UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the Quarter Ended: Commission File Number:
June 30, 2003 0-30653
SECURED DIVERSIFIED INVESTMENT, LTD.
------------------------------------------
(Name of small business issuer in its charter)
Nevada 80-0068489
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
5030 Campus Drive, Newport Beach California 92660
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (949) 851-1069
-----------------------
Check whether the Issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such
report(s), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X ] No [ ]
State the number of shares outstanding of each of the registrant's classes
of common equity, as of the latest practicable date:
As of September 5, 2003, issuer had 4,811,147 shares of its $.001 par value
common stock outstanding.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SECURED DIVERSIFIED INVESTMENT, LTD.
(Formerly Book Corporation of America)
Consolidated Balance Sheet
June 30, 2003
(Unaudited)
-------------
ASSETS
Current Assets
--------------
Cash $ 252,859
Note Receivable 425,000
-------------
Total Current Assets 677,859
Fixed Assets
------------
Equipment, net of $650 of accumulated depreciation 5,199
Real Estate, net of $32,000 of accumulated depreciation 3,023,971
-------------
Total Fixed Assets 3,029,170
Investment in Subsidiaries 97,433
Prepaid Expenses 4,561
-------------
Total Assets $ 3,809,023
=============
Continued
SECURED DIVERSIFIED INVESTMENT, LTD.
(Formerly Book Corporation of America)
Consolidated Balance Sheet
June 30, 2003
(Unaudited)
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
-------------------
Accounts Payable $ 43,516
Interest Payable 184
Payroll Liabilities 65,020
Security Deposits 29,655
Current Portion of Long-Term Debt, related party 355,646
Current Portion of Long-Term Debt 32,044
-------------
Total Current Liabilities 526,065
Long Term Liabilities
---------------------
Notes Payable, related parties 174,250
Mortgages Payable 2,480,438
-------------
Total Long-Term Liabilities 2,654,688
-------------
Total Liabilities $ 3,180,753
Minority Interest 166,524
STOCKHOLDERS' EQUITY
--------------------
Series A Preferred Stock, 7,500,000 shares authorized,
$0.01 par value, 4,997,807 issued & outstanding 49,978
Series B Preferred Stock, 20,000,000 shares authorized,
$0.01 par value, 2,552,480 issued & outstanding 25,924
Series C Preferred Stock, 22,500,000 shares authorized,
$0.01 par value, zero shares issued & outstanding -
Common Stock, 100,000,000 shares authorized, $0.001
par value, 4,811,147 issued and outstanding 4,811
Paid In Capital 4,271,378
Accumulated Deficit (3,890,345)
-------------
Total Equity $ 461,746
-------------
Total Liabilities & Stockholders' Equity $ 3,809,023
=============
See accompanying notes
SECURED DIVERSIFIED INVESTMENT, LTD.
(Formerly Book Corporation of America)
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
--------- ---------
2003 2002 2003 2002
----------- ----------- ----------- -----------
REVENUES
Rental Income $ 212,791 $ - $ 249,378 $ -
----------- ----------- ----------- -----------
Total Revenues 212,791 - 249,378 -
Operating and Administrative Costs $ 429,704 $ 13,312 $ 716,060 $ 23,853
----------- ----------- ----------- -----------
Operating Income (Loss) $ (216,913) $ (13,312) $ (466,682) $ (23,853)
Other Income and Expenses
Interest expense $ (16,807) $ - $ (30,171) $ -
Interest income 2,950 - 2,950 -
Other income (loss) (174,741) - (219,741) -
----------- ----------- ----------- -----------
Net Income (Loss) $ (405,511) $ (13,312) $ (713,644) $ (23,853)
=========== =========== =========== ===========
Basic and diluted income per
common share
Net income (loss) per share $ (0.08) $ (0.01) $ (0.20) $ (0.01)
Basic and diluted weight average
shares 4,811,146 2,349,540 3,580,343 2,349,540
See accompanying notes
SECURED DIVERSIFIED INVESTMENT, LTD.
(Formerly Book Corporation of America)
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30, 2003 June 30, 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (713,644) $ (23,853)
Adjustment to reconcile net loss to net cash used
by operating activities:
Depreciation 32,682 -
Loss on sale of note receivable 45,000 -
Loss on sale of real estate 106,832 -
Impairment of real estate 448,403 -
Increase (decrease) in liabilities
Increase (decrease) in assets and liabilities
Prepaid expenses (4,561) -
Current liabilities 117,028 (37,336)
------------- -------------
Net cash provided (used) by operating activities 31,740 (61,189)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and tenant improvements (62,542) -
Proceeds from sale of real estate 231,186 -
Investment in subsidiary (97,433) -
------------- -------------
Net cash provided by investing activities 71,211 -
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital contributions - 61,189
Proceeds from stock issuance 20,000 -
Proceeds on notes payable - related party 123,708 -
Payments on notes payable - related party (32,021) -
Proceeds from notes payable 45,000 -
Payments on notes payable (12,837) -
------------- -------------
Net cash provided by financing activities 143,850 61,189
------------- -------------
Net increase (decrease) in cash 246,801 -
Cash, beginning period 6,058 -
------------- -------------
Cash, end of period $ 252,859 $ -
============= =============
Supplemental disclosures:
Cash paid for interest $ 73,528 $ -
Cash paid for income tax $ - $ -
Non-cash investing and financing activities:
Property acquired through stock issuances, net of debt $ 411,738 $ -
Investment in subsidiary through stock issuance,
net of debt $ 343,610 $ -
Conversion of note to stock $ 500,000 $ -
Note receivable acquired in real estate sale
transaction $ 425,000 $ -
Assumption of note payable in real estate sale
transaction $ 174,250 $ -
See accompanying notes
SECURED DIVERSIFIED INVESTMENT, LTD.
Formerly Book Corporation of America
Notes to Consolidated Financial Statements
June 30, 2003
NOTE 1 - Going Concern
----------------------
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course
of business. The Company, since its inception has sustained continued
losses. Currently, the Company does not have significant cash, nor does it
have an established source of revenues sufficient to cover its operating
costs and to allow it to continue as a going concern. The Company does not
currently possess a financial institution source of financing and the
Company cannot be certain that its existing sources of cash will be
adequate to meet its liquidity requirements. To the extent possible, the
Company will attempt to raise investment capital, satisfy debt obligations
and acquire real estate holding through the issuance of additional capital
stock. Such use of the capital stock of the Company may result in
substanital dilution of the interest of the current shareholders of the
Company. There can be no assurance that the Company will be successful
in its efforts to raise investment capital, satisfy debt obligations, or
acquire real estate holdings with its capital stock.
There are no assurances that the Company will be successful in any of its
endeavors or will become financially viable.
NOTE 2 - Nature of Operations
-----------------------------
The Company was incorporated under the laws of the state of Utah on
November 22, 1978. For the purpose of (1) engaging primarily in the
specific business of acquiring, developing, owning, selling, leasing,
licensing, and otherwise dealing with literary properties and materials,
copyrights, licenses, and to carry on a negotiation for, production of,
properties in the entertainment industry, and (2) acting as principal,
agent, joint venturer, partner, or in any other capacity which may be
authorized or approved by the Board of Directors.
On July 23, 2002, the Shareholders approved a change in domicile from Utah
to Nevada. In accordance with Nevada corporate law, a change of domicile
is affected by merging the foreign corporation with and into a Nevada
corporation. On August 9, 2002, a merger between Secured Diversified
Investment, Ltd., and Book Corporation of America was completed. Upon
completion of the merger Secured Diversified Investment, Ltd., became the
surviving corporation and Book Corporation of America was dissolved. On
September 18, 2002, the OTCBB symbol for the Company's common stock was
changed for BCAM to SCDI. The shareholders also approved amendments to the
Company's Articles of Incorporation to change the par value of the
Company's Common Stock from $.005 to $.001 and to authorize 50,000,000
shares of Preferred Stock, par value $.01.
On November 15, 2002, the Company notified the Securities and Exchange
Commission of their change in fiscal year end from October to December.
From this point forward the Company will be reporting on a regular
quarterly and yearly basis.
Because of the Company's failure to develop its entertainment business,
management of the Company decided to pursue the acquisition of ownership
interest in real estate properties that are geographically and functionally
diverse. The Company believes that by acquiring interests in properties
that are geographically and functionally diverse its portfolio will be more
stable and less susceptible to devaluation resulting form regional economic
downturns and market shifts. The Company is currently focusing on
acquiring properties in markets with strong regional economies.
SECURED DIVERSIFIED INVESTMENT, LTD.
Formerly Book Corporation of America
Notes to Consolidated Financial Statements
June 30, 2003
NOTE 3 - Significant Accounting Policies
----------------------------------------
A. The accompanying consolidated financial statements include the
accounts of the Company and all of its wholly owned subsidiaries,
Katella Center and T-Rex Mall. Intercompany transactions and balances
have been eliminated.
B. Investments in companies in which the Company has 20% to 50% other
than temporary ownership interest (Spencer Springs) are carried at
cost, adjusted for the Company's proportionate share of undistributed
earnings or losses. Investments in companies in which the Company
owns less than 20% interest (Campus Drive Office Building) are carried
at the lower of cost or fair value.
C. The Company uses the accrual method of accounting.
D. Revenues, currently consisting of rental revenues, are recognized in
the period the rent is earned.
E. The Company considers all short term, highly liquid investments, that
are readily convertible to known amounts within ninety days as cash
equivalents. The Company currently has no such investments.
F. Basic Earnings per Shares are computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted Earnings Per Share shall be
computed by including contingently issuable shares with the weighted
average shares outstanding during the period. When inclusion of the
contingently issuable shares would have an antidilutive effect upon
earnings per share no diluted earnings per share shall be presented.
G. The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. The cost of leasehold
improvements is amortized over the lesser of the length of the lease
of the related assets for the estimated lives of the assets.
Depreciation and amortization is computed on the straight-line method.
H. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures;
for example, the estimated useful lives of assets and the fair value
of real property. Accordingly, actual results could differ form those
estimates.
SECURED DIVERSIFIED INVESTMENT, LTD.
Formerly Book Corporation of America
Notes to Consolidated Financial Statements
June 30, 2003
NOTE 4 Related Party Long-Term Debt
-------------------------------------
The following is a summary of the Company's debt to related parties at June
30, 2003:
Convertible note payable, bearing interest at 9%,
interest only, maturing September 30, 2003 $ 136,146
Notes payable, due on demand 52,500
Note payable, bearing interest at 8%,
interest only, maturing February 17, 2006 67,000
Note payable, bearing interest at 7.05%,
maturing April 15, 2008, interest only, secured
by first trust deed on T Rex Plaza Mall 100,000
Note payable, bearing interest at 10%,
interest only maturing April 21, 2004 174,250
-------------
Total related party debt $ 529,896
Less current portion of related party debt 355,646
-------------
$ 174,250
=============
Following are maturities of related party long-term debt for each of the
next five years:
YEAR AMOUNT
---- ------------
2003 $ 355,646
2004 -
2005 -
2006 67,000
2007 -
2008 174,250
------------
Total $ 529,896
SECURED DIVERSIFIED INVESTMENT, LTD.
Formerly Book Corporation of America
Notes to Consolidated Financial Statements
June 30, 2003
NOTE 5 Long Term Debt Payable
-------------------------------
Following is a summary of the Company's debt at June 30, 2003:
2003
------------
Mortgage payable, bearing interest at 11.5%,
maturing May 15, 2005, interest only, secured
by first trust deed on Katella Center $ 370,000
Mortgage Payable, bearing interest at 15%,
maturing July 1, 2005, interest only, secured by
second trust deed on Katella Center 25,000
Mortgage payable, bearing interest at 9.719%,
maturing April 1, 2008, amortized monthly
payment $20,245.74, secured by first trust deed
on Spencer Springs, see Subsequent Events 2,117,482
-------------
Total Long-Term Debt $ 2,512,482
Less current portion of long-term debt 32,044
-------------
$ 2,480,438
Following are maturities of long-term debt for each of the next five years:
YEAR AMOUNT
---- ------------
2003 $ 17,209
2004 37,065
2005 436,496
2006 45,775
2007 50,495
2008 1,925,443
-------------
Total $ 2,512,483
-------------
NOTE 6 Impairment of Real Estate Assets
-----------------------------------------
The Company assesses the impairment of a real estate asset when events or
changes in circumstances indicate that the net book value may not be
recoverable. Indicators management considers important that could trigger
impairment include (1) significant negative industry or economic trend, and
(2) a significant underperformance relative to historical or projected
future operating results. As a result the Company recognized impairment of
$448,000 on the T-Rex Plaza Mall
SECURED DIVERSIFIED INVESTMENT, LTD.
Formerly Book Corporation of America
Notes to Consolidated Financial Statements
June 30, 2003
NOTE 7 - Stockholders' Equity
-----------------------------
In February 2003, the Company created three series of preferred stock as
follows: (1) Series A consisting of 7,500,000 shares with a par value of
$0.01 and a liquidation preference of $1.00 per share; (2) series B
consisting of 20,000,000 shares with a par value of $0.01 and a liquidation
preference of $0.50 per share; and (3) Series C consisting of 22,500,000
shares with a par value of $0.01 and a liquidation preference of $3.00 per
share. The Company's Series A Convertible Preferred shares have the same
voting rights as Common Stock and are convertible to common stock at no
cost, at the option of the holder.
Note 8 Commitments and Contingencies
--------------------------------------
Ground lease. The Company entered into a 50-year ground lease for the land
under T-Rex Mall. The lease requires monthly payments of $13,708, adjusted
annually based on the Consumer Price Index, with a floor of 2% and a
ceiling of 3%.
Spencer Springs. The Company has the option to acquire the remaining 50%
interest in Spencer Springs, LLC for $1,000,000 in stock or cash, at the
option of the members. The Company intends to pursue the acquisition as
soon as financing becomes available.
NOTE 9 - Subsequent Events
--------------------------
Spencer Springs. Subsequent to June 30, 2003, the $2,117,482 first trust
deed on Spencer Springs was refinanced. There is now a first trust deed in
the amount of $2,250,000, bearing an interest rate of 11.50%. This debt
obligation is due and payable on September 1, 2013. The current monthly
payment is $11,400.42, compare to the previous monthly payment of $20,245.74.
Acquisition. Subsequent to June 30, 2003, the Company acquired the
Hospitality Inn Located in Dickinson, North Dakota for 1,500,000 shares of
restricted common stock and 2,500,000 shares of Series A Preferred Stock.
Financial information on the acquired property is not yet available.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
--------
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto of the Company
appearing elsewhere in this report. Such financial statements have been
prepared to reflect the Company's financial position as of June 30, 2003,
together with the results of operations and cash flows for the periods
ended June 30, 2003 and 2002.
Forward-Looking Statements
--------------------------
Historical results and trends are not necessarily indicative of future
operations. Management's statements contained in this report that are not
historical facts are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. Actual results may differ
materially from those included in the forward-looking statements. The
Company intends such forward-looking statements to be covered by the safe-
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement
for purposes of complying with such provisions. Forward-looking
statements, which are based on certain assumptions and describe future
plans, strategies and expectations of management, are generally
identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," "prospects," or similar expressions.
The Company's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have a
material adverse affect on the operations and future prospects of the
Company include, but are not limited to: changes in general economic
conditions and in the real estate market specifically (including those in
the local economy of the regions where the Company's properties are
located), legislative/regulatory changes, availability of capital, interest
rates, competition and supply and demand for operating properties in the
Company's current and proposed market areas. These risks and uncertainties
should be considered in evaluating forward-looking statements, and undue
reliance should not be placed on any such statements. Further information
concerning the Company and its business, including additional factors that
could materially affect the Company's financial results, is included herein
and in the Company's other filings with the Securities and Exchange
Commission. The Company does not intend to update any of the forward-
looking statements after the date this report is filed to conform these
statements to actual results, unless required by law.
Critical Accounting Policies
----------------------------
The preparation of these financial statements in accordance with
accounting principles generally accepted in the United States of America
requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. The Company believes that
its critical accounting policies are those that require significant
judgments and estimates such as those related to revenue recognition and
allowance for uncollectible receivables and impairment of real estate
assets and deferred assets. These estimates are made and evaluated on an
on-going basis using information that is currently available as well as
various other assumptions believed to be reasonable under the
circumstances. Actual results could vary from those estimates and those
estimates could be different under different assumptions or conditions.
Revenue Recognition and Allowance for Uncollectible Receivables
----------------------------------------------------------------
Base rental income is recognized on a straight-line basis over the
terms of the respective lease agreements. Differences between rental
income recognized and amounts contractually due under the lease agreements
are credited or charged, as applicable, to rent receivable. The Company
maintains, as necessary, an allowance for doubtful accounts for estimated
losses resulting from the inability of tenants to make required payments
that will result in a reduction to income. Management determines the
adequacy of this allowance by continually evaluating individual tenant
receivables considering the tenant's financial condition, security
deposits, letters of credit, lease guarantees and current economic
conditions.
Impairment of Real Estate Assets
--------------------------------
The Company assesses the impairment of a real estate asset when events
or changes in circumstances indicate that the net book value may not be
recoverable. Indicators management considers important that could trigger
an impairment review include the following:
- significant negative industry or economic trend;
- a significant underperformance relative to historical or
projected future operation results; and
- a significant change in the manner in which the asset is used.
Real Estate Investments
-----------------------
The following table presents a summary of the Company's wholly-owned
properties and properties in which it owns interests through certain
limited liability companies as of June 30, 2003:
Square Date Major
Property Name Location Ownership% Feet Acquired Tenant(1)
-------------------- ------------ ----------- -------- ---------- --------------
Operating Properties
Katella Center Orange, CA 100 9,500 03/31/03(2) Judith by
Strings
T-Rex Mall Dickenson, ND 100 86,642 03/31/03(2) Newby's
Spencer Springs Las Vegas, NV 50(3) 24,336 03/31/03 Amerident
Chris's Place
Campus Drive Newport Beach, 19(3) 8,685 01/24/03 Borders
Office Building CA
(1) Tenant occupying largest space of property.
(2) The Company assumed operations of the property in February 2003.
(3) Limited liability company membership interest.
Acquisitions
------------
Pursuant to the terms and conditions of an Asset Purchase Agreement
consummated on March 31, 2003, between the Company and Seashore Diversified
Investment Company ("Seashore"), a Maryland corporation, the Company
acquired certain real estate holdings from Seashore in exchange for
restricted shares of the Company's Preferred and Common Stock. Seashore is
a real estate investment trust in the business of acquiring, selling and
managing real estate holdings. Specifically, in exchange for 3,630,000
shares of restricted common stock of the Company and 7,370,000 shares of
Series A Convertible Preferred Stock of the Company the Company was to
acquire two properties, interests in two limited liability companies and
the general partnership interest in Seacrest Hospitality I, a limited
partnership, ("Seacrest").
During the quarter ended June 30, 2003, the Company and Seashore
agreed to rescind the acquisition of the general partnership interest in
Seacrest. The primary asset of Seacrest is the Hospitality Inn in
Dickinson, North Dakota. Accordingly, the number of shares Seashore
received in connection with the Asset Purchase Agreement was reduced by
1,168,393 shares of common stock and 2,371,193 shares of Series A
Convertible Preferred Stock.
Subsequent to the quarter ended June 30, 2003, the Company consummated
an agreement with Seacrest to acquire the Hospitality Inn, on leased land,
in Dickinson, North Dakota for $2,500,000 payable in the Company's
restricted shares of common stock and Series A Preferred Stock in the amount
of 1,500,000 shares and 2,500,000 shares, respectively. The property is a
149 room, full service hotel and convention center with a restaurant and
banquet rooms. The inn is located on 6.6 acres of land that is subject to
a 50-year ground lease that expires in 2053. Seacrest sold the ground to a
third party that includes Sumiye Onodera-Leonard, a director of the Company,
her husband Robert J. Leonard, who manages the interest of a family trust
which effectively owns 25% of the Company's outstanding common shares, and
the Akira and Hisako Imamura Family Trust which is managed by the sister of
Sumiye Onodera-Leonard (collectively "Landowners"). The Landowners
purchased the ground from Seacrest on June 17, 2003 for $1,300,000. The
Landowners and Seacrest entered into a ground lease with monthly ground
lease payments of $10,000, $12,000 and $14,000 for the first three years,
respectively. Beginning with the fourth year, the ground lease payment
will adjust annually based on the Consumer Price Index, with a floor of 2%
and a ceiling of 3%. The Company is assuming the ground lease payments.
Pursuant to the terms of the ground lease, Seacrest may repurchase the
ground or assign its' rights to repurchase the ground to the Company. The
Landowners are in the process of selling the ground to an unrelated third
party. Additionally, the Company also acquired Dickinson Management
Company ("DMC"), a North Dakota corporation wholly owned by Seacrest, which
operated the inn, owns the liquor license and is the registered entity for
various licenses and permits necessary to operate the inn. In acquiring
DMC, the Company will be assuming certain liabilities.
Certain of the Company's board of directors and shareholders, Clifford
L. Strand, Sumiye Onodera-Leonard, Wayne Sutterfield, and Robert J.
Leonard, own limited partnership interests in Seacrest.
Pursuant to an agreement between Seashore and the other members of the
limited liability company that own Spencer Springs, the Company is required
to purchase the other 50% interest in the limited liability company by
August 2004 for $1,000,000. The purchase in cash or securities at the
option of the other members, one of whom is an officer and director of the
Company. The Company hopes to acquire the entire interest by year
end 2003. The members of the limited liability company have agreed to sell
their interest for 3,100,000 shares of the Company's Series B Preferred Stock
and $200,000.
Dispositions
------------
On April 17, 2003, the Company acquired the remaining 50% interest in
the Decatur Square strip mall from the other members of Decatur Square,
LLC, the limited liability company which owned the property, in exchange
for 1,552,480 restricted shares of the Company's Series B Preferred Stock
and $123,760. Of the shares issued to the remaining limited liability
company members, 317,000 were issued to a family trust managed by an
officer and director of the Company for the family trust's interest in the
limited liability company and the property. Under the terms of the
contract between the Company and the limited liability company, Clifford
Strand and William Biddle, officers and directors of the Company received
50,000 and 60,000 shares of Series B Convertible Preferred Stock,
respectively, as commissions which Seashore previously agreed to pay from
the Company's acquisition of Seashore's assets.
On April 17, 2003, the Company sold the Decatur Square strip mall in
Las Vegas, Nevada to an unaffiliated third-party for $1,825,000 realizing a
loss of $106,832, net proceeds of $231,186 and 59% in a note receivable.
Results of Operations
---------------------
The comparability of the financial information discussed below is
limited by acquisitions and dispositions completed during the six months
ended June 30, 2003. As discussed above, during the three months ended
March 31, 2003, the Company acquired a 100% ownership interest in a 9,500
square foot strip mall in Orange, California and a 89,642 square foot
enclosed mall in Dickinson, North Dakota. The Company also purchased a 50%
membership interest in two LLCs: one (Spencer Springs) owns a 100% interest
in a 24,336 square foot, strip mall in Las Vegas, Nevada; and the other
(Decatur Square) owned a 100% interest in a 16,500 square foot strip mall
also located in Las Vegas, Nevada. The Company also acquired a 19%
membership interest in an LLC that owns an 8,685 square foot office
building in Newport Beach, California.
Three Months Ended June 30, 2003 and 2002
-----------------------------------------
Comparability of the financial information discussed below is
materially impacted by the Company's acquisition of properties beginning in
the first quarter of 2003.
Rental Income.
--------------
Rental income consists of monthly base rent, a percentage of common-
area rent, if applicable, pursuant to tenant leases and property operating
expenses recovered from tenants. Rental income increased to $212,000 for
the three months ended June 30, 2003, due to the Company acquiring
properties and beginning active operations. The Company realized no rental
income in the comparable period 2002.
Operating and Administrative Expenses.
--------------------------------------
Operating and administrative expenses consist primarily of payroll
expenses, legal and accounting fees and costs associated with the
acquisition and ownership of real properties. These expenses increased
$416,000 to $430,000 for the three months ended June 30, 2003, compared to
$13,000 for the three months ended June 30, 2002. The increase is
attributable to the operations of the acquired real estate. Additionally,
payroll increased as a result of employment agreements being executed by
certain members of management effective May 1, 2003. These agreements
result in a monthly expense of $30,000 of which only $16,000 is being paid
and the balance accrued (See Part II - Item 5. Other Information).
Management anticipates that operating and administrative expenses will
continue to increase throughout the remainder of 2003 as the Company seeks
to acquire additional real estate holdings and expand its operations.
Depreciation.
-------------
Depreciation for the three months ended June 30, 2003 was $24,000
compared to no depreciation for the three months ended June 30, 2002.
The depreciation was attributable primarily to the Katella Center, T-Rex
Plaza Mall and Spencer Springs.
Interest and Other Expense.
---------------------------
Interest expense consists of mortgage interest paid on the Company's
properties. Interest expense of $16,807 for the three months ended June
30, 2003 was attributable to the Katella Center, T-Rex Plaza Mall and
Spencer Springs properties. The Company recognized impairment with
respect to the T-Rex property in the amount of $448,000. (See Notes to
Consoldiated Financial Statements - Note 6). The Company paid nothing in
interest and other expense during the comparable period ended June 30, 2002.
Net Income.
-----------
The net loss was $405,000 or $0.08 per share basic and diluted for
the three months ended June 30, 2003 compared to a net loss of $13,000 or
$0.01 per share basic and diluted for the three months ended June 30,
2002.
Six Months Ended June 30, 2003 and 2002
---------------------------------------
Comparability of the financial information discussed below is
materially impacted by the Company's acquisition of properties beginning in
the first quarter of 2003.
Rental Income.
--------------
Rental income consists of monthly base rent, a percentage of common-
area rent, if applicable, pursuant to tenant leases and property operating
expenses recovered from tenants. Rental income increased to $249,000 for
the six months ended June 30, 2003, due to the Company acquiring properties
and beginning active operations. The Company realized no rental income in
the comparable six month period ended June 30, 2002.
Operating and Administrative Expenses.
--------------------------------------
Operating and administrative expenses consist primarily of payroll
expenses, legal and accounting fees and costs associated with the
acquisition and ownership of real properties. These expenses increased
$692,000 to $716,000 for the six months ended June 30, 2003, compared to
$24,000 for the six months ended June 30, 2002. The increase in payroll
was attributable to the execution of employment agreements for certain
members of management effective May 1, 2003. These agreements result in a
monthly expense of $30,000 of which only $16,000 is being paid and the
balance accrued (See Part II - Item 5. Other Information). Management
anticipates operating and administrative expenses to continue to increase
throughout the remainder of 2003 as the Company seeks to acquire additional
real estate holdings and expand its operations.
Depreciation.
-------------
Depreciation for the six months ended June 30, 2003 was $33,000
compared to no depreciation for the six months ended June 30, 2002. The
depreciation was attributable primarily to the Katella Center, Spencer
Springs and to a new phone system.
Interest and Other Expense.
---------------------------
Interest expense consists of mortgage interest paid on the Company's
properties and the amortization of deferred financing fees. Interest
expense of $74,000 for the six months ended June 30, 2003 was attributable
to the Katella Center, T-Rex Plaza Mall and Spencer Springs properties.
The Company recognized impairment in the amount of $448,000 with respect to
the T-Rex Plaza Mall (See Notes to Consolidated Financial Statements - Note
6). The Company paid nothing in interest and other expense during the
comparable period ended June 30, 2002.
Net Loss.
---------
The net loss was $714,000 or $(0.20) per share basic and diluted
for the six months ended June 30, 2003 compared to a net loss of $24,000 or
$(0.01) per share basic and diluted for the six months ended June 30,
2002.
Liquidity and Capital Resources
-------------------------------
Capital Resources
-----------------
As stated in financial statement Note 1 Going Concern, the Company
does not have significant cash or other liquid assets, nor does it have an
established source of revenues sufficient to cover its operating costs and
to allow it to continue as a going concern. Moreover, the Company does not
currently possess a financial institution source of financing. The Company
anticipates that it will be dependent for a significant period of time on
additional investment capital to fund operating expenses, to meet debt
service obligations, and to fund additional property acquisitions before
achieving profitability. To the extent possible, the Company will attempt to
raise investment capital, satisfy debt obligations and acquire real estate
holding throug the issuance of additional capital stock. Such use of the
capital stock of the Company may result in substanital dilution of the
interest of the current shareholders of the Company. There can be no assurance
that the Company will be successful in its efforts to raise investment capital,
satisfy debt obligations, or acquire real estate holdings with its capital
stock.
Since its inception, the Company has covered its capital requirement
shortfall through additional financing from its control shareholders. Because
of the Company's current negative equity position, fund-raising from
non-affiliated third parties may be difficult resulting in continued reliance
upon funding from its control shareholders. These control shareholders,
however, are under no obligations and have made no commitments to continue
to fund the Company.
At June 30, 2003, the Company had $253,000 of cash and cash
equivalents as compared to $6,000 of cash and cash equivalents at
December 31, 2002 to meet its immediate short-term liquidity requirements.
This increase in cash and cash equivalents resulted primarily from the cash
proceeds from the sale of Decatur Square.
Operating cash flows are expected to increase as additional properties
and investments in unconsolidated real estate are added to the Company's
portfolio. Cash and cash equivalents decreased since December 31, 2002
principally as a result of acquisition of real estate investments.
On May 1, 2003, the debt obligations on the Katella Center in Orange,
California were refinanced. There is now a first trust deed in the amount
of $370,000, bearing an annual interest rate of 11.5%. This debt
obligation is due and payable on May 15, 2005. The current monthly
payment, which covers only interest, is $3,546. On May 5, 2003, the
Company also refinanced the second trust deed in the amount of $25,000, at
an annual rate of 15%. The monthly payment is $312 per month interest
only. This note is due and payable on July 1, 2005. Similarly, in August
2003 the Company refinanced the note secured by a first trust deed on its
Spencer Springs, strip mall in Las Vegas, Nevada. The current outstanding
indebtedness on Spencer Springs at June 30, 2003, was approximately
$2,117,482. This note matures in April 2008, with a balloon payment of
approximately $1,900,000 due at maturity. The annual interest rate on the
note is 9.7%, with a monthly payment of $20,245.74. The existing first
trust deed has been refinanced for $2,250,000. The note bears an interest
rate of 4.50% fixed for the first six months after which the rate may adjust
every six months no more than 1%, with a lifetime cap on adjustment of 5%,
according to LIBOR. The loan is a 30 year amortizing obligation with a
term of 10 years and a monthly payment of $11,400.42. The mall was
appraised by the new lender to have an estimated market value of $4,200,000.
To date, the Company has paid no dividends and does not anticipate
paying dividends into the foreseeable future.
Cash Flows from Operating Activities
------------------------------------
Net cash provided by operating activities was $32,000 for the six
months ended June 30, 2003 compared to net cash used by operating
activities of $61,000 for the six months ended June 30, 2002. This
increase in cash provided by operating activities relative to the prior
period was primarily due to the Company's acquired real estate holdings and
expenses relating to audit, legal and expanded compliance with federal and
state securities laws. The Company had no operations during the same
quarter of 2002.
Management expects cash flows from operating activities to increase
due to the acquisitions of the Katella Center, T-Rex Mall, and the limited
liability company membership interest in Spencer Springs and the Campus
Drive Office Building as well as the acquisition of additional properties
and investments in unconsolidated real estate during the remainder of the
year as the Company strategically builds its real estate portfolio.
Management is currently considering other potential opportunities to
acquire real estate. The decision to acquire one or more properties or
investments in unconsolidated real estate will generally depend upon
(i) receipt of a satisfactory environmental survey and property appraisal,
(ii) an absence of any material adverse change relating to the property,
its tenants, or local economic conditions, and (iii) adequate financing.
There is no assurance that any of these conditions will be satisfied or, if
satisfied, that the Company will purchase any additional properties or make
any further investments in unconsolidated real estate.
Cash Flows From in Investing Activities
---------------------------------------
Net cash from investing activities amounted to $71,000 for the six
months ended June 30, 2003 compared to $0 for the six months ended June
30, 2002, primarily from the sale of Decatur Square offset by an investment
in the Campus Drive office building and various capital expenditures.
At June 30, 2003, the Company does not have any material planned
capital expenditures resulting from any known demand based on existing
trends. However, management may conclude that expenditures to improve
properties are necessary and/or desirable.
Cash Flows from Financing Activities
------------------------------------
Cash provided by financing activities amounted to $144,000 for the six
months ended June 30, 2003 compared to $61,000 for the quarter ended June
30, 2002. The primary reason for the increase was proceeds from notes and
the sale of preferred stock.
The Company intends to acquire additional properties and make
additional investments in unconsolidated real estate and may seek to fund
these acquisitions through proceeds received from a combination of
subsequent equity offerings, debt financings or asset dispositions.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
-------------------------------------------------
The Company's Chief Executive Officer and Chief Financial Officer
have conducted an evaluation of the Company's disclosure controls and
procedures as of a date (the "Evaluation Date") within 90 days before the
filing of this quarterly report. Based on their evaluation, the Company's
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
applicable Securities and Exchange Commission rules and forms.
PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES
----------------------------
No instruments defining the rights of the holders of any class of
registered securities were materially modified, limited or qualified during
the quarter ended June 30, 2003.
Recent Sales of Unregistered Securities
---------------------------------------
On April 17, 2003, the Company acquired the remaining 50% membership
interests in Decatur Center, LLC, from the holders thereof in exchange for
1,552,480 restricted Series B Convertible Preferred shares and $123,760.
In connection with the transaction two Company officers and directors
received shares which Seashore previously agreed to pay fro the Company's
acquisition of Seashore's assets. William Biddle received 60,000 shares
personally as a commission, and his family trust, of which he is the
trustee, received 316,800 shares. Clifford Strand received 50,000 shares
as a commission. The shares were issued without registration under the
Securities Act of 1933 in reliance on an exemption from registration
provided by Rule 506 of Regulation D of rules and regulations promulgated
under the Securities Act, and from similar applicable state securities
laws, rules and regulations exempting the offer and sale of these
securities by available state exemptions. No general solicitation was
made in connection with the offer or sale of these securities. No funds
were received by the Company for these shares.
On August 1, 2003, the Company issued 62,000 restricted shares of
Series B Convertible Preferred Stock for a total consideration of $31,000
to the following individuals: (1) Harlan Morrison, 40,000 shares; Jay &
Alicia Kister, 5,000 shares; Matt Kister, 5,000 shares; and Thomas Kister,
12,000 shares. Jay Kister is a director of the Company and the Chairman of
its Audit Committee. Matt Kister and Thomas Kister are the brother and
father, respectively, of Jay Kister. The shares were issued without
registration under the Securities Act of 1933 in reliance on an exemption
from registration provided under Section 4(2) of the Securities Act, and
from similar applicable state securities laws, rules and regulations
exempting the offer and sale of these securities by available state
exemptions. No general solicitation was made in connection with the offer
or sale of these securities.
ITEM 5 EMPLOYMENT AGREEMENTS
Effective May 1, 2003, the Board of Directors entered into employment
agreements with Clifford Strand, William Biddle and Gernot Trolf.
Following is a brief description of the terms and conditions of each
employment agreement.
The Employment Agreement of Clifford Strand, President and Chairman
of the Board of directors of the Company provides: (a) an employment term
of three years; (b) an average annual salary of $346,667, to be paid as
follows: (i) $180,000 the first year; (ii) $360,000 the second year:
(iii), and $500,000 the third year; (c) 500,000 shares of restricted
stock; (d) 100,000 shares of restricted common stock for each year the
Company increases net assets by 20%; (e) stock options to purchase
1,000,000 shares of common stock at a price of $0.15 per share; and (f)
benefits including vacation pay, health insurance, and expense
reimbursement. In light of the Company's financial condition, the executive
has agreed to accept half of the first year's salary and the balance is
being accrued.
The Employment Agreement of William Biddle, Vice President and
Director provides: (a) an employment term of three years; (b) an average
annual salary of $240,000 to be paid as follows: (i) $120,000 the first
year, (ii) $240,000 the second year; and (iii) $360,000 the third year;
(c) 250,000 shares of restricted stock; (d) 50,000 shares of restricted
common stock for each year the Company increases net assets by 20%; (e)
stock options to purchase 500,000 shares of common stock at a price of
$0.15 per share; and (f) benefits including vacation pay, health insurance,
and expense reimbursement. In light of the Company's financial condition,
the executive has agreed to accept half of the first year's salary and the
balance is being accrued.
The Employment Agreement for Gernot Trolf, Vice President and Chief
Operating Officer provides: (a) an employment term of three years; (b) an
average annual salary of $120,000 to be paid as follows: (i) $60,000 the
first year; (ii) $120,000 the second year, and (iii) $180,000 the third
year; (c) 250,000 shares of restricted stock; (d) 50,000 shares of
restricted common stock for each year the Company increases net assets by
20%; (e) stock options to purchase 500,000 shares of common stock at a
price of $0.15 per share; and (f) benefits including vacation pay, health
insurance, and expense reimbursement. In light of the Company's financial
condition, the executive has agreed to accept 70% of the first year's
salary and the balance is being accrued.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit 10.1 Employment Agreement of Clifford L. Strand
Exhibit 10.2 Employment Agreement of William Biddle
Exhibit 10.3 Employment Agreement of Gernot Trolf
Exhibit 31.1 Certification of Principal Executive Officer
Exhibit 31.2 Certification of Principal Financial Officer
Exhibit 32.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on May 14, 2003
disclosing that the Company had changed independent auditors. That Report
is incorporated herein by this reference. The Company disclosed that it
had dismissed Bierwolf, Nilson & Associates and retained the services of
Cacciamatta Accountancy Corp. The Current Report further disclosed that
Bierwolf, Nilson & Associates' report on the Company's financial statements
for fiscal years ending October 31, 2001 and 2002 and for the transition
period ended December 31, 2002 did not contain an adverse opinion or a
disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope or accounting principles. The decision to change accountants
was recommended and approved by the registrant's audit committee.
SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf, thereunto duly authorized.
SECURED DIVERSIFIED INVESTMENT, LTD.
Date: September 8, 2003 By: /S/ Clifford L. Strand
---------------------------------------
Clifford L. Strand,
Principal Executive Officer
Date: September 8, 2003 By: /S/ Munjit Johal
---------------------------------------
Munjit Johal,
Principal Financial Officer