UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
|
[X] |
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the
fiscal year ended: December
31, 2004
|
[
] |
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the
transition period from _________ to
________
Commission
File Number 0-30653
Secured
Diversified Investment, Ltd.
(Name of
small business issuer in its charter)
Nevada |
80-0068489 |
|
State
or other jurisdiction of incorporation or organization |
(I.R.S.
Employer I.D. No.) |
4940 Campus Drive, Newport Beach,
California 92660
(Address of principal executive
offices)
(Zip Code)
Issuer's
telephone number, including area code (949)
851-1069
Securities
registered pursuant to section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act:
$.001
par value, common voting shares
(Title of
class)
Check
whether the Issuer (1) filed all reports required to be filed by section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [
]
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The
issuer’s revenue for the fiscal year ended December 31, 2004 was
$939,663.
The
aggregate market value of the issuer’s voting common stock held as of April 8,
2005, by non-affiliates of the issuer was approximately $2,223,839 based upon
the average bid and asked price of the common stock on the Over The Counter
Bulletin Board on such date.
As of
March 31, 2005, the issuer had 15,209,456 shares of its $.001 par value common
stock outstanding.
Transitional
Small Business Disclosure Format. Yes [
] No
[X]
Documents
incorporated by reference: None
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PART
I
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PART
II
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Item
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Item
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Item
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PART
III
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Item
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Item
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Forward-Looking
Statements
Historical
results and trends are not necessarily indicative of future operations.
Managements’ statements contained in this report that are not historical facts
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results may differ materially from
those included in the forward-looking statements. The Company intends such
forward-looking statements to be covered by the safe-harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of complying with such
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of management, are
generally identifiable by use of the words “believe,” “expect,” “intend,”
“anticipate,” “estimate,” “project,” “prospects,” or similar expressions. The
Company’s ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
affect on the operations and future prospects of the Company include, but are
not limited to: changes in general economic conditions and in the real estate
market specifically (including those in the local economy of the regions where
the Company’s properties are located), legislative/regulatory changes,
availability of capital, interest rates, competition and supply and demand for
operating properties in the Company’s current and proposed market areas. These
risks and uncertainties should be considered in evaluating forward-looking
statements, and undue reliance should not be placed on any such statements.
Further information concerning the Company and its business, including
additional factors that could materially affect the Company’s financial results,
is included herein and in the Company’s other filings with the Securities and
Exchange Commission. The Company does not intend to update any of the
forward-looking statements after the date this report is filed to conform these
statements to actual results, unless required by law.
Item 1. Description of Business
The
Company currently owns and manages a portfolio of four improved real estate
properties (three retail shopping centers and one single-story office building)
and one unimproved parcel of land. The five properties are located in Las Vegas,
Nevada; Dickinson, North Dakota (2); and Orange County, California (2).
The
Company intends to acquire additional commercial properties of various types in
diverse geographic areas (generally in the Western United States). The Company
believes that by acquiring interests in properties that are diversified as to
both types of property and geographical location the portfolio will be more
stable and less susceptible to devaluation resulting from regional economic
downturns and market shifts in particular locations or commercial
segment.
Property
Identification and Marketing
We
identify properties primarily through the efforts of our officers and employees.
Our officers have extensive contacts with real estate brokers, agents and owners
as a result of their many years of experience acquiring, managing and selling
property. William S. Biddle and Clifford L. Strand are members of The Society of
Exchange Counselors, an organization of knowledgeable and experienced real
estate professionals in the United States. Admission to the Society of Exchange
Counselors is difficult, requiring a recommendation from an existing member and
review and approval by the other members, often after years of observation and
evaluation. The members convene regularly to evaluate and advance real estate
transactions. Members of the Society have significant purchasing power, and
properties sold or exchanged through the Society include office buildings,
shopping centers, warehouses and industrial properties, hotels, apartments,
airports and others. Our officers believe that their membership in The Society
of Exchange Counselors provides the Company with significant leads to generate
potential acquisitions to meet the Company’s growth objectives.
Acquisitions
and Dispositions
Acquisitions
Assets of
Seashore Diversified Investment Company. The
Company acquired The T-Rex Plaza Shopping Center, Dickinson, North Dakota and
The Katella Center, Orange, California from a related party. The Company entered
into an Asset Purchase Agreement with Seashore Diversified Investment Company
(“Seashore”), a Maryland corporation, whereby the Company agreed to acquire
certain real estate holdings from Seashore in exchange for restricted shares of
its Series A Preferred and Common Stock. Seashore was a real estate investment
trust and was in the business of acquiring, selling and managing real estate
holdings. Seashore was a related party because certain officers, directors and
shareholders of the Company were also officers, directors or shareholders of
Seashore at the time the acquisition was consummated.
In March
2003, 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 Plaza Mall and Katella Center), and 50% interests in two limited
liability companies that each own a shopping center (Decatur Square, LLC and
Spencer Springs, LLC). The Company subsequently sold the Decatur Square shopping
center and Spencer Springs, LLC.
The Asset
Purchase Agreement originally included the acquisition of Seashore’s general
partnership interest in Seacrest Partners, L.P., which owned the Hospitality Inn
of Dickinson, North Dakota (“Seacrest”). However, Seashore was in default of
numerous provisions of the partnership agreement for Seacrest. The Company and
Seashore agreed to rescind the acquisition of the general partnership interest
in Seacrest. See “Hospitality
Inn”
below.
Decatur Square. On
March 31, 2003, the Company initially acquired a 50% interest in a limited
liability company, Decatur Center, LLC, which owned 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
include family trusts that are managed by William S. Biddle and Anthony
Giangrande, who are, respectively, an officer and director of the Company and a
shareholder. On April 17, 2003, the Company purchased the remaining 50% interest
in the Decatur Center, LLC for 1,552,480 shares of Series B 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 shares of Series B Preferred
Stock totaling 60,000 and 50,000 shares, respectively, in connection with the
transaction. Additionally, Anthony Giangrande and C. Marshall Mast received
60,000 and 30,000 shares, respectively, of Series B Preferred Stock as fees. The
Company subsequently sold Decatur Square (see “Dispositions”
below).
Hospitality Inn. In August
2003, the Company consummated an agreement with Seacrest to acquire the
Hospitality Inn, on leased land, in Dickinson, North Dakota for Company's
restricted shares of common stock and Series A Preferred Stock in the amount of
1,466,250 shares and 2,443,750 shares, respectively. Additionally, the Company
also acquired Dickinson Management Company ("DMC"), a North Dakota corporation
wholly owned by Seacrest, which operated the inn, owns the liquor license and is
the registered entity for various licenses and permits necessary to operate the
inn. In acquiring DMC, the Company assumed certain liabilities.
Certain
of the Company's board of directors and shareholders, Clifford L. Strand, Sumiye
Onodera-Leonard, Wayne Sutterfield, and Robert J. Leonard, own limited
partnership interests in Seacrest.
Effective
as of October 31, 2004, the Company sold the Hospitality Inn (see “Dispositions”
below).for approximately $300,000 in cash and an unimproved lot with an agreed
price between the parties of $500,000.
Campus
Drive Office Building. The
Company acquired an 18.6% interest in a limited liability company, Diversified
Commercial Brokers, LLC for $86,425. The sole asset of the limited liability
company is an 8,685 square foot office building located in Newport Beach,
California, of which the Company leases 1,193 sq. ft. for its corporate offices
for $2,000 per month. On December 30, 2003, the Company acquired an additional
32.4% and, as a result of the acquisition and the additional capital
contributions, the Company owns 53.8% of Diversified Commercial Brokers, LLC.
The 32.4% interest was owned by Wayne Sutterfield (21.1%), a Director of the
Company, and William S. Biddle and Clifford L. Strand (collectively, 11.3%),
also officers and Directors of the Company. The purchase price paid to Wayne
Sutterfield was $92,630, of which $21,000 was paid by the assignment of a
certificate of deposit and a three year promissory note in the principal amount
of $71,630. The note bears interest at an annual rate
of 8%,
with interest payable monthly and all principal due upon maturity. The note is
secured by a security interest in the Company’s membership interests in
Diversified Commercial Brokers, LLC. Wayne Sutterfield continues to own 46.2% of
Diversified Commercial Brokers, LLC. William S. Biddle and Clifford L. Strand
each received 50,000 shares of Series B Preferred Stock for their collective
$50,000 investment.
Spencer
Springs Remaining Interest. On
November 19, 2003, the Company acquired the remaining 50% of Spencer Springs,
LLC for $196,000 in cash and 3,100,000 restricted shares of Series B Preferred
Stock. The former members of Spencer Springs include William S. Biddle Family
Trust, managed by William S. Biddle who is an officer and director of the
Company, and Anthony Giangrande Family Trust, Jack Dezen, Kellogg Business
Center, Gill Biddle, Sally Podell, all of whom are shareholders of the Company.
Clifford L. Strand, William S. Biddle, and Anthony Giangrande received 124,000,
128,000, and 128,000 restricted shares of Series B Preferred Stock as fees in
connection with the transaction pursuant to a pre-existing agreement with
Spencer Springs, LLC.
The
Cannery West Shopping Center. On May
14, 2004, the Company and Denver Fund I, Ltd. entered into a Lease Agreement
(the “Lease Agreement”) with Iomega Investments, Ltd. to lease The Cannery
retail shopping center located on Flamingo Road in Las Vegas, Nevada. The
Cannery is located on approximately 3.4 acres and has approximately 37,000
square feet of rentable space. Construction was completed between 1988 and 1992.
On the date of acquisition, The Cannery was approximately 62% occupied and the
average annual rent per square foot of existing tenants is $17.40. The property
was appraised for $8,200,000 as of May 2004 by ROI Appraisal/Britton Group,
Henderson, Nevada.
Pursuant
to the Lease Agreement, the Company and Denver Fund I are entitled to receive
all lease payments due from tenants and will pay Iomega Investments a monthly
lease payment of $36,066, which amount equals the monthly payment due on the
first mortgage, including impounds for taxes, insurance and reserves. The
Company and Denver Fund I will also pay all other expenses related to the
property, including management fees and costs of maintenance. The Company has
retained ARS Management (dba Shaw Associates Realty Services) as the property
manager.
The Lease
Agreement also provided that the Company and Denver Fund I would acquire the
property for $5,950,000, including assumption of the first mortgage in the
principal amount of $4,100,000. The Company and Denver Fund I acquired grant
deeds for their respective percentage ownership of the property, but have not
yet recorded such grant deeds. The purchase price was paid partially by the
Company and partially by Denver Fund I. The Company delivered 250,000 shares of
the Company’s Series C Preferred Stock (valued between the parties at $3.00 per
share) and a two-year promissory note in the principal amount of approximately
$155,000, bearing interest at an annual rate of 7%. The principal amount of the
note is payable $50,000 at the six month anniversary, $50,000 at the 12 month
anniversary and the remainder at maturity. Denver Fund I paid $675,000 in cash
from a 1031 exchange and assigned a note receivable in the principal amount of
$225,000 secured by real property in Reno, Nevada.
The
Company then entered into a Tenant in Common Agreement with Denver Fund I
pursuant to which the Company has a 51% interest in the property and Denver Fund
I has a 49% interest. Denver Fund I will be entitled to a preferred return of 8%
on its total investment of $900,000, of which the Company has agreed to
guarantee 6%. In the event that cash flow from the property is less than $54,000
per year, the Company will pay Denver Fund I the difference. The parties also
agreed to grant mutual rights of first refusal.
Dispositions
Decatur
Square. The
Decatur Square Shopping Center was sold in April 2003 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 secured by a restaurant property. The Company had a 59%
interest in the proceeds of the note and Anthony Giangrande had a 41% interest
that was subsequently purchased by William S. Biddle. Anthony Giangrande, a
shareholder, received a commission of $100,000 in connection with the sale. The
Company subsequently sold the note for $400,000 to William S. Biddle in the
first quarter of 2004.
Hospitality
Inn. As of
October 31, 2004, the Company sold The Hospitality Inn of Dickinson, North
Dakota, acquired in 2003, to Grand Dakota Management, LLC (“Buyer”), an
unaffiliated person. The aggregate purchase price was approximately $300,000 in
cash and an unimproved lot adjacent to the hotel. The Buyer acquired the lot
from Robert and Sumiye Leonard, significant shareholders of the Company, then
delivered the lot to the Company as consideration for the purchase of the hotel
assets. Buyer acquired the lot from the Leonards for $500,000. The Company has
granted to Buyer a three-year option to repurchase the lot for $500,000. The
Company incurred a net loss of $488,754 on disposal of discontinued operations.
Spencer
Springs, LLC. On
October 29, 2004, the Company completed the sale of the Spencer Springs Retail
Center in Las Vegas, Nevada, to Roger Anderson, an unaffiliated person. The
sales price was approximately $3,875,000, consisting of assumption of an
existing loan in the principal amount of approximately $2,250,000, a note from
the buyer in the amount of $950,000 and $675,000 in cash. The buyer’s promissory
note is secured by a second trust deed on Spencer Springs and bears interest at
an annual rate of 7%. The note is due and payable in full in on October 28,
2007.
In
December 2004, Spencer Springs LLC sold membership interests representing
approximately 37% of the membership interests for $200,000 to William S. Biddle
(an officer and director of the Company) and Robert J. Leonard (a shareholder of
the Company).
On March
1, 2005, the Company sold its remaining membership interest in Spencer Springs,
LLC to William S. Biddle, a director and officer of the Company. The sole asset
of Spencer Springs, LLC was the promissory note of Roger Anderson received in
the sale of the
Spencer
Springs Shopping Center (see “Acquisitions and Dispositions” below). The
purchase price for the membership interests was $300,000 plus a promissory note
for $277,000 due October 28, 2007, bearing interest at 3% per
annum.
Recent
Developments
Asset
Dispositions. As of
October 31, 2004, the Company sold The Hospitality Inn of Dickinson, North
Dakota, acquired in 2003, to Grand Dakota Management, LLC (“Buyer”), an
unaffiliated person. The aggregate purchase price was approximately $300,000 in
cash and an unimproved lot adjacent to the hotel. The Buyer acquired the lot
from Robert and Sumiye Leonard, significant shareholders of the Company, then
delivered the lot to the Company as consideration for the purchase of the hotel
assets. Buyer acquired the lot from the Leonards for $500,000. The Company has
granted to Buyer a three-year option to repurchase the lot for $500,000. The
Company incurred a net loss of $488,754 on disposal of discontinued operations.
Competition
The
acquisition and leasing
of real estate is highly competitive. We compete for tenants with lessors and
developers of similar properties located in our respective markets primarily on
the basis of location, rent charged, services provided, and the design and
condition of our buildings. We also experience competition when attempting to
acquire real estate, including competition from domestic and foreign financial
institutions, other real estate companies, life insurance companies, pension
trusts, trust funds, partnerships and individual investors. See “Risk
Factors-- We may be
unable to compete successfully against existing and future competitors, who
could harm our margins and our business.”
Environmental
Matters
We are subject to various federal, state and local laws and regulations relating
to environmental matters. Under these laws, we are exposed to liability
primarily as an owner or operator of real property and, as such, we may be
responsible for the cleanup or other remediation of contaminated property.
Contamination for which we may be liable could include historic contamination,
spills of hazardous materials in the course of our tenants’ regular business
operations and spills or releases of hydraulic or other toxic oils. An owner or
operator can be liable for contamination or hazardous or toxic substances in
some circumstances whether or not the owner or operator knew of, or was
responsible for, the presence of such contamination or hazardous or toxic
substances. In addition, the presence of contamination or hazardous or toxic
substances on property, or the failure to properly clean up or remediate such
contamination or hazardous or toxic substances when present, may materially and
adversely affect our ability to sell or lease such contaminated property or to
borrow using such property as collateral.
Asbestos-containing material, or ACM, may be present in some of our properties.
Environmental laws govern the presence, maintenance and removal of asbestos. We
believe that
we manage
ACM in accordance with applicable laws. We plan to continue managing ACM as
appropriate and in accordance with applicable laws and believe that the cost to
do so will not be material.
Compliance with existing environmental laws has
not had a material adverse effect on our financial condition and results of
operations, and we do not believe it will have such an impact in the future. In
addition, we have not incurred, and do not expect to incur any material costs or
liabilities due to environmental contamination at properties we currently own or
have owned in the past. However, we cannot predict the impact of new or changed
laws or regulations on our current properties or on properties that we may
acquire in the future. We have no current plans for substantial capital
expenditures with respect to compliance with environmental laws.
Risk
Factors
Our
success depends on the viability of our business model, which is unproven and
may be unfeasible.
Our revenue and income potential are unproven, and our business model is still
emerging. We launched our new business strategy in September 2002, and we have
not earned any significant revenue or generated any profit from our operations.
Our business model is based on a variety of assumptions relating to our ability
to acquire real property for capital stock, the revenue generated by and
appreciation on such real property, our operating costs and future increases in
the trading price of our common stock. These assumptions may not reflect the
business and market conditions that we actually face. As a result, our operating
results could differ materially from those projected under our business model,
and our business model may prove to be unprofitable.
We
have a history of losses, and we expect our losses to increase and continue for
the foreseeable future.
We have
not generated any significant revenue from operations and have incurred
operating losses until present. Through December 31, 2004, we had incurred
accumulated losses of $8,788,687. We have not achieved profitability. We
recently began our new business strategy in the last few months. We may not
obtain enough real property to generate sufficient revenue and achieve
profitability. We believe that we will continue to incur operating and net
losses for the foreseeable future and that the rate at which we will incur
losses will increase significantly from current levels. We intend to increase
our operating expenses substantially as we:
| · |
increase
our real estate acquisition activities; |
| · |
continue
to build our management team and corporate infrastructure;
and |
| · |
increase
our general and administrative functions to support our growing
operations. |
Because
we will spend these amounts before we receive any significant revenue from these
efforts, our losses will be greater than the losses we would incur if we
developed our business more slowly. In addition, we may find that these efforts
are more expensive than we currently anticipate which would further increase our
losses. The timing of these expenses may contribute to fluctuations in our
quarterly operating results. Also, if our revenue growth is slower than we
anticipate or our operating expenses exceed our expectations, our losses will
increase significantly. We are unable to provide any assurance or guarantee that
the Company will become profitable or generate positive cash flow at any time in
the future. Even if we were to achieve profitability, we may be unable to
sustain or increase profitability on a quarterly or annual basis.
Our
limited operating history creates substantial uncertainty about future
results.
We have
only a limited operating history on which to base expectations regarding our
future results and performance. In order to succeed, we must do most, if not
all, of the following:
| · |
identify
real properties that can generate substantial revenue and
appreciation; |
| · |
diversify
our real estate acquisitions over a broad geographic region and among
different asset classes; |
| · |
raise
additional capital to sustain increased costs of
operation; |
| · |
attract,
integrate, retain and motivate qualified management and technical
personnel; |
| · |
successfully
execute our business strategies; |
| · |
respond
appropriately and timely to competitive developments;
|
| · |
increase
awareness of and promote trading in our common stock;
and |
| · |
develop,
enhance, promote and carefully manage our corporate
identity. |
Our
business will suffer if we are unable to accomplish these and other important
business objectives. We are uncertain as to when, or whether, we will fully
implement our contemplated business plan and strategy or become profitable.
We
have sold assets to generate operating capital and may be forced to curtail or
discontinue operations if we are unable to obtain, on commercially acceptable
terms, additional equity capital that we may require from time to time in the
future to finance our operations and growth.
We do not
currently have sufficient cash reserves or revenue from operations to sustain
operations. Our operating capital has been provided in part from the proceeds of
asset sales. To the extent we sell assets and use the proceeds to pay operating
costs, we deplete the equity and capital of the Company, reducing future
earnings. Therefore, we are depending upon the net proceeds from the sale of
capital stock to finance our operating costs and expenses. If we are
unsuccessful at raising operating capital through the sale of sufficient stock,
we may be forced to sell off assets or to discontinue or curtail operations.
We will
also need additional capital to continue and expand our operations and to
implement our business plan and strategy. If our operations expand faster or at
a higher rate than currently anticipated, we may require additional capital
sooner than we expect. We also may need to raise additional funds sooner to fund
more rapid expansion or the development or enhancement of our existing services,
products, businesses or technologies. We are unable to provide any assurance or
guarantee that additional capital will be available when needed by the Company,
or that such capital will be available under terms acceptable to the Company or
on a timely basis. If additional funds are raised through the issuance of
equity, convertible debt or similar securities of the Company, the percentage of
ownership of the Company by the Company’s shareholders will be reduced, the
Company’s shareholders may experience additional dilution, and such securities
may have senior rights or preferences. We are unable to provide any assurance
that additional financing will be available on terms favorable to us or at all.
If adequate funds are not available or are not available on acceptable terms,
our ability to fund our expansion, take advantage of potential opportunities,
develop or enhance services or products or otherwise respond to competitive
pressures would be limited significantly. This limitation could harm
substantially our business, results of operations and financial condition.
We
may be unable to compete successfully against existing and future competitors,
which could harm our margins and our business.
The
market for real estate is highly competitive. We expect the competitive
environment to continue in the future. We face competition from a large number
of existing real estate companies, real estate investment trusts (“REITs”), real
estate investment firms, pension funds, insurance companies and other investors
in real estate. We believe that the relatively strong financial performance of
real estate will continue to attract new competitors and encourage existing
competitors to increase their involvement. We expect competition to increase due
to the lack of significant barriers to entry for real estate.
We can
provide no assurance that we will be able to compete successfully against
current or potential competitors. Many of our current and potential competitors
have longer operating histories, better name recognition, greater management
capabilities and significantly greater financial, technical and marketing
resources than we do. Many of these competitors may have well-established
relationships with real estate brokers and other key partners and can devote
substantially more resources to real estate analysis and acquisition. Many have
securities that are traded on a nationally recognized exchange and which may be
much more acceptable to prospective sellers. As a result, they may be able to
secure real estate on more favorable terms.
Larger
competitors may enjoy significant competitive advantages that result from, among
other things, a lower cost of capital and enhanced operating efficiencies. In
addition, the number of entities and the amount of funds competing for suitable
investment properties may increase. This will result in increased demand for
these assets and therefore increased prices paid for them. If we pay higher
prices for properties, our profitability is reduced and you will experience a
lower return on your investment.
Increased
competition may result in lost acquisition opportunities, increased acquisition
costs and increased purchase prices for real property, any of which could harm
our business and adversely affect our operating results and financial condition.
We may not be able to compete successfully and respond to competitive pressures.
Our inability to compete effectively with current or future competitors could
harm our business and have a material adverse effect on our results of
operations and financial condition.
Our
inability to retain our executive officers and other key personnel may harm our
business and impede the implementation of our business
strategy.
Our
future success depends to a significant degree on the skills, experience and
efforts of our key management personnel. Our real estate acquisitions have been
identified primarily by Clifford L. Strand and William S. Biddle. The loss of
the services of any of these individuals could harm our business and operations.
In addition, we have not obtained key person life insurance on any of our key
employees. If any of our executive officers or key employees left or was
seriously injured and unable to work and we were unable to find a qualified
replacement and/or to obtain adequate compensation for such loss, we may be
unable to manage our business, which could harm our operating results and
financial condition.
We
may not be able to acquire sufficient real property to fulfill our business
plan.
We have
not been able to obtain permanent financing for future acquisitions on
acceptable terms. As a result, we must depend upon arranging financing for each
property we acquire. We have, were possible, attempted to use our capital stock
to acquire real property. However, because there is no substantial trading
market for our capital stock, our stock is unattractive to prospective sellers
of real property. As a result, we may not be able to acquire sufficient real
property and therefore could not increase our assets or revenue. As a result, it
is unlikely that the value or trading prices of our stock, if any, would not
increase. If the bid price for our common stock does not increase to at least
the deemed purchase price for the Series B Preferred Stock or Series C Preferred
Stock issued in the acquisitions, then the number of shares of common stock
issued on conversion of the preferred stock would increase significantly,
resulting in substantial dilution to existing shareholders.
Our
future real estate acquisitions are unknown and investors will not have any
opportunity to evaluate them.
Investors
will not know in advance what real properties and other assets we may acquire in
the future, and must rely on our board of directors and officers to select them.
We have acquired seven improved real properties (or interests in improved real
property) and have subsequently sold three of these. See “Item 2-Description of
Property” for a description of our properties. However, no information is
available as to the identification, location, operating histories, lease terms
or other relevant economic and financial data of any real properties, securities
or other assets we may purchase in the future. As a result, you must rely on us
to locate and acquire suitable investment properties and assets.
In
addition, our board of directors may approve future equity offerings or obtain
financing, the proceeds of which may be invested in additional properties;
therefore, you will not have an opportunity to evaluate all of the properties
that will be in our portfolio. This section contains information about the types
of properties in which we plan to invest and our criteria for evaluating
properties, nonetheless, you will be unable to evaluate the economic merit of
any particular properties prior to their acquisition.
Our
acquisition activities could result in losses.
We intend
to acquire existing properties to the extent that the suitable acquisitions can
be made on advantageous terms. Acquisitions of commercial properties entail
risks, such as the risks that we may not be in a position or have the
opportunity in the future to make suitable property acquisitions on advantageous
terms and that our investments will fail to perform as expected. Many of the
properties that we acquire may require additional investment and upgrades and
are subject to the risk that estimates of the cost of improvements to bring such
properties up to standards established for the intended market position may
prove inaccurate.
The
economic performance and value of our real property depend on many factors
beyond our control.
The
economic performance and value of our real estate holdings can be affected by
many factors, including the following:
| · |
declines
in the rent due to loss of tenants or reduced
traffic; |
| · |
reduced
demand in the surrounding geographic regions due to general economic
conditions; |
| · |
construction
of competitive properties nearby and competition from other available
space; |
| · |
increased
operating costs and expenses necessary to improve attractiveness of the
property or to complete required
maintenance; |
| · |
availability
of long term financing at reasonable rates. |
We
may have mortgages on our properties which subject us to risk of
loss.
Many of
the properties we acquire will be subject to existing mortgages or loans. We
will be responsible for repayment of such debts after the acquisition. Therefore
we are generally subject to the risks associated with debt financing. These
risks include:
| · |
the
risk that our cash flow will not satisfy required payments of principal
and interest; |
| · |
the
risk that we cannot refinance existing indebtedness on our properties as
necessary or that the terms of the refinancing will be less favorable to
us than the terms of existing debt; and |
| · |
the
risk that necessary capital expenditures for purposes such as re-letting
space cannot be financed on favorable
terms. |
If a
property is mortgaged to secure payment of indebtedness and we cannot pay the
mortgage payments, we may have to surrender the property to the lender with a
consequent loss of any prospective income and equity value from such property.
Mortgage debt increases the risk of loss since defaults on indebtedness secured
by properties may result in foreclosure actions initiated by lenders and our
loss of the property securing the loan which is in default. For tax purposes, a
foreclosure of any of our properties would be treated as a sale of the property
for a purchase price equal to the outstanding balance of the debt secured by the
mortgage. If the outstanding balance of the debt secured by the mortgage exceeds
our tax basis in the property, we would recognize taxable income on foreclosure,
but would not receive any cash proceeds.
We may in
the future give full or partial guarantees to lenders of mortgage debt to the
entities that own our properties. When we give a guaranty on behalf of an entity
that owns one of our properties, we will be responsible to the lender for
satisfaction of the debt if it is not paid by such entity. If any mortgages
contain cross-collateralization or cross-default provisions, there is a risk
that more than one real property may be affected by a default.
Adverse
economic conditions could reduce our revenue and result in
losses.
Adverse
economic conditions in our primary geographic region could reduce our income and
result in losses. We intend to acquire properties in geographically diverse
regions. However, our properties will be located mainly in states west of the
Mississippi River in the United States, and have been initially focused in the
states of California, Nevada and North Dakota. The economic performance of our
properties could be affected by changes in local economic conditions. Our
performance is therefore linked to economic conditions in the region of the
Western United States. Therefore, to the extent that there are adverse economic
conditions in this region that impact the rents, such conditions could result in
a reduction of our revenue and could result in losses.
We
depend on rental income from real property.
Approximately
half all of our income is derived from rental income from real property. As a
result, our income and funds for distribution would be negatively affected if a
significant number of our tenants were unable to meet their obligations to us or
if we were unable to lease a significant amount of space in our properties on
economically favorable lease terms. We cannot be sure that any tenant whose
lease expires will renew that lease or that we will be able to re-lease space on
economically advantageous terms.
Increased
operating expenses could result in losses.
Our
properties and any properties we buy in the future are and will be subject to
operating risks common to real estate in general, any or all of which may
negatively affect us. If any property is not fully occupied or if rents are
being paid in an amount that is insufficient to cover operating expenses, then
we could be required to expend funds for that property's operating expenses. The
properties will be subject to increases in tax rates, utility costs, operating
expenses, insurance costs, repairs and maintenance and administrative
expenses.
We
may rely on major tenants in certain properties.
We may
acquire properties that have only or a limited number of tenants. We could be
adversely affected if any such major tenant files for bankruptcy, becomes
insolvent or experiences a significant downturn in its business. In addition, we
could be adversely affected if any major tenant does not renew its leases as it
expires.
Property
ownership through partnerships and joint ventures could limit our control of
those investments.
If we
acquire interests in partnership or joint ventures that own real estate we may
be subject to risks not otherwise present for investments in real estate owned
solely by us, including the possibility that our partners or co-venturers might
become bankrupt, that our partners or co-venturers might at any time have
different interests or goals than we do, and that our partners or co-venturers
may take action contrary to our instructions, requests, policies or objectives.
Other risks of joint venture investments include impasse on decisions, such as a
sale, because neither our partner or co-venturers nor us would have full control
over the partnership or joint venture. There is no limitation under our
organizational documents as to the amount of funds that may be invested in
partnerships or joint ventures.
We
may be unable to sell a property if or when we decide to do
so.
The real
estate market is affected by many factors, such as general economic conditions,
availability of financing, interest rates and other factors, including supply
and demand, that are beyond our control. We cannot predict whether we will be
able to sell any property for the price
or on the
terms set by us, or whether any price or other terms offered by a prospective
purchaser would be acceptable to us. We cannot predict the length of time needed
to find a willing purchaser and to close the sale of a property.
We may be
required to expend funds to correct defects or to make improvements before a
property can be sold. We cannot assure you that we will have funds available to
correct such defects or to make such improvements.
In
acquiring a property, we may agree to restrictions that prohibit the sale of
that property for a period of time or impose other restrictions, such as a
limitation on the amount of debt that can be placed or repaid on that property.
These provisions would restrict our ability to sell a property.
Our
organizational documents do not limit incurrence of debt.
Our
organizational documents do not contain any limitation on the amount or
percentage of indebtedness we may incur. However, our credit agreements that
govern certain of our outstanding indebtedness do contain limits on our ability
to incur additional indebtedness.
Employees
As of
December 31, 2004, the Company had six full time employees and one full time
consultant. None of our employees are members of any union or subject to any
collective bargaining agreement. We consider our labor relations to be
satisfactory.
Research
and Development Activities
The
Company did not incur any expenditure for research and development activities
during the fiscal year ended December 31, 2003 or the fiscal year ended December
31, 2004.
Patents
and Trademarks
The
Company does not own, either legally or beneficially, any patent or
trademark.
Item 2.
Description of Property
The
Company purchases property that is diversified as to geographical location and
type of commercial application with the intend of holding the properties in its
portfolio for income generating purposes. Set forth below is a description of
the current real property interests owned by the Company.
Katella
Center, Orange, California
The
Company owns the Katella Center, a strip mall consisting of six retail rental
units of various sizes totaling approximately 9,500 square feet, located on
Katella Avenue in Orange, California. Currently, all of the units are rented.
One tenant, a clothing manufacturer, currently occupies 48% of the strip mall.
The rental rates for the individual units average $1.21 per square foot. As of
December 31, 2004, the Katella Center is currently generating monthly net cash
flow of approximately $2,071.
The
Katella Center is located on approximately 35,800 square feet of leased ground
owned by a non-affiliated third party. The lease has a 52-year term that expires
in March 2017. The ground lease payment is currently $3,000 per month.
Commencing June 1, 2007, the annual ground lease payment shall revert to 7% of
the fair market value of the land. There is a first trust deed in the amount of
$370,000, which is due and payable on June 15, 2005. The current monthly
payment, which covers only interest, is $3,545. The interest rate is 11.5% per
annum. There is also a second trust deed in the amount of $25,000 which matures
on July 1, 2005 and bears an annual interest rate of 15.0%. The current monthly
payment is $312.50 covering interest only.
The
property is managed by PSG Enterprises, an unrelated third party. PSG
Enterprises charges the Company $750 per month in management fees.
T-Rex
Plaza Shopping Mall, Dickinson, North Dakota
The
Company owns the T-Rex Mall Plaza in Dickinson, North Dakota an enclosed
shopping mall with 89,642 total square feet of which 71,141 is rentable. The
T-Rex Mall is approximately 65% occupied at this time.
During
2003, the 6.66 acres of ground on which the Mall is located was sold to a third
party for $1,645,000 with a leaseback of the ground from the buyer. During the
first year of the ground lease, the monthly lease payment was $13,708. The
current ground lease payment is $14,262. The ground lease payment will be
adjusted annually in step with the consumer price index, but such increases
shall not exceed 3% nor be less than 2% in any given year. The term of the
ground lease will be 50 years. Between the 24th month
and the 48th month of
the lease, the Company will have the option to repurchase the ground provided
the lease is still in effect and the lessor is not in default. The price to buy
back the ground will be $1,745,000. Following the 48th month,
the price to repurchase the ground lease will be $1,845,000 or ten times the
next year’s lease amount from the date of the exercise of the option, whichever
is greater. Clifford L. Strand, a Company officer and Director, was paid a
commission of $25,000 by Wayne Sutterfield in connection with the sale of the
6.66 acres underlying the Mall and subsequent lease back of that property.
The
$1,645,000 was used to pay the outstanding obligations on the Mall structure. In
connection with the acquisition of the Mall, the Company assumed obligations of
Seashore to pay $567,000 in currently secured and unsecured debts owed by
Seashore. Of these debts, Mr. Sutterfield accepted 1,000,000 shares of Series B
Preferred Stock as repayment of $500,000 of the debt. The Company has an
outstanding debt of $67,000 to Mr. Sutterfield, secured by a second trust deed
which accrues interest at the annual rate of 8.0% which matures on February 1,
2006. On April 21, 2004, the Company repaid $100,000 owed to William S. Biddle,
who acquired the first trust deed on the property from Anthony Giangrande, by
increasing Mr. Biddle’s equity interest in the note receivable from the sale of
the Decatur Square shopping center (see
Acquisitions and Dispositions - Decatur Square).
During
2003, the Company recognized an impairment loss of $448,000, representing the
entire basis of the property because the estimated future cash flows from
existing leases did not support the carrying value. The Company has determined
that the property requires between $250,000 and $350,000 of deferred maintenance
in the near future.
Currently,
the average rent per square foot received is approximately $.47.
During
2004, the Property was managed by Everett Real Estate, an unaffiliated party
owned by a minority shareholder of the Company. The Company paid Everett Real
Estate $1,300 per month in management fees. Effective April 1, 2005, the
Property is being managed by Beverly Kay for a monthly management fee of
$1,600.
As of
December 31, 2004, the Company owed $20,078 relating to property taxes, of which
$10,157 is delinquent and includes accrued penalties.
Campus
Drive Office Building, Newport Beach, California
The
Company owns 53.8% interest in a limited liability company, Diversified
Commercial Brokers, LLC. The primary asset of Diversified is an 8,685 square
office building located at 5030 Campus Drive in Newport Beach, California. The
building is subject to a first trust deed with a current principal balance of
$702,341 at December 31, 2004, with a monthly payment of $5,248 and a second
trust deed in the principal amount of $110,000 bearing an interest rate of 8%
with monthly interest payments of $771.00
The land
on which the office building sits is leased. The ground lease payment is
currently $3,608 per month will adjust again to equal 8% of the market value of
the leased premises on July 1, 2009. The lease expires on June 30, 2034, with
two ten-year options which could extend the lease to June 30, 2054.
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 is approximately
$1.63.
The
property is managed by PSG Enterprises, an unrelated third party. PSG
Enterprises charges Diversified $750 a month in management fees.
The
Cannery West Shopping Center, Las Vegas, Nevada
The
Company owns a 51% interest in the Cannery West Shopping Center (the “Cannery”)
located on Flamingo Road in Las Vegas. The Cannery is located on approximately
3.4 acres and has approximately 36,839 square feet. The property is subject to a
first trust deed with a current principal balance of $4,072,000 bearing an
interest rate of 7.52 % with monthly payments of $36,066 which include impounds
for property taxes, insurance, and building reserves.
The
property is currently 100% occupied. The average rent per square foot is
approximately $1.78.
The
property is managed by ARS Management, Inc., an unrelated third party. ARS
Management charges a minimum monthly management fee of $1,500 plus 4% of the
gross rents collected.
Unimproved
Lot, Dickinson, North Dakota
The
Company owns an unimproved lot situated next to the Hospitality Inn in
Dickinson, North Dakota. The lot equals 1.66 acres and is zoned commercial. The
Company does not currently have any plans to develop or improve the
land.
Lease
Expirations
The
Company’s leases are typically below current market rent for comparable
properties in our markets. The average monthly rent of the Katella Center is
$1.21 per square foot, and we estimate average market rates in Orange,
California to be $1.30 per square foot. The average monthly rent of the The
Cannery West property is $1.78 per square foot, and we estimate average monthly
rental rates in Las Vegas, Nevada to be $1.35 to $1.65 per square foot. The
average monthly rent at the Campus Office Building is $1.63 per square foot, and
we estimate that average monthly rent in Newport Beach, California to be $1.70.
The average monthly rent of the T-Rex Plaza Mall is $0.37 per square foot, and
we estimate average market rates in Dickinson, North Dakota to be $0.83 per
square foot. Each of the above estimates are based upon information received
from knowledgeable real estate professionals and are based upon rents within the
city or county boundaries of the relevant property.
The
leases at our properties expire at various dates. At the Campus Office Building
virtually all of the leases have past their original expiration date and
therefore have become
month-to-month
tenancies. At the T-Rex Mall, 11 leases representing approximately 14,100 square
feet of rentable space are past the expiration date and have been month to month
tenancies. Tenants subject to these leases may terminate at any time upon
thirty-day notice.
The
following table sets forth the expiration dates of the lease at our other
properties, as well as the square footage of the expiring leases, the monthly
lease payments per square foot and the percentage of square footage and revenue
that such lease constitutes of the total property.
|
Property |
2005
Expirations |
2006
Expirations |
2007
Expirations |
|
sq.
ft. |
%
of total sq. ft. |
Avg.
$
psf |
%
of rev. |
sq.
ft. |
%
of total sq. ft. |
Avg
$
psf |
%
of
rev. |
sq.
ft. |
%
of total sq. ft. |
Avg.
$ psf |
%
of
rev. |
|
Katella
Center |
0 |
0 |
0 |
0 |
2,490 |
27% |
$1.27 |
26% |
9,500 |
100 |
1.21 |
100% |
|
The
Cannery West |
0 |
0 |
0 |
0 |
1,074 |
3% |
$2.01 |
3% |
0 |
0 |
0 |
0 |
|
T-Rex
Mall |
8,290 |
12% |
$0.41 |
16% |
21,004 |
30% |
$34 |
34% |
0 |
0 |
0 |
0 |
Tenant
Concentration
Set forth
below is a list of our largest tenants (by rental revenue) and the percentage of
annual rent and square footage of all of the Company’s property such tenant
represents.
|
Top
Tenants by Rental Revenue |
|
Annual
Gross Rent from Tennant |
|
%
of Total Revenue |
|
%
of Total
sq.
ft. |
|
Chris’
Place |
|
$100,778 |
|
11.8% |
|
4.3% |
|
Amerident |
|
96,291 |
|
11.3% |
|
4.3% |
|
Borders
& Associates |
|
66,000 |
|
7.7% |
|
2.7% |
|
Strings |
|
60,000 |
|
7.0% |
|
3.9% |
|
Ace
Hardware |
|
40,224 |
|
4.7% |
|
12.8% |
|
Deltec |
|
38,448 |
|
4.5% |
|
1.9% |
|
Maples
Cleaners |
|
24,452 |
|
2.9% |
|
1.4% |
|
Bloomers |
|
19,980 |
|
2.3% |
|
1.1% |
|
Lexus
Hair |
|
19,692 |
|
2.3% |
|
1.1% |
|
Curves |
|
19,440 |
|
2.3% |
|
1.1% |
Mortgage
Debt and Other Loans
The
Company has substantial outstanding debts and mortgages. For a complete list,
see Note 6 and Note 7 to the Financial Statements attached to this Form
10-KSB.
Item 3.
Legal Proceedings.
Except as
set forth below, to the knowledge of management, there is no material litigation
pending or threatened against the Company or its management.
On April
6, 2005, the Company was served with a Complaint in the matter of Luis Leon v.
Secured Diversified Investment, Ltd. (case no. 05CC04651), filed in the Superior
Court of California, County of Orange. The Complaint alleges causes of action
for breach of contract, promissory estoppel, intentional misrepresentation,
violations of the California Labor Code. The Complaint seeks damages in an
amount to be determined at trial but including $116,358.80 of unpaid salary,
$16,666.666 for one month unpaid vacation time, $5,548.27 for unpaid insurance
benefits through August 15, 2005, reimbursable expenses of $288.00 plus a
statutory penalty of $16,666 pursuant to Labor Code Section 201. Mr. Leon also
seeks a grant of options to purchase $250,000 of Company Common Stock. The
Company intends to vigorously defend the action. Given the early stage of
litigation, the likelihood of an unfavorable outcome cannot reasonably be
estimated, however, the estimated amount of the potential loss is approximately
$140,000.00, plus the costs of defense.
Item 4. Submission of Matters to a Vote of Securities
Holders
No
matters have been submitted to the security holders for a vote, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 2004.
.
PART
II
Item 5. Market for Common Equity and Related Stockholder
Matters
Market
Price of and Dividends on the Company’s Common Equity and Other Shareholder
Matters.
The
Company’s shares are currently traded on the Over-the-Counter Bulletin Board
(“OTCBB”) under the symbol SCDI. As of March 31, 2005, the Company had
approximately 420 shareholders holding 15,019,456 common shares. Of the issued
and outstanding common stock, 499,540 are free trading, the balance are
“restricted securities” as that term is defined in Rule 144 promulgated by the
Securities and Exchange Commission. The Company has never declared a dividend on
its common shares.
The
published bid and ask quotations for the Company’s Common Stock from the first
available date through the first available price are included in the chart
below. These quotations represent prices between dealers and do not include
retail markup, markdown or commissions. In addition, these quotations do not
represent actual transactions.
|
Fiscal
Year Ending December 31, 2003 |
| |
Bid |
Ask |
|
Quarter
Ended |
High |
Low |
High |
Low |
|
March
31, 2003 |
0.08 |
0.08 |
None |
None |
|
June
30, 2003 |
0.08 |
0.03 |
None |
None |
|
September
30, 2003 |
0.18 |
0.03 |
None |
None |
|
December
31, 2003 |
0.05 |
0.05 |
None |
None |
| |
|
Fiscal
Year Ending December 31, 2004 |
| |
Bid |
Ask |
|
Quarter
Ended |
High |
Low |
High |
Low |
|
March
31, 2004 |
2.25 |
0.05 |
25.00 |
2.00 |
|
June
30, 2004 |
2.30 |
0.00 |
4.50 |
0.00 |
|
September
30, 2004 |
1.75 |
0.51 |
2.00 |
0.75 |
|
December
31, 2004 |
1.05 |
0.45 |
1.30 |
0.75 |
| |
|
|
|
|
|
Fiscal
Year Ending December 31, 2005 |
| |
Bid |
Ask |
|
March
31, 2005 |
0.45 |
0.30 |
0.75 |
0.50 |
The above
information was obtained from National
Association of Securities Dealers, OTCBB Filings Department, 9600 Blackwell
Road, 5th Floor, Rockville, MD 20850.
In
November, 2003, the shareholders of 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 authorize the grant of stock
options, restricted stock awards, stock in lieu of cash compensation and stock
purchase rights covering up to a total of 15,000,000 shares of common stock to
key employees, consultants, and members of the Company’s Board of Directors and
also provides for ongoing automatic grants of stock options to non-employee
directors. Other than the automatic annual grants to non-employee directors and
the grants and awards agreed to in the employment agreements with our executive
officers, the number and type of awards that will be granted under the 2003
Plans shall be determined by the Board in its sole discretion. The following
table sets for additional information regarding the 2003 Plans.
|
Plan
category |
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and rights
(a) |
Weighted-average
exercise
price of
outstanding
options,
warrants
and
rights
(b) |
Number
of securities
remaining
available for future
issuance
under equity
compensation
plans
(excluding
securities reflected
in
columns (a))
(c) |
|
Equity
compensation plans approved by
security
holders |
3,000,000 |
$0.15 |
12,000,000 |
|
Equity
compensation plans not approved by security holders |
-0- |
$0.00 |
-0- |
|
Total |
3,000,000 |
$0.15 |
12,000,000 |
The
Company’s common shares are subject to conversion of the Company’s outstanding
convertible preferred stock. The Company’s currently outstanding 7,078,350
shares of Series A Convertible Preferred Stock cannot be converted to common
shares of the Company for 36 months from the date they were issued, generally
November 2007. Thereafter, they may be converted at any time on a one share for
one share basis so long as the average closing bid price per share of the
Company’s common stock for the five trading days immediately preceding the date
of conversion is greater than or equal to the purchase price per share
originally paid for the Series A shares. If the average bid price per share is
lower than the purchase price paid per share, the holder of the Series A shares
shall be entitled to convert at a rate equal to the purchase
price
divided by the common stock price. The Company has 160,861 shares of Series B
Convertible Preferred shares that cannot be converted until 24 months from the
original issue date. The Series B shares are converted at the same rate as the
Series A shares. The Company has also created Series C Preferred Stock which
converts into one share of Common Stock so long as the fair market value of the
shares is at least $3.00 per share. If the price is less, then the Series C
Preferred Stock converts into a number of shares of Common Stock having a fair
market value of $3.00. As of April 15, 2004, 250,000 shares of Series C
Preferred Stock have been issued.
The
Company has no agreements to register shares on behalf of shareholders currently
holding unregistered securities. The Company has not paid, nor declared, any
dividends since its inception and does not intend to declare any such dividends
in the foreseeable future. The Company’s ability to pay dividend is subject to
limitations imposed by Nevada law.
Recent
Sales of Unregistered Securities
From
August through December 2003, we sold a total of 180,000 shares of Series B
preferred stock to the following six (6) accredited investors, including a
director, and received total proceeds of $90,000. The Company issued shares
pursuant to an exemption from registration by reason of Section 4(2) of the
Securities Act of 1933, as amended. We did not engage in any general
solicitation or advertising. Each purchaser represented his or her intention to
acquire the securities for investment only and not with a view toward
distribution. We requested our stock agent to affix appropriate legends to each
stock certificate issued and the transfer agent affixed the appropriate legends.
Each investor was given adequate access to sufficient information about us to
make in informed decision. None of the securities were sold through an
underwriter and as such no underwriting discounts or commissions were involved
to the same.
During the fiscal year ended, the Company issued a total of 1,774,765 shares of
common stock for to several consultants in exchange for services rendered.
Included in these issuances, were 50,000 shares of common each to Robert
Leonard, a significant shareholder, and William S. Biddle, a officer and
director of the company. The Company issued shares pursuant to an exemption from
registration by reason of Section 4(2) of the Securities Act of 1933, as
amended. We did not engage in any general solicitation or advertising. We
requested our stock agent to affix appropriate legends to each stock certificate
issued and the transfer agent affixed the appropriate legends.
In
March 2003, 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 Plaza Mall and Katella Center), and 50% interests in two limited
liability companies that each own a shopping center (Decatur Square, LLC and
Spencer Springs, LLC).
In April
2003, the Company purchased the remaining 50% interest in the Decatur Center,
LLC for 1,552,480 shares of Series B Preferred Stock valued at $776,240. The
Company
issued
shares pursuant to an exemption from registration by reason of Section 4(2) of
the Securities Act of 1933, as amended. We did not engage in any general
solicitation or advertising. We requested our stock agent to affix appropriate
legends to each stock certificate issued and the transfer agent affixed the
appropriate legends.
In July 2003, the Company issued 1,000,000 shares of Series B preferred stock a
current director of the company to extinguish debt in the amount of $500,000.
The Company issued shares pursuant to an exemption from registration by reason
of Section 4(2) of the Securities Act of 1933, as amended. We did not engage in
any general solicitation or advertising. We requested our stock agent to affix
appropriate legends to each stock certificate issued and the transfer agent
affixed the appropriate legends. This shareholder had adequate access to
sufficient information about us to make in informed decision.
In August
2003, the Company issued restricted shares of common stock and Series A
Preferred Stock in the amount of 1,466,250 shares and 2,443,750 shares,
respectively, to acquire the Hospitality Inn.
In November 2003, the Company issued 3,100,000 shares of Series B Preferred
Stock, valued at $1,550,000, to acquire the remaining 50% in Spencer Springs,
LLC.
In
February 2004, the Company issued 77,860 shares of Series B preferred stock to
acquire a first mortgage deed in the amount of $33,930.
In May
2004, the Company issued 250,000 shares of Series C preferred stock valued at
$367,500 for acquisition of an equity interest in a property in Las Vegas,
Nevada.
Item 6. Management Discussion and Analysis
Overview
The
following discussion should be read in conjunction with the consolidated
financial statements and notes thereto of the Company appearing elsewhere in
this report. Such financial statements have been prepared to reflect the
Company’s financial position as of December 31, 2004, together with the results
of operations and cash flows for the periods ended December 31, 2004 and 2003.
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:
| § |
a
significant negative industry or economic
trend; |
| § |
a
significant underperformance relative to historical or projected future
operation results; and |
| § |
a
significant change in the manner in which the asset is
used. |
Real
Estate Investments
The
following table presents a summary of the Company’s properties as of December
31, 2004:
|
Property
Name |
Location |
Company
Ownership % |
Rentable
square
feet |
Date
Acquired |
Major
Tenant (1) |
|
Katella
Center
|
Orange,
CA
|
100.0
|
9,500
|
03/31/03
|
Judith
by Strings
|
|
T-Rex
Mall
|
Dickinson,
ND
|
100.0
|
86,642
|
03/31/03
|
Newby’s
|
|
Campus
Drive Office Building
|
Newport
Beach, CA
|
53.8
|
8,685
|
02/09/03
12/30/03
(2) |
Borders
Architects
|
|
The
Cannery West
Vacant
Lot
|
Las
Vegas, NV
Dickinson,
ND
|
51.0
100 |
36,839
None
|
09/03/03
10/31/04
|
Oasis
Mini Mart
None
|
(1) Tenant
occupying largest space of property.
(2) Limited
liability company membership interest acquired on two separate dates - 18.6%
acquired on February 9, 2003 and 32.4% acquired on December 30, 2003, plus
additional interests acquired for cash contributions.
Results
of Operations
The
comparability of the financial information discussed below is limited by
acquisitions and dispositions completed during the fiscal year ended December
31, 2003. As discussed above, during the fiscal year ended December 31, 2003,
the Company acquired a 100% ownership interest in a 9,500 square foot strip mall
in Orange, California and an 89,642 square foot enclosed mall in Dickinson,
North Dakota. The Company purchased a 100% membership interest in two LLCs: one
(Spencer Springs) owns a 87% interest in a 24,336 square foot, strip mall
in Las Vegas, Nevada; and the other (Decatur Square) owned a 100% interest in a
16,500 square foot strip mall also located in Las Vegas, Nevada, which the
Company subsequently sold. The Company acquired the Hospitality Inn in
Dickinson, North Dakota for capital stock. The Company also acquired a 19%
membership interest in an LLC that owns an 8,685 square foot office building in
Newport Beach, California, and then acquired an additional 32.4% interest from
related parties and received an additional 2.8% interest for additional cash
contributions. The Company subsequently sold the Decatur Square shopping center.
Comparison
of years ended December 31, 2004 and 2003.
Income. Income
consists primarily of rental income from commercial properties pursuant to
tenant leases and brokerage fee income. As a result of these operations, the
Company reported income of $ $939,663 of which $47, 450 was attributable to
brokerage fees, - for the fiscal year ended December 31, 2004, compared with net
income of $651,150 for the same period ended December 31, 2003. During 2004 the
Company sold its hotel operations. The Company incurred an operational loss of
$183,080 from these discontinued operations, compared to a loss of $117,882 for
the fiscal year ended December 31, 2003.
General
and Administrative Expenses. Operating
and administrative expenses consist primarily of payroll expenses, legal and
accounting fees and costs associated with the acquisition and ownership of real
properties. These expenses increased $1,869,182 to $3,617,453 for the fiscal
year ended December 31, 2004, compared to $1,748,271 for the year ended December
31, 2003. The increase is attributable to the operation of acquired real estate.
The primary components of such expenses were payroll, real estate commissions,
land leases, and professional fees. Management anticipates that operating and
administrative expenses will continue to increase throughout the remainder of
2005 as the Company seeks to acquire additional real estate holdings and expand
its operations.
Depreciation.
Depreciation
for the fiscal year ended December 31, 2004 was $87,385 compared to $80,114 in
depreciation expense for the year ended December 31, 2003. The depreciation was
attributable primarily to the Katella Center, Spencer Springs, 5030 Campus, and
the Company’s telephone system.
Interest
and Other Expense. Interest
expense consists of mortgage interest paid on the Company’s properties. Interest
expense was $296,704 for the fiscal year ended December 31, 2004 compared to
$202,997 for the year ended December 31, 2003. Interest expense was attributable
primarily to the Katella Center, T-Rex Plaza Mall, 5030 Campus and Spencer
Springs properties. The Company also recognized impairment with respect to the
T-Rex property in the amount of $448,403.
The Company also reported gain on sale of assets of $1,388,826 attributable to
the sale of a shopping center in Las Vegas, Nevada held in the Company’s Spencer
Springs, LLC subsidiary.
Net Income. The net loss
from continuing operations was $2,218,294 or $(0.23) per share — basic and
diluted — for the fiscal year ended December 31, 2004 compared to a net
loss of $2,787,057 or $(0.55) per share — basic and diluted — for the
fiscal year ended December 31, 2003. The net loss from disposal of discontinued
operations was ($488,754), or (0.04) per share - basic and diluted - for the
fiscal year ended December 31, 2004. Discontinued operations accounted for a
loss of ($117,882) or ($0.02) - basic and diluted - for the fiscal year ended
December 31, 2003.
Liquidity
and Capital Resources
Capital
Resources
As stated
in financial statement Note 1 - Going Concern, the Company does not have
significant cash or other liquid assets, nor does it have an established source
of revenues sufficient to cover its operating costs and to allow it to continue
as a going concern. Moreover, the Company does not currently possess a financial
institution source of financing. The Company anticipates that it will be
dependent for a significant period of time on additional investment capital to
fund operating expenses, to meet debt service obligations, and to fund
additional property acquisitions before achieving profitability. Since its
inception, the Company has covered its capital requirement shortfall through
additional financing from its control shareholders. Because of the Company’s
current negative equity position, fund-raising from non-affiliated third parties
may be difficult resulting in continued reliance upon funding from its control
shareholders. These control shareholders, however, are under no obligations and
have made no commitments to continue to fund the Company.
At December 31, 2004, the Company had $35,433 of cash and cash equivalents as
compared to $125,544 of cash and cash equivalents at December 31, 2003 to
meet its immediate short-term liquidity requirements. This decrease in cash and
cash equivalents is attributable to increasing operating costs including land
lease payments, professional fees, and administrative costs.
Operating
cash flows are expected to increase as additional properties and investments in
real estate are added to the Company’s portfolio.
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 $1,514,872 for the fiscal year ended December
31, 2004 compared to net cash used by operating activities of $504,292 for the
fiscal year ended December 31, 2003. This increase in cash used by operating
activities relative to the prior period was primarily due to the Company’s
acquired real estate holdings and expenses relating to audit, legal and expanded
compliance with federal and state securities laws.
Management is currently considering other potential opportunities to acquire
real estate. The decision to acquire one or more properties or investments in
unconsolidated real estate will generally depend upon (i) receipt of a
satisfactory environmental survey and property appraisal, (ii) an absence
of any material adverse change relating to the property, its tenants, or local
economic conditions, and (iii) adequate financing. There is no assurance
that any of these conditions will be satisfied or, if satisfied, that the
Company will purchase any additional properties or make any further investments
in unconsolidated real estate.
Cash
Flows From in Investing Activities
Net cash
from in investing activities amounted to $3,044,652 for the fiscal year ended
December 31, 2004 compared to $126,182 for the fiscal year ended December 31,
2003, primarily from the sale of the Spencer Spring property.
At
December 31, 2004, 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. Currently, the Company estimates that it may undertake
deferred maintenance on the T-Rex shopping center in the amount of
$350,000.
Cash
Flows from Financing Activities
Cash used
by financing activities amounted to $(1,619,891) for the fiscal year ended
December 31, 2004 compared to $498,226 for the fiscal year ended December 31,
2003. The primary reason for the use of proceeds was due to repayments of notes
due on the sale of properties.
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 7. Financial
Statements
Index to
Consolidated Financial Statements:
Audited
Financial Statements:
F-1 Report of
Independent Registered Public Accounting Firm
F-2 Consolidated
Balance Sheet as of December 31, 2004
F-3 Consolidated
Statements of Operations - Years Ended December 31, 2004 and December
31, 2003
F-4 Consolidated
Statement of Stockholders’ Equity (Deficit)
F-5 Consolidated
Statements of Cash Flows for the Years Ended December 31, 2004 and December 31,
2003
F-6 Notes to
Consolidated Financial Statements
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Secured
Diversified Investment, Ltd.
We have
audited the accompanying consolidated balance sheet of Secured Diversified
Investment, Ltd. (the "Company") as of December 31, 2004, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards required that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2004, and the results of its operations and its cash flows for Year then ended,
in conformity with US generally accepted accounting principles.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has sustained net losses since
its inception, and the Company's operations do note generate sufficient cash to
cover its operating costs. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans regarding
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/
Kabani & Company,
Inc.
KABANI
& COMPANY, INC.
Huntington
Beach, California
March 24,
2005
SECURED
DIVERSIFIED INVESTMENT, LTD. |
|
|
|
Consolidated
Balance Sheet |
|
|
|
December
31, 2004 |
|
|
|
| |
|
|
|
|
ASSETS |
|
|
|
| |
|
|
|
|
Properties,
net of accumulated depreciation of $81,702 |
|
$ |
1,947,359 |
|
|
Equipment,
net of accumulated depreciation of $3,755 |
|
|
8,562
|
|
|
Cash
and cash equivalents |
|
|
35,433
|
|
|
Receivables |
|
|
45,023
|
|
|
Note
Receivable |
|
|
978,000
|
|
|
Prepaid
Expenses |
|
|
13,482
|
|
|
Restricted
cash |
|
|
470,000
|
|
|
Other
Assets |
|
|
17,578
|
|
|
Total
Assets |
|
$ |
3,515,436 |
|
| |
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT |
|
|
|
|
| |
|
|
|
|
|
Mortgages
payable |
|
$ |
1,407,290 |
|
|
Mortgages
payable, related parties |
|
|
223,630
|
|
|
Notes
payable |
|
|
251,980
|
|
|
Notes
payable, related parties |
|
|
166,617
|
|
|
Interest
payable |
|
|
35,021
|
|
|
Payroll
liabilities |
|
|
615,102
|
|
|
Accounts
payable, accrued expenses and other liabilities |
|
|
479,003
|
|
|
Total
Liabilities |
|
|
3,178,643
|
|
| |
|
|
|
|
|
Minority
Interest |
|
|
798,150
|
|
| |
|
|
|
|
|
STOCKHOLDERS'
DEFICIT |
|
|
|
|
| |
|
|
|
|
|
Series
A Preferred Stock, 7,500,000 shares authorized, |
|
|
|
|
|
$0.01
par value, 7,078,350 issued & outstanding |
|
|
70,784
|
|
|
Series
B Preferred Stock, 20,000,000 shares authorized, |
|
|
|
|
|
$0.01
par value, 160,861 issued & outstanding |
|
|
1,609
|
|
|
Series
C Preferred Stock, 22,500,000 shares authorized, |
|
|
|
|
|
$0.01
par value, 250,000 shares issued & outstanding |
|
|
2,500
|
|
|
Common
Stock, 100,000,000 shares authorized, $0.001 |
|
|
|
|
|
par
value, 15,016,984 issued and outstanding |
|
|
15,016
|
|
|
Paid
In Capital |
|
|
8,377,422
|
|
|
Prepaid
consulting fees |
|
|
(140,000 |
) |
|
Accumulated
Deficit |
|
|
(8,788,687 |
) |
|
Total
Stockholders' Deficit |
|
|
(461,356 |
) |
| |
|
|
|
|
|
Total
Liabilities & Stockholders' Deficit |
|
$ |
3,515,436 |
|
| |
|
|
|
|
|
See
accompanying notes |
|
|
|
|
|
SECURED
DIVERSIFIED INVESTMENT, LTD |
|
|
|
|
|
|
Consolidated
Statements of Operations |
|
|
|
|
|
|
For
the years ended December 31, 2004 and 2003 |
|
|
|
|
|
| |
|
|
|
|
|
| |
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
|
REVENUES |
|
|
|
|
|
|
|
|
Rental
Income |
|
$ |
892,213 |
|
$ |
632,728 |
|
|
Brokerage |
|
|
47,450
|
|
|
18,422
|
|
|
Total
Revenues |
|
|
939,663
|
|
|
651,150
|
|
| |
|
|
|
|
|
|
|
|
OPERATING
EXPENSES |
|
|
|
|
|
|
|
|
Litigation
Expense |
|
|
170,950
|
|
|
|
|
|
General
and Administrative Costs |
|
|
3,617,453
|
|
|
1,746,347
|
|
|
Total
Operating Expenses |
|
|
3,788,403
|
|
|
1,746,347
|
|
| |
|
|
|
|
|
|
|
|
Operating
Loss |
|
|
(2,848,740 |
) |
|
(1,095,197 |
) |
| |
|
|
|
|
|
|
|
|
Other
Income and Losses |
|
|
|
|
|
|
|
|
Interest
Expense |
|
|
(296,704 |
) |
|
(202,997 |
) |
|
Interest
Income |
|
|
22,065
|
|
|
10,326
|
|
|
Loss
on equity investment |
|
|
(52,676 |
) |
|
-
|
|
|
Gain
on sale of assets, net |
|
|
1,388,826
|
|
|
(1,036,963 |
) |
|
Loss
on sale of note |
|
|
(5,798 |
) |
|
-
|
|
|
Minority
Interest |
|
|
(425,267 |
) |
|
(13,823 |
) |
|
Impairment
loss |
|
|
-
|
|
|
(448,403 |
) |
|
Total
Other Income and Losses |
|
|
630,446
|
|
|
(1,691,860 |
) |
| |
|
|
|
|
|
|
|
|
Net
loss from continuing operations |
|
|
(2,218,294 |
) |
|
(2,787,057 |
) |
| |
|
|
|
|
|
|
|
|
Discontinued
operations: |
|
|
|
|
|
|
|
|
Net
loss on disposal of discontinued operations |
|
|
(488,754 |
) |
|
(117,882 |
) |
| |
|
|
|
|
|
|
|
|
Net
Loss |
|
$ |
(2,707,048 |
) |
$ |
(2,904,939 |
) |
| |
|
|
|
|
|
|
|
|
Net
loss per share, continuing operations |
|
$ |
(0.23 |
) |
$ |
(0.57 |
) |
|
Net
loss per share, discontinued operations |
|
$ |
(0.04 |
) |
$ |
- |
|
|
Net
loss per share |
|
$ |
(0.27 |
) |
$ |
(0.57 |
) |
|
Basic
and diluted weight average shares |
|
|
9,848,337
|
|
|
5,107,950
|
|
| |
|
|
|
|
|
|
|
|
See
accompanying notes |
|
|
|
|
|
|
|
| |
Preferred
Stock |
Preferred
Stock |
Preferred
Stock |
|
|
|
|
|
|
|
|
|
|
|
| |
Series
A |
Series
B |
Series
C |
Common
Stock |
|
Additional |
Prepaid |
|
Accumulated
|
|
Shareholders' |
|
| |
Shares
|
|
Par
Value |
Shares
|
|
Par
Value |
Shares
|
|
Par
Value |
Shares
|
|
Par
Value |
|
Paid
in Capital |
Consulting
|
|
Deficit
|
|
Equity
(Deficit) |
|
|
Balance,
December 31, 2002 |
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
2,349,540
|
|
$ |
2,350 |
|
$ |
3,112,298 |
|
-
|
|
$ |
(3,176,701 |
) |
$ |
(62,053 |
) |
|
Stock
issued for real estate acquisitions |
7,497,807
|
|
|
74,978
|
|
4,752,480
|
|
|
47,525
|
|
-
|
|
|
-
|
|
3,961,606
|
|
|
3,961
|
|
|
2,840,117
|
|
-
|
|
|
-
|
|
|
2,966,581
|
|
|
Conversion
of $500,000 note |
-
|
|
|
-
|
|
1,000,000
|
|
|
10,000
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
490,000
|
|
-
|
|
|
-
|
|
|
500,000
|
|
|
Stock
issued for cash |
-
|
|
|
-
|
|
80,000
|
|
|
800
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
39,200
|
|
-
|
|
|
-
|
|
|
40,000
|
|
|
Stock
issued for public relation services |
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
400,000
|
|
|
400
|
|
|
31,600
|
|
-
|
|
|
-
|
|
|
32,000
|
|
|
Stock
issued to officers |
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
1,100,000
|
|
|
1,100
|
|
|
20,900
|
|
-
|
|
|
-
|
|
|
22,000
|
|
|
Stock
issued to directors |
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
500,000
|
|
|
500
|
|
|
9,500
|
|
-
|
|
|
-
|
|
|
10,000
|
|
|
Shares
cancelled |
(307,426 |
) |
|
(3,074 |
) |
-
|
|
|
-
|
|
-
|
|
|
-
|
|
(153,860 |
) |
|
(154 |
) |
|
3,228
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Net
loss |
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
-
|
|
|
(2,904,938 |
) |
|
(2,904,938 |
) |
|
Balance,
December 31, 2003 |
7,190,381
|
|
|
71,904
|
|
5,832,480
|
|
|
58,325
|
|
-
|
|
|
-
|
|
8,157,286
|
|
|
8,157
|
|
|
6,546,843
|
|
-
|
|
|
(6,081,639 |
) |
|
603,590
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for cash |
-
|
|
|
-
|
|
100,000
|
|
|
1,000
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
44,100
|
|
-
|
|
|
-
|
|
|
45,100
|
|
|
Stock
issued for note receivable |
-
|
|
|
-
|
|
67,860
|
|
|
678
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
33,252
|
|
-
|
|
|
-
|
|
|
33,930
|
|
|
Stocks
issued for consulting services |
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
474,765
|
|
|
475
|
|
|
697,497
|
|
-
|
|
|
-
|
|
|
697,972
|
|
|
Stock
issued for incentive for note to directors |
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
100,000
|
|
|
100
|
|
|
77,447
|
|
-
|
|
|
-
|
|
|
77,547
|
|
|
Additional
shares issued for reprising |
28,311
|
|
|
283
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
(283 |
) |
-
|
|
|
-
|
|
|
-
|
|
|
Shares
cancelled |
(140,342 |
) |
|
(1,403 |
) |
-
|
|
|
-
|
|
-
|
|
|
-
|
|
(54,546 |
) |
|
(55 |
) |
|
1,458
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Stock
issued for real estate acquisition |
-
|
|
|
-
|
|
-
|
|
|
-
|
|
250,000
|
|
|
2,500.00
|
|
|
|
|
|
|
|
365,000
|
|
-
|
|
|
-
|
|
|
367,500
|
|
|
Shares
issued for public relation services |
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
500,000
|
|
|
500
|
|
|
559,553
|
|
(140,000 |
) |
|
-
|
|
|
420,053
|
|
|
Shares
issued for conversion of Series B Preferred stock |
-
|
|
|
-
|
|
(5,839,479 |
) |
|
(58,394 |
) |
-
|
|
|
-
|
|
5,839,479
|
|
|
5,839
|
|
|
52,555
|
|
|
|
|
-
|
|
|
-
|
|
|
Net
loss |
|
|
|
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
(2,707,048 |
) |
|
(2,707,048 |
) |
|
Balance,
December 31, 2004 |
7,078,350
|
|
$ |
70,784 |
|
160,861
|
|
$ |
1,609 |
|
250,000
|
|
$ |
2,500 |
|
15,016,984
|
|
$ |
15,016 |
|
$ |
8,377,422 |
|
(140,000 |
) |
$ |
(8,788,687 |
) |
$ |
(461,356 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
|
SECURED
DIVERSIFIED INVESTMENT, LTD |
|
|
|
|
|
|
Consolidated
Statements of Cash Flows |
|
|
|
|
|
|
For
the years ended December 31, 2004 and 2003 |
|
|
|
|
|
| |
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(2,707,048 |
) |
$ |
(2,904,939 |
) |
|
Adjustment
to reconcile net loss to net cash used by |
|
|
|
|
|
|
|
|
operating
activities: |
|
|
|
|
|
|
|
|
Depreciation
and Amortization |
|
|
87,385
|
|
|
80,114
|
|
|
Minority
Interest |
|
|
425,267
|
|
|
13,823
|
|
|
Loss
on sale of note receivable |
|
|
5,798
|
|
|
45,000
|
|
|
Loss
on disposal of subsidiary |
|
|
488,754
|
|
|
-
|
|
|
Loss
on equity investment |
|
|
52,676
|
|
|
-
|
|
|
Reserve
for note receivable |
|
|
-
|
|
|
25,000
|
|
|
(Gain)
loss on sale of real estate |
|
|
(1,388,826 |
) |
|
106,832
|
|
|
Loss
of Acquisition of minority interest |
|
|
|
|
|
1,270,154
|
|
|
Stocks
issued for services |
|
|
1,118,025
|
|
|
-
|
|
|
Stocks
issued for incentive for notes |
|
|
77,547
|
|
|
-
|
|
|
Impairment
of real estate |
|
|
-
|
|
|
448,403
|
|
|
Increase
(decrease) in assets and liabilities |
|
|
|
|
|
|
|
|
Receivables |
|
|
(45,023 |
) |
|
(38,774 |
) |
|
Inventory |
|
|
-
|
|
|
(23,981 |
) |
|
Prepaid
expenses |
|
|
26,219
|
|
|
(45,031 |
) |
|
Restricted
Cash |
|
|
(400,000 |
) |
|
(70,000 |
) |
|
Other
assets |
|
|
(17,578 |
) |
|
-
|
|
|
Accrued
interest added to notes payable |
|
|
17,445
|
|
|
12,500
|
|
|
Accounts
payable and accrued expenses |
|
|
330,236
|
|
|
575,977
|
|
|
Payroll
liabilities |
|
|
414,251
|
|
|
-
|
|
|
Net
cash used by operating activities |
|
|
(1,514,872 |
) |
|
(504,922 |
) |
| |
|
|
|
|
|
|
|
|
Cash
flow from investing activities: |
|
|
|
|
|
|
|
|
Purchase
equipment and tenant improvements |
|
|
(80,348 |
) |
|
(62,867 |
) |
|
Proceeds
from sale of minority interest |
|
|
200,000
|
|
|
-
|
|
|
Proceeds
from sale of assets |
|
|
2,925,000
|
|
|
451,186
|
|
|
Investment
in subsidiary |
|
|
-
|
|
|
(262,137 |
) |
|
Net
cash provided by investing activities |
|
|
3,044,652
|
|
|
126,182
|
|
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds
from stock issuance |
|
|
45,100
|
|
|
40,000
|
|
|
Proceeds
on notes payable - related party |
|
|
160,522
|
|
|
361,450
|
|
|
Payments
on notes payable - related party |
|
|
-
|
|
|
(28,194 |
) |
|
Proceeds
from notes payable |
|
|
232,000
|
|
|
150,147
|
|
|
Payments
on notes payable |
|
|
(2,057,513 |
) |
|
(25,177 |
) |
|
Net
cash provided by (used in) financing activities |
|
|
(1,619,891 |
) |
|
498,226
|
|
| |
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash |
|
|
(90,111 |
) |
|
119,486
|
|
| |
|
|
|
|
|
|
|
|
Cash,
beginning period |
|
|
125,544
|
|
|
6,058
|
|
| |
|
|
|
|
|
|
|
|
Cash,
end of period |
|
$ |
35,433 |
|
$ |
125,544 |
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosures: |
|
|
|
|
|
|
|
|
Cash
paid for interest |
|
$ |
279,258 |
|
$ |
202,997 |
|
|
Cash
paid for income tax |
|
$ |
2,400 |
|
$ |
- |
|
|
Non-cash
investing and financing activities: |
|
|
|
|
|
|
|
|
Property
acquired through stock issuances, net of debt |
|
$ |
367,500 |
|
$ |
3,258,761 |
|
|
Debt
on property acquired |
|
$ |
- |
|
$ |
3,652,713 |
|
|
Conversion
of note to stock |
|
$ |
- |
|
$ |
500,000 |
|
|
Note
receivable acquired in real estate sale transaction |
|
$ |
950,000 |
|
$ |
425,000 |
|
|
Shares
issued for note receivable |
|
$ |
33,930 |
|
|
-
|
|
|
See Accompanying notes |
|
|
|
|
|
|
|
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes
to Consolidated Financial Statements
December
31, 2004
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
$8,778,687 as of December 31, 2004. The current net loss amounted to $2,707,048
on December 31, 2004. The continuing losses have adversely affected the
liquidity of the Company. The Company faces continuing significant business
risks including, but not limited to, its ability to maintain vendor and supplier
relationships by making timely payments when due.
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, obtain financing and 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.
Management
intends to refinance existing properties and use the proceeds to fund operating
shortfalls. There are no assurances that the refinancing will occur or that the
cash it generates will be adequate to meet the Company’s cash requirements. In
addition, the Company intends to raise additional funds through a private
placement of its securities. However, there are no assurances that the Company
will be successful in this or any of its endeavors or become financially viable
and 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 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, par value $0.01. On November 15, 2002, the Company changed its
fiscal year end from
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
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 shopping
centers in Dickinson, North Dakota; Las Vegas, Nevada; and Orange, California;
the Company also owns a single story office building in Newport Beach,
California and an undeveloped vacant lot in Dickinson, North Dakota . The
Company is currently focusing on acquiring properties in markets with strong
regional economies.
NOTE
3 - Significant Accounting Policies
Consolidation. The
accompanying consolidated financial statements include the accounts of the
Company and its wholly and majority owned subsidiaries, which include
Diversified Commercial Brokers (DCB) LLC (53.8%), Nationwide Commercial Brokers,
Inc. (100%) - with limited operations to date; Spencer Springs LLC (63%) -;
Dickinson Management, Inc (100%) - an inactive company; and Diversified
Commercial Mortgage LLC (100%) - an inactive company. 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 a certificate of deposit, in excess of federal deposit
insurance limits, as collateral for a line of credit.
Revenue
recognition.
The Company’s revenues are derived from rental income and brokerage commission
fees derived from the sale of third party real estate transactions. Rental
revenues are recognized in the period services are provided. Brokerage
commission fees are recognized when revenue is received.
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. The Company also maintains a $400,000 deposit in a bank as
collateral for a line of credit of $400,000.
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 life of the asset. Depreciation and amortization is computed on
the straight-line
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
method.
Repairs and maintenance are expensed as incurred.
Investments. The
equity method of accounting is used for all investments in associated companies
in which the company’s interest is 20% or more. Under the equity 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. Losses from the equity investments reduce receivables from the
associated companies.
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.
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, 2004 and 2003,
all potential common shares are excluded from the computation of diluted loss
per share, as the effect of which was antidilutive.
Reclassification. For
comparative purposes, prior period’s consolidated financial statements have been
reclassified to conform to report classifications of the current period.
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
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
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.
Had the
Company determined employee stock based compensation cost based on a fair value
model at the grant date for its stock options under SFAS 123, the Company's net
earnings per share would have been adjusted to the pro forma amounts for the
year ended December 31, 2004 and 2003, as follows:
Year
ended
December 31,
2004
2003
Net
loss - as
reported
$(2,707,048)
$(2,904,938)
Stock-Based
employee compensation
expense
included in reported net
income,
net of
tax -
-
Total
stock-based employee
compensation
expense determined
under
fair-value-based method for all
rewards,
net of
tax
(13,830)
(13,377)
Pro
forma net
loss $(2,720,878)
$
(2,918,315)
========= =========
Loss
per share:
Basic
and diluted, as
reported $
(0.28)
$ (
0.57)
Basic
and diluted, pro forma $ (0.28) $ ( 0.57) |
Following
is a summary of the stock option activity:
Outstanding at December 31, 2002
- -
Granted
3,000,000
Forfeited
- -
Exercised
-
Outstanding at December 31,
2003
3,000,000
Granted
-
Forfeited
-
Exercised
- -
Outstanding at December 31,
2004
3,000,000
=======
The
500,000 options granted to directors in 2003 are vested as follows; 212,500 in
2003, 237,500 in 2004 and 50,000 in 2005. The 2,500,000 options granted to
officers in 2003 are vested as follows; 625,000 each year from 2003 to
2006.
Following
is a summary of the status of options outstanding at December 31,
2004:
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
| |
Outstanding
Options |
Exercisable
Options |
|
Exercise
Price |
Number |
Weighted
Average
Remaining
Contractual
Life |
Weighted
Average
Exercise
Price |
Number |
Weighted
Average
Exercise
Price |
|
$0.15 |
3,000,000 |
8.58
yrs |
$0.15 |
1,700,000 |
$.15 |
Stock-based
compensations recognized during the years ended December 31, 2004 and 2003 were
$-0-.
The fair
value was calculated using the Black-Scholes option pricing model assuming no
dividends, a risk-free interest rate of 3.625%, an expected life of 10 years and
expected volatility of 100%.
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.
Following
is a summary of segment information by geographic unit for the year ended
December 31, 2004:
| |
CA |
|
NV |
|
ND |
|
TOTAL |
|
|
Sales
& Rental Income |
$ |
357,541 |
|
$ |
314,221 |
|
$ |
267,901 |
|
$ |
939,663 |
|
Net
income (loss) |
|
(2,911,766 |
) |
|
283,122 |
|
|
(78,404 |
) |
|
(2,707,048 |
) |
Total
Assets |
|
2,207,627 |
|
|
1,292,625 |
|
|
15,184 |
|
|
3,515,436 |
|
Capital
Expenditure |
|
80,348 |
|
|
0 |
|
|
0 |
|
|
80,348 |
|
Depreciation
and amortization |
|
44,713 |
|
|
42,672 |
|
|
0 |
|
|
87,385 |
|
Following
is a summary of segment information by geographic unit for the year ended
December 31, 2003:
| |
|
CA |
|
NV |
|
ND |
|
TOTAL |
|
Sales
& Rental Income |
|
$ |
136,953 |
|
$ |
305,025 |
|
$ |
209,172 |
|
$ |
651,150 |
|
Net
income (loss) |
|
|
(2,611,512 |
|
|
30,122 |
|
|
(323,548 |
) |
|
(2,904,938 |
) |
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
Total
Assets |
|
|
2,182,332 |
|
|
2,533,062 |
|
|
767,650 |
|
|
5,483,044 |
|
Capital
Expenditure |
|
|
5,850 |
|
|
0 |
|
|
57,017 |
|
|
62,867 |
|
Depreciation
and amortization |
|
|
13,417 |
|
|
38,842 |
|
|
27,855 |
|
|
80,114 |
|
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 financial statements.
In
December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of Nonmonetary
Assets." The Statement is an amendment of APB Opinion No. 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. The Company believes that the adoption of this standard
will have no material impact on its financial statements.
In March
2004, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No.
03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments." The EITF reached a consensus about the criteria that
should be used to determine when an investment is considered impaired, whether
that impairment is other-than-temporary, and the measurement of an impairment
loss and how that criteria should be applied to investments accounted for under
SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES."
EITF 03-01 also included accounting considerations subsequent to the recognition
of an other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. Additionally, EITF 03-01 includes new disclosure requirements for
investments that are deemed to be temporarily impaired. In September 2004, the
Financial Accounting Standards Board (FASB) delayed the accounting provisions of
EITF 03-01; however the disclosure requirements remain effective for annual
reports ending after June 15, 2004. The Company will evaluate the impact of EITF
03-01 once final guidance is issued.
NOTE
4 - Property and Equipment
The
Company acquires income-producing real estate assets in the normal course of
business. During 2004, the Company acquired a shopping center in Las Vegas,
Nevada. The Company entered into a tenant-in-common agreement on May 14, 2004
with Denver Fund, LLC to purchase a shopping center in Las Vegas, Nevada. The
Company owns a 51% interest in the property. Both parties to the agreement are
jointly and severally liable for the obligations of the property and share in
management decisions. The agreement provides the minority tenant with a
preferential return on profits while operating losses are allocated based upon
the pro-rata ownership interest. Additionally, the Company sold the hotel in
Dickinson, North Dakota and a shopping center in Las Vegas, Nevada held in a
subsidiary.
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
| |
|
|
Estimated
Life |
|
Land |
$
46,300 |
|
|
|
Buildings
and improvements |
1,975,560
|
|
39
years |
|
Leasehold
improvements |
7,202
|
|
2 -
10 years |
|
Furniture,
fixture and equipment |
12,317
|
|
3 -
7 years |
| |
2,041,379
|
|
|
|
Less
accumulated depreciation |
(85,458) |
|
|
| |
$
1,955,921 |
|
|
During
2003, the Company recognized an impairment loss of $448,000, representing the
entire basis on the T-Rex Plaza Mall, because estimated future cash flows from
existing leases did not support the carrying value. The impairment was included
in “Other income (loss)” in the financial statements for the year ended December
31, 2003. On August 1, 2003, the Company acquired the Hospitality Inn (“the
Hotel”), a 149 room full service hotel complete with meeting and banquet rooms
as well as a restaurant and bar on leased land. The Hotel was sold October 31,
2004. and for details please refer Note 17..
Depreciation
expense at December 31, 2004 and 2003 was $87,385 and $80,114, respectively. No
interest was capitalized in either period.
NOTE
5 - Related Party Transactions
Seashore
Diversified Investment Company (SDIC). Certain
of the Company’s directors and officers were also directors, officers and
shareholders of SDIC. During 2004 and 2003, SDIC advanced monies to the Company
under a revolving note, bearing interest at 9%. The advance is due on demand. At
December 31, 2004, the outstanding balance totaled $166,617 with $23,190 in
accrued interest.
Leonard,
et al. During
2004 the Company’s Hospitality Inn leased land from a former director and
significant shareholder of the Company, Sumiye Leonard, her spouse, a
significant shareholder, Robert Leonard, and the Akira and Hisako Imamura Family
Trust, which is managed by the sister of Sumiye Leonard prior to its sale in
October 2004. During 2004 and 2003, the Company paid $104,000 and $50,000,
respectively, in land lease payments. Additionally, Robert Leonard was paid
$5,000 for services rendered in connection with the sale of 100,000 shares of
Series B preferred stock.
C.
Wayne Sutterfield (Sutterfield). At
December 31, 2004, the Company owed Sutterfield, a director and significant
shareholder, two notes, $67,000 and $71,630 secured by 2nd trust
deed on the T-Rex Plaza Mall and a 3rd trust
deed on 5030 Campus. The notes bear interest at 8% and are due in 2006.
Sutterfield is a minority owner in DCB LLC. 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
2004 and 2003 totaled $24,229 and $18,743, respectively. There is also $10,331
in accrued interest payable. The Company retains the right to acquire all his
interests. Pursuant to the operating agreement, the Company is responsible for
any cash flow deficiencies.
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
William
S. Biddle (Biddle). Biddle
(director, officer and shareholder) and Sumiye Onodero-Leonard (former director
and shareholder) loaned $150,000 to the Company; under a note secured by a
2nd trust
deed on Spencer Springs, interest at 12% due August 17, 2004, with a six-month
renewal option. On August 17, 2004, the Company exercised its option to extend
the loan for six months to February 17, 2005. Biddle and Leonard each received
25,000 shares of common stock when the loan was initially made and received an
additional 25,000 shares of common stock for the extension. During 2004, Biddle
and Leonard each received payments of $6,000
for interest. The note was repaid on October 28, 2004.
Biddle
also receives a monthly fee of $2,500 from Nationwide Commercial Brokers, Inc.
(“NCB”) in exchange for providing his brokers’ license to NCB. At December 31,
2004, the Company has an outstanding fees payable totaling $30,000.
In
December 2004, the Company sold 37% interest in its Spencer Springs subsidiary
to Biddle and Robert Leonard (major shareholders) for $200,000. Subsequently, in
March 2005, the Company sold its remaining interest in Spencer Springs to Biddle
for $577,777, which is 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. The note is secured by a $950,000 second trust deed on a shopping center
located in Las Vegas, Nevada, formerly owned by the Company (Spencer Springs).
(Note 15)
Prime
Time Auctions, Inc (Prime Time). Prime
Time is a shareholder of the Company. To date there are two outstanding loans
due Prime Time totaling $86,500 all of which bears interest at 15%, secured by
the underlying property, and maturing through 2005.
NOTE
6 - Notes Payable - Related Parties
|
Unsecured
note, bearing interest at 9%, interest only, due on demand |
$
166,617 |
Interest
expense on the notes payable - related parties amounted to $12,124 and $11,621
for the year ended December 31, 2004 and 2003, respectively.
NOTE
7 - Notes Payable
Unsecured
note, bearing interest at 9%, due on June 20,
2005,
$19,980
Secured
line of credit, bearing interest at 5.25%, due on Nov 30,
2005
232,000
Total
notes
payable $251,980
Less
current
portion
(
251,980)
Long term portion of note
payable
$ -0-
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
NOTE
8 - Mortgages Payable
|
Mortgage
note, bearing interest at 11.5%, due on June 25, 2005, 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 5.875%, principal and interest
monthly, maturing February 2, 2013, secured by 1st
trust deed on 5030 Campus |
702,341 |
|
Mortgage
note, bearing interest at 8%, due on Feb. 4, 2008, secured by
2nd
trust deed on 5030 Campus |
110,000 |
|
Mortgage
note, bearing interest at 12%, due on July 19, 2006, secured by
1st
trust deed on T-Rex Plaza Mall
|
224,949
|
|
Total
mortgages payable |
$
1,407,290 |
NOTE
9 - Mortgages Payable - Related Parties
|
Mortgage
note, bearing interest at 8%, due on Feb. 17, 2006, secured by
2nd
trust deed on T-Rex Plaza Mall |
$
67,000 |
|
Mortgage
note, bearing interest at 8%, due on Dec. 31, 2006, secured by
3rd
trust deed on 5030 Campus |
71,630 |
|
Mortgage
note, bearing interest at 15%, due on Nov 19, 2005, secured by
1st
trust deed on vacant lot, Dickinson, North Dakota |
60,000 |
|
Mortgage
note, bearing interest at 15%, due on July 1, 2005, secured by
2nd
trust deed on Katella Center |
25,000 |
|
Total mortgages payable- related parties |
$ 223,630 |
Interest
expense on the Mortgages payable - related parties amounted to $43,456 and
$34,783 for the year ended December 31, 2004 and 2003,
respectively.
NOTE
10 - Payroll Liabilities
The
Company has payroll liabilities of $615,102 which is comprised of $544,444
accrued payroll for four officers and $70,658 accrued payroll
taxes.
NOTE
11 - 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
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
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.
During
the year ended December 31, 2004, the Company had the following equity
transaction:
The
Company issued 100,000 shares of Series B Preferred stock for cash amounting
$45,000.
The
Company acquired a first mortgage deed through stock issuances, in the amount of
$33,930.
The
Company issued 250,000 shares of Series C preferred stock valued at $367,500 for
acquisition of an equity interest in a property in Las Vegas, Nevada.
The
Company issued 474,765 shares of common stock for consulting services, valued at
$697,972.
The
Company issued 100,000 shares of common stock, divided equally amongst two
shareholders in exchange for loan incentive valued at $77,547.
The
Company issued 500,000 shares of common stock in exchange for consulting
services valued at $560,053. At December31, 2004, $420,000 of these services had
been rendered and is included in operating and administrative costs. The
remaining $140,000 is reflected as prepaid consulting fees, a component of
stockholder’ equity, a contra equity account.
NOTE
12 - 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 Stock
Incentive Plan (Employee Stock Plan) and the Secured Diversified Investment,
Ltd. 2003 Non-employee Directors Stock Incentive Plan (Directors Stock Plan).
Both Plans require a The Plans terminate in November 2013
Employee
Stock Plan. The
Employee Stock Plan authorizes up to a maximum of 10,000,000 shares of common
stock for employees, consultants and other independent advisors. The plan
permits the issuing of shares or the granting of options. The exercise price is
to be determined by the Plan Administrator (currently the Board), but at no time
will the price be less than the fair market value on the date of grant.
Additionally, the Plan Administrator establishes the vesting period. Generally,
the options expire ten years after the date of grant. The plan provides for
“cashless exercise” of the options, so the optionee has the choice of paying
cash, converting unpaid salaries or services, or surrendering common stock owned
by him with a value equal to
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
the
exercise price. As discussed more fully in Note 11, the Company executed
employment contracts with its officers, which obligates the Company to issue
1,100,000 shares of stock and 2,500,000 options, leaving 6,400,000 shares of
common stock available under the Employee Stock Plan.
Directors’
Stock Plan. The
Directors Stock Plan authorizes up to a maximum of 5,000,000 shares of common
stock for non-employee directors. The plan permits the issuing of shares or the
granting of options. The exercise price is the fair market value on the date of
grant. Each Board member is automatically awarded 100,000 shares and 100,000
options upon becoming a Board member, and is awarded 100,000 options on each
anniversary date thereafter. The options vest over two years on a quarterly
basis, and expire ten years after the date of grant. The plan provides for
“cashless exercise” of the options, so the optionee has the choice of paying
cash, converting unpaid salaries or services, or surrendering common stock owned
by him with a value equal to the exercise price. Upon exercising the option, the
non-employee director is required to pay or make adequate provision for all
withholding obligations of the Company.
NOTE
13 - Loss Per Share
Following
is a reconciliation of net loss and weighted average number of shares
outstanding, in the computation of loss per share for the years ended December
31, 2004 and 2003.
| |
|
2004 |
|
2003 |
|
|
Net
loss |
|
$ |
(2,707,048 |
) |
$ |
(2,904,938 |
) |
|
Less
preferred stock dividends |
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
Net
loss available to common shareholders |
|
$ |
(2,707,048 |
) |
$ |
(2,904,938 |
) |
| |
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding |
|
|
9,848,337
|
|
|
5,107,950
|
|
|
Dilutive
potential common shares |
|
|
-
|
|
|
-
|
|
|
Diluted
weighted average shares outstanding |
|
|
9,848,337
|
|
|
5,107,950
|
|
| |
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share |
|
$ |
(0.27 |
) |
$ |
(0.57 |
) |
| |
|
|
|
|
|
|
|
|
Potential
common shares excluded from diluted |
|
|
|
|
|
|
|
|
weighted
average shares outstanding because of |
|
|
|
|
|
|
|
|
their
anti-dilutive nature: |
|
|
|
|
|
|
|
|
Convertible
Series A, B and C preferred stock |
|
|
7,489,211
|
|
|
12,922,861
|
|
|
Options
granted, not yet exercised |
|
|
3,000,000
|
|
|
3,000,000
|
|
| |
|
|
|
|
|
|
|
| |
|
|
10,489,211
|
|
|
15,922,861
|
|
NOTE
14- Commitment and Contingencies
Deferred
maintenance. The
Company has determined that T-Rex Plaza Mall needs repairs to
its
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
roof,
heating and air conditioning ventilation units, the facade and parking lot.
During 2004 the Company spent $30,870 repairing the parking lot. The estimated
costs for said repairs are between $250,000 and $350,000.
Lease
agreements. The
Company is obligated under various ground leases (T-Rex Plaza Mall, Katella
Center, and 5030 Campus), which include CPI increases, and an office lease
requiring monthly payments through 2053.
Officer
employment agreements. During
2003, the Company executed employment agreements with its officers that extend
through 2006. The employment agreements provide for the issuance of common stock
and options vesting over the term of the agreement and expire 10 years from the
date of grant. The Board did not approve the Stock Incentive Plan until late in
2003; therefore, no options were granted or stock issued during 2003. The
options, once granted, are convertible to common stock at $0.15/share.
Twenty-five percent of the options vest immediately and the remaining options
vest ratably over the term of the agreements on each officer’s anniversary date.
Under the terms of the agreements, the Company is obligated to issue 1,100,000
shares of common stock and grant 2,500,000 options. At December 31, 2004,
approximately $544,444 in officers’ salaries and $32,347 in Directors’
compensation were unpaid. No amount was expensed related to the options granted
as the exercise price per share exceeded the market price per share on the
effective date of grant.
Unpaid
taxes. The
Company has not paid approximately $10,039 in 2004 property taxes on the T-Rex
Plaza Mall due March 1, 2005, and approximately $11,495 in property taxes and
penalties on 5030 Campus Drive due December 10, 2004. These amounts are
currently delinquent. At December 31, 2004, the Company had $28,406 in unpaid
payroll tax liabilities. These payroll tax liabilities have been paid subsequent
to December 31, 2004.
Future
annual minimum lease payments and principal payments under existing agreements
are as follows:
| |
3rd
Party Lease Obligation |
Related
Party Debt |
3rd
Party Debt |
Officer
Salaries |
Total |
|
2005 |
326,546
|
251,617
|
644,744
|
1,063,869
|
2,286,776
|
|
2006 |
358,416
|
138,630
|
247,713
|
575,831
|
1,320,590
|
|
2007 |
281,434
|
-
|
22,764
|
-
|
304,198
|
|
2008 |
285,007
|
-
|
132,764
|
-
|
417,771
|
|
2009 |
288,652
|
-
|
22,764
|
-
|
311,416
|
| |
|
|
|
|
|
| |
$
1,540,055 |
$
390,247 |
$
1,070,749 |
$
1,639,700 |
$
4,640,751 |
The lease
expenses were $348,186 and $170,031 for the year ended December 31, 2004 and
2003, respectively.
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
NOTE
15 -Equity Investments in Real Estate
The
Company entered into a tenant-in-common agreement on May 14, 2004 with Denver
Fund, I to purchase a shopping center in Las Vegas, Nevada. The Company owns a
51% interest in the property and accounts for this interest under the equity
method. Both parties to the agreement are jointly and severally liable for the
obligations of the property and share in management decisions. The agreement
provides the minority tenant with a preferential return on profits while
operating losses are allocated based upon the pro-rata ownership interest. The
following information is a summary of the balance sheet as of December 31, 2004:
Current
Assets
$ 11,764
Property
and equipment,
net
5,887,821
Other
Assets 41,876
Total
Assets
5,941,461
Current
Liabilities
74,230
Other
Liabilities
232,422
Long-Term
Debt
4,069,152
Total
Liabilities 4,375,804
Equity
1,565,657
Total
Liabilities and
Equity $
5,941,461
========
Total
revenues and net loss for the year ended December 31, 2004, were $368,186 and
$103,286, respectively. The Company’s 51% of loss, $52,676, from property
operations for the year ended December 31, 2004, was included in other income
and losses in the accompanying consolidated statements of operations. The long
term debt is subject to a prepayment penalty should the Company and Denver Fund
I chose to repay the entire amount of the debt prior to maturity. As of December
31, 2004, the estimated prepayment penalty was $510,127.
Note
16 - Disposal of Discontinued Operation
The
Company sold and discontinued its hotel operations in 2004. Property and
equipment from the hotel operations as of October 31, 2004 was as
follows:
Property
$
575,122
Equipment
64,075
639,175
Accumulated
depreciation
(42,724)
Net book
value of property
sold $
596,473
Net
liabilities assumed &
expenses
incurred
50,727
Value of asset
received
(46,300)
Cash
received
(300,000)
Total
consideration
received
(346,300)
Escrow
costs
4,774
Total
loss on
disposal
$305,674
=======
The loss
from the disposal of $305,674 and the loss from operation through October 31,
2004
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
amounting
$183,080 have been recorded as loss on disposal of discontinued operations and
$30,949 recorded as litigation expenses..
Note
17 - Sale of a Subsidiary
Spencer
Springs - On October 28, 2004, the Company completed the sale of the property of
Spencer Springs Retail Center in Las Vegas, Nevada, to an unaffiliated third
party. The sales price was $3,875,000, consisting of assumption of an existing
loan in the principal amount of $2,215,329, a note from the buyer in the amount
of $950,000 and $675,000 in cash. The sale resulted in a gain on the disposal of
the asset, amounting $1,338,825. The buyer’s promissory note is secured by a
second trust deed on Spencer Springs and bears interest at an annual rate of 7%.
The note is due and payable in full in three years. In December 2004, the
Company sold a 37% interest in its Spencer Springs for $200,000 to Biddle and
Robert Leonard (significant shareholder). Subsequently, in March 2005, the
Company sold its remaining interest in Spencer Springs to Biddle for $577,777,
$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. The note is secured by a
$950,000 second trust deed on Spencer Springs Retail Center located in Las
Vegas, Nevada, formerly owned by the Company.
The
Company repaid $150,000 note held by Biddle and Onodera-Leonard secured by a
second trust deed on Spencer Springs Retail Center on October 28,
2004.
Note
18 - Income Taxes
No
provision was made for Federal income tax for the year ended December 31, 2004
and 2003, since the Company had significant net operating loss. In the year
ended December 31, 2004 and 2003, the Company incurred net operating losses for
tax purposes of approximately $2,197,000 and $793,000, respectively. Total net
operating losses carry forward at December 31, 2004 and 2003 for Federal and
State purpose were $2,996,000 and $799,000, respectively. The net operating loss
carry forwards may be used to reduce taxable income through the year 2024. The
availability of the Company’s net operating loss carry forwards are subject to
limitation if there is a 50% or more positive change in the ownership of the
Company’s stock. The provision for income taxes consists of the state minimum
tax imposed on corporations.
Temporary
differences that give rise to deferred tax assets and liabilities at December
31, 2004 and 2003, comprised of depreciation and amortization and net operating
loss carry forward. The gross deferred tax asset balance as of December 31, 2004
and 2003 was approximately $1,198,000 and $320,000 respectively. A 100%
valuation allowance has been established against the deferred tax assets, as the
utilization of the loss carry forwards cannot reasonably be assured.
The
components of the net deferred tax asset are summarized below:
December
31,2004
December
31, 2003
Deferred
tax asset
Net
operating
losses
$
1,198,000
$ 320,000
Less:
valuation
allowance
(1,198,000)
(320,000)
$
-
$
- -
=========
========
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
The
following is a reconciliation of the provision for income taxes at the U.S.
federal income tax rate to the income taxes reflected in the Statement of
Operations:
December
31, 2004
December
31, 2003
Tax
expense (credit) at statutory
rate-federal
(34)%
(34)%
State tax
expense net of federal
tax (6) (6)
Changes
in valuation
allowance
40
40
Tax
expense at actual
rate
- -
- -
===== =====
Income
tax expense consisted of the following:
| |
|
2004 |
|
2003 |
|
|
Current
tax expense: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
- |
|
$ |
- |
|
|
State |
|
|
2,400 |
|
|
2,400 |
|
|
Total
Current |
|
$ |
2,400 |
|
$ |
2,400 |
|
| |
|
|
|
|
|
|
|
|
Deferred
tax credit: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
747.000 |
|
$ |
270,000 |
|
|
State |
|
|
132,000 |
|
|
48,000 |
|
|
Total
deferred |
|
$ |
879,000 |
|
$ |
318,000 |
|
|
Less:
valuation allowance |
|
|
(879,000 |
) |
|
(318,000 |
) |
|
Net
Deferred tax credit |
|
|
- |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
Tax
expense |
|
$ |
2,400 |
|
$ |
2,400 |
|
Note
19 - Subsequent Events
At
December 31, 2004, the Company was a holder of a promissory note secured by a
first mortgage deed on a single family residence in the amount of $33,798. The
Company sold the note to an unrelated party in March 2005 for $28,000. The loss
of $5,798 was included in loss on sale of notes in the accompanying financial
statements as of December 31, 2004.
In March
2005, the Company sold its remaining interest in Spencer Springs to Biddle for
$577,777, $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.
On March
25, 2005, the Company and its affiliates entered into a Settlement Agreement and
Mutual Release with Grand Dakota Management, LLC and its affiliates to resolve
any and all disputes rising from the sale of the Hospitality Inn. The Company
paid the amount of $30,949.59. This amount was accrued in the year ended
December 31, 2004.
On
January 11, 2005, the Company terminated the employment of Luis Leon, formerly
the Chief Executive Officer of the Company. On April 6, 2005, Luis Leon filed a
complain against the Company in the Superior Court of California, County of
Orange, alleging causes of action for
SECURED
DIVERSIFIED INVESTMENT, LTD.
Notes to
Consolidated Financial Statements
December
31, 2004
breach of
contract, promissory estoppels, intentional misrepresentation, violations of the
California Labor Code. The Complaint seeks damages in an amount including
$116,358.80 of unpaid salary, $16,666.666 for one month unpaid vacation time,
$5,548.27 for unpaid insurance benefits through August 15, 2005, reimbursable
expenses of $288.00 plus a statutory penalty of $16,666. Mr. Leon also seeks a
grant of options to purchase $250,000 of Company Common Stock. The Company
intends to vigorously defend the action. Given the early stage of litigation,
the likelihood of an unfavorable outcome cannot reasonably be estimated,
however, the estimated amount of the potential loss is approximately $140,000.00
plus costs of defense. This amount of $140,000 was accrued in the financial
statement for the year ended December 31, 2004.
Item 8. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
No events
occurred requiring disclosure under Item 304(b) of Regulation
S-B.
Item 8A. Controls
and Procedures
(a)
Evaluation
of Disclosure Controls and Procedures. The
Company’s Chief Executive Officer and Chief Financial Officer has conducted an
evaluation of the Company’s disclosure controls and procedures as of the end of
the period covered by this annual report (the "Evaluation
Date"). Based
on his evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer 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.
Limitations
on the Effectiveness of Internal Controls
The
Company’s management, including the CEO and CFO, do not expect that our
disclosure controls and procedures or our internal control over financial
reporting necessarily prevent all fraud and material error. An internal control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the
inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the internal control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Item 8B.
Other Information.
None.
PART
III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act.
The
following table sets forth the name, age and position of each director and
executive officer and the term of office of each as of December 31, 2004. For
changes in management subsequent to year end, see “Subsequent Changes to
Management” below.
|
NAME |
AGE |
POSITION |
DIRECTOR
CLASS |
|
Clifford
L. Strand |
58 |
Chairman
of the Board, President |
III |
|
William
S. Biddle |
76 |
Director,
Vice President |
II |
|
Jay
Kister |
30 |
Director |
III |
|
Bruce
E. Duquette |
49 |
Director |
I |
|
Ron
Robinson |
73 |
Director |
I |
|
Wayne
Sutterfield |
69 |
Director |
II |
|
Munjit
Johal |
49 |
Chief
Financial Officer |
|
|
Gernot
Trolf |
60 |
Chief
Operating Officer |
|
The
Directors serve until the next annual meeting of shareholders or until their
successors are elected and qualified. Officers serve at the will of the Board of
Directors. As of the date hereof, the Board of Directors has one vacancy due to
the February 2005 resignation of Pamela Padgett.
Clifford
L. Strand.
Chairman of the Board of Directors, President and Chief Executive Officer. Mr.
Strand has 35 years experience in the real estate industry as a broker, investor
and strategist. Since January 2001, Mr. Strand has served as Senior Vice
President, Interim President and President of Seashore Diversified Investment
Company, a Maryland real estate investment trust, where he has been primarily
responsible for managing and directing the affairs of the Company. Seashore
specializes in the acquisition, disposition and management of real estate and
investment properties. From 1984 to 2001, Mr. Strand was self employed as an
independent real estate broker. During that time, Mr. Strand represented a
diverse clientele consisting of banks, savings and loan institutions,
universities, celebrities and corporations. From 1979 to 1984, Mr. Strand served
as president of Capital Newport Mortgage Company, which became part of the
Capital Companies. Mr. Strand has a Certificate in Real Estate from East Los
Angeles Community College.
William
S. Biddle.
Director and Vice President, Marketing. Mr. Biddle has over 37 years experience
in the real estate industry, he is a member of the Society of Exchange
Counselors. Mr. Biddle is a past recipient of the Clifford P. Weaver Memorial
Award a national award for the most creative exchange. He is also a past
president of National Exchange Counselors. In 1979, he received the designation
of Certified Commercial Investment Member
from the
National Association of Realtors. Mr. Biddle currently owns two brokerages. He
purchased Commercial Brokers, a commercial real estate brokerage firm in Las
Vegas, Nevada, in 1993. He founded Friendly Hills Realty, a brokerage
specializing in high end residential real estate in 1987. Friendly Hills
Realty’s principal office is located in Whittier, California.
Jay
Kister.
Director. Since June 2001, Mr. Kister has been employed with Blossom Valley
Mortgage, Inc. Mr. Kister currently serves as a Loan Broker. From April 1999 to
June 2001, Mr. Kister was a Personal Banker for San Diego National Bank. He was
primarily responsible opening and servicing commercial accounts and commercial
loans. From May 1998 to April 1999, Mr. Kister worked for Bank of America
performing essentially the same functions as he performed for San Diego National
Bank. Mr. Kister earned a Bachelor of Arts degree in Spanish from Weber State
University in Ogden, Utah in August 1997.
Bruce
E. Duquette. Director.
Mr. Duquette was appointed to the Board of Directors in December 2004. Mr.
Duquette is a Vice President and Financial Consultant with US Bancorp
Investments and Insurance, Newport Beach, California, and has been an employee
of US Bancorp since May 1999. Since 1985, Mr. Duquette has also been a licensed
Realtor with Century 21 Advantage, Cypress, California. Mr. Duquette has served
as the Vice President of the Orange County Multiple Listing Service from 1992 to
1994. He currently serves as the State Director of the California Association of
Realtors. Mr. Duquette received a BS in Management from Pepperdine
University.
Ron
Robinson. Director.
In 1999 Mr. Robinson founded Park Place Properties, LLC, a private real estate
development company that has developed office buildings in Las Vegas, Nevada. In
1989, Mr. Robinson founded President of National Commercial Properties, a
private company that brokered tax-free exchanges and packaged commercial loans
for institutional investors and continued to be a principal through 1998. In
1989, Mr. Robinson also founded “The Mortgage Mart”, a private mortgage company
of which he was President until 1998. Mr. Robinson was co-founder of Oasis
Residential, a publicly traded real estate investment trust that was ultimately
acquired by Camden Properties. Mr. Robinson also served as the President of
Crowne Ventures Corporation, a NASDAQ listed company that acquired real
property, including the Continental Hotel, Las Vegas, Nevada. Mr. Robinson is
also a member of the Society of Exchange Counselors.
Wayne
Sutterfield.
Director. For the past 35 years Mr. Sutterfield has been self employed in the
real estate industry as a manager, property owner and contractor. Mr.
Sutterfield has owned and managed properties in Arizona, California and North
Dakota. Mr. Sutterfield is a member of the Contractors Association of America
and the Plumbing, Heating and Cooling Contractors Association. Mr. Sutterfield
is a graduate of California L.A. Technical College-Mechanical Engineering,
Construction. Mr. Sutterfield has been a director of Seashore Diversified
Investment Company since 2001.
Munjit
Johal. Chief
Financial Officer. Mr. Johal has broad experience in accounting, finance and
management in the public sector. Since 1998, Mr. Johal has served as the Chief
Financial
Officer for Diffy Foods, Inc. Mr. Johal held the same position with Bengal
Recycling from 1996 to 1997. As the Chief Financial Officer for these companies,
Mr. Johal was primarily responsible for overseeing the financial affairs of
these entities and ensuring that their financial statements of these were
accurate and complete and complied with all applicable reporting requirements.
From 1990 to 1995, Mr. Johal serves as the Executive VP for Pacific Heritage
Bank in Torrance, California. Mr. Johal earned his MBA degree from the
University of San Francisco in 1980. He received his BS degree in History from
the University of California in Los Angeles in 1978.
Gernot
Trolf. Chief
Operating Officer. Since 1996, Mr. Trolf has served as the Chief Operating
Officer of Seashore Diversified Investment Company, a real estate investment
trust. As the Chief Operating Officer, Mr. Trolf was primarily responsible for
overseeing the day-to-day operations of the company. In 1993, he founded and
continues to own AATIC a private commodity brokerage. From 1994 to 1997, Mr.
Trolf owned The Stagecoach Restaurant a continental restaurant specializing in
Austrian, German and continental fare in Alpine, California. From 1994 to 1996,
Mr. Trolf was the Director of Food and Beverage for the Algonquin Hotel in New
York and held to same position at the Regency Hotel in New York from 1991 to
1994. Mr. Trolf was the General Manager of the Nova Park Hotel in New York from
1979 to 1982. Mr. Trolf is a former vice president of the Food & Beverage
Association of America and a member of the Board of Directors of The 400,000
Committee for Austrians living abroad. Mr. Trolf speaks German, French, English,
Spanish and Norwegian.
Involvement
in Certain Legal Proceedings
To the
knowledge of management, during the past five years, no present or former
director, executive officer or person nominated to become a director or an
executive officer of the Company:
(1) filed
a petition under the federal bankruptcy laws or any state insolvency law, nor
had a receiver, fiscal agent or similar officer appointed by a court for the
business or property of such person, or any partnership in which he was a
general partner at or within two years before the time of such filing, or any
corporation or business association of which he was an executive officer at or
within two years before the time of such filing;
(2) was
convicted in a criminal proceeding or named subject of a pending criminal
proceeding (excluding traffic violations or other minor offenses);
(3) was
the subject of any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining him from or otherwise limiting, the following
activities;
(i)
acting as a futures commission merchant, introducing broker, commodity trading
advisor, commodity pool operator, floor broker, leverage transaction merchant,
associated person of any of the foregoing, or as an investment advisor,
underwriter,
broker or dealer in securities, or as an affiliate person, director or employee
of any investment company, or engaging in or continuing any conduct or practice
in connection with such activity;
(ii)
engaging in any type of business practice; or
(iii)
engaging in any activity in connection with the purchase or sale of any security
or commodity or in connection with any violation of federal or state securities
laws or federal commodities laws;
(4) was
the subject of any order, judgment, or decree, not subsequently reversed,
suspended, or vacated, of any federal or state authority barring, suspending, or
otherwise limiting for more than 60 days the right of such person to engage in
any activity described above under this Item, or to be associated with persons
engaged in any such activity;
(5) was
found by a court of competent jurisdiction in a civil action or by the
Securities and Exchange Commission to have violated any federal or state
securities law, and the judgment in such civil action or finding by the
Securities and Exchange Commission has not been subsequently reversed,
suspended, or vacated
(6) was
found by a court of competent jurisdiction in a civil action or by the Commodity
Futures Trading Commission to have violated any federal commodities law, and the
judgment in such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended or
vacated.
Subsequent
Changes in Management
On January 11, 2005, the Board of Directors terminated Luis Leon as the Chief
Executive Officer. See Item 3. “Legal Proceedings” above.
Pamela
Padgett resigned as a director of the Company on February 28, 2005.
Appointment
of New President.
Effective as of April 5, 2005, the Board of Directors appointed Clifford L.
Strand as the Chief Executive Officer and Mr. Strand resigned his position as
President. The Company appointed Jan Wallace to serve as the President for a
term of six months, subject to earlier termination. Ms. Wallace will receive
approximately 54,900 shares of Common Stock as compensation for her services as
President. Ms. Wallace is a principal of Wallace Black Financial &
Investment Services (“WB”), which has been engaged as a consultant to perform
certain investor relations and public relations tasks. Pursuant to the
consulting agreement with WB, the Company has agreed to pay a monthly consulting
fee of $10,000. In addition, the Company has granted WB 400,000 shares of
restricted Common Stock and options to purchase 400,000 additional shares of
Common Stock at exercise prices ranging from $0.50 per share to $2.00 per share.
For biographical information on Ms. Wallace is as follows:
Jan
Wallace. Ms.
Wallace is currently the President of Wallace Black Financial & Investment
Services, a private consulting company to private and public companies and
individuals for business, financial and Investment strategies. Ms. Wallace has
served as the President and CEO of three public companies listed on the
Over-The-Counter Bulletin Board: MW Medical from 1998 to 2001; Dynamic and
Associates, Inc.; and Claire Technologies, Inc. from 1994 to 1995. From 1987 to
1996, Ms. Wallace was associated with four Canadian companies: Active Systems as
Executive Vice President; The Heafey Group, as financial consultant; Mailhouse
Plus, Ltd., owner and President; and Pitney Bowes, first female sales executive.
Ms. Wallace has a B.A. in Political Science and Economics from Queens
University, Kingston, Ontario, Canada.
Family
Relationships
There are
no family relationships between or among the directors, executive officers or
persons nominated or chosen by the Company to become directors or executive
officers.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Exchange Act requires the Company’s directors and executive
officers and persons who beneficially own more than ten percent of a registered
class of the Company’s equity securities to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Company. Officers, directors and greater than ten percent
beneficial shareholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file. To the best of our knowledge
based solely on a review of Forms 3, 4, and 5 (and any amendments thereof)
received by the Company during or with respect to the year ended December 31,
2004, the following persons have failed to file, on a timely basis, the
identified reports required by Section 16(a) of the Exchange Act during fiscal
year ended December 31, 2004:
|
Name
and principal position |
Number
of
late
reports |
Transactions
not
timely
reported |
Known
failures to
file
a required form |
|
Clifford
Strand
Chairman
of the Board, President |
0 |
0 |
0 |
|
William
S. Biddle
Director,
Vice President |
0 |
0 |
2 |
|
Jay
Kister
Director |
0 |
0 |
0 |
|
Bruce
E. Duquette
Director |
0 |
0 |
1 |
|
Ron
Robinson
Director |
0 |
0 |
1 |
|
Wayne
Sutterfield
Director |
0 |
0 |
0 |
|
Luis
Leon
Former
Chief Executive Officer |
1 |
1 |
0 |
Code
of Ethics Disclosure
As of
December 31, 2004, the Company had not adopted a Code of Ethics for Financial
Executives, which include its principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions, as required for listed issuers by sections 406 and 407 of the
Sarbanes-Oxley Act of 2002.
The
Company has begun the process of drafting a code of ethics which will be filed
with the Security and Exchange Commission upon its adoption by the board of
directors.
Item 10. Executive
Compensation
The
following chart sets forth certain summary information concerning the
compensation paid or accrued for each of the Registrant’s last two completed
fiscal years to the Registrant’s or its principal subsidiaries’ chief executive
officers and each of its other executive officers that received compensation in
excess of $100,000 during such period and the expected compensation for the next
twelve months. Each
non-employee director receives $500 per board meeting. Officers who are
directors are not paid for attending meetings.
SUMMARY
COMPENSATION TABLE
|
Name
and Principal Position |
Year |
Annual
Compensation (1) |
Long
Term Compensation |
All
other Compen-
sation(2) |
|
Awards |
Payouts |
|
Salary
($)(1) |
Bonus
($) |
Other
($) |
Restricted
Stock Awards ($) |
Securities
Underlying Options/SARs (#) |
LTIP
($) |
|
Clifford
L. Strand,
President
and Chairman (3) |
2004 |
130,000 |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
|
2003 |
82,833 |
-0- |
-0- |
500,000 |
1,000,000 |
-0- |
-0- |
|
2002 |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
|
Luis
Leon,
Former
CEO |
2004 |
34,000 |
-0- |
18,245 |
-0- |
-0- |
-0- |
-0- |
|
2003 |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
|
2002 |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
|
William
S. Biddle,
Vice
President (4) |
2004 |
60,000 |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
|
2003 |
40,000 |
-0- |
-0- |
250,000 |
500,000 |
-0- |
-0- |
|
2002 |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
|
Gernot
Trolf,
Chief
Operating Officer |
2004 |
48,000 |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
|
2003 |
34,000 |
-0- |
-0- |
250,000 |
500,000 |
-0- |
-0- |
|
2002 |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
|
Munjit
Johal,
Chief
Financial Officer |
2004 |
69,000 |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
|
2003 |
54,000 |
-0- |
-0- |
250,000 |
500,000 |
-0- |
-0- |
|
2002 |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
________
| (1) |
Salary
information represents the amount actually paid. The amounts agreed to be
paid pursuant to the employment agreements with each of Messrs. Strand,
Biddle and Trolf are substantially greater but executive officers have
agreed to defer a portion of the salary. See “Employment Contracts and
Termination of Employment and Change in Control”
below. |
| (2) |
All
other compensation in the form of perquisites and other personal benefits
has been omitted because the aggregate amount of such perquisites and
other personal benefits constituted the lesser of $50,000 or 10% of the
total annual salary and bonus of the named executive for such
yea |
| (3) |
Excludes
124,000 shares and 50,000 shares of Series B Preferred Stock received in
connection with the purchase or sale of various Company properties and
also excludes commissions or fees paid by third parties in connection with
Company transactions. See “Item 12” below. |
| (4) |
Excludes
128,000 shares and 60,000 shares of Series B Preferred Stock received in
connection with the purchase or sale of various Company
properties. |
The
Company granted no options during the fiscal year ended December 31,
2004.
Item 11. Security
Ownership of Certain Beneficial Owners and Management
The following table sets forth information about the beneficial ownership of the
Company’s capital stock at December 31, 2004 by:
| · |
each
person or entity who is known by us to own beneficially more than 5.0% of
each class or series of our outstanding
stock; |
| · |
each
of the persons named in the Summary Compensation Table;
|
| · |
each
of our directors; and |
| · |
all
directors and executive officers as a
group. |
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated, the principal address of each
of the shareholders below is c/o Secured Diversified Investment, Ltd., 4940
Campus Drive, Newport Beach, California 92660.
Except as
described in the footnotes to this table, and subject to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock and Preferred Stock held by
them.
|
Name
and Address of
Beneficial
Owner |
Title
of Class
|
Amount
and Nature of Beneficial
Owner |
Percent
of Class |
|
Wayneutterfield
(1) |
Common
Stock |
2,246,549 |
13.52% |
|
Series
A Preferred Stock |
827,326 |
11.69% |
|
Clifford
L. Strand (2) |
Common
Stock |
2,318,529 |
13.74% |
|
Series
A Preferred Stock |
511,588 |
7.23% |
|
William
S. Biddle (3) |
Common
Stock |
2,378,962 |
14.27% |
| |
Series
A Preferred Stock |
139,559 |
1.97% |
|
Series
B Preferred Stock |
50,000 |
31.08% |
|
Sumiye
Onodera Leonard (4) |
Common
Stock |
1,093,289 |
6.58% |
|
Series
A Preferred Stock |
547,162 |
7.73% |
|
Anthony
Giangrande(5) |
Common
Stock |
1,478,690
|
9.03% |
|
Series
A Preferred Stock |
68,555
|
*
|
|
Robert
J. Leonard (6)
P.O.
Box 2089
Huntington
Beach, CA 92647 |
Common
Stock |
892,035
|
5.45% |
|
Series
A Preferred Stock |
611,890
|
8.64% |
| |
|
|
|
Gernot
Trolf (7) |
Common
Stock |
820,707
|
4.94% |
|
Series
A Preferred Stock |
441,411
|
6.24% |
|
Munjit
Johal (8) |
Common
Stock |
500,000
|
3.00% |
|
Jay
Kister (9) |
Common
Stock |
469,943
|
2.83% |
|
Series
A Preferred Stock |
9,887
|
*
|
|
Pamela
Padgett (9) |
Common
Stock |
360,648
|
2.17% |
|
Series
A Preferred Stock |
21,296
|
* |
|
Ron
Robinson (9) |
Common
Stock |
350,000
|
2.11% |
|
Bruce
E. Duquette (10) |
Common
Stock |
0
|
* |
|
All
Officer and Directors as a
group
(nine persons) |
Common
Stock |
9,285,464
|
50.72% |
|
Series
A Preferred Stock |
1,951,067
|
27.56% |
| |
Series
B Preferred Stock |
50,000
|
31.08% |
* Less
than one percent.
(1)
Includes 1,111,814 shares of Common Stock and 186,357 shares of Series A
Preferred Stock held by Lincoln Trust over which Mr. Sutterfield disclaims
beneficial ownership. Includes 332,000 shares of Common Stock held through REIT,
LLC. Includes 100,000 shares of restricted stock to be issued under the 2003
Non-Employee Director Stock Incentive Plan. Includes options to purchase 250,000
shares immediately exercisable or exercisable within sixty days.
(2)
Includes 41,015 shares of Common Stock and 82,028 shares of Series A Preferred
Stock held for the benefit of Mr. Strand’s wife and children, of which Mr.
Strand disclaims beneficial ownership. Includes 334,000 shares of Common Stock
held through REIT, LLC. Includes 500,000 shares of restricted stock agreed to be
issued under the 2003 Employee Stock Incentive Plan. Includes options to
purchase 500,000 shares immediately exercisable or exercisable within sixty
days.
(3)
Includes 1,075,088 shares of Common Stock and 139,559 shares of Series A
Preferred Stock held by the William S. Biddle Family Trust of which Mr. Biddle
disclaims beneficial ownership. Includes 159,874 shares of
Common
Stock held indirectly through Mr. Biddle’s ownership interest in The Palo Verde
Center. Includes 334,000 shares of Common Stock held through REIT, LLC. Includes
250,000 shares of restricted stock agreed to be issued upon approval of the 2003
Employee Stock Incentive Plan. Includes options to purchase 250,000 shares
immediately exercisable or exercisable within sixty days.
(4) Ms.
Leonard is a former director having resigned in October 2004 and is the spouse
of Robert J. Leonard, an owner of more than 5% of the outstanding capital stock
of the Company. Includes 340,259 shares of Common Stock and 568,101 shares of
Series A Preferred Stock held by the Onodera Family Trust of which Mrs. Leonard
disclaims beneficial ownership. Includes 500,000 shares of Common Stock held
through REIT, LLC. Includes 100,000 shares of restricted stock agreed to be
issued upon approval of the 2003 Non-Employee Director Stock Incentive Plan.
Includes options to purchase 250,000 shares immediately exercisable or
exercisable within sixty days.
(5)
Includes 878,283 shares of Common Stock held of record by Anthony Giangrande
Family Trust, 134,698and 371, 432 shares held of record respectively through Mr.
Giangrande’s ownership interest in The Palo Verde Center and The Kellogg
Business Center, over which Mr. Giangrande may have voting control but of which
he disclaims beneficial ownership.
(6)
Includes 500,000 shares of Common Stock held through REIT, LLC. All other shares
held by the Robert J. Leonard Family Trust of which Mr. Leonard disclaims
beneficial ownership.
(7)
Includes 7,304 shares of Common Stock and 14,606 shares of Series A Preferred
Stock held in trust for Mr. Trolf’s children, of which Mr. Trolf disclaims any
beneficial ownership. Includes 100,000 shares of restricted stock agreed to be
issued under the 2003 Employee Stock Incentive Plan. Includes options to
purchase 250,000 shares immediately exercisable or exercisable within sixty
days.
(8)
Includes 250,000 shares of restricted stock to be issued under the 2003 Employee
Stock Incentive Plan. Includes options to purchase 250,000 shares immediately
exercisable or exercisable within sixty days.
(9)
Includes 100,000 shares of restricted stock agreed to be issued upon approval of
the 2003 Non-Employee Director Stock Incentive Plan. Includes options to
purchase 250,000 shares immediately exercisable or exercisable within sixty
days.
(10) Mr.
Duquette is entitled to receive 100,000 shares of Common Stock and options to
purchase 500,000 shares of Common Stock for his service as a director pursuant
to the 2003 Non-Employee Director Stock Incentive Plan. Mr. Duquette has elected
not to receive such shares and options and has indicated a desire to contribute
the shares to a charitable organization of his choice.
Item 12. Certain
Relationships and Related Transactions
The
Company has numerous relationships with or among related parties and has entered
into numerous transactions with related parties. See Note 5 to the Financial
Statements.
Acquisitions
from Related Parties. The
Company completed an Asset Purchase Agreement with Seashore Diversified
Investment Company. Seashore may be deemed to a related party to the Company
through common management and control. Officers and directors of the Company
owned approximately 22.1% of the limited partnership interests in Seashore.
There was no independent appraisal received by the Company with respect to the
assets of Seashore, and there can be no assurance that the number of shares of
the Company paid for the
assets of
Seashore was fair and reasonable. The Company issued 2,461,607 common shares and
4,997,807 Series A preferred shares to Seashore to acquire Katella Center in
Orange, California, T-Rex Plaza Mall in Dickinson, North Dakota, 50% interest in
Spencer Springs LLC and 50% interest in Decatur Center LLC. Spencer Springs and
Decatur Center each own a shopping center in Las Vegas, Nevada.
The
Company acquired the Hospitality Inn of Dickinson, North Dakota and Dickinson
Management Company from Seacrest Partners, L.P. in exchange for shares of common
stock and preferred stock Officers and Directors of the Company owned a majority
of the limited partnership interests of Seacrest Partners, L.P. There was no
independent appraisal received by the Company with respect to the Hospitality
Inn, and there can be no assurance that the number of shares of the Company paid
for the assets of Seacrest was fair and reasonable. The Company issued 1,445,029
common shares and 2,464,971 preferred A shares to Seacrest to acquire the
Hospitality Inn.
Leonard,
et al. The
Hospitality Inn leased land from a former director of the Company, Sumiye
Leonard, her husband, a significant shareholder, Robert Leonard, and the Akira
and Hisako Imamura Family Trust that is managed by the sister of Sumiye Leonard.
During 2003 and 2004, the Company made lease payments of $50,000 and $109,000,
respectively.
Clifford
L Strand (Strand) and William S. Biddle (Biddle). Strand
and Biddle received 50,000 shares each of Series B preferred stock when the
Company purchased their collective 11.5% interest in DCB LLC. Additionally,
Biddle holds two notes due from the Company totaling $274,250. One note bears
interest at 7.05% and matures in 2008. The other note bears interest at 10% and
matures in 2004. Both are secured by the underlying property and have been
repaid
Sales
of Assets to Related Parties.
The
Company has sold several assets to related parties. Each of William S. Biddle
and Robert J. Leonard purchased membership interests in Spencer Springs, LLC for
$200,000. The sole asset of Spencer Springs, LLC was the promissory note of
Roger Anderson in the principal amount of $950,000 due October 28, 2007. Messrs.
Biddle and Leonard effectively acquired an interest of $350,000 of the
promissory note.
The
Company subsequently sold its entire interest in Spencer Springs, LLC to Messr.
Biddle $300,000 in cash and a promissory note of $277,777 due October 28, 2007.
The note bears interest at an annual rate of 3%.
The
Company sold a promissory note in the principal amount of $425,000 secured by a
restaurant in Highland, California to William S. Biddle for
$400,000.
The
Company believes that each of such sales was on terms no less favorable to the
Company than those available in arms-length transactions from third
parties.
Payment
of Commissions to Officers. From
time to time other parties to transactions with the Company have paid certain
officers and Directors of the Company commissions or fees in connection with the
acquisition or disposition of real estate properties or the consummation of
financing activities. Generally, such fees or commissions were paid pursuant to
agreements entered into between the officer or Director and the other party
prior to date on which the officer or Director joined the Company.
Wayne
Sutterfield paid $25,000 in commission to Clifford L. Strand, its CEO, President
and Director, for services rendered in connection with the land sale and ground
lease back of the 6.66 acres underlying the T-Rex Mall acquired by the Company
on March 31, 2003.
The
members of Decatur Square, LLC paid a commission of 50,000 and 60,000 shares of
Series B Preferred Stock to Clifford L. Strand and William S. Biddle,
respectively, in connection with the acquisition of the remaining interests in
Decatur Square, LLC.
In
November 2003, Clifford L. Strand and William S. Biddle were paid 124,000 and
128,000 shares of Series B Preferred Stock, respectively, in connection with the
acquisition of the remaining interest in Spencer Springs, LLC.
Loans
from Related Parties. The
Company has borrowed funds from numerous related parties. See Footnote 6 to the
Financial Statements. The terms of such loans were negotiated between the
officers of the Company and the related party, and may not have been done on an
arm’s-length basis. The Company does not believe that financing from any
unrelated third party would have been available on terms more favorable to the
Company than those available from the related party.
Prime
Time Auctions, Inc (Prime Time). Prime
Time is a shareholder of the Company. During 2004, Prime Time extended three
loans totaling $86,500 to the Company, all of which bear interest at 15%, are
secured by the underlying property and mature through 2005.
Seashore
Diversified Investment Company (Seashore). Certain
of the Company’s directors and officers were also directors, officers and
shareholders of Seashore. During 2003, SDIC advanced monies to the Company under
a revolving note, bearing interest at 9%. The advance is due on demand. At
December 31, 2004, the outstanding balance totaled $166,617 with $23,190 in
accrued interest due.
C.
Wayne Sutterfield (Sutterfield). The
Company owed Sutterfield, a director and significant shareholder, $138,630 under
two separate notes. The notes bear interest at 8% and are due in 2006. Also in
2003, Sutterfield advanced the Company $21,000; the advance is non-interest
bearing and is due on demand. Additionally, Sutterfield is a minority owner in
DCB LLC. Under the terms of the operating agreement, the Company pays
Sutterfield a preferred return on his investment and retains the right to
acquire all his interests.
Biddle
and Leonard. During
2004, Biddle and Leonard loaned the Company $150,000 bearing an interest rate of
12%. The obligation was secured by real estate. The obligation was repaid in
October 2004.
Interest in Tenant. Two
officers and directors of the Company, Clifford L. Strand and William S. Biddle
have acquired membership interests in a tenant of The Cannery West. The tenant
used the cash invested by the officers to complete tenant improvements and other
move-in costs. The Company believes that the lease between The Cannery West and
the tenant are on terms no less favorable to the Company than those available in
an arm’s-length transaction with unrelated third parties.
|
Exhibit
Number |
Description |
|
3.1.1 |
Articles
of Incorporation, as amended (1) |
|
3.1.2 |
Amendment
to the Articles of Incorporation (4) |
|
3.2 |
By-laws
(1) |
|
4.1 |
Merger
Agreement with Book Corporation of America (1) |
|
4.2 |
2003
Stock Incentive Plan (2) |
|
4.3 |
2003
Non-Employee Director Stock Incentive Plan (2) |
|
10.1 |
Asset
Purchase Agreement with Seashore Diversified Investment Company
(3) |
|
21.1 |
|
|
31.1 |
|
|
31.2 |
|
|
32.1 |
|
________________
(1)
Previously
filed on Schedule 14A filed July 10, 2002.
(2)
Previously
filed on Form S-8 (file no. 333-111152) filed December 15, 2003.
(3) Previously
filed on Form 10-KT filed on April 15, 2003.
(4) Previously
filed on Form 10-KSB filed on May 24, 2004
Item 14. Principal Accountant Fees and
Services
Audit
Fees
The
aggregate fees billed for professional services rendered by the Company’s
principal accountant for the audit of its annual financial statements, review of
its financial statements included in its quarterly reports and other fees that
are normally provided by the Company’s accountant in connection with its audits
during the fiscal years ended December 31, 2004 and 2003 were $82,784 and
$60,000, respectively.
Audit
Related Fees
The
Company did not pay any fees for assurance and related services by the Company’s
principal accountant, other than amounts previously reported in this Item 14 for
the fiscal years ended December 31, 2004 and 2003.
Tax
Fees
The
Company did not pay its principal accountant for any professional services
related to tax compliance, tax advices and tax planning for the fiscal years
ended December 31, 2004 and 2003.
All
Other Fees
During
the fiscal year ended December 31, 2004, and 2003, the Company’s principal
accountant did not provide any other services and accordingly did not bill the
Company any other fees for the fiscal years ended December 31, 2004 and 2003,
except as provided above.
Audit
Committee
The
Company’s audit committee consists of Jay Kister and Wayne Sutterfield and has
pre-approved all of the above amounts billed to the Company prior to incurring
the expenses associated therewith.
SIGNATURES
In
accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf,
thereunto duly authorized.
Secured Diversified Investment, Ltd.
Date: May
18,
2005
/s/ Clifford L.
Strand
Clifford L. Strand, Chief Executive Officer
Date: May
18,
2005
/s/ Munjit
Johal
Munjit Johal, Chief Financial Officer