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 September 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 September 30, 2004
$.10 Par Value Common Stock 5,363,898.6 Shares
Transitional Small Business Disclosure Format (Check One): Yes ; No X .
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DIVERSIFIED REALTY, INC.
FORM 10-QSB INDEX
SEPTEMBER 30, 2004
Page Number
PART I
Condensed Financial Statements:
Balance Sheet
September 30, 2004 2
Statements of Income and Comprehensive Income -
Three Months and Nine Months
Ended September 30, 2004 and 2003 3
Statements of Cash Flows -
Nine Months Ended September 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
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DIVERSIFIED REALTY, INC.
BALANCE SHEET
AS OF SEPTEMBER 30, 2004
(Unaudited)
ASSETS
Current Assets
Cash $ 2,275,079
Marketable Securities 3,204
Prepaid Income Taxes 30,936
Total Current Assets 2,309,219
Property, Plant and Equipment, Net 808,458
Total Assets $ 3,117,677
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Liabilities $ 32,752
Due to Parent 136,049
Current Deferred Income Tax Liability 1,306
Total Current Liabilities 170,107
Long-Term Deferred Tax Liability 69,300
Stockholders' Equity
Common Stock, $.10 Par Value,
11,000,000 shares authorized,
5,363,898 shares issued & outstanding 536,389
Additional Paid-In-Capital 1,925,793
Retained Earnings 314,189
Accumulated Other Comprehensive Income 1,899
Total Stockholders' Equity 2,778,270
Total Liabilities and Stockholders' Equity $ 3,117,677
See Notes to Financial Statements.
2
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DIVERSIFIED REALTY, INC.
STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
For The Three Months For The Nine Months
Ended Ended
September 30, September 30,
2004 2003 2004 2003
Operating Revenues $ 30,963 $ 19,374 $ 499,507 $ 63,537
Operating Expenses 17,619 20,083 84,425 59,964
Income Before
Income Tax 13,344 (709) 415,082 3,573
Income Tax
(Expense) Benefit 3,456 1,648 (163,116) 3,372
Net Income $ 16,800 $ 939 $ 251,966 $ 6,945
Other Comprehensive Income(Loss)
Net of Income Taxes:
Unrealized Holding
Gains(Losses) 21 (94) (50) 234
Comprehensive
Income 16,821 845 251,916 7,179
Basic Earnings
Per Share $ 0.003 $ 0.00 $ 0.05 $ 0.001
Weighted
Average Shares 5,364,253 5,367,374 5,365,809 5,367,554
See Notes to Financial Statements.
3
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DIVERSIFIED REALTY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For The Nine Months
Ended
September 30,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net Cash From Operations $ 29,597 $ 23,270
Income Taxes Paid in Cash (20,700) (50)
Net Cash Provided By
Operating Activities 8,897 23,220
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Received on Sale of Property 483,531 --
Cash Used to Purchase Property (708,771) --
Net Cash Provided (Used) By
Investing Activities (225,240) --
CASH FLOWS FROM FINANCING ACTIVITIES
Cash Purchases of Common Stock (1,604) (232)
Net Cash Advances
From (To) Parent Company 250,000 3,961
Net Cash (Used) By
Financing Activities 248,396 3,729
NET INCREASE (DECREASE) IN CASH 32,053 26,949
CASH - BEGINNING OF PERIOD 2,243,026 2,237,202
CASH - END OF PERIOD $ 2,275,079 $ 2,264,151
See Notes to Financial Statements.
4
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DIVERSIFIED REALTY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30,
2004 and the results of the Company's operations for the nine months ended
September 30, 2004 and 2003 and cash flows for the nine months ended
September 30, 2004 and 2003. The results of operations for the nine months
ended September 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 new property identified in connection with this
exchange, located at 2212 Broadwater Avenue in Billings, Montana, was
purchased on August 1, 2004. The cost of the new property totaled $708,771.
This property is a commercial building, currently leasing to three tenants.
5
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DIVERSIFIED REALTY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE INCOME STATEMENT
September 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 AND 2003 2004 AND 2003
Revenues $ 11,588 (60%) $ 435,970 (686%)
Expenses (2,464) (12%) 24,461 (41%)
Net Income 15,860 (1,687%) 245,020 (3,527%)
Revenues increased $435,970 (686%) in the first nine months of 2004 as
compared with the first nine 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, an increase in interest and dividend revenues of $571 (4.6%),
and an increase in rental income of $8,946 (17.6%). Operating expenses
increased $24,461 (40.8%) in the first nine months of 2004 ($2,464 decrease
during third quarter of 2004) as compared with the first nine months of 2003
due primarily to an increase in legal fees, travel expenses, depreciation,
and property taxes paid during third quarter in connection with the 1031
tax-deferred exchange of properties. The provision for income tax expense
increased $166,489 (4,937%) in the first nine months of 2004 as compared with
the first nine months of 2003 due primarily to the deferred tax calculated
on the gain on sale of property.
6
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DIVERSIFIED REALTY, INC.
CONTROLS AND PROCEDURES
SEPTEMBER 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
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DIVERSIFIED REALTY, INC.
PART II
OTHER INFORMATION
SEPTEMBER 30, 2004
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 UNREGISTERED SALES OF EQUITY 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
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DIVERSIFIED REALTY, INC.
PART II
OTHER INFORMATION - CONTINUED
SEPTEMBER 30, 2004
ITEM 6 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
9
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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: October 25, 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 October 25, 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
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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
third fiscal quarter of 2004.
EXHIBIT 3.2
BY-LAWS
During the third quarter ending September 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 second quarter 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 finalized the exchange of property on
August 1, 2004, identifying and purchasing a commercial building
located at 2212 Broadwater Avenue in Billings, Montana. This cost of
the new property was $708,771. There are currently three leasing
tenants.
11
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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 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 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 third fiscal quarter that has materially
affected, or is reasonably likely to materially affect Diversified
Realty, Inc.'s internal control over financial reporting;
12
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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: October 25, 2004 s/Paul J. McCann
Paul J. McCann,
Chief Executive Officer
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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 third fiscal quarter that has
materially affected, or is reasonably likely to materially affect
Diversified Realty, Inc.'s internal control over financial
reporting;
14
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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: October 25, 2004 s/D. Mellinger
D. Mellinger,
Chief Financial Officer
15
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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 September 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: October 25, 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 September 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: October 25, 2004 s/D. Mellinger
D. Mellinger,
Chief Financial Officer
16
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