----------- -----------
Net (decrease) increase in cash (85,558) 115,130
Cash at beginning of year 115,138 8
----------- -----------
Cash at end of year $ 29,580 $ 115,138
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,049,404 $ 46,185
=========== ===========
Income taxes $ - $ -
=========== ===========
Supplemental disclosure of noncash investing and financing activities:
Surrender of fixed assets in exchange for
reduction of liabilities $ - $ 178,386
=========== ===========
Issuance of common stock for patent and patents
pending technology and other technology $ 1,518,500 $ -
=========== ===========
Settlement and conversion of note payable
for common stock $ 31,250 $ -
=========== ===========
Fair value of assets in excess of liabilities acquired upon acquisition
of SAP common stock via the issuance of
SACC common stock $ 1,067,810 $ -
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 11
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 proforma 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.
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 1999, the
Company acquired a real estate property and management company with
rental income properties. In addition, the Company also acquired a
broadband and distributive storage technology patent, and certain
patents pending and proprietary technology rights.
The Company had limited operating revenue until 1999. Its debt division
realized gross revenues in excess of $1,700,000 from the collection and
sale of loan portfolio assets. The Company intends to fund future
operations through developing revenue sources and with additional
capital raises through both public and private placement of its common
stock and debt. Subsequent to year end, the Company began the process
of raising $5,000,000 in a private placement to fund the operations and
development of Broadband Technologies, Inc. and theDebtTrader.com, LLC.
F-8
<PAGE> 12
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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., and
Broadband Technologies, Inc. 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 December 31, 1999 will be in the range of
$7,800,000 to $10,200,000, with estimated related collection costs of
approximately 30% or $2,340,000 to $3,060,000, for an estimated net
value of $5,460,000 to $7,140,000. These assets are carried on the
books of the Company at cost, which approximates $3,244,000.
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-9
<PAGE> 13
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 are 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-10
<PAGE> 14
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 December 31, 1999, SAP has liabilities to tenants of
approximately $30,000 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-11
<PAGE> 15
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 and 1998, options to purchase 1,350,000 and
450,000 common shares, respectively, were anti-dilutive and have been
excluded from the weighted average share computation.
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 "temporary differences" 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 proforma 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-12
<PAGE> 16
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 years ended December 31, 1999 and 1998, 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's 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-13
<PAGE> 17
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 thereunder.
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 is 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
$3,242,864 at December 31, 1999.
NOTE 4 - INVESTMENTS IN RENTAL REAL ESTATE
<TABLE>
<CAPTION>
December 31,
1999
-----------
<S> <C>
Land $ 1,719,050
Buildings and improvements 2,502,416
Furniture and fixtures 30,234
-----------
4,251,700
Less: accumulated depreciation (182,037)
-----------
$ 4,069,663
===========
</TABLE>
NOTE 5 - FURNITURE AND EQUIPMENT
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Furniture and fixtures $ 57,011 $ 3,650
Less: accumulated depreciation (7,522) (782)
-------- --------
$ 49,489 $ 2,868
======== ========
</TABLE>
F-14
<PAGE> 18
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred financing costs on notes payable
(See Note 10) $ 930,111 $ 31,047
Deferred financing costs associated with
long-term mortgages secured by
rental real estate 51,224 -
Less: accumulated amortization (577,088) -
--------- ---------
$ 404,247 $ 31,047
========= =========
</TABLE>
NOTE 8 - LOAN SALES PAYABLE TO THIRD PARTIES
The Company closed the sale of portions of certain loan portfolios on
December 30, 1999 for $1,649,972. The loan portfolios sale included
portfolios owned by the Company and portfolios owned by third parties.
The entire proceeds from the portfolio sale were received by the
Company resulting in the recording of loan sales payable to third
parties, including commission owing on the sale, totaling approximately
$999,400. These amounts were paid in January 2000.
NOTE 9 - LOAN PORTFOLIO PAYABLE
The Company purchased three loan portfolios from Exterra Credit in
August, September, and October 1999. The total cost of the three
portfolios was $1,072,736 of which $732,736 of the purchase price
remained to be paid as of December 31, 1999. As of April 13, 2000 all
but $150,000 of the $732,736 has been paid. Of the remaining $150,000,
Exterra Credit has verbally agreed to reduce the debt portfolios
purchase price by $50,000. Once this agreement is finalized and signed,
the Company will recognize the reduction in the cost of the portfolio.
The Company anticipates further negotiations with Exterra Credit may
further reduce the remaining $100,000 accounts payable associated with
the above portfolios.
F-15
<PAGE> 19
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 December 31, 1999 the Company has outstanding liabilities of
approximately $4,987,100 for one hundred and eighty nine (189)
nine-month notes to various individuals, family trusts, retirement
accounts and a Peace organization. Seventy-two (72) of the Investor
Notes totaling approximately $2,127,000 require quarterly payments of
interest. The remaining one hundred seventeen (117) Investor Notes
totaling $2,860,100 accrue interest and are paid at maturity, if not
converted into new Investor Notes.
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.
At December 31, 1998 the Company had notes payable totaling
approximately $472,000. Of this amount, $200,000 was owed to an
individual. During 1999 this amount was converted into common stock
(See Note 13). Also included in the above amount was approximately
$76,000 owed to an individual and $195,000, including accrued interest,
payable to the holders of the nine month notes described above.
F-16
<PAGE> 20
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 11 - LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1999:
<TABLE>
<S> <C>
Fixed rate first trust deeds payable with interest ranging from 7.02%
to 14.00% per annum, maturing through February 2029; the loans are
secured by the subject properties $ 1,020,387
Variable rate first trust deeds payable with interest ranging from
7.16% to 8.25% per annum (the interest rates on these loans are subject
to adjustment based on certain indices; the maximum rates under these
loans can range from 11.95% to 15.75%), maturing through December 2035;
the loans are secured by the subject properties 1,884,684
Fixed rate second trust deeds payable with interest ranging from 8.00%
to 15.00% per annum, maturing through May 2002; the loans are secured
by the subject properties 123,222
-----------
3,028,293
Less: Current portion (119,513)
-----------
$ 2,908,780
===========
</TABLE>
Aggregate maturities of long-term obligations at December 31 are as
follows:
<TABLE>
<CAPTION>
Year Ending Amount
- ----------- ----------
<S> <C>
2000 $ 119,513
2001 167,869
2002 31,565
2003 33,704
2004 36,470
Thereafter 2,639,172
----------
$3,028,293
==========
</TABLE>
F-17
<PAGE> 21
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 December 31, 1999, 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
December 31, 1999, 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 December 31, 1999, The Company has no significant litigation
pending.
LEASES
The Company, as of December 31, 1999, does not have any long term or
operating lease obligations. The Company's corporate office lease was
renewed for one year in January 2000 at the rate of approximately
$2,600 per month. Rental expense for the years ended December 31, 1999
and 1998 totaled $27,691 and $0 respectively.
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. For
noncancellable operating leases that were in effect as of December 31,
1999, future minimum rentals for 2000 (the end of the lease term) was
$56,250.
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> 22
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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. Since the
date of acquisition (October 31, 1999), the fair value of the space
occupied and the contributed services amounted to $7,000. This amount
is included in additional paid-in capital and in general and
administrative expenses for the year ended December 31, 1999.
STOCKHOLDERS EQUITY
During 1998, the Company issued no common stock. In 1999, the Company
committed to issue a total of 3,916,000 shares of common stock. The
shares were granted in the amount and for the purposes described below:
<TABLE>
<CAPTION>
Purpose Number of Shares
------- ----------------
<S> <C>
Acquisition of Security Asset Properties, Inc. (Note 1) 900,000
Acquisition of Broadband patent pending rights (Note 6) 810,000
Acquisition of "theDebtTrader" technology 6,000
Issued to officers for services (See below) 1,150,000
Issued to third parties for services (See below) 625,000
Issued in settlements (See below) 175,000
Issued in payment of debt (See below) 250,000
</TABLE>
During May 1999 the Company issued a total of 1,150,000 shares of
common stock to officers of the Company as compensation for consulting
services provided to the Company. For the year ended 1999 the Company
recognized $107,812 as compensation expense associated with these
grants, based on the fair value of the stock at the time of grant.
During May and December 1999 the Company issued a total of 625,000
shares of common stock to third parties as compensation for consulting
services provided to the Company. For the year ended 1999 the Company
recognized $60,938 as compensation expense associated with these
grants, based on the fair value of the stock at the time of grant.
In April and May 1999, the following shares were issued to obtain
general releases from legal issues. The Company recognized expense
totaling approximately $20,300 as a result of these issuances.
<TABLE>
<S> <C> <C>
Douglas Seaver 125,000 Shares of Common Stock
Neal Moyer 25,000 Shares of Common Stock
Harlene Moyer 25,000 Shares of Common Stock
</TABLE>
F-19
<PAGE> 23
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 13 - SHAREHOLDERS' EQUITY (DEFICIT) (Continued)
STOCK FOR DEBT
The Company, in November 1999, paid $25,000 cash and issued 250,000
shares of stock to Douglas Pierson in conversion of a $200,000 debt of
Security Asset Management, Inc. Based on the fair market value of the
stock at the settlement date, Security Asset Management, Inc. has
recorded $143,750 as debt forgiveness income, net of the applicable
taxes.
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 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:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Net (loss):
As reported $ (1,591,181) $ (38,075)
Proforma $ (1,591,181) $ (70,888)
Basic and diluted net (loss) per share:
As reported $ (0.19) $ (0.01)
Proforma $ (0.19) $ (0.01)
</TABLE>
F-20
<PAGE> 24
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
------------------------ -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
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
========== ========= ======== =========
Weighted-average fair value of options
granted during the period $ 0.75 $ 0.08
========= =========
</TABLE>
A further summary of options outstanding at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
---------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
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
========== ==========
</TABLE>
F-21
<PAGE> 25
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
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 $ -
========= =========
</TABLE>
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.
F-22
<PAGE> 26
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 15 - INCOME TAXES (Continued)
A reconciliation of the effective tax rates with the federal statutory
rate is as follows as of December 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
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) $ -
========= =========
</TABLE>
NOTE 16 - RELATED PARTY TRANSACTIONS
SAP paid commissions on the sale of its properties to its executive
officers and their affiliated companies of approximately $20,000 during
the year ended December 31, 1999.
During 1999 and 1998 the Company made payments for consulting services
to the CEO, President, CFO, and the Secretary of the Corporation.
Payments for consulting services made to these individuals were
$160,510, $37,526, $0 and $28,000 during 1999, respectively. Also
during 1999 these individuals received common stock valued at $32,813,
$32,813, $32,813, and $9,375, respectively. These shares have been
valued based on the fair value of the shares on the date of grant.
During 1998 the amounts paid to these individuals were $1,000, $0, $0,
and $0, respectively.
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> 27
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 17 - SEGMENT INFORMATION (Continued)
Information about reported segment profit or loss and segment assets
for the years ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Consumer Rental
Credit Real Estate
Portfolio Portfolio Broadband Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1999 Revenues $ 1,728,367 $ 74,586 $ - $ 1,802,953
1998 Revenues - - - -
1999 Interest expense 887,770 37,655 - 925,425
1998 Interest expense 11,754 - - 11,754
1999 Profit (loss) (1,465,733) 29,322 - (1,436,411)
1998 Profit (loss) (38,075) - - (38,075)
1999 Assets 8,884,978 2,876,223 1,552,500 13,313,701
1998 Assets 384,393 - - 384,393
</TABLE>
Reconciliations of reportable segment profit or loss, and assets to
consolidated totals for the years ended December 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Profit or Loss
Total loss for reportable segments $ (1,436,411) $ (38,075)
Consolidating entries:
Additional depreciation and elimination of
gain on sale on properties based on increase
in fair value at date of acquisition (48,520) -
------------ ------------
Loss before income taxes and extraordinary item $ (1,484,931) $ (38,075)
============ ============
Assets
Total assets for reportable segments $ 13,313,701 $ 384,393
Eliminations:
Intercompany receivables (695,858) (35,340)
Investment in subsidiaries (2,846,442) (200,000)
Unallocated amounts:
Increase in fair value of properties at date of
acquisition 1,293,863 -
------------ ------------
Consolidated total assets $ 11,065,264 $ 149,053
============ ============
</TABLE>
F-24
<PAGE> 28
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 18 - SUBSEQUENT 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 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.
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.
On March 28, 2000, the Company began soliciting capital funds (the
"Private Placement") for the Broadband Technologies, Inc. subsidiary.
In return of the full $5,000,000 in equity, investors will receive a
10% ownership in Broadband Technologies, Inc. In addition, the
Broadband investors receive warrants to purchase up to 2,500,000 shares
of the Company's common stock for $2.00 per share. The Private
Placement seeks to raise $4,500,000 after costs for Broadband
Technologies, Inc. and the Company. The funds are to be used for
development of the broadband technologies including specific
applications for use in the Debt Registry and operating costs of the
Company. As of April 21, 2000, the Company has obtained written letters
of intent to fund $3,600,000 of the $5,000,000 Private Placement. The
Company anticipates the entire Private Placement will be committed and
funded.
On April 20, 2000, the Company initiated a program to convert up to
$5,000,000 in Notes Payable to convertible preferred stock. The
convertible preferred stock will pay dividends quarterly totaling 12%
per annum. The preferred stock is convertible into common stock of the
Company at a rate of $2.00 per common share.
F-25
<PAGE> 29
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Security Asset Properties, Inc.
San Diego, California
We have audited the balance sheet of Security Asset Properties, Inc. (formerly
Four D Corporation) (the "Company") as of December 31, 1998, and the related
statements of operations, changes in shareholders' deficit, and cash flows for
the years ended December 31, 1997 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Security Asset Properties, Inc.
as of December 31, 1998, and the results of its operations and its cash flows
for the years ended December 31, 1997 and 1998, in conformity with generally
accepted accounting principles.
San Diego, California PANNELL KERR FORSTER
March 14, 2000 Certified Public Accountants
A Professional Corporation
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 30
SECURITY ASSET PROPERTIES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September
December 31, 30, 1999
1998 (Unaudited)
----------- -----------
<S> <C> <C>
Investment in real estate:
Land $ 1,204,126 $ 1,336,672
Buildings and improvements 1,688,337 1,751,756
Furniture and fixtures 29,398 30,233
Less - accumulated depreciation (115,062) (164,694)
----------- -----------
Net investment in real estate 2,806,799 2,953,967
Cash 43,874 8,198
Deposits and other assets 5,885 4,885
Due from related parties 14,000 14,000
Deferred financing costs, net 51,051 63,605
----------- -----------
Total assets $ 2,921,609 $ 3,044,655
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE> 31
SECURITY ASSET PROPERTIES, INC.
BALANCE SHEETS (Continued)
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
September
December 31, 30, 1999
1998 (Unaudited)
----------- -----------
<S> <C> <C>
LIABILITIES:
Accounts payable $ 4,432 $ 6,680
Interest payable 14,960 17,564
Tenant security deposits payable 22,350 30,890
Due to related parties 44,065 18,066
Long-term debt 3,046,904 3,239,909
----------- -----------
Total liabilities 3,132,711 3,313,109
----------- -----------
Commitments and contingencies (Note 4)
SHAREHOLDERS' DEFICIT:
Common stock, no par value, 25,000 shares
authorized; issued and outstanding:
5,000 shares at December 31, 1998 and
September 30, 1999 (unaudited), respectively 100 100
Additional contributed capital 70,000 101,500
Accumulated deficit (281,202) (370,054)
----------- -----------
Total shareholders' deficit (211,102) (268,454)
----------- -----------
Total liabilities and shareholders' deficit $ 2,921,609 $ 3,044,655
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE> 32
SECURITY ASSET PROPERTIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
Years Ended December 31, -------------------------------
------------------------- 1998 1999
1997 1998 (Unaudited) (Unaudited)
--------- --------- ------------ ---------------
<S> <C> <C> <C> <C>
Rental revenues $ 260,928 $ 283,861 $ 198,623 $ 337,040
Costs and expenses:
Rental expenses 55,830 66,090 39,128 106,780
General and administrative 90,209 50,108 42,558 55,777
Mortgage interest expense 170,894 219,743 146,385 243,449
Depreciation 34,588 52,927 40,016 49,632
--------- --------- --------- ---------
Total costs and expenses 351,521 388,868 268,087 455,638
--------- --------- --------- ---------
Loss from operations (90,593) (105,007) (69,464) (118,598)
Other income:
Gain on sale of rental property 38,381 3,155 10,733 28,935
Other 1,057 723 349 811
--------- --------- --------- ---------
Total other income 39,438 3,878 11,082 29,746
--------- --------- --------- ---------
Loss before provision for
income taxes (51,155) (101,129) (58,382) (88,852)
Provision for income taxes - - - -
--------- --------- --------- ---------
Net loss $ (51,155) $(101,129) $ (58,382) $ (88,852)
========= ========= ========= =========
Basic and diluted net loss
per share $ (10.23) $ (20.23) $ (11.68) $ (17.77)
--------- ========= ========= =========
Shares used to compute basic
and diluted net loss per share 5,000 5,000 5,000 5,000
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE> 33
SECURITY ASSET PROPERTIES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Contributed Accumulated
Shares Amount Capital Deficit Total
--------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 5,000 $ 100 $ - $(128,918) $(128,818)
Contributed services of
executive officers (Note 5) - - 33,000 - 33,000
Net loss - - - (51,155) (51,155)
--------- --------- --------- --------- ---------
Balance, December 31, 1997 5,000 100 33,000 (180,073) (146,973)
Contributed services of
executive officers (Note 5) - - 37,000 - 37,000
Net loss - - - (101,129) (101,129)
--------- --------- --------- --------- ---------
Balance, December 31, 1998 5,000 100 70,000 (281,202) (211,102)
Unaudited information:
Contributed services of
executive officers (Note 8) - - 31,500 - 31,500
Net loss for the nine months
ended September 30, 1999 - - - (88,852) (88,852)
--------- --------- --------- --------- ---------
Balance, September 30, 1999
(Unaudited) 5,000 $ 100 $ 101,500 $(370,054) $(268,454)
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-30
<PAGE> 34
SECURITY ASSET PROPERTIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 30, 1997, 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
Years Ended December 31, -------------------------------
------------------------- 1998 1999
1997 1998 (Unaudited) (Unaudited)
--------- --------- -------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (51,155) $(101,129) $ (58,382) $ (88,852)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation 34,588 52,927 40,016 49,632
Amortization of deferred financing costs 3,431 3,431 2,573 1,680
Gain on sale of rental property (38,381) (3,155) (10,733) (28,935)
Recognition of deferred financing costs
on sale of rental properties 5,975 6,173 5,617 -
Contributed services of executive officers 33,000 37,000 27,750 31,500
Changes in operating assets and liabilities:
Decrease (increase) in deposits
and other assets 19,204 10,092 (13,849) 1,000
(Decrease) increase in accounts payable
and interest payable (2,629) 4,271 152 4,852
Increase (decrease) in tenant
security deposits payable 4,960 2,053 (1,497) 8,540
--------- --------- --------- ---------
Net cash flows provided by (used in)
operating activities 8,993 11,663 (8,353) (20,583)
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition/additions to rental properties (390,420) (677,028) (218,958) (275,539)
Proceeds from sale of rental properties, net 322,789 142,309 135,137 107,674
(Increase) decrease in due from
related parties (26,295) 12,295 26,295 -
--------- --------- --------- ---------
Net cash flows used in investing activities (93,926) (522,424) (57,526) (167,865)
--------- --------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in bank overdraft 3,180 (3,180) (3,180) -
Increase in deferred financing costs (14,686) (12,149) (9,703) (14,234)
Borrowings from related parties - 35,565 10,693 -
Borrowings on long-term debt 606,500 915,400 432,900 956,600
Repayments on due to related parties (13,607) - - (25,999)
Repayments on long-term debt (507,442) (381,001) (363,856) (763,595)
--------- --------- --------- ---------
Net cash flows provided by
financing activities 73,945 554,635 66,854 152,772
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-31
<PAGE> 35
SECURITY ASSET PROPERTIES, INC.
STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
Years Ended December 31, --------------------------
-------------------------- 1998 1999
1997 1998 (Unaudited) (Unaudited)
---------- ---------- ------------- --------------
<S> <C> <C> <C> <C>
Net (decrease) increase in cash (10,988) 43,874 975 (35,676)
Cash at beginning of period 10,988 - - 43,874
---------- ---------- ---------- ----------
Cash at end of period $ - $ 43,874 $ 975 $ 8,198
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 167,503 $ 217,329 $ 146,679 $ 240,845
========== ========== ========== ==========
Income taxes $ - $ - $ - $ -
========== ========== ========== ==========
Supplemental disclosure of noncash
investing and financing activities:
Mortgage notes assumed for
rental property acquisitions $ 48,342 $ 374,769 $ - $ -
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-32
<PAGE> 36
SECURITY ASSET PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Security Asset Properties, Inc. (formerly Four D Corporation) was
incorporated in the state of Nevada on April 1, 1993. The Company owns
and operates twenty-one income producing residential properties (the
"Properties"). The Properties consist of single family homes and
apartment buildings located in San Diego County, California. The
Company provides management, leasing and development with respect to
its properties.
Effective October 31, 1999 (the "Exchange Date"), the shareholders of
the Company agreed to exchange 100% of the outstanding shares of
Security Asset Properties, Inc. for 900,000 shares of Security Asset
Capital Corporation ("SACC").
Interim Financial Statements
The accompanying balance sheet as of September 30, 1999 and the
statements of operations and cash flows for the nine month periods
ended September 30, 1998 and 1999, respectively, have not been audited.
However, these financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and the instructions of Regulation S-B. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In management's opinion, the accompanying financial
statements reflect all material adjustments (consisting only of normal
recurring adjustments) necessary for a fair statement of the results
for the interim periods presented. The results for the interim periods
are not necessarily indicative of the results which will be reported
for the entire year.
Financial Instruments
The carrying amounts reported in the balance sheet for cash, deposits
and other assets, amounts due from related parties, accounts payable,
interest payable, tenant security deposits payable and amounts due to
related parties approximate fair value due to the immediate short-term
maturity of these financial instruments.
The fair value of the Company's long-term debt approximates the
carrying amount based on the current rates offered to the Company for
debt of the same remaining maturities with similar collateral
requirements.
Investments in Real Estate
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 twenty-seven and one-half
(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 seven (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.
F-33
<PAGE> 37
SECURITY ASSET PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
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.
Concentration Risk
The Company's revenues are generated by the rental properties located
in San Diego County, California. If the demand for rental properties in
this area decreased or if the Company's ability to service the
obligations on the properties was impaired, the Company's revenue
source would be severely impacted.
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.
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 "temporary differences" 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.
Net Loss Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share",
which specifies the computation, presentation and disclosure
requirements for earnings per share for entities with publicly held
common stock. SFAS No. 128 supercedes the provisions of APB No. 15, and
requires the presentation of basic earnings per share and diluted
earnings per share. The Company has adopted the provisions of SFAS No.
128 effective January 1, 1997.
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.
F-34
<PAGE> 38
SECURITY ASSET PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
The FASB recently issued 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, 1997. For the years ended December 31,
1997 and 1998, the Company had no items that were required to be
recognized as components of other comprehensive income.
Accounting for Internal Costs Relating to Real Estate Property
Acquisitions
In March 1998, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("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, and had no material impact on the Company's
1998 financial statements.
Segment Information
The FASB recently 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, 1997. For the years
ended December 31, 1997 and 1998, the Company had only one operating
segment, rental real estate, which operated in only one geographic
area, the county of San Diego, California.
Management's Plans for Future Operations and Financing
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. At present, the Company
operates using working capital generated from buying, selling, renting
and refinancing rental real estate properties. The Company anticipates
it will continue providing operating capital in this manner. Subsequent
to year-end, the shareholders exchanged all of their outstanding common
stock for shares of Security Asset Capital Corporation common stock.
The Company plans to generate additional working and investment capital
through its now parent Security Asset Capital Corporation. The Company
intends to expand its operations in 2000 with acquisition of additional
income producing properties.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-35
<PAGE> 39
SECURITY ASSET PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 2 - LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Fixed rate first trust deeds payable with interest ranging from 7.02% to
12.00% per annum maturing through February 2029; the loans are secured by
the subject
properties $1,032,848
Variable rate first trust deeds payable with interest ranging from 7.16%
to 8.30% per annum (the interest rates on these loans are subject to
adjustment based on certain indices; the maximum rates under these loans
can range from 11.20% to 15.75%), maturing through December 2035; the
loans are secured by the subject
properties 1,507,086
Fixed rate second trust deeds payable with interest ranging from 8.00% to
15.00% per annum, maturing through May 2002; the loans are secured by the
subject
properties 506,970
----------
$3,046,904
</TABLE>
Aggregate maturities of long-term obligations at December 31 are as
follows:
<TABLE>
<CAPTION>
Year Ending Amount
- ----------- -------------
<S> <C>
1999 $ 113,107
2000 103,845
2001 73,776
2002 53,924
2003 34,118
Thereafter 2,668,134
-------------
$ 3,046,904
</TABLE>
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. At the time
of acquisition of each property, the shareholder transferred each
property and the related borrowing to the Company. As of December 31,
1998, the obligations associated with the Company'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 December 31, 1998, 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 the Company. The Company 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.
F-36
<PAGE> 40
SECURITY ASSET PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 3 - RELATED PARTY TRANSACTIONS
Due from Related Parties
Amounts due from related parties consists of the following as of
December 31, 1998:
<TABLE>
<S> <C>
Unsecured advances to affiliated companies of the shareholders. The
advances are non-interest bearing and due on demand. $ 14,000
===========
Due to Related Parties
Amounts due to related parties consists of the following as of December
31, 1998: Amounts due to shareholders and companies controlled the
shareholders, for cash advances and payment of expenses on behalf of
the Company. The amounts are non-interest bearing and due on demand. $ 44,065
===========
</TABLE>
Management Fees
The Company paid management fees of $3,000 to its executive officers
during the year ended December 31, 1997. No management fees were paid
during the year ended December 31, 1998.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Rentals 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. For
noncancellable operating leases that were in effect as of December 31,
1998, future minimum rentals for 1999 (the end of the lease term) were
$73,300.
Options to Purchase Property Granted to Tenants
The Company grants certain tenants the option to purchase the property
being leased in exchange for an option deposit paid by the tenant. The
Company recognizes these deposits as income upon the termination of the
lease and the election of the tenant not to exercise the option.
NOTE 5 - SHAREHOLDERS' EQUITY
Contributed Services of Executive Officers
The Company 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 the Company contributed services at no cost. For
the years ended December 31, 1997 and 1998, the fair value of the space
occupied and the contributed services amounted to $33,000 and $37,000,
respectively. These amounts are included in additional contributed
capital and in general and administrative expenses for the years ended
December 31, 1997 and 1998.
F-37
<PAGE> 41
SECURITY ASSET PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 6 - 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, 1998:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 55,700
Other 1,400
------------
Gross deferred tax assets 57,100
Less valuation allowance (57,100)
------------
-
Deferred tax liabilities -
------------
$ -
============
</TABLE>
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 $38,300 from 1997.
As of December 31, 1998, the Company has net operating loss
carryforwards for both federal and state income tax purposes. Federal
and state net operating loss carryforwards totaling approximately
$155,000 and $77,000, respectively expire through 2018 and 2003,
respectively. Due to federal and state laws, the availability of the
operating loss carryforwards are limited due to a cumulative change in
the Company's ownership resulting in a change in control. The Company
had such a change during the year ended December 31, 1999. The Company
has not yet calculated the limitation of the utilization of the net
operating loss carryforwards.
A reconciliation of the effective tax rates with the federal statutory
rate is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Income tax benefit at 35% statutory rate $(17,400) $(34,300)
Change in valuation allowance 18,800 38,300
State income taxes, net (3,000) (5,900)
Other 1,600 1,900
-------- --------
$ - $ -
======== ========
</TABLE>
F-38
<PAGE> 42
SECURITY ASSET PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE 7 - SUBSEQUENT EVENT
Effective October 31, 1999 (the "Exchange Date"), the shareholders of
the Company agreed to exchange 100% of the outstanding shares of
Security Asset Properties, Inc. for 900,000 shares of Security Asset
Capital Corporation. In conjunction with the share exchange above the
Company obtained independent appraisals on the properties owned as of
October 31, 1999. The fair value of the properties held as of October
31, 1999 exceeded the book value of the properties held, after
reduction for anticipated selling costs, by approximately $1,294,000.
Subsequent to year end, the Company changed its name to Security Asset
Properties, Inc. ("SAP").
NOTE 8 - NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS
Due to Related Parties
During the nine months ended September 30, 1999, the Company repaid
amounts advanced by the shareholders totaling $25,999.
Contributed Services of Executive Officers
As discussed in Note 5, the Company's executive officers contributed
services and the use of office space to the Company. For the nine
months ended September 30, 1999, the fair value of the space occupied
and the contributed services amounted to $31,500.
F-39
<PAGE> 43
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1999
<TABLE>
<CAPTION>
Security Asset
Capital
Corporation
and Subsidiaries,
excluding
Security Asset Security Asset Pro Forma Pro Forma
Properties, Inc. Properties, Inc. Adjustments Total
----------------- ---------------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 1,728,367 $ 456,821 $ - $ 2,185,188
Costs and expenses:
Cost of revenues 1,402,896 230,603 A 25,500 1,658,999
General and administrative 886,035 66,350 - 952,385
----------- ----------- ----------- -----------
Total costs and expenses 2,288,931 296,953 25,500 2,611,384
----------- ----------- ----------- -----------
Operating income (loss) (560,564) 159,868 (25,500) (426,196)
Other income (expense):
Interest expense (887,770) (303,587) - (1,191,357)
Other income (expenses) (17,399) 74,570 B (72,355) (15,184)
----------- ----------- ----------- -----------
Total other expenses (905,169) (229,017) (72,355) (1,206,541)
----------- ----------- ----------- -----------
Loss before income taxes
and extraordinary item (1,465,733) (69,149) (97,855) (1,632,737)
Income tax expense (250,000) - - (250,000)
----------- ----------- ----------- -----------
Loss before extraordinary item (1,715,733) (69,149) (97,855) (1,882,737)
Extraordinary item 143,750 - - 143,750
----------- ----------- ----------- -----------
Net loss $(1,571,983) $ (69,149) $ (97,855) $(1,738,987)
=========== =========== =========== ===========
Basic and diluted
Loss before income taxes and
extraordinary item per share $ (0.19) $ (0.19)
=========== ===========
Basic and diluted
net loss per share $ (0.19) $ (0.19)
=========== ===========
Shares used to compute basic
and diluted net loss per share 8,241,500 9,141,500
=========== ===========
</TABLE>
<PAGE> 44
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1999
The following pro forma adjustments to the unaudited pro forma consolidated
statement of operations are being recorded as if the purchase of Security Asset
Properties, Inc. on October 31, 1999, occurred as of January 1, 1999. The fair
value of the assets purchased on the acquisition date are assumed to be the same
as of January 1, 1999.
A - To record depreciation on fixed assets based on the fair value of the
properties purchased.
B - To eliminate the gain on sale of properties due to the increase in fair
value on the acquisition date.
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
<S> <C>
23.1 Consent of Accountants
</TABLE>
<PAGE> 46
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Security Asset Capital Corporation,
a Nevada corporation
/s/ DAVID R. WALTON
----------------------------------------
David R. Walton, Chief Executive Officer
<PAGE> 1
EXHIBIT 23.1
CONSENT OF
INDEPENDENT PUBLIC ACCOUNTANT
We consent to the use in Amendment No. 1 to Form 8-K of Security Asset Capital
Corporation and Subsidiaries of our report dated April 13, 2000 (except for
note 18 as to which the date is April 21, 2000), relating to the consolidated
financial statements of Security Asset Capital Corporation and Subsidiaries and
of our report dated March 14, 2000, relating to the financial statements of
Security Asset Properties, Inc. in such current report.
/s/ PANNELL KERR FORSTER
San Diego, California PANNELL KERR FORSTER
May 2, 2000 Certified Public Accountants
A Professional Corporation
