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, 2003
[ ] 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
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Secured Diversified Investment, Ltd.
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(Name of small business issuer in its chapter)
Nevada 80-0068489
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(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
5030 Campus Drive, Newport Beach, California 92660
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (949) 851-1069
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Securities registered pursuant to section 12(b) of the Exchange Act: None
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. (1) 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
$1,512,198.
The aggregate market value of the issuer's voting stock held as of April 8,
2004, by non-affiliates of the issuer was approximately $10,486.
As of March 31, 2004, the issuer had 5,512,258 shares of its $.001 par
value common stock outstanding.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
Documents incorporated by reference: None
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . .3
ITEM 2. DESCRIPTION OF PROPERTY. . . . . . . . . . . . . . . . . . . . 16
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. . . . . 21
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . 22
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . 24
ITEM 7. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . 30
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . 45
ITEM 8A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . 45
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT . . . . . . . . . . . . . . . . . . . . . . . 50
ITEM 10. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 53
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . 54
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 56
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 56
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . 57
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 58
2
ITEM 1. DESCRIPTION OF BUSINESS
The Company owns a portfolio consisting of various types of real
estate properties that are geographically diverse. The Company believes
that by acquiring interests in properties that are geographically diverse
the portfolio will be more stable and less susceptible to devaluation
resulting from regional economic downturns and market shifts. The Company
is currently focusing on acquiring properties in markets with strong
regional economies.
ACQUISITION STRATEGY
--------------------
We seek to acquire properties with the following general profile.
This profile is merely a guideline and our officers and directors may elect
to acquire properties that fall outside the general guidelines if they deem
the property to be beneficial.
Property Type: Diverse commercial retail shopping centers, small
office buildings and others.
Price: Ranging from $500,000 to $20.0 million
Target Capitalization Rate: 10% per annum
Tenants: Local, regional or national tenants
Leases: Existing leases with terms in excess of
three years
Leverage: Existing mortgages and loans not more
than 70% of the fair market value or
purchase price
Appreciation: Potential for appreciation in value in
two years
We intend to structure our acquisitions to minimize the cash required
by offering the sellers shares of our Series C Preferred Stock or other
equity rather than cash. We also structure our acquisitions to offer
several distinct benefits to the sellers. These benefits include:
- Full purchase price paid in preferred stock;
- Preferred stock convertible into common after 24 or 36 months;
- Price protection since the seller receives additional shares of
common stock on conversion if the fair market value of the common
stock is less than the price of the preferred stock paid for the
property (See "Risk Factors");
- Potentially no recognition of gain on sale until the seller sells
the common stock of the Company.
3
While each transaction may be structured to reduce or defer recognition of
any gain on the sale of the real property, we do not make any
representations about the tax consequences to the seller. Sellers must
rely upon their own tax advisors and consultants.
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 the most knowledgeable and experienced real estate
professionals in the United States. Admission to the Society of Exchange
Counselors is extremely difficult, requiring a recommendation from an
existing member and review and approval by the other members, often after
years of observation and evaluation. The Society has been one of the
leading innovators in real estate technology and change. The members
convene regularly to evaluate and advance real estate transactions.
Members of the Society have millions of dollars of 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 they have access to more
than enough potential acquisitions to meet the Company's growth objectives.
ACQUISITIONS AND DISPOSITIONS
-----------------------------
ASSETS OF SEASHORE DIVERSIFIED INVESTMENT COMPANY. The Company
acquired most of its current portfolio in a series of related transactions.
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 is a real estate investment trust and is in the
business of acquiring, selling and managing real estate holdings. Seashore
is a related party and certain officers, directors and shareholders of the
Company were or are also officers, directors or shareholders of Seashore.
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 acquired the
remaining 50% interest in 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.
4
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 a shareholder of the Company, Anthony Giangrande and an
officer and director of the Company, William S. Biddle. 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 property was subsequently sold to a third party for $1,825,000.
The buyer assumed debt of $825,000 and the Company extended a loan of
$425,000 to the buyer of which the Company had a 59% interest and Anthony
Giangrande had a 41% interest which was subsequently purchase by William S.
Biddle. Anthony Giangrande, a shareholder, received $100,000 in connection
with the sale.
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 the Company's restricted shares of common stock and Series
A Preferred Stock in the amount of 1,500,000 shares and 2,500,000 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.
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
49% 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.
5
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.
HISTORY OF THE COMPANY
----------------------
STARTED AS BOOK CORPORATION OF AMERICA. Originally, the Company was
named Book Corporation of America ("BCA"). BCA was incorporated under the
laws of the State of Utah on November 22, 1978 for the purpose of
acquiring, developing, owning, selling, leasing and licensing literary
properties and materials, copyrights, licenses, and other tangible and
intangible properties in connection with artistic ideas and endeavors,
including, but not limited to, all types of theatrical motion pictures,
theatrical stage plays, television films, programs and commercials, radio
recordings, books, and music publications and music recordings.
In 1979, BCA conducted an intrastate public offering of its common
stock. However, the original business plan of BCA failed and the Company
became dormant. On October 10, 1988, the common stock of the BCA was
reverse split 50 to 1, and the par value was changed from $0.01 to $.005
per share. Also in October 1988, BCA acquired Sun Television
Entertainment, Inc., bringing assets of 36 motion picture screenplays and
motion picture production equipment was transferred to BCA by Visto
International, Inc. Such assets were subsequently written of as having no
substantial value.
BCA filed a Form 10-SB Registration Statement with the United States
Securities and Exchange Commission ("SEC") on May 18, 2000, which
registration became effective on July 18, 2000.
CONTROL ACQUIRED BY REIT CONSULTANTS. In March 2002, control of the
Company was acquired by REIT Consultants, LLC ("REIT"), when it acquired
2,000,000 shares of Company common stock from the then controlling
shareholders. Clifford L. Strand, William S. Biddle, Sumyie and Robert
Leonard and Wayne Sutterfield extended a loan to REIT in order to acquire
the controlling interest in the company. Ronald Robinson was the manager
of REIT, subsequently became a director of the Company. When REIT
defaulted on the loan, the lenders received membership interests in REIT in
lieu of repayment. REIT has five members all of which are trusts. The
trustees of the trusts, which are members of REIT, are as follows: William
S. Biddle is the trustee of the William S. Biddle Family Trust, which owns
a 16.7% interest in REIT. Sumyie Onodera-Leonard is the trustee of the
Sumyie N. Onodera Family Trust, which owns a 25% interest in REIT; Robert
J. Leonard is the trustee of the Robert J. Leonard Family Trust, which owns
a 25% interest in REIT Robert J. Leonard is the spouse of Sumyie Onodera-
Leonard; Clifford L. Strand is the trustee of the C.L. Strand Trust, which
owns a 16.7% interest in REIT; and Myra and Wayne Sutterfield are the
trustees of the Wayne Sutterfield Family Trust which owns a 16.6% interest
in REIT.
6
At that time, REIT acquired the controlling interest in the Company,
and William Messerli, Philip Yordan and Daniel Yordan resigned as officers
and directors. Ronald Robinson became the sole officer and director of the
Company. Upon default on the loan and assignment of the REIT membership
interests, each of Clifford L. Strand, Sumyie Leonard and William S. Biddle
became officers and directors of the Company.
REINCORPORATED IN NEVADA AND NAME CHANGED. On July 23, 2002, BCA held
a special shareholder meeting. At the meeting, the shareholders approved a
proposal to change the state of organization of the Company from Utah to
Nevada and to change its name. In accordance with Nevada corporate law, a
change of domicile is affected by merging the foreign corporation with and
into a Nevada corporation. For the sole purpose of changing domicile from
Utah to Nevada, BCA formed Secured Diversified Investment, Ltd., a Nevada
corporation (the "Company"). On August 9, 2002, a merger between Secured
Diversified Investment, Ltd., and BCA was completed. Upon completion of
merger Secured Diversified Investment, Ltd., became the surviving
corporation and BCA was dissolved.
On September 18, 2002, the OTCBB symbol for the Company's common stock
was changed from BCAM to SCDI to reflect the name change.
In connection with the change of state of organization, the Articles
of Incorporation were revised to reduce the par value of the Company's
Common Stock from $.005 to $.001 and to authorize 50,000,000 shares of
Preferred Stock, par value $.01.
COMPETITION
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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."
7
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.
8
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, 2003, we had
incurred accumulated losses of $6.0 million. 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 or operations 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;
9
- 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 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. We do not desire to sell our current
assets to generate operating capital. 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 preferred 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 HAVE BEEN UNABLE TO FUND OUR OPERATIONS WITH THE CASH GENERATED FROM OUR
BUSINESS. IF WE DO NOT GENERATE CASH SUFFICIENT TO FUND OUR OPERATIONS, WE
WILL NEED ADDITIONAL FINANCING TO CONTINUE OUR GROWTH OR OUR GROWTH MAY BE
LIMITED.
To date, we have funded our operations from various sources but have
not generated sufficient cash from operations. We must generate
significant revenue from operations to finance our anticipated operating
expenses internally. If our cash flows are insufficient to fund these
expenses, we will need to fund our growth through additional debt or equity
financing or reduce costs. Our inability to finance our growth, either
internally or externally, will limit our growth potential and our ability
to implement our business strategy.
10
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 poor
performance of the stock market generally and 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.
11
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 the use
of our capital stock, primarily shares of Series B and Series C Preferred
Stock, to acquire properties. Because there is no substantial trading
market for our capital stock, such stock may be 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. See Note 8 to the
Financial Statements.
OUR FUTURE REAL ESTATE ACQUISITIONS ARE UNKNOWN AND YOU WILL NOT HAVE ANY
OPPORTUNITY TO EVALUATE THEM.
You do not know 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 only five properties (or interests in real
property). 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. You can read
"Item 1. Description of Business -- Investment Objectives and Policies" if
you want 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 particular properties prior to
their acquisition.
OUR ACQUISITION STRATEGY DEPENDS UPON SUCCESS IN INCREASING THE PRICE OF
OUR COMMON STOCK. IF WE ARE UNABLE TO INCREASE THE PRICE, THE CONVERSION
OF THE PREFERRED STOCK WILL CAUSE SUBSTANTIAL DILUTION TO OUR COMMON
STOCKHOLDERS.
We intend to acquire properties using our shares of Series B and
Series C Preferred Stock, which convert into common stock on a one for one
ratio so long as the trading price of the common stock exceeds to original
price of the preferred stock (typically $0.50 per share of the Series B
Preferred Stock and $3.00 for the Series C Preferred Stock). The preferred
stock becomes convertible into common stock two years after the date of
issuance. If our common stock price does not increase within such time
period, the former property owners may convert into a number of shares
equal to the original purchase price for the preferred stock divided by the
common stock price. Such conversion rights could result in a substantially
greater number of shares being issued, and will result in substantial
dilution to existing holders of common stock.
12
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;
13
- 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 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.
14
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.
15
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 senior
indenture and credit agreements that govern certain of our outstanding
indebtedness do contain limits on our ability to incur additional
indebtedness.
WE DO NOT HAVE PERMANENT FINANCING FOR FUTURE ACQUISITIONS.
We have not been able to obtain permanent financing for future
acquisitions on acceptable terms. As a result, we must depend upon the use
of our capital stock to acquire properties. Because there is no
substantial trading market for our capital stock, such stock may be
unattractive to prospective sellers of real property. As a result, we may
not be able to acquire sufficient real property to accomplish our business
plan. If market interest rates were to increase at a time when amounts
were outstanding under the credit facility or if other variable rate debt
was outstanding, our debt interest costs would increase, causing
potentially adverse effects on our financial conditions and results of
operations.
EMPLOYEES
---------
The Company currently has 24 full time employees, of which six are
employed in the corporate headquarters and 18 are employed by the
Hospitality Inn. The Hospitality Inn may also employees up to 30 part time
or temporary employees during peak seasons. The Company anticipates hiring
up to two additional corporate employees during the next twelve months.
None of our employees are members of any union or subject to any collective
bargaining agreement. We consider our labor relations to be satisfactory.
REPORTS TO SECURITY HOLDERS
---------------------------
The public may read and copy any materials filed by the Company with
the SEC at the SEC's Public Reference Room at 150 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
Company is an electronic filer and the SEC maintains an Internet site that
contains reports and other information regarding the Company that may be
viewed at http://www.sec.gov.
ITEM 2. DESCRIPTION OF PROPERTY
Set forth below is a description of the current real property
interests owned by the Company.
KATELLA CENTER, ORANGE, CALIFORNIA
----------------------------------
The Company owns a strip mall, which consists of six retail rental
units totaling approximately 9,500 square feet, located on Katella Avenue
in Orange, California. Currently, five of the six units are rented. The
Company is currently trying to rent the final unit. The rental units are
of varying sizes. One tenant, a clothing manufacturer, currently occupies
48% of the strip mall. The rental rates for the individual units average
$1.34 per square foot. The strip mall is currently generating monthly net
cash flow of approximately $3,535.
16
The strip mall 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 May 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 nearly 90,000 square feet enclosed T-Rex Mall
Plaza in Dickinson, North Dakota. The T-Rex Mall is approximately 73%
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 $13,989. 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, $500,000 was owed to the
family trust of Wayne Sutterfield, a director of the Company. Mr.
Sutterfield accepted 1,000,000 shares of Series B Preferred Stock as
repayment of the debt. The Company has an outstanding debt of $67,000,
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).
17
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 $150,000 and
$250,000 of deferred maintenance in the near future.
Currently, the average rent per square foot received is approximately
$.29.
The Property is managed by Everett Real Estate, an unaffiliated party
owned by a minority shareholder of the Company. The Company pays Everett
Real Estate $1,300 per month in management fees.
The Company owes $19,721 relating to property taxes, of which $10,157
is delinquent and includes accrued penalties.
RETAIL CENTER, SPENCER SPRINGS, LAS VEGAS, NEVADA
-------------------------------------------------
The Company holds a 100% interest in a limited liability company that
owns a strip mall in the Spencer Springs area of Las Vegas, Nevada. The
strip mall is located near McCarren International Airport in an area
surrounded by new complexes, high end residential developments, apartments
and condominium projects. It is the only retail center in the immediate
area. Spencer Springs has 14 retail rental units totaling 24,336 square
feet. Currently, approximately 16,800 square feet or 75% of the strip mall
is occupied. The strip mall enjoys a mix of national, regional and local
tenants.
The strip mall was built in the early 1990's and has been well
maintained. No significant renovations are anticipated in the immediate
future.
Spencer Springs is managed by Equity Group of Las Vegas, a
professional property management group. The Company pays Equity Group a
monthly fee of approximately $1,740.
The current outstanding balance of the first trust deed on Spencer
Springs was approximately $2,241,360 on December 31, 2003. The note on the
property matures in September 2013. The annual interest rate on the note
is currently 4.5%. After the first six months, the note bears interest at
an annual rate of the six-month LIBOR rate plus 3%, adjusted every six
months. The current monthly payment is $11,400.00. There is a second
trust deed in the principal amount of $150,000 owed to two separate family
trusts which are managed by William S. Biddle, an officer and director of
the Company and Sumiye Onodera-Leonard, a director of the Company,
respectively. The second trust deed matures August 17, 2004; however, the
term may be extended to February 17, 2005, at the option of the Company
with the payment of a fee in the amount of 25,000 shares of the Company's
Series B Preferred Stock to each William S. Biddle and Sumiye Onodera-
Leonard, respectively. The note bears an interest rate of 12% and the
current monthly payment is $1,500.00 covering interest only.
18
For the year ended December 31, 2003, Spencer Springs generated net
income of $30,122.
HOSPITALITY INN, DICKINSON, NORTH DAKOTA
----------------------------------------
The property is a 149-room, full service hotel and convention center
with a restaurant and banquet rooms. A 125-seat restaurant and a 110-seat
cocktail lounge are located in the Inn. The Inn is approximately 318,500
square feet. The Inn is located just off of I-94 at exit 61 and Highway
22, and is near such attractions as the Theodore Roosevelt National Park,
the Badlands, Dickinson State University, Dakota Dinosaur Museum, and a
golf course.
The Inn is located on 6.6 acres of land that is subject to a 50-year
ground lease that expires in 2053. Seacrest sold the ground to a related
third party that includes Sumiye Onodera-Leonard, a director of the
Company, her husband Robert J. Leonard, who manages the interest of a
family trust which effectively owns 25% of the Company's outstanding common
shares, and the Akira and Hisako Imamura Family Trust which is managed by
the sister of Sumiye Onodera-Leonard (collectively "Landowners"). The
Landowners purchased the ground from Seacrest on June 17, 2003 for
$1,300,000. The Landowners and Seacrest entered into a ground lease with
monthly ground lease payments of $10,000 and $12,000 for the first two
years, respectively. Beginning with the third year, the ground lease
payment will adjust annually based on the Consumer Price Index, with a
floor of 2% and a ceiling of 3%. The Company is assuming the ground lease
payments. Pursuant to the terms of the ground lease, the Company may
repurchase the ground. Since January 2004, the Company has been in default
of the land lease.
There is a first trust deed on the property in the principal amount of
$60,000 bearing an interest rate of 15% per annum and which matures October
1, 2004. The Company makes monthly interest only payments of $750.
On an annual basis the Inn is losing money, although certain months
during peak season the Inn may be profitable on a monthly basis.
Currently, the outstanding accounts payable total approximately $82,723
including 9,198 in sales taxes. The Inn also owes approximately $52,148 in
delinquent federal payroll taxes and $67,912 in property taxes of which
$34,975 is delinquent and includes accrued penalties. The Inn also
requires approximately $250,000 in deferred maintenance in the immediate
future.
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 $716,505 with a monthly payment of $5,248.16
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
19
The land on which the office building sits is leased. The ground
lease payment is currently $2,340 per month. The ground lease adjusts to
$3,608 on July 1, 2004 and 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.
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 $1.34 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 Spencer Springs property is $1.17 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 $0.29 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.
Lease at our properties expire at various dates. At the Campus
Office Building and T-Rex Mall, virtually all of the leases have past their
original expiration date and therefore have become 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 2004 Expirations 2005 Expirations 2006 Expirations
-------------------------------------------------------------------------------------
% % %
sq. $ of sq. $ of sq. $ of
ft. % psf rev. ft. % psf rev. ft. % psf rev.
-------------------------------------------------------------------------------------
Katella
Center 4,320 48% $1.16 41% None 2,490 27% $1.27 26%
-------------------------------------------------------------------------------------
Spencer
Springs 2,300 14% $1.33 12% 2,600 11% $1.40 14% 1,100 5% $1.31 5%
-------------------------------------------------------------------------------------
20
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.
---------------------------------------------------------------------------
Annual Gross Rent % of Total % of Total
Top Tenants by Rental Revenue from Tenant Revenue 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.
To the knowledge of management, there is no material litigation
pending or threatened against the Company or its management. Further, the
Company is not aware of any other material pending or threatened litigation
to which the Company or any of its directors, officers or affiliates are or
would be a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On November 13, 2003, the Company held its Annual Meeting of
Stockholders. Proxies were not solicited by the Company. At the Annual
Meeting of Stockholders a quorum of shares was present. A number of
matters were considered and voted upon at the meeting. Following is a
brief description of the matters voted upon and the results of the
shareholder votes:
The shareholders of the Company were asked to elect members to the
board of directors of the Company for a one-year term or until their
successors are elected. Clifford L. Strand, William Biddle, Sumyie
Leonard, Jay Kister, Pamela Padgett and Wayne Sutterfield were nominated to
serve as directors. Each of the aforementioned individuals received the
affirmative vote of 11,337,214 shares, with no votes against or abstaining.
The biographical information of each of the aforementioned individuals
provided in the Definitive Information Statement filed on October 22, 2003,
is incorporated herein by this reference.
21
The shareholders were also asked to adopt and approve the 2003
Employee Stock Incentive Plan and the 2003 Non-Employee Director Stock
Incentive Plan, (collectively the "2003 Plans") which were adopted by the
Company's Board of Directors on August 16, 2003, subject to shareholder
approval. The purpose of the 2003 Plans is to enable the Company to retain
and attract key employees, consultants, members of its Board of Directors
who will contribute to its success by their ability, ingenuity and
industry, and to enable such individuals to participate in the Company's
long-term success and growth by giving them a proprietary interest in the
Company. The 2003 Plans authorize the grant of stock options, restricted
stock awards, stock in lieu of cash compensation and stock purchase rights
covering up to a total of 15,000,000 shares of common stock to key
employees, consultants, and members of the Company's Board of Directors and
also provides for ongoing automatic grants of stock options to non-employee
directors. Other than the automatic annual grants to non-employee
directors and the grants and awards agreed to in the employment agreements
with our executive officers, the number and type of awards that will be
granted under the 2003 Plans shall be determined by the Board in its sole
discretion. The shareholders voted 11,337,214 shares in favor of the
adoption of the 2003 Plans, with no shares voting against or abstaining.
Finally, the shareholders voted 11,337,214 shares in favor of
ratification of the appointment of Cacciamatta Accountancy Corporation as
independent public accountants to audit the consolidated financial
statements of the Company for the fiscal year ending December 31, 2003, and
to perform other accounting services as requested by the Company.
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, 2004, the
Company had approximately 398 shareholders holding 5,512,258 common shares.
Of the issued and outstanding common stock, approximately 494,940 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.
22
Closing Bid Closing Ask
High Low High Low
------------------------------------------------------------------
2002
----
Jan. 1 thru .07 .05 None None
Mar. 31
Apr. 1 thru .06 .06 None None
June 30
July 1 thru .08 .06 None None
Sept. 30
Oct. 1 thru .08 .08 None None
Dec. 31
2003
----
Jan 1. thru .08 .08 None None
Mar. 31
Apr. 1 thru .08 .03 None None
June 30
July 1 thru .18 .03 None None
Sept. 30
Oct. 1 thru .05 .05 None None
Dec. 31
2004
----
Jan. 1 thru 2.25 .05 25.00 2.00
Mar. 31
The above information was obtained from Pink Sheets, LLC, located at
304 Hudson Street, 2nd Floor, New York, New York 10013.
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.
23
PLAN CATEGORY
Weighted- Number of
Number of average remaining available
securities to exercise for future issuance
be issued upon price of under equity
exercise of outstanding compensation plans
outstanding options, (excluding securities
options, warrants warrants reflected in
and rights and rights columns (a))
(a) (b) (c)
-------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 3,000,000 $0.15 12,750,000
Equity compensation
plans not approved by
security holders -0- -0- -0-
-------------------------------------------------------------------------------------
Total 3,000,000 $0.15 12,750,000
-------------------------------------------------------------------------------------
The Company's common shares are subject to conversion of the Company's
outstanding convertible preferred stock. The Company's currently
outstanding 4,725,410 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. 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
issued 6,000,340 shares of Series B Convertible Preferred shares. The
Series B shares cannot be converted until 24 months from the date they are
issued. The Series B shares are converted at the same rate as the Series A
shares. The Company has also created Series C Preferred Stock having the
same conversion rate. As of April 15, 2004, no 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.
24
RECENT SALES OF UNREGISTERED SECURITIES
During the fourth quarter of 2003, the Company sold 12,000 shares of
Series B Preferred Stock to two investors for $0.50 per share. Such
investors included Jay Kister, a director of the Company. The Company also
issued shares of Series B Preferred Stock to officers and Directors as
commission in connection with various real estate transactions. See
"Certain Relationships and Related Party Transactions."
On March 3, 2004, the Company issued 100,000 restricted shares of
Series B Convertible Preferred Stock for a total consideration of $50,000
to one individual who was not an affiliate of the Company. The shares were
issued without registration under the Securities Act of 1933 in reliance on
an exemption from registration provided under Section 4(2) of the
Securities Act, and from similar applicable state securities laws, rules
and regulations exempting the offer and sale of these securities by
available state exemptions. No general solicitation was made in connection
with the offer or sale of these securities. The Company paid Robert
Leonard, a significant shareholder of the Company, a fee equal to 10% of
the gross proceeds for identifying and introducing the investor.
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,
2003, together with the results of operations and cash flows for the
periods ended December 31, 2003 and 2002.
FORWARD-LOOKING STATEMENTS
Historical results and trends are not necessarily indicative of future
operations. Managements' statements contained in this report that are not
historical facts are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. Actual results may differ
materially from those included in the forward-looking statements. The
Company intends such forward-looking statements to be covered by the safe-
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement
for purposes of complying with such provisions. Forward-looking
statements, which are based on certain assumptions and describe future
plans, strategies and expectations of management, are generally
identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," "prospects," or similar expressions.
The Company's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have a
material adverse affect on the operations and future prospects of the
Company include, but are not limited to: changes in general economic
conditions and in the real estate market specifically (including those in
the local economy of the regions where the Company's properties are
located), legislative/regulatory changes, availability of capital, interest
rates, competition and supply and demand for operating properties in the
Company's current and proposed market areas. These risks and uncertainties
should be considered in evaluating forward-looking statements, and undue
reliance should not be placed on any such statements. Further information
concerning the Company and its business, including additional factors that
could materially affect the Company's financial results, is included herein
and in the Company's other filings with the Securities and Exchange
Commission. The Company does not intend to update any of the forward-
looking statements after the date this report is filed to conform these
statements to actual results, unless required by law.
25
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.
26
REAL ESTATE INVESTMENTS
The following table presents a summary of the Company's wholly-owned
properties and properties in which it owns interests through certain
limited liability companies as of December 31, 2003:
Company Square Date Major
Property Name Location Ownership % Feet Acquired Tenant(1)
-------------------------------------------------------------------------------------
Operating Properties
--------------------
Katella Center Orange, CA 100 9,500 03/31/03 Judith by
(2) Strings
-------------------------------------------------------------------------------------
T-Rex Mall Dickinson, ND 100 89,642 03/31/03 Newby's
(2)
-------------------------------------------------------------------------------------
Spencer Springs Las Vegas, NV 87 24,336 03/31/03 Amerident
(3)
-------------------------------------------------------------------------------------
Chris's Place
Hospitality Inn Dickinson, ND 100 08/01/03
-------------------------------------------------------------------------------------
Campus Drive Newport
Office Building Beach, CA 53.8 8,685 2/09/03 Borders
(4) 12/30/03 Architects
-------------------------------------------------------------------------------------
(1) Tenant occupying largest space of property.
(2) The Company assumed operations of the property in February 2003.
(3) Owned by Spencer Springs limited liability company, a subsidiary of
the Company.
(4) 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.
The following table sets forth management's estimate of current fair market
value of the real property owned, directly or indirectly, by the Company.
Current fair market value is based upon appraisals from independent third
parties as more fully set forth in the footnotes to the table. The
estimated current values also assume that the rental income for each
property has been stabilized, payments of delinquent property taxes an all
required maintenance has been accomplished. The Company is currently
working to stabilize occupancy and to perform deferred maintenance on
several properties. The amount of the secured obligations is the principal
amount plus accrued interest as of December 31, 2003. Estimated net worth
is prior to any commissions or expenses of any sale.
27
Total Secured
Estimated Obligations
Property Current as of Estimated
and Location Market Value 12/31/2003 Net Worth
---------------------------------------------------------------------------
Katella Shopping Center
Orange, CA $800,000 (1) $ 395,000 $ 405,000
---------------------------------------------------------------------------
Spencer Springs Shopping Center
Las Vegas, Nevada 4,250,000 (2) 2,241,360 2,008,640
---------------------------------------------------------------------------
Campus Office Building
Newport Beach, CA 1,150,000 (3) 833,463 316,537
---------------------------------------------------------------------------
T-Rex Shopping Center
Dickinson, North Dakota 1,555,000 (4) 437,000 1,118,000
---------------------------------------------------------------------------
Hospitality Inn
Dickinson, North Dakota 1,900,000 (5) 1,450,000 378,000
---------------------------------------------------------------------------
Total $9,205,000 4,284,823 4,910,177
---------------------------------------------------------------------------
(1) Based upon a written appraisal from Ralph H. Mauch of Villa &
Associates Real Estate Appraisers, Anaheim, CA, dated May 11, 2000.
(2) Based upon a written appraisal from Timothy R. Morse & Associates, MAI
Appraiser, dated July 22, 2003.
(3) Based upon a written appraisal from CB Richard Ellis, Inc. Valuation
and Advisory Services, Newport Beach, CA, dated November 8, 2002.
(4) Based upon a written appraisal from The Advisory Services Group,
Coldwell Banker Commercial, Source One Realty, Redondo Beach, CA, dated
April 24, 2002. The current fair market value is the appraised value less
the sale price of the underlying land. The appraised value of the real
property was $3,200,000. In February 2003 the Company sold the land
underlying the shopping center for $1,645,000. Total secured obligation
includes deferred maintenance of $250,000.
(5) Based upon a written appraisal from Bill A. Knudsen, Knudson Appraisal
Services, Bismarck, North Dakota, a member of the National Association of
Independent Fee Appraisers, dated November 18, 1999. The current fair
market value is the appraised value less the sale price of the underlying
land. The total appraised value was $3,500,000, of which the fair market
value of the real estate was $3,000,000 and the furniture, fixture and
equipment was $500,000. Seacrest Partners, L.P., the former owner, sold
the land underlying the Hospitality Inn for $1,300,000. Fair market value
is the appraised value less the value of the furniture, fixtures, equipment
and land value. Total secured obligations $250,000 of deferred maintenance
and $68,000 of delinquent property taxes.
The above table is management's current estimate of fair market value.
Fair market value is subject to change due to market factors beyond the
control of the Company. The Company cannot give any assurance that the
estimated fair market value could actually be realized in any sale
transaction.
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
28
100% membership interest in two LLCs: one (Spencer Springs) owns 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 THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Comparability of the financial information discussed below is
materially impacted by the Company's acquisition of properties beginning in
the first quarter of 2003.
INCOME. Income consists of rental income from commercial properties
pursuant to tenant leases and income from the operation of a full service
hotel. As a result of these operations, the Company reported income of
$1,441,066, net of $71,132 for coupons and discounts, for the fiscal year
ended December 31, 2003. The Company realized no income in the comparable
period 2002.
COST OF GOODS SOLD. Cost of goods sold was attributable to the
operation of the full service hotel. The cost of goods sold totaled
$491,028 for the five-month period the Company owned the hotel ending
December 31, 2003. The Company had no cost of goods sold in the comparable
period 2002.
GENERAL AND ADMINISTRATIVE EXPENSES. General 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 $2,094,984 to $2,167,225 for the fiscal year ended
December 31, 2003, compared to $72,241 for the year ended December 31,
2002. The increase is attributable to the operation of acquired real
estate and a full service hotel. The primary components of such expenses
were payroll, real estate commissions, land leases, and professional fees.
The Company also recognized impairment with respect to the T-Rex property
in the amount of $448,403. 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 fiscal year ended December 31,
2003 was $80,114 compared to no depreciation for the year ended December
31, 2002. The depreciation was attributable primarily to the Katella
Center, Hospitality Inn, Spencer Springs 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 $202,997
for the fiscal year ended December 31, 2003 compared to $1,212 for the year
ended December 31, 2002. Interest expense was attributable primarily to
the Katella Center, T-Rex Plaza Mall, Hospitality Inn and Spencer Springs
properties.
29
The Company also reported cost to purchase the remaining 50% minority
interest in Spencer Springs, LLC, which totals($1,270,154). Additionally,
the Company incurred a loss of $70,000 on certain notes while recognizing a
gain of $275,545 on the sale of assets.
NET INCOME. The net loss was $2,904,938 or $(0.57) per share basic
and diluted for the fiscal year ended December 31, 2003 compared to a net
loss of $73,193 or $(0.03) per share basic and diluted for the fiscal
year ended December 31, 2002.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2002
As of December 31, 2002, the Company had $6,058 cash on hand and no
other assets. The Company has experienced losses from inception. As of
December 31, 2002, the Company had total current liabilities amounting to
$68,111. Since inception the Company has sustained continued losses and
has an accumulated operating loss since inception of $3,425,066. As of
December 31, 2002, the Company had no revenue producing activities and was
completely dependent upon its officers and directors to provide for its
cash requirements. While the Company hopes to be successful in its efforts
to acquire and manage real estates holdings, there is no guarantee that the
Company will be successful.
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, 2003, the Company had $125,545 of cash and cash
equivalents as compared to $6,058 of cash and cash equivalents at
December 31, 2002 to meet its immediate short-term liquidity requirements.
This increase in cash and cash equivalents resulted primarily from the cash
proceeds from the sale of Decatur Square.
Operating cash flows are expected to increase as additional properties
and investments in real estate are added to the Company's portfolio. Cash
and cash equivalents decreased since December 31, 2002 principally as a
result of acquisition of real estate investments.
30
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 $504,921 for the fiscal year
ended December 31, 2003 compared to net cash used by operating activities
of $121,969 for the fiscal year ended December 31, 2002. This increase in
cash provided by operating activities relative to the prior period was
primarily due to the Company's acquired real estate holdings and expenses
relating to audit, legal and expanded compliance with federal and state
securities laws. The Company had no operations during the same quarter of
2002.
Management expects cash flows from operating activities to increase
due to the acquisitions of the Katella Center, T-Rex Mall, and the limited
liability company membership interest in Spencer Springs and the Campus
Drive Office Building as well as the acquisition of additional properties
and investments in unconsolidated real estate during the remainder of the
year as the Company strategically builds its real estate portfolio.
Management is currently considering other potential opportunities to
acquire real estate. The decision to acquire one or more properties or
investments in unconsolidated real estate will generally depend upon
(i) receipt of a satisfactory environmental survey and property appraisal,
(ii) an absence of any material adverse change relating to the property,
its tenants, or local economic conditions, and (iii) adequate financing.
There is no assurance that any of these conditions will be satisfied or, if
satisfied, that the Company will purchase any additional properties or make
any further investments in unconsolidated real estate.
CASH FLOWS FROM IN INVESTING ACTIVITIES
Net cash from investing activities amounted to $126,182 for the fiscal
year ended December 31, 2003 compared to $0 for the fiscal year ended
December 31, 2002, primarily from the sale of Decatur Square offset by an
investment in the Campus Drive office building and various capital
expenditures.
At December 31, 2003, the Company does not have any material planned
capital expenditures resulting from any known demand based on existing
trends. However, management may conclude that expenditures to improve
properties are necessary and/or desirable.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash provided by financing activities amounted to $498,226 for the
fiscal year ended December 31, 2003 compared to $107,953 for the fiscal
year ended December 31, 2002. The primary reason for the increase was
proceeds from notes and the sale of preferred stock.
The Company intends to acquire additional properties and make
additional investments in unconsolidated real estate and may seek to fund
these acquisitions through proceeds received from a combination of
subsequent equity offerings, debt financings or asset dispositions.
31
ITEM 7. 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, 2003, and
the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the two years in the period ended December 31,
2003. 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 audits.
We conducted our audits 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 audits 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, 2003, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 2003, 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, cash reserves are low 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/ CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, California
May 14, 2004
F-2
SECURED DIVERSIFIED INVESTMENT, LTD.
Consolidated Balance Sheet
As of December 31, 2003
ASSETS
Current Assets
Cash $ 125,545
Accounts Receivable 38,774
Inventory 23,981
Note Receivable, net of $25,000 reserve 400,000
------------
Total Current Assets 588,300
------------
Fixed Assets
Equipment, net of $9,434 of accumulated depreciation 60,491
Real Estate, net of $57,177 of accumulated depreciation 4,719,222
------------
Total Fixed Assets 4,779,713
------------
Other Assets
Restricted Cash 70,000
Prepaid and other 45,031
------------
Total Other Assets 115,031
------------
Total Assets $ 5,483,044
LIABILITIES AND STOCKHOLDERS' EQUITY ============
Current Liabilities
Accounts Payable $ 146,320
Interest Payable 17,576
Payroll Liabilities, including $158,684 due officers & directors 273,854
Accrued Property Tax 87,634
Accrued Sales Tax 9,198
Security Deposits 41,395
Current Portion of Long-Term Debt, related parties 328,956
Current Portion of Long-Term Debt 47,400
------------
Total Current Liabilities 952,333
------------
Long Term Liabilities
Notes Payable, related parties 337,880
Mortgages Payable 3,417,403
------------
Total Long - Term Liabilities 3,755,283
------------
Total Liabilities 4,707,616
------------
Minority Interest 171,838
------------
STOCKHOLDERS' EQUITY
Series A Preferred Stock, 7,500,000 shares authorized,
$0.01 par value, 7,190,381 issued & outstanding 71,904
Series B Preferred Stock, 20,000,000 shares authorized,
$0.01 par value, 5,832,480 issued & outstanding 58,325
Series C Preferred Stock, 22,500,000 shares authorized,
$0.01 par value, zero shares issued & outstanding -
Common Stock, 100,000,000 shares authorized, $0.001
par value, 8,157,286 issued and outstanding 8,157
Paid In Capital 6,546,843
Accumulated Deficit (6,081,639)
------------
Total Stockholders' Equity 603,590
------------
Total Liabilities and Stockholders' Equity $ 5,483,044
============
See the accompanying notes
F-3
SECURED DIVERSIFIED INVESTMENT, LTD
Consolidated Statements of Operations
Year ended December 31
------------------------
2003 2002
----------- -----------
REVENUES
Rental $ 632,728 $ -
Hotel, net of $71,132 for coupons and discounts 789,916 -
Brokerage 18,423 -
----------- -----------
Total Revenues 1,441,066 -
Cost of Goods Sold 491,028 -
----------- -----------
950,038 -
General and Administrative Expenses 2,167,225 71,029
Operating (Loss) (1,217,187) (71,029)
Other Income and Expense
Interest $ (202,997) $ (1,212)
Interest 10,326 -
Loss on sale of assets, net (1,036,963) -
Minority Interest (13,823) -
Impairment loss (448,403) -
Other 4,109 -
----------- -----------
Net (Loss) $(2,904,939) $ (72,241)
=========== ===========
Basic and diluted net (loss) per share $ (0.57) $ (0.03)
=========== ===========
Basic and diluted weighted average shares 5,107,950 2,349,540
=========== ===========
See the accompanying notes
F-4
Secured Diversified Investment, Inc.
Consolidated Statement of Shareholders' Equity
Preferred Stock Preferred Stock
Series A Series B Common Stock
-------------------- -------------------- --------------------
$0.01 $0.01 $0.01
Shares Par Value Shares Par Value Shares Par Value
---------- --------- ---------- --------- ---------- ---------
Balance, December
31, 2001 - $ - - $ - 2,349,540 $ 11,748
Contributed capital
Change in par value
from $.005 to $.001 (9,398)
Net loss
---------- --------- ---------- --------- ---------- ---------
Balance, December
31, 2002 - - - - 2,349,540 2,350
Stock issued for
real estate
acquisitions 7,497,807 74,978 4,752,480 47,525 3,961,606 3,961
Conversion of
$500,000 note 1,000,000 10,000
Stock issued for
cash 80,000 800
Stock issued for
public relation
services 400,000 400
Stock issued to
officers 1,100,000 1,100
Stock issued to
directors 500,000 500
Shares cancelled (307,426) (3,074) (153,860) (154)
Net loss
---------- --------- ---------- --------- ---------- ---------
Balance, December
31, 2003 7,190,381 $ 71,904 5,832,480 $ 58,325 8,157,286 $ 8,157
========== ========= ========== ========= ========== =========
See accompanying notes
F-4
Secured Diversified Investment, Inc.
Consolidated Statement of Shareholders' Equity
Additional
Paid In Accumulated Stockholders
Capital Deficit Equity
------------ ------------ ------------
Balance, December 31, 2001 $ 3,041,711 $(3,104,460) $ (51,001)
Contributed capital 61,189 61,189
Change in par value from $.005 to $.001 9,398 -
Net loss (72,241) (72,241)
------------ ------------ ------------
Balance, December 31, 2002 3,112,298 (3,176,701) (62,053)
Stock issued for real estate acquisitions 2,840,117 2,996,581
Conversion of $500,000 note 490,000 500,000
Stock issued for cash 39,200 40,000
Stock issued for public relation services 31,600 32,000
Stock issued to officers 20,900 22,000
Stock issued to directors 9,500 10,000
Shares cancelled 3,228 -
Net loss (2,904,938) (2,904,938)
------------ ------------ ------------
Balance, December
31, 2003 $ 6,546,843 $(6,081,639) $ 603,590
============ ============ ============
See accompanying notes
F-4
SECURED DIVERSIFIED INVESTMENT, LTD
Consolidated Statements of Cash Flows
Year ended December 31,
2003 2002
------------ ------------
Cash flows from operating activities:
Net Loss $(2,904,938) $ (72,241)
Adjustment to reconcile net loss to net cash used by
operating activities:
Depreciation 80,114 -
Minority interest 13,823 -
Loss on sale of note receivable 45,000 -
Reserve for note receivable 25,000 -
Loss on sale of real estate 106,832 -
Loss on acquisition of minority interest 1,270,154 -
Impairment of real estate 448,403 -
Increase (decrease) in assets and liabilities
Restricted cash (70,000) -
Receivables (38,774) -
Inventory (23,981) -
Accrued interest added to notes payable 12,500 -
Prepaid expenses and other (45,031) -
Accounts payable and other 575,977 (49,728)
------------ ------------
Net cash provided (used) by operating activities (504,921) (121,969)
------------ ------------
Cash flow from investing activities:
Purchase equipment and tenant improvements (62,867) -
Proceeds from sale of assets 451,186 -
Investment in subsidiary (262,137) -
------------ ------------
Net cash provided by investing activities 126,182 -
------------ ------------
Cash flows from financing activities:
Proceeds from capital contributions - 61,189
Proceeds from stock issuance 40,000 -
Proceeds from notes payable - related party 361,450 55,000
Payments on notes payable - related party (28,194) (8,236)
Proceeds from notes payable 150,147 -
Payments on notes payable (25,177) -
------------ ------------
Net cash provided by financing activities 498,226 107,953
------------ ------------
Net increase (decrease) in cash 119,487 (14,016)
Cash, beginning of the year 6,058 20,074
------------ ------------
Cash, end of the year $ 125,545 $ 6,058
============ ============
Supplemental disclosures:
Cash paid for interest $ 202,997 $ -
Cash paid for income tax $ - $ -
Non-cash investing and financing activities:
Property acquired through stock issuances $ 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 $ 425,000 $ -
See the accompanying notes
F-5
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
___________________________________________________________________________
NOTE 1 - 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.
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 (51%) - 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.
F-6
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
___________________________________________________________________________
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.
Fair value. The carrying value for cash, prepaids, and accounts payable
and accrued liabilities approximates 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.
STOCK-BASED COMPENSATION. The Company measures compensation costs for
options using the intrinsic value based method of accounting as prescribed
under Accounting Pronouncement Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) as permitted under SFAS 123. No
compensation cost was recorded because the exercise price for the shares
exceeded the market value on the date of grant. Had compensation cost for
the Company's stock-based compensation plans been determined based on the
fair value, the Company's net loss for the year ended December 31, 2003
would have increased $9,530 to $2,914,468 and loss per share would have
increased $0.002 to $(0.572). 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%.
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, 2003, all potential common shares are
excluded from the computation of diluted loss per share, as the effect of
which was antidilutive.
INCOME TAXES. The Company recognizes a deferred tax asset or liability for
the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
F-7
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
___________________________________________________________________________
At December 31, 2003, the Company had a net operating loss carry-forward of
approximately $1,185,000 that may be offset against future taxable income
through 2023. These carry-forwards are subject to review by the Internal
Revenue Service. The tax benefit was calculated using a tax rate of 35% for
Federal and 10% for State. The Company has fully reserved the related
$572,000 tax benefit because the likelihood of realization of the tax
benefit cannot be determined. Of the total tax benefit, approximately
$534,000 is attributable to 2003. Temporary differences between the time of
reporting certain items for financial and tax reporting purposes consist
primarily of real estate impairment and the cost of acquiring minority
interests recognized for book purposes.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 2002, the FASB issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS
146 addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity. "SFAS 146 generally requires a
liability for a cost associated with an exit or disposal activity to be
recognized and measured initially at its fair value in the period in which
the liability is incurred. The pronouncement is effective for exit or
disposal activities initiated after December 31, 2002. The Company's
financial position or results of operations have not been affected by this
new pronouncement.
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.
NOTE 4 - Property and Equipment
-------------------------------
The Company acquires income-producing real estate assets in the normal
course of business. During 2003, the Company acquired assets in California,
Nevada and North Dakota.
Estimated Life
Land $766,500
Buildings and improvements 3,838,918 39 years
Leasehold Improvements 170,982 2 - 10 years
Furniture, fixtures and equipment 69,924 3 -7 years
-------------
4,846,324
Less accumulated depreciation (66,611)
-------------
$ 4,779,713
=============
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 is included in "other income/loss" in the accompanying
financial statements. Depreciation expense was $80,114 in 2003, including
$13,503 on the T-Rex Plaza Mall, and $0 in 2002. No interest was
capitalized in either period.
F-8
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
___________________________________________________________________________
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. On March 31, 2003, the Company issued 2,461,607 common shares and
4,997,807 Series A preferred shares to SDIC 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.
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,
2003, the outstanding balance totaled $116,456, with $10,882 in accrued
interest due.
SEACREST LIMITED PARTNERSHIP (Seacrest). Certain of the Company's directors
and officers were the majority partners in Seacrest. On August 1, 2003,
the Company issued 1,445,029 common shares and 2,464,971 preferred A shares
to Seacrest to acquire the Hospitality Inn, a 149 room full service hotel
complete with meeting and banquet rooms as well as a restaurant and bar on
leased land in Dickinson, North Dakota. The Company also acquired Dickinson
Management Inc., a wholly owned subsidiary of Seacrest which operated the
hotel, owns the liquor license and is the registered entity for various
permits and licenses necessary to operate the Inn. In conjunction with the
acquisition, the Company assumed approximately $136,728 of liabilities.
LEONARD, ET AL. The Hospitality Inn leases land from a 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. The lease expires in 2053. The monthly
ground lease payments are $10,000, $12,000, and $14,000 for the first three
years, respectively. Beginning with the fourth year, the ground lease
payments will adjust annually based on the Consumer Price Index, with a
floor of 2% and a ceiling of 3%. Pursuant to the terms of the ground
lease, the Company may purchase the land. During 2003, the Company made
lease payments of $50,000.
C. WAYNE SUTTERFIELD (Sutterfield). At December 31, 2003, 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, totaling
$18,743 in 2003, and retains the right to acquire all his interests.
CLIFFORD L STRAND (Strand) AND WILLIAM S. BIDDLE (Biddle). During 2003,
Strand and Biddle, officers, directors and shareholders, provided real
estate services in connection with various acquisitions. For these
services, Strand and Biddle received cash of $50,000 each and shares of
Series B preferred stock totaling 174,000 to Strand and 188,000 to Biddle.
Strand and Biddle also 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.
F-9
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
___________________________________________________________________________
PRIME TIME AUCTIONS, INC (Prime Time). Prime Time is a shareholder of the
Company. During 2003, Prime Time extended three loans totaling $137,500 to
the Company, all of which bear interest at 15%, are secured by the
underlying property and mature through 2005.
NOTE 6 - Related Party Debt
- Unsecured note, bearing interest at 9%, interest only, due on demand $ 116,456
- Mortgage note, bearing interest at 8%, interest only, maturing
February 17, 2006, secured by 2nd trust deed on T-Rex Plaza Mall 67,000
- Mortgage note, bearing interest at 8%, interest only, maturing
December 31, 2006, secured by 3rd trust deed on 5030 Campus 71,630
- Mortgage note, bearing interest at 10%, maturing April 21, 2004,
interest only, secured by 1st trust deed on T-Rex Plaza Mall 100,000
- Mortgage note, bearing interest at 15%, maturing February 26, 2004,
interest only, secured by 1st trust deed on Palm Highland 52,500
- Mortgage note, bearing interest at 15%, maturing October 1, 2004,
interest only, secured by 1st trust deed on Hospitality Inn 60,000
- Mortgage note, bearing interest at 15%, maturing July 1, 2005,
interest only, secured by 2nd trust deed on Katella Center 25,000
- Mortgage note payable, bearing interest at 7.05%, maturing April
15, 2008, interest only, secured by second trust deed on Palm Highland 174,250
---------
Total related party debt 666,836
Less current portion of related party debt 328,956
---------
Long term portion of related party debt $ 337,880
=========
NOTE 7 - Third Party Debt
- Unsecured note, bearing interest at 9%, maturing June 20, 2005,
interest only $ 19,980
- Mortgage note, bearing interest at 11.5%, maturing May 15, 2005,
interest only, 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 and 70,00 restricted cash 723,463
- Mortgage note, bearing interest at 8%, maturing February 8, 2008,
interest only, secured by 2nd trust deed on 5030 Campus 110,000
- Mortgage payable, bearing interest at the "6 month London Interbank
Offer 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 2,241,360
-----------
Total third party debt $ 3,464,803
Less current portion of third party debt 47,400
-----------
Long term portion of third party debt $ 3,417,403
===========
F-10
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
___________________________________________________________________________
NOTE 8 - Stockholders' Equity
In February 2003, the Company created three series of preferred stock, all
of which are convertible at the option of the holder: (1) Series A
consisting of 7,500,000 shares with a par value of $0.01, a liquidation
preference of $1.00 per share, convertible into an equal number of common
shares 36 months after issuance, with the same voting rights as common
stock; (2) Series B consisting of 20,000,000 shares with a par value of
$0.01, a liquidation preference of $0.50 per share, and convertible into an
equal number of common shares 24 months after issuance; and (3) Series C
consisting of 22,500,000 shares with a par value of $0.01, a liquidation
preference of $3.00 per share, and convertible into an equal number of
common shares 24 months after issuance. In the event the price of common
stock is less than the purchase price of the preferred stock on the
conversion date, the holder is entitled to convert at a rate equal to the
purchase price divided by the common stock price.
The Company is offering 18,447,520 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 or in exchange for real estate
acquisitions.
During 2003, the Company issued 3,906,635 shares of common stock, 7,462,778
shares of Series A, and 4,652,480 shares of Series B in exchange for
property acquisitions. During 2003, the Company issued 400,000 shares of
common stock for public relations services. Additionally, during 2003, the
Company converted $500,000 of debt for 1,000,000 shares of Series B
preferred stock. Also in 2003, the Company sold 80,000 shares of Series B
preferred stock for $40,000.
NOTE 9 - Stock Incentive Plans
In November 2003, the Board of Directors adopted and the Shareholders
approved two stock incentive plans: the Secured Diversified Investment,
Ltd. 2003 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 "cash less
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. 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.
F-11
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
___________________________________________________________________________
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 "cash less
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 10 - 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, 2003 and 2002.
2003 2002
------------ ------------
Net loss $(2,904,938) $ (72,241)
Less preferred stock dividends - -
------------ ------------
Net loss available to common shareholders $(2,904,938) $ (72,241)
============ ============
Basic weighted average shares outstanding 5,107,950 2,349,500
Dilutive potential common shares - -
------------ ------------
Diluted weighted average shares outstanding 5,1070,950 2,349,500
============ ============
Basic and diluted net loss per share $ (0.57) $ (0.03)
============ ============
Potential common shares excluded from diluted
weighted average shares outstanding because
of their anti-dilutive nature:
Convertible Series A and B preferred stock 12,922,861 -
Options granted, not yet issued 3,000,000 -
------------ ------------
15,922,861 -
============ ============
NOTE 11 - 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 are 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. Lease payments during 2003 and 2002 totaled
$233,792 and $0, respectively.
F-12
SECURED DIVERSIFIED INVESTMENT, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
___________________________________________________________________________
UNPAID PROPERTY TAXES. The Company has not paid approximately $88,000 in
2003 property taxes on the Hospitality Inn and T-Rex Plaza Mall that were
due March 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 December 31, 2003, approximately $141,000 in officer salaries
was unpaid. Additionally, the Company accrued and expensed $26,000 of
compensation cost related to the stock to be issued, under the terms of the
agreements. 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.
Future annual minimum lease and principal payments under existing
agreements are as follows.
Related 3rd Party
Party Lease Lease Related 3rd Party Officer
Obligation Obligation Party Debt Debt Salaries Total
--------------------------------------------------------------------------
2004 $ 126,000 $ 239,187 $ 328,956 $ 47,400 $ 686,667 $1,428,210
2005 138,000 354,505 25,000 106,380 1,009,167 1,533,052
2006 144,000 256,989 67,000 51,400 670,833 1,190,222
2007 144,000 260,542 71,630 53,400 - 529,572
2008 144,000 264,167 174,250 165,400 - 747,817
--------------------------------------------------------------------
$ 696,000 $1,275,390 $ 666,836 $ 423,980 $2,366,667 $5,428,873
====================================================================
NOTE 12 - Subsequent Events
DEBT. In 2004, two directors, William Biddle and Sumiye Onodero-Leonard,
loaned $150,000 to the Company; under a note secured by a 2nd trust deed on
Spencer Springs, interest at 12% due May 2005, with a six-month renewal
option. Biddle and Leonard each received 25,000 shares of Series B
preferred stock. Two related party notes payable that matured in early
2004, totaling $152,500, were repaid. Also in 2004, the $100,000 note
payable due to officer and director William Biddle and the $52,500 note to
a shareholder were repaid.
ACQUISITIONS. In 2004, the Company issued 67,860 shares of Series B
preferred stock for a $33,930 note receivable secured by residential
property in Binghamton, New York. The note requires monthly principal and
interest payments totaling $350, and matures April 2006.
EQUITY. In 2004, Robert Leonard, a major shareholder and husband of one of
the Company's directors, was paid $5,000 for services rendered in
connection with the sale of 100,000 shares of Series B preferred stock.
F-13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The following table sets forth the name, age and position of each
director and executive officer and the term of office of each.
DIRECTOR OR
NAME AGE POSITION OFFICER SINCE
---------------------------------------------------------------------------
William Biddle 73 Director September 2002
Vice President September 2002
Munjit Johal 48 Chief Financial Officer September 2002
September 2002
Jay Kister 28 Director September 2002
46
Sumyie Onodera-Leonard 74 Director September 2002
Pamela Padgett 47 Director September 2002
Clifford L. Strand 56 Chairman of the Board September 2002
Chief Executive Officer September 2002
President September 2002
Ron Robinson 70 Director November 2003
Wayne Sutterfield 66 Director February 2003
Gernot Trolf 59 Vice President September 2002
Chief Operating Officer September 2002
Each director serves for a period of one year or until his successor
is duly elected and qualified. Officers serve at the will of the Board of
Directors.
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.
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.
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.
47
SUMYIE ONODERA-LEONARD. Director. From 1967 to 1986, Mrs. Onodera-
Leonard served as a professor at California State University, Los Angeles,
specializing in the areas in family finance and home management. She has a
BA in Business Administration and a Masters degree in Secondary Education
in 1957 and 1967 respectively from California State University, Los
Angeles. Mrs. Onodera-Leonard also earned a Masters degree in Home
Management from Michigan State University in East Lansing, Michigan in
1961. She is also a senior gold medalist, U.S. National Champion and
world-record holder in her age group in the 800 meter run.
PAMELA PADGETT. Director. Since 1994, Ms. Padgett has worked as a
real estate broker. Since March 2002, Ms. Padgett has been affiliated with
The Phoenix Group Realtors as an independent real estate agent. From 2000
through March 2002, she was affiliated as Keller Williams Realty. Ms.
Padgett also works as an independent agent for Uncommon Sense Enterprises a
company she founded in 1994 and continues to own.
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.
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.
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.
48
GERNOT TROLF. Vice President and 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.
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;
49
(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.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and executive officers are required to comply with Section
16(a) of the Securities Exchange Act of 1934, which requires generally that
such persons file reports regarding ownership of and transactions in
securities of the Company on Forms 3, 4, and 5. A Form 3 is an initial
statement of ownership of securities, Form 4 reports changes in beneficial
ownership and Form 5 is an annual statement of changes in beneficial
ownership.
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5
and amendments thereto furnished to the Company with respect to the most
recent fiscal year, it appears that the officers and directors of the
Company inadvertently failed to timely file certain Form 3s, Form 4s and
Form 5s during the fiscal year ended December 31, 2003. Those deficiencies
have been cured either through the filing of Forms 3, Form 4s or Form 5s.
The Company also believes that certain officers or Directors who own or
control more than 5% of the outstanding shares of any class of securities
have not filed Schedule 13D or 13G as required.
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.
50
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Other Awards Payouts
Name and Annual Restr All
Principal Salary Compen icted Options LTIP Other
Position Year (1) Bonus sation Stock /Awards SARs Payout
-----------------------------------------------------------------------------------
Clifford L. Strand 2003 180,000 -0- -0- 500,000 1,000,000 -0- -0-(2)
President &
Chairman 2002 -0- -0- -0- -0- -0- -0- -0-
of the Board of
Directors
William S. Biddle 2003 120,000 -0- -0- 250,000 500,000 -0- -0-(3)
Vice President 2002 -0- -0- -0- -0- -0- -0- -0-
and Director
Gernot Trolf 2003 60,000 250,000 500,000 -0- -0-
Vice President 2002 -0- -0- -0- -0- -0- -0- -0-
Munjit Johal 2003 54,000 -0- -0- 250,000 500,000 -0- -0-
Chief Financial
Officer 2002 -0- -0- -0- -0- -0- -0- -0-
William Messerli 2002 -0- -0- -0- -0- -0- -0- -0-
Former CEO 2001 -0- -0- -0- -0- -0- -0- -0-
Former Director 2000 -0- -0- -0- -0- -0- -0- -0-
________________
(1) Salary information represents the amount agreed to be paid pursuant to
the employment agreements with each of Messrs. Strand, Biddle and
Trolf. Actual salaries are less because such executive officers have
agreed to defer a portion of the salary.
(2) 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.
(3) 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.
51
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS.
Effective May 1, 2003, the Board of Directors entered into employment
agreements with Clifford Strand, William Biddle and Gernot Trolf. Following
is a brief description of the terms and conditions of each employment
agreement.
The Employment Agreement of Clifford Strand, President and Chairman
of the Board of directors of the Company provides: (a) an employment term
of three years; (b) an average annual salary of $346,667, to be paid as
follows: (i) $180,000 the first year; (ii) $360,000 the second year:
(iii), and $500,000 the third year; (c) 500,000 shares of restricted
stock; (d) 100,000 shares of restricted common stock for each year the
Company increases net assets by 20%; (e) stock options to purchase
1,000,000 shares of common stock at a price of $0.15 per share; and (f)
benefits including vacation pay, health insurance, and expense
reimbursement. In light of the Company's financial condition, the executive
has agreed to accept half of the first year's salary and the balance is
being accrued.
The Employment Agreement of William Biddle, Vice President and
Director provides: (a) an employment term of three years; (b) an average
annual salary of $240,000 to be paid as follows: (i) $120,000 the first
year, (ii) $240,000 the second year; and (iii) $360,000 the third year;
(c) 250,000 shares of restricted stock; (d) 50,000 shares of restricted
common stock for each year the Company increases net assets by 20%; (e)
stock options to purchase 500,000 shares of common stock at a price of
$0.15 per share; and (f) benefits including vacation pay, health insurance,
and expense reimbursement. In light of the Company's financial condition,
the executive has agreed to accept half of the first year's salary and the
balance is being accrued.
The Employment Agreement for Gernot Trolf, Vice President and Chief
Operating Officer provides: (a) an employment term of three years; (b) an
average annual salary of $120,000 to be paid as follows: (i) $60,000 the
first year; (ii) $120,000 the second year, and (iii) $180,000 the third
year; (c) 250,000 shares of restricted stock; (d) 50,000 shares of
restricted common stock for each year the Company increases net assets by
20%; (e) stock options to purchase 500,000 shares of common stock at a
price of $0.15 per share; and (f) benefits including vacation pay, health
insurance, and expense reimbursement. In light of the Company's financial
condition, the executive has agreed to accept 70% of the first year's
salary and the balance is being accrued.
As of December 31, 2003, the Company has entered into an employment
agreement with Munjit Johal, the Chief Financial Officer, which provides:
(a) an employment term of three years ending May 1, 2006; (b) an annual
salary to be paid as follows: (i) $100,000 the first year; (ii) $120,000
the second year, and (iii) $250,000 the third year; (c) 250,000 shares of
restricted stock; (d) stock options to purchase 500,000 shares of common
stock at a price of $0.15 per share; and (e) benefits including vacation
pay, health insurance, and expense reimbursement.
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 March 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.
52
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., 5030 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.
Amount and
Nature of
Name and Address of Beneficial Percentage
Beneficial Owner Title of Class Owner of Class
--------------------------------------------------------------------------------
Wayne Sutterfield (1) Common Stock 1,121,614 19.1%
Series A Preferred Stock 842,298 17.8%
Series B Preferred Stock 1,000,000 16.7%
William S. Biddle (2) Common Stock 903,779 15.0%
Series A Preferred Stock 139,559 3.0%
Series B Preferred Stock 1,115,309 18.6%
Clifford L. Strand (3) Common Stock 1,576,869 24.2%
Series A Preferred Stock 476,228 10.0%
Series B Preferred Stock 224,000 3.7%
Sumiye Onodera Leonard (4) Common Stock 1,028,337 17.5%
Series A Preferred Stock 298,239 6.3%
Robert J. Leonard (5) Common Stock 715,954 13%
P.O. Box 2089 Series A Preferred Stock 401,753 8.5%
Huntington Beach, CA 92647 Series B Preferred Stock 50,000 *
Gernot Trolf (6) Common Stock 713,402 11.7%
Series A Preferred Stock 426,806 9.0%
Munjit Johal (7) Common Stock 500,000 8.3%
Pamela Padgett (8) Common Stock 410,648 7.0%
Series A Preferred Stock 21,296 *
Jay Kister (9) Common Stock 54,943 6.0%
Series A Preferred Stock 9,887 *
Series B Preferred Stock 15,000 *
REIT, LLC Common Stock 2,000,000 36.3%
All Officer and Directors as a Common Stock 7,425,546 78.9%
group (eight persons) Series A Preferred Stock 2,214,313 46.9%
Series B Preferred Stock 2,354,309 39.2%
* Less than one percent.
(1) Includes 332,000 shares of Common Stock held through REIT, LLC.
Includes 100,000 shares of restricted stock issued under the 2003 Non-
Employee Director Stock Incentive Plan. Includes options to purchase
250,000 shares immediately exercisable or exercisable within sixty days.
53
(2) Includes 334,000 shares of Common Stock held through REIT, LLC.
Includes 250,000 shares of restricted stock issued under the 2003 Employee
Stock Incentive Plan. Includes options to purchase 250,000 shares
immediately exercisable or exercisable within sixty days.
(3) Includes (i) 334,000 shares of Common Stock held through REIT, LLC.
Includes 500,000 shares of restricted stock issued under the 2003 Employee
Stock Incentive Plan. Includes options to purchase 500,000 shares
immediately exercisable or exercisable within sixty days.
(4) Ms. Leonard is the spouse of Robert J. Leonard, an owner of more than
5% of the outstanding capital stock of the Company. Ownership excludes
shares held by Robert J. Leonard. Includes 500,000 shares of Common Stock
held through REIT, LLC. Includes 100,000 shares of restricted stock agreed
issued under the 2003 Non-Employee Director Stock Incentive Plan. Includes
options to purchase 250,000 shares immediately exercisable or exercisable
within sixty days.
(5) Includes 500,000 shares of Common Stock held through REIT, LLC.
(6) Includes 250,000 shares of restricted stock issued under the 2003
Employee Stock Incentive Plan. Includes options to purchase 250,000 shares
immediately exercisable or exercisable within sixty days.
(7) Includes 250,000 shares of restricted stock issued under the 2003
Employee Stock Incentive Plan. Includes options to purchase 250,000 shares
immediately exercisable or exercisable within sixty days.
(8) Includes 100,000 shares of restricted stock issued under the 2003 Non-
Employee Director 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 issued under the 2003 Non-
Employee Director Stock Incentive Plan. Includes options to purchase
250,000 shares immediately exercisable or exercisable within sixty days.
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 Note5
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.
54
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.
PAYMENT OF COMMISSIONS TO OFFICERS. From time to time certain
officers and Directors of the Company have been paid commissions or fees in
connection with the acquisition or disposition of real estate properties or
the consummation of financing activities.
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.
In April 2003, Clifford L. Strand and William S. Biddle were paid
50,000 and 60,000 shares of Series B Preferred Stock, respectively, in
connection with the acquisition of the remaining interest 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.
55
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K.
None.
(b) Exhibits. The following exhibits are included as part of this
report:
Exhibit 3.1* Articles of Incorporation
Exhibit 3.2* Bylaws
Exhibit 4.1* Merger Agreement with Book Corporation of America
Exhibit 4.2** 2003 Stock Incentive Plan
Exhibit 4.3** 2003 Non-Employee Director Stock Incentive Plan
Exhibit 10.1*** Asset Purchase Agreement with Seashore Diversified
Investment Company
Exhibit 10.2** Consulting Agreement with Mark Taggatz
Exhibit 10.3**** Employment Agreement with Clifford L. Strand
Exhibit 10.4**** Employment Agreement with William S. Biddle
Exhibit 10.5**** Employment Agreement with Gernot Trolf
Exhibit 10.6 Employment Agreement with Munjit Johal
Exhibit 21.1 Subsidiaries
Exhibit 31.1 Certification of Principal Executive Officer
Pursuant toSection 302 of the Sarbanes-Oxley Act of
2002
Exhibit 31.2 Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Exhibit 32.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
________________
56
* Previously filed on Schedule 14A filed July 10, 2002.
** Previously filed on Form S-8 (file no. 333-111152) filed December 15,
2003.
*** Previously filed on Form 10-KT filed on April 15, 2003.
**** Previously filed on Form 10-QSB for the quarter ended June 30, 2003.
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, 2003 and 2002 were $60,000 and $8,475, 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, 2003 and 2002.
TAX FEES
The company did not pay its principal accountant for any professional
services related to tax compliance, tax advise and tax planning for the
fiscal years ended December 31, 2003 and 2002.
ALL OTHER FEES
During the fiscal year ended December 31, 2003, and 2002, 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, 2003 and 2002, except as provided above.
AUDIT COMMITTEE
The Company's directors serve as its audit committee and, other than
the tax related fees; have pre-approved all of the above amounts billed to
the Company prior to incurring the expenses associated therewith.
ITEM 14. 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 transition
report. 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.
57
(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.
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 21, 2004 /S/ Clifford L. Strand
---------------------------------------------
Clifford L. Strand, Chief Executive Officer
Date: May 21, 2004 /S/ Munjit Johal
---------------------------------------------
Munjit Johal, Chief Financial Officer
58