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 SEPTEMBER 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 October 31, 1998, the Registrant had 3,300,400 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, 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..................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 12
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 18
SIGNATURE PAGE............................................................... 19
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, December 31,
1998 1997
------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 120,189 $ 78,156
Investments held for development (Note 7) 1,984,962 -
Accounts receivable--trade 100,366 92,878
Refundable income taxes - 34,176
Offering expenses - 425,821
Prepaid expenses 64,502 12,280
-------------------------------------
2,270,019 643,311
Furniture and equipment, net (Note 4) 93,670 56,487
Intangible assets, net 46,243 114,779
Development costs 1,062,016 241,433
Accounts receivable--affiliates (Note 3) 1,156,649 310,407
--------------------------------------
$ 4,628,597 $ 1,366,417
======================================
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 148,783 $ 652,445
Interest payable - 33,070
Note payable--bank (Note 5) - 1,604,575
Deferred salaries and bonuses 191,823 577,508
---------------------------------------
340,606 2,867,598
Deferred bonuses - 234,405
---------------------------------------
340,606 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;
3,300,400 shares issued and outstanding at
September 30, 1998 and 1,800,000 at December 31, 1997 6,315,086 100
Unrealized losses on investments (Note 7) (16,655) -
Deemed distribution (1,335,790) (1,335,790)
Accumulated deficit (1,566,580) (1,291,826)
--------------------------------------
4,287,991 (1,735,586)
--------------------------------------
$ 4,628,597 $ 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 Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
-------------------------------------------- ----------------------- ---------------------
Income:
Management fees 182,754 211,383 590,033 648,799
Reimbursement fees 338,938 354,201 1,006,211 1,106,008
Development fees 158,500 - 475,506 -
Home care fees 90,197 55,855 253,124 122,018
Other 10,032 - 11,971 11,659
------------------- ------------------- --------------------- --------------------
780,421 621,439 2,336,845 1,888,484
------------------- ------------------- --------------------- --------------------
Expenses:
Personnel related 701,867 705,890 2,104,945 2,216,972
Administrative and other 229,418 99,627 596,653 254,867
Depreciation and amortization 18,174 15,515 52,185 47,057
------------------- ------------------- --------------------- --------------------
949,459 821,032 2,753,783 2,518,896
------------------- ------------------- --------------------- --------------------
Operating loss 169,038 199,593 416,938 630,412
Other (income) expenses:
Interest and other income (47,342) - (147,862) -
Interest expense and other - 44,861 5,678 109,880
------------------ ------------------- --------------------- --------------------
Loss before income tax benefit 121,696 244,454 274,754 740,292
Income tax benefit - (76,600) - (202,500)
------------------- ------------------- --------------------- --------------------
Net loss $ 121,696 $ 167,854 $ 274,754 $ 537,792
=================== =================== ===================== ====================
Net loss per common share $ 0.04 $ 0.09 $ 0.09 $ 0.25
=================== =================== ===================== ====================
Weighted average shares outstanding 3,300,000 1,800,000 3,228,840 2,116,769
=================== =================== ===================== ====================
The accompanying notes are an integral part of the financial statements.
DIVERSIFIED SENIOR SERVICES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
Unrealized
Preferred Common Preferred Common Gain on Deemed Accumulated
Shares Shares Stock Stock Investment Distribution Deficit Total
$
--------- ----------- --------- -------- ---------- ------------ ------------ ------------
Balance, January 1, 1997 $ - $2,277,778 $ - $ 100 $ - $(1,335,790) $ (523,137) $(1,858,827)
Retirement of common
stock, June 30, 1997 - (477,778) - - - - - -
Exchange note payable
to affiliate for
preferred stock 178,386 - 891,930 - - - - 891,930
Net loss for the nine
months ended
September 30, 1997 - - - - - - (537,792) (537,792)
---------- ---------- -------- --------- --------- ------------ -----------
Balance, September 30,
1997 $ 178,386 $1,800,000 $891,930 $ 100 $ - $(1,335,790) $(1,060,929) $(1,504,689)
========== ========== ======== ========= ========= ============ ============ =============
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 - 1,500,400 - 6,314,986 - - - 6,314,986
Unrealized losses on
investments - - - - (16,655) - - (16,655)
Net loss for the nine months
ended September 30, 1998 - - - - - - (274,754) (274,754)
--------- ---------- -------- ---------- --------- ------------- ------------ ------------
Balance, September 30,
1998 $ 178,386 $3,300,400 $891,930 $6,315,086 $(16,655) $(1,335,790) $(1,566,580) $ 4,287,991
========= ========= ======== ========== ========= ============= =============== ============
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 Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- --------------
Operating activities:
Net loss $ (121,696) $ (167,854) $ (274,754) $ (537,792)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 18,174 15,515 52,185 47,057
Gain on sale of management contracts (7,700) - (7,700) -
Changes in operating assets and liabilities:
Accounts receivable 29,356 (22,897) (7,488) (24,869)
Prepaid expenses 3,257 (3,914) (18,046) 3,668
Accounts payable, trade 1,723 21,367 (33,498) 3,000
Accounts payable, affiliates (148,897) (58,182) (446,698) (158,173)
Interest payable - 16,096 (33,070) 20,995
Deferred salaries and bonuses - 89,124 (620,090) 299,268
---------------- ------------- -------------- --------------
Total adjustments (104,087) 57,109 (1,114,405) 190,946
---------------- ------------- -------------- ---------------
Net cash used by operating activities (225,783) (110,745) (1,389,159) (346,846)
---------------- ------------- -------------- ---------------
Investing activities:
(Increase) decrease in investments held for development 737,542 - (2,001,617) -
Purchase of furniture and equipment (17,163) - (73,406) -
Development costs paid (394,445) (22,974) (818,647) (44,726)
Sale of management contracts 61,851 - 61,851 -
Other - - (50,520) 20,250
---------------- ------------- -------------- ---------------
Net cash provided (used) by investing activities 387,785 (22,974) (2,882,339) (24,476)
---------------- ------------- -------------- ----------------
Financing activities:
(Repayment of) proceeds from borrowings - 252,349 (1,729,575) 538,554
Proceeds from issuance of common stock, net - - 6,442,650 -
Offering expenses prepaid - (120,032) - (120,032)
Advances and repayments to affiliates (219,699) 182,222 (601,818) 110,251
Advances and repayments from affiliates - (171,051) 202,274 (161,251)
---------------- ------------- -------------- ---------------
Net cash provided (used) by financing activities (219,699) 143,488 4,313,531 367,522
---------------- ------------- -------------- ---------------
Net increase (decrease) in cash (57,697) 9,769 42,033 (3,800)
Cash and cash equivalents - beginning 177,886 17,563 78,156 31,132
---------------- ------------ -------------- ---------------
Cash and cash equivalents - ending $ 120,189 $ 27,332 $ 120,189 $ 27,332
================ ============ ============== ===============
Cash payments for interest $ - $ 24,105 $ 38,748 $ 88,885
================ ============ ============== ===============
Cash payments for taxes $ - $ - $ - $ -
================ ============ ============== ===============
The accompanying notes are an integral part of the financial statements.
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
On September 30, 1997, the Company issued 178,386 shares of preferred stock
to its parent in exchange for a note payable in the amount of $891,930, in a
non-cash transaction as follows:
Issuance of preferred stock $ 891,930
Exchange of note payable--affiliate (968,484)
------------
Reclassification of remainder to account payable-affiliates $ (76,554)
============
The accompanying notes are an integral part of the financial statements.
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 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 nine months ended September 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 after completion of the development
cycle. Sixty percent of such fee income is recognized at commencement of
construction and the remaining forty percent of such fee income is recognized
when a facility receives a certificate of occupancy.
RECLASSIFICATION
Certain items in the financial statements for 1997 have been reclassified
to conform to the format presented in these financial statements.
NOTE 3: RELATED PARTY TRANSACTIONS
The Company is developing three 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 properties will be sold to a not for profit owner after permanent
financing is completed. At September 30, 1998 development fees of $475,506 and
reimburseable costs of $324,576 are payable to the Company.
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
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 nine months ended September 30, 1998 and 1997.
Due (to) from Due (to) Note
from
Affiliated THE and Payable
Partnerships Subsidiaries THE Total
------------- ------------ ------------- -------------
Amounts due (to) from affiliates at December 31, 1996: $ 233,616 $ (36,170) (1,096,320) $ (898,874)
Repayment to affiliate - 33,415 - 33,415
Computer equipment lease payment due to parent - (3,636) - (3,636)
Rent due to parent - (13,500) - (13,500)
Accrued interest to parent - (27,191) - (27,191)
Repayments to parent - - 127,836 127,836
Advances from parent - (110,251) - (110,251)
Exchange note for preferred stock - - 891,930 891,930
Reclass remaining note to account payable - (76,554) 76,554 -
Tax benefit of operating losses due from parent - 202,500 - 202,500
-------------- ---------- -------------- -------------
Balance, September 30, 1997 $ 233,616 $(31,387) $ - $ 202,229
============== ========== ============== ==============
Amounts due (to) from affiliates at December 31, 1997: $ 233,616 $ 76,791 $ - $ 310,407
Computer equipment lease payment due to THE - (4,508) - (4,508)
Rent due to THE - (24,300) - (24,300)
Development fees and costs due from properties - 800,082 - 800,082
Repayments to THE - 277,242 - 277,242
Advances from THE - (202,274) - (202,274)
------------- ---------- ------------- ------------
Balance, September 30, 1998 $ 233,616 $ 923,033 $ - $ 1,156,649
============= ========== ============== ============
There was no interest income received from related parties during the nine
months ended September 30, 1998 and 1997. The amounts due from affiliates are
collectible, but will not be realized until such time as certain partnerships
terminate. Accounts payable to related parties bear no interest and have no
scheduled repayment terms. On September 30, 1997, the Company issued 178,386
shares of preferred stock to THE in exchange for a note payable in the amount of
$891,930. The remaining $76,554 was reclassified to an account payable. The
interest rate on the note to THE was 8.25% per annum and interest expense of
$27,191was accrued for the nine months ended September 30, 1997.
The Company earned income from partnerships, a general partner of which is
a beneficial shareholder of THE, for the nine months ended September 30, 1998
and 1997 as follows:
1998 1997
---- ----
Management fees $ 218,678 $ 215,067
Reimbursement fees 415,671 418,691
Home care fees 9,360 -
--------- ----------
$ 643,709 $ 633,758
========= ==========
At September 30, 1998, $30,303 of such fees are included in trade accounts
receivable.
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4: FURNITURE AND EQUIPMENT
The Company has furniture and equipment as follows:
September 30, December 31,
1998 1997
---------------- -----------------
Computer equipment $ 152,623 $ 86,355
Office furniture 51,307 43,112
---------------- -----------------
203,930 129,467
Less accumulated depreciation (110,260) (72,980)
---------------- -----------------
$ 93,670 $ 56,487
================ =================
Depreciation expense for the nine months ended September 30, 1998 and 1997
was $37,280 and $27,589, 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 at $5.00 per share) $ 7,500,000
Offering expenses paid during 1998 (1,057,350)
-------------
6,442,650
Offering expenses paid prior to December 31, 1997 (127,664)
-------------
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 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 losses of $16,655 at September
30, 1998 have been recorded in equity. The carrying value of the funds were
based on current market prices at the statement date.
NOTE 8: DEVELOPMENT INCOME
The Company has commenced work on three of its 60-unit assisted living
facilities. These facilities are located in Mocksville, Hamlet and Rocky Mount,
North Carolina. For the nine months ended September 30, 1998 in accordance with
its management and development agreement with the North Carolina Housing
Foundation, the Company recognized approximately 60% of the development fee
totaling $475,506.
NOTE 9: 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.
NOTE 10: SUBSEQUENT EVENTS
On October 6, 1998 a subsidiary of THE purchased an assisted living
facility in South Boston, Virginia that was completed and certified for
occupancy in April 1998. The Company has agreed to manage the property and to
provide working capital to cover operating deficits during rent up prior to
permanent financing. The Company is pursuing permanent financing which will
involve the transfer of ownership to a not for profit. The permanent financing
will refund the advances made by the Company and provide for working capital for
the property.
On October 1, 1998, Meadowbrook of North Carolina, Inc. and the Company
jointly agreed to indefinitely postpone the proposed joint venture between the
two companies. Regardless of when the joint venture discussions resume, the
Company intends to write off the costs associated with the joint venture as soon
as the costs can be accurately estimated.
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
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. On
July 22, 1998, the Company formed a wholly-owned subsidiary, Diversified Senior
Services of Virginia, Inc. ("DSSVA"), a Virginia corporation, for the purpose of
conducting development and management of assisted living facilities in the state
of Virginia. Beginning July 22, 1998, DSSVA 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 apartment complexes 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
in North Carolina and 30 unit residences for the elderly throughout the
Southeast. As of October 27, 1998, the Company had three 60-unit residences in
the construction process, and an additional six sites approved under the state's
moratorium on new assisted living facilities. The Company expects to start
construction on two more sites in 1998 and to start construction on the
remaining sites in 1999 depending upon obtaining construction and permanent
financing. The construction process is estimated to be nine to twelve months.
The Company began managing an assisted living property for an affiliated owner
in October. The property, located in South Boston, Virginia, is licensed for up
to 64 residents but configured for 43 residents. It was completed in April,
1998. The Company will provide working capital to cover operating deficits while
the Company is pursuing permanent financing. The permanent financing involves a
transfer of ownership to a not for profit and provides for repayment of the
working capital advances made by the Company. With respect to the 30 unit
residences, the Company has seven sites under control, all of which have
positive feasibility. The sites are in Virginia, South Carolina 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 70% 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 DSSVA is incorporated
in Virginia 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 returns since North Carolina income tax regulations do not
permit filing consolidated returns.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1998 Compared to the Three and Nine
Months Ended September 30, 1997.
INCOME
Total income increased $448,361 to $2,336,845 for the nine months ended
September 30, 1998 from $1,888,484 for the nine months ended September 30, 1997.
Total income increased $158,982 to $780,421 for the three months ended September
30, 1998 from $621,439 for the three months ended September 30, 1997. The
increases were primarily due to development fees recognized in the second and
third quarters and an increase in home care income, while management fees and
reimbursement income decreased.
MANAGEMENT FEES. Management fees decreased $58,766 to $590,033 for the nine
months ended September 30, 1998 from $648,799 for the nine months ended
September 30, 1997. For the three months ended September 30, 1998, management
fees decreased $28,629 to $182,754 compared to $211,383 for the three months
ended September 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 $99,797, to $1,006,211 for
the nine months ended September 30, 1998 from $1,106,008 for the nine months
ended September 30, 1997. Reimbursement income was $338,938 and $354,201 for the
three months ended September 30, 1998 and 1997, respectively. The decreases were
the result of having fewer employees at the sites and no longer managing the two
large, non-elderly sites mentioned above in 1998. The 361 units which the
Company disposed of also generated approximately $12,000 monthly in
reimbursement income. The Company expects increases in reimbursement income as
the number of properties under management increases.
DEVELOPMENT FEES. Development fees of $475,506 were recognized for the nine
months ended September 30, 1998. The income is 60% of the development fees of
three 60 unit facilities with construction starts during the second and third
quarters. 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 $131,106, to $253,124 for the nine
months ended September 30, 1998 from $122,018 for the nine months ended
September 30, 1997. For the three months ended September 30, 1998, home care
fees increased $34,342 to $90,197 compared to $55,855 for the three months ended
September 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 $234,887 to $2,753,783 for the nine months ended
September 30, 1998 from $2,518,896 for the nine months ended September 30, 1997.
For the three months ended September 30, 1998 and 1997, operating expenses were
$949,459 and 821,032, respectively. Personnel related expenses decreased, while
administrative expenses increased; the net change for both periods was an
increase.
PERSONNEL EXPENSE. Personnel expense decreased $112,027 to $2,104,945 for the
nine months ended September 30, 1998 from $2,216,972 for the nine months ended
September 30, 1997. Personnel expense decreased slightly for the three months
ended September 30, 1998 compared to 1997. Site related personnel expense
decreased $99,797 for the nine months due to having fewer employees on site and
no longer managing the two non-elderly apartment sites and the 361 units, whose
management rights were sold July 31, 1998, as 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 or written off if a property is
abandoned. The Company expects increases in personnel expense in future periods
due to increased management activity.
ADMINISTRATION AND OTHER EXPENSES. Administration and other expenses increased
$341,786 to $596,653 for the nine months ended September 30, 1998 from $254,867
for the nine months ended September 30, 1997. For the three months ended
September 30, 1998 and 1997, administration and other expenses were $229,418 and
99,627, respectively. 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 three and nine months ended September 30, 1998
compared to the same periods of 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 $109,880 was incurred
in the nine months ended September 30, 1998 and the nine months ended September
30, 1997, respectively. The Company incurred interest and other expense of
$44,861 for the three months ended September 30, 1997. 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 $147,862 and $47,342 in
interest income from cash and cash equivalents during the nine and three months
ended September 30, 1998, respectively, and had an unrealized loss of $16,655 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 nine
months ended September 30, 1998 since the losses of the Company can only be
carried forward and applied to future income of the Company. In the three and
nine months ended September 30, 1997, DSS recorded a tax benefit of $76,600 and
$202,500, respectively, 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 $263,038 to $274,754 ($.09 per share) for the
nine months ended September 30, 1998 from $537,792 ($.25 per share) for the nine
months ended September 30, 1997. The decrease was due to the net effect of a
decrease in operating loss of $213,474, an increase in interest income of
$147,862, a decrease in interest expense of $104,202 and a decrease in the
income tax benefit of $202,500, as described above. For the three months ended
September 30, 1998 and 1997, net loss was $121,696 ($.04 per share) and 167,854
($.09 per share), respectively. The decrease was due to the net effect of a
decrease in operating loss of $30,555, an increase of interest income of
$47,342, a decrease in interest and other expense of $44,861 and a decrease in
the income tax benefit of $76,600. The Company expects to break even or have
operating losses until properties currently being developed are completed and
fully occupied.
FINANCIAL CONDITION
SEPTEMBER 30, 1998 COMPARED TO DECEMBER 31, 1997
The Company had current assets of $2,270,019 on September 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 September 30, 1998 the balance
was $1,984,962, due to the Company's increased development activity. Accounts
receivable increased from $92,878 to $100,366 due to increased activity in home
care and prepaid expenses increased from $12,280 to $64,502 due primarily to the
payment of directors and officers insurance premiums.
Furniture and equipment net of depreciation increased to $93,670 from $56,487
due to purchases of computer equipment for corporate personnel of $74,463.
Depreciation expense for the nine months ended September 30, 1998 was $37,280.
Intangible assets net of amortization decreased from $114,779 to $46,243 due to
the July 31, 1998 sale of management rights and amortization expense.
Development costs increased to $1,062,016 at September 30, 1998 from $241,433 at
December 31, 1997 due to continuing development activities with respect to
assisted living residences and residences with services. Development costs will
either be recouped with the successful completion of a property or written off
if a site is abandoned.
Accounts receivable-affiliates increased to $1,156,649 at September 30, 1998
from $310,407 at December 31, 1997. The increase is primarily due to development
fees and reimburseable costs owed to the Company as referenced in Note 3 of the
accompanying financial statements, 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 $2,761,397 to $340,606 at September 30, 1998 from
$3,102,003 at December 31, 1997. Accounts payable and accrued expenses decreased
to $148,783 from $652,445 primarily 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 $4,287,991 at September 30, 1998 from a
deficit of $1,735,586 at December 31, 1997. The increase was the net effect of
the increase in common stock net of issue costs of $6,314,986 from the initial
public offering, an unrealized loss on investment securities of $16,655 and the
increase in accumulated deficit due to the net loss of $274,754.
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 and 30 unit residences with
services. 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.
YEAR 2000
Many currently installed computer systems and software are coded to accept only
two digit entries in the date code filed. 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. All
computer programs currently in use by the Company have been upgraded to be Year
2000 compliant. 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, 47,000 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. During the third quarter, 95,000 warrants and options were granted at
an exercise price ranging from $6.00 to $9.00, having exercisable dates ranging
from July 1, 1999 to July 1, 2001. 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: November 11, 1998 G. L. Clark, Jr.
Executive Vice President and
Chief Financial Officer