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Security Land Development Corp (88572) SEC Filing 10-Q Quarterly report for the period ending Monday, December 31, 2018

Security Land Development Corp

CIK: 88572
Document and Entity Information - shares
3 Months Ended
Dec. 31, 2018
Feb. 11, 2019
Document and Entity Information:  
Entity Registrant NameSECURITY LAND & DEVELOPMENT CORP 
Document Type10-Q 
Document Period End DateDec. 31, 2018 
Amendment Flagfalse 
Entity Central Index Key0000088572 
Current Fiscal Year End Date--09-30 
Entity Common Stock, Shares Outstanding 3,766,290
Entity Filer CategoryNon-accelerated Filer 
Entity Current Reporting StatusYes 
Document Fiscal Year Focus2019 
Document Fiscal Period FocusQ1 
Entity Small Businesstrue 
Entity Emerging Growthfalse 

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 


 

 

Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

 

 

For the quarterly period ended December 31, 2018

 

 

 

 

Transition Report Pursuant to 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

 

 

For the transition period of              to            

 

Commission File Number 0-7865.

 


 

SECURITY LAND AND DEVELOPMENT CORPORATION

(Exact name of issuer as specified in its charter)

 

Georgia

 

58-1088232

(State or other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

2816 Washington Road, #103, Augusta, Georgia 30909

(Address of Principal Executive Offices)

 

Issuers Telephone Number (706) 736-6334

 

  (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Year)

 


 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 requirements for the past 90 days.    YES     NO  

 

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 

See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer

Non-accelerated filer (Do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES     NO  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes        No

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.

 

Class

 

Outstanding at February 11, 2019

Common Stock, $0.10 Par Value

 

3,766,290 shares

  

 

 

 


Table of Contents

 

SECURITY LAND AND DEVELOPMENT CORPORATION

Form 10-Q

Index

 

Part I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2018 and September 30, 2018

1

 

 

 

 

Consolidated Statements of Income for the Three Month Periods ended December 31, 2018 and 2017

2

 

 

 

 

Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three Month Period ended December 31, 2018 and 2017

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Month Periods ended December 31, 2018 and 2017

4

 

 

 

 

Notes to the Consolidated Financial Statements

5-12

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

13-14

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

14

 

 

 

Item 4.

Controls and Procedures

14

 

 

 

Part II

OTHER INFORMATION

15

 

 

 

Item 1.

Legal Proceedings

15

 

 

 

Item 1A.

Risk Factors

15

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

15

 

 

 

Item 3.

Defaults Upon Senior Securities

15

 

 

 

Item 4.

Reserved for Future Use

15

 

 

 

Item 5.

Other Information

15

 

 

 

Item 6.

Exhibits

15

 

 

 

 

SIGNATURES

16

 

 

 

 

 

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

SECURITY LAND AND DEVELOPMENT CORPORATION

CONSOLIDATED BALANCE SHEETS

   
 

December 31,

 

September 30,

 

2018

 

2018

 

(unaudited)

 

(audited)

ASSETS

CURRENT ASSETS

 

  

 

Cash

$

3,030,268

$

493,446

Receivables from tenants, net of allowance of $73,927 and $71,967

 

 

at December 31, 2018 and  September 30, 2018, respectively

 

 261,403

   

 

 412,008

Prepaid property taxes

 

 -  

 

 27,555

 

 

Total current assets

 

 3,291,671

   

 

 933,009

 

 

INVESTMENT PROPERTIES

 

 

Investment properties for lease, net of accumulated depreciation

 

 19,226,807

   

 

 6,554,718

Land and improvements held for investment or development

 

  3,478,868

   

 

 3,804,728

 

 

 

 22,705,675

 

 10,359,446

 

 

OTHER ASSETS

 

   -  

   

 

 12,716

 

 

 

$

 25,997,346

  

$

11,305,171

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

 

 

Accounts payable and accrued expenses

$

  244,554

   

$

234,381

Income taxes payable

 

  1,587,250

   

 

  75,630

Current maturities of notes payable

 

  134,987

   

 

407,554

 

 

 

 

Total current liabilities

 

  1,966,791

   

 

 717,565

 

 

LONG-TERM LIABILITIES

 

 

Notes payable, less current portion and deferred financing cost

 

 1,260,692

   

 

 3,928,690

Deferred income taxes

 

 4,071,161

   

 

 1,006,252

 

 

Total long-term liabilities

 

 5,331,853

 

  4,934,942

 

 

Total liabilities

 

7,298,644

 

  5,652,507

 

 

STOCKHOLDERS' EQUITY

 

 

Common stock, par value $.10 per share; 30,000,000 shares authorized;

 

 

    3,766,290 shares issued and outstanding

 

 376,629

 

  376,629

Retained earnings

 

 18,322,073

   

 

5,276,035

 

 

Total Stockholders' Equity

 

 18,698,702

   

 

 5,652,664

 

   

 

Liabilities and Stockholders' Equity

$

25,997,346

   

$

 11,305,171

 

  

 

The accompanying notes are an integral part of these consolidated financial statements.

- 1 -

 


SECURITY LAND AND DEVELOPMENT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

   

For the Three Months

Ended December 31,

 

2018

 

2017

 

(unaudited)

 

(unaudited)

OPERATING REVENUE

   

Rent Revenue

$

393,886

  $

 417,717

   

OPERATING EXPENSES

   

Depreciation and amortization

 

78,987

 

 48,333

Property taxes

 

58,281

 

 70,024

Payroll and related costs

 

828,296

 

 23,529

Insurance and utilities

 

 (4,120)

 

 6,366

Repairs and maintenance

 

 8,552

 

 7,151

Professional services

 

78,643

 

 21,740

Bad debt expense

 

  1,949

 

  -

Other

 

41,909

 

 1,008

   
 

 1,092,497

 

 178,151

   

Operating (loss) income

 

(698,611)

 

 239,566

   

OTHER INCOME (EXPENSE)

   

Gain on sale

 

18,367,269

 

  -

Interest

 

(46,090)

 

 (70,159)

 

 

 

 

 

18,321,179

 

 (70,159)

   

Income before income taxes

 

17,622,568

 

 169,407

   

INCOME TAXES PROVISION (BENEFIT)

   

Income tax expense

 

1,511,620

 

 54,207

Income tax deferred expense (benefit)

 

3,064,910

 

 (450,422)

 

4,576,530

 

 (396,215)

   

Net income

$

13,046,038

$

 565,622

   

PER SHARE DATA

   

Net income per common share

$

 3.46

$

 0.15

    Weighted Average Shares Outstanding

 

 3,766,290

 

 3,793,150

 

The accompanying notes are an integral part of these consolidated financial statements.

- 2 -

 


 

SECURITY LAND AND DEVELOPMENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

     
     

Total

 

 Common

 

 Retained

 

 Stockholders'

 

 Stock

 

 Earnings

 

 Equity

     

Balance, September 30, 2017

$

       379,719

$

       4,505,515

$

       4,885,234

     Net Income

 

   -

 

  565,622

 

565,622

     Purchase and retirement of common stock

 

   (2,455)

 

  (40,425)

 

 (42,880)

Balance, December 31, 2017 (unaudited)

$

      377,264

 

$

     5,030,712

 

$

      5,407,976

Balance, September 30, 2018

$

          376,629

$

          

 

         5,276,035

$

     5,652,664

     Net Income

 

  -

 

 13,046,038

 

13,046,038

Balance, December 31, 2018 (unaudited)

$

       376,629

$

   18,322,073

$

     18,698,702

     

The accompanying notes are an integral part of these consolidated financial statements.

- 3 -

 

 

 

 


SECURITY LAND AND DEVELOPMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

   

For the Three Months

Ended December 31,

 

2018

 

2017

 

(unaudited)

 

(unaudited)

OPERATING ACTIVITIES

   

Net income

$

13,046,038

$

565,622

Adjustments to reconcile net income to net cash provided by

  operating activities:

   
           

    Gain on sale

 

(18,367,269)

     

    

    Bad debts

 

1,949

 

-  

 

 

 

 

 

 

    Deferred financing costs

 

(16,146)

 

 

 

 

Depreciation and amortization

 

 77,654

 

  48,333

 

Interest on deferred financing costs

 

 1,333

 

 1,333

 

Deferred income tax

 

3,064,909 

 

     

(450,422)

 

Changes in deferred and accrued amounts

 

1,698,004

 

 38,826

 

 

 

 

Net cash provided by operating activities

 

(493,528)

 

203,692

   

INVESTING ACTIVITIES

   

      Additions to investment properties and other assets for

   

                   properties held for lease

 

 (15,044,916)

 

  -  

           Proceeds from sale of investment properties and other assets

   

                   held for lease

 

 21,017,164

 

  -  

   

Net cash used in investing activities

 

  5,972,248 

 

  -  

   

FINANCING ACTIVITIES

   

 

Purchase and retirement of common stock

 

  -  

 

 (42,880)

 

Principal payments on notes payable

 

 (2,941,898)

 

 (116,944)

 

 

 

 

 

 

        Net cash used in financing activities

 

 (2,941,898)

 

 

 (159,824)

        Net increase in cash

 

  2,536,822

         

 

 43,868

   

CASH, BEGINNING OF PERIOD

 

  493,446

 

254,522

   

CASH, END OF PERIOD

$

 3,030,268

$

298,390

   

SUPPLEMENTAL CASH FLOW INFORMATION:

   
$

 48,954

$

 68,943

Cash paid for interest

   
$

 -

$

 -

Cash paid for income taxes

   
   

The accompanying notes are an integral part of these consolidated financial statements.

 

- 4 -

 


SECURITY LAND AND DEVELOPMENT CORPORATION

 

 Notes to the Consolidated Financial Statements

 

Note 1 - Basis of Presentation

 

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q, Article 8 of Regulation S-X and accounting principles generally accepted in the United States of America; therefore, they do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows. Such statements are unaudited but, in the opinion of management, reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of results for the selected interim periods. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the audited financial statements appearing in our Form 10-K for the year ended September 30, 2018 when reviewing these interim financial statements.

 

The financial statements include estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements include the accounts of Security Land and Development Corporation and its four wholly owned subsidiaries, Royal Palms Motel, Inc., SLDC, LLC, SLDC 2, LLC and SLDC III, LLC (described on a consolidated basis as the "Company"). Significant intercompany transactions and accounts are eliminated in consolidation.

  

Critical Accounting Policies:
 

Estimates of Useful Lives of Investment Properties for Purposes of Depreciation

 

Management has estimated useful lives of investment properties, except for land that is leased, and the Company utilizes the straight-line method to compute depreciation over the estimated useful lives of the investment properties. Actual depreciation of investment properties will vary from management's estimates, and the value of investment properties is more directly impacted by market conditions and the physical condition of the investment properties.

 

Evaluation of Long-Lived Assets for Impairment

 

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of investment properties may not be recoverable. In evaluating recoverability, the Company generally estimates future cash flows expected to result from the use of the asset and its eventual disposition. An impairment loss is recognized when the expected future cash flows of the asset are less than its carrying amount.

 

Estimates of Income Tax Rates Applicable to Deferred Taxes

 

The Company has deferred income taxes through a series of tax-deferred like-kind exchange transactions on certain investment properties and through accelerated depreciation elections on certain other assets. Actual income taxes that may become due when taxable gains are realized on the sale of assets may differ from management's estimates as a result of changes in tax laws, the tax status of the Company, or the actual taxable earnings of the Company in the periods the deferred income taxes become due.

 

Refer to the Company's Form 10-K for the year ended September 30, 2018 for further information regarding its critical accounting policies.

 

 

(Continued)

- 5 -

 


Note 1 - Basis of Presentation, Continued

 
Recently Adopted Accounting Standards

 

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers in future periods. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance is effective for the Company for reporting periods beginning October 1, 2018. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services.  Adoption of the new rules affects the timing of revenue recognition for certain transactions.  The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards

 

In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU 2014-09 is effective for the Company for reporting periods beginning October 1, 2018. The Company applied the guidance using a modified retrospective approach.

 

In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will be effective for the Company for reporting periods beginning October 1, 2018.

 

In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments are effective for the Company for reporting periods beginning October 1, 2018.

 

In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments are effective for the Company for reporting periods beginning October 1, 2018.

 

In December 2016, the FASB issued technical corrections and improvements to the Revenue from Contracts with Customers Topic. These corrections make a limited number of revisions to several pieces of the revenue recognition standard issued in 2014. The effective date and transition requirements for the technical corrections are effective for the Company for reporting periods beginning October 1, 2018. The Company will applied the guidance using a modified retrospective approach.

 

Recently Issued Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-2, Leases (Topic 842), which provides the principles for the recognition, measurement, presentation and disclosure of leases. This ASU significantly changes the accounting for leases by requiring lessees to recognize assets and liabilities for leases greater than 12 months on their balance sheet. The lessor model stays substantially the same; however, there were modifications to conform lessor accounting with the lessee model, eliminate real estate specific guidance, further define certain lease and non-lease components, and change the definition of initial direct costs of leases requiring significantly more leasing related costs to be expensed upfront.

 

                                                                                                                                                                                (Continued)

 

- 6 -

 


Note 1 - Basis of Presentation, Continued

 
Recently Issued Accounting Standards, continued

 

The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which allows lessors to elect a practical expedient by class of underlying assets to not separate non-lease components from the lease component if certain conditions are met. The lessor's practical expedient election would be limited to circumstances in which the non-lease components otherwise would be accounted for under the new revenue guidance and both (i) the timing and pattern of transfer are the same for the non-lease component and the related lease component and (ii) the lease component would be classified as an operating lease. The Company expects to elect the practical expedient which would allow the Company the ability to combine the lease and non-lease components if the underlying asset meets the criteria above. ASU 2018-11 also includes an optional transition method in addition to the existing requirements for transition to the new standard by recognizing a cumulative effect adjustment to the opening balance sheet of retained earnings in the period of adoption. Consequently, a company's reporting for the comparative periods presented in the financial statements would continue to be in accordance with current GAAP (Topic 840).

 

We continue to evaluate the impact this pronouncement will have on our financial statements and the Company is currently assessing the potential changes to its accounting and whether such changes will have a material impact on its consolidated financial statements and condensed notes to its consolidated financial statements.

    

We evaluated the revenue recognition for all contracts within this scope under existing accounting standards and under the new revenue recognition ASU and confirmed that there were no differences in the amounts recognized or the pattern of recognition. Therefore, the adoption of this ASU did not result in an adjustment to our retained earnings on January 1, 2018.

 

In February 2016, the FASB  amended the Leases topic of the Accounting Standards Codification to require all leases with lease terms over 12 months to be capitalized as a right-of-use asset and lease liability on the balance sheet at the date of lease commencement. Leases will be classified as either finance leases or operating leases. This distinction will be relevant for the pattern of expense recognition in the income statement. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

 

In November 2017, the FASB updated the Income Statement and Revenue from Contracts with Customers Topic of the Accounting Standards Codification. The amendments incorporate into the Accounting Standards Codification recent SEC guidance related to revenue recognition. The amendments were effective upon issuance.

 

In September 2017, the FASB updated the Revenue from Contracts with Customers and the Leases Topics of the Accounting Standards Codification. The amendments incorporate into the Accounting Standards Codification recent SEC guidance about certain public business entities (PBEs) electing to use the non-PBE effective dates solely to adopt the FASB's new standards on revenue and leases. The amendments were effective upon issuance. The Company has evaluated the impact of adoption of this guidance and determined that these amendments do not have a material effect on its financial statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company's financial position, results of operations or cash flows.

 

- 7 -

 


Note 2 - Investment Properties

 

Investment properties leased or held for lease to others under operating leases consisted of the following at December 31, 2018 and September 30, 2018:

 

 

December 31,

2018

 

September 30,

2018

 

(unaudited)

 

(audited)

 

 

 

 

 

 

National Plaza building, land and improvements

$              

 

$              

5,322,260 

Bobby Jones Ground Lease, land and lease intangible

Evans Ground Lease, land and improvements

 

15,044,916 

2,382,673 

 

 

2,382,673 

Wrightsboro Road building, land and improvements

 

1,929,690 

 

 

1,929,690 

Commercial land and improvements

 

3,478,868 

 

 

3,804,728 

 

 

22,836,147 

 

 

13,439,351 

Less accumulated depreciation

 

(130,472)

 

 

(3,079,905)

 

 

 

 

 

 

Investment properties for lease, net of depreciation and amortization

$              

22,705,675 

 

$              

10,359,446 

 

 

 

 

 

 

 

Depreciation and amortization expense totaled approximately $77,000 and $47,000 for the three-month periods ended December 31, 2018 and 2017, respectively.  

 

Sale of National Plaza

 

National Plaza is a retail strip center located on Washington Road in Augusta Georgia. Approximately 81% of the rentable space at the National Plaza is leased to Publix Supermarkets, Inc., the National Plaza's anchor tenant. The company sold this property in December of 2018 for $21,000,000 and recognized a gain on the sale of $18,367,269.  See Note 8 for additional disclosures regarding the National Plaza retail strip center.

 

The Company entered into a long-term ground lease with a major national tenant and its developer in May 2006 on approximately 18 acres of land in Columbia County, Georgia. The agreement required monthly rental payments of $20,833 during the development period, which was completed in January 2007. Following the expiration of the development period, the lease required annual rental payments of $500,000 for the first 5 years then increasing 5% in years 6, 11, and 16. The lessee has an option to renew in year 21 and another option every 5 years thereafter for a possible total lease term of 50 years.

 

The lease provides for the tenant to pay for insurance and property taxes. The Company is recognizing rents on a straight-line basis over the lease term.

 

In September of 2015, the Company purchased a commercial building consisting of approximately 25,000 square feet of retail space and 27,000 square feet of warehouse space on approximately 3.5 acres of land located on Wrightsboro Road. The retail space is currently leased to a local retailer and rent commenced on October 1, 2015. The related lease term is 10 years with annual rental payments totaling $142,000, paid monthly, increasing to $153,000 per year in 2021. The warehouse space is available for lease. The Company is recognizing rents on a straight-line basis over the lease term. 

 

 

                                                                                                                                                                                (Continued)

 

- 8 -

 


Note 2 - Investment Properties, continued

 

Purchase of Bobby Jones Ground Lease

 

In December of 2018, the Company purchased a tract of land, consisting of 19.32 acres, and a ground lease with a major discount retailer for $15,044,916 using proceeds from the sale of National Plaza to fund the purchase. The ground lease commenced on November 21, 2005 and the initial term expires on May 1, 2028.  The Company began recognizing rental income as of the date of closing. The original lease term is 20 years with sixteen five-year extension options.  Annual rental payments total $810,636 and rent is payable monthly.  The Company's management has made an estimated allocation of the purchase price, assigning $4,358,453 to land and $10,686,463 to the ground lease until an appraisal can be completed during the quarter ended March 31, 2019.  Once the independent appraisal is completed the asset allocations may be adjusted based on the appraised allocations.  The Company's management has preliminarily assumed the useful life of the lease should coincide with the remaining lease term, which is approximately 112 months, and has recorded amortization expense accordingly.  The useful life and accumulated amortization will be adjusted accordingly per the appraisal, once complete, if necessary.

 

The Company holds several parcels of land for investment or development purposes, including 19.38 acres of land in North Augusta, South Carolina, purchased in parcels during 2007 and 2008. The Company also owns approximately 85 acres of land in south Richmond County, Georgia and a 1.1-acre parcel along Washington Road in Augusta, Georgia that adjoins the Company's National Plaza investment property.  This 1.1-acre parcel was included in the sale of the National Plaza investment property. The aggregate costs of these investment properties held for investment or development was $3,478,868 and $3,804,728 at December 31, 2018 and September 30, 2018, respectively.

 

Refer to the Company's Form 10-K for the year ended September 30, 2018 for further information on operating lease agreements and land held for investment or development purposes.

 

Note 3 - Notes Payable

 

Notes payable consisted of the following at:

          

 

December 31,
2018

(unaudited)

 

September 30,
2018

(audited)

 

A note payable to a regional financial institution, secured with a mortgage interest in National Plaza and an assignment of rents.   The note was payable in monthly installments of $33,050, through August 2027, and accrued interest at an annual fixed rate of 4.3%.  The note payable was collateralized by National Plaza.  In December of 2018 the Company sold National Plaza and used a portion of the proceeds to pay off this note.

 $                     -

 

$           2,925,424

 

A note payable to an insurance company collateralized with approximately 18 acres of land in Columbia County, Georgia, and an assignment of the long-term ground lease.  The note is payable in monthly installments of $17,896, including principal and interest, through May 1, 2027, and bears interest at a fixed rate of 5.85%.  

1,424,673

 

1,457,207

 

 

1,424,673

 

4,382,631

Less deferred financing costs

(28,994)

 

(46,387)

Less current maturities of notes payable

         (134,987)

 

(407,554)

 

 

$    1,260,692

 

$      3,928,690

 

Current maturities of notes payable will require the Company to make payments over the next 12 months totaling $134,987.

 

- 9 -

 


Note 4 - Income Taxes

Income tax payable of $1,587,250 has been accrued as of the quarter ended December 31, 2018.  As of January 31, 2019, all income taxes payable of $75,630 related to the fiscal year 2018 had been paid and $1,511,620 of accrued income taxes are payable for the quarter ended December 31, 2019.

The Tax Cuts and Jobs Act (TCJA) was signed into law by the President on Friday December 22, 2017. The TCJA  includes the reduction in the corporate tax rate from a top rate of 35% to a flat rate of 21%, changes in business deductions, and many international provisions.  The drop in the corporate rate is effective for tax years beginning after December 31, 2017.  IRC Section 15 indicates that "if any rate of tax imposed.changes, and if the taxable year includes the effective date of the change., then tentative taxes shall be computed by applying the rate for the period before the effective date of the change, and the rate for the period on and after such date, to the taxable income for the entire taxable year, and the tax for such taxable year shall be the sum of that proportion of each tentative tax which the number of days in each period bears to the number of days in the entire taxable year." (§15(a)).  As the Company is a fiscal year taxpayer, they will receive a partial benefit for the drop in the federal corporate tax rate for their fiscal year ended September 30, 2018.  The weighted average federal tax rate computed in accordance with IRC Section 15 is 24.25% for the current fiscal year.

Based on the drop in the corporate tax rate to a flat 21%, the Company revalued each of their deferred tax assets and liabilities in the quarter ended December 31, 2017 using the new corporate tax rate.  The net impact from this revaluing resulted in a tax benefit of $463,167 recognized as of December 31, 2017.

Income taxes have been provided using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

During the twelve-month period ended September 30, 2018, the Company recorded $115,469 in income tax benefits at an effective rate of -49% The Company records income taxes using an estimated annual effective tax rate for interim reporting. The individually largest factor contributing to the difference between the federal statutory rate of 24.25% and the Company's effective tax rate for the twelve-month period ended September 30, 2018 was the benefit relating to the revaluing of the deferred tax asset and liability balances to the new federal statutory rate.  

Deferred income taxes are the result of qualified tax-free exchanges of property transacted in current and prior years and reporting depreciation differently for income tax purposes.  The tax effects of temporary differences that give rise to the deferred tax liability are as follows as of:

 

 

December 31, 2018

 

September 30, 2018

Deferred income tax liabilities:

 

 

 

Basis in Investment Properties

$         4,071,161

 

$            1,006,252        

 

Taxable gains deferred by the Company in prior years and in the current year through qualified tax-free like-kind exchanges totaled approximately $15,604,996. These deferred gains for tax reporting comprise a substantial portion of the Company's deferred income tax liabilities as of December 31, 2018 and September 30, 2018, net of the effects of depreciation.

 

                                                                                                                                                                                (Continued)

 

- 10 -

 


Note 4 - Income Taxes, continued

 

The provision (benefit) for income taxes is as follows:

 

 

For the three months ended

 

December 31,

 

2018

 

2017

 

Current expense

$

1,511,620

 

$

54,207

 

Deferred expense (benefit) 

 

3,064,910

 

 

(450,422

)

 

 

 

 

 

 

 

 

$

4,576,530

 

$

(396,215

)

 

 

The provision for income taxes for the three months ended December 31, 2018 and 2017 differs from the amount obtained by applying the U.S. federal and state income tax rate to pretax income due to the following:

 

   

2018

   

2017

 

 

 

 

 

 

 

 

Net income before tax

$

17,622,568

 

$

169,407

 

 

 

 

 

 

 

 

Expected federal tax expense at December 31, 2018 and 2017 is 21% and 24.25% respectively

 

3,700,739

 

 

41,081

 

State tax expense, net of federal benefit 

 

840,596

 

 

13,126

 

Federal (benefit) expense of tax rate change

 

-

 

 

(450,422

)

Other expense  

35,195

   

-

 

 

 

 

 

 

 

 

Tax expense (benefit)

$

4,576,530

 

$

(396,215

)

 

Note 5 - Concentrations

 

Substantially all of the Company's assets consist of real estate located in Richmond and Columbia Counties in the state of Georgia and in Aiken County, South Carolina. Substantially all of the Company's rental revenues were earned from four of the Company's investment properties, National Plaza, the Evans Ground Lease, the Bobby Jones Ground Lease and the Wrightsboro Road Lease, which comprise approximately 40%, 43%, 8% and 9% of the Company's revenues, respectively, for the three-month period ended December 31, 2018. The anchor tenant for National Plaza, Publix Supermarkets, Inc. ("Publix"), a regional food supermarket chain, leased approximately 81% of the space at National Plaza. Prior to the sale of National Plaza in December of 2018 the Company generated approximately 29% of its revenues through its lease with Publix. See Note 8 for additional disclosures regarding the National Plaza retail strip center.

 

Note 6 - Related Party Transactions

 

During the quarter, the Company paid a stockholder who is also the son of the President for accounting services. The Company's Board of Directors believes that the accounting services paid to the son of its President were not in excess of prices that would have been paid had the Company obtained accounting services from other sources.

 

During the quarter, the Company paid bonuses of $787,500 to stockholders, who are also board members, related to the sale of National Plaza.

 

During the quarter, the Company paid legal fees of $25,000 to a stockholder, who is also a board member, related to resolving an operational matter with a tenant at National Plaza.

 

 

- 11 -

 


 

Note 7 - Stockholders' Equity

 

On February 7, 2017, Security Land and Development Corporation offered to purchase up to 2,526,247 shares (approximately 48.2% of the Company's outstanding shares) of its common stock from its stockholders through a tender offer ("the Offer") at a price of $1.25 per share. The Offer was part of a plan intended to enhance stockholder value and provide liquidity for the stockholders. The Offer expired on March 15, 2017, was extended by the Company, and on April 19, 2017 Security Land and Development Corporation amended the above offer to increase the offer price to $1.60 per share. The amended Offer expired on May 5, 2017.  On May 5, 2017, Security Land and Development Corporation amended the April 19, 2017 Offer to increase the offer price to $1.75 per share. Within the offer period, 192,860 shares were sold by members of the Board of Directors who are not part of the Flanagin family. As of December 31, 2018, the Flanagin family owned approximately 58% of the Company's common stock. During the offer period, the Company has purchased and retired a total of 1,477,817 shares of its stock for $2,584,461. Included within these shares purchased by the Company were 192,860 shares sold by members of the Board of Directors who are not part of the Flanagin family. The Company utilized cash on hand and funds obtained from the line of credit that has since been converted to a term note. See Note 3 - Notes Payable.  During the quarter ended December 31, 2019 the Company paid off this term note with proceeds from the sale of National Plaza.

 

Note 8 - Sale of National Plaza

 

On June 27, 2018, the Company entered into an agreement with WSQ, LLC, a Georgia Limited Liability Company, for the sale of its retail strip center (the "National Plaza") along with two adjoining outparcels, located on Washington Road in Augusta, Georgia for a combined total sales price of $21,000,000. The closing of the sale occurred on December 13, 2018, and the Company recognized a gain on the sale of $18,367,269.

 

Note 9 - Purchase of Bobby Jones Ground Lease

 

On December 20, 2018, the Company purchased a tract of land, consisting of 19.32 acres, and a ground lease with a major discount retailer and building owned by the retailer for $15,044,916 using proceeds from the sale of National Plaza to fund the purchase, including $44,916 in transaction costs. The ground lease commenced on November 21, 2005 and the initial term expires on May 1, 2028.  The Company's management has made an estimated allocation of the purchase price, assigning $4,358,453 to land and $10,686,463 to the ground lease until an appraisal can be completed during the quarter ended March 31, 2019.  Once the independent appraisal is completed the asset allocations may be adjusted based on the appraised allocations and adjustments could be material.  The Company's management has preliminarily assumed the useful life of the lease should coincide with the remaining lease term, which is approximately 112 months, and has recorded amortization expense accordingly.  The useful life and accumulated amortization will be adjusted accordingly per the appraisal, once complete, if necessary.

 

 

 

 

 

 

 

 

 

- 12 -

 


Item  2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Results of Operations:

 

The Company's results of operations for the three months ended December 31, 2018, and a comparative analysis of the same period for 2017 are presented below:

 

 

 

 

 

 

 

 

Increase (decrease)

 

 

 

 

 

 

 

2018 compared to 2017

 

2018

 

2017

 

Amount

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Rent revenues

$

393,886

 

$

417,717

 

$

(23,831)

 

-6%

Gain on sale

 

18,367,269

 

 

-

 

 

18,367,269

 

        -

Operating expenses

 

1,092,497

 

 

178,151

 

 

914,346

 

513%

Interest expense

 

46,090

 

 

70,159

 

 

  (24,069)

 

-34%

Income tax  expense (benefit), net

 

4,576,530

 

 

(396,215)

 

 

4,972,745

 

1,155%

Net income

 

13,046,038

 

 

565,622

 

 

12,480,416

 

2,306%

 

 

 

 

 

 

 

 

 

 

 

Rent revenues consist of rent revenue from the Company's National Plaza, a strip center on Washington Road in Augusta, Georgia, the Evans Ground Lease in Evans, Georgia and the Bobby Jones Ground Lease. The Company also earned rent revenue from a lease on the Wrightsboro Road property with an apparel and home goods retailer and a ground lease with an auto-repair service operation on an out-parcel of National Plaza.  The Company sold National Plaza on December 13, 2018 and purchased the Bobby Jones Ground Lease on December 20, 2018.

 

Refer to the Company's Form 10-K for the year ended September 30, 2018 for further information regarding the properties owned and their lease terms.

 

Total operating expenses for the three months ended December 31, 2018 increased compared to the same period for 2017 due primarily to bonuses related to the sale of National Plaza in 2018 that were not incurred in the prior period.  Management expects operating expenses for the remainder of the current fiscal year to decrease significantly as no additional bonuses are expected to be awarded and due to the sale of National Plaza, resulting in a reduction in related operating expenses.

 

Interest expense for the three months ended December 31, 2018 decreased compared to 2017 due to paying off the loan collateralized by National Plaza with proceeds from the sale of National Plaza in December of 2018. Management expects interest expense for the remainder of the current fiscal year to decrease.

 

Income tax expense for the three-month period ended December 31, 2018 increased significantly compared to the same period for 2017 due to the sale of National Plaza and the related proceeds.

 

Liquidity and Sources of Capital:

 

The Company's ratio of current assets to current liabilities at December 31, 2018 was 167%. The ratio was 130% at September 30, 2018. 

 

Management of the Company expects future liquidity needs of the Company to be funded from rent revenues, refinancing, and the appreciation in investment properties (which can be sold or mortgaged, if necessary). See Note 8 for additional disclosures regarding National Plaza retail strip center.

 

Current maturities of notes payable will require the Company to make payments over the next 12 months totaling $134,987. The Company projects that it will be able to fund the payment of its current maturities of notes payable through cash flows generated from its operations and cash on hand, but there can be no assurance that this will occur.

 

- 13 -

 

 


Cautionary Note Regarding Forward-Looking Statements:

 

The results of operations for the three months ended December 31, 2018 are not necessarily indicative of the results that may be expected for the entire fiscal year. The Company may, from time to time, make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission (the "Commission") and its reports to stockholders. Such forward-looking statements are made based on management's belief as well as assumptions made by, and information currently available to, management pursuant to "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, but not limited to, competition from other real estate companies, the ability of the Company to obtain financing for projects, and the continuing operations of tenants.

 

Item  3. Quantitative and Qualitative Disclosures About Market Risks

 

Not applicable to smaller reporting companies.

 

Item  4. Controls and Procedures

 

(a)      Within the 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934. Based upon that evaluation, the Company's Chief Executive Officer concluded that the Company's disclosure controls and procedures were ineffective.

 

(b)      There were no significant changes in the Company's internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date the Chief Executive Officer carried out the evaluation.

          

           As of September 30, 2018, the Company's management evaluated the effectiveness of its internal control. Based on the evaluation, the Company's management concluded that the Company's internal control over financial reporting was ineffective as of September 30, 2018 and identified a material weakness related to the lack of segregation of duties, accounting personnel with the requisite knowledge of GAAP and the lack of written policies and procedures over financial reporting.

 

           Notwithstanding the existence of this material weakness in our internal control over financial reporting, our management believes that the consolidated financial statements included in its reports fairly present in all material respects the Company's financial condition, results of operations and cash flows for the periods presented. There has been no change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 

 

 

- 14 -

 

 


 

PART II - OTHER INFORMATION

 

Item  1. Legal Proceedings

 

None 

 

Item  1A. Risk Factors

 

The Company, as a smaller reporting company, is not required to provide the information required by this item.

 

Item  2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item  3. Defaults Upon Senior Securities

 

None

 

Item  4. Reserved for Future Use

 

Item  5. Other Information

 

Management of the Company notes that a Form 8-K was filed during the period to disclose the purchase of the Bobby Jones Ground Lease.  Management is not aware of any un-reported matters occurring during the period that would require any additional disclosures in a Form 8-K. 

 

Item  6. Exhibits

 

(a)

 

Exhibit No.

 

Description

 

 

31.1

 

Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

32.1

 

Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

 

 

 

 

 

    101   The following financial information from Security Land and Development Corporation's Quarterly Report on Form 10-Q for the quarter ended December 31, 2018 is formatted in Extensible Business Reporting Language (XBRL):  (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Changes in Stockholders' Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.

 

 

 

 

 

 

- 15 -

 


SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

SECURITY LAND AND DEVELOPMENT CORPORATION

(Registrant)

 

 

 

 

 

 

By:

/s/ T. Greenlee Flanagin

 

February 18, 2019

 

 

 

 

 

 

T. Greenlee Flanagin

 

Date

 

 

President

 

 

 

 

Chief Executive Officer and Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 16 -

 

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Security Land Development Corp provided additional information to their SEC Filing as exhibits

CIK: 88572
Form Type: 10-Q Quarterly Report
Accession Number: 0001003297-19-000020
Submitted to the SEC: Tue Feb 19 2019 12:46:34 PM EST
Accepted by the SEC: Tue Feb 19 2019
Period: Monday, December 31, 2018
Industry: Real Estate Dealers For Their Own Account

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