UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the Quarter Ended Commission File Number
June 30, 2004 0-30653
SECURED DIVERSIFIED INVESTMENT, LTD.
------------------------------------------
(Name of small business issuer in its charter)
Nevada 80-0068489
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
5030 Campus Drive, Newport Beach California 92660
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (949) 851-1069
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Check whether the Issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date:
As of June 30, 2004, issuer had 8,682,051 shares of its $.001 par value common
stock outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SECURED DIVERSIFIED INVESTMENT, LTD.
Consolidated Balance Sheet
(Unaudited)
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JUNE 30, 2004
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ASSETS
Current Assets
Cash & cash equivalents $ 99,201
Inventory 21,492
Note Receivable 33,878
Other Receivables 4,955
-----------
Total Current Assets 159,525
-----------
Property & Equipment
Equipment, net of $19,778
of accumulated depreciation 50,146
Real Estate, net of $139,300
of accumulated depreciation 4,664,316
-----------
-----------
Total Property & equipment 4,714,462
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Other Assets
Equity Investment in Real Estate 363,211
Restricted Cash 70,000
Prepaid and Other 45,963
-----------
-----------
Total Other Assets 479,174
-----------
TOTAL ASSETS $ 5,353,163
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable 369,739
Interest Payable 24,243
Payroll Liabilities, including
$323,133 due officers and directors 448,243
Accrued Property Tax 141,737
Accrued Sales Tax 42,726
Security Deposits 39,287
Current Portion of Long-Term Debt, related parties 321,958
Current Portion of Long-Term Debt, others 447,980
-----------
-----------
Total Current Liabilities 1,835,913
-----------
Long Term Liabilities
Notes Payable, related parties 163,630
Mortgages Payable 2,989,061
-----------
Total Long - Term Liabilities 3,152,691
-----------
TOTAL LIABILITIES 4,988,604
-----------
Minority Interest 205,966
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STOCKHOLDERS' EQUITY
Series A Preferred Stock, 7,500,000 shares authorized,
$0.01 par value, 7,218,692 issued & outstanding 72,187
Series B Preferred Stock, 20,000,000 shares authorized,
$0.01 par value, 6,000,340 issued & outstanding 60,003
SeriesC 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, 8,682,051 issued
and outstanding 8,682
Paid In Capital 7,711,193
Accumulated Deficit (7,695,972)
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TOTAL EQUITY 158,593
-----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 5,353,163
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
SECURED DIVERSIFIED INVESTMENT, LTD
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED
JUNE 30 JUNE 30
------------------------- -----------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES
Rental Income $ 237,137 $ 212,791 $ 472,577 $ 249,378
Hotel, net of $64,892 for coupons and discounts 446,535 -- 783,601 --
Brokerage 1,125 -- 6,567 --
----------- ----------- ----------- -----------
Total Net Revenues 684,797 212,791 1,262,745 249,378
Hospitality costs (238,701) -- (476,077) --
----------- ----------- ----------- -----------
Gross Profit 446,096 212,791 786,668 249,378
General and Administrative Expenses 1,429,411 429,704 2,225,481 716,060
----------- ----------- ----------- -----------
Operating Loss (983,315) (216,913) (1,438,813) (466,682)
Other Income and Losses
Loss on Equity Investment (4,289) -- (4,289) --
Interest Expense (62,730) (16,807) (160,508) (30,171)
Interest Income 1,647 2,950 7,547 2,950
Other (18,594) (174,741) (21,260) (219,741)
----------- ----------- ----------- -----------
Total Other Income and Losses (83,967) (188,598) (178,510) (246,962)
Minority Interest (3,036) -- 2,989 --
----------- ----------- ----------- -----------
NET LOSS $(1,070,318) $ (405,511) $(1,614,333) $ (713,644)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.12) $ (0.08) $ (0.19) $ (0.20)
=========== =========== =========== ===========
Basic and diluted weight average shares 8,624,539 4,811,146 8,552,176 3,580,343
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
SECURED DIVERSIFIED INVESTMENT, LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTH PERIODS ENDED JUNE 30
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss (1,614,333) $ (713,644)
Adjustment to reconcile net loss to net cash
provided by operating activities:
Depreciation and Amortization 84,725 32,682
Minority Interest (2,989) --
Loss on equity investment 4,289 --
Loss on sale of note receivable -- 45,000
Loss on sale of real estate -- 106,832
Impairment of real estate -- 448,403
Issuance of shares for consulting services 697,905 --
(Increase) decrease in current assets:
Receivables 33,819 --
Inventory 2,489 --
Note Receivable 400,000 --
Prepaid expenses 18,543 (4,561)
Increase (decrease) in current liabilities:
Accounts payable & Accrued expenses 489,998 117,028
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Net cash provided by operating activities 114,445 31,740
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CASH FLOW FROM INVESTING ACTIVITIES:
Collection of note receivable 52 --
Purchase of equipment and real estate (400,000) (62,542)
Proceeds from sale of real estate 400,000 231,186
Investment in subsidiary -- (97,433)
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Net cash provided in investing activities 52 71,211
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance 45,000 20,000
Minority Interest 34,128 --
Proceeds on notes payable - related party 150,000 123,708
Payments on notes payable - related party (342,197) (32,021)
Proceeds from notes payable -- 45,000
Payments on notes payable (27,772) (12,837)
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Net cash provided by (used in) financing activities (140,841) 143,850
--------- ---------
Net increase (decrease) in cash (26,344) 246,801
Cash, beginning period 125,545 6,058
--------- ---------
Cash, end of period 99,201 $ 252,859
========= =========
Supplemental disclosures:
Cash paid for interest $ 152,341 $ 73,528
========= =========
Cash paid for income tax $ -- $ --
========= =========
Non-cash investing and financing activities:
Property acquired through stock issuances, net
of debt $ 367,500 $ --
========= =========
Property acquired through stock issuances, net
of debt $ 33,930 $ 411,738
========= =========
Stock issued to Director for Notes Payable $ 25,000 $ --
========= =========
Investment in subsidiary through stock issuance, $ -- $ --
========= =========
net of debt $ -- $ 343,610
========= =========
Conversion of note to stock $ -- $ 500,000
========= =========
Note receivable acquired in real estate
sale transaction $ -- $ 425,000
========= =========
Assumption of note payable in real estate
sale transaction $ -- $ 174,250
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
- --------------------------------------------------------------------------------
NOTE 1 - Basis of presentation and Going Concern
Basis of presentation:
The accompanying unaudited condensed consolidated interim financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for the presentation of interim financial
information, but do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
audited consolidated financial statements for the year ended December 31, 2003
were filed on May 24, 2004 with the Securities and Exchange Commission and is
hereby referenced. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
six-month period ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004.
Going concern:
The accompanying financial statements of Secured Diversified Investment, Ltd.
(the "Company" or "SDI") are prepared using generally accepted accounting
principles applicable to a going concern, which contemplates the realization of
assets and liquidation of liabilities in the normal course of business. The
Company since its inception has sustained net losses. Cash reserves are low and
currently the Company's operations do not generate enough cash to cover its
costs or to execute its business plan. 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 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 a hotel in Dickinson, North Dakota. The Company is
currently focusing on acquiring properties in markets with strong regional
economies.
F-6
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
- --------------------------------------------------------------------------------
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 (53.9%) - owner of 5030 Campus;
Nationwide Commercial Brokers, Inc. (100%) - with limited operations to date;
Dickinson Management, Inc. (100%) - manager of the Hospitality Inn; Spencer
Springs LLC (87%) - owner of the Spencer Springs shopping center; Decatur Center
LLC (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. No single institution holds more
than the federally insured limit.
Revenue recognition. The Company's revenues are derived from rental income and
from room and food revenues from hotel operations. Rental and hotel revenues are
recognized in the period services and goods are provided.
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.
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 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.
F-7
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
- --------------------------------------------------------------------------------
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.
Impairment. The Company adopted SFAS 144, "Accounting for the Impairment and
Disposal of Long-Lived Assets," which requires long-lived assets be reviewed for
impairment whenever circumstances indicate the carrying value may not be
recoverable.
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 June 30, 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.
Recent accounting pronouncements. In June 2003, the FASB approved SFAS 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". SFAS 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company's financial position reflects the effects of classifying
certain mandatorily redeemable equity instruments as liabilities.
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revised Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46R). FIN 46R addresses consolidation by business enterprises of variable
interest entities and significantly changes the consolidation application of
consolidation policies to variable interest entities and, thus improves
comparability between enterprises engaged in similar activities when those
activities are conducted through variable interest entities. The Company does
not hold any variable interest entities.
NOTE 4 - 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 2003, SDIC advanced monies to the Company under a revolving note, bearing
interest at 9%. The advance is due on demand. At June 30, 2004, the outstanding
balance totaled $111,958 with $16,235 in accrued interest.
F-8
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
- --------------------------------------------------------------------------------
Leonard, et al. The Hospitality Inn leases land from a director 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. The lease expires in 2053. The current monthly ground lease payment is
$12,000 and will increase to $14,000 for the third year of the lease. Beginning
with the fourth year, the ground lease payments will adjust annually based on
the Consumer Price Index, with a floor of 2% and a ceiling of 3%. Pursuant to
the terms of the ground lease, the Company may purchase the land. To date during
2004 the Company is in default on the 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 June 30, 2004, the Company owed
Sutterfield, a director and significant shareholder, $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. Total payments to Sutterfield to date in
2004 total $16,152.85. The Company retains the right to acquire all his
interests. Pursuant to the operating agreement, the Company is responsible for
any cash flow deficiencies.
William S. Biddle (Biddle). Biddle (director, officer and shareholder) and
Sumiye Onodero-Leonard (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 2004, with a six-month renewal option. The Company will
exercise its option to extend the loan for six months to February 17, 2005.
Biddle and Leonard each received 25,000 shares of Series B preferred stock when
the loan was initially made and will each receive an additional 25,000 shares of
Series B preferred stock for the extension. Biddle also receives a monthly fee
of $2,500 from Nationwide Commercial Brokers, Inc. ("NCB") in exchange for
providing his brokers' license to NCB.
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 $85,750
including accrued interest, all of which bears interest at 15%, secured by the
underlying property, and maturing through 2005.
NOTE 5 - Related Party Debt
o Unsecured note, bearing interest at 9%, interest only, due on demand $ 111,958
o Mortgage note, bearing interest at 12%, interest only, maturing August 17, 2004, 150,000
secured by 2nd trust deed on Spencer Springs
o Mortgage note, bearing interest at 8%, interest only, maturing February 17, 67,000
2006, secured by 2nd trust deed on T-Rex Plaza Mall
o Mortgage note, bearing interest at 8%, interest only, maturing December 31, 71,630
2006, secured by 3rd trust deed on 5030 Campus
o Mortgage note, bearing interest at 15%, maturing October 1, 2004, interest only, 60,000
secured by 1st trust deed on Hospitality Inn
o Mortgage note, bearing interest at 15%, maturing July 1, 2005, interest only,
secured by 2nd trust deed on Katella Center 25,000
---------
Total related party debt 485,588
Less current portion of related party debt 321,958
---------
Long term portion of related party debt $ 163,630
=========
F-9
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
- --------------------------------------------------------------------------------
NOTE 6 - Third Party Debt
o Unsecured note, bearing interest at 9%, maturing June 20, 2005, interest only $ 19,980
o Mortgage note, bearing interest at 11.5%, maturing May 15, 2005, interest 370,000
only, secured by 1st trust deed on Katella Center
o Mortgage note, bearing interest at the "1 year constant maturity treasury 713,075
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
o Mortgage note, bearing interest at 8%, maturing February 8, 2008, interest 110,000
only, secured by 2nd trust deed on 5030 Campus
o Mortgage payable, bearing interest at the "6 month London Interbank Offer
2,223,986 Rate" plus 3%, adjusting every 6 months, currently 4.5%,
maturing September 30, 2013 principal and interest due monthly, secured
by 1st trust deed on Spencer Springs $ 2,223,986
Total third party debt $ 3,437,041
Less current portion of third party debt 447,980
-----------
Long term portion of third party debt $ 2,989,061
===========
NOTE 7 - Stockholders' Equity
In February 2003, the Company created three series of preferred stock, all of
which are convertible at the option of the holder: (1) Series A consisting of
7,500,000 shares with a par value of $0.01, a liquidation preference of $1.00
per share, convertible into an equal number of common shares 36 months after
issuance, with the same voting rights as common stock; (2) Series B consisting
of 20,000,000 shares with a par value of $0.01, a liquidation preference of
$0.50 per share, and convertible into an equal number of common shares 24 months
after issuance; and (3) Series C consisting of 22,500,000 shares with a par
value of $0.01, a liquidation preference of $3.00 per share, and convertible
into an equal number of common shares 24 months after issuance. In the event the
price of common stock is less than the purchase price of the preferred stock on
the conversion date, the holder is entitled to convert at a rate equal to the
purchase price divided by the common stock price.
F-10
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
- --------------------------------------------------------------------------------
The Company is offering 13,949,660 shares of its Series B preferred stock at
$0.50 per share. Additionally, the Company is offering 22,500,000 shares of its
Series C preferred stock at $3.00. Both Series B and Series C preferred stock
are being offered for cash, notes and in exchange for real estate acquisitions.
During the second quarter of 2004, the Company issued 250,000 shares of Series C
preferred stock valued at $367,500 for acquisition of equity interest in a
property in Las Vegas, Nevada.
During the six month period ended June 30, 2004, the Company issued 474,765
shares of common stock for consulting services, valued at $697.905.
NOTE 8 - Commitment and Contingencies
Deferred maintenance. The Company has determined that T-Rex Plaza Mall needs
repairs to its roof, heating and air conditioning ventilation units, the facade
and parking lot. The estimated costs for said repairs are between $150,000 and
$250,000. The Company intends to pursue reimbursement from contractors who
recently repaired the roof in order to recover the anticipated roof repair
costs. Additionally, the Company estimates deferred interior improvements needed
at the Hospitality Inn between $100,000 and $200,000.
Lease agreements. The Company is obligated under various ground leases (T-Rex
Plaza Mall, Katella Center, Hospitality Inn, and 5030 Campus), three of which
include CPI increases, and an office lease requiring monthly payments through
2053.
Future annual minimum lease payments under existing agreements are as follows:
2005 392,505
2006 424,989
2007 428,542
2008 432,167
2009 440,330
Remaining after 5 yrs 17,164,500
Total minimum lease payment $19,283,033
-----------
The lease expenses were $175,647 and $114,234 for the six month period ended
June 30, 2004 and 2003, respectively.
Unpaid taxes. The Company has not paid approximately $68,000 in 2003 property
taxes on the Hospitality Inn of which approximately $34,000 were due March 1,
2004. The Company assumed unpaid payroll taxes attributable to the Hospitality
Inn of which approximately $50,000 were unpaid as of June 30, 2004.
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 June 30, 2004, approximately $192,036 in officer
salaries and $8,847 in Director compensation were unpaid. No amount was expensed
related to the options to be granted as the exercise price per share exceeded
the market price per share on the effective date of grant.
F-11
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
- --------------------------------------------------------------------------------
NOTE 9 -Investments in Real Estate
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 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 summarizes the unaudited balance sheet and statement
of operations as of June 30, 2004.
Current Assets $ 9,904
Property and equipment, net 5,937,286
Other Assets 752
Total Assets 5,947,942
Current Liabilities 115,469
Long-Term Debt 4,194,963
Total Liabilities 4,310,432
Equity $ 1,637,510
Total revenues and net loss for the period ended June 30, 2004 were $51,716 and
$8,410, respectively. The Company's 51% loss, $4,289, from property operations
for the period ended June 30, 2004 is included in other income and losses in the
accompanying consolidated statements of operations.
Note 10- Sale of Property
In May 2004, the Palm Highland property was sold. The proceeds from the sale
were used to payoff related party debts and for current operations.
NOTE 11. SEGMENTS AND MAJOR CUSTOMERS
The Company has two reportable segments consisting of (1) rental income from
real estate) and (2) the operation of full service hotel. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. The Company evaluates performance based on
sales, gross profit margins and operating profit before income taxes.
F-12
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
- --------------------------------------------------------------------------------
The following is information for the Company's reportable segments for the six
month ended June 30, 2004:
-----------------------------------------------------------------------
Real estate Hotel
(in thousands) Segment Segment Unallocated Total
-----------------------------------------------------------------------
Revenue $ 472,577 $ 783,601 $ 6,567 $ 1,262,745
Gross margin -0- 0 -0- 0
Depreciation and amortization 48,160 17,090 19,475 84,725
Interest expense 155,608 4,900 -0- 160,508
Other, net -0- -0- 0 0
-- (1,592)
Loss from continuing operations before tax (1,612,741) -0- (1,614,333)
Identifiable assets 4,079,558 634,904 638,701 5,353,163
Capital expenditures -0- -0- -0- -0-
The Company had one reportable segment for the six month period ended June 30,
2003.
Note 12, - Subsequent Events
The Cannery - The Company incurred a note payable due to Iomega, LLC, in the
amount of $164,268 with interest only payments due on the 14th of each month
beginning June 14th, 2004, in connection with its purchase of the Cannery. The
Company was three months delinquent in making payments but subsequently remitted
the payments. Additionally, the Company has a principal payment of $50,000 due
November 14th, 2004.
T-Rex Plaza Mall - On July 20,2004, the Company incurred indebtedness of
$225,000 secured by a first deed of trust due to an unrelated party. After loan
fees, escrow fees and property tax payments, net proceeds amounted to $186,437.
The note has a term of two years and bears interest at an annual rate of 12%.
Interest only payments are due monthly.
F-13
Item 2. Management's Discussion and Analysis
Acquisitions and Dispositions of Assets
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 $7,150,000 in December 2001 by Morgan, Beebe & Harper, Las
Vegas, 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 Tenants in Common Agreement with Denver
Fund I pursuant to which the Company will have a 51% interest in the property
and Denver Fund I will have 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%. Thus, 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. If
either party desires to sell its interest in the property, then it must first
offer the interest to the other party.
Results of Operations
The comparability of the financial information discussed below is limited
by acquisitions and dispositions completed after the end of the fiscal quarter
ended June 30, 2004.
Three Months Ended June 30, 2004 and 2003
Income.
Income consists of rental income from commercial properties pursuant to
tenant leases and income from the operation of a full service hotel. As a result
of these operations, income increased to $685,000 for the three months ended
June 30, 2004, an increase of $472,200 or 221.9%. During the comparable period
ending June 30, 2003, the Company reported income of $213,000. The increase is
primarily attributable to the acquisition of real estate assets.
Operating and Administrative Expenses.
Operating and administrative expenses consist primarily of payroll
expenses, legal and accounting fees and costs associated with the acquisition
and ownership of real properties. These expenses increased $1,508,940 to
$2,225,000 for the three months ended June 30, 2004, compared to $430,000 for
the three months ended June 30, 2003. The increase is attributable to the
operation of acquired real estate. Additionally, payroll increased as a result
of employment agreements that were executed by certain members of management
effective May 1, 2003. These agreements result in a monthly expense of $30,000
of which $16,000 is being paid in cash and the balance accrued.
Management anticipates that operating and administrative expenses will continue
to increase throughout the remainder of 2004 as the Company seeks to acquire
additional real estate holdings and expand its operations.
Depreciation.
Depreciation for the three months ended June 30, 2004 was $33,000 compared
to $24,000 for the three months ended June 30, 2003. The depreciation was
attributable primarily to Katella Center, Hospitality Inn, Spencer Springs, 5030
Campus Drive and the Company's telephone system.
Interest and Other Expense.
Interest expense consists of mortgage interest paid on the Company's
properties. Interest expense of $63,000 for the three months ended June 30, 2004
was attributable to the Katella Center, T-Rex Plaza Mall, 5030 Campus Drive and
Spencer Springs properties. Interest from the comparable period ending June 30,
2003, was $17,000.
Net Income.
The net loss was $1,070,000 or $(0.12) per share -- basic and diluted --
for the three months ended June 30, 2004 compared to a net loss of $714,000 or
$(0.08) per share -- basic and diluted -- for the three months ended June 30,
2003.
Six Months Ended June 30, 2004 and 2003
Comparability of the financial information discussed below is materially
impacted by the Company's acquisition of properties beginning in the first
quarter of 2004.
Income.
Income consists of rental income from commercial properties pursuant to
tenant leases and income from the operation of a full service hotel. As a result
of these operations, income increased to $1,263,000 for the six months ended
June 30, 2004, an increase of $1,014,000 or 406%. During the comparable period
ending June 30, 2003, the Company reported income of $249,000. The increase is
primarily attributable to the acquisition of real estate assets consummated
after the end of the quarter ended June 30, 2003.
Operating and Administrative Expenses.
Operating and administrative expenses consist primarily of payroll
expenses, legal and accounting fees and costs associated with the acquisition
and ownership of real properties. These expenses increased $812,000 to
$1,528,000 for the six months ended June 30, 2004, compared to $716,000 for the
six months ended June 30, 2003. The increase is attributable to the operation of
acquired real estate. Additionally, payroll increased pursuant to the employment
agreements that were executed by certain members of management effective May 1,
2003. These agreements result in a monthly expense of $68,333 of which $25,000
is being paid in cash and the balance accrued.
Management anticipates that operating and administrative expenses will
continue to increase throughout the remainder of 2004 as the Company seeks to
acquire additional real estate holdings and expand its operations.
Depreciation.
Depreciation for the six months ended June 30, 2004 was $66,000 compared
to $35,000 for the six months ended June 30, 2003. The depreciation was
attributable primarily to Katella Center,
Hospitality Inn, Spencer Springs, 5030 Campus Drive and the Company's telephone
system.
Interest and Other Expense.
Interest expense consists of mortgage interest paid on the Company's
properties. Interest expense of $161,000 for the six months ended June 30, 2004
was attributable to the Katella Center, T-Rex Plaza Mall, 5030 Campus Drive, the
Hospitality Inn and Spencer Springs properties. Interest from the comparable
period ending June 30, 2003, was $30,000. The Company recognized impairment with
respect to the T-Rex property in the amount of $448,000.
Net Income.
The net loss was $1,614,000 or $(0.19_) per share basic and diluted for
the six months ended June 30, 2004 compared to a net loss of $713,644 or $(0.20)
per share basic and diluted for the six months ended June 30, 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 June 30, 2004, the Company had $99,000 of cash and cash equivalents as
compared to $253,000 of cash and cash equivalents at June 30, 2003 to meet its
immediate short-term liquidity requirements. This decrease in cash and cash
equivalents resulted primarily from the use of cash for operating activities.
Operating cash flows are expected to increase as additional properties and
investments in unconsolidated real estate are added to the Company's portfolio.
Cash and cash equivalents decreased since March 31, 2004 primarily as a result
of the Company's administrative and operating expenses.
To date, the Company has paid no dividends and does not anticipate paying
dividends into the foreseeable future.
Cash Flows from Operating Activities
Net cash provided by operating activities was $114,000 for the six months
ended June 30, 2004 compared to net cash provided by operating activities of
$32,000 for the six months ended June 30, 2003. This increase in cash provided
by operating activities relative to the prior period was primarily due to the
Company's acquired real estate holdings and expenses relating to audit, legal
and expanded compliance with federal and state securities laws.
Management expects cash flows from operating activities to increase due to
the acquisitions of the Katella Center, The Cannery West and the limited
liability company membership interest in Spencer Springs and the Campus Drive
Office Building as well as the acquisition of additional properties and
investments in unconsolidated real estate during the remainder of the year as
the Company strategically builds its real estate portfolio. Management is
currently considering other potential opportunities to acquire real estate. The
decision to acquire one or more properties or investments in unconsolidated real
estate will generally depend upon (i) receipt of a satisfactory environmental
survey and property appraisal, (ii) an absence of any material adverse change
relating to the property, its tenants, or local economic conditions, and (iii)
adequate financing. There is no assurance that any of these conditions will be
satisfied or, if satisfied, that the Company will purchase any additional
properties or make any further investments in unconsolidated real estate.
Cash Flows From in Investing Activities
Net cash provided by investing activities amounted to $0 for the six
months ended June 30, 2004 compared to net cash provided by investing activities
of $71,000 for the six months ended June 30, 2003.
At June 30, 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.
Cash Flows from Financing Activities
Cash used by financing activities amounted to $141,000 for the six months
ended June 30, 2004 compared to $144,000 provided by financing activities for
the six months ended June 30, 2003. The primary reason for the decrease was less
proceeds from notes and the sale of preferred stock.
The Company intends to acquire additional properties and make additional
investments in unconsolidated real estate and may seek to fund these
acquisitions through proceeds received from a combination of subsequent equity
offerings, debt financings or asset dispositions.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer have
conducted an evaluation of the Company's disclosure controls and procedures as
of a date (the "Evaluation Date") within 90 days before the filing of this
quarterly report. Based on their evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the applicable Securities and Exchange
Commission rules and forms.
PART II OTHER INFORMATION
Item 2. Changes in Securities
No instruments defining the rights of the holders of any class of
registered securities were materially modified, limited or qualified during the
quarter ended June 30, 2004.
Recent Sales of Unregistered Securities
The Company also agreed to issue 250,000 shares to Iomega Investments,
LLC, the owner of The Cannery West shopping center, as part of the consideration
for the lease and acquisition of the shopping center.
All of the shares identified above were issued without registration under
the Securities Act of 1933 in reliance on an exemption from registration
provided under Section 4(2) of the Securities Act, and from similar applicable
state securities laws, rules and regulations exempting the offer and sale of
these securities by available state exemptions. No general solicitation was made
in connection with the offer or sale of these securities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 Certification of Principal Executive Officer
Exhibit 31.2 Certification of Principal Financial Officer
Exhibit 32.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current Report on Form 8-K filed with the Commission on June 1, 2004
included information regarding Item 4 Changes in the Registrant's Certifying
Accountant.
Current Report on Form 8-K filed with the Commission on June 1, 2004
included information regarding Item 2. Acquisition or Disposition of Assets.
SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf, thereunto duly authorized.
SECURED DIVERSIFIED INVESTMENT, LTD.
Date: August 19, 2004 By: /S/ Clifford L. Strand
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Clifford L. Strand, Principal Executive Officer
Date: August 19, 2004 By: /S/ Munjit Johal
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Munjit Johal, Principal Financial Officer