<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 June 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: 12,361,000 of common stock shares as
of June 30, 2000.
Transitional Small Business Disclosure Format (check one):
Yes No X
------ --------
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of 6/30/00:
Number of Shares
----------------
Common Stock, $.001 par Value 11,761,000
Additional Common Stock, $.001 par Value Issuable 600,000
----------
Total Common Stock Outstanding 12,361,000
==========
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.
<PAGE>
<TABLE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
ASSETS
<CAPTION>
(Unaudited) (Audited)
June 30, 2000 December 31, 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash $ 408,494 $ 29,580
Cash in Transit 1,649,972
Loan portfolio assets 2,208,406 3,243,864
Related party receivables - directors 74,331 14,000
Notes and advances receivable 232,875 36,149
------------- -------------
Total current assets 2,924,106 4,973,565
------------- -------------
Rental real estate, net 3,798,259 4,069,663
Furniture and equipment, net 65,223 49,489
Other assets:
Patent and patents pending 1,552,500 1,552,500
Investment The Debt Registry 1,373,980
Goodwill (Universal View Corp) 1,025,000
Deferred financing costs, net 488,264 404,247
Miscellaneous assets 194,536 15,800
------------- -------------
8,497,762 1,972,547
------------- -------------
Total assets $ 11,421,868 $ 11,065,264
============= =============
The accompanying notes are an integral part of the consolidated financial statements.
F-3
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<PAGE>
<TABLE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<CAPTION>
(Unaudited) (Audited)
June 30, 2000 December 31, 1999
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 42,852 $ 97,882
Loan sales payable to third parties 999,428
Loan portfolio payable B 732,736
Due to related parties B 18,066
Accrued expenses and other liabilities 3,799 46,578
Notes payable (including accrued interest of
$199,904 and $170,795 at June 30, 2000 and
December 31,1999, respectively) 6,676,301 4,987,110
Current portion of long term debt 50,000 119,513
------------- -------------
Total current liabilities 6,772,952 7,001,313
------------- -------------
Long term debt, net of current portion 2,713,666 2,908,780
Deferred income taxes 250,000 250,000
------------- -------------
Total liabilities 9,736,618 10,160,093
------------- -------------
Commitments and contingencies (Notes 12 and 18)
Shareholders' equity (deficit):
Common stock, $0.001 par value, 25,000,000
shares authorized; 11,761,000 and 9,901,000
shares issued and outstanding in June 30, 2000
and December 31,1999, respectively; and 600,000
and 925,000 shares issuable at June 30, 2000
and December 31, 1999, respectively 12,361 10,826
Additional paid-in capital 5,784,238 3,422,274
Accumulated deficit (4,111,349) (2,527,929)
------------- -------------
Total shareholders' equity (deficit) 1,685,250 905,171
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 11,421,868 $ 11,065,264
============= =============
The accompanying notes are an integral part of the consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarter Ended June 30, 2000 and 1999
<CAPTION>
(Unaudited) (Unaudited)
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Revenues:
Portfolio revenue $ 69,048 $ 7,553
Rental revenue 100,234 -
------------- -------------
Total revenues 169,282 7,553
------------- -------------
Expenses:
Portfolio expenses 65,990 1,819
Rental expenses 85,272 -
General and administrative 496,130 288,960
------------- -------------
Total expenses 647,392 290,779
------------- -------------
Loss from operations (478,110) (283,226)
Other income (expense):
Other income 84,331 B
Interest expense (including amortization of deferred
Financing costs of $309,729 and $100,827 in
2nd Quarter 2000 and 1999, respectively) (530,515) (192,580)
Other expenses B B
------------- -------------
Total other expense (446,184) (192,580)
------------- -------------
Loss before income taxes (924,294) (475,806)
Income tax expense B 0
------------- -------------
Net loss $ (924,294) $ (476,670)
============= =============
Basic and diluted loss before extraordinary item per share $ (0.07) $ (0.07)
============= =============
Basic and diluted net loss per share $ (0.07) $ (0.07)
============= =============
Shares used to compute basic and diluted net loss per share and
loss before extraordinary item per share 11,900,000 6,910,000
============= =============
The accompanying notes are an integral part of the consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2000 and 1999
<CAPTION>
(Unaudited) (Unaudited)
Six Months 2000 Six Months 1999
------------- -------------
<S> <C> <C>
Revenues:
Portfolio revenue $ 1,294,118 $ 7,848
Rental revenue 215,038 -
------------- -------------
Total revenues 1,509,156 7,848
------------- -------------
Expenses:
Portfolio expenses 1,055,465 1,819
Rental expenses 129,166 -
General and administrative 965,144 343,233
------------- -------------
Total expenses 2,149,775 345,052
------------- -------------
Loss from operations (640,619) (337,204)
Other income (expense):
Other income 90,308 B
Interest expense (including amortization of deferred
financing costs of $590,882 and $136,178 in
first six months of 2000 and 1999, respectively) (1,033,109) (247,932)
Other expenses B B
------------- -------------
Total other expense (942,801) (247,932)
------------- -------------
Loss before income taxes (1,583,420) (585,136)
Income tax expense B 0
------------- -------------
Net loss $ (1,583,420) $ (586,000)
============= =============
Basic and diluted loss before extraordinary item per share $ (0.13) $ (0.08)
============= =============
Basic and diluted net loss per share $ (0.13) $ (0.08)
============= =============
Shares used to compute basic and diluted net loss per share and
loss before extraordinary item per share 11,900,000 6,910,000
============= =============
The accompanying notes are an integral part of the consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY For the Six Months
Ended June 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
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 B 51,150
Issuance of stock to officer and an employee
for services 150,000 150 24,600 - 24,750
Isuance of Stock for Universal
View Corp. 400,000 400 899,600 - 900,000
Contribution of Executives Services B B 24,224 B 14,855
Net loss for the Quarter ended
June 30, 2000 - - - (924,294) (924,294)
------------------------------------------------------------------------
Balance, June 30, 2000 12,361,000 $ 12,361 $ 5,784,238 $(4,111,349) $ 1,685,250
========================================================================
<
The accompanying notes are an integral part of the consolidated financial statements.
F-7
</TABLE>
<PAGE>
<TABLE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and June 30, 2000
(Unaudited)
<CAPTION>
1st 1st
Six Mnths 99 Six Mnths 2000
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (586,000) $(1,583,420)
Adjustments to reconcile net loss to net cash flows
(used in) provided by operating activities:
Depreciation & Amortization 300 28,738
Amortization of deferred financing costs 136,178 590,882
Issuances of common stock for settlement of dispute 20,138 12,375
Issuances of common stock for consulting and other services 157,675 51,150
Issuances of common stock for other employee 47,876 24,750
Contributed services of executive officers B 25,224
Changes in operating assets and liabilities:
(Increase) decrease in:
Cash in transit B 1,649,972
Loan portfolio receivable (1,743,593) 1,035,458
Advances receivable and other current assets B (257,057)
Increase (decrease) in:
Payables, accrued expenses and other liabilities (36,770) (1,630,068)
Deferred income taxes payable B B
----------------------------
Net cash flows (used in) provided by
operating activities (2,004,196) (50,996)
----------------------------
Cash flows from investing activities:
Acquisition/additions to other assets (46,369) (53,736)
Purchase/Sale of property and equipment - Net B 225,931
Purchase of The Debt Registry
(Cash outlay in addition $1,350,000 in stock was issued) B (23,980)
Purchase of Universal View Corp
(Cash outlay in addition $900,000 in stock was issued) B (125,000)
Net cash flows provided by
investing activities (46,369) 23,215
----------------------------
The accompanying notes are an integral part of the consolidated financial statements.
F-8
</TABLE>
<PAGE>
<TABLE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Six Months Ended June 30, 1999 and June 30, 2000
(Unaudited)
1st 1st
Six Mnths 99 Six Mnths 2000
----------------------------
<S> <C> <C>
Cash flows from financing activities:
Increase in deferred financing costs $ (333,736) $ (799,899)
Borrowings of notes payable 2,606,114 1,489,287
Borrowings of long-term debt B (264,626)
Repayment of notes payable - related parties 3,326 (18,067)
----------------------------
Net cash flows provided by
financing activities 2,275,704 406,695
----------------------------
Net (decrease) increase in cash 225,139 378,914
Cash at beginning of period 115,138 29,580
----------------------------
Cash at end of period $ 340,277 $ 408,494
============================
The accompanying notes are an integral part of the consolidated financial statements.
F-9
</TABLE>
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
ORGANIZATION AND BUSINESS
Security Asset Capital Corporation, a Nevada corporation ("SACC"),
traded under the symbol "SCYA", operates through the following wholly
owned subsidiaries:
Security Asset Management, Inc., a California corporation ("SAM"),
which, together with SACC, acquires, manages, collects and markets
distressed consumer credit portfolios for their own account and
third parties.
Security Asset Properties, Inc., a Nevada corporation ("SAP"),
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 net income for the second quarter 2000 for Four D
would have been $15,136 for net loss first six month of 1999 of
($43,984).
Broadband Technologies, Inc., a Nevada corporation ("Tech"), 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-10
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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.,
TheDebtTrader.Com, 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 June 30, 2000 will be in the range of
$5,600,000 to $6,630,000, with estimated related collection costs of
approximately 30% or $1,680,000 to $1,990,000, for an estimated net
value of $3,920,000 to $4,640,000. These assets are carried on the
books of the Company at cost, which approximates $2,209,000.
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-11
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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
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-12
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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 June 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-13
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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. No options were issued during first
quarter 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-14
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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 March 31, 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-15
<PAGE>
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 equity financing via a private
offering 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)
June 30, 2000
-----------------
Land $ 1,589,445
Buildings and improvements 2,415,265
-----------------
4,004,710
Less: accumulated depreciation (206,451)
-----------------
$ 3,798,259
=================
NOTE 5 - FURNITURE AND EQUIPMENT
(Unaudited)
June 30,2000
-----------------
Furniture and fixtures $ 78,069
Less: accumulated depreciation (12,846)
-----------------
$ 65,223
=================
F-16
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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 June 30, 2000:
June 30, 2000
-----------------
Deferred financing costs on notes payable
(See Note 10) $ 1,602,193
Deferred financing costs associated with
long-term mortgages secured by
rental real estate - Net 45,817
Less: accumulated amortization (1,159,746)
-----------------
$ 488,264
=================
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-17
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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 (oInvestor 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 June 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 June 30, 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 renewed into new Investor
Notes.
F-18
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
NOTE 11 - LONG-TERM DEBT
------------------------
Long-term debt consists of the following as of June 30, 2000:
Loan term mortgages with various terms total $ 2,763,666
==================
In April 2000, SAP sold two properties. The total debt paid in
connection with the sales was $252,655.
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. The title transfer of the properties was
recorded with the County Recorders Office of San Diego. 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 June 30, 2000, The Company has no significant litigation pending.
LEASES
The Company, as of June 30, 2000, does not have any long term or
operating lease obligations. The Company's corporate office leases were
renewed 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-19
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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. The fair
value of the space occupied and the contributed services amounted to
$24,224 for the six months ended June 30, 2000. This amount is included
in additional paid-in capital and in general and administrative
expenses for the year ended June 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.
<TABLE>
<S> <C> <C>
Archie Fischer 25,000 Share of Common Stock
14th St. & Beardsly Ltd. Prshp 25,000 Shares of Common Stock
Payson Ridge Co., Inc. 25,000 Shares of Common Stock
</TABLE>
In the 2nd Quarter 2000, 400,000 shares of common stock were issued for
the acquistion of Universal View Corp.
F-20
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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 six months ended June 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:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
-----------------------------
<S> <C> <C>
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)
</TABLE>
F-21
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
NOTE 14 - STOCK OPTION PLAN (Continued)
---------------------------
<TABLE>
A summary of the activity of the stock options for the years ended
December 31, 1999 and 1998 is as follows:
<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>
<TABLE>
A further summary of options outstanding at December 31, 1999 is as
follows:
<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>
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 were granted, of these options 90,000 shares exercisable at $0.25
and the remainder at $1.25. This brings the total stock options
outstanding to 1,715,000.
F-22
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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. Nothing has materially
change during the 1st & 2nd quarter 2000 related to the provision for
income taxes.
F-23
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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-24
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
NOTE 17 - SEGMENT INFORMATION (Continued)
-----------------------------
Information about reported segment profit or loss and segment assets
for the year to date June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Consumer Rental
Credit Real Estate TheDebtTrader
Portfolio Portfolio Broadband Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
2000 Revenues $ 1,294,117 $ 215,038 $ - $ 1,509,155
1999 Revenues - - - -
2000 Interest expense 162,649 58,138 B 220,787
1999 Interest expense 18,614 - - 18,614
2000 Profit (loss) (1,543,540) (6,372) (33,508) (1,583,420)
1999 Profit (loss) (109,330) - - (109,330)
2000 Assets 4,605,222 3,884,775 2,931,871 11,421,868
1999 Assets 973,789 - - 973,789
</TABLE>
F-25
<PAGE>
SECURITY ASSET CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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-26
<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 was founded on September 22,
1993, and has pursued 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 Company,
inclusive of its management company, Security Asset Management Inc., has
acquired over the past several years: (1) an income property company, Security
Asset Properties, Inc., which purchases and operates performing rental real
estate; (2) an Internet portal for buying and selling assets in the asset
liquidation and purchasing industry, TheDebtTrader.Com; (3) a proprietary
e-commerce technology company with one patent and four patents pending, each
directed toward providing full-screen, video-on-demand, Broadband Technologies,
Inc.; and (4) The Debt Registry(TM), a company providing a structured approach
to documenting ownership of assets in the unsecured debt markets, similar to
CUSIP numbers for publicly held stocks.
The Company's core competency remains the acquisition of debt assets. Creating
and evolving The Debt Registry,(TM)however, has become one of management's
primary initiatives. The Debt Resgistry has the potential to be the most
important income stream for the Company's future.
The debt industry's sale of portfolios for the first two quarters of
2000 was down mostly because of the financial institutions' final resolution of
the past Y2-K problem. Our Company's second quarter revenues and income are down
in response to this situation. Also, management's allocation of time and
resources to the development of The Debt Registry(TM) likely contributed to slow
down the acquisition and collection of debt assets. The following two quarters
and the end of the year results are predicted to provide the Company with a net
profit as a result of portfolio sales and revenue from The Debt Registry.
27
<PAGE>
The company is presently developing The Debt Registry,(TM) an integrated
hardware and software system, as a revolutionary online system for registering
loan portfolios that are sold into the secondary marketplace and will generate
revenue by charging minimal fees per each sold account registered. These fees
are similar to those being charged for title insurance. The Debt Registry(TM) is
intended to provide the financial lending and asset liquidation industry with
much needed structure and technological expansion. The management team has met
with the country's four major rating agencies and received complete support of
The Debt Registry.(TM) Additional support was received by one of the largest
securitizers of these portfolios who is presently considering that The Debt
Registry(TM) enlist approximately $8 Billion of their previous securitized
portfolios.
In addition, management has been successful in meeting major banks and
financiers of securitized loan portfolios for the purpose of acquiring further
commitments and endorsements from the financial community at large. The Company
remains in discussions with Bank of America, G.E. Capital, the Associates,
Sears, and Bank One regarding a commitment to require that all loan portfolio
purchasers register their accounts with The Debt Registry(TM) as a prerequisite
to any sale.
The Debt Registry(TM) is presently under construction with the assistance of
Exp@nets and the Center 7 companies. The projected final testing is to be in
September and plans are for this extraordinary Internet product to be
operational in October 2000.
Additionally, Broadband Technologies remains dedicated to bringing full screen,
video-on-demand 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 video-on-demand 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:
1. 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.
2. 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.
28
<PAGE>
3. 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.
4. 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.
5. DESIGN. The design and engineering of the "viewing center" is protected under
this claim.
In April 2000, an independent valuation based on the expansion of Broadband's
technology was completed by Dr. Kelly Segraves, whose evaluations over the last
twelve years include various communication technologies for both satellite and
Internet broadcasting used by Masters International Satellite Network and Astar
Satellite Networks. According to Dr. Segraves, Broadband's technology has a
future value exceeding $60 million, which validated an initial evaluation
conducted earlier this year.
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 intends to provide, for their success.
Consumers who want to watch movies on-demand and pay "per-view" fees comprise
the private market. The Company operates under the assumption that the
movie-watching consumer does not want to browse the Internet on their
television, nor does the average person want to watch full-length feature films
on their PC. It is believed that consumers would, however, purchase and/or
subscribe to an Internet service via their television if they could watch movies
on demand.
Customers for Broadband's technology services are likely to include the real
estate, education, travel and tourism industry segments that have already moved
forward in technology by offering video as part of their presentation package.
Consumers who want to watch movies on-demand and pay "per-view" fees comprise
the private market. We believe that the home movie-watching consumer does not
want to browse the Internet on their television for movies, nor does the average
person want to watch full-length feature films on their personal computer.
However, a consumer would purchase or subscribe to an Internet service via their
television if they could watch movies on demand.
29
<PAGE>
TheDebtTrader.Com brokers and auctions charged-off debt portfolios and notes
over the Internet. Previously known to the asset liquidation industry as "The
Note and Paper Trader", this innovative Internet portal was acquired by the
Security Asset Capital Corporation in 1999 and is an industry recognized forum
for information and portfolio exchange. Membership spans 50 states and 5 foreign
countries and includes financial institutions, law firms, resellers, collectors
and product companies. Over $40 million of debt portfolios were sold through the
site in 1999 alone. TheDebtTrader.Com made history in February 2000 by hosting
the industry's first online chat session. Revenues are earned from service fees
arising out of the online sale of portfolios and notes.TheDebtTrader.Com is
modeled as a national exchange for debt buyers and sellers. It was the first
to offer a Multiple Listing Site for debt portfolios (Credit Card Charge-off,
Auto, Consumer Loan, etc.).
The Company's most recent acquisition, Security Asset Properties, Inc., a Nevada
corporation, was previously known as "Four D Corporation". The company, founded
in 1993, purchases cash-flowing multi-family residential rental properties in
San Diego and currently owns and manages more than twenty properties. The
Company plans to expand Security Asset Properties' capital base through
exchanges and acquisitions and to later convert it into a real estate investment
trust (REIT). Security Asset Properties has an experienced management team and
creates an ongoing profit center for the Company.
30
<PAGE>
The Security Asset Companies possess several distinct advantages over
competitors in the "dot com" and e-commerce world. The company is one of the few
corporate structures with not just the dream of future technological
advances but also the base of solid earnings now. The debt purchase, selling and
collection and the rental income real estate factions, form a solid business
nucleus. The Debt Registry(TM) is an application of the technology division that
can produce income within six months. The interrelated solid business structure
coupled with the potential future applications of full screen, video-on-demand
give Security Asset Capital Corporation a distinct advantage over competitors.
The Debt Registry will be the first of its kind in innovative structures to
assist the financial institutions in the debt purchasing and selling arena.
The position of being first to market with the best product has always been a
proven and solid business concept. The Debt Registry promises to be a solid
profit center and it is Security Asset Capital's corporate strategy to grow this
base operation into a dominance in the financial services business sector.
Security Asset Capital Corporation, or SCYA, as it is listed on the Moody's
Industrial Index, is publicly traded on the Nasdaq's Over-the-Counter
Electronic Bulletin Board. The Company and all of its four subsidiaries are well
positioned to become a dominant force in both the booming industries of asset
liquidation and e-commerce technology. The Company plans to qualify and apply
for admission onto the NASDAQ National Market System Board within in the fourth
quarter of this year. 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.
Security Asset Capital Corporation expects to become one of a handful of
companies with a fully developed infrastructure necessary to achieve and
maintain national reach.
RESULTS OF OPERATIONS FOR EACH OF THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999.
REVENUE
Revenue for the six months ended June 30, 2000 increased by $1,501,308 to
$1,509,156, as compared to $7,848 or the six months ended June 30, 1999. The
increase is primarily attributable to added revenues from Portfolio Revenue.
LOSS FROM OPERATION
Loss from Operations is calculated by subtracting operating expenses from net
revenue. Net Loss from Operation for the six months ended June 30, 2000
increased to $640,619 as compared to $337,204 for the six months ended June 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.
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 six months ended June 30, 2000
increased by $621,911 to $965,144, as compared to $343,233 for the six months
ended June 30, 1999. This increase was primarily attributable to increase in
Portfolio activities and related increase in costs and staff.
NET LOSS
Net loss for the six months ended June 30, 2000 decreased by $997,420 from a net
loss of $586,000 for the six months ended June 30, 1999 to a net loss of
$1,583,420 for the six months ended June 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
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 June 30, 2000,
the Company had cash and cash equivalents of $408,494. During the six months
ended June 30, 2000, the Company had cash flow deficit from operations of
$640,237.
The Company plans to continue funding operations through revenue earned from its
asset portfolio purchase and sale operations, additional debt and equity capital
raises.
31
<PAGE>
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.
32
