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 ended MARCH 31, 1998
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 : 333-34367
DIVERSIFIED SENIOR SERVICES, INC.
(Exact name of Small Business Issuer as specified in its charter)
NORTH CAROLINA 56-1973923
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
915 WEST 4TH STREET, WINSTON-SALEM, NC 27101
- -------------------------------------- -----
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (336) 724-1000
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that 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, 1998, the registrant had 3,300,000 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format Yes___ No X
DIVERSIFIED SENIOR SERVICES, INC.
FORM 10-QSB
MARCH 31, 1998
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets...................................... 3
Consolidated Statements of Operations............................ 4
Statements of Changes In Shareholders' Deficit................... 5
Consolidated Statements of Cash Flows............................ 6
Notes to Consolidated Financial Statements....................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 11
PART II: OTHER INFORMATION
Items 1 through 5..........................................................None
Item 6. Exhibits and Reports on Form 8-K................................. 15
SIGNATURE PAGE............................................................. 16
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 116,856 $ 78,156
Investments held for development (Note 6) 3,579,245 -
Accounts receivable--trade 111,471 92,878
Refundable income taxes 34,176 34,176
Offering expenses - 425,821
Prepaid expenses 87,577 12,280
------------- ------------
3,929,325 643,311
Furniture and equipment, net (Note 3) 79,492 56,487
Intangible assets, net 109,262 114,779
Development costs 405,669 241,433
Accounts receivable--affiliates (Note 2) 333,783 310,407
------------- ------------
$ 4,857,531 $ 1,366,417
============= ============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 262,619 $ 652,445
Interest payable - 33,070
Note payable--bank (Note 4) - 1,604,575
Deferred salaries and bonuses 209,823 577,508
------------- ------------
472,442 2,867,598
Deferred bonuses - 234,405
------------- ------------
472,442 3,102,003
------------- ------------
SHAREHOLDERS' DEFICIT
Preferred stock, no par, authorized 100,000,000 shares;
178,386 issued and outstanding at March 31,
1998 and December 31, 1997 891,930 891,930
Common stock, no par, authorized 100,000,000 shares;
3,300,000 shares issued and outstanding at
March 31, 1998 and 1,800,000 at December 31, 1997 6,315,086 100
Unrealized gains on investments (Note 6) 49,602 -
Deemed distribution (1,335,790) (1,335,790)
Accumulated deficit (1,535,739) (1,291,826)
------------- ------------
4,385,089 (1,735,586)
------------- ------------
$ 4,857,531 1,366,417
=========== =========
The accompanying notes are an integral part of the financial statements.
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1998 1997
--------------------- ---------------------
Income:
Management fees 203,532 226,611
Reimbursement fees 301,718 375,082
Home care fees 76,429 23,679
Other
1,572 4,474
--------------------- ---------------------
583,251 629,846
--------------------- ---------------------
Expenses:
Personnel related 670,181 737,598
Administrative and other 166,768 72,474
Depreciation and amortization 15,883 15,616
--------------------- ---------------------
852,832 825,688
--------------------- ---------------------
Operating loss 269,581 195,842
Other (income) expenses:
Interest and other income (31,346) -
Interest expense 5,678 32,668
--------------------- ---------------------
Loss before income tax benefit 243,913 228,510
Income tax benefit - (55,900)
--------------------- ---------------------
Net loss $ 243,913 $ 172,610
===================== =====================
Net loss per common share $ 0.08 $ 0.08
===================== =====================
Weighted average shares outstanding 3,083,333 2,277,778
===================== =====================
The accompanying notes are an integral part of the financial statements.
DIVERSIFIED SENIOR SERVICES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
UNREALIZED
PREFERRED Common PREFERRED Common Gain on Deemed ACCUMULATED
SHARES Shares STOCK Stock Investments Distribution DEFICIT Total
Balance, January 1, 1997 - 2,277,778 $ - $ 100 $ - $(1,335,790) $ (523,137) $(1,858,827)
Net loss for the three months
ended March 31, 1997 - - - - - - (172,610) (172,610)
------- --------- ---------- ---------- ----------- ------------ ----------- -----------
Balance, March 31, 1997 - 2,277,778 $ - $ 100 $ - $(1,335,790) $ (695,747) $(2,031,437)
======= ========= ========== ========== =========== ============ =========== ============
Balance, January 1, 1998 178,836 1,800,000 891,930 100 - (1,335,790) (1,291,826) (1,735,586)
Issuance of common stock - 1,500,000 - 6,314,986 - - - 6,314,986
Unrealized gain on
investments - - - - 49,602 - - 49,602
Net loss for the three months
ended March 31, 1998 - - - - - - (243,913) (243,913)
------- --------- ---------- ---------- ----------- ------------ ----------- -----------
Balance, March 31, 1998 178,836 3,300,000 891,930 $6,315,086 $ 49,602 $(1,335,790) $(1,535,739) $4,385,089
======= ========= ========== ========== =========== ============ =========== ============
The accompanying notes are an integral part of the financial statements.
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,
1998 1997
------------------------ --------------------
Operating activities:
Net loss $ (243,913) $ (172,610)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 15,883 15,616
Changes in operating assets and liabilities:
Accounts receivable
(18,593) 17,117
Prepaid expenses (75,297) (522)
Accounts payable, trade
26,353 (535)
Accounts payable, affiliates 9,603 (45,549)
Interest payable (33,070) 4,835
Deferred salaries and bonuses (602,090) 81,152
------------------------ --------------------
Total adjustments
(677,211) 72,114
------------------------ --------------------
Net cash used by operating activities (921,124) (100,496)
------------------------ --------------------
Investing activities:
Investments held for development (3,529,643) -
Purchase of furniture and equipment (33,372) -
Development costs paid (166,672) (17,650)
Other
(50,000) 27,750
------------------------ --------------------
Net cash provided (used) by investing activities (3,779,687) 10,100
------------------------ --------------------
Financing activities:
(Repayment of) proceeds from borrowings (1,729,575) 99,371
Proceeds from issuance of common stock, net 6,502,065 -
Advances and repayments to affiliates (235,254) (38,764)
Advances and repayments from affiliates 202,275 4,489
------------------------ --------------------
Net cash provided by financing activities 4,739,511 65,096
------------------------ --------------------
Net increase (decrease) in cash 38,700 (25,300)
Cash and cash equivalents - beginning 78,156 31,132
------------------------ --------------------
Cash and cash equivalents - ending $ 116,856 5,832
======================== ====================
Cash payments for interest
$ 38,748 27,833
======================== ====================
Cash payments for taxes
$ - $ -
======================== ====================
The accompanying notes are an integral part of the financial statements.
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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 conjuction with the Company's 1997 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, 1998 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: RELATED PARTY TRANSACTIONS
From time to time, the Company advances or borrows funds from the
parent, Taylor House Enterprises, Limited ("THE") or other related entities. The
following schedule summarized related party activities for the three months
ended March 31, 1998 and 1997.
DUE (TO) FROM DUE (TO) FROM NOTE
AFFILIATED PARENT AND PAYABLE
PARTNERSHIPS SUBSIDIARIES PARENT TOTAL
------------------ ------------------- ------------------ ---------------
Amounts due (to) from affiliates at December 31, 1996: $ 233,616 $ (36,170) (1,096,319) $ (898,873)
Repayment to affiliate - 33,415 - 33,415
Computer equipment lease payment due to parent - (1,212) - (1,212)
Accrued interest to parent - (9,139) - (9,139)
Repayments to parent - 5,349 - 5,349
Advances from parent - (4,489) - (4,489)
Tax benefit of operating losses due from parent 55,900 - 55,900
------------------ ------------------- ------------------ --------------
Balance March, 31, 1997 $ $ 233,616 $ 43,654 (1,096,319) $ (819,049)
================== =================== ================== ==============
Amounts due (to) from affiliates at December 31, 1997: $ 233,616 $ 76,791 $ - $ 310,407
Computer equipment lease payment due to parent - (1,503) (1,503)
Rent due to parent - (8,100) (8,100)
Repayments to parent - 235,253 235,253
Advances from parent - (202,274) (202,274)
------------------ ------------------- ------------------ --------------
Balance March, 31, 1998 $ 233,616 $ 100,167 $ - $ 333,783
-
================== =================== ================== ==============
DIVERSIFIED SENIOR SERVICES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2: RELATED PARTY TRANSACTIONS (continued)
There was no interest income received from related parties during the
three months ended March 31, 1998 and 1997. The amounts due from affiliates are
collectible but will not be realized until such time as the partnerships
terminate. Accounts payable to related parties bear no interest and have no
scheduled repayment terms. The interest rate on the note to parent was 8.25% per
annum and interest expenses of $9,139 was accrued for the three months ended
March 31, 1997.
The Company earned income from partnerships, a general partner of
which is a beneficial shareholder of THE , for the three months ended March 31,
1998 and 1997 as follows:
1998 1997
---- ----
Management fees $ 72,746 $ 71,935
Reimbursement fees 122,776 133,183
Home care fees 3,120 -
---------------- -----------------
$198,642 $205,118
================ =================
At March 31, 1998, $22,687 of such fees are included in trade accounts
receivable.
NOTE 3: FURNITURE AND EQUIPMENT
The Company has furniture and equipment as follows:
MARCH 31, December 31,
1998 1997
---------------- -----------------
Furniture and equipment
Computer equipment $ 120,162 $ 86,355
Office furniture 42,677 43,112
---------------- -----------------
162,839 129,467
Less accumulated depreciation (83,347) (72,980)
---------------- -----------------
$ 79,492 $ 56,487
================ =================
Depreciation expense for the three months ended March 31, 1998 was $10,367 and
$9,128, respectively.
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4: NOTE PAYABLE
Notes payable consist of the following:
MARCH 31, December 31
1998 1997
------------------ ------------------
Bank line of credit, bearing interest at prime (8.50%
at December 31, 1997), payable quarterly, originally
maturing October 1997. The note is guaranteed by
THE, and 61,303 shares of Omega Healthcare
Investors, Inc. common stock owned by THE are
pledged as collateral for the loan. In July and
October 1997, the Company modified its line of credit
by increasing the authorized amount to $1.6 million
and extending the maturity date to January 1998.
The note was paid January 14, 1998. See Note 5. $ - $ 1,604,575
================== ==================
NOTE 5: INITIAL PUBLIC OFFERING
On January 14, 1998, the Company completed its public offering of
1,500,000 shares of common stock at $5.00 per share. The following gives the
effect of the offering and subsequent use of the proceeds.
Gross proceeds (1,500,000 shares at $5.00 per share) $ 7,500,000
Offering expenses paid during first quarter 1998 (997,935)
------------------
6,502,065
Offering expenses paid prior to December 31, 1997 (127,664)
Offering expenses accrued at March 31, 1998 (59,415)
------------------
Net proceeds from offering 6,314,986
------------------
Use of proceeds:
Repayment of bank loan and accrued interest (1,637,645)
Payment of deferred salaries and bonuses (602,090)
Investments held for development (3,500,000)
------------------
(5,739,735)
------------------
Remainder to be used for general corporate purposes 575,251
==================
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 6: INVESTMENTS HELD FOR DEVELOPMENT
The Company's investments held for development are invested in
government and corporate bond mutual funds and are held for the development and
construction of assisted living facilities. These investments are classified as
available for sale and accordingly, unrealized gains of $49,602 at March 31,
1998 have been recorded in equity. The carrying value of the funds were based on
current market prices at the statement date.
NOTE 7: PROVISION FOR INCOME TAXES
On January 14, 1998 DSS and RPM ceased to be a subsidiary of THE for
federal income tax purposes. An income tax benefit is not recorded since the
loss for 1998 can only be carried forward and applied to future taxable income
of DSS and RPM.
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 THE COMPANY AND THE NOTES TO INTERIM FINANCIAL
STATEMENTS INCLUDED HEREWITH, AND THE FORM 10-KSB FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION UNDER SEPARATE COVER.
OVERVIEW
Diversified Senior Services, Inc. ("DSS") was formed in May 1996 as a wholly
owned subsidiary of Taylor House Enterprises, Limited ("THE") and began
operations in July 1996. DSS was capitalized with $100 and its parent, THE,
received 100 shares of common stock. THE provided working capital to DSS during
its start-up phase. Upon formation, DSS agreed to take responsibility for
deferred salaries and bonuses for certain executives of THE for the period
January 1, 1996 through June 30, 1996.
In July 1996, THE exchanged all of the stock of its wholly owned subsidiary
Residential Properties Management, Inc. ("RPM") for 2,277,678 shares of DSS. RPM
was formed in March 1989 to manage government subsidized multi- family and
elderly residential rental apartments. Effective June 30, 1997, THE returned
477,778 shares of common stock to DSS which DSS retired leaving 1,800,000 shares
of common stock issued and outstanding. On January 14, 1998, DSS completed its
initial public offering of 1,500,000 shares of common stock at $5.00 per share
for a total of $7,500,000. On February 16, 1998, the Company formed a
wholly-owned subsidiary, DSS Funding ("DSSF"), a North Carolina corporation, for
the purpose of securing permanent financing for the assisted living facilities
which the Company develops for its third party owners. Beginning July 1, 1996,
the financial statements of DSS are consolidated statements of DSS and RPM and
beginning February 16, 1998, DSSF is included in the consolidated statements.
The Company anticipates a moderate growth in the number of apartment units
managed and also expects that income will increase due to inflationary effects
on rents. All personnel located at the apartments who manage the apartments and
perform maintenance are employees of the Company. However, the apartments
reimburse the Company for the services of the on site personnel. The Company
anticipates a moderate growth in reimbursement income as a result of increases
in salaries of on site personnel and an increase in the number of apartment
complexes under management.
The Company began offering home care services in August 1996 at selected
apartment locations. Management anticipates that growth in home care service
income will continue at a moderate, controlled pace as it begins to offer these
services to elderly residents in other apartments that it manages. However,
management does not expect the income from these services to be material with
respect to the total income of the Company over the next several years.
Because the Company has not yet completed development and construction of any
assisted living residences, it has not recognized any development fee income or
management fee income from its assisted living development activities. The
policy of the Company is to recognize development fee income when the
construction of the facility is completed and a certificate of occupancy is
issued. The Company expects to earn a fee of approximately $225,000 per facility
for its standard 60 unit facility. As of May 1, two sites are under contract;
twelve sites have been optioned and eleven positive feasibility studies have
been completed. With respect to each facility, the construction process is
estimated to be nine to twelve months. Once construction on an assisted living
residence is completed, the Company will begin to recognize management fee
income for those properties. Management believes that in the near future the
development and management of assisted living facilities will provide the vast
majority of the Company's revenues and profits.
Most of the operating expenses of the Company are related to the personnel
directly performing the management services and the corporate management staff.
Between 75% and 90% of the expenses are for salaries, benefits and payroll
taxes. The remaining expenses are primarily administrative expenses that support
the activities of the personnel such as travel, rent, telephone and office
expenses. Since the Company's inception, the operating staff increases have been
due primarily to the entrance of the Company into the home care business.
However, the corporate staff has grown over that same period of time because of
the need to have adequate personnel in place to develop the assisted living
residences. Management expects that expenses associated with operating personnel
will continue to increase significantly as the Company expands, but management
does not expect to increase the number of corporate staff significantly during
the next several years.
The Company owns office furniture and computer equipment that is being
depreciated. The Company also owns management contract rights that were
purchased by RPM from an affiliate on January 1, 1996 and September 1, 1996.
Certain of these contracts are subject to amortization and are being amortized
over a seven-year period. The Company expects to extend the contracts upon
expiration at no additional cost to the Company.
DSS, RPM and DSSF are incorporated in North Carolina and, as C corporations,
file their federal income tax returns as part of a consolidated group. Prior to
the public offering, DSS and RPM filed their federal income tax returns as part
of THE's consolidated group. An income tax benefit has been recorded in 1996 and
1997 since the losses of DSS and RPM can be applied to income in THE's
consolidated group. DSS, RPM and DSSF file separate state returns since North
Carolina income tax regulations do not permit filing consolidated returns.
RESULTS OF OPERATIONS
The Quarter Ended March 31, 1998 Compared to the Quarter Ended March 31, 1997.
INCOME
Total income decreased $46,595 to $583,251 for the quarter ended March 31, 1998
from $629,846 for the quarter ended March 31, 1997. The decrease was primarily
due to decreases in management fees and reimbursement income while home care
income increased.
MANAGEMENT FEES. Management fees decreased $23,079 to $203,532 for the quarter
ended March 31, 1998 from $226,611 for the quarter ended March 31, 1997. The
Company stopped managing two large non-elderly apartment properties that did not
fit into the long term goals of the Company. Management fees from these
properties were included in 1997 fees, but not in 1998 fees. The Company expects
growth in fee income as it begins to manage assisted living facilities and
additional apartments.
REIMBURSEMENT INCOME. Reimbursement income decreased $73,364, to $301,718 for
the quarter ended March 31, 1998 from $375,082 for the quarter ended March 31,
1997. The decrease was the result of having fewer employees at the sites and no
longer managing the two large, non-elderly sites mentioned above in 1998. The
Company expects increases in reimbursement income as the number of facilities
under management increases.
HOME CARE FEES. Home care fees increased $52,750, to $76,429 for the quarter
ended March 31, 1998 from $23,679 for the quarter ended March 31, 1997. The
Company increased the hours charged by increasing the number of individuals
served. The Company provides care for residents of the apartments for the
elderly managed by the Company and for others. The Company expects moderate
growth over time in home care fees.
OPERATING EXPENSES
Operating expenses increased $27,144 to $852,832 for the quarter ended March 31,
1998 from $825,688 for the quarter ended March 31, 1997. Personnel related
expenses decreased, but administrative expenses increased such that
the net change was an increase.
PERSONNEL EXPENSE. Personnel expense decreased $67,417 to $670,181 for the
quarter ended March 31, 1998 from $737,598 for the quarter ended March 31, 1997.
Site related personnel expense decreased $73,364 due to having fewer employees
on site and no longer managing the two non-elderly apartment sites mentioned
above. There were increases in both the number of corporate personnel and their
rate of pay in 1998 compared to 1997; however, due to increased development
activity, certain salaries for development personnel were capitalized to the
specific property upon which the personnel worked. Those salaries will be
charged to development expense as development fee income is recognized. The
Company expects increases in personnel expense in future periods due to
increased management activity.
ADMINISTRATION AND OTHER EXPENSES. Administration and other expenses increased
$94,294 to $166,768 for the quarter ended March 31, 1998 from $72,474 for the
quarter ended March 31, 1997. The increases reflect increased activity in home
care, the assisted living development activity, and expenses related to
operating the public company. The Company expects further increases in
administrative expenses as the number of assisted living properties managed
increases.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
stayed approximately the same for the quarter ended March 31, 1998 compared to
the quarter ended March 31, 1997. The Company expects modest increases in
depreciation expense due to the purchase of office furniture and equipment used
by management personnel.
OTHER INCOME AND EXPENSES. Interest expense of $5,678 and $32,668 was incurred
in the quarter ended March 31, 1998 and the quarter ended March 31, 1997,
respectively. The interest expense was incurred on a bank loan which was paid
off with proceeds from the equity offering completed in January 1998. The
Company earned $31,346 in interest income from cash and cash equivalents during
the quarter ended March 31, 1998 and had an unrealized gain of $49,602 on funds
held for development. The Company does not expect to have either material
interest income or expense in future periods.
INCOME TAX BENEFIT. The Company did not record an income tax benefit in the
quarter ended March 31, 1998 since the losses of the Company can only be carried
forward and applied to future income of the Company. In the quarter ended March
31, 1997, DSS recorded a tax benefit of $55,900 since the losses of DSS and its
subsidiary were used to reduce prior period income of the parent and its
consolidated group. Due to the public company status of DSS, the Company and its
subsidiaries were no longer consolidated with THE for federal income tax
purposes effective January 14, 1998.
NET LOSS. The net loss increased $71,303 to $243,913 ($.08 per share) for the
quarter ended March 31, 1998 from $172,610 ($.08 per share) for the quarter
ended March 31, 1997. The increase was due to the net effect of an increase in
operating loss of $73,739, an increase in interest income of $31,346, a decrease
in interest expense of $26,990 and a decrease in the income tax benefit of
$55,900, as described above. The company expects to have operating losses until
properties currently being developed are completed and fully occupied.
FINANCIAL CONDITION
MARCH 31, 1998 COMPARED TO DECEMBER 31, 1997
The Company had current assets of $3,929,325 on March 31, 1998 and $643,311 on
December 31, 1997. The primary current asset on December 31, 1997 was offering
expense of $425,821 which were incurred to prepare for the offering of common
stock completed during the quarter ended March 31, 1998. After completion of the
offering, these expenses were charged to equity. Also following the completion
of the offering, the Company had approximately $3.5 million to use in the
development of assisted living properties. On March 31, 1998 the balance was
$3,579,245, an increase due to income earned on these funds. Accounts receivable
increased from $92,878 to $111,471 due to increased activity in home care and
prepaid expenses increased from $12,280 to $87,577 due to the payment of
directors and officers insurance premiums.
Furniture and equipment increased to $79,492 from $56,487 due to purchases of
computer equipment for corporate personnel. Intangible assets decreased from
$114,779 to $109,262 due to amortization expense.
Development costs increased to $405,669 at March 31, 1998 from $241,433 at
December 31, 1997 due to continuing development activities with respect to
assisted living residences. Development costs will either be recouped with the
successful completion of a facility or written off if a site is determined not
to be feasible.
Accounts receivable-affiliates, primarily fees receivable from affiliated
partnerships, increased to $333,783 at March 31, 1998 from $310,407 at December
31, 1997. The increase is the net effect of transactions between DSS and the
parent, including the tax benefit to the parent of
DSS's operating losses.
Total liabilities decreased $2,629,561 to $472,442 at March 31, 1998 from
$3,102,003 at December 31, 1997. Accounts payable and accrued expenses decreased
to $262,619 from $652,445 due to the payment of offering expenses that were
accrued at December 31, 1997. The bank loan and accrued interest were paid off
during the quarter ended March 31, 1998 and the deferred salaries of $577,508
and deferred bonuses of $24,582 were also paid off during the quarter. Proceeds
from the equity offering provided the funds to pay the liabilities referred to
above.
Shareholder's equity increased to $4,385,089 at March 31, 1998 from a deficit of
$1,735,586 at December 31, 1997. The increase was the net effect of the increase
in equity of $6,314,986 from the initial public offering, an unrealized gain on
investment securities of $49,602 and the increase in accumulated deficit due to
the net loss of $243,913.
LIQUIDITY AND CAPITAL RESOURCES
The Company has operated, and expects to continue to operate, on a negative cash
flow basis due to start-up expenses and length of the development cycle.
Currently, the Company's primary cash requirements include covering operating
deficits and development expenses related to the development, construction and
fill-up of assisted living residences. The Company had relied upon its parent,
THE, and its bank lender to provide it with operating cash until the initial
public offering was completed January 14, 1998.
The net proceeds of the 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 projects and for general corporate
purposes. The Company anticipates that the net proceeds from the public
offering, together with construction funds available for each facility will be
sufficient to fund its operations for the next twelve months, if the Company's
future operations are consistent with management's expectations. The Company may
need additional financing thereafter. There can be no assurance that the Company
will be able to obtain financing on a favorable or timely basis. The type,
timing and terms of financing selected by the Company will depend on its cash
needs, the availability of other financing sources and the prevailing conditions
in the financial markets.
THE advanced funds to cover operating deficits for DSS and RPM in 1996 and 1997.
In 1996, THE helped DSS secure a bank loan by providing collateral and
guaranteeing the loan. After the equity offering was completed and the bank loan
was repaid, THE will not offer either its collateral or its guarantee to DSS in
future bank financings.
INFLATION AND INTEREST RATES
Inflation has minimal impact on the daily operations of the
Company. Increases in salaries and administrative expenses
are 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, the Company expects the
reimbursement to keep pace with inflation.
The primary concern regarding inflation is interest rate fluctuations. High
interest rates would increase the cost of building new facilities and could slow
down the Company's development plans. Also, during a period of rapid inflation,
interest rates could become so expensive that it would not be economical to use
tax exempt bond financing for permanent financing.
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.
The Company adopted its Stock Incentive Plan effective January 1, 1997. On
February 11, 1998, 50,000 stock options were granted 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 exercisable on July 1, 1998 and are 100% vested on
that date. The options expire five years after the date of grant, or February
10, 2003. In addition, a direct grant of 400 common shares was made to the
Company's outside directors.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DIVERSIFIED SENIOR SERVICES, INC.
By: /S/ G. L. CLARK, JR.
Date: May 14, 1998 G. L. Clark, Jr., Executive
Vice President and
Chief Financial Officer