Diversified Senior Services (DISSE) Inactive
Filed: 15 May 00, 12:00am
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.For the quarterly period ended March 31, 2000
or [ ] 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: 000-23321
DIVERSIFIED SENIOR SERVICES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
North Carolina |
|
56-1973923 |
915 West 4th Street, Winston-Salem, NC |
|
27101 |
Registrant's Telephone Number, Including Area Code: |
|
(336) 724-1000 |
Check whether the Registrant (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___
As of April 30, 2000, the Registrant had outstanding 3,743,622 shares of Common Stock, no par value.
Transitional Small Business Disclosure Format Yes___ No X
DIVERSIFIED SENIOR SERVICES, INC.
FORM 10-QSB
March 31, 2000
TABLE OF CONTENTS
Page
PART I: |
FINANCIAL INFORMATION |
|
SIGNATURE PAGE |
21 |
(Unaudited)
March 31 , December 31,
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 335,219 $ 383,701
Development fees and costs due from
affiliates - 1,235,650
Accounts receivable - trade 79,462 86,893
Accounts receivable - properties 50,000 -
Prepaid expenses and other 163,794 120,109
Interest receivable 11,364 28,796
Notes receivable - properties 74,220 86,206
------ ------
714,059 1,941,355
Furniture and equipment, net 101,401 112,852
Development costs 440,024 606,911
Development fees and costs due from
affiliates 4,145,445 3,917,140
Accounts receivable - affiliates 712,826 669,507
Accounts receivable - properties 786,100 687,159
Interest receivable 66,123 43,789
Notes receivable - properties 2,684,115 1,673,909
Investment in bonds 300,000 300,000
Other assets 250,000 250,000
------- -------
$10,200,093 $10,202,622
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 361,846 $ 308,047
Commitments - affiliates with
properties under construction 37,474 38,595
Preferred dividends payable 103,366 242,735
------- -------
502,686 589,377
Accounts payable - affiliates 596,194 760,246
Deferred salaries and bonuses 191,823 191,823
------- -------
1,290,703 1,541,446
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par, authorized
100,000,000 shares; 180,114 issued
and outstanding at March 31, 2000
and 180,611 at December 31, 1999 4,016,076 4,914,068
Common stock, no par, authorized
100,000,000 shares; 3,743,622 shares
issued and outstanding at
March 31, 2000 and 3,301,400 at
December 31, 1999 7,217,238 6,319,246
Deemed distribution (1,335,790) (1,335,790)
Preferred dividends (403,307) (299,941)
Accumulated deficit (584,827) (936,407)
-------- --------
8,909,390 8,661,176
--------- ---------
$10,200,093 $10,202,622
=========== ===========
See accompanying notes and independent accountants' review report.
Three Months Three Months
Ended Ended
March 31, March 31,
2000 1999
---------- -------------
Income:
Management fees $ 253,754 $ 189,158
Reimbursement income 675,209 368,307
Development fees 593,350 899,627
Other 6,913 88,326
----- -------
1,529,226 1,545,418
--------- ---------
Expenses:
Personnel related 1,073,252 817,618
Administrative and other 203,733 204,746
Depreciation and amortization 13,316 19,757
------ ------
1,290,301 1,042,121
--------- ---------
Operating income 238,925 503,297
Other income (expenses):
Interest and other income 121,088 28,227
Interest and other expense (8,433) -
------ ------
Net income before cumulative effect of
change in accounting for development
related costs 351,580 531,524
Cumulative effect of change in accounting
for development related costs - 328,566
------- -------
Net income 351,580 202,958
Preferred stock dividends 103,366 -
------- -------
Net income available for common shareholders $ 248,214 $ 202,958
========== ==========
Per share data:
Net income available to common
shareholders before cumulative
effect of change in accounting for
development related costs $ 0.07 $ 0.16
Cumulative effect of change in
accounting for development related
costs - 0.10
----- ----
Net income per share - basic and
diluted $ 0.07 $ 0.06
=========== ==========
Weighted average shares outstanding -
basic 3,443,866 3,301,400
========= =========
Weighted average shares outstanding -
diluted 3,458,382 3,329,418
========= =========
See accompanying notes and independent accountants' review report.
Preferred Common Preferred Common Deemed Preferred Accumulated
Shares Shares Stock Stock Distribution Dividends Deficit Total
--------- --------- ---------- ---------- ------------ ---------- ------------ -----------
Balance, January 1, 1999 178,386 3,301,400 $ 891,930 $6,319,246 $(1,335,790) $ - $(1,293,560) $4,581,826
Decrease in unrealized gain - - - - - (14,852) (14,852)
Net income for the three months
ended March 31, 1999 - - - - - - 202,958 202,958
------- --------- ---------- ---------- ----------- ---------- ---------- ----------
Balance, March 31, 1999 178,386 3,301,400 $ 891,930 $6,319,246 $(1,335,790) $ - $(1,105,454) $4,769,932
======= ========= ========== ========== =========== ========== =========== ==========
Balance, January 1, 2000 180,611 3,301,400 $4,914,068 $6,319,246 $(1,335,790) $ (299,941) $(936,407) $8,661,176
Conversion of preferred stock (497) 442,222 (897,992) 897,992 -
Preferred dividends (103,366) (103,366)
Net income for the three months
ended March 31, 2000 351,580 351,580
------- --------- ---------- ---------- ----------- ---------- ---------- ----------
Balance, March 31, 2000 180,114 3,743,622 $4,016,076 $7,217,238 $(1,335,790) $ (403,307) $(584,827) $8,909,390
======= ========= ========== ========== =========== ========== ========= ==========
See accompanying notes and independent accountants' review report.
Three Months Three Months
Ended Ended
March 31, March 31,
2000 1999
----------- -------------
Operating activities:
Net income $351,580 $202,958
Adjustments to reconcile net income to net cash
provided used by operating activities:
Depreciation and amortization 13,316 19,757
Cumulative effect of write off of development
related costs - 328,566
Allowance for uncollectible accounts receivable 5,000 -
Changes in operating assets and liabilities:
Accounts receivable - trade 7,431 (8,073)
Prepaid expenses and other (20,861) (90,940)
Accounts receivable - affiliates - (20,433)
Interest receivable (4,902) -
Development fees receivable, net of
collections (299,861) (571,059)
Accounts payable - trade 53,799 7,078
Accounts payable - affiliates 1,503 9,603
----- -----
Total adjustments (244,575) (325,501)
-------- --------
Net cash provided (used) by operating
activities 107,005 (122,543)
======= ========
Investing activities:
Investments - 702,924
Purchases of furniture and equipment (1,865) (6,968)
Development costs reimbursed (paid) 166,887 (346,316)
Advances to properties in exchange for notes
receivable (527,720) -
Advances to affiliate for properties in
development, net of repayments 842,753 (185,079)
Advances to and investment in properties (159,988) -
Other (1,121) -
Net cash provided by investing activities 18,946 164,561
Financing activities:
Advances from affiliates, net of repayments (208,874) (52,932)
Preferred dividends paid (242,735) -
Increase in prepaid expenses and other (22,824) (7,500)
------- ------
Net cash used by financing activities (474,433) (60,432)
======== =======
Net decrease in cash (48,482) (18,414)
Cash and cash equivalents - beginning 383,701 32,150
------- ------
Cash and cash equivalents - ending $335,219 $13,736
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1999 1998
--------- --------
Cash payments for interest $ 8,433 $ -
========= =====
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Preferred dividends declared and accrued $ 103,366 $ -
========= ======
Conversion of preferred stock to common
stock:
Decrease in preferred stock $(897,992) $ -
Increase in common stock 897,992 -
--------- ------
$ - $ -
========= ======
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
NOTE 1: SELECTED DISCLOSURES
The accompanying unaudited consolidated financial statements, which are for interim periods, do not include all disclosures provided in the annual consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with Diversified’s 1999 Annual Report filed with the Securities and Exchange Commission on Form 10-KSB.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial statements. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results to be expected for the year.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reporting amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 2: ACCOUNTING POLICIES
Reclassification
Certain items in the financial statements for 1999 have been reclassified to conform to the format presented in these financial statements.
NOTE 3: RELATED PARTY TRANSACTIONS
Diversified is developing properties for 60-unit assisted living facilities and 30-unit independent senior housing residences with services. The owner of certain of the properties during development is Taylor House Enterprises, Limited (“Taylor House”), Diversified’s majority stockholder. Taylor House intends to sell the properties to third party owners after permanent financing is arranged. At March 31, 2000 development fees of $1,822,626 and reimbursable development costs of $2,037,128 are due to Diversified from Taylor House. At March 31, 2000, Diversified is the guarantor for $2,461,843 outstanding Taylor House construction loans for two 30-unit properties currently under construction. The total commitment for the properties currently under construction is $3,900,000.
From time to time, Diversified advances to or borrows funds from Taylor House or other related entities. The following schedule summarizes the related party activities for the three months ended March 31, 2000 and 1999.
Due from Due (to) from
Affiliated Taylor House &
Partnerships Subsidiaries Total
-------------- -------------- -------
Amounts due (to) from affiliates at January 1, 1999: $ 233,616 $ 2,859,709 $ 3,093,325
Computer equipment lease payment
due to Taylor House - (1,503) (1,503)
Rent due to Taylor House (8,100) (8,100)
Development fees and costs due from properties
currently held by Taylor House 1,490,383 1,490,383
Advances due from affiliate 73,365 73,365
----------- ----------- -----------
Balance, March 31, 1999 $ 233,616 $ 4,413,854 $ 4,647,470
=========== =========== ===========
NOTE 3: RELATED PARTY TRANSACTIONS (continued)
Due from Due (to) from
Affiliated Taylor House &
Partnerships Subsidiaries Total
-------------- -------------- -------
Amounts due from affiliates at January 1, 2000: $ 233,616 $ 4,828,435 $ 5,062,051
Computer equipment lease payment
due to Taylor House - (1,503) (1,503)
Management fees due from affiliates 7,669 7,669
Development fees and costs due from properties
currently held by Taylor House - (1,055,586) (1,055,586)
Interest receivable from affiliated properties - 48,241 48,241
Advances due from affiliate 35,650 35,650
Repayments to Taylor House - 172,294 72,294
Advances from Taylor House - (6,739) (6,739)
---------- ----------- ------------
Balance, March 31, 2000 $ 233,616 $ 4,028,461 $ 4,262,077
=========== =========== ===========
Included in the accompanying balance sheets under the following captions:
March 31, December 31,
2000 1999
---- ----
Development fees and costs due from affiliates (current asset) $ - $ 1,235,650
Development fees and costs due from affiliates (long-term asset) 4,145,445 3,917,140
Accounts receivable-affiliates (long-term asset) 712,826 669,507
Accounts payable-affiliates (long-term liability) (596,194) (760,246)
---------- ----------
$ 4,262,077 $ 5,062,051
============= =============
Diversified earned interest of $78,862 for the three months ended March 31, 2000 on development fees and costs due from affiliates. Interest receivable of $260,070, net of a $13,950 allowance, is included in development fees and costs due from affiliates at March 31, 2000. There was no interest income earned from affiliates for the three months ended March 31, 1999.
In management’s opinion, net amounts due from affiliated partnerships are collectible, but will not be realized until such time as certain partnerships terminate. Diversified earned income from a wholly owned subsidiary of Taylor House. Diversified managed partnerships, whose general partner is Diversified’s chief executive officer and a beneficial shareholder of Taylor House. Revenues from these affiliates for the three months ended March 31, 2000 and 1999 are as follows:
2000 1999
---- ----
Management fees $ 89,747 $ 84,828
Reimbursement fees 277,975 172,291
----------- -----------
$ 367,722 $ 257,119
=========== ===========
At March 31, 2000 and 1999, uncollected management fees and reimbursement fees are included in accounts receivable-trade and accounts receivable-affiliates.
NOTE 4: FURNITURE AND EQUIPMENT
The Company has furniture and equipment as follows:
March 31, December 31,
2000 1999
------ ------
Computer equipment $ 232,702 $ 230,836
Office furniture 50,766 52,005
----------- -----------
283,468 282,841
Less accumulated depreciation (182,067) (169,989)
------------ ------------
$ 101,401 $ 112,852
=========== ===========
Depreciation expense for the three months ended March 31, 2000 and 1999 was $13,316 and $8,948.
NOTE 5: NOTES RECEIVABLE
Notes receivable consisted of the following:
March 31, December 31,
2000 1999
------ --------
9% note receivable with interest
payable semi-annually, due 2009 $ 515,921 $ 515,921
7% note receivable, principal and interest due 2040 574,133 574,133
7% note receivable, principal and interest due 2040 670,061 670,061
10% note receivable with interest payable
monthly, due 2010 493,499 -
6.6% acquisition fee receivable, principal and interest
due monthly, due 2007 470,500
Prime based working capital line of credit, due 2000 34,221 -
------------ -------
2,758,335 1,760,115
Less current portion (74,220) (86,206)
----------- ------------
Notes receivable-properties $ 2,684,115 $ 1,673,909
=========== ===========
Interest receivable, related to the above notes receivable was $73,862 at March 31, 2000. Interest receivable of $7,739 is included in interest receivable as a current asset, while $66,123 interest receivable on the notes receivable due 2040 is included as a long-term asset.
Maturities of the notes receivable for future years are as follows:
Current year $ 74,220
2001 27,165
2002 93,540
2003 148,434
2004 148,434
2005 234,641
later years 2,031,901
-------------
$ 2,758,335
=============
NOTE 6: INVESTMENTS
For the three months ended March 31, 1999, proceeds from sales of Diversified’s investments were $730,000, resulting in gains of $31,045 and realized losses of $10,328. These gains and losses are reflected in other income in the financial statements. There were no proceeds from sales of investments in 2000.
NOTE 7: CONVERSION OF PREFERRED STOCK
On February 25 and March 4, 2000, preferred shareholders converted 22 and 475 shares, respectively, of 12% Series B Cumulative Convertible Preferred Stock with no par value per share and a stated value of $2,000 per share. The preferred shares were converted to 20,000 and 422,222 common shares, respectively.
The Company had preferred stock as follows:
March 31, 2000 December 31, 1999
---------------- -------------------
Shares Amount Shares Amount
--------- ------------- --------- -------------
Series A 178,386 $ 891,930 178,386 $ 891,930
Series B 1,728 3,124,146 2,225 4,022,138
------ ------------- ------ -------------
180,114 $ 4,016,076 180,611 $ 4,914,068
======= ============= ======= =============
NOTE 8: PROVISION FOR INCOME TAXES
The components of income tax benefit are as follows for the three months ended March 31, 2000 and 1999:
3/31/00 3/31/99
------- -------
Current taxes payable (refundable):
Federal $ 125,200 $ 54,300
State 30,500 16,500
Utilization of operating loss carryforwards (155,700) (70,800)
----------- ----------
- -
----------- ----------
Deferred tax expense (benefit):
Deferred compensation (35,400) -
Start up costs 3,100 3,600
Generation of state loss carryforwards (9,600) -
Generation of federal loss carryforwards - -
Utilization of loss carryforwards 155,700 65,500
All other changes 19,100 -
Increase (decrease) in valuation allowance (132,900) (69,100)
----------- ----------
- -
----------- ----------
Income tax benefit $ - $ -
=========== ==========
NOTE 8: PROVISION FOR INCOME TAXES - continued
The actual income tax benefit attributable to income (loss) from continuing operations for the three months ended March 31, 2000 and 1999 differed from the amounts computed by applying the U.S. federal tax rate of 34 percent to loss before income tax benefit as a result of the following:
3/31/00 3/31/99
------- -------
Computed “expected” tax expense (benefit) $ 119,500 $ 69,000
Timing differences related to deferred compensation 35,400 -
Timing differences related to depreciation and amortization (4,300) (3,100)
Utilization of net operating loss carryforward (125,200) (60,000)
Generation of net operating loss carryforward - -
All other changes (25,400) (5,900)
========== =========
Income tax benefit $ - $ -
=========== =========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes. Significant components of the Company’s deferred income tax assets are as follows. There are no significant deferred income tax liabilities.
3/31/00 3/31/99
------- -------
Non-current deferred tax asset:
Deferred compensation $ 132,300 $ 72,900
Deferred revenues (162,500) -
Start-up cost 24,800 29,500
State operating loss carryforwards 129,900 226,100
Federal operating loss carryforward 64,000 240,700
All others 5,800 11,800
--------- ----------
194,300 581,000
Valuation allowance (194,300 (581,000)
--------- ----------
Net deferred tax asset $ - $ -
========= ==========
At March 31, 2000 the Company and its subsidiaries had operating loss carryforwards available to reduce future state and federal taxable income. These carryforwards are subject to examination by taxing authorities and if not previously utilized, expire as follows:
Federal State
------- -----
2012 $ - $567,299
2013 - 552,209
2014 - 123,872
2018 152,139 -
2019 35,706 -
NOTE 9: EARNINGS PER SHARE
The following is a reconciliation of net income per share - basic and diluted for the three months ended March 31, 2000 and 1999:
3/31/00 3/31/99
------- -------
Net income - basic and diluted $ 248,214 $ 202,958
============== =============
Weighted average shares outstanding - basic 3,443,866 3,301,400
Additional shares issued assuming
exercise of options 76,729 76,729
Shares assumed repurchased (62,213) (48,711)
--------------- --------------
Weighted average shares outstanding - diluted 3,458,382 3,329,418
============== =============
For the three months ended March 31, 2000 and 1999, an additional 142,000 options and warrants were not included since conversion would be anti-dilutive. Conversion of the remaining Series B Cumulative Convertible Preferred Stock in 2000 also were not included
Independent Accountants’ Review Report
To the Board of Directors and Shareholders of
Diversified Senior Services, Inc. and Subsidiaries
We have reviewed the accompanying consolidated balance sheet of Diversified Senior Services, Inc. and subsidiaries (“Diversified”) as of March 31, 2000, and the related consolidated statements of operations, changes in shareholders’ equity and of cash flows for the three-month periods ended March 31, 2000 and 1999. These consolidated financial statements are the responsibility of Diversified’s management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, with the exception of the matter described in the following paragraph, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles.
The accompanying consolidated interim financial statements of Diversified do not include all of the information and notes required by generally accepted accounting principles for complete consolidated financial statements. In Diversified management’s opinion, the disclosures presented are adequate to make the information presented not misleading.
We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Diversified Senior Services, Inc. and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, changes in shareholders’ equity and of cash flows for the year then ended (not presented herein); and in our report dated March 29, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it was derived.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The discussion and analysis below should be read in conjunction with the Interim Financial Statements of Diversified and Notes appearing elsewhere in this report and the Form 10-KSB for the year ended December 31, 1999 as filed with the Securities and Exchange Commission.
Overview
Diversified Senior Services, Inc. (“Diversified”) was formed in May 1996 as a wholly owned subsidiary of Taylor House Enterprises, Limited (“Taylor House”) and began operations in July 1996. Diversified manages apartments, primarily for seniors, and develops and manages assisted living properties and develops and independent living properties for seniors. All properties target low and moderate income residents.
In July 1996 Diversified acquired Residential Properties Management, Inc. (“RPM”), a wholly owned subsidiary of Taylor House. RPM was formed in March 1989 to manage government subsidized multi-family and elderly residential rental apartments. On January 14, 1998, Diversified completed its initial public offering. On February 16, 1998, Diversified formed a wholly-owned subsidiary, DSS Funding, Inc. (“DSSF”), a North Carolina corporation, for the purpose of securing permanent financing for the properties which Diversified develops or acquires for third party owners. On July 22, 1998, Diversified formed a wholly owned subsidiary, Diversified Senior Services of Virginia, Inc. (“DSSVA”), a Virginia corporation, for the purpose of developing and managing properties in Virginia.
Diversified, RPM and DSSF are incorporated in North Carolina, and DSSVA is incorporated in Virginia and, as C corporations, file federal income tax returns as part of a consolidated group. Diversified, RPM, DSSF and DSSVA file separate state returns since state income tax regulations do not permit filing consolidated returns.
Diversified began offering home care services in August 1996 at selected apartment locations. We sold the home care business effective June 1, 1999 to an independent home care provider to execute a strategy to expand the availability of services to its managed properties.
Diversified anticipates growth in income from a moderate increase in the number of residential units managed and from inflationary effects on rent and service fees. All personnel located at the residences are our employees. However, we are reimbursed for the services of site personnel. Diversified anticipates moderate growth in reimbursement income because of increases in salaries of site personnel and an increase in the number of complexes under management.
Diversified continues to develop 60-unit assisted living residences and 30-unit independent senior housing residences with services. As of May 5, 2000, Diversified has two assisted living properties stabilized at greater than 90% occupancy, one in final rent-up, one in initial rent-up, two nearing the completion of construction, and controls six additional sites approved under North Carolina's moratorium on new assisted living facilities. The construction process is estimated to be nine to twelve months for each 60-unit assisted living residence.
Our first two 60-unit assisted living facilities commenced operations in June and July, 1999. We also began managing an assisted living property for an affiliated owner in October 1998. The property, located in South Boston, Virginia, is licensed for up to 64 residents but currently configured for 43 residents. It was completed in April 1998. On March 1, 2000 Diversified began managing two 64 resident assisted living facilities located in Newport and Shelby, North Carolina.
We completed construction of our first 30-unit residence in March 2000, and we have another site scheduled for completion during the summer of 2000. There are two sites ready to begin construction and an additional site we control, all of which have positive feasibility. All sites are in North Carolina.
Upon completion of these 60-unit and 30-unit residences, we will begin to recognize management fee income from the properties. Our development and construction pace depends upon our success in obtaining construction and permanent financing. There can be no assurance that we will obtain financing on a regular or timely schedule. If alternative financing cannot be arranged on acceptable terms, we may not be able to produce a pipeline of developed properties on a regular basis. We believe that in the future the development and management of assisted living facilities and residences for the elderly will provide the vast majority of Diversified's revenues and profits.
Diversified develops properties for third party owners. Diversified recognizes development fee income on the percentage of completion basis. Development costs are paid by Diversified as incurred and are reimbursed by the purchaser when the property is sold. If a site is abandoned, all development costs associated with that property are written off.
Most of the operating expenses of Diversified are related to the personnel directly performing the management services and the corporate management staff. Between 75% and 85% of the expenses are for salaries, benefits and payroll taxes. The remaining expenses are primarily administrative expenses such as travel, rent, telephone and office expenses that support the activities of the personnel. Since Diversified's inception, the operating staff increases have been due to the addition of properties under management. However, the corporate staff has grown over that same period of time because of the need to have adequate personnel in place to support the development effort. We expect that expenses associated with operating personnel will continue to increase significantly as Diversified expands, but we do not expect to increase the corporate staff significantly during the next several years.
Results of Operations
Three Months Ended March 31, 2000 As Compared to the Three Months Ended March 31, 1999
Income
Total income decreased $16,192 to $1,529,226 for the three months ended March 31, 2000 from $1,545,418 for the three months ended March 31, 1999. The slight decrease was the net effect of a decrease in development fees and increases in management fees and reimbursement income.
Management Fees. Management fees increased $64,596 to $253,754 for the three months ended March 31, 2000 from $189,158 for the three months ended March 31, 1999. The increase was due primarily to the recognition of management fees on the two 60-unit assisted living facilities developed by Diversified, which commenced operations during the third quarter of 1999, and beginning March 1, 2000, the management of two 64 resident assisted living facilities located in Newport and Shelby, North Carolina. Diversified expects growth in fee income as the developed assisted living and independent living properties are completed and rented.
Reimbursement Income. Reimbursement income increased $306,902, to $675,209 for the three months ended March 31, 2000 from $368,307 for the three months ended March 31, 1999. The increase was the result of income received from the properties for personnel hired to manage the two 60-unit assisted living facilities developed by Diversified that began accepting residents in June and July of 1999 and the two new 64 resident assisted living facilities mentioned above. Diversified expects continued increases in reimbursement income as the number of properties under management increases.
Development Fees. Development fees decreased $306,277 to $593,350 for the three months ended March 31, 2000 from $899,627 for the three months ended March 31, 1999 as a result of decreased development activities during the first quarter of 2000. Since development fee income is recognized on a percentage of completion basis on the 60-unit assisted living facilities and the 30-unit independent senior housing residences currently being developed by Diversified. Diversified expects development fee income to be cyclical, depending on the availability of both construction and permanent financing at reasonable rates.
Other Income. Other income decreased $81,413 to $6,913 for the three months ended March 31, 2000 from $88,326 for the three months ended March 31, 1999. Other income includes DSSF consulting fees and, for the three months ended March 31, 1999, home care fees. The decrease is due to a decrease in home care fees. On June 1, 1999, Diversified sold the home care business to an independent home care provider. Diversified expects consulting fees earned by DSSF to be cyclical, just as development fee income mentioned above.
Operating Expenses
Operating expenses increased $248,180 to $1,290,301 for the three months ended March 31, 2000 from $1,042,121 for the three months ended March 31, 1999. The increase is due to personnel related expenses.
Personnel Related Expense. Personnel expense increased $255,634 to $1,073,252 for the three months ended March 31, 2000 from $817,618 for the three months ended March 31, 1999. The increase was the net effect of an increase in site related personnel expense of $306,902, as mentioned above in reimbursement income, offset by a decrease in personnel expense related to the home care business which was sold on June 1, 1999. Diversified expects increases in personnel expense in future periods depending upon increases in management and development activity.
Administrative and Other Expenses. Administrative and other expenses decreased $1,013 to $203,733 for the three months ended March 31, 2000 from $204,746 for the three months ended March 31, 1999. Diversified expects increases in administrative expenses as the number of assisted living and independent senior housing properties managed increases for support of direct management of the properties, but only minor increases attributable to corporate management of Diversified.
Other Income and Expenses. Diversified earned $121,088 and $28,227 in interest income from the investment of cash and cash equivalents and interest on funds loaned to the owners of properties being developed during the three months ended March 31, 2000 and 1999, respectively. The increase is the net effect of an increase in interest on funds loaned to properties and a decrease in the amount of funds held for development at March 31, 2000 as compared to March 31, 1999. Diversified expects interest income in future periods from funds loaned to the owners of properties currently being developed.
Net Income before cumulative effect of change in accounting for development related costs. The net income before the cumulative effect decreased $179,944 to $351,580 for the three months ended March 31, 2000 from $531,524 for the three months ended March 31, 1999. The decrease was the net effect of a decrease in operating income and an increase in interest income.
Cumulative effect of change in accounting for development related costs. The change in accounting policy resulted in the write off of salaries and administrative and other expenses in the amount of $328,566 capitalized in development costs at January 1, 1999.
Net Income. The net income increased $148,622 to $351,580 for the three months ended March 31, 2000 from $202,958 for the three months ended March 31, 1999. The increase was due to the net effect of a decrease in operating income, an increase in interest income and the cumulative effect of change in accounting for development related costs at January 1, 1999.
Preferred Stock Dividends. During 1999, Diversified issued 2,225 shares of 12% Series B Cumulative Convertible Preferred Stock with no par value per share and a stated value of $2,000 per share. The Stock pays a 12% dividend semiannually and has a liquidation preference superior to all stock, common or preferred, currently issued and outstanding. During the first quarter of 2000, 497 shares were converted to 442,222 shares of common stock. Preferred stock dividends were $103,366 for the three months ended March 31, 2000.
Net Income Available to Common Shareholders. The net income available to common shareholders increased $45,256 ($.01 per share) to $248,214 ($.07 per share) for the three months ended March 31, 2000 from $202,958 ($.06 per share) for the three months ended March 31, 1999. The increase was due to the net effect of a decrease in operating income and an increase in interest income, offset by the cumulative effect of the change in accounting policy and the preferred stock dividends. Diversified expects to break even until properties currently being developed are completed and reach stabilized occupancy.
Financial Condition
March 31, 2000 As Compared to December 31, 1999
Diversified had current assets of $714,059 on March 31, 2000 and $1,941,355 on December 31, 1999. The primary current asset on December 31, 1999 was development fees and costs due from affiliates of $1,235,650. This amount was collected during the first quarter of 2000. Accounts receivable-trade decreased to $79,462 at March 31, 2000 compared to $86,893 at December 31, 1999 due primarily to the termination of the home care business in 1999. Diversified expects receivables to increase as Diversified increases management of apartment units and assisted living residences. Prepaid expenses and other increased from $120,109 at December 31, 1999 to $163,794 at March 31, 2000 due primarily to the payment of certain operating expenses during the three months ended March 31, 2000 that will be charged to expense as the related services are performed.
Development costs decreased to $440,024 at March 31, 2000 from $606,911 at December 31, 1999. The decrease is due to reimbursements of development costs previously advanced by Diversified. During the initial stages of development, Diversified advances funds for, and capitalizes certain development costs. When development fee income is recognized on a certain property, that property's associated development costs become receivable from either Taylor House, on a temporary basis, or from the permanent owner. Development costs are either recouped with the successful completion of a property or written off if a site is abandoned.
Development fees and costs due from properties currently held by Taylor House increased to $4,145,445 at March 31, 2000 from $3,917,140 at December 31, 1999. The increase reflects the ongoing development of properties and the related recognition of development fees by Diversified as the properties near completion. Development fees and costs are collected at permanent financing or from operations of the property after stabilized occupancy depending upon the type and amount of permanent financing.
The Company completed the permanent financing on four 60-unit facilities in June and July of 1999 and one 60-unit facility in February of 2000. As part of the transactions, the ownership of those facilities transferred from Taylor House to a third party, not-for-profit organization. As a result of the transfers of properties from Taylor House to third parties, receivables previously recorded in development fees and costs due from properties are reclassified to accounts receivable-properties and/or notes receivable-properties, as appropriate. At March 31, 2000, accounts receivables from properties were $786,100 as compared to $687,159 at December 31, 1999 and notes receivable-properties increased to $2,758,335 at March 31, 2000 from $1,760,115 at December 31, 1999.
Accounts receivable-affiliates increased to $712,826 at March 31, 2000 from $669,507 at December 31, 1999. The increase is due primarily to Diversified's advances made to an affiliate for operations at the Virginia facility.
Accounts payable-affiliates decreased to $596,194 at March 31, 2000 from $760,246 at December 31, 1999 due to Diversified's repayments to Taylor House for advances associated with properties currently being developed.
Total liabilities decreased $250,743 to $1,290,703 at March 31, 2000 from $1,541,446 at December 31, 1999 due primarily to the decrease in accounts payable-affiliates, as mentioned above and the payment of preferred dividends accrued at December 31, 1999. The deferred salaries of $191,823 are payable at the discretion of the employees and more than likely will not be paid from cash.
Shareholder's equity increased to $8,909,390 at March 31, 2000 from $8,661,176 at December 31, 1999. The increase was the net effect of a decrease due to the accrual of preferred dividends of $103,366 and the decrease in accumulated deficit due to the net income of $351,580. As discussed previously, during the three months ended March 31, 2000, 497 shares of Series B Cumulative Convertible Preferred Stock were converted to 442,222 shares of common stock. The conversion resulted in a decrease of $897,992 in preferred stock and an increase of $897,992 in common stock.
Liquidity and Capital Resources
Generally, Diversified has operated, and expects to continue to operate, on a negative cash flow from operations basis due to start-up expenses and lengths of the development cycles. Currently, Diversified's primary cash requirements include funding operating deficits and development expenses related to the development, construction and fill-up of 60 unit assisted living residences and 30 unit independent senior housing residences with services.
The net proceeds of the January 14, 1998 initial public offering were used to pay off the outstanding balance under the bank line of credit, to provide $3.5 million in development working capital for the assisted living and independent living projects and for general corporate purposes. The proceeds from the initial public offering designated for development were fully invested in assisted living and in dependent living properties by the end of the first quarter of 1999. The proceeds from the issuance of preferred stock during the second, third and fourth quarters of 1999 provided additional development working capital. Diversified has arranged for a $1 million, three year term loan from a bank that will be repaid primarily from the collection of notes receivable properties over the life of the loan. Diversified anticipates that the proceeds from the term loan, the collection of development fees and costs receivable, together with construction funds available for each facility, will be sufficient to complete the current development pipeline. Future development will require additional debt or equity financing. Diversified currently has several sources of potential funding and does not anticipate that liquidity demands will not be met. However, there can be no assurance that Diversified will be able to obtain financing on a favorable or timely basis. The type, timing and terms of financing selected by Diversified will depend on its cash needs, the availability of other financing sources and the prevailing conditions in the financial markets.
Diversified is the guarantor on the construction loans for the 30-unit properties currently under construction owned by Taylor House.
Inflation and Interest Rates
Inflation has had minimal impact on the daily operations of Diversified. Increases in salaries and administrative expenses have been offset by increases in management fees that are computed as a percentage of rent and resident service fees. Increases in resident service fees may lag behind inflation since the amount of the fee is based on a cost reimbursement by public sources. Except for the lag time, however, Diversified expects the reimbursement to keep pace with inflation.
Diversified's primary concern regarding inflation is interest rate fluctuations. High interest rates would increase the cost of building new facilities and could slow down Diversified's development plans.
Year 2000
All computer programs currently in use by Diversified have been upgraded to be Year 2000 compliant as part of normal updating expense. We have experienced minor problems with the software for filing Medicaid claims but the dollar amounts involved have not been material.
Certain Accounting Considerations
SFAS No. 123
In October 1995, FASB issued SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. Examples are stock purchase plans, stock options, restricted stock awards, and stock appreciation rights. This statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions must be accounted for, or at least disclosed in the case of stock options, based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The accounting requirements of SFAS No. 123 are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is initially adopted for recognizing compensation cost. The statement permits a company to choose either a new fair value-based method or the current APB Opinion No. 25 intrinsic value-based method of accounting for its stock-based compensation arrangements. Diversified adopted its Stock Incentive Plan effective January 1, 1997. During 1998, Diversified granted 47,000 stock options at an exercise price ranging from $4.75 to $5.225, the market value of the shares at the date of grant. The stock options are 100% vested and have a five-year term. Warrants for 45,000 shares were issued with a four-year term, a one-year vesting schedule and exercise prices ranging from $6.00 to $9.00 per share. Warrants for 50,000 shares have a four-year term, one year vesting schedule and an exercise price of $6.75 per share. At March 31, 2000, a total of 142,000 stock options and warrants are outstanding, 1,400 common shares have been issued and 356,600 shares are available for granting.
Information Concerning Forward Looking Statements
With the exception of historical information (information relating to Diversifed's financial condition and results of operations at historical dates or for historical periods), the matters discussed herein contain “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “will be,” “will likely continue,” “will result,” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements. These forward-looking statements are based on management's expectations as of the date hereof, and Diversified does not undertake any responsibility to update any of these statements in the future.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities.
At May 3, 1999, Diversified entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors contemplating the potential funding of up to $4.450 million (the “Funding”). The Funding provided for the private placement by Diversified of up to 2,225 shares of 12% Series B Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”) convertible into shares of Diversified's Common Stock, no par value (the “Common Stock”). Pursuant to the Purchase Agreement, Diversified sold to the investors the Series B Preferred Stock in three tranches in the following amounts: (i) $3,000,000 of the stated value of the Series B Preferred Stock in the first tranche; (ii) $715,000 of the stated value of the Series B Preferred Stock in the second tranche; and (iii) $735,000 of the stated value of the Series B Preferred Stock in the third tranche. In the second quarter of 1999, the first tranche was funded at the signing of the Purchase Agreement; in the third quarter of 1999, the second tranche was funded within 10 days of Diversified filing a resale registration statement with the Securities and Exchange Commission with respect to the Series B Preferred Stock and the underlying Common Stock; and in the fourth quarter of 1999, the third tranche was funded within 10 days of such resale registration statement being declared effective by the Securities and Exchange Commission. Taylor House Enterprises, Ltd. (“THE”), Diversified's parent, participated as an investor in the Funding, purchased $60,000 (30 shares), $20,000 (10 shares), and $20,000 (10 shares) of Series B Preferred Stock (30 shares) in the first tranche, second tranche, and third tranche, respectively.
Holders of Series B Preferred Stock are entitled to receive, in preference to the holders of Common Stock or any other securities which are junior to the Series B Preferred Stock, cumulative dividends at an annual rate of 12% which shall be paid semi-annually in arrears on the first business day of January and July in each year (each, a “Dividend Date”), commencing on July 1, 1999. Dividends will be payable to holders of record as they appear on Diversified's stock books on the record date, which will be the December 15 or June 15, as the case may be, before the related Dividend Date.
The Series B Preferred Stock was convertible into shares of Diversified's Common Stock at $4.00 per share until January 29, 2000 and, after such date, at the lower of $4.00 per share or the lowest bid price of the Common Stock during the 30 trading days preceding the date of conversion. However, each of the investors has agreed that in no event shall it be permitted to convert any shares of Series B Preferred Stock in excess of the number of such shares upon the conversion of which, the sum of (i) the number of shares of Common Stock owned by such investor plus (ii) the number of shares of Common Stock issuable upon conversion of such shares of Series B Preferred Stock, would be equal to or exceed 9.999 percent of the number of shares of Common Stock then issued and outstanding, including the shares that would be issuable upon conversion of the Series B Preferred Stock held by such investor. The Purchase Agreement prohibits the investors and their affiliates from engaging in shorting transactions in the Common Stock at any time the Common Stock is trading below $8.00 per share.
Diversified has the right to redeem the outstanding Series B Preferred Stock, in whole or in part, at any time and from time to time, from and after the first day on which the price of the Company's Common Stock exceeds $8.00 by paying to the holders of the Series B Preferred Stock 100% of its stated value, together with all accrued and unpaid dividends thereon through the date of redemption.
Until such time as all of the Series B Preferred Stock has been converted into Common Stock, or has been redeemed, Diversified shall not, without the written consent of 75% of the holders of interest of the then outstanding shares of Series B Preferred Stock, incur any indebtedness except for: (i) indebtedness existing as of the closing of the first tranche, (ii) indebtedness (including guarantees thereof) secured by real property (including leasehold interests) incurred by Diversified in connection with the development of, or purchase of, such real property, provided that such indebtedness does not exceed 80% of the fair market value of the property interest securing such indebtedness at the time such indebtedness is put in place or (iii) any guarantees of lines of credit used specifically to finance the working capital of affiliates which develop senior housing or assisted living facilities; provided, however, that prior to such time as all of the shares of Series B Preferred Stock are converted into shares of Common Stock, the aggregate amount of the guarantees referenced in sub-clause (iii) outstanding at any one time shall not exceed $3,000,000. Furthermore, until such time as all the Series B Preferred Stock has been converted into Common Stock, or have been redeemed, Diversified must maintain a tangible net worth (determined in accordance with United States generally accepted accounting principals applied on a consistent basis) of at least $4,000,000.
Each purchaser of the Series B Preferred Stock has the right to cause Diversified to redeem a portion of such purchaser's shares of Series B Preferred Stock, at any time and from time to time, after May 3, 2002 at 100% of the stated value of such shares, together with all accrued and unpaid dividends thereon through the date of redemption plus a Put Premium (as defined below). The maximum number of shares of Series B Preferred Stock, expressed as a percentage of the total number of shares of Series B Preferred Stock issued, that may be so redeemed during certain defined periods is set forth in the table below. The “Put Premium” shall be an additional payment by Diversified to the holder of the Series B Preferred Stock being redeemed in an amount such that when added to the total dividends paid to such holder through the date of redemption will yield an annual percentage rate of return (“Total Return”) to such holder set forth below opposite the period in which such redemption occurs. The additional amount represented by the Put Premium may, at the option of the holder of the Series B Preferred Stock, be paid in cash or in shares of registered Common Stock.
| Redemption Date |
Maximum Percentage of Shares Redeemed |
Total Return |
| May 3, 2002 - May 4, 2003 |
33% |
18% |
| May 3, 2003 - May 4, 2004 |
66% |
19% |
| May 4, 2004 and thereafter | 100% | 20% |
On November 4, 1999, THE transferred 362,500 shares of Diversified's unregistered Common Stock to Diversified, and, on November 9, 1999, Diversified delivered such shares of unregistered Common Stock to the purchasers of the Series B Preferred Stock, other than THE. The stock was transferred in accordance with terms of the Series B Preferred Stock purchase agreement since the closing bid price for Diversified's Common Stock did not reach $14.00 per share for at least five trading days on or before October 30, 1999. Since this provision became effective, Diversified does not expect to issue any new shares of its Common Stock in the immediate future.
The offers and sales to the purchasers of the Series B Preferred Stock were made pursuant to a claim of exemption under Section 4(2) of the Securities Act, as amended (the “Securities Act”). Diversified did not use any general advertisement or solicitation in connection with the offer or sale of the Series B Preferred Stock to the investors. Each of the investors represented and warranted, among other things, that he or it was purchasing the Series B Preferred Stock for investment purposes and not with a view to distribution and that he or it was an “accredited investor” (as defined in Regulation D promulgated by the SEC). Appropriate legends were affixed to the certificates.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule.*
(b) Reports on Form 8-K
None.
------------------------
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DIVERSIFIED SENIOR SERVICES, INC. Registrant |
| By: /s/ G. L. Clark, Jr. |
| Date: May 15, 2000 |
G. L. Clark, Jr. Executive Vice President and Chief Financial Officer |