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, 2014
☐	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 Web site, 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, 2015
Common Stock, $0.10 Par Value		5,243,107 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, 2014 and September 30, 2014		1
	Consolidated Statements of Income and Retained Earnings for the Three Month Periods ended December 31, 2014 and 2013		2
	Condensed Consolidated Statements of Cash Flows for the Three Month Periods ended December 31, 2014 and 2013		3
	Notes to the Consolidated Financial Statements		4-7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		8-9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		9
Item 4.	Controls and Procedures		9-10
Part II	OTHER INFORMATION		10
Item 1.	Legal Proceedings		10
Item 1A.	Risk Factors		10
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		10
Item 3.	Defaults Upon Senior Securities		10
Item 4.	Reserved for Future Use		10
Item 5.	Other Information		10
Item 6.	Exhibits		10
	SIGNATURES		11-13

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SECURITY LAND AND DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS

		December 31,				September 30,
		2014				2014
		(unaudited)
ASSETS
CURRENT ASSETS
Cash		$	30,284			$	65,982
Receivables from tenants, net of allowance of $46,392 and $43,578 at December 31, 2014 and September 30, 2014, respectively			380,695				527,579
Total current assets			410,979				593,561
INVESTMENT PROPERTIES
Investment properties for lease, net of accumulated depreciation			5,419,385				5,459,560
Land and improvements held for investment or development			3,639,598				3,639,598
			9,058,983				9,099,158
OTHER ASSETS			74,105				76,239
		$	9,544,067			$	9,768,958
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	283,941			$	452,669
Income taxes payable			251,146				229,031
Current maturities of notes payable			455,969				554,065
Current maturities of deferred revenue			12,326				18,489
Current note payable to stockholder			50,433				50,433
Total current liabilities			1,053,815				1,304,687
LONG-TERM LIABILITIES
Notes payable, less current portion			2,372,643				2,435,541
Deferred income taxes			733,733				737,230
Total long-term liabilities			3,106,376				3,172,771
Total liabilities			4,160,191				4,477,458
STOCKHOLDERS’ EQUITY
Common stock, par value $.10 per share; 30,000,000 shares authorized; 5,243,107 shares issued and outstanding			524,311				524,311
Additional paid-in capital			333,216				333,216
Retained earnings			4,526,349				4,433,973
Total Stockholders’ Equity			5,383,876				5,291,500
Liabilities and Stockholders’ Equity		$	9,544,067			$	9,768,958

 

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

 

 

SECURITY LAND AND DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

		For the Three Month Period Ended December 31,
		2014				2013
		(unaudited)				(unaudited)
OPERATING REVENUE
Rent revenue		$	381,272			$	373,748
OPERATING EXPENSES
Depreciation and amortization			42,311				32,937
Property taxes			64,422				67,863
Payroll and related costs			21,871				20,133
Insurance and utilities			8,771				7,635
Repairs and maintenance			16,124				23,720
Professional services			24,944				11,580
Bad debt			2,814				-
Penalties			4,518				-
Other			1,714				604
			187,489				164,472
Operating income			193,783				209,276
OTHER EXPENSE
Interest			44,887				47,399
Income before income taxes			148,896				161,877
INCOME TAXES PROVISION (BENEFIT)
Income tax expense			60,017				61,931
Income tax deferred benefit			(3,497	)			(481	)
			56,520				61,450
Net income			92,376				100,427
RETAINED EARNINGS, BEGINNING OF PERIOD			4,433,973				4,104,155
RETAINED EARNINGS, END OF PERIOD		$	4,526,349			$	4,204,582
PER SHARE DATA
Net income per common share		$	0.02			$	0.02

 

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

 

 

SECURITY LAND AND DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the Three Month Period Ended December 31,
		2014				2013
		(Unaudited)				(Unaudited)
OPERATING ACTIVITIES
Net income		$	92,376			$	100,427
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			42,309				32,938
Deferred income tax			(3,497	)			(481	)
Changes in deferred and accrued amounts			(5,894	)			9,648
Net cash provided by operating activities			125,294				142,532
FINANCING ACTIVITIES
Principal payments on notes payable			(160,994	)			(142,150	)
Net cash used in financing activities			(160,994	)			(142,150	)
Net (decrease) increase in cash			(35,700	)			382
CASH, BEGINNING OF PERIOD			65,982				24,599
CASH, END OF PERIOD		$	30,282			$	24,981
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest		$	43,389			$	47,399
Cash paid for income taxes		$	37,902			$	-

 

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

 

 

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, 2014 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, 2014 for further information regarding its critical accounting policies.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts (Topic 606). The new standard is effective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. 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 could affect 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. The Company is currently evaluating the impacts of adoption and the implementation approach to be used.

 

 

Note 2 – Investment Properties

 

          Investment properties leased or held for lease to others under operating leases consisted of the following at December 31, 2014 and September 30, 2014:

			December 31, 2014			September 30, 2014
			(unaudited)
	National Plaza building, land and improvements		$	5,325,348		$	5,325,348
	Evans Ground Lease, land and improvements			2,382,673			2,382,673
	Commercial land and improvements			3,639,598			3,639,598
				11,347,619			11,347,619
	Less accumulated depreciation			(2,400,299	)		(2,360,803	)
				8,947,320			8,986,816
	Residential rental property			145,847			145,847
	Less accumulated depreciation			(34,184	)		(33,505	)
				111,663			112,342
	Investment properties for lease, net of accumulated depreciation		$	9,058,983		$	9,099,158

 

          Depreciation expense totaled approximately $40,000 for the three-month period ended December 31, 2014 and approximately $31,000 for the three-month period ended December 31, 2013.

 

          The 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 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 requires 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 at 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.

 

 

Note 2 – Investment Properties, Continued

 

          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. The aggregate costs of these investment properties held for investment or development was $3,639,598 at December 31, 2014 and September 30, 2014.

 

          Refer to the Company’s Form 10-K for the year ended September 30, 2014 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, 2014				September 30, 2014
			(unaudited)
	In November of 2012, the Company converted the line of credit to a fixed rate loan due December 2017. The new term loan accrues interest at 5.5% annually with monthly installments of $3,287. The current balance relates to the purchase of the 1 acre adjoining the North Augusta, South Carolina property in May 2008 and is collateralized by the residential property on Stanley Drive in Augusta, Georgia.		$	254,046			$	260,323
	A note payable to an insurance company, secured with a mortgage interest in National Plaza and an assignment of rents. The note is payable in monthly installments of $35,633, including principal and interest, through June 2015, and bears interest at a fixed rate of 7.875%.			208,972				310,423
	A note payable to a regional financial institution collateralized with 17.54 acres of land in North Augusta, South Carolina. The note is payable in monthly installments of $7,563, including principal and interest, through July 2018, and bears interest at a fixed rate of 5%.			300,322				319,330
	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%.			1,892,266				1,918,026
	A construction loan to a regional financial institution collateralized with 17.54 acres of land in North Augusta, South Carolina. The loan was procured to finance tenant improvements for the lease of in-line space at National Plaza executed on January 17, 2014. In April, 2014 construction of the tenant improvements was completed and with total principal borrowed of $186,804. The loan converted to a note payable with monthly installments of $3,728 including principal and interest over a 60 month term with fixed interest of 4.25%. The related lease agreement calls for monthly payments of this amount to be paid to the Company in addition to monthly minimum rental payments.			173,006				181,504
	A note payable to a stockholder, who is also a member of the Flanagin Family, to meet the cash flow needs of the Company. The note matures in July 2015 and accrues interest at 5%.			50,433				50,433
				2,879,045				3,040,039
	Less current maturities			(506,402	)			(604,498	)
			$	2,372,643			$	2,435,541

 

 

Note 3 – Notes Payable, Continued

 

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). Additionally, funding can be obtained from members of the Company’s Board of Directors.

 

Current maturities of notes payable will require the Company to make payments over the next 12 months totaling $506,402. 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.

 

If the Company is unsuccessful in their efforts described above, the Company intends to seek additional financing or sell certain of its assets.

 

Note 4 – Income Taxes

 

The Company has a total outstanding payable for income tax in the amount of $251,146 at December 31, 2014. Of this amount, $56,520 of which is related to the fiscal year 2015. At September 30, 2014 the Company had outstanding income tax payable of $229,031, all of which was related to the fiscal year 2014.

 

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. Approximately 99% of the Company’s revenues are earned from two of the Company’s investment properties, National Plaza and the Evans Ground Lease, which comprise approximately 56% and 44% of the Company’s revenues, respectively. The anchor tenant for National Plaza, Publix Supermarkets, Inc. (“Publix”), a regional food supermarket chain, leases approximately 81% of the space at National Plaza. The Company generates approximately 37% of its revenues though its lease with Publix.

 

Note 6 – Related Party Transactions

 

The Company hired an attorney who is also a member of the Company’s Board of Directors and who also serves as Vice President of the Company, to represent the Company in a legal matter regarding a tenant’s claim for reimbursement of certain expenses charged. It is the opinion of the Company’s management that the Company is not liable for this claim.

 

During the second quarter of fiscal 2014, the Company borrowed $50,015 from a stockholder, who is also a member of the Flanagin family, to meet cash flow needs. The amount matures in July 2015 and accrues interest at a rate of 5%. The note balance at December 31, 2014 is $50,433 which includes $418 of accrued interest.

 

 

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, 2014, and a comparative analysis of the same period for 2013 are presented below:

									Increase (Decrease)
									2014 compared to 2013
			2014			2013			Amount			Percent
	Rent revenue		$	381,272		$	373,748		$	7,524			2	%
	Operating expenses			187,489			164,472			23,017			14	%
	Interest expense			44,887			47,399			(2,512	)		-5	%
	Income tax expense			56,520			61,450			(4,930	)		-8	%
	Net income			92,376			100,427			(8,051	)		-8	%

	Rent revenue consists primarily of rent revenue from the Company’s National Plaza, a strip center on Washington Road in Augusta, Georgia, and the Evans Ground Lease in Evans, Georgia. The Company also earned rent revenue from a ground lease with an auto-repair service operation on an out-parcel of National Plaza.
	Refer to the Company’s Form 10-K for the year ended September 30, 2014 for further information regarding the properties owned and their lease terms.
	Total operating expenses for the three months ended December 31, 2014 increased compared to the same period for 2013 due primarily to increased depreciation expense, professional fees and income tax penalties. Depreciation expense increased due to capital expenses incurred in relation to a tenant buildout in 2014. Professional fees increased due to increased legal fees compared to the prior year related to an ongoing dispute over a tenant’s claim for reimbursement of certain expenses charged. This dispute is unresolved as of December 31, 2014. It is the opinion of the Company’s management that the Company does not owe any reimbursement. Tax penalties incurred in 2014 that were not incurred in 2013 relate to the Companies outstanding income tax balance at December 31, 2014. Management expects operating expenses for the remainder of the current fiscal year to be comparable to the current operating period.
	Interest expense for the three month period ended December 31, 2014 decreased compared to 2013 due to the decrease in debt resulting from scheduled principal payments. Management expects interest expense for the remainder of the current fiscal year to continue to decrease slightly as outstanding debt is amortized.
	Income tax expense for the three month period ended December 31, 2014 decreased slightly compared to the same period for 2013 due mainly to higher operating expenses as noted above. Management expects income tax expense for the remainder of the current fiscal year to be comparable to the current operating period.

 

 

	Liquidity and Sources of Capital:
	The Company’s ratio of current assets to current liabilities at December 31, 2014 was 39%. The ratio was 45% at September 30, 2014.
	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). Additionally, funding can be obtained from members of the Board of Directors.
	Current maturities of notes payable will require the Company to make payments over the next 12 months totaling $506,402. 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.
	If the Company is unsuccessful in their efforts described above, the Company intends to seek additional financing, sell certain of its fully owned and un-collateralized assets or borrow money from certain stockholders.
	Cautionary Note Regarding Forward-Looking Statements:
	The results of operations for the three-month period ended December 31, 2014 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, 2014, 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, 2014 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
	During 2011, the Company was notified by a tenant of a claim for reimbursement of certain expenses charged. It is the opinion of the Company’s management that the Company is not liable for this claim. The Company has accrued approximately $150,000 for professional fees and other expenses to defend its position.
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 no Forms 8-K were filed during the period and Management is not aware of any un-reported matters occurring during the period that would require disclosure 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, 2014 is formatted in Extensible Business Reporting Language (XBRL): (i) The Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Retained Earnings, (iii) the condensed Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements.

 

 

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 11, 2015
	T. Greenlee Flanagin		Date
	President
	Chief Executive Officer and Chief Financial Officer