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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ______________ to __________________
Commission file number: 000-23321
DIVERSIFIED SENIOR SERVICES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
NORTH CAROLINA 56-1973923
(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, 1999, the Registrant had outstanding 3,301,400 shares of
Common Stock, no par value.
Transitional Small Business Disclosure Format Yes___ No X
DIVERSIFIED SENIOR SERVICES, INC.
FORM 10-QSB/A
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.............. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 13
PART II: OTHER INFORMATION
Item 2 Changes in Securities and use of Proceeds............... 18
Item 6. Exhibits and Reports on Form 8-K........................ 19
SIGNATURE PAGE........................................................ 20
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1999 1998
ASSETS ------------- ------------
Current assets:
Cash and cash equivalents $2,748 $32,150
Investments (Note 5) 501,354 819,074
Accounts receivable - trade 237,549 113,921
Prepaid expenses and other 138,516 90,858
--------- ----------
880,167 1,056,003
Furniture and equipment, net (Note 4) 96,907 90,201
Development costs 609,924 730,604
Development fees and costs due from affiliates (Note 3) 4,978,897 2,603,656
Accounts receivable - affiliates (Note 3) 352,299 489,669
Accounts receivable - properties 853,708 -
Interest receivable - properties 145,608 -
Notes receivable - properties (Note 6) 1,760,115 -
Other assets 310,809 43,235
----------- ------------
$9,988,434 $5,013,368
=========== ============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $243,649 $200,774
Commitments to affiliates with properties
under construction 471,079 38,945
Accounts payable - affiliates (Note 3) 721,285 -
Deferred salaries and bonuses 191,823 191,823
Accrued preferred dividends 109,532 -
----------- ----------
1,737,368 431,542
SHAREHOLDERS' EQUITY
Preferred stock, no par, authorized 100,000,000 shares;
180,244 issued and outstanding at September 30,
1999 and 178,386 at December 31, 1998 (Note 7) 4,252,762 891,930
Common stock, no par, authorized 100,000,000 shares;
3,301,400 shares issued and outstanding at
September 30, 1999 and December 31, 1998 6,319,246 6,319,246
Deemed distribution (1,335,790) (1,335,790)
Preferred dividends (166,738) -
Accumulated deficit (818,414) (1,293,560)
------------ -------------
8,251,066 4,581,826
------------ -------------
$9,988,434 $5,013,368
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,
1999 1998 1999 1998
-------------- ------------- ------------- -----------
Income:
Management fees 232,448 203,681 652,903 636,913
Reimbursement income 549,455 338,938 1,353,456 1,006,211
Development fees 515,170 158,500 1,801,502 475,506
Other 23,241 79,302 269,513 218,215
----------- ----------- ---------- ------------
1,320,314 780,421 4,077,374 2,336,845
----------- ----------- ---------- ------------
Expenses:
Personnel related 949,967 701,867 2,640,648 2,104,945
Administrative and other 295,296 229,418 1,032,008 596,653
Depreciation and amortization 20,570 18,174 60,293 52,185
------------ ----------- ----------- -------------
1,265,833 949,459 3,732,949 2,753,783
------------ ----------- ----------- -------------
Operating income (loss) 54,481 (169,038) 344,425 (416,938)
Other income (expenses):
Interest and other income 145,263 47,342 173,490 147,862
Interest and other expense (23,160) - (26,708) (5,678)
------------ ------------- ------------ ------------
Net income (loss) 176,584 (121,696) 491,207 (274,754)
Preferred stock dividends 109,533 - 166,738 -
------------ ------------- ------------ ------------
Net income (loss) available for
common shareholders $67,051 $(121,696) $324,469 $(274,754)
============ ============= ============ ============
Per share data:
Net income (loss) per common share -
basic and diluted $0.02 $(0.04) $0.10 $ (0.09)
Weighted average shares outstanding - ============ ============= ============ ============
basic 3,301,400 3,300,000 3,301,400 3,228,840
============ ============= ============ ============
Weighted average shares outstanding -
diluted 3,324,287 3,300,000 3,326,693 3,228,840
============ ============= ============ ============
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, 1999 and 1998
(Unaudited)
Preferred Common Preferred Common Deemed Preferred Accumulated
Shares Shares Stock Stock Distribution Dividends Deficit Total
--------- ------- ---------- -------- ------------ ---------- ------------- -------
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 - 1,500,400 - 6,314,986 - - - 6,314,986
Unrealized loss on investments - - - - - - (16,655) (16,655)
Net loss for the nine months
ended September 30, 1998 - - - - - - (274,754) (274,754)
-------- ---------- -------- ---------- ------------ ------------ ----------- -----------
Balance, September 30, 1998 178,836 3,300,400 $891,930 $6,315,086 $(1,335,790) $ - $(1,583,235) $4,287,991
======== ========== ======== ========== ============ ============ =========== ===========
Balance, January 1, 1999 178,386 3,301,400 $891,930 $6,319,246 $(1,335,790) - $(1,293,560) $4,581,826
Issuance of preferred stock 1,858 - 3,360,832 - - - - 3,360,832
Decrease in unrealized gain - - - - - - (16,061) (16,601)
Preferred dividends - - - - - (166,738) - (166,738)
Net income for the nine months
ended September 30, 1999 - - - - - - 491,207 491,207
-------- --------- ---------- ---------- ------------ ---------- ----------- ------------
Balance, September 30, 1999 180,244 3,301,400 $4,252,762 $6,319,246 $(1,335,790) $(166,738) $ (818,414) $8,251,066
======== ========= ========== ========== ============ ========== =========== ============
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,
1999 1998 1999 1998
Operating activities:
Net income (loss) $176,584 $(121,696) $491,207 $(274,754)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 20,570 18,174 60,293 52,185
Gain on sale of management contracts - (7,700) - (7,700)
Changes in operating assets and liabilities:
Accounts receivable (12,194) 29,356 (123,628) (7,488)
Accounts receivable, affiliates (26,189) - (75,089) -
Interest receivable (157,359) - (157,359) -
Development fees receivable, net of collections (113,075) (158,500) (1,070,841) (475,506)
Prepaid expenses 96,308 3,257 (556) (18,046)
Accounts payable, trade 115,281 1,723 42,876 (33,498)
Accounts payable, affiliates 1,502 9,603 15,307 28,808
Interest payable - - - (33,070)
Deferred salaries and bonuses - - - (620,090)
---------- --------- ------------ ------------
Total adjustments (75,156) (104,087) (1,308,997) (1,114,405)
---------- --------- ------------ ------------
Net cash provided (used) by operating activities 101,428 (225,783) (817,790) (1,389,159)
---------- --------- ------------ ------------
Investing activities:
Investments held for development (336,902) 737,542 301,659 (2,001,617)
Purchase of furniture and equipment (24,141) (17,163) (34,572) (73,406)
Development costs paid (165,397) (394,445) (247,425) (818,647)
Advances to affiliate for properties
in development (214,836) (219,699) (2,259,975) (324,577)
Advances to and investment in properties (1,159,280) - (1,159,280) -
Other 61,851 11,331
---------- --------- ------------ ------------
Net cash provided (used) by
investing activities (1,900,556) 168,086 (3,399,593) (3,206,916)
---------- --------- ------------ ------------
Financing activities:
Repayment of borrowings - - - (1,729,575)
Proceeds from (costs of) issuance of
common stock, net - - - 6,442,650
Proceeds from issuance of preferred stock, net 673,300 - 3,360,832 -
Advances from affiliates, net of repayments 897,925 - 918,435 (74,967)
Preferred dividends paid - - (57,205) -
Other (28,981) - (34,081) -
---------- --------- ------------ ------------
Net cash provided by financing activities 1,542,244 - 4,187,981 4,638,108
---------- --------- ------------ ------------
Net increase (decrease) in cash (256,884) (57,697) (29,402) 42,033
Cash and cash equivalents - beginning 259,632 177,886 32,150 78,156
---------- --------- ------------ ------------
Cash and cash equivalents - ending $2,748 $120,189 $2,748 $120,189
========== ========= ============ ============
Cash payments for interest $- $ - $ - $38,748
========== ========= ============ ============
The accompanying notes are an integral part of the financial statements.
DIVERSIFIED SENIOR SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 1998 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, 1999 are not necessarily
indicative of the results to be expected for the year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reporting amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE 2: ACCOUNTING POLICIES
RECLASSIFICATION
Certain items in the financial statements for 1998 have been reclassified to
conform to the format presented in these financial statements.
NOTE 3: RELATED PARTY TRANSACTIONS
The Company is developing properties for 60-unit assisted living facilities and
30-unit independent senior housing residences with services. The owner of the
properties during development is Taylor House Enterprises, Limited ("THE"), the
majority stockholder of the Company. THE intends to sell the properties to a
third party owners after permanent financing is completed. At September 30, 1999
development fees of $1,966,291 and reimbursable costs of $3,012,606 are due to
the Company. The Company is the guarantor on the construction loans for the
properties currently under construction. The amount of the loans outstanding at
September 30, 1999 was $2,769,586. The total commitment for the properties
currently under construction is $2,769,586.
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 the related party activities
for the nine months ended September 30, 1999 and 1998.
Due from Due (to) from
Affiliated THE and
Partnerships Subsidiaries Total
Amounts due (to) from affiliates at January 1, 1998: $ 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
currently held by THE 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
=========== =========== ===========
Amounts due from affiliates at January 1, 1999: $ 233,616 $ 2,859,709 $ 3,093,325
Computer equipment lease payment due to THE - (4,508) (4,508)
Rent due to THE - (10,800) (10,800)
Development fees and costs due from properties
currently held by THE - 2,375,240 2,375,240
Interest receivable from affiliated properties - 123,834 123,834
Advances from THE (1,172,940) (1,172,940)
Repayment to THE - 120,000 120,000
Advances due from affiliate - 209,594 209,594
----------- ----------- -----------
Balance, September 30, 1999 $ 233,616 $ 4,500,129 $ 4,733,745
=========== =========== ===========
There was no interest income received from related parties during the nine
months ended September 30, 1999 and 1998. The amounts due from affiliated
partnerships are collectible, but will not be realized until such time as
certain partnerships terminate.
The Company earned income from a subsidiary of THE, which is owned by officers
of the Company. The Company managed partnerships, whose general partner is the
chief executive officer and a beneficial shareholder of the Company, for the
nine months ended September 30, 1999 and 1998 as follows:
1999 1998
---- ----
Management fees $ 246,249 $ 218,678
Reimbursement fees 659,978 415,671
Home care fees 9,360 9,360
----------- -----------
$ 915,587 $ 643,709
=========== ===========
At September 30, 1999, $28,560 of such fees are included in trade accounts
receivable and $139,309 is included in accounts receivable-affiliates.
NOTE 4: FURNITURE AND EQUIPMENT
The Company has furniture and equipment as follows:
September 30, December 31,
1999 1998
Computer equipment $ 198,129 $ 163,557
Office furniture 52,005 52,005
----------- -----------
250,134 215,562
Less accumulated depreciation (153,227) (125,361)
------------ ------------
$ 96,907 $ 90,201
=========== ===========
Depreciation expense for the nine months ended September 30, 1999 and 1998 was
$27,866 and $37,280.
NOTE 5: INVESTMENTS
The Company's investments at September 30, 1999 include a $500,000 certificate
of deposit at a bank which is being used as collateral for a letter of credit.
The remaining investments are invested in government and corporate bond mutual
funds and are held for development and construction of assisted living and
independent living facilities. These investments are classified as available for
sale. The carrying value of the funds were based on current market prices at the
statement date. Proceeds from sales of the company's investments for the nine
months ended September 30, 1999 were $2,883,359, resulting in gains of $34,279
and realized losses of $85,987. These gains and losses are reflected in other
income in the financial statements.
NOTE 6: NOTES RECEIVABLE
Upon the completion of the permanent financing on four 60-unit assisted living
facilities, the Company took notes receivable from the properties as follows:
9% note receivable with interest
payable semi-annually, due 2009 $ 515,921
7% note receivable, due 2040 574,133
7% note receivable, due 2040 670,061
----------
$1,760,115
==========
The Company accrued interest of $29,899 for the nine months ended September 30,
1999. Maturities of the notes for future years are as follows:
2000 $ 86,206
2001 93,965
2002 102,422
2003 111,640
2004 121,688
later years 1,244,194
===========
$ 1,760,115
============
NOTE 7: ISSUANCE OF PREFERRED STOCK
On May 3, 1999 and July 13, 1999, the Company issued 1,500 and 358 shares,
respectively, of 12% Series B Cumulative Convertible Preferred Stock with no par
value per share and a stated value of $2,000 per share. The following gives the
effect of the offering.
Gross proceeds (1,857.5 shares at $2,000 per share) $ 3,715,000
Offering expenses 354,168
-------------
Net proceeds from the offering $ 3,360,832
=============
The Company had preferred stock as follows:
September 30, 1999 December 31, 1998
Shares Amount Shares Amount
Series A 178,386 $ 891,930 178,386 $ 891,930
Series B 1,858 3,360,832 - -
------ ------------- --- -------------
180,244 $ 4,252,762 178,386 $ 891,930
======= ============= ======= =============
NOTE 8: PROVISION FOR INCOME TAXES
The components of income tax benefit are as follows for the nine months ended
September 30, 1999 and 1998:
9/30/99 9/30/98
Current taxes payable (refundable):
Federal $ 110,300 $ -
State 26,599 -
Utilization of operating loss carryforwards (136,899) -
--------------- --------
- -
--------------- --------
Deferred tax expense (benefit):
Deferred compensation 13,000 126,500
Start up costs 15,200 10,400
Generation of state loss carryforwards - (147,100)
Generation of federal loss carryforwards - (215,300)
Utilization of loss carryforwards 154,,200 -
All other changes (15,000) (1,400)
Increase (decrease) in valuation allowance (167,400) 226,900
---------- ---------
- -
---------- ---------
Income tax benefit $ - $ -
========== =========
NOTE 8: PROVISION FOR INCOME TAXES - continued
The actual income tax benefit attributable to income (loss) from continuing
operations for the nine months ended September 30, 1999 and 1998 differed from
the amounts computed by applying the U.S. federal tax rate of 34 percent to loss
before income tax benefit as a result of the following:
9/30/99 9/30/98
Computed "expected" tax expense (benefit) $ 110,300 $ (93,400)
Timing differences related to deferred compensation (4,800) (116,100)
Timing differences related to depreciation and amortization (4,200) (7,100)
Utilization of net operating loss carryforward (110,300) -
Generation of net operating loss carryforward - 215,300
All other changes 9,000 1,300
-------------- -------------
Income tax benefit $ - $ -
============== =============
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes. Significant
components of the Company's deferred income tax assets are as follows. There are
no significant deferred income tax liabilities.
9/30/99 9/30/98
Non-current deferred tax asset:
Deferred compensation $ 65,200 $ 72,900
Start-up costs 17,900 36,400
State operating loss carryforwards 193,400 239,900
Federal operating loss carryforward 184,700 215,300
All others 21,500 8,000
-------------- -------------
482,700 572,500
Valuation allowance (482,700) (572,500)
--------------- --------------
Net deferred tax asset $ - $ -
=============== ==============
From May 17, 1996 (Date of Inception) through January 13, 1998, the Company was
included in the consolidated federal return of THE; therefore, loss
carryforwards for federal purposes have been utilized. Effective January 14,
1998, DSS and its subsidiaries file a consolidated federal return separate from
THE.
At September 30, 1999 the Company and its subsidiaries had operating loss
carryforwards available to reduce future state and federal taxable income. These
carryforwards are subject to examination by taxing authorities and if not
previously utilized, expire as follows:
FEDERAL STATE
2001 $ - $ (720,500)
2002 - (495,000)
2003 - (732,300)
2018 (542,899) (128,700)
NOTE 9: EARNINGS PER SHARE
Net income (loss) per share-basic is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Net income (loss) per share-diluted reflects the potential
dilution that could occur if options or other contracts to issue common stock
were exercised into common stock. The Treasury Stock method is used in the
calculation of the dilutive effect of the exercise of options.
The following is a reconciliation of net income (loss) per share - basic and
diluted for the nine months ended September 30;
1999 1998
Net income (loss) - basic and diluted $ 324,469 $ (274,754)
============ ===========
Weighted average shares outstanding - basic 3,301,400 3,228,840
Additional shares issued assuming
exercise of options 76,729 -
Shares assumed repurchased (51,436) -
------------- -----------
Weighted average shares outstanding - diluted 3,326,693 3,228,840
============ ===========
NOTE 10: SUBSEQUENT EVENTS
Between October 6, 1999 and November 4, 1999, the Company issued an additional
367.5 shares of 12% Series B Cumulative Convertible Preferred Stock (the
"Stock") with no par value per share and a stated value of $2,000 per share. The
Company received $706,400, which was net of a selling commission. The Company
will have other expenses, not yet determined, that are associated with the
offering.
Approximately $234,000 of commitments to affiliates with properties under
construction have been paid with proceeds from construction loans and permanent
financing that are obligations of the properties.
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, 1998 AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
Diversified Senior Services, Inc. (the "Company") was formed in May 1996 as a
wholly owned subsidiary of Taylor House Enterprises, Limited ("THE") and began
operations in July 1996. The Company manages apartments, primarily for seniors,
develops and manages assisted living properties and develops and manages
independent living properties. All properties are targeted for the low and
moderate income residents.
In July 1996 the Company acquired Residential Properties Management, Inc.
("RPM"), a wholly owned subsidiary of THE. RPM was formed in March 1989 to
manage government subsidized multi-family and elderly residential rental
apartments. On January 14, 1998, the Company completed its initial public
offering. On February 16, 1998, the Company formed a wholly-owned subsidiary,
DSS Funding, Inc. ("DSSF"), a North Carolina corporation, for the purpose of
securing permanent financing for the properties which the Company develops or
acquires for third party owners. 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 developing and managing properties in
Virginia.
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 site personnel. The Company
anticipates a moderate growth in reimbursement income as a result of increases
in salaries of site personnel and an increase in the number of apartment
complexes under management.
The Company is in the process of developing 60-unit assisted living residences
in North Carolina and 30-unit independent senior housing residences with
services throughout the Southeast. As of November 10, 1999, the Company has two
60-unit properties (and one in Virginia) in the rent-up stage, three in the
construction process, and an additional six sites approved under North
Carolina's moratorium on new assisted living facilities. The construction
process is estimated to be nine to twelve months for each 60-unit assisted
living residence. The first two 60-unit assisted living facilities developed by
the Company commenced operations in June and July, 1999. The Company began
managing an assisted living property for an affiliated owner in October 1998.
The property, located in South Boston, Virginia, is licensed for up to 64
residents but currently configured for 43 residents. It was completed in April
1998. The Company will provide working capital to this facility to cover
operating deficits while the Company is pursuing permanent financing. With
respect to the 30-unit residences, the Company has two sites under construction,
two sites ready to begin construction, and an additional site under control, all
of which have positive feasibility. The sites are in North Carolina. Once
construction of these 60-unit and 30-unit residences is completed, the Company
will begin to recognize management fee income for the properties. The pace of
development and construction depends upon the success of the Company in
obtaining construction financing and permanent financing for the properties.
There can be no assurance that the Company will consummate such financing on a
regular, timely schedule, and if alternative financing cannot be arranged on
terms acceptable to the Company, the Company may not be able to produce a
pipeline of developed properties on a regular basis as scheduled. Management
believes that in the 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.
The Company is developing 30-unit and 60-unit properties for third party owners.
The Company recognizes development fee income on the percentage of completion
basis. Development costs are paid by the Company as incurred. Other development
costs are reimbursed by the purchaser when the property is sold. If a site is
abandoned, all development costs associated with that property are written off.
Most of the operating expenses of 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 and
decreases have been due to the addition of properties under management and 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 support the development effort. 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.
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 were applied to income in THE's consolidated group. DSS, RPM, DSSVA and
DSSF file separate state returns since state income tax regulations do not
permit filing consolidated returns.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1999 Compared to the Three and Nine
Months Ended September 30, 1998
INCOME
Total income increased $1,740,529 to $4,077,374 for the nine months ended
September 30, 1999 from $2,336,845 for the nine months ended September 30, 1998.
Total income increased $539,893 to $1,320,314 for the three months ended
September 30, 1999 from $780,421 for the three months ended September 30, 1998.
The increase was due to increases in development fees recognized in 1999,
reimbursement income, management fees and other income .
MANAGEMENT FEES. Management fees increased $15,990 to $652,903 for the nine
months ended September 30, 1999 from $636,913 for the nine months ended
September 30, 1998. For the three months ended September 30, 1999, management
fees increased $28,767 to $232,448 compared to $203,681 for the three months
ended September 30, 1998. The increase was due to the recognition of management
fees on the two assisted living facilities developed by the Company, which
commenced operations during the third quarter. 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 the developed assisted living and independent living properties
are completed and rented.
REIMBURSEMENT INCOME. Reimbursement income increased $347,245, to $1,353,456 for
the nine months ended September 30, 1999 from $1,006,211 for the nine months
ended September 30, 1998. Reimbursement income was $549,455 and $338,938 for the
three months ended September 30, 1999 and 1998, respectively. The increase was
the result of income received from the properties for personnel hired to manage
the assisted living facility in Virginia and the two 60-unit assisted living
facilities developed by the Company that began accepting residents in June and
July. The Company expects increases in reimbursement income as the number of
properties under management increases.
DEVELOPMENT FEES. Development fees increased $1,325,996 to $1,801,502 for the
nine months ended September 30, 1999 from $475,506 for the nine months ended
September 30,1998. Development fees were $515,170 for the three months ended
September 30, 1999 compared to $158,500 for the three months ended September 30,
1998. The income is recognized on a percentage of completion basis on the
60-unit assisted living facilities and the 30-unit independent senior housing
residences currently being developed by the Company. The Company expects
development fee income to be cyclical, depending on the availability of both
construction and permanent financing at reasonable rates.
OPERATING EXPENSES Operating expenses increased $979,166 to $3,732,949 for the
nine months ended September 30, 1999 from $2,753,783 for the nine months ended
September 30, 1998. For the three months ended September 30, 1999 and 1998,
operating expenses were $1,265,833 and $949,459, respectively. The increase is
due to personnel related expenses and administrative expenses.
PERSONNEL EXPENSE. Personnel expense increased $535,703 to $2,640,648 for the
nine months ended September 30, 1999 from $2,104,945 for the nine months ended
September 30, 1998. Personnel expense was $949,967 for the three months ended
September 30, 1999 compared to $701,867 for the three months ended September 30,
1998. Site related personnel expense increased $347,245 for the nine months due
to the increase in personnel expense at the Virginia facility and the two new
60-unit facilities, as mentioned above. Personnel expenses also increased due to
the increased development activity. The Company expects increases in personnel
expense in future periods depending upon increases in management and development
activity.
ADMINISTRATION AND OTHER EXPENSES. Administration and other expenses increased
$435,355 to $1,032,008 for the nine months ended September 30, 1999 from
$596,653 for the nine months ended September 30, 1998. For the three months
ended September 30, 1999 and 1998, administration and other expenses were
$295,296 and $229,418, respectively. The increase reflects increases in the
assisted living and independent senior housing development activity, and
expenses related to operating the public company. The Company expects further
increases in administrative expenses as the number of assisted living and
independent senior housing properties managed increases for support of direct
management of the properties, but only minor increases attributable to corporate
management of the Company.
OTHER INCOME AND EXPENSES. The Company earned $173,490 and $147,862 in interest
income from the investment of cash and cash equivalents and interest on funds
loaned to the owners of properties being developed during the nine months ended
September 30, 1999 and 1998, respectively. The increase is the net effect of an
increase in interest on funds loaned to properties and a decrease in the amount
of funds held for development at September 30, 1999 compared to September 30,
1998. The Company expects interest income in future periods from funds loaned to
the owners of properties currently being developed.
NET INCOME (LOSS). The net income increased $765,961 to $491,207 for the nine
months ended September 30, 1999 from a net loss of $274,754 for the nine months
ended September 30, 1998. The increase was due to the increase in operating
income and an increase in interest income. For the three months ended September
30, 1999, net income was $176,584 compared to a net loss of $121,696 for the
three months ended September 30, 1998 and again the increase was due to
increases in operating and interest income.
PREFERRED STOCK DIVIDENDS. On May 3 and July 13, 1999, the Company issued 1,500
and 357.5 shares, respectively, of 12% Series B Cumulative Convertible Preferred
Stock with no par value per share and a stated value of $2,000 per share. The
Stock pays a 12% dividend semiannually and has a liquidation preference superior
to all stock, common or preferred, currently issued and outstanding. Preferred
stock dividends were $166,738 for the nine months ended September 30, 1999.
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS. The net income (loss)
available to common shareholders increased $599,223 ($.19 per share) to $324,469
($.10 per share) for the nine months ended September 30, 1999 from a net loss of
$274,754 ($.09 loss per share) for the nine months ended September 30, 1998. The
increase was due to the net effect of an increase in net income reduced by the
preferred stock dividends. For the three months ended September 30, 1999, net
income available for common shareholders was $67,051 ($0.02 per share) compared
to a net loss of $121,696 ($.04 per share) for the same period of 1998. The
Company expects to break even until properties currently being developed are
completed and reach stabilized occupancy.
FINANCIAL CONDITION
SEPTEMBER 30, 1999 COMPARED TO DECEMBER 31, 1998
The Company had current assets of $880,167 on September 30, 1999 and $1,056,003
on December 31, 1998. The primary current asset on December 31, 1998 was
investments of $819,074. On September 30, 1999 the balance was reduced to
$501,354, due to the Company's increased development activity. Accounts
receivable-trade increased to $237,549 at September 30, 1999 compared to
$113,921 at December 31, 1998 due to increases in DSSF consulting fees, which
are not necessarily recurring. Prepaid expenses and other increased from $90,858
to $126,765 due primarily to the payment of certain operating expenses in the
first nine months that will be charged during the current year.
Development costs decreased to $609,924 at September 30, 1999 from $730,604 at
December 31, 1998. During the initial stages of development, certain development
costs are capitalized. When development fee income is recognized on a certain
property, that property's associated costs become receivable from either THE, on
a temporary basis, or from the permanent owner. Development costs will either be
recouped with the successful completion of a property or written off if a site
is abandoned.
Development fees and costs due from properties currently held by THE increased
to $4,978,897 at September 30, 1999 from $2,603,656 at December 31, 1998. The
increase is due to development fees and reimbursable costs on properties
currently being developed that are due to the Company. Development fees are
collected at permanent financing or from operations of the property after
stabilized occupancy depending upon the type and amount of permanent financing.
The Company completed the permanent financing on four 60-unit facilities in June
and July of 1999. As part of the transactions, those facilities were transferred
by THE to a third party, not-for-profit organization. As a result of the
transfer from THE to third parties, receivables previously recorded in
development fees and costs due from properties are now recorded as accounts
receivable-properties. At September 30, 1999, receivables from properties were
$853,708. The Company also took notes totaling $1,760,115 as referenced in Note
6.
Accounts receivable-affiliates decreased to $352,299 at September 30, 1999 from
$489,669 at December 31, 1998. The decrease is the net effect of collection of
advances to THE offset by increases in the Company's advances made to an
affiliate for operations at the Virginia facility.
Accounts payable-affiliates were $721,285 at September 30, 1999 for advances
made by THE for costs associated with the permanent financing of four properties
during the third quarter,
Total liabilities increased $1,305,826 to $1,737,368 at September 30, 1999 from
$431,542 at December 31, 1998 due primarily to payments of commitments to
affiliates with properties under construction, accounts payable to affiliates
and preferred dividends payable. Approximately $234,000 of the commitments to
affiliates with properties under construction have been subsequently paid and
the remainder will be transferred to the respective property at permanent
financing or will be paid out of those proceeds. The deferred salaries of
$191,823 are payable at the discretion of the employees and more than likely
will not be paid from cash.
Shareholder's equity increased to $8,251,066 at September 30, 1999 from
$4,581,826 at December 31, 1998. The increase was the net effect of the proceeds
of $3,360,832 from the issuance of preferred stock, a decrease in unrealized
gains on investment securities of $16,061, a decrease due to the accrual of
deferred dividends of $166,738 and the decrease in accumulated deficit due to
the net income of $491,207.
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 independent senior
housing residences with services.
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 and independent living
projects and for general corporate purposes. The proceeds from the initial
public offering designated for development were fully invested in assisted
living and in dependent living properties by the end of the first quarter of
1999. The proceeds from the issuance of preferred stock during the second, third
and fourth quarters will provide additional development working capital. The
company anticipates that the proceeds from the issuance of preferred stock, the
collection of development fees and costs receivable, together with construction
funds available for each facility, will be sufficient to complete the current
development pipeline. Future development will require additional debt or equity
financing. The Company currently has several sources of potential funding and
does not anticipate that liquidity demands will not be met. 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 Company is the guarantor on the construction loans for the properties
currently under construction owned by THE.
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.
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. The possibility exists
that isolated incidents of a Year 2000 nature could affect individual properties
managed by the Company, but the Company does not anticipate that such
incident(s) would have a material impact on the Company's business or
operations. The Company is in the process of contacting customers, vendors and
service providers to determine which of them is affected by the year 2000
problem, and to what extent, in order to assess the potential impact 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. The
Company adopted its Stock Incentive Plan effective January 1, 1997. During 1998,
the Company granted 47,000 stock options at an exercise price ranging from $4.75
to $5.225, the market value of the shares at the date of grant. The stock
options are 100% vested and have a five-year term. Warrants for 45,000 shares
were issued with a four-year term, a one-year vesting schedule and exercise
prices ranging from $6.00 to $9.00 per share. Warrants for 50,000 shares have a
four-year term, one year vesting schedule and an exercise price of $6.75 per
share. At December 31, 1998, a total of 142,000 stock options and warrants are
outstanding, 1,400 common shares have been issued and 356,600 shares are
available for granting.
INFORMATION CONCERNING FORWARD LOOKING STATEMENTS
With the exception of historical information (information relating to 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities.
As of May 3, 1999, the Company entered into a Securities Purchase Agreement (the
"Purchase Agreement") with certain investors contemplating a potential funding
of up to $4.450 million (the "Funding"). The Funding provides for the private
placement by the Company of up to 2,225 shares of 12% Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock") convertible into
shares of the Company's Common Stock, no par value (the "Common Stock").
Pursuant to the Purchase Agreement, the Company shall issue and sell to the
investors the Series B Preferred Stock in three tranches in the following
amounts: (i) $3,000,000 of the stated value of the Series B Preferred Stock in
the first tranche; (ii) $715,000 of the stated value of the Series B Preferred
Stock in the second tranche; and (iii) $735,000 of the stated value of the
Series B Preferred Stock in the third tranche. The first tranche was funded at
the signing of the Purchase Agreement. The second tranche was funded between
July 13th and July 15th 1999. The third tranche was funded between October 6th
and November 4th, 1999. Taylor House Enterprises, Ltd. ("THE"), the Company's
parent, participated as an investor in the Funding, purchasing $60,000 of Series
B Preferred Stock in the first tranche and $20,000 of Series B Preferred Stock
in each of the next two tranches.
On August 3, 1999, a registration statement on Form S-3 covering the shares of
common stock underlying the Series B Preferred Stock was declared effective by
the United States Securities and Exchange Commission.
Holders of Series B Preferred Stock are entitled to receive, in preference to
the holders of Common Stock or any other securities which are junior to the
Series B Preferred Stock, cumulative dividends at an annual rate of 12% and
shall be paid semi-annually in arrears on the first business day of January and
July in each year (each, a "Dividend Date"). Dividends will be payable to
holders of record as they appear on the stock books of the Company on the record
date, which will be the December 15 or June 15, as the case may be, before the
related Dividend Date.
The Series B Preferred Stock is convertible into shares of the Company's Common
Stock at $4.00 per share until January 29, 2000 and, after such date, at the
lower of $4.00 per share or the lowest bid price of the Common Stock during the
30 trading days preceding the date of conversion. However, each of the investors
has agreed that in no event shall it be permitted to convert any shares of
Series B Preferred Stock in excess of the number of such shares upon the
conversion of which, the sum of (i) the number of shares of Common Stock owned
by such investor plus (ii) the number of shares of Common Stock issuable upon
conversion of such shares of Series B Preferred Stock, would be equal to or
exceed 9.999 percent of the number of shares of Common Stock then issued and
outstanding, including the shares that would be issuable upon conversion of the
Series B Preferred Stock held by such investor. The Purchase Agreement prohibits
the investors and their affiliates from engaging in shorting transactions in the
Common Stock at any time the Common Stock is trading below $8.00 per share.
The Company shall have the right to redeem the outstanding Series B Preferred
Stock, in whole or in part, at any time and from time to time, from and after
the first day on which the price of the Company's Common Stock exceeds $8.00 by
paying to the holders of the Series B Preferred Stock 100% of its stated value,
together with all accrued and unpaid dividends thereon through the date of
redemption.
Until such time as all of the Series B Preferred Stock has been converted into
Common Stock, or has been redeemed, the Company shall not, without the written
consent of 75% of the holders of interest of the then outstanding shares of
Series B Preferred Stock, incur any indebtedness except for: (i) indebtedness
existing as of the closing of the first tranche, (ii) indebtedness (including
guarantees thereof) secured by real property (including leasehold interests)
incurred by the Company in connection with the development of, or purchase of,
such real property, provided that such indebtedness does not exceed 80% of the
fair market value of the property interest securing such indebtedness at the
time such indebtedness is put in place or (iii) any guarantees of lines of
credit used specifically to finance the working capital of affiliates which
develop senior housing or assisted living facilities; provided, however, that
prior to such time as all of the shares of Series B Preferred Stock are
converted into shares of Common Stock, the aggregate amount of the guarantees
referenced in sub-clause (iii) outstanding at any one time shall not exceed
$3,000,000. Furthermore, until such time as all the Series B Preferred Stock has
been converted into Common Stock, or have been redeemed, the Company must
maintain a tangible net worth (determined in accordance with United States
generally accepted accounting principals applied on a consistent basis) of at
least $4,000,000.
Each purchaser of the Series B Preferred Stock has the right to cause the
Company to redeem a portion of such purchaser's shares of Series B Preferred
Stock, at any time and from time to time, after May 3, 2002 at 100% of the
stated value of such shares, together with all accrued and unpaid dividends
thereon through the date of redemption plus a Put Premium (as defined below).
The maximum number of shares of Series B Preferred Stock, expressed as a
percentage of the total number of shares of Series B Preferred Stock issued,
that may be so redeemed during certain defined periods is set forth in the table
below. The "Put Premium" shall be an additional payment by the Company to the
holder of the Series B Preferred Stock being redeemed in an amount such that
when added to the total dividends paid to such holder through the date of
redemption will yield an annual percentage rate of return ("Total Return") to
such holder set forth below opposite the period in which such redemption occurs.
The additional amount represented by the Put Premium may, at the option of the
holder of the Series B Preferred Stock, be paid in cash or in shares of
registered Common Stock.
Redemption Maximum Percentage
Date of Shares Redeemed Total Return
- ------------- ------------------- -------------
May 3, 2002 -
May 4, 2003 33% 18%
May 3, 2003 -
May 4, 2004 66% 19%
May 3, 2004 and thereafter 100% 20%
Pursuant to the terms of the Purchase Agreement, on November 4, 1999, THE
transfered, out of its holdings of the Company's Common Stock, 362,500 shares of
unregistered Common Stock to the Company and, on November 11, 1999, the Company
delivered such shares of unregistered Common Stock to the purchasers of the
Series B Preferred Stock, other than THE. The Company did not issue any new
shares of its Common Stock.
The offers and sales to the purchasers of the Series B Preferred Stock were made
pursuant to a claim of exemption under Section 4(2) of the Securities Act, as
amended (the "Securities Act"). The Company did not use any general
advertisement or solicitation in connection with the offer or sale of the Series
B Preferred Stock to the investors. Each of the investors represented and
warranted, among other things, that he or it was purchasing the Series B
Preferred Stock for investment purposes and not with a view to distribution and
that he or it was an "accredited investor" (as defined in Regulation D
promulgated by the SEC). Appropriate legends were affixed to the certificates.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule.*
(b) Reports on Form 8-K
None.
- ------------------------
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIVERSIFIED SENIOR SERVICES, INC.
REGISTRANT
By: /S/ G. L. CLARK, JR.
Date: November 12, 1999 ------------------------
G. L. Clark, Jr.
Executive Vice President and
Chief Financial Officer