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U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-QSB (Mark One)  x
    Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 2004  o
    Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________ to ______________. Commission file number 0-18808 Great Western Land and Recreation, Inc. 
  Nevada
    
    13-3530765(State or other jurisdiction
    
    (IRS Employer Identification No.)of incorporation or organization)
 7373 N. Scottsdale Road, Suite C-140
Scottsdale, AZ 85253
(480) 949-6007
(Address and telephone number of
principal executive offices) Indicate by check mark whether the registrant: (1) has 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   x    No    o The number of shares of the registrants Common Stock outstanding at July 31,
2004 was 20,885,399. 1




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GREAT WESTERN LAND AND RECREATION, INC. CONTENTS PAGEPart I
Financial InformationItem 1. Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis
    
    
    15Item 3. Disclosure Controls and Procedures
    
    
    21Part II
Other InformationItem 1. Legal Proceedings
    
    
    22Item 2. Changes in Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits and Reports on Form 8-K
    
    
    22Signatures
    
    
    23Exhibit 31.1Exhibit 31.2Exhibit 32
  2




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BUSINESS RISKS AND FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-QSB includes forward-looking statements.
Forward-looking statements are often characterized by the use of words such as
may, believes, plans, will, anticipates, estimates, expects, or
intends or by discussions of strategy, plans or intentions. All
forward-looking statements in this Form 10-QSB are made based on our current
expectations and estimates, which involve risks, uncertainties and other
factors that could cause results to differ materially from those expressed in
forward-looking statements. You are cautioned not to place undue reliance on
any such forward-looking statements. We have no obligation to publicly release
the result of any revisions that may be made to any forward-looking statements
to reflect anticipated or unanticipated events or circumstances occurring after
the date of such statements. Forward-looking statements involve a number of
risks and uncertainties including, but not limited to, general economic
conditions, the cyclical nature of the real estate market, competitive factors,
our ability locate new projects and to finance the acquisition and development
of these projects on acceptable terms, possible delays in bringing our projects
to market, the availability of qualified third-party contractors, our exposure
to changes in interest rates, demand for new housing starts, the availability
of finished lots within a particular area and the cost of compliance with
government regulations. 3




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##### Table of Contents



PART I FINANCIAL INFORMATION 
 Item 1.Financial Statements GREAT WESTERN LAND AND RECREATION, INC.
CONSOLIDATED BALANCE SHEETS June 30,
    
    September 30,2004
    
    2003(unaudited)ASSETSCash and cash equivalents
    
    $
    537,104
    
    
    $
    1,100,844Notes receivable
    
    
    143,375
    
    
    
    70,118Land held for development and sale
    
    
    12,709,492
    
    
    
    9,321,515Receivable from related entities
    
    
    49,622
    
    
    
    68,080Property and equipment, net of accumulated
depreciation of $62,785 and $42,583 at June 30,
2004 and September 30, 2003, respectively
    
    
    186,545
    
    
    
    201,727Other
    
    
    1,002,386
    
    
    
    985,046$
    14,628,524
    
    
    $
    11,747,330LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesNotes payable
    
    $
    6,593,200
    
    
    $
    4,026,588Subordinated debt
    
    
    3,183,589
    
    
    
    3,319,684Payable to related entities
    
    
    900,309
    
    
    
    745,427Accounts payable and other accrued liabilities
    
    
    1,066,736
    
    
    
    620,586Total liabilities
    
    
    11,743,834
    
    
    
    8,712,285Minority interest
    
    
    31,229
    
    
    
    46,843Stockholders equityPreferred stock, $0.001 par value; 10,000,000 shares authorized;
22,580 and 14,380 shares issued and outstanding at
June 30, 2004 and September 30, 2003 respectively;
20,000 additional shares issued, held by a subsidiary
and reported as treasury shares at June 30, 2004;
liquidation value - $1,539,000 at June 30, 2004
    
    
    1,374,821
    
    
    
    660,409Common stock, $0.001 par value; 30,000,000 shares
authorized; 20,885,399 and 20,785,399 shares issued
and outstanding at June 30, 2004 and
September 30, 2003, respectively
    
    
    20,885
    
    
    
    20,785Additional paid-in capital
    
    
    2,574,367
    
    
    
    2,595,298Accumulated other comprehensive loss
    
    
    (733
    )
    
    
    (733
    )Accumulated deficit
    
    
    (1,115,879
    )
    
    
    (287,557
    )Total stockholders equity
    
    
    2,853,461
    
    
    
    2,988,202$
    14,628,524
    
    
    $
    11,747,330
 The accompanying notes are an integral part of these consolidated financial
statements. 4




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GREAT WESTERN LAND AND RECREATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) Three months ended June 30,
    
    Nine months ended June 30,2004
    
    2003
    
    2004
    
    2003Land and lot sales
    
    $
    628,153
    
    
    $
    879,587
    
    
    $
    1,437,776
    
    
    $
    2,811,380Cost of land and lot sales
    
    
    307,751
    
    
    
    450,217
    
    
    
    666,368
    
    
    
    1,316,414Gross profit on sales
    
    
    320,402
    
    
    
    429,370
    
    
    
    771,408
    
    
    
    1,494,966Operating, selling, general and
administrative expense
    
    
    410,070
    
    
    
    307,949
    
    
    
    1,233,135
    
    
    
    1,393,692(89,668
    )
    
    
    121,421
    
    
    
    (461,727
    )
    
    
    101,274Other income (expense)Interest expense
    
    
    (163,882
    )
    
    
    (163,784
    )
    
    
    (375,621
    )
    
    
    (458,321
    )Interest income
    
    
    1,173
    
    
    
    34,782
    
    
    
    5,570
    
    
    
    82,608Equity in losses of unconsolidated company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53,530
    )Gain on settlement of quepasa.com claim
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    405,750Other income
    
    
    10,900
    
    
    
    84,134
    
    
    
    5,506
    
    
    
    175,509(151,809
    )
    
    
    (44,868
    )
    
    
    (364,545
    )
    
    
    152,016Earnings (loss) before minority interest
    
    
    (241,477
    )
    
    
    76,553
    
    
    
    (826,272
    )
    
    
    253,290Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,040
    )Net earnings (loss)
    
    
    (241,477
    )
    
    
    76,553
    
    
    
    (826,272
    )
    
    
    251,250Less: preferred stock dividends applicable to the
period
    
    
    (25,036
    )
    
    
    (11,815
    )
    
    
    (48,666
    )
    
    
    (35,445
    )Net earnings (loss) available for common stock
    
    $
    (266,513
    )
    
    $
    64,738
    
    
    $
    (874,938
    )
    
    $
    215,805Net earnings (loss) per common and common
equivalent shareBasic and diluted
    
    $
    (0.01
    )
    
    $
    
    
    
    $
    (0.04
    )
    
    $
    0.01Weighted average common and common
equivalent shares outstandingBasic and diluted
    
    
    20,885,399
    
    
    
    20,785,399
    
    
    
    20,874,450
    
    
    
    20,785,399
 The accompanying notes are an integral part of these consolidated financial
statements. 5




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GREAT WESTERN LAND AND RECREATION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE LOSS
(unaudited) AccumulatedotherPreferred Stock
    
    Common Stock
    
    Additionalpaid-in
    
    compre-hensive
    
    Accumulated
    
    Compre-hensiveShares
    
    Amount
    
    Shares
    
    Amount
    
    capital
    
    loss
    
    deficit
    
    lossBalance, September 30, 2003
    
    
    14,380
    
    
    $
    660,409
    
    
    
    20,785,399
    
    
    $
    20,785
    
    
    $
    2,595,298
    
    
    $
    (733
    )
    
    $
    (287,557
    )
    
    $
    Issuance of preferred stock in
exchange for land
    
    
    8,200
    
    
    
    678,581
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of preferred stock to
subsidiary and reported
as treasury stock
    
    
    20,000
    
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock held by
subsidiary and reported
as treasury stock
    
    
    (20,000
    )
    
    
    (1,000,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of discount on
preferred stock
    
    
    
    
    
    
    35,831
    
    
    
    
    
    
    
    
    
    
    
    (35,831
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock in
exchange for minority
interest and an option to
purchase land
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    100
    
    
    
    14,900
    
    
    
    
    
    
    
    
    
    
    
    Payment of dividends on
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,050
    )
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (826,272
    )
    
    
    (826,272
    )Comprehensive loss for the
nine months ended
June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (826,272
    )Balance, June 30, 2004
    
    
    22,580
    
    
    $
    1,374,821
    
    
    
    20,885,399
    
    
    $
    20,885
    
    
    $
    2,574,367
    
    
    $
    (733
    )
    
    $
    (1,115,879
    )
 6




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GREAT WESTERN LAND AND RECREATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Nine months ended June 30,2004
    
    2003Cash flows from operating activitiesNet earnings (loss)
    
    $
    (826,272
    )
    
    $
    251,250Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    31,815
    
    
    
    23,578Bad debt expense
    
    
    
    
    
    
    31,675Accrued interest expense included in debt
    
    
    320,924
    
    
    
    557,695Deferred income taxes
    
    
    
    
    
    
    (12,937
    )Accretion of interest income
    
    
    
    
    
    
    (88,187
    )Collection of notes receivable relating to prior years sales
    
    
    1,868
    
    
    
    429,505Uncollected notes receivable from current year sales
    
    
    (75,125
    )
    
    
    (104,186
    )Loss on disposal of property and equipment
    
    
    
    
    
    
    9,756Equity in losses of unconsolidated company
    
    
    
    
    
    
    53,530Gain on settlement of quepasa.com claim
    
    
    
    
    
    
    (405,750
    )Minority interests in earnings of consolidated subsidiaries
    
    
    
    
    
    
    2,040Change in operating assets and liabilities:Land held for development and sale
    
    
    (2,593,956
    )
    
    
    (385,008
    )Other assets
    
    
    (13,951
    )
    
    
    104,620Accounts payable and other accrued liabilities
    
    
    446,150
    
    
    
    179,837Deferred income
    
    
    
    
    
    
    (51,037
    )Net cash provided by (used in) operating activities
    
    
    (2,708,547
    )
    
    
    596,381Cash flows from investing activitiesCollection of receivable from related entities
    
    
    18,458
    
    
    
    20,126Investment in unconsolidated company
    
    
    
    
    
    
    (53,530
    )Purchase of property and equipment
    
    
    (45,022
    )
    
    
    (4,933
    )Proceeds from sales of property and equipment
    
    
    40,000
    
    
    
    Net cash provided by (used in) investing activities
    
    
    13,436
    
    
    
    (38,337
    )Cash flows from financing activitiesIssuance of notes payable
    
    
    4,160,649
    
    
    
    634,900Payments on notes payable
    
    
    (1,803,523
    )
    
    
    (1,370,502
    )Issuance of note payable to related entities
    
    
    150,000
    
    
    
    Increase (decrease) in payable to related entities
    
    
    4,882
    
    
    
    (22,162
    )Decrease in subordinated debt
    
    
    (378,587
    )
    
    
    (133,253
    )Payment of dividends on preferred stock
    
    
    (2,050
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    2,131,371
    
    
    
    (891,017
    )Net decrease in cash and cash equivalents
    
    
    (563,740
    )
    
    
    (332,973
    )Cash and cash equivalents at beginning of period
    
    
    1,100,844
    
    
    
    500,818Cash and cash equivalents at end of period
    
    $
    537,104
    
    
    $
    167,845Supplemental disclosure of cash flow information:Cash paid during the period for interest, net of amount capitalized
    
    $
    64,660
    
    
    $
    111,603Noncash investing and financing activitiesAccrued interest capitalized included in debt
    
    
    61,054
    
    
    
    14,178Transfer of Wagon Bow ranch land in exchange for minority interest in
Houston Warren Ranch LLC
    
    
    15,614
    
    
    
    Transfer of Wagon Bow ranch land in exchange for minority interest in Willow
Springs Ranch, LLC and a reduction in the payable to minority investors
    
    
    
    
    
    
    134,962Preferred stock issued in exchange for land in Houston, Texas
    
    
    678,581
    
    
    
    Common stock issued in exchange for 47.5% minority interest in Firebird
Financial, LLC and an option to purchase land
    
    
    15,000
    
    
    
    Subordinated debt issued in exchange for land in College Station, Texas
    
    
    70,000Offset of note payable for quepasa.com claim
    
    
    
    
    
    
    405,750
 The accompanying notes are an integral part of these consolidated financial statements. 7




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GREAT WESTERN LAND AND RECREATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) NOTE A  BACKGROUND AND BASIS OF PRESENTATION The accompanying consolidated financial statements as of June 30, 2004 and
September 30, 2003 and for the three month and nine month periods ended June
30, 2004 and 2003 include the accounts of Great Western Land and Recreation,
Inc. (formerly 1st Realty Investments, Inc.) and its wholly- and majority-owned
subsidiaries (collectively, the Company). Investments in companies that
represent 20% to 50% of the ownership interest are accounted for on the equity
method. Investments in companies that represent less than a 20% ownership
interest are accounted for on the cost basis. All material intercompany
accounts and transactions have been eliminated. The Company is engaged principally in the acquisition, development and sale of
land located in Houston and College Station, Texas, Phoenix and Glendale,
Arizona and certain country areas of New Mexico and Arizona. Transactions
include both retail and nonretail land sales, depending upon the progress of
the development and sub-division process. On July 23, 2002, the Company entered into an Agreement and Plan of Merger (the
Merger Agreement or the Agreement) with Great Western Land and Recreation,
Inc., a Delaware corporation (Great Western Delaware). Under the Merger
Agreement, the Company agreed to undertake a series of transactions the result
of was the transfer of control of the Company to Amortibanc Investments, LC,
(Amortibanc), the stockholder of Great Western Delaware, and the merger of
Great Western Delaware into the Company (the Merger). The Company was the
surviving entity. The transaction also involved the election of new directors
of the Company and the amendment of the Companys Articles of Incorporation to
change its name to Great Western Land and Recreation, Inc. The Board of
Directors of the Company unanimously approved the Merger Agreement and the
other transactions to be undertaken and the holders of a majority of the
outstanding stock of the Company approved the transactions in writing on July
25, 2002. On July 23, 2002 the stockholder of Great Western Delaware consented
in writing to the Merger Agreement transactions. Under applicable Nevada law,
written consent by the holders of a majority of the outstanding stock of the
Company to the transactions outlined in the Agreement was sufficient to approve
the transactions, without a meeting or vote of all of the stockholders. This
transaction became effective on February 20, 2003. Immediately following the
merger, former 1st Realty stockholders owned approximately 9% of the Company
and Amortibanc owned approximately 91% of the Company (94% assuming the
conversion of the Series A preferred stock into common stock). The Company expects that the Merger will be treated as a tax-free
reorganization under Section 368(a)(1)(B) of the Internal Revenue Code of 1986,
as amended. If the Merger qualifies as a tax-free reorganization, no gain or
loss will be recognized for income tax purposes by either the Company or Great
Western Delaware as a result of the acquisition. There also should not be any
material tax effects to the existing stockholders of the Company as a result of
the transaction. However, neither the Company nor Great Western Delaware
requested a tax ruling from the Internal Revenue Service with respect to the
transaction. Accordingly, the Company can give no assurance that the
transaction will qualify as a tax-free reorganization. The Company has
accounted for its acquisition of Great Western Delaware as a reverse
acquisition, with Great Western Delaware the acquirer and the Company the
acquiree for reporting purposes. Prior to September 2000, 1st Realty was a
dormant non-operating company. Its operations up to the date of the Merger
were solely the result of the series of transactions it entered into with Great
Western Delaware. As a result, the assets and liabilities of both companies
have been combined at their historical cost. The accompanying financial
statements and notes are presented as if the Merger were consummated on October
1, 2002. The accompanying unaudited financial information reflects all adjustments,
consisting only of normal recurring adjustments, that are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods presented. Such financial information should be read in conjunction
with the consolidated financial statements and related notes as of September
30, 2003 included in Form 10-KSB filed with the SEC on December 29, 2003. The Company maintains its records and prepares its financial statements in
accordance with accounting principles generally accepted in the United States
of America for real estate operations. In preparing financial statements in
conformity with accounting principles generally accepted in the United States
of America, management is responsible for making 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
reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates. 8




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NOTE B  PRO FORMA INFORMATION The Company accounts for its stock option plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employeesand related Interpretations using the intrinsic value based method.
No stock-based employee compensation cost is reflected in net earnings, as all
options granted under this plan had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net earnings and earnings per share if the Company
had applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation
for the three month and nine month periods ended June 30, 2004 and 2003. Three months ended June 30,
    
    Nine months ended June 30,2004
    
    2003
    
    2004
    
    2003Net earnings (loss)
    
    $
    (241,477
    )
    
    $
    76,553
    
    
    $
    (826,272
    )
    
    $
    251,250Deduct: Total stock-based employee
compensation expense determined
under fair value based method (1)
    
    
    (3,274
    )
    
    
    (2,496
    )
    
    
    (8,266
    )
    
    
    (5,603
    )Pro forma net earnings (loss)
    
    $
    (244,751
    )
    
    $
    74,057
    
    
    $
    (834,538
    )
    
    $
    245,647Net earnings (loss) per share:Basic and diluted - as reported
    
    $
    (0.01
    )
    
    $
    0.00
    
    
    $
    (0.04
    )
    
    $
    0.01Basic and diluted - pro forma
    
    $
    (0.01
    )
    
    $
    0.00
    
    
    $
    (0.04
    )
    
    $
    0.01
  (1)
    
    The fair value method amortizes the estimated fair value of the options
at date of grant over the vesting period. The fair value of these options
was estimated at the date of grant assuming a risk-free interest rate of
4.88%, an expected option life of 10 years with no volatility or
dividends. The expected option life is based on all options being
exercised just prior to expiration. NOTE C  NET EARNINGS (LOSS) PER SHARE Basic net earnings (loss) per share is computed by dividing net earnings (loss)
less preferred stock dividends applicable to the period by the weighted average
common shares outstanding during the period. The 20,785,399 common shares
issued and outstanding upon the completion of the Merger are assumed to be
outstanding for the three month and nine month periods ended June 30, 2003.
Diluted net earnings (loss) per share is the same as basic earnings (loss) per
share because the convertible preferred stock and the stock options are either
anti-dilutive or have no impact and therefore are excluded from the
computation. NOTE D  INVESTMENT IN UNCONSOLIDATED COMPANY On September 19, 1997, Laguna Investments L.L.C. (Laguna Investments), a
subsidiary of the Company, acquired a 25.52% ownership in Laguna at Arrowhead
Apartments L.L.C. (Laguna), which owns an apartment complex in Phoenix,
Arizona. On December 30, 2002, the Company sold a 7.1% interest in Laguna
Investments to Lafayette Financial Services (Lafayette) for $35,500 in
partial payment of a note payable to Lafayette. Lafayette is 50% owned by the
Chairman of the Companys Board of Directors. On September 29, 2003, the
Company sold an additional 6.37% interest in Laguna Investments to Lafayette
for $31,855, also in partial payment of the note payable to Lafayette. On
September 29, 2003, the Company also sold a 3.0% interest in Laguna Investments
to Torok Partners, LLC for $15,000 in exchange for Torok Partners minority
interest in one of the Companys projects. Torok Partners is controlled by the
Chairman of the Companys Board of Directors. As a result of these
transactions, at June 30, 2004 the Company owns 83.53% of Laguna Investments,
which represents a 21.32% interest in Laguna. This investment in Laguna is accounted for using the equity method. Under the
equity method, the Companys investment balance approximates the Companys
original cost adjusted for its equity interest in the earnings and losses of
Laguna since the date of acquisition. At June 30, 2004 the Companys
investment balance in Laguna was $-0-. Under the terms of the Laguna at
Arrowhead Apartments L.L.C. operating agreement, Laguna Investments L.L.C. is
subject to additional capital calls in connection with its ownership interest
in Laguna. A capital call for $53,530 was paid in fiscal 2003. Had Laguna
Investments L.L.C. failed to make the required payment, its ownership interest
would have been reduced from 25.52% to 24.14%. As a result of this payment,
unrecognized 9




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equity losses from prior periods were recorded in fiscal 2003 to the extent of
the capital call. Unrecognized losses from Laguna as of June 30, 2004 total
$275,248. Summarized unaudited financial information for Laguna is as follows: June 30,2004Current assets
    
    $
    25,766Noncurrent assets
    
    
    8,033,648Total assets
    
    $
    8,059,414Current liabilities
    
    $
    173,907Noncurrent liabilities
    
    
    9,161,066Members capital
    
    
    (1,275,559
    )$
    8,059,414
 For the three months ended
    
    For the nine months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    354,541
    
    
    $
    376,742
    
    
    $
    1,067,963
    
    
    $
    1,144,074Net loss from continuing
operations and net loss
    
    
    (131,176
    )
    
    
    (107,783
    )
    
    
    (411,670
    )
    
    
    (417,607
    )
 NOTE E  RELATED ENTITIES Related entity receivables/payables are as follows: June 30,
    
    September 30,2004
    
    2003Receivable from related entitiesManagement Pool, LLC
    
    $
    20,238
    
    
    $
    43,244Minority investor in Houston Warren Ranch Partners, LLC (1)
    
    
    17,750
    
    
    
    16,625Other
    
    
    11,634
    
    
    
    8,211$
    49,622
    
    
    $
    68,080Payable to related entitiesMinority investors in Glendale Condominiums, LLC (2)
    
    $
    742,184
    
    
    $
    710,885Minority investors in Villa Maria, LLC (3)
    
    
    158,125
    
    
    
    Lafayette Financial Services (4)
    
    
    
    
    
    
    34,542$
    900,309
    
    
    $
    745,427
  (1)
    
    The Company has a 70% interest in Houston Warren Ranch Partners, LLC,
with Jessica Star Partners, LLC owning the remaining 30%. Jessica Star
Partners, LLC is 50% owned by the Chairman of the Companys Board of
Directors. The note receivable bears interest at 10%, with principal
and interest due on September 24, 2004.(2)
    
    The Company has a 70% interest in Glendale Condominiums, LLC. The
land for the project was purchased from two trusts, who own the other
30% of the project. The payable represents the balance due, including
interest at 8% per annum, for this purchase. Principal and interest
are due quarterly from September 2008 through September 2018. The land
and development costs for this project total $3,342,641 and $2,379,178
at June 30, 2004 and September 30, 2003, respectively, and are included
in land held for development and sale. 10




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(3)
    
    The Company has an 82.5% interest in Villa Maria, LLC, which is
constructing a townhome project in College Station, Texas called
Woodland Court. The remaining 17.5% is owned by minority investors,
consisting of the three members of the Companys Board of Directors.
The payable represents the balance due to these investors. Interest on
this balance accrues at 10% per annum, with principal and interest due
at the end of the project.(4)
    
    Lafayette Financial Services is 50% owned by the Chairman of the
Companys Board of Directors. This note resulted from the purchase of
certain real estate options by the Company in 1999. The note bears
interest at prime and is payable in semi-annual installments of $15,760
plus interest. The note was paid in full in October 2003. NOTE F  DEPOSITS Effective July 8, 2003, in exchange for a $650,000 note payable, the Company
acquired land in Stafford, Texas for $125,000 and also agreed to become general
partner and to acquire a 34% interest in #22 Stafford Springs LTD (Stafford
Springs) for $525,000. Stafford Springs owns the Summer Park Duplexes, a
168-unit, HUD-financed, manufactured housing duplex rental community in
Stafford, Texas. The $525,000 paid for Stafford Springs has been accounted for
as a deposit pending receipt of final approval of this transaction by HUD, and
is included in Other Assets in the accompanying consolidated balance sheet. As
of June 30, 2004, HUD approval had not yet been received. The Chairman of the
Companys Board of Directors also owns 33% of Stafford Springs. NOTE G  SUBORDINATED DEBT The Companys operations have been partially financed with periodic advances in
prior years from Amortibanc. The advances are subordinate to the Companys bank
financing and bear interest at 4% to 10%. The interest accrued on these
advances has primarily been added to the subordinated debt. Payments on the
debt are made only when cash flow from a land sale, after payment of bank debt,
exceeds the Companys operating cash requirements. This determination is made
by the Companys management, however under the terms of the bank loan the
Company obtained to finance the Woodland Court townhome project, the
outstanding balance may not be less than $3,000,000. On October 1, 2003, the
Company made a payment of $378,587.  The total advances and accrued interest due are
$3,112,714 and $3,319,684 at June 30, 2004 and September 30, 2003 respectively. Also included in subordinated debt is a note payable related to the purchase of
land in College Station, Texas for the Woodland Court townhome project. The
note bears interest at 5.0% and is subordinate to other loans on this property.
Principal on the note is due on April 1, 2009, with interest payments due
quarterly. The balance due on this note, including accrued interest, is
$70,875 at June 30, 2004. NOTE H  COMMITMENTS AND CONTINGENCIES The Company sold notes receivable with repayment terms of up to 15 years, with
recourse upon nonpayment by the debtor of $328,527 and $493,963 during the nine
months ended June 30, 2004 and 2003, respectively. The remaining balances due,
with recourse, of all notes sold are $1,348,279 and $1,157,023 as of June 30,
2004 and September 30, 2003 respectively. In certain instances, 15% of the note sales proceeds are retained by the
purchaser of the notes as a nonpayment reserve and returned to the Company when
the original land purchasers pay off the note balances. The reserve balance is
$238,067 and $200,330 at June 30, 2004 and September 30, 2003, respectively and
is included in other assets, net of an allowance established for recourse
chargeback of $34,436 and $27,608 at June 30, 2004 and September 30, 2003,
respectively. When the Company incurs a chargeback, ownership of the original
land sold reverts to the Company and can be resold to help recover any losses
incurred by the Company as a result of the chargeback. During the nine months
ended June 30, 2004, the Company was notified of two chargebacks, totaling
$53,214. During the nine months ended June 30, 2003, the Company was notified
of two chargebacks, totaling $61,600. From time to time the Company is involved in a variety of legal matters that
arise in the normal course of business. Based on information currently
available, management does not believe that the ultimate resolution of any such
matters will have a material adverse effect on the Companys financial
condition, results of operations or cash flow. The Company entered into a five-year employment agreement with its president
during 2001. In the event the Company consummates an acquisition (as defined in
the agreement) during the terms of the agreement, the contract provides for
salary increases and issuance of options to acquire a total of 600,000 common
shares of the surviving corporation at a price not to exceed the fair market
value of such shares on the closing date of the acquisition. The agreement also
provides for severance payments upon termination in the 11




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amount of the total compensation for the remainder of the contract terms and a
consulting arrangement upon retirement of the president. NOTE I  PREFERRED STOCK The Company has authorized three series of preferred stock: Series A Cumulative
Convertible Preferred Stock (Series A Preferred), Series B Cumulative
Convertible Preferred Stock (Series B Preferred) and Series C Cumulative
Convertible Preferred Stock (Series C Preferred). As of June 30, 2004, there
are 14,380 shares of Series A Preferred and 8,200 shares of Series C Preferred
issued and outstanding. As of June 30, 2004, 20,000 shares of Series B
Preferred have been issued and are held by a subsidiary of the Company. Series A Preferred Stock Effective June 28, 2002, the company issued 14,380 shares of Series A Preferred
with a liquidation value of $719,000. The Series A Preferred is senior to the
Series B Preferred and to the Series C Preferred, and is not redeemable at a
fixed or determinable price on a fixed or determinable date or upon the
occurrence of any event that is not solely within the Companys control. It is
convertible by the holder at any time into shares of the Companys common stock
at a price equal to the average market price of the Companys common stock for
the thirty business days immediately preceding the conversion, and is
redeemable by the Company at any time after one year from the date of issuance.
The Series A Preferred has a cumulative dividend, payable semi-annually at the
following rates: First year from the date of issuance
    
    0% per annumSecond year from the date of issuance
    
    2% per annumThird year from the date of issuance
    
    4% per annumFourth year from the date of issuance
    
    5% per annumFifth year from the date of issuance
    
    6% per annumThereafter
    
    7% per annum
 As the Series A Preferred has an increasing dividend rate, it was initially
recorded at its fair value at the date of its issuance by discounting the
preferred stock using managements estimate of the current market rate for
dividend yields and comparing it to the actual dividend rate of the stock.
This resulted in a discount of $114,071, which is being amortized to additional
paid-in capital over the period of increasing dividend rates of the stock. The
balance of the Series A Preferred (net of unamortized discount) was $685,069
and $660,409 at June 30, 2004 and September 30, 2003, respectively. At June
30, 2004, dividends in arrears totaled $14,380, or $1.00 per share. Series B Preferred Stock Effective June 1, 2004, the company issued 20,000 shares of Series B Preferred
with a liquidation value of $1,000,000 to Houston Warren Ranch Partners, LLC, a
majority-owned subsidiary of the Company. The Series B Preferred was then
pledged by Houston Warren Ranch Partners, LLC as collateral on a loan. The
Series B Preferred ranks junior to the Series A Preferred, but is senior to the
Series C Preferred, and is not redeemable at a fixed or determinable price on a
fixed or determinable date or upon the occurrence of any event that is not
solely within the Companys control. It is convertible by the holder at any
time into shares of the Companys common stock at a price equal to the average
market price of the Companys common stock for the thirty business days
immediately preceding the conversion, and is redeemable by the Company at any
time after one year from the date of issuance. The Series B Preferred has a
cumulative dividend, payable semi-annually at the following rates: First
year from the date of issuance
    
    2.0% per annumSecond
year from the date of issuance
    
    3.0% per annumThird
year from the date of issuance
    
    3.5% per annumThereafter
    
    4.0% per annum
 As a majority-owned subsidiary of the Company, the accounts of Houston Warren
Ranch Partners, LLC are included in the accompanying consolidated financial
statements. Accordingly, the shares of Series B Preferred owned by Houston
Warren Ranch Partners, LLC are reported as treasury shares in the accompanying
consolidated balance sheet. Series C Preferred Stock Effective March 31, 2004, the company issued 8,200 shares of Series C Preferred
with a liquidation value of $820,000. The Series C Preferred ranks junior to
the Series A Preferred and to the Series B Preferred, and is not redeemable at
a fixed or determinable price on 12




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a fixed or determinable date or upon the occurrence of any event that is not
solely within the Companys control. It is convertible by the holder at any
time into shares of the Companys common stock at the following prices: First year from the date of issuance
    
    $1.00 per share of common stockSecond through fourth years from the date of issuance
    
    $2.00 per share of common stockThereafter
    
    $3.50 per share of common stock
 The Series C Preferred is redeemable by the Company at any time after five
years from the date of issuance. It has a cumulative dividend, payable in cash
semi-annually at the following rates: First year from the date of issuance
    
    1% per annumSecond year from the date of issuance
    
    2% per annumThird year from the date of issuance
    
    3% per annumFourth year from the date of issuance
    
    4% per annumFifth year from the date of issuance
    
    5% per annumThereafter
    
    7% per annum
 As the Series C Preferred has an increasing dividend rate, it was initially
recorded at its fair value at the date of its issuance by discounting the
preferred stock using managements estimate of the current market rate for
dividend yields and comparing it to the actual dividend rate of the stock.
This resulted in a discount of $141,419, which is being amortized to additional
paid-in capital over the period of increasing dividend rates of the stock. The
balance of the Series C Preferred was $689,752 June 30, 2004. There were no
dividends in arrears at June 30, 2004. NOTE J  COMMON STOCK On October 30, 2003, the Company issued 100,000 shares of common stock in
exchange for the 47.5% minority interest in Firebird Financial, LLC, one of the
Companys subsidiaries, and for an option to purchase 80 acres of land in
Yavapai County, Arizona. NOTE
K  STOCK OPTION PLAN The Company has established a 2001 stock option plan and has reserved 3,500,000
shares to be issued under the plan. All employees are eligible to participate
in this plan and participants shall be selected by an Administrative Committee
consisting of not less than three members of the Companys Board of Directors.
The options generally vest over a period of 3 years, however certain options
granted to employees who have been with the Company for over five years vest
immediately. The options expire no more than 10 years from the date of grant.
Upon termination of an option holders employment, all unvested options will
immediately terminate and vested options will generally remain exercisable for
a period of three months after date of termination (one year in case of
disability or death). The options issued in 2002 and 2003 were issued at an
exercise price of $0.15 per share, which approximated the fair market value of
the Companys common stock on the date of issuance. Since no public market
existed for the Companys common stock at that time, fair market value was
determined by the Board of Directors. At June 30, 2004 options for 1,937,500
shares of common stock were available for issuance under the plan. Additional
information with respect to stock option plan activity is as follows: Outstanding OptionsWeightedNumber
    
    Averageof
    
    ExerciseShares
    
    PriceOctober 1, 2003
    
    
    2,043,750
    
    
    $
    0.18Grants
    
    
    100,000
    
    
    
    0.45Cancellations
    
    
    (581,250
    )
    
    
    0.19June 30, 2004
    
    
    1,562,500
    
    
    $
    0.19
 13




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NOTE
L  INCOME TAXES Income taxes are accounted for using the asset and liability method. Under this
method, deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred income tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is provided for deferred tax assets that are not expected
to be recovered from future operations. During the three and nine month
periods ended June 30, 2004, the valuation allowance was increased to account
for the net operating loss during the periods. As a result, there is no income
tax expense for the three and nine month periods ended June 30, 2004. NOTE M  SETTLEMENT OF QUEPASA.COM CLAIM The Company entered into a merger agreement with quepasa.com as of August 6,
2001. In October 2001, in order to induce the Company to amend and extend the
original merger agreement, quepasa.com loaned the Company $500,000 (the
loan). In February 2002, the merger agreement was terminated. The merger
agreement provided for a termination fee of $500,000 as liquidated damages
under certain circumstances. The Company believed that it was entitled to this
termination fee, which would result in the loan being deemed paid in full and
filed a declaratory judgment action against quepasa.com on that issue.
Quepasa.com filed a counterclaim, alleging that it was entitled to the
termination fee and seeking to foreclose on the loan. This lawsuit was settled
in October 2002. Under the terms of the settlement, the Company retained the
termination fee, which resulted in the loan being deemed paid in full, in
exchange for a payment by the Company to quepasa.com of $50,000 and the
transfer to quepasa.com of 642,000 shares of quepasa.com common stock with a
market value of $44,250. The net result was that the Company recognized a gain
on the settlement of the claim against quepasa.com of $405,750 during the nine
months ended June 30, 2003. NOTE
N  RELATED PARTY TRANSACTIONS In December 2003, the three members of the Companys Board of Directors
invested a total of $150,000 in exchange for a subordinated note
payable from Villa Maria, LLC and a 17.5% minority interest in Villa Maria, LLC. The Company
currently owns the remaining 82.5% of Villa Maria, LLC, together with
a subordinated payable. Villa Maria, LLC is
constructing Woodland Court, a planned 43-unit townhome project located in
College Station, Texas. Interest on the $150,000 balance accrues at 10% per
annum, with principal and interest due at the end of the project (see Note E).
The Company believes that the terms of the subordinated note payable are at
least as good as it could have obtained through arms-length negotiations. In March 2004, the Chairman of the Companys Board of Directors made two
non-interest bearing loans to the Company totaling $32,000. As of June 30,
2004, one of these loans, totaling $15,000 remained outstanding. NOTE
O  SALE OF WILLOW SPRINGS RANCH On January 9, 2004, the Companys Board of Directors approved an agreement to
sell the Willow Springs Ranch near Socorro, New Mexico for $125 per acre, or a
total of approximately $4.7 million. Payment will consist of cash, assumption
of debt and a note receivable, with the buyer entitled to a discount of up to
3% of the purchase price in exchange for an early payoff of the note
receivable. The buyer had an inspection period that ended on June 21, 2004,
with closing to occur within 60 days after the end of the inspection period.
At June 30, 2004, the carrying value of the Willow Springs Ranch was
approximately $4.0 million. 14




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Item 2.Managements Discussion and Analysis The following discussion includes forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from the results
contemplated by these forward-looking statements due to certain factors,
including those discussed below, elsewhere in this Form 10-QSB and in the
Companys other filings with the SEC. Overview Great Western Land and Recreation, Inc. (formerly 1st Realty Investments, Inc.)
(we or the Company) is incorporated in the state of Nevada. On July 23,
2002, we entered into an Agreement and Plan of Merger (the Merger Agreement
or the Agreement) with Great Western Land and Recreation, Inc. a Delaware
corporation (Great Western Delaware). Under the Merger Agreement, we agreed
to undertake a series of transactions the result of which was the transfer of
control of the Company to Amortibanc Investments, LC (Amortibanc), the
stockholder of Great Western Delaware, and the merger of Great Western Delaware
into the Company. We were the surviving entity. Immediately following the
merger, former 1st Realty stockholders owned approximately 9% of the Company
and Amortibanc owned approximately 91% of the Company (94% assuming the
conversion of the Series A preferred stock into common stock). We have accounted for our acquisition of Great Western Delaware as a reverse
acquisition, with Great Western Delaware the acquirer and 1st Realty the
acquiree for reporting purposes. Prior to September 2000, we were a dormant
non-operating company. Our current operations are solely the result of the
series of transactions we entered into with Great Western Delaware. As a
result, the assets and liabilities of both companies have been combined at
their historical cost. The accompanying discussion and analysis is presented
as if the Merger was consummated on October 1, 2002. We acquire, develop, market, sell and finance residential and recreational
property in the southwestern United States, with approximately 48,000 acres in
various stages of development. Our properties are located in Houston and
College Station Texas, Phoenix and Glendale Arizona and certain country areas
of New Mexico and Arizona, and consist of a variety of lifestyle choices
including townhomes and condominiums for first-time homebuyers, vacant lots for
commercial homebuilders and ranch lots for those seeking recreational and
investment properties. Over the years, we have developed a number of
subdivision projects in the Houston area, with additional subdivision projects
currently in various stages of development. Subdivided residential lots are
marketed principally to builders seeking to build homes in quality residential
settings in the low- to mid-price range. Our ranch properties are marketed to
purchasers seeking a long-term investment in up-scale vacant ranch land, with
occasional bulk sales also occurring. In addition, we engage in ranching and
agricultural activities on some of our properties until the properties are
either developed or sold. These activities include the planting of tree farms,
the ownership of a modest cattle herd on one of our ranches and the leasing of
another ranch property for cattle grazing. As an additional marketing incentive
to customers for our recreational land, we offer financing on individual
purchases of ranch lots. The majority of these loans are then sold to third
parties. On January 9, 2004, our Board of Directors approved an agreement to sell the
Willow Springs Ranch near Socorro, New Mexico for $125 per acre, or a total of
approximately $4.7 million. Payment will consist of cash, assumption of debt
and a note receivable, with the buyer entitled to a discount of up to 3% of the
purchase price in exchange for an early payoff of the note receivable. The
buyer had an inspection period that ended on June 21, 2004, with closing to
occur within 60 days after the end of the inspection period Results of Operations Three months ended June 30, 2004 (third quarter of fiscal 2004) compared to the
three months ended June 30, 2003 (third quarter of fiscal 2003) Land and lot sales.Land and lot sales decreased $251,434 or 29% to $628,153 in
the third quarter of fiscal 2004 from $879,587 in the third quarter of fiscal
2003. This decrease was the result of decreases in residential lot sales of
$434,207 partially offset by increases in ranch land sales of $182,773. The
decline in residential lot sales reflects the fact that our current projects in
Houston are nearing completion. The Wheatstone and Wheatstone III subdivisions
were completed and sold out during fiscal 2003. We expect the Coventry
subdivision to be sold out early in fiscal 2005. However, we expect Woodland
Court, a planned 43-unit townhome project located in College Station, Texas, to
begin generating revenue in the fall of 2004. In addition, Mallard Crossing
and Westchester Lakes, two new large residential developments in the Houston
metro area, are expected to begin generating revenue in 2005. 15




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The increases in ranch land sales occurred at both the Wagon Bow Ranch, near
Wikieup, Arizona and at the Willow Springs Ranch, near Socorro, New Mexico.
During the third quarter of fiscal 2004, approximately 52% of our ranch land
sales were generated at the Wagon Bow Ranch, with the remaining 48% coming from
the Willow Springs Ranch. Gross margins are significantly higher at the Wagon
Bow Ranch due to higher average per-acre selling prices. As a result of
continued lower than expected sales at the Willow Springs Ranch, we have
decided to sell the entire ranch and focus our ranch land sales efforts on the
Wagon Bow Ranch. As discussed more fully in Liquidity and Capital Resources
below, on January 9, 2004, our Board of Directors approved an agreement to sell
the Willow Springs Ranch for $125 per acre, or a total of approximately $4.7
million. The sale of the Willow Springs Ranch will allow us to better focus
our resources on improving our marketing programs and the quality of our sales
force at the Wagon Bow Ranch. We believe that these efforts, along with an
improvement in the economy, will lead to increased ranch land sales at the
Wagon Bow Ranch. Our land and lot sales are affected by numerous factors including mortgage
interest rates, demand for new housing starts and the availability of finished
lots within a particular area. Generally, the pace of sales and the price per
lot increase over the life of a project as developments gain popularity and as
contract price escalators become effective. Cost of land and lot sales.Cost of land and lot sales decreased $142,466, or
32%, to $307,751 in the third quarter of fiscal 2004 from $450,217 in the third
quarter of fiscal 2003. As a percentage of land and lot sales, the cost of land
and lot sales decreased to 49% in the third quarter of fiscal 2004 from 51% in
the third quarter of fiscal 2003. This was primarily due to a change in the
mix of sales, with a higher percentage of our sales coming from ranch land
sales during the third quarter of fiscal compared to the third quarter of
fiscal 2003. Ranch land sales historically have had significantly higher gross
margins than residential lot sales. Operating, selling, general and administrative expenses.Operating, selling,
general and administrative expenses increased $102,121, or 33%, to $410,070 in
the third quarter of fiscal 2004 from $307,949 in the third quarter of fiscal
2003. The increase was primarily due to increases in professional fees of
$85,251 and salaries of $25,408, partially offset by a $15,128 decrease in
filing fees. Professional fees were unusually low in the third quarter of
fiscal 2003, returning to a more typical level in the third quarter of fiscal
2004. In addition, professional fees in the third quarter of fiscal 2004
included legal and consulting fees related to the sale of the Willow Springs
Ranch discussed above. Salaries increased due to slightly higher staffing
levels this year. Filing fees were unusually high during the third quarter of
fiscal 2003 due to costs related to the Merger between Great Western Delaware
and 1st Realty. Interest expense.Interest expense increased $98 to $163,882 in the third
quarter of fiscal 2004 from $163,784 in the third quarter of fiscal 2003. Interest income.Interest income decreased $33,609 to $1,173 in the third
quarter of fiscal 2004 from $34,782 in the third quarter of fiscal 2003 due to
lower outstanding balances on notes receivable. Other income.Other income was $10,900 in the third quarter of fiscal 2004
compared to $84,134 in the third quarter of fiscal 2003. Other income in the
third quarter of fiscal 2003 included $50,192 in life insurance proceeds. Net earnings (loss).Net loss was $241,477 in the third quarter of fiscal 2004
compared to net earnings of $76,553 the third quarter of fiscal 2003. This
decrease is primarily due to a $108,968 decrease in gross profit due to lower
land sales, an increase in operating expenses primarily due to an increase in
professional fees, and decreases in interest income and other income. Nine months ended June 30, 2004 (first nine months of fiscal 2004) compared to
the nine months ended June 30, 2003 (first nine months of fiscal 2003) Land and lot sales.Land and lot sales decreased $1,373,604 or 49% to
$1,437,776 in the first nine months of fiscal 2004 from $2,811,380 in the first
nine months of fiscal 2003. This decrease was the result of decreases in
residential lot sales of $1,331,551 and a decrease in ranch land sales of
$42,053. The decline in residential lot sales reflects the fact that our
current projects in Houston are nearing completion. The Wheatstone and
Wheatstone III subdivisions were completed and sold out during fiscal 2003. We
expect the Coventry subdivision to be sold out early in fiscal 2005. However,
we expect Woodland Court, a planned 43-unit townhome project located in College
Station, Texas, to begin generating revenue in the fall of 2004. In addition,
Mallard Crossing and Westchester Lakes, two new large residential developments
in the Houston metro area, are expected to begin generating revenue in 2005. 16




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The decrease in ranch land sales is primarily due to a $400,000 bulk sale that
occurred during the first nine months of fiscal 2003. There were no such bulk
sales in the first nine months of fiscal 2004. Excluding the bulk sale, ranch
land sales increased at both the Wagon Bow Ranch, near Wikieup, Arizona and at
the Willow Springs Ranch, near Socorro, New Mexico. However, during the first
nine months of fiscal 2004, approximately 69% of our ranch land sales were
generated at the Wagon Bow Ranch, with the remaining 31% coming from the Willow
Springs Ranch. Gross margins are also significantly higher at the Wagon Bow
Ranch due to higher average per-acre selling prices. As a result of continued
lower than expected sales at the Willow Springs Ranch, we have decided to sell
the entire ranch and focus our ranch land sales efforts on the Wagon Bow Ranch.
As discussed more fully in Liquidity and Capital Resources below, on January
9, 2004, our Board of Directors approved an agreement to sell the Willow
Springs Ranch for $125 per acre, or a total of approximately $4.7 million. The
sale of the Willow Springs Ranch will allow us to better focus our resources on
improving our marketing programs and the quality of our sales force at the
Wagon Bow Ranch. We believe that these efforts, along with an improvement in
the economy, will lead to increased ranch land sales at the Wagon Bow Ranch. Our land and lot sales are affected by numerous factors including mortgage
interest rates, demand for new housing starts and the availability of finished
lots within a particular area. Generally, the pace of sales and the price per
lot increase over the life of a project as developments gain popularity and as
contract price escalators become effective. Cost of land and lot sales.Cost of land and lot sales decreased $650,046, or
49%, to $666,368 in the first nine months of fiscal 2004 from $1,316,414 in the
first nine months of fiscal 2003. As a percentage of land and lot sales, the
cost of land and lot sales decreased slightly, to 46% in the first nine months
of fiscal 2004 from 47% in the first nine months of fiscal 2003. This was
primarily due to a change in the mix of sales, with a higher percentage of our
sales coming from ranch land sales during the first nine months of fiscal
compared to the first nine months of fiscal 2003. Ranch land sales
historically have had significantly higher gross margins than residential lot
sales. This was offset by a decrease in gross margins on residential lot sales
due to the completion of the Wheatstone and Wheatstone II subdivisions, which
generated higher gross margins than the Coventry subdivision, which is still
active. Operating, selling, general and administrative expenses.Operating, selling,
general and administrative expenses decreased $160,557, or 12%, to $1,233,135
in the first nine months of fiscal 2004 from $1,393,692 in the first nine
months of fiscal 2003. The decrease was primarily due to decreases in
professional fees of $39,606, taxes of $53,349, bad debt expense of $46,175 and
printing and reproduction of $23,696, partially offset by a $40,823 increase in
insurance costs. Professional fees and printing and reproduction costs were
unusually high in the first nine months of fiscal 2003 due to activity related
to Great Western Delawares merger with 1st Realty. Taxes decreased due to
lower property and franchise tax liabilities associated with our Houston
projects. Bad debt expense in the first nine months of fiscal 2003 was
unusually high due to the write-off of notes receivable carried by 1st Realty
prior to the Merger. The increase in insurance costs was due to our
instituting director and officer liability coverage this year as well as
slightly higher property and liability insurance premiums. Interest expense.Interest expense decreased $82,700 or 18% to $375,621 in the
first nine months of fiscal 2004 from $458,321 in the first nine months of
fiscal 2003. The decrease is due to lower average outstanding balances on our
loans due to the repayment of principal as lots are sold. Interest income.Interest income decreased $77,038 to $5,570 in the first nine
months of fiscal 2004 from $82,608 in the first nine months of fiscal 2003 due
to lower outstanding balances on notes receivable. Equity in losses of unconsolidated company. Equity in losses of unconsolidated
company (Laguna) was $0 in the first nine months of fiscal 2004 compared to
$53,530 in the first nine months of fiscal 2003. Due to losses experienced by
Laguna in prior years, our investment in Laguna had been written down to $0.
However, under the terms of the Laguna at Arrowhead Apartments L.L.C. operating
agreement, Laguna Investments L.L.C. is subject to additional capital calls in
connection with its ownership interest in Laguna at Arrowhead Apartments L.L.C.
An additional capital call, for $53,530, was paid during the first nine months
of fiscal 2003. As a result of this payment, unrecognized equity losses from
prior periods were recorded to the extent of the capital call. There have been
no such capital calls during the first nine months of fiscal 2004. Gain on settlement of quepasa.com claim.We entered into a merger agreement
with quepasa.com as of August 6, 2001. In October 2001, quepasa.com loaned us
$500,000 (the loan). In February 2002, the merger agreement was terminated.
The merger agreement provided for a termination fee of $500,000 as liquidated
damages under certain circumstances. Under the terms of our settlement with
quepasa.com, we retained the termination fee, which resulted in the loan being
deemed paid in full, in exchange for a payment to quepasa.com of $50,000 and
the transfer to quepasa.com of 642,000 shares of quepasa.com common stock with
a market value of $44,250. The net result was that we recognized a gain on the
settlement of the claim against quepasa.com of $405,750 during the first nine
months of fiscal 2003. Other income.Other income was $5,506 in the first nine months of fiscal 2004
compared to $175,509 in the first nine months of 17




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fiscal 2003. Other income in the first nine months of fiscal 2003 included
$50,192 in life insurance proceeds, a $32,000 gain on the sale of two notes
receivable and a $28,817 gain on the sale of a 7.1% interest in Laguna
Investments L.L.C. to Lafayette Financial Services (Lafayette) in partial
payment of a note payable to Lafayette. Net earnings (loss).Net loss was $826,272 in the first nine months of fiscal
2004 compared to net earnings of $251,250 the first nine months of fiscal 2003.
This decrease is primarily due to a $723,558 decrease in gross profit due to
lower land sales, a $405,750 decrease in gain on settlement of quepasa.com
claim and a $170,003 decrease in other income, partially offset by a $160,557
decrease in operating expenses. Liquidity and Capital Resources In this section of the management discussion and analysis segment, we are going
to discuss:  
    
    sources and uses of cash, and significant factors that influence both;  
    
    our analysis of our cash flows for the first nine months of fiscal 2004; and  
    
    our commitments and contractual obligations. All of these factors are important to obtain an understanding of our ability to
meet our current obligations, to fund working capital, to finance the
acquisition and development of new projects and to pay down existing debt. Sources and uses of cash. We require cash to fund our operating expenses, to
finance the acquisition and development of new projects and to pay debt
service. Our principal sources of liquidity are cash on hand, cash generated
from land and lot sales, cash generated from bulk land sales, collections on
notes receivable, refinancings and funds from external borrowings. We may also
raise additional funding through future equity offerings, subject to market
conditions. We believe that the key factors that could affect sources of cash include:  
    
    factors that affect our results of operations and cash flows,
including reduced demand for land resulting from the economic slowdown,
competitive pricing pressures; and  
    
    factors that affect our access to bank financing that could impair
our ability to obtain needed financing on acceptable terms to finance
the acquisition and development of new projects. 18




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Analysis of cash flows.Cash flow information for the nine months ended June
30, 2004 and 2003 follows: Nine months ended June 30,2004
    
    2003Cash flows from operating activitiesNet earnings (loss)
    
    $
    (826,272
    )
    
    $
    251,250Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities
    
    
    279,482
    
    
    
    496,719Change in assets and liabilities
    
    
    (2,161,757
    )
    
    
    (151,588
    )Net cash provided by (used in) operating activities
    
    
    (2,708,547
    )
    
    
    596,381Cash flows from investing activitiesCollection of receivable from related entities
    
    
    18,458
    
    
    
    20,126Investment in unconsolidated company
    
    
    
    
    
    
    (53,530
    )Purchase of property and equipment
    
    
    (45,022
    )
    
    
    (4,933
    )Proceeds from sales of property and equipment
    
    
    40,000
    
    
    
    Net cash provided by (used in) investing activities
    
    
    13,436
    
    
    
    (38,337
    )Cash flows from financing activitiesIssuance of notes payable
    
    
    4,160,649
    
    
    
    634,900Payments on notes payable
    
    
    (1,803,523
    )
    
    
    (1,370,502
    )Issuance of note payable to related entities
    
    
    150,000
    
    
    
    Increase (decrease) in payable to related entities
    
    
    4,882
    
    
    
    (22,162
    )Decrease in subordinated debt
    
    
    (378,587
    )
    
    
    (133,253
    )Payment of dividends on preferred stock
    
    
    (2,050
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    2,131,371
    
    
    
    (891,017
    )Net decrease in cash and cash equivalents
    
    
    (563,740
    )
    
    
    (332,973
    )Cash and cash equivalents at beginning of period
    
    
    1,100,844
    
    
    
    500,818Cash and cash equivalents at end of period
    
    $
    537,104
    
    
    $
    167,845
 Cash flow activity for the nine months ended June 30, 2004 (first nine months
of fiscal 2004).As of June 30, 2004, we had cash and cash equivalents of
$537,104, a decrease of $563,740 from the September 30, 2003 balance. This
compares to a decrease in cash and cash equivalents of $332,973 in the first
nine months of fiscal 2003. Cash flow used in operating activities was $2,708,547 for the first nine months
of fiscal 2004 compared to cash provided of $596,381 in the first nine months
of fiscal 2003, a decrease of $3,304,928. Factors causing decreased cash flows
from operating activities in the first nine months of fiscal 2004 as compared
to the first nine months of fiscal 2003 include:  
    
    A decrease in land and lot sales to $1,437,776 in the first nine
months of fiscal 2004 from $2,811,380 in the first nine months of fiscal
2003;  
    
    Collections of notes receivable totaled $1,868 in the first nine
months of fiscal 2004 compared to $429,505 in the first nine months of
fiscal 2003. The fiscal 2003 collections were primarily due to the
payoff of a $351,666 note related to a bulk sale of land in Houston,
Texas;  
    
    Land held for development and sale increased $2,593,956 in the first
nine months of fiscal 2004 compared to an increase of $385,008 in the
first nine months of fiscal 2003. The increase in fiscal 2004 is
primarily due to the capitalization of development costs related to our
condominium project in Glendale, Arizona and our townhome project in
College Station, Texas, and to the purchase of 200 acres of land in the
Houston area for a residential lot development called Westchester Lakes.
Construction costs for the Glendale and College Station projects are
being funded primarily through bank loans. The purchase of the 200
acres was funded by a bank loan and by the issuance of preferred stock
to the sellers; and  
    
    Other assets increased $13,951 in the first nine months of fiscal
2004 compared to a decrease of $104,620 in the first nine months of
fiscal 2003. The decrease in the first nine months of fiscal 2003 was
primarily due to a $158,090 decrease in interest receivable due to
interest payments received on notes receivable. 19




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These were partially offset by the following factors:  
    
    A decrease in cash paid for operating, selling, general and
administrative expense to $1,187,950 in the first nine months of fiscal
2004 compared to $1,393,699 in the first nine months of fiscal 2003; and  
    
    The change in deferred income was $0 during the first nine months of
fiscal 2004 compared to a decrease of $51,037 in the first nine months
of fiscal 2003. Looking forward, we expect cash flow from operations to remain slow for the
next twelve months, While we have several new projects that will come on-line
during the next twelve months, cash flow is typically slower in the early
stages of a project, increasing in the later stages as the bank financing is
paid down. Net cash provided by investing activities was $13,436 in the first nine months
of fiscal 2004 compared to cash used of $38,337 in the first nine months of
fiscal 2003. Collections of receivables from related entities totaled $18,458
in the first nine months of fiscal 2004 compared to $20,126 in the first nine
months of fiscal 2003. We purchased $45,022 of property and equipment in the
first nine months of fiscal 2004 compared to $4,933 in the first nine months of
fiscal 2003. We are not planning any significant purchases of property and
equipment for the remainder of the fiscal year. We also received proceeds of
$40,000 from the sale of a portion of the cattle herd at the Willow Springs
Ranch. Cash used in the first nine months of fiscal 2003 included $53,530 that
was paid as an additional capital call in connection with our ownership
interest in Laguna at Arrowhead Apartments L.L.C. Net cash provided by financing activities was $2,131,371 in the first nine
months of fiscal 2004 compared to cash used of $891,017 in the first nine
months of fiscal 2003. During the first nine months of fiscal 2004, additional
borrowings totaled $4,160,649 compared to $634,900 in the first nine months of
fiscal 2003. The borrowings in fiscal 2004 consisted primarily of $1,644,000
in proceeds from refinancing the Wagon Bow Ranch and the Coventry subdivision
to take advantage of the equity that has accumulated in those projects. We
also borrowed $900,000 to fund our purchase of 200 acres in the Houston area
for a residential lot development called Westchester Lakes. Development
activity at Westchester Lakes is expected to begin late this year. The
remainder of the borrowings consisted of draws on construction loans for the
development of our condominium project in Glendale, Arizona and our townhome
project in College Station, Texas. Construction on Phase I of the Glendale
project and on the College Station project are both expected to continue
through 2005, with sales beginning this fall. Payments on notes payable
totaled $1,803,523 in the first nine months of fiscal 2004 compared to
$1,370,502 in the first nine months of fiscal 2003. Principal payments on our
notes are made primarily through the payment of release prices as lots are
sold, however the payments in the first nine months of fiscal 2004 included the
repayment of $540,371 due to the refinancing of the Wagon Bow Ranch discussed
above. Proceeds from the issuance of notes to related entities totaled $150,000 in the
first nine months of fiscal 2004. This occurred when the three members of our
Board of Directors invested $150,000 in exchange for a subordinated
note payable from Villa Maria, LLC and a 17.5% minority interest in Villa Maria, LLC. We currently
own the remaining 82.5% of Villa Maria, LLC, together with a
subordinated payable. Villa Maria, LLC is constructing
Woodland Court, a planned 43-unit townhome project located in College Station,
Texas. Interest on the $150,000 balance accrues at 10% per annum, with
principal and interest due at the end of the project. We believe that the terms
of the subordinated note payable are at least as good we could have obtained
through arms-length negotiations. Other payables to related entities increased
$4,882 during the first nine months of fiscal 2004 compared to a decrease of
$22,162 in the first nine months of fiscal 2003. Subordinated debt decreased $378,587 in the first nine months of fiscal 2004,
compared to a decrease of $133,253 in the first nine months of fiscal 2003. Contractual obligations. Our long-term debt includes notes payable of
$6,593,200 and subordinated debt of $3,183,589. Other than two vehicle loans,
all of the notes payable were incurred to finance the development of our real
estate projects. Principal payments on those notes payable are primarily made
as lots are sold, although minimum principal payments are also required on
certain loans. The construction loan for our condominium project in Glendale,
Arizona requires cash contributions by the Company each time construction on a
new building is started. As of June 30, 2004, construction on two 8-unit
buildings has been started. The remaining four buildings in this phase of the
project are expected to begin construction at various dates through early 2005. In March 2004, we purchased 200 acres in the Houston area for a residential lot
development called Westchester Lakes. A portion of the purchase price was paid
through the issuance of Series C preferred stock with a liquidation value of
$820,000, with the balance of the purchase price financed by a bank loan. The
Series C preferred stock is convertible into shares of our common stock, and
has a cumulative dividend, payable semi-annually. The dividend rate is 1% for
the first year from the date of issuance, and escalates each 20




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year until it reaches 7% in the sixth year from the date of issuance.
Development activity at Westchester Lakes is expected to begin late this year. Included in subordinated debt is a note payable related to the purchase of land
in College Station, Texas for the Woodland Court townhome project. The note
bears interest at 5.0% and is subordinate to other loans on this property.
Principal on the note is due on April 1, 2009, with interest payments due
quarterly. The balance due on this note, including accrued interest, is
$70,875 at June 30, 2004. The remaining subordinated debt, totaling
$3,112,714, consists of periodic advances in prior years from our majority
stockholder. Payments on this subordinated debt are made only when cash flow
from a land sale, after payment of bank debt, exceeds our operating cash
requirements. This determination is made by our management, however under the
terms of the bank loan we obtained to finance the Woodland Court project, the
outstanding balance may not be less than $3,000,000. On October 1, 2003, we
made a payment of $378,587. On June 28, 2002, our majority stockholder
contributed an additional $719,000 of capital to the Company through the
conversion of subordinated debt to Series A preferred stock. The Series A
preferred stock is convertible into shares of our common stock, and has a
cumulative dividend, payable semi-annually. The dividend rate is 0% for the
first year from the date of issuance, and escalates each year until it reaches
7% in the sixth year from the date of issuance. At June 30, 2004, the dividend
rate was 4%. In the normal course of our business, we have also entered into various
operating leases for equipment and vehicles. Our primary future cash needs, both in the short term and in the long term will
focus on funding operating expenses, financing the acquisition and development
of new projects and paying debt service. During the first nine months of
fiscal 2004, cash generated by land and lot sales was not sufficient to pay our
operating expenses. To meet our operating cash flow needs during the period
and to provide funds to invest in new projects, we refinanced the Wagon Bow
Ranch and the Coventry subdivision to take advantage of the equity that has
accumulated in those projects. While this provided us with an immediate source
of funds, the refinancings will also result in increased interest costs in the
future. To meet our cash flow needs during the remainder of fiscal 2004 it
will be necessary to supplement the land and lot sales with bulk sales of ranch
property or sales of one or more of our notes receivable. Additional
borrowings will also be needed to finance our new projects. On January 9,
2004, our Board of Directors approved an agreement to sell the Willow Springs
Ranch near Socorro, New Mexico for $125 per acre, or a total of approximately
$4.7 million. Payment will consist of cash, assumption of debt and a note
receivable, with the buyer entitled to a discount of up to 3% of the purchase
price in exchange for an early payoff of the note receivable. The buyer had an
inspection period that ended on June 21, 2004, with closing to occur within 60
days after the end of the inspection period. Although there can be no assurances, management believes that cash flow from
operations coupled with existing cash and cash equivalent balances, proceeds
from bulk sales of property or the sale of one or more notes receivable, along
with borrowings from banks and other financial institutions will generate
sufficient cash to fund our operating and cash flow needs for the next twelve
months. To the extent that actual results or events differ from our financial
projections, our liquidity may be adversely affected. All of our land held for development is carried on our books at cost plus
development costs, loan costs, interest and real estate taxes incurred during
the period the development is in process. Due to changes in market conditions
over time, we estimate that the fair value of our land held for development
exceeds book value by approximately $16 million based on appraisals and current
selling prices. We project that our capital expenditures for property and
development will be approximately $13.3 million over the next twelve months,
but that only a small portion of that amount will need to be funded internally.
The remainder will be borrowed from banks and other financial institutions. As
part of our business strategy, we continuously review acquisition opportunities
and proposals. We expect to finance any future acquisitions with additional
equity and debt financing, to the extent available on attractive terms. We hold $143,375 of third party notes receivable from the sale of property.
These notes are secured by the property sold and bear interest at 9.5% per
year. We evaluate the collectibility of these notes based on the payment
history and the value of the collateral, and charge off any uncollectible
balances. As of June 30, 2004, there were no delinquencies on any of these
notes receivable. 
 Item 3. Controls and Procedures We carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of
the period covered in this report, our disclosure controls and procedures were
effective to ensure that information required to be disclosed in reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the required time periods and is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. 21




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##### Table of Contents



PART II: OTHER INFORMATION 
 Item 1.Legal Proceedings We are not a party to any pending legal proceedings other than routine
litigation incidental to our business, and to the best of our knowledge, no
other litigation against us has been threatened. 
 Item 2.Changes in Securities and Use of Proceeds We have not materially modified the instruments defining the rights of our
security holders during the reporting period. 
 Item 3.Defaults Upon Senior Securities Not Applicable. 
 Item 4.Submission of Matters to a Vote of Security Holders Not Applicable 
 Item 5.Other Information Not Applicable 
 Item 6.Exhibits and Reports on Form 8-K (a) Exhibits ExhibitNo.31.1
    
    Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of
2002
 (b) Reports on Form 8-K On May 24, 2004, a Form 8-K was filed to report the news release of the
Companys results for the quarter ended March 31, 2004. 22




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##### Table of Contents



SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. GREAT WESTERN LAND AND RECREATION, INC.
(Registrant)Date: August 13, 2004
    
    By
    
    /s/ Ron OConnorRon OConnor, Senior Vice
President and Chief
Financial Officer (Duly
Authorized Officer and
Principal Financial Officer)
 23




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EXHIBIT INDEX ExhibitNo.31.1
    
    Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of
2002