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 ended JUNE 30, 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
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 July 31, 1998, the Registrant had 3,300,000 shares of Common Stock, no
par value, outstanding.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
DIVERSIFIED SENIOR SERVICES, INC.
FORM 10-QSB
JUNE 30, 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
Item 6. Exhibits and Reports on Form 8-K............................17
SIGNATURE PAGE............................................................18
PART I -FINANCIAL INFORMATION
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1998 1997
------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 177,886 $ 78,156
Investments held for development (Note 7) 2,801,736 -
Accounts receivable--trade 129,722 92,878
Refundable income taxes - 34,176
Offering expenses - 425,821
Prepaid expenses 67,759 12,280
------------ ----------
3,177,103 643,311
Furniture and equipment, net (Note 4) 90,484 56,487
Intangible assets, net 104,244 114,779
Development costs 679,265 241,433
Accounts receivable--affiliates (Note 3) 788,053 310,407
------------ ----------
$ 4,839,149 $1,366,417
============ ==========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 158,407 $ 652,445
Interest payable - 33,070
Note payable--bank (Note 5) - 1,604,575
Deferred salaries and bonuses 191,823 577,508
------------ ----------
350,230 2,867,598
Deferred bonuses - 234,405
------------ ----------
350,230 3,102,003
------------ ----------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, no par, authorized 100,000,000 shares;
178,386 issued and outstanding at June 30,
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
June 30, 1998 and 1,800,000 at December 31, 1997 6,315,086 100
Unrealized gains on investments (Note 7) 62,577 -
Deemed distribution (1,335,790) (1,335,790)
Accumulated deficit (1,444,884) (1,291,826)
------------ ----------
4,488,919 (1,735,586)
------------ ----------
$ 4,839,149 $ 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 Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------------------------------------- ---------------------------------------
Income:
Management fees $ 203,747 $ 210,805 $ 407,279 $ 437,416
Reimbursement fees 365,555 376,725 667,273 751,807
Development fees 317,006 - 317,006 -
Home care fees 86,498 42,484 162,927 66,163
Other 367 7,185 1,939 11,659
----------- ---------- ---------- ----------
973,173 637,199 1,556,424 1,267,045
----------- ---------- ---------- ----------
Expenses:
Personnel related 732,897 773,484 1,403,078 1,511,082
Administrative and other 200,467 82,766 367,235 155,240
Depreciation and amortization 18,128 15,926 34,011 31,542
----------- ---------- ---------- ----------
951,492 872,176 1,804,324 1,697,864
----------- ---------- ---------- ----------
Operating income (loss) 21,681 (234,977) (247,900) (430,819)
Other income (expenses):
Interest and other income 69,174 - 100,520 -
Interest expense - (32,351) (5,678) (65,019)
----------- ---------- ---------- ----------
Income (loss) before income tax benefit 90,855 (267,328) (153,058) (495,838)
Income tax benefit - 70,000 - 125,900
----------- ---------- ---------- ----------
Net income (loss) $ 90,855 $ (197,328) $ (153,058) $(369,938)
=========== ========== ========== ==========
Net income (loss) per $ 0.03 $ (0.09) $ (0.05) $ (0.16)
=========== ========== ========== ==========
common share
Weighted average shares outstanding 3,300,000 2,277,778 3,192,265 2,277,778
=========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
DIVERSIFIED SENIOR SERVICES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 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 six
months ended
June 30, 1997 - - - - - - (369,938) (369,938)
---------- ---------- ------------ ---------- ------------- ------------- ------------- ------------
Balance,
June 30, 1997 - 2,277,778 $ - $ 100 $ - $(1,335,790) $(893,075) $(2,228,765)
========== ========== ============ =========== ============= =============== ============= ============
Balance,
January 1,
1998 178,386 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 - - - - 62,577 - - 62,577
Net loss for
the six months
ended
June 30, 1998 - - - - - - (153,058) (153,058)
---------- ---------- ------------ ---------- ------------- ------------- ------------- ------------
Balance,
June 30,
1998 178,386 3,300,000 $891,930 $6,315,086 $62,577 $(1,335,790) $(1,444,884) $4,488,919
========== ========== =========== =========== ============== =============== =============== =============
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 Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30
1998 1997 1998 1997
------------ --------- -------- ---------
Operating activities:
Net income (loss) $ 90,855 $ (197,328) $ (153,058) $(369,938)
Adjustments to reconcile net
income (loss) to net
cash used by operating activities:
Depreciation and amortization 18,128 15,926 34,011 31,542
Changes in operating assets and liabilities:
Accounts receivable (18,251) (19,089) (36,844) (1,972)
Prepaid expenses 53,994 8,104 (21,303) 7,582
Accounts payable, trade (61,574) (17,832) (35,221) (18,367)
Accounts payable, affiliates (307,404) (54,442) (297,801) (99,991)
Interest payable - 64 (33,070) 4,899
Deferred salaries and bonuses (18,000) 128,992 (620,090) 210,144
------------ ------------- -------------- -----------
Total adjustments (333,107) 61,723 (1,010,318) 133,837
------------ ------------- -------------- -----------
Net cash used by operating activities (242,252) (135,605) (1,163,376) (236,101)
------------ ------------- -------------- -----------
Investing activities:
(Increase) decrease in
investments held for development 790,484 - (2,739,159) -
Purchase of furniture and equipment (22,871) - (56,243) -
Development costs paid (257,530) (4,102) (424,202) (21,752)
Other (520) (7,500) (50,520) 20,250
------------ ------------- -------------- -----------
Net cash provided (used)
by investing activities 509,563 (11,602) (3,270,124) (1,502)
------------ ------------- -------------- -----------
Financing activities:
(Repayment of) proceeds from borrowings - 186,834 (1,729,575) 286,205
Proceeds from issuance of common stock, net (59,415) - 6,442,650 -
Advances and repayments to affiliates (146,866) (33,207) (382,119) (71,971)
Advances and repayments from affiliates - 5,311 202,274 9,800
Net cash provided (used) by financing activities (206,281) 158,938 4,533,230 224,034
Net increase (decrease) in cash 61,030 11,731 99,730 (13,569)
Cash and cash equivalents - beginning 116,856 5,832 78,156 31,132
------------ ------------- -------------- -----------
Cash and cash equivalents - ending $177,886 17,563 177,886 17,563
============ ============= ============== ===========
Cash payments for interest $ - $ 23,341 $ 38,748 $ 42,035
============ ============= ============== ===========
Cash payments for taxes $ - $ - $ - $ -
============ ============= ============== ===========
The accompanying notes are an integral part of the financial statements.
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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 conjunction with the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997 as filed with the Securities
and Exchange Commission.
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 six months ended June 30, 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: ACCOUNTING POLICIES
INCOME RECOGNITION
Development fee income is recognized at the completion of the
development cycle with sixty percent recognized at the beginning of construction
and the remaining forty percent at certificate of occupancy.
NOTE 3: RELATED PARTY TRANSACTIONS
Diversified Senior Services, Inc. ("DSS" or the "Company") is
developing two properties for 60- unit assisted living facilities that are
currently under construction. The owner of the properties is Taylor House
Enterprises, Limited ("THE"), the majority stockholder of the Company. THE
intends to sell the properties to a not-for-profit owner after permanent
financing is completed. At June 30, 1998, development fees of $317,006 and
reimbursable costs of $104,877 are payable to the Company from the properties.
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
NOTE 3: RELATED PARTY TRANSACTIONS (continued)
From time to time, the Company advances or borrows funds from THE or
other related entities. The following schedule summarizes related party
activities for the six months ended June 30, 1998 and 1997.
Due (to) Due (to)
from from Note
Affiliated THE and Payable
Partnerships Subsidiaries THE 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 THE - (2,424) - (2,424)
Rent due to THE (5,400) (5,400)
Accrued interest to THE - (18,085) - (18,085)
Repayments to THE - 38,556 - 38,556
Advances from THE - (9,800) - (9,800)
Tax benefit of operating
losses due from THE 125,900 - 125,900
----------- ----------- -------------- ------------
Balance June, 30, 1997 $233,616 $125,992 $(1,096,319) $(736,711)
=========== =========== ============== ============
Amounts due (to) from
affiliates at December 31, 1997: $233,616 $76,791 $ - $ 310,407
Computer equipment lease - (3,005) (3,005)
payment due to THE
Rent due to THE - (16,200) (16,200)
Development fees and costs
due from properties 421,883 421,883
Repayments to THE - 277,242 277,242
Advances from THE - (202,274) (202,274)
----------- ----------- -------------- ------------
Balance June, 30, 1998 $233,616 $554,437 $ $788,053
=========== =========== ============== ============
There was no interest income received from related parties during the
six months ended June 30, 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 THE was 8.25% per
annum and interest expense of $18,085 was accrued for the six months ended June
30, 1997.
The Company earned income from partnerships, a general partner of
which is a beneficial shareholder of THE ,for the six months ended June 30, 1998
and 1997 as follows:
1998 1997
---- -------
Management fees $145,878 $143,410
Reimbursement fees 270,403 271,787
Home care fees 6,240 -
----------- ---------
$422,521 $415,197
============ ==========
At June 30, 1998, $24,483 of such fees are included in trade accounts
receivable.
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
NOTE 4: FURNITURE AND EQUIPMENT
The Company has furniture and equipment as follows:
June 30, December 31,
1998 1997
------------ --------------
Computer equipment $135,960 $86,355
Office furniture 50,460 43,112
------------ --------------
186,420 129,467
Less accumulated depreciation (95,936) (72,980)
------------ --------------
$90,484 $56,487
============ ==============
Depreciation expense for the six months ended June 30, 1998 and 1997 was $22,956
and $18,564, respectively.
NOTE 5: NOTE PAYABLE
On December 31, 1997 the Company had a bank line of credit, bearing
interest at prime (8.50% at December 31, 1997), with a balance of $1,604,575.
The note was paid January 14, 1998. See Note 6.
NOTE 6: 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 $7,500,000
$5.00 per share)
Offering expenses paid during 1998 (1,057,350)
------------
6,442,650
Offering expenses paid prior to (127,664)
December 31, 1997 ------------
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
(UNAUDITED)
NOTE 7: 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 $62,577 at June 30, 1998
have been recorded equity. The carrying value of the funds were based on current
market prices at the statement date.
NOTE 8: PROVISION FOR INCOME TAXES
On January 14, 1998, DSS and Residential Properties Management, Inc.
("RPM") ceased to be a subsidiaries of THE for federal income tax purposes. An
income tax benefit for the six months ended June 30, 1998 is not recorded since
the loss can only be carried forward and applied to future taxable income of DSS
and RPM.
NOTE 9: SUBSEQUENT EVENTS
On July 31, 1998 the Company sold management rights for 361 units,
primarily multi-family units located in South Carolina, for $61,850. The sale
resulted in a gain of $7,700. The apartments generated management fees of
approximately $10,500 monthly.
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 NOTES THERETO APPEARING ELSEWHERE IN
THIS REPORT AND THE FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997 AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
Diversified Senior Services, Inc. ("DSS" or the "Company") 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
from 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 for
elderly residents 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.
The Company is in the process of developing 60 unit assisted living residences
and 30-unit residences for the elderly. As of August 11, 1998, the Company had
two 60-unit residences in the construction process and an additional six sites
under control. All sites are in North Carolina and have positive feasibility.
The construction process is estimated to be nine to twelve months. With respect
to the 30-unit residences, the Company has one site under contract and seven
sites under control, all of which have positive feasibility. The sites are in
Virginia and North Carolina. Once construction of residences 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 and residences for the elderly 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.
Certain development expenses are paid by the Company as incurred. The expenses
are capitalized and either expensed when development income is recognized,
reimbursed when a property is completed and permanently financed, or written off
when a site is abandoned.
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 initial 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 tax returns since
North Carolina income tax regulations do not permit filing consolidated tax
returns.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1997
INCOME
Total income increased $289,379 to $1,556,424 for the six months ended June 30,
1998 from $1,267,045 for the six months ended June 30, 1997. The increase was
primarily due to development fees recognized in the second quarter and an
increase in home care income, while management fees and reimbursement income
decreased.
MANAGEMENT FEES. Management fees decreased $30,137 to $407,279 for the six
months ended June 30, 1998 from $437,416 for the six months ended June 30, 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. On July 31, 1998
the Company sold the management rights for 361 units, primarily multi-family,
which generated management fees of approximately $10,500 per month. The Company
expects growth in fee income as it begins to manage assisted living facilities
and additional apartments.
REIMBURSEMENT INCOME. Reimbursement income decreased $84,534, to $667,273 for
the six months ended June 30, 1998 from $751,807 for the six months ended June
30, 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. On
July 31, 1998, as mentioned above, the 361 units also generated approximately
$12,000 monthly in reimbursement income. The Company expects considerable
increases in reimbursement income as the number of facilities under management
increases.
DEVELOPMENT FEES. Development fees of $317,006 were recognized for the six
months ended June 30, 1998. The income is 60% of the development fees of two
60-unit facilities with construction starts during the second quarter. The
Company expects development fee income to increase as the 60-unit and 30-unit
properties begin to roll out.
HOME CARE FEES. Home care fees increased $96,764, to $162,927 for the six months
ended June 30, 1998 from $66,163 for the six months ended June 30, 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 $106,460 to $1,804,324 for the
six months ended June 30, 1998 from $1,697,864 for the six months ended June 30,
1997. Personnel related expenses decreased, while administrative expenses
increased; the net change was an increase.
PERSONNEL EXPENSE. Personnel expense decreased $108,004 to $1,403,078 for the
six months ended June 30, 1998 from $1,511,082 for the six months ended June 30,
1997. Site related personnel expense decreased $84,534 due to having fewer
employees on site and no longer managing the two non-elderly apartment sites
mentioned above. Site related personnel expense will decrease approximately
$12,000 monthly due to the 361 units no longer under management referred to
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
$211,995 to $367,235 for the six months ended June 30, 1998 from $155,240 for
the six months ended June 30, 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
increased slightly for the six months ended June 30, 1998 compared to the six
months ended June 30, 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 $65,019 was incurred
in the six months ended June 30, 1998 and the six months ended June 30, 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 $100,520 in interest income from cash and cash equivalents during
the six months ended June 30, 1998 and had an unrealized gain of $62,577 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 six
months ended June 30, 1998 since the losses of the Company can only be carried
forward and applied to future income of the Company. In the six months ended
June 30, 1997, DSS recorded a tax benefit of $125,900 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 decreased $216,880 to $153,058 ($.05 per share) for the
six months ended June 30, 1998 from $369,938 ($.16 per share) for the six months
ended June 30, 1997. The decrease was due to the net effect of a decrease in
operating loss of $182,919, an increase in interest income of $100,520, a
decrease in interest expense of $59,341 and a decrease in the income tax benefit
of $125,900, as described above. The Company expects to break even or have
operating losses until properties currently being developed are completed and
fully occupied.
The Company has signed an agreement to purchase an assisted living property in
South Boston, Virginia for $3.4 million. The property, completed in April 1998,
is licensed for 64 residents. The purchase is subject to a financing contingency
and normal due diligence process. The Company is still in the due diligence
process and anticipates a decision on whether to proceed with the transaction
within the next thirty days.
FINANCIAL CONDITION
JUNE 30, 1998 COMPARED TO DECEMBER 31, 1997
The Company had current assets of $3,177,103 on June 30, 1998 and $643,311 on
December 31, 1997. The primary current asset on December 31, 1997 was offering
expenses 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 June 30, 1998 the balance was
$2,801,736, due to the Company's increased development activity. Accounts
receivable increased from $92,878 to $129,722 due to increased activity in home
care and prepaid expenses increased from $12,280 to $67,759 due to the payment
of directors and officers insurance premiums.
Furniture and equipment increased to $90,484 from $56,487 due to purchases of
computer equipment for corporate personnel. Intangible assets decreased from
$114,779 to $104,244 due to amortization expense.
Development costs increased to $679,265 at June 30, 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 increased to $788,053 at June 30, 1998 from
$310,407 at December 31, 1997. The increase is primarily due to development fees
and reimbursable costs owed to the Company as referenced in Note 3, and the net
effect of transactions between DSS and the majority stockholder, including the
tax benefit to THE's operating losses in 1997.
Total liabilities decreased $2,751,773 to $350,230 at June 30, 1998 from
$3,102,003 at December 31, 1997. Accounts payable and accrued expenses decreased
to $158,407 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 $42,582 were also paid off during the first six months.
Proceeds from the equity offering provided the funds to pay the liabilities
referred to above.
Shareholder's equity increased to $4,488,919 at June 30, 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 $62,577 and the increase in accumulated deficit due to
the net loss of $153,058.
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 60- unit 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 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 projects and for general
corporate purposes. The Company anticipates that the net proceeds from the
initial 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.
YEAR 2000
Many currently installed computer systems and software are coded to accept only
two digit entries in the date code field. Beginning the year 2000, these date
code fields will need to accept four digit entries to distinguish twenty- first
century dates from twentieth century dates. As a result, within the next
eighteen months, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements.
The Company has developed plans to modify its computer information systems
enabling proper processing of data relating to the year 2000 and beyond. Only
one computer program currently in use by the Company has a problem and an
upgraded version of such program is due in September 1998. While there can be no
assurance that Year 2000 matters will be satisfactorily identified and resolved,
the Company currently believes that Year 2000 issues will not have a material
adverse effect on the Company.
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 shares of common stock, no par
value, was made to the Company's outside directors.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
With the exception of historical information (information relating to the
Company'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 the Company
does 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:
27 Financial Data Schedule.*
b. REPORTS ON FORM 8-K:
None.
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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.
Registrant
By: /S/ G. L. CLARK, JR.
Date: August 14, 1998 G. L. Clark, Jr.
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Executive Vice President and
Chief Financial Officer