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
September 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 November 10, 2003, issuer had 6,531,147 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
September
30, 2003
--------------
(Unaudited)
ASSETS
Current Assets
--------------
Cash $ 135,476
Accounts Receivable 64,908
Inventory 20,740
Note Receivable 425,000
--------------
Total Current Assets 646,125
Fixed Assets
------------
Equipment, net of $4,261 of accumulated depreciation 65,663
Real Estate, net of $43,832 of accumulated depreciation 3,600,716
--------------
Total Fixed Assets 3,666,380
Other Assets
------------
Investment in Subsidiaries 109,703
Deposits 5,330
Prepaid Expenses 6,064
--------------
Total Other Assets 121,098
--------------
Total Assets $ 4,433,602
==============
Continued
2
SECURED DIVERSIFIED INVESTMENT, LTD
(Formerly Book Corporation of America)
Consolidated Balance Sheet
September
30, 2003
--------------
(Unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
-------------------
Accounts Payable $ 71,382
Interest Payable 184
Payroll Liabilities 198,810
Accrued Property Tax 49,768
Accrued Sales Tax 46,812
Security Deposits 35,664
Current Potion of Long-Term Debt, related parties 314,557
Current Portion of Long-Term Debt 61,000
--------------
Total Current Liabilities 778,177
Long Term Liabilities
---------------------
Notes Payable, related parties 174,250
Mortgages Payable 2,603,981
--------------
Total Long - Term Liabilities 2,778,231
--------------
Total Liabilities 3,556,408
==============
Minority Interest 166,524
STOCKHOLDER' EQUITY
-------------------
Series A Preferred Stock, 7,5000,000 shares authorized,
$0.01 par value, 7,677,807 issued & outstanding 74,978
Series B Preferred Stock, 20,000,000 shares authorized,
$0.01 par value, 2,620,480 issued & outstanding 26,175
Series C Preferred Stock, 22,500,000 shares authorized,
$0.01 par value, zero share issued & outstanding -
Common Stock, 100,000,000 shares authorized, $0.001 par
value, 6,531,147 issued and outstanding 6,311
Paid in Capital 4,821,175
Accumulated (Deficit) (4,217,969)
--------------
Total Liabilities & Stockholders' Equity $ 4,433,602
==============
See accompanying notes
3
SECURED DIVERSIFIED INVESTMENT, LTD
(Formerly Book Corporation of America)
Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES
Rental Income $ 559,880 $ - $ 809,258 $ -
------------ ------------ ------------ ------------
Total Revenues 559,880 - 809,258 -
Operating and
Administrative Costs $ 810,572 $ 20,752 $ 1,925,279 $ 44,605
------------ ------------ ------------ ------------
Operating Income (Loss) $ (250,692) $ (20,752) $ (1,116,021) $ (44,605)
Other Income and Expenses
Interest expense $ (54,545) $ - $ (137,471) $ -
Interest income 4,425 - 7,375 -
Other income (loss) (25,812) - 202,850 -
------------ ------------ ------------ ------------
Net Income (Loss) $ (326,623) $ (20,752) $ (1,034,267) $ (44,605)
============ ============ ============ ============
Basic and diluted income per
common share
Net income (loss) per share $ (0.07) $ (0.01) $ (0.22) $ (0.02)
Basic and diluted weighted
average shares 4,811,146 2,349,540 4,811,146 2,349,540
See accompanying notes
4
SECURED DIVERSIFIED INVESTMENT, LTD
(Formerly Book Corporation of America)
Consolidated Statements of Cash Flows
(Unaudited)
September September
30, 2003 30, 2002
------------ ------------
Cash flows from operating activities:
Net loss $ (1,043,267) $ (44,605)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 61,596 -
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 assets and liabilities:
Receivables (64,908) -
Inventory (20,740) -
Prepaid expenses (6,064) -
Current liabilities 437,891 (16,584)
------------ ------------
Net cash provided (used) by operating activities (35,257) (61,189)
Cash flow from investing activities:
Purchase of equipment and tenant improvements (62,542) -
Proceeds from sale of real estate 231,186 -
Investment in subsidiary (109,703) -
------------ ------------
Net cash provided by investing activities 58,941 -
Cash flows from financing activities:
Proceeds from capital contributions - 61,189
Proceeds from stock issuance 34,000 -
Proceeds on notes payable - related party 123,708 -
Payments on note payable - related party (72,021) -
Proceeds from notes payable 45,000 -
Payments on notes payable (12,837) -
------------ ------------
Net cash provided by financing activities 117,850 61,189
------------ ------------
Net increase (decrease) in cash 141,534 -
Cash, beginning of period 6,058 -
------------ ------------
Cash, end of period $ 135,476 $ -
============ ============
Supplemental disclosures:
Cash paid for interest $ 137,397 $ -
Cash paid for income tax $ - $ -
Non-cash investing and financing activities:
Property acquired through stock issuances, net
of debt $ 1,077,974 $ -
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 $ 194,230 $ -
See accompanying notes
5
SECURED DIVERSIFIED INVESTMENT, LTD.
Formerly Book Corporation of America
Notes to Consolidated Statements
September 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.
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.
6
SECURED DIVERSIFIED INVESTMENT, LTD.
Formerly Book Corporation of America
Notes to Consolidated Statements
September 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.
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.
NOTE 4 Related Party Transactions
-----------------------------------
On August 1, 2003, the Company acquired the Hospitality Inn, a 149 room
full service hotel complete with meeting and banquet rooms as well as a
restaurant and bar on leased land. The hotel was purchased from Seacrest
Hospitality I, a limited partnership ("Seacrest") for $2,500,000. The
Company also acquired Dickinson Management Inc., a wholly owned subsidiary
of Seacrest which operated the inn, owns the liquor license and is the
registered entity for various permits and licenses necessary to operate the
inn. In acquiring Dickinson Management Inc, the Company has assumed
certain tax liabilities. The purchase price was paid in stock consisting
of 1,500,000 restricted shares of common stock and 2,500,000 restricted
shares of Series A Preferred Stock. Certain officers, directors and
shareholders of the Company, Clifford Strand, Sumiye Leonard, Robert
Leonard, and Wayne Sutterfield, are limited partners of Seacrest.
Additionally, the Company assumed the land lease. The land is owned by
Robert Leonard, Sumiye Leonard, and the Akira and Hisako Imamura Family
Trust which is managed by the sister of Sumiye Leonard. The lease has a
term of 50 years that expires in 2053. The monthly ground lease payments
are $10,000, $12,000, and $14,000 for the first three years, respectively.
Beginning with the fourth year, the ground lease payments will adjust
annually based on the Consumer Price Index, with a floor of 2% and a
ceiling of 3%. Pursuant to the terms of the ground lease, the Company may
purchase the land.
7
SECURED DIVERSIFIED INVESTMENT, LTD.
Formerly Book Corporation of America
Notes to Consolidated Statements
September 30, 2003
NOTE 5 Related Party Long-Term Debt
-------------------------------------
The following is a summary of the Company's debt to related parties at
September 30, 2003:
Convertible note payable, bearing interest at 9%,
interest only, matured September 30, 2003 $ 135,057
Note payable, due on demand 12,500
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 $ 488,807
Less current portion of related party debt 314,557
------------
$ 174,250
Following are maturities of related party long-term debt for each of the
next five years:
YEAR AMOUNT
---- ---------------
2003 $ 247,557
2004 -
2005 -
2006 67,000
2007 -
2008 174,250
---------------
Total $ 488,807
===============
8
SECURED DIVERSIFIED INVESTMENT, LTD.
Formerly Book Corporation of America
Notes to Consolidated Statements
September 30, 2003
NOTE 6 Long Term Debt Payable
Following is a summary of the Company's debt at September 30, 2003:
2003
------------
Note Payable, bearing interest at 9%,
maturing June 20, 2005, interest only, unsecured. $ 19,980
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 2,250,000
------------
Total Long-Term Debt $ 2,664,980
Less current portion of long-term debt 61,000
------------
$ 2,603,980
Following are maturities of long-term debt for each of the next five years:
YEAR AMOUNT
---- ---------------
2003 $ 10,500
2004 61,000
2005 437,980
2006 45,000
2007 50,000
2008 2,060,500
---------------
Total $ 2,664,980
9
SECURED DIVERSIFIED INVESTMENT, LTD.
Formerly Book Corporation of America
Notes to Consolidated Statements
September 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.
Private Placement. The Company is offering 18,447,520 shares of its Series
B preferred stock at $0.50 per share in order to raise working capital.
Additionally, the Company is offering 22,500,000 shares of its Series C
preferred stock at $3.00 per share in exchange for real estate
acquisitions. Both Series B and Series C preferred stock is convertible to
common stock at the option of the holder. During the quarter ended
September 30, 2003, the Company sold 28,000 shares of Series B Preferred
Stock for $14,000.
NOTE 8 Financial Statements of Acquired Properties and Interests
------------------------------------------------------------------
Hospitality Inn. August 1, 2003, the Company acquired a 100% ownership
interest in a full service hotel on leased land. The following represents
the unaudited condensed financial statements of Hospitality Inn prior to
the acquisition.
Hospitality Inn
Condensed Balance Sheet
July 31, 2003
ASSETS
Cash $ 60,019
Receivables 33,601
Inventory 22,016
Deposits 5,330
Real Estate, net 602,161
Furniture, Fixtures & Equipment, net 60,952
------------
Total Assets $ 784,079
LIABILITIES AND CAPITAL
Liabilities
Accounts Payable $ 65,797
Taxes Payable 142,554
Other Liabilities 405,557
------------
Total Liabilities $ 613,908
Capital
Retained Earnings $ (531,683)
Net Income 771,589
------------
Total Capital $ 170,171
============
10
SECURED DIVERSIFIED INVESTMENT, LTD.
Formerly Book Corporation of America
Notes to Consolidated Statements
September 30, 2003
Hospitality Inn
Condensed Statement of Operations
July 31, 2003
Revenues $ 1,226,221
Expenses (1,509,780)
------------
Net Loss (283,559)
Other Income
Gain on Sale of Land 907,786
Other Income 147,362
------------
Total Other Income $ 1,055,148
------------
Net Income $ 771,589
Note 9 Commitments and Contingencies
--------------------------------------
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%.
The Company assumed a 50-year ground lease for the land under the
Hospitality Inn. The monthly ground lease payments are $10,000, $12,000,
and $14,000 for the first three years, respectively. Beginning with the
fourth year, the ground lease payments will adjust annually based on the
Consumer Price Index, with a floor of 2% and a ceiling of 3%.
NOTE 10 - Subsequent Events
---------------------------
On October 25, 2003, the Company acquired the remaining 50% of Spencer
Springs, LLC for $167,865 in cash and 3,100,000 restricted shares of Series
B Preferred Stock. The former members of Spencer Springs include William
S. Biddle Family Trust, managed by William Biddle an officer and director
of the Company, and Anthony Giangrande Family Trust, Jack Dezen, Kellogg
Business Center, Gill Biddle, Sally Podell all of whom are shareholders of
the Company. Clifford Strand, William Biddle, and Anthony Giangrande
received 124,000, 128,000, and 128,000 restricted shares of Series B
Preferred Stock as fees.
11
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 September 30,
2003, together with the results of operations and cash flows for the
periods ended September 30, 2003 and 2002.
Forward-Looking Statements
Historical results and trends are not necessarily indicative of future
operations. Managements' 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.
12
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:
- a 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 September 30, 2003:
Company 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 Dickinson, ND 100 89,642 03/31/03 (2) Newby's
Spencer Springs Las Vegas, NV 50(3) 24,336 03/31/03 Amerident Chris's
Place
Hospitality Inn Dickinson, ND 100 08/31/03
----------------
Investments in
Unconsolidated
Real Estate
----------------
Campus Drive Newport Beach,
Office Building CA 19(4) 8,685 01/24/03 Borders
(1) Tenant occupying largest space of property.
(2) The Company assumed operations of the property in February 2003.
(3) Owned by Spencer Springs limited liability company.
(4) Limited liability company membership interest.
13
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.
On August 1, 2003, the Company acquired from Seacrest the Hospitality
Inn, on leased land, for $2,500,000 payable in the Company's restricted
shares of common stock and Series A Preferred Stock in the amount of
1,320,000 shares and 2,680,000 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. 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 officers, directors and shareholders,
Clifford L. Strand, Sumiye Onodera-Leonard, Wayne Sutterfield, and Robert
J. Leonard, own limited partnership interests in Seacrest.
Subsequent Events
On October 25, 2003, the Company acquired the remaining 50% of Spencer
Springs, LLC for $167,865 in cash and 3,100,000 restricted shares of Series
B Preferred Stock. The former members of Spencer Springs include William
S. Biddle Family Trust, managed by William Biddle an officer and director
of the Company, and Anthony Giangrande Family Trust, Jack Dezen, Kellogg
Business Center, Gill Biddle, Sally Podell all of whom are shareholders of
the Company. Clifford Strand, William Biddle, and Anthony Giangrande
received 124,000, 128,000, and 128,000 restricted shares of Series B
Preferred Stock as commissions.
14
Results of Operations
The comparability of the financial information discussed below is
limited by acquisitions and dispositions completed during the nine months
ended September 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 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, which the Company subsequently sold.
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 September 31, 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.
Income.
-------
Income consists of rental income from commercial properties pursuant
to tenant leases and income from the operation of a full service hotel. As
a result of these operations, income increased to $559,880 for the three
months ended September 30, 2003. The Company realized no 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
$789,820 to $810,572 for the three months ended September 30, 2003,
compared to $20,752 for the three months ended September 30, 2002. The
increase is attributable to the operation of 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 $19,000 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 September 30, 2003 was $29,026
compared to no depreciation for the three months ended September 30, 2002.
The depreciation was attributable primarily to the Katella Center,
Hospitality Inn and Spencer Springs.
Interest and Other Expense.
---------------------------
Interest expense consists of mortgage interest paid on the Company's
properties. Interest expense of $54,545 for the three months ended
September 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. The Company paid
nothing in interest and other expense during the comparable period ended
September 30, 2002.
15
Net Income.
-----------
The net loss was $326,623 or $(0.07) per share basic and diluted
for the three months ended September 30, 2003 compared to a net loss of
$20,752 or $(0.01) per share basic and diluted for the three months
ended September 30, 2002.
Nine Months Ended September 31, 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.
Income.
-------
Income consists of rental income from commercial properties pursuant
to tenant leases and income from the operation of a full service hotel. As
a result income increased to $809,258 for the nine months ended September
30, 2003. The Company realized no 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
$1,880,674 to $1,925,279 the nine months ended September 30, 2003, compared
to $44,605 for the nine months ended September 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 $19,000 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 nine months ended September 30, 2003 was $61,596
compared to no depreciation for the nine months ended September 30, 2002.
The depreciation was attributable primarily to the Katella Center, Spencer
Springs, Hospitality Inn, and 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 $137,471for the nine months ended September 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. The Company paid nothing in interest
and other expense during the comparable period ended September 30, 2002.
Net Loss.
---------
The net loss was $1,043,267 or $(0.22) per share basic and diluted
for the nine months ended September 30, 2003 compared to a net loss of
$44,605 or $(0.02) per share basic and diluted for the nine months
ended September 30, 2002.
16
Liquidity and Capital Resources
Capital Resources
-----------------
As stated in financial statement Note 7 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. 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 September 30, 2003, the Company had $135,476 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.
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 used by operating activities was $35,257for the nine months
ended September 30, 2003 compared to net cash used by operating activities
of $61,000 for the nine months ended September 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.
17
Cash Flows From in Investing Activities
---------------------------------------
Net cash from in investing activities amounted to $58,941for the nine
months ended September 30, 2003 compared to $0 for the nine months ended
September 30, 2002, primarily from the sale of Decatur Square offset by an
investment in the Campus Drive office building and various capital
expenditures.
At September 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 $117,850 for the
nine months ended September 30, 2003 compared to $61,000 for the quarter
ended September 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 September 30, 2003.
18
Recent Sales of Unregistered Securities
---------------------------------------
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. On August 26, 2003, the Company issued
6,000 restricted shares of Series B Convertible Preferred Stock for $3,000
to Marilyn Jacobs. 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.
On September 30, 2003, the Company issued 400,000 restricted shares of
common stock, of which 200,000 shares will eventually be registered, to
Mark Taggatz, President of Wall Street Marketing Group, Inc. Mr. Taggatz
would represent, advise, and assist the Company in corporate development,
investor and public relations, and assist with shareholder relations. 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. The Company received no cash
for these shares.
Item 4 Submission of Matters to a Vote of Security Holders
Subsequent to quarter end, on November 13, 2003, the Company held its
Annual Meeting of Stockholders. Proxies were not solicited by the Company.
At the Annual Meeting of Stockholders a quorum of shares was present. A
number of matters were considered and voted upon at the meeting. Following
is a brief description of the matters voted upon and the results of the
shareholder votes:
The shareholders of the Company were asked to elect members to the
board of directors of the Company for a one-year term or until their
successors are elected. Clifford L. Strand, William Biddle, Sumyie
Leonard, Jay Kister, Pamela Padgett and Wayne Sutterfield were nominated to
serve as directors. Each of the aforementioned individuals received the
affirmative vote of 11,337,214 shares, with no votes against or abstaining.
The biographical information of each of the aforementioned individuals
provided in the Definitive Information Statement filed on October 22, 2003,
is incorporated herein by this reference.
19
The shareholders were also asked to adopt and approve the 2003
Employee Stock Incentive Plan and the 2003 Non-Employee Director Stock
Incentive Plan, (collectively the "2003 Plans") which were adopted by the
Company's Board of Directors on August 16, 2003, subject to shareholder
approval. The purpose of the 2003 Plans is to enable the Company to retain
and attract key employees, consultants, members of its Board of Directors
who will contribute to its success by their ability, ingenuity and
industry, and to enable such individuals to participate in the Company's
long-term success and growth by giving them a proprietary interest in the
Company. The 2003 Plans authorize the grant of stock options, restricted
stock awards, stock in lieu of cash compensation and stock purchase rights
covering up to a total of 15,000,000 shares of common stock to key
employees, consultants, and members of the Company's Board of Directors and
also provides for ongoing automatic grants of stock options to non-employee
directors. Other than the automatic annual grants to non-employee
directors and the grants and awards agreed to in the employment agreements
with our executive officers, the number and type of awards that will be
granted under the 2003 Plans shall be determined by the Board in its sole
discretion. The shareholders voted 11,337,214 shares in favor of the
adoption of the 2003 Plans, with no shares voting against or abstaining.
Finally, the shareholders voted 11,337,214 shares in favor of
ratification of the appointment of Cacciamatta Accountancy Corporation as
independent public accountants to audit the consolidated financial
statements of the Company for the fiscal year ending December 31, 2003, and
to perform other accounting services as requested by the Company.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 2003 Employee Stock Incentive Plan
Exhibit 10.2 2003 Non-Employee Director Stock Incentive Plan
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
None.
20
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: November 18, 2003 By: /S/ Clifford L. Strand
-------------------------------------
Clifford L. Strand, Principal Executive Officer
Date: November 18, 2003 By: /S/ Munjit Johal
-------------------------------------
Munjit Johal, Principal Financial Officer
21