Diversified Senior Services (DISSE) Inactive
Filed: 31 May 01, 12:00am
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 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 endedMarch 31, 2001 |
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 (State or Other Jurisdiction of Incorporation or Organization) | 56-1973923 (I.R.S. Employer Identification No.) |
| 915 West 4th Street, Winston-Salem, NC (Address of Principal Executive Offices) | 27101 (Zip Code) |
| 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, 2001, the Registrant had 4,752,520 shares of Common Stock, no par value, outstanding.
Transitional Small Business Disclosure Format Yes___ No X
DIVERSIFIED SENIOR SERVICES, INC.
FORM 10-QSB
September 30, 2000
TABLE OF CONTENTS
| Page |
| PART I: | FINANCIAL INFORMATION |
| Item 1. | Financial Statements |
| Consolidated Balance Sheets Consolidated Statements of Operations Statements of Changes In Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements | 3 4 5 6 8 |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 14 |
| PART II: Item 6. | OTHER INFORMATION Exhibits and Reports on Form 8-K | 20 |
| SIGNATURE PAGE | 21 |
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
ASSETS
Current assets:
Cash and cash equivalents $ 11,016 $185,803
Accounts receivable - trade 154,746 128,591
Prepaid expenses and other 99,650 73,058
Interest receivable 23,425 38,362
Notes receivable - properties 95,477 95,477
384,314 421,291
Furniture and equipment, net 78,143 86,007
Development costs 366,492 361,951
Development fees and costs due from affiliates 4,319,163 4,181,527
Accounts receivable - affiliates 248,259 253,616
Accounts receivable - properties 1,162,980 1,241,804
Interest receivable 186,668 153,557
Notes receivable - properties 2,691,040 2,656,949
Investment in bonds 300,000 300,000
Deferred tax asset 250,000 250,000
Other assets 279,326 282,917
$ 10,266,385 $ 10,189,619
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 483,570 $ 284,333
Commitments - affiliates with properties under construction 77,885 69,260
Note payable - current portion 375,000 250,000
Preferred dividends payable 294,054 197,481
1,230,509 801,074
Note payable 625,000 750,000
Accounts payable - affiliates 609,733 605,923
Deferred salaries and bonuses 451,823 451,823
2,917,065 2,608,820
SHAREHOLDERS' EQUITY
Preferred stock, no par, authorized 100,000,000 shares;
180,493 issued and outstanding at March 31,
2001 and 180,114 at December 31, 2000 4,703,010 3,868,384
Common stock, no par, authorized 100,000,000 shares;
4,377,762 shares issued and outstanding at
March 31, 2001 and 4,255,984 at December 31, 2000 6,530,304 7,364,930
Deemed distribution (1,335,790) (1,335,790)
Preferred dividends (801,295) (704,722)
Accumulated deficit (1,746,909) (1,612,003)
7,349,320 7,580,799
$ 10,266,385 $ 10,189,619
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2001 2000
------------------- -------------------
Income:
Management fees $ 362,441 $ 253,754
Reimbursement income 1,275,265 675,209
Development fees 9,500 593,350
Other 27,503 6,913
------------------- -------------------
1,674,709 1,529,226
------------------- -------------------
Expenses:
Personnel related 1,650,711 1,073,252
Administrative and other 189,022 203,733
Depreciation and amortization 16,196 13,316
------------------- -------------------
1,855,929 1,290,301
------------------- -------------------
Operating income (loss) (181,220) 238,925
Other income (expenses):
Interest and other income 71,661 121,088
Interest and other expense (25,347) (8,433)
------------------- -------------------
Net income (loss) (134,906) 351,580
Preferred stock dividends 96,573 103,366
------------------- -------------------
Net income (loss) available for common shareholders $ (231,479) $ 248,214
=================== ===================
Per share data:
Net income (loss) per share - basic and diluted $ (0.05) $ 0.07
=================== ===================
Weighted average shares outstanding - basic 4,599,439 3,443,866
=================== ===================
Weighted average shares outstanding - diluted 4,599,439 3,458,382
=================== ===================
DIVERSIFIED SENIOR SERVICES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
PREFERRED COMMON PREFERRED COMMON DEEMED PREFERRED ACCUMULATED
SHARES SHARES STOCK STOCK DISTRIBUTION DIVIDENDS DEFICIT TOTAL
--------- ------ ---------- ----------- ------------- ----------- ------------ --------------
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
======= ========= =========== =========== =========== ========= ========== ===========
Balance,
January 1,
2001 180,032 4,255,984 $3,868,384 $ 7,364,930 $(1,335,790) $(704,722) $(1,612,003) $ 7,580,799
Conversion
of preferred
stock (36) 564,000 (65,217) 65,217 -
Exchange
of common
for preferred 497 (442,222) 899,843 (899,843) -
Preferred
dividends (96,573) (96,573)
Net loss
for the
three months
ended March
31, 2001 (134,906) (134,906)
------- --------- ----------- ----------- ----------- ---------- ---------- ------------
Balance,
March 31,
2001 180,493 4,377,762 $ 4,703,010 $ 6,530,304 $(1,335,790) $(801,295) $(1,746,909) $ 7,349,320
======= ========= =========== =========== =========== ========= ========== ===========
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2001 2000
----------------- -------------------
Operating activities:
Net income (loss) $ (134,906) $ 351,580
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization 16,196 13,316
Allowance for uncollectible accounts receivable - 5,000
Changes in operating assets and liabilities:
Accounts receivable - trade (26,155) 7,431
Prepaid expenses and other (26,592) (20,861)
Accounts receivable - affiliates (15,752) 1,503
Interest receivable (18,174) (4,902)
Accounts receivable - properties (97,366) (221,270)
Accounts payable - trade 199,834 53,799
Interest payable (597) -
-------------- ---------------
Total adjustments 31,394 (165,984)
-------------- ---------------
Net cash provided (used) by operating activities (103,512) 185,596
-------------- ---------------
Investing activities:
Purchases of furniture and equipment (4,741) (1,865)
Development costs reimbursed (paid) (4,541) 166,887
Advances to properties in exchange for notes receivable (34,091) (527,720)
Advances to affiliate for properties in development,
net of repayments (115,419) 842,753
Advances to and investment in properties 176,190 (238,579)
Other 8,625 (1,121)
-------------- ---------------
Net cash provided by investing activities 26,023 240,355
-------------- ---------------
Financing activities:
Advances to (repayments) from affiliates 2,702 (208,874)
Preferred dividends paid - (242,735)
Increase in prepaid expenses and other - (22,824)
-------------- ---------------
Net cash provided (used) by financing activities 2,702 (474,433)
-------------- ---------------
Net decrease in cash (74,787) (48,482)
Cash and cash equivalents - beginning 85,803 383,701
-------------- ---------------
Cash and cash equivalents - ending $ 11,016 $ 335,219
============== ===============
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(CONTINUED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2001 2000
------------------- -------------------
Cash payments for interest $ 25,944 $ 8,433
=================== ===================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Preferred dividends declared and accrued $ 96,573 $ 103,366
=================== ===================
Conversion of preferred stock to common stock:
Decrease in preferred stock $ (65,217) $ (897,992)
Increase in common stock 65,217 $ 897,992
------------------- -------------------
$ - $ -
=================== ===================
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2001
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 2000 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, 2001 are not necessarily indicative of the results to be expected for the year.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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
Reclassifications
Certain items in the consolidated financial statements for 2000 have been reclassified to conform to the format presented in these consolidated 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, 2001 development fees of $1,889,722 and reimbursable development costs of $2,082,908 are due to Diversified from properties owned by Taylor House. At March 31, 2001, Diversified is the guarantor for $3,971,351outstanding Taylor House loans for two 30-unit properties. The total commitment for the properties is $4,300,000.
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 nine months ended March 31, 2001 and 2000.
Due from Due (to) from
Affiliated Taylor House &
PARTNERSHIPS SUBSIDIARIES TOTAL
-------------- -------------- -------
Amounts due (to) 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 172,294 172,294
Advances from Taylor House (6,739) (6,739)
----------- ------------ ------------
Balance, March 31, 2000 $ 233,616 $ 4,028,461 $ 4,262,077
=========== =========== ===========
NOTE 3: RELATED PARTY TRANSACTIONS (continued)
Due from Due (to) from
Affiliated Taylor House &
PARTNERSHIPS SUBSIDIARIES TOTAL
-------------- -------------- -------
Amounts due from affiliates at January 1, 2001: $ 233,616 $ 3,595,604 $ 3,829,220
Management fees due from affiliates 2,534 2,534
Development fees and costs due from properties
currently held by Taylor House - 117,919 117,919
Interest receivable from affiliated properties - 10,718 10,718
Advances due from affiliate 1,108 1,108
Advances from Taylor House - (3,810) (3,810)
----------- ----------- -----------
Balance, March 31, 2001 $ 233,616 $ 3,724,073 $ 3,957,689
=========== =========== ===========
Included in the accompanying balance sheets under the following captions:
March 31, December 31,
2001 2000
------ ------
Development fees and costs due from affiliates (long-term asset) 4,319,163 4,181,527
Accounts receivable-affiliates (long-term asset) 248,259 253,616
Accounts payable-affiliates (long-term liability) (609,733) (605,923)
------------- ---------
$ 3,957,689 $ 3,829,220
============= =============
Diversified earned interest of $10,718 and $78,862 for the three months ended March 31, 2001 and 2000, respectively, on development fees and costs due from affiliates. Interest receivable of $321,033 and $310,316 is included in development fees and costs due from affiliates at March 31, 2001and December 31, 2000, respectively.
Development fees and costs due from affiliates includes an allowance of $250,000 for advances of development costs made to an affiliate.
In management's opinion, net amounts due from affiliated partnerships are collectible, but will not be realized until such time as the properties are sold and the 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, 2001 and 2000 are as follows:
2001 2000
------ ------
Management fees $ 93,232 $ 89,747
Reimbursement fees 289,482 277,975
Development fees 2,500 122,850
----------- -----------
$ 385,214 $ 490,572
=========== ===========
Effective February 28, 2001, Diversified discontinued the management of the South Boston, Virginia property, owed by a Taylor House subsidiary.
At March 31, 2001 and 2000, 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,
2001 2000
------ ------
Computer equipment $ 179,742 $ 261,356
Office furniture 15,115 50,766
----------- -----------
194,857 312,122
Less accumulated depreciation (116,714) (226,115)
------------ ------------
$ 78,143 $ 86,007
=========== ===========
Depreciation expense for the three months ended March 31, 2001 and 2000 was $12,605 and $13,316.
NOTE 5: NOTES RECEIVABLE
Notes receivable consisted of the following:
March 31, December 31,
2001 2000
------ ----------
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 453,499 453,499
6.6% acquisition fee receivable, principal and interest
due monthly, due 2007 470,500 470,500
Prime based working capital line of credit, due 2001
(9% at March 31, 2001) 102,403 68,312
----------- ------------
2,786,517 2,752,426
Less current portion (95,477) (95,477)
----------- ------------
Notes receivable-properties $ 2,691,040 $ 2,656,949
=========== ===========
Interest receivable, related to the above notes receivable was $206,469 and $182,857 at March 31, 2001 and December 31, 2000, respectively. $19,801 and $29,300 interest receivable is included in interest receivable as a current asset at March 31, 2001 and December 31, 2000, respectively. $186,668 and $153,557 interest receivable on the notes receivable due 2040 is included as a long-term asset for the respective years.
Maturities of the notes receivable for future years ending December 31 are as follows:
Current year $ 95,477
2002 127,631
2003 148,434
2004 148,434
2005 234,640
2006 234,640
later years 1,797,261
-------------
$ 2,786,517
=============
NOTE 5: NOTES RECEIVABLE - continued
The notes receivable and interest due 2040 may be prepaid prior to maturity should the properties' owners prepay the primary mortgage obligation prior to 2040. Prepayments of principal and interest on the notes receivable may also be made by the properties' owners from surplus cash flows (as defined in the primary mortgage agreements between the owners and the lender) of the properties and with prior written approval of the lender.
NOTE 6: NOTE PAYABLE
Diversified obtained a bank loan totaling $1,000,000 in April of 2000. The loan bears interest, payable monthly, at prime plus one and one-half percent (1.5%); nine and one-half percent (9.5%) at March 31, 2001. Quarterly principal payments of $125,000 begin on July 15, 2001. All unpaid principal and interest is due on April 15, 2003. Certain accounts and notes receivable due from unrelated third parties totaling approximately $3,700,000 at March 31, 2001 have been pledged as collateral securing this loan. The loan is personally guaranteed by an officer of the company. Maturities of the note payable for future years are $250,000 in 2001, $500,000 is 2002 and $250,000 in 2003.
NOTE 7: CONVERSION OF PREFERRED STOCK
During the first quarter of 2001, preferred shareholders converted a total of 36 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 preferred shares were converted to a total of 564,000 common shares.
On March 22, 2001, the company agreed to exchange 442,222 shares of common stock held by certain holders of Series B Preferred Stock for 497.5 shares of Series B Preferred Stock. Of those shares of common stock, 20,000 had been issued in connection with conversions of Series B Preferred Stock on February 25, 2000 at a conversion price of $2.25 and 422,222 had been issued in connection with conversions of Series B Preferred Stock on March 3, 2000 at a conversion price of $2.25. The net effect of this exchange will be to decrease the number of our outstanding shares of common stock by 442,222 shares and increase the number of our outstanding shares of Series B Preferred Stock by 497.5.
The Company had preferred stock as follows:
MARCH 31, 2001 DECEMBER 31, 2000
---------------- -------------------
SHARES AMOUNT SHARES AMOUNT
-------- ------------- --------- -------------
Series A 178,386 $ 891,930 178,386 $ 891,930
Series B 2,107 3,811,080 1,646 2,976,454
------ ------------- ------ -------------
180,493 $ 4,703,010 180,032 $ 3,868,384
======= ============= ======= =============
NOTE 8: PROVISION FOR INCOME TAXES
The components of income tax benefit are as follows for the three months ended March 31, 2001 and 2000:
3/31/01 3/31/00
------- --------
Current taxes payable (refundable):
Federal $ - $ 125,200
State 1,400 30,500
Utilization of operating loss carryforwards (1,400) (155,700)
--------------- --------------
- -
-------------- -------------
Deferred tax expense (benefit):
Deferred compensation (17,700) (35,400)
Start up costs 1,600 3,100
Deferred loan costs (1,200) -
Deferred revenues 13,200 -
Generation of state loss carryforwards (12,800) (9,600)
Generation of federal loss carryforward (48,100) -
Utilization of loss carryforwards - 155,700
All other changes 19,300 19,100
Increase (decrease) in valuation allowance 45,700 (132,900)
-------------- --------------
- -
-------------- -------------
Income tax benefit $ - $ -
============== =============
The actual income tax expense attributable to income from continuing operations for the three months ended March 31, 2001 and 2000 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:
3/31/01 3/31/00
------- -------
Computed "expected" tax expense $ (45,900) $ 119,500
Temporary differences related to deferred compensation 17,700 35,400
Temporary differences related to depreciation and amortization (1,600) (4,300)
Deferred revenues (13,200) -
All other changes (2,700) (17,700)
Income (decrease) in valuation allowance 45,700 (132,900)
-------------- --------------
Income tax expense (benefit) $ - $ -
============== =============
NOTE 8: PROVISION FOR INCOME TAXES - continued
Deferred taxes based upon differences between the financial statement and tax bases of assets and liabilities and available tax carryforwards consists of:
03/31/01 03/31/00
-------- ---------
Deferred tax asset (liabilities):
Deferred compensation $ 171,300 $ 132,300
Receivables reserve 85,000 -
Deferred revenues (350,800) (162,500)
Capitalized personnel costs 53,300 -
State operating loss carryforwards 246,900 129,900
Federal operating loss carryforward 589,800 64,000
All others (200) 30,600
--------------- -------------
795,300 194,300
Valuation allowance (545,300) (194,300)
--------------- --------------
Net deferred tax asset $ 250,000 $ -
============== =============
At March 31, 2001 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
------- -----
2011 $ - $ 216,156
2012 - 715,154
2013 - 552,209
2014 - 129,707
2015 - 1,381,760
2018 279,195 -
2019 - -
2020 1,734,654 -
NOTE 9: EARNINGS PER SHARE
The following is a reconciliation of net income (loss) per share - basic and diluted for the three months ended March 31, 2001 and 2000:
03/31/01 03/31/00
-------- --------
Net income (loss) - basic and diluted $ (231,479) $ 248,214
=============== =============
Weighted average shares outstanding - basic 4,599,439 3,443,866
Additional shares issued assuming
exercise of options - 76,729
Shares assumed repurchased - (62,213)
-------------- -------------
Weighted average shares outstanding - diluted 4,599,439 3,458,382
============== =============
For | the three months ended March 31, 2001 and 2000, 218,729 and 142,000 options and warrants, respectively, were not included since conversion would be anti-dilutive. Conversion of the remaining Series B Cumulative Convertible Preferred Stock in 2001 and 2000 also were not included. |
|
NOTE 10: COMMITMENTS AND CONTINGENCIES
In 1999, Diversified entered into a loan agreement with the owner of the Goldsboro and Mocksville assisted living facilities to provide up to $500,000 in working capital as needed. Borrowings under this agreement bear interest at prime plus one percent (1%). At March 31, 2001, $102,403 was borrowed under this agreement. (Also see Note 5).
In connection with the above-described loan agreement, Diversified obtained from a bank a $500,000 irrevocable letter of credit that expired July 27, 2000. The bank renewed the letter of credit extending the expiration date to July 27, 2001. Diversified purchased a $500,000 certificate of deposit as collateral for the letter of credit initially, and in March 2000, the bank released $250,000 to Diversified. At March 31, 2001, there were no outstanding borrowings under the letter of credit, and the $250,000 certificate of deposit is included in Other Assets.
Diversified is the guarantor for up to $4,300,000 Taylor House loans for two 30-unit properties. Approximately $4,000,000 in Taylor House loans outstanding at March 31, 2001 are due with one balloon payment on May 26, 2002.
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 Consolidated Financial Statements of Diversified and Notes appearing elsewhere in this report and the Form 10-KSB for the year ended December 31, 2000 as filed with the Securities and Exchange Commission.
Overview
Diversified Senior Services, Inc., ("Diversified") formed in May 1996 as a wholly owned subsidiary of Taylor House Enterprises, Limited, ("Taylor House") began operations in July 1996. We manage apartments, primarily for seniors, and develop and manage assisted living properties and independent living properties for seniors. All properties target low and moderate income residents.
In July 1996 we 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, we completed our initial public offering. On February 16, 1998, we formed a wholly-owned subsidiary, DSS Funding, Inc. ("DSSF"), a North Carolina corporation, for the purpose of securing permanent financing for the properties which we develop or acquire for third party owners. On July 22, 1998, we 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.
Our core business is managing apartments, independent living properties and assisted living properties. The following table shows the properties we are managing as of April 2001 by type of property. It includes the number of units and the occupancy at three different dates – June 30, 2000, December 31, 2000 and April 30, 2001.
CONTINUING PROPERTIES 6/30/00 12/31/00 4/30/01
UNITS OCC % UNITS OCC % UNITS OCC %
Apartments
Senior 1122 98% 1122 97% 1124 96%
Student (1) 320 71% 320 94% 368 89%
All others 626 93% 626 94% 626 95%
-------- ------- --------
2068 2068 2118
-------- ------- --------
Independent Living
Rent-up 30 - 60 8% 60 27%
-------- ------- --------
Assisted Living
Stabilized 248 94% 248 96% 248 94%
Rent-Up - - 180 41% 180 63%
Blue Ridge - - - - 503 80%
-------- -------
--------
248 428 931
--------
------- --------
2346 2556 3109
======== ======= ========
(1) Occupancy of student apartments varies with the seasons.
We anticipate 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, except Blue Ridge personnel. We are reimbursed by each property for the services of our site personnel. We anticipate moderate growth in reimbursement income because of increases in salaries of site personnel and an increase in the number of complexes under management.
In addition to managing, we develop assisted living properties and independent living properties for seniors. Our first two 60-unit assisted living facilities commenced operations in June and July 1999. On March 1, 2000 we began managing two 64 resident assisted living facilities located in Newport and Shelby, North Carolina. The occupancy of those four stabilized properties averages in the mid 90% and was 94% at April 30, 2001. We opened three more assisted living properties in the fall of 2000 that are now in the rent up state with occupancy at April 30, 2001 of 63%. On February 22, 2001, we began managing nine assisted living facilities, Blue Ridge, with 503 units, seven located in western North Carolina and two in southwestern Virginia. These properties have 80% occupancy at April 30, 2001.1We terminated management of the South Boston, Virginia facility, which we began managing in October 1998, effective February 28, 2001. Additionally, we control six sites approved under North Carolina's moratorium on new assisted living facilities.
We completed construction of two 30-unit independent living residences in March and November 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 earn management fee income from the properties based on facility income. 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 majority of our revenues and profits.
We develop properties for third party owners. We recognize development fee income on the percentage of completion basis. Development costs are paid by us 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 our operating expenses are related to the personnel directly performing the management services and the corporate management staff. Between 80% and 90% of our normal operating 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 our inception, the operating staff increases have been due to the addition of properties under management. We expect that expenses associated with operating personnel will continue to increase significantly as we expand, but we do not expect to increase the corporate staff significantly during the next several years.
Results of Operations
Three Months Ended March 31, 2001 As Compared to the Three Months Ended March 31, 2000
Income
Total income increased $145,483 to $1,674,709 for the three months ended March 31, 2001 from $1,529,226 for the three months ended March 31, 2000. The increase was the net effect of increases in management fees and reimbursement income and a decrease in development fees.
Management Fees. Management fees increased $108,687 to $362,441 for the three months ended March 31, 2001 from $253,754 for the three months ended March 31, 2000. The increase was due primarily to management fees on the assisted living facilities we developed during 2000, the management, which began in March 1, 2000, of two 64 resident assisted living facilities located in Newport and Shelby, North Carolina and the management of nine assisted living facilities, discussed above, which began February 22, 2001. We expect growth in fee income as the developed assisted living and independent living properties are rented.
Reimbursement Income. Reimbursement income increased $600,056, to $1,275,265 for the three months ended March 31, 2001 from $675,209 for the three months ended March 31, 2000. The increase was the result of income received from the properties for personnel hired to manage the assisted living facilities developed by us in 2000 and the two 64 resident assisted living facilities mentioned above. The site personnel of the nine properties, which we began managing in February 2001,are not the company's employees; therefore, reimbursement income will not be recorded on these properties. We expect continued increases in reimbursement income as the number of properties under management increases.
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1 We expect gross management fees from Blue Ridge at 80% occupancy of $75,000 per quarter.
Development Fees. Development fees decreased $583,850 to $9,500 for the three months ended March 31, 2001 from $593,350 for the three months ended March 31, 2000. The decrease is due to reduced development activities during the first three months of 2001, primarily a result of the lack of permanent financing sources. 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 we are currently developing. We expect development fee income to be cyclical, depending on the availability of both construction and permanent financing at reasonable rates.
Other Income. Other income increased $20,590 to $27,503 for the three months ended March 31, 2001 from $6,913 for the three months ended March 31, 2000. The increase is due to DSSF consulting fees. We expect other income to be immaterial in the future.
Operating Expenses
Operating expenses increased $565,628 to $1,855,929 for the three months ended March 31, 2001 from $1,290,301 for the three months ended March 31, 2000. The increase was the net effect of an increase in personnel related expenses and depreciation expense offset by a decrease in administrative expenses.
Personnel Related Expense. Personnel expense increased $577,459 to $1,650,711 for the three months ended March 31, 2001 from $1,073,252 for the three months ended March 31, 2000. The increase was the net effect of an increase in site related personnel expense of $591,719, offset by a decrease in corporate personnel expense. We expect minor increases in corporate personnel expense in future periods depending upon increases in management and development activity.
Administrative and Other Expenses. Administrative and other expenses decreased $14,711 to $189,022 for the three months ended March 31, 2001 from $203,733 for the three months ended March 31, 2000. The decrease was due primarily to a reduction in fees paid to professionals for corporate business. We expect 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 matters.
Other Income and Expenses. We earned $71,661 and $121,088 in interest income during the three months ended March 31, 2001 and 2000, respectively. The decrease is due to the decrease in interest on funds loaned to properties. We expect interest income in future periods to depend on the amount of funds loaned to the owners of properties being developed. Interest and other expenses were $25,347 for the three months ended March 31, 2001 compared to $8,433 for the same period of 2000. Interest expense increased since we obtained a three year loan from a bank in April of 2000.
Net Income (Loss). The net income (loss) decreased $486,486 to a loss of $134,906 for the three months ended March 31, 2001 from income of $351,580 for the three months ended March 31, 2000. The decrease was due to decreases in both operating income and interest income.
Preferred Stock Dividends. During 1999, we 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 has a 12% dividend semiannually and has a liquidation preference superior to all stock, common or preferred, currently issued and outstanding. Preferred stock dividends were $96,573 for the three months ended March 31, 2001 compared to $103,366 for the three months ended March 31, 2000. The 2001 decrease in preferred stock dividends is due to the conversions of preferred shares into common shares during the quarter ended March 31, 2001.
Net Income (Loss) Available to Common Shareholders. The net income (loss) available to common shareholders decreased $479,693 or $.12 per share to a net loss of $231,479 or ($.05) for the three months ended March 31, 2001 from net income of $248,214 or $.07 per share for the three months ended March 31, 2000. The decrease was due to the net effect of a decrease in operating income and interest income offset by a decrease in preferred stock dividends. We expect to operate near break even until properties currently being rented reach stabilized occupancy.
Financial Condition
March 31, 2001 As Compared to December 31, 2000
We had current assets of $384,314 on March 31, 2001 and $421,291 on December 31, 2000. Accounts receivable–trade increased to $154,746 at March 31, 2001 compared to $128,591 at December 31, 2000. We expect receivables to increase as we increase management of apartment units and assisted living residences. Prepaid expenses and other increased from $73,058 at December 31, 2000 to $99,650 at March 31, 2001 due primarily to the payment of certain operating expenses during the three months ended March 31, 2001 that will be charged to expense as the related services are performed.
Development costs increased to $366,492 at March 31, 2001 from $361,951 at December 31, 2000. During the initial stages of development, we advance funds for, and capitalize 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 $4,319,163 at March 31, 2001 from $4,181,527 at December 31, 2000. The increase reflects the ongoing development of properties and the related recognition of development fees by us 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.
We 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, 2001, accounts receivables from properties were $1,162,980 as compared to $1,241,804 at December 31, 2000 and notes receivable-properties increased to $2,786,517 at March 31, 2001 from $2,752,426 at December 31, 2000.
Accounts receivable-affiliates decreased to $248,259 at March 31, 2001 from $253,616 at December 31, 2000. The decrease is due primarily to repayments made by an affiliate for operations at the Virginia facility, which we stopped managing February 28, 2001.
Accounts payable-affiliates increased to $609,733 at March 31, 2001 from $605,923 at December 31, 2000 due to advances by Taylor House associated with properties currently being developed.
Total liabilities increased $308,245 to $2,917,065 at March 31, 2001 from $2,608,820 at December 31, 2000 due primarily to increases in accounts payable and preferred dividends payable. The deferred salaries of $451,823 are payable at the discretion of the employees and more than likely will not be paid from cash.
Shareholders' equity decreased to $7,349,320 at March 31, 2001 from $7,580,799 at December 31, 2000. The decrease was the cumulative effect of the declaration of preferred dividends of $96,573 and the decrease in accumulated deficit due to the net loss of $134,906. During the first three months of 2001, 36 shares of Series B Cumulative Convertible Preferred Stock were converted to 564,000 shares of common stock and 442,222 shares of common stock were exchanged for 497.5 shares of preferred stock. The net effect was an increase of $834,626 in preferred stock and an decrease of $834,626 in common stock.
Liquidity and Capital Resources
Generally, we operate, and expect to continue to operate, on a negative cash flow from operations due to start-up expenses and lengths of the development cycles. Currently, our 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.
During May of 2000, we and the holders of our Series B Preferred Stock amended the purchase agreement pursuant to which the Series B Preferred Stock was sold to allow us to incur, subject to certain conditions, additional bank debt. Immediately after this amendment became effective, we drew down $1,000,000 on our bank facility.
As of March 22, 2001, we and the Series B Preferred Stock holders further amended the Series B Preferred Stock agreements to:
• | specify that we will not be deemed to be in default or otherwise subject to penalties if our common stock is delisted from the Nasdaq SmallCap Market, as long as we maintain a listing on the OTC Bulletin Board; |
• | specify that the failure of the Company's Board of Directors to declare a dividend on the Series B Preferred Stock as of January 1, 2001 will not be deemed a default or otherwise subject us to penalties; |
• | allow us to issue additional debt, equity or convertible securities if the net proceeds are first used to redeem the Series B Preferred Stock at its stated value plus accumulated but unpaid dividends through the date of redemption; and |
• | specify that, until September 22, 2001, subject to our actually raising such additional funds, the holders of the Series B Preferred Stock agree to redeem their shares of Series B Preferred Stock at that amount. |
In connection with the March 22, 2001 amendments, we agreed that we will exchange 442,222 shares of common stock held by certain holders of Series B Preferred Stock for 497.5 shares of Series B Preferred Stock. Of those shares of common stock, 20,000 had been issued in connection with conversions of Series B Preferred Stock on February 25, 2000 at a conversion price of $2.25 and 422,222 had been issued in connection with conversions of Series B Preferred Stock on March 3, 2000 at a conversion price of $2.25. The net effect of this exchange will be to decrease the number of our outstanding shares of common stock by 442,222 shares and increase the number of our outstanding shares of Series B Preferred Stock by 497.5. We originally designated 3,000 shares of preferred stock as 12% Series B Cumulative Convertible Preferred Stock. Giving effect to the exchange, we will have 277.5 shares of 12% Series B Cumulative Convertible Preferred Stock available for issuance.
As mentioned above, we obtained a $1 million, three year term loan from a bank during 2000 that will be repaid primarily from the collection of notes receivable-properties over the life of the loan. In the event that cash collected from the notes receivable is inadequate to timely repay quarterly installments on the note, we have arranged with a related party to provide interim funding for the quarterly installments. We anticipate that the collection of development fees and costs receivable, together with bank funds available for each facility, will be sufficient to complete the current development pipeline. Future development will require additional debt or equity financing. We currently have several sources of potential funding and anticipate that liquidity demands will be met. However, there can be no assurance that we will be able to obtain financing on a favorable or timely basis. The type, timing and terms of financing selected by us 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 and working capital loans for the properties owned by Taylor House
Inflation and Interest Rates
Inflation has had minimal impact on our daily operations. 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, we expect the reimbursement to keep pace with inflation.
Our primary concern regarding inflation is interest rate fluctuations. High interest rates would increase the cost of building new facilities and could slow down our development plans.
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. We adopted our Stock Incentive Plan effective January 1, 1997. During 1998, we 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, 2001, 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 our 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 we do not undertake any responsibility to update any of these statements in the future.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) | Exhibits |
(b) | Reports on Form 8-K |
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* 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. |