SECURED
DIVERSIFIED
INVESTMENT, LTD.
Notes
to
Consolidated Financial Statements
NOTE
1 - Basis of presentation and Going Concern
Basis
of presentation:
The
accompanying consolidated financial statements have been prepared in
accordance
with the rules and regulations of the Securities and Exchange Commission
for the
presentation of financial information, and include all the information
and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included.
Going
concern:
The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principle, which contemplate continuation
of the
Company as a going concern. However, the Company has accumulated deficit
of
$8,735,061 as of December 31, 2006. The Company reported net loss of
$740,202 at
December 31, 2006. Additionally, the Company reported cash of only $112,885
at
December 31, 2006. The Company does not have adequate cash reserves to
pay its
existing obligations and does not appear to be able to raise the necessary
capital to meet its obligations for the next 12 months. Since
our
inception we have been unsuccessful in pursing revenues with our investment
properties. Several of our acquired properties, including the T-Rex Plaza,
the
Hospitality Inn, and the Katella Center, among others, were or became
impaired
assets that were underperforming. These properties were incapable of
generating
adequate revenues. A major contributing factor to the lack of revenues
for these
properties was high-cost of debt and ground lease obligations underlying
these
properties. The assets that sufficiently produced cash to service their
obligations, but not sufficient cash to support the Company’s overhead, such as
Decatur Center, Spencer Springs and the Cannery West, had to be sold
to continue
our operations, including the high costs associated with being a public
company,
in addition to absorbing the costs associated with our impaired assets.
Current
management has restructured the Company’s operations by selling many of its
poorly performing properties and reducing the associated high cost of
debt and
ground leases. The Company significantly reduced overhead and rolled
backed the
stock in order to restructure the Company’s capital structure. As
a
result of the problems with our properties, our ability to raise capital
was met
with failure in several instances. Management
continues with efforts to find business partners. Our
company stands in financial jeopardy and may not continue as a going
concern. We
are not likely to raise capital and we are forced to consider other business
opportunities.
In
view
of the matters described in the preceding paragraph, recoverability of
a major
portion of the recorded asset amounts shown in the accompanying balance
sheet is
dependent upon continued operations of the Company, which in turn is
dependent
upon the Company’s ability to raise additional capital to succeed in its future
operations. The financial statements do not include any adjustments relating
to
the recoverability and classification of recorded asset amounts or amounts
and
classification of liabilities that might be necessary should the Company
be
unable to continue as a going concern.
NOTE
2 - Nature of Operations
The
Company was incorporated under the laws of the state of Utah on November
22,
1978. 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
effected by merging the foreign corporation with and into a Nevada corporation.
On August 9, 2002, a merger between the Company and Book Corporation
of America
was completed. Upon completion of the merger Book Corporation of
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes
to
Consolidated Financial Statements
America
was dissolved. On September 18, 2002, the OTCBB symbol for the Company’s common
stock was changed from 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 (Series A, B and C), par value $0.01. On November 15,
2002, the
Company changed its fiscal year end from October 31 to December 31.
During
2002, the Company began pursuing the acquisition of ownership interests
in real
estate properties that are geographically and functionally diverse in
order to
be more stable and less susceptible to devaluation resulting from regional
economic downturns and market shifts. Currently, the Company owns a shopping
center in Orange, California; the Company also owns a single story office
building in Newport Beach, California through its majority owned subsidiary
Diversified Commercial Brokers, LLC. During the first quarter of 2006
the
Company acquired two additional properties in Phoenix, Arizona.
NOTE
3 - Significant Accounting Policies
Consolidation.
The
accompanying consolidated financial statements include the accounts of
the
Company and its’ majority owned subsidiary, Diversified Commercial Brokers, LLC
(53.8%). All material inter-company transactions and balances have been
eliminated.
Estimates.
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 from those estimates.
Credit
and concentration risk.
The
Company maintains deposit accounts in numerous financial institutions.
From time
to time, cash deposits may exceed Federal Deposit Insurance Corporation
limits.
The Company maintains no certificates of deposit in excess of federal
deposit
insurance limits; however, the Company’s general operating account exceeds
federal deposit insurance limits.
Revenue
recognition.
The
Company’s revenues are derived from rental income. Rental revenues are
recognized in the period services are provided.
As
a
lessor, the Company has retained substantially all of the risks and benefits
of
ownership of the Office Properties and account for our leases as operating
leases. Income on leases, which includes scheduled increases in rental
rates
during the lease term and/or abated rent payments for various periods
following
the tenant’s lease commencement date, is recognized on a straight-line basis.
Property leases generally provide for the reimbursement of annual increases
in
operating expenses above base year operating expenses (excess operating
expenses), payable to the Company in equal installments throughout the
year
based on estimated increases. Any differences between the estimated increase
and
actual amounts incurred are adjusted at year end.
Cash
and cash equivalents.
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.
Restricted
cash. The
Company is required by a lender to maintain a $70,000 deposit in a bank
account
at the lenders financial institution. The deposit and 1st
trust
deed on real property serve as collateral for the loan. The deposit is
returnable subject to the borrower meeting certain payment and financial
reporting conditions.
Property
and equipment.
Property
and equipment are depreciated over the estimated useful lives of the
related
assets. Leasehold improvements are amortized over the lesser of the lease
term
or the estimated
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes
to
Consolidated Financial Statements
life
of
the asset. Depreciation and amortization is computed on the straight-line
method. Repairs and maintenance are expensed as incurred.
Investments. The
consolidated method of accounting is used for investments in associated
companies in which the company’s interest is 50% or more. Under the consolidated
method, the Company recognizes its share in the net earnings or losses
of these
associated companies as they occur rather than as dividends are received.
Dividends received are accounted for as a reduction of the investment
rather
than as dividend income.
Fair
value.
The
carrying value for cash, prepaid, and accounts payable and accrued liabilities
approximate fair value because of the immediate or short-term maturity
of these
financial instruments. Based upon the borrowing rates currently available
to the
Company for loans with similar terms and average maturities, the fair
value of
long-term debt approximates its carrying value.
Long-lived
assets.
Effective
January 1, 2002, the Company adopted Statement of Financial Accounting
Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS
144"), which addresses financial accounting and reporting for the impairment
or
disposal of long-lived assets and supersedes SFAS No. 121, "Accounting
for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of,"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations for a Disposal of a Segment of a Business."
The
Company periodically evaluates the carrying value of long-lived assets
to be
held and used in accordance with SFAS 144. SFAS 144 requires impairment
losses
to be recorded on long-lived assets used in operations when indicators
of
impairment are present and the undiscounted cash flows estimated to be
generated
by those assets are less than the assets' carrying amounts. In that event,
a
loss is recognized based on the amount by which the carrying amount exceeds
the
fair market value of the long-lived assets. Loss on long-lived assets
to be
disposed of is determined in a similar manner, except that fair market
values
are reduced for the cost of disposal.
Issuance
of shares for service.
The
Company accounts for the issuance of equity instruments to acquire goods
and
services. The stocks were valued at the average fair market value of
the freely
trading shares of the Company as quoted on OTCBB on the date of
issuance.
Income
(Loss) per share.
Basic
loss per share is based on the weighted average number of common shares
outstanding during the period. Diluted loss per share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock
were exercised or converted into common stock. At December 31, 2006 and
2005,
all potential common shares are excluded from the computation of diluted
loss
per share, as the effect of which was anti-dilutive.
Stock-based
compensation.
In
October 1995, the FASB issued SFAS No. 123, “Accounting for Stock-Based
Compensation”. SFAS No. 123 prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options,
restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS
No. 123
requires compensation expense to be recorded (i) using the new fair value
method
or (ii) using the existing accounting rules prescribed by Accounting
Principles
Board Opinion No. 25, “Accounting for stock issued to employees” (APB 25) and
related interpretations with pro forma disclosure of what net income
and
earnings per share would have been had the Company adopted the new fair
value
method. The company uses the intrinsic value method prescribed by APB25
and has
opted for the disclosure provisions of SFAS No.123.
In
November of 2003, the Company adopted the 2003 Employee Stock Incentive
Plan and
the 2003 Non-Employee Director Stock Incentive Plan, (collectively the
“2003
Plans”). The 2003 Plans authorized 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 our Board of Directors and also provides for ongoing automatic
grants of stock options to non-
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes
to
Consolidated Financial Statements
employee
directors. Effective April 1, 2005, the 2003 Employee Plan had been eliminated.
The officers rescinded their employment agreements thereby forgiving
and
rescinding their respective grant of options under the 2003 Employee
Plan. The
options were part of the 2003 employment agreements (see Footnote 12
Commitments
and Contingencies Officer
Employment Agreements).
The
former officers of the Company were collectively granted a total of $2,500,000
shares of which 1,250,000 were vested at December 31, 2004. The Company
recorded
the expense of the vested options at that date. However, a majority of
the
non-employee directors who received grants have resigned and were required
to
exercise such options within six months of resigning from the board or
the
options would expire and automatically cancel. All grants of stock options
have
expired and thus cancelled. There are no outstanding stock options as
of
December 31, 2006.
Gain
recognition on sale of real estate assets.
In
accordance with SFAS No. 66, Accounting for Sales of Real Estate, the
Company performs evaluations of each real estate sale to determine if
full gain
recognition is appropriate and of each sale or contribution of a property
to a
joint venture to determine if partial gain recognition is appropriate.
The
application of SFAS No. 66 can be complex and requires the Company to make
assumptions including an assessment of whether the risks and rewards
of
ownership have been transferred, the extent of the purchaser’s investment in the
property being sold, whether its receivables, if any, related to the
sale are
collectible and are subject to subordination, and the degree of its continuing
involvement with the real estate asset after the sale. If full gain recognition
is not appropriate, the Company accounts for the sale under an appropriate
deferral method.
Income
Taxes. Deferred
income tax assets and liabilities are computed annually for differences
between
the consolidated financial statements and tax basis of assets and liabilities
that will result in taxable or deductible amounts in the future based
on enacted
laws and rates applicable to the periods in which the differences are
expected
to affect taxable income (loss). Valuation allowance is established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
Advertising.
The
Company expenses advertising costs as incurred.
Segment
Reporting. Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure about
Segments of an Enterprise and Related Information" requires use of the
"management approach" model for segment reporting. The management approach
model
is based on the way a company's management organizes segments within
the company
for making operating decisions and assessing performance. Reportable
segments
are based on products and services, geography, legal structure, management
structure, or any other manner in which management disaggregates a company.
During
2005, the Company sold two improved real properties and our unimproved
parcel of
land located Dickinson, North Dakota and Las Vegas, Nevada. By the end
of 2005,
our remaining portfolio consisted of a 100% ownership interest in the
Katella
Business Center in Orange, California, and a 53.8% ownership interest
in the
Campus Drive Office Building in Newport Beach, California.
During
the first quarter of 2006, the Company acquired investment interest in
two
separate properties in Arizona.
On
January 6, 2006, the Company acquired a 25 percent Tenant-in-Common interest in
a commercial property located in Paradise Valley, Arizona for $300,000.
The
tenant-in common partners include a director of the Company, 25 percent,
and an
unrelated third party, 50 percent and SDI 25%. The unrelated third party
will be
responsible for all costs of operation including, but not limited to,
landscaping, maintenance, taxes, insurance, property management and debt
payments.
On
February 15, 2006, the Company acquired a 33.3 percent interest in a
property
located in Phoenix, Arizona for $200,000. The property consists of a
2,180
square foot structure on approximately 38,587
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes
to
Consolidated Financial Statements
square
feet of land. The Company’s interest was purchased from Ms Jan Wallace, an
officer and director of the Company. The property will be used to house
the
Company’s headquarters. The Company is not responsible for any of the expenses
and does not share in the revenue stream associated with these properties.
During
the years ended December 31, 2006 and 2005, all of the Companies properties
are
located in California except for the investment properties which are
located in
Arizona. Properties in Arizona does not contribute to the income or expense
stream of the Company.
Recent
accounting pronouncements. In
December 2004, the FASB issued FASB Statement No. 123R, "Share-Based
Payment, an
Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date
fair value
of stock options and other equity-based compensation issued to employees.
FAS
No. 123R is effective beginning in the Company's first quarter of fiscal
2006.
The Company believes that the adoption of this standard will have no
material
impact on its consolidated financial statements.
In
February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise
would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes
a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation,
clarifies
that concentrations of credit risk in the form of subordination are not
embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on
the
qualifying special-purpose entity from holding a derivative financial
instrument
that pertains to a beneficial interest other than another derivative
financial
instrument. This statement is effective for all financial instruments
acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006. Management believes that this statement will
not have
a significant impact on the consolidated financial statements.
In
March
2006 FASB issued SFAS 156 ‘Accounting for Servicing of Financial Assets’ this
Statement amends FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,
with
respect to the accounting for separately recognized servicing assets
and
servicing liabilities. This Statement:
| 1. |
Requires
an entity to recognize a servicing asset or servicing liability
each time
it undertakes an obligation to service a financial asset by
entering into
a servicing contract.
|
| 2. |
Requires
all separately recognized servicing assets and servicing liabilities
to be
initially measured at fair value, if practicable.
|
| 3. |
Permits
an entity to choose ‘Amortization method’ or Fair value measurement
method’ for each class of separately recognized servicing assets and
servicing liabilities:
|
| 4. |
At
its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities
with
recognized servicing rights, without calling into question
the treatment
of other available-for-sale securities under Statement 115,
provided that
the available-for-sale securities are identified in some manner
as
offsetting the entity’s exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently
measure at fair value.
|
This
Statement is effective as of the beginning of the Company’s first fiscal year
that begins after September 15, 2006. Management believes that this statement
will not have a significant impact on the consolidated financial
statements.
In
September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles (GAAP), and expands disclosures
about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board
having
previously concluded in those accounting pronouncements that fair value
is the
relevant measurement attribute. Accordingly, this Statement does not
require any
new fair value measurements. However, for some entities, the application
of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November
15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on financial
statements.
In
September 2006, the FASB issued SFAS 158 (“SFAS 158”), “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans,
an
amendment of FASB Statements No. 87, 88, 106, and 132(R)”.
This
statement requires an employer to recognize the over funded or under
funded
status of a defined benefit postretirement plan as an asset or liability
in its
statement of financial position and to recognize changes in that funded
status
in the year in which the changes occur through comprehensive income of
a
business entity. This statement also requires an employer to measure
the funded
status of a plan as of the date of its year end statement of financial
position,
with limited exceptions. The Company will be required to initially recognize
the
funded status of a defined benefit postretirement plan and to provide
the
required disclosures as of the end of the fiscal year ending after
December 15, 2006. The requirement to measure plan assets and benefit
obligations as of the date of the employer’s fiscal year end statement of
financial position is effective for fiscal years ending after December 15,
2008, or fiscal 2009 for the Company. Adoption of SFAS 158 is not expected
to
have a material impact on the Company’s consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), "The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115”. SFAS
159
permits entities to choose to measure many financial instruments and
certain
other items at fair value. Unrealized gains and losses on items for which
the
fair value option has been elected will be recognized in earnings at
each
subsequent reporting date. SFAS 159 will be effective for the Company
on
January 1, 2008. Adoption of SFAS 159 is not expected to have a material
impact on the Company’s consolidated financial statements.
Reclassification
Certain
items in the accompanied financial statements are reclassified for comparative
purpose.
NOTE
4 - Property and Equipment
The
Company acquires income-producing real estate assets in the normal course
of
business. During 2005, the Company sold a shopping center and vacant
lot in
Dickinson, North Dakota and a shopping center in Las Vegas, Nevada.
Depreciation
expense at December 31, 2006 and 2005 was $42,583 and $43,950, respectively.
No
interest was capitalized in either period.
During
2003, the Company acquired the T-Rex Plaza Mall and recognized an impairment
loss of $448,000, representing the entire basis of the property, because
the
Company does not anticipate any future cash flows from existing leases.
The
impairment was included in “Other income (loss)” in the financial statements for
the year ended December 31, 2003. On November 9, 2005, the Company sold
the
T-Rex Plaza Mall, Dickinson North Dakota, to an unrelated third party
for total
consideration of $274,840 which entailed $50,000 in cash and assumption
of the
underlying debt in the amount of $224,840. The Company was also released
from
the land lease obligation totaling $14,401 per month and the payment
of property
taxes in the amount of $27,834, including penalties, of which $10,039
was
delinquent. The Company recorded a gain in the amount of $276,173. A
commission
of $5,000 was paid to Nationwide Commercial Brokers, Inc, a former subsidiary
of
the Company. The sale of the property netted no cash.
On
October 18, 2005, the Company sold its vacant lot in Dickinson, North
Dakota to
Morgan Rose Investment, LLC for $110,000. The lot was acquired in connection
with the sale of the Hotel in October 2004. The Company recognized a
gain on the
sale of the lot in the amount of $63,700. The sale of the lot resulted
in the
payoff of a mortgage and accrued interest to Prime Time Auctions in the
amount
of $61,475 and the Company netting $37,683 in cash.
During
2003, the Company acquired the Katella Business Center. The property
is
encumbered by a first trust deed in the amount of $370,000 bearing an
interest
rate of 11.5% per annum maturing June 25, 2007, and a second trust deed
in the
amount of $25,000 bearing an interest rate of 15% per annum. The second
trust
deed was paid off on January 19, 2006. In 2005, the Company recognized
an
impairment loss of $214,977, representing 45% of the property’s basis. The
impairment was included in “Operating Expenses” in the financial statements for
the year ended December 31, 2005. During 2006, the Company recognized
an
additional impairment loss of $248,137. In June 2007 the ground lease
payment
will increase to $4,760 per month with annual CPI increases, resulting
in
reduced cash flow of $2,300 per month. As a result of the impairments
in 2005
and 2006 Katella Business Center is 100% impaired as of December 31,
2006.
NOTE
5 - Related Party Transactions
Seashore
Diversified Investment Company (SDIC).
Certain
of the Company’s directors and officers were also directors and officers of SDIC
and continue to be major shareholders of SDIC. During 2004, 2003 and
2002, SDIC
advanced monies to the Company, of which $55,000 bearing interest at
9% is
evidence by a note. The advance has matured and is due on demand. At
December
31, 2005, the outstanding advances totaled $162,143 with $38,143 in accrued
interest. However, while the Company has recorded the liability and accrued
interest, it is not evidence by a written instrument. Further, SDIC,
whose
president and major shareholders were former officers and directors of
the
Company agreed and acknowledge the forgiveness of all but $35,000 of
the
advances and accrued interest. This forgiveness was verbally granted
in 2004 and
again in 2005 and acknowledged in a letter dated December 13, 2005. However,
in
the same letter, SDIC retracted its forgiveness. SDIC has not confirmed
the debt
or provide the required documentation. As of December 31, 2006 the Company
recognized debt forgiveness of $200,285.
Robert
Leonard.
In July
2005, the Company sold its entire interest in Nationwide Commercial Brokers,
Inc. (“NCB”) to Robert J. Leonard, a large shareholder of the Company for
$50,000. Prior to the sale, NCB had borrowed $20,000, due on demand,
from Mr.
Leonard during 2005 and 2004. The Company realized a loss of $21,352
from
discontinued operations and a gain of $75,382 on the disposal of the
subsidiary.
On November 1, 2005, the Company relocated its offices to 5030 Campus
Drive,
Newport Beach, California, which is owned by the Company’s subsidiary, DCB. NCB
assumed the Company’s former offices at 4940 Campus Drive indemnifying and
holding the Company harmless from any and all claims, demands, causes
of action,
losses, costs (including without limitation reasonable court costs and
attorneys’ fees), liabilities or damages of any kind or nature whatsoever that
the Company may sustain by reason of NCB’s breach or non-fulfillment (whether by
action or inaction), at any time. Leonard and NCB breached the subject
agreement
with the Company.
Sutterfield
Family Trust and C. Wayne Sutterfield (Sutterfield).
At
December 31, 2005, the Company owed Sutterfield, a former director and
shareholder, two notes, $67,000 and $71,630 both secured by trust deeds
on 5030
Campus Drive. The notes bear interest at 8% and mature on February 17
2007, and
December 31, 2006, respectively. The Company is in default on the $71,630
note
and subsequently on the other note of $67,000. Sutterfield is a minority
owner
in DCB. In addition to the interest payment on the 3rd
trust
deed, the Company, pursuant to the terms of the operating agreement,
pays
Sutterfield a preferred return on his investment. Payments to Sutterfield
in
2006 and 2005 totaled $14,034.40 and $22,177, respectively. There is
also
$25,003 in accrued interest payable. The Company retains the right to
acquire
all his interests in DCB. Pursuant to the operating agreement, the Company
is
responsible for any all cash flow deficiencies.
In
December 2004, the Company sold 37% interest, equal to $350,000, in its
Spencer
Springs subsidiary to Biddle and Robert Leonard (large shareholder) for
$200,000. In March 2005, the Company sold its remaining interest in Spencer
Springs to Biddle for $577,777, comprised of $300,000 in cash and a promissory
note for $277,777 accruing interest at 3% per annum, all due and payable
on
October 28, 2007. Biddle repaid the note, including accrued interest,
in full on
May 2, 2005. The note was secured by a $950,000 second trust deed on
a shopping
center located in Las Vegas, Nevada, formerly owned by the Company (Spencer
Springs). The Company realized a income of $3,491 from discontinued operations
and a gain of $285,125 on the disposal of the subsidiary.
NOTE
6 - Mortgages Payable
|
Mortgage
note, bearing interest at 11.5%, due on June 25, 2007, secured
by
1st
trust deed on Katella Center
|
$
370,000
|
|
Mortgage
note, bearing interest at the “1 year constant maturity treasury rate”
plus 3.5%, adjusting annually, currently 8.0%, principal and
interest
monthly, maturing February 2, 2013, secured by 1st
trust deed on 5030 Campus
|
656,207
|
|
Mortgage
note, bearing interest at 8%, due on Feb. 4, 2008, secured
by
2nd
trust deed on 5030 Campus
|
110,000
|
|
Total
mortgages payable
|
_________
$
1,141,174
|
Interest
expense on the Mortgages payable amounted to $104,592 and $138,963 for
the three
months ended March 31, 2007 and 2006, respectively.
NOTE
7 - Mortgages Payable - Related Parties
|
Mortgage
note, bearing interest at 8%, due on Feb. 17, 2007, secured
by 5030 Campus
Drive
|
$
67,000
|
|
Mortgage
note, bearing interest at 8%, due on Dec. 31, 2006, secured
by
3rd
trust deed on 5030 Campus
|
71,630
|
|
Total
mortgages payable- related parties
|
________
$
138,630
======
|
Interest
expense on the Mortgages payable - related parties amounted to $31,441
and
$38,521 for the three months ended March 31, 2007 and 2006, respectively.
The
Company is in default on both the notes as of December 31, 2006.
NOTE
8 - Stockholders’ Equity
In
February 2003, the Company created three series of preferred stock, all
of which
are convertible at the option of the holder: (1) Series A consisting
of
7,500,000 shares with a par value of $0.01, a liquidation preference
of $1.00
per share, convertible into an equal number of common shares 36 months
after
issuance, with the same voting rights as common stock; (2) Series B consisting
of 20,000,000 shares with a par value of $0.01, a liquidation preference
of
$0.50 per share, and convertible into an equal number of common shares
24 months
after issuance; and (3) Series C consisting of 22,500,000 shares with
a par
value of $0.01, a liquidation preference of $3.00 per share, and convertible
into an equal number of common shares 24 months after issuance. In the
event the
price of common stock is less than the purchase price of the preferred
stock on
the conversion date, the holder is entitled to convert at a rate equal
to the
purchase price divided by the common stock price.
On
August
19, 2004, the Company obtained a written consent from the holders of
a majority
of its outstanding shares of Common Stock and Series B Preferred Stock
to amend
the Certificate of Designation. Such consent amends the terms of the
Series B
Preferred Stock to permit the Board of Directors to permit conversion
of the
Series B Preferred Stock into Common Stock prior to the expiration of
the
two-year prohibition on conversion. All 250,000 shares of Series C Preferred
Stock also consented to the amendment. The amendment to the Certificate
of
Designation became effective October 28, 2004. After approval to amend
the
Certificate of Designation, 5,839,479 shares of Series B Preferred Stock
were
converted to Common Stock.
On
August
1, 2006, our Board of Directors resolved to amend the Articles of Incorporation
pursuant to Nevada Revised Statues 78.207 to decrease the number of authorized
shares of our common stock, par value $.001, from 100,000,000 to 5,000,000
shares. Correspondingly, our Board of Directors affirmed a reverse split
of
twenty to one in which each shareholder will be issued one common share
in
exchange for each twenty common share of their currently issued common
stock. At
the same time and under the same authority, our Board of Directors resolved
to
amend the Articles of Incorporation to decrease the number of authorized
shares
of our preferred stock, par value $0.01, from 50,000,000 to 2,500,000
shares.
Correspondingly, our Board of Directors affirmed a reverse split of twenty
to
one in which each shareholder will be issued one common share in exchange
for
each twenty common share of their currently issued common stock. A record
date
of August 14, 2006 was established in order to provide the NASD ten days
notice
pursuant to Rule 10b-17 of the Securities and Exchange Act of 1934 as
amended.
All shareholders of this record date will receive one share of our common
stock
for each twenty shares owned. These share certificates will be issued
upon
surrender. On August 1, 2006, we filed a Certificate of Amendment to
the
Articles of Incorporation with the Nevada Secretary of State to reflect
the
decrease in authorized shares. Under Nevada Revised Statutes 78.207,
shareholder
approval was not required.
All
the
issued and outstanding shares have been retroactively restated for the
effect of
the reverse stock split of 20:1.
During
the year ended December 31, 2006:
On
February 2, 2006, Iomega converted its 250,000 shares of Series C Preferred
Stock for 15,000,000 shares of the Company’s common stock. The shares were
converted at a price of $0.05 per share.
On
October 23, 2006, the Company issued 400,000 bonus shares to its Chief
Executive
Officer and 200,000 bonus shares to its Chief Financial Officer. These
shares
were recorded at the fair market value close to the date of issuance
and charged
to operations.
On
October 24, 2006, the Company issued 400,000 shares for consulting services.
These shares were issued at the fair market value close to the date of
issuance
and charged to operations.
NOTE
9 - Stock Incentive Plans
In
November 2003, the Board of Directors adopted and the Shareholders approved
two
stock incentive plans: the Secured Diversified Investment, Ltd. 2003
Employee
Stock Incentive Plan (2003 Employee Plan) and the Secured Diversified
Investment, Ltd. 2003 Non-employee Directors Stock Incentive Plan (2003
Directors Plan). The Plans authorized 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 our Board of Directors and also provides for
ongoing
automatic grants of stock options to non-employee directors. Effective
April 1,
2005, The 2003 Employee Plan had been eliminated. The officers rescinded
their
employment agreements thereby forgiving the entire amount of their accrued
salaries, shares issued and their grant of options under the 2003 Employee
Plan.
The former officers of the Company were collectively granted stock options
totaling 2,500,000 shares of which 1,250,000 were vested at December
31, 2004.
The Company recorded the expense of the vested options See Footnote 12
Commitments and Contingencies Officer
Employment Agreements
and
Footnote 13 Litigation.
The
2003
Director Plan has also been eliminated in 2006. However, a majority of
the
non-employee directors who received grants have resigned and were required
to
exercise such options within six months of resignation or the options
would
expire and automatically cancel. At December 31, 2006, all grants of
stock
options have expired and been cancelled.
NOTE
10 - Warrants
At
December 31, 2006, the Company had the following subscriptions for warrants
outstanding:
|
Date
|
Number
of Warrants
|
Exercise
Price
|
Expiration
Date
|
|
April
4, 2005
|
400,000
|
Range
from $0.50 to $2.00
|
April
4, 2010
|
Following
is a summary of the warrant activity:
Warrants Aggregate
Outstanding Intrinsic
Value
Outstanding
at December 31, 2005
400,000
- $ -
Granted
-
Forfeited
-
Exercised
-
Outstanding
at December 31, 2006 400,000
$
-
Following
is a summary of the status of warrants outstanding at December 31,
2006:
Outstanding
Warrants_________ Exercisable Warrants_
Weighted
Weighted
Remaining
Average Average
Exercise
Contractual
Exercise Exercise
Price
Number Life Price Number
Price
$
0.50 -
$2.00 400,000 3.25 years
$ 1.25
75,000
$1.25
The
fair
value was calculated using the Black-Scholes option pricing model assuming
no
dividends, a risk-free interest rate of 6.5%, an expected life of 5 years
and
expected volatility of 100%.
NOTE
11 - Commitment and Contingencies
Lease
agreements.
The
Company is obligated under various ground leases (Katella Center and
5030
Campus). Future ground lease payments will be adjusted by a percentage
of the
fair market value of the land.
Future
annual minimum lease payments and principal payments under existing agreements
are as follows:
[Missing
Graphic Reference]
The
lease
expenses were $79,290 and $222,657 for the year ended December 31, 2006
and
2005, respectively.
On
November 1, 2005, the Company relocated its offices to 5030 Campus Drive,
Newport Beach, California. 5030 Campus is owned by the Company’s subsidiary,
Diversified Commercial Brokers. Nationwide Commercial Brokers, a former
subsidiary of the Company owned by Robert Leonard a major shareholder
of the
Company, assumed the Company’s former offices at 4940 Campus Drive and indemnify
and hold the Company harmless from any and all claims, demands, causes
of
action, losses, costs (including without limitation reasonable court
costs and
attorneys’ fees), liabilities or damages of any kind or nature whatsoever that
the Company may sustain by reason of Nationwide Commercial Brokers’ breach or
non-fulfillment (whether by action or inaction), at any time. Nationwide
has
breached the agreement.
Officer
employment agreements.
During
2003, the Company executed employment agreements with its officers that
extend
through 2006. On May 11, 2005 and effective April 1, 2005, the officers
have
rescinded their employment agreements and forgiven the entire amount
of their
accrued salaries and their respective grant of options under the Company’s 2003
Employee Stock Incentive Plan. The Company entered into new employment
agreements with the officers. Shares and stock options issued under the
previous
agreements will be rescinded. The employment agreements will provide
for a
reduced issuance of common stock and options vesting over the term of
the
agreement. Since then three officers have agreed to resign, and the Company
has
decided to set aside $177,000 in contingent liabilities as potential
payout and
settlement to these officers. The Company is now in a dispute with these
former
officers (See Note 13 - Litigation).
Unpaid
taxes.
The
Company has not paid approximately $19,909 in property taxes and penalties
on
5030 Campus Drive. These amounts are currently delinquent. At March 31,
2007,
the Company had $1,606 in unpaid payroll tax liabilities.
NOTE
12 - Litigation
On
January 13, 2006, Alliance Title Company, Inc. (“Alliance”) filed a complaint in
the matter of Alliance Title Company, Inc. v. Secured Diversified Investment,
Ltd. (case no. 06CC02129) in the Superior Court of California, County
of Orange.
The complaint alleges that Alliance, our escrow agent, was entrusted
with
$267,000 pursuant to escrow instructions, and that a mutual written agreement
among the parties to the escrow was required to properly disperse the
funds.
Alliance further alleges that no instructions were provided to disperse
the
funds, but instead, competing claims for the funds were made by Secured
Diversified Investment, Ltd., Clifford L. Strand, William S. Biddle,
Gernot
Trolf, Nationwide Commercial Brokers, Inc., and Prime Time Auctions,
Inc.
Alliance has deposited the funds with the court and has asked for a declaration
of rights regarding the funds. Alliance has requested that its reasonable
costs
and attorney’s fees be paid from the deposited funds.
This
matter was dismissed by Alliance Title Company in open court in February
2007.
The
Company received $33,803 as its share out of the funds and recognized
as gain on
equity investment as of December 31, 2006.
On
January 20, 2006, Clifford L. Strand, William S. Biddle, Gernot Trolf,
our
former management, and Nationwide Commercial Brokers, Inc., our former
subsidiary (collectively, “Plaintiffs”), filed a complaint in the matter of
Clifford L. Strand v. Secured Diversified Investment, Ltd. (case no.
06CC02350)
in the Superior Court of California, County of Orange. The complaint
contains
causes of action for fraud and misrepresentation, negligent misrepresentation,
breach of contract, breach of the covenant of good faith and fair dealing,
conversion, common counts, money had and received, and declaratory relief.
These
allegations arise out of the hold over of funds at issue in Alliance
Title
Company, Inc. v. Secured Diversified Investment, Ltd. (case no. 06CC02129),
described above. To date, however, the matters have not been consolidated.
The
Company has set aside $177,000 in contingent liabilities as potential
payout and
settlement to these officers. As of December 31, 2006 the Company paid
$45,000
to William S. Biddle and $42,000 to Gernot Trolf.
This
matter has been settled as of April 5, 2007 (See note 20 for
details)
On
March
10, 2006, some of our shareholders, including Clifford L. Strand, Robert
J.
Leonard, William S. Biddle, and Gernot Trolf (collectively, “Plaintiffs”) filed
a complaint in the matter of William S. Biddle v. Secured Diversified
Investment, Ltd. (case no. 06CC03959) in the Superior Court of California,
County of Orange. Plaintiff seek declaratory relief as to whether we
are a
foreign corporation under California Corporation Code Section 2115(a)
and
whether Plaintiff’s alleged demand for our shareholder list and for an
inspection of the accounting books and records and minutes of shareholders
,
board of directors and committees of such board is governed under California
Corporation Code Sections 1600 and 1601. The Company is contesting this
case
vigorously and is proceeding with discovery. At this time, the Company
cannot
make any evaluation of the outcome of this litigation.
Note
13 - Sale of a Subsidiary
During
2006 the Company established a new wholly owned subsidiary, Secured Lending,
LLC, to engage in mortgage banking activities in the state of Arizona.
The new
subsidiary was incorporated on June 15th,
2006
and it began funding loans in July. However, Secured Lending was not
able to
sustain its mortgage banking activities and these relationships were
mutually
terminated. The Company discontinued its mortgage banking activity at
December
31, 2006. The Company recognized a loss of $153,672 as a result of discontinued
operations and recorded net assets held for sale of $23,544.
Note
14 - Subsequent Events
On
February 17, 2006, the $67,000 note, secured by 5030 Campus Drive, payable
to
the Sutterfield Family Trust (Wayne Sutterfield) matured. The note is
in
default.
On
April
29, 2007, the Company’s subsidiary Diversified Commercial Brokers, LLC, opened
escrow to sell the office building located at 5030 Campus Drive, Newport
Beach,
California. The sales price is $1,300,000.