U.S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to________.
Commission file number 0-2864
DIVERSIFIED REALTY, INC.
(Exact name of small business issuer as specified in its charter)
Montana 81-0268110
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
128 Second Street South, Great Falls, Montana 59405
(Address of principal executive offices)
(406) 727-2600
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
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
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by
a court. Yes No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
Class Outstanding at June 30, 2004
$.10 Par Value Common Stock 5,365,753 Shares
Transitional Small Business Disclosure Format (Check One): Yes ; No X .
<page>
DIVERSIFIED REALTY, INC.
FORM 10-QSB INDEX
JUNE 30, 2004
Page Number
PART I
Condensed Financial Statements:
Balance Sheet
June 30, 2004 2
Statements of Income and Comprehensive Income -
Three Months and Six Months
Ended June 30, 2004 and 2003 3
Statements of Cash Flows -
Three Months and Six Months
Ended June 30, 2004 and 2003 4
Notes to Financial Statements 5
Management's Discussion and Analysis
of the Statements of Income 6
Controls and Procedures 7
PART II
Other Information 8-9
Signatures 10
Exhibits 11-17
1
<page>
DIVERSIFIED REALTY, INC.
BALANCE SHEET
AS OF JUNE 30, 2004
(Unaudited)
ASSETS
Current Assets
Cash $ 2,249,191
Marketable Securities 3,168
Due From Parent Company 113,951
Prepaid Income Taxes 8,080
Prepaid Expenses 1,554
Total Current Assets 2,375,944
Property, Plant and Equipment, Net 105,449
Other Assets
Restricted Cash 483,531
Total Assets $ 2,964,924
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and
Accrued Liabilities $ 18,606
Current Deferred Income Taxes 1,291
Total Current Liabilities 19,897
Long-Term Deferred Tax Liability 169,900
Stockholders' Equity
Common Stock, $.10 Par Value,
11,000,000 shares authorized,
5,365,753 shares issued
& outstanding 536,575
Additional Paid-In-Capital 1,926,535
Retained Earnings 310,140
Accumulated Other Comprehensive Income 1,877
Total Stockholders' Equity 2,775,127
Total Liabilities and
Stockholders' Equity $ 2,964,924
See Notes to Financial Statements.
2
<page>
DIVERSIFIED REALTY, INC.
STATEMENTS OF INCOME
AND
COMPREHENSIVE INCOME
(Unaudited)
For The Three Months For The Six Months
Ended Ended
June 30, June 30,
2004 2003 2004 2003
Operating
Revenues $ 447,649 $ 22,433 $ 468,545 $ 44,163
Operating
Expenses 32,060 21,571 54,055 39,881
Operating
Income 415,589 862 414,490 4,282
Income Tax
(Expense)
Benefit (169,120) 3,599 (166,572) 1,724
Net Income $ 246,469 $ 4,461 $ 247,918 $ 6,006
Other Comprehensive Income(Loss)
Net of Income Taxes:
Unrealized
Holding Gains
(Losses) (198) 292 (72) 328
Comprehensive
Income $ 246,271 $ 4,753 $ 247,846 $ 6,334
Basic Earnings
Per Share $ 0.05 $ 0.001 $ 0.05 $ 0.001
Weighted
Average Shares 5,366,252 5,367,701 5,366,595 5,367,730
See Notes to Financial Statements
3
<page>
DIVERSIFIED REALTY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For The Six Months
Ended
June 30,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net Cash from Operations 7,542 14,903
Income Taxes (Paid) in Cash (700) --
Net Cash Provided By
Operating Activities $ 6,842 $ 14,903
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Received on Sale of Property 483,531 --
CASH FLOWS FROM FINANCING ACTIVITIES
Cash Purchases of Common Stock (677) (42)
Net Cash Advances
From (To) Parent Company -- 2,641
Net Cash Provided By
Financing Activities (677) 2,599
NET INCREASE
(DECREASE) IN CASH 489,696 17,502
CASH - BEGINNING OF PERIOD 2,243,026 2,237,202
CASH - END OF PERIOD $ 2,732,722 $ 2,254,704
See Notes to Financial Statements.
4
<page>
DIVERSIFIED REALTY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2004
Note 1. Basis of Presentation
In the opinion of management, all adjustments necessary (consisting
of only normal recurring accruals) have been made to the unaudited
financial statements to present fairly the financial position as of
June 30, 2004 and the results of the Company's operations for the
three months ended June 30, 2004 and 2003 and cash flows for the three
months ended June 30, 2004 and 2003. The results of operations for
the three months ended June 30, 2004 and 2003 are not necessarily
indicative of the results to be expected for the full year.
Parent - M Corp, Great Falls, Montana owns approximately 95% of the
outstanding shares of the Company.
Note 2. Significant Accounting Policies
For purposes of the statements of cash flows, cash equivalents include
time deposits, certificates of deposit and money market accounts, all
with original maturities of three months or less.
Comprehensive income includes net income, as well as other changes in
stockholder's equity that result from transactions and economic events
other than those with stockholders. The Company's only significant
element of other comprehensive income is unrealized gains and losses
on available-for-sale securities.
Basic earnings per share (EPS) is calculated by dividing net income by
the weighted number of common shares outstanding for the period.
Note 3. Contingencies
The Board of Directors has approved the Company's participation in an
attempt to purchase a savings and loan institution. The Company will
participate in the purchase with its parent, M Corp. Should the
purchase take place, the liquidity of the Company will be
significantly affected.
The Board of Directors has approved a merger between a newly formed
company and Diversified Realty, Inc. in order to take the Company
private and such merger is pending. Schedule 13e-3 and Schedule
13e-3/A have been filed electronically with the Securities Exchange
Commission, and can be viewed at www.sec.com.
Note 4. Real Estate Sale
Diversified Realty, Inc. owned one property, not operated as a rental
unit, in Clearwater, Florida. On May 25, 2004 the Company sold this
property which was carried on the financial statements at a cost of
$122,000 with $61,015 in accumulated depreciation. The Company
recorded a gain of $426,451 during the second quarter of 2004. The
net proceeds from the sale, $483,531, are currently being held by
Asset Preservation Inc. pending a tax-deferred like-kind exchange
expected to occur in the third quarter of 2004. The Company has
identified the new property in connection with this exchange located
at 2212 Broadwater Avenue in Billings, Montana and expects to
complete the exchange in the third quarter of 2004.
5
<page>
DIVERSIFIED REALTY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE INCOME STATEMENT
June 30, 2004
A summary of the period-to-period changes in items included in the
statements of income is shown below.
COMPARISON OF
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2004 AND 2003 2004 AND 2003
Revenues $ 425,216 (1,895%) $ 424,382 (961%)
Expenses 10,489 (48.6%) 14,173 (35.5%)
Net Income 266,507 (5,973%) 266,412 (4,436%)
Revenues increased $424,382 (961%) in the first six months of 2004
as comparedwith the first six months of 2003 due to the sale of
Clearwater, Florida property during May of 2004 resulting in a gain
of $426,451 during second quarter, a decrease in interest and
dividend revenues of $1,207 (13.2%), and a decrease in rental income
of $863 (2.5%). Operating expenses increased $14,173 (35.5%) in the
first six months of 2004 ($10,489 in the second quarter of 2004) as
compared with the first six months of 2003 due primarily to an
increase in legal fees and travel expenses. The provision for
income tax expense increased $143,796 (8,339%) in the first six
months of 2004 as compared with the first six months of 2003 due
primarily to the deferred tax calculated on the gain on sale of
property.
6
<page>
DIVERSIFIED REALTY, INC.
CONTROLS AND PROCEDURES
JUNE 30, 2004
Evaluation of disclosure controls and procedures. Based on an
evaluation carried out under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer during the 90-day period
prior to the filing of this report, our Chief Executive Officer
and Chief Financial Officer believe that our disclosure controls
and procedures, as defined in Securities Exchange Act Rules 13a-14
and 15d-14, are, to the best of their knowledge, effective.
Changes in internal controls, subsequent to the date of this
evaluation. Our Chief Executive Officer and Chief Financial
Officer are not aware of any significant changes in our internal
controls over financial reporting, including any corrective actions
with regard to significant deficiencies and material weakness, or
in other factors that could significantly affect these controls to
ensure that information required to be disclosed by us, in reports
that we file or submit under the Securities Act, is recorded,
processed, summarized, and reported within the time period
specified in Securities and Exchange Commission rules or
regulations.
7
<page>
DIVERSIFIED REALTY, INC.
PART II
OTHER INFORMATION
JUNE 30, 2004
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
8
<page>
DIVERSIFIED REALTY, INC.
PART II
OTHER INFORMATION - CONTINUED
JUNE 30, 2004
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description Page #
3.1 Articles of Incorporation 11
3.2 By-Laws 11
10 Material Contracts 11
31.1 Certification required under Section 302 12-13
31.2 Certification required under Section 302 14-15
32.1 Certification required under Section 906 16
32.2 Certification required under Section 906 16
(b) Reports on Form 8-K
No current reports on Form 8-K were filed during second
fiscal quarter of 2004.
9
<page>
SIGNATURES
In accordance with the requirements of section 13 or 15(d) of the
Exchange Act, the Registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIVERSIFIED REALTY, INC.
Registrant
Date: July 28, 2004 By: s/R. Bruce Robson
R. Bruce Robson,
President,
Chairman of the Board
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in
the capacities indicated on July 28, 2004.
Director s/Tyler Arneson
Tyler Arneson
Director s/S.M. McCann
S.M. McCann
Chief Financial Officer s/D. Mellinger
D. Mellinger
Chief Executive Officer s/Paul J. McCann
Paul J. McCann
10
<page>
DIVERSIFIED REALTY, INC.
EXHIBIT 3.1
ARTICLES OF INCORPORATION
The Articles of Incorporation were signed on December 2, 1957.
There have been no amendments to the Articles of Incorporation
during the second fiscal quarter of 2004.
EXHIBIT 3.2
BY-LAWS
During the second quarter ending June 30, 2004, there were no
changes to the Diversified Realty, Inc. By-laws.
EXHIBIT 10
MATERIAL CONTRACTS
On May 25,2004, a contract was executed for the sale of
property located in Clearwater, Florida in the amount of $520,000.
This property was carried on the financial statements at a cost of
$122,000 with $61,015 in accumulated depreciation. The Company
recorded a gain of $426,451 during the secondquarter of 2004. The
net proceeds from the sale, $483,531 are held by Asset Preservation
Inc. pending a tax-deferred like-kind exchange expected to occur
during the third quarter of 2004. The Company has identified the
new property in connection with this exchange located at 2212
Broadwater Avenue in Billings, Montana and expects to complete the
exchange in the third quarter of 2004.
11
<page>
DIVERSIFIED REALTY, INC.
EXHIBIT 31.1
CERTIFICATION
I, Paul J. McCann, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Diversified Realty, Inc.
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in the quarterly report, fairly present in
all material respects the financial condition, results of operations
and cash flows of Diversified Realty, Inc., as of, and for, the
periods presented in this report.
4. Diversified Realty, Inc.'s other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) for Diversified Realty, Inc.
and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to nsure that material information relating to
Diversified Realty, Inc., including its consolidated subsidiaries,
is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Evaluated the effectiveness of Diversified Realty, Inc.'s
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
on such evaluation; and:
c. Disclosed in this report any change in Diversified Realty, Inc.'s
internal control over financial reporting that occurred during
Diversified Realty, Inc.'s second fiscal quarter that has materially
affected, or is reasonably likely to materially affect Diversified
Realty, Inc.'s internal control over financial reporting;
12
<page>
DIVERSIFIED REALTY, INC.
EXHIBIT 31.1 - CONTINUED
CERTIFICATION
5. Diversified Realty Inc.'s other certifying officers and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to Diversified Realty, Inc.'s auditors and the
audit committee of Diversified Realty, Inc.'s Board of Directors (or
persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect Diversified Realty,
Inc.'s ability to record, process, summarize and report financial
information; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in Diversified Realty,
Inc.'s internal control over financial reporting.
Date: July 28, 2004 s/Paul J. McCann
Paul J. McCann,
Chief Executive Officer
13
<page>
DIVERSIFIED REALTY, INC.
EXHIBIT 31.2
CERTIFICATION
I, D. Mellinger, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Diversified Realty, Inc.
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other
financial information included in the quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of Diversified Realty,
Inc., as of, and for, the periods presented in this report.
4. Diversified Realty, Inc.'s other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f) for Diversified Realty, Inc. and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to
Diversified Realty, Inc., including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
b. Evaluated the effectiveness of Diversified Realty, Inc.'s
disclosure control and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and:
c. Disclosed in this report any change in Diversified Realty,
Inc.'s internal control over financial reporting that occurred
during Diversified Realty, Inc.'s second fiscal quarter that has
materially affected, or is reasonably likely to materially affect
Diversified Realty, Inc.'s internal control over financial
reporting;
14
<page>
DIVERSIFIED REALTY, INC.
EXHIBIT 31.2 - CONTINUED
CERTIFICATION
5. Diversified Realty Inc.'s other certifying officers and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to Diversified Realty, Inc.'s auditors
and the audit committee of Diversified Realty, Inc.'s Board of
Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect Diversified Realty,
Inc.'s ability to record, process, summarize and report financial
information; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in Diversified Realty,
Inc.'s internal control over financial reporting.
Date: July 28, 2004 s/D. Mellinger
D. Mellinger,
Chief Financial Officer
15
<page>
DIVERSIFIED REALTY, INC.
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED UPRSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Diversified Realty, Inc.
on Form 10-QSB for the period ending June 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"),
I, Paul J. McCann, Chief Executive Officer of Diversified Realty, Inc.,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my
knowledge and belief, that;
The report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of Diversified Realty, Inc.
Date: July 28, 2004 s/Paul J. McCann
Paul J. McCann,
Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED UPRSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Diversified Realty, Inc.
on Form 10-QSB for the period ending June 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"),
I, D. Mellinger, Chief Financial Officer of Diversified Realty, Inc.,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my
knowledge and belief, that;
The report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of Diversified Realty, Inc.
Date: July 28, 2004 s/D. Mellinger
D. Mellinger,
Chief Financial Officer
16
<page>