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
March 31, 2003 0-30653
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SECURED DIVERSIFIED INVESTMENT, LTD.
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(Name of small business issuer in its chapter)
Nevada 87-0375228
-------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
5030 Campus Drive, Newport Beach California 92660
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (949) 851-1069
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Securities registered pursuant to section 12(b) of the Exchange Act: None
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. (1) Yes [X ] No [ ]
State the number of shares outstanding of each of the registrants classes
of common equity, as of the latest practicable date:
As of June 15, 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
(Unaudited)
March 31,
ASSETS 2003
-----------
Current Assets
--------------
Cash $ 3,186
-----------
Total Current Assets 3,186
Fixed Assets
------------
Equipment, net of $163 of accumulated depreciation 5,688
Real Estate, net of $8,871 accumulated depreciation 3,475,766
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Total Fixed Assets 3,481,454
Investment in Subsidiaries 431,675
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Total Assets $ 3,916,315
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
-------------------
Accounts Payable $ 91,591
Interest Payable 9,310
Payroll Liabilities 20,200
Property Taxes Payable 13,891
Security Deposits 29,655
-----------
Total Current Liabilities 164,647
Long Term Liabilities
---------------------
Notes Payable, related parties 263,958
Mortgages Payable 2,480,320
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Total Long - Term Liabilities 2,744,278
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Total Liabilities $ 2,908,925
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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, 1,552,480 issued & outstanding 10,000
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 4,260,911
Accumulated Deficit (3,484,834)
-----------
Total Equity $ 840,866
Total Liabilities & Stockholders' Equity $ 3,916,315
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SECURED DIVERSIFIED INVESTMENT, LTD
(Formerly Book Corporation of America)
Consolidated Statement of Operations
(Unaudited)
Three months ended March 31
2003 2002
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REVENUES
Rental Income $ 36,586 $ -
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Total Revenues $ 36,586 $ -
Operating and Administrative Costs $ 286,354 $ 13,312
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Operating Income (Loss) $ (249,768) $ (13,312)
Interest Expense $ (13,365) $ -
Other Income (Loss) $ (45,000) $ -
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Net Income (Loss) $ (308,132) $ (13,312)
=========== ===========
Basic and diluted income per common share
Net income (loss) per share $ (0.13) $ (0.01)
Basic and diluted weight average shares 2,349,540 2,349,540
SECURED DIVERSIFIED INVESTMENT, LTD
(Formerly Book Corporation of America
Consolidated Statement of Operations
(Unaudited)
Three months ended March 31
2003 2002
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Cash flows from operating activities:
Net Loss $ (308,132) $ (13,312)
Adjustment to reconcile net loss to net cash used by
operating activities:
Depreciation 9,034 -
Loss on sale of note receivable 45,000 -
Increase (decrease) in liabilities
Current Liabilities 143,300 (47,877)
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Net cash used by operating activities (110,798) (61,189)
Cash flow from investing activities:
Purchase equipment and tenant improvements (42,775) -
Investment in subsidiary (81,675) -
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Net cash used by investing activities (124,450) -
Cash flows from financing activities:
Proceeds from capital contributions - 61,189
Proceeds on notes payable - related party 292,295 -
Payments on notes payable - related party (59,919) -
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Net cash provided by financing activities 232,376 61,189
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Net increase (decrease) in cash (2,872) -
Cash, beginning period 6,058 -
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Cash, end of period $ 3,186 $ -
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Supplemental disclosures:
Cash paid for interest $ 4,055 $ -
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 $ 268,325 $ -
Conversion of note to stock $ 500,000 $ -
SECURED DIVERSIFIED INVESTMENT, LTD
(Formerly Book Corporation of America
Notes to Financial Statements
March 31, 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.
NOTE 3 - Significant Accounting Policies
----------------------------------------
A. The accompanying consolidated financial statements include the
accounts of the Company and majority-owned subsidiaries (Decatur
Center). 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.
I. The fair value of notes payable to related parties cannot be
determined due to the related party nature of the obligations.
The carrying amounts of other assets and liabilities, qualifying
as financial instruments are a reasonable estimate of their fair
value.
J. Deferred income taxes are provided on a liability method for
temporary differences between the financial reporting and tax
basis of assets and liabilities that will result in taxable or
deductible amounts in the future. Deferred tax assets and
liabilities are adjusted for the effect of changes in tax laws
and rates on the date of enactment. Deferred tax asset are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all
of the deferred tax assets will be realized. Cumulative losses
incurred since inception create a net operating loss that can
offset future tax liabilities; however, because of the
uncertainty of the Company's ability to utilize the benefit, an
allowance was created to offset the entire benefit (deferred tax
asset).
NOTE 4 Related Party Transactions
-----------------------------------
During the quarter ended March 31, 2003, the Company acquired certain real
estate holdings from a related party, Seashore Diversified Investment
Company ("Seashore"), a Maryland corporation; certain directors and
shareholders of the Company are also shareholders and directors of
Seashore. The Company exchanged 2,461,607 shares of restricted common
stock and 4,997,807 shares of Series A Convertible Preferred Stock for two
shopping centers (T-Rex Mall and Katella Center), and 50% interests in two
limited liability companies that each own a shopping center (Decatur Square
and Spencer Springs).
T-Rex Mall. The Company acquired a 100% ownership interest of an 89,642
square foot enclosed shopping center, T-Rex Mall, located on a 6.66-acre
parcel in Dickinson, North Dakota. Wayne Sutterfield, a director of the
Company, was an owner of T-Rex Mall and a director of Seashore. As such,
the property was transferred to the Company at Sutterfield's basis in the
property. In connection with the acquisition, the Company issued 1,453,985
shares of restricted common stock and 2,952,029 shares of Series A
preferred stock and assumed obligations of $1,982,000 associated with the
property. Of these debts, $500,000 was due to a family trust that is
managed by Wayne Sutterfield, and $67,000 is due to Mr. Sutterfield for
funds he advanced in connection with Mall operations and tenant
improvements. Effective March 31, 2003, the $500,000 obligation was
converted to 1,000,000 shares of Series B preferred stock; while the stock
certificates have not yet been issued, the $500,000 is included as Series B
preferred stock in the accompanying financial statements. The Company has
agreed to secure the $67,000 obligation with the property. The Company
paid Clifford L. Strand, President and CEO of the Company $25,000 in
commissions related to the transaction. Concurrently with the acquisition,
the Company sold the land under the mall for $1,645,000 to an unrelated 3rd
party and executed a 50-year ground lease; proceeds from the land sale were
used to pay off the $1,415,000 mortgage on the property and to pay closing
costs.
Katella Center. The Company acquired 100% ownership interest in a 9,500
square foot strip mall on Katella Avenue in Orange, California. In
connection with the acquisition, the Company issued 178,284 shares of
restricted common stock and 361,970 shares of Series A preferred stock and
assumed obligations of $354,826 associated with the property. The mortgage
was refinanced subsequent to March 31, 2003; see Subsequent Events
discussions. No related party commissions were incurred on this
transaction.
Spencer Springs. The Company acquired a 50% interest in a limited
liability company, Spencer Springs, LLC, which owns a 24,336 square foot
strip mall in Las Vegas, Nevada. The Company issued 404,393 shares of
restricted common stock and 821,041 shares of Series A preferred stock and
assumed a mortgage of $2,125,500. A significant owner of the limited
liability company is a family trust managed by an officer and director of
the Company, William S. Biddle. The Company has the right to acquire the
remaining 50% interest in the property for $1,000,000 at which time,
commissions totaling $100,000 will be paid to Biddle, Clifford L. Strand,
Anthony Giangrande and C. Marshall Mast. At March 31, 2003, minority
interest in the property totaled approximately $167,000.
Decatur Square. The Company acquired a 50% interest in a limited liability
company Decatur Center, LLC, which owns a 16,515 square foot strip mall in
Las Vegas, Nevada. The Company issued 424,945 shares of restricted common
stock and 862,767 shares of Series A preferred stock and assumed debt of
approximately $1.1 million. Significant owners of the limited liability
company are a shareholder of the Company, Anthony Giangrande and an officer
and director of the Company, William S. Biddle. The Company had the right
to acquire the remaining 50% interest in the property for $480,000 at which
time total commission of $100,000 was to be paid to Biddle, Clifford L.
Strand, Anthony Giangrande, and C. Marshall Mast. The Company acquired the
remaining 50% ownership and sold the entire asset subsequent to March 31,
2003; see Subsequent Events discussions.
Campus Drive Office Building. The Company acquired a 19% interest in a
limited liability company, Diversified Commercial Brokers, LLC for $81,675.
The sole asset of the limited liability company is a 8,685 square foot
office building located in Newport Beach, California. The remaining
interest is held by the following directors and officers of the Company:
Wayne Sutterfield, William S. Biddle, and Clifford L. Strand, 70%, 5.5%,
and 5.5% respectively. The Company leases office space from this entity
for $1,000 per month (see Commitments and Contingency disclosure).
NOTE 5 Related Party Long-Term Debt
-------------------------------------
The following is a summary of the Company's debt to related parties at
March 31, 2003:
Convertible note payable, bearing interest at 9%,
Interest only, maturing September 30, 2003 $ 144,458
Notes payable, due on demand 52,500
Note payable, bearing interest at 8%,
Interest only, maturing February 17, 2006 67,000
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Total related party debt $ 263,958
============
Less current portion of related party debt (196,958)
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$ 67,000
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Following are maturities of related party long-term debt for each of the
next five years:
YEAR AMOUNT
2003 $ 196,958
2004 -
2005 -
2006 $ 67,000
Thereafter -
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Total $ 263,958
==========
NOTE 6 Long Term Debt Payable
Following is a summary of the Company's debt at March 31, 2003:
2003
------------
Mortgage payable, bearing interest at 12%,
Maturing August 15th, 2003, interest only,
Secured by first trust deed; see Subsequent Events $ 350,000
Mortgage Payable, bearing interest at 10%,
Matured, interest only, secured by second
Trust deed; see Subsequent Events 4,826
Mortgage payable, bearing interest at 9.719%,
Maturing April 1st, 2008, amortized monthly
Payment $20,245.74, secured by first trust deed 2,125,494
Total Long-Term Debt $ 2,480,320
Less current portion of long-term debt 380,046
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$ 2,100,274
Following are maturities of long-term debt for each of the next five years:
YEAR AMOUNT
2003 $ 380,046
2004 37,065
2005 41,496
2006 45,775
2007 50,495
2008 1,925,443
Total $2,480,320
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. All preferred stock is convertible to common stock at no
cost, at the option of the holder.
NOTE 8 Financial Statements of Acquired Properties and Interests
Spencer Springs, LLC. On February 10, 2003, the Company purchased a 50%
interest in Spencer Springs. The following is unaudited condensed
financial statements of Spencer Springs, LLC, just prior to the
acquisition.
Spencer Springs, LLC
Condensed Balance Sheet
March 31, 2003
ASSETS
Cash $ 23
Property, net of accumulated depreciation 2,540,721
Total Assets $ 2,540,744
LIABILITIES AND MEMBER'S CAPITAL
Short term notes payable members $ 10,000
Short term notes payable other 42,500
Security deposits 29,655
Mortgage notes 2,125,493
Total Liabilities $ 2,207,648
Members' capital $ 333,096
Total Liabilities and Member Capital $ 2,540,744
Spencer Springs , LLC
Condensed Statement of Operations
Quarter ended March 31, 2003
REVENUES
rental income $ 97,322
EXPENSES
Operating and administrative costs 46,714
Depreciation expense 12,947
Interest expense $ 51,758
Net Income (Loss) $ (14,097)
Decatur Center, LLC. On March 31, 2003, the company purchased a 50%
interest in Decatur Center, LCC. The following represents unaudited
condensed financial statements of Decatur prior to the acquisition.
Decatur Center, LLC
Condensed Balance Sheet
March 31, 2003
ASSETS
Cash $ 1,497
Property, net of accumulated depreciation
1,483,906
Total Assets $ 1,485,403
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities - security deposits $ 12,605
Long term notes payable 32,562
Mortgage note 1,083,846
Total Liabilities $ 1,129,013
Members Capital 356,390
Total Liabilities and Member Capital $ 1,485,403
Decatur Center, LLC
Condensed Statement of Operations
Quarter ended March 31, 2003
REVENUES
rental income $ 32,163
EXPENSES
Operating Expenses 3,632
Depreciation 3,216
Interest Expense 10,965
Net Income (Loss) $ 14,800
Katella Center. The Company acquired a 100% ownership interest in a strip
mall. The following represents the unaudited condensed statement of
operations; balance sheet information is not yet available.
Katella Center
Condensed Statement of Operations
Quarter ended March 31, 2003
REVENUES
rental income $ 52,358
EXPENSES
Operating and administrative costs 27,335
Depreciation 9,892
Interest Expense 25,100
Net Income (Loss) $ (9,969)
T-Rex Mall. The Company acquired 100% ownership interest in a shopping
mall. Financial statements are not yet available.
Note 9 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%.
Hotel acquisition. The Company entered into an agreement to acquire a 49%
interest in a Nevada limited partnership that owns the Hospitality Inn, a
149-room hotel with restaurant and banquet facilities in Dickinson, North
Dakota. The Company is currently performing due diligence on the
acquisition.
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.
Office lease. The Company's office lease is with an entity in which the
Company owns 19% interest. Payments due under the lease are $1,000 per
month for 36 months; payments total $10,000 in 2003, $12,000 in 2004 and
2005 and $2,000 in 2006.
NOTE 10 - Subsequent Events
Katella Center. Subsequent to March 31, 2003, the $350,000 first trust
deed on Katella Center was refinanced. There is now a first trust deed in
the amount of $370,000, bearing an interest rate of 11.50%. This debt
obligation is due and payable on May 15, 2005. The current monthly
payment, which covers only interest, is $3,545.83. The Company also
refinanced the $4,826 second trust deed for $25,000, at a rate of 14.00%,
from a shareholder Seashore. The monthly payment is $291.66 per month.
This payment covers only the interest on the loan. This note is due and
payable on May 15, 2004. Also subsequent to March 31, 2003, the Company
retained an unrelated third party property management group to manage this
property. The management fee is equal to 6% of the monthly rents
collected.
Decatur Square. On April 17, 2003, the Company purchased the remaining 50%
interest in the Decatur Center, LLC for 1,552,480 share of Series B
Convertible preferred stock. One of the limited liability company members
is a family trust managed by William S. Biddle, an officer and director of
the Company. The trust received 317,000 shares of Series B preferred
stock. William S. Biddle and Clifford L. Strand, Officers and Directors of
the Company, received commissions in the amount of $30,000 and $25,000,
respectively, paid in Series B preferred stock totaling 60,000 and 50,000
shares, respectively. Additionally, Anthony Giangrande received 60,000
shares of Series B preferred stock and C. Marshall Mast received 30,000
shares of Series B preferred stock. The property was subsequently sold to
a third party for $1,825,000. The buyer assumed debt of $825,000 and the
Company extended a loan of $425,000 to the buyer. Anthony Giangrande, a
shareholder, received $100,000 in connection with the sale.
Private Placement. Subsequent to March 31, 2003, the Company is offering
approximately 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.
Item 2. Management Discussion and Analysis of Results of Operations
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 March 31, 2003,
together with the results of operations and cash flows for the periods
ended March 31, 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
Through March 31, 2003, the Company, had purchased interests in two
operating real estate properties, limited liability membership interests in
three operating properties. Through March 31, 2003, the Company had sold no
properties. Subsequent to March 31, 2003, the Company sold one operating
property and rescinded the acquisition of its general partnership interest
in the limited partnership.
The following table presents a summary of the Company's wholly-owned
properties and properties in which it owned limited liability company
membership and limited partner interests as of March 31, 2003:
Property Company Date Major
Name Location Ownership % (Sq Ft) Acquired Tenant(1)
-------------- --------------- ----------- ------- ---------- -------------
Operating Properties
Katella Center Orange, CA 100.00% 9,500 03/31/03(2) Judith by Strings
T-Rex Mall Dickinson, ND 100.00 89,642 03/31/03(2) Newby's
Amerident
Spencer Springs Las Vegas, NV 50.00(3) 24,336 03/31/03 Chris's Place
-------
123,478
Investments in
Unconsolidated
Real Estate
Decatur Square Las Vegas, NV 50.00(3)(4) 16,500 03/31/03 Hamika & Alsafar
Campus Drive
Office Building Newport
Beach, CA 19.00 8,685 01/24/03 Borders
(1) Tenant occupies largest space of property.
(2) The Company assumed operations of the property in February 2003.
(3) Limited liability company membership interest.
(4) Property sold subsequent to quarter end.
Acquisitions
On March 31, 2003, the Company consummated an Asset Purchase Agreement
with Seashore Diversified Investment Company ("Seashore"), a Maryland
corporation, whereby the Company acquired certain real estate holdings from
Seashore in exchange for restricted shares of its Preferred and Common
Stock. Seashore is a real estate investment trust and is in the business
of acquiring, selling and managing real estate holdings. Specifically, the
Company acquired two properties and interests in two limited liability
companies in exchange for 2,461,606 shares of restricted common stock of
the Company and 4,997,807 shares of Series A Convertible Preferred Stock of
the Company. The Company's Series A Convertible Preferred shares have the
same voting rights as the Common Stock. The primary assets of the limited
liability companies and the limited partnership are real estate holdings.
Despite best efforts of both parties, the Company has been unable to
consummate a fifth acquisition of the hospitality inn. Due dilegence of
the acquisition is on going.
Following is a brief description of the interests the Company acquired
from Seashore.
Katella Center, Orange, California
----------------------------------
The Company acquired a 100% ownership interest in a strip mall that
consists of six retail rental units totaling approximately 9,500 square
feet located on Katella Avenue in Orange, California. Currently, five of
the six units are rented. The Company is currently trying to rent the
final unit. The rental units are of varying sizes. Judith by Strings, a
clothing manufacturer, currently occupies 45% of the strip mall. The
rental rates for the individual units range from $1.04 to $1.41 per square
foot.
Subsequent to March 31, 2003, the debt obligations on this property
were refinanced. There is now a first trust deed in the amount of
$370,000, bearing an annual interest rate of 11.50%. This debt obligation
is due and payable on May 15, 2005. The current monthly payment, which
covers only interest, is $3,545.83. The Company also refinanced the second
trust deed in the amount of $25,000, at an annual rate of 14.00%. The
monthly payment is $291.66 per month. This payment covers only the
interest on the loan. This note is due and payable on May 15, 2004.
All delinquent property taxes have been paid in full and are thus
current. Subsequent to March 31, 2003, the Company retained an unrelated
third party property management group to manage this property. The
management fee is equal to 6% of the monthly rents collected.
T-Rex Mall, Dickinson, North Dakota
-----------------------------------
The Company acquired a 100% ownership interest in an 89,642 square
foot enclosed shopping mall in Dickinson, North Dakota. The Mall is
approximately 70% occupied at this time. Newby's, a hardware store is the
Mall's largest tenant, currently occupying 16% of the Mall. The average
rent per square foot received is approximately $.52 and a pass-though
expense of $.13.
The mall is subject to a $67,000 debt obligation, which is owed to
Wayne Sutterfield, a director of the Company. The 6.6 acres of ground is
subject to a 50-year ground lease that expires in 2053, and is held by an
unrelated third party. The Company has an option to buy back the ground
lease.
The Company is currently seeking to retain the services of a
management company in Dickinson, North Dakota to manage this property.
Strip Mall, Spencer Springs, Las Vegas, Nevada
----------------------------------------------
The Company acquired a 50% interest in a limited liability company
that owns a strip mall in the Spencer Springs area of Las Vegas, Nevada.
Spencer Springs currently has 21 retail rental units totaling 24,336 square
feet. Currently 86% of the strip mall is occupied. Amerident Dental
Corporation and Chris's Place are currently the Mall's largest tenant,
each occupying 4,800 square feet or 20% of the strip mall. The
average rental per square foot is approximately $1.32.
The outstanding indebtedness on Spencer Springs on March 31, 2003 was
approximately $2,125,500. This note on the property matures in April 2008,
with a balloon payment of approximately $1,900,000 due on maturity. The
annual interest rate on the note is 9.7%.
Pursuant to an agreement with the other members of the limited
liability company that own Spencer Springs, Seashore is required to
purchase the other 50% interest in the limited liability company by August
2003 for $1,000,000. The purchase price may be paid in cash or securities
at the option of the other members, one of whom is an officer and director
of the Company.
Spencer Springs is managed by an unrelated third party property
management group. The Company pays a monthly management fee of
approximately $1,740.
Decatur Square, Las Vegas, Nevada
---------------------------------
The Company also acquired a 50% interest in a limited liability
company that owns a strip mall known as Decatur Square. On April 17, 2003,
the Company acquired the remaining 50% interest in the limited liability
company from its other members in exchange for 1,552,480 restricted shares
of the Company's Series B Preferred Stock and $123,760. The shares issued
were valued at $.50 per share. 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 properties. Under the
terms of the contract between Seashore and the limited liability company,
upon acquisition of the remaining 50% interest in 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 for commissions from the former limited members company
members. The shares were valued at $.50 per share.
On April 17, 2003, the Company sold Decatur Square to an unrelated
third party for $1,825,000.
Hospitality Inn, Dickinson, North Dakota
----------------------------------------
As discussed above, pursuant to the terms and conditions of the Asset
Purchase Agreement between the Company and Seashore, the Company intended to
acquired a general partnership interest in a limited partnership, whose
primary asset was a Hospitality Inn in Dickinson, North Dakota.
The Company is continuing to review the acquisition of the Hospitality
Inn and may elect to proceed with the acquisition in the future, subject to
the fulfillment of certain conditions precedent, including that the
property be deliverable to the Company free and clear of all liens and
encumbrances, that the property enter into a sale/leaseback of the ground
underlying the property on terms and conditions acceptable to the Company
and that the purchase and sale of the property be unanimously approved by
all partners of the limited partnership. Certain members of the Company's
board of directors own limited partnership interests in the partnership
that owns the Hospitality Inn and would be required to abstain from voting
on this transaction. The acquisition will be consummated only upon
approval of a majority of the disinterested members of the Company's board
of directors.
The Company also acquired an interest in the following property.
Campus Drive Office Building
----------------------------
On January 24, 2003, the Company acquired a 19% membership interest in
Diversified Commercial Brokers, LLC. The primary asset of Diversified is
an 8,685 square foot office building where the Company maintains its
corporate headquarters. The office building is located on Campus Drive in
Newport Beach, California. The Company paid $81,675 for this interest.
The remaining 82% interest in Diversified is owned by three directors of
the Company.
The office building contains twelve office suites, eleven of which are
currently being rented out. It is anticipated that the final office suite
will be rented in the near future. The average rent per square foot
exceeds $2.00.
In November 2002, the office building was appraised at $1,150,000.
The building is currently subject to a first trust deed in the amount of
$740,000 and a second trust deed in the amount of $110,000. The land on
which the office building sits is leased. The lease expires on June 30,
2034, with two ten-year options that could extend the lease to June 30,
2054.
The property is managed by an unrelated third party for a $750 a month
management fee.
Dispositions
------------
The Company sold the land under T-Rex Plaza Mall for $1,645,000 to an
unrelated third party and executed a fifty year ground lease. The proceeds
from the land sale were used to pay a $1,415,000 mortgage on the property
and pay closing costs.
As disclosed above, 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. The Company realized a gain on the sale of Decatur Square of
approximately $167,000. Following deduction of costs associated with the
sale, such as commissions, escrow fees and closing costs the Company realized
net proceeds of $231,186.
Results of Operations
---------------------
The comparability of the financial information discussed below is
limited by acquisitions and dispositions completed during the quarter ended
March 31, 2003. As discussed above, during the quarter ended March 31,
2003, the Company acquired a 100% ownership interest in a 9,500 square foot
strip mall in Orange California and a 90,000 square foot enclosed mall in
Dickinson, North Dakota. The Company also purchased 50% membership
interest in two LLCs, one of which owns a 100% interest in a 24,336 square
foot, strip mall in Las Vegas, Nevada, the other owned a 100% interest in a
16,500 square foot strip mall also located in Las Vegas, Nevada.
Three Months Ended March 31, 2003 and March 31, 2002
----------------------------------------------------
As previously noted, comparability of the financial information
discussed below is materially impacted by the property acquisitions during
the quarter ended March 31, 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 $36,586 for
the quarter ended March 31, 2003 due to the Company acquiring properties
and beginning active operations.
Operating and Administrative Expenses.
--------------------------------------
Operating and administrative expenses consist primarily of third party
legal and accounting fees and costs associated with the acquisition and
ownership of real properties. These expenses increased $273,042 to
$286,354 for the quarter ended March 31, 2003 compared to $13,312 for the
quarter ended March 31, 2002. Management anticipates operating and
administrative expenses to continue to increase throughout the remainder of
fiscal 2003 as the Company seeks to acquire additional real estate holdings
and expand its operations.
Depreciation.
-------------
Depreciation for the quarter ended March 31, 2003 was $9,034. The
depreciation was attributable primarily to the Katella Center, T-Rex Mall
and to a new phone system.
Interest Expense.
-----------------
Interest expense consists of mortgage interest paid on the Company's
properties and the amortization of deferred financing fees. Interest
expense of $13,365 for the quarter ended March 31, 2003 was attributable to
the Katella Center and T-Rex Mall properties.
Net Loss.
---------
Net Loss was $308,132 or $0.13 per share basic and diluted for the
quarter ended March 31, 2003 compared to a net loss of $13,312 or $0.01 per
share basic and diluted for the quarter ended March 31, 2002.
Liquidity and Capital Resources
-------------------------------
Capital Resources
-----------------
At March 31, 2003, the Company had $3,186 of cash and cash equivalents
as compared to $6,058 of cash and cash equivalents at December 31, 2002 to
meet its immediate short-term liquidity requirements. As stated in Note 1
Going Concern, the Company does not have significant cash or other material
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.
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 operating expenses.
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 $110,799 for the three
months ended March 31, 2003 compared to net cash used by operating
activities of $61,189 for the three months ended March 31, 2002. This
increase in cash used by operating activities relative to the prior period
was primarily due to the Company's increased administrative and operating
costs as it began to acquire 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 completed during and subsequent to the quarter ended
March 31, 2003, as well as the acquisition of additional properties and
investments in unconsolidated real estate during the remainder of the year
as the Company strategically build 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 Used in Investing Activities
---------------------------------------
Net cash used in investing activities amounted to $124,450 for the
three months ended March 31, 2003 compared to $0 for the three months ended
March 31, 2002. The Company invested $81,675 in investments in
unconsolidated real estate operating properties during the quarter ended
March 31, 2003, (including $37,250 for tenant improvements at the T-Rex
Mall and $5,850 for a new phone system. In comparison, the Company spent
$0 in real estate investments during the quarter ended March 31, 2002
At March 31, 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 $232,376 for the
three months ended March 31, 2003 compared to $61,189 for the three months
ended March 31, 2002. The primary reason for the increase was purchases of
real property. Cash provided by financing activities for the quarter ended
March 31, 2003 increased by $171,187 as a result of borrowings related to
the acquisition of real estate holdings compared to $0 borrowed under notes
payable for the quarter ended March 31, 2002. The major offsetting use of
cash in connection with financing activities included $59,919 in principal
payments on notes payable, primarily related to the repayment of unsecured
debt to a related party.
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.
(b) Changes in Internal Controls and Procedures.
--------------------------------------------
Subsequent to the Evaluation Date, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls, nor were any corrective actions
required with regard to significant deficiencies and material weaknesses.
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 March 31, 2003.
Recent Sales of Unregistered Securities
---------------------------------------
On March 31, 2003, the Company entered into an Asset Purchase
Agreement whereby the Company acquired two real properties, interests in
two limited liability companies and an interest in a limited partnership
from Seashore Diversified Investment Company in exchange for 2,461,606
restricted common shares and 4,997,807 restricted Series A Convertible
Preferred shares. The shares were issued without registration
under the Securities Act of 1933 in reliance on an exemption from
registration provided by 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. No funds were received by the Company for these shares.
Pursuant to the Asset Purchase Agreement between the Company and
Seashore, the Company acquired Seashore's 50% membership interest in
Decatur Center, LLC. On April 18, 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.
In connection with the transaction two Company officers and directors
received shares. 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 March 31, 2003, the Company issued 1,000,000 restricted shares of
Series B Convertible Preferred stock to Wayne Sutterfield, a director of
the Company, in satisfaction of a $500,000 debt obligation owed Mr.
Sutterfield in connection with the T-Rex Mall. 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. No funds were received by the Company
for these shares.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 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 April 28, 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
retained 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: June 20, 2003 By: /S/ Clifford L. Strand
--------------------------------------------
Clifford L. Strand, Chief Executive Officer
Date: June 20, 2003 By: /S/ Munjit Johal
--------------------------------------------
Munjit Johal, Chief Financial Officer
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Clifford L. Strand, certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of Secured
Diversified Investment, Ltd., (the "Company");
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this quarterly
report;
(4) The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company is made known to
us by others within those entities, particularly during the period
in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The Company's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons fulfilling the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data and
have identified for the Company's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the Company's
internal controls; and
(6) The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 20, 2003 By:/S/ Clifford L. Strand
--------------------------------------------
Clifford L. Strand, Chief Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Munjit Johal, certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of Secured
Diversified Investments, Ltd., (the "Company");
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this quarterly
report;
(4) The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company is made known to
us by others within those entities, particularly during the period
in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The Company's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons fulfilling the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data and
have identified for the Company's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the Company's
internal controls; and
(6) The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 20, 2003 By: /S/ Munjit Johal
---------------------------------------
Munjit Johal, Chief Financial Officer