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SECURITY LAND AND DEVELOPMENT CORPORATION

Form 10-Q

Index

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SECURITY LAND AND DEVELOPMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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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, 20112012 when reviewing 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 are 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 the 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, 20112012 for further information regarding its critical accounting policies.

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Note  2 —– Investment Properties

Investment properties leased or held for lease to others under operating leases consisted of the following at
June 30, December 31, 2012 and September 30, 2011:2012:

Depreciation expense totaled approximately $31,000 and $93,000 for botheach of the three-month and nine-month periods ended June 30,December 31, 2012 and 2011.

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.  As of June 30,December 31, 2012, the Company is working with Publix on plans to renovate and upgrade this center.  Currently the Company is working with creditors to finance the planned renovation.

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.

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 June 30,December 31, 2012 and September 30, 2011.2012.

Refer to the Company’s Form 10-K for the year ended September 30, 20112012 for further information on operating lease agreements and land held for investment or development purposes.

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Note  3 —– Notes Payable and Line of Credit

Notes payable and line of credit consisted of the following at:

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 $832,581, including the line of credit of $300,000.$531,924.  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.

The Company expects to renew the $300,000 line of credit through refinancing prior to its maturity in December 2012.  Although the company expects to secure this refinancing prior to the maturity of the line of credit, there can be no assurances that such refinancing will be secured or that such refinancing will be on terms acceptable to the Company. (Continued)

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(Continued)

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Note  3 —– Notes Payable and Line of Credit, (Continued)

If the Company is unsuccessful in either of 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 income tax payable in the amount of $308,240.  Of this amount, $49,493 is related to the first quarter of 2013, $202,950 is related to 2012 and the remaining $55,797 is related to the 2011 tax expense.  An additional $5,000 was paid in January 2013.

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 North Augusta, 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 52% and 47% 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 41%37% of its revenues though its lease with Publix.

Note  5 —6 –  Related Party Transactions

The Company hired an attorney who sits on the Company’s Board of Directors and who also serves asa 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 quarter, the Company borrowed $30,000 from a member of the Company’s Board of Directors, who is also a member of the Flanagin family, to meet cash flow needs.  The amount was repaid during the quarter also with interest at a rate of 6%.

Note 7 – Subsequent Events

As of January 2013 the Company is involved in an agreement with the Georgia Department of Transportation regarding the potential sale of .5 acres of the land parcel that contains the Evans Ground Lease in Columbia County, Georgia for $156,000.  Of this amount, approximately $144,000 is obligated to go to principal pay down on the associated debt and the remaining approximately $12,000 will go to the lessee.  Management does not believe that the parcel in question has any significant affect on the Evans Ground Lease or the Company’s ability to continue leasing the property or related rental revenues.  As of January 2013, Management expects this sale to close before February 28, 2013.

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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 ninethree months ended June 30,December 31, 2012, and a comparative analysis of the same period for 2011 are presented below:

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, 20112012 for further information regarding the properties owned and their lease terms.

Total operating expenses for the ninethree months ended June 30,December 31, 2012 increaseddecreased slightly compared to the same period for 2011 due primarily to increased bad debt expense anddecreased professional fees.  Bad debt expense increasedProfessional fees decreased due to the write-off of an accounts receivable management deemed uncollectible.  Professional fees increased due to increaseddecreased 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, 2012. It is the opinion of the Company’s management that the Company does not owe any reimbursement.  Management expects operating expenses for the remainder of the current fiscal year to be comparable to the current operating period.

Interest expense for the ninethree month period ended June 30,December 31, 2012 decreased compared to 2011 due to the decrease in debt resulting from scheduled principle 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 ninethree month period ended June 30,December 31, 2012 decreased slightlyincreased compared to the same period for 2011.2011 due mainly to increased income as a result of lower professional fees and interest expense as noted above.  Management expects income tax expense for the remainder of the current fiscal year to be comparable to the current operating period.

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Liquidity and Sources of Capital:

The Company’s ratio of current assets to current liabilities at June 30,December 31, 2012 was 24%28%.  The ratio was 39%37% at September 30, 2011.2012. 

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 $832,581, including the Company’s line of credit of $300,000.$531,924.  The Company projects that it will be able to fund the

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